Income Tax Appellate Tribunal - Mumbai
Armour Chemicals Ltd. vs Joint Cit, Spl. Range-6 on 23 July, 2007
ORDER
V.K. Gupta, Accountant Member.
1. This appeal filed by the assessee is directed against the order of Commissioner (Appeals), XLII, Mumbai, dated 29-3-2001 for the assessment year 1995-96.
2. We have heard both the parties and have also perused the records and other applicable legal position, Grounds raised by the assessee read as under:
Gr. No. 1: The Commissoner of Income-tax (Appeals) has erred in law and facts on records in confirming the assessing officer's action of rejecting the book results and estimating the average net profit rate @ 3 per cent amounting to Rs. 83,57,970 which is totally unrealistic and unjustifiable on the facts and circumstances of the case.
2. Without prejudice to the above, in case of rejection of book results and estimation of N.P. rate, the 'depreciation' as well as interest should be separately deducted as has been held in various decisions. As againstthis, the assessing officer had relied on CBDT Circular No. 29-D, dated 31-8-1965 and allowed only 'depreciation'. The Commissioner (Appeals) has rejected the appellant's contention of allowing both i.e. 'depreciation' and 'interest' without giving any cogent reason for the same.
3.Without prejudice as regards disallowance under Section 43BRs. 1,02,10,450 being interest to financial institutions, the learned Commissioner (Appeals)has wrongly confirmed the assessing officer's action of above disallowance without appreciating the f act that when book result is rejected and N.P. rate is applied without deducting interest there is no scope for making thedisallowance for said interest under Section 43B.
4. The Commissioner (Appeals) has wrongly confirmed the assessing officer's action of making disallowance under Section 43 B for unpaid bonus Rs. 8,21,264 even after applying N.P. rate.
5. The Commissioner (Appeals) has wrongly confirmed the assessing officer's action of making disallowance under Section 43B for unpaid PF/EPF Rs. 46,219 even after applying N.P. Rate.
6. The Commissioner (Appeals) has wrongly confirmed the assessing officer's action of making disallowance under Section 40A(3) amounting to Rs. 1,06,746 even after applying N.P. rate.
7. The Commissioner (Appeals) has wrongly confirmed the assessing officer's action of not allowing deduction under Section 80-1 for the company's industrial undertaking at Mandideep Distt. Raison (M.P.) despite the fact that such deduction was allowed in earlier year's assessment under Section 143(3) and also by appellate authorities and the necessary audit report for this year was duly submitted before the assessing officer. The assessing officer had disallowed and confirmed by the Commissioner (Appeals) without bringing any material on record to the contrary.
8. The Commissioner (Appeals) has erred in law and f acts on records in not disposing off the additional grounds of appeals (relating to deduction under Section80HHC) which were submitted to her on 5-10-2000 i.e., much before the date of passing the appellate order.
4. The facts, in brief, relating to Ground Nos. 1 and 2 are that the original assessment was completed under Section 143(3) of the Act at the total income of Rs. 60,45,920 as against the loss return filed by the assessee. On appeal, the learned Commissioner (Appeals) set aside the entire assessment and directed the assessing officer to pass fresh assessment order. In the second proceedings, the assessing officer again rejected the books of account and thereafter analysed the contentions raised by the assessee in respect of loss suffered by it and held that in the facts of the case, estimation of net profit was more appropriate instead of gross profit because the expenses claimed were also not ascertainable. Accordingly, the assessing officer determined the average net profit before depreciation at Rs. 83,57,970. The relevant findings of the assessing officer are as under:
Thus, in the case of this assessee the correct thing to estimate is net profit and not gross profit because even the expenses are not reliable as has been shown above. In the assessment order for assessment year 1994-95also the same method was adopted and the average. G.P. rate of earlier five years was considered before depreciation and addition on this account was confirmed by the Commissioner (Appeals). However, considering the facts that the purchases prices of raw material have either remained same orreduced slightly but the sale prices have reduced considerably comparedto last year and also that the case of the assessee has been admitted bythe BIFR where the proceedings are taking place and considering other submissions made by the assessee for reduction in profit margins, theaverage profit are before depreciation is adopted at a round figure of3 per cent. The assessee has shown sales and other income of Rs. 3,747.50lakhs. However, it has been represented and shown by the assessee thatthis sales consists of captives sales being internal branch-wise transfer ofRs. 961.51 lakhs. This sales is deducted from the above sales and otherincome and the average rate of 3 per cent is applied on sales and otherincome of Rs. 2,785.99 lakhs. Therefore, the average net profit before depreciation amounts to Rs. 83,57,970.
The assessing officer also rejected the contention of the assessee that profit should have been arrived at after taking into consideration interest also because quantification of the interest was not possible in the facts of the case and also as per the Circular issued by the CBDT, income was to be estimated subject to allowance of depreciation only. Aggrieved by this, the assessee carried the matter into appeal before the learned Commissioner (Appeals). The learned Commissioner (Appeals), also confirmed this action of assessing officer and re- corded his findings as under:
I have considered the facts. I agree with the assessing officer that the facts of this case invites the estimation of net profit since the books of account are not reliable and. the expenses claimed by the appellant hence is also unreliable. In the appellate order relating to assessment year 1994-95, the Commissioner (Appeals) has confirmed the average rate of last 5 years of 7.04 per cent before depreciation. The assessing officer has estimated the average profit rate before depreciation at 3 per cent after taking into consideration the decline in sale prices as against a comparatively lesser decline in purchase. The average profit rate is reasonable considering the facts cited supra.
5. The learned Counsel, appearing on behalf of the assessee, narrated the factual matrix of the case and strenuously argued the matter. He also drew our attention to paras 9 and 10 of the paper book containing the details of past/future history of the operations carried on by the assessee and based upon these details he contended that downfall started from the assessment year 1993-94 itself and quantum of borrowings increased which resulted into substantial losses and eventually the assessee company was ref erred to BIFR. Hence, there was no justification f or estimating net profits at the rate of 3 per cent.
6. The learned D.R., on the other hand, placed strong reliance on the order of assessing officer.
7. We have considered the submissions made by both sides, material on record and orders of authorities below. Admittedly, the assessee's books of account have been rejected by the assessing officer and such rejection of books of account has not been challenged. Thus, it remains only a question of estimation of net profit. The assessee has brought on record sufficient material to show that there has been decline in the profits over the years due to unfavourable market conditions, hence, in the facts of the case, we are of the considered opinion that interests of justice would be met if the rate of estimation of net profit is reduced to 1.5 per cent instead of 3 per cent as applied by the revenue Authorities. We order accordingly. Thus, Ground No. 1 stands partly allowed.
8. Ground No. 2 is connected with Ground No. 1 wherein the only grievance of the assessee is that the interest paid by the assessee should have been further allowed after computing the net profit on estimated basis. However, as per the concise ground, the assessee appears to be aggrieved on both counts ie. non-consideration of depreciation as well as interest. In our opinion, this is f actually incorrect as the assessing officer himself has allowed depreciation out of the estimated net profits, hence, we shall only consider the issue of further allowance of interest from the estimated profits. The learned Commissioner (Appeals) has not accepted the claim of the assessee in this regard for the reason that interest in the case of the assessee was not separately ascertainable, hence, the case of the assessee was distinguishable on this facts from the facts of the case relied on by the assessee.
9. The learned Counsel, appearing on behalf of the assessee, narrated the factual matrix of the case and placed reliance on the following decisions:
(i) CIT v. Jain Construction Co. .
(ii) CIT v. Vinod Kumar Bhatia (1995) 211 ITR 2532 (Punj. & Har.)
(iii) ITO v. Amar Singh Krishan Chander (2001) 71 TTJ (Jodh.) 182
(iv) ITO v. Khosla Construction Co. (2002) 75 TTJ (Asr.) 515.
10. The learned DR on the other hand, contended that assessee had prepared P&L Account wherein interest had been debited in the normal course and this practice was followed consistently, hence, net profit rate when estimated by the Assessing Officer as compared to the net profit rate of the earlier years, the interest stood duly considered, hence, there was no case for any further deduction. The learned DR further contended that in the case of Jain Construction Co. (supra), only depreciation was involved and in the present case, the depreciation had already been given by the Assessing Officer after the estimation of net profit, hence, this case was not of any further help to the assessee. In respect of the case of Vinod Kumar Bhatia (supra), the learned D.R. contended that in this case the assessee had himself estimated profits and thereafter, the assessee had claimed interest there from along with depreciation which was not the case here because in this case the books of account had been rejected and the estimation had been done by the Assessing Officer after considering all the facts, hence, this case was also distinguishable on facts and, accordingly, it did not help the assessee in any manner.
11. We have considered the submissions made by both sides, material on record and orders of authorities below. The computation of net profit as per books of account takes into consideration both interest and depreciation, hence, the results as shown by the assessee over the years are after due consideration of both the factors. In the present case, the net profit rate has been estimated as the expenses were also not verifiable, hence, it cannot be said that interest has not been taken into consideration because such net profit rate is much less as compared to net profit rate shown in the earlier year. Also, net profit rate has been further reduced by us to 1.5 per cent, hence, there remains no scope for any further deduction there- from. In this view of the matter, we reject this ground of the assessee.
12. In Ground Nos. 3,4, 5 and 6, the assessee is aggrieved by the decision of learned Commissioner (Appeals) in confirming the action of the assessing officer in making disallowance under Sections 43B and 40A(3) of the Act after estimation of net profit. The assessing officer made disallowances under Section 43B of the Act on account of Bonus, PF, EPF and interest to financial institutions and also made disallowance under Section 40A(3) of the Act in respect of cash payment made in excess of Rs. 10,000 from the net profit before depreciation. Aggrieved by this, the assessee carried the matter into appeal before the learned Commissioner (Appeals). The learned Commissioner (Appeals) held that the assessing officer had made disallowance under Section 40A(43) of the Act based upon the decision of the Tribunal in the case of ITO v. D.D. Hazare (1994) 48 ITD 595 (Bom.) wherein it was held that in such circumstances disallowance under Section 40A(3) of the Act could be made. The learned Commissioner (Appeals) also analysed the nature of other disallowances and confirmed the action of Assessing Officer. Still aggrieved, the assessee is in appeal before us.
13. The learned Counsel, appearing on behalf of the assessee, narrated the factual matrix of the case and placed strong reliance on the decision of the Hon'ble A.P. High Court in the case of lndwell Constructions v. CIT (1998) 232 ITR 776 wherein it was held that when the books of account had been rejected and income was estimated then, all deductions under Section 29 of the Act were deemed to have been taken into account while making estimation including the disallowance under Section 40 of the Act. The learned Counsel thereafter drew our attention to the assessment order wherein these disallowances were made after the estimation of the net profit and contended that this amounted to double addition and also net profit rate not stood at thesarae rate at which the assessing officer was estimated the profits.
14. The learned D.R., however, placed strong reliance on the order of assessing officer and learned Commissioner (Appeals).
15. We have considered the submissions made by both sides, material on record and orders of authorities below. Admittedly, in the present case, the assessing officer has estimated the net profit and not the gross profit because the expenses are not reliable, hence, it is the natural corollary of the deductions permissible under Sections 29 to 44 have been considered. The assessing officer has also giving a finding, while making the disallowances, that statutory disallowances, have nothing to do with estimation of profit, which means that the assessing officer has not taken into consideration the statutory disallowances to be made in the estimation of profit, which apparently means, that once a net profit rate is estimated at an income higher than the income shown by the assessee and where the gross receipts are not being disturbed then, in such situation, it is only a result of implied disallowances of certain expenses, hence, the logic of the assessing officer in this regard appears to be unjustified. However, we make it clear that it will depend upon the nature of disallowance, for example; disallowance under Section 40A(3) can be made, but the amount of such disallowance should be reduced from the estimated net profit so as to make a disallowance thereafter otherwise it would amount to double addition. This position would be valid even if there is no specific mention of nature of expenses being disallowed. We would like to further point out that the situation in regard to Section 43B stands on a different footing because even if the trading results are not rejected, then, in that situation, the disallowances under Section 43B have to be made invariably in view of the provisions of this Section. Thus, even in the case of estimated profits, disallowances under Section 43B cannot be deemed to have been considered while making such estimation. Accordingly, disallowances under this Section have to be made after estimation of profits without first deducting such amounts from estimated profits. In view of the foregoing, we hold that disallowance made by the assessing officer under Section 43B are liable to be confirmed and amount equal to disallowance made under Section 40A(3) is required to be reduced from the estimated profits so as to avoid double disallowance. Accordingly, Ground Nos. 3, 4 and 5 stands dismissed and Ground No. 6 stand allowed.
16. In Ground No. 7, the assessee is aggrieved by the denial of deduction under Section 80-1 of the Act to the assessee in respect of company's industrial undertaking at Mandideep Distt. Raison (M.P.).
17. The facts, in brief, are that the assessee claimed deduction under Sections 80-1 and 80-IA of the Act vide its letters dated 27-1-1998 and 23-10-1997 and a note was also attached with the computation of income wherein it was mentioned that in the absence of taxable income, depreciation under Section 32 and deduction under Section 80HHC was not claimed. However, no mention was made therein with regard to deduction under Section 80-1 or 80-IA of the Act. On a query from the Assessing Officer, the assessee submitted necessary details. However, the assessing officer held that since the assessee's books of account were not reliable, hence, profit relating to that unit could not be ascertained. It was also held by the assessing officer that other conditions were not satisfied in the absence of any explanation by the assessee in this regard. Aggrieved by this, the assessee carried the matter into appeal before the learned Commissioner (Appeal) who also upheld the action of assessing officer and recorded his findings as under:
I have considered the submissions of the appellant which is very vagueand general in nature. The appellant's main argument is that they hadsubmitted necessary audit report. The appellant also argued that theirclaim for earlier years were allowed. I find from the discussion of thisissue by the assessing officer that the Tax Audit report itself indicate thatthe accounts have not been properly maintained. The Audit Report hasnot certified the other conditions for granting deduction under Section80-1 are fulfilled. A specific mention to the effect being stated in the Tax Audit Report submitted by the appellant clearly indicates as to why the assessing officer has rejected the appellant's claim. The decision of the assessing officer is hence confirmed.
Aggrieved by this, the assessee is in appeal before us.
18. The learned Counsel, appearing on behalf of the assessee, narrated the factual matrix of the case and contended that in assessment year 1992-93, deduction was claimed originally under Section 80-IA, however, deduction under Section 80-1 was allowed in respect of the very same unit, hence, the deduction under Section 80-1 was allowable. The learned Counsel also placed reliance on the decision of the Tribunal in CIT v. Paul Bros. (1995) 79 Taxman 378 (Bom.).
19. The learned DR, on the other hand, placed strong reliance on the orders of revenue Authorities.
20. We have considered the submissions made by both sides, material on record and orders of authorities below. Admittedly, both revenue Authorities have disallowed deduction under Section 80-1 for the reason that profits for eligible undertaking could not be computed. In the proceedings before us, the learned Counsel has not been able to establish this fact that how deduction under Section 80-1 can be given when the profits of the said unit cannot be computed. In this view of the matter, we do not find any deficiency in the orders of revenue Authorities, accordingly, the same is confirmed. Thus, this ground of the assessee is rejected.
21. Ground No. 8 was not pressed, hence, dismissed as not pressed.
22. Ground No. 9 is general in nature, hence, no specific decision is called thereon.
23. In the result, appeal filed by the assessee stands partly allowed.