2014 (4) TMI 633 - HC - Income Tax

Pharma manufacturer's tax appeal dismissed due to discrepancies in income calculation

Commissioner of Income Tax –II Versus Leo Formulations Pvt. Ltd.

The courts upheld the rejection of book results for the assessment years 2007-08 and 2008-09 for a pharmaceutical drug manufacturer. Additional income of ... Rejection of book results – Restriction of extra consumption of raw materials – To what extent the additions were necessary - Held that:- The AO as well as the appellate authorities held that the book results did not reflect the correct position - CIT(Appeals) as well as the Tribunal limited such additions - CIT(A) reduced the excess sales to 20% of the turnover and, thereafter applied GP rate of 35% taking average of the three years of GP rate of the assessee – Relying upon Commissioner of Income-tax vs. President Industries [1999 (4) TMI 8 - GUJARAT High Court] - exercise undertaken by CIT(A) and the Tribunal on the basis of evidence on record gives no rise to the substantial question of law - The exercise is primarily in the nature of appreciation of evidence and would be based on questions of facts – the contentions of the revenue cannot be accepted – Decided against Revenue. Issues:1. Assessment of appropriate additions to the income of the assessee after rejection of book results for assessment years 2007-08 and 2008-09.Analysis:1. The assessing officer found discrepancies in the recording of raw material consumption by the pharmaceutical drug manufacturer, leading to the estimation of excess raw material consumption at 46.05%. Additionally, unaccounted purchases were noted, resulting in the addition of Rs. 88.47 lakhs to the assessee's income. The CIT(Appeals) upheld the rejection of book results and limited the additions by applying a 35% GP ratio on the extra consumption taken at 20% of the turnover. This decision was based on previous court rulings emphasizing the taxation of net profit rather than entire sales. The Tribunal confirmed the CIT(Appeals) decision, rationalizing the estimation of profit element at 36% of the extra consumption.2. The assessing officer's approach of adding 40% of the total turnover as income due to excess production and sales was challenged by the CIT(Appeals) and the Tribunal. They reduced the excess sales to 20% of turnover and applied a 35% GP rate based on the average of three years. This decision aligned with precedents like Commissioner of Income-tax vs. President Industries and Commissioner of Income-tax vs. Gurubachhan Singh J. Juneja. The courts deemed this exercise as factual and evidence-based, dismissing the Revenue's argument to add the entire excess consumption to income without evidence of unaccounted expenditures related to production.3. The assessing officer's confusion between excess raw material consumption and unaccounted sale of finished products was clarified by the courts. They highlighted that excess raw material consumption does not directly equate to excess sales, as manufacturing processes involve various costs beyond raw materials. The CIT(Appeals) correctly attempted to tax the income arising from unaccounted raw material consumption by applying a GP rate of 35% on the estimated excess consumption, reflecting the possible profit of the assessee. Ultimately, the Tax Appeals were dismissed, affirming the decisions of the lower authorities.