TaxTMI 
TaxTMI 
2016 (10) TMI 921
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....1, brief facts of the case are that the assessee has started operations during the year and in the business of procuring milk from the villagers and after pasteurizing and other relates processes, sold it in the market to various retail outlets/milk booths. The assessee submitted its return of income declaring net loss of Rs. 1,54,14,140/- as per audited books of accounts. The books of accounts were produced before ld. AO and same were examined in detail, but the same were rejected by the AO by invoking provisions of section 145(3) of the Act and thereafter AO disallowed the whole of the manufacturing/trading loss of Rs. 62,77,969/-. Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A) who has confirmed the action of the AO. Hence, the assessee is in appeal before us. 2.1 Before we examine the contentions of the assessee, it would be useful to refer to the findings of the ld. CIT(A) which are reproduced as under: "I have considered the facts of the case and the submission made. The AR could not controvert the findings of the AO. The AO clearly mentioned in the assessment order that the assessee has not maintained any quantitative day to day stock re....
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....to retail outlets which included marketing offers such as Free Milk on lifting certain quantity, Discounts in prices on achieving monthly target etc. Such schemes and incentives resulted in lrealization of sold milk. 1.4 There was low utilization of installed capacity in the first year (AY 2006- 07) which resulted in the turnover of Rs. 3.79 Crore. After stabilization of the operations, the assessee could achieve the turnover of Rs. 10.85 Crore in the next assessment year 2007-08 and reduced the losses. 2.3 Regarding rejection of the books of account by the AO u/s 145(3), the ld AR has submitted as under: ALLEGATION BY LD. AO ( Serial No. 1.1 on Page No. 2 of the Assessment Order): 1.5 The assessee has shown the purchase of raw milk from various villagers for which self made vouchers were maintained for payment without mentioning the complete addresses of the persons from whom said purchases have been made. The payments of raw milk purchases were also made in cash of which no verification could be made for the reason that assessee has denied any personal attendance of few of the suppliers for verification vide order sheet entry dated 16/12/2008: SUBMISSION OF APPE....
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....mitted a quantitative tally on 14/10/2008(without including SMP milk) and on 10/11/2008 (after including SMP milk)(See PB No. 27 to 28). Without quantitative records, how could the assessee submit the Q-Tally to the Ld. AO in the course of assessment proceedings. ALLEGATION BY LD. AO ( Serial No. 1.3 on Page No. 2 of the Assessment Order) 1.7 The assessee has manufactured Ghee also during the year, for which no quantitative day to day stock register showing opening stock, purchase, sales and closing stock has been maintained, hence the production of Ghee shown by the assessee remains unverifiable: SUBMISSION OF APPELLANT In dairy business, Ghee is produced when the surplus milk is left after supply of milk in accordance with the daily demand of milk. During the AY 2006-07, assessee did not have such occasions and therefore could sell the Ghee worth Rs. 4.59 Lacs ( 3948Kgs.) only out of the total sale of Rs. 379.23 Lacs which works out approx 1% of total sale. Ghee falls under the `Essential Commodities Act' and question of no maintaining quantitative details relating to the production/stock/sale etc. does not arise. ALLEGATION BY LD. AO ( Serial No. 1.4 on Page No....
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....5 12 9.55 8 NOV-05 12 10.44 12 MAR-06 12 10.33 10.5 The operations of assessee commenced in April, 2005 and had to give free samples/ schemes to distributors on lifting the certain quantity for gaining market share. Therefore, the milk realization was initially lower which began to improve steadily from November, 2005 onwards. Milk was purchased at the fixed rate of Rs. 12/- from villagers and SMP was purchased at the market rates from GCMMF Ltd.(Amul) and the prices of these items were beyond the control of assessee. ALLEGATION BY LD. AO ( Serial No. 1.9 on Page No. 2 of the Assessment Order): 1.11 It is also noticed that various quantities of opening stock, purchases of raw milk, stock of raw material shown are different in the two separate details furnished by assessee vide its letter dated 14/10/2008 and 10/11/2008. These discrepancies are noted below........." SUBMISSION OF APPELLANT Assessee had submitted two quantitative details i.e. first on 14/10/2008 and second on 10/11/2008. Being the first year of assessment, assessee could not submit the proper data on 14/10/2008 which was corrected and resubmitted on 10/1....
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.... in the absence of quantitative details, it cannot be ascertained whether the goods mentioned in the purchase bills were actually received or not and the goods not consumed are taken in the closing stock or not. Given this reasoning, the Ld. AO has disallowed Gross Loss (Rs. 6277969/-). The question is when the whole of the expenses/income were not verifiable as per opinion of Ld. AO, then what is the basis for 100% disallowance of Gross Loss. Being the first year of business, the assessee did not have any past history and the Ld. AO also did not bring any comparable case on record to justify determining ZERO GROSS LOSS. This shows the clear arbitrariness and lack of rational, logical approach and thinking on part of Ld. AO. In the eyes of law, here is no basis for such arbitrariness and adhoc disallowances. In making a best judgment, the AO must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. A best judgment assessment is not a punitive assessment. In making best judgment assessment, the AO does not possess absolute arbitrary authority to assess at any figure he likes. He must be guided by the rule of justice, equity and g....
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....g in view that the addition in the profits and gains returned by the assessee were not necessary concomitant of an order made under section45(1) or 145(2). As a result there was no error in the order of the Tribunal in deleting the entire additions to the trading results after holding that proviso to section 145 was applicable." 1.15.2 Malani Ramjivan Jagannath V/s ACIT 207 CTR 19, Hon'ble jurisdictional High court of Rajasthan held: "Mere deviation in GP rate cannot be a ground for rejecting books of account, and entering in realm of estimate and guesswork. Lower GP r rate shown in the books of account during current year and fall in GP rate was justified and also admitted by the Assessing Officer as well as CIT(A) as well as the Tribunal. Therefore, fall in GP rate lost its significance. Having accepted the reason for fall in GP rate, namely, stiff competition in market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated GP by rule of thumb merely for making certain additions. We are, therefore, of the opinion that the findings arrived at by the Tribunal suffers from basic ....
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....as submitted that being the first year of its operations, the staff of the assessee was untrained to handle the procurement and supply and there were losses on account of milk processing and rejections. On the purchase side, given the presence of other established players in the market, villagers were offered high rates alongwith upfront cash payments as incentive which resulted in higher cost of raw milk. Similarly, on the sale side, given the market dynamics and competition from the established brands such as saras, Amul, and Mother Dairy etc., the assessee had to offer various schemes to retail outlets such as free milk on lifting specific quantity of milk, discounts in prices on achieving monthly targets, etc which resulted in lower realization of milk sold. Further there was lower utilization of installed capacity in the instant year. However, the assessee achieved the turnover of Rs. 10.85 crores in the next financial year as compared to Rs. 3.79 crores in the instant year after stabilization of its operation and the losses have been reduced in the subsequent years. Regarding each of the contentions raised by the AO while rejecting the books of account u/s 145(3) of the Act, ....
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....reby closing stock was held to be short by 21,389 Kgs. In our view, where the assessee has corrected its mistake during the course of assessment proceedings in terms of incomplete/incorrect data and submitted the revised data which is supported by the quantitative records and books of accounts maintained by the assessee, it is not correct on the part of the AO to disregard the same without any valid reasons. The ld. AR has further submitted that even if the contentions of the AO is accepted that there is a shortage in closing stock, the AO is not justified in disallowing whole of the manufacturing loss of Rs. 62,77,969/- as against the value of closing stock of Rs. 2,24,584/- in respect of shortage of stock as determined by the AO. Regarding the processing and handling loss of 99,277/- Kgs, the ld AR has submitted that the details were submitted as part of quantitative tally filed with the AO on 10.11.2008 and the same worked out to 2.95 %of the total milk quantity handled by the assessee of 33,62,775 Kgs. and the same is comparable to the established industry standard of 0.82 to 2.6%. The ld. AR has further submitted that there are other direct expenses in the nature of water, ele....