ACIT 24(1), MUMBAI vs. AUM ENTERPRISES, MUMBAI

The revenue is challenging the decision of ld.CIT(A) in respect of following issues :

a) Estimation of Gross-Profit (GP) by rejecting the books of account of the assessee; b) Addition made under section 68 of the Act; and c) Addition made on account of cessation of liability.

We heard the parties and perused the record. The assessee is engaged in the business of manufacturing of Wire Drawings, Chokes, Switches etc. The AO noticed that the GP of the assessee has dropped drastically from 2.44% to 0.64%. When questioned, the assessee. Vide its letter dated 7.9.2009, submitted that : a) During the year, the assessee has shifted its factory premises and hence the assessee was constrained to stop the production. However, certain expenses including wages had to be incurred and the same has resulted in reduction of GP; b) There was theft of material worth Rs.36.76 lakhs on 31.7.2006 and the same was released by the court on 29.12.2006. Due to fall in the price of the material, the assessee suffered a loss of Rs.6,66,000/-. However, both the explanations furnished by the assessee were not acceptable to the AO. He took the view that direct expenses would also have gone down due to stoppage of production. He further noticed that the assessee did not make any claim with the insurance company with regard to the theft of material. Accordingly, he rejected the books of account and estimated the profit at Rs.2.00% and the same has resulted in an addition of Rs.54.87 lakhs.

In the appellate proceedings, the ld. CIT(A) deleted the addition by observing that the irregularities pointed out by the AO can be regularized and reconciled and the same does not require rejection of books of account.

We heard the parties on this issue and perused the record. We agree with the observations made by the ld. CIT(A) that fall in GP rate, per se, does not warrant rejection of books of accounts, unless it is shown that the book results are not reliable. At the same time, it is the responsibility of the assessee to furnish proper explanations with regard to the fall in the GP rate. The assessee has submitted two explanations and during the course of hearing, the ld. AR also submitted that the fall in GP rate was also on account of price fluctuations. However, we notice that the effect of each of the reasons was not quantified by any of the parties. Even though the ld. CIT(A) observed that the fall in GP was a matter of reconciliation, yet he has also not examined the effect of various reasons over the rate of GP. Unless the effect of reasons submitted by the assessee are quantified approximately, in our view, the fall in rate of GP cannot be properly explained. Accordingly, we are of the view that this issue requires fresh examination. Accordingly, we set aside the order of ld. CIT(A) on this issue and direct the AO to examine the same afresh by duly considering various explanations and their effect on the rate of GP. The assessee is also directed to furnish the workings in support of its claim. After considering the explanation of the assessee, the AO may take appropriate decision in accordance with law.

The next issue relates to disallowance made u/s 68 of the Act. The AO has noticed that the assessee has received loan of Rs. 5 lakhs from a person named Ms. Gul B Malklani. In response to the query raised by the AO, the assessee submitted the confirmation letter, copy of return acknowledgment of the creditor and also bank statement showing transactions of loan. The AO noticed that the creditor has declared income of Rs.1,20,510/- only in the return of income. Accordingly, the AO took the view that the creditor could not have given loan of Rs.5.00 lakhs to the assessee and accordingly added the same u/s 68 of the Act. The ld. CIT(A) deleted the addition on the reasoning that the assessee has proved identity, creditworthiness of the creditor and genuineness of the loan.

We heard the parties on this issue and perused the record. At the time of hearing, the Ld A.R invited our attention to the letter dated 09-11- 2009 furnished by the assessee to the assessing officer, wherein he had stated that the creditor Ms. Gul Malkani had held a deposit of Rs.13.00 lakhs with M/s Multi Lighting Controls P Ltd and the impugned sum of Rs.5.00 lakhs was paid of the refund received from the above said company. The Ld A.R submitted that the assessee had also filed confirmation letter obtained from Multi Lighting Controls P Ltd confirming the above fact. Accordingly he submitted that there is no reason to make any addition u/s 68 of the Act. On examination of the relevant documents, we notice that the creditor has given the loan of Rs.5.00 lakhs to the assessee out of the deposits held with M/s Multi Lighting Controls P Ltd, which fact has also been confirmed by the said company. Accordingly, we are of the view that the addition of Rs.5.00 lakhs was not warranted and accordingly confirm the order of Ld CIT(A) on this issue.

The third issue relates to the addition made u/s 41(1) of the Act by holding that the liability towards the creditors is not available or remitted. The Ld A.R submitted that the assessee has shown the creditors as outstanding and it has also made the payment to them in subsequent years. Accordingly he submitted that the AO was not justified in invoking the provisions of sec. 41(1), when the liability still subsists. We find merit in the submissions. If the assessee has discharged the sundry creditors balance in the subsequent years, there is no reason to invoke the provisions of sec. 41(1) of the Act. However, this factual position has not been examined by the Ld CIT(A). Accordingly, we set aside his order on this issue and restore the same to the file of the AO for fresh examination.

In the result, the appeal filed by the revenue is treated as partly allowed for statistical purposes.