Income Tax Appellate Tribunal - Indore
Erawat Phorma Ltd., Indore vs Assessee
1
IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH,
INDORE
BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND
SHRI R.C. SHARMA, ACCOUNTANT MEMBER
ITA Nos. 198, 199 and 228/Ind/2010
A.Ys.2005-06, 2006-07 and 2007-08
M/s Erawat Pharma Limited
Indore
PAN - AAACE-3757F Appellant
Vs
Asstt. Commissioner of Income tax
2(1), Indore Respondent
Appellant by : Shri M.C. Mehta with
Shri Hitesh Chimnani
Respondent by : Shri P.K. Mitra
O R D E R
PER JOGINDER SINGH, Judicial Member
These are the appeals by the assessee against the orders of the learned CIT(A) dated 30.11.2009 and 5.2.2010 on the following grounds :-
1. That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in maintaining increase in turnover of Rs.20,66,612/- and so also in the gross profit by estimating gross profit at the rate of 27.5% as against 25.71% (A.Y. 2005-06, turnover of Rs.11,06,469/- and estimation of gross profit rate at the rate of 16% as against 14.64% (A.Y.2006-07 and maintaining addition of Rs.4,88,720/- by applying gross profit rate of 14% as against 13.46% without properly appreciating the 2 submissions so made and declared by the assessee, respectively
2. That, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in maintaining ad hoc disallowance of Rs.10,000/- out of office and general expenses of Rs.86,183/- (A.Y. 2005-06) and Rs.5,000/- out of office and general expenses of Rs. 42,333/- (A.Y. 2006-07).
2. During hearing of these appeals, we have heard Shri M.C. Mehta along with Shri Hitesh Chimnani, ld. Counsel for the assessee and Shri P.K.Mitra, learned Senior Departmental Representative. The crux of arguments on behalf of the assessee is that the books of accounts of the assessee company are duly audited, the quantitative details are periodically checked by the excise authorities and no mistake was found by them. The financial stake of excise duty was claimed to be much higher as compared to the income tax by submitting that during the assessment year 2005-06 the excise duty claimed by the assessee was to the extent of Rs.75,63,905/- for which our attention was invited to page 17 of the paper book as against nil demand of income tax even after assessment. Mr. Mehta further contended that during the course of assessment complete details of each and every item relating to raw material, production, opening stock, closing stock of work in progress and finished stock were filed. A plea was also raised that the assessee company requires 45 days for production of its final product i.e. Gelatin capsule. For the process of production, our attention was invited to 3 pages 7 and 8 (para 4.1.2) of the assessment order. It was claimed that no defect was found in maintaining the quantity and financial details and the addition in the income has been made only due to fall in gross profit rate. It was further pleaded that the increase in manufacturing expenses and increase in salary of employees along with increase in cost of various items, the gross profit decreased. On a query by the Bench about non-submission of bifurcation of expenses at the stages of production it was claimed by the ld. Counsel for the assessee that such details cannot be taken out in the manufacturing concern, therefore, not possible.
3. On the other hand, the learned Senior Departmental Representative strongly defended the impugned order. On the condonation application it was contended that the reasons for delay mentioned in the application are not convincing. On merit, it was argued that the decline in the gross profit rate is very sharp, therefore, a pragmatic approach has already been taken in the impugned orders for which our attention was invited to para 1.7 (page 8) of the impugned order by further submitting that increase in the expenditure has not been explained by the assessee and necessary details were never submitted before the revenue authorities and inspite of asking by the learned Assessing Officer, the bifurcation of expenses at the stage of production 4 was never produced by the assessee, therefore, the addition was strongly defended.
4. We have considered the rival submissions of ld. representatives of both sides and perused the material available on record. As far as the delay of 47 days for filing the appeal before the Tribunal, though the reasons mentioned in the application are not much convincing, still by taking a lenient view, we are of the view that no person should be condemned unheard, therefore, the delay is condoned. 4.1 Brief facts are that the assessee is a public limited company carrying on business of manufacture and sale of empty hard gelatin capsules. These empty capsules are used for filling the medicinal powder to be consumed by the patients. The assessee company started commercial production from 23.10.1997, declared net taxable income in its return filed on 30.10.2005 (assessment year 2005-06). The return was processed u/s 143(1) on 17.4.2006 and subsequently vide notice u/s 143(2) of the Act, the return was selected for scrutiny. The details along with books of accounts were produced before the Assessing Officer and the same were test checked. The assessee showed gross profit of Rs.2,14,75,115/- on the gross sales of Rs.8,35,39,670/- at the rate of 25.7% as compared to gross profit of Rs.2,88,77,847/- on the gross sales of Rs.9,19,60,791/- at the rate of 31.39% declared in the immediately preceding accounting year relevant to the assessment year 5 2004-05. In view of the fall of 5.68% in gross profit, the assessee was asked to explain the reason for such fall. The assessee vide letter dated 26.9.2007 submitted before the Assessing Officer as under :-
"GP rate for A.Y.2005-06 is 25.71% against 31.39% of 2004-05 A.Y. The reduction is due to increase in cost of input. Our main raw material in gelatin the cost of which is gone up from 222.5 per kg to 256 Rs. per kg in 2005-06 i.e. up by 15% (Few bills of purchases of 2004-05 & 2005- 06 enclosed for reference). The cost of power and labour and other expenses is also gone up by 15% but the selling prices is not increased in that proportion hence there is a reduction in G.P. rate."
Before us, the assessee canvassed that the average purchase rate of raw material per kg. increased from Rs.223.51 to Rs.256.05 i.e. an increase of 14.56% and the purchase during last year was Rs.3,70,56,397/- and after the increase by 14.56%, being increase in cost of raw material will come to around Rs.4,28,37,195/-. The crux of arguments on behalf of the assessee is that the learned Assessing Officer and the learned Commissioner of Income Tax (Appeals) have accepted the gross profit rate of 16% and 14% in the Assessment Years 2006-07 and 2007-08, respectively, as against declared by the assessee at 14.64% and 13.46%, respectively, therefore, it was prayed that the addition declared by the assessee may be accepted.
5. Now the question arises whether the fall in gross profit rate is justified pursuant to explanation/arguments advanced by the ld. Counsel for the assessee ? We find that the learned Assessing Officer has 6 considered the details/comparison cost in table 1 (page 3), comparative chart showing the production of different sizes of capsules (table 2) and average manufacturing cost of capsules (table 3) and comparative chart showing sales made during the accounting years 2005-06 and 2006-07 (table 4) as submitted by the assessee. On examination of these details, the assessee was categorically asked to furnish the inventory of items both in terms of quantity and value along with method of valuation of stock and other necessary details in support of its claim. The details submitted by the assessee have been mentioned in table 5 and 6 at pages 4 and 5 of the assessment order. The valuation of finished goods has been summarized in table 7 and valuation of work in progress in table 8 of the assessment order. The manufacturing process has been discussed in para 4.1.2 onwards. The gross profit ratio is summarized as under :-
Assessment 2004-05 2005-06 2006-07 2007-08
year
Gross profit 31.40% 25.71% 14.64% 13.46%
ratio declared
by the
assessee
Gross profit 31.40% 27.50% 16.00% 14.00%
applied by
Assessing
Officer
If the aforesaid trend of gross profit is analysed, definitely it is a decreasing trend. Now the question arises whether the assessee has explained the decreased in trend satisfactorily with the help of 7 documentary evidence. As mentioned above, inspite of specific asking by the Assessing Officer, the bifurcation of expenses at the stage of production, the details could not be produced by the assessee on the plea that such bifurcation of expenses is not possible. The increase in manufacturing expenses and salary is also not in the same ratio but at the same time, as mentioned in the assessment order (page 2) the assessee duly attended the assessment proceedings from time to time and furnished the details. The books of accounts were also produced for verification and the same were test checked meaning thereby no substantial defect was pointed out by the Assessing Officer, therefore, in such a situation, keeping in view the totality of facts and the assertion made before us, we are of the view that it will meet the ends of justice if the gross profit rate is applied at 26.50%, 15.32% and 13.74% for the Assessment Years 2005-06, 2006-07 and 2007-08, respectively. We order accordingly. This ground in the respective appeals is partly allowed. However, we are making it clear that our above conclusion has been arrived at due to the peculiar facts of these appeals only.
6. The next ground pertains to maintaining the ad hoc disallowance of Rs.10,000/- and Rs.5,000/- out of office and general expenses, respectively. After hearing the rival submissions, first because it is a case of a company and ad hoc disallowance has been made, therefore, even keeping in view the smallness of disallowance in respect to claim 8 of the assessee, the disallowance so made is deleted, therefore, this ground in the respective appeals is allowed.
Finally, the appeals are partly allowed.
Order pronounced in open Court on 24th February, 2011.
(R.C.SHARMA) (JOGINDER SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 24th February, 2011
Copy to: Appellant, Respondent, CIT, CIT(A), DR, Guard File Dn/-