TMI Blog2010 (10) TMI 1118X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and in the circumstances of the case, the learned CIT (A) has grossly erred in sustaining lump sum addition of ₹ 5,00,000/- on ADHOC BASIS on account of alleged fall in gross profit margin in the activity of manufacturing of grey cloth . 2. That on the facts and in the circumstances of the case, the learned CIT (A) has erred in sustaining the impugned addition even after discarding the stand of he learned AO of rejecting the regularly maintained books of accounts and quantity records of the appellant . 5. Briefly, the facts of the case are that the AO made addition of ₹ 15,30,398/- on account of low gross profit by rejecting the books of account. The AO observed that the assessee was engaged in the business of sale of grey cloths manufactured on its own machine and getting it manufactured on job work basis from other parties whereas in earlier years the assessee carried out activity on its own machine only. The gross profit rate in the year under consideration was 4.31% compared to 19.96% last year. When required to explain the same, the assessee gave detailed working of two financial years in respect of production and sale on its own machine and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not maintained day to day record of consumption of raw material and opening and closing stock were not verifiable. However, it was found that the observations of the AO are not correct. The learned CIT(A) noted that complete details were produced at the assessment stage along with evidences which support the submission of the assessee. Complete quantitative details of finished goods and details of day to day stock register have been filed. Therefore, rejection of the book results has been done arbitrarily. The learned CIT(A) noted that in the instant case the assessee has maintained detail stock register on day to day basis comprising of details of purchase, production and sales. The AO has not found any instances of unaccounted purchase or sales. All purchases and sales were confirmed by the parties. No specific defect has been pointed out in maintenance of the account. Therefore, rejection of book results is not in order. The learned CIT(A) thereafter noted that the turnover of the assessee has increased by more than 3.5 times and increased turnover would normally result in increase in over all profit. Hence, gross profit has decreased. The learned CIT(A) accepted the conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed. 8. Ground No.2 of the appeal of the revenue reads as under: 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition made by the A. O. regarding addition u/s 40A(2)(b) on account of excess job charges paid to its associate sister concerns of ₹ 95,39,796/-. 9. The AO made the addition of ₹ 95,39,796/- out of job charges paid to sister concern by invoking the provisions of section 40A(2)(b) of the IT Act. The AO observed that the assessee was paying higher cost for job work done by its sister concerns. The assessee stated that the payment to all these concerns was for two activities, which is twisting, warping and winding of yearn as preparatory for weaving and thereafter weaving of grey cloths and mending the same. Compared to the assessee firm did not own any twisting, warping or winding set up and therefore the cost of production arrived at by own firm was not comparable with the cost of job work production and the job charges paid were the same as charged by other parties in similar circumstances. The AO however, held hat the assessee did not furnish quality wise details of grey clot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s improper, unjustified and even illogical. The learned Counsel for the assessee further submitted that the assessee firm owned only power looms utilized for weaving of grey cloths and not other machines for twisting, warping and winding of yarn, while the job charges paid by the assessee firm to the job workers were for two activities i.e. primarily twisting, warping and winding of yarn as preparatory for weaving and thereafter weaving of grey cloths and mending thereof. Thus, the cost of production in own unit could not be compared with that of the cost of production on job work basis. The assessee also submitted copy of bills of independent job workers who charged job charges at equivalent rates for similar services to prove reasonability of job charges incurred by the assessee firm as per the prevailing market rate for similar services Even other wise if the production achieved through job workers was carried in the own manufacturing set up of the assessee, it would require incurrence of additional expenses on plant, machinery, factory building, additional technical staff, upgraded power connections, etc. which would be over and above the basic expenses of yarn and labour charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the AO has arrived at the conclusion that the job charges paid to the sister concerns were excessive when the activities of the job workers and the appellant were totally different. It is also seen that the appellant has filed copies of bills independent job workers, who charged at almost the same rat4e for similar services. This evidence has not been taken into account by the AO Further, section 40A(2) of the IT Act can be invoked only if the conditions precedent for invoking the provisions are satisfied. The AO in the instant case has not taken into account whether the fair market value of services rendered by the job workers was less than that charged by the job workers, who were sister concerns of the appellant. In fact, the AO is apparently influenced by the fact that the payments for the job charges have been made to the sister concern. He would have probably accepted the payments had the same been made to the outside parties. I find that the AO has compared the cost of production of the appellant itself with the cost of production in the course of job workers which cannot be a base since the activities of the two parties are different. The important point to note in case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market value. Independent bills were produced to show that the assessee paid reasonable amount to the sister concerns. Since the AO compared cost of production incurred by the assessee, therefore, addition has been rightly deleted by the learned CIT(A). 14. We have considered the rival submissions and the material available on record. Section 40A(2) of the IT Act provides that when the AO is of the opinion that expenditure is excessive or unreasonable having regard to fair market value of the goods, services or facilities in which payment is made for the legitimate needs of the business or profession of the assessee or benefit derived by or accruing to him, therefore, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as deduction. Hon ble Supreme Court in the case of Upper India Publishing House Pvt. Ltd. Vs CIT 117 ITR 569 held that before section 40A (2) is applied, AO should have prove expenditure as excessive or unreasonable . The assessee specifically pleaded before the authorities below that the AO compared the cost of production incurred by the assessee on its own manufacturing set up with that of the cost of produ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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