ACIT, CIR-40, KOLKATA, KOLKATA vs. M/S SHYAMLAL IRON & STEEL CO., KOLKATA

ORDER Per Dr. A.L.Saini, A.M.:

The captioned appeal filed by the Revenue pertaining to assessment year 2010-11, is directed against the order passed by the Ld. Commissioner of Income- Tax (A) -XII, Kolkata in appeal No.18/XII/Cir-40/13-14 dated 21/10/2013, which in turn arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short, ‘the Act’), dated 08/03/ 2013.

1. That on the fact and in the circumstances of the case the Ld. CIT(A) erred in accepting the books of accounts of the assessee and ignoring the fact that the cost of inferior material supplied to M/s. Tata Motors Ltd. should be lower than the declared cost, than proper account of stocks, processing of material and sale is not maintained, the rate of purchase is higher than the rate of sale and the assessee failed to explain the discrepancy of opening stock, purchase and closing stock detected regarding transaction with M/s. Tata Motors Ltd.“

2. The facts of the issue are stated in brief. The assessee inter alia, carries on the business of supplying of iron scrap(M.S.) to Tata Motors at Jamshedpur through the Head Office of the respondent at Kolkata. The iron scrap was purchased from local markets, Kolkata and the same is supplied by the respondents to Tata Motors, job work processing like decoilling, straightening and cutting of M.S. coils is done for Telco ancillaries. The Revenue has observed that neither material is supplied to M/s. Tata Motors should be lower than the declared cost. The business activity of the assessee’s Head Office consists of supply of iron scrap (M.S.) procured from local sources to M/s. Tata Motors at Jamshedpur and there is gross profit, not gross loss in the transaction with M/s. Tata Motors Ltd. Since the assessee has shown the net loss, therefore, the AO made the addition based on the net profit shown by its branches. The ld. AO made the addition based on estimated net profit and aggrieved from the order of the AO, the assessee filed the appeal before the ld. CIT(A), who has deleted the addition observing the following: /Kol/2013 M/s. Shyamlal Iron & Steel Co. “5.1.3. Decision: I have considered the facts of the case, the finding in the assessment order, the report of the Assessing Officer as well as the submissions and arguments put forth on behalf of the appellant. The case of the Assessing Officer is that the net profit declared by the appellant in the Head Office business was comparatively less than that declared in Pune Branch and that in the absence of qualitative records, the deductions and losses claimed in respect of sales to Tata Motors, warranted rejection of book results and application of net profit rate. Whereas the appellant's case is that in view of the different business activities carried in the HO and branches, the margin of the branch and HO is not comparable, that the principal, M/s Tata Sons, being a company of international repute conscious of quality control, had made heavy deductions on account of non-ferrous metal from the iron scrap supplied by the appellant, and that the appellant had to sacrifice profit on many occasions to meet business expediency in long term interest. I find merit in the submissions of the appellant on account of the following points:- (i) Firstly, the several units of the appellant firm are engaged in different types of business earning different margins. The Assessing Officer has not doubted the profit shown in branches. The Pune branch is shown to have been engaged in the business of trading in M.S Scraps (locally) procuring scrap of local origin and selling the same to larger stockiests or to iron processing units, while in the Head Office, the appellant is engaged Trading in Iron Scrap purchased from third parties by weight including purchases from outside parties of Durgapur, Balasore etc. and sale of the same to Tata Motors, Jamshedpur.

(ii) Unlike the principals in respect of Pune Branch, the appellant's principal in respect of the Head Office has been Tata Motors, who had shown to have made heavy deductions on account of short weight and non-ferrous contents in the iron scrap. The business conditions being dissimilar, it could not be said that the cases of Pune branch and Head Office could not be said to be identical and profit margin similar. /Kol/2013 M/s. Shyamlal Iron & Steel Co. (iii) The Assessing Officer has not doubted the purchases. He has not called for the accounts of the appellant with Tata Sons and verified the same before arriving at the conclusion that out of total purchases of scrap, only inferior quality of scrap was supplied to Tata Sons. Having not carrying out such exercise, and having not found any adverse results, the Assessing Officer was not justified in jumping to the conclusion that better quality of scrap must have been sold to some other parties and suppressed profits.

(iv) The accounts are apparently supported with quantitative details. Absence of qualitative accounts, on the facts and in the circumstances of the case and its past history, did not by itself render the books of account defective. There is not finding that the purchases are bogus. Neither is there any finding that the expenses debited in the HO account are not supported with bills and vouchers and are unreasonable and unverifiable.

(v) It is not uncommon that businessmen will compromise with profitability in certain transactions keeping in view the long term business interest as in the case of the appellant with Tata Sons. Where absence of a stock register, cash memos etc., coupled with other factors like absence of vouchers in support of the expenses and purchases and existence of low profit, may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee, the authorities would be justified in rejecting the account books under section 145(2) and in making assessment in the manner contemplated in that provision. However, this is not the case with the appellant.

(vi) The Assessing Officer has not pointed out any specific defects in the maintenance of account except stating that the appellant has not maintained qualitative records of M.S. steel scraps supplied by weight to the company, M/s Tata Sons. The appellant has given sufficient reasons for 4 /Kol/2013 M/s. Shyamlal Iron & Steel Co. the low profit shown this year in respect of the supply of M.S. scrap to Tata Sons. As regards the past history of case, it is seen that the assessment of the appellant for assessment year 2009-10 had been completed under scrutiny, where the facts are more or less similar, and the books of account were not rejected.

(vii) In Jindal Aluminium Ltd. v. Deputy CCT.( 1999) 115 STC 257, 278 (Karn)], it has been held that "the books maintained by an assessee in the regular course of business are the prima facie proof unless they are proved false by any other material on record. The assessment cannot be made on the basis of personal opinion". In the case of Sf. Teresa's Oil Mills v. State of Kerala, (1970) 76 IIR 365, 367-8(Ker), it was held that the accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The department has to prove satisfactorily that account books are unreliable, incorrect or incomplete before it can reject accounts, which may be done by showing that important purchases are omitted therefrom or proper particulars or vouchers are not forthcoming or the accounts do not include entries relating to a particular class of business. Rejection of accounts should not be done light-heatedly.

(viii) In CIT v. Amitbhai Gunwantbhai (1981) 129 ITR 573, 580 (Guj)], the Hon' ble Gujarat High COurt held that the basic principle is the same in the law relating to income- tax as well as in civil law, namely, if there is no challenge to the transaction represented by the entries or to the genuineness of the entries, then it is not open to the revenue or other side to contend that what is shown by the entries is not the real state of affairs.

(ix) When it is not established by the A.O that sales are suppressed or any item of purchase is inflated, no gainful purpose is served because value of closing stock will have direct bearing on opening stock (thereby the profits) of next year thereby proportionately adjusting the next year's 5 /Kol/2013 M/s. Shyamlal Iron & Steel Co. profit. In the number of legal pronouncements it has been held that merely because stock register is not maintained, books of a/cs cannot be rejected. Reference in this regard may be made to the judgements in the cases of Ashoke Refractories (P) Ltd v. CIT (2005) 279 ITR 457(Cal); ACIT v. Ravi Agricultural lndustries (2009) 316.1TR. AT (Agra).

In view of the facts of the case, principles of the case laws discussed above, I am of the view that the Assessing Officer was not justified in rejecting the books of account of the Head Office of the appellant and applying a net profit rate of 7.23% shown in branch account. The consequent addition to the trading results is hereby deleted and these grounds of appeal of the appellant are allowed.”

3. Not being satisfied with the order of the ld. CIT(A), the Revenue is in appeal before us.