Income Tax Appellate Tribunal - Lucknow
Aliga Rubber Works, Kanpur vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL,
B - BENCH, LUCKNOW.
Before Shri H.L.Karwa, Hon'ble Vice President and
Shri N.K.Saini, Accountant Member
I.T.A.No. 578(LKW.)/2010
A.Y. : 2006-07
The Dy.CIT-4, vs. M/s.Aliga Rubber Works,
Kanpur. 84/8, Fazalganj,
Kanpur.
PAN AABFA5380Q
(Appellant) (Respondent)
Appellant by : Shri P.K.Bajaj, D.R.
Respondent by : Shri J.J. Mehrotra, C.A.
O R D E R
PER H.L.KARWA, VICE PRESIDENT This appeal filed by the Revenue is directed against the order of the Ld.CIT(A)-II, Kanpur dated 30.6.2009 relating to the assessment year 2006-
07.
2. Ground No.1 of the appeal reads as under:
"1. On the facts & circumstances of the case, the Commissioner of Income Tax (Appeals)-II, Kanpur has erred in law in deleting the addition of Rs.15,87,215/- ignoring the fact that the Assessing Officer had established that the books of account of the assessee are not reliable due to huge variations in the closing stock as well as sundry debtors / creditors. "
3. Briefly stated, the facts of the case are that the assessee is manufacturing vulcanized/unvulcanised rubber products as per 2 specifications desired by the customers in each case i.e. dealing in tailor- made products and is not dealing in general/standard product. The G.P. rates declared by the assessee for seven assessment years including the previous year relevant to assessment year 2006-07 are as under :
Asstt. Year Total Turnover Gross Profit G.P.Rate 2000-01 2,95,20,156 1,18,50,213 40.14% 2001-02 3,05,29,053 1,16,14,630 38.00% 2002-03 2,48,99,488 81,29,605 32.66% 2003-04 3,00,65,653 1,23,96,070 41.24% 2004-05 3,02,59,637 1,18,78,321 39.25% 2005-06 1,58,70,594 55,35,926 34.88% 2006-07 1,89,02,75 55,39,131 29.3% 3.1 During the course of assessment proceedings, the AO required the assessee to explain as to why there was low gross profit during the assessment year under consideration. In this regard, the assessee explained as under :
"(i) Considering the business activity/nature of business of the assessee i.e., making goods tailor made/ as per specification· of the customers, the gross profit rate is variable depending on the orders as per specific requirements of the customers received, rates negotiated, the current cost of the raw materials, developmental activities/ expertise involved etc. The product manufactured is not a regular product and hence the gross profit rate is not consistent. The matter has been examined in last assessments and accepted.
(ii) .... Other reasons for fall in G.P. rate during the year were as under:-
(a) Increase in wages as per govt. rules.
(b) Increase in Power charges rates.
(c) Repairs of Factory premises.3
(iii) The decrease in G.P. rate stands explained as above."
3.2 The AO enquired from various sources including the debtors, creditors and also the bankers of the assessee wherefrom the assessee availed credit facilities. The AO found that there were huge variations in the amount of sundry creditors, sundry debtors and also the value of the closing stock as declared by the assessee in his balance sheet and that submitted to its bank for availing credit facilities. In view of the above discrepancies, the AO was of the opinion that the books of account maintained by the assessee during the relevant previous year were not reliable and required the assessee to show cause as to why book results should not be rejected. In response to the above query, the assessee submitted a detailed reply which reads as under :
"Explanation for G. P. rate was submitted vide letter dated 22.09.2008 (para 22) and further vide letter dated 08.12.2008 (para 2) and are reiterated.
Considering the nature of business i. e. making items mostly for defence and Air Force as per required specifications of different customers for use of goods for specified use by the customers. Compound of each item differs and the margins differ in each case. The net result of gross profit always differ from year to year depending upon the orders received/ negotiated. Since no regular items are made, the gross profit rate can never remain constant. This fact has been accepted by the department for the last over 30 years.
Declared results are as per books of accounts and stock registers maintained. The variations in the circumstances are bound to happen and unavoidable as the assessee is not dealing in standard/ regular product. Where there are margin higher results accrue and are declared as such. From the above figures it will be seen that G. P. rate 4 in A.Y. 95-96 was 24.83% which was increased to 45.00% in A.Y. 03-04 i.e., increase of 20.17% and was declared by the assessee. Further G.P. rate in A.Y. 03-04 was 45.00% which was reduced to 34.92% in A.Y. 05-06 i.e., fall of around 7.00% and was accepted.
G.P. rates of previous year and also future years (beyond this assessment year)and as accepted on assessments u/s 143(3) till A.Y. 205-06 are further given as under :
Increase Decrease
A.Y. 95-96 24.83% - -
A.Y. 99-00 32.63% 7.80% -
A.Y.00-01 40.15% 7.52% -
A.Y.01-02 38.30% - 1.85%
A.Y.02-03 33.60% - 4.70%
A.Y.03-04 45.00% 11.40% -
A.Y.04-05 41.71% - 3.29%
A.Y.05-06 34.92% - 6.79%
A.Y.06-07 29.30% - 5.62% Asstt. in
Process
A.Y.07-08 37.97% 8.67% Return filed
A.Y.08-09 38.83% 0.86% Return filed
Based on above facts/considerations, G.P. rate of 29.30% for the year under consideration is as per orders received.
(2) Difference in figures of stocks and debtors given to bank against CC limit and actual stocks is explained vide para 3 our letter dated 8.12.2008 and are reiterated."
3.3 The AO observed that the assessee had not furnished any concrete justification of the aforesaid specified discrepancies and has also failed to explain satisfactorily the different amounts shown by him in respect of sundry creditors, debtors and stocks. The AO has also observed that even the results of enquiries conducted under Section 133(6) of the Act in respect of its customers and suppliers went against the assessee. In that 5 view of the matter, the AO doubted the correctness and completeness of the books of account of the assessee. He, therefore, invoked the provisions of Section 145 of the Act and rejected the book results. Consequently, the average gross profit rate of last six years i.e. 37.7% was taken for the assessment year under consideration. The gross profit at the rate of 37.7% (average for last six years) was worked out to Rs.71,26,346 as against Rs.55,39,131 shown by the assessee. The addition of Rs.15,87,215 was made to the income of the assessee.
4. Aggrieved by the order of the AO, the assessee carried the matter in appeal before the ld.CIT(A) and took the following line of arguments :
(i) That the fall in G.P. rate for the year was 5.62%.
(ii) That the fall in G.P. rate for the year after considering the specific reason on account of increase in expenses (as accepted by AO) comes to 1.84%.
(iii) That considering the business activity/nature of business of the assessee i.e. making goods tailor made/as per specification of the customers, the gross profit rate is variable depending on the orders as per specific requirements of the customers received, rates negotiated, the current cost of the raw materials, developmental activities/expertise involved etc. The product manufacture is not a regular product and hence the gross profit rate is not consistent.6
(iv) That the reasons for fall in gross profit rate during the year were as under:
(a) Increase in wages as per Govt. rules.
(b) Increase in power charges rates.
(c) Repairs of factory premises.
(v) That considering the nature of business i.e. making items mostly for defence and Air Force as per required specifications of different customers for use of goods for specified use by the customers. compound of each item differs and the margins differs in each case. The net result of gross profit always differs from year to year depending upon the orders received/negotiated. Since no regular items are made, the gross profit rate can never remain constant.
(vi) That the assessee had maintained books of account and stock register as required.
(vii) That the variations in the gross profit rate bound to happen and unavoidable as the assessee is not dealing in standard/regular product.
(viii) That in the earlier years, the Department has accepted the declared gross profit rates.
(ix) That the assessee is manufacturing numerous items of vulcanised/unvulcanised rubber products as per specifications 7 desired by the customers. The manufacturing process involves mixing of rubber with chemicals and heating of the compound which, once done, is of no reuse as technical specifications differ in each case and are also not saleable items.
(x) That the gross profit in each case/job differs as the compound in each case is different and also depending upon the orders received/negotiated, developmental activities/expertise involved and gross profit will always differ i.e. increase/decrease as in past and cannot be consistent.
(xi) That the fact of variations in gross profit rate from year to year in the circumstances i.e. the nature of business activity of the assessee which are unavoidable has been accepted by the department for the last over 30 years and there has been no adverse finding and till last assessment year 2005-06 wherein the fall in gross profit rate was 6.79%, which has been accepted by the AO.
(xii) That no specific irregularity was observed by the AO as regards the following issues:-
-From the books or its maintenance.
-Defects in Accounts maintained.8
-Stock registers including quantitative details maintained.
-Method of valuation of stocks.
-Purchases-Fictitious/unaccounted.
-Sales-Fictitious/unaccounted.
-Expenses.
-Infirmities/inconsistencies in records.
-Method of accounting followed.
-Accounting Standards/Policies followed.
(xiii) That the AO had sought information u/s. 133(6) from 6 parties and the alleged petty differences (given at page 4 of the order) in 4 cases are not significant. In one case, the difference is of Rs.2,846, in the second case, the difference is of Rs.1886.88 (in both cases relating to opening balances) and in the two other cases the differences are of Rs.0.91 and Rs.2.20.There are no differences in transactions during the year.. The alleged differences were explained during assessment proceedings which are ignored by the AO in the order.
(xiv) That considering total creditors of the assessee of Rs.2533364.48 and the explanations as above, the alleged petty differences as above, do not justify invoking of Section 145(1) and rejection of book results.9
(xv) That the AO had sought information u/s 133(6) from HDFC bank which sanctioned CC Limit of Rs.27 lacs against security of stocks & debtors and the AO has highlighted the differences between the figures as per records and given to bank. The availed limit in March,2006 was only Rs.509534.82 against sanctioned limit of Rs.27 lacs. The figures of stocks, debtors and creditors given to bank were less than what the assessee carried as per books of accounts. There is no case of availing higher limit on fictitious stocks.
(xvi) That the difference in figures of stocks/debtors/creditors as given to Bank and as per records as explained above does not justify invoking of Section 145(1)and rejection of book results.
4.1 The ld.CIT(A) deleted the addition observing as under :
5.3 Decision:
Having perused the Asstt. Order and also the submissions made by the ld.AR in this regard, I am of the considered view that the AO had no cogent material to take such an extreme step as to reject the books of accounts by invoking sec.145 of the Act. Minor discrepancies in creditor's or debtor's balances is a common thing in commercial world and even these minor discrepancies had been duly explained by the appellant during the course of assessment. The books of accounts of the appellant are audited and the AO has not been able to point out any significant faults with the accounts which could entail the rejection. The fall in GP rate per se cannot be a reason to reject the books. At best it can give rise to suspicion or a knock at the door that investigation is required. In this case, it is seen that the AO has rejected the books solely on the ground that GP is low during the year but no material has been brought on record by the AO to disprove the explanation given by the appellant in this regard. Thus, 10 the rejection of books by the AO is held to be unwarranted and therefore, no addition made thereupon can be sustained.
Relief Rs.15,87,215."
5. We have heard the rival submissions. It seems that the AO has made the addition merely only the ground of low gross profit. The AO has not brought any concrete material on record to disprove the explanation given by the assessee in this regard. The assessee is manufacturing vulcanised/unvulcanised rubber products as per specifications desired by the customers in each case i.e. dealing in tailor-made products and is not dealing in general/standard product. In our considered view, gross profit rate, in the circumstances, cannot be consistent in all the years. This fact is clear from the gross profit rates shown by the assessee in seven assessment years including the previous year relevant to assessment year under consideration. The assessee has also submitted before the AO that the other reasons for fall in gross profit during the year were (a) increase in wages as per Govt. rules, (b) increase in Power charges rates and (c) repairs of factory premises. The AO has not rejected these reasons. It is also true that the gross profit rate cannot be the same in all the years. We find that the assessee has maintained regular books of accounts, stock register, purchases/sale bills and vouchers for the transactions made during the year.
The AO has not pointed out any material defect in the books of account regularly maintained by the asessee. The AO has also not given any adverse comments regarding method of accounting regularly followed by the assessee. The only reason for making the addition was that there was a variation in gross profit rate as compared to earlier years. It is swell settled law that merely low profit may provoke an enquiry but that by itself without more, cannot justify an addition to the profit shown. In that view of the 11 matter, we agree with this observation of the ld.CIT(A) that the AO was not justified in rejecting the book results solely on the ground that the gross profit is low during the year. No material has been brought on record by the AO to disprove the explanation given by the assessee in this regard. We also find that the assessee enjoyed CC limit from HDFC bank for Rs.27 lacs only against which the stocks/debtors carried were much more than required by the bank as security and only required stocks/debtors to cover the limit availed were submitted to bank. We further find that the books of account of the assessee are audited and the AO has not been able to point out any significant discrepancy in the books of account. We also find that there were minor discrepancies in creditor's or debtor's balances, which is a common thing in commercial world and even these minor discrepancies had been duly explained by the assessee during the course of assessment proceedings. Thus, considering the entire facts and circumstances of the present case, we fully agree with the observation of the ld. CIT(A) that in the facts and circumstances of the present case, there was no justification in invoking the provisions of Section 145 of the Act. We, therefore, do not see any infirmity in the findings of the ld. CIT(A) on this issue and accordingly uphold the order on this aspect.
6. Ground No.2 of the appeal reads as under :
"2. On the facts & circumstances of the case The Commissioner of Income Tax (Appeals)-II, Kanpur has erred in law in deleting the addition of Rs.3,00,000/- on account of factory rent even though the expenditure hit by provisions of section 40A(2)(a)/40A(2)(b) of the I.T. Act 1961."
7. The AO has discussed this issue in the following manner:
12"From the perusal of the P.& L. account, it was noticed that the assessee debited sum of Rs.12,06,167/ - under the head Factory rent and repairs, which includes building rent of factory premises at Rs.6,00,000/-. It may be mentioned that factory repairs was debited at Rs.6,67,167/ -. The assessee was required to ¢xplain the reasons for such increase in the factory rent.
The assessee has reiterated that the rent was increased in A. Y. 2004-05 and continues the same during the year and vide letter dated 15.10.2008 submits the similar explanation as was done in preceding assessment year. As per explanation dated 22.09.2008 factory rent of Rs.6,00,000/- has been paid @ 50,000/- P.M. for Factory/Office premises. The Factory/office premises was owned by several persons for the last over 40 years and the assessee was paying rent. Rent has been paid to the following persons as under:-
Chandrika Tandon Rs.50,000
Vijay Tandon Rs.93,750
R.K.Tandon (Individual) Rs.1,43,748
Ravi Tandon (HUF) Rs.1,31,250
Sharad Tandon(Individual) Rs.1,81,248
Rs.6,00,000
Further the assessee had explained that the assessee was paying rent of Rs.4,500/- P. M. till A. Y. 2003-04 and thereafter from. A.Y.2004- 05, the rent has been increased from Rs.4,500 /- to Rs.50,000 /- P. M. Assessee has further submitted that the factory premises is situated in the prime industrial area of the Fazalganj, Kanpur. The construction of the said building was made by the owners since inception. Assessee is paying rent for land as well as constructed shed. The area of land is 3,786 Sq. Yard and built up sheds/office is 26,000 Sq. Fit. The assessee further explained that the owners of the land and building are family members of the partners of the firm. Present cost of land in existing structure of the factory is more than at Rs.150 Lacs. The rent would be over Rs.1,00,000/- P. M. After a long discussion and negotiation with owners of the premises rent of Rs.50,000/- P. M. has been determined and the same has been paid during the previous year.
The explanation reply as mentioned above was examined and found 13 the same as not acceptable for the following reasons:-
(i) Assessee did not file/produce copies of old agreement and new agreement made with owners of the property regarding payment of rent. Therefore, the details of owners of the property and terms and conditions of rent, maintenance of property, payment of house tax and water tax are not verifiable. In fact the family members of the partners and some outsiders were owner of the property till A.Y. 2003-04 and thereafter ownership of the property have been come in the hands of family members of the partners of the firm. This fact has been admitted by A.R. that 75% of the profit ratio is owned by Tandon family and 25% by Owlak family.
(ii) The assessee did not justified the ALV of property and has not filed any details of Annual letting value as determined by competent authority of Nagar Mahapalika to charge House tax and Water tax.
(iii) The assessee had filed a copy of report issued by Sri S. K. Ahuja, Registered Valuer. During the assessment proceedings for A.Y. 2005-06. The report had not been prepared to determine the rental value of property. In fact valuer had determined the market value of Property for the Fair Market Value as desired by Co-owner. As per report dated 03.01.2003 (submitted during assessment proceedings A.Y. 2005-06) the following persons were co-owner of the property:-
M/s Ailga Rubber Warks Managing Director Sri Buddhu Lal Mehrotra, S /o Late Sri Jwala Prasad Smt.Pushpa Rani Mehrotra,W/o Late Jagannath Mehrotra Smt. Mridula Rani Mehrotra, W /o Mr. Pashupati Nath Mehratra Sri Jagannath Tandan, S/o Mr. Gapal Das Tandon Mr. Lalit Kumar Tandon, S/o Mr. Shiv Narayan Tandan Mr. Raj Kumar Tandon, S/o Mr. L.B.D. Tandon Smt. Raj Chandra Kala Tandon, W / o Mr. Gopi Nath Tandon 14 Smt. Raj Rani Tandon, W /o Sri L.B.D. Tandon Smt. Shyam Kumari Tandan, W /o Mr. Kailash Nath Tandon Smt. Padma Tandon, W /o Mr. Amar Nath Tandon Smt. Ramola Tandon, W /o Mr. Badri Nath Tandon
(iv) The rent was paid by assessee to the persons specified u/ s 40A(2)(b).
Since, the payment of rent is made to the specified persons as mentioned in section 40A (2)(a), the payment of rent in excess of the Market Rate is not allowable u/s 40A(2)(b). To determine the market rate one has to keep in mind the combined effect of the facts of the case, prevalent market rate, situation and locality of the property, ownership and use of the property and cost price index and other relevant factors.
However, looking to the fact that the rent of the property has not been increased since long therefore, the rent should be increased reasonably looking to the price index and market rate of rent as notified by Competent District Authorities. Price index has been increased in F.Y. 2004-05 by 4.80 times since 1981-82. A rent of Rs.4.,500/- P. M. has been paid by assessee upto A.Y. 2003-04. Considering history, facts and circumstances of the case, the market rate is estimated as at Rs.25,000/- P.M. i.e. Rs.3,00,000/- per annum .. Therefore, the payment of factory rent in excess of the Market Rate is determined at Rs.3,00,000/- (Rs.6,00,000/ - minus Rs.3,00,000/ -) is disallowed u/s 40A(2)(a) of the Act and added to the income of the assessee. "
8. On appeal, the ld.CIT(A) deleted the addition observing as under:
"6.1 Discussion/Decision The AO has simply copied the observations from the assessment order dt. 31.12.07 for A.Y. 2005-06 for disallowing the rent of Rs.300000. The impugned addition made for AY 2005-06 had been deleted by the Ld. CIT (A)-II, KNP and that order of the Ld.CIT(A) has been confirmed by the Hon ITAT. Respectfully following the same, I hereby delete the impugned disallowance made by the AO.
Relief Rs.3,00,000."15
9. After considering the ld. Representatives of both the parties, we find that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of the I.T.A.T.,Lucknow Bench-B in the asessee's own case in I.T.A.No.128(Luc.)/2009 relating to assessment year 2005-06. While deciding the similar issue, the Tribunal vide its order dated 29.1.2010 held as under :
"7. We have considered the rival submissions and carefully gone through the materials available on the record. In the instant case, it is not in dispute that the assessee was paying the rent @Rs.4,500/- per month for last over 25 years and upto the assessment year 2003-2004. It was increased to Rs.50,000/- per month during the year under consideration. Now question arises whether enhancement of rent to Rs.50,000/- per month was reasonable. In the instant case, we are of the opinion that when the recipient of the rent were the family members of the partners of the assessee firm, the provisions of section 40A(2)(a) of the Act are applicable and if it is a case where the payment of rent was excessive then only the addition can be made. In the instant case, the assessee furnished the fair rental value of the property in question from a registered valuer who valued the same at Rs.77,630/- per month. The said valuation was not doubted. Similarly the assessee quoted a case where for the similar area and locality, the rent @Rs.6/- per sq. ft. per month had been paid and the rent for the premises possessed by the assessee, if taken @Rs.6/- per sq. ft., worked out to Rs.2,00,000/- per month. Therefore, it cannot be said that the rent paid by the assessee was excessive, particularly when the Assessing Officer, at the time of estimating the rent @Rs.25,000/- per month, has not brought on record any comparable case in support of the said estimate. We, therefore, considering the 16 totality of the facts, do not see any infirmity in the impugned order of the Learned CIT(A) on this issue."
9.1 Respectfully following the order of the Tribunal (supra), we do not see any merit in this ground of appeal and therefore, we dismiss the same.
10. In the result, the appeal is dismissed.
The order pronounced in the open Court on 19.1.11.
Sd. Sd.
(N.K.Saini) (H.L.Karwa)
ACCOUNTANT MEMBER VICE PRESIDENT
January 19th , 2011.
Copy to the :
1. Appellant 2. Respondent 3. C IT(A) (4) CIT 5.DR.
A.R.,ITAT, Lucknow.
Srivastava.