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Income Tax Appellate Tribunal, “E”, BENCH
Before: SHRI M.BALAGANESH, AM & SHRI AMARJIT SINGH, JM
आदेश / O R D E R PER M. BALAGANESH (A.M): These appeals in 3321/Mum/2017 for A.Y.2011-12 & 2010-11 respectively arise out of the order by the ld. Commissioner of Income Tax (Appeals)-21, Mumbai in appeal No.CIT(A)- 21/ITO-13(3)(4)/IT-421/2015-16 dated 06/02/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 28/03/2014 by the ld. Asst. Commissioner of Income Tax, Palghar (hereinafter referred to as ld. AO). Since identical issues are involved in these appeals, they were heard together and are being disposed off by this consolidate order, for the sake of convenience.
3323/Mum/2017 M/s. Tarapur Transformers Ltd.,
The first identical issue involved in these appeals is with regard to estimation of gross profit of the assessee. The facts of Asst Year 2010-11 are taken up for adjudication and the decision rendered thereon would apply with equal force for Asst Year 2011-12 also except with variance in figures.
The brief facts of this issue are that the assessee is engaged in the business of manufacture and repair of electrical transformers and had filed its return of income for the Asst Year 2010-11 on 11.10.2010 declaring total income of Rs 1,42,93,346/-. The ld AO observed that during the course of assessment proceedings, the assese submitted copy of return along with computation of total income together with tax audit report and its annexures, the details called for were furnished partly. The ld AO observed that the books of accounts in PDF form and some box files containing purchase bills for regular transactions and for purchase of fixed assets were produced for verification which were verified on test check basis. The ld AO observed that assessee has show gross receipts of Rs 32,98,49,592/- with gross profit of Rs 6,26,97,384/- (GP ratio of 19.01%) and net profit of Rs 2,64,55,414/- (NP ratio of 8.02%), in comparison with immediately preceding assessment year wherein the GP ratio and NP ratio was declared at 22.02% and 12.61% respectively. The assessee had explained for the reduction in GP and NP ratios to be reduced margins, delayed payments from customers, reduction in sale prices , under utilization of capacity etc. The ld AO observed that the books of accounts in PDF form were produced at the fag end by the assessee and hence the same could not be verified by him. The assessee also explained before the ld AO that books of accounts and some files were seized by the sales tax department and hence was unable to produce the same. The assessee also produced a copy of the receipt of 3323/Mum/2017 M/s. Tarapur Transformers Ltd., sales tax department evidencing the seizure of books. However, the PDF version of the books of accounts were available with the assessee and the same were accordingly produced for verification. The ld AO observed that he had deputed his Inspector to verify the said fact of seizure by the sales tax department and it was learnt that the seizure of books were pertaining to earlier years and not the year under consideration. The ld AO observed that on 28.3.2013, the assessee submitted various ledger accounts in PDF format. Accordingly, the ld AO concluded that the assessee had intentionally submitted the books at the fag end to ensure that the same does not get verified by him.
3.1. The ld AO however proceeded to verify the reasons for fall in GP and NP ratio during the year when compared to earlier year. He observed that since the income from commodity transaction was a separate business altogether, the GP and NP ratios excluding income from commodity transactions were called for. The ld AO reproduced the comparative chart of GP and NP ratios for the three years both including and excluding commodity transactions as under:-
GP and NP ratio including MCX trading transactions Asst Year GP ratio NP ratio 2008-09 30.77% 18.78% 2009-10 22.02% 12.61% 2010-11 19.01% 8.02% GP and NP ratio excluding MCX trading transactions Asst Year GP ratio NP ratio 2008-09 32.12% 18.65% 2009-10 26.38% 15.04% 2010-11 22.08% 9.26%
3323/Mum/2017 M/s. Tarapur Transformers Ltd., 3.2. The ld AO observed that the GP ratio and NP ratio had reduced by 4.30% (26.38% - 22.08%) and 5.78% ( 15.04% -9.26%) during the year when compared to that of earlier year. On perusal of profit and loss account, it was observed by the ld AO that certain expenses viz Power and Fuel and other direct expenses have increased many fold as compared to earlier year eventhough there was not much increase in turnover during the year. He observed that power and fuel had increased by 67% whereas the increase in turnover was only 21% compared to earlier year. In case of direct expenses, he observed that the same had increased by 34% as against 21% increase in turnover. The ld AO also observed that the assessee failed to justify the stock valuation done at the end of the year.
3.3. In view of the aforesaid observations, the ld AO resorted to estimated the GP ratio at 25% as against the GP ratio shown by the assessee excluding MCX trading transactions at 22.08% and made an addition to the difference of 3.92% at Rs 1,10,78,005/- ( 28,26,02,171 * 3.92%).
3.4. The ld CITA deleted the addition by observing as under:- “8.4. I have considered the facts on record and the submissions filed carefully. The assessing officer has stated that there is not much increase in sales turnover but the actual facts are contrary. The details tabulated shows that turnover excluding MCX transactions increased from Rs 10.95 crores to Rs 22.05 crores and then to Rs 28.26 crores. The appellant has given evidence that it has bid lower to obtain contracts. The turnover has certainly gone up. As per the appellant this is at the cost of profitability. The main raw material is copper and evidence has been filed "to show that the prices of the raw materials increased during the year. Similar evidence of increase in prices is filed for transformer oil. The appellant has filed reasons for increase in expenses on power but the same has not been appreciated by the assessing officer. There is nothing brought on record to show that power consumption is proportional to sales turn over. The appellant manufactures transformers. In fact power expenses on oven
3323/Mum/2017 M/s. Tarapur Transformers Ltd., installed at WADA , if at all, is more in the nature of fixed costs. Without specifying defects in books or proving significant non-genuine expenses, GP addition cannot be justified. Further, there is no basis given to assume 25% as the norm for gross profit. Even the difference based on 25% gross profit and actual at 22.08 % is 2.92 % and not 3.92 % erroneously considered by the assessing officer. The assessing officer in the remand proceedings did not address why the explanation of the appellant for fall in gross profit is not acceptable. In these facts the addition made on account of low GP is not justified and is therefore deleted. The ground of appeal no 5 is therefore allowed.”
3.5. Aggrieved, the revenue is in appeal before us.
3.6. We have heard the rival submissions. We find that the ld DR argued that there is no question of rejection of books by the ld AO as the same were produced by the assessee only at the fag end of the assessment proceedings to prevent any verification by the ld AO. Moreover, the assessee had mislead the department by stating that the books were seized by the sales tax department when it proved that from the verification carried out by the Inspector that the seizure of books were done for the earlier years and not for the year under consideration. We find that the ld CITA had directed the ld AO to verify the books of accounts during appellate proceedings by way of a remand. The entire bills were also produced before the ld CITA by way of additional evidences under Rule 46A of the Rules. We find that the ld AO in the remand report did not utilize the said opportunity of verifying the books of the assessee and merely objected to admission of additional evidences by the ld CITA as is evident from the remand report enclosed in page 73 of the paper book. Since the ld AO had stated in his remand report that the issue be decided on merits of the case, the ld CITA had decided the issue on merits pointing out certain factual mistakes committed by the ld AO as could be seen from his observations hereinabove. We find from page 22 of the Paper Book containing the ledger account of Electricity charges,
3323/Mum/2017 M/s. Tarapur Transformers Ltd., that the same had been paid by the assessee to the state government on which no deficiency was pointed out by the ld AO except stating that it had increased when compared to earlier year. We also find from the comparative chart showing purchases and sales for Asst Years 2009-10 and 2010-11 wherein it could be found that purchases cost had increased during the year under consideration and sale price had decreased during the year under consideration. We find from page 13 of the Paper book containing significant accounting policies of the assessee company wherein with regard to valuation of inventories , it had been mentioned as under:- Raw materials are valued at cost. Work in progress (WIP) is valued at Cost Plus estimated value of overheads. Finished Goods are valued at cost or net realizable value whichever is lower.
3.6.1. We are inclined to accept the argument of the ld AR that the overheads could only be estimated with regard to overheads attributed to the stage of completion of transformers. Hence there could be no fallacy in the said accounting policy adopted by the assessee. We find that eventhough the ld AO states that the assessee could not justify the stock valuation done at the end of the year, no separate addition was made towards closing stock by the ld AO. All these factors collectively contribute to reduction in GP and NP ratios of the assessee when compared to earlier year. We find that the ld AR placed reliance on the co-ordinate bench decision of this tribunal in the case of Harish K Alimchandani, Saico Engineers & Fabricators vs JCIT in dated 19.6.2013 in support of his contentions. He also placed on record that copy of the order of the Hon’ble Jurisdictional High Court in ITA No. 2427 of 2013 dated 20.6.2016 approving the said tribunal decision. In view of the aforesaid observations, we hold that the 3323/Mum/2017 M/s. Tarapur Transformers Ltd., ld CITA had given detailed reasoning for giving relief to the assessee and hence we do not find any infirmity in his reasoning. Accordingly, the grounds raised by the revenue for Asst Year 2010-11 are dismissed.
3.7. For Asst Year 2011-12, the turnover of assessee had been reduced practically by 80%, whereas the expenditures are to be incurred by the assessee as they are fixed in nature. Hence obviously it would lead to reduction in profit in Asst Year 2011-12. For this year, there was only gross loss. However, the ld AO estimated the GP at 20% . We find from pages 20 to 26 of the paper book of the assessee that there were lot of warranty obligations which had to be met by the assessee during the Asst Year 2011-12 in respect of sales made in Asst Year 2010-11 as per the contract. Hence this had also contributed to reduction in net profit in Asst Year 2011-12. We also find from the comparative chart reflected in page 33 of the order of the ld CITA with regard to the break up of revenue from Asst Years 2009-10 to 2011-12, that the revenue from repairs of transformers was 44.4% during the year when compared to that of the earlier year of 13.09%, whereas the revenue from sale of transformers during the year was 55.60% when compared to that of earlier year of 78.13%. We find lot of force in the argument of the ld AR that the margings from repair works would be very less when compared to that of sale of transformers. Moreover, in Asst Year 2010-11, the assessee had trading sales which was completely absent in Asst Year 2011-12. The assessee also produced the copy of purchase bills to prove the rate of variation in copper (which contributes almost 40% of raw material cost). All these factors collectively had contributed for reduction in GP and NP margins during the year under consideration, which fact has been rightly appreciated by the ld CITA. Hence we do not find any 3323/Mum/2017 M/s. Tarapur Transformers Ltd., infirmity in the order of the ld CITA in this regard. Accordingly, the Ground No.1 raised by the revenue for Asst Year 2011-12 is dismissed.
The last issue to be decided in the appeal of the revenue for Asst Year 2011-12 is as to whether the ld CITA was justified in deleting the disallowance made by the ld AO on account of increase in office and administrative expenses of Rs 61,15,842/- in the facts and circumstances of the case.
4.1. The ld AO observed that office and administrative expenses had substantially increased from Rs 1,39,36,108/- to Rs 2,00,51,950/- despite the steep decrease in turnover of the assessee. Accordingly, he disallowed the difference of Rs 61,15,842/- ( 20051950 – 13936108) in the assessment. The ld CITA deleted the same by observing as under:-
“8.4. I have considered the submissions carefully. Perusal of the assessment order does indicate that the expenses have been disallowed on an ad-hoc basis by disallowing the increase in administrative expenses over the preceding year. There is no finding that any of the expenses claimed is found to be non-genuine or bogus. The claim in respect of IPO is covered in the next ground in respect of section 35D. In these circumstances, the ad-hoc disallowance of the expenses is not justified. The disallowance is therefore deleted and ground of appeal no 5 is allowed.” 4.2. Aggrieved, the revenue is in appeal before us.
4.3. We have heard the rival submissions. We find that the assessee had furnished the unitwise details of office and administrative expenses during the year under consideration. From the same, we find that majority of the expenses incurred during the year are fixed in nature and were towards employees cost, travelling and conveyance, legal and professional charges etc. which had nothing to do with the sales. These
3323/Mum/2017 M/s. Tarapur Transformers Ltd., are fixed expenses and expenses of peculiar nature (i.e for legal and professional charges) and had to be incurred irrespective of the fact whether there is increase in turnover or not. We find that the ld AO had not held that the expenses incurred by the assessee are not genuine or had been incurred for non-business purposes. His only grievance is that there was no increase in turnover during the year and hence there was no need to have increase in office and administrative expenses, ignoring the fact that these are fixed expenses which are to be incurred at any cost by the assessee. We also find that the list of office and administrative expenses admittedly included loss on sale of fixed assets in the sum of Rs 1,01,010/- which had already been disallowed by the assessee in the computation of total income. Even this has been included by the ld AO for computing the disallowance of office and administrative expenses thereby leading to double addition. This goes to prove that the entire disallowance has been made by the ld AO in a cavalier manner. We hold that the ld CITA had rightly deleted the disallowance of expenses in this regard, which does not call for any interference. Accordingly, the Ground No. 2 raised by the revenue is dismissed.
The Grounds 3 & 4 raised by the revenue for Asst Year 2011-12 are general in nature and does not require any specific adjudication.
In the result, both the appeals of the revenue are dismissed.
Order pronounced in the open court on this 05/07/2019