1. This appeal by the revenue and cross-objection by the assessee relating to assessment year 1988-89 are taken up together and disposed of by a common order for the sake of convenience.
2. I.T.A. No. 1519/Chandi/90 is the appeal by the revenue wherein the grounds taken are as under :- 1. On the facts and in the circumstances of the case, ld. CIT(A) has erred in law and facts in deleting trading addition of Rs. 6,71,090.
2. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in law and facts in deleting addition of Rs. 12,500 made by the Assessing Officer on a/c of disallowance under section 40A(2)(b).
3. In the cross-objection No. 69/Chandi/90 filed by the assessee, the grounds taken are as under :- 1. That the order of the learned Commissioner of Income-tax (Appeals) sustaining the addition of Rs. 4,000 made by the learned Income-tax Officer on account of the estimated value of packing material alleged to have not been disclosed is contrary to law and the facts of the case.
2. That the ld. CIT(A) was not justified in sustaining the disallowance of Rs. 1,000 out of telephone expenses out of the disallowance of Rs. 3,000 made by the ld. ITO.4. We will take up the revenue's appeal first and facts relating to deletion of addition of Rs. 6,71,090 in the trading account are that the assessee is engaged in the business of sale and purchase of brass/copper scrap. The ld. Assessing Officer felt that the assessee had understated the sale of scrap as some of the parties to whom scrap was sold by the assessee, sold the same to the assessee's sister concern around those very dates at some what higher prices. The ld.Assessing Officer was of the view that the very same scrap sold by the assessee must have been sold by the vendees to the assessee's sister concern as no loading/unloading expenses were debited in their books of account. The scrap sold by the assessee was, therefore, held to have only been routed through other parties to divert profit as, according to the Assessing Officer, the market rates of scrap sold by the assessee were higher which is shown by the very fact that the parties to whom the scrap was sold by the assessee, sold the same scrap on about same dates at higher prices. The ld. Assessing Officer accordingly rejected the book results of the assessee by applying the proviso to section 145(1) of the Income-tax Act and estimated the sale price of scrap at rates at which scrap was sold by another concern of Jagadhari, namely, M/s. Krishna Engg. Industries. The ld. Assessing Officer also relied on two judgments of the High Courts for coming to these conclusions.
The assessee appealed and the ld. CIT(A) for the reasons given in detail in the impugned order deleted the addition of Rs. 6,71,090. The revenue is aggrieved with the action of the ld. CIT(A) and has challenged the same by filing this appeal.
5. Smt. Parneet Mahal, the ld. D.R., submitted that the ld. first appellate authority was not justified in deleting the addition of Rs. 6,71,090 made by the Assessing Officer which was based on correct analysis of the trading results declared by the assessee and the addition was supported by reference to the case of M/s. Krishna Engg.
Industries. The ld. D.R. read extensively through the assessment order and emphasised that instances given in paras 4 and 5 of the assessment order indicate that the sales were made by the assessee at rates varying from Rs. 46 to Rs. 55 per kg. and these were subsequently sold at higher rates to the sister concerns of the assessee which fact proves that there was divergence of profit by the assessee. She accordingly submitted that the ld. first appellate authority was not justified in deleting the addition.
6. Shri P. C. Jain, Chartered Accountant, the learned representative of the assessee, strongly relied on the order of the ld. CIT(A) and further submitted that the Assessing Officer has no basis for rejecting the book results of the assessee and determining the assessee's profit from the sale of scrap by applying the rates of another concern of Jagadhari. It was contended that the assessee had maintained correct and complete accounts and had followed proper method of accounting as in earlier years. Trading results of the assessee were accepted in the past on the basis of these very records. It was contended that the ld.Assessing Officer had brought on record no such material, on the basis of which it could be said that the assessee had understated the sale value in its accounts and that the market value of the same material was higher. It was argued that the assessee had furnished complete details of the parties to whom the sales were made and these parties were available and the sales completely verifiably. There was no evidence whatsoever to indicate that any of these parties had made any payment to the assessee over and above the amounts recorded in the sale bills. The sales were claimed to have been made at the market rates and the payments received through cheques or drafts. It was submitted that all the vendees are regular income-tax assessees and in their cases, the purchases were accepted as genuine by the same ld. Assessing Officer. It was contended that there was no material whatsoever on record to show that the sale transaction in question was sham and, therefore, these could not be disbelieved in view of the ratio of the decisions in. Sri Ramalinga Choodambikai Mills Ltd. v. CIT [1955] 28 ITR 952 (Mad.) and CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC). It was pointed out that the vendees to whom the goods in question were sold were entirely independent concerns and in no way connected with the assessee and all of them are regular dealers in the sale and purchase of commodities which was brass/copper scrap in question. It was contended that there was no material available on record to show that the same goods which were sold by the assessee were sold by the vendees to the assessee's sister concerns. It was pointed out that the assessee had sold similar goods to other parties at the same rate as in the transaction in question and in those cases, the goods were independently used by the third parties. Accordingly, it was submitted that this fact conclusively proved that the assessee had sold the goods to the parties in question at market rate. It was pointed out that the ld. Assessing Officer seems to have proceeded on the basis that the quality of all scrap is the same. It was argued that the quality differs widely from lot to lot and after purchase of each lot, the scrap is sorted out quality wise and sold. It was explained that out of one lot, some goods would be sold at cheaper and some at higher rates.
It was submitted that the very large variation in the sale rates as mentioned in the assessment order itself clearly proved this contention of the assessee as such large variation could not be possible if the quality of the goods sold is same. It was emphasised that the assessee was maintaining complete quantitative tally of all stocks and materials which shows that all purchases were properly accounted for and that accounts maintained in the same manner were accepted in the past. The GP rate declared this year was 2.3% as against 1.89% of the immediately preceding year which was accepted. It was pointed out that the case of M/s. Krishna Engg. Industries was not comparable with the assessee's case as that assessee was purchasing virgin metal from MMTC, the scrap of which was costlier than the other scrap. It was submitted that by making the impugned addition, the GP rate would come to 13.68% and no other concern of Jagadhari engaged in the same line of business was showing that much profit. Accordingly, it was submitted that the CIT(A) was perfectly justified in deleting the addition as the result shown by the assessee was better than that of last year and was comparable to the rates shown by several cases of Jagadhari instances of which were given in the written submissions filed before the CIT(A) and which have been recorded at page 5 of the impugned order.
7. We have considered the rival submissions and have gone through the orders passed by the Assessing Officer and the ld. CIT(A) and has also taken note of paper-book running into 47 pages filed by Shri P. C.Jain, Chartered Accountant, the ld. representative of the assessee. In the paper-book, Shri Jain furnished a copy of the written submissions filed before the ld. CIT(A) which runs through pages 1 to 19 which was duly taken note of by the ld. CIT(A) while disposing of the appeal filed by the assessee. The ld. first appellate authority has discussed in detail the business of the assessee, the reasoning of the ld.Assessing Officer for rejecting the trading results, the arguments of the assessee which were given in the form of written submissions and his finding in deleting the addition amounting to Rs. 6,71,090 in paras 2 to 2.2 of the impugned order. Since we are in complete agreement with his approach and uphold his order deleting the addition of Rs. 6,71,090, it is considered expedient and in the fitness of things that paras 2 to 2.2 are reproduced below because otherwise it shall be simply re-writing his order making changes in the language :- "2. The appellant is engaged in the sale/purchase of brass/copper scrap. The learned ITO felt that the appellant had understated the sale of scrap as some of the parties to whom scrap was sold by the appellant, sold the same to the appellant's sister concerns around those very dates at some what higher prices. The ld. ITO was of the view that the very same scrap sold by the appellant must have been sold by the vendees to the appellant's sister concerns as no loading/unloading expenses were debited in their books of account.
The scrap sold by the appellant was therefore held to have only been routed through other parties to divert profit as the learned ITO found that the market rates of scrap sold by the appellant were higher which is shown by the very fact that the parties to whom the scrap was sold by the appellant, sold the same scrap on about same dates at higher prices. The ld. ITO accordingly rejected the book results of the appellant under section 145 of the Income-tax Act, 1961 and estimated the sale price of scrap at rates at which scrap was sold by another concern of Jagadhari namely M/s. Krishna Engg.
Industries. The ld. ITO also placed reliance on two judgments of High Courts for coming to these conclusions.
2.1 It was contended for the appellant that the ld. ITO was wholly unjustified in rejecting the book results of the appellant and in determining the appellant's profit from the sale of scrap by applying the rates of another concern of Jagadhari. It was contended that the appellant had maintained correct and complete accounts and had followed proper method of accounting as in the earlier years and the trading results of the appellant were accepted in the past on the basis of these very records. It was contended that the learned ITO had brought on record no such material, on the basis of which it could be said that the appellant had understated the sale value in its accounts and that the market value of the same material was higher. It was argued that the appellant had furnished complete details of the parties to whom the sales were made and these parties were available and the sales completely verifiable. It was claimed that there was no evidence whatever to indicate that any of these parties had made any payment to the appellant over and above the amounts recorded in the sale bills. The sales were claimed to have been made at market rates and the payments received through cheques or drafts. All the vendees were stated to be regular income-tax assessees and in their cases, the purchases were claimed to have been accepted as genuine by the same ld. ITO. The ld. counsel for the appellant contended that there was no material whatever on record to show that the sale transactions in question were sham and therefore these could not be disbelieved in view of the judgments Sri Ramalinga Choodambikai Mills Ltd v. CIT [1955] 28 ITR 952 (Mad.) and CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8(SC). It was pointed out that the vendees to whom the goods in question were sold were entirely independent concerns, in no way connected with the appellant and all of them are regular dealers in the sale/purchase of the commodity in question. It was also contended that there was no material whatever on record to show that the same goods which were sold by the appellant were sold by the vendees to the appellant's sister concerns. It was argued that the appellant had sold similar goods to other parties at the same rates as in the transactions in question and in those cases the goods were independently used by the third parties. This, it is claimed, would conclusively establish that the appellant had sold the goods to the parties in question at market rates. It was argued that the reliance of the ld. ITO on the judgment reported at 55 ITR 392 was not correct as in that case, the assessee had made purchases from the sister concern at prices higher than the market rates, whereas, in the instant case, the appellant had made no purchases and it only sold goods to the third parties totally unconnected with the appellant. It was pointed out that the ld. ITO seems to have proceeded on the basis that the quality of all scrap was the same.
It was argued that the quality differs widely from lot to lot and after purchase of each lot, the scrap is sorted qualitywise and sold. It was explained that out of the same lot, some goods would be sold at cheaper and some at much higher rates. The very large variation in the sale rates as mentioned in the assessment order itself was claimed to prove this contention of the appellant as such large variation could not be with the same quality of goods. It was explained that the appellant was maintaining complete quantitative tally of all stocks and materials which shows that all purchases were properly accounted for and that accounts maintained in the same manner were accepted in the past. It was argued that the GP rate declared this year was 2.3% against 1.89% of the immediately preceding year which was accepted. It was pointed out that the case of M/s. Krishna Engg. Industries was not comparable with the appellant's case as that assessee was purchasing virgin metal from M.M.T.C., the scrap of which was costlier than the other scrap. It was claimed that by making the impugned addition the GP rate would come to 13.68% and no other concern of Jagadhari engaged in the similar line of business was showing this much profit. The appellant relied on the book results of the following assessee engaged in the same line of business for pointing out that the GP rate declared by other concerns of Jagadhari was about the same as declared by the appellant :------------------------------------------------------------------------Name of the assessee Sales Gross % age of profit GP-----------------------------------------------------------------------Desh Rolling Mills, Jagadhari 13057235 432755 3.31%Arun Metal Ind., Jagadhari 6575196 232787 3.54%Dwarka Enterprises, Jagadhari 5240712 27,3813 5.2%Jai Ganesh Metal Ind., Jagadhari 18062707 486067 2.7%Lakshmi Industries, Y/Nagar 14254812 615202 4.31%Satish Engg. Works, Jagadhari 13780499 532475 3.86%Girish Kohli, Prop. Shiv ShankarMetal Works, Jagadhari 5004795 211181 4.2%Ajanta Metal Works, Jagadhari 15131532 341663 2.25%Himalayan Enterprises, Jagadhari 21047293 900264 4.2%Goel Strips, Jagadhari 3899776 171772 4.4%Sham Sunder & Sons, Jagadhari 11575891 407602 3.5%R. K. Steel & Metals (India), Jag. 5618746 256763 4.5%Frontier Enterprises, Jagadhari 4485110 149176 3.3%Sunder Singh, S/o Sh. BalwantSingh, Jagadhari 5138000 172915 3.3%----------------------------------------------------------------------- The above figures of sales/gross profit, etc., were confirmed to be correct by the ld. ITO during hearing of the appeal. Regarding the profit on the sale of brass scrap, it was pointed out that out of the total sales of brass scrap only a small quantity was sold to parties who later made sales to the appellant's sister concerns. The remaining quantity of brass scrap was claimed to have been sold to several other independent parties who are claimed to have consumed the same. It was argued that the sale rates in all these cases were about the same and this shows that the sales to even those concerns who later made sales to the appellant's sister concerns were at market rates. It was explained that the sales made to M/s.
Parmeshwar Metal Industries and M/s. Capital Metal Industries in the first week of March at rates running from Rs. 30.50 per kg. to Rs. 31 per kg. were of inferior quality of brass scrap which remained at the end of the year. The appellant claims to sort the scrap after purchase qualitywise and accordingly the sale price in each transaction is stated to be different. It was argued that the learned ITO's reliance on the Punjab & Haryana High Court reported at 111 ITR 224 was not proper as in that case it was only held that if profit is to be estimated and the accounts are to be rejected then profits could be estimated by relying upon on comparable cases.
It was pointed out that in the instant case, the ld. ITO had not applied the GP rate of other similar concerns in the area which were comparable to the GP rate disclosed by the appellant but had applied only the sale rate of another concern when there was no material to show that the goods dealt in by that concern were similar to the goods dealt in by the appellant. It was accordingly contended that the addition of Rs. 6,71,090 made by the ld. ITO was wholly unjustified and should be deleted : 2.2 I have carefully considered the arguments for the appellant and find force in these. The appellant's claim that the brass scrap purchased is sorted out qualitywise and when sold, the sale price varies according to the quality, appears to be correct as the wide variation in the sale price of scrap could only be for this reason.
The ld. ITO appears to have been mainly moved by the fact that some of the concerns to whom the appellant sold the scrap, later sold scrap to some of the sister concerns of the appellant at somewhat higher prices, though nowhere near the sale price of Rs. 59 adopted by the ld. ITO for estimating the appellant's profit on the sale of scrap weighing 35528 kgs. The appellant's case is that all the parties who later sold some scrap to the appellant's sister concerns dealt in purchase/sale of scrap at a large scale. The appellant as well as its sister concerns also dealt in purchase/sale of scrap at a large scale. It was claim that the mere fact that some of the parties to whom a part of the total scrap was sold by the appellant later sold some scrap to the appellant's sister concerns did not at all mean that the very same scrap sold by them later to the appellant's sister concerns. It was contended that the wide variation in the prices of scrap was because the quality differed from lot to lot and since the price at which the scrap was sold to the appellant's sister concerns was a little higher than the rates at which the appellant had sold the scrap it could very well be said that the scrap sold to the sister concerns was not the same which was sold by the appellant. Regarding the non-debiting of cartage/carriage expenses, it was contended that such expenses are never debited in local sales of scrap as all concerns are having their own cartage arrangements and the goods are sent through hand carts whenever these are sold by one concern to another. The appellant's case is that not only the appellant but virtually no other concern of Jagadhari/Yamunanagar in this line of business is debiting in its accounts any expenditure on account of carriage/cartage in respect of local sales because the goods are carried by the employees in hand carts or three wheelers, etc., owned by these concerns. These arguments do look reasonable on the face of it as the learned ITO has brought on record no material to show that the same goods which were sold by the appellant were later diverted to the appellant's sister concerns. The appellant had made very substantial other sales or scrap also. Since no carriage/cartage expenses had been debited in the appellant's accounts in respect of these sales, I am of the view that no adverse inference could be drawn from the non-debiting of any cartage/carriage expenses in respect of the goods sold by the appellant to parties who later sold some scrap to the appellant's sister concerns. All the concerns to whom scrap was sold by the appellant and who later sold scrap to the appellant's sister concerns were independent third parties and these transactions have not been proved by the learned ITO to be sham accommodation entries only. Another important fact pointed out for the appellant was that the learned ITO had applied the sale rate of Rs. 59 per kg. to the sale of 35528 kgs. of scrap on the ground that Rs. 59 per kg. was the sale rate of scrap of M/s. Krishna Engg. Industries, Jagadhari.
It was pointed out that the same learned ITO in another order passed on the same date on which the order in question was passed, namely, in the case of M/s. Lakhsmi Metal Works for the assessment year 1988-89 in para 15 at page 6 had held the average rate of sale of copper scrap in the case of M/s. Krishna Engg. Industries to be Rs. 48.45 per kg. It was contended that this fact alone showed that the rate of Rs. 59 per kg. applied by the learned ITO was arbitrary. I have perused the order of the learned ITO in the case of M/s.
Lakshmi Metal Works and find that the learned ITO had indeed held in that case that the sale rate of copper scrap by Krishna Engg. Inds.
in the previous year relevant to the assessment year 1988-89 was Rs. 48.45 per kg. (which appears to be the correct position) whereas in the instant case the sale rate of copper scrap in the case of M/s.
Krishna Engg. Industries, Jagadhari has been stated to be Rs. 59 per kg. This difference alone would result in deletion of a very large part of the addition made by the learned ITO. It is true that the appellant maintained accounts for this year on the same basis as in the past when the accounts were accepted. All the purchases, sales/expenses are supported by proper vouchers. The ld. ITO has not been able to establish that any sales/purchases made by the appellant were not genuine. The appellant has maintained a complete stock tally of all the stocks which shows that all the material purchased by the appellant was accounted for. The learned ITO has not succeeded in bringing on record enough evidence to show that some of the sales made by the appellant were bogus and the goods sold were later sold by the vendees to the appellant's sister concerns at higher prices. It is not at all clear as to what benefit, the appellant or its sister concerns derive from such transactions as it would only result in passing some profit to third parties and there is not even an iota of evidence to show that any part of this profit was later on passed by the vendees in question to the appellant or its sister concerns. The transactions stand accepted in the hands of the vendees. The ld. ITO's reliance on the judgments reported at 55 ITR 392 and 111 ITR 224 is considered to be of no help to the revenue as the facts in these cases were entirely different and have no application to the facts of the instant case.
The G.P. rate declared by the appellant in the year under consideration was 2.3% against 1.89% for the immediately preceding year. There is also force in the appellant's contention that with the addition made by the learned ITO, the G.P. rate of the appellant would work out to 13.68% which was many times the G.P. rate declared by other comparable concerns. It is seen that the appellant has sold scrap at about the same rates not only to parties who later sold some scrap to the sister concerns of the appellant but also to other third parties which shows that the sales made even to those parties who later sold some scrap to the appellant's sister concerns, were at market rates. There is no evidence to show that any part of the same scrap which was sold by the appellant was later sold by the vendees to some of the sister concerns of the appellant or that any part of the profit earned by these vendees on these transactions was passed on to the appellant or its sister concerns. The ld. ITO is accordingly held to have made out no case either for rejection of the appellant's accounts under section 145 of the Income-tax Act, 1961 or that the appellant had understated its sale price in collusion with the vendees or that it had received any amount in respect of these transactions over and above what is recorded in its accounts. The average sale rate of Rs. 59 per kg. stated by the learned ITO to have been declared by M/s. Krishna Engg. Industries, Jagadhari also appears to be incorrect as discussed above. In view of these facts, the learned ITO is held to have made out no case for making the impugned addition of Rs. 6,71,090 which is deleted." We may also point out that almost in similar circumstances, additions made by the Assessing Officer which were deleted by the CIT(A) in the case of Lakshmi Metal Works and Gupta Metal Industries and the action of the ld. CIT(A) in those cases was also upheld by the Tribunal in I.T.A. No. 1518/Chandi/90 and I.T.A. No. 1517/Chandi/90 order dated 20-2-1996. Accordingly we do not find any merit in ground of appeal No.1 which is accordingly dismissed.
8. Coming to ground No. 2, the issue has been adjudicated by the CIT(A) in paras 5 to 5.3 of the impugned order as under :- (a) That the learned ITO further erred in disallowing Rs. 12,500 under section 40A(2)(b) of the Income-tax Act out of rent when the rent paid was reasonable and not excessive.
(b) That the ld. ITO disallowed Rs. 12,500 out of the rent arbitrarily without appreciating the real facts and submissions of the appellant.
A sum of Rs. 15,000 was debited in the books of account of rent paid to Mrs. Uma Gupta, w/o Sushil Gupta and Smt. Manju Gupta w/o Sh.
Sushil Gupta respectively as Rs. 7,500 each for the period 1-6-1987, 31-3-1988 for a plot with boundry wall for the first time. Since amount paid on this account was considered excessive, the assessee vide notice dated 17-3-1989 was requested to justify the same. The assessee has furnished a written reply on 30-3-1989 in which it has been stated that the rent was paid on the basis of mutual understanding and settlement arrived at between the assessee and the owner and that the same cannot be disregarded unless the transaction was shown to be sham or that the value shown in the books was not the value really paid or that the transaction was not bona fide. In support of its contention, the assessee has also cited some case laws. The market value of the land in question cannot be ascertained as the owners are not wealth-tax assessees. But the very fact that an amount of Rs. 7,500 each was credited to the owners' account despite the fact that in Jagadhari the land rates are not very high and even the rent of constructed building is not very attractive.
Considering these facts, the rent paid is considered excessive and the same is restricted to Rs. 250 p.m. The allowable deduction comes to Rs. 2,500 only against claim of Rs. 15,000. The balance amount of Rs. 12,500 is disallowed under section 40A(2)(b).
5.2 It was contended for the appellant that the ld.ITO was not justified in disallowing a part of the rent paid by the appellant in respect of the land taken on lease by the appellant. It was explained that the land in question was 650 sq. yds. and was located adjacent to the appellant's factory which was in the heart of Jagadhari town. It was argued that for such valuable land the payment of rent @ Rs. 1,500 per month was most reasonable. It was explained that the necessity for hiring out the land arose because of the very large scrap imported by the appellant during the year and the premises in question were used by the appellant during the year for storing and sorting out the importer scrap. It was argued that the ld.ITO had given no basis for holding that the rent of Rs. 250 p.m. for the land in question would be reasonable.
5.3 I have carefully considered the arguments for the appellant and find force in these. The learned ITO has only mentioned that the land rates at Jagadhari were not very high and accordingly a rent for the land @ Rs. 250 p.m. would be reasonable. The ld.ITO has not mentioned as to what, according to him, would be the value of the plot in question. Considering that the land in question was located in the heart of the town and was adjacent to the appellant's factory and also considering the high land rates in urban areas these days, I am of the view that the rent of Rs. 1,500 per month paid by the appellant for 650 sq.yds. of land was quite reasonable and should be allowed. The addition of Rs. 12,500 made by the learned ITO is accordingly deleted." 9. After hearing the parties to the dispute and going through the relevant portion of the order of the ld. CIT(A), which has been extracted by us above, we do not find any infirmity in the reasoning and conclusion of the ld. CIT(A) in deleting the addition of Rs. 12,500 made by the Assessing Officer under section 40A(2)(b) and for that we make the reasoning and conclusion of the CIT(A) as recorded above as our own.
11. We shall now take up assessee's cross objection. Ground No. 1 of the objection has been dealt with by the CIT(A) in paras 4 to 4.3 as under :- That the learned Income-tax Officer further erred in making an addition of Rs. 4,000 on account of the value of packing material alleged to have not been disclosed on wholly unsustainable grounds.
It was found that the assessee did not declare any sales or the manner of disposal of the packages such as steel drums, etc., in which material was imported. As such, vide notice dated 17-3-1989, the assessee was requested to show cause why profit should not be estimated and added to the income. The assessee's reply furnished in response to this query that the drums are damaged and discarded, in general in nature. Considering that the packing material, i.e., steel drums was of reliable value, a sum of Rs. 4,000 is added on this account.
4.2 For the appellant, written submissions were filed which read as under :- The learned Income-tax Officer made an addition of Rs. 4,000 on account of the value of the packing material alleged to have not been disclosed. The assessee submitted to the learned Income-tax Officer that the materials are received on card board packages as well as in drums and card board packages are damaged in transit and are received in broken condition and the goods are sold in the same packages or drums to the parties and as such there could not be any profit on the same. Without prejudice to the aforesaid factual position, no addition or profit could be estimated as the method of the assessee in valuing the closing stocks was cost and since there was no cost of the said packing material to the assessee, no profit could have been estimated. It is therefore, prayed that the addition of Rs. 4,000 be very kindly deleted.
4.3 I have carefully considered the arguments for the appellant and find no force in these. I do not agree with the argument for the appellant that the cost of packing material to the appellant was nil. The cost of packing material is included in the cost of scrap purchased and accordingly the value of closing stock of packing material was required to be shown by the appellant. Since no value of the packing material has been shown in the closing stock, the same remains unaccounted for and the addition of Rs. 4,000 made by the learned ITO in this regard is considered reasonable. There is also no force in the appellant's contention that the goods are sold in the same packages in which these are received. The appellant has claimed that the scrap purchased is sorted qualitywise and sold in small lots. As such, the entire packing material in which the scrap was received could not have been given away along with sales particularly since the scrap sold is stated to be transported in hand carts and the drums in which the imported scrap is received are not suitable for being transported in hand carts. Considering these facts, the addition of Rs. 4,000 made by the learned ITO is confirmed." 12. After hearing the parties to the dispute, we are of the opinion that the ld. CIT(A) has given valid reasons for sustaining the addition of Rs. 4,000 on account of scrap value of packing material and we will uphold his action in this regard and for that we will make the reasoning of the ld. CIT(A) as reproduced above as our own. Ground No.1 in the cross-objection is thus dismissed.
13. Regarding ground No. 2 in the cross-objection, the issue has been discussed by the CIT(A) in paras 6 to 6.3 of the impugned order as under :- That the learned Income-tax Officer further erred in disallowing Rs. 3,000 out of telephone expenses on wholly unsustainable grounds.
6.1 The learned ITO has made this disallowance for personal expenses of the partners out of total telephone expenses of Rs. 29,020.
6.2 It was contended for the appellant that the disallowance was excessive as no disallowance in this regard was made in the assessment year 1987-88 and a disallowance of Rs. 500 only was made in the assessment year 1985-86. It was contended that the expenditure did not relate to any telephone installed at the residence of the partners and was the expenditure of only the telephones installed at the business premises of the appellant.
6.3 I have carefully considered the arguments for the appellant and find some force in these. Considering that the entire expenditure relates to the telephones at the business premises only, the disallowance made by the ld. ITO does appear to be excessive.
Considering all the facts, I am of the view that a disallowance of Rs. 1,000 would meet with the ends of justice. The disallowance of Rs. 3,000 made by the learned ITO is accordingly reduced to Rs. 1,000." 14. After hearing the parties to the dispute, we do not find any justification in taking a different view than that of ld. CIT(A) whose order on the issue we will uphold and for that we make the reasoning and conclusion of ld. CIT(A) as reproduced above as our own.
Cross-objection No. 2 is also dismissed.
15. In the net result, both the revenue's appeal and assessee's cross-objection are dismissed.
1. After going through the proposed order of learned brother, I have not been able to persuade myself to concur with his conclusions and findings and my reasons for the same are as below.
2. With regard to ground No. 1 of the revenue's appeal, facts and arguments of both the parties are well-recorded in the proposed order and I need not repeat the same. Ld. CIT(A), whose findings and conclusions have almost been upheld, were based mainly on the ground that there were different types of lots of scrap having different quality and different market value, without successfully bringing out such difference with the support of stock register, any material or evidence to substantiate the claim of the assessee, nor it was established by the assessee either before the Assessing Officer or before ld. CIT(A) that there was any other case of same type, to rebut the claim of the Assessing Officer of comparable case, with facts and figures. The case referred to by ld. counsel for the assessee, M/s.
Gupta Metal Industries, has to be examined by bringing out facts and results of that case and that of the assessee's case and full exercise was required to be done, which, to me, appears to have not been done by ld. first appellate authority before applying the ratio of the case referred to supra. Therefore, in view of facts and circumstances of the case, it would be appropriate to set aside this issue to the file of the Assessing Officer to reconsider the same afresh, after examining stock registers, etc., and giving due opportunity to the assessee. I hold and direct accordingly. The ground succeeds for statistics.
3. As regards ground No. 2, I find that neither the Assessing Officer while making addition nor ld. CIT(A) while deleting the same, has taken into account any instance or comparable case. Accordingly, orders of both the lower authorities are set aside and this issue is also restored to the file of the Assessing Officer for fresh enquiries in this regard and to pass fresh order thereafter.
4. But as regards conclusion in C.O. of the assessee, I do concur with the reasoning and conclusion of my learned brother.
On a difference of opinion between the members who heard the appeal and the cross-objection, the following point of difference is referred to the Hon'ble President for the opinion of the Third Member :- "Whether, on the facts and in the circumstances of the case, the view of the Accountant Member in confirming the order of the ld. CIT(A) is justified or the view taken by the Judicial Member that the order of the ld. CIT(A) be set aside to the file of the Assessing Officer for fresh adjudication, is correct ?" 1. On a difference of opinion between the Members constituting the Division Bench, the following point of difference was referred for my opinion by the Hon'ble President acting under section 255(4) of the Income-tax Act, 1961 :- "Whether, on the facts and in the circumstances of the case, the view of the Accountant Member in confirming the order of the 11.
CIT(A) is justified or the view taken by the Judicial Member that the order of the ld. CIT(A) be set aside to the file of the Assessing Officer for fresh adjudication, is correct ?" 2. The facts no doubt are set out at length in the order of the ld.Accountant Member to which the ld. Judicial Member has agreed but for purposes of disposing of the present reference, I propose to summarise these as under.
3. The assessee is engaged in the sale of brass/copper scrap. The Assessing Officer took the view that the assessee had understated the sale of scrap since some of the parties to whom the same had been sold had in turn sold the same to the assessee's sister concern round about the same very dates at higher prices. The Assessing Officer also felt that the same very scrap sold by the assessee must in turn have been sold by the vendees to the assessee's sister concern since no loading and unloading expenses had been debited in their books of accounts.
This led the Assessing Officer to conclude that the assessee must have routed the scrap through intermediary parties to divert its own profit as the market rate of scrap sold by the assessee was higher and which was reflected by the fact that the parties to whom the said scrap had been sold by the assessee sold the same at higher prices. In the final analysis, the Assessing Officer rejected the book results by applying proviso to section 145(1) and estimated the sale price of scrap applying the rate at which the same had been sold by one M/s. Krishna Engg. Industries, Jagadhari. An addition of Rs. 6,71,090 came to be made as a result of the view expressed by the Assessing Officer but which on further appeal came to be deleted by the CIT(A) which led to second appeal before the Tribunal on the part of the revenue.
4. At the time of hearing of the appeal, the ld. D.R. took exception to the relief given by the CIT(A) strongly supporting the order of the Assessing Officer and which according to her had been based on a correct analysis of trading results declared by the assessee as also with reference to the case of M/s. Krishna Engg. Inds. It was pointed out that sales were made at rates varying between Rs. 46 to Rs. 55 per kg. and which were subsequently sold at higher rates to the sister concern of the assessee. The ld. D.R. made a plea to the effect that the order of the Assessing Officer be restored.
5. The arguments of the ld. counsel for the assessee, on the other hand, were strongly in support of the order of the first appellate authority and a perusal of the order of the ld. Accountant Member shows that detailed arguments were advanced and which I summarise as under :- (1) There was no basis on the part of the Assessing Officer to reject the results of the assessee and determine the profit from sale of scrap by applying the rates of another concern of Jagadhari.
(2) Complete books of account and records had been maintained as in earlier years when the trading results had been duly accepted.
(3) No material had been brought on record by the Assessing Officer to substantiate his allegation that the assessee had understated the figure of sales or that the market value of the same material was higher on the relevant dates.
(4) Complete details of the parties to whom the sales had been made were available and the sales were fully verifiable.
(5) There was no evidence to indicate that any of the parties had made any payment to the assessee over and above the amounts recorded in the sale bills and the sales were effected at market rates and payments received through cheques/drafts.
(6) All the vendees were regular income-tax assessees and purchases in their cases had been accepted as genuine.
(7) There was nothing on record to show that the sale transactions were sham in any manner, more so when the vendees to whom the goods were sold were absolutely independent concerns having no relationship with the assessee.
(8) There was no material on record to show that the goods which were sold by the assessee to the vendees in question were in turn sold by them to the assessee's sister concerns.
(9) That the assessee had sold similar goods to other parties at the same rate and these had been independently used by such parties.
(10) That the Assessing Officer had proceeded on the basis that the quality of the scrap was the same whereas the fact was that the quality differed from lot to lot. it was submitted that the scrap was sorted out qualitywise and then sold which led to some being sold at cheaper rates and some at higher rates.
(11) The assessee was maintaining complete quantitative details which showed that all purchases had been properly reflected and further the accounts had been maintained in the same manner as in the past when they stood accepted.
(12) The GP rate declared this year was 2.3% which was better than the figure of 1.89% disclosed in the immediately preceding year and accepted.
(13) The case of M/s. Krishna Engg. Inds. was not comparable with the assessee's case since the aforesaid assessee was purchasing virgin metal from MMTC the scrap of which was costlier than other scrap.
(14) By making the impugned addition, the GP rate would come to 13.68% which no other concern of Jagadhari engaged in the same line of business had shown.
On the basis of the aforesaid submissions, it was urged that the decision of the CIT(A) be confirmed.
6. The ld. Accountant Member, who passed the initial order, accepted the arguments advanced on behalf of the assessee and after corelating them to the material available on record and to which attention had been invite during the course of hearing confirmed the view of the first appellate authority. Inasmuch as the first appellate authority had discussed the matter at length and passed a detailed speaking order, the ld. Accountant Member did not consider it necessary to record any separate reasons but proceeded to set out the relevant observations and the reasonings recorded by the CIT(A). These appear in para 7 of the order of the first appellate authority but for purposes of the present proceedings, I proceed to summarise the operative portion of the order of the CIT(A), i.e., para 2.2 at page 7 and which the ld. Accountant Member has adopted as his own :- (1) The assessee's claim that the brass scrap purchased was sorted out qualitywise and then sold appears to be correct taking note of the variation in the sale price of the scrap.
(2) The Assessing Officer appears to have been moved by the fact that some of the concerns to whom the assessee had sold the scrap later sold the scrap to some of the sister concerns of the assessee at somewhat higher rates but which was nowhere near the sale price of Rs. 59 adopted by the Assessing Officer.
(3) That the parties who subsequently sold some scrap to the assessee's sister concerns dealt in purchase/sale of scrap on a larger scale and the assessee as also its sister concerns were also involved in the same business on the same scale.
(4) There was nothhig to prove that the scrap which had been sold to the sister concerns of the assessee was the same scrap which the assessee had sold to the aforesaid parties.
(5) The wide variation in the price of scrap was entirely on account of quality which differed from lot to lot.
(6) The question of debiting the cartage/carriage expenses did not arise as all the concerns had their own cartage arrangements in the form of hand carts. It was submitted that no other concern of Jagadhari and Yamunanagar in the said line of business was debiting such expenses in its books of accounts.
(7) All the concerns to whom scrap had been sold by the assessee and who later sold scrap to the assessee's sister concerns were independent third parties and none of the transactions had been proved by the Assessing Officer to be sham transactions in the form of accommodation entries.
(8) That the Assessing Officer had applied a sale rate of Rs. 59 per kg. to the sale of 39535 kgs. of scrap on the ground that Rs. 59 per kg. was the sale rate of scrap of M/s. Krishna Engg. Inds., Jagadhari whereas it was pointed out on behalf of the assessee that the same Assessing Officer in another case, i.e., of M/s. Laxmi Metal Works for the assessment year 1988-89 had applied a rate of Rs. 48.45 per kg. in respect of the sale of scrap pertaining to the same M/s. Krishna Engineering Industries (the CIT in fact perused the order of the Assessing Officer in the case of Laxmi Metal Works and found the submissions made on behalf of the assessee to be correct). This difference alone according to the CIT(A) would lead to the deletion of a substantial part of the addition made by the Assessing Officer.
(9) The assessee had maintained accounts in the year under appeal on the same basis as in the past when these were accepted. Further, all purchases, sales and expenses were fully vouched and the Assessing Officer had not been able to establish that any of them were not genuine.
(10) The assessee had maintained complete stock tally of all the stocks which showed that the material purchased had been accounted for.
(11) The Assessing Officer had not brought any material on the record to show that the sales made by the assessee were bogus or the goods sold were later sold by the vendees to the assessee's sister concerns at higher rates.
(12) It was not at all clear as to what benefit the assessee or its sister concern were to derive from such transactions as it would only result in passing on some profit to third parties and there was no iota of evidence to show that any part of the profit was later passed on by the vendees either to the assessee or its sister concerns.
(13) That the transactions stood accepted in the hands of the vendees.
(14) The GP rate declared by the assessee at 2.3% was better compared to the rate of 1.89% declared in the immediately preceding assessment year and there was adequate force in the argument raised to the effect that the addition would lead to a GP rate of 13.68% which was much more than what others in the same line of business had declared.
7. On the basis of the aforesaid line of reasoning, the CIT(A) took the view and which was confirmed by the ld. Accountant Member that there was no case made out for rejection of the assessee's account under section 145 of the Income-tax Act, 1961 and neither any case had been made out that the sale price had been understated in any manner in collusion with the vendees or that the assessee had received any amount in respect of these transactions over and above what it had recorded in its books of accounts. The average sale rate of Rs. 59 per kg. adopted by the ITO was also found to be incorrect by the CIT(A). In the final analysis, the addition of Rs. 6,71,090 was deleted and which the ld.Accountant Member in concluding further observed that in similar circumstances, the relief given by the CIT(A) in the cases of Laxmi Metal Works and Gupta Metal Indus. came to be confirmed by the Tribunal vide order dated 20-2-1996 in I.T.A. Nos. 1518 & 1517/Chandi/90.
8. The second point in the revenue's appeal, which was the subject-matter of difference between the ld. Members, pertained to disallowance of Rs. 12,500 made by the Assessing Officer under section 40A(2)(b) vis-a-vis the sum of Rs. 15,000 paid as rent to Mrs. Uma Gupta w/o Shri Sushil Gupta and Smt. Manju Gupta w/o Shri Sunil Gupta at Rs. 7,500 each, for hiring a plot with a boundry wall. On the ground that the payment was excessive, the Assessing Officer issued a notice to the assessee dated 17-3-1989 to which written reply was furnished on 30-3-1989. The assessee stated that the rent was paid on mutual understanding and settlement arrived at between the assessee and the owners and this could not be disregarded unless the transaction was shown to be sham. The Assessing Officer, on the other hand, took the view that the amount paid was excessive since the land rates in Jagadhari were not very high and the market value could not be ascertained since the owners were not wealth-tax assessees. Considering a rent of Rs. 250 p.m. to be reasonable, the Assessing Officer allowed a deduction of Rs. 2,500 out of the total claim of Rs. 15,000 disallowing the balance.
9. Before the CIT(A), the assessee contended that there was no justification on the part of the Assessing Officer in disallowing a part of the rent, more so when the land measured 650 sq.yds and located adjacent to assessee's factory which was in the heart of Jagadhari town. It was argued that for this land the payment of Rs. 1,500 p.m.
was quite reasonable. As regards the necessity for hiring the land, the argument was to the effect that a large quantity of scrap had been imported by the assessee during the year and premises were required for storing and sorting out the same. Exception was also taken to the figure of Rs. 250 p.m. adopted by the Assessing Officer.
10. The aforesaid submissions found favour with the CIT(A) who proceeded to delete the addition taking note of the relevant facts including the location of the land as also the necessity for hiring the same on the part of the assessee. The ld. Accountant Member after examining the facts and hearing the parties proceeded to uphold the action of the CIT(A).
11. The ld. Judicial Member who passed a short dissenting order at the outset agreed with the ld. Accountant Member insofar as the recording of facts and arguments of the parties was concerned vis-a-vis the first issue. He, however, disagreed with the ld. Accountant Member on the following two grounds :- (1) The reasoning and conclusion of the ld. first appellate authority had proceeded merely on the ground that there were different qualities of scrap but this had not been brought out with the support of a stock register or any other material or evidence; and (2) the decision of the Tribunal such as M/s. Gupta Metal Industries, etc., relied upon by the assessee's counsel had to be examined "by bringing different facts and results of that case and that of the assessee's case and full exercise was required to be done, which to me, appears to have not been done by ld. first appellate authority before applying the ratio of the case referred to supra".
On the basis of the aforesaid, the ld. Judicial Member took a view to the effect that the matter was required to be restored to the file of the Assessing Officer to decide the same afresh "after examining stock registers, etc. ..." 12. The ld. D.R. strongly supported the order of the ld. Judicial Member whereas the ld. counsel for the assessee vehemently supported the view expressed by the ld. Accountant Member. Inasmuch as the detailed arguments with reference to the merits of the case have already been reproduced initially in the order of the CIT(A), thereafter in the order of the ld. Accountant Member and thereafter summarised by me, I don't find it necessary to refer to these once again. I would only like to highlight certain arguments advanced before me by counsel and these were to the effect that whereas the CIT(A) had taken the view that provisions of section 145(1) were not applicable, the revenue had not come up before the Tribunal by raising a specific ground. The other submission was to the effect that there was no justification on the part of the ld. Judicial Member to restore the matter to the file of the Assessing Officer who had appeared before the first appellate authority and at no stage of the proceedings, i.e., either before the CIT(A) or before the Tribunal at the time of hearing before the Division Bench had any submissions been made on behalf of the revenue that the matter be restored back. The ld. counsel further stated that all comparable cases relied upon by the assessee were made available to the CIT(A). He also referred to the order of ld. Judicial Member stating that none of the factual aspects stated by the ld.Accountant Member or the line of reasoning set out had been rebutted by the ld. Judicial Member by referring to any material on record which would justify a view to the contrary. The other submission was to the effect that since all relevant material had been placed initially before the Assessing Officer, thereafter before the CIT(A) and lastly before the Tribunal, no useful purpose would be served by sending the matter back to the Assessing Officer. The ld. counsel also made a statement to the effect that complete particulars of the parties with their addresses had been furnished at every stage of the proceedings and all payments had been made and received by account-payee cheques.
The last submission was to the effect that the decisions of the Tribunal in the cases of M/s. Gupta Metal Industries and M/s. Laxmi Metal Works, supra, had been accepted by the department and no reference application had been filed under section 256(1). In concluding, it was urged that the view taken by the ld. Accountant Member be confirmed.
13. After hearing both the parties, I am of the view that the opinion expressed by the ld. Accountant Member whereby he has upheld the decision of the CIT(A) to delete the addition of Rs. 6,71,090 merits approval. Not only is his judgment complete in all respects vis-a-vis the facts and thereafter the reasoning adopted but it is also the decision which is most appropriate on the perusal of the facts and the material. As already argued by the ld. counsel, the ld. Judicial Member has not at all rebutted any of the facts or the reasons set out by the ld. Accountant Member but has chosen to set at naught the order of the CIT(A) on grounds which apparently had not been argued on behalf of the department and nor was it the case of anybody that a stock register had to be looked into for deciding whether the quality of the scrap was different. It appears that the dissenting order has been passed only with a view to express an opinion contrary to the one arrived at by the ld. Accountant Member. A new element has been introduced in the proceedings, i.e., a stock register to decide the question whereas the CIT(A) and thereafter the ld. Accountant Member have referred to numerous factual aspects which could lead to no other conclusion but to one that addition on the facts and circumstances of the case was not at all warranted. In my opinion, not only do the cumulative effects noted by CIT(A) and ld. Accountant Member lead to the relief asked for but even some of these individually would lead to the same result. As I have already summarised the various grounds on which the relief has been given, I do not find it necessary to repeat them once again. The ld. Judicial Member has also taken a second ground for setting aside the order of the CIT(A) that is the decision of the Tribunal referred to in para ... in the order of the ld. Accountant Member, namely, M/s.
Gupta Metal Inds. and M/s. Laxmi Metal Works. I have mentioned in some of my Third Member decisions that it is obligatory on the part of the Tribunal to examine its own judgments when placed before it by the parties and express a positive opinion as to whether these are applicable or not to the facts of the case presently under consideration. This duty cannot be passed on either to the assessing Officer or to the CIT(A). It may not be out of place to mention that the ld. Judicial Member was a party to both the decisions of the Tribunal supra and it is nobody's case that the copies of these judgments were not filed before the Division Bench at the time of the hearing. Then again, the order of the CIT(A) was passed on 6-7-1990 whereas the two decisions of the Tribunal, supra, were delivered in February, 1996. In other words, these were not available to the Assessing officer or to the first appellate authority and as already noted by me the Tribunal was required to consider these.
14. In the final analysis, I conclude by holding that the view expressed by the ld. Accountant Member is the correct view and which is required to be confirmed, more so when the ld. Judicial Member has not brought out anything in his dissenting order which would justify a view to the contrary being confirmed by the Third Member.
15. Similarly, regarding the second point of difference, I have already set out the basic facts in the earlier part of the present order and I really do not understand as to how a different opinion could be expressed other than the one taken by the ld. Accountant Member to uphold the view taken by the CIT(A). It was an accepted fact during the course of the proceedings before the tax authorities that the owners of the land were not wealth-tax assessees and the market value therefore was not ascertainable. The CIT(A) deleted the addition taking note of the situation of the plot as also the necessity for taking the plot on hire as pleaded by the assessee. The decision to allow relief was on the aforesaid twin considerations and I really do not understand as to what purpose is supposed to be achieved by sending the matter to the Assessing Officer for fresh enquiries. As in the first question, the difference in respect of the second issue is also on a frivolous ground and could have been clearly avoided. In respect of this issue as well, I approve of the view expressed by the ld. Accountant Member.
16. The matter may now be placed before the Division Bench for passing an order in conformity with the majority opinion.