1997-VIL-98-ITAT-AHM
Equivalent Citation: TTJ 061, 006,
Income Tax Appellate Tribunal AHMEDABAD
Date: 27.02.1997
VIKSHARA TRADING & INVESTMENT (P) LTD.
Vs
DEPUTY COMMISSIONER OF INCOME TAX.
BENCH
Member(s) : B. L. CHHIBBER., H. L. KARWA.
JUDGMENT
This appeal by the assessee is directed against the order of the learned CIT(A), Ahmedabad.
2. The assessee is a private limited company and is engaged in the manufacture of detergent powder, detergent cakes, souring powder, etc.
3. The first grievance of the assessee is that the learned CIT(A) is not justified in confirming the disallowance of Rs. 25,14,250 under s. 40A(2)(b) in respect of detergent powder purchased from M/s Gum Products. During the course of assessment proceedings the AO noted that 4 lacs kgs. of loose detergent powder was purchased at the rate of Rs. 11.29 per kg between 15th March, 1989, and 22nd March, 1989, from M/s Gum Products, one of the sister-concerns of the assessee-company. She further found that the detergent powder purchased at the rate of Rs. 11.29 per kg from M/s Gum Products was sold on average rate of Rs. 8.25 per kg, i.e., at a loss of Rs. 3.04 per kg. According to her, the same detergent powder was sold at the rate of Rs. 4.91 per kg. to Manvanturs Trading Investment P. Ltd., another sister-concern of the assessee-company. During the course of assessment proceedings a detailed explanation was furnished before the AO and it was explained that the detergent powder purchased from M/s Gum Products was of export quality and in proof thereof, the sales bills from the said concern viz., M/s Gum Products were filed along with the written submissions dt. 29th Feb., 1992. The xerox copies of the said bills were at pages 291 upto 302 of the paper book filed before the AO and the same are reproduced at pages 48 to 71 of the paper book filed before the CIT(A). It was also contended that ultimately these goods were exported to Russia and the assessee enjoyed export benefits to the tune of Rs. 21,62,033 and special excise duty set off of Rs. 87,662 and the details of the same were filed before the AO. A letter dt. 28th Feb., 1992, from M/s Gum Products was also filed before the AO in which the said concern had categorically stated that the goods sold to the assessee-company were of export quality and in the said letter the said party worked out the bare cost of the said detergent powder at Rs. 9.59 per kg. as against the goods sold to the assessee-company at the rate of Rs. 9.54 per kg. since the bags were returnable by the assessee-company. It was submitted before the AO that the goods purchased from M/s Gum Products were not sold to M/s Manvanturs Trading Investment P. Ltd. and the detergent powder which was sold to M/s Manvanturs Trading Co. at the rate of Rs. 4.91 per kg was of local/inferior quality. Obviously the AO was not satisfied with the explanations furnished and after considering the explanations of the assessee reached a conclusion that unreasonable payments had been made to M/s Gum Products for purchase of detergent powder at the rate of Rs. 11.29 per kg. She held that reasonable price should be Rs. 5 per kg. and, therefore, excess payments of Rs. 25,14,250 were disallowed under s. 40A(2)(b) of the Act.
4. The assessee appealed before the CIT(A). Detailed arguments were advanced before him and it was submitted that the addition made by the AO was unjustified on the facts of the case. It was submitted that the AO had compared the price of Dec., 1987, to the price prevailing in March, 1988, i.e., the AO had not taken the price of immediate contemporary period but of one year old. It was further submitted that the AO had without any evidence not accepted the contentions of the assessee that the detergent powder purchased from M/s Gum Products was of export quality and it was meant for export and ultimately it was exported to Russia. The attention of the CIT(A) was drawn to the evidence furnished before the AO referred to supra. A number of cases were cited before the CIT(A) to the effect that the provisions of s. 40A(2)(b) can be applied only when there are positive evidence and the expenditure incurred is excessive and unreasonable and in the absence of such evidence the addition made by the AO deserved to be deleted. The CIT(A) did not accept the contentions of the assessee and confirmed the addition observing as under:
"11. I have carefully considered the facts of the case and submission of the learned counsel of the appellant. One of the important test to prove that payments made to sister-concern do not attract provisions of s. 40A(2) is to prove that for similar services or purchases, similar payments have been made to other parties who are not related to the assessee. In the present case, it is seen that appellant has not brought any evidence on record to show that in the month of March, 1989 detergent powder was purchased at the rate of Rs. 11.29 per kg. from other parties. The evidence on which the appellant has heavily relied is a letter dt. 28th Feb., 1992 of M/s Gum Products India Ltd. in which, it is stated that the bare cost of export quality detergent powder is 9.59 paise as against this the goods sold to the appellant company at 9.54 paise per kg. because the bags were returnable. In my opinion, much reliance cannot be placed on this evidence because this is a letter from an interested party who happens to be a sister-concern and hence, this letter cannot be much more than a self-serving evidence of no creditable value. On the other hand, from the facts of the case, it is obvious that goods purchased at the rate of 11.29 per kg. was sold to outside party at the rate of Rs. 9 per kg. and at Rs. 4.91 per kg. to still another associated concern M/s Manvantar Trading Co. Pvt. Ltd. In the normal course of trading, no prudent business men would purchase the goods at a higher rate and sell them at a lower rate until and unless there is shortage of demand in the market. In the present case, it is seen that whatever goods were purchased have been sold to M/s Space Enterprise for export and to others and, therefore, there was no problem of marketing. Under these circumstances, the conclusion reached by the AO seems to be the only logical conclusion and she was fully justified in holding that goods were purchased from M/s Gum Products India at the rate of 11.29 per kg. for the reasons other than business and as M/s Gum Products India P. Ltd. happens to be an associated concern, such payments can be termed nothing but unreasonable and excessive. I would, therefore, hold that the AO was fully justified in invoking the provisions of s. 40A(2)(a) of the IT Act.
12. Now, coming, to the reasonableness of payment, I have found that she has taken the reasonable price at Rs. 5 per kg. To my mind, this appears quite fair and reasonable keeping in view the fact that the appellant had sold detergent powder at the rate of 4.91 per kg. to Manvantar Trading & Investment Pvt. Ltd. I would, therefore, confirm the addition of Rs. 25,14,250."
5. Shri K.H. Shah, the learned counsel for the assessee, reiterated the submissions made before the AO and the learned CIT(A). He drew our attention to the detailed explanations filed before the AO and reiterated before the CIT(A) that the goods purchased from M/s Gum Products were of export quality. He drew our attention to the purchase bills from M/s Gum Products placed before the AO and the CIT(A). He also drew our attention to the detailed written submissions along with the annexures filed before the CIT(A) placed at pages 75 to 82 of the paper book. He further drew our attention to the letter dt. 28th Feb., 1992, from M/s Gum Products filed before the AO in which the said concern had categorically stated that the goods sold to the assessee were of export quality and in the said letter the said party had worked out the bare cost of the said detergent powder at Rs. 9.59 per kg. as against the goods sold to the assessee-company at the rate of Rs. 9.54 per kg. since the bags were returnable by the assessee-company. He submitted that the attention of the CIT(A) was drawn to this letter but he summarily brushed aside the same as self-serving evidence for which there was no justification. The learned counsel for the assessee submitted that M/s Gum Products were having only export quality goods which were sold to the assessee-company at the end of the accounting year and in support of this he relied upon the year-wise break-up of purchase of local/inferior quality of detergent powder and export quality of detergent powder placed at page 80 of the paper book. These details were also before the AO and the CIT(A). He further relied upon the Annexure A giving the list of sales of loose detergent powder to M/s Manvantar Trading & Investment P. Ltd. by the assessee-company placed at page 81 of the paper book which formed annexure A to the submissions to the CIT(A) the learned counsel for the assessee submitted that the conclusion arrived by the AO and the CIT(A) was factually incorrect because the authorities below did not appreciate in correct perspective the evidence in this regard filed before them. In support of his contentions, he relied upon the judgment of the Gujarat High Court in the case of Marghabhai Kishabhai K. Patel & Co. vs. CIT 1976 CTR (Guj) 262 : (1977) 108 ITR 54 (Guj); Circular No. 6(P), dt. 6th July, 1968, issued by the CBDT; the decision of the Delhi Bench of the Tribunal in the case of Shriram Pistons & Rings Ltd. vs. IAC (1991) 39 TTJ (Del) 132; the decision of the Tribunal in the case of Heera Textiles vs. ITO (1991) 39 ITD 312 (Bom).
6. The learned Departmental Representative strongly supported the orders of the authorities below. He submitted that there was no denying the fact that M/s Gum Products was sister-concern of the assessee-company and the assessee could not prove before the authorities below that the goods purchased from the said concern were of export quality. He submitted that the letter dt. 28th Feb., 1992, from M/s Gum Products was a self-serving evidence and the authorities below have rightly rejected the same. He submitted that under the IT Act it is the real income which has to be assessed and in support of this he relied upon the judgment of the Supreme Court in the case of State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC) and, since the assessee held inflated the purchase price, the AO rightly rejected the version of the assessee and made the impugned addition.
7. We have considered the rival submissions and perused the facts on record. We find that it was contended before the AO that the assessee-company had purchased export quality detergent powder from M/s Gum Products at the rate of Rs. 9.75 per kg. plus Rs. 1.54 representing the excise duty. Necessary evidence was filed before the AO. The same contention was reiterated before the CIT(A) with all the supporting evidence but the authorities below ignored the same in a summary manner without bringing on the record anything to rebut the unimpeachable evidence like the copies of purchase bills from M/s Gum Products. It is also noted that M/s Gum Products produced 1400 MTs of superior quality of detergent powder. It exported 1000 MT to Russia and the remaining 400 MT were sold to the assessee which the assessee also ultimately exported through M/s Space Enterprise to Russia which fact is evidenced by the agreement entered into by the assessee-company with the exporter which was filed before the AO on 8th Oct., 1990. The authorities below mistook these goods as local/inferior quality of detergent powder and thus wrongly compared the price with that of the goods sold by the assessee to the same concern at the rate of Rs. 4.79 per kg. in the preceding year (Dec., 1987 to March, 1988). We also note that the authorities below have simply brushed aside the letter dt. 28th Feb., 1992 from M/s Gum Products filed before the AO in which the said concern had categorically stated that the goods sold to the assessee were of export quality and in the said letter the seller party worked out the bare cost of the said detergent powder at Rs. 9.59 per kg. as against the goods sold to the assessee at the rate of Rs. 9.54 per kg. since the bags were returnable by the assessee. In our view, there is no ground for rejecting this vital evidence in the absence of any evidence to the contrary. We also note that the authorities below have also conveniently ignored the fact that M/s Gum Products had sold the same quality of detergent powder weighing 1000 MT for export to Russia through M/s Chemicals D-Universe at the rate of 9.54 per kg. and at the cost there is a small difference of 21 paise per kg. but that is more than off-set by the export benefits which the assessee derived, i.e., excise duty set off of Rs. 21,62,033 and special excise duty set off of Rs. 87,662 as per details placed at page 121 of the paper book.
7.1 In Marghabhai K. Patel & Co. the Hon'ble High Court of Gujarat, relying on the decisions reported in Shri Ramalinga Choodambikai Mills Ltd. vs. CIT (1956) 28 ITR 952 (Mad), CIT vs. Keshavlal Chandulal (1966) 59 ITR 120 (Guj) and Das & Co. vs. CIT (1962) 45 ITR 369 (Pat) held as under:
"Under the general law, transaction even with relatives and/or associate concerns cannot be disregarded unless it is shown that the onus thereafter is on the Department that the transactions was sham one or the value shown in the books was fully relied upon or the transactions was not a bona fide one."
In Circular No. 6(P), dt. 6th July, 1968, under s. 40A(2), the CBDT has clarified as under:
"The ITO is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payment to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases."
In Shriram Pistons & Rings Ltd. vs. IAC, the Tribunal, Delhi Bench has held as under:
"In order to attract s. 40A(2), the AO has to place on record evidence on the basis of which it could be said that the expenditure incurred by the assessee is excessive or unreasonable having regard to the services rendered."
Further, in Heera Textiles vs. ITO, the Tribunal has held that where the assessee-firm allowed certain rebate on its sales made to two firms and a private company, provisions of s. 40A(2) could not be invoked to disallow the aforesaid amount on the ground that partners/director of aforesaid firms/company were related to partners of the assessee.
7.2 In the light of the above discussion we hold that there is no justification for the impugned addition of Rs. 25,14,250. We accordingly delete the same.
8. The next grievance of the assessee is that the CIT(A) is not justified in confirming the disallowance under s. 40A(2)(b) in respect of loose detergent powder sold to M/s Manvantar Trading & Investments P. Ltd. During the course of assessment proceedings the learned AO noted that the detergent powder was sold to Manvantar Trading & Inv. Pvt. Ltd. at the rate of 4.91 per kg. she further noted that some goods were sold to outside parties at the rate of 7.61 per kg. she further found that M/s Manvantar Trading & Inv. Pvt. Ltd. was a sister-concern of the assessee-company. She, therefore, treated the difference between the two sale prices as unreasonable and excessive and under the provisions of s. 40A(2)(b) made an addition of Rs. 10,73,612.
8.1 The CIT(A) confirmed the addition observing as under:
"15. I have carefully considered the facts of the case and submission of the learned counsel of the appellant. As in the case of M/s Gum Products India discussed above, here also appellant has not brought any material on record to prove that the sales at the same time was made at the same rate to other parties. The appellant company has also brought nothing on record to show that there was increase in the cost price of goods in the month of Feb., 1989 as compared to Aug., 1988. On the other hand, the AO has relied on the sale price of the appellant itself to other parties. As the appellant could not explain satisfactorily as to why less amount has been charged for the sale of detergent powder to Manvantar Trading & Inv. Co., a sister-concern as compared to others to whom same goods have been sold at 7.61 per kg. I am of the considered opinion that the AO was fully justified in invoking provisions of s. 40A(2)(b). The addition of Rs. 10,73,612 made by her is confirmed hereby."
8.2 Shri K.H. Shah, the learned counsel for the assessee, submitted that the authorities below have gone wrong by following the facts relating to the purchases made from M/s Gum Products. He submitted that the goods purchased from Gum Products were exported and what was sold to M/s Manvantar Tdg. & Inv. P. Ltd. was loose/inferior quality of detergent powder and hence, the authorities below were not justified in invoking the provisions of s. 40A(2)(b). He further submitted that the provisions of s. 40A(2)(b) are not applicable to the sales and in support of his contentions he drew our attention to some judicial pronouncements.
8.3 The learned Departmental Representative relied upon the orders of the authorities below. He further submitted that the facts relating to the purchases from M/s Gum Products are applicable to the case of M/s Manvantar Trading & Inv. Ltd. which is a sister-concern of the assessee. He further submitted that by selling the detergent powder at a lower price to M/s Manvantar Tdg. & Inv. P. Ltd., the assessee's aim was to reduce its profits and thereby reduce its incidence of tax.
8.4 We have considered the rival submissions and perused the facts on record. As held by us supra, the facts relating to the purchases of detergent powder from M/s Gum Products are different from the facts of sale of detergent powder sold to M/s Manvantar Tdg. & Inv. P. Ltd. As held by us, the detergent powder purchased from M/s Gum Products was of export quality and it was exported to Russia. What was sold to M/s Manvantar Tdg. & Inv. P. Ltd. was of local/inferior quality of detergent powder and accordingly it cannot be said that the assessee suppressed the sale price to its sister-concern viz., M/s Manvantar Tdg. & Inv. P. Ltd. Further, s. 40A(2)(b) contemplates the assessee incurring any expenditure in respect of which payment has been made or is to be made. In order to invoke s. 40A(2)(b) there must be a payment which is an expenditure. In a given case even if the assessee bona fide sells goods at a price lower the market price, there is no expenditure incurred by him and s. 40A(2)(b) cannot be invoked in view of the following decisions:
1. CIT vs. A.K. Subbaraya Chetty & Sons (1980) 16 CTR (Mad) 252 : (1980) 123 ITR 592 (Mad);
2. CIT vs. Udhoji Shrikrishnadas (1981) 21 CTR (MP) 171 : (1983) 139 ITR 827 (MP).
In the light of the above decision, we hold that there is no justification for the impugned addition of Rs. 10,73,612 and the same is deleted. This ground accordingly succeeds.
9. The next ground of the assessee is that the CIT(A) is not justified in confirming the disallowance in respect of Rama Kirana Stores. During the course of assessment proceedings the AO noted a sum of Rs. 1 lac standing in the name of Rama Kirana Stores and interest of Rs. 16,000 thereon. According to the AO the assessee failed to produce the depositor or furnish the confirmation letter and accordingly she treated the sum of Rs. 1,16,000 as assessee's income from undisclosed sources.
9.1 The assessee appealed to the CIT(A) and submitted before him that the assessment on this point may be set aside in the interest of natural justice because the assessee could not contact the depositor. It was further submitted that it was a trade creditor and if an opportunity is given, necessary evidence can be furnished. The CIT(A) did not agree to the contentions made before him and confirmed the addition of Rs. 1,16,000 observing as under:
"18. I have carefully considered the facts of the case and submissions of the learned counsel of the appellant. I do not see any reason to set aside the assessment on this ground because I have found that an adequate opportunity has been allowed by the AO to produce the depositor as well as the confirmation letters and considerable time has passed between the assessment order and hearing of appeal and during this period also the appellant has not been able to procure any confirmation letter from the depositor which in itself creates doubt about genuineness of deposit. Since the appellant has failed to discharge the primary onus of proving the genuineness of cash credit of the deposit I hold that the AO was fully justified in making the addition of Rs. 1,16,000; same is confirmed hereby."
9.2 The learned counsel for the assessee submitted that the AO did not give sufficient opportunity to the assessee and the request of the assessee before the CIT(A) for setting aside this issue and restoring it back to the file of the AO was justified and in all fairness the CIT(A) should have accepted the same. He submitted that the credit appeared in an earlier year and there was no justification for making the addition during the year under appeal. The learned Departmental Representative relied upon the orders of the authorities below.
9.3 We have considered the rival submissions and perused the facts on record. The addition made is of Rs. 1,16,000 and on the face of it, it appears to be a trade credit. In our view, the request of the assessee before the CIT(A) for setting aside the issue to the file of the AO was a reasonable request and ought to have been accepted. We will not like to go into the merits of the addition at this stage and would like to restore this issue to the file of the AO for fresh adjudication after giving an opportunity of being heard to the assessee. This ground accordingly stands restored to the file of the AO.
10. The next grievance of the assessee relates to the charging of interest under s. 234B. The AO charged interest under s. 234B as, according to her the assessee has failed to pay advance tax. On appeal, the CIT(A) confirmed the action of the AO stating "since it (interest) has been charged as per law no interference is called for".
11. Shri K.H. Shah, the learned counsel for the assessee, submitted that the assessee had totally denied liability to pay interest and similar ground was also taken before the CIT(A) as per Ground No. 9. He submitted that the assessee filed loss return of Rs. 16,36,242 which was converted into the income of Rs. 27,78,980 and as such, the assessee could not be asked to be foreseen for such liability of interest. In this connection, he drew our attention to the provisions of various sections relating to the advance tax, i.e., ss. 207 to 219 of the Act. He, therefore, submitted that since the assessee had filed a return of loss it was not expected to deposit any advance tax.
12. Shri V.K. Mathur, the learned Departmental Representative submitted that though the assessee had filed return declaring loss ultimately it resulted into the substantial income of Rs. 27,78,980 and accordingly the assessee was liable to pay advance tax. He further submitted that the provision of s. 234B are not applicable.
13. We have considered the rival submissions and perused the facts on record. Sec. 207, as substituted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1988 lays down that tax shall be payable in advance during any financial year, i.e., 1st April to 31st March in accordance with provisions under s. 208 upto 219, in respect of the total income of the assessee which would be chargeable to tax (not charged to tax) for the assessment year immediately following that financial year, such income on which advance tax is payable is to be called the "current income". As is evident from the facts of the case, the assessee having suffered a loss, had no such current income on which advance tax was payable. The provisions of ss. 207 to 219 relating to the advance tax are based on the principles "Pay as you earn". As held by the Kerala High Court in the case of Lord Krishna Bank Ltd. vs. ITO (1989) 76 CTR (Ker) 62 : (1989) 176 ITR 508 (Ker), the advance tax means only the tax paid before the assessment as required by the Act. We accordingly hold that the assessee was not liable to pay any advance tax and hence, there is no justification for charging interest under s. 234B.
13.1 As regards the contention of the learned Departmental Representative that the provisions of s. 234B are not appealable, we do not find any merit in the same in view of the judgment of the Tribunal, Cochin Bench in the case of M. Mani vs. Asstt. CIT (1995) 51 TTJ (Coch) 273 in which it has been held as under:
"Having regard to the rival submissions as also the latest pronouncement of the Supreme Court in the case of J.K. Synthetics Ltd. vs. CTO (1994) 119 CTR (SC) 222 wherein their Lordships held that the provisions empowering the levy of interest for delayed payment of tax, even if construed as forming part of machinery provisions is substantive law and not adjectival law, we hold that levy of interest cannot be made under ss. 234B and 234C of the IT Act without affording an opportunity of being heard to the assessee. The principles of natural justice should be read into the provisions of ss. 234B and 234C as these sections are in substitution of the earlier provisions for levy of interest and the earlier provisions for levy of penalty. As these principles were not observed and taking note of the circumstances in which the assessee was placed with the fixed deposits having been frozen, we delete the levy of interest under ss. 234B and 234C of the IT Act. In the view we have taken on this issue, we do not go into the alternative contention of the assessee for suitable deduction in the quantum of interest."
This ground accordingly succeeds.
14. The last ground raised by the assessee reads as under:
"The learned CIT(A)-V, Ahmedabad, erred in confirming the issue regarding jurisdiction without appreciating the facts."
14.1 At the time of hearing, this ground was not pressed. The same is accordingly dismissed.
15. In the result, the appeal is allowed in part.
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