Income Tax Appellate Tribunal - Chandigarh
Vashisht Alloys, Kala Amb vs Assessee on 21 April, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND MS. RANO JAIN, ACCOUNTANT MEMBER
ITA No.710/Chd/2014
(Assessment Year : 2010-11)
M/s Vashisht Alloys, Vs. The D.C.I.T.,
Nahan Road, Circle Yamuna Nagar.
Kala Amb. Yamuna Nagar.
PAN: AAAFV8967F
And
ITA No.837/Chd/2014
(Assessment Year : 2010-11)
The D.C.I.T., Vs. M/s Vashisht Alloys,
Circle Yamuna Nagar. Nahan Road,
Yamuna Nagar. Kala Amb.
PAN: AAAFV8967F
(Appellant) (Respondent)
Assessee by : Shri Ashwani Kumar
Department by : Shri Manjit Singh, DR
Date of hearing : 22.03.2016
Date of Pronouncement : 21.04.2016
O R D E R
PER RANO JAIN, A.M. :
Both the cross appeals are directed against the order of learned Commissioner of Income Tax (Appeals), Panchkula dated 11.7.2014 for assessment year 2010-11. 2
2. Briefly, the facts are that the assessee filed its return of income at Rs.1,42,467/- on 25.9.2010. On net profit of Rs.94,38,789/-, the assessee claimed deduction under section 80IC of the Income Tax Act, 1961 (in short 'the Act'). During the assessment proceedings, the Assessing Officer analyzed the comparative figures of sales, net profit, consumable stores, electricity charges and addition to plant and machinery for assessment years 2006-07 to 2010-11. He observed that since assessment year 2006-07 to assessment year under appeal, the sales and net profits have increased manifold but no such major addition has been made in plant and machinery, Further, consumable stores and electricity charges have not increased in the same proportion. The major addition to plant and machinery was made in financial year 2005-06. The Assessing Officer considered one year to get effect of new machinery on production. The Assessing Officer further found that the turnover relevant to financial year 2009-10 increased 42% as compared to turnover in financial year 2006-07, whereas the consumable stores increased only by 12% and electricity consumption decreased by 10% in the same period. The assessee made a detailed reply to the apprehension raised by the Assessing Officer. After considering the same, the Assessing Officer considered assessment year 2007-08 as base year for production of metal products on new plant and machinery after giving due benefit on additions to plant and machinery in the preceding year. The Assessing Officer observed that there was no major addition to the plant and machinery in subsequent years and 3 he considered the net profit of the base year i.e. assessment year 2007-08 as the profit of the relevant assessment year and excess net profit over and above to the net profit shown in assessment year 2007-08 was considered as inflated claim for deduction under section 80IC of the Act and accordingly, assessed as income under the head 'income from other sources'. In this way, the Assessing Officer charged the income amounting to Rs.51,12,102/- as assessee's income from other sources and did not allow deduction under section 80IC of the Act on the same.
4. Before the learned CIT (Appeals), various arguments taken before the Assessing Officer were reiterated. The assessee's main contention was that installation of new furnace during the assessment year 2006-07 led to improvement in production with reduced consumption of inputs and optimization of operational efficiencies. It was emphasized that the productivity and consequential profitability depends on number of factors such as quality of raw material at optimal price, availability of funds and acceptability of product in the market. It was also contended that the Assessing Officer had proceeded to assume that the dynamic business environment, operational efficiencies and profitability of the unit would show identical results over various years. The audited accounts were produced before the Assessing Officer, which were test checked and no defect was pointed out. It was further submitted that the Department has accepted the book results in earlier assessment years and 4 there is no change in fact, during the year under appeal to warrant a different conclusion in the matter. For all the years, the assessee was covered under the Income Tax Act as well as Sales Tax Act and no adverse inference has been found by any said authorities. The ratios of gross profit, net profit, purchases and sales transactions with associates and consumption ratios of electricity and consumable stores for assessment year 2006-07 to 2010-11 were provided. It was submitted that the transformer was installed during the year relevant to assessment year 2008-09, which led to reduction in electricity consumption in subsequent years.
5. After considering the submissions of the assessee, the learned CIT (Appeals) formed an opinion that the Assessing Officer's assessment is based on the initial finding that there was abnormal increase in the net profit during the current year. However, the Assessing Officer computed the abnormality by considering only consumable stores and electricity charges, both being direct expenses without considering the other direct and indirect expenses which would have a bearing on gross profit and net profit results. After giving this finding, the learned CIT (Appeals) summarized the ratios of gross profit, net profit, purchases from associates and sales to associates for assessment years 2006-07 to 2010-11. From this analysis, the learned CIT (Appeals) stated that the gross profit and net profit ratios were lowest in assessment year 2007-08, which was taken by the Assessing Officer as the base year and were highest in the 5 succeeding assessment year i.e. 2008-09. In assessment year 2009-10, these again declined and then increased again in assessment year 2010-11, being the relevant assessment year. As per the learned CIT (Appeals), these results negate the finding of the Assessing Officer that there was impact in the production in subsequent years on the installation of plant and machinery in the assessment year 2006-07. The results also negate the submission of the assessee that after the installation of plant and machinery in assessment year 2006- 07 and installation of transformer in assessment year 2008- 09, it had impact on the increase in productivity due to better operational efficiencies. He also found that the contention of the assessee that the optimum results are obtained in a gradual manner over 4-5 years, is also negated by the results which do not show steady rising growth rather than there have been fluctuations in the results. In this way, the learned CIT (Appeals) held that the observation of the Assessing Officer that there was abnormal increase in the net profit vis-à-vis the increase/decrease in consumables stores, electricity consumption respectively cannot be ruled out. However, the Assessing Officer made an estimation of excess net profit by taking the net profit of assessment year 2007-08 as base year but to give the effect of all the factors, a correct estimation of excess net profit would be if the base is taken as the average net profit shown by the assessee over the period. In this way, the learned CIT (Appeals) computed the net income included in business profit at Rs.10,95,300/- being 6 excess of net profit rate during the year being 4.29% over the average net profit being 3.80%.
6. Aggrieved by this, both the assessee as well as the Department have come up in appeal before us. The assessee has filed appeal against the action of the learned CIT (Appeals) in confirming a part of addition made by the Assessing Officer, while the Department is in appeal against the portion of addition deleted by the learned CIT (Appeals).
7. The learned counsel for the assessee before us, reiterated the submissions made before the Assessing Officer as well as the learned CIT (Appeals) in detail. However, in addition to that, emphasis was placed on the fact that both the Assessing Officer as well as the learned CIT (Appeals) has tinkered with the profits shown by the assessee whithout rejecting the books of account. It was contended that the consumable stores and electricity expenses affect only the gross profit and not net profit. The learned CIT (Appeals) himself has given a finding that the gross profit rate is almost within the range of average gross profit rate in all these years. How can an addition on account of net profit be made. He further submitted that in all the assessment years, the assessments had been done under section 143(3) of the Act and no such abnormality in any of the years have been found by the Assessing Officer. In this view, it was prayed that the addition made by the Assessing Officer be deleted. Reliance was placed on the judgment of the Himachal Pradesh High Court in the case of CIT Vs. Swastik Food Products (2015) 61 7 Taxmann.com 83 (HP) for the proposition that in the absence of any adverse remarks by special auditor, assessee's books of account could have been re-investigated but same could not have been rejected.
8. The learned D.R. relied on the order of the Assessing Officer and further submitted that the Assessing Officer has taken great pain to analyze the record of the assessee for five years to bring out the fact that the assessee is showing abnormal profits during the year in order to avail deduction under section 80IC of the Act. Therefore, the action of the Assessing Officer be confirmed.
9. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. The undisputed facts of the case are that the assessee is an undertaking claiming deduction under section 80IC of the Act since assessment year 2006-07. The basis of addition made by the Assessing Officer emanated from the fact that the assessee is having profits more that what it has been showing in the earlier years. It is also undisputed that the assessee is maintaining books of account which are audited books of account. The Assessing Officer has nowhere in his order brought on record any discrepancy with regard to sales, purchases and any other expense other than consumable stores and electricity charges. Another undisputed fact is that the Assessing Officer has not rejected the books of account of the assessee. The Assessing Officer started with 8 analysis of sales, net profit, consumable stores and electricity charges with respect to addition in plant and machinery made by the assessee for the last five years and came to the conclusion that the assessee is showing more than expected profits during the year. Since it is claiming deduction under section 80IC of the Act, the Assessing Officer started with an apprehension that the income has been inflated in order to avail said deduction. Further, the Assessing Officer made assessment year 2007-08 as base year to conclude that the income earned in that year is the normal income which ought to have been earned in the current year also and whatever the assessee shows over and above that is not its business income eligible for deduction under section 80IC of the Act. The learned CIT (Appeals) partly agreed with the view taken by the Assessing Officer. He compared the average net profit rate of five years with the net profit rate shown by the assessee during the current year and in this way, sustained partial disallowance. We do not find the approach of the Assessing Officer as well as that of the learned CIT (Appeals) being as per law in this regard. The whole exercise done by both the officers is based on the apprehension that the assessee is intentionally showing higher profits in order to avail deduction under section 80IC of the Act. The earning of income has the effect on a number of factors, which include raw material, cost, operational expenses, selling price, quality of plant and machinery installed, its operational efficiency in addition to several other factors.
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10. The Assessing Officer or the learned CIT (Appeals), for that matter, have not cast any doubt over the books of account maintained by the assessee and without rejecting the audited books of account maintained by the assessee, how the results shown by it can be tinkered with, we do not understand. No inconsistency or error has been pointed out in the books of account maintained by the assessee.
11. We find ourselves in agreement with the observation of the learned CIT (Appeals) that the Assessing Officer has considered only limited parameters for drawing abnormalities in the results shown by the assessee and further the results of assessment year 2007-08 taken as base for comparison is also not fair. We do not understand how the Assessing Officer can conclude that the assessee is showing unreasonable profit on the basis of results of some previous year and comparison of two factors of products being consumables and electricity expenses. We should not forget that there being so many factors affecting the efficiency and profitability of a concern, that it is almost impossible to have exactly the same results year to year. The abnormal profits in a year in comparison to some earlier year may be a trigger point for the Assessing Officer to investigate the issue further. However, the conclusion has to be arrived only on the basis of outcome of investigation of the activities of the relevant assessment year. Nowhere in his whole order, the Assessing Officer has brought on record any material or evidence to prove that the assessee 10 has intentionally inflated the income for the year. That may be the reason for him to prefer not to reject the books of account.
12. We do not find even the approach of the learned CIT (Appeals) in dealing with the matter. Though he discarded the method adopted by the Assessing Officer and preferred to compare the net profit shown by the assessee during the year with the average net profit for the last five years. Even he did not bother to investigate the issue properly. If once, he has accepted that there is not much substance in the view of the Assessing Officer that the assessee had inflated gross profit in view of the fact that the gross profit rate is almost consistent with the average gross profit rate declared by the assessee in the last five years. How can he compare the average net profit rate with the net profit rate shown by the assessee and sustained a part disallowance? Even he has failed to bring on record any evidence or material to prove that the assessee has declared more than actual net profit rate. No discrepancy in any of the expenses claimed by the assessee has been pointed out. In the absence of any abnormality pointed out in any of the components of the Profit & Loss Account of the assessee, the said addition is not sustainable.
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13. In the result, the appeal of the assessee in ITA No.710/Chd/2014 is allowed and the appeal of the Revenue in ITA No.837/Chd/2014 is dismissed. Order pronounced in the open court on this 21st day of April, 2016.
Sd/- Sd/- (BHAVNESH SAINI) (RANO JAIN) JUDICIAL MEMBER ACOUNTANT MEMBER Dated : 21 s t April, 2016 *Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh