TMI Blog2004 (9) TMI 590X X X X Extracts X X X X X X X X Extracts X X X X ..... e and M/s. Navin Projects Pvt. Ltd. (NEPL for short) having 10% share. The firm is engaged in the business of manufacturing and fabrication of rollers, CI parts, solar equipments, etc. 3. During the assessment year under reference the assessee has shown sales of Rs. 66,26,000 and gross profit has been shown amounting to Rs. 52,866 yielding the GP rate of 0.79% as against the GP rate of 16.5% shown in the Assessment year 1993-94 and 11.12% for assessment year 1994-95. The turnover of Rs. 66,26,000 shown for the assessment year under reference comprises of the following items : ( i )Sales - Rs. 53,82,940 ( ii )Design and dyeing charges - Rs. 8,50,000 ( iii )Job Charges - Rs. 3,93,095 4. The design charges of Rs. 8,50,000 credited as above have been received from a sister concern, namely M/s. Telecom Products (P.) Ltd. and if these design charges are excluded from the trading account, the balance gross profit rate would come down to a negative figure. When called upon by the Assessing Officer to explain the reasons for the steep fall in the gross profit, the assessee submitted vide its letter dated 2-12-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2758 Sector 7, Faridabad. - 2,37,500" 7. In the case of M/s. R.K. Enterprises, CDPD Fabricators, 92 to 95% payments have been made in cash. In the case of Himco Structural, against the expenses claimed at Rs. 2,37,500, only payment of Rs. 4,750 has been made and the balance amount of Rs. 2,32,750 has been shown as outstanding in the books as on 31st March, 1995. 8. With a view to scrutinizing the genuineness of the fabrication expenses, the Assessing Officer called upon the assessee to produce evidence regarding the material supplied to the abovementioned fabricators as well as receipt of fabricated goods along with the challans, gate pass, stock register records, manufacturing records, etc. However, the assessee stated that no goods were dispatched to the abovementioned fabricators and the labour of these fabricators came to the business premises of the assessee for doing the fabrication job for the assessee. 9. The Assessing Officer issued summons under section 131 to the above three fabricators, but the same could not be served. The Inspector reported that the fabricators M/s. R.K. Enterprises were not available at the address given by the assessee at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer, therefore, concluded that the expenses of Rs. 5,51,027 booked under the head fabrication expenses were non-genuine and fictitious and are liable to be disallowed. 11. The Assessing Officer has further scrutinized the sales turnover of the assessee and noted vide para 5 of the assessment order that the entire sales have been made to M/s. Navin Projects Pvt. Ltd., 235, Okhla Industrial Estate, New Delhi, the company being a partner in the firm with 10% share. As we have already mentioned above the firm comprises two partners M/s. NEPL having 10% share, other partner Shri Navin Kohli having 90% share. Shri Navin Kohli, Partner is also the Director of the above said company. The constitution of the firm, thus, clearly indicates that Shri Navin Kohli is the key person controlling and running the firm. The Assessing Officer noted that goods allegedly sold by the assessee to NEPL are directly supplied to Century Pulp Papers under the same GR number of the transporter whereas corresponding sale bill raised by NEPL is for a much higher figure. The comparative figures along with other particulars like bill No. as well as GR No. have been given by the Assessing Officer at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations : "The billing of the sales were being raised as per Schedule is not correct. As on perusal of the bills raised by NIPPL clearly show that rates have been applied as per per pcs. e.g. in Bill No. 28, 178 pcs. of brockets has been sold for Rs. 86,226 excluding sales tax of Rs. 3,449 by the assessee firm but M/s. NIPPL has raised bill for 178 brockets at 1,30,000 before charging Sales tax of Rs. 3,449. Bill No. 38 is in respect of 450 Associates rollers has been billed for Rs. 86,246 by the assessee and M/s. NIPPL has billed the same 450 pcs. for Rs. 2,94,013 as per the bill No. PRO 212, 455 Associated Roller has been billed for Rs. 80,220 vide bill No. 31 of the assessee and M/s. NIPPL has booked the sales of same 455 rollers at Rs. 2,51,700." 14. From the aforesaid facts, the Assessing Officer concluded that the assessee is selling the products to its sister concern M/s. NEPL at an understated price even less than the cost price so as to reduce its tax liability. Placing reliance on the decision of Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 1 the Assessing Officer concluded that colourable device has been adopted by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em sales deserves to be made. The CIT(A) further held that provisions of section 40A(2) cannot be applied in the matter considering the reasonableness of the sale consideration received by the assessee from the sister concern. The Revenue is aggrieved against the reliefs on both the grounds as above and has come up in appeal before us. 18. We have heard the Ld. representatives on both the sides and also gone through the orders of the tax authorities below. In so far as rejection of books of account of the assessee under the provisions of section 145 is concerned, the CIT(A) has clearly upheld the finding of the Assessing Officer. The defects in the books of account have been elaborately indicated by the Assessing Officer in the assessment order and the same have been duly noted by the CIT(A) in the appellate order while upholding the addition of Rs. 7,72,844 in the trading account. It appears that no appeal has been filed by the assessee against the impugned order of the CIT(A). Therefore, there is no dispute before us regarding the rejection of accounts of the assessee. The Revenue has assailed the order of the CIT(A) firstly on the relief allowed to the extent of Rs. 1,94,622 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Supreme Court constituted by 5 judges. In this decision, the Hon ble Supreme Court has specifically and unequivocally buried deep the Westminster principles as had been enunciated by the British Courts. The Supreme Court disapproved its earlier decision in the case of CIT v. A. Raman Co. [1968] 67 ITR 11 wherein it was observed that avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. The said dictum, which pertains to alluring logic of tax avoidance is no longer valid after the Mcdowell decision. We feel that the Mcdowell decision clearly applies in the facts of the instant case in as much as there are tell tale features in the entire evidence brought on record indicating a deliberate and conscious effort on the part of the assessee to divert its profits to a partner by understating the sale consideration. In so far as sale of structural fabrication to the sister concern aggregating to Rs. 28.33 lakhs is concerned the Assessing Officer has estimated the turnover at Rs. 71,13,725 and applied GP rate of 13.6% and worked out the gross profit at Rs. 9,67,466. Obviously the sale of solar system shown by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sale of solar equipment is called for. We are unable to endorse the reasoning and finding of the CIT(A) on the issue. The first addition of Rs. 9,67,466 made by the Assessing Officer and reduced to Rs. 7,72,844 by the CIT(A) does not take into account sale of solar equipment. In fact, the sale of solar equipment has been separately dealt with by the Assessing Officer and, therefore, since the facts and circumstances with regard to these sales are also identical with that of sale of steel fabrication discussed above, we feel that the addition of Rs. 11,05,000 made by the Assessing Officer deserves to be upheld. The admitted facts are that the assessee has shown sale of solar equipment to its sister concern for a consideration which is much less than the cost of production claimed by the assessee itself. Thus, colourable device has been adopted by the assessee by understating the sale consideration in respect of solar equipment also so as to reduce its profits. The addition of Rs. 11,05,000, therefore, is liable to be upheld. Regarding the observations of the CIT(A) that section 40A(2) applies only in respect of incurring of expenditure, we fell that the basic issue to be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X
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