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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI VIKAS AWASTHY, HONBLE & SHRI S. RIFAUR RAHMAN, HONBLE
O R D E R PER S. RIFAUR RAHMAN (AM)
This appeal is filed by the revenue against order of the Learned Commissioner of Income Tax (Appeals)-8, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 26.02.2019 for the A.Y.2012-13.
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., 2. Brief facts of the case are, assessee filed its return of income on 29.09.2012 declaring total income of ₹.NIL after set off of brought forward business loss of ₹.4,36,921/-. Assessee declared book profits u/s. 115JB of Income-tax Act, 1961 (in short “Act”) of ₹.3,32,838/- on which tax liability was computed. The return of income was processed u/s. 143(3) of the Act. The case was selected for scrutiny under CASS and notice u/s.143(2) and 142(1) of the Act were issued and served on the assessee. In response AR of the assessee attended and submitted the relevant information as called for.
During the assessment proceedings Assessing Officer observed that the assessee declared Gross Profit of 7.44% when compared to previous two Assessment Years the Gross Profit declared by the assessee is too low compared to the Gross Profit declared by the assessee 49.91% and 57.93% in A.Y. 2011-12 and 2010-11 respectively. When the assessee was asked to explain huge variation in the Gross Profit ratio compared to previous two Assessment Years, in response assessee submitted letter dated 09.03.2015, contents are reproduced below: - "The plates are received in different sizes which are bigger ones and are cut as per specifications of the customer requirement and instructions. The volume in F.Y.2010-11 for plates was much lower and activities had started in last two months of the said year. The volume increased
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., to almost 10 times in F.Y.2011-12 which can be seen from the attached data. The main reason for decline in Gross Profit Ratio is process loss in said business as well as low realization from the scrap sales on waste generated in process loss. It is submitted that due to inadvertent error and initial period of the activities in February and March, 2011, the stock has been reflected in the annual accounts for the year ended at full, however, process loss for the said two months were not considered while considering the closing stock value in that year. During the year, as explained earlier that activities for the year under consideration comprises period of 12 months (full year) as compared to last two months in last financial year and in view of the same, the closing stock for the year under consideration was correctly reflected and on account of increase in process loss as well as low realization of the scrap sales, there has been variation in the gross profits. It is further submitted that there is no defect in the books of account which are duly audited and therefore, no adverse inference should be drawn with regard to gross profit."
Assessing Officer after considering the submissions of the assessee rejected the same and observed that assessee mainly attributed the variation in Gross Profit to the process loss as well as low realization of the scrap sales. He observed that the submissions made by the assessee are more general and not supported with any documentary evidences. The assessee itself admitted that there is an error in valuation of closing stock for the A.Y. 2011-12 which raises question about the correctness of the books of account maintained by the assessee. Further, Assessing Officer observes certain discrepancies in short term loans and advances of the balance sheet. He observed that assessee has shown balance with Excise Authorities of ₹.2,65,53,607/-. However, he noticed from Exhibit
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., 6 to Para 22(a) of Tax Audit Report in Form 3CD; the details of cenvat credit availed or utilized during the year, the balance cenvat credit is shown at ₹.2,48,61,108/-. When the assessee was asked to explain assessee has submitted the details as under: -
Cenvat Cenvat Cenvat Sr. Nature credit Closing Name of the Party credit Credit no. of Exps. Opening bal availed utilized Balance 1 Opening balance as per - - - - 3,63,34,277 RG 23A Part II 2 Fujifilm India Pvt Ltd, Purchase 2,46.08,803 3,61,00,470 - 3 Closing Balance as per - - - - 2,48,42,610 RG 23A Part II
Not convinced with the submissions of the assessee, the Assessing Officer made the additions to the extent of ₹.3,64,69,277/- with the following observations: - “4.7 As aforementioned, have already invoked the provisions of section 145 of the Act and rejected books of accounts based on the finding that the book results are not reliable. So, essentially it will have to be an assessment to the best judgement and reasoned estimate. As discussed above, the assessee has declared gross profit ratio of 7.44% for A.Y.2012-13, 49.61% for AY 2011-12 and (57.93% for A.Y.2010-11. In view of the facts brought on record as discussed above the gross profit ratio for the year under consideration is taken as the average of gross profit ratio declared by the assessee for three consecutive assessment year viz., A.Yrs.2012-13, 2011-12 and 2010- 11, which works out to 38.33%. The assessee has declared sales of Rs. 11,80,65,079/- during the year under consideration. The gross profit @ 38.33% on the sales declared works out to Rs.4,52,54,344/- whereas the assessee has declared gross profit of Rs 87,85,067/ Therefore, the difference in gross profit of Rs.3,64,69,277/- is hereby added back to the total income of the assessee. By not declaring the correct profits of the business, the assessee has not only concealed the taxable income but also furnished inaccurate particulars of income. Penalty proceedings u/s.271(1)(c) of the Act are initiated
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., separately for the default committed within the meaning of that section.
Aggrieved with the above order assessee preferred an appeal before the Ld.CIT(A) and filed detailed submissions before him. Ld.CIT(A) after considering the detailed submissions allowed the ground raised by the assessee with the following observations: -
“3.1.10 The gross profit arrived by the appellant company is calculated after considering sales and services of the following products/services. a) Trading-Printing Plates. b) Trading- Film Rolls. c) Trading-Packing Material & Sheets d) Slitting & Sheet Charges e) Printing Plates finishing charges, 3.1.11 The appellant has incurred drastic losses in respect of Trading in Printing Trading of printing plates. 3.1.12 The average rate of printing plates are Rs.290 for A.Y.2012- 13 and average sale rate is Rs.299 for A.Y.2012-13. The appellant company has scraped 36,327 printing plates at the average rate of Rs.40.75 per sqmtr, therefore, generating the scrap receipt of Rs.14,80,398/- instead of Rs.1,08,65,687/-( 36327*299.11) if it has been actually sold at the earlier rate. Thus, it incurred a loss of Rs.93,85,289/- from wastage of printing plates during A.Y.2012-13. Trading of Film Rolls 3.1.13 In A.Y.2011-12, a total of 61,566 qty of film rolls had been sold. However, only 169 qty was sold in A.Y2012-13. Therefore, gross profit in A.Y.2012-13 has been reduced drastically. Further, 4194 qty has been scraped which are not saleable, and even if the sale of that is counted, then also, the gross profit will be 15%.
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., Gross profit therefore, for A.Y.2012-13, 2011-12 and 2010-11 are as follows:- A.Y.2012-13 A.Y.2012-13 Trading Printing Slitting & Trading Trading Packing plates Particulars Sheeting Total Printing Hates Film Rolls Materials & finishing Charges sheets Charges Opening Stock 41,26,282 457,729 6.00.0439 51,84,450 10,75,9037 Purchase 10,75,53,884 34,890 2,100 4 Finished Goods - - Purchased Manufacturing 6,48,102 226 6,48328 Expenses
1,37,60,466 30,97,562 11,80,65,07 Sales 10,11,71,701 35350 9 Closing Stock 35,43,210 - 6,00,439 - - 41,43,649
Gross profit (76,13,357) (4,57,495) (2,100) 1,37,60,466 30,97,562 8735,076 A.Y.2011-12 A.Y. 2011-12 Trading Printing Trading Slitting & Trading Packing Plates Particulars Printing Sheeting Total Film Rolls Materials & Finishing Plates Charges sheets Charges Opening Stock - 3,77,509 5,83,034 9,60,543 Purchase 13084,212 5539,924 2,66,322 139,40,458 Finished Goods - - - - . - Purchased Manufacturing 2,39,930 2,12,002 4,51,932 Expenses
Sales 89,23,200 78,84,513 73,104 1,24,16,485 7,86,606 3,00,83,908 Closing Stock 41,26,282 457,729 6,00,439 » - 51,84,450
Gross Profit (2,74,660) 21,62,807 (1,75,813 1,24,16,485 7,86,606 1,49,15,425
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., A.Y.2010-11 A.Y.2010-11 Trading - printing Trading Slitting & Trading Film Packing Plates Particulars printing Sheeting Total Rolls Materials & Finishing Plates Charges sheets Charges Opening Stock - - 29,527 29,527 Purchase - 12,25,945 17,44,539 29,70,484 Finished Goods - - - - Purchased Manufacturing - 489,572 4,89,572 Expenses - Sales - 9,69,748 11,88,574 38,53,078 - 60,11,400 Closing Stock - 3,77,509 5,83,034 - - 9,60,543 - Gross Profit - (3,68,260) (2,458) 38,53,078 * 34,82,360 3.1.14 In view of the above, I find that the!' major cause for the fall in the gross profit was because of booking of scrap of printing plates and rolls in the assessment year under consideration. In support of the same, sale and purchase register along with the copy of invoices are also submitted by the appellant for A.Y.2012-13. 3.1.15 Moving further, it is found that the A.O may proceed under Section 145(3) under any of the following circumstances: Where he is not satisfied about the correctness or completeness of the accounts or b) Where method of accounting cash or mercantile has not been regularly by the assessee; or (c) Accounting Standards as notified by the Central Government have not been regularly followed by the assessee. 3.1.16 Now, though the fall in G.P rate definitely provides a ground to the Assessing Officer for invocation of the provisions of Section 145(3), yet it alone is not a sufficient condition. The Assessing Officer is required to analyse various other parameters which have the effect on the gross profit rate of the assessee for the relevant period, before drawing any conclusion on the merit of such claim. The fall in G.P rate might be a symptom of malaise with which the assessee's account would be suffering. However, it is the duty of the Assessing Officer to pin-point the malaise and bring it out in the Assessment Order by marshalling the facts encompassing the same. In the case of low Gross Profit rate there could be inflated purchases or unrecorded sales, besides manipulation in the valuation of closing stock.
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., Therefore, the Courts expect that the Assessing Officer shall bring on record specific defects in the books of account of the assessee before invoking the provisions of Section 145(3). The rejections of books of account simply on the basis of lower G.P rate in comparison to earlier years or with other assessees placed in similar circumstances would not suffice and will not stand the test of appeal, especially when the decline is completely explainable as in the case of the present appellant. 3.1.17. …. 3.1.18 In the absence of a definite finding that the case falls within the ambit of Section 145(3), the rejection of books of accounts cannot be sustained merely on the fact that the gross profit of the assessee is low during the relevant period as compared to book results of other years. Similarly, the system of accounting adopted by the assessee cannot be rejected merely on the ground that the gross profits disclosed by his books were low as compared unfavourably with those of others in the same line of business. 3.1.19 I have found no valid reasons for rejection of books of accounts as provided by the assessing officer. I find that there is no justifiable reason for rejecting the books of account of the assessee for the year under consideration. Further, the loss on account of the scrap sale which has resulted into reduction in gross profit for the year under consideration was not considered by the AO. I also find that the AO has not considered the fact that the business of the manual camera rolls and related products is declining in this digital era. It is no longer a bright business as it used to be. Therefore, in view of the facts and circumstances of the case and the relevant explanation submitted by the appellant, the assessing officer is directed to delete the addition on account of difference in estimated gross profit of Rs. 3,64,69,277/-. This ground of appeal is, therefore, allowed.”
7. Aggrieved revenue is in appeal before us raising following grounds in its appeal: - “1. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was correct in deleting on merits the addition of Rs. 3,64,69,277/- made by the Assessing Officer after rejecting the books of accounts of the assessee?
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was correct in admitting additional evidence (A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., submitted by assessee during appellate proceedings in violation of Rule-46A of the Income Tax Rules and further whether he was correct in adjudicating on the additional evidence provided without calling for remand report from the AO by giving the AO opportunity under Rule 46A? 3. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was correct in not recognizing that the assessee had failed to explain how there was Cenvat Receivable for the related Previous Year of Rs. 2,46,25,266/- and Cenvat credit utilized at Rs.3,61,00,470/- from Fuji Films India Pvt Ltd., a trading concern when the said concern was registered only on 13.01.2012? 4. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of Assessing Officer be restored.
5. The appellant craves leave to amend, alter, delete or add grounds which may be necessary.”
8. At the time of hearing, Ld. DR submitted that the Ld.CIT(A) deleted the additions made by the Assessing Officer even though Assessing Officer has rejected the Books of Accounts submitted by the assessee. Further, Ld.CIT(A) admitted the additional evidences submitted by the assessee during the Appellate Proceedings without giving proper opportunity to the Assessing Officer which is in violation of Rule 46A of the I.T. Rules. He submitted that assessee has declared profit very low and the profit has declined drastically during this year. Ld.DR supported the findings given by the Assessing Officer and reasons why he has rejected the Books of Accounts.
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., 9. Further, he submitted that the assessee has miserably failed to explain how there was cenvat credit receivable for the related previous year and cenvat credit utilized during the year from Fuji Films India Pvt. Ltd., which is a trading concern when the said concern was registered only on 13.01.2012.
Further, he raised a query that when assessee is only doing job work how it can generate scrap. Therefore, he submitted that Ld.CIT(A) has violated Rule 46A of I.T. Rules and he prayed that the issue may be remitted back to the file of the Assessing Officer.
On the other hand, Ld. AR submitted that no doubt assessee has filed additional evidences but Ld.CIT(A) not relied on such additional evidences. He brought to our notice Page No. 26 of the Ld.CIT(A) order. Further, he brought to our notice Page No. 56 of the Paper Book which is the submissions made by the assessee before the Assessing Officer which contain the data relating to reduction of Gross Profit and various reasons to the Assessing Officer in particular he brought to our notice Exhibit 6 of Modvat Receivable and filed the copies of sample invoice copy which shows the details of Fuji Films India Pvt. Ltd., transactions.
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., 12. He also brought to our notice Page No. 58 of the Paper Book to show the statement of scrap sales in A.Y. 2011-12 and 2012-13 which is also filed before Ld.CIT(A). He submitted that all these informations were submitted before the Assessing Officer also. Further, he brought to our notice Page No. 116 of the Paper Book-2 which is the 142(1) notice issued by the Assessing Officer and in response assessee has filed all the relevant details before him. He also brought to our notice Page No. 3 of the Paper Book-1 to submit that assessee has submitted various informations relating to business activities with all other information before the Assessing Officer.
He also brought to our notice Page No. 120 of the Paper Book to highlight that assessee has submitted the detailed note on the reasons for reduction of Gross Profit. Further, he brought to our notice Page No. 6 of the Assessment Order to submit that Assessing Officer has rejected the Books of Accounts merely observing that discrepancies in booking of cenvat credit. Finally, he objected to the additions made by the Assessing Officer and he supported and relied on the findings of the Ld.CIT(A).
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., 14. In the rejoinder Ld.DR submitted that in Page No. 27 of the Ld.CIT(A) order the details reproduced by the Ld.CIT(A) is the information which is extracted from additional evidences.
With regard to Ground No. 3 he brought to our notice Page No. 61 of the Paper Book to submit that assessee has utilized cenvat credit even though the Fuji Films India Pvt. Ltd., was registered only on 13.01.2012, how assessee has utilized the cenvat credit even though this company was registered only on 13.01.2012.
In response Ld. AR brought to our notice Page No. 59 of the Paper Book to submit that assessee has filed the copy of invoice of Fuji Films India Pvt. Ltd., only as sample, the date mentioned in that invoice and not the registration date of the Fuji Films India Pvt. Ltd.,. The Fuji Films India Pvt. Ltd., is a renowned company which is in existence for several years.
He brought to our notice Page No. 57 of the Paper Book which is the submissions made by the assessee before the Assessing Officer explaining the transactions with Fuji Films India Pvt. Ltd., and further, he relied on the following case laws: -
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., Sr.No. Case Law Citation Page No. “Books of Accounts maintained by an assessee, which are otherwise regularly audited, cannot be rejected by the AO under section 145(3) of the Income-tax Act, 1961 unless he is able to demonstrate, with cogent material, any defects or discrepancies in the books of accounts so maintained by the assessee. The fact that queries raised were not appropriately responded to by assessee also cannot led to rejection of books of accounts of 2016 dated 25.6.18 (Bom) 1. PCIT v. Time & Space Haulers 1-3 2. PCIT v. Swananda Properties (P.) Ltd. [2019] 267 Taxman 429 (Bom) 4-9 Fall in gross profit ratio, in the absence of any cogent reasons could not, by itself, have been a ground to reject the books of accounts in entirety and frame best judgment assessment on hypothetical basis by applying a particular gross profit ratio 3. CIT v. Smt. Poonam Rani [2010] 326 ITR 223 (Del) 10-14 4. PCIT v. IBILT Technologies Ltd. [2018] 98 taxmann.com 255 (Del) 15-24 5. ACIT v. Budhalal & Co. [2011] 47 SOT 27 (Ahm) 25-36 Books of accounts which are regularly maintained and duly audited, free from any qualification by the auditors, should be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Revenue to show that the Books of accounts were incorrect or incomplete 6. CIT v. Paradise Holidays [2010] 325 ITR 13 (Del) 37-40 7. St. Teresa's Oil Mills v. State of Karela [1970] 76 ITR 365 (Ker) 41-45 AO cannot reject the books of account of an assessee under section 145 only on the basis of surmises and conjecture. The onus is on him to demonstrate any defects or discrepancies 8. ITO v. M/s. Eternity Jewels ITA No. 1318/Mum/2016(dtd 4.2.19) 46-51 In any case, insignificant mistakes or defects pointed out by the AO cannot be a valid basis to reject books of account of an assessee under section 145 of the Act 9. CIT v. Padamchand Ramgopal [1970] 76 ITR 7 19 (SC) 52-53 Without prejudice, while making addition in gross profit rate of assessee, AO cannot take as a comparable a period wherein the business was operational for the whole of year, whereas, the other was functional only for a period of two months 10. CIT v. Mahan Marbles (P.) Ltd. [2013] 354 ITR 238 (Raj) 54-62
Considered the rival submissions and material placed on record, we observe from the record that Assessing Officer during the assessment proceedings observed certain discrepancies in RG 23A book and not satisfied with the submissions made by the assessee proceeded to make
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., an addition on the difference adhoc net profit being 38.33% (average Gross Profit of previous three years) as against the book profits declared by the assessee. We observe from the record that assessee has submitted a detailed note and data for the reasons of decline in Gross Profit particularly in trading of film rolls, printing plates and also packing materials.
The chart submitted before the Ld.CIT(A) for the purpose of brevity it is reproduced below: - Particulars A.Y. 2012-13 A.Y. 2011-12 A.Y. 2010-11 Opening Stock 51,84,450 9,60,543 29,527 Purchase 10,75,90,883 1,89,28,153 29,70,484 Finished Goods Purchased - 1,655 - Manufacturing Expenses 6,48,328 4,51,932 4,89,572 11,34,23,661 2,03,42,282 34,89,581 Sales 11,80,65,079 3,00,83,908 60,11,400 Closing Stock 41,43,649, 51,84,450 9,60,543 12,22,08,728 3,52,68,358 69,71,943 Gross Profit 87,85,067\ 1,49,26,075 34,82,362 Gross Profit Ratio 7.44% 49.61% 57.93%
From the above chart, we observe that the financial data in the above chart indicates that assessee’s sales in A.Y. 2010-11 is only ₹.60.11 lacs and in A.Y. 2011-12 it is increased to ₹.3 Crores. The business was growing in these two Assessment Years and no doubt the profit declared by the assessee is abnormal in the previous assessment years. The assessee has achieved sales of ₹.11.81 Crores during the impugned
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., assessment year. Further, we observe that assessee has explained the reasons for incurring loss in trading of printing plates and trading of film roles. As per the informations submitted it clearly indicate that the reasons for fall in Gross Profit was due to booking of scarp of printing plates and roles in the earlier assessment year.
We have already observed in the earlier para that assessee has declared abnormal profit in the last two previous Assessment Years, it clearly indicates that assessee has booked the loss in scrap of printing plates and roles only in this assessment year.
We observe that Assessing Officer has rejected the Books of Accounts only on the basis of the lower Gross Profit declared by the assessee when compared to earlier Assessment Years. From the Assessment Order, we observe that there is nothing on record or reasons why rejection of books by the Assessing Officer. In the absence of proper reasons for rejection of books and when the Books of Accounts maintained by the assessee which are otherwise regularly audited without there being any defects or discrepancies, the Assessing Officer cannot reject the Books of Accounts.
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., 23. From the findings of the Ld.CIT(A), we observe that Ld.CIT(A) has considered the various submissions and came to proper conclusion that Assessing Officer cannot estimate the profit merely on the basis that in earlier Assessment Years assessee has declared more profit.
Further, we observe that revenue has filed a ground objecting that Ld.CIT(A) has accepted the additional evidences without giving proper opportunity to the Assessing Officer under Rule 46A of I.T. Rules, we observe that Ld.CIT(A) has coterminous power to verify the records or admit the evidences submitted before him. Since Ld.CIT(A) has power to enhance which means it is only an extension of assessment proceedings. He has power to entertain the evidences submitted before him particularly when the informations were already submitted before the Assessing Officer. Therefore, the ground raised by the revenue are dismissed.
We observe from the record that Assessing Officer has estimated the income based on the average Gross Profit declared by the assessee, this Method of adopting the profit is not proper method. Assessing Officer should have calculated actual Gross Profit earned by the assessee as under: -
(A.Y: 2012-13) M/s. A.B. Color Pvt. Ltd., Particulars Amount in ₹. Amount in ₹. Total Sales 15,41,60,387 Opening Stock 29,527 purchases 12,94,89,520 Direct expenses 15,89,832 13,11,08,879 (-) Closing stock 41,43,649 12,69,65,230 Gross profit 2,71,95,157 Gross Profit percentage on sale 17.640
Since assessee has already declared Gross Profit in A.Y. 2010-11 and 2011-12, it cannot be reversed. Hence he should have given credit and finally arrived at the actual profit. Rejecting books without properly bringing on record the proper reasons are bad. Therefore, we do not find any infirmity in the findings of the Ld.CIT(A) in this regard.
With regard to Ground No. 3, Ld. AR clearly brought on record that the commencement date of the Fuji Films India Pvt. Ltd., mentioned in the ground of appeal is not correct. Therefore, we are inclined to reject this grounds of appeal also. Therefore, we do not find any infirmity with the findings of the Ld.CIT(A).