Pr. Commissioner Of Income Tax -15 v. Pharmalab Engineering India Pvt Ltd

IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J.INCOME TAX APPEAL NO. 615 OF 2017 Pr. Commissioner of Income Tax -15..Appellant Versus Pharmalab Engineering India Pvt Ltd..Respondent ................... Mr. Akhileshwar Sharma for the Appellant Mr. Akhileshwar Sharma for the Appellant Mr. Tanmay Phadke i/by Mr. Satendra Kumar Pandey for theRespondentMr. Tanmay Phadke i/by Mr. Satendra Kumar Pandey for theRespondent ................... CORAM : AKIL KURESHI & S.J. KATHAWALLA, JJ. P.C.: DATE : AUGUST 5, 2019. 1.This appeal is filed by the Revenue to challenge thejudgment of the Income Tax Appellate Tribunal, Mumbai("the Tribunal" for short) dated 22.6.2016. 2.Following question is presented for our consideration:- "Whether on the facts and in the circumstances of the case, theTribunal was correct in law in deleting the addition of Rs.1,38,47,120/- made on account of suppression of profit by recordingthat no cogent material has been deduced from audited accounts toshow suppression of profit, thereby completely ignoring theauthoritative findings of the Assessing Officer and excluding theentire sales to its sister concern from turnover for calculating gross profit and passing an order in favour of the assessee on erroneousfinding of facts giving rise to a substantial question of law?" 3.The respondent - assessee is an engineering companyand had filed return of income for the assessment year 2008-09. The Assessing Officer made additions inter alia on theground of lower GP rate in the present year. The CIT(A)granted partial relief being calling for remand report. Theassessee carried the matter further in appeal before theTribunal. The Tribunal, by the impugned judgment, deletedthe entire additions retained by CIT(A), making followingobservations:- "10.We have considered the rival contentions and perused thematerial on record including case laws relied upon. We haveobserved that the assessee is a company engaged in the business ofmanufacturing of equipments / machineries which are used byPharmaceuticals and allied industries. The AO has made additionson the grounds that the gross profit margin earned during the yearbeing lower than the gross profit margin of immediately precedingyear and the additions were made to the income of the assessee byapplying the gross profit margin of 31.82% to the sales of theprevious year relevant to the assessment year under appeal , basedon gross profit margin earned during the preceding year. Theassessee contended that in respect of some items, the sale price tooutside parties is inclusive of accessories being supplied along withthe manufactured products as well is inclusive of installation andcommissioning whereas in the case of sister concern, the installationand commissioning was carried on by the sister concern itself. The AO rejected the contentions during assessment proceedings as thesame were not based upon documentary evidences, while theassessee had duly submitted all the details before the authoritiesbelow. No particular defect was pointed out by the AO in the remandreport proceedings with respect to this contention of the assessee.The submissions made before the AO with this regards are placed inpaper book page 18-22. It was also explained by the assessee thatthe sale price to the sister concern was lower because excise dutyand sales tax(against H form) was not included in the sale price formanufactured products as the products were procured by the sisterconcern which were meant for exports. This contention of theassessee was accepted by the AO in remand report proceedings . Itwas also accepted by the AO in remand report proceedings that theAO in the assessment proceedings while computing the gross profitmargin has not included the other manufacturing costs such aslabour, power and fuel , carriage inwards etc. and only material costswere considered by the AO in arriving at gross profit margin whileframing assessment u/s 143(3) of the Act. With respect to the sale ofspares components to sister concern of Rs.6.49 crores at cost owingto assessee merger , the same were accepted of being sold at costby learned CIT(A) and consequent relief was given by learned CIT(A)in the first appellate proceedings vide orders dated 23.12.2013 andthe Revenue is not in appeal before the Tribunal against the saidrelief granted by the learned CIT(A) . It was also observed by the AOwhile framing assessment that the assessee booked salescommission of Rs 99 lacs on sales of Rs 19.01 crores during theprevious year relevant to the impugned assessment year, while inthe immediately preceding assessment year the sales commissionwas only Rs.1.08 lacs on sales of Rs.20.58 crores. A separateaddition was made by the AO of Rs. 99 lacs in the assessment orderfor the impugned assessment year under appeal. The learned CIT(A)deleted the said addition after calling remand report from the AO whereby the AO accepted that the commissions expenses were dulyverified. It is not brought on record by the Revenue that the secondappeal has been filed with the Tribunal by the Revenue challengingthe relief granted by the learned CIT(A) in his appellate orders. In ourconsidered view, merely because gross profit margin is lower in theinstant assessment year under appeal vis-a-vis precedingassessment year cannot be a ground of additions to the income ofthe assessee unless the Revenue points out particular defect ordiscrepancies in the books of accounts maintained by the assessee.The assessee is maintaining books of accounts which are audited.The assessee has duly met all the adverse reservations of the AO inremand report/appellate proceedings before learned CIT(A) as setout above. No cogent material has been brought on record to provethat the assessee has manipulated its accounts to suppress profits.Therefore, there are no reasons or justification in law to reject theexplanation given by the assessee to support its contentions. Merefall in the gross profit ratio , in the absence of any cogent reasonscould not be a ground to hold that the proper income could not bededuced from the audited accounts maintained by the assessee andthe book results ought to be rejected, and consequently gross profitmargin rate of preceding years be applied to the sales of the instantassessment year under appeal. There is no averments that there isan deliberate attempt to inflate cost of material or other expenses onthe part of the assessee or to suppress sale price of products sold bythe assessee. The allegations of the AO were duly met by theassessee in remand report/appellate proceedings as set out above.The Revenue is not in appeal before the Tribunal with respect to therelief’s granted by the learned CIT(A). Our view is consistent with thedecision of Hon’ble Delhi High Court in the case of CIT v. SmtPoonam Rani (2010) 326 ITR 223 (Del.HC). In our considered view,the additions made by the learned AO as sustained/confirmed by thelearned CIT(A) to the tune of Rs.1,38,47,120/- is not sustainable in law and we order deletion of the same. We order accordingly." It can, thus, be seen that the Tribunal after detailconsideration came to the conclusion that the assessee'sbooks were not rejected. Merely because, in the presentyear, the assessee had reflected lower margin, would not bea ground for making additions. Most significantly, theassessee had explained the reason for sale of products to itssister concern at a lower rate than that of the assessee hadsupplied to the other purchasers by pointing out that theprice quoted to the sister concern was minus sales taxcomponent since the product was meant for export. Theentire issue is based on appreciation of evidence on record.No question of law arises. The Appeal is dismissed. [ S.J. KATHAWALLA, J. ] [ AKIL KURESHI, J ]