TaxTMI 
TaxTMI 
2014 (6) TMI 572
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....he brief facts of the case are that the Assessing Officer observed that the assessee is engaged in manufacturing and trading of glazed tiles. The sales, gross and net profit of the assessee during the year under consideration and earlier three years were as under: Asst. Year Turnover Gross Profit % Net Profit % 2006-07 18,48,38,000 4,25,89,875 23.04 97,98,942 5.30 2007-08 20,15,89,793 4,71,98,249 23.41 1,05,38,313 5.23 2008-09 22,85,54,986 5,37,41,942 23.51 1,20,07,955 5.25 2009-10 36,54,77,061 7,92,23,469 21.68 78,57,610 2.15 4. Further, the Assessing Officer required the assessee to furnish the reason for fall in gross profit rate and net profit rate. The assessee submitted that the fall in the gross profit rate as compared to last year by 1.83% was on account increase in the cost of raw materials, transportation expenses and various other manufacturing expenses. The Assessing Officer found that the selling price per box of glazed tiles increased during the year under consideration to Rs 220/- per box compared to Rs 130/- per box in the immediately preceding year. He, therefore,....
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....se and in this process also, electricity is used. After the pressing process, goods are put on conveyor belt and the same is sent to horizontal dryer where the remaining moisture evaporates. The temperature of this horizontal dryer is 300 to 400 degrees. For all this process, fuel and electricity is used. Afterwards, it is sent for printing purpose where glazes, colour and chemical as per requirement is added and the work of design as per requirement is carried out and the entire process also uses electricity. Afterwards, it is sent to kiln where temperature is 1,210 degrees. The supply in the kiln is continuous and uninterrupted and fuel is used for this process also. After the above process, polishing and sizing process is done through conveyor belt and the assessee has to use electricity for this purpose. Thereafter, sorting of finished goods as per quality like premium, standard, commercial etc. is done. Thereafter, finished goods are packed manually and the strapping of the boxes is done on machine. Considering the above manufacturing process, it will be clear that most of the plant runs by electricity and fuel. It was submitted that the assessee had no control over consumptio....
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....ly excessive as compared to last year: A.Y. 2009-10 A.Y. 2008-09 (i) Consumable stores & spares 1,85,44,245 55,49,505 (ii) Payment to employees including labour 1,73,68,919 70,79,432 (iii) Repairs & maintenance expenses 1,28,93,965 1,43,568 9. He noted that the assessee was required to furnish the details of such expenses, reasons of increase in expenses as compared to last year and to produce relevant vouchers of all expenses. The Assessing Officer noted that the assessee furnished details of the expenses regarding the repairs and maintenance of Rs 1,28,93,965/-. The assessee furnished details in three parts as follows: (i) Rs 88,84,093/- (ii) Rs 9,66,340/- (iii) Rs 30,43,532/- Rs 1,28,93,965/- 10. The Assessing Officer further noted that the assessee admitted that expenditure of Rs 30,43,532/- is capital expenditure related to erection of "dryer plant". Accordingly, the same will be treated as capital expenditure on which depreciation of Rs 5,01,530/- at the rate of 15% will be allowed and balance Rs 25,....
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.....e. cost of raw materials, market competition and availability, change of product concept and design, terms and condition of suppliers. The appellant has submitted that the provision of section 145 does not apply in the case of assessee as AO has failed to prove the basic aspects to reject the books of accounts u/s145 of the Act. The appellant has submitted that it has maintained and regularly employed a method of accounting and books of accounts are audited under the provision of companies/act as well as income tax Act, no significant omission found regarding completed accounts and AO has not found any discrepancy in books of accounts as well as no comment regarding correctness and completeness of the accounts and no reason has been recorded by the AO to the unacceptability of the method and irregularity of the accounts kept by the assessee. The appellant submitted that it is well settled law that in the absence of such a finding recorded by the authorities, the books result cannot be ignored only for the reason that the assessee has made expenses which are highly excessive as compared to last year. 2.5 After going through the facts of the case, it is seen th....
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....aterials in quantity value and production compared to last month of the year. In ceramics manufacturing process there are divisions for manufacturing of tiles like spray direr, kiln, polish unpolish stock yard, packing and unpack stock yard etc. hence, variation in breakage depended upon situation, use of items and practical problems occurred at the time of manufacturing process, therefore, the variation in breakage during the year is not a valid reason regarding rejecting books of accounts or fall down of Gross profit. This explanation of the appellant is very general and not substantiated by any documentary evidence or any systematic detail as to how the breakage in one month is higher and not in other month irrespective of the production. This shows that appellant has not kept the record properly from which the details can be procured. In assessment order para 3.5, the AO has noted the expenses of this year which are highly excessive as compared to last year. The details are as under: A.Y. 2009-10 A.Y. 2008-09 (i) Consumable stores & spares 18544245 55495....
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....s that appellant has inflated the expenses to lower the profit during the year. The gross profit rate as compared to last year is less by 1.83% due to increase in cost of raw materials, transportation expenses and various manufacturing expenses etc. This plea of the assessee is not acceptable as the selling price per box during the assessment year under consideration is Rs.220/- per box as compared to Rs.130/- per box last year. The appellant has also submitted the comparable profit ratio of other Tiles manufacturing companies. This comparison is not conclusive as every case has different set of facts and secondly, in all the company there is no significant change of profit whereas in appellant's case the fall is almost 60% compared to earlier year. It can be said that even if regular adoption of a method of accounting is there the annual profits cannot properly be deduced from the method employed and there are significant omission to show the correct expenses. The AO has rightly rejected the books of accounts and reasonably estimated the gross profit of the assessee @ 23.338% being the average G.P rate of last 3 years, as against G.P. rate of 21.68% shown by the appellant. &nbs....
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.... confirmed. The ground of the appellant is dismissed." 12. The Authorized Representative of the assessee besides relying on his submission before the Commissioner of Income Tax (Appeals),argued that on the basis of consumption of fuel and electricity, the production of the assessee cannot be estimated and addition cannot be made on account of suppressed production. For this, he placed reliance on the decision of this Tribunal in the case of ITO Vs. Pragati Fashions reported in (2011) 12 ITR 444 (Ahd.) (Trib.) wherein it was held that "cloth cannot be processed merely by using electricity. It also requires consumption of various dyes and chemicals and also use of manpower. For all these factors, no adverse finding is given by the Assessing Officer. Thus, the consumption of intermediate and labour behind this is sufficient production achieved by the assessee. Considering all these factors, there is no cause of addition as made out by the Assessing Officer. We, therefore, do not find any justification for sustaining the addition as proposed by the Assessing Officer." Further he relied on the decision of this Tribunal in the case of Bharuch & Sons, Surat Vs. Department of Income Tax....
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....t is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. Secondly, even if for some reason the books are rejected it is not open to Assessing Officer to make any addition on estimate basis or on pure guess work. The burden of showing that the apparent state of affairs is not the real one is very heavy on the Department. (Bedi & Co. Pvt. Ltd. Vs. CIT 144 ITR 352 (Karnataka) affirmed by the Hon'ble Supreme Court in 230 ITR 580. No material has been placed before us to doubt the nature of transactions recorded in the books as mentioned by the Commissioner of Income Tax (Appeals). No specific discrepancies or defects in the books of account of the assessee have been pointed out nor was any material brought to our notice to establish that purchases were inflated or receipts suppressed. In these circumstances, there was no justification for invoking the provisions of section 145 of the Act (Vikram Plastics 239 ITR 161 (Guj.) and estimating the profits. In view of the above facts specially when there is no material before us to take a different view in the matter, we are not inclined to interfere with the findings of the Commissioner of Incom....
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....or method of accounting employed is such on the basis of which correct profit of the assessee cannot be deduced. 17. Further, on finding defect in a particular account only, the effect of which can be separately worked out or estimated, then wholesale rejection of books of account should not be resorted to. 18. Now coming to the facts of the instant case, we find that it is not in dispute that the assessee maintained regular books of account which were duly audited and the stock register was also duly maintained by the assessee. 19. Further, no material was brought on record to show that any transaction made by the assessee was not recorded in the books of account. 20. Further, no material was brought on record to show that the method of accounting employed by the assessee was not a regular or consistent method or a method from which the correct profit of the assessee could not be deduced. 21. Further, apart from the breakage, no other expenses entered in the books of account were found to be not supported by proper vouchers or were not verifiable. 22. Further, in our considered opinion, disproportionate increase in expenses under any head by itself does not empow....
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....hat on going through the details of fuel consumption and consumption of raw materials for Financial Year 2006-07 and 2007-08, it is noticed that fuel consumption increased abnormally in the assessment year under consideration whereas production did not increase proportionately. He observed that the details are as under: Financial Year 2007-08 2006-07 Fuel Consumption Rs 5,39,26,525/- Rs 3,58,63,663/- Consumption of raw material Rs 3,18,21,550/- Rs 3,53,93,340/- Production of tiles in boxes 17,11,343 sq. mts. 16,09,394 sq. mts. From the above table, the Assessing Officer found that consumption of fuel increased approximately Rs 2 crores whereas consumption of raw materials is reduced in Financial Year 2007-08. He observed that because fuel is consumed for production of tiles only, quantity of tiles manufactured in Financial Year 2007-08 must have increased proportionately as compared to fuel but the same has not happened in the case of the assessee. The assessee was required to explain the reasons for the same. He observed that on proportionate basis the production should have been 24,15,908 square metres. He noted that against propor....
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....was running kiln at higher temperature by 40 degree centigrade. The assessee's argument that kiln was also empty run to some extent is also not acceptable as last year also, same kiln was used by the assessee and kiln cannot be fully loaded every time. Same operational activities are carried on in kiln every year as assessee is manufacturing tiles only. The Assessing Officer observed that for working out the shortfall in manufacture of tiles by 52591 square metres assessee has taken into consideration only quantity of LNG which is not correct as all fuel consumed should have been taken into consideration. The Assessing Officer further observed that the assessee has filed acknowledgement from Minister of Commerce & Industry dated 24.03.2004 in which it is mentioned that the assessee's manufacturing capacity is 18 lakh square metres and in his reply filed on 30.11.2010 also, the assessee has taken ground that its production capacity is still 18 lakh square metres and argued that production of tiles more than capacity is not possible. The Assessing Officer observed that this argument of the assessee was reasonable and acceptable also. He observed that anyway total production cannot ex....
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....s not recorded in the books of account and applying gross profit rate on the sale value of such excess production, made addition of Rs 27,20,045/- to the income of the assessee as profit on undisclosed sales. 29. On appeal, the Commissioner of Income Tax (Appeals) deleted the above addition by observing that there may be various reasons for variance in fuel consumption on manufacturing of glazed tiles, the comparison of absolute value of fuel consumption is not proper and can give absurd result, there was a change in the process of manufacturing during the year under consideration, insofar as the assessee during the year changed LPG fuel to LNG fuel for its manufacturing and lastly, no specific defect in the audited accounts of the assessee was pointed out and in absence of the same, the addition made was only on the basis of conjectures and surmises. 30. The Departmental Representative before us supported the order of the Assessing Officer. The only specific contention of the Departmental Representative before us was that the assessee during the course of assessment hearing itself admitted to have produced 17,63,930 square metres of glazed tiles and therefore, the Commission....
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.... of the facts of the case, but it by itself does not empower the Assessing Officer to assume some undisclosed production and thereby make addition to the result disclosed by the regularly maintained books of account. We, therefore, do not find any infirmity in the order of the Commissioner of Income Tax (Appeals) which is hereby confirmed and the ground of appeal of the Revenue is dismissed. 36. Ground no. 2 in the Revenue's appeal is directed against the order of the Commissioner of Income Tax (Appeals) deleting the addition of Rs 1,34,569/- made on account of additional deprecation on electric installation. 37. We have heard the rival submissions and perused the orders of lower authorities and materials available on record. The undisputed facts of the case are that the assessee claimed depreciation at the rate of 15% on electric installations which were part and parcel of plant and machinery of the assessee. The Assessing Officer allowed depreciation at the rate of 10% to the assessee on the electric installations on the ground that as per Income Tax Rules, depreciation on electric installations is allowable at the rate of 10% only for Assessment Year 2008-09. The Commissio....