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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Futuristic Offshore Service of Income Tax Officer, Chemical Ltd. Ward 1(1)(3) 1st Floor, Dena Bldg, 53 M.K. Vs. Mumbai RD, Marine Lines Mumbai-400 002 Appellant .. Respondent PAN No. AAACG1524C Assessee by .. Shri Yojesh A. Thar & Ms. Ritu Panjabi, AR Revenue by .. Shri B.S. Bist, DR Date of hearing .. 04-04-2017 Date of pronouncement .. 04-04-2017 O R D E R PER MAHAVIR SINGH, JM:
This appeal by the assessee is arising out of the order of CIT(A)-1, Mumbai, in appeal No. CIT(A)-I/IT-14/2012-13 dated 30-08-2013. The Assessment was framed by ACIT Central Circle 15 & 16, Mumbai for the A.Y. 2004-05 vide order dated 26-12-2006 under section 143(3)(ii) of the Income Tax Act, 1961 (hereinafter ‘the Act’). The penalty under dispute was levied by the ITO ward 1(1)(3) under section 271(1)(c) of the Act vide order dated 26-03-2012.
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: -
“1) This is an appeal filed against the order of Ld. CIT(A)-1 dated 30.08.2013 passed under section 271(1)(c) of the act for A.Y.2004-05.
2) The learned CIT(A) is not justified in confirming the penalty u/s 271(1)(c) of the Act for Rs. 80,48,987/- which initially was imposed by Income tax officer on the ground Futuristic Offshore Service of Chemical Ltd.; A.Y:04-05 of additions made by AO for fall in Gross Profit(GP) ratio of current year in-comparison to that of and preceding year.
The learned CIT(A) fails to understand the basic fact that when turnover of the current year has dropped by 6 times as compared to preceding year then how GP of 2 years can be comparable under such uneven circumstances.
Concealment penalty u/s 271(1)0 can be imposed when assessee has concealed the particulars of his income or furnished inaccurate particulars of income. In this case AO has made such addition just on the basis of comparison of GP ratios of 2 years without considering the fact that appellant company is a public limited listed entity and its annual accounts were audited by independent Statutory Auditors and no were auditors have indicated that there were deficiencies in the appellant company’s books. So there was no reason with AO to make such additions on estimation basis.”
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
conclusion as to whether the explanation of the assessee is reasonable or not. The AO categorically mentioned that the assessee did not furnish complete details. Before the learned CIT(A) the assessee filed statements of gross profit/loss for the previous three assessment years to show that even if the expenditure is to be compared with the earlier years the loss can at least be taken at 22.22% whereas the assessee originally declared a loss of 66.67%. Since itemised details were not furnished the learned CIT(A), based on the available material, accepted the GP sheet as prepared by the assessee and while arriving at the GP ratio at 22.22% the gross loss works out to `2.09 crores. It is well settled that while estimating the income it is difficult to maintain exactitude. So long as the estimate is reasonable, based on the facts available on record, the appellate authorities should not interfere with the estimate made by the lower authorities. In the instant case no fresh material was furnished before us to indicate that even the CIT(A) has committed an error in restricting the GP ratio (loss) to 22.22%. Under these circumstances we do not find any infirmity in the order passed by the CIT(A). Accordingly, we confirm the order of the CIT(A) and dismiss the appeal filed by the assessee.”
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
Futuristic Offshore Service of Chemical Ltd.; A.Y:04-05 then to restart a plant again and again also consumes more fuel and power as it requires very high heating to restart the plant. As a result, cost of power and fuel also increased Also due to frequent shut down of plant due to power cut on account of delay in payment of power bills many times our raw material batch lying in the plant for processing were getting spoiled and the resultant finished goods processed after restart of plant have fetch very negligible price. As a result of this raw material consumption ratio has been increased from 79 to 88% during the current year in comparison to previous year. Please find herewith month wise details of expenses incurred and revenue generation. From the table it is very much clear that even though after October, 2003 there was no revenue generation but still there are certain expenses which cannot be avoided in general.
Hence disallowance made on the basis of comparison of GP and two totally uneven years is not at all justified and the said addition is required to be deleted.”
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
Futuristic Offshore Service of Chemical Ltd.; A.Y:04-05
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: -
“The above finding of the Tribunal makes it clear that additions made by the Assessing Officer were based on estimation only. A fact or allegation based on estimation cannot be said to be correct only, it can be incorrect also. Therefore, in the facts and circumstances of the case, penalty was wrongly levied by the Assessing Officer. The basis for levying penalty in the present case is only estimation, which is purely a question of fact and there is a concurrent finding of fact recorded by first appellate authority as well as the appellate Tribunal both.”
In view of the above facts of the present case and judgment of Hon’ble Rajasthan High Court cited supra, we delete the penalty levied by AO and confirmed by CIT(A).
In the result, the appeal of assessee is allowed. Order pronounced in the open court on 04-04-2017.