DCIT, Kanpur v. M/s. Aliga Rubber Works, Kanpur

ITA 578/LKW/2010 | 2006-2007
Pronouncement Date: 19-01-2011 | Result: Dismissed

Appeal Details

RSA Number 57823714 RSA 2010
Assessee PAN AABFA5380Q
Bench Lucknow
Appeal Number ITA 578/LKW/2010
Duration Of Justice 4 month(s) 9 day(s)
Appellant DCIT, Kanpur
Respondent M/s. Aliga Rubber Works, Kanpur
Appeal Type Income Tax Appeal
Pronouncement Date 19-01-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 19-01-2011
Date Of Final Hearing 18-01-2011
Next Hearing Date 18-01-2011
Assessment Year 2006-2007
Appeal Filed On 09-09-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL B - BENCH LUCKNOW. BEFORE SHRI H.L.KARWA HON'BLE VICE PRESIDENT AND SHRI N.K.SAINI ACCOUNTANT MEMBER I.T.A.NO. 578(LKW.)/2010 A.Y. : 2006-07 THE DY.CIT-4 VS. M/S.ALIGA RUBBER WORKS KANPUR. 84/8 FAZALGANJ KANPUR. PAN AABFA5380Q (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P.K.BAJAJ D.R. RESPONDENT BY : SHRI J.J. MEHROTRA C.A. O R D E R PER H.L.KARWA VICE PRESIDENT THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF THE LD.CIT(A)-II KANPUR DATED 30.6.2009 RELATING TO TH E ASSESSMENT YEAR 2006- 07. 2. GROUND NO.1 OF THE APPEAL READS AS UNDER: 1. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE C OMMISSIONER OF INCOME TAX (APPEALS)-II KANPUR HAS ERRED IN LAW IN DELETING THE ADDITION OF RS.15 87 215/- IGNORING THE FACT TH AT THE ASSESSING OFFICER HAD ESTABLISHED THAT THE BOOKS OF ACCOUNT OF THE ASSESSEE ARE NOT RELIABLE DUE TO HUGE VARIATION S IN THE CLOSING STOCK AS WELL AS SUNDRY DEBTORS / CREDITORS . 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS MANUFACTURING VULCANIZED/UNVULCANISED RUBBER PRODUC TS AS PER 2 SPECIFICATIONS DESIRED BY THE CUSTOMERS IN EACH CA SE I.E. DEALING IN TAILOR- MADE PRODUCTS AND IS NOT DEALING IN GENERAL/STAND ARD PRODUCT. THE G.P. RATES DECLARED BY THE ASSESSEE FOR SEVEN ASSESSMEN T YEARS INCLUDING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2006-07 A RE AS UNDER : ASSTT. YEAR TOTAL TURNOVER GROSS PROFIT G.P.RATE 2000-01 2 95 20 156 1 18 50 213 40.14% 2001-02 3 05 29 053 1 16 14 630 38.00% 2002-03 2 48 99 488 81 29 605 32.66% 2003-04 3 00 65 653 1 23 96 070 41.24% 2004-05 3 02 59 637 1 18 78 321 39.25% 2005-06 1 58 70 594 55 35 926 34.88% 2006-07 1 89 02 75 55 39 131 29.3% 3.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS TH E AO REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY THERE WAS LOW GROSS PROFIT DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. IN THIS REGARD THE ASSESSEE EXPLAINED AS UNDER : (I) CONSIDERING THE BUSINESS ACTIVITY/NATURE OF B USINESS OF THE ASSESSEE I.E. MAKING GOODS TAILOR MADE/ AS PER SPECIFICATION OF THE CUSTOMERS THE GROSS PROFIT R ATE IS VARIABLE DEPENDING ON THE ORDERS AS PER SPECIFIC REQUIREMENTS OF THE CUSTOMERS RECEIVED RATES NEGOT IATED THE CURRENT COST OF THE RAW MATERIALS DEVELOPMENTA L ACTIVITIES/ EXPERTISE INVOLVED ETC. THE PRODUCT MANUFACTURED IS NOT A REGULAR PRODUCT AND HENCE THE GROSS PROFIT RATE IS NOT CONSISTENT. THE MATTER HAS BEEN EXAMINED IN LAST ASSESSMENTS AND ACCEPTED. (II) .... OTHER REASONS FOR FALL IN G.P. RATE DURI NG THE YEAR WERE AS UNDER:- (A) INCREASE IN WAGES AS PER GOVT. RULES. (B) INCREASE IN POWER CHARGES RATES. (C) REPAIRS OF FACTORY PREMISES. 3 (III) THE DECREASE IN G.P. RATE STANDS EXPLAINED A S ABOVE. 3.2 THE AO ENQUIRED FROM VARIOUS SOURCES INCLUDING THE DEBTORS CREDITORS AND ALSO THE BANKERS OF THE ASSESSEE WHE REFROM THE ASSESSEE AVAILED CREDIT FACILITIES. THE AO FOUND THAT THERE WERE HUGE VARIATIONS IN THE AMOUNT OF SUNDRY CREDITORS SUNDRY DEBTORS AND ALS O THE VALUE OF THE CLOSING STOCK AS DECLARED BY THE ASSESSEE IN HIS BALANCE SHEET AND THAT SUBMITTED TO ITS BANK FOR AVAILING CREDIT FACILITIES. IN VIEW O F THE ABOVE DISCREPANCIES THE AO WAS OF THE OPINION THAT THE BOOKS OF ACCOUNT MAI NTAINED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR WERE NOT RELIABLE AND REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY BOOK RESULTS SHOULD NOT BE REJECTED. IN RESPONSE TO THE ABOVE QUERY THE ASSESSEE SUBMITTED A DETAILED REPLY WHICH READS AS UNDER : EXPLANATION FOR G. P. RATE WAS SUBMITTED VIDE LETT ER DATED 22.09.2008 (PARA 22) AND FURTHER VIDE LETTER DATED 08.12.2008 (PARA 2) AND ARE REITERATED. CONSIDERING THE NATURE OF BUSINESS I. E. MAKING ITE MS MOSTLY FOR DEFENCE AND AIR FORCE AS PER REQUIRED SPECIFICATION S OF DIFFERENT CUSTOMERS FOR USE OF GOODS FOR SPECIFIED USE BY THE CUSTOMERS. COMPOUND OF EACH ITEM DIFFERS AND THE MARGINS DIFFE R IN EACH CASE. THE NET RESULT OF GROSS PROFIT ALWAYS DIFFER FROM Y EAR TO YEAR DEPENDING UPON THE ORDERS RECEIVED/ NEGOTIATED. SIN CE NO REGULAR ITEMS ARE MADE THE GROSS PROFIT RATE CAN NEVER REM AIN CONSTANT. THIS FACT HAS BEEN ACCEPTED BY THE DEPARTMENT FOR THE LA ST OVER 30 YEARS. DECLARED RESULTS ARE AS PER BOOKS OF ACCOUNTS AND S TOCK REGISTERS MAINTAINED. THE VARIATIONS IN THE CIRCUMSTANCES ARE BOUND TO HAPPEN AND UNAVOIDABLE AS THE ASSESSEE IS NOT DEALING IN S TANDARD/ REGULAR PRODUCT. WHERE THERE ARE MARGIN HIGHER RESULTS ACCR UE AND ARE DECLARED AS SUCH. FROM THE ABOVE FIGURES IT WILL BE SEEN THAT G. P. RATE 4 IN A.Y. 95-96 WAS 24.83% WHICH WAS INCREASED TO 45. 00% IN A.Y. 03-04 I.E. INCREASE OF 20.17% AND WAS DECLARED BY THE ASSESSEE. FURTHER G.P. RATE IN A.Y. 03-04 WAS 45.00% WHICH WA S REDUCED TO 34.92% IN A.Y. 05-06 I.E. FALL OF AROUND 7.00% AND WAS ACCEPTED. G.P. RATES OF PREVIOUS YEAR AND ALSO FUTURE YEARS (BEYOND THIS ASSESSMENT YEAR)AND AS ACCEPTED ON ASSESSMENTS U/S 143(3) TILL A.Y. 205-06 ARE FURTHER GIVEN AS UNDER : INCREASE DECREASE A.Y. 95-96 24.83% - - A.Y. 99-00 32.63% 7.80% - A.Y.00-01 40.15% 7.52% - A.Y.01-02 38.30% - 1.85% A.Y.02-03 33.60% - 4.70% A.Y.03-04 45.00% 11.40% - A.Y.04-05 41.71% - 3.29% A.Y.05-06 34.92% - 6.79% A.Y.06-07 29.30% - 5.62% ASSTT. IN PROCESS A.Y.07-08 37.97% 8.67% RETURN FILED A.Y.08-09 38.83% 0.86% RETURN FILED BASED ON ABOVE FACTS/CONSIDERATIONS G.P. RATE OF 2 9.30% FOR THE YEAR UNDER CONSIDERATION IS AS PER ORDERS RECEIVED. (2) DIFFERENCE IN FIGURES OF STOCKS AND DEBTORS GI VEN TO BANK AGAINST CC LIMIT AND ACTUAL STOCKS IS EXPLAINED VI DE PARA 3 OUR LETTER DATED 8.12.2008 AND ARE REITERATED. 3.3 THE AO OBSERVED THAT THE ASSESSEE HAD NOT FURNI SHED ANY CONCRETE JUSTIFICATION OF THE AFORESAID SPECIFIED DISCREPAN CIES AND HAS ALSO FAILED TO EXPLAIN SATISFACTORILY THE DIFFERENT AMOUNTS SHOWN BY HIM IN RESPECT OF SUNDRY CREDITORS DEBTORS AND STOCKS. THE AO HAS A LSO OBSERVED THAT EVEN THE RESULTS OF ENQUIRIES CONDUCTED UNDER SECTION 133(6) OF THE ACT IN RESPECT OF ITS CUSTOMERS AND SUPPLIERS WENT AGAINS T THE ASSESSEE. IN THAT 5 VIEW OF THE MATTER THE AO DOUBTED THE CORRECTNESS AND COMPLETENESS OF THE BOOKS OF ACCOUNT OF THE ASSESSEE. HE THEREFORE IN VOKED THE PROVISIONS OF SECTION 145 OF THE ACT AND REJECTED THE BOOK RESULT S. CONSEQUENTLY THE AVERAGE GROSS PROFIT RATE OF LAST SIX YEARS I.E. 3 7.7% WAS TAKEN FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. THE GROSS PROF IT AT THE RATE OF 37.7% (AVERAGE FOR LAST SIX YEARS) WAS WORKED OUT TO RS .71 26 346 AS AGAINST RS.55 39 131 SHOWN BY THE ASSESSEE. THE ADDITION OF RS.15 87 215 WAS MADE TO THE INCOME OF THE ASSESSEE. 4. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE C ARRIED THE MATTER IN APPEAL BEFORE THE LD.CIT(A) AND TOOK THE FOLLOWING LINE OF ARGUMENTS : (I) THAT THE FALL IN G.P. RATE FOR THE YEAR WAS 5. 62%. (II) THAT THE FALL IN G.P. RATE FOR THE YEAR AFTER CONS IDERING THE SPECIFIC REASON ON ACCOUNT OF INCREASE IN EXPENSES (AS ACCEPTED BY AO) COMES TO 1.84%. (III) THAT CONSIDERING THE BUSINESS ACTIVITY/NATURE OF BU SINESS OF THE ASSESSEE I.E. MAKING GOODS TAILOR MADE/AS PER SPECI FICATION OF THE CUSTOMERS THE GROSS PROFIT RATE IS VARIABLE D EPENDING ON THE ORDERS AS PER SPECIFIC REQUIREMENTS OF THE CUSTOME RS RECEIVED RATES NEGOTIATED THE CURRENT COST OF THE RAW MATE RIALS DEVELOPMENTAL ACTIVITIES/EXPERTISE INVOLVED ETC. T HE PRODUCT MANUFACTURE IS NOT A REGULAR PRODUCT AND HENCE THE GROSS PROFIT RATE IS NOT CONSISTENT. 6 (IV) THAT THE REASONS FOR FALL IN GROSS PROFIT RATE DUR ING THE YEAR WERE AS UNDER: (A) INCREASE IN WAGES AS PER GOVT. RULES. (B) INCREASE IN POWER CHARGES RATES. (C) REPAIRS OF FACTORY PREMISES. (V) THAT CONSIDERING THE NATURE OF BUSINESS I.E. MAKING ITEMS MOSTLY FOR DEFENCE AND AIR FORCE AS PER REQUIRED SP ECIFICATIONS OF DIFFERENT CUSTOMERS FOR USE OF GOODS FOR SPECIF IED USE BY THE CUSTOMERS. COMPOUND OF EACH ITEM DIFFERS AND THE MA RGINS DIFFERS IN EACH CASE. THE NET RESULT OF GROSS PROF IT ALWAYS DIFFERS FROM YEAR TO YEAR DEPENDING UPON THE ORDERS RECEIVED/NEGOTIATED. SINCE NO REGULAR ITEMS ARE MAD E THE GROSS PROFIT RATE CAN NEVER REMAIN CONSTANT. (VI) THAT THE ASSESSEE HAD MAINTAINED BOOKS OF ACCOUNT A ND STOCK REGISTER AS REQUIRED. (VII) THAT THE VARIATIONS IN THE GROSS PROFIT RATE BOUND TO HAPPEN AND UNAVOIDABLE AS THE ASSESSEE IS NOT DEALING IN STAN DARD/REGULAR PRODUCT. (VIII) THAT IN THE EARLIER YEARS THE DEPARTMENT HAS ACCEP TED THE DECLARED GROSS PROFIT RATES. (IX) THAT THE ASSESSEE IS MANUFACTURING NUMEROUS ITEMS O F VULCANISED/UNVULCANISED RUBBER PRODUCTS AS PER SPEC IFICATIONS 7 DESIRED BY THE CUSTOMERS. THE MANUFACTURING PROCES S INVOLVES MIXING OF RUBBER WITH CHEMICALS AND HEATING OF THE COMPOUND WHICH ONCE DONE IS OF NO REUSE AS TECHNICAL SPECI FICATIONS DIFFER IN EACH CASE AND ARE ALSO NOT SALEABLE ITEMS . (X) THAT THE GROSS PROFIT IN EACH CASE/JOB DIFFERS AS THE COMPOUND IN EACH CASE IS DIFFERENT AND ALSO DEPENDING UPON T HE ORDERS RECEIVED/NEGOTIATED DEVELOPMENTAL ACTIVITIES/EXPER TISE INVOLVED AND GROSS PROFIT WILL ALWAYS DIFFER I.E. INCREASE/ DECREASE AS IN PAST AND CANNOT BE CONSISTENT. (XI) THAT THE FACT OF VARIATIONS IN GROSS PROFIT RATE FROM YEAR TO YEAR IN THE CIRCUMSTANCES I.E. THE NATURE OF BUSINESS AC TIVITY OF THE ASSESSEE WHICH ARE UNAVOIDABLE HAS BEEN ACCEPTED BY THE DEPARTMENT FOR THE LAST OVER 30 YEARS AND THERE HAS BEEN NO ADVERSE FINDING AND TILL LAST ASSESSMENT YEAR 20 05-06 WHEREIN THE FALL IN GROSS PROFIT RATE WAS 6.79% WHICH HAS BEEN ACCEPTED BY THE AO. (XII) THAT NO SPECIFIC IRREGULARITY WAS OBSERVED BY THE A O AS REGARDS THE FOLLOWING ISSUES:- -FROM THE BOOKS OR ITS MAINTENANCE. -DEFECTS IN ACCOUNTS MAINTAINED. 8 -STOCK REGISTERS INCLUDING QUANTITATIVE DETAILS MAI NTAINED. -METHOD OF VALUATION OF STOCKS. -PURCHASES-FICTITIOUS/UNACCOUNTED. -SALES-FICTITIOUS/UNACCOUNTED. -EXPENSES. -INFIRMITIES/INCONSISTENCIES IN RECORDS. -METHOD OF ACCOUNTING FOLLOWED. -ACCOUNTING STANDARDS/POLICIES FOLLOWED. (XIII) THAT THE AO HAD SOUGHT INFORMATION U/S. 133( 6) FROM 6 PARTIES AND THE ALLEGED PETTY DIFFERENCES (GIVEN AT PAGE 4 OF THE ORDER) IN 4 CASES ARE NOT SIGNIFICANT. IN ONE CASE THE DI FFERENCE IS OF RS.2 846 IN THE SECOND CASE THE DIFFERENCE IS OF RS.1886.88 (IN BOTH CASES RELATING TO OPENING BALANCES) AND I N THE TWO OTHER CASES THE DIFFERENCES ARE OF RS.0.91 AND R S.2.20.THERE ARE NO DIFFERENCES IN TRANSACTIONS DURING THE YEAR .. THE ALLEGED DIFFERENCES WERE EXPLAINED DURING ASSESSMENT PROC EEDINGS WHICH ARE IGNORED BY THE AO IN THE ORDER. (XIV) THAT CONSIDERING TOTAL CREDITORS OF THE ASS ESSEE OF RS.2533364.48 AND THE EXPLANATIONS AS ABOVE THE A LLEGED PETTY DIFFERENCES AS ABOVE DO NOT JUSTIFY INVOKING OF SE CTION 145(1) AND REJECTION OF BOOK RESULTS. 9 (XV) THAT THE AO HAD SOUGHT INFORMATION U/S 133(6) FROM HDFC BANK WHICH SANCTIONED CC LIMIT OF RS.27 LACS AGAINS T SECURITY OF STOCKS & DEBTORS AND THE AO HAS HIGHLIGHTED THE DIFFERENCES BETWEEN THE FIGURES AS PER RECORDS AND GIVEN TO BAN K. THE AVAILED LIMIT IN MARCH 2006 WAS ONLY RS.509534.82 A GAINST SANCTIONED LIMIT OF RS.27 LACS. THE FIGURES OF STO CKS DEBTORS AND CREDITORS GIVEN TO BANK WERE LESS THAN WHAT T HE ASSESSEE CARRIED AS PER BOOKS OF ACCOUNTS. THERE IS NO CASE OF AVAILING HIGHER LIMIT ON FICTITIOUS STOCKS. (XVI) THAT THE DIFFERENCE IN FIGURES OF STOCKS/DEBT ORS/CREDITORS AS GIVEN TO BANK AND AS PER RECORDS AS EXPLAINED ABOV E DOES NOT JUSTIFY INVOKING OF SECTION 145(1)AND REJECTION OF BOOK RESULTS. 4.1 THE LD.CIT(A) DELETED THE ADDITION OBSERVING AS UNDER : 5.3 DECISION: HAVING PERUSED THE ASSTT. ORDER AND ALSO THE SUBM ISSIONS MADE BY THE LD.AR IN THIS REGARD I AM OF THE CONSI DERED VIEW THAT THE AO HAD NO COGENT MATERIAL TO TAKE SUCH AN EXTREME STEP AS TO REJECT THE BOOKS OF ACCOUNTS BY INVOKING SEC.145 OF THE AC T. MINOR DISCREPANCIES IN CREDITORS OR DEBTORS BALANCES I S A COMMON THING IN COMMERCIAL WORLD AND EVEN THESE MINOR DISCREPANCIES HAD BEEN DULY EXPLAINED BY THE APPELLANT DURING THE COURSE OF AS SESSMENT. THE BOOKS OF ACCOUNTS OF THE APPELLANT ARE AUDITED AND THE AO HAS NOT BEEN ABLE TO POINT OUT ANY SIGNIFICANT FAULTS WITH THE ACCOUNTS WHICH COULD ENTAIL THE REJECTION. THE FALL IN GP RATE PER SE CANNOT BE A REASON TO REJECT THE BOOKS. AT BEST IT CAN GIVE RISE TO S USPICION OR A KNOCK AT THE DOOR THAT INVESTIGATION IS REQUIRED. IN THIS CA SE IT IS SEEN THAT THE AO HAS REJECTED THE BOOKS SOLELY ON THE GROUND THAT GP IS LOW DURING THE YEAR BUT NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE AO TO DISPROVE THE EXPLANATION GIVEN BY THE APPELLANT IN THIS REGARD. THUS 10 THE REJECTION OF BOOKS BY THE AO IS HELD TO BE UNW ARRANTED AND THEREFORE NO ADDITION MADE THEREUPON CAN BE SUSTAI NED. RELIEF RS.15 87 215. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT SEEMS T HAT THE AO HAS MADE THE ADDITION MERELY ONLY THE GROUND OF LOW GROSS PR OFIT. THE AO HAS NOT BROUGHT ANY CONCRETE MATERIAL ON RECORD TO DISPROVE THE EXPLANATION GIVEN BY THE ASSESSEE IN THIS REGARD. THE ASSESSEE IS MANUFA CTURING VULCANISED/UNVULCANISED RUBBER PRODUCTS AS PER SPEC IFICATIONS DESIRED BY THE CUSTOMERS IN EACH CASE I.E. DEALING IN TAILOR-MADE PRODUCTS AND IS NOT DEALING IN GENERAL/STANDARD PRODUCT. IN OUR CONSIDE RED VIEW GROSS PROFIT RATE IN THE CIRCUMSTANCES CANNOT BE CONSISTENT IN ALL THE YEARS. THIS FACT IS CLEAR FROM THE GROSS PROFIT RATES SHOWN BY THE ASSE SSEE IN SEVEN ASSESSMENT YEARS INCLUDING THE PREVIOUS YEAR RELEVANT TO ASSES SMENT YEAR UNDER CONSIDERATION. THE ASSESSEE HAS ALSO SUBMITTED BEFO RE THE AO THAT THE OTHER REASONS FOR FALL IN GROSS PROFIT DURING THE YEAR W ERE (A) INCREASE IN WAGES AS PER GOVT. RULES (B) INCREASE IN POWER CHARGES RATE S AND (C) REPAIRS OF FACTORY PREMISES. THE AO HAS NOT REJECTED THESE REA SONS. IT IS ALSO TRUE THAT THE GROSS PROFIT RATE CANNOT BE THE SAME IN ALL TH E YEARS. WE FIND THAT THE ASSESSEE HAS MAINTAINED REGULAR BOOKS OF ACCOUNTS STOCK REGISTER PURCHASES/SALE BILLS AND VOUCHERS FOR THE TRANSACTI ONS MADE DURING THE YEAR. THE AO HAS NOT POINTED OUT ANY MATERIAL DEFECT IN T HE BOOKS OF ACCOUNT REGULARLY MAINTAINED BY THE ASESSEE. THE AO HAS ALS O NOT GIVEN ANY ADVERSE COMMENTS REGARDING METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE. THE ONLY REASON FOR MAKING THE ADDITION W AS THAT THERE WAS A VARIATION IN GROSS PROFIT RATE AS COMPARED TO EARL IER YEARS. IT IS SWELL SETTLED LAW THAT MERELY LOW PROFIT MAY PROVOKE AN ENQUIRY B UT THAT BY ITSELF WITHOUT MORE CANNOT JUSTIFY AN ADDITION TO THE PROFIT SHOW N. IN THAT VIEW OF THE 11 MATTER WE AGREE WITH THIS OBSERVATION OF THE LD.CI T(A) THAT THE AO WAS NOT JUSTIFIED IN REJECTING THE BOOK RESULTS SOLELY ON T HE GROUND THAT THE GROSS PROFIT IS LOW DURING THE YEAR. NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE AO TO DISPROVE THE EXPLANATION GIVEN BY THE ASSESS EE IN THIS REGARD. WE ALSO FIND THAT THE ASSESSEE ENJOYED CC LIMIT FROM HDFC B ANK FOR RS.27 LACS ONLY AGAINST WHICH THE STOCKS/DEBTORS CARRIED WERE MUCH MORE THAN REQUIRED BY THE BANK AS SECURITY AND ONLY REQUIRED STOCKS/DEBT ORS TO COVER THE LIMIT AVAILED WERE SUBMITTED TO BANK. WE FURTHER FIND THA T THE BOOKS OF ACCOUNT OF THE ASSESSEE ARE AUDITED AND THE AO HAS NOT BEEN ABLE TO POINT OUT ANY SIGNIFICANT DISCREPANCY IN THE BOOKS OF ACCOUNT. WE ALSO FIND THAT THERE WERE MINOR DISCREPANCIES IN CREDITORS OR DEBTORS BALANCES WHICH IS A COMMON THING IN COMMERCIAL WORLD AND EVEN THESE MIN OR DISCREPANCIES HAD BEEN DULY EXPLAINED BY THE ASSESSEE DURING THE COUR SE OF ASSESSMENT PROCEEDINGS. THUS CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE WE FULLY AGREE WITH THE OBSERVATION O F THE LD. CIT(A) THAT IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE THERE WAS NO JUSTIFICATION IN INVOKING THE PROVISIONS OF SECTION 145 OF THE ACT. WE THEREFORE DO NOT SEE ANY INFIRMITY IN THE FINDINGS OF THE LD. CIT(A) ON THIS ISSUE AND ACCORDINGLY UPHOLD THE ORDER ON THIS ASPECT. 6. GROUND NO.2 OF THE APPEAL READS AS UNDER : 2. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE CO MMISSIONER OF INCOME TAX (APPEALS)-II KANPUR HAS ERRED IN LAW IN DELETING THE ADDITION OF RS.3 00 000/- ON ACCOUNT OF FACTORY RENT EVEN THOUGH THE EXPENDITURE HIT BY PROVISIONS OF SECTION 40A(2)(A)/40A(2)(B) OF THE I.T. ACT 1961. 7. THE AO HAS DISCUSSED THIS ISSUE IN THE FOLLOWING MANNER: 12 FROM THE PERUSAL OF THE P.& L. ACCOUNT IT WAS NOT ICED THAT THE ASSESSEE DEBITED SUM OF RS.12 06 167/ - UNDER THE H EAD FACTORY RENT AND REPAIRS WHICH INCLUDES BUILDING RENT OF FACTOR Y PREMISES AT RS.6 00 000/-. IT MAY BE MENTIONED THAT FACTORY RE PAIRS WAS DEBITED AT RS.6 67 167/ -. THE ASSESSEE WAS REQUIRED TO XPLAI N THE REASONS FOR SUCH INCREASE IN THE FACTORY RENT. THE ASSESSEE HAS REITERATED THAT THE RENT WAS INCRE ASED IN A. Y. 2004-05 AND CONTINUES THE SAME DURING THE YEAR AND VIDE LETTER DATED 15.10.2008 SUBMITS THE SIMILAR EXPLANATION AS WAS D ONE IN PRECEDING ASSESSMENT YEAR. AS PER EXPLANATION DATED 22.09.200 8 FACTORY RENT OF RS.6 00 000/- HAS BEEN PAID @ 50 000/- P.M. FOR FAC TORY/OFFICE PREMISES. THE FACTORY/OFFICE PREMISES WAS OWNED BY SEVERAL PERSONS FOR THE LAST OVER 40 YEARS AND THE ASSESSEE WAS PAY ING RENT. RENT HAS BEEN PAID TO THE FOLLOWING PERSONS AS UNDER:- CHANDRIKA TANDON RS.50 000 VIJAY TANDON RS.93 750 R.K.TANDON (INDIVIDUAL) RS.1 43 748 RAVI TANDON (HUF) RS.1 31 250 SHARAD TANDON(INDIVIDUAL) RS.1 81 248 RS.6 00 000 FURTHER THE ASSESSEE HAD EXPLAINED THAT THE ASSESSE E WAS PAYING RENT OF RS.4 500/- P. M. TILL A. Y. 2003-04 AND THEREAFT ER FROM. A.Y.2004- 05 THE RENT HAS BEEN INCREASED FROM RS.4 500 /- TO RS.50 000 /- P. M. ASSESSEE HAS FURTHER SUBMITTED THAT THE FACTORY PRE MISES IS SITUATED IN THE PRIME INDUSTRIAL AREA OF THE FAZALGANJ KANPUR. THE CONSTRUCTION OF THE SAID BUILDING WAS MADE BY THE OWNERS SINCE INCE PTION. ASSESSEE IS PAYING RENT FOR LAND AS WELL AS CONSTRUCTED SHED. T HE AREA OF LAND IS 3 786 SQ. YARD AND BUILT UP SHEDS/OFFICE IS 26 000 SQ. FIT. THE ASSESSEE FURTHER EXPLAINED THAT THE OWNERS OF THE L AND AND BUILDING ARE FAMILY MEMBERS OF THE PARTNERS OF THE FIRM. PRESENT COST OF LAND IN EXISTING STRUCTURE OF THE FACTORY IS MORE THAN AT R S.150 LACS. THE RENT WOULD BE OVER RS.1 00 000/- P. M. AFTER A LONG DISC USSION AND NEGOTIATION WITH OWNERS OF THE PREMISES RENT OF RS. 50 000/- P. M. HAS BEEN DETERMINED AND THE SAME HAS BEEN PAID DURING T HE PREVIOUS YEAR. THE EXPLANATION REPLY AS MENTIONED ABOVE WAS EXAMIN ED AND FOUND 13 THE SAME AS NOT ACCEPTABLE FOR THE FOLLOWING REASON S:- (I) ASSESSEE DID NOT FILE/PRODUCE COPIES OF OLD AG REEMENT AND NEW AGREEMENT MADE WITH OWNERS OF THE PROPERTY REGARDING PAYMENT OF RENT. THEREFORE THE DETAILS O F OWNERS OF THE PROPERTY AND TERMS AND CONDITIONS OF RENT MAINTENANCE OF PROPERTY PAYMENT OF HOUSE TAX AND W ATER TAX ARE NOT VERIFIABLE. IN FACT THE FAMILY MEMBERS OF THE PARTNERS AND SOME OUTSIDERS WERE OWNER OF THE PROPE RTY TILL A.Y. 2003-04 AND THEREAFTER OWNERSHIP OF THE PROPERTY HAVE BEEN COME IN THE HANDS OF FAMILY MEMB ERS OF THE PARTNERS OF THE FIRM. THIS FACT HAS BEEN ADM ITTED BY A.R. THAT 75% OF THE PROFIT RATIO IS OWNED BY TANDO N FAMILY AND 25% BY OWLAK FAMILY. (II) THE ASSESSEE DID NOT JUSTIFIED THE ALV OF PRO PERTY AND HAS NOT FILED ANY DETAILS OF ANNUAL LETTING VALUE A S DETERMINED BY COMPETENT AUTHORITY OF NAGAR MAHAPALI KA TO CHARGE HOUSE TAX AND WATER TAX. (III) THE ASSESSEE HAD FILED A COPY OF REPORT ISSUE D BY SRI S. K. AHUJA REGISTERED VALUER. DURING THE ASSESSMENT PROCEEDINGS FOR A.Y. 2005-06. THE REPORT HAD NOT BE EN PREPARED TO DETERMINE THE RENTAL VALUE OF PROPERTY. IN FACT VALUER HAD DETERMINED THE MARKET VALUE OF PROPERTY FOR THE FAIR MARKET VALUE AS DESIRED BY CO-OWNER. AS PE R REPORT DATED 03.01.2003 (SUBMITTED DURING ASSESSMEN T PROCEEDINGS A.Y. 2005-06) THE FOLLOWING PERSONS WER E CO-OWNER OF THE PROPERTY:- M/S AILGA RUBBER WARKS MANAGING DIRECTOR SRI BUDDHU LAL MEHROTRA S /O LATE SRI JWALA PRASAD SMT.PUSHPA RANI MEHROTRA W/O LATE JAGANNATH MEHROTR A SMT. MRIDULA RANI MEHROTRA W /O MR. PASHUPATI NATH MEHRATRA SRI JAGANNATH TANDAN S/O MR. GAPAL DAS TANDON MR. LALIT KUMAR TANDON S/O MR. SHIV NARAYAN TANDAN MR. RAJ KUMAR TANDON S/O MR. L.B.D. TANDON SMT. RAJ CHANDRA KALA TANDON W / O MR. GOPI NATH TANDON 14 SMT. RAJ RANI TANDON W /O SRI L.B.D. TANDON SMT. SHYAM KUMARI TANDAN W /O MR. KAILASH NATH TANDON SMT. PADMA TANDON W /O MR. AMAR NATH TANDON SMT. RAMOLA TANDON W /O MR. BADRI NATH TANDON (IV) THE RENT WAS PAID BY ASSESSEE TO THE PERSONS SPECIFIED U/ S 40A(2)(B). SINCE THE PAYMENT OF RENT IS MADE TO THE SPECIFIED PERSONS AS MENTIONED IN SECTION 40A (2)(A) THE PAYMENT OF REN T IN EXCESS OF THE MARKET RATE IS NOT ALLOWABLE U/S 40A(2)(B). TO DETE RMINE THE MARKET RATE ONE HAS TO KEEP IN MIND THE COMBINED EFFECT OF THE FACTS OF THE CASE PREVALENT MARKET RATE SITUATION AND LOCALITY OF THE PROPERTY OWNERSHIP AND USE OF THE PROPERTY AND COST PRICE IN DEX AND OTHER RELEVANT FACTORS. HOWEVER LOOKING TO THE FACT THAT THE RENT OF THE P ROPERTY HAS NOT BEEN INCREASED SINCE LONG THEREFORE THE RENT S HOULD BE INCREASED REASONABLY LOOKING TO THE PRICE INDEX AND MARKET RA TE OF RENT AS NOTIFIED BY COMPETENT DISTRICT AUTHORITIES. PRICE I NDEX HAS BEEN INCREASED IN F.Y. 2004-05 BY 4.80 TIMES SINCE 1981- 82. A RENT OF RS.4. 500/- P. M. HAS BEEN PAID BY ASSESSEE UPTO A. Y. 2003-04. CONSIDERING HISTORY FACTS AND CIRCUMSTANCES OF THE CASE THE MARKET RATE IS ESTIMATED AS AT RS.25 000/- P.M. I.E. RS.3 00 000/- PER ANNUM .. THEREFORE THE PAYMENT OF FACTORY RENT IN EXCESS OF THE MARKET RATE IS DETERMINED AT RS.3 00 000/- (RS.6 00 000/ - MINUS R S.3 00 000/ -) IS DISALLOWED U/S 40A(2)(A) OF THE ACT AND ADDED TO TH E INCOME OF THE ASSESSEE. 8. ON APPEAL THE LD.CIT(A) DELETED THE ADDITION OB SERVING AS UNDER: 6.1 DISCUSSION/DECISION THE AO HAS SIMPLY COPIED THE OBSERVATIONS FROM THE ASSESSMENT ORDER DT. 31.12.07 FOR A.Y. 2005-06 FOR DISALLOWING THE R ENT OF RS.300000. THE IMPUGNED ADDITION MADE FOR AY 2005-06 HAD BEEN DELETED BY THE LD. CIT (A)-II KNP AND THAT ORDER OF THE LD.CIT(A) HAS BEEN CONFIRMED BY THE HON ITAT. RESPECTFULLY FOLLOWING T HE SAME I HEREBY DELETE THE IMPUGNED DISALLOWANCE MADE BY THE AO. RELIEF RS.3 00 000. 15 9. AFTER CONSIDERING THE LD. REPRESENTATIVES OF BOT H THE PARTIES WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF TH E ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE I.T.A.T. LUCKNOW BE NCH-B IN THE ASESSEES OWN CASE IN I.T.A.NO.128(LUC.)/2009 RELATING TO AS SESSMENT YEAR 2005-06. WHILE DECIDING THE SIMILAR ISSUE THE TRIBUNAL VIDE ITS ORDER DATED 29.1.2010 HELD AS UNDER : 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CA REFULLY GONE THROUGH THE MATERIALS AVAILABLE ON THE RECORD. IN THE INSTANT CASE IT IS NOT IN DISPUTE THAT THE ASSESSEE WAS PAYING THE REN T @RS.4 500/- PER MONTH FOR LAST OVER 25 YEARS AND UPTO THE ASSESSMEN T YEAR 2003-2004. IT WAS INCREASED TO RS.50 000/- PER MONTH DURING TH E YEAR UNDER CONSIDERATION. NOW QUESTION ARISES WHETHER ENHANCE MENT OF RENT TO RS.50 000/- PER MONTH WAS REASONABLE. IN THE INSTA NT CASE WE ARE OF THE OPINION THAT WHEN THE RECIPIENT OF THE RENT WE RE THE FAMILY MEMBERS OF THE PARTNERS OF THE ASSESSEE FIRM THE P ROVISIONS OF SECTION 40A(2)(A) OF THE ACT ARE APPLICABLE AND IF IT IS A CASE WHERE THE PAYMENT OF RENT WAS EXCESSIVE THEN ONLY THE ADDITIO N CAN BE MADE. IN THE INSTANT CASE THE ASSESSEE FURNISHED THE FAIR R ENTAL VALUE OF THE PROPERTY IN QUESTION FROM A REGISTERED VALUER WHO V ALUED THE SAME AT RS.77 630/- PER MONTH. THE SAID VALUATION WAS NOT DOUBTED. SIMILARLY THE ASSESSEE QUOTED A CASE WHERE FOR THE SIMILAR AREA AND LOCALITY THE RENT @RS.6/- PER SQ. FT. PER MONTH HA D BEEN PAID AND THE RENT FOR THE PREMISES POSSESSED BY THE ASSESSEE IF TAKEN @RS.6/- PER SQ. FT. WORKED OUT TO RS.2 00 000/- PER MONTH. TH EREFORE IT CANNOT BE SAID THAT THE RENT PAID BY THE ASSESSEE WAS EXCESSI VE PARTICULARLY WHEN THE ASSESSING OFFICER AT THE TIME OF ESTIMATI NG THE RENT @RS.25 000/- PER MONTH HAS NOT BROUGHT ON RECORD A NY COMPARABLE CASE IN SUPPORT OF THE SAID ESTIMATE. WE THEREFOR E CONSIDERING THE 16 TOTALITY OF THE FACTS DO NOT SEE ANY INFIRMITY IN THE IMPUGNED ORDER OF THE LEARNED CIT(A) ON THIS ISSUE. 9.1 RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNA L (SUPRA) WE DO NOT SEE ANY MERIT IN THIS GROUND OF APPEAL AND THEREFOR E WE DISMISS THE SAME. 10. IN THE RESULT THE APPEAL IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 19.1.11 . SD. SD. (N.K.SAINI) (H.L.KARWA) ACCOUNTANT MEMBER VICE PRESIDENT JANUARY 19TH 2011. COPY TO THE : 1. APPELLANT 2. RESPONDENT 3. C IT(A) (4) CIT 5.DR . A.R. ITAT LUCKNOW. SRIVASTAVA.