VAISHALI METALS PVT LTD vs. ASSIST COMISIONER OF I T CIRCLE 4 JAIPUR

1 ITA No.171/2016 HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 171 / 2016 Vaishali Metals Private Limited, Having its registered address at G- 485, Road No.9A, VKI Area, Jaipur through its Director & Authorized signatory Sh. Sandeep Papriwal, aged 48 years, S/o late Sh. S.K. Papriwal, R/o C-151, Bahubali Path, Shyam Nagar, Jaipur. Assessee-Appellant Versus Assistant Commissioner of Income Tax, Circle 4, Jaipur having its address at new Central Revenue Building, Statue Circle, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Siddharth Ranka with Mr. Saurav Harsh For Respondent(s) : Mr. K.D. Mathur with Mr. Prateek Kedawat for Mr. R.B. Mathur _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 31/10/2017 1. By way of this appeal, the appellant has challenged the judgment and order of the tribunal whereby tribunal has partly allowed the appeal of the assessee for statistical purposes remanding back matter to the AO and rejected the department appeal. 2. This court while admitting the appeal on 3.10.2016 framed following substantial question of law:- “Whether on the facts and material available on record and in law the ld. ITAT was justified in remanding back the matter to the AO after having come to the conclusion that there was no justification in rejecting the books of accounts?”

2 ITA No.171/2016 3. Counsel for the appellant has taken us to the order of AO who while considering the issue has observed as under:- “Subsequently, as discussed above by invoking provisions of Section 145(3) of the IT Act, 1961, and adopting G.P. rate of last year @ 9.18% on total turnover of Rs.10,36,19,819/- declared by the assessee which gives gross profit of Rs.95,12,300/- as against 31,75,146/- declared by assessee, resulting into a trading addition of Rs.63,37,152/-

(Rs.95,12,300/- Rs.31,75,146/-). Since, the assessee has failed to verify the various items used in production and is not able to confirm the items/consumables for manufacture therefore there is no option but to reject the books of accounts. Penalty proceedings u/s 271(1)(c) of the Income Tax Act are separately initiated for filing inaccurate particulars of income. Conversion Charges: During the course of assessment proceedings it was observed that assessee has paid conversion charges of Rs.92,86,773/- to various persons but on perusal of the details of TDS filed by the assessee it is observed that assessee has paid conversion charges to M/s. Kwality Tube & Capillaries of Rs.69,29,015/-, M/s. New India Extension Pvt. Ltd. of Rs.29,02,635/-

and

M/s.

Sam Enterprises Rs.16,63,522/- totaling to Rs.1,14,95,172/-. Thus there was a difference of Rs.22,08,399/- which could not be explained by the assessee, therefore is added to the income of the assessee. But since the trading addition of Rs.63,37,152/- has been made therefore to give telescoping benefit to the assessee the addition of Rs.22,08,399/- is covered under the trading addition.” 4. He has also taken us to the order of CIT (A) which reads as under:-

3 ITA No.171/2016 “But in the interest of justice the AO is directed to apply GP rate of 6% as against 9.18% applied by him. This 6% is average of GP rate of 9.18% shown in AY 2008-09 and 3.06% shown in AY 2009-10 (9.18+3.06 divided by 2 is equal to about 6%). Applying 6% on Turnover of Rs.10,36,19,819 profit comes to Rs.62,17,189, the appellant has shown profit of Rs.31,75,146, therefore, the trading addition is upheld of

Rs.30,42,043

(Rs.62,17,189- Rs.31,75,146).” 4.1 He further contended that CIT(A) has also failed to consider the submissions made by the counsel for the appellant. 4.2 He also contended that before the authorities below, he has raised the following objections with regard to rejection of books of accounts:- 2.1 Fall in GP% Rate: The Company’s Gross Turnover, Gross profit and GP% for the last three years is as under:- A.Y. Turnover G.P. G.P.% 2007-08 13,98,32,076/- 1,49,13,306 10.67 2008-09 13,75,44,601 1,26,26,335 9.18 2009-10 10,36,19,819 31,75,146 3.06 That on perusal of above, it is noticed that it is undisputed fact that there has been substantial fall in the Turnover and the GP% of the assessee during the the year under consideration. REASONS FOR FALL IN GP% 2.2 The Company’s Sales Quantity, Average Selling Price, % Increment (YOY) for last three years is as under:- A.Y. Quantity sold in % Increment y.o.y. Average Price per kg. % Increment y.o.y.

4 ITA No.171/2016 2007-08 236448 591.34 2008-09 238268 0.77% 577.27 -2.38% 2009-10 186634 -21.67% 555.20 -3.82% 2.2.1. Thus, the total sales quantity during the year under consideration has dropped considerably and also the average selling price per kg has also dropped. The average selling price has dropped by over 6.20% over the last 2 years. This has squeezed the margin of the assessee Company and has led to a sharp downfall in the G.P.%. 2.3 The Company’s Production Quantity, Average Production Price (without excise duty), %Increment (YOY) for last three years is as under:- A.Y. Quantity Produced in Kg’s % Increment y.o.y. Average Price per kg % Increment y.o.y. 2007-08 236509 446.54 2008-09 241326 2.04% 436.94 -2.15% 2009-10 185238 -23.24% 489.37 12.00% 2.3.1. Thus, the total production quantity during the year under consideration has dropped considerably and also the average cost of production per kg has also increased substantially. This has squeezed the margin of the assessee Company and has led to a sharp downfall in the GP%. 2.4 That on the one hand average selling price has fallen during the year under consideration and at the same time the cost of production has increased during the year under consideration, leading to sharp reduction in GP%. The chart showing 80% component of selling price consists of Copper and the prices of Copper are linked to prices determined at London Metal Exchange (LME) & Bombay Metal Exchange (BME). The LME-Histroical price graph for copper for the financial year 2006-07, 2007-08, 2008-09 & 2009-10 which have been

5 ITA No.171/2016 reproduced by the counsel for the appellant before the ITAT in page no.5 & 6 of the appeal. 5. The assessee has also shown a chart indicating average selling price and he stated that in fact it has also liquidated the stock at loss in the month of November to March, for convenience the table is reproduced as under:- Month Average Selling Price Average Raw Material Consumption Cost Gross Margin April 550.85 433.31 117.55 May 558.97 445.18 113.79 June 564.25 490.53 73.72 July 569.72 482.33 87.39 August 584.56 490.65 93.9 September 534.58 486.01 48.56 October 525.45 483.89 41.56 November 441.36 492.21 -50.85 December 456.14 455.22 0.92 January 385.77 455.26 -69.49 February 406.94 420.72 -13.78 March 374.89 389.66 -14.77 6. Inspite of that, the tribunal while considering the performance of the other public Limited Company i.e. M/s. Hindustan Copper Limited whose profit was also reduced and turnover has also come down for the relevant year from profit of Rs.302.50 to Rs.5.48 and net profit of the public sector undertaking also fallen from 16.44 to 0.40%.

6 ITA No.171/2016 7. Mr. Ranka has relied upon the observation made by the tribunal which reads as under:- 3.4 In our considered opinion view the rejection of books of account is not mere rituals and cannot be based upon the subjectivity of the AO. The AO should objectively examine the books of account furnished before him, verify each transaction so recorded by the assessee and its impact on profit. In the case of hand, the ground for rejection of books of account is that there is steep fall in the gross profit. We find merit in the submissions of the ld. Counsel as the margins are the difference between selling price and cost price. The AO ought to have verified this from the books of account of the assessee including the stock register whether the production was made out of the raw materials purchased earlier and what was the sale price of such finished goods. We do not find from the record that this fact was verified by the authorities below. Another contention of the assessee is that it is amenable to Central Excise law, movements of raw material and manufactured products remains under control and supervision under the Central Excise Act. It is stated that records related to raw material and manufactured products are subject to audity by the department of Central Excise Act, in fact, audited the records of the assessee and our attention is drawn to the Audit Report of the Central Excise Authority. We find this contention of the ld. Counsel for the assessee correct as these entries are duly reflected. Further, in respect of Invoice of M/s. Perfect Industries dt. 6.3.2009 of 486.200 kgs amounting to Rs.65,131/- not entered, it is submitted that AO has failed to correctly understand the actual transaction and has totally misunderstood the fact that the invoice is towards purchase of Aluminum Tubes and not Copper. The ld. counsel for the assessee has drawn our attention to page 164 of the paper book. This contention of ld. counsel for the assessee found to be correct. The objections of the AO as mentioned in the assessment order are as under:- On examination of books of accounts, it is noticed that the assessee has not taken

7 ITA No.171/2016 various items of stock materials like purchase of copper wire vice invoice no. dt. 9.3.2009 valued at Rs.6,14,724/- and further dt. 6.3.2009 of Rs.65,131/- in closing value of stock, further value of scrap of 5223.150 kg has been taken at Rs.200/- per kg, further on perusal of Form No.4 of the raw material dt. 31.3.2009 it has been seen that the assessee has declared loss of 184.950 kgs while no complete details of production has been shown against them. The assessee has given para-wise explanation in the paper book by way of written submission. In support of the submissions, the assessee has also furnished the Daily Stock Account of Copper Scrap and also the Job Work done by M/s. Kwality Tubes and Capillaries alongwith reference of challan, quantity, production loss etc. the assessee has given para-wise explanation in the paper book by way of written submission. In support of the submission, the assessee has also furnished the Daily Stock Account of Cooper Scrap and also the Job Work done by M/s. Kwality Tubes & Capillaries alongwith reference of challan, quantity, production loss etc. the assessee has also filed copy of RG 23A Register demonstrating that all the transactions were duly recorded. The assessee has also given ledger account of conversion charges of sister concerns and also copy of Form No.16A. In respect of difference in conversion charges as per TDS certificates and what was debited, it is stated that the difference of Rs.19,30,603/- is due to the credit of CENVAT included in the goods sent for job work and goods received from job work through the credit notes received from M/s. New India Extrusions Pvt. Ltd. on which though TDS is deducted but not debited to Conversion Charges A/c but to CENVAT Credit A/c. The difference of Rs.2,77,796/- is due to the Credit Note of Discount received from M/s. SAM Enterprises on 31.3.2009 but on which TDS was already deducted earlier. Thus there is no error and difference of Rs.22,08,399/-

(1930603+277796)

is reconciled. It is stated that these credit notes were produced before the AO but were not understood by the AO. It is stated that these objections of the AO that the difference could not be explained is contrary to the facts. It is further stated the books of accounts were duly submitted before the AO as the AO

8 ITA No.171/2016 himself has noted in the assessment order that books of accounts, bills and vouchers etc. were examined on test check basis. We find that AO has noted that in spite of repeated opportunity, the assessee has not submitted the books of account after the date 9.9.2011 on which the assessee was required to justify the defect as mentioned above to cross verify the contention of the assessee. We find force in the contention of the ld. counsel for the assessee that assessee had submitted plausible explanation to the defects as pointed out by the AO. We also noticed that in the paper book the asessee has given certificate that except document at sl No.10, all other documents were part of the record of the lower authorities. Therefore, it can be inferred that these materials were available before the AO. The AO has not given any finding on this evidences, therefore, in our considered view, the AO was not justified in rejecting the books of account without properly examining the same and giving a specific finding on the material so placed before him. The books of account cannot be rejected in a causal manner and proceed to estimation of GP merely on the basis of past history of the assessee.” 8. He contended that the books of accounts are required to be accepted and AO has wrongly rejected the same. The remand order is only an academic power given to handle the orders passed by AO, if he exercises the arbitrary power. 9. He has relied upon the decision of this court in ITA No.21/2001 decided on 31.8.2016 (Heera Lal Kataria vs. The Commissioner of Income Tax) wherein it has been held as under:- “10. The books of accounts which were submitted by the assessee were in order, there was no basis for the ld.Tribunal to enhance the income to Rs.1,00,000/-. 11. In our view, while accepting the books of accounts, estimating the income to Rs.1,00,000/- by the ld. Tribunal is not permissible in law & the Tribunal ought

9 ITA No.171/2016 not to have estimated income having accepted books of accounts.” 10. Counsel for the respondent has supported the order of all the authorities and contended that the view taken by the authorities is not required to be disturbed. 11. We have heard counsel for the parties. 12. Having accepted the contentions raised by the appellant that the books of accounts have wrongly been rejected, in our considered opinion, the tribunal ought to have considered the case and give finding on the basis of loss to public sector undertaking which is stated hereinabove has reduced to 22 times from last year. The earlier rate in the present case was proportionate to only 1/3, therefore, the contentions raised by Mr. Ranka is required to be accepted because of the international and local market condition, the profit is bound to go down. The tribunal has committed an error in passing the order of remand and therefore the same is quashed and set aside. 13. In that view of the matter, the issue is answered in favour of the assessee and against the department. 14. The appeal stands allowed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Brijesh 24.