Income Tax Appellate Tribunal - Amritsar
Assistant Commissioner Of Income Tax vs Punjab Bone Mills on 19 September, 2005
Equivalent citations: (2006)103TTJ(ASR)564
ORDER
Joginder Pall, A.M.
1. This appeal of the Revenue has been filed against the order of the CIT(A), Jalandhar, for the asst. yr, 1998-99.
2. The first two issues raised in this appeal relate to the fact that the learned GIT(A) was not justified in holding that the assessee had maintained complete books of account and, therefore, provisions of Section 145(3) were not applicable and consequent deletion of trading addition of Rs. 62,18,003. The facts of the case are that the assessee was engaged in the business of manufacture and sale of glue flakes, technical Gelatin, Ossein, bone tallow and a by-product obtained in the form of Di-Calcium Phosphate. For the assessment year under reference, the assessee has shown GP of Rs. 2,59,03,398 on turnover of Rs. 10,07,75,897, which worked out to 25.07 per cent. The AO observed that in the asst. yrs. 1996-97 and 1997-98, the assessee had shown GP rate of 32.42 per cent and 30.01 per cent, respectively. Thus, he found a substantial fall in the GP rate. He also observed that the account books of the assessee were not supported by day-to-day records of consumption of raw material and production of finished goods, by-products obtained, shortages or wastage resulting in manufacturing process. Even the auditors in the audit report had not mentioned that the stock register had been maintained. He also observed that not even a single kilogram of process loss or wastage was reflected in the quantitative stock details as per column 12 of audit report in Form 3CD enclosed with the return. When the assessee was called upon to explain the reason for the fall in GP rate of 4.32 per cent as compared to last year, the assessee stated that complete manufacturing, stock and production register were maintained which gave a correct picture of the business activities of the assessee. However, the AO observed that there was marginal increase in the comparative cost of production, which was substantially neutralized by increase in the sale deed priced of various products. He also observed that in the audit report, auditors had mentioned that method of valuation of closing stock was cost price or market price whichever was lower. However, he found substantial difference in the cost price and the average sale rate, which according to the AO was almost static. According to the AO, the closing stock should have been valued by taking average sale rate and reducing therefrom margin of GP. He, therefore, found that the closing stock was undervalued by Rs. 32,56,558. The AO also observed that the process loss wastage, etc. was not incorporated in the audit report. Thus, the AO observed that book results were liable to be rejected and income required to be estimated under Section 145(3) of the IT Act, 1961. Accordingly, he rejected book results, invoked provisions of Section 145(3) and by applying GP rate of last year made a trading addition of Rs. 62,18,003. He also made addition of Rs. 32,56,558 on account of undervaluation of closing stock. But he observed that since trading addition of Rs. 62,18,003 exceeded the addition of Rs. 32,56,558, no separate addition on account of undervaluation of closing stock was made because the same was covered under the trading addition.
3. Being aggrieved, the assesses impugned the action of the AO for rejecting book results and applying the provisions of Section 145(3) and also making trading addition of Rs. 62,18,003. It was stated before the CIT(A) that the assessee had maintained complete books of account, which were also audited, statutory audit report under Section 44AB was also filed along with the return. The value of semi-finished goods weighing 175.900 MT at Rs. 13,63,753 was duly reflected in the closing stock. It was pointed out that the observations made by the AO that increase in the sale rate was much higher than the cost of production were not correct because while calculating the sale rate, the AO omitted to include an amount of Rs. 37,75,330 being expenses incurred on cartage charges and packing material debited to manufacturing and trading account. It was also pointed out that GP rate was declared at 23.12 per cent, 32.42 per cent, 30.01 per cent for the asst. yrs. 1995-96, 1996-97 and 1997-98, respectively. The GP rate for the immediately succeeding asst. yr. 1999-2000 was declared at 11.45 per cent, which was less than 14 per cent of the GP rate declared in the assessment year under reference. The assessments for the preceding assessment years and subsequent assessment year were completed under Section 143(3). Book results were accepted by the AO and no addition for the same had been made. Therefore, there was no justification for rejecting the book results and for making the trading addition for the assessment year under reference. It was also pointed out that the AO was not correct in observing that the assessee had not maintained complete quantitative details of raw material consumed, items manufactured, process loss, etc. It was submitted that such details formed part of the audit report filed with the return. It was submitted that the production was a continuous process. Such details were duly prepared by the assessee. The learned CIT(A) considered these submissions and observed that the facts of the case were similar to the facts of a sister-concern, i.e., namely, M/s Protinkem, Jalandhar, where trading addition made by the AO was deleted vide CIT(A)'s order dt. 16th May, 2002. Therefore, for the same reasons, the learned CIT(A) deleted the addition by observing that there was no justification in rejecting book results and invoking the provisions of Section 145(3) of the IT Act. The Revenue is aggrieved by the order of the CIT(A). Hence, this appeal before us.
4. The learned Departmental Representative heavily relied on the order of the AO and submitted that the submissions in this case were the same as made in the case of Protinkem reported as Asstt. CIT v. Protinkem (2006) 102 TTJ (Asr) 604Ed. heard on the same date.
5. The learned Authorized Representative also heavily relied on the order of the CIT(A) and reiterated the submissions, which were made before the authorities below. He further submitted that the facts of the present case are the same as in the case of Protinkem (supra), heard simultaneously. The submissions made therein may also be taken into account while deciding the present appeal.
6. We have heard both the parties and carefully considered the rival submissions, gone through the material and evidence placed on record and also the orders of the authorities below. We find that the facts of the present case are absolutely similar to the facts in the case of Protinkem (supra), which was also heard along with this case. For the detailed reasons recorded in our order dt. 15th Sept., 2005 in the case of Protinkem (supra), we have held that the AO was not justified in rejecting the book results, invoking the provisions of Section 145(3) and making the trading addition. The relevant findings recorded in the case of Protinkem, (supra)(ITA No. 283/Asr/2002) in paras 7 and 7.1 are as under:
7. We have heard both the parties at some length and given our thoughtful consideration to the rival contentions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below. From the facts discussed above, it is obvious that the AO rejected the book results mainly on the ground that the assessee had not maintained day-to-day details of consumption of raw material, items manufactured and the quantity of closing stock, GP rate for the assessment years was low as compared to earlier assessment years, the increase in the comparative cost of production was marginal vis-a-vis increase in sale rate and there was no basis for showing process loss. These findings of the AO have not been found correct by the CIT(A). The CIT(A) has clearly mentioned in the impugned order that the assessee had maintained stock register and quantitative details of consumption of raw material along with production of finished goods were made part of the audit report filed with the return of income. Nowhere the AO has mentioned that the assessee was asked to produce stock register and the assessee failed to produce the same. On the contrary, statements placed at pp. 20A to 20F clearly show that quantitative details, the working of the cost, valuation of closing stock furnished before the AO were part of the return itself. However, no defects therein have been pointed out by the Revenue. Besides, the method of valuation of closing stock has not been doubted by the Revenue. As regards the fall in the GP rate, the assessee has given proper explanation. Besides the facts placed on record do show that GP rate was 25.29 per cent, 31.93 per cent and 25.60 per cent for the preceding asst. yrs. 1995-96, 1996-97 and 1997-98, respectively. This again shows variation in the GP rate. For the immediately succeeding asst. yr. 1999-2000, the GP rate shown was 12.13 per cent which was lower than the GP rate of the assessment year under reference at 20.79 per cent and the assessments for all the assessment years were completed under Section 143(3). Neither books results were rejected nor any trading addition was made. This fact is very important because in the subsequent assessment year, i.e., 1999-2000, the fall in the GP rate was more than 8 per cent and even the process loss was higher at 42 per cent than 40 per cent in the assessment year under reference. Still no trading addition was made by rejecting book results. As regards process loss, it is a fact that the process loss is part of assessee's business. In fact, for the assessment year under reference, such loss has been shown at 40 per cent. Such process loss was shown at 42 per cent in the asst. yr. 1999-2000 and 43 per cent in the asst. yr. 1995-96. The assessee has submitted that such loss varied from 38 per cent to 43 per cent in spite of the fact that process loss for the other years was higher than the process loss of the assessment year under reference. Still, neither book results were rejected nor any trading addition was made. It is pertinent to mention that the AO very well knew that the substantial trading addition was made for the asst. yr. 1998-99 by rejecting the book results and by applying the GP rate of 25.60 per cent. In the subsequent assessment years, not only the GP rate was lower at 12.13 per cent, even the process loss was much higher at 43 per cent. Neither the book results were rejected nor any trading addition was made. In fact, apart from the assessment year under reference, the book results have always been accepted by the Revenue. Thus, even on merits, we find that book results were not liable to be rejected.
7.1 Even otherwise, we are of the view that principle of consistency demands that similar treatment should be accorded for all the assessment years. Reliance is placed on the judgment of Hon'ble apex Court in the case of Berger Paints India Ltd. v. CIT , Hon'ble Delhi High Court in the case of Director of IT v. Lovely Bal Shiksha Parishad , the decision of Tribunal, Chandigarh Bench in the case of Dy. CIT v. United Vanaspati Ltd. . In the case of CIT v. Vikas Chemi Gum India , the Hon'ble Punjab & Haryana High Court has held that if the Department did not contest the decision of CIT(A) for deleting the addition for the earlier asst. yr. 1986-87, it could not challenge similar order passed in relation to asst. yr. 1988-89. No doubt in this case, the order was passed by the CIT(A), but the fact remains that the Department has not made any addition for any of the assessment years, even though GP rate was low and process loss was higher in respect of many other assessment years as compared to the assessment year under reference. Therefore, there is no justification for taking a different view for the assessment year under reference. Taking into account these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that the CIT(A) was justified in holding that provisions of Section 145(3) were not applicable and consequently the trading addition has been rightly deleted. We confirm his order and reject both the grounds of appeal of the Revenue.
The facts of the present case being identical to the facts of the abovesaid case, the decision in the case of Protinkem (supra) would equally apply to the facts of the present case. Respectfully following the same, we confirm the order of the CIT(A) for deleting the trading addition and the finding that book results were not liable to be rejected and reject the first two grounds of appeal of the Revenue.
7. The next ground relates to an addition of Rs. 32,56,558 made by the AO on account of undervaluation of closing stock. Briefly stated, the facts of the case are that the AO observed that the assessee had valued the closing stock at cost price or market price whichever was less. He observed that the sale price was uniform throughout the year. Accordingly, the AO reduced the GP rate of 25.70 per cent from the average sale price and valued the closing stock of Ossien and Gelatine resulting in addition of Rs. 32,56,558. However, no separate addition on this account was made because the trading addition of Rs. 62,18,003 covered the same.
7.1 Aggrieved the assessee carried the matter in appeal before the GIT(A). It was submitted before the CIT(A) that the assessee had followed the same method of accounting, which was consistently followed for valuing the closing stock in the past and in the future. It was argued that while valuing the closing stock, the AO erroneously reduced the average GP rate of 25.70 per cent from the sale price, which was a defective method to arrive at the cost of each product because the GP rate varied from item to item. It was explained that the GP rate in Ossien was 15.48 per cent, Glue TG 27.83 per cent, but the AO reduced it by the average GP rate of 25.70 per cent. It was pointed out that if the AO had valued the correct method instead of reducing the average GP from the sales, the actual figure would have worked out to lesser amount. Accepting the contentions of the assessee, the learned CIT(A) deleted the addition by recording following findings in para 3.5 of the impugned order:
3.5 I have considered the submissions of the learned Authorized Representative, heard the AO and gone through the case records to verify the rival contentions. The method of valuation adopted by the appellant is recognized method, which has been consistently followed, and there is no change during the relevant assessment year. Further, the appellant is manufacturing various items and for valuation, the average GP earned in that item have to be applied than overall GP which was adopted by the AO to work out the value of the closing stock under these items. By adopting the gross margin figure actually earned by the appellant under these two products it becomes clear that there is no case of undervaluation of the closing stock as made out by the AO. The calculation of cost of production were enclosed in the form of schedules with the return of income and the same being in consonance with the method of valuation of the stock regularly followed by the appellant, therefore, the addition of Rs. 32,56,558 made by the AO which is without any basis is deleted. There will be no separate relief to the appellant as it is part of the trading addition of Rs. 62,18,003 decided in favour of the appellant.
The Revenue is aggrieved by the order of the CIT(A). Hence, this appeal before us.
7.2 The learned Departmental Representative heavily relied on the order of the AO.
7.3 The learned Authorized Representative, on the other hand, relied on the order of the CIT(A).
7.4 Having considered the rival contentions, we find no merit in the ground of appeal of the assessee (sic-Revenue). It is not in dispute that the assessee had consistently followed the same method of valuation of closing stock, i.e., at cost or market price, whichever is less. This is the accepted method of accounting for the purpose of income-tax assessments. The factual position stated by the learned CIT(A) that the AO erroneously reduced the average GP rate of 25.70 per cent in respect of both the items though the GP rate varied from item to item is not disputed by the Revenue. Moreover, the method of valuation of closing stock has been accepted in the past and in subsequent assessment years. Thus, in the light of these facts and in the absence of any material or evidence to show that the assessee had undervalued the closing stock, we are of the opinion that the learned CIT(A) was justified in deleting the addition. We confirm his order and reject this ground of appeal.
8. The last ground of appeal relates to reducing the disallowance out of repairs and replacement expenses from Rs. 14,12,100 to Rs. 35,000. The facts of the case are that the AO observed that the assessee had claimed expenses amounting to Rs. 28,24,195 (excluding car repairs) for repairs and replacement. He observed that considering the WDV of assets at Rs. 55,15,396, the expenses claimed on account of current repairs were excessive. The assessee was, therefore, asked to furnish the details of such expenses. The assessee could furnish only combined information of entire expenses of repairs and replacement. However, the AO observed that the assessee had claimed expenses of Rs. 4,58,728 on account of repair of building, which was beyond his comprehension. Thus, the AO disallowed 50 per cent of such expenses and made an addition of Rs. 14,12,100. It is worthwhile to mention that the AO did not treat the expenses of capital in nature.
8.1 Aggrieved, the assessee carried the matter in appeal before the CIT(A). It was submitted before the CIT(A) that the expenditure incurred under the head repair, replacement and maintenance related to 26 heads like building, boiler, plant and machinery, pipe fittings, tube well, electrical, scooter, cars, furniture, electric motors, etc. and head-wise details of such expenses were furnished before the AO during the course of assessment proceedings. Books of account were produced which contained separate ledger account in respect of each head of such expenses. Even the copies of certain vouchers called for by the AO were furnished. The AO has not pointed out any specific items, which were not allowable, The reasons for incurring heavy expenses on repair and replacement were also explained due to the fact that the hydrochloric acid had strong corrosive action and it slowly eats the iron metal. It was also submitted that in the asst, yrs. 1995-96, 1996-97, 1997-98 and subsequent asst. yr. 1999-2000, similar expenses of Rs. 31,22,610, Rs. 24,38,692, Rs. 29,98,869 and Rs. 21,40,692, respectively, were claimed and allowed while completing the assessments for these assessment years under Section 143(3) of the IT Act. The learned CIT(A) considered the submissions and restricted the claim (sic-disallowance) of the assessee to Rs. 35,000 by relying on his order in the case of sister-concern, namely, M/s Protinkem. The Revenue is aggrieved by the order of the CIT(A). Hence, this appeal before us.
8.2 The learned Departmental Representative heavily relied on the order of the AO and referred to the reasons given for making disallowance on pp. 6 and 7 of the assessment order.
8.3 The learned Authorized Representative, on the other hand, heavily relied on the order of the CIT(A) and reiterated the submissions made before the CIT(A). He also drew our attention to p. 20 of the paper book, which contained head-wise details of the expenses claimed on account of repairs, replacement and maintenance. He further drew our attention to pp. 21 to 113 of the paper book, which contained complete details of repairs and maintenance expenses, consolidated at p. 20 of the paper book. He further submitted that on identical facts, the AO had made disallowance @ 50 per cent in the case of sister-concern, namely M/s Protinkem. The learned CIT(A) deleted the disallowance; the Revenue has not even filed an appeal against the order of the CIT(A). Thus, he submitted that the CIT(A) has rightly deleted the addition.
8.4 We have heard both the parties and given our thoughtful consideration to the rival contentions, examined the facts, evidence and material on record. From the facts discussed above, it is obvious that the AO has disallowed the claim of the assessee without examining specific details of the expenses. It is not his case that the expenditure incurred was capital in nature because no depreciation on the same has been allowed. His finding is that 50 per cent of the expenses incurred are beyond the genuine needs of the assessee. Such finding is not supported by any evidence, and material on record. It is the claim of the assessee, which has not been rebutted by the AO that the entire expenses were supported by bills and vouchers. The genuineness of the same has not been disputed by the Revenue. Therefore, it is not understood as to how the claim of the assessee for repairs and maintenance expenses could be disallowed on ad hoc basis because it is not the case where it could be said that the assessee had incurred such expenses for personal use or has diverted payments to some of its associate concerns. It is also a fact that even in the past substantial expenses varying from Rs. 24.38 lakhs to Rs. 31.22 lakhs and expenses of Rs. 21.40 lakhs for the subsequent year had been claimed and allowed by the AO at the time of completing assessment for these assessment years under Section 143(3). Therefore, the rationale and logic of making disallowance in an isolated assessment year is not clear to us. In any case, similar disallowance of 50 per cent of such expenses incurred in the case of sister-concern, i.e., M/s Protinkem was made where similar expenses at the rate of 50 per cent amounting to Rs. 6,12,880 were disallowed. Such disallowance was deleted by the CIT(A). The Revenue has not even filed an appeal against the order of the CIT(A) on this issue. Therefore, principle of consistency demands that the Revenue should have not contested this issue on identical facts in the present case also. Reliance in this regard is placed on the decision of Hon'ble Supreme Court in the case of Beige: Paints India Ltd. v. CIT , where it was held that if the Department had accepted the decision in the case of one assessee, the Department could not challenge the same in the case of the other assessee without valid reason. Reliance is also placed on the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Vikas Chemi Gum India , the judgment of Hon'ble Delhi High Court in the case of Director of IT v. Lovely Bal Shiksha Parishad and the decision of the Tribunal Chandigarh Bench in the case of Dy. CIT v. United Vanaspati Ltd. (2004) 83 TTJ (Chd) (TM) 201 : (2005) 275 WR 124 (Chd) (TM) (AT). In the light of these facts and circumstances of the case, we are of the considered opinion that the learned CIT(A) was justified in deleting the impugned disallowance. We confirm his order and reject this ground of appeal of the Revenue.
9. In the result, the appeal of the Revenue is dismissed.