ACIT, Central Circle-11(2), Kolkata, Kolkata V. M/s Senco Gold Impex (p) Ltd., Kolkata

ITA 247/KOL/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0469 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 09-02-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ROBIN CHOUDHUR Y
• Assessee Lawyers: MIRAJ D. SHAH
• Keywords: Gross profit estimation; Question of law
• Section: 143(3)

Judgement Text

, B , IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH B KOLKATA BEFORE SHRI J.SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI S.S.GODARA, JUDICIAL MEMBER ITA NO.250 & 247/KOL/2017 ASSESSMENT YEAR:2011-12 M/S SENCO GOLD IMPEX (PVT) LTD. 41A, A.J.C. BOSE ROAD, 10 TH FLOOR, KOLKATA-17 [ PAN NO.AAKCS 2962 C ] ACIT, CIRCLE-11(2), P-7, CHOWRINGHEE SQUARE, KOLKATA-69 / V/S . / V/S . JCIT, RANGE-11, M/S SENCO GOLD IMPEX (P) LTD., 7 & 8 CIT ROAD, KOLKATA-14 /APPELLANT .. /RESPONDENT /BY ASSESSEE SHRI MIRAJ D SHAH, ADVOCATE ! /BY RESPONDENT SHRI ROBIN CHOUDHURY, ADDL. CIT-DR /DATE OF HEARING 21 -08-2018 /DATE OF PRONOUNCEMENT 19-09-2018 /O R D E R PER S.S.GODARA, JUDICIAL MEMBER:- THE REVENUE AND ASSESSEE HAVE FILED THEIR INSTANT CROSS-APPEALS FOR ASSESSMENT YEAR 2011-12 AGAINST THE COMMISSIONER OF INCOME TAX (APPEALS)-4, KOLKATAS ORDER DATED 23.11.2016 PASSED IN CASE NO.1217/CIT(A)-4/RA NGE-11/KOL/14-15, INVOLVING PROCEEDINGS U/S 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT. HEARD BOTH THE PARTIES. CASE FILES PERUSED. 2. IT EMERGES AT THE OUTSET THAT THE INSTANT CROSS- APPEALS CHALLENGE THE CIT(A)S ACTION PARTLY REVERSING ASSESSING OFFICERS FINDING ESTIMATING THIS TAXPAYERS PROFITS ADDITION OF 98,87,631/- TO THE EXTENT OF 63,05,156/- THEREBY UPHOLDING THE BALANCE ITA NO.250 & 247/KOL/2017 A.Y.2011-12 M/S SENCO GOLD IMPEX (PVT) LTD. VS.JCIT, RAN GE-11,KOL. PAGE 2 AMOUNT OF 35,82,475/- IN LOWER APPELLATE PROCEEDINGS. BOTH TH E LEARNED REPRESENTATIVES TAKE US TO CIT(A)S DETAILED DISCUS SION READING AS UNDER:- 4. GROUND NOS. 2 & 3 THESE TWO INTERLINKED GROUNDS ARE DIRECTED AGAINST THE ACTION OF THE AO IN MAKING AN ADDITION OF 98,87,631/- ON ACCOUNT OF SUPPRESSED PROFIT NOT SH OWN BY THE ASSESSEE IN RESPECT O ITS HEAD OFFICE UNIT. THE MATTER IS DISCU SSED FROM PARA 2 TO PARA 6 OF THE ASSESSMENT ORDER. IN THIS REGARD THE SUBMISSION OF THE AR OF THE APPELLANT IS REPRODUCED AS FOLLOWS AND WHICH WOULD ALSO INCORPOR ATE THE SALIENT POINTS OF THE ASSESSMENT ORDER IN THE MATTER: OUR CLIENT M/S SENCO GOLD IMPEX PVT. LTD. (NOW MER GED WITH SENCO GOLD LIMITED) WAS IN RECEIPT OF AN ASSESSMENT ORDER U/S. 143(3) DT. 30.03.2014 RELATING TO AY 2011-12 WHEREIN LD AO (JCIT RANGE-11 /KOL) HAS MADE AN ADDITION ON THE PREMISE THAT THE NET PROFIT MARGINS OF THE 2 UNITS OF THE ASSESSEE COMPANY (VIZ. H.O DIVISION AND SEZ DIVISIO N) ARE DIFFERENT FOR THE SAID FINANCIAL YEAR. HE HAS SIMPLY MADE AN AVERAGE OF BOTH THE NET PROFIT RATIOS AN ADDED THE DIFFERENTIAL AMOUNT WITH THE PROFITS O F THE DIVISION HAVING THE LOWER NET PROFIT RATIO. THIS HAS RESULTED IN AN ADD ITION OF RS.98,87,631. BEING AGGRIEVED FROM THE SAID ORDER OUR CLIENT HAS PREFER RED AN APPEAL BEFORE YOUR HONOUR ON THE FOLLOWING GROUNDS: GROUNDS OF APPEAL: 1) FOR THAT THE ASSESSING OFFICER OF THE LD. AO IS WRO NG, ARBITRARY, BAD IN LAW AND AGAINST THE FACTS OF THE CASE. 2) FOR THAT THEE LD. AO WAS NOT JUSTIFIED IN MAKING AN ADDITION OF RS.98,87,631 ON ACCOUNT OF SUPPRESSED PROFIT NOT S HOWN BY THE ASSESSEE AND TREATED THE SAME AS ASSESSEES INCOME. 3) FOR THAT THE LD. AO DID NOT TAKE COGNIZANCE OF THE VARIOUS FACTS AND MATERIALS SUBMITTED TO HIM DURING THE ASSESSMENT PR OCEEDINGS. 4) FOR THAT THE ASSESSEE CRAVES LEAVE TO ADD, ALTER, A MEND OR MODIFY ALL OR ANY OF THE ABOVE GROUND/GROUNDS OF APPEAL AT OR BEFORE THE TIME OF HEARING. IN THIS REGARD WE, ON BEHALF OF OUR CLIENT MOST HUM BLY PRAY TO SUBMIT AS BELOW: THE LD AO HAS ARBITRARILY MADE AN ADDITION WHICH IS BASED ON HIS OWN PRESUMPTIONS, ASSUMPTIONS, SURMISES AND CONJECTURES ETC. WE ARE REPRODUCING THE RELEVANT PORTION OF THE LD. ASSESSING OFFICER'S ORDER FOR YOUR READY REFERENCE (POINT NO. 6 OF THE ASSESSMENT ORDER) CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE FACTS OF THE CASE AND ON THE BASIS OF ABOVE DISCUSSION, IT WILL BE FA IR AND REASONABLE TO CALCULATE THE NET PROFIT OF THE ASSESSEE IN RESPECT OF HEAD OFFICE UNIT AT THE AVERAGE RATE OF NET PROFIT SHOWN BY ITS BOTH HEAD O FFICE AND SEZ UNITS. THE AVERAGE RATE OF NET PROFIT IS CALCULATED AT (5. 38%+ 8.14%)/2 I.E.6.76%. THUS, THE NET PROFIT OF THE ASSESSEE SHO ULD BE INCREASED BY (AVERAGE NET PROFIT I.E. 6.76% - NET PROFIT OF THE ASSESSEE SHOULD BE INCREASED BY (AVERAGE NET PROFIT I.E. 6.76% - NET P ROFIT OF H.O I.E. 5.338%) I.E. 1.38% WHICH THE ASSESSEE HAS NOT SHOWN IN COMP UTING THE INCOME FROM HEAD OFFICE. THUS THE ASSESSEE HAS SUPPRESSED NET P ROFIT OF 1.38% ON THE TURNOVER OF THE HEAD OFFICE OF R.71,64,95,000 WHICH COMES TO RS.98,87,631 BY NOT SHOWING ACTUAL NET PROFIT EARNE D BY ITS HEAD OFFICE UNIT. THEREFORE, RS.98,87,631 IS ADDED BACK TO THE TOTAL INCOME OF THE ITA NO.250 & 247/KOL/2017 A.Y.2011-12 M/S SENCO GOLD IMPEX (PVT) LTD. VS.JCIT, RAN GE-11,KOL. PAGE 3 ASSESSEE AS SUPPRESSED PROFIT NOT SHOWN BY THE ASSE SSEE IN RESPECT OF ITS HEAD OFFICE UNIT. OUR SUBMISSION: 1) DIFFERENT MARKETS; THE LD AO HAS OVERLOOKED A FACT THAT THE COMPANY HA S 2 DIVISIONS NAMELY THE H.O DIVISION WHICH MAINLY CATERS TO THE DOMESTIC MA RKET AND THE SEZ DIVISION WHICH CATERS TO THE EXPORT MARKET. 2) DIFERENT PRODUCTON ENVIRONMENTS: THE PRODUCTS SOLD BY THE HO DIVISION ARE MANUFACTUR ED THROUGH INDEPENDENT KARIGARS (ARTISANS/CRAFTSMAN) BY WAY OF OUTSOURCING . WHEREAS THE PRODUCTION OF THE SEZ DIVISION IS FORM THE COMPANYS FACTORY LOCA TED AT THE GEM & JEWELLERY SEZ (MANIKANCHAN) KOLKATA. THE PRODUCTION MADE IN T HE SEZ FACTORY IS DONE UNDER CONTROLLED ENVIRONMENT HAVING STRICT QUALITY CONTROL & OTHER CHECKS WHICH RESULTS IN LOWER WASTAGE AND CONSEQUENTLY LOWER COS T OF PRODUCTION. 3) DIFFERENT COST OF PRODUCTION: IT IS A WELL KNOWN FACT THAT THE COST OF PRODUCTION IN CASE OF OUTSOURCING WILL ALWAYS BE HIGHER THAN AS COMPARED TO THE COST OF IN HOUSE PRODUCTION BECAUSE THE COST OF PRODUCTION FROM OUTSOURCING ALSO HAS THE PR OFIT ELEMENT OF THE VENDOR (SUPPLIER) WHO IS PRODUCING SUCH PRODUCTS WHICH IS NOT PRESENT IN CASE OF INHOUSE PRODUCTION. THIS IMPACTS THE NET PROFIT MARGIN OF T HE RESPECTIVE DIVISION. IN OTHER WORD, SINCE THE PRODUCTION OF THE PRODUCTS UNDER TH E HO DIVISION IS OUTSOURCED THROUGH INDEPENDENT KARIGARS, THE PROFIT MARGINS OF HO DIVISION ARE LOWER AS COMPARED TO PROFIT MARGINS OF SEZ DIVISION. 4) DIFFERENT GEOGRAPHIES OF SALES A) THE SALES MADE THROUGH HO DIVISION OF THE COMPANY A RE MAINLY TO THE DOMESTIC MARKET AND THE MAIN CUSTOMER IS SENCO GOLD LTD. FURTHER THEE PROFIT MARGINS IN DOMESTIC MARKET ARE MUCH LOWER AS COMPAR ED TO THE EXPORT MARKETS. THERE ARE CERTAIN COSTS LIKE THE ADVERTISE MENT AND SALES PROMOTION OF RS.13.06 LACS AND BANK CHARGES OF RS.15.00 LACS WHI CH ARE DIRECTLY ATTRIBUTABLE TO THE HO UNIT WHICH HAS ALSO CONTRIBU TED TO LOWER MARGIN/PROFITS IN THE HO UNIT AS COMPARED TO THE SEZ UNITS. THE SE Z DIVISION DOES NOT MAKE ANY ADVERTISEMENTS OR SALES PROMOTION ACTIVITIES HE NCE THE ENTIRE SUCH EXPENSES IS ATTRIBUTED TO THE HO DIVISION. B) THE SALES OF THE ASSESSEE COMPANY IS TO 2 DIFFEREN T MARKET SEGMENTS I.E. THE HO DIVISION WHICH CATERS TO DOMESTIC MARKET AND SEZ DIVISION WHICH CATERS TO EXPORT MARKET. THERE IS HUGE COMPETITION FROM THE O RGANIZED AS WELL AS UNORGANIZED SECTOR OF JEWERLERS IN THE DOMESTIC MAR KET WHICH LEADS TO CUT THROAT COMPETITION IN THE PRICING AND SELLING OF JE WELLERY PRODUCTS AND LOWERING OF NET PROFITS IN THE HO DIVISION WHEREAS IN CASE OF EXPORT SALES THE COMPETITION IS VERY LESS BECAUSE THERE ARE HARDLY A NY JEWELERS WHO PRODUCE AND EXPORT BENGAL TYPE JEWELLERY FORM WEST BENGAL WHICH IS A SPECIALTY OF THE LOCAL ARTISANS AND IS IN HUGE DEMAND OVERSEAS. THIS HELPS THE ASSESSEE COMPANY TO COMMAND A HIGHER VALUE ADDITION (MAKING CHARGES) FROM THE OVERSEAS CUSTOMER AS COMPARED TO THE MARKING CHARGE S CHARGED FROM THE DOMESTIC OR LOCAL CUSTOMER. AS A RESULT THE EZ DIVI SION YIELDS HIGHER PROFIT MARGINS AS COMPARED TO HO DIVISION. 5) DIFFERENT PRODUCT DESIGDNS & WASTAGES IN THIS CONTEXT IT I IMPERATIVE TO STATE THAT THE P RODUCTION AND DESIGN SOLD IN THE DOMESTIC MARKET AND THE OVERSEAS MARKET ARE ALSO DI FFERENT. WE WOULD ALSO LIKE TO STATE THAT THE MAJOR PART OF PRODUCTION (ALMOST 90% ) OF JEWERLLERY IS BY WAY OF ITA NO.250 & 247/KOL/2017 A.Y.2011-12 M/S SENCO GOLD IMPEX (PVT) LTD. VS.JCIT, RAN GE-11,KOL. PAGE 4 HANDMADE PRODUCTION MADE BY THESE KARIGARS HENCE TH ERE IS NO STANDARDIZATION OF PRODUCT AND DESIGN. THEREFORE, THE COST OF PRODUCTI ON ALSO VARIES BASED ON THE PRODUCT AND / OR DESIGN WHICH ULTIMTEL9Y IMPACTS TH E NET PROFIT MARGINS. IN CASE OF EXPORT MARKET THE PRODUCTS GENERALLY SOLD ARE OF HE AVY WEIGHT JEWELLERY IN NATURE WHICH HAVE LOWER COST OF PRODUCTION AS COMPARED TO LIGHT WEIGHT JEWELLLERY WHICH IS SOLD IN DOMESTIC MARKET HAVING HIGHER COST OF PR ODUCTION AS THE WASTAGE COMPONENT IN HEAVY WEIGHT JEWELLERY IS LOWER AS COM PARED TO THE LIGHT WEIGHT JEWELLERY. FURTHER IT IS WORTH MENTIONING THAT IN CASE OF EXPO RTS THE CUSTOMER IS SUPPLIED WITH DESIGN AS PER HIS CHOICE WHICH HELPS THE ASSES SEE COMPANY TO COMMAND HIGHER PRICE FOR CUSTOMIZATION THIS RESULTS IN HIGH ER PROFIT MARGIN WHEREAS IN CASE OF DOMESTIC SALE THE PRODUCTION IS IN BULK WITH SET DESIGNS AND LOWER PRICES AND CONSEQUENTLY LOWER PROFIT MARGINS. 3. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO RI VAL CONTENTIONS. CASE FILE STANDS PERUSED WITH THE ABLE ASSISTANCE OF BOTH THE PARTIES. THIS ASSESSEE IS A COMPANY ENGAGED IN MANUFACTURING AND EXPORT OF JEWELLERY PR ODUCTS FROM SEZ UNIT. THE ASSESSING OFFICER TOOK UP SCRUTINY IN ITS CASE. HE CAME ACROSS ASSESSEES NET PROFITS FROM HEAD OFFICE @ 5.4% AND THAT @ 8.15% PERTAINING TO SEZ UNITS ON RESPECTIVE SALES OF 7,13,266/- AND 19,32,340/-; COMING TO 38,596/- AND 1,57,514/-; RESPECTIVELY. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE SAID VARYING NET PROFIT RATE IN THE SAME BUSINESS ACTIVITY WAS NOT JUSTIFIE D. THE ASSESSEE QUOTED VARIOUS REASONS MORE PARTICULARLY DIFFERENCE BETWEEN DOMEST IC AND EXPORT MARKETS WHEREIN THE LATTER TURN OUT TO BE MORE PROFITABLE SINCE DER IVING INCOME IN FOREIGN CURRENCY. WE NOTICE FORM THE ASSESSING OFFICER DATED 30.03.2014 THAT THE ASSESSING OFFICER REJECTED ALL THE SAID PLEADINGS TO ESTIMATE ASSESSEES NET P ROFIT AT AN AVERAGE RATE OF 5.38 AND 8.14% WHICH WAS DIVIDED BY 2 COMING TO 6.76%. HE TH EN REDUCED NET HEAD OFFICE NET PROFIT @ 5.38% FROM 6.76% COMING 1.38% WHICH WAS AL LEGEDLY NOT SHOWN IN COMPUTING HEAD OFFICE INCOME. HE THUS CALCULATED TH E INSTANT TAXPAYERS NET PROFIT @ 1.8% ON HEAD OFFICE TURNOVER OF 71,64,95,000/- RESULTING IN THE IMPUGNED ADDITION O F 98,87,631/- AS REDUCED TO 35,82,475/- ONLY IN THE CIT(A)S FINDINGS HEREUNDER . 4. LEARNED COUNSEL REPRESENTING ASSESSEE QUOTES CA SE LAW SARGAM CINEMA VS. CIT CIVIL APPEAL NO. 6973 OF 2009 DECIDED ON 19.10. 2009 UPHOLDING TRIBUNALS DECISION. THE ASSESSING OFFICER HAD NOT REJECTED T HE CONCERNED TAXPAYERS BOOKS THEREIN BEFORE MAKING REFERENCE TO THE DEPARTMENTAL VALUATION OFFICER. THEN COMES HON'BLE JURISDICTIONAL HIGH COURTS DECISION IN M/S SWADESHI COMMERCIAL CO.LTD. VS. ITA NO.250 & 247/KOL/2017 A.Y.2011-12 M/S SENCO GOLD IMPEX (PVT) LTD. VS.JCIT, RAN GE-11,KOL. PAGE 5 THE COMM. OF INCOME TAX , ITA NO.219 OF 2001 DECIDED ON 18.12.2008 ACCEPTIN G ASSESSEES TAX APPEAL DIRECTED AGAINST THE TRIBUNAL S ORDER INVOLVING THE ISSUE OF GROSS PROFIT ESTIMATION WITHOUT REJECTION OF BOOKS. MR. S HAH SUBMITS THAT THEIR LORDSHIPS HAVE ANSWERED THE SUBSTANTIAL QUESTION OF LAW FRAME D IN ASSESSEES FAVOUR THAT SUCH AN ESTIMATION IN ABSENCE OF BOOK REJECTION IS NOT SUST AINABLE. LAST JUDICIAL PRECEDENT QUOTED IS ITA 1685/KOL/2009 M/S SRK TEA PROCESSING INDUSTRIES LTD. VS. ACIT DATED 11.03.2011 ACCEPTING ASSESSEES APPEAL CHALLENGING SIMILAR GROSS PROFIT ESTIMATION WITHOUT CORRESPONDING REJECTION OF ITS BOOKS OF ACC OUNT. LEARNED DEPARTMENTAL REPRESENTATIVE FAILS TO REBUT THE CLINCHING FACT TH AT NEITHER OF THE LOWER AUTHORITIES HAS REJECTED ASSESSEES BOOKS OF ACCOUNT BEFORE ESTIMAT ING ITS NET PROFITS IN ISSUE. WE THEREFORE DRAW STRONG SUPPORT FROM THE ABOVE JUDICI AL PRECEDENTS TO CONCLUDE THAT BOTH THE LOWER AUTHORITIES HAVE ERRED IN LAW AS WELL AS ON FACTS IN ESTIMATING ASSESSEES NET PROFITS WITHOUT REJECTING ITS BOOKS OF ACCOUNT. THE REVENUES APPEAL ITA 250/KOL/2017 SEEKING TO REVIVE THE IMPUGNED ADDITIO N TO THE EXTENT OF 63,05,156/- FAILS WHEREAS ASSESSEES CROSS APPEAL CHALLENGING C ORRECTNESS OF REMAINING ADDITION OF 35,82,475/- SUCCEEDS. 5. THE REVENUES APPEAL ITA NO.250/KOL/21017 IS DIS MISSED AND ASSESSEES CROSS APPEAL ITA NO.247/KOL/2017 IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 19/09/2018 SD/- SD/- ( !) () !) (J.SUDHAKAR REDDY) (S.S.GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER *DKP-SR.PS * - 19/09/2018 / KOLKATA / COPY OF ORDER FORWARDED TO:- 1. /ASSESSEE-M/S SENCO GOLD IMPEX (PVT) LTD. 41A A.J.C. BOSE ROAD 10 TH FLOOR, KOLKATA-17 2. ! /REVENUE-JCIT,RANGE-11, KOLKATA 3. - . / CONCERNED CIT 4. . - / CIT (A) 5. / ))- , - /DR, ITAT, KOLKATA 6. 3 / GUARD FILE. BY ORDER/ , /TRUE COPY/ SR. PRIVATE SECRETAR Y, HEAD OF OFFICE/DDO -,