2012 (7) TMI 622 - AT - Income Tax

Addition made on account of excess process loss - Consumption of gold casted - Held that - Comparing to AY 2006-07 the consumption of gold casted items went down in assessment year 2007-08 and the percentage of process loss has gone up. In the present year even the percentage of consumption of gold casted items was almost at par with such percentage in assessment year 2006-07 but percentage of process loss in the present year is more than 1.5 times of the process loss in assessment year 2006- 07. This working goes to show that when the consumption of casted gold items is more in total consumption the percentage of process loss goes down when we compare the same for assessment year 2006-07 and 2007- 08 but in the present year even when consumption of gold casted items is at par with such consumption in assessment year 2006-07 the percentage of process loss is very high. For this reason the A.O. was justified in making disallowance of excess process loss declared by the assessee. Even if this addition is upheld then the assessee is eligible for exemption u/s 10A - Held that - Section 10A (4) states that the claim to be allowed u/s 10A should be worked out on the basis of total profit to the extent of proportion of export turnover to total turnover of the assessee. In the present case the export turnover of the assessee is Rs.4, 68, 34, 166/- and domestic turnover has been worked out by the A.O. at Rs.7, 52, 740/- being the addition made by him on account of alleged sale outside the books. After inclusion of this amount of domestic sale total turnover comes to Rs.4, 75, 86, 906/-. Total profit from business assessed by the A.O. is Rs.12, 24, 878 - thus as per the provisions Section 10A(4) the exemption allowable u/s 10A comes to Rs.12, 50, 503/- and net taxable income stands at Rs.19, 375 - direction to AO to recompute the liability - quantum appeal partly in favour of assessee Penalty u/s 271(1)(c) - Held that - Penalty levy is not justified because the entire addition was made by the A.O. on the basis of assumption without bringing any concrete material on record in support of any outside books sale made by the assessee and hence penalty is not justified even for this part addition upheld - in favour of assessee.

Summary

Issues Involved:
1. Addition of Rs. 7,52,740/- due to alleged excess process loss.
2. Eligibility for exemption under Section 10A.
3. Imposition of penalty under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Addition of Rs. 7,52,740/- due to alleged excess process loss:
The primary issue in the quantum appeal was the addition of Rs. 7,52,740/- made by the Assessing Officer (A.O.) on the grounds of excess process loss of 1220 grams (11.71%). The A.O. noted that the assessee, engaged in manufacturing and exporting jewellery, showed a process loss of 2161.60 grams, which equated to a 20.71% loss. The A.O. allowed a 9% loss as per the Ministry of Commerce and Industry's handbook, deeming the excess 11.71% as sales outside the books, thus adding Rs. 7,52,740/- to the income.

The tribunal, after considering submissions and reviewing the handbook and comparative charts, upheld the A.O.'s decision. It concluded that process loss should only be allowed for raw gold and not for casted jewellery, as the latter does not undergo substantial processing. The tribunal also noted discrepancies in the process loss percentages over different years, supporting the A.O.'s addition.

2. Eligibility for exemption under Section 10A:
The assessee's alternative contention was that even if the addition was upheld, they should be eligible for exemption under Section 10A. The tribunal examined sub-section (4) of Section 10A, which stipulates that the exemption should be proportional to the export turnover relative to the total turnover. The tribunal recalculated the exemption, including the alleged domestic turnover, and concluded that the assessee was eligible for a deduction under Section 10A on the enhanced profit. This adjustment reduced the net taxable income to Rs. 19,375/- from the A.O.'s calculation of Rs. 7,52,750/-.

3. Imposition of penalty under Section 271(1)(c):
In the penalty appeal, the issue was the confirmation of a penalty of Rs. 2,75,446/- levied by the A.O. under Section 271(1)(c). The tribunal noted that the penalty was based on the addition of Rs. 7,52,740/- for excess process loss. Given that the quantum appeal upheld only a minor addition of Rs. 19,380/-, the tribunal found that the penalty was not justified. It emphasized that the A.O.'s addition was based on assumptions without concrete evidence of sales outside the books. Consequently, the tribunal deleted the entire penalty.

Conclusion:
The quantum appeal was partly allowed, upholding the addition but recalculating the exemption under Section 10A, significantly reducing the taxable income. The penalty appeal was fully allowed, resulting in the deletion of the entire penalty. The order was pronounced in the open court.