DICITEX LIFESTYLE P.LTD, MUMBAI V. ADDL CIT RG 15(1), MUMBAI

ITA 1847/MUM/2016

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 4529 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2005-2006
• Appeal Filed On: 28-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Principle of natural justice; Set aside
• Section: 44AD; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D, MUMBAI BEFORE SHRI RAJESH KUMAR, ACCOUNTANT MEMBER AND SHRI RAM LAL NEGI, JUDICIAL MEMBER ITA NO.1847/M/2016 ASSESSMENT YEAR: 2005-06 M/S. DICITEX LIFESTYLE PVT. LTD., FORMERLY KNOWN AS FASHION SYNTHETICS PVT. LTD., 301-B, M BLDG., 3 RD FLOOR, PALM COURT COMPLEX, ABOVE D MART, MALAD LINK ROAD, MALAD (W), MUMBAI 400 064 PAN: AAHFR 9846A VS. ADDL. CIT, RANGE 15(1), MUMBAI (APPELLANT) (R ESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI HARIOM TULSIYAN, A.R. SHRI SASHI TULSIYAN, A.R. REVENUE BY : SHRI , D.R. DATE OF HEARING : 18.12.2019 DATE OF PRONOUNCEMENT : 14.03.2019 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSES SEE AGAINST THE ORDER DATED 29.02.2016 OF THE COMMISSIO NER OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS TH E CIT(A)] RELEVANT TO ASSESSMENT YEAR 2005-06. 2. THE VARIOUS GROUNDS RAISED BY THE ASSESSEE ARE U NDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ORDER PASSED U/S 144 TH E INCOME TAX ACT, 1961 ('THE ACT') OF THE ACT BY THE LD. AO WHEREBY HE HAS REJECTED TH E BOOKS OF ACCOUNTS U/S ITA NO.1847/M/2016 M/S. DICITEX LIFESTYLE PVT. LTD. 2 145 OF THE ACT OF THE ASSESSEE COMPANY WITHOUT ISSU ING ANY SHOW CAUSE OR PROVIDING ANY OPPORTUNITY TO THE ASSESSEE COMPANY A ND THUS VIOLATING THE PRINCIPLES OF NATURAL JUSTICE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITIONS MADE BY THE LD. A O BY ARRIVING AT A LOW WASTAGE IN THE TEXTILE INDUSTRY ON AN ESTIMATED BASIS AND T HAT TOO WITHOUT ANY CORROBORATIVE EVIDENCE IN THIS REGARD AND DISREGARDING THE SUBMIS SIONS OF THE AR. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITIONS MADE BY THE LD. A O OF RS. 5,00,000/- ON ACCOUNT OF SALE OF WASTAGE ON AD-HOC BASIS WITHOUT GIVING A NY CORROBORATIVE EVIDENCE IN THIS REGARD AND DISREGARDING THE SUBMISSIONS OF THE AR. 4. THE APPELLANT CRAVES THE RIGHT TO ADD, AMEND, MODIFY, OR SUBTRACT ANY GROUND OF APPEAL AT ANY STAGE OF HEARING. 3. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS MAN UFACTURER OF EMBROIDERED CLOTH AND SALES THEREOF AND FILED ITS R ETURN OF INCOME ON27.10.2015 DECLARING AN INCOME OF RS. 1,04 ,05,780/-. THE CASE OF THE ASSESSEE WAS SELECTED UNDER SCRUTIN Y AND STATUTORY NOTICES WERE DULY ISSUED AND SERVED UPON THE ASSESSEE. THE ASSESSEE DID NOT HAVE ANY FACTORY PRE MISES OR WAREHOUSE AND DURING THE YEAR THE ASSESSEE HAS AN UNDERSTANDING WITH ANOTHER COMPANY WHICH HAS A PROC ESS HOUSE WHICH TAKES THE DELIVERY OF GREY FABRIC AND C ARRY OUT ALL THE PROCESSES ON THE GREY CLOTH AND THEREAFTER SEND ING THE FINISHED GOODS TO THE CUSTOMERS OF THE ASSESSEE COM PANY AS PER ITS DIRECTIONS. THUS, THE GREY CLOTH PURCHASED BY T HE ASSESSEE USED TO BE DELIVERED DIRECTLY TO THE PROCESS HOUSE AND THE SAID CONTRACTOR USED TO CARRY OUT ALL THE PROCESSES LIKE DYEING, EMBROIDERY, FINISHING, AND CUTTING TO SIZES AS PER REQUIREMENTS OF THE CUSTOMERS AND DISPATCHING TO THE CUSTOMERS. IN THIS BACKGROUND THE VARIOUS GROUNDS RAISED BY THE ASSESS EE ARE ADJUDICATED IN THE ENSUING PARAS. ITA NO.1847/M/2016 M/S. DICITEX LIFESTYLE PVT. LTD. 3 4. AT THE OUTSET THE LD. COUNSEL OF THE ASSESSEE S UBMITTED THAT THE ISSUE IN GROUND NO.1 IS NOT PRESSED AND IS DISM ISSED AS NOT PRESSED. 5. THE ISSUE RAISED IN THE SECOND GROUND OF APPEAL IS AGAINST THE CONFIRMATION OF ADDITION OF RS. 1,79,51,233/- A S MADE BY THE AO ON ACCOUNT OF HIGH WASTAGE WHEREAS THE ISSUE IN GROUND NO 3 IS AGAINST THE ORDER OF CIT(A) CONFIRMING THE ADDIT ION OF RS.5,00,000/- AS MADE BY THE AO TOWARDS THE ESTIMAT ION OF SALE OF WASTAGE. BOTH THE GROUNDS ARE RELATED TO EACH O THER AND THEREFORE DECIDED TOGETHER. 6. THE AO FOUND THAT AGAINST THE TOTAL PURCHASE OF 17,87,679 METERS OF GREY FABRIC, THE FINISHED GOODS WERE 11,9 2,521 METERS OF EMBROIDERED CLOTH. THE AO ALSO NOTED THAT THE W ASTAGE OF 5,95,158 METERS AS WASTAGE SHRINKAGE AND SAMPLES WA S VERY HIGH AND ALSO THE CLOSING STOCK WAS SHOWN AS NIL. T HE AO BY REJECTING THE EXPLANATION OF THE ASSESSEE QUA THE HIGH WASTAGE, ESTIMATED THE WASTAGE AT 12.50% OF THE ENTIRE GREY CLOTH PURCHASED FOR MANUFACTURING PROCESS AND THUS CALCUL ATED THE WASTAGE AT 2,23,459 METERS THEREBY REJECTING THE DI FFERENTIAL WASTAGE OF 3,71,738 METERS. THE AO VALUED THE EXCES S WASTAGE AT RS.1,79,51,233/- AND ADDED THIS AMOUNT TO THE IN COME OF THE ASSESSEE BY HOLDING THAT THE SAID CLOTH WAS EITHER SOLD IN THE MARKET OR LYING IN THE STOCKS. THE AO ALSO HELD TH AT THE ASSESSEE HAS NOT SHOWN ANY SALE OF WASTAGE AND THER EFORE ESTIMATED THE SALE OF WASTAGE AT RS. 5,00,000/- AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. ITA NO.1847/M/2016 M/S. DICITEX LIFESTYLE PVT. LTD. 4 7. IN THE APPELLATE PROCEEDINGS, THE LD CIT(A) UPH ELD THE ORDER OF CIT(A) AFTER REJECTING THE VARIOUS CONTENTIONS PUT UP BY THE ASSESSEE. IT WAS SUBMITTED BY THE ASSESSEE BEFORE THE LD CIT(A) THAT ACTUAL WASTAGE IS 5,31,488 METERS AND NOT 5,95 ,158 METERS WHICH WORKS OUT TO 30% AND 34% AS CONCLUDED BY THE AO. THE ASSESSEE SUBMITTED THAT FREE SAMPLES DISTRIBUTED WE RE ALSO PART OF THE WASTAGE. THE LD AR SUBMITTED THAT WASTAGE SH OWN IN THE TAX AUDIT REPORT COMPRISED OF TWO PARTS - ONE FOR S HRINKAGE AND WASTAGE DURING PRODUCTION AND SECOND FINISHED CLOTH DISTRIBUTED AS SAMPLES. THE LD CIT(A) DIRECTED THE AO TO VERIFY THE SAMPLE DISTRIBUTED FOR BUSINESS PURPOSES AND TO ALLOW IF T HE SAME WAS PROVED BUT UPHELD THE REMAINING ADDITION ON ACCOUNT OF WASTAGE. SIMILARLY, THE CIT(A) CONFIRMED THE ADDIT ION QUA ESTIMATION OF SALE OF WASTAGE SCRAP BY REJECTING TH E ARGUMENTS OF THE ASSESSEE THAT MATERIALS MANUFACTURED USED TO BE SUPPLIED AND DELIVERED TO THE CUSTOMERS BY THE PROCESS HOUSE AND THUS THERE WAS NO SALE OF WASTAGE IN THE ASSESSEE BOOKS OF ACCOUNTS. 8. THE LD AR SUBMITTED BEFORE THE BENCH THAT THE OR DER OF CIT(A) IS WRONG AS THE APPELLATE AUTHORITY HAS FAIL ED TO CONSIDER THE FACTUAL ISSUES WHILE DECIDING THE APPEAL OF THE ASSESSEE. THE LD AR RE-ITERATED HIS ARGUMENTS BEFORE THE TRIBUNAL AS MADE BEFORE THE AUTHORITIES BELOW. THE LD AR SUBMITTED T HAT THERE ARE THREE STAGES OF MANUFACTURING OF EMBROIDER CLOTH NA MELY (I) DYEING AND PROCESSING (II) EMBOIDERY AND (III)CUTTI NG AND PACKING. THE LD AR SUBMITTED THAT IN THE 1 ST STAGE OF PROCESS, THE SHRINKAGE /WASTAGE RANGES FROM 5% TO 25% DEPENDING ON THE QUALITY OF THE FABRIC. SHRINKAGE IS MORE IF HEAVY E MBROIDERY IS DONE TO AVOID HOLES ON THE CLOTH. IN THE SECOND STA GE THE DYED CLOTH IS CUT INTO PIECES OF 21 METERS EACH TO FIT I NTO THE ITA NO.1847/M/2016 M/S. DICITEX LIFESTYLE PVT. LTD. 5 EMBROIDERY MACHINE. THE REMAINING PIECES ARE AGAIN STITCHED TOGETHER AND CUT INTO PIECES OF 21 METERS FOR PUTTI NG INTO THE MACHINE. THE TWO ENDS OF THE PIECE OF 21 METERS ARE PUT INTO THE MACHINE WHICH CAN NOT BE EMBROIDERED AND THAT ALSO GOES AS WASTAGE. THIS PROCESS INVOLVES WASTAGE OF ABOUT 10% .IN THE THIRD STAGE THE EMBROIDERY SUITS ARE CUT INTO DIFFE RENT SIZES AS PER REQUIREMENT OF THE CUSTOMERS. FOR EXAMPLE FOR N ORTH INDIAN MARKET THE SIZE IS 2.5 METERS FOR KAMEEZ WHEREAS 2 .25 METERS FOR MUMBAI MARKET. THE LD AR SUBMITTED THAT OUT OF FINISHED CLOTH 63, 670 METERS WAS USED FOR THE PURPOSE OF FR EE SAMPLES. THE LD. AR SUBMITTED THAT CIT(A) APPRECIATED AND DI RECTED THE AO TO VERIFY AND ALLOW THE SAME IF FOUND CORRECT. T HE LD AR STATED ALL THESE WASTAGES /SCRAPS ARE GENERATED AT THE PROCESS HOUSE AND THERE IS NO SUCH UNDERSTANDING OF RETURNI NG THE SAID WASTE MATERIALS. FURTHER THE WASTAGE IS IN THE NATU RE OF CHINDI WHICH IS USED FOR CLEANING THE MACHINES AND HAS NO REALIZABLE VALUE. THE LD AR SUBMITTED BEFORE US THAT THE PRICE S OF THE FINISHED PRODUCTS ARE SO FIXED TO TAKE INTO ACCOUNT THE AMOUNT OF WASTAGE AND SCRAPS. THE LD AR SUBMITTED THAT DURING THE YEAR THE TOTAL TURNOVER OF THE ASSESSEE WAS RS. 9,70,03, 552/- AGAINST THE COST OF MATERIALS PURCHASED RS. 3,24,75,208/-, MANUFACTURING EXPENSES RS.5,24,94,161/- AND ADMINIS TRATIVE, SELLING, DISTRIBUTION, INTEREST AND DEPRECIATION RS . 16,28,407/-. IT IS THUS CLEAR THAT VERY SMALL AMOUNT OF EXPENSES WERE INCURRED ON ADMINISTRATIVE, SELLING AND DISTRIBUTIO N EXPENSES WHICH ARE BORNE BY THE PROCESS HOUSE. THUS THE GROS S PROFIT WAS 12.41% NET PROFIT WAS 10.73%. THE LD AR SUBMITTED T HAT THE ASSESSEE IS MAINTAINING THE STOCKS RECORDS IN RESPE CT OF RA MATERIALS AND FINISHED PRODUCTS AND NOT DAILY PRODU CTION ITA NO.1847/M/2016 M/S. DICITEX LIFESTYLE PVT. LTD. 6 REGISTER AS THE ENTIRE MANUFACTURING PROCESS WAS CA RRIED OUT AT THE PROCESS HOUSE. THE LD AR CONTENDED THAT THE ASS ESSEE HAS MAINTAINED STOCK RECORDS BUT NOT AS PER THE FORMAT OF AO. THE LD AR ALSO ARGUED THAT IN CASE OF NO BOOKS, THE PROFIT IS TAKEN AT 8% AS PER SECTION 44AD ON PRESUMPTIVE BASIS BUT IN THE CASE OF THE ASSESSEE IT IS HIGHER. THE LD AR CONTENDED THAT IF THE ADDITION AS CONFIRMED BY THE CIT(A) IS SUSTAINED FO R, THE GP RATE AND NP RATE WOULD BE 31.27% AND 29.75% WHICH IS UN HEARD OF AND UNREALISTIC AND IN THE TEXTILE INDUSTRY IT IS I MPOSSIBLE. THEREFORE THE LD AR PRAYED THAT THE ADDITIONS ON A CCOUNT WASTAGE MAY BE DELETED. SIMILARLY IT IS CONTENDED T HAT ADDITIONS TOWARDS SALE OF WASTAGE/SCRAP IS ALSO WITHOUT ANY B ASIS AND BASED ON PRESUMPTIONS AND ASSUMPTIONS OF THE AO AS THE AO NOTED IN THE ASSESSMENT ORDER THAT THE WASTAGE MIGH T HAVE BEEN SOLD IN THE MARKET OR LYING IN THE STOCK AT THE YEA R END OR MIGHT BE TRANSFERRED TO THE FLAGSHIP COMPANY IN THE GROUP . THE LD AR RELIED UPON THE DECISION OF HONBLE APEX COURT IN D HAKESHWARI COTTON MILLS LTD VS. CIT(1954) 26ITR775(SC) WHEREIN IT HELD THAT THE ITO IS NOT FREE TO MAKE GUESS TO MAKE AN ASSESSMENT WITHOUT ANY EVIDENCE. IN PRESENT CASE ALSO THE LD A R ARGUED THAT THE ADDITION BY THE AO IS NOT BASED UPON ANY EVIDEN CE THAT THE ASSESSEE HAS RECEIVED ANY MONEY FROM THE SALE OF WA STAGE OR SCRAP AND THEREFORE THE ORDER OF LD CIT(A) UPHOLDIN G THE ORDER OF AO IS INCORRECT AND THEREFORE MAY BE DELETED. 9. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORD ERS OF AUTHORITIES BELOW. THE LD DR SUBMITTED THAT IT IS V ERY UNCUSTOMARY AND UNUSUAL THAT THERE IS NO WASTAGE OR SCRAP IN THE BUSINESS OF THE ASSESSEE. IN THE MANUFACTURING PROCESS, THE WASTAGE IS INEVITABLE. THE LD DR ARGUED THAT IT IS NOT POSSIBLE TO ITA NO.1847/M/2016 M/S. DICITEX LIFESTYLE PVT. LTD. 7 BELIEVE THE THEORY OF THE ASSESSEE THAT THE MANUFAC TURING IS OUTSOURCED TO THE PROCESS HOUSE AND RATE CHARGED FR OM THE CUSTOMERS ARE FACTORED IN AND ALSO THE PAYMENT TO T HE PROCESS HOUSE IS FIXED ACCORDINGLY. THEREFORE, THE ADDITIO N ON ACCOUNT OF WASTAGE AS CONFIRMED BY THE LD CIT(A) MAY BE CONFIR MED. SO FAR AS THE ADDITION TOWARDS THE SALE OF SCRAP IS CONCER NED THE LD DR ARGUED THAT SALE OF SCRAP IS ALSO INEVITABLE IN THE TEXTILE MANUFACTURING INDUSTRY. SO THE ADDITION OF RS. 5,00 ,000/- MAY BE UPHELD AS THE ASSESSEE HAS NOT PROVIDED ANY INFO RMATION ON THAT ISSUE. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AS PLACED BEFORE US CAREFULLY. IN THIS CAS E, WE OBSERVE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING OF EM BROIDERED FABRIC AND SALE THEREOF. THE ASSESSEE DOES NOT DO M ANUFACTURING ITSELF BUT IT IS OUTSOURCED TO OUTSIDE PROCESS HOUS E. THE RAW MATERIALS PURCHASED ARE DELIVERED AT THE PROCESS HO USE AND SIMILARLY THE FINISHED PRODUCTS ARE ALSO DELIVERED DIRECTLY TO THE CUSTOMERS AS PER ASSESSEES DIRECTIONS. ADMITTEDLY, THE ASSESSEE IS NOT MAINTAINING ANY RECORDS OF DAILY MANUFACTURI NG PROCESS AND ONLY STOCK OF RAW MATERIALS AND FINISHED PRODUC TS ARE MAINTAINED. THE ASSESSEE HAS EXPLAINED THE WASTAGES ACCORDINGLY TO THE STAGES OF MANUFACTURING WHICH IN OPINION APPEARS TO BE QUITE REASONABLE. MOREOVER THE TEXTIL E INDUSTRY THE MARGIN ARE VERY MEAGER AND IF THE WASTAGE IS TAKEN INTO ACCOUNT AS PER ORDER OF CIT(A) IT GIVES HIGHLY UNREALISTIC FIGURE OF GP AND NP WHICH COME TO 31.72 AND 29.75 RESPECTIVELY AND NOT FEASIBLE AT ALL. ON THE OTHER HAND THE GP RATE AND NP RATE OF THE ASSESSEE ARE 12.41% AND 10.73%. THE TOTAL TURNOVER OF THE ASSESSEE WAS RS. 9,70,03,552/- AGAINST THE COST OF MATERIALS ITA NO.1847/M/2016 M/S. DICITEX LIFESTYLE PVT. LTD. 8 PURCHASED RS. 3,24,75,208/-, MANUFACTURING EXPENSE S RS. 5,24,94,161/- AND ADMINISTRATIVE, SELLING, DISTRIB UTION, INTEREST AND DEPRECIATION RS. 16,28,407/-. IT IS THUS CLEAR THAT VERY SMALL AMOUNT OF EXPENSES WERE INCURRED ON ADMINISTRATIVE, SELLING AND DISTRIBUTION EXPENSES WHICH ARE BORNE BY THE PROCES S HOUSE. MOREOVER, THE AO HAS NOT BROUGHT ANY EVIDENCES ON R ECORD TO REBUT THE SUBMISSIONS OF THE ASSESSEE. IT IS FOR T HESE REASONS WE ARE NOT IN AGREEMENT WITH THE CONCLUSION OF THE LD CIT(A). ACCORDINGLY WE DIRECT THE AO TO DELETE THE ADDITION ON ACCOUNT OF WASTAGE. SIMILARLY, WE FIND THAT THE ADDITIONS OF R S. 5,00,000/- IS ALSO BASED ON THE GUESS WORK OF THE AO WITHOUT A NY BASIS OR MATERIALS ON RECORDS. THE AO HAS SIMPLY GUESSED THA T THE ASSESSEE EITHER MIGHT HAVE SOLD THE SCRAPS IN THE M ARKET OR TRANSFERRED TO THE FLAGSHIP COMPANY WHICH HIGHLY HY POTHETICAL AND HAS BEEN UPHELD BY THE CIT(A). IN OUR OPINION, NO ADDITIONS CAN BE CONFIRMED WHICH ARE BASED UPON ESTIMATES AND GUESS WORK WITHOUT ANY CORROBORATING EVIDENCES. ACCORDIN GLY, WE SET ASIDE THE ORDER OF CIT(A) AND DIRECT THE AO TO DELE TE THE ADDITIONS OF RS.1,79,51,233/- AND RS. 5,00,000/-. G ROUND NO 2 AND 3 ARE ALLOWED. 11. IN RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14.03.2019. SD/- SD/- ( RAM LAL NEGI) (RAJESH KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 14.03.2019. * KISHORE, SR. P.S. ITA NO.1847/M/2016 M/S. DICITEX LIFESTYLE PVT. LTD. 9 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORDER DY/ASS TT. REGISTRAR, ITAT, MUMBAI.