Commissioner Of Income Tax v. Evergreen Synthetics Pvt.ltd.....opponent(S

O/TAXAP/1412/2005 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1412 of 2005TO TAX APPEAL NO. 1413 of 2005 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ==================================== 1Whether Reporters of Local Papers may be allowed to see the judgment?2To be referred to the Reporter or not?3Whether their Lordships wish to see the fair copy of the judgment?4Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder?5Whether it is to be circulated to the civil judge? ==================================== COMMISSIONER OF INCOME TAX....Appellant(s) Versus EVERGREEN SYNTHETICS PVT.LTD.....Opponent(s) ==================================== Appearance: MR MR BHATT, SR ADVOCATE with MRS MAUNA M BHATT, ADVOCATE for the Appellant(s) No. 1 MR SN SOPARKAR, SR ADVOCATE with MRS SWATI SOPARKAR, ADVOCATE for the Opponent(s) No. 1 ==================================== 1. 2. CORAM: HONOURABLE MR.JUSTICE KS JHAVERIandHONOURABLE MR.JUSTICE K.J.THAKER Date : 15/12/2014 ORAL JUDGMENT(PER : HONOURABLE MR.JUSTICE KS JHAVERI) By way of these Tax Appeals the department has assailed the order of the Tribunal dated 28/02/2005 passed in ITA No. 2785/AHD/2004 for the Assessment Year 2001-02 as well as order dated 28/02/2005 passed in ITA No. 3008/AHD/2004 for the Assessment Year 2001-02. Brief facts of the cases on hand are that the assesee company is engaged in the business of grey cloth manufacturing and also selling dyed and printed cloth after processing in other dyeing houses on job work basis. The assessee's unit is a composite unit i.e. activities like twisting, weaving and warping are carried out by them. Return declaring income of Rs.9,20,470/- under Section 115 JB of the Income Tax Act, 1961 (for brevity 'the Act') was filed on 30/10/2001 but the Assessing Officer (AO) determined the income of Rs.2,94,43,565/- under Section 143(3) of the Act vide order dated 31/03/2004. The AO made addition of Rs.3,23,01,330/- on account of unaccounted income generated by the company on the ground that compared to other two concerns connected with the assessee company, fuel consumption is more per meter of cloth. The AO also compared the profit rate of the assessee company with the two other concerns and accordingly observed that unaccounted income has been generated by way of incurring heavy expenditure. It is the case of the assessee before the CIT (Appeals) that the AO had made wrong comparisons and drawn wrong inferences on the basis of presumption. The CIT (Appeals), after considering the case of the assessee, partly allowed the appeal of the assessee by order dated 10/08/2004, which was challenged by the assessee as well as by the department before the ITAT and the ITAT vide its order dated 28/02/2005, impugned in these appeals, decided the appeal in favour of the assessee and against the department, giving rise to present appeals. 3.Heard, the learned counsels appearing for the parties. 3.1 Counsel for the appellant Mr. Bhatt pointed out that CIT (Appeals), while considering the case of the assessee, has observed that the Assessing Officer (AO) appears to have made a huge addition on the basis of presuming wrong facts which were not even in existence and eventually has partly allowed the appeal. He drew our attention to para 5 and 6 of the order of the CIT (Appeals), for ready reference, they are reproduced hereunder: 3.Heard, the learned counsels appearing for the parties. 3.1 Counsel for the appellant Mr. Bhatt pointed out that CIT (Appeals), while considering the case of the assessee, has observed that the Assessing Officer (AO) appears to have made a huge addition on the basis of presuming wrong facts which were not even in existence and eventually has partly allowed the appeal. He drew our attention to para 5 and 6 of the order of the CIT (Appeals), for ready reference, they are reproduced hereunder: “5.I have carefully perused the contentions raised by the appellant in the aforesaid paras. The Assessing Officer (AO) appears to have made a huge addition on the basis of presuming wrong facts which are not even in existence The finished product of the appellant company is clearly different from the two companies. The appellant has furnished facts and figures stating the fuel expenses incurred by them are not exactly the same type as of the compared two companies. The appellant company has shown gross profit as under: Looking to the facts of this case including decline in gross profit rate in the year under appeal, it would be fair and reasonable to sustain addition of Rs.1,07,67,110/- and delete the remaining addition of Rs.2,15,34,220/-. 6In the result the appeal is partly allowed.” 3.2He submitted that, while considering the same, the Tribunal has not taken into consideration the reasoning adopted by the CIT (Appeals). He, therefore, contended that the appeal, at least of the department qua allowing the appeal of the assessee is required to be allowed. 4.Per contra, Mr. Soparkar, counsel for the respondent, drew our attention to para 11 and 12 of the order of the ITAT. For ready perusal, the same are extracted hereunder:attention to para 11 and 12 of the order of the ITAT. For ready perusal, the same are extracted hereunder: “11.We have duly considered the rival contentions. The ld. Assessing Officer rejected the book results of the assessee mainly on the ground that it has shown consumption on fuel disproportionately very high than the other similar situated assessees. We have re-appreciated the comparability of all the three concerns and found that the results cannot be compared because these concerns are not doing the business in similar atmosphere. There are lots of disparity such as, nature of machineries, quality of finished products, nature of fuel, nature of raw-material, input cost etc. The sale price of the finished products of these concerns varies in between Rs.25/- to 28/-,whereas the sale price of assessee's product is Rs.47.64 per meters. This factor in itself shows that goods produced by the assessee were of superior quality. Similarly, there is a vast difference between raw-material used by these concerns and the assessee. The assessee has used the raw-material having value of Rs.113.34, whereas, these concerns were using raw-material of Rs.164.60 and Rs.180.95 respectively. The other concerns were using the costly raw-material and producing cheaper goods. On the other hand, the assessee is using cheaper raw-material and producing costly finished products. All these circumstances indicate that the result are not comparable. The assessee has been using different types of machineries which can only be run on a specific electric motor having a specific power base. The consumption of electricity or diesel would remain static, but its output may vary because if the assessee is able to achieve 100% capacity of output only, then its consumption towards fuel would be on the lower side if worked out in output ratio. The assessee has been using different types of fuel electricity as well as DG set whereas, other concerns have been using electricity motors. The Gross Profit of these concerns is lower than that of the assessee. Hence, if we examine all the details, shown to us during the arguments and whose cognizance have been taken by us, then their settings as a whole would show that result of these concerns are not comparable and rejection of assessee's book results on this analysis is not appropriate. 12.The next reason taken by the Assessing Officer for rejecting the book result of the assessee is that sales and purchases are not verifiable. This inquiry has been initiated by the Assessing Officer at the fag end of the assessment proceedings, i.e. in the month of March itself. Except three parties notices have been served on all other concerns. Out of these three parties, only sale has been made tot he two concerns. Sales proceeds have been realized through “A/c. payee cheques”. Hence, in our opinion, the ld. Assessing Officer could not bring out the sufficient material for rejecting the book result of the assessee. We further find that the Assessing Officer has misconstrued the fuel expenses recorded by the assessee and arrived at a wrong conclusion that it varies from Rs.4.99 to Rs.10.58 per meter. The ld. Counsel for the assessee has demonstrated before us that this comparison has been made on the basis of purchase and not on the basis of consumption. Therefore, we find merit in the appeal of the assessee and allow the same, whereas, the appeal of the Revenue is devoid of any merit, it is dismissed.” 4.1In support of his case, he relied on decision of Rajashthan High Court in Commissioner of Income-tax Vs. Sulabh Marbles (P.) Ltd., reported in [2007] 165 Taxman 258 (Rajashthan), decision of Kerala High Court in St. Teresa's Oil Mills Vs. State of Kerala, reported in [1970] 76 ITR 365 (Kerala) as well as decision of this Court in Commissioner of Income Tax Vs. Vikram Plastics and Other, reported in [1999] 239 ITR 161 and contended that observation of the Tribunal that books of account were wrongly rejected is required to be accepted, in view of decision of this Court. Relevant portion of the decision of this Court in Vikram Plastics (supra) is extracted hereunder: “Learned Counsel appearing for the applicants has taken us through the relevant material on record. It was contended by him that the provisions of Section 145(2) of the said Act were rightly invoked by the Assessing Officer and the Tribunal ought not to have taken a different view of the matter. In this regard, we “Learned Counsel appearing for the applicants has taken us through the relevant material on record. It was contended by him that the provisions of Section 145(2) of the said Act were rightly invoked by the Assessing Officer and the Tribunal ought not to have taken a different view of the matter. In this regard, we note that the Tribunal has specifically considered the provisions of Section 145 in paragraph 7.3 of its order and after noticing the approach of the Assessing Officer it found that there was no defect or discrepancy pointed out specifically in the books of accounts maintained. The Tribunal reiterated in paragraph 7.4 of its order that the assessee maintained books of accounts adopting the mercantile method of accounting as in the past and the position being so, neither the Assessing Officer had given any finding nor there could be any such finding that no method of accounting had been regularly employed. It was held that the Assessing Officer therefore, could invoke the provisions of sub-section (2) of Section 145 of the Act, only on being satisfied that the books of accounts maintained were not correct and complete. The Tribunal then found, after mentioning the situations in which the books of accounts maintained could be said to be incorrect and incomplete, that in this case there was no material brought on record to prove and establish that the purchases and expenses had been inflated or the sales had been suppressed and in the absence of any such material or finding given, the provisions of Section 145 (2) ought not to have been invoked. It was held that on the facts given, the Tribunal did not find sufficient justification for invoking the provisions of Section 145(2) of the Act. In our opinion, in view of the finding reached by the Tribunal that there were no discrepancies or defects pointed out in the books of account and further that they were regularly maintained and also on the finding that there was no material brought on record to establish that purchases or expenses were inflated or sales suppressed and also in view of the finding that this was not a case that there was no method of regular accounting employed, the Tribunal was fully justified in coming to the conclusion that the provisions of Section 145(2) could not be invoked. This conclusion is based on findings of fact and raises no question of law.” 5.The common question of law, which was posed for consideration of this Court while admitting these appeals, is as follows: “Whether the Appellate Tribunal has rightly appreciated the facts on record and thereby deleted the entire addition of Rs.3,23,01,330/- made on account of unaccounted income generated by the assessee, and finding is perverse?” 6.On appreciating the arguments advanced by both the sides, we are of the opinion that the Tribunal has rightly held that the books of account, which were sought to be rejected only on the ground of excessive fuel charges, were not according to law and the Tribunal has held that the books of account of the assessee were wrongly rejected and in that view of the matter, the are of the opinion that the Tribunal has rightly held that the books of account, which were sought to be rejected only on the ground of excessive fuel charges, were not according to law and the Tribunal has held that the books of account of the assessee were wrongly rejected and in that view of the matter, the 7. hiren question of Gross Profit will not arise, in our view, while considering the case of other sister concerns or units, the Tribunal has rightly analysed the facts and figures and has rightly held in favour of the assessee. We are in agreement with the same and accordingly we answer the question of law holding that in the facts on record, the Tribunal has rightly deleted the entire addition of Rs.3,23,01,330/- made on account of unaccounted income generated by the assessee. 7. hiren question of Gross Profit will not arise, in our view, while considering the case of other sister concerns or units, the Tribunal has rightly analysed the facts and figures and has rightly held in favour of the assessee. We are in agreement with the same and accordingly we answer the question of law holding that in the facts on record, the Tribunal has rightly deleted the entire addition of Rs.3,23,01,330/- made on account of unaccounted income generated by the assessee. On the above premises, the issue is answered in favour of the assessee and against the revenue. The present appeals are dismissed accordingly. [ K. S. Jhaveri, J. ] [ K. J. Thaker, J. ]