COMMISSIONER OF INCOME TAX-I LUDHIANA vs. M/S MANSAROVER IMPEX (REGD) LUDHIANA

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ITA/131/2013HC Punjab & HaryanaPHHC01104978201322 July 2013Author: MR. JUSTICE RAJIVE BHALLA,MR. JUSTICE DR. BHARAT BHUSHAN PARSOON9 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that no substantial question of law arose for adjudication. The Court found that the orders of the ITAT and CIT(A) were passed after due consideration of the entire dispute, including the remand report. A clear finding was recorded that the assessee's sister concern charged higher rates from the assessee as well as from all other entities to which it supplied similar finished goods. The CIT(A) had noted that the rates of purchase from the sister concern were higher than from outside parties, but the sister concern also made sales to outside parties at higher rates than to the assessee. The variation in prices was explained by differences in thickness, finishing, quality of nickel polishing, hardening, tempering, grinding, etc., with goods purchased from the sister concern being of superior quality and heavier weight. The CIT(A) also noted that the sister concern was paying tax at the same rate as the assessee, negating any incentive for the sister concern to supply goods at a higher rate than the market rate, as it would increase its own profits. The GP ratio of the assessee had also increased. The Assessing Officer had not been able to pinpoint any defect in the assessee's stand. Therefore, the High Court found no error of jurisdiction or law in the ITAT's order and dismissed the appeal.

What were the facts?

The revenue (Commissioner of Income Tax-I, Ludhiana) appealed an order dated 10.4.2012 passed by the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench 'A'. The ITAT had confirmed the order of the Commissioner of Income Tax (Appeals), who deleted an addition of Rs. 45,88,653/- made by the Assessing Officer (AO). The dispute concerns the assessment year(s) not explicitly stated but implied to be the year under appeal. The AO had disallowed the excess payment made by the assessee firm, M/s Mansarover Impex (Regd.), Ludhiana, for purchased goods from its sister concern, M/s Mansarovar Forgings Pvt. Ltd., Ludhiana, on the grounds that the price was higher than that charged to unrelated parties and potentially to shift profits to a unit enjoying tax exemption under Section 80IB of the Income Tax Act, 1961.

What were the issues?

The Tribunal had to decide seven questions of law, framed by the revenue, concerning the correctness of the ITAT's order confirming the CIT(A)'s deletion of the AO's disallowance. The core issues are: 1. Whether the ITAT erred in confirming the CIT(A)'s order by ignoring that the assessee firm purchased goods at a higher price from its sister concern, purportedly for superior quality, while selling similar goods to unrelated concerns at parity with inferior quality goods. 2. Whether the ITAT was correct in confirming the CIT(A)'s order by wrongly appreciating the justification for higher purchase price from the sister concern, given the lack of detailed descriptions on bills and the sale of goods at uniform prices irrespective of quality. 3. Whether the ITAT was correct in not appreciating that the availability of superior and inferior grades of goods in stock was unverifiable due to the absence of a detailed stock register, as noted by the statutory auditor. 4. Whether the ITAT was correct in confirming the CIT(A)'s order by ignoring that the transaction of purchase at a higher price with the sister concern was intended to shift profits to a unit enjoying tax exemption under Section 80IB. 5. Whether the ITAT was correct in accepting the assessee's argument despite the transaction not being revenue neutral, as it involved transferring profits from a taxable to an exempted unit by ignoring the arm's length principle, leading to tax evasion. 6. Whether the ITAT was correct in confirming the CIT(A)'s order by ignoring that the sister concern, though exempt under Section 80IB, had resorted to tax evasion methods, as evidenced by income from other sources being falsely claimed as exempt business income, leading to additions and penalty confirmed up to the ITAT. 7. Whether the ITAT overlooked that the assessee group attempted to claim false exemption and gain favour from lower appellate courts by suppressing facts about the sister unit's exemption, making the argument of same tax rates immaterial, as per the principle in CIT Vs. Zoom Communication (327 ITR, 510 (Delhi HC)). Assessee's Contention: The assessee argued that the higher prices charged by the sister concern were justified by superior quality, heavier weight, and better finishing of the goods. The sister concern also sold similar goods to outside parties at higher rates than to the assessee. The Gross Profit (GP) rate of the assessee had increased. The sister concern, M/s Mansarovar Forgings Pvt. Ltd., was paying tax at the same rate as the assessee, thus having no incentive to supply goods at a higher rate than the market rate as it would increase its own profits. The CIT(A) relied on the judgment in CIT vs. Siya Ram Garg HUF (49 DTR P126).

Which sections of the Income-tax Act were involved?

Section 80IB,Section 271(1)(c)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT FOR THE STATES OF PUNJAB AND HARYANA AT CHANDIGARH Date of decision: July 22, 2013. Commissioner of Income Tax-I, Ludhiana ... Appellant v. M/s Mansarover Impex (Regd.), Ludhiana ... Respondent CORAM: HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE DR. BHARAT BHUSHAN PARSOON Present: Shri Rajesh Katoch, Advocate, for the appellant. Rajive Bhalla

, J. (Oral): The revenue, challenges order dated 10.4.2012, passed by Income Tax Appellate Tribunal, Chandigarh Bench 'A', Chandigarh on seven questions, styled as substantial questions of law, which read as follows:- “(i) Whether the ITAT was correct in law as well as facts and circumstances of the case in confirming the order of Commissioner of Income Tax (Appeals) therefore, ignoring that assessee firm has purchased the goods at higher price from its sister concern, which is claimed to be justified for being superior and different in quality, while the sale price has been put on parity with the so called inferior quality Kadyan Vinod Kumar 2013.08.07 13:38 integrity of this document Chandigarh goods purchased from other unrelated independent concern? (ii)Whether ITAT was correct in law as well as facts and circumstances of the case by confirming the order of Commissioner of Income Tax (Appeals) by wrongly appreciating the justification given by assessee firm for purchase from sister concern at higher price being superior in quality, cannot be relied, as no detail/description has been given on purchase bills and similarly assessee firm is also not giving any description of goods with regard to superior quality as the goods are being sold at one and the same price irrespective of quality of goods purchased? (iii) Whether ITAT was correct in law as well as facts and circumstances of the case in not appreciating that availability of superior and inferior grades of goods in stock are not verifiable as no detailed stock register is being maintained by the firm, the fact which has been pointed out by the statutory auditor in his tax audit report? (iv) Whether ITAT was correct in law as well as facts and circumstances of the case by confirming the order of Commissioner of Income Tax (Appeals) ignoring one Kadyan Vinod Kumar 2013.08.07 13:38 integrity of this document Chandigarh important aspect that assessee firm has entered into transaction of purchase at higher price with sister concern to shift the profit of the taxable unit to the unit enjoying tax exemption u/s 80IB of I.T. Act, 1961? (v) Whether ITAT was correct in law as well as facts and circumstances of the case by accepting the argument of assessee concern ignoring the basic fact that although the rate of tax may be same in both unit but yet the transaction was not revenue neutral as transfer of profit from taxable to exempted unit was being effected by entering into the transaction of purchases at higher price with sister concern by ignoring the arms length principle and which leads to evasion of tax? (vi) Whether ITAT was correct in law as well as facts and circumstances of the case by confirming the order of Commissioner of Income Tax (Appeals), but ignored the vital facts that although no tax is to be paid by the assessee in his sister concern M/s Mansarovar Forgings Pvt. Ltd., Ludhiana being exempted u/s 80IB of I.T. Act, 1961, yet the sister concern of the instant assessee firm has resorted to methods which lead to evasion of tax as the income from other sources disclosed during the survey operation amounting to Rs. 1 crore has falsely Kadyan Vinod Kumar 2013.08.07 13:38 integrity of this document Chandigarh been claimed exempted as business income u/s 80IB and which has been added back by the A.O. during the scrutiny assessment and quantum as well as concealment penalty stand confirmed upto ITAT. Therefore, it is clear that assessee group is in habit of resorting to practice which leads to evasion of tax due to exchequer and the instant methodology of profit shifting from taxable to exempted sister unit is example of one such fraudulent means with malafide intention and shows utter disregard the assessee has when it comes to comply the provisions of fiscal laws? (vii) Whether ITAT was correct in law as well as facts and circumstances of the case by overlooking to the facts that only very small percentage of tax return is being picked up for scrutiny and knowing well this facts of the govt. policy that most of the returns are being accepted by the I.T. Department without scrutiny the assessee group has tried to take chance by claiming false exemption and also tried to take favour of various lower appellate courts by suppressing the facts of sister unit of assessee group being exempted thus the argument taken by the assessee that same rate of tax being applicable in both unit is immaterial. This principle of law with regard to the Kadyan Vinod Kumar 2013.08.07 13:38 integrity of this document Chandigarh malafide intention of assessee has also been enumerated by Hon'ble Delhi High Court in CIT Vs. Zoom Communication (327 ITR, 510 (Delhi HC)?” We would, before dealing with the controversy, like to impress upon the Department that it must take care in framing “substantial questions of law”, as it is the quality of a question and not their quantity that invites attention of a Court. We have come across various appeals where questions of fact, howsoever small, are sought to be altered into a substantial question of law. In the present case the only question that may arise, has been divided into seven different questions. Counsel for the appellant submits that as the assessee purchased finished goods from a sister concern at a much higher rate than the rate offered to other similarly situated units, the Assessing Officer was right in disallowing excess payment made to the sister concern. The findings recorded by Commissioner of Income Tax (Appeals), affirmed by the Income Tax Appellate Tribunal, are contrary to the facts on record and have no foundation, whether in fact or in law and may, therefore, be set aside. The mere fact that the sister concern sold these items to other entities, at higher rates, is insufficient to allow the assessee to evade responsibility and to claim the amount paid to the sister concern, as valid business expense.

We have heard counsel for the appellant, perused the Kadyan Vinod Kumar 2013.08.07 13:38 integrity of this document Chandigarh impugned orders and find no reason to hold that any question of law, much less a substantial question of law, arises for adjudication. A perusal of orders passed by the Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals) reveals that after due consideration of the entire gamut of the dispute, including the remand report forwarded by the Assessing Officer, a clear finding has been recorded, from the chart filed by the assessee that the assessee's sister concern has charged higher rates from the assessee as well as from all other entities, to which it supplied similar finished goods. In order to place our conclusion in its correct perspective, it would be appropriate to reproduce a relevant extract from the order passed by the Commissioner of Income Tax (Appeals):- “5. ... Perusal of this chart reveals that factually whatever has been stated by the A.O. is in as much as the rates of purchase of the appellant from the sister concern are higher than the rates of the purchases from the outside partes. But at the same time the contention of the appellant is also correct that the sister concern has been making sales to outside parties at higher rate as compared to the sale rate offered by the sister concern to the appellant. The Assessing Officer in his remand report has failed to comment upon this important issued raised by the learned counsel for the appellant. Perusal of the record suggests Kadyan Vinod Kumar 2013.08.07 13:38 integrity of this document Chandigarh that the appellant has made these very submissions even before the Assessing Officer during the course of assessment proceedings vide letter dated 06.11.2008.

5.

1 The learned counsel has taken me through the written submissions filed by him vide letter dated 15.12.2009. He has highlighted that the G.P. Rate of the appellant has gone up to 7.65% during the year under appeal as compared to 6.69% during the earlier year. He has also taken me through the comparative charts of purchase price of various items purchased from outside parties and also from the sister concern M/s Mansarovar Forgings Pvt. Ltd., and also comparison with sales made by M/s Mansarovar Forgings Pvt. Ltd., to other parties. He also took me through photocopies of the relevant bills which have been filed along with the written submissions. He explained in detail that the variation in prices is consequential upon the difference arising from the thickness, finishing, quality of nickel polishing, hardening, tempering, barreling, grinding, etc. He also highlighted the fact that the goods purchased from its sister concern where of a superior quality and heavier weight. He specifically draw my attention to the chart showing comparative sale rates which is being reproduced below:- Combination Spanner Purchases by assessee from outside parties Purchases by assessee from Mansarover Forgings Sales by Mansarover Forgins to outside parties 19MM 3.66 3.9 4.24/4.45 10MM 3.44/3.52 4.06 4.41/4.50 11MM 3.58 4.26 4.63/4.72 12MM 3.78 4.54/4.81 4.88/5.19 13MM 4.39/4.52 5.25 5.71/5.82 14MM 4.51/4.69 5.5 5.98/6.10 Kadyan Vinod Kumar 2013.08.07 13:38 integrity of this document Chandigarh Combination Spanner Purchases by assessee from outside parties Purchases by assessee from Mansarover Forgings Sales by Mansarover Forgins to outside parties 17MM 6.31/7.10 7.6 8.16/8.44 19MM 7.16/7.42 8.68 9.32/9.91 DOE Spanner Purchases by assessee from outside parties Purchases by assessee from Mansarover Forgings Sales by Mansarover Forgins to outside parties 12 x 3 3.28 4.07/4.35 4.29/4.78 14 x 15 4.03 4.74/5.06 5.00/5.57 16 x 17 4.60/4.68 5.75/6.14 6.06/6.75 18 x 19 5.87/5.93 6.98 7.36/8.19 20 x 22 7.18/7.2 8.87/9.46 9.03/10.41 24 x 27 11.8 14.88 17.24 25 x 28 11.2 15.72/16.82 19.1 30 x32 16.14 20.29/20.36

23.

75 Ring Spanner Purchases by assessee from outside parties Purchases by assessee from Mansarover Forgings Sales by Mansarover Forgins to outside parties 14 x 15 7.58/16.14 8.75/10.60 10.11/11.42 16 x17 10.04/15.27 10.04/12.72 12.15/12.86 18 x 19 12.05 11.93/14.16 13.52/15.28 20 x 22 13.95 13.83/17.06 16.28/18.39

5.

2 Keeping in view the facts and above stated position of the case, I am of the view that the submissions made by the appellant's counsel are fully justified. The rate of a product depends upon the quality, the weight, the fineness etc. Further, M/s Mansarovar Forgings Pvt. Ltd., made sales to outside parties at higher rate than the appellant firm. Moreover, the said sister concern is also paying tax at the same rate as that paid by the appellant, there could have been no incentive for the sister concern to supply the goods at a higher rate than the market rate because it Kadyan Vinod Kumar 2013.08.07 13:38 integrity of this document Chandigarh would go to increase its profits. I have also gone through the judgment of the Hon'ble Punjab and Haryana High The Assessing Officer has not been able to pin-point any defect in the stand put forward by the appellant. I am, thus, inclined to agree with submissions of the appellant's counsel and direct to delete the disallowance of Rs.45,88,653/-.” The order passed by the Commissioner of Income Tax (Appeals) has been affirmed by the Income Tax Appellate Tribunal after taking into consideration the aforementioned facts. The finding recorded in the above order and order passed by the Income Tax Appellate Tribunal do not suffer from any error of juri iction or law so as to raise a substantial question of law, much less the questions framed by the revenue. In view of what has been recorded hereinabove, the appeal is dismissed.

[ Rajive Bhalla ]

Judge

[Dr. Bharat Bhushan Parsoon] July 22, 2013. Judge kadyan Kadyan Vinod Kumar 2013.08.07 13:38 integrity of this document Chandigarh

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