AGARWAL METALS & ALLOYS,MUMBAI vs. ADDL CIT RG 14(1), MUMBAI

The grounds urged by the assessee relates to the following issues:- a. Non-service of notice u/s 143(2) of the Act. b. Rejection of books of accounts and estimation of gross profit. c. Addition made u/s 69C of the Act. d. Deduction u/s 80IB of the Act. e. Deduction of Customs duty paid. f. Interest u/s 234C of the Act. g. Interest u/s 234D of the Act.

The facts relating to the case are stated in brief. The assessee is engaged in the business of manufacturing of aluminium rods out of aluminium ingots, aluminium scraps and other consumables. The assessee sources the raw materials from within the country as well as through imports. The assessing officer received information that the Central Excise and Customs authorities have conducted search in the hands of the assessee and accordingly the AO selected the return of income filed by the assessee for the year under consideration for scrutiny. The assessing officer completed the assessment by making various types of additions. The appeal filed by the assessee challenging the additions was partly allowed by Ld CIT(A). Still aggrieved, the assessee has filed this appeal before us.

The first issue relates to the claim of non-receipt of notice u/s 143(2) of the Act. At the time of hearing, the Ld A.R did not press the grounds relating to the said issue and accordingly those grounds are dismissed as not pressed.

The second issue relates to the rejection of books of accounts and estimation of gross profit consequent to the same. The AO received information from Central Excise and Customs officials that the assessee has been alleged to have been indulging in manipulation of value of imports, i.e., it has under invoiced the imports and thus paid lower amount of Customs Duty. It was alleged that the difference amount of the purchase price was sent to the suppliers through illegal channels. Consequent thereto, the Customs officials have issued show cause notice to the assessee. They also recorded statements from one of the partners of the firm on 16.1.2007 and again on 07.2.2008. It is stated that the partner of the firm confessed in both the statements that they are indulging in under invoicing of imports. Accordingly, the AO took the view that the assessee is indulging in under invoicing of imports and the difference amount was paid in cash through illegal channels. The AO further noticed that 3 Agarwal Metals & Alloys the Gross Profit ratio and Net Profit ratio declared by the assessee were not consistent over the years. The AO further noticed that the assessee has incurred major portion of expenses by way of cash. The AO worked out the ratio of expenses incurred by way of cash at 12.7% of the total expenses. On these reasoning, the AO came to the conclusion that the books of accounts of the assessee are not reliable and accordingly rejected the same. The Assessee had declared Gross profit at 7.07%, 15.40% and 5.36% respectively in AY 2005- 06, 2006-07 and 2007-08. The AO accepted the explanation of the assessee that it made exceptional wind fall profit in AY 2006-07 and accordingly ignored the same. Accordingly the AO estimated the Gross profit for current year also at 7.07% as declared by the assessee in AY 2005-06, as against the G.P. rate of 5.36% declared for the current year and thus made an addition of Rs.1.92 crores to the total income. The Ld CIT(A) also sustained the same.

The main contention of the assessee is that the Customs department merely issued Show cause notice and till date the proceedings have not been completed. He further submitted that the partner of the assessee admitted under invoicing of imports upon pressure & coercion and hence he has retracted from the statements given by him on both the occasions. Accordingly, the Ld A.R submitted that the assessing officer was not justified in placing reliance on mere show cause notice to suspect the books of accounts of the assessee. He further submitted that the ratio of cash expenses worked out by the AO at 12.7% is wrong and the actual ratio works out to only 1.27%. He submitted the said ratio shows that the assessee has incurred about 97.73% expenses through banking channels and hence the said reasoning given by the AO also fails. He further submitted that the gross profit earned by the assessee would depend upon market conditions. He further submitted that the assessee has maintained proper stock register and its books of accounts have also been audited. He

On the contrary, the Ld D.R submitted that the Central Excise and customs department have found out under invoicing of imports and the said information is sufficient to show that the books of accounts of the assessee are not reliable.

In the rejoinder, the Ld A.R submitted that the assessing officer has not disturbed the gross profit ratio declared by the assessee in other years and did not make any addition, even though the allegation of Central Excise and Customs department extends to the preceding and succeeding years.

We have heard rival contentions on this issue and perused the record. We notice that the assessing officer has given mainly two reasons to reject the books of accounts. The first reason is the show cause notice issued by the Central Excise and Customs department. The assessee has submitted that the show cause notice was mere allegation and so far they have not concluded the proceedings by implicating the assessee. The said statement was not controverted by Ld D.R. We further notice that the assessing officer has also not conducted any independent enquiry in this matter. Even though it is alleged that the difference between the actual import value and invoiced value was sent out of India in the illegal route, the same appears to be a mere allegation, i.e., neither the Customs department nor the assessing officer has brought on record any material to support the said allegation. We notice that the AO did not make

The second main reason given by the AO is with regard to quantum of expenses incurred by way of cash. We have noticed that the AO has wrongly computed the cash expenses as 12.7% of the total expenses as against 1.27%. Thus, we notice that the percentage of cash expenses incurred out of total expenses is very low and hence this reasoning of the AO also fails.

The AO has also stated that the G.P and N.P ratio declared by the assessee were fluctuating. However, the AO himself has accepted that the assessee could generate high G.P. ratio in Ay 2006-07 due to windfall gains. However, the contention of the assessee that the G.P. ratio would depend upon various market conditions has not been controverted. We have also noticed that the AO has adopted the G.P. ratio of 7.07% declared in AY 2005-06 as against 5.36% reported by the assessee for the current year, without analysing the facts and circumstances of each of the year. Hence, this reasoning given by the assessee also, in our view, does not warrant rejection of books of accounts.

In view of the foregoing discussions, we are of the view that there is merit in the contentions of the assessee that the rejection of books of accounts was not justified. Accordingly, we set aside the order of Ld CIT(A) on this issue. Since we have set aside the orders of tax authorities passed in respect of rejection of books, the consequent estimate of gross profit and addition thereof are also liable to be deleted. Further, the AO has modified only Gross profit and he has accepted the expenses claimed by the assessee, meaning thereby he did

The next issue relates to the addition made u/s 69C of the Act. On the basis of show cause notice issued by the Customs department, the AO worked out the amount of under invoicing at Rs.59.26 lakhs for the period from 1.4.2006 to 16.5.2006. The AO considered the same as the amount paid by the assessee outside the books of account and accordingly added the same as unexplained expenditure u/s 69C of the Act. The Ld CIT(A) also confirmed the same in principle, but gave relief to the extent of the calculation mistake made by the AO. Accordingly, a sum of Rs.45,55,338/- came to be confirmed by Ld CIT(A).

The Ld A.R submitted that the assessing officer was not justified in making addition on the basis of show cause notice issued by the Customs department. He submitted that the Customs department has informed that the documents named “relied upon documents” are available with them, but the AO did not choose to call for or examine them. He submitted that the assessing officer did not make any independent enquiry before making this addition. He submitted that the valuation is being determined by the Customs department only for the purpose of collection of Customs duty and the same does not establish that the assessee has paid money outside the books of account. He submitted that the Hon’ble Bombay High Court has held in the case of CIT Vs. The Central Provinces Manganese Ore Co. Ltd (296 ITR 217 @ 220) that the market price determined by the Customs authorities could not be a ground to make additions. He submitted that the DRI authorities have conducted search at the premises of the assessee and they did not unearth any incriminating documents, excess stock or any document evidencing alleged payments made outside the books of accounts.

He further submitted that the AO placed reliance on three insurance documents, but the fact remains that the insurance documents do not pertain to the year under consideration and further they have been taken by the suppliers. The AO has also referred to an international enquiry conducted, but the same also does not pertain to the year under consideration. Further, the enquiry has been made with Brussels, where as the assessee has imported metals from New York. Accordingly the Ld A.R contended that the documents relied upon by the assessee do not pertain to the year under consideration and they do not support the case of the assessing officer. He further submitted that the statements given by the partner of the firm has since been retracted within a short period and hence the AO could not have placed reliance thereon. He submitted that the said partner was not in charge of imports and hence he was not well versed with the information relating to imports, but the statement was taken by the Customs authorities from him under coercion. The statements taken from certain other persons were also relied upon, but the assessing officer himself has admitted that the assessee has not purchased goods from them during the year under consideration. He further submitted that the statements were taken from other persons without oath and hence they could not be relied upon. Further the assessee has not been provided with an opportunity to cross examine them. Accordingly he contended that the addition made u/s 69C of the Act is liable to be deleted.

On the contrary, the Ld D.R submitted that the under invoicing of imports has been accepted by the partner of the firm and he did not retract from the same immediately. He further submitted that the assessing officer has made this addition on the basis of enquiries made by the Customs authorities.

We have heard the parties on this issue and perused the record. We notice that the assessing officer has fully relied upon the show cause notice issued by the Customs officials to make this addition. The admitted fact is that the assessing officer did not make any independent enquiry to confirm the allegation of under invoicing of invoices. The question of addition u/s 69C of the Act shall arise only if it is shown that the assessee has incurred any expenditure outside the books of account. In the instant case, we notice that the assessing officer has not brought any material on record to show that the assessee has made any payment through illegal sources to cover up the amount of under invoicing. Thus the assessing officer has entertained belief that the assessee has made the payments through illegal channels, only on the basis of presumptions. In our view the presumptions so entertained would not satisfy the condition prescribed in sec. 69C, viz., the assessee incurred any expenditure, source of which was not explained.

The Ld A.R has also contended that the various documents/statements relied upon by the assessing officer do not pertain to the year under consideration. It is further stated that the statement given by the partner on two occasions have been retracted within short period of time. Accordingly, we find merit in the contentions of the assessee that the assessing officer could not have placed reliance on those documents/statements. Further, the Hon’ble Bombay High Court has held in the case of The Central Provinces Manganese Ore Co. Ltd (supra) has held that the market value determined by the Customs authority for imposing Customs duty could not be a ground to make additions under the Income tax Act. Further, from the written submissions given by the assessee, we notice that the assessee has shown that it has made imports at contemporaneous prices by taking data from M/s Infodrive India (P) Ltd. This contention of the assessee has not been controverted by the AO.

In view of the foregoing discussions, we are of the view that the Ld CIT(A) was not justified in confirming the addition made u/s 69C of the Act. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.

The next issue urged by the assessee relates to the deduction claimed u/s 80IB of the Act. The assessee had earned interest income of Rs.25.14 lakhs in the Profit and Loss account. Though the AO assessed the same as business income, he rejected the deduction u/s 80IB of the Act claimed on the above said interest income. The Ld CIT(A) allowed deduction on the interest received from customers (Rs.2,08,198/-) and accordingly confirmed the rejection of claim for deduction u/s 80IB on the remaining amount of Rs.23.06 lakhs.

The contention of the assessee is that it has paid interest on bank overdraft facility to the tune of Rs.87.16 lakhs. The Ld A.R submitted that the assessee has given loans and made deposits with banks, out of the loans borrowed through overdraft facility. Accordingly the Ld A.R contended that the interest income should be netted off against the interest expenditure and accordingly the deduciton u/s 80IB should be worked out. In support of this proposition, the Ld A.R placed reliance on the following case law:-

We heard the parties on this issue. The netting off sought by the assessee could be given, if it is shown that there is nexus between the borrowed funds and loans given/deposits made. Since this factual aspect requires verification,

The next issue relates to the rejection of claim for deduction of Customs duty paid by the assessee. The assessee had paid Customs duty of Rs.65.00 lakhs during the year under consideration, but did not claim the same as deduction. During the course of assessment proceedings, the assessee lodged the claim for deduction of the same u/s 43B of the Act. Since the claim was made without filing revised return of income, the AO as well as the Ld CIT(A) rejected the claim, by following the decision rendered by Hon’ble Supreme Court in the case of Goetz India Vs. CIT (284 ITR 323).

We heard the parties on this issue. The Hon’ble Supreme Court, in the above said case, has held that the decision rendered by it does not impinge upon the powers of the Tribunal to consider and admit additional ground. Further, the Hon’ble jurisdictional High Court has held in the case of CIT Vs. Pruthvi Brokers & Shareholders Pvt Ltd (349 ITR 336) that additional ground could be admitted by the appellate authorities. Accordingly, we admit this additional ground. However, since this claim has not been examined by the AO, we restore this issue to his file for examination and for taking appropriate decision. The order of Ld CIT(A) passed on this issue stands modified accordingly.

The next two issues relate to the interest charged u/s 234C and 234D of the Act. The assessee is aggrieved by the decision of Ld CIT(A) in remanding these issues to the file of the AO. Since it involves computation of interest, we do not find any infirmity in the decision of Ld CIT(A) in remanding these two issues to the file of the AO.

The assessee has also raised certain additional grounds. However, at the time of hearing, the Ld A.R did not advance any argument thereon. Accordingly, we do not find it necessary to address them and accordingly reject them.

In the result, the appeal of the assessee is treated as allowed for statistical purposes.