Income Tax Appellate Tribunal - Mumbai
Adhunik Synthetics Ltd , Mumbai vs Assessee on 29 January, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'I' MUMBAI
BEFORE SHRI PRAMOD KUMAR (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM)
ITA No.455/Mum/2008
Assessment Year- 2004-05
M/s. Babubhai Pranlal & The ACIT 12(1),
Brothers, Mumbai
281/3, Mehta Bldg.,
Shahid Bhagat Singh Road, Vs.
Fort,
Mumbai-400 001
PAN-AACFB8785D
(Appellant) (Respondent)
ITA No.971/Mum/2008
Assessment Year- 2004-05
The ACIT 12(1), M/s. Babubhai Pranlal &
Mumba Brothers,
281/3, Mehta Bldg.,
Vs. Shahid Bhagat Singh Road,
Fort,
Mumbai-400 001
(Appellant) (Respondent)
ITA No.454/Mum/2008
Assessment Year- 2004-05
M/s. Babubhai Enterprises, The ACIT 12(1),
218/3, Mehta Bldg., Mumbai
Shahid Bhagat Singh Road,
Fort,Mumbai-400 001 Vs.
PAN-AACFB8788Q
(Appellant) (Respondent)
2 Babubhai Pranlal & Brothers
ITA No.970/Mum/2008
Assessment Year- 2004-05
The ACIT 12(1), M/s. Babubhai Pranlal &
Mumba Brothers,
281/3, Mehta Bldg.,
Vs. Shahid Bhagat Singh Road,
Fort,
Mumbai-400 001
(Appellant) (Respondent)
Assessee by: Shri Chetan Karia
Department by: Ms. Vandana Sagar
ORDER
PER SMT. ASHA VIJAYARAGHAVAN (JM) This is a set of cross appeal two preferred by the assessee and the two preferred by the Revenue are directed against the orders dt. 7.11.2007 passed by the Ld. CIT(A)-XII, Mumbai for the assessment 2004-05.
2. The first ground of appeal raised by the assessee reads as follows:
"The Ld. CIT(A)-XII, on the facts and in the circumstances of the case and in law erred in confirming the addition to the extent of Rs. 33,66,350/- on account of gross profit on estimated basis."
3. The assessee had declared a gross total loss at 8.56% amounting to Rs. 33,66,350/-. The Assessing Officer estimated the G.P. rate at 2.75% amounting to Rs. 10,16,515/-. The AO observed that this year the assessee disclosed the gross loss at 8.56% of the turnover of Rs. 3.69 crores, as against gross loss at 5.76% only on the total turnover of Rs.
3 Babubhai Pranlal & Brothers 4.18 crores last year. Therefore, he asked the assessee to explain the reasons fall in the G.P. ratio percentage.
4. The assessee replied as follows:
"The prices of the raw materials went up mainly due to increase in crude and petro chemical products. There was stiff competition from other large manufacturers and since the sales price were pre-determined, the same could not be increased. Thus the appellant was forced to sell the products at lower prices in order to survive in the highly competitive market. Because of continued losses, the appellant ultimately discontinued this line of business in the subsequent year and diversified in other activities. It was also explained that if the stock would not have been sold out at lower prices, the same would have resulted into piling up of unsold obsolete stock and once out of fashion, the losses must have been further increased. Therefore it was a business decision to minimize the losses by getting rid of the piling of stock in view of the commercial expediency."
5. The AO proceeded to adopt GP rate at 2.75% following the order in the case of the sister concern of the assessee. The AO also observed in his order that the assessee did not maintain the stock register and therefore the AO doubted the correctness of the valuation of the closing stock as the same had been determined on estimate basis as certified by the partner.
6. Aggrieved, assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A), firstly the assessee denied that there is a gross loss in its case. The Authorised Representative of the assessee claimed that the trading loss appearing is only a notional loss. If the trading account is recast after taking into consideration the Duty Draw Back, Exchange gain and DFRC etc., there will not be any loss on the other hand there will be a positive gross profit of Rs. one crore.
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7. Secondly, the Authorised Representative of the assessee submitted that the AO had wrongly mentioned that no stock register was maintained. He produced the copy of Tax Audit Report and also the stock register before the Ld. CIT(A). The AR submitted that the same was produced before the AO and furnished the quantitative details of raw material and finished goods before the AO would not have been possible if the stock register was not maintained. Further the AR stated that the gross loss had further gone up by 2.8% because of the rise in the prices of raw materials and stiff competition in the market from big players and in support of his contention copies of invoices for the purchase of granules being 95% of raw materials were produced to show the increase in their prices. The AR also objected to the AO's remarks that the stock was valued on estimate basis as certified by the partners.
8. The Ld. CIT(A) held as follows:
"The undersigned has carefully perused through the rival contentions. The appellant has tried to explain almost all the observations made by the AO. However, the undersigned is not convinced with atleast one explanation i.e. why the appellant did not revise its sale price despite the mounting pressure of the increase in the purchase price of raw materials, stiff competition in the market, especially with big players, may be a major factor; yet it cannot be accepted that the appellant would continue to sell its goods at losses only, year after year.
The appellant has also not explained as to what would have been the sale price of the stock if allowed to remain unsold as against the lesser non-competitive price at which it had to be sold and losses incurred.
However, it is also noted by the undersigned that the AO has not given any credit for the genuine reasons stated by the appellant for incurring continued losses. Atleast he should have accepted the explanation as partly true. Moreover, many of his observations are not correct as his remarks for the non- maintenance of the stock register, etc is not found correct.
5 Babubhai Pranlal & Brothers The AO has also not stated the basis for adopting the G.P. rate at 2.75% of the turnover despite the fact that in earlier years the loss figures were accepted.
The undersigned after going through the rival contentions, is of the opinion that the lacunae persists in the approach of the appellant as well as in that of the AO.
Therefore in the reasonableness and fairness of the matter, the AO is directed to disallow the gross loss claimed at (-) Rs. 33,66,350/- and thus treat the G.P. at Rs. Nil. Therefore in actual sense, the addition to the extent of Rs. 33,66,350/- is confirmed and the addition to the extent of Rs. 10,16,515/- is deleted. Thus the appellant gets part relief. This ground is therefore partly allowed."
9. Aggrieved, assessee preferred an appeal before us.
10. We heard both the parties. We had seen page 57 of the Paper Book where the assessee had replied as follows:
"Further, it is incorrect to state that the Tax Audit Report reveals that no stock register is maintained. A copy of Tax Audit Report is enclosed herewith and marked as Exhibit-E and a perusal of the same would indicate that nowhere the Tax Auditors have mentioned that the stock register is not maintained. The fact of the matter is that the appellants have maintained stock register and the same was produced before him. In any event the same is once against produced before your honour for verification. A further perusal of the Tax Audit Report would also indicate that the appellants have also furnished quantitative details of the finished goods and raw material which would not have been possible if the stock register is not maintained.
Thus, again the basis on which the AO has made the addition itself is incorrect.
A copy of order u/s. 143(3) of the Act for immediate proceeding year is also enclosed herewith and marked as Exhibit-K which indicates that even in the earlier year in the identical circumstances, the AO has accepted the so called gross loss in scrutiny assessment."
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11. In our opinion there is no lacuna in the approach of the assessee as well as that of the AO as held by the Ld. CIT(A). There is no reason for not relying on the books of accounts maintained by the assessee and the figure of the gross loss shown by the assessee is to be accepted. Further the stock register has also been maintained. In these circumstances, the addition to the extent of Rs.33,66,350/- on account of gross profit on estimate basis is to be deleted.
12. The second ground of appeal has not pressed by the assessee, therefore it is dismissed as not pressed.
13. Regarding ground No. 3, the Ld. CIT(A) has erred in upholding the disallowance of claim of deduction u/s. 80IB of the Act of Rs. 12,18,169/-.
14. This ground is general and the ground Nos. 4 to 7 deal with specific grounds of disallowance against certain income which shall be dealt with here under:
15. The 4th ground of appeal reads as under:
"The Ld. CIT(A) on the facts and in the circumstances of the case and in law erred in confirming the action of the AO in holding that income of Rs. 60,80,295/- from duty drawback is not derived from industrial undertaking and the same is not to be considered while working out eligible profit of the industrial undertaking for the purpose of deduction u/s. 80IB of the Act."
16. The AO observed that the receipt is not directly received from the industrial undertaking therefore the same ought to be excluded from the profits of the industrial undertaking as there is no direct nexus between 7 Babubhai Pranlal & Brothers the receipt and the industrial undertaking. The Ld. AO has reduced profit by Duty drawback, Exchange gain, DFRC and Sundry credit balance write back and has allowed deduction accordingly following Sterling Foods, 237 ITR 579 (SC) and Pandian Chemicals Ltd. 262 ITR 278(SC).
17. The Ld. Departmental Representative referring to the decision of the Hon'ble Supreme Court in the case of Liberty India Ltd Vs CIT 317 ITR 218 submitted that duty drawback does not form part of net profit of eligible industrial undertaking for the purpose of deduction u/s. 80I/80IA/80IB of the I.T. Act.
18. We find that the Co-ordinate Bench of the Mumbai Tribunal in the case of M/s. Ipca Laboratories Ltd. Vs ACIT in ITA No. 5046/Mum/2007 has held as follows:
"We have considered rival submissions made by both the sides, perused the orders of the authorities below and gone through the paper book filed by the assessee before us. We have also gone through the decisions cited before us. We find the ground raised by the revenue has to be allowed in view of the latest decision of Hon'ble Supreme Court in the case of Liberty India Ltd. cited supra. We do not find much force in the arguments advanced by the learned counsel for the assessee by distinguishing the decision of Hon'ble Supreme Court. 6.1 We find the Hon'ble Supreme Court in the said decision at pages 233 to 235 has held as under:-
"DEPB is an incentive. It is given under the Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of Customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as a percentage of the FOB value of 8 Babubhai Pranlal & Brothers exports made in freely convertible currency. Credit is available only against the export product and at rates specified by the DGFT for import of raw materials, components, etc., DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the schemes framed by Central Government or from section 75 of the Customs Act, 1963, hence, incentives profits are not profits derived from the eligible business under section 80-IB. They belong to the category of ancillary profits of such undertakings.
The next question is - what is duty drawback ? Section 75 of the Customs Act, 1962, and section 37 of the Central Excise Act, 1944, empower the Government of India to provide for repayment of customs duty and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class of description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or Central Excise duty actually paid by an individual importer-cum- manufacturer. Sub-section (2) of section 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various clauses of goods imported. Basically, the source of the duty drawback receipt lies in section 75 of the Customs Act and section 37 of the Central Excise Act.
Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression 'profits from industrial undertaking' in section 80-IB.
9 Babubhai Pranlal & Brothers Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said Standard.
AS-2 deals with valuation of inventories. Inventories are assets held for sale in the course of business; in the production for such sale or in the form of materials or supplies to be consumed in the production.
'Inventory' should be valued at the lower of cost and net realizable value (NRV). The cost of 'inventory' should compromise all costs of purchase, costs of conversion and other costs including costs incurred in bringing the 'inventory' to their present location and condition.
The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence, trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, duty drawback, rebate, etc., should not be treated as adjustment (credited) to the cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly (see page 44 of the Indian Accounting Standards and GAAP by Dolphy D'souza). Therefore, for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even the institute of Chartered Accountants of India (ICAI) has issued guidance note on accounting treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e. duty recoverable from the Department at a later stage) arising on account of rebates, duty drawback, DEPB benefit, etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets, etc. Therefore, we are of the view that the duty drawback, DEPB benefits, rebates, etc., cannot be credited against the cost of manufacture of goods debited in the 10 Babubhai Pranlal & Brothers profit and loss account for purposes of section 80IA/80IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking.
In the circumstances, we hold that duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of section 80I/80IA/80IB of the 1961 Act."
In view of the ratio laid down by the Hon'ble Supreme Court in the case of Liberty India Ltd. cited supra we hold that the receipt on account of Duty drawback/DEPB and rebate of Central Excise Duty are the income not derived from the manufacturing unit of the said industrial undertaking and thereby not eligible for deduction u/s 80IB(4) of the Act. We hold and direct accordingly. Thus, this ground raised by the revenue is allowed.
Respectfully following the above said decision, we dismiss this ground of the assessee.
19. The 5th ground raised by the assessee reads as follows:
"The Ld. CIT(A) on the facts and in the circumstances of the case and in law erred in confirming the action of the AO in holding that income of Rs. 18,22,222/- from exchange gain is not derived from industrial undertaking and the same is not to be considered while working out eligible profit of the industrial undertaking for the purpose of deduction u/s. 80IB of the Act."
20. As regards the observation of the AO that 90% of Exchange gain and Sundry balance written back should be excluded from the profit of the business under explanation (baa) of Sec. 80HHc for computing deduction u/s. 80HHC, it is submitted that the same is against the provisions of law as these receipts are not governed by explanation (baa) to Sec. 80HHC nor these receipts are akin to any receipts of similar nature and therefore the action of the AO on this ground is not justified.
11 Babubhai Pranlal & Brothers
21. The ground relating to Sundry credit balance written off was not pressed before the Tribunal.
22. On the issue of exchange gain , the assessee submitted that the same is nature of sale receipts and therefore has to be considered in quantifying deduction allowable u/s. 80IB(10). The assessee relies on following judgement:
1) 282 ITR 144 (Guj)
2) 306 ITR 194 (Bom) and
3) 306 ITR 1 (AT)(SB).
23. We find that this issue is covered by the decision of the Mumbai Special Bench in 306 ITR 1 (AT) and therefore direct the AO to redo the assessment in the light of the decision of the Special Bench decision.
24. Ground No. 6 reads as under:
"On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in confirming the action of the AO in holding that income of Rs. 53,56,061/- being DFRC receipts is not derived from industrial undertaking and the same is not to be considered while working out eligible profit of the industrial undertaking for the purpose of deduction u/s. 80IB of the Act."
25. We find that this issue is covered by the decision of the Supreme Court in the case of Liberty India Ltd. Vs CIT 317 ITR 218. Respectfully following the same, we dismiss this ground raised by the assessee.
26. The 7th ground raised by the assessee reads as follows:
12 Babubhai Pranlal & Brothers "On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in confirming the action of the AO in reducing eligible profit u/s. 80IB of the Act from eligible profit of the business for the purposes of section 80HHC in view of Sec. 80IA(a)/80IB(13) of the Act."
27. The matter has been decided by the Special Bench of the Mumbai Tribunal in the case of M/s. Hindustan Mint Agro Ltd. 315 ITR 401. Respectfully following the decision of the Mumbai Tribunal, we remit the issue to the file of the AO to redo the assessment in the light of the Special Bench decision.
28. Ground Nos. 8 & 9 are general in nature.
29. In the result, the appeal filed by the assessee is partly allowed.
ITA No. 971/M/08-Departmental appeal30. The only ground raised by the Revenue reads as follows:
"On the facts and circumstances of the case and in law the Ld. CIT(A) erred in not confirming the action of the AO in excluding 90% of exchange gain, miscellaneous receipts and sundry balances written back from the profits of the business for computing the deduction u/s. 80HHC, without appreciating the fact that these receipts were not derived directly from the export business although they were incidental to the business."
31. The assessee submitted that the issue has been decided in favour of the assessee in following judgements.
1) 282 ITR 144 (Guj)
2) 306 ITR 01 (AT(SB)
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32. The assessee further submitted that mention of other receipts in the ground of appeal seems to be erroneous as the Ld. CIT(A) has not allowed the claim of the assessee in respect of other receipts.
33. We find that the same is covered by the decision of the Mumbai Special Bench in the case of Prakash L. Shah 306 ITR 01(AT)(SB). Therefore we direct the AO to redo the assessment in the light of the decision in the case of Prakash L. Shah (supra).
34. In the result, the appeal filed by the Revenue is allowed for statistical purposes.
ITA NO. 454/M/08- Assessee's appeal
35. The first ground raised by the assessee reads as follows:
"The Ld. CIT(A) on the facts and in the circumstances of the case and in law erred in confirming the addition to the extent of Rs. 12,92,015/- on account of gross profit on estimated basis."
36. This ground is similar to in assessee's appeal in ITA No. 455/M/08 in the case of M/s. Babubhai Pranalal & Brothers where at para-11 in which it has been held as follows:
"In our opinion there is no lacuna in the approach of the assessee as well as that of the AO as held by the Ld. CIT(A). There is no reason for not relying on the books of accounts maintained by the assessee and the figure of the gross loss shown by the assessee is to be accepted. Further the stock register has also been maintained".
In these circumstances, the addition to the extent of Rs. 12,92,015/- on account of gross profit on estimate basis is to be deleted.
14 Babubhai Pranlal & Brothers
37. Ground No. 2 has not pressed by the assessee therefore it is dismissed as not pressed.
38. Ground No. 3 relates to disallowance of claim u/s. 80IB to the extent of Rs. 5,86,024/-. Ground No. 4 to 7 are support ground No. 3.
39. In the assessment order other receipts has been listed at page 5 as follows:
Duty drawback 37,50,464/-
Exchange gain 10,56,254/-
Sale of import licence 32,63,188/-
Misc. receipts 59,587/-
Advance from customers
Written back 1,21,656/-
40. We find that as regards issue of duty draw back the judgement of Hon'ble Supreme Court in the case of Liberty, 317 ITR 218(sc) is against the assessee.
41. On the issue of exchange gain, the assessee submitted that the same is nature of sale receipts and therefore has to be considered in quantifying deduction allowable u/s. 80IB(10). The assessee relies on following judgement:
1) 282 ITR 144 (Guj)
2) 306 ITR 194 (Bom) and
3) 306 ITR 1 (AT)(SB).
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42. We find that this issue is covered by the decision of the Mumbai Special Bench in 306 ITR 1 (AT) and therefore direct the AO to redo the assessment in the light of the decision of the Special Bench decision.
43. As regards sale of import license the judgement of Hon'ble Supreme Court in Liberty India 317 ITR 218 (SC) is against the assessee.
44. The ground No. 8 relating to Miscellaneous receipts and advance from customers written off is not pressed by the assessee therefore it is dismissed as not pressed.
45. Ground No. 9 is as follows:
"The Ld. CIT(A) on the facts and in the circumstances of the case and in law erred in confirming the action of the AO in reducing eligible profit u/s. 80IB of the Act from eligible profit of the business for the purpose of Sec. 80HHC in view of Sec. 80IA(A)/80IB(13) of the Act.
46. This issue has been decided by the Special Bench of the Mumbai Tribunal in the case of M/s. Hindustan Mint Agro Ltd. 315 ITR 401. Respectfully following the decision of the Mumbai Tribunal, we remit the issue to the file of the AO to redo the assessment in the light of the Special Bench decision.
47. In the result, the appeal filed by the assessee is partly allowed.
ITA No. 970/M/08 - Revenue's appeal48. The only ground raised by the Revenue in this appeal is similar to ITA No. 971/M/08 in Revenue's appeal in para No. 31 to 33. 16 Babubhai Pranlal & Brothers
49. In the result, the appeal filed by the Revenue is allowed for statistical purposes.
Order pronounced on this 29th day of January, 2010 Sd/- Sd/-
(PRAMOD KUMAR) (ASHA VIJAYARAGHAVAN)
Accountant Member Judicial Member
Mumbai, Dated 29th January, 2010
Rj
Copy to :
1. The Appellant
2. The Respondent
3. The CIT-concerned
4. The CIT(A)-concerned
5. The DR 'I ' Bench
True Copy
By Order
Asstt. Registrar, I.T.A.T, Mumbai
17 Babubhai Pranlal & Brothers
Date Initials
1 Draft dictated on: 15.12.09 Sr. PS/PS
2. Draft placed before author: 21.12.09 ______ Sr. PS/PS
3. Draft proposed & placed before ______ JM/AM
the second member:
4. Draft discussed/approved by ______ JM/AM
Second Member:
5. Approved Draft comes to the Sr. ______ Sr. PS/PS
PS/PS:
6. Kept for pronouncement on: ______ Sr. PS/PS
7. File sent to the Bench Clerk: ______ Sr. PS/PS
8. Date on which file goes to the _________ ______
Head Clerk:
9. Date of dispatch of Order: _________ ______