The ACIT, 1(2), V. M/s Bhopal Gelatines Pvt. Ltd.,

ITA 333/IND/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 2955 (ITAT-INDORE)
• Duration Of Justice: 1 year(s) 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-05-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 28-04-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 21-07-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: APARNA KARAN
• Assessee Lawyers: S S DESH
• Section: 133(6)

Judgement Text

PAGE 1 OF 10 - I.T.A.NO. 333/IND/2008 M/S. BHOPAL GELATINES PVT.LTD., BHOPAL IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH : INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI V.K. GUPTA, ACCOUNTANT MEMBER PAN NO. : AABCB2605E9 I.T.A.NO.333/IND/2008 A.Y. : 2005-06 ACIT, M/S. BHOPAL GELATINES PVT.LTD., 1(2), VS JINSI, BHOPAL. BHOPAL. APPELLANT RESPONDENT APPELLANT BY : SMT.APARNA KARAN, SR.DR RESPONDENT BY : SHRI S. S. DESHPANDE, C.A. DATE OF HEARING : 28.04.2010 O R D E R PER V.K. GUPTA, A.M. THIS APPEAL FILED BY THE ASSESSEE ARISES OUT OF ORD ER OF THE LD. CIT(A), UJJAIN , DATED 27.02.2007, FOR THE ASSESSME NT YEAR 2001-02. 2. WE HAVE HEARD BOTH THE PARTIES AND HAVE ALSO PERUSE D THE MATERIAL AVAILABLE ON RECORD. 3. GROUND NO.1 READS AS UNDER:- IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 44 ,15,904/- ON ACCOUNT OF DISALLOWANCE OF INFLATED EXPENSES OF COST OF PAGE 2 OF 10 - I.T.A.NO. 333/IND/2008 M/S. BHOPAL GELATINES PVT.LTD., BHOPAL PRODUCTION, IN A SUMMARY MANNER WITHOUT GIVING ANY SPECIFIC REASON AGAINST THE STAND TAKEN BY THE ASSE SSING OFFICER. 4. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE IS MANUF ACTURING GELATINE AND ANIMAL GLUE. THE A.O. FOUND THAT THE C OST OF PRODUCTION OF GELATINE WAS SHOWN BY THE ASSESSEE AT RS. 62/- PER KG., WHEREAS THE COST OF PRODUCT OF GELATINE OF THE SISTER CONCERN WAS RS . 40/- PER KG. HENCE, THE A.O. REQUIRED THE ASSESSEE TO JUSTIFY THE COST OF PRODUCTION SHOWN BY IT. THE ASSESSEE SUBMITTED THAT IT WAS MANUFACTURIN G EDIBLE AND PHARMA GRADE GELATINE AS COMPARED TO NON-EDIBLE TECHNICAL PURPOSE GELATINEE PRODUCED BY A SISTER CONCERN, NAMELY M/S. BHOPAL GL UES AND CHEMICALS PRIVATE LIMITED. THE ASSESSEE SUBMITTED THE DETAILS OF MANUFACTURING PROCESS AND DIFFERENCE IN THE NATURE OF PRODUCTS OF TWO COMPANIES. IT WAS ALSO SUBMITTED THAT AVERAGE SALE PRICE IN THE CASE OF THE ASSESSEE COMPANY WAS MUCH HIGHER. THE A.O., HOWEVER, ANALYZED THE CO MPOSITION OF SALE OF FIRST THREE MONTHS, WHICH REVEALED THAT OUT OF T OTAL SALES ONLY 27 % THEREOF WAS IN REGARD TO SALE OF PHARMA/FOOD GRADE GELATINE. HENCE, THE HELD THAT ASSESSEES CLAIM THAT IT WAS MANUFACTURIN G ONLY PHARMA/FOOD GRADE GELATINE SINCE THE MIDDLE OF THE LAST YEAR WA S NOT CORRECT. THE A.O., THEREAFTER, ALSO ISSUED NOTICE U/S 133(6) TO SUPPLIERS FROM WHOM THE ASSESSEE HAD PURCHASED RAW MATERIALS. HOWEVER, IN F OUR CASES, NO REPLY PAGE 3 OF 10 - I.T.A.NO. 333/IND/2008 M/S. BHOPAL GELATINES PVT.LTD., BHOPAL WAS RECEIVED TO WHICH THE ASSESSEE REPLIED THAT THE SAID PARTIES HAD ALREADY FILED THE DETAILS AND MUST BE IN THE PROCES S OF REACHING TO THE A.O., HOWEVER, THE A.O. TOOK AN ADVERSE VIEW FROM NO REPLY BY SUCH PARTIES OF THE DETAILS REQUIRED BY HIM. THE A.O., T HEREAFTER, COMPARED THE COMPOSITION OF PRODUCT AND ALSO HELD THAT THE ASSES SEE DID NOT FURNISH THE BIFURCATION OF TOTAL STOCK INTO PHARMA/FOOD GRADE G ELATINE OR NON-EDIBLE GRADE GELATINE ONLY WITH THE OBJECT TO PRINT THE A. O. FROM MAKING NECESSARY THE ANALYSIS. THE A.O., THEREAFTER, ANALY ZED THE COST OF PRODUCTION OF THE SISTER CONCERN AND COMPARED THE S AME FROM THE COST OF PRODUCTION WITH REFERENCE TO THE TYPES OF PRODUCTS MANUFACTURED BY THEM AND HELD THAT THE ASSESSEE HAD DELIBERATELY INFLATE D THE COST OF RAW MATERIALS AND CONSUMABLES. THE A.O. FOUND THAT THE COST OF PRODUCTION IN THE CASE OF SISTER CONCERN WAS RS. 40/- PER KG., WH EREAS IN THE CASE OF THE ASSESSEE COMPANY, IT WAS RS. 62/-, HENCE. HE HELD T HAT HAVING REGARD TO THE DEFICIENCIES FOUND BY HIM, THE COST OF PRODUCTI ON COULD BE CONSERVATIVELY ESTIMATED AT RS. 50/- PER KG. AND HE MADE AN ADDITION OF RS. 44,`15,904/-. AGGRIEVED BY THIS, THE ASSESSEE C ARRIED THE MATTER INTO APPEAL BEFORE THE LD. CIT(A), WHEREIN IT WAS CONTEN DED THAT THE A.O. FAILED TO UNDERSTAND THE INTRICACIES AS REGARD TO T HE NATURE OF PRODUCTS AND CONSEQUENT IMPACT THEREOF ON THE COST OF PRODUCTION I.E. COST OF RAW MATERIALS AND CONVERSION COSTS. IT WAS ALSO SUBMITT ED THAT PHARMA/FOOD PAGE 4 OF 10 - I.T.A.NO. 333/IND/2008 M/S. BHOPAL GELATINES PVT.LTD., BHOPAL GRADE PRODUCT WAS TO COMPLY WITH STRINGENT QUALITY CONTROLS IF THE PRODUCTION OF SUCH GELATINE DID NOT MEET SUCH TEST, THEN IT HAD TO BE SOLD AS NON-EDIBLE GELATINE. IT WAS ALSO PLEADED THAT TH E COMPARISON OF COST OF PRODUCTION OF THE ASSESSEE WITH THAT OF ITS SISTER CONCERN WAS A CAUSE OF COMPARING MARUTI 800 CAR WITH A LUXURY CAR, EVEN TH OUGH THE RAW MATERIALS WAS STEEL FOR BOTH THE TYPES OF PRODUCTS. THE ASSESSEE ALSO PLEADED THAT THE A.O. HAD NOT BROUGHT A SINGLE INST ANCE TO JUSTIFY HIS VIEW OF INFLATION OF COST AND IT WAS ALSO CONTENDED THAT THERE WERE SUBSTANTIAL DOCUMENTARY EVIDENCES AS TO JUSTIFY THE COST OF RAW MATERIALS PURCHASED. IT WAS ALSO CONTENDED THAT THE ASSESSEE COMPANY HAD HUGE ACCUMULATED CARRIED FORWARD LOSSES AND, THEREFORE, THERE WAS AB SOLUTELY NO MOTIVE FOR THE APPELLANT COMPANY TO INFLATE THE COST. THE LD. CIT DR AGREEING WITH THESE SUBMISSIONS OF THE ASSESSEE, DELETED THE ADDI TION. THE RELEVANT FINDINGS OF THE LD. CIT(A) ARE AS UNDER :- I HAVE CAREFULLY EXAMINED THE ASSESSMENT ORDER IN DETAIL. I FIND THAT THE A.O. HAS NOT POINTED OUT ANY INSTANCE WHERE THE APPELLANT HAS INFLATED COSTS. I HAVE ALSO PERUSED T HE SUBMISSION OF THE APPELLANT. I HAVE ALSO GONE THROU GH THE PROCESS OF MANUFACTURE AS HAS BEEN REPRODUCED BY TH E ASSESSING OFFICER IN HIS ASSESSMENT ORDER. I AM, TH EREFORE, OF THE VIEW THAT THE REASONS GIVEN BY THE ASSESSING OF FICER TO PAGE 5 OF 10 - I.T.A.NO. 333/IND/2008 M/S. BHOPAL GELATINES PVT.LTD., BHOPAL ARRIVE A THE CONCLUSION THAT THE COSTS HAVE BEEN IN FLATED ARE NOT TENABLE. I AM ALSO IN AGREEMENT WITH THE SUBMIS SIONS OF THE LD. AR THAT THE COST OF PRODUCTION ACHIEVED IN THE ASSOCIATE CONCERN BHOPAL GLUES & CHEMICALS PVT.LTD. CANNOT BE COMPARED WITH THAT OF THE APPELLANT COMPA NY AS THE PRODUCTS MANUFACTURED ARE DIFFERENT DESPITE THE RAW MATERIALS BEING THE SAME. NO COGENT MATERIAL HAS BE EN BROUGHT ON RECORDED BY THE ASSESSING OFFICER TO ARR IVE AT THE CONCLUSION THAT THERE IS AN INFLATION OF COSTS SO A S TO MAKE THE ADDITION. THEREFORE, THE ADDITION OF RS. 44,15, 904/- MADE BY THE ASSESSING OFFICER TOWARDS THE ALLEGED INFLAT ION OF COSTS CANNOT BE SUSTAINED AND IT HAS TO BE DELETED, THUS, THE GROUND TAKEN BY THE APPELLANT IN THIS CONTEXT IS A LLOWED. 5. AGGRIEVED BY THIS, THE REVENUE IS IN APPEAL BEFORE US. THE LD. DEPARTMENTAL REPRESENTATIVE. SR. DR NARRATED THE FA CTS AND TOOK US THROUGH THE ASSESSMENT ORDER AND SUBMITTED THAT THE LD. CIT(A) HAS DELETED THE ADDITION WITHOUT GIVING ANY SPECIFIC RE ASONS AGAINST THE STAND TAKEN BY THE ASSESSING OFFICER. 6. THE LEARNED COUNSEL, ON THE OTHER HAND, AGAIN NARRA TED THE FACTS AND CONTENDED THAT THE COMPARISON MADE BY THE ASSES SING OFFICER WAS PAGE 6 OF 10 - I.T.A.NO. 333/IND/2008 M/S. BHOPAL GELATINES PVT.LTD., BHOPAL NOT PROPER AS THE PRODUCTS OF BOTH THE FORMS WERE E NTIRELY DIFFERENT AS WELL AS THE MANUFACTURING PROCESS WAS ALSO DIFFEREN T. THE LEARNED COUNSEL FURTHER CONTENDED THAT IT WAS NOT THE CASE THAT NOTICE SENT U/S 133(6) REMAINED TOTALLY UN-SERVED OR NON-COMPLIED, AS THE REPLY HAD BEEN SENT TO THE A.O., BUT BEFORE PASSING THE ASSESSMENT ORDER, THE SAME DID NOT REACH TO THE A.O. THEREFORE, NO ADVERSE INFEREN CE COULD BE TAKEN AGAINST THE ASSESSEE. THE LEARNED COUNSEL FURTHER S UBMITTED THAT 100 % PRODUCT OF THE ASSESSEE WERE OF EDIBLE GRADE AND FA ILING THE TEST FOR SUCH GRADING, THE SAME WERE TO BE SOLD AS NON-EDIBLE PRO DUCTS AND, THEREFORE, INSPITE OF INCURRENCE OF HIGHER COST, THE AVERAGE R EALIZATION COULD BE LESS. THE LEARNED COUNSEL, IN THIS REGARD, FURTHER SUBMIT TED THAT AVERAGE REALIZATION OF THE ASSESSEE WAS APPROXIMATELY RS. 6 5/- PER KG. AS AGAINST THE AVERAGE COST OF PRODUCTION OF RS. 62/- PER KG, WHEREAS IN THE CASE OF THE SISTER CONCERN, THE AVERAGE SALES REALIZATION W AS RS. 44/- TO RS. 47/- PER KG. AS AGAINST THE COST OF PRODUCTION OF PRODUC TS MANUFACTURED BY SUCH FIRM AT RS. 40/-. HENCE, THE SAME COULD NOT BE TAKEN AS BASIS TO ARRIVE AT THE COST OF PRODUCTION OF THE ASSESSEE FI RM. IT WAS ALSO CONTENDED THAT THE ASSESSEE VALUED CLOSING STOCK AT RS. 62/- PER KG AND IF THE SAME WAS OF NON EDIBLE GRADE, THEN, THE SAME WOULD HAVE BEEN VALUED AT RS. 40/- APPROX. AND CONSEQUENTLY, THE PROFITS OF THE A SSESSEE COMPANY COULD HAVE BEEN MUCH LESS. THE LEARNED COUNSEL FURTHER SU BMITTED THAT THE LD. PAGE 7 OF 10 - I.T.A.NO. 333/IND/2008 M/S. BHOPAL GELATINES PVT.LTD., BHOPAL CIT(A) HAD PASSED A SHORT ORDER, BUT ALL THE FACTS HAVE BEEN CONSIDERED BY HIM AND HIS FINDINGS WERE ALSO SPECIFIC AND NOT VAG UE AS CONTENDED BY THE REVENUE. HE FURTHER PLACED RELIANCE ON THE ORDER OF THE LD. CIT(A). 7. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS OF THE AUTHORITIE S BELOW. 8. IT IS NOTED THAT THE BASIS OF THE ACTION OF THE A.O . IS THE COMPARISON OF COST OF PRODUCTION OF ASSESSEE WITH T HAT OF ITS SISTER CONCERN AND FURTHER ACTION HAS BEEN TAKEN BY THE AS SESSING OFFICER ON THIS PREMISE. HENCE, IT BECOMES CRITICAL TO FIND OU T WHETHER SUCH COMPARISON IS PROPER OR NOT. IN THIS REGARD, WE FIN D THAT THERE IS NO DISPUTE THAT SALE PRICE OF THE PRODUCTS MANUFACTURE D BY ITS SISTER CONCERN IS IN THE RANGE OF RS. 44/- TO RS. 47/- PER KG, WHE REAS THE AVERAGE SALE PRICE OF THE PRODUCTS OF THE ASSESSEE COMPANY IS RS . 65/- PER KG. AND, CORRESPONDINGLY, THERE IS A DIFFERENCE IN THE COST OF PRODUCTION OF BOTH THE COMPANIES. THUS, THIS VERY FACT SHOWS THAT THE PROD UCTS MANUFACTURED BY BOTH THE COMPANIES ARE MATERIALLY DIFFERENT COMMERC IALLY. HENCE, SUCH COMPARISON IS NOT PROPER AND IF THAT IS SO, THEN, F URTHER ENQUIRIES MADE BY THE ASSESSING OFFICER ARE JUST TO SUPPORT THIS FLAW ED BASIS AND, THEREFORE, CANNOT BE GIVEN MUCH SIGNIFICANCE. WE FURTHER FIND THAT THE ASSESSEE HAS VALUED ITS CLOSING STOCK AT THE COST OF PRODUCTION AND IF THE ASSESSEE WOULD HAVE BIFURCATED THE STOCK OF GELATINE/EDIBLE/ NON-EDIBLE CATEGORY, PAGE 8 OF 10 - I.T.A.NO. 333/IND/2008 M/S. BHOPAL GELATINES PVT.LTD., BHOPAL THEN THE VALUATION OF NON-EDIBLE CATEGORIES WOULD H AVE BEEN MUCH LESS AND, ACCORDINGLY, THE PROFITS OF THE ASSESSEE COMPA NY AND WOULD BE SUBSTANTIALLY LOWER. WE FURTHER FIND THAT THE ASSES SEE AS REGARD TO ACTION OF A.O. U/S 133(6)STATED THAT RESPECTIVE PARTIES HA D SUBMITTED THE REQUIRED DETAILS AND IT IS NOT THE CASE THAT THE ASSESSMENT WAS GOING TO BE TIME BARRED IMMEDIATELY. HENCE, THE A.O. COULD NOT WAIT FOR SUCH DETAILS. WE FURTHER FIND THAT THE A.OS ACTION OF ADOPTING COST OF PRODUCTION AT RS.50/- IS NOT BASED ON ANY COGENT MATERIAL. HENCE FROM THA T ANGLE ALSO, SUCH ACTION OF THE A.O. IS NOT CORRECT IN LAW. THUS, TAK ING INTO CONSIDERATION THE FACTS OF THIS CASE, WE FIND NO MERIT IN THIS GR OUND OF THE REVENUE. BEFORE PARTING, WE MAY ALSO ADD THAT THE LD. CIT(A) HAS GIVEN ALL THE RELEVANT FINDINGS AND, IN OUR OPINION, IT IS NOT TH E LENGTH OF THE ORDER, BUT THE STRENGTH OF THE ORDER WHICH IS MATERIAL. HENCE , WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE REVENUE THAT THE ORD ER OF THE LD. CIT(A) IS VAGUE OR NON-SPECIFIC. THEREFORE, THE SAME IS ALSO REJECTED. IN VIEW OF ABOVE FACTS, THIS GROUND OF THE REVENUE IS DISMISSE D. 9. IN GROUND NOS.2 AND 3, THE ISSUE IS REGARDING DELET ION OF DISALLOWANCE MADE BY THE ASSESSING OFFICER OUT OF D EPRECIATION AND VEHICLE AND RUNNING MAINTENANCE EXPENSES. 10. THE A.O. DISALLOWED 16 % OF THESE EXPENSES BEING IN CURRED BY THE ASSESSEE FOR NON-BUSINESS PURPOSE. ON APPEAL, T HE LD. CIT(A) DELETED PAGE 9 OF 10 - I.T.A.NO. 333/IND/2008 M/S. BHOPAL GELATINES PVT.LTD., BHOPAL THE SAME FOR THE REASON THAT THE ASSESSEE WAS ARTIF ICIAL JURIDICAL PERSON, HENCE, THERE COULD NOT BE ANY DISALLOWANCE ON ACCOU NT OF PERSONAL USE. AGGRIEVED BY THIS, THE REVENUE IS IN APPEAL BEFORE US. 11. THE LD. SR. DR SUBMITTED THAT DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER FOR THE REASON THAT A PART OF THE EXPENDITURE HAD TO BE CONSIDERED AS INCURRED FOR NON-BUSINESS PURPOSES AN D NOT ON ACCOUNT OF PERSONAL USE AND THAT TOO IN THE BACKGROUND THAT NO PERSONAL VEHICLE OWNED BY THE DIRECTORS OF THE ASSESSEE COMPANY. HE NCE, THE ACTION OF THE A.O. WAS FULLY JUSTIFIED. SHE FURTHER CONTENDED THAT THE LD. CIT(A) DELETED THE DISALLOWANCE FOR DIFFERENT REASONS. HEN CE, THE ORDER OF THE LD. CIT(A) WAS NOT CORRECT. 12. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT RATE OF DISALLOWANCE COULD BE REDUCED FROM 16 %. 13. WE FIND THAT THE A.O. HAS GIVEN A SPECIFIC FINDING THAT SUCH DISALLOWANCE WAS MADE FOR THE REASON THAT WHOLE EXP ENDITURE COULD NOT BE CONSIDERED AS INCURRED FOR BUSINESS PURPOSES. TH E PROVISIONS OF SECTION 38(2) ALSO SUPPORT SUCH VIEW, WHEREAS THE L D. CIT(A) HAS NOT GIVEN ANY FINDING ON THIS ASPECT AND HAS DELETED TH E ADDITION TREATING THE DISALLOWANCE MADE ON ACCOUNT OF PERSONAL USE, WHICH IS NOT A CORRECT VIEW IN THE FACTS OF THE CASE. HENCE, WE CONFIRM TH E ORDER OF THE A.O. IN PRINCIPLE ON BOTH THE ISSUES. HOWEVER, WE REDUCE TH E RATE OF DISALLOWANCE PAGE 10 OF 10 - I.T.A.NO. 333/IND/2008 M/S. BHOPAL GELATINES PVT.LTD., BHOPAL FROM 16 % TO 10 % IN RESPECT OF GROUND NO.3. THUS, THIS GROUND OF THE REVENUE STANDS PARTLY ALLOWED AND GROUND NO.3 IS AL LOWED. 14. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STA NDS PARTLY ALLOWED. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 4 TH MAY, 2010. SD/- SD/- (JOGINDER SINGH) (V. K. GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 4 TH MAY, 2010. CPU* 2930435