TaxTMI 
TaxTMI 
2016 (11) TMI 1772
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.... Phagwara Circle, Phagwara circle phagwara was served upon the assessee on 29th Sept., 2010. On 21st April, 2011 notices under s. 143(2) and 142(1) along with questionnaire were issued and served upon the assessee on 14th May, 2011. Subsequently, the case was taken up for scrutiny by the Addl. CIT, Phagwara Range, Phagwara Range, Phagwara and notice under s. 143(2) and 142(1) dt. 7th July, 2011 were issued and served upon the assessee on 8th July, 2011. 2. The response to the said notices, Shri Sandeep Vijh, CA Authorised Representative of the assessee along with Sh. Kapil Bhatia, Accountant attended the proceedings from time to time and furnished the requisite information/details. Books of account, and bills/vouchers for purchases sales expenses claimed etc., were produced and examined. The case was discussed and heard. 3. The assessee firm is in the business of manufacturing of electrical goods mainly swathes. During the year under consideration, the assessee firm has shown gross profit of Rs. 47.13 lacs on sales of Rs. 1.47 crore, thereby giving a GP rate of 32.06 per cent as compared to the gross profit of Rs. 41.33 lacs on sales of Rs. 1.1....
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....ly dt. 7th Dec, 2011, the assessee stated as under: Details of labour charges of preceding year is enclosed at Annex. 7 page No. 26. We had done job work for this party in the preceding year during the year under assessment we did not get any order and the party had taken part of our premises as well as equipment on rent Thus, the assessee stated that no labour charges were received, since the party took part of the premises and equipment on rent. Vide order sheet 'noting dt. 8th Dec., 2011, therefore, the assessee was further asked to explain the following: (a) Regarding labour charges it is stated that no order was received during the year since the party took your premises on rent. Please specify when the premises was let out as per rent deed, it was let out in December 2005 please explain. (b) Also state what were the expenses pertaining to this income in the preceding year. (c) Give reasons for fall in your turnover from Rs. 3.53 crore in asst. year 2006,-07 : Rs. 1.47 crore in this year In response to this, vide submission dt. 13th Dec, 2011, the assessee replied as follows: (a) Regarding labour....
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....as returned a GP of as much as Rs. 2,42,943, which works out to 41,1 per cent vide order sheet noting dt. 20th Nov., 2011, the assessee Authorised Representative was therefore asked to explain as under: (a) it is seen that the GP returned by your Gagret unit is much higher, at 41 per cent, as compared to the GP returned, by Phagwara unit of 32 per cent only. Please explain. (b) Give the total quantum of sales of thermos flasks (in quantity and value) in Gagret Unit. (c) Give description of the main electrical items being manufactured at Gagret and at Phagwara. (d) Comparison of critical/core expense related to manufacturing at Gagret with those at Phagawara. The reply to this, furnished by the assessee vide its submission dt. 21st Dec., 2011, is reproduced herewith. (a) No comparison can be made with the Gagret Unit M/s Fewa Electrical Corporation. This unit is located in the different State and is not similarly circumstances as our unit It also has certain advantages is terms of lower cost of manpower, lower electricity cost as well as no excise. Further it is manufacturing these items. Moreover, the electrical switches ma....
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....judicial pronouncements relied upon by the assessee as well as the AO and other material placed by the assessee on record. On careful consideration of the rival contentions, I am of the opinion that the AO has pointed out various defects in the maintenance of books of account which are sufficient to reject the trading results declared by the assessee. It is also incorrect on the part of the assessee that the AO has not pointed out any defect in the inventory and valuation of closing stock whereas so many defects have been noticed in the valuation of closing stock. The defects pointed out by the AO are not being repeated here again as the AO has elaborately discussed these defects in the assessment order. Moreover, if we exclude labour charges from the gross profit shown by the assessee, there is no uniformity in the gross profit declared in the earlier years. The assessee has just repeated the submissions during appellate proceedings as were made by it during assessment proceedings. Keeping in view the discussion made by the AO in the assessment order, I am of the opinion that the trading result have correctly been rejected in this case. I am further of the opinion that the gross p....
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....further, it remains unchallenged that if the labour charges are excluded from the gross profit shown by the assessee, there is no uniformity in the gross profit declared by the assessee in the earlier years; that it also remains unquestioned that the gross profit declared by the assessee during the year is (sic-not) comparable with the trading results declared by its sister concern; that both, i.e., the assessee and its sister concern were engaged in almost similar businesses; that the assessee normally used to earn almost identical profits from different items manufactured by it; that obviously, if the manufacturing cost of the sister concern of the assessee is less, then its sale price will also be less; and that in these facts and circumstances, there being no merit in the appeal of the assessee, the same be rejected and the addition be upheld. 6. Apropos rejection of the trading results by invoking the provision of s. 145(3) of the Act, the AO observed that there was a fall in GP rate from 37.14 per cent in the preceding year, to 32.06 per cent in the year under consideration. This fall in GP rate was attributed to fall in the labour charges. As available from page 2 of the ....
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.... it was as such, that no closing stock of finished goods was available. Again, the authorities below have not taken this position into consideration. 9. The AO, further, was not satisfied with the stock lists concerning the opening sales and closing stocks. However, nothing has been brought on record to show that these lists were not genuine. The learned CIT (A) has failed to take cognizance of this shortcoming in the AO's order, 10. The AO had also raised objection with regard to variation in monthly ratio of raw material purchased, wages, consumable stores, etc., to sales. Concerning this, the assessee has maintained that all purchases and consumable stores are not directly linked to the sales made. Since the, stock taking was not done at the end of each month, figures of ratio of consumption which could have been of significance in this regard, could not be provided qua monthly consumption. Moreover, purchases made in one month were utilized in the next month also, which fact has remained unchallenged. Too, the expenses in question related to production, rather than to sales and the AO went wrong in wanting to use the denominator in the ratio, which was, in fact sales.....
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.... to both of them, as evident from the record (APB, 6-7). 13. The AO observed that for the last five months, the assessee had not shown any rental income and had stated that the building, that machinery had been used for the assessee's own purpose; that this ought to have resulted in increase in production/sales in the last six month and that the scope of closing stock of finished goods also ought to have increased. Production, however, as rightly contended on behalf of the assessee, is not an immediate process, it requires efforts in order to ensure better sales. Production has to be increased. This takes time Moreover, undisputedly, the assessee showed better sales and higher value of stock of semi-finished goods in the last two months. Too, in the next assessment year, sales rose to Rs. 24246498. a significant increase over the sales of the year under consideration. 14. The above discussion makes it clear that the fall in the gross profit rate has been properly explained by the assessee before the authorities below. Neither the AO, nor the learned CIT (A) have brought anything on record to justify the rejection of either the assessee's books of account, or its ....
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....ws, that mere rejection of books of account need not necessarily lead to additions to the returned income. 22. The above apart, the authorities below further erred in ignoring the past history of the case. As per the G.P. chart (APB 22) (asst. yr. 2000-01), the past history of the case duly supports the cause of the assessee. lt stands well settled that past history is a most relevant consideration for application of GP rate. It has been so held in CIT v. Pawan Kumar [2009] 316 ITR 324 (Punj. & Har.). 23. So far as regards the sister concern of the assessee, i.e., M/s Fewa Electrical Corporation, it is patent on record, as explained by the assessee before the authorities below, that Fewa was having lower manpower cost and lower electricity cost as compared to the assessee. Further, it was not covered by excise, since it was based in Himachal Pradesh. Moreover, it was manufacturing thermos flasks and PVC wires, which products were not the manufacture of the assessee. So much so, even the electrical switches manufactured by both the concerns were different so far as regards design, shape, appearance and variety. The assessee's reply in this regard, filed before the AO, h....
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....arty had taken a part of the premises and equipment on rent. However, vide reply dt. 13th Dec, 2011, the assessee stated that in the reply dt. 7th Dec., 2011, it had inadvertently been stated that no order for labour work had been received from the party during the year under consideration, as the party had taken a part of the premises and equipment on rent. The assessee clarified that job work had been done for M/s Tech Tools Ltd., but the words "and the party had taken a part of the premises as well as equipment on rent" had been typed through mistake, since this actually pertained to an earlier period. This explanation of the assessee stands accepted by the learned CIT(A). 28. In the reply dt. 13th Dec, 2011, the assessee further explained that separate details of expenses incurred for labour work had not been maintained and that these expenses were in the nature of wages; salaries, electricity charges, consumable stores, machinery maintenance etc., for which, separate details could not be maintained, since the same employees, equipment and premises were used for manufacture as well as job work/labour work. The AO, however, refused to accept this explanation of the assessee. ....