Income Tax Appellate Tribunal - Mumbai
Aventis Pharma Ltd, vs Department Of Income Tax on 24 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH 'L' BENCH
BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND
SHRI J.SUDHAKAR REDDY (ACCOUNTANT MEMBER)
ITA Nos. 4177 & 4178 /Mum/2003
Assessment Years: 1996-97 & 1997-98
I.T.A.3084/Mum/2004: Assessment year: 1995-96
Roussel India Ltd., JCIT, Special Range-23,
(Now known -Aventis Pharma Ltd.) Mumbai.
(amalgamated with Hoechst Marion
Roussel Ltd) Hoechst Centre, Vs.
54/A, Sir Mathuradas Vasanji Road,
Chakala, Andheri(E),
Mumbai-400 093.
PA No.AAACR 1771 H
(Appellant) (Respondent)
ITA Nos.4483 & 4484 /Mum/2003
Assessment Years: 1996-97 & 1997-98
I.T.A. No.3002/Mum/2004: A.Y. 1995-96
JCIT, Special Range-23, Roussel India Ltd.,
Mumbai (Now known -Aventis Pharma Ltd.)
(amalgamated with Hoechst Marion Roussel
Vs. Ltd) Hoechst Centre,
54/A, Sir Mathuradas Vasanji Road,
Chakala, Andheri(E),
Mumbai-400 093.
PA No.AAACR 1771 H
(Appellant) (Respondent)
Assessee by : Mr J.D.Mistri
Respondent by: Mr Narendra Kumar
Date of hearing: 24.4.2012
Date of pronouncement: 30.4.2012
ORDER
Per Bench:
These cross appeals have been filed by the assessee and the department against the order of ld CIT(A) dated 23.2.2004 for assessment year 1995-96 and common order dated 28.3.2003 of the CIT(A)-VIII, Mumbai for the assessment years 1996-97 & 1997-98, respectively. Since in most of the grounds, facts and issues are
2 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98 identical, we heard these appeals together and dispose of them by this common order for the sake brevity and convenience.
2. Firstly, we take up the appeals for the assessment years 1996-97 and 1997-98, which are arising out of common order dated 28.3.2003.
3. Ground No.1 of the assessee for both the assessment years is common, which reads as under:
"On the facts and in the circumstances of the case and in law, ld CIT(A) has erred in not affording proper opportunity of being heard before disposing of the appeal before him. Accordingly, his consolidated order dated 28.3.2003 in appeal Nos.CIT(A)VIII/IT-707/1999-2000 and CIT(A)VIII/IT-708 /1999/00 for assessment years 1996-97 and 1997-98 be set aside."
4. At the time of hearing, ld A.R. submitted that above ground taken for both the assessment years is not pressed. Hence, Ground No.1 of appeal taken by the assessee for both the assessment years is rejected as not pressed.
5. Ground No.2 of appeal of the assessee for the assessment years 1996-97 & 1997-98 and the ground of appeal No.1 taken by the department for the assessment years 1996-97 & 1997-98 are interconnected. Therefore, for the sake of clarity, we consider it relevant to adjudicate the said grounds taken by both the sides, which are as under:
Assessee's Ground:
"On the facts and in the circumstances of the case and in law, ld CIT(A) has erred in holding that the conditions prescribed in section 92 of the Income tax Act, 1961 existed in the procurement of raw materials viz. Cefotaxime Sodium and Roxythroumycin from closely related non resident suppliers and which were used respectively for the manufacture of 'Claforan" and 'Rulide'. He has thereby erred in holding that the profits in terms of section 92 of the Act was liable to be re-determined by taking the purchase price of the respective materials at 10% in excess of the rate paid to the Korean suppliers by other manufacturers. He ought not to have done so. He ought to have deleted the entire addition made in 3 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98 both the assessment years which was made in this assessment by ld AO under section 92 of the Act."
Department's ground:
"On the facts and in the circumstances of the case and in law, ld CIT(A) erred in directing the AO to work out the profit by taking the cost of raw materials at rates at which the supplies are made by the Korean concerns to other Pharma companies with an addition of 10% thereof instead of the actual cost declared by the assessee while invoking the provisions of section 92 of the Act."
6. In the above grounds, the issue is in respect of applicability of Section 92 of the Act on account of assessee company having imported raw material from the concern with whom it had close relationship. The Assessing Officer while completing the assessment for both the assessment years under consideration, has invoked provisions of section 92 of the Act on account of transaction for purchase of Cefotaxime Sodium and Roxythroumycin and made addition in terms of the said section on the ground that the assessee had purchased raw materials from Roussel Uclaf, a French Company with whom it has a close connection. The AO has stated that assessee purchased raw materials having paid higher purchase price for supply thereof compared to that other pharmaceutical companies had paid to Korean Suppliers for the import of the material of similar formulation. Therefore, AO has stated that the assessee had earned lesser profit and, accordingly, added the amount of Rs.7,92,31,956 for the assessment year 1996-97 and Rs.13,68,74,668 for the assessment year 1997-98. Being aggrieved, the assessee filed appeals before ld CIT(A).
7. The CIT(A) has stated that during the course of appeal proceedings, the assessee made detailed submissions making a claim that application of section 92 in respect of transaction with French Company for the import of raw material is not called for. Ld CIT(A) has stated that he has accepted the detailed submissions of the assessee in terms of Rule 46A of I.T.Rules, and remanded the matter to the Assessing Officer for verification and report. He has stated that the Remand Report in respect of the said submissions was received from Assessing officer and copy of the same was also 4 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98 forwarded to the assessee for their comments. He has stated that the contents of the Remand Report as well as the comments of the assessee have been taken into account while deciding the appeal.
8. Ld CIT(A) has stated that similar additions made by Assessing Officer under section 92 of the Act for assessment year 1999-2000 were decided by him vide order dated 20.3.2003. He has stated that it has been held in respect of the said assessment year that the transaction of the imported raw material by the assessee with the closely related foreign companies was entered into and the assessee has earned a lesser profit and hence, section 92 is attracted. Ld CIT(A) has stated that the action of Assessing Officer in this regard is confirmed that the provisions of section 92 are attracted. However, ld CIT(A) has stated that the assessee has been able to establish that the suppliers held the patent rights over the product supplied and in view of the investment made for the development of the products, the rates at which the raw material were supplied to the assessee company are bound to be higher than the rates at which the supplies are made by Korean Concerns to other pharmaceutical companies. Ld CIT(A) has further stated that in the assessment year 1999-2000, AO was directed to recompute the profit taking the cost for this purpose at 10% higher than the rate at which the materials were being supplied by the Korean Suppliers. Ld CIT(A) has stated that on the same analogy, AO shall work out the profits by taking the cost at rates at which the supplies are made by the Korean parties with an addition of 10% thereof and the difference between the purchase price paid by the assessee company and the cost so arrived at will be the profit that has to be added to income of the assessee in terms of section 92 of the Act for both the assessment years under consideration. Hence, assessee as well as department are in appeals before the Tribunal.
9. During the course of hearing, learned A.R. after giving the background of the business of the assessee submitted that the assessee company was formerly known as Russel India Ltd., which was amalgamated with Hoechst Marion Roussel Ltd and presently known as Avantis Pharma Ltd., the assessee herein. He submitted that 5 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98 similar issue was considered in the case of Hoechst Marion Roussel Ltd for assessment years 1996-97 and 1997-98 in department's appeal being I.T.A No.2273 & 3120/M/2001 vide order dated 16th May, 2007, copy of which is placed on record and the Tribunal after considering the submissions of the representatives of both the sides and the order of ld CIT(A) vide paras 27 & 28 confirmed the order of ld CIT(A) by holding that the provisions of section 92 could not be applied to the transactions entered into between the resident company and non-resident parent company. He further submitted that similar issue again came up for consideration before the Tribunal in appeal filed by the revenue for the assessment year 1998-99 in the case of Hoechst Marion Roussel Ltd an amalgamated company in I.T.A No.4993/M/2001 and the Tribunal vide its order dated 27.10.2010 confirmed the order of ld CIT(A) after holding that the transactions between the assessee and non-resident company was not an arranged transaction and, therefore, the provisions of section 92 could not be applied to disown loss incurred by the assessee. Ld A.R. also field a copy of the order dated 27.10.2010 of the Tribunal to substantiate his submission. He further submitted that the order of the Tribunal dated 16.5.2007 was confirmed by Hon'ble Bombay High Court vide its order dated 8.9.2009 in Income Tax Appeal No.1528 of 2009 and filed a copy of the said order of Hon'ble High Court to substantiate his submission. He further submitted that the order passed by ld CIT(A) for the assessment year 1999-2000 which has been followed in the assessment year under consideration is subsequent to the orders passed for assessment years 1996- 97 and 1997-98, which had been considered by the Tribunal vide its order dated 16.5.2007 (supra) but ld CIT(A) in these appeals have taken a different view while holding to work out the profits by taking the cost at rates at which the supplies are made by the Korean parties with an addition of 10% thereof. He submitted that the issues are squarely covered in favour of the assessee by the order of the Tribunal dated 16.5.2007 (supra), which has been confirmed by Hon'ble Jurisdictional High Court(supra).
10. On the other hand, ld D.R. submitted that AO is justified to hold that transactions for supply of raw materials by the parent company to the assessee company is a 6 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98 controlled transaction and as such, it is hit by section 92 of the Income tax Act. He submitted that the addition made by Assessing Officer for both the assessment years under consideration be confirmed. He submitted that there is no evidence on record that materials supplied by Korean Company is of sub-standard as there is no study that the said raw material of Korean company is of sub-standard. He submitted that if the material is purchased by the assessee from its parent company then the end products should also get higher price and, therefore, loss claimed is not justified. However, ld A.R. submitted that the price of the drugs under consideration has been brought under the Drug Price Control order, 1995, as a result of which price at which the drugs could be sold was fixed by the company which was much less than the rate at which it was sold by the assessee company before Drug Price Control order came into effect. The assessee made substantial profits on the sales of said drugs before 1995 and it started making substantial loss after the fixation of price under the Drugs Price Control order, 1995. Therefore, question of selling the drugs at a higher price does not arise.
11. We have carefully considered the submissions of the representatives of the parties and the orders of the authorities below and the earlier orders of the Tribunal (supra). We observe that the facts in the assessment years under consideration are similar to the facts which were considered by the Tribunal vide its order dated 16.5.2007 (supra) and we consider it prudent to reproduce paras 27 & 28 of the said order, which are as follows:
"27. The assessee is a company engaged in the pharmaceutical business for number of years. It is a subsidiary of Hoechst AG, Germany subsequently known as Hoechast Marion Roussell and Aventies Pharma Ltd. Assessee and Roussel India Ltd. manufactured formulations known as "omanatax" and "claforan" the active ingredient of which is Cefotaxime Sodium, a drug which is the result of original research of Roussell Uclaf, France and Heochst AG. Omnatax contains cefotaxime sodium which isan antibiotic used in the treatments of various infections including gastrointestinal, genitor-uninary, respiratory tract infections, septicemia etc. The drug was therefore claimed as a life saving drug. This cefotaxime sodium originally discovered / manufactured by its parent company Hoechst AG and Roussell Uclaf and is one of the most successful and valuable antibiotics the world. It is protected by numerous valid and subsisting patents taken out jointly by Choechst AG and Roussel Uclaf and these patents are sought to be enforced worldwide by the said companies. It is the contention of 7 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98 the assessee that to bring cefotaximesodium to the stage of being a viable antibiotic the discovering companies spent billions of dollars and are constantly engaged in research and development in an attempt to discover and produce life saving pharmaceutical products. The cost of such research will have to be recovered in order to sustain useful research and development further to produce such life saving medicines. The pricing strategy of Hoechst AG and Roussel costs, the affordability of the population of the purchasing country, the prevalence of infections in the purchasing country etc. During the assessment year 1996-97 the assessee company purchased cefotaxime sodium at the price of US$ 1350 per kg and the landed cost in India (including duties, etc.) amounted to Rs.57,653 per kg. It is to be appreciated that given the purchasing power of the Indian population, the level and prevalence of infections which are treated by cefotaxime sodium and other relevant factors the price was fixed at a level that was lower than the price at which the companies had sold cefotaxime sodium anywhere in the world. This fact has been certified by the Report of the Auditors of Hoechst Marion Deloitte Touche & Tohmastsu dated 27th September, 1999, placed at pages 73 to 75 of the compilation and by the Board of Hoechst Marion Rousel's certificate dated 08th September, 1999 (placed at page 76 of the paper book) as also by the certificate of M/s Pricewaterhouse Cooper, the auditors of Aventis Pharma Deutscheland GmbH dated 29th September, 2001 (placed at paper book page 77). The assessing officer has made a comparison of the prices with the purchase of 75 kgs by IPCA Laboratories at Rs.30,784 and Lyka Labs Ltd. which purchased undisclosed quantity at Rs.32,013 and similar undisclosed small quantity by Aristopharma at 27,270. The details discussed by the assessisng officer are insufficient and are clearly not comparable to the purchases made by the assessee company. The CIT(A) has elaborately discussed this aspect of the matter in his order on pages 9 to 33 at paragraphs 11 to 45 which deals with each and every contentions of the assessing officer as well as the CIT(A). The learned CIT(A) also afforded an opportunity to the assessing officer for his comments on the material placed before the learned CIT(A) by the assessee from time to time. It is our considered view that the learned CIT(A) has properly appreciated all the facts of the case, the prevailing conditions and the provisions of section 92 to reach to a conclusion that the price paid by the assessee ws not higher than the price paid by the other buyers of cefotaxime sodium from the same non-resident company. There are certain other facts found by the learned CIT(A) that remains uncontroverted before us hat cefotaxime sodium supplied by the Korean companies were of inferior quality and the Koren company had no patent right by itself and so naturally the price paid for cefotaxime sodium supplied by the Korean companies cannot be compared with that of the drugs imported by the assessee from Hoechst AG, Germany. No doubt provisions of section 92 can be invoked in a case where it appears to the assessing officer that (a) the course of business "is so arranged" that the business transacted between the assessee and the non-resident; (b) produces to the resident "either no profits or less than the ordinary profits; and (c) which might be expected to arise in that business. But in the instant case the assessing 8 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98 officer has not made out a case to show that provisions of section 92 are clearly applicable to the cae for violation of any of the above clauses. It cannot be said that the course of business yielded no profit to the assessee for the simple reason that prior to the notification issued by the government under the simple reason that prior to the notification issued by the government under DPCO the assessee, in the past, has been making lot of profits on sale of the drug "omnatax". It is only because the government regulated the sale price of the drug for being a life saving medicine, the sale of the drug resulted in loss.
28. In view of the above we hold that the transaction between the assessee and the non-resident company was not an "arranged transaction" . The certificates produced by the assessee from various parties establish that the assessee did not buy the product cefotaxime sodium at a price higher than the price at which the same product was sold to others. Accordingly we hold that the assessing officer failed to establish a case where provisions of section 92 could be applied to disown the loss incurred by the assessee. Therefore we do not find a reason to take a different view than the one arrived at by the learned CIT(A). We therefore reject the ground of the Revenue."
12. We observe that the said order of the Tribunal has been confirmed by Hon'ble Bombay High Court in Income tax Appeal No.1528 of 2009 vide order dated 8.9.2009, copy of which is placed at page 1 of PB. We also observe that the same issue had come before the Tribunal in I.T.A.No.4993/M/2001 and the Tribunal vide order dated 27.10.2010 by following its earlier order confirmed the order of ld CIT(A) and dismissed the grounds of appeal taken by the Revenue. Respectfully following the earlier orders of the Tribunal (supra), we allow Grounds of appeal No.2 taken by the assessee for assessment years 1996-97 and 1997-98 and dismiss the grounds of appeal No.1 taken by the revenue for both assessment years.
13. We now take up Ground No.2 of appeal in appeal of the department i.e. deletion of addition of Rs.7,84,000 for assessment year 1996-97 and Rs.11,63,000 for assessment year 1997-98, for which addition was made by Assessing Officer to the value of closing stock on account of freight charges.
9 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98
14. We have heard learned representatives of the parties and perused the orders of the authorities below. We observe that similar issue had come up for consideration in assessee's own case for the assessment year 1993-94 in appeal filed by the department being I.T.A.No.6075/M/1996 and the Tribunal in its order dated 23.4.2003 vide para 8 after considering the decision of Hon'ble apex Court in the case of CIT vs. British Paints India Ltd., 188 ITR 44 (SC) has confirmed the deletion of addition made by Assessing Officer to the closing stock on account of freight charges. We consider it prudent to reproduce para 8 of the said order which reads as under:
"We have heard both sides and perused the orders passed by the revenue authorities. The addition in dispute was made by the AO on account of non- inclusion of element of freight to the vale of closing stock lying with consignment agencies. He found that the assessee was not including the cost of transportation from factory to consignment agency in respect of goods lying with consignment agency for the purpose of valuation. The assessee explained before him that such non-inclusion was consistent with the accounting practice constituently followed over many years and that it would have a very marginal impact on the profit. The AO rejected the explanation of the assessee for the reasons stated by him in para 3 of his order and made the addition in dispute by invoking the provisions of section 145(1) of the I.T. Act. The CIT(A) deleted the addition by observing in para 3.1 of his order as follows:
'I have considered the submissions made by the appellant. The AO in his order has stated tht the system of accounting followed by the appellant is not acceptable in view of the observations made by the Supreme Court in the case of British Paints. I find that the AO has not properly followed the case of British Paints. In this case the Apex Court of the country held that if the correct profits and gains could not be deduced from the accounts so maintained in the opinion of the AO he was obliged to have recourse to the provisions of Sec.145 of the I.T.Act, 1961. In the present case the appellant is following the accounting practice consistently for the last so many years. As per this practice, the value of the goods lying with the consignment agents is valued without considering the cost of transportation incurred from the factory at Thane. The value of freight is very small compared to the value of goods and it is impractical to value the stock lying at C.A including the cost of freight. Since the same principle has been followed consistently, both opening stock and closing stock have been valued on the same principles, therefore, if theoretically freight element is added in the closing stock, the same is to be added in the opening stock as well and it will have no effect on the profit. The accounting method adopted by the appellant appears to be as per the Accounting practice and I do not find any difficulty in finding out the correct profits from this system. As this system is being followed from the last so many years, there would be no effect on the profits of the 10 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98 appellant company. Therefore, I do not find any reason for changing this method of accounting. As the profits of the company can be deduced from this method without any problem, I find that by changing the method of account ting by relying on the Supreme court decision in the case of British Paints is not justified. Thus the addition of Rs.2,11,288 made by the AO is hereby deleted."
15. We further observe that similar issue again came up for consideration in I.T.A. No.4651/M/1998 for the assessment year 1995-96 in the appeal filed by the revenue and the Tribunal vide its order dated 23rd July, 2003 confirmed the order of ld CIT(A) in deleting the addition of Rs.3,15,080 made by the AO to the closing stock on account of freight charges. Ld D.R. could not bring any other facts to distinguish the earlier cases and hence, we do not find any reason to interfere with the order of ld CIT(A). Therefore, Ground No.2 taken by the department for both the assessment years i.e. 1996-97 and 1997-98 is rejected.
16. Now we take up for our consideration the appeals filed by the assessee and the department for assessment year 1995-96.
17. It is relevant to state that these appeals are arising out of reassessment proceedings initiated by Assessing Officer under section 147 of the Act.
18. At the time of hearing, learned A.R. submitted that Ground Nos.1 & 2 of the appeal taken by the assessee to dispute the validity of initiation of reassessment proceedings are not pressed. Hence, Ground Nos.1 & 2 of the appeal is dismissed as not pressed.
21. Ground No.3 of appeal taken by the assessee and Ground No.1 taken by the department is similar to Grounds of appeal No.2 taken by the assessee and Ground No.1 of appeal taken by department for assessment years 1996-97 and 1997-98.
11 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98
22. Since the facts and issues are common and the same have been dealt with by us vide paras 5 & 12 hereinabove and following the reasons therein, we allow Ground No.3 taken by the assessee and reject Ground No.1 taken by the department.
23. Ground No.4 taken by the assessee is as under:
"On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in holding that deduction under section 80-M of the Act was allowable to the appellant after reducing 5% of the gross dividend received from shares and units other than the capital gains units and after reducing 2% of the gross dividend received on capital gains units."
24. At the time of hearing, learned A.R. submitted that disallowance on adhoc basis is excessive and whereas ld D.R. relied on orders of ld CIT(A).
25. However, during the course of hearing, ld A.R. agreed that the disallowance of Rs.2 lakhs be considered while allowing deduction u/s.80M of the Act to which, ld D.R. had no objection. Therefore, Ground No.4 taken by the assessee is allowed in part directing that Rs.2 lakhs be reduced while considering the deduction to be allowed u/s. 80M of the Act.
26. Ground No.2 in the appeal of the department is in regard to the deletion of addition of Rs.7,85,290 by ld CIT(A) in respect of unaccounted sales.
27. The Assessing Officer has stated that on perusal of quantitative details of principal items of finished products from the Tax Audit Report, there is discrepancy in the figure of Omnatex. The closing stock works out to a negative figure after reducing breakages of 0.55 million. Therefore, assessee was asked to give justification and give stock reconciliation. The Assessing officer has stated that in response to query, assessee filed reply vide letter dated 17.2.2003 wherein, breakages in the form of "others" is shown at 77,244 & closing stock at 67,813. The Assessing Officer has stated that there was a typographical mistake because of which the figure of closing stock was shown at 0.70 million instead of 0.07 million. The Assessing Officer has stated that even 12 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98 after accepting the contention of assessee that there was a typographical mistake, the figure of breakages show the discrepancy which he has concluded that there is an excess breakage of 22,244. The Assessing Officer stated that there is no difference in closing stock mentioned in the audit report & the reconciliation of stock submitted by the assessee after accepting that there was a typographical mistake. In absence of valid justification, Assessing Officer has stated that there was unaccounted sales of Rs.7,85,290. Therefore, he made this addition to the income of the assessee. Being aggrieved, assessee filed appeal before the first appellate authority.
28. Ld CIT(A) after considering the submissions of assessee, deleted the said addition and the relevant paras 26 to 28 of the order of ld CIT(A) are as under:
"26. The submission made in this respect has been considered. There is a merit in the claim. For if the figures shown in Annexure XIV B is to be taken as correct, it reflects an excess production that has gone into the stock. However, on account of such excess production that is already part of the stock no addition by way of sales can be made. No addition on this account can be made on account of unaccounted purchase in the absence of any evidence on this effect.
27. Further addition in the instant case has been made on the presumed unaccounted sales without verifying the stock inventory and the quantum and value of the said item forming part of the stock. In the instant case, the appellant's representative has furnished the details of said stock item vide letter dated 31.12.2003 indicting adequately that only 67,813 units form part of the stock.
28. Finally, no auditor will certify in the audit report that there will be a negative shortage indicting in effect the generation of excess stock. Hence the conclusion drawn in this regard is hasty without proper application of mind and hence cannot be sustained. The addition of Rs.7,85,290 made on this account is deleted. Appeal in respect of Ground No.4 is disposed off as allowed."
29. Hence, department is in appeal before the Tribunal.
30. Ld D.R. submitted that Assessing Officer when pointed out the discrepancy in the closing stock, assessee accepted the same but has taken three different stands to explain the discrepancy. He submitted that ld CIT(A) accepted the certificate of the auditors and ignored the audit report which was signed by auditors while deleting the said addition. He submitted that ld CIT(A) is not justified to hold that if there is any 13 I.T.A.3084 3002/Mum/2004: A.Y 1995-96 ITA Nos.4177 & 4178 /Mum/2003 ITA Nos.4483 & 4484 /Mum/2003 Assessment Years: 1996-97 & 1997-98 unaccounted sales, there should be unaccounted purchases. Ld D.R. submitted that the breakage is a balancing figure and so the closing stock is not correctly computed and the addition made by Assessing Officer is as per record. Hence, said addition should be confirmed.
31. On the other hand, ld A.R. submitted that there was a typographical mistake and even if there was discrepancy due to typographical mistake in the breakages, the same could not be out of book sales and could go to closing stock. Hence, addition made by AO was not justified. He submitted that the order of ld CIT(A) be confirmed.
32. We have carefully considered the submissions of learned representatives of the parties. We are of the considered view that the assessee has been able to explain with certificate of the auditors that there was a typographical mistake while stating the breakages in the audit report. Since assessee has explained the discrepancy duly supported by certificate of an auditor and has been considered by ld CIT(A) as mentioned hereinabove, we do not find any infirmity in the order of ld CIT(A) to delete the addition made by AO. Accordingly, Ground No.2 taken by department is rejected by upholding order of ld CIT(A).
33. In the result, all the three appeals for assessment years 1996-97, 1997-98 and 1995-96 filed by the assessee are allowed in part and whereas all the three appeals filed by department are dismissed.
Pronounced in the open court on 30th April, 2012
Sd/- Sd/-
(J.SUDHAKAR REDDY) (B.R. MITTAL)
Accountant Member Judicial Member
Mumbai, Dated 30th April , 2012
Parida
14 I.T.A.3084 3002/Mum/2004: A.Y 1995-96
ITA Nos.4177 & 4178 /Mum/2003
ITA Nos.4483 & 4484 /Mum/2003
Assessment Years: 1996-97 & 1997-98
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),VIII, Mumbai
4. Commissioner of Income Tax, MC-VIII , Mumbai
5. Departmental Representative, Bench 'L' Mumbai
//TRUE COPY// BY ORDER
ASSTT. REGISTRAR, ITAT, MUMBAI