ITAT Indore Strikes Down Ex-parte Additions: CIT(A) Relief Confirmed in Kriti Nutrients Matter

Overview of the Tribunal's Decision

The Indore Bench of the Income Tax Appellate Tribunal dismissed the Revenue's appeal, thereby upholding the relief granted by the CIT(A) to the assessee in ACIT Vs Kriti Nutrients Ltd. The Tribunal's ruling for Assessment Year 2021-22 reinforces the principle that ex-parte assessments under Section 144 cannot be sustained merely through mechanical rejection of books, arbitrary gross profit enhancement, ad-hoc expenditure disallowances, or unsubstantiated treatment of trade creditors as unexplained cash credits.

The aggregate relief of approximately Rs. 26.60 crores granted by the CIT(A) was confirmed, delivering a significant verdict on procedural fairness and evidentiary standards in assessment proceedings.

Background Facts

Assessment Proceedings Initiated

For the previous year 2020-21 relevant to Assessment Year 2021-22, the assessee filed its return declaring total income of Rs. 20,87,25,840/-, which was initially processed determining income at Rs. 20,94,62,720/-. Subsequently, the case was selected for scrutiny assessment under the Computer Assisted Scrutiny Selection (CASS) mechanism.

Notices and Compliance Timeline

The Assessing Officer issued statutory notice under Section 143(2) dated 28th June 2022, followed by detailed questionnaire notices under Section 142(1) on 22nd September 2022, 3rd October 2022, and 31st October 2022. The Revenue contended that despite multiple opportunities, the assessee provided only partial compliance.

Reasons for Delayed Submissions

The assessee explained that delays occurred due to unavoidable circumstances including the sad demise of the Chief Financial Officer's father and transition in key accounting personnel. The company attempted to submit comprehensive details on 9th December 2022, but encountered technical difficulties as the e-proceedings submission tab was deactivated on the portal. Consequently, all documents were uploaded through the grievance portal mechanism.

Ex-parte Assessment Order

Without considering materials submitted via the grievance portal, the Assessing Officer passed an ex-parte order dated 19th December 2022 under Section 144 determining total income at Rs. 47,59,29,192/- against returned income of Rs. 20,87,25,840/-, thereby making aggregate additions of Rs. 26,71,03,352/-.

Additions Made in Assessment Order

Enhancement of Gross Profit – Rs. 16,77,57,242/-

The AO rejected the book results invoking Section 145(3), applying an enhanced gross profit rate of 7.20% (being average of preceding three years: AY 2018-19 at 7.92%, AY 2019-20 at 7.71%, and AY 2020-21 at 5.96%) as against the declared GP rate of 4.75% on total turnover of Rs. 685.75 crores.

Disallowance of Sales Promotion and Commission Expenses – Rs. 1,82,82,000/-

The entire amount debited under sales promotion and commission expenses was disallowed on ad-hoc basis for alleged want of supporting evidence and details.

Disallowance of Travelling and Conveyance – Rs. 16,57,600/-

Twenty percent of travelling expenses (Rs. 67.98 lakhs) and conveyance expenses (Rs. 14.90 lakhs) aggregating to Rs. 16,57,600/- was disallowed without specific finding of personal element or non-business nature.

Foreign Exchange Fluctuation Loss – Rs. 60,63,000/-

Net loss on currency fluctuation debited in the profit and loss account was disallowed in entirety.

Trade Payables Treated as Unexplained – Rs. 7,22,60,000/-

Sundry creditors aggregating Rs. 7,22,60,000/- were treated as unexplained income under Section 68 allegedly for non-furnishing of confirmations, PANs, and supporting evidence.

Assessee's Submissions Before CIT(A)

Nature of Business Operations

The assessee, a public limited company listed on BSE/NSE, is engaged in manufacturing refined soybean oil, de-oiled cake (DOC), and lecithin through its solvent extraction plant. The company maintains books of account under modern SAP-based system following Indian Accounting Standards (Ind AS), subject to multiple layers of audit including statutory audit, internal audit, cost audit, secretarial audit, and tax audit under the Income Tax Act, 1961.

Past Assessment History

The assessee demonstrated an unblemished track record with assessments in preceding years completed under Section 143(3) and Section 143(1) with minimal or nil disallowances:

This historical pattern established the credibility of books of account maintained by the assessee.

Explanation for Gross Profit Decline

COVID-19 Impact

The assessee submitted detailed explanation attributing the decline in gross profit to the unprecedented impact of COVID-19 pandemic commencing from 21st March 2020. Nationwide and global lockdown measures substantially reduced export demand for lecithin and de-oiled cake throughout the world.

Raw Material Price Volatility

Significant escalation in raw material costs was documented:

• Crude oil prices increased from Rs. 72/- per kg to Rs. 123/- per kg
• Soybean seed prices surged from Rs. 40/- per kg to Rs. 59/- per kg

Simultaneously, selling prices of finished products declined due to subdued demand and intense market competition.

Product-wise Analysis

Lecithin Sales Analysis (Turnover Rs. 19.62 Crores with 64.64% export component):

The drastic reduction in profit margin from 63.23% to 26.34% was clearly attributable to increased production costs coupled with decreased realization.

Soya De-oiled Cake Analysis (Turnover Rs. 178.28 Crores with 45.77% export):

The loss in de-oiled cake segment increased by Rs. 11.97 crores compared to previous year. This adverse margin was partially offset by better profits in refined oil segment and stringent control over overhead expenditure.

Manufacturing Efficiency

The assessee demonstrated improved manufacturing yield percentages as reported in Tax Audit Report:

• AY 2021-22: 93.75%
• AY 2020-21: 92.66%
• AY 2019-20: 92.68%

This established that operational efficiency was maintained; profitability reduction was purely attributable to market forces beyond the assessee's control.

Documentary Evidence Submitted

The assessee furnished comprehensive documentation including:

• Month-wise and day-to-day quantitative records of raw material consumption and finished goods production
• Party-wise purchase details aggregating Rs. 637.98 crores with complete names, addresses, and PANs
• Party-wise sales records with distributor details
• Expenditure vouchers exceeding Rs. 10 lakhs under various heads
• Market price trends of refined oil, crude oil, and soybean seeds
• Confirmation certificates from major suppliers constituting trade payables
• Reconciliation statements addressing alleged discrepancies in Tax Audit Report

Submission via Grievance Portal

The assessee submitted detailed written explanation dated 9th December 2022 through the grievance portal, specifically requesting opportunity of hearing since the regular e-proceedings tab was deactivated. The letter comprehensively addressed all queries raised in notices issued under Section 142(1).

CIT(A)'s Findings and Directions

Admission of Additional Evidence

The CIT(A) admitted additional evidence furnished by the assessee under Rule 46A of the Income Tax Rules, 1962, and called for remand report from the Assessing Officer vide communications dated 27th May 2024, with reminders on 14th June 2024 and 1st August 2024.

Despite sufficient opportunity, the Assessing Officer failed to file any remand report or substantive response, thereby waiving the right to controvert the evidence.

Deletion of GP Enhancement

The CIT(A) restricted the gross profit rate to 4.75% as declared by the assessee, observing that:

• The assessee is a listed company maintaining audited SAP-based books reconciled at multiple levels
• Quantitative records, production yields, and stock details were properly maintained and furnished
• Cogent commercial explanation supported by documentary evidence was provided for GP decline
• COVID-19 pandemic impact, export slowdown, raw material price escalation, and finished goods price reduction were established facts
• Manufacturing yield improvement demonstrated operational efficiency
• Prior year GP rates cannot be mechanically applied without disproving current year's commercial realities