Income Tax Appellate Tribunal - Mumbai
King Metal Works, Mumbai vs Department Of Income Tax on 23 January, 2013
आयकर अपीलीय अिधकरण "ए" Ûयायपीठ मुंबई मɅ।
IN THE INCOME TAX APPELLATE TRIBUNAL " A " BENCH, MUMBAI
ौी Ǒदनेश कुमार अमवाल, Ûयाियक सदःय एवं
ौी डȣ. कǽणाकर राव, लेखा सदःय के सम¢ ।
BEFORE SHRI DINESH KUMAR AGARWAL, JM AND
SHRI D. KARUNAKARA RAO, AM
आयकर अपील सं./I.T.A. No. 318/Mum/2012
( िनधा[रण वष[ / Assessment Year : 2008-09)
Asstt. Commissioner बनाम/
बनाम King Metal Works,
of Income-tax - 20(1), Vs. A-7, Nanddham Indl.
Room No. 603, Estate,
6 t h floor, Marol Maroshi Road,
Piramal Chambers, Andheri (E),
Lalbaug,Parel, Mumbai - 400059.
Mumbai - 400 012.
ःथायी ले खा सं . /PAN : AAAFK4021F
(अपीलाथȸ /Appellant) .. (ू×यथȸ / Respondent)
अपीलाथȸ कȧ ओर से / Appellant by Shri Surinder Jit Singh
:
ू×यथȸ कȧ ओर से/ Respondent by : Dr. K. Shivaram
सुनवाई कȧ तारȣख / Date of Hearing : 23-01-2013
घोषणा कȧ तारȣख /Date of Pronouncement : 31-01-2013
आदे श / O R D E R
PER DINESH KUMAR AGARWAL, JM. :
This appeal preferred by the Revenue is directed against the order dtd. 21-10-2011 passed by the ld. CIT(A)- 31, Mumbai for the assessment year 2008-09.
2. The undisputed facts of the case extracted from the order of the ld. CIT(A) are (para 3 to 3.4.2) : "3................ The A.O. has observed that the 2 ITA No. 318/Mum/2012 appellant is a registered export house, engaged in primarily, the following three categories of exports:
• Manufactured by the appellant itself (aluminum and stainless steel), • Getting the manufacturing done on job work basis (aluminum and stainless steel); and • Purchasing the ready-made utensils (stainless steel).
3.1. From the details furnished by the appellant the AO has observed that the gross profit ratio pertaining to trading export is much higher than the gross profit ratio shown in the manufacturing exports. In this regard, as per the detailed chart prepared for this purpose in para-3 (page-3) of the assessment order, it is noticed that the overall GP ratio disclosed by the appellant is 15.50% ; whereas, the GP ratio in respect of its trading exports is 19.59% and GP ratio of 8.59% is disclosed in its manufacturing exports and loss on power generation business from windmill. Further analysis of the month wise purchases and sales, as discussed in para 3.1 of the assessment order, the A.O has observed that the overall GP ratio in the initial six months of the previous year i.e. April, 2007 to September, 2007 works out to 17.24%; whereas, the GP ratio for the second half of the previous year i.e. October, 2007 to March, 2008 works out to 5.90% only. Therefore, according to the AO there is huge difference in the profit margins disclosed in the first half and the second half of the relevant accounting year under consideration. The AO has further observed that in the month of March, 2008 the appellant has earned a huge profit of Rs.1,92,63,871/-and if this profit earned for the month of March, 2008 is excluded, the profit margin for the rest of the five months in the second half of the accounting year i.e. October, 2007 to February, 2007 would result into negative GP ratio of (-) 0.33%. Thereafter, the 3 ITA No. 318/Mum/2012 A.O has further analyzed the month wise trading results and closing stock position at the end of each month by including the opening stock available on 01.04.2007 in para 3.4 (page-6) of the assessment order and consequently observed that the figure of opening stock is reduced to Rs.1,07,77,564/-( i.e. 31.11.2007) at the end of November, 2007; whereas, the closing stock available at the end of the previous year i.e. 31.03.2008 would work out to Rs.3,90,29,845/-. On account of the same, the A.O has further observed that the figure of closing stock worked out as on 30.11.2007 of Rs.1,07,77,564/- is quite abnormal due to the following factors:
(a) The closing stock includes following kind of stock - Raw material, semi finished material (in house production), finished goods (in house production), raw material issued for job works, finished goods received from job work party, stock of trading goods, labour component and packing material.
(b) The process of manufacturing of steel utensils involves a series of steps like purchase of raw material in the shape of patta or coil, cutting it to various sizes (Blank cutting), Deep drawing, Spinning, Stamping, fabrication, annealing, acid washing, caustic soda washing, deep brush finishing and polishing. When raw material has to pass through these many processes, the final product manufacturing take quite a long time ranging from 10 days to one month.
(c) The assessee is an exporter and most of the sales are exports. The order is received in bulk hence corresponding purchases have also to be in bulk and even otherwise is required to maintain a huge stock inventory to smoothly run its business to take care of scarcity of metal and fluctuation in rate in market.
The total purchases during the year are Rs.35,74,60,844/- giving an average monthly purchases of Rs.2,97,88,404/-. The closing stock of Rs.1,07,77,564/- is equivalent to less than 11 days consumption of material in a month. It has already been highlighted that assessee is engaged in the business of manufacturing of steel/aluminum utensils which involves a number of steps spread over longer period to complete the manufacturing process. In such a situation assessee must have a 4 ITA No. 318/Mum/2012 reasonable quantity of stock. The opening stock and closing stock figures give enough reasons to believe that assessee in normal course maintains a stock inventory of more than 20 to 30 days of consumption. 3.1.1. Therefore, on account of the above, the A.O has observed that the appellant has made total purchases of Rs. 35,74,60,844/- thereby giving an average monthly purchases of Rs.2,97,88,404/- for the relevant assessment year. It was further observed that the closing stock of Rs. 1,07,77,564/-, as discussed above is equivalent to less than 11 days consumption of raw- material in a month. It was further observed that as the appellant is engaged in the manufacturing of steel, aluminum utensils which involves a number of steps spread over longer period to complete the manufacturing process, therefore, according to the A.O the appellant must have a reasonable quantity of stock at a given point of time. Therefore, it was held that the opening & closing stock figures give enough reasons to believe that the appellant normally maintains closing stock or stock inventory of 20-30 days of its consumption. With this background, the A.O has examined the books of account maintained by the appellant.
3.1.2. Thereafter, the A.O in para 3.5 of the assessment order has further observed that the books of account of the appellant revealed following defects due to which the A.O could not work out the exact difference in the profit margins of manufacturing goods and trading goods and to determine the actual closing stock of the appellant at the end of November, 2007:
a) No stock register on qualitative basis of various items is maintained.5 ITA No. 318/Mum/2012
b) No daily production register is maintained to determine the actual production both in qualitative and quantitative terms.
c) No record is maintained to prove the quantity of raw material issued for job work and what quality or quantity of goods are received back.
d) Similar is the position for in-house production. There is no record to prove quantitative details of raw material issued and average period of manufacturing of goods.
3.1.2(sic). On account of the above, the A.O. has observed that if an attempt is made to work out the average period of manufacturing of any item, weight loss in manufacturing of steel/aluminum utensils, there is no record with the appellant to do so. In para 3.6 of the assessment order, the A.O. has observed that the trading goods are purchased in number of pieces basis; whereas, the raw material is purchased in weight terms, therefore, an exercise was carried out to determine the weight of the purchase of trading goods and compare the same with the total weight of total sales. From the said exercise made (para 3.6 at page-10) of the assessment order, the A.O has observed that the appellant has sold trading goods @ Rs.298/- per kilogram and purchased the same @ Rs. 240/- per kilogram giving a net GP of Rs. 58/- on sale, which works out to approximately l9.50%, which is the same GP as declared by the appellant in its return of income.
3.1.3. Regarding, the quantitative details of manufactured goods (stainless steel and aluminum) the A.O as per detailed discussion made in para 3.6.1 (page-11) of the assessment order has worked out the following details: 6 ITA No. 318/Mum/2012
Particulars Quantity in kgs Amount in Rs. Opening stock of metal 71,250 1,32,56,725/- Add. Purchases during the year 8,06,329 17,97,55,555/- Total 8,77,579 19,30,23,390/- Less: Closing stock 1,42,772 2,90,39,251/- Metal consumed during the year (against 7,34,807 16,39,84,140/- sales effected during the year)
3.1.4. Therefore, on account of the above exercise, the A.O. has worked out average price of material consumed at Rs.223/- per kilogram (16,39,84,104 / 7,34,807) and average sale price at Rs.305/- per kilogram (18,33,41,908 / 6,00,257) and accordingly, worked out the GP of Rs.82/-per kilogram (305- 223) i.e. 26.88% of the total manufacturing goods sold.
3.1.5. Thereafter, the A.O in para 3.6.2 of the assessment order has observed that the appellant has understated the closing stock to the tune of 67,274 kg which according to the A.O will increase the closing stock valuation considerably. In this regard, the A.O has observed that considering the average cost of Rs.205/- per kilogram, if the effect thereof is given the amount of closing stock and profit disclosed by the appellant will increase by a sum of Rs.1,37,91,170/- (i.e. 67,274 X 205). The A.O has further observed that according to the appellant the GP ratio for the current year has decreased due to higher cost of purchases, however, on perusal of closing stock statement filed by the appellant along with tax audit report, it is seen that there is not much difference in the valuation of closing stock (rate per kilogram) as on 31.03.2008 vis-a-vis the value of closing stock as on 31.03.2007. The A.O has further observed, that in case the quantitative statement of closing stock furnished by 7 ITA No. 318/Mum/2012 the appellant is held correct, in that eventuality it would be presumed that the appellant has sold material or stock to the tune of 67,274 kilograms @ Rs.305/- per kilogram which would increase the profits of the appellant from manufacturing activity by a sum of Rs.2,05,18,570/-. Accordingly, it was observed that the total profit of the appellant from manufacturing activity would work out to Rs.3,98,76,338/- on turnover of manufacturing activities of Rs. 18,33,41,908/- resulting into GP ratio of 21.75% in manufacturing business. 3.1.6. Therefore, on account of the above discussion, the A.O. in para 3.7 of the assessment order has further observed that the segment wise trading results i.e. in the first half and the second half of the previous year show abnormal trading results i.e. shortfall in GP in the second half of the year is abnormal, the closing stock inventory disclosed by the appellant on 30.11.2007 is not reliable, therefore, the A.O has inferred that:
a. The above proportion suggests that assessee earned more profit on the export of trading of the goods as computer (sic) to the own manufacturing.
Normally, when the goods are bought from outside party, such person will retain his profit margin leading to lesser profit margins for the subsequent buyer. Hence, such gap in the profit ratios cannot be accepted.
b. the assessee is in the business of manufacturing of utensils since 1970 and is a Government recognized export house. Having such a wide experience presupposes that assessee has better quality control and efficient system to reduce wastage leading to high profits cost of making this reverse has happened.
c. Have (sic) we are comparing the gross profits of the two segments and not the net profits, hence the question of establishment costs does not come into operation.8 ITA No. 318/Mum/2012
3.1.7. Therefore, on account of the above the A.O in para 3.8 of the assessment order has held that the books of account maintained by the appellant do not reflect the true affairs of the business of the appellant, hence, the books of account maintained by the appellant were rejected by invoking the provisions of section 145 of the Act. The A.O, in support of his said proposition has relied on the following case laws:
(a) Hargopal Singh V/s. CIT -273 ITR 507 (P & H)
(b) Sumarsingh das & Ramkrsihana Pungaliya V/s. AC1T 272 ITR 469 (Raj.)
(c) Mohd Haroon & Co. v/s. CIT 274 ITR 490 (All) 3.1.8. Thereafter, the AO has held that the only scientific basis to estimate the profit of the appellant is by comparing the GP ratio on export of trading goods vis-a-vis manufacturing goods. In this regard, he has further observed that in the export of trading goods the appellant has no in-house process to be carried out, the goods purchased are directly exported, therefore, the gross profit shown in case of export of trading goods is the correct GP shown by the appellant. He has further observed that the major area of concern is manufacturing activity in which the appellant could not offer any evidence to help the Department in arriving at a fair estimate. In this regard, he has further observed that looking at the quantity of items manufactured, the average purchase and sale rates are quite low as compared to trading goods. The A.O, reiterating his earlier discussion, made in the preceding paragraphs of the assessment order has observed that the appellant has shown GP ratio of l9.29% in its trading activity;
whereas, it has shown GP ratio of only 8.59% in its manufacturing activity. 9 ITA No. 318/Mum/2012 However, according to the A.O, the real profit on export of manufactured goods works out to 26.88% as discussed in para 3.6.1 and 2l.75% as discussed in para 6.3.2 of the assessment order. He has further observed that the average working of the same comes to 24.32% (26.88 + 21.75/2) as against which the appellant has shown GP ratio of only 8.59% in its manufacturing activity, resulting into a net difference of 15.73%. Accordingly, he has worked out the unaccounted income of the appellant by applying the difference in GP rate i.e. @ 15.72% on total manufacturing turnover of Rs. 17,93,86,238/- and accordingly, worked out a net difference of Rs. 2,82,17,455/- (17,93,86,238 X 15.73/100) on this account. The entire amount of Rs. 2,82,17,455/- was therefore, added to the total income of the appellant as suppressed profit or unaccounted income of the relevant assessment year."
3. However, subsequently, the A.O. while observing that there is a mistake apparent from the record has reduced the addition from Rs. 2,82,17,455/- to Rs. 81,58,714/- vide order dtd. 28-6-2011 passed u/s 154 of the Act. .
4. On appeal, the ld. CIT(A) after considering the order passed by the A.O. u/s 154 of the Act (supra) and for the reasons as discussed in detail in the appellate order for the A.Y. 2007-08 dtd. 7-4-2010 in assessee's own case while holding that the rejection of books of accounts is not warranted, deleted the entire addition made by the A.O.
5. Being aggrieved by the order of the ld. CIT(A) the Revenue is in appeal before us taking following grounds of appeal:-
10ITA No. 318/Mum/2012
"1. The Learned CIT(A) has erred on facts and in law and in the circumstances of the case in holding that the rejection of books of account of the Assessing Officer is not warranted and deleting the addition of Rs. 2,82,17,455/-, made by applying higher gross profit ratio to estimate the gross profit in its manufacturing exports.
2. The Learned CIT (A) has erred in law and in the circumstances of the case is not considering the facts that in taxation matters, the strict rule of 'res judicata' is not applicable. The view taken by revenue authorities to arrive at the correct income chargeable to tax for a particular A.Y. is not applicable to another Assessment year.
3. The Learned CIT(A) has erred in law and in the circumstances of the case is not appreciating the facts that maintenance of stock register and daily production and other records of quantities and quality of raw material and finished products are important and necessary to determine the total income of the assessee, which the assessee failed to do.
4. The Appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the A.O be restored.
6. At the time of hearing, the ld. D.R. while relying on the order of the A.O. fairly admits that the Tribunal in the appeal filed by the Revenue in ACIT vs. King Metal Works in ITA No. 5507/Mum/2010 for A.Y. 2007-08 order dtd. 12- 4-2012 upheld the order of the ld. CIT(A) in deleting the addition made by the A.O. He, therefore, submits that the issue may be decided accordingly.
7. On the other hand, the ld. counsel for the assessee while relying on the order of the ld. CIT(A) submits that on the identical grounds raised by the Revenue for the A.Y. 2007-08 appearing at page 147 of the assessee's paper book the Tribunal vide order dtd. 12-4-2012 (supra) has upheld the order of the ld. CIT(A) in deleting the similar addition of Rs. 2,23,09,138/- made by the A.O. He, therefore, submits that since facts are identical and the issue 11 ITA No. 318/Mum/2012 involved is common, therefore, the appeal filed by the Revenue on similar grounds be dismissed.
8. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that on the similar facts, the A.O. in the immediately preceding assessment year 2007-08 while rejecting the books of accounts had made G.P. addition of Rs. 2,23,09,138/- which has been deleted by the ld. CIT(A) and on an appeal filed by the Revenue taking the similar grounds, the Tribunal has upheld the order of the ld. CIT(A) vide findings recorded in para 8 of its order which are reproduced as under:-
"8. We have considered the rival submissions, perused the record and gone through the orders of the authorities below. It is observed that the AO rejected the books of account of the assessee on the ground that the assessee has not maintained any stock register, daily production register and other records of quantities and quality of raw material and finished products. Thereafter, he estimated the actual profit on export of manufactured goods, by taking the GP ratio of export of trading goods i.e. 27.42% in stead of GP ratio declared by the assessee on the same at 15.21% and made the addition of Rs. 2,23,09,138/-. The CIT(A) following the decision of his predecessor in assessee's case for AY 2001-02, wherein under similar facts and circumstances, the books of account rejected by the AO was decided in favour of the assessee by the then CIT(A), deleted the addition of Rs. 2,23,09,138/- made by the AO by applying higher gross profit ratio to estimate the gross profit in assessee's manufacturing exports. While deleting the addition made by the AO, the CIT(A) held that nothing is brought on record by the AO that the trading results of the assessee in respect to its manufacturing export is in-genuine or bogus inasmuch as that the assessee has either inflated its purchases or not accounted for its sales or inflated its direct expenses and, therefore, the ad-hoc addition made by the AO is not warranted and unjustified. As regards the rejection of books of account, the CIT(A) held that in all its preceding assessment years the returns filed by the assessee have been accepted by the Department, wherein no such additions are made although the assessee has disclosed its income based on the same set of accounting method. Moreover, the books of account of the assessee are 12 ITA No. 318/Mum/2012 duly audited by the tax auditors as required u/s 44AB of the Act, in which no such discrepancies or defects are pointed out by the auditors. He further held that the assessee's books of account are subject to the state VAT authorities and for the relevant assessment year, the VAT audit is already completed in which no such defects or discrepancies are pointed out. He, therefore, held that the AO is not justified in rejecting the books of account. In view of the above findings of the CIT(A), we do not find any reason to interfere with the order of the CIT(A) in deleting the addition made by the AO on account of difference in GP ratio. Therefore, we uphold the order of the CIT(A) on this count and dismiss the grounds raised by the revenue".
9. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the order of the Tribunal (supra) decline to interfere with the order passed by the ld. CIT(A) in holding that the A.O. was not justified in invoking the provisions of section 145 of the Act and in deleting the entire addition made by the A.O. Accordingly, the grounds raised by the Revenue are rejected.
10. In the result, Revenue's appeal stands dismissed.
पǐरणामतः राजःव कȧ अपील खाǐरज कȧ जाती है ।
Order pronounced in the open court on 31-01-2013 .
आदे श कȧ घोषणा खुले Ûयायालय मɅ Ǒदनांकः31-01-2013 को कȧ गई ।
Sd/- Sd/-
(D. KARUNAKARA RAO) (DINESH KUMAR AGARWAL)
लेखा सदःय / ACCOUNTANT MEMBER Ûयाियक सदःय / JUDICIAL MEMBER
मुंबई Mumbai; Ǒदनांक Dated 31/ 01/2013
व.िन.स./ r.k. , Sr. PS
13
ITA No. 318/Mum/2012
आदे श कȧ ूितिलǒप अमेǒषत/Copy
षत of the Order forwarded to :
1. अपीलाथȸ / The Appellant
2. ू×यथȸ / The Respondent.
3. आयकर आयुƠ(अपील) / The CIT(A)-
4. आयकर आयुƠ / CIT
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई /
DR, ITAT, Mumbai
6. गाड[ फाईल / Guard file.
स×याǒपत ूित //True Copy//
आदे शानुसार/
ार BY ORDER,
उप/
उप/सहायक पंजीकार (Dy./Asstt.
Registrar)
आयकर अपीलीय अिधकरण,
अिधकरण, मुंबई / ITAT, Mumbai