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TMI Blog2014 (6) TMI 572X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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, did not accept the contention of the assessee that the fall in gross profit rate was on account of increase i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 consumption of fuel and electricity which are supplied by the State Government and consumed as required and therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 25,42,002/- will be disallowed and added to the income of the assessee. The Assessing Officer further observed that regarding the increase in expenses under various heads mentioned above, the assessee did not give any specific reason and simply stated that turnover of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ects 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 that AO has pointed out many defects/discrepancies in the books of the accounts of the appellant. The appellant is engaged in manufacturing and trading of glazed tiles. The sale, gross and net profit shown by the appellant during the assessment year under consideration and earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 5549505 (ii) Payment to employees including labour 17368919 7079432 (iii) Repairs & Maintenance 12893965 143568 The appellant has submitted that compared to previous year consumption of raw materials increase is 260%, it is settled that the consumption of stores and spares was liable to increase and therefore, increase of con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.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. 2.9. The appellant has also cited the case laws in the case of Pandit Bros vs. CIT (1954) 20 ITR 159, (Punj) Ram Kumar Beniprasad vs. ITO (1977) Taxation 49 (6)-141, Trimurti Salt Co. vs. ITO (1981) Taxation 63(6)-13, Shri Ambikaji Rice Mills vs. CIT (1990) 90 CTR (Pat) 127, Raza Textiles Ltd. vs. CIT (1972) 86 ITR 673 (All), Narsinghdas Ramakishan Pungaliya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 for Assessment Year 2005-06 passed in ITA No. 2423/Ahd/2008 order dated 26.10.2012, wherein it was held that "for working out the suppression of production, the Assessing Officer has relied on the ratio of consumption of electricity and gas as compared between the months of the year on the basis of which consumption in the month of May and the production achieved during the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. 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 Income Tax (Appeals) and there the ground of appeal of the assessee is dismissed." 13. The Departmental Representative fully justified the order of the Assessing Officer. 14. We have heard the rival submissions and perused the orders of lower authorities and material available on record. In the instant case, the assessee is engaged in manufacturing and trading of glazed tiles. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute 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 empower the Revenue to reject the book results. Such a situation only creates a doubt and requires the Assessing Officer to verify the genuineness of the expenditure with caution. However, the Assessing Officer cannot reject such expenses without finding that any bogus or non-business expenditure or capital expenditure has been debited therein. 23. In the instant case, we find that the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 proportionate production of 24,15,900 square metres, the assessee has manufactured 17,11,343 square metres of tiles. It shows the assessee has not entered into the books the remaining production of 8,06,514 square metres of tiles which is production on account of excess consumption of fuel. He observed that it seems that the excess production has been sold out of books. He issued show cause notice on the assessee requesting him to explain w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 exceed the production capacity of the manufacturing units. In view of these aspects, total unaccounted production is calculated by taking into consideration overall production capacity of the unit which is 18 lakh square metres per annum. This way, total excess production is worked out as under: 18,00,000 - 17,11,343 = 88657 square metres He observed that average sale price per square metre in the year under conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 Commissioner of Income Tax (Appeals) was not justified in deleting the entire addition. 31. On the other hand, the Authorized Representative of the assessee strongly objected to the above argument and submitted that during the course of assessment proceedings, the assessee simply presented a calculation before the Assessing Officer showing estimated production on the basis of consumption of fuel and on different basis. The assessee never admitted before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Commissioner of Income Tax (Appeals) by following the decision of the Ahmedabad Bench of the Tribunal in the case of Madhu Industries Limited Vs. ITO 132 TTJ 233 and the decision of Mumbai Special Bench of the Tribunal in the case of DCIT Vs. Datacraft India Limited 40 SOT 295 held that where electric installations were part of plant and machinery, the assessee was entitled to depreciation at the rate applicable to plant and machinery and not electric installations and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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