TMI Blog2018 (8) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... AO without verifying the fact from the books of accounts of the assessee and record nature of business of the assessee rejected the books of accounts without any just reasons. The reasons given by the AO were based only upon the data supplied by the assessee. AO on the basis of details supplied by the assessee prepared trading account monthly and also re-casted the stocks and other items for the purpose of rejecting the book result of the assessee. AO without bringing any material fact against the assessee on record made the addition against the assessee. It appears to be a case of hypothetical calculations made by the AO on the basis of entries in the books of accounts for making the additions against the assessee without any justification. Further, AO has not pointed out if assessee violated any accounting standards prescribed by rules for maintenance of books of accounts. It is a case of hurried assessment framed by the AO without verifying the facts from the record of the Revenue Department particularly when in preceding and subsequent assessment years, the similar claim of assessee have been accepted by the AO. CIT(A) on proper appreciation of facts and material on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee will not be significantly variable and would be same more or less as a mix. In the normal course of business generally purchases and direct expenses keep a stable ratio vis- -vis the sales. However in the present case there are variations. The trading account was submitted by the assessee on the basis of actual stock records maintained by him and the value of closing stock is stated to be on actual basis by the assessee. In furtherance of proceedings, the assessee was asked to produce the stock register to substantiate the stock amounts, however assessee maintained silence. The assessee was also requested to furnish the figures of monthly stocks given to the bank which was filed by the assessee. Taking the various figures of monthly expenses and sales etc. from the monthly trading account submitted by the assessee, monthly trading accounts have again been prepared taking the stock values from the stock statements submitted to the bank which is reproduced in the assessment order. 4. The AO noted that assessee is having negative G.P. in the months of May 2007, Jule 2007, January 2008, February 2008, and March 2008. The G.P. has varied from (-) 82.25% to 55.90%. AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s alongwith monthly stocks statements showing the breakup value of raw material, WIP, accessories and finished goods. The quantitative reconciliation of finished goods and monthly stock statement have been submitted which is noted in the assessment order. The AO accordingly noted that the assessee has adopted adhoc values while valuing the closing stock. The AO also noted that assessee has received certain money from her parents. To confirm the same, their bank accounts were obtained to match the entries. It was noted that there were deposits in their banks which looked suspicious. In this regard, it was possible round triping of money taken out from the business by the assessee, Notices u/s 133(6) was issued to them calling for narration of deposits in their bank accounts and certain other information. From the details it was found that there were large numbers of deposits in the accounts of the parties. The assessee was requested to furnish the copy of ledger of these parties in the books of assessee which has been submitted. The brief analysis of the transactions is noted in the assessment order and the AO noted that the transactions are prima-facie suspicious and abnormal. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory of the assessee and computed the average of G.P. Rates to 28.73% which resulted the gross profit to be of ₹ 5,29,36,282/- whereas the gross profit shown by the assessee is at ₹ 2,54,48,347/-, therefore the addition to the income was worked out at ₹ 2,74,87,935/-. 7. The AO also noted that the assessee has also given the quantitative consumption per piece along with his reply. The stock is converted into Kg figures by taking 14 meters as equal to 1 Kg. From the monthly trading account prepared on the basis of fixed monthly G.P. as refer to above, it was seen that the peak negative stock has arisen in the month of December, 2007 i.e. the gross profit has been suppressed till December 2007 and thereafter bogus expenses bills have been inserted. In this regard from the figures submitted by the assessee as noted in the assessment order, the per unit average quantity consumption was worked out for the month of April 2007 to December 2007 and noted in the assessment order. The average per unit consumption was worked out at 0.3712 per piece. For the whole year total pieces manufactured are 570579. Multiplying the two total consumptions for the year works out to 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a provided by the assessee. The expenses are booked as and when the bills are received/ passed for payment which required time. In short the matching of direct expenses relating to each shipment may be possible manually but the same are not entered in the books of account on matching principle and hence the preparing of monthly trading account from the tally data and corresponding the same to the sales and gross profit rate may give misleading results. The Assessing Officer s approach that recording of an entry in a particular month means the expenditure pertains to that particular month is not practically correct. Sometime fabric is purchased in the month of April 2007 for manufacture of garments, however, the shipment of the same may take place in June 2007. The assessee filed various Annexures on the basis of books of accounts to give the correct picture. The books of accounts have been maintained as per system of accounting and same are audited. The fluctuation in the gross profit rate is on account of various styles of garments manufactured during the month and the sales made which significantly may result in lower margin of profit on either one of the styles. Therefore, G.P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck statement showing the breakup value of raw material, work in progress, accessories and finished goods. While valuing the cost of per unit of finished goods, the AO has erred in taking the quantity of finished goods correctly but taking the value of finished goods without adding the value of finished goods (lying in semi-finished house), clubbed under semifinished goods to the value of finished goods. The assessee filed quantity of finished goods and closing stock is correctly taken and there is no major variation. Moreover, considering the various styles that the assessee manufacturers the working of average cost per unit will vary greatly depending on the style of garment manufactured alongwith quantity in stock at any given point of time. The explanation of the assessee is substantiated with material available on record. The exercise done by the AO to obtain per unit value of stock is completely baseless and illogical and far away from the common understanding of average price where the product is not similar and has wide variety of consumption based on designs and value. The assessee submitted correct address of various creditors vide letter dated 20.12.2010 but due to paucit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f hosiery, and some of other fabrics, including lining fabric where required. Hence a uniformity of gross profit across different styles and kinds is not possible. It has also been explained that the normal cycle for shipping of garments from order to delivery ranges from 70 to 90 days, including preparation and approval of samples, quoting and negotiation of rates, receipt of purchase order, placing of orders for fabric and other items, cutting, embroidery and stitching, till the garment is ready for shipment. It is contended therefore, that a monthwise gross profit working cannot present a correct picture of the trading results. The direct expenses relating to each shipment would not fall in the month of delivery, hence the Assessing Officer s approach of comparing monthwise expenses with sales is not practical. However, the appellant has carried out the exercise of correlating the expenses relatable to particular shipments with regard to fabric, stitching etc. as corresponding to the actual styles. The appellant has furnished various charts to show that there is considerable variation in the G.P. margins between the various styles, however the G.P rate for a particular style rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t provide a correct picture of G.P when the manufacturing cycle is of about 3 months. The monthwise sales figures show considerable variation. The Assessing Officer has himself noted that some bills of purchase/expenditure are entered into the books within days, while some bills are accounted for after a number of months. The appellant has shown that certain bills of expenditure are processed only after the consignment has been accepted by the buyer, considering the possibility that alterations/corrections may have to be carried out. The Assessing Officer has not pinpointed any specific defect in the books of account. The Assessing Officer has also failed to substantiate his allegation that goods were sold by associate concerns M/s Express Exports and M/s Prakul Fashion to the three parties M/s Sakshi Creations, M/s Latika Enteprises and M/s Laurel (India) Impex Ltd., which were then sold to the appellant, resulting in over reporting of cost. In the absence of any finding that goods and services were procured from the three parties at higher than market rates, or that the same goods and services were not actually procured, I am unable to agree with the view of the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... system of accounting, by applying enhanced G.P. rate or estimating the consumption, cannot lead to the conclusion that there is under estimation of profit. In this case the estimation of excess consumption is arbitrary and fanciful, and cannot be said to be based on relevant material. The rejection of books of account on the basis of variation in monthly results required to be backed up by specific instances of bogus billing. The appellant has correctly argued that neither can a uniform rate of G.P. be applied for every month of the year, nor can a uniform rate of consumption of material be applied to garments of assorted styles and descriptions. After careful consideration, it is held that the addition of estimated excess consumption of ₹ 1,77,73,854/- deserves to be deleted in toto. Hence the appellant succeeds at grounds of appeal nos. 2(i) and (iii). 10. We have heard the Ld. Representatives of both the parties and perused the material available on record. The Ld. DR relied upon the order of the AO and submitted that addition was made by the AO on account of excess consumption of material, variation in G.P. and closing stock. The high consumption of goods/material s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to prove that assessee is in the business of exports of readymade garments. The assessee submitted invoices of direct expenses, comparative chart of G.P. as per Tally and actual figures, details of various styles of garments with their cost sheet and working of G.P. and inventories of finished goods and of raw material. The assessee has disclosed G.P. of 13.81%. The comparative chart of GP is filed at page 218 of Paper Book which shows that turnover of the assessee in assessment year under appeal is better as compared to preceding and subsequent Assessment Years. The Gross Profit is more as compared to the earlier year. The nature of business of the assessee is same in preceding Assessment Year as well as in subsequent Assessment Years. The AO accepted book result of the assessee in preceding and subsequent Assessment Years 2007-08 and 2009-10 in scrutiny assessment u/s 143(3) of the Act and no additions of similar nature have been made. In Assessment Year 2010-11 also, AO accepted the book result of the assessee, as submitted, u/s 143(3) of the IT Act. Therefore instead of re-casting the trading account per month, AO should have brought some independent and concrete material on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... figure provided to the bank. The assessee explained that some time the bills are recorded in the books of accounts when the same are settled/passed, therefore, month wise co-relation with the expenses with sales may not be possible. The assessee produced complete details of consumption of raw material which are noted in the books of accounts. The AO has not been able to point out any specific instance of round tripping of material purchased from different concerns, as noted above and then sold to the assessee. The assessee produced all the relevant bills and invoices to show materials have been purchased genuinely from the parties at the same or lower price than other suppliers. The assessee also explained that while the computing the cost per unit of finished goods, AO has failed to include the value of semi-finished goods, which were provided during the assessment proceedings. The assessee submitted confirmations of all the suppliers of raw materials and of embroidery/stitching services. The parties have also confirmed the genuine transactions conducted with the assessee in their replies u/s 133(6) of the Act. Even in the case of Sh. Darshan Luthra, (M/s Express Export Proprieto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d nature of business of the assessee rejected the books of accounts without any just reasons. The reasons given by the AO were based only upon the data supplied by the assessee. The AO on the basis of details supplied by the assessee prepared trading account monthly and also re-casted the stocks and other items for the purpose of rejecting the book result of the assessee. It would therefore establish that the AO without bringing any material fact against the assessee on record made the addition against the assessee. It appears to be a case of hypothetical calculations made by the AO on the basis of entries in the books of accounts for making the additions against the assessee without any justification. Further, AO has not pointed out if assessee violated any accounting standards prescribed by rules for maintenance of books of accounts. 14. It is a case of hurried assessment framed by the AO without verifying the facts from the record of the Revenue Department particularly when in preceding and subsequent assessment years, the similar claim of assessee have been accepted by the AO. Therefore, the Ld. CIT(A) on proper appreciation of facts and material on record correctly did not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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