TMI Blog2020 (10) TMI 989X X X X Extracts X X X X X X X X Extracts X X X X ..... :-On perusal of the installation report placed we note that the machine was installed on 2ndJune 2007 which implies that it was ready to use on that date. Therefore, the disallowance of the interest expenses should be limited to the extent pertaining to two months only. Assessee has also utilized its own funds in the purchase of machineries in addition to the borrowed fund from the bank. Accordingly, CIT (A) excluded the amount of own fund utilized by the assessee while working out the amount of interest expenses to be capitalized. These facts, have not been disputed by the Learned DR at the time of hearing - No infirmity in the order of the Learned CIT (A). Hence, the ground of appeal of the Revenue is dismissed. - ITA No (s) 1894/Ahd/2013 - - - Dated:- 22-10-2020 - SHRI MAHAVIR PRASAD , JUDICIAL MEMBER And SHRI WASEEM AHMED , ACCOUNTANT MEMBER Revenue by : Shri Dileep Kumar , Sr. DR. Assessee by : Shri Pritesh Shah , AR ORDER PER WASEEM AHMED, ACCOUNTANT MEMBER: The appeal has been filed by the Revenue for A.Y. 2008-09 which is arising from the order of the CIT(A)-XI, Ahmedabad dated 23.04.2013, in the proceedings under section 143(3)of the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Current Year Next Year Sales [A] 16798335 24547218 57765174 Raw Materials Consumed [B] 5050536 14074560 19641800 Direct Expenses [C] 3775789 3660219 5039431 Gross Profit (Sales Less Cost of Goods Sold) [A-D] 7972010 6812439 33083943 Gross Profit Percentage 47.46% 27.75% 57.27% Paper Purchase 2752598 6785785 9386109 % of Paper Purchase to Sales 16.386% 27.644% 16.249% 16.38% 27.64% 16.24% The AO also noted that the assessee is not maintaining quantitative details of the items purchases and sales made by it. 6. On question by the AO, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration, despite GP rate of the subsequent Assessment Year at 57.27% of the turnover, and worked out the suppressed gross profit amounting to ₹ 1,40,79,756/- and added to the total income of the assessee. 12. Aggrieved assessee preferred an appeal to the Learned CIT-A. 13. The assessee before the Learned CIT (A) submitted that it has vide letter dated 6thDecember 2010 filed before the AO during the assessment proceedings claimed that it was maintaining the stock registers/quantitative details but the AO for the reasons best known to him has not considered its submission. But he (the AO) has concluded based on the letter dated 3rd November 2010 that assessee is not maintaining any stock/ quantitative details. Accordingly, the assessee contended that its books of accounts cannot be rejected merely on the reasoning that the assessee was not maintaining the stock registers which is wrong finding of the AO. 14. The assessee also submitted that it has justified based on documentary evidence for the reasons of increase in the cost of certain materials which has contributed in the reduction of gross profit ratio in the year under consideration. As such t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the ground of appeal of the assessee. 20. Being aggrieved by the order of Learned CIT (A), the Revenue is in appeal before us. 21. The Learned DR before us vehemently supported the order of the AO whereas the Learned AR before us filed a Paper Book running from pages 1 to 151 and reiterated the contentions as made before the authorities below. The Learned AR vehemently supported the order of the Learned CIT (A). 22. We have heard the rival contentions of both the parties and perused the materials available on record. As per Section 145(3) of the Act, the AO is empowered to reject the books of accounts of the assessee and make best judgment assessment in the manner as specified under Section 144 of the Act, if he is not inter-alia satisfied with the completeness or correctness of the books of accounts of the assessee. Generally, the instances for the rejection of books of account include when entries in respect of certain transactions are altogether omitted or incorrect or where the accounts show an abnormally low rate of profit or where there is an inherent lacuna in the system of accounting. However, the AO cannot use this power as a tool to reject the books of accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all in gross profit rate lost its significance. Having accepted the reason for fall in gross profit rate, namely, stiff competition in market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated gross profit by rule of thumb merely for making certain additions was justified. Therefore, the findings arrived at by the Tribunal suffered from basic defect of not applying its mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except, what had been shown by the assessee in the books of account. Therefore, the order of the Tribunal, was unsustainable. [Para 11] We also note that the AO has not pointed out any specific defect in the details submitted by the assessee and in the audited financial statements furnished by the assessee. Therefore, in our considered view, the books of accounts of the assessee cannot be rejected until and unless the AO points out the specific mistakes. A similar principle has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rage GP rate was slightly lower than the average GP rate of the earlier year. In the instant case, the sales of the assessee during the year under consideration had increased substantially from ₹ 1.24 crores to ₹ 1.54 crores which resulted in marginal decline in GP rate from 11.51 per cent to 9.94 per cent, the same could not be made reason for rejecting the book results. It is well-settled business proposition that for having increase in sales, a businessman has to sacrifice a small margin of profit rate. During the year the total sales of the assessee had increased from ₹ 1.24 crores to ₹ 1.54 crores. No defect was found in the books of account. There was no valid reason for rejection of books of account during the year under consideration and thereby applying higher GP rate of 11.51 per cent, which was earned by the assessee on low sales of ₹ 1.24 crores in the preceding year. The other reason stated by the Assessing Officer of making trading addition was that in the Assessment Year 2001-02, GP rate declared by the assessee at 9.64 per cent was not accepted and trading addition so made by rejecting the books of account was confirmed by the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e machinery was put to use should be capitalized under Section 36(1)(iii) of the Act. On question, by the AO the assessee failed to make any reply. Accordingly, the AO worked out the proportionate amount of interest expenses up to the date 2ndJuly 2007 when the machine was put to use amounting to ₹ 16,41,611/- and added the same to the total income of the assessee. 26. Aggrieved assessee preferred an appeal to the Learned CIT (A). 27. The assessee before the Learned CIT (A) submitted that the amount of interest attributable in the purchase of such machinery stands at ₹ 42,08,928/- only which should be considered for the purpose of the disallowance. Further, out of such amount there was an opening written down value of the machinery amounting to ₹ 2,46,51,138/-, therefore, the amount of interest pertaining to such opening written down value should be ignored. 28. The assessee further submitted that the machine was installed on 2nd June 2007 therefore if the interest needs to be disallowed then it should be limited to the extent of ₹ 3,02,129/- for the period of two months only instead of three months and that too after considering the fact of its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest on borrowed capital to purchase Plant Machinery of ₹ 4,93,853/-. The appellant has made this computation strictly as per the provisions of proviso to sec.36(1)(iii). This computation has been filed before the A.O. and the A.O. has not brought any evidence to controvert this computation in view of above, I am of the considered opinion that interest expenses to the extent of ₹ 4,93,853/- should be capitalized as per the provisions of proviso to sec.36(1)(iii). The A.O. is further directed to allow depreciation on capitalization of interest as per the provisions of Income-tax Act. 3.7 It is also seen that in the assessment order the A.O. had disallowed interest under section 36(1)(iii) of the I. T. Act, 1961. The interest expenses are allowable u/s.36(1)(iii) of the I. T. Act, if the following conditions are fulfilled:- (a) The capital must have been borrowed by the assessee. (b) It should have been borrowed for the purposes of (c) The assessee should Have paid the amount of interest claimed as an allowance under clause (iii) of section 36(1). Perusal of the record reveals that the A.O. has not brought any evidence on record to prove that th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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