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Shree M.D. Industries D-137, Versus The I.T.O. (OSD) -4 Range-2, Surat

2015 (9) TMI 747 - ITAT AHMEDABAD

Under valuation of closing stock - Rejection of books of accounts - A.O has rejected books of accounts mainly on three grounds namely fall in GP ratio, non maintenance of stock register and quantitative details and under valuation of closing stock of yarn - Held that:- A.O in the order has noted that Assessee has earned a gross profit of 9.75% as against the gross profit of 6.69% in the immediate preceding year. However on perusing the particulars of accounting and the ratio which are Annexure t .....

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at of immediate preceding year, it appears that there is no fall in the gross profit ratio. Another submission of the ld. A.R. that due to typographical error the closing stock in quantitative terms of the raw material has been shown at 82,458 kg seems to be correct when seen in the light of the submission of the quantitative details which were submitted to the A.O. On perusing the statement it is seen that the closing stock of yarn is 57,369.865 kg whereas the closing stock which is erroneously .....

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ing the addition therefore in the present case is uncalled for and therefore we are of the view that no addition on account of closing stock is called for. We thus direct its deletion. - Decided in favour of assessee.

Disallowance on account of weaving majuri expenses - Held that:- In the present case, the A.O has disallowed labour expenses on adhoc basis. We further find that ld. CIT(A) has noted that Assessee did not produce register or records of the labour charges paid before the .....

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hat the ends of justice shall be met if addition is restricted to 10% of the expenses as against the 20% made by A.O. We thus direct accordingly. - Decided in favour of assessee in part.

Disallowance of interest expenses - Held that:- From the details of loans and advances which is reproduced by ld. CIT(A) it is seen that the amount (excluding the TDS receivable) which has been advanced by the Assessee is ₹ 41,36,507/-. Before us, it is Assessee’s contention that it has sufficie .....

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ts, the contention of the ld. A.R. about the availability of sufficient interest free funds could not be verified. However, in the interest of justice, we feel that the contention of Assessee needs re-examination. We therefore remit the issue to the file of A.O to verify the contention of Assessee about the availability of interest free funds vis-à-vis the amounts advanced. In case the contention of Assessee about availability of interest free funds in excess of the amounts advanced is found cor .....

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1. This appeal filed by the Assessee is against the order of CIT(A)-II, Surat dated 04.09.2009 for A.Y. 2006-07. 2. The relevant facts as culled out from the material on record are as under. 3. Assessee is a partnership firm stated to be engaged in the business of manufacturing of grey cloth. Assessee filed its return of income for A.Y. 2006-07 on 29.12.2006 declaring total income at Rs. Nil. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) vide or .....

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invoking the provisions of section 143(3) of the Act, which is absolutely erroneous and needs to be deleted. 2. On facts and circumstances of the case, the learned CIT(A) has grossly erred in sustaining the addition of ₹ 27,38,931/- as made by the AO, by alleging undervaluation of closing stock, which is absolutely erroneous and needs to be deleted. 3. On facts and circumstances of the case, the learned CIT(A) has grossly erred in sustaining the disallowance of ₹ 5,47,178/-, as made .....

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ted that 1st ground being general is not pressed and therefore the same is dismissed as not pressed. 2nd ground is with respect to addition of ₹ 27,38,931/- on account of under valuation of closing stock 5. During the course of assessment proceedings, A.O noticed that during the year Assessee has earned gross profit of 9.75% as against the gross profit of 16.69% in the immediate preceding year. The Assessee was asked to justify the fall in G.P. A.O noted that in the absence of any satisfac .....

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ing stock. He was of the view that Assessee has under valued the closing stock. He therefore rejected the books u/s. 145 (3) and thereafter on the basis of the average rate of purchases and applying to the quantity of stock, worked out the under valuation of stock at ₹ 27,38,931/- and enhanced the trading result by ₹ 27,38,931/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who confirmed the action of A.O by holding as under:- 6. I have carefully cons .....

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142(1) and the questionnaire. It thus appears that the file has been tampered with. Secondly, a copy of the written submission allegedly furnished before the A.O which has been enclosed to the written submission in appellate proceedings is undated, whereas, in the asst. records it is shown to be dated 18.11.2008. The two letters have other differences as well. The copy of the letter furnished by the AR in appellate proceedings on the left top of the comer, has the word proprietor (M.NO.72278) w .....

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f it is to be accepted that the purported letter was actually filed before the AO, then on an examination of the same, it is seen that there are glaring discrepancies with the Audit Report. The Annexure-IV to the Audit Report contains details of opening stock, purchases, consumption, sales and closing stock of raw materials in kgs. as also finished goods i.e. grey in kgs. The closing stock of raw material in this Annexure is shown at 82,458 kgs. In the tables furnished by the AR in appellate pro .....

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stock of grey, It is absolutely clear therefore, that either the submissions made by the AR and accompanied by the annexures or the Audit Report itself was bogus. The only conclusion which can be drawn is that, there was absolutely no merit in what had been stated before the AO, as also now in appellate proceedings. Further, the Assessee had furnished only a couple of ledger accounts during this asst. proceedings, but had failed to furnish the relevant bills and vouchers. This was important sinc .....

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Simply furnishing a series of tables which have not been corroborated or authenticated by the relevant books of account and bills and vouchers, cannot be accepted as sufficient evidence in support of the claim made by the Assessee 6.2Given such facts and circumstances of the case as discussed above in considerable detail, I have come to the inevitable conclusion that the AO was fully justified in rejecting the book results u/s. 145(3) and in making the addition on account of undervaluation of c .....

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Tax Audit Report. He therefore submitted that A.O has erroneously compared the G.P ratio of A.Y. 05-06 of 16.69% with the net profit ratio of A.Y. 06-07 of 9.75% and concluded that there is fall in G.P. He therefore submitted that the comparison of profits made by the A.O was wrong as the gross profit of a year cannot be compared with the net profit of another year and submitted that in fact the gross profit ratio in the year has increased in comparison to two preceding assessment years and ther .....

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erms of quantity. He therefore submitted that since the actual closing stock of yarn was 57,370 kg and not 82,458 kg that was considered by the A.O and therefore the addition on that count was also not made correctly by the A.O. He further submitted that if the average rate of ₹ 94.93 per kg is adopted for valuation of stock of 57,370 kgs. being the correct quantity, the valuation of stock would be very near to be value of stock as shown in the Profit and Loss account. He therefore submitt .....

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ly the addition was also not called for. Ld. D.R. on the other hand supported the order of A.O and ld. CIT(A). 8. We have heard the rival submissions and perused the material on record. In the present case, we find that A.O has rejected books of accounts mainly on three grounds namely fall in GP ratio, non maintenance of stock register and quantitative details and under valuation of closing stock of yarn. We find that the A.O in the order has noted that Assessee has earned a gross profit of 9.75 .....

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other year whereas the correct way would have been that he should have compared the gross profit ratio for both the years. If the gross profit ratio for the year under consideration is compared with that of immediate preceding year, it appears that there is no fall in the gross profit ratio. Another submission of the ld. A.R. that due to typographical error the closing stock in quantitative terms of the raw material has been shown at 82,458 kg seems to be correct when seen in the light of the su .....

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lso reflected in the profit and loss account placed at page 68 of the paper book. Before us, Revenue has not brought any material on record to controvert the submissions of ld. A.R. In such circumstances, considering the fact that A.O has compared the gross profit with the net profit and computing the working of closing stock with the incorrect quantity and thereby making the addition therefore in the present case is uncalled for and therefore we are of the view that no addition on account of cl .....

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d thus made an addition of ₹ 5,47,178/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:- 10. I have carefully considered both the positions. The point to note is that, none of the detailed explanation and statistics which have now been furnished by the AR was presented before the AO. The copy of the only undated written submission which was allegedly filed during the asst. proceedings contained no such details. .....

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ad claimed labour charges of ₹ 2.16 crores against the job-work receipts of ₹ 2.29 crores. The Assessee had produced the labour payment register from where the AO found that the signatures of particular labourers were entirely different from one month to another. Many entries were made in the same handwriting, etc, etc. It was submitted that the Assessee had no regular employees/labourers Who switched over from one employer to another. The AO however rejected the Assessee's submi .....

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CIT(A). In the case of our Assessee, no register or record was produced before the AO, no explanation was furnished in course, of the asst, proceedings except for submitting that the expenditure involved petty amounts incurred on a day-today basis. Moreover, the labourers employed by the Assessee were not migrant labourers but were on the regular employment of the Assessee. It is for this reason that the Assessee was able to undertake not only its own manufacturing activity but also do job-work .....

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the preceding year the turnover of manufacturing (of grey) was ₹ 3.99 crores. During the year under consideration, the turnover on manufacturing, job-work and trading put together worked out to ₹ 2.79 crores. Therefore, even though the labour cost for manufacturing may have decreased as also manufacturing overheads, it cannot be denied-that inspite of the substantial fall in the turnover, even after taking into consideration the change in the composition of the business activity of t .....

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of ld. CIT(A), Assessee is now in appeal before us. 11. Before us, ld. A.R. reiterated the submissions made before A.O and ld. CIT(A) and further submitted that during the year there was a significant change in the components of income from operations and in such a case, the components of turnover cannot be compared. He further submitted that the ratio of labour cost to total cost is higher in job work activity as compared to manufacturing activities which has resulted into increase in proporti .....

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on adhoc basis. We further find that ld. CIT(A) has noted that Assessee did not produce register or records of the labour charges paid before the A.O. Before us, ld. A.R. has submitted that there is change in the constitution of the income and therefore the ratio of labour expenses as compared to earlier year would not be proper. He has also submitted that the disallowance of 20% made by the A.O is on a higher side and a reasonable disallowance may be made. Considering the totality of facts and .....

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also noticed that Assessee has advanced loans aggregating to ₹ 42,60,381/- on which no interest was charged by the Assessee, A.O in the absence of any convincing reply from Assessee by applying the rate of 12% being the rate paid to the bank on the amount advanced by Assessee worked out the interest liability of ₹ 5,11,245/- which according to him could not be allowed. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding .....

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even though it has been claimed that the advances were given for business purposes. Once again, it must be an accepted that in course of the asst. proceedings the Assessee's AR simply failed to furnish either any explanation or detail or evidence. The AR in appellate proceedings has repeatedly attempted to make a case for the Assessee and to argue for deletion of the additions made. /However, on this particular issue, I find that apart from the TDS receivable of ₹ 1,23,874, interest o .....

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mitted that the advance of ₹ 38,46,507/- was given as capital advance for factory land and building and ₹ 2,90,000/- was advanced for making sampling brochure. He submitted that both the advances were genuine and for the purpose of business and the business nexus has been established. He further submitted that Assessee has own funds which is more than 8.52 times of the funds advanced by the Assessee and therefore in the absence of any nexus, the presumption would be that the amounts .....

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