DCIT, NEW DELHI vs. M/S. OMNIA APPLIANCES PVT. LTD., NEW DELHI

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the revenue against the order of the ld CIT(A)-7, New Delhi dated 03.03.2015 for the Assessment Year 2010-11. 2. The revenue has raised the following grounds of appeal:- “1. On the facts and circumstances of the case, the ld CIT(A) has erred in deleting the disallowance of Rs. 3,51,88,221/- made by the AO in respect of expenses incurred out of books of rejecting the books of account by giving a clear finding of facts that the assessee company had suppressed its promotion expenses to inflate the claim of deduction u/s 80IC of the IT Act, 1961.

2. On the facts and in the circumstances of the case, the ld CIT(A) has erred in holding that the books of account was not properly rejected as per the provisions of section 145 of the Act despite the fact that the AO has given elaborate details and basis as to why the books of a/c of the assessee did not give the correct picture of its financial affairs.”

4. The broad facts culled out from the orders of the lower authorities. Shows that assessee is a company engaged in the assembling of ceiling fans, water heaters at Haridwar. The fans assembled by the company are sold to M/s Bajaj electrical Ltd. The assessee filed its return of income on 26/9/2010 declaring income of INR 5 136918. The assessment under section 143 (3) of the act was passed on 14/3/2013 determining total income of the assessee at INR 4 0325139 wherein an addition of INR 3 5188221 was made on account of disallowance under section 80 IC as discussed by the learned assessing officer as under:-

3. Disallowance of deduction claimed u/s 801C:- 3.1 The assessee company is engaged in assembling of ceiling fans, water heaters at plot no. 9, Sector-6, AIIE, Haridwar, Uttrakhand. The fans Page | 2 assembled at this Unit are mainly sold to M/s Bajaj Electricals Ltd. The company has claimed its whole profit as exempted under section 80IC of the Income Tax Act, 1961. It is a well known fact that the assessee is running units in Haridwar (Uttarakhand) or Baddi at Himachal Pradesh are showing excessive profits by suppressing various expenses just to claim enhanced deductions u/s 80IC. 3.2 In this case during the course of assessment proceedings, it came to notice that the assessee company assembled / manufactured ceiling fans 639232, fresh air fans, 39506 and water heater 41542. The assessee company filed audited balance sheet and also manufacturing and consumption details of various items used for manufacturing of ceiling fans and other items. Perusal thereof reveals that the company manufactured 639232 fans. The quantitative details of fans manufactured was examined with reference to raw material consumed and found that the consumption of material for manufacturing of 639232 fans was not in consonance with material consumed e.g. blades used for manufacturing / assembling for e.g. minimum requirement per fan of a blade is three or four. The assessee disclosed consumption of blades at 1576907. Similarly, the other items also found on lower side than the actual consumption required for manufacturing of fans at 639232. This fact created doubt. Therefore, the assessee vide this office letter dated 12.2.2013 was required to furnish total raw material required for manufacturing a fan. In compliance relevant portion of which is reproduced as under thereto, the assessee did not furnish any detail and simply stated as under vide reply dated 25.2.2013:- "2.The unit is manufacturing electrical items like ceiling fans, water heater, mixer grinders, fresh air fans etc. and is using hundreds of components for its manufacturing. Some of the parts are manufactured inside the premises, some are procured on job work basis from the vendors and some are bought from the open market. These are then assembled to manufacture the finished product." 3.3 From the facts noted above, it is clear that the assessee did not want to disclose as to how much raw material is required for manufacturing a fan. It is a very strange case wherein the Chartered Accountant of the firm certified consumption of various items at the time of audit but the same were changed during the course of assessment proceedings and after issue of questionnaire by this office. Both the charts filed at the time of filing of return and filed during the assessment proceedings on 25.2.2013 are reproduced hereunder:- Chart furnished at the time of filing of return of income Quantitative details in respect of goods manufactured Description Unit Opening Purchase Manufacture Sale Closing Balance d Balance

Ceiling Fan Nos. 2,246/- - 6,39,232/- 6,33,375/ 8,104/- - Water heater Nos. 599/- - 41,542/- 42,082/- 59/- Mixer Grinder Nos. - 30/- 20/- 10/- 0 Fresh Air Fan Nos. - 39,506/- 38,185/- 1,321/- 0 Raw Material Consumption S.No Items Unit Current Year Opening Receipt Consumpti Closing on Qty. Qty Qty Qty Ball Bearing Nos. 41 193 670000 609496 101679 6201 Ball Bearing Nos. 41 193 598914 68279 2 626000 6202 1 3 Blade Nos. 51302 156331 1576907 34726 Shaft Nos. 30923 677963 559110 149776 1 5 Shakle Assly Nos. 20708 619565 566200 74073 Top Cover Nos. 24998 684983 686683 23298 6 7 Stator Nos. 12736 547214 547214 12736 Down Road Nos. 29350 680516 634830 75036 8 9 Body Ring Nos. 7075 53400 37951 22524 Value of Raw Materials and Components consumed PARTICULARS CURRENT YEAR PREVIOUS % OF TOTAL YEAR CONSUMPTION Imported Nil 5.78 Indigenous 4287.49 2744.29 100% Total 4287.49 2750.06 Chart submitted on 25.2.2013 SI. Items Units Current Year No. Opening Receipt Consumptio Closing Qty. Qty. n Qty. 1 Ball Bearing Nos. 41,193 6,46,00 6,55,965 31,228 Qty. 6201 0 2 Ball Bearing Nos. 41,193 6,46,00 6,51,289 35,904 Nos. 30,923 6,89,523 6.890.740 Shalt 39.706 6202 0 Shakly Assly Nos. 20,708 6,63,865 6,41,232 43,341 5 Blade Nos. 51,302 22,19,499 21,69,869 1,00,932 6 Element Nos. 1,933 46,104 47,236 801 7 Thermostat Nos. 2,732 45,900 48,632 0 8 Cut Out Nos. 2,491 47,200 48,591 1,100 9 Bearing LD Nos. 6,150 30,000 35,410 740 10 Shaft LD Nos. 2,028 44,607 39,442 7,203 3.4 From the perusal of both the charts it is noticed that the assessee suppressed production expenses just to inflate profit for claiming deduction u/s 80IC. The details of production expenses suppressed are calculated as under:- S.No. Item Consumption Minimum disclosed Consumption required 1 Ball bearing 609496 639232 for 639232 fans 2 Ball bearing 598914 639232 6201 3 Blade 1576907 1917696 6202 4 Shaft 559110 639232 5 Shakle Assly 566200 639232 6 Starter 547214 639232 7 Down Rod 634830 639232 8 Body for water 37951 42082 heaters(42082) Total 5130622 5795170

3.5 From perusal of above it is clear that in terms of percentage, the assessee has disclosed manufacturing expenses at 46.9% (5130622/ 10925792 X 100) as against consumption comes on the basis of quantity produced at 54.9%(5795170 10925792 X 100). The total production expenses of the assessee are Rs.43,98,52,763/- and accordingly the 8% suppression of production expenses by the assessee comes at Rs.3,51,88,221/ - and accordingly the gross profit of the assessee is Rs. 10,68,437/- against Rs. 3,99,52,596/- as disclosed by the assessee which means the assessee company is not earning any profit from this business but enhanced its profit by suppressing production expenses just to claim deduction u/s 80IC. The assessee was confronted on this point and in compliance thereto the AR of the assessee furnished written reply dated 25.2.2013 as under:- "This is to certify that we have audited and signed the Balance sheet and Profit & Loss account of M/s Omnia Appliances Pvt. Ltd. having its registered office at 29-B, Prehlad Market, D.B. Gupta Road, Karol Bagh, New Delhi-110005, for the financial year ended on 31.3.2010. In the said financial statements due to oversight wrong quantitative details of consumption of raw material have been printed and reported. The correct figures of the quantitative details of raw material consumption are as under- SI. Items Unit Current Year No s Openin Receipt Consumptio Closing . g Qty• n Qty- 1 Ball Nos. 41,193 6,46,000 6,55,965 31,228 Qty• Qty• 2 Ball Nos. 41,193 6,46,000 6,51,289 35,904 Bearing 3 Shaft Nos. 30,923 6,89,523 6,890,740 39,706 Bearing 6201 4 Shakly Nos. 20,708 6,63,865 6,41,232 43,341 6202 Assly Page | 5

5 Blade Nos. 51,302 22,19,49 21,69,869 1,00,93 6 Element Nos. 1,933 9 46,104 47,236 2 801 7 Thermosta Nos. 2,732 45,900 48,632 0 8 Cut Out Nos. 2,491 47,200 48,591 t 1,100 9. Bearing Nos. 6150 30,000 35,410 740 LD 10 Shaft LD Nos. 2028 44,607 39,442 7203 . We further certify that to the best of our knowledge and belief there is no financial impact on the balance sheet and Profit and Loss Account of the company due to said error in reporting of quantitative details. The above certificate has been issued at the request of the assessee.” 3.6 The contention of the assessee regarding wrong quantitative details and correct details furnished were examined and found that while furnishing details of consumption during the assessment proceedings, the assessee did not disclose use of starter for manufacturing of fans which is shown as consumed at 5472 14. Similarly, the down rod used at 634830 was not used while furnishing reply during the assessment proceedings. Further, the assessee company vide their reply has also changed quantity of closing stock e.g. ball bearings in closing stock was shown at 101697 and later on the same was reduced to 31228. In this exercise, the assessee company inflated number of blades in closing stock from 34726 to 100932. The assessee company tried its best to match quantitative figures in total but value thereof is not verifiable from the records maintained. In the above noted chart filed on 25.2.2013, the AR of the assessee did not furnish any details either for consumption or closing stock of starter whereas as per copy of bills for the month of March revealed that the assessee company purchased starters detailed below:- SI. No. Bill / Invoice Date No. of starter Amount No. 1 0130 3.3.2010 732 1,13,460 2 0131 4.3.2010 456 70,680 3 1696 5.3.2010 1230 2,06,640 4 0134 5.3.2010 1,02,300 660 5 0135 6.3.2010 624 96,720 6 0136 7.3.2010 600 93,000 7 0137 8.3.2010 582 90.210 8 1713 8.3.2010 1020 171360 9 0142 9.3.2010 570 98,646 10 0140 9.3.2010 576 89,280 11 0144 10.3.2010 528 84,480 12 0143 10.3.2010 576 89,280 13 1724 10.3.2010 570 95,760 14 0145 11.3.2010 1116 1,78,560 15 1739 11.3.2010 510 85,740 16 0148 12.3.2010 606 96,960 17 0153 14.3.2010 834 1,33,440 18 1755 14.3.2010 1110 1,86,660 Page | 6

19 0154 15.3.2010 1092 1,74,720 20 0156 16.3.2010 726 1,19,790 21 0155 16.3.2010 834 1,37,610 22 0157 17.3.2010 630 1,03,950 23 0158 17.3.2010 720 1,18,800 24 1780 17.3.2010 1050 1,77,480 25 1785 18.3.2010 540 91,680 26 0159 18.3.2010 582 96,030 27 0160 18.3.2010 756 1,24,740 28 1815 22.3.2010 1170 1,98,300 29 0170 23.3.2010 648 1,02,384 30 1823 23.3.2010 780 1,32,600 31 0171 24.3.2010 816 1,28,928 32 0172 25.3.2010 720 1,13,760 33 1841 25.3.2010 1350 2,26,920 34 1855 27.3.2010 720 1,21,140 35 0174 28.3.2010 540 85,320 36 1863 28.3.2010 960 1,61,280 37 0176 29.3.201 624 1,01.088 38 1874 30.3.201 1320 2,21,760 0 39 0177 30.3.2010 594 96,228 0 40 0179 31.3.2010 762 1,23,444 41 0178 31.3.2010 534 86,508 42 1887 31.3.201 810 1,37,100 0 3.7 Thus, the plea of the assessee regarding there is no financial impact on balance sheet and P 85 L account due to so called error in reporting is wrong and not verifiable from the records. 3.8 From the facts noted above, it is clear that the assessee company has suppressed its production expenses by 8% as discussed above and thereby enhanced the profit just to claim deduction u/s 80IC for Rs. 3,51,88,221/- . Since the assessee company has earned income from undisclosed sources and the same has been introduced in the name of profit in the company for claiming deduction u/s 80IC. The books of accounts maintained by the assessee cannot be relied upon, the provisions of section 145(3) are clearly applicable in this case. Therefore, the books of accounts maintained by the assessee company are hereby rejected. 3.9 After rejection of books of accounts, the profit of the assessee has to be estimated on the basis of material available on record. In the instant case the assessee company has suppressed its expenses about 8% and thereby claimed enhanced deduction u/s 80IC. It appears that the assessee company has incurred expenses from undisclosed sources without recording the same in the books of accounts therefore, the expenses incurred out of books of accounts is estimated to the extent of Rs.3,51,88,221/-. Accordingly, the deduction claimed u/s 80IC at Rs 1,85,76,062/- is hereby disallowed and expenses incurred to that extent without recording the same in the books of accounts is hereby added to the Page | 7 total income of the assessee company u/s 69C of the I.T. Act, 1961. 'The addition of Rs. 3,51,88,221/- includes disallowance of deduction of Rs. 1,86,76,62/- which means that the addition of Rs. 3,51,88,221/- is added to the total income declared by the assessee.”

“6. Ground No. 5, 6, 7, 8, 9,10, 11 A 12 are in respect of addition of Rs.3,51,88,221/- respect of expenses incurred out of books and rejection of claim of deduction of Rs.1,86,76,062/- u/s 80IC. 6.1. I have noted from the order that the AO is proceeding with a pre-conceived notion. The AO has stated that the appellant was showing excessive profits by suppressing expenses to claim enhanced deductions u/s 80IC. In any case then there exempt u/s 80IC. 6.2. During the course of assessment proceedings, the AR of the appellant furnished a letter stating that in the financial statements wrong quantative details of consumption of raw materials was printed. This however, would have no impact on the PAL A/c or balance sheet. The AO however rejected the claim of the appellant and invoked section 145(3). 6.3. The AO then stated that the appellant would have incurred expenses outside books of account and estimated such expenses at Rs.3,51,88,221/-. I am unable to comprehend by what logic the estimation of expenses has been done. The AO did not make any inquiries, did not mention the defect in the books of account, did not state what type of expenses were incurred out of books. 6.4. The AO in the order has clearly stated that various details and documents were examined on test check basis. The AO has nowhere stated that purchases were verified or sales were verified. The AO has not Stated which vouchers of expenses were verified and found not genuine. 6.4. The appellant stated that it was manufacturing fans and water heaters. The appellant had claimed deduction u/s 80IC on its only unit at Baddi. The appellant has a Single buyer who is Bajaj Electronics Pvt. Ltd. 6.5. The appellant stated that there was a mistake in statement of quantative details which was rectified. The complete purchases were Page | 8 booked and the closing stock was correctly valued. The correct profit as per the books of account was shown. 6.6. Regarding rejection of books which is in ground No. 4,1 shall quote section 145: “Section 145(1) specifically provides that income chargeable under the head "Profit & Gains from Business and Profession or income from other sources" shall be computed in accordance with the method of accounting regularly employed by the appellant." 6.7. It is not only the right but also the duty of the AO to consider whether or not the books disclose the true state of accounts and the correct income can be deduced there from. While 145 enables the AO not to accept the method of accounting of the appellant if he is of the opinion that the method employed is such that income cannot be properly deduced, there is no power with the AO to impose his own method upon the appellant. 6.8. If the appellant's method of accounts has been accepted regularly for a number of years as his basis for assessment, the AO shall not be justified if for any particular year, he refuses such method as the basis for assessment for that year. Only on conjectures books of account cannot be rejected. 6.9. If there is a system whereby profits can properly be deduced, even by appropriate adjustments, the AO is bound to accept such profits [CIT v Krishnasanim Hudafiar 53 ITR 122,128,129 (SC). 6.10. What is to be determined by the AO in exercise of his power is a question of fact is whether or not income chargeable under the Act can be properly deduced from the books of account and he must decide the others, with reference to the relevant material and in accordance with correct principles [British Paints India Ltd 188 ITR 44,49 (SC)]. 6.11. Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. 6.12. If there is rejection of accounts regularly maintained it is the right of appellant to be given opportunity to explain defects - Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The AO has to prove satisfactorily that the account books are incorrect or incomplete before the AO can reject the accounts. Rejection of accounts should not be done light-heartedly. Though it may not be possible to lay down the exact circumstances in which the accounts should be rejected as unreliable or incorrect, the accounts may be rejected as unreliable if important transactions are Page | 9 omitted or if proper particulars and vouchers are not forthcoming or if they do not include entries relating to a particular class of business. The appellant should be given an opportunity on his failure to satisfactorily explain the defects. 6.13. It, therefore, follows that appellant's account books are to be accepted, unless, on verification, they disclosed any faults or defects, which cannot be reasonably and satisfactorily explained by the appellant [R.B. Jerraram Fataehchand (Sugar Deptt) v CIT, (1970) 75 ITR 33, 37 (Bom)]. 6.14. The AO rejected the books of account stating that the appellant had not given correct details of material. However, without recording the finding that the profits and gains cannot be property deduced from the books of account, the AO should not have resorted to provisions of Sec. 145(3). 6.15. The Hon'ble Delhi High Court in the case of CIT v Jacksons House 039 DTR 0212 has held that:- “The Tribunal relying upon the decision of Supreme Court in S.N. Namasivayam Chettiar vs. CIT (1960) 38 ITR 579 (SC) held that if the method adopted by the assessee was a regularly employed method and was such that the income, profit and gain can be properly deduced therefrom, then such method of accounting, as followed by the assessee, cannot be discarded. The Tribunal also noted that the accounts of the assessee were audited and no discrepancy of accounting had been pointed out." "In any case, the question whether the accounts maintained by the assessee were defective and/or incomplete, or not, was a question of fact. Neither the CIT(A) nor the Tribunal found the accounts to be defective or incomplete. Both, CIT(A) as well as the Tribunal were satisfied with the stock register maintained by the assessee and appreciated the fact the raw material, i.e., the fabric purchased by the assessee was to be measured in metres, whereas the finished products were to be counted in numbers, NO reasonable ground has been made out for this Court to go in to this question and revisit the finding returned by the CIT(A) and the Tribunal. The question as to whether the assessee had duly explained the drop in the GP ratio or not was a question of fact. It is not as if the assessee did not give any plausible explanation for the. fall in GP during year in question. He gave a number of reasons in this regard and the explanation given by the assessee having been accepted by the CIT(A) as well as by the Tribunal, it is not for this Court to go into such a question of fact. “

6.16. The most important fact is that sufficient opportunity has not been given to the appellant before invoking 145. The appellant is the business for long and has been consistently filing its return of income on the basis of audited accounts. The AO has not given sufficient basis to suggest that the accounts of the appellant were such that correct profits could not be deduced from the accounts. 6.17. The AO has not given an opportunity to the appellant before invoking section 145. This is an essential prerequisite of any proceeding that the AO cannot draw an adverse inference against the appellant without giving an opportunity and a fair and just chance to the appellant to give its submissions. Principles of natural justice should have been followed. 6.18. There is no basis on which the AO has disallowed expense of Rs.3,51,88,221/-. The addition of this amount is deleted. The deduction u/s 80IC is allowed to the appellant. The ground of appeal is ruled in favour of the appellant.”

6. Learned departmental representative vehemently supported the order of the learned assessing officer and extensively read para number 3 of the assessment order and stated that as the books of accounts of the assessee are not reliable the provisions of section 145 (3) are applied by the learned assessing officer and rejected them. He submitted that when the assessee company has suppressed the production expenses and thereby and hence the profit just to claim the higher deduction under section 80 IC of the act. The books of accounts of the assessee cannot be relied. He further stated that the learned assessing officer has correctly held that the assessee company has suppressed its expenses about 8% and thereby claimed enhance deduction under section 80 IC of the act. He further stated that this proves that the assessee has incurred expenditure from undisclosed sources without recording the same in the books of accounts and hence, the learned AO has correctly estimated the expenses incurred out of the books of accounts of the above amount in the deduction claimed by the assessee of INR 1 8676062/– is disallowed. He submitted that the learned CIT – A, has deleted the whole addition without appreciating the assessment order passed by the learned assessing officer.