Income Tax Appellate Tribunal - Ahmedabad
Femina Filaments, Surat vs Department Of Income Tax
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IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D" AHMEDABAD
Before S/Shri Bhavnesh Saini, JM and D.C.Agrawal, AM
ITA No.4510/Ahd/2007
Asst. Year :2004-05
Income-tax Officer, Ward 2(4), Vs. M/s Femina Filaments,
Surat. Plot No.6310-12
No.65-B, GIDC,
Sachin, Surat.
(Appellant) .. (Respondent)
Appellant by :- Shri Bhubnesh Kulshrestha, DR
Respondent by:- Shri M. K. Patel, AR
ORDER
Per D. C. Agrawal, Accountant Member.
This is an appeal filed by the Revenue raising following grounds :-
(1) On the facts and circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs.2,00,000/- made on account of fall in GP.
(2) On the facts and circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs.5,97,354/- made on account of suppressed production.
2. The assessee is engaged in the business of texturising and twisting of yarn. The return of income was filed on a total income of Rs.3,051/- on 3.9.2004. The assessment was completed under section 143(3) on 29.12.2006 determining total income of Rs.8,54,160/-. The AO proposed following additions :-
- On account of fall in GP Rs.2,00,000/-
- On account of suppressed production Rs.5,97,354/-
ITA No.4510/Ahd/2007
Asst. Year 2004-05
3. In respect of GP addition AO noticed that total sales are shown at Rs.6,86,79,353/- and GP has been shown at Rs.48,15,440/- @ 7.01% as against GP of Rs.53,92,908/- on total sales of Rs.3,93,27,344/- showing GP @ 13.54% in the immediately preceding year. The AO noticed that even though expenses on manufacturing, salary and wages etc. have decreased as compared to immediately preceding year but purchase price of POY and Oil has been substantially increased this year and also the sale price of TFO has been reduced to Rs.123.34 per kg from 136.44 per kg. Considering all these aspects AO proposed a lump sum addition of Rs.2 lakhs.
4. The ld. CIT(A) deleted the addition by observing that AO has not rejected the books of account and without rejecting the books he has resorted to estimate the profits. In this regard ld. CIT(A) has observed as under :-
"6. I have carefully considered both the positions. My first observation is that the AO could not have made any addition to the GP especially on a lump sum basis without rejecting the Assessee's book results. I agree with the AR that the AO failed to point out a single defect in the Assessee's accounts. It is for this reason perhaps that the AO did not take any recourse to rejecting the books. Without rejecting the books, the AO was simply not within his power to make any addition in the Assessee's declared gross profit. In this context reliance is placed on the decision of the Ahmedabad bench of ITAT(T.H) in the case ITO Vs. Skyjet Aviation P.Ltd. 71 ITT 95.
6.1 Secondly, the AO failed to take into consideration the detailed submissions of the Assessee. Firstly, the nature and content of the business of the Assessee had changed over the years, in the process of which the Assessee laid more stress on its own manufacturing activities in place of job work. Because of the several expenses which is required to be incurred in connection with the manufacturing activity, it is a known fact that the margin is always lower In manufacturing than It is in job work, The bills raised against the job work are inclusive of all expenses 2 ITA No.4510/Ahd/2007 Asst. Year 2004-05 plus the desired profit margin. Therefore, it was natural that the gross profit margin of the Assessee would have reduced over the years, as the Assessee reduced its job work business. This would have been the case, in spite of the job work receipts In absolute terms being more during the year under consideration than in the preceding years. The AO also ignored the Assessee's claim that its cost of production had increased because of the increase in the purchase price of POY yarn as also of oil Even though the cost of power and Fuel had gone down only as a percentage of the turnover which had increased, there was no decrease In absolute terms. Without taking all these facts into consideration, the AO simply came to the conclusion in a very summary manner that the fall in the GP ratio was not satisfactorily explained. Even if it was so, there was no case for making any lump sum addition. He ought to have given a finding as to what should have been the appropriate GP ratio for the year. Given such facts of the case, I am of the view that there was simply no case For the AO to make any addition to the gross profit, especially when, he had not rejected the book results, The addition of the sum of Rs. 2 lacs will therefore, stand deleted."
5. We have heard the parties and carefully perused the material on record. In our considered view there is no case for interference in the order of ld. CIT(A). The entire order of the AO does not indicate that he has found any defect in the books and gave any finding that profits cannot be deduced from the books of account of the assessee and accordingly he has invoked provisions of section 145(3). Hence if books are not apparently rejected, he cannot resort to estimation of profits.
6. If the AO does not record any finding that books of account maintained by the assessee were incorrect rendering it impossible to deduce the profits then he does not have jurisdiction to estimate profits. We derive support from the following decisions:-
1. Madnani Construction Corporation P. Ltd. Vs. Commissioner of Income-tax (2008) 296 ITR 45 (Gau) Held,_ that the Assessing Officer did not record any finding that the books of account maintained by the assessee were incorrect rendering it impossible to deduce the profit and despite that he 3 ITA No.4510/Ahd/2007 Asst. Year 2004-05 went on to complete the assessment invoking the principles of best judgment
2. Income-tax Officer Vs. Girish M. Mehta [2008] 296 ITR (A.T.) 0125- (Rajkot)
3.Commissioner of Income-tax Vs. Rajni Kant Dave [2006] 281 ITR 0006- (All)
4. Ashoke Refractories P. Ltd. Vs. Commissioner of Income-tax [2005] 279 ITR 0457- [Calcutta High Court]
5. Juggilal Kamlapat Udyog Ltd. Vs. Commissioner of Income-
tax [2005] 278 ITR 0052- [Calcutta High Court]
6.Vishal Infrastructure Ltd. v.A.c.i.t., Circle 3(4), Hyderabad [2007] 104 ITD 537 (HYD.) / 107 TTJ 584 9 ITAT HYDERABAD BENCH 'A') Assessing Officer invoking provisions of section 145(3) rejected account books of assessee and estimated income of assessee at higher amount - Whether since assessee had been consistently following a particular method of accounting and Assessing Officer had not found fault with that method of accounting, Assessing Officer had wrongly rejected account books of assessee - Held, yes
6.K.S. Mehta (HUF) Vs. Commissioner of Income-tax (2005) 278 ITR 59 (CAL)
7.Commissioner of Income-tax Vs. Vikram Plastics [1999] 239 ITR 0161- [Gujarat High Court]
8. Ramjiwan Lal Vs. Commissioner of Income-tax [1980] 123 ITR 0319- [Allahabad High Court]
7. In view of the above, we confirm the order of ld. CIT(A) and reject this ground of Revenue.
8. The second addition is about suppression of production. The ld. AO observed that main manufacturing activity of the assessee is 4 ITA No.4510/Ahd/2007 Asst. Year 2004-05 texturising of yarn. The assessee has shown consumption of POY a raw material, yield of texturised yarn after processing and percentage of yield as under :-
Sl.No. Consumption of Production Percentage of POY (Kg) yield 1 629219.160 633348.900 100.656 According to the AO yield shown by the assessee is low and it should be more by 1.62%. He accordingly calculated suppression of production as under :
Consumption of raw material 629219.160 kgs. Expected production @ 1.62% of oil gain 639412.51 kgs.
Less: Actual production 633348.900 kgs.
Suppressed production 6064.51 kgs.
Thereafter he calculated the suppression of production at Rs.98.50 per kg. and proposed an addition of Rs.5,97,354/-.
9. The ld. CIT(A) deleted the addition by holding that there is no material to hold that suppression of production is lower by 1.62%. He deleted the addition by observing as under :-
"10. I have carefully considered the view taken by the AO and the very logical and well argued submissions of the AR, which makes me agree with the position of the assessee, and reject the very summarised and general findings of the AO. Once again, the AO failed to really examine the issue in the manner it deserved to be examined. He simply applied the ratio of Marmo Texturisers (supra) without really examining the facts of that case, and comparing the same with the facts of the assessee's case. What resulted was therefore was a very supercilious and vague 5 ITA No.4510/Ahd/2007 Asst. Year 2004-05 conclusion. On the other hand the AR has very logically and reasonably presented the case of the assessee. He has shown that the oil consumption of the assessee was much less at 0.97% as compared to 5.12% in the case of Marmo Texturisers. Consequently, the oil gain was also less at 0.66%, as against 1.62% decided by the ITAT in that case. The wastage was also only 0.31% as compared to 3.50% in the case of Marmo Texturisers. Such low consumption and low wastage was because of a more advanced technology used by the assessee, than Marmo Texturisers. All these facts were neither understood nor appreciated by the AO. Instead of giving any finding of his own, the AO simply applied the ratio of Marmo Texturisers in a very arbitrary manner, without even bothering to get into the facts of the case. Therefore, I am of the view that the AO had completely erred in making the addition of the sum of Rs.5,97,354/- on account of suppressed production. He is directed to delete the addition."
10. We have heard the parties and carefully perused the material on record. In our considered view, books cannot be rejected merely on account of low production. Secondly, there is no basis for holding that production was lower or should have been more than 1.62%. Thirdly, AO relied on a case for comparing the production without comparing the facts of the two cases. Fourthly the AO has not taken into account the advanced technology used by the assessee. In any case following the authorities relied on by us while disposing of first ground, we hold that without pointing out defects in the books, AO cannot reject the same and profits cannot be estimated. The estimation of suppression of production is an estimation of profits and, therefore, it affects the GP. Both the first addition as well as this addition are part of trading cum manufacturing account and for the same reasons as we have stated above we hold that 6 ITA No.4510/Ahd/2007 Asst. Year 2004-05 without rejecting the books AO cannot resort to estimation of profit. Accordingly, this ground of Revenue is also rejected.
11. In the result, appeal filed by the revenue is dismissed.
Order was pronounced in open Court on 17/9/10.
Sd/- Sd/-
(Bhavnesh Saini) (D.C.Agrawal)
Judicial Member Accountant Member
Ahmedabad,
Dated : 17/9/10.
Mahata/-
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Ahmedabad
1.Date of dictation 19/8/2010.
2.Date on which the typed draft is placed before the Dictating Member................Other Member................
3.Date on which the approved draft comes to the Sr.P.S./P.S.............
4.Date on which the fair order is placed before the Dictating Member for pronouncement..............
5.Date on which the fair order comes back to the Sr.P.S./P.S...............
6.Date on which the file goes to the Bench Clerk...........
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.................
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