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Income Tax Appellate Tribunal, DELHI “F” BENCH: NEW DELHI
Before: SHRI VIKAS AWASTHY & SHRI MANISH AGARWAL
The present appeal is filed by the assessee against the order dated 23.03.2017 passed by Ld. Commissioner of Income Tax (A)- 33, New Delhi [“Ld.CIT(A)”] in Appeal No.67/15-16 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 30.12.2011 passed u/s 143(3) of the Act pertaining to assessment year 2009-10.
Brief facts of the case are that assessee is a company, engaged in the business of manufacturing of CMS Crossings, Point & Cross/Switches & Castings, S.G./CI Castings etc. which are mainly supply to Indian Railways, filed its return of income on 15.09.2009, declaring loss of INR 99,47,741/- which was processed u/s 143(1) of the Act. The case was taken up for scrutiny and after considering the submission made by the assessee, total income of the assessee was assessed at INR 42,65,540/- by making various additions / disallowances.
3. Against the said order, assessee filed an appeal before Ld. CIT(A) who vide order dated 23.03.2017, partly allowed the appeal of the assessee and sustained trading additions and certain other additions made.
Aggrieved by the order of Ld.CIT(A), assessee is in appeal before the Tribunal by taking following grounds of appeal:-
1. “The learned Commissioner of Income (Appeals) has further erred in law and facts of the case in upholding the addition of Rs.63,35,554/- on account of low G.P. without any basis and contrary to material on records. The observation made to substantiate addition of 1% on account of low GP are wholly and entirely devoid of the factual substratum.
2. The learned Commissioner of Income (Appeals) has further erred in law and facts of the case in upholding the addition of Rs.3,35,449/- on account of deferred revenue expenditure without any basis and contrary to material on records.
Any other ground of appeal at the time of hearing.”
Ground of appeal No.1 raised by the assessee is towards the 5. trading addition of INR 63,35,554/- by applying 1 % extra G.P. rate profit on the total turnover of the assessee.
6. Before us, Ld.AR for the assessee submits that the assessee is a Private Limited Company and was maintaining day-to-day stock register and other records including proper books of accounts which were audited by the Statutory Auditor and no defect whatsoever, was pointed out by the Auditors. He further submits that assessee was having transactions with its Associate Enterprises (“AEs”) and had furnished report as prescribed u/s 92E of the Act in Form 3CEB with AO which has been accepted, and no adverse inference was drawn with respect to the transactions carried out with its AEs. Ld. AR further submits that AO had made the trading additions solely for the reason that G.P rate declared had decreased from 20.95% to 11.80% in the year under appeal as compared to preceding year, by ignoring the fact that there was substantial increase of about 25% in the turnover as well as sharp increase in the cost of raw material, for which copies of the few were are also filed. The AO has not pointed out any defect whatsoever in any of the entries made in the books of accounts including stock records and made the additions on assumption & presumption that too without invoking the provisions of section 145(3) of the Act. He further submits that assessee is working for Indian Railways where the goods are supplied after serious inspection regarding quality by RDSO and frequent re-doing of the material sold is a common feature in the supplies of the goods to Indian Railways as it involves precious human life and all these factors had made adverse impact on the profitability of the assessee company. He further submits that AO has not brought any comparable case before disbelieving the GP rate declared by the assessee. It is further submitted by Ld. AR that sales have been made for Indian Railways and the rates are fixed for a long period of time however, the cost of raw material keeps going up which had not been efactored in the sale price therefore, adversely affected the profitability of the assessee. These facts were ignored by the AO while estimating the income. Ld.AR submits that since the AO has not invoked the provision of section 145(3) of the Act and made the trading addition which action is not in accordance with law and therefore, the consequent additions made is liable to be deleted. He prayed accordingly.
On the other hand, Ld. Sr. DR for the Revenue submits that AO has applied only 1 % G.P. rate on the declared turnover which looking to the sharp decline in the G.P. rate is quite reasonable and thus, the order of AO deserves to be upheld. He requested accordingly.
Heard the contentions of both parties and perused the material available on record. It is seen that AO’s main allegation is about the sharp decline in the G.P. rate declared in the year under appeal which falls from 20.90% to 11.80% as compared to immediately preceding year. The claim of the assessee is that there was substantial increase in the cost of raw material. He further submits that assessee is making almost 49% of its purchase from its AEs and no doubts were raised with respect to the price charged by them towards the cost of raw material. The assessee filed all details with respect to purchases of raw material including the quantitative tallies which were duly verified by the statutory auditors. The assessee is supplying goods mainly to Indian Railways where the goods have been duly verified and thoroughly inspected with respect to the quality by the RDSO. The AO failed to point out any defect in the books of accounts so maintained and produced before him nor the provision of section 145(3) were invoked.
8. Hon’ble Calcutta High Court in the case of M/s. Swadeshi Commercial Co.Ltd. vs CIT, W.B.-IV, Calcutta [2008] (12) TMI 823 (Calcutta H.C.) has held that since the books of accounts were not rejected, trading additions should not be made.
This view is further supported by the judgement of Hon’ble Rajasthan High Court in the case of Commissioner of Income Tax vs. Maharaja Shree Umaid Mills Ltd. (1991) 192 ITR 565 (Rajasthan H.C.).
It is also a matter of fact that the transactions made with AEs were duly reported in Form 3CEB which was filed before AO and some was accepted without raising any doubts with respect to the price charged for goods. The assessee further submits that during the year, it purchased scraps from the local markets where the rust and dust had affected cost of inputs. Further, as per its submissions made before Ld. CIT(A) as tabulated at page 20 of the order, the rates of ferro alloys and scraps were increased. As per the said chart, average price of scrap is increased from Rs. 22.74 to 27.73 i.e. increase of about Rs. 5.00 which is almost 18%. Further average cost of Ferro Alloys was increased from Rs. 44.83 to Rs. 105.16 which is about Rs. 61 and in percentage terms comes to more than 150% increase. Further we find force in the argument that work orders were awarded at earlier stage and the cost of raw material had increased thereafter for which no proper estimation could be made at the time of participating in the tender.
In view of above facts and further considering the fact that the AO has not invoked the provisions of section 145(3) of the Act before estimating the income of the assessee and in the light of aforesaid decisions of hon’ble High Courts, we direct the AO to delete the addition of INR 63,35,554/-. Accordingly, Ground of appeal No.1 raised by the assessee is allowed.
Ground of appeal No.2 raised by the assessee is with respect to the disallowance of INR 3,35,449/- out of deferred revenue expenditure.
From the perusal of the order of Ld. CIT(A), it is seen that this issue has not been pressed before Ld. CIT(A) by the assessee nor before any submission was made on this ground of appeal. Therefore, the same is hereby dismissed.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open Court on 10.10.2025.