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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
आदेश /O R D E R PER O. P. MEENA, ACCOUTANT MEMBER: 1. These are cross appeals by the Assessee and the Revenue are directed against the order of CIT(A) dated 28.01.2014 for the
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assessment year 2009-10 which in turn has arisen from the Arisen from the order passed by the ACIT, Circle-1, Surat (the “AO”) u/s.144 dated 29.06.2012 for the assessment year 2009-10 u/s.144 of the Income Tax Act, 1961 (in short ‘the Act’).
First, we take up the appeal of the assessee in ITA No.1167/Ahd/2014.
The Ground No.I and II relates to rejection of books of accounts and confirming rejection of books of accounts by the CIT(A) whereas Ground No.II pertains to confirming the addition of gross profit of Rs.49,20,122/- because of minor fall in the gross profit from 13.39 % to 11.50 %. Since the above grounds are interconnected, therefore, these are being discussed simultaneously.
Succinctly, facts as culled out from the orders of the lower authorities are that a survey u/s.133A was conducted on 13.07.2011 wherein it was noticed that the company was not maintaining any day to day stock register and production register and inward and outward register in the factory as well as in the office and also at the premises of the factory no such register was found maintained on computer. The statutory register RG-1 for finished stock and RG-23A part 2 are supposed to be maintained at the manufacturing premises as
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prescribed by the Central Excise Act. But, on verification, there was no such register available at the factory premises and all these registers were maintained in the main office only. Therefore, in view of the complexities of the accounts of the company and in view of the findings during the course of survey with reference to maintenance of books of accounts, the AO referred the case for Special Audit u/s.142(2A). During the course of assessment proceedings, the AO noted that opening as well as closing stock of raw material shown in the balance sheet of audit report and as per back up data print out mark as Anneure-S-1 differs at large from the figures of stock reported in the audit report of the assessee. The Assessing Officer (AO) has mentioned this difference in the chart given in the assessment order. It was also mentioned that total closing stock of finished goods comes to Rs.4,70,46,706/- (Annexure S-4) whereas closing stock of finished goods as reported by the assessee company in its audit report comes to be Rs.4,50,43,269/- (Annexure S-3). Therefore, looking to the above defects detected from the books of accounts of the assessee, the AO observed that the books of accounts prepared / audited report are not revealing the correct picture of the financial transaction of the assessee, accordingly same were rejected by invoking the provisions of section 145(3) of the Act. After the rejecting the books of accounts,
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the AO noticed that the gross profit ratio in the year under consideration was disclosed by the assessee at 11.50% as against the gross profit rate of 13.39 % in the immediate preceding year. The reasons for short fall was given that there was increase in price of raw material and export sales, including export incentives. However, this reason for fall in gross profit was considered to be as general in nature and the AO noted that the plea of the assessee that composition of sale is also a reason of fall in gross profit cannot be correct, because in assessee’s own case it is clear that the export sales are increasing which clearly proves that export sales are more profitable than the local sales. In view of these facts, the AO observed that the fall in gross profit remained as unexplained in absence of true and fair books of accounts. Therefore, the AO has estimated the gross profit at 13.39% at par with the gross profit disclosed by the assessee in the immediate preceding year. Accordingly, the difference in gross profit ration was worked out to 1.9% (13.39% to 11.50%). Thus, the AO has made the gross profit addition of Rs.49,20,122/- being 1.89% of gross turnover reported by the assessee company at Rs.26,03,23,915/-. Accordingly, the addition of Rs.49,20,122/- was made.
Being aggrieved, the assessee filed appeal before the CIT(A). However, the CIT(A) observed that the discrepancies noticed by the AO
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are supported with substantiate evidence. As per chart given in the assessment order, the AO has worked out the difference in the opening stock and closing stock shown in the audited report and back up data in the computer found at the premises of the assessee during the survey. The defects in maintaining details of the closing stock has been elaborately discussed by the AO in the assessment order with a specific figures. The CIT(A) observed that as mentioned by the AO that Director of the company admitted during the recording of statement on oath on 18.074.2011 that he had not verified the stock for last 15 years which proves that the details in the books of accounts are being maintained on estimate basis without taking the physical figures of stock. The conclusion of the AO that the calculation of stock is not made on the basis of actual figures is supported with the report of special auditor also wherein he has mentioned that there were no such report of physical verification of stock kept by the assessee. The contention of the appellant that the raw material on machine is taken on account, there remains the difference of identical figures of 12,669kg in both opening and closing stock and since the difference in both the stock is identical the effect would lead to nil result. However, this explanation of the appellant was not found acceptable by the CIT(A) on the ground that how the figures of raw material on
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machine at 405766 kg and 161844 kg to be included in the opening stock and closing stock respectively is not explained. No supporting documentary evidence has been provided to substantiate the figures. From Annexure S-4 enclosed with the assessment order which can very well be seen that the AO had already taken into account the figures of working in progress stock while computing the details of closing stock. Thus, the argument of the appellant that because of raw material on machine there was a difference in the figures of stock as shown in the audit report and back up data of computer does not survive. Similarly, the difference of Rs.20,03,436/- between the two figures of closing stock (Rs.4,70,46,705/- as computed by the AO – Rs.4,50,43,269/- as shown in the audit report) has been explained by the appellant, that it was due to different methods of valuation of stock at cost or market price, whichever is lower, adopted by the assessee. However, the appellant has failed to support his argument with item wise details of closing stock and nor its valuation is supported with the documentary evidence such as bills and vouchers he has specifically mentioned that which item has been valued at cost or market price, whichever is lower. Similarly, the appellant has tried to explain difference in item of stock that in the back up data stock at Dhuliya and Guwahati Branch totaling to 15969 no’s and 1281513 no’s were not included and figures
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of wastage 32254 was not considered, therefore, this discrepancy arosed is also not acceptable for the reason that the AO, as reflected from Annexure S-4 while computing the quantum ways closing stock has already included the stock of Dhuliya and Guwahati Branch. So far as the wastage of 32254 no’s is concerned, appellant had not supported this figure with any documentary evidence. It is also not mentioned that this figure was submitted during the assessment proceedings before the AO. In absence of any primary evidence to support the figures of wastage, the explanation of the appellant cannot be accepted. Therefore, the CIT(A) held that the books of accounts maintained by the appellant are not reliable and authentic, therefore, the AO has rightly rejected the same u/s.145(3) of the Act.
With regard to gross profit addition, the CIT(A) observed that the reasons for short fall given by the appellant that there was increasing price of raw material and export sales including export incentives is not convincing. The AO, therefore, has rightly held that the reasons given by the appellant are general in nature. In view of this matter, the addition of Rs.49,20,122/- made by the AO on the basis of estimation of profit was upheld and sustained.
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Being aggrieved, the assessee filed this appeal before the Tribunal. The ld.Counsel for the assessee submitted that the AO considered the opening stock of raw material at Rs.22,61,397/- as per audit report as against balance as per back up data at Rs.18,68,300/- as per Annexure S-1. However, the AO has not considered the stock of raw material in process at 405766 kg shown in the Annexure S-2 and also forming part of the seized computer back up of the assessment order at page 11 of 11 of Annexure S-2. If the same is added to the back up stock of Rs.18,68,300/- then total stock works out to 2274066kg, thus, there would be difference of 12699 (22,74,066 – 22,61,397) which is negligible and same is identical figure for closing stock also, hence, will not affect the operational results. Similarly, the AO considered the closing stock of raw material at Rs.8,10,319/- as per back up data as against closing stock of raw material shown at 959494 kg. However, if the stock in process as appearing in S-2 which is forming part of the seized computer back up and the assessment order is considered, then total closing stock would worked out at Rs.9,72,163/- (8,10,319 – 1,61,844) as against the closing stock as per audited books of accounts at Rs.9,59,494/- which gives the quantity difference of 12.669kg. If this is in the considered quantity details, therefore this does not affect the book results. If the value of raw
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material in process as per Annexure S-2 at Rs.42,52,526/- is added in the closing stock of rs.3,03,04,317/- then total value of closing stock of raw material will tally. The AR further submitted that the AO considered the value of opening finished stock at Rs.40,54,353/- as against which value shown in computer back up at Rs.33,33,079/- as per Annexure S-3 of computer back up. However, the AO has not considered the stock lying at Dhuliya and Guwahati Branch of Rs.7,21,274/- if the same is added to the backup stock then total comes to Rs.40,54,353/-, hence, there is no difference in the finished goods stock. Similarly, the AO has considered the value of closing stock of finished goods at Rs.48,77,541/- as per audit reports as against Rs.36,12,313/- shown in S-4 of computer back up. However, the AO has not considered the value of finished goods stock of Rs.15,969/- placed at Dhuliya Branch of Rs.12,81,513/- placed at Guwahati Branch, if the same is added then the total value of finished goods stock would be at Rs. 49,09,795/- as against 48,78,541 giving the difference of Rs.32,254/- which is 0.09 % of total production. The AR also submitted that value of finished goods stock comes to at Rs.4,50,43,269/- whereas the stock as per Annexure S-3 considered by the AO at Rs.3,47,35,837/- in which if the stock Dhuliya and Guwahati Branch is added then total value of back up data from computer would come to
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Rs.4,70,46,705/- and there would be difference of 20,03,436/- which is on account of method of valuation of stock at cost or reliable value whichever is lower. Therefore, it was contended by the ld.Counsel that there is no difference in the books of accounts maintained in the computer back up and audited books of accounts as per audit report, hence, the AO was not justified in rejecting the books of accounts.
On the other hand, the ld.Departmental Representative has supported the orders of the AO as well as the CIT(A) and submitted that the assessee was not able to reconcile the figures and discrepancies as found during the course of survey and also admitted by the directors of the assessee company in their statement. Therefore, the AO was correct in rejecting books of accounts. Similarly, the reasons for fall in gross profit were given by the assessee are of general in nature. Therefore, the assessee is not able to explain the fall in gross profit, hence, the addition made by the AO and sustained by the CIT(A) are in order.
We have considered the facts and perused the material on record. It is seen that a survey u/s.133A was carried out in the case of assessee on 13.07.2011 wherein back up of computer data were taken from the assessee’s premises. However, it is noticed that no
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statutory stock registers RG-1 and RG-23 was found to have been maintained at the factory premises. Similarly, during the course of statement recorded on oath Shri V. Sekhar, Director of the assessee company has stated that he had not certified any stock in his 15 years of career which means that closing stock was being shown in the books of accounts on estimated basis only as no physical verification of the stock was kept by the assessee. The AO has made out a chart at page 8 of assessment order wherein he has pointed out the difference between the opening, finished stock shown in the audited books of accounts and as stock reflected in the computer back up taken and inventorised as per the Annexure S-1, S-2, S-3 and S-4. The ld.Authorised Representative has contended that the stock considered as Annexure S-1 opening of raw material and closing raw material stock does not include the stock kept on machine i.e. as per Annexure S-2 and if the same is considered then there is only difference of figure of 12,669kg. However, even if the contention of the assessee is accepted on this score even then there is a difference in the book stock as well as stock shown in the audited balance sheet. Similarly, there is a difference between two figures of finished closing stock of Rs.20,03,436/- (Rs.4,70,46,705/- as computed by the AO Rs.4,50,43,269/-) as shown in the audit report. However, the assessee
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has failed to explain the same as the same has been clearly reflected in Annexure S-4. The claim of the assessee that stock difference of stock of Rs.20 Lakh is on account of different methods of valuation of stock adopted as at cost or market price whichever is lower. However, it is clearly mentioned in Annexure S-4 that the value of total finished stock at Rs.4,70,46,706/-. Therefore, the contention of the assessee that difference is on account of valuation method is not tenable in law and on facts as the impounded Annexure S-4 being computer back up data clearly considers the stock of finished goods at Rs.4,70,46,706/-. Therefore, in this background and admitted position of difference of stock as shown in the audited balance sheet and as reflected in S-1, S-2 and S-4 is not matching. Hence, in view of specific defects noticed by the AO, we are of the considered opinion that the AO has justified in rejecting the books of accounts by invoking the provisions of section 145(3) of the Act.
Coming to the gross profit addition, we find that the gross profit disclosed during the year is at 11.50% as against the gross profit rate of 13.39% in the immediate preceding year. The reasons for short fall given by the assessee are general in nature and not supported by any documentary evidences, hence, same are not convincing. Moreover, we agree with the observation of the AO that in the case of assessee
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export sales are increasing which clearly proves that the export sales are more profitable than the local sales. Otherwise, the export business would not have increased and only local sales would be increased because no businessman works without profit, and maximization of profit is the sole objective of the business. Further, as we find that there is a clear cut difference of Rs.20.03 lakhs in the stock of finished goods, therefore, the books result of the assessee are not reliable and there is a under statement of profit. Therefore, the addition made on account of fall in gross profit by 1.89% on the total turnover at Rs.49,20,122/- is quite logical and therefore we do not find any substance in the claim of the assessee and therefore findings recorded by the lower authorities are accordingly upheld. Thus, Ground No’s.I and II of the assessee are therefore dismissed.
Ground No.III relates to charging of interest u/s.243A, 234B and 234C which is mandatory as held by the Hon’ble Supreme Court in the case of CIT vs. Anjum M.H.Ghaswala & Ors. 252 ITR 1 and same is upheld. However, the AO is direct to allow consequential relief if any to the assessee.
Now, we will take up the Revenue’s appeal in ITA No.1102/Ahd/2014.
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Ground No.1 states that ld.CIT(A) was not justified in deleting the addition of Rs.40,00,000/- made u/s.68 of the Income Tax Act, when the assessee was failed to prove the identity or creditworthiness of the loan creditor and genuineness of the loan transaction. And Ground 1 to 3 relates to deleting the disallowance interest payment of Rs.8,60,712/- claimed on the unsecured loans.
Facts aproposed of the Ground No.1 to 3 are that the assessee has accepted the fresh loan during the year under consideration of Rs.20 lakhs from M/s.P C J Finvest Pvt. Ltd. Rs.10 lakhs from M/s.Stronac Trade Pvt. Ltd. of Rs.10 lakhs from M/s.Aradhna Investment Ltd. A notice issued u/s.133(6) in sample case and in respect of 11 parties were returned back unserved, therefore, the AO has issued commission u/s.131(d) to the office of the Director of Income Tax-(Investigation), Kolkata wherein his office has gathered the information from the parties by sending summons, but same remained unverifiable, therefore, the AO made disallowance of Rs.40 lakhs in respect these 3 parties and consequentially also disallowed interest payment of Rs.8,26,395/- allowing the loan interest payment made in the case of above 3 parties in the case of M/s.Aradhna Investment Pvt. Ltd. amounting to Rs.34,326/-.
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Being aggrieved, the assessee filed this appeal before CIT(A). During the course of appellate proceedings, it was submitted that all the required evidences to establish the genuineness of the loans were provided to AO. The confirmation of creditors, copy of audited financial statements, copy of acknowledgment of return, copy of ledger accounts and copy of bank statements in respect of three parties namely i) P C J Finvest Pvt. Ltd., ii) Stronach Trade Pvt. Ltd., and iii) Aradhna Investment Pvt. Ltd were submitted to the AO, but he did not consider it. The CIT(A) was of the view that the documents revealed that all the three creditors are assessed to tax, they have sufficient funds to advance loan to the appellant and transactions have been made through account payee cheque. From the details filed, it is clear that the relevant documents were submitted by the appellant to the AO during the assessment proceedings. But, AO failed to consider them. Therefore, the CIT(A) was of the view that all three conditions as envisaged by section 68 of the Act are fulfilled. In the case of Aradhna Investment Pvt. Ltd it was stated by the AO that the ADIT- (Inv), Kolkata has not included the name of this party in the list of creditors who were considered explained by him. In view of this, it was concluded that the assessee has failed to explain the amount of Rs.10 Lakhs. But now the appellant has filed the copy of letter dated
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30.05.2012 submitted to DDIT-(Inv), Unit-1(3), Kolkata includes enclosing the copies of confirmation balance sheet, profit and loss account, bank statement acknowledgement of return etc,. Therefore, the CIT(A) viewed that these documents established the genuineness of the loan which were submitted to the AO as well as DDIT-Investigation, Kolkata. Further, this creditor is a regular income tax assessee, which has filed the return of income for the year disclosing income of Rs.4,98,71,763/- and thus have funds to advance loan to the appellant. Thus, the CIT(A) has held that the AO has wrongly held the aforesaid three loans on unexplained without considering the documents and evidences filed by the appellant during the assessment proceedings, hence, same were directed to be deleted. Similarly, the disallowance of interest of Rs.8,60,721/- on account of unsecured loan in respect of aforesaid three parties as stated as unexplained. Since the loan of these parties have been treated as explained, the addition made by the AO was also deleted.
Being aggrieved, the Revenue filed appeal before this Tribunal. The ld.Senior Departmental Representative (Sr.DR) vehemently relied on the order of the AO and submitted that the assessee has failed to establish the genuineness of the unsecured loan and the CIT(A) ought to have upheld the order of AO.
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On the other hand, the ld.Counsel for the assessee submitted that the assessee has submitted all the necessary evidences in the form of confirmation, audited financial statement, income tax acknowledgment, copy of return, bank statement, explaining the source of funds in respect of all the three parties. The assessee has also submitted necessary evidences before the DDIT-(Inv), Kolkata vide letter dated 30.05.2012 in respect of M/s.Aradhana Investment Pvt. Ltd., therefore, the CIT(A) has rightly deleted the addition considering the fact that all the three ingredients of section 68 are satisfied and consequentially deleted the addition of Rs.40 Lakhs and consequential effect disallowance in respect of these unexplained creditors as well as other creditors brought forward old creditors.
We have considered the facts and perused the material on record. We find that the assessee has furnished necessary evidence in the form of copy of confirmation letter, coy of bank statement, copy of acknowledgment of income tax return, audited balance sheet and financial statements in respect of all these persons before the AO during the course of assessment proceedings as well as during the course of appellate proceedings. It is also noticed that M/s.Aradhna Investment Pvt. Ltd. has filed a reply vide letter dated 30.05.2012
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before the DDIT-(Inv), Kolkata as well as before the AO. It is also noticed that the said concern is assessed the tax and has shown the income of Rs.4,98,71,763/- in his return of income. Therefore, the creditors from whom loans are taken by the assessee are assessed to tax and have capacity to advance the loan, hence, genuineness of the transaction, identity and creditworthiness of the creditors has been established as required u/s.68 of the Act. Therefore, we do not find any infirmity in the order of learned CIT(A). Accordingly, the same is upheld. Therefore, the ground of appeal 1 to 3 of Revenue are accordingly dismissed.
In the result, the appeal of Revenue is dismissed.
Finally, the appeals filed by the Assessee as well as Revenue are dismissed.
The order pronounced in the open court on 05-06-2018.
Sd/- Sd/- (सी.एम.गग�) /(C.M. GARG) (ओ.पी.मीना) /(O.P.MEENA) �याियक सद�य/JUDICIAL MEMBER लेखा सद�य/ ACCOUNTANT MEMBER सुरत/ Surat: �दनांक /Dated : 5th Jun, 2018 / SGR Copy sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order / / TRUE CO / / TRUE COPY / / Assistant Registrar, Surat