TaxTMI 
TaxTMI 
2019 (10) TMI 1193
X X X X Extracts X X X X
X X X X Extracts X X X X
....u/s.115JB of the Act. b) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs. 14,06,42,330/- made on account of suppression of production/sale of tiles by rejecting books of account. 2. The 1st issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 6,15,723/- under the provisions of section 14A read with rule 8D under normal computation of income and MAT computation of income under section 115JB of the Act. 3. The facts in brief as culled out from the order of the authorities below are that the assessee in the present case is a limited company and engaged in the business of manufacturing and trading of vitrified tiles, wall tiles, ceramic tiles and agglomerated marble stones, trading of Agro products and chemical products. 4. The AO during the assessment proceedings observed that the assessing has made huge investments in shares which will give rise to the exempted income under section 10(34) of the Act. Accordingly, he was of the view that the assessee is liable to make the disallowance of the expenses under the provisions of section 14A read with rule 8D of Income Tax Rule. 4.1 On ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e arises before us for the adjudication whether the disallowances made under section 14A r.w rule 8D can be made in absence of exempted income earned during the year under consideration. At this juncture, we find important to refer the provisions of section 14A of the Act which reads as under: "Expenditure incurred in relation to income not includible in total income^85. ^86 14A. ^87[(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred^88 by the assessee in relation to^88 income which does not form part of the total income^88 under this Act.] ^87[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed^89, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act." 7.3 The above provision requires to makes the disallowance....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Delhi High Court in case of Joint Investments (P) Ltd vs. CIT reported in 372 ITR 694 holding that disallowance of expenditure in terms of section 14A read with Rule 8D cannot exceed the exempt income itself. Our High Court has also adopted the similar view in case of Commissioner of Income Tax vs. Corrtech Energy Pvt Ltd. reported in 372 ITR 97. 3. Tax appeal is, therefore, dismissed. 7.6 We also note that the Hon'ble Apex court has also confirmed the principles laid down by the Hon'ble High Court as discussed above in the case of CIT vs. State Bank of Patiala reported in 99 taxmann.com 286 by dismissing the Special Leave petition. In view of the above, we hold that the disallowance of the expenses under section 14A read with rule 8D cannot be made in absence of exempt income. Hence we do not find any reason to interfere in the order of the learned CIT (A). 7.7 Regarding the disallowance under MAT, we note that the AO in the instant case has made the disallowance u/s 14A r.w.r. 8D of the Income Tax Rules for Rs. 6,15,723/- while determining the income under normal computation of income. Further, the AO while determining the income under Minimum Alternate Tax (MA....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... resort need not and cannot be made to section 14A of the Act." 7.11 Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra). 7.12 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we note that there is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. However, we find that there are judgments on the issue which mandates that the disallowance of the expenses cannot exceed the exempt income i.e. CIT Vs. Vision Finstock Ltd. of Hon'ble Gujarat High Court in 486 of 2017 or only those investments should only be considered for the purpose of the disallowance which have resulted the dividend income. However, we are also conscious to the fact that the above judgments were rendered in connection with the income determined under normal computation o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....egating to 34,38,77,640 kgs. 10. However, the AO during the assessment proceedings, on comparison with the other companies available in the public domain, observed that the assessee has shown less production of tiles out of the material consumption shown in the books of accounts. Accordingly, the AO issued show cause notice to the assessee dated 12-3-2015 seeking the clarification from the assessee. The contents of the show cause notice are set out here in below: From the Annexure-M to Form NO.3CD, it is noticed that you have total production excluding marble at 12519851 Sq.Mrt. It is further noticed from Annexure-1 to Form No.3CD that you have shown consumption of raw material weighing 343877640 Kg. The information available in the public domain shows that for production of 1.92 Sq.Mtr. of tiles requires 45 to 48 Kg. of raw material. Applying the said thumb-rule ratio and considering the fact that you have shown consumption of raw material weighing 34877640 Kg. the correct production during the year would Consumption of raw material Ratio of production 343877640 Ratio of production 1.92 Sq.Mtr. per 47 Kg. By applying thumb-ru....
X X X X Extracts X X X X
X X X X Extracts X X X X
....laimed to have utilized 4,52,18,213 kgs of raw material against the production of 5,99,953 square meters of marbles. 12. However, the AO observed that the assessee has been changing its stands by furnishing the different details of the material consumed in the production of tiles and the Marbles. As such the assessee was increasing the consumption of the raw materials in the production of Marbles whereas it was decreasing the consumption of raw materials in the production of tiles in order to maintain the input output ratio for the production of the tiles. Thus it was clear that the assessee did not maintain the stock registers properly. Thus, the AO rejected the books of accounts of the assessee. 12.1 It was also observed that the assessee has not furnished the details of the consumption of the materials with respect to different Marbles such as composite marble and quartz marble produced by the assessee. 12.2 The AO in view of the above observed that the production of the tiles shown by the assessee was not in consonance with the production ratio of other companies available in the public domain. As per the AO the consumption of materials for the production of tiles as s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....support of its contention relied on the orders as detailed below: i. RA Casting Pvt Ltd vs. CCE Meerut (237) ELT 674 which was confirmed by the Hon'ble Allahabad High Court and Hon'ble Supreme Court. ii. M/s Rishi Steel & Alloys Pvt Ltd vs. ACIT & others in ITA No 219 to 221/PN/2012 iii. Century Tiles Ltd vs. JCIT 51 taxmann.com 515(Ahmedabad) 13.1 Accordingly, the assessee further claimed that the entire addition made by the AO was based on his surmise, suspicion, presumption and conjecture which are not permissible under the provisions of law. The assessee also referred the land mark judgment of the Hon'ble Supreme Court in the case of Umacharan Shaw & Bros vs. CIT reported in 37 ITR 271 wherein it was held that the suspicion howsoever strong it is, but the same cannot take place of evidence. Therefore, there cannot be any adverse inference against the assessee based on such suspicion. 13.2 There was no evidence or material available with the AO suggesting that the assessee has made any sales outside the books of accounts. Therefore, in the absence of such concrete evidence, there cannot be any addition on account of suppression of production and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther submitted that the AO has not pointed out any material defects in its books of accounts. Therefore the AO was under the obligation to accept the results shown by the assessee in its books of accounts. The assessee in support of his contention referred the following orders: (a) CIT v Vikram Plastics & ORS reported in 239 ITR 161 (b) S. VeeriahReddiar v CIT,(1960) 38 ITR 152, 170 (ker) (c) CIT v Mcmillan& Co (1958) 33 ITR 182 SC (d) CIT v Sarangpur Cotton Mfg . Co. Ltd. (1938) 6 ITR 36 (PC) 14. The learned CIT (A) after considering the submission of the assessee referred to the informations about the 4 companies on the basis of which the addition was made by the AO on account of suppressed production and sale of such production outside the books of accounts. The learned CIT (A) accordingly held that such information about the 4 companies was about the packing of the tiles which cannot be used for making the addition on account of suppressed production and sale of such production outside the books. 14.1 The learned CIT (A) also observed that there was no iota of evidence such as utilization of raw materials, production capacity, consum....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uction and accordingly a notice under section 148 was issued but the same was quashed by the Hon'ble Gujarat High Court in the special civil application No. 13933 of 2014. Accordingly, the learned CIT (A) was of the view that the production shown by the assessee for the year under consideration has been accepted by the excise department. In view of the above, the learned CIT (A) held that the books of accounts of the assessee cannot be rejected merely on the ground that there was less yields of the tiles/marbles in comparison to the other companies. Accordingly, the learned CIT (A) directed the AO to accept the production shown by the assessee in its books of accounts. Being aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us. 15. The learned DR before us supported the findings of the AO by reiterating the observations contained therein. 16. On the other hand, the learned AR before us submitted as under: 1. The ld. AO relying upon the public domain information of 4 companies was of the opinion that there is thumb rule that the production of 1.92 Sq. Mtr. Of tiles requires 45 to 48 Kg. of raw material. 2. In this connect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion and in turn suppressed sale of tiles cannot be determined, without bringing on record any tangible, direct and affirmative and incontrovertible evidences and (d) the assessing officer has not pointed out any defects in the accounts of the appellant and therefore the books of accounts could not have been rejected by the AO. Arguments : A. The public domain information as relied upon by the ld. AO to held that there is thumb rule of requirement of 45 to 48 Kg. of raw material to produce 1.92 Sq. Mtr. of tiles is irrelevant, irrational, illogical, unreliable, unauthenticated, absurd and without any basis 1. The ld. AO on pg. no.9 of the assessment order vide para 5.3 A.1) has referred to four companies namely (a) Exxaro Tiles, (b) Wintop Vitrified, (c) Sunheart Rediant and (d) Regent Granito to contend that consumption of 47 Kg raw material will yield 1.92 Sq. Mtr. Of tile is thumb rule for production and yield in respect of manufacturing of tiles. 2. In the entire assessment order, the ld. AO has not provided the details of such public domain information of thumb rule of consumption of raw material for manufacturing of tiles. 3. In pur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed goods as on 31/03/2012, which would show that the Appellant manufactures various sizes of tiles and marbles. The Appellant further submits that the ceramic and tiles industries is very dynamic and their pattern and style of tiles changes very frequently in order to remain present in the market and to provide unique products to the customers. Therefore, the Appellant fails to understand that how product catalog of company can be relied upon to contend that there is a thumb rule of requirement of 45 to 48 kgs. of raw material to have production of 1.92 Sq. Mtrs. and uniformly apply to all the products, without making comparison to their size, pattern, weight, manufacturing process, technologies, know-how etc. 3. That there are 239 types of body material and 789 types of other materials are consumed by the Appellant during the year under consideration to manufacture Tiles and Marbles. Details of the same can be found on pg. nos. 80-89 of P/B. By drawing inference to such details, the Appellant wants to submit that there is a combination of more than 1000 raw materials which are consumed for the production of Tiles and Marbles in accordance with various sizes, weight and pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oved by tangible, direct, affirmative and incontrovertible evidences relating to,- (a) Receipt of raw material inside the factory premises, and non-accounting thereof in the statutory records; (b) Utilization of such raw material for clandestine manufacture of finished goods; (c) Manufacture of finished goods with reference to installed capacity, consumption of electricity, labour employed and payment made to them, packing material used, records of security officers, .discrepancy in the stock of raw materials and final products; (d) Clandestine removal of goods with reference to entry of vehicle/truck in the factory premises, loading of goods therein, security gate records, transporters' documents, such as L.Rs, statements of lorry drivers, entries at different check posts, forms of the Commercial Tax Department and the receipt by the consignees; (e) Amount received from the consignees, statement of the consignees, receipts of sale proceeds by the consignor and its disposal. 7. Since, no such evidenced brought on record by the department, the appeal of R.A.Casting was allowed and held that demand raised onalleged clandestine....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case, but it by itself does not empower the Assessing Officer to assume some undisclosed production and thereby make addition to the result disclosed by the regularly maintained books of account. Copy of the said decision is enclosed herewith marked as Annexure - C. The appeal against the said order filed by the department before the Hon'ble Gujarat High Court has been dismissed by the High Court in Tax Appeal No.15 of 2015, copy of which is enclosed herewith marked as Annexure - D. 2. The CIT(A) has therefore rightly deleted the impugned addition. (Pls. see para 6.3.3 to 6.3.7 on pg. nos.41-44 of the CIT(A) order) C. Rejection of Books of Accounts by the ld. AO and quantitative details maintained by the Appellant. At the outsets, it is most respectfully submitted that the Department has 1. not challenged the finding of ld. CIT(A) in discarding the action of ld. AO in rejecting books of accounts of the Appellant. 2. It is most respectfully submitted that when the books of accounts of the Appellant are not challenged to be rejected u/s 145 of the Act by the department, there is no question of challenging the finding of CIT(A)....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for the production of tiles and marbles. It is further an admitted and undisputed fact that the Appellant has maintained quantitative details of the consumption of raw materials. Even the Appellant vide letters dated 17/03/2015 and 27/03/2015 has submitted entire quantitative details of the consumption of raw materials. It is further submitted that the quantitative details of the consumption of raw materials as furnished by the Appellant vide letter dated 17/03/2015 has been accepted by the ld. AO, however, the reclassification of said data as furnished in letter dated 27/03/2015 in pursuant to the request made by the ld. AO vide order sheet entry dated 26/03/2015 has been rejected by the ld. AO. It is further important to note that the Appellant vide letter dated 27/03/2015 also furnished reconciliation statement of quantitative details as furnished in letter 5. dated 17/03/2015 with 27/03/2015 and also furnished the invoice, LRs, GRNs etc to justify the reconciliation statement. Pls. refer pg. nos. 95-254 of P/B. It is pertinent to note that the ld. AO has not even whispered about the justification furnished for reconciliation statement as furnished by the Appellant vid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has not found any material defect in the books of account and the incident of so called mistake/error as recorded by the AO are not mistake or error as discussed hereinabove. It is well settled that without finding any defect in the books of account the AO is not empowered to make any changes in the book result declared by the assessee. As per the scheme of the Act, for rejecting the books of accounts it is the revenue's onus to prove that either the books of account maintained by the assessee is not correct and complete or the method of accounting adopted is such that true profits cannot be deduced therefrom. From these legal provisions what follows is that if the revenue doubts the correctness of stock declared by the assessee, then, it first of all should reject the assessee's books of accounts after specifying mandatory requirement of section 145 which can be done after pointing out 8. specific defects in the books of account. The first proviso to S. 145(1), or section 145(2), can be invoked only if and where the elements attracting either of those provisions are found to exist. A clear finding to that effect, along with the material on which such finding is ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....val of excisable is to be proved by tangible, direct, affirmative and incontrovertible evidences relating to (i) Receipt of raw material inside the factory premises, and non-accountal thereof in the statutory records; (ii) Utilization of such raw material for clandestine manufacture of finished goods; (iii) Manufacture of finished goods with reference to installed capacity, consumption of electricity, labour employed and payment made to them, packing material used, records of security officers, discrepancy in the stock of raw materials and final products; (iv) Clandestine removal of goods with reference to entry of vehicle/truck in the factory premises, loading of goods therein, security gate records, transporters' documents, such as L.Rs, statements of lorry drivers, entries at different check posts, forms of the Commercial Tax Department and the receipt by the consignees; (v) Amount received from the consignees, statement of the consignees, receipts of sale proceeds by the consignor and its disposal. In the instant case, no such evidences to the above effect have been brought on record. 18.2 We further note that the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e raised by the ITO that the HUFs of the assessees had made profit by sale of articles purchased from the assessees larger than the profit which the assessees had made, was not justified, since there was no evidence on the record about the price at which similar goods were sold by the assessees to other merchants and about the profit which those other merchants made by sale of those goods." (b) CIT v Shivakami Co. (P) Ltd., 159 ITR 71 (SC) (capital gain) "unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for computation of capital gains. The onus is on the revenue the inference might be drawn in certain cases but to come to a conclusion that a particular higher amount was in fact received must be based on such material from which such an irresistible conclusion follows" (c) Karinos Weave (P.) Ltd. Vs DCIT 13 taxmann.com 241(Cochin) The finding of suppression of income can only be validated on the basis of strong circumstantial evidence/s. There was no case of any tax avoidance, as (say) on account of differential rate of tax or there being losses in one firm which could be adjusted ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee. Moreover, the AO has never collected any information from the companies available in the public domain about their internal production process system. Thus we are of the view that, such information available in the public domain cannot be used to draw any adverse inference against the assessee until and unless it is supported with conclusive evidence and that too after providing the opportunity of being heard to the assessee. Moreover, we also note that the assessee is using more than thousand items as raw materials in the production of the tiles and the marbles, thus the possibility is very remote to draw any inference on the basis of comparison with the other companies. It is because the working capacity, the machines used, raw materials consumed, labour employed etc may be different to the assessee viz a viz to those companies. 18.6 The production of the assessee was subject to excise audit and there was no adverse remark signifying that the assessee has suppressed its production. Thus, in our considered view such report from the excise department supports the contention of the assessee. In case of excise unit, there is a direct control of the excise department on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rstanding, the consumption ratio of raw material having bearing on the production shown by the other concern engaged in a similar activity cannot be a criterion to reject the books. It is because the consumption/production of a concern depends upon various factors such as quality of raw materials, production process/ methods, machinery used, labour employed, factory infrastructure, quality of output and the scrap generated etc. But the AO has not brought all these facts on record whether the assessee and the comparable entities were working under similar conditions. Therefore we disagree with the finding of the AO. 18.11 Admittedly, the assessee revised the details of the consumption of raw materials used in the production of tiles and marbles. But we note that final revised details furnished by the assessee were supported by purchase bills, goods receipt, lorry receipts, reconciliation statement, gate pass etc as placed on pages 95 to 254 of the PB. The AO did not point out any defect in the revised details of the consumption of raw materials furnished by the assessee. Therefore in our considered view, the books of accounts of the assessee cannot be rejected until and unless....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any defect could not be rejected merely because the average GP rate was slightly lower than the average GP rate of the earlier year. In the instant case, the sales of the assessee during the year under consideration had increased substantially from Rs. 1.24 crores to Rs. 1.54 crores which resulted in marginal decline in GP rate from 11.51 per cent to 9.94 per cent, the same could not be made reason for rejecting the book results. It is well-settled business proposition that for having increase in sales, a businessman has to sacrifice a small margin of profit rate. During the year the total sales of the assessee had increased from Rs. 1.24 crores to Rs. 1.54 crores. No defect was found in the books of account. There was no valid reason for rejection of books of account during the year under consideration and thereby applying higher GP rate of 11.51 per cent, which was earned by the assessee on low sales of Rs. 1.24 crores in the preceding year. The other reason stated by the Assessing Officer of making trading addition was that in the assessment year 2001-02, GP rate declared by the assessee at 9.64 per cent was not accepted and trading addition so made by rejecting the books of ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e addition made by the AO for Rs. 43,76,530/- under the provisions of section 14A read with rule 8D of income tax rule under normal computation of income. 22. At the outset we note that, the identical issue has been decided by us in favour of the assessee in the ITA No. 1517/Ahd/2017 vide paragraph number 7 of this order. Respectfully following the same we do not find any reason to interfere in the finding of the learned CIT-A. Hence, the ground of appeal of the Revenue is dismissed. 23. The 3rd issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 3,85,979/- on account of depreciation on car. 24. The AO during the assessment proceedings observed that the assessee has claimed depreciation on car for Rs. 3,85,979/- whereas the car was registered in the name of the director. Accordingly, the AO was of the view that the assessee is not eligible for the depreciation on the impugned car. Accordingly, he disallowed the same and added to the total income of the assessee. 25. Aggrieved assessee preferred an appeal to the learned CIT (A) who has deleted the addition made by the AO. Being aggrieved by the order of the ....