Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH: ‘E’: NEW DELHI
Before: SMT. DIVA SINGH & SH. O.P. KANT
Appellant by Sh. P. DAM Kanunjna, Sr. DR Respondent by S/sh. Sunil Gandhi & N.K. Bansal, CA Date of hearing 23.02.2016 Date of pronouncement 30.03.2016 ORDER PER O.P. KANT, A.M.: This appeal of the Revenue is directed against the order dated 28/03/2013 of the ld. Commissioner of Income-tax( Appeals) for assessment year 2008-09 raising following grounds of appeal:
1. On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the disallowance of purchases amounting to Rs. 1,08,66,524/- on the ground that payments were made to these parties through bank cheques since mere by making the payments through banking channel, the genuineness of the transaction cannot be proved.
2. On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the disallowance of Rs. 18,90,349/-, out of expenditure incurred on foreign travel by the employees related to the assessee.
3. On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the disallowance of Rs. 6,44,589/-, out of salary and incentive u/s 40A(2)(b).
On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the disallowance of electricity and water expenses of Rs. 6,18,048/-, when lease agreement specifically states the monthly rent of Rs. 2500/- inclusive of electricity and water expenses. 5. On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the addition of Rs. 1,90,43,902/- on account of estimation of gross profit made by the Assessing Officer after rejecting books of accounts of assessee, wherein all the above disallowances were telescoped. 6. The appellant craves leave to add, alter or amend any of the grounds of appeal
before or during the course of hearing of the appeal.
2. The facts in brief are that the assessee was engaged in the business of manufacturing and export of ready-made garments in the name of proprietorship concern M/s Magnolia Blossom. For the year under consideration, the assessee filed return of income declaring income of Rs. 1,16,28,712/- on 29/09/2008. The case was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 (in short “the Act”) was issued and served within stipulated period. In the scrutiny assessment order under Section 143(3) of the Act, the ld. Assessing Officer (in short “the AO") made additions/disallowances for non-genuine purchases of Rs. 67,99,974/- and Rs. 40,66,550/- from M/s Ma Durga Traders and M/s. Vikas Udyog respectively, foreign travel expenses of Rs. 23,13,278/-, amount of Rs. 6,44,589/-under section 40A(2)(b) of the Act for salary/incentive paid to related persons, business promotion expenses of Rs. 1,02,694/-, electricity and water expenses of Rs. 6,18,048 paid to M/s. Magnolia Clothing Company Private Limited, and an addition of Rs. 1,90,43,902/- by applying the gross profit rate of 18% on the turnover of Rs. 37,86,06,390/-. The ld. AO telescoped all the disallowances against the addition of gross profit of Rs. 1,90,43,902/-and no separate addition in respect of the disallowances mentioned above was made. Aggrieved, the assessee filed appeal before the ld. Commissioner of Income-tax (Appeals), who in impugned order, partly allowed the appeal of the assessee. Aggrieved with the relief allowed to the assessee, the Revenue is in appeal before the Tribunal.
In ground No. 1, the Revenue has challenged the deletion of the disallowances of purchases amounting to Rs. 1,08,66,524/- by the ld. Commissioner of Income-tax(Appeals). 3.1 The ld. Departmental Representative (DR) relying on the order of the Assessing Officer requested for sustaining of the disallowance, whereas on the other hand, the ld. Authorized Representative (AR), relying on the order of the learner Commissioner of Income-tax(Appeals), submitted that all the documentary evidence including confirmation of the parties, their PAN, current address, payments through bank, purchase bills having inward stamp, goods receipt note, fabric inspection report etc. were filed and, therefore, the purchases were duly held a genuine by the learned Commissioner of Income-tax (Appeals). 3.2 We have heard the rival submissions and perused the material on record. During the scrutiny proceedings, the AO observed that purchases of Rs. 67,99,974/- and Rs. 40,66,650/- from M/s. Ma Durga Traders and M/s Vikas Udyog respectively were shown, which were operating from same premises located at 3685, Gali No. -2, Dharampura, Gandhi Nagar, Delhi. Further, on verification of the premises by the Inspectors of the office of the AO, he found that address was a residential house and one of the occupants of the house, Sh. Sandeep Sharma, who was staying there for last 40 years, denied of having any knowledge of the aforesaid two firms. This fact was brought to the notice of the assessee, and the assessee was asked to produce these two parties along with supporting evidences. In response, the assessee submitted that the property belonged to Sri Ram Krishnan Sharma and he had given a part of the property on rent during the year 2007 and when he came to know that the tenant was using premises for business purposes he got the property vacated from these two firms. The assessee further submitted that these facts may be he verified through the Inspector or through notice or summon under the provisions of the income tax Act. The assessee further submitted that the payments to both the parties were made through account payee cheque. The assessee also filed confirmation of payments to these firms from the bank and also filed duly signed confirmations from both the firms for the period under consideration. The ld. AO, examined documents filed with assessee and observed that the owner of the premises stated that one Sh. Kaushik Dass was staying at the above stated premises and he was dealing in the fabrics in the name of M/s Ma Durga Traders and M/s Vikas Udyog, whereas the confirmation letters in respect of M/s Maa Durga Traders was signed by Mr. Kaushik Dass and the confirmation letter in respect of M/s Vikas Udyog was signed by Mr. Uma Shankar Ojha, who claimed to be the proprietor of the said concern. The AO further observed that copy of letters furnished by the above two concerns to the assessee intimating change of their address, were signed by some other person and not either by Sh. Kaushik Dass or Sh Uma Shankar Ojha. The AO asked the assessee to produce the parties, however, the assessee could not produce both the concerned parties for examination. In view of these observations, the AO disallowed the purchases made from these two concerns. The Commissioner of Income-tax(Appeals), however, allowed the appeal of the assessee on the issue with findings as under:” “5. Grounds of appeal nos. 3 to 3.4 pertain to the disallowance of purchases of Rs. 67,99,974/- from M/s Ma Durga Traders and of Rs. 40,66,550/- from M/s Vikash Udyog. The Assessing Officer has relied on the office inspector's report that such parties were not found at the given address, and the occupant of the house, Sh. Sandeep Sharma, had denied that any such business had been carried on there. The appellant on the other hand obtained an affidavit of the owner of the house, Sh. Ram Kishan Sharma, that the house had been rented to one Mr. Kaushik Dass in the year 2007, who had carried on business of trading in fabric. The appellant M/s Ma Durga Traders and M/s Vikash Udyog, which were stated to be the proprietary concerns of Sh. Kaushik Dass and Sh. Uma Dutt Ojha respectively, with PAN and the changed address. The appellant has further produced certificate from the bank of the appellant that the payments for the purchases had been made by account payee cheques. The appellant submitted that it could not produce the parties as it had no business dealings with them currently, however the Assessing Officer was requested to enforce their attendance through section 133(6)/131. The appellant has aptly relied on the judgement of the Delhi High Court in the case of CIT Vs. Jas Jack Elegance Exports (supra), wherein the Court held that the Assessing Officer was at liberty to summon the parties to whom payments had been made for fabrication, embroidery, etc. to verify the genuineness of the payments, and in the absence of such course of action, the failure of the assessee to produce such persons could not have been a ground for rejecting the claim. During the appellate proceedings, the appellant was required to produce the ledger account of these parties in the books of account, with purchase bills and evidence of receipt of the goods in question. The appellant has filed copies of the purchase bills, bearing the inward stamp of M/s Magnolia Blossom, goods receipt note, and fabric inspection report of the items of purchase from M/s Ma Durga Traders and M/s Vikash Udyog. The ledger accounts of these parties show that the entire payments were made during the year, and were made by cheques. The Assessing Officer has not rebutted any of these evidences in the remand report. Considering that the appellant has produced the confirmations of the parties, with their PAN and current addresses, and payments have been made to them through banks, no basis is found for sustaining the disallowance of purchases amounting to Rs. 1,08,66,524/-. Hence the appellant succeeds at ground of appeal No. 3.”
3.3 From the findings of the learned Commissioner of Income-tax( Appeals), we observe that the assessee filed confirmations from both the concerns with their PAN and changed address. The assessee produced certificate from bank that the assessee made payments to those parties through account payee cheque, however could not produce the parties as the assessee was not having any business dealings during the assessment period, but the assessee requested the AO to enforce their attendance through section 133(6)/131 of the Act. The assessee also produced bills bearing the inward stamp of the proprietary concern, goods received note, fabric inspection reports in respect of purchases from those two parties. Thus, in our opinion, the assessee has demonstrated sufficient proof of genuineness of the purchases, and therefore the findings of the learned Commissioner of Income-tax( Appeals) on the issue in dispute are well reasoned and no interference on our part is required. Accordingly, the ground of the Revenue is dismissed.
4. In ground No. 2, the revenue has challenged deletion of the disallowance of Rs. 18,90,349/- out of expenditure incurred on foreign travel by the employees of the assessee concern. 4.1 The Ld. DR relying on the order of the AO submitted that Sh. Siddharth Mohan, who had made foreign travels, a son of the assessee and also director in number of associated concerns and therefore the disallowance made by the AO was justified. Whereas, on the other hand, learned Authorized Representative relying on the order of the learned Commissioner of Income-tax(Appeals), submitted that the companies, in which Mr Sidhartha Mohan was director were not doing any business during the period under consideration and the learned Commissioner of Income-tax (Appeals) has already confirmed the disallowance of Rs. 4,22,929/-out of the disallowance of Rs. 23,13,278/-and therefore no further disallowance is required in respect of expenses on foreign travel. 4.2 We have heard the rival submissions and perused the material on record. The Assessing Officer observed from the foreign travel expenses detail of the assessee, that the assessee herself never visited any places and most of the foreign travelling expenses were related to her son Sh. Sidhartha Mohan and Mrs. Pallavi Mohan, daughter-in-law of the assessee. The Assessing Officer disallowed 25% of the foreign travelling expenses claimed by the assessee on the ground that Sh. Sidhartha Mohan happened to the director in other concerns/companies of the family and the assessee could not produce any evidence in support of the claim that foreign travelling expenses were incurred only for the assessee. The learned Commissioner of Income-tax(Appeals) after considering the submission and examination of the details of the expenses, sustained disallowance of Rs. 4,22,929/- out of the disallowance of Rs. 23,13,278/-. The relevant findings of the learned Commissioner of Income- tax(Appeals) are as under: “6. At ground of appeal no. 4, the appellant has objected to the disallowance of Rs. 23,13,278/- out of the expenditure incurred on foreign travel by the employees who are related persons of the appellant. The Assessing Officer's case is based on the fact that Sh. Siddharth Mohan is also a director in, or associated with, a number of associate concerns engaged in the same line of business. The Assessing Officer has concluded that some part of the expenditure on foreign travel was incurred in relation to the business of the other concerns. The appellant has placed on record the Certificates of Incorporation, and balance sheets as on 31.03.2008, of M/5 Magnolia Textiles Pvt. Ltd. and of M/s Jacaranda Textiles Pvt. Ltd. to show that both companies were incorporated late in March 2008, and had no business turnover in that year. Moreover, both concerns have had no export business till date. The other company mentioned by the Assessing Officer namely M/s Magnolia Martinique Clothing Pvt. Ltd. had no business turnover in the Assessment Year 2008-09, as evidenced by return of income, audit report and balance sheet filed before the Assessing Officer vide submission of 10.11.2010. In the case of M/s Magnolia Clothing Co. Pvt. Ltd., profit of Rs. 33,72,654/- has been disclosed on sales of Rs. 15,21,86,223/- in the Assessment Year 2008-09, and the travelling expenses debited in that case amount to Rs. 30,93,221/-. Hence there is no material basis for holding that foreign travel expenses of the associate concerns have been claimed in the accounts of the appellant. The counsel for the appellant was required to file details of the foreign travel expenses and to justify that the expenses were incurred wholly and exclusively for the purposes of business. It is seen that Sh. Siddharth Mohan and Smt. Pallavi Mohan have travelled to Hong Kong, France, Doha, and Sweden during the year under consideration. The appellant has also furnished the lists of foreign buyers and suppliers, from which it is seen that the appellant has no business connection with Doha. The expenditure incurred on travel to Doha by Siddharth Mohan and Smt. Pallavi Mohan is claimed at Rs. 4,22,929/-. As the appellant has been unable to show the purpose of such travel, the disallowance is confirmed to the extent of Rs. 4,22,929/-. Hence the appellant succeeds in part at this ground of appeal.”
4.3 From the above observation of the learned Commissioner of Income-tax (Appeals), we find that he has examined the expenses incurred under the head foreign travel expenses and sustained the disallowance, where the expenses were not found to be wholly and exclusively related to the business of the assessee in terms of section 37 (1) of the Act. In our view the finding of the learned Commissioner of Income-tax (Appeals) are well reasoned. Accordingly, we uphold his finding on the issue in dispute, hence the ground of the appeal is dismissed.
In ground No. 3, the Revenue has agitated deleting the disallowance of Rs. 6,44,589/-out of the salary/incentives under section 40A(2)(b) of the Act. 5.1 The Ld. DR relying on the order of the AO submitted that disallowance was justified in terms of section 40A(2)(b) of the Act. On the other hand the Ld. AR relying on the order of the learned Commissioner of Income-tax( Appeals) submitted that action of the AO was not justified as per the provisions of the Act because he failed to establish that the expenses were excessive or unreasonable having regard to the market value of the services for which the payment was made. 5.2 We have heard the rival submissions and perused the material on record. The Assessing Officer has made disallowance of 25% out of the salary and incentive paid to Sh. Sidhartha Mohan, son of the assessee and Smt. Pallavi Mohan, daughter-in-law of the assessee on the reasons similar to the disallowance made on account of foreign travel expenses. The learned Commissioner of Income-tax( Appeals) after taking into account the submission of the assessee, deleted the disallowance with remarks as under: “7. Ground of appeal no. 5 relates to the disallowance of Rs. 6,44,589/- out of salary and incentive u/s 40A(2)(b). The Assessing Officer has stated that Sh. Siddharth Mohan and Smt. Pallavi Mohan have been paid identical salary and incentive of Rs. 7,39,178/- and Rs. 5,50,000/- respectively. The Assessing Officer has not provided any specific ground for the disallowance of 25% of the salary and incentive paid, apart from observing that Sh. Siddharth Mohan is associated with a number of sister concerns. As discussed at paragraph no. 6 above, 3 of the 4 concerns referred to by the Assessing Officer had no business activity during the Assessment Year 2008-09, and the remaining concern, M/s Magnolia Clothing Co. Pvt. Ltd., has paid director's remuneration to directors other than Sh. Siddharth Mohan, implying that Sh. Siddharth Mohan was not a working director in that company. It is also submitted that Smt. Pallavi Mohan was not a director in any of the companies. The appellant has submitted a detailed explanation regarding the qualifications of Sh. Siddharth Mohan and Smt. Pallavi Mohan, and of their responsibilities in the proprietary concern of the appellant. Admittedly the Assessing Officer has not established that the salary and incentive paid are excessive or unreasonable having regard to the fair market value of the services for which the payment is made, or the legitimate needs of the business, or the benefit derived by the appellant. The appellant has relied on a number of case laws to argue that merely making payment to a relative will not call for disallowance u/s 40A(2)(b), and disallowance is not justified without bringing any comparable case on record. It is also argued that the reasonableness of the expenditure is to be examined from the point of view of the businessman. It is observed that the two employees are assessed to tax in the highest tax bracket. Considering all the above reasons, the disallowance made u/s 40A(2)(b) of Rs. 6,44,589/- is deleted.” 5.3 We find that the assessee submitted the qualification, experience and the services rendered by both the relatives of the assessee and demonstrated that the salary and incentive paid was not excessive or unreasonable having regard to the market value of the services and no finding were given by the Assessing Officer whether the payment was excessive or unreasonable having regard to the fair market value. We don’t find any infirmity in the finding of the learned Commissioner of Income-tax(Appeals), on the issue is dispute, and thus, we uphold his finding on the issue in dispute. The ground of the appeal is accordingly dismissed. 5.4 The ground No. 4 raised by the Revenue is in respect of deletion of the disallowance on electricity and water expenses of Rs. 6,18,048/-.
5.5 The ld DR relied on the findings of the Assessing Officer, whereas, on the other hand the ld. AR relied on the finding of the learned Commissioner of Income-tax (Appeals). 5.6 We have heard the submissions of the parties and perused the material on record. The Assessing Officer observed that the assessee had taken property no. D-36, Okhla industrial area, phase 1, on lease for a sum of Rs. 2500 per month inclusive of electricity charges and everything from M/s Magnolia clothing company private limited, a related concern. But the Assessing Officer also noticed that in addition to the rent of Rs. 30,000/- paid, the assessee also paid Rs. 6,18,048/-towards electricity and water expenses to M/s Magnolia clothing private limited. According to Assessing Officer this payment towards electricity and water charges was not as per the agreement, and therefore he disallowed the said expenses paid by the assessee. Before the learned Commissioner of Income- tax( Appeals), the assessee submitted that no opportunity was allowed to explain the reason for incurring of the expenses and submitted, the ‘Triparte’ agreement among the assessee, M/s Magnolia clothing company private limited and M/s Ess Aar fashions, who was acting as fabricator of garments for the assessee as well as M/s Magnolia clothing company private limited. According to this Triparte agreement the assessee was required to pay 50% of the electricity expenses pertaining to the area occupied by M/s Ess Aar fashions and balance 50% by M/s Magnolia clothing company private limited. In view of the submissions and the evidences furnished, the learned Commissioner of Income- tax( Appeals) allowed the grounds of the assessee with finding as under: “9. At ground of appeal no. 7, the disallowance of electricity and water expenses of Rs. 6,18,048/- to M/s Magnolia Clothing Co. Pvt. Ltd. has been contested. The Assessing Officer has based the disallowance on the lease rent agreement of the appellant with M/s Magnolia Clothing Co. Pvt. Ltd. which provides for payment of rent of Rs. 2,500/- per month, inclusive of electricity charges. The appellant on the other hand has submitted that a different section of the premises at 0-36, Okhla Industrial Estate, New Delhi, belonging to M/s Magnolia Clothing Co. Pvt. Ltd. had been occupied by M/s Ess Aar Fashion for the fabrication job work carried out for the appellant. The appellant has filed a copy of the tripartite agreement providing for sharing of the electricity and water charges by the appellant and M/s Magnolia Clothing Co. Pvt. Ltd. It is submitted that the rent of Rs. 2,500/- is paid only in respect of a small space of about 500sq feet for purposes of storage, and for supervision of the production activities of M/s Ess Aar Fashion. As argued by the appellant, no query was raised by the Assessing Officer before making the disallowance and the appellant had no opportunity to justify the expenditure. In the remand report, the Assessing Officer has simply reiterated that the lease agreement between the appellant and M/s Magnolia Clothing Co. Pvt. Ltd. does not provide for more than Rs. 2,500/- to be paid per month, including electricity charges. No comments have been offered regarding the tripartite agreement allowing the contractor M/s Ess Aar Fashion to use the basement and ground floor of the factory premises, on the understanding that the electricity and water charges shall be shared equally by M/s Magnolia Blossom, and M/s Magnolia Clothing Co. Pvt. Ltd. The appellant was required to submit copy of the ledger account of M/s Ess Aar Fashion in the books of the appellant, and to show deduction of tax on the contract payments. From the ledger account, it is seen that -the appellant has paid fabrication expenses and washing and finishing charges of a total amount of Rs. 46,82,075/- to M/s Ess Aar Fashion, including the opening balance of Rs. 14,90,413/-. Tax has been deducted at source on the amounts paid/credited of Rs. 31,91,662/- and copies of TDS certificates have been placed on record. After verifying the evidences furnished by the appellant, the disallowance of Rs. 6,18,048/- on account of electricity and water expenses is deleted.” 5.7 The fact of the tripartite agreement among the parties was not disputed by the ld DR and the Ledger account of the M/s Ess Aar essence confirmed that the party acted as contractor for fabrication of goods and washing and finishing of goods of the assessee and the assessee also deducted tax at source on the payments made to the party. In our view, the findings of the learned Commissioner of Income-tax( Appeals) on the issue in dispute are well reasoned and no interference on our part is required. We thus uphold his findings on the issue in dispute. Accordingly the ground of the appeal is dismissed.
6. In ground No. 5, the Revenue has challenged the deletion of addition of Rs. 1,90,43,902/- on account of estimation of gross profit by the AO after rejecting books of accounts of the assessee. 6.1 The Ld. DR supported the order of the AO on the issue and submitted that books of accounts were rejected correctly by the AO and the gross profit estimated was also based on average of gross profit shown in earlier years. On the other hand, the ld. AR relying on the order of the learned Commissioner of Income-tax(Appeals), submitted that there was no basis with the AO for rejecting books of accounts and estimating the gross profit and that too without providing any opportunity. 6.2 We have heard the rival submissions and perused the material on record. The Assessing Officer observed fall in gross profit rate of the proprietary concern from 19.87% in AY 2006-07 to 17.71% in AY 2007-08 to 12.97% in the year under consideration. The Assessing Officer also analyzed the expenses on various heads including purchase of fabric, accessories, design and development, dying printing etc and observed that some expenses have gone up whereas some expenses have come down. The Assessing Officer also observed that no quantitative details of the product manufactured and traded by the assessee, was maintained. Coupled with the above facts and disallowance made by him on unverifiable purchases, disallowance of electricity and water charges etc, he rejected the books of accounts invoking section 145 (3) of the Act and estimated the gross profit of Rs. 6,81,49,150/-applying the gross profit rate of 18% on the turnover of the proprietary concern and after reducing the gross profit of Rs. 4,91,05,248/-, he made addition for the difference amount of Rs. 1,90,43,902/-. The Assessing Officer did not make separate addition for the disallowances as the telescoped in the addition for the gross profit. 6.3 The assessee submitted before the learned Commissioner of Income- tax(Appeals) justification for the fall in gross profit rate mainly as global recession in the export market. The findings of the learned Commissioner of Income-tax(Appeals) on the issue are as under:
“10. Grounds of appeal nos. 9 and 10 pertain to the rejection of books of account and estimation of gross profit, resulting in an addition of Rs. 1,90,43,902/-. The Assessing Officer has estimated the gross profit at 18% as against the gross profit declared at 12.97%. The appellant has submitted that its explanation regarding the fall in gross profit rate, filed on) 14.06.2010, has been ignored, and the Assessing Officer has wrongly stated that no explanation or justification for the fall in gross profit has been furnished. Moreover it can be seen from the record that the appellant was not allowed an opportunity to rebut the estimate of gross profit. The various observations made by the Assessing Officer have been refuted by the appellant during the appellate proceedings. It has been explained that the fall in gross profit ratio is mainly on account of the export market being hit by global recession in the year under consideration. It has also been demonstrated that if the export incentives are excluded, then the gross profit ratio on manufacturing sales of the Assessment Years 2007-08 and 2008-09 stand at 17.71% and 14.77% respectively. If the export incentives of Rs. 152.86 lakhs and Rs. 223.13 lakhs for the Assessment Years 2007-08 and 2008-09 respectively are included, the gross profit ratios are almost the same at 21.34% and 20.39% respectively. Hence the Assessing Officer's finding that the gross profit rate has fallen by 5% is incorrect. It is further argued that the sales turnover had increased by 14.18% but the manufacturing sales had in fact decreased by 4.94% as the appellant had begun purchasing readymade garments during the year. The appellant has stated that the profit margins are lower on trading sales than on manufacturing sales; the appellant has computed the gross profit on trading sales at 3.86% as against gross profit of 14.77% on the manufacturing sales. It is argued moreover that the Assessing Officer has mistakenly compared the purchase of raw material to the sales of finished goods without taking into account the actual consumption. The appellant has also recast the ratio of consumption of various inputs to manufacture to show that fabric consumption has decreased by 2.99%, and consumption of accessories has increased by 1.11%. Moreover, consumption of packing materials has decreased by 0.07%, which the Assessing Officer has wrongly stated as having increased by 133.38%. It is argued that expenditure on design and development and sampling material are similar in nature, incurred to obtain business both from existing and new customers, and the increase of expenditure on this account of 35.95% was on account of attempts to obtain orders in a highly competitive market.
10.1 The appellant has further submitted that the observation of the Assessing Officer that the books of account are unreliable as the stock register was not produced, requires to be rejected as the Assessing Officer never called for the production of stock register. However quantitative details of consumption of raw material and of manufacture of finished goods, including details of opening and closing stock, were prepared and audited, as evidenced from the audit report in form no. 3CD. It is argued that maintenance of daily stock register which shows item wise consumption of raw material through to final production of finished goods is not feasible in the nature of business of the appellant, wherein at each stage of production there is a process loss/wastage, change in nature of input to stock in process, to finished goods. The finished goods very considerably as per the specifications of the buyers, and the fabrics and accessories used, and dyeing/printing, cutting, stitching and finishing processes are correspondingly variable. It is not possible to maintain a stock register for each stage of the manufacturing process, however the stock of fabric, accessories, packing material, and readymade garments is physically inventorised at the end of the year, and such statements were verified in audit. It is also argued by relying on the judgement of the Delhi High Court in the case of CIT Vs. Smt. Poonam Rani (supra) that there is no statutory requirement of maintenance of stock register, and even if no such register was being maintained, that by itself does not lead to the inference that it was not possible to deduce the true income from the accounts maintained by an assessee. It is reiterated that the Assessing Officer did not ask for the details of physical inventory, hence they were not produced during the assessment proceedings, however no adverse comments have been offered on the same by the Assessing Officer in the remand report. 10.2 It is seen that the Assessing .Officer has based the rejection of the books of account, partially on the finding that the purchases from M/s Ma Durga Traders and M/s Vikash Udyog were not genuine. As discussed in earlier paragraphs, the addition made on this account has been deleted as the appellant has produced the confirmations of the parties concerned, proven the receipt of material from them, and shown that the payment for the purchases has been made by cheque during the year itself. The Assessing Officer has also rejected the books of account on the grounds that stock register was not maintained. The appellant has explained that maintenance of stock register is not feasible in its line of business because of the multiple stages involved, as well as the variations in the finished products depending on the requirements of buyers. However the quantitative details of consumption of raw material and production of finished garments have been incorporated in the audit report, and in the absence of inherent defects in the stock statements, the finding of the Assessing Officer that the accounts are not reliable on this account cannot be sustained. The Assessing Officer has also stated that the manufacturing expenses, in terms of consumption of accessories and packing materials, and in terms of dyeing and printing, and washing and finishing expenses have increased disproportionately. The appellant has shown that the Assessing Officer has compared the purchases of the raw materials to the sales, whereas comparison of consumption of raw material to the sales would show that the ratios have varied only marginally. It has been submitted that expenditure incurred on design and development and sampling has increased as customers have to be shown samples of latest trends and designs as per the market requirement, and such expenditure cannot be maintained at fixed levels. Moreover expenditure of fabrication, dyeing and printing, etc. would also vary depending on the nature of orders. It is noted that the purchases and manufacturing costs are subject to audit and no defects have been pointed out by the auditors. There is no denying that fall in the gross profit rate could be for various reasons such as increase in cost of raw material, decrease in market price of finished goods, increase in the cost of processing, etc., and gross profit rate cannot be kept unchanged year upon year, as the business environment is subject to change. In the absence of inherent defects in the books of account, fall in gross profit rate by itself cannot be a justifiable reason for rejection of accounts. It is also taken note of that the appellant's accounts have been subjected to scrutiny in the Assessment Years 2003-04, 2004-05, 2005-06 and 2009-10, the last assessment having been completed by the Addl. CIT, Range 23, New Delhi, and no additions have been made to the gross profit, apart from disallowance out of administrative expenses. After carefully considering the evidences and arguments submitted, no basis is found for the finding that the accounts were not correct and complete, or that the income could not be properly determined and deduced from the books. Accordingly, the addition made of Rs. 1,90,43,902/- on account of estimation of gross profit is deleted.”
6.4 The assessee has demonstrated the reasons for fall in gross profit rate and explained that there was no inconsistency in the inventory and also explained for non-maintenance of consumption of raw material as the assessee was engaged in production of garments for foreign buyers involving number of raw materials and multiple stages of production. The defects in respect of disallowance of unverifiable purchases, disallowances of electricity and water charges etc have already been rejected by us, and therefore in our considered opinion the rejection of books of accounts by the AO was not justified. The findings of the learned Commissioner of Income-tax (Appeals) on the issue in dispute are well reasoned and no interference on our part is required. Accordingly the ground of the appeal is dismissed.
Ground No. 6 being general in nature and not required to adjudicate upon.
In the result appeal of the Revenue is dismissed. The decision is pronounced in the open court on 30th March, 2016.