Income Tax Appellate Tribunal - Ahmedabad
Fairdeal Filaments Ltd.,, Surat vs Assessee on 6 December, 2012
आयकर अपील य अ धकरण, अहमदाबाद यायपीठ 'बी', अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
" B " BENCH, AHMEDABAD
ी मकल
ु ु कमार
ु ावत, या यक सद य एवं ी ट .आर.मीणा, लेख ा सद य के सम ।
BEFORE SHRI MUKUL Kr.SHRAWAT, JUDICIAL MEMBER And
SHRI T.R.MEENA, ACCOUNTANT MEMBER
1. आयकर अपील सं./I.T.A. No.1562/Ahd/2010 - A.Y. 2007-08
2. आयकर अपील सं./I.T.A. No.1576/Ahd/2010 - A.Y. 2007-08
1. Fairdeal Filaments Ltd. बनाम/ 1. The Dy.CIT
3 r d Floor Vs. Circle-1, Surat
Dawar Chambers
Ring Road
Surat
2.The Dy.CIT 2. M/s.Fairdeal Filaments
Circle-1, Surat Ltd., Surat
थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AAACF 3804 A
(अपीलाथ /Appellants) .. ( यथ / Respondents)
Assessee by :
Shri R.N.Vepari
Revenue by : Shri Y.P.Verma, Sr.D.R.
सनवाई
ु क तार ख / Date of Hearing : 06.12.2012
घोषणा क तार ख /Date of Pronouncement : 15.2.13
आदे श / O R D E R
PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER :
These are the cross-appeals by the Assessee and the Revenue from arising from the order of the ld.CIT(A)-I, Surat dated 10/03/2010 passed for A.Y. 2007-08.
2. Assessee's appeal, ITA 1562/Ahd/2010 - A.Y. 2007-08 2.1. In this appeal, the assessee has raised the following grounds:-
(I) Disallowance u/s.40A(2) of the Act:-ITA No.1562/Ahd/2010 (By Assessee) & ITA No.1576/Ahd/2010 (By Revenue)
Fairdeal Filaments Ltd. vs. DCIT Asst.Year - 2007-08 -2- The learned Commissioner of Income-tax (Appeals) erred in retaining addition of Rs.23.36 lacs in respect of payment made to Uday Yarn Twisting Group by holding it as falling u/s.40A(2)(b) of the Act, when the above concern is not falling u/s.40A(2)(b) of the Act.
(II) Disallowance of Depreciation:- (1) The learned Commissioner of Income-tax (Appeals) erred in confirming the view of the Assessing Officer that the appellant was not entitled to deduction u/s.32 in respect of depreciation @ 50% on machinery required under TUFs.
(2) On the facts and circumstances and as per law, the learned Commissioner of Income-tax (Appeals) was not justified in taking the aforementioned view.
(III) Miscellaneous:-
(1) The app submits that it is not liable to interest u/s.234B of the Act.
(2) The appellant submits that it is not liable to interest u/s.234C of the Act.
(3) The app craves to leave, add, alter or vary any of the grounds of appeal.
2.2. Revenue's appeal, ITA 1576/Ahd/2010 - A.Y. 2007-08 In this appeal, the Revenue has raised the following grounds:-
(1) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in restricting the addition made by the A.O. on account of fall in GP of Rs.1,49,24,480/- to 23,36,000/-
(2) On the facts and in the circumstances of the case, the learned CIT(A) ought to have upheld the order of the Assessing Officer.ITA No.1562/Ahd/2010 (By Assessee) & ITA No.1576/Ahd/2010 (By Revenue)
Fairdeal Filaments Ltd. vs. DCIT Asst.Year - 2007-08 -3- (3) It is, therefore, prayed that the order of the CIT(A) may be set-aside and that of Assessing Officer may be restored to the above extent.
3. Facts in brief as emerged from the corresponding assessment order passed u/s. 143(3) dated 30.12.2009 were that the assessee-company is engaged in the business of manufacturing of yarn & fabrics. It was noted by the AO that during the year under consideration, the assessee has shown gross profit of Rs.4,15,27,000/- on total turnover of Rs.62,70,79,000/- which worked out to 6.62% as against the G.P. of 13.70% on total turnover of Rs.45,25,71,000/- shown in the immediate preceding year. According to AO, there was a fall in G.P. of 7.08% during the year under consideration as compared to immediate preceding year. In compliance of show cause, the explanation of the assessee was that there was high increase in the salary and wages. It has also been informed that the cost of the material had gone up. As per AO, there was disproportionate increase in the expenses. There was no day-to-day stock register maintained by the assessee. He has referred Samir Diamonds 71 ITD 75 for the legal proposition that in the absence of incomplete books of accounts, the AO is justified in invoking the provisions of section 145(2) of IT Act. The AO has also cited Awadhesh Pratap Singh Abdul Rehman and Brothers 210 ITR 406 for the proposition that the presence or the absence of a Stock Register is important. The absence of the same give rise to a legitimate inference that all is not well with the books. Finally, applying the provisions of section 145(3) of IT Act, the books of accounts were rejected and in his opinion, it was reasonable to adopt 9% GP rate as against the GP of ITA No.1562/Ahd/2010 (By Assessee) & ITA No.1576/Ahd/2010 (By Revenue) Fairdeal Filaments Ltd. vs. DCIT Asst.Year - 2007-08 -4- 6.62% shown by the assessee. The difference of Rs.1,49,24,480/- was taxed in the hands of the assessee.
4. At this juncture, it is worth to mention that in the grounds of appeal the assessee has made a reference of disallowance u/s.40A(2)(b) of IT Act and objected that the Uday Yarn Twisting did not fall under section 40A(2)(b). In this regard, we have noted that there was no invocation of the provisions of section 40A(2)(b) by the AO in the impugned assessment order. There was only a reference of payment of lease rent which was increased during the year under consideration. Otherwise, there was no specific mention of the invocation of section 40A(2)(b) for the purpose of disallowance. The AO has noted that the lease rent paid to Uday Yarn Twisting had increased from Rs.35.83 lacs to Rs.59.19 lacs. It has also been noted by the AO that the said party happened to be a related party thus falling within the meaning of section 40A(2)(b). According to him, the increase of 65% in lease rent was quite unreasonable. In the opinion of the AO, the assessee had not given any specific reason for such increase in the lease rent. But the fact remained that the AO had finally applied the GP rate at 9% and since the assessee had adopted 6.62%, therefore the difference between the two GP rates, i.e. 2.38% was accordingly taxed in the hands of the assessee.
5. When the matter reached before the CIT(A), the view taken by him is reproduced below for the sake of clarity.
ITA No.1562/Ahd/2010 (By Assessee) & ITA No.1576/Ahd/2010 (By Revenue)Fairdeal Filaments Ltd. vs. DCIT Asst.Year - 2007-08 -5- "2.3. I have considered the submission made by the appellant and the observation of the A.O. The main reason for rejecting the books of account is that the assessee has not maintained day-to- day stock register whereas the assessee has stated that it has maintained the stock register as it was subject to excise duty. The same was produced before the A.O. The A.O. has rejected the books of account saying that the valuation of closing stock is not supported with evidences. The appellant on the other hand stated that vide letter dated 30.11.2009 Annexure-VII gave complete details of stock record. The appellant has been able to substantially explain the fall in G.P. rate in manufacturing as seen from the above discussion. However, with respect to the lease rent it is seen that the lease rent has been increased from Rs.35.83 lacs to Rs.59.19 lacs, i.e. an increase of almost Rs.23.36 lacs. It has been stated that 52 water jet looms were utilized both in current year as well as in last year and still the lease rent has increased substantially by almost 65%. The explanation of the assessee that the lease rent is paid as per agreed contract. Confirmation of the party was given. It is pertinent to note that the party is covered by provisions of Section 40A(2)(b) and hence this explanation is not fully acceptable. The appellant has brought no material on record to show that the lease rent of the water jet loom had to be increased. This is second year of taking the water jet looms. Increase of rent just after one year is not justified, specially when the lesser is sister concern and because of this reason also the assessee's profit has decreased. Hence, this increase of expenditure by Rs.23.36 lacs covered by Section 40A(2)(b) is not at all justifiable. In view of the above, I agree with the appellant that there is no reason for rejecting the books of account, since the A.O. has not brought any specific defects on it. The A.O. has brought no material to show that the sales and purchases were not genuine, bogus or purchases were inflated etc. In view of this, rejecting of books of account is deleted. However, as regards addition of G.P. is concerned, the same is restricted to Rs.23.36 lacs being disallowance u/s.40A(2)(b) as the assessee has increased its cost of lease rent in respect of the group concern, namely, Udai Yarn Twisting group, than the second reason with no reason. In view of the above, the addition of Rs.1,49,24,480/-
ITA No.1562/Ahd/2010 (By Assessee) & ITA No.1576/Ahd/2010 (By Revenue)Fairdeal Filaments Ltd. vs. DCIT Asst.Year - 2007-08 -6- is restricted to Rs.23.36 lacs. These grou7nds of appeal are, therefore, partly allowed."
6. It was noted by him that the rejection of books of accounts by the AO for not maintaining day-to-day stock register was not on sound footing because it was stated before him that the assessee had maintained the stock register as per the requirement of Excise Department. The records of the Excise duty was placed before the AO. As per ld.CIT(A), the assessee was also in a position to substantially explain the fall in GP. But in respect of lease-rent, the observation of ld.CIT(A) was that the payment to sister-concern was not justified especially the substantial increase in rent in respect of lease-of water jet looms. Therefore, the increase of lease-rent of Rs.23.36 lacs was held to be covered by the provisions of section 40A(2)(b) of the Act. Because of this part relief now both the sides are before us.
7. From the side of the assessee, ld.AR Mr.R.N.Vepari appeared and at the outset informed that actually the fall in the GP in the manufacturing operation was only 1.92%, therefore the AO has wrongly held that the fall in GP was 2.38%. He has bifurcated the Gross Profit rate of the different operations of the assessee in the following manner:-
"Reasons for fall in rate of gross profit rate Asst.Year Turnover Gross Profit Rate Rs. Rs.
Combined
2006-07 45,40,57,047 4,81,39,131 13.76%
2007-08 61,39,77,799 4,37,97,172 6.62%
ITA No.1562/Ahd/2010 (By Assessee) &
ITA No.1576/Ahd/2010 (By Revenue)
Fairdeal Filaments Ltd. vs. DCIT
Asst.Year - 2007-08
-7-
Manufacturing
2006-07 43,20,65,348 4,77,32,844 11.05%
2007-08 44,46,57,250 4,06,09,091 9.13%
Trading
2006-07 2,19,91,699 4,06,287 1.85%
(4.8% of total)
2007-08 16,93,20,549 31,88,081 1,88%
(27.5% of total)
Act7ual fall of rate of gross profit in manufacturing operation has been from 11.05% to 9.13% i.e. by 1.92% only."
7.1. The next plank of the argument of the ld.AR was that per se the non-maintenance of stock register should not be made the basis for addition. Case law relied upon were as follows:-
1. Kiran Corporation [TM] - 102 TTJ 375 (Ahd)
2. Protinkem - 102 TTJ 604 (Asr)
3. Gajanan Traders - 104 TTJ 1030 (Bang]
4. Ashokkumar Agarwal - 98 TTJ 663 (Jd.) 7.2. Further, it has also been argued that the assessee had maintained the stock records on software known as DOS. Ld.AR has also informed that the assessee had maintained the complete record as prescribed by Excise Department. He has therefore pleaded that the GP addition made by the AO merely because of the reason that there was no stock register was baseless.
8. From the side of the Revenue, ld.Sr.DR Mr.Y.P.Verma has pleaded that in the absence of stock register, the AO is empowered to estimate the GP. Rather, the ld.CIT(A) has arbitrarily held that the provisions of section 40A(2)(b) was to be applied, although the AO has ITA No.1562/Ahd/2010 (By Assessee) & ITA No.1576/Ahd/2010 (By Revenue) Fairdeal Filaments Ltd. vs. DCIT Asst.Year - 2007-08 -8- not made out the case in that manner. Because of this reason ld.DR has pleaded that the question of 40A(2)(b) along with the GP addition is required to be considered by the Tribunal.
9. We have heard both the sides. We have perused the material on record. At first, we shall adjudicate upon the basis of GP addition as made by the AO. We have noted that the assessee was in a position to substantiate its sales as also the purchases. Rather, the undisputed fact was that the month-wise quantitative details of the manufactured article was kept by the assessee. The assessee was subject to Excise Duty, hence under obligation to maintain such records. It has also been noted that stock records for each segment, i.e. sizing, texturising, TFO and weaving activity has also been maintained by the assessee. Thus, it was pleaded that for each segment a separate month-wise quantity in respect of opening stock, purchase, sales, purchase returns, sales returns and transfer of closing stock was duly maintained. We are also of the view, as held by several Courts that the absence of stock register as demanded by the AO, per se would not lead to an inference that rest of the accounts of the assessee were also false or incomplete. The absence of the stock register should be coupled with the other facts to demonstrate that there was falsity in the book result, then only the AO is empowered to apply an estimation to determine the profit of the assessee. On the contrary, the assessee has informed that the slight fall in the GP was because of hike in the rate of payment of salary and wages as also there was hike in the cost of the material. Comparative figures were on record to substantiate the hike in the expenses. We therefore hold that the ld.CIT(A) has rightly ITA No.1562/Ahd/2010 (By Assessee) & ITA No.1576/Ahd/2010 (By Revenue) Fairdeal Filaments Ltd. vs. DCIT Asst.Year - 2007-08 -9- held that the assessee was able to substantially explain the fall in GP rate in manufacturing activity. On this count, we therefore hold that no addition is required in the hands of the assessee.
9.1. Now we are left with an another issue in relation to the invocation of the provisions of section 40A(2)(b) of IT Act. Since the order of the AO merges with the order of ld.CIT(A), therefore the applicability of the provisions of section 40A(2)(b), as invoked by the CIT(A), must not be overlooked. However, while applying the provisions of section 40A(2)(b), the ld.CIT(A) has not examined the lease agreement, if any, as also the reason for increase in lease-rent from Rs.35.83 lacs to Rs.59.19 lacs. Only this much was stated that 52 water jet-looms. were utilized. There was a mention of a contract on the basis of which the lease-rent was paid, but that fact remained uninvestigated. From the tone and tenor of the arguments of both the sides, we have noticed that the Revenue as also the Assessee both remained unsatisfied with the result of ld.CIT(A), hence both are in appeal before us. It was expressed from both the sides that before invocation of section 40A(2)(b), certain informations were required to be collected and in the absence of those information it was not fair on the part of the ld.CIT(A) to assess an amount by holding that the increase in the lease-rent was not justified.
We therefore deem it proper to restore this issue back to the file of ld.CIT(A) for de novo adjudication with the direction that the parties before us should be allowed a reasonable opportunity of hearing to be granted on this issue, so that a reasonable as also a justifiable view should follow.
ITA No.1562/Ahd/2010 (By Assessee) & ITA No.1576/Ahd/2010 (By Revenue)Fairdeal Filaments Ltd. vs. DCIT Asst.Year - 2007-08
- 10 -
10. The result of above discussion is that ground No.1 of both sides are set aside, hence to be treated as allowed for statistical purposes only.
11. Apropos to Ground No.2 of the assessee, the issue of disallowance of depreciation on the machinery under TUF Scheme now stood resolved by several orders as rightly followed by ld.CIT(A) and restricted to 50%. For AYs 2004-05 & 2006-07 by a consolidated order of ITAT "B" Bench Ahmedabad in assesseee's own case titled as "Fairdeal Filaments Ltd. vs. DCIT dated 23/04/2010, it was held by paragraph No.5 that the assessee is entitled for depreciation on plant & machinery purchased under TUF Scheme @ 50%. Respectfully following this decision, we hereby direct to allow the same rate of depreciation for the year under consideration as well. Ground is allowed.
12. In the result, both the appeals may be treated as partly allowed that too for statistical purposes only.
Sd/- Sd/-
( ट .आर.मीणा ) ( मकल
ु ु कमार
ु ावत )
लेखा सद य या यक सद य
( T.R. MEENA ) ( MUKUL Kr. SHRAWAT )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 15 / 2 /2013
ट .सी.नायर, व. न.स./T.C. NAIR, Sr. PS
ITA No.1562/Ahd/2010 (By Assessee) &
ITA No.1576/Ahd/2010 (By Revenue)
Fairdeal Filaments Ltd. vs. DCIT
Asst.Year - 2007-08
- 11 -
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. संबं धत आयकर आयु त / Concerned CIT
4. आयकर आयु त(अपील) / The CIT(A)-I, Surat
5. वभागीय त न ध, आयकर अपील य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड फाईल / Guard file.
ु / BY ORDER,
आदे शानसार
स या पत त //True Copy//
उप/सहायक पंजीकार (Dy./Asstt.Registrar)
आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad
1. Date of direct dictation on computer dated ......4.2.13
2. Date on which the typed draft is placed before the Dictating Member 5.2.13.................. Other Member.....................
3. Date on which the approved draft comes to the Sr.P.S./P.S.................
4. Date on which the fair order is placed before the Dictating Member for pronouncement......
5. Date on which the fair order comes back to the Sr.P.S./P.S.........15.2.13
6. Date on which the file goes to the Bench Clerk..................... 15.2.13
7. Date on which the file goes to the Head Clerk..................................
8. The date on which the file goes to the Assistant Registrar for signature on the order..........................
9. Date of Despatch of the Order..................