9911796707
TMI Blog2016 (11) TMI 1357X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act, 1961 (hereinafter called as 'the Act'). Subsequently, the case has been selected for scrutiny and accordingly, notices u/s 143(2) & 142(1) of the Act were issued. In response to notices, the authorized representative of the assessee appeared from time to time and filed details and produced books of accounts. 3. During the course of assessment proceedings, the assessing officer noticed that stock registers maintained by the assessee are not susceptible for verification, therefore, issued a notice and asked to furnish complete details of quantitative details of major raw materials purchased, consumption of raw materials and furnished goods produced. In response to show cause notice, the assessee has furnished details of stock along with Central Excise records. As per the information furnished by the assessee, the assessee has disclosed closing stock of steel wire rope of 1,196.79 MT which was valued at Rs. 2,89,54,890/-. The assessee has adopted cost method to value raw material, stores, spares and consumables net of excise duty, and finished goods/work in progress are valued at factory cost. Similarly, finished good is valued at lower of estimated cost or no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under consideration, the input cost of raw materials has been increased and the sale price was reduced, which is the main reason for reduction in gross profit. The assessee further submitted that percentage of gross profit depends upon various factors such as cost of input raw materials, type of products manufactured, product mix and selling price. It has maintained books of accounts along with stock registers, which was submitted to the Central Excise Department on quarterly basis and the Central Excise Department has not pointed out any discrepancy in the stock registers, therefore, there is no reason for doubting gross profit declared for the year under consideration. The assessee further submitted that its books of accounts are audited u/s 44AB of the Act and the auditor has issued audit report, wherein the auditor has not pointed out any discrepancies in stock registers and valuation of stock, therefore, the gross profit declared for the year cannot be altered. 5. The A.O. after considering the explanation furnished by the assessee, held that the assessee has failed to submit details with regard to valuation of closing stock of steel wire rope. The A.O. further observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was added back to the total income of the assessee. 6. Similarly, the A.O. observed that gross profit declared by the assessee for the year under consideration is substantially less than the gross profit declared for the previous financial year. The assessee has failed to adduce any reasons for declaring low gross profit. Though assessee claims that the reason for reduction in gross profit is due to increase in the cost of raw materials and decrease in the cost of final products, the assessee has failed to substantiate the reduction in gross profit with necessary evidences. Since, the stock register maintained by the assessee are not showing true and correct position of movement of stocks and also the assessee has failed to take physical inventory of closing stock at the end of the year, the correct gross profit cannot be determined based on such books of accounts, with these observations, rejected books of accounts and estimated gross profit by taking into account average gross profit of 3 financial years which works out to 12.59% and applied the average gross profit rate to the total turnover and determined gross profit of Rs. 5,41,14,105/- as against gross profit of Rs. 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in estimation of gross profit, as the books of accounts of the assessee are audited by an accountant under the provisions of section 44AB of the Act and the auditor issued tax audit report with nil comments on stock books maintained by the assessee which clearly shows that the books of accounts maintained by the assessee are true and correct and the A.O. has no reasons to doubt the books of accounts maintained by the assessee. The assessee further submitted that it is not a case of A.O. that the assessee has inflated purchase cost or inflated manufacturing expenses to reduce the profit. The A.O. has accepted expenditure claimed by the assessee and also purchase of raw materials. Once the books of accounts have been accepted, there is no reason for the A.O. to doubt the gross profit declared for the year. 8. The CIT(A) after considering the explanations furnished by the assessee, held that the assessee has not demonstrated with evidences the value adopted by the A.O. is wrong. The A.O. has adopted average price of March purchases to value the closing stock of raw materials. The assessee has failed to furnish breakup details of closing stock of raw materials with reference to rates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for variance in production loss due to non-consideration of stock available at shop floor, the assessee has failed to convince the availability of work in progress in the shop floor. The CIT(A) further observed that the assessee has claimed stock to the tune of 121.407 MT at the shop floor as on 1.4.2006, but the financial statement showed such position to be nil as on 31.3.2006. Similarly, the assessee has claimed stock at the shop floor to the tune of 168.864 MT for the month of March, 2007 but has not admitted any closing stock of work in progress in the financial statements. No such entry for stock in shop floor was found recorded in the stock register for any of the months. With these observations, hold that the A.O. has rightly estimated gross profit on an average of 12.59% taking the gross profit position of last 3 years. However, from the details filed, it is noted that the A.O. is not justified in adopting such gross profit rate on the gross sales of Rs. 42,98,18,151/- as the gross sales considered by the A.O. is inclusive of excise duty payable to the Government, as such gross profit cannot be estimated on excise duty component, with these observations, directed the A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materials issued for production. On verification of the details furnished by the assessee, we find that while analyzing the closing stock details, the A.O. has taken raw materials issued for production and goods manufactured for the particular month without considering brought forward stock available at shop floor, which is the reason for arriving at a shortage/excess production loss on monthly basis. Therefore, we are of the opinion that when the books of accounts maintained by the assessee are accepted without any discrepancies, the A.O. was not correct in tinkering with the method of closing stock adopted by the assessee to determine the value of closing stock of raw materials. Hence, we are of the view that the A.O. was completely erred in adopting average price method to determine the closing stock as against the consistent method of accounting followed by the assessee i.e. cost price method to determine the closing stock. Hence, we direct the A.O. to delete additions made towards short valuation of closing stock. 12. The next issue that came up for our consideration is additions towards alleged excess production loss. The A.O. made additions of Rs. 17,18,230/- towards exces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of stock. 14. Having heard both the parties, we find force in the arguments of the assessee for the reason that the assessee has maintained stock registers in accordance with the provisions of Central Excise rules and furnished such stock registers on quarterly basis to the Central Excise authorities which were accepted without any modifications. We further noticed that the books of accounts of the assessee were audited under the provisions of section 44AB of the Act and the quantitative details as required by clause 28(b) of form no.3CD regarding raw materials and finished goods were prepared and audited by certified accountant and were enclosed with form no.3CD which had been placed on record, but the assessing officer analyzed the consumption of raw materials in his own wisdom which in our opinion is not correct for the reason that the A.O. has analyzed consumption of raw materials on monthly basis without taking into account the opening stock and closing stock available at shop floor which is essential to arrive at production loss. Though the A.O. analysed raw materials consumption according to his own method, the method followed by the A.O. is inconsistent with the accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit depends on a host of variable factors such as demand for various products, the product mix, market conditions, competition factors, cost of inputs, etc. The assessing officer did not go into any of these aspects, determined gross profit on surmises and conjectures on arbitrary basis without pointing out any defects in the books of accounts or stock registers. The assessee further contended that due to increase in prices of raw materials, the average cost of raw materials has been increased about 15% when compared to the previous financial year. The aforesaid relevant factors have been totally ignored by the A.O. and proceed with estimation of gross profit by taking into average gross profit of last 3 financial years, which is totally arbitrary and unwarranted. It is further submitted that the assessing officer has accepted cost of raw materials and expenses shown and nothing contrary has been brought on record either by way of inflation of purchases or expenditure to manipulate the gross profit. Since the sales as well as the cost of expenses have been accepted by the A.O. as per the books of accounts, there is absolute no scope to work out the gross profit on a different o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee are not showing true and correct position of closing stock or consumption of raw materials. The basis for the A.O. to arrive at a conclusion to reject the books of accounts is that he had analyzed consumption of raw materials and production of finished goods on monthly basis in his own wisdom and quantified production loss which is more in few months. Based on such analysis of raw materials, the A.O. come to the conclusion that it is impossible to compute true and correct profit of the assessee from the books of accounts and hence rejected books of accounts under the provisions of section 145 of the Act and estimated gross profit by taking into account last 3 years average gross profit declared by the assessee. 18. The assessing officer has not pointed out any particular defect or discrepancy in the account books maintained by the assessee. Though, the A.O. analyzed consumption of raw materials, failed to come to the conclusion that what is the exact amount of production loss when compared to the production loss declared by the assessee, which is supported by stock registers. On the other hand, the assessee clearly demonstrated before the authorities with necessary evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee relied upon the decision of High Court of Delhi, in the case of CIT Vs. Smt. Poonam Rani (2010) 326 ITR 223. The Hon'ble High Court of Delhi under similar circumstances held as under: "The assessee was engaged in the business of manufacturing copper wires. For the relevant assessment year, she filed a return declaring gross profit at the rate of 1.4 per cent against gross profit rate of 5.91 per cent for the preceding year. On being asked, the assessee attributed the fall in gross profit rate to the increase in the purchase price. The Assessing Officer rejected the explanation given by the assessee on the ground that no supporting evidence was produced to show increase in the purchase price and decrease in sales. He also noticed that the weight of finished products declared by the assessee was more than the weight of raw materials. When asked to explain, the assessee submitted that after drawing wire, the process went on to put the wire for enamelling, as a result of which the weight of the wire increased by 2-3 per cent. The Assessing Officer felt that in the absence of adequate supporting evidence, the explanation given by the assessee could not be accepted. He, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w material consumed and closing stock of raw material, opening stock of finished goods, finished goods produced during the year, finished goods sold and closing stock of finished goods) were prepared and audited certified accountant and were enclosed with Form No. 3CD which had been placed on record, but the Assessing Officer had ignored the factual figures, both in qualitative and quantitative terms, enclosed with the return and filed during the course of assessment proceedings. It was for that reason that the Commissioner (Appeals) was satisfied that the assessee had furnished complete details, including quantitative details in respect of purchase of raw material, manufacture of copper wire and sale of the finished products. In those circumstances, the accounts maintained by the assessee could not have been said to be incomplete or inaccurate. In fact, the Assessing Officer had no material before him to treat the accounts of the assessee as defective or incomplete. [Para 6] As regards the marginal increase in the weight of the finished product, the explanation given by the assessee had been accepted not only by the Commissioner (Appeals) but also by the Tribunal. The Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losed with the return. In any case, there is no statutory provision tinder the income-tax regime requiring the assessee to maintain the daily stock register. Hence, even if no such register was being maintained by the assessee, that; by itself, would not lead to the inference that it was not possible to deduce the true income of the assessee from the accounts maintained by her; nor the accounts could be said to be defective or incomplete for that reason alone. If the stock register is not maintained by the assessee, that may put the Assessing Officer on guard against the falsity of the return made by the assessee and persuade him to carefully scrutinize the account books of the assessee, but the absence of one register alone does not amount to such a material leading to the conclusion that the account books were incomplete or inaccurate. Similarly, if the rate of gross profit declared by the assessee in a particular period is lower as compared to the gross profit declared by him in thepreceding year, that may alert the Assessing Officer and serve as a warning to him to look into the accounts more carefully and to look for some material which could lead to the conclusion that the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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