RECLAMATION WELDING LTD. Vs. DEPUTY COMMISSIONER OF INCOME TAX
LAWS(IT)-2014-5-48
INCOME TAX APPELLATE TRIBUNAL
Decided on May 16,2014

Appellant
VERSUS
Respondents

JUDGEMENT

T.R.MEENA - (1.) THESE two appeals are cross appeals filed by the assessee as well as revenue. These appeals are emanated from the order of the ld. CIT(Appeals) -XVI, Ahmedabad, order dated 01.09.2010 for A.Y. 2007 - 08. Both appeals were heard together and are being disposed of by way of this common order for the sake of convenience. Grounds of both appeals are as under: Ground of assessee's appeal in ITA No. 2809/Ahd/2010 "1. The Ld CIT(A) XIV has erred in law and on facts in confirming the addition of Rs.64,09,187 made by the Ld Assessing Officer while making the assessment u/s 143(3), in respect of the GP declared by the appellant. The appellant prays that the order being bad in law and on facts may kindly be quashed and the addition may kindly be deleted." Additional Ground of assessee's appeal "1. The Ld. CIT(A) has erred both in law and on facts of the case in confirming the action of AO in rejecting the books of account u/s 145 of the Act. The Ld. CIT(A) ought to have held that AO was not right in rejecting assessee's books of accounts." Ground of Revenue's appeal in ITA No. 3091/Ahd/2010 "1. The Ld. Commissioner of Income tax (A) has erred in law and on facts in deleting the addition of Rs.48,04,034/ - made on account of disallowance of Freight Inward, Outward & Octroi expense.
(2.) THE Ld. Commissioner of Income tax (A) has erred in law and on facts in deleting the addition of Rs.1,10,27,492/ - made on account of suppressed conversion charges." First we take ITA No. 2809/Ahd/2010 (Assessee's appeal) 2. The assessee's sole ground of appeal is against confirming the addition of Rs.64,09,187/ - made by the ld. A.O. u/s. 143(3). The assessee company derives income from the business of job work of manufacturing of alloys, steel casting as in past. The assessee had declared Gross Profit ofRs. 4,62,27,426/ - on sale of Rs.19,69,19,616/ - which works out to 22.57% asagainst gross profit of Rs.4,75,88,572/ - on sales of Rs.17,67,36,617/ - whichworks out to 26.37% for the preceding year. The A.O. gave reasonableopportunity of being heard on this issue as GP is declined compared topreceding year. The assessee replied vide letter dated 10.11.2009. Afterconsidering assessee's reply, the A.O. observed as under: "1. The assessee is not maintaining the stock register of raw materials required for it's manufacturing activities. 2. Due to non -maintenance of stock register, the valuation of closing stock is not verifiable in quantum as well as in valuation.
(3.) THE assessee has claimed burning loss at 10.78% which obviously appears to be abnormal which is sufficient for defect in books of accounts. The assessee has explained that the fall in GP as compared to A.Y.2005 -06 is 7.71% whereas compared with A.Y. 2006 -07%, it is 4.16%. It is observed from records that the assessee is having entire receipts from its associate enterprise namely AIA Engineering Co. This means that the receipts fall in controlled category, which can be manipulated by both the company to suit their business convenience, whereas the expense part is beyond the control of assessee company. It is pertinent to note that commensurate increase in the conversion charges charged by assessee to AIA Engineering Co. is not made so as to compensate the assessee for increase in input cost of the processes. On further analysis of trading account, the following comparison is made: - Sr.No Name of item/expense A. Y.2006 -07 (% of conversion receipt/sales) A.Y.2007 -08 (% of conversion receipt/sales) 1 Material consumption 9.41 10.676 2 Power and Fuel 41.00 44.46 3 Labour charges 11.23 12.63 4 Employee's remuneration 7.15 7.97 The assessee has not furnished the month -wise details of job work rate. It is a fact that assessee is suffering at the cost of AIA Engineering in as much as despite increase in input cost, commensurate increase in job charges rate was not neither asked for nor negotiated nor enforced, so as to have better trading results. All these were happened because of proximity between the management of assessee company and AIA Engineering Company. Relying on the decision of the Hon'ble Supreme Court in the case of CIT V/s. S.N. Namasivayam Chettiar reported at 38 ITR 579, in which it was held that if the assessee is not maintaining the stock register properly, the application of Sec. 145 is attracted. After application of Sec. 145(3), the G.P. rate is applied at 26.73% (as declared by the assessee for the preceding year) on the sales of Rs.19,69,19,616/ - for the year under assessment. Thus, the Gross Profit is worked out as under : - Sales for the year declared : Rs.19,69,19,616 GP rate applied as discussed above : 26.73% GP declared : Rs 4,62,27,426 GP works out : Rs 5,26,36,613 Short fall in GP declared (i.e. 52636613 -46227426) : Rs 64,09,187 In view of the above discussion, the trading addition of Rs.64,09,187/ - is made on account of low Gross Profit." 3. Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A) who had confirmed the addition by observing as under: "2.3 I have considered the submission made by the appellant and observation of the AO. During the appellate proceeding, the appellant was asked to file the rates of conversion charges and its increase over the lastthree or four years. The appellant has filed copy of the agreement, and it is seen that the rate of conversion of the job charges were fixed on first of April 2003 and they have remained the same till date. It is very interesting that over the last three years there has been no change or revision in the job charges of the rate of conversion. The appellant does not have any answer to this interesting fact. The principal is nothing but sister concern of the assessee. The appellant is doing job work mainly for its sister concern. As admitted by the appellant the expenses on various items like power and fuel, labor charges and employee remuneration have increased continuously, over the last three years. But still, there is no increase in the job charges received by the assessee. From this it is clear that the entire receipts have been manipulated to show less profit over the years. This is the main reason why the GP rate has been decreasing continuously, over the last three years. The appellant has not filed any documentary evidence to show that even some efforts were made to revise the rates. In fact, both being sister concern, the appellant never felt they needed to do so. The job rate agreement dated 25th of March 2003 has a clause (10), according to which, the agreement came into effect from 1st of April 2003 and shall remain in force for a period of one year. However, the agreement may be renewed on the same terms or on modified terms as may be agreed upon between the parties, in writing, for a further period not exceeding one year at any time. Interestingly, despite this clause, the appellant company has renewed the same job rates year after year, for the last three years at the same rate. This is a fit case for the application of the decision of honorable Supreme Court in the case of Macdowell 158 ITR 148 wherein the honorable Supreme Court stated that corporate veil needs to be lifted in appropriate circumstances and colourable device cannot be part of legal planning. This is a fit case, where the appellant has decided to fix sale price, in consultation with its sister concern and not with respect to the market rate. In fact, it is not a simple sister concern but a holding company as stated by the AO. The expenses have increased continuously, due to increase in the market rate but thejob charges have remained fixed for the last three years because the assessee company wanted to transfer the profits to its sister concern. In view of this reason, the addition of the gross profit made by the AO is correct and this ground of appeal is dismissed." 4. Now the assessee is before us. Ld. Counsel for the assessee submitted that similar additions were made by the ld. A.O. in A.Y. 03 -04 & A.Y. 06 -07 in ground nos. 2 & 3 and Revenue's ground of appeal in A.Y. 06 -07 on identical issues, in both the years, the CIT(A) deleted the addition on GP addition, which were challenged by the Revenue before the Hon'ble ITAT, but Revenue's appeal in both years have been dismissed. The ld. A.R. further submitted that assessee's books of account are audited which had been furnished in Form No. 10CCB along with return. The ld. A.O. had wrongly rejected books of account u/s. 145 of the Act as no defects had been pointed out. The A.O. rejected in the books result u/s. 145 of the IT Act on account of non maintaining the stock register of raw material and closing stock. The assessee also claimed abnormal burning loss during the year and GP rate also have fallen down. The stock register impounded by the A.O. and was with him. All the required details were submitted before the A.O. Reason of declined GP had been explaining before both the authorities. The ld. A.O. simply compared the various datas of the assessee and came to conclusion that assessee had suppressed the income. Thus, he requested to delete the addition made by the A.O. and confirmed by the CIT(A). At the outset, ld. Sr. D.R. supported the order of the CIT(A).;


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