TMI Blog2012 (4) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... ale price of these items sold in the subsequent year after deducing a particular margin, which has been uniformly followed by the assessee in the earlier and the subsequent years - for assessment year 2003-04, an assessment order was passed on 31st March, 2006 and in the said assessment order no addition whatsoever was made to the closing stock but the method adopted by the assessee for the said assessment year was same - Decided in favor of the assessee Regarding addition of Rs.25,80,879/- made by the AO on account of travelling expenses - Assessing Officer had disallowed the entire expenditure of Rs. 25,80,879/- The tribunal while partly deleting the disallowance held that the expenses were incurred for purpose of business under Section 37 - Held that: tribunal has estimated and disallowed 20% of the foreign travel expenditure on the ground that it may not have been incurred wholly and exclusively for the purpose of business - Decided in favor of the assessee Regarding addition u/s 40A(2)(b) of the Act on the ground that excessive/unreasonable expenditure was incurred on getting garments fabricated from associate concerns, namely, R.A. Exports and Sensational Exports - Held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tribunal is perverse. Learned counsel for the appellant has placed reliance on three facets. Firstly, stock register was not maintained or at least not produced before the Assessing Officer. She submits that the Assessing Officer has recorded that the stock register was possibly maintained by the assessee but deliberately not produced. Secondly, in the special audit report, adverse remarks have been recorded, but not given due credence by the tribunal. Lastly, it is submitted that there was a change in method of valuation of closing stock. In this connection, she has drawn our attention to the table noted by the Assessing Officer, who has held that the closing stock was bifurcated into three categories; finished goods, semi finished goods and goods under process. The Assessing Officer has stated that the opening stock of finished goods was valued @ 90% of the sales recorded/made for first 20 days of the beginning of the year i.e., 1st April, 2001 to 20th April, 2001 but the closing stock was valued @ 90% of the sales made in the period of 15 days after end of the financial year from 1st April, 2002 to 15th April, 2002. Similarly, Semi finished Goods‟ and Goods under Proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be treated as closing stock of finished goods. The time period during which the finished goods, unfinished goods and goods under process etc. were sold and exported depends upon various factors, like, availability of container, inspection by the importer‟s agent, need and requirement of the importer, time of shipment etc. The closing stock, whether finished, semi finished etc. need not be sold/exported within a fixed/specified period each year. There cannot be any such assumption and it is not logical to accept this proposition. The contention of the Revenue is that opening stock and closing stock must be sold/exported within the same period cannot be accepted. The respondent assessee has, before us, filed a chart giving year-wise details of the closing stock from the assessment year 1997-98 to 2005-06 in respect of finished goods, semi finished goods, goods under process and raw material. The said chart indicates that the closing stock was exported or was sold in different time spans in each year. This chart was filed before the tribunal. There is no consistency or certainty in this regard and indeed there cannot be any consistency and certainty as to the period when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uce the findings recorded by the tribunal on the question of closing stock in the impugned order:- 4.8 We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding method of valuation of semi finished, finished and goods in progress appearing in the closing stock. The assessee admittedly is not maintaining day-to-day account of the stock due to practical difficulties because of nature of business. The assessee had been taking periodical inventory of stock. The items of finished goods, semi finished goods and goods in process appearing in the closing stock at the tiend of the eyar have been valued on the basis of sales made of finished goods relating to the items appering in the closing stock in the immediate following accounting year. From the sales made in the next year, the first sales made up-to the quantity of finished stock were being allocated towards finished stock; the second sales up to the quantity of semi finished stock were appropriated towards the semi finished stock and the rest towards the goods under process. The assessee was adopting a particular percentage of these sales as per details given in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance against the goods under progress. This is a systematic and reasonable basis adopted by the assessee, which has been uniformly followed. As the quantity of items appearing in closing stock will vary from year to year, the period of sales adopted for valuation of closing stock in different year will also differ. This has been demonstrated by the assessee by producing a chart regarding the valuation for different years which show that period of sales adopted for different years is different. 4.10 We find that the A.O. has accepted the basis of valuation of closing stock items adopted by the assessee i.e. as a specified percentage of sales of the closing stock items. He has rejected the inventory of closing stock and has taken the period of sales of the closing stock items as the same period as taken for the sale of closing stock of last year in order to determine the closing stock inventory and its value. One of the reasons given for rejecting the closing stock is that the value of closing stock shown was only 80% of shipping loan whereas as per terms and conditions of loan it should have been 125%. But there is no material collected by the A.O. to show that the closing stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them was Rs.8.63 crores, which is equal to about three months of the turnover. The Assessing Officer did not go into the question of lead time, i.e., the time for preparation of the finished product from the date of purchase of the raw material. It is interesting to note that for assessment year 2003-04, an assessment order was passed on 31st March, 2006 and in the said assessment order no addition whatsoever was made to the closing stock but the method adopted by the assessee for the said assessment year was same. In these circumstances, no substantial question of law arises out of the finding recorded by the tribunal on the question of valuation of closing stock. 10. The next question relates to disallowance/addition of Rs.25,80,879/- made by the Assessing Officer on account of travelling expenses incurred by Deven Chachra, who is related to the partners of the firm. Learned counsel for the Revenue has submitted that the order of the tribunal is perverse and merits interference in view of the findings recorded by the Assessing Officer, which were confirmed by the CIT(Appeals). The Assessing Officer while making the said addition has observed that Deven Chachra was paid salary o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted issues and settlement of rates and approval of samples etc. The assessee had filed copies of e-mails to substantiate the claim that the expenditure had been incurred for the purpose of business. It has also been submitted that the expenditure under this head had been allowed in the earlier year and in the succeeding year in scrutiny assessments, as was clear from the chart placed at page 1265 of Paper Book-IX. The case of the revenue is that, it was not established that Shri Deven Chachra was an employee and the expenditure had been incurred for the purpose of business. The e-mails produced by the assessee had originated from India, which can be sent from sitting in a room in India and these did not contain details of business activities. We have considered the matter carefully. Out of total tour and travel expenses on account of Mr. Deven Chachra amounting to Rs.2580879/-, a sum of Rs.2493842/- is on foreign travelling. For claiming any expenditure as deduction, burden is on the assessee to prove that the expenditure has been incurred wholly and exclusively for the purpose of business. From e-mails, it cannot be established that the entire expenditure had been incurred for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business. We order accordingly. The order of CIT(A) will be modified to that extent. 12. Thus, the tribunal has estimated and disallowed 20% of the foreign travel expenditure on the ground that it may not have been incurred wholly and exclusively for the purpose of business. The said amount will be slightly more than Rs.6 lacs. We fail to understand why and on what ground the Revenue can claim and submit that the findings recorded by the tribunal are perverse. No substantial question of law, therefore, arises on the said aspect. 13. The third issue raised in the present appeal relates to deletion of addition of Rs.1,14,60,996/- made by the Assessing Officer under the heading margin of profit on sale of raw material on cost price to sister concerns. 14. Learned counsel for the Revenue again submits that the findings recorded by the tribunal are perverse and factually incorrect. 15. In the assessment order the Assessing Officer noticed that raw material purchased by the assessee was transferred to two sister concerns, namely, Superior Crafts India and Supreme Exports India. The raw material was transferred on cost basis. The Assessing Officer held that the respondent as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision for making any addition on account of lower sale consideration shown compared to the market value. The only ground for making addition could be tax evasion device but for this burden lies on the revenue to establish that the transfer had been made with a view to evade tax. The ld counsel has pointed out that both the concerns are in the same tax bracket and therefore there is no tax evasion on account of any transfer at lower price. These claims have not been controverted before us. Therefore, we do not see any tax evasion device involved in the transfer. Further the corresponding value of purchase in the case of sister concerns have been accepted by the revenue. There is also no material to show that the assessee had received any money over and above the consideration stated in the books. Under the circumstances, any addition on account of lower sale value declared by the assessee is not justified in our opinion. The order of CIT(A) is accordingly set aside and the addition is deleted. 17. On the basis of material on record, the tribunal has accepted the stand of the respondent assessee. The aforesaid findings are findings of fact and these cannot be regarded as pervers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eness of transactions. Payment to the three firms aggregating to Rs.83,48,292/- should be treated as Bogus in view of the fact that above listed two firms being firms in which partners are substantially interested and M/s Prakash Fabrication since all the bills issued by Prakash Fabrication were as cash memos. Moreover at any point either during the course of audit or during the course of assessment proceedings the assessee could not substantiate its claim that the work was actually executed at its business premises or it has actually incurred such expenditure. The assesse did not produce any evidence regarding attendance record of such employees, PF/ESI records of such employees, regular entries in the books of accounts etc. with the help of which we could have relied upon the contention of the assessee. Moreover it was noticed from perusal of page 109 of Part I of Special Auditor‟s report that ESI PF contribution of both employer and employee in respect of other similar contractor namely Ram Pravesh Contractor (Babu Finishing) has been borne by the assessee. It is thus not in doubt that assessee is bearing such contributions when the similar contract was bonafide. Also, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellate stage to show that evidence regarding processing charges had been produced before the special auditor. CIT(A) therefore concluded that the assessee did not discharge onus that the payment had been made wholly and exclusively for the purpose of business and accordingly confirmed the disallowance. 24.8 The ld counsel has reiterated the earlier stand before us that no GRN or challans was required as the goods were fabricated at the factory premises. The attendance of labourers was required to be made by the contractor and not the assessee. It was also pointed out that violation of the provisions of PF and ESI Act, could not be made the basis for disallowance. The ld counsel also submitted that both the special auditor as well as the A.O. had raised query only in relation to section 40A(2)(b) and 40A(3). The assessee had never been asked to prove the genuineness of transaction. No disallowance under the provisions of section 40A(2)(b) could be made as there was no material before the A.O. to show that payments were excessive compared to the market value. As for the cash transactions, the auditors had not reported the same tin the audit report as the individual payments di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ground and on what basis the Revenue contends and submits the contention that the aforesaid findings are perverse. In fact, it is difficult to appreciate the finding of the Assessing Officer that the entire expense was bogus or should be disallowed by invoking Section 48A(2)(b). The Assessing Officer did not conduct any investigation or verification into the reasonableness of the said expense with reference to payment made to third parties or fair market charges payable for similar nature of work. The Assessing Officer also included the payment made to unrelated concern, namely, Prakash Fabrication while making the said addition. It is not the case of the Assessing Officer that the garments were not fabricated or manufactured. Exports of garments have been made. Revenue is unable to show that the findings recorded by the tribunal are not supported by material or evidence. The conclusion reached is after examing a number of facts. It cannot be said that the factual finding are such that no person acting judicially and properly instructed as to the relevant law would have reached the same conclusion. Tribunal has not ignored or excluded relevant evidence or taken into considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent-assessee did not produce attendance records, provident fund/Employees State Insurance records of the employees engaged by R.A. Exports, Sensational Exports and Prakash Fabrication Unit and they did not file inward and outward challans for movement of stock/goods. 26. After rejecting the books of accounts, the Assessing Officer observed that the G.P. rate declared by the assessee in the year under consideration i.e. 2000-01, of 23.87% was low. The G.P. rate for succeeding five assessment years i.e. 2001-02, 2002-03, 2003-04, 2004-05 and 2005-06 were 19.16%, 28.92%, 22.17%, 38.17% and 23.04%, respectively. He held that the G.P rate declared for the assessment year 2002-03 was on the lower side and keeping in view the facts of the present case, the Assessing Officer applied the G.P. rate of 32% to the export sales turnover of Rs.41,47,44,473/-. He accordingly computed the gross profit at Rs.13,27,18,231/- as against Rs.9,53,19,,175/-. 27. The CIT (Appeals) deleted the said addition. He substantially relied upon the order passed by the tribunal in the case of the respondent-assessee for the assessment year 2002-03, which is subject matter of ITA No. 244/2009. The finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard, she relies upon decision of Allahabad High Court in Bimal Kumar Anant Kumar Vs. Commissioner of Income-Tax [2007] 288 ITR 278 (All) and this Court in Action Electricals Vs. Deputy Commissioner of Income-Tax (2002) 258 ITR 188 (Del). 29. In Bimal Kumar Anant Kumar (supra), a Division Bench of Allahabad High Court referred to Section 145 of the Act and Court decisions and observed that the Assessing Officer is entitled to compute income in his own way when he is of the opinion that income cannot be properly deduced from the books of accounts. It was noticed that the gross profit declared by the assessee was too low in comparison to other assessees in the same trade. The Assessing Officer had accordingly compared the gross profit rate and made an ad-hoc addition of Rs.15,000/-, which was reduced to Rs.13,000/- by the tribunal. Looking at the factual matrix of the said case, the questions of law were answered in favour of the Revenue and the appeal filed by the assessee was dismissed. 30. In the case of Action Electricals (supra), the exact observations of the High Court read as follow:- We are unable to persuade ourselves to agree with learned counsel for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... returns made by the assessee. He cannot say that merely because there is no stock register the account books must be false. The account books in this case were accepted as correct and disclosing a true state of affairs. The absence of one register cannot amount to material and there must be material before the Income-tax Officer before he can apply the provisions of the proviso to Section 13. Again, we find that the Income-tax Officer did not adopt any basis for the increase made by him. XXXXXX ....In the second place, even if such a finding were to be implied from his order it cannot be said that there was material before him which would enable him to come to this finding. The fact that the profits appeared to him to be insufficient and the fact that there was no stock register maintained by the assessee are not in my view materials upon which such a finding can be given, but these are circumstances which may provoke an inquiry. The Income-tax Officer must discover evidence or material aliunde before he can give such a finding. 33. This decision was referred to by the Supreme Court in the case of S. N. Namasivayam Chettiar v. CIT (1960) 38 ITR 579, 588 (SC) and it was explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod of accounting, is not bound by the figure of profits shown in the accounts. It is for the Income-tax Authorities to consider the material which is placed before them and, if, after taking into account in any case the absence of a stock register coupled with other materials they are of the opinion that correct profits and gains cannot be deduced, then they would be justified in applying the proviso to s.13. 34. The Supreme Court had another occasion to examine the said question in the case of Chhabildas Tribhuvandas Shah v. CIT (1966) 59 ITR 733 (SC) and it was held:- .... What we have to see is whether the finding of the Appellate Tribunal that the income, profits and gains cannot properly be deduced from the method of accounting employed by the appellant is based on any material. The Appellate Tribunal has given two reasons for its conclusions. The first reason is that the appellant was doing business in the main on wholesaler basis and there should have been no difficulty in tallying quantities in respect of major items of trading account. This certainly is a relevant consideration. In the absence of such a tally, the next reason given is that the fall in the margin is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd part of sub-section (3) of section 145 does not apply to this case. As noted by the Commissioner of Income-tax (Appeals) as well as by the Income-tax Appellate Tribunal, the Assessing Officer had not pointed out any defect in the account books maintained by the assessee, which, admittedly, were produced before the Assessing Officer for his consideration. This is also not the finding of the Assessing Officer that the account of the assessee was not complete. No provision either in the Act or in the rules requiring an assessee carrying business of this nature, to maintain a stock register, as a part of its accounts has been brought to our notice. As regards non-production of stock register, the assessee has given an explanation which has been accepted not only by the Commissioner of Income-tax (Appeals) but also by the Tribunal and both of them have given a concurrent finding of fact that maintaining stock register was not feasible considering the nature of the business being run by the assessee which was engaged in the business of manufacturing readymade garments by purchasing fabric which was then subjected to embroidery, dyeing and finishing and then converted into readymade ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port and state that it was not possible to decipher and compute income/profits from the books of account. The special auditor had examined the books of account, vouchers, invoices etc., but did not suggest that books of accounts should be rejected. The Assessing Officer for the assessment year 2002-03 did not reject the books of accounts. In the said year, the Assessing Officer did make additions/disallowances, but not after rejecting the books of accounts. In the said assessment year, similar disallowance and additions were made for identical grounds/reasons given by the Assessing Officer as in the assessment year 2001-02. Therefore, we do not agree with the counsel for the Revenue that rejection of books of accounts was justified and findings recorded by the tribunal are perverse. Accordingly, we do not think that on this aspect any substantial question of law arises for consideration. 40. The next contention raised by the Revenue pertains to the payments made to the contractors such as R.A. Exports, Sensational Exports and Prakash Fabrication Unit. The Assessing Officer has recorded that the assessee was asked to prove genuineness of the transactions for which payment was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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