TMI Blog2015 (12) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt) 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 is added back by the ld.CIT(A). Taking a holistic view of the entire matter, we do not see any reason to disturb the finding of the ld.CIT(A). Accordingly, same is upheld. Moreover, in our considered view, the AO has not given any basis for estimation of net profit @ 5% of turnover. - Decided against revenue. - I.T.A. No.720/Ahd/2009 - - - Dated:- 15-10-2015 - SHRI KUL BHARAT, JUDICIAL MEMBER And SHRI MANISH BORAD, ACCOUNTANT MEMBER For The Appellant : Shri Sanjay Agrawal,CIT-DR For The Respondent : 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 1,15,63,596/-. Aggrieved by this order of the ld.CIT(A), the Revenue is now in appeal before us. 3. The only effective ground in this appeal is against deletion of addition made by the AO on account of estimation of profit by rejecting the books of accounts u/s.145 of the Act. The ld.CIT-DR Shri Sanjay Agrawal 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 Coordinate Bench (ITAT D Bench Ahmedabad) rendered in the case of Archna Dyeing Printing Mills Pvt.Ltd. vs. ITO in ITA No.268/Ahd/2009 for AY 2005-06, dated 25/11/2011. Further, the ld.CIT-DR submitted that one of the reasons for rejecting the books of accounts was that the sundry debtors figure did not match with the corresponding company. He further submitted that the AO observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions 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 the AO was not justified in rejecting the books of accounts of the assessee. The ld.counsel for the assessee submitted that the reason for fall in gross profit was duly explained to the AO, but the AO on the basis of whims and fancies proceeded to reject the books of accounts. The ld.counsel for the assessee submitted that there is no ITA No.720 /Ahd/2009 ACIT vs. Garden Silk Mills Ltd. Asst.Year 2005-06 - 6 - dispute with regard to the fact that the AO has neither doubted the sales nor purchases. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice of reasoning for rejection of books of accounts is ill-founded, misplaced and is based on conjectures and surmises. 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 work-in-progress. (ii) Sundry Debtors figure does not match with the balance sheet of corresponding company. (iii) Huge difference between stock declared in the books of accounts and stock statement submitted to banks for securing work in capital. (iv) Non-furnishing of quantitative details for readymade garments. (v) No proper disclosure of the person covered u/s.40A(2)(b). (vi) Inter-group transactions. (vii) Non-furnishing of separate trading accounts. (viii) Transfer to General reserve. 4.1. There is no dispute that the AO is empowered to reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing process. The yarn and cloth on the loom have been included in the closing stock. The appellant argued that as and when the cloth is ready the same is cut from the beam and taken into finished product. The A.O. has stated that the appellant has not given any evidence of following this method. The appellant has also not produced the physical inventory taken at the end of the year in this regard as an evidence. He, therefore, rejected the books of account. The appellant has on the other hand argued that without prejudice to the above argument 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 end of the year as an evidence for the work-inprogress in the closing stock the valuation made by the A.O. is correct. An addition of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appellant company are assessed with the same A.O. and hence this could have easily verified by the A.O. With respect to the difference in balances of STML and the appellant company, the detailed groupings in the books of STML are as under:- Account Code Group Code Account Name Cr. Balance Dr. Balance B17001 080201 Garden Silk Mills Ltd. 0 17260245 O44001 080201 Garden Silk Mills Ltd. 278832575 0 Sub-total 17260245 Net Balance 261572330 From the above table it is clear that the balance of ₹ 26.16 crores is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tem is more than the stock statement submitted to the Bank and hence the Department cannot have any case that either there should be an addition or the books of accounts are wrong. The stock statement only shows the value and not the quantity. Further, the stock statement to the Bank shows ₹ 37.11 crores of total finished product and work-inprogress and not only finished goods as stated by the A.O. The comparison of the stock as per the books and stock as per statement given to the Bank is as under:- Details of stock as per books as on 31-3-2005 Details of stock as on 25-3- 2005 as submitted 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment order, the A.O. has stated that the name of Kamla Associates and Creative Processing Ltd. (CPL) are shown under 40A(2)(b) even though there are large number of transactions with them. The appellant has on the other hand stated that the group concern Kamla Associates and CPL has no common Directors with the appellant company's Directors which is clear from the following table:- No Name of the Concern Names of the trustees/ directors 1. Kamla Associates 1.Smt. Sonia Firoz Khan 2. Shri 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of different activities undertaken by the assessee. Since the G.P. rate has drastically fallen this information is required. But despite several opportunities the assessee did not give these separate trading accounts and, therefore, the A.O. rejected the books of account. During the appellate proceedings, the appellant has stated that it has given detailed reasons and quantified the same for fall in G.P. rate which is as under:- 1 Decrease in manufacturing cost Rs.(+)329472859 2 Increase in raw material cost Rs.(-)416127256 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve should not be viewed as violation of section 145 of the act. The said non-transfer of reserve does not in any manner affects the computation of income for the Assessment Year in question. I agree with the appellant that the 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 explained by the appellant as under:- 1 Decrease in manufacturing cost Rs.(+)329472859 2 Increase in raw material cost Rs.(-)416127256 3 Fall in sales realization Rs.(-)472525614 Net effect on Gross Profit Rs.(-)559180011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 accounts of the assessee cannot be treated as correct or complete giving rise to distorted figure of GP. The Hon ble Apex Court in the case of Sanjeev Woolen Mills vs. CIT reported at [2005] 279 ITR 434 (SC) has held as under:- 9. Section 145 provides that in case AO is of the view that the assessee s accounts are incomplete or incorrect or method of accounting has not been regularly followed by the assessee, the AO may resort to make best judgment assessment in the manner provided under s. 144 of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt the submissions/explanations of the assessee with regard to the profit likely to be computed by the AO. The case of the assessee had been that the fall in Gross Profit was due to increase in the cost of rawmaterial and decrease in sale realization. We find that the AO did not give any finding on this aspect. However, the ld.CIT(A) accepted the contention of assessee after 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 dependent on various factors, for example, in the case of manufacturer cost of raw-material plays a vital role. If there is rise into cost of raw-material, naturally cost of production would increase and badly effect the profit if there is not corresponding increase in sale price. As per AO, there is increase in turnover, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of CIT vs. Riddhi Steel and Tubes (P.) Ltd. (supra), wherein the Hon ble High Court has held as under: 9.2. It is a settled law, as rightly held by the Tribunal, that only on account of inflated statements furnished to the banking authorities for the purpose of availing of larger credit facilities, no addition can be made if there appears to be a difference between the stock shown in the books of account and the statement furnished to the banking authorities. If, for the purpose of fulfilling the margin requirements of the bank purely on inflated estimate basis, when the stock statement had reflected inflated value of the stock in wake of otherwise satisfactory explanation, both for the purpose of value as well as quantity, we find no reason to interfere with the order of the Tribunal. 4.4. In the light of the above judgement of the Hon ble Jurisdictional High Court, the contention of the ld.CIT-DR is unacceptable. 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 is added back by the ld.CIT(A). Taking a holisti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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