Asstt. Commissioner of Income tax, Amritsar V. M/s. Chand Enterprises, Amritsar

ITA 342/ASR/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60677 (ITAT-AMRITSAR)
• Duration Of Justice: 1 year(s) 10 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-06-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 28-05-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 30-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRIK CHAND
• Assessee Lawyers: P N ARORA
• Keywords: Gross profit estimation
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. B.P.JAIN, ACCOUNTANT MEMBER I.T.A. NO. 342(ASR)/2010 ASSESSMENT YEAR:2006-07 PAN:AACFC0728R THE ASSTT. COMMR. OF INCOME-TAX, VS. M/S. CHAND ENT ERPRISES, CIRCLE IV, AMRITSAR. AMRITSAR. (APPELLANT) (RESPONDENT) C.O. NO.25(ASR)/2010 (ARISING OUT OF ITA NO.342(ASR)/2010) ASSESSMENT YEAR: 2006-07 M/S. CHAND ENTERPRISES, VS. THE A.C.I.T. AMRITSAR. CIRCLE IV, AMRITSAR. (APPELLANT) (RESPONDENT) DEPARTMENT BY:SH. AMRIK CHAND, DR ASSESSEE BY:SH. P.N. ARORA, ADV. DATE OF HEARING :28/05/2012 DATE OF PRONOUNCEMENT:05/06/2012 ORDER PER BENCH: THIS APPEAL OF THE REVENUE ARISES FROM THE ORDER OF THE CIT(A), AMRITSAR, DATED 31.05.2010 FOR THE ASSESSMENT YEA R 2006-07. THE ASSESSEE HAS ALSO FILED CROSS OBJECTION. 2 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPE AL: I) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF R S.7837410/- MADE BY THE AO BY REJECTING THE BOOKS OF ACCOUNTS A ND BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE IN COME TAX ACT, 1961. II) WHETHER THE LD. CIT(A) HAS ERRED BY NOT APPRECIATIN G THE FACT THAT ADDITION OF RS.7837410/- WAS MADE BY THE AO AF TER APPLYING THE G.P. RATE OF 30% WHICH IS MEAN OF ASSE SSEES OWN G.P. RATE SHOWN FOR THE LAST THREE YEARS. III) WHETHER THE LD. CIT(A) HAS ALSO ERRED IN IGNORING T HE FACT THAT THE ASSESSE FIRM, WHICH IS ENGAGED IN EXPORT OF ENG INEERING GOODS, IS NO LONGER ELIGIBLE FOR DEDUCTION ON EXPOR T PROFITS (I.E. U/S 80HHC) HAD BEEN REDUCING GROSS PROFIT DRASTICAL LY OVER THE PRECEDING THREE YEARS WHEREAS THE SISTER CONCERN OF THE ASSESSEE VIZ M/S. CHAND ENGINEERS (OPERATING UNDER SIMILAR CIRCUMSTANCES AND DEALING WITH EXACTLY THE SAME BUS INESS) WHICH IS STILL ELIGIBLE FOR DEDUCTION (I.E. U/S 10B ) GROSS PROFIT RATES ARE REMAINING THE SAME OVER THE YEARS I.E. AR OUND 58%. IV) APPELLANT CRAVES LEAVE TO AMEND OR ADD ANY OR MORE GROUNDS OF APPEAL 3. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN C.O . I. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT(A), WAS JUSTIFIED IN DELETING THE ADDITION OF R S.7837410/- MADE BY THE AO BY REJECTING THE BOOKS OF ACCOUNTS A ND BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE AC T. II. THAT THE LD. CIT(A) HAS DELETED THE ADDITION BY CON SIDERING ALL THE FACTS AND MATERIAL ON THE RECORD AND HE HAS FUL LY DISCUSSED THE SAME IN HIS ORDER IN PARA 6 FROM PAGE NOS. 9 TO 18 OF HIS ORDER DATED 31.5.2010. III. THAT THE LD. CIT(A) WAS FULLY JUSTIFIED IN ACCEPTIN G THE APPEAL THEREBY DELETING THE ADDITION IN THE TRADING ACCOUN T AT RS.78,37,410/- BY CONSIDERING ALL THE OBJECTIONS RA ISED BY THE AO IN HIS ORDER AND CIT(A) WAS JUSTIFIED IN DELETIN G THE ADDITION WHEN ESPECIALLY THE BOOKS OF ACCOUNTS HAVE NOT BEEN REJECTED AND NO OMISSION OR COMMISSION HAS BEEN POI NTED OUT. AS SUCH THE ORDER OF THE LD. CIT(A) MAY BE CONFIRME D AND THE 3 DEPARTMENTAL APPEAL MAY BE DISMISSED AS THE ACIT HAS GOT NO BASIS AND JUSTIFICATION FOR COMING IN APPEAL BEFOR E THE TRIBUNAL. 4. THE BRIEF FACTS IN THE APPEAL OF THE REVENUE ARE THAT THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXP ORT OF ENGINEERING GOODS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAD DECLARED GROSS PROFIT OF RS.2,14,4 9,531/- (21.14%) ON SALES OF RS.10.14 CRORES DURING THE YEAR UNDER ASSESSMENT AS COMPARED TO GP OF RS.2,86,14,225/- (31.11%) ON SALES OF RS.9.19 CRORE S IN THE PRECEDING YEAR. THE ASSESSEE EXPLAINED THE FALL IN GP IS ON ACCOUNT OF INCREASE IN TURNOVER, INCREASE IN COST OF MANUFACTURING AND OVER HEAD EXP ENSES, DOLLAR FLUCTUATION ETC. THE AO, AFTER OBSERVING THAT THE ASSESSEE DID NOT MAINTAIN RECORDS OF CONSUMPTION OF RAW MATERIAL AND PRODUCTION OF FINIS HED GOODS, THE CLOSING STOCK WAS SHOWN AT ESTIMATED COSTS IN RESPECT OF CE RTAIN MISC. ITEMS AND NO SALE OF SCRAP WAS SHOWN, REJECTED THE BOOKS OF ACCO UNTS BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE ACT. AFTER COMP ARING THE CASE OF M/S. CHAND ENGINEERING, A GROUP CONCERN WHICH HAD SHOWN GP OF ABOUT 58% CONSISTENTLY OVER THREE YEAR AND ENGAGED IN THE SIM ILAR LINE OF BUSINESS, THE AO DISREGARDED THE SUBMISSIONS OF THE ASSESSEE AND MADE ADDITION OF RS.78,37,410/- ON ACCOUNT OF LOW GP BY ESTIMATING T HE GP @ 30% WHICH 4 WAS THE AVERAGE OF GP DECLARED BY THE ASSESSEE IN T HREE YEARS INCLUDING THE YEAR UNDER ASSESSMENT. 5. BEFORE THE LD. CIT(A), THE ASSESSEE MADE SUBMISS IONS, WHICH WERE ACCEPTED BY THE LD. CIT(A). THE LD. CIT(A) VIDE PAR A 6 OF HIS ORDER OBSERVED THAT THE ASSESSEE WAS NOT MAINTAINING STO CK REGISTER AND GP DECLARED IS LESSER AS COMPARED TO THE SISTER CONCER N M/S. CHAND ENGINEERING CO. THE AO ACCORDINGLY REJECTED THE BOOKS OF ACCOUN T. THE LD. CIT(A) OBSERVED THAT NO DEFECTS IN THE PURCHASE AND SALES HAVE BEEN POINTED OUT. THE ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING ACCOUN TING PRACTICE ON VALUING THE STOCK AS PHYSICALLY VERIFIED. THERE IS NO CHANG E IN ACCOUNTING SYSTEM. ACCORDINGLY, THE LD. CIT(A) RELYING UPON THE DECIS IONS OF VARIOUS COURTS OF LAW REVERSED THE DECISION OF THE AO FOR INVOKING TH E PROVISIONS OF SECTION 145(3) OF THE ACT. THE LD. CIT(A) FURTHER OBSERVED WITH REGARD TO ESTIMATION OF INCOME BY THE AO THAT THE ASSESSEE HA D INCREASED THE SALES DURING THE YEAR BY OVER RS. 1 CRORE, AS THERE WAS I NCREASE IN COST MATERIAL, MANUFACTURING EXPENSES AND FLUCTUATION IN THE EXCHA NGE RATE. THESE FACTORS WERE NOT CONSIDERED BY THE AO. AS REGARDS THE COMPA RABLE CASE OF M/S. CHAND ENGINEERING, THE SAID CONCERN IS KNEW CONCERN , WHO HAD INSTALLED A NEW MACHINES OF ABOUT RS.4.69 CRORES WHEREAS IN THE CASE OF THE ASSESSEE THERE ARE INVESTMENT IN MACHINES OF RS.0.85 CRORES ONLY. M/S. CHAND 5 ENGINEERING WAS MANUFACTURING GOODS WITH LATEST TE CHNOLOGY WITH HIGHER PROFIT MARGIN. THIS EXPLANATION WAS NOT TAKEN INTO CONSIDERATION BY THE AO. MOREOVER, THE ASSESSEE HAD CHANGED THE EXPORT BASKE T DURING THE YEAR AS COMPARED TO THE IMMEDIATELY PRECEDING YEAR AND MANY HIGH MARGIN ITEMS WHICH WERE EXPORTED LAST YEAR WERE NOT EXPORTED DUR ING THE YEAR. IN SUCH ITEMS, THERE WAS A GP RATE OF AS HIGH AS 60 -62% AS COMPARED TO THE GP RATE OF 22-24% IN REGULAR ITEMS. THIS ASPECT WAS ALSO NO T CONSIDERED BY THE AO. THE NP RATE DURING THE YEAR WAS 06.46% AS COMPARED TO 06.56% IN THE IMMEDIATELY PRECEDING YEAR. THE SAME ASPECT WAS ALS O NOT CONSIDERED BY THE AO. IN VIEW OF THE SAID EXPLANATION OF THE ASSESSE E, WHICH IS AVAILABLE BEFORE THE AO ALSO, THE LD. CIT(A) DELETED THE ADDI TION MADE BY THE A.O. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. AS REGARDS THE MAINTENANCE OF STOCK REGISTER, THE A SSESSEE IS NOT MAINTAINING STOCK REGISTER, IS NOT UNDER DISPUTE. IT WAS ARGUED BEFORE THE BOTH THE AUTHORITIES BELOW THAT THE ASSESSEE IS MAINTAINING MORE THAN ONE THOUSAND ITEMS AND IT IS NOT POSSIBLE FOR IT TO KEEP STOCK RECORDS OF ALL THE ITEMS. THE STOCK IS VALUED ON PHYSICAL VERIFICATION BY THE MAN AGEMENT. THIS METHOD HAS BEEN ADOPTED IN THE EARLIER YEARS AND HAS BEEN ACCE PTED BY THE DEPARTMENT CONSISTENTLY AND THERE IS NO CHANGE IN THE METHOD O F ACCOUNTING. IN THIS REGARD, WE ARE OF THE VIEW THAT THERE IS NOTHING SH OWN BY THE ASSESSEE BEFORE 6 ANY OF THE AUTHORITIES BELOW OR EVEN BEFORE US, WH Y THE STOCK REGISTER OF ONE THOUSAND ITEMS OR ABOVE CANNOT BE MAINTAINED OR NOT POSSIBLE TO BE MAINTAINED. IN THE ABSENCE OF ANY SUCH EXPLANATION ON RECORD, IT CANNOT BE ACCEPTED THAT THE STOCK REGISTER IS NOT POSSIBLE T O BE MAINTAINED IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. AS REGARDS THE CONSISTENCY, THE MISTAKE, IF ANY, IN THE PRECEDING YEAR, CANNOT BE REPEATED IN THE PRESENT YEAR. EVERY YEAR IS AN INDEPENDENT YEAR IN THE INCO ME TAX PROCEEDINGS. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF THE CA SE, WHEN CLOSING STOCK AND OPENING STOCK ARE VALUED ON THE ESTIMATED BASIS, H AVING NO RELEVANCE WITH THE QUANTITATIVE DETAILS OF PURCHASES AND SALES, TH EN ANY FIGURE AS ESTIMATED BY THE MANAGEMENT IS ON ADHOC FIGURE OF CLOSING STO CK AND THEREFORE, DIRECTLY EFFECTS THE GROSS PROFIT OF THE ASSESSEE AND THE PROFITS DEDUCED CANNOT BE SAID TO BE ACCURATE. IN THE FACTS AND CIR CUMSTANCES OF THE PRESENT CASE, WE FIND NO INFIRMITY IN THE ORDER OF THE A.O . WHO HAS RIGHTLY INVOKED THE PROVISIONS OF SECTION 145(3) OF THE ACT, IN REJ ECTING THE BOOKS OF ACCOUNT. THE ORDER OF THE LD. CIT(A) IS REVERSED ON THIS ACC OUNT. 7. AS REGARDS THE ESTIMATION OF INCOME, WE CONCUR WITH THE FINDINGS OF THE LD. CIT(A) AND ARGUMENTS AND EXPLANATION GIVEN BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AND BEFORE US THAT THERE WAS FLUCTUATION IN THE EXCHANGE RATE, INCREASE IN THE COST OF MANUFACTURED ITEMS AND OTHER OVER- 7 HEAD EXPENSES AND THE ASSESSEE HAS DISCARDED THE EX PORT OF HIGH VALUE ITEMS WHICH ATTRIBUTED TO GP RATE IN THE EARLIER YEARS A T 60-62% AS COMPARED TO THE GP RATE OF 22-24% ON REGULAR ITEMS. THESE ASPEC TS WERE NOT TAKEN INTO CONSIDERATION BY THE AO. EVEN IF THE BOOKS OF ACCOU NT ARE REJECTED, IT IS NOT NECESSARY TO MAKE THE TRADING ADDITION. THE ESTIMAT ES BY THE AO CANNOT BE ON SURMISES AND CONJECTURES. THERE HAS TO BE SOME M ATERIAL ON RECORD TO MAKE SUCH ESTIMATION. THE CASE OF M/S. CHAND ENGINE ERING IS QUITE DISTINGUISHABLE ON THE FACTS THAT IN THAT CASE, THE ASSESSEE HAD BEEN DECLARING GP RATE OF ABOUT 58% IN THE PRECEDING THREE YEARS W HEREAS THE ASSESSEE HAD DECLARED 39% DURING THE ASSESSMENT YEAR 2004-05 AND 31.11% IN THE ASSESSMENT YEAR 2005-06. THE DEPARTMENT IN THE PRES ENT ASSESSEE HAD ACCEPTED THE GP RATE SO DECLARED IN THE PRECEDING Y EARS. THEREFORE, THE PERCENTAGE OF G.P. RATE DECLARED IN THE CASE OF M/S . CHAND ENGINEERING IS QUITE DIFFERENT IN THE PRECEDING YEARS TO THAT OF T HE ASSESSEE IN THE PRECEDING YEARS AS HAS BEEN ACCEPTED BY THE DEPARTMENT. THER EFORE, THE FACTS IN BOTH THE CASES CAN NOT BE IDENTICAL OR SIMILAR, AS SUBMI TTED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW. M/S. CHAND ENGINEERING HAD I NSTALLED NEW MACHINES WORTH RS.4.69 CRORES AND IS MANUFACTURING GOODS WIT H LATEST TECHNOLOGY AND HIGHER PROFIT MARGIN AS COMPARED TO THE OLD MACHIN ES IN THE CASE OF THE ASSESSEE WORTH RS.0.85 CRORES COUPLED WITH MANY OTH ER FACTORS WHICH HAD 8 BROUGHT DOWN THE GROSS PROFIT AS LOW AS 21.14% DECL ARED BY THE ASSESSEE. THESE ARE THE MATERIALS WHICH WERE AVAILABLE WITH T HE AO FOR ESTIMATING THE INCOME, WHICH IN FACT WERE NOT CONSIDERED BY THE AO . THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND AS PER EXPLANATIO N SUBMITTED BY THE ASSESSEE AND THE MATERIAL AVAILABLE ON RECORD, EVEN IF THE BOOKS HAVING BEEN REJECTED, NO ADDITION IS CALLED FOR. WE FIND NO INF IRMITY IN THE ORDER OF THE LD. CIT(A) IN THIS REGARD. THUS, THE APPEAL OF THE REVE NUE IS PARTLY ALLOWED. 8. AS REGARDS THE C.O. OF THE ASSESSEE, THE SAME I S SUPPORTIVE TO THE ORDER OF THE LD. CIT(A). SINCE WE HAVE UPHELD THE ORDER OF THE LD. CIT(A) IN PART, THE C.O. OF THE ASSESSEE IS DISMISSED. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.342(ASR)/2010 IS PARTLY ALLOWED AND C.O. NO.25(ASR)/2010 OF THE ASSE SSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 5TH JUNE, 2012. SD/- SD/- (H.S. SIDHU) (B.P. JAIN ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 5TH JUNE, 2012 /SKR/ COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE:M/S. CHAND ENTERPRISES, AMRITSAR. 2. THE ACIT, CIR. IV, ASR. 3. THE CIT(A), ASR. 4. THE CIT,ASR/ 5. THE SR DR, ITAT, AMRITSAR TRUE COPY 9 BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH : AMRITSAR.