TaxTMI 
TaxTMI 
TaxTMI 
2015 (1) TMI 606
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of appeal relating to disallowance of unaccounted business expenditure on repairs and renovation of factory shed amounting to Rs. 13,83,807/- declared by the appellant during the course of survey proceedings. The ld. CIT(Appeals)-I, Surat, also erred in law by misinterpretation of proviso to Sec 69C of the Income Tax Act, 1961. 3. The brief facts of the case are that a survey action u/s 133A of the I.T. Act was carried out at the business premises of the assessee on 17.12.2002. During the course of survey proceedings it was noticed by the Assessing Officer that the assessee was carrying out construction of shed and had also carried out some repairing/renovation work in the factory building. The assessee had admitted a sum of Rs. 13,83,807/- was incurred towards construction of shed and repair and renovation of factory building which was not recorded in the books of account. Therefore, the Assessing Officer disallowed the expenditure of Rs. 13,83,807/- u/s 69C of the Incometax Act on the ground of capital expenditure, relying on the judgment of Hon'ble Gujarat High Court in the case of Fakir Mohamed Haji Hassan, reported in 247 ITR 290 and held that the same could not be credi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....appeal are dismissed." 5. The Authorized Representative of the assessee besides relying on his submission before the Commissioner of Income Tax (Appeals), argued that the Assessing Officer and CIT(A) adjudicated the issue against the assessee relying on the judgment of Hon'ble Gujarat High Court in the case of Fakir Mohamed Haji Hasan (supra) which was considered and overruled by the subsequent judgment of Hon'ble Gujarat High Court in the case of Shilpa Dyeing & Printing Mills (P.) Ltd., reported in 219 Taxman 279, wherein it was held as under:- "9. We may further notice that the decision in case of Fakir Mohmed Haji Hasan Vs. Commissioner of Income Tax (supra) came-up for consideration in case of Deputy Commissioner of Income Tax Vs. Radhe Developers India Ltd. and anr (supra),it was observed as under: 'The decisions of this Court in the case of Fakir Mohmed Haji Hasan (supra) and Krishna Textiles (supra) are neither relevant nor germane to the issue considering the fact that in none of the decisions the Legislative Scheme emanating from conjoint reading of provisions of sections 14 & 56 of the Act have ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the statute with effect from 01.04.1999 and therefore applicable in the assessment year under consideration. 9. Before us, the AR of the assessee vehemently argued that the decision of the Hon'ble Gujarat High Court in the case of Fakir Mohamed Haji Hasan (supra) is distinguishable on facts and is not applicable. For the above contention, he relied upon the recent decision of the Hon'ble Gujarat High Court in the case of of Shilpa Dyeing & Printing Mills (P.) Ltd. (Supra). 10. We find that in the case of Shilpa Dyeing & Printing Mills (P.) Ltd. (supra), the issue came up for consideration of the Hon'ble Gujarat High Court was that the loss suffered by the assessee under any other head is to be allowed as set off or not against the income deemed u/s 69 which is assessable under the head "income from other sources". We find the issue involved in the present case is quite distinct and different from the issue which was involved in the case before the Hon'ble Gujarat High Court. In the instant case, the issue of unexplained expenditure which is covered by Section 69C is involved, whereas in the case before the Hon'ble Gujarat High Court the issue was in respect of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is Bench of the Tribunal in the case of ACIT Vs. M/s. Vrujbhumi Cotton Industries in ITA No.2210/Ahd/2008, passed in Assessment Year 2004-05, order dated 22.07.2011, wherein the Tribunal held that "the assessee has not retracted the statement given at the time of survey but has only made the correct working of the excess stock. Since no mistake is pointed out by the Revenue in the working of the excess stock by the assessee, we do not find any justification for not accepting the same and making the addition on the basis of excess stock worked out at the time of survey in hurried manner or on estimated basis." 16. He further placed reliance on the decision of this Bench of the Tribunal in the case of Smt. Babiben R. Patel Vs. ITO and Shri Dashrathbhai Prahladbhai Patel Vs. ITO in ITA Nos.32 & 33/Ahd/2004 for Assessment Year 2000-01, order dated 16.07.2010, wherein the Tribunal relying on the decision of Hon'ble Kerala High Court in the case of Paual Mathews and Sons v. CIT (2003) 263 ITR 101 (Ker.) held that "the statement elicited during the survey operation had no evidentiary value and power to examine a person on oath is specifically conferred on authorized officer only u/s ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Revenue's appeal 23. The grounds of appeal raised by the Revenue in this appeal read as under:- (i) On the facts and in the circumstances of the case and in law, the ld. CIT(A)-I, Surat has erred in directing to delete the addition of Rs. 35,72,885/- made on account of law gross profit, which inter alia includes the disallowance of deliberate loss of Rs. 31,35,469/- incurred on sale of grey cloth in the post-survey period. (ii) On the facts and in the circumstances of the case and in law, the ld. CIT(A)-I, Surat has erred in accepting the assessee's contention that it had furnished confirmatory letters, contra accounts, etc. of the customers to whom sales were made in cash ignoring the fact that no such details were furnished by the assessee, as communicated to it vide notice U/s 142(1) dated 15.12.2004 alongwith query letter as highlighted in para 4.3(q) of the order u/s 143(3) and also order sheet entry dated 22.12.04. (iii) On the facts and in the circumstances of the case and in law, the ld. CIT(A)-I, Surat has erred in not accepting the fact and holding that the sales made in post-survey period were at the pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....peal the grievance of the Revenue is that the CIT(A) erred in deleting the addition of Rs. 35,72,885/- made on account of low gross profit, which inter alia includes the disallowance of deliberate loss of Rs. 31,35,469/- incurred on sale of gray cloth in the post-survey period. 27. The brief facts of the case are that the Assessing Officer observed that the contention of the assessee-company was incorrect with regard to the claim of the assessee-company regarding loss on sale of grey at the market rate. According to the Assessing Officer, the assessee-company had purchased substantial portion of grey cloth from its sister concerns at a much higher rate than the sale price and sold the same at lower rates. In support of his finding, the Assessing Officer stated that the sale rate of grey in the market in general were higher i.e. almost at Rs. 13/- per mtrs as against the sale rate shown by the assessee-company at Rs. 11.75 per mtrs and he accordingly observed that the difference between the purchase rate of grey as made from its sister concern and that of sale at which the grey was sold by it would be disallowable u/s 40A(2)(b) of the I.T. Act, 1961. The Assessing Officer has furth....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... It is seen that while rejecting the books of account, the AO had also relied upon certain decisions of Honourable ITAT, Ahmedabad and other cases. 9.1 According to the AO, regarding goods traded during the year under consideration, various rates were found prevailing and it (the rate) varied from quality to quality ranging between Rs. 5/- to Rs. 50/- per mtr and based on that observed that the appellant company had sold its grey at much lower rate than the prevailing market rate. However, it is seen that the AO could not establish the manner in which the appellant should have sold its grey and therefore failed to prove his viewpoint that the goods were sold at a lower rate which resulted in artificial loss to it. 9.2 Further, the AO has observed that the appellant company did not maintain proper records of parties to which cash sales were made and in absence of it genuineness of transactions resulting into losses could not be verified. It is seen that during the course of assessment proceedings, the appellant company had submitted complete details of the parties including their addresses and PAN and contra confirmations in support of its sta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....licable to the facts of the appellant's case. Relevant portion of the reply made by the AR in this regard has already been quoted above wherein it is found that the AR has very well distinguished the facts of the case of the appellant company from the facts of the cases of the assessee in connection with which above decisions were rendered. It is seen that Honourable ITAT "A" Bench, Ahmedabad while deciding the case of M/s Goyal Silk Mills Pvt.Ltd. Vs. ACIT (supra) has followed the findings of the Honourable ITAT Ahmedabad in the cases of M/s Ojas Techno Vs.CIT & M/s Suresh Scrap Vs.CIT(supra). It is further seen that in the business premises of M/s Goyal Silk Mills Ltd a search action had taken place and during that the above referred assessee made a huge disclosure but while filing its return of income, it did not offer the entire amount of disclosure for tax. The AO while framing the assessment order made an addition of Rs. 28,88,307/- but the same was deleted by CIT(A) holding that it was not effectively offered for tax by the said assessee. 9.4 While deciding the appeal, it was observed by the Honourable ITAT that the assessee did not offer the disclose....
X X X X Extracts X X X X
X X X X Extracts X X X X
....case of the appellant company was mainly attributable to losses shown by it in its trading activities of grey by observing that "it would be suffice to say that it deceptively appears to be correct". Further in para 4.4(h)(iii) of the assessment order, it is again found that the AO has admitted that average gross profit ratio gives only an indication of gross profit prevailing in the market which means that the AO has himself indirectly admitted that it (average gross profit) cannot be taken as a pointer to determine the gross profit of succeeding year In a definite manner as there are various factors relating to a particular trade which may affect the gross profit ratio. 9.8 Thus, on the above discussed facts and also after analyzing the judicial findings as quoted by the AO in support of its arguments and also as relied upon by the AR in support of his contention, I am of the view that the addition made by the AO by estimating the gross profit of the appellant company after rejecting its books of accounts u/s 145 of the I.T.Act,1961 is totally unjustified in the eyes of law. As discussed in detail and also supported by various judicial rulings of various Courts, it is seen that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ubmissions, he submitted that the loss incurred by the assessee-company in trading with the admitted stock should not be treated as abnormal one in the light of the prevailing market force of demand and supply. 30. On the contrary, the Departmental Representative supported the order of the Assessing Officer. Further, at the time of hearing, the DR filed a written submissions dated 20.10.2014 which reads as under:- "In this case return declaring total income of Rs. 23,84,868/- was filed on 29.11.2003. The assessment u/s. 143(3) was finalized the total income of Rs. 76,41,830/- on 31.12.2004. In this case, survey u/s. 133A was carried out at the business premises of the assessee on 17.12.2002. In the course of survey proceedings, the assessee had admitted a sum of Rs. 90 lacs as unaccounted income which inter-alia inclusive of the following items:- (i) Unrecorded investment in factory shed Rs. 13,83,807/- (ii) Furniture & Fixtures. Rs. 7,40,280/- (iii) Unaccounted stock of grey Rs. 50,02,330/- (iv) Unaccounted stock of colour & chemicals. Rs. 10,10,201/- (v) Unaccounted stock of screen Rs. 8,23,500/- 2. In the P&L account the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to ascertain the assessee's claim of loss, the assessee was categorically asked to furnish the mailing addresses of the parties to whom sales were made in cash. The assessee, vide its letter dated 15.12.2004 had stated that the confirmatory letters of the persons were annexed with it. However, verification of the enclosures annexed with the above referred letter revealed that no such confirmatory letters were furnished by the assessee. Accordingly, on the same date itself query letter along with notice u/s. 142(1) of the Act highlighting the aforesaid fact was issued to the assessee by the A.O. As per this A.O's letter, the assessee was categorically asked to furnish the confirmatory letters on 22.12.2004 as claimed in its letter dated 15.12.2004 (para 4.3(g) of the order u/s. 143(3) may kindly be referred to). However, on 22.12.2004, the assessee's A.R., attended the office of the A.O. but did not furnish the requisite details (order sheet entry dated 22.12.2004 may kindly be referred to). Accordingly, he was required to furnish the aforesaid details. But, till date of finalization of assessment proceedings, no such details were furnished by the assessee. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....count - rejection - non inclusion of addressee of customer in respect of cash transaction cannot be a basis of rejection of books of account -There is no necessity for assessee to maintain the addresses of customers and failure to maintain the same or to supply them as and when called for cannot give rise to suspicion with regard - to genuineness of transactions - Rejection of book result not Justified" (iii)The ld. CIT(A) has observed that the A.O. could not establish the manner in which the assessee should have sold its grey and accordingly, the A.O. could not prove his view point that grey was sold at a lower rate, which resulted into artificial loss (para 9.1 and 9.2 of the appellate order may kindly be referred to). (iv) As regards the applicability of the ratio of Hon'ble ITAT, Ahmedabad's decision in the case of Goyal Silk Mills Pvt. Ltd. Vs. CIT and others, the ld. CIT(A) has distinguished the cases, as discussed in para - 9.4 of the appellate order. (v) In the books of accounts for the post survey period the A.O. did not notice any mis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Bombay High Court relied upon by the CIT(A) does not squarely applicable in the case of assessee. 3. The observation of the ld. CIT(A) that in the case of Goyal Silk Mills is not applicable in the case of assessee. Here, reference is invited to the Hon'ble ITAT, Ahmedabad's decision in the case of Marutinandan Infotech Pvt. Ltd. Vs. CIT in ITA No. 2217/A/2004 dated 04.03.2005, wherein, the Hon'ble ITAT has confirmed the ld. Cir(A)'s view that the discrepancies in stock found and admitted by the assessee at the time of survey proceedings is sufficient ground for rejection of books of accounts u/s. 145 of the I. T. Act. In this decision, the Hon'ble ITAT has again given the direction to compute the total income of the assessee on the above norms laid down in the case of Goyal Silk Mills Pvt. Ltd. Accordingly, in view of these decisions, the ld. CIT(A)'s observation that the ratio laid down above, is not applicable in the instant case is not incorrect. 4. The observation of the ld. CIT(A) that the A.O. could not establish the manner in which the assessee should have sold the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on the ground that the expenditure was incurred wholly and exclusively for the purpose of promoting its business activities. 35. The Departmental Representative supported the order of the Assessing Officer, whereas the Authorized Representative of the assessee supported the order of the CIT(A) . Further, at the time of hearing, the DR filed written submissions dated 20.10.2014 in support of his claim. The relevant paragraphs of the written submission read as under:- "......... 6. As regards the second issue of deletion of addition of Rs. 2,60,385/- made on account of disallowance u/s. 40A(2)(b), it is pertinent to mention that the assessee had claimed an expenditure of Rs. 14,51,716/- under the head brokerage and sales promotion expenses. Out of these expenses, a sum of Rs. 10,93,619/- was paid to its sister concerns namely Laurel Apparel's. This brokerage was paid @ 5.25 % of the job receipts brought in by it, as compared to the brokerage charges of 4% paid to others. Thus, as the assessee had paid excess brokerage charges @ 1.25% to that of market rate the disallowance u/s. 40A(2)(b) was....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... renovation of factory shed but was found as not allowable by the Assessing Officer and with respect to the amount of Rs. 39,882/- surrendered by the assessee during the course of survey. On appeal, the CIT(A) confirmed the above levy of penalty. With respect to the levy of penalty on the amount of Rs. 39,882/- surrendered by the assessee during the course of survey, we have deleted the addition while deciding Ground No.2 of the appeal of the assessee. As the very basis for levy of penalty does not exist, therefore, the levy of penalty on the same also does not survive and hence, the levy of penalty on amount of Rs. 39,882/- is deleted. 39. With respect to the amount of Rs. 13,83,807/- being unrecorded expenditure being factory shed, we find that the assessee during the course of survey admitted of having incurred expenditure of Rs. 13,83,807/- on repairs and renovation of factory shed from undisclosed sources. In the return of income, the assessee credited the said amount in the P&L Account as income and also debited the said amount as expenditure for repairs. Thus, the income of Rs. 13,83,807/- disclosed by the assessee in the return of income was accepted by the Revenue. Howeve....