TaxTMI 
TaxTMI 
2022 (3) TMI 345
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.... Particulars Assessment year 2009-2010 Assessment Year 2010-2011 Assessment Year 2011-12 Gross Profit Raito 47.85% 50.89% 59.85% 2.1. From the month-wise purchase, sale and production expenses filed by the assessee, he observed that the assessee company incurred major expenses on production in the month of March. He noted that from the month of April 2010 to December 2010, the assessee made purchases of Rs. 37 crores and in the month of January and February, made purchases of Rs. 40.13 cores. The assessee in its submission justified the increase in production expenses that "because of increase in the price of raw material and accessories and increase in wage rates, production cost was increased." However, the AO while scrutinising the schedule of cost of production, noted that there is sharp decline in production charges. He observed that in Financial Year 2009-10, the assessee made total purchases of Rs. 73.02 crores and incurred production charges Rs. 9.65 Crores. However, in FY 2010-11, the assessee incurred production charges of Rs. 4.82 Crores on a total raw material purchase of Rs. 77.54 Crores and closing stock of raw material and work in progress in ....
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....t 49.37%, the AO determined the gross profit for the impugned assessment year at Rs. 64,49,20,316/-. After deducting the gross profit declared in the books at Rs. 38,98,89,894/-, the AO made addition of Rs. 25,50,30,422/- to the total income of the assessee. He accordingly determined the total income at Rs. 20,01,05,360/-. 3. Before the ld. CIT(A), it was argued that the assessee is engaged in the business of manufacturing and trading of readymade garments and accessories. The sale turnover of the assessee consists of the following three streams:- i. Retail sale of garments manufactured and purchased ('first stream') ii. Trading of fabric ('second stream') iii. Wholesale trading of garments ('third stream') 3.1 It was submitted that in the first stream only, the assessee has to incur production expenses to the extent it relates to the garments manufactured by the assessee. On the rest of the turnover, the assessee is not required to incur any production expenses. Therefore, incurrence of production expenses by the assessee cannot be matched/correlated to the entire purchases/turnover of all the three streams. Thus, the AO has committed an error in t....
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....47% in the AY 2010-11. Thus, there is no unprecedented increase in the production expenses. iv. Due to the fact of recession in the market and also the closure of many retail outlets, the assessee, in order to survive and cut-down the expenses, had shifted its focus on the second stream of the turnover i.e. 'trading of fabric'. It was argued that the turnover of this stream has gone up to 42.20 crores from 14.60 crores. It was argued that there is low profit in the case of trading in the fabrics. 3.2. Relying on various decisions, it was argued that the AO has not appreciated the facts properly and made huge addition on flimsy ground by rejecting the book results which is not correct and not in accordance with law. 4. Based on arguments advanced by the assessee and decisions cited, the Ld. CIT(A) called for a remand report from the AO. After considering the remand report of the AO and the rejoinder filed by the assessee to such remand report, the Ld. CIT(A) deleted the addition by observing as under:- "4.2 I have carefully gone through the submissions made by the appellant, remand reports submitted by the AO and rejoinder submitted by the appellant. ....
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....s been explained with reference to similar expenses incurred in respect of A.Y. 2009-10 at 34.43%. Thus, the increase in the production expenses from A.Y. 2009- 10 to 2010-11 was 13.47% and increase in production expenses from A.Y.2010-11 to 2011-12 is 12.06%. Therefore, it has been explained that increase in production expenses in the year under consideration is also normal increase from year to year. 4.4 In the written submission, it has been explained that the incidence of incurrence of production expenses cannot be seen in the light of incident of making the purchase, which fact has been relied upon by the AO for pointing out the defect in the maintenance of books of account. It has been submitted that the debit of production expenses will depend on issue of raw-material If or manufacturing, issue of bill by the person to whom the job has been handed over and completion of job by him. Thus, there is force in the submission made by the Id. counsel that the production expenses are required to be seen in the light of production and not in the light of purchases made. 4.5 All the data furnished by the assessee was forwarded to the AO and detailed remand report was....
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.... Moreover, all the data was sent to the AO and after considering the same, the AO has submitted the remand report. 4.7 It is not the case of additional evidence/ new evidence in true spirit in as much as details and data are part of regular books of accounts and no evidence relating to any third party is being filed. 4.8 It has been brought on record that in A.Y. 2012- 13, the assessee had reported loss of Rs. 28,40,34,399. The assessment has been framed by the AO as per assessment order dated 20-03- 2015 which is subsequent to the assessment framed for the year under consideration which is 31-03- 2014. It is seen from the assessment order that the loss of the assessee had been assessed at Rs. 27,61,33,380/- by accepting the books of account and only the two additions have been made which relates to disallowance of donation of Rs. 2,100/- and disallowance u/s 40(a) (ia) Rs. 38,99,000/-. The said assessment order has been annexed as annexure-4 with the written submission filed on 07-12- 2016. 4.9 Assessment for A.Y. 2013-14 has also been framed u/s 143(3) vide order dated 18-03-2016. The assessee had returned a loss of Rs. 24,02,10,005/- which has been ass....
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.... sole and only ground to reject the book results in entirety and frame best judgment assessment. 4.12 Therefore, in this view of situation, keeping in view the entirety of facts and circumstances of the case, I am of the opinion that it is not a fit case for rejection of books of account as no specific defect has been pointed out by the AO in the maintenance of books of account by the assessee except so called discrepancy in the incurrence of production expenses vis-a-vis commensurate incidence of purchase. The increase in the production expenses has been explained by the assessee with reference to earlier year's figures and the increase in the production expenses is normal increase. Incurrence of production expenses also cannot be correlated to the incidence of purchase as incurrence of production expenses would depend on the various factors such as time of issue of raw- material, time of preparation of finished goods and issue of bill by the person performing the job. No other specific defect has been pointed out by the AO either during the course of assessment proceedings or in the remand reports. Therefore, the rejection of books of accounts on account of lower gross p....
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.... 2012- 13, the copy of which is placed at pages 24 to 26 of the paper book, submitted that the loss declared by the assessee at Rs. 28,40,34,399/- was accepted and the addition only on account of donation paid and disallowance u/s 40(a) of the Act for short payment of TDS was made but books of account were not rejected and the book results were accepted. Referring to the copy of the assessment order for AY 2013-14, copy of which is placed at page 39 to 46 of the paper book, he submitted that here also the AO in the order passed u/s 143(3) on 18.03.2016 has accepted the loss of Rs. 24,02,10,005/-, wherein, he has made addition on account of various other items such as bad debts, traffic fine, deemed income, interest income, disallowance of loss on account of bad debts and disallowance on account of loss of sale of fixed assets but has not rejected the books of account. He submitted that when the assessee has closed down lot of its retail outlets, it is incomprehensible that the gross profit will increase. Relying on various decisions, the ld. Counsel for the assessee submitted that the books of account cannot be rejected merely for the reason that there is decline in gross profit ra....
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....5,50,30,422/- to the total income of the assessee. 10. We find the Ld. CIT(A) after considering various submission filed by the assessee and after obtaining the remand report from the AO, deleted the addition made by the AO, the reasons of which have already been reproduced in the preceding paragraphs. We do not find any infirmity in the order of Ld. CIT(A) on this issue. From the various details furnished by the assessee, we find the case of the assessee was also scrutinized in AY 2012-13 and 2013-14 and in both the assessment years, the AO has passed orders u/s 143(3) and the book results were not rejected and loss declared at Rs.(-) 28,40,34,399/- for AY 2012-13 and loss of Rs.(-) 24,02,10,005/- for AY 2013-14 have been accepted with minor additions on various other issues but not on account of low gross profit. Further, the assessee in the instant case has maintained its books of accounts and such books of accounts were duly audited and the auditors have not pointed out any mistakes in the books of accounts. Such audited books of account along with bills and vouchers were produced before the AO and no specific defects were pointed out by the AO in the books of accounts. The ....
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.... recorded above to determine whether or not the books of accounts were rightly rejected, but without ignoring the low profit rate." 12. We find the Hon'ble Delhi High Court in the case of CIT vs Paradise Holiday 325 ITR 0013 (Del.) has observed as under:- In this case it has been held that section 145(3) can be applied only where the AO is not satisfied about the correctness or completeness of the accounts. The accounts which are regularly maintained in the course of business and are duly audited, free from qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Revenue to show that either the books of accounts maintained by the assessee were incorrect or incomplete or method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom. Reference can be made to the following observations:- In this case it has been held that section 145(3) can be applied only where the AO is not satisfied about the correctness or completeness of the accounts. The accounts which are regularly maintained in the course of busine....