The DCIT, Circle-1(2),, Baroda v. M/s. Jaytick Intermiate Pvt.Ltd.,, Baroda

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI JM AND D.C.AGRAWAL A M DY CIT CIR.1(2) BARODA. V/S . M/S JAYTICK INTERMEDIATE P. LTD. 49 RISHI ENCLAVE NEAR SAPNA HALL MAKARPURA ROAD BARODA- 390007. PAN NO.AAACJ4592P (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI P. ORAM SR.DR RESPONDENT BY:- SHRI YOGESH DESAI AR O R D E R PER D.C.AGRAWAL ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) DATED 28.8.2009 FOR ASST. YEAR 1995-96 WHEREIN HE HAS CANCELLED THE PENALTY MADE ON ACCOUNT OF LOW GP. 2. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT ASSESSEE-COMPANY HAS NOT MAINTAINED FIXED ASSETS RE GISTER IN THE PRESCRIBED FORMAT AS REQUIRED IN SCHEDULE VI OF THE COMPANIES ACT. THE SAID REGISTER AS MAINTAINED BY THE ASSESSEE IN GENE RAL FORMAT WAS NOT AUDITED BY THE C.A. NO STOCK REGISTER OF RAW MATER IAL WAS MAINTAINED. WHATEVER WAS MAINTAINED DID NOT CONTAIN COMPLETE EN TRIES COLUMN ITA NO.2992/AHD/2009 ASST. YEAR : 1995-96 2 RELATING TO BALANCES ARE KEPT BLANK. TAX AUDIT REPO RT SUBMITTED WAS INCORRECT. VARIOUS FIGURES NOTES FROM AUDIT REPORT AND BOOKS OF ACCOUNTS SHOW DIFFERENCES AS UNDER :- NAME OF PRINCIPEL RAW MATERIALS QTY. PURCHASES QTY CONSUMPTION AS PER TAX AUDIT REPORT AS PER STOCK REGISTER PRODUCED DITS.IN QTY.AND VALUE AS PER TAX AUDIT REPORT AS PER STOCK REG. PRODUCED DITS. 1. 2.4 DNCB 82173 70130 12043(RS.4.10 LAKHS) 77043 65000 12043 2. 2:5 DCNB 55750 52850 2900(RS.0.76 LAKHS) 57750 54850 2900 3. NAHS 104788 105788 1000(RS.0.11 LAKHS) 96048 97048 1000 4. CAMSTIC LYE/REAL 56485 65485 +30000(RS.4.83 OP.STOCK LAKHS 39000 56485 83735 27250 THE ASSESSEE FAILED TO EXPLAIN THE DIFFERENCES IN Q UANTITIES AS NOTED BY THE AO AS PER AUDIT REPORT AND AS PER BOOKS OF ACCOUNT. THE AO AFTER COMPARING THE TWO WORKED OUT NON-GENUINE PURCHASES/ CONSUMPTION AT RS.9.80 LAKHS. 3. THE ASSESSEE DID NOT MAINTAIN ANY DAY TO DAY QUA NTITY RECORDS FOR WORK-IN-PROGRESS. THE ASSESSEE CHANGED THE METHOD O F ACCOUNTING INASMUCH AS OPENING STOCK OF THE CURRENT YEAR WAS V ALUED AS PER LAST YEARS VALUATION BUT WHILE VALUING CLOSING STOCK TH IS YEAR THERE WAS REDUCED MODVAT CLAIM FROM CONSUMPTION NOT SHOWING M ODVAT AS INCOME AS IN PAST CONSISTENTLY FOLLOWING METHOD BY INCLUDING MODVAT. THUS CHANGING THE METHOD WITHOUT EFFECTING OPENING STOCK RESULTED INTO INCORRECT DETERMINATION OF TAXABLE INCOME. THE AO N OTICED THAT BY SUCH CHANGES THERE WAS SUBSTANTIAL DIFFERENCE IN THE VAL UATION. IN THE OPENING STOCK OF FINISHED GOODS IT WAS VALUED AT RS.3 26 48 2/- PER M.T. WHEREAS 3 CLOSING STOCK OF THE SAME PRODUCT (DYE INTERMEDIATE S )WAS VALUED AT RS.1 95 693/- PER M.T. 4. IN THE TAX AUDIT REPORT ALL TRANSACTIONS COVERIN G SECTION 40A(2)(B) ARE NOT MENTIONED. THE ASSESSEE HAD MADE PAYMENT OF COMMISSIONS TO CLOSE ASSOCIATES NAMELY M/S COREMENT INVESTMENTS CO . (P) LTD. AT RS.1 84 400/-. IT DID NOT FIND MENTION IN THE AUDIT REPORT. THERE ARE CRISS- CROSS TRANSACTIONS OF EXPENSES WITH SISTER CONCERNS . DEBTORS OF THE COMPANY WERE COLLECTED BY AND CREDITORS WERE PAID B Y SISTER CONCERN. NO PROPER ACCOUNTING IS FOUND. THE POINTS RAISED BY TH E AO IN HIS ORDER AS TO THE DEFECTS WERE NOT EXPLAINED. IN ADDITION AO P OINTED OUT FOLLOWING DEFECTS WHICH WERE NOT EXPLAINED:- (II) THE ASSESSEE FAILED TO EXPLAIN THE VALUE OF R ATE DIFFERENCE OF RS.16 668/- FOR 4 CAP RS.3423.76 OF 4 NAP. NO VOUCHERS WERE PRODUCED FOR SAID RATE DIFFERENT. IT WAS SIMPLY REDUCED FROM TOTAL GROSS S ALES AT THE YEAR END JUST TO TALLY THE SALES FIGURES. NO OBJECTIVE WORKING FURNI SHED. THE ASSESSEE FAILED TO PROVE ON RECORD WHETHER SALES RETURN OF 5419.75 KG. OF 4 CAP WAS INCLUDED IN THE STOCK REGISTER. NO OBJECTIVE SATISFACTORY EXPLA NATION FURNISHED WITH DOCUMENTARY PROOF VOUCHERS AND SALES RETURN REGISTE R ALSO NOT MAINTAINED. THE ASSESSEE ALSO FAILED TO GIVE DETAILS OF RS.15 0 00/- LIQUIDATED DAMAGES WITH DOCUMENTARY PROOF. (IV) NO DETAILS OF RS.11736 PAID ON 3.10.94 BY M/S YUJICHEM INDS. WERE FURNISHED BY THE ASSESSEE VIDE ASSESSEES LETTER DATED 29.12. 97. NO DELIVERY CHALLAN FOR PURCHASE OF C.I. POWDER ON 1.4.94 VIDE INVOICE NO.1 FROM M/S UMIA ENTERPRISE WAS FURNISHED THOUGH THE BILL WAS DEBITE D IN PROFIT AND LOSS ACCOUNT BUT THE SAME WERE NOT SHOWN IN STOCK REGISTER. EVEN INDIRECT TAXES WERE NOT PAID BY JUST WRITING RESLE. (V) THE ASSESSEE FAILED TO PROVE ON RECORD WHY SALES QT Y. ON WHICH COMMISSION WAS PAID TO ITS ASSOCIATES AND ACTUAL SALES SHOWN I N RESPONSE TO NOTICE U/S 142(1) OF THE ACT. THE ASSESSEE FAILED TO GIVE VALU E RATE QTY. OF 1:6 CLEARE ACID AS ALSO MONTH-WISE PRODUCTION DATE OF SAID FIN ISHED GOODS. IT WAS SIMPLY SUBMITTED BY THE ASSESSEE THAT 360 KG. OF C. A. WAS MANUFACTURED IN MARCH 95 AND HELD AS CLOSING STOCK. (VI) THE ASSESSEE ALSO FAILED TO EXPLAIN AS TO WHY THERE WAS 3 TO 4 TIMES UNDERVALUATION OF AVERAGE FINISHED STOCKS. IT SIMPL Y STATED IN RESPONSE TO LAST AND FINAL SHOW CAUSE NOTICE DATED 13.1.1998 TH AT THE WORKING GIVEN IN THE NOTICE MIGHT BE RELEVANT FOR ANYTHING ONLY IF T HERE WAS ONLY ONE ITEM OF FINISHED GOODS OR MANY ITEMS OF FINISHED GOODS HAVI NG SAME COST OF 4 PRODUCTION/SALES. OTHERWISE THE SAID CALCULATION PR OVE TO BE WITHOUT ANY MEANING. THE FACT OF THE CASE IS THAT THE COMPANY I S MANUFACTURING VERITY OF PRODUCTS. WITH THESE REMARKS THE AO HAS REJECTED THE BOOKS OF ACCOUNT. HE THEREAFTER MADE ADDITION OF RS.12.25 LAKHS IN THE T RADING ACCOUNT. AFTER INCLUDING THEREIN BOGUS AND NON-GENUINE PURCHASES O F RS.9.80 LAKHS UNDER VALUATION OF RS.1.04 LAKHS UNDER VALUATION O F WORK-IN-PROGRESS IN FINISHED GOODS BY RS.0.90 LAKHS AND MISC. ITEMS AT RS.0.47 LAKHS. 5. THE MATTER WENT TO THE TRIBUNAL WHICH REDUCED TH E ADDITION TO RS.6 LAKHS. IN RESPECT OF THIS THE TRIBUNAL OBSERVED AS UNDER :- 6. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND THAT THE AO HAS VERIFIED THE CONSUMPTION AS PER TAX AUDIT FIGURES AND AS PER THE CONSUMPTION GI VEN BY THE ASSESSEE. THE AO HAS ALSO VERIFIED THE FIGURES WHICH ARE ON PAGE 4 OF TH E REMAND REPORT AND FROM THIS ANALYSIS; THE ASSESSEE WAS NOT ABLE TO MAINTAIN THE YIELD RATIO. THE ASSESSEE HAS ALSO NOT MAINTAINED DAY TO DAY QUANTITATIVE RECORD OF WO RK-IN-PROGRESS. THE ASSESSEE HAS NOT MAINTAINED DAY TO DAY QUANTITATIVE RECORD OF AL L THE RAW MATERIALS AND THE STOCK REGISTER. THE ASSESSEE HAS ALSO VALUED THE RAW MATE RIAL AT AVERAGE RATE AND ANNUAL CONSUMPTION OF RESPECTIVE RAW MATERIALS AND THIS YE AR THE ASSESSEE HAS CHANGED THE METHOD OF VALUATION. THE ASSESSEE HAS ALSO NOT FOLL OWED ANY METHOD AS REGARD TO FINISHED GOODS. THE AO HAS ALSO OBSERVED THAT THE A SSESSEE HAS MADE PENCIL ENTRIES IN THE BOOKS AND THE ASSESSEE IS NOT KEEPING AND MAINT AINING VOUCHERS. THEREFORE WE ARE OF THE VIEW THAT THE AO IS JUSTIFIED IN REJECTI NG THE BOOK RESULT AND WE UPHOLD THE ACTION OF THE AO. WE FIND THAT THERE WAS DIFFERENCE OF GP AND THIS YEAR THE GP WAS LOW OF ABOUT 6 TO 10% AND THE AO HAS MADE THE ADDIT ION OF RS.12.25 LAKHS BUT WHEN THE BOOK RESULTS ARE REJECTED THE AO HAS ALSO ESTIM ATED THE GP IN OUR CONSIDERED OPINION THE ADDITION OF RS.6 LAKHS WOULD BE REASONA BLE. THE AO IS DIRECTED TO RESTRICT THE ADDITION ON THIS COUNT TO RS.6 00 000/- (RUPEES SIX LAKHS). 6. IN RESPONSE TO NOTICE ASSESSEE FURNISHED FOLLOWI NG REPLY :- PENALTY U/S 271(1)(C) IS ATTRACTED WHERE AN ASSESS EE EITHER SUBMITS INCORRECT PARTICULARS OF INCOME OF CONCEALS ITS INCOME. IT I S A SETTLED LAW THAT PENALTY U/S 271(1)(C) CANNOT BE INVOKED WHERE ADDITIONS ARE MAD E TO THE INCOME ON ESTIMATED BASIS AS THE ASSESSEE IS NOT IN A POSITION TO COMPR EHEND SUCH PROPOSED ACTION OF THE ASSESSING OFFICER DURING THE ASSESSMENT. IT HAS FUR THER CONTENDED THAT IN THE CASE OF THE ASSESSEE CONTROVERSIAL AND DISPUTED ADDITIONS H AS BEEN MADE WHICH HAS NOT BEEN ACCEPTED BY THE ASSESSEE AND HAS ALREADY PREFERRED AN APPEAL BEFORE THE HIGH COURT. 5 THE ASSESSEE HAS ALSO RELIED UPON VARIOUS JUDICIAL PRONOUNCEMENTS AS QUOED IN THE AFORESAID LETTER. THE AO WAS NOT SATISFIED AND ACCORDINGLY LEVIED PEN ALTY IN RESPECT OF ADDITION OF RS.6 LACS AND OTHER ADDITIONS OF RS.12 000/- & RS.1 95 000/- CONFIRMED BY THE TRIBUNAL. HE ACCORDINGLY LEVIED PE NALTY OF RS.3 72 000/-. THE LD. CIT(A) DELETED THE PENALTY I N RESPECT OF ESTIMATED ADDITION OF RS.6 LACS IN TRADING ACCOUNT. HE REFERR ED TO THE FOLLOWING JUDGMENTS : (I) SAHYOG SAHKARI SHRAM SAMRIDE SAMITI LTD. VS. A CIT (LUCKNOW) (II) KANHAIYA LAL CHEL BIHARI LAL VS. ITO (11 TTJ 4 62) 7. BEFORE US LD. DR SUBMITTED THAT IT IS NOT A MER E CASE OF REJECTION OF BOOKS OF ACCOUNT AND ESTIMATE IN THE PROFITS BUT IT WAS A CASE WHERE THE AO FOUND SUBSTANTIAL DIFFERENCES IN THE STOCK OF GO ODS AS PER TAX AUDIT REPORT AND AS PER BOOKS OF ACCOUNT. THE ASSESSEE HA S FAILED TO EXPLAIN THESE DIFFERENCES AND ALSO OTHER DISCREPANCIES POIN TED OUT BY THE AO. THEREFORE THE AO WAS JUSTIFIED IN LEVYING THE PENA LTY WHICH FALLS WITHIN THE MEANING OF SECTION 271(1)(C). THE ASSESSEE HAS NOT FURNISHED ANY EXPLANATION WITH RESPECT TO THE DISCREPANCIES FOUND BY COMPARING TAX AUDIT REPORT AND BOOKS OF ACCOUNTS AND ALSO HAS NOT FURNISHED ANY EXPLANATION IN RESPECT OF CHANGED METHOD OF ACCOUNT ING AND ACCORDINGLY UNDER VALUING THE CLOSING STOCK WITHOUT ANY REASON. 8. ON THE OTHER HAND LD. AR SUBMITTED THAT ADDITIO NS WER MADE MERELY ON ESTIMATION AND THEREFORE NO PENALTY IS L EVIABLE IN VIEW OF THE TWO DECISIONS REFERRED TO BY THE LD. CIT(A) AS WELL AS THE DECISION IN THE CASE OF PARAMOUNT RATIO SERVICES VS. ITO 36 TTJ 464 . 6 9. LD. DR SUBMITTED THAT DECISION IN PARAMOUNT RATI O SERVICES VS. ITO(SUPRA) PERTAINED TO ASST. YEAR 1976-77 AND 77-7 8 AND THE PROVISIONS OF SECTION 271(1)(C) HAVE UNDERGONE SUBSTANTIAL CHA NGES THEREAFTER. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW LD. CIT(A) WAS NO T JUSTIFIED IN CANCELING THE PENALTY ON ADDITION AT RS.6 LAKHS. IT IS BECAUSE IT IS NOT A CASE OF MERE ESTIMATION OF ADDITION AFTER REJECTING THE BOOKS BUT IT WAS SPECIFIC ADDITION MADE BY THE AO IN RESPECT OF BOGU S PURCHASES VALUATION OF CLOSING STOCK WORK-IN-PROGRESS MISCE LLANEOUS. RATE DIFFERENCES. EVEN THOUGH THE TRIBUNAL HAS FINALLY R EDUCED THE ADDITION BY ESTIMATE BUT THAT DOES NOT TAKE AWAY THE BASIC STRU CTURE OF ADDITION WHICH WAS THE SPECIFIC ITEMS OF FURNISHING INACCURATE PAR TICULARS OF INCOME AND FAILURE TO EXPLAIN THE DISCREPANCIES. 11. THE CASE OF THE ASSESSEE CLEARLY FALLS WITHIN T HE MEANING OF EXPLANATION -1 TO SECTION 271(1)(C) WHICH READS AS UNDER :- EXPLANATION -1 WHERE IN RESPECT OF ANY FACTS MATER IAL TO THE COMPUTATION OF THE TOTAL INCOME OF ANY PERSON UNDER THIS ACT - (A) SUCH PERSON FAILS TO OFFER AN EXPLANATION OR OF FERS AN EXPLANATION WHICH IS FOUND BY THE [ASSESSING] OFFICER OR THE [COMMISSION ER (APPEALS)] [OR THE COMMISSIONER] TO BE FALSE OR (B) SUCH PERSON OFFERS AN EXPLANATION WHICH HE IS N OT ABLE TO SUBSTANTIATE[AND FAILS TO PROVE THAT SUCH EXPLANATION IS BONA FIDE A ND THAT ALL THE FACTS RELATING TO THE SAME AND MATERIAL TO THE COMPUTATION OF HIS TOTAL I NCOME HAVE BEEN DISCLOSED BY HI] THEN THE AMOUNT ADDED OR DISALLOWED IN COMPUTING T HE TOTAL INCOME OF SUCH PERSON AS A RESULT THEREOF SHALL FOR THE PURPOSES OF CLAUS E OF THIS SUB-SECTION BE DEEMED TO REPRESENT THE INCOME IN RESPECT OF WHICH PARTICULAR S HAVE BEEN CONCEALED. THE CASE OF THE ASSESSEE WOULD FALL WITHIN CLAUSE-A AS ASSESSEE FAILED TO EXPLAIN WHY THERE WAS A DIFFERENCE IN TAX AUDIT REP ORT AND BOOKS OF 7 ACCOUNT. THE ASSESSEE FAILED TO EXPLAIN WHY ONLY TH E CLOSING STOCK WAS VALUED DIFFERENTLY BY EXCLUDING MODVAT AND NOT THE OPENING STOCK. IT HAS BEEN HELD BY THE COURTS THAT IF CHANGE IN VALUA TION OF STOCK IS EFFECTED THEN IT HAS TO BE EFFECTED IN OPENING STOCK AS WELL AS IN CLOSING STOCK. HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. MAH AVIR ALLUMINIUM LTD. (2008) 297 ITR 77 (DEL) HAS HELD THAT IF ANY C HANGE IS TO BE MADE IN CLOSING STOCK THEN CORRESPONDING CHANGE IN THE OPEN ING STOCK HAS ALSO TO BE MADE. HONBLE SUPREME COURT IN SANJEEV WOOLEN MI LLS VS. CIT (2005) 279 ITR 434 (SC) HAS HELD THAT IT IS NOT PRO PER TO ADOPT DIFFERENT METHODS FOR VALUING OPENING AND CLOSING STOCK TO IN FLATE SPECIAL DEDUCTION FOR ONE AND SUPPRESSION OF PROFITS OF NEX T YEAR. AFTER COMING INTO FORCE OF THE EXPLANATION TO SECTION 271(1)(C) THE BURDEN IS ON ASSESSEE TO SHOW THAT THERE IS NO CONCEALMENT OF AN Y PARTICULARS OF THE INCOME AND ASSESSMENT MADE BY ESTIMATE IS INASMUCH AS LEGAL AS ANY OTHER ASSESSMENT. ONCE PENALTY IS INITIATED THEN IT IS FOR THE AO TO CONSIDER IT EITHER IN MAIN SECTION OR IN THE EXPLAN ATION. HE HAS IN FACT INVOKED CLAUSES A & B BOTH OF EXPLANATION -1 TO SEC TION 271(1)(C) FIRSTLY THERE IS NO EXPLANATION IN RESPECT OF MAJOR DISCREPANCIES POINTED OUT BY THE AO IN THE ASSESSMENT ORDER; SECONDLY WHA TEVER EXPLANATION HAS BEEN FURNISHED BY THE ASSESSEE AND AS REPRODUCE D ABOVE IS APPARENTLY NOT BONA FIDE AND ALL THE MATERIAL LEADING TO THE A SSESSMENT HAVE NOT BEEN FURNISHED INASMUCH AS IT IS NOT POINTED OUT AS TO W HETHER FIGURES GIVEN IN TAX AUDIT REPORT ARE CORRECT OR THE FIGURES GIVEN I N THE BOOKS ARE CORRECT. IT IS ALSO NOT EXPLAINED ON WHAT BASIS TAX AUDIT REPOR T WAS PREPARED BY THE AUDITORS. THE ASSESSEE ALSO FAILED TO EXPLAIN AND F URNISH THE NECESSARY EVIDENCE AS TO WHY IT CHANGED THE METHOD OF VALUATI ON OF CLOSING STOCK ONLY AND WHICH RESULTED IN LOWER INCOME FOR THE PUR POSE OF ASSESSMENT. THUS WHEN EXPLANATION -1 IS INVOKED DEEMING FICTION MENTIONED IN SECTION 271(1)(C) COMES INTO PLAY AND ADDITION SO P ROPOSED BY THE AO 8 AND AS MODIFIED BY THE TRIBUNAL WILL REPRESENT INCO ME IN RESPECT OF WHICH IT IS DEEMED THAT ASSESSEE HAS CONCEALED PARTICULAR S OF INCOME OR FILED INACCURATE PARTICULARS OF INCOME. THE ONUS NOW IS S HIFTED TO THE ASSESSEE TO DISCHARGE THIS BURDEN IN RESPECT OF WHICH HE HAS FAILED. 12. THE DECISIONS REFERRED BY THE CIT(A) ARE NOT AP PLICABLE ON THE FACTS OF THE PRESENT CASE BECAUSE ON THOSE CASES AD DITIONS WERE MADE SIMPLICITORY ONE ESTIMATE WAS SUBSTITUTED BY OTHER ESTIMATE AND NO OTHER BUT IN THE PRESENT CASE THERE ARE SPECIFIC FINDING OF FURNISHING INACCURATE PARTICULARS AND DISCREPANCIES WHICH REMAINED UN-CON TROVERTED TILL THE TRIBUNAL STAGE. IN VIEW OF THIS WE HOLD THAT LD. CI T(A) WAS NOT JUSTIFIED IN CANCELING THE PENALTY. THE APPEAL OF REVENUE IS ALL OWED. SD/- SD/- (BHAVNESH SAINI) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD DATED : 22/01/2010 MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD ORDER PRONOUNCED IN OPEN COURT ON 22/01/2010