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Income Tax Appellate Tribunal, DELHI BENCH “A” NEW DELHI
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “A” NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND Ms. SUCHITRA KAMBLE : JUDICIAL MEMBER Asstt. Yr: 2008-09 M/s Allied Engineering Works Vs. Income-tax Officer, 13/5, Meerut Road, Delhi. Ward-1(5), Ghaziabad. Meerut Road, Delhi. PAN: AABFA 5737 B ( Appellant ) (Respondent) Appellant by : Shri U.S. Bhargava Adv. Assessee by : Shri T.Vasanthan DR Date of hearing : 08/02/2016. Date of order : 16/02/2016. O R D E R PER S.V. MEHROTRA, A.M:
This is assessee’s appeal assailing the order dated 15.10.2015, passed by the ld. CIT(A), Ghaziabad, deleting the penalty levied u/s 271(1)(c) of the Income-tax Act, 1961, relating to A.Y. 2008-09.
Brief facts of the case are that assessee had filed return declaring Nil income. The assessee firm, in the relevant assessment year, was in the business of manufacturing of machinery parts, special purpose machines and fabrication work at the address given in the return. The assessee had shown g.p. rate of 30.08% and net loss before partners’ remunerations and interest at Rs.185791/- had been declared. The AO noticed from the audit report that there was no mention regarding maintenance of stock register. As regards the valuation, it was mentioned as ‘at cost price for raw-material and at estimated realizable value for finished goods and semi-finished goods'. The AO required the assessee to prove the rate of GP and also to produce inventory relating to closing stock and value as adopted. The comparative results of trading a/c for the last there years were as under:
A.Y. Sales GP(Rs.) GP Rate Consumption (Rs.) of material/ finished goods 2008-09 7627636 2295093 30.09% 67.55% 2007-08 9401068 2989934 31.80% 76.77% 2006-07 6543173 2309965 35.30% 75.81%
The assessee also explained the reasons for fall in g.p. rate, which have been reproduced by AO at page 2 of his order, in which the assessee, inter alia, pointed out that there was enormous dearth of orders in this year and the down trend forced the assessee to obtain orders either at par or in most of the cases below the calculated cost for survival and to keep the work force busy. Further due to very stiff competition the assessee could not obtain profitable orders in this year. The assessee further explained that because of specific orders, lebour/wages employed, remained unpredictable and consumption of material and consumable constituted higher element of cost. Further, assessee did not manufacture one type of goods every time but based on specification & drawings, as such, it was not possible to prove the fall in G.P. rate or to substantiate the G.P rate by giving 5-6 illustration. As regards the valuation of closing stock, the assessee pointed out that the same was done on the physical verification of stock and detailed valuation for the same was also filed before the AO.
The AO had also made addition of Rs. 7,09,370/- to cover the loss of profit earned on sale of machinery. The AO also initiated penalty proceedings.
AO levied penalty of Rs. 3,35,714/- in respect of two additions viz. Rs. 1,30,432/- and Rs. 7,09,370/-, inter alia, observing as under:
It is worth mentioning here that at the time of quoting the price for tenders, the assessees doing specific type of job work generally consider all these factors and-after taking into account all the factors as narrated by it, they quote the prices fh the tenders. Further, the assessee has also carried out direct purchase-sale of various machinery items as has also been done in earlier years but the inventory of stock produced during the course of assessment proceedings mentions grouping of the materiais such as raw-materials of all kinds Rs. 2,04,777/- ;,consumables Rs. 19,455/- , finished and semi-finished goods Rs. 2,60,000/- and scrap (a) MS round end pieces Rs. 1,05,000/- and (b) MS boring & turning Rs. 10,700/-. All the above stock inventory had been stated to be after physical verification but this contention of the assessee is not acceptable as the assessee failed to give detail of all the stocks whether salable items or consumable items as such the valuation of stock is not acceptable. Further, the general & basic calculation in the business is that if the consumption of material, is less, the gross profit ratio would increase and if the (0 consumption of raw material is more the gross profit ratio would decrease. But in the case of the assessee the results are reverse when the consumption of material has gone down by 9.22% in comparison to the consumption in the assessment year 2007-08. Considering the above facts, the AO has very reasonably taken the GP rate 31.8%.
In quantum appeal before the Tribunal, the addition on account of low gross profit stands confirmed but the addition of Rs. 7,09,370/- has been deleted.
Therefore, now the issue before us is primarily in regard to the penalty apropos addition of Rs. 1,30,432/-.
The AO while levying penalty in respect of low g.p. has, inter alia, observed as under:
As per the prudent accounting practices it is presumed that in case the .turnover of any business goes up, the GP always goes down and if the turnover goes down the GP will go up. Besides on the basis of the analysis of GP and consumption of raw material furnished by the AR of the assessee it is evident that the consumption of material has gone down by 9.22% in comparison to the consumption during the A.Y. 2007-0S. Accordingly, the GP should increase as the consumption has gone down substantially. Even if we consider the reply of the AR regarding decrease in GP rate, it would not be justified if we calculate the GP below the GP achieved by the assessee during the AY 2007-0S. Considering all the fact' and circumstances of the case, a disallowance of Rs.1,30,432/- taking the effective rate of GP @31.80%.”
Ld. CIT(A) while confirming the penalty apropos this addition, inter alia, has observed as under:
The case laws cited by appellant are not helpful to it. It is true that every addition would not result in penalty, but at the same time on the given facts~ present addition certainly smacks of a planned strategy and tactics of tax evasion and also deliberately furnishing inaccurate particulars. The confirmation of the was not proper.
From the above observation of ld. CIT(A) it is evident that he confirmed the penalty because Tribunal had confirmed the addition in quantum appeal. It is well settled law that there is no presumption of concealment merely on the basis of confirmation of quantum in the hands of assessee. The main reasoning for confirming this addition by Tribunal was that on the basis of analysis and consumption of raw material furnished by the assessee, it was evident that the consumption of raw material had gone down by 9.22% in comparison to the consumption during AY 2007-08. Accordingly, the gross profit should have increased as the consumption had gone down substantially. This reasoning may be sufficient for confirming the addition in the hands of assessee but that does not lead to the conclusion that the assessee had furnished inaccurate particulars of income. There is no thumb rule that when-ever there is increase in consumption of material then gross profit should rise. There may be business exigencies when this position might get completely reversed. The assessee’s explanation has not been controverted by any evidence and the addition has been confirmed only on probability. Under such circumstances, we are of the considered opinion that no penalty is leviable on the estimated addition made in the hands of assessee. Accordingly, on the facts and circumstances of the case the penalty levied u/s 271(1)(c) is liable to be deleted and we do so.
In the result, assessee’s appeal is allowed.
Order pronouncement in open court on 16/02/2016.