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Income Tax Appellate Tribunal, “ D ” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आदेश / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Revenue against the order of the Commissioner of Income Tax (Appeals)–XI, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-XI/988/2009-10 dated 18/11/2010 arising in the assessment order passed under s.143(3) r.w.s.144(1)(b) of the Income Tax Act, 1961(here-in-after referred to as "the Act") dated 07/12/2009 relevant to Assessment Year (AY) 2007- 08.
The Revenue has raised following grounds of appeal:-
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 2 - 1. The Ld.Commissioner of Income tax (A) has erred in law and on facts in deleting the addition of ₹1,90,23,678/- made on account of difference of job-work. 2. The Ld. Commissioner of Income tax (A) has erred in law and on facts in deleting the addition of ₹1,60,23,176/- made on account of suppressed production. 3. The Ld.Commissioner of Income tax (A) has erred in law and on facts in deleting the addition of ₹3,52,600/- in respect of low GP. 4. The Ld.Commissioner of Income tax (A) has erred in law and on facts in deleting the addition of ₹1,07,220/- for under- valuation of closing stock. 5. The Ld.Commissioner of Income tax(A) has erred in law and on facts of the case in directing the AO to verify the contention fo assessee and to modify the assessment order, in contravention of Sec.251 of the I.T.Act, in respect of the following issues: 1) Addition of ₹99,800/- being suppressed sales of injections. 2) Addition of ₹28,67,000/- being suppressed sales of ointment. 3) Addition of ₹7,67,028/- being suppressed closing stock. 4) Addition of ₹1,81,133/- being freight reimbursement expenses. 5) Addition of ₹13,55,474/- being disallowance u/s.40(a)(ia).
The 1st issue raised by the Revenue is that the Ld.CIT (A) erred in deleting the addition made by the AO for Rs. 1,90,23,678/- on account of the difference in the job work.
Briefly stated facts are that the assessee in the present case is a Private Ltd Company and engaged in the manufacturing business of pharmaceutical products. The assessee in the year under consideration has shown gross sales amounting to Rs. 2,29,65,518/-, Re-sale (R.M. &
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 3 - P.M.) of Rs. 13,84,700/- and the job work charges of Rs. 29,70,886/- only.
4.1. As per the assessee, it has done the job work of the excisable goods on contract basis amounting to Rs. 7,60,94,713/- in the year under consideration. The assessee against such job work has shown gross job work income of Rs. 29,70,886/-only. The assessee also submitted that it has to maintain the gross value of job work done on the excisable goods under the excise law. As such the assessee claimed that the value of the job work is not the turnover of the assessee.
4.2. However, the AO found that the total turnover of the assessee as per excise records comes to Rs. 10,20,31,117/- only. Thus the AO observed a difference of Rs. 7,60,94,713/- {(10,20,31,117.00 – (2,29,65,518.00 + 29,70,886.00)} between the turnover disclosed by the assessee in its audited financial statements and excise records maintained by it. Accordingly, the AO was of the view that the assessee has concealed the job work of Rs. 7,60,94,713/-only. The AO further noted that such job work could not be done without incurring the corresponding expenses. Therefore, the AO worked out a sum of Rs. 1,90,23,678/- being 25% of Rs. 7,60,94,713/- as concealed job work income of the assessee. Thus the AO made the addition of Rs. 1,90,23,678/- to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld.CIT(A). The assessee before the Ld. CIT (A) submitted that it had done the job work
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 4 - in the year under consideration on the loan license basis. This fact was duly disclosed in the excise return filed by the assessee. The assessee further submitted that the provisions of the Excise Act require to show the clearance of all the goods manufactured by it for itself or on a job work basis. Thus the assessee only receives the job work charges on the goods manufactured by it on behalf of outside parties which has been duly disclosed in the income tax return.
The Ld.CIT(A) after considering the submission of the assessee, deleted the addition made by the AO by observing as under:
“6.2. I have considered the submissions made by the A. R. of the appellant and the observations of the assessing officer in the assessment order. The appellant is a manufacturer of pharmaceutical products. Besides own manufacture, it undertakes manufacture of pharmaceutical products by way of job-work from loan-licensees. The Central Excise Return filed by it shows total value of the products cleared at Rs. 10,20,31,117/-. Out of this Rs. 3,89,96,579/- was the value of own products, and the value of products of loan-licensees is Rs. 6,30,34,358/-. On being asked during the course of appellate proceedings [within the terms of Rule 46A(4)], certificate dated 02-11-2010 from M/s. C. Patel & Co. C.As (who audited the appellant's books of accounts u/s. 44AB) was filed affirming the said state of affairs. Appellant's sales during the year were to the tune of Rs. 2,29,65,518/-. Job work income of Rs. 29,70,886/- was admitted by, the appellant. Appellant's books of accounts are audited u/s. 44AB of the Act.
6.2.1. A.O. proposed to adopt the assessable value of products cleared (including the assessable value of products of loan-licensees) as sales of the appellant. As seen from the relevant paras of the assessment order reproduced above, appellant explained that the assessable value of products (as per Central
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 5 - Excise department's Notification : 8/2003-C.E dated 01-Mar.- 2003) can never be equated with sales. Besides it was explained that the products of loan-licensees do not belong to the appellant. The job-work charges received from loan-licensees of Rs.29,70,886/- is already credited to the P & L A/c. 6.2.2. As seen from the judgments in the cases of Indica Laboratories Pvt. Ltd. Vs. UOI - 1990 (50) E.L.T. 210 (Guj. H.C.) and Ashok Pharmaceuticals vs. Commissioner of Central Excise - 2004 (169) E.LT.103 (Tribunal - Chennai), it is an established trade practice that besides own manufacture, one can permit loan- licensees to manufacture pharmaceuticals in one's factory. Such trade-practice is contemplated and permitted under Rules 69A and 74B of the Drugs and Cosmetics Rules, 1945. However, owner of the factory is to maintain the necessary records and pay the Central Excise duty on the assessable value of the entire manufactured goods cleared (including those of loan-licensees, who will be reimbursing the duty to the owner of the factory).
6.2.3. Given the settled and established legal position and trade practices in this regard, the A. O. in the instant case went on to hold that assessable value for Central Excise purposes is synonymous with sales and went on further to hold the value of the products of loan-licensees as sales of the appellant and estimated 25% of the assessable value as income of the appellant. These are the twin fatal flaws in the A.O's findings. In the process, he completely ignored the detailed and repeated explanation offered by the appellant (and reproduced in the assessment as stated earlier in this order). I find the entire approach of the A. O. to be weird and callous. A.O. has not brought on record any material to say that the appellant's contentions are incorrect; or that the loan- licensees are dummies of the appellant. The addition is not at all based on any outside inquires - either with the Central Excise department or with the loan-licensees or with the purchasers of the products. As emerges from the assessment order, the A.O. for the reasons best known to him ignored the facts of the case and the appellant's explanation. He indulged in some fictitious arithmetical exercise to make the addition. In fact the Excise
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 6 - returns filed by the appellant in E.R.-1 (the very basis on which the addition came to be made) show that the appellant is (beside being a manufacturer) engaged in doing job-work of loan-licensees.
6.2.4. In the light of the above discussion, I hold that the addition of Rs. 1,90,23,378/- is entirely unwarranted. It is deleted. This ground of appeal is allowed.”
Being aggrieved by the order of the Ld.CIT (A), Revenue is in appeal before us. The Ld. DR before us vehemently supported the order of the AO.
On the other hand, the Ld. AR before us filed a paper book running from pages 1 to 330 and reiterated the submissions as made before the authorities below.
We have heard the rival contentions and perused the materials available on record. In the instant case, the AO noticed the difference between the turnover shown by the assessee in the financial statements and turnover shown in the excise records amounting to Rs. 7,60,94,713/- which was treated as undisclosed job work carried out by the assessee. Accordingly, the AO worked out the element of profit in such job work at Rs. 1,90,23,678/- being @ 25% of Rs. 7,60,95,713/- and added to the total income of the assessee.
9.1. However, the Ld.CIT (A) deleted the addition made by the AO by observing that there was no concealed job work as alleged by the AO.
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 7 - Now the issue before us arises for our adjudication whether the assessee has concealed its job work income in the given facts and circumstances. In this regard, we find that the addition was made by the AO merely on the basis of the difference of sales shown by the assessee in its books and the excise records. There was no other material available with the AO suggesting that the assessee has carried out any job activity outside the books of accounts.
9.2. The assessee in support of his claim that it has carried out the job work on behalf of other parties has filed the excise returns, production registers, VAT returns, stock registers, declaration filed to the excise authorities, TDS certificate issued by the loan license party. All these documents are available on record. But the AO has not pointed out any defect in such documents.
9.3. The AO was very much empowered to take the confirmation from the loan license party under section 131/133(6) of the Act, but he failed to exercise his powers given under the statute.
9.4. The Ld. DR before us has not brought anything contrary to the finding of Ld. CIT(A). Accordingly, we do not find any reason to interfere in the order of the Ld. CIT(A). Hence, the ground of appeal of the Revenue is dismissed.
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 8 - 10. The 2nd issue raised by the Revenue is that the Ld.CIT(A) erred in deleting the addition made by the AO for Rs. 1,60,23,176/- on account of suppressed production.
The AO during the assessment proceedings found the difference between the production of the goods in the excise records vis-a-vis in the books of accounts of the assessee as detailed under:
Production of tablets and capsules shown in excise return 2,87,91,668 nos. Production of tablets and capsules shown in books of accounts 1,32,35,186 nos. Difference 1,55,56,482 nos
11.1. The difference above in the production was determined at Rs.1,60,23,176/- and the same was added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld.CIT(A). The assessee before the Ld. CIT(A) submitted that the difference in the production is arising on account of the job work carried out by it during the year on loan license basis. As such there was no production of the goods which was not recorded in the books of accounts.
The Ld. CIT(A) after considering the submission of the assessee deleted the addition made by him by observing as under:
“7.2. I have considered the submissions made by the A.R. of the appellant and the observations of the assessing officer in the assessment order.
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 9 -
7.2.1. As seen from relevant paras of the assessment order reproduced above, once again the A.O. turned a blind eye and deaf ear to the facts and to the explanation given by the appellant. He treated the production of Tablets and Capsules of loan-licensees to be the production of appellant. Having made the addition on the total assessable value of products cleared, A.O. further compounded the error by making this addition on quantitative basis of Tablets and Capsules. In view of my finding at paras 6.2. to 6.2.4 above, I hold that this addition of Rs.1,60,23,176/- is extremely unwarranted. It is deleted. This ground of appeal is allowed.”
Being aggrieved by the order of the Ld.CIT (A), Revenue is in appeal before us. The Ld. DR before us vehemently supported the order of the AO.
On the other hand, the Ld. AR before us reiterated the submissions as made before the Ld.CIT (A).
We have heard the rival contentions and perused the materials available on record. At the outset, we note that the AO observed the difference in the production due to the job work carried out by the assessee during the year. We have already adjudicated the similar ground of the Revenue vide paragraph numbers 9 to 9.4 of this order. The reasoning given in ground No. 1 of the Revenue as discussed above will also be applied to this ground as well with full strength. Therefore, we do not find any infirmity in the order of the Ld.CIT(A). Hence, the ground of appeal of the Revenue is dismissed.
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 10 - 17. The 3rd issue raised by the Revenue is that the Ld.CIT(A) erred in deleting the addition made by the AO for Rs. 3,52,600/- on account of lower GP ratio.
The AO during the assessment proceedings found that the assessee has shown gross profit ratio at the rate of 23.71% of its turnover amounting to Rs. 2,73,21,104/- which works out at Rs. 64,77,675/-only. As per the AO, the assessee has shown low GP ratio. Accordingly, the AO has taken the GP ratio at the rate of 25% and determined the gross profit at Rs. 68,30,280/-only. Thus the difference of Rs. 3,52,600/- (68,30,280 – 64,77,675) on account of low GP ratio was added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld.CIT(A) who have deleted the addition made by the AO by observing as under:
“11.2. I have considered the submissions made by the A.R. of the appellant and the observations of the assessing officer in the assessment order. A.O. has not mentioend any basis – G.P. in comparable cases – t estimate G.P. @ 25% as against 23.71% admitted by the appellant. Further it is seen that the G.P. in theimmediately preceding A.Y. 2006-07 was only 22.5% (as against G.P. of 23.71% admitted during the year). Hence, the addition is not sustainable. It is deleted. This ground of appeal is allowed.”
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 11 - 20. Being aggrieved by the order of the Ld. CIT(A), Revenue is in appeal before us. Both the Ld. DR and the AR before us vehemently supported the order of the Authorities below as favorable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. In the instant case, the AO has estimated the gross profit at the rate of 25% without adducing any reason thereon. In our considered view if the AO was not satisfied with the gross profit ratio shown by the assessee, then he should have referred the gross profit declared in the earlier and subsequent assessment year. We find that the assessee in earlier years has shown the GP less than 25% of the turnover. The necessary details of the GP ratios are placed on page 130 of the paper book. But the AO has not made any reference to the GP ratio declared by the assessee in earlier assessment years. Therefore we are of the view that the GP ratio taken by the AO is based on his surmise and conjecture. Thus we do not find any reason to disturb the finding of the Ld.CIT (A). Hence the ground of appeal of the Revenue is dismissed.
The 4th issue raised by the Revenue is that the Ld.CIT(A) erred in deleting the addition made by the AO for Rs. 1,07,220/- on account of undervaluation of closing stock.
The AO during the assessment year found that the assessee has shown its opening stock at the rate of Rs. 0.34 per tablet amounting to Rs. 6,34,312/-only. The AO further observed that the assessee had shown closing stock at Rs. 0.26 per tablet amounting to Rs. 3,53,201/-only. The
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 12 - AO found the difference of Rs. 0.08 per tablet between the opening and closing stock valuation. As per the AO, the assessee should have valued the closing inventory at the rate of 0.34 per tablet only. Thus the AO worked out the difference of Rs. 1,07,220/- on account of undervaluation of closing stock and added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld. CIT(A) who deleted the addition made by the AO by observing as under:
“12.2. I have considered the submissions made by the A.R. of the appellant and the observations of the assessing officer in the assessment order. The valuation of closing stock by the appellant (at cost or market price whichever is lower) cannot be faulted. Addition is unwarranted. It is deleted. This ground of appeal is allowed.”
Being aggrieved by the order of the Ld.CIT(A), Revenue is in appeal before us. Both the Ld. DR and the AR before us vehemently supported the order of the Authorities below as favorable to them.
We have heard the rival contentions and perused the materials available on record. The accounting standard 2 issued by the ICAI requires the assessee to show closing stock either on cost or market value whichever is less. The AO in the case on hand has rejected the valuation done by the assessee without adducing any reason thereon. The Ld. DR before us has also not brought anything on record contrary to the finding of the Ld.CIT (A). Hence we do not find any reason to disturb the finding
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 13 - of the Ld.CIT (A). Hence the ground of appeal of the Revenue is dismissed.
The last issue raised by the Revenue is that the Ld.CIT(A) erred in contravening the provisions of section 251 of the Act by directing the AO to verify the contention of the assessee.
The AO during the assessment proceedings has made the disallowance/ addition of the certain items/expenses as detailed under:
1) Addition of Rs. 99,800/- being suppressed sales of injections. 2) Addition of Rs. 28,67,000/- being suppressed sales of ointment. 3) Addition of Rs. 7,67,028/- being suppressed closing stock. 4) Addition of Rs. 1,81,333/- being freight reimbursement expenses. 5) Addition of Rs. 13,55,474/- being disallowance u/s 40(a)(ia).
The above disallowances/ additions were added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld.CIT(A), who has remitted the matter back to the AO to adjudicate the matter of fresh after verifying the contention of the assessee.
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08 - 14 - 31. Being aggrieved by the order of the Ld.CIT(A), Revenue is in appeal before us. The Ld. DR before us vehemently supported the order of the AO. On the other hand the Ld. AR before us submitted that the AO in giving effect order to the direction of the Ld.CIT (A) has deleted the addition vide order dated 9th June 2011. Therefore, the Ld. AR claimed that the ground of appeal of the Revenue becomes infructuous. The Ld. AR vehemently supported the order of the Ld.CIT (A).
We have heard the rival contentions and perused the materials available on record. At the outset, we note that the Ld. CIT (A) has not restored the matter for fresh adjudication. But it was restored to the AO to adjudicate the issues with the direction. Therefore, we hold that there was not blanket direction provided to the AO which is in contravention to the provisions of section 251 of the Act.
32.1. In addition to the above, we also note that the AO in giving effect order to the Ld.CIT (A) direction has deleted the addition in its order dated 9th June 2011. The copy of the order is placed on record. Thus we are of the view that once addition deleted by AO, there remains no grievance to the AO. Accordingly, the ground of appeal filed by the Revenue does not require to be adjudicated separately. As such the ground of appeal of the Revenue as discussed above becomes infructuous. Accordingly, the ground of appeal of the Revenue is dismissed.
ITA No.292/Ahd/2011 ITO vs. M/s.Navil Laboratories Pvt.Ltd. Asst.Year – 2007-08
32.2. The other grounds raised by the Revenue are general nature and do not require any separate adjudication.
In the result, the appeal of the Revenue is dismissed. This Order pronounced in Open Court on 4/02/2019
Sd/- Sd/- ( RAJPAL YADAV ) ( WASEEM AHMED ) JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 4/02/2019 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS आदेश 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)-XI, Ahmedabad �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 30.1.2019 (word processed by Hon’ble AM in his computer) 2. Date on which the typed draft is placed before the Dictating Member 30.1.2019 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S … 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S…….5.2.19 7. Date on which the file goes to the Bench Clerk…………………5.2.19 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………