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2020 (10) TMI 989
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....d in ignoring the working of interest of Rs. 8,04,747/- made on proportionate basis by the A.O. in the remand report. iii) On the facts and circumstances of the case, the Ld. Commissioner of Income Tax (A) ought to have upheld the order of the Assessing Officer. iv) It is, therefore, prayed that the order of the Ld. Commissioner of Income tax (A) may be set-aside and that of the Assessing Officer be restored." 3. The first issue raised by the Revenue is that the Learned CIT-A erred in deleting the addition made by the AO for Rs. 1,40,79,756/- on account of low gross profits after rejecting the books of accounts under Section 145(3) of the Act. 4. The facts in brief are that the assessee in the present case is a private limited company and engaged in the business of printing which is carried out along with paper as well as along with other component without the use of paper. The AO during the assessment proceedings compared the gross profit for the year under consideration shown by the assessee with the gross profit of the immediate preceding and succeeding Assessment Year's i.e. Assessment Years 2007-08 and 2009-10 and found that the gross profit of the curr....
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....ating film, Ink purchase and paper purchase, but there was no corresponding inflated sales price charged from the customer in the year under consideration which has also contributed in the reduction in the gross profit in the year under consideration. 10. However, the AO disagreed with the contention of the assessee by observing that even the contention of the assessee is assumed correct that there was change in the business model in the year under consideration viz a viz in the immediate preceding Assessment Year, then also, gross profit of the assessee for the year under consideration is significantly low in comparison to the immediate succeeding Assessment Year. Accordingly, contention of the assessee was disregarded by the AO in view of the fact that the assessee is not maintaining quantitative/stock registers of the items in which it was dealing. Hence, the AO rejected the books of accounts of the assessee by invoking the provisions of section 145(3) of the Act. 11. Nevertheless, the AO considering the contention of the assessee for the change of its business model, has considered the GP rate at 50% of the turnover for the year under consideration, despite GP rate of the....
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....nt proceedings and no single discrepancy was pointed out with respect to the same. Accordingly, the assessee contended that its books of accounts cannot be rejected and therefore no addition is warranted. 18. The Learned CIT (A) after considering the submission of the assessee observed that higher consumption of raw material can be a ground for making further and deeper investigations but the same cannot be a ground for rejecting the books of accounts. The AO has not discharged his duty by pointing out any specific defect in the financial statements of the assessee which are duly audited by the qualified auditors. 18.1 Learned CIT (A) also found that the assessee has furnished the quantitative details vide letter dated 6thDecember 2010 before the AO during the assessment proceedings but the AO failed to take any cognizance of the same in the assessment order. 19. In view of the above the Learned CIT (A) held that the books of accounts of the assessee cannot be rejected without bringing any cogent defects in the books of accounts under the provisions of Section 145(3) of the Act. Accordingly, the Learned CIT (A) allowed the ground of appeal of the assessee. 20. Being agg....
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....lained the reasons for declining the GP which were not controverted by the AO. Furthermore, the lower gross profit as compared to earlier and succeeding year cannot be the ground to reject the books of accounts. In holding so we draw the support from the order of the Hon'ble Rajasthan High court in case of Malani Ramjivan Jagannath vs. Asstt. Commissioner of Income Tax reported in 316 ITR 120 where it was held by Hon'ble Rajasthan High Court as detailed under: "The Tribunal committed basic error in not appreciating the reasoning given by the Commissioner (Appeals). It was trite to say that in the facts and circumstances of the instant case, account books were maintained as they were ordinarily maintained year after years and which were found to yield a fair result. Mere deviation in gross profit rate cannot be a ground for rejecting books of account and entering realm of estimate and guesswork. Lower gross profit rate shown in the books of account during current year and fall in gross profit rate was justified and also admitted by the Assessing Officer as well as Commissioner (Appeals) as well as the Tribunal. Therefore, fall in gross profit rate lost its significance. Hav....
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....d if the assessee does not maintain the stock registers until and unless it is coupled with other defects such as it is found that sales/ purchase made outside the books of accounts. But in the instant case, we note that there was no such allegation by the authorities below. We also find support and guidance from the order of ITAT Bench in the case of Haridas Parikh vs. ITO reported in 113 TTJ 274 wherein it was held as under: "Unless the Assessing Officer is able to point out certain transactions which have been left to be entered in the books of account or that the assessee has sold some of the items at a price higher than what is disclosed in the books of account or if proper particulars, bills, vouchers are not forthcoming, etc., the books of account cannot be rejected without assigning specific reasons. In the instant case merely because different range and nature of items were being dealt with by the assessee and the maintenance of quantitative stock of each and every item was not practically possible, the books of account maintained by the assessee which were free from any defect could not be rejected merely because the average GP rate was slightly lower than the av....
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....s stated above and after considering the facts in totality, we are of the view that the books of accounts of the assessee are not liable to be rejected as per the provisions of Section 145(3) of the Act. Accordingly, we conclude that once the books of accounts of the assessee are not liable to be rejected then its book profit should be accepted in the given facts and circumstances. Accordingly, in the backdrop of the aforesaid discussion and precedent, we find no infirmity in the order of the Learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the Revenue is dismissed. 24. The second issue raised by the Revenue is that the Learned CIT (A) erred in reducing the disallowance of interest expenses made by the AO from Rs. 8,04,747/-to Rs. 4,93,853/- to be capitalized under Section 36(1)(iii) of the Act. 25. The AO during the assessment proceedings found that the assessee has acquired a machinery loan which was put to use only after 2ndJuly 2007. Accordingly, the AO was of the view that the interest paid by the assessee up- to the date i.e. 2ndJuly 2007 when the machinery was put to use should be capitalized under Section 36(1)(iii....
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.... Rs. 34,04,181/- being Rs. 8,51,045/- should have been capitalized instead of Rs. 16,41,611/-." 30. The Learned CIT (A) after considering the submission of the assessee and the remand report of the AO has confirmed the order of the AO in part by observing as under: "....In the instant case the A.O. has not brought cogent evidences on record to prove the quantum of borrowed capital as well as the interest liability has also not been quantified. The A.O. had simply proposed to capitalize one fourth of interest expenses incurred against "Machinery loan account". The fact of inclusion of old Plant & Machinery in the "Machinery loan account" has not been examined by the A.O. The A.O. has also not examined the fact of purchasing Plant & Machinery from non interest bearing funds. Since the proportionate capitalization of interest is not prescribed by the provisions of proviso to sec.36(1)(iii), accordingly, I am not inclined to agree with the contentions of Ld, A.O. 3.6 Perusal of facts available on record indicate that the appellant has agreed for capitalization of interest on borrowed capital to purchase Plant & Machinery of Rs. 4,93,853/-. The appellant has made th....