Income Tax Appellate Tribunal - Ahmedabad
Abbey Chemicals Pvt. Ltd.,, Baroda vs Department Of Income Tax on 7 July, 2004
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C", AHMEDABAD
Before Shri Mahavir Singh, JM & Shri A.N. Pahuja, AM
I.T.A. No.2875/Ahd/2004
(Assessment year 2001-02)
ITO, Ward-1(1) vs Abbey Chemicals Pvt Ltd
Baroda 510, Gayatri Chambers
R.C. Dutt Road, Alkapuri
Baroda
[PAN : AACA4923F]
(Appellant) (Respondent)
Revenue by : Shri Shelley Jindal,DR
Assessee by : Shri SH Talati,AR
ORDER
AN Pahuja : This appeal by the Revenue against an order dated 07-07-2004 of the ld. CIT(A)-I, Baroda, raises the following grounds:
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in
(i) allowing deduction u/s 10B of the Act which ought to have been disallowed to the assessee as the assessee company was not a new industrial undertaking.
(ii) deleting the addition made on account of lower G.P.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order passed by the AO.
3. It is, therefore, prayed that the order of the CIT(A) may be set aside and that of the AO be restored."
2. Adverting first to ground no.1(i) in the appeal, facts, in brief, as per relevant orders are that return declaring income of Rs.6,933/-filed on 29-10-2001 by the assessee, engaged in the manufacture of 2.2Dithio-di benzoic acid, was taken up for scrutiny with the issue of notice u/s 143(2) of the Income-tax Act,1961[hereinafter referred to as the 'Act'].During the course of assessment 2 I.T.A. No.2875/Ahd/2004 proceedings, the Assessing Officer[AO in short] noticed that the assessee claimed deduction u/s 10B of the Act in respect of profits of its export orient unit, even when in the preceding assessment years 1998-99 to AY 2000-01,it claimed deduction u/s 80HHC of the Act. The AO was of the opinion that the provisions of section 10B(2) of the Act were available to the new undertakings only and reconstruction or conversion of business already in existence does not entitle the assessee for the benefit u/s 10B of the Act . The AO further observed that it was incumbent upon the assessee to prove that its plant and machinery was not used earlier for any purpose subject to explanation below section 10B(2) of the Act. According to the AO ,it will be self defeating exercise if the legislation having introduced a sunset clause in section 80HHC(4) of the Act contemplates deduction u/s 10B to the same industrial undertaking. In response to a show cause notice, the assessee explained that all the machines/equipments and plants are newly purchased and are installed for the manufacturing purposes. However, the AO observed that the equipment and plants were not newly purchased as was evident from the following details:
A.Y. W.D.V. of machinery Additions during the FY 1997-98 76,53,224 2,31,693 1998-99 78,84,917 8,01,607 1999-2000 86,86,524 25,75,659 2000-01 1,12,62,184 39,32,858 2001-02 1,51,95,042 51,48,070
and thus, the assessee cannot claim the status of new industrial undertaking for the purpose of deduction u/s 10B of the Act. The assessee while explaining that EOU is approved by the Government is a totally new undertaking and has not used machinery or plant used ,earlier used in any other plant in India. However, the AO rejected these submissions of the assessee and denied the claim for deduction u/s 10B of the Act on the ground that the provisions of section 10B, substituted by Finance Act, 2000 w.e.f. 1.4.2001 start with the heading "Special 3 I.T.A. No.2875/Ahd/2004 Provision in respect of newly established hundred percent export oriented undertakings" and the assessee did not fulfill the conditions stipulated u/s 10B(2) of the Act since
i) the letter of permission for conversion of existing Domestic Tariff Area unit in to 100% EOU, issued by the Government of India on 6th January, 2001 is not an approval in exercise of powers conferred by Section 14 of the Industrial Development & Regulation) Act, 1951, but is a letter extending facilities & privileges admissible as envisaged in Export Import Policy 1997-2002;
ii) as per Chapter 9 (paragraph 9.3) of the EXIM policy 1997-2002 conversion of domestic tariff area (DTA) unit to EOU was permitted, subject to that no concession was permissible to plant, machinery and equipments already installed in so far as concession on duties and taxes was concerned while para 9.4 of the said policy mandated the applicant to maintain distinct identity and required to maintain separate accounts also.;
iii) the new notification changed the convertibility clause as under :
"(a) Existing DTA units may also apply for conversion into an EOU/EHTP/STP unit, but no concession in duties and taxes would be available under the scheme for plant, machinery and equipment already installed.
2.1 The AO further pointed out that the aforesaid facts were clearly borne out from the assessee's application dated 25-10-2000 to DGFT and the relevant para of the said application reads as under:
"We are a private limited company manufacturing and exporting above mentioned product since last five years. As we have sizeable export, we propose to fully convert our existing unit into EOU. For this purpose we have already sent application dated 3-7- 2000, however by oversight we have mentioned it as for setting up of a new unit."4 I.T.A. No.2875/Ahd/2004
2.2 According to the AO, explanation 2 to section 80I(2) of the Act defines "newly established industrial undertaking" and such undertaking has to satisfy the requirement of restriction of 20% of the machinery used in previous undertaking. Since the assessee admitted that all plant and machinery were already installed prior to the date on which the letter of permission dated 06-01-2001 was received and even the plant and machinery added during the year were also installed prior to the "conversion" of the assessee's existing unit into an EOU, the AO recorded the statements of assessee's, representative Shri SS Patel, NRI, Managing Director, Shri DG Patel, Alternate Director to the said SS Patel and Shri RC Patel, Chief Chemist, in charge of installation, production, quality control and while referring to circular No.794 dated 09-08-2000, thereafter show caused the assessee vide letters dated 01-03-2004 and 08-03-2004 as reproduced in the assessment order. In response, the assessee, vide letter dated 16-03-2004 replied that the letter of permission (LOP) issued by the Ministry of Commerce & Industry, dated 16/1/2001 is sufficient compliance for claiming deduction u/s 10B of the Act and that the assessee complied with the provisions of section 10B(2)(ii) of the Act. The assessee also contended that in their case there has not been any transfer of the assets . However, the AO did not agree with the submissions of the assessee and observed that the "conversion" of unit allowed by the Ministry of Commerce is defacto reconstruction for the purposes of Section 10B(2)(ii) and that the assessee's argument that "it is amply therefore clear that the business already in existence can claim exemption u/s 10B if the two situation (split-up and reconstruction) are not there." has no meaning and is superfluous.
2.3 In the light of aforesaid facts and circumstances, the AO concluded that since the assessee is an old undertaking and even if it has registered itself as on E.O.U. the provisions of Section 10B of the Act are not applicable and the assessee is ineligible to claim its income exempt under section 10B of the Act. The establishment of a new industrial undertaking, installation of brand new machinery (at least 80%) and approval u/s 14 of the Industries (Development and Regulation) Act, 1951 are sine qua non for any claim of exemption u/s 10B of the 5 I.T.A. No.2875/Ahd/2004 Income Tax Act, 1961 w.e.f. 1.4.2001 i.e., AY 2001-2002, the AO held. The AO further observed that the very admission of the assessee that the assessee is using the machinery or plant previously used precludes it from the ambit of benevolent provisions of newly introduced Sec.10B of the I.T. Act.The assessee has failed to prove all the conditions and, therefore, its claim for exemption u/s 10B is treated as bogus / sham and rejected. Consequently, the certificate issued by the accountant in form 56 G was also treated as untrue and the report of the said accountant was rejected.
3. On appeal, the assessee while reiterating their submissions before the AO contended that the letter of permission issued by the Department of Industrial Policy and Promotion, Secretariat for Industrial Assistance, was only after clearance of the proposal by the Board of Approval. Therefore, the Letter of Permission No.PER:1(2001) EOB/98/2000 dated 16-01-2001 issued to M/s.Abbey Chemical Pvt.Ltd. is with the approval of the Board of Approval, constituted under Section 14 of Industries (Development and Regulation) Act, 1951. The ld. CIT(A) confronted this evidence to the Departmental Officers, and in view of the clear cut language of the above letter it was accepted that the permission was sufficient U/s.14 of the Industries (Development & Regulation) Act, 1951, and for the purposes of provisions of section 10B, explanation 2(iv). Accordingly, the ld. CIT(A) observed that as per the evidence available, it is clear that the existing DTA unit of the assessee clearly falls under the category of EOU with effect from 16-1-2001.
3.1 The assessee further submitted that the unit was formed neither by splitting up nor by reconstruction of a business already in existence. There was no "transfer" of any ' plant & machinery previously used for any purpose. Therefore, as none of these conditions existed, it has to be treated as a newly established undertaking. It was pointed out that the word "new" is used only in the heading of section 10B, and was more relevant at the time of introduction of Section in 1988. The word "new" is no where defined in the section. The existing 6 I.T.A. No.2875/Ahd/2004 units like the assessee's have been kept in mind in the substituted section 10B, as a proviso for existing units has been put in sub-section (1) itself which states that "where in computing the total income of the undertaking for any assessment year the profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in the sub- section only for the unexpired period of aforesaid 10 consecutive assessment years." The fact that it was a new industrial undertaking and that approval for EOU was sought subsequently does not disentitle the assessee from claiming the benefit of section 10B, the assessee added. It was further pointed out that circular no.528 dated 16-12-1988 clearly mentions in Clause 5 that the option is given to units which were manufacturing earlier, to state the five consecutive years in which they would avail of the benefit of section 10B.
4. In the light of aforesaid submissions, the ld. CIT(A) allowed the claim of the assessee in the following terms:
"2.15 After going through the facts of the case and submissions from both the sides, I find that the Assessing Officer's basic objection is to the fact that the unit was already existing and getting deduction U/s.80HHC prior to becoming an EOU. In this situation, he has termed it as a "conversion" which is equivalent to reconstruction and also that old machinery has been used in the EOU and therefore, the conditions of Section 10B(2) are not satisfied. The appellant, on the other hand stated that merely getting status as EOU subsequently does not change the position in any way whatsoever, and it satisfied the conditions of eligibility as it has neither used old machinery in its unit nor is it formed by splitting or reconstruction of an existing business but is the same business which was already in existence.
2.16 Circular No.528 dt.16-12-1988 states that vide Section 10A a five year tax holiday was allowed to industrial undertakings in a Free Trade Zone for five consecutive years falling within a block of 8 years. It is further stated as follows:
" The above tax holiday was not available to a hundred per cent export oriented undertaking. Such undertakings were eligible only for deduction out of their export profits under 7 I.T.A. No.2875/Ahd/2004 section 80HHC of the Income Tax Act. With a view to providing further incentive for earning foreign exchange, a new section 10B has been inserted by the Act so as to secure that the income of a hundred per cent export-oriented undertaking shall be exempt from tax for a period of five consecutive assessment years falling within the block of eight assessment years".
2.17 From the above it would appear that undertakings which were getting benefits u/s 80HHC could now avail of benefit of Section 10B so as to provide further incentive for earning foreign exchange. Subsequently, w/hen the section was amended, Circular/No 794 dated 8-9-2000 was issued in which it was stated that Section 10B allowed a ten year tax holiday to export oriented undertakings, and with a view to rationalising the provisions of Sec.l0A & 10B they haye been substituted by new provisions. The new provisions state that the deduction would be granted with reference to the Assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things, and it also stipulated that the existing units would get a deduction for the expired period of ten yeas only. Here again, there is reference to old units so long as they are EOU.
2.18 From a harmonious construction of the provisions of the Section, the concepts of "splitting up" and "reconstruction", "transfer" of machinery, and 'new' unit, it would appear that the section 10A originally intended to give benefit to new units in Free Trade Zones set up after a specific date. In such a situation a specific date was mentioned. Thereafter, the same benefit was extended to EOUs U/s.l0B. However, in Section 10B, no specific date was mentioned and the circular No.528, in fact, clarifies that existing units which were claiming deduction U/S.80HHC could now obtain the benefit provided they fall in the eight year period. In brief, the intention was to give benefit within 8/10 years starting from the date of manufacture. Therefore, in no case, can any unit exceed 10 years from the date of manufacture and is limited to five years within that period.
2.19 Coming to the specific eligibility clauses, I would hold that "splitting up" and "reconstruction" referred to situations where an existing unit having both export ' and internal trade and 8 I.T.A. No.2875/Ahd/2004 manufacturing, Splits itself into an export unit and a local unit so as to ensure that the export unit gets the full benefit of Section 10B. Similarly, a "reconstruction" would mean breaking down of part of the original to form a new one. Here, the intention would clearly be that part of a total activity being carried on was intended to be separated so as to avail of the full benefit of this Section. Sometimes, this work of splitting up and reconstruction could be done on paper only merely to claim this benefit. It was to limit such cases that this eligibility criteria was drawn up. Similar would be the position in respect of the clause regarding new machinery and machinery which has been earlier utilized.
2.20 In the case of the appellant, the position however, would be very different, as it was 'formed' as a "new" unit in 1991 and has purchased only "new" machines. It can not therefore be stated to have been formed by "splitting up" or "reconstruction" of any other unit, or that it has utilized machinery which was earlier utilized by another unit. This narrows down the debate to the issue whether it would be considered as a "new undertaking" for claiming the benefit of section 10B. The section itself is not at all explicit on this point. The word "new" was in the title when the section was first introduced. It is however not defined. However, the intention of legislature was to give benefits to EOUs in a way similar to those in the Free Trade Zones. Existing units i.e. old units availing benefits of section 80HHC could avail of this benefit, provided they were not formed by splitting, reconstruction and utilization of old machinery. This is tantamount to saying that the "old units" referred to in the Board's Circular also have the same characteristics as the so called 'new' units. This draws us to the conclusion that the unit itself should be new at the time it was formed regardless of whether it was formed as an EOU or not. It is the point at which it was formed that a decision has to be taken as to whether it' was formed by reconstruction/splitting or utilization of old machinery. If it has not been so formed, then it is a "new" unit, which satisfies the eligibility criteria laid down in the Section. It would however, not be eligible for deduction U/s.l0B, until it obtains an EOU certificate.
2.21 Applying the above reasoning in the case of the assessee, the records clearly speak of the fact that when it was formed, it was absolutely "new" and utilized only new machines which had not been used elsewhere, and therefore, it has to be termed as a "new" unit. Once it was so formed, and was doing export business, it was claiming deduction U/S.80HHC even though it was registered as DTA unit, and it applied for the EOU status only subsequently. Once it has 9 I.T.A. No.2875/Ahd/2004 obtained a valid EOU Certificate, it continues for the relevant period of ten years to be a new unit not formed by splitting up reconstruction or utilization of old machinery, but can avail of the benefit of Section 10B only during the unexpired period out of the ten years available. The concept of conversion' as stated by the Assessing Officer can not apply to the detriment of the appellant merely because it was converted- from a DTA to an EOU unit. Mere registration as EOU does not mean, that the same unit which is not formed by splitting, reconstruction etc., would suddenly become an old unit for this purpose, or stated to be formed by splitting or reconstruction. Change in the nature of registration has been done as per suitable rules laid down under-the Exim Policy and after approval of the relevant Board. Therefore, it has to be termed to be a "new" unit which obtained EOU status in the year under consideration, and would therefore, be eligible for exemption U/s.lOB only to the extent of the unexpired period of 10 years from the date it started manufacture.
2.22 As regards the Assessing Officer's observation that when the legislature is introducing a sunset clause for Section 80HHC, no purpose would be served in allowing the same unit the benefit of Section 10B, I would, ' on the contrary state that the purpose of Section 10B and its final closure in the year 2009-2010 was to protect 100% EOUs and other free trade zone units, from losing the benefits available and thereby harming the inflow of foreign exchange into the country. The benefit was not similarly extended to those units which had both exports and local sales, and thus continued to avail of deduction U/S.80HHC.
2.23 In the appellant's case, it is clear from the record and also from the figures available in the Assessing Officer's order, that even prior to the years when it has become an EOU, the appellant was in any case doing only export business, and the entire production formed the export turnover. Therefore, this is not a case of mixed production, where any bifurcation restructuring or conversion from one kind to another kind of unit has been done. This is a clear cut case of a company doing export, but claiming EOU status at a later date, and this is not sufficient to debar the unit from the benefits of Section 10B. If the intention of the legislature had been to limit the benefits of the Section to only absolutely newly set up- units 10 I.T.A. No.2875/Ahd/2004 which should start manufacture only when they were made into EOUs, then like Sections 801 & 10A, specific clauses would have been included regarding the same. The absence of these clauses in Section 10B is very material. Even otherwise, the appellant is free to obtain whichever claim is more beneficial to him so long as it is otherwise eligible. As examined above, I would hold that the appellant does satisfy the eligibility criteria by not being formed through splitting up/reconstruction or utilization of old machinery. At the time it was formed, it was a new unit utilizing new machinery and is therefore, eligible to .claim the benefit to the limited period available within the 10 year zone from the date of manufacture. As per the income tax records, the date of manufacture in the appellant's case appears to be Assessment year 1995-96. Therefore, the Assessing Officer is directed to calculate the ten years from this point of time and grant the benefit of Section 10B for the remaining period only, starting with Assessment year 2001-02, when it has obtained the EOU status."
5. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR while carrying us through the impugned order supported the findings of the AO while the ld. AR on behalf of the assessee relied upon the order of the ld. CIT(A).
6. We have heard both the parties and gone through the facts of the case. A perusal of relevant provisions reveals that the benefit of deduction u/s 10B of the Act is available to any undertaking which fulfils all the following conditions, namely:--
(i) it manufactures or produces any articles or things or computer software;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of any under taking which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in 11 I.T.A. No.2875/Ahd/2004 section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Undisputedly and as observed by the ld. CIT(A) in her elaborate order since the undertaking of the assessee was 'formed' as a "new" unit in 1991 and purchased only "new" machines, it could not have been formed by "splitting up" or "reconstruction" of any other unit, or that it has utilized machinery which was hitherto utilized by another unit. As is evident from aforesaid circular no. 528 referred to by the ld. CIT(A), the intention of legislature was to give benefits to EOUs in a way similar to those in the Free Trade Zones. The existing units availing benefits u/s 80HHC of the Act could avail of benefit of deduction u/s.l0B of the Act provided these were not formed by splitting, reconstruction and utilization of old machinery and had obtained an EOU certificate. As found out by the ld. CIT(A) in the instant case, the undertaking of the assessee, was absolutely "new" and utilized only new machines which had not been used elsewhere, and was doing export business. It had been claiming deduction u/s.80HHC hitherto while being registered as DTA unit, and it applied for the EOU status only subsequently. With the amendment of section 10B by the Taxation Laws (Second Amendment) Act of 1998, operative from assessment year 1999-00, the assessee was already entitled to a larger period of tax holiday; when the new section was substituted, there was already an unexpired portion of tax holiday to be availed by it. Section 10B was substituted by the Finance Act 2000 w.e.f 01.04.2001. The first proviso to the substituted section 10B provides that the unit shall be eligible to the tax holiday under the new section for the unexpired period of 10 years beginning with the assessment year relevant to the previous year in which the said undertaking begins to manufacture. The reference in the proviso is to the unexpired period of 10 years without any qualification. It does not refer to the expired period of the tax holiday duration. The substituted section, being without any qualification is, therefore, to be held as applicable to the respondent. Circular No. 794 dated 09.08.2000 explaining 12 I.T.A. No.2875/Ahd/2004 the provisions of the Finance Act 2000 is to the same effect as also the circular no. 1 of 2005. In the light of these amended provisions ,we are of the opinion that once the assessee obtained an EOU Certificate, it continues for the relevant period of ten years to be a new unit not formed by splitting up reconstruction or utilization of old machinery and thus, can avail of the benefit of section 10B only during the unexpired period out of the ten years available from the date it started manufacture. Once the conditions stipulated in section 10B of the Act were fulfilled, providing deduction for 10 consecutive assessment years the assessee can not be denied the claim for deduction, even when in the initial years it had claimed deduction u/s 80HHC of the Act.
6.1 We find that while adjudicating a similar issue in the case of CIT v. Mahavir Spinning Mills Ltd. (2008) 217 CTR (P&H) 125 , Hon'ble High Court noticed that in the assessment year 1998-99, the taxpayer claimed deduction under section10B of the Act for the first time vide letter dated 19.01.2001.The taxpayer undertaking came into operation during the assessment year 1991-92 and was availing deduction under section 80I of the Act and later was converted into 100% EOU during the AY 1995-96.Though the ld. CIT(A) upheld the order of the AO denying deduction u/s 10B of the Act, the ITAT decided the issue in favour of the taxpayer. On appeal by the Revenue, the Hon'ble High Court, while relying upon the CBDT circular No. 1 of 2005, held as under:
"7. The contention raised by the Revenue is without any merit. The assessee has claimed exemption under s. 10B for the first time vide letter dated 19th Jan., 2001. Admittedly, the impugned exemption was not claimed by the assessee in the original as well as revised return. This unit came into operation in the asst. yr. 1991-92 but during the financial year 1994-95 got converted into 100 per cent Export Oriented Unit (EOU) with the permission of the Department of Industrial Development, Ministry of Industry, Government of India, New Delhi vide letter dated 28th Oct., 1994. Admittedly, Arihant Spinning Mills Unit-II (ASM-II) came into operation as DTA unit for the first time at Malerkotla, Distt. Sangrur (Punjab) during the asst. yr. 1991-92 and was eligible for deduction under s. 80-I of the Act and during the financial year relevant for the asst. yr. 1995-96 the said unit was got registered as 100 per cent EOU. The whole controversy is that the assessee claimed deduction under s. 80-I 13 I.T.A. No.2875/Ahd/2004 during the assessment proceedings and claimed exemption under s. 10B of the Act after its conversion as 100 per cent EOU. In such a situation, it has to be analysed in the light of both the sections, i.e., ss. 10B and 80-I, and their requirement.
8. After going through the record of the case, the Tribunal has given a finding of fact that the unit of the assessee was entitled to the benefit under s. 10B of the Act. Admittedly, the Circular No. 1 of 2005 is clarificatory in nature and the same is also binding upon the Department. "
6.2 In view of the foregoing and the view taken by the Hon'ble Punjab & Haryana High Court in their aforesaid decision, especially when the Revenue have not placed before us any material controverting the aforesaid findings of the ld. CIT(A) ,we have no hesitation in upholding his findings. Therefore, ground no.1(i) in the appeal is dismissed..
7. Ground no.1 (ii) relates to addition on account of low gross profit[GP]. During the course of assessment proceedings, the AO noticed that the assessee reflected net profit @ 3.42% as against 11.94% in the AY 2000-01 & 28% in the AY 1999-2000. Net profit in the succeeding assessment years 2002-03 was 7.36% & AY 2003-04 -13.62%. The AO further noticed that the assessee disclosed closing stock valued at Rs.24,63,300 (quantity 12,075) whereas the average cost of production worked out to Rs.260 per kg and the average sale price worked out at Rs.272.60 per kg. The auditors reported that the inventories were valued at the lower of cost or net realizable value using first out method. The AO was of the view that there was clear cut violation of method of valuation of closing stock and therefore, asked the assessee as to why the average difference in cost of production vis-à-vis closing stock quantity should not be worked out. Further it was noticed by the AO that the assessee disclosed export sales at Rs.10,22,26,940/- in the audited accounts whereas the same factually worked out at Rs.10,30,66,250/- as per the details of exports furnished by the assessee in respect of 2.2 Di Thio Benzoic Acid. This meant that as per working given by the Director of the company, there were total export of 3,80,685 14 I.T.A. No.2875/Ahd/2004 kgs whereas export of only 3,75,000 kgs was disclosed in the audit report. The assessee was, therefore, asked to explain the difference of 5,685 kgs which, according to the AO had been deducted by the accountant twice while preparing the final accounts. Accordingly, the assessee was show caused to explain why a sum of Rs.8,39,310 representing the difference in the export sales should not be treated undisclosed income of the year. Since the net profit disclosed by the assessee in the year under consideration was only at 3.42%, to a query by the AO as to why net profit be not adopted @ 15%, the assessee replied that the financial year relevant to the assessment year under consideration was a bad year as far as profitability was concerned. The average exchange rate per Pound Sterling in 1999-2000 was 69.46 and in 2000-01 it became 67.49 i.e. less by 2 pound sterling. If multiplied by the sales, there is straightaway a difference of Rs.30 lakhs. Secondly, the cost in comparison to sales was higher by 11% as compared to the previous year mainly due to cost of transportation from South India. The AO however, after considering the submissions of the assessee found the exchange rate difference of only Rs.5,10,611. The assessee's argument, therefore, was held to be leading to a paradoxical situation presupposing that goods would be supplied at a pre-determined rate over the years. He observed that there was only one buyer, viz. Super Patco having an address in London, and the residential address of the NRI shareholder of the company was the same. In all probability, it was an associated enterprise and therefore, there was a strong possibility of price rigging and siphoning off profits. Therefore, a casual explanation generalizing exchange rate variation cannot be accepted and the arguments regarding supplies from South India remains unsubstantiated as the assessee is paying transport charges to the concerns of alternative Directors. According to the AO, the reduction in the profit is due to the assessee's apprehension that its claim u/s 10B may be rejected, hence, the profit should be shown low. The AO therefore, applied a rate of 9% on sales and made an addition of Rs.93,29,573. He also did not allow the alternative claim for deduction u/s 80HHC of the Act for want of the requisite report u/s 80HHC(4) of the Act.15 I.T.A. No.2875/Ahd/2004
8. On appeal, the assessee while reiterating their contentions before the AO submitted that the AO's allegation of possibility of price rigging is not correct; he has only assumed that the address of the foreign buyer and the NRI director is similar. The similarity in the address is a mere coincidence and the product exported was to UK only. In the same year, the Chemical Weekly showed import in India from China at comparable prices. Therefore, the AO's suspicion is baseless and unfounded. The estimation @ 9% is also without any basis and totally uncalled for. In the subsequent years, the assessee had earned higher profits as in previous years and no specific purpose was to be served in lowering the profits for this year only. Inter alia, the assessee relied on the decisions in the case of Pandit Bros vs CIT 26 ITR 159 (Pun),S Veeraiah Reddiar vs CIT (1960) 38 ITR 152)(Ker),International Forest Co vs CIT 101 ITR 721 (J&K),Dhakeshwari Cotton Mills Ltd 26 ITR 775 (SC),C Vasantlal & Co 45 ITR 206 (SC) and CIT vs Daulatram Rawatmall 87 ITR 349 (SC). In the light of these submissions, the ld. CIT(A) deleted the addition,holding as under:
"3.6 The Assessing Officer, while having questioned the closing stock and sales in the show cause notice, has not given any findings on the same and on going through the record, I find that the discrepancies mentioned have been clarified by the appellant. Copy of the same is placed on record before me also. The Assessing Officer has not stated anything about the explanation, hence, it can be presumed that he has accepted the same. In any case, they have not been made the basis for the estimation of profit.
3.7 On further discussion regarding the exchange fluctuation and the appellant's claim that it earned less G.P, further details were called for and the appellant has submitted a comparative chart showing the figures for the F.Y. 1999- 2000 and 2000-01. From the chart, it is seen that the STG Pound value, Export value, Realized value and the Average Realized Price per pound is as follows:
Financial STG Pound Export Value Realized Average
16 I.T.A. No.2875/Ahd/2004
year value (Rs.) Value (Rs.) Realized
price per
pound
sterling
1999-2000 1638750 112715600 114181278 69.67584
2000-2001 1520550 102710350 102226940 67.23024
3.8 The appellant has further submitted as under:
"Áppellant exported materials worth $ 15.20 lacs and the average exchange rate in terms of Pound Sterling to Rupee fell by Rs.2/- approximaterly as compared to the previous year which straightway affected the company by Rs.30/- lacs approximately. This is the reality. Now, the LAO mixes up this reality with exchange rate difference of Rs.5.10 lacs which has been included in Sales. When exports are made, they are credited in books at a rate prevailing on the day of export but when the same is paid by the customer, the actual price received becomes the real price. And at this time, an adjusting entry is passed either debiting or crediting the export sales which is called as exchange rate difference. The LAO refers to this but it has nothing to do with the average rate of Pound Sterling realized during the year. Hence, the fact remains that the company realized around Rs.30/- lacs less due to fluctuation in the rate of the Pound Sterling which adversely affected the company's profit."
3.9 After going through the entire details, I find that in the Annual report, the Company has itself mentioned regarding operations and financial results that "sales recorded during the year were 10.37 Crores, as against 11.34 Crore in the previous year. The profit after taxation stood at Rs.35.46 lakhs as against Rs.136 lakhs in the previous year. The decrease in the profit is mainly due to fall in value of rupee in terms of Pound Sterling, low prices of the finished products, increased input cost and increase in expenses." Given this background, it was for the Assessing Officer to obtain and gather evidence that the expenses had not gone up, or that the value of the rupee vis-à-vis the pound had not gone down, or that the expenses claimed were bogus or inflated. Mere statement that the foreign party had the same address as that of the NRI Directors, and that the transport companies were 17 I.T.A. No.2875/Ahd/2004 concerns of the alternative Directors is not sufficient to prove either price rigging or inflation of expenses or even bogus billing. A further exercise should have been done to come to such a conclusion to prove that the accounts submitted were incorrect in any way.
3.10 The appellant has produced before me copy of the Chemical Weekly dated 216th September, 2000, in which an Indian Company M/s Tarak Chemicals have imported the same product from China @ Rs.226.75 per Kg., when the appellant has sold the product to UK @ 272.61 per Kg. In fact, in the previous year, it was sold @ Rs.290.70 per Kg. Hence, there is lower realization this year as compared to previous year, but it is better than comparable instances of purchase of the same product from China. It is, therefore, clear that the prices are comparable. The details submitted regarding the lower realization per pound also stands substantiated and is not to be mixed up with the exchange rate difference alluded to by the Assessing Officer. Under the circumstances, I do not find any evidence to uphold the Assessing Officer's claim that the profits have not been correctly shown. The Assessing Officer has in no way proved that the figures given were not correct or that the Auditor's report is faulty in any respect. There is also no justification for the figure of 9% of sales taken as G.P. except that it was an average of preceding and succeeding assessment years. The appellant, on the other hand, has produced sufficient evidence to show prima facie that the expenditure debited is correct, that the sales realization is correct and therefore, any allegation that the situation may be conducive to price rigging or inflation of expenses is not proved.
3.11 The Assessing Officer has also not made any observation regarding rejection of books, but has merely estimated a higher profit. This can not be done without pointing out specific defects, shortfalls, or earning of excess income. The apparent state of affairs should be taken as real, unless there are compelling reasons to show that the apparent is not true. Case law is available from 2 ITR onwards to state that additions can not be made on suspicion, surmises and conjectures. Exact circumstances for rejection of accounts have to be available and not mere guess work. The Gujartat High Court in the case of CIT Vs. Amitbhai Gunvantbhai 18 I.T.A. No.2875/Ahd/2004 (129 ITR 573)) held that "if there was no challenge to the transaction 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". Further, even if for some reasons, the books are rejected, it is not open to the Assessing Officer to make any addition on estimate basis or on pure guess work. The law on this point has been laid out by the Supreme Court as early as 26 ITR 775 in the case of Dhakeshwari Cotton Mills Ltd. Vs CIT and numerous cases have followed on the same line. The Ahmedabad Bench in the case of Pushpanjali Dyeing & Printing Mills held that if the revenue failed to point out any specific defects in the books of account and considering that the accounts were subject to audit, then failing to put any material against the observations of the Auditor, any addition merely on the ground of low yield can not be sustained. Relying on the above case law and in the absence of any evidence to show price rigging or inflation of expenses or bogus claims, and earning of income outside the books, the addition on account of higher GP can not be sustained and is therefore deleted."
9. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR while carrying us through the impugned order supported the findings of the AO while the ld. AR on behalf of the assessee relied upon the order of the ld. CIT(A).
10. We have heard both the parties and gone through the facts of the case. As pointed out by the ld. CIT(A) though the AO questioned the closing stock and sales in the show cause notice, he did not record any findings on these issues. The ld. CIT(A) on going through the records found that these discrepancies have been clarified by the assessee and accordingly, it was concluded these have not been made the basis for the estimation of profits. The ld. CIT(A) further noticed that the decline in the profits is mainly due to fall in value of rupee in terms of Pound Sterling, low prices of the finished products, increased input cost and increase in expenses. After perusing a copy of the Chemical Weekly dated 26th September, 2000, wherein an Indian Company M/s Tarak Chemicals is reported to have imported the same product from China @ Rs.226.75 per Kg., while the 19 I.T.A. No.2875/Ahd/2004 assessee sold the product to UK party @ 272.61 per Kg in the year consideration and @ Rs.290.70 per Kg in the preceding year, the ld. CIT(A) concluded that the lower realization this year as compared to previous year, is better than comparable instances of purchase of the same product from China and therefore, there was no justification for the figure of 9% of sales taken as G.P. except that it was an average of preceding and succeeding assessment years. The Revenue have not placed before us any material , controverting these findings of the ld. CIT(A) .Undisputedly and as observed by the ld. CIT(A) in the impugned order the AO did not point out any defects in the books of account while ignoring the book results. 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 profit declared by the assessee as compared to the previous 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 20 I.T.A. No.2875/Ahd/2004 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. The AO, without recording any finding that the books of account maintained by the assessee were incorrect, rendering it impossible to deduce the profits, proceeded to reject the book results while admitting the disclosed turnover. 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. In these circumstances , there was no justification for estimating the profits @9% on the disclosed turnover. [ Vikram Plastics,239 ITR 161(Guj). Since the AO has not recorded any findings for ignoring the book results and applying the average profit rate of the preceding and succeeding years, we are of the opinion that the ld. CIT(A) was justified in deleting the addition. 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, especially when there is no material before us for taking a different view in the matter, we have no option but to uphold the findings of the ld. CIT(A). Consequently, ground no.1(ii) is dismissed.
11. Ground nos.2 & 3 ,being general in nature, do not require any separate adjudication and are, therefore, dismissed 21 I.T.A. No.2875/Ahd/2004 12 . In the result, appeal is dismissed.
Order pronounced on this day of 29th January, 2010.
Sd/- Sd/-
(Mahavir Singh) (A.N. Pahuja)
Judicial Member Accountant Member
Ahmedabad,
Dated : 29th January 2010
Pk/-
Copy to:
1. The Assessee
2. ITO Ward-1(1),Baroda
3. the CIT(A)-IV, Baroda
4. the CIT-II, Baroda
5. the DR, "C" Bench
By order
Deputy Registrar, ITAT, Ahmedabad