TaxTMI 
TaxTMI 
2019 (10) TMI 1193
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....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 question by the AO, the assessee claimed that it has not generated ....
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....e 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 income85. 86 14A. 87[(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred88 by the assessee in relation to88 income which does not form part of the total income88 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 prescribed89, 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 of the expenses in relation to the income which does not form part of the total income under this Act. The term used under section 14A o....
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.... 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 (MAT) as per the provisions of section 115JB of the Act, has also added the disallowance made under the normal computation of Income under section 14A r.w.r. 8D of Income Tax Rule for Rs. 6,15....
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.... 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 of income but to our mind the same principles can also be applied to the case on hand. It is because, the provisions of section 115JB of the Act require to make the disallowance of the expenditure related to any income to....
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.... 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-rule the quantity of production during the year 343877640/47 X 1.92 14047767 Less: Production shown 12519851 Suppression of sales [14047767 - 12519851] 1527916 By applying average price of Rs. 470/- per sq. mtr. shown in valuing the closi....
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....es. 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 shown by the assessee has resulted the suppression of production. 12.3 However, the AO after taking into account all the submissions filed by the assessee as discussed above considered the quantity used in the production of tiles as furnished vide letter dated 17 March 2015 and the ratio of the produ....
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....cordingly, 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 sale of such production outside the books. The assessee in support of his contention relied on the judgments as detailed under: (a) CIT v Calcutta Discount Co. Ltd. 91 ITR 8 (SC) (b) CIT v A. Raman & Company, 67 ITR 11 (SC) (c) CIT v Shivakami Co. (P) Ltd., 159 ITR 71 (SC) (d)Karinos Weave (P.) Ltd. Vs DCIT 13 taxmann.com 241(Cochin) (e) ShoorjiVallabhdash& Co 46 ITR 144 (....
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....r 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, consumption of electricity, labour employed, purchase of the raw materials, sale of the goods etc signifying that the assessee has suppressed the production. 14.2 The learned CIT (A) also observed that the assessee was using different kinds of raw materials in the range of more than 1000 different items in the production of tiles/marbles. Accordingly he held that there cannot be any specific arithmetical formula to determine the production of the tiles/marbles. In view of the above, the learned C....
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....es/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 connection, the Appellant vide letters dated 17/03/2015 and 27/03/2015 submitted a detailed reply and explained to the ld. AO that, (a) there is no as such thumb rule as mentioned in the show cause notice and (b) even if for a moment such mathematical formula is taken into consideration, then also, there is no question of suppression of production resulting into suppression of sales by placing on record (a) entire raw material stock register showing consumption of raw material in consonance with tax audit report and (pls. see pg nos.7....
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....e, 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 pursuant to the request letter, the ld. AO vide his letter dated 08/03/2016 provided such public domain information, which is nothing but the product catalogue of such 4 companies, wherein, the details of packing box for tiles have been provided by them. 4. The ld. CIT(A) has made these product catalogues as Annexure - A to the appellate order. The ld. CIT(A) has reproduced the packing box details extracted by the ld. AO on pg. no.40 of the Appellate Order. 5. Also see pg. nos. 303-320 of P/B - Product Catalogues of such 4 companies. On perusal of the same, it can be seen that what has been pr....
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....t, 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 pattern of the products. There can never be application of any arithmetical formula which can exactly determine that what could have been the actual production of tiles and marbles, based on the consumption of raw materials. Not at least on the basis of catalog which has provided details of packing box of tiles, as relied upon by the ld. AO in the present case. In any case, even if the ld AO had to compare the production of tiles and marbles with respect to the consumption of raw materials, the ld. AO ought to have made comparison of actual consumption of combination raw materials with respect to different sizes, weight and pattern of the tiles of other companies wit....
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....atements 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 removal of goods based on electricity consumption and without brining on record any tangible, direct and affirmative evidences. It is further most respectfully submitted that the said decision of Delhi Tribunal has been upheld by the Hon'ble High Court of Allahabad, as reported in 2011 (269) ELT 337(All.). Appeal filed by the Department against this Order was dismissed by the Apex Court in 2011 (269) ELT 1081. Copy of the said decisions is enclosed herewith marked as Annexure - B- Colly. 8.By drawing inference to this decision, the Appellant most respectfully submits that merely by applying arithmetical formula of consumption of raw material to the production of tiles, suppressed production of tiles and in turn suppressed sale of tiles cannot be determined, wit....
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.... 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) in deleting the unwarranted addition made on the basis of assumption and surmises. 3. Without prejudice to above, even if it is presumed that the department has challenged the ground with regard to rejection of books of accounts in general, then also, it is most respectfully submitted that the ld. CIT(A) has righty discarded the action of ld. AO in rejecting books of accounts of the Appellant. The ld. AO was of the view that the yield shown by the assessee for production of tiles is on lower side in comparison to consumption of raw material shown by various concerns who are into manufacturing of vitrified tiles and accordingly, the Appellant vide SCN dated 12/03/2015 has been asked to explain the reason for such low yield. Further the ld. AO has relied upon unauthenticated, unreliable, illogical and irrational public domain data to contend that the yield show....
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....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 vide letter dated 27/03/2015. In fact, the Appellant vide letter dated 27/03/2015 also stated that the complete details of raw materials purchased, consumed etc. is maintained and complete details of the quantity of goods manufactured in the form of excise register is also maintained by the Appellant. It was also submitted and explained to the ld. AO that the books of accounts of the Appellant are subjected to the vigorous excise audit and for the year under consideration excise authorities have not found any discrepancies in the excise audit. It was also explained that the excise authorities have conducted their independent audit for the year under consideration and there was no such allegation made of suppression of sales and in fact the records of production / manufacture has been accepted by them. The Appellant further asked the ld. AO that if need be the Sr. Vice President, Sale & Marketing, Shri....
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....rst 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 based, has to be made out and given by the assessing officer. No assessment under the first proviso to S. 145(1) or under S. 145(2) can be sustained if the AO has not considered and recorded a finding against the assessee as to whether he has been regularly employing a method of accounting or whether his income, profits or gains can properly be deduced from his method of accounting if he has been regularly employing a method of accounting or whether the accounts are correct and complete, and the AO's decision on these matters is not a subjective or arbitrary decision but a judicial decision and cannot be accepted if there is no material to support his finding. Reliance is placed on CIT vs. Vikram Plastics &Ors. reported in 239 ITR 161 (Guj.). 17. Both the ld. DR and the AR before us relied on the order of authorities below as favorable to them. 18. We have heard the rival contentions of both the parties and perused the materials available on record....
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....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 assessee is having a factory where the tiles are produced. To produce the tiles, the assessee requires raw materials, labourers, machines, electricity, finance, buyers, suppliers, registration with various authorities where the assessee declares the sales, purchases and production of the final product etc. But the AO has not pointed out any defects in the entire system of production as discussed above except a general remark that the assessee has shown more consumption in the production of marble to justify the consumption in the production of tiles, though there was no specific defect pointed out in the details furnished by the assessee for the raw materials used in the production of the tiles/marbles. Thus, in the absence of any specific defect/infirmity signifying that the assessee has suppressed production which was sold outside the books of accounts, we are of the view that the AO has made the impugned addition based on his surmise and conjecture. As such, any addition based on the surmise and conjecture is not sus....
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....ce, as (say) on account of differential rate of tax or there being losses in one firm which could be adjusted through the transfer of profits, or the transferee concern being exigible to a lower rate of tax, etc. In fact, there was no charge of tax avoidance in any manner. The charge of tax can only be on the real, and not notional, income, i.e., what it might or ought to have been. The law in the matter, i.e., of only the real income/actual income being liable to tax, is well-settled. The actual accruing/earning of income being a matter of fact, would include inferential findings based on the surrounding facts and circumstances as well, it was the genuineness of the stock transfer which was being essentially questioned by the revenue. 18.4 We also note that the informations collected by the AO from the public domain and used against the assessee were never supplied to the assessee for the rebuttal which is against the principles of the natural justice. As such the information used behind the back of the assessee cannot be relied upon for making the addition in the hands of the assessee. In this regard we find support and guidance from the judgment of Hon'ble Bombay High Court in ....
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....n of the assessee. In case of excise unit, there is a direct control of the excise department on the movement of the purchase, consumption and closing stock of the raw materials as well as production and sales of the finished goods. The assessee under the excise law has to maintain various records including the purchases of the raw materials, issue of raw materials for the production, scrap generated in the process of the production and the final outcome of the goods produced. However, the AO has not pointed out any iota of infirmity/defects in such records. 18.7 Taking up the matter further, as per section 145 of the Act, the AO is empowered to reject the books of accounts of the assessee and make best judgment assessment in the manner as specified under section 144 of the Act if he is not inter-alia satisfied with the completeness or correctness of the books of accounts of the assessee. Generally, the instances for the rejection of books of account include when entries in respect of certain transactions are altogether omitted or incorrect or where the accounts show an abnormally low rate of profit or where there is an inherent lacuna in the system of accounting. 18.8 However, t....
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....red view, the books of accounts of the assessee cannot be rejected until and unless the AO points out the specific mistakes. A similar principle has been laid down by the Hon'ble Allahabad High Court in case of Awadhesh Pratap Singh Adbul Rehman & Bros v/s. CIT 201 ITR 404(All) which reads as; "It is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be deduced. Whether presence or absence of stock register is material or not, would depend upon the type of the business. It is true that absence of stock register or cash memos in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where a stock register, cash memos, etc., coupled with other factors like vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, it may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee. In such a situation the authorities would....
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.... accepted and trading addition so made by rejecting the books of account was confirmed by the Commissioner (Appeals), therefore, by following the order of the earlier year the Assessing Officer had made an addition by rejecting the GP rate of 9.64 per cent declared during the year under consideration. The assessee placed on record the order of the Tribunal in the assessee's own case in the assessment year 2001-02 wherein addition made by the Assessing Officer by applying GP rate of 10.14 per cent was deleted by the Tribunal and the GP rate of 9.64 per cent declared by the assessee was found to be reasonable and correct. As the facts and circumstances during the year under consideration were the same, the issue was squarely covered by the order of the Tribunal in the preceding year. Respectfully following the same, the findings and conclusion of the lower authorities were to be rejected and the Assessing Officer was to be directed to delete the impugned trading addition made by him. In view of the above, we opined that the AO cannot reject the books of accounts for the reasons as discussed above in a situation where the assessee does not maintain the stock register. Accordingly....