Income Tax Appellate Tribunal - Ahmedabad
Gulsan Prints Pvt.Ltd.,, Surat vs Assessee on 16 October, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL : D' BENCH : AHMEDABA D
Camp at Surat
(Before Hon'ble Shri T.K. Sharma, J.M. & Hon'ble Shri D.C. Agrawal , A.M.)
I.T.A. No. 4381/AHD./2007
Assessment Year : 2004-2005
M/s. Gulshan Prints Pvt. Ltd., Surat -vs.- Income Tax Officer, Ward-1(2), Surat
(PAN : AAACG 8635 L)
(Appellant) (Respondent)
Appellant by : Shri Mehul Shah
Respondent by : Smt. Jyoti Laxmi, Sr. D.R.
ORDER
Per Shri T.K. Sharma, Judicial Member :
This appeal filed by the assessee is against the order dated 16.10.2007 of Learned Commissioner of Income Tax(Appeals)-I, Surat for the assessment year 2004-05. Various grounds raised by the assessee in this appeal are as under :_ (1) On the facts and in circumstances of the case as well as law on the subject, the Learned Commissioner of Income Tax(Appeals) has erred in confirming the action of the Assessing Officer in rejecting the books of accounts u/s. 145(3) of the Act.
(2) On the facts and in circumstances of the case as well as law on the subject, the Learned Commissioner of Income Tax(Appeals) has erred in confirming the action of the Assessing Officer in making addition of Rs.38,55,735/- on account of alleged low gross profit.
(3) On the facts and in circumstances of the case as well as law on the subject, the Learned Commissioner of Income Tax(Appeals) has erred in confirming the action of the Assessing Officer in charging interest u/s. 234B of the Act.
2. Brief facts of this case are that the assessee-Company is engaged in the business of process work of dyeing and printing of cloth on job work basis. For the assessment year under appeal, it filed the return of income declaring nil income. This return of income was accompanied by audited final accounts alongwith audit report in Form No. 3CA and 3CD as required under section 44AB of the Income Tax Act, 1961. The industrial unit of the assessee-
2 ITA No.4381/AHD/2007company is situated at 254-255B, GIDC, Pandesara, Surat. It received grey cloth from various parties, i.e. traders from market for dyeing and printing in the process mill of the assessee. The assessee-company received job charges against processing of cloth from parties. During the financial year relevant to the year under assessment, the assessee has shown receipt of processing charges of Rs.12,57,74,217/-. On processing of 2,16,81,079.30 meters of cloth and declared gross profit at Rs.93,75,713/- at the ratio of 7.45% and declared net profit of @ 0.71% as against which in the immediate preceding year, the assessee has shown receipt ofprocessing charges of Rs.7,50,60,756/- on processing of 9637743 meters of cloth declared gross profit of Rs.79,09,934/- at the ratio of 10.52% and declared net profit @ 1.43%.
3. During the course of assessment proceedings, the Assessing Officer asked the assessee to furnish the reasons for fall in G.P. ratio. The reasons were furnished by the assessee, which are reproduced by the Assessing Officer at para 3.2 on pages 7 to 17 of the assessment order. The Assessing Officer was not satisfied by the reply of the assessee. The Assessing Officer rejected the books of accounts under section 145(3) and made addition of Rs.38,55,735/- by adopting G.P. ratio of 10.52% as declared in the last year. This is mentioned in para 3.3 on pages 17 to 26 of the assessment order.
4. Before the Learned Commissioner of Income Tax(Appeals), the assessee filed the detailed paper book containing various charts for comparison of expenses with last year and also various evidences which were filed before the Assessing Officer. After considering the same, the Learned Commissioner of Income Tax(Appeals) confirmed the addition by giving findings at para 2.8 on pages 8 to 11 of his impugned order. In the impugned order, the Learned Commissioner of Income Tax(Appeals) also made enhancement of income under section 251(2) amounting to Rs.86,07,591/- on account of payment of water charges. The detail of this addition is that Surat Municipal Authority levied water charges pertaining to several years. The bill amount for the assessment year 2000-01 to 2004-05 was Rs.86,07,591/-. The assessee debited 10% of the same amounting to Rs.8,60,759/- in the previous year relevant to the assessment year under appeal. The Learned Commissioner of Income Tax(Appeals) disallowed the same but made no separate addition on the ground that Assessing Officer will allow the telescopic of Rs.8,60,759/- against G.P. addition of Rs.38,55,735/- which is separately confirmed by the Learned Commissioner of Income Tax(Appeals) in the impugned order. Aggrieved with the 3 ITA No.4381/AHD/2007 view taken by the Learned Commissioner of Income Tax(Appeals), the assessee is in appeal before the Tribunal.
5. At the time of hearing, on behalf of assessee Shri Mehul Shah, ld. counsel appeared and filed a paper book containing 83 pages, which, inter alia, includes written submissions filed before the Learned Commissioner of Income Tax(Appeals) alongwith comparative chart showing
(i) various expenses as percentage of sales,
(ii) sales value and average job rate charged per meter,
(iii) month-wise sales,
(iv) increase in rate of colour and chemical expenses,
(v) utilization of coal and average rate of coal for purchases from GMDC as well as imported coal,
(vi) increase in rate of diesel,
(vii) expenses on account of consumption of stores and spares,
(viii) tracing rate,
(ix) rate of bolting cloth,
(x) increase in average rate of black grey cloth.
In the paper book, a chart is also enclosed showing salary paid to supervisory and administrative during the year under appeal, ledger account of water charges and tax audit report under section 44AB of the Act alongwith audited financial statements. Ld. counsel of the assessee submitted that rate of G.P. as shown in the audit report of the Company for the year under consideration and earlier years is as under :-
AY 2001-2002 2002-2003 2003-2004 2004-2005 Total job work 87519198 63772131 76002676 12,57,74,217 Gross Profit 8335747 9654182 8732378 1,22,84,016 Percentage 9.52 15.13 11.49 9.76 4 ITA No.4381/AHD/2007
5.1. From the above chart, the ld. counsel of the assessee pointed out that it should be noted that total job work receipts were boosted in the year under consideration by almost 65% from just preceding assessment years. The achievement becomes more significant if considered with then market conditions and competition and the rate of G.P. shown by the other companies engaged in the same line of business. He submitted that economists always support the theory that more turnover yields less margin and less turnover yields more margin. The ld. counsel of the assessee further pointed out that in the assessment year 2001-02, the G.P. rate was 9.52%, when turnover was Rs.8,75,19,198/-. In the assessment years 2002-03 & 2003-04, when the turnover was less, G.P. was more. This is evident from the aforesaid table. The ld. counsel of the assessee submitted that there is no justification for rejecting the books of accounts merely on the ground that G.P. declared in the assessment year is less than in the immediately preceding assessment year. Continuing his argument, he submitted that during the year under appeal, cost of raw material was increased in comparison to earlier years, which is evident from the following :-
A.Y. 2003-04 % A.Y. 2004-05 % Total sales 7,50,60,756 12,57,74,217 Cost of raw 3,31,57,632 44.17 7,10,13,810 56.46 material & consumed Material 13,13,658 1.75 48,44,602 3.85 purchase Manufacturing 3,27,99,008 43.70 3,78,46,670 30.09 expenses Total expenses 6,72,70,298 89.62 11,37,05,082 90.40
5.2. On the basis of above chart, the ld. counsel of the assessee pointed out that total manufacturing expenses were reduced from 43.70% to 30.09%, whereas cost of raw material and purchase of raw material was increased from 44.17% to 56.46% and 1.75% to 3.85% respectively. With regard to cost of various raw materials, the ld. counsel of the assessee drew our attention to various comparative charts and several vouchers of purchases of colour & chemical, coal and water etc. He submitted that in the assessment year under appeal, the assessee 5 ITA No.4381/AHD/2007 incurred more cost with regard to almost all raw materials in comparison to earlier year, which prove the genuineness of rate of gross profit declared by the assessee.
5.3. With regard to maintenance of day-to-day stock, the ld. counsel of the assessee submitted that it is not possible to maintain day-to-day consumption of stock. This policy was adopted by the assessee-company since its inception. In the last year also, no day-to-day stock consumption record was maintained despite that correct profit was adduced from the books of accounts maintained by the assessee. In support of this, reliance was placed on the following decisions :-
(i) Mr. Duraj Raj -vs.- CIT [1972] 83 ITR 484 (Ker.);
(ii) Geroge Commen -vs.- Commr. Of Agrl. IT (1964) 52 ITR 977 (Ker.);
(iii) Smt. Satinderjit Kaur -vs.- ITO (1995) 52 TTJ (Chd.) 388;
(iv) ITO -vs.- L.B. Shah & Co. (1988) 31 TTJ (Ahd.) 216;
(v) Vijaya Traders -vs.- CIT (1969) 74 ITR 279 (Mys.);
(vi) ITO -vs.- Rupal Chem Dyes & metal Salts Corp. (1992) 42 TTJ (Ahd.) 245;
(vii) IAC -vs.- Ushnakmal Madanlal (1989) 34 TTJ (Del.) 8;
(viii) Geetanjali Woolen Pvt. Ltd. -vs.- ACIT (1994) 50 TTJ (Ahd.) 19;
(ix)Hynoup Food & Oil Ind. Ltd. -vs.- ACIT (1993) 47 TTJ (Ahd.) 556.
5.4. With regard to fall in G.P., the ld. counsel of the assessee made further submissions :-
(i) In this year assessee substantially changed the production mix. In this year although the turnover of assessee has increased by 1.7 times but the average job charges decreased to Rs 5.25 per meter as against Rs.8.12 per meter last year This is because this year only processing of dyeing work was carried out for most of the job In caser of dyeing job of processing the unit earns low gross profit margin.
(ii) Because of increase in job charges the assessee has to consume more coal compare last year. Assessee has assessed quota with GMDC was exhausted and he had to make import of coal substantially. The average rate of imported coal is Rs 2038.11 compare to quota coal at Rs 767.45 so assessee incurred amount of Rs 83,38,627/- as compared to Rs 16,83,112/- incurred in last year The increase in production is only 1.7 times so as per last year price assessee has to incur coal charges of around Rs 28 lakhs but he incurred amount of Rs 83,38 627/- so more than Rs 50 lakhs was on account of increase in coal expenses which contribute for low gross profit ratio.6 ITA No.4381/AHD/2007
(iii) Assessee had also to bear the increase m price of diesel stores & spares, tracing, bolting cloth etc but the addition can be explained only on account of the increase m the coal charges.
(iv) Although no day to day stock register is maintained in regard to raw material but detail stock was taken with regard lo each item of material and projecting item description, quality, quantity, rate All the purchase of raw material are supported by vouchers and bills The payment of raw materials are paid through account payee cheque and Assessing Officer has not doubted any purchase of the raw material In the invoice for the purchase of raw material the description and quantity of the material purchased are mentioned Assessing Officer has never doubted that any item of purchase which remain unconsumed was taken into closing stock.
5.5. With regard to enhancement of Rs.8,60,759/- made by the Learned Commissioner of Income Tax(Appeals), the ld. counsel of the assessee submitted that the assessee-company incurred the additional water charges expenses for less consumption of water. That Surat Municipal Corporation has issued bill of Rs 86,07,591/- on 17.12.2003 for payment of water charges levied for less consumption of water from the 65% of quota allotted for various previous years The issue was crucial and affected almost all the process houses hence the same was taken up by the association of process houses and it was agreed upon to deposit 10% of the bill immediately without any dispute for the remaining amount legal action was taken, which is still pending before honourable court As per mercantile system of accounting instead of 10%, full amount of Rs 36,07 591/- is allowable in view of decision of Supreme Court in case of Kedarnalh Jut Mfg. Co Ltd V/s CIT (1971) 62 ITR 363 (SC). However assessee claimed only 10% of expenditure being amount deposited with SMC pending outcome of the legal action However Ld CIT(A) didn't grant deduction of this expenditure and he enhanced the income to by Rs 8,60,759 as per his findings al Para no. 4.2 & 4.3 (Page no 13 to 15) of the appellate order. However he has telescoped this addition with gross profit addition If the water charges of Rs 8,60,759/- is held to be allowable in earlier years, it doesn't make any difference as in earlier years there was loss and so more loss is available for set off in this year So effect would be neutralize.
6. On the other hand, Smt. Jyoti Laxmi, ld. Sr. D.R. appearing on behalf of the Revenue vehemently supported the order of Learned Commissioner of Income Tax(Appeals). The ld. D.R. pointed out that this year GP rate had decreased by 3.07% as compared to last year. The net 7 ITA No.4381/AHD/2007 profit rate had become half of last year. He pointed out that no prudent business man will increase the turnover, which resulted reduction of net profit. The margin of profit can be reduced only when one earns more net profit. The ld. D.R. further pointed out that in the impugned order, the Learned Commissioner of Income Tax(Appeals) after considering the same upheld the action of Assessing Officer regarding rejection of books of accounts with adoption of G.P. and estimated in the gross profit, therefore, the view taken by the Learned Commissioner of Income Tax(Appeals) be upheld.
6.1. With regard to enhancement made by the Learned Commissioner of Income Tax(Appeals), the ld. D.R. pointed out that the expenses pertained to earlier years, therefore, these cannot be allowed in the assessment year under appeal. She further submitted that she has no objection if telescopic effect is given, as is done by the Learned Commissioner of Income Tax(Appeals).
7. Having heard both the sides, we have carefully gone through the orders of authorities below. It is pertinent to note that in the assessment year under appeal, the assessee has substantially changed the production mix. Though the turnover of the assessee has increased by 1.7 times, but the average job charges decreased to Rs.5.25 per meter as against Rs.8.12 per meter last year. This is one of the main factor for reduction in the G.P. It is also true that the assessee has not maintained day-to-day consumption of stock, but this policy was adopted by the assessee in the earlier years also. In the assessment order, the Assessing Officer has not found any defect or discrepancy in the job work charges and purchase bills. The mere fact that the letters written by the Assessing Officer under section 133(6) of the Income Tax Act, were received unserved, is no ground to presume that there is a discrepancy in the accounts maintained by the assessee. In these circumstances, various observations made by the Assessing Officer for rejecting the books of accounts are of general nature. We, therefore, delete the addition of Rs.38,55,735/- on account of low G.P. made by the Assessing Officer.
7.1. Now coming to the enhancement of Rs.8,60,759/- made by the Assessing Officer, we are of the view that this pertained to earlier years. In the impugned order, the Learned Commissioner of Income Tax(Appeals) has proposed to make this enhancement for the detailed reasons given in para 4.3, which reads as under :-
8 ITA No.4381/AHD/2007"4.3. As regards reliance on various case laws by the appellant, it is stated that I have gone through the decision of Supreme Court in the case of Kedarnath Jute Manufacturing (supra) the facts in that case are entirely different. As far as the ratio of the decision of the Hon'ble Supreme Court is concerned, it goes against the assessee. The liability arose in the year in which the water was used and hence all this expenses are earlier year expenses. In the case of Saurashtra Cement and Chemicals (supra), the Hon'ble Gujarat High Court stated that the A.O. cannot disallow earlier years expenses simply without going into the fact of crystallization. According to the Hon'ble High Court if the crystallization of these expenses is in the current year then they have to be allowed. I agree with the decision of the Hon'ble Gujarat High Court. From the above facts it is clear that only the demand notice has been given by SMC in the current year. These expenses have not been crystallized during the current year and they cannot be allowed. Even the current year liability although allowable has not been claimed by the assessee by debiting the P&L A/c. this liability has also been fully disputed and only ad hoc payment has been made by the assessee to SMC. Hence this decision of the Hon'ble Gujarat High Court is not applicable in the case of the assessee. The decision of the Hon'ble Courts in the case of Nathmal Tolaram (supra) and Aska Cooperative Sugar Industries Ltd. (supra) say the same thing and hence they are not discussed separately. Therefore, this amount of Rs.8,60,759/- is disallowed. However, since this forms part of gross profit addition made by the A.O. because water charges are manufacturing expenses no separate addition is to be made on this account. Hence, the income is enhanced by Rs.8,60,759/- on this account but a telescopic effect is given in gross profit rate and hence no separate addition is made".
7.2. Admittedly, it appears that the assessee was using less amount of water than the installed capacity. Therefore, as per the agreement on accrual basis, the assessee should have claimed the water charges by debiting in the Profit & Loss A/c. from year to year basis. Merely because the billing section of Surat Municipal Corporation made a mistake and billed the assessee as per the actual usage does not mean that the liability of the assessee as per the agreement did not accrue in the earlier years. In view of this, we are of the view that enhancement of Rs.8,60,759/- in the assessment year under appeal was correctly made by the Assessing Officer. In the impugned order, the Learned Commissioner of Income Tax(Appeals) has allowed the telescopic addition from gross profit addition sustained by him. Since we have deleted the gross profit addition (supra), the addition of Rs.8,60,759/- is restored.
8. To sum up, the gross profit addition of Rs.38,55,735/- is deleted and water charges pertaining to earlier years amounting to Rs.8,60,759/- is disallowed. Thus instead of making 9 ITA No.4381/AHD/2007 gross profit addition, the Assessing Officer is directed to disallow water charges amounting to Rs.8,60,759/- and re-compute the income of the assessee accordingly.
9. Ground No. 3 is against levy of interest under section 234B of the Income Tax Act. Levy of interest under this section is mandatory. Accordingly, Assessing Officer is directed to allow the consequential relief in levy of interest under this section.
10. In the result, the appeal filed by the assessee is partly allowed.
The Order was pronounced in the Court on 30.07.2010
Sd/- Sd/-
(D.C. Agrawal) (T.K. Sharma)
Accountant Member Judicial Member
DATED : 30/ 07 / 2010
Copy of the order is forwarded to :
1) The Assessee
(2) The Department.
3) CIT(A) concerned, (4) CIT concerned, (5) D.R., ITAT, Ahmedabad.
True Copy By Order Deputy Registrar, ITAT, Ahmedabad Laha/Sr.P.S.