CIT vs. SUPERIOR CRAFTS

*IN THE HIGH COURT.OF DELHI AT NEW DELHI + tT A 547 t201 1 . 5481201 1 & 6151201 1 COMMISSIONER OF INCOME TAX ..... Appellant Through Ms. Suruchi Agganrual, Sr. Standing Counsel. VETSUS SUPERIOR CRAFTS ..... Respondent Through Mr. Sastish Khosla & Mr. Manu K. Giri, Advocates. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTIGE R.V.EASWAR ORDER { % 06.03.2012 For detailed order see ITA 24412009 titled Commissioner of Income Tax Vs. Superior Crafts decided today. IY I t" 4?_,1[ SANJIV KHANT{A, J. ltl--', R.V, EASWAR, J. ililP 06' 2012 2012:DHC:9801-DB

$-16 to'19. "H{ T[-nE Hlcl-l co[.,RT oF DEI-!-ll AT NIEW DEL[-I[ r- ITA 24412009, 547 12011, 54812011 & 61 512011 : COMMISSIONER OF INCOME TAX ..... Appellant Through Ms. Suruchi Agganrval, Sr. Standing Counsel. I VETSUS i SUPERIOR CRAFTS I ..... Respondent Through Mr. Sastish Khosla & Mr. Manu K. Giri, Advocates' GORAM: t-lo N!' ts LE tM R. ..! l.isiTI c E sANlJ lv Kl-lANl hlA !-{ONI'tsLE ruNR. .JI..'S!TIGE R.V.EASWAR OR.DER. i. % 06.03.2012 i Revenue has preferred these four appeals under section 2604 of the lncome Tax Act, 1961 (1Act, for short) in the case of I a partnership firm, Superior Crafts. I tfn No.24412009 pertains to assessment year 2OO2-03 and id directed against tlre order i dated 28th March, 2008 passed Oyl tfre' Income -l-ax Appellate ,i Tribr-rnal (tribunal, for short). As this appeal was treal.ed as a lead case by the counsel for the parties, we will first refelr to and decide this appeal. 2. In the assessment year 2OO2-03, the Assessing; ofticer had directed special audit under Section 142(2A) of tlre Act. After receiving a special audit report, the Assessing Officer l'ln Nos. 244l2}og, 54'7t?-O11, 548t2o11 &615t2o11 i Page I ot 44 v 2012:DHC:9801-DB

rejected the closing stock as declared by th"o respondent assessee and held that there *"ri under-valuation of closing stock to the extent of Rs.1,49,28,9001-. i 3. The CIT (Appeals) confirmed the said addition, but by the 'impugned order the tribunal has deleted the said addition. 4. The contention raised by the appellant Revenue is that the I decision of the tribunal is perverse.- Learned counsel for the appellant has placed reliance on three facets. Firstly, stocl< i register was not maintained or at least not.produced before the Assessing Officer. She submits that the Assessing Off icer has I recorded that the stock register was, podsibly maintained by the i assessee but deliberately not produced. Secondly, in the special i audit report, adverse remarks have Qeen recorded, but not given l; due credence by the tribunal. Lastly, it, is submitted thrat there I was a change in methocl of valuation of closing stocl<. In this i connection, she has drawn our attention to the table noted by the Assessing Officer, who has held that the closing stock was bifurcated into three catr:gories; finished goods, semi finished goods and goods under process. itnq Assessing Officer has stated that the opening stock of finished goods was villued @ g0% of the sales recorded/made, for first 20 days of the I beginning of the year i.e., 1"t April, 2OO1 to 20th April, 2001 but Pagc 2 of 44 v I 2012:DHC:9801-DB

the closing stocl< was valued @ 90% of the sales macle in the period of 15 days after end of the finanicial year from 1't April, 2OO2 to 1Sth April, 2002. Simililrly, 'Semi finished'Goods' and 'Goods under i'rocess' were valued @ 74% and 64o/o of the sale value, respectively but the period of days was 20 days and 35 days for the purpose of opening stock lut 15 days and 20 days for the purpose of closing stock. She has drawn inspiration from the findings recorded by the CIT (Appeals), who has held that there was change in the rnethod of valuation of closing stock as the assessee had computed the closing stock by applying different periods in which the sales were made viz. the opening stock. Thus, an anomaly has resulted and the consequence was understatement of closing stock. i 5. To examine the contention of the.\earned counsel for the Revenue, we have gone through the papers and material placed before us. The stand of the appellant Revenue that tlrere was a change in the method in the valuation of closing 'stocl< is false and wrong. FinOing" to this effect recorded by the CIT (Appeals) : and the Assessing Officer are incorrect. The assessee'S case, which has been accepted.by the tribunal, is that the assessee was not maintaining stocl< register on a daily basis. This fact is also mentioned in the audit reporl and stated in the repoft ITA Nos. 244t2OO9,547t2011,54812-011 & 615/2011 ' Page 3 of 44 t 2012:DHC:9801-DB

submitted by the special auditor. The allegation that stoclt register was maintained but not produced is an assunrption or surmise without any foundation. The. assessee undertakes physical stock inventory at the end of the financial year. The physical inventory is divided and consists of four categories; finished goods; semi finished goods; wprk under process; and raw material. The finished goods are valued at 90% of the sale value.i.e. the sale price received on sale made in the next year. Semi finished goods and goods under process are valued at 74o/o and 60% of the sale value. The raw material is valued at costs. The Assessing Officer has not disturbed or disputed the closing stock of raw material. The closing stock of finished, semi finished or work in process, it is not disputed was sold in the next assessment year and sale value rhras received when the export *d: made. The contentiolr of the Revenue is that opening stocl< and closing stock of finished, semi finished or worl< in process must be soldiexported within the sarne time period. For example, opening stockiof finished goods was sold within 20 days and therefore closing stock of firrished goods should lrave sold/exported within 20 days. Accordingly, entire 'exports made in 20 days should be'treated as closing stocl< of finished goods. The time period during which the finished goods, t' rrn rgG 244r2oos, s47t2o11, s4lt2ot1 &61512011 { l>age 4 of 44 2012:DHC:9801-DB

unfinished goods and goods under process etc. were sold and i exported depends upon various factcirs, like, availability of container, inspection by the importJr's agent, need and requirement of the importer, time of; shipment etc. The closing ti stock, whether finished, semi finishdd etc. nged not be I sold/exported within a fixed/specified period each year. There cannot be any such assumption and it is not logical to accept ' t' this proposition. The contention of the Auu"nr" is that opening : stock and closing stock must be sold/exported within the same period cannot be accepted. The respondent assessee has, before us, filed a chart giving year-wise details of the closing stock from the assessment year 1997-98'to 2005-06 in respect of finished goods, semi finished gqods, goods under process and raw material. The said chart indicates that the closing stocl< was exported or was sold in different time spans in each year. This chart was filed before the tribunial. There is no consistency t; or certainty in this regard and indeed there cannot be any consistency and certainty as to the period when the finished, semi finished or goods under process would be sold by way of export. The chargeiallegation of change of method of valuation of closing stock is baseless, factually incorrect and hars to be l7 rejected. ITA Nos. 24412009, 54712011, 54812011 & 61512011 Page 5 of44 2012:DHC:9801-DB

Accounting Standard 2 issuecl by the lnstitute of Clrartered 'Accountants of India. , Suppression in Closing Stock Rs.1,49,28,90 0.t. 7. As noticed above, the tribunal thas clearly and rightly held 1i that there was no change in methop of accounting for closing il stock in the earlier years. The tribunal has further held that the special auditor had rightly held that the Stock in the earlier year ll and the subsequent year was valued at a particular percentage I of sale price. With regard to the eilements and cost element included while valuing the stock, it ,will be appropriate to note that in spite of the observations of the special auditor, the Assessing Officer did not interfere/reject ihe valuation of the ' closing stock made by the assesseq @ goo/o, 74o/o and 60% of i the sale value for finished, semi hinith"O and goods under ii process. There is a good reason w{y the Assessing Officer did not disturb the said valuation. The glross profit rate, as cleclared ii by the assess'ee, was 28.92% and after the additions nrade by the Assessing Officer, it had gone ug/inci-eased substantially. In i I ITA Nos. 244t2OOg, 547t2011,5481201t A OtSlZOt t i PageT of 44 ' 2012:DHC:9801-DB

case, the closing stock is calculated py excluding the gross profit { rate, the value of the closing stock would have come, down I substantially. The observation "f the special auditor that expenses/costs have been left out *l.rit" computing closirrg stock i is factual incorrect and has no basisi. No documenUmaterial has been filed by the Revenue beforu ,rl,o justify their contention. I B. We may reproduce the findirlgs recorded by the tribunal I qn the question of closing stock in the impugned order:- lr "4.8 We have peruseQ the records and considered the rival cdnterrtions carefully- The 'dispute raised ip this ground is regarding method of ivaluation of semi finished, finished and goocls in progress appearing in the closing stock. The assessee admittedly is rjot nraintaining day- to-day account of the stfck due to practical . difficulties because of pature of business- The assessee had beejn taking periodical inventory of stocl<. Thb itdms of finished goods, semi finished gPods and goods in process appearing in theiclosing stock at the tiend of the gy"ar have peen valued on the basis of sales made iof 'finished goods relating to the items appering in the closing stock in the immediate fpllowing accounting year. From the sales m{de in the next year, the first sales made upto the quantity of finished stock were being allocated towards finished stock; the secQnd sales up to tlre quantity of semi finished stocl< were appropriated towards thQ serni finished stocl< and the rest towards I ttre goods under process. The assessQe vvas adopting el particular percentage ofithese sales as per details given in para 4 otthis order earlier for ITA Nos. 24412009, 547 1201 1, 5481201 1 & 61 5120i 1 Page 8 of 44 2012:DHC:9801-DB

determining the value oflclosing stock. The A.O. did not accept the plea of the assessee that it was not possiblelto maintain proper accounts of stock recorils. - He also noted that the assessee had taken'a shipping loan against the stock at thu margin of 25o/o, which'meant that stock a! the end of the year should be 125% of shipping loan but actually it was only B0%. 'He, therefore, rejected the method of valuation I adopted by the assessee. He adopted lthe period of sales for the purpose of stock rlaluation same as in the case of opening stock but accepted the percentage of sales I adopted by the assessee in respect of pifferent categories. This resulted into additiQn of Rs.1492B9OO|- on account of under r,1aluation. of closinE stock. In appeal, CIT(A) also noted that the assessee had not pr:oduced the stocl< inspection re;rort of theiban,k in connection with the shipping loan apd qlso did not give any reason for ensuringl ths premises at D- 13, Mundappa, although ino stock was statecl to be maintained there.i Ensured value of stock was also pointed out to be higher. He, therefore, agreed with lhe 'decision of the A.O. and confirmed the Eddition. I 4.g On careful consiberation of all the aspects of the matter,i we find that ther approach adopted and the finding given by the lower authorities in' relation to closingl stock valuation is not i correct. lt is an admitted fact that the jassessee had not been maintaining dayto;day account of the stock. The assessee has been determining the closing stock it,ems on physical verification at the end I of the year. For valuing the inventory I appearing in the closing stock, the assessee'has to follow a particular method. The assessee has either to compute the cost of each item separately or he can derive the cost. after deducting v ITA Nos. 244 12009. 547 1201 1, 5481 20 1 1 & 61 51201 1 I ' l. Page I of 44 2012:DHC:9801-DB

v Considering the volume ofi business and numerous items involved, the assessee has; been valuing the finished goods, semi finished goods and goods in progress on ther basis of sale price of these items sold in tlrer subsequent year after dgducing a particular margin, whiclr has been uniformly followecl by the assessee in th" earlier and the subsequent years. 'Forlcomputing the sale values of items of closilg stock in different categories, the assessee has been appropriating the first isales towards the finished goocls, the next sales towards the: semi finished goods andjthe balance against the goods under progress. This is a systematic and reasonable basis adopted by the assessee, which has been uniformlir followed. As the quantity of items appearingy in closing stock will vary fro'm year to year, the period of sales adopted'for valuation of closing stock in different,Vear will also differ. This has been denjonstrated by the: assessee by producing 4 chart regarding the valuation for different years qrhich show that certain margin from I the sale price. period of sales adopted for different years is different. 4.10 We find that the A.,O. has accepted ther basis of valuation of closing stock items adopted by the assessee i.e'. as a specified percentage of sales of thg closing stock items. He has rejected the inventory of closing stock and has taken the period of sales of the closing stock iteins as the same period as taken for the gale.of closing stocl< of last year in order to deterfnine the closing stock inventory and its ivalde. One of the reasons giveri for rejecting tlre closing stock is that the value of closipg stock shown was only B0% of shipping lgan whereas as per terms and conditions ofi loan it should havc+ been 125%. But there is no material ITA Nos. 24412009, 547 l2O1 1, 54Bl2O1 1 & 61 51201 1 Page 10 of44 2012:DHC:9801-DB

collected by the n.O. ito show that the closing stock was actually more than the one declared by the assessee!. Violation of terms and conditions of loan or the fact that the assessee did not p[oduce the stock inspection reporl of the bank, cannot be the ground for rejecting Ih" closing stocl< declared by the assessee. Similarly, the ensurecl value of stoc[< being higher. or insuring of some premises other than the factory ;rremises for the purpose of stock are also not conclusive factors in determining the stock on the last day;of the year. lt is an undisputed fact that there was no stock found at the insured preinises. Further, the insured value i.e. the sum insured is the maximum value the asselsee can get as per insurance rules and it h'as no relevance to availability of stock on a particular day which may vary from time to time. .No efforts have been made to obtain the stock inspection repod from the bank or to gather any other material to establish that,the closing stocl< on the last day of the accbunting period was higher than the declared value. Even if the A.O. rejects the closing inventory on the ground that no day to day stock register is maintained, he had to determine the gross profit only on estimate either'on the basis oi' assessee's own past record or on the basis of a comparable case. No comparable case has been brought on recbrd and the GP rate declared by the assebsee this year at 25.93% is substantially higher than the GP rate 19.16% accepted in ithe assessee's own case in the immediate preceding year. In view of better results, noj addition is possible on account of trading I account of which closing stock value is an intbgral part. The assessee has followed a'reasonable basis of valuation of closing stock, which has been regularly followed andl accepted by tlre department in the earliqr years and in the i.i ir dqv ITA Nos. 24412009, 547 l2O1 1, 54Bl 20 1 1 & 6 1 51201 1 Page 11 of 44 2012:DHC:9801-DB

,' subsequent year. In view of this position and the GP rate declared being higher this year compared to accepted.GP rate in the immediate preceding year, any addition on account of closing stock vhluation is not lubtitieO. We, therefore,rset :aside the order . of CIT(A) and delete the addition made by the A.O." I lr .l 9. The aforesaicl findings recorded by the triburral cannot be categorized an.d regarded as perverse. These are factual li findings based on reasoning and referring to the contentions. .l We may note here that the assessee had total ex1:orts turnover I of 25.77 crores and the closing stock ,declared by them was i Rs.B.63 crores, which is equal to 'about three months of the I turnover. The Assessing Officer did not go into the question of lead time, i.e., the time for preparation of the finished product il from the date of purchase of the raw material. lt is interesting to i note that for assessment year 2003-O4i an assessment order ,:. was passed on 31*t March,2006 dnd in the said assessment : order no addition whatsoever was made to the closing stock but i, the method adopted by the assessee fbr the said assessment i year Was Same. In these circumstances, no substantial question of law arises out of the finding recordeg OV the tribunal on the questiorr of valuation of closing stocli. i i 10. The next question relates to disallowance/addition of ITA Nos. 24412009, 54712011 , 548120'11 & 6'1 5/201 1 Page 12 of 44 v 2012:DHC:9801-DB

i Rs.25,80,8791- made by the Assessing Officer on account of travelling expenses incurred by Deven Chachra, who is related to the partners of the firm. Learned counsel for the Revenue has submitted that the order of the tribunal is perverse and merits interference in view of the findings recorcled by the Assessing Officer, which were confirmed by the C|T(Appeals). The Assessing Officer'while t"t ing thei said addition has I observed that Deven Chachra was paid salary of Rs.1,14,000/- per annum but this was not paid pursuapt to specific ernployer- employee relationship. The exact findings recorded by the Assessing Officer read:- i "...Upon the commentsias ,made in other para's and- findings given 'by the special ' auditor that the salary to,Mr.'Deven Chachra . was only an entry and not paid in pursuance to the specific ,employer-employee relationship. At this stage it will not be out o1' place to reliance on sub-papa k below, his salary is only Rs.1,'14,000/- per annum and his expenditure on the I mobile phone has been considered above of Rs.2,19,430/- and the same has been disallowed. Again no evidence has been placed on record to substantiate the visits rof Deven for the purposes of business ,of the firm. Tlre assessee is only attempting to cover up tlre personal expenditure as business without substantiation. In view of any evidence the entire expenditure of Tour & Travelling of Deven of Rs.25,80,879/-,is disallowed-" 11 The tribunal by the impugnecl order has held thart Deven i I ITA Nos. 244t2oog, 54712011, 548t2011 &615t2011 | I I, 'ii Page 13 of44 , ( 2012:DHC:9801-DB

,i. ; Chachra was an enrployee. He is h5ving degree of Bachelor of I Science and Economics, with specialization in marketing from i Pennsylvania University, Wharton Sihool of Business. He was i CEO of the firm since 1994. We may note that statement of I Deven Chachra was recorded in thq assessment year ?-003-04 I I but an ad hoc amount of Rs.5 lac's was disallowed from the I overseas travel expenses on his travel, on ground of personal I expenses. The Revenue has not cfallenged and has accepted I the finding of the tribunal that Deven Chachra was an employee I of the respondent assessee and on flre salary paid to him. But, the challenge is to the foreign travel bxpenses of Rs.25,80,879/-, on the ground that these were not ,incurred for the purpose of business. The Assessing Officer ,had disallowed the entire expenditure of Rs. 25,80,8791- The tribunal while partly deleting the disallowance held that the "10"n.", were incurred for ,i purpose of business under Section 3,7 and observed as under:- 'i "8.4 We have peruseq th'e records and carefully gone it",torgd the submissions made by both the naltie,s . The dispute raised in this gro{nd is regardingl disallowance of travelling expenses of Slrri ' Deven Chachra in l,ndia and abroacl amounting to Rs.2580579/-. The case of ther assessee is that Shri Delren Chachra was arl employee who had unQertal<en the travels for negotiation with; foreign buyers, negotiation of disputed issues ancl ITA Nos. 244t2Q09, 547 I 201 1, 548120 I 1 & 61 5 I 201 1 Page 14 o.f 44 I I % 2012:DHC:9801-DB

97 settlement of 1ates and a,pproval of samples etc. The assessee had, filed copies of e- mails to substantiate tlne claim that the expenditure lrad been I incurred for the purpose of business. ilt has also been submitted that the expenditure under this head had been allowed lin the earlier year and in the succeeding' year in scrutiny assessments, as was clear from the chart placed at page 1265 of laper Book-lX. The case of the revenue is th€t, it was not established that Shri Deven Chachra was an employee and the expenditure had been incurred for the purpose of business. The e- mails produced by th. assessee had originated from India, which can be sent from sitting in a room in rlndia and these did not contain details of business activities. We have considered th," nratter carefully. Out of total tour and travel expenses on account of Mr. Deven Chachra amounting to Rs.25B0B79l-, a sum of Rs.24938421- is on foreign travelling. lior 'claiming any expenditure as deductiop, burden is on the assessee to prove that the expenditure has been incurred wholly and exblusively for the purpose of business. i From e-mails, it cannot be established that the entire expenditure had been j incurred for the purpose of business. The only details given by the assessee at page 43 of paper book-V were the place of visit, gurchases of foreign exchange and the morley spent. Merely because the person hqd travelled abroad and the monLsy on foreign tiravel had been actually spent, cannot lestablish that the expenditure was incurred wholly and exclusively for the purpose of business. Even if the foreign travel, had been made for the purpose of businpss,,, the personal expenses or expenseq . uifrelated to the business trip cannot be Sllowed. No details were given as to how the n'loney was spent ITA Nos. Zq4tZOOg. 54712Q11, 54812011 & 615/2011 i1,. I Page 15 of44 ;J 2012:DHC:9801-DB

or whetl'ler there was ani inVitation frorn the ITA Nos. 24412009, 547 l21'l 1, 54Bl2O1 1 & 61 51201 1 buyers for discussing ar;v business matter. However, we can also not oVerlool< the fact that substantial expend,iture on tour and travel of Shri Driven Chachra have been incurred and allowed bylthel,revenue in the earlier years as well asl in {he subsequent year. ln the immediafe preceding year, expenditure on this account claimed at Rs.22O1052/- was allovrled in assessment. In the immediate sucpeeding year, the assessment for which hpd been completed after the impugned assessment, expenditure on account of tour and tr{vel bf Shri Chachra had been clerimed at fls.261 53411- and a sum of Rs.S lacs on estirhate has been disallowed under the heid 'tour and travel'. The business requireme;rt of the substantial tour and travel by $hri : Chachra has therefore, been acceptqd by the revenue authorities in the earlier iyears as well as in the sub'sequent year. lhe disallowance of entire expenditure is therefore, not justified. One of the reasons givin by the authorities below for making the digallowance of entire expenditure was that I he. was not an employee. But this aspect, We have already dealt with while dealing iruith another ground relating to disallowance bf salary in the later' part oittris order and hafe hBld in para 12.5 that salary has to be alloweU as deduction. However, the full details arfd evidence are not available to quantify. as to how much ' expenditure had been i,ncurred wholly and exclusively for the puipose of business. Expenditure on travglling may vary substantially from yeai to year as the business requirement mflV not be the same. In our view, considering ithe:'entirety of facts and circumstances including the past record, it will be appropriate to disallow on estimate 20% of the expendituie claimed as not incurred wholly and exclusively for ther Page 16 of44 2012:DHC:9801-DB

purpose of business. Wg order accordingly. The order of CIT(A) willlbe lnodified to that extent." I i I I 12. Thus, the tribunal has estimated and disallowed 2oo/o of I the foreign travel expenditure on thejground that it may not have t; bee.n incurred wholly and eiclu$ively for the purpose of i business. The said amount will be glightly more than Rs.6 lacs. i We fail to understand why and on what giround the Revernue can I claim and submit that the findings r;ecorded by the tribunal are I perverse. No substantial question lof law, therefore, arises on 1,, the said aspect. I f I 13. The third issue raised in thef present appeal relates to i deletion of addition of Rs. 1,14,60,9p61 made by the Assessing I't- Officer under.the heading "margil of profit on sale of raw I I material on cost price to sister concQrns..r' I 14. Learned counsel for the Revdnue again submits that the factually findings recorded by the tribunal incorrect. I,are oerverse and l I ' 15. In the assessment order the Assessing Officer noticed that l: raw material purchased by the asse,sse,S was transferred to two I sister concerns, namely, SuperiorlCratts India and Supreme I Exports India. The raw material wds transferred on cost basis. ITA Nos. 244 l2OO9, 547 I 2O1 1, 548 | 20 1 1 & 61 5l2O 1 1 Page 1'l of 44 2012:DHC:9801-DB

l{ I I The Assessing Officer held that thel respondent assess;ee had :v shown gross profit rate o1' 2832% and, l:herefore, an addition of I Rs.1 ,14,60,996/- should be made I on the ground that the I assessee should have earned profit and charged cost price plus ' profit margin of 28.92% from the bister concerns when they v transferred/sold the raw material. The Assessing Officer pondent assessee that to rejected the contention of the res L secure competitive and lower rates, they had purchased raw I I material in bulk and sometimes the said raw material was sold to i the sister concerns on cost price. lt rivas further submitted by the I assessee that quota allocation and, e41ort orders, sotnetimes I necessitated and required transferi of 'raw material to sister i concerns. Sale made was viabl", ,.5"onable and did not violate I I| ,: law of the land. The aforesaid conte,lntions were rejected on the ground that these avern'lents werq general in nature without documentary evidence. The CIT (Appeals) had affirmed this addition. 16. The tribunal has, recording as under: however. deleted t,. ITA Nos. 24412009, 54712011, 54812011 & 615/201 1 ; "i I "14.6 On careful consideration of all the aspects of the issue, we find the stand of the assess6e and the arguments advanced by the ld counsel quite copvincing. The raw material/semi processed goods had been the addition, inter alia, Page 1B of44 1t liii 2012:DHC:9801-DB

transferred to the sister concerns en commercial expediency ps quota had been received in their names. I Had the assessee not transferred the good$ to sister concerns, the goods could not be exported for want of quota and the assessee would have incurred loss and therefore, commerqial expediency is involved in the transfei at,l.ower price. As all the concerns belorlged' to the same group, which are fun byla family, it is quite prudent to make commofl purchases in bulk to save cost and later transfer the goods. The ld DR has pointed out tlrat the assessee had its own quota which 1ruas sold during the year. But the assesseej has explained that quota related to some i other category of goods and there is nothipg to controvert this claim. The only issue is that goods have been transferred at costi price or at a price much below the market pricq but there is no provision in tfre Act as rightly pointed out by the ld counsel to make pny addition on this ground. There are prgvisions in Section 40A(2) as per which in cpse the expenditure incurred on account of gonnected person is excessive compared to tl;re ndarl<et value, the A.O. can make disallowqnce but there is no such provision foi makipg any addition on account of lower sale cbnsideration shown compared to the markqt value. The only ground for nraking additio{ could be tax evasion device but for thi,s brliden lies on the revenue to establish thpt the transfer had been made with a view to evade tax. The ld counsel h?" pointed but that both the concerns are in the same tax bracl<et and therefore there is no tax levasion on account of any transfer at lower grice. These claims have not been . contrqverted before us. Therefore, we do not see any tax evasion device involved in the trinsfer. Further the corresponding value of purchase in the case of sister concerns have; been accepted by I v ITA Nos. 24412009, 54712011, 5481201'l &61512011 Page 19 of44 2012:DHC:9801-DB

findings are findings of fact and these cannot be regarded as oerverse. the revenue. There is also no material to show that the assesseQ had received any money over and abovej the consideration stated in the bookb. Under the circumstances, any addition on account of lower sale value declareQ by the assessee is not justified in our opin;ion.i1 The order of CIT(A) is accordingly set 'aside and the addition is deleted." 17. ,On the basis of material oh rqicord, the tribunal has had been du the sister concerns. wh'ich was clear from ITA Nos. 24412009. 547 1201 1. 5481201 1 & 61 51201 1 Page 20 of 44 | ' | ,t. i:{ accepted the stand of the respondept assessee. The aforesaid I 18. At this juncture, we may now leal with the objection. of the I special auditor that certain elements jon costs were ignored while I' calculating the cost price paid b y th+ sister concers. lt is alleged i that the assessee'after purchasingj sto"cl( had transported the I raw material. Some other uop{nr", were also incurred. I However, while charging the cost pri,ce fpom the sister concerns, ;l ir. "14.5 .....The assessee. has' challenged the decision of CIT(A) and it;has'been argued by the ld counsel that whalever expenses had been incurrecl in conneition,with the goods v no element of chargesiexpenses on account of transportation I etc. were charged. The tribunal examined the said aspect and has held'as under:- 2012:DHC:9801-DB

the pages 904-907 on thle paper book-lV. lt has been pointed out thlat the transfer was for,commercial expediengy as had the goods not been transferred. the'se were of no value v to the assessee in the apsence of quota. 11: was also argued that thelre was no provision for taxing notional profit lnd,therefore, even if the goods were trarisferred at cost or lesser u"lu", no addition bould be made." (emphasis supplied) contention. 20. The last addition subject mattqr 19. Revenue is not able I to controvert and contest the said : Act, on the qround that tv Page 21 of 44 under Section 40A(2Xb) of the excessive/unreasonable expenditure was incurred on getting I I garments fabricated from associaL concerns, namely, R.A. 'l Exports and Sensational l=xports. lt is accepted and adnritted by i the res;rondent assessee that botf of them were associate I concerns. The Assessing Officer al6o made addition in respect i of payments made to Prakash Fabrication, which is not an l associate concern. The entire payment, of Rs.83,48,292 made i to R.A. Exports, Sensational Exports and Prakash Fabrication I was disallowed as if the assessee 'had not incurred any i expenditure .at all on fabrication 1f garments from the said i concerns. The findings recorded by the Assessing Officer for t,. the sake of convenience are reprodubed',below:- ITA Nos. 24412009, 547 1201 1, 5481 20 1 1 & 6 1 51201 1 2012:DHC:9801-DB

"Besides above paym'ents a sum of Rs.32,27,883/- as contrpct payment have also been paid to M/s Qrakash Fabrication unit in which transactionslof similar nature to related firms have been Qntered. The above three firms have been shown as contractors of the assessee. The adsessee was asked to prove the genuineneis of transactions. Payment to tlre three films aggregating to Rs.83,48,2921- should be treated as Bogus in view of the fact that aQove listed two firms ' being firms in which Partners are substantially interested land M/s Prakash Fabrication since all t4" bills issued by Prakash Fabrication wefp as cash memos. Moreover at any pointf either during the course of aurdit or duqing .,the course of assessment proceedingsjthe'assessee could not substantierte its claim that the work was actually executed at its bilsiness premises or it has actually incurredl such expenditure. The assesse did not prQduce any evidence regarding attendance I record of such employees, PF/ESl 1'eco,rds of such employees, regular entries in the books o1' aicounts etc. with the lhelp of which we could have relied upon the contention of the asseSsee. Moreover i! was noticed from perusal of page 109 of Part I of Special Auditor's report that ESI & PF contribution of both employer and employee in respect of other similar contracfor namellt RaP Pravesh Contractor (Babu Finishing) has been borne by the assessee. lt is thus not in doubt that assessee I is bearing such contiibutions when the similar contract was bonafide. I Also, as per Page 199-?04 of Pad-ll of the Audit Report, the auditors has mentionecl various points which \ryere, duly supported with the documentary evidence, whicft proves that no recordp were placed orl' record by the assessqe for claiming thel v Page 22 of 44 ITA Nos. 244t2O09, 547 1201 1, 54Bl2O1 I & 61 51201 1 --i 2012:DHC:9801-DB

genuineness of such expbnditure. ln view of this, the entire amount lof Rs.83,48,2921-, being bogus in nature, is, adQed bacl< to the income of the assessee iuis:37('l) of the lT t I ADDITIOf'{ Of RE.83,48,2921 -" I 21. The said disallowance, it is apparent, is not under Section i; 40A(2Xb) as stated in the grounds o{ appjeal by the Revenue but i the Assessing Officer had treated lhe ,,said expenses as non i genuine or as bogus expenditure. ilhe aforesaid addition was i affirmed by CIT (Appeals). i i 22. The addition has been deletef by the tribunal, inter alia, I observing as under:- I "24.7 We have purrr"J th,e records and considered tl"re' rival cohteniions raised. by both the parties. DigPute is regarding disallowance of fabricatipn charges paid'to M/s.R.A. Exports and I M/s. Sensational Exports, which are related tq the assessee and to M/s. Prakash ilndlrstries, totaling Rs.B34B292l-. The special auditor had reported that there werb no goods receipt note (GRN) or challans made regarding receipt and clispatch of ithese goods. The bills in respect of these irayments had been issued serially and entered on computer separately. There werel also several cases of cash payment. Th" , assessee has explained that paymentq were for supplyingl labour to the assessee fgr doing the stitchingl job at factory premises ds per the conditionsi imposed by the foreigq buyer. The A.O. however, disallowed the lenti,ie claim treatingl the same as bogus on tlre ground that there was no evidence produied that the job hacl Act. ITA Nos. 24412009, 54712011, 54812011 & 615/201 1 Page 23 of 44 '* 2012:DHC:9801-DB

actually been done there was neither I J I I I i 'tat factory premises as attendance record nor v there was any record fgr deduction of PF and ESI in respect ofi employees. The assessee has explained to CIT(A) that there was no record of dispatbtr of goods as the job had been done at th,e factory premises. CIT(A) lrowever noted that the payment was not supported by any billp and vouchers and there was no record of ilabour maintained. There was also no agreement regarding supply of labour. He fu,rther observed that the payments had beenimade for engaging labour but the expenditure' was declared under the head 'procesping charges'. No evidence had been produced either before the A.O. or at the appeillate, stage to show that evidence regarding'processing charges had been produced before the special auditor. CIT(A) therefor{ concluded that the assessee did not dischittgu onus that the payment had been 1"nade wholly ancl exclusively for the purpqse. of. business ancl accordingly confirmed the disallowance. 24.8 The ld . counsel ,has' reiterated the earlier stand before ud thbt no GRN or . challans was required 3s the goods were . fabricated at the factohrr premises- Tlrer attendance oF labourersiwas required to be: made bY the contractor. and not the assessee. lt was alsp pbinted out that violation of the provisionS of'PF and ESI Act, could not be made | ,tne basis for disallowance. The ld coLnsel also submitted -t that both the special aLiditot as well as the A.O. had raised queryi only in relation to section 40A(2Xb) anil 404(3). The: assessee had never bgen .asked to prove the genuineness of itransaction. I\o disallowance under the provisions of section 40A(2Xb) could be made as there was no material before the A-O. to shovtt that ITA Nos. 244t200s,54712011,54812011 &615t2011 I ' : I Page 24 of 44 I ift I I 2012:DHC:9801-DB

3T payments. The ITA Nos. 24412009, 54712011, 54812011 & 61512011 payments were excessiv'e compared to the payments in case the e4Reriditure had been --l incurred in relation to lconnected persona and Section 40A(3) is regarding cash assessee therefore market value. As for thd cash iransactions, the aUditors'had not rep,orted the same tin the audit r6port as the ihdivldual payments did not exceed Rs.20,000/-. As the payment for labour had been, made in connection with fabrication, the expenpiture had been booked under the head 'gurchase fabrication account'. The assessee had filed copy of account. of the Parties as well as confirmation and the parties were assessed to tax separately and lhu payments had been made b5r cheques. lHe,.also referred to comparative chart placep aii page 1290 of paper book-lX to show tl;rat rio disallowance on this'account had deen made in the precedirrg or in the succe'eding year. i 24.9 We have carefully considerecl the matter. We find that thb diSallowance had been made mainly on Jhe basis of some technical defaults noted; by the A.O. The assessee has satisfactbrily explained the absence of GRN or challans, which were nol: required as the work was being done at the factory premises of the qssessee. Similarly, there was no requiremer,it of 'any attendance record or deduction of PF & ESI as the worlc was being on contract ar1d. the workers were not employees of the dssessee- We firrcl sufficient forcd'in the plea taken by the lcl counsel that the A.O. h,ad {ot doubted ther genuin6ness of expenditure' as query letter issued by the A.O. al copy of which is available at page 279-Z,BO of paper book-|, makes it clear that the A.O. had asked the assessee to give justificptioqi with respect to section 40A(2) and +Ofl(e); only. Section 4OA(2) relates to ieasonableness ' of Page 25 of 44 2012:DHC:9801-DB

lr I I I I I v explained the matter orjly with respect to these provisions vide lett'er dated 2.11-2005 a copy of which has bepn placed at page 434 .of paper book -ll. i lt has also been claimed that there was Ino ,cash payment exceeding Rs.20,000f qnd the ld DR has produced no material ito controvert this claim. Nor there is any material to show that the payments made ito ,the associate concerns were excesqive l compared to market value. All these 'concerns are assessed to tax and the paynrents had been made by cheques. Simil3r payments for job work had been made ip the earlier years also as well as in the succeeding year when no disallowance had been "'made- Under these circumstances, any disallowance this year is not justified. We, jther"efore, set aside the order of CIT(A) on this point and delete the additions made." 23. We fail to understand on what ground and on what basis I I the Revenue contends and. submifs the contention that the aforesaid findings are Perverse. ln fact. it is difficult to appreciate the finding of the Asse{sing Officer that the entire i: expense was bogus or should be diqalloWed by invoking Section 4BA(2Xb). The Assessing Offiier did not conduct any I investigation or verification into the lreaSonableness of the said i expense with reference to payment imade to third parties or fair I I market charges payable for similar nature of work. The :ri Assessing Officer also included the lpayment made to unrelated i concern, namely, Prakash Fabrication'while making the said ITA Nos. 244t2o09, 547 I 201 1, 54Bl2O 1 1 & 61 5 l2O1 I Page 26 of 44 2012:DHC:9801-DB

addition. lt is not the case of theiAssessing Officer that the i, ', garments were not fabricated or panufactured. Exports of garments have been made. Revenub is.unable to show that the i findings recorded by the tribunal are not supported by material I or evidence. The conclusion reached is after examing a number I of facts. lt cannot be said that the factual finding are such that I "no person acting judicially and prpRerlV instructecl as to the I relevant law" would have reached thb same conclusion. Tribunal i has not ignored or excluded relevant evidence or tal<en into l,i consideration i nadnrissible evidence.l li t' 24. ln view of the aforesaid discu'ssion, we do not think any I I v substantial question of law arises in the appeal No.244l2OO9. fTA No. 54812011 25. This appeal by the Revenue qertains to assessffredt year rl 2000-01. However, we may notice tfrat the assessment order in this case was passed on 28th De;ember, 2007, whereas the I il assessme4t year 2O02-O3 was passed assessment order for the on 1Oth lrlovember. 2005. rejected , the books of rejecting the bool<s of assessment order are:- (1) Stock register was ITA Nos. 24412009, 547 1201 1, 5481201 1 i The Asseqsing Officer in this case had The reasons/findings for as discernible from the not produced and, therefore, stocl< &61512011 Page27 of44 accounts. accounts i.' 2012:DHC:9801-DB

(2) The audit report in fbrm of No. i3CB and 3CD column 2B(b) l, was left blank with the remarks "in iriew of the large number of I I iterns it is not possible to give such details". The said column I I I details could not be verified. pertains to information in respect of qualitative details of raw material, semi finished products etc. (3) The' assessee had not suQmitted working notes i preparation of inventory of stock And in the absence of same, comparative qualitative detail$ cannot be verified. (4) the figures of the closing stock quqted ,by the assessee. The assessee was not able to satisfactbrily explain the reasbn for insurance at a higher value. I (5) The assessee had entered into tfansactions of Rs.1.56 I' crores (approximately) with its sisteq concern, namely, lSuperior Crafts (lndia). [n this year, no matqrial was transferred/sold to i the sister company, namely, Supreme Exports (lndia)1. As per i the Assessing Officer, there is no reason why the trans;fer was i on cost basis only and not for ea1'ning profit. No clirect or i indirect expenses incurred by the lassessee were tal<en into I consideration while computing thej cost. No evidence was for the The assessee had insured the ]stock at a higher value than ITA Nos. 24tll21j9. 547 l2O1 I . 54Bl2O1 1 & 61 51201 1 Page 28 ot 44 2012:DHC:9801-DB

v brought on record to dernonstrate that only raw material was transferred and n I I finished or seimi finished products. In i absence of stock register, this aspect could not be verified. i I (6) Payments were made to contractors R.A. l-xports, Sensational Exports and Prakash I FaQrication Unit, but the assessee had failed to prove thq genuineness of services I rendered by the contractors. Thejse transactions should be i treated as bogus as R.A. Exports'and Sensational Exports were I firms in which partners were sub'stantially interested. The i respondent-assessee did not produce attendance records, I provident fund/Employees State. lnsurance records of the I employees engaged by R.A. Exports, Sensational Exports and I I Prakash Fabrication Unit and they did not file inward and i outward challans for movement of stgck/Ooods. I 26. After rejecting the books of ac'counts, the Assessing I Officer observed that the G.P. rate declared by the assessee in i the year under consideration i.e. 2900-01 , of 23.87%o was low. I The G.P. rate for succeeding five dssessment years i.e. 2001- l I 02, 2OO2-O3, 2OO3-O4, 2OO4-O5 a,nd 2005-06 were 19'160/o, I 28.g2o/o, 22.17o/o, 38.17To and n.q4%i respectively. He held i that the G.P rate declared for the assessment year 2002-03 was I on the lower side and keeping in view the facts of the present ITA Nos. 24412009, 547 l2O1 1, 5481201 1 & 61 51201 1 Page 29 of 44 to ot 2012:DHC:9801-DB

v case, the Assessing Officer applied the G.P. I expotl sales turnover of Rs.41 ,47,{4,4731-. lle accordingly I computed the gross profit at Rs.h3,27,18,2311- as against the said addition. He substantially relied upon the order p?ssed I by the tribunal in the case of the respondent-assessee forlthe assessment year 2002- I 03, which is subject matter of ITA ryo. dl+t2009.;, The findings lo recorded by him are detailed "nb ektensive. He, in the I concluding paragraph, the CIT (A) reporded as under:- I "3.8 Adverting back toi tfre facts of tlre case, it is a fact that bookslof accounts of the assesee are audited and n,o discrepancy has ' been pointed out by the AO. The production results have not been founp to be acceptable to the AO in absence of I day to day stocl< register. The AO has completely ignored the ' substantial increase in thelgross profit of the assessee whicl"r itself indiiates that the AO has acted in a very arbitrary and illogical manner by applying g.p. ratio of a proceeding assessment year which is well in absolute terms against normal prpctiie of drawing conclusions on the basis of comparisons and common sense. The IAO' made other observations also with regard to the reliability of the book results of the iassessee which is evident from the text of the]asspssment order' fhe observations of thb AO indicate that the AO is inclined tg believe that the assessee has indulged iin suppression of production, stock and its plofit but the AO has not unearthed the suppressicin. The crucial ,i Rs.9,53, 19,,1751-. 27. The CIT (APPeals) deleted ITA Nos. 244t20Q9, 54712011, 54812011 & 615/2011 I I I rate of 32% to the Page 30 of44 2012:DHC:9801-DB

fact of a substantial increa Ibe in gross profit ratio as compared to earlier ye,ars has been brushed aside. Rs.3,73,99,056/- made by the AO is deleted'" 3.9 In the light of the iudicial authorities cited in preceding P,aragraphs, and particularly the decision of the Hon'ble ITAT, Delhi in its order in appellant's own case for A.Y. 2OO2-03 on the similar issue with identical facts and cilcumstances, as reproduced above; the dsiimaJion of gross profit on the basis of a futrire year in view of absolute facts is liable to pe rejected being arbitrary, illogical and not ir'! conformity with a logical practice of drawing qonclusions on the basis of precedence of lprevious trading- results. There{bre, the tradiqg addition of (Appeal). ZB. Aggrieved, the Revenue prefdrrec{ an appeal before the tribunal on the aforesaid aspect. The tribunal vide order dated l: 27th August, 2010, dismissed the said appeal. The tribunal has affirmed and agreed with the fin{ings recorded by the CIT ii The contention of the leqrned counsel for the appellant is that the findings of the further submits that once the stock tribunal are perverse. She register was not metintained and there was fall in G.P. rate as held by the Assessing Officer, rejection of books of accounts is justified and proper. In this l"i' regard, she relies upon decision of Allahabad High Couit in lr tsimal Kurmar Anant Kumar Vs. Cornmissioner of trncome- I Tax [2007] 2BB tTR ,278 (All) 3nd* this court in Action ITA Nos. 244 12OO9. 547 1 201 1, 548120 1 1 & 61 5 1201 1 Page 31 of44 2012:DHC:9801-DB

\4 t4 Electricals Vs, Deputy llorn missiqner;:.of Incorne-Tasr (2002) 258 ITR 1 BB (Det). t- 29. ln Bimat Kumar Anant Kumdr 6upra), a Division Bench I i' of Allahabad High Court referred to,Section 145 of the Act and i, Court decisions and observed that the Assessing Officer is t.'l? entitled to compute incorne in his own way when he is of the i opinion that income cannot be propqrly deduced from the books t, of accounts. lt was noticed that the'gror" profit declared by the I I assessee was too low in comparisoh to other assessqes in the lo. I same trade. The Assessing Officeri hacl accordingly compared Ii. the gross profit rate and made an ad;hoc additiotr of Rs.15,000/- I , which was reduced to Rs.13,000f iby the tribunal. Looking at I the factual matrix of the said case,!tneiquestions of'law were I answered in favour of the Revenue land, the appeal filerj by tlre assessee was dismissed. 30. ln the case of Action Elec,tricals (supra), the exact i obse'rvations of the High Cburt read as foltow:-' t' "We are unable to persuade ourselves to agree with learned counsei for the assessee. Section 145(2) of the nbt empowers tlre Assessing Ofticer to makq a best judgment assessment when he is rjot satisfied about the correctness; or' completeness of the accounts of the assessee. ft is not possible to categorise various types of ;defects which may render rejection of books iof account of an ITA Nos. 24412009. 547 l2O1 1 . 5481201 1 & 6151201 1 Page 32 of 44 2012:DHC:9801-DB

u{ assessee on the ground that the accounts are not complete or correct. Each case has to be considered on its own pequliai facts, having regard to the nature of business. Though it is true.that the absence of stock register, in a given situation, may not per se lead to an inference that the accountsi are, incomplete or false the absence of such a register, coupled with other factor, like fall iq profits, etc., may lead to an inference thdt the accounts are ngt correct. As noticed above, i,n the instant case, non-maintenance of stockl register, coupled with the fact that unaccop-rntdd sales were detected during the coursg of search, in our opinion, is a relevant factor to sustain the view of the Assessing Officer. We do not firrd any legal infirmity in the view taken by tlre Tribunal that the disclosures/surrender of Rs. 5 lakhs by the assessee at the {ime of search, as its unaccounted sales, constitutes sufficient material for the Assessing Officer to base his satisfaction thgt the books of account of the assessee are not correct and complete. ln so far as thel estjmation of tlre sales/ gross profit rate is concerned, it being a best judgment assessmenf, based on past years results cannot be said to be arbitrary." 31. A careful reading of the aforesaid observations indicates that the'same do not sgpport the contention of the Revenue. The High Court f,?t clearly observed that i absence of stock register, in a givgn situation, may not per se i lead to an inference that the acjcounts were incomplete or i false but this issue has to be dxamined l<eeping view the I other factors, which include fall in,gross profit rate. All factors I i ITA Nos. 24412009, 54712011 , 54812011 & 61512011 Page 33 of44 I 2012:DHC:9801-DB

have to be examined and taken into consideration and then I alone the Assessing Officer can reject the bool<s of accounts- i In the said case there was evidence of unrecorded sales v outside the books. 32. Punjab and HarYana H give such a finding." ITA Nos. 24412009, 547 1201 1, 5481201 1 & 61 51201 1 igh Court in the case of Page 34 of 44 rl Pandit Bros. v. ctT (1954) 26 ITR /59 has elucidated and I examined the said question and itlwas opined as under:- I "..... Again, the fact thatl there is no stock register only cautions him lagainst the falsity of the returns made by the .assessee. He cannot say that merely bqcause there is no stock register the account books must be false. The account bookt lin thi= case \Mere accepted as correct and ldisclosing a true state of affairs. The absence of one register cannot amount to material ,and there must be material before the lncomgtax'Officer before he can apply the provision,s of the proviso to Section 13. Again, we find that the Income-tax Officer did not adopt a,ny basis for the increase made by him. i XXXXM i ....1n the second place, even if'such a finding were to be implied from his order it cannot be said that there was material before him which would enable him to comeito this finding. The fact that the profits appebre$, to him to be insufficient and the fact that ithere was no stock register maintained by the assessee are not in my view materials VPori which such a finding can be given,l b,,,t these are circumstances which may prov'oke an inquiry. The lncome-tax Office; fiust discover evidence or material aliunde'before he can 2012:DHC:9801-DB

The importance of such register was pointed out by the Nagpur High Court in Ghanshyatn ' Das Permai'and v' Cbmfuissioner of lncorne-tax, C. P. & Berar ( 1959 (21) ITR 79, 81). In cases such as thb instant case, the keeping of a stock register' is of great importance because that I is a means of verifying the assessee's accounts by having a 'quantitative tally'. lf, after t3king into account all the materials including the Want of a stock register, it is found that from ihe method of accounting correct profits oI the business are not deducible, the operatiQn of proviso to s. 13 of the lncome-tax Act would be attracted, Bombay Cycte Sfores Cotnpany Ltd' v' Commissioner of lncomg-ta$ ( 1958 (33) ITR 13 ). lt may also be abded, as was held by this Court in Commissioner of Income-tax v. MacMillan & Co. (1958 (33) ITR 182, 197), that the Income-tax Officer,ievqn if he accepts the assessee's method of lacc'ounting, is not bound by the figure of prbfits shown in the accounts. lt is for the lncome lax Authorities to consider the materiall wh'ich is placed before them and, if, after laking into account in any case the absence 9f a stock register coupled with other materials they are of the opinion that correct profitsl and gains cannot be deduced, then they would be justified in applying the Proviso to s.1 3." i 34. The Supreme Court had anotfer occasion to examine the I' said question in the case of Chhahildas Tribhuvandas Shah v. 'l CtT (1966) 59 ITR 733 (SC) and it was held:- I ".... What we have to dee is whether the finding of the Appellate i Tribunal that the income, profits and gains icannot properly be deduced from the method of accounting employed by the appellant is based on any ITA Nos. 24412009, 547 t2O1 1, 5481201 I & 6151201 1 Page 36 of 44 2012:DHC:9801-DB

. I I material. The Appellate Tflbunal has given two reasons for its conclusicns. The first reason is that the appetlant was doing business in the rnain on wholesaler basis and there should have been no difficulty in tallying v)/ quantities in respect of major items of trading account. This certainly i is a relevant consideration. ln the absence qf such a tally, the next reason given is that the fall in the margin is all the more difficult to explairr in view of the fact that the appellant also had a quota of irnports worth about Rs. B, 00, 000 which would have given them a handsome margin of profit. This again is a relevant fact and it is well-known that imported goods fetch a very hanclsome margin of Profit. Accordingly, we hold that there is material in support of the impugned finding of the Appellate Tribunal. We may point out that we are not concerned with theicorr;gctness of the conclusion and we are only concerned with the question whether there is any material in support of the finding ,of the Appellate Tribunal. ln cases involvinglthe applicability of the proviso to section 13, the question to be determined by the Income-tax Officer is a question of fact, namely, wihether the income, profits and gains can or cannot be properly deduced.'from the methbd of accounting regularly a'dopted by the assessee." 35. Recently in Sanjeev Woolen Milts Vs. Cotnmissioner of I I lncome-Tax [2005J 279 tTR 434 (SC), it was observed by the I <i Supreme Court that the true trading result of business for an I accounting period cannot be ascertaihed without tal<ing into l; account the stock-in-trade at the enb of the accounting period. lt was held that valuation of closing istock cannot be dispensed ITA Nos. 24412009, 547 1201 1, 5481201 1 & 61 51201 I Page37 of44 2012:DHC:9801-DB

balance the cost of those goods I'i - i ,.i entered'on the other sicle of the accounts at the time of purchase,l so that cancelling of the entries relating to the same stock frpm both sides of the t' accounts would leave only the transactio.nt :n which there have been actual sales in the course of t_t1e year showing the profit or loss actually realized. ln the saiOl case, the assessee was I valuing the opening stock and closing stock by applying different I: parameters and the profit discl,osed was only notional. 36. Recently this Court in Comrnissioner of fnaorne Tax Vs. I Jas Jack Elegance ExPorts [201P] I occasion to deal with the said conte4tion and it was observed as with. The truq purpose under:- ITA Nos. 24412009, 547 l2O1 1, 54Bl2O1 1 & 6'1 51201 1 i I I I of creditinq thb value of unsold stock is to I 324 ITR s5 (Dethi) had ? "Tltis is not the case qf the Revenue that the assessee had not followed either cash or mercantile system of accoi:nting stipulated in sub-section (1) of section 145 of the Act. This is also not the case of the Revenue that the Central Government had notified any o particular accounting standards to be followed by manufacturers and exporters of readymade garments. Hence, the seconcl part produced before the Assessing Officer for his of sub-section (3) of section 145 does not apply to this case. As riroted by the Commissioner of lncome-tax (Appeals) as well as by the Income-taxlAppellate Tribunal, the Assessing Officer had not pointed out any defect in the accountibooks maintained by the assessee, whichj admittedly, were , Page 38 of44 2012:DHC:9801-DB

It' ?l ConSideration.Thisisa|soinotthefindingof> the Assessing Officer that,the,account of the "/ assessee was not complete. No provision either in the Act or in the lrules requiring an assessee carrying business of this nature, to maintain a stock register,i as, a part of its accounts has been brought to. our notice. As regards non-production of stock register, the assessee has given an explanation Which has been accepted not only by'the Commissioner of Income-tax (Appeals) ibut also by the Tribunal and both of them have given a concurrent finding of fac! that maintaining stock register was not feasible considering the nature of the business being run by the assessee which was engaged in the business of manufacturing readymade garments by purchasing fabric which w3s then subjected ' to embroidery, dyeing and, finishing and then converted into readymade, garments by stitching. Section 145(3) of the Act therefore could not have l:een applied by the Assessing Officer to the Present case." I i; 37. A similar view has been takel by"the Gauhati High Court i: in swap na Rani sarkar vs. com,missioner of lncctme Tax and others (2010) 320 tTR 70 (Gtauhqti) and it was observed that no law has been laid down fhat. if stock iegister is not i maintained, the only consequence would be rejection of the -,.- i; books of accounts. Rajasthan High] Court in the case of l. commissioner af lncome Tax Vs. '.lnani Marbtes P. Ltd. t, (2009) g16lTR l25hadreiterated tfe aforesaid principle. ITA Nos. 24412009, 547 1201 1, 5481201 1 & 61 51201 1 Page 39 of44 2012:DHC:9801-DB

,t I i 38. Thus, the contention of the Revenue that stock register I was not maintained and the relevant column of the. auditor's l report record indicate absence ofi ttre stock register, justify i rejection of the books of accounts, c{nnot be accepted. I 39. lt is now important and relevant'to notice and examine the i other contentions raised by the Revenue for rejecting the books t, of accounts and the cumulative ef,fect in the absence of the I rl stock register. The other grounds and.,reasons given by the iii assessing Officer were specifically deal't with and examined by I the tribunal in their order for the utdetsment year 2002-03 and i' no merit in the same was found. The cgntentiorr with regard to I the sale to sister concerns has already been examined above in i ITR 244l2OOg and the contention jof the Revenue has been ir rejected. Similarly, the objectionj raised with regard to the ! payments made to the contractoi's duch as R.A. Exports, I Sensational Exports and Prakash Fabrication Unit has not been i accepted. The aforesaid aspects doi not constitute a ground for I rejection of bool<s of account ol' indicate inability of the i I Assessing Officer to compute true and correct profits. The same i were in nature of specific disallowanbes." We may further notice i.' that the payments made to the contractors, transfer of raw .i material to sister concern have O""h nrade subject matter of a 7 ITA Nos. 24412009, 54712011, 54812011 &61512011 Page 40 of 44 2012:DHC:9801-DB

il i separatd additions by the Assessing ;Officer himself in the assessment order for the year in gueEtion. He was able to i examine the said entries and made specific additions. On a perusal of the order passed by tfe Assessing Officer, it is l: evident that the rejection of i books is based upon reasons/grounds stated in the assessment order for the i assessment year 2002-2003. In lh" said assessment year, I there was a special audit. The special auditor did not report and state that it was not possible i" decipher and compute i income/profits from the books of a{count. . The special auditor had examined the books of account,ivouchers, invoices etc., but ii did not suggest that books of accounts s.hould be rejected. The ,t' Assessing Officer for the assessnient' year 2OO2-03 did not i reject the books of accounts. ln the said year, the Assessing Officer did make adQ,itions/disallowa'n."S, but not after rejecting t' the books of accounts. In the said assessment year, similar disallowance _rnd additions were made for identical ; grounds/reasons given by the Assessing Officer as in the t: assessment year 2001-02. Therefore, we do not agree with the counsel for the Revenue that rejectiJn of books of accounts was lr justified and findings recorded by lthe tribunal are perverse. ? r l't A Nos. 24412009. 547 l2O1 1 . 54Bl2O1 1 & 61 51201 1 Page 41 ot 44 I I 2012:DHC:9801-DB

Accordingly, we do not think that onj this aspect any substantial I question of law arises for consideratibn.i: 40. The next contention raised Oy ihe Revenue pertains to the I payments made to the contractois such as R.A- Exports, I I Sensational Exports and Prakashl Fabrication Unit. The I Assessing Officer. has recorded thatlthe assessee was asked t6 I prove genuineness of the transactions for which payment was I made to the contractors and whether the worl< was actually executed in the business premiseslof the assessee and infact the expenses were incurred. 24412009, we do not thinl< that any substantial question of lawi arises for con'sideration on I this aspect. We nray only note that there is no finding of the I Assessing Officer that no work wasl done or extra or additional I payment above/more thetn the market rate were made to R.A. i Exports, Sensational Exports and Pral<ash Fabrication Unit. The ! Assessing Officer did not invoke Seqtion 40A(2) (b) of the Act. i 42. We do not think that the order passed by the tribunal is I perverse and, therefore, requires int{rference. I I tT A 547 1201 1 & 615120'l'1 43. These appeals relate to the jassessment years 2005-06 and 2001-02, respectively. The Relenue is aggrieved in these I v 41. For the reasons given in ITA ITA Nos. 24412009, 547 l2O1 1, 5481201 1 & 61 51201 1 Page 42 o( 44 I I It1 I i 2012:DHC:9801-DB

Assessing Officer that the books of 5ccoUnts should be rejected I and the profit should be calculated by applying G.P. rate of 32%. I The second contention raised by the Revenue is again with -1, regard to the payment made to th,e contractors, namely, R-A. I I Exports, Sensational Exports and Priakash Fabrication Unit. I 44. The observations and finding$ given in ITA 54812011 on I' the aforesaid contentions are equal,ly applicable to the facts of I the present case. I l! 45. In ITA No.54712011, which lrelates to the assessment I year 2005-06, another issue relatin! to addition of Rs.71,9491- I has been raised. The Assessin! Officer noticed that the i opening and closing balance of somf, of the creditors were same I and no business transactions had tqken place during thr: year in I question. He accordingly added birck the said amount to the I income as unverified creditors. The CIT (Appeals) deleted the lr said addition holding that there is ino liasis for the Assessing i Officer to make the said additiop. lVlerely because the I assessee had no transactions with some creditors and their i ! opening and closing balances remained the same, cannot be a I ground to add the said amount. Tfe tribunal has affirmed the two appeals as the tribunal hasl upset the finding of the ITA Nos. 244 12OO9, 547 1 2O'1 1 . 54Bl 20 1'l & 61 5 120 1 1 Page 43 of 44 I I I I 2012:DHC:9801-DB

said finding. We do not see any reaqon to interfere with the said I I I finding. l. I In view of the aforesaid dijcussion, the appeals are I dismissed holding that no substantidl question of law arises for consideration. MARCH 06,2012 VKR/NIA { ITA Nos. 244l2OOs, 547 t2O1 1, 54Bt2O1 I & 61 51201 1 v -r' / L't - lt r-- / -'It , $AlsJ [\P K[-!A[\l htrA, .i. I . lr Iil\ Itwltwcr-\ , R.V. ErqSWAFl, .J. Itage 44 of 44 2012:DHC:9801-DB