Income Tax Appellate Tribunal - Kolkata
Sitalamata Oil Mill Pvt. Ltd., Hooghly vs Assessee on 8 July, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH: KOLKATA
[Before Shri M. Balaganesh, AM & Shri S. S. Viswanethra Ravi, JM]
I.T.A No.2318/Kol/2013
Assessment Year: 2009-10
Assistant Commissioner of Income-tax, Vs. Sitalamata Oil Mill Pvt. Ltd.
Circle-I, Midnapore. (PAN: AAJCS9351C)
(Appellant) (Respondent)
&
C. O. No.106/Kol/2014
In I.T.A No.2318/Kol/2013
Assessment Year: 2009-10
Sitalamata Oil Mill Pvt. Ltd. Vs. Assistant Commissioner of Income-tax
Circle-I, Midnapore.
(Cross Objector) (Respondent)
Date of hearing: 29.06.2016
Date of pronouncement: 08.07.2016
For the Revenue: Shri G. Mallikarjuna, CIT, DR
For the Assessee/Cross Objector: Shri Somnath Ghosh, Advocate
ORDER
Per Shri M. Balaganesh, AM:
This appeal by revenue and Cross Objection by assessee are arising out of order of CIT(A)-XXXVI, Kolkata vide Appeal No. 235/CIT(A)-XXXVI/Kol/R-2,Mid/2012- 13 dated 19.06.2013. Assessment was framed by JCIT, Range-1, Midnapore u/s. 144 of the Income tax Act, 1961 (hereinafter referred to as the "Act") for AY 2009-10 vide his order dated 29.12.2011. Both the appeals are taken up together and disposed of by a common order for the sake of convenience.
2. The only issue to be decided in the appeal of the revenue is as to whether the ld. CITA is justified in determining the profit rate @ 10% as against 42.48% determined by the ld. AO in the facts and circumstances of the case.
3. The brief facts of this issue are that the assessee is a private limited company engaged in the business of manufacturing edible oil. The assessee filed its return of income u/s. 139(1) of the Act for the assessment year under dispute on 27.09.2009 disclosing a total income of Rs. 59,05,533/-. During the course of the assessment 2 ITA No.2318/K/2013 & CO No.106/K/2014 Sitalamata Oil Mill Pvt. Ltd. AY 2009-10 proceedings, the Ld. Assessing Officer desired the assessee to furnish documents and evidence in support of its return filed by issuing notice u/s. 142(1) of the Act. However, such notice could not be served on the assessee since the unit of the assessee was closed and taken over by the creditor of the assessee, the Punjab National Bank, Midnapore Branch. Only on one occasion, an alleged representative appeared who was speciously served with a notice u/s. 142(1) of the Act. Thereafter, there was no compliance from the assessee. In fact, an endeavour to serve notice u/s. 142(1) of the Act was made by the Ld. Assessing Officer by way of affixture. Since the books and documents of the assessee were in the custody of the creditor bank, the Ld. AO issued summons u/s. 131(1) of the Act to it directing them to produce the same. However, the creditor bank also failed to comply with the relevant requisition of the Ld. AO in respect of the assessee. The assessee had actually disclosed gross profit at 8.42%. The ld. AO proceeded to complete the assessment by determining the gross profit at 42.48% which was the profit declared in the preceding assessment year by the assessee. The ld. AO applied the rate of 42.48% on the total sales of Rs. 23,55,85,195/- disclosed in the accounts of the assessee and estimated the gross profit at Rs. 10,00,76,590/- as against Rs. 1,98,38,326/- disclosed by the assessee thereby making an addition of Rs.8,02,38,264/- as concealed gross profit and framed the assessment u/s 144 of the Act.
4. On first appeal, the ld. CITA vide para 7.1 of its order has observed as follows:-
"7.1. On perusal of the assessment it is seen that the AO did not dispute the turnover shown by the appellant or the other incidental expenditure incurred for effecting such turnover to the extent of Rs. 23,55,85,195/-. Therefore, it can be said that the turnover and expenditure incurred during the assessment year under dispute were not doubted by the AO. His only grievance was that the rate of G.P. in the concerned assessment year was low in comparison to the immediately earlier assessment year. He has not even discussed anything in the assessment order or given any acceptable reason for adopting the G.P. rate of earlier year and application of the same in the impugned assessment year when admittedly the AO did not dispute the factual position as explained by the appellant. In fact, the situation prevalent in the assessment year 2008-2009 is thoroughly distinguishable as the turnover in the impugned assessment year is 7 times more than that recorded in that year. Further, it is an accepted proposition that where turnover is enhanced, gross profit has to be sacrificed to an extent. The turnover for the assessment year under dispute was to the tune of Rs. 23,55,85,195/-, which was more than 7 times in comparison to earlier year's figure of only Rs.3,45,33,965/- and the quantum of gross profit rose to Rs.l,98,38,326/- during the year under consideration in comparison to earlier year's G.P. in the sum of Rs.1,46,71,246/-. Therefore, applying such proposition to the facts of the instant case, the fall in G.P. rate seems to be in tune with the circumstances. Further, there is no other comparable case brought on record 3 ITA No.2318/K/2013 & CO No.106/K/2014 Sitalamata Oil Mill Pvt. Ltd. AY 2009-10 by the AO to justify his estimate. Therefore, it emerges that when the turnover is not disputed and expenses incurred for achieving such turnover are also not disputed, then the gross profit declared by the appellant on such turnover can never be doubted. Estimate of G.P. made by the AO should be on plausible reasons backed by evidence, which is glaringly missing in the instant case. However, in such circumstances, although the submission of the A/R is plausible about low rate of G.P. in the impugned assessment year in comparison to immediately earlier assessment year, but the undisputed facts remain that the books of accounts were not available to the AO and the items of expenditure could not be verified. The entire thing is based on estimate. It is well-settled in the case of Kachwala Gems vs. JCIT (2006) 288 ITR 10 (SC) that in a best judgment assessment, there is always a certain degree of guess work. No doubt, the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment, and should not act totally arbitrarily. As stated above, in the instant case, I find no basis for the estimate as made by the AO. In fact, the estimate is thoroughly capricious. The addition of income by way of gross profit is not a concomitant of the rejection of books of account. Therefore, considering the affairs of the instant case, huge turnover and higher quantum of gross profit in comparison to earlier assessment year, in my considered opinion, it would meet the ends of justice if the rate of G.P. for the assessment year under dispute on the turnover shown and accepted by the AO is taken @ 10%. I, therefore, direct the AO to take G.P. @ 10% on the admitted turnover instead and place of 8.15% disclosed by the appellant and determine the income accordingly. Ground No. 1 and 3 is partly allowed to the above extent."
5. Aggrieved, the revenue is in appeal before us on the following grounds:-
"Assessment was completed on the basis of materials available on record and rate of G.P. of 42.48% as disclosed by the assessee during the assessment year 2008-09 was adopted instead of 8.42% as disclosed for this assessment year.
Ld. C.I.T (A) has erred in restricting the G.P rate at 10% without any basis, whereas in the financial year 2007-08, the G.P rate disclosed by the assessee is 42.48% which was adopted by the AO while passing the ex-parte order.
Ld. C.I.T (A) has erred in concluding that this estimation made by the AO was without any basis. The AO was compelled to pass ex-parte order u/s.144 of the I. T. Act, 1961 due to non-cooperation of the assessee and adopted the G.P rate which was disclosed by the assessee itself during the financial year 2007-08."
The assessee had also raised cross objections before us on the following grounds :-
"1. FOR THAT the Ld. Commissioner of Income Tax (Appeals) XXXVI, Kolkata failed to appreciate that none of the conditions precedent existed and/or has been complied with and/or fulfilled in the instant case for assumption of jurisdiction u/s. 145(3) of the Income Tax Act, 1961 by the Ld. Joint Commissioner of Income Tax, Range 1, Midnapore and his purported finding on that behalf is completely unfounded, unjustified and untenable in law.
2. FOR THAT the Ld. Commissioner of Income Tax (Appeals) XXXVI, Kolkata was remiss in upholding the rejection of books of accounts by the Ld. Joint Commissioner of Income Tax, Range 1, Midnapore for estimation of Gross Profit by unwarranted application of s. 145(3) of the Income Tax Act, 1961 while taking into account the figures in the trading account in the impugned books and the failure of non estimation of Net Profit in such circumstances is based on extraneous considerations not germane to the issue in dispute which is wholly illegal, illegitimate and infirm in law.4 ITA No.2318/K/2013 & CO No.106/K/2014
Sitalamata Oil Mill Pvt. Ltd. AY 2009-10
3. FOR THAT the specious action of the Ld. Commissioner of Income Tax (Appeals) XXXVI, Kolkata in upholding the estimate on account of Gross Profit to the extent of 10% vis-a-vis 42.48% adopted by the Ld. Joint Commissioner of Income Tax, Range-1, Midnapore indulging in speculation, surmise, suspicion and conjecture is altogether excessive, arbitrary, unwarranted and perverse."
6. The Ld. DR vehemently supported the order of the ld. AO by stating that the ld. AO did not have any other option but to resort to estimation of gross profit as even the statutory notices could not be served on the assessee in view of the possession taken over by the creditor of the assessee i.e Punjab National Bank. Even the summons issued u/s 131 of the Act to the Bank calling for books of accounts of the assessee and other details were not replied by the Bank. Under these circumstances, the ld. AO went by the past history of the assessee wherein it had started the business in the immediately preceding asst year wherein gross profit of 42.48% was earned by the assessee. The ld. AO instead of resorting to external comparables sought to adopt the gross profit rate of earlier year of the assessee itself. He further argued that the relief given by the ld. CITA to restrict the gross profit to 10% of turnover was without any basis.
7. In response to this, the ld. AR argued that there was total inability on the part of the assessee to produce the details called for by the ld. AO as stated supra and the ld. CITA had clearly stated that the turnover of the assessee had increased by 7 times during the year under appeal as compared to the immediately preceding asst year and for which purpose, the assessee had to obviously compromise on the gross profit margins. In any case, the gross profit determined by the ld. AO was more than 5 times of the declared amount without offering any clinching proof in this respect. This only results in absurdity and it is practically not possible to earn this much of profit in the industry in which assessee was involved. He further argued that the identical issue came up before this tribunal in the case of sister concern of the assessee in the case of ACIT vs Sitalamata Rice Mill Pvt Ltd in ITA No. 2317/Kol/2013 dated 1.1.2015.
8. We have heard the rival submissions including the paper book filed by the assessee from pages 1 to 102. We find that the accounts of the assessee were duly audited and no adverse inference was drawn by the auditor. The books of accounts 5 ITA No.2318/K/2013 & CO No.106/K/2014 Sitalamata Oil Mill Pvt. Ltd. AY 2009-10 could not be produced before the ld. AO as the assessee's unit had been taken over by the lending institution. The entire unit including its assets and the books of accounts were in the possession of the bank. The ld. AO was duly aware of this fact and accordingly had also issued summons u/s 131 of the Act to the bank but despite that they have not produced the books of accounts. In such a situation, in our opinion, adverse inference cannot be drawn against the assessee on the ground that books of accounts were not produced by the assessee. We find that asking the assessee to produce the books of accounts in these circumstances would only result in impossibility of performance. The legal maxim 'LEX NON COGUT AD IMPOSSIBLIA' - a law cannot compel a man to perform an act which he cannot possibly perform would come to the rescue of the assessee. In such a situation, we note that the decision of the Hon'ble Delhi High Court in the case of Addl CIT vs Jay Engineering Works Ltd reported in (1978) 113 ITR 389 (Del) dated 21.2.1978 wherein it was held that :-
"The Income-tax Officer and certain other authority functioning under the Income-tax Act have a dual character. They are both agencies of investigation made into the incomes of assessees and they are also quasi- judicial authorities assessing the liabilities of the assessees to payment of income-tax. Under section 142(2) of the Act the Income- tax Officer may make such enquiry as he considers necessary for the purpose of obtaining full information in respect of the income or loss of an assessee. Under section 143(3) of the Act, the Income-tax Officer does not only hear such evidence as the assessee may produce or as he may require to be produced, but also takes into consideration "all relevant material which he has gathered" for the purpose of making an assessment. While the word "evidence" may recall the oral and documentary evidence as may be admissible under the Indian Evidence Act, the use of the word "material" shows that the Income-tax Officer not being a court can rely upon material which may not be strictly evidence admissible under the Indian Evidence Act for the purpose of making an order of assessment. Courts often take judicial notice of certain facts which need not be proved, while administrative and quasi-judicial authorities can take "official notice" of wider varieties of facts which need not be proved before them. Thus, not only in respect of the relevancy but also in respect of proof the material which can be taken into consideration by the Income-tax Officer and other authorities under the Act is far wider than the evidence which is strictly relevant and admissible under the Evidence Act.
Under section 34 of the Indian Evidence Act account books maintained in the regular course of business are evidence after the relevant entries are proved by oral evidence or are admitted. The Income-tax Officers, however, have to deal with such numerous cases of assessment that they can accept as correct books of account maintained in regular course of business without such a formal proof.
In the present case, the relevant books of account in which detailed information as to the expenses which were claimed as deductions for the assessment years 1962-63 and 1963- 64 are destroyed by fire in November, 1962. Under the Indian Evidence Act secondary 6 ITA No.2318/K/2013 & CO No.106/K/2014 Sitalamata Oil Mill Pvt. Ltd. AY 2009-10 evidence of the contents of these account books would have to be adduced if they were to be used to prove any fact. The external auditors of the assessee-companies had, however, made their annual reports under section 227(2) of the Companies Act, 1956, to the members of the company on the accounts examined by them and on the balance- sheets and profit and loss accounts for these two years. These reports do not doubt the correctness of the expenses, deductions of which were claimed by the assessees. Under section 227(3)(b) and (c) the auditor's report had to state whether in their opinion proper books of account as required by law have been kept by the company and whether the company's balance-sheets and profit and loss accounts were in agreement with the books of account and returns. Under section 209 of the Companies Act, the assessee- company was required to maintain proper books of account with reference to the receipts and expenditure taking place in the business of the assessees. The account books maintained by them must be such as to give a true and fair view of the state of affairs of the companies.
The question arises, therefore, whether the reports of the auditors could be said to be "material" on which reliance could be placed by the income-tax authorities. Unlike the proof required of such reports as also of the account books under the Indian Evidence Act, it is quite competent for the income-tax authorities not only to accept the auditors'. report, but also to draw the proper inference from the same. The income-tax authorities could, therefore, come to the conclusion that since the auditors were required by the statute to find out if the deductions claimed by the assessees in their balance-sheets and profit and loss accounts were supported by the relevant entries in their account books, the auditors must have done so and must have found that the account books supported the claims for deductions, when the deductions were disallowed, by the Income-tax Officer on the ground that detailed information regarding them was not available, justice was not done to the assessees. It was not possible for the assessees to produce the original account books, which were destroyed in fire. There was, however, other material mainly consisting of the auditors' reports from which it could be inferred that the deductions were properly supported by the relevant entries in the account books. In a sense it may be a question of law as to what the meaning of "material" is and whether the auditors' reports were material. But the question of law is well settled and is not capable of being disputed and does not, therefore, call for reference.Point No. 2
The Tribunal has stated that, though, ordinarily, the adjustments relating to expenses should have been made by the assessees in the accounts of the year to which the adjustments relate and not in a subsequent year, it is often inevitable that such adjustments relating to earlier years have to be made in subsequent years. This is specially so, when the business, as of the assessees, is of giant proportions and the branches are farflung. The Tribunal has also very properly relied upon the auditors' reports to draw the proper inference from the same. Since the evidence in income- tax proceedings need not consist necessarily of evidence admissible under the Evidence Act but may consist of other material which has a probative value, the Tribunal was justified in taking such material into account.
It cannot, therefore, be said that the decision of the Tribunal was not based on any evidence. On the contrary, it was based on evidence meaning thereby that it was based on relevant material which can be considered in the income-tax proceedings. The applications are, therefore, dismissed."
8.1. It is an admitted fact that the assessee was engaged in the business of manufacturing edible oil. In pursuance of its activities, it had raised a huge loan of 7 ITA No.2318/K/2013 & CO No.106/K/2014 Sitalamata Oil Mill Pvt. Ltd. AY 2009-10 Rs.1,78,36,065/- as cash credit facility and Rs.1,16,19,863/- on account of term loan from Punjab National Bank, Midnapore Branch. In fact, the aggregate amount of secured loan was to the tune of Rs.5,07,46,485/-. It had also raised an amount of Rs.3,70,64,511/- on account of unsecured loan. The ld AR argued that as the law and order problem related to the Maoist insurgency in such area had risen to the extreme, the business activities of the assessee had suffered badly. The business effectively became hostage to the high handed dictates in respect of prices paid for oil seeds, the raw material and the rate of sale regarding the finished product 'oil'. The sharp declining trend in the gross profit ratio in edible oil industry is to be accepted in the previous year relevant to the asst year under appeal in an area infected with Maoist menace from which there was no respite. The labour deployed was under their thumb and it was futile to exhort them to stick to maintain productivity. As a result, huge inputs resulted in low outputs which made earnings so low as to make it impossible to service the loans with the ultimate result that the creditor bank took possession of the office and the unit due to default. We find lot of force in the arguments of the ld AR as these facts were not disputed by the revenue before us.
8.2. It is not in dispute that the gross profit declared by the assessee during the year under appeal is much less than that declared in the immediately preceding asst year. The assessee cannot purchase and sell except at market determined prices. The only leeway is to sell below the market price to undercut the others to raise turnover and keep competition at bay so as to achieve the benefit in the long run. In the process, the gross profit has to be squeezed so that reference to an earlier year involving far less turnover would only result in absurdity. The turnover of the assessee for the preceding year was only Rs. 3,45,33,965/- whereas for the impugned assessment year it was Rs. 23,55,85,195/-. It was argued before the ld. CITA that the assessee had to increase its sales by undercutting the market price for a very good reason as it was in debt to the bank and all efforts had to be made to increase the net profit to service the debt. But even after such attempts, the assessee had to suffer the extreme prejudice of being taken over by the bank. We find that this is a telling instance of the assessee failing in its efforts to achieve its objects through its actions. We find that the ld CITA had categorically stated that the turnover and the direct expenses incurred by the assessee 8 ITA No.2318/K/2013 & CO No.106/K/2014 Sitalamata Oil Mill Pvt. Ltd. AY 2009-10 has not been disputed by the Ld. AO. We also find that the trading account cannot be interfered with unless purchases are proved to be bogus or overstated or sales are understated. In the instant case, no such stance has been taken by the ld. AO. No anomalies were found by the ld. AO on the purchases, sales and closing stock declared by the assessee. The Ld. AR filed a comparison of the trading account for the years ended 31.3.2009 (year under appeal) and that of 31.3.2008 (preceding year). From the same it could be seen that the gross profit during the year had reduced by 34.06%; consumption to the percentage of turnover had increased by 34.95% and direct expenses had decreased by 0.89% in the year ended 31.3.2009 when compared to that of the immediately preceding year. In these circumstances, adoption of preceding year's gross profit would only result in absurdity as rightly pointed out by the ld. CITA. We find that the assessee had declared profit at 8.42% in its return based on audited data. We find under these circumstances, the revenue had to place the complete reliance on the audited financial statements for the purpose of determination of total income. The ld. CITA had estimated the total income at 10% of turnover. However , we, in our considered opinion, in the facts and circumstances of the case, especially considering the state of affairs in which assessee is placed, feel that adoption of profit at the rate of 9% of turnover would meet the ends of justice. The ld. AO is directed to adopt 9% of turnover as income of the assessee as against 42.48%. Accordingly the grounds raised by the revenue are dismissed and cross objections of the assessee are partly allowed.
9. In the result, the appeal of the revenue is dismissed and cross objection of the assessee is partly allowed.
10. Order is pronounced in the open court on 08.07.2016.
Sd/- Sd/-
(S.S.Viswanethra Ravi) (M. Balaganesh)
Judicial Member Accountant Member
Dated : 8th July, 2016
Jd.(Sr.P.S.)
9 ITA No.2318/K/2013 & CO No.106/K/2014
Sitalamata Oil Mill Pvt. Ltd. AY 2009-10
Copy of the order forwarded to:
1. APPELLANT - ACIT, Circle-1, Midnapore
2 Respondent -Sitalamata Oil Mill Pvt. Ltd., C/o S. N. Ghosh &
Associates, Advocates, Seven Brothers' Lodge, P.O. Buroshibtala, P.S. Chinsurah, Dist. Hooghly-712105
3. The CIT(A), Kolkata
4. CIT , Kolkata
5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar.