Commissioner of Income Tax II vs. P. Govinda Rao

HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR D.B. Income Tax Appeal No. 67 / 2007 Rajasthan Art Emporium, through its partner Mr. R.K.Singhal s/o Shri H.K.Singhal, aged about 55 years, Heritage House, Rai Ka Bagh, Jodhpur. ----Appellant Versus D.C.I.T., Circle, Jodhpur. ----Respondent Connected With D.B. Income Tax Appeal No. 117 / 2006 Rajasthan Art Emporium ----Appellant Versus D.C.I.T.Circle Jodhpur ----Respondent D.B. Income Tax Appeal No. 5 / 2007 Raj.Art Emporium ----Appellant Versus D.C.I.T.Jodhpur ----Respondent _____________________________________________________ For Appellant(s) : Mr. Ankit Sarin for Mr. Sanjay Jhanwar For Respondent(s) : Mr. K.K.Bissa _____________________________________________________ HON'BLE MR. JUSTICE GOVIND MATHUR HON'BLE MR. JUSTICE VINIT KUMAR MATHUR Judgment

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Per Hon’ble Govind Mathur,J. 04/05/2017 These three appeals are having similar questions for adjudication before us. For convenience we are noticing the facts of appeal bearing D.B. Income Tax Appeal No.67/2007, Rajasthan Art Emporium v. DCIT, Circle, Jodhpur.

The questions for adjudication before us under this Income Tax Appeal are as follows:- “1. Whether the finding of the Tribunal that amount paid to M/s. Singhal Resources and Marketing Pvt. Ltd. and M/s. Mewar Security Services Pvt. Ltd. is possibly a device to raise capital of the concerned associates of the assessee firm, for substaining additions made by the Assessing Officer, are finding based on conjectures and surmises when actual payment having been made to two registered companies by the assessee firm was not even in doubt? 2. Whether the extent of any expenses to be incurred for expanding business is within the domain of the assessee running business or is in the domain of Assessing Officer.” The factual matrix, necessary to be noticed to examine the questions formulated, is that the appellant assessee is a

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partnership firm engaged in the business of manufacturing and exporting handicraft made by wood, iron, glass, brass etc. For the assessment year 1993-94, a return of income in a tune of Rs.9,95,553/- was filed by the assessee on 3.2.1994. The Assessing Officer determined the same as of Rs.13,18,320/- by arriving at the conclusion that no satisfactory explanation is given to divert the business funds to an associate concern without interest, as such, the interest free advance is not allowable. While making assessment as per Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act of 1961’) the Assessing Officer also ordered to initiate penalty proceedings in accordance with Section 271(1)(c) of the Act. An appeal giving challenge to the order passed by the Assessing Officer also came to be disposed of under an order dated 9.4.1999 by holding as under:- “14. I have considered the submissions very carefully in this regard. I have also seen the reasoning given by the AO for disallowing intt. amounting to Rs.163630. After due consideration of the matter, I hold that the A.O was not justified in disallowing the interest because appellant had sufficient funds at this disposal on which no interest is received. Appellant had given amount to sister concern out of non interest bearing funds. A.O had not proved the fact that interest bearing funds were diverted by the appellant for giving amount to M/s Singhal Bros. Accordingly, in view of the decisions of under mentioned cases, I hold that the A.O was not

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justified in making the disallowance of interest only on the basis of presumption and assumption. I, therefore, delete the addition made by the AO amounting to Rs.1,63,620.” Aggrieved by the order dated 9.4.1999 the revenue preferred an appeal before the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur that came to be accepted in part under order dated 26.2.2004. The Tribunal held that the assessee failed to point out any service having been rendered by the associate company to the assessee firm during the relevant period sufficient to infer even impliedly that the services at all were given. The discussion made by the Tribunal in this regard reads as follows:- “After carefully considering the facts and circumstances and legal position, we give our findings on this issue as under. It is true that there was an agreement between the assessee and M/s Singhal’s Resourcing and Marketing Pvt. Ltd. It is also true that the P & L a/c of M/s Singhal’s Resourcing and Marketing Pvt. Ltd. reveals that it incurred revenue expenditure for giving the said services as has been claimed in the P & L a/c. It is also true and clear from the computation of total income of M/s Singhal’s Resourcing and Marketing Pvt. Ltd., which proves that it had paid tax at maximum marginal rate on its income. It is also an undisputed fact that the said M/s Singhal’s Resourcing and Marketing Pvt. Ltd. is separately assessed to tax. But the fact remains that both the concerns being closely knit concerns wherein the same partners or their near relatives are the masters to the affairs. What is

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required by the assessee to prove is that exact services which were provided by the said M/s Singhal’s Resourcing and Marketing Pvt. Ltd. concern/ company. Despite the detailed calculations made by the Assessing Officer, as we have discussed in our former part of the order, the assessee was not in a position to tell the exact services provided by the said company. The assessee also failed to tell the Assessing Officer as to what were the exact orders which could be gained by employing services of the said concern. The fact that the capital in the hands of the partners of the other company definitely increased although the tax was paid at maximum marginal rate. So, it can be a device to raise the capital of those concerned persons. What is required by the assessee to prove is that the services were rendered. The assessee was required to prove that actually such and such services were rendered by the company in question. But the ld. AR could not point out to any evidence on record wherefore it could be inferred that the service in that respect was rendered by the company. The ld. AR has been beating about the bush by submitting that the department has not disputed the agreement in question. The department has not denied the payments through cheques. So the findings of the Assessing Officer are not correct. The ld. AR has further submitted that as per the agreement the said company has to perform computerized services, marketing services, consultancy services, correspondence, personal and industrial services, organizational and production services and export financial and maintenance of accounts, etc. He has further submitted that it was agree between the parties that all the equipments would be used by the said company. The company would not claim any right to tenancy, etc. The service charges @ 2% on sales was

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agreed by the assessee to the said company. The only submission with regard to the particular services having been rendered by the company are that the said company performed its duties as per the agreement by further employing highly paid persons in administration. But, to our exclamation, the ld. AR has not been able to point out any particular services having been rendered on record by the said company to the assessee firm. The ld. AR has invited our attention to the particular clause in the agreement which refers to various acts which are to be performed by the said company. The ld. AR has relied on the PB filed wherein w/ss have been submitted with regard to this issue and other issues. The ld. AR has also relied on the decision of the Hon’ble Calcutta High Court in the case of CIT Vs. Hindustan Development Corpn. decided on 13.1.1998 reported in (1998) 101 Taxman 146 and has also file a photocopy of the said decision for our perusal.” In appeal, the only argument advanced before us is that the Tribunal failed to appreciate the material available on record establishing that the services were actually rendered by M/s. Singhal Resources and Marketing Pvt. Ltd. entitling it to claim service charges from the appellant firm. Per contra, Shri K.K.Bissa, learned counsel appearing on behalf of the revenue, submits that the Income Tax Appellate Tribunal has considered each and every aspect of the matter and then gave a finding of fact which is not required to be interfered by this Court in its appellate jurisdiction. It is asserted that the

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questions formulated by the Court are not even substantial questions of law and this Court even at this stage may dismiss the appeal by holding that same do not involve any substantial question of law. Heard learned counsels and examine the record. As already stated, the only argument advanced is that the findings arrived by the Income Tax Appellate Tribunal are based on surmises and conjectures and not on adequate appreciation of the material available as well as the legal provisions applicable. From perusal of the order passed by the Income Tax Appellate Tribunal, the relevant portion of that has already been quoted above, we do not find that the Tribunal arrived at the conclusions on basis of surmises and conjectures, but the Tribunal noticed that an agreement between the assessee and M/s Singhal’s Resourcing and Marketing Pvt. Ltd. was there and further that the profit and loss account of M/s Singhal’s Resourcing and Marketing Pvt. Ltd. discloses that it incurred revenue expenditure for giving the said service, but except that no other material was available and the assessee was not at all in position to express even about the services which were availed. The Tribunal after examining all aspects of the matter held that the assessee failed to establish the factum of having service from M/s Singhal’s Resourcing and Marketing Pvt. Ltd. and while doing so also observed that the agreement may be a device adopted to

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ignore the tax liability. Pertinent to notice that the assessee and M/s Singhal’s Resourcing and Marketing Pvt. Ltd. though are separately assessed to tax, but are closely knitted concerns and the partners are either close relatives or the same persons. In entirety, we do not find any wrong with the findings arrived by the Income Tax Appellate Tribunal. We find force in the argument advanced by learned counsel that the appeal as a matter of fact is having no substantial question of law. Section 260A(4) of the Act of 1961 permits the revenue to address the Court in this regard at this stage too also and we are inclined to accept the same. Accordingly, the appeals are dismissed. (VINIT KUMAR MATHUR)J. (GOVIND MATHUR)J. MathuriaKK/PS