COMMISSIONER OF INCOME TAX -II V. LEO FORMULATIONS PVT LTD

TAX APPEAL NO. 301 of 2014

AI Insights

The case involves the Commissioner of Income Tax as the appellant and Leo Formulations Pvt Ltd as the respondent, concerning the assessment years 2007-08 and 2008-09. The core issue was the appropriate additions to be made to the income of the assessee after the rejection of book results due to unreconciled discrepancies in raw material consumption. The assessing officer had initially estimated the excess consumption and unaccounted sales at 40% of the turnover, which was contested by both parties at various appellate levels. The CIT(Appeals) and the Tribunal reduced the excess sales to 20% and applied a GP rate of 35%, which was challenged by the Revenue in the High Court. The High Court upheld the lower authorities' decisions, emphasizing that the entire unaccounted sales should not be treated as income without proper estimation of the profit element.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 361523 (HC-GUJARAT)
• Appeal Type: High Court cases
• Pronouncement Date: 07-04-2014
• Appeal Filed By: Department
• Assessment Year: 2007-2008
• Other Referred Cases: Nathuram Munnalal Seth vs. CIT, President Industries vs. CIT, CIT vs. Gurubachan Singh J. Juneja, M/s.Aradhana Textile Mills vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S N DIVETIA
• Assessee Lawyers: MAUNA BHATT
• Keywords: Extra consumption of raw materials; GP rate; Rejection of book results; Unaccounted consumption; Unaccounted sales
• Section: 143(3)

Judgement Text

"O/TAXAP/301/2014 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 301 of 2014 With TAX APPEAL NO. 302 of 2014 TO TAX APPEAL NO. 304 of 2014 ================================================================ COMMISSIONER OF INCOME TAX -II....Appellant(s) Versus LEO FORMULATIONS PVT LTD....Opponent(s) ================================================================ Appearance: MRS MAUNA M BHATT, ADVOCATE for the Appellant(s) No. 1 MR SN DIVETIA, ADVOCATE for the Opponent(s) ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI Date : 07/04/2014 ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. These appeals concern assessment years 2007-08 and 2008-09 involving the same assessee. Each assessment year has given rise to two appeals since against the order of CIT(Appeals), the Revenue as well as the assessee both had approached the Tribunal. In short, the question pertains to appropriate additions to be made in the income of the assessee after rejection of book results. We may notice that in Tax Page 1 of 8 Downloaded on : Tue Jun 03 15:20:45 IST 2025 Uploaded by EZHURHASSAN SUDHIR ACHUTHAN(HC00192) on Fri Apr 11 2014 2014:GUJHC:10572-DB NEUTRAL CITATION O/TAXAP/301/2014 ORDER Appeal No.301 of 2014 Revenue has suggested following questions:- “[A] Whether the Appellate Tribunal has substantially erred in restricting the extra consumption of raw materials at 15% as against 40% worked out by the assessing officer even after upholding rejection of book results for unreconciled discrepancies in consumption?” [B] Whether the Appellate Tribunal has substantially erred in upholding the order of the CIT(A) in directing to adopt GP at 35% of the sales out of extra consumption as against the income @ 40% of book sales of Rs.2,21,18,899/- adopted by the assessing officer?” 2. The assessee is engaged in the business of manufacture of pharmaceutical drugs. The assessing officer noted that the assessee had not recorded the consumption of different raw materials correctly in the books of accounts and had suppressed the production. He estimated that the assessee had consumed different raw materials for manufacture of the drugs excess by 46.05% which would have been utilized for manufacture and sale of unaccounted finished products. He also recorded that there was also unaccounted purchases to be considered. He, therefore, put unaccounted sales of the assessee at 40% of the turnover and resultantly added a sum of Rs.88.47 lakhs to the income of the assessee. The Page 2 of 8 Downloaded on : Tue Jun 03 15:20:45 IST 2025 Uploaded by EZHURHASSAN SUDHIR ACHUTHAN(HC00192) on Fri Apr 11 2014 2014:GUJHC:10572-DB NEUTRAL CITATION O/TAXAP/301/2014 ORDER assessee carried the matter before CIT(Appeals), who while accepting the rejection of the book results limited the additions by applying 35% GP ratio on the extra consumption to be taken at 20% of the turnover. He held and observed as under: “5.2 I have considered the rival submissions. Since the rejection of books of account has been upheld by me, the logical result would be to estimate the income of some reasonable and proper basis as held in case of Nathuram Munnalal Seth vs. CIT[25 ITR 216] [Nag.]. When admittedly, the consumption has not been correctly recorded in the books maintained by the appellant, there could be addition in respect of profit realizable from sales out of such unrecorded consumption. It was held in case of President Industries [258 ITR 654] (Guj) and CIT vs. Gurubachan Singh J. Juneja [302 ITR 63] [Guj.] and recently following the said decisions in case of M/s.Aradhana Textile Mills [ITA No.968/Ahd/200 dated 13.5.2011] it was held that the entire sales or processing charges would not be the income of the assessee but only net profit would be subjected to tax. Respectfully following the aforesaid decisions, the addition has to be restricted to the profit element in the sales worked out in respect of excessive consumption taken at 20%. It is noticed from the gross profit chart given at page 9 of the paper book that the appellant had disclosed G.P. at 33.28% in the immediately preceding year and G.P. at 38.51% in the year under appeal. It has shown G.P. at 35.10% in the succeeding year i.e. A.Y.2008-09. Therefore, the average G.P. at 35% would be a fair and reasonable estimation of its income. The AO is, therefore, directed to work out the extra consumption at 20% and adopt G.P. at 35% of such extra consumption which would be the addition upheld. In the result, this ground of appeal is partly allowed.” Page 3 of 8 Downloaded on : Tue Jun 03 15:20:45 IST 2025 Uploaded by EZHURHASSAN SUDHIR ACHUTHAN(HC00192) on Fri Apr 11 2014 2014:GUJHC:10572-DB NEUTRAL CITATION O/TAXAP/301/2014 ORDER 3. Both, the assessee as well as the Revenue carried this issue in appeals before the Tribunal. The Tribunal confirmed the view of CIT(Appeals) and rejected both the appeals observing as under: “7. Third issue of estimating of GP at 36% on such extra consumption, we find that the approach of the CIT(A) was justified in view of the fact that the assessee has disclosed the GP rate of 35.10% for this year and had disclosed GP at 38.51% in the immediately preceding year. The plea of the learned DR that the entire expenses on purchase of raw-material have already been debited in the books of accounts, and hence 100% of the unaccounted sales should be added as income of the assessee, is unsustainable. The CIT(A) has recorded a finding that the estimate of income has to be rightly rational as well as based on material on record, and that the entire sales or processing charges cannot be treated as income chargeable to tax, unless there is any material to come to such conclusion. He has cited decisions in the case of President Industries, 258 ITR 654 (Guj) and CIT vs. Gurubachan Singh Juneja, 302 ITR 63 (Guj) in support of the conclusion of applying the GP rate on the extra consumption. We are in agreement with the decision of the CIT(A) in estimating the profit element out of extra consumption, and not adding the entire sales as well as extra- consumption as income in the hands of the assessee. We also find that there is no direct evidence of any unaccounted sales made outside the books of Accounts. However, the addition is partly upheld on account of estimating on the basis of preponderance of probabilities, in the facts of the case of the assessee. Accordingly, the order of the CIT(A) in estimate the profit element at 36% of such extra consumption is fair and reasonable, is upheld and the grounds of the appeal of the assessee are dismissed.” Page 4 of 8 Downloaded on : Tue Jun 03 15:20:45 IST 2025 Uploaded by EZHURHASSAN SUDHIR ACHUTHAN(HC00192) on Fri Apr 11 2014 2014:GUJHC:10572-DB NEUTRAL CITATION O/TAXAP/301/2014 ORDER 4. Hence, the Revenue has filed two appeals for the each assessment year 2007-08. Facts are similar for the assessment year 2008-09. It is, therefore, not necessary to record them separately. 5. As noted above, question of rejection of the books of accounts is not an issue. The assessing officer as well as the appellate authorities held that the book results did not reflect the correct position. Only remaining question was, to what extent th additions were necessary. In this respect the assessing officer adopted addition at the rate of 40% of the total turnover on the premise that there had been excess production and sale at the rate of 46%, out of which some adjustment would have to be made for purchases which were also unaccounted. 6. CIT(Appeals) as well as the Tribunal, however, limited such additions. In particular, CIT(Appeals)reduced the excess sales to 20% of the turnover and, thereafter applied GP rate of 35% taking average of the three years of GP rate of the assessee. In the process CIT(Appeals) relied on the decision of this Court in case of Commissioner of Income-tax vs. President Industries reported in Page 5 of 8 Downloaded on : Tue Jun 03 15:20:45 IST 2025 Uploaded by EZHURHASSAN SUDHIR ACHUTHAN(HC00192) on Fri Apr 11 2014 2014:GUJHC:10572-DB NEUTRAL CITATION O/TAXAP/301/2014 ORDER [2002] 258 ITR 654 and in case of Commissioner of Income-tax vs. Gurubachhan Singh J. Juneja reported in [2008]302 ITR 63 (Guj). 7. In our opinion, such exercise undertaken by CIT(Appeals) and the Tribunal on the basis of evidence on record gives no rise to the substantial question of law. This exercise is primarily in the nature of appreciation of evidence and would be based on questions of facts. Learned counsel for the Revenue, however, strenuously urged that having accepted that there was a degree of unaccounted consumption of raw materials, entire excess consumption should be added to the income since it was not shown that there was any unaccounted expenditure relatable to the production of the final goods. 8. This argument has two difficulties. Firstly, the assessing officer himself, as noted above, has recorded in the assessment order that there has been unaccounted purchases which needs to be considered against the unaccounted sales. Even in the decision of this Court in case of Commissioner of Income-tax vs. President Industries(supra) the Court was conscious of this angle when it observed as under:- “ Therefore unless there is a finding to the Page 6 of 8 Downloaded on : Tue Jun 03 15:20:45 IST 2025 Uploaded by EZHURHASSAN SUDHIR ACHUTHAN(HC00192) on Fri Apr 11 2014 2014:GUJHC:10572-DB NEUTRAL CITATION O/TAXAP/301/2014 ORDER effect that investment by way of incurring the cost in acquiring the goods which have been sold has been made by the assessee and that has also not been disclosed. In the absence of such finding of fact the question whether entire sum of undisclosed sale proceeds can be treated as income of the relevant assessment year answers by itself in negative. The record goes to show that there is no finding nor any material has been referred about the suppression of investment in acquiring the goods which have been found subject of undisclosed sales.” 9. Secondly and equally importantly, the assessing officer with somewhat confusingly equated excess consumption of raw material and unaccounted sale of finished product. It is not as if the excess consumption of raw material would automatically result into matching value of excess sale of the finished product. Unaccounted consumption of raw material would be used for manufacturing raw material which process would require, depending on the nature of the product, deployment of man power and machinery, consumption of electricity and even other ingredients. Essentially, on the basis of estimation of excess consumption of raw material the possible profit of the assessee would have to be worked out for making actual additions. In this background, we must view the observations of CIT(Appeals), who while adopting the excess consumption of the unfinished product at 20% of the Page 7 of 8 Downloaded on : Tue Jun 03 15:20:45 IST 2025 Uploaded by EZHURHASSAN SUDHIR ACHUTHAN(HC00192) on Fri Apr 11 2014 2014:GUJHC:10572-DB NEUTRAL CITATION O/TAXAP/301/2014 ORDER gross sale applied the GP rate of 35% averaging three years of GP rate in the case of the assessee. Essentially, therefore, on the basis of available material on record, CIT(Appeals) had attempted to tax the income of the assessee arising out of the unaccounted consumption of raw material which would result into unaccounted sales of finished product. 10. In the result, Tax Appeals are dismissed. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) SUDHIR Page 8 of 8 Downloaded on : Tue Jun 03 15:20:45 IST 2025 Uploaded by EZHURHASSAN SUDHIR ACHUTHAN(HC00192) on Fri Apr 11 2014 2014:GUJHC:10572-DB NEUTRAL CITATION "