TaxTMI 
TaxTMI 
TaxTMI 
2015 (12) TMI 366
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....e 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 Profit (GP). Further, the AO made disallowance o....
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....hat 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 that books of accounts alone give correct picture and....
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.... 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 business of manufacturing and is substantially dependent on....
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.... 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 assessment order on page-17 & 18. As per this calculation, the A.O. has stated that....
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....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 From the above table, it is very clear that the balance of the appellant company of Rs. 2.50 crores has been shown by the appellant but it has been gro....
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....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 work-inprogress and not only finished goods as stated by the A.O. The comparison of the stock as per the books and stock as per statement given to the Bank is as under:- Details of stock as per books as on 31-3-2005 Details....
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....re 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 Mills Limited 1.Shri Praful A. Shah 2.Shri Alok P.Shah 3. Smt. Shilpa P.Shah 4.Shri S.B. Bhesania 5.Shri Rajen P.Shah 6.Shri S.J.Bhesania 7. Shri H.F.Shah 8.Shri J.P.Shah 9.Shri A.N.Jariwala 10.Shri Sunil Sheth 11.Smt.Smita Shah 12.Shri Madanlal Lankapati 13.Shri Y.N.Ramamurty (Nominee) In view of the above, the appellant say....
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.... 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 that its various activities of making chips, yarn from chips, grey from yarn and dyed/printed fabric from grey involves not only sales to the outside parties at each stage but also captive consumption of various products. The yarn is a raw material for grey cloth activity but it is a finished goods the activity of making yarn similarly for fabric. The appellant has stated that for making separate trading accoun....
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....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 tax purposes. In other words, Assessing Officer could not pinpoint any specific item in the working results for a specific addition in the assessment as disallowable item of expenditure etc. The only point of addition pointed out is with respect to undervaluation of WIP. This clearly supports the argument that the book results were rejected by the Assessing Officer on insignificant grounds. The only ground valid is with respect to addition in the ....
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....f 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 value is not permissible. The method adopted of maintaining the accounts should be definite method of valuation which is carried by the assessee from year to year. To attract the provision of s. 145 of the Act the consistent method of maintaining accounts books is a first condition thereafter the AO should be of the view that the accounts are correct and complete but the method employed is such that in the opinion of the AO the income cannot properly be....
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.... 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 Department in the registers maintained under the Central Excise Act, regarding rawmaterial and furnished goods, which is subjected to inspection and audit. In our considered view, the rejection of books of accounts should not be in a mechanical fashion, the AO has to come to a definite conclusion that the accounts so placed before him are not correct or not complete, consequently, it has distorted the true picture of profit. The AO is required to make analysis....