TMI Blog2010 (2) TMI 953X X X X Extracts X X X X X X X X Extracts X X X X ..... to establish that purchases or expenses were inflated or receipts suppressed, there was no justification in invoking the provisions of section 145 of the Act - appeal of the revenue is dismissed - IT APPEAL NO. 512 (AHD.) OF 2007 - - - Dated:- 26-2-2010 - BHAVNESH SAINI AND A.N. PAHUJA, JJ. Smt. Neeta Shah for the Appellant. Ramesh Goyal for the Respondent. ORDER A.N. Pahuja, Accountant Member. - This appeal by the revenue against an order dated 29-11-2006 of the learned Commissioner of Income-tax (Appeals)-I, Surat, raises the following grounds : "1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in deleting the disallowance/addition of Rs. 31,68,116 being devised loss, Rs. 28,62,745 being addition on account of production outside the books of account and Rs. 3,43,532 being undervaluation of closing stock of work-in-progress made duly after rejecting the book result and resorting to the provisions of section 145(3) read with section 144 of the Income-tax Act. 2. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals)-1, Surat ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer, etc., relying upon a decision in the case of Dy. CIT v. Samir Diamonds Exports (P.) Ltd. [1999] 71 ITD 75 (Mum.), the Assessing Officer rejected book results having recourse to the provisions of section 145(3) of the Act and determined income in accordance with the provisions of section 144 of the Act. Since the assessee incurred loss per metre of Rs. 5.66 in processing 4,61,074 metres of cloth, the Assessing Officer disallowed the said loss of Rs. 30,24,645 ignoring other manufacturing expenses and added net profit of Rs. 1,43,471 on 4,61,074 metres of cloth, following the net profit rate of 3.52 per cent shown by M/s. Akruti Dyeing and Printing Mills Pvt. Ltd., resulting in an addition of Rs. 31,68,116. 3. The Assessing Officer further noticed that the assessee had two stenters comprising eight chambers and six printing machines. As per common knowledge, better quality of fabric could be produced at 35000 metres per day on each of these machines, after considering 2-3 times pass/rotation quality of colour, etc. In case of lower quality, the production could be even 50000 metres per day on each of these machines, the Assessing Officer observed. To a query by the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the production outside the books of account, adopting net profit rate of 3.52 per cent in the case of M/s. Akruti Dyeing and Printing Mills Pvt. Ltd. 5. The Assessing Officer further noticed that though the assessee had two stenters and six printing machines, the closing work-in-progress shown was much lower. Since the assessee admitted completion of process in five days, the Assessing Officer adopted production of 26,948 metres per day and computed the work-in-progress as under : 26,948 metres per day 5 days = 1,34,740 metres 1,34,740 metres Rs. 3.94 being half of the cost of processing charge = Rs. 5,30,875 6. After deducting the work-in-progress shown by the assessee at Rs. 1,87,343, the Assessing Officer added Rs. 3,43,532 estimated work-in-progress to the total income. 7. In view of the foregoing, the Assessing Officer added total amount of Rs. 63,74,393. 8. On appeal, the assessee reiterated their contentions before the Assessing Officer while relying upon decisions in the case of CIT v. Vikram Plastics [1999] 239 ITR 161 (Guj.), Pushpanjali Dyeing Printing Mills (P.) Ltd. v. Jt. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Pushpanjali Dyeing Printing Mills (P.) Ltd. [2001] 72 TTJ (Ahd.) 886, the Hon ble Income-tax Appellate Tribunal stated that the reasons for low gross profit and excess expenditure of electricity had been satisfactorily explained and therefore merely low yield did not warrant rejection of books of accounts. The decision of the Hon ble Allahabad High Court in the case of Awadhesh Pratap Singh Abdul Rehman Bros. v. CIT [1994] 210 ITR 406 is squarely applicable. In this case the Hon ble court observed as under (headnote) : It is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be deduced. Whether the presence or the absence of a stock register is material or not would depend upon the type of the business. It is true that the absence of a stock register or cash memos in a given situation may not per se lead to an inference that the accounts are false or incomplete. However, where the absence of a stock register, cash memos, etc., is coupled with other factors such as that vouchers in supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessed for sister-concern on proportionate basis. Since this job charges of sister-concern is much higher as admitted by the Assessing Officer at Rs. 22 per metre compared to average of Rs. 7.45 per metre, the cost of processing the same cannot and should not be taken on proportionate basis. If gross profit rate is taken at 8 per cent the cost of such processing for sister-concern would be Rs. 20 and there would be no loss for processing done for other parties. uNo defect has been pointed out in terms of unaccounted sales or purchases or expenses. Although not keeping the quantitative stock register is a serious defect but as stated by the Hon ble High Court in the case of Awadhesh Pratap Singh Abdul Rehman Bros. v. CIT [1994] 210 ITR 406 totality of factors as stated above neither warrants rejection of books of account nor warrants the above addition. In view of these reasons the argument of the appellant is acceptable and the addition made by the Assessing Officer is deleted. This ground of appeal is therefore allowed." 10. For the addition of Rs. 28,62,745, the learned Commissioner of Income-tax (Appeals) concluded that : "4.4 I have considered the submissions ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer. The appellant has given the figures from RG-1 register of first five days of production of subsequent year. The appellant has accepted the Assessing Officer s contention that the production of first five days of the subsequent year would give the correct work-in-progress. The appellant has also accepted the rate of Rs. 3.94 per metre adopted by the Assessing Officer for working out the value of work-in-progress. The appellant has further argued that the computation of 1,34,740 metres is theoretical and it is adopted by taking average of the whole year. The actual figure shown by the RG-1 register needs to be adopted. I agree with the appellant that the figures taken by the Assessing Officer are based on average and hence it is theoretical. The Assessing Officer has not explained as to why when the RG-1 register is available the figures were not adopted from the same. In view of this reason the figure of 47,549 metres shown by RG-1 register should be adopted. If this figure is adopted then the value of work-in-progress amounts to Rs. 1,87,347 which has been adopted by the appellant. Hence the figures of work-in-progress shown by the appellant is correct and the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative while carrying us through pages 55 to 60 of the paper book, pointed out that there were no discrepancies in the stock or actual production and similar method in the case of their sister-concern had been accepted by the Assessing Officer. 13. We have heard both the parties and gone through the facts of the case as also the decisions relied upon. Undisputedly, the gross profit rate in the year under consideration was 7.56 per cent as against 8.56 per cent in the immediately preceding year while net profit rate increased to 2.8 per cent as against 1.7 per cent in the preceding year. The assessee attributed increase in turnover and cost of inputs as the reasons for fall in gross profit rate. The Assessing Officer rejected the book results and made estimated addition since the assessee was not maintaining day-to-day consumption records, even when no defects were noticed in the books of account maintained by the assessee. Though the learned Departmental representative contended that books of account were not produced before the Assessing Officer, we find from paragraph 2 of the assessment order that books were produced before the Assessing Officer and were also test checke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count while ignoring the book results nor brought any material on record regarding the genuineness of expenditure on account of colour, chemical, power, coal, gas, etc. The hon ble Gauhati High Court in Aluminium Industries (P.) Ltd. observed that a lower rate of gross profit declared by the assessee as compared to the previous year, would not by itself be sufficient to justify any addition. The mere fact that the percentage of loss or gross profit is high or low in a particular year does not necessarily lead to inference that there has been suppression. Low profit is neither a circumstance nor material to justify addition of profits. The ratio of the judgments in Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC); Raghubar Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 (SC); State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC); State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC); Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC); Chouthmal Agarwalla v. CIT [1962] 46 ITR 262 (Assam); R.V.S. Sons Dairy Farm v. CIT [2002] 257 ITR 764 (Mad.); International Forest Co. v. CIT [1975] 101 ITR 721 (J K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue to contend that what is shown by the entries is not the real state of affairs. In the light of these observations of the hon ble jurisdictional High Court, we uphold the findings of the learned Commissioner of Income-tax (Appeals) in holding that there was no basis for rejection of books of account. 14. As regards addition of Rs. 31,68,116 made by the Assessing Officer in consequence of rejection of books of account, we find that both the turnover and net profit rate had increased substantially while the gross profit declined marginally. The learned Commissioner of Income-tax (Appeals) found that the calculations made by the Assessing Officer were wrong because though the Assessing Officer reduced the receipt from sister-concern, he did not reduce the corresponding cost nor considered the effect of opening and closing stock of work-in-progress and raw material. After considering that loss reduced to Rs. 7.33 lakhs by taking the cost of goods processed for sister-concern on proportionate basis. Since the job charges of sister-concern were much higher as admitted by the Assessing Officer at Rs. 22 per metre compared to average of Rs. 7.45 per metre, the learned Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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