Income Tax Appellate Tribunal - Ahmedabad
Dada Associates, Surat vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH - AHMEDABAD
(BEFORE S/SHRI BHAVNESH SAINI, JM AND D. C. AGRAWAL, AM)
ITA No.3316/Ahd/2007 and 2125/Ahd/2008
A. Y.: 2004-05 and 2005-06
The A. C. I. T., Range -6, Surat Vs M/s. DADA Associates,
Room NO.203, Aayakar 204, GIDC, Pandesara,
Bhavan, Majura Gate, Surat
Surat
PA No. AACFD 0419 N
(Appellant) (Respondent)
ITA No.2171/Ahd/2008
A. Y.: 2005-06
M/s. DADA Associates, Vs
The A. C. I. T., Range -6, Surat
204, GIDC, Pandesara, Room NO.203, Aayakar Bhavan,
Surat Majura Gate,
Surat
PA No. AACFD 0419 N
(Appellant) (Respondent)
Department by Shri S. K Meena, DR
Respondent by Shri M. K. Patel, AR
ORDER
PER BHAVNESH SAINI: This order shall dispose of all the above appeals in respect of the same assessee.
2. We have heard the learned representatives of both the parties, perused the findings of the authorities below and the materials available on record.
ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 2M/s. DADA Associates
3. Now, we shall decide the appeals as under.
ITA No.3316/Ahd/2007 (departmental appeal)For : A Y 2004-05
4. This appeal by the revenue is directed against the order of the learned CIT(A)-IV, Surat dated 25-05-2007 for assessment year 2004-05 challenging deletion of addition of Rs.1,32,32,146/- on account of suppression of job charges.
5. Briefly, the facts of the case leading to making the above addition is that the AO observed on perusal of the books of account that the assessee has suppressed job charges. It was seen that except in the months of October, 2003 and March, 2004, there was suppression of job charges in all the months. By consumption of 139944 units of electricity, there was production of 986688 meters of dyed and printed fabrics in October, 2003 whereas in the month of May, 2003 against consumption of 86670 units of electricity, the production was 353618 meters whereas it should have been 611074 meters on the basis of production in October, 2003. The AO further observed that if April and May, 2003 were not taken into account due to strike in the textile industries, even then, in the rest of the months there was suppression of production in the ratio of electricity to production. Similar comparison was made with regard to consumption of coal and gases. The AO on the basis of consumption of electricity, coal and gases with the production of clothes found that there was suppression of production. The assessee in explanation to the above comparison of consumption and production submitted before the AO that it was doing only dyeing and printing job work on behalf of the clients and did not make any production of its own cloth. Dyeing and printing charges depend on the programmes given by the clients and if only dyeing is done, the job charges would be less. It was submitted that production would not depend only on consumption ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 3 M/s. DADA Associates but here are other factors also, therefore, comparison from the month of October is without any basis. It was submitted that the assessee had to keep the machines running even if there are no production, since the gum coating on the blanket in printing machine will get spoiled and cost of each blanket was Rs.2,00,000/- In the case of jet printing machines, the assessee could dye up to 35 batches in one time but while in lean months there can be less quantity of clothes and the consumption of electricity would remain the same. It was further submitted that boilers had to be kept running since steam had to be given to the machinery and so even in this season consumption of coal, electricity and gas will remain at high level. It was stated that in off season, the meterage per design was less when less grey was given by the clients for processing, whereas in peak months the programme for printing and dyeing was in big lots when the machines were give higher out put per electricity unit consumption because it was running continuously. Copy of RG-1 is filed every month with the Excise Department which support assessee's claim for total processing during the year. It was further explained that production depended on number of factors like quality of raw materials, irregular supply of electricity and fuel consumption etc. Therefore, there is no basis to make the addition. The AO however, did not accept the contention of the assessee and made the addition. Same facts were reiterated before the learned CIT(A). Details and evidences and documents were placed and it was explained that no defect has been found in the books of account by the AO. The comparison of production with electricity consumption in the month of 0ctober is on hypothetical basis and was unjustified. It was also explained that in other months there were festivals and as such production would be less. The assessee relied upon several decisions in support of his contention that addition is unjustified and submitted that the AO did not bring any evidence on record in support of the allegation with regard to suppression of production. It was further submitted that the monthly return filed with ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 4 M/s. DADA Associates the Excise Authorities were accepted by them and therefore, the addition was not justified. It was also explained that ITAT Ahmedabad Bench in the case of ACIT Vs Pigeon Textiles in ITA No..1861/Ahd/2006 dated 3-11-2006 deleted the entire addition on the identical facts. The learned CIT(A) considering the explanation of the assessee deleted the entire addition on account of suppression of job charges but maintain the addition of Rs.5,20,000/- on account of low gross profit/net profit as compared with earlier years. His findings in the impugned order reproduced as under:
"I have considered the submissions and gone through the details filed by the appellant. The AO has considered the month of September, 2003 as the benchmark for working out the production during the other 11 months of the year. It appears that the submissions filed by the appellant and the reasons for low production in other months has not been fully appreciated by the AO but he has also admitted that a variation of 25% is possible on account of fluctuation of electricity, day to day repairing of the machinery, modification in dyeing & printing etc. The main argument of the AO is based on consumption of unit of electricity vis-à-vis production in meters. It is also seen that the AO has taken into account the quantity of finished goods which were dispatched from the factory during the month and not the actual production. Further, I am inclined to agree with the appellant that the consumption of electricity worked out by the AO is not actually the consumption during the month but the bill which was raised for the month which could make a difference in electricity used and the production of fi0nished goods obtained per month. The AO has also not appreciated the fact that the production would be severely effected in the first three months of the year due to strike in the weaving industry when the appellant could not get sufficient material but the expenditure in terms of fixed overheads like electricity, labour charges etc. would not be reduced to that extent. Further, the consumption of electricity would form an important factor in a case where a single process for production is used but in a dyeing & printing house, the process itself is complex and comprises a number of sub-process each of which would consume different amount of electricity. It could be possible that by consumption of more electricity in a sub-process, lower ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 5 M/s. DADA Associates quantity of material is processed whereas in other sub- process lower consumption of electricity could yield better production I also do not understand as to why one particular month of the year i.e. October, 2003 has been adopted in the benchmark for working out hypothetical production in the other 11 months of the year. It appears that this month has been selected by the AO, since taking any other month as the benchmark would not have given the results desired by the AO. It is also seen that the production record of the appellant is subject to check by the Excise authorities, who have not pointed out any abnormality or any clearance of goods illicitly from the factory premises nor has the AO been able to find any sales outside the books of accounts. Further, I am also inclined to agree with the appellant that the consumption of electricity and other items like gas and diesel would depend on a number of factors, like quality of dyeing & printing, colour & shade of the printed material, special process required for some fabrics and power consumption in non-productive activities. These aspects have probably not been appreciated by the AO, who has simply worked out the so-called suppression of producing on the basis of production in only one month of the year which is not at all justified. It is also seen that the AO has worked out the percentage consumption of electricity, gas, coal & diesel and all these are on a very high side in the month of April, May & June, whereas compared to October, 2003, the month adopted as the benchmark the percentage in other eight months of the year are almost similar to September. I have also gone through the various case laws cited by the appellant specially the case of Pigeon Textile wherein the Hon'ble ITAT, Ahmedabad have upheld the order of CIT(Appeal) deleting the addition made by the AO by working out average production of cloth on the basis of electricity consumed. The Hon'ble ITAT in this case held that the assessee was engaged only in job work and was not engaged doing any production of its own and keeping in view the submission of the assessee and also the fact that there was no material on record to suggest that the assessee was engaged in the activity of doing job work outside the books of accounts the addition made by the AO was not justified. It is also a fact that the Court have very clearly held the unreliability, incorrectness and incompleteness of accounts has to be shown by the Dept. before rejecting book results and strong and sufficient reasons must be given to indicate that the accounts were unreliable. The courts have also held (the Hon'ble Kerala High Court in the case of St. Teresa's Oil Mills 76 ITR 365) that the mere fact that there was a disparity in ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 6 M/s. DADA Associates consumption of electricity would not justify the rejection of book results because such variation could be due to various factors beyond the control of the assessee.. I am also of the view that it was not proper for the AO to work out the average production on the basis of per unit consumption of electricity and gas. Further, the AO has nowhere doubted the consumption of other materials like colour & chemicals, labour charges etc. which would be the most important criterion for working out the suppression of job work charges. It is also important to note that the entire production of the appellant's factory is over seen by the Excise Authorities. Taking the entirety of facts of the case into account, I am of the considered view that the action of the AO in making an addition on account of suppression of job charges is not in order and the same is directed to be deleted. However, it is also seen that the gross profit shown by the appellant during the year is 9.50% and the net profit has also declined marginally from 5.16% to 5.12%. In upwardly mobile market, there is no justification for fall in NP which should in fact be higher compared to last year. In view of this and also considering some defects in the books of accounts like non- maintenance of colour & chemical stock register, I would be fair and reasonable if the GP is treated at 15% which calls for an addition of Rs.5.20 lakhs to the income of the appellant.
In the result appeal is partly allowed."
6. The learned DR relied upon the order of the AO and submitted that the basis of making the addition was consumption of electricity for the month of October, 2003 as compared with the production of the remaining months. The learned DR submitted that the assessee has failed to explain the reasons for fall in production as compared with the electricity consumption and hat there was also fall in the net profit rate as compared with earlier years. Therefore, addition is justified. On the other hand, the learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that there was no basis to make comparison by production of month of October, 2003with electricity consumption and relied upon the order of the ITA Ahmedabad Bench in the case of M/s. Suita Dyeing Pvt. Ltd. Vs ITO ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 7 M/s. DADA Associates dated 31-01-2006 I ITA No.897/Ahd/1999 in which on identical facts the additions deleted by the learned CIT(A) have been confirmed. He has also filed a chart of the job receipts for the year under consideration and for earlier years and submitted that if the addition maintained by the learned CIT(A) for a sum of Rs.5,20,000/- is added to the net profit, the net profit rate would be enhanced to 5.53% as against 5.12% shown by the assessee. He has submitted that addition made by the learned CIT(A) has been accepted by the assessee and no appeal has been preferred before the Tribunal.
7. We have considered the rival submissions and the material available on record and do not find any justification to interfere with the order of the learned CIT(A). Mainly the AO considered this issue of suppression of job receipts on comparison of the job receipts with production on the basis of electricity consumption etc. The AO chose particular month for the purpose of making the addition. The learned CIT(A) on proper appreciation of facts and material on record correctly deleted the addition. The assessee produced complete books of account and the details before he authorities below in which no specific defect has been pointed out by the AO. The assessee also produced excise records before the AO in which also no defect has been pointed out. The assessee explained the reasons for low production in other months because of the strike, festivals and off season in which the machines were continuously running but there was no production as compared to other months. The AO has not pointed out any mistake in the explanation of the assessee and no basis has been explained why one month's production is compared with other months. The reasons given by the assessee have been very clearly examined by the learned CIT(A) and came to the just finding that addition is made on hypothetical calculation by the AO without any cause. It may be further noted that in the preceding assessment year 2003-04 the assessee has shown net ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 8 M/s. DADA Associates profit rate of 5.16% and gross profit rate of 8.34%. However, in the assessment year under consideration there was slight fall in net profit rate by 5.12% and gross profit rate by 9.50% The learned CIT(A) maintained addition of Rs.5,20,000/- because of this reason of fall in net profit and addition is accepted by the assessee as explained by the learned Counsel for the assessee. The learned Counsel for the assessee filed calculation to show that if the above addition maintained by the learned CIT(A) on account of fall in net profit rate is added o the profit of the assessee before depreciation, the net profit rate would enhance to 5.53%. The above facts would show that while making further addition by the learned CIT(A) the net profit rate and gross profit rate have enhanced as compared to earlier years. ITAT Ahmedabad Bench in the case of Sunita Dyeing Pvt. Ltd. (supra) held as under:
"Keeping in view the entirety of the facts and circumstances of the case and the above mentioned position of law, we are of the opinion that ld CIT(A) is fair enough to observed that there could not be any hypothetical addition on the basis of electricity consumption. However, we are of the view that he has rightly upheld the addition up to Rs. 3 lacs to cover the discrepancies noticed with regard to color and chemicals and for the period of one month after the date of survey as for the period prior to survey the books of accounts were already scrutinized by the department and disclosure was accepted of Rs.5 lacs with regard thereto"
8. Considering the totality of the facts and circumstances noted above, we do not find any justification to interfere with the order of the learned CIT(A) in deleting the addition. There is no merit in the departmental appeal. The same is accordingly dismissed.
9. In the result, the departmental appeal stands dismissed.
ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 9M/s. DADA Associates ITA No2125/Ahd/2008 (departmental appeal) ITA No.2171/Ahd/2008 (assessee's appeal) For A. Y. 2005-06
10. These cross appeals are directed against the order of the learned CIT(A)-IV, Surat dated 14-03-2008 for assessment year 2005-06.
11. The revenue challenged the order of the learned CIT(A) in restricting the addition of gross profit at 9% on turnover as against 9.5% made by the AO. The assessee is in appeal challenging the order of the learned CIT(A) in confirmation of part of the addition on account of low gross profit.
12. The AO observed that the assessee has shown gross profit of 8.34% compared to gross profit at 9.5% in the immediately preceding year. When required to explain, the assessee stated that the fall was due to increase in cost of color and chemicals by 0.66%, increase in consumption opening stock sores and spares by 1.07%, increase in labour charges by 0.99% and decrease in job charges per meter. The AO did not accept the explanation of the assessee and observed that on verifying the books of account, it was found that most of the payments of wages and bonus were in cash, most of the labourers were not permanent employee and therefore total wages payment was not fully explained. The AO issued notice u/s 133(6) of the IT Act to a number of parties but in some cases the same remained un-complied with. These parties were also not produced for verification which was a reason for doubting the genuineness of such purchases. The AO, therefore, held that the books of accounts were not reliable more so, when the purchases from one M/s. Abhi Dyes were not genuine since the owner of the sai0d firm Shri Rohit Panwala categorically denied that he never made delivery to the assessee and only issued bogus bills.. The AO, therefore, invoked the provisions of section 145(3) of the IT Act and ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 10 M/s. DADA Associates rejected the book results and estimated profit at the same rate as in the immediately preceding year.
13. The addition was challenged before the learned CIT(A) and it was submitted that regarding purchases from M/s. Abhi Dyes, the assessee produced bills and copy of bank statement through which the payment was reflected which was made by account payee cheque. Further, no opportunity to cross examine Shri Rohit Panwala was given to the assessee. The addition on account of gross profit was not justified and the fall in gross profit was only due to increase in job charges and competition in the market. Payments to labourers were made by cheque also besides cash payment. The total turn over of the assessee was Rs.12.11 crores and gross profit rate was 8.48% during the year. However, the AO had taken the figure of assessment year 2003-04 and if the correct figure was taken the gross profit addition would be less than what has been adopted by the AO. It was further submitted that most of the parties to whom notices were issued, sent their confirmation but in some cases because of change of address, no confirmation could be filed.
14. The learned CIT(A) considering the submission of the parties and the material on record partly allowed the appeal of the assessee. His findings are reproduced as under:
"I have considered the submissions but I am not inclined to agree with the appellant on this account. There is no doubt about the fact that the purchases claimed to have been made from M/s. Abhi Dyes were not genuine since the owner of the said firm categorically accepted the facts that he had issued only bills without supplying the material. Further, the fact that some of the purchases were not confirmed also raised doubts about the correctness of the books of accounts. However, the most important fact for invoking the provision of section 145 of the IT Act would be bogus purchase made from M/s. Abhi Dyes. This defect is sufficient to doubt the completeness and correctness of the books of accounts. Therefore, the rejection of book results is in order. However, it ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 11 M/s. DADA Associates is also a fact that a businessman cannot be expected to maintain the same GP year after year in a competitive market. Therefore, the AO's action in estimating the GP at 9.5% i.e. at the same level as immediately preceding year does not appear to be reasonable. I am of the considered view that it would be fair, if GP for the year is estimated at 9%. That would make a difference of from the GP declared by the appellant. The AO is therefore, directed to restrict the addition on account of GP to 0.64% of the turn over"
15. The learned DR relied upon the order of the AO. On the other hand, the learned Counsel for the assessee reiterated the submissions made before the authorities below and also submitted that in case the addition sustained by the learned CIT(A) is added to the net profit shown by the assessee before depreciation, the net profit rate would enhance to 4.33% as against 3.68% shown by the assessee.
16. On consideration of the rival submissions, we do not find it to be a fit case for interference in the order of the learned CIT(A). It is admitted fact that in the preceding assessment year 2004-05 also the learned CIT(A) maintained addition of Rs.5,20,000/- on account of fall in net profit rate which has been accepted by the assessee as is considered in ITA No.3316/Ahd/2007 above. There is no change in the facts and circumstances of the case and nature of business of the assessee is same in this year also. The AO pointed out specific defects in the books of accounts of the assessee as is noted above whereby the genuineness of the purchases was doubted. Therefore, book results were rightly rejected by the authorities below. Even, there is no specific ground of appeal by the assessee challenging rejection of books of accounts by the AO and confirmed by the learned CIT(A). It is admitted fact that in the preceding assessment year 2004-05, the assessee has shown gross profit rate of 9.5% but in the assessment year under appeal it has shown gross profit rate of 8.48%. The net profit rate in the preceding assessment year was shown at 5.12% and by adding the addition made by the learned CIT(A) ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 12 M/s. DADA Associates in assessment year 2004-05, the net profit rate was 5.53%. However, in the assessment year under appeal the assessee has shown net profit rate of 3.68% and if the addition sustained by the learned CIT(A) is taken into consideration, the net profit rate would be 4.33%. Thus, there is a fall in gross profit rate and net profit rate in the assessment year under appeal as compared with the result of the preceding assessment year 2004-05. Considering the totality of the facts and circumstances noted above and that rejection of the book is not challenged by the assessee in its appeal, we are of the view that the learned CIT(A) was justified in estimating the gross profit at 9% as against 9.5% applied by the AO because the job receipts shown by the assessee have enhanced as compared to the earlier years. In the preceding assessment year the assessee has shown job receipts of Rs.10,40,33,889/- and in the assessment year under appeal the assessee has shown job receipts of Rs.12,11,22,276/, as explained by the assessee's counsel. Considering the above discussions, we are of the view that the learned CIT(A) has rightly estimated the profit by taking gross profit rate at 9% as compared with the earlier years.
17. In the result, the departmental appeal and the appeal of the assessee, both are dismissed.
18. No other point is argued or pressed.
19. In the result, both the departmental appeals and the appeal of the assessee are dismissed.
Order pronounced in the open Court on 15-10-2010.
Sd/- Sd/-
(D. C. AGRAWAL) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date : 15-10-2010
Lakshmikant/-
ITA No.3316/Ahd/2007, 2125 and 2171/Ahd/2008 13
M/s. DADA Associates
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad