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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: Shri Joginder Singh & Shri Rajendra
आदेश / O R D E R Per Joginder Singh (Judicial Member)
The Revenue is aggrieved by the impugned order dated 30/12/2013 of the ld. First Appellate Authority, Mumbai, wherein, it was held that reasons for rejection of books of accounts u/s 145 (3) of the Income Tax Act, 1961 (hereinafter the Act) are not correct without appreciating the fact that since from the books of accounts, maintained by the assessee, the correct quantum of production is not ascertainable, therefore, the true and fair profit of business cannot be verified, thus, the books of accounts deserves to be rejected u/s 145(3) of the Act and consequently deleting the addition of Rs.1,92,31,781/- made on account of sales not reflected in the books of account on the suppressed production.
During hearing, the ld. counsel for the assessee, Shri Subhash S. Shetty along with Shri R. N. Vasani, claimed that the impugned issue is covered in favour of the assessee by the decision of the Tribunal dated 18/11/2015 (ITA No.6653 & 6570/Mum/2011) for A.Y. 2008-09. This factual matrix was consented to be correct by Shri M. Murli, ld. DR.
2.1. We have considered the rival submissions and perused the material available on record. In view of the
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above, we are reproducing hereunder the relevant portion from the aforesaid order of the Tribunal dated 18/11/2015 for ready reference and analysis:-
“These are cross appeals, i.e. by the assessee and the Revenue directed against the order of the Commissioner of Income Tax (Appeals)-17 Mumbai (hereinafter referred to as 'the CIT(A)') dated 29.07.2011, which in turn has arisen from the order passed ~y the Assessing Officer u/s. 143(3)(ii) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') dated 07.12.2010 pertaining to the assessment year 2008-09.
First, we shall take up the, appeal of the Revenue, wherein, the following three Grounds of appeal have been preferred:-
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the reasons for rejection of books of accounts u/s.145(3) of the Act, are riot correct, without appreciating the facts of the case". .
"On the fads and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.2,70,46,846/- made by the Assessing Officer on account of undisclosed production of 252609 kgs without appreciating the facts of the case. 3. On the facts and in the circumstances of the case and in law, the Ld . CIT(A) in not appreciating that since from the books of accounts maintained by the assessee, the correct quantum of production and consequently the true and fair profit of business cannot be deducted, the books of accounts deserved to be rejected u/s.145(3) of the, I.T. Act which has also been endorsed by various courts". .
A perusal of the aforesaid Grounds reveal that the Revenue has raised the multiple Grounds of appeal but essentially the dispute relates to the action of the CIT(A) in deleting the addition of Rs. 2,70,46,846/- made by the Assessing Officer on account of undisclosed production.
In order to appreciate the rival aspects of the dispute, the following discussion is relevant. The assessee before us is a company incorporated under the provisions of Companies Act, 1956, and is inter-alia engaged in
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production and dealing in a variety of chemicals. The assessee company manufactures many types of Lubricant Additive, E.O. Derivates/Emullsifier's & other specialty Chemicals for various industries and processes. In the course of assessment proceedings, the Assessing Officer examined the month-wise quantitative details of raw materials consumed and production of various products and compared the same with those in the respective months of the immediately preceding assessment year of 2006-07. The Assessing Officer also required the assessee to produce day-to-day item Wise consumption of raw material and production with the consumption of electricity, in units; Labour in number etc. 'In response, assessee company explained that it was using various raw materials for manufacturing of variety of chemicals and it was explained that, the finished products are manufactured, according to the requirements of the user industry, which may vary from product to product and buyer to buyer and, therefore it was not possible to give the break-up of each item}an~ quantity of material used for the specific finished products. The Assessing Officer examined the month-wise details of the raw material consumption and the production and noticed that there was variation in the proportion of consumption and production from month to month." According to the Assessing Officer" the production of finished goods was more than the consumption of raw material in few months, whereas, in other months, the production was lesser than the raw' materials consumed. In the said background and considering the absence of any record of day-to-day item wise consumption/production, the Assessing Officer proceeded to reject the manufacturing account results depicted in the account books by invoking the provisions of section 145(3) of the Act. Once the book results were rejected, the Assessing Officer adopted production ratio of the month of March 2008, and proceeded to compute the likely quantity of finished goods produced during the year under consideration. This methodology resulted in an extra production of 2,52,609 kg. which was valued at Rs. 2,70,46,846/-. The aforesaid amount was added to the 'returned income on the ground that such extra production would have been sold outside the books of account.
In this background, assessee challenged the order of the Assessing Officer in appeal before the CIT(A). Before the
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CIT(A), assessee relied upon the statutory quantitative records for raw materials land finished goods which were maintained and were audited by the Central Excise authorities it was asserted by the assessee that the assessing Officer had passed the assessment order merely on assumptions, guesswork and surmises because the Assessing Officer had not found any discrepancy' in quantitative records furnished. The variation in production in certain months vis-a-vis consumption of raw materials was explained to be on account a large number of finished goods being manufactured, which required different concentration of raw materials. Assessee also explained that in comparison to the immediate preceding .assessment year, there was no increase in the ratio of consumption of raw material to the sales and that there was no fall in the Gross Profit rate. On facts, it was asserted by the assessee that the Assessing Officer had not found any defects in the books of account maintained. The CIT(A) accepted the plea of assessee and has set -aside the action of Assessing Officer of rejecting the books of account and accordingly he deleted the addition of Rs. 2,70,46,846/-.
Aggrieved by the order of CIT(A), the Revenue is in appeal before us.
7 Before us, the Ld. DR appearing for the Revenue reiterated the reasoning adverted to by the Assessing Officer in order to' support the case of the Revenue. Such reasoning has already been detailed by us in para 4 of this order and is not being repeated for the sake of brevity.
On the other hand, the Ld. Representative appearing for the assessee, has relied upon the findings of the CIT(A) and also referred to the explanation furnished before the lower authorities, copies of Which have been placed in the Paper Book filed, in order to substantiate that there was no justification for' the Assessing Officer to have rejected the books of account u/s 145(3) of the Act.
We have carefully considered the rival submissions. In the present case, the controversy revolves around the invoking of section 145(3) of the Act by the Assessing Officer in' order to reject the books of account maintained
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by the assessee. Section 145(3) of the Act empowers the Assessing Officer to disregard the books of account maintained by the assessee if he is not satisfied about the correctness or completeness of the accounts maintained by the assessee. In the present case, the reasons advanced by the Assessing Officer to reject the, books of account, in our view, do not justify an inference that the books of account of the assessee were either incorrect or incomplete.
Notably, the first reason advanced by the Assessing Officer was that there was a variation in production in certain months vis-a-vis consumption of raw materials. In our considered opinion, such variation can at best be an indication to investigate the issue further but such a variation by itself cannot be conclusive of incorrectness of the accounts. Moreover, the assessee company had explained before the Assessing Officer the reasons for such variation. Such explanation has also been noted by the CIT(A) in para 3.1 of his order which to the effect that the assessee company was undertaking manufacture of various specialty chemicals and concentration of raw materials was decided keeping in mind the specific requirements of each of the user industry. On this aspect, assessee also explained that in comparison to the immediate preceding assessment year, there was no increase in the ratio of consumption of raw materials to sales ratio and there was no fall in the GP rate also. Secondly, it is noted from the assessment order that the· Assessing Officer has also referred to a fall in the net profit in the current year vis-a- vis the immediate preceding assessment year. On this aspect also, assessee had explained before the Assessing Officer vide communication dated 7.9.2010, a copy. of which is placed in the Paper Book at page 27 to·28, that due to abnormal increase in overhead expenses with respect to, depreciation, interest and loan etc, the net profit has declined vis-a-vis the preceding year, though there was no decline in the Gross Profit ratio. At page '54 of the Paper Book is placed a tabulation of the GP ratio and the NP ratio for four assessment years which shows that the GP ratio in the instant year stands at 15.19% vis-a-vis 13.20% in the immediate preceding year. Similarly, the net profit ratio in the current year is 2.30% as against 6.24% in the immediate preceding year. With regard to decline in NP ratio, assessee had explained before the Assessing
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Officer that during the year assessee had undertaken a job work to manufacture paints in the months of May 2007 to December 2007 but such a project was abandoned, which resulted in heavy overhead expenses. It was for this reason the net profit for the year under consideration was low in comparison to the immediate preceding year, though" there was no decline in the Gross Profit ratio. The aforesaid explanation rendered by assessee has been glossed over by the Assessing Officer without finding any fault in it. Notably, assessee had referred to statutory records maintained including the stock registers etc, prescribed under the excise laws and such material has not been commented adversely by the Assessing Officer. The variation in the month-wise figures of consumption of. raw materials,' vis-a-vis the finished products has been properly explained by the" assessee. The Assessing Officer merely disbelieved the version of the assessee without finding any fault" therein. In nutshell, in our view, the Assessing Officer merely proceeded on surmises and conjectures in rejecting the books of account, which is inconsistent with the requirement of section. 145(3) of the Act. As a consequence, we find no error on the part of the C"IT(A) in setting-aside the action of the Assessing Officer of invoking the provisions of section 145(3) of the Act. The "CIT(A) has, therefore, correctly" deleted the addition of Rs. 2,70,46,846/, which we hereby affirm. Thus, the appeal of the Revenue is dismissed.”
2.2. If the aforesaid order is analyzed, we find that on identical issue in A.Y.2008-09, an elaborate discussion has been made by the Tribunal and after considering the factual matrix, it was concluded that for invoking the provision of section 145(3) of the act to reject the books of accounts, by the Assessing Officer, it can be done only when, the Assessing Officer is not satisfied with respect to the correctness of completeness of the accounts maintained by the assessee. We find that the assessee duly explained the alleged variations with respect to month-wise
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consumption of raw material vis-à-vis finished products and the same were disbelieved by the Assessing Officer without finding any fault therein. The rejection of books of accounts by the Assessing Officer is inconsistent with the requirement of section 145(3) of the Act, thereby, we affirm the stand of the ld. Commissioner of Income Tax (Appeals) in deleting the impugned addition, thus, on this ground, the appeal of the Revenue is without any merit, consequently, dismissed. Finally, the appeal of the Revenue, on this issue, is dismissed. This order was pronounced in the open in the presence of ld. representatives from both sides at the conclusion of the hearing on 21/03/2016.
Sd/- Sd/- (Rajendra) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated : 21/03/2016
f{x~{tÜ? P.S/.�न.स.
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant (Respective assessee) 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai,
9 ITA No.1639/Mum/2014 M/s Kusa Chemicals P. Ltd.
�वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//
उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai