O/TAXAP/1412/2005 JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1412 of 2005 TO TAX APPEAL NO. 1413 of 2005 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER 1 Whether Reporters of Local Papers may be allowed to see judgment? 2 To be referred to Reporter or not? 3 Whether their Lordships wish to see fair copy of judgment? 4 Whether this case involves substantial question of law as to interpretation of constitution of India, 1950 or any order made thereunder? 5 Whether it is to be circulated to civil judge? COMMISSIONER OF INCOME TAX Appellant(s) Versus EVERGREEN SYNTHETICS PVT.LTD. Opponent(s) Appearance: MR MR BHATT, SR ADVOCATE with MRS MAUNA M BHATT, ADVOCATE for Appellant(s) No. 1 MR SN SOPARKAR, SR ADVOCATE with MRS SWATI SOPARKAR, ADVOCATE for Opponent(s) No. 1 Page 1 of 10 O/TAXAP/1412/2005 JUDGMENT CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 15/12/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. By way of these Tax Appeals department has assailed order of Tribunal dated 28/02/2005 passed in ITA No. 2785/AHD/2004 for Assessment Year 2001 02 as well as order dated 28/02/2005 passed in ITA No. 3008/AHD/2004 for Assessment Year 2001 02. 2. Brief facts of cases on hand are that assesee company is engaged in business of grey cloth manufacturing and also selling dyed and printed cloth after processing in other dyeing houses on job work basis. assessee's unit is composite unit i.e. activities like twisting, weaving and warping are carried out by them. Return declaring income of Rs.9,20,470/ under Section 115 JB of Income Tax Act, 1961 (for brevity 'the Act') was filed on 30/10/2001 but Assessing Officer (AO) determined income of Rs.2,94,43,565/ under Section 143(3) of Act vide order dated 31/03/2004. AO made addition of Rs.3,23,01,330/ on account of unaccounted income generated by company on ground that compared to other two concerns connected with assessee company, fuel consumption is more per meter of cloth. AO also compared profit rate of assessee company with two other concerns and accordingly observed that unaccounted income has Page 2 of 10 O/TAXAP/1412/2005 JUDGMENT been generated by way of incurring heavy expenditure. It is case of assessee before CIT (Appeals) that AO had made wrong comparisons and drawn wrong inferences on basis of presumption. CIT (Appeals), after considering case of assessee, partly allowed appeal of assessee by order dated 10/08/2004, which was challenged by assessee as well as by department before ITAT and ITAT vide its order dated 28/02/2005, impugned in these appeals, decided appeal in favour of assessee and against department, giving rise to present appeals. 3. Heard, learned counsels appearing for parties. 3.1 Counsel for appellant Mr. Bhatt pointed out that CIT (Appeals), while considering case of assessee, has observed that Assessing Officer (AO) appears to have made huge addition on basis of presuming wrong facts which were not even in existence and eventually has partly allowed appeal. He drew our attention to para 5 and 6 of order of CIT (Appeals), for ready reference, they are reproduced hereunder: 5. I have carefully perused contentions raised by appellant in aforesaid paras. Assessing Officer (AO) appears to have made huge addition on basis of presuming wrong facts which are not even in existence finished product of appellant company is clearly different from two companies. Page 3 of 10 O/TAXAP/1412/2005 JUDGMENT appellant has furnished facts and figures stating fuel expenses incurred by them are not exactly same type as of compared two companies. appellant company has shown gross profit as under: Asstt. Year Turnover Percentage 1999 2000 8,086,131.00 20.11% 2000 2001 61,523,497.00 24.47% 2001 2002 93,051,446.00 18.23% 2002 2003 87,636,580.00 18.37% Looking to facts of this case including decline in gross profit rate in year under appeal, it would be fair and reasonable to sustain addition of Rs.1,07,67,110/ and delete remaining addition of Rs.2,15,34,220/ . 6 In result appeal is partly allowed. 3.2 He submitted that, while considering same, Tribunal has not taken into consideration reasoning adopted by CIT (Appeals). He, therefore, contended that appeal, at least of department qua allowing appeal of assessee is required to be allowed. 4. Per contra, Mr. Soparkar, counsel for respondent, drew our attention to para 11 and 12 of order of ITAT. For ready perusal, same are extracted hereunder: 11. We have duly considered rival contentions. Page 4 of 10 O/TAXAP/1412/2005 JUDGMENT ld. Assessing Officer rejected book results of assessee mainly on ground that it has shown consumption on fuel disproportionately very high than other similar situated assessees. We have re appreciated comparability of all three concerns and found that results cannot be compared because these concerns are not doing business in similar atmosphere. There are lots of disparity such as, nature of machineries, quality of finished products, nature of fuel, nature of raw material, input cost etc. sale price of finished products of these concerns varies in between Rs.25/ to 28/ ,whereas sale price of assessee's product is Rs.47.64 per meters. This factor in itself shows that goods produced by assessee were of superior quality. Similarly, there is vast difference between raw material used by these concerns and assessee. assessee has used raw material having value of Rs.113.34, whereas, these concerns were using raw material of Rs.164.60 and Rs.180.95 respectively. other concerns were using costly raw material and producing cheaper goods. On other hand, assessee is using cheaper raw material and producing costly finished products. All these circumstances indicate that result are not comparable. assessee has been using different types of machineries which can only be run on specific electric motor having specific power base. consumption of electricity or diesel would Page 5 of 10 O/TAXAP/1412/2005 JUDGMENT remain static, but its output may vary because if assessee is able to achieve 100% capacity of output only, then its consumption towards fuel would be on lower side if worked out in output ratio. assessee has been using different types of fuel electricity as well as DG set whereas, other concerns have been using electricity motors. Gross Profit of these concerns is lower than that of assessee. Hence, if we examine all details, shown to us during arguments and whose cognizance have been taken by us, then their settings as whole would show that result of these concerns are not comparable and rejection of assessee's book results on this analysis is not appropriate. 12. next reason taken by Assessing Officer for rejecting book result of assessee is that sales and purchases are not verifiable. This inquiry has been initiated by Assessing Officer at fag end of assessment proceedings, i.e. in month of March itself. Except three parties notices have been served on all other concerns. Out of these three parties, only sale has been made tot he two concerns. Sales proceeds have been realized through A/c. payee cheques . Hence, in our opinion, ld. Assessing Officer could not bring out sufficient material for rejecting book result of assessee. We further find that Assessing Officer has misconstrued fuel expenses Page 6 of 10 O/TAXAP/1412/2005 JUDGMENT recorded by assessee and arrived at wrong conclusion that it varies from Rs.4.99 to Rs.10.58 per meter. ld. Counsel for assessee has demonstrated before us that this comparison has been made on basis of purchase and not on basis of consumption. Therefore, we find merit in appeal of assessee and allow same, whereas, appeal of Revenue is devoid of any merit, it is dismissed. 4.1 In support of his case, he relied on decision of Rajashthan High Court in Commissioner of Income tax Vs. Sulabh Marbles (P.) Ltd., reported in [2007] 165 Taxman 258 (Rajashthan), decision of Kerala High Court in St. Teresa's Oil Mills Vs. State of Kerala, reported in [1970] 76 ITR 365 (Kerala) as well as decision of this Court in Commissioner of Income Tax Vs. Vikram Plastics and Other, reported in [1999] 239 ITR 161 and contended that observation of Tribunal that books of account were wrongly rejected is required to be accepted, in view of decision of this Court. Relevant portion of decision of this Court in Vikram Plastics (supra) is extracted hereunder: Learned Counsel appearing for applicants has taken us through relevant material on record. It was contended by him that provisions of Section 145(2) of said Act were rightly invoked by Assessing Officer and Tribunal ought not to have taken different view of matter. In this regard, we Page 7 of 10 O/TAXAP/1412/2005 JUDGMENT note that Tribunal has specifically considered provisions of Section 145 in paragraph 7.3 of its order and after noticing approach of Assessing Officer it found that there was no defect or discrepancy pointed out specifically in books of accounts maintained. Tribunal reiterated in paragraph 7.4 of its order that assessee maintained books of accounts adopting mercantile method of accounting as in past and position being so, neither Assessing Officer had given any finding nor there could be any such finding that no method of accounting had been regularly employed. It was held that Assessing Officer therefore, could invoke provisions of sub section (2) of Section 145 of Act, only on being satisfied that books of accounts maintained were not correct and complete. Tribunal then found, after mentioning situations in which books of accounts maintained could be said to be incorrect and incomplete, that in this case there was no material brought on record to prove and establish that purchases and expenses had been inflated or sales had been suppressed and in absence of any such material or finding given, provisions of Section 145 (2) ought not to have been invoked. It was held that on facts given, Tribunal did not find sufficient justification for invoking provisions of Section 145(2) of Act. In our opinion, in view of finding reached by Page 8 of 10 O/TAXAP/1412/2005 JUDGMENT Tribunal that there were no discrepancies or defects pointed out in books of account and further that they were regularly maintained and also on finding that there was no material brought on record to establish that purchases or expenses were inflated or sales suppressed and also in view of finding that this was not case that there was no method of regular accounting employed, Tribunal was fully justified in coming to conclusion that provisions of Section 145(2) could not be invoked. This conclusion is based on findings of fact and raises no question of law. 5. common question of law, which was posed for consideration of this Court while admitting these appeals, is as follows: Whether Appellate Tribunal has rightly appreciated facts on record and thereby deleted entire addition of Rs.3,23,01,330/ made on account of unaccounted income generated by assessee, and finding is perverse? 6. On appreciating arguments advanced by both sides, we are of opinion that Tribunal has rightly held that books of account, which were sought to be rejected only on ground of excessive fuel charges, were not according to law and Tribunal has held that books of account of assessee were wrongly rejected and in that view of matter, Page 9 of 10 O/TAXAP/1412/2005 JUDGMENT question of Gross Profit will not arise, in our view, while considering case of other sister concerns or units, Tribunal has rightly analysed facts and figures and has rightly held in favour of assessee. We are in agreement with same and accordingly we answer question of law holding that in facts on record, Tribunal has rightly deleted entire addition of Rs.3,23,01,330/ made on account of unaccounted income generated by assessee. 7. On above premises, issue is answered in favour of assessee and against revenue. present appeals are dismissed accordingly. [ K. S. Jhaveri, J. ] [ K. J. Thaker, J. ] hiren Page 10 of 10 Commissioner of Income-tax v. Evergreen Synthetics Pvt. Ltd