FUTURSTIC OFFSHORE SERVICE AND CHEMICALS LTD, MUMBAI V. ACIT CEN CIR 15 & 16, MUMBAI

ITA 5825/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8517 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 31-07-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 19-07-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: C SRINIVAS REDDY
• Assessee Lawyers: M SUBRAMANIAN
• Keywords: Gross profit estimation
• Section: 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'F' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO. 5825/MUM/2010 (ASSESSMENT YEAR: 2004-05) FUTURISTIC OFFSHORE SERVICES & ACIT, CENTRAL CIRCLE 15 & 16 CHEMICAL LTD. MUMBAI 1ST FLOOR, DINA BUILDING, 53 MK ROAD VS. MUMBAI 400002 PAN - AAACG 1524 C APPELLANT RESPONDENT APPELLANT BY: SHRI M. SUBRAMANIAN RESPONDENT BY: SHRI C. SRINIVAS REDDY DATE OF HEARING: 31.07.2012 DATE OF PRONOUNCEMENT: 19.10.2012 O R D E R PER D. MANMOHAN, V.P. THIS APPEAL IS FILED AT THE INSTANCE OF THE ASSESSE E AND IT PERTAINS TO A.Y. 2004-05. 2. ESTIMATION OF GROSS PROFIT AND CONSEQUENTIAL ADDITI ON MADE BY THE AO IS THE SUBJECT MATTER OF DISPUTE BEFORE THE TRIBUNA L. 3. ASSESSEE COMPANY WAS A MANUFACTURER OF CHEMICALS AN D ALSO ENGAGED IN OFFSHORE SERVICES. FOR THE YEAR UNDER CONSIDERAT ION IT DECLARED A LOSS OF ` 19,28,54,261/-. THE RETURN WAS ACCOMPANIED BY TAX A UDIT REPORT DATED 20.10.2004. THE RETURN WAS ORIGINALLY PROCESSED UND ER SECTION 143(1) OF THE ACT. THEREAFTER THE ASSESSEE COMPANY FILED A REVISE D RETURN, WITHIN THE TIME PERMISSIBLE UNDER THE ACT, DECLARING A LOSS OF ` 10,57,33,014/-. 4. THE CASE WAS TAKEN UP FOR SCRUTINY. THOUGH NOTICES WERE ISSUED UNDER SECTION 142(1) OF THE ACT FROM TIME TO TIME, ACCORD ING TO THE AO, ASSESSEE COMPANY FAILED TO COMPLY WITH THE NOTICES. REPRESEN TATIVE OF THE COMPANY FURNISHED INCOMPLETE DETAILS. SINCE THE MATTER WAS BECOMING BARRED BY LIMITATION, A FINAL OPPORTUNITY WAS GIVEN TO THE AS SESSEE ON 11.12.2006 TO ITA NO. 5825/MUM/2010 FUTURISTIC OFFSHORE SERVICES & CHEMICAL LTD. 2 SUBMIT THE DETAILS CALLED FOR. SINCE THE ASSESSEE H AS NOT FURNISHED COMPLETE DETAILS, THE AO PROCEEDED TO COMPLETE THE ASSESSMEN T ACCORDINGLY. IN THIS REGARD HE OBSERVED THAT THE ASSESSEE COMPANY REPORT ED GROSS LOSS OF ` 5,75,60,979/- FROM BUSINESS, WHICH WORKS OUT TO 66. 67% AS AGAINST THE GROSS LOSS OF 6.51% DECLARED IN THE EARLIER YEAR. T HE ASSESSEE COMPANY WAS DIRECTED TO EXPLAIN THE INCREASE IN LOSS WITH SUPPO RTING EVIDENCES BUT THE ASSESSEE COMPANY FAILED TO FURNISH ANY EXPLANATION IN RESPONSE TO THE NOTICE. VIDE LETTER DATED 11.12.2006 ASSESSEE COMPA NY SUBMITTED THAT THE PLANT WAS NOT IN OPERATION FOR LARGER PART OF THE P ERIOD DURING THE PREVIOUS YEAR UNDER CONSIDERATION DUE TO WORKING CAPITAL CRU NCH AND HENCE THERE WAS INCREASE IN LOSS. THE AO OBSERVED THAT THE ASSE SSEE COMPANY HAS NOT FURNISHED COMPLETE DETAILS AND IT COULD NOT SUBSTAN TIATE THE DETAILS FURNISHED ALONGWITH EVIDENCES. THE INCREASE IN LOSS IS 11 TIMES OF THE LOSS IN THE IMMEDIATELY PRECEDING YEAR. THOUGH HE ADMITTED THAT THE SALES HAVE BEEN REDUCED FROM 49.13 CRORES TO 8.63 CRORES, WHIC H MAY LEAD TO INCREASE IN LOSS, IN HIS CONSIDERED OPINION THE INCREASE OF 11 TIMES IS NOT JUSTIFIED. SINCE THE INITIAL ONUS IS UPON THE ASSESSEE COMPANY TO PROVE THAT THE CLAIM MADE IN THE RETURN IS PROPER, IN THE ABSENCE OF ANY EVIDENCE THE AO CONCLUDED THAT THE INCREASE IN GROSS LOSS WAS NOT S UBSTANTIATED. THOUGH HE ADMITTED THAT THE SALES FELL DRASTICALLY BY 82.43% AND SUCH FACTS MAY CONTRIBUTE TO INCREASE IN GROSS LOSS, THE HIGHER VA RIATION IN THE GROSS LOSS WAS HELD TO BE NOT ACCEPTABLE. CONSIDERING THE CHAN GE OF CIRCUMSTANCES OVER THE PRECEDING YEAR THE GROSS LOSS WAS RESTRICTED TO 10% OF THE TURNOVER WHICH WORKS OUT TO ` 86,33,435/-. 5. AGGRIEVED, ASSESSEE CONTENDED BEFORE THE CIT(A) THA T THE INCREASE IN LOSS IS ON ACCOUNT OF DRASTIC FALL IN TURNOVER. IT WAS CONTENDED THAT THE AO HAS ADMITTED THE FACT THAT THE REVENUE OF THE COMPA NY HAS DROPPED ALMOST AT 6 TIMES. IT IS ALSO CONTENDED THAT THE TOTAL EXP ENDITURE OF ANY ENTERPRISE CONSISTS OF THREE COMPONENTS I.E., (A) TOTALLY VARI ABLE EXPENSES, (B) SEMI VARIABLE EXPENSES, AND (C) FIXED EXPENSES. IF THE P LANT WAS RUNNING AT OPTIMUM LEVEL THEN ONLY VARIABLE EXPENSES VARIES IN PROPORTION TO PRODUCTION VOLUME BUT OTHER SEMI VARIABLE AND FIXED OVERHEADS WILL NOT FALL IN THE SAME PROPORTION. IN THE INSTANT CASE THE PLANT WAS NOT O PERATIONAL FOR SOME PART ITA NO. 5825/MUM/2010 FUTURISTIC OFFSHORE SERVICES & CHEMICAL LTD. 3 AND IT WAS OPERATED AT A VERY LOW LEVEL BUT CERTAIN EXPENSES SUCH AS FIXED OVERHEADS, ETC. CANNOT BE AVOIDED. UNDER THESE CIRC UMSTANCES FALL IN GP RATIO DESERVES TO BE ACCEPTED. 6. THE LEARNED CIT(A) OBSERVED THAT THE AO WAS NOT JUS TIFIED IN REJECTING THE APPELLANTS AUDITED FINANCIAL STATEMENTS WITHOU T ASSIGNING ANY LEGAL/ FACTUAL REASONS FOR HIS ACTION. IN OTHER WORDS, THE AO CAN MADE AN ADDITION ON ACCOUNT OF LOWER GROSS PROFIT, ONLY IF HE ASSIGN S ANY SPECIFIC DEFECT IN THE ACCOUNTS OF THE ASSESSEE. HE ALSO OBSERVED THAT THE AO CANNOT CONCLUDE THAT THERE SHOULD BE AN EXACT CO-RELATION BETWEEN THE RA TIO OF REDUCTION IN EXPENDITURE. IN OTHER WORDS THE AO HAS NOT MADE ANY EFFORT TO ARRIVE AT THE CORRECT REASONING FOR MAKING ADDITION. EVENTHOUGH T HE COMPANY HAS NOT MADE ANY TURNOVER FROM DECEMBER 2003 TILL MARCH 200 4 THE EXPENDITURE COULD NOT BE AVOIDED. THEREFORE, THE LEARNED CIT(A) CONCLUDE THAT THERE IS NO JUSTIFICATION IN MAKING AN ADDITION OF ` 4.89 CRORES BUT, AT THE SAME TIME, HE RESTRICTED THE DISALLOWANCE TO THE EXTENT OF ` 2.09 CRORES. ASSESSEE IS AGGRIEVED BY THE ADDITION OF ` 2.09 CRORES CONFIRMED BY THE LEARNED CIT(A). 7. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO HAS NOT POINTED OUT ANY DEFECT IN THE BOOKS OF ACCOUNT DULY AUDITED UNDER SECTION 44AB OF THE ACT BUT MERELY REJECTED THE BOOKS TO ES TIMATE THE GP. THE ASSESSEE COMPANY IS IN BIFR AND ANY ADDITION MADE T O SUCH COMPANY WOULD RESULT IN REFLECTING HIGHER LOSS. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF JCIT VS. VIDEO ELECTRONICS LTD. 99 ITD 342 AND ANOTHER DECIS ION IN THE CASE OF NARENDRA MAFATLAL MEHTA VS. ITO (1977) 59 TTJ (BOM) 165 IN SUPPORT OF HIS CONTENTION THAT IN THE EVENT OF DECLINE IN BUSINESS DUE TO VARIOUS FACTORS, WHICH WERE EXPLAINED BEFORE THE AO, IT HAS TO BE TR EATED AS COGENT EXPLANATION FOR DECLINE IN GROSS PROFIT RATIO AND H ENCE NO ADDITION CAN BE MADE MERELY ON ACCOUNT OF REDUCTION IN GROSS PROFIT RATIO. IT MAY BE NOTICED THAT THE BOMBAY BENCH OF THE TRIBUNAL OBSERVED THAT WITHOUT REJECTING THE BOOK RESULTS THE AO SHOULD NOT PROCEED TO ESTIMATE INCOME. 8. ON THE OTHER HAND, THE LEARNED D.R. SUBMITTED THAT THE ASSESSEE HAS NOT FURNISHED DETAILS. IN FACT THE ASSESSEE FILED F EW INCOMPLETE DETAILS AND ITA NO. 5825/MUM/2010 FUTURISTIC OFFSHORE SERVICES & CHEMICAL LTD. 4 FAILED TO COMPLY WITH THE NOTICES ISSUED FROM TIME TO TIME. THEREFORE IT CANNOT BE STATED THAT THE AO HAD AN OPPORTUNITY TO VERIFY THE CORRECTNESS OR OTHERWISE. IN THE ABSENCE OF PRODUCTION OF BOOKS OF ACCOUNT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT THE AO HAS NOT POINTED OUT ANY SPECIFIC DEFECT. THE CASE OF THE ASSESSEE ALL THROU GH WAS THAT ON ACCOUNT OF SEVERAL REASONS PRODUCTION AND CONSEQUENT SALES HAV E FALLEN DRASTICALLY WHICH IN TURN RESULTED IN LOWER GROSS PROFIT. THE L EARNED D.R. SUBMITTED THAT EVEN AS PER THE STATEMENT GIVEN BEFORE THE CIT(A) I N RESPECT OF THE PREVIOUS YEAR RELEVANT TO A.Y. 2001-02 THE ASSESSEES TURNOV ER WAS ` 45 CRORES OF WHICH GROSS PROFIT OF ` 9.26 CRORES WAS DECLARED ON WHICH THE GP RATIO WAS 20.23. COMPARED TO THAT ASSESSMENT YEAR THE FALL IN GP WAS MUCH STEEP IN THE YEAR UNDER CONSIDERATION. EVEN AS COMPARED WITH THE IMMEDIATELY PRECEDING YEAR THE FALL IN GP IS UNACCEPTABLE. IT W AS THUS CONTENDED THAT THE LEARNED CIT(A) HAS ERRED IN LAW IN HOLDING THAT THE AO WAS NOT JUSTIFIED IN REJECTING THE AUDITED FINANCIAL STATEMENTS WITHOUT ASSIGNING ANY LEGAL/ FACTUAL REASONS FOR HIS ACTION. HE THUS STRONGLY SU PPORTED THE ORDER PASSED BY THE AO. 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. UNDISPUTEDLY, IF THE BOOKS ARE DULY AUDITED AND IF THEY ARE PRODUCED BEFORE THE AO, THE BURDEN LIES UPON THE REVENUE TO SHOW THAT THE BOOKS ARE DEFECTIVE OR INCOMPLETE, IN ORDER TO ESTIMATE REASO NABLE INCOME FROM TURNOVER. HOWEVER, IN THE INSTANT CASE THE ASSESSEE HAS NOT FURNISHED RELEVANT DETAILS AND NOWHERE IN THE ASSESSMENT ORDE R IT IS INDICATED THAT THE ASSESSEE HAS FURNISHED THE BOOKS OF ACCOUNT. ON THE CONTRARY, THE AO CATEGORICALLY MENTIONED THAT THE ASSESSEE HAS NEVER COOPERATED WITH THE AO AND FURNISHED SEVERAL INCOMPLETE DETAILS AND DID NO T RESPOND TO THE NOTICES. IN THE ABSENCE OF BOOKS THE BURDEN CANNOT BE THRUST UPON THE REVENUE TO PROVE THAT THE BOOKS ARE DEFECTIVE. THE AO CANNOT B E ASKED TO DO AN IMPOSSIBILITY. UNDER THESE CIRCUMSTANCES, THE CONTE NTION OF THE ASSESSEE THAT NO ADDITION CAN BE MADE IN THE EVENT OF NOT GI VING A SPECIFIC FINDING WITH REGARD TO THE DEFECT IN THE NATURE OF BOOKS, D ESERVES TO BE REJECTED. ITA NO. 5825/MUM/2010 FUTURISTIC OFFSHORE SERVICES & CHEMICAL LTD. 5 10. THE NEXT ISSUE IS AS TO WHETHER THE ADDITION AS CON FIRMED BY THE LEARNED CIT(A) IS IN ACCORDANCE WITH LAW. IT MAY BE NOTICED HERE THAT THE REVENUE HAS NOT PREFERRED ANY CROSS APPEAL IN THIS CASE AND HENCE THE ISSUE IS AS TO WHETHER THE AO WAS JUSTIFIED IN MAKING THE ADDITION OF ` 4.89 CRORES AS AGAINST ` 2.09 CRORES CONFIRMED BY THE CIT(A). RATHER THE CAS E OF THE ASSESSEE IS THAT EVEN ADDITION OF ` 2.09 CRORES IS EXCESSIVE IN THE PECULIAR CIRCUMSTANCES OF THE CASE. AS WE HAVE ALSO NOTICED, THE ASSESSEE HAS NOT FURNISHED BOOKS OF ACCOUNT AND NO MATERIAL WAS PLAC ED BEFORE THE AO TO COME TO A CONCLUSION AS TO WHETHER THE EXPLANATION OF THE ASSESSEE IS REASONABLE OR NOT. THE AO CATEGORICALLY MENTIONED T HAT THE ASSESSEE DID NOT FURNISH COMPLETE DETAILS. BEFORE THE LEARNED CIT(A) THE ASSESSEE FILED STATEMENTS OF GROSS PROFIT/LOSS FOR THE PREVIOUS TH REE ASSESSMENT YEARS TO SHOW THAT EVEN IF THE EXPENDITURE IS TO BE COMPARED WITH THE EARLIER YEARS THE LOSS CAN AT LEAST BE TAKEN AT 22.22% WHEREAS TH E ASSESSEE ORIGINALLY DECLARED A LOSS OF 66.67%. SINCE ITEMISED DETAILS W ERE NOT FURNISHED THE LEARNED CIT(A), BASED ON THE AVAILABLE MATERIAL, AC CEPTED THE GP SHEET AS PREPARED BY THE ASSESSEE AND WHILE ARRIVING AT THE GP RATIO AT 22.22% THE GROSS LOSS WORKS OUT TO ` 2.09 CRORES. IT IS WELL SETTLED THAT WHILE ESTIMATI NG THE INCOME IT IS DIFFICULT TO MAINTAIN EXACTITUDE. SO LONG AS THE ESTIMATE IS REASONABLE, BASED ON THE FACTS AVAILABLE ON RECORD, THE APPELLATE AUTHORITIES SHOULD NOT INTERFERE WITH THE ESTIMATE MADE BY THE LOWER AUTHORITIES. IN THE INSTANT CASE NO FRESH MATERIAL WAS FURNISHED BEFORE US TO INDICATE THAT EVEN THE CIT(A) HAS COMMITTED AN ERROR IN RESTRICTING TH E GP RATIO (LOSS) TO 22.22%. UNDER THESE CIRCUMSTANCES WE DO NOT FIND AN Y INFIRMITY IN THE ORDER PASSED BY THE CIT(A). ACCORDINGLY WE CONFIRM THE OR DER OF THE CIT(A) AND DISMISS THE APPEAL FILED BY THE ASSESSEE. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH OCTOBER, 2012. SD/- SD/- (RAJENDRA) (D. MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI, DATED: 19 TH OCTOBER, 2012 ITA NO. 5825/MUM/2010 FUTURISTIC OFFSHORE SERVICES & CHEMICAL LTD. 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 1, MUMBAI 4. THE CIT 1, MUMBAI CITY 5. THE DR, F BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.