Income Tax Appellate Tribunal - Ahmedabad
Ashish Dyeing & Printing Mills ... vs Department Of Income Tax on 9 April, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
Before SHRI D K TYAGI,JM & SHRI A N P AHUJ A, AM
ITA No.2057/Ahd/2010
(Assessment Year:-2007-08)
Income-tax Officer, W ard- V/s M/s Ashish Dyeing &
1(1), Room no.111, Printing Mills Pvt. Ltd., S-
Aayakar Bhavan, Majura 101, J.J. AC Market, Ring
Gate, Surat Road, Surat
PAN: AACCP 3637 R
[Appellant] [Respondent]
Revenue by :- Shri U S Raina,DR
Assessee by:- Shri Hardik Vora, AR
O R D E R
A N Pahuja: This appeal by the Revenue filed on 15.6.2010 against an order dated 9-04-2010 of the ld. CIT(Appeals)-I, Surat for the Assessment Year 2007-08, raises the following grounds:-
1 "On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the rejection of books of accounts and making GP addition made by the AO of Rs.8,17,532/-.
2 On the facts and in the circumstances of the case, the learned CIT(A) ought to have upheld the order of the AO.
3 It is, therefore, prayed that the order of the CIT(A) may be set-aside and that of AO may be restored to the above extent."
2 At the outset, the learned AR on behalf of the assessee pleaded that the tax effect in the appeal filed by the Revenue being below Rs.3 lakhs, the appeal should not be entertained in view of the decision dated 3-03-2011 of the Hon'ble Delhi High Court in the case of CIT vs. Delhi Race Club Ltd. in ITA no. 128/2008,following their decision dated 2.8.2010 in CIT v M/s P S Jain and Co.,in ITA no. 179/19910. On the other hand, the learned DR pointed out that appeal has been filed in terms of CBDT instruction no. 5 of 2008 dated 15.5.2008 and contended that recent instruction dated ITA no.2057/Ahd/2010 9.2.2011 did not apply to the pending matters. Inter alia, the ld. DR relied upon Full Bench decision dated 4.2.2011 of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Varindra Construction Co. in ITA no.209 of 2003 .
3. After hearing both the parties, we find that the Instruction no. 3 of 2011 dated 9.2.2011 itself specifies in para 11 that the said instruction would apply to appeals filed on or after 9.2.2011. Prior to this, instruction no. 5 of 2008 dated 15.5.2008 also mentioned in similar terms in para 11 that the said instruction would apply to all the appeals filed on or after 15.5.2008.In this context, Full Bench of Hon'ble Punjab & Haryana High Court in their decision dated 4.2.2011 in the case of CIT vs. Varindra Construction Co. in ITA no.209 of 2003 concluded as under:
"10. After due consideration of rival contentions, we are in agreement with the contention raised on behalf of the revenue. Circular laying down monetary limit controls the filing of the appeals and not their hearing. Appeals filed as per applicable limit at the time of filing cannot be governed by circular applicable at the time of hearing. We respectfully differ from the view taken by Bombay High Court as followed by this Court. The object of circular under section 268A as already mentioned is only to govern monetary limit for filing of the appeals. There is no scope for reading the circular as being applicable to pending appeals. Even Hon'ble the Bombay High Court held that the circular was not retrospective. It only observed that having regard to the falling money value and choking Court docket, policy of monetary limit was needed to be adopted for pending matters. The document referred to as circular dated 5.6.2007, in our view, has not been properly appreciated. It only says that the department was not following instructions as to monetary limit while filing the appeals and should examine whether pending appeals which did not conform to prescribed monetary limit should be withdrawn. The said memorandum was purportedly issued on a direction of the High Court and was applicable only to cases pending in Bombay High Court. The same cannot be read to mean that in all High Courts, all pending appeals were to be examined in the light of monetary limit applicable on the date of hearing and not on the date of filing.
11. Accordingly, we hold that monetary limit laid down vide circular dated 15.5.2008 will apply only to filing of appeals. Appeals already filed and pending prior thereto will be governed by monetary limit laid down at the time of filing."
3.1 Since the instant appeal by the Revenue has been filed on 15.6.2010 and is ,thus, governed by the instruction no. 5 of 2008 2 ITA no.2057/Ahd/2010 dated 15.5.2008, in the light of view taken by the Hon'ble Punjab & Haryana High Court in their aforecited decision, we have no hesitation in rejecting the plea of the ld. AR. Therefore, we proceed to decide the appeal on merits.
4. Adverting now to ground no.1 in the appeal, facts, in brief, as per relevant orders are that return declaring nil income filed on 31- 10-2007 by assessee, engaged in dyeing and printing of fabrics on job work basis, was taken up for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act,1961[hereinafter referred to as the 'Act'] on 20.9.2008. The Assessing Officer [AO in short] noticed that the assessee company disclosed gross profit[GP] @ 14.51% on sales of Rs.8,17,53,204/- in the year under consideration as against GP @ 19.39% on sales of Rs.8,57,77,537/- in the immediately preceding year. Since GP declined by 4.88% in the year under consideration vis-à-vis results of the immediately preceding year and the assessee company did not maintain any day to day stock details of colour, chemicals, coal, lignite and like , resulting in inability of the AO to verify the reasons for the fall in the GP, the AO asked the assessee to explain as to why the book results should not be rejected u/s 145(3) of the Act and resultantly GP determined on the basis of results of the preceding year i.e. why GP should not be adopted at 19.39%. Initially, the assessee did not submit any explanation. Later, on 15-12-2009, the assessee's AR filed written submissions, mentioning as under:-
"First of all we would like to draw your kind attention to the fact that total quantity of cloth processed was higher in the current year in comparison to immediate preceding year, whereas total job charges were reduced, in fact the processing industry was running in acute crisis owing to recession and cut throat competition, assessee company succeeded to obtain higher quantity of cloth for processing in such conditions because management decided to reduce the rates of processing by reducing margin of profit to attract the customers. A statement is being produced showing comparison of total quantity of cloth processed and amount of job charges received in both the periods.
3
ITA no.2057/Ahd/2010
Particulars A.Y. 2007-2008 A.Y. 2006-2007
Total Job Charges 8,17,53,204 8,57,77,537
Cloth Processed (Qty.) 1,04,18,083 1,01,42,037
Average Job Charges 7.85 8.46
(Per Mt.)
It is seen from the above given chart that average rate per meter was slashed from its earlier, which directly affected the margin of profit, to establish the fact, copies of some bills of job charges issued by the company in both the period for same quality of goods are attached, which proves the reduction in the rate of job charges.
A comparative study of consumption of colour & chemical reveals that percentage of consumption is higher in the current year in comparison to immediate preceding year. It was because rate of some of the items of the colour & chemical were raised, to prove the fact copies of some of the bills of purchases relevant to both periods are attached. It is further submitted that overall effect of the price rise on the rate of gross profit is 3.52%.
It is brought to your kind notice that expenditure of electricity was also increased in comparison to earlier year because of rise in the rate of electricity, to prove the same copies of some of the bills for both the period are attached. It is also considerable that an electric subsidy of Rs. 12,54,921 was given to the assessee company in the period relevant to immediate preceding year, which was not there in the current year. Your honour will appreciate the fact that expenditure in the earlier year was reduced by the same amount, which directly affected the rate of gross profit. Your kind attention is invited to the fact that overall effect of electricity on the rate of gross profit is 2.53%.
Considering the above reasons and after giving the effect of the same in the comparative figures of rate of gross profit, following position emerges.
Original short fall as shown in the submission 4.88%
Less:- a) On account of colour & chemical 3.52%
b) On account of electricity 2.53%
6.05%
-----------
Short Fall remains at (-) 1.17%
Your honour will appreciate the fact that besides slash in rates of job charges rate of gross profit would have been better if the two ' expenses remained same as that of earlier year. Management of the company in fact 4 ITA no.2057/Ahd/2010 tried hard and controlled other direct and indirect expenditures to curtail the reduction of job charges and appreciation of rate of colour & chemical and fuel. The figure shows that management succeeded to some extent.
The rate of gross profit declared by the company was though lesser in comparison to its earlier years' but at the same time the rate was most reasonable and adequate considering the general rate of profit showing by other companies in this line of business.
To prove the genuineness of the books and purchases, assessee Company has collected some confirmations from various parties of purchases, which were furnished earlier.
All books of accounts and other records was maintained as provided in the law and same were completed and closed in due course and audited by a chartered accountant.
Assessee company maintained complete quantitative records in' respect of all inward or outward of goods were duly maintained.
All sales and purchases were supported by relevant vouchers and all major transactions were made through cheque.
No suppression of job charges as well as bogus purchases was found or noticed during the course of assessment proceedings.
No mistake or discrepancy was found or noticed, which may become the legitimate reasons for rejection of books of accounts.
Comparison of rate of gross profit with one period to another and one party to another is not logical because changes in circumstances several other factors.
These are umpteen number of court cases on this issue but we think it sufficient to cite following two cases of our jurisdictional ITAT.
Pushpanjali Dyeing & Printing Mills Pvt. Ltd. vs. JCIT (2001) 72 TTJ (Ahd) 886 Kiran Corp. vs. ACIT (2006) 98 ITD 119 (Ahd) (TM)."
4.1 However, the AO did not accept the submissions of the assessee and rejected the book results on the ground that the percentage cost of colour chemicals, freight, electricity, octroi and gas have increased during the year under consideration as compared to the immediately preceding year whereas that of other inputs have decreased; the 5 ITA no.2057/Ahd/2010 combined cost of all the above five inputs was only 50.54% whereas the cost with respect to the balance 49.46% decreased. Moreover, the job charges average per metre received by the assessee decreased from Rs.8.46/mtr in the immediately preceding year to Rs.7.85/mtr in the year under consideration. This coupled with the absence of the basic records of day-to- day issue, receipt and consumption of raw materials as also stock records and non-availability of details of closing stock of 'work-in-progress', led the AO to conclude that the books of account of the assessee company could not be considered to be complete and the reasons put forth becomes unverifiable. Accordingly, the AO invoked the provisions of sec. 145(3) of the Act while relying upon decisions in SN Namasivayam Chettiar vs. CIT,38 ITR 579(SC) & CIT vs. British Paints India Ltd.,188 ITR 44(SC) and rejected the book results. Accordingly, increasing the GP by 1% of the gross receipts, the AO added an amount of Rs.8,17,532/-.
5. On appeal, the Ld. CIT(A) deleted the addition in the following terms;
" I have considered the submission made by the appellant and the observation of the AO.I agree with the appellant that the AO has brought no specific defects in the books of account. There is no discrepancy in respect of purchase or job charges received. Merely because consumption register is not there and GP fallen, the AO cannot reject the books of account. The appellant has been able to explain the fall in GP rate due to decrease in job charges received and increase in cost of colour and chemicals as well as effect of electric subsidy. Therefore, the addition made by the AO is deleted and these grounds of appeal are allowed."
6. The Revenue is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned DR supported the order of the AO and relied upon the statement of facts, annexed to the appeal, referring to decisions in ITAT, Mumbai in the case of Samir Diamonds Exports Ltd.,71-ITD-750(Mumbai), Awadhesh Pratap Singh Abdul Rehman & Bros vs. CIT,210 ITR 406(All) and Hari Shankar Gopal Hari,97 ITR-716(All). On the other hand, the learned AR on behalf of the assessee supported the findings of the learned CIT(A) while relying 6 ITA no.2057/Ahd/2010 upon the decision dated 11-02-2011 of the ITAT in Mamta Silk Mills Pvt. Ltd. vs. ITO in ITA no.1669/Ahd/2008 and ITA no.370/Ahd/2009 for the AYs 2004-05 and 2005-06 respectively and order dated 21- 08-2009 in Dharmesh Silk Mills P. Ltd. vs. ITO in ITA No.4108/Ahd/2007 for the AY 2004-05.To a query by the Bench, the ld. AR replied that assessee is not in appeal against any of the findings of the ld. CIT(A).
7. We have heard both the parties and gone through the facts of the case as also the decisions relied upon. We find from the assessment order that the AO did not point out any specific defects in the books of account while ignoring the book results nor brought any material on record regarding the genuineness of expenditure on account of colour chemicals, freight, electricity, octroi and gas etc.. There is no finding or opinion either that the records were incorrect and incomplete or that the method applied was such that the income could not be deduced from the accounts maintained by the assessee. The ld. CIT(A) found that the assessee has been able to explain the fall in GP rate due to decrease in job charges received and increase in cost of colour and chemicals as well as owing to non-receipt of electric subsidy in the year under consideration. Hon'ble Gauhati High Court in Aluminium Industries (P) Ltd. v. CIT (I.T.R. No. 12 of 1990) observed that a lower rate of gross profit declared by the assessee as compared to the previous year, would not in itself be sufficient to justify any addition. The mere fact that the percentage of loss or gross profit is high or low in a particular year does not necessarily lead to inference that there has been suppression. Low profit is neither a circumstance nor material to justify addition of profits. The ratio of the judgments in Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC); Raghubir Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 (SC); State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC); State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC); Brij Bhusan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC); Chouthmal Agarwalla v. CIT [1962] 46 ITR 262 (Assam); R.V.S. and Sons Dairy Farm v. CIT [2002] 257 ITR 764 (Mad); International Forest Co. v. CIT [1975] 101 ITR 721 (J & K) ; M. Durai Raj v. CIT [1972] 83 ITR 484 (Ker); Ramchandra Ramnivas v. State of Orissa 7 ITA no.2057/Ahd/2010 [1970] 25 STC 501 (Orissa); Action Electricals v. Deputy CIT [2002] 258 ITR 188 (Delhi) and Kamal Kumar Saharia v. CIT [1995] 216 ITR 217 (Gauhati) indicate that the AO is not fettered by any technical rules of evidence and pleadings, and he is entitled to act on material which are not acceptable in evidence in a court of law, but while making the assessment under the principles of best judgment, the Income-tax Officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment. 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 Gunwantbhai, 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 shown 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 AO to make any addition on estimate basis or on pure guess work. The AO, without recording any finding that the books of account maintained by the assessee were incorrect, rendering it impossible to deduce the profits, proceeded to reject the book results, invoking the provisions of sec. 145 of the Act. 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. In these circumstances , there was no justification in invoking the provisions of section 145 of the Act [ Vikram Plastics,239 ITR 161(Guj). Since the AO has not mentioned any specific defects for ignoring the book results nor adduced any basis for increasing the GP by 1%, we are of the opinion that the ld. CIT(A) was justified in deleting the addition. As regards decisions relied upon in the statement of facts, these were rendered on their own peculiar facts and the ld. DR did not demonstrate before us as to how these decisions are applicable in the facts and circumstances of the case under consideration. Rather, in the decision relied upon by the ld. AR in Dharmesh Silk Mills P. Ltd.(supra), the ITAT deleted the addition under similar circumstances while distinguishing the decisions relied upon in the statement of facts. The Tribunal held in their order dated 21-08-2009 as under:-
8ITA no.2057/Ahd/2010 "7. We live heard the rival submissions. It is pertinent to note that the assessee is engaged in the dyeing and printing of grey cloth on job work basis. It is the observation of the authorities below that the assessee has no quantitative records in respect of day to day consumption of color and chemicals and other inputs, which are the major raw materials for the assessee. To this the assessee's explanation is that keeping quantitative records of colour and chemicals is very difficult to keep as the items are in liquid form and therefore the stock of colours and chemicals is physically taken on 31st March by the management and the same is valued at cost.
There is no dispute of the fact that the assessee has maintained the details of purchases of colours and chemicals and steam coal. No defect could be pointed out by the Revenue in the said details. When the assessee has maintained the details of purchases and also the physical stock as on 31st March valued at cost, from which no defect was found by the Revenue, in our considered view, non-maintenance of day to day consumption record of the inputs cannot be a ground for rejection of books of accounts. The decisions relied on by the learned CIT(A) in support of his order confirming rejection of books of accounts are on distinguished facts. In the case of Kachwala Gems v. JCIT (288 ITR 10), the assessee had not maintained quantitative details/stock register; there was no evidence to verify closing stock, the genuineness of purchases was not proved without any doubt. But in the present case at hand, there is no dispute about the purchases of colours, chemicals, steam coals etc. No defect has been pointed out by the authorities below in such details of purchases. The assessee has maintained closing stock by taking physical stock of the year. In the case of Abdul Rauhman & Brothers v. CIT (210 ITR 406) and in the case of Hari Shankar Gopal Hari v. CIT (97 ITR 716) relied on by the learned CIT(A), it has been observed that whether the presence or the absence of a stock register is material or not would depend upon the type of the business. In the instant case the assessees is engaged on the dyeing and printing of grey cloth on job work basis. The use of colour and chemicals depends upon the designs of colour to be printed. In case of dark colours the use of colour and chemicals is higher and therefore, the ratio of consumption of colour and chemicals cannot be d in proportion of the turnover of processed meters of cloth. Considering the nature of business, there is no denial of the fact that in such type of business it is very difficult to maintain day to day consumption of colours, chemicals and steam coal etc. True it is that during this year the assessee has shown GP of 4.49% during the year under consideration against GP of 5.66% in Assessment Year 2002-03 and 5.35% in the Assessment Year 2003-04 and thus there is fall in the GP in terms of percentage by 0.86% in comparison to last year. Mere low GP alone cannot be a ground for rejection of books of accounts. Therefore, considering the facts and circumstances of the case in entirety, the rejection of books of accounts and making addition by way of estimation of GP, in our considered view, is not proper. The addition of Rs.2,27,389 made on this count is deleted."
9ITA no.2057/Ahd/2010 7.1 If there is no challenge to the transactions represented in the books, then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. In view of the foregoing, especially when the Revenue have not placed before us any material controverting the aforesaid findings of the ld. CIT(A). we have no hesitation in upholding his findings. Consequently, ground no.1 is dismissed.
8. Ground nos.2 & 3 ,being general in nature, do not require any separate adjudication and are, therefore, dismissed
9. In the result, appeal is dismissed.
Order pronounced in the court today on 1-04-2011
Sd/- Sd/-
(D K TYAGI) (A N P AHUJ A)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Date : 1 -04-2011
Copy of the order forwarded to:
1. M/s Ashish Dyeing & Printing Mills Pvt. Ltd., S-101, J.J. AC Market, Ring Road, Surat
2. Income-tax Officer, W ard-1(1), Room No.111, Aayakar Bhavan, Majura Gate, Surat
3. CIT concerned
4. CIT(A)-I, Surat
5. DR, ITAT, Ahmedabad Bench-D, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD 10 ITA no.2057/Ahd/2010 11