KLENZAIDS CONTAMINATION CONTROLS P. LTD, MUMBAI V. DCIT (OSD) 8(1), MUMBAI

ITA 3116/MUM/2012

• Counselvise Citation: 311619914 RSA 2012
• Duration Of Justice: 1 year(s) 9 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 24-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 07-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M L PERUMAL
• Assessee Lawyers: N JAYENDRAN
• Keywords: Gross profit estimation; Bad and doubtful debts; Onus to prove
• Section: 28; 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A , BENCH MUMBAI , BEFORE SHRI I.P.BANSAL , J M & SHRI R.C.SHARMA , A M ITA NO. 3116 / MUM/20 1 2 ( ASSESSMENT YEAR : 200 8 - 0 9 ) M/S KLENZAIDS CONTAMINATION CONTROLS PVT. LTD., C/O M/S NATVARLAL VEPARI & CO. ORICON HOUSE, 4 TH FLOOR, 12, K. DUBASH MARG, MUMBAI - 23 VS. DCIT - 8(1)(OSD), MUMBAI PAN/GIR NO. : A A A C K 8427 G ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI MR. N.JAYENDRAN /REVENUE BY : SHRI M.L.PERUMAL DATE OF HEARING : 24 TH FEB R UARY , 2 01 4 DATE OF PRONOUNCEMENT : 5 TH MARCH , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A), MUMBAI, DATED 5 - 3 - 2012 , FOR THE ASSESSMENT YEAR 200 8 - 0 9 , IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) OF THE I.T. ACT, 1961. 2 . THE ASSESSEE IN ITS APPEAL HAS RAISED THE FOLLOWING GROUN D S : - 1.(I). THE COMMISSIONER OF INCOME TAX (APPEALS) - 16, MUMBAI, [CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS. 24,29,982/ - MADE BY THE AO ON ACCOUNT OF DECLINE IN GROSS PROFIT WITHOUT CONSIDERING THE FACTS AND SUBMISSIONS GIVEN DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND APPELLATE PROCEEDINGS. (I) THE AO ERRED IN MAKING AD - HOC ADDITION BY FINDING THE ARITHMETIC DIFFERENT BETWEEN GR OSS PROFIT OF THE PREVIOUS YEAR AND THE GROSS PROFIT OF THE YEAR UNDER CONSIDERATION, WHEN HE HAS NOT FOUND ANY INCORRECTNESS IN THE BOOKS OF ACCOUNTS AND THE DETAILS FILED. ITA NO. 3116 /20 1 2 2 (II) WITHOUT PREJUDICE, THE APPELLANT SUBMITS THAT THE AO OUGHT TO HAVE CONSIDER ED GROSS PROFIT AT 12% AS AGAINST 17. 39% WHICH THE APPELLANT HAD OFFERED AS PART OF HIS LETTER DATED 14. 12.2010, WHICH WAS SUBMITTED DUE TO PAUCITY OF TIME IN EXPLAINING THE DECLINE IN THE GROSS PROFIT RATIO. 2. THE CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF BAD DEBTS OF RS. 2,76,568/ - . THE APPELLANT SUBMITS THAT THE SAID AMOUNT REPRESENTS SUNDRY BALANCES AND EARNEST MONEY DEPOSIT GIVEN FOR TENDER PURPOSE DURING THE COURSE OF TRADE AND THEREFORE THE SAME ARE BUSINESS LOSS AND OUGHT TO HAVE BEEN ALLO WED AS DEDUCTION U/S.29/37(1) OF THE ACT, BEING LOSS OF CIRCULATING CAPITAL. 3. EACH OF THE GROUNDS IS WITHOUT PREJUDICE TO ONE OTHER. ' 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. GROUND NO.1 IS REGARDING CONFIRMING THE ADDITION BY REJ ECTING PROJECT ACCOUNT FOR FALL IN G.P. 4. FACTS IN BRIEF ARE THAT ASSESSEE IS ENGAGED IN MANUFACTURING OF PHARMA MACHINERY AND CLEANED EQUIPMENTS. THE ASSESSEE COMPANY ALSO UNDERTAKES SETTING UP OF LABORATORIES ON TURNKEY BASIS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT IN MANUFACTURING ACCOUNT, THE GROSS PROFIT (GP) DISCLOSED DURING THE YEAR UNDER CONSIDERATION WAS BETTER THAN THE LAST YEAR. THEREFORE, MANUFACTURING ACCOUNT WAS NOT DISTURBED. HOWEVER, THERE WAS A FALL IN G.P . IN JOB PROJECTS ACCOUNT FROM 17.39% TO 8.8% AS COMPARED TO LAST YEAR. THE AO REJECTED BOOKS OF ACCOUNTS AND ADOPTED THE G.P. RATE OF LAST YEAR AFTER APPLYING THE PROVISIONS OF SECTION 145(3) OF THE ACT IN RESPECT OF JOB PROJECT ACCOUNT ONLY. 5 . A GAINST THE INACTION ON THE PART OF THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). THE CIT(A) BY THE IMPUGNED ORDER ITA NO. 3116 /20 1 2 3 CONFIRMED THE ACTION OF THE AO, AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 6. IT WAS ARGUED BY THE LEARNED AR THAT DURING THE YEAR, ENTIRE ORDERS WERE FROM PUBLIC SECTOR UNDERTAKINGS, WHICH WERE RECEIVED ON OPEN TENDER BASIS WHERE THE ASSESSEE COMPANY HAD TO KEEP MARGIN LOW IN ORDER TO OBTAIN THE PROJECTS FROM THE PUBLIC SECTOR COMPANIES. HE INVITED OUR ATTENTION TO THE NET PROFIT OF THE COMPANY, WHICH HAS INCREASED FROM 3.54% TO 5.44% DURING THE YEAR UNDER CONSIDERATION. IT WAS SUBMITTED THAT WITHOUT POINTING OUT ANY DEFECT IN THE BOOKS OF ACCOUNT, THE AO HAS REJECTED THE SAME BY INVOKING THE PROVISIONS OF SECTIO N 145(3). 7. ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDER OF LOWER AUTHORITIES AND CONTENDED THAT THERE WAS DECLINE IN THE PROFIT SHOWN BY THE ASSESSEE IN THE PROJECT ACCOUNT AS COMPARED TO THE LAST YEAR, THEREFORE, THE AO WAS JUSTIFIED IN ADOPTING THE GP RATE OF LAST YEAR. 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS CAREFULLY AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW AND FOUND FROM THE RECORD THAT ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PHARMA MACHINERY AND CLEANED EQUIPMENTS. IT ALSO UNDERTAKES SETTING UP OF LABORATORIES ON TURNKEY BASIS, WHICH INCLUDES DESIGN AND CONSTRUCTION OF LABORATORIES AND CLEAN ROOM EQUIPMENTS USED IN PHARMACEUTICALS MANUFACTURING UNITS AND LABORATORIES. OUT OF THE TOTAL ACTIVITY OF ASSES SEE, A PROJECT ACTIVITY ONLY CONSTITUTED 10% OF THE TOTAL ITA NO. 3116 /20 1 2 4 TURNOVER IN YEAR UNDER CONSIDERATION. RECEIPTS FROM JOB PROJECTS DURING THE YEAR WERE RS.2.86 CRORES AS AGAINST RECEIPTS OF RS.1.50 CRORES IN THE LAST YEAR. THUS, THERE WAS SUBSTANTIAL INCREASE IN THE RECEIPT ON ACCOUNT OF PROJECTS DURING THE YEAR UNDER CONSIDERATION. MERELY ON THE PLEA THAT IN THE EARLIER YEAR GP IN THE PROJECT ACCOUNT WAS HIGHER, THE AO HAS REJECTED THE BOOKS OF ACCOUNT AND MADE ADDITION BY APPLYING THE GP RATE OF EARLIER YEAR W ITHOUT CONSIDERING THE REASONS GIVEN BY THE ASSESSEE FOR SUCH DECLINE. FROM THE RECORD WE FOUND THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD GOT ENTIRE PROJECT ORDERS FROM THE PUBLIC SECTOR UNDERTAKING ON OPEN TENDER BASIS WHERE THE ASSESSEE COMPANY HAD TO KEEP LOW MARGIN IN ORDER TO OBTAIN THE PROJECTS FROM PUBLIC SECTOR UNDERTAKING. HOWEVER, NET PROFIT RATE OF ASSESSEE HAS SUBSTANTIALLY INCREASED FROM 3.69% IN THE LAST YEAR TO 6.02% IN THE YEAR UNDER CONSIDERATION. WHILE REJECTING BOOKS OF A CCOUNTS, THE AO HAS NOT POINTED OUT ANY REASON EXCEPT THAT IN EARLIER YEAR GP RATE WAS HIGHER. AS PER OUR CONSIDERED VIEW, THE BOOKS OF ACCOUNT REGULARLY MAINTAINED IN THE COURSE OF BUSINESS WHICH ARE DULY AUDITED UNDER THE PROVISIONS OF INCOME TAX ACT, 19 61 AND WHICH ARE FREE FROM ANY QUALIFICATION BY THE AUDITORS SHOULD BE TAKEN AS CORRECT UNLESS THERE ARE STRONG AND SUFFICIENT REASON TO INDICATE THAT THEY ARE UNRELIABLE. FOR REJECTING THE BOOKS OF ACCOUNT, IT IS REVENUE'S ONUS TO PROVE THAT EITHER THE BO OKS OF ACCOUNT MAINTAINED BY THE ASSESSEE ARE NOT CORRECT AND COMPLETE OR THE METHOD OF ACCOUNTING ADOPTED IS SUCH THAT TRUE PROFITS CANNOT BE DEDUCED THEREFROM. AS THE ONUS TO MAKE OUT ITA NO. 3116 /20 1 2 5 A CASE FOR REJECTION OF BOOKS OF ACCOUNT IS ON THE REVENUE, THE ASSES SING OFFICER IS REQUIRED TO INDICATE SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNT WHICH CLINCHES THE PROFIT SHOWN BY THE ASSESSEE OR ITS STATE OF AFFAIRS. IN THE CASE BEFORE US THE AO COMPLETELY FAILED TO INDICATE ANY DEFECTS IN THE BOOKS OF ACCOUNTS. AFTER PR ODUCTION OF BOOKS OF ACCOUNT AND SUBMISSION OF EXPLANATION BY THE ASSESSEE, IF ANY ASKED FOR, THE AO MAY ACCEPT THE SAME OR AFTER POINTING OUT THE SPECIFIC DEFECT MAY REJECT THE BOOKS OF ACCOUNT AND PROCEED TO DETERMINE THE ASSESSEE'S INCOME AS PER THE PRO VISIONS OF SEC. 145. EVEN THOUGH, IT IS NOT POSSIBLE TO LAY DOWN THE EXACT CIRCUMSTANCES IN WHICH ACCOUNTS SHOULD BE REJECTED AS UNRELIABLE OR INCORRECT, YET THE ACCOUNTS MAY BE REJECTED AS UNRELIABLE IF IMPORTANT ENTRIES AND TRANSACTIONS ARE OMITTED THERE FROM OR IF PROPER PARTICULARS AND VOUCHERS, BILLS, ETC. ARE NOT FORTHCOMING OR IF THEY DID NOT INCLUDE ENTRIES RELATING TO PARTICULARS CLASS OF BUSINESS TRANSACTION ETC. THE ASSESSEE SHOULD INVARIABLY BE GIVEN OPPORTUNITY FOR OFFERING EXPLANATION REGARDING DEFECTS IN ACCOUNTS AND ON HIS FAILURE TO SATISFACTORILY EXPLAIN THE DEFECTS, THE DEPARTMENT WOULD BE JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNT. THUS, BOOKS OF ACCOUNT SHOULD NOT BE REJECTED LIGHT - HEARTEDLY. IN THE INSTANT CASE T HE ASSESSING OFFICER HAS NOT INDICATED ANY DEFECT IN THE SYSTEM OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE, OR ITS CORRECTNESS, NOR THERE WAS ANY CHANGE IN THE METHOD OF ACCOUNTING DURING THE YEAR UNDER CONSIDERATION AS C OMPARED TO THE EARLIER YEARS TO INDICATE ANY INTENTION OF ASSESSEE TO SHOW LOW GROSS PROFIT. HOWEVER, ON THE CONTRARY THERE WAS SUBSTANTIAL INCREASE IN ITA NO. 3116 /20 1 2 6 THE NET PROFIT OF THE YEAR UNDER CONSIDERATION AS COMPARED TO IMMEDIATELY PRECEDING YEAR. HOWEVER VARIOUS REASONS AND EXPLANATIONS WERE FURNISHED BY THE ASSES SEE TO SUBSTANTIATE THE DECLINE IN G.P. RATE SHOWN DURING THE YEAR BUT THE SAME WERE NOT APPRECIATED BY THE AO. 9 . THERE IS NO DISPUTE TO THE WELL SETTLED PROPOSITION THAT WITH INCREASE IN THE SALES THERE WILL BE SOME DECLINE IN THE GROSS PROFIT RATE. T HE INCREASE IN TURNOVER CAN BE ACHIEVED BY MARGINAL SACRIFICE IN THE GROSS PROFIT RATE. DURING THE YEAR UNDER CONSIDERATION THERE WAS SUBSTANTIAL INCREASE IN TURNOVER OF PROJECT ACCOUNT TO RS.2.86 CRORES AS COMPARED TO RECEIPT OF EARLIER YEAR AMOUNTING TO RS.1.50 CRORES. KEEPING IN VIEW THE FACT THAT OVERALL PROFIT OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAS BEEN INCREASED SUBSTANTIALLY TO RS.1,60,78,012/ - AS COMPARED TO THE NET PROFIT OF EARLIER YEAR WHICH WAS RS.98,01,615/ - AND ALSO KEEPING IN VIEW THE NATURE OF TURNKEY PROJECT UNDERTAKEN BY THE ASSESSEE VIS - A - VIS FACT THAT SOME OF THE INFORMATION CALLED BY THE AO WOULD NOT BE SUPPLIED BY ASSESSEE, WE MODIFY THE ORDER OF BOTH THE LOWER AUTHORITIES AN D DIRECT THE AO TO TAKE GP RATE AT 14% AS AGA INST GP RATE OF 8,88% SHOWN BY THE ASSESSEE AND G.P. RATE OF 17.39% ADOPTED BY THE AO. THE AO IS TO RECOMPUTE THE ADDITION AS PER THE GP RATE OF 14%. WE DIRECT ACCORDINGLY. 10 . THE NEXT GRIEVANCE OF THE ASSESSEE RELATES TO DISALLOWANCE OF BAD DEBTS OF R S.2,76,568/ - . ITA NO. 3116 /20 1 2 7 11 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS WRITTEN OFF BAD DEBTS AND ADVANCES OF RS.2,76,559.95 IN RESPECT OF 61 PARTIES. THE AMOUNT SO WRITTEN OFF WERE EITHER IN THE NATURE O F EARNEST MONEY DEPOSIT OR THE PETTY/SMALL BALANCE OUTSTANDING IN THE ACCOUNT OF DEBTORS, WHICH COULD NOT BE RECOVERED, SINCE LONG. THE AMOUNT SO WRITTEN OFF EITHER CONSTITUTED BAD DEBTS WHICH IS ALLOWABLE UNDER SE CTION 36(1 )(VII) OR A BUSINESS LOSS ALLO WABLE UNDER SECTION 28 OF I.T. ACT. NOWHERE THE AO HAS DOUBTED THE GENUINENESS OF AMOUNT WRITTEN OFF. MERELY ON THE REASON THAT AMOUNT OF EARNEST MONEY ARE NOT TRADING RECEIPTS AND THEY HAVE NOT BEEN OFFERED IN PREVIOUS YEAR AS A REVENUE, THE AO DECLINED ASSESSEE'S CLAIM. AFTER GOING THROUGH THE LIST OF AMOUNT WRITTEN OF, WE FOUND THAT THESE AMOUNT PERTAINS TO 61 PARTIES. IN RESPECT OF 60 PARTIES, VERY SMALL AMOUNT WAS OUTSTANDING SINCE LONG BACK, THEREFORE, ASSESSEE WRITTEN OFF THE SAME IN ITS BOOKS OF AC COUNT. SIMILARLY THERE WAS EARNEST DEPOSIT OF RS.1 ,04,857/ - , WHICH COULD NOT BE RECOVERED IN SPITE OF EFFORTS UNDERTAKEN BY THE ASSESSEE. THE GENUINENESS OF THE ASSESSEE'S CLAIM IS NOT IN DOUBT AND IT IS ALLOWABLE EITHER UNDER SECTION 36(1 )(VII) OR AS BUS INESS LOSS UNDER SECTION 28 OF THE ACT. WE, THEREFORE, DIRECT THE AO TO DELETE THE DISALLOWANCE SO MADE. THE AO IS AT LIBERTY TO TAX, IF ANY AMOUNT IS RECEIVED IN FUTURE IN THE RESPECTIVE YEARS OF RECEIPT AND THE ASSESSEE IS ALSO DIRECTED TO OFFER ANY AMO UNT RECEIVED IN SUBSEQUENT YEARS, IF ANY. WE DIRECT ACCORDINGLY. 12 . IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED IN PART. ITA NO. 3116 /20 1 2 8 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 05/03/2014 . 05/03/2014 SD/ - SD/ - ( ) ( I.P.BANSAL ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 05 / 0 3 /2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) - X, MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//