Gujarat High Court
Pr. Commissioner Of Income Tax-I vs Garden Silk Mills Ltd.....Opponent(S) on 6 May, 2016
Author: Harsha Devani
Bench: Harsha Devani, G.R.Udhwani
O/TAXAP/412/2016 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 412 of 2016
FOR APPROVAL AND SIGNATURE:
HONOURABLE MS.JUSTICE HARSHA DEVANI
and
HONOURABLE MR.JUSTICE G.R.UDHWANI
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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PR. COMMISSIONER OF INCOME TAX-I....Appellant(s)
Versus
GARDEN SILK MILLS LTD.....Opponent(s)
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Appearance:
MR SUDHIR M MEHTA, ADVOCATE for the Appellant(s) No. 1
MR MANISH J SHAH, ADVOCATE for the Opponent(s) No. 1
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CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANI
and
HONOURABLE MR.JUSTICE G.R.UDHWANI
Date : 06/05/2016
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O/TAXAP/412/2016 JUDGMENT
ORAL JUDGMENT
(PER : HONOURABLE MS.JUSTICE HARSHA DEVANI)
1. By this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), the appellant - revenue has called in question the order dated 15.10.2015 passed by the Income Tax Appellate Tribunal, "D" Bench, Ahmedabad in ITA No.720/Ahd/2009 by proposing the following question stated to be a substantial question of law:
"Whether on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was correct in arriving at the conclusion that the Assessing Officer has no sufficient material to reject the books of account by invoking section 145 of the I. T. Act and deleting the addition though the Assessing Officer has elaborately brought on record the defects noticed during the course of assessment proceedings and work in progress valued by the Assessing Officer has been found correct?"
2. The case of the assessee was picked up for scrutiny assessment and the assessment came to be framed under section 143(3) of the Act by an order dated 31.12.2007 whereby, the Assessing Officer made disallowance of commission paid to its directors of Rs.88,00,000/- and disallowance of expenditure by invoking the provisions of section 14A of the Act of Rs.298/-. The Assessing Officer rejected the books of account of the assessee and estimated the profit of the assessee and made addition of Page 2 of 9 HC-NIC Page 2 of 9 Created On Sat Jun 11 00:28:50 IST 2016 O/TAXAP/412/2016 JUDGMENT Rs.31,31,87,129/- being 5% of net turnover considering the same as suppression of gross profit. He further disallowed interest of Rs.1,88,84,000/- and depreciation of capital goods of Rs.62,23,134/- and computed the book profit at Rs.2,15,36,320/- as against the book profit of Rs.2,02,69,269/- as declared by the assessee. The assessee carried the matter in appeal before the Commissioner (Appeals), who, after considering the submissions of the assessee, deleted the addition made on account of estimation of gross profit by holding that the Assessing Officer was not justified in rejecting the books of account. He, however, sustained the addition made on account of undervaluation of work-in-progress in the closing stock to the extent of Rs.1,15,63,596/-. The revenue carried the matter in appeal before the Tribunal, but did not succeed.
3. Mr. Sudhir Mehta, learned Senior Standing Counsel for the appellant assailed the impugned order by submitting that the Tribunal has failed to appreciate the evidence on record in proper perspective while upholding the order of the Commissioner (Appeals) and holding that the books of account had wrongly been rejected by the Assessing Officer. The attention of the court was invited to the findings recorded by the Assessing Officer, to point out that the Assessing Officer had noted as many as eight discrepancies in the books of account maintained by the assessee for the purpose of coming to the conclusion that the books are not reliable. It was submitted that in these circumstances, the Tribunal was not justified in holding that the books of account had been wrongly rejected. The learned counsel further reiterated the grounds of appeal stated in the memorandum of appeal as well as the Page 3 of 9 HC-NIC Page 3 of 9 Created On Sat Jun 11 00:28:50 IST 2016 O/TAXAP/412/2016 JUDGMENT grounds canvassed before the Tribunal. Reliance was placed upon the decision of the Supreme Court in the case of Kachwala Gems, Jaipur v. Joint Commissioner of Income Tax, Jaipur, 2007 (288) ITR 10, wherein it has been held that it is well settled that in a best judgment assessment, there is always a certain degree of guess work. No doubt, the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment, and should not act totally arbitrarily, but there is necessarily some amount of guess work involved in a best judgment assessment, and it is the assessee himself who is to be blamed as he did not submit proper accounts. It was, accordingly, urged that the appeal does give rise to a substantial question of law as proposed or as may be formulated by the court.
4. On the other hand, Mr. J. P. Shah, learned counsel appearing on behalf of the respondent on caveat supported the impugned order by submitting that the Tribunal has concurred with the findings of fact recorded by the Commissioner (Appeals) and that in essence, the impugned order is based upon the findings recorded by the Tribunal upon appreciation of the evidence on record and hence, in the absence of any perversity in the findings recorded by the Tribunal, the impugned order does not give rise to any question of law. Various other contentions have also been raised on the merits of the findings recorded by the Commissioner (Appeals). However, it is not necessary to refer to the same in detail.
5. The record of the case reveals that the Assessing Officer Page 4 of 9 HC-NIC Page 4 of 9 Created On Sat Jun 11 00:28:50 IST 2016 O/TAXAP/412/2016 JUDGMENT found, in all, eight discrepancies in the books of account maintained by the assessee and rejected the books of account as not reliable. The Commissioner (Appeals) examined each discrepancy pointed out by the Assessing Officer and after giving detailed reasons in respect thereof, found that none of the eight grounds taken by the Assessing Officer for rejecting the books of account are valid and held thus:
"The fall in the G.P. rate has been fully explained by the appellant as under:
1 Decrease in Rs.(+) 329472859 manufacturing cost 2 Increase in raw material Rs.(-) 416127256 cost 3 Fall in sales realization Rs.(-) 472525614 Net effect on Gross Rs.(-) 559180011 Profit Effect on Gross Profit (in 8.90% %) The Assessing Officer has not even once doubted or made any adverse remarks with reference to the yield of yarn/grey cloth of the appellant company. This would mean that the Assessing Officer has fully accepted the purchase, sales, consumption, shortage, etc., of the appellant company. The Assessing Officer could not quantify any particular item of deduction as disallowable item for the tax purposes. In other words, Assessing Officer could not pinpoint any specific item in the working results for a specific addition in the assessment as disallowable item of expenditure etc. The only point of addition pointed out is with respect to undervaluation of WIP. This clearly supports the argument that the book results were rejected by the assessing Officer on insignificant grounds. The only ground valid is with respect to addition in the closing stock of work-in-
progress as discussed in ground No.1 for rejecting the books of account. As discussed above, the G.P. addition made by the Page 5 of 9 HC-NIC Page 5 of 9 Created On Sat Jun 11 00:28:50 IST 2016 O/TAXAP/412/2016 JUDGMENT Assessing Officer is restricted to only addition on account of undervaluation of work-in-progress in the closing stock to the extent of Rs.1,15,63,596/-. Hence, the addition is sustained only to the extent of Rs.1,15,63,596/- as undervaluation in work-in-progress and the balance is deleted. This ground of appeal is, therefore, partly allowed."
6. The Tribunal, after appreciating the material on record, concurred with the findings recorded by the Commissioner (Appeals) and held thus:
"4.3 Now the question arises whether the learned CIT (A) is correct in reaching to this conclusion or not. The learned CIT (A) has given a finding that the AO was not correct for rejecting the books of accounts as the grounds for rejection of books of accounts were found to be inconsistent. It is a settled position of law that the AO is expected to make assessment on the basis of the material available on record and basis should be tenable in the eyes of law. In the present case, the AO after rejecting the books of accounts estimated the profit. It was incumbent upon the AO when he rejected the books of accounts, he had to make the assessment in the manner prescribed under section 144 of the Act. As per this provision, the AO after taking into account all relevant material which he had gathered and was required to give the assessee an opportunity of being heard before making the assessment, of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment. It is also settled position of law that the books of accounts cannot be rejected on Page 6 of 9 HC-NIC Page 6 of 9 Created On Sat Jun 11 00:28:50 IST 2016 O/TAXAP/412/2016 JUDGMENT insignificant grounds. The AO should point out the specific defects, whereby the accounts of the assessee cannot be treated as correct or complete giving rise to distorted figure of GP. .... ....."
"4.3 ... ... ... The case of the assessee had been that the fall in Gross Profit was due to increase in the cost of raw material and decrease in sale realization. We find that the AO did not give any finding on this aspect. However, the learned CIT (A) accepted the contention of assessee after verifying the details furnished before him. The basic factor for fall in G.P. in the case of the assessee was found to be increase in crude oil price and decline in realization of POY Yarn sale as per learned CIT (A). This finding on fact is not rebutted by the Revenue.
Further, we find merit in this contention of the assessee that the gross profit would fall if the sale of price remains same or lower than the earlier year but the cost of raw material increases. The earning of gross profit is dependent on various factors, for example, in the case of manufacture cost of raw material plays a vital role. If there is rise into cost of raw material, naturally cost of production would increase and badly effect the profit if there is not corresponding increase in sale price. As per AO, there is increase in turnover, therefore the gross profit ought to have been increased instead of decreasing. We are of the view that such reasoning cannot be universally applied and becomes fallacious in certain conditions. In the case in hand, the assessee is a company subjected to internal audit as well as statutory audit. The auditors have not pointed out any defect Page 7 of 9 HC-NIC Page 7 of 9 Created On Sat Jun 11 00:28:50 IST 2016 O/TAXAP/412/2016 JUDGMENT and/or there is no adverse remarks. The AO has not made any adverse comment upon sale & purchase. Undisputedly, no defect has been noticed by the Central Excise Department in the registers maintained under the Central Excise Act, regarding raw material and finished goods, which is subjected to inspection and audit. In our considered view, the rejecting of books of accounts should not be in a mechanical fashion, the AO has to come to a definite conclusion that the accounts so placed before him are not correct or not complete, consequently, it has distorted the true picture of profit. The AO is required to make analysis of each item and factor which has impact on the profit of the assessee. Assuming that a particular item of account is found to be not correct or complete, the AO is required to find out its impact on the profit of the assessee, if it is found that there is no impact or very minuscule impact on profit. Such defect becomes insignificant. In such a situation, there would be no need of rejection of entire books of accounts, the AO would be justified to make addition into the profit to the extent of such item. The law is well settled that the insignificant defects in the books of accounts should not be the basis of rejection of the entire books of accounts. In the present case, we find that the learned CIT (A) has explained point-wise as to how the reasoning of the AO for rejection of books is not tenable in law. We are in agreement with the reasoning of the learned CIT (A), as the finding is based upon uncontroverted facts. ... ... ..."
7. Thus, both, the Commissioner (Appeals) and the Tribunal Page 8 of 9 HC-NIC Page 8 of 9 Created On Sat Jun 11 00:28:50 IST 2016 O/TAXAP/412/2016 JUDGMENT have, after appreciating the material on record, recorded concurrent findings of fact and have given detailed, cogent and convincing reasons for holding that the Assessing Officer was not justified in rejecting the books of account of the assessee. Essentially therefore, the impugned order is based upon concurrent findings of fact recorded by the Tribunal after appreciating the material on record. The learned counsel for the appellant is not in a position to dislodge the findings of fact recorded by the Tribunal by pointing out any material to the contrary, nor is it the case of the revenue that the Tribunal has placed reliance upon any irrelevant material or that any relevant material has been ignored. Under the circumstances, in the absence of any perversity being pointed out in the findings of fact recorded by the Tribunal after appreciating the material on record, the conclusion arrived at by the Tribunal being based upon findings of fact, does not give rise to any question of law, much less, a substantial question of law warranting interference.
8. The appeal, therefore, fails and is, accordingly, rejected.
(HARSHA DEVANI, J.) (G.R.UDHWANI, J.) parmar* Page 9 of 9 HC-NIC Page 9 of 9 Created On Sat Jun 11 00:28:50 IST 2016