Casa Paradox Pvt. Ltd., New Delhi v. ITO, New Delhi

5021-2010-CP 1 IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B NEW DELHI) BEFORE SHRI RAJPAL YADAV JUDICIAL MEMBER AND SHRI K. G. BANSAL ACCOUNTANT MEMBER I.T.A. NO.5021/D/2010 ASSESSMENT YEAR: 2006-07 M/S CASA PARADOX PVT. LTD. VS. INCOME TAX OFFICER 177 M.G. ROAD SULTANPUR WARD 3(3) NEW DELHI-30 NEW DELHI (APPELLANT) (RESPONDENT) PAN NO.AAACC 3492P APPELLANT BY : SHRI M.P. RASTOGI ADVOCATE RESPONDENT BY: MS. MONA MOHANTY SR. DR ORDER PER K.G. BANSAL: AM: THE ONLY QUESTION IN THIS APPEAL IS REGARDING TAXATION OF `20 65 855/- BEING PURCHASES MADE BY THE ASSESSEE FOR THE CUSTOMERS FROM WHOM ADVANCES WERE RECEIVED. 2. IN THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING O FFICER FOUND THAT THE ASSESSEE-COMPANY HAD RECEIVED `85 24 063/- FROM VARIOUS CUSTOMERS WHICH WERE NOT TREATED AS INCOME. THE ASSESSEE HAD ALSO PURCHASED GOODS AND INCURRED OTHER EXPENSES OF `20 65 855/- FOR MANUFACTURING FINAL PRODUCTS TO BE DELIVERED TO THE CUSTOMERS. THE ASSESSING OFFICER CAME TO THE CONCLUSI ON THAT THE ADVANCES RECEIVED TO THE EXTENT OF GOODS PRODUCED/PURCHASED REPRESENT T HE INCOME OF THE ASSESSEE. THIS VIEW HAS BEEN CONFIRMED BY THE LEARNED CIT(A) . 5021-2010-CP 2 2.1 BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMI TTED THAT THE AFORESAID PURCHASES FORMED PART OF THE CLOSING STOCK. THEREFORE T HE SAME AMOUNT COULD NOT BE FURTHER TREATED AS INCOME. 2.2 ON THE OTHER HAND THE LEARNED DR RELIED ON THE ORDER OF THE LOWER AUTHORITIES. IN THIS CONTEXT WE MAY REPRODUCE THE FIND INGS OF THE LEARNED CIT(A):- I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF LEARNED A R AND HAVE GONE THROUGH THE OBSERVATIONS OF THE ASSESSING OFFICER. THE APPELLANT COMPANY HAS RECEIVED ADVANCES OF `85 24 063/- FROM ITS CUSTOMERS AND HAS SHOWN IT AS ADVANCES IN THE BALANC E SHEET. FOR DELIVERY OF SAID ORDERS THE APPELLANT COMPANY RECEIVED SUP PLIES FROM OUTSIDE VENDORS/MANUFACTURERS TO THE TUNE OF `20.65 855/ -. THE ASSESSING OFFICERS OBJECTION IS THAT SINCE THE ADVAN CES HAVE NOT BEEN SHOWN AS INCOME SO TO THE EXTENT OF `20.65 855/- THE ADVANCES ARE TO BE TREATED AS INCOME OF THE ASSESSEE. WHILE DECIDING THE ISSUE THE ASSESSING OFFICER HAS RELIED ON CERT AIN JUDGMENTS. THE LEARNED ARS OBJECTION IS THAT THESE JUD GMENTS DO NOT MATCH WITH THE PRESENT CASE AS THE APPELLANT IS A TRADER. ON CAREFUL CONSIDERATION I FIND THAT IN THE CASE OF UTTAM SINGH D UGGAL & CO. PVT. LTD. SUPRA IDENTICAL ISSUE CAME UP. ALTHOUGH IN THAT CASE THE ASSESSEE WAS A CONTRACTOR AND THERE WAS A CONTRACT FOR C ONSTRUCTION OF BLAST FURNACES FOR M/S HINDUSTAN STEEL PRIVATE LTD. HOWEVER THE ASSESSEE WAS GIVEN THE AMOUNT OF `13 00 000/- FOR PURCHA SE OF TIMBER FOR SHUTTERING IN CONNECTION WITH CONTRACT. T HERE WAS A SEPARATE ARRANGEMENT REGARDING THIS AMOUNT. THE ASSESSEE DEB ITED EXPENSES INVOLVED IN PROVIDING THE SHUTTERING TO PROFIT & LOSS ACCOUNT BUT THE SUM OF `13 00 000/- WAS TREATED AS LOAN OR AD VANCE. THE ASSESSING OFFICER SPREAD THE SUM OF `13 00 000/- OVER 1 5 MONTHS DURING WHICH THE WORK WAS ACTUALLY DONE. IT WAS OBSER VED BY HONBLE HIGH COURT THAT IT APPEARS FROM THE CONSTRUCTI ON OF THE CONTRACT THAT THE SUM OF `13 00 000/- WAS PAYMENT FOR THE TIMBER WHICH WAS TO BELONG TO M/S HINDUSTAN STEEL PRIVATE LTD. IT CANNOT BE SAID THAT THE MONEY PAID FOR THE TIMBER WAS NOT A PAY MENT TOWARDS THE TIMBER TO BE SUPPLIED. RATHER IT WAS PAYMENT FOR WO RK TO BE DONE OR GOODS TO BE SUPPLIED. NO DOUBT THE INCOME HAD ACCRUED AND HAD ALSO BEEN RECEIVED BY THE ASSESSEE. THE HONBLE COU RT FURTHER OBSERVED THAT IN THAT CASE WHERE THE RECEIPT IS EAR LIER THE CONCERN IS NOT SO MUCH WITH AS TO WHEN /THE INCOME ACCR UED BUT AS TO WHEN THE PAYMENT BECAME CONVERTED INTO INCOME. WHEN THE WORK 5021-2010-CP 3 WAS ACTUALLY DONE IN THE CALENDAR YEAR 1958 THE AMOUNT RECEIVED HAD TO BE ACCOUNTED FOR IN THE PROFIT AND LOSS ACCOUNT AS BEING PAYMENT FOR WORK DONE. IN THE PRESENT CASE ALSO THE APPEL LANT PROCURED ITEMS TO THE TUNE OF `20 65 855/- FOR SUPPLYIN G THE SAME TO ITS CLIENTS. THUS THE AMOUNT IS PAID FOR THE GOODS TO BE SUPPLIED. THE PAYMENT FOR THIS WORK IS ALREADY RECEIVED AND /THE WORK HAS ACTUALLY BEEN DONE. THUS THE PAYMENT GETS CONVERTED INTO INCOME. HENCE THE ASSESSING OFFICER WAS RIGHT IN CONCLUDING THAT THE INCOME TO THE EXTENT OF `20 65 855/- PERTAINS TO THE YEAR UNDER CONSIDE RATION. THE LEARNED AR HAS ALSO RAISED AN OBJECTION THAT THE APP ELLANT IS FOLLOWING THIS ACCOUNTING SYSTEM FROM EARLIER YEARS AN D HAS ALSO REFLECTED THE SALES IN SUBSEQUENT YEARS. HOWEVER IT IS A SET TLED LAW THAT PRINCIPLE OF RES-JUDICATA IS NOT APPLICABLE IN TH E INCOME-TAX PROCEEDINGS AND /THE ASSESSING OFFICER HAS TO COMPUTE THE INCOME OF EACH YEAR CORRECTLY AFTER EXAMINING THE FACTS OF THE CASE. LOOKING INTO THE FACTS OF THE PRESENT CASE THE ASSESSING OFFICER WAS J USTIFIED IN TREATING THE AMOUNT OF `20 65 855/- AS INCOME OF THE AS SESSEE IN THE YEAR UNDER CONSIDERATION. HENCE THE ADDITION IS UPHELD. AS REGARDS LEARNED ARS OBJECTION ON DOUBLE TAXATION OF THE SAME AMO UNT THE ASSESSING OFFICER IS DIRECTED TO VERIFY SO THAT NECESSARY EFFECT IF REQUIRED IS GIVEN. 2.3 WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIO NS MADE BEFORE US. ON PERUSAL OF TRADING AND PROFIT AND LOSS ACCOUNT I T IS SEEN THAT THE ASSESSEE DECLARED SALES OF ABOUT `2.82 CRORES. AS AGAINST THE AF ORESAID COST OF GOODS SOLD HAS BEEN DEBITED ABOUT `1.28 CRORES. SCHEDULE M REGARDING COST OF GOODS SOLD READS AS UNDER:- SCHEDULE M COST OF GOODS SOLD OPENING STOCK 2 648 200 3 410 830 PURCHASES 12 620 149 9 183 090 PACKING EXPENSES 401 750 32 882 JOB WORK CHARGES PAID . 36 000 600 850 15 706 099 13 227 652 LESS: CLOSING STOCK 2 859 779 2 648 200 COST OF GOODS SOLD 12 846 320 10 579 452 5021-2010-CP 4 2.4 FROM THE AFORESAID SCHEDULE IT IS CLEARLY DISCERNIBL E THAT THE ASSESSEE HAS SHOWN CLOSING STOCK AT `28 59 770/-. ALTHOUGH AN ASSERTION HAS BEEN MADE BEFORE US THAT THE PURCHASES ETC. UNDER CONSIDERATION AMO UNTING TO `20 65 855/- HAVE BEEN INCLUDED IN THE CLOSING STOCK THERE IS NO EVIDENC E TO THAT EFFECT ON THE RECORD. THE DETAILS OF STOCK HAVE BEEN PLACED IN THE PAPER BOOK ON PAGE 30. 2.5 THE LEARNED CIT(A) WHILE CONFIRMING THE ACTION OF T HE ASSESSING OFFICER HAS MAINLY RELIED ON THE DECISION OF HONBLE DELHI HIGH COUR T IN THE CASE OF UTTAM SINGH DUGGAL & COMPANY (P) LTD. VS. CIT (1981) 127 ITR 21 . THE FACTS OF THE CASE ARE THAT THE ASSESSEE WAS A CONTRACTOR FOR CONSTRUCTION OF BLAST FURNACES AT ROURQILA FOR HINDUSTAN STEELS PRIVATE LIMITED INVOLVING A SUM OF `4 CRORES. IT WAS GIVEN TWO AMOUNTS AGGREGATING TO `13 00 000/- FOR PURCHASING T IMBER FOR SHUTTERING IN CONNECTION WITH THE CONTRACT. THERE WAS A SEPARATE AGREEM ENT REGARDING THIS AMOUNT. A SUM OF `5 00 000/- WAS RECEIVED IN CALENDAR YEAR 1957 AND `8 00 000/- IN CALENDAR YEAR 1958 CORRESPONDING TO AS SESSMENT YEARS 1958-59 AND 1959-60. THE CONTRACT PROVIDING THAT IN CASE OF FAILURE TO COMPLETE THE MAIN CONTRACT IN TIME THE SUM OF `13 00 000/- WILL BE REFU NDED TO M/S HINDUSTAN STEELS (P) LIMITED. THE PROCEDURE ADOPTED BY THE ASSESSEE WAS TO DEBIT THE EXPENDITURE TO ITS PROFIT AND LOSS ACCOUNT BUT THE SUM OF `13 00 00 0/- WAS TREATED AS A LOAN OR ADVANCE. THE ENTIRE AMOUNT WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT IN THE SUBSEQUENT ACCOUNTING PERIOD RELEVANT TO ASSESSMENT YEAR 1 960-61. THE TRIBUNAL CAME TO THE CONCLUSION THAT NOT ONLY THE SUM OF `13 00 000/- HAD ACCRUED AS INCOME BUT IT HAS ALSO BEEN RECEIVED THEREFORE IT COULD NOT BE TAKEN OUT OF THE TOTAL INCOME. THE HONBLE COURT MENTIONED THAT SINCE NO WORK WAS DONE IN 1957 THE 5021-2010-CP 5 SUM OF `5 00 000/- CAN BE TREATED AS A KIND OF ADVANCE . HOWEVER IN THE YEAR 1958 THE WORK WAS DONE AND EXPENDITURE HAD BEEN DEBITED TO T HE PROFIT AND LOSS ACCOUNT. THEREFORE IT IS NOT UNDERSTANDABLE HOW IT CAN BE SAID THAT THE INCOME TO THE EXTENT NOTED BY THE ASSESSING OFFICER HAD NOT ACTUALL Y BEEN RECEIVED. AT THIS POINT OF TIME WE MAY ALSO REFER TO THE DECISION OF HON BLE ORISSA HIGH COURT IN THE CASE OF NANDRAM HUNATRAM (1976) 103 ITR 433. THE FAC TS ARE THAT THE ASSESSEE UNDERTOOK A PROJECT CALLED DBK RAILWAY PROJECT. NO I NCOME WAS DECLARED FROM THIS SOURCE. FROM THE BALANCE SHEET THE ASSESSING OFFI CER FOUND THAT THE ASSESSEE HAD MADE A CREDIT OF `1 34 028/- AND A DEBIT OF `2 18 422/-. THE NET DEBIT BALANCE OF `84 414/- HAD BEEN CARRIED OVER TO THE NEXT YEAR AS AN ASSET. THE ASSESSING OFFICER REJECTED THE CLAIM OF EXPENDITURE OF `2 1 8 442/- FOR LACK OF DETAILS. THEREFORE HE TOOK THE AMOUNT OF `1 34 028/- AS TOTAL EXPENDITURE MADE IN THE CONTRACT WORK. FINALLY HE ESTIMATED PROFIT ON THI S EXPENDITURE @15%. THE AAC CONFIRMED THE DECISION OF TAXATION BUT REDUCED THE PROFI T TO 12.5%. THE TRIBUNAL CAME TO THE CONCLUSION THAT SINCE THE PAYMENT HAD NOT B EEN FINALLY ADJUSTED THERE WAS NO REAL INCOME ACCRUING TO THE ASSESSEE. THE HONBLE COURT MENTIONED THAT THE ASSESSEE COULD CLAIM EXPENDITURE IS `2 18 422/- UNDER M ERCANTILE SYSTEM PROVIDED THAT (I) THERE WAS A LEGAL LIABILITY TO PAY TH E AMOUNT; (II) THE WHOLE OF IT WAS IN THE NATURE OF REVENUE EXPENDITURE. HOWEVER NOTHING OF TH AT KIND WAS DONE AND THE ENTRY WAS HELD TO BE NON-GENUINE. THE OTHER MATERIAL A VAILABLE WAS RECEIPT OF `1 34 028/- FROM THE RAILWAYS. THIS ENTRY WAS RIGHTL Y TREATED AS INCOME ACCRUED TO THE ASSESSEE AS HE HAS ACQUIRED THE RIGHT TO RECEIVE THE AMO UNT. THEREFORE THE AAC WAS RIGHT IN ESTIMATING PROFIT ON THIS RECEIPT. 3. HAVING CONSIDERED THE FACTS OF THIS CASE BEFORE US AND THE CASES RELIED UPON BY THE LOWER AUTHORITIES. IT WILL BE SEEN THAT THEY CAN B E DISTINGUISHED. THE ASSESSEE HAD RECEIVED CERTAIN MONIES WHICH CAN BE PRIMA FACIE TAKEN AS ADVANCES IN THE 5021-2010-CP 6 LIGHT OF THE DECISION IN THE CASE OF UTTAM SINGH DUGGAL AND COMPANY (P) LTD. (SUPRA). THE ASSESSEE PURCHASED GOODS ETC. WORTH `20 65 855/- FOR MANUFACTURING GOODS TO BE SUPPLIED TO THE PERSONS FROM WHOM ADVANCES W ERE RECEIVED. IT IS CLEAR FROM THE ORDERS OF THE LOWER AUTHORITIES THAT THIS AMOUN T WAS DEBITED TO PROFIT AND LOSS ACCOUNT. HOWEVER THE FURTHER CASE OF THE LEARNED CO UNSEL IS THAT THESE GOODS WERE SHOWN IN THE CLOSING STOCK OF THE OVERALL VALUE OF `28 59 770/-. THIS FACT IS NOT VERIFIABLE ON THE BASIS OF EVIDENCES FILED IN THE PAPER BOOK. IF THIS AMOUNT HAS BEEN SHOWN IN THE CLOSING STOCK THE ONLY THING WHICH C OULD BE DONE ON THE BASIS OF THE DECISION IN THE CASE OF NANDRAM HUNATRAM (SUPRA) WA S TO ESTIMATE PROFIT ON THIS AMOUNT AS RECEIPTS EXCEEDING THIS AMOUNT. FURTHER CASE O F THE ASSESSEE BEFORE THE LOWER AUTHORITIES WAS THAT HE HAS BEEN ACCOUNTING FOR TH E SALES ON THE BASIS OF BILLS RAISED AT THE TIME OF THE SUPPLY OF THE GOODS. THE GOO DS CORRESPONDING TO THESE PURCHASES HAD NOT BEEN SUPPLIED. THEREFORE ON THE BASIS OF CONSISTENT PRACTICE OF ACCOUNTING FOR PURCHASES IT WAS ARGUED THAT NO PROFI T MAY BE COMPUTED AS IT HAS BEEN ACCOUNTED FOR IN THE SUBSEQUENT YEAR WHEN GOODS WERE SOL D AND THE BILLS WERE RAISED. THE LEARNED CIT(A) REJECTED THIS SUBMISSION B Y MENTIONING THAT THE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE TO INCOME- TAX PROCEEDINGS AND THE ASSESSING OFFICER HAS TO COMPUTE INCOME FOR EACH YEAR SEPA RATELY. ASSUMING THIS PROPOSITION IS CORRECT THEN THE LEARNED CIT(A) OUGHT TO HAVE MADE SIMILAR ADJUSTMENT IN RESPECT OF GOODS PURCHASED AND LYING IN T HE OPENING STOCK. HOWEVER THE SAME HAS NOT BEEN DONE. THERE MAY BE SOME DEFEC T IN THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE REGARDING RECOGNITION OF INCOME THE SAME HAS BEEN COMMITTED OVER A NUMBER OF YEARS IN THE PAST AND HAS BEEN ACCEPTED. ALTHOUGH THE RULE OF CONSISTENCY DOES NOT REALLY OVER RI DE THE PRINCIPLE AGAINST RES JUDICATA IN INCOME-TAX PROCEEDINGS THE FACT REMAINS TH AT IF ANY ADJUSTMENT IS MADE IN THIS YEAR SIMILAR ADJUSTMENT WILL BE REQUIRED IN PAS T AND FUTURE. IN SUCH A SITUATION THE RULE OF CONSISTENCY MAY TAKE PRECEDENT OVER THE PRINCIPLE AGAINST RES 5021-2010-CP 7 JUDICATA AS THE ISSUE IS FUNDAMENTAL IN NATURE AND PERME ATES OVER A NUMBER OF YEARS. THEREFORE IT IS HELD THAT NO USEFUL PURPOSE WILL BE SERVED BY ALTERING THE SYSTEM OF ACCOUNTING REGARDING RECOGNITION OF PROFIT ONLY FOR THIS YEAR. THIS LEAVES US WITH THE QUESTION OF VERIFICATION OF ACCOUNTING FOR OF THE PURCHASES OF `20 65 855/- IN THE CLOSING STOCK. THIS MATTER IS RES TORED TO THE FILE OF THE ASSESSING OFFICER SUBJECT TO THE REMARK THAT IF IT IS NOT ACCOUNT ED FOR IN THE CLOSING STOCK THE INCOME AS ASSESSED BY THE ASSESSING OFFICER SHALL STAND OTHERWISE THE AMOUNT SHALL BE DELETED FROM THE INCOME. FOR THIS PURPOSE THE ASSESSING OFFICER SHALL GRANT A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 4. IN RESULT THE APPEAL IS TREATED AS ALLOWED FOR STAT ISTICAL PURPOSES AS INDICATED ABOVE. THIS ORDER WAS PRONOUNCED IN OPEN COURT ON 18.02.2011 . SD/- SD/- ( RAJPAL YADAV ) ( K.G. BANSAL ) JUDICIAL MEMBER ACCOUNTANT ME MBER DT. 18/02/2011 NS COPY FORWARDED TO:- 1. M/S CASA PARADOX PRIVATE LIMITED 177 M.G. ROAD SULTA NPUR NEW DELHI- 30. 2. INCOME TAX OFFICER WARD 3(2) NEW DELHI. 3. THE CIT 4. THE CIT (A) NEW DELHI. 5. THE DR ITAT LOKNAYAK BHAWAN KHAN MARKET NEW DELHI. TRUE COPY BY ORDER (ITAT NEW DELHI).