The ACIT, Bharuch Circle, Bharuch V. Maksons Finechem Pvt.Ltd., Bharuch

ITA 922/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8742 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 25-03-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 01-03-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M C PANDIT
• Assessee Lawyers: J P SHAH
• Keywords: Gross profit estimation; Rejection of books of accounts; Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER DATE OF HEARING: 25.03.10 DRAFTED ON: 25.03.10 ITA NO.922/AHD/2007 ASSESSMENT YEAR : 2003-2004 DEPUTY COMMISSIONER OF INCOME TAX, BHARUCH CIRCLE, BARUCH VS. MAKSONS FINE CHEM (P) LTD. C/O. J.P. SHAH & CO. 7/8, MRIDUL TOWER, 1 ST FLOOR, H.K. HOUSE LANE, ASHRAM ROAD, AHMEDABAD-380 009 PAN/GIR NO. : AABCM 2773Q (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI M.C.PANDIT SR. D.R. RESPONDENT BY: SHRI J.P.SHAH O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :- THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-VI, BA RODA, DATED 08.12.2006. 2. THE SOLE GROUND TAKEN IN THIS APPEAL READS AS U NDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE CIT(A) ERRED IN DELETING THE ADDITION OF RS.66,06,4 74/- BEING THE FALL IN GP FROM 33.64% TO 25.09% WITHOUT APPRECIATING THE FACTS THAT THE ASSESSEE WAS UNABLE TO PROVIDE ANY COGENT REASONS FOR SUCH A DRASTIC FALL IN GP. ITA 922/AHD/2007 - 2 - 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS DECIDED THIS ISSUE AS UNDER:- 3. THE FIRST GROUND OF APPEAL IS AGAINST THE ADDIT ION OF RS.66,06,474/- MADE BY THE AO ON ACCOUNT OF UNDER V ALUATION OF CLOSING STOCK. THE ASSESSEE COMPANY IS ENGAGED I N THE BUSINESS OF MANUFACTURING OF BULK DRUG INTERMEDIATE S, FINE CHEMICALS AND SPECIALITY CHEMICALS. THE ASSESSEE CO MPANY FILED ITS RETURN OF INCOME ON 27.11.2003 DECLARING TOTAL INCOME OF RS.22,96,475/- AFTER CLAIMING DEDUCTION U/S 80HH C OF THE I.T.ACT,1961 OF RS.15,33,675/-. THE RETURN OF INCOM E WAS ACCOMPANIED BY THE AUDITED ACCOUNTS. 3.1. IT WAS OBSERVED BY THE AO THAT DURING THE RELE VANT PREVIOUS YEAR, THE ASSESSEE HAS DECLARED GROSS PROF IT OF RS.25.09% ON TURNOVER OF RS.4,46,58,028/- AS AGAINS T GROSS PROFIT OF 33.64% ON TURNOVER OF RS.2,86,06,056/- DU RING THE IMMEDIATELY PRECEDING FINANCIAL YEAR. THE ASSESSEE WAS REQUIRED TO FURNISH THE JUSTIFICATION FOR FALL IN G P IN COMPARISON TO THE PRECEDING YEAR VIDE QUESTIONNAIRE ISSUED ON 20.02.2006. IN RESPONSE, THE ASSESSEE VIDE ITS REPL Y DATED 09.03.2006 CONTENDED THAT THE FALL IN THE GROSS PRO FIT WAS DUE TO FALL IN SALE PRICES OF THE VARIOUS PRODUCTS SOLD BY THE COMPANY .IN RESPECT OF FOUR MAIN PRODUCTS OF THE AS SESSEE COMPANY WHICH ACCOUNT FOR AROUND 85% OF THE TURNOVE R. VIZ. TAMI-C, TAMI-B, BROMASIL AND IBEFONE, MONTH-WISE DE TAILS OF PRODUCTION IN QUANTITY AS WELL AS VALUE WERE CALLED FOR BY ASSESSING OFFICER. THE FOLLOWING DETAILS WERE ALSO CALLED FOR ON THE SAME DATE AS RECORDED IN THE ORDER SHEET ON THA T DATE: A) DETAILS OF CORRESPONDING RAW MATERIAL OF ABOVE 4 ITEMS IN RESPECT OF OPENING STOCK, PURCHASE, CONSUMPTION, CL OSING STOCK. B) RATIO OF QUANTITY OF RAW MATERIAL CONSUMED TO QU ANTITY OF PRODUCTION. 3.1.1. THE ASSESSEE WAS ALSO REQUIRED TO PRODUCE TH E STOCK REGISTER FOR VERIFICATION ON THE SAME DATE. HOWEVER , THE ASSESSEE DID NOT PRODUCE SUCH DETAILS ON 20.03.2006 . IT WAS ALSO CATEGORICALLY STATED THAT NO STOCK REGISTER IS MAINTAINED. THE RG-1 REGISTER OF FINISHED GOODS MAINTAINED FOR THE PURPOSE OF EXCISE WAS PRODUCED BEFORE THE AO. THE A SSESSEE WAS GIVEN FURTHER TIME TO PRODUCE THE REQUIRED DETA ILS BUT ON ITA 922/AHD/2007 - 3 - 27.03.2006, IT WAS AGAIN STATED THAT NO SUCH DETAIL S COULD BE FURNISHED AS NO STOCK REGISTER IS MAINTAINED. 3.2. IT IS ALSO OBSERVED BY THE AO THAT CLOSING STO CK HAS NOT BEEN PROPERLY VALUED E.G. THE FINISHED PRODUCT TAMI -C IS VALUED AT RS.3400/-PER KG. AS AGAINST AVERAGE SALE PRICE OF RS.9838/- PER KG. FOR EXPORT SALES. SIMILARLY IN RE SPECT OF WORK IN PROGRESS, ONE OF THE ITEMS TAMI-S1 HAS BEEN VALU ED AT RS.1000/- PER KG WHEREAS THE RAW MATERIAL TAMI-S1 H AS BEEN PURCHASED AT AN AVERAGE PRICE OF RS.1889.95 PER KG. 3.2.1. IT IS ALSO EXPRESSED BY THE AO THAT WHILE ON THE ONE HAND THE GP MIGHT HAVE FALLEN DUE TO FALL IN THE SALE PR ICES, AT LEAST A PART OF THE FALL HAS BEEN COMPENSATED BY THE FALL IN THE PRICES OF THE RAW MATERIALS AND ON ITS PART, THE ASSESSEE HAS NOT GIVEN THE EXACT QUANTIFICATION OF THE EFFECT OF THE FALL IN THE PRICES OF THE FINISHED GOODS AND THE RAW MATERIALS AND HAS DE LIBERATELY EMPHASIZED ONLY THE FALL IN PRICE IN RESPECT OF THE FINISHED PRODUCTS. FURTHER THE ASSESSEE MAINTAINED NO QUANTI TATIVE DETAILS OF RAW MATERIALS CONSUMPTION AND PRODUCTION S, WHATSOEVER, THEREBY MAKING IT IMPOSSIBLE TO VERIFY AS TO WHETHER THE RATIO OF INPUT TO OUTPUT IS BEING PROPE RLY REPORTED BY THE ASSESSEE OR NOT. THE FALL IN THE GP RATE FRO M 33.64% TO 25.09% WAS LINKED TO INCOMPLETE AND INCORRECT BOOKS OF ACCOUNT BY THE AO. IT IS STATED BY ASSESSING OFFICE R THAT UNLESS ENTIRE QUANTITY OF OPENING STOCK AND PURCHASES IS A CCOUNTED FOR EITHER AS ISSUED FOR CONSUMPTION OR IN THE CLOSING STOCK, THE BOOKS CANNOT BE SAID TO BE CORRECT OF COMPLETE AS D ESCRIBED ABOVE. UNDER THE CIRCUMSTANCES, THE AO REJECTED THE BOOKS OF ACCOUNTS OF THE ASSESSEE U/S 145(3) OF THE ACT,1961 AND GP @ 35% WAS ESTIMATED. THE GROSS PROFIT WAS ESTIMATED AS UNDER: RAW MATERIAL CONSUMPTION RS.268,24,501 ADD: 1. MFG. EXPENSES RS. 41,44,201 2. DECREASE IN STOCK RS. 21.13.400 COGS RS.330,82,102 GROSS PROFIT = COGS X GP RATE 100 - GP RATE I.E. 35 = 330,82,102 X 35 65 ITA 922/AHD/2007 - 4 - = RS. 1,78,13,440/- THUS, THE ADDITION OF RS.66,06,474/- (I.E. RS.1,78, 13,440- RS.1,12,06,966) WAS MADE. 3.3. IN APPEAL, IT IS ARGUED THAT THE ASSESSING OFF ICER HAD NOT EXAMINED ALL THE DOCUMENTS SUBMITTED DURING THE COU RSE OF ASSESSMENT PROCEEDINGS. IT IS SUBMITTED THAT ON 20. 02.2006, THE AO HAD ASKED FOR DETAILS IN RESPECT OF EXPORT TRAD ING ACCOUNT AND MODE OF RECEIPT OF PAYMENTS AND THAT THE ENTI RE DETAILS OF EXPORT TRADING WERE SUBMITTED. IT IS VEHEMENTLY PRE SSED THAT BIFURCATION OF MANUFACTURING AND TRADING ACTIVITIES WERE PROVIDED IN PROFIT AND LOSS ACCOUNT AND ON THE CRED IT SIDE EXPORT SALES WERE CLEARLY MENTIONED. IT IS STATED T HAT FOLLOWING THE VOLUME OF SALE OF TRADED PRODUCTS FOR A.Y.2003- 04 WAS 1.47 CRORES IN COMPARISON TO NIL SALE OF TRADED PRODUCT IN A.Y.2002-03. IT IS ALSO MENTIONED THAT AS AGAINST T HE GROSS PROFIT OF 22.29 % FROM THE MANUFACTURING ACTIVITIES , THE GROSS PROFIT FROM TRADING ACTIVITIES WAS 14.32%. 3.3.1. THE FOLLOWING DETAILS OF M/F & TRADI NG ACTIVITIES WERE EXTRACTED FROM THE PROFIT AND LOSS ACCOUNT: A.Y.03-04 A.Y.02-03 SR. NO DESCRIPTION AMOUNTS AMOUNTS 1 TOTAL SALES DURING THE YEAR 44658028.00 28606056.00 2 SALES OF TRADED PRODUCTS( A + B) 14780119.00 0.00 (A) EXPORT SALES(TRADING) 12440119.00 (B) LOCAL SALES(TRADING) 2340000.00 3 SALES OF MANUFACTURED PRODUCTS(L-2) 29877909.00 28606056.00 GP FROM TRADING ACTIVITY SR. NO DESCRIPTION AMOUNTS AMOUNTS 1 SALES OF TRADED PRODUCTS 14780119.00 0.00 2 PURCHASE VALUE OF TRADED PRODUCTS 12663050.00 0.00 3 PROFIT FROM TRADING ACTIVITY(2-L) 2117069.00 0.00 4 GP AS % FROM TRADING ACTIVITY 14.32 0.00 ITA 922/AHD/2007 - 5 - GP FROM MANUFACTURING ACTIVITY A.Y.2003-04 A.Y.2002-03 SR. NO DESCRIPTION AMOUNTS AMOUNTS 1 SALES OF MANUFACTURING PRODUCTS 29877909.00 28606056.00 2 CLOSING STOCK 3069314 3785721.00 3 RAW MATERIAL PURCHASED 15558444.00 14429440.00 4 OPENING STOCK 3785721.00 3764855.00 5 DIRECT EXPENSES FOR MANUFACTURED PRODUCTS 4851808.00 4720026.00 6 PROFIT FROM MANUFACTURED PRODUCTS (1-2-3-4-5) 8751259.00 9477456.00 7 GP AS % FROM MANUFACTURING ACTIVITY 29.29 33.13 3.3.2. IN OTHER WORDS THE REDUCTION IN THE GROSS PR OFIT DURING THE YEAR WAS MERELY ON ACCOUNT OF LOW GROSS PROFIT IN TRADING ACTIVITY WHICH WAS NON EXISTENT IN THE PRECEDING YE AR AND THAT THE AO HAS OVER LOOKED THIS ASPECT WHILE MAKING THE ADDITION ON ACCOUNT OF GROSS PROFIT. IT IS FURTHER STATED TH AT COMPLETE CENTRAL SALES TAX AND EXCISE RECORDS ARE MAINTAINED AND COMPANY BEING A SMALL SCALE UNIT, THEY ARE NOT REQU IRED TO MAINTAIN PRODUCTION AND CONSUMPTION A/CS ON DAILY B ASIS. IT IS ALSO STATED THAT 1321 KGS OF TAMI-C WAS SOLD DURING THE YEAR AGAINST WHICH THERE WAS A PURCHASE OF 1320 KGS OF T AMI-C AS THIS PRODUCT WAS TRADED. THE LAST SALES REALIZATION WAS RS.8839/- PER KG AT PROFIT MARGIN OF 10-12%. ON THE OTHER HAND, CLOSING STOCK OF MATERIAL PRODUCED BY THE APP ELLANT WAS VALUED @ 3400 PER KG. AS THE SAME COULD NOT BE SOLD DUE TO QUALITY PROBLEMS. FURTHER IN RESPECT OF TAMI-S1, TH E AVERAGE PRICE WAS RS.911/- PER KG WHEREAS IN THE ASSESSMENT ORDER, THE AO HAS WRONGLY CONSIDERED THE VALUE AT RS. 1889.95 PER KG. IT IS PRESSED THAT ALL THE INFORMATION CALLED FOR BY T HE ASSESSING OFFICER WERE FURNISHED DURING THE COURSE 'OF ASSESS MENT PROCEEDINGS AND THE AO WAS NOT JUSTIFIED IN REJECTI NG THE BOOKS OF ACCOUNTS. 3.4. I HAVE CAREFULLY GONE THROUGH THE SUBMISSIONS. THE DETAILS SUBMITTED BY THE APPELLANT WERE DISCUSSED WITH THE CONCERNED ITA 922/AHD/2007 - 6 - ASSESSING OFFICER ON 07.01.2006. HOWEVER, NO COMMEN TS WERE OFFERED BY THE AO ON THE ISSUES RAISED BY THE APPEL LANT. IT ALSO APPEARS THAT DETAILS SUBMITTED ON 20.03.2006 AND 27 .03.2006 BY APPELLANT DURING ASSESSMENT PROCEEDINGS HAVE NOT BEEN EXAMINED BY THE AO. 3.4.1. IT IS A FACT THAT THERE IS SUBSTANTIAL TRADI NG ACTIVITY DURING THE YEAR AS COMPARED TO NO SUCH ACTIVITY IN THE LAST YEAR. THE GROSS PROFIT FROM TRADING ACTIVITY WAS MU CH LESS THAN THAT FROM THE MANUFACTURING ACTIVITY. THE AO SEEMS TO HAVE MISSED THIS ASPECT COMPLETELY WHILE COMPARING THE G ROSS PROFIT RATE. THE GROSS PROFIT FROM THE MANUFACTURING ACTIV ITY HAD GONE DOWN DUE TO MULTIPLE FACTORS. SUCH FALL IN GP IS RE SULT OF CHANGE IN MIX OF BUSINESS ACTIVITIES. THIS IS OFFSE T TO A MUCH SMALLER EXTENT BY FALL IN RAW MATERIAL PRICES. REJE CTION OF BOOKS OF ACCOUNTS MERELY ON THE GROUND THAT THERE WAS VAR IATION IN THE GROSS PROFIT AND WITHOUT ANALYZING THE UNDERLYI NG REASONS IS NOT WARRANTED, WHEN THERE ARE SPECIFIC REASONS F OR SUCH DECLINE. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ADDITION OF RS.66,06,474/- IS, THEREFORE, DELET ED. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE O N RECORD. IN THE INSTANT CASE, THE LEARNED ASSESSING OFFICER OBSERVE D THAT THE GROSS PROFIT RATE DISCLOSED BY THE ASSESSEE COMES TO 25.0 9% WHICH IS MUCH LOWER THAN 33.64% DECLARED BY THE ASSESSEE IN THE I MMEDIATELY PRECEDING YEAR. THE LEARNED ASSESSING OFFICER ALSO OBSERVED THAT THE ASSESSEE COULD NOT SUBSTANTIATE THE VALUATION ADOPT ED FOR CLOSING STOCK. IN THESE CIRCUMSTANCES, HE REJECTED THE BOO K RESULTS OF THE ASSESSEE AND ESTIMATED GROSS PROFIT OF THE ASSESSEE @ 35% AND THEREBY MADE TRADING ADDITION OF RS.66,06,474/-. 5. ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) OBSERVED THAT THE ASSESSEE HAS STARTED TRADING BUSINESS ITA 922/AHD/2007 - 7 - ALSO DURING THE YEAR UNDER CONSIDERATION. ON VERIFI CATION OF RESULTS OF TRADING ACCOUNT, HE OBSERVED THAT THE GROSS PROFIT WORKS OUT TO 14.32% IN THE TRADING ACCOUNT, AND THEREFORE, ACTUA L GROSS PROFIT DISCLOSED BY THE ASSESSEE IN MANUFACTURING ACCOUNT COMES TO 29.29% AND NOT 25% AS OBSERVED BY THE LEARNED ASSESSING OF FICER. HE THEREFORE, DELETED THE ENTIRE TRADING ADDITION OF R S.66,06,474/-. 6. IN APPEAL BEFORE US, THE LEARNED DEPARTMENTAL RE PRESENTATIVE CONTENDED THAT THE ASSESSEE COULD NOT CONTROVERT TH E FINDING OF THE LEARNED ASSESSING OFFICER IN RESPECT OF DEFECTS POI NTED OUT IN THE VALUATION OF CLOSING STOCK AND THEREFORE, THE LEARN ED COMMISSIONER OF INCOME TAX(APPEALS) WAS NOT JUSTIFIED IN ACCEPTI NG THE LOWER GROSS PROFIT OF 29.29% IN RESPECT OF MANUFACTURING GOODS. HE THEREFORE, PRAYED FOR SUSTAINING OF THE ADDITION IN RESPECT OF DEFECTS POINTED OUT IN RESPECT OF CLOSING STOCK OF MANUFACT URED GOODS. 7. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE COULD NOT DISPUTE THE ABOVE PROPOSITION OF THE LEARNED DE PARTMENTAL REPRESENTATIVE. 8. ON THE ABOVE FACTS AND CIRCUMSTANCES, IN OUR CON SIDERED OPINION, THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS) WAS NOT JUSTIFIED IN DELETING THE ENTIRE TRADING ADDITION. IN OUR CONSIDERED OPINION, IT SHALL MEET THE ENDS OF JUSTICE, IF TRAD ING ADDITION IS RETAINED AT RS.10 LACS ON ACCOUNT OF DEFECTS IN THE VALUATION OF CLOSING STOCK WHICH COULD NOT BE CONTROVERTED BY THE ASSESS EE TO WHICH AR ALSO AGREED IN WRITING BEFORE THE BENCH. WE THEREFO RE, MODIFY THE ITA 922/AHD/2007 - 8 - ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS) TO THE ABOVE EXTENT AND PARTLY ALLOW THE APPEAL OF THE REV ENUE. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS PART LY ALLOWED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 31/03/2010. SD/- SD/- ( MAHAVIR SINGH) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUNTAN T MEMBER AHMEDABAD; DATED 31/03/2010 PARAS# COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS) 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD