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Income Tax Appellate Tribunal, ‘’C’’ BENCH, AHMEDABAD
आयकर अपील�य अ�धकरण, अहमदाबाद �यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’C’’ BENCH, AHMEDABAD BEFORE, SHRI WASEEM AHMED, ACCOUNTANT MEMBER And Ms. MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./ITA No.1517/AHD/2016 �नधा�रण वष�/Asstt. Year: 2012-13 & आयकर अपील सं./ITA No. 2451/AHD/2016 �नधा�रण वष�/Asstt. Year: 2013-14
D.C.I.T. Asian Grantio India Ltd. Cir.1(1)(1), Vs. 22-Dev Arc, Ahmedabad Opp. Iskon Temple, S.G. Highway, Ahmedabad PAN: AAFCA2340H
(Applicant) (Respondent) Revenue by : Shri O.P. Sharma, C.I.T.DR Assessee by : Shri Ankit Talsania, A.R सुनवाई क� तार�ख/Date of Hearing : 01/08/2019 घोषणा क� तार�ख /Date of Pronouncement: 23/10/2019 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeals have been filed at the instance of the Revenue against the separate orders of the Learned Commissioner of Income Tax (Appeals)-1, Ahmedabad [Ld.CIT(A) in short], dated 30/03/2016 & 22/07/2016 arising in the matter of assessment order passed under s. 143(3) of
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the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated 30/03/2016 & 23/03/2016 relevant to Assessment Year (A.Y.s) 2012-13 & 2013-14 respectively.
The Revenue has raised following grounds of appeal. a) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.6,15,723/- made on account of disallowance under section 14A r.w.r. 8D and adjustment of same to the Book Profit u/s.115JB of the Act. b) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.14,06,42,330/- made on account of suppression of production/sale of tiles by rejecting books of account.
The 1st issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 6,15,723/- under the provisions of section 14A read with rule 8D under normal computation of income and MAT computation of income under section 115JB of the Act.
The facts in brief as culled out from the order of the authorities below are that the assessee in the present case is a limited company and engaged in the business of manufacturing and trading of vitrified tiles, wall tiles, ceramic tiles and agglomerated marble stones, trading of Agro products and chemical products.
The AO during the assessment proceedings observed that the assessing has made huge investments in shares which will give rise to the exempted income under section 10(34) of the Act. Accordingly, he was of the view that the assessee is liable to make the disallowance of the expenses under the provisions of section 14A read with rule 8D of Income Tax Rule.
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4.1 On question by the AO, the assessee claimed that it has not generated any exempt income in the year under consideration. Therefore, there cannot be any disallowance of expenses under the provisions of section 14A read with rule 8D of Income Tax Rule.
4.2 However, the AO being dissatisfied with the contention of the assessee computed the amount of disallowance as per rule 8D of Income Tax Rule as detailed below: i. direct expenditure NIL ii. interest expenditure 540723 iii. administrative expenditure 75000 total 615723
4.3 Accordingly, the AO disallowed the sum of Rs. 6,15,723/- under the provisions of section 14A read with rule 8D of income tax rule under the normal computation of income as well as under MAT computation of income.
Aggrieved assessee preferred an appeal to the learned CIT (A).
The assessee before the learned CIT (A) submitted that there was no exempt income earned by it in the year under consideration. Therefore there cannot be any disallowance of any expenses warranted under the provisions of section 14A read with rule 8D.
5.1 The learned CIT (A) after considering the submission of the assessee deleted the addition made by the AO under normal as well as MAT computation of income.
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Being aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us.
The learned DR before us vehemently supported the order of the AO whereas the learned AR for the assessee before us submitted that there cannot be disallowance of any expense under section 14A of the Act as there is no exempt income in view of the Gujarat High Court decision in the case of Corrtech Energy Pvt. Ltd. [223 Taxman 130 (Guj.)]. The ld. AR supported the order of the ld. CIT-A.
We have heard the rival contentions of both the parties and perused the materials available on record.
7.1 The assessee, a public limited company in the instant case has invested in the share of the other company. Accordingly, the AO was of the view that the assessee is required to make the disallowance of the expenses against the exempt income from the investment under section 10(34) of the Act. Accordingly, the AO invoked the provisions of section 14A r.w. rule 8D of Income Tax Rule and made the disallowance of Rs. 6,15,723/- only. However, the learned CIT (A) deleted the addition made by the AO.
7.2 Now the issue arises before us for the adjudication whether the disallowances made under section 14A r.w rule 8D can be made in absence of exempted income earned during the year under consideration. At this juncture, we find important to refer the provisions of section 14A of the Act which reads as under: “Expenditure incurred in relation to income not includible in total income85.
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86 14A. 87[(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred88 by the assessee in relation to88 income which does not form part of the total income88 under this Act.] 87[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed89, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.”
7.3 The above provision requires to makes the disallowance of the expenses in relation to the income which does not form part of the total income under this Act. The term used under section 14A of the Act “amount of expenditure incurred in relation to such income” implies that the expenditure cannot exceed the amount of exempted income.
7.4 In holding so we draw support and guidance from the judgment of Hon’ble Delhi High Court in the case of joint investments private Ltd vs. CIT reported in 372 ITR 694 wherein it was held as under: “By no stretch of imagination can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.” 7.5 We also note that in the identical facts and circumstances the Hon’ble jurisdictional High Court has decided that the amount of disallowance of the expenditure cannot exceed the amount of exempted income in the case of CIT vs. Vision Finstock Stock Ltd in tax appeal No. 486 of 2017 vide order dated 31 July 2017. The relevant extract of the order is reproduced below:
"1. The Revenue has challenged the judgement of the Income Tax Appellate Tribunal dated 07.07.2016 raising following questions for our consideration:
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"A. Whether on the facts and circumstances of the case and in low, the YTAT was justified in restricting the disallowance made of Rs. l,02,82,049/- u/s. 14A to the extent of exempt income of Rs. 55,6047- only? B. Whether on the facts and circumstances of the case and in law, the ITAT was justified in restricting the disallowance of Rs. 1,02,82,049/- made u/s. 14A of the Act to the extent of income earned of Rs. 55,6047- without appreciating that the assessee had paid interest of Rs.1,45,52,6327- on borrowed funds?" 2. From the record it emerges that, during the period relevant to the assessment year 2008-09, the assessee had earned exempt income of Rs.55,604/-. As against that, the Assessing Officer had worked out the disallowance of expenditure under section 14A of the Act read with Rule 8D to Rs. 1,02,82,049/-. The Tribunal, while restricting the disallowance to Rs. 55,604/-, relied on the decision of Delhi High Court in case of Joint Investments (P) Ltd vs. CIT reported in 372 ITR 694 holding that disallowance of expenditure in terms of section 14A read with Rule 8D cannot exceed the exempt income itself. Our High Court has also adopted the similar view in case of Commissioner of Income Tax vs. Corrtech Energy Pvt Ltd. reported in 372 ITR 97. 3. Tax appeal is, therefore, dismissed.
7.6 We also note that the Hon’ble Apex court has also confirmed the principles laid down by the Hon’ble High Court as discussed above in the case of CIT vs. State Bank of Patiala reported in 99 taxmann.com 286 by dismissing the Special Leave petition.
In view of the above, we hold that the disallowance of the expenses under section 14A read with rule 8D cannot be made in absence of exempt income. Hence we do not find any reason to interfere in the order of the learned CIT (A).
7.7 Regarding the disallowance under MAT, we note that the AO in the instant case has made the disallowance u/s 14A r.w.r. 8D of the Income Tax Rules for Rs. 6,15,723/- while determining the income under normal computation of income. Further, the AO while determining the income under Minimum Alternate Tax (MAT) as per the provisions of section 115JB of the Act, has also added the disallowance made under the normal computation of Page 6 of 36
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Income under section 14A r.w.r. 8D of Income Tax Rule for Rs. 6,15,723/- in pursuance to the clause (f) of explanation 1 to section 115JB of the Act.
7.8 However, we note that in the recent judgment of Special Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the net profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below: “In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962.”
7.9 The ratio laid down by the Hon’ble Tribunal is squarely applicable to the facts of the case on hand. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act.
7.10 However, it is also pertinent to note that the disallowance needs to be made with respect to the exempted income in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw support from the judgment of Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance regarding the exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:-
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“We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act.” 7.11 Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra).
7.12 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we note that there is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. However, we find that there are judgments on the issue which mandates that the disallowance of the expenses cannot exceed the exempt income i.e. CIT Vs. Vision Finstock Ltd. of Hon’ble Gujarat High Court in 486 of 2017 or only those investments should only be considered for the purpose of the disallowance which have resulted the dividend income. However, we are also conscious to the fact that the above judgments were rendered in connection with the income determined under normal computation of income but to our mind the same principles can also be applied to the case on hand. It is because, the provisions of section 115JB of the Act require to make the disallowance of the expenditure related to any income to which section 10 applies other than section 10(38) of the Act. Accordingly, we hold that the expenses incurred in connection with the exempted income cannot exceed the amount of such exempted income under
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the provisions of section 115JB of the Act. Accordingly, we limit the disallowance of the expenses to the extent of exempt income which is NIL in the case on hand. Thus no disallowance of the expense is warranted under section 115BJB of the Act. Hence the ground of appeal of the Revenue is dismissed.
The 2nd issue raised by the Revenue is that the learned CIT (A) erred in 8. deleting the addition made by the AO for Rs. 14,06,42,330/- on account of suppression of production/sales after rejecting the books of accounts under section 145(3) of the Act.
The assessee in the year under consideration has produced different types of tiles and marbles besides the trading in these items. The tax auditor of the assessee in its report in form 3CD has reported the details of the items in which the assessee has traded during the year. Such trading items include tiles, marbles, Agro products, chemical products, raw materials, spares and the scraps. The quantity wise details such as opening stock, purchases, sales and the closing stock were furnished in the annexure K attached to form 3 CD of tax audit report.
9.1 Similarly, the tax auditor of the assessee has reported the quantitative details of raw materials consumed in the production of tiles and the marbles along with the scraps in the annexure L attached to form 3 CD of tax audit report. As per this annexure the assessee has consumed 239 types of raw materials measuring the quantity of 33,01,13,859 kgs besides the other raw materials of 1,37,63,781 kgs aggregating to 34,38,77, 640 kgs to produce the tiles and the marbles.
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9.2 The tax auditor of the assessee has further reported the details of the finished goods produced i.e. tiles, marbles during the year in the annexure M attached to form 3 CD of tax audit report. As per this annexure, the assessee has produced the Tiles of 1,25,19,851 square meters and Marbles of 5,99,953 square meters out of the total consumption of raw materials aggregating to 34,38,77,640 kgs.
However, the AO during the assessment proceedings, on comparison with the other companies available in the public domain, observed that the assessee has shown less production of tiles out of the material consumption shown in the books of accounts. Accordingly, the AO issued show cause notice to the assessee dated 12-3-2015 seeking the clarification from the assessee. The contents of the show cause notice are set out here in below: From the Annexure-M to Form NO.3CD, it is noticed that you have total production excluding marble at 12519851 Sq.Mrt. It is further noticed from Annexure-1 to Form No.3CD that you have shown consumption of raw material weighing 343877640 Kg. The information available in the public domain shows that for production of 1.92 Sq.Mtr. of tiles requires 45 to 48 Kg. of raw material. Applying the said thumb-rule ratio and considering the fact that you have shown consumption of raw material weighing 34877640 Kg. the correct production during the year would Consumption of raw material Ratio of 343877640 production Ratio of production 1.92 Sq.Mtr. per 47 Kg. By applying thumb-rule the quantity of 343877640/47 X 1.92 14047767 production during the year Less: Production shown 12519851 Suppression of sales [14047767 – 12519851] 1527916 By applying average price of Rs.470/- per sq. 1527916 X 470 718120718 mtr. shown in valuing the closing stock, the suppressed value out to From the above working it can be seen that you have suppressed the production by 152716 Sq.Mtr. the value thereof works out to Rs.718120718/- [1527916 X 470]. You are therefore, required to explain as to why the book resulted declared by you should not be rejected u/s.145 of the Act and income should not be estimated.
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The assessee in response to such show cause notice vide letter dated 17-03-2015 expounded the details of annexure L demonstrating the items consumed in the production of the tiles, the marbles and the scrap. In such details, the descriptions of 1028 items were furnished which were utilized for the production of the tiles and the marbles. The items mentioned in the list (first part beginning from serial No. 1 to 938) aggregating to 30,31,18,075 kgs were utilized for the production of the tiles. Similarly, the items mentioned in the 2nd part of the list beginning from serial No. 1 to 90 aggregating to 3,75,37,319.77 kgs were utilized for the production of the marbles. The assessee at the same time also claimed that it has generated scrap of 32,22,245 kgs in the production of tiles.
11.1 Accordingly, the assessee in the revised detailed annexure L dated 17- 03-2015 claimed that it has consumed raw material of 30,31,18,075 kgs in the production of tiles of 1,25,19,851 square meters including the scrap generated for 32,22,245 kgs and there was the output of 5,99,953 square meters marbles against the consumption of raw material of the 3,75,37,319.77 kgs without generating any scrap.
11.2 The assessee during the assessment proceedings further revised the annexure-L in response to the query raised by the AO vide order sheet entry dated 26-03-2015 vide letter dated 27-03-2015
11.3 Accordingly, the assessee in the new revised annexure-L dated 27-03- 2015 claimed that it has consumed 29,60,34,781 kgs raw materials to produce 1,25,19,851 square meters of tiles and worked out consumption & production yield ratio at 45.40 kgs material for 1.92 square meters of tiles. Similarly, the
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assessee claimed to have utilized 4,52,18,213 kgs of raw material against the production of 5,99,953 square meters of marbles.
However, the AO observed that the assessee has been changing its stands by furnishing the different details of the material consumed in the production of tiles and the Marbles. As such the assessee was increasing the consumption of the raw materials in the production of Marbles whereas it was decreasing the consumption of raw materials in the production of tiles in order to maintain the input output ratio for the production of the tiles. Thus it was clear that the assessee did not maintain the stock registers properly. Thus, the AO rejected the books of accounts of the assessee.
12.1 It was also observed that the assessee has not furnished the details of the consumption of the materials with respect to different Marbles such as composite marble and quartz marble produced by the assessee.
12.2 The AO in view of the above observed that the production of the tiles shown by the assessee was not in consonance with the production ratio of other companies available in the public domain. As per the AO the consumption of materials for the production of tiles as shown by the assessee has resulted the suppression of production.
12.3 However, the AO after taking into account all the submissions filed by the assessee as discussed above considered the quantity used in the production of tiles as furnished vide letter dated 17 March 2015 and the ratio of the production of the tiles as furnished vide letter dated 27 March 2015 i.e. 30,31,18,075 kgs. and 45.40 kgs used in the production of 1.92 square meters of tiles. Accordingly, the AO worked out the suppressed production of tiles Page 12 of 36
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and held that such production have been sold outside the books of accounts. The relevant finding of the AO is set out as under: 5.24 As discussed above, the suppression of production of tiles is worked out as under considering the submission of the assessee dated 17/03/2015 and also considering the submission of the assessee regarding the quantity in Kg. consumed for manufacturing of tiles at 45.40 Kg.
Particulars As per assessee Consumption of raw material 343877640 Less: Marble material consumed as per (-)37537319 sheet scrap (-)3222243 (New Annexure-L) Net Material Consumer for tiles 303118075 Ratio of production 1.92 sq.Mtr. Per 45.40 Kg. By applying thumb-rule the quantity of 303118076/45.40 X 1.92 12819090 production during the year Less: Production shown 12519851 Suppression of sale in Sq.Mtr. 12819090 – 12519851 299239 Suppression of sale in vlue 299239 x 470 140642330 5.25 From the above working, it can be seen that the assessee under stated the production of tiles by 299239 Sq.Mtr. the value thereof of Rs.470/- works out as above, comes to Rs.14,06,42,330/- is treated as undisclosed income of the assessee by suppressing the production of tiles weighing 299239 Sq. Mtr. and the same is added to the total income.
The aggrieved assessee preferred an appeal to the learned CIT (A).
The assessee before the learned CIT (A) submitted that the entire foundation of the addition was the arithmetical formula of production which was based on some information gathered from public domain. There was no material available to the AO during the assessment proceedings suggesting that the assessee has suppressed its production and sold in the market without recording the same in the books of accounts. The assessee in support of its contention relied on the orders as detailed below:
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i. RA Casting Pvt Ltd vs. CCE Meerut (237) ELT 674 which was confirmed by the Hon’ble Allahabad High Court and Hon’ble Supreme Court. ii. M/s Rishi Steel & Alloys Pvt Ltd vs. ACIT & others in ITA No 219 to 221/PN/2012 iii. Century Tiles Ltd vs. JCIT 51 taxmann.com 515(Ahmedabad)
13.1 Accordingly, the assessee further claimed that the entire addition made by the AO was based on his surmise, suspicion, presumption and conjecture which are not permissible under the provisions of law. The assessee also referred the land mark judgment of the Hon’ble Supreme Court in the case of Umacharan Shaw & Bros vs. CIT reported in 37 ITR 271 wherein it was held that the suspicion howsoever strong it is, but the same cannot take place of evidence. Therefore, there cannot be any adverse inference against the assessee based on such suspicion.
13.2 There was no evidence or material available with the AO suggesting that the assessee has made any sales outside the books of accounts. Therefore, in the absence of such concrete evidence, there cannot be any addition on account of suppression of production and sale of such production outside the books. The assessee in support of his contention relied on the judgments as detailed under: (a) CIT v Calcutta Discount Co. Ltd. 91 ITR 8 (SC) (b) CIT v A. Raman & Company, 67 ITR 11 (SC) (c) CIT v Shivakami Co. (P) Ltd., 159 ITR 71 (SC) (d) Karinos Weave (P.) Ltd. Vs DCIT 13 taxmann.com 241(Cochin) (e) ShoorjiVallabhdash& Co 46 ITR 144 (SC) (f) CIT v ChamanlalMangaldas& Co. 39 ITR 8 (SC) (g) CIT v Birla GawaliorLtd 89 ITR 266 (SC)
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(h) Godhra Electricity Co. Ltd. v CIT 225 ITR 746 (SC)
13.3 The assessee also claimed that the information gathered by the AO from the public domain and used against the assessee for alleging the suppression of the production and sale of such production outside the books, was not provided for the rebuttal. Thus any information used against the assessee without confronting the same cannot be the basis of drawing any adverse inference.
13.4 There cannot be any thumb rule that the assessee has to consume 45 to 48 kgs of raw materials to produce 1.92 square meter of tiles. As such, the opinion of the AO was based on the information of the website of the companies where such details of consumption of raw materials viz a viz production of tiles was displayed which was actually in relation to the packing detail of the tile boxes. In fact, the AO has never called for any internal production data from such companies.
13.5 The assessee also submitted that it has furnished the details of the raw material used in the production of tiles/marbles vide letter dated 17 March 2015 and 27th of March 2015. These details were supported with the invoices, lorry receipt, goods receipt. Moreover, the entire production was subject to the excise duty and there was also independent audit conducted by the excise department but there was no allegation for such suppression and sale of the goods outside the books. Accordingly, the assessee claimed that there cannot be rejection of its books of accounts. The assessee further claimed that even if it does not maintain the stock registers, then also its books of accounts cannot be rejected. The assessee to support its contentions referred to the following judgments:
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(a) Pundit Bros V CIT 26 ITR 159 (Punj) (b) Ashoke Refactories (P) Ltd v CIT 279 ITR 457 (Cul) 13.6 The assessee further submitted that the AO has not pointed out any material defects in its books of accounts. Therefore the AO was under the obligation to accept the results shown by the assessee in its books of accounts. The assessee in support of his contention referred the following orders: (a) CIT v Vikram Plastics & ORS reported in 239 ITR 161 (b) S. VeeriahReddiar v CIT,(1960) 38 ITR 152, 170 (ker) (c) CIT v Mcmillan& Co (1958) 33 ITR 182 SC (d) CIT v Sarangpur Cotton Mfg . Co. Ltd. (1938) 6 ITR 36 (PC)
The learned CIT (A) after considering the submission of the assessee referred to the informations about the 4 companies on the basis of which the addition was made by the AO on account of suppressed production and sale of such production outside the books of accounts. The learned CIT (A) accordingly held that such information about the 4 companies was about the packing of the tiles which cannot be used for making the addition on account of suppressed production and sale of such production outside the books.
14.1 The learned CIT (A) also observed that there was no iota of evidence such as utilization of raw materials, production capacity, consumption of electricity, labour employed, purchase of the raw materials, sale of the goods etc signifying that the assessee has suppressed the production.
14.2 The learned CIT (A) also observed that the assessee was using different kinds of raw materials in the range of more than 1000 different items in the production of tiles/marbles. Accordingly he held that there cannot be any specific arithmetical formula to determine the production of the tiles/marbles.
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In view of the above, the learned CIT (A) deleted the addition made by the AO for Rs. 14,06,42,330/- on account of such suppressed production and the consequent sales outside the books.
14.3 The learned CIT (A) also observed that the assessee has furnished the details of the consumption of raw materials vide letter dated 17 March 2015 and 27th of March 2015. The quantitative detail filed by the assessee vide letter dated 27th of March 2015 was not considered by the AO without adducing any reason thereon. As such, these details were reconciled with the quantities used in the manufacture of tiles and the marbles and the same was supported on the basis of invoices, lorry receipt and goods receipts etc.
14.4 The learned CIT (A) also observed that the assessee requested the AO in the latter dated 27th of March 2015 that if he requires, the senior vice president sales and marketing would remain present on the next date of hearing. Similarly the assessee also offered the AO to visit the factory to understand the exact production process involving different kinds of raw materials. But the AO has not considered the request of the assessee.
14.5 The AO has not disputed the total consumption of the raw materials of 343877640 kgs but rejected the information furnished by the assessee in the letter dated 27th March 2015 detailing the raw materials used in the production of the tiles/marbles on the ground that the assessee has been changing its stands about the materials consumed in the production of tiles and the marbles. As such, there was no specific reason assigned by the AO for rejecting the details furnished by the assessee.
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14.6 The learned CIT (A) similarly observed that there was no allegation by the excise department for the suppression of the production in the year under consideration. Indeed, there was an allegation by the excise department in the earlier year for the suppression of the production and accordingly a notice under section 148 was issued but the same was quashed by the Hon’ble Gujarat High Court in the special civil application No. 13933 of 2014. Accordingly, the learned CIT (A) was of the view that the production shown by the assessee for the year under consideration has been accepted by the excise department.
In view of the above, the learned CIT (A) held that the books of accounts of the assessee cannot be rejected merely on the ground that there was less yields of the tiles/marbles in comparison to the other companies. Accordingly, the learned CIT (A) directed the AO to accept the production shown by the assessee in its books of accounts.
Being aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us.
The learned DR before us supported the findings of the AO by reiterating the observations contained therein.
On the other hand, the learned AR before us submitted as under:
The ld. AO relying upon the public domain information of 4 companies was of the opinion that there is thumb rule that the production of 1.92 Sq. Mtr. Of tiles requires 45 to 48 Kg. of raw material. 2. In this connection, the Appellant vide letters dated 17/03/2015 and 27/03/2015 submitted a detailed reply and explained to the ld. AO that, (a) there is no as such thumb rule as mentioned in the show cause notice and (b) even if for a moment such mathematical formula is taken into Page 18 of 36
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consideration, then also, there is no question of suppression of production resulting into suppression of sales by placing on record (a) entire raw material stock register showing consumption of raw material in consonance with tax audit report and (pls. see pg nos.79-94 of P/B) (b) reconciliation statement of consumption of raw material alongwith invoices, lorry receipts, goods material note, gate pass etc. (pls. see pg. nos.95-254 of P/B). 3. However, the ld. AO did not appreciate the facts submitted by the Appellant and rejected books of accounts mainly on the ground that the yield shown by the appellant for production of tiles is on lower side in comparison to the consumption of raw material shown by various concerns who are into manufacturing of vitrified tiles. The ld. AO made huge addition of Rs.14,06,42,330/- on account of 4. suppression of production / sales merely on the basis of weird thumb rule (public domain information), presumption, conjecture and surmises only. 5. The ld. AO held that in order to produce 1.92 Sq. Mtr. of tiles, 45.40 Kg. of Raw Material is required and since the Appellant has consumed Net Material of 303118075 Kg., the Appellant should have produced 12819090 Sq. Mtrs. of tiles, however, since the Appellant has actually produced 12519851 Sq. Mtrs. of tiles, there was suppression of sales of 299239 Sq. Mtr. of tiles resulting into value of suppression of sales at Rs.14,06,42,330/-. Accordingly, the ld. AO arbitrarily made an addition of Rs.14,06,42,330/- on account of alleged suppression of sales to the total income of the Appellant. 6. The ld. CIT(A) has deleted the addition made by the ld. AO on the ground (a) there is not a single evidence of suppression of production / sale of goods, (b) the Assessing Officer, on the basis of catalog which provided details of packing box of tiles, had made assumption of consumption of raw material into the production of tiles, which is not rational and logical, (c) merely by applying arithmetical formula of consumption of raw material into the production of tiles, suppressed production and in turn suppressed sale of tiles cannot be determined, without bringing on record any tangible, direct and affirmative and incontrovertible evidences and (d) the assessing officer has not pointed out any defects in the accounts of the appellant and therefore the books of accounts could not have been rejected by the AO. Arguments : A. The public domain information as relied upon by the ld. AO to held that there is thumb rule of requirement of 45 to 48 Kg. of raw material to produce 1.92 Sq. Mtr. of tiles is irrelevant, irrational, illogical, unreliable, unauthenticated, absurd and without any basis 1. The ld. AO on pg. no.9 of the assessment order vide para 5.3 A.1) has referred to four companies namely (a) Exxaro Tiles, (b) Wintop Vitrified, (c) Sunheart Rediant and (d) Regent Granito to contend that consumption of 47 Kg raw material will yield 1.92 Sq. Mtr. Of tile is thumb rule for production and yield in respect of manufacturing of tiles. 2. In the entire assessment order, the ld. AO has not provided the details of such public domain information of thumb rule of consumption of raw material for manufacturing of tiles. 3. In pursuant to the request letter, the ld. AO vide his letter dated 08/03/2016 provided such public domain information, which is nothing but the product catalogue of such 4 companies, wherein, the details of packing box for tiles have been provided by them. 4. The ld. CIT(A) has made these product catalogues as Annexure – A to the appellate order. The ld. CIT(A) has reproduced the packing box details extracted by the ld. AO on pg. no.40 of the Appellate Order. Page 19 of 36
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Also see pg. nos. 303-320 of P/B – Product Catalogues of such 4 companies. On perusal of the same, it can be seen that what has been provided in so called public domain information is the product catalogue and that also 6. the packing details of tiles boxes. They have not provided any production line data / ratio of consumption of raw material for production of tiles. In fact no prudent businessman would ever provide their crucial production line data on public domain. 7. The ld. CIT(A) has rightly held that the Public Domain Information as relied upon by the ld. AO do not indicate as to what should be the consumption of raw material into the production of 1.92 sq. mtr. Of tiles but it only indicates the packing details of box of tiles, which has nothing to do with the thumb rule of consumption of raw material to the production of tiles. (Pls. see para 6.3.1 to 6.3.2 on pg. nos.39-41 of the CIT(A) order) B. No arithmetic formula can be applied to allege suppressed production / sale of tiles without brining on record any cogent, tangible and incriminating material 1. Apart from relying upon so called packing details of boxes, the ld. AO has not brought on record any cogent and incriminating material so as to establish alleged suppression of production / sales of tiles. 2. The ld. AO further failed to appreciate that every company has their own process of manufacturing. There are so many factors which are required to be considered while comparing one company with other companies. There will be different process of manufacturing, research and development units, know-how, different sizes, weight and pattern of products, different combination of numbers of raw-materials with regard to different size, weight and pattern of products, different technologies, plant & machineries. Pls. refer to pg. nos. 74-78 of P/B – details of finished goods as on 31/03/2012, which would show that the Appellant manufactures various sizes of tiles and marbles. The Appellant further submits that the ceramic and tiles industries is very dynamic and their pattern and style of tiles changes very frequently in order to remain present in the market and to provide unique products to the customers. Therefore, the Appellant fails to understand that how product catalog of company can be relied upon to contend that there is a thumb rule of requirement of 45 to 48 kgs. of raw material to have production of 1.92 Sq. Mtrs. and uniformly apply to all the products, without making comparison to their size, pattern, weight, manufacturing process, technologies, know-how etc. 3. That there are 239 types of body material and 789 types of other materials are consumed by the Appellant during the year under consideration to manufacture Tiles and Marbles. Details of the same can be found on pg. nos. 80-89 of P/B. By drawing inference to such details, the Appellant wants to submit that there is a combination of more than 1000 raw materials which are consumed for the production of Tiles and Marbles in accordance with various sizes, weight and pattern of the products. There can never be application of any arithmetical formula which can exactly determine that what could have been the actual production of tiles and marbles, based on the consumption of raw materials. Not at least on the basis of catalog which has provided details of packing box of tiles, as relied upon by the ld. AO in the present case. In any case, even if the ld AO had to compare the production of tiles and marbles with respect to the consumption of raw materials, the ld. AO ought to have made comparison of actual consumption of combination raw materials with respect to different sizes, weight and pattern of the tiles of other companies with the Appellant. Therefore, it is most respectfully submitted that the method adopted by the ld. AO is very absurd, illogical and irrational.
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The Appellant most respectfully submits that time and again demand has been raised on account suppression of production / sales / clandestine removal of goods without payment of excise duty solely relying on the consumption of electricity by the excise authorities and addition in the hands of the assessee on account thereto by the assessing officer. 5. At this juncture, the Appellant would like to draw Your Honour’s attention to the decision, of another statute i.e Excise Act, in the case of R.A. Casting Pvt. Ltd. vs. CCE, Meerut – I, 2009 (237) ELT 674, copy of which is enclosed herewith marked as Annexure – A. In the case of R.A.Casting, the clandestine removal of goods was presumed on the basis of consumption of electricity to the production of MS Ingots and demand was raised. The allegations leveled in R. A. Casting (supra) were mainly,- (a) Inordinately high electricity consumption without any explanation, (b) Sale of Ingots at a huge loss over last 4-5 years,which was economically and commercially not possible, generation of fictitious profits in the balance sheets by depositing huge amount of cash with the stock brokers and receiving (c) cheques of profits against the cash so deposited, and (d) Claim of High Auxiliary load of about 35%. 6. However, the Delhi Tribunal in R.A.Casting (supra) in categorical terms held that no demand can be raised / upheld based on electricity consumption as such because the clandestine manufacture and removal of excisable goods is to be proved by tangible, direct, affirmative and incontrovertible evidences relating to,- (a) Receipt of raw material inside the factory premises, and non-accounting thereof in the statutory records; (b) Utilization of such raw material for clandestine manufacture of finished goods; (c) Manufacture of finished goods with reference to installed capacity, consumption of electricity, labour employed and payment made to them, packing material used, records of security officers, .discrepancy in the stock of raw materials and final products; (d) Clandestine removal of goods with reference to entry of vehicle/truck in the factory premises, loading of goods therein, security gate records, transporters' documents, such as L.Rs, statements of lorry drivers, entries at different check posts, forms of the Commercial Tax Department and the receipt by the consignees; (e) Amount received from the consignees, statement of the consignees, receipts of sale proceeds by the consignor and its disposal. 7. Since, no such evidenced brought on record by the department, the appeal of R.A.Casting was allowed and held that demand raised onalleged clandestine removal of goods based on electricity consumption and without brining on record any tangible, direct and affirmative evidences. It is further most respectfully submitted that the said decision of Delhi Tribunal has been upheld by the Hon'ble High Court of Allahabad, as reported in 2011 (269) ELT 337(All.). Appeal filed by the Department against this Order was dismissed by the Apex Court in 2011 (269) ELT 1081. Copy of the said decisions is enclosed herewith marked as Annexure – B- Colly. 8.By drawing inference to this decision, the Appellant most respectfully submits that merely by applying arithmetical formula of consumption of raw material to the production of tiles, suppressed production of tiles and in turn suppressed sale of tiles cannot be determined, without bringing on record tangible, direct, affirmative and incontrovertible evidences relating to, (a) Receipt of raw material inside the factory premises, and non-accounting thereof in the statutory records; (b) Utilization of such raw material for suppressed manufacture of finished goods;
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(c) Manufacture of finished goods with reference to installed capacity, consumption of electricity, labour employed and payment made to them, packing material used, records of security officers, discrepancy in the stock of raw materials and final products; Suppressed sales of goods with reference to entry of vehicle/truck in the factory premises, loading of goods therein, security gate records, transporters' documents, such as L.Rs, statements of lorry drivers, entries at different check posts, forms of the Commercial Tax Department and the (d) receipt by the purchaser of such goods; (e) Sale proceeds of such suppressed sale of goods. 9.Reliance is further placed on the Ahmedabad bench of Tribunal in the case of Century Tiles Ltd. vs. JCIT in 51 taxmann.com 515, wherein under similar facts of the case, the Hon’ble Tribunal has held that We find that absolutely no material was brought on record by the Revenue to show that the assessee actually produced quantity more than what has been disclosed in the books of account or made any sale which was not recorded in the books of account. In the circumstances, in our considered view, variation in the amount of consumption of fuel could have been a ground for careful scrutinising of the facts of the case, but it by itself does not empower the Assessing Officer to assume some undisclosed production and thereby make addition to the result disclosed by the regularly maintained books of account. Copy of the said decision is enclosed herewith marked as Annexure – C. The appeal against the said order filed by the department before the Hon’ble Gujarat High Court has been dismissed by the High Court in Tax Appeal No.15 of 2015, copy of which is enclosed herewith marked as Annexure – D. 2. The CIT(A) has therefore rightly deleted the impugned addition. (Pls. see para 6.3.3 to 6.3.7 on pg. nos.41-44 of the CIT(A) order) C. Rejection of Books of Accounts by the ld. AO and quantitative details maintained by the Appellant. At the outsets, it is most respectfully submitted that the Department has 1. not challenged the finding of ld. CIT(A) in discarding the action of ld. AO in rejecting books of accounts of the Appellant. 2. It is most respectfully submitted that when the books of accounts of the Appellant are not challenged to be rejected u/s 145 of the Act by the department, there is no question of challenging the finding of CIT(A) in deleting the unwarranted addition made on the basis of assumption and surmises. 3. Without prejudice to above, even if it is presumed that the department has challenged the ground with regard to rejection of books of accounts in general, then also, it is most respectfully submitted that the ld. CIT(A) has righty discarded the action of ld. AO in rejecting books of accounts of the Appellant. The ld. AO was of the view that the yield shown by the assessee for production of tiles is on lower side in comparison to consumption of raw material shown by various concerns who are into manufacturing of vitrified tiles and accordingly, the Appellant vide SCN dated 12/03/2015 has been asked to explain the reason for such low yield. Further the ld. AO has relied upon unauthenticated, unreliable, illogical and irrational public domain data to contend that the yield shown by the Appellant is on lower side. Pls. refer pg. nos. 6 and 7 of the assessment order. In connection thereto, the Appellant vide letter dated 17/03/2015 categorically explained to the ld. AO that the arithmetical formula as proposed by the ld. AO in SCN is incorrect and not Page 22 of 36
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acceptable. However, without prejudice to such denial, the Appellant furnished details of consumption of raw materials to the production of tiles and marbles. However, the ld. AO vide order sheet 4. dated 26/03/2015 once again asked the Appellant to reconcile the figures and furnish details of raw materials used for production of Composite / Agglomerated / Quartz marbles and in connection thereto the Appellant vide letter dated 27/03/2015 furnished not only reconciliation but also the supporting thereto. Pls. refer pg. nos.95 to 254 of P/B. However, the ld. AO was of the view that the Appellant was changing its facts and figures every time in order to support the production of tiles shown by it and when the increased raw material consumption in production of marble is shown the production of tiles is found to be very low. In other words, for the alleged low yield of production of tiles and on the basis of unauthenticated, unreliable, illogical and irrational public domain data, the ld. AO rejected books of accounts of the Appellant. In this connection, it is most respectfully submitted that it is an admitted and undisputed fact that the Appellant has consumed total 343877640 Kgs of raw materials for the production of tiles and marbles. It is further an admitted and undisputed fact that the Appellant has maintained quantitative details of the consumption of raw materials. Even the Appellant vide letters dated 17/03/2015 and 27/03/2015 has submitted entire quantitative details of the consumption of raw materials. It is further submitted that the quantitative details of the consumption of raw materials as furnished by the Appellant vide letter dated 17/03/2015 has been accepted by the ld. AO, however, the reclassification of said data as furnished in letter dated 27/03/2015 in pursuant to the request made by the ld. AO vide order sheet entry dated 26/03/2015 has been rejected by the ld. AO. It is further important to note that the Appellant vide letter dated 27/03/2015 also furnished reconciliation statement of quantitative details as furnished in letter 5. dated 17/03/2015 with 27/03/2015 and also furnished the invoice, LRs, GRNs etc to justify the reconciliation statement. Pls. refer pg. nos. 95-254 of P/B. It is pertinent to note that the ld. AO has not even whispered about the justification furnished for reconciliation statement as furnished by the Appellant vide letter dated 27/03/2015. In fact, the Appellant vide letter dated 27/03/2015 also stated that the complete details of raw materials purchased, consumed etc. is maintained and complete details of the quantity of goods manufactured in the form of excise register is also maintained by the Appellant. It was also submitted and explained to the ld. AO that the books of accounts of the Appellant are subjected to the vigorous excise audit and for the year under consideration excise authorities have not found any discrepancies in the excise audit. It was also explained that the excise authorities have conducted their independent audit for the year under consideration and there was no such allegation made of suppression of sales and in fact the records of production / manufacture has been accepted by them. The Appellant further asked the ld. AO that if need be the Sr. Vice President, Sale & Marketing, Shri B.M.Singhal, who is technically qualified person would also remain present and would explain any technical issue which the ld. AO may require. It was also proposed by the Appellant to the ld. AO that if it was required the ld. AO can visit the factory premises to understand the exact production process and also identify the various raw materials used therein. However, the ld. AO without appreciating such facts of the case, discarded the submission furnished on 27/03/2015. The ld. AO has even not given any cogent reasons for not accepting the details as furnished by the Appellant vide letter dated 27/03/2015. The ld. AO has rejected books of accounts merely on the ground of alleged low yield of 6. production of tiles on the basis of unauthenticated, unreliable, illogical and irrational public domain data.
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The Appellant relies on following authorities, wherein the Hon’ble authorities has gone to the extent that even if the stock register is not maintained, books of accounts cannot be rejected, whereas in the present case before Your Honours, it is undisputed facts that the Appellant has maintained stock register as well as followed prescribed valuation guideline • Pandit Brothers vs. CIT 26 ITR 159 (Punj.) • Ashoke Refactories (P) Ltd. vs. CIT 279 ITR 457 (Cal.)
There is no mistake or error in the books of accounts maintained by it and therefore the same are not required to be rejected. The learned AO has not found any material defect in the books of account and the incident of so called mistake/error as recorded by the AO are not mistake or error as discussed hereinabove. It is well settled that without finding any defect in the books of account the AO is not empowered to make any changes in the book result declared by the assessee. As per the scheme of the Act, for rejecting the books of accounts it is the revenue's onus to prove that either the books of account maintained by the assessee is not correct and complete or the method of accounting adopted is such that true profits cannot be deduced therefrom. From these legal provisions what follows is that if the revenue doubts the correctness of stock declared by the assessee, then, it first of all should reject the assessee's books of accounts after specifying mandatory requirement of section 145 which can be done after pointing out 8. specific defects in the books of account. The first proviso to S. 145(1), or section 145(2), can be invoked only if and where the elements attracting either of those provisions are found to exist. A clear finding to that effect, along with the material on which such finding is based, has to be made out and given by the assessing officer. No assessment under the first proviso to S. 145(1) or under S. 145(2) can be sustained if the AO has not considered and recorded a finding against the assessee as to whether he has been regularly employing a method of accounting or whether his income, profits or gains can properly be deduced from his method of accounting if he has been regularly employing a method of accounting or whether the accounts are correct and complete, and the AO's decision on these matters is not a subjective or arbitrary decision but a judicial decision and cannot be accepted if there is no material to support his finding. Reliance is placed on CIT vs. Vikram Plastics &Ors. reported in 239 ITR 161 (Guj.).
Both the ld. DR and the AR before us relied on the order of authorities below as favorable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. The AO in the case on hand has alleged that the assessee has suppressed its production of the tiles for 2,99,239 square meters which was sold outside the books of accounts. Accordingly, the AO treated such amount of sale of Rs. 14,06,42,330/- as undisclosed income of the
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assessee and added to the total income. However, the learned CIT (A) was pleased to delete the addition made by the AO as elaborated in the preceding paragraph.
18.1 From the preceding discussion, we note that the AO has compared the production of the tiles shown by the assessee with the companies available in the public domain. Accordingly the AO held that there was suppression in the production shown by the assessee which was further sold outside the books of accounts. In this regard, we note that there was no material available with the AO evidencing that there was less production of the tiles except the input output ratio of the raw material consumed and the final outcome on the basis of the data collected from the public domain. In our considered view, the assessee cannot be alleged that it has suppressed the production merely on comparison with outside companies until and unless it is based on some concrete materials in the form of documentary evidences. In this regard we find support and guidance from the judgment of RA Casting Pvt Ltd (supra) where it was held as under:
The clandestine manufacture and removal of excisable is to be proved by tangible, direct, affirmative and incontrovertible evidences relating to (i) Receipt of raw material inside the factory premises, and non-accountal thereof in the statutory records; (ii) Utilization of such raw material for clandestine manufacture of finished goods; (iii) Manufacture of finished goods with reference to installed capacity, consumption of electricity, labour employed and payment made to them, packing material used, records of security officers, discrepancy in the stock of raw materials and final products; (iv) Clandestine removal of goods with reference to entry of vehicle/truck in the factory premises, loading of goods therein, security gate records, transporters' documents, such as L.Rs, statements of lorry drivers, entries at different check posts, forms of the Commercial Tax Department and the receipt by the consignees;
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(v) Amount received from the consignees, statement of the consignees, receipts of sale proceeds by the consignor and its disposal. In the instant case, no such evidences to the above effect have been brought on record. 18.2 We further note that the assessee is having a factory where the tiles are produced. To produce the tiles, the assessee requires raw materials, labourers, machines, electricity, finance, buyers, suppliers, registration with various authorities where the assessee declares the sales, purchases and production of the final product etc. But the AO has not pointed out any defects in the entire system of production as discussed above except a general remark that the assessee has shown more consumption in the production of marble to justify the consumption in the production of tiles, though there was no specific defect pointed out in the details furnished by the assessee for the raw materials used in the production of the tiles/marbles. Thus, in the absence of any specific defect/infirmity signifying that the assessee has suppressed production which was sold outside the books of accounts, we are of the view that the AO has made the impugned addition based on his surmise and conjecture. As such, any addition based on the surmise and conjecture is not sustainable as held by the Hon’ble Supreme Court in the case of Umacharan Shaw & Brose vs. CIT reported in 37 ITR 271. The relevant extract of the judgment is extracted below: Taking into consideration the entire circumstances of the case, we are satisfied that there was no material on which the ITO could come to the conclusion that the firm was not genuine. There were many surmises and conjectures, and the conclusion was the result of suspicion which could not take the place of proof in these matters
18.3 Similarly, there was no information available with the AO suggesting that the income generated by the assessee outside the books of accounts by suppressing the production and the sales whether it was invested or utilized by itself directly or indirectly through the involvement of the directors and other Page 26 of 36
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parties associated with the company. As such, there was no information signifying that the assessee has generated the income outside the books of accounts. Therefore in our considered view there cannot be any addition on account of the allegation made by the AO that the assessee has made sales outside the books of accounts. In this regard we find support and guidance from the judgment as detailed below along-with their relevant portion of the judgment:
(a) CIT v A. Raman & Company, 67 ITR 11 (SC)
“the inference raised by the ITO that the HUFs of the assessees had made profit by sale of articles purchased from the assessees larger than the profit which the assessees had made, was not justified, since there was no evidence on the record about the price at which similar goods were sold by the assessees to other merchants and about the profit which those other merchants made by sale of those goods.”
(b) CIT v Shivakami Co. (P) Ltd., 159 ITR 71 (SC) (capital gain) “unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for computation of capital gains. The onus is on the revenue the inference might be drawn in certain cases but to come to a conclusion that a particular higher amount was in fact received must be based on such material from which such an irresistible conclusion follows”
(c) Karinos Weave (P.) Ltd. Vs DCIT 13 taxmann.com 241(Cochin)
The finding of suppression of income can only be validated on the basis of strong circumstantial evidence/s. There was no case of any tax avoidance, as (say) on account of differential rate of tax or there being losses in one firm which could be adjusted through the transfer of profits, or the transferee concern being exigible to a lower rate of tax, etc. In fact, there was no charge of tax avoidance in any manner. The charge of tax can only be on the real, and not notional, income, i.e., what it might or ought to have been. The law in the matter, i.e., of only the real income/actual income being liable to tax, is well-settled. The actual accruing/earning of income being a matter of fact, would include inferential
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findings based on the surrounding facts and circumstances as well, it was the genuineness of the stock transfer which was being essentially questioned by the revenue.
18.4 We also note that the informations collected by the AO from the public domain and used against the assessee were never supplied to the assessee for the rebuttal which is against the principles of the natural justice. As such the information used behind the back of the assessee cannot be relied upon for making the addition in the hands of the assessee. In this regard we find support and guidance from the judgment of Hon’ble Bombay High Court in case of H.R. Mehta vs. ACIT reported in 72 taxmann.com 110 where it was as under:
Assessing Officer should have done was to grant an opportunity to the assessee to meet the case against him by providing the material sought to be used against him in arriving before passing the order of assessment. This not having been done, the denial of such opportunity goes to root of the matter and strikes at the very foundation of the assessment and, therefore, renders the orders passed by the Commissioner (Appeals) and the Tribunal vulnerable. The assessee was bound to be provided with the material used against him apart from being permitting him to cross examine the deponents whose statements were relied upon by him. Despite the request seeking an opportunity to cross examine the deponents and furnish the assessee with copies of statements and disclose material, these were denied to him. Therefore, the addition made to the income of the assessee was not justified and liable to be deleted.
18.5 On perusal of the information collected by the AO from the public domain we also note that it relates to the packing of the tiles and as such it does not deal with the production of those companies. Therefore, in our considered view such packing details cannot be compared with the production of the assessee. Moreover, the AO has never collected any information from the companies available in the public domain about their internal production process system. Thus we are of the view that, such information available in the public domain cannot be used to draw any adverse inference against the Page 28 of 36
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assessee until and unless it is supported with conclusive evidence and that too after providing the opportunity of being heard to the assessee. Moreover, we also note that the assessee is using more than thousand items as raw materials in the production of the tiles and the marbles, thus the possibility is very remote to draw any inference on the basis of comparison with the other companies. It is because the working capacity, the machines used, raw materials consumed, labour employed etc may be different to the assessee viz a viz to those companies.
18.6 The production of the assessee was subject to excise audit and there was no adverse remark signifying that the assessee has suppressed its production. Thus, in our considered view such report from the excise department supports the contention of the assessee. In case of excise unit, there is a direct control of the excise department on the movement of the purchase, consumption and closing stock of the raw materials as well as production and sales of the finished goods. The assessee under the excise law has to maintain various records including the purchases of the raw materials, issue of raw materials for the production, scrap generated in the process of the production and the final outcome of the goods produced. However, the AO has not pointed out any iota of infirmity/defects in such records.
18.7 Taking up the matter further, as per section 145 of the Act, the AO is empowered to reject the books of accounts of the assessee and make best judgment assessment in the manner as specified under section 144 of the Act if he is not inter-alia satisfied with the completeness or correctness of the books of accounts of the assessee. Generally, the instances for the rejection of books of account include when entries in respect of certain transactions are
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altogether omitted or incorrect or where the accounts show an abnormally low rate of profit or where there is an inherent lacuna in the system of accounting.
18.8 However, the AO cannot use this power as a tool to reject the books of accounts merely due to non-maintenance of the stock register, variation in gross profit and non-furnishing of certain vouchers or its explanation or non- confirmation of sundry creditors. Anyway, before rejecting the books of accounts, the AO must record the specific reason for rejecting the books of accounts. Such satisfaction has to be established and substantiated based on facts and figures, which further depends on the circumstances of each case. Mere minor mistakes/typological errors/absence of stock registers/lower GP may not ipso facto amount to incorrectness/incompleteness of accounts in terms of section 145(3) of the Act. But the case would be different where the above-mentioned mistakes are coupled with other findings.
18.9 In the given case, AO has rejected the book results of the assessee based on the finding that there was less production of tiles in comparison to the companies available in the public domain and non-maintenance of production registers properly. In the light of the above facts, the AO invoked the provisions of section 145(3) of the Act and thereby he has made certain upward additions on account of suppressed production which was sold outside the books.
18.10 In our humble understanding, the consumption ratio of raw material having bearing on the production shown by the other concern engaged in a similar activity cannot be a criterion to reject the books. It is because the consumption/production of a concern depends upon various factors such as quality of raw materials, production process/ methods, machinery used, labour Page 30 of 36
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employed, factory infrastructure, quality of output and the scrap generated etc. But the AO has not brought all these facts on record whether the assessee and the comparable entities were working under similar conditions. Therefore we disagree with the finding of the AO.
18.11 Admittedly, the assessee revised the details of the consumption of raw materials used in the production of tiles and marbles. But we note that final revised details furnished by the assessee were supported by purchase bills, goods receipt, lorry receipts, reconciliation statement, gate pass etc as placed on pages 95 to 254 of the PB. The AO did not point out any defect in the revised details of the consumption of raw materials furnished by the assessee. Therefore in our considered view, the books of accounts of the assessee cannot be rejected until and unless the AO points out the specific mistakes. A similar principle has been laid down by the Hon’ble Allahabad High Court in case of Awadhesh Pratap Singh Adbul Rehman & Bros v/s. CIT 201 ITR 404(All) which reads as; “It is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be deduced. Whether presence or absence of stock register is material or not, would depend upon the type of the business. It is true that absence of stock register or cash memos in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where a stock register, cash memos, etc., coupled with other factors like vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, it may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee. In such a situation the authorities would be justified to reject the account books under section 145(3) and to make the assessment in the manner contemplated in these provisions.” 18.12 We also note that the books of accounts cannot be rejected if the assessee does not maintain the stock registers until and unless it is coupled with other defects such as sales/ purchase outside the books of accounts. But
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in the instant case, we note that there was no such conclusive finding by the AO. We also find support and guidance from the order of ITAT Bench in the case of Haridas Parikh Vs. ITO reported in 113 TTJ 274 wherein it was held as under:
Unless the Assessing Officer is able to point out certain transactions which have been left to be entered in the books of account or that the assessee has sold some of the items at a price higher than what is disclosed in the books of account or if proper particulars, bills, vouchers are not forthcoming, etc., the books of account cannot be rejected without assigning specific reasons. In the instant case merely because different range and nature of items were being dealt with by the assessee and the maintenance of quantitative stock of each and every item was not practically possible, the books of account maintained by the assessee which were free from any defect could not be rejected merely because the average GP rate was slightly lower than the average GP rate of the earlier year. In the instant case, the sales of the assessee during the year under consideration had increased substantially from Rs. 1.24 crores to Rs. 1.54 crores which resulted in marginal decline in GP rate from 11.51 per cent to 9.94 per cent, the same could not be made reason for rejecting the book results. It is well-settled business proposition that for having increase in sales, a businessman has to sacrifice a small margin of profit rate. During the year the total sales of the assessee had increased from Rs. 1.24 crores to Rs. 1.54 crores. No defect was found in the books of account. There was no valid reason for rejection of books of account during the year under consideration and thereby applying higher GP rate of 11.51 per cent, which was earned by the assessee on low sales of Rs. 1.24 crores in the preceding year. The other reason stated by the Assessing Officer of making trading addition was that in the assessment year 2001-02, GP rate declared by the assessee at 9.64 per cent was not accepted and trading addition so made by rejecting the books of account was confirmed by the Commissioner (Appeals), therefore, by following the order of the earlier year the Assessing Officer had made an addition by rejecting the GP rate of 9.64 per cent declared during the year under consideration. The assessee placed on record the order of the Tribunal in the assessee's own case in the assessment year 2001-02 wherein addition made by the Assessing Officer by applying GP rate of 10.14 per cent was deleted by the Tribunal and the GP rate of 9.64 per cent declared by the assessee was found to be reasonable and correct. As the facts and circumstances during the year under consideration were the same, the issue was squarely covered by the order of the Tribunal in the preceding year. Respectfully following the same, the findings and conclusion of the lower authorities were to be rejected and the Assessing Officer was to be directed to delete the impugned trading addition made by him.
In view of the above, we opined that the AO cannot reject the books of accounts for the reasons as discussed above in a situation where the assessee Page 32 of 36
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does not maintain the stock register. Accordingly, we note that the reasons which were based by the AO for rejecting the books of accounts are not sufficient enough and cogent to reject the books of accounts. Accordingly, we conclude that once the books of accounts of the assessee are not liable to be rejected then its book profit should be accepted in the given facts and circumstances.
In view of the above and after considering the facts in totality, we do not find any reason to interfere in the order of the learned CIT (A). Hence, the ground of appeal of the revenue is dismissed.
In the result, the appeal of the revenue is dismissed.
Coming to the ITA No. 2451/Ahd/2016 for A.Y. 2013-14
The 1st issue raised by the Revenue is that the learned CIT (A) erred in 19. deleting the addition made by the AO for Rs. 50,00,000/- on account of suppression of production.
At the outset we note that, the identical issue has been decided by us in favour of the assessee in the ITA No 1517/Ahd/2016 vide paragraph number 18 of this order. Respectfully following the same we do not find any reason to interfere in the finding of the learned CIT (A). Hence, the ground of appeal of the Revenue is dismissed.
The 2nd issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 43,76,530/- under the provisions
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of section 14A read with rule 8D of income tax rule under normal computation of income.
At the outset we note that, the identical issue has been decided by us in favour of the assessee in the ITA No. 1517/Ahd/2017 vide paragraph number 7 of this order. Respectfully following the same we do not find any reason to interfere in the finding of the learned CIT-A. Hence, the ground of appeal of the Revenue is dismissed.
The 3rd issue raised by the Revenue is that the learned CIT (A) erred in 23. deleting the addition made by the AO for Rs. 3,85,979/- on account of depreciation on car.
The AO during the assessment proceedings observed that the assessee has claimed depreciation on car for Rs 3,85,979/- whereas the car was registered in the name of the director. Accordingly, the AO was of the view that the assessee is not eligible for the depreciation on the impugned car. Accordingly, he disallowed the same and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT (A) who has deleted the addition made by the AO.
Being aggrieved by the order of the learned CIT-A the Revenue is in appeal before us.
The learned DR and the AR before us relied on the order of the authorities below as favourable to them. Page 34 of 36
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We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion we note that the payment for the purchase of the car was made by the assessee though the same was registered in the name of the director. This fact can be verified from the assessment order as well as CIT (A) order.
27.1 Thus it is clear that, the assessee was the beneficial owner of the car and accordingly it was eligible for claiming the deduction for the depreciation on such car. In this regard we find support and guidance from the judgment of Hon’ble Supreme Court in case of PCIT vs. Cadila Health Care Ltd wherein it was held as under:
With respect to Question [H] which pertains to depreciation claimed by the Company on purchase of a Car for the Director, the case of the assessee was that the payment for purchase of vehicle was made by the Company, though the Car was registered in the name of the Director. This Court under similar circumstances in the case of CIT v. Aravali Finlease Ltd. [2012] 21 taxmann.com 147/341 ITR 282 ruled in favour of the assessee. This question is, therefore, not considered
In view of the above, we hold that the assessee is eligible for depreciation on the car purchased by it but registered in the name of the director as the assessee is the beneficial owner of such car. Hence the ground of appeal of the Revenue is dismissed.
In the result, the appeal of the Revenue is dismissed.
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In the combined results, both the appeals of the Revenue are dismissed.
Order pronounced in the Court on 23/10/2019 at Ahmedabad.
-Sd- -Sd- (Ms MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 23/10/2019 Manish
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