ITO, WARD - 11(2), KOLKATA, KOLKATA vs. M/S. SANTHAL MULTICAST PVT. LTD., KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal by the Revenue is arising out of order of Commissioner of Income Tax (Appeals)-I, Kolkata in appeal No.128/CIT(A)-1/Ward-1(2)/06-07 dated 15.05.2007. Assessment was framed by ITO Ward-45(2), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 26.10.2006 for assessment year 2004-05.

ITA No.2229/Kol/2010 A.Y 2004-05 ITO Wd-11(2) Kol. v. M/s Santhal Multicast Pvt. Ltd. Page 2 However, we find that it is a Revenue appeal and the issue raised in this appeal by the Revenue can be adjudicated without the appearance of the assessee. Hence, we proceed to take up this appeal after hearing, Shri Sanjay Mukherjee, Ld. Departmental Representative appearing on behalf of Revenue.

ITA No.2229/Kol/2010 A.Y 2004-05 ITO Wd-11(2) Kol. v. M/s Santhal Multicast Pvt. Ltd. Page 3 vi) The assessee failed to provide the stock register for verification. The assessee just claimed that the accounts have been audited by an independent auditor and according to his report the accounts are maintained in accordance with the companies Act. vii) The AO observed the discrepancy between the TDS certificate issued by the TATA Motors and submission made by the assessee.

In view of above the AO rejected the books of accounts and framed the assessment under section 144 of the Act. Aggrieved assessee preferred an appeal to CIT(A) who allowed this ground in favour of the assessee by observing as under : “I have gone through the submission of Ld. AR as well as the assessment order passed by Assessing Officer and find that books of account were maintained as per Accounting Standard as well as by excise law. It is showing the accounts are incorrect or incomplete is a revenue. The facts as narrated by AR remained the question of rejection of books of account cannot be justified. This ground is therefore allowed.”

Aggrieved, Revenue is in appeal before us on the following ground : “1. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the application of sec. 145 of the I.T. Act denying the comment of auditor’s report.

(i) Whether the assessee has regularly employed a method of accounting? (ii) Even if regular adoption of a method of accounting is there whether the annual profits can properly be deduced from the method employed?

ITA No.2229/Kol/2010 A.Y 2004-05 ITO Wd-11(2) Kol. v. M/s Santhal Multicast Pvt. Ltd. Page 4 (iii) Whether the accounts are correctly maintained? (iv) Whether the accounts maintained are complete in the sense that there is no significant omission therein? If the answers to above four questions are in the affirmative, assessee's profits are to be computed on the basis of his accounts. In such cases, proviso to section 145(1) or section 145(2) cannot be invoked.

The Patna High Court has delivered a very important ruling in Md. Umer vs. CIT 1975 CTR (Pat) 13 : (1975) 101 ITR 525 (Pat). In that case, the assessee was individual, who derived income from sale of country liquor in assessment year 1966-67. Tribunal gave five reasons for the purpose of rejection of book profits as follows:-

(1) The sales were not verifiable. (2) From the point of drawing of the liquor from the barrels, no account was maintained and even the normal leakage in the process of drawing and filling in the bottles was not shown. (3) Year to year, the book results shown have been rejected and profit invariably estimated by the Department. (4) The percentage of profit shown was low. (5) Drawings for expenses were inadequate. However, assessee had produced all his books of accounts before the Income-tax Officer and only two defects were found by him : (1) absence of cash memos which means sales are not verifiable, and (2) certain transactions were noted in lump sums.

5.1 But no finding has been recorded by either of the authorities below as to the unacceptability of the method and irregularity of the accounts kept by the assessee. It is well settled that in the absence of such a finding recorded by the authorities, the book results cannot be ignored or brushed aside [See R.B.

ITA No.2229/Kol/2010 A.Y 2004-05 ITO Wd-11(2) Kol. v. M/s Santhal Multicast Pvt. Ltd. Page 5 Bansilal Abirchand Spinning & Weaving Mills vs. CIT (1970) 75 ITR 260 (Bom)].

As held by the Supreme Court in CIT vs. A Krishnaswami Mudaliar (1964) 53 ITR 122 (SC), this proviso imposes a statutory duty on the Income-tax Officer to examine in every case, the method of accounting employed by the assessee and to see whether or not it has been regularly employed and to determine whether the income, profits and gains of the assessee could properly be deduced there from. Very important principle of law is laid down by Patna High Court in the following words:-

"There is no finding in the present case that any of the entries in the books of account was not correct; there is no finding that the assessee is not employing a method of accounting; and there is no finding that such a method of accounting has been irregularly employed by the assessee. In the absence of any such finding, there being no reason germane to the unacceptability of the book results, it must be held that the Tribunal as well as the Revenue authorities below had no materials before them, on the basis of which it could be said that the trading results were not verifiable and that, therefore, they should not be accepted, nor is it their case that the trading results could not be deducible from the entries of the books of accounts regularly employed." [See also C. Arumugaswami Nadar vs. CIT (1961) 42 ITR 237 (Mad)].” The Patna High Court, therefore, held that—"the finding of the Tribunal upholding the rejection of the book profit shown by the assessee was vitiated by reason of its reliance upon suspicion, surmises as also irrelevant material. The finding that sales were unverifiable is not based on the materials on record and is an arbitrary finding."

In view of above, the ground raised by the Revenue regarding rejection of books of accounts is dismissed.

ITA No.2229/Kol/2010 A.Y 2004-05 ITO Wd-11(2) Kol. v. M/s Santhal Multicast Pvt. Ltd. Page 6 “2. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the disallowance of loss of Rs.84,40,567/- on the basis of some fresh evidence violating the provision of Rule-46A(3) of I.T. Rules.

During the year under consideration, assessee has shown manufacturing expenses of Rs.5,23,32,438/- in relation to sale shown in the financial statement of the assessee for Rs.4,38,91,871/-. From the above, AO found a loss of Rs.84,40,567/- is arising out of trading account of assessee. The AO called upon the assessee to justify the trading loss but according to the AO the assessee did not offer any explanation. Therefore the AO rejected the loss claimed by assessee. So AO disallowed the loss claim by assessee and added it to the income of assessee.

ITA No.2229/Kol/2010 A.Y 2004-05 ITO Wd-11(2) Kol. v. M/s Santhal Multicast Pvt. Ltd. Page 7 this addition deserves to be deleted and on merits as stated above this ground is allowed.”

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.

1) Assessee was engaged in the business of manufacture of steel ingots from scrap. Low gross profit was due to decrease in sale price of finished goods and increase in cost of raw materials and also the very high outgo on account of electricity. This being the first year of manufacturing there were teething problems which took time to stabilize. 2) As may be seen from the following comparative chart the cost of electricity per metric ton for this year was much higher compared to next year: Year 2003-04 2004-05 Production (M.ton) 4007.68 4129.95

Electricity consumed (Rs) 1,54,78,738 1,18,12,249 Consumption per M.Ton 3862 2860

3) The company’s manufacturing unit was not working smoothly throughout the year despite assessee’s best efforts. Just to keep the business running and to increase production manufacturing expenses were incurred. Due to several problems like electricity, labour, etc., the manufacturing unit was ultimately shut down on 03/11/2006. In concluding, we submit the following: 1. The Assessing Officer has not detected any discrepancy in the amounts of purchases, sales, closing stock or any other item of expenditure. The alleged defects raised by the Assessing Officer were all explained in course of the assessment proceedings.

ITA No.2229/Kol/2010 A.Y 2004-05 ITO Wd-11(2) Kol. v. M/s Santhal Multicast Pvt. Ltd. Page 8 2. The accounts of the company were properly audited and the same were followed by tax audit, a report of which in Form No. 3CD was filed along with the return. In annexure to Form No. 3CD information in respect of quantity of purchases, consumption, closing stock and production were given and those have not been disputed by the Assessing Officer. 3. During the course of the assessment proceedings, details of the manufacturing process, issue of raw materials and as to how the raw material, finished goods, etc., were accounted for in the books of accounts were furnished and the Assessing Officer had not found any fault with such details. 4. The Assessing Officer had not found any evidence that the assessee had made purchase or sales outside the books of account. The items manufactured by the assessee being excisable goods, the manufacturing and related records were also subjected to periodical checking by the Central Excise Authorities. Such authorities have never given any adverse finding against the records maintained by the company. 5. The rejection of the books of account by the Assessing Officer is not based on any cogent reason. 6. The reason for the high cost of production which ultimately resulted in a loss under the manufacturing and trading account was mainly due to the high expenditure on account of electricity as have been explained in detail above. Considering the facts and circumstances as submitted above, it is humbly prayed that the addition of Rs.84,40,567/- may kindly be deleted.” From the aforesaid discussion, we find that AO has nowhere rejected the sales or purchase of assessee vis-à-vis other manufacturing expenses incurred by assessee during the year. We find that AO, after rejecting the books of accounts, had presumed that no prudent business man would sell the goods less than the manufacturing cost. However, there is no restriction under any law that assessee cannot sale the product less than its manufacturing cost. Moreover, it was the first year of its business of the assessee and assessee was not having expert knowledge of its business intricacies. We further find that AO has disallowed the loss incurred by assessee without any rational ground. Whereas the AO had not pointed out any material defect in the books of accounts of the assessee, the mere fact that for certain reason, the assessee could not earn better margin of profit,

ITA No.2229/Kol/2010 A.Y 2004-05 ITO Wd-11(2) Kol. v. M/s Santhal Multicast Pvt. Ltd. Page 9 cannot be the reason to believe that the assessee returned less profit than what it actually earned. Possibility of unstable market condition cannot be ruled out. The Tribunal, therefore, deleted the trading additions. We do not find any additional evidence having been admitted by the Ld. CIT(A) except comparative chart of expenses. The Ld. DR was unable to point out as to what was the fresh evidence on the basis of which the Ld. CIT(A) allowed relief to the assessee. Even the ground of appeal of the Revenue in this regard is very vague. In view of the above, we incline not to interfere in the order of Ld. CIT(A) and this ground of Revenue’s appeal is dismissed.