ACIT,, Ludhiana v. M/s C.L. Jain Woollen Mills Pvt. Ltd.,, Ludhiana

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES B CHANDIGARH BEFORE SHRI N. BARATHVAJA SANKAR VICE PRESIDENT AND MS SUSHMA CHOWLA JUDICIAL MEMBER ITA NO.635/CHD/2010 ASSESSMENT YEAR: 2005-06 THE ACIT VS. M/S C.L.JAIN WOOLLEN MILLS PVT. LTD . CIRCLE-III LUDHIANA LUDHIANA PAN NO. AAACC6833C & ITA NO. 240/CHD/2010 ASSESSMENT YEAR: 2006-07 M/S C.L.JAIN WOOLLEN MILLS PVT. LTD. VS. THE DCIT CIRCLE-III LUDHIANA LUDHIANA PAN NO. AAACC6833C (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R.K.GUPTA RESPONDENT BY: SHRI SUBHASH AGGRWAL ORDER PER SUSHMA CHOWLA JM THE APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF CIT(A)-I LUDHIANA DATED 25.3.2009 RELATING TO ASSESSMENT YEA R 2005-06 AGAINST ORDER PASSED U/S 143(3) OF THE ACT. THE APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF CIT(A) DATED 25.1.2010 RELATIN G TO ASSESSMENT YEAR 2006-07 AGAINST ORDER PASSED U/S 143(3) OF THE INCO ME TAX ACT. 2 2. BOTH THE APPEALS OF THE REVENUE AND ASSESSEE INV OLVING THE SIMILAR ISSUES WERE HEARD TOGETHER AND ARE BEING DISPOSED O F BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE FIRST GROUND OF APPEAL RAISED BY THE REVENUE IS AS UNDER:- 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AND FACTS IN D ELETING THE ADDITION OF RS. 40 91 436/- ON ACCOUNT OF G.P. RATE MADE BY THE ASSESSING OFFICER BY REJECTING THE BOOK RESULTS BY APPLYING PROVISIONS OF SECTION 145(3) OF THE INCOME TAX ACT 1961. 4. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT D URING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER REFERRED THE MAT TER FOR SPECIAL AUDIT U/S 142(2A) OF THE INCOME TAX ACT. THE SPECIAL AUD IT WAS REFERRED TO ASCERTAIN THE QUANTITATIVE VALUE OF OPENING STOCK / RAW MATERIAL PURCHASED / VALUE OF SALE AND CLOSING STOCK. THE AUDITOR SUB MITTED ITS REPORT AND A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE TO GIV E EXPLANATION ON THE SPECIFIC POINTS RAISED IN THE SPECIAL AUDIT REPORT. THE FIRST OBJECTION RAISED BY THE SPECIAL AUDITOR WAS IN RESPECT OF THE FALL IN GP RATE AS COMPARED TO THE EARLIER YEARS. THE EXPLANATION OF THE ASSESSEE WAS THAT THE FALL IN GP RATE WAS DUE TO MARKET CONDITIONS. THE ASSESSING OFFICER REJECTED THE EXPLANATION OF THE ASSESSEE VIDE PARA 10.3 AND APPLIED THE GP RATE DECLARED BY THE ASSESSEE IN ASSESSMENT YEAR 20 04-05 AT 9.06% TO THE SALE OF THE PRESENT YEARS RESULTING IN AN ADDITION OF RS. 40 91 436/-. THE CIT(A) OBSERVED THAT IT WAS A SETTLED POSITION OF L AW THAT BOOKS OF ACCOUNT COULD NOT BE REJECTED WITHOUT PINPOINTING A NY DEFECT IN ACCOUNTS BOOK I.E. SUPPRESSION OF SALE PRICE OR INFLATION OF EXPENSES ETC. THE CIT(A) FURTHER NOTED THAT THOUGH THE ASSESSING OFFI CER HAD BROUGHT OUT 3 THAT THERE WAS FALL OF GP OF 9.06% ON THE MANUFACTU RING ACTIVITIES AS COMPARED TO ASSESSMENT YEAR 2004-05 BUT NOT EVEN A SINGLE INSTANCE HAS BEEN QUOTED WHEREFROM IT COULD BE SHOWN THAT THE AP PELLANT INCURRED EXPENSES LESS THAN THAT WHICH HAD BEEN SHOWN IN THE P&L ACCOUNT AND OR IT HAD MADE SALES WHICH WERE UNACCOUNTED FOR IN THE BOOKS OF ACCOUNT OR THE SALES HAD BEEN MADE AT AN AMOUNT WHICH WAS NOT THE ACTUAL AMOUNT . ACCORDINGLY THE CIT(A) HELD THAT IN THE ABSENCE OF SUCH EVIDENCE REJECTION OF ACCOUNTS BOOK ON THE GROUND OF FALL IN GP RATE COULD NOT BE HELD TO BE JUSTIFIED. THE CIT(A) FURTHER OBSERVED THE ASSESSEE TO HAVE MAINTAINED COMPLETE RECORDS INCLUDING STOCK REGISTE R AND THE ACCOUNT BEING SUBJECT TO VERIFICATION BY EXCISE AUTHORITIES . THE CIT(A) FURTHER NOTED THE OBSERVATION OF THE SPECIAL AUDITOR THAT T HE ASSESSEE MIGHT HAVE UNDER VALUED THE CLOSING STOCK. ANOTHER OBSERVATION OF THE AUDITOR WAS THAT THE TRADING RESULT OF THE ASSESSEE APPEARS TO BE INGENUINE AND FURTHER THE APPELLANT WAS MAKING SALES AT A LOSS. THE CIT (A) HELD THAT THE SAID OBSERVATION OF THE SPECIAL AUDITOR COULD FORM BASIS FOR FURTHER INQUIRES BY THE ASSESSING OFFICER TO FIND OUT THE SPECIFIC INST ANCES OF SALES OUTSIDE THE BOOKS OF ACCOUNT OR INFLATION OF EXPENSES ETC. THE CIT(A) THUS HELD JUST ON THE BASIS OF THIS OBSERVATION ADVERSE INFE RENCE COULD NOT BE DRAWN AGAINST THE APPELLANT . IN RESPECT OF THE UNDER VALUATION OF STOCK POINTED OUT BY THE SPECIAL AUDITOR THE CIT(A) OBSE RVED THAT THE ASSESSING OFFICER HAD NOT MADE OUT A CASE THAT SUCH AN UNDER VALUATION WAS ACTUALLY FOUND. THE CIT(A) FURTHER HELD THAT M ERELY BECAUSE THE TRADING RESULTS APPEARS TO BE UNRELIABLE THE SAME COULD NOT BE REJECTED U/S 145(3) OF THE ACT UNLESS THE SAME WAS PROVED WITH S UPPORTING EVIDENCE. THE CIT(A) THUS HELD THAT ASSESSING OFFICER WAS NOT JUSTIFIED IN REJECTING THE BOOK RESULTS BY APPLYING PROVISIONS OF SECTION 145(3) OF THE ACT AND ADDITION OF RS. 40 91 436/- WAS DIRECTED TO BE DELE TED. 4 5. THE LD. DR FOR THE REVENUE PLACING RELIANCE ON T HE OBSERVATION OF THE ASSESSING OFFICER TOOK US THROUGH THE FINDINGS OF THE ASSESSING OFFICER AND POINTED OUT THAT THOUGH THE ASSESSEE CL AIMS THAT THE FALL IN GP RATE WAS DUE TO MARKET CONDITIONS BUT NO EVIDENCE WAS FURNISHED OF THE MARKET CONDITIONS WHICH RESULTED IN FALL IN GP RAT E. IT WAS FURTHER POINTED OUT THAT THE CLOSING STOCK OF THE PRECEDING YEAR WAS MUCH HIGHER THEN THE CLOSING STOCK OF THE PRESENT YEAR. THE LD . AR FOR THE ASSESSEE STRESSED THAT THERE WAS NON APPLICATION OF MIND BY THE ASSESSING OFFICER FOR MAKING THE AFORESAID ADDITION BY SIMPLY RELYING ON THE SPECIAL AUDIT REPORT. RELYING ON THE ORDER OF THE CIT(A) IT WAS POINTED OUT BY THE LD. AR FOR THE ASSESSEE THAT THE ASSESSEE WAS MAINTAINI NG DAY TO DAY STOCK REGISTER AND NO DEFECTS WERE POINTED BY THE ASSESS ING OFFICER IN BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. IT WAS FURTHER STRESSED THAT THE DEFECTS POINTED OUT BY SPECIAL AUDITOR WERE MET WIT H BY THE ASSESSEE. THE LD. AR FURTHER PLACED RELIANCE ON THE RATIO LAI D DOWN IN CIT V M/S OM OVERSEAS [315 ITR 185 (P&H)] FOR THE PROPOSITION THAT WHERE THE GROSS PROFITS DECLARED WAS LOWER THAN THE PRECEDING YEAR AND NO DEFECTS BEING POINTED OUT THE BOOKS OF ACCOUNT COULD NOT B E REJECTED. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE ISSUE ARISING VIDE THE PRESENT GROUND NO.1 RAISED B Y THE REVENUE IS AGAINST THE TRADING ADDITION DELETED BY THE CIT(A). DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED CERTAIN DEFECTS IN THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE AND THE CASE WAS REFERRED FOR SPECIAL AUDIT U/S 142(2A) OF THE INCOME TAX ACT. TH E FIRST OBJECTION RAISED WAS IN CONNECTION WITH THE FALL IN GP RATE S HOWN BY THE ASSESSEE DURING THE YEAR AS COMPARED TO THE GP RATE SHOWN BY THE ASSESSEE IN THE 5 PRECEDING YEAR. THE BOOK RESULTS OF THE ASSESSEE A S PER THE SPECIAL AUDITORS WERE NOT RELIABLE AS IT WAS DIFFICULT TO A CCEPT THAT THE ASSESSEE WAS MAKING SALES AT A LOSS AND FURTHER THERE WAS AN ALLEGATION OF UNDER VALUATION OF STOCK BY THE SPECIAL AUDITORS. THE ASS ESSING OFFICER IN VIEW OF THE CONCLUSION OF THE SPECIAL AUDITORS AND CONSI DERING THE RESULTS SHOWN BY THE ASSESSEE CONCLUDED THAT THE BOOKS RESU LTS WERE NOT RELIABLE THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SEC TION 145 (3) OF THE ACT AND BY APPLYING GP RATE OF 9.06% AS SHOWN IN TH E IMMEDIATE PRECEDING YEAR I.E. ASSESSMENT YEAR 2004-05 DETERM INED THE RESULT OF THE ASSESSEE COMPANY AND COMPUTED AN ADDITION AT RS. 40 91 436/-. THE FINDINGS OF CIT(A) HAVE BEEN NOTED BY US IN THE PAR AS HEREINABOVE IN WHICH IT HAS BEEN CATEGORICALLY OBSERVED THAT THOUG H THERE IS FALL IN GP RATE IN THE MANUFACTURING ACTIVITIES AS COMPARED TO THE PRECEDING YEAR BUT NOT EVEN A SINGLE INSTANCE HAS BEEN QUOTED WHEREFRO M IT COULD BE SHOWN THAT THE ASSESSEE INCURRED EXPENSES LESS THAN THAT WHICH HAD BEEN SHOWN IN THE P&L ACCOUNT AND OR IT HAD MADE SALES WHICH W ERE UNACCOUNTED FOR IN THE BOOKS OF ACCOUNT OR THE SALES HAD BEEN MADE AT AN AMOUNT WHICH WAS NOT THE ACTUAL AMOUNT. 7. WE FIND THAT THE ISSUE OF REJECTION OF BOOKS OF ACCOUNT HAS BEEN CONSIDERED BY THE HONBLE PUNJAB & HARYANA HIGH COU RT IN CIT V OM OVERSEAS (SUPRA) DISMISSING THE APPEAL OF REVENUE O BSERVED THAT THE FACTUAL FINDINGS OBSERVED GIVEN BY THE COMMISSIONER (APPEALS) THAT THE ADDITIONS WERE MADE BY THE ASSESSING OFFICER WITHOU T POINTING OUT ANY SPECIFIC DEFECT IN THE BOOKS OF ACCOUNT WAS UPHELD BY THE TRIBUNAL AND AS NO PERVERSITY OR ILLEGALITY IN THE FINDING WAS POIN TED OUT BY THE DEPARTMENT NO SUBSTANTIAL QUESTION OF LAW AROSE FO R DETERMINATION. 6 8. IN THE FACTS OF THE PRESENT CASE BEFORE AS ADMI TTEDLY THERE WAS A FALL IN GP RATE OF MANUFACTURING ACTIVITIES BUT THE ASSESSING OFFICER OR THE SPECIAL AUDITORS HAVE FAILED TO POINT OUT ANY DISCR EPANCY IN THE BOOKS OF ACCOUNT VIZ A VIZ THE SALES MADE BY THE ASSESSEE AN D THE EXPENSES INCURRED BY THE ASSESSEE. MERELY BECAUSE THERE WAS A FALL I N GP RATE WE FIND NO JUSTIFICATION IN THE REJECTION OF BOOKS OF ACCOUNT AND APPLICATION OF GP RATE REFLECTED BY THE ASSESSEE IN THE PRECEDING YEA R AS THE BASIS FOR COMPUTING INCOME FOR THE CURRENT YEAR IN THE ABSEN CE OF ANY DEFECTS BEING POINTED OUT. THE ASSESSEE IS EXIGIBLE TO EXC ISE AND THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE ARE SUBJECT TO V ERIFICATION BY THE EXCISE AUTHORITIES. IN ADDITION TO MAINTAINING THE BOOKS OF ACCOUNT THE ASSESSEE HAS ALSO MAINTAINED COMPLETE STOCK REGISTE R AND WITHOUT POINTING OUT ANY SPECIFIC DEFECTS IN THE SAID BOOKS OF ACCOU NT MAINTAINED BY THE ASSESSEE WE FIND NO MERIT IN THE REJECTION OF THE SAME. THE ASSESSING OFFICER HAS IN THE PRESENT CASE APPLIED THE OBSERVA TIONS OF THE SPECIAL AUDITOR WITHOUT MAKING ANY FURTHER ENQUIRIES AND IN THE ABSENCE OF ANY FINDINGS OF SALES OUTSIDE THE BOOKS OF ACCOUNT OR I NFLATION OF EXPENSES WE ARE IN CONFORMITY WITH THE ORDER OF CIT(A) IN HOLDI NG THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN REJECTING THE BOOK RES ULTS BY APPLYING THE PROVISIONS OF SECTION 145(3) OF THE ACT. ACCORDING LY WE UPHOLD THE ORDER OF CIT(A) IN DELETING THE ADDITION OF RS. 40 91 436 /-. THE GROUND NO.1 RAISED BY THE REVENUE IS THUS DISMISSED. 9. THE GROUND NO. 2 RAISED BY THE REVENUE IS AS UND ER;- 2. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS O F THE CASE IN DELETING THE ADDITION AMOUNTING TO RS. 7 41 43 502/- MADE BY THE ASSESSING OFFICER ON ACCOUN T OF PURCHASE FROM SISTER CONCERN U/S 40A(2)(B). 10. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE SPECIAL AUDITORS VIDE ITS REPORT U/S 142(2A) OF THE ACT POINTED OUT THAT THE GROSS PROFIT PER ITEM OTHER THAN THE KNITTED CLOTH WAS 8.7% FOR ASSE SSMENT YEAR 2004-05 WHICH HAD GONE DOWN TO 3.09% FOR ASSESSMENT YEAR 20 05-06. THE SPECIAL AUDITORS POINTED OUT THAT THERE WAS WIDE FLUCTUATIO N IN PURCHASE AND SELLING PRICE OF SIMILAR ITEMS AND IN CASE OF KNITT ED CLOTH THERE WAS VARIATION IN THE GROSS PROFIT FROM 24.56% TO 1.10% . THE EXPLANATION OF THE ASSESSEE IN RESPECT OF THE VARIATION WAS DUE TO SEASONAL VARIATION IN THE RATE OF VARIOUS ITEMS. FURTHER IN THE SPECIAL AUDITOR REPORT IT WAS POINTED OUT THAT THE ASSESSEE WAS BUYING AND SELLIN G MATERIAL OF ITS SISTER CONCERN M/S TARAK INTERNATIONAL AND THE RATES WERE DIFFERENT FROM THE SIMILAR ITEMS PURCHASED AND SOLD TO THE OTHER PARTI ES. AS PER ANNEXURE 18 THE PURCHASE PRICE FROM SISTER CONCERNS VARIED FROM RS. 368/- TO RS. 517/- WHILE FROM OTHER PARTIES BETWEEN RS. 339/- TO 375/-. THE TOTAL SALES OF M/S TARAK INTERNATIONAL AT RS. 4.47 CRORES OF DI FFERENT ITEMS IS BIFURCATED AT PAGE 12 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER NOTED THE ASSESSEE OF HAVING SOLD TRADED ITEMS TO ITS SISTER CONCERN. THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN WHY THE EXCESSI VE PAYMENT TO THE SISTER CONCERN BE NOT DISALLOWED UNDER THE PROVISIO NS OF THE SECTION 40A(2) OF THE ACT. IN REPLY IT WAS SUBMITTED BY T HE ASSESSEE THAT THE RATE COMPARISON OF THE ITEMS SOLD TO THE DIFFERENT PARTI ES COULD NOT BE DONE AS THE QUALITY OF ITEMS WERE DIFFERENT. IT WAS FURTHE R POINTED OUT BY THE ASSESSEE THAT THE TRANSACTIONS WITH M/S TARAK INTER NATIONAL WERE AS PER MARKET RATES. THE COMPARATIVE CHART OF PURCHASES F ROM M/S TARAK INTERNATIONAL AND FROM OTHER PARTIES IS INCORPORATE D IN PARA 11.9 AT PAGE 8 13 OF THE ASSESSMENT ORDER. THE AVERAGE PURCHASE P RICE OF THE ITEMS FROM M/S TARAK INTERNATIONAL AND OTHER PARTIES WERE COMP ARED AND DIFFERENCE BETWEEN THE PAYMENTS MADE BY THE ASSESSEE AND THE F AIR MARKET VALUE FOR THE PURCHASES IN RESPECT OF WOOL TOP KNITTED CLOT H AND SCOURED RAW WOOL WAS COMPUTED BY THE ASSESSING OFFICER IN PARAS 11.1 0.1 TO 11.12.1 AND IT WAS HELD THAT THE TOTAL PURCHASE FROM M/S TARAK INT ERNATIONAL WERE EXCESSIVE BY RS. 41 43 502/-. THE ADDITION OF SIMI LAR AMOUNT WAS MADE AS M/S TARAK INTERNATIONAL WAS A PERSON COVERED U/S 40A(2)(B) OF THE ACT. 11. BEFORE THE CIT(A) THE LD. AR FOR THE ASSESSEE POINTED OUT THAT THE DETAILED REPLY FILED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER EXPLAINING THE MISTAKE IN THE CHART PREPARED BY THE SPECIAL AUDITORS HAS NOT BEEN CONSIDERED IN ENTIRETY BY THE ASSESSING OF FICER RESULTING IN THE SAID ADDITION. THE CIT(A) ON CONSIDERATION OF T HE AFORESAID EXPLANATION REQUISITIONED THE ASSESSEE TO EXPLAIN AS TO AT WHAT PRICE THE GOODS SOLD TO THE ASSESSEE BY M/S TARAK INTERNATIONAL WERE PURCHA SED FROM THE DIFFERENT CONCERNS BY IT. THE CIT(A) WAS OF THE VIEW THAT T HESE DETAILS WERE REQUIRED TO LOOK INTO THE MARGIN OF PROFIT EARNED B Y TARAK INTERSECTIONAL IN SELLING THE GOODS TO THE ASSESSEE. THE SUBMISSI ON OF THE ASSESSEE IN THIS REGARD IS INCORPORATED AT PAGES 11 TO 13 OF TH E APPELLATE ORDER. THE ASSESSEE HAS EXPLAINED THE RATES OF PURCHASES MADE BY M/S TARAK INTERNATIONAL FROM DIFFERENT CONCERNS AND THE CONSE QUENT RATES OF SALES TO THE ASSESSEE COMPANY OF WOOLTOP KNITTED CLOTH AND SCOURED RAW WOOL. THE CIT(A) ON THE PERUSAL OF THE RECORD OBSERVED TH AT THOUGH THE CONTENTION OF THE ASSESSEE WAS THAT THE DIFFERENCE IN PURCHASE PRICE OF THE SAME ITEMS PURCHASED FROM M/S TARAK INTERNATIONAL A ND OTHER PARTIES WAS ON ACCOUNT OF DIFFERENCE IN QUALITY BUT THERE WAS NOTHING ON RECORD TO 9 SHOW THAT THE QUALITY OF THE ITEMS PURCHASED BY THE ASSESSEE FROM M/S TARAK INTERNATIONAL COULD BE CONCLUSIVELY SAID TO B E OF THE SAME QUALITY AS THE QUALITY OF SIMILAR ITEMS PURCHASED FROM OTHER P ARTIES. THE CIT(A) REFERRED TO THE DETAILS FURNISHED BY THE ASSESSEE I N RESPECT OF PURCHASES MADE BY M/S TARAK INTERNATIONAL INCLUDING THE COPIE S OF RELEVANT PAGES OF STOCK REGISTER OF TARAK INTERNATIONAL AND THE CONSE QUENT SALE BY M/S TARAK INTERNATIONAL TO THE ASSESSEE. THE SAID DETAILS WE RE MADE ANNEXURES TO THE APPELLATE ORDER BEING ANNEXURE A FOR WOOLTOP ANNEX URE B FOR KNITTED CLOTH AND ANNEXURE C FOR SCOURED RAW WOOL. THE C ONCLUSION OF THE CIT(A) ON THE PERUSAL OF THE AFORESAID DETAILS WAS THAT IT CANNOT BE SAID THAT M/S TARAK INTERNATIONAL HAD SOLD THESE GOODS T O THE APPELLANT AT EXCESSIVE PRICE AS BEING ALLEGED IN THE ASSESSMENT ORDER . THE CIT(A) AT PAGES 14 AND 15 OF THE APPELLATE ORDER HAD COMPA RED THE PURCHASES MADE BY M/S TARAK INTERNATIONAL IN RESPECT OF DIFFE RENT QUANTITIES OF THE ITEMS DATE WISE AND THE SALE PRICE CHARGED BY TARA K INTERNATIONAL FROM THE ASSESSEE AND FOUND THAT THERE WAS NOMINAL PROFI T CHARGED FROM THE ASSESSEE IN RESPECT OF THE ITEMS SOLD UNDER THE THR EE CATEGORIES I.E. WOOLTOP KNITTED CLOTH AND SCOURED RAW WOOL. THE C ONCLUSION OF THE CIT(A) WAS THAT M/S TARAK INTERNATIONAL HAD SOLD TH E GOODS TO THE ASSESSEE AT MARKET PRICE ONLY AND IT WAS FURTHER HE LD THAT THE GOODS WHICH WERE SOLD AT HIGHER PRICE WERE FURTHER PURCHA SED BY TARAK INTERNATIONAL AT SIMILAR HIGHER PRICE WOULD SHOW TH AT THE CONTENTION OF THE APPELLANT THAT THE DIFFERENCE IN THE PURCHASE PRICE WITH RESPECT OF SISTER CONCERN AND OTHER PARTIES WAS ON ACCOUNT OF SOME QUALITY DIFFERENCE APPEARS TO BE QUITE CORRECT AND JUSTIFIE D. IN THE LIGHT OF ABOVE DISCUSSION AND KEEPING IN VIEW PARTICULARLY THE DET AILS OF THE GOODS PURCHASED AND SOLD BY M/S TARAK INTERNATIONAL THER E IS NO CASE AGAINST THE APPELLANT THAT IT HAD PAID EXCESSIVE PRICE FOR THE PURCHASES MADE FROM 10 THE SISTER CONCERN M/S TARAK INTERNATIONAL. THE AD DITION OF RS. 41 43 502/- MADE BY THE ASSESSING OFFICER BY APPLYI NG PROVISIONS OF SECTION 40A(2) THEREFORE CANNOT BE SUSTAINED. 12. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE LD. DR FOR THE REVENUE HAS FAILED TO BRING ON RECOR D ANY EVIDENCE ADVERSE TO THE FINDINGS OF THE CIT(A) IN RESPECT OF THE PURCHASE PRICE PAID BY M/S TARAK INTERNATIONAL IN RESPECT OF THE ITEMS SOLD TO THE ASSESSEE AT A PARTICULAR RATE. THE LD. DR FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF ASSESSING OFFICER. WE FIND NO MERIT IN THE SAI D STAND OF THE REVENUE IN VIEW OF THE ELABORATE DELIBERATION ON THE ISSUE BY THE CIT(A) WHEREIN THE CIT(A) HAS ELABORATELY NOTED THE PURCHASE PRICE IN THE HANDS OF M/S TARAK INTERNATIONAL AND CORRESPONDING SALE OF THE I TEMS TO THE ASSESSEE BY M/S TARAK INTERNATIONAL AND CONCLUDED THAT THE SAID ITEMS WERE SOLD AT A NOMINAL MARGIN OF PROFIT. THE PROVISIONS OF SECT ION 40A(2) ARE TO BE APPLIED IN CONNECTION WITH ANY EXPENDITURE IN RESPE CT OF WHICH THE PAYMENTS HAVE BEEN MADE TO A RELATED PARTY AND THE ASSESSING OFFICER IS OF THE OPINION THAT THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARKET VALUE OF GOODS SERVICES OR FA CILITIES FOR WHICH PAYMENT IS MADE. THE DETERMINING FACTOR IS THE FA IR MARKET VALUE OF THE GOODS FOR THE PURPOSE OF INVOKING THE PROVISIONS O F SECTION 40A (2). IN THE FACTS OF THE PRESENT CASE THE CIT(A) HAS ELABO RATELY CONSIDERED THE EXPLANATION OF THE ASSESSEE AND FOUND THE ASSESSEE TO HAVE ONLY PAID THE MARKET VALUE OF THE GOODS PURCHASED BY IT FROM M/S TARAK INTERNATIONAL. IN THE ABOVE SAID CIRCUMSTANCES WE FIND NO MERITS IN THE INVOKING THE PROVISIONS OF SECTION 40A(2) OF THE ACT. WE UPHO LD THE ORDER OF CIT(A) IN THIS REGARD IN DELETING THE ADDITION OF RS. 41 4 3 502/- AND DISMISS THE GROUND NO.2 RAISED BY THE REVENUE. 11 13. THE GROUND NO.3 RAISED BY THE REVENUE IS AS UN DER:- 3. THAT THE LD. CIT(A) HAS ERRED IN LAW AND FACTS O N THE CASE IN DELETING THE ADDITION AMOUNTING TO RS. 6 35 237/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNDER VALUATION OF STOCK. 14. THE ASSESSING OFFICER NOTED THAT THE SPECIAL AU DITOR HAD IN ITS REPORT MENTIONED THAT THE VALUATION OF STOCK WAS NO T CORRECTLY MADE BY THE ASSESSEE. THE SPECIAL AUDITOR DREW QUARTERLY TRAD ING ACCOUNT IN THE CASE OF THE ASSESSEE AND AS PER THE CALCULATION THE VAL UE OF CLOSING STOCK AT THE END OF THE YEAR CAME TO RS. 44 27 845/-. THE ASSE SSEE HAD DECLARED STOCK OF RS. 37 92 608/- AS PER THE BOOKS OF ACCOUNT. T HE DIFFERENCE OF RS. 6 35 237/- WAS ADDED AS INCOME OF THE ASSESSEE AS P ER ANNEXURE A-16 OF THE SPECIAL AUDITORS REPORT. THE CIT(A) OBSERVE D THAT THE ADDITION IN THIS REGARD WAS MADE ON THE BASIS OF CERTAIN WORKIN G GIVEN BY THE SPECIAL AUDITORS AS REPRODUCED AT PAGE 17 OF THE ASSESSMEN T ORDER. THE CIT(A) FURTHER OBSERVED THAT THE WORKING DONE BY THE SPECI AL AUDITOR DID NOT APPEAR TO BE JUSTIFIED AND IT WAS HELD THAT THE VALUATION OF CLOSING STOCK HAS TO BE DONE TAKING INTO ACCOUNT THE STOCKS AVAIL ABLE ON THE LAST DATE OF THE ACCOUNTING PERIOD PHYSICALLY AND APPLYING THE R ATES AS PER THE ACCEPTED NORMS FOR VALUATION OF SUCH CLOSING STOCK. IN THE DETAILS GIVEN BY THE SPECIAL AUDITORS THE VALUATION OF CLOSING STOC K HAS BEEN APPARENTLY DONE BY ADOPTING THE PRICE BEING AVERAGE PRICE OF T HE ESTIMATED COST OF THE OPENING STOCK FOR THE LAST QUARTER. IT CANNOT BE DENIED THAT IN THESE CALCULATIONS THE OPENING STOCK FOR ALL THE QUARTER S EXCEPT FOR THE FIRST QUARTER IS ON THE BASIS OF ESTIMATED COST FOR THE P URCHASES MADE QUARTER WISE. ON THE OTHER HAND THE APPELLANT IS CLAIMING THAT THE CLOSING STOCK WAS VALUED BY THEM BY FOLLOWING FIFO METHOD OF VALU ING THE CLOSING STOCK 12 WHICH IS RECOGNIZED METHOD OF ACCOUNTANCY. I FULLY AGREE WITH THE LD. COULD THAT THIS CLAIM OF THE APPELLANT COULD NOT BE REJECTED WITHOUT BRINGING ON RECORD SOME MATERIAL TO SHOW THAT THE C LOSING STOCK WAS NOT VALUED CORRECTLY WITH REFERENCE TO FIFO METHOD. THE CIT(A) DELETED THE ADDITION OF RS. 65 237/-0 HOLDING THAT THE VALU ATION OF CLOSING STOCK DONE BY THE ASSESSEE FOLLOWING FIFO METHOD COULD NO T BE SUBSTITUTED BY VALUATION DONE BY SPECIAL AUDITOR ON ESTIMATE BASIS WITHOUT F IRST SHOWING THAT THE VALUE OF CLOSING STOCK SHOWN BY TH E ASSESSEE WAS AT VARIANCE WITH THE CLOSING STOCK AS PER FIFO METHOD. 15. THE LD. DR FOR THE REVENUE PLACING RELIANCE ON THE ORDER OF ASSESSING OFFICER STATED THAT THE ASSESSEE HAS FAIL ED TO FURNISH ANY EVIDENCE OF FOLLOWING FIFO METHOD. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT IT WAS MAINTAINING DAY TO DAY STOCK REGIST ER FROM WHICH THE FIFO METHOD APPLIED BY THE ASSESSEE STANDS ESTABLISHED. RELIANCE WAS PLACED ON THE OBSERVATIONS OF THE CIT(A) AT PAGES 16 & 17 BY THE LD. AR FOR THE ASSESSEE. 16. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE ADDITION IN THE CASE HAS BEEN MADE ON THE BASIS OF THE SPECIAL AUDITORS REPORT WHO IN TURN HAD DETERMINED THE VALUE OF CLO SING STOCK BY DRAWING UP QUARTERLY TRADING ACCOUNT AND HAD ON ESTIMATE BA SIS WORKED OUT THE VALUE OF CLOSING STOCK. THE ASSESSEE ON THE OTHER HAND HAD FOLLOWED FIFO METHOD AND WORKED OUT THE VALUE OF CLOSING STOCK. THE LD. DR FOR THE REVENUE HAS FAILED TO BRING ON RECORD ANY EVIDENCE TO PROVE THE CONTRARY. IN THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND NO MERIT IN THE ISSUE RAISED BY THE REVENUE IN THIS REGARD KEEPING IN VIE W THE OBSERVATION OF CIT(A) ON THIS ISSUE AND THE METHOD OF ACCOUNTING F OLLOWED BY THE 13 ASSESSEE AS AGAINST ESTIMATED WORKING OF THE SPECIA L AUDITOR. UPHOLDING THE ORDER OF CIT(A) WE DISMISS THE GROUND OF APPEA L RAISED BY THE REVENUE. 17. THE ASSESSEE IN ITA NO. 240/CHD/2010 IS IN APPE AL AGAINST THE ORDER OF CIT(A) RELATING TO ASSESSMENT YEAR 2006-07 . THE LD. AR FOR THE ASSESSEE AT THE OUTSET POINTED OUT THAT THE ONLY IS SUE RAISED IS AGAINST THE ADDITION OF RS. 35 76 138/- ON APPLICATION OF THE PROVISIONS OF SECTION 40A(2) OF THE INCOME TAX ACT. THE LD. AR SUBMITT ED THAT THE ISSUE IS IDENTICAL TO THE ISSUE RAISED IN ASSESSMENT YEAR 20 05-06 IN RELATION TO PURCHASES MADE FROM M/S TARAK INTERNATIONAL DETAIL S OF WHICH WERE FURNISHED BEFORE THE AUTHORITIES BELOW. IT WAS FURTHER POINTED OUT BY THE LD. AR THAT IN THE INSTANT CASE AS IN THE PREC EDING YEAR THE RATE AT WHICH ITEMS WERE PURCHASED BY M/S TARAK INTERNATION AL AND RATES AT WHICH SALES WERE MADE BY M/S TARAK INTERNATIONAL TO THE A SSESSEE WERE WITH A SLIGHT MARGIN OF PROFIT AND THERE WAS NO MERIT IN T HE ADDITION. OUR ATTENTION WAS DRAWN TO THE DETAILS FURNISHED IN RES PECT OF THE WOOLTOP AND KNITTED CLOTH FURNISHED IN THE PAPER BOOK. THE LD . DR PLACED RELIANCE ON THE ORDER OF CIT(A). 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE ISSUE RAISED BEFORE US IS IDENTICAL TO THE ISSUE RA ISED IN ITA NO. 635/CDH/2009 VIDE GROUND NO.2. IN LINE WITH OUR O BSERVATIONS WITH THE PARAS HEREINABOVE IN CONNECTION WITH GROUND NO.2 IN ASSESSMENT YEAR 2005-06 WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS. 35 76 138/- MADE IN VIEW OF THE PROVISIONS OF THE S ECTION 40A(2) IN CONNECTION WITH PURCHASES MADE FROM THE SISTER CONC ERN M/S TARAK 14 INTERNATIONAL. THUS THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE ALLOWED. 19. IN THE RESULT APPEAL OF THE REVENUE RELATING T O ASSESSMENT YEAR 2005-06 IS DISMISSED AND APPEAL OF THE ASSESSEE REL ATING TO ASSESSMENT YEAR 2006-07 IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF FEBRUARY 2010. SD/- SD/- (N.BARATHVAJA SANKAR) (SUSHMA CHOWLA) VICE PRESIDENT JUDICIAL MEMBER DATED : 23 RD FEBRUARY 2010 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR