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2016 (11) TMI 252 - ITAT DELHI

2016 (11) TMI 252 - ITAT DELHI - TMI - Addition towards closing stock as suppressed - Held that:- 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 Commiss .....

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-tax (Appeals) on the issue in dispute . - Decided against revenue - Addition under the head ‘Detention and Demurrage Charges’ - payment in the 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 .....

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ns. 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 - Held that:- The issue has already been decided in favour of the assessee by the judgment of the jurisdictional High Court reported in . Prisma Electronics .....

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nasmuch as there was a transfer of the industrial undertaking as a whole along with its assets and liabilities.- Decided against revenue - Rejection of books of accounts - estimating gross profit - Held that:- We find that the assessee has explained fall in gross profit rate as computed by AO. 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 .....

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cy or defect in the books of accounts of the assessee and, therefore, rejection of books of accounts merely on the low gross profit rate was not justified.- Decided against revenue - ITA No. 1551/Del/2012 - Dated:- 19-10-2016 - Sh. H.S. Sidhu, Judicial Member And Sh. O. P. Kant, Accountant Member Appellant by Sh. Ankur Garg, CIT (DR) Respondent by Sh. Rohit Jain, Adv. & Ms. Shaily Gupta ORDER Per O. P. Kant, A. M. This appeal by the Revenue is directed against the order dated 12/01/2012 pass .....

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ting 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( .....

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assessment order. In the remand report, the issue was not answered on merit 5. That the learned CIT (A) has erred in law and on facts in accepting the submission that M/s Dixon Technologies (India) Pvt. Ltd.(Dixon) had been awarded contract for supply of 9,00,000 colour televisions(CTVs) and out of said contract appellant was sub- contracted 4.70 lakh CTVs, without appreciating the fact that Dixon is also a partner in assessee firm. 6. That the learned CIT has erred in law and on facts in not a .....

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8. That the order of Ld. CIT (Appeals) being erroneous in law and on facts deserves to be set aside/cancelled and the order of the AO to be restored. 2. The facts in brief of the case are that, the assessee, a partnership firm, was engaged in business of manufacturing of Colour TVs . During relevant period of time, the assessee company had two units i.e. one at Noida and other at Jammu. The assessee filed return of income on 30/09/2008, declaring total income of ₹ 55,81,664/-. The case was .....

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eport as well as the submission and rejoinder of the assessee, allowed relief to the assessee on major issues. Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above. 3. The ground No. 1, is related to the addition towards closing stock 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 or .....

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), 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 that the assessee s con .....

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er hand, the learned Authorized Representative of the assessee submitted that all details in respect of the items worth ₹ 48,08,683/- were produced before the Assessing Officer and explained that the same were appearing in the closing stock already declared. He further submitted that in the remand report, the assessing officer himself has admitted that the contention of the assessee in respect of the items appearing in closing stock was found to be correct and thereafter filing further app .....

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the issue in dispute as under: 3.2.6. After careful consideration of all the facts on record and rival submissions as contained in assessment order and in appellant s submission, my observations/conclusions in respect of Ground of appeal No. 2 , are as under:- As can be perused from the above; the A.O. has himself expressed his satisfaction-after verifying the entire details of stock during remand proceedings in the original assessment, the A.O. had observed the discrepancy simply because the i .....

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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 rema .....

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me issue is not justified unless any discrepancy or intentional misreporting of facts by the Assessing Officer in remand report is observed. In our opinion, the findings of the learned Commissioner of Income-tax (Appeals) on the issue in dispute is well reasoned, and no interference on our part is required, accordingly, we confirm the finding of the learned Commissioner of Income-tax (Appeals) on the issue in dispute . The ground of the Revenue is dismissed. 4. The ground No. 2 relates to deleti .....

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ntractual payment made to various parties like PAL Road Carriers, Ahuja Road Lines etc., for delay in loading/unloading of material. The learned Commissioner of Income Tax (Appeals) forwarded the additional evidences submitted with assessee, to the Assessing Officer, who after going through the additional evidences and submission of the assessee did not offer any adverse comments. The learned Commissioner of Income-tax (Appeals) after considering the submission of the assessee, remand report and .....

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Representative of the assessee, relied on the findings of the learned Commissioner of Income- tax (Appeals) and submitted that detail of expenses was submitted before the learned Commissioner of Income-tax (Appeals), who forwarded the same to the Assessing Officer. He further submitted that in the remand report, the Assessing Officer did not dispute to the submission of the assessee that the detention and demurrage charges were normal business expenditure. 4.4 We have heard the rival submission .....

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um 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 th .....

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sed in respect of Detention and demurrage charges . The same has been verified by the A.O. and the A.O. has not made any adverse comments in the remand report. 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 compensat .....

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part of the Assessing Officer is observed. We find that order of the learned Commissioner of Income-tax (Appeals) on the issue in dispute is well reasoned and no interference on our part is required. Accordingly, we uphold the same and the ground of the Revenue is dismissed. 5. The ground No.3 relates to deduction of ₹ 5,97,794/- under section 80IB of the Act, which was disallowed by the Assessing Officer, but allowed by the learned Commissioner of Income-tax (Appeals). In the ground, the .....

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of the Act were not satisfied by the assessee: (i) in a 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 .....

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rs. 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. 5.2 The learned Commissioner of Income-tax (Appeals) forwarded the submission and additional evidences of the assessee to the Assessing Officer and after considering the remand report, and submission and rejoinder of the assessee, the learned Commissioner .....

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king should not be formed by transfer to a new business of machinery or plant previously used for any purpose. 5.4 The learned Commissioner of Income-tax (Departmental Representative) relied on the on the findings of the Assessing Officer. 5.5 On the other hand, the learned Authorized Representative of the assessee relying on the finding of the learned Commissioner of Income- tax (Appeals) submitted that issue in dispute in assessment year 2005-06 and 2006-07 has also been decided by the Tribuna .....

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prietorship concern into partnership amounted to reconstruction of the business of the undertaking. We find that the issue has already been decided in favour of the assessee by the judgment of the jurisdictional High Court reported in (2015) 377 ITR 207 (All). The relevant paragraphs of the judgment are reproduced as under: 12. The same principle is applicable in the instant case. Admittedly, the undertaking was in existence since 2002. The proprietorship concern changed into a partnership firm. .....

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old 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 w .....

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books of accounts and estimating gross profit which led to addition of ₹ 15,69,58,867/- by the Assessing Officer. This addition has been deleted by the learned Commissioner of Income-tax (Appeals). The facts in brief in respect of issue in dispute are that the Assessing Officer compared the trading results of two units of the assessee with respect to the trading results of immediately preceding year. The Assessing Officer found that in respect of Noida Unit, in immediately preceding year, .....

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id not produce any documentary evidence in support of decline in gross profit rate except producing the copy of agreement between Dixon Technologies (India) Limited. The Assessing Officer observed that a tender for supply of 30 lacs Colour TV sets was allotted to M/s. Dixon Technologies (India) Limited by Electrics Corporation of Tamil Nadu (ELCOT) and those TVs were to be supplied during the period from 01/12/2007 to 30/09/2008 . The Assessing Officer further observed that agreement was execute .....

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period. According to the Assessing Officer, presuming all the sales for the month of December, 2007 to March, 2008, were made to Dixon Technologies India Ltd. for onward sales to ELCOT, the total sales 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 r .....

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f ₹ 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 assessee explained that in the immediately preceding year, out of the total turnover of ₹ 1,01,88,2 .....

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produced by the learned Commissioner of Income-tax (Appeals) in the impugned order are as under: 7.2.2 During appellate proceedings, the counsel of the appellant attended and has made following written submissions vide his letter dated 30-08-2011 as under: - During the relevant previous year, the appellant manufactured/assembled bulk television sets on highly subsidized rates for Dixon Technologies India (P) l td. ( Dixon ) under a contract from Government of Tamil Nadu, through Electronic Corpo .....

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to supply colour televisions in bulk at highly subsidized rates, which resulted in substantial fall in the gross profit rate. The assessing officer, without appreciating the submission of the appellant, proceeded to reject the books of accounts of the appellant only on the ground that there was substantial fall in the gross profit rate and estimated the income by applying an ad-hoc rate of 20% on turnover of the appellant. Before dealing with the specific allegations of the assessing officer, it .....

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ioned 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 kind .....

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direct manufacturing cost, the appellant was left with the agreed margin of ₹ 95 per set, as was earned when the appellant manufactured television sets for Dixon on job work basis. Due to higher volume of business, the appellant, during the relevant previous year, earned substantial profit of ₹ 1,59,84,211 in absolute terms, as compared to profit of ₹ 24,47,304/- during the immediately preceding previous year, i.e. an increase of about 653 %. On perusal of the nature of activit .....

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is for the simple reason that in the assessment year 2007-08, the appellant had shown job receipts only as income whereas in the year under consideration, the amount received towards sales was shown as income. Thus, even though the appellant continued to receive the same amount of ₹ 95 per CTV as profit, since the denominator during the year under consideration is much larger (being the sales value) as compared to a much smaller denominator in the assessment year 2007-08 (i.e., job receip .....

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t rate during the year under consideration, as explained hereunder: Noida Unit Total CTV s manufactures (A) 4,70,581 Margin Per CTV (B) Rs.95 Total margin 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% d .....

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s no fall in the gross profit rate as compared to the earlier year. Independent comparable instance It is further respectfully submitted that, as stated above, Dixon had sub-contracted a part of the manufacturing activity to an independent third party, viz. M/s Hotline Electronics Ltd. ( Hotline ) under an agreement dated 19.09.2007, whereunder, Hotline, too, agreed to manufacture televisions for Dixon at a margin/conversion charges of ₹ 95 per television. Copies of sample invoices raised .....

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the price and profit of an independent third party. Rebuttal of AO's allegation The assessing officer has, in the assessment order, alleged that during the relevant previous year the gross turnover of the Noida unit of the appellant was ₹ 86,47,15,391, whereas the appellant had manufactured television sets worth only ₹ 8 6,61,3 31 /- for ELCOT, which is about 1% of the total turnover of the said Noida unit and, therefore, this factor alone could not have reduced the gross profit .....

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y 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 basicall .....

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s worth ₹ 86,61,331/- only for supply to ELCOT is, therefore, factually incorrect. In that view of the matter, the aforesaid allegation made by the assessing officer is, it is respectfully submitted, devoid of any merit and is based on incorrect appreciation of facts. Addition made by AO - totally unrealistic It is further submitted that huge addition of ₹ 15,69,58,867 made by the assessing officer leads to unrealistic figures, which further substantiates the contention of the appell .....

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book - II). Addition of ₹ 15,69,58,867, made by the assessing officer, on 4,70,581 units supplied by the appellant transforms into per-unit addition of ₹ 333.50 (approx.). If aforesaid addition per unit of ₹ 333 is added to sale price of appellant of ₹ 2000-2200, it leads to price range of ₹ 2,333 -2533, which would be almost equivalent to final price of ₹ 2,571,64 awarded to Dixon by Elcot, and infact, much lower than the reduced price of ₹ 2,047 as per .....

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d/or specifying as to how on 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 de .....

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eclared 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 supported by regular books of accounts, vouchers and inventory of stock. The addition made in the trading results was deleted by the Tribunal. ● The Delhi Bench of Tribunal in Chandra Timber Traders v DCIT (1996) 54 TTJ 544 (Del) held that Low profit without any other defect being foun .....

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d readymade garments on retail basis. The ITO found that cash hook, ledger, purchase register, etc. were duly maintained, but not the stock register. The ITO observed that though it was true that in the business of cloth generally the stock register was not maintained, in the instant case, there was no way to verify the closing stock. The Tribunal observed that it was not possible for the assessee to furnish details of monthly sales of the cloth of each mill. It was impossible to maintain a reco .....

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15.9% and the assessee is not maintaining day to day production register. AO rejected the book results and made the addition. The Tribunal held that mere non-maintenance of production register cannot lead to rejection of book results of assessee. ● The Indore Bench of Tribunal in Jagdish Oil Mills v ITO (1995) 52 TTJ 102 held that rejection of books on account of low G.P. rate, without disclosing any defect in the books, is not justified. ● The Jaipur Bench of Tribunal in ACIT v Mewa .....

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nal 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 .....

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TO observing that the rate of profit of the contractor fell by 20% is unjustified and deleted the same. ● In Harlal Hemraj v ITO (1982) 14 TTJ 505 (Jai) the Tribunal held that occurrence of minor discrepancies in the normal course and fall in profit rate during previous year would not form basis for rejection of trading results. ● In ITO v Arun Oil Industries (1985) 13 ITD 769 (JP) assessee carried on business of extraction and sale of groundnut oil. ITO rejected accounts of assessee .....

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ults of assessee and making addition on account of alleged shortage of yield of oil. ● The Jodhpur Bench of the Tribunal in ITO v Prakash Chand : (2006) 100 TTJ 639 (JD) even held that even if stock register is not maintained, that could not be the sole'basis of rejecting the books of accounts. The Tribunal observed that the assessing officer had not pointed out any specific defect in the books of account and he had also not found any inflated purchase or suppressed sales. The Tribunal .....

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e of books of account by the assessee, rejection of book results only on the ground of fluctuation of G.P. rate is not tenable. ● It was 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 .....

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herefrom. 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 business, gross profit rate cannot remain static. In the present case, as stated above, the gross profit rate, in fact, increased to 35.75%, if one were to take the same base .....

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not have resulted in rejection of the books of accounts and estimation of the trading profits. In view of the aforesaid, it is submitted that the assessing officer erred in rejecting the books of accounts of the appellant that, too, on an erroneous basis that there was fall in the GP rate of the appellant. Conclusion In view of the aforesaid, it is respectfully submitted that the assessing officer erred in estimating the profits of the appellant on an ad-hoc basis on the ground that there was fa .....

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ssessee and additional evidences submitted by the assessee on the issue in dispute to the Assessing Officer for his comments, however, Assessing Officer did not offer any comment on the submission of the assessee whereas admission of the additional evidences was not objected by the Assessing Officer. After considering the remand report, submission and rejoinders of the assessee, the Ld. Commissioner of Income-tax (Appeals) deleted the addition with following observations: 7.2.6. After careful co .....

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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 ͅ .....

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sale of ₹ 6,14,857/- last year. The appellant had actually earned a loss on the manufacturing and sale activity last year, but because of the huge contract awarded, it earned a healthy G.P. of 1.85%, resulting indeed a hefty gross profit of 1,48,87,501/- on its manufacturing and sale activities; which,when combined with the profit of ₹ 25,44,153/-on job work activity, give an overall gross profit of ₹ 1,59,84.211/-. Thus, when the entire details and break up of activities in t .....

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hich appellant has earned a healthy G.P. rather than a loss in the last year. After segregation, we find that the job work activity has decreased as compared to last year and correspondingly there is a decline in G.P. on job work from 26.34% last year to 21.20% this year. But that is not a very major decline and is well explained by the fact that there are minimum over heads specially in form of wages and workers expenses , which do not decrease proportionately i.e. in proportion to the decrease .....

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Income Tax (Departmental Representative) addressing the grounds submitted that the learned Commissioner of Income-tax (Appeals) has not taken into account the reasons for falling gross profit rate of the assessee pointed out by the Assessing 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 Author .....

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