Income Tax Appellate Tribunal - Delhi
Senior India (P) Ltd., Delhi vs Assessee on 26 July, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : G : NEW DELHI
BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
ITA No.4522/Del/2011
Assessment Year : 2008-09
Senior India (P) Ltd., Vs. DCIT,
1568, Church Road, Circle-8(1),
Kashmere Gate, New Delhi.
Delhi.
PAN : AAAC12419N
(Appellant) (Respondent)
Assessee By : Shri C.S. Aggarwal, Sr. Advocate &
Shri R.P. Mall
Department By : Shri Ramesh Chandra, CIT, DR
ORDER
PER A.D. JAIN, JUDICIAL MEMBER:
This is Assessee's appeal for Assessment Year 2008-09 against the order dated 26.07.2011, passed by the Ld. CIT (A)-XI, New Delhi, taking the following grounds:-
"1. That the impugned order of ld CIT(A) sustaining the additions and disallowances made and the findings recorded by the ld AO is erroneous both on facts and in law and thus the adverse findings recorded by the ld AO and ld CIT(A) deserves to be set aside, so well the additions sustained to the total income declared by the assessee company.
2. That learned CIT(A) has further erred both on facts and in law in upholding an addition made by the ld AO of Rs. 3,71,25,681/- in the 2 ITA No.4522/Del/2011 trading account. In doing so, the ld CIT(A) has failed to comprehend the factual substratum of the case and the evidence placed by the assessee in support that the addition made by the Id AO was based on theoretical and non existent ground and were not only arbitrary but were based on unwarranted assumptions and presumptions.
2.1 That ld CIT(A) has failed to comprehend that Books of accounts maintained by the assessee (which admittedly were produced before the AO), could not have been rejected as no defect was found in the books of accounts regularly maintained by the assessee in the normal course of business, other than that there was a fall in the average rate of profit.
2.2 That ld CIT(A) has erred in failing to appreciate that the assessee is maintaining the books of accounts in accordance with the provisions of the Act and no defect have been found therein and that the accounts have been maintained as were maintained in earlier assessment years, which has been accepted and as such, the rejection of books of accounts is wholly unwarranted and unjustified.
2.3 That the Ld CIT(A) has failed to appreciate that the adverse comments of the ld Assessing Officer that "assessee has not given any breakup or detail of meterwise production vis-a-vis consumption of power & fuel and number wise production vis-a-vis consumption of power & fuel" cannot be regarded any valid basis to reject the books of accounts or to reject the results derived from such books of accounts, since neither such details are possible to be maintained nor are required to be maintained in law.
2.4 That the ld CIT(A), while confirming the addition made by the ld AO, has failed to appreciate that all what the ld AO has done is, that he had enhanced the declared OP rate by 7% and further proceeded to make disallowances of expenses without specifying or identifying any expenses or even head of the expenditure, which was stated to be from P&L account including manufacturing and trading account. Such an approach is contrary to law, as it is contradictory in nature and thus the order is vitiated in law as the same is based on non application of mind.
2.5 CIT(A) has failed to appreciate that ld AO himself has not doubted the incurring of expenditure on power and fuel and has neither identified a single expenditure which can be said to have not been incurred by the assessee, as such, enhancement of gross profit by 7% is highly arbitrary and unjustified in law.
2.6 That various other observations made in the order of assessment are based on factualinaccuracies and are in disregard of submissions made by the assessee which are supported by necessary evidence and material.
3 ITA No.4522/Del/20112.7 That the learned CIT(A) has failed to appreciate that the assessee had admittedly produced the books of accounts on 18.10.2010 and had also produced them on 18.10.2010. In the absence of any endorsement in the order sheet entry of non production of books of account on 18.10.2010, thus cannot be validly alleged and thus the findings of the AO and CIT(A) were erroneous both on facts and in law.
2.8 That without prejudice to each of the aforesaid grounds the CIT(A) has failed to appreciate even if it is held that the declared results could not be accepted then only a net profit rate could be estimated and the income could not be enhanced by enhancing the gross profit rate.
3. That the ld CIT(A) has erred on facts and in law in confirming a disallowance of Rs 35,98,902/- out of expenses claimed of Rs. 1,02,59,968/- being Warranty expenses "claimed by the appellant. That while upholding the disallowance of Rs 35,98,902/-, ld CIT(A) has failed to appreciate that the appellant had created the provision on the basis of past history and was based on a scientific and reliable method and as such, the disallowance sustained by the ld CIT(A) deserves to be deleted. The said provision made was towards accrued and ascertained liability ought to have been held allowable as such.
4. That the ld CIT(A) has erred on facts and in law in confirming disallowance of Rs.52,11,793 being amount of expenditure incurred on sales commission expenses. The ld CIT(A) failed to appreciate that the ld AO had made the disallowance only for the year without providing to the appellant sufficient meaningful and proper opportunity of being heard and directing the assessee to produce any further specific material or evidence.
4.1 That ld CIT(A) has erred in failing to appreciate that assessee had furnished the complete details alongwith the name of the persons and has also filed the confirmations of the persons to whom such sales commission had been paid as such, upholding the disallowance of sales commission expenses was highly unjustified and was unwarranted both in law and on facts."
2. As per the material on record, the assessee, a private limited company incorporated on 01.10.1996 under the Companies Act, 1956, is engaged in the business of manufacturing and sale of Automotive Flexible Exhaust Connectors and Stainless Steel Flexible hoses with Braid. The said products are exported by it to its associated enterprises and are also locally supplied to various `original manufacturers' of equipment in India.
4 ITA No.4522/Del/20113. Ground No.1 is general in nature.
4. Apropos Ground No. 2, on 29.9.08, the assessee company filed its Return of Income, wherein income for the current year was declared at Rs. 3,54,56,540/-. On 11.02.2010, a notice under section 143(2) of the Income Tax Act along with a questionnaire under section 142(1) of the Act was issued to the assessee. In response to the aforesaid questionnaire, the assessee, in the course of the assessment proceedings, furnished replies dated 2.3.10, 12.4.10 and 14.5.10, enclosing various details as required as per the questionnaire. On 8.7.10, the AO raised further queries. In response to the aforesaid queries, the assessee furnished replies dated 28.7.10, 16.8.10, 1.9.10 and 8.10.10, enclosing the various details as were required as per the queries raised by the AO. On 13.10.10, the AO issued a show cause notice. In response to the aforesaid show cause notice, assessee furnished replies dated 1.11.10 and 18.11.10.
5. On 13.6.11, the AO framed the order of the assessment at an income of Rs. 8,80,53,982/-, as against the returned income of Rs. 3,54,56,540/-, making, inter alia, the following additions/disallowances:
Addition/ Amount (Rs)
Disallowance made
Trading additions 3,71,25,681
Warranty Expenses 1,02,59,968
Sales Commission 52,11,793
Total 5,25,97,442
6. Vide the impugned order dated 26.7.11, the ld. CIT(A) disposed of the appeal of the assessee, sustaining the addition of Rs. 3,71,25,681/- made to the assessee's declared trading results.
7. The ld. Counsel for the assessee, vide his arguments and the written submissions filed, has contended that the assessee is engaged in the business of manufacturing of Automotive Flexible Exhaust Connectors and Stainless Steel Flexible hoses with Braid; that during the course of the 5 ITA No.4522/Del/2011 assessment proceedings, the AO had, on 28.07.2010 directed the assessee company to furnish details of month-wise production and consumption of power and in compliance thereto, the same were furnished as per Annexures 2 and 3 of submissions dated 16.08.2010; that the AO had also directed the assessee company to provide details of gross profit rate and net profit rate, which were furnished on 16.08.2010; that thereafter, based on the aforesaid data, the AO, by a notice dated 13.10.2010, observed that there was no match between the consumption of power & fuel and the production, which was against the basic premise of the input-output theory and that so, the assessee was being show caused as to why the books of account should not be rejected and profit be attributed accordingly; that the assessee company, on receipt of the aforesaid show cause notice, by its submissions dated 18.11.2010, stated that:
"Your goodself has raised a query that there is no match between consumption of power & fuel and production. Further, your goodself has asked the assessee to show cause why books of accounts should not be rejected on this premises.
We wish to submit that one to one match between consumption of power/fuel and production of goods is not possible due to inherent nature of products manufactured, process/time involved in manufacturing, process of raising invoices by electricity authorities and various other factors beyond the control of the assessee. These reasons are explained below in details:
a) The assessee had submitted details of month wise production vide submission letter dated August 16, 2010. The same are attached herewith for reference as Annexure 1. From the details submitted it can be seen that production for some products is measured in number of units manufactured while for others it is measured in meters manufactured. The unit used for measuring quantity of different kind of products is different. However, while making a comparison with power consumption and fuel cost in the above referred notice, quantity of all the products manufactured has been added together. This renders the monthly data incomparable.
b) Further, in the above referred show cause notice production of finished goods is compared with power and fuel expenses.
The appellant explained that there is always stock of unfinished goods/work in progress (WIP) at the end of the 6 ITA No.4522/Del/2011 month. Power and fuel expenses are also incurred on such WIP. The volume of WIP at the end of each month will also affect the power and fuel expenses as the volume of WIP at the end of a month varies on month to month basis. Hence, direct comparison of power and fuel expenses with number of units manufactures is not correct.
c) We wish to state that power consumption for different kinds of products is different. Some products manufactured by the assessee consume more units of power than other products manufactured by the assessee.
Therefore, consumption of power and fuel expenses in a month largely depends on the quantities in which each good is manufactured. If in a period, products which consume more power are manufactured in larger quantities than the products which consume less power, the power and fuel expenses shall be higher. Irrespective of the total quantities of all the products manufactured, number of power units consumed in a month depends largely on the type of products manufactured.
For instance, manufacture of corrugated assemblies requires 'tig welding process' at high voltage and hence, consumes more power which is almost 100% more power as compared to other products.
Therefore, adding monthly production quantity of all the products and comparing it with monthly power and fuel expenses does not provide the correct view.
d) As stated above, the assessee manufactures different kinds of products. Some products are manufactured as individual parts while some products are used as attachments in making other larger parts like hose assemblies. Some attachments to hose assemblies are of such nature, that they can be either manufactured in its own factory by the appellant or can be bought from external market vendors according to the required specification.
In any period, where such attachments are procured from external vendors, the power consumption shall be lower as compared to the period in which such attachments are manufactured internally.
e) The assessee had submitted details of month wise power and fuel expenses vide submission letter dated August 16, 2010.
7 ITA No.4522/Del/2011From the submissions it can be seen that electricity expenses are paid to Dakshin Haryana Bijli Vitran Nigam Ltd. (DHBVN). DHBVN is a division of Haryana State Electricity Board (HSEB) and a wholly state owned corporation. Copies of all the invoices received from DHBVN have already been submitted vide submission letter dated August 16, 2010.
All the payments have been made by the assessee vide account payee cheques. All the power expenditure has been duly vouched for and recorded in the books of accounts.
f) Comparison of power expenses with production as made in the above referred notice is not correct due to another reason. DHBVN invoice is normally from mid of month to mid of next month. The period of invoicing also changes frequently as can be observed from the details filed. Therefore, comparison of power expenses with production on the basis of power invoices is not correct.
g) Other power and fuel expenses comprise of diesel expenses for generators used in the factory of the assessee. The assessee has installed high power generators in its factory to run its production activities in case of power cuts and power failures. Cost of own generation of power through generators is higher than the cost of power supplied by DHBVN. It is almost 1.5 times the cost of power supplied by DHBVN.
Hence, in a month when DHBVN power supply is less, power and fuel expenses will increase irrespective of increase in production. Hence, these expenses cannot be correlated directly in proportion to production.
h) The diesel used to run these generators is purchased from external vendors. All the payments to diesel vendors are made through account payee cheques. All the expenses have been duly vouched for and recorded in the books of accounts.
In view of the above discussions, your goodself shall appreciate that the variation in consumption of power and fuel in is due to various reasons beyond the control of the assessee."
8. The ld. Counsel for the assessee further contended before us that in para 5 of the aforesaid submission dated 18.11.2010 (page 116 of the APB), it was further submitted before the AO as under:
"Complete books of accounts are produced for your verification. Since the supporting vouchers and invoices are very voluminous, 8 ITA No.4522/Del/2011 the same can be produced for verification on test check basis as desired."
9. It was further stated that however, the AO, in the order of assessment, observed that the gross profit and net profit of the assessee for the instant assessment year was 22% and 5% respectively, and for the immediately preceding year, the same was 29% and 6%, respectively; that during the assessment proceedings, the assessee, vide its submissions dated 01.11.2010 (APB 110-111), furnished its explanation in respect of the fall in Gross Profit, as follows:
1. Comparison of Gross profit rate and Net Profit rate for last three years and reason in variation of the same.
Comparative chart of Gross Profit rate and Net Profit rates has been enclosed for your reference (Annexure 1).
The fall in gross profit rate as compared to previous yearsis mainly due to increase in cost of production. The cost of principal raw materials has steadily increasedover previous three years without a corresponding increase in the selling prices. A Comparative chart showing cost prices of principal raw material for last three years has been enclosed for reference (Annexure 2). Copies of invoices for last three years of principal raw materials have also been enclosed on sample basis for as evidence.
As stated above, the prices of assessee's products did not increase in correspondence with increase in prices of raw materials, in domestic as well as international markets due to global recessionary pressures and increasing competition from Chinese manufacturers. A comparative chart showing selling prices of principal goods is enclosed for reference (Annexure 3). copies of invoices for last three years of principal customers have also been enclosed on sample basis for as evidence.
The above comparisons and supporting documents show that the fall in Gross profit rate is due to normal business conditions.
We further wish to submit that all the purchases and sales are made from/to well established parties and all the payments/receipts are through account payee cheques."
10. It has been further stated that despite the submissions of the assessee and documentary evidence placed on record, the AO wrongly held that since 9 ITA No.4522/Del/2011 the assessee had not maintained the books of account as per section 209(1)(d) of the Companies Act, 1956, since the books of account were not produced for verification, since there was increase in the manufacturing expenses from Rs. 4,94,48,811/- to Rs. 5,07,87,651/- and also under the head employees remuneration & benefit from Rs. 4,71,24,704/- to Rs. 5,08,65,913/- and there was fall in gross profit rate, the books of account were being rejected by invoking section 145 of the Act; that it was as such, that the AO wrongly made an addition of Rs. 3,71,25,681/- by increasing the gross profit rate @ 7%; that the allegation is that the assessee company has not maintained books of account as per section 209(1)(d) of the Companies Act, and not that no books of account, as maintained, were produced; that the AO could have reached a conclusion that the books of account had not been maintained as per section 209(1)(d) of the Companies Act only when he had seen the books of account, and not otherwise; that the ld. CIT(A) wrongly upheld such finding of the AO on the ground that since the AO had applied the principle of proportionality, the assessment order did not require any interference; that this was done without appreciating the submissions of the assessee; that the observation of the AO and upholding of this observation by the learned CIT(A), that the assessee had not produced its books of account, is factually incorrect and contrary to the material on record; that on 18.11.10, the assessee had duly furnished its written submissions (APB 112-116) before the AO; that on the said date, authorized representatives of the assessee, along with one of the directors of the company, had attended the proceedings before the AO, and had produced the complete books of account for verification; that it had been further submitted before the AO, that since the supporting vouchers and invoices were very voluminous in nature, it was not practically feasible to produce all of them; that however, the assessee had offered to produce the desired vouchers and invoices for verification purposes on a test check basis; that the AO ignored the fact that the assessee had actually so produced its books of account and had further so offered to produce the desired 10 ITA No.4522/Del/2011 vouchers and invoices for verification on a test check basis; that in fact, the AO has, on the one hand, held that the books maintained by the assessee could not be relied upon, and on the other hand, she has held that books of account were not produced; that if the books of account were not produced, there was no occasion to hold that the books of account of the assessee could not be relied on; that so, these observations are mutually contradictory; that had the assessee not produced the books of account before her, the AO would have recorded so in the order sheet on the relevant date of hearing, i.e., on 18.11.2010, whereas no such entry stands made; that it is not comprehendible that when the books of account are being regularly maintained by the assessee and they have been produced for all the preceding years since A.Y. 2004-05, the assessee would not have produced them before the AO this year; that though the assessment proceedings were initiated on 11.2.10, throughout, till the passing of the assessment order, there was no such allegation of non production of books of account; that during the assessment proceedings, the assessee had furnished as many as nine replies before the AO, i.e., replies dated 2.3.10, 12.4.10, 14.5.10, 28.7.10, 16.8.10, 1.9.10, 8.10.10, 1.11.10 and 18.11.10 and had enclosed all the relevant documents and evidence, as required by the AO vide notices dated 11.2.10 and 13.10.10; that it is also not the case of the AO that the assessee had not complied with the notices issued by him, or that it had not cooperated in the course of the assessment proceedings; that after the receipt of the notice dated 13.10.10, through which, the assessee was required to produce its books of account, the assessee duly furnished its reply dated 01.11.10 and thereafter, on 18.11.10, it furnished its further reply and also produced the complete books of account; that thereafter, the assessee was never called upon by the AO to produce the books of account; that since the assessee had duly complied with all the notices issued by the AO and had also furnished the relevant documents as called for, the statement of the assessee, made vide its submission dated 18.11.10, whereby it had submitted that the books of 11 ITA No.4522/Del/2011 account were produced, cannot be doubted; that in the proceedings before the CIT(A) too, the assessee once again furnished the books of account; that however, the same were not accepted by the CIT(A) and he merely upheld the findings of the AO wrongly; that in support of this factual aspect, the assessee was furnishing an affidavit of Shri Naresh Aggarwal, CFO and Director of the assessee company under Rule 10 of the Income Tax Appellate Tribunal Rules; that assessee has maintained complete books of account and all the books of account maintained by the assessee would be produced, if so required, for the perusal of this Tribunal; that the assessee's books of account for the year under consideration had been duly prepared by the assessee in accordance with all applicable Accounting Standards; that such books of account prepared by the assessee have been duly audited by a firm of Chartered Accountants; that in the Auditor's Report for the relevant year, prepared as per the Companies (Auditor's Report) Order, 2003, the independent statutory auditors have expressed their opinion with reference to the books of account maintained by the assessee; that on page 4 of the Audit Report, it has been opined by the auditors as under:
"6. The Company has maintained proper records of its inventories. The discrepancies between the stocks that have been physically verified and book stocks were not material and have been properly dealt with in the books of account.";
that further, at page 6 of the Report, the auditors have opined as under:
"b) In our opinion, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books;
c) The Balance Sheet, Profit & Loss Account and cash flow statement dealt with by this report, are in agreement with the books of account;
d) Except for accounting standard 17 on segment reporting, the Balance Sheet, Profit and Loss Account and cash flow statement dealt with by this report comply with the accounting standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956.";12 ITA No.4522/Del/2011
that AS-17, as noted in the Auditor's Report, relates to the Accounting Standard which is in relation to reporting of segmental data in the financial statements; that this Accounting Standard does not, in any way, affect the way the books of account are maintained, or the income is computed; that Annexure A (APB 60) of the Auditor's Report (APB 41-96) u/s 44AB of the Act provides the list of books of account maintained, which were duly examined by them; that so, there can be no doubt regarding the maintenance, completeness and accuracy of the books of account maintained by the assessee; that however, ignoring all the above facts placed on record by the assessee, the AO merely wrongly relied only on the following observation of the auditors:
"13. According to the information and explanations given to us, the Company has not maintained the prescribed books of account and records pursuant to the rules made by the Central Government for the maintenance of cost records under section 209(1)(d) of the Companies Act, 1956 the manufacture of automotive components.";
that the above observation does not relate to the maintenance of books of account for the purpose of computing income, rather It is only with relation to maintenance of cost records, which are not related to the books of account for computing profits and income of the assessee; that without understanding the nature of above referred observation of the auditors, the AO has erroneously concluded that the profits shown by the assessee in the present assessment year cannot be accepted; that since the assessee has maintained complete books of account as per the Accounting Standards and this fact has also been certified by the auditors, the completeness of the assessee's books of account cannot be called in question; that the judicial pronouncements relied upon by the AO do not apply to the assessee's case, as the facts of the assessee's case are entirely different; that as regards the observation of the AO that the assessee's consumption of power and fuel is not commensurate with its production, it is submitted:
a) That production for some products is measured in number of units manufactured, while for others, it is measured in meters. The unit used 13 ITA No.4522/Del/2011 for measuring quantity of different kind of products is different.
However, perusal of the show cause notice reveals that while making a comparison with power consumption and fuel cost, quantity of all the products manufactured has been added together by the AO. This renders the monthly data incomparable.
b) That there always remains some stock of unfinished goods/work in progress (WIP) at the end of the month. Power and fuel expenses are also incurred on such WIP. The volume of the WIP at the end of each month will also affect the power and fuel expenses, as the volume of the WIP at the end of a month varies from month to month. Hence, direct comparison of power and fuel expenses with the number of units manufactured is not correct.
c) That power consumption for different kinds of products is different.
Some products manufactured by the assessee consume more units of power than other products manufactured by the assessee. For example, Hose Assembly has more wielding process and as such, it consumes more power as compared to that required for the other products manufactured. Therefore, consumption of power and fuel expenses in a month largely depends on the quantities in which each product is manufactured. If during a period, products which consume more power are manufactured in larger quantities than the products which consume less power, the power and fuel expenses shall be higher. Irrespective of the total quantities of all the products manufactured, the number of units of power consumed in a month depends largely on the type of the products manufactured. For instance, manufacture of corrugated assemblies requires 'tig welding process' at high voltage and hence, it consumes more power, which is almost 100% more power as compared to other products. Therefore, adding the monthly production quantity of all the products and comparing it with the overall monthly power and fuel expenses does not provide the correct view.
d) That the assessee manufactures different kinds of products. Some products are manufactured as individual parts, while some are used as attachments in making other larger parts like Hose Assemblies. Some attachments to Hose Assemblies are of such nature, that they can be either manufactured in its own factory by the assessee, or they can be bought from external market vendors, according to the required specification. In any period, where such attachments are procured from external vendors, the power consumption shall be lower as compared to the period in which such attachments are manufactured internally.
e) That electricity expenses are paid to Dakshin Haryana BijliVitran Nigam Ltd. (DHBVN). DHBVN is a division of Haryana State Electricity Board (HSEB) and a wholly state owned corporation. All the payments have 14 ITA No.4522/Del/2011 been made by the assessee vide account payee cheques. All the power expenditure has been duly vouched for and recorded in the books of account. Copies of all the invoices received from DHBVN had been submitted to the AO vide written submissions dated 16.8.10.
f) Comparison of power expenses with production, as made by the AO, is not correct due to the reason that a DHBVN invoice is normally from mid of a month to mid of the next month. Therefore, comparison of power expenses with production on the basis of power invoices is not correct.
g) Other power and fuel expenses comprise of diesel expenses for generators used in the factory of the assessee. The assessee has installed high power generators in its factory to run its production activities in case of power cuts and power failures. Cost of own generation of power through generators is higher than the cost of power supplied by DHBVN. It is almost 1.5 times the cost of power supplied by DHBVN. Hence, in a month when DHBVN power supply is less, power and fuel expenses will increase, irrespective of the increase in production. Hence, these expenses cannot be correlated directly in proportion to production. The diesel used to run these generators is purchased from external vendors. All the payments to diesel vendors are made through account payee cheques. All the expenses have been duly vouched for and recorded in the books of account of the assessee.;
that as such, the observation of the AO that the power and fuel expenses are not commensurate with the production is wholly unjustified; that in respect of the power and fuel expenses, the assessee has produced complete bills and vouchers and no discrepancy what so ever has been recorded by the AO with regard to the incurrence of the expenditure; that without prejudice, there is no excessive consumption of the power and fuel; that merely because expenditure on power and fuel is higher, this cannot be a ground for rejection of the books of account, as held in the case of 'St. Teresas Oil Mills vs. State of Kerala, 76 ITR 365 (Ker); that the AO has rejected the books of account and has proceeded to make a heavy addition arbitrarily by increasing the gross profit rate by 7%, being the difference in the gross profit rate of the assessment year in question and that of the preceding assessment year; that the AO has not brought on record any reason or fact as to how this conclusion was drawn and the addition has been made purely 15 ITA No.4522/Del/2011 on conjectures and surmises, without any basis whatsoever; that it is also not the case of the AO that the assessee has made any sale outside the books, or has suppressed the sales; that mere low gross profit is not a ground for rejection of the books of account, as held in the case of 'CIT vs Poonam Rani', 326 ITR 223 (Del); that the AO found that the net profit of the assessee for the year under consideration had fallen from 6% to 5%, as against that of the preceding year and proceeded to frame the assessment by enhancing the gross profit by 7%, as the gross profit of the assessee for the instant assessment year, which was declared at 22% had fallen by 7% as compared to the previous assessment year, in which year, it was declared at 29%; that like has to be compared with like; that in other words, if the AO was to enhance the gross profit and compute income on the basis of the GP, instead of Net Profit, she could have held that the deficit of 7% warrants an addition; that however, in the instant case, by making an addition of 7% to the Gross Profit, she enhanced the net profit from 5% to 12%; that in fact, the question is as to whether the margin of 12% of Net Profit can be said to be correct; that the declared profit margin is 5% as against 6% in the preceding assessment year and 5% for the year ended 31.03.2006; that in the assessee's own case, in AY 2006-07, trading additions were made by the AO on the basis of difference in gross profit rate from preceding years; that the assessee preferred an appeal before the ld. CIT(A) and the trading additions were deleted in full; that subsequently, the revenue filed an appeal before the ITAT, which was dismissed vide order dated 21.4.10.(APB 177-
181) holding that the AO had failed to bring any plausible reason for replacing the GP shown by the assessee without pointing out any discrepancy in the purchases of raw materials and sales, opening stock or closing stock and without pointing out any defect in the books of account of the assessee;; that in the instant case, the AO has recorded that since there was increase in the manufacturing expenses from Rs. 4,94,48,811/- to Rs. 5,07,87,651/- and also under the head of employees' remuneration & benefit from Rs. 4,71,24,704/- to Rs. 5,08,65,913/- and there was fall in gross profit, 16 ITA No.4522/Del/2011 the books of account could not be accepted; that in recording the aforesaid finding, she has failed to consider that the material cost of the main input (APB 365), i.e., of coil and wire had increased by more than 15% and 22%, respectively, whereas increase in the manufacturing expenses was only of 2.7% and increase in employee cost was only of 7.95%, as compared to the previous year; that if the aforesaid facts are taken into consideration, the fall in Gross Profit would be justified; that in the present case also, the AO did not raise any query regarding the purchase value of raw materials from any of the parties from whom purchases were made, nor did the AO ask any question regarding the sales value of the products sold to any of the parties, nor was she able to point out any defect in the books of account of the assessee; that in 'State of Orissa v. Maharajah Shri B.P. Singh Deo', 76 ITR 690 (SC), it was held that where the AO considers the material placed before him by an assessee as not reliable, he cannot proceed to make an arbitrary assessment and if the AO thinks that the profits shown by the assessee are not acceptable, it is for the taxing authority to prove that the assessee had made more profits and then, the AO has to relate his estimate to some evidence or material on record; that reliance in this regard was also being placed on 'International Forest Co. v. CIT', 101 ITR 721 (SC), 'Dhakeswari Cotton Mills Ltd. v. CIT', 26 ITR 775 (SC) and 'Dhirajlal Girdharilal v Commissioner of Income tax', 26 ITR 736 (SC); that the AO has made an addition of Rs. 3,71,25,681/- and has relied upon section 145 of the Act to enhance the gross profit by 7%; that in doing so, he has compared the average rate of gross profit, instead of average net rate of profit; that if trading results are to be rejected and the AO is to estimate the income of the assessee to the best of his judgment, it is only net profit rate and not gross profit rate which is required to be compared; that in case it is held that the AO could adopt the gross profit rate to be a valid basis, he would be accepting the expenditure debited in the profit and loss account, which, obviously, is based on the books of account; that this would be contrary to the theory of rejection of books of account; that it is not possible to hold that 17 ITA No.4522/Del/2011 the books of account are partially correct and partially incorrect; that further, the AO has not enhanced the turnover and has accepted the disclosed turnover, but has applied the gross profit rate on the declared turnover; that this only means that there is no dispute about the declared turnover; that further, the AO has only disputed the excessiveness of the expenditure incurred on power and fuel, but without disputing that such an expenditure has been incurred, which expenditure, in her opinion, is excessive when compared to the production; that the total expenditure incurred on power and fuel in the instant year aggregates to Rs. 81,53,942/- (APB 261), whereas in the preceding year, such expenditure incurred amounted to Rs. 72,45,660/- (APB 261); that however, the AO has not disputed the incurrence of the expenditure, either in respect of power and fuel, or under any other head; that all that has been stated is that there is no match between the production and the consumption of power and fuel; that further, the AO has admitted that the electricity expenses have been incurred in respect of the electricity bills paid; that likewise, she has also admitted that the department does not intend to dispute the statement of the assessee that the diesel used to run generators was purchased from external vendors; that therefore, the approach of the AO is highly arbitrary and erroneous in law, being perverse; that it is not a case where the AO has disputed the cost of the expenditure incurred in respect of the power and fuel, or under any other head of expenditure; that had there been any mismatch between the production and the consumption of fuel, obviously the expenditure incurred would have been found to be disproportionate, either in terms of value, or otherwise, and likewise, of the production; that in fact, once the AO has applied the gross profit rate on the declared turnover, it becomes absolutely evident that the AO accepts the figure of turnover and thereby, the production, as declared by the assessee, to be correct and thus no addition could have been attempted by her; that thus, the basis of making the aforesaid addition by the AO by enhancing the gross profit rate is highly unjustified; that the average rate of gross profit had fallen on account of 18 ITA No.4522/Del/2011 substantial increase in the cost of raw material, as was explained before the AO in the assessee's Written Submissions dated 1.11.10 (APB 110); that the AO has not disputed the aforesaid submission or the fact that the cost of raw material had substantially increased, which fact is fully supported by vouchers and all the payments have been made by account payee cheques; that there is no finding by the AO that the cost of the raw material, as reflected in the books of account, was either inflated, or unverifiable; that therefore, the AO has grossly erred in making the aforesaid addition; and that in case the Tribunal is of the opinion that the books of account need to be re-examined in the light of the observations of the AO's comments, in the assessment order, the assessee will have no objection to have the same re- examined by the AO.
11. On the other hand, the Ld. DR, vide written submissions dated 25.2.13 (APB 137-140) has contended, inter alia, that the AO had specifically asked the assessee vide notices dated 23.9.09 and 8.7.10 to produce the books of account, documents and other evidence in support of the return of income filed; however, the assessee failed to do so; that the order sheet of the AO clearly shows that at least the books of account were not shown to the AO and had it been otherwise, there would have been a recording/entry to that effect in the order sheet; that even if for argument sake it is presumed that the books were carried and produced by the assessee, when the assessee was asked to sign the order sheet, it could have been qualified to that effect; that the absence of such a qualification shows that books of account were never produced before the AO; that the affidavits filed before the Tribunal on behalf of the department also go to show that the books of account were not produced; that the affidavit filed by Shri Naresh Aggarwal on behalf of the assessee needs to be rejected, since the hearings before the AO were attended by him along with Manju Bharadwaj and Kartik Bansal, whereas the affidavit has been filed only by him; that moreover, the affidavit of Shri Naresh Aggarwal was filed for the first time only before the Tribunal and no 19 ITA No.4522/Del/2011 such affidavit was filed before the Ld. CIT (A), disclosing that the contents of such affidavit are merely an afterthought; that no such affidavit was filed before the Ld. CIT (A) due to the apprehension of being caught by the CIT (A), whose powers include the power of examining the deponent and the power to prosecute for making a false statement, under the IPC; that even the Audit Report of the assessee states that according to the information and explanations given to the auditors, the assessee company had not maintained the prescribed books of account and records pursuant to the Rules made by the Central Government for the maintenance of cost records u/s 201 (1) (d) of the Companies Act, 1956, for the manufacture of automotive components; that this further proves that books of account, which were not even maintained by the assessee, had not been produced before the AO; that further, presuming, though not admitting, that the books were maintained and produced before the AO, they could well have been produced before the CIT (A) also, to rebut the findings of the AO; that there is nothing on record showing any attempt/proposal by the assessee to produce them even before the CIT (A); that the contention of the assessee that despite doubting the power consumption, the AO does not disturb the Turnover is also of no help, because there was no such material available with the AO to in any way doubt the suppression of turnover; that when it was so, the question of doubting the turnover by the AO would not have arisen; that further, the assessee has failed to appreciate that there was no question of doubting the genuineness of the power bills because they were raised by the Government departments only; that since there were vast variations in the consumption pattern inference of manipulations within the books by the assessee only was the most reasonable logical inference which the AO could have drawn; that another argument of the assessee has been that the action of the AO for rejecting the books of account or the book results, inter alia, on the ground of failure of the assessee to 20 ITA No.4522/Del/2011 furnish monthly data in terms of consumption of power in terms of units and the production in terms of meters was not justified, because the AO failed to appreciate that the items being produced were of multiple types, of which, a few were in terms of units, while the other were in terms of meterage, that thus, assessee says that from the uncomparable data nothing could have been inferred by the AO and that when it is so, this cannot be a ground for rejection of books; that in the same breath, it has been averred by the assessee, that there is no co-relation between the production and the electricity consumption; that in this connection, the assessment order shows that such a contention was never advanced by the assessee before the AO, which ought to nave been done, especially when the AO had specifically asked for explanation about the vast variations in the trading results in reference to the preceding years; that in para 3.1(a) of the Assessment Order, the AO has clearly pointed out about the failure of the assessee to give the break up or details of meter wise production vis-a-vis the consumption of power and fuel and number wise production vis-a-vis the consumption of power and fuel; that when originaIIy this contention was not advanced, no cognizance thereof can be taken now as it is just an afterthought; that the assessee contends that the aspect of power consumption is the only reason given by the AO for rejecting the books; that in this connection, assessment order shows that primarily, the factors which prompted the AO to reject the book results and to apply the GP rate, hiking it by 7%, were
(a) Mismatch between month wise production, consumption of raw material, power and fuel and the resultant production, (b) Non-furnishing of details of WIP & unfinished goods produced, (c) Vast variations between the production and consumption, (d) Non-furnishing of details as to which items consume less power 21 ITA No.4522/Del/2011 vis-a-vis other items, which has to be there in any industrial activity, (e) Non-furnishing of details of products manufactured as individual parts and as used as attachments in making other larger parts, (f) Sharp fall in GP & NP, respectively, of 7% &1 % as compared to the last year, (g) Failure to file specific details to prove as to how the cost of production increased and there was no corresponding increase in sale price, (h) Failure to produce books and bills in support of the figures quoted, (i) Non- maintenance of prescribed books/cost records, etc., as required under section 209(1)(d) of the Companies Act, 1956 regarding the manufacture of automotive components and (j) Sharp increase in the manufacturing expenses and expenses under the head of employee remuneration & benefit; that it was in the light of all the above reasons and not just on the basis of consumption of power, that drawing support from various squarely applicable judicial decisions, the AO rightly invoked section 145 of the Act & rejected the books and hiked the GP by 7%; that it was resultantly, that the AO made disallowance of expenses to the equivalent extent amounting to Rs.3,71,25,681 out of the Manufacturing and Trading A/c; that the explanation of the assessee that despite there being increase in cost of production, there has not been any corresponding increase in the sale price was found to be too general to explain such a drastic fall; that regarding the contention put forth that the AO on the one hand doubts manufacturing results but makes addition out of the P & L A/c, the AO was doubting not only the correctness of the manufactured items, but also of the P & L A/c comprising of the Trading and Manufacturing A/ c; that on the argument that no notice was given to the assessee to produce books of account, it is the assessee's self-destructive argument, because on the one hand, it is contended that no such notice was given, while on the 22 ITA No.4522/Del/2011 other, it says that the books were produced; that while contending so, the assessee forgets to appreciate that the books could not have been produced, unless there was a requirement/notice from AO to that effect; that further, the assessee fails to appreciate that when, as observed by the Auditors in their Audit Report, certain important manufacturing records were not maintained at all, it was impossible for the assessee to produce the non-existent records before the AO; that while contending that if the books were not there and were not produced, how it would have been possible for the AO to reject them and that too without seeing them, the assessee fails to appreciate that the contention of the AO has been that certain records, as observed by the Auditors also, were not at all maintained and hence, they were not produced and that accordingly, whatever books were maintained by the assessee, on the basis of which trading results were arrived at, were clearly defective and unreliable; that this is why those books, which were not even shown to the AO, were to be rejected, as a logical deduction and that non production of the books before the AO was a good enough reason for the AO to reject book results because they, i.e., the results, were not verifiable; that all the arguments raised before the Tribunal were taken by the assessee before the AO and then before the Ld. CIT (A) also; that the CIT (A), after considering the facts and circumstances of the case, did not find the explanation of the assessee to be convincing and, accordingly, rightly upheld the order of the AO; that the assessee has not been able to effectively refute the detailed observations made by the AO; that the assessee has also not been able to rebut the categorical findings of fact recorded by the Ld. CIT (A) in rightly upholding the assessment order on this issue; that it has been specifically noted in the order under appeal that in spite of repeated requests by the AO, the assessee had not produced its books of account for physical verification 23 ITA No.4522/Del/2011 and as such, it was not possible to verify the claim made by the assessee; that the Ld. CIT (A) has rightly held that the assessee failed to explain before the AO the reason for such low GP and that in the absence of production of books of account, the explanation of the assessee had rightly been rejected by the AO; that further, there is also no rebuttal to the Ld. CIT (A)'s observation that no material was placed on record by the assessee to show that it had been prejudiced by the estimation of GP made by the AO; and that the assessee has also not been able to rebut the finding of the Ld. CIT (A) that the principle of proportionality was applied by the AO by making a detailed discussion.
12. Apropos the affidavit filed by the assessee, i.e., the affidavit (APB 69-
70) of Shri Naresh Aggarwal, CFO and Director of the assessee company, wherein, it has been stated on oath that along with various replies filed by the assessee before the AO, the assessee had enclosed all the relevant documents and evidence as required by the AO and had produced complete books of account for perusal and verification by the AO and that the observation of the AO that no books/bills/vouchers were ever produced, was factually incorrect as the assessee had produced complete books of account before the AO on 18.11.2010 and that though the assessee carried the books of account even before the CIT (A) for his perusal and verification, the CIT (A) did not look into these books of account and decided the appeal filed on the basis of written submissions filed by the assessee, the Ld. DR filed letter (APB 77A) dated 6.7.12, submitting a document (APB 77B) dated 5.7.12 as affidavit of Ms Nishtha Tiwari, Dy. Commissioner of Income-tax, Circle 8 (1), New Delhi (the AO in this case), stating, inter alia, that no books/bills/vouchers were ever produced in the course of assessment proceedings.
24 ITA No.4522/Del/201113. In response to the above document, the assessee filed rejoinder (APB 78-83), objecting that the said purported affidavit is neither verified, nor notarized and so, it is not admissible as evidence.
14. Later, the department filed another document (APB 123-124), dated 3.10.12, stated to be an affidavit of Shri Arkendra Singh, Assistant Commissioner of Income-tax, Circle 8 (1), New Delhi, stating that as mentioned in the assessment order dated 10.12.2010, the assessee was requested to produce books of account and bills in support of figures quoted by it; that in response, the assessee had in letter dated 18.11.10 stated that complete books of account were produced for the AO's verification; and that however, no such books/bills/vouchers were produced during the course of assessment proceedings.
15. The Ld. DR has contended vide oral submissions and written submissions (supra) dated 25.2.13 that the affidavit filed by the assessee has been filed under Rule 10 of the Income-tax Appellate Tribunal Rules; that the said Rules do not define an affidavit and hence, what may be an affidavit under Order XIX Rule 3 of the CPC, is not relevant; that therefore, the assessee's contention that the affidavit filed by the Department are not in accordance with Order XIX, Rule 3 of the CPC, is not sustainable; that even otherwise, both the affidavits filed by the revenue are strictly in accordance with the requirements of Order XIX, Rule 3 CPC; that the affidavit of the AO, Ms Nishtha Tiwari, contains verification on the basis of personal knowledge; that the affidavit of Shri Arkendra Singh, apart from being notarized, discloses the source of verification, as disclosed in the affidavit itself; that an affidavit can be either on oath, or as an affirmation; that both the affidavits filed by the department are on affirmation before the Tribunal, which has the authority to administer such oath/affirmation and so, just because the affidavits do not specifically mention the word 'oath', they cannot be discarded; that Section 8 of the Notaries Act, 1952 defines the function of a 25 ITA No.4522/Del/2011 notary to be to administer oath to, or take affidavit from any person; that since the affidavit of Shri Arkendra Singh was filed before a notary, it is evident that without administering oath, which could be oral, or in writing, the notary would not have taken the affidavit; that by virtue of Section 8 (e) of the Notaries Act, a presumption of administration of oath is attached to an affidavit, when it stands duly notarized; that so, the assessee's contention that the affidavit, not being on oath, is not acceptable, needs to be rejected; that further, as per Section 4 of the Oaths Act, 1969, an oath or affirmation is to be made by witnesses and interpreters of questions put to an evidence given by witnesses; that since the AO herself acted in a judicial capacity and even by virtue of the provisions of Section 4 of the Oaths Act, there was no requirement for her to make oath or affirmation; that otherwise too, if the affidavits filed are not taken to be affidavits on oath, there was no requirement of filing such affidavits; and that so, the objection raised by the assessee be rejected.
16. The assessee has filed rejoinder submissions (APB 125-136), wherein it has been contended, inter alia, that the document filed in substitution of the purported affidavit of Ms Nishtha Tiwari, AO, i.e., the purported affidavit of Shri Arkendra Singh, ACIT, Circle 8 (1), New Delhi, is also not an affidavit inasmuch as the same, like the purported affidavit of Ms Nishtha Tiwari, AO, is not verified; that in the absence of verification, this document is a mere statement; that however, such statement, as is evident from the contents of the document, is not based either on personal knowledge, or on any material placed on record; that it is not a sworn document and it has merely been attested by a notary without any one having verified the deponent before the notary; that moreover, the statement made in the alleged affidavit is not by the person who had framed the assessment; that Shri Arkendra Singh cannot make a statement in respect of a matter which could not have been in his personal knowledge; that what the basis of the statement is, has not been stated therein and it has been only stated that the statement made is as per 26 ITA No.4522/Del/2011 the order of assessment; that apropos the objection of the Ld. DR that an affidavit under Rule 10 of the ITAT Rules can be a mere sworn statement, due to which, the affidavit filed cannot be disregarded, since the ITAT Rules do not define an affidavit and Order XIX, Rule 3 of the CPC has no relevance, it remains undenied that the affidavit has not been verified; that for a document to be taken to be in the nature of an affidavit, it is necessary that the statement sworn therein must be verified; that further, Rule 10 of the ITAT Rules specifically states that the affidavit to be filed has to be a 'duly sworn' affidavit; that this is entirely in keeping with the requirement of Order XIX, Rule 3, CPC; that an affidavit should be verified by expressly stating as to which part thereof is true to the personal knowledge of the deponent and which is true on the basis of information; that an affidavit serves as evidence in the absence of any other evidence; that in the present case, there is no evidence to support the contention of the department that the books of account were not produced before the AO by the assessee; and that in such a scenario, the affidavit filed by the assessee can only be rebutted by a counter affidavit, whereas the documents filed by the department are no affidavit in the eye of law.
17. The assessee has filed further written submissions (APB 141-164), which are in rejoinder to the department's written submissions (supra) dated 25.2.13. It has been contended, inter alia, that it is incorrect to state that the provisions of Order XIX Rule 3, CPC have been complied with; that the affidavit of Ms Nishtha Tiwari is neither notarized nor verified; that the affidavit of Shri Arkendra Singh also does not contain verification; that Rule 10 of the ITAT Rules only provides that a fact which is not borne out or is contrary to the record can be proved on affidavit; that however, the said Rule does not provide as to who can state on affidavit and as to how a statement should be given on affidavit; that it is incorrect that the record does not show the production of books of account by the assessee before the AO; that the assessee's written submissions dated 18.11.10 before the AO 27 ITA No.4522/Del/2011 belie this; and that Section 4 of the Oaths Act provides that oaths or affirmations shall be made by all witnesses, interpreters and jurors; and that it does not provide that jurors cannot swear on oath.
18. We have heard the parties on this issue and have examined the material placed on record with regard thereto. Apropos the affidavits filed before us by both the parties, it is noted that as correctly contended on behalf of the assessee, the affidavit of Ms Nishtha Tiwari, AO and Shri Arkendra Singh, ACIT, are both not affidavits in the eye of law. The affidavit of Ms Nishtha Tiwari was neither verified, nor notarized. Both these requirements have been held to be the sine qua non for a valid affidavit in 'State of Bombay vs. Purushottam Jog Naik' AIR 1952 SC 317 and in 'AKK Nambiar vs. UOI and Another', AIR 1970 SC 652. The affidavit of Shri Arkendra Singh, though it is notarized, it does not contain any verification. There is no merit in the department's contention that the assessee's objections in this regard are merely technical objections. There is also no merit in the department's submission that in the face of Rule 10 of the ITAT Rules, Order XIX Rule 3, CPC cannot be taken recourse to. Rule 10 of the ITAT Rules provides that where a fact which cannot be borne out by or is contrary to the record alleged, it shall be stated clearly and concisely and supported by a sworn affidavit. It does not dilate upon as to what an affidavit is. That being so, the relevant provisions of the CPC, i.e., Order XIX, Rule 3 thereof needs must be resorted to.
19. So far as regards the issue of verification, in 'AKK Nambiar vs. UOI and Another (supra) and in 'Virendra vs. Jagjiwan' 1974 SC 1957, it has been held that the reasons for verification of affidavits are to enable the court to find out which facts can be said to be proved on the affidavit evidence of rival parties; that the importance of verification is to test the genuineness and authenticity of the allegations and also to make the deponent responsible for the allegations; that in essence, verification is required to enable the court to 28 ITA No.4522/Del/2011 find out as to whether it will be safe to act on such affidavit evidence. In 'Subal vs. S', AIR 1952 SC 255, it has been held that affidavits not properly verified will be rejected and that in the absence of proper verification, affidavits cannot be admitted in evidence. No decision to the contrary has been cited before us by the department. Then, in 'D.N. Gupta vs. Jaswant', AIR 1982 Delhi 250, it has been held that where an affidavit is not properly verified, it cannot be allowed to be amended, but the deponent may be allowed an opportunity to file another affidavit. In the present case, accordingly, since the affidavit of Ms Nishtha Tiwari did not contain any verification, the department was allowed an opportunity to file her fresh affidavit. However, the affidavit filed the second time round is not of the deponent in the first affidavit, i.e., the AO. Further, this second affidavit also does not contain any verification.
20. Apropos the department's reliance on Section 4 of the Oaths Act, 1969, the said provision reads as follows:-
"4. Oaths or affirmations to be made by witnesses, interpreters and jurors.
(1) Oaths or affirmations shall be made by the following persons, namely:-
(a) All witnesses, that is to say, all persons who may lawfully be examined, or give, or be required to give, evidence by or before any court or person having by law or consent of parties authority to examine such persons or to receive evidence;
(b) Interpreters of questions put to, and evidence given by, witnesses; and
(c) Jurors;"
21. It is clear from the aforesaid Section 4 of the Oaths Act, that it does not provide that jurors cannot swear on oath. Likewise, Section 4 of the Oaths Act also does not say that an AO cannot, or should not, make affirmations on oath by filing an affidavit.
29 ITA No.4522/Del/201122. Regarding the department's further contention that an affidavit can either be on oath or as an affirmation and that both the affidavits filed on behalf of the department are on affirmation before the Tribunal, which has the authority to administer such oath/affirmation and so, these affidavits cannot be rejected, in the present case, neither of the affidavits filed by the department are statements on oath. They also contain no verification. It is also incorrect to state that since the Tribunal has the authority to administer such oath/affirmation, the affidavit cannot be rejected. It is trite that all affidavits need must be duly verified, as observed in the decisions noted hereinabove.
23. Further, the reliance of the department on Section 8 of the Notaries Act, 1952 is also out of context. The said provision nowhere provides that an affidavit without verification is a valid affidavit.
24. For the above reasons, neither of the affidavits filed by the department before us are 'affidavits' in the eye of law and the same cannot be read in evidence.
25. Now, addressing the question of production of the books of account by the assessee before the AO, the intrinsic mutual contradiction between the observations made by the AO in the assessment order with regard to this aspect has been noted above. Despite this glaring contradiction, the same was not taken note of by the Ld. CIT (A) and the CIT (A) merely went by the assessment order as it is, illegally upholding the addition made.
26. Be that as it may, it is seen that the assessment order does not take into consideration the contentions raised before us by the assessee, which have repeatedly been stated to have specifically been taken before the AO. It has been contended that the AO has only referred to the monthwise production vis-a-vis the consumption of power and fuel and held that there is no match of the consumption of power and fuel with the production. It has 30 ITA No.4522/Del/2011 been submitted that while doing so, the AO did not take into consideration the fact that Flexible Corrugated Assemblies and Automotive Exhaust Connectors are manufactured in numbers and, as such, their production was also recorded in numbers. It has been submitted that Flexible Corrugated Metal Hoses and Wire Brading are manufactured lengthwise and therefore, they are recorded in terms of metres. It has been contended that as such, since these items have no co-relation inter se, the number of units manufactured and the lengths adopted together cannot match the consumption of power and fuel and electricity. In this regard, RG-1, i.e., the record of finished goods and RG-23, i.e., the record of input were produced to show that the items manufactured are excisable goods and a complete record of the manufacture thereof is maintained by the assessee.
27. The response of the department in this regard is that in para 3.1 (a) of the assessment order, it has been observed that the assessee failed to give the break up or details of metrewise production vis-a-vis the consumption of power and fuel and numberwise production vis-a-vis consumption of power and fuel.
28. We find that in the assessment order, the AO has not dealt with the aforesaid contentions of the assessee. It is pertinent to reiterate here that it was vide order sheet noting dated 28.7.10, that details of monthly production and of monthly power consumption were asked for by the AO from the assessee. Vide order sheet noting dated 17.8.10, the AO noted that reply to the above queries was filed on behalf of the assessee. The Ld. CIT (A) has also not taken note of this aspect of the matter and has not recorded any finding with regard thereto.
29. Further, as correctly pointed out on behalf of the assessee, the AO has accepted both - the figures of production of the assessee and those of its consumption of power and fuel. In this regard, the assessee made submissions before the AO vide its replies dated 16.08.10, 1.11.10 and 31 ITA No.4522/Del/2011 18.11.10 and also before the Ld. CIT (A) (APB 345-348). The details of power and fuel consumed in each month are at APB 117-120, the details of power and fuel for the last five years are at APB 202 and the details of power and fuel consumption are at APB 366.
30. So far as regards the AO's observation that the assessee has not given any break up or detail of metrewise production vis-a-vis consumption of power and fuel and numberwise production vis-a-vis consumption of power and fuel, with no detail in respect of bifurcation of monthly production of goods which consumes less power and all those which consume more power has been furnished, or of manufactured all individual parts and products used as attachment and all details of WIP and unfinished goods produced, the assessee's reply is contained in its reply dated 18.11.10. These submissions were also filed before the Ld. CIT (A). The details of power and fuel per month and for the last five years and of fuel consumed and percentage to the cost of the sales of the assessee have also been filed, as noted above. The contention is that it is not possible to deduce as to which product consumes more electricity than the others and that in the absence of separate meters of consumption of electricity vis-a-vis production of different items, such details are not possible to be maintained. The assessee maintains that the items manufactured in each month are not manufactured in the same volume and quantity and show the consumption of power and fuel vis-a-vis the items manufactured would be more, or less, depending on the production. It has also been stated that legally, the assessee is not required to maintain a record indicating as to which product consumes more electricity and which product requires less electricity; and that also, this has nothing to do with the method of accounting, which is the same employed by the assessee as done by it from its very inception and in which method, no defect has ever been found by the department.
32 ITA No.4522/Del/201131. These submissions of the assessee, made before the AO, have also not attracted any finding in the assessment order, even though the AO observes that :
"The department does not intend to dispute the statement of the assessee that it has made electricity bill payment........."
32. There is also no finding recorded in this regard by the Ld. CIT (A) too.
33. To the AO's objection that there is no co-relation between the fall in GP and NP ratio with the business expenses, again, the assessee's eloquent replies dated 1.11.10 and 18.11.10 contained its submissions made. Similar submissions were made before the Ld. CIT (A) also. It has been stated that the material cost of the main input, i.e., coil and wire, stood increased by about 15% and 22%, respectively, on account of market conditions, whereas increase in the manufacturing expenses was only of 2.7% and that the increase in employee cost was only of 7.9%, as compared to the preceding year and if this is taken into consideration, the fall in gross profit stands explained; that for Assessment Year 2005-06, the GP was 37%, and it fell to 29% for Assessment Year 2007-08, which was accepted; that the net profit rate also fell to 5% for Assessment Year 2006-07 from 9% for Assessment Year 2005-06 and the AO's addition on this account was deleted by the CIT (A), which deletion was upheld by the Tribunal.
34. Again, these submissions of the assessee were not taken into account by the AO and the ld. CIT (A) also did not comment on the same. This, despite the fact that neither the purchase value of the raw materials, nor the sales value of the products sold were disputed by the AO.
35. In the above view of the matter, it is deemed appropriate that in the interest of justice since the real issue involved is the determination of the correct income of the assessee, the matter be remitted to the file of the AO to be decided afresh in accordance with law, on affording due opportunity of 33 ITA No.4522/Del/2011 hearing to the assessee and on examining the books of account of the assessee. The assessee, no doubt, shall cooperate in the proceedings before the AO. The assessee shall be free to raise all possible pleas, as available to it under the law on this issue and to place all relevant material before the AO, including its books of account.
36. Since the issue concerning Ground No.2 is remitted to the file of the AO, as above, the issues pertaining to Ground Nos.3 and 4 are also remitted to the file of the AO for decision afresh, as directed to be done for Ground No.2 above. These issues also relate directly with the books of account of the assessee. In the face of the controversy as to whether the books of account were, in fact, produced by the assessee before the AO or not, which is the matter pertaining to Ground No.2, besides the relevant addition made, arguments on Ground Nos.3 and 4 were not heard. These grounds having been admitted by us, the above directions given by us regarding Ground No.2 shall equally apply to the fresh proceedings before the AO, concerning Ground Nos.3 and 4 and the assessee shall be at liberty to place all relevant material and evidence before the AO, including the books of account. All pleas available to the assessee under the law qua these issues will also be allowed to be raised.
37. In the result, for statistical purposes, the assessee's appeal is treated as allowed.
The order pronounced in the open court on 09.04.2014.
Sd/- Sd/-
[SHAMIM YAHYA] [A.D. JAIN]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 09.04.2014.
dk
34 ITA No.4522/Del/2011
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.