Income Tax Appellate Tribunal - Ahmedabad
Priyadarshani Synthetics Pvt.Ltd., ... vs Assessee on 19 July, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A", AHMEDABAD
Before Shri Bhavnesh Saini,JM & Shri A.N. Pahuja, AM
ITA No.3701/Ahd/2007
(Assessment year 2004-05)
Priyadarshani Synthetics Pvt Ltd vs ITO, Ward-1(4)
Plot No.808/1, GIDC Aayakar Bhavan
Sachin, Surat Majura Gate,Surat
[PAN : AABCP4383R]
(Appellant) (Respondent)
Assessee by : None
Revenue by : Shri Govind Singhal, DR
ORDER
A.N. Pahuja : This appeal by the assessee against an order dated 19-07-2007 of the ld.CIT(A)-I, Surat, raises the following grounds:
"(1) The learned CIT(A) has grossly erred in law and on facts, in confirming the addition of Rs.11,79,617/- on account of lower gross profit by rejecting the results shown by the accounts book and in estimating the income by applying an ad hoc rate of gross profit;
(2) That on the fact and circumstance of the case, the learned assessing officer has erred in making addition of Rs.62,138/-
by disallowing PF and ESI on account of late payment before dates specified under respective act;
(3) The appellant craves leave to add, alter, delete or modify any ground of appeal."
2. Adverting first to ground no.1 relating to trading addition, facts, in brief ,as per relevant orders are that the return declaring nil income filed on 30-03-2005 by the assessee, engaged in the business of dyeing and printing of art silk cloth, after being processed on 30-05-2005 u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), was taken up for scrutiny with the issue of notice u/s 143(2) of the Act on 09-06-2005. During the course of assessment proceedings, the Assessing Officer [AO in short] noticed that the assessee 2 ITA No.3701/Ahd/2007 reflected turnover of Rs. 8,70,36,023/- as against turnover of Rs.8,67,35,824/- in the preceding assessment year, resulting in gross profit[GP] rate of 14.14% as against 16.28% in the preceding year. To a query by the AO, the assessee explained that the average gross profit in the preceding five years was 14.676% and thus, the GP in the year under consideration was lower by 0.536% only vis- à-vis average gross profit . The assessee further explained that due to the increase in rates of colour and chemicals and change of master in the month of May-June, 2003, a new master took up maintenance of machines and discarded used colours and chemicals. Thereafter, different types of colour and chemicals were purchased apart from use of imported colour and chemicals. Moreover, the average rate of dyeing metres were Rs. 4.57 per metre vis-a-vis Rs.5.21 per metre in the preceding year while average rate of printing metres increased to Rs.12.39 per meter as against last year rate of Rs.11.31 per meter while there was no decrease in job rates in printing metres. Accordingly, the assessee submitted that these factors contributed towards fall in GP rate. However, the AO did not accept these submissions of the assessee on the ground that (i) the assessee was not maintaining day to day stock and consumption records of raw material and packing material; (ii) the plea of the assessee that the new master discarded old colours and chemicals was not supported by any evidence, no such fact having been mentioned in the inventory of closing stock of colour & chemicals. iii) the plea of use of imported colour and chemicals as also increase in average rate of production was not supported by any evidence and
iv) the assessee was not showing any work-in-progress. In view of these inconsistencies and irregularities, the AO rejected the book results, having recourse to the provisions of section 145(3) of the Act and accordingly, applying the GP rate of 15.5% on the disclosed turnover, added an amount of Rs.11,79,617/-.
3. On appeal, the assessee reiterated their submissions before the AO. In the light of these submissions, the ld.CIT(A) concluded as under:
3 ITA No.3701/Ahd/2007"2.4 I have considered the submissions made by the appellant and observation of the AO. The fact remains that there is fall in GP rate by more than 2% as observed by the AO even though the turnover is almost same. The appellant has tried to explain the fall in GP by giving various reasons as stated above. However, no documentary evidence has been given to show that the fall in GP for a particular reason and it amounted to a certain percentage. The entire fall of 2.14% has not been explained. Admittedly, the day to day stock register of colour and chemicals consumed has not been maintained. As shown by the AO the assessee has not shown work in progress in the closing stock to the extent of almost Rs.4.37 lacs. Therefore, the books of accounts as well the P&L A/c cannot be relied upon and the AO has rightly rejected the books of accounts. Admittedly, the appellant is not maintaining day to day stock register saying that the maintenance of stock register is not commensurate with the cost benefit analysis. In the absence of day to day stock register it is almost impossible for the AO to verify the results shown by the appellant.
2.5.1 It is true that simply non-maintenance of stock register is not enough for rejection of books of accounts. However, as decided by the Hon'ble Allahabad High Court in the case of Avdhesh Pratap Singh Abdul Rehman and Brothers vs. CIT [210 ITR 406] that non- maintenance of quantity records along with various other facts could lead to rejection of books of accounts. The decision of the Hon'ble court is quoted as under:
"It is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be deduced. Whether the presence or the absence of a stock register is material or not would depend upon the type of the business. It is true that the absence of a stock register or cash memos in a given situation may not per se lead to an inference that the accounts are false or incomplete. However, where the absence of a stock register, cash memos, etc., is coupled with other facts such as that vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, it may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee."
2.5.2 Further the Hon'ble Supreme Court in the case of Kachwala Gems vs. JCIT [288 ITR 10] has held as under:-
4 ITA No.3701/Ahd/2007"It is well settled that in a best judgment there is always a certain degree of guess work. No doubt the authorities should try to make an honest and fair estimate of the income even in a best judgment assessment and should not act totally arbitrarily, but there is necessarily some amount of guess work involved in a best judgment assessment.
The AO resorted to best judgment of the assessee on the following grounds:
i) the assessee had not maintained quantitative details / stock register;
ii) there was no evidence to verify closing stock;
iii) the genuineness of purchases was not proved without any doubt.
....there was no arbitrariness in this case in resorting to best judgment assessment. It was the assessee himself who was to blame as he did not submit proper accounts".
2.6 In view of these reasons, the books of accounts has been rightly rejected as the assessee has neither shown work in progress nor has maintained day to day consumption register of colour and chemicals etc. The AO has however, considered the various reasons given for fall in GP and in respect of 2.14% fall, the AO has added only 1.36% which is reasonable in view of the above reasons and that the results of the assessee are not verifiable for want of day to day consumption of colour and chemicals and the reasons given by the appellant shown and quantify the effect of such reason on the fall of GP. Hence the addition made by the AO is confirmed and this ground of appeal is dismissed."
4. The assessee is now in appeal before us against the aforesaid findings of ld. CIT(A). None appeared on behalf of the assessee nor any request for adjournment has been made despite service of notice [AD on record]on 15-02- 2010. On the other hand, the ld. DR supported the findings of the ld.CIT(A).
5. We have heard the ld. DR and gone through the facts of the case. Undisputedly, the GP rate in the year under consideration declined by 2.14%[16.28-14.14] while assessee was not maintaining any stock register or consumption records.The ld. CIT(A) upheld the rejection of book results for want 5 ITA No.3701/Ahd/2007 of consumption records and not valuing the closing work in progress. We find that the impugned order is totally silent on the basis of valuation of opening work in progress and the method followed by the assessee in valuation of stock in the preceding assessment years. The ld. CIT(A) have not recorded any findings on the plea of the assessee regarding increase in rates of colour and chemicals or use of imported colours without corresponding increase in job charges nor analysed their impact on the gross profits. The assessee mainly attributed increase in cost of inputs and use of imported colours and chemicals as the reasons for fall in GP rate. The AO rejected the book results and made estimated addition since the assessee was not maintaining day to day consumption records, even when no defects were noticed in the books of accounts maintained by the assessee. We are of the opinion that though the quantitative stock register was important for a manufacturing industry, the books of accounts could not be rejected unless some specific defects were brought on record like unaccounted sales or expenditure. It is difficult to catalogue various types of defects in the account books of an assessee which may render rejection of accounts on the ground that accounts are not complete from which the correct profit cannot be deduced. Whether presence or absence of stock register is material or not would depend upon the type of business?. It is true that absence of stock register or cash memos in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where the absence of stock register, cash memos etc. is coupled with other factors like purchase and sales made which not being proved to be genuine and profit being low or loss, may give rise to legitimate inference that all is not well with the books and the same cannot be allowed to assess, the income, profits or gains. Such is not the situation in the instant case. We find from the impugned orders that the AO did not point out any 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, chemical, power, coal, gas etc.. 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 6 ITA No.3701/Ahd/2007 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 [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. 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. Though the ld. CIT(A) observed that closing work in progress is not shown, he is totally silent on the opening work in progress.To 7 ITA No.3701/Ahd/2007 arrive at a correct profit in the year, same method of valuation has to be followed both for opening stock and closing stock. In these circumstances , we are opinion that that there was no justification in invoking the provisions of section 145 of the Act [ Vikram Plastics,239 ITR 161(Guj)]. 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. In the light of these observations of the Hon'ble jurisdictional High Court, we are not inclined to uphold the findings of the ld. CIT(A) in rejecting the book results and estimation of profit. Therefore, ground no.1 in the appeal is allowed. .
6. Ground No.2 relates to disallowance of Rs. 62,138/- on account on belated payments contributed by employees towards PF & ESI. The AO noticed that the following payments on account of employees' contribution towards PF & ESI were belated:
Provident Fund MONTH Due Date Date of payment Amount collected from employees [Rs.] May, 2003 15 June, 2003 24 June, 2003 10,818 June, 2003 15, July, 2003 23 July, 2003 10,910 Nov., 2003 15 Dec., 2003 26 Dec., 2003 11,366 Jan. 2004 15 Feb. 2004 29 Feb. 2004 10,808 Feb., 2004 15 March, 2004 17 May, 2004 7,596 March, 2004 15 April, 2004 17 May, 2004 7,495 TOTAL 59,003 E.S.I. MONTH Due Date Date of payment Amount collected from employees [Rs.] May, 2003 25 June, 2003 24 June, 2003 569 June, 2003 21 July, 2003 23 July, 2003 561 8 ITA No.3701/Ahd/2007 Nov., 2003 21, Dec., 2003 26 Dec., 2003 501 Jan.2004 21 Feb 2004 29 Feb. 2004 562 Feb., 2004 21 March, 2004 17 May, 2004 478 March, 2004 21 April, 2004 17 May, 2004 474 Total 3,145 Accordingly, while referring to provisions of sec. 36(1)(va) & 43B of the Act and relying upon the decision in the case of South India Corporation Ltd 242 ITR 114; Gallium Equipment (P) Ltd vs Dy.CIT, 81 ITD 358 (Del),AVU Engg Ltd vs ACIT & Ors 227 ITR 441 (AP), the AO disallowed the aforesaid amount of Rs.62,138/-.
7. On appeal, the assessee did not make any submissions. Accordingly, following the view taken by Hon'ble Kerala High Court in the case of South India Corporation Ltd (supra), the ld.CIT(A) upheld the addition.
8. The assessee is now in appeal before us. The ld. DR supported the findings of the ld. CIT(A). We have heard the ld. DR and gone through the facts of the case. On a similar issue, the ITAT Ahmedabad Benches have been consistently following the decision of the Hon'ble Delhi High Court in the case of CIT v. P.M.Electronics Ltd., 220 ITR635 (Delhi), in favour of the assessee. In the case of Gujarat Containers Ltd. v. ACIT in ITA No.2609/Ahd/2008 for the Assessment Year 2004-05 in their decision dated 2.3.2009 as also in the case of Shri Omarsingh B. Rawat Vs ITP ITA No.1908/Ahd/2009 vide their order dated 18-09-2009, the Tribunal allowed the appeal of the assessee on the issue of employees' contribution relying upon the aforesaid decision of the Hon'ble Delhi High Court. We find that the Hon'ble Delhi High Court in the case of P.M.Electronics Ltd.(supra), following the decision of Hon'ble Apex Court in the case of Vinay Cement Ltd.(supra), allowed the claim of the assessee for deduction of the employees' contribution towards PF.
9 ITA No.3701/Ahd/20078.1 Moreover, recently, Hon'ble Apex Court in the case of CIT vs Alom Extrusions Ltd 319 ITR 306 (SC) held that the omission of the second proviso to section 43B of the Act by the Finance Act, 2003, operated, retrospectively, with effect from, April 1, 1988 and not prospectively from April 1, 2004. Hon'ble Court observed that earlier under the second proviso to section 43B as amended by the Finance Act, 1989, the assessees were entitled to deduction only if the contribution stood credited on or before the due date given in the Provident Funds Act. This created further difficulties and on a representation made to the Finance Ministry one more amendment was made by the Finance Act, 2003. Though this amendment was made applicable with effect from April 1, 2004, the amendment was curative in nature and applied retrospectively with effect from April 1, 1988.It was clarified that when a proviso in a section is inserted to remedy unintended consequences and to make the section workable, the proviso which supplies an obvious omission therein is required to be read retrospectively in operation, particularly to give effect to the section as a whole.
8.2 Even more recently, Hon'ble Delhi High Court in their decision dated 23.12.2009 in CIT Vs. AIMIL Ltd.(Delhi)in ITA no. 1063/2008 observed that S. 2 (24) (x) provides that amounts received by an assessee from employees towards PF contributions etc shall be "income". S. 36 (1) (va) provides that if such sums are contributed to the employees account in the relevant fund on or before the due date specified in the PF etc legislation, the assessee shall be entitled to a deduction. The second Proviso to s. 43B (b) provided that any sum paid by the assessee as an employer by way of contribution to any provident etc fund shall be allowed as a deduction only if paid on or before the due date specified in 36(1)(va). After the omission of the second Proviso w.e.f 1.4.2004, the deduction is allowable under the first Proviso if the payment is made on or before the due date for furnishing the return of income. The Hon'ble High Court while considering whether the benefit of s. 43B can be extended to employees' contribution as well which are paid after the due date under the PF law but before the due date for filing the return, held that 10 ITA No.3701/Ahd/2007
(i) Though the Revenue has argued that a distinction is to be made between "employers' contribution" and "employees' contribution" and that employees' contribution being in the nature of trust money in the hands of the assessee cannot be allowed as a deduction if not paid on or before the due date specified in the PF etc law, the scheme of the Act is that employees' contribution is treated as income u/s 2 (24) (x) on receipt by the assessee and allowed as a deduction u/s 36 (1) (va) on making deposit with the concerned authorities. S. 43B (b) stipulates that such deduction would be permissible only on actual payment;
(ii) The question as to when actual payment should be made is answered by Vinay Cements 213 CTR 268 where the deletion of the second Proviso to s. 43B w.e.f 1.4.2004 was held applicable to earlier years as well. As the deletion of the 2nd Proviso is retrospective, the case has to be governed by the first Proviso. Dharmendra Sharma 297 ITR 320 (Del) & P.M. Electronics 313 ITR 161 (Delhi) followed;
(iii) If the employees' contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. Insofar as the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down in Vinay Cement. "
8.3 In view of the foregoing, we have no hesitation in holding that the employees' contribution towards PF & ESI having been made by the assessee within the due date of filing of return u/s 139(1) of the Act for the assessment year under consideration, there is no ground for disallowing the same. Therefore, ground no.2 in the appeal is allowed.11 ITA No.3701/Ahd/2007
9. No additional ground have been raised in terms of residuary ground no.3 accordingly, this ground is dismissed.
10. In the result, appeal is allowed.
Order pronounced in the open court, on this 11th day of March, 2010.
Sd/- Sd/-
(Bhavnesh Saini) (A.N. Pahuja)
Judicial Member Accountant Member
Ahmedabad,
Dated : 11th March, 2010
Copy to:
1. The assessee
2. ITO, Ward-1(4),Surat
3. CIT(A)-I, Surat
4. CIT-concerned,Surat By order
5. DR, "A" Bench
Deputy Registrar, ITAT, Ahmedabad