2008 (4) TMI 365 - AT - Income Tax

Tribunal remands case for further investigation on agreement authenticity & tax benefits

The Tribunal remanded the case to the Assessing Officer for further investigation regarding the genuineness of the agreement dated 31st March 1995 between ... Addition Issues Involved:1. Whether the agreement dated 31st March 1995 between the assessee and M/s P.G. Foils Ltd. was genuine or a colourable device.2. Whether the reduction in job charges by Rs. 56,70,828 was justified.3. Whether the reduction in conversion charges by Rs. 4,08,109 was justified.Detailed Analysis:1. Agreement Dated 31st March 1995:The primary issue revolves around the genuineness of the agreement dated 31st March 1995 between the assessee and M/s P.G. Foils Ltd. The AO considered this agreement to be a 'colourable device' aimed at reducing taxable income, while the CIT(A) accepted it as genuine.- AO's Perspective:- The AO argued that the agreement was a device to reduce taxable income, citing that the job charges were reduced drastically from Rs. 4,000-8,000 per MT to Rs. 1,000 per MT at the end of the financial year.- The AO noted that the same directors managed both companies, raising suspicion about the agreement's authenticity.- The AO pointed out that the agreement was not acted upon throughout the year, as both companies continued transactions at the old rates until the year-end debit notes were issued.- CIT(A)'s Perspective:- The CIT(A) accepted the agreement as genuine, attributing the reduced rates to business considerations.- It was noted that the agreement led to benefits such as Modvat credit and reduced excise duty liability, which ultimately resulted in a better profit rate for the assessee.- Tribunal's Analysis:- The Tribunal found that the AO did not insist on the production of letters referenced in the agreement, which could have clarified its genuineness.- The Tribunal also noted that the AO did not verify the resolution of the board of directors or the date of purchase of stamp papers, which are critical to establishing the agreement's authenticity.2. Reduction in Job Charges:The assessee reduced job charges by Rs. 56,70,828 through debit notes issued at the end of the financial year, which the AO considered unjustified.- AO's Findings:- The AO observed that the job charges were initially invoiced at Rs. 4,000-8,000 per MT but were later reduced to Rs. 1,000 per MT.- The AO concluded that this reduction was a device to reduce taxable income, especially since the same rates were charged in the preceding and succeeding years.- CIT(A)'s Findings:- The CIT(A) accepted the explanation that the reduction was due to business exigencies and the agreement's terms.- It was noted that the reduced rates enabled the assessee to execute large orders for RSEB, resulting in overall business benefits.- Tribunal's Analysis:- The Tribunal found that the AO's suspicion was justified, given the significant reduction in rates and the timing of the debit notes.- The Tribunal also noted that the AO did not properly consider the impact of Modvat credit and excise duty benefits.3. Reduction in Conversion Charges:The assessee also reduced conversion charges by Rs. 4,08,109, which the AO again considered a device to reduce taxable income.- AO's Findings:- The AO observed that conversion charges were initially invoiced at Rs. 4,000 per MT but were later reduced to Rs. 2,000 per MT.- The AO concluded that this reduction was not justified, especially since the same rates were charged to other parties without any reduction.- CIT(A)'s Findings:- The CIT(A) accepted the reduction as genuine, attributing it to business considerations and the agreement's terms.- It was noted that the reduction in rates was necessary for the assessee to execute large orders and achieve better overall business results.- Tribunal's Analysis:- The Tribunal found that the AO's suspicion was justified, given the significant reduction in rates and the timing of the debit notes.- The Tribunal also noted that the AO did not properly consider the impact of Modvat credit and excise duty benefits.Conclusion:The Tribunal concluded that the matter required further investigation to verify the genuineness of the agreement from all angles. The case was remanded to the AO for fresh consideration, with specific directions to verify the agreement's authenticity, the impact of Modvat credit and excise duty benefits, and the deduction under s. 80HHC in the hands of M/s P.G. Foils Ltd. The appeal was accepted for statistical purposes.