The DCIT, Circle-2, RAJKOT-GUJARAT V. M/s National Export Industries, Dhoraji

ITA 461/RJT/2008

• Counselvise Citation: 46124914 RSA 2008
• Duration Of Justice: 2 year(s) 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 26-07-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 19-08-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N R SONI
• Assessee Lawyers: DM RANDANI

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT BEFORE SHRI A.L. GEHLOT (AM) AND SHRI N.R.S. GANESA N (JM) I.T.A. NO.461/RJT/2008 (ASSESSMENT YEAR 2005-06) DY.CIT, CIR.2 VS M/S NATIONAL EXPORT INDUSTRIES RAJKOT 8-B, NATIONAL HIGHWAY, DHORAJI PAN : AACFN3303P (APPELLANT) (RESPONDENT) DATE OF HEARING : 26-07-2011 DATE OF PRONOUNCEMENT : 12-08-2011 APPELLANT BY : SHRI NR SONI RESPONDENT BY: SHRI DM RANDANI O R D E R PER N.R.S. GANESAN, JM THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF CIT(A)-III, RAJKOT DATED 06-05-2008 PERTAINING TO THE ASSESSME NT YEAR 2005-06. 2. THE FIRST GROUND OF APPEAL IS WITH REGARD TO 70, 73,662 TOWARDS LOW RECOVERY OF OIL. 3. SHRI NR SONI, THE LD.DR SUBMITTED THAT THE ASSES SEE IS IN THE BUSINESS OF MANUFACTURING GROUND NUT OIL. IN THE COURSE OF ITS BUSINESS ACTIVITY, THE ASSESSEE PURCHASED GROUND NUT AND CRUSHED THE SAME AT THE OI L MILL. THE ASSESSEE ALSO RUNS SOLVENT EXTRACTION PLANT FOR EXTRACTING OIL FR OM THE CAKE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER FOUND THAT AS PER THE LABORATORY RECORD, THE YIELD OF OIL IS 46.82% TO 51.54%. THE LD.DR FURTHER SUBMITTED THAT SOMA HAS CERTIFIED THAT THE YIELD OF GROUND NUT OIL IN SAURASHTRA AREA IS 42% TO 52%. HOWEVER, THE AUDIT REPORT FILED BY THE ASSESS EE IN FORM 3CD INDICATED THE YIELD OF GROUND NUT OIL AT 36.74%. ACCORDING TO THE ASSESSING OFFICER THE OIL PRODUCTION IS 37.54%. ACCORDING TO THE LD.DR, THE OIL PRODUCTION SHOULD BE ITA NO.461/RJT/2008 2 37.54% WHEREAS THE ASSESSEE HAS SHOWN THE PRODUCTIO N AT 36.74%. THEREFORE, THE ASSESSEE HAS SUPPRESSED THE OIL PRODUCTION TO T HE EXTENT OF 0.80%. THE ASSESSING OFFICER THUS WORKED OUT THE COST OF SUPPR ESSED OIL PRODUCTION AT RS. 70,73,662. HOWEVER, ON APPEAL BY THE ASSESSEE THE CIT(A) DELETED THE ADDITION WITHOUT ANY REASON. REFERRING TO THE ORDER OF CIT( A), THE LD.DR POINTED OUT THAT THE CIT(A) COMPARED THE PROFIT RATIO OF THE EARLIER YEAR FOR DELETING THE ADDITION MADE BY THE ASSESSING OFFICER. ACCORDING TO THE LD .REPRESENTATIVE, THE OIL PRODUCTION HAS TO BE CONSIDERED ON THE BASIS OF THE GROUND NUT SEED USED AND THE REAL OIL PRODUCTION. THEREFORE, BASED UPON THE PROFIT RATIO, THE CIT(A) COULD NOT HAVE DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 4. ON THE CONTRARY, SHRI DM RINDANI, THE LD.REPRESE NTATIVE FOR THE ASSESSEE SUBMITTED THAT ADMITTEDLY THE ASSESSEE IS IN THE BU SINESS OF PRODUCTION OF OIL FROM THE GROUND NUT. ACCORDING TO THE LD.REPRESENTATIVE , THE PRODUCTION OF OIL DEPENDS UPON THE QUALITY OF THE GROUND NUT USED FOR PRODUCT ION. THEREFORE, THE ASSESSING OFFICER IS NOT CORRECT IN ESTIMATING THE LOW PRODUC TION ON THE BASIS OF SOME LABORATORY REPORT. REFERRING TO THE ORDER OF THE C IT(A), THE LD.REPRESENTATIVE POINTED OUT THAT SGS ANALYSIS REPORT FILED BY THE A SSESSEE BEFORE THE LOWER AUTHORITIES CLEARLY SHOWS THAT OIL IS ALSO PRESENT IN DE OIL CAKE. THE PERCENTAGE OF OIL CONTENT IN DE OIL CAKE VARIES FROM 0.79% TO 0.97%. HOWEVER, THE ASSESSING OFFICER HAS NOT CONSIDERED THE YIELD OF OIL CONTENT IN DE OIL CAKE WHICH IS 0.80% IN CASE OF THE ASSESSEE. ACCORDING TO THE LD.REPRESEN TATIVE, THE SGS ANALYSIS REPORT IS SUBMITTED BY A TECHNICAL AGENCY. THEREFO RE, DUE COGNIZANCE HAS TO BE GIVEN BY THE LOWER AUTHORITIES ON THE REPORT FILED BY THE ASSESSEE FROM SGS INDIA PVT LTD. ACCORDING TO THE LD.REPRESENTATIVE THE AS SESSEE HAS DISCLOSED 36.74% OIL PRODUCTION FOR THE YEAR UNDER CONSIDERATION. A SIMILAR PERCENTAGE OF PRODUCTION WAS UPHELD IN EARLIER YEAR. REFERRING T O THE COMPARATIVE YIELD CHART, THE COPY OF WHICH IS AVAILABLE IN THE PAPER BOOK, T HE LD.REPRESENTATIVE SUBMITTED THAT FOR THE ASSESSMENT YEAR 2004-05 THE YIELD OF G ROUND NUT OIL WAS 29.62% AND OIL FROM DE OIL CAKE WAS 6.56% WHICH COMES TO 36.18 % IN AGGREGATE WHEREAS FOR THE ASSESSMENT YEAR 2003-04 THE TOTAL OIL PRODUCTIO N WAS 34.73%. THEREFORE, FOR ITA NO.461/RJT/2008 3 THE YEAR UNDER CONSIDERATION, THE OIL PRODUCTION AT 36.74% IS QUITE REASONABLE. MOREOVER, THE PROFIT OF THE ASSESSEE HAS ALSO INCRE ASED DURING THE YEAR UNDER CONSIDERATION. IN EARLIER ASSESSMENT YEAR THE GROS S PROFIT OF THE ASSESSEE WAS AT 1.73% WHEREAS FOR THE YEAR UNDER CONSIDERATION THE GROSS PROFIT OF THE ASSESSEE IS AT 2.48%. THEREFORE, ACCORDING TO THE LD.REPRES ENTATIVE, THE CIT(A) HAS RIGHTLY DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND HAVE ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMITTED LY, THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OIL FROM GROUNDNUT AND DE OIL CAKE. THE ASSESSEE PURCHASED GROUND NUT FROM VARIOUS CONCERNS AND CRUSHED THE SAME FOR THE PURPOSE OF PRODUCING GROUND NUT OIL. THE RESUL TANT DE OIL CAKE IS FURTHER UTILIZED FOR EXTRACTION OF OIL. APART FROM THIS TH E ASSESSEE IS ALSO PURCHASING DE OIL CAKE FROM THE MARKET FOR FURTHER EXTRACTION OF THE OIL. THE ONLY DISPUTE IS ABOUT THE PERCENTAGE OF THE OIL PRODUCED BY THE ASSESSEE DURING THIS PROCESS. ADMITTEDLY THE ASSSESSEE DISCLOSED THE YIELD AT 36. 74%. HOWEVER, THE ASSESSING OFFICER ESTIMATED THE OIL PRODUCTION AT 3 7.54%. BOTH THE ASSESSEE AS WELL AS THE ASSESSING OFFICER ARE REFERRING TO CERT AIN TECHNICAL REPORTS FOR THE PURPOSE OF ESTIMATING THE OIL PRODUCTION. IT IS CO MMON KNOWLEDGE THAT OIL FROM THE GROUND NUT WOULD DEPEND UPON THE QUALITY OF THE GROUND NUT AND THE CLIMATIC CONDITION IN WHICH IT IS CRUSHED. TECHNICAL REPORT S MAY SUGGEST AN AVERAGE PERCENTAGE OF THE YIELD. SUCH TECHNICAL REPORT MAY BE IMPORTANT FOR THE PURPOSE OF ESTIMATING THE OIL PRODUCTION IN CASE THE ASSESS EE WAS NOT MAINTAINING THE BOOKS OF ACCOUNT. IN THIS CASE THE ASSESSEE IS MAI NTAINING THE BOOKS OF ACCOUNT. THE PURCHASE OF GROUND NUT WAS ACCOUNTED AS PER THE BOOKS OF ACCOUNT, RAW MATERIAL USED FOR PRODUCTION OF OIL WAS ALSO RECORD ED IN THE BOOKS OF ACCOUNT. IN THOSE CIRCUMSTANCES, IN OUR OPINION, IT MAY NOT BE NECESSARY TO GO INTO THE TECHNICAL REPORTS FOR THE PURPOSE OF ESTIMATING THE OIL PRODUCTION. AS ALREADY OBSERVED, THESE TECHNICAL REPORTS MAY SUGGEST CERTA IN PERCENTAGE OF OIL FROM THE GROUND NUT. HOWEVER, FOR THE PURPOSE OF INCOME-TAX ACT WE HAVE TO FIND OUT THE ACTUAL PRODUCTION AS PER THE BOOKS OF ACCOUNT. IN CASE THE BOOKS OF ACCOUNT ARE ITA NO.461/RJT/2008 4 NOT RELIABLE OR NOT REFLECTING THE REAL PRODUCTION OF OIL WE MAY GO TO THE TECHNICAL REPORT TO ESTIMATE THE REASONABLE OIL PRODUCTION FR OM THE GROUND NUT USED FOR CRUSHING. IN THIS CASE, THE ASSESSEE CLAIMS THAT B OOKS OF ACCOUNT ARE MAINTAINED. EVEN THOUGH THE ASSESSING OFFICER REJE CTED THE BOOKS OF ACCOUNT, THE CIT(A) REVERSED THE FINDING OF THE ASSESSING OF FICER WITH REGARD TO REJECTION OF BOOKS OF ACCOUNT. THEREFORE, WHEN THE BOOKS OF ACC OUNT ARE AVAILABLE ON RECORD, IN OUR OPINION, THERE IS NO NECESSITY FOR ESTIMATIO N OF LOW PRODUCTION ON THE BASIS OF THE TECHNICAL / ADVISORY REPORTS. 6. AS DISCUSSED EARLIER, OIL PRODUCTION WOULD DEPEN D UPON THE QUALITY OF THE GROUND NUT AND THE CLIMATIC CONDITION IN WHICH IT W AS CRUSHED. THEREFORE, IT IS FOR THE ASSESSEE TO PRODUCE NECESSARY MATERIAL TO SHOW HOW MUCH QUANTITY OF GROUND NUT WAS USED FOR CRUSHING AND HOW MUCH RESUL TANT PRODUCT WAS RECEIVED AS A RESULT OF CRUSHING. IT MAY VARY DEPENDING UPO N THE QUALITY OF RAW MATERIAL USED FOR CRUSHING. UNLESS AND UNTIL THE ASSESSING OFFICER HAS A DOUBT ABOUT THE ACCOUNTS MAINTAINED BY THE ASSESSEE FOR CRUSHING TH E RAW MATERIAL AND FOR RECEIVING THE RESULTANT PRODUCT, IN OUR OPINION, RE SORTING TO ESTIMATION ON THE BASIS OF THE TECHNICAL REPORT MAY NOT ARISE FOR CON SIDERATION. IN THIS CASE, THOUGH THE ASSESSEE HAS MAINTAINED THE BOOKS OF ACCOUNT, T HE LOWER AUTHORITY HAS RESORTED TO ESTIMATION. THEREFORE, IN OUR OPINION, THE MATTER NEEDS TO BE CONSIDERED AFRESH IN THE LIGHT OF THE MATERIAL PROD UCED BY THE ASSESSEE. ACCORDINGLY WE SET ASIDE THE ORDER OF THE LOWER AUT HORITY AND REMIT THE ISSUE TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING O FFICER SHALL RECONSIDER THE ISSUE AFRESH IN THE LIGHT OF BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE FOR PURCHASE, USAGE AND THE RESULTANT PRODUCT RECEIVED AS A RESUL T OF CRUSHING OF THE RAW MATERIAL. THEREAFTER THE ASSESSING OFFICER SHALL D ECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW. IT IS MADE CLEAR THAT IN CASE THE BOOKS OF ACCOUNT ARE NOT RELIABLE OR DOES NOT REFLECT THE TRANSACTIONS CORRE CTLY, THEN IT IS OPEN TO THE ASSESSING OFFICER TO REJECT THE BOOKS OF ACCOUNT AF TER BINGING ON RECORD THE REASONS AND TO ESTIMATE THE RESULTANT PRODUCT ON TH E BASIS OF THE MATERIAL AVAILABLE ON RECORD. ITA NO.461/RJT/2008 5 7. THE NEXT GROUND OF APPEAL IS WITH REGARD TO ADDI TION OF RS.2,71,860 U/S 40A(2)(B). 8. THE LD.DR CONTENDED THAT WHEN THE ASSESSEE PURCH ASED SIMILAR QUALITY FROM THE VERY SAME AREA FOR LESSER PRICE, THERE IS NO REASON FOR PAYING HIGHER PRICE TO THE RELATIVES. THEREFORE, THE PAYMENTS MA DE TO THE RELATIVES ARE HIT BY SECTION 40A(2)(B). 9. ON THE CONTRARY, THE MAIN CONTENTION OF THE LD.R EPRESENTATIVE FOR THE ASSESSEE IS THAT THOUGH THE ASSESSEE PURCHASED OVER RS.42 CRORES GROUND NUTS, THE PURCHASES FROM RELATIVES ARE ONLY RS.22 LAKHS. EVEN THOUGH SOME HIGHER PRICE WAS PAID TO RELATIVES IT WAS BECAUSE OF HIGH QUALITY OF GROUND NUT PURCHASED FROM THEM. THEREFORE, ACCORDING TO THE LD.REPRESEN TATIVE FOR THE ASSESSEE, THE CIT(A) HAS RIGHTLY DELETED THE ADDITION. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND HAVE ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO CAREFULLY GONE THROUGH THE ORDER OF LOWER AUTHORITIES. THE ASSESSING OFFI CER FOUND THAT THE ASSESSEE HAS PAID RS.2.43 IN EXCESS OF THE PRICE PAID TO OTHERS FOR PURCHASING 1,11,877 KGS OF GROUND NUT FROM RELATIVES. ACCORDINGLY THE ASSESSI NG OFFICER COMPUTED THE EXCESS AMOUNT PAID TO THE RELATIVES AT RS.2,71,860. AS RIGHTLY SUBMITTED BY THE LD.REPRESENTATIVE FOR THE ASSESSEE, THE PRICE OF TH E GROUND NUT WOULD DEPEND UPON THE QUALITY OF THE GROUND NUT. THE QUALITY OF THE GROUND NUT MAY VARY DEPENDING UPON VARIOUS REASONS. HOWEVER, THE ASSES SEE HAS TO PRODUCE NECESSARY MATERIAL FOR THE PURPOSE OF JUSTIFYING TH E EXCESS PAYMENT MADE TO RELATIVES. MERELY BECAUSE THE ASSESSEE HAS PAID ON LY RS.22 LAKHS OUT OF TOTAL PURCHASE OF MORE THAN RS. 42 CRORES, THE EXCESS PAY MENT MADE TO CLOSE RELATIVES CANNOT BE ACCEPTED UNLESS AND UNTIL THE A SSESSEE SHOWED THAT THE QUALITY OF THE GROUND NUT PURCHASED FROM RELATIVES IS SUPERIOR IN QUALITY. THE CIT(A) DELETED THE ADDITION WITHOUT BRINGING ON REC ORD THE NATURE AND THE QUALITY OF THE GROUND NUT PURCHASED BY THE ASSESSEE FROM TH E RELATIVES. THEREFORE, IN ITA NO.461/RJT/2008 6 OUR OPINION, THE MATTER NEEDS TO BE RECONSIDERED BY THE ASSESSING OFFICER. ACCORDINGLY THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ISSUE OF DISALLOWANCE U/S 40A(2)(B) ARE RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR RECONSIDERATION. THE ASSESSING OFFICER SHALL RE-EX AMINE THE ISSUE AND BRING ON RECORD THE QUALITY OF THE GROUND NUT PURCHASED FROM THE RELATIVES AND ALSO WILL BRING ON RECORD HOW IT DIFFERED FROM THE QUALITY OF RAW MATERIAL PURCHASED FROM OTHER PEOPLE AND THEREAFTER DECIDE THE SAME AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING OPPORTUNITY OF HEARING TO THE ASSESSEE. 10. THE NEXT GROUND OF APPEAL IS WITH REGARD TO REJ ECTION OF BOOKS OF ACCOUNT. 11. WE HAVE HEARD THE LD.DR AND LD.REPRESENTATIVE F OR THE ASSESSEE. THIS REJECTION OF BOOKS OF ACCOUNT WOULD DEPEND UPON THE ADDITION MADE BY THE ASSESSING OFFICER WITH REGARD TO LOW RECOVERY. THI S WAS CONSIDERED ELABORATELY IN THE EARLIER PARAGRAPHS OF THIS ORDER. WHEN THE ASS ESSEE CLAIMS THAT THE BOOKS OF ACCOUNT ARE MAINTAINED AND IT REFLECTS THE CORRECT PROFIT RATIO THERE IS NO QUESTION OF ESTIMATION OF THE LOW PRODUCTION AND THE PROFIT RATIO. SINCE THE ISSUE WITH REGARD TO LOW PRODUCTION WAS REMANDED BACK TO THE F ILE OF THE ASSESSING OFFICER, IN OUR OPINION, THE REJECTION OF BOOKS OF ACCOUNT A LSO NEEDS TO BE CONSIDERED BY THE ASSESSING OFFICER AFRESH. ACCORDINGLY THE ORDE RS OF THE LOWER AUTHORITIES ON THIS ISSUE ARE SET ASIDE AND THE ISSUE IS REMANDED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL REC ONSIDER THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER GIVING OPPORTUNITY OF HEA RING TO THE ASSESSEE. 12. THE NEXT GROUND OF APPEAL IS WITH REGARD TO UND ER VALUATION OF CLOSING STOCK. THE CLOSING STOCK WOULD DEPEND UPON THE OIL PRODUCTION, UTILIZATION OF RAW MATERIAL, ETC. THEREFORE, IT NEEDS TO BE DECIDED C ONSEQUENT TO THE DECISION TAKEN IN CASE OF LOW PRODUCTION. THEREFORE, FOR THE SAKE OF CONSISTENCY, THIS ISSUE IS ALSO REMANDED BACK TO THE FILE OF THE ASSESSING OFF ICER FOR RE-CONSIDERATION. THE ASSESSING OFFICER SHALL EXAMINE ALL DETAILS ON RECO RD AND THEREAFTER WILL TAKE A ITA NO.461/RJT/2008 7 DECISION AFRESH IN ACCORDANCE WITH LAW AFTER PROVID ING OPPORTUNITY OF HEARING TO THE ASSESSEE. 13. IN THE RESULT, APPEAL OF THE REVENUE IS TREATED AS ALLOWED, FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 12-08-2011. SD/- SD/- (A.L. GEHLOT) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER RAJKOT, DT : 12 TH AUGUST, 2011 PK/- COPY TO: 1. ASSESSEE 2. REVENUE 3. THE CIT(A)-III, RAJKOT 4. THE CIT-II, RAJKOT 5. THE DR, I.T.A.T., RAJKOT (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, RAJKOT