Income Tax Appellate Tribunal - Ahmedabad
Maksons Finechem Pvt.Ltd.,, Bharuch vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C"
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND
SHRI MAHAVIR SINGH, JUDICIAL MEMBER
Date of hearing: 25.03.10 Drafted on: 25.03.10
ITA No.922/AHD/2007
Assessment Year : 2003-2004
Deputy Commissioner Vs.
Maksons Fine Chem (P)
of income tax, Ltd. C/o. J.P. Shah & Co.
Bharuch Circle, 7/8, Mridul Tower, 1 s t
Baruch Floor, H.K. House Lane,
Ashram Road,
Ahmedabad-380 009
PAN/GIR No. : AABCM 2773Q
(APPELLANT) .. (RESPONDENT)
Appellant by : Shri M.C.Pandit Sr. D.R.
Respondent by: Shri J.P.Shah
ORDER
PER N.S.SAINI , ACCOUNTANT MEMBER :-
This is an appeal filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-VI, Baroda, dated 08.12.2006.
2. The sole ground taken in this appeal reads as under:-
"1. On the facts and in the circumstances of the case, the CIT(A) erred in deleting the addition of Rs.66,06,474/- being the fall in GP from 33.64% to 25.09% without appreciating the facts that the assessee was unable to provide any cogent reasons for such a drastic fall in GP."
ITA 922/Ahd/2007 -2-
3. The Learned Commissioner of Income Tax (Appeals) has decided this issue as under:-
"3. The first ground of appeal is against the addition of Rs.66,06,474/- made by the AO on account of under valuation of closing stock. The assessee company is engaged in the business of manufacturing of bulk drug intermediates, fine chemicals and speciality chemicals. The assessee company filed its return of income on 27.11.2003 declaring total income of Rs.22,96,475/- after claiming deduction u/s 80HHC of the I.T.Act,1961 of Rs.15,33,675/-. The return of income was accompanied by the audited accounts.
3.1. It was observed by the AO that during the relevant previous year, the assessee has declared gross profit of Rs.25.09% on turnover of Rs.4,46,58,028/- as against gross profit of 33.64% on turnover of Rs.2,86,06,056/- during the immediately preceding financial year. The assessee was required to furnish the justification for fall in GP in comparison to the preceding year vide questionnaire issued on 20.02.2006. In response, the assessee vide its reply dated 09.03.2006 contended that the fall in the gross profit was due to fall in sale prices of the various products sold by the company .In respect of four main products of the assessee company which account for around 85% of the turnover. Viz. Tami-C, Tami-B, Bromasil and Ibefone, month-wise details of production in quantity as well as value were called for by Assessing Officer. The following details were also called for on the same date as recorded in the order sheet on that date:
a) Details of corresponding Raw Material of above 4 items in respect of opening stock, purchase, consumption, closing stock.
b) Ratio of quantity of Raw Material consumed to quantity of production.
3.1.1. The assessee was also required to produce the stock register for verification on the same date. However, the assessee did not produce such details on 20.03.2006. It was also categorically stated that no stock register is maintained. The RG-1 register of finished goods maintained for the purpose of excise was produced before the AO. The assessee was given further time to produce the required details but on ITA 922/Ahd/2007 -3- 27.03.2006, it was again stated that no such details could be furnished as no stock register is maintained.
3.2. It is also observed by the AO that closing stock has not been properly valued e.g. the finished product Tami-C is valued at Rs.3400/-per kg. as against average sale price of Rs.9838/- per Kg. for export sales. Similarly in respect of work in progress, one of the items Tami-S1 has been valued at Rs.1000/- per KG whereas the raw material Tami-S1 has been purchased at an average price of Rs.1889.95 per kg.
3.2.1. It is also expressed by the AO that while on the one hand the GP might have fallen due to fall in the sale prices, at least a part of the fall has been compensated by the fall in the prices of the raw materials and on its part, the assessee has not given the exact quantification of the effect of the fall in the prices of the finished goods and the raw materials and has deliberately emphasized only the fall in price in respect of the finished products. Further the assessee maintained no quantitative details of raw materials consumption and productions, whatsoever, thereby making it impossible to verify as to whether the ratio of input to output is being properly reported by the assessee or not. The fall in the GP rate from 33.64% to 25.09% was linked to incomplete and incorrect books of account by the AO. It is stated by Assessing Officer that unless entire quantity of opening stock and purchases is accounted for either as issued for consumption or in the closing stock, the books cannot be said to be correct of complete as described above. Under the circumstances, the AO rejected the books of accounts of the assessee u/s 145(3) of the Act,1961 and GP @ 35% was estimated. The gross profit was estimated as under:
Raw material consumption Rs.268,24,501 Add: 1. Mfg. Expenses Rs. 41,44,201
2. Decrease in stock Rs. 21.13.400 COGS Rs.330,82,102 Gross profit = COGS x GP Rate 100 - GP Rate i.e. 35 = 330,82,102 x 35 65 ITA 922/Ahd/2007 -4- = Rs. 1,78,13,440/-
Thus, the addition of Rs.66,06,474/- (i.e. Rs.1,78,13,440- Rs.1,12,06,966) was made.
3.3. In appeal, it is argued that the Assessing Officer had not examined all the documents submitted during the course of assessment proceedings. It is submitted that on 20.02.2006, the AO had asked for details in respect of export trading account and mode of receipt of payments and that the entire details of export trading were submitted. It is vehemently pressed that bifurcation of manufacturing and trading activities were provided in profit and loss account and on the credit side export sales were clearly mentioned. It is stated that following the volume of sale of traded products for A.Y.2003-04 was 1.47 crores in comparison to NIL sale of traded product in A.Y.2002-03. It is also mentioned that as against the gross profit of 22.29 % from the manufacturing activities, the gross profit from trading activities was 14.32%.
3.3.1. The following details of m/f & trading activities were extracted from the profit and loss account:
A.Y.03-04 A.Y.02-03 Sr. Description Amounts Amounts No 1 Total sales during the year 44658028.00 28606056.00 2 Sales of traded products( a + b) 14780119.00 0.00
(a) Export sales(Trading) 12440119.00
(b) Local sales(Trading) 2340000.00 3 Sales of manufactured 29877909.00 28606056.00 products(l-2) GP From Trading Activity Sr. Description Amounts Amounts NO 1 Sales of traded products 14780119.00 0.00 2 Purchase value of traded 12663050.00 0.00 products 3 Profit from trading activity(2-l) 2117069.00 0.00 4 GP as % from trading activity 14.32 0.00 ITA 922/Ahd/2007 -5- GP from manufacturing activity A.Y.2003-04 A.Y.2002-03 Sr. Description Amounts Amounts NO 1 Sales of manufacturing 29877909.00 28606056.00 products 2 Closing Stock 3069314 3785721.00 3 Raw material purchased 15558444.00 14429440.00 4 Opening stock 3785721.00 3764855.00 5 Direct expenses for 4851808.00 4720026.00 manufactured products 6 Profit from manufactured 8751259.00 9477456.00 products (1-2-3-4-5) 7 GP as % from manufacturing 29.29 33.13 activity 3.3.2. In other words the reduction in the gross profit during the year was merely on account of low gross profit in trading activity which was non existent in the preceding year and that the AO has over looked this aspect while making the addition on account of gross profit. It is further stated that complete Central Sales tax and excise records are maintained and company being a small scale unit, they are not required to maintain production and consumption a/cs on daily basis. It is also stated that 1321 kgs of Tami-C was sold during the year against which there was a purchase of 1320 kgs of Tami-C as this product was traded. The last sales realization was Rs.8839/- per kg at profit margin of 10-12%. On the other hand, closing stock of material produced by the appellant was valued @ 3400 per kg. as the same could not be sold due to quality problems. Further in respect of Tami-S1, the average price was Rs.911/- per kg whereas in the assessment order, the AO has wrongly considered the value at Rs. 1889.95 per kg. It is pressed that all the information called for by the Assessing Officer were furnished during the course "of assessment proceedings and the AO was not justified in rejecting the books of accounts.
3.4. I have carefully gone through the submissions. The details submitted by the appellant were discussed with the concerned ITA 922/Ahd/2007 -6- assessing officer on 07.01.2006. However, no comments were offered by the AO on the issues raised by the appellant. It also appears that details submitted on 20.03.2006 and 27.03.2006 by appellant during assessment proceedings have not been examined by the AO.
3.4.1. It is a fact that there is substantial trading activity during the year as compared to no such activity in the last year. The gross profit from trading activity was much less than that from the manufacturing activity. The AO seems to have missed this aspect completely while comparing the gross profit rate. The gross profit from the manufacturing activity had gone down due to multiple factors. Such fall in GP is result of change in mix of business activities. This is offset to a much smaller extent by fall in raw material prices. Rejection of books of accounts merely on the ground that there was variation in the gross profit and without analyzing the underlying reasons is not warranted, when there are specific reasons for such decline. Considering the facts and circumstances of the case, the addition of Rs.66,06,474/- is, therefore, deleted."
4. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the Learned Assessing Officer observed that the Gross Profit rate disclosed by the assessee comes to 25.09% which is much lower than 33.64% declared by the assessee in the immediately preceding year. The Learned Assessing Officer also observed that the assessee could not substantiate the valuation adopted for closing stock. In these circumstances, he rejected the book results of the assessee and estimated gross profit of the assessee @ 35% and thereby made trading addition of Rs.66,06,474/-.
5. On appeal, the Learned Commissioner of Income Tax(Appeals) observed that the assessee has started trading business ITA 922/Ahd/2007 -7- also during the year under consideration. On verification of results of trading account, he observed that the Gross Profit works out to 14.32% in the trading account, and therefore, actual gross profit disclosed by the assessee in manufacturing account comes to 29.29% and not 25% as observed by the Learned Assessing Officer. He therefore, deleted the entire trading addition of Rs.66,06,474/-.
6. In appeal before us, the Learned Departmental Representative contended that the assessee could not controvert the finding of the Learned Assessing Officer in respect of defects pointed out in the valuation of closing stock and therefore, the Learned Commissioner of Income Tax(Appeals) was not justified in accepting the lower gross profit of 29.29% in respect of manufacturing goods. He therefore, prayed for sustaining of the addition in respect of defects pointed out in respect of closing stock of manufactured goods.
7. The Learned Authorised Representative of the assessee could not dispute the above proposition of the Learned Departmental Representative.
8. On the above facts and circumstances, in our considered opinion, the Learned Commissioner of Income Tax(Appeals) was not justified in deleting the entire trading addition. In our considered opinion, it shall meet the ends of justice, if trading addition is retained at Rs.10 lacs on account of defects in the valuation of closing stock which could not be controverted by the assessee to which AR also agreed in writing before the Bench. We therefore, modify the ITA 922/Ahd/2007 -8- order of the Learned Commissioner of Income Tax(Appeals) to the above extent and partly allow the appeal of the Revenue.
9. In the result, the appeal of the revenue is partly allowed.
Order signed, dated and pronounced in the Court on 31/03/2010.
Sd/- Sd/-
( MAHAVIR SINGH) ( N.S. SAINI )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 31/03/2010
Paras#
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals)
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER,
स᭜यािपत ᮧित //True Copy//
(Dy./Asstt.Registrar), ITAT, Ahmedabad