Softtouch Fabrics Pvt.Ltd., Surat V. The Income tax Officer, Ward-6(2), Surat

ITA 2891/AHD/2006

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0489 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 04-11-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 22-12-2006
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Keywords: Gross profit estimation; Corroborative evidences
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER, AND SHRI D. C. AGRAWAL, ACCOUNTANT MEMBER ITA NO.2891/AHD/2006 ITA NO.527/AHD/2007 ASSESSMENT YEAR:2003-04 DATE OF HEARING:4.11.09 DRAFTED:6.11.09 SOFTTOUCH FABRICS PVT. LTD. 102, AIRLON HOUSE, 2/4569, SAGRAMPURA, SURAT PAN NO.AAECS7581D INCOME TAX OFFICER WARD-4(3), SURAT V/S . V/S . INCOME TAX OFFICER, WARD-6(2), SURAT M/S. SOFTTOUCH FABRICS PVT. LTD. 102, AIRLON HOUSE, 2/4569 SAGARAMPURA, SURAT (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI HARDIK VORA, AR REVENUE BY:- SHRI C.K. MISHRA, SR. DR O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE ARE ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-III, SURAT IN APPEAL NO.CAS- III/62/05-06 DATED 27-11-2006. THE ASSESSMENT WAS F RAMED BY THE ITO WARD-4(3), SURAT U/S.143(3) OF THE INCOME-TAX ACT, 1961 (HEREI NAFTER REFERRED TO AS THE ACT) VIDE HIS ORDER DATED 24-11-2005 FOR THE ASSESSMENT YEAR 2003-04. 2. THE ISSUES RAISED BY REVENUE AND THE ASSESSEE AR E COMMON AND INTERCONNECTED. THE ASSESSEE HAS RAISED THE ISSUE REGARDING REJECTION OF BOOKS OF ACCOUNT AND PARTLY CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER ON LOW ITA NO.2891/AHD/2006 & 527/AHD/2007 A.Y. 2003-04 SOFTTOUCH FABRICS PVT. LTD. V. ITO WD-6(2), SURAT PAGE 2 GROSS PROFIT (GP). THE REVENUE IS AGAINST THE DELET ION OF ADDITION PARTLY ON ACCOUNT OF LOW GROSS PROFIT. FOR THIS, THE ASSESSEE HAS RA ISED THE FOLLOWING TWO GROUNDS :- 1. ON THE FACT AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING TH E ACTION OF THE ASSESSING OFFICER IN REJECTING THE BOOKS OF ACCOUNT U/S.145 O F THE I.T. ACT. 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT (APPEALS) HAS ERRED IN PARTLY CONFI RMING THE ADDITION OF RS.6,47,185/- OUT OF ADDITION OF RS.21,97,531/- MAD E BY THE ASSESSING OFFICER FOR ALLEGED LOW GROSS PROFIT. THE REVENUE HAS RAISED THE FOLLOWING TWO GROUNDS :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT (APPEALS), SURAT HAS ERRED IN RESTRICTING THE ADDIT ION OF RS.6,47,185 WITHOUT ANY COGENT REASON. 2. THE LD. CIT (APPEALS) HAS NOT APPRECIATED THE FA CT TAT THE ASSESSEE HAD NEVER PRODUCED ANY CORROBORATIVE EVIDENCES IN SUPPO RT OF ITS SUBMISSION BEFORE THE ASSESSING OFFICER. THE ESTIMATION OF GP @ 40.05% BY THE ASSESSING OFFICER WAS ABSOLUTELY JUSTIFIED. 3. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE HAVE ALSO PERUSED TH E CASE RECORDS INCLUDING THE ASSESSMENT ORDER AS WELL AS ORDER OF CIT(A). THE B RIEF FACTS LEADING TO THE ABOVE COMMON ISSUES ARE THAT DURING THE YEAR THE ASSESSEE -COMPANY HAD SHOWN A GP OF 25.80% ON A TOTAL TURNOVER OF RS.1,54,26,319/- AS C OMPARED TO 34.13% ON A TURNOVER OF RS.1,36,6,026/- IN THE IMMEDIATELY PRECEDING YEA R. THE ASSESSING OFFICER ASKED THE ASSESSEE TO PRODUCE THE PRODUCTION AND WAGE REG ISTER BUT THE ASSESSEE EXPRESSED ITS INABILITY IN THIS REGARD ON THE GROUN D THAT IT WAS PRACTICALLY NOT POSSIBLE TO MAINTAIN SUCH RECORDS DUE TO THE COMPLEXITY OF P RODUCTION PROCESS INVOLVED. THE ASSESSEE WAS REQUIRED TO EXPLAIN THE FALL IN GP DUR ING THE YEAR AND IT WAS STATED THAT THERE WAS INCREASE IN MANUFACTURING EXPENSES BY 2.0 7% AND DECREASE IN NET MARGIN ON SALES OF SATIN RIBBON BY 6.25% AND THE COST OF Y ARN HAD ALSO INCREASED IN THE CURRENT YEAR. IT WAS FURTHER STATED THAT DAY-TO-DAY QUANTITATIVE RECORDS COULD NOT BE MAINTAINED SINCE THE PRODUCTION PROCESS WAS A COMPL EX ONE WHICH HAD VARIOUS STAGES LIKE WARPING, BEAMING, WEAVING, DYEING & CUT TING, ROLL PACKAGING ETC. AND THEREFORE IT WAS PRACTICALLY IMPOSSIBLE TO TAKE OUT YARN AND GRAY RIBBONS FROM VARIOUS STAGES FOR MAINTAINING EVERYDAY QUANTITATIVE RECORD S ON A DAILY BASIS. THE TOTAL SHORTAGE CLAIMED BY THE ASSESSEE WAS ONLY 1.42% OF CONSUMPTION OF YARN AND ITA NO.2891/AHD/2006 & 527/AHD/2007 A.Y. 2003-04 SOFTTOUCH FABRICS PVT. LTD. V. ITO WD-6(2), SURAT PAGE 3 0.99% OF THE CONSUMPTION OF GRAY RIBBON. THE ASSESS EE RELIED ON THE DECISIONS IN THE CASE OF PANDIT BROSS V. CIT 26 ITR (1954) 159 (PUNJAB) AND STATED THAT IN THIS CASE, THE HONBLE HIGH COURT HAS HELD THAT THE ABSE NCE OF STOCK REGISTER CANNOT LEAD TO AN INFERENCE THAT THE ACCOUNTS WERE FALSE AND SU CH ABSENCE OF STOCK REGISTER DID NOT EMPOWER THE AO TO REJECT THE BOOK RESULTS. THE AO OBSERVED THAT MONTH-WISE PRODUCTION AND CONSUMPTION OF ELECTRICITY WERE DIFF ERENT IN DUE COURSE OF DIFFERENT MONTHS AND PRODUCTION OF GRAY CLOTH PER/UNIT CONSUM PTION OF ELECTRICITY VARIED FROM 0.27 KGS. TO 0.52 KGS IN DIFFERENT MONTH. IT WAS FU RTHER OBSERVED THAT CONSUMPTION OF YARN WAS 50608.11 KGS AGAINST PRODUCTION OF STAIN R IBBON AT 44976 KGS. WHICH MEANT THAT THE OVERALL SHORTAGE WAS 5632.11 KGS BUT THIS WAS NOT IN ACCORDANCE WITH THE AUDIT REPORT THEREFORE THE GENUINENESS OF PRODUCTIO N AND WASTAGE WAS NOT ESTABLISHED. IN RESPONSE TO THIS THE ASSESSEE STAT ED THAT WHILE CALCULATING CONSUMPTION OF ELECTRICITY PER KG. OF PRODUCTION, T HE MONTHLY PRODUCTION OF FINISHED SATIN RIBBONS WERE NOT TAKEN INTO ACCOUNT AND THERE FORE THE CORRECT METHOD WOULD BE TO CONSIDER THE MONTHLY PRODUCTION OF FINISHED SATI N RIBBONS ALONG WITH MONTHLY PRODUCTION OF GRAY RIBBON. REGARDING DISCREPANCY IN QUANTITY DETAILS AS PER AUDIT REPORT AND THE ONE SUBMITTED DURING THE ASSESSMENT PROCEEDINGS, IT WAS STATED THAT THE QUANTITY AS PER AUDIT REPORT TALLIED WITH BOOKS OF ACCOUNT AND THE QUANTITY DETAILS AS PER SUBMISSIONS WERE IN FACT MONTHLY STOCK STATE MENT SUBMITTED TO THE BANK WAS FOR AVAILING CREDIT LIMIT. THE AO DID NOT ACCEPT TH E EXPLANATION ON THE GROUND THAT COST OF PURCHASE INCREASED DID NOT HAVE ANY RELEVAN CE TO THE LOWER GP SINCE GP WAS WORKED OUT ON THE BASIS OF CONSUMPTION OF RAW M ATERIAL AND NOT PURCHASE OF RAW MATERIAL. FURTHER, NO REASON AS TO WHY FINISHED GOO DS WERE SOLD AT A LOWER PRICE WAS GIVEN. THE ASSESSEE ALSO HAD NOT PRODUCED STOCK REG ISTER OR PRODUCTION REGISTER AND THE SHORTAGE IN THE FINAL PRODUCTION OF SATIN RIBBO NS WAS 11.1% WHICH WAS VERY HIGH. THE AO RELIED ON VARIOUS JUDICIAL PRONOUNCEMENTS IN SUPPORT OF HIS PROPOSAL TO REJECT THE BOOKS RESULTS U/S./145 OF THE ACT. THE AO ALSO PREPARED A CHART REGARDING PRODUCTION OF FINISHED GOODS BY CONSUMPTION OF ELEC TRICITY AND FOUND THAT THE PRODUCTION PER UNIT OF ELECTRICITY VARIED FROM 2.17 % TO 4.30% IN DIFFERENT MONTHS. THE AO THEREFORE REJECTED THE BOOK RESULTS BY RESORTING TO PROVISIONS OF SECTION 145 OF THE ACT AND ESTIMATED GP AT 40.05% WHICH WAS THE AV ERAGE OF THE PRECEDING TWO YEARS AND MADE AN ADDITION OF RS.21,97,531/- ON THI S ACCOUNT. WE FIND FROM THE ABOVE FACTS THAT THE ASSESSEE COULD NOT PRODUCE THE PRODUCTION RESULTS, THE STOCK REGISTER AND WAGE REGISTER. THE ASSESSEE HAS NOT PR ODUCED THE BASIC PRIMARY ITA NO.2891/AHD/2006 & 527/AHD/2007 A.Y. 2003-04 SOFTTOUCH FABRICS PVT. LTD. V. ITO WD-6(2), SURAT PAGE 4 RECORDS BEFORE THE LOWER AUTHORITIES. ON QUERY FROM THE BENCH, ASSESSEE COULD NOT SUBMIT HOW THE PRIMARY RECORDS COULD NOT BE MAINTAI NED. WHEN PARTICULARLY ASKED THAT WHAT IS THE METHOD OF MEASUREMENT OF RAW MATER IAL AND FINISHED GOODS, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT IT WAS IN KGS. AND DURING THE YEAR, IT HAS PURCHASED AND PROCESSED IN KG. WE FIND NO REASON W HY THE ASSESSEE COULD NOT MAINTAIN THE RECORDS IN KG. AS HE MAY BE BUYING YAR N IN KG.FOR MANUFACTURING SATIN RIBBONS. ACCORDINGLY, WE ARE IN CONFORMITY WITH TH E FINDING OF LOWER AUTHORITIES THAT THE ASSESSEE HAS NOT MAINTAINED DAY-TO-DAY STOCK PR ODUCTION, PRODUCTION REGISTER AND ALSO THE FACT THAT WASTAGE OF MANUFACTURING PRO CESS IS QUITE HIGH WHICH COULD NOT BE VERIFIED FROM BOOKS RESULTS. IN THE ABSENCE OF THESE RECORDS, THE TRUE PROFIT CANNOT BE DEDUCED ON THE BASIS OF BOOK RESULTS. ACC ORDINGLY, WE CONFIRM THE REJECTION OF BOOK RESULTS AND THIS INTER-CONNECTED COMMON ISSUE OF THE ASSESSEES APPEAL IS DISMISSED. 4. AS REGARDS THE ESTIMATION OF GP, THE CIT(A) HAS TAKEN INTO CONSIDERATION THE GP RATE OF EARLIER YEARS, THAT IS RANGING FROM 40% TO 5.80% IN THIS YEAR. THE CIT(A) HAS GONE INTO THE GP RATE AND FACTS OF EARLIER YEAR S, I.E. IN ASSESSMENT YEAR 2001-02 THE GP WAS 39%, IN ASSESSMENT YEAR 2002-03 AND 2003 -04 IT WAS 30.3% AND 27.03%. UNDER THE YEARS CONSIDERATION, THE ASSESSE E HAS DECLARED 25.80% AND THE CIT(A) HAS REASONABLE ESTIMATED THE GP AT 30% BY GI VING FOLLOWING FINDINGS:- I HAVE GONE THROUGH THE SUBMISSIONS FILED BY THE L D. AR AND THE ASSESSMENT ORDER. THE AO HAS RESORTED TO THE PROVISIONS OF SEC TION 145(3) OF THE IT ACT AND REJECTED THE BOOK RESULTS ON THE MAIN GROUND TH AT THE DAY TO DAY STOCK REGISTER AND PRODUCTION REGISTER WAS NOT BEING MAIN TAINED BY THE APPELLANT AS ALSO HE FACT THAT WASTAGE IN THE MANUFACTURING PROC ESS WAS QUITE HIGH. IT IS ALSO A FACT THAT THERE WAS CONSIDERABLE FALL IN GP COMPARED TO IMMEDIATELY PRECEDING YEAR. THE AO ALSO POINTED OUT THE DISCREP ANCIES IN PRODUCTION OF FINISHED GOODS PER MONTH VIS--VIS THE CONSUMPTION OF ELECTRICITY AND ALSO THE DISCREPANCY IN QUANTITATIVE DETAILS SUBMITTED DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS AND THOSE MENTIONED IN THE AUDIT REPORT . THESE DEFECTS ARE, IN M VIEW, AND THE NON-MAINTENANCE OF PRODUCTION REGISTE R AND STOCK REGISTER COUPLED WITH THE FACT THAT THERE WAS A FALL OF ABOU T 9% IN GP ARE SERIOUS DEFECTS WHICH WARRANT REJECTION OF BOOK RESULTS BY APPLYING PROVISIONS OF SECTION 145(3) OF THE ACT. THE APPELLANTS ARGUMENT THAT THE PROCESS OF PRODUCTION WAS A COMPLICATED ONE AND THEREFORE DAIL Y PRODUCTION REGISTER COULD NOT BE MAINTAINED IS ALSO NOT VERY CONVINCING . UNLESS A DAILY PRODUCTION REGISTER IS MAINTAINED, THERE WOULD BE NO CONTROL O VER THE WASTAGE AND PRODUCTION OF FINISHED GOODS. THEREFORE THE ACTION OF THE AO IN REJECTING THE BOOK RESULTS IS IN ORDER. FURTHER, THE APPELLANT HA S NOT FURNISHED ANY CONVINCING REASON FOR FALL IN GP OTHER THAN THE EXP LANATION THAT THERE WAS ITA NO.2891/AHD/2006 & 527/AHD/2007 A.Y. 2003-04 SOFTTOUCH FABRICS PVT. LTD. V. ITO WD-6(2), SURAT PAGE 5 INCREASE IN THE MANUFACTURING EXPENSES AND DECREASE IN NET MARGIN ON SALES. HOWEVER, THE EXPLANATION READING DISCREPANCY IN QUA NTITATIVE DETAILS AS PER AUDIT REPORT AND SUBMISSIONS FILED DURING THE ASSES SMENT PROCEEDINGS THAT THE SAME WAS AS PER MONTHLY BANK STOCK STATEMENT APPEAR S TO BE IN ORDER AS ALSO THE EXPLANATION THAT THE ACTUAL SHORTAGE IN THE PRO DUCTION PROCESS WAS ONLY 4% AGAINST 11% WORKED OUT BY THE AO. IT IS FURTHER SEEN HAT THE AO HAS ADOPTED A GP OF 50% TAKING THE AVERAGE OF TWO PRECE DING YEARS BUT THIS WORKING IS ALSO NOT CORRECT SINCE IT ALSO INCLUDES THE ADDITIONS MADE IN THE EARLIER ASSESSMENT YEAR WHICH COULD NOT GIVEN THE C ORRECT PICTURE. IT IS FURTHER SEEN THAT THE GP FOR THE ASSESSMENT YEARS 2004-05 A ND 2005-06 IS 30.03% AND 27.03% RESPECTIVELY. THEREFORE, ALTHOUGH THE RE JECTION OF BOOK RESULTS IS IN ORDER, IT WOULD BE FAIR AND REASONABLE IF THE GP FOR THE YEAR UNDER APPEAL IS ESTIMATED AT 30% AS AGAINST 25.30% DECLARED BY THE APPELLANT TAKING INTO ACCOUNT THE GP RATIO OF IMMEDIATELY PRECEDING YEAR AND THE FUTURE YEARS WHERE IT APPEARS TO BE A DOWNWARD TREND IN PROFIT. IN VIEW OF THIS 30% OF GP WOULD WORK OUT AT RS.46,27,895/- AS AGAINST RS.39,8 0,710/- DECLARED BY THE APPELLANT AND ADDITION ON ACCOUNT OF LOW GP IS DIRE CTED TO BE RESTRICTED TO RS.6,47,185/- ONLY IN VIEW OF THE FACTS DISCUSSED ABOVE, ALSO CONSIDER ING THE DECISION OF CIT(A), WE FIND NO INFIRMITY IN THE ORDER OF CIT(A) AND ACCORDINGLY BOTH THE APPEAL OF THE ASSESSEE AND REVENUE ARE DISMISSED. 5. IN THE RESULT, BOTH, THE APPEAL OF ASSESSEE AND THA T OF REVENUE ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON13/11/2009 SD/- SD/- (D.C.AGRAWAL) (MAHAVI R SINGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD, DATED : 13/11/2009 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- III, SURAT 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD