TMI Blog2016 (11) TMI 252X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of penalty or not - Held that:- We find that the assessee has given detail of bills in respect of ‘Detention and Demurrage Charges’ before the learned Commissioner of Income-tax (Appeals). The complete detail of the expenditure under reference including invoices raised by the parties were forwarded to the Assessing Officer, who did not dispute the expenses were in violation of the statutory acts or laws and therefore not allowable under section 37 of the Act. It is clear from the perusal of the details and submission that these “Detention and demurrage charges” represent contractual charges paid for delay in loading/unloading of material and are part of normal business activities. There is no element of any violation of statutory Acts or Laws. Rather these payments are in the nature of compensation for breach of contractual obligations. Various court’s decisions cited by appellant in its submission above squarely favour the view that there is no penal element in this expense. - Decided against revenue Deduction under section 80IB - converting the proprietorship into a partnership firm resulted into transfer of plant and machinery previously used by the undertaking - Hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing stock-of ₹ 40,08,68/- made by the Assessing Officer (AO) after rejecting book results and making due enquiries. 2. That the learned CIT (A) has erred in law and on facts in deleting the addition of ₹ 1,01,762/- under the head Detention and Demurrage Charges treating the expense as normal business expenditure as per section 37 of the I.T. Act. The detention and demurrage charges are paid over and above the normal loading and unloading charges and these penal charges never fall within the ambit of section 37 of the I.T. Act, 1961. 3. That the learned CIT (A) has erred in law and on facts in allowing the deduction u/s 80IB resulting in deletion of ₹ 5, 97,794/-, without appreciating the fact that as per provisions of sub clause-(ii) of section 80IB(2) Industrial undertaking should not be formed by the transfer to a new business of machinery or plant previously used for any purpose . The assessee was running the industrial undertaking under a proprietor ship which was converted into partnership on 1.4.2004, resulting in transfer of plant machinery previously used. 4. That the learned CIT (A) has erred in law and on facts in deleting the tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 40,08,683/- stated by the Assessing Officer as suppressed. The Assessing Officer observed that items worth ₹ 40,08,683/-, a list of which is produced by the Assessing Officer on page 5 of the assessment order, were purchased in the month of March 2008, however neither the consumption of same was shown, nor the same were included in the closing stock. According to the Assessing Officer, the assessee did not furnish any explanation in respect of the items of ₹ 40,08,683/- and thus the assessee had suppressed the value of the closing stock to the tune of ₹ 40,08,683/-, accordingly, he made addition to the returned income of the assessee. Before learned Commissioner of Income-tax (Appeals), the assessee contended that all the items referred by the Assessing Officer were duly accounted for in the closing stock declared by the assessee. The assessee furnished additional evidences in this respect which were forwarded by the learned Commissioner of Income- tax( Appeals) to the Assessing Officer. The Assessing Officer after taking into account the additional evidences, sent remand report to the learned Commissioner of Income-tax (Appeals), in which he admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the entire details and submissions and I am fully convinced that the appellant has been able to satisfactorily explain the discrepancies as observed by the A.O. and that there is no suppression in the valuation of closing stock. Therefore, the addition of ₹ 40,08,683/- is hereby deleted. 3.4 The learned Commissioner of Income-tax (Appeals) has also observed that dispute emerged because of the reason that issue of stock of Jammu Unit had not been taken into account by the Assessing Officer at the time of assessment proceedings. We find that in remand proceedings, the Assessing Officer himself has analysed the submission of the assessee and satisfied himself that the items worth ₹ 48,08,683/, under reference, were appearing in the closing stock. In our opinion, once the Assessing Officer has himself admitted that there was no understatement of the stock and accordingly on the basis of his comments, the learned Commissioner of Income-tax (Appeals) has allowed relief to the assessee and then subsequently filing further appeal on the same issue is not justified unless any discrepancy or intentional misreporting of facts by the Assessing Officer in remand report i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant material on record. We find that the assessee has given detail of bills in respect of Detention and Demurrage Charges before the learned Commissioner of Income-tax (Appeals), which are reproduced by the learned Commissioner of Income-tax (Appeals) in the impugned order on page 29 as under: For example, bill No. 1536 dated 28.05.2007 for ₹ 4,200/- raised by M/s. Pal Road Carriers upon Dixon Technologies India Pvt. Ltd. on account of Prisma Electronics, included a sum of ₹ 1,000/- paid towards one day detention charges. Similarly, bill no. 1349 dated 01.05.2007 for ₹ 8,700/- raised by M/s. Pal Road Carriers upon Dixon Technologies India Pvt. Ltd. on account of Prisma Electronics, included a sum of ₹ 5,000 paid towards one day detention charges. 4.5 The complete detail of the expenditure under reference including invoices raised by the parties were forwarded to the Assessing Officer, who did not dispute the expenses were in violation of the statutory acts or laws and therefore not allowable under section 37 of the Act. 4.6 The learned Commissioner of Income-tax (Appeals) has given his finding on the issue in dispute as in under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case where the industrial undertaking manufactures or produces articles or things, the undertaking employees 10 or more workers in any manufacturing process carried on with the aid of power or employs 20 workers in manufacturing process carried on without the aid of the power. (ii) The industrial undertaking is not formed by splitting up, or the reconstruction of a business already in existence or it is not formed by the transfer to a new business of machinery plant previously used for any purpose. 5.1 Before the learned Commissioner of Income-tax(Appeals) the assessee furnished the additional evidences in support of the claim that it satisfied both the conditions. It was explained by the assessee that Labourers were hired through labour contractor and Provident Fund (PF) and Employees State Insurance(ESI) in respect of those labourers were paid by the assessee, which were sufficient proof in support of employing 10 or more workers. In respect of second condition, the assessee submitted that deduction under section 80IB was disallowed in earlier years on this ground but the Tribunal in assessment year 2005-06 and 2006-07 has allowed the issue in favour of the assessee. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(i) does not come in the way. 13. In Commissioner of Income Tax Vs. Bullet International, (2012) 349 ITR (All) a Division Bench of this Court held that the exemption granted to a proprietorship concern, which converted from a proprietorship into a partnership concern was still entitled for exemption under Section 10A of the Act. 14. In the light of the aforesaid, we hold that the Tribunal was justified in dismissing the appeals of the revenue holding that the assessee was entitled for deduction under Section 80-IB of the Act and was not hit by the provisions of Section 80-IB(2)(i) of the Act. The Tribunal was also justified in holding that upon conversion of the proprietorship concern to a partnership concern there was no transfer of plant and machinery to the partnership firm, inasmuch as there was a transfer of the industrial undertaking as a whole along with its assets and liabilities. Consequently, for the reasons stated aforesaid, all the appeals fail and are dismissed. The questions of law as indicated aforesaid are answered accordingly. 5.7 Thus respectfully, following the finding of the Hon ble jurisdictional High Court, we uphold the finding of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s during the year under consideration to ELCOT, were to the tune of ₹ 86,61,331/- which constituted only 1% of the total turnover of the Noida Unit of ₹ 86,47,15,391/-. In view of these observations, the Assessing Officer concluded that sales to ELCOT could not be the only factor which reduced the gross profit from 24% in last year to 1.85% during the year under consideration. The Assessing Officer referred to the addition of closing stock, and disallowance of deduction under section 80IB of the Act and held that he was not satisfied with the correctness and completeness of the accounts maintained with assessee and accordingly rejected the book results of the assessee and estimated gross profit rate of 20% on the turnover declared by the assessee, which resulted into addition of ₹ 15,69,58,867/-. 6.1 Before the learned Commissioner of Income-tax (Appeals), the assessee made a detailed submission explaining that there was no fall in gross profit rate during the year under consideration as compared to the immediately preceding year. The submission of the assessee had been reproduced by the learned Commissioner of Income-tax (Appeals) in the impugned order. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit price of ₹ 2,571.64, sub-contracted manufacture of CTV s to the appellant and another company called Hotline Electronics. The appellant was sub-contracted the order of manufacture and supplying 4,70,581 CTV s to Dixon. It may also be mentioned here that during assessment year 2007- 08, the appellant had undertaken manufacturing of CTV s for Dixon on job work basis only, whereunder the appellant received ₹ 95 per set as conversion/ labour charges. Copy of ledger account maintained by the appellant in respect of job work carried out for Dixon for AY 2007-08 has been submitted in submissions dated November 22, 2010, attached herewith at pages 26 to 109 (@63 to 73) of the Paper book-I. On perusal of the aforesaid, it will kindly be appreciated that in the assessment year 2007-08, the appellant received job charges of ₹ 96.59,400, out cf total receipts of ₹ 1,01,88,242 of the Noida Unit. During the relevant previous year, the appellant manufactured 4,70,581 CTV s on subcontract basis, which were sold to Dixon. The appellant sold CTV s to Dixon at a price of ₹ 2,000-2,200 approx per CTV (depending upon the model), which was fixed in suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n C= (A) X (B) Rs.4,47,05,195 Gross profit declared D Rs.1,59,84 Gross profit ratio D/CX100 35.75% On perusal of the aforesaid, it will kindly be appreciated that gross profit rate, in fact, increased to 35.75%, if one were to take the same base as in the immediately preceding assessment year, which is much higher than gross profit rate of 24% declared in the said year. The Assessing Officer, on the other hand, compared the following fares: Noida Unit Jammu Unit F.Y. 2007-08 2006-07 F.Y. 2007-08 2006-07 Sales 86,47,15,391/- 1,01,88,242/- 9,04,75,218/- 4,04,67,454/- Gross Profit 1,59,84,211/- 24,47,304 83,07,015/- 40,60,915/- GP Rate 1.85% 24% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... May 15,86,25,543.5 June 13,74,71,987.8 July 13,51,61,338.2 Aug 11,78,55,368.3 Sep 14,01,50,553.4 Oct 15,47,26,826 Nov 3,98,32,618.05 Dec 86,06,099.54 Jan 3,94,03,166.14 Feb 5,59,657.51 Mar 7,740.07 Total 97,14,40,285.8 The assessing officer, it is respectfully submitted, erred in referring to the subsequent agreement dated 19.09.2007 to hold that the CTV s were to be supplied from December, 2007 to September, 2008. The assessing officer failed to appreciate that the aforesaid contract was basically extension of the contract by Dixon in view of ELCOT placing additional order of supplying 4,45,000 CTV s vide purchase order dated 31.07.2008 (refer page 422 of Paper book - I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of books of accounts maintained by the assessee, it is not possible to correctly deduce taxable profit there from. Your Honour s kind attention, in this regard, is further invited to the following decisions wherein it has been held that no trading addition can be made on the basis of mere fall in the G.P rate:- ● The Jodhpur Bench of Tribunal in ITO vs. Arun Kumar Gupta (2006) 103 TTJ 134 (Jd.) held that assessing officer having not pointed out any defect in the assessee s books of account and the assessee having explained that the marginal decline in the GP rate was on account of substantial increase in the sales during the year, books of account could not be rejected. ● In Bombay Steel Centre v ITO (1995) 83 Taxman 85(Ahd), (AT) the assessing officer made an addition to the declared trading results by estimating the sales and applying a G.P. rate of 21% thereon as against rate of 16% shown in the year under consideration and 15.36% declared by the assessee and accepted by the assessing officer in the immediately preceding year. The Tribunal held that the assessee had not maintained day-to-day stock records, but the declared results were supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity cannot justify rejection of entire books of account particularly when in the past department had never rejected the books of account of the assessee and had finalized the assessments as per book results only. Trading addition deleted as there was no justification for estimating higher turnover or applying higher G.P. rate on the basis of preceding year in changed circumstances. ● The Delhi Bench of Tribunal in Miracle Menthol Distillary v ITO (1993) 46 TTJ 13 (Del) deleted the additions made by applying higher G.P. rate holding that the additions are based on surmises and conjectures. The Tribunal observed that G.P. rate cannot remain static and is likely to vary from year to year depending on the facts and circumstances prevailing. ● The Hyderabad Bench of Tribunal in Toco Engg. Co. v ITO (1986) 18 ITD 267 held that mere low gross profit rate is not a valid reason for rejecting assessee s book results under proviso to section 145. ● In Arjun Sewing Machine Co. v ITO (1982) 14 TTJ 5 (Jab) the ITO applied a gross profit rate of 50% to the declared rate of 34%. The Tribunal observed that the ITO was wrong in applying a rate of 50% without any par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s similarly held by the Ahmedabad Bench of Tribunal in Surat District Co- operative Milk Producers Union Ltd: 99 TTJ 390 ● The Rajkot Bench of Tribunal in Girish M. Mehta: 99 TTJ 394 held that before rejecting the books of account, Department has to prove that accounts are unreliable, incorrect and incomplete. The accounts regularly maintained in the course of business, duly audited under the provisions of the IT Act and free from any qualification by the auditors, should be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The Tribunal further held that for rejecting the books of account, it is the Revenue s onus to prove that either the books of accounts maintained by the assessee are not correct and complete or the method of accounting adopted is such that true profit cannot be deduced therefrom. On perusal of the aforesaid, it will, thus, kindly be appreciated that various Courts and Benches of the Tribunal have consistently held that mere fall in the gross profit rate cannot be the reason for making any trading addition. In fact, the Courts/Tribunal have gone to the extent of holding that in any running busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.6 to 6.3 , are as under:- On this issue, first of all my finding is that it is not a case where A.O. found any discrepancy or defect in the assessee s books of accounts. On the other hand the appellant has produced all the records, details and copies of accounts to show that books of accounts were correctly and completely maintained. The A.O. has also submitted in the remand report that he has no objection to the evidences brought on record. Thus, I hold that there is no case of rejection of books of accounts. Further I find that appellant has satisfactorily explained the change in business circumstances in this year viz-a-viz last year. In the earlier year i.e. A.Y. 2007-08, the appellant had under taken the manufacturing of CTVs for Dixon on Job work basis, wherein the appellant used to receive ₹ 95/- for each set as conversion/labour charges. The appellant received total job work charges of ₹ 96,59,400/-, out of total receipts of ₹ 1,01,88,242/-. As against that; in the present year, the appellant was awarded a contract for manufacture and supply of 4,70,581/- set of CTVs to Dixon. To re-iterate, this year the contract is not for job work but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer. Relying on the order of the Assessing Officer, the learned Commissioner of Income Tax (Departmental Representative) prayed that the addition of gross profit made by the Assessing Officer might be sustained. 6.4 On the other hand, the learned Authorized Representative of the assessee relied on the submission made before the learned Commissioner of Income-tax (Appeals) as well as on the finding of the learned Commissioner of Income-tax (Appeals) on the issue in dispute. 6.5 We have heard the rival submissions and perused the relevant material on record. We find that the assessee has explained fall in gross profit rate as computed by the Assessing Officer. The assessee has thereafter for the purpose of comparison of results with last year converted the result of this year in the form of job work and explained that gross profit rate of the assessee in the year under consideration should have been 35.75%, which is much more than the gross profit rate of 24 percent declared by the assessee in the immediately preceding year. After detailed discussion of the submission of the assessee and taking into consideration the remand report of the Assessing Officer, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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