DCIT 9(1), MUMBAI V. AUROCHEM LABORATORIES P. LTD, MUMBAI

ITA 6906/MUM/2010

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7701 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 02-05-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 04-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B S BIST
• Assessee Lawyers: V C SHAH
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 6906/MUM/2010 ASSESSMENT YEAR: 2004-05 DCIT 9(1) VS. M/S. AUROCHEM LABORATORIES PVT. LTD. ROOM NO. 223, AAYAKAR BHAVAN A-3, KAVITA APARTME NT, DR. N.R.KARODE M.K. ROAD, MARG, BORIVALI(W) MUMBAI 400020 MUMBAI - 400092 PAN NO. AAACA9690D (APPELLANT) (RESPONDENT) REVENUE BY : SHRI B.S. BIST, DR ASSESSEE BY: SHRI V.C. SHAH, AR DATE OF HEARING :11/01/201 7 DATE OF PRONOUNCEMENT: 29/03/2017 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE REVENUE. THE RELEVAN T ASSESSMENT YEAR IS 2004-05. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER (APPEALS) 19, MUMBAI AND ARISES OUT OF THE ORDER U/S 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT). 2. THE GROUND OF APPEAL FILED BY THE REVENUE READS AS UNDER:- I. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 2,09,17,19 4/- PERTAINING TO UNPROVED MANUFACTURING EXPENDITURE DISREGARDING THE FIN DING OF THE ASSESSING OFFICER THAT THE BOOKS OF ACCOUNTS WERE DE FECTIVE AND UNRELIABLE AND THAT NO COGENT REASONS WERE ADVANCED FO R THE FALL IN GROSS PROFIT FROM 28.06% IN THE PRECEDING YEAR TO 16.64% IN THE YEAR UNDER REFERENCE. ITA NO. 6906/MUM/2010 2 3. IN A NUTSHELL, THE FACTS ARE THAT THE BUSINESS O F THE ASSESSEE IS MANUFACTURING PHARMACEUTICAL PRODUCTS AND VARIOUS F ORMULATIONS. THE ASSESSING OFFICER (AO) NOTICED THAT THERE WAS A FALL IN THE GROSS PROFIT MARGIN OF THE ASSESSEE IN THE IMPUGNED ASSES SMENT YEAR IN COMPARISON TO THE PREVIOUS ASSESSMENT YEARS. THE SA ME IS AS UNDER: A.Y. G.P. % 2002-03 90,45,645/- 28.06% 2003-04 78,17,194/- 25.07% 2004-05 74,55605/- 16.64% 3.1 THE AO NOTED THAT THERE WAS INCREASE IN MANUFAC TURING COST. WHILE THE MANUFACTURING COST IN THE PRECEDING YEAR WAS RS. 1,61,25,009/-, THE SAME WAS RS. 3,48,45,137/- DURIN G THE IMPUGNED ASSESSMENT YEAR. HE THUS OBSERVED THAT THE ACCOUNTS OF THE ASSESSEE COMPANY WERE NOT RELIABLE. THE AO THEN ADOPTED THE COST OF MANUFACTURE OF THE PRECEDING YEAR WHICH WAS 42.24% OF SALES, AS THE RATE FOR THE IMPUGNED ASSESSMENT YEAR (AS AGAINST 8 8.92% SHOWN IN THE CURRENT YEAR) AND THUS ADDED THE DIFFERENCE OF 46.68% OF THE SALES OF RS. 4, 48, 09, 756/-, RESULTING IN ADDITION OF R S. 2,09,17,194/-. 4. THE ASSESSEE PREFERRED AN APPEAL AGAINST THE ORD ER OF THE AO BEFORE THE LEARNED CIT(A). THE AR OF THE ASSESSEE S UBMITTED BEFORE THE LEARNED CIT(A) THAT (I) PARTY-WISE DETAILS OF P URCHASE, (II) COPIES OF MONTHLY STOCK STATEMENT, (III) COPIES OF COST SH EET AND STATEMENT OF MOVEMENT OF RAW MATERIAL, FINISHED GOODS AND PACKIN G MATERIALS AND (IV) REASONS FOR HIGHER INVENTORY TO BE MAINTAINED, WERE FILED BEFORE THE AO. IT WAS FURTHER STATED THAT PURCHASE RECORDS OF RAW MATERIAL AND PACKING MATERIAL ALONG WITH REGISTERS PRESCRIBE D UNDER VAT AND CENTRAL EXERCISE LAW ALONG WITH SUPPORTING BILLS WE RE AVAILABLE. IT WAS THUS STATED BEFORE THE LEARNED CIT(A) THAT THE AO, WITHOUT FINDING ITA NO. 6906/MUM/2010 3 A SINGLE DEFECT DISALLOWED 46.68% OF MANUFACTURING COST AMOUNTING TO RS. 2,09,17,194/-. THE LEARNED CIT(A) WAS CONVIN CED WITH THE SUBMISSION OF THE ASSESSEE THAT THE COST OF MANUFAC TURE HAD INCREASED FROM 74.94% TO 83.30%. THERE WAS NO SUCH INCREASE F ROM 42.24% TO 88.92% AS STATED BY THE AO. THE LEARNED CIT(A) WAS CONVINCED WITH THE DATA IN THE FOLLOWING TABLE: 31.03.2001 31.03.2002 30.03.2003 30.03.2004 SALES 8,25,32,005 3,22,32,847 3,11,76,555 4,48,09,7 56 COST OF PRODUCTION BEING MANUFACTURING COST PLUS OR MINUS INCREASE/DECREASE IN STOCK 6,12,54,430 2,08,38,837 2,33,63,032 3,73,23,302 CONTRIBUTION 2,12,77,575 1,13,94,010 78,13,523 74,8 6,454 CONTRIBUTION PERCENTAGE 25.78% 35.34% 25.06% 16.70% COST OF MFG PERCENTAGE 74.22% 64.76% 74.94% 83.30% 4.1 AS THE AO HAS NOT FOUND ANY DEFECTS IN THE ACCO UNTS MAINTAINED BY THE ASSESSEE BUT HAS ONLY PROCEEDED ON THE BASIS OF CONSUMPTION OF RATIO MATERIALS, THE LEARNED CIT(A) DELETED THE ADDITION OF RS. 2,09,17,194/- MADE BY THE AO. 5. BEFORE US, THE LEARNED DR SUPPORTS THE ORDER PAS SED BY THE AO. ON THE OTHER HAND, THE LEARNED COUNSEL OF THE ASSES SEE RELIES ON THE ORDER PASSED BY THE LEARNED CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WHEN THE AO DOES NOT ACCEPT THE ASSESSEES METHOD OF ACCOUNTING, THEN HE HAS TO RESORT TO THE FIRST PROVISO TO SECTION 145(1) FOR COMPUTATION OF INCOME BY ADOPTIN G SUCH OTHER BASIS AS DETERMINED BY HIM. THE AOS POWER UNDER TH E SAID PROVISO TO CHOOSE THE BASIS AND MANNER OF COMPUTATION OF INCOM E IS NOT AN ARBITRARY POWER TO ASSESS THE INCOME, BUT MUST EXER CISE HIS DISCRETION ITA NO. 6906/MUM/2010 4 AND JUDGEMENT JUDICIALLY. IT HAS BEEN HELD SO IN KARNATAKA STATE FOREST INDUSTRIES CORPORATION LTD. VS. CIT (1993) 201 ITRF 674, 679 (KARN.). 6.1 ACCOUNTS REGULARLY MAINTAINED IN THE COURSE OF BUSINESS HAVE TO BE TAKEN AS CORRECT UNLESS THERE ARE STRONG AND SUF FICIENT REASONS TO INDICATE THAT THEY ARE NOT RELIABLE. REJECTION OF A CCOUNTS SHOULD NOT BE DONE LIGHT-HEARTEDLY. THE ASSESSEE SHOULD BE GIVEN REASONABLE OPPORTUNITY FOR OFFERING EXPLANATIONS REGARDING THE DEFECTS IN THE ACCOUNTS AND ON HIS FAILURE TO SATISFACTORILY EXPLA IN THE DEFECTS, THE AO WOULD BE JUSTIFIED IN REJECTING THE ACCOUNTS. WE FI ND THAT IN THE INSTANT APPEAL THE AO HAS NOT GIVEN THE ASSESSEE REASONABLE OPPORTUNITY FOR OFFERING THE EXPLANATION REGARDING THE DEFECTS, IF ANY IN THE ACCOUNTS. IN R.B. JESSARAM FATEHCHAND (SUGAR DEPTT) VS. CIT (1970) 75 ITR 33, 37 (BOM), IT HAS BEEN HELD THAT THE ASSESSEES ACCO UNT BOOKS ARE TO BE ACCEPTED, UNLESS, ON VERIFICATION, THEY DISCLOSE AN Y FAULTS OR DEFECTS, WHICH CANNOT BE REASONABLY AND SATISFACTORILY EXPLA INED BY THE ASSESSEE. WE FIND THAT IN THE PRESENT CASE THE AO H AS FAILED TO GIVE VALID REASONS FOR DECLARING THE ACCOUNTS OF THE ASS ESSEE TO BE EITHER FALSE OR NOT TO HAVE BEEN MAINTAINED PROPERLY. 7. IN VIEW OF THE REASONS DELINEATED AT PARA 6 AND 6.1 HERE-IN- ABOVE, WE UPHOLD THE ORDER OF THE LEARNED CIT(A) AN D DISMISS THE APPEAL FILED BY THE REVENUE. ORDER PRONOUNCED IN THE OPEN COURT ON 29/03/2017 SD/- SD/- (MAHAVIR SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBE R MUMBAI: DATED: 29/03/2017 BISWAJIT, SR. P.S. ITA NO. 6906/MUM/2010 5 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI