Income Tax Appellate Tribunal - Hyderabad
M/S. Sudhakar Pvc Products, Hyderabad vs Department Of Income Tax on 11 December, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
S.No. ITA No. AY Appellant Respondent
1 996/H/11 2007-08 Asst. M/s Sudhakar PV
Commissioner Products,
of Income-tax, Suryapet,
Circle - 9(1), PAN -
Hyderabad. AALFS1886K
2 998/H/11 2007-08 -do- M/s Sudhakar
Irrigation Systems
(P) Ltd., Surpapet,
PAN-
AAFCS5170B
3 997/H/11 2007-08 -do- M/s Sudhakar
Plastic Ltd.,
Suryapet.
PAN-
AADCS4065K
Revenue by: Shri P. Soma Sekhar Reddy
Assessee by: Sri A.V. Sadasiva
Date of hearing: 11/12/2013
Date of pronouncement: 09/01/2014
O RDE R
PER CHANDRA POOJARI, AM:
These appeals filed by Revenue in case of different assessees are directed against separate orders of CIT(A)-VI, Hyderabad for the assessment years 2007-08 Since common issues are involved in these appeals, they were clubbed and heard together, therefore a common order is passed for the sake of convenience.
ITA Nos. 996 & 998/Hyd/11 in cases of M/s Sudhakar PVC Products and M/s Sudhakar Irrigation Systems (P) Ltd.
2. Since the grounds raised by the revenue in both these appeals are similar, for convenience we consider the ITA No. 996/H/11. The grounds in ITA No. 996/H/2011 are as follows:
2 I.T.A. Nos. 996, 997 & 998/Hyd/2011M/s Sudhakar Plastic Ltd. and others "1. The learned CIT(A) erred in holding that the Assessing Officer cannot invoke provision of section 145(3) ever when he is not satisfied about the correctness or completeness of the accounts.
2. The learned CIT(A) ought to have taken into account the incompleteness of information of books as highlighted in the assessment order.
3. The CIT(A) accepted the contention of the assessee that for many of the earlier assessments were completed u/s 143(3) and AOs. Have accounted the returns of the assessee firm except for various small disallowances. Therefore, the chain of consistency cannot be broken if sufficient reason is not established. However, it is seen that there are sufficient reasons to break the consistency. The basic legal proposition is that there is no res-judicata for matter of facts as well as no res-judicata for assessment of different assessment years."
3. Briefly the facts are that the assessee manufactures and sells PVC pipes. For AY 2007-08, the assessee filed return of income on 29/10/2007 declaring an income of Rs. 28,07,547/- On examination of record, the Assessing Officer found that there was a drastic fall in the GP rate as compared to earlier year and also subsequent year results. Therefore, the Assessing Officer asked the assessee to furnish the details of input-output statements and production sheets. Since, the assessee failed to produce the said details, the Assessing Officer after issuing notice dated 18/12/2009, informed to the assessee that analysis reveals that there is marginal increase in raw material consumption cost in FY 2006-07 compared to FY 2005-06. It was pointed out by the Assessing Officer that increase in sales is only about 8.9% whereas there is a heavy decrease in closing stock of about 48.7%. The Assessing Officer was of the view that this kind of situation is possible only when the sale prices are slashed heavily and however, it was observed that if the sales are made to sister concerns, assessee was asked to furnish the data to justify such sale price. In the absence of input-output or production sheets for verification, the Assessing Officer proposed to reject the books of account of the assessee. The Assessing Officer concluded that there is an unexplained fall in gross profit rate as per the following table:
3 I.T.A. Nos. 996, 997 & 998/Hyd/2011M/s Sudhakar Plastic Ltd. and others Item FY 2003- FY 2004- FY 2005- FY 2006- 04 05 06 07
PVR Resin price 41529 48405 41329 43106 Increase/decrease - 17.32% -14.61% 4.3% GP% 12.49 10.84 14.97 8.51 Increase/decrease - -1.65 4.13 -6.45
4. The assessing officer opined that the GP for financial year 2004- 05 decreased when there was sharp increase in the Resin price but only by about 1.65%. However, when there is only increase of 4.3% in Resin price during financial year 2006-07, the GP sharply fell by 6.46% in fact lower than that for financial year 2004-05.
5. Accordingly, the assessing officer observed that (i) In the scenario of standard yield, small price rise in input cost could not be the reason for GP shortfall (ii) that the Excise Authorities are not concerned about the income of the appellant and that there is suppression of sales was noticed during search uls 132 done in an earlier year in the case of the appellant (iii) that the appellant declared GP of 33% during the next financial year (iv) that the appellant makes sales to Mls Sudhakar Marketing P Ltd which is a closely held group concern and that the appellant never submitted detailed data on sales made to the concern so that independent verification can be done with sales made by third party manufacturers in the industry. The assessing officer further opined that in view of the above, there was definite manipulation by the assessee in the sales or in the closing stock to reduce the G.P.
6. In view of the above, the assessing officer noted that there was abnormal decrease n GP for financial year 2006-07 and that the same was not explained by the appellant. It was further noted that there is no material change in the manufacturing process when compared to previous years and that there were no abnormal conditions in the market. Accordingly, the assessing officer 4 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others inferred that the possible explanation for such reduction in GP could be attributable to manipulation of sale price in sales which were mostly made to its sister concern or suppression of closing stock as there reduction in closing stock without much change in the yield. In view of the above observations, the assessing officer proceeded to reject the book results of the appellant u/s 145(3) of the Act being incorrect and incomplete and the Gross profit was estimated @ 15% on the gross sales ( Rs. 2,08,63,291 - Rs.
1,18,31,187) Rs. 90,32,032 and added the same to the income admitted by the appellant.
7. During the course of appellate proceedings, the authorized representative of the appellant strongly contended against the observations made by the assessing officer in the assessment order. It was submitted that the profits declared by the appellant were accepted as proper in earlier years. The submissions of the appellant item-wise are summarized by the learned CIT(A) in the impugned order from para 12 to 26. The learned AR also relied on few case laws, which were extracted by the CIT(A) in para 27 of his order.
8. After considering the submissions of the assessee, the learned CIT(A) observed that the assessing officer in his analysis for reaching out to the conclusion that the sharp fall in gross profit without any change in the method of accounting that has been regularly followed by the appellant, tried to prove that the entire books of accounts maintained by the appellant are defective for the lone reason. However, nothing was brought on record to indicate that the vouchers in respect of purchase of various raw materials, sales, expenditure etc were defective or the maintenance of the books of accounts by the appellant was in such a fashion that it could not reveal the true and fair profits of the appellant. On the other hand, the appellant contended the observations of the assessing officer on a concrete footing that all 5 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others the purchases, sales and expenses were fully vouched and that the same were subjected to various pre-checks and post-checks by various statutory authorities such as Central Excise, Sales Tax etc. The mere analysis of quantitative details and consumption of raw materials and increase in purchase price of raw material could not determine the true and correct income of any concern on their own. When the business of an assessee has to be analysed, the total picture has to be taken into consideration and not the single shot where in the opinion of the assessing officer went wrong.
9. The CIT(A) noted that the appellant's submissions that the assessing officer failed to note the impact of opening stock and closing stock where both raw material and finished goods exists, has definitely got some force in it. On the other hand, the sister concern with whom the appellant entered into transactions is also assessed to tax and the income returned by M/s. Sudhakar Marketing Agencies Pvt. Ltd. for the AY 2007-08 had been accepted by the Assessing Officer vide order dt. 29.12.2009, a copy of which was placed before me by the AR of the appellant.
10. The CIT(A) observed that coming to the rejection of books of accounts without pointing out any single defect in maintenance of the same, Hon'ble ITAT, Ahmedabad in their decision in 4 ITR 29 in the case of DCIT vs Paras Dyeing and Printing Mills P Ltd had held that low profit is neither a circumstance nor material to justify addition to profits. Low profit in a particular year by itself cannot be the reason for invoking the powers of best judgement assessment without support of any material on record. Similarly, Hon'ble ITAT, Rajkot in the case of ITO vs Girish M Mehta ( 296 ITR 125) had held that Revenue must prove books of account not reliable and that once the books of accounts were audited and were subjected to scrutiny by other Statutory authorities, simple rejection of the same without any reason is not acceptable.
6 I.T.A. Nos. 996, 997 & 998/Hyd/2011M/s Sudhakar Plastic Ltd. and others
11. Further, the CIT(A) observed that in the present case, the assessing officer himself certified that the yield remained constant and in fact increased during the present year. The other attributables for decrease in low GP as submitted by the appellant have not been examined by the assessing officer in his assessment e.g. impact of opening stock and closing stock. The quantitative details available with him have not been thoroughly gone through and on the other hand the submissions of the appellant that the average price variance in procurement of raw materials could not alone be attributable to the low gross profit ratio. Coming to the finding of the assessing officer that the appellant could have either manipulated sales price or suppressed closing stock clearly indicate that the assessing officer is blowing hot and cold at the same time. The mere fact of price of a similar product down loaded from internet could not have formed the basis for such a pre-determined approach by the assessing officer. On the contrast, the appellant demonstrated as to how the gross profit decline was attributable to various factors being the other variables such as inputs, outputs and other attributable remaining constant more importantly the yield remaining at a similar point or at a slightly higher point.
12. In view of the above observations, the CIT(A) held as under:
In view of the above and also in view of the judicial pronouncement in the case of Dhakeswari Cotton Mills Ltd. Vs. CIT (26 ITR 775) that "the Income tax officer is not entitled to make a pure guess and make an assessment without reference to any evidence and material at all. There must be something more than suspicion to support the assessment. The same principle is also reiterated in the case of Umacharan Shaw & Bros. Vs. CIT (37 ITR 71). It was held that a suspicion however, strong may not take the place of proof. The conclusions which are based on surmises and the assessment made by the AO which is predominantly influenced by. suspicion is liable to set aside.
"
I am of the opinion that mere surmises and conjectures 7 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others cannot be the basis for a pre-determined approach leave alone a thorough investigation from third party transactions by the assessing officer. The available documentary evidence in the form of purchase invoice, sales invoice, various bills and vouchers have not been found defective by the assessing officer at any point of time. The quantitative details certified by other Statutory Authorities which are also a part of the record have not been examined and more contrastingly rejected by the assessing officer under the pretext that the purpose of other statutory authorities is not to determine the income. It is true that the purpose of verification of quantitative details by other statutory authorities is purely for the purpose of manufacturing process only, it is an undeniable fact that the appellant could not have brought anything else than what he has produced and which was subjected to taxation by the other agencies. It is not the case of the assessing officer that there were any material defects noticed at the time of examination of books of accounts and also that there is any change in method of accounting adopted by the appellant from what was regularly adopted. Accordingly, I am of the opinion that the assessing officer cannot blow hot and cold at the same time and the onus clearly lied on the assessing officer to prove that the books of accounts maintained by the appellant suffers any defects. In the absence of any documentary evidence indicating any lapse on the part of the appellant in maintenance of books of accounts which were subjected to audit by statutory authorities, I am of the opinion that the addition made by the assessing officer to gross profit only on the basis of surmises and conjectures of low gross profit compared to earlier years and subsequent year also could not stand the test of law leave alone his own logic. Accordingly, the addition of Rs. 90,32,032/- made by the Assessing Officer to the gross profit is deleted."
13. Aggrieved, the revenue is in appeal before us.
14. We have heard the arguments of both the parties, perused the record and have gone through the orders of the revenue authorities. We find that the assessee produced bills for purchases and the same are found to be in conformity with the excise and sales tax records. When the AO asked the assessee to substantiate its claim, the assessee vide replies on 29/12/2009 and 31/12/2009, submitted as follows:
"i) All the bills for purchase were furnished for verification which 8 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others are in conforimity with Excise and sales tax records.
ii) That the yield during FY 2005-06 was 94.70% whereas the same in FY 2006-07 in 96.01%.
iii) That there is variation in average purchase price of resin between FY 2005-06 (Rs. 41,329) and FY 22006-07 (Rs.
43,016)
iv) That most of the sales were made through its sister concern Sudhakar Marketing P. Ltd.
v) That the decrease in rate was attributable to changes in seasonal demands.
vi) That all purchases and sales were fully vouched.
vii) That the bills relating to purchases and sales were produced during the hearing.
viii) That the sales/purchases were accepted by Central Excise authorities on day to day basis.
ix) That it employs accepted accounting standards.
x) That there is no change in method of accounting.
xi) That the GP for FY 2003-04 was 12.49% and 10.84% in FY 2004-05, 14.87% in FY 2005-06 and 8.51% in FY 2006-07.
We are of the view that the reasons given by the AO to reject the data produced are inappropriate as the non-production of input-output statements or production sheets cannot be justified to reject the books of account. The AO admitted that there is increase in the cost of purchases, however, he was of the opinion that the raise in purchase price is only 3.5% and the GP decrease by 6.46%, which is not commensurate with the raise in the purchase price of raw materials. In our view, decrease in GP is not only the reason in purchase price of raw material, but, also other related expenditure debited to the trading account. The AO should have considered cumulative effect of all the factors which resulted in decrease in GP. In other words, raw material prices have been increase but in the same proportion sale price has not increase. Being so, the AO is not 9 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others justified in making the addition on the basis of low GP rate. More so, all purchases and sales were fully vouched and verified by statutory auditors. Even the AO has not brought any thing on record to establish that the assessee has done low billing in sales to avoid tax. Accordingly, we do not find any infirmity in the order of the CIT(A) in deleting the addition made by the AO on this count and, therefore, we uphold the orders of the CIT(A) in both the appeals. The grounds raised by revenue on this issue are dismissed.
15. In the result ITA Nos. 996 & 998/hyd/2011 are dismissed.
ITA NO. 997//H/11 in the case of M/s Sudhakar Plastic Ltd., Suryapet.
16. The revenue has raised the following grounds of appeal:
"2. The Ld. CIT(A) erred in not appreciating the fact that on non furnishing of certain information net profit @ 2.31% of the turnover, net of all expenses, was made after detailed examination/verification of the information furnished by the assessee. As has been discussed at length in the assessment order, the net profit rate of 2.31% was adopted after taking into cognizance all the material facts and documentary evidence adduced at the state of assessment.
3. The estimation of net profit @ 2.31% is based on the net profit admitted by the assessee for three years. As no special circumstances are existed for AY 2007-08 the average rate of net profit admitted by the assessee for the assessment years 2005-06, 2006-07 and 2007-08 was taken to estimate the profit for assessment years 2007-08."
17. Briefly the facts are that as could be seen from the assessment order, the assessee firm manufactures and sells PVC pipes. For the assessment year 2007-08, it had filed its return admitting income of Rs. 14,26,506. The case was selected for scrutiny and during the course of assessment proceedings, the assessing officer noticed that there is drastic fall in gross profit and net profit rate compared to the earlier years results. The Assessing Officer observed that though there is increase in 10 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others turn over still there is decline in the gross profit and net profit returned. In this regard the Assessing officer made an analysis of gross profit and net profit reported and expenses claimed for the earlier asst. years i.e. 2005-06 and 2006-07. Upon the assessing officer requiring the appellant to show reasons for decline in rates of gross profit and net profit, the appellant had submitted that the cost of raw materials consumed during the financial year 2006-07 was heavy as compared to that in the financial year 2005-06 and furnished a quantitative detail of raw material consumption and production. The appellant further submitted before the Assessing officer that the stock records maintained by them are in conformity with the law relating to Central Excise. The appellant further submitted that the implication and the impact on the average purchase price for the year on account of raw material as under:
AY Quantity Value (Rs.) Rae per ton
2007-08 3445 147593696 42843
2006-07 3378.53 137487076 40694
The appellant before the AO submitted that the difference in the average price in both the years of indigenous raw material works out to Rs. 2,149/- which accounts for gross value of increase in the purchase price of Rs. 74,03,305/-. It had been further submitted that the percentage of increase in the purchases as compared with the percentage of increase in sale price is therefore justified in its case.
18. However, the Assessing Officer in the assessment order held that though there is a marginal fall in GP ratio, the net profit had been shown at an abysmal low rate of 0.33% compared to that shown in the earlier years i.e. asst. year 2005-06 at 3.2% and asst. year 2006:07 at 3.31 % . The AO held even if the appellant's claim of increase in the raw material cost is accepted (manufacturing and trading expenses), the appellant had not 11 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others brought out any evidence on record to show that there is no corresponding increase in sale price. The AO observed that the accepted and / or cardinal principle of trade is whenever there is an increase in the cost/purchase price, there would be a corresponding rise in the price of sale. The AO felt that the appellant could in no way justify its claim that there is increase in the cost of inputs with there being no corresponding rise in the price of sale. He observed that there is no significant increase in the expenses viz. Personnel cost, administrative and selling expenses, interest and finance charges etc. considering the increase in turn over reported from year to year. Hence the Assessing Officer held that the steep decline in the rate of net profit therefore, cannot be attributed to the increase in input costs and concluded that the net profit admitted by the appellant is not free from doubt and does not represent the appellant's true and fair profits. The Assessing officer therefore, arriving at average of net profits for the asst. years 2005-06, 2006-07 and 2007-08 at 2.31 % , had applied the same and arrived at the net profit of Rs. 96,65,266/- on the turn over of Rs. 41,84,09,775/-.
19. During the course of appellate proceedings, the authorized representative of the appellant strongly contended against the observations made by the assessing officer in the assessment order. It was submitted that the profits declared by the appellant were accepted as proper in earlier years. The AR submitted that though not stated that the books are rejected, the AO impliedly rejected the books and resorted to estimate the income @2.31 % of gross sales of Rs. 41,84,09,775/- which works out to Rs 82,71,996/- to which income from other sources of Rs. 1,33,258 had been added to arrive at the total taxable income of Rs. 97,98,520/- (the income returned by the appellant was not reduced by the AO in arriving at the total taxable income) as against the income returned by the appellant of Rs. 14,26,506/-.
12 I.T.A. Nos. 996, 997 & 998/Hyd/2011M/s Sudhakar Plastic Ltd. and others
20. After summarizing the submissions of the assessee from paras 6 to 17 of the impugned order, the CIT(A) observed that the assessing officer in his analysis for reaching out to the conclusion that the sharp fall in net profit without any change in the method of accounting that has been regularly followed by the appellant, tried to prove that the entire books of accounts maintained by the appellant are defective for the lone reason. However, nothing was brought on record to indicate that the vouchers in respect of purchase of various raw materials, sales, expenditure etc were defective or the maintenance of the books of accounts by the appellant was in such a fashion that it could not reveal the true and fair profits of the appellant. On the other hand, the appellant contended the observations of the assessing officer on a concrete footing that all the purchases, sales and expenses were fully vouched and that the same were subjected to various pre-checks and post-checks by various statutory authorities such as Central Excise, Sales Tax etc. The mere analysis of quantitative details and consumption of raw materials and increase in purchase price of raw material could not determine the true and correct income of any concern on their own. When the business of an assessee has to be analysed, the total picture has to be taken into consideration and not the single shot where in the opinion of the assessing officer went wrong.
21. The CIT(A) noted that the appellant's submissions that the assessing officer failed to note the impact of opening stock and closing stock where both raw material and finished goods exists, has definitely got some force in it. On the other hand, the sister concern with whom the appellant entered into transactions is also assessed to tax and the income returned by M/s. Sudhakar Marketing Agencies Pvt. Ltd. for the AY 2007-08 had been accepted by the Assessing Officer vide order dt. 29.12.2009, a 13 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others copy of which was placed before me by the AR of the appellant.
22. Further, the CIT(A) noted that coming to the rejection of books of accounts without pointing out any single defect in maintenance of the same, Hon'ble ITAT, Ahmedabad in their decision in 4 ITR 29 in the case of DCIT vs Paras Dyeing and Printing Mills P Ltd had held that low profit is neither a circumstance nor material to justify addition to profits. Low profit in a particular year by itself cannot be the reason for invoking the powers of best judgement assessment without support of any material on record. Similarly, Hon'ble ITAT, Rajkot in the case of ITO vs Girish M Mehta ( 296 ITR 125) had held that Revenue must prove books of account not reliable and that once the books of accounts were audited and were subjected to scrutiny by other Statutory authorities, simple rejection of the same without any reason is not acceptable.
23. The CIT(A) observed that in the present case, the assessing officer himself certified that the yield remained constant during the present year. The other attributables for decrease in low NP as submitted by the appellant have not been examined by the assessing officer in his assessment e.g. impact of opening stock and closing stock, increase in the over heads such as administrative and selling, interest and finance charges and depreciation. The quantitative details available with him have not been thoroughly gone through and on the other hand the submissions of the appellant that the average price variance in procurement of raw materials could not alone be attributable to the low net profit ratio. The appellant demonstrated as to how the net profit decline was attributable to various factors being the other variables such as inputs, outputs and other attributable. The Assessing Officer on one hand accepted the books of account, which have been statutorily audited and subjected the verification 14 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others by sales tax and central excise authorities and without pointing out any specific defects in the books maintained, cannot hold that the net profit admitted by the appellant is not free from doubt and does not represent the assessee's true and fair profits. The opinion that the net profit reported by the appellant for the asst. year under consideration does not represent its true and fair profits fro business is not supported by making any specific findings in the manner of maintenance of books of account, suppression of sales, inflation of expenditure etc. The over all study of the case record shows that the appellant had produced all the material required by the Assessing Officer and the Assessing Officer after accepting the books of account produced before him proceeded to indirectly reject the same without quoting any specific grounds for his rejection and proceeded to estimate the net profit. In view of the above observations, the CIT(A) held as follows:
22. In view of the above and also in view of the judicial pronouncement in the case of Dhakeswarf'Cotton, Mills Ltd.
Vs. CIT (26 ITR 775) that. "the Income tax officer is not entitled to make a pure guess and make an assessment without reference to any evidence and material at all.There must be something more than suspicion to support the assessment. The same principle is also reiterated in the case of Umacharan Shaw & Bros. Vs. CIT (37 ITR 271). It was held that a suspicion however, strong may not take the place of proof. The conclusions which are based on surmises and conjectures, cannot take the place of proof. Therefore the assessment made by the AO which is predominantly influenced by suspicion is liable to set aside. "
23. Hon'be Jodhpur ITAT in the case of Shri Goutham Textiles vs ITO ( 72 TTJ 169) held that in the absence of specific instance of deficiency in the vouchers, books cannot be rejected. They opined that no specific defects were pointed out to how that the books were incomplete or incorrect in such a manner that it is impossible to deduce the true and correct profit, the books cannot be rejected.
24. Hon'ble ITAT (Rajkot) in the case of ITO Vs. Girish M. Mehta ( 296 ITR AT 125) have held that During the course of 15 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others hearing, the assessee has furnished day to day purchases, sales and stock register according to which, the gross profit of each and every transaction could be ascertained. No defect has been pointed by the Assessing Officer either in the books of account or with respect to quantitative details furnished by the assssee, nor in the method of accounting followed by assessee for computing its business income. We also found that the assessee has furnished day to day rate prevailing in the Ahmedabad Bullion merchant Association. day to day gold and silver bullion purchases a dsales details and also details of profit and gross profit on day to day basis. The Assessing Officer was unable to find anything wrong in the impugned statement furnished before him ..........• As per our considered view before rejecting the books of account, the Department has to prove that the accounts are unreliable, incorrect or incomplete. The accounts regularly maintained in the course of business, duly audited under the provisions of IT Act are free from any qualification by the auditors, should be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. Eventhough it is not possible to lay down the exact circumstances in which accounts should be rejected as unreliable or incorrect, yet the accounts may be rejected as unreliable if important entries and transactions are omitted therefrom or if proper particulars and vouchers, bills etc. are not forth coming or if they did not include entries relating to particular class of business transaction." Inferring this judgment of the Hon'ble Rajkot ITAT, it could be seen that the Assessing Officer had nowhere found any defects in the books of account maintained by the appellant nor pointed out any defects but on the other hand had accepted the same and proceeded to estimate the net profit without considering the reasons for low net profit returned i.e. the increase in overheads of expenditure on administrative and finance charges, depreciation etc.
25. In this regard further reference can also be made to the decision reported in 113 ITR 389, in the case of Addl.CIT Vs. Jay Engineering Works Ltd.,wherein the Hon'ble Delhi High Court had opined that "the income-tax authorites could, therefore, come to the conclusion that since the auditors were required by the statute to find out if the deductions claimed by the assessee in their balance sheets and profit and loss accounts were supported by the relevant entries in their account books, the auditors must have done so and must have found that the account books supported the claim for deductions, when the deductions were disallowed, by the income-tax office on the ground that detailed information reqardinq them was not available, 16 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others justice was not done to the assessee".
26. I am of the opinion that mere surmises and conjectures cannot be the basis for a pre-determined approach leave alone a thorough investigation from third party transactions by the assessing officer. The available documentary evidence in the form of purchase invoice, sales invoice, various bills and vouchers have not been found defective by the assessing officer at any point of time. The quantitative details certified by other Statutory Authorities which are also a part of the record have not been examined and more contrastingly rejected by the assessing officer under the pretext that the purpose of other statutory authorities is not to determine the income. It is true that the purpose of verification of quantitative details by other statutory authorities is purely for the purpose of manufacturing process only, it is an undeniable fact that the appellant could not have brought anything else than what he has produced and which was subjected to taxation by the other agencies. It is not the case of the assessing officer that there were any material defects noticed at the time of examination of books of accounts and also that there is any change in method of accounting adopted by the appellant from what was regularly adopted. Accordingly, I am of the opinion that the assessing officer cannot blow hot and cold at the same time and the onus clearly lied on the assessing officer to prove that the books of accounts maintained by the appellant suffers any defects. In the absence of any documentary evidence indicating any lapse on the part of the appellant in maintenance of books of accounts which were subjected to audit by statutory authorities, I am of the opinion that the addition made by the assessing officer to net profit only on the basis of surmises and conjectures of low net profit compared to earlier years could not stand the test of law. Accordingly, the net profit adopted by the AO at 2.31% of the turnover, net of all expenses is hereby deleted.
24. Aggrieved by the order of the CIT(A) the revenue is in appeal before us.
25. We have heard the arguments of both the parties, perused the record and have gone through the orders of the revenue authorities. The Assessee explained before us that the net profit rate is 0.33% for the AY under consideration as compared to 3.31% in AY 2006-07, however, there is no much change in the GP rate. The fall in net profit 17 I.T.A. Nos. 996, 997 & 998/Hyd/2011 M/s Sudhakar Plastic Ltd. and others rate is on account of cumulative effect in increase in purchase price of raw material and there was no proportionate increase in the sale price as also there is increase in the administrative and selling expenses, finance charged and also depreciation. We are of the view that unless and until, the AO brings on record that the Assessee inflated the expenditure and debited to the P&L A/c so as to reduce the net profit, the AO is not justified in making the addition on the reason of low net profit rate. Moreover, the AO has not rejected the books of account and all the purchase and sales expenses are supported by proper vouchers and bills, which are in conformity with the law relating to central excise on the basis of which the statistical information required under Schedule VI of the Companies Act 1956 were prepared which were in the form of Notes to Accounts. The books of account of the assessee are audited by statutory auditors. In such a situation, the net profit rate reported by the assessee is to be accepted and the CIT(A) has rightly accepted the arguments of the assessee and finally the CIT(A) after examining the issue elaborately with case laws, deleted the addition made by the AO on this count. Therefore, we do not find any infirmity in the order of the CIT(A) and the same is hereby upheld dismissing the grounds raised by the revenue.
26. In the result, appeal in ITA No. 997/Hyd/2011 is dismissed.
27. To sum, all the appeals of Revenue being ITA Nos. 996, 998 & 997/Hyd/2011 are dismissed.
Pronounced in the open court on 09/01/2014.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated 09/01/2014.
kv
18 I.T.A. Nos. 996, 997 & 998/Hyd/2011
M/s Sudhakar Plastic Ltd. and others
Copy forwarded to:
1. ACIT, Circle - 9 (1), Hyderabad, IT Towers, AC Guards, Hyderabad.
2. M/s Sudhakar Plastics Ltd., Balaram Thanda Industrial Estate, Surpyapet, Nalgonda District.
3. CIT(A)-VI, Hyderabad
4. CIT-VI, Hyderabad
5. The DR, ITAT, Hyderabad