TMI Blog2004 (1) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... e from export sales. Since all sales was export sales, the total profit of Rs. 19,61,339 was claimed to be exempt. During the course of assessment proceedings the AO asked for producing the books of accounting. The AO noticed certain discrepancy in the books of accounts. On the basis of these defects the AO held that the assessee is not maintaining proper books of accounts. He further held that the assessee is maintaining minimum double set of books of accounts, one meant for auditors, on the basis of which audit report has been issued and the other set of account is meant for the AO. He, on the basis of various mistakes stated in the assessment order, rejected the books of accounts and made addition of Rs. 17,55,882 being total of all totalling and posting errors in the cash book, ledger, etc. These amounts were added to the income computed by the assessee as per P L a/c. Further, the AO made an addition of Rs. 15,50,005 by assuming that assessee is doing local business. The above addition was made on the ground that purchase vouchers have not been produced and books of accounts have been rejected under s. 145(3). He estimated that 5 per cent of export turnover of Rs. 3,10,00,109 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to him, the discrepancies mentioned by the AO in the cash book and ledger are not such which can warrant rejection of books of accounts. It was argued that all these mistakes are of clerical nature and have been taken into account at the time of preparation of the final audited balance sheet and P L a/c. He drew our attention to the detailed submission made in writing before the CIT(A) explaining each and every error and also the detailed trial balance on the basis of the books of accounts without carrying out rectifications, the entries required for rectification and the final balance sheet and P L a/c prepared after carrying out the rectification. It was pointed out that after carrying out these rectifications in the books, the final balance sheet and P L a/c is exactly the same as has been audited and attached with the return of income. It was submitted that these errors have been committed by the accountant and are of totalling and postings and there is no entry which shows that there is any suppression of sales or purchases. In the books of accounts written manually these errors often occur and the auditors while doing the audit trace out such errors and at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in the register of export is not correct. Similarly, it was explained that assessee is exporting gold jewellery only. The stock of gold jewellery is maintained by weight only and this is the normal trade practice being followed by all. It was further submitted that it is impossible to maintain stock record item-wise and as such adverse inference drawn on this basis by the CIT(A) is unjustified. As regards quantitative discrepancy, it was explained that the CIT(A) has again misunderstood the facts. The assessee has submitted complete stock tally. The weight of the gold is to be measured with reference to its purity. As gold is given to Karigars and it gets converted into jewellery of different fineness, the debit and credit is done on the basis of gold purities (fineness). It was further submitted that the CIT(A) has made out an entirely different ground for rejection of books of accounts on the basis of stock record whereas the AO s case for rejection of books of accounts was mistake/errors in the cash book and ledger which the assessee has been able to explain fully. 5. As regards, the statement of auditor recorded under s. 131 during the assessment proceedings whereby they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded to hide facts from the Department by using white fluid as has been observed by the AO, the assessee would have got its books rewritten, may be on computer which is otherwise not a costly exercise. The assessee has been sincere and transparent and produced all the facts before the Department and has explained each and every difference with facts and figures and accordingly no adverse inference can be drawn. The authorised representative argued that books of accounts can be rejected when there is evidence of suppression of sale/purchases, expenses, income, etc. In this case there is not a single evidence to suggest anything like this. There being clerical mistake which the assessee himself has taken into consideration while preparing final P L a/c, the action of the CIT(A) confirming the rejection of books of account is unjustified. To support his argument, the authorised representative referred to the various case laws. It was submitted that in the case of RB Jessaram Fatchchand vs. CIT (1970) 75 ITR 33 (Bom), it has been held by the Bombay High Court, that assessee s books of accounts are to be accepted unless on verification they disclose any defects and faults which cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the P L a/c along with explanation in support of its contention that the final P L a/c filed with the return of income gives a true picture of the profit and no further adjustment is required. After going through the paper book, and the detailed explanation filed before the CIT(A), we find that the contention of the assessee is correct. The AO has made the addition in an arbitrary manner and in the remand report filed by the AO to the CIT(A) to the explanation filed by the assessee before the CIT(A), the AO has not given any reason for rejection of the explanation nor he has rebutted the same. The basis for rejection of the books of accounts by the AO and the CIT(A) has been that there are cuttings, overwriting, use of fluid and some of the totals made in pencil besides totalling and posting errors in the cash book, ledger. The AO has also indulged in surmises whereby he has stated that totals in pencils gives a free hand to the assessee to change the figures. The cutting, overwriting, use of fluid, totals with pencils cannot by itself be the basis for rejection of books of accounts unless these are corroborated with some other material or evidence such as sales, purchases or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition on the ground that rate of 5 per cent profit on total turnover of Rs. 3,10,00,109 is justified which means she has applied the rate on total turnover of Rs. 3,10,00,109 while the AO considers sale of Rs. 15,50,005 as local sales. 9. Besides this, the learned counsel also submitted that the addition has been made purely on surmises and conjectures. The assessee is engaged in export of jewellery since long and there is no material or evidence whatsoever giving any indication that assessee has made any local sales or sales outside the books of accounts. It was submitted that firstly the observation of the AO for justifying this addition that the assessee has not produced complete purchase bills/vouchers is wrong and against the facts on record. He invited our attention to various pages of the paper book and the letter filed before the AO where purchase bills/vouchers have been produced and even impounded by the AO. Attention was also invited to CIT(A) s order p. 8 wherein CIT(A) has confirmed this fact and stated that copies of purchase vouchers have been filed in the paper book. It was further submitted that major/all the purchases are from MMTC/SBI and payments of all pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious letters written by him to the AO and also the observation of the CIT(A) where she has confirmed the fact that copies of purchase vouchers have been filed in the paper book. A copy of the paper book was also sent to the AO for a remand report. Accordingly the AO was not justified in making addition on this account. Further, the basis for making the addition adopted by the AO is the local sales, i.e., sales in India. No material or evidence has been referred to or indicated on the basis of which it can be inferred that the assessee has made sales within India. 12. For sustaining an addition there has to be some basis. The AO is not supposed to make a pure guesswork. The various case laws cited by the authorised representative on this point supports the case of the assessee. As regards the stand of the CIT(A) as discussed above, the assessee having taken into account all the differences pointed out in the books of accounts while preparing P L a/c, there were no reason for sustaining the addition. Accordingly we hold that addition of Rs. 15,50,005 is without any basis and the same is deleted. 13. Ground Nos. 9 to 12 pertain to addition of Rs. 4,00,000 sustained by the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnative, it was argued that expenditure is allowable under s. 37 of the Act as the same is directly incurred for the purpose of business. In support of its contention the learned authorised representative has relied upon the judgment of Ahmedabad Bench of the Tribunal in the case of Ruby Builders vs. ITO (1999) 63 TTJ (Ahd) 202 and M.K. Mathivathanan vs. ITO (1990) 36 TTJ (Mad) 417. It was further clarified that the proviso inserted in s. 69C denying benefits of unexplained expenditure under s. 37 has been inserted with effect from asst. yr. 1999-2000 and as such is not applicable to the year under appeal. Learned counsel, therefore, argued that CIT(A) was not justified in confirming the addition. On the other hand, learned Departmental Representative supported the order of the CIT(A). 16. We have considered the rival submissions. The CIT(A) has sustained the addition on account of 5 per cent wastage of gold in remaking of jewellery from old jewellery the gross weight of which has been computed at 6,530 gms. There is no dispute that this wastage of gold, if any, will be a business expenditure allowable under s. 37 of the Act and the restriction placed under s. 69C of allowing suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was stated by the authorised representative that the CIT(A) was not justified in confirming the action of the AO denying exemption under s. 80HHC. The learned authorised representative stated that the reason given by the CIT(A) for denying exemption are entirely different from the reasons given by the AO. He invited our attention to paras 11 and 12 of the assessment order where the AO has given his findings as under: "11. It is pertinent to mention that the assessee has not furnished the Bank certificate of export and realisation on Form No. 1, which is mandatory. The assessee claimed that it is doing export sales and receiving export realisation in foreign exchange. But the assessee has brought nothing on record to establish that the sale proceeds were received in convertible foreign exchange which is an essential ingredient for claiming deduction under s. 80HHC. 12. Under the facts and circumstances discussed above, the claim under s. 80HHC amounting to Rs. 19,61,339 is disallowed." 20. It was pointed out by the authorised representative that the observation of the AO is incorrect both on facts and in law. Firstly, there is no statutory requirement of furnishing bank cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a CA certificate under s. 80HHC(4). The CA has to compute deduction and issue certificate as per his own examination. Sec. 80HHC(4) requires filing of this certificate that deduction has been rightly claimed in accordance with the provisions of the Act. There is no requirement of audit. Even Form No. 10CCAC on which report is to be given does not state of audit. It only refers to examination of accounts and records. As such, assessee having filed the certificate, the provisions of s. 80HHC(4) stands complied with and deduction cannot be denied. Learned counsel stated that even the statement of the auditor recorded under s. 131 of the Act has confirmed that he has issued the certificate under s. 80HHC(4) of the Act. He has nowhere stated that certificate issued by him is wrong or there is any error. On the contrary he has even produced his audit register. As such the authorised representative argued that denial of a statutory exemption is unjustified. It was further argued, though the rejection of books of accounts in this case is wrong and unjustified, but for the sake of argument even if it is considered that books of accounts have been rightly rejected (though not conceded) eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tons Rings Ltd. vs. Asstt. CIT (1995) 81 Taxman 164 (Del)(Mag) and Mandhana Exports (P) Ltd. vs. Asstt. CIT (2002) 76 TTJ (Mumbai) 559 : (2002) 82 ITD 306 (Mumbai). The authorised representative also argued that the CIT(A) was not justified in ignoring the legal position in this regard. He further submitted that the finding of the CIT(A) that certificate has been issued by the auditor without auditing of the books is against the facts on record and the statement of the auditor. The auditor has confirmed in his statement that he has audited the books and signed the certificate after auditing. The learned counsel argued that CIT(A) has wrongly distinguished the case cited before her and the assessee is entitled to deduction under s. 80HHC not only of the amount stated in the certificate but of higher amount in case any enhancement is made to the returned income of the business or profession. 25. On the other hand, learned Departmental Representative supported the actions of the CIT(A) and reiterated that certificate without proper auditing is not an acceptable certificate. 26. We have considered the rival submissions. The disallowance of deduction under s. 80HHC has been upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at as per provisions of s. 80HHC(1) an assessee is entitled to a deduction of the profits derived by the assessee from the export of such goods, or merchandise. Sub-s. (3) of s. 80HHC prescribes the method of computation of profits derived by the assessee from the exports and cl. (a) of this section states that profits derived from export shall be the amount which bears to the 'profit of the business' the same proportion as the export turnover of the business bears to the total turnover. The profits of the business has been defined in Expln. (baa) and means profit of the business as computed under the head profit and gains of business . As such, any disallowance or addition made to the business income shall increase the profit and gains of business and deduction under s. 80HHC will be computed on the basis of such assessed income as that is the income as per the AO which has been computed under the head profits and gains of business or profession. The certificate of chartered accountant is based on the profits and gains as computed by the assessee, and once the AO does not agree with the profits and gains of business or profession as computed by the assessee, then he is required t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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