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TMI Blog2014 (5) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case and in law, the Ld. CIT(Appeals) erred in deleting the addition of Rs. 66,87,215/- made on account of low G.P. as the assessee had failed to explain the reasons for the low G.P. during year. Further, the ld.CIT (Appeals) ought to have remanded the Assessing Officer the submission of the assessee which was not submitted before the Assessing Officer for his report under the provisions of section 46A of the Income-tax Rules." 3. Ground no. 1 relates to disallowance of Rs. 23,95,470/- u/s. 40(A)(2)(b) of the Act. 4. Brief facts of the case are that AO noted that the assessee was a manufacturing of aluminium chloride. From form 3CD, Annexure D, it was seen that payments of Rs. 2,39,54,709/- were made to Synergy Overseas Ltd. (SOL) towards purchase of aluminium chloride. It was found that SOL was a person specified u/s. 40A(2)(b). Since the assessee was a manufacturer of aluminium chloride, the AO saw no reasons for the assessee to purchase same product from its sister concern. Accordingly 10% of the sale price i.e. Rs. 23,95,470/- was held to be excessive and unreasonable and therefore disallowed and added to the income of the assessee by AO. 5. Before Ld. CIT(A) assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as explained that SOL has granted long credit terms to the appellant of over 200 days. A copy of the ledger account of SOL in the hooks of the appellant was furnished which shows that the opening balance of SOL was a credit of 71.36 lakhs which went to 173.25 lakhs at the end of the year, an increase of almost one crore rupees. A study of the account will show that the amount due at the beginning of the year was paid in small amounts by the end of September. But in the same period purchases of Rs. 1.10 Crores were made. Out of this by the end of the year about Rs. 80 lakhs were paid while in the last six months purchases of Rs. 1.44 Crores were made which were unpaid till the end of the year together with the unpaid balances as at 30th September. Even if simple interest is calculated at 12.25% (the rate at which the appellant paid interest to its Rankers on the Cash Credit facility), the same would work out to almost Rs. 15 lakhs. The marginal variation in prices paid to SOL is therefore justifiable. 2.5 It will not be out of place to state here that 616.415 Tons of Aluminium Chloride was sold by M/s. Synergy Overseas Ltd., to M/s. Base Metal Chhrinations Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions were motivated by commercial considerations. Accordingly, the disallowance of Rs. 23,95,470/- is directed to be deleted." 7. Aggrieved by this order, now revenue is in appeal before us. 8. At the time of hearing Ld. DR submitted that before AO no explanation whatsoever was given by the assessee when query in respect of purchases from sister concern were raised by the AO, therefore Ld. CIT(A) before giving relief to the assessee should have taken comments of the AO on the submissions of the assessee. Concluding his argument he submitted that matter which may kindly be restored back to the file of AO. Learned counsel of the assessee on the other hand refuted this submission of the Ld. DR by showing us that assessee did reply to the query raised by the AO and on the basis of same submissions case was presented before Ld. CIT(A). There was nothing new which was submitted before the ld. CIT(A). No violation of Rule 46A is there in this case. He placed reliance on the submissions before Ld. CIT(A) and the order of Ld. CIT(A). 9. After hearing both the parties and perusing the record, we find no merit in the argument advanced by Ld. AR that there was violation of Rule 46A. We fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions 145A of the Act. 12. Before Ld. CIT(A) assessee reiterated the submissions made before AO and submitted that AO erred in computing the preceding year's and current year's GP rate at 18.56% and 8.51% respectively. AO erroneously considered the combined turn-over of different products in both the years while working out the GP rate which was not correct, since the assessee had sales of different product-mix in the two years. Hence comparison was not valid. 13. After taking into consideration the submission of the assessee Ld. CIT(A) held that AO was not justified in this case to reject the books of account maintained by the assessee by invoking the provisions of section 145 as no specific defect as such was pointed out in the books of account maintained by assessee and deleted this addition by observing as under:- "5. Ground No. 3 challenges the reduction of book results and estimation of profit @ 10.05 %, resulting in addition of Rs. 66,87,215/- to the total income. The AO found during the course of assessment proceedings that there was decline in the gross profit ratio. The assessee was asked t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 145 one has to demonstrate the following: (i) the system of accounting regularly followed by the assessee has been departed from, or (ii) the accounting standards notified by the Central Government have not been followed, or (iii) the accounts of the assessee are either incorrect or incomplete 5.3 The circumstances under which the books of accounts may be rejected u/s 145 have been examined in numerous decisions of the Courts. The Supreme Court has laid down the principle in this regard in CIT v. McMillan & Co. 33 ITR 182. In that case, it was laid down that section 145 can be invoked only if and where the elements attracting the provisions are found to exist, and a clear finding to that effect along with the materials on which such findings are based has to be stated by the A.O. No assessment u/s 145 can be sustained if the A.O has not considered and recorded a finding against the assessee as to whether he has been regularly employing the method of accounting or whether his income, profits or gains can be properly deduced from this method of accounting or whether the accounts are accu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n & office staff expenses) 17.18% 13.72% Increase in GP during the year GP rate (including Directors remuneration & office staff expenses) 12.85% 9.85% Increase in GP during the year B. Trading Activities:- GP rate of Aluminium Chloride 8.74% 9.32 % Marginal decline in GP GP rate of other items 7.94% 13.49 % Difference of product mix 5.3 So far as manufacturing activities are concerned, it is seen that when the accounts are recast in order to make the items comparable by excluding certain expenses in both the years and also by including both the expenses in the two years, the GP rate has shown improvement. Hence there could be no grounds for drawing any adverse inference with regard to the manufacturing activities. Coming to the trading activity, the marginal decline by 0.58% in respect of aluminium chloride is due to the fact that the turnover of this item increased from Rs. 1.02 crorcs to Rs. 3.35 crores, thereby registering increase of more than 300%. It is not uncommon for gross margin to be sacrificed in order to achieve higher turnover. In any event, the marginal fall of 1/2 % is not significant enough to lead to any adve ..... 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