ASSISTANT COMMISSIONER OF INCOME-TAX vs. M/S. ECOCERT INDIA PVT. LTD., AURANGABAD

आदेश आदेश

PER D. KARUNAKARA RAO, AM :

This appeal is filed by the Revenue against the order of CIT(A)-1, Aurangabad, dated 15-10-2015 for the Assessment Year 2011-12. 2. Grounds raised by the Revenue read as under :

“1. On the facts & in the circumstances of the case, the Ld.CIT(A), Aurangabad has erred in not considering the facts of the case and non reliability of the books of accounts of the assessee.

the return of income declaring total income of Rs.73,23,080/-. AO made

various additions. AO rejected the books of accounts in view of low rate of Gross Profit and proceeded to estimate the profits applying the overall net

profit rates for the A.Yrs. 2009-10 and 2010-11. At the end of the assessment proceedings u/s.143(3) of the Act, AO quantified the assessed

income at Rs.1,78,83,937/-. It is the case of the assessee that, the AO

erroneously invoked the provisions of section 145A of the Act which was subsequently corrected by the CIT(A) in the First Appellate proceedings.

were the main issues raised before him. At the end of the proceedings, on the issue of invoking of provisions of section 145A of the Act, CIT(A) did not approve the AO’s decision in rejection of books of account. Contents of Para No.5 of the order of CIT(A) are relevant. CIT(A), relying on various

binding judgments, gave a categorical finding that the fall in GP rate is no reason for invoking the provisions of section 145(3) of the Act when the books of account are otherwise, accurate and complete. Eventually, the CIT(A) gave relief to the assessee on the issue of rejection of books of account and also gave part relief on other items of itemized additions.

with the grounds extracted above.

that the order of CIT(A) should be reversed.

attention to the discussion of CIT(A) given in Para No.5 of his order and stated that the order of the CIT(A) was justified. He also submitted that the assessee did not have any grievance with regard to the itemized additions

confirmed by the CIT(A).

relevant lines from the order of CIT(A) and the same are reproduced here as under :

“5. I have duly considered the submissions of the appellant. I have also considered the rival contentions. The AO was also requested to submit remand report in the present matter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The AO had rejected the book results u/s.145A of the assessee company allegedly on the ground that though the turnover of the assessee company had fallen as compared to earlier year yet certain expenses had increased substantially. However the observations made by the AO were merely theoretical and no material discrepancy was pointed out by him. I do not understand as to how on such hypothetical grounds, the AO could not have resorted to rejection of book results. The grievance of the AO that the assessee company had shown higher expenses in spite of fall in turnover, was not sufficient to reject the book results. The AO probably wanted to invoke provisions of section 145(3) of the Income Tax Act but he had inadvertently invoked provisions of section 145A which dealt with the method of accounting employed by the assessee company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Assessing Officer felt that in the absence of adequate supporting evidence, the explanation given by the assessee could not be accepted. He, therefore, rejected the books of account of the assessee under section 145(3) of the Income-tax Act, 1961 and held that it would be fair and reasonable to take the gross profit rate at 5.59 per cent, which was also the rate for the preceding assessment year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . It was held that the fall in gross profit ratio, in the absence of any cogent reasons could not by itself be a ground to hold that proper income of the assessee could not be deducted from the accounts maintained by the assessee and consequently, could not have been a ground to reject the accounts invoking section 145(3) of the Act.

expenses was mainly on account of new subscription for magazines and introduction of new services such as certification for Organic Cosmetics, Organic Aquaculture, Natural Detergents, Organic Candles, Natural Paints and Coatings etc. Moreover the increase in Advertising expenses from Rs.4,91,348/- in AY 2010-11 to Rs.7,03,332/- in the current year was not substantial. The increase in Agency Fees was mainly on account of fees of Rs.2,50,000/- paid to Organic Mission to obtain contract of a NGO in Bihar working on behalf of government providing consultancy to the agriculturists in Bihar. The increase in Promotional Purpose expenses was mainly on account of development of a new website for which an expenditure of RsA,64,512/- had been incurred. It also included social charges of Rs.3,60,000/- whereby tea/refreshments were provided to the farmers in various meetings. The Office Rent had increased on account of opening of new branch offices. The total increase in Wages and Salaries was around 10% mainly on account of annual increment to the staff. It was normal compared to average increment in this line of business. The increase in Analysis Expenses was on account of testing fees of Rs.3,49,763/- paid to Microchem Laboratories as the appellant company did testing based on risk factors analysis and on the implementation of international requirements for various standards to cover all maximum risk. Further the increase in Hotel Restaurant Mission and Hotel Restaurant Invitation was only marginal. On the other hand, the AO had not pointed out any discrepancy or contradiction in the expenses claimed by the appellant company as per the agreement. Neither he had pointed out any defect or deficiency in the regular books of accounts maintained by the appellant company nor any defect in the bills and vouchers for such expenses maintained by it during the course of normal business. The accounts of the appellant company were duly audited and in the audit report, it was declared by them that the proper books of accounts as required by the law had been kept by the appellant company and the profit and loss account and its Balance sheet were in consonance with the books of account which gave a true and fair view of the company's affairs. The AO had not found out or pointed out any adverse findings regarding the audited version of the books of accounts nor in the mercantile system of account followed by the company. Thus, the completeness and correctness of the books of accounts maintained by the appellant company were in no way disputed or doubted by the AO. Hence, the provisions of section 145A had been incorrectly applied by the AO on the facts and circumstances of this case. . . . . . . .”

From the above, it is evident that the CIT(A) held that the variation in Gross Profit rates is not a sustainable basis/ground for invoking the provisions of section 145(3) of the Act. AO has not made out a case to conclude with the accuracy and completeness of the books of account are the issues in the assessee’s case. Alternatively, it is not the case of the AO

that the assessee deviated from the method of accounting consistently

followed in recognizing the profits of the assessee. Contents of the above

extractions amply suggest that the order of CIT(A) is fair and reasonable on the legal issue. As such, the Revenue did not raise any specific ground on merit of additions. Therefore, we are of the opinion that the same does not call for any interference. Accordingly, the grounds raised by the Revenue

are dismissed.

Order pronounced on this 27th day of March, 2018. (SUSHMA CHOWLA) (D.KARUNAKARA RAO) "ाियक सद" / JUDICIAL MEMBER लेखा सद" / ACCOUNTANT MEMBER पुणे / Pune; "दनांक Dated : 27th March, 2018. Satish

आदेश क" आदेश क" "ितिलिप "ितिलिप अ"ेिषत अ"ेिषत/Copy of the Order is forwarded to : आदेश आदेश क" क" "ितिलिप "ितिलिप अ"ेिषत अ"ेिषत

अपीलाथ" / The Appellant;

स"यािपत "ित //// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune