Kiran Industries Ltd., Surat V. The ACIT, Circle -1, Surat

ITA 1985/AHD/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9827 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-10-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 03-09-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 18-06-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: RASESH SHAH
• Keywords: Gross profit estimation; Rejection of books of accounts
• Section: 143(3); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL : B BENCH : AHMEDABA D (BEFORE HON'BLE SHRI G.D. AGRAWAL, V.P.(AZ) & HON BLE SHRI T.K. SHARMA, J.M. ) I.T.A. NO. 1985/AHD./2009 ASSESSMENT YEAR : 2005-2006 KIRAN INDUSTRIES LTD., SURAT -VS.- DEPUTY COMMISSIONER OF INCOME TAX, (PAN : AAACK 0359 C) CIRCLE-1, SURAT (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI RASESH SHAH AND HARDIK VORA RESPONDENT BY : SHRI K. MADHUSUDAN, S R. D.R. O R D E R PER SHRI T.K. SHARMA, JUDICIAL MEMBER : THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE O RDER DATED 29.05.2009 OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I, SURAT FOR T HE ASSESSMENT YEAR 2005-06 ON THE FOLLOWING GROUNDS :- (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(APPEALS) HAS ERRED IN CONF IRMING THE ACTION OF THE ASSESSING OFFICER IN REJECTING THE BOOKS OF ACC OUNTS U/S. 143(3) OF THE I.T. ACT. (2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(APPEALS) HAS ERRED IN CONF IRMING THE ADDITION OF RS.1,50,58,882/- MADE BY ASSESSING OFFICER ON AC COUNT OF LOW GROSS PROFIT. 2. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE I S A COMPANY ENGAGED IN MANUFACTURING OF DYED YARN, KNITTED FABRICS AND NARROW WIDTH FABRIC. FOR THE ASSESSMENT YEAR UNDER APPEAL, IT FILED THE RETURN OF INCOME ON 25.10.2005 DECLARING TOTAL INCOME OF RS.1,17,88,590/-. THE ASSESSING OFFICER FRAMED THE ASSESSMENT UNDER SECTION 143(3) ON 28.12.2007 AT TOTAL INCOME OF RS.22,332,109/-. IN THE ASSESSMENT ORDER, THE ASSES SING OFFICER REJECTED THE BOOKS OF ACCOUNTS BY INVOKING PROVISO TO SECTION 145(1) AND MADE THE ADD ITION OF RS.1,50,58,882/-. ON APPEAL, IN THE IMPUGNED ORDER, THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) UPHELD THE ACTION OF ASSESSING OFFICER IN REJECTING THE BOOKS OF ACCOUNT S AND MAKING THE ADDITION OF RS.1,50,58,882/- ON ACCOUNT OF LOW GROSS PROFIT. AGGRIEVED BY THIS, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2 ITA NO. 1985/AHD/2009 3. AT THE TIME OF HEARING, SHRI RASESH SHAH, LD. CO UNSEL APPEARED ON BEHALF OF THE ASSESSEE AND ARGUED AT LENGTH THAT ASSESSING OFFICER IS NOT JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNTS BY INVOKING THE PROVISO TO SECTION 145(1). ALTERNATIVE LY, THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT EVEN IF THE BOOKS OF ACCOUNTS ARE REJECTED, IN THAT EVENT THE ASSESSING OFFICER HAS NO OPTION BUT TO ESTIMATE THE INCOME. THE LD. COUNSEL OF THE ASSESSEE FILED PAPER BOOK, WHICH INTER ALIA, INCLUDES THE VARIOUS DETAILS AND DOCUMENTS SUBMITTE D BEFORE THE AUTHORITIES BELOW. IN PAPER BOOK II INDEX, THE ASSESSEE HAS FURNISHED A CHART SHOWIN G COMPARATIVE RATES OF COLOUR AND CHEMICALS, COMPUTATION OF GROSS PROFIT (DIVISION-WISE) FOR IMM EDIATELY PRECEDING YEAR AND THE YEAR UNDER CONSIDERATION, COMPARATIVE ANALYSIS OF GROSS PROFIT OF DYING DIVISION. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT IN THE ASSESSMENT YEAR UNDE R APPEAL, THE COMPUTATION OF GROSS PROFIT (DIVISION-WISE) FOR THE YEAR ENDING ON 31.03.20-05 IS AS UNDER :- INCOME DYEING 31.03.2005 OTHER 31.03.2005 TOTAL 31.03.2005 SALES 314,160,330 314,160,330 INCREASE(DECREASE) IN CLOSING STOCK OF FINISHED GOODS 18,067,868 18,067,868 JOB CHARGES RECEIVED 55,592,716 6,769,135 62,36 1,851 55,592,716 338,997,333 394,590,049 EXPENDITURE DYEING 31.03.2005 OTHER 31.03.2005 TOTAL 31.03.2005 COST OF RAW MATERIAL CONSUMED 202,041,677 202,041,677 MANUFACTURING & MAINTENANCE EXP. 37,930,190 69,050,828 106,981,018 PAYMENTS & PROVISIONS FOR EMPLOYEES 9,941,227 24,065,979 34,007,206 47,871,417 295,158,484 343,029,901 GROSS PROFIT 7,721,299 43,838,849 51,560,148 % OF GROSS PROFIT 13.89 13.66 13.69 IN THE IMMEDIATELY PRECEDING YEAR, THE COMPUTATION OF GROSS PROFIT (DIVISION-WISE) FOR THE YEAR ENDING 31.03.2004 IS AS UNDER :- INCOME DYEING 31.03.2004 OTHER 31.03.2004 TOTAL 31.03.2004 SALES 242,601,139 242,601,139 INCREASE(DECREASE) IN CLOSING STOCK OF FINISHED 7,827,412 7,827,412 3 ITA NO. 1985/AHD/2009 GOODS JOB CHARGES RECEIVED 34,973,414 1,635,261 36,60 8,675 34,973,414 252,063,812 287,037,226 EXPENDITURE DYEING 31.03.2004 OTHER 31.03.2004 TOTAL 31.03.2004 COST OF RAW MATERIAL CONSUMED 153,110,892 153,110,892 MANUFACTURING & MAINTENANCE EXP. 16,975,055 46,917,545 63,892,600 PAYMENTS & PROVISIONS FOR EMPLOYEES 4,015,163 16,779,793 20,794,956 20,990,218 216,808,230 237,798,448 GROSS PROFIT 13,983,196 35,255,58 2 49,238,778 % OF GROSS PROFIT 39.98 13.99 17.15 3.1. THE LD. COUNSEL OF THE ASSESSEE DREW OUR ATTEN TION TO THE AFORESAID COMPARISON AND POINTED OUT THAT IN THE ASSESSMENT YEAR UNDER APPEA L, THE GROSS PROFIT IS LOW IN DYING DIVISION. THE REASON FOR FALL IN GROSS PROFIT IN DYING DIVISI ON WAS FURNISHED BEFORE BOTH THE DEPARTMENTAL AUTHORITIES ALONG WITH NECESSARY EVIDENCES. THE ASS ESSING OFFICER REJECTED THE BOOKS OF ACCOUNTS ON DOUBTS AND SUSPICION. THE LD. COUNSEL OF THE ASS ESSEE SUBMITTED THAT ON PAGE 8 OF THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS TABULAT ED THE GROSS PROFIT DECLARED BY THE ASSESSEE IN THE LAST THREE YEARS. ACCORDING TO THIS TABLE, THE GROSS PROFIT DECLARED BY THE ASSESSEE FOR THE YEAR ENDING 31 ST MARCH OF EACH YEAR IS AS UNDER :- YEAR 2004 YEAR 2003 YEAR 2002 RS.5,40,95,642/- RS.4,00,61,426/- RS.2,86,67,915/- PERCENTAGE OF GP 19.37% 14.09% 10.90% THE LD. COUNSEL OF THE ASSESSEE FURTHER SUBMITTED T HAT ON THIS PAGE ITSELF, THE ASSESSING OFFICER HAS REPRODUCED THE G.P. WORKING AS PER THE ASSESSEE AND AS WORKED OUT BY HIM. ACCORDING TO ASSESSING OFFICER, G.P. FOR THE YEAR UNDER APPEAL W ORKS OUT TO 15.27% AS AGAINST G.P. WORKED OUT BY THE ASSESSEE AT 13.69%. ACCORDING TO ASSESSI NG OFFICER, THE FALL IN G.P. WAS OF 4% TO 4.11%. IN THE ASSESSMENT ORDER, THE ASSESSING OFFIC ER AFTER CONSIDERING THE VARIOUS FACTORS, ADOPTED GROSS PROFIT FALL AT 4% AND ESTIMATED THE G .P. ADDITION OF RS.1,50,58,882/-. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE AVERAGE G.P. OF THE LAST THREE YEARS IS 14.79%. AS 4 ITA NO. 1985/AHD/2009 AGAINST THIS, ACCORDING TO WORKING OF G.P. BY ASSES SING OFFICER IT COMES TO 15.27%. HE ACCORDINGLY SUBMITTED THAT SINCE G.P. DECLARED IN T HE ASSESSMENT YEAR UNDER APPEAL IS BETTER THAN THE AVERAGE G.P. OF IMMEDIATELY LAST THREE YEARS, T HE ENTIRE ADDITION OF RS.1,50,58,882/- MADE BY THE ASSESSING OFFICER BE DELETED. 4. ON THE OTHER HAND, SHRI K. MADHUSUDAN, LD. SR. D .R. APPEARING ON BEHALF OF THE REVENUE VEHEMENTLY SUPPORTED THE ORDER OF AUTHORITIES BELOW . THE LD. D.R. SUBMITTED THAT THE ASSESSING OFFICER REJECTED THE BOOKS OF ACCOUNTS AND ESTIMATE D THE G.P. FOR REJECTING THE BOOKS OF ACCOUNTS, THE ASSESSING OFFICER HAS GIVEN DETAILED REASONS AND SAME ARE DISCUSSED IN THE ASSESSMENT ORDER, WHICH READS AS UNDER :- (I) THERE WAS A HUGE FALL IN G.P. FOR THE YEAR CO MPARED TO THE EARLIER YEARS, (II) ASSESSEE FAILED TO PROVE GENUINENESS CERTAIN CREDITORS AND LABOUR PAYMENTS, (III) RECORDS OF CONSUMPTION OF MATERIAL WERE NOT MAINTAINED, (IV) STOCK REGISTER WAS NOT MAINTAINED, (V) VALUATION OF WIP/ SEMI-FINISHED GOODS WAS NOT CORRECTLY TAKEN, (VI) ASSESSEE PAID RS.3,93,64,912/- TO PERSONS COVE RED BY SECTION 40A(2)(B) BUT NO DETAILS AND NO REASONABLENESS / JUSTIFICATION OF SUCH HUGE EXPENDITURE WAS FILED (PARA 4.4(A) TO (J) ON PAGES 7-16. 4.1. THE LD. D.R. SUBMITTED THAT THE ACTION OF ASSE SSING OFFICER REJECTING THE BOOKS OF ACCOUNTS WAS UPHELD BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS), THEREFORE, REJECTION OF BOOKS OF ACCOUNTS BY INVOKING THE PROVISO TO SEC TION 145 OF THE ACT BE UPHELD. IN SUPPORT OF THIS, HE RELIED ON THE FOLLOWING DECISIONS :- (I) BRITISH PAINTS INDIA LTD. [188 ITR 44 (SC)]; (II) SAMIR DIAMONDS EXPORTS LTD. [71 ITD 75 (ITAT , MUMBAI)]; (III) ABDUL REHMAN & BROTHERS [210 ITR 406 (ALL.) ]; (IV) HARI SHANKAR GOPAL HARI [97 ITR 716 (ALL.)]; (V) MACMILLAN & CO. [33 ITR 182 (SC)]; (VI) S.N. NAMASIVAYAM CHETTIAR [38 ITR 579 (SC)]; (VII) K.Y. PILLAI & SONS [63 ITR 411 (SC)]. WITH REGARD TO ESTIMATION OF G.P., THE LD. D.R. REL IED ON THE FOLLOWING TWO DECISIONS :- 5 ITA NO. 1985/AHD/2009 (I) KUTCHWALA GEMS VS.- JCIT [288 ITR 10(SC)]; (II) ASHWINI KUMAR MEHRA VS.- ITO [33 TTJ 300 (ITAT, DE LHI)]. CONTINUING HIS ARGUMENT, THE LD. D.R. POINTED OUT T HAT THERE WAS A SHORTFALL OF G.P. BY 4.11%. HOWEVER, THE ASSESSING OFFICER GAVE CREDITS TO CERT AIN FACTORS RAISED BY THE ASSESSEE MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. AFTER CONSIDERING THESE FACTORS, THE ASSESSING OFFICER WORKED OUT THE ADDITION ON ACCOUNT OF FALL IN G.P. AT 4%. IN THIS MANNER, THE ASSESSING OFFICER HAS ALLOWED THE BENEFIT OF 0.11%. HE ACCORD INGLY SUBMITTED THAT THE ADDITION MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) BE UPHELD. 5. IN REJOINDER, THE LD. COUNSEL OF THE ASSESSEE S UBMITTED THAT THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF KUTCHWALA GEMS (SUPRA) RELIED BY THE LD. D.R. PERTAINED TO AN ASSESSEE, WHO DEALS IN PRECIOUS AND SEMI-PRECIOUS S TONES. IN THAT CASE, THE ASSESSING OFFICER ESTIMATED THE GP AT 40%. THE LEARNED COMMISSIONER O F INCOME TAX(APPEALS) REDUCED IT TO 35% AND ON FURTHER APPEAL, TRIBUNAL REDUCED IT TO 30%. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT IN THAT JUDGMENT ALSO, IT HAS BEEN HELD THAT THE CO NCERNED AUTHORITY SHOULD TRY TO MAKE AN HONEST AND FAIR ESTIMATE OF THE INCOME EVEN IN A BEST JUDG MENT ASSESSMENT, AND SHOULD NOT ACT TOTALLY ARBITRARILY, BUT THERE IS NECESSARILY SOME AMOUNT O F GUESSWORK INVOLVED IN A BEST JUDGMENT ASSESSMENT. HE SUBMITTED THAT EVEN IF THE BOOKS OF ACCOUNTS ARE TO BE REJECTED, THE ASSESSING OFFICER SHOULD HAVE ESTIMATED THE INCOME BY APPLYIN G THE AVERAGE G.P. OF LAST THREE YEARS. 6. WITH REGARD TO THE DECISION OF ITAT, E BENCH, DELHI IN THE CASE OF ASHWINI KUMAR MEHRA RELIED BY THE LD. D.R., THE LD. COUNSEL OF TH E ASSESSEE SUBMITTED THAT INCOME SHOULD BE ESTIMATED IN A REASONABLE AND FAIR MANNER. THE G.P. DECLARED BY THE ASSESSEE IN THE IMMEDIATELY LAST PRECEDING THREE ASSESSMENT YEARS AS MENTIONED BY THE ASSESSING OFFICER ON PAGE 8 OF THE ASSESSEE ORDER IS AS UNDER :- YEAR ENDING ON 31.03.2004 YEAR ENDING ON 31.03. 2003 YEAR ENDING ON 31.03.2002 PERCENTAGE OF GP 19.37% PERCENTAGE OF GP 14.09% PERCENTAGE OF GP 10.90% THE AVERAGE G.P. OF LAST THREE ASSESSMENT YEARS WOR KS OUT TO 14.79%. THE GP FOR THE ASSESSMENT YEAR UNDER APPEAL AS WORKED OUT BY THE ASSESSING OF FICER IN THE ASSESSMENT ORDER IS 15.27%. SINCE THE GP DECLARED BY THE ASSESSEE IN THE ASSESS MENT YEAR UNDER APPEAL IS BETTER THAN THE 6 ITA NO. 1985/AHD/2009 AVERAGE GP DECLARED IN THE LAST THREE ASSESSMENT YE ARS, THEREFORE, ON THIS GROUND ALONE, NO ADDITION ON ACCOUNT OF LOW G.P. IS CALLED FOR. 7. HAVING HEARD BOTH THE SIDES, WE HAVE CAREFULLY G ONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT IN THE ASSESSME NT ORDER, THE ASSESSING OFFICER HAS POINTED OUT VARIOUS DEFECTS AND REJECTED THE BOOKS OF ACCOUNTS. IN THE IMPUGNED ORDER, THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) UPHELD THE ACTI ON OF ASSESSING OFFICER REGARDING REJECTION OF BOOKS OF ACCOUNTS. KEEPING IN VIEW THE VARIOUS DEFECTS, WE ARE ALSO OF THE VIEW THAT THE BOOKS OF ACCOUNTS ARE RIGHTLY REJECTED. HOWEVER , ONCE THE BOOKS OF ACCOUNTS ARE REJECTED, THE ASSESSING OFFICER HAS NO OPTION BUT TO ESTIMATE THE INCOME. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS MENTIONED THAT GP DECLARED IN THE ASSESSMENT YEAR UNDER APPEAL IS 15.27%. THE AVERAGE G.P. OF LAST THREE YEARS WORKS OUT TO 14.79%. ADMITTEDLY, PERCENTAGE OF G.P. DECLARED BY THE ASSESSEE IN THE ASSESSMENT YEA R UNDER APPEAL IS BETTER THAN THE AVERAGE G.P. OF IMMEDIATELY THREE ASSESSMENT YEARS. SINCE, THE G .P. DECLARED IS BETTER THAN AVERAGE OF LAST THREE YEARS, WE ARE OF THE VIEW THAT NO ADDITION ON ACCOUNT OF LOW G.P. IS CALLED FOR. IN THIS VIEW OF THE MATTER, THE ADDITION OF RS.1,50,58,882/- MAD E BY THE ASSESSING OFFICER IS DELETED. 8. IN THE RESULT, FOR STATISTICAL PURPOSES, THE APP EAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. THE ORDER WAS PRONOUNCED IN THE COURT ON 01.10.201 0 SD/- SD/- (G.D. AGRAWAL) (T.K. SHARMA ) VICE-PRESIDENT (AZ) JUDICIAL MEMBER DATED : 01/ 10 / 2010 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE (2) THE DEPARTMENT. 3) CIT CONCERNED, (4) D.R., ITAT, AHMEDABAD. TRUE COPY BY ORDER DEPUTY REGIS TRAR, ITAT, AHMEDABAD LAHA/SR.P.S.