In a recent judgment ITAT Kolkata has stated held that there is no restriction under any law that assessee cannot sale the product less than its manufacturing cost. ITAT further clarified that the mere fact that for certain reason, the assessee could not earn better margin of profit cannot be the reason to believe that the assessee returned less profit than what it actually earned

Case Details:
ITA No.2229/Kol/2010 Assessment Year :2004-05
Income Tax Officer vs. M/s Santhal Multicast Pvt. Ltd.
Date of Order: 041-2-2015

Facts of the Case:
The respondent assessee was a Private Limited Company engaged in business of manufacturing of ingots and cement. The assessee filed return of income for the relevant assessment year declaring the loss of Rs. 338876.61 under the head of business income. During the assessment year under consideration, the assessee had shown manufacturing expenses of Rs.5,23,32,438/- in relation to sale of Rs.4,38,91,871/-. As per financial statement. From the above, Assessing Oficer (AO) found a loss of Rs.84,40,567/- is arising out of trading account of assessee. The AO called upon the assessee to justify the trading loss but according to the AO the assessee did not offer any explanation. Therefore the AO rejected the loss claimed by assessee. So AO disallowed the loss claim by assessee and added it to the income of assessee.

Aggrieved assessee preferred appeal before Ld. CIT(A) who allowed the claim of assessee by observing as under:-

“Taking into the account the circumstance and facts as narrated above, it is apparent that no difference in the amount between manufacturing cost and sale plus closing stock could be added to the Net Profit of the Appellant as the Appellant had maintained his Books of Accounts as per the provisions of law and further the assessing officer had not found any discrepancy relating to the purchase and sale. While it is unusual for the sale price to be less than the cost price it is not an essential ‘ sine qua non’ of business enterprise. There has been and will be situations when this may be the case. The crucial fulcrum for this to be tested on is evidence and a proper enucleating and marshalling of facts. This unfortunately is woefully lacking in this case. Further, the AO has not brought any evidence on record in support of his contention. Therefore, this addition deserves to be deleted and on merits as stated above this ground is allowed.”

Important Excerpts of ITAT Order:

We have heard Ld. DR and perused the materials available on record. Before us, Ld. DR vehemently relied on the order of AO. We find that during the appellate proceedings before Ld. CIT(A) Ld. AR of assessee submitted the arguments, which extracted from the order of Ld. CIT(A) is reproduced below:-

“It is wrong to assume that sale price cannot be less than cost price. In a manufacturing, cost exceeds sales price due to various reasons such as purchase of raw material at high rate, lack of quality control High cost of production due to wrong calculation, over consumption of electrically or power where quality is not stabilized in the first year, use of Finally techniques etc. In this case, the appellant also incurred high cost of production due to following reasons:

1) Assessee was engaged in the business of manufacture of steel ingots from scrap. Low gross profit was due to decrease in sale price of finished goods and increase in cost of raw materials and also the very high outgo on account of electricity. This being the first year of manufacturing there were teething problems which took time to stabilize.

2) As may be seen from the following comparative chart the cost of electricity per metric ton for this year was much higher compared to next year:

Year	2003-04	2004-05
Production (M.ton)	4007.68	4129.95
Electricity consumed (Rs)	1,54,78,738	1,18,12,249
Consumption per M.Ton	3862	2860

3) The company’s manufacturing unit was not working smoothly throughout the year despite assessee’s best efforts. Just to keep the business running and to increase production manufacturing expenses were incurred. Due to several problems like electricity, labour, etc., the manufacturing unit was ultimately shut down on 03/11/2006.

In concluding, we submit the following:

1. The Assessing Officer has not detected any discrepancy in the amounts of purchases, sales, closing stock or any other item of expenditure. The alleged defects raised by the Assessing Officer were all explained in course of the assessment proceedings.

2. The accounts of the company were properly audited and the same were followed by tax audit, a report of which in Form No. 3CD was filed along with the return. In annexure to Form No. 3CD information in respect of quantity of purchases, consumption, closing stock and production were given and those have not been disputed by the Assessing Officer.

3. During the course of the assessment proceedings, details of the manufacturing process, issue of raw materials and as to how the raw material, finished goods, etc., were accounted for in the books of accounts were furnished and the Assessing Officer had not found any fault with such details.

4. The Assessing Officer had not found any evidence that the assessee had made purchase or sales outside the books of account. The items manufactured by the assessee being excisable goods, the manufacturing and related records were also subjected to periodical checking by the Central Excise Authorities. Such authorities have never given any adverse finding against the records maintained by the company.

5. The rejection of the books of account by the Assessing Officer is not based on any cogent reason.

6. The reason for the high cost of production which ultimately resulted in a loss under the manufacturing and trading account was mainly due to the high expenditure on account of electricity as have been explained in detail above. Considering the facts and circumstances as submitted above, it is humbly prayed that the addition of Rs.84,40,567/- may kindly be deleted.”

From the aforesaid discussion, we find that AO has nowhere rejected the sales or purchase of assessee vis-à-vis other manufacturing expenses incurred by assessee during the year. We find that AO, after rejecting the books of accounts, had presumed that no prudent business man would sell the goods less than the manufacturing cost. However, there is no restriction under any law that assessee cannot sale the product less than its manufacturing cost. Moreover, it was the first year of its business of the assessee and assessee was not having expert knowledge of its business intricacies. We further find that AO has disallowed the loss incurred by assessee without any rational ground. Whereas the AO had not pointed out any material defect in the books of accounts of the assessee, the mere fact that for certain reason, the assessee could not earn better margin of profit, cannot be the reason to believe that the assessee returned less profit than what it actually earned. Possibility of unstable market condition cannot be ruled out. The Tribunal, therefore, deleted the trading additions. We do not find any additional evidence having been admitted by the Ld. CIT(A) except comparative chart of expenses. The Ld. DR was unable to point out as to what was the fresh evidence on the basis of which the Ld. CIT(A) allowed relief to the assessee. Even the ground of appeal of the Revenue in this regard is very vague. In view of the above, we incline not to interfere in the order of Ld. CIT(A) and this ground of Revenue’s appeal is dismissed.

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