C I T JAIPUR vs. M/S CENTURY P P INDUSTRIES

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 658 / 2011 COMMISSIONER OF INCOME TAX, JAIPUR-III ,JAIPUR ----Appellant Versus M/s Century P.P. INdustries, F-57, Industrial Area, Sikar. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Daksh Pareek for Mr. Sameer Jain For Respondent(s) : Mr. Gunjan Pathak with Mr. Aditya Bohra _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 09/01/2018 1. By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby tribunal has dismissed the appeal of the department as well as cross objections filed by the assessee. 2. This court while admitting the appeal on 26.8.2014 framed following substantial question of law:- “(i) Whether the ITAT being the last fact finding body was justified in holding that the provisions of Sec.145(3) are not applicable without recording finding on its own assigning reasons in support thereof? (ii) Whether provisions of 40A (2) of the Act are non applicable in spite of the fact that admittedly payments were made to relative concerns which were excessive and unreasonable on account of interest, freight and purchases?” 3. Earlier, the appeal was dismissed in default on 11.9.2017

(2 of 9) and thereafter, it was restored by this court and today it has come for final hearing. 4. The facts of the case are that as in earlier years, the assessee mainly derived income from business of transformer repair/supply on contract, awarded by various electricity boards/Nigams. During the year assessee has executed another work of supply and installation of MCCB Boxes for DHBVNL. As per the manufacturing and trading accounts, assessee’s sales/receipts including labour charges receipts are Rs. 12,11,06,197/-, against which gross profit of Rs. 1,41,21,012/- @ 11.66% is declared. As per the separate trading account of scrap, total sales are Rs. 51,82,004/- against which G.P. of Rs. 89,494/- @ 1.7% has been declared. As per another separate trading account of MCCB Box, sales/receipts including labour charges receipts are Rs. 4,85,21,849/- against which gross profit of Rs. 35,09,597/- @ 7.2% is declared. As per combined profit and loss account ofall the three trading accounts, the assessee has declared net profit of Rs. 62,23,170/- (which is also the total income declared by assessee), after deducting all expenses including depreciation and interest to partners. The business of assessee firm is essentially of repair and supply on contract basis. Receipts of the assessee include labour charges receipts relating to labour work done by assessee on contract. Receipts are essentially from various Electricity Boards/Nigams; whether on account of repair of transformers, supply of transformers, MCCB Boxes or labour work for their installation. These receipts are essentially of contract nature and have all the characteristic features of contract work.

(3 of 9) Expenses like cash discount Rs. 37,21,596/- debited in P & L account relate to timely payment by Electricity Board and in fact relates to trading account rather than P & L account. Similarly truck and jeep (pick up) are used for transporting the transformers etc. to and from to various sites. Similarly for the same purpose assessee has debited its P & L account by Rs. 12,66,334/- as freight expense. All these expenses are of trading nature and chargeable against contract receipts. In the circumstances of the assessee’s case, its income can be better estimated by applying N.P. rate as in the case of other contractors. 5. Counsel for the appellant has taken us to the order of the AO wherein it has been observed as under:- 3.3 The assessee has framed separate trading account for scrap and separate trading account for MCCB Box. However the assessee has not mentioned the quantitative details as required in clause 28(a) of audited form No.3CD. The fact shows that the accounting system adopted by assessee is not complete. Furnishing of these details later on does ot add sancity to assessee’s accounts. If these details were practical to be maintained there is no reason for not mentioning these details in audit report. 3.4In respect of manufacturing/repairing activity, the assessee has maintained quantitative details in Annexure-E. But these details are not complete as required vide clause 28(b) of form No.3CD [against clause 28(b) annexure mentioned is F but details are maintained in annexure E enclosed with form 3CD.] In this annexure details like % yield and shortage are not mentioned. Quantities of various material mentioned in annexure E do not tally. 3.5 In the notes on accounts and as per clause 12(a)&(b) of form No.3CD, the

(4 of 9) assessee has deviated from valuation of closing stock of finished goods and repaired transformers. The fact shows that books do not reflect true profit of assessee. As per note-7 on accounts, the assessee has not maintained vouchers for petty cash expenses. Assessee’s claim that all its expenses are vouched is thus not correct. 3.8 Assessee has debited Rs.9,50,485/- as inward freight and Rs.12,66,334/- as outward freight i.e. total expense on freight is Rs.22,16,819/-. Out of these expenses, payment of Rs.13,44,900/- is made to the HUF of partner Shri Suresh Kumar Saraf. During the course of assessment proceedings, copy of “truck income and expenditure account” of Suresh Kumar Saraf HUF was filed. As per this copy of account gross truck freight receipts of Suresh Kumar Saraf HUF were Rs.14,08,700/-. Thus practically entire receipts were from the assessee. Suresh Kumar Saraf HUF has declared gross profit of Rs.3,75,515/- (which is also the net profit)

from

truck

receipts

of Rs.14,08,700/-. Thus net profit in the hands of Suresh Kumar Saraf HUF from truck plying is 26.6% which is very high as compared to normal profit from truck plying. The anomaly is due to arbitrariness in the freight rates paid by assessee to related persons. Under the circumstances the accounting in assessee’s book can not be considered genuine/correct. 5.1 He further contended that Tribunal as well as CIT(A) have committed serious error in reversing the finding of the AO and rejecting the books of accounts. 5.2 He contended that in view of para no.3.11, the AO has rightly observed as under:- 3.11 In the trading account of MCCB Box assessee has shown labour charges receipts of Rs.37,51,572/- on the sales side. Labour charges expenses on purchase

side

are

shown

at Rs.15,92,840/- Obviously the difference

(5 of 9) between the two is the profit of the assessee, which comes to Rs.21,58,732/- i.e. 57.5%. This fact shows the extent of high profit margin inherent in the labour related contract work executed by assessee. Similarly in the manufacturing and trading account (Transformer repairing), assessee has shown labour charges receipts of Rs.88,91,146/- which have heavy profit margin as illustrated above. 5.3 He further contended that the AO was right in invoking provisions of Sec. 40A(2)(b) of the Income Tax Act. 5.4 He contended that in para no.7.1, the tribunal observed as under:- While invoking provisions of section 145(3), the AO has pointed out in his order the following discrepancies :- a) Position of the books of account and the working done during the year are similar as for the A.Y. 2005-06 {AO page 3 para 3.1}. b) Payment of job work to Hoshiyar Singh is not found genuine (AO page 3 para 3.2). c) Payment to labourers at site are not properly vouched and auditors note for non maintaining of petty cash vouchers {AO page 4 para 3.5}. d) Shortage in raw material and % yield of finished product is not ascertainable {AO page 4 para 3.4}. e) Defect in accounting of scrap as regards to the difference in purchases of scrap and TCS certificate amount {Page 4 para 3.6}. f) Assessee has paid interest at higher rates to the related parties {AO page 4 para 3.7}. g) Payment of freight outward and inward are not found reasonable (AO page 5 para 3.8 & 3.9). h) Assessee has made purchases from related parties for diversion of income {AO page 5-6 para 3.10}. 6. However, counsel for the respondent has relied on the

(6 of 9) observations made by the CIT(A) wherein it has been observed as under:- 2-3 eSaus nksuksa ikfVZ;ksa ds rdksZa dk voyksdu fd;k ,oa ik;k fd fo-v- ds rdZ mfpr gSaA vihykFkhZ QeZ ds ekeys esa ,DlkbZt foHkkx dk dkuwu ykxw gksrk gS rFkk ,DlkbZt dkuwuksa dh ikyuk esa vihykFkhZ QeZ dbZ izdkj ds fjdkMZ j[krk gS] ftudh ppkZ Åij dh tk pqdh gS] rFkk fu-v- us ,DlkbZt vf/kdkfj;ksa }kjk tkap esa dHkh dksbZ foijhr fVIi.kh ugha ikbZ gSA blds vfrfjDr ekuuh; vk;dj vihyh; U;k;kf/kdj.k us mijksDr lanfHkZr vkns’k esa fu-v- } kjk /kkjk 145 ds mi;ksx dks mfpr ugha ekurs gq, dh xbZ o`f) dks gVk fn;k gS rFkk eSaus Lo;a us ekuuh; U;k;kf/kdj.k ds vkns’k dk llEeku vuqlj.k djrs gq, dj fiNys fu-o- 2005&06 ,oa 2006&07 esa ifj, esjs mijksDr lanfHkZr vkns’kksa esa fu-v- }kjk 145¼3½ ds mi;ksx dks ;qfDrlaxr ugha ekurs gq, gVk fn;k gSA blds vfrfjDr ik;k fd fu-v- us eq[;r% vihykFkhZ QeZ ds fiNys bfrgkl dks ns[krs gq, gh /kkjk 145¼3½ dk mi;ksx fd;k gSA tgka rd fu-v- }kjk dj fu-o- 2003&04 esa ntZ dh xbZ folaxfr;ksa ds vfrfjDr folaxfr;ka fopkj.kh; o"kZ esa ik, tkus dk iz’u gS] fu-v- }kjk ntZ folaxfr;ka lk/kkj.k izÑfr dh gSa] ,oa dksbZ fof’k"V folaxfr fu-v- vius vkns’k esa ntZ ugha dj ik;k gSA cfYd fu-v- us vihykFkhZ ds fiNys bfrgkl dks ns[krs gq, rFkk lkekU; folaxfr;ka ntZ djrs gq, /kkjk 145¼3½ ds izko/kkuksa dk mi;ksx fd;k gS rFkk lkFk gh rdZ fn;k fd vihykFkhZ ds ekeys esa mPp U;k;ky; esa foHkkx }kjk vihy dh gqbZ gS] blfy, ekuuh; U;k;kf/kdj.k ds fu.kZ; dks foHkkx us Lohdkj ugha fd;k gS rFkk blh vk/kkj ij fu-v- us fopkj.kh; o"kZ esa Hkh cgh[kkrs fujLr dj vk; esa o`f) dh gSA ijUrq ekuuh; vk;dj vihyh; U;k;kf/kdj.k rF;ksa dk vUos"k.k dj fu.kZ; nsus ds fy, mPpre izkf/kdkj gS rFkk ekuuh; vk;dj vihyh; U;k;kf/kdj.k us vihykFkhZ ds ekeys esa mijksDr lanfHkZr fu.kZ;ksa esa fu-v- }kjk /kkjk 145¼3½ ds mi;ksx dks lgh ugha ekudj gVk fn;k gSA vr% vihykFkhZ QeZ ds fiNys bfrgkl dks fopkj esa ysrs gq, rFkk vius Lo;a ds dj fu-o- 2005&06 ds vkns’k ds leku fopkj.kh; o"kZ esa Hkh fu-v- }kjk /kkjk 145¼3½ ds mi;ksx dks lgh ugha ekuk tkrk ,oa gVk;k tkrk gSA rn~uqlkj fu-v- }kjk vk; esa dh xbZ o`f) dks mfpr ugha ekudj gVk;k tkrk gS rFkk vihykFkhZ QeZ dh vihy bu rhuksa eqn~nksa ij Lohdkj dh tkrh gSA 9-3 eSaus nksuksa ikfVZ;ksa ds rdksZa dk voyksdu fd;k ,oa ik;k fd vihykFkhZ us mDr nksuksa ikfVZ;ksa ls dqy [kjhn : 16228884 dh gS] ftlesa ls ,elhlhch cksDl dh [kjhn :- 11172356 gS rFkk :- 5056528 dh [kjhn dPps eky dh gSA vihykFkhZ ,elhlhch cksDl fuekZ.k dk dk;Z ugha djrk] cfYd dsoy vkiwfrZ dk dk;Z djrk gSA vihykFkhZ us mDr nksuksa fj’rsnkj ikfVZ;ksa ,oa vU; ckgj dh ikfVZ;ksa ls ,elhlhch cksDl [kjhns gSa ,oa vkiwfrZ fd, gSaA vihykFkhZ us fj’rsnkj ikfVZ;ka ,oa ckgj dh ikfVZ;ksa dks leku njksa ij Hkqxrku fd;k gSA blfy, fu-v- dk fj’rsnkj ikfVZ;ksa dks fd, x, Hkqxrku ij lansg izdV djus dk dksbZ vk/kkj ugha gSA blds vfrfjDr fu-v- us mDr nksuksa ikfVZ;ksa ls [kjhn&fcØh ds vanj dks vihykFkhZ dh vk; esa tksM fn;k gS] tcfd ;g ,d fufoZokfnr rF; gS fd fdlh Hkh izdkj ds fuekZ.k dk;Z esa cgqr ls [kpZ tSls] fdjk;k&HkkMk] etnwjh] fctyh&ikuh vkfn

(7 of 9) Hkh gksrs gSa] ftudks fu-v- us dksbZ [k;ky gh ugha j[kk gSA blds vfrfjDr mDr nksuksa ikfVZ;ksa fu;fer vk;djnkrk gSa] viuh vk;dj fooj.kh foHkkx dks fu;fer rkSj ij is’k djrh jgh gS rFkk mDr ikfVZ;ksa dh [kjhn&fcØh ij dHkh dksbZ lansg foHkkx ugha dj jgk gSA blds vfrfjDr vk;dj vf/kfu;e ds izko/kkuksa ds vuqlkj fj’rsnkj ikfVZ;ksa ls [kjhn ugha fd, tkus dk dksbZ ca/ku ugha gS] cfYd /kkjk 40,¼2½¼ch½ ds izko/kku dsoy tku&cw>dj] vius ykHk dks de djus dh ea’kk ls viuh fj’rsnkj ikfVZ;ksa dks fd, tkus okys Hkqxrkuksa dh tkap djus gsrq j[kh xbZ gSA vr% fu-v- ds fu.kZ; dks ;qfDrlaxr ,oa rdZlaxr ugha ekuk tkrk ,oa gVk;k tkrk gS rFkk vihykFkhZ dh vihy bl eqn~ns ij Lohdkj dh tkrh gSA 6.1 He also relied upon the following observations made by the tribunal:- “9. After examining the orders of AO and ld. CIT (A), we find that ld. CIT (A) was correct in holding that provisions of section 145(3) are not applicable. For A.Y. 2003-04, 05-06 and 06-07 the provisions of section 145(3) were invoked by the AO. Matter reached to the stage of Tribunal and the Tribunal has held that the provisions of section 145(3) are not applicable as assessee has maintained proper books of account. Defects noted by the AO re not such that it can be held that provisions of section 145(3) are not applicable. Order of the Tribunal for these years are placed at pages 86, 97 of the paper book and for assessment year 2006-07 the order of the Tribunal is filed along with written submissions. Latest order passed by Tribunal for assessment year 2006-07 is in ITA No. 538/JP/2009 and ITA No. 652/JP/2009 decided on 31.3.2010. In this year also the provisions of section 145(3) were applied and g.p. rate was estimated at 3.5% on the declared turnover against g.p. rate of 0.08% shown in earlier year. Facts and circumstances are similar for the year under consideration and this fact has also been mentioned by the AO in his order at page 3 that for assessment years 2003- 04 05-06 and 06-07 the provisions of section 145(3) are made applicable. However, the ld. CIT (A) has allowed the issue in favour of the assessee but since the department has filed appeal before the Tribunal and before Hon’ble High Court, therefore, he rejected the books of account for the year under consideration

(8 of 9) also. Since in earlier year the issue has been decided in favour of the assessee, therefore, for the same reasoning given by Tribunal, we confirm the order of the ld. CIT (A) for the year under consideration also. Accordingly, ground no. 1 in appeal of the department is rejected. 19. Ground Nos. 4, 5 and 6 are against restricting the addition on account of sale of scrap to Rs. 91,876/- against addition of Rs. 4,28,706/- made by AO and deleting the addition made under section 40A(2)(b) at Rs. 2,86,400/- and at Rs. 4,06,740/-. 20. These additions were made by AO on the basis of earlier year. The ld. CIT (A) has deleted these additions by observing that similar additions were made in earlier year and order of ld. CIT (A) has been confirmed by the Tribunal for earlier year. Accordingly the addition on account of sale of scrap was restricted to Rs.91,876/- and addition made under section 40A(2)(b) were deleted. 21. After considering the orders of the AO and ld. CIT (A) we find no infirmity in the finding of ld. CIT (A) which is based on the finding of Tribunal given in earlier year. Neither the findings of the ld. CIT (A) could be controverted nor any other material was brought on record to hold otherwise. In view of the above facts and circumstances, we confirm the order of ld. CIT (A) on these issues. 29. After considering the submissions and perusing the material on record, the ld. CIT (A) found that payments made to related persons are similar as made to private parties. On similar rates the assessee has purchased the material covered under section 40A(2)(b) and on same rate the same material has been purchased from private parties also. Therefore, he held that provisions of section 40A(2)(b) are not applicable on the facts of the present case. Accordingly he deleted the addition.”

(9 of 9) 7. We have heard counsel for the parties. 8. Taking into account the observations made by the CIT(A) and while considering the matter, the tribunal has rightly observed in para no.9 as reproduced above, upholding the view taken by the CIT(A) and adding g.p. rate of 1.73% shown by the assessee and restricting the addition on account of sale of scrap to Rs.91,876/- and deleting the addition made u/s 40A(2)(b). 9. In that view of the matter, both the issues are answered in favour of the assessee and against the department. 10. The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S.JHAVERI)J. Brijesh 43.