The DCIT, Circle-1(1), Baroda V. Base metal Chlorinations Pvt.Ltd., Baroda

ITA 1822/AHD/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73134 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 04-03-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 28-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D C MISHRA
• Assessee Lawyers: M K PATEL
• Keywords: Gross profit estimation; Onus to prove
• Section: 145; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH BEFORE: SRI D.K TYAGI, JUDICIAL MEMBER AND SHRI ANIL CHATURVEDI, ACCOUNTAN T MEMBER THE DCIT, CIR. 1(1), BARODA (APPELLANT) VS BASE METAL CHLRORINATIONS PVT. LTD, 101, SYNERGY HOUSE II, GORWA- SUBHANPURA, BARODA. PAN: AAACB 7628 L (RESPONDENT) REVENUE BY: SRI D.C. MISHRA, SR.D.R. ASSESSEE BY: SRI M.K. PATEL, A.R. DATE OF HEARING : 04-03-2014 DATE OF PRONOUNCEMENT : 21-03-20 14 / ORDER PER : D.K. TYAGI, JUDICIAL MEMBER:- THIS IS THE REVENUES APPEAL AGAINST THE ORDER OF LD. CIT(A)-I BARODA DATED 18-02-2010. ITA NO. 1822/AHD/2010 ASSESSMENT YEAR 2005-06 I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 2 2. REVENUE HAS TAKEN FOLLOWING GROUNDS OF APPEAL:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(APPEALS) ERRED IN DELETING THE ADDITION OF R S. 23 , 95,470/- MADE U/S.40A(2)(B) OF THE ACT ON ACCOUNT OF PAYMENT S TO M/S. SYNERGY OVERSEALS LTD. (SOL) AS THE ASSESSEE HAD FAILED TO DISCHARGE THEIR ONUS TO PROVE THE REASONABLENESS OF THE EXPENDITURE INCURRED. FURTHER, THE LD.CIT(APPEALS) OUGHT TO HAVE REMANDED THE ASSESSING OFFICER THE SUBMISSION OF THE ASSESSEE WHICH WAS NO T SUBMITTED BEFORE THE, ASSESSING OFFICER FOR HIS REPORT UNDER THE PRO VISIONS OF SECTION 46A OF THE INCOME-TAX RULES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LD. CIT(APPEALS) ERRED IN DELETING THE ADDITION OF RS. 66,87,215/- MADE ON ACCOUNT OF LOW G.P. AS THE ASSESSEE HAD FAI LED TO EXPLAIN THE REASONS FOR THE LOW G.P. DURING YEAR. FURTHER, THE LD.CIT (APPEALS) OUGHT TO HAVE REMANDED THE ASSESSING OFFICER THE SU BMISSION OF THE ASSESSEE WHICH WAS NOT SUBMITTED BEFORE THE ASSESSI NG OFFICER FOR HIS REPORT UNDER THE PROVISIONS OF SECTION 46A OF THE I NCOME-TAX RULES. 3. GROUND NO. 1 RELATES TO DISALLOWANCE OF RS. 23,9 5,470/- U/S. 40(A)(2)(B) OF THE ACT. 4. BRIEF FACTS OF THE CASE ARE THAT AO NOTED THAT T HE ASSESSEE WAS A MANUFACTURING OF ALUMINIUM CHLORIDE. FROM FORM 3CD , ANNEXURE D, IT WAS SEEN THAT PAYMENTS OF RS. 2,39,54,709/- WERE MADE T O SYNERGY OVERSEAS LTD. (SOL) TOWARDS PURCHASE OF ALUMINIUM CHLORIDE. IT WAS FOUND THAT SOL WAS A PERSON SPECIFIED U/S. 40A(2)(B). SINCE THE A SSESSEE WAS A MANUFACTURER OF ALUMINIUM CHLORIDE, THE AO SAW NO R EASONS FOR THE ASSESSEE TO PURCHASE SAME PRODUCT FROM ITS SISTER CONCERN. ACCORDINGLY 10% OF THE SALE PRICE I.E. RS. 23,95,470/- WAS HELD TO BE EXCE SSIVE AND UNREASONABLE AND THEREFORE DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE BY AO. I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 3 5. BEFORE LD. CIT(A) ASSESSEES SUBMISSION WAS AS U NDER:- 'THE LEARNED AO HAS MADE AN ADDITION OF RS.23,94,47 0/- U/S, 40A(2)(B) OF THE ACT BY HOLDING THAT THE COMPANY HA S MADE EXCESSIVE PAYMENT TO M/S. SYNERGY OVERSEAS LTD., HE HAS ESTIM ATED 10% OF THE TOTAL PAYMENT MADE TO M/S. SYNERGY OVERSEAS LTD., A S UNREASONABLE PROFIT. 22 IF IS SUBMITTED THAT THE ACCOUNTANT OF THE COMPA NY AT THAT TIME WAS ONE MR.SANJAY TRIVEDI WHO LEFT THE JOB HALFWAY AND MIGRATED TO THE UNITED KINGDOM. THE DETAILS COULD NOT BE COMPILED B Y THE NEW INCUMBENT SHRI MISHRA WHO WAS A RETIRED PERSON FROM KOLKATA AND DID NOT KNOW MUCH ABOUT THE TRANSACTION BETWEEN THE INTER RELATED COMPANIES. THIS WAS PARTICULARLY BECAUSE HE WAS APP OINTED ONLY TO LOOK AFTER THE MATTER OF BASE METAL CHEMICALS AND B ASE METAL CHLORINATIONS PVT LTD., AND THE MATTERS OF M/S. SYN ERGY OVERSEAS LTD., WERE LOOKED AFTER BY OTHER ACCOUNTANTS. IT WAS DUE TO NON-CAPABILITY OF THIS SENIOR PERSON TO COMPILE THE DATA, THE NECE SSARY DATA COULD NOT BE FURNISHED TO THE AO IN THE FORMAT AS REQUIRED BY HIM. HOWEVER, ALL THE INFORMATION WHICH WAS REQUIRED BY THE LEARNED A O WAS GIVEN TO HIM, ALBEIT IN A DIFFERENT FORMAT. 2.3 WE ENCLOSE HEREWITH A CHART (EXTRACT OF THE TR ADING PURCHASE REGISTER) WHICH WAS FURNISHED TO THE LEARNED AO TO SHOW THE TOTAL PURCHASES OF THE ITEMS SOLD BY M/S SYNERGY OVERSEAS LTD. (SOL), TO M/S. BASE METAL CHLORINATIONS PVT. LTD. (BMCPL), WH O IN TURN HAVE SOLD THEM TO M/S. LUNA INDUSTRIES LTD. AT THE SAME TIME THE APPELLANT HAS FALSO MADE DIRECT PURCHASES FROM GACL. IN THE C HART ENCLOSED, PURCHASES MADE WITHIN DAYS OF EACH OTHER FROM GCL A ND SOL ARE HIGHLIGHTED. ILLUSTRATIONS ORE AS UNDER: DATE RATE OF PURCHASE QUANTITY PURCHASE FROM DI FFERENCE RS./KG KG. RS./KG 18/01/2005 36.90 10000 GACL 19/01/2005 37.75 10000 SOL .85 18-02-2005 35.69 10000 GACL 19/02/2005 37.16 10000 SOL 1.46 04/03/2005 35.08 10000 GACL 05/03/2005 35.10 10000 SOL 0.02 I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 4 05/03/2005 35.08 10000 GACL 07/03/2005 36.54 10000 SOL 1.46 24/03/2005 35.08 10000 GACL 28/03/2005 36.54 10000 SOL 1.46 2.4 YOUR HONOUR WILL APPRECIATE THAT THE MAXIMUM D IFFERENCE IN THE PRICES CHARGED BY GACL AND SOL DOES NOT EXCEED 4%. DURING THE COURSE OF THE ASSESSMENT, VIDE THE APPELLANT'S LETT ER DATED 11/12/2007 IT WAS EXPLAINED THAT SOL HAS GRANTED LONG CREDIT T ERMS TO THE APPELLANT OF OVER 200 DAYS. A COPY OF THE LEDGER AC COUNT OF SOL IN THE HOOKS OF THE APPELLANT WAS FURNISHED WHICH SHOWS TH AT THE OPENING BALANCE OF SOL WAS A CREDIT OF 71.36 LAKHS WHICH WE NT TO 173.25 LAKHS AT THE END OF THE YEAR, AN INCREASE OF ALMOST ONE CRORE RUPEES. A STUDY OF THE ACCOUNT WILL SHOW THAT THE AMOUNT DU E AT THE BEGINNING OF THE YEAR WAS PAID IN SMALL AMOUNTS BY THE END OF SEPTEMBER. BUT IN THE SAME PERIOD PURCHASES OF RS. 1.10 CRORES WERE M ADE. OUT OF THIS BY THE END OF THE YEAR ABOUT RS. 80 LAKHS WERE PAID WHILE IN THE LAST SIX MONTHS PURCHASES OF RS. 1.44 CRORES WERE MADE W HICH WERE UNPAID TILL THE END OF THE YEAR TOGETHER WITH THE U NPAID BALANCES AS AT 30 TH SEPTEMBER. EVEN IF SIMPLE INTEREST IS CALCULATED A T 12.25% (THE RATE AT WHICH THE APPELLANT PAID INTEREST TO ITS RA NKERS ON THE CASH CREDIT FACILITY), THE SAME WOULD WORK OUT TO ALMOST RS. 15 LAKHS. THE MARGINAL VARIATION IN PRICES PAID TO SOL IS THEREFO RE JUSTIFIABLE. 2.5 IT WILL NOT BE OUT OF PLACE TO STATE HERE THAT 616.415 TONS OF ALUMINIUM CHLORIDE WAS SOLD BY M/S. SYNERGY OVERSEA S LTD., TO M/S. BASE METAL CHHRINATIONS PVT. LTD. FOR RS.2,39,54,79 9. OUT OF THIS, 604 TON MATERIAL WERE SOLD BY M/S. BASE METAL CHLORINAT IONS PVT. LTD., TO M/S. LONA INDUSTRIES LTD., FOR RS.2,41.08,960 MAKIN G A PROFIT OF RS. 1,54,252. THE AVERAGE PRICE FOR THE WHOLE YEAR OF MATERIAL PU RCHASED FROM M/S. SYNERGY OVERSEAS LID., IS RS 38.86 PER KG. WHICH IN TURN HAS BEEN SOLD TO M/S. LUNA INDUSTRIES LTD., AT RS.39.92 PER KG. 2.6 IT WILL NOT BE OUT OF PLACE TO STATE HERE THAT A SIMILAR QUESTION AROSE IN ASSESSMENT YEAR 2007-08 AND BASED ON THE I NFORMATION SIMILAR TO THAT BEING FURNISHED HEREWITH THE A.O. H AS ACCEPTED THE FACT THAT THERE IS NO UNREASONABLENESS IN THE PAYMENT MA DE BY M/S. BASE METAL CHLORINATIONS PVT. LTD., TO M/S. SYNERGY OVER SEERS LTD, AND NO ADDITION HAS BEEN MADE ON THAT ACCOUNT. COPY OF THE ASSESSMENT ORDER I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 5 FOR ASSESSMENT YEAR 2007-08 IS ENCLOSED FOR YOUR HO NOUR'S READY REFERENCE. 2.7 IT IS RESPECTFULLY SUBMITTED THAT PAYMENTS MAD E BY THE APPELLANT COMPANY TO SYNERGY OVERSEAS LIMITED IS REASONABLE A ND DISALLOWANCE MADE OF 23,95,470/- U/S 40A(2)(B) BE KINDLY BE DIRE CTED TO BE DELETED.' 6. AFTER TAKING INTO CONSIDERATION THE ABOVE SUBMIS SION OF THE ASSESSEE LD. CIT(A) DELETED THIS BY OBSERVING AS UNDER:- 4.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE LD. AR AND THE FACTS OF THE CASE. FROM THE TABLE FURNISHED BY THE LD. AR IT IS SEEN THAT THE ASSESSEE HAD MADE PURCHASE FROM SOL AS WELL AS GACL A PUBLIC SECTOR COMPANY MANUFACTURING THE SAME PRODUCTS. THE ASSESSEE OBTAINED ORDERS FOR SUPPLY OF ALUMINIUM CHLORIDE WH ICH WERE IN EXCESS OF ITS CAPACITY TO PRODUCE IN ITS OWN PLANT. HENCE IN ORDER TO FULFILL ITS SALES OBLIGATION, IT HAD TO RESORT TO P URCHASES FROM THE MARKET. THE ENTIRE PURCHASES COULD NOT BE MADE FROM GACL SINCE IT WAS THE MAIN COMPETITOR OF THE ASSESSEE. THEREFORE CERTAIN PURCHASES HAD TO BE ROUTED THROUGH ITS SISTER CONCERN, SOL. 4.3 FURTHER, IT IS SEEN THAT SOL HAD ALLOWED CREDI T TO THE ASSESSEE AMOUNTING TO RS. 173.25 LAKHS. THIS WAS A VALUABLE CONSIDERATION. AS MENTIONED BY THE LD. AR, HAD THE SAME BEEN OBTAINED FROM BANK, THE INTEREST EXPENSES INCURRED WOULD HAVE BEEN MINIMUM RS. 15 LAKHS. HENCE IT IS HELD THAT THERE WAS NO ELEMENT OF UNREA SONABLENESS IN THE PURCHASES MADE FROM THE SISTER CONCERN NOR COULD TH E PAYMENTS BE SAID TO BE EXCESSIVE. THE TRANSACTIONS WERE MOTIVAT ED BY COMMERCIAL CONSIDERATIONS. ACCORDINGLY, THE DISALLOWANCE OF R S. 23,95,470/- IS DIRECTED TO BE DELETED. 7. AGGRIEVED BY THIS ORDER, NOW REVENUE IS IN APPEA L BEFORE US. 8. AT THE TIME OF HEARING LD. DR SUBMITTED THAT BEF ORE AO NO EXPLANATION WHATSOEVER WAS GIVEN BY THE ASSESSEE WH EN QUERY IN RESPECT OF PURCHASES FROM SISTER CONCERN WERE RAISED BY THE AO , THEREFORE LD. CIT(A) I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 6 BEFORE GIVING RELIEF TO THE ASSESSEE SHOULD HAVE TA KEN COMMENTS OF THE AO ON THE SUBMISSIONS OF THE ASSESSEE. CONCLUDING HIS ARGUMENT HE SUBMITTED THAT MATTER WHICH MAY KINDLY BE RESTORED BACK TO TH E FILE OF AO. LEARNED COUNSEL OF THE ASSESSEE ON THE OTHER HAND REFUTED T HIS SUBMISSION OF THE LD. DR BY SHOWING US THAT ASSESSEE DID REPLY TO THE QUE RY RAISED BY THE AO AND ON THE BASIS OF SAME SUBMISSIONS CASE WAS PRESENTED BEFORE LD. CIT(A). THERE WAS NOTHING NEW WHICH WAS SUBMITTED BEFORE TH E LD. CIT(A). NO VIOLATION OF RULE 46A IS THERE IN THIS CASE. HE PL ACED RELIANCE ON THE SUBMISSIONS BEFORE LD. CIT(A) AND THE ORDER OF LD. CIT(A). 9. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE FIND NO MERIT IN THE ARGUMENT ADVANCED BY LD. AR THAT THERE WAS VIOLATION OF RULE 46A. WE FURTHER FIND THAT LD. CIT(A) HAS GIVEN REL IEF TO THE ASSESSEE BY GIVING A CATEGORICAL FINDING THAT ASSESSEE OBTAINED ORDERS OF SUPPLY OF ALUMINIUM CHROLRIDE WHICH WERE IN EXCESS OF ITS CAP ACITY TO PRODUCE IN ITS OWN PLANT AND THEREFORE HE HAD TO MAKE CERTAIN PURC HASES THROUGH SISTER CONCERN. THE LD. CIT(A) ALSO CONSIDERED THE FACT T HAT SISTER CONCERN HAD ALLOWED CREDIT TO THE ASSESSEE AMOUNTING TO RS. 173 .25 LAKHS WHICH WAS VALUABLE CONSIDERATION AND HAS RESULTED IN REDUCIN G ITS INTEREST LIABILITY TO THE BANK, HAD THIS AMOUNT WAS TAKEN AS LOAN FROM TH E BANK. DURING THE APPELLATE PROCEEDINGS ASSESSEE WAS ASKED WHETHER IN PREVIOUS YEAR AND SUBSEQUENT YEARS ALSO ASSESSEE WAS MAKING PURCHASES FROM ITS SISTER CONCERN AND WHETHER SIMILAR ADDITION HAS BEEN MADE IN THOSE YEARS. THE REPLY OF THE ASSESSEE BEING THAT ASSESSEE HAS MADE PURCHASES IN EARLIER AND SUBSEQUENT YEARS AND NO ADDITION BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) WAS EVER MADE, WE ARE NOT INCLINED TO INTERFERE WITH TH E ORDER PASSED BY LD. CIT(A) AND THE SAME IS HEREBY UPHELD. THIS GROUND OF REVENUE IS DISMISSED. I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 7 10. 2 ND GROUND RELATES TO ADDITION OF RS. 66,87, 215/- MAD E ON ACCOUNT OF LOW GP. 11. DURING THE ASSESSMENT PROCEEDINGS AO FOUND THAT THERE WAS DECLINE IN GROSS GP RATE. THE ASSESSEE WAS ASKED TO EXPLAI N THE REASON FOR SUCH FALL. THE EXPLANATION OF THE ASSESSEE WAS THAT THE COMPAN Y HAS TWO LINES OF BUSINESS I.E. MANUFACTURING ACTIVITIES AND TRADING ACTIVITIES. THE APPARENT FALL IN GP WAS ON ACCOUNT OF PRESENTATION DIFFERENC E. IN THE EARLIER YEARS THE ASSESSEE HAD EXCLUDED DIRECTORS THE REMUNERATION A ND OFFICE STAFF EXPENSES FROM THE CALCULATION OF GP WHEREAS IN THE CURRENT Y EAR SUCH EXPENSES WERE INCLUDED. THIS RESULTED IN FALL IN GP. IF THE SAI D EXPENSES WERE EXCLUDED FROM THE CALCULATION IN ORDER TO MAKE COMPARABLE IT CAN BE SEEN THAT THERE WAS IN FACT RISE IN GP. SIMILARLY IF THE ACCOUNTS WERE RECAST BY INCLUDING THESE EXPENSES FOR BOTH THE YEARS THEN THE CURRENT YEARS RATE WOULD BE HIGHER THAN IN THE EARLIER YEAR. THIS EXPLANATION WAS NOT ACCEPTABLE TO THE AO AND BOOK RESULT SHOWN BY THE ASSESSEE-COMPANY WA S REJECTED INVOKING THE PROVISIONS OF SECTION 145A OF THE ACT AND GP WA S WORKED OUT AT 18.5% OF THE EARLIER YEAR AS COMPARED TO 8.5% OF THE CURR ENT YEAR. THE ADDITIONAL GP (10.5%) WAS WORKED OUT AT RS. 66,87,215/- AND AD DED BACK TO THE TOTAL INCOME OF THE ASSESSEE BY INVOKING THE PROVISIONS 1 45A OF THE ACT. 12. BEFORE LD. CIT(A) ASSESSEE REITERATED THE SUBMI SSIONS MADE BEFORE AO AND SUBMITTED THAT AO ERRED IN COMPUTING THE PRE CEDING YEARS AND CURRENT YEARS GP RATE AT 18.56% AND 8.51% RESPECTI VELY. AO ERRONEOUSLY CONSIDERED THE COMBINED TURN-OVER OF DIFFERENT PROD UCTS IN BOTH THE YEARS WHILE WORKING OUT THE GP RATE WHICH WAS NOT CORRECT , SINCE THE ASSESSEE HAD I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 8 SALES OF DIFFERENT PRODUCT-MIX IN THE TWO YEARS. H ENCE COMPARISON WAS NOT VALID. 13. AFTER TAKING INTO CONSIDERATION THE SUBMISSION OF THE ASSESSEE LD. CIT(A) HELD THAT AO WAS NOT JUSTIFIED IN THIS CASE TO REJECT THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE BY INVOKING THE PROVISIONS OF SECTION 145 AS NO SPECIFIC DEFECT AS SUCH WAS POINTED OUT I N THE BOOKS OF ACCOUNT MAINTAINED BY ASSESSEE AND DELETED THIS ADDITION BY OBSERVING AS UNDER:-. 5. GROUND NO. 3 CHALLENGES THE REDUCTION OF BOOK RESULTS AND ESTIMATION OF PROFIT @ 10.05 %, RESULTING IN ADDITI ON OF RS. 66,87,215/- TO THE TOTAL INCOME. THE AO FOUND DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS THAT THERE WAS DECLINE IN TH E GROSS PROFIT RATIO. THE ASSESSEE WAS ASKED TO EXPLAIN THE REASON FOR SUCH FALL. IT WAS EXPLAINED BY THE ASSESSEE THAT THE COMPANY HAS TWO LINES OF BUSINESS, I.E. MANUFACTURING ACTIVITIES AND TRADING ACTIVITIES. THE APPARENT FALL IN GP RATE WAS ON ACCOUNT OF PRESENTA TION DIFFERENCE ONLY. IN THE EARLIER YEAR, THE ASSESSEE HAD EXCLUDE D DIRECTOR'S REMUNERATION AND OFFICE STAFF EXPENSES FROM THE CAL CULATION OF GP, WHEREAS IN THE CURRENT YEAR SUCH EXPENSES WERE INCL UDED. THIS RESULTED IN AN OSTENSIBLE FALL IN GP. IF THE SAID E XPENSES WERE EXCLUDED FROM THE CALCULATION IN ORDER TO MAKE IT COMPARABLE , IT COULD BE SEEN THAT THERE WAS IN FACT RISE IN GP. SIMILARLY, IF TH E ACCOUNTS WERE RECAST BY INCLUDING THE SAID EXPENSES FOR BOTH THE YEARS E VEN THEN THE CURRENT YEAR'S GP RATE WOULD BE FOUND TO BE HIGHER THAT IN THE EARLIER YEAR. THIS EXPLANATION WAS NOT ACCEPTED BY THE AO AND GP WAS WORKED OUT AT 18.56% OF THE EARLIER YEAR AS COMPARED TO 8.51% OF THE CURRENT YEAR. THE ADDITIONAL GP (10.05%) WAS WORKED OUT AT RS. 66,87,215/- AND ADDED BACK TO THE TOTAL INCOME. 5.1 IN APPEAL, THE ARGUMENTS TAKEN AT THE ASSESSME NT STAGE WERE REITERATED. THE DETAILED WORKING IN THIS REGARD WAS FILED. IT WAS STATED THAT THE AO ERRED IN COMPUTING THE PRECEDING YEAR'S AND CURRENT YEAR'S GP RATE AT 18.56% AND 8.51% RESPECTIVELY. TH E AO ERRONEOUSLY CONSIDERED THE COMBINED TURNOVER OF DIF FERENT PRODUCTS IN BOTH THE YEARS WHILE WORKING OUT THE GP RATE. THIS WAS NOT CORRECT SINCE THE ASSESSEE HAD SALES OF DIFFERENT PRODUCT-M IX IN THE TWO YEARS. HENCE THE COMPARISON WAS NOT VALID. I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 9 5.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE LD , AR AND THE FACTS OF THE CASE. THE ADDITION HAS BEEN MADE BY REJECTING THE B OOK RESULTS U/S 145. SECTION 145 PRESCRIBES THAT THE INCOME CHARGEA BLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION SHALL BE COMPUTED IN ACCORDANCE WITH THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. WHERE THE A.O IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OR METHOD OF ACCOUNTIN G WHICH HAS BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THE A.O MAY MAK E AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144. SECTION 144 PERMITS THE A.O IN THE SPECIFIED CIRCUMSTANCES TO COMPUTE THE INCOME T O THE BEST OF HIS JUDGMENT AFTER TAKING INTO ACCOUNT ALL RELEVANT MAT ERIAL WHICH HAS BEEN GATHERED. THEREFORE, IN ORDER TO HAVE RECOURSE TO THE PROVISIONS OF SECTION 145 ONE HAS TO DEMONSTRATE THE FOLLOWING : (I) THE SYSTEM OF ACCOUNTING REGULARLY FOLLOWE D BY THE ASSESSEE HAS BEEN DEPARTED FROM, OR (II) THE ACCOUNTING STANDARDS NOTIFIED BY THE CENTRAL GOVERNMENT HAVE NOT BEEN FOLLOWED, OR (III) THE ACCOUNTS OF THE ASSESSEE ARE EITHER IN CORRECT OR INCOMPLETE 5.3 THE CIRCUMSTANCES UNDER WHICH THE BOOKS OF ACCO UNTS MAY BE REJECTED U/S 145 HAVE BEEN EXAMINED IN NUMEROUS DEC ISIONS OF THE COURTS. THE SUPREME COURT HAS LAID DOWN THE PRINCIP LE IN THIS REGARD IN CIT V. MCMILLAN & CO. 33 ITR 182. IN THAT CASE, IT WAS LAID DOWN THAT SECTION 145 CAN BE INVOKED ONLY IF AND WHERE T HE ELEMENTS ATTRACTING THE PROVISIONS ARE FOUND TO EXIST, AND A CLEAR FINDING TO THAT EFFECT ALONG WITH THE MATERIALS ON WHICH SUCH FINDI NGS ARE BASED HAS TO BE STATED BY THE A.O. NO ASSESSMENT U/S 145 CAN BE SUSTAINED IF THE A.O HAS NOT CONSIDERED AND RECORDED A FINDING AGAIN ST THE ASSESSEE AS TO WHETHER HE HAS BEEN REGULARLY EMPLOYING THE METH OD OF ACCOUNTING OR WHETHER HIS INCOME, PROFITS OR GAINS CAN BE PROP ERLY DEDUCED FROM THIS METHOD OF ACCOUNTING OR WHETHER THE ACCOUNTS A RE ACCURATE AND COMPLETE. THE A.O'S DECISION ON THESE MATTERS IS NO T TO BE A SUBJECTIVE OR ARBITRARY DECISION BUT A JUDICIAL DECISION AND C ANNOT BE ACCEPTED IF THERE IS NO MATERIAL TO SUPPORT HIS FINDING. IN VAR IOUS OTHER CASES, IT HAS BEEN LAID DOWN THAT IN THE ABSENCE OF A FINDING THAT THE CASE FELL WITHIN SECTION 145, IT WAS NOT POSSIBLE TO SUSTAIN REJECTION OF BOOK RESULTS AND ADDITION TO THE GROSS PROFIT. THE MERE FACT THAT THE PROFITS WERE LOW IS NOT A CIRCUMSTANCE OR A MATERIAL WHICH COULD JUSTIFY AN ESTIMATE [EG.. PANDIT BROTHERS V. CIT 86 ITR 159 (P UNJAB)]. IN LAXMI STORES V. CST, 43 STC 167 ALLAHABAD HIGH COURT HELD THAT LOW PROFIT I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 10 WITHOUT ANY DEFECT BEING FOUND IS NOT A SUFFICIENT GROUND FOR REJECTION OF BOOKS. IT HAS ALSO BEEN HELD THAT THE SYSTEM OF ACCOUNTING ADOPTED BY THE ASSESSEE CANNOT BE REJECTED MERELY ON THE GR OUND THAT THE GROSS PROFIT DISCLOSED IN ITS BOOKS COMPARED UNFAVOURABLY WITH THOSE OF OTHERS IN THE SAME LINE OF BUSINESS OR WITH THE PRO FITS OF ASSESSEE'S OWN BUSINESS IN THE EARLIER YEARS [RNP PERIANNA PIL IAL & CO. V. CIT, 42 ITR 370 (MAD)]. THE COURTS HAVE CONSISTENTLY HEL D THAT THERE IS A STRONG PRESUMPTION IN FAVOUR OF THE CORRECTNESS OF THE BOOKS MAINTAINED REGULARLY BY THE ASSESSEE. IT HAS BEEN C LEARLY LAID DOWN THAT IT IS FOR THE ASSESSING AUTHORITY TO PROVE THA T THE ACCOUNT BOOKS WERE UNRELIABLE, INCORRECT OR INCOMPLETE BEFORE IT COULD REJECT THE ACCOUNTS. THE UNRELIABILITY, INCORRECTNESS AND INCO MPLETENESS COULD BE SHOWN BY DEMONSTRATING, FOR EXAMPLE, THAT STOCK BOOK WAS NOT PROPERLY MAINTAINED, ENTRIES IN THE BOOKS WERE NOT SUPPORTED BY DOCUMENTARY EVIDENCE, CERTAIN TRANSACTIONS WERE NOT RECORDED IN THE BOOKS, ETC. THE AHMEDABAD BENCH OF THE ITAT IN PUSH PANJALI DYEING & PRINTING MILLS (P)LTD V. JCIT 72 TJ 886, HAS HELD THAT MERE LOW YIELD DOES NOT WARRANT AN ADDITION IN THE TRADING A CCOUNT, PARTICULARLY WHERE THE ASSESSEES BOOKS WERE AUDITED U/S 44AB UN DER THE IT.ACT AS WELL AS UNDER THE COMPANIES ACT, AND NO ADVERSE OBS ERVATION HAS BEEN MADE BY THE AUDITORS, AND WHERE THE REVENUE FA ILED TO POINT OUT ANY SPECIFIC DEFECT IN THE BOOKS OF ACCOUNTS. 5.4 EVEN OTHERWISE, ON RECASTING THE ACCOUNTS BY MAKING SIMILAR COMPARISON, IT IS SEEN THAT THE FOLLOWING POSITION EMERGES:- A. MANUFACTURING ACTIVITIES:- AY 2005-06 AY 2004- 05 REMARKS GP RATE (EXCLUDING DIRECTORS REMUNERATION & OFFICE STAFF EXPENSES) 17.18% 13.72% INCREASE IN GP DURING THE YEAR GP RATE (INCLUDING DIRECT ORS REMUNERATION & OFFICE STAFF EXPENSES) 12.85% 9.85% INCREASE IN GP DURING THE YEAR B. TRADING ACTIVITIES:- I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 11 GP RAT E OF ALUMINIUM CHLORIDE 8.74% 9.32 % MARGINAL DECLINE IN GP GP RATE OF OTHER ITEMS 7.94% 13.49 % DIFFERENCE OF PRODUCT MIX 5.3 SO FAR AS MANUFACTURING ACTIVITIES ARE CONCERNE D, IT IS SEEN THAT WHEN THE ACCOUNTS ARE RECAST IN ORDER TO MAKE THE I TEMS COMPARABLE BY EXCLUDING CERTAIN EXPENSES IN BOTH THE YEARS AND ALSO BY INCLUDING BOTH THE EXPENSES IN THE TWO YEARS, THE GP RATE HAS SHOWN IMPROVEMENT. HENCE THERE COULD BE NO GROUNDS FOR DR AWING ANY ADVERSE INFERENCE WITH REGARD TO THE MANUFACTURING ACTIVITIES. COMING TO THE TRADING ACTIVITY, THE MARGINAL DECLINE BY 0. 58% IN RESPECT OF ALUMINIUM CHLORIDE IS DUE TO THE FACT THAT THE TURN OVER OF THIS ITEM INCREASED FROM RS. 1.02 CRORCS TO RS. 3.35 CRORES, THEREBY REGISTERING INCREASE OF MORE THAN 300%. IT IS NOT UNCOMMON FOR GROSS MARGIN TO BE SACRIFICED IN ORDER TO ACHIEVE HIGHER TURNOVER. IN ANY EVENT, THE MARGINAL FALL OF 1/2 % IS NOT SIGNIFICANT ENOUGH TO LEAD TO ANY ADVERSE CONCLUSION. REGARDING THE GP RATE OF OTHER ITEMS TH ERE IS SUBSTANTIAL DECLINE. HOWEVER, FROM THE DETAILS FILED IT IS SEEN THAT IN THE EARLIER YEARS THE ASSESSEE HAD MADE SALES OF VARIOUS ITEMS. THIS INCLUDED ALUMINIUM INGOTS, CHLORINE, ALUMINIUM CHLORIDE, CUP ROUS CHLORIDE, CAUSTIC SODA LYE, CPC BLUE, BOREX, SS FLAT AND SS P ATTA. IN THE CURRENT YEAR, THE ASSESSEE HAD SOLD ONLY CUPROUS CHLORIDE A ND CHLORINE. THERE HAVE BEEN NO SALES OF OTHER ITEMS. IN THE CURRENT Y EAR THERE IS NO SALE OF ALUMINUM INGOTS, BOREX. SS FLAT AND SS PATTA. IN THE EARLIER YEAR THERE WERE NO SALES OF CHLORINE AND CUPROUS CHLORID E. THE PRODUCT MIX WAS DIFFERENT IN THE TWO YEARS. NO COMPARISON CAN T HEREFORE BE MADE WITH RESPECT TO THE GP RATIO. LOOKING TO THE ABOVE, IT IS HELD THAT THE AO WAS NOT JUSTIFIED IN REJECTING THE BOOKS OF ACCO UNTS AND ESTIMATING THE GP AT ADDITIONAL 10.05%. THE ADDITION OF RS. 66 ,87,215/- ON THIS ACCOUNT IS DIRECTED TO BE DELETED. 14. AGGRIEVED BY THIS ORDER OF LD. CIT(A), NOW THE REVENUE IS IN APPEAL BEFORE US. I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 12 15. AT THE TIME OF HEARING LD. DR SUBMITTED THAT LD . CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE SIMPLY ACCEPTING THE SUBMISS IONS OF THE ASSESSEE MADE BEFORE HIM WHICH WERE NOT BEFORE AO AND WITHOUT TAK ING COMMENTS ON THEM FROM THE AO, THUS VIOLATING THE PROVISIONS OF RULE 46A OF THE INCOME TAX RULES. LEARNED COUNSEL OF THE ASSESSEE ON THE OTHER HAND SUBMITTED THAT ALL THE DETAILS ON THE BASIS OF LD. CIT(A) HAS GIVE N RELIEF TO THE ASSESSEE WERE ALREADY THERE AND NO NEW DETAILS/EVIDENCE WAS PRODUCED IN SUPPORT OF HIS EXPLANATION FOR LOW GP DURING THE YEAR UNDER AP PEAL. 16. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE FIND NO MERIT IN THE ARGUMENTS ADVANCED BY LD. DR THAT THER E IS ANY VIOLATION OF RULE 46A. WE FURTHER FIND THAT IN THIS CASE ASSESSING O FFICER HAS ESTIMATED THE GP OF THE ASSESSEE BY REJECTING THE BOOKS OF ACCOUNT B Y INVOKING THE PROVISIONS OF SECTION 145A OF THE ACT. LD. CIT(A) HOWEVER HELD THAT AO WAS NOT JUSTIFIED IN SUCH REJECTION OF BOOKS OF ACCOUNT AS HE HAS NOT POINTED OUT ANY DEFECTS IN THE BOOKS MAINTAINED BY THE ASSESSEE-COM PANY. WHILE DOING SO, HE HAS PLACED RELIANCE ON VARIOUS CASE LAWS ON THE ISSUE. ON MERITS ALSO HE FOUND THAT THERE IS NO SUBSTANCE IN THE AOS CONTEN TIONS THAT ASSESSEE HAS SHOWN LOWER GP IN RESPECT OF ITS MANUFACTURING ACTI VITY OR TRADING ACTIVITY BY DEMONSTRATING THAT IN THE CASE OF MANUFACTURING ACTIVITIES IN FACT THERE IS INCREASE IN GP DURING THE YEAR AND MARGINAL DECLINE IN GP IN TRADING ACTIVITIES IS DUE TO 300% INCREASE IN THE TURN OVER OF THE ASSESSEE. WE FURTHER FIND THAT REVENUE HAS NOT CHALLENGED THE FI NDING OF THE LD. CIT(A) THAT BOOKS OF ACCOUNTS WERE WRONGLY REJECTED BY AO BY TAKING ANY GROUND IN THIS RESPECT WHILE FILING THIS APPEAL BEFORE US. WITHOUT CHALLENGING THE SAME, GP ADDITION CANNOT BE DEFENDED. IN VIEW OF A BOVE, WE ARE NOT I.T.A NO.1822/AHD/2010 A.Y. 2005-06 PAGE NO DCIT VS. BASE METAL CHLORINATIONS PVT. LTD 13 INCLINED TO INTERFERE WITH THE ORDER OF LD. CIT(A) AND THE SAME IS HEREBY UPHELD. THIS GROUND OF REVENUE IS ALSO DISMISSED. 16. IN THE REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE AT CAPTION PAGE SD/- SD/- (ANIL CHATURVEDI) ( D.K. TYAGI) ACCOUNTANT MEMBER J UDICIAL MEMBER AHMEDABAD : DATED 21/03/2014 AK / COPY OF ORDER FORWARDED TO:- 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,