M/s Ginni Filaments Ltd., Mathura V. A.C.I.T., Range-3, Mathura

ITA 173/AGR/2013

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 2810 (ITAT-AGRA)
• Duration Of Justice: 6 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-09-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 26-08-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 24-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Gross profit estimation; Rejection of books of accounts; Related party transaction; Depreciation; Principle of natural justice; Rule of consistency; Fair market value; TDS; Set aside
• Section: 43B; 142(1); 234B; 80IB; 145; 37; 144

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, AGRA BENCH, AGRA BEFORE : SHRI LALIET KUMAR, JUDICIAL MEMBER AND DR. MITHA LAL MEENA, ACCOUNTANT MEMBER ITA NO. 173/AGR./2013 ASSESSMENT YEAR: 2008-09 M/S. GINNI FILAMENTS LTD., 110 K.M. STONE DELHI MATHURA ROAD, CHHATA, DISTT. MATHURA. PAN-AABCG0942K (APPELLANT) VS. A.C.I.T., RANGE - 3, MATHURA. (RESPONDENT) APPELLANT BY SH. R.S. SINGHVI, C.A. RESPONDENT BY SH. WASEEM ARSHAD, SR. DR ORDER PER LALIET KUMAR, J.M.: PRESENT APPEAL IS BEING FILED BY THE ASSESSEE AGGRI EVED FROM THE ORDER OF THE LD. CIT(A) DATED 07.12.2012 ON THE FOLLOWING CONCIS E GROUNDS : 1. BECAUSE, UPON DUE CONSIDERATION OF FACTS AND IN THE OVERALL CIRCUMSTANCES OF THE CASE 'CIT(A)' HAD FALLEN IN ERROR OF FACT AND IN LAW IN PROCEEDING TO PASS APPELLATE IN AN EX-PARTE MANNER WITHOUT DUE CONSIDE RATION OF MATERIAL FACTS AVAILABLE ON RECORDS OF THE AUTHORITIES BELOW. 2. (A) BECAUSE, UPON DUE CONSIDERATION OF FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN MA KING ADDITION OF RS.7,31,07,000 AFTER REJECTING THE MANUFACTURING/TRA DING RESULTS AS WERE DERIVED FROM THE ACCOUNTS, MAINTAINED ON REGULAR BA SIS WHICH WERE DULY AUDITED UNDER SECTION 44AB OF THE 'ACT' AND THE AUDITOR HAS FURNISHED UNQUALIFIED AUDIT REPORT CERTIFYING THE CORRECTNESS IN THE ACCOUNTS. DATE OF HEARING 08.08.2019 DATE OF PRONOUNCEMENT 02.09 .2019 ITA NO. 173/AGR/2013 2 (B)BECAUSE, THE AUTHORITIES BELOW HAD TAKEN THE EST IMATED RATE OF GROSS PROFIT WITHOUT CONSIDERING THE FACTS OF THE CASE, EXPLANAT IONS FURNISHED BY THE APPELLANT AND EVIDENCES AS WERE BROUGHT ON RECORDS DURING THE COURSE OF HEARING. (C) BECAUSE, IN ANY VIEW OF THE MATTER, REJECTION O F ACCOUNTS DO NOT ISPO FACTO GIVES RISE TO THE JURISDICTION TO THE 'AO' TO MAKE ADDITION IN THE GROSS PROFIT AS FAIRLY SHOWN BY THE 'APPELLANT' IN THE LIGHT OF LAW LAID DOWN BY THE HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS GOTAN LIM E KHANIJ UDYOG REPORTED IN (2002) 256 ITR 243(RAJ.). 3. BECAUSE, THE AUTHORITIES BELOW ERRED ON FACTS IN MAKING AND SUSTAINING ADDITION OF RS. 12,26,645/- ON ACCOUNT OF NOTIONAL GAIN ON FOREIGN CURRENCY AS INCOME WITHOUT CONSIDERING THE FACTS THAT THE SAME IS UNREALIZABLE AND NOTIONAL. 4. BECAUSE, THE AUTHORITIES BELOW HAD FALLEN IN ERR OR IN DISALLOWING PRIOR PERIOD EXPENSES AMOUNTING TO RS. 13,52,866/- AND TAXING PR IOR PERIOD INCOME WITHOUT CONSIDERING THE NORMAL PRUDENCE ACCOUNTING SYSTEM A N ERRONEOUS INTERPRETATION OF LAW AND WITHOUT APPRECIATING THAT ACCRUALS EVENT OF THE SAME HAS TAKEN PLACE IN CURRENT YEAR. 5.BECAUSE, THE AUTHORITIES BELOW HAD FALLEN IN ERRO R IN MAKING ADDITION OF RS.29,11,000/- TOWARDS NOTIONAL INCOME ON ACCOUNT O F RENT OF MACHINES WITHOUT CONSIDERING THE FACTS THAT THE SAME ARE NOT REALIZE D AND IS NOT REALIZABLE. 6. BECAUSE, THE AUTHORITIES BELOW HAD FALLEN IN ERR OR IN DISALLOWING DEFERRED REVENUE EXPENSES AMOUNTING TO RS.19,67,582/- WITHOU T CONSIDERING THE FACTS THAT THE SAME WAS NEVER CLAIMED IN EARLIER YEARS BY THE ASSESSEE AND THE SAME IS BEING PARTLY CLAIMED ON YEAR TO YEAR BASIS IN PART AND IS BEING ALLOWED ACCORDINGLY CONSISTENTLY. 7. BECAUSE, ON DUE CONSIDERATION OF FACTS AND IN TH E OVERALL CIRCUMSTANCES OF THE CASE THE ID CIT(A) OUGHT TO HAVE GIVEN CLEAR CUT FINDING IN ALLOWING THE LOSS ON MERGER OF COMPANIES FOR THE PERIOD 01.1 2.2007 T O 31.03.2008. 8. BECAUSE, THE 'AO' HAS ERRED IN GIVING CREDIT OF TDS BY RS. 10,34,853/- INSTEAD OF RS. 13,81,255/- AS CLAIMED BY THE ASSESSEE IN TH E REVISED COMPUTATION OF INCOME. ITA NO. 173/AGR/2013 3 9. BECAUSE, WHILE MAKING THE ASSESSMENT THE 'AO' AN D WHILE SUSTAINING THE ADDITION THE 'CIT(A)' MADE VARIOUS OBSERVATIONS/CONC LUSIONS WHICH ARE CONTRARY TO FACTS AVAILABLE ON RECORDS. THE FINDINGS RECORDED IN THIS ASPECT ARE WHOLLY PERVERSE AND INADMISSIBLE IN LAW. WHILE MAKING AND SUSTAINING THE ADDITION SUBMISSION MADE AND EVIDENCES FILED HAVE BEEN REJEC TED ARBITRARILY. 10. BECAUSE, THE 'APPELLANT' DENIES LEVY OF INTERES T UNDER SECTION 234B & 234C OF THE 'ACT'. 11. BECAUSE, THE ORDER APPEALED AGAINST IS CONTRARY TO THE FACTS, LAW AND PRINCIPLES OF NATURAL JUSTICE. 2. EFFECTIVELY GROUND NO. 2(A) TO 2(C) PERTAIN TO REJE CTION OF BOOKS OF ACCOUNT AND ESTIMATION OF GROSS PROFIT @ 16% AS AGA INST 13.96% DISCLOSED BY THE ASSESSEE. 3. APROPOS THESE GROUNDS LD. AR FOR THE ASSESSEE HA S DRAWN OUR ATTENTION TO PAGE 7 OF THE ASSESSMENT ORDER TO THE FOLLOWING EFF ECT : PERUSAL OF ABOVE MENTIONED TABLE REVEALS THAT - 1. PRODUCTION LOSS AS SHOWN IN TABLE 'A' OF THE CU RRENT YEAR IS 92.7 % HIGHER THAN THAT OF A.Y. 2007-08. IT IS 81.97% HIGHER THAN THAT OF A.Y. 09-10. 2. CONSUMPTION OF PROCESSED FABRIC IN PRODUCTION O F GARMENTS VARIES FROM 1.578 KG. PER GARMENT IN A.Y. 2007-08 TO 0.268 KG. IN A.Y. 2009-10 DURING THE YEAR UNDER CONSIDERATION IT IS 0.33 KG. 3. COUNT WISE DETAILS OF PRODUCTION CONSUMPTION, S ALES ETC. OF YARNS HAS NOT BEEN MAINTAINED BY THE ASSESSEE. 4. VALUATION OF STOCK IS NEITHER AT COST OR MARKET PRICE AS CAN BE SEEN FROM THE ABOVE TABLES. 5. PERUSAL OF THE ABOVE CHART REVEALS THAT AVERAGE COST OF YARNS COMES TO RS. 163.66 PER KG, WHEREAS THE ASSESSEE IS MAKING SALES @ 95.05. COST OF PROCESSED FABRICS COMES TO RS. 317.78 AGAINST THE AVERAGE SAL E PRICES OF RS.257.94 PER KG. ITA NO. 173/AGR/2013 4 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A S DISCUSSED ABOVE, MANUFACTURING/TRADING RESULTS AS SHOWN BY THE ASSES SEE CANNOT BE ACCEPTED. BOOKS OF ACCOUNT ARE LIABLE TO BE REJECTED UNDER SE CTION 145(3) OF INCOME TAX ACT AND SALES HAVE TO BE ESTIMATED BY ADOPTING APPR OPRIATE G.P. RATE. THERE IS HUGE FALL IN G.P. RATE AS COMPARED TO IMMEDIATELY P RECEDING YEAR. THIS IS A FACT THAT COTTON PRICES HAVE INCREASED SUBSTANTIALLY. OT HER REASONS AS STATED BY THE ASSESSEE CANNOT BE TOTALLY IGNORED. BUT THE FACT RE MAIN THAT THE ASSESSEE IS SELLING GOODS AT PRICES LOWER THAN ITS COST. THE AS SESSEE HAS ALSO MADE SALES OF SOME ITEMS AT PRICES LOWER THANITS PURCHASE PRICE. THERE IS NOTHING ON RECORD TO SNOW THE ASSESSEE HAD ENTERED IN LONG TERM CONTRACT TO MAKE SALES AT PRICES LOWER THAN ITS COST. IN THESE CIRCUMSTANCES ABNORMA LLY LOW SALE PRICE CANNOT BE ACCEPTED. THE ACCOUNT SUFFERS FROM INFIRMITIES AS DI SCUSSED ABOVE. KEEPING IN VIEW THE REPLY FILED BY THE ASSESSEE FORM TIME TO T IME, IT WOULD BE APPROPRIATE TO ALLOW SOME DISCOUNT IN G.P. RATE WHILE ADOPTING G.P . RATE OF EARLIER YEAR. IN A.Y. 2007-08 THE ASSESSEE HAS SHOWN G.P. RATE OF 20.71 % AND IN THE A.Y. 2009-10 G.P. RATES IS 15.80%. IN THE CURRENT YEAR G.P. RATE IS 1 3.96%. IF G.P. RATE OF THE CURRENT YEAR IS TAKEN AT 16 % IT WILL BE FULLY JUSTIFIED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. 4. IT WAS SUBMITTED BY THE LD.AR THAT THE AO HAD WR ONGLY REJECTED THE BOOKS OF ACCOUNT AND THEREAFTER HAD COMPUTED THE GROSS PROFI T @ 16%. IT WAS SUBMITTED THAT ON APPEAL BEFORE THE LD. CIT(A), THE LD. CIT(A) HAD ALSO FOLLOWED THE DECISION OF THE ASSESSING OFFICER AND IN PARAGRAPH NO. 5.3 HE HAD CONCLUDED AS UNDER : 5.3 I HAVE CONSIDERED ALL THESE OBJECTIONS TAKEN B Y THE APPELLANT IN THE FIRST GROUND, HOWEVER, I FIND THAT NEITHER IN THE STATEME NT OF FACTS, NOR IN THE GROUNDS TAKEN, NO REASON HAS BEEN GIVEN FOR SELLING CERTAIN ITEMS AT PRICE LESS THAN ITS COST. THE OBJECTIONS RAISED IN THE GROUND HAVE ALSO BEEN FOUND TO BE VERY BRIEF AND GENERAL IN NATURE AND NO SUPPORTING DOCUMENTS, DATA OR FIGURES HAVE BEEN MENTIONED SHOWING THAT THE DECISION OF THE AO WAS W RONG. IN ORDER TO SUBSTANTIATE THE OBJECTIONS TAKEN IN THIS GROUND, T HE APPELLANT HAS ALSO BEEN PROVIDED OPPORTUNITY TO APPEAR BEFORE ME TO SHOW FR OM THE RECORD AND ALSO PRODUCE THE RELEVANT DOCUMENTS TO PROVE THAT DATA T AKEN BY THE AO WHILE DRAWING HIS CONCLUSION IN THE ASSESSMENT ORDER ABOU T INCREASE IN THE PRODUCTION COST AND SALE OF CERTAIN ITEMS AT A PRICE LESS THAN THE COST ARE CONTRARY TO THE FACT. BUT NO SUCH ATTEMPT HAS BEEN MADE BY THE APPE LLANT COMPANY, EVEN NO WRITTEN SUBMISSION HAS BEEN FILED GIVING DETAILS AN D SHOWING THAT THE CONCLUSION ITA NO. 173/AGR/2013 5 DRAWN BY THE AO WAS WRONG. THEREFORE, I HAVE ACCEPTE D THE CONCLUSION DRAWN BY THE AO ABOUT NON-MAINTENANCE OF BOOKS OF ACCOUNT BY THE ASSESSEE(APPELLANT) PROPERTY SHOWING CORRECT POSITION OF MANUFACTURING AND TRADING RESULTS AND HENCE, I CONFIRM THE DECISION OF THE AO REJECTING T HE BOOKS OF ACCOUNT U/S.145(3) OF THE I.T. ACT. HAVING CONFIRMED THE REJECTION OF B OOKS OF ACCOUNT BY THE AO, I HAVE ALSO FOUND THAT THE AO HAS REASONABLY ESTIMATE D THE GROSS PROFIT RATE AT 16% AFTER TAKING INTO ACCOUNT THE GP RATE DISCLOSED BY THE ASSESSEE(APPELLANT) IN THE PREVIOUS ASSESSMENT YEAR AS WELL AS IN THE S UBSEQUENT YEAR AND HENCE, I DO NOT FIND ANY INFIRMITY IN ESTIMATION OF PROFIT BY T HE AO AND MAKING THE REQUISITE ADDITION OF RS.7,31,07,000/- ON ACCOUNT OF SHOWING LOW GP RATE AND, THEREFORE, THE ADDITION OF RS.7,31,07,000/- IS CONFIRMED AND A CCORDINGLY, GROUND NO.1 IS DISMISSED. 5. IT WAS SUBMITTED THAT DURING THE ASSESSMENT PROCEED INGS, THE ASSESSEE HAD PRODUCED THE BOOKS OF ACCOUNT CONSISTING OF AUDITED BALANCE SHEET AND TAX AUDIT REPORT, COST AUDIT REPORT AND OTHER DOCUMENTS AS CA LLED UPON BY THE ASSESSING OFFICER AND THERE IS NO REASON FOR THE ASSESSING OF FICER TO REJECT THE BOOKS OF ACCOUNT. 5.1 BEFORE THE LD. CIT(A), THE ASSESSEE HAD GIVEN P OINT-WISE REBUTTAL TO THE OBJECTION RAISED BY THE ASSESSING OFFICER. SAID OBJ ECTIONS ARE FORMING PART OF THE PAPER BOOK. THE LD. AR HAS SUMMARIZED THE SAME IN T HE WRITTEN SUBMISSIONS IN PARA 6.10 TO THE FOLLOWING EFFECT : 6.10 IN FACT, THE OBSERVATIONS OF THE ASSESSING OFFICER AT PG 7 ARE ARBITRARY, IRRATIONAL AND BASED ON MIS-APPRECIATION OF FACTS. THE POINT WAS REBUTTAL OF THE SAME IS HEREUNDER: IT IS SUBMITTED THAT FIGURES INDICATING RISE I N PRODUCTION LOSS IN TABLE A AT PG 5 OF THE ASSESSMENT ORDER ARE UNCORROBORATED AND IT IS NOT KNOWN FROM WHERE THE ASSESSING OFFICER HAS PICKED UP THESE FIGURES. MOREOVER, THE ASSESSING OFFICER HAS TOTALLY IGNORED THE QUANTITY OF WORK IN PROGRES S WHILE COMPUTING THE PURPORTED PRODUCTION LOSS AND AS SUCH THE VERY BASI S OF CONCLUSION IS INCORRECT ITA NO. 173/AGR/2013 6 AND ERRONEOUS. EVEN OTHERWISE, THE MERE FACT OF INC REASE IN PRODUCTION LOSS IN THE YEAR UNDER REFERENCE PER SE WOULD NOT LEAD TO A NY ADVERSE INFERENCE AS LONG AS THE PRODUCTION DATA IS ACTUAL AND CORRECT. IT MA Y BE APPRECIATED THAT ASSESSING OFFICER HAS NOT DISPUTED THE CORRECTNESS OF OPENING STOCK, PURCHASES, SALES AND CLOSING STOCK AND AS SUCH HYPOTHETICAL AL LEGATION OF PRODUCTION OF LOSS IS HIGHLY ARBITRARY AND MISCONCEIVED. THE AO HAS OBSERVED THAT THERE IS REDUCTION IN CONSUMPTION OF FABRIC IN TABLE B AT PAGE 6 OF THE ORDER. IT IS OBSERVED THAT CONSU MPTION OF FABRIC PER GARMENT HAS REDUCED FROM 1.578 KG IN AY 2007-08 TO 0.33 KG IN CURRENT YEAR. IT IS INCOMPREHENSIBLE AS TO HOW REDUCTION OF CONSUMPTION IS AN INDICATOR OF DEFECT IN BOOKS OF ACCOUNT. IN FACT, THE REDUCTION IN CONSUMP TION IS A FAVOURABLE FACT WHICH SHOWS IMPROVED EFFICIENCY AND RESULTS IN INCR EASE IN PROFIT. THE AO HAS OBSERVED THAT APPELLANT HAS NOT MAIN TAINED COUNT-WISE DETAILS OF PRODUCTION WHICH IS FACTUALLY INCORRECT AS COMPLETE COUNT-WISE DETAILS ARE MAINTAINED WHICH IS CORROBORATED FROM COST AUDIT RE PORT. THE OBSERVATION OF AO REGARDING VALUATION OF ST OCK IS ALSO FACTUALLY INCORRECT. IT IS CLARIFIED THAT STOCK HAS BEEN CONSISTENTLY VA LUED AT COST OR NRV WHICHEVER IS LOWER. THIS POSITION IS CORROBORATED FROM POINT NO. 12(A) OF TAX AUDIT REPORT AT PB PG 38 AS WELL AS NOTE NO. 8 OF AUDITED BALANCE S HEET AT PB PG 27. THE ALLEGATION OF DIFFERENCE BETWEEN COST AND S ALE PRICE OF YARN AS PER TABLE C AND TABLE D AT PG 6 OF THE ASSESSMENT ORDER IS ILL OGICAL AS THE AO HAS ATTEMPTED TO COMPARE COST AND SALE PRICE OF DIFFERE NT QUALITIES OF YARN AND SUCH THE VERY BASIS OF COMPARISON IS PATENTLY WRONG. IN ANY CASE/ IN ABSENCE OF ANY DISPUTE WITH REGARD TO CORRECTNESS OF DATA EXTRACTE D FROM OUR OWN RECORD, THERE COULD BE NO GROUND OR BASIS FOR DRAWING ADVERSE INF ERENCE BY MAKING ERRONEOUS COMPARISONS. 6. ON THE BASIS OF THE ABOVE, IT WAS SUBMITTED THAT FIRSTLY THERE WAS WRONG EXERCISE OF POWER U/S. 145(3) BY THE ASSESSING OFFI CER AND SECONDLY, EVEN IF THERE WERE ALLEGED OBJECTIONS, THOSE OBJECTIONS WERE DULY ANSWERED BY THE ASSESSEE THE ASSESSMENT PROCEEDINGS AS WELL AS IN REMAND PROCEED INGS. THE LD. AR HAS TAKEN US ITA NO. 173/AGR/2013 7 TO THE ORDER PASSED BY THE LD. CIT (A) WHERE THE CO NTENTIONS OF THE ASSESSEE WERE DULY NOTICED BY THE LD. CIT(A). MOREOVER, OUR ATTEN TION WAS DRAWN TO PAGE 32 OF THE PAPER BOOK (ANNUAL REPORT) WHERE THE QUANTITIES, CO ST AND VALUE OF RAW MATERIAL CONSUMED FOR THE ASSESSMENT YEAR 2007-08 WEREMENTI ONED TO THE FOLLOWING EFFECT : 2007-08 QUANTITY AMOUNT RS. IN LACS (E)SALES (I).YARN 225.42 @ 21426.93 (III) PROCESSED FABRICS 14.68## 3786.56 2007-08 KGS IN LACS RS. IN LACS (G) RAW MATERIAL CONSUMED YARN 12.82 2098.16 PROCESSED FABRICS 0.37 117.58 6.1 IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING THE SAME ACCOUNTING METHOD AND THERE WAS NO REASON FOR THE ASSESSING OFFICER TO REJECT THE BOOKS OF ACCOUNT. FURTHER, IT WAS SUBMITTED THA T THE CONCLUSION OF THE ASSESSING OFFICER IS WHOLLY UNSUSTAINABLE. 6.2 IT WAS SUBMITTED THAT ON ACCOUNT OF FALL IN GP RATIO, THE ASSESSING OFFICER IS NOT EMPOWERED TO INVOKE THE PROVISIONS OF SECTION 145(3 ). IT WAS SUBMITTED THAT NO ADDITIONS COULD BE MADE ON ACCOUNT OF ALLEGED DEFEC TS POINTED OUT BY THE ASSESSING OFFICER. THE LD. AR HAS RELIED UPON THE FOLLOWING D ECISIONS : ITA NO. 173/AGR/2013 8 (I). CIT VS. UP STATE FOOD AND ESSENTIAL COMMODITIE S (2014) 221 TAXMAN 16 (ALLAHABAD HC) (II). CIT V. POONAM RANI (2010) 326 ITR 223 (DELHI HC) (III). DCIT V. SUBHASH CHAND AGRAWAL (2013) 58 SOT 122 (ALLD. TRIBUNAL) 7. IT WAS FURTHER SUBMITTED BY THE LD. AR THAT FOR THE ASSESSMENT YEAR 2012-13, THE LD. CIT(A) IN THE IDENTICAL FACTS, DESPITE DECL INE IN GP, HAD ACCEPTED THE GP RATE OF 8.41%. HE HAS DRAWN OUR ATTENTION TO THE TABLE REPR ODUCED IN PARAGRAPH 6.7 OF THE WRITTEN SUBMISSIONS TO THE FOLLOWING EFFECT : A.Y. SALES ACCRETION/ (DECRETION) OF STOCK MATERIAL & MANUFACTURE NGEXP. PAYMENT & BENEFIT TO EMPLOYEE G.P. G.P. RATE ASSESSMENT UNDER 2000-01 15,595.80 -105.82 11,080.18 578.97 3,830.83 24.56% U/S143(3) 2001-02 17,732.39 773.36 13,679.41 700.54 4,125.80 23.27% U/S143(3) 2002-03 17,130.92 -811.42 12,205.08 728.91 3,385.51 19.76% U/S 143 (1) 2003-04 17,433.03 -107.67 12,737.39 781.76 3,806.21 21.83% U/S143(3) 2004-05 19,821.31 258.01 15,169.17 822.22 4,087.93 20.62% U/S 143 (3) 2005-06 18,462.63 -93.30 13,839.95 951.29 3,578.09 19.38% U/S 143 (3) 2006-07 19,042.44 135.02 13,939.33 1,075.90 4,162.23 21.86% U/S 143 (3) 2007-08 22,445.75 752.87 17,185.56 1,357.64 4,655.42 20.74% U/S 143 (3) 2008-09 30,176.50 753.91 24,662.71 2,053.55 4,214.15 13.97% U/S 143 (3) 2009-10 40,805.38 -606.49 31,530.16 2,217.47 6,451.26 15.81% U/S 143 (3) 2010-11 50,720.84 327.04 38,320.82 2,404.81 10,322.25 20.35% U/S 143 (3) 2011-12 69,298.80 5170.08 57,959.74 2,865.75 13,643.39 19.69% U/S 143 (3) 2012-13 71,214.93 -3500.87 48,647.57 2,985.96 16,080.53 8.41% U/S 143 (3)/250 ITA NO. 173/AGR/2013 9 THE PARA 9 OF THE ORDER OF THE LD. CIT(A) FOR ASSE SSMENT YEAR 2012-13 ACCEPTING THE G.P. RATE OF 8.41% BASED ON THE REMAND REPORT, WAS AS UNDER : '9. G.P. ADDITION RS. 82,68,05,337/- THE AO HAS MADE AN ADDITION OFRS. 82,68,05,337/- BY APPLYING THE AVERAGE GP RATE 20.02% WHICH IS INCREASED BY 11.61% OF THE RELEVANT YEAR GP RATE. THE ASSESSEE'S CO. HAD G.P. RATE OF 2035% IN THE A.Y. 2010-11 AND G.P. RATE OF 19.69% IN A.Y. 2011-12. THE SAME HAS FALLEN TO 8.41% IN THE RELEVANT ASSESSMENT YEAR I.E. 2012-13. THE ASSESSEE CO. WAS ASKED TO FILE THE DETAILS REGARDING MONTH WISE SALE AND PURCHASE VIDE NOTICE U/S. 142(1) DATED 30.01.2015. THE ASSESSEE WAS FAILED TO FILE ANY OF THESE DETAILS. I N ABSENCE OF THESE DETAILS THE GENUINENESS OF THE TRADING RESULT DECLARED BY THE ASSESSEE CO. COU LD NOT BE RELIED UPON BY THE AO AND THIS ADDITION HAD BEEN MADE. DURING THE COURSE OF REMAND PROCEEDINGS ASSESSEE CO . FURNISHED A DETAILED SUBMISSION REGARDING ADDITION ON G.P. RATE. IT IS WORTHWHILE T O MENTION HERE THAT AO HAS NOT INDICATED ANY DISCREPANCY IN THE BOOKS OF ACCOUNT, STATUTORY AUDIT REPORT AND ALSO IN TAX AUDIT REPORT ALREADY PLACED ON RECORD. THE AO HAS NOT REJECTED B OOKS OF ACCOUNTS U/S. 145(3) ASSUMPTION BASIS APPLYING G.P. RATE WITHOUT FINDING ANY DISCREPANCY IN BOOKS OF ACCOUNT. THE ASSESSEE CO. HAS MAINTAINED PROPER BOOKS OF ACC OUNT AND ARE AUDITED UNDER COMPANIES ACT AND TAX AUDIT IS ALSO CONDUCTED AS PER THE PROV ISIONS OF INCOME TAX ACT. THE COMPANY IS ALSO SUBJECT TO COST AUDIT AND DULY MAINTAINING COS T RECORD IN COMPANIES WITH COMPANIES ACT. THE DECISION ON THIS ISSUE MAY BE TAKEN IN THE LIGHT OF THE ABOVE DISCUSSION.' SUBMISSIONS OF DR 8. ON THE OTHER HAND, THE LD. DR RELIES UPON THE OR DERS OF THE LOWER AUTHORITIES. IT WAS SUBMITTED THAT THE BOOKS OF ACCOUNT WERE NOT MA INTAINED BY THE ASSESSEE IN PROPER FORM, THEREFORE, AO HAD RIGHTLY REJECTED. H E DREW OUR ATTENTION TO PAGE 7 OF THE ORDER PASSED BY THE ASSESSING OFFICER AS WELL A S THE ORDER OF THE LD. CIT(A) IN PARA 5.1 TO 5.3. ITA NO. 173/AGR/2013 10 9. WE HAVE HEARD THE RIVAL CONTENTIONS OF THE PARTI ES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. BEFORE WE DEAL WITH THE FACTS OF THE CASE WE WOULD LIKE TO MENTION THAT THE ASSESSING OFFICER IS EMPOWERED BY VIRTUE OF SECTION 145(3) TO REJECT THE BOOKS OF ACCOUNT AND MAKE ASSESSMENT ON ESTIMATE BASIS AS PER SECTION 144 OF THE ACT. BUT BEFORE INVOKING THE PROVISIONS OF SECTION 145, IT WAS INCUMBENT UPON THE ASSESSING OFFICER TO RECORD THAT THE BOOKS OF ACCOUNT WERE NOT CORRECTLY MAINTAINED AND WERE NOT COMPLETE AND ALSO TO MENTIO N THAT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE WAS NOT IN ACCO RDANCE WITH THE NORM LAID DOWN BY ICA OR THE CENTRAL GOVERNMENT. FURTHER, IT WAS T HE DUTY OF THE ASSESSING OFFICER TO SHOW THAT THE INCOME WAS NOT COMPUTED BY THE AO IN ACCORDANCE WITH NOTIFIED ACCOUNTING STANDARD. 9.1 IF WE LOOK INTO THE ORDERS OF THE AUTHORITIES B ELOW, THEN WE FIND THAT THELOWER AUTHORITIES HAVE NEITHER POINTED OUT ANY DEFECT IN THE BOOKS OF ACCOUNT OF THE ASSESSEE WITH RESPECT TO THE CORRECTNESS OR COMPLET ENESS (IN FACT, THE AO HAS RELIED UPON THE BOOKS OF ACCOUNT AND USED THE TRANSACTIONS RECORDED IN THE BOOKS OF ACCOUNT TO COME TO THE CONCLUSION THAT THERE WAS DE CREASE IN GP). 9.2 FURTHER THE AO HAS NOT MENTIONED THAT THE METHO D OF ACCOUNTING USED BY THE ASSESSEE WAS CONTRARY TO THE NOTIFIED ACCOUNTING ST ANDARDS AND ALSO HE HAD FAILED TO MENTION THAT THE INCOME COMPUTED WAS CONTRARY TO TH E STANDARD NOTIFIED BY THE AUTHORITIES. ITA NO. 173/AGR/2013 11 9.3 IN OUR UNDERSTANDING, THE GROSS PROFIT/NET PROF IT ARE THE END RESULT REACHED ON THE BASIS OF BOOKS OF ACCOUNT. IN OTHER WORDS, THE GROSS PROFIT OR NET PROFIT ARE THE RESULTANT VALUES ARRIVED BY THE ASSESSEE ON THE BAS IS OF THE MAINTAINING THE BOOKS OF ACCOUNT. MERELY BECAUSE THERE IS DECREASE IN GP MAY BE A REASON TO ALARM AND ALERT THE ASSESSING OFFICER, BUT THE ASSESSING OFFICER HA S TO DO MORE HOMEWORK TO DIG UP THE REASONS FOR DECREASE IN GP/NP AND FOR THAT PURP OSE, IT IS THE DUTY OF THE ASSESSING OFFICER TO POINT OUT THE SPECIFIC DEFECTS AS TO THE CORRECTNESS AND COMPLETENESS OF THE BOOKS OF ACCOUNT. NOTHING HAS B EEN DONE IN THE PRESENT CASE. 10. WHEN WE LOOK INTO THE ORDER OF THE AO, IT IS CLEAR THAT THE ASSESSING OFFICER HAS GIVEN FOLLOWING REASONS FOR REJECTION OF BOOKS OF A CCOUNT AS FALL IN G.P. RATE (PAGE 3 OF AO). THE REASONS FOR FALL IN GP RATE WERE DELINE ATED ON ACCOUNT OF FOLLOWING REASONS: (I). INCREASING RAW MATERIAL PRICE (II). DECREASE IN SALE PRICE THE ASSESSING OFFICER IN TABLES A,B,C,D&E AT PAGE 5 TO 7 HAS MENTIONED THAT THE PRODUCTION OF GRAY FABRICS FROM YARN, PRODUCTION OF GARMENTS FROM PROCESSED FABRICS, COST OF DIFFERENT RAW MATERIAL USED, AVERA GE SALE PRICE OF DIFFERENT ITEMS SOLD BY THE ASSESSEE AND AVERAGE RATE OF OPENING AND CLO SING STOCK OF DIFFERENT ITEMS ARE SHOWN. AFTER RECORDING ALL THIS, THE AO HAS REJECTE D THE BOOKS OF ACCOUNTS OF THE ASSESSEE. ITA NO. 173/AGR/2013 12 10.1 THE ASSESSING OFFICER HAD MENTIONED THE REASON FOR COMING TO THE CONCLUSION FOR INCREASE IN RAW MATERIAL BY COMPARING THE COST OF PURCHASE OF RAW MATERIAL FOR THE PREVIOUS YEARS. NO OTHER INDEPENDENT MATERIAL W AS BROUGHT ON RECORD TO SHOW THAT THE PRICES PAID FOR THE RAW MATERIAL WAS NOT P REVALENT IN THE MARKET OR THERE WAS INTERRELATED PARTY TRANSACTION BY VIRTUE OF WHI CH THE ASSESSEE HAD PAID THE HIGHER PRICE TO THE RELATED PARTY, THEREBY REDUCE T HE PROFIT. SIMILARLY FOR THE DECREASE IN SALE PRICE THE ASSESSING OFFICER HAD CO MPARED THE SALE PRICE OF YARN WHICH HAD RESULTED INTO LOSS. IN FACT WHILE DOING S O THE ASSESSING OFFICER HAD COMPARED THE SALE PRICE OF RAW YARN WITH THE PROCES SED FABRIC. IN THIS CASE ALSO THE ASSESSING OFFICER HAD NOT BROUGHT ON RECORD ANY IND EPENDENT EVIDENCE FOR DECREASING THE SALE PRICE. THE ASSESSING OFFICER HA S NOT BROUGHT ON RECORD THAT THE ASSESSEE HAS MADE A SALE OUT OF BOOKS OR HAVE MADE UNDER INVOICING. IN VIEW OF THE ABOVE ON FACTS ALSO WE DO NOT FIND ANY REASONS FOR REJECTING THE BOOKS OF ACCOUNT BY THE ASSESSING OFFICER. 10.2 IN OUR CONSIDERED OPINION, THE REQUIREMENT OF SECT ION 145(3) MUST BE COMPLIED BY THE ASSESSING OFFICER AND HE HAS TO ME NTION POINTEDLY THAT IN WHAT MANNER AND ON WHAT BASIS, THE CONCLUSION WAS DRAWN BY THE ASSESSING OFFICER THAT THE BOOKS OF ACCOUNT HAVE NOT BEEN CORRECTLY MAINTA INED. ITA NO. 173/AGR/2013 13 10.3 ON THE CONTRARY, IF WE LOOK INTO THE FIGURES PROVI DED IN TABLES A TO E THEN IT IS CLEAR THAT THE SAID TABLE WORK WERECONSTRUCTED BY T HE ASSESSING OFFICER BASED ON THE BOOKS OF ACCOUNTS OF THE ASSESSEE, COST AUDIT REPOR T AND BALANCE SHEET OF THE ASSESSEE. IF THE RECORD IS MAINTAINED BY THE ASSESS EE, THEN IT IS FOR THE ASSESSING OFFICER TO POINT OUT HOW THE MAINTAINED BOOKS OF AC COUNTS WERE CONTRARY TO ACCOUNTING STANDARD OR HOW THE SAME WERE DEFECTIVE. ONCE,THE ASSESSING OFFICER IS TAKING THE SAME FIGURES AS PROVIDED BY THE ASSESSEE IN BOOKS OF ACCOUNT AND IF THE SAID FIGURES GAVE RISE TO DECREASE IN GP RATE, THAN THE DECLINE IN GP CANNOT BE MADE BASIS OF REJECTING THE BOOKS OF ACCOUNT. IN OUR VIE W THE WHOLE EXERCISE OF REJECTION OF BOOKS OF ACCOUNT IS TOTALLY AN EXCESSIVE USE OF POW ER BY THE ASSESSING OFFICER. WE ARE OF THE OPINION THAT ONCE THE ASSESSEE IS MAINTA INING TRUE AND CORRECT ACCOUNTS IN RESPECT TO AFFAIRS OF ITS INDUSTRY THEN THE SAME CA NNOT FORM BASIS FOR REJECTION OF BOOKS OF ACCOUNT. WE MAY RELY UPON T. HE DECISION OF [2013] 40 TAXMANN.COM 284 (GUJARAT)DHIRAJ R RUNGTA* WHEREIN IT WAS HELD THAT THE REJECTED BOOKS OF ACCOUNT CAN NOT FORM BASIS OF ADDITION , SIMILAR VIEW WAS T AKEN IN THE MATTER OF U. P STATE FOOD AND ESSENTIAL COMMODITIES. 221 TAXMAN 16 (ALL) . 10.4 IN THE PRESENT CASE, BASIS OF REJECTION OF REJECTI ON OF ACCOUNTS BY THE ASSESSING OFFICER WAS TOTALLY ERRONEOUS AND UNCALLED FOR. THE ASSESSING OFFICER HAS NOT GIVEN ANY REASON WHICH WOULD FALL WITHIN THE FOUR CORNERS OF THE INGREDIENTS AS STIPULATED U/S. 145 (3) OF THE ACT. ITA NO. 173/AGR/2013 14 11. WE MAY FURTHER MENTION THAT THE BASIS OF MAKING TH E ADDITION ON THE BASIS OF G.P. IS ALSO UNSUSTAINABLE, AS MAKING THE GP ADDITI ON ON THE BASIS OF EARLIER YEAR OR FUTURE YEAR IS NOT CALLED FOR WHEN THE REJECTION OF BOOKS OF ACCOUNT WAS FOUND TO BE UNSUSTAINABLE. AS IN THE PRESENT CASE, WE DO NOT AG REE WITH THE FINDING OF THE LOWER AUTHORITIES WITH RESPECT TO THE REJECTION OF BOOKS OF ACCOUNT AND IN CONSEQUENCE THEREOF, WE HAVE NO HESITATION TO HOLD THAT THE GP RATE OF 16% IS ALSO ERRONEOUS AND LIABLE TO BE SET ASIDE. WE MAY FURTHER MENTION THAT IN THE SIMILAR CIRCUMSTANCES, THE REMAND REPORT WAS SUBMITTED BY THE ASSESSING OFFICE R FOR THE ASSESSMENT YEAR 2012-13 AND THE LD. CIT(A) HAD DELETED THE ADDITION OF RS.82.68 CRORES BASED ON THE REMAND REPORT OF THE ASSESSING OFFICER. 12. BOOKS OF ACCOUNTS MAINTAINED IN REGULAR COURSE OF BUSINESS CANNOT BE REJECTED UNLESS THERE ARE STRONG AND SUFFICIENT REA SONS TO INDICATE THAT THEY ARE UNRELIABLE. HONBLE SUPREME COURT IN THE CASE OF WO ODWARD GOVERNOR INDIA PRIVATE LIMITED [(2009) 312 ITR 254 SC] = [TS-40-SC-2009-O] HELD THAT ...ACCOUNTS REGULARLY MAINTAINED IN THE COURSE OF BUSINESS ARE TO BE TAKEN AS CORRECT UNLESS THERE ARE STRONG AND SUFFICIENT REASONS TO INDICATE THAT THEY ARE UNRELIABLE... 12.1 THE PRIMARY CONDITION FOR REJECTING THE BOOK RESUL TS AS LAID DOWN UNDER SECTION 145 OF THE INCOME-TAX ACT, 1961 IS THAT THE LD. AO SHOULD BE SATISFIED THAT THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE ARE NOT COMPLETE AND CORRECT. AS CAN BE SEEN FROM THE FINDINGS OF THE LOWER AUTHORITIES, TH ERE IS NO INSTANCE OF FALSITY OR ITA NO. 173/AGR/2013 15 INCOMPLETENESS OF THE BOOKS OF ACCOUNT. THE BOOKS O F ACCOUNT REFLECT THE TRUE STATE OF AFFAIRS OF THE ASSESSEE COMPANY. UNDER SUCH CIRC UMSTANCES MERELY BECAUSE THE ASSESSEE COMPANY SOLD ITS PRODUCTS TO ITS SISTER-CO NCERN, AT A PRICE LESSER THAN THE PREVALENT MARKET PRICE ON THE DATE OF SALE, WOULD N OT BE A SUFFICIENT GROUND TO COME TO A CONCLUSION THAT BOOKS OF ACCOUNT OF ASSESSEE C OMPANY WERE NOT COMPLETE OR CORRECT. THIS FINDING CANNOT, IN ANY WAY, WARRANT R EJECTION OF BOOKS OF ACCOUNTS. 12.2 SIMILAR RATIO, UNDER IDENTICAL SET OF FACTS, HAS B EEN LAID DOWN BY THE HONBLE ITAT BANGALORE BENCH IN THE CASE OF SPHOORTI MACHIN E TOOLS (P.) LTD [(2012) 19 ITR 0736 BANG] = [TS-744-ITAT-2012(BANGALORE)-O] IN WHI CH THE HONBLE BENCH HELD THAT ...THE FACT THAT THE ASSESSEE HAS SOLD ITS PR ODUCTS TO ITS SISTER-CONCERNS AT A PRICE LESSER DOWNLOADED FROM THAN THE PRICE AT WHI CH THE SAME PRODUCT IS SOLD TO THE THIRD PARTIES, IN OUR OPINION, WOULD NOT BE A S UFFICIENT GROUND TO COME TO A CONCLUSION THAT THE BOOKS OF ACCOUNT OF THE ASSESSE E ARE NOT COMPLETE AND CORRECT. THERE IS NO EVIDENCE BROUGHT ON RECORD THAT OVER AN D ABOVE THE PRICE SHOWN IN THE BOOKS OF ACCOUNT, THE ASSESSEE RECEIVED SOMETHING M ORE FROM M/S. PRAGATHI AUTOMATION P. LTD. AS RIGHTLY CONTENDED ON BEHALF O F THE ASSESSEE IT IS FOR THE BUSINESSMAN TO DECIDE THE PRICE AT WHICH HE HAS TO SELL ITS PRODUCTS TO ITS CUSTOMERS. THE LAW IS WELL-SETTLED THAT THE REVENUE CANNOT INS IST ON THE WAY IN WHICH BUSINESSMEN SHOULD CONDUCT HIS BUSINESS. THE REVENU E CANNOT COMPEL A ITA NO. 173/AGR/2013 16 BUSINESSMAN TO SELL ITS PRODUCTS AT A PARTICULAR PR ICE, SO THAT THE ASSESSEE DERIVES MAXIMUM PROFIT... 12.3 RELIANCE IS ALSO PLACED ON THE ORDER OF HONBLE P UNJAB & HARYANA HIGH COURT IN THE CASE OF SAIMBHI CYCLES & AUTO INDUSTRIES, LU DHIANA [(2015) 229 TAXMAN 552 P&H] = [TS5397-HC-2014(PUNJAB &HARYANA)-O] WHEREIN THE HONBLE HIGH COURT HAS UPHELD THE FOLLOWING FINDING OF HONBLE ITAT CONTAI NED IN PARA 7 OF THE ORDER. THE SAME IS REPRODUCED FOR THE SAKE OF CONVENIENCE: ...THE ABOVE FINDINGS WERE AFFIRMED BY THE TRIBUNA L VIDE ORDER DATED 29.4.2013, ANNEXURE A.III WITH THE FOLLOWING OBSERVATIONS: '8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. WE FIND THAT FIRST OF ALL THE ASSESSEE IS A CONCERN WHEREIN ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 80IB OF THE ACT @ 25% WHICH WOULD MEAN THAT EFFECTI VE TAX RATE WOULD BE 22.50% WHEREAS THE SISTER CONCERN M/S DARSHAN UDYOG IS REQ UIRED TO PAY TAX @ 30%, THEREFORE, THERE WAS NO INCENTIVE TO MAKE SALES AT LOWER RATE. IN ANY CASE, IN THE DETAILED SUBMISSIONS BEFORE THE ASSESSING OFFICER A ND CIT(A) IT DEMONSTRATED THAT PRACTICALLY NO SALES HAVE BEEN MADE TO OUTSIDE PART IES AND THEREFORE, COMPARISON IS NOT CORRECT. IN ANY CASE, THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. GLAXO SMITHKINE ASIA (P) LIMITED HAS CLEARLY HELD THAT SI NCE THERE WAS NO PROVISION TO MAKE ADDITION ON ACCOUNT OF RECEIPTS WHICH ARE AT L ESS THAN THE FAIR MARKET VALUE, ITA NO. 173/AGR/2013 17 THEREFORE, SUCH ADDITIONS ARE NOT JUSTIFIED. IN THE SE CIRCUMSTANCES, WE FIND NOTHING WRONG WITH THE ORDER OF LEARNED CIT(A) AND WE CONFI RM THE SAME.... 12.4 IN VIEW OF THE ABOVE AND ALSO IN VIEW OF THE FACT THAT THERE WAS NO REJECTION OF BOOKS OF ACCOUNTS, GROUND NOS. 2(A) TO (C) ARE ALLO WED. 13. GROUND NO. 3 IS NOT PRESSED. 13.1 GROUND NO.4 PERTAINS TO DISALLOWANCE OF PRIOR PERIOD EXPENSES. THE LD. AR HAS DRAWN OUR ATTENTION TO PAGE 10 OF THE ASSESSMENT OR DER WHERE THE ASSESSING OFFICER AT SL. (D) HAS DISALLOWED THE AMOUNT OF RS. 13,52,8 66/- ON ACCOUNT OF PRIOR PERIOD EXPENSES. IT WAS SUBMITTED THAT THE ASSESSEE HAS NO T CLAIMED THIS AMOUNT IN THE COMPUTATION OF INCOME AND OUR ATTENTION WAS DRAWN T O PAGE 29 SL. NO. 11 OF THE PAPER BOOK TO THE FOLLOWING EFFECT : 2007-08 2006-07 (RS.IN LACS) (RS.IN LACS) 11.A) PRIOR PERIOD INCOME(EXPENSES) REPRESENTS: DEBIT RELATING TO EARLIER YEARS (15.14) (34.91) CREDIT RELATING TO EARLIER YEARS 14.75 11.13 DEPRECIATION ADJUSTMENT - 0.85 ----------- ----------- (0.39) 22.93) ----------- ----------- FURTHER, IT WAS SUBMITTED THAT THE ASSESSEE HAS BEE N CONSISTENTLY FOLLOWING THIS POLICY IN THE EARLIER YEARS ALSO AND HAS CLAIMED AS ALLOWABLE EXPENSES U/S. 37 OF THE ACT. ITA NO. 173/AGR/2013 18 14. ON THE OTHER HAND, THE LD.DR HAD DRAWN OUR ATTE NTION TO PAGE 12 & 13 OF THE CIT(A) ORDER WHERE THE LD. CIT(A) HAS DISCUSSED IN DETAILS THE ISSUE OF PRIOR PERIOD INCOME AND EXPENDITURE. 15. WE HAVE HEARD THE RIVAL CONTENTIONS OF THE PART IES AND PERUSED THE MATERIAL ON RECORD. PARA 8.2 OF THE LD. CIT(A)S ORDER IS AS UNDER : 8.2 AS I HAVE HELD IN THE PREVIOUS GROUND, DUE TO F OLLOWING OF MERCANTILE SYSTEM OF ACCOUNTING, IF ANY, GAIN OR LOSS IS ARISING TO T HE ASSESSEE(APPELLANT) ON THE LAST DAY OF ACCOUNTING YEAR, THE SAME HAS TO BE TAKEN IN TO ACCOUNT WHILE COMPUTING THE INCOME OF THE ASSESSEE(APPELLANT), SIMILARLY, I N CASE OF CLAIMING OF ANY EXPENSE, IF THE SAME PERTAINS TO THE PREVIOUS YEAR, THESE EXPENSES CANNOT BE ALLOWED DURING THE YEAR UNDER CONSIDERATION AND SUC H EXPENSES SHOULD HAVE BEEN QUANTIFIED IN THE PREVIOUS YEAR ITSELF AND DED UCTION FOR THE SAME SHOULD HAVE BEEN TAKEN. THEREFORE, I FIND THAT THE AO IS CO RRECT IN DISALLOWING THE CLAIM OF PRIOR PERIOD EXPENSES OF RS.13,52,866/-. AS REGA RDS TO PRIOR PERIOD INCOME THOUGH THE APPELLANT HAS MENTIONED IN GROUND NO.4 T HAT THE AO HAS TAXED THE PRIOR PERIOD INCOME, NO SUCH DETAILS HAVE BEEN BROU GHT BEFORE ME ABOUT AMOUNT OF PRIOR PERIOD INCOME TAXED BY THE AO DURING THE Y EAR UNDER CONSIDERATION. HOWEVER, THE AO IS DIRECTED TO EXAMINE FROM THE DET AILS OF INCOME FURNISHED BEFORE HIM WHETHER ANY PRIOR PERIOD INCOME HAS BEEN TAXED IN THIS YEAR AND IF ANY SUCH INCOME HAS BEEN TAXED FOR THIS YEAR, THE S AME SHOULD BE EXCLUDED AND THE ASSESSMENT PROCEEDING OF EARLIER YEAR MAY BE RE OPENED FOR TAXING THE INCOME OF PRIOR PERIOD IN THE RELEVANT ASSESSMENT Y EAR. 16. FROM THE PERUSAL OF THE ABOVE, IT IS CLEAR THAT THE LD. CIT(A) HAS DIRECTED THE ASSESSING OFFICER TO VERIFY FROM THE RECORD WHETHER ANY PRIOR PERIOD INCOME HAS BEEN TAXED IN THE YEAR UNDER CONSIDERATION AND IF I T WAS SO THEN IT SHOULD BE EXCLUDED AND ADDED TO THE RELEVANT ASSESSMENT YEAR AFTER REOPENING THE CASE FOR ITA NO. 173/AGR/2013 19 TAXING THE INCOME OF THE PRIOR PERIOD. IN OUR CONSI DERED OPINION, THE INCOME AND EXPENDITURE ARE REQUIRED TO BE TAXED IN THE YEAR IN WHICH IT WAS ACCRUED AND IF THE INCOME IS CONSIDERED TO BE ACCRUED IN THE YEAR UNDE R CONSIDERATION, MAY BE RELATING TO THE PRIOR PERIOD, THEN ANY EXPENDITURE LAID OUT OR EXPANDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS IS ALSO REQ UIRED TO BE ALLOWED IN THIS YEAR. IN THE PRESENT CASE, IF WE LOOK INTO THE COMPUTATION O F INCOME, THEN IT IS CLEAR THAT THE ASSESSEE HAS NOT TAKEN INTO ACCOUNT THE PRIOR PERIO D EXPENSES IN COMPUTATION OF INCOME. AS THE ASSESSEE HAS NOT TAKEN INTO ACCOUNT THE PRIOR PERIOD EXPENSES FOR THE PURPOSE OF COMPUTATION OF INCOME, THEN THERE WAS NO REASON FOR THE ASSESSING OFFICER TO MAKE DISALLOWANCE OF RS. 13,52,866/-. IN VIEW OF THE ABOVE, THE GROUND RAISED BY THE ASSESSEE IS ALLOWED, AS THERE IS NO O CCASION FOR THE ASSESSING OFFICER TO DISALLOW THE SAME BEING NOT ARISING AND FORMING PAR T OF THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE. 17. GROUND NO. 5 OF THE ASSESSEES APPEAL PERTAINS TO NOTIONAL RENTA L INCOME. THE AR HAS DRAWN OUR ATTENTION TO PAGE 11 OF THE ASSESS MENT ORDER WHERE THE ASSESSING OFFICER HAD ADDED THE AMOUNT OF RS.29,11,000/- AS N OTIONAL RENT FOR THE YEAR UNDER CONSIDERATION. THE SUBMISSIONS OF THE AR ARE THAT T HE APPELLANT HAD LET OUT THE MACHINERY TO M/S. GINNI INTERNATIONAL LTD. (GIL) AN D DISPUTE AROSE BETWEEN THE ASSESSEE AND THE TENANT WHICH LED TO FILLING OF C IVIL SUIT BEFORE THE DELHI HIGH COURT ITA NO. 173/AGR/2013 20 AND THE ASSESSEE IN BALANCE SHEET AT PAGE 29 HAD DI SCLOSED THE PENDENCY OF THE SUIT BEFORE THE DELHI HIGH COURT. NOTE 7 READS AS UNDER : 7. THE COMPANY HAD GIVEN CERTAIN MACHINES VALUING R S.340.08 LACS (WDV AS ON 31.03.2008 RS. 134.78 LACS) ON LOAN AGAINST PAYMENT OF RENT TO M/S. GINNI INTERNATIONAL LTD. (GIL). GIL CONTINUED TO PAY THE AGREED RENT UP TO AUGUST 2000, WHERE AFTER THEY STOPPED PAYING THE SAID RENT. THE S AID MACHINES FORMED PART OF THE OVERALL ASSETS FINANCED BY VARIOUS FINANCIAL INSTIT UTIONS AND HYPOTHECATED TO THEM. THE MACHINES LENT TO GIL WERE WITH THE CONSENT OF THE C OMPETENT AUTHORITIES. DURING THE YEAR 2002-03 GIL CLAIMED THAT THE SAID MACHINES WER E GIVEN TO THEM UNDER HIRE PURCHASE SYSTEM. SINCE THE CLAIM OF GIL IS UNFOUNDE D AND NOT TENABLE IN LAW, AND IN ABSENCE OF RENT FORTHCOMING, THE COMPANY WAS LEFT W ITH NO ALTERNATIVE BUT TO FILE A CIVIL SUIT BEFORE HON'BLE DELHI HIGH COURT FOR RECOVERY O F THE RENT OUTSTANDING RS.98.67 LACS UPTO AUGUST 2003 INCLUDING INTEREST OF RS.11.33 LAC S AND FURTHER RENT @ RS.2.43 LACS PER MONTH FROM SEPTEMBER 2003 ONWARDS. IN VIEW OF T HE FINANCIAL STATUS OF GIL AND THE LEGAL ADVICE THE COMPANY IS CERTAIN TO RECOVER THE OUTSTANDING AMOUNT FROM GIL. AS ACCOUNTING PRUDENCE, THE COMPANY HAS NOT RECOGNI SED INCOME OF RS.29.11 LACS IN PROFIT & LOSS A/C AS RENT ON THE SAID MACHINES DURI NG THE YEAR. 17.1 IT WAS FURTHER SUBMITTED THAT M/S. GIL HAD RE FUSED TO RECOGNIZE ITS LIABILITY TO PAY RENT ON ACCOUNT OF NON-REALIZATION OF RENT AND THAT THE AO HAD ACCEPTED THIS POSITION IN THE PRECEDING AS WELL AS SUCCEEDING YEA R AND NO ADDITIONS WERE MADE ON ACCOUNT OF NOTIONAL RENT. 17.2 FURTHER, IT WAS SUBMITTED THAT AN AMICABLE SET TLEMENT ENTERED BETWEEN THE PARTIES IN THE ASSESSMENT YEAR 2011 FOR THE TOTAL C ONSIDERATION OF RS.2.60 CRORES BASED ON THE COST OF MACHINE AND RENT OF MACHINES A S PLACED AT PAGE 162 OF THE PAPER BOOK. IT WAS SUBMITTED THAT THE ABOVE SAID AM OUNT RECEIVED BY THE ASSESSEE ITA NO. 173/AGR/2013 21 WAS USED BY THE ASSESSEE FOR REDUCING THE BLOCK OF ASSET IN THE ASSESSMENT YEAR 2010-11. 17.3 THE LD. AR RELIES ON THE DECISION OF HONBLE S UPREME COURT IN THE CASE OF CIT VS. EXCEL INDUSTRIES LTD., 358 ITR 295 (SC) AND ALS O IN THE MATTER OF CIT VS. GOYAL MG GASES (P) LTD. 303 ITR 159 (DELHI). 18. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THA T THE ASSESSEE WAS FOLLOWING MERCANTILE METHOD OF ACCOUNTING AND HENCE, THE RENT IS REQUIRED TO BE SHOWN ON ACCRUAL BASIS IN THE BOOKS OF ACCOUNT. 19. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE RENT WAS PAYABLE BY GIL ON ACCOUNT OF MACHINES LET OUT BY TH E ASSESSEE AND THE SAID MACHINES WERE GIVEN TO GIL AFTER TAKING CONSENT FROM THE FI NANCIAL INSTITUTION TO WHOM THE MACHINES WERE HYPOTHECATED. 19.1 IN OUR VIEW, IF GIL WAS NOT LIABLE TO PAY THE RENT, AND THAT POSITION OF GIL WAS ACCEPTED BY THE ASSESSEE, THEN IT WAS NOT REQUIRED TO BE SHOWN IN THE BOOKS OF ACCOUNT. HOWEVER, ONCE THE ASSESSEE IS CLAIMING THE RENT ON ACCOUNT OF LEASING OUT THE MACHINES TO GIL AND GIL IS SUBSEQUENTLY SETTLIN G THE SUIT FILED BEFORE THE DELHI HIGH COURT ON THE BASIS OF MUTUAL SETTLEMENT WHEREB Y THE GIL PAID AN AMOUNT OF RS.2.60 CRORES TOWARDS PAYMENT AGAINST MACHINERY COST, RENT CHARGES ETC . ITA NO. 173/AGR/2013 22 19.2 IN THE OPINION OF BENCH , MERE ASSERTION OF TH E ASSESSEE THAT GIL WAS DENYING THE RENT AND HENCE IT WAS NOT SHOWN IN THE BOOKS A ND THEREFORE ADDITION OF NOTIONAL RENT WAS INCORRECT, IS TOTALLY UNACCEPTABLE. THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM AND THE RENT WAS REQUIRED TO BE PAID ON ACCR UAL BASIS. FURTHER THE LETTER AT PAGE 162 WITH SUBJECT PAYMENT TOWARDS MACHINERY COST, RENT CHARGES ETC. CLEARLY SHOWS THAT THE AMOUNT OF RS.2.60 LACS WERE NOT ONLY TOWARDS BLOCK OF ASSETS, BUT WAS ALSO TOWARDS RENT CHARGES ALSO . THEREFORE, THE STAND OF THE ASSESSEE IS BELIED BY THE LETTER OF THE GIL FILED BY THE ASSESS EE ITSELF . IN VIEW OF THE ABOVE, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER PAS SED BY THE LOWER AUTHORITIES. FURTHER, WE ARE OF THE OPINION THAT MERELY BECAUSE NO NOTIONAL RENT WAS ADDED EITHER IN PRIOR OR SUBSEQUENT YEAR IS NO REASON TO DENY THE ARGUMENTS OF THE LD. DR. EVERY YEAR IS A SEPARATE ASSESSMENT YEAR AND THE PR INCIPLE OF RES JUDICATA DOES NOT APPLY IN THE TAX PROCEEDINGS IS AN ADMITTED POSITIO N IN LAW. 19.3 RELIANCE ON THE JUDGMENT OF CIT VS. EXCEL INDU STRIES BY THE ASSESSEE IS NOT APPLICABLE AS IN THE SAID CASE, THE HONBLE SUPREME COURT MENTIONED THAT THERE WAS NO CORRESPONDING LIABILITY ON THE CUSTOM AUTHORITIE S TO PASS ON THE BENEFIT OF DUTY FREE IMPORTS TO THE ASSESSEE UNTIL THE GOODS ARE ACTUALL Y IMPORTED AND MADE AVAILABLE FOR CLEARANCE AND IN THOSE FACTS, IT WAS HELD AS UNDER : APPLYING THE THREE TESTS LAID DOWN BY VARIOUS DECI SIONS OF THIS COURT, NAMELY, WHETHER THE INCOME ACCRUED TO THE ASSESSEE IS REAL OR HYPOTHETICAL ; WHETHER ITA NO. 173/AGR/2013 23 THERE IS A CORRESPONDING LIABILITY OF THE OTHER PAR TY TO PASS ON THE BENEFITS OF DUTY FREE IMPORT TO THE ASSESSEE EVEN WITHOUT ANY I MPORTS HAVING BEEN MADE ; AND THE PROBABILITY OR IMPROBABILITY OF REALISATION OF THE BENEFITS BY THE ASSESSEE CONSIDERED FROM A REALISTIC AND PRACTICAL POINT OF VIEW (THE ASSESSEE MAY NOT HAVE MADE IMPORTS), IT IS QUITE CLEAR THAT IN FACT NO REAL INCOME BUT ONLY HYPOTHETICAL INCOME HAD ACCRUED TO THE ASSESSEE AND SECTION 28(IV) OF THE ACT WOULD BE INAPPLICABLE TO THE FACTS AND CIRCUMSTANCE S OF THE CASE. ESSENTIALLY, THE ASSESSING OFFICER IS REQUIRED TO BE PRAGMATIC AND N OT PEDANTIC. HOWEVER, WHEN WE LOOK INTO THE RECORD, IT IS CLEAR THAT THE ASSESSEE HAS LET OUT THE MACHINES ON LEASE TO GIL AND THE GIL WAS UNDER LEGA L OBLIGATION TO PAY YEARLY RENT OF RS.29.11 LACS. IN OUR CONSIDERED OPINION, THERE IS AN OBLIGATION OF GIL TO PAY RENT TO THE ASSESSEE IN TERMS OF LEASE AGREEMENT AND FURTHE R IT WAS UNDER OBLIGATION TO RETURN BACK THE ASSETS LEASED TO IT BY THE ASSESSEE . FURTHER THE GIL WHILE ENTERING INTO AMICABLE SETTLEMENT HAD PAID AN AMOUNT OF RS.2 .60 CRORES TOWARDS THE VALUE OF MACHINES AS WELL AS FOR PENDING RENT WHICH CLEARLY SHOWS THAT THE RENTAL INCOME OF THE ASSESSEE WAS NOT A HYPOTHETICAL OR IMAGINARY INCOME, BUT HAD ACCRUED ON ACCOUNT OF USE OF INDUSTRIAL PLANT BY GIL . THEREFO RE, THERE WAS NO ERROR IN THE ORDERS OF THE AUTHORITIES BELOW. 20. GROUND NO. 6 PERTAINS TO DISALLOWANCE OF CLAIM OF DEFERRED REVENUE EXPENSES TO THE EXTENT OF RS. 19,67,582/- IN RESPECT OF PAYM ENT MADE TO FINANCIAL INSTITUTION ON RESTRUCTURING OF LOANS. THE AO CONSIDERED THE DI SALLOWANCE ON THE GROUND THAT DEFERRED REVENUE EXPENSES ARE ONLY ALLOWABLE IN TER MS OF PROVISIONS OF SECTION ITA NO. 173/AGR/2013 24 35DAND THE PAYMENT MADE TO FINANCIAL INSTITUTION IS COVERED U/S 43B OF THE ACT. THE CIT(A) HAS ALSO UPHELD THE DISALLOWANCE. THE CONTEN TION OF THE LD. AR IS THAT THE IDENTICAL CLAIM OF DEFERRED REVENUE EXPENSES ARE BE ING ALLOWED SINCE AY 2003-04 WITHOUT ANY REFERENCE TO PROVISIONS OF SECTION 35D OR 43B OF THE ACT. IT WAS SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION THERE WAS NO FRESH EXPENSES OR NEW CLAIM AND IT IS NOT UNDERSTOOD ON WHAT BASIS, R EFERENCE WAS MADE TO PROVISIONS OF SECTION 35D OR 43B. THE LD. AR FURTHER CLARIFIED THAT THE CLAIM OF DEFERRED REVENUE EXPENSES WAS IN RESPECT OF ADVANCE PAYMENT OF MANAG EMENT FEE, RESTRUCTURING FEE AND OTHER ADMINISTRATIVE EXPENSES TO FINANCIAL INST ITUTIONS SPREAD OVER THE PERIOD OF RESPECTIVE LOANS. THE DETAILS OF DEFERRED REVENUE E XPENSES AND SUPPORTING DOCUMENTS ARE PLACED AT PAPER BOOK PAGES 165-170. T HE EXPENSES HAVE BEEN SPREAD OVER THE PERIOD OF LOAN SO AS TO REFLECT TRUE AND F AIR PICTURE OF PROFIT AND LOSS OF THE COMPANY AND THERE IS ABSOLUTELY NO DISPUTE WITH REG ARD TO GENUINENESS OF THE EXPENSES AND THE ASSESSING OFFICER HAS MERELY DISAL LOWED THE CLAIM ON TECHNICAL GROUND WITHOUT APPRECIATING THE NATURE OF THE CLAIM AND PAST HISTORY AND THE FACT THAT PAYMENTS OF SUCH EXPENSES HAVE ALREADY BEEN MA DE IN AY 2002-03 AND AS SUCH PROVISIONS OF SECTION 43B ARE NOT APPLICABLE. 21. IT WAS FURTHER SUBMITTED BY THE LD. AR THAT IDE NTICAL CLAIM OF EXPENSE HAS BEEN ITA NO. 173/AGR/2013 25 APPELLANT FROM AY 2002-03 ONWARDS AND AS SUCH THE I MPUGNED DISALLOWANCE, IN ABSENCE OF ANY CHANGE IN FACTS, IS IN TOTALLY WRONG AND IN DISREGARD TO PRINCIPLE OF CONSISTENCY. THE FACTUAL POSITION TO THIS EFFECT IS SUPPORTED FROM SCHEDULE 19 OF PROFIT AND LOSS A/C PLACED AT FB PG 26 WHEREIN THE IDENTICAL CLAIM OF DEFERRED REVENUE EXPENSES IN AY 2007-08 HAS BEEN ALLOWED BY THE ASSESSING OFFICER. IT IS THEREFORE, SUBMITTED THAT THE CLAIM OF DEFERRED REV ENUE EXPENSES IS RELATABLE TO EXPENSES ACTUALLY INCURRED AND APPORTIONED OVER THE PERIOD OF LOAN, THE SAME IS IN ACCORDANCE WITH PROVISIONS OF SECTION 37 OF THE INC OME TAX ACT, 1961 PARTICULARLY BASED ON PAST ACCEPTED HISTORY. 22. THE LD. DR, ON THE OTHER HAND, RELIED ON THE OR DERS OF AUTHORITIES BELOW. 23. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT THE IDENTICAL CLAIM OF ASSE SSEE, IN THE SIMILAR FACTS AND CIRCUMSTANCES OF THE CASE, HAS BEEN ACCEPTED BY THE REVENUE AUTHORITIES SINCE 2002- 03 ONWARDS. THERE IS NO REBUTTAL OF THE FACT STATED BY THE ASSESSEE THAT THE IMPUGNED DEFERRED REVENUE EXPENSES ARE RELATABLE TO EXPENSES ACTUALLY INCURRED AND APPORTIONED OVER THE PERIOD OF LOAN. IN VIEW OF THE ABOVE AND FOLLOWING THE RULE OF CONSISTENCY, WE ARE OF THE OPINION THAT THE LD. AUTHORITIES BELOW WERE NOT JUSTIFIED ITA NO. 173/AGR/2013 26 IN DISALLOWING THE CLAIM OF THE ASSESSEE. ACCORDING LY, THE DISALLOWANCE MADE ON THIS COUNT IS LIABLE TO BE DELETED. 24. REST OF THE GROUNDS ARE EITHER GENERAL IN NATUR E OR CONSEQUENTIAL. 25. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND SEPT., 2019. SD/- SD/- (DR. MITHA LAL MEENA) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2 ND SEPT., 2019 *AKS* COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AGRA BENCH, AGRA