The ACIT, Gandhidham Circle,, GANDHIDHAM v. M/s Shipra Veneers Pvt. Ltd.,, GANDHIDHAM

ITA 131/RJT/2009 | 2005-2006
Pronouncement Date: 23-12-2010 | Result: Dismissed

Appeal Details

RSA Number 13124914 RSA 2009
Assessee PAN AAICS0773K
Bench Rajkot
Appeal Number ITA 131/RJT/2009
Duration Of Justice 1 year(s) 9 month(s) 3 day(s)
Appellant The ACIT, Gandhidham Circle,, GANDHIDHAM
Respondent M/s Shipra Veneers Pvt. Ltd.,, GANDHIDHAM
Appeal Type Income Tax Appeal
Pronouncement Date 23-12-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted DB
Tribunal Order Date 23-12-2010
Date Of Final Hearing 15-12-2010
Next Hearing Date 15-12-2010
Assessment Year 2005-2006
Appeal Filed On 20-03-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH RAJKOT BEFORE SHRI A.L. GEHLOT (AM) AND SHRI D.T. GARASIA (JM) I.T.A. NO.131/RJT/2009 (ASSESSMENT YEAR 2005-06) ACIT GANDHIDHAM CIRCLE VS M/S SHIPRA VENEERS PVT LTD GANDHIDHAM PLOT NO.244/1 NATIONAL HIGHWAY 8A GANDHIDHAM PAN : AAICS0773K (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI JM SAHAY RESPONDENT BY : SHRI KALPESH DOSHI O R D E R GARASIA : THIS APPEAL BY THE REVENUE IS DIRECTED AG AINST THE ORDER OF CIT(A)-II RAJKOT DATED 23-12-2008 FOR THE ASSESSMENT YEAR 200 5-06. THE EFFECTIVE GROUNDS RAISED IN THE APPEAL READS AS BELOW: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A)-II RAJKOT HAS ERRED IN DELETING THE ADDITION OF RS.46 65 775/- ON ACCOUNT OF ESTIMATION OF GROSS PROFIT DIFFERENCE AFTER REJECTING BOOKS OF ACCOUNTS U/S 145(3) OF THE I.T. ACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A)-II RAJKOT HAS ERRED IN DELETING THE DISALLOWANCE OF LOSS OF GOLD TRADING OF RS.15 43 77 8/-. 2. THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGE D IN THE BUSINESS OF GOLD BUILLION AND TIMBER TRADING. THE ASSESSEE DOE S IMPORT AND EXPORT OF TIMBER. THIS IS THE FIRST YEAR OF BUSINESS OF THE ASSESSEE. 3. BOTH THE GROUNDS RAISED IN THE APPEAL PERTAIN TO REJECTION OF BOOKS OF ACCOUNT AND CONSEQUENT TO ESTIMATION OF GROSS PROFI T IN THE ACCOUNT OF TIMBER TRADING AND GOLD TRADING ACCOUNT. THE ASSESSING OF FICER FROM THE DETAILS ITA NO.131/RJT/2009 2 FURNISHED ALONGWITH THE RETURN OF INCOME FILED BY T HE ASSESSEE NOTICED THAT THE ASSESSEE HAD SHOWN FOREIGN EXCHANGE FLUCTUATION GAI N IN ITS ACCOUNTS. ACCORDING TO THE ASSESSING OFFICER THIS INCOME IS NOT PART OF TRADING ACTIVITIES AND THEREFORE WHEN REDUCED THE SAME FROM THE BOOK RESU LTS SHOWN THE ASSESSEE INCURRED LOSS IN THE TRADING ACTIVITIES. AS PER TH E ASSESSING OFFICER THE AQSSESSE HAS SHOWN A NET LOSS OF RS.15 43 778 AGAINST THE SA LES OF RS.68.84 CRORES WHICH IS QUITE UNBELIEVABLE THEREBY THE BOOKS RESULTS SHO WN BY THE ASSESSEE DO NOT PROJECT THE TRUE STATEMENT OF AFFAIRS OF THE BUSINE SS ACCORDINGLY THE ASSESSEE ALSO FAILED TO ADDUCE ANY CONVINCING REPLY WITH EVI DENCE TOWARDS THE PROPOSED REJECTION OF BOOK RESULTS U/S 145(3) OF THE ACT. W ITH REGARD TO THE TIMBER TRADING ALSO THE ASSESSING OFFICER NOTICED THAT THE ASSESSE E HAS PROJECTED THE SALES OF TIMBER TO THE TUNE OF RS.24 41 12 762 AND SHOWN A N ET LOSS OF RS.29 11 016. HE FURTHER OBSERVED THAT THE MAIN PARAMETERS TO DECLAR E LOSS IN TIMBER TRADING ARE (I) FLUCTUATION IN FOREIGN CURRENCY; AND (II) COMPA RISON CASE OF GREEN GOLD TIMBER PVT LTD. THE FOREIGN EXCHANGE FLUCTUATION GAIN WAS REJECTED AS IN THE CASE OF GOLD TRADING ACCOUNT AND THE COMPARISON WAS REJECTE D AS IN THAT CASE THE ASSESSING OFFICER NOTICED THAT THERE WAS SURVEY OPE RATION U/S 133A AND THAT ASSESSEE MOVED THE SETTLEMENT COMMISSION. THEREFOR E THE ASSESSING OFFICER REJECTED THE BOOK RESULTS U/S 145(3) AND THE GROSS PROFIT OF THE ASSESSEE WAS ESTIMATED AT 3% WHICH RESULTED IN AN ADDITION OF RS .46 65 775 IN THE TIMBER TRADING ACCOUNT AND REJECTING THE LOSS OF RS. 15 43 778 IN THE GOLD TRADING ACCOUNT AS AGAINST 1.09% SHOWN BY THE ASSESSEE.. T HE ASSESSEE CONTESTED THE ADDITION BEFORE CIT(A). (I) THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE ARE DULY AUDITED BOTH UNDER THE COMPANIES ACT AS WELL AS UNDER THE INCOM E-TAX ACT. THE BOOKS OF ACCOUNT ARE DULY SUPPORTED BY BILLS VOUCHERS AND O THER RELEVANT DETAILS AND ALL THE PRIMARY RECORDS LIKE SALE PURCHASE REGISTER C ASH BOOK BANK BOOK JOURNALS AND LEDGERS. ITA NO.131/RJT/2009 3 (II) THE ASSESSEE IS A NEW ENTRANT IN BOTH THE BUSI NESS ACTIVITIES CARRIED OUT BY IT AS THIS IS THE FIRST YEAR OF ASSESSEES BUSIN ESS. (III) THE ASSESSEE IS MAINLY DEALING WITH PEC LTD A GOVERNMENT UNDERTAKING. PEC LTD OPENS LETTER CREDIT IN THEIR NAME AND GOLD IS IMPORTED AND KEPT IN THEIR BOND STORE AND AS AND WHEN DEMAND ORDER IS SENT BY THE ASSESSEE GOLD IS RELEASED. IN MOST OF THE CASE GOLD IS SOLD IN CAS H AND ALL THE SALE PROCEEDS ARE DEPOSITED WITH PEC LTD. THE ASSESSEE HAD GIVEN FIX ED DEPOSIT IN FAVOUR OF PEC LTD ON THE BASIS OF WHICH LOC HAS BEEN ISSUED BY TH EM. (IV) THE ASSESSING OFFICER CALLED FOR DETAILS FROM MORE THAN 20 PARTIES TO WHOM SALES HAVE BEEN MADE. OUT OF THESE TWO PARTIES 9 PARTIES HAVE NOT COMPLIED WITH NOTICES. THE NOTICES IN ALL THOSE TWENTY CASE S ON THE ADDRESSES GIVEN BY THE ASSESSEE HAVE BEEN DULY SERVED AND THEREFORE THE I DENTITY OF THOSE PARTIES IS DULY ESTABLISHED. THE ASSESSEE HAS GIVEN COPIES OF ACCOUNTS AND COMPLETE DETAILS OF SALES EFFECTED AND HAS ALSO FURNISHED FO RM C ISSUED BY THESE PARTIES TO ASSESSEE. THESE DECLARATIONS IN FORM C HAVE B EEN MADE BY THE RESPECTIVE PARTIES BEFORE THEIR SALES-TAX AUTHORITIES. IT WAS EXPLAINED TO THE ASSESSING OFFICER THAT THOSE PARTIES WERE LOCATED IN VARIOUS PARTS OF THE COUNTRY AND THEREFORE IT WAS DIFFICULT FOR THE ASSESSEE TO COLL ECT THE DETAILS FROM THEM AFTER EFFLUX OF TIME. (V) THE GENUINENESS OF THE TRANSACTIONS COULD NOT B E DOUBTED AS THE TRANSACTIONS ARE MADE THROUGH BANKING CHANNEL AND A LL THE RELEVANT DETAILS WERE FURNISHED BEFORE THE ASSESSING OFFICER AND THAT THE SALES-TAX DEPARTMENT ALSO DID NOT FIND ANY DISCREPANCIES IN THE SALES RECORDS OR ANY OTHER DOCUMENTS OF THE ASSESSEE AND THEREFORE THE BOOKS OF ACCOUNT ARE COR RECT AND COMPLETE. (VI) THE ASSESSEE IS A WHOLESALER IN GOLD AND THE P ROFIT MARGIN IS VERY LOW. THE PROFIT EARNED BY THE ASSESSEE FROM THE GOLD BUS INESS WAS EXPLAINED AS ITA NO.131/RJT/2009 4 BELOW AND WITH DETAILS THE ASSESSEE CONTENDED THAT IT HAS SHOWN REASONABLE GROSS PROFIT: SALES 68 84 83 740 OTHER INCOME RELATED TO TRADING ACTIVITY 38 93 607 PURCHASES 68 50 27 693 GROSS PROFIT 73 49 654 G.P. RATIO 1.07% ADMINISTRATIVE EXPENSES 49 99 825 NET PROFIT 23 49 829 NET PROFIT RATIO 0.34% (VII) GOVERNMENT UNDERTAKINGS SUCH AS PEC LTD AND S TC LTD HAD A GROSS PROFIT RATIO OF 0.39% AND 0.38% RESPECTIVELY. THE B OOK RESULTS WERE REJECTED MERELY ON THE GROUND THAT GROSS PROFIT MARGIN AS SH OWN BY THE ASSESSEE WAS NOT AS EXPECTED BY AO. (VIII) THE ITAT IN THE CASE OF GIRISH MEHTA 99 TTJ 394 (RJT) HAS ACCEPTED GP RATE OF 0.18% IN THIS LINE OF BUSINESS WHEREAS THE ASSESSEE HAS SHOWN 1.07% GP RATE. (IX) THE ASSESSEE IS MAINTAINING STOCK REGISTER AND OTHER RECORDS AND ON THE BASIS OF SUCH RECORDS GROSS PROFIT OF EACH AND EVER Y TRANSACTION COULD BE OBTAINED. (X) THE GOLD IS ALSO SOLD AT THE OPEN MARKET AND RA TES ARE CONTROLLED BY THE MARKET FORCE THE ASSESSEE CANNOT CHARGE ITS OWN RA TE AND THEREFORE THE SALES HAS BEEN DONE AT THE MARKET RATS ONLY. (XI) THE EXCLUSION OF FDR INTEREST FROM THE BUSINES S INCOME AS DONE BY THE ASSESSING OFFICER TO WORK OUT THE GROSS PROFIT RATE WAS NOT JUSTIFIED AS THE FDR ITA NO.131/RJT/2009 5 WAS OPENED FOR THE PURPOSE OF LOC OPENED WITH PEC L TD AND THAT HAD THAT FDR NOT OPENED THEY WOULD NOT HAVE ALLOWED THE FACILIT Y OF PURCHASE OF GOODS ON LOC AND THEREFORE OPENING FDR WAS A BUSINESS DECIS ION AND HAS A DIRECT BUSINESS CONNECTION AND IS VERY MUCH ATTRIBUTABLE T O THE BUSINESS OF THE ASSESSEE. RELIANCE WAS PLACED ON THE APEX COURT DE CISION IN THE CASE OF VELORE ELECTRONIC CORP LTDF 227 ITR 557 (SC) AND GALIUM EQ UIPMENTS 73 TTJ (DEL) 130. (XII) THE ASSESSING OFFICER HAS NOT COME OUT WITH A CASE THAT THE BOOKS OF ACCOUNTS ARE UNRELIABLE INCORRECT AND INCOMPLETE. THE ACCOUNTS REGULARLY MAINTAINED AND DULY AUDITED SHOULD BE TAKEN AS CORR ECT UNLESS STRONG AND SUFFICIENT REASONS ARE FOUND TO INDICATE IT TO BE U NRELIABLE. (XIII) IN THE ABSENCE OF ANY SUCH RECORDINGS THAT E NTRIES WERE NOT FOUND RECORDED IN THE BOOKS OR SOME PORTION OF THE BUSINE SS ARE NOT RECORDED OR BOOKS ARE NOT SUPPORTED BY BILLS VOUCHERS OR SUPPORTING EVIDENCES TO DEDUCE CORRECT PROFIT THE BOOKS OF ACCOUNT CANNOT BE REJECTED. (XIV) THE ONUS TO FIND OUT DEFECTS IN THE BOOKS OF ACCOUNT IS ON THE ASSESSING OFFICER. THE ASSESSING OFFICER FAILED TO POINT OUT ANY SUCH DEFECTS OR OMISSION IN THE BOOKS OF ACCOUNT THE REJECTION OF BOOKS OF ACC OUNT IS NOT TENABLE AND THE CONSEQUENTIAL ESTIMATION OF GROSS PROFIT IS UNTENAB LE AND THEREFORE THE ASSESSING OFFICER OUGHT TO HAVE ACCEPTED THE GROSS PROFIT SHO WN BY THE ASSESSEE. 4. WITH REGARDING TO THE ADDITION OF RS. 46 65 775 ON ACCOUNT OF REJECTION OF BOOKS OF ACCOUNT OF TIMBER TRADING THE ASSESSEE AD DED AS FOLLOWS: (I) THE TRADING RESULTS OF THE ASSESSEE WERE AS BEL OW: SALES & OTHER TRADING RECEIPT RS. 25 32 88 231 COST OF SALES RS. 25 06 30 624 GROSS PROFIT RS. 26 57 607 ITA NO.131/RJT/2009 6 GP RATIO 1.09% ADMINISTRATIVE EXPENSES RS. 2 21 693 NET PROFIT RS. 23 49 829 NET PROFIT RATIO 1.00% (II) THE ASSESSEE HAS SOLD GOODS ON HIGH SEA BASIS AND MORE THAN 90% OF THE TURNOVER IS ON HIGH SEA BASIS. THEREFORE THE PROFIT MARGIN IN THE HIGH SEA BASIS IS MUCH LOWER AS COMPARED TO RETAIL BUSINESS. (III) THE COMPARATIVE CASE SHOWN IN THE CASE OF GRE EN GOLD TIMBER PVT LTD FOR AY 2005-06 WHO HAS SHOWN NET PROFIT OF 0.46% ON TUR NOVER OF RS.2957.39 LACS WAS IGNORED BY THE ASSESSING OFFICER UNDER A MISTAK EN FACTS RELATING TO ASSESSMENT YEAR 2002-03. (IV) THE COMPARING MADE BY THE ASSESSING OFFICER WI TH THE CASE OF PRIME LUMBER PVT LTD IS NOT COMPARABLE CASE AS THE SAID P ARTY IS MAINLY ENGAGED IN THE RETAIL BUSINESS AND NOT DEALING IN HIGH SEA ON WHOLE SALE BASIS. THIS PARTYS TURNOVER IS TOO LOW AS COMPARED TO THAT OF THE ASSE SSEE. HOWEVER THE ASSESSING OFFICER HAS NOT COME OUT WITH BASIC DETAILS OF THAT ASSESSEE AND THEREFORE IT IS NOT POSSIBLE TO COMMENT ON THAT ASSESSEE. (V) THE YEAR UNDER CONSIDERATION WAS THE FIRST YEAR OF BUSINESS OF THE ASSESSEE AND BEING THE FIRST YEAR OF BUSINESS THE ASSESSEE HAD TO FACE VARIOUS PROBLEMS AS THE ASSESSEE WAS NOT HAVING LONG MARKET ING STANDING. THE ASSESSEE WAS HAVING VERY LIMITED AMOUNT OF CAPITAL AND THEREFORE THE GOODS ARE PURCHASED ON CREDIT ALSO. THE ASSESSEE DID NOT ENJ OY THE EXPERIENCE IN THIS LINE OF ACTIVITIES AS IN OTHER CASES. (VI) THE ASSESSEE HAS IMPORTED GOODS AND THERE WAS HUGE FOREIGN EXCHANGE FLUCTUATION IN THIS YEAR AND THIS BEING THE FIRST Y EAR THE ASSESSEE COULD NOT MANAGE THE SITUATION IN A MORE PROFITABLE MANNER. THE ACTION OF THE ASSESSING ITA NO.131/RJT/2009 7 OFFICER IN IGNORING THE PROFIT ON FOREIGN EXCHANGE FLUCTUATION WAS NOT JUSTIFIED BECAUSE THIS PROFIT IS EARNED ON ACCOUNT OF PURCHAS E AND SALE OF TIMBER ON HIGH SEA BASIS. THE INCOME IS MORE PART AND PARCEL OF T HE TRADING ACTIVITY OF THE ASSESSEE. RELIANCE WAS PLACED ON THE DECISIONS IN THE CASE OF BERG TRADING LTD 14 SOT 455 (MUM) AND IN THE CASE OF LUCENT TECHNOLO GIES HINDUSTAN LTD 106 TTJ 205 (BANG) 5. FINDING MERIT IN THE CONTENTIONS RAISED BY THE A SSESSEE THE LD.CIT(A) DELETED BOTH THE ADDITIONS. AGGRIEVED THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 6. THE LD.DR SUBMITTED THAT THE CIT(A) WAS NOT JUST IFIED IN KNOCKING DOWN THE ADDITIONS. THE ASSESSING OFFICER HAS NOTED THAT EX CLUDED THE FOREIGN EXCHANGE FLUCTUATION GAIN THE NET RESULTS SHOWN BY THE ASSE SSEE WAS VERY LOW. WHEN SHOW CAUSED TO REJECT THE BOOK RESULTS THE ASSESSE E COULD NOT COME OUT WITH ANY PLAUSIBLE EXPLANATION AS TO WHY THE PROPOSED AC TION OF REJECTING THE BOOKS COULD NOT BE RESORTED TO. THE INTEREST EARNED ON F DR AND THE FOREIGN EXCHANGE FLUCTUATION GAIN BY NO STRETCH OF IMAGINATION COULD BE CONSIDERED AS TRADING PROFIT OF THE ASSESSEE. THE LD.DR THEREFORE PRAYED THAT T HE ORDER OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER MAY BE SET ASIDE. 7. THE LD.AR OF THE ASSESSEE ON THE OTHER HAND RE ITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) AND PRAYED THAT THE ORDER OF CIT(A) DOES NOT NEED ANY INTERFERENCE AS HE HAS FACTUALLY FOUND THAT THE ASS ESSING OFFICER DID NOT FIND ANY DEFECT IN THE BOOKS OF ACCOUNT NOR IN THE QUANTITAT IVE TALLY. IN THE ABSENCE OF SUCH A FINDING FROM THE ASSESSING OFFICER THE REJE CTION OF BOOKS OF ACCOUNT IS NOT TENABLE IN THE EYES OF LAW. THE LD.AR DEFENDED THA T THE GROSS PROFIT MARGIN SHOWN BY THE ASSESSEE IN BOTH THE ACCOUNTS ARE HIGH ER THAN THE RATE OF PROFIT PREVALENT IN THIS LINE OF BUSINESS. THE ASSESSEE H AD PROVIDED INFORMATION ON THE COMPARABLE CASES CITED BEFORE THE ASSESSING OFFICER WHICH WERE NOT ACCEPTABLE TO THE ASSESSING OFFICER FOR THE REASONS BEST KNOWN TO HIM. THE LD.AR FURTHER ITA NO.131/RJT/2009 8 SUBMITTED THAT IT IS NOT ONLY WITH THE ASSESSEE BUT IN CASE OF EVERY BUSINESSMAN THAT IN THE INITIAL YEAR OF BUSINESS DUE TO LACK EX PERIENCE THE BUSINESS CANNOT BE RUN UPTO THE DESIRED DESIGN AND EVEN IF THERE IS AN Y FALL IN THE GROSS PROFIT RATIO THE REASONS COULD BE WELL ATTRIBUTED TO MANAGERIAL INEXPERIENCE THOUGH THE LD.AR DEFENDED THAT THE GROSS PROFIT SHOWN WAS FAIR AND JUST. THE LD.AR ALSO SUBMITTED THAT THE CAPITAL AVAILABLE WITH THE ASSES SEE WAS NOT SUFFICIENT ENOUGH TO AMASS THE HUGE TURNOVER THE ASSESSEE HAS ACHIEVE D AND THEREFORE THE ASSESSEE HAD TO BORROW FUNDS FROM OUTSIDE SOURCES A LSO. HE PRAYED THT THE ORDER OF THE CIT(A) MAY BE UPHELD. 8. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES RECORD PERUSED. THE AO CAN ASSUME JURISDICTION IN REJECTING THE BOO KS OF ACCOUNTS OF THE ASSESSEE BY VIRTUE OF SECTION 145 OF THE INCOME-TAX ACT RELATING TO 'METHOD OF ACCOUNTING'. THE SAID SECTION 145 READS AS UNDER:- 145 (1) INCOME CHARGEABLE UNDER THE HEAD PRO FITS AND GAINS OF BUSINESS OR PROFESSION OR 'INCOME FROM OTHER SOURC ES' SHALL BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTIN G REGULARLY EMPLOYED BY THE ASSESSEE. PROVIDED THAT IN ANY CASE WHERE THE ACCOUNTS ARE CO RRECT AND COMPLETE TO THE SATISFACTION OF THE ASSESSING OFFIC ER BUT THE METHOD EMPLOYED IS SUCH THAT IN THE OPINION OF THE ASSESS ING OFFICER THE INCOME CANNOT PROPERLY BE DEDUCED THERE FROM THEN THE COMPUTATION SHALL BE MADE UPON SUCH BASIS AND IN SU CH MANNER AS THE ASSESSING OFFICER MAY DETERMINE. PROVIDED FURTHER .... PROVIDED ALSO..... (2)WHERE THE ASSESSING OFFICER IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECT ION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB-SECTION (2) HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE THE ASSESS ING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTIO N 144. 8.1 SUB-SECTION (2) ABOVE IS SAME AS THE SUB SECT ION (3) OF THE POST AMENDED SECTION 145 OF THE INCOME TAX ACT HAS FOLLOWING ING REDIENTS: ITA NO.131/RJT/2009 9 (A) AO BEING NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE; (B) THE VERY MEANING OF THE CORRECTNESS AND COMPLET ENESS OF THE ACCOUNTS; AND MAKING OF AN ASSESSMENT IN THE MANNER PROVIDED IN S ECTION 145. 8.2 THE ABOVE TWO INGREDIENTS (A) AND (B) ARE RELEVANT FOR REJECTION OF THE ACCOUNTS OF THE ASSESSEE. REGARDING THE 'AO BEING N OT SATISFIED' ABOUT THE CORRECTNESS AND COMPLETENESS OF THE ASSESSEE'S ACCO UNTS THE CALCUTTA HIGH COURT JUDGMENT IN THE CASE OF ASHOK REFRACTORIES PV T. LTD (279 ITR 457) IS RELEVANT. IN THE SAID CASE THE HONBLE HIGH COURT HELD THAT IN ORDER TO REJECT THE ACCOUNTS THE AO HAS TO COME TO AN OPINION THAT THE INCOME CANNOT BE PROPERLY DEDUCED FROM THE ACCOUNTS SO MAINTAINED. IN ORDER T O ARRIVE AT SUCH CONCLUSION IT MUST BE SHOWN THAT THE AO HAS TAKEN INTO CONSIDE RATION RELEVANT FACTORS AND NOT OMITTED TO CONSIDER THE MATERIAL BEFORE HIM. RE GARDING THE REJECTION OF BOOKS OF ACCOUNTS ACCEPTING THE BOOKS OF ACCOUNTS OF TH E ASSESSEE IS A RULE AND REJECTING THE SAME IS AN EXCEPTION'. THIS IS THE PR INCIPLE IN EXISTENCE KEEPING IT IN MIND. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V CHANDRAVILAS HOTEL (1987) 165 ITR 300 (GUJ) HELD AS UNDER: PAGE 317 IT IS ALSO IMPORTANT TO BEAR IN MIND THAT UNDER SECTION 145(2) THE INCOME CHARGEABLE UNDER THE HEAD ' PROF ITS AND GAINS OF BUSINESS OR PROFESSION ' OR ' INCOME FROM OTHER SOURCES ' HAS TO BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUN TING REGULARLY EMPLOYED BY THE ASSESSEE UNLESS IN THE OPINION OF THE INCOME-TAX OFFICER THE INCOME PROFITS AND GAINS CANNOT PROPE RLY BE DEDUCED THERE FROM OR THE INCOME-TAX OFFICER IS NOT SATISFI ED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE. UNDER THE PROVISO TO SUBSECTION (1) OF SECTION 145 IN ANY CASE WHERE THE ACCOUNTS ARE CORRECT AND COMPLETE TO THE SATISFACTION OF ITA NO.131/RJT/2009 10 THE INCOME-TAX OFFICER BUT THE METHOD EMPLOYED IS S UCH THAT IN THE OPINION OF THE INCOME-TAX OFFICER THE INCOME CANNO T PROPERLY BE DEDUCED THERE FROM THEN THE COMPUTATION HAS TO BE PAGE 318 MADE UPON SUCH BASIS AND IN SUCH MANNER AS THE INCOME-TAX OFFICER MAY DETERMINE. HOWEVER IF THE I NCOME-TAX OFFICER IS NOT SATISFIED ABOUT THE CORRECTNESS OR C OMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR WHERE NO METHOD OF ACCO UNTING HAS BEEN REGULARLY EMPLOYED BY THE ASSESSEE THE INCOME -TAX OFFICER MAY MAKE THE ASSESSMENT IN THE MANNER PROVIDED IN S ECTION 144. SECTION 145 IS MANDATORY AND THE REVENUE IS BOUND B Y THE ASSESSEE'S CHOICE OF A METHOD REGULARLY EMPLOYED UN LESS BY THAT METHOD THE TRUE INCOME PROFITS AND GAINS CANNOT BE ARRIVED AT.( FOND BOLD BY US) IN OTHER WORDS SECTION 145 ENACTS THAT FOR THE PURPOSE OF SECTION 28 (PROFITS AND GAINS OF BUSINES S PROFESSION OR VOCATION) AND SECTION 56 (INCOME FROM OTHER SOURCES ) INCOME PROFIT AND GAINS MUST BE COMPUTED IN ACCORDANCE WIT H THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. T HEREFORE IF THE ASSESSEE REGULARLY EMPLOYS A PARTICULAR METHOD OF A CCOUNTING AND IF NO DEFECTS ARE FOUND IN THE METHOD OR MAINTENANC E OF ACCOUNTS THE TAXING AUTHORITY IS BOUND TO COMPUTE THE PROFIT S AND GAINS OF BUSINESS OR PROFESSION OR VOCATION IN ACCORDANCE WI TH THE METHOD EMPLOYED BY THE ASSESSEE. THEREFORE IN CASE WHERE THE INCOME- TAX OFFICER OR THE TAXING AUTHORITY FINDS THAT IN M AINTAINING ACCOUNTS THE ASSESSEE HAS REGULARLY EMPLOYED A PARTICULAR ME THOD AND DOES NOT MAKE ANY INVESTIGATION TO FIND OR DOES NOT FIND ANY DEFECT IN THE ACCOUNTS AND ACCEPT THE ACCOUNTS AS THEY ARE HE IS BOUND TO COMPUTE THE INCOME IN ACCORDANCE WITH THE ACCOUNTS MAINTAINED BY THE ASSESSEE. THEREFORE WHEN THE ASSESSEE REPRE SENTS TO THE TAXING AUTHORITY THAT ITS ACCOUNTS ARE MAINTAINED B Y A METHOD OF ITA NO.131/RJT/2009 11 ACCOUNTING REGULARLY EMPLOYED HE EXPECTS THE INCOM E-TAX OFFICER TO ACT UPON SUCH METHOD AND COMPUTE THE INCOME ACCO RDINGLY. 8.3 THE ABOVE SCOPE OF THE PROVISIONS OF SECT ION 145 CONCLUSIVELY ESTABLISHING THE FACT THAT WHAT IS IMPORTANT FOR R EJECTION OF BOOKS IS THE AO BEING NOT SATISFIED ABOUT THE CORRECTNESS AND COMPLETENES S OF THE ACCOUNTS AND IT IS NOT THE QUESTION OF ASSESSEE ESTABLISHING THE METHO D APPLIED IS FIT ENOUGH TO DEDUCE FROM THE ACCOUNTS THE CORRECT PROFITS. BUT IT IS THE AO'S OPINION WHICH IS MATERIAL AND SAID OPINION SHOULD BE ABOUT BOTH CORR ECTNESS AND COMPLETENESS AS THE CONJUNCTION 'AND' IS USED. 8.4 IN THE INSTANT CASE THE MAIN OBJECTION OF THE ASSESSING OFFICER WAS IF EXCLUDED THE GAIN ON FOREIGN EXCHANGE GAIN AND THE INTEREST EARNED ON THE FDR THE NET RESULT WOULD BE A NEGATIVE FIGURE AND THERE FORE HE CALLED FOR THE EXPLANATION. THE ASSESSEE EXPLAINED BOTH THE ITEMS TO HIS LEVEL BEST WHICH WERE SUPPORTED BY SOME JUDICIAL PRECEDENTS. THE FALL IN GROSS PROFIT IF ANY WAS ALSO EXPLAINED WHICH WERE NOT ACCEPTABLE TO THE ASSESSIN G OFFICER BY PROVIDING SOME COMPARABLE CASES. THESE EXPLANATIONS WERE NOT ACCE PTABLE TO THE ASSESSING OFFICER. THE ASSESSING OFFICER BY SIMPLY REJECTING THE COMPARISON OF CASE REFERRED TO BY THE ASSESSING OFFICER UNDER MISCONCEIVED FACT S AS HAS BEEN POINTED OUT BY THE LD.AR OF THE ASSESSEE HAS GONE ON TO OBSERVE THE ASSESSEE FAILED TO FURNISH ANY CONVINCING EXPLANATION WITH SUPPORTING EVIDENCE THAT ITS BOOKS OF ACCOUNTS REVEAL TRUE STATEMENT OF AFFAIRS OF ITS BUSINESS. WHILE DOING SO THE ASSESSING OFFICER DID NOT COME OUT WITH A SINGLE DEFECT OR IN CORRECTNESS OR OMISSION IN THE BOOKS OF ACCOUNT PRODUCED BEFORE HIM. A MERE BALD STATEMENT SUCH AS THIS WOULD NOT PERMIT THE ASSESSING OFFICER TO HAVE RECO URSE TO SECTION 145(3) OF THE ACT. THE CIT(A) RECORDED A FINDING THAT THE AO DI D NOT FIND ANY DEFECTS IN THE BOOKS OF ACCOUNT NOR IN THE QUANTITATIVE TALLY. THIS FINDING STANDS UNCONTROVERTED BEFORE US. WHEN BOOKS OF ACCOUNT AR E NOT LIABLE TO BE REJECTED THE QUESTION OF ESTIMATION OF INCOME DOES NOT ARISE . THEREFORE WE FIND THAT THE ITA NO.131/RJT/2009 12 REJECTION OF BOOKS OF ACCOUNT IS NOT MAINTAINABLE I N THE EYES OF LAW AND THAT THE CIT(A) WAS JUSTIFIED IN HOLDING SO. 9. THE OTHER OBJECTION OF THE ASSESSING OFFICER THA T INTEREST ON FDR SHOULD NOT BE PART OF TRADING RESULTS AND THEREFORE IT SHO ULD BE EXCLUDED WHILE WORKING OUT THE GROSS PROFIT RATE. THE LD.AR SUBMITTED THA T THE FDR WAS OPENED FOR THE PURPOSE OF LOC OPENED WITH PEC LTD AND THAT HAD THA T FDR NOT OPENED THEY WOULD NOT HAVE ALLOWED THE FACILITY OF PURCHASE OF GOODS ON LOC AND THEREFORE OPENING FDR WAS A BUSINESS DECISION AND HAS A DIREC T BUSINESS CONNECTION AND IS VERY MUCH ATTRIBUTABLE TO THE BUSINESS OF THE AS SESSEE. RELIANCE WAS PLACED ON THE APEX COURT DECISION IN THE CASE OF VELORE EL ECTRONIC CORP LTDF 227 ITR 557 (SC) AND GALIUM EQUIPMENTS 73 TTJ (DEL) 130. I NA THE CASE OF VELLORE ELECTRIC CORP LTD VS CIT (SC) SUPRA THE HONBLE AP EX COURT HELD THAT ASSESSEEINGT BEING STATUTORILY OBLIGED TO CREATE CO NTINGENCY RESERVE OUT OF ITS REVENUES AND INVEST THE SAME IN SECURITIES AUTHORIT IES UNDER THE INDIAN TRUSTS ACT 1882 INTEREST EARNED ON SUCH SECURITIES IS IN COME ATTRIBUTABLE TO PRIORITY INDUSTRY ELIGIBLE FOR RELIEF UNDER S.80-I. THIS DE CISION IS APPLICABLE TO THE CASE OF THE ASSESSEE. SIMILARLY IN THE CASE OF ACIT VS GAL LIUM EQUIPMENT (P) LTD (SUPRA) THE THIRD MEMBER HELD THAT INTEREST EARNED BY ASSESSEE ON FDRS MADE WITH THE BANK OUT OF MONEY BORROWED FROM THE BANK W HICH WAS OFFERED AS SECURITY FOR OBTAINING BANK GUARANTEES IN FAVOUR OF CUSTOMERS WHO DEMANDED SUCH GUARANTEES WHILE MAKING DEPOSITS (ADVANCE) WIT H THE ASSESSEE AND ALSO WHILE RELEASING FULL PAYMENT HAD DIRECT NEXUS WITH THE INDUSTRIAL UNDERTAKING OF THE ASSESSEE AND THEREFORE INTEREST INCOME IS TO BE TREATED AS DERIVED FROM THE SAID UNDERTAKING AND ASSESSEE IS ENTITLED TO BENEFI T OF S.80-I ON INTEREST INCOME. THIS DECISION IS ALSO APPLICABLE TO THE CASE OF THE ASSESSEE. 10. WITH REGARD TO THE EXCLUSION OF FOREIGN EXCHANG E GAIN THE MAIN THRUST OF ARGUMENT OF THE ASSESSEE IS THAT IF IT WERE NOT FOR THE EXPORT / IMPORT BUSINESS CARRIED ON BY THE ASSESSEE THERE WOULD HAVE BEEN NO FOREIGN EXCHANGE GAIN / LOSS AND THEREFORE THE FOREIGN EXCHANGE GAIN IS A BUSINESS PROFIT OF THE ITA NO.131/RJT/2009 13 ASSESSEE PARTICULARLY WHEN THERE IS NO DISPUTE THA T THE ASSESSEE IS IN THE BUSINESS OF EXPORT / IMPORT OF TIMBER. THE CO-ORDI NATE BENCH OF THE MUMBAI TRIBUNAL IN THE CASE OF BERG TRADING LTD VS ACIT 14 SOT 455 (MUM) HELD THAT ADDITIONAL LIABILITY ARISING ON ACCOUNT OF VARIATIO N IN THE EXCHANGE RATE OF FOREIGN CURRENCY ON THE DATE ON WHICH THE PURCHASE IS MADE AND THE DATE ON WHICH PAYMENT IS SETTLED IS DIRECTLY ATTRIBUTABLE TO THE COST OF MATERIAL IMPORTED BY ASSESSEE AND HAS TO BE CONSIDERED AS PART OF MATERI AL COST AND INCLUDED IN THE VALUE OF CLOSING STOCK. SIMILARLY IN THE CASE OF LUCENT TECHNOLOGIES HINDUSTAN LTD VS JCIT 106 TTJ (BAG) 205 IT WAS HELD THAT FORE IGN EXCHANGE LOSS ON ACCOUNT OF PURCHASE OF RAW MATERIAL AND SERVICES IS ON THE TRADING ACCOUNT CRYSTALLIZING ON THE LAST DATE OF FINANCIAL YEAR AND IS AN ALLOWABLE DEDUCTION. 11. THEREFORE IN VIEW OF THE ABOVE DISCUSSIONS WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE CIT(A) DELETING THE ADDITION OF RS .46 65 775 ON ACCOUNT OF ESTIMATION OF GROSS PROFIT DIFFERENCE IN THE ACCOUN T OF TIMBER TRADING AND RS. 15 43 778 BEING THE AMOUNT LOSS DISALLOWED BY THE A SSESSEE IN THE ACCOUNT OF GOLD TRADING. THE ORDER OF CIT(A) IS HEREBY UPHELD . 12. IN THE RESULT APPEAL FILED BY THE REVENUE IS D ISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 -12-2010 SD/- SD/- (A.L. GEHLOT) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DT : 23 RD DECEMBER 2010 PK/- ITA NO.131/RJT/2009 14 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A)-II RAJKOT 4. THE CIT-I RAJKOT 5. THE DR (TRUE COPY) BY ORDER ASSTT.REGISTRAR ITAT RAJKOT