DCIT (OSD)8(2), MUMBAI V. KUSA CHEMICALS P.LTD, MUMBAI

ITA 1639/MUM/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3426 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 21-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 10-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M MURLIDR
• Assessee Lawyers: R N VASANI
• Keywords: Depreciation
• Section: 145

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO.1639/MUM/2014 ASSESSMENT YEAR-2009-10 DCIT(OSD) - 8(2), ROOM NO.218, 2 ND FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020 / VS. M/S KUSA CHEMICALS PVT. LTD. 6, J. K. INDUSTRIAL ESTATE MAHAKALI CAVES ROAD, ANDHERI (ROAD), MUMBAI-400093 PAN NO. AAACK2777R ( / REVENUE) ( / ASSESSEE) / REVENUE BY SHRI M. MURLI-DR / ASSESSEE BY SHRI SUBHASH S. SHETTY & SHRI R. N. VASANI / DATE OF HEARING : 21/03/2016 / DATE OF ORDER: 21/03/2016 ITA NO.1639/MUM/2014 M/S KUSA CHEMICALS P. LTD. 2 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE REVENUE IS AGGRIEVED BY THE IMPUGNED ORDER DATED 30/12/2013 OF THE LD. FIRST APPELLATE AUTHORI TY, MUMBAI, WHEREIN, IT WAS HELD THAT REASONS FOR REJEC TION OF BOOKS OF ACCOUNTS U/S 145 (3) OF THE INCOME TAX ACT , 1961 (HEREINAFTER THE ACT) ARE NOT CORRECT WITHOUT APPRE CIATING THE FACT THAT SINCE FROM THE BOOKS OF ACCOUNTS, MAI NTAINED BY THE ASSESSEE, THE CORRECT QUANTUM OF PRODUCTION IS NOT ASCERTAINABLE, THEREFORE, THE TRUE AND FAIR PROFIT OF BUSINESS CANNOT BE VERIFIED, THUS, THE BOOKS OF ACCOUNTS DES ERVES TO BE REJECTED U/S 145(3) OF THE ACT AND CONSEQUENTLY DELETING THE ADDITION OF RS.1,92,31,781/- MADE ON ACCOUNT OF SALES NOT REFLECTED IN THE BOOKS OF ACCOUNT ON THE SUPPRE SSED PRODUCTION. 2. DURING HEARING, THE LD. COUNSEL FOR THE ASSESSE E, SHRI SUBHASH S. SHETTY ALONG WITH SHRI R. N. VASANI , CLAIMED THAT THE IMPUGNED ISSUE IS COVERED IN FAVOU R OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL DATED 18/1 1/2015 (ITA NO.6653 & 6570/MUM/2011) FOR A.Y. 2008-09. TH IS FACTUAL MATRIX WAS CONSENTED TO BE CORRECT BY SHRI M. MURLI, LD. DR. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN VIEW O F THE ITA NO.1639/MUM/2014 M/S KUSA CHEMICALS P. LTD. 3 ABOVE, WE ARE REPRODUCING HEREUNDER THE RELEVANT PO RTION FROM THE AFORESAID ORDER OF THE TRIBUNAL DATED 18/1 1/2015 FOR READY REFERENCE AND ANALYSIS:- THESE ARE CROSS APPEALS, I.E. BY THE ASSESSEE AND THE REVENUE DIRECTED AGAINST THE ORDER OF THE COMMISSIO NER OF INCOME TAX (APPEALS)-17 MUMBAI (HEREINAFTER REFERRE D TO AS 'THE CIT(A)') DATED 29.07.2011, WHICH IN TURN HA S ARISEN FROM THE ORDER PASSED ~Y THE ASSESSING OFFICER U/S. 143(3)(II) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') DATED 07.12.2010 PERTAINI NG TO THE ASSESSMENT YEAR 2008-09. 2. FIRST, WE SHALL TAKE UP THE, APPEAL OF THE REVEN UE, WHEREIN, THE FOLLOWING THREE GROUNDS OF APPEAL HAVE BEEN PREFERRED:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE REASONS FOR RE JECTION OF BOOKS OF ACCOUNTS U/S.145(3) OF THE ACT, ARE RIOT CORRECT, W ITHOUT APPRECIATING THE FACTS OF THE CASE'. . 2. 'ON THE FADS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.2,70,46 ,846/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNDISCLOSED PRODUCT ION OF 252609 KGS WITHOUT APPRECIATING THE FACTS OF THE CASE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD . CIT(A) IN NOT APPRECIATING THAT SINCE FROM THE BOO KS OF ACCOUNTS MAINTAINED BY THE ASSESSEE, THE CORRECT QUANTUM OF PRODUCTION AND CONSEQUENTLY THE TRUE AND FAIR PROFIT OF BUSINESS C ANNOT BE DEDUCTED, THE BOOKS OF ACCOUNTS DESERVED TO BE REJECTED U/S.145(3 ) OF THE, I.T. ACT WHICH HAS ALSO BEEN ENDORSED BY VARIOUS COURTS'. . 3. A PERUSAL OF THE AFORESAID GROUNDS REVEAL THAT T HE REVENUE HAS RAISED THE MULTIPLE GROUNDS OF APPEAL B UT ESSENTIALLY THE DISPUTE RELATES TO THE ACTION OF TH E CIT(A) IN DELETING THE ADDITION OF RS. 2,70,46,846/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNDISCLOSED PRODUCT ION. 4. IN ORDER TO APPRECIATE THE RIVAL ASPECTS OF THE DISPUTE, THE FOLLOWING DISCUSSION IS RELEVANT. THE ASSESSEE BEFORE US IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF COMPANIES ACT, 1956, AND IS INTER-ALIA ENGAGED IN ITA NO.1639/MUM/2014 M/S KUSA CHEMICALS P. LTD. 4 PRODUCTION AND DEALING IN A VARIETY OF CHEMICALS. T HE ASSESSEE COMPANY MANUFACTURES MANY TYPES OF LUBRICA NT ADDITIVE, E.O. DERIVATES/EMULLSIFIER'S & OTHER SPEC IALTY CHEMICALS FOR VARIOUS INDUSTRIES AND PROCESSES. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER EXAMINED THE MONTH-WISE QUANTITATIVE DETAILS OF RAW MATERIALS CONSUMED AND PRODUCTION OF VARIOUS PRODUC TS AND COMPARED THE SAME WITH THOSE IN THE RESPECTIVE MONTHS OF THE IMMEDIATELY PRECEDING ASSESSMENT YEAR OF 2006-07. THE ASSESSING OFFICER ALSO REQUIRED THE AS SESSEE TO PRODUCE DAY-TO-DAY ITEM WISE CONSUMPTION OF RAW MATERIAL AND PRODUCTION WITH THE CONSUMPTION OF ELECTRICITY, IN UNITS; LABOUR IN NUMBER ETC. 'IN RE SPONSE, ASSESSEE COMPANY EXPLAINED THAT IT WAS USING VARIOU S RAW MATERIALS FOR MANUFACTURING OF VARIETY OF CHEMICALS AND IT WAS EXPLAINED THAT, THE FINISHED PRODUCTS ARE MANUFACTURED, ACCORDING TO THE REQUIREMENTS OF THE USER INDUSTRY, WHICH MAY VARY FROM PRODUCT TO PRODUCT AN D BUYER TO BUYER AND, THEREFORE IT WAS NOT POSSIBLE T O GIVE THE BREAK-UP OF EACH ITEM}AN~ QUANTITY OF MATERIAL USED FOR THE SPECIFIC FINISHED PRODUCTS. THE ASSESSING O FFICER EXAMINED THE MONTH-WISE DETAILS OF THE RAW MATERIAL CONSUMPTION AND THE PRODUCTION AND NOTICED THAT THE RE WAS VARIATION IN THE PROPORTION OF CONSUMPTION AND PRODUCTION FROM MONTH TO MONTH.' ACCORDING TO THE ASSESSING OFFICER' THE PRODUCTION OF FINISHED GOODS WAS MORE THAN THE CONSUMPTION OF RAW MATERIAL IN FEW MO NTHS, WHEREAS, IN OTHER MONTHS, THE PRODUCTION WAS LESSER THAN THE RAW' MATERIALS CONSUMED. IN THE SAID BACKGROUND AND CONSIDERING THE ABSENCE OF ANY RECORD OF DAY-TO-DAY ITEM WISE CONSUMPTION/PRODUCTION, THE ASSESSING OFFICER PROCEEDED TO REJECT THE MANUFACTURING ACCOUNT RESUL TS DEPICTED IN THE ACCOUNT BOOKS BY INVOKING THE PROVI SIONS OF SECTION 145(3) OF THE ACT. ONCE THE BOOK RESULTS WE RE REJECTED, THE ASSESSING OFFICER ADOPTED PRODUCTION RATIO OF THE MONTH OF MARCH 2008, AND PROCEEDED TO COMPUTE T HE LIKELY QUANTITY OF FINISHED GOODS PRODUCED DURING T HE YEAR UNDER CONSIDERATION. THIS METHODOLOGY RESULTED IN A N EXTRA PRODUCTION OF 2,52,609 KG. WHICH WAS VALUED AT RS. 2,70,46,846/-. THE AFORESAID AMOUNT WAS ADDED TO TH E 'RETURNED INCOME ON THE GROUND THAT SUCH EXTRA PROD UCTION WOULD HAVE BEEN SOLD OUTSIDE THE BOOKS OF ACCOUNT. 5. IN THIS BACKGROUND, ASSESSEE CHALLENGED THE ORDE R OF THE ASSESSING OFFICER IN APPEAL BEFORE THE CIT(A). BEFO RE THE ITA NO.1639/MUM/2014 M/S KUSA CHEMICALS P. LTD. 5 CIT(A), ASSESSEE RELIED UPON THE STATUTORY QUANTITA TIVE RECORDS FOR RAW MATERIALS LAND FINISHED GOODS WHICH WERE MAINTAINED AND WERE AUDITED BY THE CENTRAL EXCISE AUTHORITIES IT WAS ASSERTED BY THE ASSESSEE THAT TH E ASSESSING OFFICER HAD PASSED THE ASSESSMENT ORDER M ERELY ON ASSUMPTIONS, GUESSWORK AND SURMISES BECAUSE THE ASSESSING OFFICER HAD NOT FOUND ANY DISCREPANCY' IN QUANTITATIVE RECORDS FURNISHED. THE VARIATION IN PR ODUCTION IN CERTAIN MONTHS VIS-A-VIS CONSUMPTION OF RAW MATE RIALS WAS EXPLAINED TO BE ON ACCOUNT A LARGE NUMBER OF FI NISHED GOODS BEING MANUFACTURED, WHICH REQUIRED DIFFERENT CONCENTRATION OF RAW MATERIALS. ASSESSEE ALSO EXPLA INED THAT IN COMPARISON TO THE IMMEDIATE PRECEDING .ASSESSMENT YEAR, THERE WAS NO INCREASE IN THE RATI O OF CONSUMPTION OF RAW MATERIAL TO THE SALES AND THAT T HERE WAS NO FALL IN THE GROSS PROFIT RATE. ON FACTS, IT WAS ASSERTED BY THE ASSESSEE THAT THE ASSESSING OFFICER HAD NOT FOUND ANY DEFECTS IN THE BOOKS OF ACCOUNT MAINTAINE D. THE CIT(A) ACCEPTED THE PLEA OF ASSESSEE AND HAS SET -A SIDE THE ACTION OF ASSESSING OFFICER OF REJECTING THE BO OKS OF ACCOUNT AND ACCORDINGLY HE DELETED THE ADDITION OF RS. 2,70,46,846/-. 6. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 7 BEFORE US, THE LD. DR APPEARING FOR THE REVENUE REITERATED THE REASONING ADVERTED TO BY THE ASSESSI NG OFFICER IN ORDER TO' SUPPORT THE CASE OF THE REVENU E. SUCH REASONING HAS ALREADY BEEN DETAILED BY US IN PARA 4 OF THIS ORDER AND IS NOT BEING REPEATED FOR THE SAKE OF BRE VITY. 8. ON THE OTHER HAND, THE LD. REPRESENTATIVE APPEAR ING FOR THE ASSESSEE, HAS RELIED UPON THE FINDINGS OF THE C IT(A) AND ALSO REFERRED TO THE EXPLANATION FURNISHED BEFO RE THE LOWER AUTHORITIES, COPIES OF WHICH HAVE BEEN PLACED IN THE PAPER BOOK FILED, IN ORDER TO SUBSTANTIATE THAT THE RE WAS NO JUSTIFICATION FOR' THE ASSESSING OFFICER TO HAVE RE JECTED THE BOOKS OF ACCOUNT U/S 145(3) OF THE ACT. 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. IN THE PRESENT CASE, THE CONTROVERSY REVOLVES AROUND T HE INVOKING OF SECTION 145(3) OF THE ACT BY THE ASSESS ING OFFICER IN' ORDER TO REJECT THE BOOKS OF ACCOUNT MA INTAINED ITA NO.1639/MUM/2014 M/S KUSA CHEMICALS P. LTD. 6 BY THE ASSESSEE. SECTION 145(3) OF THE ACT EMPOWERS THE ASSESSING OFFICER TO DISREGARD THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE IF HE IS NOT SATISFIED A BOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS MAINTAI NED BY THE ASSESSEE. IN THE PRESENT CASE, THE REASONS ADVA NCED BY THE ASSESSING OFFICER TO REJECT THE, BOOKS OF AC COUNT, IN OUR VIEW, DO NOT JUSTIFY AN INFERENCE THAT THE BOOK S OF ACCOUNT OF THE ASSESSEE WERE EITHER INCORRECT OR INCOMPLETE. 10. NOTABLY, THE FIRST REASON ADVANCED BY THE ASSES SING OFFICER WAS THAT THERE WAS A VARIATION IN PRODUCTIO N IN CERTAIN MONTHS VIS-A-VIS CONSUMPTION OF RAW MATERIA LS. IN OUR CONSIDERED OPINION, SUCH VARIATION CAN AT BEST BE AN INDICATION TO INVESTIGATE THE ISSUE FURTHER BUT SUC H A VARIATION BY ITSELF CANNOT BE CONCLUSIVE OF INCORRE CTNESS OF THE ACCOUNTS. MOREOVER, THE ASSESSEE COMPANY HAD EXPLAINED BEFORE THE ASSESSING OFFICER THE REASONS FOR SUCH VARIATION. SUCH EXPLANATION HAS ALSO BEEN NOTED BY THE CIT(A) IN PARA 3.1 OF HIS ORDER WHICH TO THE EFFECT THAT THE ASSESSEE COMPANY WAS UNDERTAKING MANUFACTURE OF VAR IOUS SPECIALTY CHEMICALS AND CONCENTRATION OF RAW MATERI ALS WAS DECIDED KEEPING IN MIND THE SPECIFIC REQUIREMENTS O F EACH OF THE USER INDUSTRY. ON THIS ASPECT, ASSESSEE ALSO EXPLAINED THAT IN COMPARISON TO THE IMMEDIATE PRECE DING ASSESSMENT YEAR, THERE WAS NO INCREASE IN THE RATIO OF CONSUMPTION OF RAW MATERIALS TO SALES RATIO AND THE RE WAS NO FALL IN THE GP RATE ALSO. SECONDLY, IT IS NOTED FROM THE ASSESSMENT ORDER THAT THE ASSESSING OFFICER HAS AL SO REFERRED TO A FALL IN THE NET PROFIT IN THE CURRENT YEAR VIS-A- VIS THE IMMEDIATE PRECEDING ASSESSMENT YEAR. ON THI S ASPECT ALSO, ASSESSEE HAD EXPLAINED BEFORE THE ASSE SSING OFFICER VIDE COMMUNICATION DATED 7.9.2010, A COPY. OF WHICH IS PLACED IN THE PAPER BOOK AT PAGE 27 TO28, THAT DUE TO ABNORMAL INCREASE IN OVERHEAD EXPENSES WITH RESPECT TO, DEPRECIATION, INTEREST AND LOAN ETC, TH E NET PROFIT HAS DECLINED VIS-A-VIS THE PRECEDING YEAR, T HOUGH THERE WAS NO DECLINE IN THE GROSS PROFIT RATIO. AT PAGE '54 OF THE PAPER BOOK IS PLACED A TABULATION OF THE GP RATIO AND THE NP RATIO FOR FOUR ASSESSMENT YEARS WHICH SHOWS THAT THE GP RATIO IN THE INSTANT YEAR STANDS AT 15.19% V IS-A-VIS 13.20% IN THE IMMEDIATE PRECEDING YEAR. SIMILARLY, THE NET PROFIT RATIO IN THE CURRENT YEAR IS 2.30% AS AGAINS T 6.24% IN THE IMMEDIATE PRECEDING YEAR. WITH REGARD TO DEC LINE IN NP RATIO, ASSESSEE HAD EXPLAINED BEFORE THE ASSESSI NG ITA NO.1639/MUM/2014 M/S KUSA CHEMICALS P. LTD. 7 OFFICER THAT DURING THE YEAR ASSESSEE HAD UNDERTAKE N A JOB WORK TO MANUFACTURE PAINTS IN THE MONTHS OF MAY 200 7 TO DECEMBER 2007 BUT SUCH A PROJECT WAS ABANDONED, WHI CH RESULTED IN HEAVY OVERHEAD EXPENSES. IT WAS FOR THI S REASON THE NET PROFIT FOR THE YEAR UNDER CONSIDERAT ION WAS LOW IN COMPARISON TO THE IMMEDIATE PRECEDING YEAR, THOUGH' THERE WAS NO DECLINE IN THE GROSS PROFIT RA TIO. THE AFORESAID EXPLANATION RENDERED BY ASSESSEE HAS BEEN GLOSSED OVER BY THE ASSESSING OFFICER WITHOUT FINDI NG ANY FAULT IN IT. NOTABLY, ASSESSEE HAD REFERRED TO STAT UTORY RECORDS MAINTAINED INCLUDING THE STOCK REGISTERS ET C, PRESCRIBED UNDER THE EXCISE LAWS AND SUCH MATERIAL HAS NOT BEEN COMMENTED ADVERSELY BY THE ASSESSING OFFICER. THE VARIATION IN THE MONTH-WISE FIGURES OF CONSUMPTION OF. RAW MATERIALS,' VIS-A-VIS THE FINISHED PRODUCTS HAS BEE N PROPERLY EXPLAINED BY THE' ASSESSEE. THE ASSESSING OFFICER MERELY DISBELIEVED THE VERSION OF THE ASSESSEE WITH OUT FINDING ANY FAULT' THEREIN. IN NUTSHELL, IN OUR VIE W, THE ASSESSING OFFICER MERELY PROCEEDED ON SURMISES AND CONJECTURES IN REJECTING THE BOOKS OF ACCOUNT, WHIC H IS INCONSISTENT WITH THE REQUIREMENT OF SECTION. 145(3 ) OF THE ACT. AS A CONSEQUENCE, WE FIND NO ERROR ON THE PART OF THE C'IT(A) IN SETTING-ASIDE THE ACTION OF THE ASSESSIN G OFFICER OF INVOKING THE PROVISIONS OF SECTION 145(3) OF THE ACT. THE 'CIT(A) HAS, THEREFORE, CORRECTLY' DELETED THE ADDI TION OF RS. 2,70,46,846/, WHICH WE HEREBY AFFIRM. THUS, THE APPEAL OF THE REVENUE IS DISMISSED. 2.2. IF THE AFORESAID ORDER IS ANALYZED, WE FIND TH AT ON IDENTICAL ISSUE IN A.Y.2008-09, AN ELABORATE DISCUS SION HAS BEEN MADE BY THE TRIBUNAL AND AFTER CONSIDERING THE FACTUAL MATRIX, IT WAS CONCLUDED THAT FOR INVOKING THE PROVISION OF SECTION 145(3) OF THE ACT TO REJECT TH E BOOKS OF ACCOUNTS, BY THE ASSESSING OFFICER, IT CAN BE DONE ONLY WHEN, THE ASSESSING OFFICER IS NOT SATISFIED WITH R ESPECT TO THE CORRECTNESS OF COMPLETENESS OF THE ACCOUNTS MAI NTAINED BY THE ASSESSEE. WE FIND THAT THE ASSESSEE DULY EXP LAINED THE ALLEGED VARIATIONS WITH RESPECT TO MONTH-WISE ITA NO.1639/MUM/2014 M/S KUSA CHEMICALS P. LTD. 8 CONSUMPTION OF RAW MATERIAL VIS--VIS FINISHED PROD UCTS AND THE SAME WERE DISBELIEVED BY THE ASSESSING OFFI CER WITHOUT FINDING ANY FAULT THEREIN. THE REJECTION O F BOOKS OF ACCOUNTS BY THE ASSESSING OFFICER IS INCONSISTENT W ITH THE REQUIREMENT OF SECTION 145(3) OF THE ACT, THEREBY, WE AFFIRM THE STAND OF THE LD. COMMISSIONER OF INCOME TAX (AP PEALS) IN DELETING THE IMPUGNED ADDITION, THUS, ON THIS GR OUND, THE APPEAL OF THE REVENUE IS WITHOUT ANY MERIT, CONSEQUENTLY, DISMISSED. FINALLY, THE APPEAL OF THE REVENUE, ON THIS ISSUE, IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 21/03/2016. SD/- SD/- (RAJENDRA) (JOGINDER SINGH) '# / ACCOUNTANT MEMBER $# / JUDICIAL MEMBER MUMBAI; # DATED : 21/03/2016 F{X~{T? P.S/. . . %$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. %& '( / THE APPELLANT (RESPECTIVE ASSESSEE) 2. )*'( / THE RESPONDENT. 3. + + , ( %& ) / THE CIT, MUMBAI. 4. + + , / CIT(A)- , MUMBAI, ITA NO.1639/MUM/2014 M/S KUSA CHEMICALS P. LTD. 9 5. /01 )2 , + %& %23 , / DR, ITAT, MUMBAI 6. 14 5 / GUARD FILE. / BY ORDER, */& ) //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI