Atam Rice Mills,, Distt.Ferozepur vs Assessee

Department by:Sh. Virender Kumar Singh, DR Assessee by:Sh. P.N.Arora, Advocate

Date of hearing:12/01/2015 Date of pronouncement:27/01/2015

ORDER

PER B.P.JAIN, AM:

This appeal of the Revenue arises from the order of the CIT(A),

Bathinda, dated 21.02.2014 for the assessment year 2009-10. The assessee

has also filed cross objection.

2. The Revenue has raised the following grounds of appeal: 2 ITA No.276(Asr)/2014

C.O.No.27(Asr)/2014

"1. That the Ld. CIT(A) has erred in deleting the addition of Rs.41,79,002/- made by the AO on GP rate, without appreciating that the AO has made the addition, after comparing the trading results of the current year with that of the past and consistent history of the assessee's own business, as there was drastic fall in GP rate from 15.98% to 4.27% when compared to AY 2007-08 and from 12% to 4.27% when compared to AY 2008-09.

2. That the Ld. CIT(A) has erred in giving a relief of Rs.212601/-

by restricting the disallowance at Rs.25,000/- against Rs.237601/- made by the AO out of Diesel expenses of Rs.15,84,009/- without fully appreciating that a reasonable percentage of disallowance was made as the expenses claimed by the assessee were not fully vouched.

3. That the order of the Ld. CIT(A) be set aside and that of the Assessing Officer be restored.

4. That the appellant craves to add or amend any grounds of appeal before the appeal is disposed off."

3. In the C.O., the assessee has raised the following grounds:

"1. That on the facts and circumstances of the case, the Ld. CIT(A) was fully justified in deleting the addition and the order of the Ld. CIT(A) is well reasoned and in view of these circumstances the department has got no reason or basis for coming in appeal before the Tribunal and the appeal of the department may be dismissed.

2. Any other ground of cross objection which may be urged at the time of hearing of the appeal."

4. The brief facts of the case are that the assessee is running a flour Mill

and it was noticed by the AO that the assessee had declared a GP rate of

4.27% as compared to 12% in the preceding year and 15.98% in the year 3 ITA No.276(Asr)/2014 C.O.No.27(Asr)/2014

before the preceding year. It was observed that there was a drastic fall in the

GP rate and on show cause notice given, the assessee submitted the

explanation, which is available at pages 2 to 5 of AO's order. The assessee

mainly submitted a comparative chart of the gross profit, net profit, raw

material consumed, difference in average purchase and sale price, apart from

comparative statement of three years, including the impugned year. In

quantity, the wheat purchase, average rate, finished products produced, sale

rate and profit margin difference was submitted. In fact, the explanation of

the assessee in brief for low GP rate and the losses in the impugned year was

due to inflation in the market rate, the Government of India through its

agency i.e. FCI released wheat to State Govt. under the open Market Sale

Scheme to check the inflationary trend vide Govt. of India Notification

No.1-3/2006-PY.IV dated 17.09.2008 and rate of wheat was fixed at

Rs.1021 per qtl. as compared to cost price of the assessee, which came at

Rs.1177/-, as available in the comparative chart at page 3 of AO's order.

Also due to inferior quality of wheat process, the assessee had to consume

more raw-material to match the quality standard and to compete in the

market for survival. It was also submitted that rate of finished products was

the same or there was slight increase whereas raw-material was much more

costly as compared to the preceding year. The assessee also submitted 4 ITA No.276(Asr)/2014 C.O.No.27(Asr)/2014

various accounting ratios i.e. gross profit to turnover, net profit to turnover,

stock-in-trade to turnover, material consumed to finished goods, apart from

yield of bye-products in percentage available at page 4 of AO's order. The

AO on analyzing the various comparative charts and the ratios in the

explanation brought on record by the assessee came to the conclusion that

total marginal difference is less than 75% but fall in GP rate is very drastic

i.e. 12% to 4.27% in the impugned year and accordingly comparing the

results of the preceding year made an estimation of GP rate at 7.98%,

making an addition of Rs.15,84,009/-. On production of vouchers, the AO

noticed that the expenses as claimed are not fully vouchable. Accordingly,

taking a reasonable view, the AO made disallowance of 15% of the claim

made by the assessee and made an addition of Rs.2,37,601/- to the income of

the assessee.

5. Before the Ld. CIT(A), the assessee made submissions who after

taking remand report from the AO deleted the addition of Rs.41,79,002/- for

the reasons that the AO has failed to rebut the explanation given by the

assessee in the assessment order and even in the remand report. The AO has

failed to point out any defect in the regular books of account, which were

maintained by the assessee and which were produced during the course of

the assessment proceedings. The books of account of the assessee are 5 ITA No.276(Asr)/2014 C.O.No.27(Asr)/2014

audited. The business of manufacturing of wheat flour by the assessee is

under the control and supervision of Food & Supply Department for which

authenticated stock register has been maintained by the assessee. It was

produced during the course of appellate proceedings before the Ld. CIT(A).

The Ld. CIT(A) observed that low GP rate or low profits are symptoms of

disease and not the disease itself and addition on account of fall in GP rate

cannot be made without pointing out any specific defect in the books of

account. He relied upon the decision of the Hon'ble Punjab & Haryana High

Court in the case of CIT vs. Om Overseas, 315 ITR 185 and the decision of

Special Bench of ITAT in the case of Shanker Rice Co. 72 ITD 139 in this

regard. The Ld. CIT(A) also observed that on merits also, the assessee has

submitted his explanation as regards fall in GP rate from 15.98% to 4.27%

and keeping in view the facts of the case, the Ld. CIT(A) deleted the

addition of Rs.41,79,002/-.

6. As regards the disallowance of expenditure on account of diesel

expenses, the assessee submitted the explanation before the Ld. CIT(A). The

Ld. CIT(A) after taking comments of the AO, took into consideration the

submissions of the assessee that none the vouchers were missing which was

found to be incorrect in view of the order-sheet entry of the AO dated

25.11.2011 signed by assessee's counsel. The Ld. CIT(A), however, limited 6 ITA No.276(Asr)/2014 C.O.No.27(Asr)/2014

the disallowance to the extent of Rs.25,000/- and allowed a relief of

Rs.212601/-.

7. The Ld. DR argued that there was a drastic fall in the GP rate of

15.98% during the assessment year 2007-08 to 4.27% in the impugned year.

The Ld. DR argued that the AO had made a comparison of the GP rate and

trading results with the past history of the assessee's own business, which is

a consistent history of the assessee's business. Accordingly, he prayed to

confirm the order of the AO and reverse the order of the Ld. CIT(A) on the

issue.

8. As regards the disallowance of diesel expenses @ 15% by the AO,

which were restricted by the Ld. CIT(A) to Rs.25,000/-, it was argued by the

Ld. DR that expenses were not fully vouched and this fact has been

confirmed by the assessee in the order sheet of the AO vide entry dated

25.11.2011. Accordingly, the Ld. DR prayed that the disallowance made by

AO was reasonable and there is no reason for the Ld. CIT(A) to restrict the

disallowance at Rs.25,000/- which is 75% of the diesel expenses.

Accordingly, the Ld. DR prayed to confirm the order of the AO and reverse

the order of the ld. CIT(A).

9. On the other hand, the ld. Counsel for the assessee Mr. P.N. Arora,

Advocate, strongly relied upon the order of the ld. CIT(A) and argued that 7 ITA No.276(Asr)/2014 C.O.No.27(Asr)/2014

the order passed by the ld.CIT(A) is well reasoned order. He argued that the

assessee is maintaining regular books of account and no defect in the

purchase, sale and stock register has been pointed out by the AO which was

produced in the assessment proceedings. The AO has not invoked the

provisions of section 145(3) of the Act. Without pointing out any specific

defect and without invoking the provisions of section 145(3) of the Act, no

addition can be made by the AO. He relied upon the decision of Hon'ble

Punjab & Haryana High Court in the case of CIT vs. Om Overseas (supra)

and decision of Special Bench of ITAT in the case of Shanker Rice Co.

(supra). He further argued that the reasons for fall in GP rate during the

impugned year were submitted, which in fact have not been taken in right

spirit by the AO. The AO has not been able to point out any defect in the

explanation given by the assessee which is reproduced at pages 2 to 5 of

AO's order. The AO in fact proceeded on misconception of facts and

proceeded to apply GP rate of 7.98% on surmises and conjectures.

Accordingly, the ld. Counsel for the assessee prayed to confirm the order of

the ld. CIT(A).

10. As regards the disallowance of expenses on account of diesel

consumption, he argued that all the vouchers were produced before the AO

and the Ld. CIT(A) has rightly restricted the disallowance at Rs.25,000/-. 8 ITA No.276(Asr)/2014

C.O.No.27(Asr)/2014

11. We have heard the rival contentions and perused the facts of the case.

Undisputed facts of the case are that the assessee is running a flour mill and

had declared a GP rate of 15.98% for the assessment year 2007-08, 12% for

the assessment year 2008-09 as compared to 4.27% in the impugned year.

The assessee has produced the books of account before the AO which are

audited books of account. No defect in the same has been pointed out i.e.

opening stock, purchases, sales and closing stock of the assessee has been

accepted by the AO. The AO has not rejected the books of account and has

not invoked the provisions of section 145(3) of the Act. With these

undisputed and uncontroverted facts, the question arises whether the AO at

all can make any addition by applying different GP rate to the turnover.

According to us, while having accepted the trading account as correct, the

AO has no power to compute different GP rate which has been done in the

present case. The reliance has been placed by the Ld. CIT(A) on the

decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs.

Om Overseas (supra) where the facts are that the AO rejected the books of

account without pointing out any specific defect and made an addition by

applying GP rate of 7.98% as against 5.28% declared by the assessee, which

was deleted by the Ld. CIT(A) on finding that no specific defect has been

pointed out in the books of account, which has been upheld by the Tribunal 9 ITA No.276(Asr)/2014 C.O.No.27(Asr)/2014

and the Hon'ble Punjab & Haryana High Court confirmed the findings of

the Tribunal, since the Departmental Representative was unable to point out

any illegal perversity in the said findings of fact. The Ld. CIT(A) has also

relied upon the decision of Special Bench of ITAT in the case of Shanker

Rice Co.(supra), where the findings of the Special Bench are that proviso to

section 145(1) cannot be applied where the accounts are audited, proper

books of account are maintained and no defects are pointed out. In the

circumstances and facts of the case, we find no infirmity in the order of the

ld. CIT(A), who has rightly deleted the addition so made by relying upon

the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT

vs. Om Overseas (supra) and Special Bench of ITAT in the case of Shanker

Rice Co. (supra).

12. As regards the merits of the case, the ld. Counsel for the assessee has

submitted the explanation that due to inflation in the market, Govt. of India

through its agency i.e. FCI has released wheat to State Government under

open market sale scheme where rate of wheat was fixed at Rs.1021/- per qtl.

on subsidized rate as compared to the cost price of the assessee, which

comes at Rs.1177/-. There is no dispute, in fact this reason alone is sufficient

enough to explain the reason for low GP rate in the impugned year as

compared to the preceding year and in the year before preceding year, which 10 ITA No.276(Asr)/2014 C.O.No.27(Asr)/2014

has not been taken by the AO in right spirit, who had proceeded to apply

different GP rate as declared by the assessee. In the facts and circumstances

of the case, the AO is not justified in making any addition and the ld. CIT(A)

has rightly deleted the addition so made by the AO. Accordingly, ground

No.1 of the Revenue is dismissed.

13. As regards ground No.2, after hearing the parties, we are of the view

that the assessee has maintained the vouchers of diesel expenses which were

produced before the AO. Some of the vouchers are not vouched, is not under

dispute though the assessee has maintained before the ld. CIT(A) and before

us that none of the vouchers were missing. On perusal of facts on record, we

find that assessee had maintained the vouchers which were not fully vouched

and the AO has made a disallowance @ 15% without any basis and

moreover same is not backed by any past history of the assessee and

accordingly, the ld. CIT(A) in the facts and circumstances of the case, has

rightly restricted the disallowance at Rs.25,000/- and we find no infirmity in

the order of the ld. CIT(A). Thus, ground No.2 of the Revenue is also

dismissed.

14. The assessee also raised the cross objection bearing No.27(Asr)/2014

and the ground as reproduced hereinabove. The ground taken in the said

C.O. of the assessee is supportive to the findings of the ld. CIT(A) and in 11 ITA No.276(Asr)/2014 C.O.No.27(Asr)/2014

fact does not have any effective ground of appeal and accordingly the same

is dismissed.

15. In the result, both the appeal of the Revenue in ITA No.276(Asr)/2014

and C.O. No.27(Asr)/2014 of the assessee are dismissed.

Order pronounced in the open court on 27th January, 2015.

Sd/- Sd/- (A.D.JAIN) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 27th January, 2015 /SKR/ Copy of the order forwarded to:

1. The Assessee:M/s. Atam Rice Mills, Talwandi Road, Zira.

2. The ITO Ward III(2), Ferozepur.

3. The CIT(A), Bathinda

4. The CIT, Bathinda

5. The SR DR, ITAT, Amritsar.

True copy By order

(Assistant Registrar) Income Tax Appellate Tribunal, Amritsar Bench: Amritsar.