The ITO, Ward-6(4), Surat V. M/s. Tirupati Paints,

ITA 965/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0184 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 5 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-08-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 21-07-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 05-03-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K M MAHESH
• Assessee Lawyers: MITESH MODI
• Keywords: Rejection of books of accounts; Opportunity of being heard; Set aside
• Section: 133(6); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD C BENCH (BEFORE S/SHRI G.D. AGARWAL, VICE-PRESIDENT AND T.K. SHARMA, JUDICIAL MEMBER) ITA.NO.965/AHD/2007 WITH CO NO.102/AHD/2007 [ASSTT. YEAR : 2004-2005] ITO, WARD-6(4) SURAT. VS. M/S.TIRUPATI PRINTS 207, PLOT NO.37, BAMROLI DIST : SURAT. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI K.M. MAHESH ASSESSEE BY : SHRI MITESH MODI O R D E R PER G.D. AGRAWAL, VICE-PRESIDENT: THESE ARE REVENUES APPEAL AND THE ASSESSEES CO AGAINST THE ORDER OF THE COMM ISSIONER OF INCOME-TAX (APPEALS)-IV, SURAT DATED 22.12.2006. 2. IN THIS APPEAL OF THE REVENUE, THE FOLLOWING GRO UNDS ARE RAISED: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE IN LAW, THE LD.CIT(A), SURAT HAS ERRED IN RESTRICTI NG THE ADDITION OF RS.11,40,7000/- AS AGAINST RS.90,13,638/- MADE BY T HE ASSESSING OFFICER ON ACCOUNT OF SUPPRESSED PRODUCTION OF CLOTH. 2. THE LD.CIT(A) HAS NOT APPRECIATED THE FACTS OF THE CASE AND HAS DECIDED THE ISSUE ON FICTIONAL OBSERVATION. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, AND IN LAW, THE LD.CIT(A), SURAT OUGHT TO HAVE UPHELD THE ORDER OF THE AO. WHILE THE ASSESSEE IN THE CROSS-OBJECTION HAS RAIS ED THE FOLLOWING GROUNDS: 1. THE DEPARTMENTAL APPEAL IS BAD IN LAW AS WELL ON THE FACTS OF THE CASE AND IS LIABLE TO BE DISMISSED. ITA.NO.965/AHD/2007 WITH CO NO.102/AHD/2007 -2- 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, BOTH THE LOWER AUTHORITIES HAVE FAILED TO APPRECIATE IN THE RIGHT PERSPECTIVES THE BELIEVABLE AND AUTHENTIC REASONS/EVIDENCES FURNISHE D TO SUBSTANTIATE THE FALL IN GP FOR THE COGENT REASONS AND HENCE, THERE IS NO GROUND TO REJECT THE BOOKS OF ACCOUNTS U/S.145 OF THE ACT WITHOUT PO INTING OUT ANY SPECIFIC DEFECT IN THE REGULAR BOOKS OF ACCOUNTS, B UT ONLY ON PRESUMPTION OF JOB WORK CHARGES WITHOUT SPECIFYING CRITERIA FOR THE ALLEGED SUPPRESSION OF JOB WORK CHARGES AND THEREFORE, THE CIT(A)HAS ERRED IN CONFIRMING ADDITION ON ESTIMATE BASIS OF THE EXTENT OF RS.11,40,7000/- ON ACCOUNT OF FALL IN GP DESERVES TO BE DELETED. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE DERI VES INCOME FROM JOB WORK OF DYEING AND PRINTING OF CLOTH. FOR THE YEAR UNDE R CONSIDERATION, THE ASSESSEE HAD SHOWN GROSS PROFIT OF RS.34,87,728/- @ 15.28% O N JOB CHARGES OF RS.2,28,13,959/- AS AGAINST GROSS PROFIT OF RS.33,6 1,708/- @ 21.13% ON JOB CHARGES OF RS.1,57,49,006/- DURING THE PRECEDING YE AR. THE AO FOUND THAT THE ASSESSEE HAS NOT MAINTAINED THE COMPLETE DETAILS OF THE CONSUMPTION OF COLOUR AND CHEMICALS. TO VERIFY THE GENUINENESS OF THE PU RCHASE OF COLOUR AND CHEMICALS AS WELL AS THE RECEIPT OF JOB WORK, THE A O ISSUED NOTICE UNDER SECTION 133(6) OF THE ACT TO VARIOUS PARTIES. HOWE VER, THE NOTICES WERE RECEIVED BACK FROM THE VARIOUS PARTIES UN-SERVED WH ILE SOME OTHER PARTIES DID NOT RESPOND DESPITE SERVICE OF THE NOTICES. CONSID ERING THE FACTS OF THE CASE AND THE ASSESSEES SUBMISSION, THE AO REJECTED THE TRADING RESULTS AND WORKED OUT SUPPRESSED JOB CHARGES AT RS.90,13,638/-. THE RELEVANT FINDINGS OF THE AO GIVEN IN PAGE NO.9 OF THE ASSESSMENT ORDER READS AS UNDER: IN VIEW OF THE ABOVE, IT IS CLEAR THAT THE ASSESSE E FAILED TO RECONCILE THE DIFFERENCE FOUND IN THE ACCOUNTS OF V ARIOUS PARTIES WITH THE ACCOUNTS OF THE ASSESSEE. THUS, IT IS CLE AR THAT THE JOB WORK OF THE ASSESSEE IS NOT GENUINELY ACCOUNTED IN THE BOOKS OF ACCOUNTS. IT IS PRIMA FACIE DUTY OF THE ASSESSEE T O JUSTIFY THE GENUINENESS AND REASONABLENESS OF THE TRANSACTION. THE ASSESSEE FAILED TO DISCHARGE ITS PRIMA FACIE DUTY. (XI) THE ASSESSEE FAILED TO FURNISH THE CONFIRMATION OF M/S.K.K. TEXTILE. THE ASSESSEE ALSO FAILED TO FURNISH THE A DDRESS OF THE PARTY AND FAILED TO PRODUCE HIM FOR VERIFICATION. THEREFORE, IT IS CLEAR THAT JOB WORK OF THE ASSESSEE IS NOT VERIFIAB LE. ITA.NO.965/AHD/2007 WITH CO NO.102/AHD/2007 -3- (XII) DURING THE COURSE OF ASSESSMENT PROCEEDINGS, LETTER U/S.133(6) OF THE ACT WERE ISSUED TO THE VARIOUS PARTIES. REPLY OF SOME OF THE PARTIES WAS NOT RECEIVED. THE SUBMISSION OF THE AS SESSEE IS NOT ACCEPTABLE BECAUSE IT IS PRIMA FACIE DUTY OF THE AS SESSEE TO PROVE THE GENUINENESS AND REASONABLENESS OF THE TRANSACTI ON, WHICH THE ASSESSEE FAILED TO DISCHARGE. THEREFORE, THE JOB W ORK RECEIVED, EXPENDITURE INCURRED ETC., ARE NOT VERIFIABLE. FUR THER, THERE ARE VARIOUS OTHER REASONS ON WHICH REJECTION OF BOOKS O F ACCOUNTS IS DEPENDED. IN LIGHT OF THAT THE BOOKS OF ACCOUNTS O F THE ASSESSEE ARE NOT SHOWING CORRECT INCOME OF THE ASSESSEE. (XIII) FURTHER, VIDE ITS LETTER DATED 15.12.2006, THE ASSE SSEE HAD FURNISHED THAT THE TWO STENTERS AND SEVEN CHAMBERS WERE INSTALLED IN HIS FACTORY. FROM DATA GATHERED BY THE DEPARTME NT, IT IS OBSERVED THAT THE AVERAGE PER DAY PRODUCTION OF ONE CHAMBER MACHINES COMES TO 12,500 METERS FOR DYEING WORKS. THEREFORE, THE INSTALLED CAPACITY OF THE ASSESSEE FOR 300 DAYS OF A YEAR S CALCULATED AT 2,62,50,000 METERS (12500 METERS X 7 CHAMBERS X 300 DAYS), WHICH ALSO PROVES THAT THE ASSESSEE IS H AVING CAPACITY OF PRODUCING 1,30,32,959 METERS CLOTHS. THUS, IT I S CRYSTAL CLEAR THAT THE ASSESSEE HAD SUPPRESSED PRODUCTION BY 36,9 6,114 METERS. AVERAGE RATE OF JOB CHARGES ARE RS.2.44 PER METER. THEREFORE, SUPPRESSED JOB CHARGES CALCULATED IS OF RS.90,13,63 8/- (36,94,114 X 2.44). THE ADDITION OF RS.90,13,638/- IS MADE TO THE TOTAL INCOME OF THE ASSESSEE. PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT ARE INITIATED SEPARATELY ON THIS ISSUE. 4. ON APPEAL, THE CIT(A) UPHELD THE REJECTION OF TH E BOOKS OF ACCOUNTS, HOWEVER, HE WAS OF THE OPINION THAT THE WORKING OF THE SUPPRESSED JOB CHARGES BY THE AO WAS HYPOTHETICAL WITHOUT ANY BASIS. HE T HEREFORE UPHELD THE REJECTION OF THE BOOKS OF ACCOUNTS, BUT DIRECTED TH E AO TO RESTRICT THE GP ADDITION TO 5% OF THE TOTAL TURNOVER. ACCORDINGLY, HE UPHELD THE ADDITION OF RS.11,40,700/- AS AGAINST THE ADDITION OF RS.90,13, 638/- MADE BY THE AO. THE RELEVANT FINDINGS OF THE CIT(A) READ AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS AND HAVE PERUSED THE DETAILS FILED BEFORE ME. IT IS SEEN THAT GROSS PROFIT OF THE APP ELLANT HAS GONE DOWN BY 5.85% AND THE REASONS GIVEN FOR THE SAME ARE THAT T HERE WAS A STRIKE IN THE MONTH OF APRIL & MAY AND THE EXEMPTION OF ELECT RICITY DUTY HAS BEEN SHOWN IN P&L ACCOUNT. WHILE THE FIRST REASON APPEA RS LOGICAL, I DO NOT ITA.NO.965/AHD/2007 WITH CO NO.102/AHD/2007 -4- UNDERSTAND AS TO HOW THE CONSUMPTION OF ELECTRICITY WOULD AFFECT GROSS PROFIT RATIO. IT IS ALSO SEEN THAT THE APPELLANT I S NOT MAINTAINING STOCK REGISTER OF COLOURS AND CHEMICALS AND THEREFORE THE EXACT CONSUMPTION OF THE MOST IMPORTANT RAW MATERIAL IN APPELLANTS B USINESS CANNOT BE RELIED UPON. IT IS ALSO SEEN THAT THE PRODUCTION H AS INCREASED IN THE CURRENT YEAR COMPARED TO LAST YEAR AND THE RATIO OF FIXED EXPENDITURE WOULD GO DOWN WHEN THE PRODUCTION INCREASES. I AM ALSO IN AGREEMENT WITH THE AO THAT THE COST OF COLOUR & CHEMICALS WHI CH IS STATED TO HAVE INCREASED BY THE APPELLANT IS NOT GIVING THE TRUE A ND CORRECT PICTURE. THE AO BY COMPARISON OF VARIOUS COLOURS & CHEMICALS IN AY 2002-03 & AY 2003-04 HAS WORKED OUT THAT THE APPELLANTS CLAI M WAS NOT CORRECT IN THIS RESPECT. FURTHER, THE DIFFERENCE IN ACCOUNTS OF THE APPELLANT VIS-A- VIS THE THIRD PARTY HAVE NOT BEEN SATISFACTORILY EX PLAINED AND THEREFORE I AM OF THE CONSIDERED VIEW THAT TRUE AND CORRECT PRO FITS OF THE BUSINESS COULD NOT BE ASCERTAINED FROM THE BOOKS OF ACCOUNTS AND THE AO HAS RIGHTLY RESORTED TO THE PROVISIONS OF SECTION 145(3 ) OF THE IT AC IN REJECTING THE BOOK RESULTS. HOWEVER, I DO NOT AGRE E WITH THE WORKING OF SUPPRESSED PRODUCTION AS CALCULATED BY THE AO. THE AO HAS APPLIED A MATHEMATICAL FORMULA REGARDING AVERAGE PER DAY PROD UCTION BY A CHAMBER MACHINE AT 12500 METERS AND SINCE THE APPEL LANT OWNED SEVEN CHAMBERS, THE AO HAS CALCULATED PRODUCTION FOR 300 DAYS AT 13032959 METERS. THIS IS ONLY A HYPOTHETICAL SITUATION AND IT IS ALSO NOT UNDERSTOOD AS TO WHY THE AO HAS ADOPTED THE FIGURE OF 300 DAYS IN THE YEAR. HOWEVER, SINCE THE BOOK RESULTS CANNOT BE RE LIED UPON, THE ONLY COURSE LEFT IS TO ESTIMATE GROSS PROFIT. IT IS SEE N THAT THERE IS A FALL IN GP TO THE EXTENT OF 5.85% IN THE YEAR UNDER CONSIDERAT ION COMPARED TO LAST YEAR AND MARGIN OF 0.85% IN FALL IN GROSS PROFIT ON ACCOUNT OF STRIKE IN THE MONTH OF APRIL & MAY COULD BE JUSTIFIED. THERE FORE, I AM OF THE CONSIDERED VIEW THAT THE APPELLANT HAS NOT GIVEN AN Y CONVINCING REASONS FOR SUCH FALL IN GROSS PROFIT AND THEREFORE, IT WOU LD BE FAIR AND REASONABLE, IF THE ADDITION IS RESTRICTED TO RS.11, 40,700/- WHICH IS 5% OF THE TOTAL TURNOVER AT RS.2,28,13,959/- ON ACCOUNT O F DRASTIC FALL IN GP CLAIMED BY THE APPELLANT. 5. THE REVENUE AGGRIEVED BY THE RELIEF ALLOWED BY T HE CIT(A) IS IN APPEAL BEFORE US, WHILE, THE ASSESSEE AGGRIEVED BY THE ADD ITION OF RS.11,40,700/- SUSTAINED BY THE CIT(A) IS IN CROSS OBJECTION BEFOR E US. 6. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BO TH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THA T DURING THE UNDER CONSIDERATION, THERE WAS FALL IN GP. TO VERIFY THE CORRECTNESS OF THE TRADING ITA.NO.965/AHD/2007 WITH CO NO.102/AHD/2007 -5- RESULT, THE AO ISSUED NOTICE CALLING FOR INFORMATIO N UNDER SECTION 133(6) OF THE ACT TO VARIOUS PARTIES. THE NOTICES ISSUED TO TWEL VE PARTIES WERE RETURNED UN- SERVED AND THE DETAILS OF WHICH WERE GIVEN AT PAGE NO.2 OF THE ASSESSMENT ORDER AS UNDER: 1) SHIVALI ENTERPRISE 2) HARSHIDA TEXTILES 3) VALLABH TRADERS 4) GURIA TEXTILES 5) CLASSIC CREATIONS 6) GOVARDHAN SYNTHETICS 7) HARISH SILK MILLS 8) SUNIL SILK 9) RICHO TAFFETA CO. 10) K.K. TEXTILES 11) TEJAL ENTERPRISE 12) JAY AMBE BRUSH SERVICES TWENTY-ONE PARTIES DID NOT FURNISH INFORMATION CALL ED FOR UNDER SECTION 133(6). THE DETAILS OF SUCH PARTIES WERE GIVEN IN PAGE NO.3 AT PARA-(V) OF THE ASSESSMENT ORDER. THE ASSESSEE WAS CONFRONTED WITH THE RESULT OF THE ABOVE INQUIRY AND THE AO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE AS TO WHY THE BOOKS OF ACCOUNTS OF THE ASSESSEE SHOULD NOT BE REJ ECTED UNDER SECTION 145 OF THE I.T.ACT AND INCOME SHOULD NOT BE ESTIMATED. TH E ASSESSEE FURNISHED WRITTEN SUBMISSIONS BEFORE THE AO WHICH IS CONSIDER ED IN DETAILS BY THE AO VIDE PAGE NOS.6, 7, 8 AND 9 OF HIS ORDER, IN WHICH THE AO HAS POINTED OUT THAT THERE IS DISCREPANCY BETWEEN THE ACCOUNTS FURNISHED BY THE CERTAIN PARTIES WITH THE DETAILS FURNISHED BY THE ASSESSEE, AND THE ASSE SSEE WAS UNABLE TO RECONCILE SUCH DIFFERENCE. THE AO HAS ALSO POINTED OUT THAT CONSUMPTION OF COLOUR AND CHEMICALS WAS ALSO MORE IN THIS YEAR AS COMPARED TO PRECEDING YEAR AND THE ASSESSEE WAS NOT MAINTAINING DAY-DO-DAY QUANTITATIV E RECORD OF THE CONSUMPTION OF COLOUR AND CHEMICALS. CONSIDERING T OTALITY OF THE FACTS, THE AO REJECTED THE BOOKS OF ACCOUNTS AND ESTIMATED THE JO B CHARGES. THE ASSESSEE WAS UNABLE TO EXPLAIN THE DISCREPANCY POINTED OUT BY TH E AO, THEREFORE, THE CIT(A) UPHELD THE REJECTION OF THE BOOKS OF ACCOUNTS. EVE N BEFORE US, THE ASSESSEE ITA.NO.965/AHD/2007 WITH CO NO.102/AHD/2007 -6- COULD NOT EXPLAIN THE DISCREPANCY IN THE ACCOUNTS, AS POINTED OUT BY THE AO IN THE ASSESSMENT ORDER. WE THEREFORE UPHOLD THE FIND INGS OF THE LOWER AUTHORITIES SO FAR AS THE REJECTION OF THE BOOKS OF ACCOUNTS IS CONCERNED. HOWEVER, WE FIND THAT THE AO HAS WORKED OUT THE RECEIPT FROM JOB CHA RGES ON THE BASIS OF INSTALLED CAPACITY OF THE ASSESSEES FACTORY, PRESU MING 300 DAYS OF THE YEAR AS THE WORKING DAYS. SUCH WORKING BY THE AO IS PURELY HYPOTHETICAL. BEFORE THE AO, THE ASSESSEE HAS POINTED OUT THAT THERE WAS A S TRIKE IN THE MONTH OF APRIL AND MAY, 2003. EVEN IN OTHER MONTHS, THE FACTORY D ID NOT RUN ON EACH DAY AND THAT TOO AT THE OPTIMUM CAPACITY AS PRESUMED BY THE AO. WE ALSO FIND THAT AS PER THE AO HIMSELF THE JOB CHARGES RECEIVED HAS INC REASED FROM 157.49 LAKHS OF LAST YEAR TO RS.22.8.13 LAKHS. THUS, THERE WAS NO JUSTIFICATION FOR WORKING OUT THE RECEIPT ON HYPOTHETICAL BASIS BY THE AO. ADMIT TEDLY, THERE IS A FALL IN THE GP RATE FOR WHICH NO SATISFACTORY EXPLANATION IS GI VEN. THEREFORE, IN PRINCIPLE, WE APPROVE OF THE ORDER OF THE CIT(A) THAT ADDITION FOR FALL IN GP IS REQUIRED TO BE MADE. HOWEVER, AT THE TIME OF HEARING BEFORE US , THE LEARNED COUNSEL FOR THE ASSESSEE STATED THAT THE FIGURE OF THE FALL OF GP R ATE GIVEN BY THE AO IN THE ASSESSMENT ORDER IS FACTUALLY INCORRECT. HE HAS FU RNISHED THE FIGURE OF TURNOVER, GP AND GP RATIO AT PAGE NO.9 OF THE PAPER BOOK WHIC H READS AS UNDER: ACCOUNTING YEAR ASSESSMENT YEAR 2003-04 2004-05 2002-03 2003-04 TURNOVER 22813959 15749006 GROSS PROFIT 2214296 1791697 GROSS PROFIT RATIO 9.71% 11.37% NET PROFIT RATIO 6.95% 6.51% AS PER THE CHART, THE FALL IN THE GP IS LESS THAN 2 % AS COMPARED TO THE PRECEDING YEAR. HOWEVER, AS PER THE AO, THE FALL IN THE GP I S 5.8%. WHAT WAS THE ACTUAL GP DISCLOSED BY THE ASSESSEE IN THE PRECEDING YEAR AS WELL AS IN THIS YEAR IS REQUIRED TO BE VERIFIED AT THE END OF THE AO. WE T HEREFORE DEEM IT PROPER TO SET ASIDE THE ORDER OF THE AUTHORITIES BELOW AND RESTOR E THE MATTER BACK TO THE FILE OF THE AO AND DIRECT HIM TO MAKE GP ADDITION EQUIVALEN T TO THE FALL IN GP RATE AS ITA.NO.965/AHD/2007 WITH CO NO.102/AHD/2007 -7- COMPARED TO THE IMMEDIATELY PRECEDING YEAR. NEEDLE SS TO MENTION, HE WILL ALLOW OPPORTUNITY OF BEING HEARD TO THE ASSESSEE WH ILE GIVING EFFECT TO THIS ORDER. 7. IN THE RESULT, THE REVENUES APPEAL AS WELL AS T HE ASSESSEES CO ARE DEEMED TO BE PARTLY ALLOWED AS ABOVE. ORDER PRONOUNCED IN OPEN COURT ON 6 TH AUGUST, 2010. SD/- SD/- (T.K. SHARMA) JUDICIAL MEMBER (G.D. AGARWAL) VICE-PRESIDENT PLACE : AHMEDABAD DATE : 06-08-2010 VK* COPY OF THE ORDER FORWARDED TO: 1) : APPELLANT 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR/AR, ITAT, AHMEDABAD