Income Tax Appellate Tribunal - Indore
M/S Pithampur Poly Products Ltd., ... vs The Acit 1(2), Indore on 7 June, 2018
आयकर अपील य अ धकरण, इ दौर यायपीठ, इ दौर
IN THE INCOME TAX APPELLATE TRIBUNAL
INDORE BENCH, INDORE
BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER
AND
SHRI MANISH BORAD, ACCOUNTANT MEMBER
ITA No.208 & 209/Ind/2013
Assessment Years: 2007-08 & 2008-09
M/s. Pithampur Poly Products ACIT-1(2),
Ltd., बनाम/ Indore
2, Fairdeal Building, Geeta
Vs.
Bhawan Square, Indore(M.P.)
(Appellant) (Revenue )
P.A. No.AAAAC1063F
Appellant by Shri Anil Kamal Garg & Arpit Gaor CA's
Respondent by Shri K.G. Goyal, Sr. DR
Date of Hearing: 04.06.2018
Date of Pronouncement: 07.06.2018
आदे श / O R D E R
PER KUL BHARAT, J.M:
These two appeals by the assessee are pertaining to A.Ys. 2007-08 & 2008-09 against the separate orders of the Commissioner of Income Tax(Appeals)-III dated 30.01.2013 & 20.02.2013. Since identical grounds have been raised in both these two appeals were taken up for hearing together and are being disposed of by way of consolidated order for the sake of convenience.
First, we take up assessee's appeal in ITA No.208/Ind/2013 Pithampur Poly Products Ltd.
The assessee has raised following grounds of appeal:
"That the Learned CIT(A) erred in law and facts of the case and confirmed to Gross Profit addition of Rs.1,79,52,140/- made by assessing officer inspite of the fact that assessee company is maintaining quantity records and purchase & sales are fully verifiable and no any discrepancies, what so ever, pointed out by assessing officer.
The addition made by the Assessing Officer and confirmed by the CIT(A) is arbitrary, wrong and bad on the facts of the case."
2. The only effective ground in the appeal is against confirming the gross profit addition of Rs.1,79,52,140/-.
3. Briefly stated facts are that the case of the assessee was selected for scrutiny assessment and the assessment u/s 143(3) of the Income Tax Act, 1961 was framed vide order dated 23.12.2009. While framing the assessment, the assessing officer noticed that the assessee has disclosed lower gross profit comparing the earlier year. He, therefore, applied gross profit @ 52.09% after rejecting the books of account of the assessee.
4. Aggrieved against this the assessee preferred an appeal before the Ld. CIT(A) who after considering the submissions confirmed the addition. Now, the assessee is in appeal before this Tribunal.
5. The ld. counsel for the assessee reiterated the submissions as made in this synopsis. This submission of the assessee as made by the ld. counsel for the assessee are as under:
"PART- I - GENERAL DETAILS 1 Assessment Year 2007-08 2008-09 2 Date of Filing of 14-11-2007 30-09-2008 Return of Income [PB Page No. 8] [PB Page No. 5] under s. 139(1) of the 2 Pithampur Poly Products Ltd.
Income-Tax Act, 1961 3 Returned Income Rs. Nil Rs. Nil [PB Page No. 8 & 9] [PB Page No. 5 & 6] 4 Section under which 143(3) of the IT Act, 143(3) of the IT the assessment Order 1961 Act, 1961 has been Passed 5 Date of passing the 23-12-2009 31-12-2010 Assessment Order 6 Income assessed Rs.1,91,06,646/- Rs.1,51,42,877/- under section 143(3) 7 Total Additions [which Rs.1,79,52,140/-. Rs.1,07,33,257/-. is subject matter of The addition has The addition has the present appeal] been made on been made on made by AO and account of low account of low reason thereof gross profit. gross profit.
[AO's Findings at [AO's Findings at
Para (3) at Page Para (3) at Page
No. 2 to para (11) No. 2 to first para
at page no. 5 of the at page no. 5 of
Assessment Order] the Assessment
Order]
8 Relevant Para and Findings at Para Findings at Para
Page No. of CIT(A)'s (4.3) of Page No. 13 (5.4) of Page No. 4
Order to Para (4.4) of of the Appellate
page no. 19 of the Order
Appellate Order
9 Date of passing the 30-01-2013 20-02-2013
order by learned CIT
3
Pithampur Poly Products Ltd.
PART- II - FACTS OF THE CASE [LEAD YEAR A.Y. 2007-08] 1.00 The appellant is a Public Limited Listed Company duly incorporated under the Companies Act, 1956 on 28- 07-1994. The appellant company is listed on the Bombay Stock Exchange since 1995. The main object of the company is to carry on the business of manufacturing of PP/ HDPE/ Woven Sacks/ Jumbo Bags, both on its own account as well as a Job Work Contractor for other manufacturing units.
2.01 The appellant company voluntarily furnished its return of income for the relevant assessment year as per details given in the table above.
2.02 In response to the return so furnished, the case of the appellant was selected for scrutiny. During the course of the assessment proceedings, the AO issued various notices and in response, the appellant made necessary compliances from time to time. Copies of the Notices are placed at page no. 51 to 53 of our Compilation for the lead year A.Y. 2007-08. Copies of the written submissions made by the appellant before the ld. AO are placed at page no. 54 to 59 of our Paper Book.
2.03 During the course of the assessment proceedings, the appellant also produced its books of account along with supporting bills, vouchers, registers, bank statements etc., as noted by the learned AO himself at the opening para of the Assessment Order.
2.04 Finally, the AO framed the assessment under s.143(3) of the Act by assessing the total income of the appellant at Rs.1,91,06,646/- as against the returned income of Rs. Nil. One of the major additions made by the learned AO pertains to estimation of gross profit of Rs.1,79,52,140/-, which is the only issue of the present appeal before this Hon'ble Bench.
2.05 As against the assessment framed by the AO, the appellant preferred appeal before the ld. CIT(A).
2.06 The ld. CIT(A), vide his Order dated 30-01-2013, granted relief on some of the petty additions made by the 4 Pithampur Poly Products Ltd.
AO. However, on the core issue of estimation of gross profit, as aforesaid, the ld. CIT(A)s confirmed the entire addition in the hands of the appellant. 2.07 As against the addition confirmed by the ld. CIT(A), on account of low gross profit, the appellant has preferred second appeal before the Hon'ble Bench.
PART- III - OUR SUBMISSION [LEAD YEAR A.Y. 2007-08] ADDITIONAL GROUND NOs. 1 & 2 "1. That, on the facts and in the circumstances of the case, the learned Assessing Officer grossly erred in rejecting regular books of account maintained by the appellant and also in making the addition on account of low gross profit without affording proper and reasonable opportunity of being heard to the appellant."
"2. That, on the facts and in the circumstances of the case, the learned AO also grossly erred in rejecting the books of account of the appellant without issuing any show-cause notice and without finding any discrepancy or defect in the books of account of the appellant."
SUBMISSION In this context, it is submitted as under:
1.00 That, in the instant case, the AO has not granted sufficient opportunity of being heard to the appellant in order to defend its case or make further submission for establishing the genuineness of the book results. 2.00 That, in the instant case, the ld. AO has rejected the books of account of the appellant without first issuing any show-cause notice under s.145(3) of the Act which is a sine-qua-non for the purpose of making assessment to the best of his judgment.
3.00 That, during the course of the assessment proceedings, as noted by the learned AO himself at the opening para of the Order, the appellant had duly produced its books of account along with supporting bills 5 Pithampur Poly Products Ltd.
and vouchers before the AO for his necessary verification. It is submitted that in the books of account and supporting evidences produced by the appellant, the ld. AO had not found any specific defect or discrepancy either in the maintenance of the books of account or in the observation of method of accounting. It is submitted that from the financial statements, the AO drawn the inference at his own, without giving any opportunity of being heard to the appellant on his inferences. The learned AO had not averted the appellant of his proposed action of rejection of books of account by issuance of any specific notice to this effect.
4.00 That, the act of the AO in not affording any reasonable opportunity of being heard to the appellant is in gross violation of the principles of natural law and justice and therefore, the consequent result being the assessment order deserves to be quashed on this count alone. For such preposition, reliance is placed on the following judicial pronouncement:
i) CIT vs. Ashwani Gupta (2010) 322 ITR 396 (Del) MAIN GROUND NO. 1 [Lead Year A.Y. 2007-08] "That the learned CIT(A) erred in law and facts of the case and confirmed to gross profit addition of Rs 1,79,52,140/-
made by Assessing officer inspite of the fact that assessee company is maintaining quantity records and purchase & sales are fully verifiable and no any discrepancies, what so ever, pointed out by Assessing officer. The addition made by the Assessing Officer and confirmed by the CIT(A) is arbitrary, wrong and bad on the facts of the case."
S. Particulars A.Y. 2007-08 No.
1 Relevant Para of the AO's OrderPara (3) at Page No. 2 to para (11) at page no. 5 2 Relevant Para of the CIT(A)'s Para (4.3) of Page No. Order 13 to Para (4.4) of page no. 19 6 Pithampur Poly Products Ltd.
3 Relevant Submission before ld. Page No. 1 to 4 of the CIT(A) Paper Book SUBMISSION In this context, it is submitted as under :
1.01 That, the appellant company is engaged in the business of manufacturing of PP/ HDPE/ Woven Sacks/ Jumbo Bags. These bags are used for packaging and storage.
1.02 That, besides carrying out manufacturing on its own account, the appellant company also carries out manufacturing for others on job work basis. During the relevant previous year, the appellant company has carried out job work only on behalf of one manufacturing unit named and titled as 'M/s. Bulk Pack Exports Ltd.' (in short, 'BPEL').
2.00 That, during the course of the assessment proceedings, the AO issued various notices to the appellant from time to time and in response to the same, the appellant duly made the desired compliances. The appellant also produced its complete books of account along with all the vouchers, bills, registers etc. before the AO for his verification. Such fact also finds place at first para of page no. 1 of the AO's Order for A.Y. 2007-08.
2.01 That, during the course of the assessment proceedings, although (as noted by the ld. AO himself at para (7) of the Order) the appellant produced its production register before the AO but it could not produce certain reports relating to production at different stages.
2.02 That, it was submitted before the ld. AO that the reports so desired by him were not preserved by the appellant as once having made entries in the final production register, on day to day basis, neither it was required nor it was practically feasible to maintain day to day details of production made at the various level of production which involves several processes such as 7 Pithampur Poly Products Ltd.
grinding of granules, making of tape, drawing of yarns, cutting and stitching of fabric, packing, printing, bailing etc. However, the culminated production of everyday, passing through the several processes, was duly recorded in the production register and such register was duly produced before the ld. AO as per the finding given by the ld. AO himself at para (7) of the Order.
2.03 That, the ld. AO further from the Production Register noted that the record of the raw materials has been maintained in terms of weight whereas the record of finished goods have been maintained in terms of numbers. According to the AO, due to such factor, the reconciliation between the consumption of raw material and production was not possible. Upon being confrontation, it was duly submitted before the AO that the desired reconciliation was very well possible by way of converting the quantity of bags of finished goods into weight by taking the average weight. However, the AO did not choose to get the reconciliation exercise done. It shall be pertinent to note that except pointing out the above features, the AO could not find any other defect or discrepancy in the maintenance of the register. Such fact speaks in volume about the genuineness of the maintenance of records by the appellant company.
3.01 That, the AO also observed that almost entire sales have been made by the appellant to one company namely M/s. Bulk Pack Exports Ltd. in which the son of the managing director of the appellant is a director and is having substantial interest. It was further observed by the AO that the appellant has sold the goods below the cost price. However, while reaching to such finding, at first para of page no. 5 of the Order, the ld. AO committed a factual error inasmuch he has considered the total production of the appellant company was of 44.094 MT whereas the fact remained that during the relevant previous year, the appellant company had produced 378.784 MT of finished goods (kindly refer PB Page No. 29- against the row of Work in Progress). It is submitted that out of 8 Pithampur Poly Products Ltd.
the production of 378.784 MT, quantity weighing 44.094 MT were used by the appellant company for its own purpose of reselling whereas the remaining quantity of 334.690 MT was utilized by it for substituting the finished goods of its principal i.e. M/s. Bulk Pack Exports Ltd. (BPEL) to whom it was supposed to handover the finished goods of the required quality.
3.02 That, during the relevant previous year, the appellant had claimed raw material consumption cost of Rs.1,23,59,403/- [kindly refer PB Page No. 43] for manufacturing of finished goods of the quantity of 378.784 MT. Thus, the per MT raw material cost of the production works out to be Rs.32.66/- per kg and not of Rs.275/- per kg as wrongly computed by the ld. AO at first para of page no. 5 of the Assessment Order.
4.01 That, the appellant is carrying out manufacturing job work on behalf of BPEL in consideration of receipt of job work charges. The receipt of such job work charges have duly been shown by it in its audited financial statements under the head 'Job Work Domestic Income' at Rs.6,27,31,942/- [kindly refer PB Page No. 36]. It is submitted that under the Job Work Agreement, the BPEL used to provide raw material to the appellant company and thereafter, the appellant company by employing its own man power and machinery, produces the finished goods of the desired quality. As per the agreement, the appellant was required to produce and return back a certain percentage of quantity of finished goods as against the quantity of raw material supplied by BPEL. Thus, in other words, the BPEL was allowing the appellant to generate the wastage to a particular percentage only and if any wastage gets generated over and above the stipulated percentage, the same was required to be compensated by the appellant from its own sources. Thus, on this count, the appellant company was required to compensate BPEL by quantity of 334.690 MT.
4.02 That, due to inadvertent mistake, the scrap compensation for the immediately preceding 9 Pithampur Poly Products Ltd.
previous year of approximately 70 MT having value of nearly Rs.70 lakhs could not be accounted for in that year i.e. in F.Y. 2005-06 relevant to A.Y. 2006- 07 and eventually, the effect for such scrap compensation was given during the previous year under consideration. It is submitted that due to non- recognition of appropriate scrap compensation in F.Y. 2005-06, the Work in Progress has got stated excessively as on 31-03-2006 by 70MT. Due to such error, the scrap for financial year 2005-06 has also got understated at 175.59 MT whereas the same ought to have been worked out at 245.59 MT [175.59 + 70]. Had the scrap compensation of 70MT pertaining to F.Y. 2005-06 been not included in the current year's scrap compensation of 385.281 MT [refer PB Page No. 29], the same would have got worked out at 315.281 MT only thereby making the figure of scrap for two years as comparable. It is submitted that due to such error only, the GP rate for the immediately preceding previous year has got shooted to 52.09% from that in the immediately preceding financial year i.e. F.Y. 2004-05 [A.Y. 2005- 06] at 22.60% [kindly refer PB Page No. 61]. 4.03 Your Honours, due to inclusion of scrap weight nearly 70MT pertaining to A.Y. 2006-07 in the scrap wastage for the assessment year under consideration i.e. A.Y. 2007-08, the percentage of scrap for the assessment year under consideration has resulted at a higher level and correspondingly the percentage of scrap for the immediately preceding assessment year has got worked out at a lower level.
5.01 That, from the manufacturing expenses, the AO noted that the appellant has claimed incentive payable of Rs.25,03,530/- to M/s. Bulk Pack Exports Ltd.. Here, the AO observed that the appellant has done job work for earlier years also but no such incentive was allowed despite the same rate of job work charged in earlier year. The AO also noted that generally the incentive is allowed to the parties which carry out the job work. However, as 10 Pithampur Poly Products Ltd.
per the AO, no satisfactory reply was given by the appellant.
5.02 That, it was submitted before the ld. AO that due to clerical error, the nomenclature has got wrongly mentioned in the books of account as incentive. It was submitted that factually, the credit for Rs.25,03,530/- was given by the appellant to the account of its principal BPEL on account of quantity discount but due to clerical error on the part of a novice accountant, the same got entered as Incentive. 5.03 Your Honours, the principal i.e. BPEL has shown the corresponding income of Rs.25,03,530/- in its books of account on account of the above quantity discount and has also made such income subjected to tax [kindly refer PB Page No. 142 of Additional Paper Book]. It shall be pertinent to note that the BPEL is also subjected to maximum rate of tax. Thus, there could not be any room for creating any suspicion on such transaction merely on the pretext that the directors of both the companies are related to each other. 6.01 Your Honours, according to the AO, during the previous year relevant to A.Y. 2007-08, the appellant has shown gross profit rate of 27.75% as against the same shown at 52.09 % in the immediately preceding previous year relevant to A.Y. 2006-07. Thus, according to the AO, there was a sharp decline in the gross profit rate of the appellant for the years under consideration.
6.02 Your Honours, at the outset, it is submitted that due to the error of under recognition of scrap generation during the immediately preceding financial year 2005-06 relevant to A.Y. 2006-07, the GP rate of the appellant for A.Y. 2006-07 has got wrongly shooted upto 52.09%. It is submitted that in its immediately preceding year i.e. F.Y. 2004-05 relevant to A.Y. 2005-06, the GP rate was of 22.60% only. Further, for A.Y. 2003-04 and A.Y. 2004-05, the rate of GP was of 39.81% and 25.618% only.
Likewise, in the subsequent A.Y. 2009-10 which is not under appeal, the appellant has shown GP rate 11 Pithampur Poly Products Ltd.
of 33.10% which has duly been accepted by the Department without any intervention. A copy of statement showing year-wise comparison of GP rates is placed at page no. 61 of the Paper Book.
6.03 Your Honours, had the error of recording of scrap generation in the immediately preceding previous year i.e. A.Y. 2006-07 not crept into, it would not have resulted into over-statement of GP during such year with the corresponding decrease in the year under consideration. If such error would not have crept-in, the GP rate of the appellant for the assessment year under consideration would have become quite comparable with that of the immediately preceding previous year relevant to A.Y. 2006-07 as shown in the table below:
(Rs. In lakhs) S. Description F.Y.2006-07 F.Y. 2005-
No. (A.Y. 2007-08) 06
[Under (A.Y. 2006-
Consideration] 07)
1 Turnover 725.19 684.71
2 Gross Profit (as per books) 198.19 356.06
3 Value of scrap related to 70.00 (-)70.00
F.Y. 2005-06 but
inadvertently recognized in
F.Y.2006-07
4 Adjusted Gross Profit after 268.19 286.06
rectifying the mistake (2-3)
5 GP Rate 36.98% 41.78%
6.04 Your Honours, had the appellant correctly recorded its scrap loss for A.Y. 2006-07, its carried forward loss for such year would have got increased by a sum of Rs.70 lakhs with a corresponding decrease in the loss for A.Y. 2007-08 by Rs.70 lakhs thereby resulting into no impact on overall profitability or tax liability of the appellant for 12 Pithampur Poly Products Ltd.
the reason that in both the years the appellant had shown income at Rs. Nil after claim of brought forward losses.
7.00 Your Honours, the learned AO has estimated GP rate of the appellant at 52.09% which is not possible in any industry and particularly in an industry in which the appellant is. It is submitted that the ld. AO has not taken into consideration a very vital fact that barring A.Y. 2006-07, the GP rate of the appellant for other two prior years was ranging between 22% to 26% only.
8.00 Your Honours, without prejudice to the above, it is submitted that in the appellant's case, the rate of gross profit from year to year vary on various factors such as (i) fluctuation in prices of raw material; (ii) fluctuation in foreign exchange rates; (iii) variation in labour cost; (iv) variation in wastage as per difference in sizes/ variety of bags; (v) variation in other direct costs; and (vi) difference in quality of raw material required for the orders. Each and every factor affecting the GP rate in the industry as well as the appellant is discussed in the ensuing paras.
8.01 That, the variation in gross profit of this industry largely depends upon the fluctuation in the prices of raw material. The raw materials for the appellant company are PP granules, which are manufactured from oil. It is therefore, the prices of PP granules depend upon the prices of the oil in the international market. There can be huge fluctuation in the international prices of the granules. For such an assertion, a graph indicating the variation in polymer prices in international market has been furnished by us at page no. 69 of the Paper Book for A.Y. 2007-08. Such graph has been downloaded by us from the website of plastemart.
8.01.1 On a perusal of the graph, it shall be observed by Your Honours that the price of polymer January 2004 was USD800 which has gone up to USD2050 in September 13 Pithampur Poly Products Ltd.
2008 and has fallen down to USD700 in December 2008. Even during the previous years relevant to the A.Y. 2007- 08 and A.Y. 2008-09, the prices of polymer were constantly increasing as compared to that prevailing in the previous year relevant to A.Y. 2006-07.
8.01.2 It is submitted that the gross profit of the appellant company is directly affected by the difference in rate of raw material prevailing at the time of receiving order from the customer and the rate prevalent at the time of making the purchase order for executing the work order. In case of direct sales i.e. where there is no advance order, the rate of raw material prevailing at the time of sale also plays a very important role in deciding the sale price of the finished goods. Therefore, it shall be appreciated by Your Honours that the high variation in prices of raw material play a vital role in deciding the profits of the company.
8.02 That, the variation in gross profit of this industry also depends upon the fluctuation in the foreign exchange rates. As submitted in the earlier paras that the raw materials, being polymers, are internationally governed commodities and since the production cycle ranges from six to ten weeks, the conversion rate of dollar/ euro is varied to a considerable extent. Therefore, the variation in rates of foreign exchange affects profitability of the appellant.
8.03 That, the variation in labour cost is also a dominant factor in the industry to determine the profitability of an entity. A kind reference of Your Honours is invited to a comparative chart furnished at page no. 70 &71 of our Additional Paper Book for A.Y. 2007-08 and A.Y. 2008-09. On a perusal of the chart, it shall be observed by Your Honours that in the immediately preceding previous year i.e. A.Y. 2006-07, the appellant has made its own sales at Rs.1,80,77,679/- and has derived job work income at Rs.5,03,94,279/-. During the previous year relevant to A.Y. 2007-08 and A.Y. 2008-09, the appellant has made 14 Pithampur Poly Products Ltd.
sales of Rs.97,87,175/- and Rs.1,23,73,974/- respectively. Further, in these years, the appellant has derived job work income of Rs.6,27,31,942/- and Rs.6,19,91,124/- respectively. It shall further be observed that the job work income of the appellant for A.Y. 2007-08 has increased roughly by 25% in comparison to the A.Y. 2006-07. The proportion of labour cost and processing charges to turnover was 11.52% during A.Y. 2006-07 which has gone up to 13.59% for A.Y. 2007-08 and 17.99% for A.Y. 2008-09. The increase in labour cost is attributable to the increase in cost of wages, increased labour force for the increased job work, differently skilled labour for executing the different types of orders etc. 8.04 That, the wastage in the process of manufacturing of PP/ HDPE/ Woven Sacks/ Jumbo Bags largely depends upon the difference in sizes and variety of bags. The wastage in manufacturing Woven sacks would be different from the wastage in manufacturing jumbo bags, PP bags and HDPE bags. There cannot be a fixed percentage of wastage in the industry and therefore, the percentage of wastage ranges from 7% to 12% depending upon the type of orders received by the appellant company.
8.05 That, since there are various sizes and variety of bags manufactured by the appellant, the manufacturing process of every kind of bag also differs from one another. In such circumstances, there are various costs which are directly proportional to the manufacturing process such as power and fuel cost, labour cost, stores and spares, stitching charges etc. These costs are connected with the type of bags being manufactured by the appellant. 8.06 That, there are various types/ grades of raw material i.e. polymers used for the purpose of manufacturing PP bags such as Polypropylene, High Density Polyethylene, Linear Low Density Polyethylene, Low Density Polyethylene, Poly Vinyl Chloride, etc. The prices of each of the raw material varies and different types/ grades of raw material are used for the purpose of manufacturing 15 Pithampur Poly Products Ltd.
different varieties of bags. Thus, the difference in quality of raw material required for the purpose of executing the orders is also an important factor to determine the gross profit of the company.
9.00 Your Honours, in the appellant's case, the major composition of revenue was from job work receipts and since it is not the case of the ld. AO that the appellant has either suppressed job work receipts or over claimed manufacturing expenses, there could not have been any justification for estimation of flat rate of GP at 52.09% merely on guess work.
10.00 Your Honours, in the appellant's case, the learned AO has given a finding that the appellant has sold goods to its sister concern at rates less than market rates. In this regard, it is submitted that first of all, such finding is not factually correct as the appellant has sold goods to its sister concern only at the prevailing market rates. Even otherwise it is submitted that unless it is shown that the sales shown by the appellant are sham transactions or the appellant had received any consideration over and above that stated in the books, no adverse inference could be drawn. For such proposition, reliance is placed on the following judicial pronouncements:
i) CIT vs. Raman & Company (1968) 67 ITR 11 (SC)
ii) Ramalinga Choodambikai Mills Ltd. vs. CIT (1955) 28 ITR 952 (Mad.)
iii) Patiala Biscuits Manufacturing Pvt. Ltd. vs. CIT (1976) 103 ITR 208 (P&H)
11.00 Your Honours, the appellant is an excisable unit governed by the Central Excise Act, 1958 and being an excisable unit, for each and every receipt and issue of the material, it is required to maintain proper records and such records are subject to periodical verification by the excise authorities. The copies of monthly excise returns are placed at page no. 150 to 197 of the additional 16 Pithampur Poly Products Ltd.
paper book for A.Y. 2007-08. It is submitted that in the appellant's case, excise authorities have not found any defect or discrepancy in the maintenance of accounts and therefore, there was no justification for the learned AO to disturb the trading results. For such proposition, reliance is placed on the following judicial pronouncements:
i) Motipur Sugar Factory (P) Ltd. vs. CIT (1974) 94 ITR 401 (PatHC)
ii) Ashoke Refractories Pvt. Ltd. vs. CIT (2005) 279 ITR 457 (KolHC)
12.00 Your Honours, it is a settled law that books of account of an assessee cannot be rejected merely on the ground of a lower rate of profit in comparison to that in the immediately preceding previous year without finding any specific defect in the books of account. Reliance is placed on the following judicial pronouncements:
i) Pandit Bros. vs. CIT (1954) 20 ITR 159 (Punj)
ii) Veeriah Reddiar vs. CIT (1960) 38 ITR 152 (Ker);
iii) International Forest Co. vs. CIT 1975 CTR (J&K) 88
iv) Ratan Café vs. State of Madras (1974) 33 STC 39 (Mad);
v) M. Durai Raj vs. CIT (1972) 38 ITR 484 (Ker)
vi) R.M.P. Perianna Pillai & Co. vs. CIT (1961) 42 ITR 370 (Mad)
13.00 Your Honours, the appellant has maintained proper records in respect of the manufacturing division. The appellant has also maintained quantitative records in respect of the production made during the relevant previous years. Further, the appellant has also maintained the excise records under the strict vigil of the excise authorities and has also furnished the excise returns on monthly basis before the excise authorities. The appellant is also subjected to excise audit on regular basis. But the excise authorities have also not found any defect in the records of the appellant. The appellant has also 17 Pithampur Poly Products Ltd.
maintained the production register on daily basis. It is submitted that all the records were duly produced before the AO for his verification. However, the AO could not find any single defect or discrepancy in the records so maintained by the appellant. The AO merely harped upon the steep decline in the gross profit rate of the appellant in comparison to the earlier year without considering and understanding the facts and circumstances prevailing in the case of the appellant company.
In view of the facts and circumstances of the case, it is most humbly prayed that the estimation of the gross profit made by the AO at an arbitrary rate of 52.09% thereby making addition of Rs.1,79,52,140/- may kindly be deleted and oblige."
6. On the contrary the Ld. DR opposed the submission. The ld. DR submitted that the assessee himself has been showing higher gross profit in earlier years. In rejoinder of the Ld. counsel for the assessee submitted that the Assessing Officer cannot proceed mechanically after rejecting the books of account. He submitted although there was no ground to rejecting the books of accounts. However, even if it is rejected, the AO should have examined the past history.
7. We have heard the rival contentions and perused material available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the AO has applied gross profit rate related to earlier year. It is contended that the reason for declaring higher rate of gross profit was due to some mistake and one of the reasons for lower gross profit in the year under consideration was higher wastage.
18Pithampur Poly Products Ltd.
8. We have given our thoughtful consideration of the facts of the case and after considering the material placed on record we are of the view that gross profit as applied by the AO is at a higher side. The AO has not given any specific reason as to why he has taken the immediate preceding year as guiding factor for applying the gross profit for the year under consideration.
The Ld. counsel for the assessee drew our attention to the gross profit ratio for the A.Y.2005-06 where the gross profit ratio was at 41.78% and in the assessment year under consideration, it was 36.98% if the mistake had not occurred. It is also stated in the synopsis the gross profit ratio for the assessment years 2003-04 & 2004-05 was of 39.81% and 25.618% respectively. Likewise, in the subsequent year A.Y. 2009-10, the appellant has shown gross profit rate of 33.10%. We therefore, considering the gross profit ratio related to different years direct the AO to adopt gross profit @ 40% and recomputed the addition. The ground raised in this appeal is partly allowed.
Now we take assessee's appeal in ITANo.209/Ind/2013 The assessee has raised solidary ground as reads as under:
"That the Learned CIT(A) erred in law and facts of the case and confirmed to Gross Profit addition of Rs.1,07,33,257/- made by assessing officer inspite of the fact that assessee company is maintaining quantity records and purchase & sales are fully verifiable and no any discrepancies, what so ever, pointed out by assessing officer.
The addition made by the Assessing Officer and confirmed by the CIT(A) is arbitrary, wrong and bad on the facts of the case."19
Pithampur Poly Products Ltd.
9. The facts are identical as were in ITANo.208/Ind/2013, the respective representative of the parties have adopted the same argument as were in ITANo.208/Ind/2013. We therefore, taking a consistent view direct the AO to adopt gross profit rate at 40% as against 52.09% to adopt by the AO and recomputed the addition. Thus, the ground of the assessee is partly allowed.
10. In the result, both the appeal of assessee in ITA No.208 /Ind/2013 & ITANo.209/Ind/2013 are partly allowed.
Order was pronounced in the open court on 07 .06.2018.
Sd/- Sd/-
(MANISH BORAD) (KUL BHARAT)
ACCOUNTANT MEMBER JUDICIALMEMBER
Indore; दनांक Dated : 07/ 06/2018
ctàxÄ? P.S/. न.स.
Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file.
By order Private Secretary/DDO, Indore 20