The DCIT, Circle-4, Baroda V. M/s. Madanji Meghraj Jewellers Pvt.Ltd., Baroda

ITA 1770/AHD/2009

• Counselvise Citation: 177020514 RSA 2009
• Duration Of Justice: 2 year(s) 3 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 01-09-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 28-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Gross profit estimation
• Section: 143(3)

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, B BENCH . . , ! , '# . $ . %& , ' $ ! BEFORE S/SHRI G.D. AGARWAL, VICE-PRESIDENT AND D.K. TYAGI , JUDICIAL MEMBER) ITA NO.1770/AHD/2009 [ASSTT.YEAR : 2005-06] DCIT, CIR.4 BARODA. /VS. M/S.MADANJI MEGHRAJ JEWELLERS P. LTD. GF 16/17, PANORAMA COMPLEX R.C. DUTT ROAD, BARODA. PAN : AACCM 7940 G ( (( ()* )* )* )* / APPELLANT) ( (( (+%)* +%)* +%)* +%)* / RESPONDENT) ' , - $/ REVENUE BY : SHRI SAMIR TEKRIWAL /0 , - $/ ASSESSEE BY : MS.URVASHI SHODHAN 12 , 03/ DATE OF HEARING : 1 ST SEPTEMBER, 2011 456 , 03/ DATE OF PRONOUNCEMENT : 9 TH SEPTEMBER, 2011 $7 / O R D E R PER G.D. AGARWAL, VICE-PRESIDENT : THIS IS REVENUES APPEAL AGAINST ORDER OF THE COMMISSIONER OF INCOME-TAX (AP PEALS)-III, BARODA DATED 19-3-2009 ARISING OUT OF THE ORDERS OF THE ASSESSIN G OFFICER UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. 2. IN ALL THIS APPEAL BY THE FOLLOWING GROUNDS ARE RAISED: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD.CIT(A) ERRED IN DELETING THE GP OF RS.35,50,786/- IGNORING THE FACT THAT ASSESSEE FAILED TO JUSTIFY THE PAYMENT MADE TO PERS ONS COVERED U/S.40A(2)(B) OF THE ACT, WHEREBY PROFIT OF RS.18,9 3,384/- WAS DIVERTED. 3. AT THE TIME OF HEARING BEFORE US, IT IS STATED B Y THE LEARNED DR THAT THE ASSESSEE DERIVES INCOME FROM THE BUSINESS OF GOLD O RNAMENTS. FOR THE YEAR UNDER APPEAL, THE GP PERCENTAGE OF THE ASSESSEE HAS REDUCED SUBSTANTIALLY AS ITA NO.1770/AHD/2009 -2- COMPARED TO THE LAST YEAR. THAT THE ASSESSEE HAD A CCEPTED THE DEPOSIT FROM VARIOUS ASSOCIATED CONCERNS/RELATIVES IN THE FORM O F GOLD OF 39494.880 GRAMS IN THE PAST. FOR SUCH BORROWINGS, THE INDIVIDUAL ACCO UNT OF THE LENDERS WERE CREDITED WHICH IN TOTAL AMOUNTED TO RS.1,92,10,309/ -. AT THE TIME OF ACCEPTANCE OF DEPOSITS THE ACCOUNT OF THE PERSONS W ERE CREDITED AT THE RATE OF RS.486.00 PER GRAM OF GOLD RECEIVED BY THE ASSESSEE . HOWEVER, THE GOLD WAS RETURNED DURING THE YEAR UNDER CONSIDERATION WHEN T HE RATE OF GOLD WAS RS.534.34 PER GRAMS. THAT THE ASSESSEE HAD ALSO PA ID THE INTEREST AT THE RATE OF 18% PER ANNUM ON THE ABOVE DEPOSIT. THAT WHEN THE GOLD WAS RETURNED, ITS RATE WAS MUCH HIGHER I.E. RS.534.34 PER GRAM. IN THIS P ROCESS, THE LENDERS OF THE GOLD WERE BENEFITED AND THE ASSESSEE SUFFERED THE L OSS. THIS LOSS WAS QUANTIFIED BY THE AO AT RS.18,93,384/- AND HE HELD THAT THE SA ME IS DISALLOWABLE UNDER SECTION 40A(2)(B) BECAUSE THE DEPOSIT OF THE GOLD W AS TAKEN FROM THE RELATIVES/ ASSOCIATED CONCERNS. THE AO ALSO REJECTED THE BOOK S OF ACCOUNTS BECAUSE THE ASSESSEE COULD NOT EXPLAIN THE SUBSTANTIAL FALL IN THE GP SATISFACTORILY AND MOREOVER, THE MINT LOSS CLAMED BY THE ASSESSEE WAS EXCESSIVE. THE AO IN VIEW OF THESE DEFECTS REJECTED THE ASSESSEES BOOKS OF ACCOUNTS AND APPLIED THE GP RATE AS DISCLOSED BY THE ASSESSEE IN THE EARLIER YEAR I.E. 25.58% WHICH RESULTED IN ADDITION OF RS.35,50,786/-. SINCE THE GP ADDITION WAS MORE THAN THE PROPORTIONATE DISALLOWANCE UNDER SECTION 40A(2) (B), THE AO DID NOT MAKE ANY SEPARATE DISALLOWANCE UNDER SECTION 40A(2)(B). THAT THE CIT(A) HELD THAT THE ASSESSEES BOOKS OF ACCOUNTS WERE NOT LIABLE TO BE REJECTED. HE THEREFORE DELETED THE ENTIRE GP ADDITION OF RS.35,50,786/- MA DE BY THE AO. THAT WHEN THE CIT(A) DELETED THE GP ADDITION HE SHOULD HAVE U PHOLD THE DISALLOWANCE PROPOSED TO BE MADE BY THE AO UNDER SECTION 40A(2)( B). HE ALSO SUBMITTED THAT THE AO GAVE ADEQUATE REASONS FOR REJECTING THE BOOKS OF ACCOUNTS. THE APPLICATION OF GP RATE BY THE AO IS FAIR AND REASON ABLE BECAUSE THE AO HAD APPLIED GP AS DISCLOSED BY THE ASSESSEE IN THE LAST YEAR. THE CIT(A) DELETED THE ADDITION WITHOUT APPRECIATING THE FACTS OF THE CASE. HE THEREFORE SUBMITTED ITA NO.1770/AHD/2009 -3- THAT THE ORDER OF THE CIT(A) SHOULD BE REVERSED AND OF THE AO SHOULD BE RESTORED. 4. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTH ER HAND, RELIED UPON THE ORDER OF THE CIT(A) AND SHE HAS STATED THAT THE ASS ESSEES SUBMISSION BEFORE THE CIT(A) IS DULY REPRODUCED BY THE CIT(A) AT PAGE NO. 4.4 OF HIS ORDER. SHE RELIED UPON THE SAME AND SHE ALSO RELIED UPON THE F INDINGS OF THE CIT(A) IN PARA 5.3. OF HIS ORDER. SHE FURTHER STATED THAT TH E DEPOSIT IN THE FORM OF GOLD WAS ACCEPTED WHICH WAS 39,494.880 GRAMS. THE SAME QUANTITY OF GOLD WAS RECEIVED BY THE ASSESSEE AS DEPOSIT AND THE SAME QU ANTITY WAS RETURNED DURING THE YEAR UNDER CONSIDERATION. THAT MERELY BECAUSE THE MARKET RATE OF THE GOLD HAS INCREASED IT CANNOT BE SAID THAT THE ASSESSEE G AVE ANY UNDUE BENEFIT TO THE LENDERS OF THE GOLD. THE DEPOSIT WAS ACCEPTED IN K IND AND RETURNED IN KIND. SO FAR AS THE VARIATION IN THE GP RATE IS CONCERNED, S HE ALSO STATED THAT THE ASSESSEE HAS MAINTAINED REGULAR BOOKS OF ACCOUNTS WHICH ARE DULY AUDITED. NO DEFECT IN THE ASSESSEES BOOKS OF ACCOUNT IS POINTED OUT. ME RELY BECAUSE THE GP RATE HAS REDUCED FROM THE LAST YEAR WOULD BE NOT GROUND FOR REJECTION OF THE BOOKS OF ACCOUNTS. SHE THEREFORE SUBMITTED THAT THE ORDER O F THE CIT(A) SHOULD BE SUSTAINED. 5. WE HAVE CAREFULLY CONSIDERED ARGUMENTS OF BOTH T HE SIDES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE CIT(A) HAS DISCUSSED THE ISSUE AT LENGTH. HE HAS CONSIDERED THE FINDING OF THE AO, SUBMISSIONS OF THE ASSESSEE, RELEVANT CASES LAWS ON THIS ISSUE AND THE REAFTER HAS ARRIVED AT HIS CONCLUSION WHICH ARE RECORDED IN PARA 5.3 OF THE OR DER. FOR READY REFERENCE WE REPRODUCE THE SAME HEREINBELOW: 5.3 I HAVE CONSIDERED THE SUBMISSIONS OF THE COUNS EL AND FACTS OF THE CASE. THE AO REJECTED BOOK RESULT U/S.145 ON THE G ROUND THAT GROSS PROFIT DURING THE YEAR IS LESS THAN LAST YEAR. THE AO ALSO MENTIONED THAT DEPOSITS IN THE FORM OF GOLD WERE RETURNED AT A HIG HER RATE TO RELATED PARTIES BY GIVING THEM DOUBLE BENEFITS. APART FROM THIS, THE ASSESSING OFFICER OBSERVED THAT IN RESPECT OF DIAMOND, THE GR OSS PROFIT IS ONLY ITA NO.1770/AHD/2009 -4- 1.88% AS AGAINST 13.1% LAST YEAR. THE ASSESSING OFF ICER ALSO FOUND MINT LOSS HIGHER ON NEW AND OLD ORNAMENTS. BOOK RESULT W AS REJECTED IN VIEW OF THESE REASONS. HOWEVER, THE APPELLANT SUBMITTED THAT THE ASSESSING OFFICER REJECTED THE BOOKS WITHOUT APPRECIATING THE FACTS OF THE CASE. BOOKS OF ACCOUNT ARE AUDITED U/S. 44AB FOR BOTH THE BRANCHES AND AUDITORS HAVE NOT FOUND ANY DEFICIENCY IN THE BOOKS . IT IS ALSO SUBMITTED THAT REGULAR BOOKS ARE MAINTAINED ALONG WITH STOCK RECORDS SUPPORTED BY BILLS AND VOUCHERS. THEREFORE MERELY BECAUSE THE RE IS VARIATION IN THE PROFIT RATE, IT CANNOT BE SAID THAT BOOKS OF ACCOUN TS DO NOT REFLECT CORRECT AFFAIRS. FURTHER, THE APPELLANT STRESSED THAT THE A SSESSING OFFICER HAS NOT POINTED ANY DEFECTS IN THE BOOKS OF ACCOUNT OR STOC K RECORDS OR VOUCHERS. IN THE ABSENCE OF ANY DEFECTS IN THE RECO RDS MAINTAINED, THE ASSESSING OFFICER CANNOT REJECT THE BOOKS OF ACCOUN T. THE APPELLANT RELIED UPON VARIOUS DECISIONS TO STRE SS ITS POINT. IMPORTANT CASE LAWS FROM JURISDICTIONAL ITAT ARE PU SHPANJALI DYEING AND PRINTING MILLS AND KEY STONE INDIA P. LTD. IN T HESE CASES, IT IS HELD THAT WHEN THE ASSESSEE MAINTAINED COMPLETE BOOKS OF ACCOUNT AND THE AUDITOR HAS NOT POINTED OUT ANY DEFECTS, THE SAME C ANNOT BE REJECTED WITHOUT POINTING OUT SPECIFIC DEFECTS BY THE ASSESS ING OFFICER. IT IS ALSO FIELD THAT REJECTION OF BOOK RESULT ONLY ON THE GRO UND OF LOW GROSS PROFIT IS NOT TENABLE. CONSIDERING THESE DECISIONS, IT IS CLEAR THAT BOOK RESULT CANNOT BE REJECTED ONLY ON THE GROUND OF LOW GROSS PROFIT UNLESS THE ASSESSING OFFICER POINTS OUT SPECIFIC DEFECTS IN TH E MAINTENANCE OF BOOKS OF ACCOUNTS, STOCK RECORDS OR VOUCHERS. IN THIS CAS E, THE ASSESSING OFFICER HAS NOT FOUND ANY DEFECTS IN THE BOOKS OF A CCOUNT OR STOCK REGISTER. HIS REJECTION IS MAINLY ON THE GROUND OF COMPARATIVE LOW PROFIT AND CLAIM OF MINT LOSS. SINCE JURISDICTIONAL ITAT H AS CLEARLY HELD THAT BOOK RESULT CANNOT BE REJECTED IN SUCH SITUATION, T HE ACTION OF THE ASSESSING OFFICER IN REJECTING BOOK RESULT OF THE A PPELLANT ON THE GROUND OF LOW GROSS PROFIT IS NOT UPHELD. THE APPELLANT SUBMITTED DETAILED EXPLANATION TO THE POINTS RAISED BY THE ASSESSING OFFICER. THE REASONS FOR LOW GROSS PROFIT DURING THE YEAR WERE EXPLAINED AS - SUBSTANTIAL INCREASE IN TU RNOVER FROM RS. 1.62 CRORES TO RS.2.82 CRORES, INCREASED JOB WORK INCOME AS COMPARED TO LAST YEAR, LOW MARGIN IN BOTH 22 AND 24 CTS GOLD JEWELLE RY AND VERY LESS QUANTITY OF DIAMOND JEWELLERY SOLD. THE APPELLANT S UBMITTED THAT PROFIT MARGIN DEPENDS ON THE PRODUCT MIXE. PRODUCT MIX FOR THE TWO YEARS WERE DIFFERENT AND THEREFORE THE PROFIT CANNOT BE C OMPARED. AS REGARDS THE ASSESSING OFFICER'S MENTION THAT ON VALUATION O F CLOSING STOCK, ADDITION OF RS.18.54 LACS MADE IN A.Y 2004-05, THE APPELLANT SUBMITTED THAT THE SAID ADDITION WAS DELETED BY MY ID. PREDEC ESSOR VIDE ORDER DATED 23-9-2008. AS REGARDS THE ASSESSING OFFICER'S OBSERVATION REG ARDING ITA NO.1770/AHD/2009 -5- REPAYMENT OF GOLD DEPOSIT, IT WAS SUBMITTED THAT TH E DEPOSIT WAS RECEIVED IN F.Y 2002-03 AT THE VALUE OF 486.40 WHIC H WAS VALUED AT AVERAGE COST OF RS.498/- AT THE END OF F.Y 2003-04. AT THE TIME OF RETURN, THE DEPOSIT WAS RETURNED AT THE ORIGINAL VALUE I.E RS.486.40 PER GM. THE RETURN OF DEPOSIT WAS REPRESENTED BY OPENING STOCK AND THE SAME WAS SHOWN AT RS.486/- ONLY AND NOT RS.534/-. THEREFORE THE CALCULATION OF PROFIT ON THIS ACCOUNT BY THE ASSESSING OFFICER IS NOT CORRECT. SINCE THE DEPOSIT OF GOLD WAS RETURNED AT THE SAME VALUE THER E IS NO QUESTION OF GIVING EXTRA BENEFIT TO THE RELATED PARTIES. FURTHER, THE APPELLANT ALSO SUBMITTED THE COMPARA TIVE COST AND SALES PRICE AND MARGIN OF 22 CT. AND 24 CT GOLD JEW ELLERY IN BARODA AND CALCUTTA FOR BOTH THE YEARS. AS PER THE SAID WORKIN G, THE MARGIN WAS REDUCED ON ACCOUNT OF HIGHER AVERAGE COST. ACCORDIN GLY, THE GROSS PROFIT WAS LOWER. IN PRECIOUS METAL LIKE GOLD, THE PRICE O F WHICH FLUCTUATES VERY WIDELY, THE PROFIT MARGINS ARE BOUND TO BE DIFFEREN T. THE CALCULATION SHOWN BY THE APPELLANT CLEARLY SHOWS THAT THE LESS PROFIT IS ON ACCOUNT OF HIGHER COST DURING THE YEAR. CONSIDERING ALL THE ABOVE, THE APPELLANT JUSTIFIED AND EXPLAINED ALL THE POINTS RAISED BY THE ASSESSING OFFICER. THE REASONS FOR FALL IN G.P ARE ELABORATELY EXPLAINED. SINCE REJECTION OF BOOK RESULT IS NOT UPHELD AND THE REASONS FOR FALL IN G.P ARE FOUND TO BE SAT ISFACTORY, THE ADDITION TO GROSS PROFIT MADE BY THE ASSESSING OFFICER IS DE LETED. 6. AFTER CONSIDERING THE ARGUMENTS OF BOTH THE SIDE S AND THE FACTS OF THE CASE, WE ENTIRELY AGREE WITH FINDINGS OF THE LEARNE D CIT(A). THE ASSESSEES BOOKS OF ACCOUNTS CANNOT BE REJECTED MERELY BECAUSE THE MARGIN OF THE PROFIT IS LOW AS COMPARED TO THE LAST YEAR. WE FIND THAT THE BEFORE THE AO AS WELL AS THE CIT(A), THE ASSESSEE HAS TRIED TO EXPLAIN THE REASO NS FOR THE REDUCTION IN THE RATE OF THE GP. HOWEVER, IN OUR OPINION, EVEN IF T HE EXPLANATION OF THE ASSESSEE FOR FALL IN THE GP RATE IS NOT ACCEPTABLE TO THE AO WHICH BY ITSELF WOULD NOT BE GROUND FOR THE AO TO REJECT THE BOOKS OF ACCOUNTS. THIS MAY LEAD TO DEEP PROBE IN THE ASSESSEES BOOKS OF ACCOUNTS. HOWEVER , THE BOOKS OF ACCOUNTS CAN BE REJECTED ONLY IF SOME DEFECTS ARE FOUND IN THE B OOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE OR IN THE METHOD OF ACCOUNTING FOLL OWED BY THE ASSESSEE. ADMITTEDLY, IN THIS CASE, THE AO HAS NOT POINTED OU T ANY SPECIFIC DEFECT IN THE BOOKS OF ACCOUNTS WHICH MAY JUSTIFY THE REJECTION O F THE SAME. ONE OF THE ITA NO.1770/AHD/2009 -6- DEFECTS POINTED OUT BY THE AO IS ACCEPTANCE OF THE GOLD DEPOSITS FROM RELATIVES IN THE EARLIER YEAR AND THE RETURN OF THE SAME IN T HE YEAR UNDER CONSIDERATION. ON THIS ISSUED ALSO WE AGREE WITH THE FINDING OF TH E CIT(A) THAT THE DEPOSIT WAS ACCEPTED IN THE FORM OF GOLD AND RETURNED IN TH E FORM OF GOLD. MERELY BECAUSE THE RATE OF THE GOLD HAS INCREASED AS COMPA RED TO THE DATE ON WHICH THE GOLD WAS BORROWED WOULD BE NO GROUND TO HOLD THAT T HE ASSESSEE HAS GIVEN UNDUE BENEFIT TO THE RELATIVES. ANOTHER DEFECT POI NTED OUT BY THE AO WAS MORE MINT LOSS AS COMPARED TO LAST YEAR. HOWEVER, IT IS NOT THE CASE OF THE AO THAT THE MINT LOSS DISCLOSED BY THE ASSESSEE IS NOT GENU INE/NOT VERIFIABLE. THEREFORE, WE HOLD THAT MERELY BECAUSE MINT LOSS IS MORE AS CO MPARED TO THE LAST YEAR, WOULD BE NO GROUND FOR REJECTION OF BOOKS OF ACCOUN TS. IN VIEW OF THE TOTALITY OF THE ABOVE FACTS, WE DO NOT FIND ANY JUSTIFICATIO N TO INTERFERE WITH THE ORDER OF THE CIT(A). THE SAME IS SUSTAINED AND THE REVENUE S APPEAL IS REJECTED. 7. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED . ORDER PRONOUNCED IN OPEN COURT THE DATE MENTIONED O N THE FIRST PAGE OF THIS ORDER. SD/- SD/- ( . $ . %& /D.K. TYAGI ) ' ' ' ' /JUDICIAL MEMBER ( . .. . . .. . G.D. AGARWAL) ! ! ! ! /VICE-PRESIDENT C OPY OF THE ORDER FORWARDED TO: 1) : APPELLANT 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR/AR, ITAT, AHMEDABAD