Maldeep Catalysts Pvt.Ltd., Surat V. The Dy.CIT.,Circle-1, Surat

ITA 3708/AHD/2008

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1749 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 15-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 14-11-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: U S RAINA
• Assessee Lawyers: J P SHAH
• Keywords: Opportunity of being heard

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' BEFORE SHRI D K TYAGI, JM & SHRI A N PAHUJA, AM ITA NO.3708/AHD/2008 (ASSESSMENT YEAR:-2005-06) MALDEEP CATALYSTS PVT. LTD., 3, HARIKUNJ, UDHNA INDUSTRIAL ESTATE, S V P ROAD NO.3, UDHNA, SURAT V/S DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, ROOM NO. 108,AAYAKAR BHAVAN, MAJURA GATE,SURAT PAN: AABCM 6306 M [APPELLANT] [RESPONDENT] ITA NO.3911/AHD/2008 (ASSESSMENT YEAR:-2005-06) DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, SURAT V/S MALDEEP CATALYSTS PVT. LTD., 3, HARIKUNJ, UDHNA INDUSTRIAL ESTATE, S V P ROAD NO.3, UDHNA, SURAT [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI J P SHAH, AR REVENUE BY:- SHRI U S RAINA, DR O R D E R A N PAHUJA: THESE CROSS APPEALS DIRECTED AGAINST AN ORDER DATE D 18-09-2008 OF THE LD. CIT(APPEALS)-I, SURAT, FOR TH E ASSESSMENT YEAR (AY) 2005-06, RAISE THE FOLLOWING GROUNDS:- ITA NO.3708/AHD/2008[ASSESSEE] 1 THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWANCE OF COMMISSION E XPENSES AMOUNTING TO RS.5,12,341/- AS MADE BY THE AO, WHICH IS ABSOLUTELY INCORRECT AND BAD IN LAW, REQUIRING OUTRIGHT DELETI ON. 2 THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, SUBSTITUTE, AND MODIFY ANY OR ALL THE ABOVE GROUNDS OF APPEAL, IF NECESSAR Y, ON THE BASIS OF SUBMISSIONS TO BE MADE AT THE TIME OF PERSONAL HEAR ING. ITA N OS.3708 & 3911/A/08 2 ITA NO.3911/AHD/2008[REVENUE] [1] ON THE FACT, AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED CIT(A)-I, SURAT HAS ERRED IN HOLDING THAT THE FORMU LA USED BY THE A.O. CANNOT GIVE A CORRECT PICTURE AS HE HAS NOT TA KEN INTO ACCOUNT THE MIXING OF M.T.O., A FINISHED PRODUCT, BEFORE TH E SAME IS SOLD WITHOUT APPRECIATING THE FACT THAT M.T.O. IS MIXED IN VARIED QUANTITY GIVING MORE YIELD AS DISCUSSED BY THE A.O. IN THE A SSESSMENT ORDER ON PAGE NO.3 [2] ON THE FACT AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT(A)-I, SURAT HAS ERRED IN HOLDING THAT THE A.O. HAS ADOPTED WRONG BASIS FOR CALCULATION OF PRODUCTION WITHOUT A PPRECIATING THE FACT THAT THE A.O, HAS WORKED OUT THE CALCULATION O F EXCESS CONSUMPTION OF RAW MATERIALS AND HAS WELL DISCUSSED IN THE ORDER OF ASSESSMENT ITSELF. [3] ON THE FEET AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT(A)-I, SURAT HAS ERRED IN DELETING THE ADDITION MADE BY THE A.O. OF RS.35 ; 97,603/- AND RS.52,01,771/- ON ACCOUNT OF EXCESS CONSUMPTION OF RAW MATERIALS. [4] ON THE FACT AND CIRCUMSTANCES OF THE CASE AND I N LAW,, THE LEARNED CIT(A)-I, SURAT HAS ERRED IN DELETING THE DISALLOWA NCE MADE BY THE A.O. OF RS.18,10,372/- WITHOUT APPRECIATING THE FAC T THAT THE ASSESSEE HAS NOT FURNISHED ANY EVIDENCE BEFORE THE A.O. WHICH MAY PROVE THE 'NATURE OF SERVICES RENDERED, IF ANY, BY THE SO CALLED TWO COMMISSION AGENTS VIZ. M/S. KAPADIA ENTERPRISE AND M/S. COMPLEX MARKETING CORPORATION [5] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LEARNED CIT (A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER ON THIS ISSUE. [6] IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE CIT (A) BE SET ASIDE AND THAT THE ORDER OF THE ASSESSING OFFICER BE RESTORED . 2. ADVERTING FIRST TO GROUND NOS.1 TO 3 IN THE APPE AL OF THE REVENUE, FACTS, IN BRIEF, AS PER RELEVANT ORDERS A RE THAT RETURN DECLARING INCOME OF RS.63,70,830/- FILED ON 30-10-2 005 BY THE ASSESSEE, MANUFACTURING PAINT DRIERS, AFTER BEING P ROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REF ERRED TO AS THE ACT], WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT, ON 7-7-2006.DURING THE COURSE OF ASSESSMENT ITA N OS.3708 & 3911/A/08 3 PROCEEDINGS, THE ASSESSING OFFICER [AO IN SHORT] NO TICED THAT THE ASSESSEE MANUFACTURED THE FOLLOWING CHEMICALS:- (A) COBALT OCTOATE (B) LEAD OCTOATE (C) ZIRCONIUM OCTOATE (D) MANGANESE OCTOATE (E) ZINC OCTOATE (F) CALCIUM OCTOATE 2.1. TO A QUERY BY THE AO SEEKING CHEMICAL FOR MULAE FOR THE MANUFACTURE FOR THE AFORESAID CHEMICALS, THE ASSESS EE PROVIDED DETAILS OF PRODUCTS WITH FORMULAE. THE AO NOTICED T HAT THE RAW MATERIAL USED TO PRODUCE 1000 KG. OF THE FINAL PROD UCT, REVEALED AS UNDER:- SR. NO. NAME OF THE FINAL PRODUCT ATOMIC WEIGH OF THE MAIN RM 1 RM 1 REQUIRED AS PER THE CALCULATION GIVEN BY THE ASSESSEE TO PRODUCE 1 MT OF FG - AS PER SUBMISSION DATED 23- 10-2007 RM 1 REQUIRED AS PER THE CALCULATION GIVEN BY THE ASSESSEE TO PRODUCE 1 MT OF FG - AS PER SUBMISSION DATED 21- 11-2007 ATOMIC WEIGHT OF THE MAIN RM 2 RM 2 REQUIRED AS PER THE CALCULATION GIVEN BY THE ASSESSEE TO PRODUCE 1 MT OF FG AS PER SUBMISSION DATED 23- 10-2007 RM 2 REQUIRED AS PER THE CALCULATION GIVEN BY THE ASSESSEE TO PRODUCE 1 MT OF FG AS PER SUBMISSION DATED 23- 10-2007 1 COBALT OCTOATE 332 625 650 280.93 400 574 2 LEAD OCTOATE 288 415 290 223.20 400 410 3 ZINC OCTOATE 288 425 365 81.38 155 148 4 ZIRCONIUM OCTOATE 288 315 520 301.22 600 615 5 CALCIUM OCTOATE 288 480 490 74.08 100 100 6 MANGANESE OCTOATE 332 550 585 546.94 285 1015 2.2 SINCE THE ASSESSEE ADMITTED BEFORE THE AO THA T THE QUANTITATIVE DATA AS SUBMITTED BY THEM ON 23-10-200 7 WAS INCORRECT, THE AO AFTER ANALYZING THE COMPONENTS OF CHEMICALS MANUFACTURED BY THE ASSESSEE, CONCLUDED AS UNDER:- ITA N OS.3708 & 3911/A/08 4 A. OVER THE ASSESSMENT HEARINGS, THE ASSESSEE HAS BEEN GIVING OUT VARIED DATA AS EXPLAINED IN THE FOOTNOTE 1, ON THE PAGE 3 & 4 OF THE ASSESSMENT ORDER. B. THE MOLECULAR WEIGHT ETC. WERE CALCULATED AND CO NFRONTED TO THE ASSESSEE AND HE HAS CLARIFIED THAT THE FORMULA AS CALCULATED BY THE DEPARTMENT IS CORRECT. C. EVEN IF THE ASSESSEE WERE TO BE GIVEN THE SET OF F FOR THE YIELD PURPOSE, IT CAN BE AS PER HIS SUBMISSIONS AND PERSONAL DISCUSSION TO THE TUNE OF25% ONLY. THIS IS BEING DONE TO COUNTER THE ARGUMENT OF THE ASSESSEE REGARD ING THE SCALING OF THE STOCHIOMETRIC REACTION TO THE PRODUC TION LEVEL WHERE MANY OF THE FACTORS LIKE TEMPERATURE, PRESSUR E ETC. WILL MAKE DIFFERENCE. D. THE QUERIES HAVE BEEN RAISED FROM THE DATA PROVI DED BY THE ASSESSEE DURING THE SUBMISSION MADE. THE ASSESSEE A S PER THE LETTER DATED 02-11-2007 HAS PROVIDED THE QUANTI TIES REQUIRED FOR THE PRODUCTION OF ONE MT OF THE FINISH ED PRODUCTS. IT MUST BE CAREFULLY NOTED THAT THE QUANT ITIES OF THE MATERIALS, WHICH ARE NOT COSTLY, ARE GENERALLY MATCHING WITH THE MOLECULAR WEIGHT WISE CONSUMPTION FIGURES. IT IS ONLY THE COSTLY MATERIALS WHERE THE FIGURES ARE GOI NG HAYWIRE. 2.3 ON THE BASIS OF CHARTS OF THE CONSUMPTION AND THE COMPARISON FOR THE MAIN RAW MATERIAL I.E. OCTOIC ACID AND THE SECOND RAW MATERIAL, MENTIONED IN PARA 2.6(F) OF THE ASSESSMEN T ORDER, THE AO CONCLUDED THAT THERE WAS A MISMATCH IN THE CONSUMP TION FIGURES AND THE ACTUAL FIGURES, WHICH COULD NOT BE EXPLAIN ED BY THE ASSESSEE. ACCORDINGLY, THE EXCESS CONSUMPTION OF TH E OCTOIC ACID OF RS.35,97,603 AND OTHER RAW MATERIALS OF RS.52,01,77 1 WAS DISALLOWED AND ADDED TO THE INCOME . 3. ON APPEAL, THE LEARNED CIT(A) DELETED THE ADDITI ON IN THE FOLLOWING TERMS:- 2.3.1 I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AND THE OBSERVATION OF THE A.O. THE APPELLANT HAS STATED TH AT A FIXED QUANTITY OF FINISHED PRODUCT IS PRODUCED WHEN THE TWO RAW-MATER IALS ARE CHEMICALLY REACTED, THE REACTION IS BASED ON MOLECULAR WEIGHT OF FINISHED PRODUCTS VIS-A-VIS MOLECULAR WEIGHT OF RAW MATERIAL . HOWEVER, THE FINAL PRODUCT IS MIXED WITH MTO BEFORE IT IS SOLD TO THE CUSTOMERS. THE SECOND ITA N OS.3708 & 3911/A/08 5 ARGUMENT OF THE APPELLANT IS THAT THE EXCISE DEPA RTMENT AND SALES-TAX DEPARTMENT HAS NOT FOUND ANY OBJECTION. THE THIRD ARGUMENT OF THE APPELLANT IS THAT THE A.O. HAS WRONGLY CALCUL ATED THE FORMULAS AND AVERAGES AND, THEREFORE, THE ADDITION MADE IS WRO NG. THE APPELLANT FURTHER STATED THAT AVERAGE CONVERSION RATIO OF 0.8 1 AS CALCULATED BY IT IN THE TABLE GIVEN ABOVE MATCHES WITH THE AVERAGE MENT IONED IN THE TAX AUDIT REPORT. THE APPELLANT STATED THAT THE A.O. HA S CALCULATED THE AVERAGE CONVERSION RATIO OF 0.95 WHICH IS ACTUALLY ON THE BASIS OF VALUE. THE CORRECT RATIO IS 0.81 WHICH IS ON THE BASIS OF QUANTITY. IN VIEW OF THIS REASON, THE ARGUMENT OF THE APPELLANT APPEARS TO BE CORRECT THAT THE A.O. HAS ADOPTED A WRONG BASIS FOR CALCULATING PRODUCTIO N. THE BASIS FOR PRODUCTION CANNOT BE VALUE OF RAW MATERIAL, IT HAS TO BE QUANTITY. 2.3.2 AS REGARDS CALCULATION OF THE A.O., IF THE FI NISHED PRODUCT IS MIXED WITH TURPENTINE OIL IN VARYING QUANTITY BEFORE SELL ING THE SAME THEN THE THEORY OF FIXED AMOUNT OF RAW MATERIAL PRODUCING FI XED AMOUNT OF FINISHED PRODUCTS DOES NOT SURVIVE. IN VIEW OF THIS REASON, THE CALCULATIONS OF THE A.O. BECOME TOTALLY WRONG. THE DIRECTOR OF THE APPE LLANT HAS STATED THAT IN THE FINISHED PRODUCT IS VARYING QUANTITIES. THIS ME ANS THAT IF THE FINISHED PRODUCT IS MIXED WITH MORE TURPENTINE OIL THEN THIS WILL BE GIVING MORE YIELD. HENCE THE YIELD CANNOT BE CALCULATED AS DONE BY THE A.O. WITHOUT FINDING OUT THE RATIO IN WHICH MTO WAS MIXED WITH EACH PROD UCT IN THE SAME WAY AS MILK PRODUCTION CANNOT BE FOUND OUT FROM THE SAL E OF MILK IF THE WATER IS MIXED WITH THE MILK AND THE QUANTITY OF THE WATER M IXED IS NOT KNOWN. IN THE PRESENT CASE ALSO, THE APPELLANT HAS BEEN MIXIN G MTO IN VARYING QUANTITIES WITH THE FINISHED PRODUCTS BEFORE SELLIN G THE SAME TO THE CUSTOMERS. THE FORMULAS USED BY THE A Q, CANNOT GIV E THE CORRECT PICTURE BECAUSE HE HAS NOT TAKEN INTO ACCOUNT THE MIXING OF MTO WITH THE FINISHED PRODUCT BEFORE THE SAME IS SOLD. THE FORMULAS ALSO DO NOT GIVE CORRECT PICTURE BECAUSE THE A.O. HAS ADOPTED THE RATIO OF 0 .95 INSTEAD OF 0.81, THE APPELLANT ARGUED THAT AS PER THE SETTLED POSITION O F LAW NO ADDITION CAN BE MADE SOLELY ON THE BASIS OF FORMULA WITHOUT REJECTI NG THE BOOKS OF ACCOUNT. THE APPELLANT HAS RELIED ON THE DECISION OF THE HON 'BLE I.T.A.T. JAIPUR IN THE CASE OF ITO VS. QUALITY CHEMICALS (1998) 61 TTJ (JP) 395, WHEREIN THE HON'BLE I.T.AT. HELD AS UNDER:- 'THE VERY FUNDAMENTAL PRINCIPLE UNDER THE IT ACT HA S TO BE APPRECIATED THAT INCOME HAS TO BE DETERMINED AS PER BOOK OF ACCOUNT AND NOT AS PER CHEMICAL FORMULA. IF THE BOO KS ARE SUCH FROM WHICH CORRECT INCOME CANNOT BE DETERMINED, OR IF TH ERE ARE SUFFICIENT REASONS IN THE FORM OF SOME MATERIAL WHICH POINT TO WARDS SUPPRESSION OF PRODUCTION, THEN, IN ADDITION, THE A O SHOULD SUPPORT HIS FINDING BY AN OPINION OF THE EXPERT. BUT MERELY BY ITSELF, NEITHER A PERSON WHO IS AN EXPERT IN A FIELD OTHER THAN ACCOU NTS, NOR A CHEMICAL FORMULA CAN HELP ONE TO CONCLUDE THAT THE ACCOUNTS ARE DEFECTIVE AND DO NOT GIVE A TRUE PICTURE ABOUT THE INCOME. THE CIT(A) HAS GIVEN VERY SOUND REASONS TO DELETE THE A DDITION. THE DELETION IS SUSTAINED.'' ITA N OS.3708 & 3911/A/08 6 IN VIEW OF THE ABOVE, I AGREE WITH THE APPELLANT TH AT THE CHEMICAL FORMULA CANNOT BE MADE ON BASIS OF ADDITION WITHOUT BRINGING ANY MATERIAL ON RECORD TO SHOW THAT THERE WAS ACTUALLY AN EXCESS CO NSUMPTION OR INFLATION OF PURCHASE OR SUPPRESSION OF PRODUCTION. 2.3.3 FURTHER, IT IS SEEN THAT THE BOOKS OF ACCOU NT HAVE NOT BEEN REJECTED BY THE AO AND AS PER THE SETTLED POSITION OF LAW AD DITION CANNOT BE MADE TO THE BOOK RESULTS EITHER BY WAY OF EXCESS UNACCOU NTED CONSUMPTION OR EXCESS PRODUCTION UNLESS THE BOOKS ARE REJECTED OR THERE IS SOME 'MATERIAL EVIDENCE ON RECORD TO SHOW THAT THE PRODUCTION OF F INISHED GOODS OR CONSUMPTION OF RAW MATERIAL WAS MORE THAN SHOWN BY THE APPELLANT, IN THE PRESENT CASE, THERE IS NO MATERIAL AVAILABLE ON REC ORD REGARDING EXCESS PRODUCTION OF FINISHED GOADS OR EVEN EXCESS CONSUMP TION RAW MATERIALS. IN THIS REGARD, THE DECISIONS OF THE VARIOUS COURTS CA N BE SEEN AS UNDER:- (I) IN THE DECISION OF THE HON'BLE KERALA HIGH COUR T IN THE CASE OF ST. TERESA'S OIL MILLS (76-ITR-365) THE HON'BLE COURT H AS HELD THAT UNRELIABILITY; INCORRECTNESS OR INCOMPLETENESS OF T HE ACCOUNT BOOKS HAVE TO BE SHOWN BY THE DEPARTMENT BEFORE REJECTING THE SAME AND MERE DISPARITY IN CONSUMPTION OF ELECTRICITY IN CER TAIN MONTHS CANNOT BE THE REASON FOR REJECTION OF BOOKS ARID FOR ADDIT ION. (II) IN THE DECISION OF THE HON'BLE LT.A.T., AHMEDA BAD IN THE CASE OF BABUL PRODUCTS (62-ITD-179) THE HON'BLE I.T.A.T. HE LD THAT WHERE THERE IS NO EVIDENCE OF SALE OF SILVER FOIL OR THAT SILVER FOIL HAD BEEN PURCHASED FROM UNDISCLOSED SOURCES THERE CANNOT BE ADDITION FOR EXCESS CONSUMPTION OR EXCESS STOCK. (III) IN THE DECISION OF THE HON'BLE I.T.A.T,. ANME DABAD IN THE CASE OF NUTAN TOBACCO PVT. LTD, (85-ITD-34) THE HON'BLE I.T .A.T, HELD THAT THE ASSESSEE HAVING MAINTAINED CORRECT AND COMPLETE BOOKS OF ACCOUNT ON THE BASIS OF THE METHOD OF ACCOUNTING RE GULARLY EMPLOYED AND FOLLOWED A REASONABLE METHOD OF VALUAT ION OF BARDANA, ADDITION ON ACCOUNT OF EXCESS CONSUMPTION OF BANDANA ARID SALE OF BARDANA WERE NOT JUSTIFIED, ESTIMATE O F CONSUMPTION OF BARDANA MADE BY THE A.O. 'BEING FACTUALLY AND APPAR ENTLY INCORRECT. (IV) IN THE DECISION OF THE HON'BLE CALCUTTA HIGH C OURT IN THE CASE OF SIDDHESHWARI COTTON MILLS PVT. LTD. (117-ITR-953) T HE HON'BLE HIGH COURT STATED THAT IF THE ITO HAS NOT REJECTED THE B OOKS OF ACCOUNT IT CANNOT BE ASSUMED THAT THE ITO HAD CONSIDERED AND R EJECTED THE BOOKS BECAUSE IT WOULD BE SPECULATIVE ASSUMPTION. T HE HON'BLE HIGH COURT HELD THAT THERE WAS NO MATERIAL TO HOLD THAT EXTRA WASTAGE WAS UTILIZED BY THE ASSESSEE AND THAT THE E XTRA PRODUCTION WAS SOLD AT A CERTAIN RATE. IN VIEW OF THIS, SINCE THE BOOKS OF ACCOUNT HAVE NOT BEEN REJECTED EXPRESSLY IN THE ASSESSMENT ORDER IT CANNOT BE PRESUMED THAT THE BOOKS OF ACCOUNT ARE DEEMED TO BE REJECTED AND, THEREFORE, SINCE THE BOOKS OF ACCOUNTS ARE NOT REJECTED NO ADDITION CAN BE MADE AS THE A.O. HAS BROUGHT NO MAT ERIAL ON RECORD ITA N OS.3708 & 3911/A/08 7 TO SHOW THAT THERE WAS EXCESS PURCHASE OF RAW MATER IAL OR EXCESS PRODUCTION OF FINISHED PRODUCTS. 2.3.4 IN VIEW OF THE ABOVE REASONS, I AGREE WITH TH E APPELLANT THAT THE CHEMICAL FORMULA CANNOT BE MADE THE BASIS OF ADDITI ON AS DECIDED BY THE HON'BLE I.T.A.T. JAIPUR AND THE HON'BLE I.T.A. T., AHMEDABAD IN THE CASES CITED ABOVE WITHOUT REJECTING THE BOOKS OF AC COUNT AND WITHOUT BRINGING ANY MATERIAL ON RECORD FOR HAVING MADE UNA CCOUNTED PURCHASE OR FOR MAKING UNACCOUNTED SALES. HENCE, THE ADDITION M ADE BY THE AO IS DELETED AND THIS GROUND OF APPEAL IS ALLOWED. 4. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED DR SUPP ORTED THE ORDER OF THE AO WHILE THE LEARNED AR ON BEHALF OF THE ASS ESSEE SUPPORTED THE FINDINGS OF THE LEARNED CIT(A).WHILE REFERRING TO PAGE-8 &11 TO 14 OF THE IMPUGNED ORDER, THE LD. AR CONTENDED TH AT THE AO ADOPTED INCORRECT RATIO WHILE WORKING OUT THE ADDIT ION. EVEN OTHERWISE THE BOOKS HAVING NOT BEEN REJECTED BY THE AO, THE LEARNED CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION, THE LD. AR ADDED. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. INDISPUTABLY, THE AO ADOPTED AN INCORRECT METHOD FOR CALCULATING THE PRODUCTION, HAVING CALCULATED THE AVERAGE CONVE RSION RATIO OF 0.95 ON THE BASIS OF VALUE INSTEAD ON THE BASIS OF QUANTITY. C ONSEQUENTLY, THE LD. CIT(A) CONCLUDED THAT THE BASIS FOR PRODUCTION COULD NOT BE THE VALUE OF RAW MATERIAL, BUT QUANTITY ONLY, ESPECIALLY WHEN TURPENTINE OIL W AS MIXED IN VARYING QUANTITY WITH EACH PRODUCT AND THE AO DID NOT TAKE INTO ACC OUNT THE FACTOR OF MIXING OF MTO WITH THE FINISHED PRODUCT. EVEN OTHER WISE, WIT HOUT POINTING OUT ANY DEFECT IN THE BOOKS AND WITHOUT ESTABLISHING THAT THERE WAS ACTUALLY EXCESS CONSUMPTION OR INFLATION OF PURCHASE OR SUPPRESSION OF PRODUCTI ON NOR HAVING AN EXPERT OPINON, CHEMICAL FORMULAE CAN NOT BE THE SOLE BASIS FOR A DDITION. THE DECISION OF THE ITAT IN QUALITY CHEMICALS (SUPRA) RELIED UPON BY TH E LD. CIT(A) SUPPORTS THIS VIEW . UNDISPUTEDLY, THE ASSESSEE IS MAINTAINING THE BOOK S OF ACCOUNTS AND NO DEFECTS HAVE BEEN POINTED OUT BY THE AO IN THE PURC HASES OR SALES AND EVEN IN THE EXPENSES. THERE IS NO FINDING OR OPINION EITHER THAT THE RECORDS WERE INCORRECT AND INCOMPLETE OR THAT THE METHOD APPLIED WAS SUCH THAT THE INCOME COULD NOT BE ITA N OS.3708 & 3911/A/08 8 DEDUCED FROM THE ACCOUNTS MAINTAINED BY THE ASSESSE E . SIMPLY ON THE BASIS OF AN AXIOMATIC CHEMICAL FORMULAE, WITHOUT ANY DEFECTS IN THE BOOKS OF ACCOUNTS, WHEN THE METHOD OF ACCOUNTING HAS CONSISTENTLY BEEN ADOPTED BY THE ASSESSEE, ADDITION COULD NOT BE SUSTAINED. IT IS DI FFICULT TO CATALOGUE VARIOUS TYPES OF DEFECTS IN THE ACCOUNT BOOKS OF AN ASSESSEE WHIC H MAY RENDER REJECTION OF ACCOUNTS ON THE GROUND THAT ACCOUNTS ARE NOT COMPLE TE FROM WHICH THE CORRECT PROFIT CANNOT BE DEDUCED. THE LD. CIT(A) FOUND THAT NO DEFECTS WERE POINTED OUT BY THE AO IN THE BOOKS NOR ANY SUCH DEFECTS HAVE BE EN BROUGHT TO OUR NOTICE. THE LD. DR DID NOT REFER US TO ANY MATERIAL CONTRO VERTING THE AFORESAID FINDINGS OF FACTS RECORDED BY THE LD. CIT(A). HONBLE GUJARAT H IGH COURT IN THE CASE OF CIT VS. AMITBHAI GUNWANTBHAI, 129 ITR 573 HELD THAT IF THERE WAS NO CHALLENGE TO THE TRANSACTIONS REPRESENTED IN THE BOOKS THEN IT IS NO T OPEN TO REVENUE TO CONTEND THAT WHAT IS SHOWN BY THE ENTRIES IS NOT THE REAL S TATE OF AFFAIRS. SECONDLY, EVEN IF FOR SOME REASON, THE BOOKS ARE REJECTED IT IS NOT O PEN TO THE AO TO MAKE ANY ADDITION ON ESTIMATE BASIS OR ON PURE GUESS WORK. T HE BURDEN OF SHOWING THAT THE APPARENT STATE OF AFFAIRS IS NOT THE REAL ONE IS VE RY HEAVY ON THE DEPARTMENT [BEDI & CO. PVT. LTD. VS. CIT,144 ITR 352(KARN) AFFIRMED BY HONBLE SUPREME COURT IN 230 ITR 580]. NO MATERIAL HAS BEEN PLACED BEFORE U S TO DOUBT THE NATURE OF THE TRANSACTIONS RECORDED IN THE BOOKS AND AS MENTIONED BY THE LD. CIT(A), NO SPECIFIC DISCREPANCIES OR DEFECTS IN THE BOOKS OF A CCOUNT OF THE ASSESSEE HAVE BEEN POINTED OUT NOR WAS ANY MATERIAL BROUGHT TO OUR NOTICE TO ESTABLISH THAT PURCHASES WERE INFLATED OR RECEIPTS SUPPRESSED. IN THESE CIRCUMSTANCES , THERE WAS NO JUSTIFICATION IN ESTIMATING THE PROFITS [ V IKRAM PLASTICS,239 ITR 161(GUJ) . IN VIEW OF THE FOREGOING, ESPECIALLY WHEN THERE IS NO MATERIAL BEFORE US FOR TAKING A DIFFERENT VIEW IN THE MATTER WHILE PURCHAS ES OF RAW MATERIAL AND SALES HAVE NOT BEEN DOUBTED AT ALL, WE ARE NOT INCLINED T O INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). THEREFORE, GROUND NOS. 1 TO 3 IN TH E APPEAL OF THE REVENUE ARE DISMISSED. 6. ADVERTING NOW TO GROUND NO.4 IN THE APPEAL OF TH E REVENUE AND GROUND NO.1 IN THE APPEAL OF THE ASSESSEE, REL YING ON HIS FINDINGS IN THE ASSESSMENT ORDER FOR AY 2004-05 AND IN THE ABSENCE OF ANY EVIDENCE OF SERVICES RENDERED BY THE RECIPIE NTS OF ITA N OS.3708 & 3911/A/08 9 COMMISSION TO THE ASSESSEE IN THE YEAR UNDER CONSID ERATION, THE AO DISALLOWED AN AMOUNT OF RS.23,98,378/- ON ACCOUNT O F COMMISSION PAID TO THE FOLLOWING FIVE PARTIES:- SR. NO. NAME AND ADDRESS OF THE AGENT PAN AMOUNT (RS.) 1 COMPLEX MARKETING CORPORATION, S R PETROL PUMP, COLLEGE ROAD, NADIAD-387 007 AGVPS 8912 J 6,97,911 2 PHENO-CHEM INDUSTRIES, 13/6, EAST PUNJABI BAUGH, NEW DELHI-110 026 AATPK 0280 H 4,80,359 3 KAPADIA ENTERPRISE, (PROP. KETAN KAPADIA), 6, HANUMAN BUILDING, 67, TAMBAKANTA, PYDHONIE, BOMBAY-400 003 AACPK 57449 11,12,461 4 AMAR CHEMICALS D NO.11-52/1-33/B, IMMAMPANJA STREET, MAIN ROAD, VIJAYWADA-520 001 AALEA 4362 Q 9,924 5 SCORPION ENTERPRISE, 47, MUKUND NAGAR, OPP. D S K CHANDRADEEP, SILVER OAK, PUNE-411037 AAEFS 1329 L 22,058 6 MISC. TRADE DISCOUNT 75,665 TOTAL 23,98,378 7. ON APPEAL, THE LEARNED CIT(A) WHILE RELYING UPON HIS OWN FINDINGS FOR THE ASSESSMENT YEAR 2004-05, CONCLUDED AS UNDER:- 3.3 I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AND THE OBSERVATION OF THE A.O. WHILE DECIDING THE APPEAL F OR A.Y. 2004-05, THE CIT(A) HAD CONSIDERED THIS ISSUE AND HAD ALLOWED TH E COMMISSION IN RESPECT OF KAPADIA ENTERPRISE AND CAMPLEX MARKETING CORPORATION AS PER THE FOLLOWING DECISION:- '3.3 I HAVE CONSIDERED THE SUBMISSION MADE BY THE A PPELLANT AND OBSERVATION OF THE AO. THE APPELLANT HAS SHOWN COMM ISSION PAYMENT OF M/S PHENO CHEM INDUSTRIES, M/S KAPADIA ENTERPRISES, M/S CAMPLEX MARKETING CORPORATION AND M/S SCORPION ENTERPRISES. WITH RESPECT TO KAPADIA ENTERPRISES AND CAMPLEX MARKETING CORPORATI ON, M/S ASIAN PAINTS ITA N OS.3708 & 3911/A/08 10 LTD. AND BERGER PAINTS INDIA LTD. HAVE CONFIRMED TH AT THEY ARE THE AGENTS THROUGH WHOM THEY HAVE MADE PURCHASES FROM THE ASSE SSEE COMPANY. THEREFORE IN RESPECT OF THESE TWO PARTIES THE PROOF THAT THEY ARE COMMISSION AGENTS HAS BEEN ESTABLISHED. HOWEVER, TH ERE IS NO EVIDENCE THAT PHENO CHEM INDUSTRIES OR SCORPION ENTERPRISE W ERE AGENTS AT ALL BECAUSE THE AO HAS STATED HAS THAT THE INVOICES ARE NOT BELIEVABLE BECAUSE THEY SEEM TO HAVE BEEN TAMPERED WITH. THE A PPELLANT HAS NOT PROVED WHAT SERVICES HAVE BEEN RENDERED BY PHENO CH EM INDUSTRIES AND SCORPION ENTERPRISES AND THEREFORE COMMISSION PAYME NT IN RESPECT OF PHENO CHEM INDUSTRIES AND SCORPION ENTERPRISES HAS BEEN RIGHTLY DISALLOWED BY THE AO, IN VIEW OF THE ABOVE REASONS THE DISALLOWANCE MADE BY THE AO OF COMMISSION PAYMENT IN RESPECT OF PHENO CHEM INDUSTRIES AND SCORPION ENTERPRISE IS CONFIRMED AND THE COMMISSION PAYMENT IN RESPECT OF KAPADIS ENTERPRISE AND CAMP/E X MARKETING CORPORATION IS DELETED. THIS GROUND OF APPEAL IS TH EREFORE PARTLY ALLOWED. ' SINCE THE FACTS IN THE CURRENT YEAR ARE SAME, THERE FORE, FOLLOWING THE DECISION OF A.Y. 2004-05, THE COMMISSION PAID TO M/ S. KAPADIA ENTERPRISE AND M/S. CAMPLEX MARKETING CORPORATION IS ALLOWED. HOWEVER, THERE IS NO EVIDENCE THAT PHENO CHEM INDUSTRIES, AMAR CHEMICALS OR SCORPION ENTERPRISE WERE AGENTS AT ALL BECAUSE THE AO HAS ST ATED HAS THAT THE INVOICES ARE NOT BELIEVABLE BECAUSE THEY SEEM TO HA VE BEEN TAMPERED WITH. THE APPELLANT HAS NOT PROVED WHAT SERVICES HA VE BEEN RENDERED BY PHENO CHEM INDUSTRIES, AMAR CHEMICALS AND SCORPION ENTERPRISES AND THEREFORE COMMISSION PAYMENT IN RESPECT OF PHENO CH EM INDUSTRIES, AMAR CHEMICALS AND SCORPION ENTERPRISES HAS BEEN RIGHTLY DISALLOWED BY THE AO. IN VIEW OF THE ABOVE REASONS THE DISALLOWANCE M ADE BY THE AO OF COMMISSION PAYMENT IN RESPECT OF PHENO CHEM INDUSTR IES, AMAR CHEMICALS AND SCORPION ENTERPRISE IS CONFIRMED. IN VIEW OF THE ABOVE, THIS GROUND OF APPEAL IS PARTLY ALLOWED. 8. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A), UPHOLDING THE DISAL LOWANCE TO THE EXTENT OF R.5,12,341/- ON ACCOUNT OF COMMISSION TO M/S PHENO CHEM INDUSTRIES, AMAR CHEMICALS AND SCORPION ENTERPRISE WHILE THE REVENUE IS IN APPEAL AGAINST DELETION OF THE REMAINING AMOUNT. TH E LEARNED AR ON BEHALF OF THE ASSESSEE WHILE CARRYING US THROUGH PA GES 11 TO 15 OF THE PAPER BOOK CONTENDED THAT M/S PHENO CHEM INDUST RIES WAS A CONSIGNMENT AGENT AND THEIR CONFIRMATION ALONG WITH PAN HAD BEEN FURNISHED. THEREFORE, THE LEARNED CIT(A) WAS NOT JU STIFIED IN UPHOLDING THE ADDITION. TO A QUERY BY THE BENCH, TH E LEARNED AR DID NOT CONFIRM AS TO WHETHER OR NOT THE DOCUMENTS PL ACED AT PAGE 13 TO 15 OF THE PAPER BOOK WERE FILED BEFORE THE AO. ON THE OTHER ITA N OS.3708 & 3911/A/08 11 HAND, THE LEARNED DR CONTENDED THAT IN VIEW OF TAMP ERING OF SALES INVOICES AND IN THE ABSENCE OF ANY EVIDENCE OF SERV ICES RENDERED BY THE RECIPIENTS OF COMMISSION, THE AO WAS JUSTIFIED IN MAKING THE ADDITION. TO A QUERY BY THE BENCH, THE LEARNED AR S UBMITTED A COPY OF THE ORDER DATED 11-06-2010 OF THE ITAT AHMEDABAD BENCH [CAMP AT SURAT] IN THE ASSESSEES OWN CASE FOR THE AY 200 4-05 IN ITA NOS.3071-3075/AHD/2008 AND POINTED OUT THAT THE MAT TER RELATING TO PAYMENT OF COMMISSION HAD BEEN RESTORED TO THE FIL E OF THE AO FOR RE-ADJUDICATION. 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. WE FIND THAT OUT OF AFORESAID FIVE PARTIE S, COMMISSION WAS PAID TO M/S CAMPLEX MARKETING CORPORATION, M/S KAPA DIA ENTERPRISES ,M/S PHENO CHEM INDUSTRIES, AND M/S SCO RPION ENTERPRISES IN THE PRECEDING YEAR ALSO. THOUGH THE LEARNED CIT(A) HAD UPHELD THE DISALLOWANCES ON ACCOUNT OF PAYMENT OF COMMISSION TO M/S PHENO CHEM INDUSTRIES AND M/S SCORPION ENTER PRISES IN THE PRECEDING YEAR WHILE DELETING THE DISALLOWANCE OF COMMISSION TO THE REMAINING TWO PARTIES, ON APPEALS BY THE ASSESS EE AND THE REVENUE, ITAT, VIDE THEIR AFORESAID ORDER DATED 11. 6.2010, RESTORED THE MATTER OF PAYMENT OF COMMISSION TO THE FILE TH E AO FOR FRESH ADJUDICATION WITH THE FOLLOWING DIRECTIONS:- 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW MATTER IS REQUIRE D TO HAVE A RELOOK BY THE ASSESSING OFFICER AS FRESH EVIDENCE HAS BEEN FU RNISHED BEFORE THE LD. COMMISSIONER OF INCOME TAX( APPEALS) AS POINTED OUT BY LEARNED AUTHORISED REPRESENTATIVE IN THE DOCUMENTS BEFORE U S. EVEN THOUGH THERE IS TEMPERING ON THE INVOICES BUT IF BUYERS HAVE ACT UALLY PURCHASED THE GOODS FROM THE ASSESSEE DURING THE AGENTS THEN TEMP ERING SHOULD NOT COME IN THE WAY TO ALLOW THE CLAIM. HOWEVER, IT IS TO BE SEEN AS TO WHAT THE AGENTS HAVE DONE FOR THE ASSESSEE. COPY OF THE CORRESPONDENCE BY THE ASSESSEE WITH THE AGENTS AND BY THE AGENTS WITH THE BUYERS SHOULD BE PRODUCED. COPY OF THE AGENCY AGREEMENT SHOULD BE EX AMINED SO AS TO FIND OUT THE NATURE OF SERVICES TO BE RENDERED BY T HE AGENTS TO THE ASSESSEE AND WHETHER SUCH SERVICES HAVE ACTUALLY BE EN RENDERED TO THE ASSESSEE. IF THE EVIDENCE INDICATED THAT WHAT IS RE CORDED IN THE AGREEMENT ITA N OS.3708 & 3911/A/08 12 ABOUT THE NATURE OF THE SERVICES IS ACTUALLY .PERFO RMED BY THE AGENTS, THEN PAYMENT OF COMMISSION SHOULD BE ALLOWED. CONFIRMATI ON BY THE BUYERS THAT THEY HAVE MADE PURCHASES THROUGH THE AGENTS IS ONE EVIDENCE AND CAN BE TREATED AS ONE OF THE SERVICES RENDERED BY T HE AGENTS TO THE ASSESSEE, BUT, IT ALL DEPENDS UPON THE TERMS MENTI ONED IN THE AGENCY AGREEMENT. TO THE EXTENT SERVICES MENTIONED IN THE AGENCY AGREEMENT ARE PERFORMED BY THE AGENTS, PAYMENT OF COMMISSION SHOU LD BE ALLOWED. THEREFORE, FOR CONSIDERING THE ISSUE AFRESH WE REST ORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSEE WILL EXTEND FULL COOPERATION TO THE ASSESSING OFFICER WHO WILL PROVIDE HIM OPPORTUNITY OF BEING HEARD. AS A RESULT THIS GROUND IN ASSESSEES APPEAL AND IN REVE NUES APPEAL ARE ALLOWED, BUT FOR STATISTICAL PURPOSES. 10. INDISPUTABLY, THE FACTS & CIRCUMSTANCES RELAT ING TO THE PAYMENT OF COMMISSION TO THE AFORESAID FOUR PARTIES VIZ. M/ S CAMPLEX MARKETING CORPORATION, M/S KAPADIA ENTERPRISES ,M/S PHENO CHEM INDUSTRIES, AND M/S SCORPION ENTERPRISES ARE SIMILA R TO THE FACTS OBTAINING IN THE PRECEDING YEAR WHILE THE PAPER BO OK FILED BEFORE US REVEALS THAT RELEVANT CERTIFICATES[PG.13 TO 15 OF P B] FROM THREE PARTIES WERE PLACED ONLY BEFORE THE LD. CIT(A). IT IS NOT KNOWN AS TO WHETHER OR NOT THESE DOCUMENTS WERE BEFORE THE AO A T THE TIME OF COMPLETION OF THE ASSESSMENT NOR THE LEARNED CIT(A) HAVE REFERRED TO THESE DOCUMENTS IN THE IMPUGNED ORDER. IN THESE CIRCUMSTANCES, ESPECIALLY WHEN ISSUE OF COMMISSION HAS BEEN REST ORED TO THE FILE OF THE AO IN THE PRECEDING YEAR, WE CONSIDER IT FA IR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE I SSUE RELATING TO PAYMENT OF COMMISSION TO THE AFORESAID FOUR PARTIES TO THE FIL E OF THE AO FOR READJUDICATION IN ACCORDANCE WITH LAW AND IN THE L IGHT OF DIRECTIONS OF THE ITAT IN THEIR ORDER DATED 11.6.2010 FOR THE AY 2004-05 AND OF COURSE AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE ASSESSEE. 11. AS REGARDS THE PAYMENT OF COMMISSION TO M/S AM AR CHEMICALS, THE LEARNED AR DID NOT MAKE ANY SUBMISSIONS BEFORE US NOR REFERRED US TO ANY EVIDENCE OF SERVICES RENDERED BY THE SAID PARTY TO THE ASSESSEE. SINCE THE ASSESSEE FAILED TO FURNISH ANY EVIDENCE OF SERVICES RENDERED BY THE SAID PARTY TO THE ASSESSE E, BEFORE THE LOWER AUTHORITIES AND EVEN BEFORE US, WE HAVE NO HE SITATION IN ITA N OS.3708 & 3911/A/08 13 UPHOLDING THE FINDINGS OF THE LD. CIT(A) IN CONFIR MING THE DISALLOWANCE OF COMMISSION TO M/S AMAR CHEMICALS. WITH THESE OBSERVATIONS, GROUND NO.4 IN THE APPEAL OF THE REVE NUE AND GROUND NO.1 IN THE APPEAL OF THE ASSESSEE ARE DISPOSED O F. 12. GROUND NOS.5 & 6 IN THE APPEAL OF THE REVENUE B EING MERE PRAYER, DO NOT REQUIRE ANY SEPARATE ADJUDICATION WH ILE NO ADDITIONAL GROUND HAVING BEEN RAISED IN TERMS OF RESIDUARY GRO UND NO.2 IN THE APPEAL OF THE ASSESSEE, THESE GROUNDS ARE DISMISSE D. 13. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE US. 14. IN THE RESULT, BOTH THE APPEAL FILED BY THE REV ENUE AND THAT FILED BY THE ASSESSEE ARE ALLOWED PARTLY FOR STATIS TICAL PURPOSES. ORDER PRONOUNCED IN THE COURT TODAY ON 18-03-2011 SD/- SD/- (D K TYAGI) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 18 -03-2011 COPY OF THE ORDER FORWARDED TO: 1. MALDEEP CATALYSTS PVT. LTD., 3, HARIKUNJ, UDHNA INDUSTRIAL ESTATE, S V P ROAD NO.3, UDHNA, SURAT 2. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, SU RAT 3. CIT CONCERNED 4. CIT(A)-I, SURAT 5. DR, ITAT, AHMEDABAD BENCH-D, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD