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Income Tax Appellate Tribunal, SURAT
Before: SHRI C.M.GARG & SHRI O.P.MEENA
आदेश /ORDER PERC.M.GARG, JUDICIAL MEMBER: This appeal has been filed by the Assessee against the order of Commissioner of Income Tax (Appeals)-II, Surat (‘CIT(A)’ for short) dated 10.02.2016 for the Assessment Year (A.Y) 2009-10.
The grounds raised by the Assessee read as follows: 1. a) That on the facts and in the circumstances of the case as well as in law, the learned CIT (A) has erred in upholding the rejection
2 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. of the books of accounts of the appellant u/s. 145(3) of the Income Tax Act, 1961 (the Act) and thereby erred in upholding the estimating of the gross profits of the appellant on the basis of G.P. Ratio of last year. b) That the reasons mentioned by Id. AO as well as by Id. CIT(A) for rejecting the audited accounts of the appellant u/s. 145(3) of the Act are incorrect, invalid and unsustainable in law. c) That on the facts and in the circumstances of the case as well as in law, the Id. CIT(A) has erred in upholding the addition of Rs. 1,06,89,745/- made on account of fall in G. P. Ratio, by estimating the gross profits as per the G. P. Ratio of last year. d) That the Id. CIT (A) has apparently and grossly erred in overlooking and ignoring the explanation of the appellant that the figure of Sales for the year under appeal includes re-sales of the raw-materials (POY) of Rs. 10,26,08,823/- which did not yield any gross profits, whereas such re-sales of raw-material (POY) in last year were of Rs. 14,38,797/- only and that after excluding these figures of purchases and re-sale of raw materials (POY), there is in fact no significant fall in G.P. Ratio (i.e. gross profits as percentage of sales). e) The appellant humbly contends and prays that the rejection of the audited accounts of the appellant u/s. 145(3) of the Act and the consequent addition of Rs. 1,06,89,745/- in the name of fall in G.P. Ratio are completely wrong, incorrect, unjustified and beyond the scope of law. 2. That on the facts and in the circumstances of the case as well as in law, the Id. CIT(A) has erred in sustaining the disallowance of Rs. 6,57,684/- out of interest expenditure. 3. That on the facts and in the circumstances of the case, the Id. CIT (A) has erred in sustaining the ad hoc disallowance of Rs. 1,00,000/- out of salary and wages expenses.
a) That the Id. CIT (A) has erred in upholding the charging of interest u/s. 234B in respect of the additions/disallowances sustained by him. b) That the Id. CIT(A) has erred in law in upholding the charging of interest u/s. 234C, which is erroneous and charged on the basis assessed income instead of returned income. Ground No.1: 3. We have heard the arguments of both sides and carefully perused the relevant material placed on the record of the Tribunal. The ld.
3 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. Assessee’s Representative (AR) submitted that the first appellate authority has erred in upholding the rejection of the books of accounts of the appellant u/s. 145(3) of the Income Tax Act, 1961 (the Act) and thereby erred in upholding the estimating of the gross profits of the appellant on the basis ofG.P. Ratio of last year. He further submitted that the reasons mentioned by Id. AO as well as by Id. CIT(A) for rejecting the audited accounts of the appellant u/s. 145(3) of the Act are incorrect, invalid and unsustainable in law. He further drew our attention towards para 4 at pg. 2 of assessment order and submitted that the defects pointed out by the Assessing Officer (AO) are not sufficient for rejecting books of accounts of the assessee as per provision of s. 145(3) of the Income Tax Act, 1961 (in short 'the Act') as merely because the assessee has not maintained some registers pertaining to stock and salary and wages and did not made valuation of closing stock the books of the assessee cannot be rejected on this count. The ld. AR further submitted that even steep fall in GP rate cannot be a cause for rejecting books of accounts of the assessee. The ld. AR also submitted that as per schedule 20 at pg. 94 of the assessee’s paper book administrative and civil expenses has been shown as 2 ½ times more in comparison to the previous yearand from the valuation of closing stock submitted before the AO vide letter dated 15.12.2011 clearly shows that the basis of valuation for raw material, oil and packaging material was at cost and valuation of
4 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. finished goods was takenas market value and working progress was valued at cost plus processing charges which cannot be said as incorrect or illogical. In this situation and written submitted dated 15.12.2011 placed at pgs. 110-111, it is apparent that the allegation of AO in para 4 (2) of the assessment order that the valuation closing stock was not made after taking into consideration the overhead expenses incidental to the purchases is not correct as the cost also includes overhead expenses to the incidental of raw material, oil and packing material. The ld. AR submitted that the rejection of books of accounts is not correct and justified and as per decision of Hon’ble Jurisdictional High Court of Gujarat in the case of Jaytick Intermediates (P.) Ltd. vs. ACIT reported as 242 Taxman 319 (Guj.), non-maintaining of da-to-day stock register is not a ground to reject books of account.
The ld. AR further submitted that the AO has not disputed the quantum of sales undertaken by the assessee during the relevant period and has included the sale of raw material for the purpose of calculation of gross profit which is not correct and justified as per decision of Hon’ble High Court of Karnataka in the case of CIT vs. Motor Industries Co. Ltd. reported in 49 taxmann.com 538 (Kar.). The ld. AR further submitted that the AO has wrongly noted that the GP rate declared by the assessee is 6.11% whereas the GP declared for AY 2009-10 was 7.59% which is marginally lessor than previous AY 2008-09 GP rate which was 8.14%.
5 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. The ld. AR reiterated the submissions dated 05.08.2013 before the ld. CIT(A). Further, the ld. AR submitted that the assessee submitted all details of alleged purchasers to whom POY sales was made along with confirmations from the respective parties. The ld. AR further submitted that the assessee also submitted the lessor account of salary and wages before the AO along with letter dated 23.12.2015 (assessee paper book pgs. 16-26) hence, the allegations in para 4 of assessment order are not correct.
Replying to the above, the ld. Departmental Representative (DR) supported the rejection of books and pointed out that the during the assessment proceedings the Manger and Accountant of the assessee were asked to produce stock register of raw materials received and releases for process and the stock registers of goods manufactured and dispatch of the sale, stock register trading goods etc. but they failed to produce these registers for having not prepared. Placed reliance on the decision of Hon'ble Supreme Court in the case of British Prints India Pvt. Ltd. reported in 188 ITR 44 (SC), wherein it was held that where the accounts are prepared without disclosing the real cost of the stock in trade albeit on sound expert advice in the interest of efficient administration of business, it is the duty of the AO to determine the taxable income by making such computation as he thinks fit.
6 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. 6. On careful consideration of above rival submissions, we may point out that as per provision of s. 145(3) of the Act, where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee then, the AO may make an assessment in the manner provision in s. 144 of the Act. From findings recorded by the AO in paras 4 to 10 of the assessment order, we clearly see that the AO rejected books of accounts after considering the reply of the assessee to his show cause notice and thereafter in subsequent paras, he recorded findings and reasoning why he is not satisfied about the correctness or completeness of the accounts of the assessee. From the assessment as well as first appellate order, it is vivid that the authorities below have recorded categorical finding that the books of accounts maintained by the assessee were full of discrepancies which was also accepted by the appellant itself. When the discrepancies were pointed out to the assessee then, the explanation that it is auditor’s mistake typing errors were not supported with the evidences and facts therefore, the same were treated as afterthought and unsustainable by the authorities below. The ld. CIT(A) uphold the findings of the AO recorded in paras 4to 10 of the assessment order.
first of all, we may point out that from the copies of the submissions made before the AO through letter dated 23.12.2015, copies of the
7 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. computation of the total income, tax audit report and audited financial statement, copy of statement showing month wise details of purchase and sales along with quantities and amounts and quantity tally and ledger of purchases and sales along with details of valuation of closing of stock furnished before the AO and submissions dated 05.08.2013, 18.12.2014 and 05.02.2016, it is apparent that the assessee submitted all relevant and possible documents before the AO as well as before the ld. CIT(A) supporting the financial results and correctness and completeness of the books of accounts of the assessee. From copy of the letter dated 20.09.2011 submitted to the AO also shows that the assessee submitted copies of the salary and wages register and ledger accounts of salary and wages accounts.
Inview of above, allegations of the AO recorded in para 4 of the assessment order becomes incorrect and contradictory. Further, from the facts recorded by the AO in para 3, it is also apparent that the AO proceeded to consider incorrect GP rate of as 6.11% for the present AY which was actually 7.59% on the sales of Rs. 3,21,85,871/- which was marginally less in comparison to preceding AY 2008-09 which was 8.14% of turnover. As per decision of Hon’ble Jurisdictional High Court in the case of Jaytick Intermediates (P.) Ltd. (supra) non maintenance of day to day stock register is not a valid ground to reject books of accounts. Further, this view was also taken by Hon'ble High Court of Delhi in the
8 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. case of CIT vs. Poonam Rani 326 ITR 223 (Del.), wherein it was held that if stock register is not maintained by the assessee that may put AO on guide against falsity of return made by the assessee and to scrutinize books of accounts carefully but in absence of one register alone does not amount to such a material as would lead to a conclusion that account books were incomplete or inaccurate. In the present case also the AO proceeded to reject books of accounts on the allegation of non- maintenance of day to day stock register and salary and wages register which cannot be a basis for rejection of books of accounts of the assessee. In the present case, as we have noted above that the assessee has establish that he submitted copies of salary and wages register along with ledger account of said expenses. The assessee vide submissions before the AO also submitted month-wise details of purchases and sales and during remand proceedings vide letter dated 23.12.2015 the assessee also submitted details of POY sales and supporting the documents which were furnished to the AO during assessment proceedings copies of which have been placed at pgs. 101- 111 of the assessee’s paper book. In this situation, on the basis of foregoing discussion, we have no hesitation to hold that the rejected books of accounts of the assessee without any justified and basis and without complying with the requirement and mandate of relevant provision of s. 145(3) of the Act and thus, the rejection of books of accounts on the
9 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. basis of such allegations cannot be held as sustainable and hence, we dismiss the same.
Furthermore, for the sake of argument, if we consider the GP rate adopted by the AO then we find that the AO in para 3 of the assessment order wrongly adopted and noted that the GP rate for present year was 6.11% and from the copy of the submissions dated 05.08.2013 placed before the ld. CIT(A) which were also confronted to the AO during remand proceedings, from the table given at pg. 2 of the submission, it is clear that the GP rate for the present year was 7.59% which was .65% lessor then, the preceding AY 2008-09 which was 8.14% in that year. From this table it is also apparent that the assessee made re-sale of raw material POY of Rs. 14,38,797/- during preceding year which was very huge during present year of Rs.10.26 crores and on resale of raw material the profit margin cannot be compared with the high profit which is earned from the sale of finished/manufactured goods. In these facts, marginal following GP rate cannot be a basis for doubting financial results of the assessee and in this scenario we are in agreement with the contention of the ld. AR that the GP rate was wrongly taken as 6.11% by the authorities below and the GP rate of 7.59% is sufficient in view of the huge sale of the resale of POY raw material during the present financial period. The AO proceeded to invoke provision of s. 145(3) of the Act on the basis of incorrect facts and figures which also hit the rejection of books of
10 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. accounts. Accordingly, ground No.1 of the assessee is allowed and AO is directed to delete the addition on the basis of GP estimation.
Ground NO.2: 10. The ld. AR submitted that as per decision of Hon’ble Jurisdictional High Court of Gujarat in the case of CIT v. Gujarat Foils Ltd. reported at 377 ITR 324 (Guj.), wherein it was held that the assessee was having sufficient interest free funds available with it to lend interest free advanced then the disallowance u/s. 36(1)(iii) of the Act cannot be held as sustainable. He further pointed out that in para 15 at pg. 11, the AO made disallowance of interest on the interest free advances given by the assessee, but ignore the fact the assessee was having sufficient fundsto advance these loans due to commercial expediency. The ld. AR took us through the pg. 87 of the assessee paper book and submitted that the assessee was having share capital, share application money and Reserves and Surplus more than Rs. 3.10 crores and the amount of interest free loan was only Rs. 54,80,703/-. Therefore, no disallowance of interest can be made. Further, drawing our attention towards pages 147, 148 & 151 of the assessee paper book and submitted that the AO has alleged interest free advances to M/s. Mahak Creation and Mahak Chemicals and sometimes assessee also takes interest free advances from these debtors which is also apparent from the ledgers placed at pgs. 147 & 148 of the assessee’s paper book and the assessee has also
11 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. charged interest from the debtors which is also clear from pg. 151 of the assessee paper book. The ld. AR also submitted that the basis taken by the AO for making disallowance is incorrect in view of the decision of Hon'ble High Court in the case of Gujarat Foils Ltd. (supra).
Replying to the above, the ld.DR supported the orders of the authorities below and submitted that the funds should be used for reducing the interest bearing loans may reduce interest expenditure but the assessee company paid huge interest amount and at the same time gave interest free advances to the debtors therefore, the AO was right in making proportionate disallowance.
On careful consideration of above rival submissions, we note that from the balance sheet of the assessee as on 31.03.2009, it is clear that the assessee was having amount of share capital, share application money and reserve and surplus of Rs. 3,13,35,060/- and the amount of interest free advances as noted by the AO Rs. 54,80,703/- therefore, this covers amount of interest free advances and we may safely presume that the assessee advanced interest free amounts to the debtors out of their own interest free funds. As per decision of Hon’ble Jurisdictional High Court in the case of Gujarat Foils Ltd. (supra), where the assessee was having sufficient interest free funds available with it to lend interest free advances then, no disallowance u/s. 36(1)(iii) of the Act can be made.
12 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. Further, we are also in agreement with the contention of the ld. AR that the assessee also got interest free advances from the same debtors during the relevant period and it was a mutual financial support as per requirements therefore, no interest was charged from these debtors. Accordingly, ground No.2 of the assessee is allowed and the AO is directed to delete the disallowance.
Ground No.3: 13. The ld. AR submitted that the AO was not correct in making ad-hoc disallowance of salary and wages expenses of Rs. 1,00,000/- therefore, the same may kindly be deleted.
The ld. DR supported the assessment order as well as first appellate order and submitted that in absence of any satisfactory explanation regarding failure to produce the original salary/wages register the disallowance made on ad-hoc basis was correct and justified.
On careful consideration of above rival submissions, we are of the view that the onus on the assessee to establish claim of expenditure on salary and wages and when the assessee is not producing original salary/wages register supporting the copies of the same then, ad-hoc disallowance of Rs. 1,00,000/- cannot be held as unreasonable and unjustified. Accordingly, ground No.3 of the assessee being devoid of
13 ITA No.493/Ahd/2016/SRT (A.Y: 2009-10) M/s. Umapati Synthetics Pvt. Ltd. merits is dismissed and orders of the authorities below are upheld on this count.
In the result,appeal of the assessee is partly allowed.
Order pronounced in the open court on this day of23rdAugust, 2018.
Sd/- Sd/- (ओपीमीना) (सीएमगग�) (O.P.MEENA) (C.M.GARG) लेखासद�/Accountant Member �ाियकसद� Judicial Member / सूरत/Surat; �दनांक Dated : 23rdAugust, 2018 EDN आदेश क� ��त�ल�प अ�े�षत/Copy of the Order is forwarded to : 1. अपीलाथ�/The Appellant; 2.��थ�/The Respondent; 3.आयकरआयु�(अपील) /The CIT(A)-II, Surat; 4. Prl. CIT-II, Surat; 5. िवभागीय�ितिनिध,आयकरअपीलीयअिधकरण,सूरत/ DR, ITAT, Surat; 6. गाड�फाईल / Guard file.
आदेशानुसार/ BY ORDER, // true copy // सहायकप�जीकर / Assistant Registrar आयकर अपील�य अ�धकरण,सूरत / ITAT, Surat