Income Tax Appellate Tribunal - Ahmedabad
Jay Vijay Prints Pvt.Ltd.,, Surat vs Assessee on 4 October, 2011
आयकर अपीलीय अिधकरण, अहमदाबाद Ûयायपीठ 'बी', अहमदाबाद
सव[ौी ौी भवनेश सैनी,
ी, Ûयाियक सदःय एवं ौी ए.
ए.मोहन अलंकामोनी,
ामोनी लेखा सदःय के सम¢
IN THE INCOME TAX APPELLATE TRIBUNAL : 'B' BENCH : AHMEDABAD
Before Hon'ble Shri Bhavnesh Saini, J.M. & Hon'ble Shri A.Mohan Alankamony, A.M.)
आयकर अपील सं. ITA No. 3882/Ahd./2007 : िनधा[रण वष[ः- 2004-2005
Jay Vijay Prints Pvt. Ltd., Surat -Vs- The A.C.I.T., Circle-1(1), Surat
(PAN : AAACJ 5969J)
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
अपीलाथȸ कȧ ओर से/ Appellant By : Shri U.S.Bhati, A.R.
ू×यथȸ कȧ ओर से / Respondent By : Shri Samir Tekriwal, Sr.D.R.
सुनवाई कȧ तारȣख / Date of Hearing : 04/10/2011
घोषणा कȧ तारȣख / Date of Pronouncement: 29/12/2011
आदे श / Order
Per Shri A. Mohan Alankamony, Accountant Member :
This appeal is filed by the assessee aggrieved by the order of the Commissioner of Income-tax (Appeals)-I, Surat in Appeal No.CAS- I/268/06-07 dated 14.08.2007 for the assessment year 2004-05 passed under section 250 r.w.s 143(3) of the I.T. Act, 1961.
2. The assessee company had, originally, raised its grounds in a narrative and illustrative manner. Subsequently, it came up with revised grounds in a concise manner, which are reproduced hereunder:
1. the Ld CIT (A) erred in law and on facts in confirming the disallowance of interest paid to specified persons u/s 40A(2)(b) of the Income-tax Act, 1961 without appreciating the fact that the appellant had borrowed at the same rate of interest from all other unsecured creditors.
ITA No. 3882-Ahd-07
2. the ld. CIT (A) erred in law and on facts in upholding the finding of the ld. AO that the appellant company had paid job charges at higher rate(s) to M/s. Ganga Fashion Pvt. Ltd. (a specified person) without appreciating the facts and submissions of the appellant company.
3. The ld. CIT (A) erred in law and on facts in holding that books of account of the appellant were not reliable though no such finding was given by the ld. AO.
4. The ld. CIT (A) erred in law and on facts in holding that AO has rightly rejected books of account and adopted the last year's GP @ 12.8% without considering the detailed submissions duly supported by the evidence.
5. The appellant may be allowed to add, amend, alter or raise additional grounds of appeal.
3. The assessee company ['the assessee' henceforth] engaged in purchase of art silk cloth and after getting the same processed on job work basis and sales finished fabrics, furnished its return, admitting a total income of Rs.12,25,448/- which was initially processed u/s 143(1)(a) of the Act. Subsequently the case was taken up for scrutiny assessment and the assessment order was passed on 15/12/2006 U/s. 143(3) of the Act. During the course of scrutiny assessment proceedings, the AO, after examination of the details furnished and consideration of the assessee's contentions, made the following additions/disallowances under distinctive captions, namely:
I. Disallowance u/s 40A(2)(b) of the Act:
It was the stand of the AO that the assessee had obtained unsecured loans from specified persons covered u/s 40A(2)(b) of the Act and had paid interest the rate of 18% to the tune of Rs.16,40,519/- to those persons and of Rs.11,63,484/- to other persons. He had also reasoned that the assessee had paid higher 2 ITA No. 3882-Ahd-07 interest at 18% to its sister concern and other parties wherein the bank PLR at the relevant time was only at 11.25%. The AO took a view that when it was easier to obtain loan from the banks at a lower rate, the assessee had taken loans from its sister concern and specified persons at a higher rate of interest without assigning any reason and, therefore, proposed to disallow the excess interest payment of 6.75% on loans being over and above the PLR rate of banks as non-business purpose. Accordingly, the disallowance made was at Rs.10,51,502/-.
II. Job work charges paid to Ganga Fashions Pvt. Ltd:
It was the case of the AO that the assessee had paid Rs.2.9 crores as job work charges to Ganga Fashions Pvt. Ltd [GFPL] which was specified u/s 40A(2)b). Brushing aside the assessee's claim that it was paying job charges to GFPL at the same rate as the job charges paid to other parties including Floral Creation, the AO disputed that the bill in respect of assessee was about 14 items whereas the bill of Floral Creation was only of 3 items and, hence, the rate applied by GFPL in the assessee's case was not comparable with the outside parties. The AO also noticed that the assessee did not justify the claim of having paid market rate to GFPL who was a specified person by submitting as many comparable bills as it could. Since the AO has jurisdiction over GFPL, he noticed that the average job charges paid by the assessee and average job charges received by GFPL shows that on an average GFPL was charging much less rate from other parties than the assessee. As per the chart prepared by the AO, the GFPL had charged excess amount to the tune of Rs.11,15,155/- which, according to the AO, had reduced the 3 ITA No. 3882-Ahd-07 assessee's GP to the extent of Rs.11.15 lakhs which clearly exhibits from the fact that during the year the assessee had shown turnover of Rs. 12.2 crores and GP rate of only 10.83% as compared to Rs.19.49 crores and 12.81% of GP in the preceding year. However, the AO took a view that since the addition in respect of fall in GP was being separately made no separate addition in this regard is made as this element is concerning trading account bearing consequential effect on gross profit.
III. Estimation of further gross profit of 2%:
The AO had noticed that there was a fall in GP to the extent of almost 2% and also there was fall in turnover by almost Rs.7 crores. As the assessee had failed to give any explanation for fall in GP, the AO took a view that the books of accounts were not reliable by relying on the decisions of (i) Hon'ble ITAT, Mumbai Bench in the case of Samir Diamonds Exports Ltd [71 ITD 75] and (ii) the Hon'ble Allahabad High Court in the cases of (a) Avdhesh Pratapsingh Abdul Rahman & Brothers v. CIT [210 ITR 406] and (b) Hari Shankar Gopal Hari v. CIT [97 ITR 716]. The assessee was required to give details of:
(i) closing stock of quantity, value, the basis of valuation;
(ii) the desired details in regard to its sister concern;
(iii) Supporting evidence and the supporting evidence and basis of valuation in respect of closing stock Since the assessee did not furnish the above details the Ld.AO opined that the assessee had inflated its job charges expenses paid to its sister concern - Ganga Fashion Pvt. Ltd. Further the assessee had failed to justify the fall in GP by 2%, therefore the Ld.AO rejected the books of accounts and made the addition of Rs.24,40,960/- by adopting the last year's GP.4
ITA No. 3882-Ahd-07
4. The assessee took up these issues with the ld. CIT (A) for relief. The contentions of the assessee before the ld. CIT (A) as well as the findings of the ld. CIT (A) are extracted from the impugned order of the Ld. CIT (A) in distinctive headings as under:
Interest payment:
Assessee's submission:
"[Para 2.2 of the CIT(A)'S order] During the appellate proceedings the appellant has stated that the AO has failed to appreciate the fact that the assessee was enjoying bank facilities as is clear from the balance sheet and the rate of interest paid to specified persons was same as interest paid to other creditors of unsecured loans. It was also argued that these loans/deposits from specified persons were old loans and interest was paid at the rate of 18% even earlier. The appellant has relied on the decision of Hon'ble ITAT, Ahmedabad in the case of Omkarmal Gaurishankar v. ITO [39 TTJ 223] wherein it was held that considering the ever increasing inflation, the interest rate of 24% was justified. The assessee has also relied on the decision of Hon'ble Jodhpur ITAT in the case of ITO v. Brar Brother [127 Taxman 152] wherein it was stated on the facts and circumstances of the case, the payment of interest u/s 40A(2)(b) was justified."
The Ld. CIT (A)'s findings:
"2.3. I have considered the submission made by the appellant and observation of the AO. The decision of ITAT relied on by the appellant are all on facts of those cases and not applicable to the assessee's case as rate of interest varies from year to year. The case of the AO is that the assessee could have obtained loan from banks and therefore payment of high rate of interest that too much higher than the bank rate to the specified persons is not justified and any prudent businessman would have taken care to discharge the loans to the specified persons and obtained loans at the lower rate either from the market or from the bank. The appellant has failed to show that it could not have obtained loan from the bank and it had exhausted all its possibility of obtaining loan from bank and loan at lower rate of interest was not possible from the market. Clearly, the higher 5 ITA No. 3882-Ahd-07 rate of interest at 18% to the specified persons is not as per the market rate since the banks were providing loans at a much lower rate with PLR of 11.25%. The only argument given is that it had loans from other parties also at the rate of 18% but this does not establish this contention in the light of lower rate of interest being offered by the bank. Therefore, the disallowance of interest by AO u/s 40A (2)(b) in respect of specified parties is justified. Although, the rate of interest on loans obtained from other parties is also very high at 18%, however, the same cannot be disallowed u/s 40A(2)(b) and hence, the disallowance is restricted to the loans obtained from the specified parties only and deleted in respect of interest pertaining to other parties.
Hence, this ground of appeal is partly allowed. The AO is directed to rework out the interest that would be disallowed in respect of the specified parties only."
Job work charges paid to Ganga Fashions Pvt. Ltd:
Assessee's submission:
"[Para 3.2 of the CIT(A)'s order] During the appellate proceedings the appellant has stated that the AO has compared the average job charges of the sister concern only for seven months and the AO has not taken into account that the appellant company was dealing in many varieties of processed cloth. According to the appellant it has paid job charges whose average of full year is Rs.10.33 and the average job charges paid by the assessee to all the parties is Rs.10.79 meaning thereby that the job charges paid to Ganga Fashions Pvt. Ltd is less. It has also been argued that Ganga Fashions Pvt. Ltd is paying heavy tax and hence it cannot be said that the assessee has evaded taxes. It has been argued that during the current year Ganga Fashions Pvt. Ltd has shown income of Rs.21.64 lacs much higher than the income declared by the assessee at Rs.12.24 lacs and hence this addition should not be made."
The Ld. CIT (A)'s findings:
"3.3. I have considered the submission made by the appellant and observation of the AO. As per the AO the assessee has paid higher job charges to Ganga Fashions Pvt. Ltd than other parties in the month of April, May, July, August, September, October and November. As per the details filed by the appellant also the appellant has paid higher job charges to Ganga Fashions Pvt. Ltd 6 ITA No. 3882-Ahd-07 than other parties in the month of April, May, June. Since the job charges paid by assessee to Ganga Fashions Pvt. Ltd are higher than the average of total job charges paid to all the parties in some months, there is a case for disallowance of 40A(2)(b). This clearly shows that the appellant has at least to some extent in some months tried to reduce its profit by making more payment to its sister concern. However, since the AO has not made any addition on this issue separately, so this ground of appeal is dismissed."
Addition on account of low GP:
Assessee's submission:
"[Para 4.4. of the CIT(A)'s order] During the appellate proceedings the appellant has stated that in the last year there was a survey operation at the premises of the assessee and the assessee has declared an amount of Rs.69, 49,704/- which included the stock and also the cash found and has stated that the GP was more in the last year by Rs.2,36,501/- because the cash declared was included therein. It has also been stated that in the last year the trade discount was Rs.28.34 lacs but in the current year it was Rs.62.46 lacs. This has decreased the GP in the current year.
The Ld. CIT (A)'s findings:
"4.5. I have considered the submission made by the appellant and observation of the AO. The assessee has failed to produce the details of closing stock, its basis of valuation and day to day consumption of raw material quantity-wise before the AO. The appellant also paid higher job charges to its sister concern during a few months as discussed above. Therefore, it is clear that the profit shown by the appellant cannot be relied upon. This is also clear from the fact the appellant has admitted in the last year during the survey that it has offered disclosure of unaccounted income of Rs.69.49 lacs. Although the last year cannot be made the basis for the current year but the fact that the appellant has failed to produce the details and basis of valuation of closing stock and paid higher job charges to its sister concern and the fact that there is a huge fall in turnover from Rs.19 crores to Rs.12 cores which remains unexplained and the fact that there is a big fall in GP from 12.8% to 10.8% which remains unexplained shows that the assessee is prone to concealing the income and hence the books of accounts are not reliable. In view of the decisions relied upon by the AO, the AO has 7 ITA No. 3882-Ahd-07 rightly rejected the books of accounts and adopted the last year's GP. Therefore, the GP addition made by the AO is confirmed and these grounds of appeal are dismissed."
5. Agitated with the findings of the Ld. CIT (A), the assessee has come up with the present appeal. The submissions of the ld. A R are reproduced as under:
"[As enclosure with Form No.36] I.Regarding disallowance u/s 40A(2)b) from interest payments made Rs.6,15,195:
(1) The Ld. CIT (A) erred in law and on facts in confirming the disallowance made by the AO u/s 40A(2)(b) of the Act to the extent of interest paid to specified parties without appreciating the correct facts relating to these borrowings vis-à-vis the interest paid to other creditors of the appellant company.
(2) The Ld. CIT (A) further erred in law in confirming the said disallowance on the ground that the appellant failed to show that it could have obtained loan from the bank and it had exhausted all the possibility of obtaining loan from bank and loan at lower rate of interest was not possible from the market.
(3) The Ld. CIT (A) erred in law in not appreciating the well settled legal proposition that a businessman cannot be compelled to carry on his business in a particular manner so as to make the maximum profits. A businessman is at liberty to carry on his business in a manner he likes.
(4) The disallowance of interest partly confirmed by the CIT (A) may, therefore, be deleted in the facts and circumstances of the case.
II. Reg. alleged excessive job charges paid to Ganga Fashion Rs.11,15,155/-
(Though considered in addition of Rs.24,40,960):
(5) The Ld. CIT (A) erred in not appreciating the facts of the case in proper perspective while upholding the allegation of excessive job charges paid to specified person viz., Ganga Fashion Pvt. Ltd for the job work done by them in a few months this year.8
ITA No. 3882-Ahd-07 (6) The Ld. CIT (A) also erred in applying the law of averages to the job charges paid to this concern vis a vis other concern without taking into consideration that these charges depend upon the nature of the job work entrusted i.e., the nature and extent of the design involved and colours required to be used and process and treatment required to be given depending upon the quality & texture of the cloth to be processed.
(7) The CIT (A) erred in not appreciating the fact that as per appellate order the charges paid to Ganga Fashion Pvt. Ltd were less than the charges paid to others in some months. Therefore, the allegation of reducing the profits by making more payment to sister concern could not be justified.
(8) The Ld. CIT (A) erred in not appreciating the fact that there has been substantial fall in the total turnover this year as compared to the earlier year and, therefore, the standing charges remaining the same there was bound to be some fall in the G.P this year.
(9) The Ld. CIT (A) erred in upholding the reasoning of the AO on the only ground that there was fall in the GP. This year by about 2% although he has noted that the fall in the turnover was about 7 crores. Therefore, this could not be a valid ground for rejecting the book result, ignoring the correctness and completeness of the audited books of account of the appellant company.
III. Regarding estimated GP - addition of Rs.24,40,960:
(10) The Ld. CIT (A) erred in law and on facts in confirming the action of the AO in rejecting the book result and in estimating the profits and in making the GP addition of Rs.24,24,960/- (sic) Rs.24,40,960/- without any plausible reason.
(11) The Ld. CIT (A) failed to appreciate the relevant facts and legal position while dismissing the ground(s) regarding the GP addition.
Therefore, the impugned addition of Rs.24,40,960/- may be deleted."
6.1. During the course of hearing, the ld. A R furnished paper books containing 1 - 68 pages which consist of, inter alia, copies of (i) written submission before the CIT (A); (ii) comparative bills of job charges 9 ITA No. 3882-Ahd-07 issued by GFPL and other parties (iii) revised GP working statement; (iv) correspondence with the lower authorities etc., To strengthen his submissions, the Ld. A R had placed strong reliance on the case laws reported in (2011) 43 SOT 1 (Ahd) and (2011) 44 SOT 45 (Ahd.) 6.2. On the other hand, the Ld. D R supported the stand of the authorities below and vehemently argued that the issues have been analyzed in depth and arrived at the conclusion in a judicious manner by the authorities concerned which requires no intervention of this Bench at this stage.
6.3. We have carefully considered the rival submissions, meticulously perused the relevant case records and also the documentary evidences adduced by the Ld. A R during the course of hearing in the shape of paper books. With due respects, we have also perused the various case laws on which the assessee has placed its unstinted faith.
6.4. We shall now proceed to adjudicate the issues chronologically.
I. Disallowance u/s 40A(2)(b) of the Act:
It was the case of the AO that the assessee had obtained unsecured loans from specified persons covered u/s 40A(2)(b) of the Act and had paid interest at the rate of 18% to the tune of Rs.16,40,519/- to those persons and of Rs.11,63,484/- to other persons and that the assessee had paid higher interest to its sister concern and other parties when the bank PLR at the relevant time was pegged only at 11.25% The AO had further alleged that when the loan facilities from the banks at a lower rate were at ease, the assessee had availed loans from its sister concern and specified persons at a higher rate of interest without assigning any reason and, therefore, resorted to disallow the excess 10 ITA No. 3882-Ahd-07 interest payment of 6.75% being over and above the PLR rate of banks as non-business purpose.
However, interestingly, the AO had not brought any credible evidence on record to suggest that the assessee had given more interest its sister concern than to other parties. On the other hand, the assessee during the appellate proceedings vouched that the AO had failed to appreciate the fact that the assessee was enjoying bank facilities as could be clear from its balance sheet and the rate of interest paid to specified persons was same as interest paid to other creditors of unsecured loans. It was, further, argued by the assessee that the loans/deposits from those specified persons were old and the interest was being paid at the rate of 18% earlier as agreement upon.
At this juncture, we recall the finding of the Hon'ble earlier Bench which, in the case of DCIT v. M/s.Ganga Fashions Pvt. Ltd (in ITA No.568/Ahd/2008 dated: 20.3.2009 on an identical issue, has observed thus:
"7. So far as issue relating to deletion of interest concerned, we after having considered the facts and circumstances of the case first of all, are of the opinion that it is very surprising as to how the assessing officer came to the conclusion that it was easy for assessee to procure loan from the bank interest lower than from the market. Consequently, if loan from the bank was also available on market rate, then how he came to the conclusion that rate of interest paid by the assessee was higher than the market rate.
8. Without prejudice to the above, we are, further, of the opinion that the assessing officer completely ignored the vital submissions/facts of the case that interest @ 18% was paid not only to the sister concern and outsiders also and, therefore, provisions of section 40A(2)(b), in our opinion, was applied in an arbitrary and unjustified manner to invoke these provisions, it is incumbent upon the assessing officer to quote the market rates 11 ITA No. 3882-Ahd-07 and gave the reasons as to how the rate of interest paid by the assessee was higher than the rate of interest payment in the market or to the outsiders, no such evidence or finding has been arrived at by the assessing officer and in view of this, we do not find any infirmity in the order of the CIT(A) which is confirmed."
Incidentally, the Ld. AO had not quoted any comparable instances wherein the interest payments made to specified persons were much less than what has been paid by the present. In view of the above facts and also in conformity with the finding of the earlier Bench referred above, we are of the considered view that the Ld CIT (A) was not justified in selectively confirming the disallowance of interest u/s 40A(2)(b) of the Act in respect of specified parties. In essence, the disallowance of Rs.10,51,502/- made by the AO is deleted.
II. Job work charges paid to Ganga Fashions Pvt. Ltd:
Brushing aside the assessee's claim that it was paying job charges to GFPL at the same rate as the job charges paid to other parties including Floral Creation, the AO took a stand that the bill in respect of assessee was about 14 items whereas the bill of Floral Creation was only of 3 items and, hence, the rate applied by GFPL in assessee's case was not comparable with the outside parties and that the assessee did not justify the claim of having paid market rate to GFPL who was a specified person by submitting as many comparable bills as it could. To strengthen his argument, the AO stated that the average job charges paid by the assessee and average job charges received by GFPL shows that on an average GFPL was charging much less rate from other parties than from the assessee.12
ITA No. 3882-Ahd-07 However, during the course of hearing, the Ld. A R has hotly denied the AO's allegation and to substantiate the assessee's claim he had furnished copies of Invoice-cum-challans of Ganga Fashions P.Ltd, according to which, the job charge rate per LMTR charged for the assessee as well as for other concerns are illustrated, for appreciation of facts, as under. (Source: P 13 - 42 of PB) Sl. Name of the Invoice Description of Job charge No. concern No. goods rate per LMTR 01 Jay Vijay Prints P. 429 Dark RTY PTD 11.00 Ltd 278 11.00 Anjali Exports 2792 11.00 Chintan Silk Mills 50 11.00 Laxmi Fashion 1070 11.00 Bhavin silk Mills 02 Jay Vijay Prints P. 157 Gold Print 15.00 Ltd 289 15.00 Floral Creations 490 15.00 Krunal Silk Mills 03 Jay Vijay Prints P. 208 Shaded 08.50 Ltd 122 08.50 Tara Syntex P.Ltd 04 Jay Vijay Prints P. 2761 Dark Dischar 13.00 Ltd 2792 13.00 Chintan Silk Mills 05 Jay Vijay Prints P. 74 Dyed Poly Micro 05.00 Ltd 88 05.00 Anil Fabrics 06 Jay Vijay Prints P. 90 Printed Poly 10.00 Ltd 311 Micro 10.00 Floral Creations 2909 10.00 Chintan Silk Mills
05. Jay Vijay Prints P. 26 Dyed Poly Lazer 06.00 Ltd 76 Poly American 06.00 Anil Industries 1161 Grape 06.00 Tara Syntex P.Ltd 2825 06.00 Texport (India) 06 Rachna Fabrics 141 PolyPoonam 08.00 13 ITA No. 3882-Ahd-07 Dani The above tabular dispels the AO's claim that the assessee has been charged much higher than the other parties. There is strong force in the submission of the assessee to the effect that those charges depend upon the nature of the job work entrusted, namely, the nature and extent of the design involved and the coulurs requires to be used, the process and treatment required to be applied depending upon the quality and texture of the cloth to be proceed. Naturally, the job charges vary for the application of technology and treatment required to be applied for specific clothes. This very vital aspect has not been addressed to as it deserved either by the Ld. AO or by the Ld. CIT (A) Moreover, the assessee's allegation before the appellate authority that the AO had compared the average job charges of its sister concern only for seven months and that the AO had not taken into account that the appellant company was dealing in many varieties of processed clothes has not been effectively addressed to by the learned first appellate authority. The Ld. CIT (A) had, perhaps, leaned heavily on the AO's assertion that the assessee had paid higher job charges to its sister concern in stead of looking into the ground realties. In a nut-shell, neither the AO nor the first appellate authority brought out any case to bring the assessee's case under the ambit of s. 40A(2)(b) of the Act as no discreet material was brought on record to even remotely suggest that unreasonable or excessive payment was made to its sister concern as compared with the fair market value. Strangely, the AO had failed to quote any comparable rates which were prevailed at that relevant time for such job works so as to dispute the assessee's claim. In essence, the AO had not pointed out in his impugned order as to what was the unreasonable or exorbitant payment made to the assessee's sister 14 ITA No. 3882-Ahd-07 concern. As rightly pointed out by the earlier Bench in the case of DCIT v. Alidhara Texpro Engineers (P) Ltd reported in (2011) 43 SOT 1 (Ahd), the AO cannot make ad hoc addition or disallowance without bringing any concrete evidence on record about the reasonableness or excessiveness of the payment made to its sister concern in comparison with fair market value. Since the AO was contemplating in his impugned order to make addition in respect of fall in GP which was dealt with separately, he had not ventured to make any separate addition under this head. Thus, this issue is decided in favour of the assessee in respect of Job work charges..
III. Estimation of further gross profit of 2%:
The reasoning of the AO was that there was a fall of almost 2% as compared to the preceding year of the assessee's GP. As there was no compliance to the queries in respect of fall in GP, he felt that there was no option except to evaluate and decide the issue on merits. Taking cue from the findings of the Hon'ble Mumbai 'C' Bench and the Hon'ble Allahabad High Court cited supra and also in the absence of details of average rate of job charges paid to its sister concern, details with regard to closing stock in terms of quantity and value along with the basis of such valuation, he arrived at a conclusion that by allowing higher rate of jobs charges, the assessee had reduced its profits which had resulted in fall in GP. Having taken into account the above mentioned facts, he estimated further profit by 2% which came to Rs.24.40 lakhs and the same was added to the total income of the assessee.
On his part, the Ld. CIT (A) observed that though the last year cannot be made the basis for the current year but the fact that the appellant had failed to produce the details and basis of valuation of 15 ITA No. 3882-Ahd-07 closing stock and paid higher job charges to its sister concern and the fact that there was a huge fall in turnover from Rs.19 crores to Rs.12 cores which remains unexplained and the fact that there was a big fall in GP from 12.8% to 10.8% which remains unexplained shows that the assessee was prone to concealing the income and hence the books of accounts are not reliable and, thus, the AO had rightly rejected the same and adopted the last year's GP.
However, the assessee's submission before the first appellate authority that there was a survey operation at its premises, consequence of which, it had declared Rs.69.49 lakhs which included the stock and also cash found during the survey and this, according to the assessee, had pushed the GP upward as the cash declaration of Rs.2.36 lakhs was also included. This aspect had not been given due consideration. It was also claimed by the assessee that during the last year the trade discount was Rs.28.34 lakhs as against Rs.62.46 lakhs for the year under consideration, this has, according to the assessee, brought down the GP considerably.
Even from legal angle too, there were no valid reasons for not relying on the books of accounts. Even though the AO had not recorded any specific finding as to whether he had invoked the provisions of s.145 of the Act in rejecting the books of account and it was apparent from the order of the AO that he had not relied on the books as there were defects. However, there were no adequate defects which warranted the AO to took a stand that the books were not reliable. The main thrust of the AO in resorting to estimate the further profit by 2% solely on the ground that the assessee had not furnished the details like average rates of job charges paid to sister concern, justification and reasonableness of 16 ITA No. 3882-Ahd-07 job charges and the supporting evidences in respect of valuation of closing stock. Merely making a sweeping remark without actually looking into books of account and pointing out the defects would not be a sufficient reason to resort to estimation of profits. The assessee had in fact furnished copies of invoices with supporting evidences to justify the reasonableness of job charges paid to its sister concern. This issue has elaborately been dealt with and the same has been decided in favour of the assessee under the captain 'Job work charges paid to Ganga Fashions Pvt. Ltd (supra). Incidentally, the earlier Bench in its finding in the case of DCIT v. Associated Petroleum Corporation reported in (2011) 44 SOT 45 (Ahd) has observed that without pointing out any defect, the AO cannot resort to estimate of profits by applying GP rate.
Taking into account the facts of the issue as narrated in the foregoing paragraphs and also in conformity with the finding of the Hon'ble earlier Bench (supra) we are of the considered view that the stand of the Ld. AO in estimating the further profit by 2% cannot be construed was on a sound footing and, accordingly, the addition to the extent of Rs.24,40,960/- on this count is deleted. It is ordered accordingly.
7. In the result, the assessee's appeal is allowed.
इस आदे श कȧ घोषणा Ǒदनांकः 29/12/2011 को Ûयायालय मɅ कȧ गई ।
Sd/- Sd/-
(Bhavnesh Saini) (A.Mohan Alankamony)
Judicial Member Accountant Member
DATED : 29/12/2011
17
ITA No. 3882-Ahd-07
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4. आयकर आयुƠ- अपील-
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद ।
6. गाड[ फाइल आदे श से, उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद।
Talukdar/ Sr. P.S. 18