TMI Blog2014 (6) TMI 572X X X X Extracts X X X X X X X X Extracts X X X X ..... and requires the AO to verify the genuineness of the expenditure with caution - the AO cannot reject such expenses without finding that any bogus or non-business expenditure or capital expenditure has been debited. Revenue could not bring any material on record to show that any bogus expenditure or non-verifiable expenses were debited under any head of expenses - the wholesale rejection of book result was not warranted - reasons given for rejecting the book results was inability of the assessee to properly explain the reason for decline in gross profit for disproportionate increase in expenses in three heads - the reason could at best present a case where the AO ought to have verified the books with caution and make due inquiries but does not empower the AO to reject the book results. The breakage claimed during the year worked out to 0.61% of the total production which compares favourably with the breakage of 1.22% accepted by the Department in the case of the assessee in the AY 2007- 08 and 1.08% accepted in the AY 2008-09 - no addition in respect of breakage claimed in the year is also warranted - the entire addition is not sustainable – Decided in favour of Assessee. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed against Revenue. - ITA No.1058/Ahd/2013 & ITA No.2310/Ahd/2011 - - - Dated:- 9-6-2014 - N S Saini And Kul Bharat, JJ. For the Appellant : Shri K C Mathews, Sr. DR For the Respondent : Shri D K Parikh, AR ORDER:- PER : N S Saini The appeal in ITA No. 1058/Ahd/2013 is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-VIII, Ahmedabad dated 28.01.2013 for Assessment Year 2009-10. The appeal in ITA No. 2310/Ahd/2011 is filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-VIII, Ahmedabad dated 05.07.2011 for Assessment Year 2008-09. We first take up the assessee s appeal. 2. In the assessee s appeal, the issue involved is that the Commissioner of Income Tax (Appeals) erred in law and on facts in confirming the addition of Rs 60,71,567/- made by the Assessing Officer by adopting GP at 23.338% after rejecting the books of account of the assessee by invoking the provisions of section 145(3) of the Act. 3. The brief facts of the case are that the Assessing Officer observed that the assessee is engaged in manufacturing and trading of glazed tiles. The sales, gross and net profit of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17,11,343 square metres of tiles and fuel consumption of Rs 5.39 crores. Therefore, the Assessing Officer issued show cause notice to the assessee as to why addition for suppressed production on account of excess fuel consumption should not be made in this year also as made in the preceding assessment year. 5. In reply to the show cause notice, the assessee submitted that production cannot be calculated on estimate since the assessee maintains all books of account with inventory and therefore, on account of excess consumption of fuel compared to the previous year was not sufficient reason for estimating excess production. It was submitted that manufacturing process of ceramic glazed tiles was most important. The assessee submitted that after receiving the raw materials and checking the same, the same is stored in go-downs and as per requirement of production, material is put on conveyor belt which is sent to ball mill. After this, the material is put for grinding purpose. After this process, it is put to slurry processing where it mixes with water. Afterwards, it is extracted through pipe where the water component is separated and the dust and other materials which are not usef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys 100% of its capacity of 18 lakh square metres per annum as against 97.61% shown by the assessee is not correct. 6. The Assessing Officer further observed that it is noticed from month-wise production in weight including the breakage as under: Month Production (Kg.) Brekage (Kg.) Percentage April, 2008 3801440 12000 0.3156 May, 2008 3577917 4000 0.117 June, 2008 3114172 9000 0.2890 July, 2008 3972212 8000 0.2013 August, 2008 2668075 67000 2.511 September, 2008 2697080 42000 1.5572 October, 2008 3533908 24000 0.6791 November, 2008 2285218 21000 0.9189 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Rs 25,42,002/- will be disallowed and added to the income of the assessee. The Assessing Officer further observed that regarding the increase in expenses under various heads mentioned above, the assessee did not give any specific reason and simply stated that turnover of the assessee has increased from 22.85 crores in immediately preceding year to 36.54 crores in this year which is 60% more as compared to last year. The Assessing Officer observed that this plea of the assessee does not carry weight as selling price per box increased to Rs 220/- as compared to Rs 130/- per box in the immediately preceding year and that the net quantity sale of the assessee is less than the immediately preceding year. According to him, this year, sale is 16,58,779 square metres which was in the immediately preceding year 17,53,399 square metres. The Assessing Officer observed that from the above facts, it is apparent that the book result declared by the assessee are not subject to proper verification and are not conclusive and therefore by invoking provision of section 145(3) of the Act, he rejected the book results of the assessee. He further noted that the gross profit rate of 23.338% being th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut many defects/discrepancies in the books of the accounts of the appellant. The appellant is engaged in manufacturing and trading of glazed tiles. The sale, gross and net profit shown by the appellant during the assessment year under consideration and earlier 3 years are reproduced as under: A.Y. Turnover Gross Profit % Net profit % 2006-07 18,48,38,000 4,25,89,875 23.04 97,98,942 5.30 2007-08 20,15,89,793 4,71,98,249 23.41 1,05,38,313 5.23 2008-09 22,85,54,986 5,37,41,942 23.51 1,20,07,955 5.25 2009-10 36,54,77,061 7,92,23,469 21.68 78,57,610 2.15 The appellant submitted that the gross profit rate as compared to last year is less by 1.83% due to increase in cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In assessment order para 3.5, the AO has noted the expenses of this year which are highly excessive as compared to last year. The details are as under: A.Y. 2009-10 A.Y. 2008-09 (i) Consumable stores spares 18544245 5549505 (ii) Payment to employees including labour 17368919 7079432 (iii) Repairs Maintenance 12893965 143568 The appellant has submitted that compared to previous year consumption of raw materials increase is 260%, it is settled that the consumption of stores and spares was liable to increase and therefore, increase of consumption of stores spares was reasonable compared to previous year. Further, repair and maintenance was increased compared to previous year due to machinery was liable to maintenance after 5 years of continued production. However, the assessee has claimed capital expenses of Rs.3043532/- under repair and maintenance head as revenue expenditure and same was added back to the total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t even if regular adoption of a method of accounting is there the annual profits cannot properly be deduced from the method employed and there are significant omission to show the correct expenses. The AO has rightly rejected the books of accounts and reasonably estimated the gross profit of the assessee @ 23.338% being the average G.P rate of last 3 years, as against G.P. rate of 21.68% shown by the appellant. 2.9. The appellant has also cited the case laws in the case of Pandit Bros vs. CIT (1954) 20 ITR 159, (Punj) Ram Kumar Beniprasad vs. ITO (1977) Taxation 49 (6)-141, Trimurti Salt Co. vs. ITO (1981) Taxation 63(6)-13, Shri Ambikaji Rice Mills vs. CIT (1990) 90 CTR (Pat) 127, Raza Textiles Ltd. vs. CIT (1972) 86 ITR 673 (All), Narsinghdas Ramakishan Pungaliya V/s. ACIT, 272 ITR 467 RAJASTHAN, Shri Ambikaji Rice Mills vs. CIT (1990) 90 CTR (Pat) 127 and others as supra. In all the cases, the Hon ble courts have held that the AO cannot reject the books of accounts and estimate the GP merely because the profits were low. It was also held in these cases that the AO has to establish the defects in the books of accounts. In the appellant case the AO has established that how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion achieved by the assessee. Considering all these factors, there is no cause of addition as made out by the Assessing Officer. We, therefore, do not find any justification for sustaining the addition as proposed by the Assessing Officer. Further he relied on the decision of this Tribunal in the case of Bharuch Sons, Surat Vs. Department of Income Tax for Assessment Year 2005-06 passed in ITA No. 2423/Ahd/2008 order dated 26.10.2012, wherein it was held that for working out the suppression of production, the Assessing Officer has relied on the ratio of consumption of electricity and gas as compared between the months of the year on the basis of which consumption in the month of May and the production achieved during the same month, the Assessing Officer worked out estimated production for the remaining part of the year and after adjusting the production disclosed by the assessee and allowing for 20% variation, the Assessing Officer worked out suppressed job work charges received by the assessee. Since the addition has been made by the Assessing Officer without bringing any concrete materials on record to show that assessee has received job work charges more than what has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese circumstances, there was no justification for invoking the provisions of section 145 of the Act (Vikram Plastics 239 ITR 161 (Guj.) and estimating the profits. In view of the above facts specially when there is no material before us to take a different view in the matter, we are not inclined to interfere with the findings of the Commissioner of Income Tax (Appeals) and there the ground of appeal of the assessee is dismissed. 13. The Departmental Representative fully justified the order of the Assessing Officer. 14. We have heard the rival submissions and perused the orders of lower authorities and material available on record. In the instant case, the assessee is engaged in manufacturing and trading of glazed tiles. The Assessing Officer observed that the assessee has disclosed gross profit of 21.68% which was lesser than the gross profit of 23.51% disclosed in the immediately preceding year. The Assessing Officer further observed that the expenses claimed by the assessee under the head consumable stores and spares, payment to employees including labour and repairs and maintenance were disproportionately higher than the expenses under these heads claimed by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod from which the correct profit of the assessee could not be deduced. 21. Further, apart from the breakage, no other expenses entered in the books of account were found to be not supported by proper vouchers or were not verifiable. 22. Further, in our considered opinion, disproportionate increase in expenses under any head by itself does not empower the Revenue to reject the book results. Such a situation only creates a doubt and requires the Assessing Officer to verify the genuineness of the expenditure with caution. However, the Assessing Officer cannot reject such expenses without finding that any bogus or non-business expenditure or capital expenditure has been debited therein. 23. In the instant case, we find that the Assessing Officer could not bring any material on record to show that any bogus expenditure or nonverifiable expenses were debited under any head of expenses. In the above circumstances, in our considered view, the wholesale rejection of book result in the instant case was not warranted. The reasons given by the lower authorities in the instant case for rejecting the book results was inability of the assessee to properly explain the reason for decline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l increased approximately Rs 2 crores whereas consumption of raw materials is reduced in Financial Year 2007-08. He observed that because fuel is consumed for production of tiles only, quantity of tiles manufactured in Financial Year 2007-08 must have increased proportionately as compared to fuel but the same has not happened in the case of the assessee. The assessee was required to explain the reasons for the same. He observed that on proportionate basis the production should have been 24,15,908 square metres. He noted that against proportionate production of 24,15,900 square metres, the assessee has manufactured 17,11,343 square metres of tiles. It shows the assessee has not entered into the books the remaining production of 8,06,514 square metres of tiles which is production on account of excess consumption of fuel. He observed that it seems that the excess production has been sold out of books. He issued show cause notice on the assessee requesting him to explain why the value of unrecorded production of 8,06,514 square metres of tiles should not be added to the income for the assessment year under consideration. In response to this show cause notice, the assessee explained tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee has filed acknowledgement from Minister of Commerce Industry dated 24.03.2004 in which it is mentioned that the assessee s manufacturing capacity is 18 lakh square metres and in his reply filed on 30.11.2010 also, the assessee has taken ground that its production capacity is still 18 lakh square metres and argued that production of tiles more than capacity is not possible. The Assessing Officer observed that this argument of the assessee was reasonable and acceptable also. He observed that anyway total production cannot exceed the production capacity of the manufacturing units. In view of these aspects, total unaccounted production is calculated by taking into consideration overall production capacity of the unit which is 18 lakh square metres per annum. This way, total excess production is worked out as under: 18,00,000 17,11,343 = 88657 square metres He observed that average sale price per square metre in the year under consideration was Rs 130.50 and therefore, unaccounted production is worked out at Rs 1,15,69,738/- by applying the said rate. He further observed that for manufacturing unaccounted production, the assessee must have incurred unaccount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing and lastly, no specific defect in the audited accounts of the assessee was pointed out and in absence of the same, the addition made was only on the basis of conjectures and surmises. 30. The Departmental Representative before us supported the order of the Assessing Officer. The only specific contention of the Departmental Representative before us was that the assessee during the course of assessment hearing itself admitted to have produced 17,63,930 square metres of glazed tiles and therefore, the Commissioner of Income Tax (Appeals) was not justified in deleting the entire addition. 31. On the other hand, the Authorized Representative of the assessee strongly objected to the above argument and submitted that during the course of assessment proceedings, the assessee simply presented a calculation before the Assessing Officer showing estimated production on the basis of consumption of fuel and on different basis. The assessee never admitted before the Assessing Officer to have actually produced 17,63,930 square metres of glazed tiles during the year under consideration. 32. We find that the Commissioner of Income Tax (Appeals) has recorded in this respect in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used the orders of lower authorities and materials available on record. The undisputed facts of the case are that the assessee claimed depreciation at the rate of 15% on electric installations which were part and parcel of plant and machinery of the assessee. The Assessing Officer allowed depreciation at the rate of 10% to the assessee on the electric installations on the ground that as per Income Tax Rules, depreciation on electric installations is allowable at the rate of 10% only for Assessment Year 2008-09. The Commissioner of Income Tax (Appeals) by following the decision of the Ahmedabad Bench of the Tribunal in the case of Madhu Industries Limited Vs. ITO 132 TTJ 233 and the decision of Mumbai Special Bench of the Tribunal in the case of DCIT Vs. Datacraft India Limited 40 SOT 295 held that where electric installations were part of plant and machinery, the assessee was entitled to depreciation at the rate applicable to plant and machinery and not electric installations and allowed the appeal of the assessee. Thus, he deleted the disallowance of Rs 1,34,519/- made by the Assessing Officer on account of depreciation. 38. We find that the Departmental Representative could no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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