ITA NO. 2792/Del/2013
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "B", NEW DELHI
BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER
AND
SHRI J.S. REDDY, ACCOUNTANT MEMBER
I.T.A. No. 2792/DEL/2013
A.Y. : 2009-10
ACIT, CIRCLE-24(1), M/s Ess Ell Cables Co.,
st
ROOM No. 1305, E-2, SP VS. D-50, 1 floor, Basant Lok,
Mukherjee, Civic Centre, Vasant Vihar,
Minto Road, New Delhi
New Delhi (PAN: AAAFE3222A)
(APPELLANT) (RESPONDENT)
Department by : Smt. Parvinder Kaur, Sr. DR
Assessee by : Sh. Amit Goel, CA
Date of Hearing : 10-06-2015
Date of Order : 11-06-2015
ORDER
PER H.S. SIDHU, JM
Revenue has filed this appeal against the Order dated
27.2.2013 passed by the Ld. Commissioner of Income Tax
(Appeals)-XXIII, New Delhi pertaining to assessment year 2009-10
on the following grounds:-
"1. On the facts and on the circumstances of the case,
the CIT(A) has erred in deleting the addition of
Rs. 4,31,41,035/- made by the AO.
2. The assessee craves leave to add, alter or amend
any of the grounds of appeal before or during the
course of the hearing of the appeal."
2. The brief facts of the case are that the assessee firm filed its
return of Income for the Assessment Year 2009-10 on 23.09.2009
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ITA NO. 2792/Del/2013
disclosing loss of Rs. 3,63,85,885/-. The assessee is engaged in the
business of manufacturing of enamelled wire, submersible wire, bare
copper wire, etc. During scrutiny assessment proceedings, the
Assessing Officer examined the claim of gross loss of (-) 3.65%
against the total turnover of Rs. 59,07,03,526/-, particularly in view
of the fact that the assessee had disclosed gross profit at the rate of
5.48% in the earlier year. The assessee explained that the loss was
on account of continuous fall in the price of the principal raw
material, copper, which had an average cost of Rs. 445 per kg at the
beginning of the year, and an average cost of Rs. 233 per kg at the
end of the year. The assessee stated that its purchases were booked
at the prices prevailing on the date of order whereas the prices had
fallen substantially by the time delivery was taken. The assessee
also incurred heavy losses where forward contracts had been
booked at higher prices than those prevailing on the date of
delivery. The assessee also stated that direct expenses had
increased, and higher depreciation had been debited on account of
investments in new plant. The Assessing Officer held that the fall in
the rate of copper was not an acceptable reason for incurring loss as
monthwise details of purchase and sale showed that the sale price
was lower than the purchase price only in the two months of
November and December 2008. The Assessing Officer also observed
that the assessee was involved in sale and purchase of copper with
its group concerns. In such a situation, the Assessing Officer
apprehended the possibility of diversion of income. The Assessing
Officer noticed that the assessee had sold copper scrap at Rs. 320 to
330 per kg. to. M/s Bombay Metal Industries, an associate concern,
and at Rs. 160 to 200 per kg. to M/s KG Metal and Alloys, another
sister concern. The Assessing Officer disallowed the claim of gross
loss of Rs. 2,15,80,361/-, and estimated the gross profit at 3.65% for
the year under consideration, at Rs. 2,15,60,678/- and completed
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the assessment u/s. 143(3) vide order dated 19.12.2011 wherein he
computed the gross profit @ 3.65% (2/3rd of last year gross profit
rate of 5.48%) of the immediately preceding previous year and after
disallowing gross loss declared of Rs. 2,15,80,361/- by the assessee
and making his own calculations and made additions for Rs.
2,15,60,678/- for gross profit earned (effectively disallowing Rs.
4,31,41,039/-) and computed the net taxable income at Rs.
67,55,154/-.
3. Against the aforesaid assessment order of the Assessing
Officer, Asseessee appealed before the Ld. First Appellate Authority,
who vide impugned order 27.2.2013 has allowed the appeal of the
assesee by deleting the addition of Rs. Rs. 4,31,41,039/-.
4. Aggrieved by the aforesaid order dated 27.2.2013, Revenue is
in appeal before the Tribunal.
5. At the time of hearing Ld. Departmental Representative has
relied upon the order of the Assessing Officer and reiterated on the
contentions raised in the grounds of appeal filed by the Revenue.
6. On the other hand, Ld. Counsel of the assessee relied upon
the order of the Ld. CIT(A) and submitted that the order of the Ld.
CIT(A) may be upheld. In support of his contention, he filed the
synopsis. For the sake of convenience, the synopsis are reproduced
hereunder:-
"The assessee is a partnership firm engaged in the-
business of manufacturing of enameled wire, submersible
wire and bare copper wire etc. Return of income was filed
by assessee declaring loss of Rs.3,63,85,885/-. The A.O.
completed the assessment at income of Rs.67,55,154/-
by making addition of Rs. 4,31,41,035/- by estimating
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ITA NO. 2792/Del/2013
G.P. rate of 3.65%. The Ld. CIT(A) has deleted the
disallowance made by the A.O. The assessee is
maintaining proper books of accounts. The books of
accounts of the assessee are based on actual state of
affairs and not based on any adhoc G.P.rate basis. The
accounts of the assessee are duly audited u/s 44AB of
Income Tax Act. The assessee is maintaining proper
records (both, quantity wise and amount wise) of opening
stock, purchase, sales and closing stock. All the details in
relation thereto had been furnished before the A.O. The
books of accounts were produced before the A.O. which
has been examined by him as admitted by himself in first
part of the assessment order. The book of accounts have
not been rejected. No discrepancies whatsoever has been
pointed by the A.O. in the books of accounts or the
details furnished by assessee. No discrepancies in the
quantity and amount of purchase and sales has been
pointed out by the A.O. Similarly no discrepancy in the
quantity and valuation of opening and closing stock has
been pointed out by A.O. No discrepancy in any of the
expenses claimed by the assessee has been pointed by
A.O. Under the circumstances, there was no rationale for
the A.O. to make the addition. The A.O. has made the
addition in an arbitrary manner without appreciating the
facts of the case.
It is a settled law that A.O. cannot make any addition
based on estimated G.P. if the books of accounts have
not been rejected by him. In fact, the various courts have
held that merely fall in G.P. rate cannot be a ground for
rejection of books of accounts. In the assessee's case, the
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ITA NO. 2792/Del/2013
facts are even stronger in as much as even the books of
accounts have been duly accepted by A.O. and has not
been rejected. Reliance is placed on the following case
laws :-
CIT v Smt Poonam Rani (Delhi High Court) 326 ITR 223
(2010)
CIT v Jacksons House (Delhi High Court) 198 Taxman 385
(Delhi)(2011)
DCIT v Hanuman Sugar Mills (P) Ltd (Allahabad High
Court) (2013) 221 Taxman 156
Madnani Construction Corp. Ltd. v CIT (2008) 296 ITR 45
(Gauhati High Court)
CIT v UP State Food & Essential Commodities (2013) 39
Taxmann.com 106 (Allahabad)
ACIT v Hitech Grain processing Pvt. Ltd. (ITAT, Delhi) ITA
No. 2885/De1l2011
ACIT v Ercon Composites (2014) ITAT Jodhpur 49
taxmann.com 489
Century Tiles Ltd v JCIT (2014) 51 taxman.com 515 (Ahd.
ITAT)
ITO v Sani Trade Agency (Ahd. ITAT) ITA No.
3524/Ahd/2007
ACIT v. Rushabh Vatika (Rajkot Bench) ITA No. 51 (RJK)
0[2013]
The CIT(A) in para 4 to para 4.4 (page No. 15 to Page No.
18 of her order) after elaborate discussion and cogent
reasons has rightly deleted the addition made by the
A.O."
7. We have heard both the parties and perused the records
especially the impugned order dated 27.2.2013, synopsis filed by
the Assessee, we find that the assessee before the Ld. CIT(A) has
submitted that the return of Income was filed on 23.09.2009
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ITA NO. 2792/Del/2013
declaring a loss Rs. 3,63,85,885/-. When AO has selected the case of
assessee and assessee has filed the computation of income along
with audited accounts and tax audit report for the year during the
course of assessment proceedings along with other details called for
from time to time. The assessee is a partnership firm engaged in the
manufacture of enamelled and submersible wire, bare copper wire,
etc. During the course of assessment proceeding the AO had raised
query as to the gross loss on operations amounting to Rs.
21580361/- calculated to be 3.65% of the turnover of Rs.
590703526/- as compared to a gross profit of 5.48% and 5.47%
declared for the immediately two preceding assessment years 2008-
09 and 2007-08 and consequent net loss declared by the assessee.
The assessee vide its submission dated 13.9.2011 filed the
comparative gross profit and net profit chart for three years
(including the year under assessment) wherein the reasons for
declaring the gross loss on operations and incurring net loss for the
year were elaborated upon along with documentary evidence in
support of its claims. No further queries were raised by the AO on
the issue nor was any show cause given to the assessee that the
arguments advanced by it explaining the loss incurred was not
acceptable to the AO thereafter. The AO then framed the
assessment order under section 143(3) of the Act on 19.12.2011
wherein he computed the gross profit @ 3.65% (2/3rd of last year
gross profit rate of 5.48%) of the immediately preceding previous
year and after disallowing gross loss declared of Rs. 2,15,80,361/- by
the assessee and making his own calculations / assumptions figures
made additions for Rs. 2,15,60,678/- for gross profit earned
(effectively disallowing Rs. 4,31,41,039/-) and computed the net
taxable income at Rs. 67,55,154/-.
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7.1 We further find that the scrutiny assessments had been framed
in its case for the Assessment Years 2006-07, 2007-08 and 2008-09,
in which only some disallowance out of expenses had been made
The assessee has argued that comparing the month wise rates of
purchase and sale does not take into account the value of opening
and closing stock as also of direct expenses. The assessee has
shown that merely comparing the difference of sales and cost of
sales and inventories would show a nominal profit of Rs.82,04,274/-,
but after including the manufacturing expenses, the assessee
incurred a gross loss of Rs. 2,15,80,361/-, which is evidenced by the
audited accounts. The assessee has also pointed to the fact that in
the immediately succeeding year, the Assessment Year 2010-11,
with the increase in the prices of copper, the gross profit jumped
back to 7.5%. It has been" argued that there was a global melt down
in commodity prices between September 2008 and March 2009
following the collapse of banks in the United States. The assessee
has submitted a chart of the monthly average rates prevailing at the
London Metal Exchange, which shows that the average rate of April
2008 was USD 8684.93, which fell to USD 3717.00 in November
2008, and for the month of March 2009 was at USD 3749.75. The
assessee has pointed out that, as compared to the earlier year, its
sales increased in quantity from 15,27,065/- kgs to 16,40,902 kgs
but in value fell from Rs. 64,44,74,892/- to Rs.59,07,03,526/- due to
fall in prices.
7.2 We note that the CIT(A) observed that the assessee's contention
regarding loss incurred on account of forward contracts entered into
for purchase of copper has also been verified with reference to the
booking orders placed and the corresponding purchases made. The
assessee has shown with reference to the bookings made and the
deliveries taken, that it paid an excess value of Rs. 2,45,85,874/- on
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ITA NO. 2792/Del/2013
account of forward contracts entered into between 16.07.2008 and
29.09.2008. To give an example, the assessee had contracted to
purchase 18 MT of copper on 29.07.2008 at a rate of Rs. 434.25, but
when delivery was taken on 02.11.2008, the market rate was only
Rs. 221.73. Copies of purchase bills in respect of the forward
contracts with the suppliers M/s Sterlite Industries and M/s Hindalco
have been filed by the assessee. The excess price paid on account
of forward contracts alone works out to Rs. 2,45,85,874/-. The
assessee has also furnished evidence of cancellation of a forward
contract for purchase of 25 MT of copper which was cancelled
without delivery resulting in a loss of Rs. 38,70,047/-.
7.3 The observation of the Assessing Officer that profit may have
been diverted to sister concerns is also found to be unsubstantiated.
The instances of sales of copper scrap mentioned in the. assessment
order are of different times of the year. The sale of copper scrap at
Rs. 320-330 per kg. took place between April and July 2008 when
the sale price of copper wire was between Rs. 410 and 430 per kg.
The sale of scrap at Rs. 160-200 per kg. was in December 2008
when the sale price of copper wire was Rs. 225 per kg. The
Assessing Officer has not compared these sale instances with any
sales to outside parties, and the Assessing Officer has not shown
that the sale price of copper scrap prevailing at the time was lower
than the rate charged from the sister concerns.
7.4 The counsel for the assessee has submitted that the gross loss is
also on account of the opening stock of 88,692 kgs. of copper valued
at Rs. 445 per kg. The purchase quantity of 1552.210 MT is less than
the sale quantity of 1640.90 MT which could only have come out of
the opening stock. Hence the finding of the Assessing Officer that
the monthly rates of sale and purchase shows a surplus of Rs.
5,25,35,185/- at the end of the year inspite of the fall in the rate of
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ITA NO. 2792/Del/2013
copper, ignores the value of opening stock of Rs. 3,94,67,940/-
(88,692 x 445). We find that this contention is correct, as a working
of gross profit must necessarily take into account the opening and
closing stock, and direct expenses, and not only be based on
comparison of purchase prices of raw material and sale prices of
finished products. That the Assessing Officer has based the addition
of Rs. 4,31.41,035/- entirely on the fall in gross profit rate, without
bringing any other material on record, and without disputing the
results. It is established law that fall in gross profit alone, without
pointing out defects in the books of account, is not an adequate
basis for making additions. "Additions to the profits of the assessee
made solely on the ground that it was low without giving a specific
finding that the accounts of the assessee were not correct and
complete, or that the income could not be properly determined and
deduced from the accounting method employed by the assessee, is
not justified. We find considerable cogency in the finding of the Ld.
CIT(A) in the impugned order that the mere fact that there was a
less rate of gross profit declared by an assessee as compared to the
previous year would not by itself be sufficient to justify the addition."
In this regard, Ld. CIT(A) has referred the decision in the case of
Aluminium Industries (P) Ltd. Vs. CIT (1995) 80 Taxmann 184
(Gauhati). After considering the evidences filed before Ld. CIT(A)
regarding the continuous fall in the prices of copper, and after
verifying the quantitative tally of consumption of raw material and
manufacture of finished goods, the addition made on account of
estimation of gross profit, has rightly been deleted by the Ld. CIT(A).
In the background of the aforesaid detailed discussions, we find that
Ld. CIT(A) has rightly deleted the addition of Rs. 4,31,41,035/-
entirely on the fall in gross profit rate. Therefore, we do not see any
reason to interfere with the well reasoned order of the Ld. CIT(A),
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accordingly, we uphold the same by dismissing the appeal filed by
the Revenue.
8. In the result, the Appeal filed by the Revenue stands
dismissed.
Order pronounced in the Open Court on 11/06/2015.
Sd/- Sd/-
[J.S. REDDY] [H.S. SIDHU]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date 11/6/2015
"SRBHATNAGAR"
Copy forwarded to: -
1. Assessee -
2. Respondent -
3. CIT
4. CIT (A)
5. DR, ITAT TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
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