Income Tax Appellate Tribunal - Ahmedabad
Naval Technoplast Ind.Ltd.,, ... vs Department Of Income Tax on 18 January, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
Before SHRI BHAVNESH S AINI,JM & SHRI A N P AHUJ A, AM
ITA No.1326/Ahd/2007
(Assessment Year:-2003-04)
Assistant Commissioner of V/s Naval Technoplast
Income-tax, Circle-5, Industries Ltd., 38, W hite
Ahmedabad House, Panchwati,
Ahmedabad
[PAN: AAACN 4950 B]
[Appellant] [Respondent]
Revenue by :- Shri Sandip Garg, DR
Assessee by:- Shri S N Soparkar, AR
O R D E R
A N Pahuja: This appeal by the Revenue against an order dated 18-01-2007 of the ld. CIT(Appeals)-XI, Ahmedabad, raises the following grounds:-
1. "The Ld. Commissioner of Income tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of Rs.21,75,379/-on account of disallowance of manufacturing expenses.
2. The Ld. Commissioner of Income tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of Rs.2,32,776/- on account of disallowance of packing and freight charges.
3. The Ld. Commissioner of Income tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of Rs.2,50,000/- on account of disallowance of travelling and conveyance expenses.
4. The Ld. Commissioner of Income tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of Rs.6,12,600/-being the value of excess stock found during the course of survey operation under section 133A 1 of the Income tax Act, 1961 carried out on 03/01/2002.
5. The Ld. Commissioner of Income tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of ITA No.1326/Ahd/2007 Rs.3,00,453/- on account of disallowance of interest relating to the difference in cash found during the course of survey."
2 Adverting first to ground no.1 in the appeal, facts, in brief, as per relevant orders are that return declaring income of Rs.18,47,706/- filed on 14.10.2003 by the assessee, manufacturing bobbins, tubes, cones, etc., after being processed on 24.12.2003 u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as the "Act"], was selected for scrutiny with the service of notice u/s 143(2) on 17-01-2004.In this case a survey u/s 133A of the Act was conducted on 03-01-2003. During the course of assessment proceedings, the Assessing Officer (AO in short) noticed that even though sales during the year had increased from Rs.6,21,17,426/- in FY 2001-02 to Rs.7,57,81,816/- in the year under consideration, increase in following expenses was disproportionate:
Ex pe ns es F Y 0 1- 02 F Y 02 - 0 3 % I nc r e as e
A) Mf g . ex p e ns es ( i nc lu d in g
Pr oc es s i n g c ha r g es )
67 , 68 ,4 9 2 1, 1 8, 54 , 32 3 75 %
B) P r oc es s in g c h ar ges 11 , 90 ,4 5 0 58 , 23 ,7 4 1 39 0%
C) P ac k in g & Fr e ig h t 77 , 82 2 3, 4 2, 50 5 34 0%
D) T r a v e ll i n g & C on v e ya nc e 46 , 73 1 3, 1 4, 30 0 57 2%
2.1 To a query by the AO, the assessee submitted that even
though the sales of the company have increased by 22% during the year over the sales of preceding year, the manufacturing expenses excluding the process charges increased by only b y 8.11%, the company having got its work done from outside parties. There was substantial increase in process charges while other manufacturing expenses like power and fuel, labour charges have remained stagnant or have shown only marginal increase. As regards increase in packing & freight charges, the assessee explained that earlier it was the practice of the 2 ITA No.1326/Ahd/2007 company to recover some of the packing expenses from the customers and the assessee used to charge certain percentage of sale as packing charges from them. Since some of the customers resisted the levy of packing charges, the recovery of the packing charges from these customers was reduced to the extent of some percentage of the sale amount in the year under consideration vis-a-vis preceding year. The assessee also pointed out that no personal visit was included in the traveling and conveyance expenses. These expenses increased due to substantial process activities done from outside parties. However, the AO did not accept these contentions of the assessee on the ground that if the assessee got work done from outside parties, then direct manufacturing expenses like power & fuel, labour charges etc. would have decreased vis-à- vis preceding year. The fact that direct manufacturing expenses had increased by 8.11% reflected that the manufacturing had been done in the assessee's own factory premises and processing charges were paid only to decrease the profit of the company. Since there was 43% increase in production of finished goods in the year under consideration while the assessee could not justify substantial increase in the expenses, the AO disallowed the manufacturing expenses of Rs.21,75,379/-.
3. On appeal, the learned CIT(A) deleted the disallowance in the following terms:-
"3.1 In the written submissions, it is submitted by the AR of the appellant as under:
"The appellant is a Limited Company engaged in the manufacturing and selling of bobbins, tubes and cones etc. that during the year under consideration the sales of the appellant have increased from Rs.6,21,17,426/- to Rs.7,57,81,846/- in value terms showing an increase of 22%. In quantity terms also the sales have increased 3 ITA No.1326/Ahd/2007 from 343574 kgs. to 491550 kgs. showing an increase of 43%. The said results have been achieved by the appellant mainly because the appellant got its job done from outside parties. The outside job consisted of processing of raw materials to finished goods i.e. the appellant gave the raw material to the job processors and in turn got the finished goods in saleable conditions. The appellant did not incur any expenditure in respect of this job work except the job charges. All the variable expenditure like electricity, wages etc. were borne by the job processors. The appellant had to resort to this business plan as the installed capacity was utilized in full by it and there was no scope for immediate expansion of the installed capacity. Had the appellant gone for expansion of installed capacity it would have incurred fixed cost by way of interest on term loan for land, building and plant and machinery and depreciation etc By adopting this business plan the appellant was benefited in as much as that with the same business setup and with the same level of fixed overhead expenditure it could earn higher profits which can be seen from a statement attached herewith -as annexure 'A' showing the incremental/marginal profit of Rs.18,62,210/- earned by it due to job work done from outside.
It is respectfully submitted that the learned Assessing Officer has not appreciated the written submission made by the appellant contained in its letter dated 16.11.05.
It is further submitted that the learned A.O. has not pointed out any amount in relation to the processing charges which, in her opinion, is either bogus or not supported by proper bills. On the other hand the appellant has submitted all the details in respect thereof to show that the transactions were fully vouched and the payments were through cheques only. It had also produced the excise records to show the movement of raw material from appellant's premises to job processors and back from job processors to appellant's premises in the form of finished goods.
In view of the above submissions it is prayed that the disallowance made by the learned AO on this ground may kindly be deleted.
3.2 The submissions made by the A. R. of the appellant have been perused. The observations of the assessing officer in the assessment order have also been perused.
3.2.1. It may be seen that for the assessment year under consideration there has been considerable growth in total turnover of the appellant. The growth of sales is at 43%. The appellant had to get articles manufactured from out side parties on job work basis since its own manufacturing capacity being limited. Therefore, there is a corresponding increase in manufacturing expenses. The appellant has been maintaining books of accounts and the job work is also subject to Central Excise supervision. The increase in cost of 4 ITA No.1326/Ahd/2007 manufacturing is inevitable in view of the fact that the appellant has increased the total manufacturing of the articles which manifests in increase the sales. Therefore, it appears that the facts of the case are not appreciated by the AO and has resorted to partial disallowance of the manufacturing expenses. I do not find any valid reason in making partial disallowances of manufacturing expenses since the said expenses are not proved of bogus nature. Hence, the addition made cannot be sustained."
4. The Revenue is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned DR supported the order of the AO while the learned AR on behalf of the assessee supported the findings of the ld. CIT(A).
5. W e have heard both the parties and gone through the facts of the case. W e find that the AO has nowhere doubted the genuineness of the expenditure nor pointed out any defect in the books of account. W e find that the quantity of goods manufactured increased from 343574 kgs. to 491550 kgs. in the year under consideration. As pointed out by the ld. CIT(A),since the assessee got the articles manufactured from outside parties on job work, there was no corresponding increase in manufacturing expenses. In the absence of any material that the expenditure on account of manufacturing expenses, processing charges, packing and freight or travelling expenses were not genuine or not supported by any bills, etc., we are not inclined to interfere with the findings of the learned CIT(A). Therefore, ground no.1 in the appeal is dismissed.
6. Ground no.2 relates to disallowance of Rs.2,32,776/- on account of packing and freight charges. The AO disallowed an amount of Rs.2,32,776/- since quantity of sales increased only by 41% in comparison to preceding assessment year while packing charges increased by 340%.
7. On appeal, the learned CIT(A) deleted the disallowance on the submission of the assessee that the recovery of packin g 5 ITA No.1326/Ahd/2007 charges from the customers was merely 80% in the year under consideration as against 94% in the preceding year. Total packing and freight charges were Rs.17.96 lacs in the year under consideration as against Rs.13.55 lacs in the preceding year.
8. The Revenue is in appeal before us against the aforesaid findings of the learned CIT(A). The learned DR supported the order of the AO while the learned AR on behalf of the assessee supported the findings of the learned CIT(A).
9. W e have heard both the parties and gone through the facts of the case. W e do not find any infirmity in the findings of the learned CIT(A) in accepting the submission of the assessee that the recovery of packing charges from the customers was lower in the year under consideration vis-à-vis in the preceding year while total packing and freight charges were Rs.17.96 lacs in the year under consideration as against Rs.13.55 lacs in the preceding year. Even otherwise the Revenue has not placed any material before us in order to enable us to take a different view. Therefore, we have no hesitation in upholding the findings of the ld. CIT(A) and consequently reject ground no.2 in the appeal.
10. Ground No.3 relates to disallowance of Rs.2,50,000/- out of travelling and conveyance expenses. The AO disallowed an amount of Rs.2,50,000/- on estimate on the ground that since the substantial production of the assessee having been carried out in its own factory premises, the plea of the assessee that the company got substantial process activities done from outside parties and therefore, was required to exercise supervisory control, was not acceptable.
6 ITA No.1326/Ahd/200711. On appeal, the learned CIT(A) deleted the disallowance on the ground that there was no specific finding indicating any non- business expenditure.
12. The Revenue is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned DR supported the order of the AO while the learned AR on behalf of the assessee supported the findings of the learned CIT(A).
13. W e have heard both the parties and gone through the facts of the case. W e find that the AO has not doubted the genuineness of the expenditure nor pin-pointed any specific item of expenditure under the head "Travelling & Conveyance Expenditure" which had been incurred for non-business purposes. Even otherwise the learned DR did not refer us to any material controverting the fact that increased amount of travelling and conveyance expenses were incurred only to supervise the substantial processing activities done from outside parties. In these circumstances, therebeing no basis so as to as enable us to take a different view in the matter, we are not inclined to interfere with the findings of the learned CIT(A). Therefore, ground no.3 in the appeal is also dismissed.
14. Ground No.4 in the appeal relates to an addition of Rs.6,12,600/- on account of excess stock found during the course of survey u/s 133A of the Act in the premises of the assessee on 03-01-2003. The AO noticed that during the course of survey in the business premises of the assessee, stock of 141317 kgs. was found in the business premises whereas the stock as per books were only 134168 kgs. The assessee did not explain the discrepancy during the course of survey. To a query by the AO during the course of assessment proceedings, the assessee submitted that the survey party considered the stock of colour and chemicals and other consumables while the 7 ITA No.1326/Ahd/2007 books of account contained inventory of only finished goods and raw material. The stock of raw materials, colour and chemicals, packing material and reusable materials along with finished goods were kept in bags as well as in loose quantity. The materials kept in bags were not of uniform quantity in each bag. Since the survey party estimated that each bag contained 25 kgs. whereas some of the bags might have lower quantity while the actual measurement of stock was not taken, there was possibility of percentage of error of 2 to 3 % in estimation. However, the AO did not accept the contentions of the assessee, the assessee having failed to explain the difference of 7149 kgs. in stock. Since the average cost of raw material as revealed from notes on accounts was Rs.85.69 per kg., the AO added an amount of Rs.6,12,600/- towards unexplained expenditure.
15. On appeal, the learned CIT(A) deleted the addition in the following terms:-
" 5.2. The submissions made by the A. R. have been perused. The observations of the assessing officer have also been perused. In the light of the above submission of the AR, it appears that the inventory taken is on estimation basis from which it looks accuracy factors are not deserved, hence, difference in stock cannot be attributed as correct as alleged, therefore, the addition made by the A. 0. is deleted."
16. The Revenue is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned DR while referring to the impugned orders, contended that the assessee did not dispute the difference in quantity of stock until the issue of show-cause notice issued by the AO, even when a copy of inventory was handed over to the assessee by the survey party on conclusion of survey . Since item-wise details of colour and chemicals and other consumables were not available in the 8 ITA No.1326/Ahd/2007 books of account nor the assessee could give any clarification during the course of survey, the AO was justified in making the addition on estimate basis. The learned DR pointed out that the CIT(A) has not given any reasons while deleting the addition apart from stating that the inventory was taken on estimate basis. On the other hand, the learned AR on behalf of the assessee contended that the AO has not identified as to whether the colour and chemicals were in short or some other item. Even the average price on the basis of notes on accounts adopted by the AO was not justified in absence of identification of the material. In reply, the learned DR added that since the assessee did not maintain any stock register, physical inventory of stock was taken during the course of survey. The assessee having failed to explain the difference, the ld. CIT(A) was not justified in deleting the addition.
17. W e have heard both the parties and gone through the facts of the case. During the course of survey, inventory of stock weighing 141137 kgs. was prepared while the stock as per books was found to be 134168 kgs. Undisputedly stock of colour and chemicals and other consumables were not accounted for in the books of accounts while admittedly only stock of finished goods and raw material alone were accounted for. In these circumstances, especially when difference of 7149kgs. was pointed out during the course of survey, onus was on the assessee to explain the difference with cogent evidence. There is nothing to suggest that the assessee discharged this onus. The ld. CIT(A) did not analyse either the inventory of physical stock found during the course of survey or the statement of the assessee recorded during the survey nor the same have been placed before us. Apparently, the aforesaid order of the ld. CIT(A) is not a speaking order. The application of mind to the material facts and the arguments should manifest itself in the order. Section 250(6) 9 ITA No.1326/Ahd/2007 of the Income Tax Act ,1961 mandates that the order of the CIT(A) while disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reason for the decision. As is apparent from the impugned order, in our opinion, the order passed by the ld. CIT(A) is cryptic and grossly violative of one of the facets of the rules of natural justice, namely, that every judicial/quasi-judicial body/authority must pass reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it. The requirement of recording of reasons and communication thereof has been read as an integral part of the concept of fair procedure. The requirement of recording of reasons by the quasi-judicial authorities is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision-making process. We may reiterate that a 'decision' does not merely mean the 'conclusion'. It embraces within its fold the reasons forming basis for the conclusion.[Mukhtiar Singh Vs. State of Punjab,(1995)1SCC 760(SC)]. As is apparent, the impugned order suffers from lack of reasoning and is not a speaking order. In view of the foregoing, especially when the ld. CIT(A) has not passed a speaking order on the issue raised in ground no. 4 in the appeal before us ,we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issues raised in the said ground afresh in accordance with law in the light of our aforesaid observations, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the issue, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act. With these observations, ground no. 1 is disposed of.
18. Ground no.5 relates to disallowance of interest of Rs.3,00,453/- on account of difference in cash found during the course of survey. During the course of survey on 03-01-2003 cash of Rs.91,200/- was found whereas books of accounts of the assessee revealed cash of Rs.17,60,385/-. Shri Sharad 10 ITA No.1326/Ahd/2007 Tibrewala, Authorized Signatory of the assessee explained in his statement recorded during the course of survey that the difference was because of the fact that certain expenditure on account of salary and factory expenses were yet to be recorded in the computerized books of accounts. However, he could not produce any vouchers for expenses nor these were found, either in the factory premises or in the office premises. During the course of assessment proceedings, to a query by the AO, the assessee explained vide letter dated 23-03-2006 that the physical cash was found in excess in the books of account because cash had been withdrawn from time to time from the respective banks for the purpose of meeting the expenses. Since the expenses were not recorded in the computer, physical cash was found less. The assessee furnished a copy of cash flow statement till 31-12-2002. On perusal of cash flow statement, the AO observed that except for the month of October, the monthly expenses never exceeded Rs.3 lacs and the assessee was having enough brought forward cash balance in the beginning of the month to meet the monthly expenses. Since the assessee was not unable to substantiate its explanation in respect of cash difference, the AO disallowed the interest at the rate of 18% pa on the excess cash of Rs.16,69,185/-, out of total interest claim of Rs.5,86,981/-.
19. On appeal, the learned CIT(A) deleted the disallowance accepting the submissions of the assessee that the AO did not disprove the expenses which were not accounted for in the books of accounts at the time of survey and reflected in the cash flow statement.
20. The Revenue is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned DR 11 ITA No.1326/Ahd/2007 supported the order of the AO while the learned AR on behalf of the assessee supported the findings of the learned CIT(A).
21. W e have heard both the parties and gone through the facts of the case. W e find that the genuineness of the expenditure debited in the books of account has nowhere been doubted and in fact the AO has allowed the expenses while completing the assessment. Under these circumstances, especially when the Revenue have not placed any material, controverting the findings of the learned CIT(A), we have no alternative but to uphold his findings. Therefore, ground no.5 in the appeal is dismissed.
22. In the result, the appeal is partly allowed, but for statistical purposes.
Order pronounced in the court today on 30-09-2010 Sd/- Sd/-
(BHAVNESH S AINI) (A N P AHUJ A) JUDICI AL MEMBER ACCOUNTANT MEMBER Date : 30-09-2010 Copy of the order forwarded to:
1. Naval Technoplast Industries Ltd., 38, W hite House, Panchwati, Ahmedabad
2. ACIT, Circle-5, Ahmedabad
3. CIT concerned
4. CIT(A)-XI, Ahmedabad
5. DR, Bench-D, ITAT, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD 12