TMI Blog2014 (5) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) is upheld – Decided against Revenue. Deletion on account of Low GP – Failure to explain reasons – Held that:- There was no merit in the arguments of revenue that there is any violation of rule 46A – AO has estimated the GP of the assessee by rejecting the books of account by invoking the provisions of section 145A of the Act - CIT(A) held that AO was not justified in such rejection of books of account as he has not pointed out any defects in the books maintained by the assessee-company - there is no substance in the AO’s contentions that assessee has shown lower GP in respect of its manufacturing activity or trading activity by demonstrating that in the case of manufacturing activities in fact there is increase in GP during the year and marginal decline in GP in trading activities is due to 300% increase in the turnover of the assessee - revenue has not challenged the finding of the CIT(A) that books of accounts were wrongly rejected by AO by taking any ground - GP addition cannot be defended – the order of the CIT(A) is upheld – Decided against Revenue. - ITA No.1822/Ahd/2010 - - - Dated:- 21-3-2014 - Sri D.K Tyagi and Shri Anil Chaturvedi, JJ. For the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22 If is submitted that the Accountant of the company at that time was one Mr.Sanjay Trivedi who left the job halfway and migrated to the United Kingdom. The details could not be compiled by the new incumbent Shri Mishra who was a retired person from Kolkata and did not know much about the transaction between the inter related companies. This was particularly because he was appointed only to look after the matter of Base Metal Chemicals and Base Metal Chlorinations Pvt Ltd., and the matters of M/s. Synergy Overseas Ltd., were looked after by other Accountants. It was due to non-capability of this senior person to compile the data, the necessary data could not be furnished to the AO in the format as required by him. However, all the information which was required by the learned AO was given to him, albeit in a different format. 2.3 We enclose herewith a chart (extract of the Trading Purchase Register) which was furnished to the learned AO to show the total purchases of the items sold by M/s Synergy Overseas Ltd. (SOL), to M/s. Base Metal Chlorinations Pvt. Ltd. (BMCPL), who in turn have sold them to M/s. Luna Industries Ltd. At the same time the Appellant has falso made dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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. Ltd. for Rs.2,39,54,799. Out of this, 604 Ton material were sold by M/s. Base Metal Chlorinations Pvt. Ltd., to M/s. Lona Industries Ltd., for Rs.2,41.08,960 making a profit of Rs. 1,54,252. The average price for the whole year of material purchased from M/s. Synergy Overseas Lid., is Rs 38.86 per KG. which in turn has been sold to M/s. Luna Industries Ltd., at Rs.39.92 per KG. 2.6 It will not be out of place to state here that a similar question arose in Assessment Year 2007-08 and based on the information similar to that being furnished herewith the A.O. has accepted the fact that there is no unreasonableness in the payment made by M/s. Base Metal Chlorinations Pvt. Ltd., to M/s. Synergy Overseers Ltd, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions 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 further find that Ld. CIT(A) has given relief to the assessee by giving a categorical finding that assessee obtained orders of supply of aluminium chrolride which were in excess of its capacity to produce in its own plant and therefore he had to make certain purchases through sister concern. The Ld. CIT(A) also considered the fact that sister concern had allowed credit to the assessee amounting to Rs. 173.25 lakhs which was valuable consideration and has resulted in reducing its interest liability to the bank, had this amount was taken as loan from the bank. During the appellate proceedings assessee was asked whether in previous year and subsequent years also assessee was making purchases from its sister concern and whether similar addition has been made in those years. The reply of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 to explain the reason for such fall. It was explained by the assessee that the company has two lines of business, i.e. manufacturing activities and trading activities. The apparent fall in GP rate was on account of presentation difference only. In the earlier year, the assessee had excluded director's remuneration and office staff expenses from the calculation of GP, whereas in the current year such expenses were included. This resulted in an ostensible fall in GP. If the said expenses were excluded from the calculation in order to make it comparable, it could be seen that there was in fact rise in GP. Similarly, if the accounts were recast by including the said expenses for both the years even then the current year's GP rate would be found to be higher that in the earlier year. This explanation was not accepted by the AO and GP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 accurate and complete. The A.O's decision on these matters is not to be a subjective or arbitrary decision but a judicial decision and cannot be accepted if there is no material to support his finding. In various other cases, it has been laid down that in the absence of a finding that the case fell within section 145, it was not possible to sustain rejection of book results and addition to the gross profit. The mere fact that the profits were low is not a circumstance or a material which could justify an estimate [eg.. Pandit Brothers v. CIT 86 ITR 159 (Punjab)]. In Laxmi Stores v. CST, 43 STC 167 Allahabad High Court held that low profit without any defect being found is not a sufficient ground for rejection of books. It has also been held that the system of accounting adopted by the assessee cannot be rejected merely on the ground that the gross profit disclosed in its books compared unfavourably with those of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 adverse conclusion. Regarding the GP rate of other items there is substantial decline. However, from the details filed it is seen that in the earlier years the assessee had made sales of various items. This included aluminium ingots, chlorine, aluminium chloride, cuprous chloride, caustic soda lye, CPC blue, borex, SS flat and SS patta. In the current year, the assessee had sold only cuprous chloride and chlorine. There have been no sales of other items. In the current year there is no sale of aluminum ingots, borex. SS flat and SS patta. In the earlier year there were no sales of chlorine and cuprous chloride. The product mix was differe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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