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TMI Blog2014 (7) TMI 1028X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts. 2(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of the AO in rejecting the books of accounts of the assessee. (ii) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of the AO in rejecting the books of account ignoring the explanation and evidences submitted by the assessee in support of its contention and on the wrong premises that the accounts of the assessee have not been audited despite the fact that the audited accounts and the audit report was available with the AO during the assessment proceedings. (iii) On the facts and circumstances of the case, the order passed by the learned CIT(A) is bad in the eye of law as the action of the AO rejecting the books of accounts has been confirmed without giving any findings on the various contentions raised by the assessee against rejection of the books of accounts during the appellate proceedings. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of VAT written off. 7. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of AO in not allowing assessee the exemption under section 10B of the Act, despite the assessee being eligible for the same. 8. The appellant craves leave to add, amend or alter any of the grounds of appeal." 3. Ground No.1 is general in nature and does not require any adjudication. 4. In the ground nos.2(i), (ii) and (iii), the issue involved is confirming the action of Assessing Officer in rejecting the books of accounts of the assessee. While pleading on behalf of the assessee the ld. AR submitted that the Assessing Officer raised queries which have been replied by the assessee. He submitted that assessee company was managed by father and three brothers, who were also the directors of the company. There was a long pending dispute among them. The matter was pending with the Company Law Board, therefore, the company could not get its accounts audited in time. The previous auditors were siding with one group of directors and did not give report in time. Finally, the new auditors were appointed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various observations like non-availability of various balance confirmations, non-availability of office copies of the invoices raised by the company, noncompliance of various provisions of Companies Act, 1956, non-maintenance of fixed asset register, payment of managerial remuneration without complying with the provisions of section 11 of Part II of Schedule XIII of the Companies Act, 1956 giving salary to relative of whole time director in contravention of the provisions of Companies Act, not physically verifying of the stock and various assets by the management, not maintaining proper stock record and sales transaction with the group company where directors are interested and no internal control system show that assessee's books of accounts were not reliable. He prayed that the action of the lower authorities below be confirmed. 6. We have heard both the sides on the issue. We have perused the records available and we decide as under :- The company is managed by father and three brothers who were also directors of company. Assessee claims that they were having dispute among themselves. Dispute in directors or brothers shall not be sufficient to explain the delay in getting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Bhiwadi and another at Delhi. He submitted that the reason for fall in the gross profit rate during the year under consideration was fully explained with the documents to Assessing Officer. The Assessing Officer has not doubted the purchases and sales of assessee. In absence of any such discrepancy, the Assessing Officer was not justified in rejecting the books. The books were duly audited by the chartered accountant. The assessee has made total sales of Rs. 11,39,10,962/- in respect of Bhiwadi unit during the year and earned gross profit of Rs. 55,10,573/-. For the year, if compared to just preceding year, gross profit has gone down by Rs. 95,98,673/-. This gross profit has gone down due to decline in the exchange rate of UK Pound which was Rs. 86.90 in the financial year 2006-07 (Assessment Year 2007-08) as compared to the rate of Rs. 79.81 in the year under consideration. The difference of Rs. 6.38 in the exchange rate of UK Pound has contributed to a decline of gross profit to the tune of Rs. 96,98,673/-. The realization of sale price has gone down to UK Pound 1,12,795 and by applying the rate 79.81 of the current year it has contributed for decline of gross profit of Rs. 90 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecords filed in the paper book. On perusal of assessment order, we find that the Assessing Officer has not properly verified and examined the explanation of assessee pertaining to decline in GP rates at Bhiwadi and Delhi unit. From the orders of the authorities below, we also observe that neither the Assessing Officer nor the CIT (A) attempted to examine the veracity of reasons submitted by the assessee for decline in GP rate. The Assessing Officer as well as the CIT (A) made and confirmed the addition mainly on the reason that books of accounts stood rejected. As we have restored the issue of rejection of books to the file of the Assessing Officer for fresh and de novo adjudication, under these circumstances, we are also inclined to set aside the issue of GP rate to the file of Assessing Officer for de novo adjudication after affording due opportunity of hearing for the assessee. Considering all these facts, we hold that for the year under consideration, a fresh look is required on this issue at the Assessing Officer level. We set aside the issue to the file of Assessing Officer to be decided de novo. 11. In the ground nos.4(i) and 4(ii), the issue involved is confirming the disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vi) rupees 100 crore or more 2,00,000 Provided that the ceiling limits specified under this sub-paragraph shall apply, if - (i) payment of remuneration is approved by a resolution passed by the Remuneration Committee; (ii) the company has not made any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding financial year before the date of appointment of such managerial person The term "effective capital" has been described as under: "Explanation I. - For the purposes of section II of this part, "effective capital" means the aggregate of the paid-up share capital (excluding share application money or advances against shares): amount, if any, for the time being standing to the credit of share premium account, reserves and surplus (excluding revaluation reserve), long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc" and other short-term arrangements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Profit) Rules, 2003, reads as under: (a) Partner or relative of a Director or Manager; or (b) Firm in which such Director or Manager, or relative of either is a partner; or (c) Private Company of which such Director or Manager or relative of either is a Director or Member which carries a monthly remuneration exceeding Rs. 50,000 p.m.] As per these provisions of Schedule XIII, we find that the managerial remuneration which could be paid by the assessee per managerial person comes to Rs. 1,25,000/- monthly or say Rs. 15 lacs per annum. In the assessee's case, the amount paid is only Rs. 12,96,000/-. Therefore, in our considered view, this is well within the limit as prescribed in the Companies Act, 1956. Therefore, the CIT (A) was not justified in sustaining the same. Similarly, the salary can be paid to relative of the directors were up to Rs. 20,000/- per month or Rs. 2,40,000/- per annum. In this case, the salary paid was only Rs. 2,40,000/-, therefore, this payment was also within the limits of Companies Act, 1956 which does not require any approval from Board or Central Government. Therefore, this ground of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d loss account at cost or market price, whichever is lower-the market value being ascertained on the last date of the accounting year, not at any intermediate date. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word "profits" implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset: it is a trading asset. Therefore, the concept of profits and gains made by a business during the year can only materialize where a comparison of the assets of the business at two different dates are taken into account. Under the mercantile system of accounting, what is due is brought into credit before it is actually received : it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. UNITED COMMERCIAL BANK v. CIT [1999] 240 ITR 355 (SC) followed. . The accounting method followed by an assessee continuously for a given period of time has to be presumed to be correct till the Assessing Officer comes to the conclusion for reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing the aforesaid decision, we allow this ground of assessee's appeal. 20. In the ground no.7, the issue involved is confirming the action of the Assessing Officer in not allowing assessee the exemption u/s 10B of the Act. 21. Ld. AR submitted that the assessee is eligible for deduction u/s 10B. Such deduction has been allowed in the past years, i.e. 2006-07 and 2007-08. Evidence is placed for Assessment Year 2006-07 at pages 1286 to 1288 of the paper book and for Assessment Year 2007-08, the evidence is placed at pages 1293 - 1295 of the paper book. The assessee fulfills all the conditions of exemption including approval of Development Commissioner. The CIT (A)'s observation that the assessee has not given submission and evidence to show that all conditions are fulfilled, is factually wrong as is evident from written submissions placed at pages 1377-78 of the paper book. 22. We have heard both the sides on the issue. The claim of deduction u/s 10B has been exempted by the Assessing Officer in assessee's own case in Assessment Years 2006-07 and 2007-08. The orders in which such claims have been allowed are placed at pages 1286-88 and 1293-95 of the paper book. As per the order, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial provisions in respect of newly established hundred per cent export oriented undertakings (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export oriented undertaking from the export of articles or things or computer hardware for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce article or things or computer" software, as the case may be shall be allowed from the total income of the assessee." 3.5 The relevant words, here are profits and gains as are derived by a 100% EOU from the export of article. The expression "derived from" came up for consideration before the Apex Court in Cambay Electric Supply Industrial Co. Ltd. Vs CIT (1978) 113 ITR 84, where the Hon'ble court held that the expression "derived from" has to be given a restricted meaning as opposed to the word "attributable to" which are wider and broader in scope. This principal was clearly enunciated by the Apex Court again in the case of CIT Vs Sterling Foods (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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