| SooperKanoon Citation | sooperkanoon.com/68701 |
| Court | Income Tax Appellate Tribunal ITAT Allahabad |
| Decided On | Sep-29-1996 |
| Reported in | (1997)61ITD246(All.) |
| Appellant | Bansal Ispaat (Lucknow) (P.) Ltd. |
| Respondent | Assistant Commissioner of |
2. The assessee is a company having business of steel re-rolling. In this process, raw materials, like ingots, billets, iron scrap etc. are heated in the furnace and re-rolled into iron rods, angles etc. of different sizes.
3. In the course of assessment proceedings, it was noticed that the assessee had made certain sales to a sister concern, M/s. Shreejee Traders, Lucknow in which the wives of the directors were partners.
Such sales were Rs. 27,74,688 for 445.005 M.T. The concern had same place of business as the assessee. It was further found that no actual delivery of the goods was made to this concern. The delivery was made through the challans from the factory of the assessee directly to the ultimate buyer. However, bills for these goods were raised by the assessee on M/s. Shreejee Traders, who in turn, raised bills on the ultimate buyer. The assessee was asked to explain these transactions.
It was submitted that they were in normal course of business. It was general practice in the trade to make such direct deliveries. Further M/s. Shreejee Traders did not have a godown of their own. The profit on such transactions in the hands of M/s. Shreejee Traders was only Rs. 54,467, which was less than 1.9% of the total turnover of the Company.
4. The Assessing Officer did not accept the explanation. He emphasised that the sales were made to a sister concern, which had its premises in the same building. He held that the transaction was nothing but a device for reduction of income and avoidance of tax in the hands of the company. The profit on such transactions came to Rs. 54,567 and the amount was added to the total income as diversion of profit to its sister concern. At one part of the assessment order, a reference was also made to section 40A(2)(b) of the Act.
5. Nothing more was added before the CIT(A) who held that the device adopted by the Assessing Officer was obviously colourable and the case law, such as CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC) and CIT v. A. Raman & Co. [1968] 67 ITR 11 (SC) were clearly distinguishable. The addition was confirmed.
6. The learned counsel for the assessee submitted before us that the sales of the assessee-company were quite high and stood at Rs. 2,17,46,960 with the gross profit of 6.83%. Compared to the total sales, the sales to M/s. Shreejee Traders of Rs. 27,74,688 were very petty. The Assessing Officer had placed too much significance on these small sales. Our attention was invited to a copy of assessment order under section 143(1) in the case of M/s. Shreejee Traders and also copy of sales-tax assessment order. This showed that it was the genuine concern as accepted by these authorities.
7. The Bench invited attention of the learned counsel to a copy of Trading and Profit and Loss account of M/s. Shreejee Traders in the Paper Book according to which, the sales of iron and steel were only Rs. 36,48,565 for the year. There was no opening or closing stock for these goods. Compared to this figure, the sales of Rs. 27,74,688 by the assessee to this concern were very substantial and a large percentage and not insignificant. Attention was also invited to the figures in the Profit and Loss account according to which the net profit for the year was Rs. 56,187 apportioned as under to the profits :- Income-tax on the firm and partners would obviously be very small compared to the tax on the same profit in the hands of the company. The learned counsel for the assessee did not make any further submissions in this regard.
8. The learned counsel thereafter invited our attention to a chart at page 73A of the Paper Book showing the rates of sale per M.T. on various dates to M/s. Shreejee Traders and the rates of sale to other parties on the same dates. According to this chart, the rates of sale to M/s. Shreejee Traders were the same as the rates to outsiders. The learned counsel submitted that the assessee-company was a wholesaler and, therefore, even after purchasing from the assessee-company M/s.
Shreejee Traders could make a profit in retail sales. According to him, this was a normal business transaction.
9. However, when the Bench inquired from the learned counsel whether this chart had been produced before the Assessing Officer, or the CIT(A), it was admitted that this was fresh evidence placed before the Tribunal. His attention was thereafter invited to Rule 29 of the Tribunal Rules relating to additional evidence, according to which the parties to the appeal shall not be entitled to produce additional evidence before the Tribunal. No further submissions were made in this regard.
10. The learned counsel thereafter submitted that similar disputes had arisen in other years. In assessment year 1986-87, the CIT(A) had set aside the matter to the file of the Assessing Officer as per paras 6 and 7 of his appellate order. Thereafter, the Assessing Officer had accepted the explanation of the assessee in fresh assessment dated 28-7-1992 in para 2.25 of the assessment orders.
11. Our attention was also invited to the assessment order for assessment year 1989-90, where similar, dispute was discussed, but the assessee's explanation was accepted and no addition was made in para 5 of the assessment order dated 19-12-1991. The learned counsel submitted that when the department had accepted the explanations for those years, there was no reason to reject this for this year.
12. The Bench perused the order of the CIT(A) for assessment year 1986-87 found that the plea taken before him was materially different.
It was submitted that M/s. Shreejee Traders were usually making payments in advance and, therefore, concessions in price were given which was a general practice known as cash discount. The CIT(A) set aside the addition in that so that this aspect could be examined.
However, as far as assessment year 1988-89 is concerned, it is not the assessee's case that sales were made to M/s. Shreejee Traders at a concessional price. The additional evidence sought to be placed before us is, in fact, different. When confronted with this position, the learned counsel stated that the transactions noted in the additional evidence were only a few and he could not say whether there was concessional price in other transactions.
13. Lastly, the learned counsel submitted that the provisions of section 40A(3)(b) were not applicable since they related to expenditure only. For these reasons, he submitted that the addition should be deleted.
14. The learned Departmental Representative relied strongly on the assessment order and the order of the CIT(A), he submitted further that the principle of res judicata did not apply to income-tax proceedings and the findings for assessment years 1986-87 and 1989-90 could not come in the way. He also submitted that the assessee had no right to submit additional evidence as clearly prohibited Rule 29 of the Tribunal Rules. The learned Departmental Representative further emphasised that there was nothing to show that M/s. Shreejee Traders had done any work like procurement of orders etc. and were really in the nature of a benamidar of the assessee-company. He emphasised again that the whole transaction was only a device to evade tax and the addition should be confirmed.
15. We have considered the rival submissions carefully. We agree with the submission of the learned Departmental Representative that the principle of the res judicata does not apply in income-tax proceedings.
Indeed, if this principle were to apply, it would operate against the assessee and not in favour of the assessee as contended by the learned counsel for the assessee. The reason is quite simple. The assessment order for the year under consideration i.e. assessment year 1988-89 was passed first and the fresh order for assessment year 1986-87 and the assessment order for assessment year 1989-90 were passed later as the following date will show :Assessment year Dates of assessment order1988-89 24-3-19911989-90 19-12-19911986-87 28-7-1992(After being set aside) 16. In case the principle of res judicata was applicable, the department would have been obliged to follow the finding for assessment year 1988-89 for the other two years also and not the other way round.
However, it is well settled that this principle does not apply. We, therefore, proceed to examine the issue on merits for assessment year 1988-89 itself.
17. We also agree with the learned Departmental Representative that additional evidence cannot be filed by the assessee before the Tribunal in view of the prohibition contained in Rule 29 of the Tribunal Rules.
Our view finds support from the decision of the Bombay High Court in the case of CIT v. Smt. Kamal C. Mehboobbani [1995] 214 ITR 15/81 Taxman 311. We, therefore, decline to consider the chart of comparative rates of sale filed by the learned counsel before us. We decline further to use our own discretion under Rule 29 to consider it, since even if the learned counsel is not certain whether the overall transactions were at the same price or at concessional price compared to others. The additional evidence is, therefore, rejected.
18. The contention of the learned counsel that section 40A(2)(b) is not applicable, is accepted. This section relates to disallowance of expenditure under certain circumstances. However, there is no such dispute here. The reference to the section is quite superfluous since the Assessing Officer has not proceeded to disallow any expenditure, but has made an addition on totally different grounds, which we will now examine.
19. The Assessing Officer has clearly held that the transactions were a device for reduction of income and avoidance of tax in the hands of the company. The CIT(A) has also held that "the device adopted by the appellant-company is obviously colourable". The law on the subject has been laid down by the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CIT [1985] 154 ITR 148/22 Taxman 11. Relevant extract from the head note is given below :- "Tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
There is behind taxation laws as much moral sanction as is behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court of take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction." 20. We may add further that the observation on tax avoidance in A.Raman & Co.'s case (supra) and CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC) were disapproved by the Supreme Court in the above judgment.
21. The facts of the present case should now be examined in light of the above guidelines of the Supreme Court. The assessee-company is a manufacturer and produces re-roller bars, angels etc. It has a fairly large turnover of about 2.17 crores in this year. M/s. Shreejee Traders is a small trading firm having a turnover of only Rs. 36.48 lacs in this year. The purchases were Rs. 34.74 lacs, most of which were from the assessee-company, being Rs. 27.74 lacs. This firm was situated in the same premises as the assessee-company. The partners were the wives of the directors of the company and, thus, closely connected. The firm did not possess a godown. The staff was minimal, the salary for the year being only Rs. 38,490. There were no expenses on freight or storage and there was no opening or closing stock for the simple reason that the assessee-company despatched the goods directly to the ultimate buyer. The learned Department Representative has rightly observed that there is no material on record to show any work done by this firm.
There is a clear saving of tax in this arrangement, as we have already noticed above. The need for the existence of the firm can only be to save this tax and to divert income in the hands of the lady partners, who were the wives of the directors. In these circumstances, we agree with the CIT(A) that it is only a colourable device. The Supreme Court have held that colourable devices cannot be part of tax planning. The device adopted here is not one to which the judicial process may accord its approval.
It has been held by the Supreme Court that it is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction. Respectfully, following the same, we refuse to give our benediction to this colourable device and we hold that the profit shown to have been earned by M/s. Shreejee Traders is really the profit of the assessee-company. It has, thus, been rightly assessed in the hands of the company.
22. Before parting with the matter, we may mention that the reliance of the assessee on the decision of the Supreme Court in the case of A.Raman & Co. (supra) is misplaced. It was held therein that income which accrues to the trader is taxable in his hands, but not income which could have accrued. However, this is not the principle being applied here. The principle being applied is that of exposing a colourable device under the guidelines laid down by the Supreme Court in the case of McDowells & Co. Ltd. (supra).