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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’: NEW DELHI
Before: SHRI BHAVNESH SAINI & SHRI L.P. SAHU
This appeal by the Revenue has been directed against the order of Ld. CIT(A) XXIII, New Delhi, dated 23.10.2012 for Assessment Year 2008-09, challenging the deletion of addition of Rs. 1,77,73,854/- on account of estimated excess consumption and in not approving the rejection of books of accounts u/s 145(3) of the Income Tax Act, 1961.
Briefly the facts of the case are that the return of income for Assessment Year under appeal was filed on 16.10.2008 showing a total income of Rs. 72,98,324/- which was duly processed u/s 143(1) of the Income Tax Act. During the year under consideration, the assessee has earned income under the head “Income from Business”
& “Income from Other Sources”. The assessee started business of exports of readymade garments in the previous year 2006-07 only.
During the course of assessment proceedings, the assessee was requested to submit the trading account on a monthly basis which was submitted by the assessee.
AO examined the same and reproduced in the assessment order and noted that G.P.
Rate for the month of May 2007, January 2008 and February 2008 are negative. The G.P. Rate in the month of April 2007, August 2007, November 2007 and December 2007 are above 30%. The GP Rates in the last quarter of the year are the least if positive and are the highest negative. This in a way points out that some adjustments have been done in the last quarter of the Financial Year to evade the taxes. The AO also noted that, during the month of October 2007 to January 2008, the monthly sales are in the range of Rs. 1.8 to 1.9 crores per month. However, the purchases and direct expenses are very much variable ranging from Rs. 0.9 crores to Rs. 2.3 crores per month. It was expected that the product mix of the assessee will not be significantly variable and would be same more or less as a mix. In the normal course of business generally purchases and direct expenses keep a stable ratio vis-à-vis the sales.
However in the present case there are variations. The trading account was submitted by the assessee on the basis of actual stock records maintained by him and the value of closing stock is stated to be on actual basis by the assessee. In furtherance of proceedings, the assessee was asked to produce the stock register to substantiate the stock amounts, however assessee maintained silence. The assessee was also requested to furnish the figures of monthly stocks given to the bank which was filed by the assessee. Taking the various figures of monthly expenses and sales etc. from the monthly trading account submitted by the assessee, monthly trading accounts have again been prepared taking the stock values from the stock statements submitted to the bank which is reproduced in the assessment order.
The AO noted that assessee is having negative G.P. in the months of May 2007, Jule 2007, January 2008, February 2008, and March 2008. The G.P. has varied from (-)
82.25% to 55.90%. AO noted that such variation is not expected in the books of accounts maintained correctly. All these facts were confronted to the assessee. The AO also examined the case from the point of annual G.P. Rate of 13.81% and re-casted the monthly Trading A/c accordingly. The same is reproduced in the assessment order.
The AO noted that in the months of June 2007, October 2007, November 2007, December 2007 and January 2008, the assessee is having negative closing stock which means that during these months the actual G.P. should have been higher than the annual G.P. Rate of 13.81% as is deduced from the annual trading account submitted by the assessee. The AO therefore, noted that the books of accounts of the assessee are not giving a true and fair picture. AO further noted that in the month of December 2007, stitching expenses are exorbitantly high. While the sale level is almost similar in November 2007 and December 2007. M/s Latika Enterprises is having the largest share in the stitching expenses for the month. During the month of January 2008, it is seen that abnormally high amount of purchases of fabric have been booked, for example the purchases in December 2007 are 53.6 lacs whereas the purchases in the month of January, 2008 are Rs. 134.2 lacs whereas the sales levels are almost similar. It was found that M/s Sakshi Creations has sold largest amount of fabric to the assessee during this month. During the month of February, 2008, it was seen that the embroidery expenses are gone up very high. From the party wise detail, it was found that largest amount of bills have been given by M/s Latika Enterprises. It was noted that the very same firm gave highest amount of stitching expenses bills during the month of December, 2007. Similar abnormalities noted in other months. A summary of parties accounting to highest expenses is noted in the assessment order. The AO noted that three parties, namely,(1) M/s Latika Enterprises, (2) Laurels (India) Impex Ltd. (3)
Sakshi Creations have supplied material to the assessee and also given job work to the assessee. In a way completely manufactured/finished items have been supplied by these entities. At the same time, these entities are the entities due to which in some months expenses are abnormally inflated. The assessee has during the course of proceedings submitted the details of quantity of goods manufactured and in stocks alongwith monthly stocks statements showing the breakup value of raw material, WIP, accessories and finished goods. The quantitative reconciliation of finished goods and monthly stock statement have been submitted which is noted in the assessment order.
The AO accordingly noted that the assessee has adopted adhoc values while valuing the closing stock. The AO also noted that assessee has received certain money from her parents. To confirm the same, their bank accounts were obtained to match the entries.
It was noted that there were deposits in their banks which looked suspicious. In this regard, it was possible round triping of money taken out from the business by the assessee, Notices u/s 133(6) was issued to them calling for narration of deposits in their bank accounts and certain other information. From the details it was found that there were large numbers of deposits in the accounts of the parties. The assessee was requested to furnish the copy of ledger of these parties in the books of assessee which has been submitted. The brief analysis of the transactions is noted in the assessment order and the AO noted that the transactions are prima-facie suspicious and abnormal.
The AO as per the above discussion reiterated that there is a negative GP in few months and positive GP in few months which is not possible and that the creditors of the assessee remained unverifiable in the notices issued u/s 133(6) of the Act. The show-cause notice was issued to the assessee on 29.12.2010 as to why the books of accounts should not be rejected. The assessee filed reply on 31.12.2010 and also produced the books of accounts, bills and other materials which have been examined by the AO. The assessee in the reply reiterated the facts submitted before the AO and submitted that due to the nature of business of the assessee, he has to process the bills only on confirmation/surety of goods acceptance by the buyers atleast to some extent.
The reasons of variation in GP and explanation with details have been submitted on various dates. The assessee maintained proper books of accounts, bill & vouchers which were produced alongwith audited reports, and therefore, books of accounts should not be rejected.
AO considered the reply of the assessee noted that the assessee has submitted that generally a bill is entered after one month, after it is received. The AO however noted that, if that be the case then this should have average doubt the effect in all the months as the bills of months first will be entered in the books in the month second and so on. The AO from the bills of M/s Sakshi Creation noted that the date of bills and stamping on the bills are entered into the books of account were passed on the same day or on the next day. This would show that these bills have been processed exceptionally fast and the normal routine checks and waiting have been ignored. Therefore 1/3rd of the total purchase and expenses in the case of the above three companies should have been disallowed.
The AO from the bills of M/s New Variety Textiles found that the bills are dated in the months of February and March 2008, however, these bills have been passed after 5 to 6 months in the month of August 2008 on 19.08.2008 which falls in the subsequent financial year. Similar is the case with the bills of M/s S.H. Zari Art. The AO in view of the above facts, noted that books of account of the assessee are unreliable being incorrect and accordingly provisions of Section 145(3) of the IT Act was invoked and books of accounts were rejected. The AO considered the above history of the assessee and computed the average of G.P. Rates to 28.73% which resulted the gross profit to be of Rs. 5,29,36,282/- whereas the gross profit shown by the assessee is at Rs. 2,54,48,347/-, therefore the addition to the income was worked out at Rs. 2,74,87,935/-.
The AO also noted that the assessee has also given the quantitative consumption
per piece along with his reply. The stock is converted into Kg figures by taking 14 meters as equal to 1 Kg. From the monthly trading account prepared on the basis of fixed monthly G.P. as refer to above, it was seen that the peak negative stock has arisen in the month of December, 2007 i.e. the gross profit has been suppressed till December 2007 and thereafter bogus expenses bills have been inserted. In this regard from the figures submitted by the assessee as noted in the assessment order, the per unit average quantity consumption was worked out for the month of April 2007 to December 2007 and noted in the assessment order. The average per unit consumption was worked out at 0.3712 per piece. For the whole year total pieces manufactured are 570579. Multiplying the two total consumptions for the year works out to 211799.
Whereas the total consumption shown by the assessee is 232276.13, the assessee has shown artificial excess consumption of 9.67% and accordingly the AO noted that there should be an addition of this percentage in the G.P percentage. As per this G.P. addition works out to Rs. 1,77,73,854/-. The AO noted that it is a lesser addition, therefore addition of Rs. 1,77,73,854/- was made to the income of the assessee.
The assessee challenged the addition before the Ld. CIT(A). The written submissions of the assessee is reproduced in the appellate order in which the assessee explained that: the assessee is an individual and derives income from business in a proprietary concern, M/s Messianic alongwith income from other sources. During the year under appeal the turnover of the assessee is Rs. 18.42 crores as against Rs. 9.58 crores in the previous year giving gross profit of Rs. 2.54 crores as against Rs. 1.39 crores in last year. The assessee’s business consists of manufacturing and export of readymade garments. The assessee exports various styles and forms of garments including dresses, tops, blouses, tunics, skirts etc. Some needing embroidery, some garments being made from hosiery as well as fabrics, others with artistic or floral design or patch work etc. The normal cycle for different garments to be shipped ranges from 70-90 days. The procedure involves the samples of various styles are prepared and sent to the customers aboard for approval. On approval of a particular sample, the rates for the same are quoted by the assessee taking into consideration the style of the garments, the consumption of fabric, and the cost of stitching and accessories alongwith other overhead expenses. The price is further negotiated and on mutual settlement, the price is settled and delivery time ranging from 70 to 90 days. On receipt of the order, the assessee further orders for fabrics and other items needed for the manufacture of garments which may take from 15 to 25 days for delivery and after which the other activities of cutting, embroidery, stitching etc. are performed and within the specified period the garment is made ready for shipment. The assessee filed various charts, figures and average consumption calculations supported by all the material on record. The AO has taken figures for making monthly trading account on the basis of tally data provided by the assessee. The expenses are booked as and when the bills are received/ passed for payment which required time. In short the matching of direct expenses relating to each shipment may be possible manually but the same are not entered in the books of account on matching principle and hence the preparing of monthly trading account from the tally data and corresponding the same to the sales and gross profit rate may give misleading results. The Assessing Officer’s approach that recording of an entry in a particular month means the expenditure pertains to that particular month is not practically correct. Sometime fabric is purchased in the month of April 2007 for manufacture of garments, however, the shipment of the same may take place in June 2007. The assessee filed various Annexures on the basis of books of accounts to give the correct picture. The books of accounts have been maintained as per system of accounting and same are audited. The fluctuation in the gross profit rate is on account of various styles of garments manufactured during the month and the sales made which significantly may result in lower margin of profit on either one of the styles. Therefore, G.P. differs on different styles of manufacturing. The addition is made by the AO merely on presumption.
Sometime in the course of business the assessee may not make profit and in fact make loss on certain products to retain the customer. In the case of assessee the sales are mostly to M/s Vila/ A/s which are to the tune of Rs. 8.28 crores and to M/s Complete Clothing Co. Inc. of Rs. 9.02 crores. Thus, the substantial sale is made to these concerns. The details of the stock submitted to the banks are purely on estimate basis.
As per books of accounts it is more than the stock detail given to the bank. Therefore, no adverse inference should be drawn. The direct expenses have been taken on the basis of actual and not as per tally software. A perusal of the chart will show that there is no negative closing balance in any of the months on the basis of annual gross profit margin of 13.81%, therefore addition is erroneous. The assessee filed copy of accounts of parties alongwith their PAN and all document desired results was submitted in response to notice u/s 133(6) of the IT Act supported by bank statements. It was pointed out that these parties are existing for last several years and before the assessee had started business. M/s Latika Enterprises was doing job work for other concerns since 1997-98 and it is only in Financial Year 2007-08 it had started dealing with the assessee. M/s Laurels India Impex Ltd. was doing sales and job work since April, 2004 and similarly M/s Sakshi Creations was in the business of job work since 2002-03 for various manufacturers. There is no evidence on record to suspect the transaction with these parties particularly when parties have accepted transactions with the assessee.
In the case of M/s Laurels (India) Impex Ltd., no cash payment has been made and in the case of M/s Latika Enterprises the cash payment is of approximately Rs. 1 lacs made on various dates. It is only in the case of M/s Sakshi Creations that the payments have been made in cash as well as cheque against stitching and embroidery expenses.
These parties have accepted the transaction u/s 133(6) with the assessee. Therefore, there is no basis to reject books of A/c or make any addition against the assessee.
During the course of assessment proceedings, the assessee has submitted the details of quantity of goods manufactured and in stock alongwith monthly stock statement showing the breakup value of raw material, work in progress, accessories and finished goods. While valuing the cost of per unit of finished goods, the AO has erred in taking the quantity of finished goods correctly but taking the value of finished goods without adding the value of finished goods (lying in semi-finished house), clubbed under semi- finished goods to the value of finished goods. The assessee filed quantity of finished goods and closing stock is correctly taken and there is no major variation. Moreover, considering the various styles that the assessee manufacturers the working of average cost per unit will vary greatly depending on the style of garment manufactured alongwith quantity in stock at any given point of time. The explanation of the assessee is substantiated with material available on record. The exercise done by the AO to obtain per unit value of stock is completely baseless and illogical and far away from the common understanding of average price where the product is not similar and has wide variety of consumption based on designs and value. The assessee submitted correct address of various creditors vide letter dated 20.12.2010 but due to paucity of time some replies could not have been received before the assessment is framed on 31.12.2010. The total consumption as per AO comes to 2,50,034 as against actual consumption of 2,32,276. The detail of the same is reproduced at page 16 of the Appellate Order. The findings of the AO are therefore incorrect. There is no basis to reject the books of accounts which are maintained on similar basis in Assessment Year under appeal as well as in earlier years which are also audited. No specific defects have been pointed in maintenance of books of A/c by assessee. Therefore, there is no justification to reject the books of accounts merely on assumption. The assessee filed copy of assessment order in the case of Sh. Darshan Luthra, Prop. Of M/s Express Export Consultants for Assessment year 2008-09 wherein the return of income has been accepted except disallowance on minor expenses. The assessee has also filed copy of the assessment order in the case of the assessee for Assessment year 2009-10. The assessee has filed copy of the ledger account of all the parties and all the parties have confirmed genuineness of the transactions in their reply u/s 133(6) of the Act. Thus, there is no basis of the AO to make any addition against the assessee.
The Ld. CIT(A) considering the explanation of the assessee and material available on record, deleted the entire additions by accepted the books of accounts of the assessee. The findings of the Ld. CIT(A) in paras 5 to 7 of the appellate order are reproduced as under:-
“5. The above written submissions were carefully considered. The various evidences filed by the appellant including invoices of direct expenses, comparative charges of G.P. as per Tally and actually figures, details of various styles of garments with their cost sheet and working of G.P., and inventories of finished goods and of raw material, have been carefully examined. I have also called for and verified the case records, with particular reference to the Submission made during the assessment proceedings. The appellant has disclosed a gross profit margin of 13.81% on turnover of Rs. 18,42,54,374/-. It has been explained with reference to supporting documents, that the appellant manufactures various types of garments including dresses, tops, blouses, tunics, skirts etc. Some of the garments require embroidery or patch work, some garments are made of hosiery, and some of other fabrics, including lining fabric where required. Hence a uniformity of gross profit across different styles and kinds is not possible. It has also been explained that the normal cycle for shipping of garments from order to delivery ranges from 70 to 90 days, including preparation and approval of samples, quoting and negotiation of rates, receipt of purchase order, placing of orders for fabric and other items, cutting, embroidery and stitching, till the garment is ready for shipment. It is contended therefore, that a monthwise gross profit working cannot present a correct picture of the trading results. The direct expenses relating to each shipment would not fall in the month of delivery, hence the Assessing Officer’s approach of comparing monthwise expenses with sales is not practical. However, the appellant has carried out the exercise of correlating the expenses relatable to particular shipments with regard to fabric, stitching etc. as corresponding to the actual styles. The appellant has furnished various charts to show that there is considerable variation in the G.P. margins between the various styles, however the G.P rate for a particular style remains more or less stable throughout the year. The appellant has also pointed out that the Assessing Officer has relied on the stock statement furnished to the bank to adopt the figures of monthwise closing stock where as the stock as per books exceeds the figures furnished to the bank. It is vehemently argued that hypothetical calculations of gross profit and of consumption of raw material have been made while ignoring the actual figures as per the audited books of account. It is also submitted that allegations of roundtripping of transactions with the associated concerns have been made by the Assessing Officer, however, no specific instances of roundtripping of materials purchased from M/s Express Exports (Proprietor Shri Darshan Luthra) and M/s Prakul Fashion (Proprietor Smt. Shashi Luthra) by M/s Sakshi Creations, M/s Laurels (India) Impex Ltd. or M/s Latika Enterprises, and then sold to the appellant have been pointed out. The appellant has shown, by producing the relevant invoices, that material has been purchased from the three impugned concerns, at the same or lower prices than other suppliers. The appellant has further shown that the Assessing Officer, while computing the cost per unit of finished goods, has failed to include the value of semi finished goods, of which complete details had been provided during the assessment proceedings. The appellant has submitted confirmations of all suppliers of raw materials and of embroidery/stitching services. The appellant has also submitted the copy of the assessment order u/s 143(3) in the case of the appellant for the A.Y. 2009-10, i.e. the immediately succeeding year, in which the book results have been accepted, apart from disallowance out of administrative expenses such as staff welfare, conveyance, repair, travel etc. The appellant has further submitted the copy of the assessment order u/s 143(3) for the A.Y. 2008-09 in the case of Shri Darshan Luthra, (Proprietor M/s Express Export) wherein the returned income has been accepted, apart from routine disallowances.
6. There is no denying that in the nature of manufacturing business that the appellant is engaged in, the consumption of raw material and the costing per garment varies depending upon the order and style. The Assessing Officer’s exercise of calculating monthly G.P. by obtaining monthwise trading account on the basis of Tally accounts cannot provide a correct picture of G.P when the manufacturing cycle is of about 3 months. The monthwise sales figures show considerable variation. The Assessing Officer has himself noted that some bills of purchase/expenditure are entered into the books within days, while some bills are accounted for after a number of months. The appellant has shown that certain bills of expenditure are processed only after the consignment has been accepted by the buyer, considering the possibility that alterations/corrections may have to be carried out. The Assessing Officer has not pinpointed any specific defect in the books of account. The Assessing Officer has also failed to substantiate his allegation that goods were sold by associate concerns M/s Express Exports and M/s Prakul Fashion to the three parties M/s Sakshi Creations, M/s Latika Enteprises and M/s Laurel (India) Impex Ltd., which were then sold to the appellant, resulting in over reporting of cost. In the absence of any finding that goods and services were procured from the three parties at higher than market rates, or that the same goods and services were not actually procured, I am unable to agree with the view of the Assessing Officer that the transactions are suspicious and abnormal, or that the entries are artificial. The Assessing Officer has computed the addition of Rs. 1,77,73,854/- by applying a fixed monthly G.P. to the manufacturing and consumption figures of April to December 2007, and by calculating the average consumption of fabric per unit of clothing at 0.3712 kgs. The appellant has shown by reference to the audited books of account that the average
per unit consumption of fabric works out to 0.4382 kgs. for the period April to December 2007, and to 0.4071 kgs. for the entire previous year. The computation of “artificial excess consumption” of 9.67% amounting to Rs. 1,77,73,854/- is not proven on facts, and cannot be sustained. The alternative addition computed by the Assessing Officer of Rs. 2,74,87,935/- by applying an average G.P rate of 28.73% is also based on a hypothetical working of monthly trading account. There is no coherent basis for holding that purchases and direct expenses must keep a stable ratio vis-a-vis the sales, month upon month. There is no evidence found for the allegation that bogus bills have been introduced in the books of account. It is also evident that the show cause notice was issued to the appellant, seeking to reject the books of account, as late as 29.12.2010 for an assessment time barring on 31.12.2010. Hence the appellant was not provided with a reasonable opportunity to counter the allegations, and explanations filed by the appellant before the Assessing Officer on 13.12.2010, 20.12.2010, 23.12.2010, 26.12.2010, 29.12.2010 and 30.12.2010 have not been dealt with in the assessment order, apart from holding that “the assessee has not addressed the issues correctly and has only made general arguments unsupported by any document.”
7. The Apex Court has held in the case of CIT v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 that an accounting system regularly followed needs to be presumed to be correct till the Assessing Officer comes to the conclusion for cogent reasons to be given that the said system does not reflect true and correct profit. There must be a reference to inherent defects in the system and a clear finding that the correct profits cannot be deduced from the books of account. Where no exercise has been undertaken to identify bogus bills or artificial claims of expenditure, mere reliance on an alternative system of accounting, by applying enhanced G.P. rate or estimating the consumption, cannot lead to the conclusion that there is under estimation of profit. In this case the estimation of excess consumption is arbitrary and fanciful, and cannot be said to be based on relevant material. The rejection of books of account on the basis of variation in monthly results required to be backed up by specific instances of bogus billing. The appellant has correctly argued that neither can a uniform rate of G.P. be applied for every month of the year, nor can a uniform rate of consumption of material be applied to garments of assorted styles and descriptions. After careful consideration, it is held that the addition of estimated excess consumption of Rs. 1,77,73,854/- deserves to be deleted in toto. Hence the appellant succeeds at grounds of appeal nos. 2(i) and (iii).”
We have heard the Ld. Representatives of both the parties and perused the material available on record. The Ld. DR relied upon the order of the AO and submitted that addition was made by the AO on account of excess consumption of material, variation in G.P. and closing stock. The high consumption of goods/material shows manipulation in the books results. Therefore, book accounts were correctly rejected by the AO. The Ld. CIT(A) did not verify the details noted by the AO.
On the other hand, Ld. Counsel for the assessee reiterated the submissions made before authorities below. He has submitted that assessee manufactured different/several items in different designs etc. with different material. Therefore, there cannot be a static G.P. for each item manufactured. The Ld. CIT(A) properly appreciated the facts of the case. In Assessment year 2009-10, the AO accepted the same books of accounts of the assessee on identical facts. There is no change in maintenance of books of accounts of the assessee. PB-1 is comparative chart of tally and actual figures of G.P. which disclose G.P. rate of 13.81% in assessment year under appeal. PB-2 is month wise details of difference in Tally and Actual data. PB-3 is details of Export Sales. PB-4 to 77 are the details of various style and their G.P. supported by several documents. PB-78 is chart of actual figures of G.P. at 13.81%, PB-94 is details of average consumption calculation which is also reproduced at page 16 of the appellate order shows that the total consumption shown was 232276.1 whereas the data of total consumption shown by AO was 250034.3, therefore assessee has shown lesser consumption. PB-218 is details of sales turnover and Gross Profit & G.P. percentage from Assessment Year 2007-08 to A.Y. 2012-13 in which financial results as per books have been accepted u/s 143(3) and 143(1) of the Act. PB-219 to 223 is assessment order in the case of the assessee for Assessment Year 2007-08 u/s 143(3) in which on the same business of manufacturing and exports of garments book result have been accepted and no addition have been made. Ld. Counsel for the assessee also submitted that the AO gave show-cause notice to reject the books of accounts only on 29.12.2010 and assessee furnished all the documents, books of accounts and reply on 31.12.2010, the AO without considering the case of the assessee in proper perspective passed the assessment order on the same day on 31.12.2010, therefore, Ld. CIT(A) correctly deleted the additions.
We have considered the rival submissions and perused the material available on record. The assessee filed complete evidences/materials before the authorities below supported by the bills and invoices to prove that assessee is in the business of exports of readymade garments. The assessee submitted invoices of direct expenses, comparative chart of G.P. as per Tally and actual figures, details of various styles of garments with their cost sheet and working of G.P. and inventories of finished goods and of raw material. The assessee has disclosed G.P. of 13.81%. The comparative chart of GP is filed at page 218 of Paper Book which shows that turnover of the assessee in assessment year under appeal is better as compared to preceding and subsequent Assessment Years. The Gross Profit is more as compared to the earlier year. The nature of business of the assessee is same in preceding Assessment Year as well as in subsequent Assessment Years. The AO accepted book result of the assessee in preceding and subsequent Assessment Years 2007-08 and 2009-10 in scrutiny assessment u/s 143(3) of the Act and no additions of similar nature have been made.
In Assessment Year 2010-11 also, AO accepted the book result of the assessee, as submitted, u/s 143(3) of the IT Act. Therefore instead of re-casting the trading account
per month, AO should have brought some independent and concrete material on record to reject book results in Assessment Year in appeal.
It is well settled law that rule of consistency apply to the Income Tax Proceedings. Unless some specific material is brought on record against the assessee, the AO should follow the rule of consistency and should not have made the addition of the nature as discuss in the present case. We rely upon the decisions of the Hon’ble Supreme Court in the case of Radha Soami Satsang 193 ITR 321 and Excel Industries Ltd. 358 ITR 295. The assessee has explained that he manufactures various types of garments including dresses, tops, blouses, tunics, skirts etc. and some of the garments require embroidery or patch work, some garments are made of hosiery, and some other fabrics, including lining fabric etc. The explanation of assessee has been supported by the documentary evidences on record; therefore, uniformity of Gross Profit in different styles of manufacturing of items may not be possible. It may also require different consumption of raw materials for manufacturing the garments for exports. The assessee also explained that normal cycle for shipping of garments from order to delivery ranges from 70 to 90 days, including preparation, approval of samples, quoting and negotiation of rates, receipts of purchase order, placing of orders for fabrics and other items, cutting, embroidery and stitching, till the garment is ready for shipment. The assessee therefore correctly explained that month wise gross profit working would not give correct picture of the trading results. The direct expenses relating to each shipment would not fall in the month of delivery. Therefore, comparison of the expenses month wise with the sales may not be possible in the line of business of the assessee. The assessee has however placed on record several charts supported by documents and books of accounts to co-relate the expenses with a particular shipment for the purpose of exports. The AO rejected the books of accounts because it shows there was a variation in G.P. margins because sometime it was showing month wise negative or positive profit but assessee has explained that G.P. rate for a particular style remained more or less stable throughout the year. The assessee has given stocks statement to be banks on estimate basis. The assessee explained that stocks as per the books of accounts are excessive as compared to the estimated figure provided to the bank. The assessee explained that some time the bills are recorded in the books of accounts when the same are settled/passed, therefore, month wise co-relation with the expenses with sales may not be possible. The assessee produced complete details of consumption of raw material which are noted in the books of accounts. The AO has not been able to point out any specific instance of round tripping of material purchased from different concerns, as noted above and then sold to the assessee. The assessee produced all the relevant bills and invoices to show materials have been purchased genuinely from the parties at the same or lower price than other suppliers. The assessee also explained that while the computing the cost
per unit of finished goods, AO has failed to include the value of semi-finished goods, which were provided during the assessment proceedings. The assessee submitted confirmations of all the suppliers of raw materials and of embroidery/stitching services.
The parties have also confirmed the genuine transactions conducted with the assessee in their replies u/s 133(6) of the Act. Even in the case of Sh. Darshan Luthra, (M/s Express Export Proprietor) the book result has been accepted in the scrutiny assessment u/s 143(3) of the Act, copy of which it is filed in the Paper Book. The assessee consumed raw material depending upon the order and style. The AO calculated the monthly G.P. by obtaining month wise trading account on the basis of Tally accounts which would not provide correct picture of G.P. when the manufacturing cycle is of about 3 months. The AO also noted that some bills of purchase/expenditure are entered into the books of account within days, while some bills are accounted for after a number of months. It would support the explanation of the assessee that bills are entered into the books of account when they are finally settled or passed. The AO has not been pointed out any specific defects in maintenance of the books of account by the assessee. The assessee has established that he was maintaining books of accounts on the same pattern as per accounting standard, as maintained in preceding and subsequent Assessment Year which Revenue Department has accepted. Thus, there was no basis for the AO to reject the book of accounts of the assessee u/s 145(3) of the Act. It may be noted that the AO ultimately made addition on the basis of excess consumption of raw material, however, the assessee produced complete details, supported by the Audit Report and books of account to show that it was artificial excess consumption computed by the AO. The assessee has given the detail of average consumption calculation which is noted at page 16 of the appellate order, copy of which it is filed at page 94 of the Paper Book, in which Ld. Counsel for the assessee pointed out that the total consumption shown by the assessee was 232276.1 whereas AO has presumed total consumption at 250034.3, therefore, it is not an excess consumption shown by the assessee. It may be noted here that the AO issued a show-cause notice for rejection of books of account on 29.12.2010. The assessee filed the reply as well as document and produced the books of account before the AO immediately on 31.12.2010, denying the allegation of the AO. The AO instead of appreciating the explanation of the assessee in a proper perspective with reference to the material available on record passed the assessment order on the same day on 31.12.2010. It would show that the AO without verifying the fact from the books of accounts of the assessee and record nature of business of the assessee rejected the books of accounts without any just reasons. The reasons given by the AO were based only upon the data supplied by the assessee. The AO on the basis of details supplied by the assessee prepared trading account monthly and also re-casted the stocks and other items for the purpose of rejecting the book result of the assessee. It would therefore establish that the AO without bringing any material fact against the assessee on record made the addition against the assessee. It appears to be a case of hypothetical calculations made by the AO on the basis of entries in the books of accounts for making the additions against the assessee without any justification. Further, AO has not pointed out if assessee violated any accounting standards prescribed by rules for maintenance of books of accounts.
It is a case of hurried assessment framed by the AO without verifying the facts from the record of the Revenue Department particularly when in preceding and subsequent assessment years, the similar claim of assessee have been accepted by the AO. Therefore, the Ld. CIT(A) on proper appreciation of facts and material on record correctly did not agree with the findings of the AO. During the proceeding before Tribunal, no material have been produced to rebut the findings on fact recorded by the Ld. CIT(A) in favour of the assessee.
In view of the above discussion, in the light of the findings of the Ld. CIT(A) and material on record, we do not find any justification for the AO to reject the books of accounts u/s 145(3) of the Act or to make the addition. We confirm the findings of the Ld. CIT(A) in deleting the addition. The Departmental appeal has no merit, the same is accordingly dismissed.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 01/8/2018