TMI Blog2012 (5) TMI 841X X X X Extracts X X X X X X X X Extracts X X X X ..... Further the decision of the Hon'ble ITAT in assessee's case has not been accepted by the Department and appeal U/S.260A of the I.T. Act has already been filed. 2.1 Both the sides agreed that this issue is identical to ground No.1(a) of the revenue in assessment year 2006-07 and 2007-08 in I.T.A.No. 129 and 1856/Ahd/2010 and in the present year also, this issue may be decided on similar lines. In those two years, this issue has been decided by the tribunal as per order dated 11.05.2012 in favour of the assessee as per para 12.2, which is reproduced below: 12.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the tribunal decision cited by the Ld. A.R. We find that the decision of Ld. CIT(A) is by following tribunal order in assessee s own case for the assessment year 2002-03, 2003-04 2004-05 and the Ld. D.R. could not show us as to how this tribunal decision is not applicable in the present year by pointing out any difference in facts and hence, under these facts, we do not find any reason to interfere in the order of Ld. CIT(A) on this issue. Accordingly, ground No.1 (a) of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, these two judgements of Hon ble Apex Court will not be applicable where the assessee has written back the liability but where assessee has not written back the liability in the books, Section 41(1) cannot be invoked as per these two judgments of Hon ble Apex Court even after the insertion of Explanation (1) in Section 41(1). These two judgements of Hon ble Apex Court will not be applicable where the assessee has written back the liability but where assessee has not written back the liability in the books, Section 41(1) cannot be invoked as per these two judgments of Hon ble Apex Court even after the insertion of Explanation (1) to Section 41(1) of the Act. Since in the present case, assessee has not written back the liability in question, provisions of Section 41(1) cannot be invoked and hence, we decline to interfere in the order of Ld. CIT(A) on this issue. Ground No.1(d) of the assessment year 2006-07 and ground No.1(c) for assessment year 2007-08 are rejected. 2.2.2 Since no difference in the facts could be pointed out buy the Ld. D.R., this issue is decided in favour of the assessee in the present year also by respectfully following the tribunal order in assessee s o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses. 2.4 Ground No.4 is as under: [4] On the facts and circumstances of the case and in law, the Ld. CIT(A)-I, Surat has erred in deleting the addition of ₹ 4,95,000/- made on account of unexplained creditors without appreciating the fact the assessee failed to discharge the onus cast upon it to prove the genuineness of the creditors. 2.4.1 Regarding his issue, it was agreed by both the side that similar issue was raised by the revenue in earlier two years i.e. assessment year 2006-07 and 2007-08 as per ground 1(d) and 1(c) respectively and therefore, in the present year also, this issue may be decided on similar lines. In those two years, this issue was decided by the tribunal in favour of assessee as per para 15.2 of the tribunal order of earlier two years which is reproduced below: 15.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that this is an admitted fact in both these years that in the books of the assessee, the amount in question is shown as liability and it was not written back by the assessee by way of credit to the P L account. In the light of these fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was treated as differed revenue expenditure, without appreciating the fact that the expenses incurred were for enduring benefits and can not be claimed in a single year. Further, the Ld. CIT(A) has not appreciated the fact that decision of Hon'ble ITAT is not accepted by the Department and appeal U/S.260A of the I.T. Act is filed. 2.5.1 It was submitted by the Ld. D.R. that this is new issue in the present year. He supported the assessment order whereas Ld. A.R. of the assessee supported the order of Ld. CIT(A). He further submitted that Ld. CIT(A) has followed the tribunal order in assessee s own case for the assessment year 2005-06. Relevant para of the tribunal order was reproduced by Ld. CIT(A) in his order. 2.5.2 We have considered the rival submission, perused the material on record and have gone through the orders of authorities below. We find that this issue was decided by Ld. CIT(A) by following the tribunal order in assessee s own case for the assessment year 2005-06. No difference in the facts in the present year could be pointed out by Ld. D.R. and hence, we do not find any reason to take a contrary view in the present year. By respectfully following the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are as under: On the facts and in the circumstances of the case and in law, Commissioner of Income Tax (Appeals)-1 Surat erred in :- 2.0 Upholding the disallowance of ₹ 315000 and in not appreciating that the said expenditure was incurred wholly and exclusively for the purposes of business and that these were not related to agricultural activities. 3.0 Upholding the disallowance of ₹ 1613897 without appreciating that the said expenditure was fully allowable in the year under consideration. 4.0 Upholding an addition of ₹ 1296788 by making reference to Sec.145A and in not appreciating that the figure of ₹ 33375312 since represents Excise Duty on closing stock of raw materials the same is not comparable with ₹ 34672100 which represents the closing balance of Modvat Recoverable and that in view of appellants facts / ICWA's guidance Note, Sec.145A has no impact on the profit as shown in the Profit Loss Account 5.0 Without prejudice to Ground No.4.0 above, and the fact that ₹ 1296788 addition has been confirmed by CIT(A), being contested by the appellant, not directing the Assessing Officer that the Opening Stock on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of the assessee u/s 28(iv) of the Income tax Act, 1961. In support of this contention, reliance was placed on the following decisions: (a) CIT Vs Chetan Chemicals (P) Ltd. 267 ITR 770 (Guj.) (b) Logitronics P. Ltd. Vs CIT 333 ITR 386 (Del.) (c) Iskraemeco Regent Ltd. Vs CIT 331 ITR 317 (Mad.) 3.3.2 He further submitted that even if loan was obtained by the assessee for purchase of fixed assets, waiver of this loan cannot result into reduction in the book value of the fixed assets because cost of fixed assets once determined in accordance with law, cannot undergo a change mainly because of loan borrowed for this purpose is partly waived off by the lender. In support of this contention, reliance was placed on the following three judgements: (a) CIT Vs Tata Iron and Steel co. Ltd. 231 ITR 285 (S.C.) (b) CIT Vs Cochin Co.(P) Ltd. 184 ITR 230 (Ker.) (c) Steelco Gujarat Ltd. Vs ACIT 33 SOT 437 (Ahd.) 3.3.3 He further submitted that the amount of waiver of loan, in relation to working capital loan cannot be regarded as income and in support of this contention, reliance was placed on the tribunal decision of Ahmedabad bench of the Tribunal rendered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is on loan obtained by the assessee from the lender and hence, the facts in the present case are different and, therefore this tribunal decision is not directly applicable in the present case. 3.3.5 Now, we consider the applicability of various judgements cited by the Ld. A.R. with regard to reduction of waiver of loan amount form the cost of fixed assets. The main judgment cited by the Ld. A.R. is the judgement of Hon ble apex Court rendered in the case of Tata Iron Steel Co. (supra). In that case, the issue before the Hon ble Apex Court was as to whether the gain in respect of fluctuation in the rates of foreign exchange while repaying the installments of foreign loan will reduce the actual cost of asset for the purpose of computation of depreciation and similarly whether the loss from the fluctuation in the rates of foreign exchange after excluding the payment attributable to the interest will go to increase the actual cost of depreciable asset. Under these facts, it was held by the Hon ble Apex Court that it is difficult to understand as to how, the manner of repayment of loan can effect the cost of asset acquired by the assessee. The relevant par of this judgement is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the lender can be assessed as income u/s 28(iv) or u/s 41(1) of the Income tax Act, 1961. Regarding Section 41(1), we would like to observe that only this portion of rebate allowed by the lender can be brought to tax in the year when liability ceases to exist which was earlier allowed by the A.O. as a deduction while computing taxable income of the assessee. In respect of this, no finding is given by the A.O. that any portion of waiver allowed by the lender is in respect of interest portion on such loan. He has proceeded to make the addition on this basis that the loan in question was used by the assessee for purchasing the fixed assets and on such fixed assets, assessee claimed deduction in the form of depreciation and, therefore, this waiver by the lender can be indirectly treated as trading liability and accordingly, it can be taxed u/s 41(1) of the Income tax Act, 1961.We do not find any merit in this contention of the A.O. because depreciation was allowed on the cost of the fixed asset and as per the judgment of Hon ble Apex Court rendered in the case of Tata Iron Steel Co. (supra), remission in the loan amount cannot go to reduce the value of the fixed asset for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a deduction has been granted during the course of assessment for any year in respect of loss, expenditure or trading liability which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed to be the profits and gains of business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. In the facts of the case on hand, without entering into the aspect as to whether the liability to repay the loans would be a trading liability or not, it is an admitted position that there had been no allowance or deduction in any of the preceding years and, hence, there is no question of applying the provision as such. Section 28 of the Act deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i.e. Without Moisture) basis being the correct way of comparing the figures of 2 years. c) Proceeding to enhance appellant income by ₹ 44,95,37,000 and in ignoring appellant's submission read with Statutory Auditors clarification / figures recorded in Certificate dtd.30.06.2011, making wrong observations inter-alia relating to account maintenance, back dating of records, month-wise figures and Gross Profit figures Ratios. 3.4.1 Brief facts of the case are that it is noted by Ld. CIT(A) in para 15 of his order that on going through the records of the assessee company during appellate proceedings, it was noted that there was fall in GP in the present year for which no proper explanation was furnished by the assessee. Ld. CIT(A) issued letter dated 11.03.2011 to the assessee asking the assessee to furnish year-wise yield and weight showing consumption of raw material in quantity and production of finished goods in quantity for all the three units. Assessee was also asked to furnish the number of units of electricity consumed. He also asked the assessee to indicate the GP margin for the last three years in respect of all the three units. In reply, the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the audit report, consumption is of 100135 MT and not 87218 MT as shown in the chart dated 28.06.2011 in respect of JKPM unit. In reply to this show cause notice, assessee furnished a certificate form the auditor M/s. Lodha Co. Chartered Accountants, in which they have certified that if the yield % is computed for JKPM unit on net weight basis by excluding moisture content, as per the record available and explanation made, the figures would have been 87218 ADMT. Ld. CIT(A) observed that the auditor s certificate is not reliable because it is based on the explanation given by the management and they do not mention to have fully checked the primary records. Ld. CIT(A) rejected the books of account and increased the GP percentage by 5% by adopting average GP for the last 5 years. In this manner, he made addition of ₹ 4495.37 lacs as against originally proposed by him of ₹ 139 crores. Now, the assessee is in appeal before us. 3.4.3 Regarding ground no.1 challenging jurisdiction of Ld. CIT(A), it was submitted by the Ld. A.R. that enhancement notice given by Ld. CIT(A) is not within his powers because this issue was not discussed by the A.O. and, therefore, he has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oney invested in the purchase and if on credit basis, why the books of account were not maintained and if maintained, why they were not produced. Under these facts, it was held by Hon ble Delhi High Court that this action of Ld. A.R. is of taxability of income for a new source of income and it has not been considered by the A.O. and so, the jurisdiction to decide with the same in appropriate case may be dealt with u/s147/148 of the Income tax Act, 1961 or under Section 263 of the Income tax Act, 1961 if requisite conditions are fulfilled. It was also held that in the presence of such specific provision, a similar power is not available to the 1st appellate authority. In the present case, no new source of income is being examined by Ld. CIT(A) as in that case, when he wanted to examine the source of finance for making purchases, which was never subject matter before the A.O. Hence, this judgement of Hon ble Delhi High Court is not applicable in the facts of the present case. 3.4.6 Now, we examine the judgement of Hon ble Apex Court cited by Ld. D.R. having been rendered in the case of Nirbheyram Daluram (supra). In that case, it was held by the Hon ble Apex Court that the Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n writing by the Ld. A.R. on 04.05.2012 and the same are reproduced here as under: IN RELATION TO GROUND NO.1.1 - ENHANCEMENT OF INCOME BY ₹ 44,95.37.000 ASSESSEE'S APPEAL - ITA NO.2262 / Ahd-2011 ASSESSMENT YEAR 2008-09 The ground under appeal arises from CIT(A)'s order dtd.08.07.2011 and the relevant observations / findings etc starts from Para 15 at Page 31 and ends at Page 44(Second Para). In the hearing before the Hon'ble Tribunal on 27.04.2012 assessee's counsel had made detailed submissions to substantiate for allowing relief which was objected by Ld.Sr.DR in the submissions made at the time of hearing. The submissions made by Ld.Sr.DR stands included in the written submissions (WS) filed and the Hon'ble Tribunal agreed to assessee's counsel prayer for filing a rejoinder to the points made by Ld.Sr.DR. It is in this background that this note has been made and before making further submissions the following needs to be highlighted:- 1. CIT(A)'s relevant paras which deals with this issue have been typed below in this font 2. Assessee's observations / comments / submissions have been given after each observations / fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08 77255 239325 - 316580 122240 38.61 2008-09 100135 295282 12 395429 121363 30.69 2004-05 78693 337326 653 416672 109838 26.40 2005-06 81596 320888 61 402545 123683 30.73 2006-07 60045 233365 - 293410 112803 38.45 2007-08 77255 239325 - 316580 122240 38.61 I.25 T.A.No.2262,2505/Ahd/2011 2008-09 100135 295282 12 395429 121363 30.69 [In the order, adverse view has been taken for the so called fall in yield by 7.92% i.e. from 38.61% to 30.69%. The subsequent paragraphs would show that in fact the yield in this year is better than last year and CIT(A) has ignored the facts of the case] Looking to the decline in yield of JKPM Unit, (In fact there is no decline and there is an improvement by 0.42% as would be seen in following paras) The appellant was asked to explain the reasons for decline. In response to above query, a letter dated 23.06.2011 was filed which is reproduced hereafter-Further to the discussion we had with you on last date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction and yield. The said chart is reproduced below: Asstt Year Raw Material Consumed Finished goods Paper Board production Yield Bamboo Hardwood Pulp Others Total 2004-05 Qty/MT QTY/MT Qty/MT Qty/MT Qty/MT % 78693 337326 653 416672 109838 26.40 2005-06 81596 320888 61 402545 123683 30.73 2006-07 60045 233365 - 293410 112803 38.45 2007-08 77255 239325 - 316580 122240 38.61 2008-09 100135 295282 12 395429 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the figures of its CPM unit. The respective units of the appellant company reports raw-material consumption figures to HO for the purposes of consolidation both in ADMT / Gross. As mentioned earlier the figures of CPM unit picked-up for consolidation were the ones which were on ADMT basis but through oversight / mistake while picking-up figures of JKPM unit Gross figures were picked-up instead of ADMT figures and the consolidated figure for the Company as a whole reported in the Annual Accounts (Tax Accounts for April 07 - March 08) was total of two figures which were on different basis. This clearly shows that there was a genuine mistake in picking up JKPM's Gross figures instead of ADMT figures. 2. The raw-material (Wood / Bamboo) which are received in the appellants manufacturing units has large variation in moisture ranging from 10% to 45% under the and Indian conditions the minimum moisture in such material is around 10%. Therefore, all the wood bamboo procured is tested for moisture level by drawing samples (5-7 logs from each Truck) and sent to lab for moisture analysis. In Lab the sample pieces are subject to drying in a forced circulation oven till it is complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gross Profit Ratio (C/A*100) 41.92% 39.27% 38.76% [CPM Unit figures of GP Ratio submitted to CIT(A) are 39.20% for Asstt Year 2006-07, 37.44%forAsstt Year 2007-08 and 34.67% of Asstt Year 2008-09 though are lower than JKPM GP Ratio have been accepted by CIT(A) in his Order. The CPM Unit GP Ratio figures were submitted vide Annex. F-l of letter dtd.23.06.2011 and the relevant portion is as under:- SN Particulars Assessment Year 2006-07 2007-08 2008-09 D. Gross Profit Ratio (C/A *100) Lac/Rs. Lac/Rs. Lac/Rs. 39.20% 37.44% 34.67% 6) During the course of hearing by order sheet entry dated 23.06.2011 appellant company was asked to show cause [This is the first show cause which was issued at the time of hearing on 26.3.2011.] why yield in respect of JKPM not enhanced by 8% (38.61% - 30.69%) resulting in addition of about ₹ 139 crore. The appellant company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement clearly records The month-wise consumption of raw material, production of finished goods and yield has been computed / apportioned on the basis of yearly yield . In view of this note, comparison of any yield percentage for any purpose is not warranted and in any case the actual yield gets disclosed in the annual yield which stood at 39.03% in the year under appeal as compared to 38.61% in the immediately preceding year] Along with the said letter the appellant has filed revised statement of unit wise raw material consumed, finished goods produced and yield which is reproduced below:- Asstt Year Measurement of qty of raw material Raw Material Consumed Finished goods Paper Board production Yield Bamboo Hardwood Pulp Others Total 2004-05 MT (Gross) Qty/MT QTY/MT Qty/MT Qty/MT Qty/MT % 78689 337316 653 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... + 164 +08.88 January 8017 8052 +35 +00.44 February 8259 4558 -3701 -44.81 March 7958 8952 +994 +12.49 Total for the year 100135 87218 12917 -12.90 [In view of the position explained while dealing with Point No.7(Under S.No.1.6 previous Page no further comments are being advanced on the data appearing in the last 2 columns of above chart] [Ld.Sr.DR at the time of making submissions before the Hon'ble Bench wrongly understood that the figures in the last column of the above chart represents yield or for that matter the moisture content in the rawmaterial. This is to highlight that the figures appearing in column 2 3 in the above chart represents the raw-material consumption (Month wise) which before CIT(A) was highlighted that this is on a proportionate and that the annual consumption and finished goods p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant conversation was written in the order sheet which was confirmed and signed by Shri Vinit Marwaha is reproduced below:- Telephonic conversation with Sh.Bishwajit Deb, GM, JKPM in the presence of Shri Vinit Marwaha on 29.06.11. Shri Bishwajeet Deb explained that when a truck with bamboo comes, gross weight is taken. There after 4-5 bamboos are picked up on sample basis and test is carried out to ascertain the moisture content. This test takes two days. What the result comes, the gross weight is converted to net weight on the basis of percentage of moisture content in the sample test. The payment to supplier is made on gross weight basis . [This is factually correct except that it was mentioned that the payment to suppliers is both on gross / net weight basis depending up on terms and conditions agreed with the seller] (12) After going through the various details, submissions made by the appellant vide order sheet entry dated 29.06.2011 the appellant was show caused as under:- 29.6.2011 : A comparison, of audited figures of R.M. consumption for this year and immediately preceding year indicates that the contention regarding Gross Weight and net weight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Being the previous year relevant to the Assessment Year 2007- 08) which are as under:- The particulars of raw-material consumed reported in Note No.31 of Schedule 20 of Financial Year 2007-08 is a consolidated figure of Company's two units i.e. JK Paper Mills, Rayagada and Central Pulp Mills, Songadh and the particulars so reported as under:- * Includes ₹ 496.93 Lac in pulp cost transferred to Packaging Board (Previous year -₹ 62.63 Lac) and ₹ 2557.52 Lac trial run consumption (Previous year ₹ 60.74 lac) The Bamboo consumption figures reported in Financial Year 2007-08 above totaling to 195653 Tons includes 100135 Tons of JK Paper Mills, Rayagada is on gross weight basis (Including Moisture) and incase reporting would have been on Net Weight basis (Excluding Moisture) as per the records available and explanations made the figure would have been 87218 ADMT. The Hardwood consumption figures reported in Financial Year 2007-08 above totaling to 339085 Tons includes 295282 Tons of JK Paper Mills, Rayagada is on gross weight basis (Including Moisture) and incase reporting would have been on Net Weight basis (Excluding Moisture) as per the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y correctness of the figures and the figures so reported / certified are as per the records of the appellant.] [Admittedly, the figures reported in the Annual Accounts warrants revision in several instances such as mistakes in the figure earlier reported and it is in this context that that appreciating this possibility to happen the Institute of Chartered Accountants of India have published Guidance Note on Revision of Audit Report and accordingly, the statutory auditors had given the Certificate which inter-alia clearly certifies the figures of raw-material consumption on ADMT and Gross basis. Neither CIT(A) nor Ld.DR has pointed out any mistake in the Auditors Certificate. The Institute of Chartered Accountants in their above referred Guidance Note have clearly highlighted that the Members are expected to exercise care and caution while giving revised report / certificates.] [This is to reiterate that reporting of raw-material consumption figures in the Annual Accounts has no impact on the profit declared in the Profit Loss Account and therefore, there is no justification in increasing the said profit merely on the basis of raw-material consumption figures reported in S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;A'. CIT(A) did not consider it appropriate to take this route for checking neither the offer so made has been recorded in the impugned order] (14) In view of the above, it is clear that appellant had come up with the hypothesis of Gross and net weight only to cover up the low yield. [This is incorrect since there was no low yield as has been explained above] Considering the above discussion, it is clear that when the appellant was asked to explain reasons for fall in GP in JKPM Unit, [Right from the first letter of 2.6.2011 it was submitted that in JKPM Unit the GP ratio was as high as 38.76% (CPM Unit at 34.63%) as compared to 39.29% in the immediately preceding year] the explanation was general in nature [Yes, was in general nature and what was listed are the reasons which generally lead to lower GP Ratio but in the case of JKPM Unit GP Ratio being almost same as last year there was no reason to have a look at the actual reasons] such as price of raw material has increased and increase in all direct cost. However, in spite of specific requirement to produce quantity accounts, the appellant did not produce any quantity record of consumption of raw material. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower yield in JKPM Unit was appearing on wrong comparison of 2 years figures i.e. for A.Y.2007-08 figures which were on Net basis was being compared with the A. Y.2008-09 figures which are on gross basis. Once this anomaly was noted /pointed out it is necessary to make a comparison of the correct figures rather than continuing to insist on comparison of the two years figures which are not like to like] that there was decline in yield due to the reasons stated as under:- - ' i. More moisture in the Bamboo which is one of the raw material for production of fiber through which paper of different quality are produced. ii. More bark in bamboo which has no use while making fiber for paper product, iii. Thin material which did not produce any fiber as the same has been lost during the process of cooking bleaching. iv. Higher yard which has been used first while making fiber for paper product. Since, last year material has been used first, the quality of material product reduces due to old one which has direct impact on production fiber. All the reasons given by appellant are general in nature [Not relevant since the yield is higher] and without any supporting evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g story [This observation is contrary from the facts emerging from the appellants records] has been developed by the appellant company to hide concealed yield as well as concealed income. [In view of detailed submission this finding is incorrect] Further to that, even for a while if the adjustment on account of moisture is to be claimed by the assessee, the figure given for that purpose on monthly basis in submissions dated 28th June 2011 are not in consonance with the said explanation, which has been discussed above. Also, during the course of examination of primary records pertaining to Gross weight and net weight on 04.07.2011, it is observed that the appellant does not maintain such records on real time basis and vital entries are backdated. [Stands already clarified / explained] This fatal lapse, including other defects mentioned above, cast a serious reflection on reliability of books of account maintained by the appellant in this regard. Thus, on the one hand appellant has failed to explain the reduction in yield [There is no reduction and in fact the yield was higher as explained above] and GP [This was almost the same as last year and higher than a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f hearing before the Hon'ble Bench Assessee's counsel had submitted that though there is no case for rejecting Books of Account by invoking Se.145 but Ld.CIT(A) has not been fair enough in comparing the yield for the 2 years i.e. for the year under appeal and for the immediately preceding year and then proceeding to compare the GP of year under appeal with that of the average of last 5 years GP. Adopting any such basis is bound to give different / absurd results since the average GP ratio would be substantially different if instead of 5 years 10 years are adopted. With due respect it is submitted that Ld.Sr.DR grossly erred in submitting that adopting last 5 years average is the reasonable basis since it would factor ups and downs.] [At the time of hearing it was highlighted by the Assessee's counsel that in Sec.l43(3) Order for the Asstt Year 2009-10 which was passed after the impugned CIT(A) order dtd.08.07.2011 accepts that the figures of raw-material consumption reported by the Auditors in their Certificate are correct which further goes to establish that the figures of raw-material consumption pertaining to appellants JKPM unit for the previous year relevant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate that reporting of consumption of bamboo in F.Y. 2006-07 is on net basis, but the fact is to the contrary. In F.Y. 2007-08, the gross bamboo consumption of 195653 M.T. (100135 of JKPM + 955189 CPM) is shown by the auditor on gross weight basis and not on net basis. Thus the corresponding figure of A.Y. 2006-07 also 174280 M.T. has to be necessarily of gross weight and not net weight. Further, the auditor relied on the explanation given by management that the figure of gross weight of bamboo from JKPM is 100135 M.T. and net weight is 87218 M.T. (para 2 of the auditor's certificate). The auditors do not mention to fully check the primary records themselves (para 12 page 39 of the CIT(A) order). The CIT(A) had asked the assessee on 29.06.2011 to bring all primary records if auditor's certificate is being furnished as evidence. The appellant was asked to show the primary records of gross and net weight. The appellant produced a register for August, 2007 where gross and net weight were entered. However, the record was not maintained on real time basis. For example, in respect of truck load of raw material arrived on 31.08.2007 (100 trucks), the moisture content report is of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore moisture in the bamboo which is one of the raw material. (ii) More bark in bamboo which is of no use for making paper. (iii) Thin material which did not produce any fiber is lost in the process. (iv) Higher Yard which has been used first while making fiber for paper product. Since, last year material has been used first, the quality of material product reduces due to old one which has direct impact on production fiber. The CIT(A), thereafter, stated that all the above reasons given by the appellant were general in nature and without supporting evidence including internal and external records of the appellant company. Along with the said letter 23.06.2011 the appellant has given details of raw material consumption and yield which also accepts the reduction in yield. However, it was claimed that the G.P. of unit does not vary. It was only after getting notice for making an addition by adopting the yield ratio of 38.61 % as per last year, the appellant has now come up with the story that for determining the plant efficiency the material are covered into common determinate which is called by them as ADMT and for that purpose they have claimed adjustments upto 10% in moi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led in explaining the fall in G.P. rate with supporting evidence. The legal position in respect of rejection of books of accounts and making the addition on account of low G.P. rate is supported by the following decisions of Supreme Court and Allahabad High Court- S.N. Namasivayam Chettiar [19601 38 ITR 579 (SO- In this case the Hon'ble Supreme Court stated as under: - FACTS ' The appellant-assessee was a 'resident and ordinarily resident' in India and carried on extensive trade in Colombo in grains, fodder, gram and other food-stuffs for cattle and poultry. For the assessment year 1943-44, the assessee showed a profit of 3.5 per cent. For the two previous assessment years the appellant's gross profits were 9 per cent and 8 per cent respectively. The ITO, by its order, rejected the accounts and estimated the gross profit by adding back certain amount to the returned income, which was confirmed by the AAC. On second appeal, the Tribunal after pointing out various defects, rejected the account books but accepted the appellant's turnover and computed the profits at 15 per cent on grains imported from India and 12% per cent on grains purchased in Ceylon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his finding the Tribunal accepted the turnover as shown in the appellant's books. In making the computation of profits, the Tribunal took into consideration the following matters: that the export of food grains from India was prohibited except under a licence, that there was an acute shortage of cattle fodder in Ceylon and the appellant had to resort to dubious means in order to obtain grains, the during a substantial portion of the year of accounting there was no price control in Colombo, that as the appellant was a manufacturer of forage by mixing several kinds of grains and powdering them and sold them in packets of various weights, the appellant must have made higher profits than persons who deal in grain only. Keeping all this in view the Tribunal was of the opinion that the rate of 15 per cent adopted in regard to imported grains was not too high but in the case of local purchases it was, and therefore reduced the rate of profit in the latter case to 12 per cent. It was on this material that the Tribunal adopted the figure of profits estimated by the ITO and the order to support this opinion further, the Tribunal remarked that in certain cases which had come to its notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not properly be deduced from the method of accounting employed by the assessee reasons given by the Tribunal was that the assessee was doing business in the main on wholesale basis and there, should have been no difficulty in tallying quantities in respect of major items of trading account. That certainly was a relevant consideration. In the absence of such a tally, the next reason given was that (lie fall in the margin was all the more difficult to explain in view of the fact that the assessee also had a quota of imports worth about ₹ 8,00,000 which would have given them a handsome margin of profit. That again was a relevant fact and it was well-known that imported goods fetch a very handsome margin of profit. Accordingly, there was material in support of the impugned finding of (lie Appellate Tribunal. In view of aforesaid, the instant appeal was dismissed and order of the High Court upholding the Tribunal's order was affirmed. Note: Decision was in favour of revenue. 3] Awadhesh Pratap Singh Abdul Rehman Bros. [19941 76 TAXMAN 106 (ALL.) - In this case the Hon'ble High Court stated as under:- FACTS The Assessing Officer in the instant case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income, profits or gains of an assessee. In such a situation the authorities would be justified to reject the account books under section 145(2) and to make the assessment in the manner contemplated in those provisions. Taking all these aspects and the material into consideration, the Tribunal had found as a fact that the claim of the assessee for acceptance of the account books was not sustainable. On the findings of the fact recorded by the Tribunal, its order did not give rise to any question of law. (4) Kachwala Gems [2007] 158 TAXMAN 71 (SC) - - In this case the Hon'ble Supreme Court stated as under :- FACTS The assessee was dealing in precious and semi-precious stones. The Assessing Officer noticed certain defects in books of account of the assessee, viz., that it had not maintained any quantitative details/stock register for the goods traded in by it; that there was no evidence/ document on record to verify the basis of the closing stock valuation shown by it; that GP rate declared by the assessee at 13.49 per cent during the assessment year did not match the result declared by the assessee itself in the previous assessment years; and that the gross profit decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 139 crores. In reply, various submissions were made by the assessee including furbishing auditor s certificate in respect of JKPM unit in which it was certified by the auditors that the quantity of raw material consumption of JKPM unit for this year was reported on gross basis whereas the same for CPM unit was reported on net basis. It was also certified by the auditors that if raw material consumption figure of JKPM unit is considered on net basis, the same should be only 87218 ADMT as against originally reported as 100135 Ton on gross weight basis (including moisture). It was submitted by the assessee before Ld. CIT(A) on the basis of this auditors certificate that if the yield percentage is worked out for JKPM unit on the basis of quantity of consumption of raw material on net weight basis, the yield works out to 39.29%, which is better than the preceding year s yield of JKPM unit as well as current year s yield of CPM unit. This submission of the assessee along with auditors certificate was brushed aside by Ld. CIT(A) merely on this basis that this explanation is an after thought and cannot be accepted. Regarding auditors certificate, it was stated by Ld. CIT(A) that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w material of JKPM unit on gross basis in the present year whereas, the consumption quantity of CPM unit for the present year was reported on ADMT basis and consumption quantity of both the units for the preceding year was reported on ADMT basis and because of this mistake, the yield percentage of this year in respect of JKPM unit is lesser as compared to the preceding year of the same unit and as compared to the CPM unit for the present year. From the chart of year-wise yield percentage of both the units, we find that the same was around 30% and below that in assessment year 2004-05 and 2005-06, which increased to around 37-38% in assessment year 2006-07, 2007-08 2008-09. It is explained by the assessee before us that up to assessment year 2005-06, yield percentage was reported based on raw material consumption quantity on gross basis and from assessment year 2006-07, the yield percentage is based on raw material consumption quantity on net basis. It is also important to note that Ld. CIT(A) had rejected the books of account on this basis alone that the assessee did not maintain the quantitative record on real time basis and vital entries are back dated. If the books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in yield percentage of JKPM unit is not found reflected in fall of GP percentage in the present year of JKPM unit and CPM unit. In JKPM unit there is allegation of fall in yield percentage of around 8% but the fall in GP percentage is only marginal around 0.51% whereas for CPM unit, where there is no allegation of fall in the yield percentage, fall in GP percentage is of 2.77%. These figures of fall in GP and explanation of the assessee regarding fall in yield percentage of JKPM unit appears to be valid and reasonable since, it is supported by the auditor s certificate and no defect could be pointed out by Ld. CIT(A) or by Ld. D.R. in the auditors certificate except this that this auditors certificate is on the basis of explanation of the management and not on the basis of records. We have seen that this allegation is not correct that auditor s certificate is simply on the basis of assessee s explanation because the auditors have stated this also that it is as per records. Hence, the allegation of Ld. CIT(A) regarding fall in yield percentage cannot be accepted and it has to be held that this fall in yield percentage of JKPM unit was properly explained by the assessee duly suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by him on page 43 of his order that ultimately lower yield goes to reduce GP and suppress the real income but this is not coming out from the figure of alleged fall in yield of JKPM unit and fall in GP percentage of this unit and CPM unit. We have seen that the allegation regarding fall in yield percentage of JKPM unit is this that the fall in yield percentage is of around 8% but the fall in GP of this unit in the present year is only 0.51% whereas, in respect of CPM unit, there is no allegation regarding any fall in the percentage of yield in the present year but there is fall in GP rate of this unit of around 2.77%. Therefore, it is seen that this basis adopted by Ld. CIT(A) is also incorrect that the fall in yield percentage goes to reduce GP and, therefore, addition is to be made on the basis of fall in GP percentage in the present year as compared to average GP of the last five years. 3.5.3 As per above discussion, we have noted that rejection of book results by Ld. CIT(A) is not justified in the facts and circumstances of the present case but still even if it is held that profit is to be estimated, no addition is called for in respect of GP because the fall in GP perce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpleted by the A.O. u/s 143(3) and no deduction was allowed by the A.O. in respect of increase in opening stock of that year to the extent of addition made by Ld. CIT(A) in the present year. Although this cannot be a basis to delete the addition in the present year and we are deleting the same for other reasons as discussed above but this factor also supports our view. 3.5.5 Now, we consider various contentions raised by the Ld. D.R. in his written submission reproduced above. From the written submission of the Ld. D.R. we find that he has mainly put stress on the finding of Ld. CIT(A) on various aspects and we have already discussed in above paras that the findings of Ld. CIT(A) are not sustainable. In para 3 of para 1.12 of the written submission, it was submitted by the Ld. D.R. that as per the month-wise chart of raw material consumption on gross weight basis and net weight basis submitted by the assessee before Ld. CIT(A) and reproduced by him on page 36 of his order, the difference in gross weight and net weight in different months is ranging between (+)12.49% to (-) 44.81% and this could not be properly explained by the assessee. It was the submission of the Ld. D.R. that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore Ld. CIT(A) in respect of Augusts 2007 and no defect could be pointed out by Ld. CIT(A) in the auditor s certificate and in the register for August 2007 except the objections that auditors certificate is not on the basis of actual examination of records but only on the basis of submissions of the management of the assessee and register for August 2007 was not maintained on real time basis. These objections of Ld. CIT(A) were not found to be acceptable in the above paras of our order. Therefore, the rejection of books of account by Ld. CIT(A) itself was not found to be sustainable. 3.5.7 Now, we examine the applicability of various judgements cited by Ld. D.R. in the facts of the present case. - The 1st judgment cited is the judgement of Hon ble Apex Court rendered in the case of S N Namasivayam Chettiar Vs CIT as reported in 38 ITR 879 (S.C.). In that case, clear finding was given by the tribunal that correct profit could not be deduced from the books produced by the assessee whereas in the present case, we have seen that there is no other allegation regarding not maintaining of proper books except that there is fall in yield of JKPM unit and even this fall in this unit is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of JKPM unit itself was not existing because the fall in yield is satisfactorily explained by the assessee along with independent evidence in the form of auditors certificate in which no valid defect could be pointed out by Ld. CIT(A) or by Ld. D.R. and the same was also supported by the register for the month of august 2007 in which also no acceptable defect could be pointed out by Ld. CIT(A) or by Ld. D.R. Ld. CIT(A) himself was also not sure about fall in yield in JKPM unit after various submissions were made by the assessee because even after issuing show cause notice for making addition of ₹ 139 crores only on the basis of fall in yield of this unit i.e. JKPM unit, he has proceeded to make addition of ₹ 44.95 crores only on the basis of fall in GP percentage of the present year as compared to average GP of last five years by observing that fall in yield ultimately resulted into fall in GP. But this allegation is not supported by the facts of the present case because even after alleging of 8% fall in the yield of JKPM unit, fall in GP of this unit as compared to last year GP of this unit is only marginal to the extent of 0.51% and hence, the allegation of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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