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Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: SHRI MAHAVIR PRASAD & SHRI WASEEM AHMED
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “C” BENCH
(BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMBER & SHRI WASEEM AHMED, ACCOUNTANT MEMBER)
ITA. Nos: 1508 & 1593/AHD/2014 (Assessment Year: 2009-10)
The ACIT, Circle-1(2), V/S IWI Cryogenic Baroda Vaporization System (I) Pvt. Ltd., A-36, Ganshyam Nagar Society, No. 2, GIDC Road, Manjalpur, Baroda IWI Cryogenic V/S Vaporization System (I) The ACIT, Circle-1(2), Pvt. Ltd., A-36, Ganshyam Baroda Nagar Society, No. 2, GIDC Road, Manjalpur, Baroda (Appellant) (Respondent)
PAN: AAACI4408B
Appellant by : Shri Lalit P. Jain, Sr. D.R. Respondent by : Shri Mukund Bakshi, A.R.
(आदेश)/ORDER
Date of hearing : 07 -03-2019 Date of Pronouncement : 30-04-2019
ITA No. 1508 & 1593/Ahd/2014 2 . A.Y. 2009-10 PER MAHAVIR PRASAD, JUDICIAL MEMBER 1. ITA Nos. 1508 & 1593/Ahd/2014 are cross appeals by the Revenue and the Assessee preferred against the order of the Ld. CIT(A)-IV, Baroda dated 26.02.2014 pertaining to A.Y. 2009-10. The Revenue has taken following grounds of appeal: i. On the facts and circumstances of the case, the Ld.CIT(A) erred in allowing GP for tanks @ 19.9% in place of 32.77%, after confirming the finding of the A.O that the Books of Accounts is not reliable. ii. On the facts and circumstances of the case, the order of the Ld.CIT(A) has erred in allowing benefit of 8% on account of abnormal loss, when the assessee has failed to substantiate the claim of losses.
Facts of the case are as emanated from the Assessment order: "The assessee is engaged in the business of manufacturing of vaporizer equipment, all parts of cylinder filling systems and trading as a dealer for Argon, Nitrogen & other gases, renting & business repairing of Cryogenic Tanks & Vessels. The assessee had declared turn over at Rs. 2,088.35 lakhs for the year under consideration and gross profit at Rs. 311.08 lakhs as compared to immediately preceding year's turnover at Rs. 1,113.84 lakhs and gross profit at Rs.323.05 lakhs. The net profit declared by the assessee during the year is Rs.83.73 lakhs as compared to the preceding year's net profit at Rs. 104.96 lakhs. Therefore, it is to say that the gross profit of the assessee has substantially decreased by 17.87% and net profit by 6.64%. In the course of assessment proceedings, the assessee was requested to substantiate with supporting evidences such drastic decrease in the gross result of the company. Firstly, the assessee submitted as under:
"Asst Year Turnover Gross Profit Net Margin
2009-10 208834944 14.90% 4. 01 %
2008-09 98582339 32. 77% 10.65%
The down fall in gross profit/net profit margin is due to following reasons.
ITA No. 1508 & 1593/Ahd/2014 3 . A.Y. 2009-10 1. Free replacement supply of 6 units vaporizers worth US dollars 98175/- equivalent to approx. INR 48,59,990/- to a customer in fulfillment of business obligations. 2. Customers' deducted liquidated damages on account of delay in delivery aggregating an amount of INRs.11,21,039/- 3. One export consignment to Newzealand were damaged during transit and in order to satisfy customer, it got repaired at Newzealand at very expensive cost worth INRs 996888/-; equivalent to USD 23302.68."
The head to head details were called for in subsequent hearings. The assessee submitted the details. In this case, the assessee more or less tried to explain the additional expenditure of about Rs. 89-90 lakhs. Therefore, this office felt it appropriate to have reasons for decrease in net profit. The assessee had repeated the same excuses. For the sake of convenience, the relevant gist of this office show cause notice dated 14/12/2011 is reproduced hereunder:
"1. That you have declared NP at 4.01% which was at 10.65% in the preceding year. You are requested to explain the difference of 6.64%. In response, you have explained the additional expenditure of Rs.69,77,917/-. However, your reply is incomplete. To elaborate, you have declared total turnover of Rs.20,88,34,944/- and 6.64% thereof comes to Rs.1,38,66,640/-. Again, to retrieve, you have explained expenditure to the tune of Rs.69,77,917/-, leaving the balance difference of Rs.68,88,723/-. You are requested to explain the difference of Rs.68,88,723/- with supporting evidences or this office shall have constrained to draw appropriate inference."
It is worthwhile to mention here that in order to deduce true and correct picture of state of affairs of the assessee/ this office had emphasized on the reasons for decrease in net profit to ascertain whether the assessee had any reason over and above stated for decrease in gross profit. In reply, the assessee submitted four reasons out of which three are that of explained in earlier submission but one additional reason was explained that it had lost 81006 kgs of Argon Gas. The assessee's submission is reproduced hereunder for the sake of convenience:
"The abnormal transactions; we have presented, were more meaningful contribution in reducing our earnings ratios down for the year under assessment. Each of the case in brevity is again explained with documents as under:
A. Free Replacement of 6 units of LNG Vaporizers amounting to US 98175/- :- for the first time we accepted order for supplying "Ambient Air Vaporizers' for LNG Application to a company named M/s. Gas Technology global of
ITA No. 1508 & 1593/Ahd/2014 4 . A.Y. 2009-10 Australia; who in turn had to install/supply to sites where the Natural Gas is the only source of all energy. Up on installation; they complained about the under performance of our supplied vaporizers; causing them enormous troubles and many more dire consequences. Hence, even though; we were paid in full for the supplied vaporizers (copy of their Purchase Order - Invoice, Packing List, Bill of lading are attached all pertained to previous year; where in we offered tax on the all sales); we were constraint to conclude after long back and forth communication on design calculation, heat/thermal calculation; on 24.11.2008 that we need to give them free re-placement (mail to that effect is attached). And that while adopting the correct procedural aspect about 'supplying free' i.e. sought GR waiver from bank declaring before all concerned authorities about the free replacement -We have on 3.1.2008 supplied 4 units (copy of GR Waiver-Invoice, Packing list and BL are attached) an on 10-12-2008 supplied 2 units (copy of GR Waiver-Invoice, Packing list and BL are attached)free of cost. Whereas customer paid their clearance charges and duties applicable to them on this account as a good .gesture; while reciprocating our spirit. Of course, it was abnormal loss, we incurred prima facie but what is saved is 'retention of customer - our good will/reputation in the Australian market who gave us orders thereafter and could avoid legal claim even on account of their expensive removal and re- installation cost of the unit; their local taxes and duties on the additional units. We could satisfy ourselves avoiding all these unwarranted expenses and adverse claims. The vaporizers supplied as referred above were designed and sent for the first time for LNG application. It has been established that there was a fault with our piping configuration and heat transfer calculations. Being customer focused company and also to maintain our reputation as well as on going interest in the Australian Market, we had replaced all the six units. This is a business contingency all these were done in business interest at large. We request you to consider the matter in this spirit. Cost of bringing back: It is most respectfully submitted with due respect that, we pressed a lot to the client in order to claim back the units returned but of late they came out claiming USD 48470.69 as the cost of removal at their end and justified the cost involvement (mail communication dated 6/4/2009 is attached with the sheet of cost sheet is attached). Besides, we were also required to incur cost of sea & land transportation and clubbing all expenditure it went to INRs 45 lacs approximately. We have taken a departure and kept 'silent' in order to avoid this heavy cost and aved on further losses. B. Liquidated Damages deducted by M/s. BOC India Limited amounting to INRs 10.75 lacs: this is our loyal customer; and under contractual obligations only they deducted liquidated damages on our delay in supplies made on PO 144735 aggregating order value of INRs 257.95 lacs and out of this sum only '5% of the basic value towards LD' was deducted in conformity with the contract, we executed. And especially where they have paid LD to their customers; the end principal customers.
ITA No. 1508 & 1593/Ahd/2014 5 . A.Y. 2009-10 We refer and rely upon Bombay High Court's Judgement in the matter of CIT v R.D. Sharma & Co. as reported in ITR Vol. 137 (copy attached); where in a just similar case held that 'Delay in completion of contract is INCIDENTAL to business and :Liability is in the nature of compensation and is an allowable deduction." However, from next orders onwards from the same customer; we remained vigilant and complied the delivery terms in Toto C. M/s. Air Liquid NewZealand deducted sum of USD 23302.68 as cost of repair & re-work: Client found that the supplied vaporizers were having dust inside; they have sent us photographs as well as to convince us. The customer is world best in cryogenics and we are catering them since our inception. We value them highest and especially when they claimed re- worked/cleaning etc. Their officers did explain the need of re-work and patiently heard our concerns. Back and forth communications of E mail certain photographs are additionally supported (and their debit note; expenses vouchers, they incurred on re-work etc., are already placed on record) We just can't make Air Liquid Group of Companies dis-satisfied and besides, it was our business obligations to perform. What we saved, while accepting their debit note is retention of customer - we remain in the good book of 'Air Liquide Grup' benefiting by further order from them. D. Loss on ARGON GAS Besides, as explained loss of Liquid Argon Gas, One event of loss of LAr gas are discussed in detailed with relevant documents attached; one on 11.09.2008 vide invoice no. 17; we filed one ISO container (number IGEU8899114) with Liquid Argon Gas of 19500 kgs. Of the worth USD 38025/- and transmitted onward for exporting to Nigeria. While this was taking on board; the captain of the vessel rejected this container since it was leaking/evaporating gas and so refused to take on vessel and that we were constraint to prefer 'Back to Town' procedure of the Indian Custom. The procedural requirements took abnormal time and that we could not recover the gas through spent for transportation back to our place, this consignment were made on C & F terms of supply and lack 'insurance coverage' and that we incurred total loss of Argon whereas sale has been booked. The further cost incurred on account of procedural aspects and transportation etc., resulted no result nor we could recover anything from customer. Total loss booked on this account came around INRs above 25 lacs/-(copies of all relevant expense vouchers are attached)." On the top of it; in compensation to our previous year's Trading Activities of Liquid Argon; Evaporization loss of Argon gas as 'Loss during transit' were 9 times higher than previous year. It is submitted that in order to sell more quantities of LAr; we delivered the LAr at a longer distances wherein weight loss during transit is quite obvious. It may pleased be appreciated that last year LAr sold in terms of quantity were 550472 at a loss of 2850 kgs(o.518%) current year's activities of trading of Liquid Argon sold quantities were
ITA No. 1508 & 1593/Ahd/2014 6 . A.Y. 2009-10 1799038 at a losses to the tune of 81006 kgs. (4.51%); this includes above instance of 19500 kgs. (Of a total loss case). And further more we faced acute competition these years and lost our monopoly kind of status so far. Hope this year being full of abnormalities on all front we could not add any strength to the worth of the company but soon we could recover." 4.1. The submission of the assesses has been carefully perused. First of a/I it is more relevant to mention here that there is a sharp decrease in gross profit by 17.87%, i.e.Rs.3,73,18,804/- (17.87% of Rs.20,88,34,944/-). The reasoning explained by the assessee is discussed in analytical forum as under: A. Replacement of 6 unit of LNG Vaporizers amounting to USD 98175. The assessee, after long discussion, arrived that it had incurred at about Rs.45 lakhs on this count. If the submission of the assessee is considered the first effect of decrease in profit is Rs.45 lakhs. B. Liquidated damages is deducted by M/s. BOC India Ltd. The assessee claimed to have suffered liquidated damages worth Rs.10,75,000/- on account of liquidated damages. The assessee also substantiated such loss with documentary evidences viz., contractual agreement etc. The assessee explained Rs. 10,75, ODD/- on the second count. C. M/s. Air Liquide Newzealand deducted sum of USD 23302 as loss of repairs. On the third count, the assessee claimed cost of repairs to the tune of USD 23302. The conversion value in terms of Rs.9,96,888/- as explained in the earlier submission. Thus, Rs.9,96,888/- had been explained on the third aspect. D. Loss on Argon Gas The assessee explained that 81006 kgs of Argon gas were lost. The approximate value has been derived by FIFO method at per kg cost of Rs.29.04. Without prejudice, if the contention of the assessee is accepted though not acceptable, Rs.23,52,414/-(81006 x Rs.29.04 per kg) comes under the fourth explanation put forth by the assessee. In nut shell, the assessee explained four reasons as above. The assessee some how succeeded in explaining reasons for decrease in gross profit by Rs.88,97,302/-. However, there is a vast difference in gross profit by Rs.3,73,18,804/- (Rs.6,84,35,210 minus Rs. 3,11,16,406) as against assessee some how succeeded to explain to the extent of Rs.88,97,302/- only. There remains un- reconciled and unexplained reason for decrease in gross profit to the tune of Rs.2,84,21,502/-. Therefore, the book result declared by the assessee is not acceptable. The case is decided on merits. 4.2 By the Finance Act, 1995, the law was amended inasmuch as insertion of section 145 of the Act, i.e. Method of Accounting. Further provisions of section 44AA mandates the assessee to maintain books of account in accordance
ITA No. 1508 & 1593/Ahd/2014 7 . A.Y. 2009-10 with the provisions of Income-tax Act to enable the Assessing Officer to compute the total income of the assessee. The books of account are defined in the section 2(12A) of the Act which includes ledgers, day-books, cash books, account-books and other books which the assessee failed to produce in entirety to enable this office to compute the total income of the assessee. Thus, the assessee failed to maintain books of account as per ambit of sec. 44AA r.w.s. 2(12A) of the Act. Thus, I have reason to believe that the books of assessee are window-dress and don't reflect true and correct picture of state of affairs of the business of the assessee. It is clinching to note here that the assessee's business result were as high as 32.74% (Gross profit ratio) in the immediately preceding assessment Year, The business result of the assessee drastically reduced to 14.90% (gross profit) that to assigning any reasons thereof rather four reasons impacting the profit at about Rs.88,97,302/-. In short, the books of the assessee are rejected being in contravention to provision of sec. 145 and 44AA r.w.s. 2(12A) of the Act. 4.2.1 The lengthy discussion supra is to arrive at the conclusion that as per costing analysis, the fixed cost more or less remains static and variable on the other hand increases. There might be adverse proportion by (±) 0.5% to 1% in the formal tendency of increase in sales. More particularly it is to enlighten here that the sales in the year under consideration was at his pinnacle then preceding years'. The book result of the assessee is nothing but flaw and is rejected being in contravention to the provisions of section 145 of the Act. The important task here is to determine income of the assessee. The best possible yardstick is nothing but the assessee's own business results of past year. The gross profit of the previous assessment year is applied and the income of the assessee is determined by virtue of provisions of section 145 of the Act. 4.3 The crux of the above is that gross profit ratio of 32.77% is determined and the gross profit of Rs. 6,84,35,210/- (32.77 % of 208834944) is determined as against Rs.3,11,08,OOO/- declared by the assessee. 4.3.1 Out of the above gross profit so determined at Rs. 6,84,35,210/-, keeping in view administrative cost, other cost, depreciation etc. expenditure of Rs.3,27,89,389/- allowed as operational/Administrative expenditure. The allowable administrative expenditure are arrived at by deduction an amount of Rs.3,06,339/- on account of higher depreciation claimed on Hydraulic Cram from the total administrative cost of Rs.3,30,95,728/-. The issue of depreciation on Hydraulic Grain is discussed in para 5 of the order. Apart from the expenditure allowable of Rs.3,27,89,389/-, the assessee is also allowed abnormal expenditures of Rs.88,97,302/- as explained by the assessee on four aspects - page 6 supra. 4.3.2. In short, the expenditure of Rs. 4,16,86,691 (Rs. 3,27,89,389+Rs.88,97,302) are considered as administrative expenditures
ITA No. 1508 & 1593/Ahd/2014 8 . A.Y. 2009-10 and other expenses on various counts and allowed form the gross profit determined at Rs. 6,84,35,210/-. . 4.4 To sum up the issue, the net profit remained in the hands of the assessee is Rs.2,67,48,519/- (Rs. 6,84,35,210 minus Rs. 4,16,86,691/-) is taxed in the hands of the assessee."
Thereafter, assessee preferred first statutory appeal before the ld. CIT(A) who partly allowed the appeal of the assessee.
We have gone through the relevant record and impugned. There was a loss of Argon Gas in transit is 20,999 Kgs. against sale of 15,19,509 Kgs. of domestic sales. This is equivalent to 1.36% which is considered below normal in this trade.
The loss of Argon Gas in export is 40,507 Kgs. (60,007 Kgs. minus 19,500 Kgs - Explanation accepted). This pertains to the following transactions: i) MJC Global Services 22,500 Kgs. ii) Metal House Ltd. 18,000 Kgs. Total 40,500 Kgs.
The assessee has produced all the books of accounts before the Ld. A.O. from time to time as discussed in the appellate order page no. 8 to 10 and various expenses were accepted by the lower authorities which were mentioned in the profit and loss account.
Assessee is subjected to Excise rules and Excise Authority did not point out any defect in the register/record of the assessee. Books of accounts are duly audited and all products used as input are excisable and eligible for CENVAT and output products are also liable to excise duty. Complete record of inventory is maintained and Statutory Auditors of Company have verified and certified such
ITA No. 1508 & 1593/Ahd/2014 9 . A.Y. 2009-10 quantitative records and same is part of page no. 9 to 10 of appellate order and Argon Gas cannot sell in an open market.
In support of its contention, assessee cited following case laws: 1. Maddi Sudarsanam Oil Mills Co. Vs. CIT 37 ITR 369 (AP) where further addition on account of cash credit was found to be unjustified where the profit was estimated at a flat rate on rejection of accounts. The Hon'ble Court held that the I.T. authorities cannot adopt a flat rate to compute gross profit as well as rely on the books for purpose of adding unexplained cash credit which were the part of the scheme of balance in the accounts. 2 In Indwell Constructions Vs. CIT 232 ITR, 776 (AP), the addition of expenditure shown in P & L Account by invoking the provisions of sec. 40 in respect of interest and salary paid to partners was held to be unjustified in a case where the books of accounts were rejected and income is estimated. It was held that the deductions referred to in sec. 29 are deemed to have taken into account while making estimate including disallowance u/s. 40. 3. In CIT Vs. Aggrawal Engineering Co. (Jai) 302 ITR 246 (P&H) the addition from undisclosed sources u/s. 68 and 69B was found to be unjustified In the case of a contractor where profit was estimated by application of N.A. rate as it was held that once net profit rate was applied, no further addition was called for in respect of unaccounted purchases and introduction of cash in the facts and circumstances of the case. 4. In CIT vs. Banwarilal Bansidhar 229 ITR 229 (All.), the disallowance u/s. 40A (3) was found to be unjustified where income was estimated at a G. P. rate by rejecting the books of accounts of the assessee. 5. In ACIT vs. Renu Mukherjee 15 DTR 205 (Del.), the arbitrary additions and disallowances without any basis were unjustified where assessment was made by application of net profit. 6. In ACIT Vs. Padamchand Bhansali 85 TTJ 215 (Jodhpur) and New Narayan Builders Vs. ITO 43 TTJ 508 (Ahd.), the disallowance u/s. 40A (3) was found to be unjustified where income was estimated at a G.P. rate by rejecting the books of accounts of the assessee. 7. CIT vs. G.K.Contractor 19 DTR 305 (Raj.) 8. Teja Constructions Vs. ACIT 129 TTJ 57 (Hyd.) wherein the Hon'ble Tribunal held that in a case where assessment is made by invoking the provisions of sec. 145, no further addition u/s. 40(a)(ia) could be made.
In this case, GP of the assessee has been estimated and out of these all expenses including depreciation have been allowed as deduction. And respectfully
ITA No. 1508 & 1593/Ahd/2014 10 . A.Y. 2009-10 following the aforesaid orders of the Hon’ble Court/Forum, we dismiss the appeal of the Revenue.
Now we come to ITA No. 1593/Ahd/2014 Assessee’s appeal for A.Y. 2009-10. The assessee has taken following grounds of appeal: 1. The Ld. Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and in facts in holding that the quantitative records maintained by the appellant in compliance with the Excise regulations can only be taken to record the quantities of purchase and sales and cannot be taken as complete as the loss in transit or yieldare not checked by the Excise authorities. 2. The Ld. Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and in facts in holding that the quantitative records maintained under Excise regulations cannot be taken as quantitative records and in absence of quantitative records being separately maintained, the books of accounts cannot be said to be complete 3. The Ld. Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and in facts in dismissing the findings of the Ld. A.O. with respect to the maintenance of quantitative records and acceptance of completeness of books of accounts. Such dismissal is made by the Ld. CIT(A) on the basis of his own findings and without affording any opportunity to the Ld. A.O. in this respect and thereby not following the ratio of the decision of the jurisdictional High Court in the case of CIT Vs. Pradyuman M. Patel 41 taxmann.com 405. The findings of the Ld. CIT(A) in this respect are thus required to be quashed. 4. The Ld. Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and in facts in holding that the quantitative details and records as furnished by the appellant in support of the claim of loss of Argon gas of 81,006 Kgs. is not correct and that such finding is concluded without affording any opportunity of being heard to the appellant and hence is required to be quashed. 5. The Ld. Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and in facts in not appreciating the various submissions and explanation furnished with respect to the fall in Gross Profit Rate during the year and has without any sound basis held that the G.P. rate for the year under consideration ought to be 25.46% and has accordingly directed the estimation of income by applying such rate to the turnover obtained resulting into an addition of Rs. 1,65,98,304/-. Such addition, having no basis in facts, is prayed to be deleted.
Facts of the case have been discussed in detail in connected appeal of the Revenue, therefore, for the sake of convenience, we do not want to repeat here.
ITA No. 1508 & 1593/Ahd/2014 11 . A.Y. 2009-10 12. As per CIT(A) page no. 34 has held that the total loss of Gas 81006 Kgs and rate of the Argon Gas is Rs. 29 per Kg and it comes to Rs. 5,22,174/-. Therefore, we confirm the addition of Rs. 5,22,174/- and remaining addition is directed to be deleted.
In the result, appeal filed by the Assessee is partly allowed.
Order pronounced in Open Court on 30 - 04- 2019
Sd/- Sd/- (WASEEM AHMED) (MAHAVIR PRASAD) ACCOUNTANT MEMBER True Copy JUDICIAL MEMBER Ahmedabad: Dated 30/04/2019 Rajesh Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) – 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER
Deputy/Asstt.Registrar ITAT,Ahmedabad