In order to reduce the profit Purchases were made at the higher rate and Sales were at the lower rates

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In order to reduce the profit Purchases were made at the higher rate and Sales were at the lower rates

M/S Agarwal Global Steels Pvt … vs Dy.Cit, Circle-1(1),, Hyderabad on 29 September, 2017





        ITA No. 674/Hyd/2014

        Assessment Year: 2009-10

M/s Agarwal Global Steels Pvt. Vs.      Dy. Commissioner of Ltd.,

Secunderabad.                                     Income tax, Circle1(1)

PAN-AACCA0516C                                    Hyderabad

(Assessee)                                                    (Respondent)

 Assessee by :       Shri K.C. Devdas

 Revenue by :       Shri Prabhat Kumar Gupta

        Date of hearing    :    11-07-2017

        Date of pronouncement      :    29-09-2017



This appeal filed by the assessee is directed against the order of the learned Commissioner of Income-tax(A) – II, Hyderabad, dated 16-01-2014 for AY 2009-10.

  1. Briefly, the facts of the case are that the assessee is engaged in the business of trading in steel items. It filed return of income of Rs. 94,55,160/- for AY 2009-10. During the course of scrutiny assessment, the AO computed trading result for the first three quarters and for the last quarter separately. After carrying out the detailed scrutiny, the AO arrived at the conclusion that in the last quarter the purchases were made at higher rate and the sales were made at lower rate in order to reduce the profits. Thereafter, the AO ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.disallowed loss of Rs. 180,75,930/- from the loss reported for the last quarter.

2.1 The assessee had turnover of Rs. 171 crores. The AO analysed the trading results for the first three quarters and for the last quarter as under:

Trading result for the first three quarters To Opening Stock 17,32,74,397 By Sales 1,23,42,25,044 To Purchases 1,04,67,33,352 By Closing Stock 6,35,01,295 To Gross profit 7,77,18,590 Total 1,29,77,26,339 Total 1,29,77,26,339 Trading result for the last quarters To Opening Stock 6,35,01,295 By Sales 48,38,71,195 To Purchases 49,03,66,811 By Closing Stock 3,57,61,129 To Gross profit -3,42,35,782 Total 51,96,32,324 Total 51,96,32,324 2.2 The important observations made by the AO for making disallowance are as under:

(a) That there is no scope for sudden fluctuation in prices of steel items. The increase or decrease in market prices will be gradual. No other steel trader had booked losses at gross profit level. Generally in this kind of business there is no scope for losses at gross profit level.

(b) Month-wise analysis of purchases and sales clearly proves that there was no old stock which was purchased at higher rate and sold at lower rate. Rather the sales affected in the last quarter were out of fresh purchases only.

(c) Loss booked in the fourth quarter was on account of deliberate act of purchases at higher rate and sales at lower rate. The assessee ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.made purchases from M/s. Agarwal Steels which is a proprietary concern of Sri L.M. Agarwal, Managing Director of the Company. Comparison of rates of purchase price shows that rates paid to Agarwal Steels were very clearly at a higher side.

(d) That the assessee failed to produce the delivery challans for purchases/sales, therefore, the loss on account of trading without delivery should be treated as speculation loss.

(e) During the month of February and March, 2009 the assessee sold 2797 metric tons of steel to one Gautam Rolling Mills Pvt.Ltd. which was the manufacturer of steel items at the rate of Rs.25000/- per metric ton. On verification it was found that Gautam Rolling Mills have sold the entire lot immediately at an average rate of Rs.30,675/- per metric ton. On this transaction alone the assessee booked loss to the extent of Rs.122,80,300/- This clearly proves that the assessee company indulged in tax evasion.

(f) Reliance is placed on the decision of Som Nath Maini Vs. CIT 306 ITR 414 (Punjab & Haryana) wherein it was held that genuineness of transaction can be rejected, if the evidence given by the assessee is not trustworthy.

(g) Reliance is also placed on the decision of Sumati Dayal V s. CIT 214 ITR 80 (SC) wherein it was held that human probability and circumstantial evidence has to be kept in mind to testify the genuineness of transactions.

(h) Under these circumstances, though it is rightful to disallow the entire loss of Rs.352,35,782/-, taking a liberal approach, the loss of Rs. 1,80,75,930/- is disallowed as worked out by the assessee himself as under:

ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.

      Average purchase price          – Rs.29.39/ kg

      Average sale price              – Rs.28.34/ kg

      Loss per MT                     – Rs.1058.00

      Total quantity sold            – 17085 MT

Total Loss suffered in the fourth quarter Rs.1,80,75, 930/-

  1. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A).
  2. The CIT(A) summarized the submissions of the assessee made during appeal proceedings, as under:

(a) That the Assessing Officer bifurcated the trading for the first three quarters and then for the fourth quarter and disallowed the sum of Rs.180,75,930/- which is not correct.

(b) The results of company has to be determined as per the annual account computed for the entire year. The action of the AO is against the very fundamental principle of computing the tax for the entire previous year.

(c) The assessee maintains regular books of accounts and the Assessing Officer did not point out mistakes in the accounts. The accounts of the assessee were audited and the audit report was also submitted which was accepted by the AO. Hence, there is no case for any disallowance.

(d) The principle of bifurcating the trading account is totally improper. If there was a loss for the first three quarters and profit for the fourth quarter, the AO would have simply accepted the results. The trading results have to be computed for the entire year.

(e) No trader will sell his goods for profit all the time, nor for losses all the time.

ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.

(f) All the transactions are supported by bills and have entries and it is for the AO to prove that the transactions are not genuine.

(g) The issue of delivery challan is not compulsory for all the transactions. The delivery challans are not statutory requirements, they are only for the convenience of the traders. Even in the absence of delivery challans, the transactions are fully legal and valid.

(h) That the Assessing Officer has grossly mislead himself by relying on the trading results of Gautam Rolling Mills Pvt. Ltd. The assessee cannot be punished if another trader makes profit out of goods purchased from the assessee.

(i) The Assessing Officer did not bring any material on record to show that the assessee deliberately purchased the material at higher rate and deliberately sold at the lower rate.

(m) That all the purchases and sales were made as per the prevailing market prices. During the last quarter, the steel prices were falling drastically, however, the assessee was compelled to sell at lower rate to various customers as agreed earlier to maintain the customer relationships.

  1. After considering the submissions of the assessee, the CIT(A) observed that on careful scrutiny of the purchase register especially for the last quarter, from 01.01.2009 to 31.03.2009, one can clearly notice that the price paid to M/s. Agarwal Steels was much higher compared to purchases made from any other party and the assessee had not explained as to why he paid more price to his sister concern. He noted that much of his arguments in appeal proceedings were focused on the aspect that the Assessing officer has not brought any evidence on record to prove that the transactions were not genuine, ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.

but, the assessee failed to explain as to why substantially higher price was paid to M/s. Agarwal Steels.

5.1 The CIT(A) observed that similarly, for the last quarter, the assessee sold certain items to M/s Gautam Rolling Mills Pvt. Ltd. From the details of sales made to this party submitted by the assessee during assessment proceedings, it is clear that all the sales were made at Rs.25,000/- per metric ton during the months of February & March, 2009 while sales to other parties were made at Rs.30,000/- to Rs.36,000/- per metric ton. The CIT(A) opined that the assessee had not given any satisfactory explanation as to why the sales were made at lower rate to Gautam Rolling Mills Pvt. Ltd. Further, the assessee was asked to submit the details as to the nature of product purchased from M/s.Agarwal Steels, whether any similar products were purchased from others, if so, at what rate? Further, the assessee was also asked to submit similar details with reference to sales made to Gautam Rolling Mills Pvt. Ltd., what is the nature of products sold to Gautam Rolling Mills, at what rate? If similar products were sold to other parties, at what rate such products were sold? However, no details were submitted.

5.2 Further, the CIT(A) observed that the details of opening stock, purchases and sales are enclosed to this appeal in the form of Annexure. This clearly reveals that when the market prices are falling, the assessee indulged in purchasing huge quantities of steel at higher rate and sold at lower rate. The purchases made from M/s. Agarwal Steels during the last quarter are as under:

            Month           Quantity (MT)            Value

          January, 2009        917.83          37499739.97

         February, 2009        1552.835            51065257.96

          March, 2009         1023.43           31134953.07

     No. 674/H/1

     M/s Agarwal Global Steels Pvt. Ltd.

  1. The average purchase price from Agarwal Steels was Rs. 34,258/- per MT.
  2. The average purchase price from others as computed by the assessee himself Rs. 29,390/- per MT.

5.3 Similarly, the sales made to Gautam Rolling Mills Pvt. Ltd. (GRM) during the last quarter are as under:

           Month           Quantity (MT)           Value

          January, 2009          Nil                  Nil

          February, 2009       685.315             17818190

          March, 2009         2112.02             54912520

          Total              2797.335              72730710

5.4 In view of the above observations, the CIT(A) sustained the addition made by the AO, by holding as under:

“6.4 From the careful scrutiny of the purchases register, sales register, and the information on record any prudent can come to a clear conclusion that the assessee engaged in a deliberate act of over invoicing his purchases, by making purchases at higher rate from a related party M/s.Agarwal Steels and under invoiced the sales made to Gautam Rolling Mills Pvt. Ltd. This is a deliberate act of the assessee to suitably adjust his profits in the last quarter. The gross profit for the first three quarters was at Rs.7. 77 crores. In order to reduce his profits the assessee resorted to over-invoicing the purchases and under- invoicing sales and substantially reduce the profits by Rs.3.42 crores. In view of the above discussion, the addition made by the Assessing Officer of Rs.180,75,930/- is sustained.

  1. Aggrieved by the order of the CIT(A), the assessee is in appeal before us raising the following grounds of appeal:

“1. The Learned Commissioner of Income Tax (Appeals) [CIT(A)] erred in disallowing of notional loss of Rs. 1,80,75,930/- is unsustainable both on facts and in law.

  1. The learned CIT(A) in upholding that the assessee deliberately made purchases at higher rates and sold at a lower rate to camouflage loss in the last quarter without bringing any material on record for holding is unsustainable in law.”

ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.

  1. With regard to lower sale price to M/s Gautam Rolling Mills Pvt.

Ltd., the ld. AR of the assessee submitted that the assessee has entered into Long Term Contract with Gautam Rolling Mills Pvt. Ltd. for supply of TMT Bars Assorted sizes in random lengths @ 25,000/- per M.t. and the period of the contract is 5 months from the date of order i.e. before 31.03.2009. He submitted that the assessee has accepted the order with a hope that it will get the material i.e. TMT Bars assorted sizes in random lengths in the market, but, unfortunately the assessee could not get the material from steel manufacturers. The rates are falling down as per the table furnished below.


    Qtr                      Qty                               Amount


  Apri-Jun                 5942.390           249,431,851             41.93

  Jul-Sep                 10000.800           461,932,688             46.18

  Oct-Dec                  9542.060           335,378,813             35.14

   Jan-Mar                166680.460           490,366,810             29.39


     Qtr.            Qty                     Amount             Avg. rate (per


     Apri-Jun                 9083.120           399,087,372             43.93

     Jul-Sep                  9613.830           471,948,852             49.09

     Oct-Dec                 10041.160          366,331,981             36.48

     Jan-Mar                 17085.190           484,186,080             28.34

7.1      Referring to the above table, ld. AR submitted that the average

price of the prime material in 3rd quarter is Rs.36.48 per K.g. when compared to 2nd quarter there is huge fall in price i.e. near about Rs.12.60 per k.g (Rs.12,600/- per M.T) and last quarter rate was Rs.28.34 per k.g. There was fall of price Rs.8.14 per kg (Rs.8,140/- per M.T). He submitted that when prime material rate itself is Rs. 28.34 per kg., assessee can very easily procure the Assorted sizes in random lengths material on lesser rate than which rate on assessee sold to Gautam Rolling Mills Pvt. Ltd. as forecasted at the time of accepting the order. He submitted that because of the heavy down fall of the price in market near about Rs. .20.74 per kg (Rs.20,740/- per ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.

M.T) as shown above, the manufacturers have cut down the production due to heavy operational losses. He submitted that when the prime material production itself is reduced drastically due to abnormal downfall of price in the market, then where is the question of getting assorted sizes in random lengths as it arise very small quantity on the production. The ld. AR submitted that in the above circumstances, the assessee could not get the assorted sizes in random lengths material in the market. The average rate sold in the last quarter is Rs. 28.34/kg whereas the assessee has sold the material to Gautam Rolling at Rs. 25/- per kg. As per the contract note, clause 4, in case, the company failed to supply the contracted quantity it has to forfeit Rs. 3000/M.T. For the sake goodwill of the company, the assessee has supplied the quantity at the contracted rate. Ld. AR submitted that in these circumstances, the material was supplied @ 25,000/- per M.t as per order, the company is going to book loss of Rs.3.34 per kg (Rs.3340/- per M.T) otherwise also company is going to loose Rs. 3,000/- per M.t towards non compliance of order quantity as per Terms and Conditions of purchase order.

7.2 Ld. AR submitted that in these circumstances management has taken a decision better to fulfill the order quantity by bearing loss of 0.34 per kg (Rs. 340/- per M.t) So that the company can keep up the its commitment value and ethics of the business. Further, ld. AR submitted that normally profit or loss of the company for annual accounting period will be considered on the basis of entire year. Otherwise also as per the mercantile law the business period will be count for the year from April to March and profit / Loss will be considered on the same basis not in a quarter wise. He submitted that the Company has made profit of Rs. 87,52,542/- During the financial year and the books of accounts also audited both Statutory and Tax audit by a qualified chartered Accountant and Form No.3cB and 3cd also submitted along with return of income.

ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.

7.3 Ld. AR submitted that assessee is the MOU Holder for SAIL and VSP whereas Agarwal Global Steels has not got any MOU with SAIL and VSP, both the companies are Government enterprises. They are the main and first stage steel producers and produce prime quality of material. They were having their own brand image in iron and steel sector. Being a central government enterprises and first stage branded material producers consumers prefers to take their products for their industrial/domestic consumption to produce their own products and their end use. Company is also providing the quality test certificate along with their products. Which is compulsory in certain cases to produce to their customers. On certain Job it is compulsory or there is condition to use main producers material only. Hence their rate is always much higher when compared to secondary manufacturers. He submitted that since assessee has not having the MOU facilities with the above said companies they were procuring the material from Agarwal Steels.

7.4 Ld. AR submitted that whatever the material purchased by Agarwal Steels from VSP the entire material was sold to Agarwal Global Steels only by adding their nominal margin around Rs.300/- per M.t. In fact the material procured from VSP by Agarwal steels is only for Agarwal Global Steels Ltd. Hence the consignee name of Agarwal Global Steels Ltd is also mentioned in each and every sale invoice of VSP invoiced in favor of Agarwal Steels. He submitted that Mr. L.N Agarwal proprietor of Agarwal Steels as well as a Director of Agarwal Global Steels Ltd being a related party to both the firms he has not favoured anything to Agarwal steels while purchasing material for Agarwal Global Steels ltd. Charging of margin Rs.300/- per M.t. is not very high, it is very nominal and It is nothing when compared in percentage.

ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.

  1. Ld. DR submitted that assessee has purchased the TMT bars at higher rates and selling at lower rates to sister concerns and in particular M/s Gautham Rolling Mills P. Ltd. The assessee has produced supply contract to Gautham Rolling, which itself questionable as the rate fixed for the supply was Rs. 25000/MT whereas at the time of entering the agreement, the prevailing rate was Rs. 35,443/-. The assessee was not able to substantiate for quoting such low rates for securing the order. He further submitted that as per contract, the forfeiture clause states that the cost of forfeiture will be Rs. 3000/MT if the materials are supplied within the stipulated time. In case of failure, assessee will loose about 90L whereas the actual loss was much higher. No prudent businessman will venture into these kind of transactions. There is no details about any advance remittance or any financial commitments relating to this agreement, he submitted that all these agreements were created, after thought, to substantiate the unethical practice to shift the profit margin to other entities in order to evade tax.

8.1 Ld. DR submitted a working sheet, which highlights the month- wise turnover achieved by the assessee and as per which, the assessee has purchased at higher cost and sold the same at the lesser rates. It is part of paper book submitted by ld. DR. He relied on the orders of revenue authorities and submitted that assessee has indulged in diversion of profit to evade tax. He relied on the following case laws:

  1. Prafulla Kumar Tongya Vs. smt. Sarla, AIR 1998 MP 285
  2. Som Nath Maini Vs. CIT, 306 ITR 414.
  3. Considered the rival submissions and material facts on record. The facts are, the assessee is a trader in steel and it sources steel from M/s SAIL and VSP, through M/s Agarwal Steels, which is proprietary concern. The assessee places orders through M/s Agarwal Steels to SAIL and VSP. The rates are fixed by SAIL and VSP and ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.

supplied through the original delivery challan of SAIL and VSP to the assessee. The assessee, in turn, supplies to various agencies which include M/s Gautham Rolling Mills P. Ltd. During the current AY, the assessee has achieved Rs. 171.81 crores of turnover and declared net profit of Rs. 1.14 crores. However, AO noticed huge variations in the quarterly trading results of the company. He noticed that the assessee has sold the steel at less price resulting in negative gross profit. He has found that assessee has sold huge quantity in the last quarter to M/s Gautham Rolling Mills at Rs. 25000/MT whereas the assessee has bought at higher price. For which, assessee has submitted that the market condition of the TMT Bars were not conducive and prices for the same was falling steeply in the 3 rd and 4 th quarter. Since, the assessee has accepted to supply the huge quantity with competitive rate, it has to complete the agreement irrespective of the negative financial result. This was done keeping in mind the reputation and business ethics.

9.1 Considering the above factual matrix, we have noticed that the assessee has supplied the TMT bars at much lower rate resulting in negative gross profit. In the three quarters, the assessee had achieved 6.3% of GP, whereas in the 4 th quarter, it has achieved negative 7.07%, there is a negative swing of 13.37% in this quarter. No doubt, there is continuous fall in the price of TMT steel bars from April to December period. It is normal to secure big orders by the prudent businessman at competitive rates, in the result, if there is price fall, businessman will take the hit but in the net profit and not IN the gross profit. We have noticed that the GP ratio has swung 13.37% in this quarter and also the assessee has not substantiated how the price was fixed to secure the order. There is no basis to fix the rate at Rs. 25000/- per MT when the price prevailing at the time of contract was Rs. 35,443/- per MT.

ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.

9.2. The assessee has to substantiate the condition at which it has secured the order and price fixed for the future delivery in the volatile market. The assessee has fixed the rate at Rs. 25000/MT, when the price was Rs. 35,443/- per MT, i.e. about 70% of the prevailing market rate. At the same time, M/s Gautham Rolling Mills has sold at Rs. 30,675/-. When parties enter into such future contracts, they enter with back to back contracts, in which case, Gautham Rolling Mills should have entered into contract with others at the rate near to Rs. 25000/- per MT. But, in the given case, there is no such back to back arrangement but sold to others at a margin of 22.7%. It is very abnormal trading result.

9.3 The assessee has maintained proper books and the transactions were genuine as per the document submitted before us. But the result and the circumstances leading to execution of contract with M/s Gautham Rolling Mills in fact raises eye brows as the same was not substantiated by the assessee to the satisfaction of any authority. Hence, even though, the transactions recorded and document in support of trading activities are genuine and proper but we just cannot rely only on the documentation but the 3 rd quarter result and pricing decision leading to such erosion of profit shows the assessee is in bad light. It is the duty of the assessee to substantiate with the evidence to show that it has taken conscious decision in the interest of the business. In the absence of such evidence, the AO or any authority for that matter will not treat the transactions of the assessee as genuine and trustworthy. As held in the case of Sumati Dayal Vs. CIT 214 ITR 801, the Hon’ble Supreme Court held that human probability and circumstantial evidence has to be kept in mind to testify the genuineness of the transactions. We also rely on the case of Som Nath Maini Vs. CIT (supra) wherein it was held that “the AO is to apply the test of human probabilities for deciding genuineness or otherwise of a particular transaction. Merely leading of evidence that transaction was genuine, cannot be conclusive. Such ITA No. 674/H/14 M/s Agarwal Global Steels Pvt. Ltd.

evidence is required to be assessed by the AO in a reasonable way. Genuineness of the transaction can be rejected even if the assessee leads evidence which is not trust-worthy, even if the department does not lead any evidence on such an issue.” In our considered view, the assessee has not substantiated the circumstances with proper evidence which led to fix the price at Rs. 25,000/- per MT. In such a situation, we have no option but to go with the conclusion drawn by the AO. Accordingly, ground raised by the assessee is dismissed.

  1. In the result, appeal of the assessee is dismissed.

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