The ITO, Ward-4(4), Ahmedabad V. Morakhiya Metal & Alloys Ltd., Ahmedabad

ITA 268/AHD/2007

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9798 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 14-09-2010
• Assessment Year: 2001-2002
• Appeal Filed On: 15-01-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R K DHANESTAD R
• Keywords: Rejection of books of accounts; Depreciation; Proportionate interest; Corroborative evidences; Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH AHMEDABAD BENCH AHMEDABAD BENCH AHMEDABAD BENCH A AA A BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI T.K.SHARMA T.K.SHARMA T.K.SHARMA T.K.SHARMA, JUDICIAL MEMBER , JUDICIAL MEMBER , JUDICIAL MEMBER , JUDICIAL MEMBER AND AND AND AND SHRI N.S. SAINI, ACCOUNTANT MEMBER SHRI N.S. SAINI, ACCOUNTANT MEMBER SHRI N.S. SAINI, ACCOUNTANT MEMBER SHRI N.S. SAINI, ACCOUNTANT MEMBER DATE OF HEARING:14-9-2010 DRAFTED ON:14 -9-2010 ITA NO. 268 /AHD/ 2007 ASSESSMENT YEAR :2001-02 INCOME TAX OFFICER, WARD 4(4), 1 ST FLOOR, NAVJIVAN TRUST BUILDING, ASHRAM ROAD, AHMEDABAD. VS. MORAKHIYA METAL AND ALLOYS LIMITED, 12 MARADIA PLAZA, 2 ND FLOOR, B-WING, C. G. ROAD, NAVRANGPURA, AHMEDABAD. PAN/GIR NO. : AAACM 3439J (A PPELLANT ) .. ( RESPONDENT ) APPELLANT BY : SHRI R.K.DHANESTA,D.R. RESPONDENT BY: SHRI SAKAR SHARMA. O R D E R O R D E R O R D E R O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :- THIS IS AN APPEAL FILED BY THE REVENUE AGAINST TH E ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-VIII, AHMEDABAD, DATED 5-10-2006. 2. GROUND NO.1 READS AS UNDER:- 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETI NG THE DISALLOWANCE OF INTEREST OF `.3,64,930/- MADE ON AC COUNT OF INTEREST BEARING FUNDS FOR NON BUSINESS PURPOSES . 3. THE BRIEF FACTS OF THE CASE ARE THAT LEARNED ASSESSING OFFICER VIDE PARA-4 OF HIS ORDER CONSIDERED THAT ADVANCES O F `. 5 LACS WAS GIVEN TO N. G. REALTORS THROUGH THE DIRECTOR SHRI S HRIPAL MORAKHIA. HE ALSO OBSERVED THAT THE ADVANCE TO THE GROUP CONC ERN VIZ. MORAKHIA CYBER SOLUTIONS LTD., (MCSL) WAS NOT FOR B USINESS PURPOSE AND HE WORKED OUT THE INTEREST AT 15% ON TH E AVERAGE ADVANCE DURING THE YEAR AND DISALLOWED A SUM OF `.1 ,84,930/-. IN DOING SO, HE REJECTED THE CONTENTION OF THE APPELLA NT THAT THE ADVANCE WAS GIVEN TO SISTER CONCERN AND THAT THE BO RROWED FUNDS WERE NOT DIVERTED FOR SUCH ADVANCE. AS REGARDS ADVA NCE TO ANOTHER - 2 - CONCERN VIZ. SHARDA CREDIT PVT. LTD.,, THE LEARNED ASSESSING OFFICER HELD THAT NO SUPPORTING EVIDENCE/PROPER EXPLANATION WAS FURNISHED AND DISALLOWED INTEREST AT 15% ON `.7 LACS AND WORK ED OUT THE DISALLOWANCE AT `.1,05,000/-. THUS, THE TOTAL DISAL LOWANCE WAS `.3,64,930/-. 4. ON APPEAL, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE CONTENDED THAT THE LEARNED ASSESSING OFFIC ER DID NOT CONSIDER THE FREE FUNDS AVAILABLE WITH THE APPELLAN T AND THAT THE SECURED LOANS WERE SPECIFICALLY APPLIED FOR BUSINES S PURPOSE AND IN ANY CASE A SUM OF `.28,25,042/- BEING LOANS AND ADV ANCES WERE MET OUT OF PROFIT GENERATION, INCLUDING THE CURRENT YEAR PROFIT. THUS, IT WAS ARGUED THAT INTEREST FREE FLOW BEING PROFIT BEFORE DEPRECIATION AND OPENING CASH AND BANK BALANCES WER E MUCH MORE THAN THE ADVANCES DISCUSSED ABOVE AND HENCE NO INTE REST PAYMENT WAS ATTRIBUTABLE TO SUCH ADVANCES. FROM THE DETAILS FURNISHED, I FIND THAT THE CURRENT YEAR PROFIT BEFORE DEPRECIATI ON WAS TO THE TUNE OF `.47.64 LACS AND CONSIDERING THE OPENING CASH AN D BANK BALANCES CREATED OUT OF EARLIER YEAR PROFITS AND DE PRECIATION RESERVE AND THE BORROWINGS HAVE BEEN SPECIFICALLY A PPLIED TOWARDS INVENTORY AND REPAYMENT OF UNSECURED LOANS, EVEN TA KING INTO ACCOUNT PAYMENT TO SUNDRY CREDITORS AND REALIZATION OF SUNDRY DEBTORS, THERE IS NO DIVERSION OF INTEREST BEARING FUNDS FOR ADVANCES DISCUSSED ABOVE. IN THIS VIEW OF THE MATTE R, THE DISALLOWANCE EFFECTED IS PURELY ON A PRORATA BASIS WITHOUT A ONE-TO- ONE INK. THE AVAILABILITY OF INTERNAL ACCRUALS IS N OT DISPUTED BY THE LEARNED ASSESSING OFFICER. THUS, THE CLAIM OF THE A PPELLANT THAT THE ADVANCES WERE OUT OF INTEREST FREE SOURCES IS TENAB LE AND THE RELIANCE ON THE DECISION OF THE HON'BLE ITAT AHMEDA BAD BENCH IN THE CASE OF TORRENT FINANCIERS REPORTED AT 73 TTJ 6 24 IS FACTUALLY ACCEPTABLE. IN THAT VIEW OF THE MATTER, THE ADDITIO N BEING DISALLOWANCE OF INTEREST AT `.3,64,930/- IS DIRECTE D TO BE DELETED. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTE D THAT THE ASSESSEE HAS BORROWED SUM OF `4,25,02,984/- AND HAS PAID INTEREST DURING THE YEAR OF `.26,02,829/-. THE ASSE SSEE HAS GIVEN - 3 - INTEREST FREE ADVANCE OF `. 5 LACS TO N.G. REALTORS FOR PURCHASE OF FLAT WHICH IS BOOKED IN THE NAME OF DIRECTOR OF THE COMPANY SHRI SHRIPAL MORAKHIYA THEREFORE, THE ADVANCE GIVEN BY T HE COMPANY WAS FOR NON BUSINESS PURPOSES AND INTEREST THEREON WAS RIGHTLY DISALLOWED BY THE LEARNED ASSESSING OFFICER. FURTHE R THE ASSESSEE HAS ALSO GIVEN ADVANCE OF `.24,65,720/- TO ITS GROU P CONCERN MSCL WHICH WAS ALSO NOT FOR THE BUSINESS PURPOSES OF THE ASSESSEE. THE ASSESSEE WAS NOT CHARGING ANY INTEREST FROM THE SAI D MSCL. THE LEARNED ASSESSING OFFICER HAS NOTICED THAT ASSESSEE HAS GIVEN ADVANCES REGULARLY THROUGHOUT THE YEAR AND HENCE TH E LEARNED ASSESSING OFFICER WAS JUSTIFIED IN DISALLOWING INTE REST ON SUCH ADVANCE. FURTHER, ASSESSEE HAS GIVEN ADVANCE OF `. 7 LACS TO M/S. SHARDA CREDIT PVT. LTD., THE ASSESSEE EXPLAINED THA T ADVANCE WAS GIVEN 4 YEARS BACK FOR PURCHASES BUT DUE TO SOME PR OBLEM THE GOODS COULD NOT BE SUPPLIED TO THE ASSESSEE AND THE PAYMENT WAS ALSO NOT RECEIVED BACK. THE LEARNED DEPARTMENTAL R EPRESENTATIVE SUBMITTED THAT THE ASSESSEE FAILED TO PRODUCE ANY C ORROBORATIVE EVIDENCE FOR THE PURCHASES TO BE MADE BY THE ASSESS EE. THEREFORE, THE LEARNED ASSESSING OFFICER RIGHTLY DISALLOWED TH E INTEREST ON THE ADVANCE GIVEN. HE SUBMITTED THAT THE LEARNED COMMIS SIONER OF INCOME TAX (APPEALS) HAS DELETED THE DISALLOWANCE B Y ACCEPTING THE EXPLANATION OF THE ASSESSEE THAT THE DISALLOWAN CE WAS EFFECTED PURELY ON PRORATA BASIS WITHOUT PROVING ANY NEXUS B ETWEEN THE BORROWED FUNDS AND ADVANCES GIVEN FREE OF INTEREST. HE SUBMITTED THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) HAS NOT CONSIDERED THE OBSERVATION OF THE LEARNED ASSESSING OFFICER WHILE MAKING THE DISALLOWANCE OF INTEREST. WITHOUT POINT ING OUT ANY ERROR IN THE FINDING OF THE LEARNED ASSESSING OFFICER THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WAS NOT JUSTIF IED IN DELETING THE DISALLOWANCE OF INTEREST. 6. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE ON THE OTHER HAND SUPPORTED THE ORDER OF THE LEARNED C OMMISSIONER OF INCOME TAX(APPEALS). HE SUBMITTED THAT THE ASSES SEE THE LEARNED ASSESSING OFFICER HAS OBSERVED THAT THE APP ELLANT DIVERTED HIS OWN FUNDS FOR GIVING INTEREST FREE ADVANCES TO VARIOUS PARTIES - 4 - AND ITS SISTER CONCERN FOR NON BUSINESS PURPOSES WH ICH HAS RESULTED INTO RAISING OF FUNDS ON INTEREST FOR BUSINESS PURP OSES. THE OBSERVATION OF THE LEARNED ASSESSING OFFICER VERY C ATEGORICALLY INDICATE THAT BORROWED CAPITAL WAS NOT USED IN GIV ING INTEREST FREE ADVANCES AND THEREFORE, DISALLOWANCE OF INTEREST BY THE ASSESSING OFFICER ON THE FUNDS BORROWED AND UTILIZED FOR THE PURPOSE OF BUSINESS IS NOT JUSTIFIED. IT IS A SETTLED PROPOSIT ION THAT NO NOTIONAL INTEREST COULD BE DISALLOWED UNLESS IT IS PROVED TH AT INTEREST BEARING FUNDS WERE USED FOR GIVING INTEREST FREE AD VANCES. IN OUR CASE, NO NEXUS BETWEEN THE BORROWED CAPITAL AND INT EREST FREE ADVANCES HAS BEEN ESTABLISHED BY THE ASSESSING OFFI CER RATHER HE HIMSELF HAS CONCLUDED IN PARA-8 THAT THE INTEREST F REE ADVANCES WERE GIVEN BY THE APPELLANT OUT OF THE AVAILABLE OW N FUNDS. IT IS THEREFORE, SUBMITTED THAT ACTION OF THE ASSESSING O FFICER DISALLOWING INTEREST AMOUNTING TO `.3,64,930/- IS N OT JUSTIFIED AND DESERVES TO BE DELETED. FOR HIS CONTENTION HE RELIE D ON THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. TIN BOX CO. 260 ITR 637 (DEL) WHERE IT WAS HELD THAT NO NOTIONAL INTERE ST COULD BE DISALLOWED UNLESS IT IS PROVED THAT INTEREST BEARIN G FUNDS WERE USED FOR GIVING INTEREST FREE ADVANCES. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE, THE ASSESSING OFFICER DISALLOWED PROPORTIONATE INTEREST OF `.3,64 ,930/- ON THE GROUND THAT THE ASSESSEE HAS DIVERTED ITS OWN FUNDS FOR GIVING INTEREST FREE ADVANCES TO VARIOUS PARTIES AND SISTE R CONCERNS FOR NON BUSINESS PURPOSES. ON APPEAL, THE LEARNED COMMI SSIONER OF INCOME TAX (APPEALS) DELETED THE DISALLOWANCE OF IN TEREST EXPENDITURE BY OBSERVING THAT DISALLOWANCE WAS MADE WITHOUT SHOWING THAT INTEREST FREE ADVANCES WERE GIVEN BY T HE ASSESSEE OUT OF INTEREST BEARING LOANS BY THE ASSESSEE. WE F IND THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RE LIANCE UTILITIES & POWER LTD., (2009) 313 ITR 340 (BOM.) HELD THAT I F THERE WERE FUNDS AVAILABLE BOTH INTEREST FREE AND OVERDRAFT AN D/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOU LD BE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE - 5 - INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INV ESTMENTS. IN THE INSTANT CASE, THE OBSERVATION OF THE LEARNED ASSESS ING OFFICER IS THAT THE ASSESSEE HAS DIVERTED HIS OWN FUND FOR GIV ING ADVANCES FOR NON BUSINESS PURPOSES TO ITS SISTER CONCERNS AND OT HER PARTIES AND HAS BORROWED FUNDS FOR THE PURPOSES OF ITS BUSINESS . THUS, THE CASE OF REVENUE IS NOT THAT THE ASSESSEE HAS DIVERTED IN TEREST BEARING BORROWED FUNDS FOR NON BUSINESS PURPOSES. THEREFORE , DISALLOWANCE OF INTEREST MADE BY THE ASSESSING OFFICER IN THE FA CTS OF THE CASE OF THE ASSESSEE IS NOT JUSTIFIED. WE THEREFORE CONFIRM THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AND DI SMISS THE GROUND OF APPEAL OF THE REVENUE. 8. GROUND NO.2 READS AS UNDER:- THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) H AS ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETI NG THE ADDITION MADE ON ACCOUNT OF LOW G.P. OF `.25,26,337 /-. 9. THE BRIEF FACTS OF THE CASE ARE THAT LEARNED ASS ESSING OFFICER HAS MADE ADDITION OF `.25,26,337/- TO TRADING PROFI T. THE LEARNED ASSESSING OFFICER VIDE PARAGRAPH-9 TO 28 OF HIS ORD ER HELD THAT THERE WAS FALL IN GROSS PROFIT RATIO TO THE TUNE OF 4.98% THE ELECTRIC CONSUMPTION DURING THE YEAR INCREASED BY 26% AND AC CORDINGLY CONCLUDED THAT THE GROSS PROFIT WAS TO BE ESTIMATED REJECTING THE EXPLANATION OF THE APPELLANT IN THIS REGARD. THUS, HE MADE ADDITION OF `.25,26,337/- TAKING THE AVERAGE GROSS PROFIT OF LAST FOUR YEARS. 10. ON APPEAL BEFORE THE LEARNED COMMISSIONER OF IN COME TAX (APPEALS) THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE VEHEMENTLY CONTENDED THAT THE ACTION OF THE LEARNED ASSESSING OFFICER IN REJECTING THE BOOK RESULTS WAS AGAINST T HE FACTS OF THE CASE AND THAT DURING THE YEAR THE JOB WORK CARRIED OUT WAS NOT SIMILAR TO THAT OF EARLIER YEARS AND HENCE COMPARIS ON OF CURRENT YEAR RESULTS WITH THAT OF EARLIER YEARS WAS ERRONEO US. HE ALSO SPECIFICALLY POINTED OUT THAT A MAJOR JOB WORK ORDE R WITH INDO GULF IN ANTICIPATION OF GETTING ORDERS WAS CARRIED OUT A T LESSER MARGIN BUT WITHIN A SPECIFIC TIME FRAME. HE ALSO STATED TH AT NO SERIOUS - 6 - MISTAKE OR DEFICIENCY IN THE AUDITED ACCOUNTS WERE POINTED OUT. HE CONTENDED THAT FURTHER THAT AS ON THE CLOSING DATE NO JOB WORK WAS IN PROCESS AND THEY WERE ALL BILLED. THE JOB WORK C HARGES IN THE FIRST WEEK OF THE SUBSEQUENT YEAR REPRESENTED THE WORKS T HAT COULD BE COMPLETED IN A DAY AND THERE WAS NO CARRYOVER OF WO RK-IN-PROGRESS OF JOB WORK. AS REGARDS INCREASE IN LABOUR AND ELE CTRIC CHARGES, HE SPECIFICALLY POINTED OUT THAT THE QUANTITY OF MATER IALS PROCESSED DURING THE YEAR WAS MORE BY 285 TONNES (24%) AND TH E PROCESSING CHARGES PAID WAS `.35/- PER KG. WHICH DOES NOT REPR ESENT ANY UNREASONABLE PAYMENT COMPARES TO LAST YEAR OF `.30/ - PER KG. THIS, ACCORDING TO THEM WAS DEPENDING ON THE NATURE OF JO B WORK AND HENCE THE LEARNED ASSESSING OFFICERS ACTION IN REJ ECTING THE RESULTS DECLARED WAS NOT JUSTIFIED. AS REGARDS VARI ATION IN STOCK POINTED OUT IN PAGE-12 OF THE ASSESSMENT ORDER, THE LEARNED COUNSEL POINTED OUT THAT THE RAW MATERIAL CONSUMPTI ON AND SEMI- FINISHED GOODS ARE ACCOUNTED SEPARATELY IN SCHEDULE S 14 AND 16 WHICH WAS OMITTED TO BE CONSIDERED BY THE LEARNED A SSESSING OFFICER. IF THEY ARE TAKEN INTO CONSIDERATION THEN THERE IS NO DISCREPANCY BETWEEN THE STOCK REGISTER AND FINAL AC COUNTS ACCOMPANYING THE RETURN OF INCOME. HE ALSO EXPLAINE D WITH REFERENCE TO EXCISE RECORDS THAT THE CLOSING STOCK OF 12092 KGS OF C.C. RODS AS PER EXCISE REGISTER TALLIED WITH THE F IGURE IN THE STOCK REGISTER WHICH INCLUDED 1399 KGS OF SEMI-FINISHED G OODS AND 10693 KGS OF RAW MATERIALS. AS REGARDS COPPER SCRAP AGAIN THE SEMI FINISHED GOODS OF 9609 KGS WAS NOT CONSIDERED BY TH E LEARNED ASSESSING OFFICER AND HE COMPARED ONLY THE RAW MATE RIALS STOCK. IN OTHER WORDS, THERE WAS NO DIFFERENCE IN STOCK OF MA TERIALS AS HELD BY THE LEARNED ASSESSING OFFICER AND IT WAS PURELY INCORRECT UNDERSTANDING OF THE METHOD OF ACCOUNTING ADOPTED B Y THE APPELLANT. ACCORDINGLY, HE SUMMED UP HIS ARGUMENT T HAT THE ADDITION ON ACCOUNT OF VARIATION IN G.P. IS AGAINST THE FACTS OBTAINING IN THE APPELLANTS CASE AND DESERVES TO B E DELETED. - 7 - 11. AFTER GOING THROUGH THE SUBMISSIONS MADE BY THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE THE LEARN ED COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED AS UN DER :- I HAVE GONE THROUGH THE ASSESSMENT ORDER AND ALSO CONSIDERED THE EXPLANATION AND THE DETAILED WRITTEN SUBMISSIONS IN THIS REGARD. DURING THE YEAR, THE NA TURE OF JOB WORK CARRIED OUT BY THE APPELLANT WAS DIFFERENT IN NATURE AND THE QUANTUM OF MATERIALS PROCESSED DURING THE YEAR WAS ALSO HIGH. CONSIDERING THE VARIATION IN COMPOSITION OF M ATERIALS PROCESSED ADOPTING THE AVERAGE G.P. OF LAST FOUR YE ARS FOR CURRENT YEAR RESULTS IS LACKING HARMONIOUS TREATMEN T. THE INCREASE IN POWER CONSUMPTION IS EXPLAINED AS DUE T O INCREASE IN JOB WORK OUT PUT. HOWEVER, THE VARIATIO N IN JOB WORK RATE IS ON ACCOUNT OF SPECIFIC CONTRACT TO BE EXECUTED WITHIN A SPECIFIC TIME FRAME AND HENCE ADOPTING A G .P. RATE WITHOUT COMPARING OR UNDERSTANDING THE COMPARABLE FEATURES IS UNJUSTIFIABLE. THE STOCK VARIATION ALSO STOOD EXPLAINED AS DETAILED IN THE PRECEDING PARAS. IN TH AT VIEW OF THE MATTER, THE REJECTION OF BOOK RESULTS ADOPTING AVERAGE G.P. IS NOT JUSTIFIABLE AND ACCORDINGLY, THE ADDITI ON IN THIS REGARD IS PURELY ON ESTIMATE BASIS CANNOT BE SUSTAI NED AS CORRECT OR REASONABLE. IN FACT, EVEN FOR ASSESSMENT YEAR 1998-99, THE G.P. SHOWN WAS AT 12.35% WHEREAS FOR T HE CURRENT YEAR IT WAS 14.38% IN ANY CASE, COMPARISON COULD BE ON THE SAME GROUND REALITIES AFTER TAKING INTO ACCO UNT THE VARIATION IN NATURE AND COMPOSITION OF WORK CARRIED OUT. HENCE THE METHODOLOGY ADOPTED BY THE LEARNED ASSESS ING OFFICER IS NEITHER SCIENTIFIC NOR ON A PROPER APPRE CIATION OF THE ENTIRE RELEVANT FACTS. WHEN THE MATERIALS PROCE SSED ARE ALL ROUTED THROUGH EXCISE RECORDS AND NO STOCK DISC REPANCY BEING POINTED OUT THEREIN THE BOOK RESULTS CANNOT B E REJECTED JUST ON AN ARITHMETICAL NOTION. THE VARIATION IN EX PENSES IS ALSO EXPLAINED AS DUE TO INCREASE IN POWER COST AND SPECIFIC JOB WORK REQUIREMENTS. TAKING INTO ACCOUNT THE ENTI RE FACTS AND CIRCUMSTANCES DETAILED THEREIN ABOVE, THE G.P. ADDITION IS NOT SUSTAINED AND DIRECTED TO BE DELETED. 12. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORT ED THE ORDER OF THE LEARNED ASSESSING OFFICER. 13. THE LEARNED AUTHORISED REPRESENTATIVE OF THE AS SESSEE RELIED ON ORDER OF THE LEARNED COMMISSIONER OF INCO ME TAX (APPEALS). HE FURTHER SUBMITTED THAT COMPARISON OF CURRENT YEARS PROFIT WITH THE EARLIER YEARS PROFIT WAS ERRONEOUS AS DURING THE YEAR JOB WORK CARRIED OUT WAS NOT SIMILAR TO THE JO B WORK DONE IN - 8 - THE EARLIER YEARS. IT WAS SUBMITTED THAT MAJOR JOB WORK ORDER WAS WITH INDO GULF IN ANTICIPATION OF GETTING ORDERS WA S CARRIED OUT AT A LESSER MARGIN WITHIN A SPECIFIC TIME FRAME. IT WAS FURTHER ARGUED THAT THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE AUDI TED AND NO MISTAKE OR DEFICIENCY IN THE AUDITED ACCOUNTS WAS P OINTED OUT. IT WAS FURTHER SUBMITTED THAT ON THE CLOSING DATE NO J OB WORK WAS IN PROCESS AND THEREFORE, NO WORK IN PROGRESS ON ACCOU NT OF JOB WORK WAS SHOWN BY THE ASSESSEE. REGARDING THE JOB WORK C HARGES IN THE FIRST WEEK OF THE SUBSEQUENT YEAR REPRESENTS WORK C OMPLETED IN A DAY AND THERE WAS NO CARRY OVER OF WORK IN PROGRESS OF JOB WORK. REGARDING INCREASE IN LABOUR AND ELECTRIC CHARGES I T WAS POINTED OUT THAT THE QUANTITY OF MATERIALS PROCESSED DURING THE YEAR WAS MORE BY 285 TONNES (24%) AND THE PROCESSING CHARGES PAID WAS `.35/- PER KG. WHICH WAS NOT UNREASONABLE AS COMPAR ED TO THE PROCESSING CHARGES PAID IN THE LAST YEAR AT `.30/- PER KG. THE LABOUR CHARGES DEPENDS ON THE NATURE OF JOB WORK AND THERE FORE, THE LEARNED ASSESSING OFFICER WAS NOT JUSTIFIED IN REJE CTING THE BOOK RESULTS OF THE ASSESSEE. THE VARIATION IN STOCK PO INTED OUT BY THE LEARNED ASSESSING OFFICER AT PAGE-12 OF THE ASSESSM ENT ORDER IT WAS POINTED OUT THAT RAW MATERIAL CONSUMPTION AND S EMI FINISHED GOODS ARE ACCOUNTED FOR SEPARATELY WHICH WAS OMITTE D TO BE CONSIDERED BY THE LEARNED ASSESSING OFFICER. IF THE Y ARE TAKEN INTO CONSIDERATION THEN THERE IS NO DISCREPANCY IN THE S TOCK REGISTER AND FINAL ACCOUNTS FILED WITH THE RETURN OF INCOME. IT WAS FURTHER SUBMITTED THAT EXCISE RECORD SHOWED CLOSING STOCK O F 1202 KGS. OF C.C. RODS WHICH FIGURE TALLIED WITH THE STOCK REGIS TER WHICH INCLUDED 1399 KGS. OF SEMI FINISHED GOODS AND 1096 KGS. OF R AW MATERIAL. AS REGARDS THE COPPER SCRAP SEMI FINISHED GOODS OF 960 9 KGS WAS NOT CONSIDERED AS HE COMPARED ONLY THE RAW MATERIAL STO CK. THUS THERE WAS NO DIFFERENCE IN STOCK OF MATERIAL AS HELD BY T HE LEARNED ASSESSING OFFICER AND IT WAS PURELY INCORRECT UNDER STANDING OF METHOD OF ACCOUNTING OF THE ASSESSEE. IT WAS THEREF ORE SUBMITTED THAT ADDITION ON ACCOUNT OF GROSS PROFIT WAS AGAINS T FACTS OF THE CASE AND HAS RIGHTLY BEEN DELETED BY THE LEARNED CO MMISSIONER OF INCOME TAX (APPEALS) - 9 - 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE, THE LEARNED ASSESSING OFFICER OBSERVED THAT THERE WAS FALL IN G ROSS PROFIT RATIO OF 4.98% AND ELECTRICITY CONSUMPTION DURING THE YEA R INCREASED BY 26%. HE ALSO NOTED THAT MAJOR PORTION OF JOB CHARGE S WAS PAID TO GROUP CONCERN M/S. METAL TUBE ROLLING MILLS PVT. LT D. HE OBSERVED THAT LABOUR CHARGES EXPENSES INCREASED BY `.79,42,0 53/- OVER THE LABOUR CHARGES PAID IN THE IMMEDIATELY PRECEDING YE AR AND MAJOR PORTION OF INCREASE WAS DURING THE PERIOD DECEMBER, 2000 TO MARCH,2001. THE LEARNED ASSESSING OFFICER ALSO NOTE D THAT AVERAGE JOB CHARGES RECEIVED WAS `.52/- PER KG IN COMPARISO N TO AVERAGE RATE OF JOB CHARGES PAID OF `.56/- PER KG DURING TH E PERIOD OF DECEMBER 2000 TO MARCH, 2001. THUS ASSESSEE WAS PAY ING HIGHER CHARGES IN COMPARISON TO ITS JOB RECEIPTS. THE LEAR NED ASSESSING OFFICER ALSO OBSERVED THAT THE ASSESSEE HAS NOT DIS CLOSED ANY WORK IN PROGRESS FOR JOB WORK. FOR THE AFORESAID REASON, HE REJECTED THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND ESTIMATED THE INCOME OF THE ASSESSEE AT AVERAGE RATE OF GROSS PROFIT OF 4 PRECE DING YEAR WHICH WORKED OUT TO 16.59%. THE ASSESSEE HAS SHOWN GROSS PROFIT @ 14.38% THEREFORE, THE LEARNED ASSESSING OFFICER MAD E ADDITION OF DIFFERENCE IN GROSS PROFIT @ 2% OF THE TOTAL TURNOV ER OF `.12,63,16,889/- AND MADE A TRADING ADDITION OF `.2 5,26,337/-. 15. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) DELETED THE ADDITION BY OBSERVING AS UNDER:- I HAVE GONE THROUGH THE ASSESSMENT ORDER AND ALSO CONSIDERED THE EXPLANATION AND THE DETAILED WRITTEN SUBMISSIONS IN THIS REGARD. DURING THE YEAR, THE NA TURE OF JOB WORK CARRIED OUT BY THE APPELLANT WAS DIFFERENT IN NATURE AND THE QUANTUM OF MATERIALS PROCESSED DURING THE YEAR WAS ALSO HIGH. CONSIDERING THE VARIATION IN COMPOSITION OF M ATERIALS PROCESSED ADOPTING THE AVERAGE G.P. OF LAST FOUR YE ARS FOR CURRENT YEAR RESULTS IS LACKING HARMONIOUS TREATMEN T. THE INCREASE IN POWER CONSUMPTION IS EXPLAINED AS DUE T O INCREASE IN JOB WORK OUT PUT. HOWEVER, THE VARIATIO N IN JOB WORK RATE IS ON ACCOUNT OF SPECIFIC CONTRACT TO BE EXECUTED WITHIN A SPECIFIC TIME FRAME AND HENCE ADOPTING A G .P. RATE - 10 - WITHOUT COMPARING OR UNDERSTANDING THE COMPARABLE FEATURES IS UNJUSTIFIABLE. THE STOCK VARIATION ALSO STOOD EXPLAINED AS DETAILED IN THE PRECEDING PARAS. IN TH AT VIEW OF THE MATTER, THE REJECTION OF BOOK RESULTS ADOPTING AVERAGE G.P. IS NOT JUSTIFIABLE AND ACCORDINGLY, THE ADDITI ON IN THIS REGARD IS PURELY ON ESTIMATE BASIS CANNOT BE SUSTAI NED AS CORRECT OR REASONABLE. IN FACT, EVEN FOR ASSESSMENT YEAR 1998-99, THE G.P. SHOWN WAS AT 12.35% WHEREAS FOR T HE CURRENT YEAR IT WAS 14.38% IN ANY CASE, COMPARISON COULD BE ON THE SAME GROUND REALITIES AFTER TAKING INTO ACCO UNT THE VARIATION IN NATURE AND COMPOSITION OF WORK CARRIED OUT. HENCE THE METHODOLOGY ADOPTED BY THE LEARNED ASSESS ING OFFICER IS NEITHER SCIENTIFIC NOR ON A PROPER APPRE CIATION OF THE ENTIRE RELEVANT FACTS. WHEN THE MATERIALS PROCE SSED ARE ALL ROUTED THROUGH EXCISE RECORDS AND NO STOCK DISC REPANCY BEING POINTED OUT THEREIN THE BOOK RESULTS CANNOT B E REJECTED JUST ON AN ARITHMETICAL NOTION. THE VARIATION IN EX PENSES IS ALSO EXPLAINED AS DUE TO INCREASE IN POWER COST AND SPECIFIC JOB WORK REQUIREMENTS. TAKING INTO ACCOUNT THE ENTI RE FACTS AND CIRCUMSTANCES DETAILED HEREIN ABOVE, THE G.P. A DDITION IS NOT SUSTAINED AND DIRECTED TO BE DELETED. 16. WE FIND THAT NO SPECIFIC DEFECT COULD BE POINTE D OUT IN THE ABOVE ORDER OF THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS). THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HA S OBSERVED THAT IN THE ASSESSMENT YEAR 1998-99 GROSS PROFIT AC CEPTED WAS @ 12.35% WHICH WAS LOWER THAN THE GROSS PROFIT OF 14. 38% SHOWN IN THE YEAR UNDER CONSIDERATION. HE FURTHER OBSERVED T HAT COMPARISON OF GROSS PROFIT COULD BE MADE ON THE SAME GROUND RE ALITY AND TAKING INTO CONSIDERATION THE VARIATION IN NATURE A ND COMPOSITION OF WORK CARRIED OUT. NO MATERIAL WAS BROUGHT ON RECORD BY THE REVENUE TO SHOW THAT THE NATURE AND COMPOSITION OF WORK CARRIED OUT IN THE YEAR UNDER CONSIDERATION WAS THE SAME AS IN THE EARLIER YEARS. NO ERROR COULD ALSO BE POINTED OUT BY THE LE ARNED DEPARTMENTAL REPRESENTATIVE IN THE OBSERVATION OF T HE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) THAT GROSS PROF IT OF 12.35% WAS ACCEPTED IN THE ASSESSMENT YEAR 1998-99. WE ALS O FIND THAT THE ASSESSEE EXPLAINED THAT INCREASE IN POWER CONSU MPTION WAS DUE TO THE INCREASE IN JOB WORK OUTPUT AND THE VARI ATION IN JOB WORK RATE WAS ON ACCOUNT OF SPECIFIC CONTRACT TO BE EXEC UTED WITHIN A SPECIFIED TIME FRAME AND HENCE ADOPTING A GROSS PRO FIT RATE WITHOUT COMPARING OR UNDERSTANDING THE COMPARABLE F EATURES WAS - 11 - UNJUSTIFIED. NO MATERIAL WAS BROUGHT ON RECORD BY T HE REVENUE TO SHOW THAT THE SAID EXPLANATION OF THE ASSESSEE WAS NOT CORRECT. NO ERROR COULD BE POINTED OUT BY THE LEARNED DEPARTMEN TAL REPRESENTATIVE IN THE FINDING OF THE LEARNED COMMIS SIONER OF INCOME TAX (APPEALS) THAT MATERIAL PROCESSED WERE S HOWN IN THE EXCISE RECORD AND NO STOCK DISCREPANCY WAS FOUND. F URTHER, THE ASSESSEE ALSO EXPLAINED THAT THERE WAS NO CLOSING W ORK-IN-PROGRESS OF JOB WORK AS AT 31.3.2001. NO MATERIAL WAS BROUGH T ON RECORD TO SHOW THAT THE EXPLANATION OF THE ASSESSEE WAS NOT C ORRECT. THUS, IT IS OBSERVED THAT NO SPECIFIC MATERIAL COULD BE BROU GHT ON RECORD BY THE LEARNED ASSESSING OFFICER ON THE BASIS OF WHICH REJECTION OF BOOK RESULT CAN BE JUSTIFIED. NO MATERIAL WAS BROUG HT ON RECORD TO SHOW THAT THE REGULARLY MAINTAINED BOOKS OF ACCOUNT WERE INCOMPLETE OR INCORRECT. IN OUR CONSIDERED OPINION IN ABSENCE OF ANY MATERIAL BROUGHT ON RECORD BY THE REVENUE TO SH OW THAT THE FINDING OF THE LEARNED COMMISSIONER OF INCOME TAX ( APPEALS) WAS NOT CORRECT NO INTERFERENCE IN THE ORDER OF THE LEA RNED COMMISSIONER OF INCOME TAX (APPEALS) IS CALLED FOR. HENCE THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 17. GROUND NO.3 READS AS UNDER:- THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) H AS ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETI NG THE ADDITION IN RESPECT OF WORK IN PROGRESS OF `.3,10,9 50/-. 18. THE BRIEF FACTS OF THE CASE ARE RELATING TO ADD ITION ON WORK-IN- PROGRESS OF `.3,10,950/-.THE LEARNED ASSESSING OFFI CER MADE THE ABOVE ADDITION VIDE PARAGRAPH 29 OF HIS ORDER STATI NG THAT NO PROVISION FOR WORK-IN-PROGRESS WAS MADE. HE ALSO ST ATED THAT SALES AS ON 2 ND APRIL, 2001 COULD HAVE BEEN OUT OF WORK-IN-PROGRES S AS ON 31-3-2001. 19. ON APPEAL BEFORE THE LEARNED COMMISSIONER OF IN COME TAX (APPEALS), THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE CONTENDED THE SAID ITEM INVOLVED WORKING OF ABOUT 8 TO 10 HOURS - 12 - ONLY AND THE ADDITION OF THE LEARNED ASSESSING OFFI CER WAS WITHOUT APPRECIATION OF THE ACTUAL NATURE OF JOB WORK. THE LEARNED ASSESSING OFFICER HAS NOT POINTED OUT ANY SPECIFIC EXPENDITURE WHICH WAS BOOKED BUT THE CORRESPONDING BILLS HAVE N OT BEEN RAISED. THE APPELLANT VEHEMENTLY ARGUED THAT THE EN TIRE JOB WORK WAS BILLED AND THERE WAS NO CARRY OVER. IN THAT VI EW OF THE MATTER, THE ADDITION AS ABOVE ON 50% ON SALES ON 2 ND APRIL, 2001 IS NOT SUSTAINABLE. HOWEVER, STOCK OF SEMI-FINISHED GOODS HAVE BEEN EXPLAINED AND RECONCILED. THAT BEING THE POSITION, THERE IS NO GROUND FOR ANY SEPARATE ADDITION. THE ADDITION OF ` .3,10,950/- IS ACCORDINGLY DIRECTED TO BE DELETED. 20. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORT ED ORDER OF THE LEARNED ASSESSING OFFICER. 21. THE LEARNED AUTHORISED REPRESENTATIVE OF THE AS SESSEE ON THE OTHER HAND SUBMITTED THAT THERE WAS NO WORK IN PROGRESS ON ACCOUNT OF JOB WORK AS THE TIME REQUIRED FOR PROCES SING THE JOB WORK WAS 8 TO 10 HOURS AND THEREFORE, THERE WAS NO CLOSING STOCK OF WORK IN PROGRESS AT THE END OF THE YEAR. HE SUBMITT ED THAT THE FINDING OF THE LEARNED ASSESSING OFFICER THAT THERE ARE JOB CHARGES RECEIPTS BY THE ASSESSEE ON 2 ND APRIL,2001 AND THEREFORE, THE ASSESSEE MUST HAVE HAD WORK IN PROGRESS JOB CHARGES WAS NOT CORRECT. HE SUBMITTED THAT THE JOB CHARGES RECEIVED ON 2 ND APRIL, 2001 WAS FROM THE JOB WORK DONE ON THAT DAY ITSELF. THEREFORE, HE PRAYED THAT THE ADDITION OF `.3,10,950/- ON ACCOUNT OF CLOSING WORK IN PROGRESS OF JOB WORK WAS RIGHTLY DELETED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AND THE SAID O RDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) SHOULD BE CONFIRMED. 22. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE, THE LEARNED ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS NO T SHOWN CLOSING - 13 - WORK IN PROGRESS FOR JOB WORK. HE ESTIMATED SUCH WO RK IN PROGRESS AS 50% OF THE JOB CHARGES RECEIPTS OF 2 ND APRIL, 2001 AND MADE ADDITION OF `.3,10,950/-. ON APPEAL, THE LEARNED C OMMISSIONER OF INCOME TAX (APPEALS) OBSERVED THAT THE LEARNED ASSE SSING OFFICER HAS NOT POINTED OUT ANY SPECIFIC EXPENDITURE WHICH WAS BOOKED FOR WHICH CORRESPONDING BILLS HAVE NOT BEEN RAISED. THE ASSESSEE HAS VEHEMENTLY ARGUED THAT ENTIRE JOB WORK WAS BILLED A ND THERE WAS NO CARRY OVER. HE THEREFORE, DELETED THE ADDITION M ADE BY THE LEARNED ASSESSING OFFICER ON ACCOUNT OF WORK IN PRO GRESS FOR JOB WORK. BEFORE US, THE LEARNED AUTHORISED REPRESENTAT IVE OF THE ASSESSEE SUBMITTED THAT THE JOB CHARGES RECEIVED ON 2-4-2001 WERE IN RESPECT OF JOB WHICH WAS COMPLETED IN ONE D AY. THUS, MERELY FROM THIS RECEIPT IT WAS NOT CORRECT ON THE PART OF THE LEARNED ASSESSING OFFICER TO ARBITRARILY ASSUME THA T THERE MUST HAVE BEEN SOME WORK IN PROGRESS ON 31-3-2001. WE FI ND THAT NO MATERIAL WAS BROUGHT ON RECORD BY THE LEARNED DEPAR TMENTAL REPRESENTATIVE TO CONTROVERT THE FINDINGS OF THE LE ARNED COMMISSIONER OF INCOME TAX (APPEALS). NO MATERIAL W AS BROUGHT ON RECORD BY THE REVENUE TO SHOW THAT THE JOB CHARG ES RECEIPTS SHOWN BY THE ASSESSEE ON 2 ND APRIL,2001 WAS OUT OF CLOSING WORK-IN- PROGRESS OF JOB WORK AS ON 31-3-2001 AND NOT OUT OF JOB WORK DONE AFTER 31 ST OF MARCH,2001. IN ABSENCE OF ANY SUCH MATERIAL BEI NG BROUGHT ON RECORD WE FIND NO ERROR IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IN DELETING TH E ADDITION AND THEREFORE, THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS CONFIRMED AND THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 23. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 24 TH DAY OF SEPTEMBER, 2010. SD/- SD/- ( T.K. SHARMA ) ( T.K. SHARMA ) ( T.K. SHARMA ) ( T.K. SHARMA ) ( N.S. SAINI ) ( N.S. SAINI ) ( N.S. SAINI ) ( N.S. SAINI ) JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER AHMEDABAD: ON THIS 24 TH DAY OF SEPTEMBER, 2010 COMPILED AND COMPARED BY: PATKI - 14 - COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-VIII, AHMEDABAD. 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD DATE INITIALS 1. DRAFT DICTATED ON 14-9-2010 --------------- -- 2. DRAFT PLACED BEFORE AUTHORITY 15-9-2010 ------ ------------- 3. DRAFT PROPOSED & PLACED 17-9-2010 -- ----------------- JM BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED 20-9-2010 - ---------------JM/AM BY SECOND MEMBER 5. APPROVED DRAFT COMES TO P.S 24-9-2010 --------- ----------- 6. KEPT FOR PRONOUNCEMENT ON 24-9-2010 -------------------- 7. FILE SENT TO THE BENCH CLERK 24-9-201 0 -------------------- 8. DATE ON WHICH FILE GOES TO THE ---------------- -------------------- 9. DATE OF DISPATCH OF ORDER ---------------- -- -------------------