The Sagar Polypack Industries, Morbi V. The Assistant Commissioner of Income Tax, Circle-5, RAJKOT-GUJARAT

ITA 1268/RJT/2010

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 7977 (ITAT-RAJKOT)
• Duration Of Justice: 7 year(s) 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 16-11-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: MJ RANPURA
• Keywords: Business income; Corroborative evidences; Non compliance; Tax effect
• Section: 133A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT OLHE VGEN] YS[KK LNL; OLHE VGEN] YS[KK LNL; OLHE VGEN] YS[KK LNL; OLHE VGEN] YS[KK LNL; , ! BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA NO. 1268/RJT/2010 ( / ASSESSMENT YEAR : 2006-07) SAGAR POLY PACK INDUSTRIES SURVEY NO.46, GIDC ESTATE, RAFALESHWAR, MORBI. VS. ACIT, CIRCLE 5, RAJKOT ITA NO. 1336/RJT/2010 ( / ASSESSMENT YEARS : 2006-07) ACIT, CIRCLE 5, RAJKOT VS. SAGAR POLY PACK INDUSTRIES SURVEY NO.46, GIDC ESTATE, RAFALESHWAR, MORBI. ' # ./ $ ./PAN/GIR NO. : AANFS 2374 L / (APPELLANT) ( %&'' / RESPONDENT ) ASSESSEE BY : SHRI M. J. RANPURA, A.R. REVENUE BY : S SHRI PRAVEEN VERMA, SR. D.R. / DATE OF HEARING : 31/07/2018 / DATE OF PRONOUNCEMENT: 18/09/2018 ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 2 - ( / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THESE CROSS-APPEALS BY THE ASSESSEE AND REVENUE ARE DIRECTED AGAINST THE SEPARATE ORDERS OF THE COMMISSIONER OF INCOME-TAX ( APPEALS)-IV, RAJKOT DATED 15-09-2010 FOR ASSESSMENT YEAR 2006-07 2. FIRST, WE TAKE UP REVENUES APPEAL IN ITA NO.133 6/RJT/2010 FOR ASST. YEAR 2006-07. REVENUE HAS RAISED FOLLOWING GR OUNDS OF APPEALS: 1. THE LD. CIT(A)-IV, RAJKOT HAS ERRED IN LAW AND ON FACTS IN DELETING THE GP ADDITION OF RS.57,60,000/- MADE BY THE AO, WITHOUT APPRECIATING THE FACTS BROUGHT ON RECORD WH ILE FINALISING THE SURVEY RELATED ASSESSMENT. 2. THE LD. CIT(A)-IV, RAJKOT HAS ERRED IN LAW AND O N FACTS IN DELETING THE ADDITION OF RS.33,51,000/- MADE BY THE AO, ON ACCOUNT OF UNRECORDED SALES. 3. THE LD. CIT(A)-IV, RAJKOT HAS ERRED IN LAW AND O N FACTS IN DIRECTING THE AO TO ALLOW THE ASSESSEE'S CLAIM UNDE R SECTION 40(B) OF THE ACT, BEING INTEREST PAYMENT TO PARTNER S DISALLOWED BY THE ASSESSING OFFICER. 4. ON THE FACTS OF THE CASE AND IN LAW THE LD. CIT (A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. 5. ANY OTHER GROUND THAT THE REVENUE MAY RAISE BEFO RE OR DURING HEARING PROCEEDINGS BEFORE THE HON'BLE ITAT. IT IS THEREFORE, PRAYED THAT THE ORDER OF THE CIT(A )-IV, RAJKOT MAY KINDLY BE SET-ASIDE AND THAT OF ASSESSING OFFICE R BE RESTORED. ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 3 - 3. THE FIRST ISSUE RAISED BY THE REVENUE IS THAT LD . CIT (A) ERRED IN DELETING THE GP ADDITION OF RS. 57,60,000/- WITHOU T APPRECIATING THE FACTS ON RECORD. 4. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IN TH E PRESENT CASE IS A PARTNERSHIP FIRM AND ENGAGED IN THE BUSINESS OF MAN UFACTURING OF THE HDPE AND HDPP BAGS. 4.1 THERE WAS A SURVEY OPERATION CARRIED OUT AT THE BUSINESS PREMISES OF THE ASSESSEE UNDER SECTION 133A OF THE ACT DATED 22 ND AND 23 RD NOVEMBER 2005. 4.2 THE SURVEY TEAM ON THE DATE OF SURVEY PREPARED A TRADING ACCOUNT OF THE FIRM FOR THE PERIOD BEGINNING FROM 1 ST APRIL 2005 TO 22 ND NOVEMBER 2005 WHICH IS EXTRACTED AS UNDER: SAGAR POLY PACK INDUSTRIES TRADING A/C FROM 01.04.2005 TO 22.11.2005 CREDIT AMT. PARTICULARS DEBIT AMT. PARTICULARS 2,59,77,836 TOTAL OF VARIOUS SALES 1,04,9 5,250 OPENING STOCK 4,71,077 JOBWORK AND CASH DISCOUNT 2,34,55,317 VARIOUS PURCHASES 1,26,13,500 CLOSING STOCK 20,72,426 ELECTRIC A LABOUR SALARY __________ 30,39,420 GROSS PROFIT 3,90,62,413 3,90,62,413 4.3 THE SURVEY TEAM HAS ESTIMATED THE GROSS PROFIT @ 11.70% OF THE TOTAL SALES. THE RATE OF GROSS PROFIT WAS TAKEN ON THE BASIS OF LAST YEAR TRADING ACCOUNT I.E. AY 2005-06. ACCORDINGLY THE S URVEY TEAM CALCULATED THE VALUE OF CLOSING STOCK AS ON THE DAT E OF SURVEY FOR RS. ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 4 - 1,26,13,500.00 AS BALANCING FIGURES WHICH WAS WORKE D OUT BY APPLYING THE GROSS PROFIT ON THE SALES UP TO THE DATE OF SUR VEY. 4.4 THE ASSESSEE ALSO DURING THE ASSESSMENT PROCEED INGS FURNISHED THE TRADING ACCOUNT FOR THE PERIOD BEGINNING FROM 1 ST OF APRIL 2005 TO 22 ND NOVEMBER 2005 WHICH IS REPRODUCED AS UNDER: SAGAR POLY PACK INDUSTRIES TRADING A/C FROM 01.04.2005 TO 22.11.2005 CREDIT AMT. PARTICULARS DEBI T AMT. PARTICULARS 2,60,62,046 TOTAL OF VARIOUS SALES 1,0 4,95,250 OPENING STOCK 5,31,259 JOBWORK AND CASH DISCOUNT 2,63,5 5,930 VARIOUS PURCHASES AND TAX SET OFF AND TRANSPORTATION 3,03,51,000 SALES STOCK DIFF. IN SURVEY 22,79, 181 ELE., LABOUR, MACHI: AND G.P. PARTS AND PURCHASE TAX 51,04,503 CLOSING STOCK 40,81,552 GROSS LOSS _______ ___ 3,91,30,361 3,91,30,4361 4.5 HOWEVER THE AO DURING THE ASSESSMENT PROCEEDING S OBSERVED THAT THERE ARE CERTAIN MISMATCH IN THE FIGURES OF VARIOU S ITEMS SHOWN IN THE TRADING ACCOUNT PREPARED ON THE DATE OF SURVEY BY T HE SURVEY TEAM AND THE TRADING ACCOUNT PREPARED BY THE ASSESSEE TILL T HE DATE OF SURVEY. THESE DIFFERENCES AS OBSERVED BY THE AO STANDS AS UNDER: I. DIFFERENCE IN THE PURCHASES: RS. 29, 00,613/- II. DIFFERENCE IN THE EXPENSES OF ELECTRICITY AND LABOU R SALARY: RS.2,06,755/- 4.6 THE AO ALSO OBSERVED THAT THE VALUE OF THE PHYS ICAL STOCK FOUND AT THE TIME OF SURVEY WAS RS. 60,33,929/- WHEREAS THE ASSESSEE SHOWN THE ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 5 - CLOSING STOCK AT RS. 51,04,503/- IN THE TRADING AC COUNT AS ON 22-11-2005 FILE BY ASSESSEE. 4.7 THE AO ALSO OBSERVED THAT THE VALUE OF CLOSING STOCK SHOULD HAVE BEEN AT RS. 1,26,13,508/- I.E. CALCULATED BY SURVEY TEAM BY PREPARING TRADING ACCOUNT ON THE DATE OF SURVEY. THUS THE AO WORKED OUT THE DIFFERENCE IN THE VALUE OF CLOSING STOCK FOR RS. 75 ,09,005.00 (1,26,13,508-51,04,503) ONLY AS ON THE DATE OF SURV EY. 4.8 SINCE THE ASSESSEE DURING THE SURVEY PROCEEDING S ADMITTED THE DIFFERENCE OF CLOSING STOCK TO THE TUNE OF RS. 30 L ACS, THE AO OPINED THE DIFFERENCE IN THE VALUE OF CLOSING STOCK OF RS. 45, 08,997/-(1, 26,13,508 - 30,00,000 - 51,04,503) BETWEEN THE CLOSING STOCK A S PER TRADING ACCOUNT AS ON THE DATE OF SURVEY AND IN THE BOOKS OF ACCOUN TS AFTER ADJUSTING THE STOCK OF RS. 30 LACS. 4.9 THE AO DURING THE ASSESSMENT PROCEEDINGS ALSO R EFERRED TO THE RELEVANT QUESTIONS AND ANSWERS OF THE STATEMENT REC ORDED AT THE TIME OF SURVEY UNDER SECTION 133A OF THE ACT. AS PER THE ST ATEMENT THERE WERE NO PENDING ENTRIES FOR THE PURCHASES AND SALES OF THE GOODS. ACCORDINGLY AO WAS OF THE VIEW THAT THE MISMATCHES IN THE PURCHASE S AND EXPENSES AS DISCUSSED ABOVE HAVE BEEN MADE BY ASSESSEE JUST TO NULLIFY THE TAX EFFECT ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 6 - OF GROSS PROFIT ON SALE OF UNDISCLOSED STOCK ADMITT ED BY IT DURING THE SURVEY OPERATION. 4.10 THE AO FURTHER OBSERVED THAT THE BOOKS OF ACCO UNTS OF THE ASSESSEE ARE NOT RELIABLE DUE TO THE MISMATCH IN THE VALUE O F CLOSING STOCK AS DISCUSSED ABOVE. ACCORDINGLY THE AO REJECTED THE BO OKS OF ACCOUNTS OF THE ASSESSEE UNDER SECTION 145(3) OF THE ACT. 4.11 IN VIEW OF ABOVE THE AO ESTIMATED THE TURNOVER OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION AT RS. 4 CRORES AND AP PLIED THE GP AT THE RATE OF 14.40% WHICH RESULTS INTO THE GROSS PROFIT OF RS .57,60,000/-. 4.12 IN VIEW OF ABOVE THE AO MADE THE ADDITION RS. 57, 60,000/- TO THE TOTAL INCOME OF THE ASSESSEE. 5. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO LEARNE D CIT-A. THE ASSESSEE BEFORE THE LEARNED CIT-A SUBMITTED THAT HE HAD FURNISHED ALL THE REQUIRED INFORMATION/EXPLANATION DURING THE ASSESSM ENT PROCEEDINGS. BUT THE AO ALLEGED THAT THE BOOKS ARE NOT RELIABLE AND REJECTED THE SAME. THE RELEVANT EXTRACT OF ASSESSEE SUBMISSION BEFORE LD. CIT(A) READ AS UNDER: (D) AS REGARDS THE ABOVE STATED OBSERVATION OF THE AO AT THE OUTSET IT IS SUBMITTED THAT ALL THE REQUISITE INFORMATION WERE F URNISHED TO THE AO FROM TIME TO TIME AND ALSO PRODUCED THE AUDITED BOO KS OF ACCOUNT ALONG WITH BANKING RECORDS, BILLS, INVOICES, VOUCHERS ETC . (COPIES OF REPLIES ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 7 - SUBMITTED TO THE AO ARE ATTACHED). HOWEVER, CLARIFI CATION IN RESPECT OF EACH SUCH OBSERVATION OF THE AO IS GIVEN HEREUNDER: (I) COMPLETE DETAIL OF RAW MATERIALS, SEMI FINISHE D GOODS AND FINISHED GOODS IN TERMS OF QUANTITY AND VALUE WERE FURNISHED TO THE AO AS PER SERIAL NUMBER 9, 10& 11 OF REPLY DATE D 03.12.2008 WITH SUPPORTING EVIDENCES (COPIES ATTACHED). STOCK STATEMENTS SUBMITTED TO THE BANK WERE ALSO BEFORE THE AO. FURT HER, THE APPELLANT IS AN EXCISABLE UNIT AND HAS MAINTAINED C OMPLETE RECORDS AS TO INPUT OF GOODS, MANUFACTURED ITEMS AN D GOODS DISPATCHED ETC. WHICH ARE BEING PRODUCED HEREWITH ( RELEVANT COPIES OF SUCH REGISTERS ARE ATTACHED) FOR YOUR HON OURS' KIND PERUSAL THUS, THE APPELLANT HAS FURNISHED THE QUANT ITATIVE DETAILS FOR VERIFICATION OF AO, WHICH THE AO HAS VERIFIED A ND NOT FOUND ANY DEFECTS THEREIN. THOUGH THE AUDITORS HAVE GIVEN PARTIAL INFORMATION OF THE STOCK, COMPLETE DETAILS COULD HA VE BEEN VERIFIED FROM THE RECORDS SUBMITTED AT THE TIME OF ASSESSMENT PROCEEDINGS. (II) FURTHER, REGARDING THE VARIATION IN THE RA TE OF GROSS PROFIT, THE APPELLANT FURNISHED COMPARATIVE DETAILS AND EXPLAIN ED THE REASONS FOR DECLINE IN THE RATE OF GROSS PROFIT. IT WAS ALSO EXPLAINED THAT THE STOCK FOUND DURING THE COURSE OF SURVEY INCLUDED STOCK OF SUBSTANDARD QUALITY I WASTE GOODS AND THEREFORE, AS AGAINST THE ARITHMETICALLY WORKED OUT STOCK AT RS. 1,26,13,500/- ACTUAL STOCK WAS ONLY OF RS. 60,33,92 9/-. IN SUPPORT OF THE SAME SUMMARY OF OPENING STOCK, CONSUMPTION, CLOSING STOCK IN RESPECT OF RAW MATERIALS, SEMI FINISHED GO ODS AND FINISHED GOODS IS ATTACHED ALONG WITH THE INVENTORY OF STOCK PREPARED BY THE SURVEY TEAM. FROM SUCH SUMMARY, IT MAY KINDLY BE SEEN THAT THE OPENING STOCK OF SEMI-FINISHED GOO DS HAVE BEEN VALUED AT HIGHER RATE, THOUGH THE NET REALIZABLE VA LUE OF THE SAME WAS VERY NOMINAL. THIS FACT LEADS TO THE SITUATION OF LOSS. 5.1 THE ASSESSEE ALSO RELIED ON CERTAIN JUDGMENTS B EFORE THE LD. CIT(A). ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 8 - 5.2 THE LD CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE DELETING THE ADDITION MADE BY THE AO BY OBSERVING A S UNDER: 4.1 I HAVE CAREFULLY CONSIDERED THE ABOVE CONTENTI ON PUTFORTH BY THE LD AR OF THE ASSESSEE. ON VERIFICATION OF THE ABOVE CONTENTION. IT IS SEEN THAT, ACCORDING TO THE LD AR OF THE ASSESSEE, THE A SSESSING OFFICER HAD, ON ONE HAND ESTIMATED THE SALES OF THE APPELLANT, W HICH IS WITHOUT ANY BASIS, AND ON THE OTHER HAND, HAD ALSO MADE ADDITIO N OF RS 30,00 LACS BEING SUPPRESSED SALE INFERRED ON THE BASIS OF DIFF ERENCE IN STOCK. FURTHER, THE ALLEGATION OF THE ASSESSING OFFICER TH AT THE APPELLANT HAD INFLATED THE PURCHASES TO NULLIFY THE EFFECT OF THE DISCLOSURE MADE OUT OF SUPPRESSED SALE DOES NOT APPEAR TO BE CORRECT BECAU SE, THE PURCHASES ARE SUPPORTED BY EVIDENCES. IN THIS CONNECTION, HE PRODUCED BEFORE ME VARIOUS EVIDENCES LIKE PURCHASE BILLS, TRANSPORT RE CEIPTS, DETAILS OF PAYMENTS MADE, ETC. IN ORDER TO CORROBORATE THE MAT TER FURTHER, HE PRODUCED BEFORE THE STOCK STATEMENTS FURNISHED TO B ANK AT THE END OF EACH MONTH. HE FURTHER CONTENDED THAT, THE APPELLAN T IS AN EXCISABLE UNIT AND HAS TO FURNISH STOCK STATEMENTS, PRODUCTIO N DETAILS, SALES DETAILS ON REGULAR BASIS TO THE EXCISE DEPARTMENT. I FIND THE SUBMISSION OF THE AR OF THE APPELLANT CONVINCING IN VIEW OF TH E FOLLOWING FACTS. 4.2 NOWHERE THE ASSESSING OFFICER HAS RECORDED SAT ISFACTION AS TO ON WHAT BASIS HE IS ESTIMATING A HIGHER SALES TURNOVER . AS AGAINST SALES OF RS 3,76,80,547/- (SEE PARA 5 OF THE ASSESSMENT ORDE R) THE ASSESSING OFFICER HAD ADOPTED SALES OF RS 4,00,00,000/-. THIS ESTIMATION IS MADE WITHOUT ANY BASIS, IF THIS ESTIMATION IS MADE ON TH E BASIS OF DIFFERENCE IN STOCK AND THE DISCLOSURE MADE DURING SURVEY, THEN T HE SAME OUGHT NOT TO HAVE BEEN ADDED AGAIN SEPARATELY. IT IS ALSO NOT KN OWN AS TO ON WHAT BASIS HE HAS ADOPTED THE APPELLANT'S GROSS PROFIT A T 14.4%. IF THIS ADOPTION OF GROSS PROFIT OF 14,4% IS TAKEN AS BASE, THEN AFTER MAKING ALL THE ADDITIONS AS PER PARA 5.4 OF THE ASSESSMENT ORD ER, THE RESULTANT GROSS PROFIT WOULD BE AS UNDER:- TOTAL ADDITIONS (EXCLUDING OTHER INCOME) RS 1,36,1 9,997 (VIZ; RS 57,60,000 + RS 45,08,997 + 33,51,000) APPELLANT'S TOTAL SALES TURNOVER RS 4,10,31,547 ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 9 - RESULTANT GP 33.20% THIS IS MORE THAN DOUBLE [HE GROSS PROFIT ESTIMATED BY T HE ASSESSING OFFICER HIMSELF ON THE ESTIMATED SALES. THEREFORE, THE ORDER OF THE ASSESSING OFFICER IS CONTRADICTING IN ITSELF BECAUS E, ON ONE HAND HE HAS ESTIMATED THE SALES AND ESTIMATED THE GROSS PROFIT AT 144% AND FINALLY AFTER ESTIMATING ALL THE INCOME, THE GROSS PROFIT R ATIO COMES TO 33.20%. MOREOVER, THE GP RATIO OF 33.20% IS HIGHLY IMPROBAB LY, PARTICULARLY WHEN NOTHING HAS BEEN BROUGHT ON RECORD TO PROVE SU CH A PHENOMENAL RESULT. I AM THEREFORE NOT CONVINCED WITH THE ASSES SING OFFICER'S ACTION OF ESTIMATING THE SALES AT RS 4.00 CRORE AND ESTIMA TING THE GROSS PROFIT AT 14.4%. THEREFORE, THIS GROUND OF APPEAL IS ALLOW ED. 5.3 BEING AGGRIEVED BY THE ORDER OF LD CIT(A) REVEN UE IS IN APPEAL BEFORE US. 6. BOTH THE LD. DR & AR ON BEHALF OF THE RESPECTIVE PARTIES RELIED ON THE ORDER OF AUTHORITIES BELOW AS FAVORABLE TO THEM . 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE ISSUE IN THE INSTANT CASE RELATES TO THE ADDITION MADE BY AO ON ACCOUNT OF ESTIMATION OF GROSS PROFIT BY REJECTING THE BOOKS OF ACCOUNT OF ASSESSEE. 7.1 ON PERUSAL OF MATERIALS ON RECORDS WE NOTE THAT AO HAS REJECTED THE BOOKS ON THE GROUND THAT ASSESSEE HAS INCREASED HIS EXPENSES ON PURCHASE, ELECTRICITY AND WAGES DELIBERATELY SO THA T THE EFFECT OF SALE SHOWN ON ACCOUNT OF UNDISCLOSED STOCK ADMITTED DURI NG THE SURVEY CAN BE ELIMINATED. HOWEVER AO WHILE HOLDING SO FAILED TO B RING ANYTHING ON ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 10 - RECORD JUSTIFYING THE DEFECT IN THE PURCHASES AND E XPENSES CLAIMED BY THE ASSESSEE. IF THE AO HAS ANY DOUBT ABOUT THE GENUINE NESS OF PURCHASES AND EXPENSES CLAIMED BY THE ASSESSEE HE SHOULD HAVE POI NTED OUT THE DEFECT IN THE BILLS VOUCHERS SUBMITTED IN THIS REGARD BY V ERIFYING THE SAME. 7.2 IT IS ALSO RELEVANT TO MENTION HERE THAT ASSESS EE IS ALSO ASSESSABLE UNDER THE EXCISE LAW AND REQUIRED TO FILE TO THE EX CISE DEPARTMENT REGULARLY THE DETAILS OF THE INPUT AND OUTPUT RECOR DS OF RAW MATERIAL, WIP AND FINISHED GOODS IN TERMS OF AMOUNT AND QUANTITY. THE AO ALSO FAILED TO BRING ANYTHING ON RECORD TO SHOW WHETHER THERE I S ANY ADVERSE REMARK MADE BY EXCISE DEPARTMENT ON ACCOUNT OF PURCHASES, SALES AND STOCKS FURNISHED TO IT. 7.3 NOW COMING TO THE MAIN ISSUE RAISED BY THE REVE NUE I.E. ADDITION ON ACCOUNT OF GROSS PROFIT ON ESTIMATED SALE OF RS. 4,00,00,000/-, THE AO WHILE ESTIMATING THE SALE AGAIN FAILED TO BRING ANY MATERIAL ON RECORD TO JUSTIFY THE AMOUNT OF ESTIMATED SALE. 7.4 FURTHER THE AO APPLIED THE G.P @14.4% I.E. AVER AGE OF PRECEDING 3 PREVIOUS YEARS TO ESTIMATE THE GROSS PROFIT. HOWE VER IN OUR OPINION THERE WAS NO SPECIFIC DEFECT POINTED OUT IN BOOKS O F ACCOUNT AS DISCUSSED ABOVE, THEREFORE THE AO CANNOT TAKE SUCH AVERAGE RA TE TO ESTIMATE THE GROSS PROFIT. ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 11 - 7.5 IN VIEW OF ABOVE, WE CONCUR WITH THE VIEW OF LD . CIT (A) AND ACCORDINGLY INCLINED NOT TO INTERFERE IN THE FINDIN G OF LD. CIT (A). THUS, THE GROUND OF APPEAL RAISED BY THE REVENUE IS DISMISSED . 8. THE SECOND ISSUE RAISED BY THE REVENUE IS THAT L D. CIT (A) ERRED IN DELETING THE ADDITION OF RS. 33,51,000/- ON ACCOUNT OF UNRECORDED SALES ADMITTED BY ASSESSEE DURING THE SURVEY. 9. THE ASSESSEE DISCLOSED COST OF SALE FOR RS. 30 L ACS IN ITS BOOKS OF ACCOUNT ON ACCOUNT OF DIFFERENCE IN THE CLOSING STO CK WHICH WAS ADMITTED DURING THE SURVEY. THE ASSESSEE ALSO INCREASED THE COST OF SALES OF RS. 30 LACS ALONG WITH THE AMOUNT OF GROSS PROFIT @ 11.70% WHICH COMES TO RS. 3,51,000.00. ACCORDINGLY THE ASSESSEE HAS SHOWN TOTAL SALES OF RS.33,51,000/- AS SALES STOCK DIFF. IN SURVEY AND GP . 9.1 HOWEVER THE AO FURTHER ADDED THE ABOVE AMOUNT O F RS.33,51,000/- TO THE TOTAL INCOME OF ASSESSEE. 10. AGGRIEVED ASSESSEE CARRIED THIS MATTER TO LD. C IT(A) WHERE IT WAS CONTENDED THAT IT HAS ALREADY DISCLOSED THIS FIGURE IN ITS BOOKS OF ACCOUNT. THE AO ALREADY HAS ESTIMATED THE SALES AT RS. 4 CRO RES. THUS THE FURTHER ADDITION OF THIS AMOUNT WILL LEAD TO DOUBLE ADDITIO N. ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 12 - 10.1 THE LD. CIT(A) CONSIDERING THE SUBMISSION OF A SSESSEE DELETED THE ADDITION MADE BY AO OBSERVING AS UNDER: 6.1 I HAVE CAREFULLY CONSIDERED THE ABOVE CONTENTI ONS. I FIND THERE IS SUBSTANTIAL FORCE IN THE CONTENTION PUT FORTH BY TH E AR OF THE APPELLANT. NO SEPARATE ADDITION OUT OF DISCLOSURE CAN BE MADE AS THE ASSESSEE'S NET LOSS AS PER THE AUDITED ACCOUNTS, IS WORKED OUT AFT ER GIVING EFFECT TO THIS DISCLOSURE. THEREFORE, AS THE FACTOR OF DISCLOSURE OF UNRECORDED SALES HAS ALREADY BEEN EFFECTED IN, MAKING FURTHER ADDITI ON OF THE SAME ONLY RESULTED IN DOUBLE ADDITION, AND HENCE, THE ADDITIO N IS DIRECTED TO BE DELETED. HENCE, THIS GROUND OF ASSESSEE'S APPEAL IS ALLOWED. BEING AGGRIEVED BY THE ORDER OF LD. CIT (A) REVENUE IS IN APPEAL BEFORE US. 11. BOTH THE LD. DR & AR ON BEHALF OF THE RESPECTIV E PARTIES RELIED ON THE ORDER OF AUTHORITIES BELOW AS FAVORABLE TO THEM . 12. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE ISSUE IN THE INSTANT CASE RELATES TO THE ADDITION MADE FOR THE SALE DISCLOSED BY ASSESSEE IN ITS FINA NCIALS ACCOUNT ALONG WITH GROSS PROFIT ON STOCK DIFFERENCE ADMITTED BY I T DURING THE SURVEY PROCEEDING. 12.1 AT THE OUTSET, WE NOTE THAT AO DID NOT MAKE AN Y OBSERVATION WITH RESPECT TO THIS ADDITION IN HIS ORDER. HE JUST SIMP LY ADDED THIS FIGURE TO THE TOTAL INCOME OF THE ASSESSEE WITHOUT ADDUCING A NY REASON AND AFTER ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 13 - IGNORING THE FACT THE ASSESSEE ITSELF HAS DISCLOSED THIS FIGURE IN ITS BOOKS OF ACCOUNT. 12.2 AS WE HAVE ALREADY HELD IN PARA 7 OF THIS ORDE R THAT AO WAS NOT JUSTIFIED IN ESTIMATING THE GROSS PROFIT AND ASSESS EE HIMSELF HAS SHOWN SALE OF THIS UNDISCLOSED STOCK IN HIS BOOKS OF ACCO UNTS THEREFORE, ADDITION MADE BY AO ON THIS ACCOUNT CANNOT BE SUSTAINED. 12.3 THEREFORE, WE DO NOT SEE ANY REASON TO INTERFE RE IN THE FINDING OF LD. CIT-A AND ACCORDINGLY WE DISMISS THE GROUND OF APPEAL OF REVENUE. 13. THE THIRD ISSUE RAISED BY THE REVENUE IS THAT L D. CIT (A) ERRED IN DELETING THE ADDITION OF RS.7,93,233/- ON ACCOUNT O F INTEREST ON PARTNERS CAPITAL CLAIMED BY ASSESSEE UNDER SECTION 40(B) OF THE ACT. 13.1 THERE WAS A CHANGE IN CONSTITUTION OF ASSESSEE FIRM DURING THE YEAR UNDER CONSIDERATION ON 30 TH SEPTEMBER 2005. IN FACT THE FOUR PARTNERS OF THE FIRM WERE RETIRED AND ONE NEW PARTNER WAS ENTER ED INTO THE PARTNERSHIP. 13.2 THE AO DURING THE ASSESSMENT PROCEEDINGS OBSER VED THAT THE SIGNATURE OF WITNESSES ON CHANGED PARTNERSHIP DEED IS MISSING. ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 14 - 13.3 HOWEVER THE ASSESSEE FIRM IN ITS BOOKS OF ACCO UNT CLAIMED INTEREST EXPENSES ON CAPITAL ON THE BALANCE OUTSTANDING IN T HE PARTNERS CAPITAL ACCOUNT AS ON 31 ST MARCH 2006. THEREFORE THE FIRM DID NOT CLAIM INTER EST ON THE CAPITAL OF THE RETIRING PARTNER TILL THE DAT E OF CHANGE IN THE CONSTITUTION I.E. 30-9-2005. 13.4 ACCORDINGLY THE AO OBSERVED THAT THE ASSESSEE FIRM FAILED TO PAY THE INTEREST ON CAPITAL TO RETIRING PARTNER IN PURS UANCE TO THE TERMS OF PARTNERSHIP DEED. THUS THE AO HELD THAT INTEREST PA ID TO PARTNERS IS NOT ALLOWABLE U/S 40(B) OF THE ACT AND ADDED BACK RS. 7 ,93,233/- TO THE TOTAL INCOME OF ASSESSEE. 14. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL TO CIT( A) WHERE IT MADE THE SUBMISSION WHICH MAY READ AS UNDER: (A) THE AO VIDE PARA 4 OF ASSESSMENT ORDER, STATED THAT THE ASSESSEE FIRM FAILED TO WITH THE TERMS OF PAYMENT OF INTERES T TO ITS PARTNERS AS PER THE DEED OF 'PARTNERSHIP AND THEREBY DISALLOWED THE INTEREST PAID TO PARTNERS AT RS. 7,93,233/-. (B) IN CONNECTION WITH THE ABOVE, THE FACTS IN BRIE F ARE THAT, DURING THE YEAR UNDER THERE WAS A CHANGE IN THE CONSTITUTI ON OF THE PARTNERSHIP, SOME FOUR PARTNERS HAVE RETIRED AND ON E NEW PARTNER WAS ADMITTED INTO THE PARTNERSHIP BUSINESS. FOR GIVING EFFECT OF CHANGE IN THE CONSTITUTION, ONE DEED OF R ETIREMENT WAS MADE ON 30.09.2005 AS PER WHICH PARTNERS VIZ, (I) S HRI BABUBHAI VELJIBHAI DETROJA, (II) SHRI SHIALESH BABUBHAI DETR OJA. (III) SHRI SATISH BABUBHAI DETROJA, AND (IV) SMTLEENABEN BABUB HAI DETROJA HAVE BEEN RETIRED AND ON THE SAME DATE ONE SMT. MADHUBEN MUKESHBHAI DADHANIA IS ADMITTED AS NEW PAR TNER. ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 15 - (C) THE APPELLANT HAS PAID INTEREST TO ALL THE PAR TNERS WHO WERE THERE IN THE DEED OF PARTNERSHIP AS ON 31.03.2006, RELEVANT DETAILS LIKE COPIES OF ACCOUNT, DEEDS OF PARTNERSHI P AND RETIREMENT ETC. WERE FURNISHED DURING THE COURSE OF ASSESSMENT PROCEEDINGS (COPIES OF DEED OF CHANGE M CONSTITUTIO N AND DEED OF RETIREMENT ARE ALSO ATTACHED). AS PER THE CLAUSE 6 OF THE PARTNERSHIP DEED DATED 30.09.2005 IT IS SPECIFICALL Y PROVIDED THAT THE INTEREST @ 12 % IS TO BE WORKED OUT AT THE END OF THE YEAR ON PARTNER'S CAPITAL ACCOUNT AND ACCORDINGLY PROVISION OF INTEREST PAYMENT IS MADE AT THE END OF THE ON THE BALANCE OU TSTANDING IN THE PARTNERS CAPITAL ACCOUNT ON 31.03.2006. THUS, T HERE IS NO VIOLATION OF ANY OF THE TERMS OF THE DEED AS FAR AS INTEREST TO PARTNERS' CAPITAL ACCOUNT IS CONCERNED. (D) AS PER THE PROVISIONS OF SECTION 40(B) OF THE ACT, INTEREST PAID TO A PARTNER IS NOT DEDUCTABLE UNLESS THE FOLLOWING CO NDITIONS ARE FULFILLED: SR.NO CONDITION HOW FULFILLED (I) IT SHOULD BE AUTHORIZED BY AND IN ACCORDANCE WITH THE PARTNERSHIP DEED. INTEREST IS PAID TO ALL THE ELEVEN PARTNERS AS PER THE DEED OF PARTNERSHIP DATED 30.09.05. SINCE FOUR PARTNERS WERE RETIRED FROM THE FIRM, WERE NOT PAID ANY INTEREST AS SUCH. (II) IT SHOULD RELATE TO A PERIOD FALLING AFTER THE DATE OF THE PARTNERSHIP DEED, AND INTEREST WAS PAID TO TEN PARTNERS FOR THE PERIOD 01,04.05 TO 31.03.06 AND ONE NEWLY PARTNER WAS PAID INTEREST FOR THE PERIOD 01.10.05 TO 31.03.06 (I.E. RELATE TO A PERIOD AFTER THE PARTNERSHIP DEED). (III) IT SHOULD BE NOT EXCEEDING 12% P.A. SIMPLE RATE OF INTEREST. INTEREST IS PAID @12%, WHICH IS AS PER THE PRESCRIBED RATE. ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 16 - (E) THUS AS ALL THE CONDITIONS WERE FULFILLED, NO DISALLOWANCE CAN BE MADE OUT OF INTEREST PAID TO PARTNERS' CAPITAL. FUR THER, ALL THE PARTNERS HAVE SHOWN THE INTEREST INCOME IN THEIR RETURNS OF INCOME AND OFFERED TO TAX. 14.1 THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIO N MADE BY ASSESSEE DELETED THE ADDITION MADE BY AO BY OBSERVING AS UND ER: 7.1 I HAVE GONE THROUGH THE ASSESSMENT ORDER AS AL SO THROUGH THE SUBMISSION OF THE AR OF THE APPELLANT THE ASSESSI NG OFFICER HAD DENIED THE CLAIM SINCE THE PARTNERSHIP DEED PRESE NTED BEFORE HIM DID NOT HAVE THE SIGNATURE OF THE WITNESS. THIS NOT A S ERIOUS AND INCURABLE LAPSE AS LONG AS THE CONDITIONS LAID DOWN U/S. 40(B ) ARE FULFILLED IN VIEW OF THE ABOVE, THE ADDITION DESERVES TO BE DELETED A ND IS THEREFORE DIRECTED TO BE DELETED. THIS GROUND OF APPEAL IS AL LOWED. BEING AGGRIEVED BY THE ORDER OF LD. CIT (A) REVENUE IS IN APPEAL BEFORE US. 15. BOTH THE LD. DR & AR ON BEHALF OF THE RESPECTIV E PARTIES RELIED ON THE ORDER OF AUTHORITIES BELOW AS FAVORABLE TO THEM . 16. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE ISSUE IN THE INSTANT CASE RELATES TO THE DISALLOWANCE MADE BY AO ON ACCOUNT OF INTEREST ON P ARTNERS CAPITAL U/S 40(B) OF THE ACT. 16.1 AT THE OUTSET ON THE PERUSAL OF RELEVANT PORTI ON OF CIT(A) ORDER WE NOTE THAT THE ADDITION WAS DELETED BY THE LD. CIT(A ) BY OBSERVING THAT NO ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 17 - SIGNATURE OF THE WITNESSES ON PARTNERSHIP DEED IS N OT SERIOUS & CURABLE ISSUE UNDER SECTION 40(B) OF THE ACT. 16.2 HOWEVER ON THE PERUSAL OF AOS ORDER WE NOTE T HAT THE ADDITION WAS MADE ON ACCOUNT OF NON COMPLIANCE OF THE TERMS OF PARTNERSHIP DEED BY ASSESSEE FIRM BY NOT PROVIDING THE INTEREST ON C APITAL TO RETIRING PARTNER IN VIOLATION OF THE PROVISIONS OF SEC. 40(B ) OF THE ACT. ACCORDINGLY THE AO DISALLOWED THE INTEREST ON CAPIT AL OF REMAINING PARTNER AS WELL. 16.3 AT THIS JUNCTURE IT IS WORTH TO MENTION THE PR OVISION OF SEC. 40(B) OF THE ACT WHICH READS AS UNDER: 40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN S ECTIONS 30 TO[38 ], THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMP UTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION, [(B) IN THE CASE OF ANY FIRM ASSESSABLE AS SUCH, (I) ANY PAYMENT OF SALARY, BONUS, COMMISSIO N OR REMUNERATION, BY WHATEVER NAME CALLED (HEREINAFTER REFERRED TO AS R EMUNERATION) TO ANY PARTNER WHO IS NOT A WORKING PARTNER; OR (II) ANY PAYMENT OF REMUNERATION TO ANY PART NER WHO IS A WORKING PARTNER, OR OF INTEREST TO ANY PARTNER, WHICH, IN E ITHER CASE, IS NOT AUTHORISED BY, OR IS NOT IN ACCORDANCE WITH, THE TE RMS OF THE PARTNERSHIP DEED; OR (III) ANY PAYMENT OF REMUNERATION TO ANY PART NER WHO IS A WORKING PARTNER, OR OF INTEREST TO ANY PARTNER, WHICH, IN E ITHER CASE, IS AUTHORISED BY, AND IS IN ACCORDANCE WITH, THE TERMS OF THE PARTNERSHIP DEED, BUT WHICH RELATES TO ANY PERIOD ( FALLING PRIOR TO THE DATE OF SUCH PARTNERSHIP DEED) FOR WHICH SUCH P AYMENT WAS ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 18 - NOT AUTHORISED BY, OR IS NOT IN ACCORDANCE WITH, AN Y EARLIER PARTNERSHIP DEED, SO, HOWEVER, THAT THE PERIOD OF A UTHORISATION FOR SUCH PAYMENT BY ANY EARLIER PARTNERSHIP DEED DOES N OT COVER ANY PERIOD PRIOR TO THE DATE OF SUCH EARLIER PARTNERSHI P DEED; OR (IV) ANY PAYMENT OF INTEREST TO ANY PARTNER W HICH IS AUTHORISED BY, AND IS IN ACCORDANCE WITH, THE TERMS OF THE PARTNER SHIP DEED AND RELATES TO ANY PERIOD FALLING AFTER THE DATE OF SUC H PARTNERSHIP DEED IN SO FAR AS SUCH AMOUNT EXCEEDS THE AMOUNT CA LCULATED AT THE RATE OF 53 [TWELVE] PER CENT SIMPLE INTEREST PER ANNUM; OR (V) ANY PAYMENT OF REMUNERATION TO ANY PARTNER W HO IS A WORKING PARTNER, WHICH IS AUTHORISED BY, AND IS IN ACCORDAN CE WITH, THE TERMS OF THE PARTNERSHIP DEED AND RELATES TO ANY PE RIOD FALLING AFTER THE DATE OF SUCH PARTNERSHIP DEED IN SO FAR A S THE AMOUNT OF SUCH PAYMENT TO ALL THE PARTNERS DURING THE PREVIOU S YEAR EXCEEDS THE AGGREGATE AMOUNT COMPUTED AS HEREUNDER : (1) IN CASE OF A FIRM CARRYING ON A PROFESSI ON REFERRED TO IN SECTION 44AA OR WHICH IS NOTIFIED FOR THE PURPOSE OF THAT SECTION (A) ON THE FIRST RS. 1,00,000 OF THE BOOK-PROFIT OR IN CASE OF A LOSS RS. 50,000 OR AT THE RATE OF 90 PER CENT OF THE BOOK-PROFIT, WHICHEVER IS MORE; (B) ON THE NEXT RS. 1,00,000 OF THE BOOK-PROFIT AT THE RATE OF 60 PER CENT; (C) ON THE BALANCE OF THE BOOK-PROFIT AT THE RATE OF 40 PER CENT; (2) IN THE CASE OF ANY OTHER FIRM (A) ON THE FIRST RS. 75,000 OF THE BOOK-PROFIT, OR IN CASE OF A LOSS RS. 50,000 OR AT THE RATE OF 90 PER CENT OF THE BOOK-PROFIT, WHICHEVER IS MORE; (B) ON THE NEXT RS. 75,000 OF THE BOOK-PROFIT AT THE RATE OF 60 PER CENT; (C) ON THE BALANCE OF THE BOOK-PROFIT AT THE RATE OF 40 PER CENT: PROVIDED THAT IN RELATION TO ANY PAYMENT UNDER THIS CLAUSE TO THE PARTNER DURING THE PREVIOUS YEAR RELEVANT TO THE AS SESSMENT YEAR ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 19 - COMMENCING ON THE 1ST DAY OF APRIL, 1993, THE TERMS OF THE PARTNERSHIP DEED MAY, AT ANY TIME DURING THE SAID P REVIOUS YEAR, PROVIDE FOR SUCH PAYMENT. EXPLANATION 1.WHERE AN INDIVIDUAL IS A PARTNER IN A FIRM ON BEHALF, OR FOR THE BENEFIT, OF ANY OTHER PERSON (SUCH PARTN ER AND THE OTHER PERSON BEING HEREINAFTER REFERRED TO AS PARTNER IN A REPRESENTATIVE CAPACITY AND PERSON SO REPRESENTED, RESPECTIVELY ), (I) INTEREST PAID BY THE FIRM TO SUCH INDIV IDUAL OTHERWISE THAN AS PARTNER IN A REPRESENTATIVE CAPACITY, SHALL NOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS CLAUSE; (II) INTEREST PAID BY THE FIRM TO SUCH INDIV IDUAL AS PARTNER IN A REPRESENTATIVE CAPACITY AND INTEREST PAID BY THE FI RM TO THE PERSON SO REPRESENTED SHALL BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS CLAUSE. EXPLANATION 2.WHERE AN INDIVIDUAL IS A PARTNER IN A FIRM OTHERWISE THAN AS PARTNER IN A REPRESENTATIVE CAPACITY, INTER EST PAID BY THE FIRM TO SUCH INDIVIDUAL SHALL NOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS CLAUSE, IF SUCH INTEREST IS RECEIVED BY HIM ON BEHALF, OR FOR THE BENEFIT, OF ANY OTHER PERSON. EXPLANATION 3.FOR THE PURPOSES OF THIS CLAUSE, BOOK-PROFIT MEANS THE NET PROFIT, AS SHOWN IN THE PROFIT AND LO SS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR, COMPUTED IN THE MANNER LAID DOWN IN CHAPTER IV-D AS INCREASED BY THE AGGREGATE AMOUNT OF THE RE MUNERATION PAID OR PAYABLE TO ALL THE PARTNERS OF THE FIRM IF SUCH AMOUNT HAS BEEN DEDUCTED WHILE COMPUTING THE NET PROFIT. EXPLANATION 4.FOR THE PURPOSES OF THIS CLAUSE, WORKING PARTNER MEANS AN INDIVIDUAL WHO IS ACTIVELY ENGAGED IN COND UCTING THE AFFAIRS OF THE BUSINESS OR PROFESSION OF THE FIRM OF WHICH HE IS A PARTNER;] 16.4 IT IS UNDISPUTED FACT THAT THE ASSESSEE CLAIME D THE INTEREST EXPENSES ON THE CAPITAL OF THE PARTNERS WHO WERE CONTINUING AS ON 31-3-2006. THUS IT IS CLEAR THAT THE PARTNERS RETIRED FROM THE FIRM WERE NOT PAID ANY INTEREST ON THEIR CAPITAL UP-TO THE DATE OF THEIR RETIREMENT . IT IS ALSO A FACT ON ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 20 - RECORD THAT THE INTEREST ON PARTNERS CAPITAL WAS P AID AS PER THE DEED OF THE PARTNERSHIP TO THE CONTINUING PARTNERS. 16.5 THERE IS NO PROVISION UNDER THE ACT TO DISALLO W THE INTEREST ON THE PARTNERS CAPITAL CONTINUING IN THE FIRM IN THE EVE NT THAT THE INTEREST WAS NOT PAID TO THE RETIRING PARTNERS. THUS WE HOLD THA T THERE WAS NO NON- COMPLIANCE OF THE PROVISION OF SECTION 40(B) OF THE ACT WHICH ENTITLES THE FIRM FOR DEDUCTION OF INTEREST EXPENSES ON THE PART NERS CAPITAL. 16.6 WE ALSO NOTE THAT THE INTEREST PAID TO THE PAR TNERS IS TAXABLE AS BUSINESS INCOME IN THEIR HANDS. THUS ANY DISALLOWAN CE TO THE FIRM WILL LEAD TO DOUBLE TAXATION OF THE SAME INCOME I.E. IN THE HANDS OF THE FIRM AS WELL AS ITS PARTNERS. THERE WAS NO ALLEGATION OF TH E AO THAT THE PARTNERS CONTINUING IN THE FIRM HAVE NOT SHOWN ANY INTEREST INCOME IN THEIR INDIVIDUAL HANDS. IN VIEW OF ABOVE, WE DO NOT SEE A NY REASON TO INTERFERE IN THE FINDING OF LD. CIT(A) AND ACCORDINGLY WE DISMISS THE GROUND OF APPEAL OF REVENUE. NOW WE TAKE UP THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 1268/RJT/2010 17. THE ONLY ISSUE RAISED BY ASSESSEE IN THIS APPEA L IS THAT LEARNED CIT -A ERRED IN CONFIRMING THE ADDITION OF RS.45,08,997 /- ON ACCOUNT OF SUPPRESSION OF VALUE OF CLOSING STOCK. ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 21 - 18. THE AO DURING THE ASSESSMENT PROCEEDING OBSERVE D THAT THE VALUE OF THE PHYSICAL STOCK FOUND AT THE TIME OF SURVEY W AS RS. 60,33,929/- WHEREAS THE ASSESSEE SHOWN THE CLOSING STOCK AT RS. 51,04,503/- IN THE TRADING ACCOUNTS FILED BY ASSESSEE. HOWEVER THE SUR VEY TEAM WORKED OUT THE VALUE OF THE CLOSING STOCK IN THE TRADING ACCOU NT PREPARED AT THE TIME OF SURVEY IS RS.1,26,13,508/- . 18.1 SINCE ASSESSEE HIMSELF DURING THE SURVEY PROCE EDINGS ADMITTED THE DIFFERENCE OF CLOSING STOCK TO THE TUNE OF RS.30 LA CS, AO OBSERVED THE DIFFERENCE OF RS.45,08,997/-(1,26,13,508 - 30,00,00 0 - 51,04,503) BETWEEN THE CLOSING STOCK AS PER TRADING ACCOUNT ON THE DATE OF SURVEY AND IN THE AUDITED BOOKS OF ACCOUNTS OF ASSESSEE. T HUS THE ASSESSING OFFICER ADDED RS.45,08,997/- TO THE TOTAL INCOME OF ASSESSEE AS SUPPRESSION OF CLOSING STOCK. 19. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO LD. C IT-A WHO CONFIRMED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER: 5.1 I HAVE CAREFULLY CONSIDERED THE MATERIAL FACTS WITH REGARD TO THIS ADDITION, ACCORDING TO THE ASSESSING OFFICER, THE D IFFERENCE IN STOCK WORKED OUT TO RS.45,08,997/- [(I.E., RS. 1,26,13,50 0 - RS 51,04,503 (AS PER BOOKS)-RS 30.00,000 (OFFERED AS UNRECORDED SALE S)]. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE AR OF THE APPE LLANT SUBMITTED THAT, THE DIFFERENCE IN STOCK AS ON THE DATE OF SURVEY WA S DULY ACCOUNTED FOR BY BIFURCATING THE TRADING ACCOUNT TILL THE DATE OF SURVEY AND POST SURVEY PERIOD. THUS, AS AT 22.11.2005, THE DIFFERENCE IN S TOCK WAS DULY ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 22 - ACCOUNTED FOR AS CLOSING STOCK AND AS ON 23.11.2005 , THE SAME WAS SHOWN AS OPENING STOCK AND THE FINAL CLOSING STOCK AS ON 31.3.2006 TAKES CARE OF THIS EFFECT AND HENCE NO ADDITION REM AINS I HAVE CONSIDERED HIS CONTENTION, BUT THE SAME DOES NOT AP PEAR CONCEIVABLE. ON THE DAY OF SURVEY, THERE WAS DIFFERENCE IN STOCK TO THE EXTENT OF RS.75,08,997/-(RS 1,26,13,500 MINUS RS.51,04,503). THIS DEFICIT STOCK REPRESENTED UNRECORDED SALES. AS PART OF THIS DEFIC IT, DID THE ASSESSEE MAKE ADMISSION OF UNRECORDED SALES TO THE TUNE OF R S 30,00,000/- DURING THE COURSE OF SURVEY. HOWEVER, FOR THE REMAI NING PART, IT IS THE CONTENTION OF THE AR OF THE APPELLANT THAT THE SAID DIFFERENCE AROSE DUE TO RATE DIFFERENCE AND THAT, THERE IS NO DIFFERENCE IN THE PHYSICAL STOCK. HOWEVER, THIS CONTENTION OF THE AR OF THE APPELLANT OF THE APPELLANT IS NOT SUPPORTED BY ANY EVIDENCE. IN THE ABSENCE OF AN Y SUCH EVIDENCE, THE ENTIRE DIFFERENCE OF RS. 75,08,997/-OUGHT TO RECEIV E THE SAME TREATMENT AS THAT RECEIVED BY RS 30,00,000/- (I.E., REPRESENT ING UNRECORDED SALES). SINCE THE AMOUNT OF RS.30,00,000/- IS INCLUDED IN T HE AMOUNT OF RS,75,08,997/-, AN AMOUNT OF RS.45.08.997/- ADDED B Y THE ASSESSING OFFICER IS CONFIRMED ON THIS SCORE.. HENCE, THIS GR OUND OF APPEAL IS DISMISSED. BEING AGGRIEVED BY THE ORDER OF LD. CIT (A) ASSESSE E IS IN APPEAL BEFORE US. 20. AT THE OUTSET THE LD. AR AGREED TO THE ADDITION ON ACCOUNT OF SUPPRESSION IN CLOSING STOCK. HOWEVER LD. AR CONTEN DED THAT THE CLOSING STOCK BECOMES THE OPENING STOCK OF THE SUBSEQUENT Y EAR. THUS THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE PRAYED B EFORE US TO PROVIDE THE DIRECTION TO THE AO TO GIVE EFFECT OF SUCH ADDI TION IN CLOSING ACCOUNT IN THE SUBSEQUENT YEAR AS PER THE PROVISIONS OF LAW AND AS PER THE ACCOUNTING PRINCIPLES. ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 23 - 21. ON THE OTHER HAND THE LD. DR SUPPORTED THE ORDE R OF AUTHORITIES BELOW. 22. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE ISSUE IN THE INSTANT CASE RELATES TO THE ADDITION MADE BY AO ON ACCOUNT OF DIFFERENCE FOUND BETWEEN V ALUE OF CLOSING STOCK IN TRADING ACCOUNT PREPARED BY THE SURVEY TEA M AT THE TIME OF SURVEY AND CLOSING STOCK IN TRADING ACCOUNT AS PER BOOKS OF ACCOUNT OF ASSESSEE. 22.1 IN THIS REGARD LD. AR AGREED TO THE ADDITION O N ACCOUNT OF SUPPRESSION IN CLOSING STOCK. SINCE THE LD.AR DID N OT ARGUE ON THIS GROUND, WE CONFIRMED THE ADDITION OF RS. 45,08,997/ - AND DISMISS THE GROUND OF APPEAL RAISED BY ASSESSEE. 22.2 HOWEVER AT THE SAME TIME WE ALSO NOTE THAT AS PER ACCOUNTING PRINCIPLE STOCK OF CLOSING PERIOD IS SHOWN IN CR. S IDE OF TRADING ACCOUNT AND THE SAME STOCK BECOMES THE STOCK OF NEXT OPENIN G PERIOD WHICH IS SHOWN AS DR. SIDE OF TRADING ACCOUNT. ACCORDINGLY, FOLLOWING THE ABOVE ESTABLISHED ACCOUNTING PRINCIPLE WE CONCUR WITH THE CONTENTION MADE BY AR. THUS WE DIRECT THE AO TO GIVE EFFECT OF SUCH IN CREASED CLOSING STOCK IN THE OPENING STOCK OF ASSESSEE IN SUBSEQUENT YEAR AS PER THE PROVISIONS ITA NOS.1268 & 1336/RJT/2010 SAGAR PLOY PACK INDUSTRIES (CROSS APPEALS) A.Y 2006-07 - 24 - OF LAW. HENCE, GROUND OF APPEAL RAISED BY ASSESSEE IS DISMISSED IN TERMS OF ABOVE. 23. IN THE RESULT, BOTH THE APPEALS FILED BY THE RE VENUE AND ASSESSEE ARE DISMISSED. THIS ORDER PRONOUNCED IN OPEN COURT ON 18/09/2018 SD/- SD/- JKTIKY ;KNO JKTIKY ;KNO JKTIKY ;KNO JKTIKY ;KNO OLHE VGEN OLHE VGEN OLHE VGEN OLHE VGEN U;KF;D LNL; YKS [KK LNL; U;KF;D LNL; YKS [KK LNL; U;KF;D LNL; YKS [KK LNL; U;KF;D LNL; YKS [KK LNL; (RAJPAL YADAV) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 18/09/2018 PRITI YADAV, SR.PS / COPY OF THE ORDER FORWARDED TO : 1. '' / THE APPELLANT 2. %&'' / THE RESPONDENT. 3. * + , -+ / CONCERNED CIT 4. , -+ ( ) / THE CIT(A)- IV, AHMEDABAD. 5. ./ 0 %+1 , , /DR,ITAT, RAJKOT 6. 0 2 3 4 / GUARD FILE. / BY ORDER, & .+ %+ //TRUE COPY// / ( DY./ASSTT.REGISTRAR) , / ITAT, RAJKOT