Mumbai – 400 002 v. Additional Commissioner Of

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 59 OF 2011 Rishab Impex]144, Behram Mahal, 2[nd] floor,]534, Kalbadevi Road,]Mumbai – 400 002] ..Appellantversus Additional Commissioner of ]Income Tax, Range-14(2), Mumbai]3[rd] Floor, Earnest House,]Mumbai – 400 021.] ..Respondent -------- Mr.F.V.Irani with Mr.Atul Jasani for the Appellant.Mr. P.C.Chhotaray for the Respondent. ............. CORAM : J.P. DEVADHAR & M.S.SANKLECHA, JJ. DATE : 30[th] October, 2012 P.C.: This appeal under Section 260A of the Income Tax Act, 1961 ('the Act') challenges the order dated 30.07.2010 passed by the Income tax Appellate Tribunal ('the Tribunal') relating to the assessment year 2004-05. 2 Being aggrieved the appellant has formulated the following questions of law for the (a)Whether on the facts and in the circumstances of the case and in the law the order of the Tribunal confirming the rejection of the books of account maintained by the Appellant in its regular course of business as per the mercantile system of accounting is perverse and/or contrary to material on record inasmuch as non-maintenance of stock register cannot be the basis for rejection of the books of accounts especially when the quantitative tally is available and no discrepancy therein was found by the Assessing Officer and when there is no material to show that important transactions are omitted or that the accounts do not include entries relating to a particular class of business? (b) Without prejudice to above, whether on the facts and in the circumstances of the case and in law the order of the Tribunal upholding the estimation of the gross profit made by the Commissioner of Income Tax (Appeals) at the rate of seven percent is perverse and/or contrary to material on record inasmuch as the Appellant had pointed out that the fall in gross profit rate was mainly due to decrease in value of sales realization due to rise in the value of Indian Rupee as the value of US dollar had depreciated by about 9.34% in a year and due to increase in cost of material ranging from 2.34% to 12.04% for which appreciate adjustment was not granted by the Commissioner of Income Tax (Appeals)? (c) Whether the quantum of duty credit granted (the facts value of the DEPB Licence) by the government ought to be taxed in the year of accrual under section 28(iiib)? Whether the quantum 3 Brief facts leading to this appeal are as under : a)The appellant is engaged in the business of manufacturing and exporting fabrics. For the assessment year 2004-05 the appellant filed its return of income declaring total income of Rs.61.39 lacs after having claimed a deduction of Rs.25.87 lacs under Section 80HHC of the Act. b)The Assessing Officer by an order dated 31.10.2006 completed the assessment under Section 144 of the Act determining the total income at Rs.4.39 crores. The aforesaid amount was arrived at after having rejected the appellant's books of account (which showed gross profit ratio at 1.17%) under Section 145(3) of the Act and estimating the gross profit @ 10% based on 3 years average gross profit of Rs.12.05% and also disallowing the claim for deduction under Section 80 HHC of the Act interalia in respect of sale of DEPB licence under Section 28(iiib) of the Act. b)The Assessing Officer by an order dated 31.10.2006 completed the assessment under Section 144 of the Act determining the total income at Rs.4.39 crores. The aforesaid amount was arrived at after having rejected the appellant's books of account (which showed gross profit ratio at 1.17%) under Section 145(3) of the Act and estimating the gross profit @ 10% based on 3 years average gross profit of Rs.12.05% and also disallowing the claim for deduction under Section 80 HHC of the Act interalia in respect of sale of DEPB licence under Section 28(iiib) of the Act. c)Being aggrieved the appellant filed an appeal to the Commissioner of Income Tax (Appeals) ('CIT(A)'). By an order dated 25.09.2007, the CIT(A) disposed of the appeal of the appellant by upholding the order of the Assessing Officer dated 31.10.2006 to the extent the books of account were rejected under Section 145(3) of the Act and disallowance of claim for deduction under Section 80HHC of the Act interalia in respect of DEPB Licence under Section 28(iiib) of the Act. However, the gross profit ratio was reduced from 10% to 7% resulting in gross profit at Rs.2.18 crores. d)Being aggrieved, both the appellant as well as respondent preferred appeals from the order dated 25.09.2007 of the CIT(A) to the Tribunal. The Tribunal by its order dated 30.07.2010 dismissed the appeal filed by the revenue as well as the appeal filed by the appellant and upheld the order of the CIT(A) dated 25.09.2007. e)It is against the aforesaid order dated 30.07.2010 of the Tribunal that this appeal has been preferred. Regarding question (a) 4The Assessing Officer rejected the books of accounts of the appellant under Section 145(3) of the Act. This was on a finding that the appellant was not maintaining stock register, the production register, quantitywise details regarding consumption of raw material and production of final goods, the fall in gross profit rate from 12% in the earlier years to 1.17% in the assessment year 2004-05 was not fully explained and the valuation of the closing stock done by the appellant did not appear to be reliable. In appeal, the CIT(A) placed reliance upon the statement of the statutory auditor namely C.A. Pravin Jain, who in a statement made before the Assessing Officer in the course of remand proceeding had admitted that he had not examined the production record, input-output ratio, waste percentage as no documents or record were produced before him. The auditor also pointed out that the trial balance was submitted by the assessee to him on the last date of the time available to submit the Audit Report. In the circumstances, the various details were not examined by him. The partner of the appellant had also in his statement recorded before the Assessing Officer had stated that shortage/wastage recorded in the books at the end of the year were on estimate basis and not based on the actual verification. Similarly, with regard to the closing stock, the partner admitted that the same is done without any actual verification. In the aforesaid circumstances, the CIT(A) upheld the order of the Assessing Officer rejecting the books of accounts of the assessee. On further appeal, the Tribunal upheld the finding of the CIT(A) and held that the Assessing Officer was justified in invoking the provision of Section 145 (3) of the Act and rejecting the accounts of the appellant. Once, the accounts were rejected the Assessing Officer was 144 on the basis of his best judgment. 5 Mr. Irani contended that the difference is gross profit rate between the Assessment Year 2004-05 and the earlier years would be marginal if the export incentives which were received by the appellant were taken into account while computing 144 on the basis of his best judgment. 5 Mr. Irani contended that the difference is gross profit rate between the Assessment Year 2004-05 and the earlier years would be marginal if the export incentives which were received by the appellant were taken into account while computing the gross profit rate. We find all three authorities have reached concurrent finding of fact that the accounts produced by the appellant were not reliable and consequently, rejected. This finding of fact has been arrived at on the basis of the statement of appellants partner in his statement to the Assessing Officer during the remand proceeding that no proper accounts were being maintained as closing stock as well as wastages were not on actual basis but on estimation. Further, the Statutory Auditor of the appellant one C.A. Pravin Jain had also accepted the fact that he had not verified the books of the appellant as the appellant failed to produce the same for his verification. The alternative submission of Mr. Irani was rightly rejected by the Tribunal holding that the export incentives is not a trading item and therefore cannot be included while computing the gross profit ratio. Further, the comparison of gross profit rate has to be made by comparing the trading result of one year to another year. We do not find any error much less an error of law by the Tribunal in refusing to include the export incentive as a part of trading item to arrive at gross profit rate. In the circumstances, the orders of the authorities cannot be said to be perverse. Thus, the above finding of fact calls for no interference. In view of the above, question (a) is dismissed as not raising any substantial question of law. Regarding Question (b) 6The gross profit declared by the assessee for 3 previous years were as under : While for the assessment year 2004-2005, the appellant had declared a gross profit of only 1.17% in its books of accounts. The appellant explained the fall in the gross profit to 1.17% during the Assessment Year 2004-05 was on account of following factors: a)Excise rebate wrongly taken in Profit & Loss Account instead of Trading Account. b)Fall in the value of US$ resulting in a fall in gross profit to the extent of 4.56% as compared to the earlier years and c)Increase in cost of inputs between 2.72% to 12.40% . 7The Assessing Officer accepted the appellant's explanation that excise rebate had been wrongly taken in the Profit and Loss account instead of Trading Account of the appellant. The CIT(A) after considering various evidences led before him by the appellant gave further credit of SNC 9/13ITXA 59-11.doc 1% toward the fall in the US$ over and above 2% allowed by the Assessing Officer. This credit of 3% allowed by the CIT(A) as against 4.56% claimed by the assessee was after considering the fact that the average period of 5 to 6 months is involved from receipt of the order till the realisation of the sales proceed from abroad. The Tribunal after considering all the evidence concluded that 3% credit given on account of fall in the value of US$ was reasonable. Similarly, the CIT(A) has given a further credit of 2% on account of increase in costs of inputs. This increase of 2% in the cost of inputs was arrived at after reaching a finding that in respect of certain items of raw material the prices had infact gone down. Further the CIT(A) observed that while raising invoices the appellant would have taken into account the rise in cost of imports. The aforesaid finding of fact was also upheld by the Tribunal. Therefore, considering the totality of the facts the CIT(A) has held that the reasonable estimate of gross profit at 7% as against 10% estimated by the Assessing Officer in the assessment order is reasonable. The Tribunal also upheld the conclusion of the CIT(A) that reasonable estimate of gross profit at 7% is correct. Mr. Irani, Counsel appearing for the assessee made grievances about the facts that the Tribunal has not considered the various submissions made by them and the impact of the exchange loss was much greater than that allowed by the authorities as the time taken to execute an order from the time it is received is on an average about 9 months. While, the Tribunal has proceeded on the basis that the time taken is on an average only 5 to 6 months. Similarly, with regard to increase in cost of inputs, it is his submission that the increase in input cost was between 2.72% to 12.40% while the Tribunal has given credit only to the extent of 2% on that account. 8We have considered the submission of the appellant. In matters of estimate and best judgment assessment, one cannot expect mathematical precision. There may be a marginal variation between one authority and another when estimates are made. However, if the estimate are reasonable and on the basis of evidence on record one cannot call the estimation perverse. The test is whether the estimates are such that no reasonable person could have arrived at on the basis of the evidence. In this case the estimates arrived at are reasonable and a possible view on the basis of evidence on record. In view of the above, we find that question (b) also does not raise any substantial question of law as it is mere case of estimation based on factual finding. In the circumstances, question (b) is dismissed as it does not raise any substantial question of law. Regarding question (c) 9The Advocates for the appellant and respondent submit that question (c) is now covered in favour of the appellant by the decision of the Apex Court in the matter of Topman Exports V/s. CIT, reported in 343 ITR page 49. In the circumstances, question (c) stands concluded in favour of the appellant in view of the decision in the Topman Exports (Supra). However, the matter is restored to the file of the Assessing Officer to compute the deduction available to the appellant in accordance with the decision of the Apex court in the matter of Topman Exports (Supra). 10In view of the above, the appeal is dismissed so far as question nos. (a) and (b) are concerned. The appeal is allowed so far as question (c) is concerned by remanding the matter to the Assessing Officer to give effect to the decision of the Apex Court in the matter of Topman Exports (Supra). No order as to costs. (M.S. SANKLECHA, J.) (J.P.DEVADHAR, J.)