PR COMMISSIONER OF INCOME TAX JAIPUR-II vs. M/S PUSHP FORGINGS PVT LTD

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 273 / 2017 Principal Commissioner of Income Tax, Jaipur-2, Jaipur. ----Appellant Versus M/s Pushp Forgings Pvt. Ltd., F-393-A, Road No.9, F-2,VKI Area, Jaipur. ----Respondent and D.B. Income Tax Appeal No. 110 / 2015 Principal Commissioner of Income Tax, Jaipur-2, Jaipur ----Appellant Versus M/s Pushp Enterprises, H-780-A, Road No. 13, VKI Area, Jaipur Pan-AABFP2279F ----Respondent Connected With D.B. Income Tax Appeal No. 193 / 2015 Pr. Commissioner of Income Tax, Jaipur-II, Jaipur ----Appellant Versus M/s. Agrasen Engineering Industries Ltd. G-515-518, Road No. 9A, V.K.I. Area, Jaipur PAN: AABCA3401D ----Respondent D.B. Income Tax Appeal No. 12 / 2017 Principal Commissioner of Income Tax, Jaipur-2, Jaipur. ----Appellant Versus M/s. Pushp Enterprises, H-780-A, Road No. 13, VKI Area, Jaipur. PAN - AABFP2279F ----Respondent _____________________________________________________ For Appellant(s) : Mr. K.D. Mathur for Mr. R.B. Mathur

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For Respondent(s) : Mr. N.L. Agarwal Mr. Siddharth Ranka _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS JUDGMENT 12/10/2017 1. Since all these appeals arise out of same judgment and order, they are being decided by this common order. 2. By way of these appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeals of the revenue. 3. Income Tax Appeal No.273/2017 is admitted for hearing on the following substantial questions of law:- “1. Whether in the facts and circumstances of the case, the ITAT was justified in law and has not acted perversely in confirming the order of CIT(A) deleting additions of Rs.11049086/- which was made on account of suppression of scrap sales. 2. Whether in the facts and circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs.11049086/- on account of concealed sale of scrap without appreciating the fact that the assessee could not give any evidence regarding non return of the scrap by the vendors doing job work it and it is mot unlikely that the assessee will allow vendors to keep scrap with them, on which its paying excise duty itself.” 4. This court while admitting the ITA No.110/2015 on 18.05.2016, framed following substantial questions of law:- “ (I) Whether in the facts and circumstances of the case, the ITAT was justified in law and has not acted perversely in confirming the order of CIT(A) deleting additions of Rs.1,35,56,787/- on account of

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concealed sale of scrap despite of the fact that the assessee failed to submit any evidence regarding non-return of such scrap by the vendors/sub- vendors engaged in job work? (ii) Whether in the fact and circumstances of the case, the Tribunal and CIT(A) were justified in law and has not acted perversely in deleting the addition of Rs.2,33,96,017/- made by AO on account of concealed sales without appreciating the facts and circumstances of the case?” 5. This court while admitting the ITA No.193/2015 on 02.08.2017, framed following substantial questions of law:- “i) Whether on the facts and circumstances of the case and in law the ITAT was justified in deleting the trading addition of Rs.9394856/- made by the Assessing Officer after rejection of books of accounts under Section 143(3) without appreciating the facts of the case. ii) Whether on the facts and circumstances of the case and in law the ITAT was justified in deleting the addition of Rs.1277984/- made by the Assessing Officer on account of undisclosed sale despite the facts that assessee could not prove that scrap was retained by the job workers.” 6. This court while admitting the ITA No.12/2017 on 17.01.2017, framed following substantial questions of law:- “(1) Whether in the facts and circumstances of the case, the ITAT was justified in law and has not acted perversely in confirming the order of CIT(A) deleting additions of Rs.6382690/- which was made on account of suppression of scrap sales. (2) Whether in the facts and circumstances of the case, the Tribunal and CIT(A) were justified in law and has not acted perversely in deleting the addition of Rs.3881736/- on account of excise duty paid on un-returnable scrap.”

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job

work

M/s.

Pushp

Enterprises. iii) It is unreasonable and not admissible when the assessee himself declared the sale of the scrap in ER-1 and make the payment of excise duty thereon, how a prudent person would give the scrap amounting to Rs. 1,35,56,787/- to the other persons without any benefits. iv) The assessee has also declared receipts from job work amounting to Rs. 2,05,87,743/- and against that job, the assessee has not declared any sales of scrap. In these circumstances, it is clear that the explanation of the assessee is nothing but cooked story which is not admissible therefore, as show cause given to the assessee a sum of Rs. 1,35,56,787/- is added back in the income of the assessee treating the same as concealed sale of the scrap." Penalty u/s 271(1) (c) for concealment of income and for filing of inaccurate particulars is being separately initiated.” 8. However CIT(A) while considering the same has observed as under:- “3.2 The Ao had alleged that the assessee had paid the job work of Rs. 3,55,96,219/- its sister concern namely M/s Noble Industries and through this arrangement, the assessee has transferred its profit to the sister concern. The counsel of the appellant has argued that M/s Noble Industries was the sister concern and assessed to tax independently and it was regularly filing its return of income. Further M/s Noble Industries had also passed on the job work in- turn to the other vendors and out of total contract receipts of Rs. 3.88 crores, it had subcontracted the contract work of Rs. 3.10 crores to other job workers. Inspite of this fact, M/s Noble Industries had shown the sales of the scrap of Rs. 7,47,109/- in its books of account. In support of the same, copies of invoices for sale of scrap to M/s Santosh Steel Corporation and Shree Shyam Steel Corporation by M/s Noble Industries were also filed. The matter was remanded to the AO for examination of M/s Noble Industries

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along with its books of account vide my letter dated 28.03.2012. During the remand proceedings, books of account of M/s Noble Industries were produced before the AO and it was also confirmed that it had not returned any scrap to the assessee. Further part of job work was sub-contracted and it had not received any scrap from the sub-vendors. The AO has made sweeping allegations against the assessee that since the vendor namely M/s Noble Industries was an associate concern therefore by letting it retain the scrap, the profits of the assessee firm had been transferred to the said concern. However there is no material brought on record by the AO to substantiate his claim. Even during the remand proceedings, M/s Noble Industries has categorically stated that it had not returned any scrap to the assessee firm. Further 80% of the job work was sub-contracted and no scrap was ever returned by the sub-vendors to M/s Noble Industries. The appellant on the contrary had worked out percentage of wastage on the basis of engineering standards and parameters for payment of excise duty. However no amount was either realized or recovered on sale of wastage or scrap. 3.3 As per the earlier provisions, the Cenvat Credit attributable to the inputs contained in such waste and scrap which had not been received from job workers, was allowed to the assessee. Rule 57F provided that the materials cleared to the job workers was to be received back to the factory within 180 days and in case the processed inputs were not received back within 180 days, the manufacturer was liable to pay the amount equivalent to the Cenvat Credit. However after 01.04.2000, there was no provision under the Cenvat Credit Rules which provided that waste and scrap generated during the processing was to be returned to the manufacturer. New Cenvat Credit Rules made no such provision. In the case of Rocket Engineering Corporation Vs CCE 2006 (193) ELT 33 (CESTAT), it was held that the scrap was not required to be returned to raw material supplier. Further the raw material supplier was not required to pay any duty on the scrap since Cenvat Credit Rules after 1- 4-2000 did not make any such provision. This view was confirmed in CCE Vs. Rocket Engineering Corporation (2008) 223 ELT 347 (Bombay High Court DB) and it was followed in Emco Ltd. Vs CCE (2008) 223 ELT 613 (CESTAT). On the contrary, the appellant

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in the present case had paid the excise duty by way of abundant precaution in view of Rule 4 (6) of the Central Excise Rules and para 3.18 of chapter V of supplementary manual of CBEC’s instruction. The Central Excise Commissionerate, Jaipur-1 had issued show cause notice to M/s National Engineering Industries Ltd, Khatipura Road, Jaipur as to why excise as to why excise duty of Rs. 85,52,326/- along with interest should not be recovered from it as it had failed to pay excise duty on the scrap generated at the premises of job workers which was retained by them. Considering the provisions of Rule 4(6) of the Central Excise Rules 2006 read with supplementary instruction, the appellant paid excise duty on the notional value of scrap. However in the present case, it is not material whether the appellant had paid any excise duty or not on the scrap retained by the vendors since it is not the subject matter here. The moot point is whether any scrap/wastage was sold by the appellant or it was not recorded in the books of account. There is no evidence that the appellant had received wastage/scrap from its vendors. There is no evidence that the appellant had sold the scrap outside the books of account. The AO has proceeded on the presumption that as the appellant had paid the excise duty on the sale of scrap/wastage, such income had accrued or received by it. In reality, the excise duty was paid on notional value and no income had accrued to or received by the appellant. Further, on the basis of legal principle that no notional income, which should have been earned and is not earned, can be brought to tax. In the case of CIT Vs Shoorji Vallabhdas and Co. (46 ITR 144), the Hon’ble Supreme Court held that no doubt income-tax was a levy on income and the Income-tax Act took into accounts two points of time at which the liablity to tax was attracted viz., the accrual of income or its receipts, yet the substance of the matter was the income and if the income did not result at all, there could not be a tax. It was also held that where the income could be said not to have resulted at all, there was obviously neither accrual nor receipt of income. In the said case before the Hon’ble Supreme Court, the reduction in commission was a part of the agreement entered into by the assessee to secure a long time managing agency arrangement for the two companies which it had floated and since the said agreement entered into within the relevant previous year had replaced the earlier agreements and had

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altered the rate resulting in reduction of commission income, it was held by the Hon’ble Apex Court that the amount of commission income to the extent of such reduction could not be said to be accrued to the assessee. In the present case, there is no evidence that the vendors or sub vendors had returned the scrap to the appellant and same was sold by the appellant outside the books of account. In the case of State Bank of Tranvancore Vs CIT(158 ITR), it was held by the Hon’ble Supreme Court that the concept of reality of the income and the actuality of the situation were relevant factors which went to the making up of the accrual of income. It was also held that what had really accrued to the assessee, had to be found out first and what had accrue must be considered form the point of view of real income taking the probability or improbability of realization in a realistic manner and dovetailing of these factors together. In the present case, no real income accrued to the appellant or was received by it during the year under reference4 simple because it did not recover or realize the same. As evident from the examination of the vendor M/s Noble Industries by the AO during remand proceedings, it had not returned the scrap to the appellant. On the contract undertaken by it, M/s Noble Industries had shown the sale of Scrap of Rs. 7,47,109/- in its books of account. The contract of Rs. 3,10,51,125/- was sub-contracted to sub vendors and there was no evidence on the record to suggest that these sub-vendors had ever returned the scrap to the alleged vendor or the appellant itself. The appellant had provided complete names & addresses of these sub-vendors along with their PANs to the AO. Accordingly no adverse inference could have drawn against the appellant merely on surmises. There was no real income which could be brought to tax in the hands of the appellant on accrual basis or receipt basis. In view of above facts, I direct the AO to delete the addition of Rs. 1,35,56,787/- made by him. This ground of appeal is allowed. 4.In the second ground of appeal, the appellant has challenged the addition of Rs. 2,33,96,017/- on account of concealed sales which also included the amount of Rs. 1,35,56,787/- added on account of concealed sale of scrap. Before me, the counsel of the appellant has argued that during the course of assessment proceedings, the assessee had filed reconciliation statement wherein as per excise return following sales return/rate difference/short/receipts

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and other debit notes were adjusted. The assessee filed complete documentary evidences in this regard but the AO had out rightly rejected the claim of the assessee without mentioning anything in this regard. The AO had simply mentioned that the amount of rate difference could not be deduced from the sales declared in ER-1 return because the sales declared in include the increased value of invoiced through supplementary invoice value and rates had already been considered as genuine by the purchaser i.e. SKF India Ltd. Hence the submissions of the assessee were rejected. This observation of the AO was wrong because the assessee had included the rate difference bill in his ER-1 submitted to the Excise Department and paid excise duty on the same which were subsequently no reverted. The assessee also submitted complete evidences in this regard in the form of debit notes/rejection/short receipt advices. So there was no reason to reject the claim of the assessee without any ground. In view of above facts, it was prayed to delete the impugned addition of Rs. 2,33,96,017/- made by the AO. 4.1 I have duly considered the submissions of the appellant. As per excise return ER-1, the assessee had reduced the sales return/rate difference/short receipts and other debit notes which were adjusted against the sales from the total turnover. The assessee filed reconciliation statement for the same but the AO brushed aside the same allegedly on the ground that the amount of rate difference could not be deducted from the sales declared in ER-1 return because the sales declared in ER-1 return was on the basis of the quantity and the original bills and it could not have included the invoices through supplementary invoices and rates had already been considered as genuine by the purchaser i.e. SKF India Ltd. However it was factually incorrect since rate difference and rejection had been rightly reduced from the figures of sales submitted to the Excise department. On careful consideration of facts, I find that the AO has brought to tax the amount of Rs. 1,35,56,787/- twice ie. first on account of concealed sale of scrap and subsequently as understated sales which tantamounts to double addition. The appellant had claimed an amount of Rs. 29,50,662/- on account of rate difference from SKF India Ltd. The AO has not allowed the rate difference simply on the ground that the amount was raised through supplementary invoices. On the other hand, the

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appellant has filed sufficient documentary evidence in form of correspondence with SKF India Ltd to show that the rate difference of Rs. 31,26,856/- was not allowed by its principal M/s SKF India Ltd. The appellant had rightly reduced the same from the total turnover in the ER-1 return filed with the Excise Department. The appellant had further claimed an amount of Rs. 98,39,230/- on account of raw material rate difference between HSS material and raw material as per contract. The AO has not allowed the rate difference simply on the ground that the amount was raised through supplementary invoices. However on perusal of the various document filed by the appellant, the rate difference of Rs. 98,39,230/- is found to be in order. The appellant had raised the invoice No. 1528 dated 20.09.2008 for an amount of Rs. 25,93,355/- to M/s SKF India Ltd however M/s SKF India Ltd paid an amount of Rs. 12,34,549/- against this invoice and therefore there were short receipts to the extent of Rs. 13,58,806/-. The appellant had raised the invoice No. 1539 dated 22.09.2008 for an amount of Rs. 33,96,275/- to M/s SKF India Ltd however M/s SKF India Ltd paid an amount of Rs. 22,27,394/- against the invoice and therefore there were short receipts to the extent of Rs. 11,68,881/-. The appellant had raised the invoice No. 1540 dated 22.09.2008 for an amount of Rs. 56,07,531/- to M/s SKF India Ltd however M/s SKF India Ltd paid an amount of Rs. 31,45,428/- against this invoice and therefore there were short receipts to the extent of Rs. 24,62,103/-. The appellant has filed complete details containing description of raw material for rate difference along with copies of invoices. The appellant has also filed copies of invoices for rate difference of Rs. 42,07,979/-, Rs. 3,54,904/- and Rs. 2,86,557/- on account of HSS raw material rate difference. The principal M/s SKF India Ltd vide their letter dated 19.03.2009 had informed the appellant that the rate difference raised through supplementary invoices No. 1959, 1960 and 1961 was not acceptable to them. The appellant had rightly reduced the same from the total turnover in the ER-1 return filed with the Excise Department. Further the appellant had raised the invoices bearing No. 1523 to 1527 dated 20.09.2008 for Rs. 65,91,015/- however M/s SKF India Ltd had paid an amount of Rs. 36,40,336/-. Thus there were short receipts of Rs. 29,50,682/- which were reduced by the appellant form the total turnover in the ER-1 return. Though

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the AO had disallowed the rate difference of Rs. 31,26,865/-, yet the amount was inadvertently taken at Rs. 1,35,56,787/- while making the addition on account of understated sales on page 3 of the assessment order. Since the rate difference of Rs. 31,26,865/- and Rs. 98,39,230/- is supported by the necessary documentary evidence the addition made by the AO has no legs to stand and cannot be sustained. However, I find that M/s SKF India Ltd had rejected the material sent through invoices bearing No. 276 dated 25.01.2008 and 281 dated 28.01.2008 amounting to Rs. 1,76,179/-. The material was rejected in AY 2008-09 itself and was allowable in that year only. However the appellant has claimed the same in the current year by passing journal entry on 07.02.2009. However such a claim is not allowable in the year under reference. I therefore direct the AO to restrict the addition to Rs. 1,76,179/- instead of Rs. 2,33,96,017/- made by him. This ground of appeal is partly allowed.” 9. The same was confirmed by the Tribunal. 10. Taking into consideration, the observations made by both the authorities, the issues are answered in favour of assessee against the department. 11. All the appeals are dismissed.

(VIJAY KUMAR VYAS)J. (K.S.JHAVERI)J. Chouhna/46, 70,71, 72