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2016 (11) TMI 1357

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..... o delete additions made towards short valuation of closing stock. Additions towards alleged excess production loss - A.O. made additions towards excess production loss by stating that the assessee has claimed excessive production loss when compared to previous financial year - Held that:- 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 principles of calculation of production loss, therefore, in our considered view, the A.O. has completely erred in coming to the conclusion that the stock registers maintained by the assessee are not showing true and correct pictures, when the assessee has clearly demonstrated with necessary evidence that the stock figures declared in the financial statements are tallied with the stock registers maintained in accordance with the Central Excise rules. The A.O. after analyzing raw materials, failed to arrive at a correct figure of production loss instead, proceeded with estimation of production loss based on certain articles published in some magazine which is not a binding nature, ignoring the stock registers furnished by the assessee which are approved .....

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..... ng 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 ₹ 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 not realizable value exclusive of excise duty. The A.O. observed from the books of accounts, the assessee has claimed production loss of 192.144 MT which works out to 1.47% of the raw materials consumed. The A.O. further observed that the production loss claimed by the assessee for the year under consideration when compared to previous fi .....

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..... oduct 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 that the assessee has not furnished closing stock details of raw materials item-wise and rate-wise and also failed to take physical inventory of closing stock at the end of the financial year. Therefore, opined that the stock register maintained by the assessee are not giving true and correct position of quantitative detail .....

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..... ing 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 ₹ 5,41,14,105/- as against gross profit of ₹ 4,02,67,547/- admitted by the assessee. The difference of ₹ 1,38,46,558/- has been considered as suppressed gross profit and after reducing additions made towards difference in valuation of closing stock of ₹ 5,49,345/- and additions towards production loss of ₹ 17,80,230/-, the rema .....

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..... s 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 to justify adopting differential rates. Since the assessee has failed to furnish breakup of raw materials, the A.O. was right in taking average price of raw materials purchased for the month of March to value the closing stock of raw materials for the year end. As regards the add .....

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..... 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 ₹ 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. to re-compute gross profit by excluding excise duty component included in the gross sales. Aggrieved by the CIT(A) order, the assessee is in appeal before us. 10. The assessee has filed common grounds for both the assessment years. From these grounds of appeal, t .....

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..... 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 ₹ 17,18,230/- towards excess production loss by stating that the assessee has claimed excessive production loss when compared to previous financial year. According to the A.O., the production loss for the previous financial year is +1.381 MT, whereas for the current year, the pr .....

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..... rs 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 principles of calculation of production loss, therefore, in our considered view, the A.O. has completely erred in coming to the conclusion that the stock registers maintained by the assessee are not showing true and correct pictures, when the asses .....

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..... it 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 or estimated basis. 16. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. estimated gross profit @ 12.59% by taking 3 years average gross profit declared .....

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..... 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 evidence, such as stock records maintained in accordance with Central Excise rules and clarified that the closing stock details declared in its financial statements are consistent with the stock register. The assessee also proved that the .....

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..... iness 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, therefore, rejected the account books of the assessee under section 145(3) and estimated income by applying the gross profit rate of the preceding assessment year. On appeal, the Commissioner (Appeals) noted that the assessee had furnish .....

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..... ountant 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 Officer had no material before him on the basis of which it could be said that the weight of the wire did not increase even marginally during the process of enamelling. Therefore, he had no justification, in la in rejecti .....

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..... 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 accounts maintained by the assessee were not correct, but a low rate of gross profit; in the absence of any material pointing towards falsehood of the account books, cannot, by itself, be a ground to reject the acco .....

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