Income Tax Appellate Tribunal - Ahmedabad
Maruti Koautsu Cylinders Pvt.Ltd.,, ... vs Department Of Income Tax on 29 September, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDAB AD BENCH, AHMEDABAD
CAMP AT V ADODAR A -18-01-2010 to 29.01.2010
BEFO RE HO N'BLE S/SHRI DEEP AK R. SH AH, AM AND D. T. G AR ASI A,JM.
ITA No.45/ Ahd/2008
(Assessment Year- 1998-99)
DCIT
Circle-4
Baroda . Appellant
V/s
M/s Maruti Koatsu Cylinders Pvt ltd
P AN: Not found
1402, GIDC, Indus.Estate
Halol ...Respondent
Appearance
Revenue by : Shri Rajaram Saha,
Assessee by : None
ORDER
Per D.T.G ARASI A, JM.
By way of this appeal, the revenue is challenging the order of the learned CIT(A)-III, Baroda dated 29.9.2007 for the assessment year 1998-99.
2. The revenue has raised several grounds of appeal i.e deletion of addition made of Rs.80,32,060/- on account of GP rate at 18% after rejecting the books u/s 145 as against 11.27% as disclosed by the assessee. presence of assessee by the learned CIT(A).
2 I T A N o . 4 5 / Ah d / 2 0 0 8 ( As s e s s m e n t Y e a r - 1 9 9 8 - 9 9 )
3. The facts of the case are that the assessee is engaged in the business of manufacturing and marketing of gas cylinders. The return of income declaring net loss of Rs.62,47,728/- was filed by the assessee. Thereafter the Case was selected for scrutiny and notice u/s 143(2) was issued to the assessee. On verification of books of accounts, the AO observed that GP is declined to 11.27% against 24.28% in the preceding years.
4. The AO called for the explanation for this declination in the GP. In reply to the notice, the assessee submitted that due to recession in the market it has diverted the production of small cylinders to big cylinders and profit margin in the big cylinders are more than the small one. Due to change in production strategy and the sale of big cylinder is less than smaller one as compared to assessment year 1997-98, it suffered sale of cylinder which resulted into low GP ratio.
5. The explanation called for by the assessee did not find tenable. Therefore, he rejected the books of account u/s 145 and estimated the GP at 18% as against the disclosed GP rate of 11.27%. Accordingly, he made the addition on account of suppressed gross profit amounting to Rs.80,32,060/-
6. The matter was carried to CIT(A), who deleted the addition by observing as under :
3 I T A N o . 4 5 / Ah d / 2 0 0 8 ( As s e s s m e n t Y e a r - 1 9 9 8 - 9 9 ) "3.3 I have considered the submissions of the learned AR and the facts of the case, The issue regarding the addition on account of low GP rate turns on whether there was sufficient justification for rejecting the books u/s 145 and adopting the median rate of gross profit at 18% instead of 11.27% disclosed by the assessee. Judicial opinion is unanimous that in order to justify the rejection of books u/s 145(3), it has to be expressly demonstrated that the correctness or completeness of the accounts of the assessee were in doubt or the method accounting provided in section 145(1) has not been followed or that the accounting standards as notified u/s145(2) had been contravened. Where specific instances regarding incorrectness or incompleteness of the accounts have not been brought out, the rejection of books would not been justified . The issue of rejection of books of accounts and estimation of profit has been examined by courts on numerous occasions. In the landmarks case of Dhakshwari Cotton Mills Ltd V/s 26, ITR 775 he Supreme Court laid down certain guiding principles in this regard. It was held that in such cases it is a well established proposition that power under section 145 is to be exercised judicially, i.e. a clear finding was to be recorded to show that reason (s) why the book results are being rejected. The assessee must be confronted with the materials relied upon by the assessee for estimating the income.
Adequate opportunity for rebutting such material must be allowed . Estimation of income should be on a rational and reasonable basis. The Calcutta High Court ha held in Dabros Industrial co ltd. V/s CIT, 108 ITR 424 that once the books of accounts are rejected, then the income has to be estimated on the basis of proper material available. In S Veeria Reddiar V/s CIT, 38 ITR 142 the Kerala High Court has held that an estimate made zafter rejection of assessee's books cannot be based on mere conjuncture. Although high comparative GP rate of earlier years could be the basis for formation of doubt in the mind of the AO regarding the correctness of the books, yet the income finally estimated must be based on some material and not on guess work. The J and K High Court in the case of International Forest Co. V/s CIT 101 ITR 721, has encapsulated, the position in the following words:-
4 I T A N o . 4 5 / Ah d / 2 0 0 8 ( As s e s s m e n t Y e a r - 1 9 9 8 - 9 9 ) "The rate of gross profit in a particular year depends on many factors, e.g. the general market conditions based on demand and supply position, the rise or fall in market rates, specially, abrupt ones, the capital position vis-à-vis the turnover achieved, and many others. It is for the assessee to explain the fall, if it so happens, and to substantiate his reasons. Even if thereafter, the AO considered the material placed before him by the assessee to be unreliable, keeping in view the comparative statement of accounts of the earlier years, he cannot proceed to make an arbitrary addition and base his conclusion purely on guesswork. He can do so only if he relates his estimate to some evidence or material on the record as it is now well-settled that if the profit shown by the assessee in his return is not accepted, it is for the taxing authorities to prove that the assessee made more profits"
Finally, with regard to the adoption of flat rate of GP the Supreme Court has observed in CIT V/s K Y Pilliah and Sons, 63 ITR 411 that application of flat rate may sometimes be justified depending on the facts and circumstances of the case, but while doing so it must be supported by comparable rates of similar businesses in the locality. In the instant case, but while doing so it must be supported by comparable rates of similar business in the locality. In the instant case, the assessee has explained the reasons for fall in the GP rate. These reasons have not been controverted and the fact that more profit was earned has not been sufficiently demonstrated. The material on which the GP rate of 18% was adopted has not been explained. In these circumstances, it is difficult to support the addition. Accordingly, it is held that the AO was not justified in ejecting the books and adopting the GP rate of 18% as against the rate of 11.27% disclosed by the assessee. The addition of Rs.80,32,060/- made in consequence of rejection of the books is, therefore, directed to be deleted", 5 I T A N o . 4 5 / Ah d / 2 0 0 8 ( As s e s s m e n t Y e a r - 1 9 9 8 - 9 9 )
7. Aggrieved by the above direction of the CIT(A) the revenue is in appeal before us.
8. The learned DR submitted that the assessee is in the business of manufacturing and marketing of gas cylinders. The GP as declared by the assessee was 11.27% in the current year as compared to 24.28% in the immediately preceding years. The assessee has taken the contention that due to severe recession in the market, the company has decided to increase share of small cylinders in product less than those cylinders not profitable as big cylinders. The share of small cylinders has been increased from 9% to 48% in AY 1997-98 and this contributed the substantial reduction in GP margin. Therefore, he has given details of production in assessment year. But the AO has asked the assessee to submit how much big cylinders and small cylinders have been produced, but the assessee has submitted that the assessee has shown the cost of stock, spare parts, power used and quantity of fuel, repairing and maintenance and other expenses purely on estimated basis. The assessee has not accounted for the value of scrap generated as well as proper day to day quantification and sales of the same in its books of accounts. No day to day and batch to batch details of manufacturing process are maintained by the assessee. The assessee has not included the value of excise duty as a part 6 I T A N o . 4 5 / Ah d / 2 0 0 8 ( As s e s s m e n t Y e a r - 1 9 9 8 - 9 9 ) of closing stock and finished goods as on last day of accounting period. Therefore that has been resulted in the lesser profit. As the assessee did not maintain stock tally and batch to batch production and consumption details the yield of production shown by the assessee against the consumption of raw materials is not ascertainable. No ratio of use of materials as compared to finished goods is maintained by the assessee. Therefore, the assessee's books were rejected u/s 145(2) and the AO has applied 18% GP and made the addition. The CIT(A) has not verified these facts and deleted the addition.
9. W e have considered the submissions made by the learned DR. W e find that the CIT(A) has held that in order to justify the rejection of books, it has to be expressly demonstrated that the correctness or completeness of the accounts of the assessee were in doubt or the method accounting provided in section 145(1) has not been followed or that the accounting standards as notified u/s145(2) had been contravened. W here specific instances regarding incorrectness or incompleteness of the accounts have not been brought out, the rejection of books was not justified . The AO after rejecting the book result, he has not stated the comparable rates of similar business in the locality. The assessee has explained the reasons for fall in GP. W e find 7 I T A N o . 4 5 / Ah d / 2 0 0 8 ( As s e s s m e n t Y e a r - 1 9 9 8 - 9 9 ) that the AO has not brought on record any evidence that the books of account of assessee are not reliable but he has simply rejected the book result. Therefore, we are of the view the CIT(A) is justified in his action and our interference is not required.
10. In the result, the appeal of the revenue is dismissed as indicated above.
Order pronounced in the open court on 22.01.2010 Sd sd ( DEEP AK R. SH AH ) (D.T.G ARASI A) Accountant Member Judicial Member Vadodara, On this 22nd day of Jan 2010 SRL12110 Copy of the order is forwarded to:-
1. Appellant 2 .Respondent
3. CIT(A)-concerned
4. Commissioner of Income Tax Concern
5. The DR, Vadodara
6. Guard File True copy By Order Deputy Registrar, I TAT, Ahmedabad