TMI Blog2007 (9) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... 5(3) of the Act. (3)The learned CIT(A) erred in upholding estimation of unaccounted purchases of the appellant at Rs. 5,07,19,567 restricting the profit on the same at 12.5 per cent instead of 20 per cent estimated by the Assessing Officer. The said upholding of 12.5 per cent is completely unjustified. (4)The learned CIT(A) erred in upholding the profit rate of 12.5 per cent and estimating unaccounted purchases of Rs. 5,07,19,567. Without appreciating the nature of transaction of accommodation of bill which is in the nature of financial accommodation, therefore, estimation of unaccounted purchases of Rs. 5,07,19,567. Without appreciating the nature of transaction of accommodation of bill which is in the nature of financial accommodation, therefore, estimation of unaccounted purchases and profit is completely unjustified. (5)The learned CIT(A) misdirected himself on facts in not considering the submission made by the appellant during the course of appeal hearing. (6)Without prejudicing to the above and without admitting the estimation of profit determined by Assessing Officer it is submitted that not allowing interest, depreciation and other expenses against estimation of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,567 and made an addition of Rs. 1,01,43,914. The Assessing Officer rejected the books of account of the assessee under section 145(3) and on account of declared sale turnover of Rs. 13,24,04,599, profit rate was determined by the Assessing Officer at 12.5 per cent. Profit on this account was worked out by the Assessing Officer at Rs. 1,65,50,574. On this basis, total income was computed by the Assessing Officer at Rs. 2,66,94,489. From the same, the Assessing Officer allowed set off of brought forward unabsorbed business loss and brought forward unabsorbed depreciation amounting to Rs. 1,44,84,870 and net income was computed at Rs. 1,22,09,620 as against nil income as per return filed by the assessee. The assessee carried the matter in appeal before learned CIT(A). Learned CIT(A) held that 20 per cent profit estimated on account of suppressed turnover in connection with the transaction with M/s. Golden Tensil be restricted to 12.5 per cent as against 20 per cent adopted by the Assessing Officer. He upheld the rejection of Books by the Assessing Officer under section 145(3) and estimation of net profit on turnover as per books at 12.3 per cent. Against this direction of lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the assessee-company has used four entities as intermediaries, i.e., Siby Engineering used as purchasers and M/s. Golden Tensil, Bhavesh Engineering and Sai International were used as Accommodating Seller (AS). It is submitted that the assessee-company and Siby Engineering (SE) have applied to their banker for opening inland irrevocable letter of credit in favour of beneficiary either M/s. Golden Tensil (GT), Bhavesh Engineering (BE) or Sai International (SI). These concerns, i.e., the assessee-company and SE have also given purchase order in favour of the GT, BE or SI. On the basis of the said application, Punjab Maharashtra Co-operative Bank Limited issued letter of credit in favour of either GT, BE or SI. GT, BE or SI as the case may be, applied to their banker Janakalyan Sahakari Bank Limited to discount the letter of credit issued in their favour. Along with this application, they enclosed original letter of credit, bills of exchange accepted by the assessee or SE, two copies of invoices, delivery challans and debit note for debiting interest. GT, BE or SI on the basis of above application for discounting bill accepted by the assessee or SE, used to receive money from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer assumed that the whole of the amount outstanding represent creditors for purchase; and on this assumption, the Assessing Officer has estimated 20 per cent profit and made additions of 101.43 lakhs. It is submitted that in fact, there is no purchase from GT and hence, there is no question of any addition on this account. Regarding the rejection of books of the assessee and estimation of profit at the rate of 12.5 per cent on the disclosed turnover, it is submitted that the main reason for which, the Assessing Officer invoked provisions of section 145(3) was that this transaction with GT was considered by the Assessing Officer as purchase transaction, which was not disclosed. Once this allegation of the Assessing Officer is rejected as submitted earlier, there is no other basis to uphold the action of the Assessing Officer regarding rejection of books under section 145(3). Second reason given by the Assessing Officer for rejection of books under section 145(3) is that the assessee had capitalized part of interest incurred on loans obtained for plant, machinery and other equipments. In this regard, it is submitted by learned AR of the assessee that in the present year, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of transport charges, repairs and maintenance charges, miscellaneous expenses, telephone expenses and travelling expenses. It is submitted that the increase in all these expenses are for valid reasons and this is again cannot be the basis for rejecting the books of the account of the assessee. One more reason given by the Assessing Officer for rejection of books under section 145(3) is regarding some discrepancies in quantitative details. Regarding this, it is submitted that the discrepancy found is in the statement furnished and it is not deficiency in the books of account. It is submitted that quantity is correct in the books but in Tax Audit Report, there is some typing mistake in quantity. One more reason given by the Assessing Officer for rejection of books under section 145(3) is that the valuation of closing stock was not done by the assessee in accordance with section 145A. It is submitted that the valuation of stock is done in accordance with accepted accounting principles and as such, there is no deviation from section 145A; and hence, it cannot be inferred that the books of account are not properly maintained. One more reason given by the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55.64 lakhs in the present year, which is less than double. Similarly, administration, selling and distributing expenses was Rs. 143.40 lakhs in the earlier year; whereas, the same is only Rs. 173.01 lakhs in the present year; and hence, increase in this year is only about 21 per cent as against increase in sales from Rs. 645.01 lakhs to Rs. 1301.84 lakhs, which amounts to increase of 101 per cent; and hence, increase in expenses is not unreasonable; and, therefore, no adverse inference can be drawn. Income of the assessee has been accepted in the earlier year; and therefore, in the present year also, income declared by the assessee as per books of account of the assessee should be accepted. It is submitted that to avoid protected litigation and to buy peace, the assessee-company agrees that an estimated ad hoc addition of Rs. 2 lakhs may be made in the declared profit to meet out the various shortcomings pointed out by the Assessing Officer. 8. As against this, learned DR of the revenue supported the assessment order. With regard to estimation of profit at 20 per cent on suppressed sales, estimation of profit at 12.5 per cent of the declared sales and also regarding allowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rashtra Co-operative Bank Limited. We fail to understand how the credits on account of receipt of cheques can be said to be credits on account of purchase of goods merely on the basis that the credit balance at the year end is shown in the balance sheet under the heading Creditors for goods . This transaction is duly explained by the assessee that the assessee resorted to obtain finance from the bank by resorting to the tool of accommodation bills. Similar credits are appearing in the ledger account of Sai International, Bhavesh Engineering and Siby Engineering. No adverse inference has been drawn by the Assessing Officer regarding these credits in these three accounts; although, nature of credit is similar. Nothing is brought on record to show that there was any actual purchase or there was any actual sale outside books. This practice of obtaining bank finance by resorting to the tool of accommodation bills is not new and in the book Banking Law and Practice written by Shri R.K. Gupta, Deputy Legal Adviser, Reserve Bank of India, Central Office Mumbai, on page No. 640 the terms trade bill and accommodation bill are defined. This definition is reproduced below: "Trade bill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of the assessee by invoking provisions of section 145(3) and estimating income of the assessee at the rate of 12.5 per cent of the disclosed turnover of Rs. 13,24,04,599. In this regard, we find that the main reason for which, the Assessing Officer rejected the books of the assessee by invoking provisions of section 145(3) is the transaction with GT, which as per the Assessing Officer was actual purchase but was not so shown by the assessee in its books. The Assessing Officer was of the view that the assessee has made unaccounted purchase of Rs. 507.19 lakhs from GT and corresponding sales was made outside books. This issue is already decided by us in favour of the assessee as per Para No. 11 above. Once, it is held that there was no unaccounted purchase and there was no unaccounted sales, the main basis on which, the Assessing Officer invoked provisions of section 145(3) do not survive. 14. The other reasons given by the Assessing Officer for rejecting books of the assessee have no merit. We discuss the same hereinafter. 15. Regarding capitalization of interest till date of putting the asset to use, we are in agreement with learned AR of the assessee. We find that pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive because even if credit for TDS is wrongly claimed, the claim can be rejected but the books cannot be held to be defective. In the present case, the Assessing Officer has not allowed the credit for TDS but learned CIT(A) has allowed the same and the revenue is in appeal against the same. We will decide this issue while deciding that appeal of the revenue but for this reason, section 145(3) cannot be invoked. 19. The next reason mentioned by the Assessing Officer is that some expenses such as Transportation charges, Repairs, Telephone charges and Misc. Expenses are very high as compared to the earlier year. We are of the opinion that for this reason also, the accounts cannot be held to be defective because even if some expenses are excessive and it is established that the same is not for business purposes, disallowance can be made to that extent but the books cannot be held to be defective. In the present case, the sales of the assessee-company in the present year has increased by more than 100 per cent because the sales in the present year is Rs. 1301.84 lakhs as against Rs. 645.01 lakhs in the preceding year. Cost of Manufacturing which includes Transportation Charges and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 are partly allowed since we have upheld disallowance of Rs. 5 lakhs out of Freight and Repairs Expenses. 20. Ground No. 5 is general and Ground No. 6 does not survive. 21. Now, we deal the third issue, which is the only issue raised in the appeal of the revenue. 22. Regarding this issue, we find that credit for TDS was not allowed by the Assessing Officer for the reason that sales has been shown in the name of M/s. P.T. Sumber Mitra Jaya but TDS certificate is issued by M/s. Ketan Construction Ltd. This issue is decided by the learned CIT(A) in favour of the assessee on the basis that the Assessing Officer has not contested that income regarding this TDS certificate is duly accounted for. It is also observed by him that nothing has been brought on record by the Assessing Officer to show that this receipt of Rs. 3.87 crores have not been shown in sales details. It is also observed by him that if this has been the case, the Assessing Officer should have brought this income to tax instead of denying credit for TDS. Under these facts, we find no reason to interfere in the order of learned CIT(A) on this issue. 23. In the result, the appeal of the assessee is partly al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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