ACIT, SANGRUR vs. M/S AGGARSAIN FIBRES LTD., SAMANA

आदेश/Order

PER N.K. SAINI, VICE PRESIDENT This is an appeal by the Department against the order dt. 07/04/2016 of the Ld. CIT(A), Patiala.

Over a period of time, a number of new units have come into production especially in this belt and competition has been increased a lot putting pressure on our margins and to remain in market we have to offer competitive rates. Moreover, we are maintaining proper stock records and all our sales and purchases have been duly recorded in our account books.

Yield of Cotton Yarn and cotton waste is dependent upon the quality of cotton and yarn produced. We are engaged in the manufacturing of cotton yarn varying from 20c to 36c. Higher count is the fine variety of cotton yarn and fine count leads to lesser production recovery of cotton yarn and corresponding higher production of cotton waste and dust and higher consumption of electricity.

6. The A.O. observed that the assessee had not furnished any supporting evidence for its contention that the increase in cotton waste and increase in invisible loss due to dust etc. was on account of inferior quality of cotton purchased or due to higher production of superior cotton yarn. The A.O. asked the assessee to furnish information regarding sale of cotton and cotton waste for the earlier two years and as well as for one subsequent years. He also asked to produce daily production register for the year under consideration. However no such information was furnished by the assessee. The A.O. also observed that the cotton and cotton waste had been sold by the assessee on very lower rates, few instances were brought to the notice of the assessee which were as under:

Sr. no Bill no Date Party to whom sold Amount/item Reasons 1 495 24/03/2011 M/s Amarjeet & Co, 990835/- The vehicle number on Bhuchu Mandi /sale of your sale bills is cotton mentioned as PCI- 9737. On enquiry, it is learnt that there is no truck with the number PCI-9737 and this number is of Bajaj Chetak Scooter. 2 504 24/03/2011 M/s Bhubneshwari Oil 9,99,996/- The vehicle number on & Cotton Mills, Kacha /sale of cotton your sale bills is Paha Road, Sunam mentioned as PB 11 N- 6018. On enquiry, it is learnt that there is no truck with the number PB-11N-6018 and this number is of Scooter. 3 468 15/03/2011 M/s BR Spintex Pvt. Ltd, 46446/- / sale The vehicle number on Patiala Road, Samana of cotton your sale bills is waste mentioned as PB 11M- 1130. On enquiry, it is learnt that there is no truck with the number PB

11M-1130 and this number is of motor car. 4 476 20/03/2011 Sh. Pankaj Deep, Main 5764/- / sale of The vehicle number on road, Samana cotton waste your sale bills is (mitti) mentioned as PB 13Q 4467. On enquiry, it is learnt that there is no truck with the number PB 13Q- 4467 and this number is of hero Honda motorcycle.

6.1 The A.O. also issued notice under section 131(1) of the Act to S/Sh. Pankaj Deep, Main Road, Samana, Mandeep Singh S/o Kartar Singh, Village Bamna, Tehsil Samana and Satish Kumar, Cheekaj Road, Pehowa to whom sale of cotton waste was shown nearly @ 50 paisa per kg.

6.2 In response only one Shri Pankaj Deep attended whose statement was recorded which revealed that he had not actually undertaken any financial transaction with the assessee therefore the genuineness of the transaction of purchase of cotton waste from the assessee could not be established for the following reasons: a. He had not produced any books of account. b. He had not produced copies of sale/purchase bills of cotton waste (mitti) c. He had not taken delivery of the cotton waste from your concern. d. He had not engaged any truck for transportation of cotton waste (mitti) from your concern. e. He had not visited your concern to inspect the quality before the purchase. f. He did not know about the person to whom the cotton waste (mitti) allegedly purchased from your concern was sold. g. He had no documentary evidence regarding receipt and payment of the amount of consideration of the cotton waste (mitti). h. He had not disclosed income allegedly earned from the sale of cotton waste (mitti) in his income tax returns although he was filing his income tax returns. i. He had only mentioned that the cotton waste (mitti) was purchased from your concern only during the year under consideration and neither before the said year nor after this year, the said Sh. Pankaj Deep had made any transaction with your concern or with any other concern on any occasion. j. Sh. Pankaj Deep in fact was employed with M/s SSS Fibres, Bhawanigarh Road, Samana as an accountant and he could not prove genuineness of undertaking any trading activity of cotton waste (mitti). k. In one bill number 476 dated 20/03/2011 for Rs.5764/- issued by your concern in the name of the said Sh. Pankaj Deep vide which cotton waste (mitti) weighing 7210 kg has been sold at the rate of paisa 75 per kg, the truck number mentioned is PB 13Q 4467. The enquiries made from the DTO, Sangrur revealed that there is no truck with the number PB 13Q 4467 and in fact PB 13Q 4467 is the number of Hero Honda motorcycle lOOcc, Model 2005 in the name of Sh. Sukhbir Singh S/o Sh. Amarjit Singh.

6.3 The A.O. observed that the details of sale of cotton furnished by the assessee revealed that the sale was shown in the month of March to M/s Aggarwal Textiles, New Grain Market, Sunam and M/s Amarjit & Co. Buchho Mandi, but those concerns did not exist at the given addresses and that the huge loss had been incurred by the assessee because the large quantity of cotton at very lower rate had been shown to be sold to the aforesaid concerns in the month of March. The A.O. mentioned that the following facts emerged in assessee’s case: i. There is a sharp decline in the GP rate for which there is no plausible explanation offered. ii. There is a sharp decrease in the yield of cotton yarn and sharp increase in cotton waste and invisible loss of cotton for which there is no satisfactory explanation. iii. Genuineness of sale of cotton has not been established in respect of which your company has claimed to have incurred losses. iv. Genuineness of sale of cotton waste is not established, the sale of which has been shown at unbelievable ridiculous low rates. v. The sale of cotton at loss and the sale of cotton waste at whopping low price has been undertaken only to deflate the profits of the company as the sales are non-genuine. vi. The increase in production of cotton waste and the increase in invisible loss has been done just to reduce the gross profits of the company. vii. Sharp decline has been shown in production of cotton yarn for which no explanation has been furnished to account for the same.

6.4 On the basis of the aforesaid facts the A.O. was of the view that the books of accounts of the assessee for the year under consideration were not reliable. He therefore asked the assessee to explain as to why the books of accounts for the year under consideration may not be rejected by invoking the provisions Section 145(3) of the Act. He also asked the assessee to explain as to why the Gross Profit Rate (G.P.) may not be applied @ 22% i.e. the average G.P rate of the last two years as against declared GP rate of 12.10% on the gross sale.

6.5 In response the assessee furnished the following written submissions:

1. (Reply to Point no. 2-6, 11,12) Fall in G.P Rate - You have observed that in spite of increase in sales the G.P. rate has shown downward trend.

The comparative chart for last three years is given below:

Particulars 31.03.2011 31.03.2010 31.03.2009 Raw Material Purchase Cotton Purchase (Rs. In Lacs) 3819.00 1564.68 1723.17 Cotton Purchase (Kgs) 3327702.30 2281777.29 2974296.80 Average Rate (Rs. / Kg.) 114.76 68.57 57.94 Sales Cotton Yarn Sale (Rs. In lacs) 4113.93 2572.02 2113.10 Cotton Yarn Sale (Kgs.) 2530865.28 2271030.48 2070611.82 Average Rate (Rs. / Kg.) 162.55 113.25 102.05 Contribution per Kg. Rs. 47.79 Rs. 44.68 Rs. 44.11 From the perusal of the aforesaid figures it may be observed that the rates of cotton and cotton yarn have nearly doubled, thereby increasing the value of sales whereas the production volumes have only marginally increased. The prices of cotton and cotton yarn are market driven but the processing charges for converting/manufacturing cotton yarn from cotton do not vary that much rather they remain constant or sometimes we have to reduce margins to remain competitive in the market. The Contribution has marginally gone up from Rs.44.68 per kg in 2009-10 to Rs.47.79 per kg.

In our industry if the price of cotton varies it results in similar variation in the price of cotton yarn but the variation has marginal or no effect on the other manufacturing expenses and our profit margins which remain constant or show marginal change. The effect on Gross Profit rate on account of variation in purchase of cotton prices has been explained hereinabove.

Since the prices of cotton and cotton yarn have increased without increasing the profit margins which are market driven, thus effecting the gross profit ratio adversely. Although there was little change in the amount of gross profit but the ratio was badly hit resulting in fall of about 10%. Had there been fall in cotton prices and yarn the G.P. Ratio should have improved. Keeping in view the aforesaid submission you are requested to consider the fall in G.P. rate in order. 2. (Reply to Point.no.7) It has been pointed out that cotton and cotton waste was sold at very lower rates and some of the enquiries made by your office pointed out certain discrepancies which lead you to believe that these transactions are not genuine. We have to submit as under :- a. M/s Amarjeet & Co., Bucho Mandi, is a genuine dealer copy of account duly certified by him is enclosed for your perusal. Since the freight on cotton and cotton waste is paid by the buyer it is possible that vehicle number is inadvertently mentioned wrongly. The Copy of account shows that the sales have been duly entered in their books. (Annexure I) b. M/s Bhubneshwari oil & cotton Mills, Sunam – The vehicle number mentioned in this case is PN-11N-6018. This vehicle number is also advertently mentioned the correct registration number is PB-11AN-6018. A certificate from M/s Janta Road Carrier, Ghagga Road, Samana is enclosed confirming the vehicle number and also that they have sent the vehicle for carrying the goods to Sunam.( Annexure-II) c. M/s BR Spintax Pvt. Ltd. Samana is an existing party located at Patiala Road, Samana. The amount of bill stated in your observation is Rs.46,446.00 whereas the correct amount is Rs.46,846.00 and the same is being reflected in the copy of account of M/s BR Spintex Pvt. Ltd. enclosed for your reference. The Vehicle number PB-11M-1130 is correct. A certificate from the Kissan Mini Truck Operators Union, Samana. Confirming the Vehicle Number and that it is running with the Truck Union is enclosed. (Annexure-III & IV) d. Sh. Pankaj Deep- This is a genuine trader based at Samana. It is possible that some digit Alphabet has been wrongly mentioned in the sale bill otherwise it is a genuine sale and the party has appeared and given a statement before you.

It is further submitted that freight on yarn is paid by us and on cotton / cotton waste is paid by the buyer.

There are about 600 plus Sale bills and discrepancy has been observed by your office only in four bills. Out of the four we have explained the correct position in two bills. Thus the discrepancy remains in two bills only. There can be Clerical mistake in noting down the vehicle number, Sales are genuine and as such no adverse inference be drawn from clerical mistakes.

3. (Reply to Point no.8 & 9) Sh. Pankaj Deep, who had purchased a cotton waste from our company was called in your office and his statement was recorded. As per your observation the genuiness of the transaction of purchase by Sh. Pankaj Deep could not be established on account of the reasons stated in your notice. You have observed in point 8 (i) that Sh. Pankaj Deep had purchased cotton waste from our concern only during the year under consideration and neither before the said year nor after this year, the said Sh. Pankaj Deep had made any transaction with your concern or with any other concern on any occasion. It clearly shows that transaction during the year under consideration was actually undertaken and the genuineness of the same should not be doubted. If there was no transaction with the party in earlier years or subsequent years that does not imply that the sales transaction entered into during the year are not genuine. If he has failed to produce books of accounts and other relevant record or not shows any profit/ loss that does not conclude that we have not made any sales to Sh. Pankaj Deep. Moreover the principal of natural justice were not followed as we were not allowed to cross examine Sh. Pankaj Deep. 4. (Reply to Point no. 10) Sale of cotton in the month of march to M/s Aggarwal Textile, New Grain Market, Sunam and M/s Amarjit & Co., Bhucho Mandi have been shown at very low rates resulting in huge loss. It is submitted that both the parties are genuine, copy of account duly confirmed by M/s Amarjit & co. are enclosed for your perusal. It appears that M/s Aggarwal textile, Sunam has shifted his business to some other place and we are not able to locate his new address. The company had purchased cotton from M/s Aggarwal Textiles, Sunam during 2009-2010. The amount was paid by account payee cheques. Copies of purchase bills are enclosed (Annexure-V) to prove the genuineness of M/s Aggarwal Textile, Sunam. In case the party existed and entered into sales / purchase transactions with the company for the last two years, its genuineness should not be doubted. The sales / purchase entered into with M/s Aggarwal Textile, Sunam may be verified from sales tax returns of the concern. Copy of mismatch report from sales tax department for 2009-10 is enclosed (Annexure-VI) to prove that the firm was genuine and existed during the relevant year. The business scenario in India particularly in punjab have resulted in closure of many businesses due to losses and indebtedness. The owner may have shifted the place without disclosing his whereabouts, to anyone during the subsequent period. It is submitted that department should not take any adverse view if it is unable to find the whereabouts of M/s Aggarwal Textile, Sunam. The sales were made to these two parties at the prevailing market price applicable to that quality of cotton, which was discolored and exposed to water. The parties are genuine and existed during the relevant period. Cotton was water effected due to fire and subsequently of water by fire brigade. 5. (Reply to Point no.11) The yield in our Industry varies from 65% to 85%. In extraordinary cases it may go up to 90% depending on the quality of cotton yarn produced. The quality of Cotton yarn varies from 10 count to 100 count but we generally manufacture cotton yarn of 20 count to 40 count which gives an yield varying between 70% to 85%. During the relevant year the yield is on lower side which may be attributed to quality of cotton yarn produced at that time which also results in achieving better sale prices. There are about 25 Spinning Mills in and around Samana and enquiries from them can reveal the yield percentage and their average selling price during the relevant year.

Keeping in view the aforesaid submission you are requested not to reject our books of account and draw any adverse inference in respect of fall in G.P. ratio or fall in yield."

6.6 The A.O. after considering the submission of the assessee observed that the submission of the assessee were not acceptable being devoid of strength due to the following reasons:

5. The assessee has not furnished any plausible explanation regarding the increase in cotton waste which is 30.13% as compared to 13.34% for the immediate preceding year.

11. The assessee has not furnished any reasons for non-production of daily production register and the details of the sale of cotton and cotton waste etc for the earlier two years and one subsequent year.

13. The assessee's contention of inferior quality of cotton as the reason for decline in the yield is non-tenable on the facts and circumstances of the case. Firstly, the assessee has not produced production register to substantiate its claim. Secondly if the average rate of purchase of cotton by the assessee in last three years is taken into consideration, the plea of the assessee is contradictory. The average rate per kg of cotton was Rs.57.94/- during the A.Y. 2009-10 and was Rs.68.57/- during A.Y. 2010-11 and Rs.114.76/- during the A.Y. under consideration i.e 2011-12 which means the average purchase rate of cotton has increased by 100% vis-a-vis A.Y. 2009-10. This clearly indicates that there is nothing to do with the quality of the cotton. Further, the assessee has been purchasing the same cotton from the same sources and once there was sharp decline in yield from 86.11% to 73% i.e whopping 13.11% drop in yield, why it kept on buying same quality of cotton from the same sources where as other manufacturers in the business had yields in excess of 85%. A prudent businessman shall never purchase inferior quality of cotton on the rates which are comparable for the best quality of cotton in the market during the period under consideration.

14. The assessee's explanation regarding the truck Nos. are after thought. The truck no. was clearly mentioned in the bills and the assessee has not adduced any corroboratory evidence in the form of gate register or otherwise. Further, the assessee's explanation regarding M/s Aggarwal Textiles, M/s Amarjeet & Co., Bhuchu Mandi and M/s Bhubneshwari Oil & Cotton Mills is highly erroneous as the Inspector of this office made enquiries at the addresses given by the assessee. The persons available on these addresses have categorically stated that no such concern have ever operated from these premises and they have never heard of any such concerns in the vicinity which belies the plea of the assessee that they may have left the premises. Similarly, the statement oLS^Pankaj Deep was recorded. He could not adduce even a single documentary evidence of having ever purchased cotton waste from the assessee. The assessee has offered no explanation regarding the vehicle No. PB-13Q-4467 mentioned in bill issued by the assessee to Sh. Pankaj Deep which has been confirmed by the DTO, Sangrur as Hero Honda motorcycle. The assessee's plea on letter head of Kissan Mini Truck Operator Union does not have any documentary evidence such as RC to prove that PB-11M-1130 is a truck. Further, Sh. Mandeep Singh S/o Kartar Singh whom the assessee has claimed to have sold cotton waste failed to appear in response to the notice u/s 131. Similarly, the assessee failed to furnish the complete address of Sh. Satish Kumar as on the incomplete address furnished by the assessee, the notice u/s 131 remained unserved.

6.7 On the basis of the aforesaid discussion the A.O. observed as under: i. There is a sharp decline in the GP rate for which there is no plausible explanation offered. ii. There is a sharp decrease in the yield of cotton yarn and sharp increase in cotton waste and invisible loss of cotton for which there is no satisfactory explanation. iii. Genuineness of sale of cotton has not been established in respect of which assessee company has claimed to have incurred losses. iv. Genuineness of sale of cotton waste is not established, the sale of which has been shown at unbelievable ridiculous low rates. v. The sale of cotton at loss and the sale of cotton waste at whopping low price has been undertaken only to deflate the profits of the company as the sales are non-genuine. vi. The increase in production of cotton waste and the increase in invisible loss has been done just to reduce the gross profits of the company. vii. Sharp decline has been shown in production of cotton yarn for which no explanation has been furnished to account for the same.

6.8 The A.O. observed that during the year under consideration there had been constant and continuous increase in price of raw material and of finished goods and that the assessee being manufacturing unit, there had always been time gap between purchase of raw material and sale of finished goods therefore in the ever increasing market condition, the assessee reaped a good harvest. The A.O. held that the books of accounts of the assessee were not correct and hence not reliable to compute business income therefrom. He therefore rejected the books of accounts by invoking the provisions of Section 145(3) of the Act. The reliance was placed on the following case laws:

• CIT Vs. British Paints India Ltd. (1991) 188 ITR 44 (SC) • Dondiram Dalichand Vs. CIT(1971) 81 ITR 609 (Bom) • Bharat Milk Products Vs. CIT (1981) 128 ITR 682 (AD) • Punjab Trading Co. Ltd. Vs. CIT • Howrah Trading Co. (P) Ltd. Vs. CIT (1968) 67 ITR 582 (Cal.) • Orissa Fisheries Development Corporation Ltd. Vs. CIT (1978) 111 ITR 923 (Ori) • S.N. Namasivayam Chettiar Vs. CIT [1960] 38 ITR 579 (SC) • Bharat Mills Products Vs. CIT (1981) 128 ITR 682 (All) • CIT Vs. McMillan & Co. (1958) 33 ITR 182 (SC) • CIT Vs. K.Y. Pilliah and Sons [1967] 63 ITR 411 (SC) • Jhandu Mal Tara Chand Rice Mills Vs. CIT [1969] 73 ITR 192 (P&H) • R.B. Bansilal Abirchand Spinning and Weaving Mills Vs. CIT [1970] 75 ITR 260 (Bom) • Bharat Mil Products Vs. CIT 81 ITR 609 (Bom) • Steelworth Ltd. Vs. CIT 69 ITR 36 (Gau) • B.N. Maheshwari Vs. CIT 210 ITR 438 (Bom)

6.9 The A.O. observed that the nature of raw material consumed and furnished goods manufactured by the assessee for the year under consideration were the same as was in the last year and that the GP rate declared by the assessee for the A.Y. 2010-11 at 20.3% on the total sale of 26.38 crores and 23.40% on the total sale of 21.64 crores for the A.Y. 2009-10. However during the year under consideration the GP rate was merely 12.10% on the total sale of 44.56 crores. The A.O. worked out the average GP rate of the aforesaid three years which claim the 18.62%. He therefore considered it fair and reasonable to apply the GP rate of 18% on the total sale of Rs. 44.56 crores which worked out to 8,02,16,732/- as against the declared GP by the assessee at Rs. 5,44,64,422/-. Accordingly the addition of Rs. 2,57,52,310/- (Rs. 8,02,16,732/- - Rs. 5,44,64,422/-) was made in the hands of the assessee.

7. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under:

"REJECTION OF BOOKS OF ACCOUNTS The learned Assessing officer has rejected the books of Accounts of the company which were duly audited by Chartered Accountant under the company law. Every sales transaction is fully vouched and verifiable. The reasons given for the rejection of books are given hereunder in summarized form alongwith our explanation: 1. There is a sharp decline in the CP. rate for which there is no plausible explanation: A comparative chart showing the G.P. rate for the current year and two last preceding years is given hereunder:

Asstt.Year 2011-12 2010-11 2009-10 1) Sales Value 445,648,511.00 263,800,428.00 216,427,881.00 2) G.P. Rate 12.10% 20.37% 23.40% 3) N.P. Rate 0.67% 10.39% 0.78% You have observed that inspite of increase in sales the G.P. rate has shown downward trend.

One of the reasons is that the sale price of yarn and purchase price of cotton have gone up considerably without corresponding increase in margin, thus resulting in fal in G.P. Rate. In support of our contention we give below a comparative chart showing increase in sale / purchase price but only marginal increase in the margin/ contribution :-

Particulars 31.03.2011 31.03.2010 31.03.2009 Raw Material Purchase Cotton Purchase (Rs. In Lacs) 3819.00 1564.68 1723.17 Cotton Purchase (Kgs) 3327702.30 2281777.29 2974296.80 Average Rate (Rs. / Kg.) 114.76 68.57 57.94 Sales Cotton Yarn Sale (Rs. In lacs) 4113.93 2572.02 2113.10 Cotton Yarn Sale (Kgs.) 2530865.28 2271030.48 2070611.82 Average Rate (Rs. / Kg.) 162.55 113.25 102.05 Contribution per Kg. Rs. 47.79 Rs. 44.68 Rs. 44.11 From the perusal of the aforesaid figures it may be observed that the rates of cotton and cotton yarn have nearly doubled, thereby increasing the value J of sales whereas the production volumes have only marginaly increased. The prices of cotton and cotton yarn are market driven but the processing charges for converting \ manufacturing cotton yarn from cotton do not vary that much rather they remain constant or sometimes we have to reduce margins to remain competitive in the market. The Contribution has marginaly gone up from Rs.44.68 per kg in 2009-10 to Rs.47.79 per kg. In our industry if the price of cotton varies it results in similar variation in the price of cotton yarn but the variation has marginal or no effect on the other manufacturing expenses and our profit margins which remain constant or show marginal change. The effect on Gross Profit rate on account of variation in sale and purchase price has been explained hereinabove.

Since the prices of cotton and cotton yarn have increased without increasing the profit margins which are market driven, thus effecting the gross profit ratio adversely. Although there was little change in the amount of gross profit but the ratio was badly hit resulting in fal of about 10%. Had there been fal in cotton prices and yarn the G.P. Ratio should have improved. Keeping in view the aforesaid submission you are requested to consider the fal in G.P. rate in order.

From the perusal of the above it may be observed that the average sale price of cotton yarn has gone up considerably without similar increase in margins, this will result in fal in Gross profit ratio, There is only marginal increase in quantity of cotton yarn sold. The margin available i.e. the difference between the price of raw material and sale of cotton yarn have only marginaly increased as compared to the price fluctuation in raw material and cotton yarn, thus resulting in fal in G.P. rate. The Learned Assessing officer did not consider our submission as his objective was to reject the Books and apply Gross Profit rate.

It is further submitted that various High courts in the country have held that fal in G.P. rate cannot be the reason for rejecting the Books of accounts. We draw support from the folowing jugdements : > DCIT, Lucknow vs. Hanuman Sugar (Khandsari) Mils Pvt Ltd. [2013] 38 taxmann.com 53(Alahabad) > CTT- IV vs. Symphony Comfort System Ltd. [2013] 35 taxmann.com 533 (Gujarat)

There is sharp decrease in the yield of Cotton yarn and sharp Tease in cotton waste and invisible loss of cotton for which there is no satisfactory explanation. A comparative chart showing the yield of cotton yarn, cotton waste and invisible loss/shortage is given below :-

31.03.2009 31.03.2010 31.03.2011 Cotton Consumed 27,46,956.00 25,81,388.10 34,92,130.14 Yarn Produced 21,97,149.27 22,22,705.68 25,49,248.56 Cotton waste 4,02,223.21 2,96,514.60 7,68,278.51 Unrecoverable Waste 85,637.52 41,879.72 1,39,991.32 Yarn produced% 81.83% 86.78% 73.75% Cotton Waste% 14.98% 11.58% 22.23% Unrecoverable 03.19% 1.64% 4.05% Waste% No doubt there is fal in the yield of cotton yarn correspondingly resulting in increase in production of cotton waste and shortage. From the perusal of the figures given hereinabove it may be observed that the yield of finished product is not constant it has varied in the earlier years also. Any variation in production of finished product wil certainly result in variation of other outputs. This year's results show drastic fal in the yield of cotton yarn. One of the reason for the fall in yield can be attributed to the quality of input i.e. raw material. Sometimes the variation is on account of the quality of yarn produced. But in our case it appears to be mainly due to the quality of cotton procured from the market. [As per practice bulk of the cotton is purchased during the peak season and if there is any defect in it or the quality is not up to the mark will be discovered only at the time of production of yarn]. Although due precautions are taken by the persons engaged in procuring cotton for the company but sometimes mistakes do happen resulting in lower yield of yarn. There is no malafide intention to show lower yield as such no adverse inference be drawn.

3. Genuineness of sale of cotton has not been established in respect of which the assessee Company has claimed to have incurred losses :

Normaly the cotton purchased is used in the business of manufacture of yarn and may be sold if one gets higher return on the investment. In the present case the cotton was sold as it was not fit for production of good quality yam. It is submitted that there was a fire in the factory premise on 06.11.2010. (Copy of DDR Enclosed Sr.no. 1 in index) Fire tenders were called from Patiala and Sangrur for fire fighting. They used water to extinguish the fire, which in turn resulted in flooding of godown\ store where cotton was stored. Because of the water entering the stores, the cotton become unfit for manufacturing good quality fibre. Moreover, as the cotton purchased was not giving the desired result of production, it was decided to sel it. The loss on sale of cotton is lower than the loss the unit would have suffered had it gone ahead with the production of fibre from that cotton. The cotton was sold to the folowing three parties :

Sr. No. Name of Purchases Amount(Rs.) Quantity (Kg) 1. Aggarwal Textiles, Sunam 51,61,378.00 46,984 2. Amarjeet & Company, Bucho 1,11,34,198.00 1,08,884 Mandi 3. Bhuvaneshwari Oil and Cotton 68,89,415.00 65,045 Mills, Sunam Total 2,29,84,991.00 2,20,913 All the aforesaid three parties are genuine and registered with Sales Tax Department of Punjab. The Learned Assessing officer has doubted the genuinenness of Sale transactions with these parties. We had submitted the details alongwith evidence regarding the genuineness of the parties and transactions, but the same were not considered by the learned assessing officer as he assessed the facts with biased opinion. We again give herein below the facts for your kind consideration:

Sale of cotton in the month of march to M/s Aggarwal Textile, New Grain Market, Sunam and M/s Amarjit & Co., Bhucho Mandi have been shown at very low rates resulting in huge loss.

It is submitted that both the parties are genuine, copy of account duly confirmed by M/s Amarjit & co. are enclosed for your perusal (Sr.no.2 in Index). The company had purchased cotton from M/s Amarjit & Co. and these transactions are verifiable from the copy of Account enclosed. In case the party has given its Pan number and Sales tax number on its bills. The existence of these firm can be verified from the various other Government Department. Moreover the rates at which the cotton was sold to these parties were the prevailing market rates at that time for that quality of Cotton which was affected by the water ( as explained earlier). The sale of Cotton was made in the month of March as by that time the company has replenished its stock and got good price for that quality of cotton. a. It appears that M/s Aggarwal textile, Sunam has shifted his business to some other place and we are not able to locate his new address. The company had purchased cotton from M/s Aggarwal Textiles, Sunam during 2009-2010. The amount was paid by account payee cheques. Copies of purchase bils are enclosed to prove the genuiness of M/s Aggarwal Textile, Sunam. In case the party existed and entered into sales / purchase transactions with the company for the last two years, its genuiness should not be doubted. The sales / purchase entered into with M/s Aggarwal Textile, Sunam may be verified from sales tax returns of the concern. Copy of mismatch report from sales tax department for 2009-10 is enclosed (Sr.no. 3 in index) to prove that the firm was genuine and existed during the relevant year. The business scenario in India particularly in punjab have resulted in closure of many businesses due to losses and indebtedness. The owner may have shifted the place without disclosing his whereabouts, to anyone during the subsequent period. It is submitted that department should not take any adverse view if it is unable to find the whereabouts of M/s Aggarwal Textile, Sunam. b. M/s Amarjeet & Co., Bucho Mandi, is a genuine dealer copy of account duly certified by him is enclosed for your perusal. Since the freight on cotton and cotton waste is paid by the buyer it is possible that vehicle number is inadvertently mentioned wrongly. The Copy of account shows that the sales have been duly entered in their books. c. M/s Bhubneshwari oil & cotton Mils, Sunam - The vehicle number mentioned in this case is PN- 11N-6018. This vehicle number is also advertently mentioned the correct registration number is PB-11AN- 6018. A certificate from M/s Janta Road Carrier, Ghagga Road, Samana is enclosed confirming the vehicle number and also that they have sent the vehicle for carrying the goods to sunam. (Sr.no.4 in Index)

4. Genuiness of sale of cotton waste is not established the sale of which has been shown at unbelievable ridiculous low rates :

The company is in the business for the last many years. The main product is the yarn and the profitability of the unit depends on the rate of yarn only.

Cotton waste is only a bye-product and sale realization from it forms only a fraction of the total sales. The Learned Assessing Officer has stressed in his order that the sale of cotton waste has been shown at unbelievable ridiculous low price, but nowhere has he mentioned the average market rate on which it should have been sold. In the absence of any comparative market price quoted by the Learned Assessing Officer. No cognizance ' should be taken of the general remark.

All the Cotton waste produced by the unit is not the same in quality, it has got different grades. The good grade waste gets good market price and the poor quality waste gets much lower rate and sometimes one has to pay from pocket to get such waste removed. The good quality waste is used by smal units engaged in manufacturing low quality yarn whereas the poor quality waste is used by the Brick Klin owners etc. for burning. Thus a product used in mil as raw material and other used as fuel cannot have the same sale value. The company has sold cotton waste weighing 4,31,640 Kgs for Rs. 1,12,70,912/- giving an average price of 26.11. The price varies from Rs.60.50 per kg (Mil grade) to Rs.0.58 per kg (Burning grade).

The Learned Assessing Officer has pointed out the three parties to whom burning grade cotton waste was sold are not genuine. The details are discussed as under:

"It has been pointed out that cotton and cotton waste was sold at very lower rates and some of the enquiries made by your office pointed out certain discrepancies which lead you to believe that these transactions are not genuine. We have to submit as under:- d. M/s BR Spintax Pvt. Ltd. Samana is an existing party located at Patiala Road, Samana. The amount of bil stated in your observation is Rs.46,446.00 whereas the correct amount is Rs.46,846.00 and the same is being reflected in the copy of account of M/s BR Spintex Pvt. Ltd. enclosed for your reference. The Vehicle number PB-11M-1130 is correct. A certificate from the Kissan Mini Truck Operators Union, Samana. Confirming the Vehicle Number and that it is running with the Truck Union is enclosed. (Sr.no. 5 in index) e. Sh. Pankaj Deep- This is a genuine trader based at Samana. It is possible that some digit/Alphabet has been wrongly mentioned in the sale bil otherwise it is a genuine sale and the party has appeared and given a statement before you.

It is further submitted that freight on yarn is paid by us and on cotton / cotton waste is paid by the buyer. There are about 600 plus Sale bils and discrepancy has been observed by your office only in four bills. Out of the four we have explained the correct position in two bills. / Thus the discrepancy remains in two bills only. There can be Clerical mistake in noting down the vehicle number, Sales are genuine and as such no adverse inference be drawn from clerical mistakes." The statement of Sh. Pankaj Deep was taken behind our back and we were not alowed to cross examine him. As such no adverse inference should be drawn from the statement. We draw support from the folowing cases. • (2008) ITR Taxmann 440ACIT vs. Geetanjali Education Society • (2008) 174 Taxmann 206 Late Laxman Bhai S. Pate/ Vs CTT • (1981) 127ITR 816 (P&H) CTT Vs. Shaom Lai It may not be out of place to mention here that burning grade cotton waste was sold to Cheeka Solvent (P) Ltd. for Rs. 0.70 per Kg.

The company has not claimed any specific losses against sale of Cotton waste, as there can not be any direct losses. The Cotton waste is a bye-product and any sale realization wil help in reducing the cost of input.

From the perusal of the aforesaid submissions it may be observed that the Learned Assessing Officer has decided the case with biased mind. The submissions made in response to his observations were either ignored or wrong inference was drawn from the same to support his view of rejecting the Books of Accounts. In his order he has time and again stressed that the sales are not genuine. The a/legation is not supported by any evidence only some clerical mistakes have been blown out of proportion to justify his view. Instead of working out the profits suppressed he has decided the easy way out to reject the Books of account and apply average G.P. Rate. No justification has been given for applying the G.P. Rate. No reference has been given to the average G.P. Rate in the industry. Even the Case of CTT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC) is not applicable in our case. That case related to the system of accounting regularly employed. It was observed by the apex court that there was no estoppels in taxation matters and the officer was not bound by the methods followed in the earlier years. In our case, there is no change in method of accounting. We draw your attention, to the decision in the case of "CTT Vs. Dhiraj R.Rungta [2013] 40 taxmann.com 224 (Gujarat). "Where Assessees books of accounts were rejected being defective in nature, same set of books could not be relied upon to make additions to assessees taxable income." In our case, the Learned Assessing Officer has observed that there is suppression of sales and then G.P. rate has been applied on the same sales value taking it to be correct. We also bring to your notice the decision in the case of CTT Vs. Dass's Friends Builders Private Ltd. [2013] 38 Taxmann.com 358 (Alahabad).

"Specific defects are required to be pointed out in assessment proceedings for invoking provisions under section 145(3)."In our case the fal in G.P. rate was on account of lower yield of finished cotton yarn. No other major defect have been pointed out in the books of accounts to show any link between the alleged sales suppression to lower yield. As such there is no valid ground to reject the books of accounts.

We also draw support from the following cases decided by Other High courts in the country : • G V.D.I & Co. Vs. DOT, Spl. range Coimbatore (2014) 43 Taxmann.com 246 (Madras) • CTT Vs. Carpet Palace (2014) taxmann. com 340 (Allahabad) • CIT, Varanasi Vs. Jananamandal Ltd. (2013) 31 Taxmann.com 51 (Alahabad)

In his order, the Learned Assessing Officer has observed that test checking was done to justify his alegation of suppressed sales. It may be brought to your notice that the submission made by us in that regard was not considered. The number of entries selected does not commensurate with the volume of business of the Company. As such no adverse inference should be drawn. The Learned Assessing officer has also quoted the yield shown by M/s Chahal Spintex Limited, bathinda. The working results, of the company-have not been provided as such as we cannot comment on this observatior We are not aware that whether the working of that company is comparable with us or not. Keeping in view the submissions you are requested to set aside the order rejecting the Books of Accounts and application of G.P. rate which is arbitrary and on very high side and without any basis."

8. The Ld. CIT(A) after considering the submissions of the assessee observed that the assessee had maintained duly audited books of accounts and Complete quantitative & qualitative information with respect to raw material, cotton yarn and waste etc. He further observed that the assessee is a unit covered under Central Excise Act and it was obligatory to maintain quantitative records of raw material, production of principal product and by product / residual product and there were no adverse findings of Excise Department in regard to those records.

8.1 The Ld. CIT(A) further observed that the assessee had fully disclosed the yield of goods produced in duly audited books of account and furnished relevant documents including news paper cutting to establish that there was a fire in the premises of the assessee in which damage to goods (raw material, finished products etc.) stood established and there was no denial of the fact that fire in the factory had resulted in damage to the quality of finished goods and by products because of higher moisture contents due to use of water to control fire and raw material becoming unfit to produce yarn. Thus, the distress sale at lower rate could not be ruled out. The Ld. CIT(A) observed that due to fire incident increase in visible waste vis-à-vis invisible cotton wastage was also probable. He pointed out that the A.O. quoted the case of M/s Chahal Spintex Ltd. Bhatinda which had shown yield of 85.31% against 73% in the assessee’s case. However the details of the said concern were not brought to the assessee for a suitable rebuttal and that there may be several distinguishing factors impacting the production results such as quality of raw material, efficiency of plant and machinery and quality of manpower etc. He also observed that there were number of similar units located in and around Samana where the assessee’s unit was located, therefore, no valid comparison could be made with a unit located outside.

8.2 The Ld. CIT(A) pointed out that the A.O. failed to single out unaccounted transactions made by the assessee to doubt increase in wastage. He also observed that the A.O. had doubted the transportation and the rates at which sales were made by the assessee which were explained and clarified by the assessee.

8.3 The Ld. CIT(A) also observed that the A.O. did not offer any comments on multiple usage of cotton waste i.e, good quality waste used by small units and low quality cotton waste used for burning by brick kilns and rates of the two could never be equal under any circumstances and that the A.O. completely overlooked the impact of fire incidence. According to the Ld. CIT(A) the A.O. raised the doubts on mere assumptions and presumptions in the absence of any positive material to justify his contention which was not permissible and that the decision cited by him were misplaced as the facts of the assessee’s case were distinguishable as the necessary information were furnished, stock records were duly maintained under Central Excise Act and the A.O. did not brought on record any positive material to rebut the facts as placed on record by the assessee. The Ld. CIT(A) mentioned that the statement recorded at the back of the assessee was not confronted during the assessment proceedings and that the assessee had furnished detailed reply regarding the point raised by the A.O., reference was made to the following case laws:

• CIT Vs. Eastern Commercial Enterprises (1994) 210 ITR 103, (Cal), • Swadeshi Cotton Mills Co. ltd. Vs. Union of India (1981) 51 Comp Cas 210, 255 (SC) = AIR 1981 SC 818 • Maneka Gandhi Vs. Union of India, AIR 1978 SC 597 8.4 The Ld. CIT(A) further observed that the assessee furnished justification with reasoning for fall in GP rate which was due to fire at the Factory therefore the current results could not have been compared with those of the earlier years and also with those of the other unit. According to him the A.O. failed to put forth any material to prove that there was falsification of accounts or there was under invoicing of sales and that the minor defects did not turn genuine transactions into ingenuine one. He was of the view that the A.O. failed to discharge his onus to prove the unreliability of books of accounts and that the turnover of the assessee had increased substantially in comparison to the preceding two years and the rising in price of yarn in comparison to increase in the price of raw material was less, thus fall in GP rate was a natural fall out.

8.5 Ld. CIT(A) also observed that the A.O. had not pointed out any specific defect with supportive evidence in the audited books of accounts and had not given any findings with the proof relating to the assessee’s cost of raw material or cost of processing or that it had made sales of finished product outside the books of account and suppressed the sales. Therefore, the addition made by the A.O. on account of low GP rate was deleted by observing that the audited books of accounts maintained by the assessee had been wrongly rejected. The reliance was placed on the judgment of the Hon'ble High Court in the case of CIT Vs. Om Overseas(2009) 315 ITR 185 (P&H).

• CIT Vs. Jas Jack Elegance Exports (2010) 324 ITR 95 (Del) • CIT Vs. Faridabad Entertainment Pvt. Ltd. 336 ITR 129(P&H) • CIT Vs. R.K. Rice Mills (2009) 319 ITR 173 (P&H) 12. The Ld. Counsel for the assessee stated that the Ld. CIT(A) rightly deleted the arbitrary additions made by the A.O.

i. There is a sharp decline in the GP rate for which there is no plausible explanation offered. ii. There is a sharp decrease in the yield of cotton yarn and sharp increase in cotton waste and invisible loss of cotton for which there is no satisfactory explanation. iii. Genuineness of sale of cotton has not been established in respect of which assessee company has claimed to have incurred losses. iv. Genuineness of sale of cotton waste is not established, the sale of which has been shown at unbelievable ridiculous low rates. v. The sale of cotton at loss and the sale of cotton waste at whopping low price has been undertaken only to deflate the profits of the company as the sales are non-genuine. vi. The increase in production of cotton waste and the increase in invisible loss has been done just to reduce the gross profits of the company. vii. Sharp decline has been shown in production of cotton yarn for which no explanation has been furnished to account for the same.

13.1 In the present case, the explanation of the assessee before the A.O. for low yield of cotton was that yarn of better quality was produced which got the better sale price and that there was also increased in the purchase rate of cotton, however the A.O. pointed out that the increase in purchase price of raw material was 67% whereas the increase in the finished goods was only of 43%, therefore, the explanation of the assessee was not plausible. The A.O. after rejecting the books of accounts applied the average GP rate of the three years and made the impugned addition which was deleted by the Ld. CIT(A) by accepting this contention of the assessee that there was a fire in the premises of the assessee which caused damage to the goods i.e; raw material as well as finished products. However this plea was not taken before the A.O. during the course of assessment proceedings. It is also noticed that the Ld. CIT(A) only on this basis that the fire in the factory resulted in the damage to the quality of goods and because of fire, moisture contents due to use of water to control fire were more in the raw material which became unfit to produce yarn. On the contrary the contention of the assessee before the A.O. was that the low yield of cotton yarn was due to better quality produced. It is also noticed that the fire in the premises of the assessee took place on 06/11/2010 which is evident from the DDR No. 10 dt. 07/11/2010 registered in Police Chowki, Samana Police Station, Samana District Patiala (copy of which is placed at page no. 9 in Gurumukhi and English version is at page no. 10 & 10A of the assessee’s paper book). Therefore the reasoning given by the Ld. CIT(A) to delete the addition that the fire in the factory of the assessee was a major cause of loss, does not appears to be sound, particularly when no bifurcation has been given for the period from 01/04/2010 to 07/11/2010 which was undisturbed & smooth. It is also not clear how much stock was available with the assessee at the time of Fire due to which the raw material / finished product got damaged. In our opinion the Ld. CIT(A) without appreciating the facts in right perspective deleted the impugned addition made by the A.O. We therefore deem it appropriate to set aside this issue back to the file of the Ld. CIT(A) to adjudicate the same afresh in accordance with law after providing due and reasonable opportunity of being heard to both the parties.