Shanta Sizewell Pvt.Ltd., Surat V. The ACIT.,Circle-4, Surat

ITA 529/AHD/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6464 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 06-06-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 13-02-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRAKASH DUBEY
• Assessee Lawyers: R N VEPARI
• Keywords: Gross profit estimation; Business income
• Section: 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, A BENCH (BEFORE S/SHRI G.D. AGARWAL, VICE-PRESIDENT AND D.K. TYAGI, JUDICIAL MEMBER) ITA NO.529/AHD/2008 [ASSTT. YEAR : 2003-2004] SHANTA SIZEWELL P. LTD. 49/1542, OUTSIDE KAMELA DARWAJA PIMTEX SUB-STATION COMPOUND UNARWADA TEKRA, SURAT. VS. ACIT, CIR.4 SURAT. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.N.VEPARI REVENUE BY : SHRI PRAKASH DUBEY O R D E R PER G.D. AGARWAL, VICE-PRESIDENT : THIS APPEAL IS BY THE ASSESSEE AGAINST THE ORDER OF THE LEARNED COMMISSIO NER OF INCOME-TAX (APPEALS)-I, SURAT DATED 31.12.2007 FOR A.Y.2003-20 04. IN THIS APPEAL THE FOLLOWING GROUNDS ARE RAISED: I. THE LD.CIT(A) ERRED IN CONFIRMING THE REJECTION OF BOOK RESULT WHEN THEE WERE NO SPECIFIC DEFECTS NOTED AND ALL THE QUERIES IN RELATION THERETO WERE DULY REPLIED. II. THE LD.CIT(A) ERRED IN CONFIRMING ADDITION OF W ORK-IN- PROGRESS WHEN THERE WAS NO WORK-IN-PROGRESS AND IN THE FACTS AND CIRCUMSTANCES OF THE CASE, IT WAS NOT POSSIBLE TO W ORK OUT THE WORK- IN-PROGRESS. III. THE LD.CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF RS.5,05,851/- UNDER SECTION 40A(2)(B) OF THE ACT. III. THE LD.CIT(A) ERRED IN CONFIRMING LOSS OF RS.2 6,728/- WHEN THE LOSS WAS GENUINE AND OUGHT TO HAVE BEEN ALLOWED . IV. THE LD.CIT(A) ERRED IN CONFIRMING ADDITION IN R ESPECT OF UNDER VALUATION OF CLOSING STOCK AT RS.32,827/- WHE N IN FACT THE STOCK WERE VALUED AS PER ACCOUNTING STANDARD 2 OF T HE INSTITUTE OF ITA NO.529/AHD/2008 -2- CHARTERED ACCOUNTANTS OF INDIA AND THERE WAS NO BAS IS FOR MAKING THE AFOREMENTIONED ADDITION. V. THE LD.CIT(A) ERRED IN CONFIRMING ADDITION ON AC COUNT OF GROSS PROFIT WHEN THE REASONS FOR FALL IN GROSS PRO FIT WERE FURNISHED AND ON THE BASIS OF THE EVIDENCE OUGHT TO HAVE BEEN ACCEPTED. VI. THE LD.CIT(A) ERRED IN CONFIRMING CHARGING OF I NTEREST UNDER SECTION 234B OF THE ACT. 2. THE ASSESSEE DERIVES INCOME FROM (I) MANUFACTU RE AND SALE OF SIZED YARN AND (II) MANUFACTURE AND SALE OF TEXTURS ED YARN. ON EXAMINATION OF THE BOOKS OF ACCOUNTS OF BOTH THE UN ITS, THE AO FOUND SEVERAL DEFECTS IN THE ACCOUNTS WHICH CAN BE SUMMAR ISED AS UNDER: A) NON-MAINTENANCE OF DAY-TO-DAY STOCK; B) COMMON ELECTRIC METERS FOR SIZING AND TEXTURISING; C) DISALLOWANCE U/S.40A(2)(B) OF THE ACT; D) LOSS ON SALE OF GREY CLOTH; E) SALE AT LOWER PRICE TO SISTER CONCERNS; F) UNDERVALUATION OF CLOSING STOCK; G) CHEMICAL CONSUMPTION NOT ACCORDING TO FORMULA GIVEN ; H) THE EXPENSES WERE DISPROPORTIONATELY HIGH AS COMPAR ED TO THE LAST YEAR. THE AO REJECTED THE BOOKS AND ACCOUNTS AND APPLIED THE GP RATE. APART FROM ADDITION ON ACCOUNT OF LOW GP, HE HAS ALSO MAD E SEPARATE ADDITION FOR SPECIFIC DEFECT FOUND IN THE BOOKS OF ACCOUNTS. VARIOUS ADDITIONS MADE BY THE AO AMOUNTING TO RS.45,96,233/- WAS AS U NDER: ADDITION ON A/C. OF WIP : RS.7,43,834 DISALLOWANCE OUT OF EXPENDITURE : RS.5,00,000 ADDITION U/S.40A(2)(A) : RS.5,05,851 DISALLOWANCE OF LOSS : RS.26,728 UNDERVALUATION OF CLOSING STOCK : RS.32,827 ADDITION ON A/C. OF LOW GP : RS.27,86,993 ITA NO.529/AHD/2008 -3- THE AO HAS WORKED OUT THE GP ADDITION OF RS.45,96,2 33/-. HOWEVER, FROM THE GP ADDITION HE REDUCED THE ADDITIONS MADE UNDER VARIOUS OTHER HEADS AMOUNTING TO RS.18,09,240/- . THUS, THE GP A DDITION WAS RESTRICTED TO RS.27,86,993/-. THE WORKING OF THE AO IN THIS R EGARD IS AS UNDER: SIZING UNIT LAST YEARS (AY 2002-03) GP : 14.06% TOTAL SALES (AY 2003-04) : RS.2,60,08,580 GP ESTIMATED @ 14.06% : RS.36,56,795 GP SHOWN BY THE ASSESSEE AT 4.1% : RS.10,66,180 ADDITION ON ACCOUNT OF FALL IN GP : RS.25,90,615 TEXTURISING UNIT LAST YEARS (AY 2002-03) GP : 6.96% TOTAL SALES (AY 2003-04) : RS.5,31,94,715 GP ESTIMATED @ 6.96% : RS.37,02,352 GP SHOWN BY THE ASSESSEE @ 3.19% : RS.16,96,734 ADDITION ON ACCOUNT OF FALL IN GP : RS.20,05,618 3. ON APPEAL, THE CIT(A) DELETED THE DISALLOWANCE O F RS.5,00,000/- MADE BY THE AO OUT OF VARIOUS EXPENDITURE. HOWEVER HE UPHELD THE REJECTION OF THE BOOKS OF ACCOUNTS AND ALSO THE WOR KING OF THE GP BY THE AO. SINCE HE HAS DELETED THE DISALLOWANCE OUT OF E XPENSES AMOUNTING TO RS.5,00,000/-, HE ENHANCED THE GP ADDITION BY RS.5, 00,000/- AND THE GP ADDITION MADE BY THE CIT(A) WAS RS.32,86,993/-. AC CORDINGLY, IN EFFECT, THE ENTIRE ADDITION OF RS.45,96,233/- MADE BY THE A O WAS SUSTAINED BY THE CIT(A). THE ASSESSEE AGGRIEVED WITH THE ORDER OF THE CIT(A) IS IN APPEAL BEFORE US. 4. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED AT LENGTH. HE TRIED TO EXPLAIN EACH AND EVERY DEFE CT IN THE BOOKS OF ITA NO.529/AHD/2008 -4- ACCOUNTS POINTED OUT BY THE AO. HE HAS STATED THAT IN THE SIZING UNIT, IT IS NOT POSSIBLE TO MAINTAIN DAY-TO-DAY STOCK REGISTER BECAUSE THE MANUFACTURING PROCESS TAKES NUMBER OF DAYS. WHEN T HE PROCESSING TAKES NUMBER OF DAYS, IT IS NOT POSSIBLE TO MAINTAIN DAY- TO-DAY QUANTITY RECORDS. HE ALSO STATED THAT PURCHASE AND SALE TO THE SISTER CONCERNS WAS AT THE MARKET RATE AND THE ALLEGATIONS OF THE AO THAT THE PURCHASES FROM THE SISTER CONCERN WAS AT HIGH RATE AND SALE TO THE SIS TER CONCERN WAS AT LOWER ATE, WAS NOT CORRECT. WITH REGARD TO THE CHEMICAL CONSUMPTION, IT WAS STATED BY THE LEARNED COUNSEL THAT THOUGH THE CHEMI CAL USED BY THE ASSESSEE IN THE PROCESS IS AS PER THE FORMULA FOR S UCH PROCESS, BUT FOR VARIOUS PRACTICAL REASONS, THE CONSUMPTION OF THE C HEMICAL VARIES AND SOMETIMES THERE IS MORE CONSUMPTION OF A PARTICULAR CHEMICAL. IT DEPENDS ON THE QUALITY OF THE MATERIAL I.E. YARN AS WELL AS QUALITY OF THE CHEMICAL USED BY THE ASSESSEE AND ALSO QUALITY OF T HE FINISHED PRODUCTS REQUIRED. HE THEREFORE SUBMITTED THAT THERE WAS NO JUSTIFICATION FOR THE REJECTION OF THE BOOKS OF ACCOUNTS. HE ALTERNATIVE LY SUBMITTED THAT EVEN IF THE BOOKS OF ACCOUNTS WERE REJECTED, THERE WAS NO J USTIFICATION FOR THE ESTIMATION OF GP AS PER THE LAST YEAR. HE POINTED OUT THERE IS A KEEN COMPETITION IN THIS LINE OF BUSINESS AND OTHER MANU FACTURERS WHO HAVE INSTALLED MODERN MACHINERY WITH IMPROVED TECHNOLOGY ARE IN A BETTER POSITION THAN THE ASSESSEE. THE ASSESSEE HAS VERY OLD MACHINERY AND DUE TO OLD MACHINERY AND COMPETITION IN THE MARKET, THE BUSINESS OF THE ASSESSEE STARTED FALLING FROM THE ASSESSMENT YEAR U NDER CONSIDERATION AND ULTIMATELY DURING THE ACCOUNTING YEAR RELEVANT TO T HE ASSESSMENT YEAR 2007-2008, THE ASSESSEE SOLD ITS PLANT AND MACHINER Y AND STOPPED MANUFACTURING BUSINESS. HE SUBMITTED THAT THE COMP ARATIVE POSITION OF THE SALE AND GP IN VARIOUS YEARS IS AS UNDER: ITA NO.529/AHD/2008 -5- ASSTT. YEAR SALES (RS.) NET PROFIT (RS.) 2002-2003 9,08,53,294 63,02,078 2003-2004 7,68,13,332 20,15,593 2004-2005 4,15,19,214 15,20,347 2005-2006 2,71,10,920 4,14,527 2006-2007 37,72,852 14,052 2007-2008 PLANT SOLD OFF DURING THE YEAR. HE ALSO POINTED OUT THAT IN THE IMMEDIATELY SUBSEQU ENT YEAR I.E. IN A.Y.2004-2005, THE GP RATE OF 4.86% IN TEXTURIZING UNIT, 2.09% IN SIZING UNIT WAS ACCEPTED BY THE AO IN THE ORDER PASSED UND ER SECTION 143(3). HE ALSO SUBMITTED THAT WHEN GP ADDITION IS MADE, THE Q UESTION OF ADDITION/ DISALLOWANCE OUT OF ANY OTHER HEAD IS NOT JUSTIFIED BECAUSE WHILE WORKING OUT THE GP, EVERY OTHER EXPENSES IS ALREADY TAKEN I NTO ACCOUNT. HE THEREFORE SUBMITTED THAT CONSIDERING THE FACTS OF T HE ASSESSEES CASE THE ENTIRE ADDITION OF RS.45,96,233/- MADE BY THE AO AN D SUSTAINED BY THE CIT(A) SHOULD BE DELETED. 5. THE LEARNED DR, ON THE OTHER HAND, RELIED UPON T HE ORDERS OF THE AUTHORITIES BELOW AND HE HAS STATED THAT THE AO POI NTED OUT VARIOUS DEFECTS IN THE BOOKS OF ACCOUNTS WHICH HAVE NOT BEE N SATISFACTORILY EXPLAINED BY THE ASSESSEE. THAT MERELY BECAUSE THE MANUFACTURING PROCESS TAKES MORE THAN ONE DAY, WOULD BE NO GROUND FOR ASSESSEES FAILURE TO MAINTAIN DAY-TO-DAY STOCK REGISTER. IN FACT IN TEXTURING UNIT, WHERE THE GOODS IS LIABLE TO EXCISE DUTY, THE ASSES SEE HAS MAINTAINED STOCK REGISTER, BUT IN SIZING UNIT WHERE THERE IS N O EXCISE DUTY, THE ASSESSEE DID NOT MAINTAIN STOCK REGISTER. THAT WHI LE MAKING THE PURCHASES FROM THE SISTER CONCERNS, THE ASSESSEE PA ID HIGHER RATE THAN THE MARKET RATE. THE EXPENSES DEBITED TO TRADING ACCOU NT HAVE INCREASED DISPROPORTIONATELY AS COMPARED TO THE LAST YEAR. T HE SALE OF THE ASSESSEE HAS REDUCED AS COMPARED TO THE LAST YEAR WHILE THE THERE IS INCREASE IN ITA NO.529/AHD/2008 -6- SEVERAL EXPENSES. HE THEREFORE SUBMITTED THAT REJEC TION OF THE BOOKS OF ACCOUNTS BY THE AO WAS JUSTIFIED AND WAS RIGHTLY SU STAINED BY THE LEARNED CIT(A). HE ALSO STATED THAT THE AO HAS ESTIMATED T HE PROFIT AS PER THE GP DISCLOSED BY THE ASSESSEE LAST YEAR. THE ASSESSMEN T OF THE SUBSEQUENT YEAR WAS NOT WITH THE AO WHEN HE MADE THE ASSESSMEN T AND MOREOVER IN THE NEXT YEAR THERE MIGHT NOT BE ANY DEFECT IN THE BOOKS OF ACCOUNTS AND THEREFORE THE AO MUST HAVE ACCEPTED THE TRADING ACC OUNT. HOWEVER, MERELY BECAUSE IN THE SUBSEQUENT YEAR TRADING RESUL TS WERE ACCEPTED, WOULD BE NO GROUND FOR ACCEPTING THE SAME IN EVERY YEAR, ESPECIALLY IN THE YEAR UNDER CONSIDERATION IN WHICH SEVERAL DEFEC TS WERE POINTED OUT BY THE AO. 6. WE HAVE CAREFULLY CONSIDERED ARGUMENTS OF BOTH T HE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THA T THE AO HAS FOUND SEVERAL DEFECTS IN THE ASSESSEES BOOKS OF ACCOUNTS WHICH ARE DISCUSSED FROM PAGE NO.2 TO 10 OF THE ASSESSMENT ORDER. THE CIT(A) HAS ALSO CONSIDERED THE SAME IN DETAIL AND HAS UPHELD THE RE JECTION OF THE BOOKS OF ACCOUNTS. AFTER CONSIDERING THE ARGUMENTS OF THE BOTH THE SIDES AND FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE UNABLE TO ACC EPT THE CONTENTION OF THE LEARNED COUNSEL THAT THERE WAS NO DEFECT IN THE BOOKS OF ACCOUNTS. THE AO HAS POINTED OUT SEVERAL SPECIFIC DEFECTS IN THE BOOKS WHICH THE ASSESSEE COULD NOT SATISFACTORILY EXPLAIN. THEREFO RE, WE UPHOLD THE REJECTION OF THE BOOKS OF ACCOUNTS BY THE AO. HOWE VER, IN OUR OPINION, THE WORKING OUT OF THE GP AS PER THE GP RATE OF THE LAST YEAR CONSIDERING THE PECULIAR FACTS OF THE CASE WAS NOT JUSTIFIED. THE FACTS AND CIRCUMSTANCES CLEARLY INDICATE THAT THE BUSINESS OF THE ASSESSEE STARTED DOWN-TREND DURING THE YEAR UNDER CONSIDERATION AND ULTIMATELY, THE ASSESSEE WAS COMPELLED TO SELL ITS PLANT & MACHINER Y AFTER A FEW YEARS. ITA NO.529/AHD/2008 -7- ALMOST SAME OR LOWER GP IS ACCEPTED BY THE AO IN TH E SUBSEQUENT YEAR. CONSIDERING THE TOTALITY OF THE ABOVE FACTS AND CIR CUMSTANCES, IN OUR OPINION, IT WOULD BE FAIR AND REASONABLE IF THE GP IN SIZING UNIT IS APPLIED AT 7% AS AGAINST 14.06% APPLIED BY THE AO AND 4.1% SHOWN BY THE ASSESSEE. IN TEXTURISING UNIT, IT WOULD BE FAIR A ND REASONABLE TO ADOPT GP RATE OF 5% AS AGAINST 6.96% ADOPTED BY THE AO AND 3 .19% SHOWN BY THE ASSESSEE. THE GP ADDITION BY ADOPTING GP RATE OF 7% IN SIZING UNIT AND 5% IN TEXTURISING UNIT WOULD BE RS.17,17,416/- AS U NDER: SIZING UNIT TOTAL SALES : RS.2,60,08,580/- GP @ 7% : RS.18,20,595/- (-) GP SHOWN BY ASSESSEE : RS.10,66,180 ADDITION SUSTAINED (A) : RS.7,54,415 TEXTURISING UNIT: TOTAL SALES : RS.5,31,94,715 GP @ 5% : RS.26,59,735 (-) GP SHOWN BY THE ASSESSEE : RS.16,96,734 ADDITION SUSTAINED (B) : RS.9,63,001 TOTAL ADDITION (A+B) : RS.17,17,416 7. COMING TO VARIOUS OTHER ADDITIONS/DISALLOWANCES, WE ARE OF THE OPINION THAT WHEN THE ASSESSEES TRADING RESULTS AR E REJECTED AND GP IS ESTIMATED NO OTHER ADDITION/DISALLOWANCE IN RESPECT OF AN ITEM RELATING TO THE TRADING ACCOUNT CAN BE MADE. THEREFORE, IN OUR OPINION, THE ADDITION FOR WORK-IN-PROGRESS, DISALLOWANCE UNDER SECTION 40 A(2)(B) OF THE ACT, DISALLOWANCE OR ADDITION FOR THE UNDER-VALUATION OF THE CLOSING STOCK CANNOT BE SUSTAINED. EVEN OTHERWISE, THE AO HIMSEL F HAD GIVEN SET OFF OF THESE ADDITIONS FROM THE GP ADDITION. THE GP SUSTA INED BY US AT RS.17,17,416/- IS MORE THAN OTHER DISALLOWANCES/ADD ITIONS SUSTAINED BY ITA NO.529/AHD/2008 -8- THE CIT(A). THEREFORE, EVEN AS PER THE AO, SEPARAT E ADDITIONS ARE NOT REQUIRED TO BE MADE. WE THEREFORE DELETE THE ADDIT ION IN RESPECT OF WORK- IN-PROGRESS AMOUNTING TO RS.7,43,834/-, DISALLOWANC E UNDER SECTION 40A(2)(B) OF RS.5,05,851/- , DISALLOWANCE OF LOSS O F RS.26,728/- AND ADDITION ON ACCOUNT OF UNDER VALUATION OF CLOSING S TOCK OF RS.32,827/-. TO SUMMARISE, AGAINST THE ADDITION OF RS.45,96,233/ - MADE BY THE AO AND SUSTAINED BY THE CIT(A), THE ADDITION SUSTAINED BY US IS RS.17,17,416/-. 8. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. ORDER PRONOUNCED IN OPEN COURT ON 10 TH JUNE, 2011 SD/- SD/- (D.K. TYAGI) JUDICIAL MEMBER (G.D. AGARWAL) VICE-PRESIDENT PLACE : AHMEDABAD DATE : 10-06-2011 C OPY OF THE ORDER FORWARDED TO: 1) : APPELLANT 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR/AR, ITAT, AHMEDABAD