M S Three Star Granites P Ltd Trichur v. The Acit Trichur

In The Income Tax Appellate Tribunal Cochin Bench Cochin Before Shri George George K Jm Shri Manjunatha G Am Ita No 471 Coch 201 6 Asst Year 2011 2012 M S Three Star Granites Private Limited P O Thayoor Pazhavoor Erumapetty Thrissur 680 584 Pan Aaact 9044 Q Vs The Asst Commissioner Of Income Tax Circle 1 1 Trichur Appellant Respondent Appellant By Sri Sivaramakrishnan Ca Respondent By Sri A Dhanaraj Sr Dr Date Of Hearing 21 12 2017 Date Of Pronouncement 21 12 2017 O R D E R Per Manjunatha G Am This Appeal Filed By The Assessee Is Directed Against The Order Of The Commissioner Of Income Tax A Ppeal Thrissur Dated 11 Th June 2016 And It Pertains To Assessment Year 2011 201 2 2 The Assessee Has Raised The Following Grounds Of Appeal The Only Issue Is The Estimation Of Gross Profit At A Higher Percentage Than The Gross Profit Recorded In The Accounts The Appellant Is A Private Limited Company Engaged In The Business Of Mechanized Crushing Of Granite Metals Ita No 471 Coch 201 6 M S Three Star Granites Private Limited 2 During The Financial Year Ended 31 03 2011 The Total Turnover Was Rs 4 50 1 0 282 And Gross Profit Rs 1 25 29 960 Which Works Out To 27 64 The Assessing Authority While Completing The Assessment U S 143 3 For The Assessment Year 2011 2012 Estimated The Gross Profit 36 Which Was The Gross Profit Found At The Time Of Survey Conducted On 19 01 2013 This Resulted In An Addition Of Rs 37 87 93 9 Aggrieved By The Addition The Assessee Preferred Appeal And The First Appellate Authority Reduced The Addition By 50 And The Addition On Gross Profit Is Restricted To 50 Of The Addition Amounting To Rs 1 8 93 970 The Appellant Is Aggrieved By This Addition And Hence This Appeal The Assessing Officer Was Not Justified In Estimating The G P Without Any Substantial And Material Evidence The Appellant Is A Private Limited Company Engaged In The Business Of Mechanized Crushing Of Granite Metals The Appellant Is Assessed To Income Tax For The Past Many Years And For The Assessment Year 2011 12 The Appellant Have Returned A Total Income Of Rs 23 03 080 The Accounts Were Subject To Scrutiny Under 143 3 And In The Process Of Assessment The Asse Ssing Authority Have Adopted Gross Profit Of 36 Instead Of 27 64 Disclosed By The Assessee In The Books There Is No Other Addition Except The Estimation Of Gross Profit At 36 At The Time Of Assessment Though The Assessee Had Explained The Reasons For Variation In Gross Profit The Assessing Authority Proceeded To Fix The Gross Profit At 36 Being The Gross Profit Offered For The Survey Year The Gross Profit Is A Relative Term Which Varies For Various Reasons Some Of Which Are Controllable From The As Sessees Side But Most Of Which Are Beyond The Ita No 471 Coch 201 6 M S Three Star Granites Private Limited 3 Control Of The Assessee In A Business Of This Nature There Are So Many Factors Influencing Gross Profit Some Times The Machine Breaks Down Frequently Which Add To Cost Similarly The Metals Crushed Have To B E Reprocessed To Remove Mud And Other Impurity Which Some Times Is More Which Affect The Direct Expenditure The Increase In Transportation Cost Diesel Price And The Difficulty In Raising Selling Price Due To Industrial Average Also Affects The Gross Prof It The Sale Price Cannot Be Altered Frequently Whereas Crushing Cost Such As Labour Electricity Etc Varies Considerably Because Of These Reasons There Will Be Change In Gross Profit Which Cannot Be Stagnant In The Previous Year The Gross Profit Was Only 2 2 Whereas In The Year Of Assessment The Gross Profit Is 27 64 Due To Internal Control And Cost Reduction Measures The Gross Profit For The Assessment Year 2012 13 Was Raised To 36 Which Shows That The Management Is Very Keen In Reducing Wasteful Expens Es And Optimizing Profit Ours Is A Medium Type Industry And In Order To Attract Business We Use To Give Discount To Customers Which Also Affect Our Profit But On No Account Profit Can Be Estimated Estimating Gross Profit As There Is No Other Suppression Detected And Difference Found Also The Assessing Authority Have Estimated The Gross Profit 36 For The Reason That Value Of Closing Stock Cannot Be Taken As Nil As Quantitative Production Records Is Not Maintained Metal Crusher Units Are Not Struc Tured Or Standardize D Production Process Units The Demand For Metal Products Depends Upon The Market Conditions And C Onstruction Industry The Demand Is Very Volatile Normally The Demand During Rainy Season Is Very Low But During Summer Seasons The Sit Uation Is Better During The Last Quarter Of The Year Ie January To March The Sales Will Be Very High And There Will Be No Stock This Is The Reason That No Stock Is Shown As On 31 03 2011 There Is No Opening Stock Also Which Neutralize The Ita No 471 Coch 201 6 M S Three Star Granites Private Limited 4 Profit Elem Ent When There Is No Other Material Evidence The Assessing Authority Was Not Justified In Estimating The G P Even In Survey No Material Defect Was Found Nor Any Suppression Defected The Sales And Cost Of Production Worked Out At The Time Of Inspecti On And The G P Found Was Offered Gross Profit As Stated In Our Submission Varies From Year To Year And Even From Product To Product And Season To Season The Survey Was Held In 19 01 2013 Ie A Y 2013 14 In Between The Assessment Year 2011 12 And 2013 14 Lot Of Changes Have Taken Place In Our Production Process Such As Installing New Machines With More Capacity And Better Speed Change Of Spaces Of Old Machines Giving Low Production And So On The Appellant Have Reduced The Cost And Achieved Higher Perc Entage Of Profit On Subsequent Years Because Of The Cost Control Measures Adopted In Various Stages The Fact Being So The Estimation Of Higher Gp Taking The Rate Formed At A Later Year Without Any Concrete Evidence Or Material Is Quite Unwarranted And Being Objected To Law May Be Deleted On These And Such Other Grounds That May Be Put Forth At The Time Of Hearing It Is Prayed To Accept The Appeal 3 The Brief Facts Of The Case Are That The Assessee Company Is Engaged In The Business Of Mechanized Crushing Of Granite Metal Filed Its Return Of Income For The Assessment Year 2011 2012 On 30 09 2011 Declaring Total Income At Rs 23 03 080 The Case Was Selected For Scrutiny And Notices U S 143 3 And 143 1 Were Issued In Response To Notices The Aut Horized Representative Of The Assessee Appeared And Filed The Details As Called For During The Course Of Assessment Proceedings The Assessing Officer Noticed That The Assessee Has Shown Gross Profit Of 27 6 4 On Total Sales Turnover Of Ita No 471 Coch 201 6 M S Three Star Granites Private Limited 5 Rs 4 53 10 282 Th E A O Further Noted That Survey Was Conducted On 19 01 2013 At The Business Premises Of The Assessee For The Survey Year The Assessee Has Offered Gross Profit Of 36 On Sales Thus The Gp Shown By The Assessee For The Year Under Consideration Is Appare Ntly On Lower Side When Compared To Gp Declared By The Assessee For The Survey Year Therefore The A O Asked The Assessee To Justify The Decline In Gp When Compared To Gp Declared For The Survey Year With Necessary Evidences In Response To Notice The A Ssessee Submitted That The Gp Cannot Be At A Uniform Level For All The Assessment Years Gross Profit Depends On Various Factors Including Raw Material Used For Production Of Finished Goods As Well As Expenditure Incurred Which Depends Upon Factual Matters Therefore No Addition Can Be Made Towards Difference In Gp By Comparing Earlier Year Or Subsequent Year Gross Profit Percentage The Assessee Further Submitted That Its Gp For The Assessment Year 2010 2011 Was At 22 And The Same Has Been Increased To 2 7 64 For The Assessment Year 2011 2012 And Also 36 For The Assessment Year 2012 2013 There Is Consistent Increase In Gp Due To Factors Put Forth By The Management In Reducing The Wasteful Expenses And Optimizing Profit The Assessee Further Submitted Th At Without Any Observation With Regard To Incorrectness In Books Of Account Or Sales The Gp Cannot Be Estimated Based On Earlier Year Or Subsequent Year Gp The A O After Considering The Relevant Submission Of The Assessee Observed That The Assessee Has Not Maintained Quantitative Production Details And Also Not Considered Closing Stock For The Year Under Ita No 471 Coch 201 6 M S Three Star Granites Private Limited 6 Consideration Therefore The Assessees Book Results Cannot Be Accepted As Genuine And Hence Rejected The Gross Profit Declared By The Assessee And Est Imated The Gross Profit At 36 On Total Sales Turnover And Made Addition Of Rs 37 87 939 4 Aggrieved By The Assessment Order The Assessee Preferred An Appeal Before The Cit A Before The Cit A The Assessee Reiterated Its Submissions Made Before The A O To Contest Additions Made By The A O Towards Estimation Of Gp The Cit A After Considering The Relevant Submissions Of The Assessee Scaled Out The Additions Made By The A O Towards Estimation Of Gp At 50 Of Actual Additions Made By The A O Aggrieved By The Cit A S Order The Assessee Is In Appeal Before The Tribunal 5 We Have Heard Both Parties And Considered The Material On Record The A O Has Estimated Gp On The Basis Of Gp Declared By The Assessee For The Assessment Year 2013 20 14 On The Basis Of Survey Conducted In The Business Premises On 19 01 2013 The A O Further Observed That The Assessees Book Results Cannot Be Considered As Genuine Because The Assessee Could Not Produce Quantitative Production Details And Also Not Taken Into Account Closing Stock To Determine The Net Profit For The Relevant Financial Year It Is The Contention Of The Assessee That The Gross Profit Depends Upon Various Factors Including The Raw Material Used For Production Of Finished Goods And Various Ex Penditures Which Cannot Be Uniform For All The Years The Assessee Further Contended That Ita No 471 Coch 201 6 M S Three Star Granites Private Limited 7 Its Gross Profit Increased Consistently From Assessment Year 2010 2011 Onwards Which Is Evident From The Fact That It Has Declared Gross Profit At 22 27 64 And 3 6 Respectively For The Assessment Year 2010 2011 To Assessment Year 2012 2013 It Is Not The Case Of The Assessing Officer That There Is Decline In The Gp Declared By The Assessee For The Year Under Consideration When Compared To Earlier Year Gp The A O Has Considered Subsequent Years Gross Profit To Estimate The Gross Profit For The Current Year Which Is Incorrect 6 Having Heard Both The Sides We Find Merit In The Argument Of The Assessee For The Reason That The Gp Cannot Be Uniform For All The Years The Gp Depends Upon Various Factors Including Raw Material Used For The Production Of Finished Goods And The Expenses Which Vary From Year To Year Unless There Is A Finding About The Incorrectness Of Books Of Account Maintained By The Assessee Or Sales Made Outside The Books Of Account The Gp Declared By The Assessee Cannot Be Doubted In This Case The A O Has Taken Subsequent Years Gp As A Base Year For Estimating The Gp For The Current Period Normally When There Is A Decline In Gp When Compa Red To Earlier Period There Is A Possibility Of Enhancing The Gp If The Books Of Account Maintained By The Assessee Are Found With Inconsistency Or Irregularity In This Case The A O Has Not Pointed Out Any Irregularities In The Books Of Account Except S Tating That The Assessee Has Not Taken Closing Stock For The Purpose Of Determination Of Net Profit The Assessee Has Explained The Reasons For Not Ita No 471 Coch 201 6 M S Three Star Granites Private Limited 8 Considering The Net Profit Therefore We Are Of The View That There Is No Reason For The A O To Estimate G P Based On Subsequent Years Gp Without There Being Any Observations With Regard To Incorrectness In Books Of Account Hence We Direct The A O To Delete The Additions Made Towards Estimation Of Gp 7 In The Result The Appeal Filed By The Assessee Is Allowed Order Pronounced On This 21 St Day Of December 2017 Sd Sd George George K Manjunatha G Judicial Member Accountant Member Cochin Dated 21 St December 2017 Devdas Copy Of The Order Forwarded To By Order Asstt Registrar Itat Cochin 1 The Appellant 2 The Respondent 3 The Cit Thrissur 4 Cit A I Thrissur 5 Dr Itat Cochin 6 Guard File