The ACIT, Circle-5,, Surat v. M/s. Flatex Polyster, Surat

ITA 2247/AHD/2010 | 2007-2008
Pronouncement Date: 24-09-2010 | Result: Dismissed

Appeal Details

RSA Number 224720514 RSA 2010
Bench Ahmedabad
Appeal Number ITA 2247/AHD/2010
Duration Of Justice 2 month(s) 19 day(s)
Appellant The ACIT, Circle-5,, Surat
Respondent M/s. Flatex Polyster, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 24-09-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted D
Tribunal Order Date 24-09-2010
Assessment Year 2007-2008
Appeal Filed On 05-07-2010
Judgment Text
- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI JM AND D.C.AGRAWAL A M ASSTT. CIT CIR-5 ROOM NO.309 AAYAKAR BHAVAN MAJURA GATE SURAT. VS. M/S FLATEX POLYSTERS RIVER PALACE-IM 6 TH FLOOR OPP. OLD CIVIL COURT NANPURA SURAT. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI K. M. MAHESH SR.D.R. RESPONDENT BY:- SHRI J. P. SHAH AR O R D E R PER D. C. AGRAWAL ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOL LOWING GROUND:- (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE CIT(A) IV SURAT HAS ERRED IN DELETING THE ADDITION OF RS.9 13 920/- MADE BY THE AO ON ACCOUNT OF LOW GP. 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS THAT T HE LD. CIT(A) HAS DELETED ADDITION OF RS.9 13 920/- MADE BY THE AO ON ACCOUNT OF LOW G.P. THE FACTS OF THE CASE ARE THAT ASSESSEE IS TRADING IN YARN. IT HAS TWO DIVISIONS ONE IN SURAT AND ANOTHER IN AHMEDABAD. S EPARATE TRADING ACCOUNTS WERE MADE FOR BOTH THE DIVISIONS. THE AO F OUND THAT GP RATE IN THE TWO DIVISIONS VARIED CONSIDERABLY. EVEN OVERALL GP HAS BEEN DROPPED TO 1.41% FROM 2.77% DURING THE IMMEDIATELY PRECEDIN G YEAR EVEN THOUGH ASSESSEE RECEIVED COMMISSION INCOME OF RS.56 LACS DURING THE CURRENT YEAR. THE ASSESSEE WAS ACTING AS SUB-AGENT OF KRITYKA MARKETING ITA NO.2247/AHD/2010 ASST. YEAR :2007-08 ITA NO.2247/AHD/2010 ASST. YEAR 2007-08 2 ASSOCIATES AND COMMISSION WAS BOOKED FOR WORK DONE FOR THAT CONCERN. THE AO ESTIMATED PROFITS ONLY ON THE GROUND THAT GP DECLARED THIS YEAR WAS LOW. THE ASSESSEE SUBMITTED FOLLOWING EXPLANATI ON TO THE AO EXPLAINING LOW GP RATE AND DIFFERENCE IN GP RATES I N TWO DIVISIONS:- (I) BOTH DIVISIONS ARE NOT DISTINCT BUT PART OF A COMPO SITE UNIT. (II) THERE WAS A WIND FALL BUSINESS IN THE IMMEDIATELY PRECEDING YEAR WHICH HELPED IN IMPROVING THE GP WHEREAS THE SAME IS NOT THE CASE IN THE CURRENT YEA R. (III) YARN RATES ARE HIGHLY VOLATILE AND THE SAME RATE CA NNOT BE ADOPTED TO TWO DIFFERENT STATIONS. (IV) IT IS NOT POSSIBLE TO CHARGE DIFFERENT RATES OTHER THAN WHAT WAS DECIDED BY THE SUPPLIER SINCE BILL IS RAISED BY THEM. (V) BOOKS OF ACCOUNTS ARE AUDITED AND HENCE THE FINANCI AL RESULTS OUGHT TO BE ACCEPTED. THE AO DID NOT AGREE AND PROCEEDED TO ESTIMATE THE PROFITS. HE WORKED OUT PROFITS ON THE BASIS OF DIFFERENTIAL GP RATIO O F 1.05%. HE POINTED OUT THAT IN THE AHMEDABAD DIVISION GP RATE IS SHOWN AT 3.4% WHEREAS IN SURAT DIVISION IT IS SHOWN AT 6.3%. HE OVER ALL ADO PTED THE GP RATIO OF 2.46% AS AGAINST DECLARED GP RATE OF 1.41%. THUS HE WORKED OUT DIFFERENTIAL GP RATE OF 1.05% AND CALCULATED THE RE SULTANT ADDITION AT RS.9 13 920/-. 3. THE LD. CIT(A) DELETED THE ADDITION BY OBSERVING AS UNDER :- I FULLY AGREE WITH THE ARS SUBMISSION TO THE EFFE CT THAT WHEN SALES PURCHASES AND EXPENSES ARE PROPERLY AND COMPLETELY VOUCHED AND WHEN IN THE FINANCIAL AND QUANTITATIVE RECORDS PRODUCED BEFORE THE AO NO MISTAKES/SHORT COMINGS MUCH LESS ANY SERIOUS MISTAK ES/SHORT COMINGS COULD BE NOTICED BY THE AO THE AO IS NOT JUSTIFIED IN REJECTING BOOKS OF ACCOUNTS AND THE BOOK RESULTS IN THE APPELLANTS CA SE. THE FACT THAT THE APPELLANT HAS MAINTAINED AND PRODUCED BEFORE THE AO THE QUANTITATIVE DATA MAINTAINED ON DAILY BASIS IN THE STOCK REGISTE R WHEREIN AGAIN NO MISTAKES HAVE BEEN POINTED OUT BY THE AO LENDS UTMO ST CREDIBILITY TO THE BOOKS OF ACCOUNTS AND THE RELATED RECORDS MAINTAINE D BY THE APPELLANT. ITA NO.2247/AHD/2010 ASST. YEAR 2007-08 3 IN FACT THE CASE OF THE APPELLANT IS FAVOURABLY CO VERED BY THE JUDGMENTS OF THE HON. JURISDICTIONAL AHMEDABAD BENCH OF ITAT IN THE CASE OF PUSHPANJALI DYEING & PRINTING MILLS (P) LTD. AND KI RAN CORPORATION CITED SUPRA BY THE APPELLANT. AS HELD BY THE HON. I TAT IN THE SAID CASES MERE FACT OF LOW GP BY ITSELF CANNOT BE A GROUND FO R REJECTION OF BOOK RESULTS. RESPECTFULLY FOLLOWING THE JUDGMENTS OF TH E HON. JURISDICTIONAL AHMEDABAD BENCH OF ITAT IN THE ABOVE CITED CASES I QUASH THE ACTION OF THE A.O. OF REJECTING THE BOOKS OF ACCOUNTS AND THE BOOK RESULTS IN THE APPELLANTS CASE AS BEING UNJUSTIFIED AND UNCALLED FOR. 4. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF LD. CIT(A). IT IS BECAUSE AO HAS PROCEEDED TO ESTIMATE THE PROFITS WITHOUT REJECTING THE BOOKS OF ACCOUNTS. SE CTION 145 REQUIRES THE AO TO GIVE A FINDING AS TO WHETHER METHOD OF ACCOUN TING ADOPTED BY THE ASSESSEE IS SUCH THAT IT WILL NOT ENABLE THE AO TO COMPUTE THE INCOME OF THE ASSESSEE CORRECTLY OR THAT THERE ARE SERIOUS DE FECTS IN THE MAINTENANCE OF ACCOUNTS WHICH WILL NOT ENABLE THE AO TO WORK OU T THE INCOME OF THE ASSESSEE. THUS SECTION 145 ONLY RELATES TO METHOD O F ACCOUNTING OR RECORDING OF THE EVENTS WHICH TAKE PLACE DURING THE COURSE OF BUSINESS. SECTION 145 CANNOT BE INVOKED FOR CARRYING OUT BUSI NESS IMPRUDENTLY OR VERY GOOD RESULTS IN THE BUSINESS ARE NOT SHOWN. IT IS FOR THE ASSESSEE TO CARRY OUT THE BUSINESS AS PER HIS OWN PRUDENCE. EFF ICIENT BUSINESSMAN MAY GIVE BETTER RESULTS AND HIGHER INCOME WHEREAS I MPRUDENT OR INEFFICIENT BUSINESSMAN MAY NOT BE ABLE TO EARN THE PROFIT TO THAT EXTENT. THE BOOKS OF AN IMPRUDENT BUSINESSMAN CANNOT BE REJ ECTED BECAUSE IN THE EYES OF AO HE HAS NOT DECLARED THE PROFITS AS IT OU GHT TO HAVE BEEN. IN THE SIMILAR MANNER BOOKS OF ACCOUNTS OF A PRUDENT BUSIN ESSMAN GIVING HIGHER INCOME CANNOT BE ACCEPTED MERELY BECAUSE IT HAS GIV EN HIGHER PROFIT EVEN THOUGH BOOKS OF ACCOUNT CONTAINED SERIOUS DEFECTS. IN FACT EXAMINATION OF ACCOUNTS IS AN INITIAL STEP. ONLY AFTER CROSSING TH IS HURDLE AND GIVING A FINDING ON THE NATURE OF ACCOUNTS BY POINTING OUT THAT VARIOUS INGREDIENTS ITA NO.2247/AHD/2010 ASST. YEAR 2007-08 4 MENTIONED IN SECTION 145 ARE NOT SATISFIED THE AO GETS JURISDICTION/POWER TO ESTIMATE THE PROFITS. 5. PROVISIONS OF SECTION 145(3) CAN BE INVOKED FOR REJECTING THE BOOKS IF AO GIVES A FINDING THAT (I) ASSESSEE IS NOT FOLL OWING REGULARLY ANY ACCOUNTING STANDARD NOTIFIED BY THE CENTRAL GOVERNM ENT IN ACCORDANCE WITH SECTION 145(2) OR (II) AO IS NOT SATISFIED ABO UT CORRECTNESS OR COMPLETENESS OF THE ACCOUNT OR (III) WHERE ASSESSE E IS NOT FOLLOWING ANY METHOD OF ACCOUNTING REGULARLY. IF NO SUCH FINDING IS GIVEN THEN INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS HAS TO BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTIN G REGULARLY EMPLOYED BY THE ASSESSEE. FOR REJECTING THE BOOKS B Y INVOKING CONDITION NO.1 THE AO HAS TO SHOW THAT WHAT WAS THE ACCOUNTIN G STANDARD REQUIRED TO BE FOLLOWED COMPULSORILY OR WHAT WAS FOLLOWED IN EARLIER YEARS AND HAS NOT BEEN FOLLOWED THIS YEAR. THE AO HAS ALSO TO SHO W THAT BY NOT FOLLOWING AN ACCOUNTING STANDARD OR NOT FOLLOWING T HE ONE FOLLOWED EARLIER THE COMPUTATION OF CORRECT INCOME CANNOT B E DONE. FOR REJECTING THE BOOKS UNDER CONDITION NO.2 THE AO HAS TO SHOW THAT THE ACCOUNTS ARE NOT CORRECT AND COMPLETE AS THERE EXIST SERIOUS DEF ECTS IN MAINTENANCE OF ACCOUNTS IRRESPECTIVE OF WHETHER ACCOUNTING METHOD OR ACCOUNTING STANDARDS ARE REGULARLY FOLLOWED. THE AO HAS TO SHO W HERE THAT THE WAY ACCOUNTS ARE WRITTEN OR KEPT (AND NOT ACCOUNTING ME THOD ADOPTED LIKE CASH OR MERCANTILE) PROFITS CANNOT BE CORRECTLY DE DUCED THEREFROM. FOR REJECTING THE BOOKS BY INVOKING CONDITION NO.3 THE AO HAS TO SHOW THAT THE ASSESSEE IS ABRUPTLY CHANGING METHOD OF ACCOUNT ING FROM CASH TO MERCANTILE OR FOR DIFFERENT TRANSACTIONS IT IS ADOP TING DIFFERENT METHOD OF CASH OR MERCANTILE. FOR THIS THE AO HAS TO IDENTIFY THE TRANSACTIONS RECORDED IN DIFFERENT METHODS OR IDENTIFY THE ASST. YEARS IN WHICH DIFFERENT ACCOUNTING METHODS (CASH OR MERCANTILE) H AVE BEEN FOLLOWED. ITA NO.2247/AHD/2010 ASST. YEAR 2007-08 5 EVERY FINDING RELATING TO THREE CONDITIONS HAS TO B E BASED ON EVIDENCE AND SHOULD NOT BE MERELY AN OPINION OF THE A.O. FURTHER IT IS NOT ALWAYS CORRECT TO RESORT TO ESTIMATION AFTER REJECTING THE BOOKS IF ADEQUATE MATERIAL IS NOT AVAILABLE TO SUPPORT THE ESTIMATION OF HIGHER INCOME AS COMPARED TO WHAT ASSESSEE HAS SHOWN. THUS REJECTION OF THE BOOKS IN ACCORDANCE WITH SECTION 145 IS THE INITIAL STEP BEF ORE AO RESORTS TO NEXT STEP I.E. ESTIMATION OF INCOME. THUS THE REJECTION OF BOOKS CANNOT BE DONE WITHOUT POINTING THE DEFECTS IN ACCOUNTS OR AC COUNTING METHOD. AS WE HAVE HELD ABOVE THE AO HAS NEITHER GIVEN ANY FI NDING ABOUT REJECTION OF BOOKS NOR IT IS DISCERNIBLE FROM HIS ORDER THE WORKING OF HIS MIND FOR REJECTION OF THE BOOKS. IN VIEW OF THIS WE HOLD THA T AO HAS FAILED TO DISCHARGE THE ONUS OF REJECTING THE BOOKS AND INVOK ING SECTION 145(3). WE ARE SUPPORTED BY THE DECISION OF HON. GAUHATI HI GH COURT IN MADNANI CONSTRUCTION CORPORATION P. LTD. VS. COMMIS SIONER OF INCOME- TAX (2008) 296 ITR 45 (GAU) WHEREIN IT IS HELD THA T ACCOUNTS CANNOT BE REJECTED IF AO DID NOT FIND BOOKS OF ACCOUNT INCORR ECT OR ANY INFIRMITY IN THE AUDIT REPORT. IN CIT VS.RAJNI KANT DAVE [2006] 281 ITR 0006- (ALL) IT IS HELD THAT IF THERE IS NO FINDING THAT BOOKS OF A CCOUNTS ARE INCOMPLETE OR INCORRECT ACCOUNTS CANNOT BE REJECTED. IN ASHOKE R EFRACTORIES P. LTD. VS. COMMISSIONER OF INCOME-TAX [2005] 279 ITR 0457- [CA L] IT IS HELD THAT EVEN THOUGH THERE MAY BE ABSENCE OF STOCK REGISTER OR ITEMWISE ACCOUNTING OF STOCK BUT IF THERE IS NO FINDING THA T INCOME COULD NOT BE DEDUCED FROM THE METHOD OF ACCOUNT FOLLOWED ACCOUN TS CANNOT BE REJECTED AND SECTION 145 CANNOT BE INVOKED. SIMILAR VIEW WAS TAKEN BY HON. CALCUTTA HIGH COURT IN JUGGILAL KAMLAPAT UDYO G LTD. VS. COMMISSIONER OF INCOME-TAX [2005] 278 ITR 0052- [CA L] WHEREIN IT IS HELD THAT IF THERE IS NO FINDING THAT INCOME COULD NOT BE DEDUCED FROM THE ACCOUNTS MAINTAINED BY THE ASSESSEE THEN REJECTION OF ACCOUNTS WOULD BE INVALID. HON. GUJARAT HIGH COURT IN COMMISSIONER OF INCOME-TAX VS. ITA NO.2247/AHD/2010 ASST. YEAR 2007-08 6 VIKRAM PLASTICS [1999] 239 ITR 0161- [GUJ] HAS HELD THAT WHERE BOOKS OF ACCOUNTS HAVE BEEN MAINTAINED REGULARLY AND NO DEFE CTS HAVE BEEN FOUND IN THE ACCOUNTS THEN THE TRIBUNAL WOULD BE JUSTIFIE D IN HOLDING THAT ACCOUNTS CANNOT BE REJECTED UNDER SECTION 145. ACCO RDINGLY WE HOLD THAT BOOKS OF ASSESSEE CANNOT BE REJECTED AND THEREFORE AO CANNOT RESORT TO ESTIMATION OF INCOME BY ESTIMATING LOSSES. ACCORDIN GLY THE APPEAL FILED BY THE DEPARTMENT IS DISMISSED. 6. IN THE RESULT THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER WAS PRONOUNCED IN OPEN COURT ON 24/9/10. SD/- SD/- (BHAVNESH SAINI) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT ME MBER AHMEDABAD DATED :24/9/10. MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD ITA NO.2247/AHD/2010 ASST. YEAR 2007-08 7 1.DATE OF DICTATION /8/2010. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 22/9/2010 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..