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2015 (12) TMI 366 - ITAT AHMEDABAD

2015 (12) TMI 366 - ITAT AHMEDABAD - TMI - Estimation of income - Rejection of books of accounts - addition made on account of undervaluation of work-in-progress in the closing stock - CIT(A) deleted the addition made on account of estimation of GP by holding that AO was not justified in rejecting the books of accounts but sustained the addition made on account of undervaluation of work-in-progress in the closing stock - Held that:- The law is well settled that the insignificant defects in the b .....

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as relied on the judgement of Hon’ble High Court of Kerala in the case of S.Murugappa Chettiar vs. CIT (1987 (5) TMI 7 - KERALA High Court) in support of contention that difference in statement of stock to the bank and that disclosed to Revenue is a justified ground for rejection of books of accounts.

The ld.CIT(A) has also given finding after verifying the facts in respect of objections of the AO regarding sundry debtor, which has been duly reconciled. Difference in work-in-progress .....

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Shri J.P. Shah, AR ORDER PER SHRI KUL BHARAT, JUDICIAL MEMBER : This appeal by the Revenue is directed against the order of the Ld.Commissioner of Income Tax(Appeals)-I, Surat [ CIT(A) in short] dated pertaining to Assessment Year (AY) 2005-06. The Revenue has raised the following grounds of appeal:- 1. The CIT(A) has erred in law and on facts in deleting the additions made by the Assessing Officer on account of estimation of profit by rejecting the books of accounts u/s.145 of the I.T.Act when .....

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certain facts stated in paper-book were overlooked resulting into mistake apparent from record. Accordingly, the order dated 15/02/2013 in the present appeal was recalled vide order dated 27/1/2014. The appeal was directed to be fixed for hearing afresh. Hence, the appeal is fixed for hearing today and taken up for hearing afresh. 2.1. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter .....

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t (GP). Further, the AO made disallowance of interest of ₹ 1,88,84,000/- and made disallowance of depreciation of capital goods of ₹ 62,23,134/- and computed the book profit at ₹ 2,15,36,320/- as against the book profit declared by the assessee of ₹ 2,02,69,269/-. The assessee aggrieved by this order, preferred an appeal before the ld.CIT(A), who after considering the submissions of the assessee deleted the addition made on account of estimation of GP by holding that AO w .....

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grawal argued at length and submitted that the ld.CIT(A) was not justified in holding that the books of accounts were not validly rejected by the AO. He submitted that the AO had pointed out various defects into the books of accounts of the assessee. He submitted that there was suppression of work-in-progress. He submitted that the books of accounts can be rejected if there is any suppression of work-in-progress and in support of this contention, he placed reliance on the decision of the Coordin .....

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ing stock as disclosed before the revenue authorities on 31/03/2009. He further submitted that the AO noted that the assessee has not provided the quantitative details of the ready-made garments to the auditors. The AO also observed that there were inter-group transactions, however, there was no statement to the effect is made in the balance-sheet. He further submitted that the assessee failed to furnish the separate trading accounts. The ld.CIT-DR submitted that the AO was justified in rejectin .....

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published by the Ministry of Textiles. The ld.CIT-DR relied on the judgement of Hon ble Apex Court rendered in the case of Arisudana Spinning Mills Ltd. vs. CIT reported at (2012) 26 taxmann.com 39(SC) in support of the contention that the assessee is required to maintain separate trading accounts for the activities undertaken by the assessee. The ld.CIT-DR also placed reliance on the judgement of Hon ble High Court of Madras rendered in the case of Coimbatore Spinning & Weaving Co.Ltd. vs. .....

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gross profit in the year under appeal. He submitted that the assessee failed to give plausible explanation for such fall in gross profit. He submitted that the assessee was required to explain the reason for fall in G.P. 3.1. On the contrary, ld.counsel for the assessee opposed the submissions of the ld.CIT-DR and submitted that the submissions of ld.CIT-DR are misplaced and ill-founded. He submitted that the ld.CIT(A) has elaborately discussed the issue and rightly came to the conclusion that t .....

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es. He submitted that the AO has not mentioned any instance of any bogus purchases or inflated purchases. He submitted that the assessee is a public limited company and is subjected to audit by Statutory Auditor as well as the Auditor of the Company. The Auditors have not made any adverse remarks with regard to the accounts of the assessee-company. He submitted that the ld.CIT(A) has rightly examined the point-wise objections of the AO in respect of rejection of books of accounts. The ld.counsel .....

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reserve. He submitted that the AO is not correct in reaching to the conclusion that the books of accounts of the assessee do not give true and fair picture of the profit. The ld.counsel for the assessee submitted that the AO failed to appreciate the facts in right perspective. He submitted that there is no reason as to why the assessee would make an attempt to give wrong or incomplete accounts, when admittedly it is subjected to multitier auditing. The ld.counsel for the assessee submitted that .....

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ld.counsel for the assessee submitted that the AO failed to appreciate the fact that fall in gross profit was due to steep rise into the cost of raw-material. He submitted that the assessee is engaged in the business of manufacturing and is substantially dependent on raw-material. He submitted that in the instant case, there is increase in raw-material price and decrease in sale price due to tough competition. Further, he submitted that looking to the volume of turnover, the activity of ready-ma .....

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es. The ld.CIT(A) has dealt with each objection of the AO in right perspective. 4. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The only issue that needs to be examined is whether the AO was justified in rejecting the books of accounts consequently estimating the profit. The reasons for rejection of the books of accounts as enumerated in assessment order are reproduced herein below:- (i) Improper disclosure of .....

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. There is no dispute that the AO is empowered to reject the books of accounts. The question is whether such powers are unfettered can be exercised on the basis of whims and fancies only or the powers to be exercised on the basis of settled principles of law. As per section 145(3) of the Act, the books of accounts can be rejected where the AO is not satisfied about the correctness or completeness of the accounts of the assessee. In that event, the AO is empowered to proceed for making an assessm .....

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such satisfaction, the powers so exercised would become illegal and unjustified. In the case in hand, the AO has stated about eight grounds for rejection of books of accounts. However, the ld.CIT(A) dealt with each defect and rejected the reasons of AO by observing as under:- 5.3.3 The grounds of which the A.O. has rejected the books of account are now discussed with appellant's arguments: - 1) Improper disclosure of work-in-progress:- The A.O. has argued that the assessee has not completely .....

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rogress. The value of the work-in-progress worked out by the A.O. is ₹ 1,19,06,250/-. During the appellate proceedings, the appellant has argued that it has been consistently followed the method from earlier years and the Department had accepted its calculation. The A.O. has not disputed the method of accounting and, therefore, provisions of Section 145(3) cannot be invoked. The appellant has stated that the A.O. has not understood the manufacturing process. The yarn and cloth on the loom .....

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ument even if the work-in-progress in the closing stock has not been shown correctly the right and accepted method of the Department is to make an addition to the work-in-progress and not reject the entire books of account. I agree with this submission. If the closing stock value of work-in-progress is not correctly shown then the right action is to make an addition in respect of undervaluation of work-in-progress. Since the appellant has not produced the copy of physical inventory taken at the .....

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e Processing Ltd. (CPL) as sundry debtors of ₹ 2.5 crores whereas the balance sheet of CPL shows sundry creditors of ₹ 1.26 crores. Similarly, the assessee has shown sundry debtors of ₹ 26.16 crores in the name of Surat Textile Mills Ltd. (STML) whereas STML shows total sundry creditors of only ₹ 4.26 crores. According to the A.O., the appellant could not explain the above discrepancy and tried to reconcile the same with the figure of ₹ 27.7 crores appearing as adva .....

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Deb, control job charges 0 1,81,74,209 153090 070501 CA: S. Debtors cont. computer design 0 55,700 164091 070501 Garden Silk Mills Limited 2,05,84,620 0 164107 070501 070501 Kamla Associates 0 59,39,823 Sub-total 2,05,84,620 2,41,69,732 Net Disclosed in Balance Sheet 3585112 From the above table, it is very clear that the balance of the appellant company of ₹ 2.50 crores has been shown by the appellant but it has been grouped under different head. Both the companies, CPL as well as the app .....

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.16 crores is clearly reflected in the books of STML but has been grouped as above. If the A.O. had compared the detailed groupings the reconciliation given by the appellant would have been clearly seen. The appellant has also filed confirmation from both STML as well as CPL in this regard. The appellant has further argued that once the reconciliation is done it is immaterial as to the groupings of balance sheet. The presentation of debtors and creditors in different groups does not change the i .....

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ment submitted to the Bank the assessee has shown stock of finished goods of ₹ 37 crores whereas as per the books of account as on 31.03.2005 the stock of finished goods was ₹ 32.85 crores. Similarly, the stock of raw material submitted to the Bank shows a stock of ₹ 16.18 crores whereas as per the books of account as on 31.03.2005 the stock of raw material is ₹ 33.14 crores. This shows that there was a huge difference in the stock statement submitted to the Bank as compa .....

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that the stock statement submitted to the Bank was as on 25.03.2005. There is no requirement under the Law that the statement to be submitted to the Bank should also be as on 31.03.2005. If the Banks are accepting the statement as on 25.03.2005 this does not mean that the books of accounts are wrong. The appellant further argued that the stock mentioned in the books of account in respect of each item is more than the stock statement submitted to the Bank and hence the Department cannot have any .....

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itted to Bank No. Particulars Rs. Particulars Rs. 1. Stores, Spare parts, chemicals 82,857,209 Stores, Spares 44,963,000 2. Finished Goods 328,525,795 Finished goods 29,38,90,000 3. Stock in process 342,652 Stock in process 32,253,000 4. Raw Materials 331,495,383 Raw materials 161,898,000 Total 750,089,927 From the above table, it is clear that the value of stores, spares and chemicals as per books is more than the statement given to the Bank. The value of finished goods as per books is more tha .....

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ss has already been made as discussed under the first head above. Hence this ground is not the correct ground for rejecting the books of account. 4) Non-furnishing of quantitative details for readymade garments:- In the assessment order, the A.O. has stated that the turnover of readymade garment is ₹ 18,46,131/- and the assessee has not given quantitative details and, therefore, he has rejected the books of account. The appellant has stated that this objection has been raised without appli .....

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ee with the appellant. The annual accounts show the details of quantity and value of opening stock and closing stock. There are no purchases during the year and hence the sales figure is also automatically obtained by subtracting the closing stock quantity from the opening stock quantity. In any case, the entire turnover of readymade garments is very small and hence it cannot be made grounds for rejecting the books of account. 5) No proper disclosure of the persons covered u/s.40A(2)(b):- In the .....

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hri Kanubhai B. Patwa 2. Creative Processing Limited 1. Shri Tejas Manubhai Jani 2. Shri Harish Bharuchi 3. Shri Abhijit Barua 3. Garden Silk Mills Limited 1.Shri Praful A. Shah 2.Shri Alok P.Shah 3. Smt. Shilpa P.Shah 4.Shri S.B. Bhesania 5.Shri Rajen P.Shah 6.Shri S.J.Bhesania 7. Shri H.F.Shah 8.Shri J.P.Shah 9.Shri A.N.Jariwala 10.Shri Sunil Sheth 11.Smt.Smita Shah 12.Shri Madanlal Lankapati 13.Shri Y.N.Ramamurty (Nominee) In view of the above, the appellant says that the provisions of Sectio .....

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r such specific addition but rejection of books of account is not warranted. I agree with the appellant. An issue of addition u/s.40A(2)(b) requires specific addition and not rejection of books of account. Hence this ground cannot be made as a ground for rejection of books of account. 6) Inter group transactions:- In the assessment order, the A.O. has stated that there are certain payments against the expenses of the assessee company which are routed through the books of CPL and vice versa. Acco .....

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ground cannot be made a ground for rejection of books of account. I agree with the appellant. The A.O. has brought no instance or specific transaction on record which warrants disallowance or addition. In the absence of any such findings of a major amount the books of accounts cannot be rejected. 7) Non furnishing of separate trading account:- In the assessment order the A.O. has stated that the assessee was asked again and again to furnish separate trading account of different activities under .....

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3 Fall in sales realization Rs.(-)472525614 Net effect on Gross Profit Rs.(-)559180011 Effect on Gross Profit (in %) 8.90% The table very clearly shows that there was increase in the raw-material cost and decrease in the sales realization. The A.O. has brought no material on record to show bogus purchases or inflated purchases. The A.O. has also not brought any material on record of under billing of sales or sales outside the books of account. In view of this reason, simply because separate tra .....

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ing separate trading accounts of each activity it will have to give value to the inter division transfers and that will not give correct picture. The appellant stated that the separate trading accounts are not made for this reason and also because it would take lot of time. I agree with the appellant. In the absence of any instance of bogus purchase or inflated purchase or under billing of sales or sales outside the books of account, the books of account cannot be rejected merely because separat .....

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ss of audited books of account. The appellant has stated that for transferring the account under the Companies Act it is following the accounting period from 1st April to 30th June and for income-tax purposes it is following the accounting period from 1st April to 31st March. For this purpose two separate Balance Sheets and Profit & Loss Account, etc., are being prepared and are submitted to the auditors for audit. A perusal of the audit report, both under the IT Act as well as the Companies .....

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issue of transfer of reserve is an issue below the line and it has nothing to do with computation of income. In any case as stated by the appellant such reserve is relevant only for the purpose of shareholders. In view of this reason, this ground cannot be the ground for rejection of books of account. From the aforesaid discussion, it is clear that none of the eight grounds taken by the A.O. for rejecting the books of account are valid in this regard. The fall in the G.P. rate has been fully ex .....

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shortage, etc., of the appellant company. The Assessing Officer could not quantify any particular item of deduction as disallowable item for the tax purposes. In other words, Assessing Officer could not pinpoint any specific item in the working results for a specific addition in the assessment as disallowable item of expenditure etc. The only point of addition pointed out is with respect to undervaluation of WIP. This clearly supports the argument that the book results were rejected by the Asse .....

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and the balance is deleted. This ground of appeal is, therefore, partly allowed. 4.2. From the above, it is clear that the ld.CIT(A) has considered all the defect as recorded by the AO and has given a finding that the AO was not justified in rejecting the books of accounts, consequently, estimating the profit. 4.3. Now the question arises whether the ld.CIT(A) is correct in reaching to this conclusion or not. The ld.CIT(A) has given a finding that the AO was not correct for rejecting the books o .....

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r this provision, the AO after taking into account all relevant material which he had gathered and was required to give the assessee an opportunity of being heard before making the assessment, of the total income or loss to the best of his judgement and determine the sum payable by the assessee on the basis of such assessment. It is also settled position of law that the books of accounts cannot be rejected on insignificant grounds. The AO should point out the specific defects, whereby the accoun .....

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Act instead of making assessment under s. 145 (143) of the Act. To attract s. 145 of the Act, it is necessary that: (a) the assessee has computed the income in accordance with the method of accounting regularly employed by the assessee; and (b) provided where the accounts are correct and complete to the satisfaction of the AO; but (c) the method employed is such that in the opinion of the AO, the income cannot be deduced therefrom then the AO may adopt a different method of computation of the i .....

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irst condition thereafter the AO should be of the view that the accounts are correct and complete but the method employed is such that in the opinion of the AO the income cannot properly be deduced therefrom. The choice of method of accounting regularly employed by the assessee lies with the assessee but the assessee would be required to show that he has followed the chosen method regularly. The Department is bound by the assessee s choice of method regularly employed unless by this method the t .....

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ted does not afford true picture of profit, it would be rejected, but then such rejection should be based on cogent evidence and would be done with caution. The power can be exercised by the assessing authority to choose the basis and manner in computation of income but he must exercise his discretion and judgment judicially and reasonably. 4.3. From the above, it is clear that the AO should have based his finding on the basis of the material available on record. The provision also envisages tha .....

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er verifying the details furnished before him. The basic factor for fall in G.P. in the case of the assessee was found to be increase in crude oil price and decline in realization of POY Yarn sale as per ld.CIT(A). This finding on fact is not rebutted by the Revenue. Further, we find merit in this contention of the assessee that the gross profit would fall if the sale of price remains same or lower than the earlier year but the cost of raw-material increases. The earning of gross profit is depen .....

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conditions. In the case in hand, the assessee is a company subjected to internal audit as well as statutory audit. The auditors have not pointed out any defect and or there is no adverse remarks. The AO has not made any adverse comment upon sale & purchase. Undisputedly, no defect has been noticed by the Central Excise Department in the registers maintained under the Central Excise Act, regarding rawmaterial and furnished goods, which is subjected to inspection and audit. In our considered .....

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t of the assessee, if it is found that there is no impact or very miniscule impact on profit. Such defect becomes insignificant. In such a situation, there would be no need of rejection of entire books of accounts, the AO would be justified to make addition into the profit to the extent of such item. The law is well settled that the insignificant defects in the books of accounts should not be the basis of rejection of the entire books of accounts. In the present case, we find that the ld.CIT(A) .....

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