Income Tax Appellate Tribunal - Ahmedabad
Panchmahal Steel Ltd.,, Godhra. vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D" AHMEDABAD
Before Shri Mahavir Singh, Judicial Member and
Shri A.N.Phauja, Accountant Member
IT A No.1344/ Ahd/2004
Assessment Year:1997-98
Date of hearing:13.4.10 Drafted:15.4.10
Assistant Commissioner V/s. Panchmahal Steel Ltd.,
of Income-tax, 7 t h Floor Land Mark,
Panchmahal Circle, Race Course Circle,
Godhra Baroda
PAN No. AABCP2643Q
(Appellant) .. (Respondent)
Appellant by :- Shri Chhavi Anupam, CIT-DR
Respondent by:- Shri Milin Mehta, AR
ORDER
PER Mahavir Singh, Judicial Member:-
This appeal by the Revenue is arising out of the order of Commissioner of Income-tax (Appeals)-V, Baroda in appeal No.CAB/V-99/03-04 dated 25-02-2004. The assessment was framed by the Jt. Commissioner of Income-tax (Asstt.) Spl. Range-2, Baroda u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 13-03-2000 for the assessment year 1997-98.
2. The first issue in this appeal of the Revenue is against the order of CIT(A) deleting the addition made by the Assessing Officer on account of low gross profit (GP) and low yield ratio. For this, Revenue has raised the following ground No.1 of
i):-
"i) in deleting the addition of Rs.3,44,64,333/- on account of Low G.P. / low yield ratio, ignoring the facts narrated in Para-3, 3.1, 3.2 & 3.3 of the assessment order."
3. We have heard the rival contentions and gone through the facts and circumstances of the case. We have perused the case records including the assessment order and the order of CIT(A). The brief facts leading to the above issue ITA No.1344/Ahd/2004 A.Y.1997-98 ACIT Panchmahal Circle Godhra v. Panchmahal Steel Ltd. Page 2 are that the assessee is a limited company dealing in manufacturing of stainless steel billets and Rollings and the same are produced at Steel Melting Shop and for the manufacturing of the same major raw materials used by the assessee consists of steel scrap, sponge iron and alloying elements namely Ferro Chrome, Fero Nickel, Ferro Manganese etc. Whereas rolling process involves heating of billets in furnace and thereafter passing of hot billets through roughing stands and subsequent finishing stands and cooling the rolled section. The Assessing Officer further noted that the gross turnover has increased from Rs.184.01 crores in the immediately preceding assessment year to Rs.120.91 crores in the current assessment year. Further perusal of the same, it is noted that the GP ratio has sharply declined to 0.15% in the current assessment year, as against 9.05% in the immediately preceding assessment year the GP rate was 11.8% in the assessment year 1995-96. Before the Assessing Officer, it was contended by the assessee that the GP was reduced during the current assessment year due to recession in domestic and international stainless steel industry and further due to intense competition in utensil grade stainless steel segment, which effected the sales and production adversely resulting into losses for the year under consideration. He noted that there is sharp fall in the yield of finished products vis-à-vis the consumption of raw material in the current year as compared to immediately preceding assessment year and on the basis of detailed yield chart on month-to-month basis, it is noted that overall yield in the current year is 87.87% as against 88.10% shown in the immediately preceding assessment year is without taking into consideration the end-cutting and skull. If the end-cutting and skull is taken into consideration, the overall yield for the year under consideration works out to 80.01% as against 82.76% in the immediately preceding assessment year. Further the net yield after taking into consideration the end-cutting and skull as well as further taking into consideration the various additives used in the manufacturing process under consideration works out to 71.2% as against 73.20% shown in the immediately receding assessment year. The detailed analysis of the same is worked out as per the chart below:-
Particulars A.Y. 1996-97 A.Y. 1997-98
Yield without end-cutting and skull 88.10% 87.87%
Yield with end-cutting 82.74% 80.01%
Yield with end-cutting skull additives 73.20% 71.22%
ITA No.1344/Ahd/2004 A.Y.1997-98
ACIT Panchmahal Circle Godhra v. Panchmahal Steel Ltd. Page 3
He further noted that the assessee has not accounted for the value of excise duty as part of closing stock of finished goods as on 31-03-1997 and the total value of finished goods is for Rs.18,11,68,922/- and the element of excise duty on the same works out to Rs.2,71,75,238/-. According to the Assessing Officer, as per the accounting policy of the company, it is noted that excise duty payable on inventories lying at the factory is accounted for only when it is paid since as per the assessee, it becomes payable on subsequent clearance thereof. On being asked, the assessee has contended that the same shall not have any impact on the profits as if the value of excise duty is to be increased necessary deduction may also be allowed in the opening stock. It has further contended that even otherwise the entire finished goods available as on 31-03-1997, has been sold out subsequently within the time prescribed u/s. 43B of the Act, therefore, the same is an allowable deduction on payment basis u/s. 43B of the Act. The Assessing Officer in view of the above defects, not satisfactorily explained, rejected the book results by applying the provision of Sec.145(2) of the Act and therefore on the facts available on record the net GP ratio is applied to the total turnover as against the GP ratio as declared by the assessee at 0.15% and made addition of Rs.3,44,64,333/- which worked out as under:-
GP by applying GP rate of 3% on Rs.3,62,73,876/-
total turnover of Rs.1,20,91,29,205/-
GP shown by the assessee Rs. 18,09,543/-
Difference Rs.3,44,64,333
4. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) after taking remand report from the Assessing Officer on the submission of the assessee held that the above three reasons narrated are no reasons for rejecting the book results by giving following finding in para-3.14 to 3.18 of his appellate order:-
"3.14 I have considered the submissions made as well as arguments put-forth by the learned counsel for the appellant. The arguments put-forth by the Addl. CIT/AO and report dated 5.11.03 & 16.12.03 are also considered. The contention of the appellant that it has maintained regular books of account which are audited are found to be correct. The appellant has explained the reasons for shortfall in GP which can be summarized as under:-
(i) There was decrease of about 7% in average sale price in rolled product and over all average sale price had been reduced by 3% during the year. The average sale price of bright bar has gone down by about 11%.ITA No.1344/Ahd/2004 A.Y.1997-98
ACIT Panchmahal Circle Godhra v. Panchmahal Steel Ltd. Page 4
(ii) The appellant has received export incentives of Rs.1,18,80,595 during the year which were not been considered by the AO while working out the gross profit. Considering the same, the CGP works out to 1.27% as against 0.5%.
(iii) There was increase in salary & wages by 1.53% and power and fuel charges have also gone up by 5.40% since there was rise in per unit charges by the Gujarat Electricity Board. The average per unit consumption cost of LSH is Rs.7.02 as against Rs.5.81 during last year.
(iv) The appellant also submitted a monthwise chart of spares and stores which has increased by 4.18% during the year.
(v) There is increase in average puchase price of imported shredded scrap which has gone up to Rs.6,728 per MT as against Rs.5,861 per MT of last year. Similarly, the average purchase cost of Nickle Oxide has also gone up by 33% during the year.
3.15 The contention of the authorized representative is found to be convincing that overall manufacturing cost has been increased due to above reasons which resulted into huge loss for the year. The counsel also argued that the Addl CIT in the report dated 16.12.03 has accepted the above facts and concluded that if increase in consumption of stores/spares, power & fuel, salary & wages is considered, the GP rate will come to level it was claimed. In view of the above facts, I hold that the appellant has explained the reasons for shortfall in GP during the year and therefore it would be incorrect to make GP addition considering the facts of the case.
3.16 Regarding invoking provisions of section 145(2), the contention of the appellant that appellant has maintained quantitative records and the regular books of account which are duly audited and no adverse comment is observed from such report. The AO has failed to point out any specific defects so as to make it a case of rejection of book results. Considering the facts of the appellant's case, the AO was not justified in inferring that correct profit has not been adduced and in turn invoking the provisions of section 145(2) of the Act.
3.17 Regarding the low yield, the contention of the authorized representative is also found to be convincing that the appellant has maintained all quantitative records and the AO has failed to bring on record any material evidence so as to justify the addition. The appellant has also stated that it had stopped production of steel billet since the sale price was declined to less than production cost as observed by the Addl CIT in the report dtd. 116.12.03. It is also correct that due o huge losses, the company has no tax liability either in the year or in the subsequent year and therefore question of showing low profit would not arise.
ITA No.1344/Ahd/2004 A.Y.1997-98ACIT Panchmahal Circle Godhra v. Panchmahal Steel Ltd. Page 5 3.18 It is noticed that while making GP addition, the AO has failed to point out any specific defects in the books of account. It is also observed that the books of account of the appellant company have been subjected to compulsory audit under s. 44AB of the IT Act as well as under the Companies Act. Under both the Acts, auditors have to certify whether books of account which have been audited reveal true and fair picture or not."
Accordingly CIT(A) deleted the addition of net GP made by Assessing Officer. Aggrieved, Revenue came in appeal before us on this issue.
5. We find that the low GP, low yield and the element of scrap not accounted for in closing stock of finished goods cannot be reasons for rejecting the book results as the Assessing Officer could not point out any defect in the books of account. After going through the entire case records, we find that the Assessing Officer's entire premise for making addition was low GP and low yield. We further find that the assessee has explained the reasons for low GP which are as under:-
(1) There was decrease of about 7% in average sale price in rolled product and over all average sale price had been reduced by 3% during the year. The average sale price of bright bar has gone down by about 11%.
(2) The appellant has received export incentives of Rs.1,18,80,595 during the year which were not been considered by the AO while working out the gross profit. Considering the same, the CGP works out to 1.27% as against 0.5%.
(3) There was increase in salary & wages by 1.53% and power and fuel charges have also gone up by 5.40% since there was rise in per unit charges by the Gujarat Electricity Board. The average per unit consumption cost of LSH is Rs.7.02 as against Rs.5.81 during last year.
(4) The appellant also submitted a monthwise chart of spares and stores which has increased by 4.18% during the year.
(5) There is increase in average puchase price of imported shredded scrap which has gone up to Rs.6,728 per MT as against Rs.5,861 per MT of last year. Similarly, the average purchase cost of Nickle Oxide has also gone up by 33% during the year.
We further find that the observation of the auditor relating to the books of account of the assessee for the year under consideration, from the audit report as reproduced by CIT(A), and also the Director's report as reproduced, it is noted that the assessee ITA No.1344/Ahd/2004 A.Y.1997-98 ACIT Panchmahal Circle Godhra v. Panchmahal Steel Ltd. Page 6 has explained the reasons for low GP and increasing in manufacturing expenses. We find no justification for rejecting the book results and there is no material on record which justified the conclusion reached by the Assessing Officer for rejecting the books of account. We find that the assessee has maintained complete and proper books of account in accordance with the provision of Companies Act as well as provision of this Act. Accordingly, we find no infirmity in the order of CIT(A) accepting the book results and this issue of the Revenue's appeal is dismissed.
6. The next issue in this appeal of the Revenue is against the order of CIT(A) is reducing the disallowance of Rs.2,50,120/- to Rs.1,13,620/- on account of staff welfare expense by treating the same as entertainment expenses.
7. After hearing the rival contentions and going through the case records, we find that the assessee-company has incurred the expenses which include staff welfare expenses, canteen expenses, canteen subsidy, tea, coffee, sweet etc. distributed on the occasion of festivals to its workers and staff and these expenses incurred are wholly and exclusively for the purpose of business. We find that the CIT(A) has directed the Assessing Officer to consider 25% of such expenses in the nature of entertainment expenses and accordingly allow the claim of the assessee by giving following finding in para-5.5 of his appellate order:-
"5.5 I have considered the submissions made as well as the arguments put- forth by the learned counsel for the appellant. The arguments putforth by the AO are also considered. The contention of the appellant is found to be convincing that most of the expenses incurred are for the purpose of its business and mainly for staff welfare incurred during the office hours. However, the personal element also cannot be denied and therefore I agree to some extent with the inference of the AO. To meet the ends of justice, I direct the AO to consider 25% of such expenses in the nature of entertainment expenses and recalculate the deduction u/s.37(2A) of the Act accordingly. In the appeal decision for assessment year 96-97, a similar view has been taken and is applied in this year."
In view of the above reasoning adduced by CIT(A), we find no infirmity in the order of CIT(A) and accordingly we uphold the same and this issue of Revenue's appeal is dismissed.
ITA No.1344/Ahd/2004 A.Y.1997-98ACIT Panchmahal Circle Godhra v. Panchmahal Steel Ltd. Page 7
8. The next issue in this appeal of the Revenue is as regarding to the disallowance of Rs.2,39,140/- on account of vehicle expense and depreciation.
9. We find that the CIT(A) has deleted the addition on the decision of jurisdictional of High Court in the case of Sayaji Iron and Engg. Co. v. CIT (2002) 253 ITR 749 (Guj) vide para-6.3 of his appellate order as under:-
"6.3 I have considered the submission made by the appellant. The appellant being an artificial juridical person, the disallowance made out of vehicle repairs/depreciation on vehicles and out of telephones for personal use are not justified in view of the ratio laid down by the Hon'ble Gujarat High Court in the case of Sayaji Iron & Eng. Co 172 CTR 339 and ITAT Delhi in the case of DCIT Vs Haryana Oxygen Ltd 73 TTJ 575 (Delhi). The AO is directed to delete the disallowances made on this account."
We find no reason to interfere in the order of CIT(A) and accordingly we uphold the same.
10. In the result, Revenue's appeal is dismissed.
Order pronounced in Open Court on 30/04/2010
Sd/- Sd/-
(A.N.Phauja) (Mahavir Singh)
(Accountant Member) (Judicial Member)
Ahmedabad,
Dated : 30/04/2010
*Dkp
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT(Appeals)-V, Baroda
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad