TaxTMI 
TaxTMI 
2015 (12) TMI 366
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....he A.O. 3. It is, therefore, prayed that the order of the CIT(A) be set aside and that of the A.O. be restored to the above extent. 2. This Tribunal has recalled its order dated 15/02/2013 on the ground that certain facts stated in paper-book were overlooked resulting into mistake apparent from record. Accordingly, the order dated 15/02/2013 in the present appeal was recalled vide order dated 27/1/2014. The appeal was directed to be fixed for hearing afresh. Hence, the appeal is fixed for hearing today and taken up for hearing afresh. 2.1. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter referred to as "the Act") was framed vide order dated 31/12/2007, thereby the Assessing Officer (AO in short) made disallowance of commission paid to its Director of Rs. 88,00,000/- and disallowance of expenditure by invoking provisions of section 14A of the Act of Rs. 298/-. The AO after rejecting the books of accounts of the assessee made estimation of profit and, thereby made addition of Rs. 31,31,87,129/- being 5% of net turnover considering the same as suppression of Gross....
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....eparate trading accounts. The ld.CIT-DR submitted that the AO was justified in rejecting the books of accounts. In support of this contention that since there was difference in the statement of closing stock as provided to the bank the books of accounts can be validly rejected, the ld.CIT-DR placed reliance on the judgement of Hon'ble High Court of Kerala rendered in the case of S.Murugappa Chettiar vs. CIT reported at (1988) 174 ITR 0245 (Ker.). To buttress the contention that there was no slump in the business of Textile, the ld.CITDR placed reliance on the Annual Report 2004-05 published by the Ministry of Textiles. The ld.CIT-DR relied on the judgement of Hon'ble Apex Court rendered in the case of Arisudana Spinning Mills Ltd. vs. CIT reported at (2012) 26 taxmann.com 39(SC) in support of the contention that the assessee is required to maintain separate trading accounts for the activities undertaken by the assessee. The ld.CIT-DR also placed reliance on the judgement of Hon'ble High Court of Madras rendered in the case of Coimbatore Spinning & Weaving Co.Ltd. vs. CIT reported at (1974) 95 ITR 375 (Mad.) in support of the contention that heavy burden lies on assessee to prove th....
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....bmitted that the AO is not correct in reaching to the conclusion that the books of accounts of the assessee do not give true and fair picture of the profit. The ld.counsel for the assessee submitted that the AO failed to appreciate the facts in right perspective. He submitted that there is no reason as to why the assessee would make an attempt to give wrong or incomplete accounts, when admittedly it is subjected to multitier auditing. The ld.counsel for the assessee submitted that the AO has not doubted the purchases and sales and has also not given reasoning as to how the basis taken for rejection of accounts would affect the profit. The ld.counsel for the assessee, in respect of the contention of the ld.CIT-DR made on the issue of disclosure of stock to the bank and to the Revenue, relied upon the judgement of Hon'ble High Court of Gujarat rendered in the case of CITAhmedabad- III vs. Riddhi Steel and Tubes (P.) Ltd. reported at (2013) 40 taxmann.com 177 (Gujarat). The ld.counsel for the assessee submitted that the AO failed to appreciate the fact that fall in gross profit was due to steep rise into the cost of raw-material. He submitted that the assessee is engaged in the busine....
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.... AO for rejecting the books of accounts and estimation of profit would be on touch stone of a conjoint reading of both the section 145 and 144 of the Act. Any violation thereof would vitiate the action of AO. As per section 145 of the Act, at the outset, the AO has to satisfy himself about the correctness or completeness of the accounts or about the method of accounting applied by the Assessee. In the absence of such satisfaction, the powers so exercised would become illegal and unjustified. In the case in hand, the AO has stated about eight grounds for rejection of books of accounts. However, the ld.CIT(A) dealt with each defect and rejected the reasons of AO by observing as under:- "5.3.3 The grounds of which the A.O. has rejected the books of account are now discussed with appellant's arguments: - 1) Improper disclosure of work-in-progress:- The A.O. has argued that the assessee has not completely disclosed the work-in-progress. In the assessment order, the A.O. has stated that the assessee has shown work-in-progress of Rs. 3,42,654/- in the closing stock, which is not correct. The A.O. has thereafter worked out the closing stock as per calculation given in the assessm....
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.....16 crores in the name of Surat Textile Mills Ltd. (STML) whereas STML shows total sundry creditors of only Rs. 4.26 crores. According to the A.O., the appellant could not explain the above discrepancy and tried to reconcile the same with the figure of Rs. 27.7 crores appearing as advance payment in the balance sheet of STN1L. The appellant has however stated that the contention of the A.O. is totally wrong. I have gone through the submission of the appellant as discussed in the paragraphs above. The A.O. has not compared the detailed accounts. He has gone on the basis of total sundry creditors instead of going into the details of groupings. The said groupings of CPL shows the following:- Account Code Group Code Account Name Cr. Balance Dr. Balance 153073 070501 Cur. Ass: S. Deb, control job charges 0 1,81,74,209 153090 070501 CA: S. Debtors cont. computer design 0 55,700 164091 070501 Garden Silk Mills Limited 2,05,84,620 0 164107 070501 070501 Kamla Associates 0 59,39,823 Sub-total 2,05,84,620 2,41,69,732 Net Disclosed in Balance Sheet 3585112 ....
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.... account. The assessee stated that the details of textile hypothecation stock were as on 25.03.2005. However, in his letter to the Bank the assessee mentioned that this statement is for March 2005 which was submitted on 18.04.2005. The assessee, therefore, cannot say that the stock statement submitted is dated 25.03.2005 whereas it should actually been 31.03.2005. The appellant has on the other hand argued that the statements given to the bank clearly show that the stock statement submitted to the Bank was as on 25.03.2005. There is no requirement under the Law that the statement to be submitted to the Bank should also be as on 31.03.2005. If the Banks are accepting the statement as on 25.03.2005 this does not mean that the books of accounts are wrong. The appellant further argued that the stock mentioned in the books of account in respect of each item is more than the stock statement submitted to the Bank and hence the Department cannot have any case that either there should be an addition or the books of accounts are wrong. The stock statement only shows the value and not the quantity. Further, the stock statement to the Bank shows Rs. 37.11 crores of total finished product and w....
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....agree with the appellant. The annual accounts show the details of quantity and value of opening stock and closing stock. There are no purchases during the year and hence the sales figure is also automatically obtained by subtracting the closing stock quantity from the opening stock quantity. In any case, the entire turnover of readymade garments is very small and hence it cannot be made grounds for rejecting the books of account. 5) No proper disclosure of the persons covered u/s.40A(2)(b):- In the assessment order, the A.O. has stated that the name of Kamla Associates and Creative Processing Ltd. (CPL) are shown under 40A(2)(b) even though there are large number of transactions with them. The appellant has on the other hand stated that the group concern Kamla Associates and CPL has no common Directors with the appellant company's Directors which is clear from the following table:- No Name of the Concern Names of the trustees/ directors 1. Kamla Associates 1.Smt. Sonia Firoz Khan 2. Shri Kanubhai B. Patwa 2. Creative Processing Limited 1. Shri Tejas Manubhai Jani 2. Shri Harish Bharuchi 3. Shri Abhijit Barua 3. Garden Silk Mill....
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....ctivities undertaken by the assessee. Since the G.P. rate has drastically fallen this information is required. But despite several opportunities the assessee did not give these separate trading accounts and, therefore, the A.O. rejected the books of account. During the appellate proceedings, the appellant has stated that it has given detailed reasons and quantified the same for fall in G.P. rate which is as under:- 1 Decrease in manufacturing cost Rs.(+)329472859 2 Increase in raw material cost Rs.(-)416127256 3 Fall in sales realization Rs.(-)472525614 Net effect on Gross Profit Rs.(-)559180011 Effect on Gross Profit (in %) 8.90% The table very clearly shows that there was increase in the raw-material cost and decrease in the sales realization. The A.O. has brought no material on record to show bogus purchases or inflated purchases. The A.O. has also not brought any material on record of under billing of sales or sales outside the books of account. In view of this reason, simply because separate trading account of each activity could not be given, the books of accounts cannot be rejected. The appellant argued ....
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....reserve is an issue below the line and it has nothing to do with computation of income. In any case as stated by the appellant such reserve is relevant only for the purpose of shareholders. In view of this reason, this ground cannot be the ground for rejection of books of account. From the aforesaid discussion, it is clear that none of the eight grounds taken by the A.O. for rejecting the books of account are valid in this regard. The fall in the G.P. rate has been fully explained by the appellant as under:- 1 Decrease in manufacturing cost Rs.(+)329472859 2 Increase in raw material cost Rs.(-)416127256 3 Fall in sales realization Rs.(-)472525614 Net effect on Gross Profit Rs.(-)559180011 Effect on Gross Profit (in %) 8.90% The Assessing Officer has not even once doubted or made any adverse remarks with reference to the yield of yarn/grey cloth of the appellant company. This would mean that the Assessing Officer has fully accepted the purchase, sales, consumption, shortage, etc., of the appellant company. The Assessing Officer could not quantify any particular item of deduction as disallowable item for the t....
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....ect or complete giving rise to distorted figure of GP. The Hon'ble Apex Court in the case of Sanjeev Woolen Mills vs. CIT reported at [2005] 279 ITR 434 (SC) has held as under:- "9. Section 145 provides that in case AO is of the view that the assessee's accounts are incomplete or incorrect or method of accounting has not been regularly followed by the assessee, the AO may resort to make best judgment assessment in the manner provided under s. 144 of the Act instead of making assessment under s. 145 (143) of the Act. To attract s. 145 of the Act, it is necessary that: (a) the assessee has computed the income in accordance with the method of accounting regularly employed by the assessee; and (b) provided where the accounts are correct and complete to the satisfaction of the AO; but (c) the method employed is such that in the opinion of the AO, the income cannot be deduced therefrom then the AO may adopt a different method of computation of the income as he may determine. 10. The assessee may employ whichever basis of valuation of stock in hand, but it must adhere to that consistently year after year. Casual departure of valuation of trading stock in hand at cost or market....
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....crease in crude oil price and decline in realization of POY Yarn sale as per ld.CIT(A). This finding on fact is not rebutted by the Revenue. Further, we find merit in this contention of the assessee that the gross profit would fall if the sale of price remains same or lower than the earlier year but the cost of raw-material increases. The earning of gross profit is dependent on various factors, for example, in the case of manufacturer cost of raw-material plays a vital role. If there is rise into cost of raw-material, naturally cost of production would increase and badly effect the profit if there is not corresponding increase in sale price. As per AO, there is increase in turnover, therefore the gross profit ought to have been increased instead of decreasing. We are of the view that such reasoning cannot be universally applied and becomes fallacious in certain conditions. In the case in hand, the assessee is a company subjected to internal audit as well as statutory audit. The auditors have not pointed out any defect and or there is no adverse remarks. The AO has not made any adverse comment upon sale & purchase. Undisputedly, no defect has been noticed by the Central Excise Depar....