Income Tax Appellate Tribunal - Jaipur
Suresh Kumar Bajoria vs Income Tax Officer on 28 September, 2007
Equivalent citations: (2008)113TTJ(JP)364
ORDER
B.P. Jain, A.M.
1. Both these appeals are the cross-appeals filed against the order of the learned CIT(A) dt. 26th March, 2007 for the asst. yr. 2004-05.
2. The ground No. 1 of the assessee is relating to rejection of books of accounts and invoking the provisions of Section 145(3) of the Act.
The ground No. 2 of the assessee is relating to estimation of gross profit of the manufacturing business of the assessee eligible for deduction under Section 80-IC(2)(a)(iii) at Rs. 67,73.006.
The ground No. 3 of the assessee is relating to restricting the claim of deduction under Section 80-IC(2)(a)(iii) to Rs. 2,70,546 against deduction claimed at Rs. 3,32,89,399.
The ground No. 4 of the assessee is relating to exclusion of a sum of Rs. 2,90,51,228 from the computation of deduction under Section 80-IC(2)(a)(iii).
The solitary ground of the Revenue is that the learned CIT(A) has erred in deleting the addition of Rs. 25,00,000 made under Section 69C.
3. We have heard the parties. The brief facts of the case are that the assessee is proprietor of M/s Koolmint Manufacturing Company, Assam. The said concern is manufacturer of menthol, DMO and other essential oils. During the year, the said concern has declared a turnover of Rs. 19,35,14,478 and a gross profit of Rs. 3,97,91,859 at a GP rate of 20.56 per cent. The manufacturing unit is at Assam and the assessee is having branch office in Delhi. The AO at p. 2 of his order has stated that the raw material which is used in the industry is mentha oil which comes from the grass named mentha arvensis. The main area of this crop is Western part of Uttar Pradesh like Moradabad, Sambhal, Chandausi. Rampur, Kashipur and Badayun and some other places are Barabanki and Sitapur. The farmers of this particular area produce mentha arvensis and after a routine process find oil from the grass which is called mentha oil. The farmers sell their oil either to the wholesaler or to the industries as per their convenience. It is stated that mostly purchases of raw material are through Delhi branch from the farmers directly. After necessary testing, Delhi branch transfers the material to head office (Assam unit) on the goods transfer memo. After taking the satisfactory delivery of the material, shift the material into storage tank for filtration. After filtration, the material is shifted into freez machines for deep freezing and other freezing till necessary chilling point takes out the material for centriguging for separation of DMO. After this process, the material is shifted into mixing tank for mixing and from mixing tank to drums for packing. After packing, the material is ready for dispatch. The AO observed from the examination of the details furnished and records produced that the income generated through business establishments in North East States is eligible for deduction under Section 80-IC of the Act and therefore, the assessee has declared unreasonably excessive profits by way of raising sales invoices at exorbitant higher rates than the prevailing market rates as well as suppressing actual expenses incurred. The assessee has raised the invoices to the sister concern at exorbitant rates to claim more deduction of profits under Section 80-IC of the Act and on the other hand, to reduce the profits of the sister concern. The AO observed that the assessee has charged the rates from the sister concern at higher rates than published in the newspaper i.e. The Economic Time as per Table A at p. 4 of his order. As per Table B at p. 4 of AO's order, the sister concern M/s Kaizen Organics (P) Ltd. has been purchasing DMO from other concerns at a lower rates. The AO has observed in his order that the decision of the AO in the case of the sister concern where the sister concern has declared GP rate of 6.75 per cent and the AO has estimated the sale at 10 per cent in the asst. yr. 2003-04. The AO further observed that assessee has suppressed various expenses vide pp. 8 and 9 of his order. The AO also observed that the assessee has made the purchases in cash in violation of provisions of Section 40A(3) of the Act.
Therefore, the AO for the reasons mentioned hereinbefore rejected the books of accounts of the assessee by invoking the provisions of Section 145(3) of the Act.
4. The assessee had claimed deduction under Section 80-IC(2)(a)(iii) at Rs. 332,89,399. Necessary audit report in Form No. 1GCCCB under Rule 18BBB was filed along with the return. The profits of the assessee included a sum of Rs. 2,90,51,228 as refund of excise duty on account of exemption from levy of duty. The gross profit declared by the assessee was Rs 3,97,91,859. The AO at the first instance excluded a sum of Rs. 2,90,51,228 from the gross profit on the alleged plea of the same having not been derived from industrial undertaking. After excluding the said sum (bringing the gross profit at Rs. 1,07,40,631 i.e. Rs. 3,97,91,859 - Rs. 2,90,51,228), he applied a GP rate of 3.5 per cent holding the same to be reasonable profit derived from industrial undertaking. Thus gross profit of Rs. 67,73,006 (3.5 per cent of Rs. 19,35,14,478) was held to be business income and rest amount of Rs. 39,67,625 (i.e. Rs. 1,07,40,631 - Rs. 67,73,006) was held to be resulting from overbilling of sales and suppression of expenses. Out of this amount, he proceeded to tax Rs. 25,00,000 under Section 69C. Out of the gross profit of Rs. 67,73,006 expenses claimed amounting to Rs. 65,02,460 were allowed and on the balance sum i.e. Rs. 2,70,546 deduction under Section 80-IC(2)(a)(iii) was allowed by the AO. The learned CIT(A) confirmed the applicability of provisions of Section 145(3) of the Act but however, he deleted the addition of Rs. 25 lacs under Section 69C of the Act for the reasons mentioned in his order.
5. We have perused the facts of the case. The AO has made the rejection of the books of accounts by invoking the provisions of Section 145(3) of the Act mainly because of the overbilling by the assessee, suppression of expenses and cash purchases. In this regard, the learned Authorised Representative has invited our attention to the observation of the AO at p. 3 of his order that after making various enquiries and investigation, the fact which came on the surface is that the assessee is dealing in a product of which similar industry is not available and further the product sold to sister concern is not sold to any other concern so as to reach the conclusion regarding the rates charged per kilogram. The learned Authorised Representative has further invited our attention to the observation of the AO at p. 2 of his order that raw material used in the industry is the grass named as mentha arvensis and available in the Western part of Uttar Pradesh etc. The assessee is purchasing the raw material from the farmers directly through Delhi branch.
6. Therefore, the observation of the AO on one hand that the product manufactured by the assessee is not available in the industry and on the other hand, the AO is comparing the rates in newspaper i.e. The Economic Times. Therefore, the observation of the AO at p. 3 of his order that the rates in the newspaper are the market rates of the product of the assessee, cannot be said as correct and against the facts of the case, observed by the AO in his order as mentioned hereinbefore. The learned Authorised Representative argued that the product manufactured by the assessee has more purity than the product manufactured in the industry and therefore, the rates are more than the rates published in The Economic Times. Moreover, the rates quoted in the newspaper cannot be made comparable because the same are exclusive of packing, forwarding, freight and insurance while the assessee is delivering the goods on FOR basis including the cost of packing, freight and insurance charges. If the costs of all the factors are deducted, then the rate of the product of the assessee comes at Rs. 330 per kg. as compared to Rs. 346 published in the newspaper. The fact, that the assessee is producing the product which is more pure than the product manufactured by the other manufacturer has also to be taken into consideration. The observation of the AO that the product is purely agricultural and the assessee purchases the same directly from the farmers. Therefore, the learned Authorised Representative has rightly pointed out that the purchases are covered under the exception to Section 40A(3) of the Act under Rule 6DD(f) of the IT Rules. The AO has failed to point out the specific defect in the expenses incurred by the assessee. Therefore, the AO is not justified in invoking the provisions of Section 145(3) of the Act. Hence, the decision of the learned CIT(A) is reversed on this issue.
7. The learned Authorised Representative has argued that the unit of assessee is totally exempt from the excise duty but the manner to give the effect to this exemption provides that the duty will be paid in cash for allowing the clearance of goods and thereafter by 15th of the following month, the said amount will be returned to the manufacturer. The said exemption is as per Notification No. 33/99-C.E. dt. 8th July, 1999 (PB-1). The procedure is adopted for administrative convenience and the unit remains exempt from excise duty ab initio and the object is to promote the industrialization of North Eastern States. The excise duty paid is debited to the excise duty and the refund is also shown to the credit in the P&L a/c i.e. both the payments and refund are shown in the P&L a/c. The payment is not an expenditure and the refund is not an income but realization of an asset. The payment of excise duty is neutralized by refund of the same. The amount does not form the part of the net profit. The AO has wrongly observed that the assessee is claiming the refund of the excise duty of Rs. 2,90,51,228 as income whereas the deduction under Section 80-IC(2)(a)(iii) of the Act can only be claimed by the assessee in respect of the profits derived from manufacturing. The AO relied upon the decisions in the cases of CIT v. Sterling Foods , Cambay Electric Supply Industrial Co. Ltd. us. CIT , CIT v. Ritesh Industries Ltd. (2004) 192 CTR (Del) 81. The learned Authorised Representative further argued that Section 80-IC is an incentive provision meant for promotion of industrial growth as per CBDT Circular No. 421, dt. 12th Aug., 1985 . The learned Authorised Representative argued that the present case is quite different from the cases relied upon by the AO. The learned Departmental Representative on the other hand supported order of the
8. After perusal of the facts, we find that the assessee is exempt from excise duty vide Notification No. 33/99-CE, dt. 8th July, 1999. To claim the exemption, the assessee has to deposit excise duty with the Excise Department in cash for allowing clearance of goods and the payment so made is debited to excise duty account which is shown as a debit in the P&L a/c. Similarly, after the payment of excise duty and clearance of goods, the said excise duty is returned to the manufacturer by 15th of the following month. What has been refunded to the assessee is the amount which has been paid by him. The excise duty payment debited to P&L a/c and subsequent refund credited to P&L a/c do not give rise to income. Mere book entries do not give rise to any income of the assessee. When payment of excise duty is shown in the P&L a/c, then refund of excise duty has to be taken into consideration to the credit of P&L a/c to neutralize the entry. By doing so, the assessee is not claiming any extra income but the realization of the asset, but through the P&L a/c. Therefore, the case law relied upon by the AO are not applicable in the present case since the issue in the present case is quite different and distinguishable from the cases relied upon by the AO. The learned Authorised Representative has rightly relied upon the decision of Delhi Bench in the case of Asstt. CIT v. Dharampal Premchand in ITA No. 4031/Del/2003, dt. 31st Jan., 2006 [reported at (2008) 113 TTJ (Del) 290-- Ed.] where the facts are similar to the facts in assessee's case and the issue has been decided in that case in favour of the assessee that by credit of the excise duty refund with P&L a/c, the net effect is nil. The assessee was refunded the same amount which he paid under the modalities for giving effect to notification and mere book entries cannot give rise to the income to the assessee. Therefore, following the decision in the case of Asstt. CIT v. Dharampal Premchand (supra), the assessee is allowed the excise duty refund for the deduction under Section 80-IC of the Act as claimed by the assessee and deduction of Rs. 3,32,89,399 under Section 80-IC is directed to be allowed. As mentioned hereinbefore, the AO has not brought any material on record with regard to the suppression of the expenses and the assessee has also not made the overbilling and all the purchases made are genuine and the assessee is allowed the exemption of excise duty and therefore, the AO in the absence of any material cannot estimate the gross profit other than declared by the assessee. No addition on account of suppression of expenses under Section 69C can be made by the AO. Also the addition made on account of estimation of gross profit is directed to be deleted. Thus ground Nos. 1, 2, 3 and 4 of the assessee are allowed and the solitary ground of the Revenue is dismissed.
The ground No. 5 of the assessee is relating to disallowance of interest amounting to Rs. 86.810.
9. The brief facts of the case are that the assessee is having separate balance sheet and P&L a/c of M/s Koolmint Manufacturing Company and M/s Arvind International and the loan has been taken for personal need and the interest has been paid and claimed on the same amounting to Rs. 86,810. The AO has disallowed the same which was confirmed by the learned CIT(A).
We have perused the facts of the case. The loan taken by the assessee in his personal capacity from the proprietorship concern for personal need, has to be treated as withdrawal of the capital and therefore, no interest can be allowed to the proprietorship concern in this respect. Therefore, we find no infirmity in the order of the learned CIT(A) who has rightly confirmed the action of the AO. Thus ground No. 5 of the assessee is dismissed.
The ground No. 6 of the assessee is relating to charging of interest under Section 234B, 234D and 244A of the Act.
10. The charging of interest under Sections 234B, 234D and 244A(3) is mandatory in nature. The AO is directed to pass a speaking order but by providing reasonable opportunity of being heard to the assessee in view of Special Bench decision in the case of Motorola Inc. v. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB). The ground No. 6 of the assessee is allowed for statistical purposes.
11. The ground No. 7 of the assessee is general in nature which needs no adjudication by us.
In the result, the appeal of the assessee in ITA No. 592/Jp/2007 is partly allowed and the appeal of the Revenue in ITA No. 691/Jp/2007 is dismissed.