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Income Tax Appellate Tribunal, DELHI BENCH G: NEW DELHI
Before: SMT DIVA SINGH & SHRI ANADI N. MISHRA
(A) These are cross appeals filed by the revenue and the assessee against the order dated 30.09.2011 of the Id CIT(A), Ghaziabad for the Assessment Year 1994-95.
(A.l) The revenue has raised the following grounds of appeal:-
"1. The Id CIT(A) has wrongly allowed relief on account of GP rate by directing the GP rate at 24% on the total sale in place of different GP rate applied by the AO on different items sale @44.54% and 35%. Hence, the order of the Id CIT(A) be cancelled and the order of the AO be restored."
* Page 2 of 28
(A.2) The assessee has raised the following grounds of appeal:-
1. That having sustained a trading account addition of Rs. 7,95,617/- by applying a GP rate of 24% by rejecting the accounts U/sl45(2) the Ld CIT (A) is not justified in confirming / upholding the following specific additions out of trading account items which being untenable, unjust and unwarranted under the facts and circumstances of the case be kindly deleted. (A) Purchases from Raj Lubricants. 3,16,250/- (B) Payments of Job work made in contravention o f23,27,698/-provision of Sec40A(3). (C) On account of difference in transformers accessories 2,75,000/- 2. That the trading account addition of Rs. 7,95,617/- as sustained y the Ld CIT(A) by applying a GP rate of 24% as against 22.45% shown by the assessee is highly excessive despite rejection of account u/s 145(2). 3. That the Ld CIT(A) is not justified in confirming the disallowance of Rs 22,071/- out of sales promotion expenses of Rs. 54142/- by treating them as entertainment expenses. 4. That the Ld CIT(A) is not justified in confirming the addition of Rs 1,46,934/- as interest on FDR which being unwarranted and uncalled for under the facts and circumstances of the case be kindly deleted. 5. That the Ld CIT(A) is not justified in confirming the following additions which being untenable, unwarranted and uncalled for under the facts and circumstances of the case be kindly deleted
(A) Provision for Interest on bank loan. Rs 24,30,100/- (B) Additional Depreciation on revalued cost of building. Rs 3,05,693/-
6. The Ld CIT(A) is not justified in declining to admit and decide on merits the following grounds which were taken before him as additional ground which be kindly admitted and decided on merits under the facts and circumstances of the case: (A) That the deductions be kindly allowed by way of constructive adjustments towards the valuation of opening stock for Rs 705,659/- being the amount of additions sustained 7 upheld by Hon'ble ITAT towards the valuation of closing Stock of A /Y 1993- 94 (vide order dt 29-12-2006 in ITAno2322/Del/2003). (B) That deductions be kindly allowed for sum of 1536,451/- being amount of foreign consultancy expenses the disallowance of which has been upheld by Hon'ble ITAT (vide its order dt 17-08- 2004 in for A 7 Y1995-96) as being expenses pertaining to A 7Y1994-95.'
7. That in any case but without prejudice to other grounds, the various additions/ disallowances as made/ confirmed over and above the returned income, are unjust, arbitrary and very excessive. They even overlap each other and tantamount to double additions under the facts and circumstances of the case.
8. That the Ld Authorities below are not justified in-
V (a) not giving set off for brought forward unabsorbed depreciation and losses correctly as per law. (b) Allowing the deduction for depreciation correctly as per law.
That the interest u/s 234B has been wrongly charged which be kindly held as not chargeable.
That the Ld Authorities below have not appreciated the facts of the case and the assessee's contentions in the right perspective and the several inferences as drawn, are incorrect, unwarranted and/or grossly misconstrued/misconceived."
(B) Assessment order was passed by the AO on 28.2.1997 making the following additions:-
"1 Purchases from Raj Lubricants not sold nor shown in Rs. 3,16,250/- The closing stock as discussed in para 3. 2. Payment of Job Work made in contravention to the Rs. 23,27,698/- Provisions of section 40A(3) of the Act, to the two Fabricaters, disallowed as discussed in para 4 (M/s. Raj Vishwakarama Rs. 1513986/- + Vishwakarma Fabricaters 813712/-)
Profit on transformer purchases on 14.10.1993 as Rs. 25,771/- Discussed in the last para on page 13. (40% of 64428/-)
Addition on a/c of difference in transformers accessories As discussed in para 7 on page 19 Rs. 2,75,000/-
Trading Additions As discussed above, by applying the provisions of section 145 (2) of the Act, the trading addition has been to the Account Of Rs. 7482642/-. However, since additions totalling Rs. 2944719/- under the heads purchases from Raj Lubricants not sold nor shown in the closing stock (Rs. 316250/-), disallowance of job work made in contravention to the provisions of section 40A(3) to the two fabricators (Rs. 2327698/-), profit on transformer purchased on 14.10.93 (Rs. 25771/-) and on a/c of difference in transformers Accesseries (Rs. 275000/-) have been separately made, the same Is reduced from the trading addition worked out at Rs. 7482642/-. Hence the amount of trading addition comes to Rs. 4537923/- (RS. 7482642/- - Rs. 2944719/-), which is added Rs. 45,37,923/- (4) Interest on Advance to M/s. Yak Electrical System(P) Ltd. as discussed above. Rs. 1,80,000/-
(5) Interest on Advance to NLI disallowed, as discussed above Rs. 2,38,351/-
N Page 4 of 28
Interest on advances to Electrical Stamping Manufacturers, As discussed above: (i) Intt. On opening balance of Rs. 2176759/- @ 15% Rs. 326424/- (ii) Intt. On loan given during the year Rs. 9073/-
Rs. 335499/- Rs. 3,35,499/-
Disallowance out of travelling expenses, as discussed above Rs. 20,000/-
Sales Promotion expenses disallowed u/s 37(2), as Discussed above : Entertainment expenses Rs. 34142/- Less u/s 37(2) 1st 10,000/- @ 100% Rs. 10,000/- On balance 44142/- @ 50% Rs. 22,071/-
Rs. 32,071/- Rs. 32,071/-
Rs. 22,071/- Rs. 22,071/- 9. Interest on FDR, not shown as discussed above Rs. 1,46,934/-
10. Add: Disallowances made while processing the return u/s 143(l)(a) dated 30.8.1995 and confirmed in appeal 1) Additional depreciation on revalued cost of Building disallowed Rs. 305693/- 2) Interest on bank loan disallowed Rs. 2430100/-
Rs. 2735793/- Rs. 27,35,793/-
Rs. 1,60,68,198/-.
(B.l) Against the aforesaid assessment order dated 28.2.1997 the assessee filed appeal before CIT(A) who disposed off the appeal vide order dated 29.12.1997. The matter travelled to ITAT where , vide order dated 22/11/2002 in ITAT set aside all the grounds of appeal for re-adjudication by CIT(A). Fresh appellate order was passed by Ld. CIT(A) Ghaziabad on 30.09.2011. The present appeals now before us are against the aforesaid order dated 30.9.2011 of CIT(A) , Ghaziabad. During appellate proceedings the assessee filed paper books and also filed a synopsis. The relevant portion of the synopsis is reproduced as under for the convenience of ready reference "SYNOPSIS
Assessee, a Ltd Co., is engaged in the manufacturing of electrical transformers.
Return declaring a loss of Rs.46, 18,660.00 (after set off for brought forward losses against this year's income of Rs.50,16,642.00 as per Profit & Loss account was filed on 30-01-1995. Copy of Statement of Income filed with the return is at page 10 of the second paper book. 3. Assessment has been made on an income of Rs.1,56,82,263.00 vide order dated 28-02 -1997. 4. The audited books of account were produced before the A.O. but the same were rejected and assessment was made by applying section 145(2). 5. The details of the gross profit computation and the income as assessed are at Page 28 & 32-34 of the assessment order. 6. The first appellate order against the Assessment Order was passed by the CIT (A) on 29-12-1997 allowing some relief as reproduced in the impugned CIT (A) order, copy attached herewith at pages 10 - 23 of these Synopsis. 7. Hon'ble ITAT in further appeal against the above CIT(A) order dated 29/12/1997 had set aside the CIT (A)'s order on all grounds of appeal
vide its order dated 22-11-2002 and restored all the issues back to CIT (A) for fresh decision reproduced in the impugned CIT (A) order. Copy of IT AT order is attached herewith at pages 24 - 25 of these Synopsis.
8. After its restoration, the CIT (A) has disposed of this appeal vide his impugned order dated 30-09-201 '1 which is now under appeal. Ground No. 1 & 2 1) Trading account addition of three specific items Rs.29,18,948.00 as per details hereafter (Out of four additions of Rs.29,44,719.00 made by the A.O) upheld by the Ld. CIT (A).
2) Trading account addition - GP rate based balance addition of Rs.7,95,617.00 (as sustained by CIT (A) out of addition of Rs.45,37,923.00 made by the A.O)
Assessing Officer had made a trading addition of Rs. 74,82,642.00 by rejecting books of account by invoking section 145(2) and estimated gross profit by applying higher GP rates. She also made four specific additions totaling at Rs.29,44,719.00. However she allowed set off of four specific addition of Rs.29,44,719.00 against the total GP rate based addition of Rs.74,82,642.00 by telescoping them and therefore the total addition of Rs.74,82,642.00 stood bifurcated into two parts as under: a) Addition of Rs.29,44,719.00 consisting of four specific items and the other part of the balance amount of Rs.45,37,923.00 of which relevant details are at pages 28 & 32-33 of the Assessment Order.
Out of specific item additions, addition of Rs.25,771.00 in respect of one item being profit on transformer purchase on 14/10/1993 has been deleted by CIT (A), while addition of Rs.29,18,948.00 in respect of other three items has been confirmed by CIT (A) which is contested vide Ground No.l of this appeal. b) As regards other addition of balance amount of Rs.45,37,923.00, the CIT(A) by applying GP rate of 24% has allowed a relief of Rs.37,42,306.00 and has sustained the addition to the extent of Rs. 7,95,617.00 which is contested by Ground No.2 in this appeal. Against the relief allowed by CIT (A) revenue is in appeal.
Ground No. 1 (A)
Addition of Rs.3,16,250/- made by the AO on account of Purchases from Raj 9 Lubricants. a) A.O. has discussed it in Para 3 at page 2 of the Assessment Order. b) CIT (A) has dealt it in Para 7.2 at pages 29-32. c) Assessee's Submissions
On merits:- i) Paras 10-11 at page 14 of the written submissions filed before CIT(A) - first paper book by which it was submitted that the account books having been rejected u/s 145(2), such specific additions could not be legally made separately, though detailed submissions have been made on merits of such additions also. ii) Since such purchases of Rs.3,16,2501- has been recorded in account books during this year, though not shown in closing stock as per AO, but the Assessee having been shown the same as sales in the immediately succeeding assessment year viz. 1995 -96, addition of Rs.3,16,2501- made by the AO amounts to double assessment..
Consequently, the addition ofR s.3,16,2501- deserves to be deleted.
Ground No. 1(B)
Addition on account of Job Work Payments of Rs.23,27,698.00 a) A. 0. has discussed it in Para 4 at Pages 3-13of the Assessment Order. b) CIT (A) has dealt it in Para 7.2 at Pages 29-32 by reproducing the finding of his predecessor at Pages 29-31 and then by simply agreeing with him. The Ld. CIT (A) had ignored assessee's submissions and had not applied his mind independently. c) Assessee's Submissions On merits:-
1) Documents relied on -
(i) Paras 12-14 at page 15 of written submissions before CIT(A) placed in the first paper book and copies of bills at pages 50-60 of the first paper book by way of specimen.
(ii) Statement on oath of Ram Raj Vishwakarma at Pages 42-46of the second paper book.
(Hi) Statement of accounts ofShri Ram Raj Vishwakarma and of M/s Vishwakarma Fabricators at Pages 90-106 and 107-112 of second paper book.
(iv) Copies of agreement with Ram Raj Vishwakarma & M/s Vishwakarma Fabricators are at Pages 113-114 of second paper book regarding fabrication work.
2) After rejection of books of account uls 145(2) and overall addition of Rs.7,95,617.00 towards trading results having been sustained by CIT (A), this separate specific addition out of the same Trading account could not legally be made. Reliance is placed on following decisions:-
(i) CIT vs Banwari Lai Bansidhar 229 ITR 229 (Allahabad FIC), copy at pages 9 -11 of first paper book.
(ii) Shri Sreedhara Panicker vs ITa in 7 TT J 573 (ITAT Cochin), copy at pages 80-83 of second paper book.
In the alternative, without prejudice, the Submissions made before Ld. CIT (A) had been ignored by him because he has confirmed the additions by merely relying on his predecessor's order which had been set aside by ITAT. The Ld. CIT (A) having not applied his mind independently. The issue therefore be restored back to the file of A.O. or CIT (A).
Ground No. 1 (C)
Addition of Rs.2,75,000.00 on account of Difference in Transformers Accessories a) A.O. has discussed it in Para 7 at Page 19 of the Assessment Order. b) CIT (A) has dealt it In Para 7.2 at Pages 29-32 and has confirmed the addition. c) Assessee's Submissions
On merits:-
(i) Paras 16-19 at Page 16 of the first paper book in which it was specifically submitted that "there is no material whatsoever to support the Id. AO inference that the Assessee has sold 55 accessories (68 opening stock minus 13 accounted sold) outside books of accounts and that Assessee's contention was supported by plausible explanation and accounting record which has not been disproved or held to be incorrect.
(ii) Sub-Para (v) at page 5 (Written submission before CIT (A) in original appeal) of second paper book.
(Hi) Separate addition tantamount to double addition in principle in view of separate overall addition of Rs.7,95,617.00
In the alternative, the Submissions made before Ld. CIT (A) had been ignored by him because he has confirmed the additions by merely relying on his predecessor's order which had been set aside by ITAT. The Ld. CIT (A) having not applied his mind independently. The issue therefore be restored back to the file of A.O. or CIT (A).
Ground No. 2
Assessee's appeal against GP rate based addition of Rs.7,95,617.00 maintained by CIT (A) out of addition of Rs.45,37,923.00 made by A.D.
This ground is argued with reference to the comparative chart of trading results and the treatment accorded by the Revenue attached herewith as Annexure A at page 8 of these Synopsis.
However with reference to departmental appeal which is interlinked, following references are relevant - a) A.O. has summarised his conclusion at Pages 28 & 32-33 of the Assessment Order. b) CIT (A) has dealt it in Para 7.3 at Pages 32-35 of his Order. c) Assessee's Submissions
(i) Para 7 at Pages 2-3 of the first paper book (before CIT (A)).
(ii) Paras 3-7 at Pages 2-4(Before CIT (A) in original appeal) of second paper book.
(Hi) Past history of the case-Comparative Chart of trading result is enclosed as Annexure A page 8 of these Synopsis.
Ground No. 3 Disallowance of Rs.22,071 out of sales promotion expenses. This ground is not pressed. Ground No. 4
Addition ofR s.l ,46,934.00 as accrued interest on F.D.R. (of Rs.21,22,000). a) A.O. has discussed it at Page 32 of the Assessment Order. b) CIT (A) has discussed it in Para 10 at Page 36 of appellate order. c) Assessee's Submissions are as per Para 10 at Page 4 of first paper book which have been overlooked and ignored by CIT (A).
(i) Interest on FOR does not accrue on day to day basis but accrue on maturity. (ii) The entire amount of interest has been accounted for and returned and taxed in the next year i.e. A1Y: 1995-96 (which has become final) and hence its assessment in this year amounts to double addition which is not justified and deserves to be deleted.
Ground No. 5(A)
Provision for bank interest of Rs.24,30,1 00.00. a) A.O. has made the addition in computation of income at Page 34 of the Assessment Order. She has not dealt in detail probably because this addition was also made in assessment u/s 143(1)(A) (which was deleted on appeal). b) CIT (A) has dealt it in Para 11 at Pages 37-38 of his impugned appellate order. c) Assessee's Submissions
(i) Kindly refer to assessee's written submissions before CIT (A) vide Para 11.4 and 11.5 at page 5 of the first paper book.
Reliance is also placed on copy of ITAT order in the case of General Fiber Dealers (P) Ltd. (127 Taxman 161) which applies to the facts of assessee's case also (Copy at Page 19-20 of first paper book). The Ld. CIT (A) was not justified in holding that the same was distinguishable. The Ld. CIT (A) had ignored appeHate's written submissions made before him vide Para 3 at Page 22 of the first paper book in which it was highlighted that no such disallowance had been made in any of the earlier years. Further he had also not appreciated the fact that such interest was an accrued liability and was not a contingent liability. Rule of consistency is also invoked as held in 193 ITR 321-323 Radhasoami Satsang Vs. CIT (SC) also followed by P & FI Fligh Court in 278 ITR 262 and 264 ITR 276, CIT Vs. ARG Securities Printers (Delhi Ftigh Court)
(iii) Reduction In outstanding loan amount balance as per Balance Sheet as on 31- 03-1994 and 31-03-1993 as per annual account statements-Schedule 3 at Page 34 of first paper book indicates payment towards interest during the year.
Ground No. 5(B) Additional Depreciation Rs.3,05,693.00. This ground is not pressed. Additional Grounds before CIT (A) Ground No. 6(A)
Deduction by way of constructive adjustments towards the valuation of opening stock for addition of Rs. 7,05,659.00 in valuation of closing stock ofA/Y 1993-94. a) CIT (A) has dealt it in Para 13A at Page 39of his order.
ITAT having confirmed addition of Rs. 7,05,659.00 on account of valuation of closing stock for A/Y 93-94, kindly see Para 13-15 at Pages 165-166 of the tribunal order in second paper book and therefore its constructive adjustment deserve to be given to the assessee in the year under appeal viz. A/Y 94-95 because closing stock of 93-94 constituted opening stock of A/Y 94-95. This ground was raised by way of additional ground vide assessee's application dated 03-08-2011 before Ld. CIT (A) which vide Para 13A at Page 39 has been rejected being premature and out of jurisdiction. b) Assessee's Submissions
(i) Reliance is placed on Assessee's submissions before CIT (A) in Para 20 at Pages 6-7 of the first paper book.
(ii) The Ld. CI'T (A) overlooked to appreciate that ITAT order for A/y 1993-94, copy placed at Pages 156-167 of second paper book by discussing this issue at Pages 165- 166 in Paras 13-15. This tribunal order dated 22/11/2002 was subsequent to first CfT (A) order dated 29-12-1997 (99ITR 135, Mahendra Mills Ltd. Vs. P.B.Oesai).
Ground No. 6(B)
Deduction for foreign consultancy expenses of Rs.15,36,451.00 disallowed by Hon'ble ITAT in A/Y 1995-96 as pertaining to AN 1994-95. a) CIT (A) has dealt in Para 138 at Page 39 of his order by rejecting it on the ground that such grievance could not be made before him. b) Assessee's Submission
(i) Assessee's submissions before CIT(A) in Para 21 at Page 7 of the first paper book. (ii) Cause of action arose out of Hon'ble ITAT's order for A/Y 1995-96 passed subsequently on 17-08-2004. Copy of order at Pages 229-240 of second paper book. Relevant issue discussed at Pages 233-235 in Paras 9-12. Therefore the Ld. CIT (A) was not justified in rejecting it.
Ground No. 7
Excessiveness and overlapping nature of additions.
Ground is self explanatory and it stands covered along with Ground No.l and 2 above.
Ground No. 8 Claim for set off for brought forward losses/depreciation. The Ground is self explanatory. Ground No. 9 Charging of interest U/s 2348. The Ground is of Consequential Nature.
The department is in appeal against relief of Rs.37,42,306.00 allowed by CIT (A) out of Trading account addition of Rs.45,37,923.00 out of which he has sustained an addition of RS.7,95,617.00.
Assessee's Submissions in Para 7 at Page 2-3 of the first paper book {before CIT (A)}.
A Comparative Chart of trading results as enclosed at Annexure A at page 8 of these Synopsis.
The Assessee's relies on findings ofLd. CIT (A) in Para 7.3 at Page 32-35 of his order.
The Departmental appeal therefore deserves to be dismissed."
(C) The ground of appeal raised in the appeal filed by revenue is related to Trading Account addition. First ground of appeal , including sub grounds 1(A), 1(B) and 1(C) and second ground of appeal in the appeal filed by assessee are also related to Trading Account additions. These grounds in the cross appeals, being interconnected, are being taken up together for the sake of convenience. Vide assessment order dated 28.02.97 the AO made a trading addition of Rs.74,82,642/-. The assessee had disclosed total sales of Rs. 5,10,01,746/- on which Gross Profit (GP) of Rs. 1,15,40,802/- was disclosed, which came to 22.45% of Gross Profit ratio (GP ratio). The Assessing Officer (AO) rejected book results and applied higher GP ratios on sale of Distribution Transformers and 220 KV CTs. The AO found that the total sales included 2.46 crores on account of distribution transformers and Rs. 1.61 crores on account of 220 KV CTs. She applied GP ratio of 44.45% on sale of distribution transformers and 35% on sale of 220 KV CTs. This resulted in total GP addition of Rs. 74,82,642/-. The AO also made specific additions totaling Rs. 29,44,719/- in Trading Account of the assessee towards purchase from M/s. Raj Lubricants not included in closing stock (Rs. 3,16,250/-), disallowance u/s 40A(3) of I.T. Act (Rs.23,27,698/-), profit on transformer purchase (Rs. 25,771/-) and difference in transformer accessories (Rs. 2,75,000/). However, the AO allowed set off of the aforesaid four specific additions totaling Rs. 29,44,719/- against the total GP addition of Rs. 74,82,642/-. In effect, the total of trading account additions remained at Rs. 74,82,642/- as specific additions totaling aforesaid Rs. 29,44,719/- were telescoped with GP addition of Rs. 74,82,642/-.
(C.l) As mentioned earlier, the AO applied the GP rate of 44.54% on sale of distribution transformers and 35% on sale of 220 KVCTs. The basis for taking GP of 44.54% and 35% respectively for distribution transformers and for 220 KV CTs is provided by the AO at page 22 of the assessment order and is reproduced below for the convenience of ready reference:-
"On checking the trading results, it was observed that the assessee had shown the average price of 200 KVA Distribution Transformers in the finished goods at Rs. 49,500/- per piece. During the year the assessee had sold 200 KVA distribution transformers at Rs. 71,906/- per piece and Rs. 1,15,000/- per piece. The 100 KVA distribution transformers have been sold by the assessee @ Rs. 80,865/- per piece. Taking into consideration that the value of the finished goods shown by the assessee of 200 KVA distribution transformers was only Rs. 49,500/- and giving the benefit to the assessee, the average sale price of 100 KVA & 200 KVA distribution transformers comes to Rs. 89,257/- (80,865/- + 71,906/- + Rs. 1,15,000/-). Taking the above facts into consideration, the G.P. rate on the same comes to 44.54%. Likewise is for the other major sales made by the assessee of 220 KVCTs. During the year the assessee had sold 140 pieces of 220 KVCT for a sum of Rs. 1,61,55,460/- giving an average sale price of Rs. 1,15,396/- In the closing stock No. 220 KVCTs have been shown by the assessee, but in the opening stock the value of the same was shown at Rs. 75100/-. Taking the same into consideration, the G.P. rate on the same comes to 35%."
(C.2) Vide order dated 30.09.2011 Ld. CIT(A) held that it would meet both ends of justice if a GP rate of 24% is applied to assess the income in place of 22.45% declared by the assessee and he directed the AO to compute the income of the assessee on the basis of GP rate of 24% on disclosed total sales of Rs. 5,10,01,746/- for this year. Thus, he sustained GP addition to the extent of Rs.7,95,617 only whereas total GP addition made by the AO was Rs.
74,82,642/-. Both revenue and assessee are aggrieved by this direction of the Ld. CIT(A) and are in appeal before us. Vide his order dated 30.9.2011 Ld. CIT(A) also separately upheld specific additions of Rs. 3,16,250/- (purchases from Raj Lubricants), Rs.23,27,698/-
(Disallowance u/s 40A (3) of I.T. Act) and Rs. 2,75,000/- (difference in transformer accessories). The assessee is aggrieved by this and grounds 1(A), 1(B) and 1(C) of appeal filed by assessee are related to specific additions of Rs. 3,16,250/- (purchases from Raj
Lubricants), Rs, 23,27,698/- (Disallowance u/s 40A (3) of I.T. Act) and Rs. 2,75,000/-
(difference in transformer accessories) sustained by Ld. CIT(A).
(C.3) At the time of hearing before us, the Ld. Counsel for assessee drew our attention to the fact that the GP rate of 22.45% disclosed by the assessee on total sale of Rs.
5,14,01,746/- was better than GP rate of 13.43% and 20.62% disclosed by the assessee in the two preceding assessment years 1992-93 and 1993-94 respectively. He further highlighted that the GP ratio disclosed by the assessee in two subsequent assessment years 1995-96 and 1996-97 were 21.48% and 15.61% respectively which also were lower than the GP ratio for this year. The Ld. Counsel for assessee pleaded for deletion of the GP addition of Rs.7,95,617/- sustained by the Ld. CIT(A) by drawing our attention to trading results disclosed by the assessee as per assessee's books of accounts for nine Assessment years (AY 1990-91 to 1998-99), summary of which was presented by assessee at page 8 of Paper Book, and highlighted that except in AY 1991-92, the GP ratio disclosed by assessee in all the other years, as per books of the assessee, is lower that GP ratio in AY 1994-95. He also drew our attention to orders in the case of the assessee itself for different assessment years, by various authorities such as AO, CIT(A) and ITAT, to plead that the gross profit shown by assessee for this year was reasonable and deserved to be accepted. Copies of these orders by different authorities such as AO, CIT(A) and ITAT are included in the paper book filed by the assessee, and have been perused by us. The Id. Counsel for assessee also informed at the time of hearing, that book results have been rejected by the Assessing Officer in many other assessment years too, both prior to and subsequent to AY 1994-95. The Ld. Counsel for assessee further opposed the order of Ld. CIT(A) in respect of the additions of Rs. 3,16,250/- (purchases from Raj Lubricants, Rs, 23,27,698/- (Disallowance u/s 40A (3) of I.T. Act and Rs. 2,75,000/- (difference in transformer accessories) are concerned and relied on the synopsis filed in this regard and on the paper books. The synopsis filed during the appellate proceedings has already been reproduced earlier in this order for ready reference. On the other hand, Ld. Departmental Representative (DR) strongly relied on the assessment order in support of the ground of appeal filed by revenue. The Ld. DR further relied on orders of Assessing Officer and Ld.CIT (A) to oppose First ground of appeal , including sub grounds 1(A), 1(B) and 1(C) and second ground of appeal in the appeal filed by assessee.
(C.4) We have heard both sides patiently. We have also perused all the materials on record, including paper books, synopsis etc. carefully. We have also considered the orders passed by various authorities such as AO, CIT(A), ITAT for different assessment years in the case of the assessee, which formed part of paper book filed by assessee. We have also considered judicial precedents referred to in orders passed by various authorities such as AO, CIT(A),
ITAT for different assessment years in the case of the assessee. We find that the Assessing
Officer has rejected book results and this action of the AO has not per se been disputed or opposed by the assessee, though, the assessee has contested the quantum of GP additions made by the AO on the ground that Gross Profit disclosed in the books of the assessee is reasonable. As the book results have been rejected by the AO, section 145(3) of I.T.Act comes into play, which is reproduced as under:
"145(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) [has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144]"
(C.5) As the rejection of book results by the AO u/s 145 is not in dispute, and in view of the provisions of section 145(3) of I.T. Act reproduced above it is obvious that the assessment was to be completed by the AO in the manner provided in section 144 of I.T. Act. Combined reading of sections 144 and 145(3) of I.T. Act shows that the AO was required to make the assessment to the best of her judgment. Best judgment assessment has been explained by Hon'ble Apex court in the highly illuminating order in the case of CST vs. H.M. Esufali H.M.
Abdulali, 90 ITR 271 (SC). Although this was a decision under sales tax law, the Hon'ble
Supreme Court has noted in this decision itself, at page 278 of 90 ITR, that the law relating to best judgment assessment is the same both in the case of Income tax assessment as well as \ in the case of sales tax assessment. Therefore, order of Hon'ble Apex Court in CST vs. H.M.
Esufali H.M. Abdulali (supra) is applicable to this case, and serves as a binding precedent; but we find that at no stage in this case the binding precedent of CST vs. H.M. Esufali H.M.
Abdulali (supra) has been considered by concerned authorities. In the case of CST vs. H.M.
Esufali H.M. Abdulali (supra) Hon'ble Apex court held that if the estimate made by the assessing authority is a bonafide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. The Hon'ble Apex Court further held that prima facie, the assessing authority is the best judge of the situation, that it is his best judgment and not anyone else's. The Hon'ble Apex Court moreover held that high court cannot substitute its best judgment for that of the assessing authority. The substance of this order of Hon. Apex court in CST vs. H.M. Esufali H.M. Abdulali (supra) is, that in a best judgement assessment, appellate authorities cannot substitute their best judgement for that of the Assessing Officer, if there is a reasonable nexus between the basis adopted by the Assessing Officer and the estimate made by him. Hon'ble Madras High Court, in the case of CIT vs. Rayala Corporation (P.) Ltd. 215 ITR 883 (Mad.) took note of the order of Hon'ble
Supreme Court in CST vs. H.M. Esufali H.M. Abdulali (supra). Explaining best judgment assessment, Hon'ble Madras High Court held as under in the case of CIT vs. Rayala
Corporation (P.) Ltd. (supra)
"In a best judgment assessment so long as the estimate made by the assessing authority is not arbitrary and has nexus with the facts discovered the same cannot be questioned. In the very nature of things the estimate made may be an over-estimate or an under-estimate. But, that is not ground for interfering with his best judgment. The assessee cannot be permitted to take advantage of his own illegal acts and it is his duty to place all facts truthfully before the assessing authority. If he fails to do his duty, he cannot be allowed to call upon the assessing authority to prove conclusively what turnover he had suppressed. That fact must be within his personal knowledge. Hence, the burden of proving that fact is on him. If the estimate made by the assessing authority is a bona-fide estimate and is made on a rational basis, the fact that there h no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his best judgment and not of anyont else. The question whether the Income-tax Officer has committed any error in hi: judgment under section 144 of the Act can be decided only on the basis of the materials gathered by him and not on the basis of any materials that are late produced by the assessee. There cannot be a procedure wherein the best judgment o the Income-tax Officer is subjected to the discretion of the assessee to product evidence/material at the appellate stage and thus convert the proceeding of the bes judgment assessment into a proceeding for regular assessment in which the assesset is served with a notice under section 139(2) of the Act. The Tribunal cannot enter intc a reappraisal of evidence after taking into consideration the additional evidence produced by the assessee before it in a proceeding arising out of best judgmen assessment."
(C.5.1) Explaining the powers and duties of Income Tax Appellate Tribunal (ITAT), Hon'ble
Madras High Court further held in the case of CIT Vs. Rayala Corporation (P.) Ltd. (supra) a: under:
"The Appellate Tribunal is not a court. Its powers, however, are expressed in tht widest possible terms under section 254 of the Income tax Act, 1961. Its powers an almost similar to the powers of an appellate court under the Code of Civil Procedure. / wide power, however, is not such that it can be exercised in any manner. The Tribuna can interfere with the orders of the lower authorities, but can do so only on judicia considerations and on the basis of the reasons that suggest clearly that the lowe authorities had committed an error of law or such facts that had vitiated it. considerations. Its primary task is not to go into the return of the assessee and decidt what amount of tax should be levied upon his income, but to see whether the taxinc authorities, including the Appellate Assistant Commissioner, have committed any erro of law or of fact and on account of such error, the assessee has suffered. The Tribuna has got to protect, on the one hand, the interest of the assessee in the sense that he i. not subjected to any amount of tax in excess of what he is bound to pay and on tht other hand, it has a duty to protect the interests of the Revenue and to see that no ont dodged the Revenue and escaped without paying the tax."
(C.6) On careful reading of the judicial precedents in the cases of CST vs. H.M. Esufali H.M
Abdulali (supra) and CIT vs. Rayala Corporation (P.) Ltd. (Supra), two aspects are relevant in ; best judgement assessment: firstly, whether there are sufficient grounds for making the bes judgement assessment; and secondly, whether there is a reasonable basis for the estimate made. If the best judgement assessment of the AO passes these two tests, appellate authorities will be without any jurisdiction to interfere with the quantum of addition made by the AO in best judgement assessment. In the instant case, firstly, there is no dispute about rejection of books by the AO u/s 145 of I.T. Act and; by implication, on combined reading of section 145 (3) and section 144 of I.T. Act; there is no dispute that there were sufficient grounds for making best judgment assessment. On perusal of appellate order dated 30.09.2011 of Id. CIT(A), we find that he has upheld rejection of book results and observed that GP rate as declared by the appellant cannot be relied upon completely by necessary implication. The Id. CIT(A) is of the view that there are sufficient grounds for making best judgment assessment u/s 145 r.w.s. 144 of the I.T. Act. Secondly, the AO has * given detailed reasons for the gross profit ratios adopted by her. We have referred to it in paragraph (C.l) of this order. It is not the case of the Id. CIT(A) that the basis adopted by the AO for estimation of Gross Profit on sale of Distribution Transformers is not a reasonable basis. Yet, he interfered with the best judgment and the AO by substituting the best judgment of the AO with his own best judgment by directing the AO to compute income in the basis of GP rate of 24% (almost equal to average of GP rate disclosed by the Assessee in its books in AYs 1991-92, 1992-93 and 1993-94). We are satisfied with the detailed reasons given by the AO in her assessment order, referred to earlier in paragraph no. (C.l) of this order, in view of which, we hold that in this case there is a reasonable nexus between the basis adopted by the Assessing Officer and the estimate made by her for Gross Profit on sale of Distribution Transformers and on 220KV CTs. As the best judgment assessment made by the AO for estimation of Gross Profit on sale of Distribution Transformers and on 220KV CTs passes these two tests; we hold that Id. CIT(A) lacked in jurisdiction to interfere with the best judgment of the AO for estimation of Gross Profit on sale of Distribution Transformers and on 220KV CTs ; in view of judicial precedents in the cases of CST vs. H.M. Esufali H.M.
Abdulali (supra), and CIT vs. Rayala Corporation (P.) Ltd. (supra).
(C.7) Even otherwise, when we consider specific facts, we find that the substance of arguments made on behalf of the assessee, as far as Gross Profit addition is concerned, is that the GP disclosed by the assessee in its books of accounts should be accepted as the GP ratio disclosed by assessee in this year is reasonable when compared with the GP ratio disclosed by the assessee itself in its books of account in other assessment years. This argument, however, fails on two counts. Firstly, we find that the GP disclosed by the assessee over the years has exhibited huge volatility. Based on details filed by the assessee in paper book (page 8 ), in which trading results of the assessee for assessment years 1990-91 to assessment year 1998-99, as per books of the assessee, have been summarized we notice that the GP ratio disclosed by the assessee as per its own books has varied from 13.43% in assessment year 1992-93 to 36.22% in assessment year 1991-92. When the trading results disclosed by the assessee for different assessment years show enormous volatility in this kind, the plea of the assessee to treat its own trading results for different assessment years as reliable indicators for estimating trading results for this year, lacks conviction and must fail. Secondly, the other reason why the trading result as per books of the assessee for other years cannot be taken as a reliable basis for ascertaining a trading result for this year is the fact that books of accounts of the assessee have been rejected by the AO u/s 145 of I.T. Act not only in this year but also in many other years. When the book results of the assessee have been rejected by the AO in many years besides in this year, the plea of the assessee to treat its own trading results for different assessment years as reliable indicators for estimating trading results for this year, completely lacks credibility, and must once again fail.
The plea of a party for reliance on certain materials must be rejected if these materials are unreliable. In the instant case, the assessee claims reliance on its own book results for other years for the plea that the Gross Profit disclosed in this year should be accepted being reasonable; but we have already found that assessee's own trading results for different assessment years are not reliable indicators for estimating trading results for this year.
Therefore, for these reasons also, we are of the view the Id. CIT (A) erred in giving direction to the AO to compute income on the basis of GP disclosed by the assessee in its books of account in other years.
(C.8) In a best judgment assessment, it may not be possible to exactly quantify the income earned by the assessee accurately. Some element of guess work and estimation may be involved in a best judgment assessment. When the exact income earned by the assessee is not accurately quantified in a best judgment assessment the assessed income may either be an underestimation or an overestimation. If however the income determined in a best judgment assessment has reasonable nexus with supporting material, no interference by appellate authorities is warranted in a best judgment assessment, in accordance with judicial precedents in the cases of CST vs. H.M. Esufali H.M. Abdulali (supra) , and CIT vs. Rayala Corporation (P.) Ltd. (supra). In view of this detailed discussion, we are of the view that Id.
CIT(A) erred in interfering with the best judgment of the AO as far as estimation of gross profit on Distribution Transformers and on 220 KV CTs is concerned.
(C.9) Perusal of sections 145(3) of I.T. Act and section 144 of I.T. Act shows that these provisions in law are meant to act as deterrent against mischief(s) and against indisciplined / irresponsible conduct of the assessee. Section 145(3) of I.T. Act comes into play when the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided under the Act has not been regularly followed by the assessee or when income has not been computed in accordance with standard notified under the Act. Section 144 of I.T. Act comes into play when the assessee fails to make the statutory compliances regarding filing of return or regarding complying with all the terms of notice issued u/s 142(1), 142(2A) or 143(2) of I.T. Act. The I.T. Act authorizes the AO to make best judgment assessment in accordance with section 145 (3) and/or section 144 of I.T. Act when the assessee indulges in mischief by failing to conduct itself in responsible and disciplined manner. The purpose of sections 145 and 144 of I.T. Act is to encourage the assessee to conduct itself in responsible and disciplined manner; and to act as deterrence against the mischief of assessee, if the assessee fails to conduct itself in responsible and disciplined manner. In a best judgment assessment u/s 145/144 of I.T. Act, when two views are possible; that view is to be preferred which serves the purpose of sections 145 and 144 of I.T. Act, and consequently, in the case before us that view is to be preferred which serves better as a deterrent against an assessee indulging in mischief by failing to conduct itself in a disciplined and responsible manner. For taking this view, we take guidance from well known rule of interpretation called 'Mischief Rule' which has been approved in many judicial decisions including in K.P. Varghese Vs. ITO, 131 ITR 597 (SC). When 'Mischief Rule' is applied, that view is preferred which suppresses the mischief and advances the remedy. We also take guidance from rule of purposive interpretation ( under which, when two views are possible, that view is preferred which furthers the purpose with which a provision is enacted
) approved in many judicial decisions, including in Goodyear India Pvt. Ltd. & Others Vs. State of Haryana 188 ITR 402 (SC); Shashikant Laxman Kale Vs. UOI 185 ITR 104 (SC); CIT Vs.
R.K.B.K. Ltd. 331 ITR 269 (Calcutta); Great Eastern Exports Vs. CIT 332 ITR 14 (Del.) and American Hotel and Lodging Associating Educational Institution Vs. CBDT 289 ITR 46 (Del.).
(C.10) In view of the foregoing paragraphs (C), (C.l), (C.2), (C.3), (C.4), (C.5), (C.5.1), (C.6);
(C.7), (C.8) and (C.9) we set aside the order of Ld. CIT(A) and confirm the GP addition of Rs.
74,82,642/- made by the AO. As far as specific additions of Rs. 3,16,250/- (purchases from Raj Lubricants, Rs, 23,27,698/- (Disallowance u/s 40A (3) of I.T. Act and Rs. 2,75,000/-
(difference in transformer accessories) are concerned, the AO has already set off these additions against the total GP addition of Rs. 74,82,642/- by telescoping them and separate addition of specific additions of Rs. 3,16,250/- (purchases from Raj Lubricants, Rs,
23,27,698/- (Disallowance u/s 40A (3) of I.T. Act and Rs. 2,75,000/- (difference in transformer accessories) has not been made by the AO. Therefore presently the grounds of appeal pertaining to these specific additions of Rs. 3,16,250/- (purchases from Raj Lubricants, Rs,
23,27,698/- (Disallowance u/s 40A (3) of I.T. Act and Rs. 2,75,000/- (difference in transformer accessories) ; namely grounds 1(A), 1(B) and 1(C) in the appeal filed by the assessee are, being merely academic in nature, not being adjudicated. For statistical purposes the ground of appeal in the appeal filed by revenue is allowed and second ground of appeal in the appeal filed by assessee is dismissed. To summarize, the total trading account addition of Rs.74,82,642/- (GP addition) is confirmed and specific additions totaling aforesaid
Rs.29,44,719/- are not adjudicated. By way of abundant caution, we direct the AO, consistent with the approach of the AO in the assessment order, not to separately make the specific additions totaling aforesaid Rs.29,44,719/- consisting of Rs. 3,16,250/- (purchases from Raj Lubricants, Rs, 23,27,698/- (Disallowance u/s 40A (3) of I.T. Act and Rs. 2,75,000/-
(difference in transformer accessories); at present.
(D) Third ground of appeal in the appeal filed by the assessee was not pressed. Therefore, this ground is dismissed being not pressed.
(E) Fourth ground of appeal pertains to addition of Rs.1,46,934/- on account of accrued interest on fixed deposits in the bank. The assessee has offered this interest as income in the year of maturity in the next year i.e in assessment year 1995-96, on receipt basis. The addition made by AO has been upheld by Ld. CIT(A) on the consideration that this interest has already accrued in the assessment year 1994-95. The Id. counsel for the assessee pleaded that the addition in this year amounts to double addition because this amount has already been taxed in the next year i.e in assessment year 1995-96. Ld. Departmental
Representative (DR) appearing for Revenue relied on the orders of the lower authorities we find that neither the AO nor the CIT(A) has dealt with the issue of double addition. It is settled that the same income cannot be taxed twice in two different years. Moreover, neither the AO nor the CIT(A), has referred to the regular method of accounting followed by the assessee for accounting of interest income from fixed deposits - whether it is accounted on accrual basis from year to year or on receipt basis in the year of maturity of fixed deposit.
Therefore, this issue is set aside and restored back to the file of the AO with the direction to pass fresh order as per law after ascertaining the system of accounting regularly employed by the assessee for recognizing interest on fixed deposits; and to tax the interest on fixed deposits only once in the year in which this income is lawfully taxable in accordance with system of accounting regularly employed by the assessee for accounting of interest income from fixed deposits. The AO is directed to provide reasonable opportunity to the assessee before passing fresh order.
(F) Ground 5(A) of appeal is related to addition made by the AO amounting to Rs. 24,30,100/- on account of disallowance of provision for interest on bank loan. This addition was confirmed by the Ld. CIT(A) holding that the amount claimed as deduction was a contingent liability, that the amount had not accrued, and that in any case it was "unascertainable" and " not incurred" at all. The decision of the Ld. CIT(A) was based on his observation that "neither any satisfactory evidence in there on record to show that such interest was liable to be paid on accrual basis, nor there is any proof that it was ever paid". In the synopsis filed by the assessee in the course of appellate proceedings it has been submitted as under:-
"Reduction in outstanding loan amount balance as per Balance Sheet as on 31.3.1994 and 31.3.1993 as per annual account statements - Schedule 3 at page 34 of first paper book indicates payment towards interest during the year."
At the time of hearing before us the Ld. Counsel for assessee drew our attention to the relevant portion of paper book and reiterated the contention contained in synopsis regarding the reduction in outstanding loan amount balance as per Balance Sheet as on 31.3.1994 and 31.3.1993 as per annual account statements - Schedule 3 at page 34 of first paper book indicating payment towards interest during the year. The Id. DR appearing for the Revenue relied on the orders of the lower authorities. Perusal of orders passed by the AO and by the Ld. CIT(A) shows that they have not considered payment made by the assessee. It is, therefore, obvious that the orders of the lower authorities have not been passed after proper appraisal of relevant facts. Therefore, this issue is set aside and restored to the file of the AO for fresh order as per law after ascertaining all the relevant facts and after due consideration of such relevant facts. The AO is directed to provide reasonable opportunity to the assessee before passing fresh order.
(G) Ground 5(B) of appeal in the appeal filed by the assessee was not pressed by the assessee. Therefore this ground of appeal is dismissed being not pressed.
(F) Grounds 6(A) and 6(B) of appeal in the appeal filed by the assessee pertain to the fact that the Ld. CIT(A) in his order dated 30.09.2011 did not adjudicate the issues and instead held that these issues are to be carried to the AO. The Ld. CIT(A) was of the view that the assessee should approach the AO for these issues. At the time of hearing before us, the Ld.
Counsel for assessee submitted that these issues have not been addressed by the AO either, despite the directions of the Ld. CIT(A) in his aforesaid order dated 30.09.2011. The Id. DR appearing for the Revenue relied on the order of Id. CIT(A). In the foregoing facts and circumstances, we direct the AO to consider these issues after ascertaining relevant facts and to pass orders on these issues as per law after giving reasonable opportunity to the assessee.
(G) Ground 8 (a) of appeal in the appeal filed by the assessee is related to set off for brought forward unabsorbed depreciation and losses. The Ld. Counsel for assessee pleaded for direction to be issued for set off for brought forward unabsorbed depreciation and losses correctly as per law. The Ld. DR relied on the orders of the lower authorities. Unabsorbed depreciation and losses of earlier years are to be ascertained from assessment records of the assessee for earlier years. The AO is directed to carefully examine the assessment records of the assessee for earlier years; and ascertain the correct facts; and to thereafter pass order as
per law on this issue.
(H) Ground 8(b) of appeal in the appeal filed by the assessee pertains to depreciation. We find that the connected ground i.e. ground 5 (B) of appeal was not pressed by the assessee and was accordingly dismissed by us earlier in this order. Following the same, ground 8(b) of appeal is also dismissed.
(I) Grounds 7 and 10 of appeal in the appeal filed by the assessee are general in nature. In these grounds, reference has been made to various additions/disallowances and facts of the case and assessee's contentions. As we have already adjudicated on the specific additions/disallowances after considering the facts of the case and the assessee's contentions; these grounds do not require separate adjudication. These grounds are, therefore, treated as disposed off in accordance with our decisions on grounds no. 1(A), 1(B),
1(C), 2, 3, 4, 5(A), 5(B), 6(A), 6(B), 8(a), and 8(b) of appeal in the appeal filed by the assessee.
(J) Ground 9 of appeal, relating to interest u/s 234 of I.T. Act is consequential in nature. We direct the AO to re-compute interest payable by assessee u/s 234B of I.T.Act, as per law.
In the result, the appeal filed by revenue is allowed and the appeal filed by assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 13.01.2017