M/s Erawat Pharma Ltd., Indore v. The ACIT, Indore

1 IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH INDORE BEFORE SHRI JOGINDER SINGH JUDICIAL MEMBER AND SHRI R.C. SHARMA ACCOUNTANT MEMBER ITA NOS. 198 199 AND 228/IND/2010 A.YS.2005-06 2006-07 AND 2007-08 M/S ERAWAT PHARMA LIMITED INDORE PAN AAACE-3757F APPELLANT VS ASSTT. COMMISSIONER OF INCOME TAX 2(1) INDORE RESPONDENT APPELLANT BY : SHRI M.C. MEHTA WITH SHRI HITESH CHIMNANI RESPONDENT BY : SHRI P.K. MITRA O R D E R PER JOGINDER SINGH JUDICIAL MEMBER THESE ARE THE APPEALS BY THE ASSESSEE AGAINST THE O RDERS OF THE LEARNED CIT(A) DATED 30.11.2009 AND 5.2.2010 ON THE FOLLOWING GROUNDS :- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN MAINTAINING INCREASE IN TURNOVER OF RS.20 66 612/- AND SO ALSO IN THE GROSS PROFIT BY ESTIMATING GROSS PROFIT AT THE RATE OF 27.5% AS AGAINST 25.71% (A.Y. 2005-06 TURNOVER OF RS.11 06 469/- AND ESTIMATION OF GROSS PROFIT RATE AT THE RATE OF 16% AS AGAINST 14.64% (A.Y.2006-07 AND MAINTAINI NG ADDITION OF RS.4 88 720/- BY APPLYING GROSS PROFIT RATE OF 14% AS AGAINST 13.46% WITHOUT PROPERLY APPRECIATING TH E 2 SUBMISSIONS SO MADE AND DECLARED BY THE ASSESSEE RESPECTIVELY 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN MAINTAINING AD HOC DISALLOWANCE OF RS.10 000/- OUT OF OFFICE AND GENERAL EXPENSES OF RS.86 183/- (A.Y. 2005-06) AND RS.5 000/- OUT OF OFFICE AND GENERAL EXPENSES OF RS . 42 333/- (A.Y. 2006-07). 2. DURING HEARING OF THESE APPEALS WE HAVE HEARD S HRI M.C. MEHTA ALONG WITH SHRI HITESH CHIMNANI LD. COUNSEL FOR TH E ASSESSEE AND SHRI P.K.MITRA LEARNED SENIOR DEPARTMENTAL REPRESENTATI VE. THE CRUX OF ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT THE BOO KS OF ACCOUNTS OF THE ASSESSEE COMPANY ARE DULY AUDITED THE QUANTITATIVE DETAILS ARE PERIODICALLY CHECKED BY THE EXCISE AUTHORITIES AND NO MISTAKE WAS FOUND BY THEM. THE FINANCIAL STAKE OF EXCISE DUTY WAS CL AIMED TO BE MUCH HIGHER AS COMPARED TO THE INCOME TAX BY SUBMITTING THAT DURING THE ASSESSMENT YEAR 2005-06 THE EXCISE DUTY CLAIMED BY THE ASSESSEE WAS TO THE EXTENT OF RS.75 63 905/- FOR WHICH OUR ATTEN TION WAS INVITED TO PAGE 17 OF THE PAPER BOOK AS AGAINST NIL DEMAND OF INCOME TAX EVEN AFTER ASSESSMENT. MR. MEHTA FURTHER CONTENDED THAT DURING THE COURSE OF ASSESSMENT COMPLETE DETAILS OF EACH AND EVERY ITEM RELATING TO RAW MATERIAL PRODUCTION OPENING STOCK CLOSING STOCK OF WORK IN PROGRESS AND FINISHED STOCK WERE FILED. A PLEA WAS ALSO RAIS ED THAT THE ASSESSEE COMPANY REQUIRES 45 DAYS FOR PRODUCTION OF ITS FINA L PRODUCT I.E. GELATIN CAPSULE. FOR THE PROCESS OF PRODUCTION OUR ATTENT ION WAS INVITED TO 3 PAGES 7 AND 8 (PARA 4.1.2) OF THE ASSESSMENT ORDER. IT WAS CLAIMED THAT NO DEFECT WAS FOUND IN MAINTAINING THE QUANTITY AND FINANCIAL DETAILS AND THE ADDITION IN THE INCOME HAS BEEN MADE ONLY DUE T O FALL IN GROSS PROFIT RATE. IT WAS FURTHER PLEADED THAT THE INCREASE IN M ANUFACTURING EXPENSES AND INCREASE IN SALARY OF EMPLOYEES ALONG WITH INCR EASE IN COST OF VARIOUS ITEMS THE GROSS PROFIT DECREASED. ON A QU ERY BY THE BENCH ABOUT NON-SUBMISSION OF BIFURCATION OF EXPENSES AT THE STAGES OF PRODUCTION IT WAS CLAIMED BY THE LD. COUNSEL FOR TH E ASSESSEE THAT SUCH DETAILS CANNOT BE TAKEN OUT IN THE MANUFACTURING CO NCERN THEREFORE NOT POSSIBLE. 3. ON THE OTHER HAND THE LEARNED SENIOR DEPARTMENT AL REPRESENTATIVE STRONGLY DEFENDED THE IMPUGNED ORDER . ON THE CONDONATION APPLICATION IT WAS CONTENDED THAT THE R EASONS FOR DELAY MENTIONED IN THE APPLICATION ARE NOT CONVINCING. O N MERIT IT WAS ARGUED THAT THE DECLINE IN THE GROSS PROFIT RATE IS VERY S HARP THEREFORE A PRAGMATIC APPROACH HAS ALREADY BEEN TAKEN IN THE IM PUGNED ORDERS FOR WHICH OUR ATTENTION WAS INVITED TO PARA 1.7 (PAGE 8 ) OF THE IMPUGNED ORDER BY FURTHER SUBMITTING THAT INCREASE IN THE EX PENDITURE HAS NOT BEEN EXPLAINED BY THE ASSESSEE AND NECESSARY DETAILS WER E NEVER SUBMITTED BEFORE THE REVENUE AUTHORITIES AND INSPITE OF ASKIN G BY THE LEARNED ASSESSING OFFICER THE BIFURCATION OF EXPENSES AT T HE STAGE OF PRODUCTION 4 WAS NEVER PRODUCED BY THE ASSESSEE THEREFORE THE ADDITION WAS STRONGLY DEFENDED. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF LD. REPRESENTATIVES OF BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE ON RE CORD. AS FAR AS THE DELAY OF 47 DAYS FOR FILING THE APPEAL BEFORE THE T RIBUNAL THOUGH THE REASONS MENTIONED IN THE APPLICATION ARE NOT MUCH C ONVINCING STILL BY TAKING A LENIENT VIEW WE ARE OF THE VIEW THAT NO P ERSON SHOULD BE CONDEMNED UNHEARD THEREFORE THE DELAY IS CONDONED . 4.1 BRIEF FACTS ARE THAT THE ASSESSEE IS A PUBLIC L IMITED COMPANY CARRYING ON BUSINESS OF MANUFACTURE AND SALE OF EMP TY HARD GELATIN CAPSULES. THESE EMPTY CAPSULES ARE USED FOR FILLING THE MEDICINAL POWDER TO BE CONSUMED BY THE PATIENTS. THE ASSESSEE COMPANY STARTED COMMERCIAL PRODUCTION FROM 23.10.1997 DECLARED NET TAXABLE INCOME IN ITS RETURN FILED ON 30.10.2005 (ASSESSMENT YEAR 200 5-06). THE RETURN WAS PROCESSED U/S 143(1) ON 17.4.2006 AND SUBSEQUEN TLY VIDE NOTICE U/S 143(2) OF THE ACT THE RETURN WAS SELECTED FOR SCRUTINY. THE DETAILS ALONG WITH BOOKS OF ACCOUNTS WERE PRODUCED BEFORE T HE ASSESSING OFFICER AND THE SAME WERE TEST CHECKED. THE ASSESSE E SHOWED GROSS PROFIT OF RS.2 14 75 115/- ON THE GROSS SALES OF RS .8 35 39 670/- AT THE RATE OF 25.7% AS COMPARED TO GROSS PROFIT OF RS.2 8 8 77 847/- ON THE GROSS SALES OF RS.9 19 60 791/- AT THE RATE OF 31.3 9% DECLARED IN THE IMMEDIATELY PRECEDING ACCOUNTING YEAR RELEVANT TO T HE ASSESSMENT YEAR 5 2004-05. IN VIEW OF THE FALL OF 5.68% IN GROSS PROF IT THE ASSESSEE WAS ASKED TO EXPLAIN THE REASON FOR SUCH FALL. THE ASS ESSEE VIDE LETTER DATED 26.9.2007 SUBMITTED BEFORE THE ASSESSING OFFICER AS UNDER :- GP RATE FOR A.Y.2005-06 IS 25.71% AGAINST 31.39% O F 2004-05 A.Y. THE REDUCTION IS DUE TO INCREASE IN C OST OF INPUT. OUR MAIN RAW MATERIAL IN GELATIN THE COST O F WHICH IS GONE UP FROM 222.5 PER KG TO 256 RS. PER KG IN 2 005-06 I.E. UP BY 15% (FEW BILLS OF PURCHASES OF 2004-05 & 2005- 06 ENCLOSED FOR REFERENCE). THE COST OF POWER AND LABOUR AND OTHER EXPENSES IS ALSO GONE UP BY 15% BUT THE SELLING PRICES IS NOT INCREASED IN THAT PROPORTION HENCE THERE IS A REDUCTION IN G.P. RATE. BEFORE US THE ASSESSEE CANVASSED THAT THE AVERAGE PURCHASE RATE OF RAW MATERIAL PER KG. INCREASED FROM RS.223.51 TO RS .256.05 I.E. AN INCREASE OF 14.56% AND THE PURCHASE DURING LAST YEA R WAS RS.3 70 56 397/- AND AFTER THE INCREASE BY 14.56% BEING INCREASE IN COST OF RAW MATERIAL WILL COME TO AROUND RS.4 28 37 195/-. THE CRUX OF ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT THE LEA RNED ASSESSING OFFICER AND THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAVE ACCEPTED THE GROSS PROFIT RATE OF 16% AND 14% IN TH E ASSESSMENT YEARS 2006-07 AND 2007-08 RESPECTIVELY AS AGAINST DECLA RED BY THE ASSESSEE AT 14.64% AND 13.46% RESPECTIVELY THEREFORE IT W AS PRAYED THAT THE ADDITION DECLARED BY THE ASSESSEE MAY BE ACCEPTED. 5. NOW THE QUESTION ARISES WHETHER THE FALL IN GROS S PROFIT RATE IS JUSTIFIED PURSUANT TO EXPLANATION/ARGUMENTS ADVANCE D BY THE LD. COUNSEL FOR THE ASSESSEE ? WE FIND THAT THE LEARNED ASSES SING OFFICER HAS 6 CONSIDERED THE DETAILS/COMPARISON COST IN TABLE 1 ( PAGE 3) COMPARATIVE CHART SHOWING THE PRODUCTION OF DIFFERENT SIZES OF CAPSULES (TABLE 2) AND AVERAGE MANUFACTURING COST OF CAPSULES (TABLE 3) AN D COMPARATIVE CHART SHOWING SALES MADE DURING THE ACCOUNTING YEARS 2005 -06 AND 2006-07 (TABLE 4) AS SUBMITTED BY THE ASSESSEE. ON EXAMINA TION OF THESE DETAILS THE ASSESSEE WAS CATEGORICALLY ASKED TO FU RNISH THE INVENTORY OF ITEMS BOTH IN TERMS OF QUANTITY AND VALUE ALONG WIT H METHOD OF VALUATION OF STOCK AND OTHER NECESSARY DETAILS IN SUPPORT OF ITS CLAIM. THE DETAILS SUBMITTED BY THE ASSESSEE HAVE BEEN MENTIONED IN TA BLE 5 AND 6 AT PAGES 4 AND 5 OF THE ASSESSMENT ORDER. THE VALUATIO N OF FINISHED GOODS HAS BEEN SUMMARIZED IN TABLE 7 AND VALUATION OF WOR K IN PROGRESS IN TABLE 8 OF THE ASSESSMENT ORDER. THE MANUFACTURING PROCESS HAS BEEN DISCUSSED IN PARA 4.1.2 ONWARDS. THE GROSS PROFIT RATIO IS SUMMARIZED AS UNDER :- ASSESSMENT YEAR 2004-05 2005-06 2006-07 2007-08 GROSS PROFIT RATIO DECLARED BY THE ASSESSEE 31.40% 25.71% 14.64% 13.46% GROSS PROFIT APPLIED BY ASSESSING OFFICER 31.40% 27.50% 16.00% 14.00% IF THE AFORESAID TREND OF GROSS PROFIT IS ANALYSED DEFINITELY IT IS A DECREASING TREND. NOW THE QUESTION ARISES WHETHER THE ASSESSEE HAS EXPLAINED THE DECREASED IN TREND SATISFACTORILY WIT H THE HELP OF 7 DOCUMENTARY EVIDENCE. AS MENTIONED ABOVE INSPITE OF SPECIFIC ASKING BY THE ASSESSING OFFICER THE BIFURCATION OF EXPENS ES AT THE STAGE OF PRODUCTION THE DETAILS COULD NOT BE PRODUCED BY TH E ASSESSEE ON THE PLEA THAT SUCH BIFURCATION OF EXPENSES IS NOT POSSI BLE. THE INCREASE IN MANUFACTURING EXPENSES AND SALARY IS ALSO NOT IN TH E SAME RATIO BUT AT THE SAME TIME AS MENTIONED IN THE ASSESSMENT ORDER (PAGE 2) THE ASSESSEE DULY ATTENDED THE ASSESSMENT PROCEEDINGS F ROM TIME TO TIME AND FURNISHED THE DETAILS. THE BOOKS OF ACCOUNTS W ERE ALSO PRODUCED FOR VERIFICATION AND THE SAME WERE TEST CHECKED MEA NING THEREBY NO SUBSTANTIAL DEFECT WAS POINTED OUT BY THE ASSESSING OFFICER THEREFORE IN SUCH A SITUATION KEEPING IN VIEW THE TOTALITY OF F ACTS AND THE ASSERTION MADE BEFORE US WE ARE OF THE VIEW THAT IT WILL MEE T THE ENDS OF JUSTICE IF THE GROSS PROFIT RATE IS APPLIED AT 26.50% 15.32% AND 13.74% FOR THE ASSESSMENT YEARS 2005-06 2006-07 AND 2007-08 RESP ECTIVELY. WE ORDER ACCORDINGLY. THIS GROUND IN THE RESPECTIVE AP PEALS IS PARTLY ALLOWED. HOWEVER WE ARE MAKING IT CLEAR THAT OUR A BOVE CONCLUSION HAS BEEN ARRIVED AT DUE TO THE PECULIAR FACTS OF THESE APPEALS ONLY. 6. THE NEXT GROUND PERTAINS TO MAINTAINING THE AD H OC DISALLOWANCE OF RS.10 000/- AND RS.5 000/- OUT OF OFFICE AND GEN ERAL EXPENSES RESPECTIVELY. AFTER HEARING THE RIVAL SUBMISSIONS FIRST BECAUSE IT IS A CASE OF A COMPANY AND AD HOC DISALLOWANCE HAS BEEN MADE THEREFORE EVEN KEEPING IN VIEW THE SMALLNESS OF DISALLOWANCE IN RESPECT TO CLAIM 8 OF THE ASSESSEE THE DISALLOWANCE SO MADE IS DELETE D THEREFORE THIS GROUND IN THE RESPECTIVE APPEALS IS ALLOWED. FINALLY THE APPEALS ARE PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 24 TH FEBRUARY 2011. (R.C.SHARMA) (JOGINDER SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 24 TH FEBRUARY 2011 COPY TO: APPELLANT RESPONDENT CIT CIT(A) DR G UARD FILE DN/-