Income Tax Appellate Tribunal - Ahmedabad
J.K. Paper Ltd.,, Surat vs Department Of Income Tax on 27 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
" C " BENCH, AHMEDABAD
Before Shri A. K. GARODIA, ACCOUNTANT MEMBER
and Shri KUL BHARAT, JUDICIAL MEMBER
I.T.A. No. 2262/ Ahd/2011
(Assessment year 2008-09)
J K Paper Ltd. Vs. Addl CIT, Range 1,
P.O. Central Pulp Mills, Surat
Fort Songadh,
Distt. Tapi (Gujarat)
Address for Notice: J k Paper Ltd.,
Gulab Bhawan, 3rd Floor,
6A, Bahadur Shah Zafar Marg,
New Delhi-110 002
PAN/GIR No. : AAACT6305N
I.T.A.No. 2505/Ahd/2011
(assessment year 2008-09)
Addl CIT I, Surat Vs. J K Paper Ltd.,
P.O. Central Pulp Mills,
Fort Songadh
Distt Tapi (Gujarat)
(APPELLANT) .. (RESPONDENT)
Appellant by: S N Soparkar, Sr. Adv.,
Respondent by: Shri S K Gupta, CIT DR
Date of hearing: 27.04.2012
Date of pronouncement: 24. 05.2012
ORDER
PER SHRI A. K. GARODIA, AM:-
2 I.T.A.No.2262,2505/Ahd/2011
These are cross appeals filed by the assessee and the revenue which are directed against the order of ld. CIT(A) - I, Surat dated 08.07.2011 for the assessment year 2008-09.
2. First, we take up the appeal filed by the revenue i.e. I.T.A.No. 2505/ahd/2011. Ground No.1 is as under:
"[1] On the facts and circumstances of the case and in law, the Ld. CIT(A)-I, Surat has erred in directing the A.O. to follow the decision of Hon'ble ITAT in assessee's own case for A.Y. 2002-03, 2003-04, 2004-05 & 2005-06 and directed to delete the addition of Rs.66,97,985/- on account of expenditure claimed on Social Forestry, without appreciating the fact that assessee failed to explain the genuineness of expenses related to Forestry Division, when no income was derived from the land as no basic operations were carried out for cultivation of land. Further the decision of the Hon'ble ITAT in assessee's case has not been accepted by the Department and appeal U/S.260A of the I.T. Act has already been filed."
2.1 Both the sides agreed that this issue is identical to ground No.1(a) of the revenue in assessment year 2006-07 and 2007-08 in I.T.A.No. 129 and 1856/Ahd/2010 and in the present year also, this issue may be decided on similar lines. In those two years, this issue has been decided by the tribunal as per order dated 11.05.2012 in favour of the assessee as per para 12.2, which is reproduced below:
"12.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the tribunal decision cited by the Ld. A.R. We find that the decision of Ld. CIT(A) is by following tribunal order in assessee's own case for the assessment year 2002-03, 2003-04 & 2004-05 and the Ld. D.R. could not show us as to how this tribunal decision is not applicable in the present year by pointing out any difference in facts and hence, under these facts, we do not find any reason to interfere in the order of Ld. CIT(A) on this issue. Accordingly, ground No.1 (a) of the revenue's appeal is rejected in both these years."3 I.T.A.No.2262,2505/Ahd/2011
2.1.1 Since no difference in the facts could be pointed out, this issue is decided in the present year also in favour of the assessee in line with the tribunal decision in earlier two years as per relevant para reproduced above. This ground of the revenue is rejected.
2.2 Ground No.2 raised by the revenue is as under:
"[2] On the facts and circumstances of the case and in law, the Ld. CIT(A)-I, Surat has erred in directing the A.O. to follow the decision of Hon'ble ITAT in assessee's own case for A.Y. 2002-03, 2003-04, 2004-05 & 2005-06 and directed to delete the addition of Rs.20,25,393/- on account of amortization of Social Forestry expenses claimed, without appreciating the fact that expenses are related to the income exempted U/s.10 of the I.T. Act."
2.2.1 Regarding this issue also, both the sides agreed that this issue is identical to ground No.1(f) of the revenue's appeal in assessment year 2006-07 and ground No.1(c) of the revenue's appeal in assessment year 2007-08 and the same may be decided on similar lines. In those two years, this issue was decided by the Tribunal in favour of the assessee as per para 15.2 of this tribunal order which is reproduced below:
"15.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that this is an admitted fact in both these years that in the books of the assessee, the amount in question is shown as liability and it was not written back by the assessee by way of credit to the P & L account. In the light of these facts, when we examine the provisions of Section 41(1) of the Income tax Act, 1961, we find that as per Explanation (1) inserted in Section 41(1) by the Finance (No.2) Act 1996 w.e.f. 01.04.1997, if the assessee has written back the liability then it will amount to remission or cessation of liability for the purpose of invoking Section 41(1). As per the judgment of Hon'ble Apex Court rendered in the case of Sugauli Sugar Works as reported in 236 ITR 518 (S.C.) and in the case of Kesaria Tea Co. Ltd. reported in 254 ITR 434 (S.C.), even a unilateral entry passed by the assessee by writing back the liability will not amount to cessation of liability. However, after the 4 I.T.A.No.2262,2505/Ahd/2011 amendment of Section 41(1) by way of insertion of Explanation (1), to this extent, these two judgements of Hon'ble Apex Court will not be applicable where the assessee has written back the liability but where assessee has not written back the liability in the books, Section 41(1) cannot be invoked as per these two judgments of Hon'ble Apex Court even after the insertion of Explanation (1) in Section 41(1). These two judgements of Hon'ble Apex Court will not be applicable where the assessee has written back the liability but where assessee has not written back the liability in the books, Section 41(1) cannot be invoked as per these two judgments of Hon'ble Apex Court even after the insertion of Explanation (1) to Section 41(1) of the Act. Since in the present case, assessee has not written back the liability in question, provisions of Section 41(1) cannot be invoked and hence, we decline to interfere in the order of Ld. CIT(A) on this issue. Ground No.1(d) of the assessment year 2006-07 and ground No.1(c) for assessment year 2007-08 are rejected."
2.2.2 Since no difference in the facts could be pointed out buy the Ld. D.R., this issue is decided in favour of the assessee in the present year also by respectfully following the tribunal order in assessee's own case in earlier two years as per the relevant para reproduced above. This ground is also rejected.
2.3 Ground No.3 of the revenue's appeal is as under:
"(3) On the facts and circumstances of the case and in law, the Ld. CIT(A)-I, Surat has erred in directing the A.O. to follow the direction of the Hon'ble ITAT in assessee's own case for A.Y. 2004-05 and directed to delete the addition of Rs.10,40,550/- made on account of difference in valuation of Closing Stock without appreciating the fact that assessee failed to explain the difference in value of Closing Stock shown in Profit and Loss account and value of stock given to the Bank. Further, the Ld. CIT(A) has not appreciated the fact that for A.Y. 2004-05 the Hon'ble ITAT has restored the matter back to the file of the A.O. for fresh adjudication."5 I.T.A.No.2262,2505/Ahd/2011
2.3.1 Both the sides agreed that similar issue was raised by the revenue in assessment year 2006-07 & 2007-08 as per ground No.1(b) in both the years and in those two years, the tribunal has remanded the matter back to the file of the A.O. and the same may be decided in the present year also on similar lines. In those years, this issue was remanded by the Tribunal back to the file of the A.O. for a fresh decision as per para 13.2 of this tribunal order which is reproduced below:
"13.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. W find that the Ld. CIT(A) has restored back the matter to the file of the A.O. for a fresh decision on the basis of the tribunal decision in the assessee's own case for the assessment year 2004- 05 dated 04.09.2009. Ld. D.R. could not point out any difference in the facts in the present two years and hence, we do not find any reason to take a contrary view in the present two years and hence, we decline to interfere in the order of Ld. CIT(A) on this issue in both these years. Accordingly, ground No.1(b) of the revenue's appeal is rejected in both these years."
2.3.2 Since, the facts in the present year are not different, in the present year also, we restore this matter back to the file of the A.O. for a fresh decision as per the direction of the tribunal in assessee's own case in earlier two years as per the relevant para of the tribunal order reproduced above. This ground of the revenue is allowed for statistical purposes. 2.4 Ground No.4 is as under:
"[4] On the facts and circumstances of the case and in law, the Ld. CIT(A)-I, Surat has erred in deleting the addition of Rs. 4,95,000/- made on account of unexplained creditors without appreciating the fact the assessee failed to discharge the onus cast upon it to prove the genuineness of the creditors."
2.4.1 Regarding his issue, it was agreed by both the side that similar issue was raised by the revenue in earlier two years i.e. assessment year 6 I.T.A.No.2262,2505/Ahd/2011 2006-07 and 2007-08 as per ground 1(d) and 1(c) respectively and therefore, in the present year also, this issue may be decided on similar lines. In those two years, this issue was decided by the tribunal in favour of assessee as per para 15.2 of the tribunal order of earlier two years which is reproduced below:
"15.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that this is an admitted fact in both these years that in the books of the assessee, the amount in question is shown as liability and it was not written back by the assessee by way of credit to the P & L account. In the light of these facts, when we examine the provisions of Section 41(1) of the Income tax Act, 1961, we find that as per Explanation (1) inserted in Section 41(1) by the Finance (No.2) Act 1996 w.e.f. 01.04.1997, if the assessee has written back the liability then it will amount to remission or cessation of liability for the purpose of invoking Section 41(1). As per the judgment of Hon'ble Apex Court rendered in the case of Sugauli Sugar Works as reported in 236 ITR 518 (S.C.) and in the case of Kesaria Tea Co. Ltd. reported in 254 ITR 434 (S.C.), even a unilateral entry passed by the assessee by writing back the liability will not amount to cessation of liability. However, after the amendment of Section 41(1) by way of insertion of Explanation (1), to this extent, these two judgements of Hon'ble Apex Court will not be applicable where the assessee has written back the liability but where assessee has not written back the liability in the books, Section 41(1) cannot be invoked as per these two judgments of Hon'ble Apex Court even after the insertion of Explanation (1) in Section 41(1). These two judgements of Hon'ble Apex Court will not be applicable where the assessee has written back the liability but where assessee has not written back the liability in the books, Section 41(1) cannot be invoked as per these two judgments of Hon'ble Apex Court even after the insertion of Explanation (1) to Section 41(1) of the Act. Since in the present case, assessee has not written back the liability in question, provisions of Section 41(1) cannot be invoked and hence, we decline to interfere in the order of Ld. CIT(A) on this issue. Ground No.1(d) of the assessment year 2006-07 and ground No.1(c) for assessment year 2007-08 are rejected."7 I.T.A.No.2262,2505/Ahd/2011
2.4.2 Since no difference in the facts could be pointed out by the Ld. D.R. in the present year also, we decide this issue in favour of the assessee by respectfully following the Tribunal order in earlier two years as per the relevant para reproduced above. Accordingly, this ground of the revenue is also rejected.
2.5 Ground No.5 is as under:
"[5] On the facts and circumstances of the case and in Law, the Ld. CIT(A)-I, Surat has erred in directing the A.O. to follow the decision of the Hon'ble ITAT in assessee's own case for A.Y. 2005-06 and directed to delete the addition of Rs.38,29,300/- made on account of Syndicate Fees, which was treated as differed revenue expenditure, without appreciating the fact that the expenses incurred were for enduring benefits and can not be claimed in a single year. Further, the Ld. CIT(A) has not appreciated the fact that decision of Hon'ble ITAT is not accepted by the Department and appeal U/S.260A of the I.T. Act is filed."
2.5.1 It was submitted by the Ld. D.R. that this is new issue in the present year. He supported the assessment order whereas Ld. A.R. of the assessee supported the order of Ld. CIT(A). He further submitted that Ld. CIT(A) has followed the tribunal order in assessee's own case for the assessment year 2005-06. Relevant para of the tribunal order was reproduced by Ld. CIT(A) in his order.
2.5.2 We have considered the rival submission, perused the material on record and have gone through the orders of authorities below. We find that this issue was decided by Ld. CIT(A) by following the tribunal order in assessee's own case for the assessment year 2005-06. No difference in the facts in the present year could be pointed out by Ld. D.R. and hence, we do not find any reason to take a contrary view in the present year. By respectfully following the tribunal order in assessee's own case for the 8 I.T.A.No.2262,2505/Ahd/2011 assessment year 2005-06, we decline to interfere in the order of Ld. CIT(A) on this issue. This ground of the revenue is also rejected. 2.6 Ground No.6 is as under:
"[6] On the facts and circumstances of the case and in law, the Ld. CIT(A)-I, Surat has erred in directing the A.O. to follow the decision of the Hon'ble ITAT in assessee's own case for A.Y. 2005-06 and directed to delete the addition of Rs.2,40,00,000/- made on account of prior period expenses in the form of one time additional interest payment under normal provisions and also in the book profit u/s.115JB of the I.T. Act, without appreciating the fact that the expenses were not related to the year in question and also are penal in nature. Further, the Ld. CIT(A) has not appreciated the fact that decision of Hon'ble ITAT is not accepted by the Department and appeal U/S.260A of the I.T. Act is filed."
2.6.1 Ld. D.R. submitted that this issue is also a new issue in the present year. He supported the assessment order whereas, Ld. A.R. of the assessee supported the order of Ld. CIT(A). He further submitted that this issue was decided by Ld. CIT(A) by following the tribunal order in the assessee's own case for the assessment year 2005-06. Relevant para of the tribunal order is reproduced by Ld. CIT(A) in his order. 2.6.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that Ld. CIT(A) has decided this issue by following the tribunal order in assessee's own case for the assessment year 2005-06 in favour of the assessee. It is stated before us in this ground that the tribunal decision is not acceptable by the department and appeal u/s 260A of the Income tax Act, 1961 is filed before the Hon'ble Gujarat High Court. This cannot be the basis to take a contrary view in the present year since no difference in the facts could be pointed out by the revenue in the present year. We decline to interfere in the order of Ld. CIT(A) on his issue regarding both 9 I.T.A.No.2262,2505/Ahd/2011 computation of regular income as well as computation of book profits. This ground of the revenue is also rejected.
2.7 In the result, the appeal of the revenue is partly allowed for statistical purposes.
3. Now, we take up the assessee's appeal in I.T.A.No. 2262/Ahd/2011. Grounds No.2, 3, 4 & 5 are as under:
"On the facts and in the circumstances of the case and in law, Commissioner of Income Tax (Appeals)-1 Surat erred in :-
2.0 Upholding the disallowance of Rs.315000 and in not appreciating that the said expenditure was incurred wholly and exclusively for the purposes of business and that these were not related to agricultural activities.
3.0 Upholding the disallowance of Rs. 1613897 without appreciating that the said expenditure was fully allowable in the year under consideration.
4.0 Upholding an addition of Rs. 1296788 by making reference to Sec.145A and in not appreciating that the figure of Rs.33375312 since represents Excise Duty on closing stock of raw materials the same is not comparable with Rs 34672100 which represents the closing balance of Modvat Recoverable and that in view of appellants facts / ICWA's guidance Note, Sec.145A has no impact on the profit as shown in the Profit & Loss Account 5.0 Without prejudice to Ground No.4.0 above, and the fact that Rs. 1296788 addition has been confirmed by CIT(A), being contested by the appellant, not directing the Assessing Officer that the Opening Stock on the first day of the previous year relevant to the Asstt Year 2009-10 should be increased by identical amount i.e Rs. 1296788."
3.1 It was submitted by he Ld. A.R. that ground no.2 is to be decided against the assessee. It has been submitted by the Ld. A.R. that in the course of hearing of the assessee's appeal for the earlier two years i.e. assessment year 2006-07 and 2007-08 also, similar issue was raised. Similarly, he submitted that grounds No.4 & 5 are also to be decided against the assessee as it had been submitted by the assessee in the course 10 I.T.A.No.2262,2505/Ahd/2011 of hearing of the appeal of earlier two years i.e. assessment year 2006-07 and 2007-08. Regarding ground No.3, it was submitted that this is not pressed. Accordingly, ground No.3 is rejected as not pressed and grounds No. 2,4 & 5 are decided against the assessee by following the tribunal order in assessee's own case for earlier two years i.e. assessment year 2006-07 & 2007-08 in which also similar issues were raised which were decided against the assessee as per the tribunal order dated. 11.05.2012 for these two years.
3.2 Ground No.6 is as under:
"6.0 Upholding the disallowance of Rs. 30261 being contribution of employee's towards PF u/s 36(1 )(va) of the Act by holding that the same was deposited after due."
3.2.1 It was submitted by the Ld. A.R. that this issue is now covered in favour of the assessee by the judgement of Hon'ble Apex Court rendered in the case of CIT Vs Alom Extrusions Ltd. 319 ITR 306 (S.C.). Respectfully following this decision of Hon'ble Apex Court, this issue is decided in favour of the assessee. Ground No.6 of the assessee's appeal stands allowed.
3.3 Ground No.7 is as under:
"7.0 Upholding the action of Assessing Officer in bring to tax a sum of Rs.759.42 Lac. (Rs75942992) being the amount credited to Profit & Loss A/c pursuant to one time settlement of Rs.5984.33 Lac loan (Refundable to various Banks / Fit's) at discounted value of Rs.5224.91 Lac by holding that the benefit arose out of business activities and therefore same is taxable u/s 41(1) of the Act and in ignoring that Sec. 41(1) of the Act is applicable to trading liability and not applicable to waiver of principal amount of loan."
3.3.1 It was submitted by the Ld. A.R. that this is write off loan payable by the assessee and such write off cannot be regard as income in the 11 I.T.A.No.2262,2505/Ahd/2011 hands of the assessee u/s 28(iv) of the Income tax Act, 1961. In support of this contention, reliance was placed on the following decisions:
(a) CIT Vs Chetan Chemicals (P) Ltd. 267 ITR 770 (Guj.)
(b) Logitronics P. Ltd. Vs CIT 333 ITR 386 (Del.)
(c) Iskraemeco Regent Ltd. Vs CIT 331 ITR 317 (Mad.) 3.3.2 He further submitted that even if loan was obtained by the assessee for purchase of fixed assets, waiver of this loan cannot result into reduction in the book value of the fixed assets because cost of fixed assets once determined in accordance with law, cannot undergo a change mainly because of loan borrowed for this purpose is partly waived off by the lender. In support of this contention, reliance was placed on the following three judgements:
(a) CIT Vs Tata Iron and Steel co. Ltd. 231 ITR 285 (S.C.)
(b) CIT Vs Cochin Co.(P) Ltd. 184 ITR 230 (Ker.)
(c) Steelco Gujarat Ltd. Vs ACIT 33 SOT 437 (Ahd.) 3.3.3 He further submitted that the amount of waiver of loan, in relation to working capital loan cannot be regarded as income and in support of this contention, reliance was placed on the tribunal decision of Ahmedabad bench of the Tribunal rendered in the case of Steelco Gujarat Ltd. Vs ACIT as reported in 33 SOT 437 (Ahd.). Regarding the tribunal decision followed by Ld. CIT(A) being Tribunal decision rendered in the case of Binjrajka Steel Tubes Ltd. Vs ACIT 130 ITD 46 (Hyd.), it was submitted that this tribunal decision is clearly distinguishable. It was submitted that in that case, the assessee had purchased machinery of Rs.6 crores and thereafter, on account of dispute with the supplier of the machinery, the assessee was required to pay only a sum of Rs.4 crores as against the original price of Rs.6 crores and, therefore, there was reduction in the actual cost of the machinery because the supplier agreed 12 I.T.A.No.2262,2505/Ahd/2011 to charge lesser price for the machinery whereas in the present case, supplier has not reduced the price but the loan payable to the lender has partly been waived off by the lender and, therefore, this tribunal decision is not applicable in the present case. As against this, Ld. D.R. supported the orders of authorities below and he placed reliance on the same tribunal decision which was followed by Ld. CIT(A) being rendered in the case of Binjrajka Steel tubes Ltd. (supra).
3.3.4 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. First, we discuss the applicability of the tribunal decision rendered in the case of Binjrajka Steel Tubes Ltd. (supra) which was followed by Ld. CIT(A). The facts of that case are that as per note No.3 in the note of accounts, the auditor had pointed out that by virtue of settlement of dispute with M/s. Tata Steels Ltd. the cost of machinery has been reduced to Rs.4 crores against the original cost of Rs.6 crores and consequently, the depreciation for the year had been adjusted including withdrawal of excess deprecation charged in earlier year (including current year) amounting to Rs.119.01 lacs. The A.O. wanted to tax the said remission of Rs.2 crores u/s 41(1) of the Income tax Act, 1961. He taxed it accordingly. When the matter was carried in appeal before Ld. CIT(A), it was held by him that the same is not taxable u/s 28(iv) or u/s 41(1). But the same is to be reduced form the block of assets before computing depreciation in the present year as well in earlier years. In the present case, remission is not allowed by the supplier of the machinery but remission is on loan obtained by the assessee from the lender and hence, the facts in the present case are different and, therefore this tribunal decision is not directly applicable in the present case.
13 I.T.A.No.2262,2505/Ahd/20113.3.5 Now, we consider the applicability of various judgements cited by the Ld. A.R. with regard to reduction of waiver of loan amount form the cost of fixed assets. The main judgment cited by the Ld. A.R. is the judgement of Hon'ble apex Court rendered in the case of Tata Iron & Steel Co. (supra). In that case, the issue before the Hon'ble Apex Court was as to whether the gain in respect of fluctuation in the rates of foreign exchange while repaying the installments of foreign loan will reduce the actual cost of asset for the purpose of computation of depreciation and similarly whether the loss from the fluctuation in the rates of foreign exchange after excluding the payment attributable to the interest will go to increase the actual cost of depreciable asset. Under these facts, it was held by the Hon'ble Apex Court that it is difficult to understand as to how, the manner of repayment of loan can effect the cost of asset acquired by the assessee. The relevant par of this judgement is reproduced below:
"Coming to the question raised, we find it difficult to follow how the manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee, but even if the assessee did not repay the loan it will not alter the cost of the asset, If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be borne in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with non-repayable subsidy received from the Government, the cost of the asset will be the price paid by the assessee for acquiring the asset. In the instant case, the allegation is that at the time of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee may have 14 I.T.A.No.2262,2505/Ahd/2011 raised the funds to purchase the asset by borrowing but what the assessee has paid for it, is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset. In our judgment, the manner or mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the purpose of his business. We hold that the questions were rightly answered by the High Court. The appeals are dismissed. There will be no order as to costs."
3.3.6 From the above para of this judgment of Hon'ble Apex Court, it is seen that it was held by the Hon'ble Apex Court that the cost of asset cannot change by any event subsequent to the acquisition of the asset. Similarly, in the present case also, the rebate allowed by the lender cannot cause to reduce the cost of the asset for the purpose of computation of depreciation as had been done by the authorities below. The adjustment on account of change in rate of foreign currency is now covered by Section 43A but in the present case, the dispute is not about change in rate of foreign currency.
3.3.7 Now, the 2nd aspect of the matter is as to whether this rebate allowed by the lender can be assessed as income u/s 28(iv) or u/s 41(1) of the Income tax Act, 1961. Regarding Section 41(1), we would like to observe that only this portion of rebate allowed by the lender can be brought to tax in the year when liability ceases to exist which was earlier allowed by the A.O. as a deduction while computing taxable income of the assessee. In respect of this, no finding is given by the A.O. that any portion of waiver allowed by the lender is in respect of interest portion on such loan. He has proceeded to make the addition on this basis that the loan in question was used by the assessee for purchasing the fixed assets and on such fixed assets, assessee claimed deduction in the form of depreciation and, therefore, this waiver by the lender can be indirectly 15 I.T.A.No.2262,2505/Ahd/2011 treated as trading liability and accordingly, it can be taxed u/s 41(1) of the Income tax Act, 1961.We do not find any merit in this contention of the A.O. because depreciation was allowed on the cost of the fixed asset and as per the judgment of Hon'ble Apex Court rendered in the case of Tata Iron & Steel Co. (supra), remission in the loan amount cannot go to reduce the value of the fixed asset for the purpose of computation of depreciation allowable to the assessee. Hence, it cannot be said that depreciation was wrongly allowed in the earlier year and in respect of reduction in the loan liability, depreciation of fixed asset to the extent of reduction of loan liability should be brought to tax. The A.O. has also referred to the provisions of Section 28(iv) of the Income tax Act, 1961. Regarding this aspect, Ld. A.R. has placed reliance on the judgement of Hon'ble Gujarat High Court rendered in the case of Chetan Chemicals (P) Ltd. (supra). In that case, the assessee obtained unsecured loan from various creditors and because of financial difficulties faced by the assessee company, the lender approached the High Court and as per the compromise reached between the assessee company and the loan creditor, remission was allowed by the creditor in respect of the loan amount of Rs.1.77 lacs and in respect of the interest amount on such loan to the extent of Rs.2.96 lacs. The remission of interest was declared by the assessee as income u/s 41(1) and there was no dispute in this regard but remission of loan amounting to Rs.1.77 lacs was not declared by he assessee as income. In that case, the A.O. taxed such remission of loan u/s 28(iv) read with Section 41(1) of the Income tax Act, 1961. The relevant portion of this judgment of Hon'ble Gujarat High Court is reproduced below:
"Section 41(1) as was applicable for the assessment year under consideration reads as under:16 I.T.A.No.2262,2505/Ahd/2011
(1) Where an allowance or deduction has been made in the assessment or any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allow-
ance or deduction has been made is in existence in that year or not. On a reading of the provisions, it is apparent that before the section can be invoked, it is necessary that an allowance or a deduction has been granted during the course of assessment for any year in respect of loss, expenditure or trading liability which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed to be the profits and gains of business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. In the facts of the case on hand, without entering into the aspect as to whether the liability to repay the loans would be a trading liability or not, it is an admitted position that there had been no allowance or deduction in any of the preceding years and, hence, there is no question of applying the provision as such.
Section 28 of the Act deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under the head "Profits and gains of business or profession". In the facts of the present case, it cannot be said that the assessee-company was carrying on business of obtaining loans and that the remission of such loans by the creditors of the company was a benefit arising from such business.
In the light of the aforesaid legal position, we do not find any infirmity in the order of the Tribunal. The Tribunal was right in holding that the amount of Rs.1,77,052/- arising as a result of 17 I.T.A.No.2262,2505/Ahd/2011 remission of unsecured loans was not taxable in the hands of the assessee. The question referred to us is, therefore, answered in the affirmative, i.e., in favour of the assessee and against the Revenue."
3.3.8 From the above discussion, we find that the tribunal decision followed by Ld. CIT(A) is not applicable in the present case and as per the various judgments cited by the Ld. A.R., neither the rebate allowed by the lender can be reduced from the value of the fixed asset for the purpose of computation of depreciation nor the same amount can be taxed u/s 41(1) or Section 28(iv) of the Income tax Act, 1961. Hence, in the light of above discussion, this ground of the assessee's appeal is allowed. 3.4 Now, we are left with only one ground i.e. Ground No.1 of the assessee's appeal which reads as under:
"1.0 Proceeding to pass impugned order by ignoring that powers conferred on him u/s 251 of the Act for enhancement were confined only to the matters / issues considered by the Assessing Officer which are being contested in appeal and the enhancement in the impugned order being on points from "New Source" it was beyond his jurisdiction to make an addition of Rs.44,95,37,000/-. 1.1 Without prejudice to Ground No. 1.0 above -
a) Holding that Books of Account maintained by the appellant do not give full and true picture of its income and in rejecting the same by invoking Sec. 145(3) and enhancing the appellants income by Rs.44,95,37,000/-.
b) Wrongly concluding that yield of raw-material consumption of the appellant's JKPM Unit was lower by 8% as compared to the yield of immediately preceding year and in ignoring that the yield had actually improved by 0.42% being 39.03% as compared to 38.61% in the immediately preceding year on taking the consumption figures of both the years on Net (i.e. Without Moisture) basis being the correct way of comparing the figures of 2 years.
c) Proceeding to enhance appellant income by Rs.44,95,37,000 and in ignoring appellant's submission read with Statutory Auditors clarification / figures recorded in Certificate 18 I.T.A.No.2262,2505/Ahd/2011 dtd.30.06.2011, making wrong observations inter-alia relating to account maintenance, back dating of records, month-wise figures and Gross Profit figures & Ratios."
3.4.1 Brief facts of the case are that it is noted by Ld. CIT(A) in para 15 of his order that on going through the records of the assessee company during appellate proceedings, it was noted that there was fall in GP in the present year for which no proper explanation was furnished by the assessee. Ld. CIT(A) issued letter dated 11.03.2011 to the assessee asking the assessee to furnish year-wise yield and weight showing consumption of raw material in quantity and production of finished goods in quantity for all the three units. Assessee was also asked to furnish the number of units of electricity consumed. He also asked the assessee to indicate the GP margin for the last three years in respect of all the three units. In reply, the assessee submitted before him the yield percentage of two units i.e. CPM and JKPM units. It was submitted that there are only two units and not three. The yield of CPM unit was shown at 36.1% in the present year as against 38.47% in the preceding year. Similarly, the yield of JKPM unit was shown at 30.69% in the present year as against 38.61% in the preceding year. In view of the fall in the yield percentage, CIT(A) asked the assessee to explain the reasons for decline in the yield. Various reasons were submitted before him by the assessee but they were general in nature. Thereafter, as per the order sheet entry dated 23.06.2011, Ld. CIT(A) asked the assessee to show cause as to why in respect of JKPM unit yield be not enhanced by 8% resulting in addition of Rs.139 crores. Thereafter, further reply was submitted by the assessee before Ld. CIT(A) as per letter dated 28.6.2011 in which, it was explained that raw material by weight of bamboo and hard wood is being purchased by the assessee from various sources on gross weight basis 19 I.T.A.No.2262,2505/Ahd/2011 (including moisture content) It was also submitted that moisture percentage in the raw material varies depending upon age of the plant, season and gap between the harvest and supply. It was further submitted that for the purpose of determining the plant efficiency, all such raw material are converted into common determinant called ADMT (air dried metric ton) quantity. By this process, moisture content is reduced to 10%. It was also submitted that if the yield of assessment year 2008-09 i.e. the present year, is recomputed on ADMT basis, the yield will be @ 39.03% as compared to 38.67% of the preceding year. The assessee also furnished a chart showing calculation of yearly and month-wise yield. This chart is reproduced by Ld. CIT(A) on page 36 of his order. It is observed by Ld. CIT(A) that he had telephonic conversation with Shri Vishwajit Deb, GM of JKPM unit and he explained that when the supply is received by way of truck load, gross weight is taken and thereafter, random sample is picked-up and test is carried out to ascertain the moisture content which takes two days time. After the test result is received, the gross weight is converted into net weight on the basis of moisture content in the sample test but the payment to supplier is made on gross weight basis. Thereafter, Ld. CIT(A) has issued a show cause notice pointing out that as per the audit report, consumption is of 100135 MT and not 87218 MT as shown in the chart dated 28.06.2011 in respect of JKPM unit. In reply to this show cause notice, assessee furnished a certificate form the auditor M/s. Lodha & Co. Chartered Accountants, in which they have certified that if the yield % is computed for JKPM unit on net weight basis by excluding moisture content, as per the record available and explanation made, the figures would have been 87218 ADMT. Ld. CIT(A) observed that the auditor's certificate is not reliable 20 I.T.A.No.2262,2505/Ahd/2011 because it is based on the explanation given by the management and they do not mention to have fully checked the primary records. Ld. CIT(A) rejected the books of account and increased the GP percentage by 5% by adopting average GP for the last 5 years. In this manner, he made addition of Rs.4495.37 lacs as against originally proposed by him of Rs.139 crores. Now, the assessee is in appeal before us. 3.4.3 Regarding ground no.1 challenging jurisdiction of Ld. CIT(A), it was submitted by the Ld. A.R. that enhancement notice given by Ld. CIT(A) is not within his powers because this issue was not discussed by the A.O. and, therefore, he has given this enhancement notice for a new source of income which is beyond his jurisdiction and in support of this contention, reliance was placed by him on the judgment of Hon'ble Delhi High Court rendered in the case of CIT Vs Sardari Lal & Co. as reported in 251 ITR 864 (Del.).
3.4.4 As against this, it was submitted by the Ld. D.R. that no new source of income was brought into picture by Ld. CIT(A) and only business income declared by the assessee and assessed by the A.O. was examined and enhanced by Ld. CIT(A) and, therefore, this objection is not valid. Reliance was placed by him on the judgment of Hon'ble Apex Court rendered in the case of CIT Vs Nirbheram Daluram as reported in 224 ITR 610. He also placed reliance on the tribunal decision of Delhi Bench rendered in the case of Vardhman Etates Ltd. Vs DCIT rendered in I.T.A.No. 1048/Del/2009 dated 25.02.2011 and he submitted a copy of this tribunal decision.
3.4.5 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgments cited by both the sides. Regarding judgment of Hon'ble Delhi 21 I.T.A.No.2262,2505/Ahd/2011 High Court rendered in the case of Sardarilal & Co. (supra), cited by the Ld. A.R., we find that in that case, the facts were different. In that case, the assessee was an individual dealing in tyres and in the return of income filed by him for the relevant year, loss was declared of Rs.4552/- which was revised to Rs.3500/- and the said loss was computed by applying GP rate of 0.9% on the total sale of Rs.11.57 lacs. During the course of assessment proceedings, assessee did not produce books of account. The A.O. estimated the sales of Rs.11.85 lacs and by applying GP @ 3.5%, he made addition of Rs.30,756/- to the declared loss. Against this addition, assessee preferred an appeal before the appellate Assistant Commissioner (AAC). The AAC went on to examine as to how the assessee who was merely a student prior to start of business managed to secure finance for purchase of goods and sale of which resulted in such a huge turnover. He commented that source of investment in the purchase of goods has not been enquired into and various other aspects such as registration under the Shops & Establishments Act,. Sales Tax Act as to whether purchase and sales are on cash or credit basis and if on cash basis, the source of money invested in the purchase and if on credit basis, why the books of account were not maintained and if maintained, why they were not produced. Under these facts, it was held by Hon'ble Delhi High Court that this action of Ld. A.R. is of taxability of income for a new source of income and it has not been considered by the A.O. and so, the jurisdiction to decide with the same in appropriate case may be dealt with u/s147/148 of the Income tax Act, 1961 or under Section 263 of the Income tax Act, 1961 if requisite conditions are fulfilled. It was also held that in the presence of such specific provision, a similar power is not available to the 1st appellate authority. In the present case, no new source of income is 22 I.T.A.No.2262,2505/Ahd/2011 being examined by Ld. CIT(A) as in that case, when he wanted to examine the source of finance for making purchases, which was never subject matter before the A.O. Hence, this judgement of Hon'ble Delhi High Court is not applicable in the facts of the present case. 3.4.6 Now, we examine the judgement of Hon'ble Apex Court cited by Ld. D.R. having been rendered in the case of Nirbheyram Daluram (supra). In that case, it was held by the Hon'ble Apex Court that the Hon'ble High Court was in error in holding that the appellate powers conferred to the AAC u/s 251 was confined to the matter which had been considered by the ITO and the AAC exceeded his jurisdiction in making the addition of Rs.2.30 lacs on the basis of other ten items of hundies which had not been explained by the assessee. The facts of that case are that in the reassessment proceeding, the A.O. made an addition of Rs.2.45 lacs referable to ostensible transactions in hundi loans shown by the assessee and in the appellate proceedings, the AAC not only sustained the addition of Rs.2.45 lacs but he also took notice of 10 other items of ostensible hundi loans amounting to Rs.2.30 lacs. Hence, admittedly, in that case, the other 10 items of hundi loans wee never examined by the A.O. and therefore, it was held by the Hon'ble Apex Court that the same was within the powers of AAC u/s 251. In the present case also, the A.O. has assessed the income of the assessee from paper Manufacturing and although, he did not make any addition in respect of GP and low yield, the income form paper manufacturing was very much assessed by him and various disallowances were also made by him such as addition on account of excess stock, unexplained sundry creditors, adjustment u/s 145A of Income tax Act, 1961, disallowance of claim of expenses against liability written back and disallowance of expense claimed on account of 23 I.T.A.No.2262,2505/Ahd/2011 social forestry purposes etc. Therefore, in our considered opinion, it was well within the powers of Ld. CIT(A) to examine the issue of low GP and low yield. Therefore, it cannot be accepted that this was not within the powers of Ld. CIT(A). Hence, this ground of the assessee being ground No.1.0 is rejected by respectfully following this judgment of Hon'ble Apex Court. The tribunal order cited by the Ld. D.R. having been rendered in the case of M/s. Vardhman (supra) also supports the case of the revenue in which judgement of the Hon'ble Delhi High Court rendered in the case of CIT Vs Sardarilal & Co. (supra) was duly considered by the Tribunal. Therefore, this ground of the assessee is rejected.
3.5 Regarding ground No.1.1 i.e. the merit of addition made by Ld . CIT(A) by rejecting the books by invoking Section 145(3), various submissions were made by the Ld. A.R. These submissions including rejoinder about the submission of Ld. D.R. were submitted in writing by the Ld. A.R. on 04.05.2012 and the same are reproduced here as under:
"IN RELATION TO GROUND NO.1.1 - ENHANCEMENT OF INCOME BY RS.44,95.37.000 ASSESSEE'S APPEAL - ITA NO.2262 / Ahd-2011 ASSESSMENT YEAR 2008-09 The ground under appeal arises from CIT(A)'s order dtd.08.07.2011 and the relevant observations / findings etc starts from Para 15 at Page 31 and ends at Page 44(Second Para).
In the hearing before the Hon'ble Tribunal on 27.04.2012 assessee's counsel had made detailed submissions to substantiate for allowing relief which was objected by Ld.Sr.DR in the submissions made at the time of hearing. The submissions made by Ld.Sr.DR stands included in the written submissions (WS) filed and the Hon'ble Tribunal agreed to assessee's counsel prayer for filing a rejoinder to the points made by Ld.Sr.DR. It is in this background that this note has been made and before making further submissions the following needs to be highlighted:-
1. CIT(A)'s relevant paras which deals with this issue have been typed below in this font 24 I.T.A.No.2262,2505/Ahd/2011
2. Assessee's observations / comments / submissions have been given after each observations / findings of CIT(A) in this font. Rejoinder to the Ld.Sr.DR points has been covered at the appropriate place since this mainly arises from contents ofCIT(A) 's order.
(1) On going through the case records of the appellant company during the appellate proceedings it was noticed that there was fall in gross profit during the year, for which no proper explanation [At this stage no explanation was asked since the first letter was issued on 11.03.2011 which was duly replied explaining all the points on which explanation was asked] was furnished by the appellant company. In view of above, vide letter dated 11.03.2011 (This was the first letter received as mentioned earlier) the appellant was requested to furnish following various details.
1. In respect of all the three units [Be read as 2 manufacturing Units with one being at Songadh which is about 90 kins from the Office of CIT(A), Surat and the other is at Rayagada which is overnight journey from Bhubaneshwar and in the interior ofOrissa] you are requested to furnish year wise yield and wastage showing consumption of raw material in quantity and finished goods produced in quantity. This information should be given in chart from the last five years in respect of each unit.
2. You are requested to furnish total number of units of electricity consumed. You should also indicate total quantity of raw material processed and total quantity of finished goods produced for the last three years in respect of the three units.
UNIT : JKPM
Asstt Year Raw Material Consumed Finished goods Yield
Paper & Board
Bamboo Hardwood Pulp& Total production
Others
2004-05 Qty/MT QTY/MT Qty/MT Qty/MT Qty/MT %
78693 337326 653 416672 109838 26.40
2005-06 81596 320888 61 402545 123683 30.73
2006-07 60045 233365 - 293410 112803 38.45
2007-08 77255 239325 - 316580 122240 38.61
25 I.T.A.No.2262,2505/Ahd/2011
2008-09 100135 295282 12 395429 121363 30.69
[In the order, adverse view has been taken for the so called fall in yield by 7.92% i.e. from 38.61% to 30.69%. The subsequent paragraphs would show that in fact the yield in this year is better than last year and CIT(A) has ignored the facts of the case] Looking to the decline in yield of JKPM Unit, (In fact there is no decline and there is an improvement by 0.42% as would be seen in following paras) The appellant was asked to explain the reasons for decline. In response to above query, a letter dated 23.06.2011 was filed which is reproduced hereafter-Further to the discussion we had with you on last date of hearing, information / documents asked are being submitted as under:-
1. Chart(s) giving figures of Raw Materials consumed, Finished Goods Produced & Yield in respect of each of our unit named Central Pulp Mills (CPM) and JK Paper Mills (JKPM) for the relevant years (Year wise & Month wise) is enclosed (Annex A-1 & B-1).
In these Chart(s) it would be observed that our CPM unit, there is no decline in Yield. However, in JKPM unit, the yield for Asstt. Year 2008- 09 is lower than yield for Asstt. Year 2007-08. The reasons for decline in yield are broadly due to following:-
(i) More Moisture in the Bamboo which is one of the Raw Material for production of Fiber through which paper of different quality are being produced.
(ii) More bark in the Bamboo which has no use while making fiber for paper product.
(iii) Thin material which did not produce any fiber as the same has been lost during the process of cooking & bleaching.
(iv) Higher Yard which has been used first while making fiber for paper product. Since, last year material has been used first, the quality of material reduces due to old one which has direct impact on production of fiber.
However, it would be observed that inspite of low yield in current assessment year in JKPM unit (Reasons given above), the GP Ratio (Annex.FI) continues to be above 35% (Industry Norms) in all the years.
2. Details of Electricity consumed, Raw Material consumed and Finished Goods production for relevant years in respect of CPM & JKPM is enclosed (Annex.C-1). Copy of electricity bill (Sample) in respect of JKPM & CPM is enclosed as (Annex.D-1 & Annex.E-1).
26 I.T.A.No.2262,2505/Ahd/20113. Gross Profit Ratio for the relevant years in respect of CPM & JKPM is enclosed (Annex.F). Reasons for decline in G.P ratio as compared to last year which is given hereunder:-
(i) Price of Hardwood and the Bamboo has been increased which are major raw materials for production of paper.
(ii) Pulp price also increased due to shut down of some pulp mills across the world and suddenly increase in the demand of pulp.
(iii) Increase in other Direct Cost is also one of the reasons for decrease in G.P Ratio.
As per the Annex.A-1 enclosed with the above letter dated 23.06.2011, the appellant has given a chart in respect raw material consumed in respect of JKPM unit showing there in raw material consumed, finished goods paper and board production and yield. The said chart is reproduced below:
Asstt Year Raw Material Consumed Finished goods Yield Paper & Board Bamboo Hardwood Pulp& Others Total production 2004-05 Qty/MT QTY/MT Qty/MT Qty/MT Qty/MT % 78693 337326 653 416672 109838 26.40 2005-06 81596 320888 61 402545 123683 30.73 2006-07 60045 233365 - 293410 112803 38.45 2007-08 77255 239325 - 316580 122240 38.61 2008-09 100135 295282 12 395429 121363 30.69 [Admittedly the figures in the above chart were given by the appellant as Annex.A-1 attached to letter dtd.23.6.2011 and do form part of the accounts signed by the Statutory Auditors but CIT(A) ignored the fact that Asstt Year 2008-09 figures of 100135 MT being gross weight (With Moisture) of Bamboo is not comparable with 77255MT since this figure is not Net basis (Without Moisture). This aspect stands duly explained in the Auditors Certificate (dt.30.06.2011)also which has been referred by CIT(A) in the subsequent Par as. In view of this the above referred chart (Yield column excluded) has to be read as under:-27 I.T.A.No.2262,2505/Ahd/2011
Asstt Year Gross /Net Raw Material Consumed Finished goods Paper & Board Bamboo Hardwoo d Pulp& Total production Others 2004-05 Qty/MT Qty/MT QTY/MT Qty/MT Qty/MT Qty/MT MT (Gross) 78693 337326 653 416672 109838 2005-06 MT (Gross) 81596 320888 61 402545 123683 2006-07 ADMT(Net) 60045 233365 - 293410 112803 2007-08 ADMT(Net) 77255 239325 - 316580 122240 2008-09 MT(Gross) 100135 295282 12 395429 121363 At this stage it is important to highlight some of the important points which are as under:-
1. The term ADMT (Air Dried Metric Ton) is used worldwide for material balance and accounting purpose. This is to bring uniformity in material management system. Raw-material (With moistures) is called on Gross Basis Reporting raw-material consumption figures in the Accounts could be either on ADMT or on Gross. The appellant has been following since last two years ADMT basis which was adopted while reporting the figures of its CPM unit. The respective units of the appellant company reports raw-material consumption figures to HO for the purposes of consolidation both in ADMT / Gross. As mentioned earlier the figures of CPM unit picked-up for consolidation were the ones which were on ADMT basis but through oversight / mistake while picking-up figures of JKPM unit Gross figures were picked-up instead of ADMT figures and the consolidated figure for the Company as a whole reported in the Annual Accounts (Tax Accounts for April 07 - March 08) was total of two figures which were on different basis. This clearly shows that there was a genuine mistake in picking up JKPM's Gross figures instead of ADMT figures.
2. The raw-material (Wood / Bamboo) which are received in the appellants manufacturing units has large variation in moisture ranging from 10% to 45% under the and Indian conditions the minimum moisture in such material is around 10%. Therefore, all the wood & bamboo procured is tested for moisture level by drawing samples (5-7 logs from 28 I.T.A.No.2262,2505/Ahd/2011 each Truck) and sent to lab for moisture analysis. In Lab the sample pieces are subject to drying in a forced circulation oven till it is completely dry. The difference in fresh weight and dry weight is the moisture in the wood / bamboo.
3. Air dry equivalent weight of each truck / consignment received in yard is converted based on the moisture report received from the Lab. i.e. if the Lab report record moisture level of 35% then for every 100 kgs of wood / bamboo received the ADMT weight is recorded as 75kgs after retaining 10% moisture level. Similarly if the Lab report records moisture level of 25% then for every 100 kgs of wood / bamboo received the ADMT weight is recorded as 85kgs. This is to reiterate that every consignment is subject to moisture analysis. This is similar to Milk purchase where milk is received based of fat content / richness of milk and this is measured with a simple instrument called lactometer.
Lactometer is dipped in milk and the float level gives the fat content. However, since the appellants raw-material is wood/bamboo it has to undergo moisture analysis in appellants own lab since large quantities of such material are received on continuous basis.
(4) As per Annex B-1 the appellant company has given month wise consumption of bamboo of 100135 MT tones.
[Monthwise figures was computed / apportioned on the basis of yearly yield. Further, Since addition has been made comparing annual yield of 2 years, monthwise figures not reproduced here] (5) As per Annex F the appellant has given gross profit ratio of JKPM unit for the last three years as under:-
SN Particulars Assessment Year
2006-07 2007-08 2008-09
A. Sale Lac/Rs. Lac/Rs. Lac/Rs.
56987.96 65604.25 66554.94
B. 1. Other Direct Expenses (299.80) 464.06 62.72
2. 33399.69 39377.32 40697.28
Stock Variation Manufacturing Expenses
Total ( 1 to 2) 33099.89 39841.38 40760.00
C. Gross Profit (A-B) 23888.07 25762.87 25794.94
D. Gross Profit Ratio (C/A*100) 41.92% 39.27% 38.76%
29 I.T.A.No.2262,2505/Ahd/2011
[CPM Unit figures of GP Ratio submitted to CIT(A) are 39.20% for Asstt Year 2006-07, 37.44%forAsstt Year 2007-08 and 34.67% of Asstt Year 2008-09 though are lower than JKPM GP Ratio have been accepted by CIT(A) in his Order. The CPM Unit GP Ratio figures were submitted vide Annex. F-l of letter dtd.23.06.2011 and the relevant portion is as under:-
SN Particulars Assessment Year
2006-07 2007-08 2008-09
D. Gross Profit Ratio (C/A *100) Lac/Rs. Lac/Rs. Lac/Rs.
39.20% 37.44% 34.67%
6) During the course of hearing by order sheet entry dated 23.06.2011
appellant company was asked to show cause
[This is the first show cause which was issued at the time of hearing on 26.3.2011.] why yield in respect of JKPM not enhanced by 8% (38.61% - 30.69%) resulting in addition of about Rs.139 crore. The appellant company was asked to file submission by 28.06.2011.
[Though only 2 working days were allowed, 25th & 26"' June 2011 being holidays and inspite of appellants factories being in remote areas, proper compliance was made at the time of next hearing as would be evident from the subsequent paras] Noting of order sheet is reproduced below:
"Shri Vinit Marwaha is present. Please explain why yield in respect of JKPM be not enhanced by 8% resulting in addition of about Rs.139 crore".
(7) On 29/06/2011 the appellant company filed a letter dated as 28/06/2011 which is reproduced below:-
1.1 Raw Material (Both Bamboo and Hard wood) is purchased by us from various sources on Gross basis (i.e. including Moisture). Moisture percentage in Raw-Material varies depending upon age of the plant, season and gap between the harvest and supply. However, for determining the plant efficiency all such materials are converted into a 30 I.T.A.No.2262,2505/Ahd/2011 common determinant called ADMT (After Dry Metric Ton) quantity. By this process moisture of all suppliers are reduced to 10% level. 1.2 The quantities of Raw Materials (Hardwood and Bamboo) are measured on Gross basis which includes Moisture and when measured on Net basis, it excludes moisture.
1.3 The Bamboo and Hardwood contain moisture and dust to the extent of around 35%. Before using the same in the manufacturing process, it is required to be reduced to the level of around 10%.
Therefore, the weight in Gross basis is always higher than weight after Dry.
1.4 With our letter dated 23.06.2011, a chart was submitted giving figures of Raw Materials consumed in respect of our unit named JK Paper Mills (JKPM) for the Asstt. Year 2008-09 (Year wise & Month wise) which was measured on Gross basis (M.T) whereas for immediately preceding year i.e. in Assessment Year 2007-08, the same was measured and submitted on ADMT basis i.e Net basis.
[This is a factual observation which has been ignored by CIT(A) in his order] 1.5 If we recompute, the yield of Asstt. Year 2008-09 on ADMT basis, it would be observed that yield was 39.03% as compared to 38.61% of immediately preceding Asstt. Year i.e Asstt. Year 2007-08 . [This is also a factual observation which has been ignored by CIT(A) in his order] 1.6 On the basis of above, we are enclosing a chart showing calculation of yearly and month-wise yield (Annex A-1 & Annex. A-2). [This statement clearly records "The month-wise consumption of raw material, production of finished goods and yield has been computed / apportioned on the basis of yearly yield". In view of this note, comparison of any yield percentage for any purpose is not warranted and in any case the actual yield gets disclosed in the annual yield which stood at 39.03% in the year under appeal as compared to 38.61% in the immediately preceding year] Along with the said letter the appellant has filed revised statement of unit wise raw material consumed, finished goods produced and yield which is reproduced below:-
31 I.T.A.No.2262,2505/Ahd/2011Asstt Year Measureme Raw Material Consumed Finished goods Yield nt of qty of Paper & Board raw material Bamboo Hardwood Pulp& Total production Others 2004-05 MT (Gross) Qty/MT QTY/MT Qty/MT Qty/MT Qty/MT % 78689 337316 653 416658 109838 26.40 2005-06 MT (Gross) 81584 320865 61 402510 123683 30.73 2006-07 ADMT(Net) 60045 233365 239410 112803 38.45 2007-08 ADMT(Net) 77255 239325 - 316580 122240 38.61 2008-09 ADMT(Net) 87218 223714 12 310944 121363 39.03 As per Annex.A2 enclosed with the said letter appellant filed revised month wise yield of raw material consumed, production of finished goods, yield etc. (10) On comparing the month wise yield of raw material consumed and production it is seen that appellant has filed 2 different figure in respect of consumption of bamboo which is compared as under:-
Raw Material As Per Annex. B-1 As Per Annex. A- Difference Percentage of Bamboo vide letter dated 1 vide letter dated difference shown 23.06.2011 28.06.2011 in annex. Filed 28.06.2011 April 8964 6863 -2101 -23.44 May 8357 6331 -2026 -24.24 June 8189 7546 -643 -07.85 July 8212 6204 -2008 -24.45 August 7985 7004 -981 -12.34 Seotember 8545 8342 -203 -02.37 October 8184 7879 -305 -03.73 November 8754 6612 -2142 -24.47 December 8711 8875 + 164 +08.88 January 8017 8052 +35 +00.44 February 8259 4558 -3701 -44.81 32 I.T.A.No.2262,2505/Ahd/2011 March 7958 8952 +994 +12.49 Total for the year 100135 87218 12917 -12.90 [In view of the position explained while dealing with Point No.7(Under S.No.1.6 previous Page no further comments are being advanced on the data appearing in the last 2 columns of above chart] [Ld.Sr.DR at the time of making submissions before the Hon'ble Bench wrongly understood that the figures in the last column of the above chart represents yield or for that matter the moisture content in the raw-
material. This is to highlight that the figures appearing in column 2 & 3 in the above chart represents the raw-material consumption (Month wise) which before CIT(A) was highlighted that this is on a proportionate and that the annual consumption and finished goods production have been proportioned on month wise basis and the same was duly mentioned in the Chart dtd.28.06.2011. Besides the fact that Ld.Sr.DR was wrong in indicating that the figures are of yield / moisture level there is no justification for drawing any adverse inference in view of the submissions made above.] On comparing the above figure, it is seen that the figure of consumption filed with letter dates 23.06.2011 the total consumption of bamboo is shown at Rs. 100135 MT which tallies with the figures given by the statutory auditor in the audit report. Figures of consumption as given in the audit report and vide letter dated 2:3.06.2011 and 28.06.2011 differs as shown in the following chart:-
Asstt Year As per letter dtd.23.06.2011 As per letter Consumption as dtd.28. 06.2011 per Audit Report Unit-CPM Unit- Total Unit- Unit- Total JKPM CPM JKPM 2004-05 108574 78693 187267 108574 78689 187263 Not available 2005-06 95650 81596 177246 95650 81584 177234 Not available 2006-07 84778 60045 144823 84778 60045 144823 L Not available 2007-08 97025 77255 174280 97025 77255 174280 174280 2008-09 95518 100135 195656 95518 87218 182736 195653 33 I.T.A.No.2262,2505/Ahd/2011 [The difference in change of the figures from 100135 MT to 87218 MT is bound to be there since the former is Gross MT while later is Net MT; This aspect has been earlier clarified and would also be dealt in the subsequent paras] (11) During the course of hearing at the request of Shri Vinit Marwaha a telephonic conversation with Shri Vishwajit Deb, GM of JKPM in the presence of Shri Vinit Marwaha was held. The relevant conversation was written in the order sheet which was confirmed and signed by Shri Vinit Marwaha is reproduced below:-
"Telephonic conversation with Sh.Bishwajit Deb, GM, JKPM in the presence of Shri Vinit Marwaha on 29.06.11.
Shri Bishwajeet Deb explained that when a truck with bamboo comes, gross weight is taken. There after 4-5 bamboos are picked up on sample basis and test is carried out to ascertain the moisture content. This test takes two days. What the result comes, the gross weight is converted to net weight on the basis of percentage of moisture content in the sample test.
The payment to supplier is made on gross weight basis".
[This is factually correct except that it was mentioned that the payment to suppliers is both on gross / net weight basis depending up on terms and conditions agreed with the seller] (12) After going through the various details, submissions made by the appellant vide order sheet entry dated 29.06.2011 the appellant was show caused as under:-
"29.6.2011 : A comparison, of audited figures of R.M. consumption for this year and immediately preceding year indicates that the contention regarding Gross Weight and net weight is an afterthought [It is not an afterthought since the explanation advanced has been duly certified by the Auditors in their Certificate dtd.30.06.2011 submitted along with letter dt.04.07.2011] .
The auditors (G-23) have recognized the figure of consumption at 100135 MT [Yes, it is a fact but this figures is on gross basis as duly certified by the Auditors] in audited accounts and not at 87218MT [This figure is on Net basis as duly certified by the Auditors] as shown in chart dated 28.06.2011 in respect of JKPM unit. If you have to say anything in this regard please say so by 4.7.2011. [Though there were only three working days but still in spite of the short time allowed the appellant said whatever was to be said to support that 34 I.T.A.No.2262,2505/Ahd/2011 the yield in the year under appeal is higher than the yield in the immediately preceding year] The lower yield have affected the overall GP [The yield is not lower and therefore, the observation that it has effected GP is not correct].
It is seen that the average GP. Of Co of last 5 years is 42.39% as against 37.43% [This comparison i.e. current years GP ratio with the average of last 5 years average is not correct. In such cases the variation would keep on changing once the number of years change. This is to reiterate that the appellants case the GP ratio of JKPM Unit in A.Y. 2008-09 was as high as 38.76% (Was 39.27% in immediately preceding year) and even higher than its CPM unit which was 34.67% and has been accepted by CIT(A)] of this year. You may like to give reasons with evidences for this shortfall in G.P. If your are giving any auditor certificate [Authors Certificate was submitted with all the primary evidence / records] it must be supported by primary evidence which will be seen by the undersigned. Give your submission by 4.7.2011".
On 04.07.2011, the appellant filed auditor's certificate regarding raw material consumption:-
TO WHOM SO EVER IT MAY CONCERN We, Lodha & Co., Chartered Accountants, the Statutory Auditors of JK Paper Mills, Rayagada (A Unit of JK Paper Ltd) have been asked by the Company to comment / certify on Note No. 31 appearing under Schedule 20 of the Signed Accounts dtd.11.09.2008 for Financial Year 2007-08 (Being the previous year relevant to the Assessment Year 2008-09 which also shows figures of the immediately preceding year i.e. Financial Year 2006-07 (Being the previous year relevant to the Assessment Year 2007-
08) which are as under:-
The particulars of raw-material consumed reported in Note No.31 of Schedule 20 of Financial Year 2007-08 is a consolidated figure of Company's two units i.e. JK Paper Mills, Rayagada and Central Pulp Mills, Songadh and the particulars so reported as under:-35 I.T.A.No.2262,2505/Ahd/2011
Particulars of Raw Materials consumed:
2007-08 2006-07
Quantity Amount Quantity Amount
(Tonnes) Rs.in Lac (Tonnes) Rs.in Lac
1 Bamboo 195653 6533.50 174280 6080.89
2 Hardwood 339085 10862.31 282510 11774.56
3 Pulp & Others 28924 4740.06 332 170.68
*22135.87 *18026.13
* Includes Rs.496.93 Lac in pulp cost transferred to Packaging Board (Previous year -Rs.62.63 Lac) and Rs.2557.52 Lac trial run consumption (Previous year Rs.60.74 lac) The Bamboo consumption figures reported in Financial Year 2007-08 above totaling to 195653 Tons includes 100135 Tons of JK Paper Mills, Rayagada is on gross weight basis (Including Moisture) and incase reporting would have been on Net Weight basis (Excluding Moisture) as per the records available and explanations made the figure would have been 87218 ADMT.
The Hardwood consumption figures reported in Financial Year 2007-08 above totaling to 339085 Tons includes 295282 Tons of JK Paper Mills, Rayagada is on gross weight basis (Including Moisture) and incase reporting would have been on Net Weight basis (Excluding Moisture) as per the records available and explanations made the figure would have been 223714 ADMT.
Shri Vinit Marwaha, Co representative argued that in view of auditor's Certificate regarding gross weight and net weight, the issue regarding low yield of JKPM unit may be treated as explained. However, auditor's Certificate is of no help in the matter [Auditors Certificate is very relevant since it clearly certifies that 100135 tons of Bamboo consumption is on gross weight basis and further certifies that incase reporting would have been on Net basis, as per the records available and explanations made the figure would have been 87128 ADMT i.e. Net after excluding moisture weight This certificate is relevant for comparing like to like figures for the year under appeal and immediately preceding year. It would give absured results if last year's yield figures are compared with the figures of year under appeal by taking last year's consumption figure which are on Net basis and this year's figures which are on gross basis. If comparison is made on net to net basis, which is the correct method, the yield in A.Y.2008-09 is better than immediately preceding year's yield] Auditor says in his Certificate that reporting of consumption of bamboo in F.Y.2006-07 is on net basis, but the fact is to the contrary (it is not contrary)].36 I.T.A.No.2262,2505/Ahd/2011
In F.Y. 2007-08, the gross bamboo consumption of 195653 MT (100135 of JKPM + 955189 CPM) is shown by auditors on gross weight basis and not the net weight.
[Yes, this is correct since the figure of 100135 MT is gross weight]. Thus, corresponding figure for A.Y. 2006-07 of 174280 MT has to be necessarily of gross weight and not net weight.
(Not necessary and actually also it is not. The figure of 195653 MT includes 100135 MT which is on gross basis and the figure of 174280 MT includes JKPM Unit 77255 MT which is on Net basis). Secondly, the auditors have relied on the explanation given by Management that the figure of Gross weight of Bamboo for JKPM Unit is 100135 MT and net weight is 87218 MT (Para 2 of auditor's certificate). They do not mention to have fully checked the primary records. [The certificate has been given by the statutory auditors and its contents have to be accepted unless some mistakes are pointed out in the impugned order which has not been found. Auditors have their own basis / records to certify correctness of the figures and the figures so reported / certified are as per the records of the appellant.] [Admittedly, the figures reported in the Annual Accounts warrants revision in several instances such as mistakes in the figure earlier reported and it is in this context that that appreciating this possibility to happen the Institute of Chartered Accountants of India have published "Guidance Note on Revision of Audit Report" and accordingly, the statutory auditors had given the Certificate which inter-alia clearly certifies the figures of raw-material consumption on ADMT and Gross basis. Neither CIT(A) nor Ld.DR has pointed out any mistake in the Auditors Certificate. The Institute of Chartered Accountants in their above referred Guidance Note have clearly highlighted that the Members are expected to exercise care and caution while giving revised report / certificates.] [This is to reiterate that reporting of raw-material consumption figures in the Annual Accounts has no impact on the profit declared in the Profit & Loss Account and therefore, there is no justification in increasing the said profit merely on the basis of raw-material consumption figures reported in Schedule attached to the Annual Accounts. Further, the Auditors Certificate has to be accepted unless its contents are proved to be wrong which is neither the case of the matter under appeal nor there is any observation /finding both by CIT(A) and Sr.DR.] (13) On 29.6.2011, it was required of appellant, to bring all primary records if auditor's Certificate is being furnished. The appellant was asked to show the primary records of gross and net weight. The appellant 37 I.T.A.No.2262,2505/Ahd/2011 produced a register for August 2007, where gross and net weight is entered. However, it is seen that the record is not maintained on real time basis [CIT(A) has not correctly appreciated the facts and whatever might be the basis,, the fact is that the records mentions the facts].
For example, in respect of Truck loads of raw-materials arrived on 31.08.2007, (about 100 Trucks), the Moisture content report is entered on the date of 31.08.2007 itself whereas the moisture testing report is available only after 48 hrs. Thus, it is clear that the entries are i being back dated . [It is totally incorrect to make this observation. It has not been appreciated that the records clearly shows the date on which raw-material arrives in the factory and once it is so recorded it is against same date that the information of the Testing Report is plotted even though the same is available after 48 hours of the said material coming into the factory premises. It is like a job card which necessarily records all the factual aspects in the same sheet irrespective of the fact that the job is carried out either on the same day of days after the job to be done was recorded in the said card. Therefore, it is incorrect to say that there was any back date entries which was clearly highlighted / clarified in the personal hearing before CIT(A) by the operating persons], The appellant was asked to produce the records for Feb and March of 2007. However, the appellant did not produce it. The appellant also could not explain whether gross and net weight is entered in stock register or it remains only on stray working sheet.
[Not only the relevant records were produced but the appellant offered that the Department may depute Sr. Officers to understand the system, procedures, voluminous / detailed records being maintained by the appellant and this was offer in writing the contents on which is attached
-- Annexed. 'A'. CIT(A) did not consider it appropriate to take this route for checking neither the offer so made has been recorded in the impugned order] (14) In view of the above, it is clear that appellant had come up with the hypothesis of Gross and net weight only to cover up the low yield. [This is incorrect since there was no low yield as has been explained above] Considering the above discussion, it is clear that when the appellant was asked to explain reasons for fall in GP in JKPM Unit, [Right from the first letter of 2.6.2011 it was submitted that in JKPM Unit the GP ratio was as high as 38.76% (CPM Unit at 34.63%) as compared 38 I.T.A.No.2262,2505/Ahd/2011 to 39.29% in the immediately preceding year] the explanation was general in nature [Yes, was in general nature and what was listed are the reasons which generally lead to lower GP Ratio but in the case of JKPM Unit GP Ratio being almost same as last year there was no reason to have a look at the actual reasons] such as price of raw material has increased and increase in all direct cost. However, in spite of specific requirement to produce quantity accounts, the appellant did not produce any quantity record of consumption of raw material.
[All the records were produced] in the circumstances, as stated in earlier para, there being substantial reduction in the yield, being yield of 30.69% [As submitted it was actually 39.03 %] for the current year as compared to 38.61% of A.Y. 2007-08 and 38.45% for A.Y.2006-07, it was proposed to estimate the production and find out the correct income of the appellant on the basis of the yield rate of earlier years for which show cause notice was issued to appellant on 23.06.2011. Thereafter, the appellant has given submissions dated 28th June 2011 claiming that raw material being both bamboo and hardwood is purchased on gross basis which includes moisture around 35% and after purchase, all such materials are converted into ADMT (After dry metric ton) wherein moisture is reduced to 10% level and such material is used in manufacturing process. It was further explained that in A.Y.2007-08 in the Audit Report, the net figure of consumption of bamboo i.e. ADMT was reflected whereas in the Audit Report for the present year the gross figure was reflected which has resulted into reduction in yield ratio given in submission dated 23.06.2011. It was also explained that if moisture is reduced to 10%, then the yield on ADMT basis works out to 39.03% for this year as compared to 38.61%. In support this in the appellant's submission; they have also produced monthly consumption on gross basis and ADMT basis. The comparative figures so given are reproduced in para - 10 above. The figure itself shows that the adjustment upto 10% of moisture is never reflected correctly in the figure arrived at for ADMT. There are wide variations. It can be seen from the chart in para 10 above that the variation is ranging from (+) 12.49% to (-) 44.81% for which there is no explanation. It will be seen that in the month of April the reduction is 23.44%, whereas in September it is 2.27%. In February it is 44.81% and in March there is surplus of 12.49%. Thus, the logic of adjustment of moisture up to 10% itself is incorrect. Even appellant has not explained with supporting evidence to justify its claim of gross basis and ADMT consumption given into two different letter referred supra.
39 I.T.A.No.2262,2505/Ahd/2011It is also noticed that in the letter dated 23rd June, 2011 the appellant has firstly accepted [This acceptance has to be ignored since on looking into the voluminous record it was noticed that lower yield in JKPM Unit was appearing on wrong comparison of 2 years figures i.e. for A.Y.2007-08 figures which were on Net basis was being compared with the A. Y.2008-09 figures which are on gross basis. Once this anomaly was noted /pointed out it is necessary to make a comparison of the correct figures rather than continuing to insist on comparison of the two years figures which are not like to like] that there was decline in yield due to the reasons stated as under:- - ' i. More moisture in the Bamboo which is one of the raw material for production of fiber through which paper of different quality are produced. ii. More bark in bamboo which has no use while making fiber for paper product, iii. Thin material which did not produce any fiber as the same has been lost during the process of cooking & bleaching.
iv. Higher yard which has been used first while making fiber for paper product. Since, last year material has been used first, the quality of material product reduces due to old one which has direct impact on production fiber.
All the reasons given by appellant are general in nature [Not relevant since the yield is higher] and without any supporting evidences including internal and external records of appellant company. {Contention that the yield is higher is not only supported by records but have been worked out / certified by the statutory auditors] Along with the said letter dated 23rd June 2011, the appellant has given details of raw material consumption and yield which also accepts the reduction in yield. However, it was claimed that the GP of the Unit does not vary. It was only on getting the notice for adopting the yield ratio of 38.61 as per last year, the appellant has now come up with the story [It is not a story but facts which have been listed showing that actual yield in the year under appeal was 39.03%] that for determining the plant efficiency the material are to be converted into common determinant which is called by them as ADMT and for that purpose they have claimed adjustments upto 10% in moisture level from the gross value of quantum of material consumed. It is also claimed that the figure given by Auditors for the current year are on gross basis. Thus, this explanation is an after-thought and cannot be accepted, it being contradictory to the earlier explanation.
40 I.T.A.No.2262,2505/Ahd/2011[Needs to be accepted this being a fact that the yield is higher than last year] The appellant in its second letter dated 28th June 2011 has stated that yield, if adopted on ADMT basis, shows better yield though vide its letter of 5 days back it has categorically accepted that yield of JKPM unit has declined as referred supra.
[Appellant had placed the facts before CIT(A) alongwith supporting records / auditors certificate and irrespective of the days taken to clarify the same the facts have to be accepted] The explanation of appellant company in short span of 5 days has changed & contradicts itself and all the reasons & revised figures submitted for consumption & yield are without any supporting evidences. It is further observed that even in telephonic conversation with Shri Bishwajit Deb, DGM in presence of Shri Vinit Marwaha, it has been explained that when truck comes, gross weight of Bamboo is taken and after 4-5 bamboos are picked up sample basis and test is carried out to ascertain whereas in its reply dtd 28th June 2011, only one day before, it was explained that all the raw materials are converted into a common determinant by a process is also contradictory and suggest that a make believe misleading story [This observation is contrary from the facts emerging from the appellants records] has been developed by the appellant company to hide concealed yield as well as concealed income.
[In view of detailed submission this finding is incorrect] Further to that, even for a while if the adjustment on account of moisture is to be claimed by the assessee, the figure given for that purpose on monthly basis in submissions dated 28th June 2011 are not in consonance with the said explanation, which has been discussed above. Also, during the course of examination of primary records pertaining to Gross weight and net weight on 04.07.2011, it is observed that the appellant does not maintain such records on real time basis and vital entries are backdated.
[Stands already clarified / explained] This fatal lapse, including other defects mentioned above, cast a serious reflection on reliability of books of account maintained by the appellant in this regard.
Thus, on the one hand appellant has failed to explain the reduction in yield [There is no reduction and in fact the yield was higher as explained above] and GP 41 I.T.A.No.2262,2505/Ahd/2011 [This was almost the same as last year and higher than appellants CPM's Units which has been accepted in the impugned order] and on the other hand fatal defects have been noted in the books of accounts of appellant. [Not even a single defect has been noted since there is none] Reduction in yield has resulted into reduction in gross profit at 37.43% as against average gross profit of last five years being 42.39%. Considering the above position, coupled with the facts that quantity details are not produced for verification & no proper explanation regarding reduction in yield is submitted by appellant do not who true & fair picture of income and is therefore rejected u/s 145 of the Act. On careful consideration of all the details submitted by appellant from time to time, current year gross profit is estimated @ 42% (last 5 years average GP is 42.39%) as against 37.43% shown in books of account which will result into enhancement of income in case of appellant by Rs.44,95,37,000/-. Thus, appellant's income gets enhanced by a sum of Rs.44,95,37,000/-. To recapitulate, the crux of the matter is that appellant has shown lower yield by 8% [Yield is higher by 0,42%] as compared to last year in respect of JKPM unit. A detailed show cause was issued to appellant as to why Rs.139 crore be not added to its income on the ground of low yield. This show cause was given after the explanation rendered by the appellant in this regard was found unsubstantiated and the facts given by appellant were also not supported with books. However, it is to be noted that ultimately, lower yield goes to reduce the GP and suppress the real income. Therefore, a specific show cause was given as to why the GP of the Company be not enhanced by 5% to make it in line with Company's average GP for the last five years. The appellant again gave very general arguments in defence of low GP in this year. Having regard to the facts that there are vital defects in the books of appellant and also the appellant failed to furnish quantitative records of raw materials consumed, it is categorically held that books of account maintained by appellant do not give full and true picture of its income and, therefore, the same is being rejected by invoking the provisions of Sec. 145(3). [In view of detailed submissions made to each observation, the action of CIT(A) for rejecting Books of Account is totally unwarranted.] [At the time of hearing before the Hon'ble Bench Assessee's counsel had submitted that though there is no case for rejecting Books of Account by invoking Se.145 but Ld.CIT(A) has not been fair enough in comparing the yield for the 2 years i.e. for the year under appeal and for the immediately preceding year and then proceeding to compare the GP of year under appeal with that of the average of last 5 years GP. Adopting 42 I.T.A.No.2262,2505/Ahd/2011 any such basis is bound to give different / absurd results since the average GP ratio would be substantially different if instead of 5 years 10 years are adopted. With due respect it is submitted that Ld.Sr.DR grossly erred in submitting that adopting last 5 years average is the reasonable basis since it would factor ups and downs.] [At the time of hearing it was highlighted by the Assessee's counsel that in Sec.l43(3) Order for the Asstt Year 2009-10 which was passed after the impugned CIT(A) order dtd.08.07.2011 accepts that the figures of raw-material consumption reported by the Auditors in their Certificate are correct which further goes to establish that the figures of raw-material consumption pertaining to appellants JKPM unit for the previous year relevant to the Asstt Year 2008-09 are on Gross basis and for knowing its weight on ADMT basis reference needs to be made to the Auditors Certificate and once the correct figures are compared i.e. on ADMT basis there is no reduction in yield, the vary basis for enhancing the appellants income falls.] After rejection of books of account, GP is enhanced by 5% resulting into addition of Rs.44,95,37,000. Here, it is pertinent to note that originally a show cause was given for enhancing the income by Rs.139 crore. However, after considering the facts and circumstances of the case, a GP addition of Rs.44,95,37,000/- is being made after giving a specific show cause for GP addition and on finding that there is no force in appellant's arguments against GP addition. Thus, the proposed addition of Rs.139 crore has been restricted to Rs.449537000/-."
3.5.1 Similarly, Ld. D.R. has also furnished written submission on this aspect of the matter which are reproduced here in below:
"The issue of rejection of books of accounts and estimation of GP Rate:
1.11 This issue has been discussed by the C1T(A) in para 15(page 31) of his order. The CIT(A) found that in respect of CPM unit the yield in the current year was 36.71 % as compared to 38.41 % in the last year and 37.68 % in A.Y. 2006-07. He further found that in respect of JKPM unit the yield in the current year was 30.69 % as compared to 38.61 % in the last year and 38.45 % in A.Y. 2006-07. The CIT(A) further found that the assessee showed a G.P. Rate 37.43 % for the current year in his books of account whereas the average of last five years of G.F. rate is 42.39 %.
The assessee stated that there is fall in the yield because in the current year the yield was measured on gross basis (M.T.) whereas for the 43 I.T.A.No.2262,2505/Ahd/2011 immediately proceedings year i.e. A.Y. 2007-08 the same was measured and submitted on ADMT basis i.e. net basis and if this is considered than the current year yield would amount to 39.03 % on ADMT basis and hence there is no decrease. The assessee filed a certificate from the Chartered Accountant in this regard before the CIT(A) vide letter dated 04.07.2011.
1.12 The CIT(A) did not accept the above explanation for the following reasons (Please see the discussion from page 39 to page 44 of his order):-
1. The Auditor's certificate is of no help in the matter. Auditors say in his certificate that reporting of consumption of bamboo in F.Y. 2006-07 is on net basis, but the fact is to the contrary. In F.Y. 2007-08, the gross bamboo consumption of 195653 M.T. (100135 of JKPM + 955189 CPM) is shown by the auditor on gross weight basis and not on net basis. Thus the corresponding figure of A.Y. 2006-07 also 174280 M.T. has to be necessarily of gross weight and not net weight. Further, the auditor relied on the explanation given by management that the figure of gross weight of bamboo from JKPM is 100135 M.T. and net weight is 87218 M.T. (para 2 of the auditor's certificate). The auditors do not mention to fully check the primary records themselves (para 12 page 39 of the CIT(A) order). The CIT(A) had asked the assessee on 29.06.2011 to bring all primary records if auditor's certificate is being furnished as evidence. The appellant was asked to show the primary records of gross and net weight.
The appellant produced a register for August, 2007 where gross and net weight were entered. However, the record was not maintained on real time basis. For example, in respect of truck load of raw material arrived on 31.08.2007 (100 trucks), the moisture content report is of the date of 31.08.2007 itself whereas the moisture testing report is available only after 48 hours. Thus, it is clear that the entries are being back dated. The appellant was thereafter asked to produce the records for February and March, 2007. However, the appellant did not produce the same. The appellant could not explain whether gross and net weight were entered in stock register or it remained only on stray working sheet. The C1T(A) therefore stated that the hypothesis of gross and net weight has been given to cover up the low yield without giving any evidence.
2. The other explanation given for fall in G.P. is that the price of raw material and all direct cost have increased. However, inspite of specific requirement to produce quantity accounts, the appellant did not produce any quantity record of consumption of raw material para 14 page 40). In these circumstances, the assessee was unable to explain a substantial fall in the yield from 38.61 % in A.Y. 2007-08 and 38.45 % for A.Y. 2006-07 to 30.69 % in the current year for JKPM unit.
44 I.T.A.No.2262,2505/Ahd/20113. The appellant admitted on page 1 of the letter dated 28.06.2008 that raw material being bamboo and hard work was purchased on gross basis which including moisture around 35 % and after purchase, all such materials converted into ADMT (after dry M.T.) wherein moisture is reduced to 10 % level and such material used in manufacturing process. The C1T(A) stated in para 14 that in its support the assessee produce monthly consumption on gross basis and ADMT basis. This clearly shows that the adjustment upto 10 % of moisture is never reflected correctly in the figure arrived at for ADMT. There are vide variation. It can be seen from the chart in para 10 page 36 of the CIT(A) order that the variation is ranging from (+) 12.49 % to (-) 44.81 % for which no explanation has been given by the assessee. The CIT(A) further stated that in the month of April the reduction is 23.44 % whereas in September it is 2.27 %. In February it is 44.81 % and there is March surplus of 12.49 %. Thus, the logic of adjustment of moisture upto 10 % itself is incorrect. The appellant has failed to explain or justify its claim of gross basis and ADMT consumption with supporting evidence.
4. Vide letter dated 23.06.2011 (page 41 of CIT(A) order) the appellant had accepted that there was decline in the yield due to the following reasons:-
(i) More moisture in the bamboo which is one of the raw material.
(ii) More bark in bamboo which is of no use for making paper.
(iii) Thin material which did not produce any fiber is lost in the process.
(iv) Higher Yard which has been used first while making fiber for paper product. Since, last year material has been used first, the quality of material product reduces due to old one which has direct impact on production fiber.
The CIT(A), thereafter, stated that all the above reasons given by the appellant were general in nature and without supporting evidence including internal and external records of the appellant company. Along with the said letter 23.06.2011 the appellant has given details of raw material consumption and yield which also accepts the reduction in yield. However, it was claimed that the G.P. of unit does not vary. It was only after getting notice for making an addition by adopting the yield ratio of 38.61 % as per last year, the appellant has now come up with the story that for determining the plant efficiency the material are covered into common determinate which is called by them as ADMT and for that purpose they have claimed adjustments upto 10% in moisture level from the gross value of quantum of material consumed. It was stated by the assessee that the figures given by the auditor for the current year were gross. The CIT(A) stated that from the above discussion it is clear that 45 I.T.A.No.2262,2505/Ahd/2011 this explanation is only an afterthought explanation. The stand of the assessee has therefore changed from the letter dated 23.06.2011 to the stand taken in the letter dated 23.06.2011. The shift in stand has how been supported by the documentary supporting evidence as discussed above. The CIT(A) has stated on page 42 that the assessee company in a telephonic conversation has explained that when truck comes gross weight of bamboo is taken, afterwards 4-5 bamboos are picked up on sample basis and test is carried out to ascertain the moisture content and on such test basis net weight bamboo is considered. However, in the letter dated 28.06.2011, only one day before, it was explained that all raw material are converted into a common determinate (to 10% moisture) by a process and therefore the statement are contradictory.
5. The CIT(A) further stated in the last para of page 42 that during the course of examination of primary records pertaining to gross weight and net weight on 04.07.2011 it is observed that the appellant does not maintain such records on real time basis and vital entries are back dated as discussed above. This fatal lapse, including other defects mentioned above, cast a serious reflection on the reliability of books of accounts maintained by the appellant. The CIT(A) stated that the assessee has failed to explain the reduction in the yield as well as fall in G.F. rate. The above fatal defects of back dating the records show that the books of accounts cannot be relied upon. The G.P. rate is current year is 37.43 % as against the average gross profit rate of last five years being 42.39 %. In view of this reasons CIT(A) held that the books of accounts prepared and maintained by the appellant do not show true and fair picture of income and he therefore rejected the books of accounts u/s. 145. He, thereafter, adopted the G.P. rate of 42 % and made the addition of Rs. 44,95,37,0007-.
From the above it can be seen that the CIT(A) has rejected the books of accounts because of major defects of books of accounts and also failure in explaining the fall in the yield with supporting evidences. The assessee has also failed in explaining the fall in G.P. rate with supporting evidence. The legal position in respect of rejection of books of accounts and making the addition on account of low G.P. rate is supported by the following decisions of Supreme Court and Allahabad High Court- S.N. Namasivayam Chettiar [19601 38 ITR 579 (SO- In this case the Hon'ble Supreme Court stated as under: -
FACTS ' The appellant-assessee was a 'resident and ordinarily resident' in India and carried on extensive trade in Colombo in grains, fodder, gram and other food-stuffs for cattle and poultry. For the assessment year 1943-44, 46 I.T.A.No.2262,2505/Ahd/2011 the assessee showed a profit of 3.5 per cent. For the two previous assessment years the appellant's gross profits were 9 per cent and 8 per cent respectively. The ITO, by its order, rejected the accounts and estimated the gross profit by adding back certain amount to the returned income, which was confirmed by the AAC. On second appeal, the Tribunal after pointing out various defects, rejected the account books but accepted the appellant's turnover and computed the profits at 15 per cent on grains imported from India and 12% per cent on grains purchased in Ceylon. It held that correct profit for the year under assessment could not be deduced from the books produced by the appellant. The excess profits tax for the chargeable accounting periods was decided on the basis of the income-tax assessment for the year 1943-44. The reference application was rejected by the Tribunal as well as by the High Court. On appeal to the Supreme Court:
HELD The power to compute profits under the proviso to section 13 arises only where no method of accounting has been regularly employed by the assesses and where the method employed is such that the income, profits and gains cannot properly be deduced therefrom. It means that the method adopted by the assessee must prima facie prevail where it is regularly employed, though the ITO can resort to the proviso if the method is such that true profits cannot be correctly determined therefrom. In other words, even if the assessee has regularly employed a method of accounting it can be discarded under the proviso if the method does not show correct profits of the year.
In the instant case the Tribunal held that correct profits could not be deduced from the books produced by the assessee and therefore the proviso to section 13 of 1922 Act applied. The reasons it save were (1) that vouchers for several purchases made in Colombo had not been produced and for purchases no vouchers were forthcoming and without the vouchers, the entries in the account books could not be verified; (2) there was no Quantitative tally for the grains and for other materials purchased by the appellant, which were ground into powder, turned into fodder, packed in different sizes and then sold. It was not possible, according to the Tribunal, to accept the books of account, where the turnover was as large as about seventeen lakhs of rupees, without a quantitative tally; (3) a fairly big sum of money was alleged to have been paid towards purchasing of licenses for export from India; and Rs 19,000 worth of purchases were made in Titticorin when only a small sum of money in cash was shown in the assessee's account; (4) several outsiders' cheques had been entered in the accounts of the assessee without any 47 I.T.A.No.2262,2505/Ahd/2011 proof as to why those cheques were paid to the assessee; and (5) a fairly big sum of money had been invested in India in the purchase of property without money being received form Colombo. After giving this finding the Tribunal accepted the turnover as shown in the appellant's books. In making the computation of profits, the Tribunal took into consideration the following matters: that the export of food grains from India was prohibited except under a licence, that there was an acute shortage of cattle fodder in Ceylon and the appellant had to resort to dubious means in order to obtain grains, the during a substantial portion of the year of accounting there was no price control in Colombo, that as the appellant was a manufacturer of forage by mixing several kinds of grains and powdering them and sold them in packets of various weights, the appellant must have made higher profits than persons who deal in grain only. Keeping all this in view the Tribunal was of the opinion that the rate of 15 per cent adopted in regard to imported grains was not too high but in the case of local purchases it was, and therefore reduced the rate of profit in the latter case to 12 per cent. It was on this material that the Tribunal adopted the figure of profits estimated by the ITO and the order to support this opinion further, the Tribunal remarked that in certain cases which had come to its notice the rate of profits "went HU to 20 Dei-cent". In the instant case the keeping of a stock register was of great importance because that was a means of verifying the assessee's accounts by having a "quantitative tally". If, after taking into account all the materials including the want of a stock register, it was found that from the method of accounting the correct profits of the business were not deducible, the operation of the proviso to section 13 would be attracted. Even if the ITO accepted (lie assessee's method of accounting, was not bound by the figure of profits shown in the accounts. It was for the authorities to consider the material which was placed before them and, If, after taking it account in any case the absence of a stock register coupled with other materials they were of the opinion that correct profits and gains could not be deduced, then they would be justified in applying the proviso to section 13. Therefore, when the Tribunal applied the proviso to section 13 because of (lie various blemishes which were pointed out by the ITO and accepted by the Tribunal, it could not be said that there was any error in the order of the Tribunal justifying the interference by the Supreme Court under article 136.
The appeals were dismissed accordingly.
Note : The case was decided in favour of the revenue. (2) Chhabildas Tribhuvandas Shah [19661 59 ITR 733 (SO - In this case the Hon'ble Supreme Court stated as under:-48 I.T.A.No.2262,2505/Ahd/2011
FACTS The assessee filed a return showing an income of Rs. 78,350 for the assessment year 1954-55, The ITO in his assessment order, did not accept the trading accounts on the ground that the profits disclosed in comparison with the earlier years were too low and there were no day-to- day stock details for the purpose of verification and there was small withdrawals for personal expenditure in the partners' accounts, and accordingly made addition.
On appeal the AAC deleted the addition of Rs. 75,000, but as the closing stock of certain goods was under valued to the tune of Rs. 4,490, he only allowed a deduction of Rs. 70,510. On revenue's appeal, the Tribunal upheld the addition made in assessees income. On reference, the High Court upheld (fie order of the Tribunal.
On appeal to the Supreme Court: HELD Regarding the finding of the Appellate Tribunal that the income, profits and gains could not properly be deduced from the method of accounting employed by the assessee reasons given by the Tribunal was that the assessee was doing business in the main on wholesale basis and there, should have been no difficulty in tallying quantities in respect of major items of trading account. That certainly was a relevant consideration. In the absence of such a tally, the next reason given was that (lie fall in the margin was all the more difficult to explain in view of the fact that the assessee also had a quota of imports worth about Rs. 8,00,000 which would have given them a handsome margin of profit. That again was a relevant fact and it was well-known that imported goods fetch a very handsome margin of profit. Accordingly, there was material in support of the impugned finding of (lie Appellate Tribunal. In view of aforesaid, the instant appeal was dismissed and order of the High Court upholding the Tribunal's order was affirmed. Note: Decision was in favour of revenue.
£3] Awadhesh Pratap Singh Abdul Rehman & Bros. [19941 76 TAXMAN 106 (ALL.) - In this case the Hon'ble High Court stated as under:-
FACTS The Assessing Officer in the instant case noticed various defects in the account hooks of the assessee on which he came to the conclusion that the account books maintained by the assessee were neither correct nor complete. It was found that purchases and corresponding sales were not at all verifiable. No vouchers for the expenses and the cash memos were kept. No stock register was maintained. The assessee could not furnish the periodical retail sale price of the liquor. On enquiries, the 49 I.T.A.No.2262,2505/Ahd/2011 Assessing Officer was informed by the District Excise Officer that the liquor contractors were free to fix the sale price of liquor and there was no control over the selling price. A clear finding was recorded that the profit and loss account furnished by the assessee did not depict correct and real profit earned during the year. On these findings the Assessing Officer rejected the account books invoking the provisions of section 145(2) and proceeded to make assessment on best judgment. On appeal, the Commissioner (Appeals) affirmed the action of the Assessing Officer. On second appeal, the Tribunal also upheld the action by dismissing the second appeal filed by the assessee.
On an application for reference under section 256(2): HELD In the instant case, the account books were rejected because admittedly no stock register was maintained nor the sales were found verifiable in absence of the cash memos. The vouchers of expenses were also not forthcoming and the income returned was ridiculously low as compared to the exorbitant turnover and the extent of the business carried on by the assessee. It was difficult to catalogue the various types of defects in the account books of an assessee which might render rejection of account books on the ground that the accounts were not complete or correct from which the correct profits could not 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 might not per se lead to an inference that accounts were 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 be justified to reject the account books under section 145(2) and to make the assessment in the manner contemplated in those provisions. Taking all these aspects and the material into consideration, the Tribunal had found as a fact that the claim of the assessee for acceptance of the account books was not sustainable. On the findings of the fact recorded by the Tribunal, its order did not give rise to any question of law.
(4) Kachwala Gems [2007] 158 TAXMAN 71 (SC) - - In this case the Hon'ble Supreme Court stated as under :-
FACTS The assessee was dealing in precious and semi-precious stones. The Assessing Officer noticed certain defects in books of account of the 50 I.T.A.No.2262,2505/Ahd/2011 assessee, viz., that it had not maintained any quantitative details/stock register for the goods traded in by it; that there was no evidence/ document on record to verify the basis of the closing stock valuation shown by it; that GP rate declared by the assessee at 13.49 per cent during the assessment year did not match the result declared by the assessee itself in the previous assessment years; and that the gross profit declared by it was much below the rate declared voluntarily by another assessees engaged in similar business. Thereafter, the Assessing Officer rejected the books of account of the assessee and resorted to best judgment assessment under section 144 and estimated the gross profit rate at 40 per cent. The Assessing Officer, further held that the assessee had shown bogus purchases for reducing the gross profits. On appeal, the Commissioner (Appeals), though reduced the quantum of the gross profit, estimated by the Assessing Officer, vet upheld most of his impugned findings. On further appeal, the Tribunal had also given further relief to the assessee, On appeal to the Supreme Court: HELD Whether there were bogus purchases or not was a finding of fact and there was no need to interfere with the same in the instant appeal. As regards the rejection of the books of account, cogent reasons had been given by the income-tax authorities for doing so, and there was no reason to take a different view. (Para 101 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 blame as he did not submit proper accounts. There was no arbitrariness in the instant case on the part of the authorities. Thus, there was no force in the instant appeal and the same was to be dismissed accordingly. [Para 11] In view of the above factual and legal position, these grounds of appeals may kindly be dismissed and the enhancement of income may kindly be sustained."
3.5.2 After going through these submissions from both the sides and after going through the order of ld. CIT(A) and other material available on record, we find that initially, the objection of the Ld. CIT(A) was that the yield percentage reported by the assessee in respect of JKPM unit is 51 I.T.A.No.2262,2505/Ahd/2011 on the lesser side by 7.92% in the present year being 30.69% as against 38.61% in the preceding year. He issued first show cause notice to the assessee on 26.03.2011 asking the assessee to show cause as to why the yield in respect of JKPM unit not be enhanced by 8% resulting in addition of about Rs.139 crores. In reply, various submissions were made by the assessee including furbishing auditor's certificate in respect of JKPM unit in which it was certified by the auditors that the quantity of raw material consumption of JKPM unit for this year was reported on gross basis whereas the same for CPM unit was reported on net basis. It was also certified by the auditors that if raw material consumption figure of JKPM unit is considered on net basis, the same should be only 87218 ADMT as against originally reported as 100135 Ton on gross weight basis (including moisture). It was submitted by the assessee before Ld. CIT(A) on the basis of this auditors certificate that if the yield percentage is worked out for JKPM unit on the basis of quantity of consumption of raw material on net weight basis, the yield works out to 39.29%, which is better than the preceding year's yield of JKPM unit as well as current year's yield of CPM unit. This submission of the assessee along with auditors certificate was brushed aside by Ld. CIT(A) merely on this basis that this explanation is an after thought and cannot be accepted. Regarding auditors certificate, it was stated by Ld. CIT(A) that the auditors had relied on the explanation given by the management in certifying that the figures of gross weight of bamboo of JKPM unit is 100135 Mt. and net weight is 87218 MT (para 2 of auditor's certificate) and the auditor do not mention to have fully checked the primary records.
When we go through the auditor's certificate, which is reproduced by Ld. CIT(A) also, we find that it is stated by the auditors in that certificate that 52 I.T.A.No.2262,2505/Ahd/2011 the same is as per the records available and explanation given by the management. Therefore it cannot be said that the auditor's certificate is merely on the basis of explanation given by the assessee/management. It is specifically stated by the auditors that this is as per records available. Before Ld. CIT(A) also, the assessee produced register of August 2007 where the gross and net weight is entered and in the said register, no error or defect is pointed out by Ld. CIT(A) and he has merely stated that this register is not maintained on real time basis. This allegation of Ld. CIT(A) is on this basis that after the receipt of material in the factory, the testing report is obtained within 48 hours and then on the basis of this testing report, the net weight on ADMT is worked out and, therefore, this record maintained by the assessee is not on real time basis. We do not find any merit in this objection of Ld. CIT(A) because, if a truck load of raw material is received at the factory and entry is made in the register on the same date, and the gross weight is entered on the same date and thereafter, in the column of net weight, net weight is entered afterwards on the basis of testing report, it cannot be said that the record is not maintained by the assessee on real time basis and there is defect in the maintaining of such record and books of account. Moreover, the net weight factor is only for the purpose to monitor the yield percentage for the purpose of effective control of management because different lots of raw material have, different level of moisture content, yield percentage cannot be effectively controlled if raw material consumption quantity is not uniform. The raw material quantity can be uniform only if the same is on the basis of uniform moisture content in the quantity of raw material. No doubt, there is a mistake committed by the auditors as well as by the company management in reporting of consumption quantity of raw 53 I.T.A.No.2262,2505/Ahd/2011 material of JKPM unit on gross basis in the present year whereas, the consumption quantity of CPM unit for the present year was reported on ADMT basis and consumption quantity of both the units for the preceding year was reported on ADMT basis and because of this mistake, the yield percentage of this year in respect of JKPM unit is lesser as compared to the preceding year of the same unit and as compared to the CPM unit for the present year. From the chart of year-wise yield percentage of both the units, we find that the same was around 30% and below that in assessment year 2004-05 and 2005-06, which increased to around 37-38% in assessment year 2006-07, 2007-08 & 2008-09. It is explained by the assessee before us that up to assessment year 2005-06, yield percentage was reported based on raw material consumption quantity on gross basis and from assessment year 2006-07, the yield percentage is based on raw material consumption quantity on net basis. It is also important to note that Ld. CIT(A) had rejected the books of account on this basis alone that the assessee did not maintain the quantitative record on real time basis and vital entries are back dated. If the books of account are rejected on this basis that the assessee did not maintain proper quantitative record and because of this, fall in yield percentage of JKPM unit by around 8% is not acceptable, then we fail to understand the reason due to which, the Ld. CIT(A) has proceeded to make the addition on the basis of average GP percentage of last five years and thereby making an addition of Rs.44.95 crores as against addition proposed by him of Rs.139 crores on the basis of fall in yield percentage of JKPM unit. This goes to show that Ld. CIT(A) himself was also satisfied about the explanation of the assessee for the fall in yield percentage of JKPM unit and hence, he did not make this addition of 54 I.T.A.No.2262,2505/Ahd/2011 Rs.139 crores. Once, Ld. CIT(A) is satisfied about the fall in yield percentage of JKPM unit, no basis remains for rejection of books of account u/s 145(3) of the Act. Rejection of books of account merely on the basis of slight fall in GP percentage is not permissible particularly when in the preceding year, the GP rate declared by the assessee of 39.27% for JKPM unit as against 41.92% for the same unit in assessment year 2006-07 and similarly, GP rate reported in respect of CPM unit in the preceding year @ 37.44% as against GP rate of the same unit in assessment year 2006-07 @ 39.20% was accepted by the A.O. in the course of scrutiny assessment and there is no enhancement by Ld. CIT(A) in that year and there is no reopening u/s 147 for that year and there is no revision by Ld. CIT u/s 263 for that year. It goes to show that fall in GP rate of around 2-3% in the preceding year i.e. in assessment year 2007-08 was accepted by the revenue and comparing to this in the present year, the fall in GP rate of JKPM unit where there is allegation of fall in yield is almost negligible because the GP rate reported for this unit for the present year is 38.76% as against 39.27% reported in assessment year 2007-08. The fall in GP rate in the present year for CPM unit is more than fall in GP rate for JKPM unit because for CPM unit, GP rate is reported @ 34.67% as against 37.44% for the same unit in assessment year 2007-08. It means, there is a fall in GP of this unit of around 3% in the present year although there is no allegation for this unit regarding any fall in the yield percentage. These working of unit wise G.P. for the present year and the preceding year show that the alleged fall in yield percentage of JKPM unit is not found reflected in fall of GP percentage in the present year of JKPM unit and CPM unit. In JKPM unit there is allegation of fall in yield percentage of around 8% but the fall in GP 55 I.T.A.No.2262,2505/Ahd/2011 percentage is only marginal around 0.51% whereas for CPM unit, where there is no allegation of fall in the yield percentage, fall in GP percentage is of 2.77%. These figures of fall in GP and explanation of the assessee regarding fall in yield percentage of JKPM unit appears to be valid and reasonable since, it is supported by the auditor's certificate and no defect could be pointed out by Ld. CIT(A) or by Ld. D.R. in the auditors certificate except this that this auditors certificate is on the basis of explanation of the management and not on the basis of records. We have seen that this allegation is not correct that auditor's certificate is simply on the basis of assessee's explanation because the auditors have stated this also that it is as per records. Hence, the allegation of Ld. CIT(A) regarding fall in yield percentage cannot be accepted and it has to be held that this fall in yield percentage of JKPM unit was properly explained by the assessee duly supported by the auditors certificate. As per the auditors certificate itself, this certificate is not on the basis of explanation of the management only but they have also considered the available records and such record for one month was produced before ld. CIT(A) also and he also could not point out any defect in this record of August 2007 except alleging that such record is not maintained by the assessee on real time basis and we have seen that this objection of Ld. CIT(A) is not valid because in the facts and circumstances of the present case, it has not been established that such quantitative records are not maintained by the assessee on real time basis because the gross weight is entered on the date of receipt of raw material and the net weight column is filled up within reasonable time after receipt of testing report and such time is reported to be 48 hours on average. Ld. CIT(A) has also made telephonic discussion with the General Manage of JKPM unit Shri Vishvajeet Deb in the 56 I.T.A.No.2262,2505/Ahd/2011 presence of Shri Marwah, Chief of the Taxation of the assessee company on 29.06.2011. It was explained by Shri Vishvajeet Deb that when a truck of bamboos comes, gross weight is taken and thereafter, 4-5 bamboos are picked up for sample and the test is carried out to ascertain the moisture content and this test takes two days and when the result comes, the gross weight is converted into net weight on the basis of percentage of moisture content in the sample test but the payment to supplier is made on gross weight basis. In the light of above discussion we are of the considered opinion that in these facts and circumstances of the present case, the action of Ld. CIT(A) for rejecting the book records itself is not justified because his only basis is that there is fall in yield percentage of JKPM unit but even he was also not sure about this objection after various explanations were furnished by the assessee along with auditors certificate and, therefore, he did not make the addition on the basis of fall in yield percentage which was proposed by him earlier to the extent of 139 crores and he finally proceeded to make addition on the basis of fall in GP percentage. For this purpose also, instead of comparing the GP with the immediately preceding year, he has taken average of last five years and on this basis, he made addition of only Rs.44.95 crores. The basis of Ld. CIT(A) is as noted by him on page 43 of his order that ultimately lower yield goes to reduce GP and suppress the real income but this is not coming out from the figure of alleged fall in yield of JKPM unit and fall in GP percentage of this unit and CPM unit. We have seen that the allegation regarding fall in yield percentage of JKPM unit is this that the fall in yield percentage is of around 8% but the fall in GP of this unit in the present year is only 0.51% whereas, in respect of CPM unit, there is no allegation regarding any fall in the 57 I.T.A.No.2262,2505/Ahd/2011 percentage of yield in the present year but there is fall in GP rate of this unit of around 2.77%. Therefore, it is seen that this basis adopted by Ld. CIT(A) is also incorrect that the fall in yield percentage goes to reduce GP and, therefore, addition is to be made on the basis of fall in GP percentage in the present year as compared to average GP of the last five years.
3.5.3 As per above discussion, we have noted that rejection of book results by Ld. CIT(A) is not justified in the facts and circumstances of the present case but still even if it is held that profit is to be estimated, no addition is called for in respect of GP because the fall in GP percentage in the present year is comparable with the fall in GP percentage in the preceding year also and in the preceding year, no addition was made by the A.O. on account of fall in GP percentage in the scrutiny assessment u/s 143(3) and no action was taken by him u/s 147 or by Ld. CIT u/s 263 of the Act and no enhancement was made by Ld. CIT(A) in the earlier year. Therefore, slight fall in GP percentage as compared to earlier year, may be on account of various reasons and having accepted similar fall in GP in earlier years and also in the subsequent year, addition cannot be made in the present year on the basis of slight fall in GP percentage when no specific defect is pointed out except the allegation of fall in yield percentage of one unit i.e. JKPM unit which is also not being reflected in fall of GP percentage.
3.5.4 There is one more aspect of the matter that fall in yield may have impact on G.P. in three situations. Either the assessee has booked bogus purchases or the assessee has sold material outside books or the assessee has reported lesser quantity of closing stock. This is not the allegation of Ld. CIT(A) that assessee has booked any bogus purchases. This is also 58 I.T.A.No.2262,2505/Ahd/2011 not an allegation of Ld. CIT(A) that assessee has resorted to any sale outside books. In this situation, the only basis of low yield having impact on G.P. can be that the assessee has reported lesser quantity of closing stock and in that situation, addition can be made by increasing closing stock quantity and value. If such addition is made then in the next year, opening stock has to be increased by the same amount. In the present case, no such direction is given by Ld. CIT(A) to increase opening stock of the next year although he is giving reason for making GP addition that low yield results into lower GP. This allegation that low yield resulted into low GP is not supported by the fact as discussed above and moreover, even if it is a fact, then the effective addition is on account of low yield and in the absence of any allegation regarding bogus purchases or out of books sales, effective addition in that case will be on account of increase in closing stock and as a result, opening stock has to be increased in the next year. No such direction is given by Ld. CIT(A) in this regard. It was also submitted before us in the course of hearing that in the next year also, the assessment is completed by the A.O. u/s 143(3) and no deduction was allowed by the A.O. in respect of increase in opening stock of that year to the extent of addition made by Ld. CIT(A) in the present year. Although this cannot be a basis to delete the addition in the present year and we are deleting the same for other reasons as discussed above but this factor also supports our view.
3.5.5 Now, we consider various contentions raised by the Ld. D.R. in his written submission reproduced above. From the written submission of the Ld. D.R. we find that he has mainly put stress on the finding of Ld. CIT(A) on various aspects and we have already discussed in above paras that the findings of Ld. CIT(A) are not sustainable. In para 3 of para 1.12 59 I.T.A.No.2262,2505/Ahd/2011 of the written submission, it was submitted by the Ld. D.R. that as per the month-wise chart of raw material consumption on gross weight basis and net weight basis submitted by the assessee before Ld. CIT(A) and reproduced by him on page 36 of his order, the difference in gross weight and net weight in different months is ranging between (+)12.49% to (-) 44.81% and this could not be properly explained by the assessee. It was the submission of the Ld. D.R. that the atmosphere is almost similar in the month of Feb and March and then how there can be (-)44.81% difference in the month of Feb and (+) 12.49% difference in the month of March. On this aspect we feel that only because of variation in quantity difference of gross weight and net weight of raw material consumption in different months, no adverse inference can be drawn because the net weight is not dependent upon moisture lost during the month of consumption. It is based on the moisture contents at the time of receipt of particular lot of wood and the corresponding net weight by adopting 10% moisture content. If the average moisture content of a particular lot is 55% then the difference between gross weight and net weight of this particular lot will be around 45% if it is converted into raw material having 10% moisture content and if this lot is consumed in the month of Feb and in the month of March different lot is consumed which was not having any moisture content then the net weight will be more than gross weight by minimum 10%. Although the figure of (+) 12.49% does not appear to be convincing because even if the gross weight was not having any moisture content then also net weight will be only (+) 10% as compared to gross weight but this small difference of 2.49% in a particular month may be because of some calculation mistake and this alone cannot be the basis of rejection of entire explanation of the 60 I.T.A.No.2262,2505/Ahd/2011 assessee. Further, this extra increase in the net weight in the month of March will result into lesser yield and not more yield and, therefore, even if this figure of March is rectified after due examination of mistake in calculation, it will result into increase of yield and not decrease of the yield and, therefore, on account of this mistake in calculation in the month of March, no adverse inference is called for.
3.5.6 Apart form this, reliance has been placed by the Ld. D.R. on various judicial pronouncements in support of this contention that rejection of books of account and addition on account of low GP can be made even in those cases where there is fall in GP. We have already seen that rejection of books of account in the present year by Ld. CIT(A) is not proper because in our considered opinion, the assessee has satisfactorily explained the fall in yield with supporting evidence in the form of auditors certificate and production of register before Ld. CIT(A) in respect of Augusts 2007 and no defect could be pointed out by Ld. CIT(A) in the auditor's certificate and in the register for August 2007 except the objections that auditors certificate is not on the basis of actual examination of records but only on the basis of submissions of the management of the assessee and register for August 2007 was not maintained on real time basis. These objections of Ld. CIT(A) were not found to be acceptable in the above paras of our order. Therefore, the rejection of books of account by Ld. CIT(A) itself was not found to be sustainable.
3.5.7 Now, we examine the applicability of various judgements cited by Ld. D.R. in the facts of the present case.
- The 1st judgment cited is the judgement of Hon'ble Apex Court rendered in the case of S N Namasivayam Chettiar Vs CIT as reported in 61 I.T.A.No.2262,2505/Ahd/2011 38 ITR 879 (S.C.). In that case, clear finding was given by the tribunal that correct profit could not be deduced from the books produced by the assessee whereas in the present case, we have seen that there is no other allegation regarding not maintaining of proper books except that there is fall in yield of JKPM unit and even this fall in this unit is also satisfactorily explained by the assessee and, therefore, in the facts of the present case, this judgment of Hon'ble Apex Court is not applicable.
- The 2nd judgment cited by Ld. D.R. is the judgment of Hon'ble Apex Court rendered in the case of Chabildas Tribhuvan Das Shah as reported in 59 ITR 733 (S.C.). In that case also, it was the finding of the tribunal that the profit and gains could not properly be deduced from the method of accounting employed by the assessee. Hence, for the same reasons given regarding the 1st judgement, this judgment is also not applicable in the present case.
- The 3rd judgement cited by him is the judgment of Hon'ble Allahabad High Court rendered in the case of Avdhesh Pratap Singh Abdul Rehman as reported in 210 ITR 406 (All.). In that case, the accounts books were rejected because admittedly, no stock register was maintained nor the sales were found verifiable in the absence of cash memos and expenses vouchers were not forthcoming and the income returned was ridiculously low. In the present case, the stock register was duly maintained and it is not the case of revenue that the sales are not verifiable. It is also not the case of the revenue that vouchers of expense are not forthcoming and, therefore, this judgment of Hon'ble Allahabad High Court is also not applicable in the present case.
- The next judgment cited by the Ld. D.R. is the judgement of Hon'ble Apex Court rendered in the case of Kachwala Gems as reported 62 I.T.A.No.2262,2505/Ahd/2011 in 288 ITR 10 (S.C.). In that case, it is held by the Hon'ble Apex Court that whether there was bogus purchases, it was finding of fact that there was no need to interfere with the same in that case and regarding the rejection of books, cogent reason had been given by the income tax authorities for doing so and there was no reason to take a different view. In the present case, we have seen that there is no allegation regarding any bogus purchase and no cogent reasons are given by Ld. CIT(A) in the present case for rejection of books of account and, therefore, this judgment of Hon'ble Apex Court is also not applicable in the present case.
3.5.8 As per above discussion, we have seen that Ld. D.R. could not satisfy us as to why the order of Ld. CIT(A) should be sustained. We have seen as per above discussion that the basis adopted by Ld. CIT(A) for rejecting the books of accounts i.e. fall in yield percentage of JKPM unit itself was not existing because the fall in yield is satisfactorily explained by the assessee along with independent evidence in the form of auditors certificate in which no valid defect could be pointed out by Ld. CIT(A) or by Ld. D.R. and the same was also supported by the register for the month of august 2007 in which also no acceptable defect could be pointed out by Ld. CIT(A) or by Ld. D.R. Ld. CIT(A) himself was also not sure about fall in yield in JKPM unit after various submissions were made by the assessee because even after issuing show cause notice for making addition of Rs.139 crores only on the basis of fall in yield of this unit i.e. JKPM unit, he has proceeded to make addition of Rs.44.95 crores only on the basis of fall in GP percentage of the present year as compared to average GP of last five years by observing that fall in yield ultimately resulted into fall in GP. But this allegation is not supported by the facts 63 I.T.A.No.2262,2505/Ahd/2011 of the present case because even after alleging of 8% fall in the yield of JKPM unit, fall in GP of this unit as compared to last year GP of this unit is only marginal to the extent of 0.51% and hence, the allegation of Ld. CIT(A) that fall in yield ultimately result into fall in GP is not found to be correct in the facts of the present case. In the light of this and various other reasons noted by us in the above paras as per which the order of Ld. CIT(A) on this issue is found to be not sustainable and hence, we delete the addition made by Ld. CIT(A). This ground of the assessee stands allowed.
4. In the result, appeal of the assessee stands partly allowed.
5. In the combined result, appeals of the assessee as well as of the revenue are partly allowed.
6. Order pronounced in the open court on the date mentioned hereinabove.
Sd./- Sd./-
(KUL BHARAT) (A. K. GARODIA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Sp
Copy of the Order forwarded to:
1. The applicant
2. The Respondent
3. The CIT Concerned
4. The Ld. CIT (Appeals)
5. The DR, Ahmedabad By order
6. The Guard File
AR,ITAT,Ahmedabad
1. Date of dictation.........15/5
2. Date on which the typed draft is placed before the Dictating Member.........17/5.......Other Member ............
3. Date on which the approved draft comes to the Sr. P.S./P.S.22/5
4. Date on which the fair order is placed before the Dictating Member for pronouncement ............24/5/12
5. Date on which the fair order comes back to the Sr. P.S./P.S.25/5 64 I.T.A.No.2262,2505/Ahd/2011
6. Date on which the file goes to the Bench Clerk ... 25/5/2012
7. Date on which the file goes to the Head Clerk .......................
8. The date on which the file goes to the Assistant Registrar for signature on the order .........................
9. Date of Despatch of the order. ......................