Income Tax Appellate Tribunal - Ahmedabad
Sumilon Tex Pvt.Ltd.,, Surat vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
Before Shri T.K.SHARMA,
T.K.SHARMA, JUDICIAL MEMBER and
Shri N.S. SAINI, ACCOUNTANT MEMBER
Date of hearing: 19-1-11 Drafted on: 25-1-11
ITA No.4498/AHD/2007
Assessment Year : 2004-05
Sumilon Tex Pvt. Ltd., Vs. Assistant Commissioner of
Veragini Wadi, Income Tax,Circle-4,
Delhigate, Aayakar Bhavan,
Surat. Majura Gate, Surat.
PAN/GIR No. :AADCS 3655M
(APPELLANT) .. (RESPONDENT)
Appellant by : Shri K.S. Jagirdar.
Respondent by: Shri Sanjay Rai, Sr. D.R.
ORDER
PER N.S.SAINI , ACCOUNTANT MEMBER :-
This is an appeal filed by the assessee against the order of Learned Commissioner of Income Tax (Appeals)-I, Surat , dated 16-10-2007.
2. The assessee has taken following grounds of appeal:-
"1. The Learned Commissioner of Income Tax (Appeals) erred in upholding the decision of the Assessing Officer that book results are liable to be rejected under section 145(3) and that the gross profit is rightly estimated by the Assessing Officer on 34.90% against 11.33% shown by the assessee and against acceptance of 21.38% of gross profit last year i.e. Assessment Year 2004-
05.
(i) In Assessment Year 2004-05, the difference between average sale per kg. and average cost price per kg. was `.44/- against `.78/- in Assessment Year 2003-04.
(ii) In this year there was fall in local prices in comparison to prior years.
(iii) If the average of job work in total turnover is higher than percentage of production then gross profit percentage of total turnover is higher but if the job work percentage is lower, then gross profit on total turnover is lower because job work brings -2- higher gross profit than manufacturing gross profit, as the following figures shows:
A.Y. Mfg. in Job work Job work Gross Mfg. Total
Total In total charges Profit on Gross gross
turnover. Turnover. In total Job work Profit Profit %
G.P. %. Charges. on total
turnover.
2002-03 20.81% 79.19% 48.43% 58.91% 8.54% 48.43%
2003-04 88.32% 11.68% 21.38% 51.35% 17.42% 21.38%
2004-05 98.11% 1.89% 11.33% 53.36% 10.52% 11.33%
(iv) "A" had near monopoly in earlier years whereas slowly ad
gradually many SSSIS have come into this industry which started eating into profit margin.
(v) Only 4.35% sales is in cash.
(vi) Sales tax department has accepted the book results.
(vii) Books are audited.
(viii) Against the total turnover of `.1,16,99,253/- the turnover has increased to `.2,41,76,879/- i.e. increase of approximately 110%.
(ix) The list of full addresses of all the purchasers amounting to `.2,37,20,019/- was provided to the Assessing Officer, and likewise the list of the parties from whom the assessee made purchases and the full addresses of the parties who supplied the goods to the assessee was also provided.
3. The Learned Commissioner of Income Tax (Appeals) has decided the issue by observing as under:-
"2.1 In the assessment order the Learned Assessing Officer has Formatted: Line spacing: single stated that the assessee filed the return declaring total income of `.10,22,970/- on 31.10.2004. The assessee is engaged in the business of manufacturing of metallic yarn and kasab. The Learned Assessing Officer further stated that the Gross Profit ratio in the last three years is as under:-
A.Y. 2002-03 48.42%
A.Y. 2003-04 21.38%
A.Y. 2004-05(Current year) 11.33%
2.2 The Learned Assessing Officer asked the assessee to explain the Formatted: Line spacing: single
reason for fall in GP rate. When the Learned Assessing Officer did not receive a satisfactory reply he issued a show-cause notice making various observations regarding the books of accounts. In brief the -3- observations of the Learned Assessing Officer made in the show cause notice are as under:
From the sale bills the Learned Assessing Officer noticed that the assessee had sold the following goods at different prices during the month of August itself.
Invoice No. Description Rate (`.) 125 - 6-8-2003 Imitation Jari 180 128 - 4-8-2003 -do- 210 131 -16-8-2003 -do- 340 132 -16-8-2003 -do- 315 135 -20-8-2003 -do- 151 146 - 28-8-2003 -do- 200 126 - 6-8-2003 Jari Kasab 250 127 - 6-8-2003 -do- 255 137 - 22-8-2003 -do- 270 138 - 22-8-2003 -do- 260 The assessee had explained that these rates were different because Formatted: Line spacing: single
the quality was different. The Learned Assessing Officer pointed out that from the bill itself quality was not possible to be found and on being asked whether qualitative records were maintained the assessee had during the assessment proceedings stated that no such qualitative details of different products manufactured and sold were kept by the assessee. The Learned Assessing Officer stated that the average sale price during the year was 216 per kg. whereas the average sale price in the last year was `.243/- per kg. However, the average cost of raw material consumed is `.172 per kg. during the year when the average sale price is less but the average cost of raw material consumed was `.165 per kg. in the last year when the average sale price was more.
2.3 The Learned Assessing Officer pointed out that there was no Formatted: Line spacing: single convincing reply and since the qualitative records were not maintained the drastic fall in GP rate was not explained. The Learned Assessing Officer therefore asked why the books of accounts be not rejected and GP be not estimated on GP rate of earlier years. The assessee replied that the company manufactured various qualities in all products. These qualities were sold at various rates at cost of products as well as per the regular price. There are number of qualities which are produced by the companies to cater to the market demand and it is practically not possible to maintain quality-wise records as there can be no quality criteria variations. The assessee explained that the different rates mentioned in the table by the -4- Learned Assessing Officer in the month of August 2003 were due to difference in quality sold. Regarding higher cost of consumption than last year the assessee stated that the increase in cost of raw material consumed was due to general increase in raw material prices and the company does not have any control over raw material prices. The decrease in average sale price was because the company was not able to export due to general recession and also because of fall in prices in the export market. In the local market also the prices have reduced. The assessee stated before the Learned Assessing Officer that the books of accounts and records have been duly audited by the Chartered Accountant and therefore they should not be rejected. It was submitted by the assessee that difference in price variation in sales does not make the accounts doubtful. The assessee issued proper bills to the customers and sales tax collected has been paid to the authorities. The assessee relied on the decision of Hon'ble Gujarat High Court in the case of Vikram Plastics & Others [239 ITR 161] to say that if there was no discrepancy or defect in the books of accounts and if they are regularly maintained then Section 145(3) cannot be invoked to reject the books of accounts. It was stated that the ITAT, Ahmedabad has also given a similar ratio in the case of ITO vs. Rupal Camdyes and Metal Salts.
2.4 The Learned Assessing Officer did not accept the above explanation because by not mentioning the quality details in the sale bills and not maintaining the records quality-wise it was not possible to verify the purchase and sale as well as variation of closing stock.
Since the GP rate had substantially declined and the non-maintenance of quality details the book result could not be much verified. The Learned Assessing Officer further stated that various sales bills showed that the assessee had sold the products in fairly bulk quantity and therefore quality details could have been easily mentioned. The Learned Assessing Officer therefore stated that the company does not have any mechanism whereby results can be verified. With regard to the decrease in average sale price the assessee attributed it to no export during the current year and lower average price in local market. The assessee failed to give any documentary evidence to support its contention that there was indeed lowering of price in the local market. The Learned Assessing Officer stated that the assessee does not maintain day to day consumption and production register and no quality-wise details for various products are mentioned for the goods manufactured. He, therefore, relied on various judicial pronouncements which are as under:-
i) Day to day manufacturing and production of account not maintained.
Bharat Milk Products vs. CIT 81 ITR-609 (Bom.)
ii) No day to day consumption register or production register is maintained.
-5-Steelworth Ltd. vs. CIT 69 ITR-366 (Gau.)
iii) Day to day manufacturing account, quantitative consumption account not maintained.
B.N. Maheshwari vs. CIT 210 ITR 438 (Bom.)
iv) Some sales are verifiable but not all.
Bombay Cycles Stores vs. CIT 33 ITR-13 (Bom)
v) Dhondiram Dalichand vs. CIT 81 ITR 609 (Bom.)
vi) Ghanshyamdas Parmanand vs. CIT 211 ITR 79 (Nag)
vii) Amiya Kumar Roy & Bros vs. CIT Tax Law Report 616 (Cal) 2.5 In view of the above the Learned Assessing Officer rejected the Formatted: Line spacing: single books of accounts and stated that the GP rate shown by the assessee over a period of last three years presents a picture of phenomenal fall even though the manufacturing activity remained the same. It indicates systematic effort to bring down its tax liability. According to the Learned Assessing Officer this line of business involves value addition and therefore there is handsome profit margin. Non- maintenance of quality-wise details and day to day stock register coupled with the huge fall in GP rate are fatal defects found in the books of accounts. Hence the Learned Assessing Officer invoked the provisions of Section 145(3) and rejected the books and adopted the average GP rate of minimum last two years which amounted to 34.9%. The Learned Assessing Officer therefore made an addition of Rs.56,99,172/-.
3.1 During the Appellate proceedings the appellanthas repeated Formatted: Line spacing: single most of the submission made before the Learned Assessing Officer and hence the same are not discussed again. The assessee further stated that to establish correctness of sales they had produced a list of parties with address to whom the assessee had sold its products during the year. The Learned Assessing Officer could have resorted to cross-verification of all the parties. It was also stated that the assessee has been maintained quality-wise records. However, rate- wise quality-wise records are practically not possible in any kind of business. It was stated that they have produced quantity account of initiation jari, jari kasab and metallic yarn separately. However, even in one product there is range of quality depending upon colours, lustured, thickness, lacquering, sheds, evenness, fastness etc. It was stated that a list of expenses was also given and no discrepancy has been found by the Learned Assessing Officer. It was stated that the conclusion of the Learned Assessing Officer that quality-wise day to -6- day register is not maintained is erroneous because the assessee company has computerized data base to derive quantity of product on broad classification. The fall in GP margin of the assessee company is mostly due to steep reduction in job work product and consequent reduction in job charges and increasing own manufacturing for sale. In Assessment Year 2002-03 the manufacturing product was 20.81% while job production was 79.19% whereas the said ratio was 98.11% for own manufacturing and 1.8% for job production during the current year. So job work production generating high revenue and higher margin of the assessee company was substantially reduced. It was further stated that in Assessment Year 2002-03 job work gross profit margin was 58.91% and it contributed 79.19% of business while in Assessment Year 2004-05 job work gross profit margin was reduced to 53.36%. It would contribute 1.89% of the business only. It was stated that the Learned Assessing Officer has not disputed the business mix of the assessee. The manufacturing average gross profit of last two years Assessment Year 2002-03 and Assessment Year 2003-04 was 12.98% while for Assessment Year 2004-05 it was 10.52%.Therefore the fall was only 2.46%. It was further stated that in the earlier years the assessee was enjoying monopolistic position and it derived benefits on account of early entrance in the industry whereas now many small scale industries have started manufacturing similar products and therefore margins have reduced substantially. The appellant has further relied on various decisions to say that since there has been no substantial defects found in the books of accounts the same should not be rejected.
3.2 The appellant has rebutted the decisions mentioned by the Learned Assessing Officer as under:
i) Bharat Milk Products vs. CIT [128 ITR 682] - Books of accounts were rejected in that case because the purchase and cash sales were not verifiable and day to day production and manufacturing register were not kept. According to the assessee it has maintained sale, purchase and production register which are duly verifiable.
ii) Steel Worth Ltd. vs. CIT [691 ITR 366] (Gau) - The facts of this case are entirely different from the assessee case.
iii) B.N. Maheshwari vs. CIT [210 ITR 438] (Bom.) There seems to be citation error and hence case is not traceable.
iv) Bombay Cycle Stores vs. CIT [33 ITR 13] (Bom) In this case quantity account was maintained and sale of one of the branches were not ascertainable.-7-
v) Dhondiram Dalichand vs. CIT [ 81 ITR 609] (Bom.) In this case the unexplained balance sheet difference was there and therefore assessee had made false claim regarding the nature of business activity.
vi) Ghanshyamdas Parmanand vs. CIT [21 ITR 79] (Nag) In this case of the assessee proper quantity account was not prepared.
vii) Amiya Kumar Roy & Bros vs. CIT (Tax LR 616] (Cal.) In this case quantity account was not available.
3.3. The appellant has relied on various decisions which are as under:-
i) CIT vs. Vikram Plastic & Others [239 ITR 161] (Guj.) to say that if there are no discrepancy or defect pointed out in the books of accounts and if there is no material brought on record that purchases and expenses were inflated or sales suppressed then books of accounts cannot be rejected.
ii) ITO/ACIT vs. Rupal Chem Dyes & Metal Salts [42 TTJ] (AHD) 245 In this case the ITAT stated that the ITO had not pointed out any specific instance or discrepancy or manipulation of books of accounts.
iii) ITO vs. L.B. Shah & Co., [31 TTJ] (AMD) 216.
In this case the ITAT stated that the absence of stock register does not assume much importance.
The appellant has also relied on several decisions to the same effect and hence they are not quoted again.
3.4 The assessee has stated that the main reason for fall in total GP rate are:-
i) Fall in job work production which contributed major portion in profitability.
ii) Fall in job work rates.
iii) Fall in average sales realization.-8-
iv) Rise in raw material prices.
"4.1. I have considered the submission made by the appellant and Formatted: Line spacing: single observation of the Learned Assessing Officer. Admittedly, the appellant has only maintained register of quantity where product classification as per quality has been maintained. Admittedly, the day to day consumption register for manufacturing has not been maintained. In the sales bills the quality has not been maintained and hence sale prices are not verifiable. In the absence of proper quality-
wise stock register the closing stock is also not verifiable. The GP rate has decreased substantially from earlier year the reason for which is given that the job work has decreased whereas own manufacturing has increased and the GP rate of manufacturing is less than the GP rate of job work. The appellant has not substantiated the same with any evidence as to why the job work GP was more than the manufacturing GP. The Hon'ble Supreme Court in the case of Kachwala Gems vs. JCIT [288 ITR 10] has stated as under:-
"It is well settled that in a best judgment there is always a certain degree of guess work. No doubt the authorities 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.
The Learned Assessing Officer restored to best judgment of the assessee on the following grounds :
i) The assessee had not maintained quantitative details/stock register;
ii) There was no evidence to verify closing stock;
iii) The genuineness of purchases was not proved without any doubt.
.... There was no arbitrariness in this case in resorting to best judgment assessment. It was the assessee himself who was to blame as he did not submit proper accounts'.
4.2. Further in the case of Avdhesh Pratapsingh Abdul Rahman Formatted: Indent: Left: 1", Line spacing:
single & Brothers vs. CIT [210 ITR 406] and in the case of Hari Shankar Gopal Hari vs. CIT [97 ITR 716], the Hon'ble Allahabad High Court has stated as under:
"It is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be -9- deduced. Whether the presence or the absence of a stock register is material or not would depend upon the type of the business. It is true that the absence of a stock register or cash memos in a given situation may not per se lead to an inference that the accounts are false or incomplete. However, where the absence of a stock register, cash memos, etc., is coupled with other facts such as that 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."
4.3. From the above it is seen that there is substantial fall in Formatted: Indent: Left: 1", Line spacing:
single GP rate and if the books of accounts are maintained in such a manner that profit cannot be properly arrived then the books of accounts can be rejected. In the present case quantitative records is not maintained as per quality and hence neither the sales nor the closing stock is verifiable. The decision of the ITAT and Gujarat High Court mentioned above by the appellant do not come to its help in view of the above facts and decision of Hon'ble Supreme Court in the case of Kachwala Gems (supra). Hence the action of the Learned Assessing Officer for rejecting the books of accounts and adopting the average GP rate of last two years is confirmed. Therefore all the grounds of appeal are dismissed."
134. The Learned Authorised Representative of the assessee submitted in exactly the same facts and circumstances of the case the Tribunal in the case of M/s Sumilon Plastics Pvt. Ltd., a group concern of the assessee in ITA No.4244/AHD/2007 with C.O.No.19/AHD/2008 vide order dated 17-9- 2010 deleted the addition. Hence following the said order the appeal of the assessee should be allowed.
145. The Learned Departmental Representative relied on the order of the Learned Commissioner of Income Tax (Appeals).6
15. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. We find that the Tribunal in the case of M/s. Similon Plastcis Ltd., (supra) has held as under:-
"4. We have heard learned representatives of both the parties, Formatted: Line spacing: single perused the findings of the authorities and considered the material available on record.
- 10 -
5. The facts of the case are that in the assessment order the AO Formatted: Line spacing: single stated that the assessee is engaged in the business of manufacturing of metallic jari, kasab, imitation jari and metallic yarn. The AO further noticed that gross profit has been decreasing substantially over the last three years details of which are as under:
A. Y. 2002-03 GP rate 44.68% A. Y. 2003-04 GP rate 16.94% A. Y. 2004-05 GP rate 10.09% In view of the above, the AO asked the assessee to explain the huge fall Formatted: Line spacing: single
in GP rate. The AO also noticed that the average cost of production and average cost of consumption of raw material increased from Rs.188.26 per Kg. in the A. Y. 2003-04 to Rs.197.3 Kgs. in the current year whereas the sale price has decreased from Rs.260.12 Kg. in the last year to Rs.250.5 Kg. in the current year. The AO asked the assessee to explain the reason for this. The AO also noticed from the sale bills that imitation jari has been sold at different rates and therefore, he asked the assessee to explain the same. The details are given in the table reproduced by the AO on page 3 of the assessment order which is as under:
Invoice No. Description Rate (Rs.) 145 20.8.2003 Imitation jari 210 146 21.8.2003 Do 270 148 22.8.2003 Do 300 150 2.8.2003 Do 425 151 22.8.2003 Do 400 156 27.8.2003 Do 260 163 1.9.2003 Metallic Jari Kasab 270 164 1.9.2003 Do 230 165 1.9.2003 Metallic Yarn 260 166 5.9.2003 Do 170 The AO further noticed that although the assessee stated that the rates Formatted: Line spacing: single
were different because the quality was different but when it was asked whether ay qualitative records are kept for charging different rates, the assessee admitted that o quality for different products manufactured and sold are kept by the assessee. The AO also asked the assessee to explain the fact that the average cost of raw material has increased from 188.26 per Kg. in the last year to Rs.197.3 per Kg. in the current year whereas the sale price has decreased from 260.12 per Kg. in the last year to Rs.250.5 per Kg. in the current year. The assessee explained vide letter dated 20-11-2006 that in A. Y. 2002-03 and 2003-04 the assessee company had sold 86% and 34% respectively in the export market whereas in the current year the entire sale is in the domestic market. With respect to the maintenance of register as per quality the assessee stated that practically it is not possible to maintain quality-
- 11 -
wise record as there can by number of quality criteria variations and therefore the prices mentioned in the table are on account of different in qualities of products sold. It was explained that the increase in cost of raw material was because of increase in general raw material prices and the decrease in average sale prices is because there was no export in the current year as compared to last year. The sale price is different because various qualities depend upon length, thickness, lacquering, colour shades etc. The assessee stated that since no defects have been found in the books of accounts and therefore should not be rejected. The AO did not accept the above explanation and stated that the assessee has maintained its books of accounts in such way that verification of sale price is not possible. The assessee was not mentioning qualitative details in the sales bills so that the price mentioned in the bill was not subject to verification. The AO stated that the sale bills show that assessee has sold products as wholesaler. This is not a case of retailer and hence the argument of the assessee that quality-wise register is not possible is not acceptable. The AO further stated that assessee is not maintaining day to day consumption and production and no quality details of various products has been maintained. The AO relied on various decisions for rejecting the books of accounts. In the case of Bharat Milk Products 81 ITR 609, the Hon'ble Bombay High Court stated that day to day manufacturing and production of account if not maintained can be a good reason for rejection of accounts. The AO has also relied on various other decisions in this regard. The AO therefore, rejected th4e books of account for non- maintenance of quality-wise details and also for non-maintenance of day to day stock register account coupled with the fact the GP has steeply declined. The AO adopted the average GP of last two years and made the addition by adopting the GP rate of 30.81% as against 10.09% shown in the current year. Consequently the AO made the addition of Rs.38,25,997/-.
6. The addition was challenged before the learned CIT(A) and during Formatted: Line spacing: single the appellate proceedings the assessee reiterated the submissions made in the earlier years and has stated that the working of gross profit rate by the AO was incorrect. The correct working of gross profit rate after reducing the other income i.e. DEPB licence income, duty drawback and leave and license fee are as under:
1) For assessment year 2002-03 gross profit rate was 24.57% on Formatted: Line spacing: single sales of Rs.2.00 crores out of which export sale was Rs.1.71 crores and domestic sale was Rs.28.93 lacs.
2) For assessment year 2003-04 the gross profit rate was 13.96% on sales of Rs.1.57 crores consisting of export sales of Rs.53.63 lacs and domestic sales of Rs.1.03 crores.
3) For the current year the current year the gross profit rate was 10.05 on total sales of Rs.1.84 crores consisting of only domestic sales.
- 12 -
It has been stated that the AO had considered export incentive and Formatted: Line spacing: single license fee also for calculating the gross profit rate which shows very high margin of gross profit rate. It was further stated that consequent to reduction in export sales gross profit martin of the company has also reduced as export realization was far better than domestic sales and that the assessee company has tried to maintain the total sales by increasing domestic sales at lower margin. The assessee further stated that increase in price of raw material is the factor beyond the control of the assessee and has led to decrease in gross profit rate. The assessee further stated that gross profit margin in earlier year was high because the assessee company was enjoying almost monopolistic position whereas now there were many small scale industries who have started manufacturing similar goods. The assessee has stated that during the assessment year 2005-06 and 2006-07 the gross profit rate has further decreased in view of this competition. The assessee has relied upon the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Vikram Plastics and others 239 ITR 161 to contend that where there are no discrepancies and defects in books of accounts, the same cannot be rejected if they are maintained in the regular course of business. The assessee has also relied on various other decisions in support of its contention.
7. The learned CIT (A) considering the submissions of the assessee and the Formatted: Indent: Left: 0"
material on record deleted the part addition. His findings in Para 2.5 and 2.6 in the impugned order are reproduced as under:
"2.5. I have considered the considered the submission made by the appellant and observation of the AO. The correct GP after reducing the other income viz. export incentives is 24.57% for AY 2002-03 and 13.96% for AY 2003-04. The appellant has admittedly not maintained day to day stock register and also has not maintained any quantity-wise quality details. It is also admitted that that GP rate has fallen substantially which the assessee tried to explain by saying that the cost of raw material has increased, competition has increased and export sales have been stopped. The fact remains that absence of sock register, quality details coupled with t4he fall in GP is sufficient to reject the books of accounts in view of the decision of Supreme Court in the case of Kachwala Gems vs. JCIT [288 ITR 10}. Therefore, the books of accounts have been rightly rejected by the AO. In this case the Hon'ble Supreme Court has stated as under"
"It is well settled that in a best judgement there is always a certain degree of guess work. NO doubt the authorities should try to make an honest and fair estimate of the income even in a best judgement assessment and should not act totally arbitrarily, but there is necessarily some amount of guess work involved in a best judgement assessment.
- 13 -
The AO restored to best judgement of the assessee on the following grounds:
i) the assessee had not maintained quantitative details/stock register;
ii) there was no evidence to verify closing stock;
iii) the genuineness of purchases was not proved without any doubt.
...... there was no arbitrariness in this case in resorting to best judgement assessment. It was the assessee himself who was to blame as he did not submit proper accounts".
2.6 In view of the above considering the fact that the GP rate has decrease coupled with the fact that day to day stock register has not been maintained and quality details have not been maintained, the books of accounts have rightly rejected by the AO. However, the average GP rate of the last two years has been wrongly taken by the AO at 30%. After removing the other i0ncome from "A. Y. 2002- 03 and 2003-04 the average GP rate is 19.26%. The assessee has himself shown the GP rate of 10.05% and hence there is a fall in the GP rate by 9.121%. Considering the effect of competition, increase in the rate of raw material as well as stoppage of exports, it would be fair if the GP rate is increased by 8% instead of 9.21% by giving a margin of about 1.21% in view of the above reasons. Therefore the addition of Rs.38,25,997/- is restricted to Rs.14,79,000/-. This ground of appeal is therefore partly allowed".
8. The revenue as well as the assessee are aggrieved against the order of Formatted: Indent: Left: 0"
the learned CIT(A) on the grounds mentioned above.
9. The learned DR relied upon the order of the AO and submitted that Formatted: Indent: Left: 0"
there was a fall in gross profit rate as compared to earlier years. Average cost of production and average cost of consumption of raw material increased from the earlier years, however, the sale price have decreased. The learned DR also submitted that sale price have different rates and specific show cause notice was issued to the assessee to explain the issue but the assessee failed to explain the same. The learned DR further submitted that no day to day sock register has been maintained and that books of account are not maintained on quality wise details which is important in the case of the assessee being dealing in artificial jari. The learned DR, therefore, submitted that the learned CIT (A) should not have deleted even the part addition. On the other hand, the
- 14 -
learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that the assessee has produced complete books of account including bills and vouchers which have been examined by the AO and no specific defects have been pointed out in the maintenance of the books of account. The assessee is dealing in artificial jari and several types of quality of material have been used in the business. Therefore, purchase and sales depended upon the thickness and quality of the raw materials and sale rates are also fixed according to the quality. He has submitted that quantitative details are maintained and filed in the audited report (PB-34). He has submitted that complete details of the purchases in kilogram and value have been maintained and produced before the AO. Copies of the same are filed in the paper book from PB-40 onwards. The details of sales are also maintained party wise and in amount copies of which are filed at PB-49 onwards. The assessee maintained list of the stock and also maintained computerized stock register of raw material and finished goods, quantity details with daily register copies of which are filed at PB-61 to 91 of the paper book. The learned Counsel for the assessee referred to PB-35 and 36 which are the details of gross profit working and submitted in preceding assessment year 2002-03 the assessee apart from domestic sales have export sales on which gross profit rate of 24.57% has been shown and in that year there was substantial export sales and domestic sale was very small. In the assessment year 2003-04, the gross profit rate was 13.96% on the total sales which contained domestic and export sales. However, in the assessment year under appeal 2004-05, the assessee has only domestic sales on which gross profit rate of 10.05% has been shown. There were no export sales. He has, therefore, submitted that there is a change in the circumstances as compared to the earlier years. Therefore, average gross profit rate should not have been applied in the matter, or considering the earlier history of the assessee. The learned Counsel for the assessee submitted that the correct working of the gross profit should have been after reducing the other income mainly DEPB license income, duty draw back and leave and license fees. He has submitted that if the same are taken into consideration, the AIO has applied average gross profit rate 10.11% (PB-35) as against shown by the assessee at 10.05%. The
- 15 -
learned Counsel for the assessee submitted that the authorities below should not have rejected the book results of the assessee and should not have made the addition.
10. We have considered the rival submissions and the materials available Formatted: Indent: Left: 0"
on record. The assessee has given details of sales for the assessment year under appeal and the preceding assessment year along with computation of gross profit rate at pages 35 and 36 of the paper book. In the assessment year under appeal, the assessee has not made any export sales. However, in the preceding assessment years 2002-03 and 2003-04, the assessee made substantial export sales. The assessee has also shown other income and according to the assessee if the other income are excluded from calculation of the gross profit rate on the domestic sales, the gross profit rate applied by the assessee would be more than as noted by the AO. We, therefore, find that explanation of the assessee is correct that there is a change in the circumstances as compared to the preceding assessment years in which the assessee made domestic sales which are higher in the assessment year under appeal. However, there was no export sale in the assessment year under appeal which has been made in the earlier years. If the other income is excluded, the gross profit rate of the assessee would come at 10.05% and in the preceding assessment year 2003-04, it would be about 13.96%. There is no substantial variation in the gross profit rate as compared with the immediate preceding assessment year. The assessee also explained that complete details of purchases, sales and stock have been maintained. The AO has not found any purchases or sales made by the assessee outside the books of account. The assessee also maintained complete details of raw materials and finished goods quality wise with daily register copies of which are filed in the paper book from pages 61 to 91. The assessee also explained that several quality items are used in the business of the assessee; therefore, there are variations in the purchases and sales rates. The assessee maintained complete books of account which have been produced before the AO in which no specific defects have been pointed out by the AO. The assessee in the audit report maintained complete quantitative details in kilogram of all the items used in the business copy of which is filed at PB-34. The learned DR also
- 16 -
pointed out from the assessment order that approximately cash sales of 15 to 20% are effected which are non-verifiable. However, we may mention that Hon'ble Bombay High Court in the case of Jessaram Fetehchand (R.B.) (Sugar Dept.) Vs CIT 75 ITR 33 held that "non-inclusion of address of customers in respect of cash transactions cannot be a basis of rejection of books of account. It was also held that there was no necessity for assessee to maintain the addresses of the customers and failure to maintain the same or to supply them as and when called for cannot give rise to suspicion with regard to genuineness of the transaction". The above decision of the Hon'ble Bombay High Court was followed by the Hon'ble Kerala High Court in the case of M. Durai Raj Vs CIT 83 ITR 484. Therefore, the above objection of the learned DR is not significant that the assessee made cash sales which are non-verifiable. Though, the assessee did not maintain day to day stock register but quantitative details have been mentioned in the audit report in the prescribed form. The AO has not pointed out if the assessee has made any sales, purchases outside the books of account. It is also not pointed out if the assessee has inflated the expenses. According to the explanation of the assessee complete books of account have been maintained in the same pattern as have been maintained in the earlier years. The assessee explained all the points raised by the AO. Though the assessee maintained proper books of account and the AO has not brought anything on record to show that the books of account were incorrect or incomplete and that no profit could be deduced there from. Hon'ble Delhi High Court in the case of CIT Vs Smt. Poonam Rani 326 ITR 223 held as under:
"During the course of arguments before us, it was submitted by the learned counsel for the appellant that the assessee was not maintaining the daily stock register. We, however, find no such finding in the assessment order. On the other hand, we note that the assessee had submitted before the Commissioner of Income-tax (Appeals) that Form No.3 Containing all quantitative details in respect of raw materials as well as the finished goods, duly audited by the certified accountant had been placed on record, but, the Assessing Officer ignored those actual figures enclosed with the return. In any case, no statutory provision under the income-tax regime requiring the assessee to maintain the daily stock register has been brought to our notice. Hence,
- 17 -
even if no such register being maintained by the assessee as is contended by the learned counsel for the appellant, that by itself does not lead to the inference that it was not possible to deduce the true income of the assessee from the accounts maintained by her, nor can the accounts be said to be defective or incomplete for this reason alone. If stock register is not maintained by the assessee that may put the Assessing Officer on guard against th4e falsity of the return made by the assessee and persuade him to carefully scrutinize the account books of the assessee. But the absence of one register alone does not amount to such a material as would lead to the conclusion that the account books were incomplete or inaccurate. Similarly, if the rate of gross profit declared by the assessee in a particular period is lower as compared to the gross profit declared by him in the preceding year, that may alert the Assessing Officer and serve as a warning to him, to look into the accounts more carefully and to look for some material which could lead to the conclusion that accounts maintained by the assessee were not correct. But, a low rate of gross profit, in the absence of any material pointing towards falsehood of the account books, cannot by itself be a ground to reject the account books under section 145(3) of the Act".
Hon'ble Allahabad High Court in the case of CIT Vs Rajni Kant Dave 281 ITR 6 held as under:
"Held, that the books of account maintained by the assessee were not found incomplete or incorrect and it had also not been held that the method adopted by the assessee was such by which the correct income could not be deduced. Hence the provisions of section 145(1) of the Act had wrongly been invoked. The Tribunal was also right in holding that where the proper books of account and documents have been maintained under rule 6F of the Income-tax Rules, the income can properly be deduced therefrom and the provisions of section 145(1) of the Act could not be invoked. The accounts could not be rejected".
Hon'ble Rajasthan High Court in the case of Gotan Lime Khanij Udhyog 256 ITR 243 held that "mere rejection of books of account does not mean addition has to be necessarily made".
11. Considering the facts of the case in the light of the submissions of the Formatted: Indent: First line: 0"
parties and the findings of the authorities below, it is clear that the books of account maintained by the assessee was not found to be incorrect or
- 18 -
incomplete and it has also not been held that the method adopted by the assessee was such by which the correct income could not be deduced. The AO has not brought any other material against the assessee for rejection of the book results. The cash sales made to the customers by itself is no ground for rejection of book results. Considering the above circumstances, we do not find it to be a fit case for rejection of the book results or to make addition by applying average gross profit rate. We accordingly, set aside the orders of the authorities below and delete the entire addition."
12. We find that in the instant case also the assessee is engaged in Formatted: Indent: First line: 0"
the business of manufacturing of metallic yarn, jari and kasab and has shown gross profit as under:-of A.Y. 2002-03 48.42% A.Y. 2003-04 21.38% A.Y. 2004-05(Current year) 11.33%
13. We also find that in the case of M/s. Sumilon Plastic Pvt. Ltd., (supra) Formatted: Indent: First line: 0"
the Tribunal accepted the gross profit shown in Assessment Year 2004-05 at 10.09%. In the case of the present assessee the gross profit rate shown in the present year is 11.33% which is higher than the profit accepted by the Tribunal in the case of M/s. Sumilon Plastic Pvt. Ltd., (supra). Further, the Learned Departmental Representative could not show any good reason as to why the order of the Tribunal in the case of M/s. Sumilon Plastic Pvt. Ltd., (supra) should not be followed in the case of the present assessee and also could not bring material on record to show that the above quoted order of the Tribunal was reversed in appeal by a higher quorum. Therefore, facts being identical respectfully following the precedent we set aside the orders of the lower authorities and delete the entire addition.
14. In the the result, the appeal of the assessee is allowed.
- 19 -
Order signed, dated and pronounced in the Court on 31st day of January, 2011.
Sd/- Sd/-
( T.K. SHARMA ) ( N.S. SAINI )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: Ahmedabad, 31st day of January, 2011.
Compiled and compared by : Patki
- 20 -
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals)-
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER,
स᭜यािपत ᮧित //True Copy//
(Dy./Asstt.Registrar), ITAT, Ahmedabad
Date Initials
1. Draft dictated on -28-1-2011-------------- -------------------
2. Draft Placed before authority 28-1-2011------------- -------------------
3. Draft proposed & placed 28-1-2011------------- ------------------- JM
Before the Second Member
4. Draft discussed/approved 31-1-2011------------- -------------------
JM/AM
By Second Member
5. Approved Draft comes to P.S 31-1-2011-------------- --------------------
6. Kept for pronouncement on 31-1-2011-------------- --------------------
7. File sent to the Bench Clerk 31-1-2011-------------- --------------------
8. Date on which file goes to the ---------------- --------------------
9. Date of dispatch of Order ---------------- ---------------------