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Income Tax Appellate Tribunal, “E” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
These cross appeals are directed against the order dated 27.3.2015 passed by the learned CIT(A)-12, Mumbai and they relate to A.Y. 2011-12. Both the parties are aggrieved by the decision of the learned CIT(A) with regard to the income estimated by the AO.
Facts relating to the issue are stated in brief. The assessee is engaged in business of manufacturing, refining and trading in edible oils and vanaspati.
2 M/s. Kamani Oil Industries Private Limited During the course of assessment proceedings, the Assessing Officer called for various details from the assessee. The Assessing Officer noticed that the GP rate has come down to 6.80% during the year under consideration from 10% reported in the immediately preceding year. The Assessing Officer further noticed that the assessee has maintained quantity details for raw materials and finished goods, but did not maintain quantity details relating to inter process manufacturing. Hence, the Assessing Officer took the view that the assessee has failed to explain reasons for fall in GP rate to his satisfaction. Accordingly, he rejected the books of account and estimated the GP rate at 9% of the sales turnover. Accordingly, he added difference amount arising on account of difference in GP rate to the total income of the assessee, which worked out to ` 15.99 crores.
In the appellate proceedings, the learned CIT(A) did not agree with the view taken by the Assessing Officer and accordingly, set aside the order of the Assessing Officer in rejecting the books of account and also in estimating GP by taking GP rate at 9%. However, the learned CIT(A) made a lump sum addition of ` 1 crore on account of non-correlation of consumption of input and output material and for any leakages. For the sake of convenience, we extract below the operative portion of the order passed by Ld CIT(A):- “I have carefully considered assessment order as well oral/written submissions of the Ld. AO and AOs report on Ld. AR's submission. It immensely transpires that the AO had heavily relied on fall in gross profit rate in comparison of proceeding year, although turnover was increased substantially. The assessee had explained with relevant factual data that price of imported raw material was increased substantially and there was no corresponding increase in sale price. Relevant explanation is reproduced as under :
“The main reason for decline in gross profit is due to increase in cost of raw material consumed The appellant imports Crude Palm Oil and Crude Palm Karnel Oil which are the major raw mater/al (about 70 to 75% for its finished products. The oil prices are very volatile and fluctuate on daily a basis. The appellant submit that, the cost of computation of raw material was 79.03% sales in A.Y 2010-11 whereas the same is 81,64% of sales during the year under consideration. The appellant submit that during the year under consideration there is a sharp increase in the oil prices of 3 M/s. Kamani Oil Industries Private Limited crude palm oil and crude palm karnel oil used as its raw material. In support, the appellant filed before the A.O. a) A statement showing the variation in gross profit rates during the year under consideration as compared to earlier year. b) The appellant also filed before the A0 a few invoices for purchase of raw material which clearly shows that the rate of oil consumed has increased during the year under consideration as compared to that of earlier year.
The appellant further submit that although the prices for raw materials increased but due to acute competition in the business, the average rate of sale did not increase in the same proportion. The appellant therefore submit that due to increase in average rate of cost of raw material over and above the increase in average rate of sale, the net direct cost during the year under consideration has increased, which resulted in to lower gross profit percentage as compared to that of earlier year. From the comparative statement filed (refer page no. 129) it is evident that the average rate of raw material consumed per MT for A. Y. 2010-11 was approximately Rs. 56,535/, Thus, the average rate per MT is increased by Rs. 15,603.39/- per MT in AY 2011-12 as compared to earlier year i.e. A,Y 2010-11. Further average rate of sale per MT in AY 2010-11 was at approximately Rs. 52,960,73/- whereas in A.Y. 2011-12 the same is approximately Rs. 67,153.37/- per MT The appellant therefore submit that although the average rate of cost of raw material consumed has increased by approximately Rs, 15,603.39/- per MT whereas the average rate of sale has increased only by Rs. 14,192.64/- per MT Hence, the net average cost of raw material has increased by Rs. 1,41075/- over and above the increase in average rate of sale which has resulted into increase in cost of raw material consumed and consequent reduction in percentage of gross profit (refer page no. 129).”
The explanation of the assessee could not be rebutted by the Assessing Officer either in assessment proceeding or remand proceeding convincingly as it has force of facts. Be that at it may, mere fall in Gross Profit rate cannot be a ground for rejection of books of account which has been settled by judicial pronouncements, out which few are relied upon by Ld. A.R. in his submission, and which are squarely applicable to the facts of the instant case. Here, the Ld. A.R. is able to substantiate reasons for fall in Gross Profit rate. Moreover, no other infirmity or defect could be detected either during assessment proceeding or remand proceedings. It is undisputed that neither there is a inflated purchase or purchase price nor bogus/sham purchase. There is no instance of any bogus expenditure or inflated expenditure. Similarly, there is no instance or evidence of either suppression of any sale price or suppression of any sale. The stock register is also maintained. The excise records are also maintained. No quantitative or qualitative defect or infirmity could be detected either from 4 M/s. Kamani Oil Industries Private Limited excise records or regular records. The A.O. himself had also fairly mentioned that stock details were furnished along with a detail write up on the impact of the input price on profitability for the year (para 2.4 of assessment order). Moreover, tally of quantitative data was submitted before the A.O. wherein total quantity consumed under different heads of raw materials and final output as a whole was furnished (para 2.7 of assessment order). In given facts and circumstances, neither books of accounts can be rejected nor any estimation of profit on proceeding year's basis is justifiable. It is seen from the data provided by the Ld. A.R. that in past also, G.P. was to the extent of 4.40%, 4.8%, 5.5%, 6.86%, 6.78% etc. It is true that it was at 10.24% and 10.30% in two years. Thus, G.P is in variation and therefore, it cannot be basis for rejection of books of accounts in absence of any other vital defects like i.e. bogus/inflated purchases/expenses/suppressed sale/sale price, discrepancy in opening stock or closing stock or valuation thereof, wastage or shortage etc. Hence, there is no case for rejection of books and estimation of profit @ 9%. Accordingly action of the A.O. is not justifiable in given facts and addition made by the A.O. requires to be deleted. The A.O.'s main and sole concerns was that correlation to the consumption and output for each input is not possible and the A.O. himself fairly admitted in pare 2.8 of the order that the very nature of the manufacturing process makes it difficult to have any reasonable and determinable correlation of output vis a vis the input. He further admits that it is practically not feasible to tally the quantum of consumption and gross profit arising therefrom. However, such facts cannot justify huge quantum of addition made by the A.O. and rejection of books. Accordingly, rejection of books and estimation of GP @ 9% stand deleted. However a lump sum addition of Rs.1 crore would meet the end of justice and would meet the A.O’s concern for non correlation of consumption of input and output material and any leakages.”
The revenue is aggrieved by the decision of Ld CIT(A) in setting aside the rejection of books of account and consequential relief granted. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the addition to the extent of Rs.1.00 crore.
The Ld A.R submitted that the assessee, being a private limited company, has maintained records as required under Companies Act. He submitted that the turnover of the assessee has increased by about 40% during the year under consideration, vis-à-vis the immediately preceding year. He submitted that the assessee has maintained proper records for the raw materials and also for finished goods. He submitted that the assessee has manufactured and sold the virgin oils and also Vanaspathi by mixing certain oils, fat etc. He
5 M/s. Kamani Oil Industries Private Limited submitted that the quantity details have been properly maintained for both the items. He submitted that the Tax auditor has examined the stock register maintained by the assessee and reported the same in his tax audit report. He submitted that the assessee has given quantity details of raw materials in page 69 of the paper book, which shows that the percentage of yield shown by the assessee was 99.09% and the shortage was only 0.91%. He further submitted that there is no wastage in the finished goods. He submitted that the wastage of 0.91% shown in the raw material consumption is well comparable in the earlier years, wherein higher wastage was shown and the same was accepted. Accordingly the Ld A.R submitted that there is no reason to suspect the books of accounts maintained by the assessee.
He submitted that the assessee has furnished a detailed note to the AO explaining the reasons for the fall in the G.P ratio. He submitted that the submissions made to the AO are placed at page 82-84 of the paper book. He submitted that the assessee imports crude palm oil and crude palm kernel oil from the international markets, which constitute major raw material of the assessee. He submitted that the cost of raw material has increased during the year under consideration and the assessee could not make corresponding increase in the selling rate due to acute competition. He submitted that the raw material cost accounted for 78.03% of the sales in the immediately preceding year, whereas the same has accounted for 81.64% during the year under consideration. Since the sales has increased from Rs.522.76 crores to Rs.726.82 crores during the year under consideration, the raw material consumption at higher rate was more during the year under consideration. Inviting our attention to page 86 of the paper book, the Ld A.R submitted that the assessee has furnished month wise details of raw material cost from April 2010 to March 2011 and compared the same with corresponding rates in April 2009 to March 2010.
The Ld A.R further submitted that the assessee has sold the Coconut oil, Corn/Maize oil and Ground nut oil without mixing. He submitted that the 6 M/s. Kamani Oil Industries Private Limited sales of these oils constitute major portion of oils. He submitted that mixing activity is done in respect of Vanaspathi and the details thereof are placed at page 113 and 126 of the paper book. He submitted that the quantity details of vanaspathi also matche and hence there is no basis for the AO to come to the conclusion that the non-maintenance of quantity records for inter process activities would result in evasion of income.
The Ld A.R further submitted that the assessee has maintained books of account and quantity records in the similar manner and the same was accepted by the AO in AY 2009-10 and he did not make any addition thereof. The Ld A.R further submitted that the assessee has furnished all the details before the AO as well as before the Ld CIT(A). Convinced with the details furnished by the assessee, the ld CIT(A) called for a remand report from the AO, but the AO did not make any submission except stating that these details were furnished before him during the course of assessment proceedings also. The Ld A.R submitted that the Ld CIT(A) was convinced with the details of stock maintained by the assessee and accordingly held that there was no case for rejection of books of accounts. Having held so the Ld CIT(A) has, however, sustained addition to the extent of Rs.1.00 crore on adhoc basis without giving any reason or basis. The Ld A.R submitted that the Ld CIT(A) was not justified in sustaining the addition to the extent of Rs.1.00 crore and accordingly pleaded that the same should be deleted.
On the contrary, the Ld D.R submitted that the assessee has furnished quantity details on overall basis in the Tax audit report. He further submitted that the assessee has shown higher G.P. rate of 10% in the immediately preceding year and the reasons given by the assessee for fall in G.P rate were not convincing to the AO. Accordingly he stood by the order passed by the AO.
We heard the parties and perused the record. We have noticed that the AO has rejected the books of accounts mainly for the reason that there was fall in the G.P rate. However the contentions put forth by the assessee as well as 7 M/s. Kamani Oil Industries Private Limited the details furnished before the tax authorities would show that the assessee has given proper reason for the fall in the G.P rate, i.e., there was increase in the raw material cost and the assessee could not make corresponding increase in the selling price due to acute competition. The above said submission of the assessee is corroborated by the fact that the sales turnover of the assessee has increased by about 40% during the year under consideration. We notice that the assessee has given detailed notes to the AO explaining the reasons for the fall in the G.P rate. We notice that the assessee has also substantiated the explanations by furnishing the copies of purchase invoices to prove that the raw material cost has increased during the year under consideration vis-à-vis in the immediately preceding year.
We further notice that the assessee has given an additional “Note on Gross profit” before the AO and the same is placed at pages 127-128 of the paper book. A perusal of the same would show that the average cost of raw material has increased from Rs.40,932/- per MT to Rs.56,535/- per MT resulting in an average net increase of Rs.15,603/- per MT. However, the average selling price has increased from Rs.52,960/- per MT to Rs.67,153/- per MT resulting in a net increase of Rs.14,192/- per MT. Thus there is mismatch of Rs.1,411/- (Rs.15603/- less Rs.14,192/-) between the net increase in purchase rate and selling rate. This difference of Rs.1,411/- on the purchase of 1,04,952 MT of raw material has dented the Gross profit by Rs.14.80 crores. The assessee has further submitted that other direct costs and depreciation have also increased during the year to the tune of Rs.1.96 crores. Thus, we notice that the assessee has reconciled the fall in gross profit rate with facts and figures. However, we notice that the AO has simply rejected the same without finding fault with the explanations so given by the assessee.
In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in holding that the AO has not made out a proper case for rejecting the books of accounts. On the contrary, we notice that the assessee
8 M/s. Kamani Oil Industries Private Limited has convincingly explained the reasons for the fall in G.P rate. Accordingly we uphold the order of Ld CIT(A) in setting aside the order of rejection of books of account.
Since the assessee has explained the reasons for the fall in G.P rate and since the normal loss declared by the assessee is much lower than earlier years, we are of the view that the non-maintenance of inter process record has not impacted the profit of the year. We notice that the assessee has been maintaining same set of books of accounts and stock register year after year and they have been accepted by the AO in the past. Even otherwise, the assessee has reconciled the quantity details of raw materials and finished goods category wise. Under these set of facts, we are of the view that the Ld CIT(A) was not justified in making adhoc addition of Rs.1.00 crore. Accordingly we set aside the order of Ld CIT(A) in confirming the addition of Rs.1.00 crore.
In the result, the appeal filed by the assessee is allowed and the appeal of the revenue is dismissed.
Order has been pronounced in the Court on 8.2.2017.