FUTURISTIC OFFSHORE SERVICE OF CHEMICAL LTD,MUMBAI vs. ITO 1(1)(3), MUMBAI

The only issue in this appeal of assessee is against the order of CIT(A) confirming the levy of penalty by the AO under section 21(1)(c) of the Act. For this assessee has raised following ground: -

At the outset, the learned Counsel for the assessee took us through the Tribunal Order in dated 19-10-2012, in quantum appeal, at Para 10 which reads as under: - “10. The next issue is as to whether the addition as confirmed by the learned CIT(A) is in accordance with law. It may be noticed here that the Revenue has not preferred any cross appeal in this case and hence the issue is as to whether the AO was justified in making the addition of `4.89 crores as against `2.09 crores confirmed by the CIT(A). Rather the case of the assessee is that even addition of `2.09 crores is excessive in the peculiar circumstances of the case. As we have also noticed, the assessee has not furnished books of account and no material was placed before the AO to come to a Futuristic Offshore Service of Chemical Ltd.; A.Y:04-05

In view of the above, the learned Counsel for the assessee stated that the Tribunal has confirmed the order of CIT(A) restricting/estimating the loss at Rs. 2.09 crore and against the loss estimating by AO at Rs. 4.89 crores. According to him, the CIT(A) has estimated the loss at 22.22% as against the original declared loss of the assessee at 66.67%. The learned Counsel for the assessee stated the reasons for fall in gross profit ratio comparing to two years was that GP ratio of 2 years are comparable only under normal circumstances and in FY 2003-04 relevant to the AY 2004-05, the circumstances and facts are exceptional compare to previous two years as in this year total sale Revenue was at Rs. 8.63 crores as Futuristic Offshore Service of Chemical Ltd.; A.Y:04-05 against the sale Revenue of Rs. 49.13 crore in previous year 2002-03 relevant to AY 2003-04. He explained that this fall of sale in Revenue is for the tune of Rs. 40.49 crores which is 82.42%. Hence, he stated that this will be just impossible to ask that GP ratio of both the years will have same percentile. He referred to the AO’s order, wherein he himself admitted the fact that Revenue of the Company has come down by almost 6 times compare to previous year i.e. the assessment year 2003-04. The learned Counsel for the assessee drew our attention to the submissions filed before CIT(A) in quantum appeal and the relevant Para 6.2 sub-Para 2 which reads as under: - “2) In earlier years’ plant was operated at its optimum level and as a result requires bulk purchases of raw material i.e. Benzene from Reliance Industries Ltd and other supplier; and as a result assessee was getting a good quantity discount for bulk purchases from suppliers, which Is one of the reason for reducing partially per unit cost of raw material. After premature termination of ONGC contract all the working capital banks withdrew the support and hence assessee has no other alternative left but to operate the plant from its own internal accruals which are very short. In absence of working capital facility suppliers were charging higher price for supply of raw material in which financing cost was very high. During the year there was very less purchase of raw material and hence the suppliers of raw materials had not given any discount. When plant capacity was evenly used throughout the year without any major intervention then all the expenses including raw inciter/al are to be allocated and apportioned to quantity of finished goods produced using absorption costing method but when the capacity utilization itself was at very low level then automatically per unit cost of finished goods will be very high because the essential fixed expenses can not be avoided. When plant was not running regularly and (here were frequent shut downs due to scarcity of resources Page 4 of 7

In view of these facts, the learned Counsel for the assessee stated that the assessee has neither concealed the particulars of income nor furnish the inaccurate particulars of income. The learned Counsel for the assessee also filed the comparative statement showing increase / decrease in gross profit / loss and percentage increase / decrease in gross profit / loss for the FY 2002-03 to FY 2004-05 in term of percentage of expenditure and turnover. The learned Counsel for the assessee stated in the relevant year the percentage of expenditure is at minus 26.41% as against the expenditure in AY 2005-06 at minus 132.06%. The learned Counsel stated that in AY 2005-06 no disallowance on account of this loss was made while framing the assessment under section 143(3) of the Act. The learned Counsel for the assessee stated that the major expenditure is on account of power and fuel which is at Rs. 4.33 crores in AY 2003-04 and in this year i.e. AY 2004-05 it is 1.93 crore. Accordingly, the learned Counsel for the Futuristic Offshore Service of Chemical Ltd.; A.Y:04-05 assessee made submission that the entire disallowance made by AO at Rs. 4.89 crores are based on estimates, which was substantially reduced by CIT(A).

We find from the facts of the case that the assessee is a sick industrial company and registered with BIFR for rehabilitation as per the provisions of SICA Act, 1985. In this case the AO levied the penalty u/s 271(1)(c) of the Act in respect to fall in gross profit ratio which was calculated on the presumption basis by way of comparing gross profit ratio of the current year with that of the preceding years. We also find that while passing assessment order by the AO for AY 2004-05, the AO has compared the basic condition precedent for comparing gross profit ratio for 2 years. But in the present case the facts narrates otherwise and GP ratio of two assessment years i.e. AY 2003-04 and the relevant AY 2004-05 are not comparable because there are extra ordinary deviation in the current year from this tender norms of profit rates. We find that AY 2004-05 is very exceptional year in comparison to previous 10 years as in this year Revenue of sales as come down to Rs. 8.63 crores as against the sales Revenue of Rs. 40.49 crores which is almost down by 82.42%. Under these circumstances, this will just be impossible to assume that GP ratio of both the years will have same percentile because Revenue of company has dropped by six times of the previous year than the current year. Here, the expenditure of the enterprise is also to be considered and the expenditure consists of three components i.e. totally variable expenses, semi variable expenses and fixed expenses. According to us, in the given facts and circumstances of the case, in the present case plant was running at optimum level than only variable expenses varies in proportion to the production volume but other semi variable expenses and fixed overhead expenses will not vary in same proportion and will remain almost same. Due to these expenses only the profit rate increases or decreases as the case may be. In such circumstances, whether on estimate basis penalty u/s 271(1)(c) can be levied for concealing the particulars of income within the meaning of explanation 1 to section 271(1)(c) of the Act. According to us, in the present case the AO made addition of Rs. 4,89,27,544/- towards estimation of gross profit ratio which was restricted by the CIT(A) at Rs. 2,09,06,461/- just on the basis of estimates. Page 6 of 7

In view of the above facts and circumstances of the case, we refer to the decision relied on by learned Counsel for the assessee of Hon’ble Rajasthan High Court in the case of CIT v. Mahendra Singh Khedla (2012) 252 CTR 453(Raj), wherein it is held that where addition made by AO were based on estimates only, no penalty could be levied u/s 271(1)(c) of the Act. Hon’ble High Court observed in Para 8 as under: -

In the result, the appeal of assessee is allowed. Order pronounced in the open court on 04-04-2017.