TaxTMI 
TaxTMI 
2022 (6) TMI 633
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.... of Iron Ore and Manganese. He was into the business of extracting and selling iron ore. He had filed his return of income declaring total income at Rs. 2,34,19,62,190/-. The case of the assessee was selected for scrutiny assessment by issuance of a notice under section 143(2) on 08.09.2014. The ld. Assessing Officer has passed the assessment order under section 143(3) on 30.03.2016. He determined the taxable income of the assessee at Rs. 341,73,20,958/-. Ld. Assessing Officer has made the following disallowances:- 1. Periphery Development Expenses Rs. 76,47,374/- 2. Disallowance of Consultancy Charges Rs. 2,02,24,800/- 3. Disallowance u/s 40A(3) Rs. 4,25,690/- 4. Suppression of Net Prof it Rs.104,64,28,541/- 5. Undisclosed investment Rs. 6,32,363/- 3. Ld. CIT(Appeals) has deleted the disallowances. Before us, Revenue is challenging deletion of four disallowances. In other words, Revenue is challenging deletion of all the disallowances except at Sr. No. 3, i.e. the disallowance made under section 40A(3). 4. Now we take the grievances of the Revenue in seriatim as raised in the grounds of appeal. 5. Ground No. 1:- The grievance of the Revenue is that the l....
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.... of Guali; District - Keonhjar, State - Odisha, and it incurred expenses amounting to Rs. 76,47,376/-. The assessee operates its mines in the village area of Guali, Keonjhar and it has to mandatorily contribute towards the welfare of the local villagers as per the directions/instructions of the District Administrative Authorities of the village of Guali, District - Keonjhar (which includes Gram Panchayat, Collector, Sub-Collector and Tehsildar) who from time to time conduct meetings and allocate welfare projects to different mines in the village area. Malaria Eradication Programme in the Guali Village, District - Keonjhar. The assessee executed this programme of malaria eradication by hiring vehicles Keonjhar & music system from Saga Ventures India Pvt. Ltd., Bhubaneswar. The assessee created awareness in all the villages of Keonjhar District and also distributed mosquito nets with bags (purchased from Sonic Resources Pvt. Ltd., Rourkela) in the course of the awareness programme to the village people, provision of vehicles (Ambulance - Janani Express) hired from Mohan Kumar Sahoo, Keonjhar., sinking a bore well in the school premises of St. Teresa's Nursery School, Joda, Keonjh....
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....tractor plumbing & Maintenance work from Saraikunda & Sarei to Tuntuna for two months, focus Area Programme to sub collector champua, Contribution to Red Cross Fund for the year 2012-13. The appellant's A.R has also relied upon the ratio of several judicial decisions holding that where the payment of periphery development expenses were incurred by the assessee under statutory obligation or on directions of the administration, for the welfare measures for the upliftment of the tribals or local population of the locality where the mining unit was situated, or contribution for health and social welfare measures and for environmental preservation etc. such expenses were considered to be wholly and exclusively for business purposes, as held in the case of: CIT - vs.- Rungta Mines Pvt. Ltd. [205 ITR 335] by the Calcutta High Court. Held that where a trader, in his capacity as a trader, by compulsion of statutory obligation, has to incur an expenditure as a compelling requisite for carrying on his trade, the expenditure resulting in a capital asset in the hands of a third party, is to be taken as revenue expenditure because no asset arises to the trader by reason of such expenditure....
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....and those were allowed to the assessee. The Revenue challenged that the decision of the ld. CIT(Appeals) which could met the approval of the Tribunal. In other words, Tribunal has upheld the deletion of the disallowance. He placed on record the copy of the Tribunal's order dated 24.08.2020 passed in ITA Nos. 1875, 1300 & 1299/KOL/2019 for A.Ys. 2016-17, 2015-16 and 2012-13. 9. We have duly considered the rival contentions and gone through the record carefully. A perusal of the finding of the ld. CIT(Appeals) would reveal that the ld. 1st Appellate Authority has reproduced the remand report submitted by the ld. Assessing Officer on page no. 9 of the impugned order. We have also gone through this report. Section 37 of the Income Tax Act contemplates that any expenditure not being expenditure of the nature described in sections 32 to 36and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the Head "Profits & Gains of the Business or Profession". In other words, the specific nature of expenditure enume....
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....assessee failed to demonstrate the nature of services rendered by M/s. Pushpak Financial Services Pvt. Limited. 12. On appeal, the ld. CIT(Appeals) has re-appreciated the controversy and deleted the addition. The finding recorded by the ld. CIT(Appeals) reads as under:- "I have considered the material before me. The A.O found that the appellant company had paid amount of Rs. 2,02,24,800/- to M/s. Pushpak Financial Services Pvt. Ltd., in which the sister concern M/s. Thakur Prasad Sao & Sons Pvt. Ltd. was the substantial partner and Director and that the appellant was unable to furnish the details of service rendered by the said company and had thus reduced its profits through booking the said consultancy expenses. The Appellant's A/R has submitted that consultation charges were made to Pushpak Financial Services Pvt. Ltd. and that Sri Ramesh Prasad Sao was not a shareholder or Director of Pushpak Financial Services Pvt. Ltd. contrary to the finding of the A.O. and has submitted the copy of Balance Sheet of Pushpak Financial Services Pvt. Ltd. included in audited accounts, to establish that the consultancy charges of Rs. 1,80,00,000 was offered as income of the year. The subm....
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....e the disallowance based on the finding that the appellant was closely connected with the recipient viz. Pushpak Financial Services Pvt. Ltd. and had booked bogus. expenses as consultancy charges, which is contradicted by the findings of the A.O in the remand report that the appellant was not connected as either director or shareholder in the said company and the payments were duly reflected by the recipient company and offered for tax in its hands The assessee also stated that the consultancy charges Bills raised by Pushpak Financial Services Pvt. Ltd. was a total of Rs. 2,02,24,800 inclusive of Service Tax & Cess and TDS was deducted by the assessee on Rs. 2,02,24,800, and was thus a genuine expense. On similar facts for disallowance of Consultancy paid to sister concern, the Hon'ble Delhi High Court in the case of CIT v. Modi Revlon Pvt. Ltd. in ITA No. 1450 & 51 of 2010, it was had held that expenditure incurred by way of consultancy charges for paid by the assessee would be allowable revenue expenditure. The fact that it is paid to as sister concern by itself would not justify the disallowance. Therefore, the expenditure on consultancy paid to M/s. Pushpak Financial Serv....
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....s being looked into, then this expenditure is less than 1% of the returned income. There cannot be any attribution of avoidance of taxes towards the assessee. 15. We have duly considered the rival contentions. The ld. Assessing Officer himself has not disputed about the payments made by the assessee to M/s. Pushpak Financial Services Pvt. Limited. In other words, the existence of service providers has not been doubted. Now the issues are raised qua the transactions, the only passing reference made by the ld. Assessing Officer in a non-speaking assessment order is that evidences depicting the nature of services provided to the assessee were not produced. It is pertinent to observe that the ld. Assessing Officer failed to appreciate the controversy in right perspective. He has not properly investigated the issue, rather in a hurried manner made the addition by making certain vague observation, which is running into few lines only. The assessee has submitted that service provider has suffered the taxes on the payments made by the assessee, both are taxable at the same rate. The invoices produced by the assessee depict the nature of services rendered by the service provider. In other ....
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....M/s. Thakur Prasad Sao And Sons Pvt. Ltd. on the basis of agreement and part of contractual agreement between the two parties dated 25.3.2012, which permitted the appellant company to dispatch the material as and when it is produced, irrespective of the prevailing market condition to M/s. TPSL. Where as in the case of sale to other parties at different rates which could be higher, there is no certainty that any particular party would purchase from the assessee. (ii) That the said party M/s. Pratham Steel Pvt. Ltd. is a separate and independent legal entity and is in no way connected with the assessee and the Learned Assessing Officer has wrongly alleged that M/s. Pratham Steel Pvt. Ltd. is a dummy company of the group. The Learned Assessing Officer should have at least conducted an enquiry/examination in this regard before coming to any such conclusion. (iii) That the assessee has a long term arrangement with its sister concern M/s. Thakur Prasad Sao & Sons Pvt. Ltd. whereby it sells to this party throughout the year and M/s. Thakur Prasad Sao & Sons Pvt. Ltd. does not buy material from any third party and also there is no fixed Regulatory Authority which governs the prices of ....
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.... price. To quote a few In the Supreme Court of India CAT K v. Calcutta Discount Co. Ltd. Where a trader transfers his goods to another trader at a price less than the market price and transaction is a bona fide one the taxing authority cannot take into account the market price of those goods ignoring the real price fetched, to ascertain the profit from the transaction. In the Madras high Court CIT Fs. Ramalinaa Choodambikai Mills Ltd. The sales could not be regarded as mere sham transaction unless there was sufficient evidence to prove that: and if they were sham transactions, the sales had to be ignored and the company could be assessed only on the profits, if any, made by the benami purchasers when they will sell the goods in the absence of evidence to show either that the sales were sham transactions or that the market prices were in fact paid by the purchasers, the mere fact that the goods were sold at a concessional rate to benefit the purchasers at the expense of the company would not entitle the IT department to assess the difference between the market price and the price paid by the purchasers, as profits of the company. In the Hiah Court of Delhi CIT Fs. Discover....
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....not made any enquiry or any corroborative evidence to substantiate the allegation of suppression of profits through sale to sister concerns was either in genuine or bogus. In this regard, it is well settled that every trade and industry has its own market dynamics and it is best left to the businessman to take policy decisions on how best to run its business. The observation of the hon'ble High Court in CIT v. S.A Builders that no businessman can be compelled to maximize his profits and the Income Tax authorities must not put themselves in the shoes of the businessman have also been cited by the A.R in support of his averments, and found to be relevant to the issue under dispute. The A.R has also placed reliance upon the decision of the hon'ble ITAT, Chandigarh in Dept. of income tax Vs. Khandalia Oil & General Mills Pvt. Ltd., wherein it was held that, "if the sales to the related parties result in a profit to the assessee, even though the sales are made at a rate lower than at which the sales are made to other parties, the revenue cannot bring to tax the notional profit which the assessee would or could have earned, had the sales been made at the rates charged from unre....
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....;s case. Therefore, respectfully following the decision of the hon'ble jurisdictional High Court and the facts of the instant case, it is held that the action of the Assessing Officer in making the impugned addition of Rs. 1,04,64,28,541/- made by the A.O on account of alleged suppression of net profit was not justified and accordingly, the Impugned addition is directed to be deleted. This ground is allowed". 19. The ld. CIT(DR) while impugning the order of the ld. CIT(Appeals) contended that the assessee has sold Iron Ore to his associate concerns at a lower price than sold to the independent parties in the open market. Therefore, the ld. Assessing Officer has rightly considered it as a suppression of profit and has rightly estimated the profit. 20. The ld. counsel for the assessee, on the other hand, demonstrated the circumstances under which sales have been made at a different rate to two concerns. He submitted that the Mines of the assessee are operating under second and subsequent renewal. As per the policy of renewal of the State Government, if the mines are used for captive purposes, the process of renewal becomes more easier and smooth. The raw materials (i.e. Iron Or....
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....Thakur Prasad Sao & Sons Pvt. Limited. M/s. PSPL was having a Railway Siding, from where goods can be transported more easily with an understanding that whatever purchase will be made from the assessee would be sold to the sister concern at a same rate. He has sold the goods to this concern. The TPSL i.e. M/s. Thakur Prasad Sao & Sons Pvt. Limited which is termed to be a sister concern was having its sponge iron plants situated at Rourkela & Jharsuguda i.e. for captive consumption. The assessee has pointed out the following factors for making the sales to this concern:-a) The assessee has an arrangement with the company whereby the company purchases all its Raw Material (Iron Ore) from the assessee and not from any outside party. a) The assessee has to sell materials to other parties at different rates which could be higher, but there is no certainty at a particular party would purchase from us or not. Throughout the year, as and when materials are available with the assessee, it sends to the plant at the pre-determined/agreed rate. b) The Mines of the assessee are operating under second and subsequent renewal and as per policy of renewal of the State Government if the minerals....
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....to check this aspect in the Income Tax Act. In the present case, the ld. Assessing Officer has not applied any domestic transfer pricing concept. It was not available in this year. In the scheme of Income Tax Act, if by incurrence of such expenditure, some undue benefit is being extended to the sister concern, then claim of those expenditure could be disallowed. But nowhere it has been provided that assessee should earn deemed profit according to the calculation of the revenue official. In the present case, the assessee has not shown losses rather in the understanding of the Assessing Officer, he failed to show the profit as calculated by the ld. Assessing Officer. We have confronted the ld. D.R. to show us the provision under which the assessee can be compelled to make the sales to the sister concerns also at the market price or at the same price at which it was made to other concerns. 24. Apart from the above observation, it is to be appreciated the circumstances under which such sales have been made. The assessee has obtained renewal of lease licence understanding that iron ore produced in his mines will be used in a captive plant. In that exercises, he has sold the goods to th....