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TMI Blog1998 (2) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 somewhat 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------- Desh Rolling Mills, Jagadhari 13057235 432755 3.31% Arun Metal Ind., Jagadhari 6575196 232787 3.54% Dwarka Enterprises, Jagadhari 5240712 273813 5.2% Jai Ganesh Metal Ind., Jagadhari 18062707 486067 2.7% Lakshmi Industries, Y/Nagar 14254812 615202 4.31% Satish Engg. Works, Jagadhari 13780499 &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nes 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. Per Bedi-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fresh adjudication, is correct?" THIRD MEMBER ORDER 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 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 die 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 nothing 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 k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ringing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... 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