Income Tax Appellate Tribunal - Ahmedabad
Ishan Dyes & Chemicals, Borsad vs Assessee on 7 November, 2012
1 ITA No 1582 & 1862/AHD/2010
A.Yr.. 2005-06.
IN THE INCOME TAX APPELLATE TRIBUNAL "D "BENCH, AHMEDABAD
(BEFORE SHRI MUKUL KR.SHRAWAT JM & SHRI ANIL CHATURVEDI A.M.)
I.T.A. No. 1582 /AHD/2010.
(Assessment Year: 2005-06)
Assistant Commissioner of Vs. M/s. Ishan Dyes & Chemicals
Income Tax, Circle-3, Limited,
3rd Floor, Aayakar Bhavan, Taluka Borsad,
Race Course Circle, District Anand.
Baroda.
(Appellant) (Respondent)
I.T.A. No. 1862/AHD/2010.
(Assessment Year: 2005-06)
M/s. Ishan Dyes & Chemicals Vs. Assistant Commissioner of
Limited, Income Tax, Circle-3,
Taluka Borsad, 3rd Floor, Aayakar Bhavan,
District Anand. Race Course Circle,
Baroda.
(Appellant) (Respondent)
PAN: AAACI 4911R
On behalf of Revenue : Mr. T.Shankar,Sr. D.R.
O behalf of Assessee : Mr. B.T.Thakkar.
आदे श)/ORDER
(आदे Date of hearing : 07-11 -2012 Date of Pronouncement : 04-01-2013 PER: SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER.
2 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
These two appeals are filed against the order of Ld. CIT (A)-V, Baroda dated 29-3-2010 one filed by the Revenue and other by the assessee for the assessment year 2005-06.
2. The ground raised by the Revenue reads as under.
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in restricting the addition on account of G.P. @ 5% to 2% on the ground that the turnover for the year has been reduced compared to preceding year. The CIT (A) erred in not appreciating the fact that the G.P. for the immediately preceding year was 10.84% and that the substantially increased figures show by the assessee in manufacturing expenses like power, fuel addition other expenses has resulted the G.P. in negative figure."
3. Ground raised by the assessee reads as under
" The Ld. CIT (A)-V, Baroda erred in law addition on facts in partly confirming the addition on account of gross profit. The confirmation of such addition of Rs.24.50 lakhs being unjust and unlawful be deleted now."
4. Assessee has also raised additional ground as under:-
"The Ld. CIT(A) erred in law and on facts in confirming disallowance, made by ITO u/s. 40(a)(ia) of the Act of Rs.60,27,878/-."
5. Since 1st Ground of assessee's appeal and 1st ground of Revenue are inter-connected, both are considered together.
6. The facts as culled out from the orders of authorities below are as under.
3 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
7. Assessee is a company engaged in the business of manufacturing of chemicals. It filed its return of income on 31-10-2005 declaring total loss of Rs.38,08,629/-. The case was selected for scrutiny and thereafter the assessment was framed u/s.143(3) vide order dated 24-12-2007 and the total income was determined at Rs.1,10,24,060/- after making various additions/disallowances.
8. Aggrieved by the order of A.O., assessee carried the matter before CIT (A). CIT (A) vide his order dated 29-3-2010 partly allowed the appeal of the assessee. It is against the aforesaid order of CIT (A), the assessee and Revenue are now in appeal before us.
1st Ground of the Revenue and assessee relates to the addition on account of Gross Profit.
9. On perusing the Profit and loss account, the A.O. observed that there was fall in sale as compared to that of immediately preceeding year. He further observed that despite there being no change in the line of activity of the assessee nor there being any change in products being manufactured, there has been change in G.P. which according to him should not have happened. He further observed that there was increase in power and fuel cost and other manufacturing expenses when compared to the immediately preceeding year. The assessee was asked to justify the fall in G.P. The assessee interalia submitted that it was facing financial difficulties due to which the assessee could not manufacture the goods and therefore the assessee had started to function as job worker which was not very 4 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
profitable and therefore there was fall in G.P. The explanation of assessee was not found acceptable to A.O. He made addition by holding as under:-
" The comparative sales and manufacturing expenses for the A.Y. 2005-06 and 2004-05 is as under:-
Asst. Year 2005-06 2004-05
Sales 122492506 173082338
Power & Fuel 27204843 [22.20%] 30055755 [17.36%]
Other Mfg.Exp. 9865405 [8.05% ] 11010356 [6.36%]
From the above it can be clearly seen that though the assessee is carrying out same business as in preceding year, the ratio of power and fuel expenses with that sales has increased from 17.36% in the preceding year to 22.20% during the year under consideration. Similarly the ratio of Mfg. expenses with that of sales has increased from 6.36% to 8.05%.The assessee has not brought anything on record to justify the negative GP ratio except for the general argument of increase in material cost and constant sale price.
The second argument of assessee is fluctuation in raw material price. This argument is of very general nature. Assessee has not produced any evidence in support of this argument. Further, it is well accepted business principle that whenever there is increase in input cost, the sale price also goes up and this does not affect the profit margin of assessee. The assessee's plea on this account is without any force and cannot be accepted.
Here it is pertinent to note that during the course of assessment proceedings for the assessment year 2004-05, the assessee could not justify the fall in GP rate as compared to the preceding year and the assessing Officer had added the GP difference while finalizing the assessment.
In absence of any specific justification towards the increase in manufacturing cost, I am of the opinion that during the year the assessee has not declared a correct GP by inflating the expenses. Accordingly, in view of above background of the case, it is clear that the assessee could not prove its claim of negative G.P. ratio. The
5 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
reasons put forth by assessee are not acceptable in light of above discussion. The assessee is not in position to substantiate its own claim. I am unable to accept claim of assessee. In the earlier assessment proceedings for A.Y. 2002-03 and 2004-05 to meet the ends of justice and a lump sum addition was made to compensate fall in G.P. ratio. I have no reason to differ from my predecessor and in all fairness a lump sum addition of Rs.61 lakhs is made on the total sales of Rs.122.49 lakh by applying G.P. rate of 5%."
10. Aggrieved by the order of A.O., assessee carried the matter before CIT (A).CIT (A) granted partial relief by holding as under:-
"6.3. I have carefully considered the facts of the case, the submissions of the appellant and the assessment order. It is observed that the turnover has reduced as compared to the preceding year i.e. it has decreased from 1.73 crores to Rs.1.22 crores. Though in percentage terms the expenses on power and fuel has increased in comparison to the earlier year, but in the context of the reduced turnover in the current year, the increased expenditure partly explains the negative GP during the year. However, I am in part agreement with the A.O. that the drastic fall in GP is not fully explained. The appellant could not produce any evidence to support his contention that one of the reasons for the fall in GP was also fluctuation in raw material prices. Considering all the facts and circumstances, in my view, it would be reasonable to adopt GP rate of 2% on total sales of Rs.122.49 lakhs thereby restricting the addition to Rs.24.5 lakhs. Ground No.3 is partly allowed."
11. Aggrieved by the order of CIT (A), assessee as well as Revenue is now in appeal before us.
12. Before us, the Ld. A.R. submitted that the books of the assessee are audited by Chartered Accountants and A.O. has not pointed out any defects in the books of accounts. In the absence of any defects, the A.O. 6 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
was not justified in rejecting the book results. He further submitted that the A.O. has no where rejected the books of accounts by invoking the provisions of Sec. 145(3). Unless and until the book results are rejected by invoking the provisions of Sec. 145(3), no estimate of profits can be made. For this proposition he relied on the decision of Hon'ble Gujarat High Court in the case of Vikram Plastic 239 ITR 161, decision of Ahmedabad Tribunal in the case of Jay Pulse Mills vs. ITO (ITA No.1317, 1319/Ahd/2004, ITA Mo.1370/Ahd/2004, 1419 & 1420/Ahd/2004 & ITA No.818/Ahd/2006 dated 7-5-2010) and in the case of DCIT vs. Paras Dyg & Printing Mills Pvt. Ltd.,(In ITA No.512/AHD/2007 dated 26-2-2010). He thus submitted that in view of the aforesaid decisions, the addition made by the A.O. be deleted. On the other hand the Ld. D.R. supported the order of A.O.
13. We have heard the rival submissions and perused the material on record. On perusing the assessment order it is seen that the A.O. had disallowed the expenses on adhoc basis. He has not pin pointed a single instance of bogus expenditure as to why the expenses should be disallowed. Further, he has also not rejected the book results by invoking the provisions of Sec. 145(3).
14. In the case of Jay Pulse Mills v/s ITO (ITA No.1317 -1319/Ahd/2004 order dated 7-5-10, the Co-ordinate Bench held as under:-
"7. ......The assessee has produced the complete books of account before the Assessing Officer including bills and vouchers audited by the Chartered Accountant. The assessee has also maintained the stock register and after going through the assessment orders in these seven assessment years, we find that there is no whisper about the defects in the books of accounts. Even the A.O. 7 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
has not invoked the provisions of Sec.145A of the Act and has not rejected the book results. Once the book results are not rejected, the A.O. has no alternative except to accept the book results. In the present case, the A.O. has not rejected the book results and found no defects in the books of accounts of the assessee for all the seven assessment years. In such a situation, the question arises is whether, the A.O. in exercise of his powers u/s.145(1) of the Act, is whether can make estimates without rejecting the book results and without finding fault in the books of account. We are of the view that the A.O. has to give a finding of fact i.e. whether or not income can properly be deduced from the accounts maintained by the assessee, even if the accounts are correct and complete to the satisfaction of the A.O. and the income has been computed in accordance with the method of accounting regularly employed by the assessee. What is to be determined by the A.O. in exercise of his power is a question of fact i.e. whether or not income chargeable under the Act can properly be deduced from the books of account, and he must decide the question with reference to the relevant material and in accordance with the correct principles. We are of the view that the A.O. has to examine the accounts of assessee and has to consider the following questions:-
(i) Whether the assessee has regularly employed a method of accounting?
(ii) Even if regular adoption of a method of accounting is there, whether the annual profits can properly be deduced from the method employed?
(iii) Whether the accounts are correctly maintained?
(iv) Whether the accounts maintained are complete in the sense that there is no significant omission therein?
In that event, if the A.O. finding on all four counts is in the affirmative, the assessee's profit is to be computed on the basis of these accounts. We find that the first proviso to Sec. 145 (1), or section 145(2), can be invoked only if and where the elements attracting either of those provisions are found to exist. A clear finding to that 8 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
effect, along with the materials on which such finding is based, has to be made out and give by the A.O. No assessment under the first proviso to section 145(1) or under section 145(2) can be sustained if the A.O. has not considered and recorded a finding against the assessee as to whether he has been regularly employing a method of accounting or whether his income, profits or gains can properly be deduced from his method of accounting if he has been regularly employing a method of accounting or whether the accounts are correct and complete. In the absence of these findings, the A.O. cannot make assessment by invoking the provisions of Sec. 145(1) or 145 (2) of the Act."
15. In the case of Paras Dyes and Printing Mills (ITA No.512/Ahd/2007 order dated 26-2-10) the co-ordinate Bench has held as under:-
"5.... Low profit in a particular year in itself cannot be a ground for invoking the powers of best judgment assessment without support of any material on record. The Hon'ble Gujarat High Court in the case of CIT vs. Amitbhai Gunwatbhai 129 ITR 573 held that if there was no challenge to the transactions represented in the books then it is not open to Revenue to contend that what is show by the entries is not the real state of affairs. Secondly, even if for some reason, the books are rejected it is not open to the A.O. to make any addition on estimate basis or on pure guess work. No specific discrepancies or defects in the books of account of the assessee have been pointed out before us nor was any material brought to our notice to establish that purchases were inflated or receipts suppressed."
16. In the case of CIT vs. Vikram Plastic (239 ITR 161) (Guj),the Hon'ble High Court has held as under:-
" Held, dismissing the application for directing reference (i) that in view of the finding reached by the Tribunal that there were no discrepancies or defects pointed out in the books of account and further that they were regularly maintained addition also on the finding that there was no material brought on record to establish that 9 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
purchases or expenses were inflated or sales suppressed and also in view of the finding that it was not the case that there was no method of regular accounting employed, the Tribunal was fully justified in coming to the conclusion that the provisions of Sec. 145(2) of the Income Tax Act,1961, could not be invoked. This conclusion was based on a finding of fact and raised no question of law."
17. In the present case the books of accounts have not been rejected by A.O. nor has any defect been pointed out in the books of accounts. CIT (A) though has granted partial relief to the assessee has held that in the context of reduced turnover in the current year, increased expenditure partly explains the negative G.P. during the year. Considering the aforesaid factual position and in the light of aforesaid decisions, of High Court and Co-ordinate Bench of Tribunal, we are of the view that in the present case the A.O. was not right in making addition. Thus this ground of the assessee is allowed and that of Revenue is dismissed.
18. In the result, the appeal of the assessee is allowed and the ground of the Revenue is dismissed.
19. Second ground of assessee's appeal relates to disallowance u/s. 40(a)(ia) of the Act.
20. Assessing Officer observed that assessee had made payments of Rs.60,47,992/- to contractors on which the TDS though deducted, but was not paid within due date as prescribed u/s. 200 (i) but was paid in April, 2005. He was thus of the view that payment in respect of which TDS was paid late was not admissible as deduction in view of provision of Sec.40(a)(ia). He accordingly disallowed the amount of Rs.60,47,992/-.
10 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
Aggrieved by the action of A.O., assessee carried the matter before CIT (A). CIT (A) confirmed the disallowance by holding as under:
"4.3. I have carefully considered the facts of the case, the submissions of the appellant, the assessment order and the remand report. I have also called for the assessment records and examined them. On perusal of the computation of income filed along with the return, it is noticed that the appellant had suo moto added back the expenditure of Rs.39,69,318/- and Rs.4,75,904/- for non deposition of TDS. Although the basis for figure of Rs.60,47,992/- was not apparent from records, on deeper examination of the documents in the assessment records, it is gathered that the appellant had deducted TDS of Rs.2,09,462/- during the year which broadly corresponds to receipts of Rs.1,04,73,100/- (TDS rate of 2%) and after allowing for the suo moto adding back by the appellant of Rs.44,45,222/-, the rest of the disallowance would be Rs.60,27,878/-. It is also noticed that the TDS of Rs.2,09,462/- was deducted but was not paid and that TDS of Rs.1,14,422/- which was paid in the next financial year also related to the contractual payments for months earlier than March, 2005. Accordingly, the disallowance by A.O. u/s. 40(a)(ia) of the Act of Rs.60,27,878/- is confirmed. Ground No. 1 is partly allowed."
21. Aggrieved by the order of CIT (A), assessee is now in appeal before us.
22. Before us, the Ld. A.R. submitted that it had deposited the TDS in the account of Government before filing of the return of income. He placed on record the copy of statement in support of his contention that the TDS has been deposited before filing the Return of income He further submitted that since the TDS has been deposited before filing of return there cannot be disallowance u/s. 40(a)(ia) and therefore the entire addition made by A.O. be deleted. He also relied on the decision of Ahmedabad Tribunal In the 11 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
case of Alpha Projects Society Ltd.( ITA No.2869/Ahd/2011 order dated 23- 3-2012).
23. The Ld. D.R. on the other hand supported the order of A.O.
24. We have heard the rival submissions and perused the material on record. The dispute in the present case is whether the expenditure on which TDS is deducted and paid after the due date as prescribed u/s. 200, calls for disallowance in view of the provisions of Sec. 40(a)(ia)?
25. The co-ordinate Bench in the case of Alpha Projects (supra) relying on the decision in the case of Virgin Creators has held as under:-
"7. We have heard both the parties and perused the materials available on record and orders passed by the authorities below. The issue involved in the present appeal has now been decided by the Hon'ble Calcutta High Court in the case of CIT vs. Virgin Creators in GA No.3200/2011 dated 23-11-2011 against the Revenue. However, it is noteworthy that the Special Bench of ITAT Mumbai in the case of Bharati Shipyard Ltd. vs. DCIT in ITA No.2404/Mum/2009 in order dated 12-9-2011 has taken a view that the amendment is prospective in nature addition would apply accordingly. Respectfully following the decision of Hon'ble Calcutta High Court in the case of Virgin Creators (supra) the order of Ld. CIT (A) is not sustainable. Hence, this ground of assessee's appeal is allowed. The Assessing Officer is directed to delete the disallowance of Rs.3,69,568/- as made u/s. 40(a)(ia) of the Act."
26. In the present case the return of income was filed by assessee on 31- 10-2005 but as per assessee the TDS was deposited in the account of Government in April, 2005. Respectfully following the decision of co- ordinate Bench, we are of the view that no disallowance is called for in the 12 ITA No 1582 & 1862/AHD/2010 A.Yr.. 2005-06.
present case since the TDS has been deposited before filing of return. In the present case, it is also a fact that the A.O. has not examined the issue of disallowance u/s. 40(a)(ia) in light of the aforesaid decision of co- ordinate Bench. We therefore feel that in the interest of justice the issue be remanded to the file of A.O. for verification. We accordingly direct the A.O. to examine as to whether the assessee had paid the TDS to the account of Government, before filing of Return of income. If the assessee has deposited the TDS before filing of Return of Income the deduction be allowed following the aforesaid decision of Co-ordinate Bench. By this order, we also direct the assessee to furnish all the information required by the A.O. to decide the issue. The A.O. shall also grant an opportunity of being heard to the assessee. Thus this ground of the assessee is allowed for statistical purposes.
27. In the result, the appeal of the Revenue is dismissed and the appeal of the assessee is partly allowed.
Order pronounced in Open Court on 4 - 1 - 2013.
Sd/- Sd/-
(MUKUL KUMAR SHRAWAT) (ANIL CHATURVEDI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad.
S.A.Patki.
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT (Appeals)-V, Baroda.
4. The CIT concerned.
5. The DR., ITAT, Ahmedabad.
6. Guard File.
By ORDER
Deputy/Asstt.Registrar, ITAT,Ahmedabad.
13 ITA No 1582 & 1862/AHD/2010
A.Yr.. 2005-06.
1.Date of dictation 9 - 11 -2012
2.Date on which the typed draft is placed before the Dictating 27,31 /12 / 2012 Member................Other Member................
3.Date on which the approved draft comes to the Sr.P.S./P.S 2 - 1 -2013.
4.Date on which the fair order is placed before the Dictating Member for pronouncement 4 - 1 -2013
5.Date on which the fair order comes back to the Sr.P.S./P.S 4 - 1 -2013
6.Date on which the file goes to the Bench Clerk 4 - 1 -2013.
7.Date on which the file goes to the Head Clerk.............
8.The date on which the file goes to the Asstt. Registrar for signature on the order........................
9.Date of Despatch of the Order.................