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Income Tax Appellate Tribunal, F Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Sandeep GosainSmt. Varsha P. Shah
This appeal by Revenue is directed against the order of the CIT(A)-29, Mumbai dated 12.03.2013 for A.Y. 2009-10.
The facts of the case, briefly, are as under: - 2.1 The assessee, Prop. Of M/s. Dynamo Stamping Industry, and engaged in the business of wholesale trading in imported Cold Rolled Grain Oriented and Cold Rolled Non Grain Oriented material in the form of sheets, coils, etc. filed her return of income for A.Y. 2009-10 on 29.09.2009 declaring loss of `47,02,672/- . The return was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 09.12.2011, wherein the income of the assessee was determined at `3,05,24,970/- in view of the following additions/disallowances: - (i) On account of Low Gross Profit (GP) `1,56,28,9650/- (ii) On account of Dollar Fluctuation `1,01,98,459/- Smt. Varsha P. Shah `91,663/- (iii) Interest expenses disallowed u/s. 36(1)(iii) 2.2 Aggrieved by the order of assessment dated 09.12.2011 for A.Y. 2009-10, the assessee preferred an appeal before the CIT(A) 29, Mumbai on all the above three issues on which additions/disallowances were made. The learned CIT(A) disposed off the assessee’s appeal vide the impugned order dated 12.03.2013 allowing the assessee partial relief; by deleting the additions made in respect of the two items listed at (i) and (ii) in para 2.1 of this order an upheld the disallowance of the interest expenditure of `91,663/- listed at (iii). 3.1.1 Revenue, being aggrieved by the order of the CIT(A)-29, Mumbai dated 12.03.2013 has preferred this appeal raising the following ground: - “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,56,28,960/- made by the Assessing Officer on account of low GP without considering the fact that the assessee was unable to satisfactorily explain the reason for low GP in comparison to previous year.” 3.1.2 The learned D.R. for Revenue was heard in support of the grounds raised (supra). Strong reliance was placed by him on the order of the Assessing Officer (AO) wherein the addition of `1,56,28,960/- on account of low GP was made. It was contended that since the learned CIT(A) had erred in deleting the addition of `1,56,28,960/- made by the AO on account of low GP without considering the fact that the assessee was not able to satisfactorily explain the reason for low GP in comparison to the previous year, the finding of the learned CIT(A) be reversed and that of the AO be restored. 3.2.1 Per contra, the learned A.R. for the assessee supported the impugned order of the learned CIT(A), contending that the learned CIT(A)’s direction to delete the addition on account of low GP made by the AO was in order, in view of the submissions put forth by the assessee. The learned A.R. reiterated the contentions put forth before the authorities below; that the decrease in GP from 15.38% in the immediately preceding year to 5.93% in the year under consideration was, inter alia, due to worldwide recession, Smt. Varsha P. Shah losses incurred due to fluctuation in the rate of dollar and also since there were high seas sales in this year which earned a profit of only 2%. 3.2.2 The learned A.R. also reiterated the submissions made before the learned CIT(A) which are as under: - “(1) The accounts are audited as per the provisions of section 44AB of the Income Tax Act and the Auditors have not given any adverse comments as to the accounts. (2) Entire purchases of the appellant is through imports and payments for the same have to be made through banking channels only. Further, the imports are regulated by the Government as to the price of goods, quality, etc. Further, the sales of the appellant is to reputed parties and the payments for the same has also been received by cheque. There is one to one correlation of purchase and sales, which has been filed with the Assessing Officer and Assessing Officer has not noticed any defects therein. (3) The Assessing Officer has without rejecting the books of accounts or without finding out any flaws in the accounts of the appellant or even without bringing out any comparable cases in the same line of business where the parties have shown a higher gross profit, estimated the gross profit of the appellant as per last year. Your honour would appreciate that the figures of last year cannot be compared with that of the current year due to adverse factors. The Assessing Officer has himself in the order noted that the appellant had sold 2800 MT last year for Rs.31.86 crores as against 2060 MT during the current year for Rs.33.08 crores. Your honour would appreciate from the above that the appellant had sold goods during the year at the average rate of Rs.160.58 per kg as against the rate of Rs.113.78 per kg. last year. Further, though the appellant has sold lesser quantity during the year as compared to last year, the turnover has incurred from Rs.31.86 crores to Rs.33.08 crores during the year. (4) The appellant submits that having accepted recession and adverse market conditions this year, Assessing Officer himself has given 50% reduction. However, there was no justification for even the balance 50% addition of the difference in gross profit, especially when no defections were found in earlier the books of account or in the details field by the appellant by the appellant. It may be appreciated that the Assessing Officer has not rejected the books of accounts of the appellant. (5) The appellant relies on the following decisions. a) Dhakeshwari Cotton Mills Ltd. Vs. CIT (1954) 26 ITR 775 (SC) - the Assessing Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 143(3).
Smt. Varsha P. Shah b) Umachanaran Shah & Bros. Vs. C1T (1959) 37 1TR 271 (SC) - As assessment based on mere conjecture, surmise or suspicion or irrelevant and inadmissible evidence and material is invalid and unsustainable in law. c) Hirabai D. Desai & Sons Vs. CIT (1936) 4 ITR 95 (Bom) - there is no presumption of bad faith against an assessee unless there be sufficient material on record to establish and sustain bad faith. It cannot be presumed that an assessee was selling by short weighs. (6) Your honour would further appreciate that the Hon'ble Allahabad High Court in the case of C1T Vs. Lucky Laboratories Ltd. (2006) 284 ITR 435 (All) held that addition on account of steep fall in profits was not justified where assessee claimed that it had to sell goods at lower than market price because of inability to sell at normal price. Your honour would appreciate that in the present case, due to increase in dollar, the cost of imports increased substantially. However, due to recession, the appellant was unable to get the best selling price. This has led to a substantial fall in gross profit. (7) Your honour would appreciate that even in the case of best judgment assessment, it has been held by the Hon'ble Supreme Court in the case of State of Kerala Vs. C. Velukutty (1966) 17 STC 465 (SC) that the guess work shall not be a wild one, but shall have reasonable nexus to the available material and the circumstances of each case.” 3.2.3 It is submitted by the learned A.R. that it is in view of the above submissions and corroborative evidences that the learned CIT(A) found acceptable, he had allowed the assessee’s appeal on this issue, and directed deletion of the addition of `1,56,28,916/- on account of low GP in the year under consideration for the reasons cited at (1) to (vii) of para 3.3 of the impugned order. It is submitted that since there is no error in the impugned order of the learned CIT(A) on this issue, Revenue’s appeal may be dismissed. 3.3.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record. The facts of the matter as emanate from the record are that in the course of assessment proceedings, the AO observed that the GP of the period under consideration shown at 5.93% was less than the GP of 15.38% declared in the immediately preceding year. On being queried in this regard, the assessee submitted that the main reason for fall in GP was mainly due to worldwide market recession, due to fluctuation in the rate of the dollar and also due to high sea sales that earned only 2% profits, which were not there in the last Smt. Varsha P. Shah year. The explanations put forth by the assessee for low GP in this year did not find favour with the AO and he proceeded to estimate the GP @ 15.38%, being the GP of the immediately preceding year; and thereby made an addition of `1,56,28,960/- on account of low GP, after giving reduction of 50% for recession and adverse market conditions. 3.3.2 On appeal before the learned CIT(A), the assessee, inter alia, contended that the AO had wrongly estimated the GP @15.38% of the earlier. According to the assessee the AO had not pointed out any defects in the assessee’s books of account that were audited as per provisions of section 44AB of the Act; that the AO did not find any decect in the assessee’s entire purchases which were through imports for which payments were made through banking channels; similarly no errors were detected by the AO in respect of sales, both purchase and sales details having been co-related before him; that the AO had without rejecting the assessee’s books or pointing out defects therein or without bringing out any comparable cases of parties in the same line of business showing higher gross profits had estimated the GP of this year at the rate of GP of the earlier year; when the adverse factors of this year were not prevalent in the earlier year and for which the AO himself had allowed 50% reduction. The learned CIT(A) after considering the AO’s views and the submissions of the assessee deleted the addition made by the AO on account of low GP holding the same to be unjustified. 3.3.3 In the impugned order at para 3.3 thereof the learned CIT(A) has deleted the addition of `1,56,28,916/- made on account of low GP holding as under: - “3.3 I have carefully considered the facts of the case, arguments of the Assessing Officer and the written submissions of the Authorised Representative of the appellant. The contention of the appellant is found acceptable because of the following reasons. (i) The Assessing Officer has not pointed out any defects in the books of the account of the appellant. Without rejecting the books of accounts of the appellant, the figures of profit calculated on the basis of these books of account cannot be disturbed and the Assessing Officer cannot make any estimation on this account.
(ii) It is seen that there were high seas sale of Rs.45,75,575/- on which only 2% GP was earned by the appellant. On the other hand in the earlier year there were no high seas sales which would have adversely affected on the GP of that year. (iii) During appellate proceedings appellant was asked to submit itemwise details of GP earned on various materials. It is seen that the GP earned by the appellant on different items has a very wider range and it varies from 20% to 30%. In such a case it is not possible for the appellant to have a consistent GP every year. This is also clear from the GP figures given by the appellant for 5 years which is as below: AY. GP 2007-08 7.66% 2008-09 15.38% 2009-10 5.9% 2010-11 4.6% 2011-12 9.62% From the above it is clear that in the appellant's line of business the GP varies considerably year after year. (iv) One of the main reasons for reduction in GP is exchange fluctuation loss suffered during the year. In this year appellant has suffered loss of Rs.1,01,98,459/-, on account of foreign exchange rate fluctuation, whereas in the next there is a gain in the foreign exchange rate account amounting to Rs.1,92,85,685/-. Such a huge amount of foreign exchange loss/gain is a very important reason for fluctuation in GP in year after year. If in this year the foreign exchange fluctuation loss of Rs,1,01,98,459/- is excluded then there would be net profit of Rs.42,08,882/-. (v) The Assessing Officer has noted few instances in the assessment order where appellant has earned higher rates of GP. During appellate proceedings appellant has given many instances of sales where a very low GP has been earned. There are instance of loss also. The appellant has submitted a list of 22 such instances out of which some of the instances are reproduced here below:
S. Supplier name and Purchase Total Customer Name Sales Sales Amt GP GP No. address Qty Purchase Qty amount (%) Cost 1 Henrik Brunbjerg 23205 3295463 Babji Lamitronics 10913 14763255 Aps Vestergade 113 7400 Herming, Denmark Katyani Products 12292 2089640 Pvt. Ltd. 23205 3295463 23205 3562985 267432 7.51 2 Henrik Brunbjerg 14860 1458509 Shree Ganpati 13590 1359000 Aps Vestergade 113 Impex 7400 Herming, Denmark Aditya 1270 127000 14860 1458509 14860 1486000 27491 1.85 3 Agile Enterprises 24655 3744685 Vikarsh Stamping 17325 2425500 Inc 303 Fifth Ave. India Suite 1608 New Yorg, NY 10016USA Automatic 4210 785291 Electric Ltd. Metalita 3120 468000 24655 3744685 24655 3678791 -65894 -1.79 4 Henrik Brunbjerg 23854 4035078 Premier Core 4224 718080 Aps Vestergade 113 Industries 7400 Herming, Denmark Premier Core 6645 1029975 Industries Katyani Products 4975 870625 Pvt. Ltd. Automatic 7036 1453145 Electric Ltd. Premier Core 974 160710 Industries 23854 4035078 23854 4232535 197457 4.67 5 Henrik Brunbjerg 21804 2094672 Power Core 4370 589950 Aps Vestergade 113 Industries 7400 Herming, Denmark Katyani Products 16315 2447250 Pvt. Ltd. 21804 3094672 20685 3037200 101357 3.34 6 Henrik Brunbjerg 40520 3945092 Aditya 13675 1367500 Aps Vestergade 113 7400 Herming, Denmark Evergreen Metal 13220 1322000 Works Shree Ganpati 13625 1294375 Impex 40520 3945092 40520 3983875 38783 0.97 7 Henrik Brunbjerg 24240 3876811 Vikarsh Stamping 24240 3878400 Aps Vestergade 113 India 7400 Herming, Denmark 24240 3876811 2420 3878400 1589 0.04 8 Henrik Brunbjerg 19840 1928413 Shree Ganpati 16450 1727250 Aps Vestergade 113 Impex 7400 Herming, Denmark Aditya 3390 322050 19840 1928413 19840 2049300 120887 5.90 9 Henrik Brunbjerg 25505 4731110 Katyani Products 23855 4341610 Aps Vestergade 113 Pvt. Ltd. 7400 Herming, Denmark Krysf Power 1650 344537 Component 25505 4731110 25505 4686147 -44964 -0.96 1 Henrik Brunbjerg 19430 1794409 Premier Core 3700 333000 0 Aps Vestergade 113 Industries 7400 Herming, Denmark Shree Ganpati 7990 759050 Impex Parshwa Lam 4765 476500 & Core Babji 2975 282625 Lamitronics 19430 1794409 19430 1851175 56766 3.07 (vi) In order to make the addition by estimating Gross Profit of the appellant, the Assessing Officer is required to first reject the books of account of the appellant. For this, Assessing Officer is Smt. Varsha P. Shah required to notice and point out some specific defects in the books of account regularly maintained by the appellant. Without finding any defects in the books of accounts and without rejecting the books, it is not possible for the Assessing Officer to disregard the Gross Profit calculated on the basis of the entries in the regular books of accounts and make his own estimation of GP earned by the appellant. A system of accounting consistently followed as ordinarily expressed to be accepted, unless the system does not reflect true profits. (vii) Reliance is placed on following judicial decisions :- (a) Method of accounting regularly maintained by an assessee should be accepted. Md.Umer v. CIT (1975) 101 ITR 525 (Pat) where the genuineness and regularity of the accounts are not challenged, the accounts are relevant and are prime facie proof of the entries and of the correctness thereof under section 34 of the Evidence ct. St.Teresa's Oil Mills v. State of Kerala (1970) 76 ITR 365 (Ker.)
(b) Where there is no qualitative tally between the stock purchased and the stock sold the Books of Accounts cannot be rejected and this view is affirmed at the Hon'ble Bombay High Court in the case of Kishinchand Chellaram - 115 ITR 654. (c) Where the assessee gives some reasons for a fall in the rate of profit, it is for the officer to gather and place on record sufficient material to show that an addition to the returned profit should still be made. International Forest Co. v CIT (1975) 101 ITR 721 (J&K). (d) The maintenance of a stock register is of great importance in a business but the absence of a stock register cannot per se lead to an inference that the accounts are false and entail the rejection of book results. Pandit Bros v CIT (1954) 26 ITR 159 (Punj). In the case of the appellant stock records are maintained. In view of the above observations and various judicial pronouncements, it is held that Assessing Officer was not justified in making the addition of Rs.1,56,28,916/- on account of low GP and the same is deleted. This ground is allowed. 3.4 On a careful consideration of the facts of the case, the AO’s views, the submissions of the assessee, the impugned order of the learned CIT(A), we are inclined to concur with the views and observations of the learned CIT(A) at (i) to (vii) at para 3.3 (extracted supra). Apparently, no defect has been pointed out by the AO in the books of account of the assessee which Smt. Varsha P. Shah had been audited as per the provisions of section 44AB of the Act, nor have the same been rejected and therefore in our view the AO could not have disturbed the profits declared and proceeded to estimate the GP. We also find that the learned CIT(A) had, on factual examination, observed that the GP earned by the assessee on different items had a very wide GP range and therefore the assessee could not have earned consistent GP year after year. Details on record in this respect show that the assessee’s GP varied from 7.66% in A.Y. 2007-08 to 15.38% in A.Y. 2008-09, 5.9% in A.Y. 2009-10 (i.e. the year under consideration), 4.6% in A.Y. 2010-11 and 9.6% in A.Y. 2011-12. It is seen that the learned CIT(A) had also observed that apart from huge foreign exchange fluctuation loss suffered, i.e. of `1,01,98,459/- in the year under consideration, there were also instances of high sea sales which resulted in GP @ 2% and that such sales were not there in the immediately preceding year. Lastly, we also find that the learned CIT(A) observed that the assessee was able to place on record many instances of cases in the similar line of business in which may instance of sale had resulted in low GP and in loss also. In the peculiar factual matrix of the case, as discussed above, we concur with and uphold the finding of the learned CIT(A) that the AO was not justified in making the addition of `1,56,28,916/- on account of low GP. Consequently, the ground raised by Revenue is dismissed.