M/s. Minol Acids and Chemicals Pvt.Ltd., Baroda V. The Income tax Officer,Ward-4(1), Baroda

ITA 3602/AHD/2008

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 8934 (ITAT-AHMEDABAD)
• Duration Of Justice: 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 26-08-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 03-11-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ALOK JOSHI
• Assessee Lawyers: K N BHATT
• Keywords: Gross profit estimation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH AHMEDABAD (BEFORE S/SHRI H. L. KARWA, JM AND N. S. SAINI, AM) ITA NO.3602/AHD/2008 A. Y.: 2002-03 M./S. MINOL ACIDS AND CHEMICALS PVT. LTD., C-101, SUDHAN APARTMENT, ATMAJYOTI ASHRAM ROAD, VADODARA, PA NO. AABCM 3246 L VS THE INCOME TAX OFFICER, WARD 4 (1), AAYAKAR BHAVAN, RACE COURSE , VADODARA (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI K. N. BHATT, AR DEPARTMENT BY SHRI ALOK JOSHI, DR O R D E R PER H. L. KARWA: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-III, BARODA DATED 1 5-09-2008 RELATING TO ASSESSMENT YEAR 2002-03. 2. THE ONLY EFFECTIVE GROUND RAISED BY THE ASSESSEE IN THIS APPEAL, READS AS UNDER: 1. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS IN SUSTAINING THE ADDITION OF RS.10,38,939 ON ACCOUNT OF LOW GP AND HENCE YOUR PETITIONER PRAYS THAT THE SAME BE DELETED. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS ENGAGED IN MANUFACTURING OF H-ACID, MIX CLEAVES ACID AND K OTCH ACID ETC. DURING THE COURSE OF ASSESSMENT, THE AO MADE ADDITI ON OF RS.17,46,028/- ON ACCOUNT OF THE ALLEGED LOW GP. TH E AO OBSERVED THAT DURING THE CURRENT YEAR GP RATE OF 14.47% WAS DISCL OSED AS AGAINST ITA NO.2360/AHD/2008 M/S. MINOL ACIDS AND CHEMICALS PVT. LTD. 2 26.31% FOR THE IMMEDIATELY PRECEDING YEAR. THUS, TH ERE WAS A SHORTAGE OF 11.84% IN THE GP RATE DURING THE YEAR UNDER CONS IDERATION. THE AO REQUIRED THE ASSESSEE TO EXPLAIN THE FALL IN GP RAT E. IN RESPONSE TO ABOVE QUERY, THE ASSESSEE SUBMITTED THE REASONS FOR SHORT FALL IN GP AS UNDER: DURING THE YEAR UNDER CONSIDERATION, THE SALES HAS INCREASED TO 267.39 LACS AS COMPARED TO THE SAME OF RS.176.07 LACS IN THE PRECEDING YEAR SHOWING AN INCREASE OF 51.70% OVER THE PREVIOUS YEAR. THE CONSUMPTION OF MATERIAL RATIO AS COMPARED TO SALES IN THE YEAR UNDER ASSESSMENT IS 49.14% [13 1.37 / 267.39] AS COMPARED TO THE SAME OF 55.79% IN THE PR ECEDING YEAR [98.23/ 176.06]. THUS SO FAR AS THE RAW MATERI AL CONSUMPTION IS CONCERNED THERE IS A FAVOURABLE VARI ANCE. THE MANUFACTURING OVERHEADS AS COMPARED TO THE SALE S IN THE YEAR UNDER ASSESSMENT IS 24.32% [65.04/267.39] AS COMPARED TOO THE SAME OF 24.02% IN THE PRECEDING YE AR [42.30/176.07]. THUS, SO FAR AS THE MANUFACTURING O VERHEAD IS CONCERNED THERE VARIANCE IS NEGLIGIBLE. THE BIGGEST FACTOR WHICH HAS CAUSED THE FALL IN G. P. IS THE PAYMENT OF EXCISE DUTY ON THE CLEARANCE OF GOODS. I N THE YEAR, UNDER ASSESSMENT THE SAME IS RS.28,26,124/- I.E. 10 .57% OF THE SALES AS COMPARED TO THE SAME OF RS.10,11,395/- I.E. 5.74% IN THE PRECEDING YEAR. THUS THIS COST HAS ALM OST DOUBLED. AT THIS JUNCTURE, IT MAY ALSO BE NOTED THAT DURING A. Y. 2000- 01, THE SAME WAS NIL, WITH G. P. OF 10.45% AND THE SALES OF RS.136.70 LACS. DURING THE A. Y. 1999-00, IT WAS RS .20,856/- WITH G. P. OF 17.95% AND SALES OF RS.184.29 LACS THIS COST HAS KEPT ON VARYING ON THE BASIS OF NATUR E OF SALES- DOMESTIC SALES OR EXPORTS OR SALES TO EXPORT HOUSE. FURTHER, THE BENEFIT OF MODVAT IN RESPECT OF CAPITA L GOODS AND FLUCTUATION IN THE MODVAT AVAILABILITY OF RAW MATER IAL HAS KEPT THIS PAYMENT FLUCTUATING. IF THE EFFECT OF THE SUBSTANTIAL RISE NEARLY 51% IN THE SALES, THE NOMINAL FALL IN G. P. IS OBVIOUS. IN HIS CONNECTION , WE WOULD LIKE TO INVITE YOUR KIND ATTENTION TO THE NET RESUL T, I.E. NET PROFIT OF THE ASSESSEE. ITA NO.2360/AHD/2008 M/S. MINOL ACIDS AND CHEMICALS PVT. LTD. 3 WE REQUEST TO ACCEPT THE BOOK RESULT. FURTHER, AS INFORMED, THE A. Y. 2001-02 WAS ABNORMA L YEAR AND THE PROFIT WAS EXCEPTIONALLY HIGH ON ACCOUNT OF THE SHORTAGE IN INTERNATIONAL MARKET. THE AO DID NOT ACCEPT THE EXPLANATION OF THE ASSESS EE STATING THAT IF THE EXCISE DUTIES WERE CONSIDERED FOR THE PRESENT YEAR OR IN THE PRECEDING YEAR, STILL THERE WAS A FALL IN GP FROM 32.06% TO 2 5.04% WHICH HAD NOT BEEN EXPLAINED SATISFACTORILY BY THE ASSESSEE. THE AO FURTHER WORKED OUT THE CONSUMPTION OF POWER IN RELATION TO PRODUCTION MOTH WISE. THIS WORKING IS APPEARING AT PAGE 6 OF THE ASSESSMENT OR DER. THE AO CONCLUDED THAT THERE WAS UNEVEN CONSUMPTION OF POWE R THROUGHOUT THE YEAR WHICH INDICATES THAT SOME PRODUCTION WAS NOT R ECORDED IN THE BOOKS OF ACCOUNT AND SALES OF SUCH PRODUCTION WERE ALSO S UPPRESSED. THE AO CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES OF T HE PRESENT CASE ADOPTED GP RATE OF 21% AND AN ADDITION OF RS.17,46, 028/- WAS MADE, REPRESENTING DIFFERENCE ON ACCOUNT OF LOWER GP RATI O. 4. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE CA RRIED THE MATTER IN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE AS SESSEE TOOK THE FOLLOWING LINE OF ARGUMENTS: (I) THAT THE PRODUCT MIX OF THE ASSESSEE WAS SUCH THAT H-ACID, MIXED ACID, CLEAVE ACID AND KOTCH ACID COMPRISED 90 % OF THE SALES. (II) THAT DURING THE ASSESSMENT YEAR UNDER CONSIDE RATION THERE WAS A FALL IN PRICES OF THE AFORESAID PRODUCTS, RES ULTING IN LOWER GP. (III) THAT THE GP RATIO FLUCTUATES AS PER THE BUSI NESS AND MARKET CONDITIONS. (IV) THAT THERE CANNOT BE UNIFORM RATE OF GP EVERY YEAR. (V) THAT THERE WAS A HIGHER GP OF 27.92% IN AY 200 1-02 AND LOWER GP OF 8.59% IN AY 1999-2000. ITA NO.2360/AHD/2008 M/S. MINOL ACIDS AND CHEMICALS PVT. LTD. 4 5. THE CIT(A) RESTRICTED THE DISALLOWANCE TO RS.10, 38,939/- ON ACCOUNT OF LOW GP, OBSERVING AS UNDER: 3.2 I HAVE CONSIDERED SUBMISSIONS OF LEARNED A. R . IT IS TRUE THAT THERE CANNOT BE EXACTLY THE SAME LEVEL OF PROFIT FROM YEAR TO YEAR. HOWEVER, DESPITE THE EFFECT OF B USINESS CYCLE THERE WOULD BE A CERTAIN TREND IN THE RATE OF G. P. IT IS WELL KNOWN THAT WHEN THE INPUT COST INCREASES, THE SALE PRICES ARE ALSO INCREASED BY THE PRODUCERS, ALTHOUGH IT MA Y BE TO A LESSER DEGREE. MANY TIMES THE FALL IN INPUT COST IS ALSO NOT PASSED ON TO THE CUSTOMERS FULLY AND THEREBY HIGHER PROFITS ARE ALSO EARNED. HENCE, ALTHOUGH THERE MAY BE VARIA TIONS, BUT SUCH VARIATIONS FROM YEAR TO YEAR IN THE RATE OF G. P. WOULD NOT NORMALLY BE VERY LARGE SINCE THE BUSINESS CYCLE WOU LD TEND TO SMOOTHEN OUT ABNORMALITIES THEREIN. THE MORE PERTIN ENT QUESTION IS WITH REGARD TO THE UNEVEN CONSUMPTION O F POWER FROM MONTH TO MONTH DURING THE YEAR. HOWSOEVER MUCH A VALUE OF RAW MATERIAL AND FINISHED PRODUCT MAY VARY , IT IS HIGHLY UNLIKELY THAT THE OUTPUT RATIO OF THE MANUFA CTURING PROCESS WOULD VARY TO THE EXTENT NOTED BY THE A. O. SUCH WIDE FLUCTUATION IS STRONGLY INDICATIVE OF THE FACT THAT CERTAIN PRODUCTION HAS BEEN KEPT OUTSIDE THE BOOKS. FROM AN ANALYSIS OF THE POWER CONSUMPTION VIS--VIS PRODUCTION, IT I S SEEN THAT THE VALUE OF POWER CONSUMED PER METRIC TONE VARIES FROM ABOUT RS.18,000/- IN THE MONTH OF MARCH, 2002 TO AB OUT RS.43,000/- IN THE MONTH OF SEPTEMBER, 2001. THERE IS NO REGULAR TREND IN THE CONSUMPTION OF POWER WHICH IS EVIDENT FROM THE FOLLOWING TABLE. MONTH POWER BILL IN RUPEES PRODUCTION IN MT COST PER MT RS. APRIL 2001 365726 15 MT 24382 MAY 2001 461041 14 MT INCL. JOB WORK 5 MT 32932 JUNE 2001 367540 11 MT INCL. JOB WORK 5 MT 33413 JULY 2001 467364 14 MT 33383 AUGUST 2001 434181 11 MT 39471 SEPTEMBER 2001 470905 11MT 42810 OCTOBER 2001 423961 11 MT 26498 NOVEMBER 2001 287081 11 MT INCL. JOB WORK 5 MT 26098 DECEMBER 2001 546886 13MT 42068 ITA NO.2360/AHD/2008 M/S. MINOL ACIDS AND CHEMICALS PVT. LTD. 5 JANUARY 2002 413369 19MT 21756 FEBRUARY 2002 456270 19MT 24014 MARCH 2002 347036 19MT 18265 3.3 THERE WAS NO CHANGE IN THE RATES OF ELECTRIC POWER AND GAS CHARGES DURING THIS PERIOD WHICH COUL D BE REFLECTED IN THE UNEVEN RATE OF POWER CONSUMPTION. THE RATE OF POWER CONSUMPTION HAS GONE UP AND DOWN WHICH COULD NOT BE THE CASE IF THE RATES WOULD NOT VARY FROM MONTH TO MONTH. THUS, THE FLUCTUATION IN POWER CONSUMPTION CANNOT B E EXPLAINED BY ANY CHANGE IN RATES. FURTHER, THE OUTP UT EFFICIENCY OF THE MANUFACTURING PROCESS WOULD ALSO NOT FLUCTUATE WIDELY FROM MONTH TO MONTH AS NOTED ABOVE . THE ONLY EXPLANATION, THEREFORE, IS THAT IN THE MONTHS WHERE HIGHER CONSUMPTION OF POWER HAS BEEN SHOWN THERE WAS UNACCOUNTED PRODUCTION WHICH WAS SHOWN OUTSIDE THE BOOKS. ACCORDINGLY IT IS HELD THAT THE A. O. WAS CORRECT I N NOT ACCEPTING THE BOOK RESULT. THE NEXT QUESTION THEREF ORE, IS WHAT CAN BE THE QUANTUM OF DISALLOWANCE. IT IS SEEN THAT THE RATE OF G. P. HAS VARIED FROM A.Y. 1997-98 TO A. Y. 2005-06 AS UNDER: A.Y. SALES NET OF EXCISE GP AS % OF NET SALES 1997-98 18903347 27.57 1998-99 25854361 15.98 1999-00 18428669 08.59 2000-01 13670128 10.52 2001-02 16596120 27.92 2002-03 23912431 16.18 2003-04 30780067 18.38 2004-05 26525256 23.47 2005-06 31730887 17.23 AVERAGE RATE 18.43 THE AVERAGE G.P. FOR THIS PERIOD COMES TO 18.43%. A GAINST THIS THE ASSESSEE HAS DISCLOSED 16.18%. HENCE, THE DIFFE RENCE BETWEEN THESE TWO IS 2.25% HELD TO BE ON ACCOUNT OF PRODUCTION AND SALES OUTSIDE THE BOOKS OF ACCOUNTS. THE SALES AMOUNTED TO RS.2,67,38,535/-. APPLYING THE G. P. RA TE OF 18.43% THERETO, GROSS PROFIT OF RS.49,27,916/- IS O BTAINED. AS AGAINST THIS THE DISCLOSED G. P. IN THE BOOKS OF AC COUNT COMES TO RS.38,88,977/-. THE DIFFERENCE IS OF RS.10,38,93 9/-. ACCORDINGLY, THE ADDITION OF THIS AMOUNT IS CONFIRM ED. AT THE SAME TIME, THE DISALLOWANCE OF RS.7,07,089/- (RS.17 ,46,028 10,38,939) IS DIRECTED TO BE DELETED. ITA NO.2360/AHD/2008 M/S. MINOL ACIDS AND CHEMICALS PVT. LTD. 6 6. WE HAVE HEARD THE RIVAL SUBMISSIONS. SHRI K. N. BHATT, LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT THE CIT(A) HAS NOT CORRECTLY APPRECIATED THE FACTS OF THE PRESENT CASE . ACCORDING TO HIM THE CIT(A) SHOULD HAVE ACCEPTED THE REASONS GIVEN BY TH E ASSESSEE REGARDING FALL IN GP RATE. THE LEARNED COUNSEL FURTHER SUBMIT TED THAT THE GP RATE FLUCTUATE AS PER THE BUSINESS AND MARKET CONDITIONS . THERE CANNOT BE UNIFORM RATE OF GP EVERY YEAR. HE, THEREFORE, SUBMI TTED THAT THE ADDITION SUSTAINED BY THE CIT(A) MAY BE DELETED. ON THE OTHE R HAND, SHRI ALOK JOSHI, LEARNED DR HEAVILY RELIED ON THE ORDER OF TH E CIT(A). IN THE INSTANT CASE, THERE WAS SHORTFALL OF 11.84% IN THE GP RATE DURING THE YEAR UNDER CONSIDERATION. WHEN THE ASSESSEE WAS ASKED TO GIVE REASONS FOR SUCH SHORTFALL OF GP, THE ASSESSEE COULD NOT GIVE ANY PL AUSIBLE EXPLANATION FOR THE SAME. IN OUR CONSIDERED VIEW, BOTH THE AUTHORIT IES BELOW WERE JUSTIFIED IN OBSERVING THAT SUCH A FALL IN GP RATE IS STRONGLY INDICATIVE OF THE FACT THAT CERTAIN PRODUCTION HAS BEEN KEPT OUTS IDE THE BOOKS. WE HAVE ALSO PERUSED ANALYSIS OF THE POWER CONSUMPTION VIS--VIS PRODUCTION. WE FIND THAT THE VALUE OF POWER CONSUMP TION PER METRIC TONE VARIED FROM ABOUT RS.18,000 IN THE MONTH OF MARCH 2 002 TO ABOUT RS.43,000/- IN THE MONTH OF SEPTEMBER 2001. IN OUR VIEW, THE CIT(A) HAS CORRECTLY OBSERVED THAT THERE IS NO REGULAR TREND I N THE CONSUMPTION OF POWER WHICH IS EVIDENT FROM THE TABLE GIVEN IN THE ORDER OF THE CIT(A). THE CIT(A) HAS ALSO OBSERVED THAT THERE WAS NO CHAN GE IN THE ELECTRIC CONSUMPTION PATTERN AND DURING THIS PERIOD WHICH CA N BE REFLECTED IN THE UNEVEN RATE OF POWER CONSUMPTION. THE ASSESSEE HAS ALSO FAILED TO EXPLAIN THE FLUCTUATION IN POWER CONSUMPTION. IN OU R VIEW, THE CIT(A) HAS CORRECTLY OBSERVED THAT IN THE MONTH WHERE HIGHER P OWER CONSUMPTION HAS BEEN SHOWN THERE WAS UNACCOUNTED PRODUCTION WHI CH WAS SOLD OUTSIDE THE BOOK. THERE IS NO DISPUTE THAT THE CIT( A) HAS CORRECTLY UPHELD THE ORDER OF THE AO IN NOT ACCEPTING THE BO OK RESULT. AFTER CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES OF T HE PRESENT CASE, WE ARE OF THE VIEW THAT THE GP RATE OF 18.43% ADOPTED BY THE CIT(A) IS QUITE ITA NO.2360/AHD/2008 M/S. MINOL ACIDS AND CHEMICALS PVT. LTD. 7 REASONABLE IN THIS CASE. IN OUR VIEW, THE LEARNED C IT(A) HAS PASSED A WELL REASONED ORDER AFTER APPRECIATING THE FACTS OF THE PRESENT CASE AND, THEREFORE, DO NOT SEE ANY VALID GROUND FOR INTERFER ING WITH THE SAME. IN THAT VIEW OF THE MATTER, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUND RAISED BY THE ASSESSEE. . 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMIS SED. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 25-09 -09 SD/- SD/- (N. S. SAINI) ACCOUNTANT MEMBER (H. L. KARWA) JUDICIAL MEMBER DATE : 25-9-2009 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR, ITAT, AHMEDABAD