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Income Tax Appellate Tribunal, MUMBAI BENCHES “A” MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the revenue. The relevant assessment year is 2004-05. The appeal is directed against the order of the Commissioner (Appeals) – 19, Mumbai and arises out of the order u/s 143(3) of the Income Tax Act, 1961 (the ‘Act’).
The ground of appeal filed by the revenue reads as under:-
i. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 2,09,17,194/- pertaining to unproved manufacturing expenditure disregarding the finding of the Assessing Officer that the books of accounts were defective and unreliable and that no cogent reasons were advanced for the fall in gross profit from 28.06% in the preceding year to 16.64% in the year under reference.
In a nutshell, the facts are that the business of the assessee is manufacturing pharmaceutical products and various formulations. The Assessing Officer (AO) noticed that there was a fall in the gross profit margin of the assessee in the impugned assessment year in comparison to the previous assessment years. The same is as under:
A.Y. G.P. % 2002-03 90,45,645/- 28.06% 2003-04 78,17,194/- 25.07% 2004-05 74,55605/- 16.64% 3.1 The AO noted that there was increase in manufacturing cost. While the manufacturing cost in the preceding year was Rs. 1,61,25,009/-, the same was Rs. 3,48,45,137/- during the impugned assessment year. He thus observed that the accounts of the assessee company were not reliable. The AO then adopted the cost of manufacture of the preceding year which was 42.24% of sales, as the rate for the impugned assessment year (as against 88.92% shown in the current year) and thus added the difference of 46.68% of the sales of Rs. 4, 48, 09, 756/-, resulting in addition of Rs. 2,09,17,194/-.
The assessee preferred an appeal against the order of the AO before the learned CIT(A). The AR of the assessee submitted before the learned CIT(A) that (i) party-wise details of purchase, (ii) copies of monthly stock statement, (iii) copies of cost sheet and statement of movement of raw material, finished goods and packing materials and (iv) reasons for higher inventory to be maintained, were filed before the AO. It was further stated that purchase records of raw material and packing material along with registers prescribed under VAT and Central Exercise Law along with supporting bills were available. It was thus stated before the learned CIT(A) that the AO, without finding a single defect disallowed 46.68% of manufacturing cost amounting to Rs. 2,09,17,194/-. The learned CIT(A) was convinced with the submission of the assessee that the cost of manufacture had increased from 74.94% to 83.30%. There was no such increase from 42.24% to 88.92% as stated by the AO. The learned CIT(A) was convinced with the data in the following table: 31.03.2001 31.03.2002 30.03.2003 30.03.2004 Sales 8,25,32,005 3,22,32,847 3,11,76,555 4,48,09,756 Cost of production 6,12,54,430 2,08,38,837 2,33,63,032 3,73,23,302 being manufacturing cost plus or minus increase/decrease in stock Contribution 2,12,77,575 1,13,94,010 78,13,523 74,86,454 Contribution 25.78% 35.34% 25.06% 16.70% percentage Cost of mfg percentage 74.22% 64.76% 74.94% 83.30% 4.1 As the AO has not found any defects in the accounts maintained by the assessee but has only proceeded on the basis of consumption of ratio materials, the learned CIT(A) deleted the addition of Rs. 2,09,17,194/- made by the AO.
Before us, the learned DR supports the order passed by the AO. On the other hand, the learned counsel of the assessee relies on the order passed by the learned CIT(A).
We have heard the rival submissions and perused the relevant material on record. When the AO does not accept the assessee’s method of accounting, then he has to resort to the first proviso to section 145(1) for computation of income by adopting such other basis as determined by him. The AO’s power under the said proviso to choose the basis and manner of computation of income is not an arbitrary power to assess the income, but must exercise his discretion and judgement judicially. It has been held so in Karnataka State Forest Industries Corporation Ltd. vs. CIT (1993) 201 ITRF 674, 679 (Karn.).
6.1 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 not reliable. Rejection of accounts should not be done light-heartedly. The assessee should be given reasonable opportunity for offering explanations regarding the defects in the accounts and on his failure to satisfactorily explain the defects, the AO would be justified in rejecting the accounts. We find that in the instant appeal the AO has not given the assessee reasonable opportunity for offering the explanation regarding the defects, if any in the accounts. In R.B. Jessaram Fatehchand (Sugar Deptt) vs. CIT (1970) 75 ITR 33, 37 (Bom), it has been held that the assessee’s account books are to be accepted, unless, on verification, they disclose any faults or defects, which cannot be reasonably and satisfactorily explained by the assessee. We find that in the present case the AO has failed to give valid reasons for declaring the accounts of the assessee to be either false or not to have been maintained properly.
In view of the reasons delineated at para 6 and 6.1 here-in- above, we uphold the order of the learned CIT(A) and dismiss the appeal filed by the revenue.
Order pronounced in the open court on 29/03/2017