2008-VIL-424-ITAT-DEL
Equivalent Citation: [2009] 27 SOT 498 (DELHI)
Income Tax Appellate Tribunal DELHI
IT APPEAL NO. 3041 (DELHI) OF 2007
Date: 28.11.2008
KABIR LEATHERS
Vs
ADDITIONAL COMMISSIONER OF INCOME-TAX , RANGE 25, NEW DELHI
BENCH
D.R. SINGH AND K.G. BANSAL, JJ.
JUDGMENT
D.R. Singh, Judicial Member. - The assessee has filed this appeal against the order of CIT(A), New Delhi, passed in Appeal No. 439/06-07, dated 25-4-2007 on the following effective grounds:—
"1. That the order of the Learned Commissioner of Income-tax (Appeals) is arbitrary, biased and bad in law and facts of the case.
2. That the Learned CIT (Appeals) has grossly erred in confirming the rejection of books of account by the Assessing Officer without fully appreciating the facts of the case.
3. That the Learned CIT (Appeals) has grossly erred in not confirming the rejection of books of account but also in confirming the addition in trading results amounting to Rs. 22,93,113.
4. That the Learned CIT (Appeals) has grossly erred in disallowing the claim of assessee for netting off of interest and including the interest income under the head ‘Income from business or profession’ while computing deduction under section 80HHC.
5. That the Learned CIT (Appeals) has grossly erred in bringing to tax the total amount of DEPB amounting to Rs. 2,48,52,361 as compared to profit earned on transfer of DEPB amounting to Rs. 1,57,19,207 ignoring statutory provision in this regard.
6. That the Learned CIT (Appeals) has grossly erred in not providing fair and meaningful opportunity to the assessee to represent its case and the written submissions and representations made have either been quoted out of context or completely ignored.
7. That the Learned CIT (Appeals) has grossly erred in confirming the disallowance of Rs. 2 lakhs from out of tour & travelling."
2. At the outset of appellate proceedings, the ld. AR for the assessee has not pressed ground Nos. 4, 6 and 7 and accordingly the same are rejected as not pressed. Ground No. 1 is general in nature and hence needs no adjudication from our side.
3. In order to dispose off the instant appeal, the grounds of appeal required to be decided by us, involve only following two issues:—
"( i)Relating to rejection of books of account of the assessee and the trading addition made in consequence thereof as involved in Ground Nos. 2 and 3.
( ii)Relating to the issue of receipt of DEPB for the purpose of deduction under section 80HHC of the Income-tax Act, 1961 (in short ‘the Act’) as involved in Ground No. 5 of the appeal."
4. Now we shall deal with 1st issue involved in Ground Nos. 2 and 3 of the appeal relating to rejection of books of account of assessee and the trading addition made in consequence thereof.
5. Briefly stated the facts relating to first issue as borne out from the orders of tax authorities below are that the Assessing Officer rejected the books of accounts of assessee under section 145(3) of the Act and made an addition of Rs. 22,93,113 on account of low gross profit on the following basis:—
"In the trading account as on 31-3-2004 filed with the return of income, the Assessing Officer noticed that assessee had shown sale of scrap at Rs. 58,925. The Assessing Officer asked the assessee to give details of generation of scrap/wastage in quantitative terms and to support the same with evidence. The assessee furnished a calculation sheet for scrap which was stated to have been prepared on the basis of sale invoices, opening and closing stock, inventories and fabricators register and as per this calculation sheet percentage of scrap generated was 3.4 per cent. The assessee also submitted that 85 per cent production was by fabricators who did not return the scrap generated. The assessee filed certificate from two fabricators in this regard. The scrap generated and sold was in respect of in-house production only. The assessee also submitted before the Assessing Officer that scrap was sold at a very low price as it was not fit for making garments. The assessee also submitted before the Assessing Officer that it had deducted TDS wherever applicable and in the case of assessment particulars of the fabricators the assessee asked the Assessing Officer to directly call from the fabricators as per addresses given by the assessee."
6. Thereafter the Assessing Officer observed that the assessee filed the certificates from the fabricators in order to prove the point and it was for the assessee to prove it conclusively or it would be treated as a general statement with no evidentiary value. The Assessing Officer did not accept the assessee’s contention that scrap generation was in respect of in-house production only and not in respect of production by fabricators. Moreover, calculation sheet for scrap had not been prepared on the basis of primary records/registers but has been calculated by using fabricators register and sale invoices and the Assessing Officer, therefore, held that scrap generated and scrap sale has not been properly accounted for. However, no addition in this respect was made but this discrepancy was treated as a defect in the books of account maintained by the assessee.
7. Second, the Assessing Officer after considering the quantitative details of principal items of raw material and quantitative details of principal items of finished goods/WIP and details of GP rates declared during the year under consideration and during the preceding years furnished by the assessee also considering the assessees contention regarding the decline in GP rate compared to assessment year 2003-04 which according to assessee was due to overall escalation in fixed overheads, low labour charges, wages, fuel etc. which could be passed sometime to the customers and that the assessee took a new premises on rent which necessitated more workers. The Assessing Officer made a trading addition of Rs. 22,93,113 by observing as under:—
"In order to explain the decline in GP rate the assessee has made general statements and has not furnished any evidence. With continuous improvement in GP rates from assessment years 2001-02 to 2003-04, the GP rate of 14.81 per cent of assessment year 2004-05 is an aberration which the assessee should have explained with supporting evidence. The assessee, however, failed to do so. The average GP rate for the assessment years 2001-02, 2002-03 and 2003-04 works out of 15.67 per cent and the GP rate declared during the assessment year 2004-05 is even less than the same average GP rate of 15.67 per cent. Also it is the case of a manufacturing concern where the assessee does not appear to be maintaining the stock register. The extent of raw materials consumed, finished products realized, closing stock remaining at the end of the financial year remained based on estimate basis rather than on factual books of account. In the circumstances, the book result arrived at the end of the financial year lacks veracity. In view of the fact that the books of account do not establish the extent of different variety of raw material required for a particulars finished product, its actual use and resultant balance. Since actual required consumption of raw material to different finished products is not known, the production shown cannot be same as what was actually achievable. In the circumstances, books of account of the assessee are hereby rejected under section 145(3) and I proceed upon to estimate the profit by applying average GP rate of 15.67 per cent to the declared sales of Rs. 26,67,37,167 thus working out gross profit of Rs. 4,17,98,027 as against declared gross profit of Rs. 3,95,04,914. A trading addition of Rs. 22,93,113 (i.e. 4,17,98,027 - 3,95,04,914) is, therefore, made to the total income."
8. Aggrieved with the order of Assessing Officer, the assessee filed an appeal before the CIT(A) and made detailed submissions regarding wrong rejection of books of account by the Assessing Officer and rejection of the assessee’s justification for decline in GP rate in the year under consideration.
9. On considering the detailed submissions of assessee, the CIT(A) concluded that it is proved beyond doubts that the appellant was not maintaining primary manufacturing records; that appellant has not furnished day to day consumption of leather, lining and accessories and due to the lack of information it was not possible for the Assessing Officer to verify the steep fall in gross profit rate for the year under consideration; that the method of valuation as adopted by the appellant was faulty and incapable to disclosing true profit; that the appellant has not accounted for wastage on consumption of 85 per cent of raw material which resulted in suppression of profit in its books of account.
10. Thereafter the CIT(A) held that books of account of the appellant were not reliable and correct profit, and wastage could not be determined on the basis of these defective books of account. In other words the accounts maintained by the appellant firm were incapable of reflecting its true profit. Accordingly, the Assessing Officer was justified in rejecting books of account under section 145(3) on the facts and circumstances of this case.
11. Regarding the trading addition of Rs. 22,93,113 made by the Assessing Officer, the CIT(A) confirmed the order of Assessing Officer by observing as under:—
"In this case the estimate of gross profit by the Assessing Officer was based on relevant basis i.e. gross profit disclosed by the appellant in the immediately preceding assessment year. During the course of appellate proceedings, the ld. Counsel for the appellant has failed to furnish any evidence if there were any distinguishing feature in carrying out business in the year under consideration. Accordingly, respectfully following the judgment of Hon’ble Apex Court I uphold the addition of Rs. 22,93,113 made by the Assessing Officer on account of low gross profit rate."
12. We have considered the rival contentions of both the parties, perused the records and carefully gone through the orders of the tax authorities below as well as the case law cited by both the parties.
13. Regarding the issue of rejection of books of account and trading results, learned AR for assessee submitted that the assessee firm has consistently being following business practice of issuing leather to the cutters for cutting and the same is received back as per the standard cutting norms fixed for a particular size or style. An outside cutter is responsible only for the cutting of leather according to a given style and size who is remunerated on mutually decided per piece rate and is responsible for wastage/storage, if any, in the execution of the cutting job. The scrap generated in the outsourcing of fabrication of leather garments by fabricator/cutters is not returned to the assessee and the scrap accrued to the account of the fabricators. The computation of scrap/wastage generated during the in-house production was approximately 15 per cent of the total production during the year. Further, that the assessee has furnished positive evidence in the form of certificates by two fabricators, placed at pages 34 and 35 of Paper Book, during the course of the assessment proceedings wherein the fabricators had certified that the scrap/wastage of material received from the assessee for fabrication only accrued to their account. In case the Assessing Officer disbelieved the contention of the assessee he could have summoned the parties to verify the contents of the certificates and since the Assessing Officer did not do so the assessee was under a bona fide believe that the certificates from the fabricators filed by the assessee explaining the generation of scrap were accepted by the Assessing Officer on its face value. That the assessee is a 100 per cent exporter and has been following a same method of valuing closing stock of finished goods consistently at a value derived by reducing estimated project from FOB value of goods to be exported. The method has been followed by the assessee over a number of years and there has been no deviation from it in the current year. The well-settled position of law is that in case the assessee is following a regular method of accounting from which the income of the assessee could be deduced and the revenue has not found any instance of inflated expenditure, unaccounted sales or any material discrepancy in the maintenance of the accounts, the books of account of the assessee cannot be validly rejected. In support of the contention, learned AR for the assessee relied upon in the case of Orissa Cement Ltd. v. IAC [1992] 43 ITD 424 (Delhi), ITO v. Modi Rubber Ltd. [1992] 43 ITD 396 (Delhi), International Forest Co. v. CIT [1975] 101 ITR 721 (J&K) and MD. Umer v. CIT [1973] 101 ITR 525 (Pat.).
14. On the other hand, learned DR for the revenue placing strong reliance on the reasoning given in the orders of the tax authorities below to support the rejection of books of account by the Assessing Officer and also referred to the following case law :
(i) S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579 (SC)
(ii) Awadhesh Pratap Singh Abdul Rehman & Bros. v. CIT [1994] 76 Taxman 106 (All.).
15. On considering the submission and the relevant provisions of section 145 of the Act and applying the broad guidelines laid down in the case law (supra), relied upon by both the parties, to the facts of the instant case of the assessee, we find that - (i) section 145 of the Act has been described as a computation and not an assessment section. And as a machinery section it does not qualify a charging section of the Act; (ii) the well-settled law is that where any method of accounting is regularly employed by a person, his income has to be computed in accordance with such regular method followed by the assessee unless by that method true profits cannot be arrived at; (iii) the maintenance of a stock register is of great importance in a business but absence of a stock register cannot per se lead to an inference that the accounts are false and entail rejection of book results though the presence or absence of a stock register is one of the relevant aspects to be taken into account in considering the acceptance of the book result; (iv) a spurious stock register will, however, justify a conclusion that the accounts are not maintained properly; (v) where there is no quantitative tally between purchases and sales and there are suspicious features, the books can be rejected; (vi) the tally is more important in a manufacturing business; (vii) high wastage or consumption of excessive material cannot be the basis of rejection of books of account in case the particulars are maintained to the extent possible; (viii) where there is a supervision of the sales, books can be rejected and income estimated; (ix) the purchases should be properly vouched and verifiable; (x) if the purchases are found to be omitted the books can be rejected and estimate made; (xi) the low profit by itself cannot be a ground for rejection of book results. It is merely a warning to the Assessing Officer to look into the accounts more carefully to see whether there is material to lead to a conclusion that there is something false in the account books. A low profit rate complied with other circumstances may justify the rejection of books of account; and (xii) the Assessing Officer in case is able to pinpoint specific defect, omissions or non-genuine entries it would be appropriate for him to consider it sufficient to confine himself in making addition only in respect of those items instead of rejecting the books results and making a lump sum estimated addition by applying a particular rate on a total turnover.
16. Now, coming to the facts of the instant case, we find that undisputedly the tax authorities below have neither pointed out any defect in the purchases or in the expenses from the audited books of account of the assessee, which were supported by bills for purchases and with evidence for each and every expenses. Entire sales were to foreign parties, remittance for which had been received through banking channels in accordance with requirements of FEMA, which have not been doubted nor any instance of inflated purchases or of any transaction of sale outside the books of account have been pointed out in the books of account of the assessee. Hence, in our opinion in case there is neither any instance of inflated expenditure nor any instance of sale out of books except a general remark by the Assessing Officer that the assessee does not seem to be maintaining a stock register, the tax authorities below were not justified in rejecting the books of account merely on account of fall in gross profit rate or because the generation of scrap/wastage of material from fabrication of garments reflected by the assessee could not be satisfactorily explained or proved by the assessee before the Assessing Officer. In our opinion, since, the business of the assessee is export of leather garments for which it fabricates garments in-house and largely outsources to outside fabricators. The assessee issues leather to the cutters, which is received back after cutting as per norms fixed for a particular size or style, there cannot be any standard or specific yardstick for computation of wastage/generation of scrap. Moreover, in the business of the assessee the unit of production of leather garments manufactured and exported by it is in pieces whereas the unit of purchase of leather (the main raw material) is in square decimeter, hence, it is not practical in this nature of business for the assessee to maintain day-to-day production record of each garment.
17. In these facts and circumstances, we are of the considered opinion that merely on the ground that scrap generation accounted for by the assessee is not proved by the assessee to the satisfaction of the tax authorities below they were not justified in rejecting the books of account of the assessee and in making the trading addition by applying G.P. Rate. However, the non-explanation of generation of the scrap by the assessee calls for a separate enquiry by the Assessing Officer for considering the addition in respect of generation of scrap only.
18. Now, the next point that requires to be considered by us is whether the assessee is able to properly account for the computation of scrap/wastage from the production. The case of the assessee is scrap/wastage generated during the in-house production is approximately 15 per cent of the total production, whereas, the balance 85 per cent scrap/wastage is generated from production of leather garments from fabricators and the same is not received by the assessee but the same is kept by them and accounted for by them as done in the past.
19. In support of the contentions, the assessee has simply produced certificates/confirmations from two fabricators to show that the scrap was retained by them.
20. In the instant case neither the assessee nor the tax authorities below have called the fabricators for examination by the Assessing Officer to verify the genuineness of the certificates/confirmations and so it does not stand established from record as to how much scrap was generated in in-house production and as to the quantity of scrap generated from production/manufacture of garments by the fabricators. It is also not established by the fabricators whether retention of scrap by them has been accounted for by them in their records or not. Further, it is also not established by the assessee or examined by the Assessing Officer regarding the value of the sale of scrap from in-house production or from production of outsourced raw material to the fabricators. In these facts, we are of the considered opinion that in order to meet ends of justice to both the parties, we should restore this issue of quantity of generation of scrap and sale thereof from in-house production and generation of scrap from the material outsourced to the fabricators to the file of Assessing Officer to decide the same afresh by affording reasonable opportunity of being heard to the assessee for producing evidence to prove the generation of scrap reflected by it in the return. The order of CIT(A) is upheld to the extent indicated in this order. Consequently, Ground Nos. 2 and 3 of the appeal taken by the assessee stand allowed in part in terms of the order hereinabove.
21. We shall now deal with the 2nd issue regarding receipt of DEPB license for the purchase of deduction under section 80HHC of the Act as involved in Ground No. 5 of the appeal of the assessee.
22. During assessment proceedings, the Assessing Officer noticed that in the year under consideration, the assessee has received DEPB at Rs. 2,48,52,367 and the same was credited to Profit & Loss Account. Thereafter, following the recent amendment vide Taxation Laws Amendment Act No. 55 of 2005. The Assessing Officer reduced 90 per cent of such profit on transfer of DEPB from Government to the assessee as the turnover of the assessee was more than Rs. 10 crores.
23. On appeal before the CIT(A) referring to the amended provisions of section 80HHC and section 28 of the Act, the learned AR for the assessee contended that the Assessing Officer was not justified in bringing to tax DEPB of Rs. 2,48,52,376 when the assessee had a profit of Rs. 1,57,19,307 on transfer of DEPB and, therefore, profit on sale of transfer of DEPB required to be considered as business income was Rs. 1,57,19,307 and not Rs. 2,48,52,367, as taken by the Assessing Officer.
24. On considering the submissions, the CIT(A) upheld the order of the Assessing Officer by making following observation:—
"I have examined the identical issue in the case of the appellant in immediately preceding year and have confirmed the addition made by the Assessing Officer under similar facts and circumstances vide order in Appeal No. 172/05-06 for assessment year 2003-04. As the facts and circumstances of the case are pari materia with the case of the appellant in immediately preceding year, following my order for preceding year for the reason as discussed in the said order, this ground of appeal is dismissed."
25. Before us, learned AR for the assessee could not controvert the observations made in the orders of the tax authorities below, first, that as per the amended provisions for claiming deduction under section 80HHC of the Act, the turnover of the assessee should not be more than Rs. 10 crores, whereas, undisputedly, the turnover of the assessee in the year under consideration was more than Rs. 10 crores. Second, that in the Profit & Loss Account, the assessee itself has shown the income from DEPB, as credited in the Profit & Loss Account, as Rs. 2,48,52,367 and not Rs. 1,57,19,307 as claimed by the assessee.
26. Hence, in our opinion, the claim of the assessee before us that it has shown the profit from DEPB on accrual basis, whereas, it is to be allowed as per receipt basis and if we consider it on receipt basis it would be Rs. 1,57,19,307 and not at Rs. 2,48,52,367 shown by the assessee in Profit & Loss Account, cannot be accepted at this stage, nor the same finds any support from record nor from any case law in support of the contention. Therefore, the contention of the assessee, to our mind having no merits, is liable to be rejected and more so when against the addition made by the tax authorities below on the basis of the receipt of DEPB shown by the assessee in its Profit & Loss Account and on the addition made under section 80HHC of the Act and as per amended provisions of section 80HHC of the Act when assessee’s turnover is more than Rs. 10 crores being in accordance with law, and against which AR for the assessee was not able to advance any submissions regarding legality of their orders. Hence, for the reasons stated above, we find no illegality or infirmity in the orders of the tax authorities below on the issue of deduction regarding DEPB receipts and the same are upheld. The Ground No. 5 of the appeal of the assessee is rejected.
27. In the result the appeal filed by the assessee is partly allowed.
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