The ITO, Ward-5(3), Ahmedabad V. Rajkalp Mudralaya Private Ltd., Ahmedabad

ITA 1894/AHD/2013

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4564 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 year(s) 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-10-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 07-04-2020
• Assessment Year: 2008-2009
• Appeal Filed On: 04-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Gross profit estimation; Rejection of books of accounts; Business income; Depreciation; Proportionate interest
• Section: 201; 274; 113; 13; 145(3); 22; 144

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD (THROUGH VIRTUAL COURT) BEFORESHRI MAHAVIR PRASAD, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER SL. NO(S) ITA NO(S) ASSET. YEAR(S) APPEAL(S) BY APPELLANT VS. RESPONDENT APPELLANT RESPONDENT 1. 1894/AHD/2013 2008-09 INCOME-TAX OFFICER, WARD-5(3), AHMEDABAD RAJKALP MUDRAALAYA PVT. LTD. 9, PUNAJI ESTATE, DHOBIGHATE, DHUDHESHWAR, AHMEDABAD-380004 PAN NO. AABCR0460M REVENUE BY : SHRI DILEEP KUMAR,SR. DR. ASSESSEE BY : SHRI PRITESH SHAH, AR / DATE OF HEARING : 08.09.2020 / DATE OF PRONOUNCEMENT : 22.10.2020 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE APPEAL HAS BEEN FILED BY THE REVENUE FOR A.Y. 2008-09 WHICH IS ARISING FROM THE ORDER OF THE CIT(A)-XI, AHMEDABAD DATED 23.04.2013, IN THE PROCEEDINGS UNDER SECTION 143(3)OF THE INCOME TAX A CT, 1961 (IN SHORT THE ACT). 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL: I) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. 1,40,79,756/- ON ACCOUNT OF LOW GROSS PROFITS MADE BY THE A.O. II) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN RESTRICTING THE INTEREST EXPENSES TO THE EXTENT OF RS. 4,93,853/- TO BE CAPITALIZED AS P ER THE PROVISION OF PROVISO TO SEC. 36(1)(III) AS AGAINST THE CAPITALIZED EXPENSES OF RS. 16,41,61 1/- MADE IN THE ASSESSMENT ORDER AND IN 2 ITA NO. 1894/AHD/2013 AY: 2008-09 IGNORING THE WORKING OF INTEREST OF RS. 8,04,747/- MADE ON PROPORTIONATE BASIS BY THE A.O. IN THE REMAND REPORT. III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E LD. COMMISSIONER OF INCOME TAX (A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. IV) IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A) MAY BE SET-ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 3. THE FIRST ISSUE RAISED BY THE REVENUE IS THAT TH E LEARNED CIT-A ERRED IN DELETING THE ADDITION MADE BY THE AO FOR RS.1,40,79 ,756/- ON ACCOUNT OF LOW GROSS PROFITS AFTER REJECTING THE BOOKS OF ACCOUNTS UNDER SECTION 145(3) OF THE ACT. 4. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IN THE PRESENT CASE IS A PRIVATE LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF PRIN TING WHICH IS CARRIED OUT ALONG WITH PAPER AS WELL AS ALONG WITH OTHER COMPON ENT WITHOUT THE USE OF PAPER. THE AO DURING THE ASSESSMENT PROCEEDINGS COM PARED THE GROSS PROFIT FOR THE YEAR UNDER CONSIDERATION SHOWN BY THE ASSES SEE WITH THE GROSS PROFIT OF THE IMMEDIATE PRECEDING AND SUCCEEDING ASSESSMENT Y EARS I.E. ASSESSMENT YEARS 2007-08 AND 2009-10 AND FOUND THAT THE GROSS PROFIT OF THE CURRENT YEAR HAS DECLINED SIGNIFICANTLY. 5. THE AO ALSO FOUND THAT THE PERCENTAGE OF PAPER P URCHASED TO THE SALES FOR THE YEAR UNDER CONSIDERATION IS SIGNIFICANTLY H IGH IN COMPARISON TO THE IMMEDIATE PRECEDING AS WELL AS SUCCEEDING ASSESSMEN T YEARS I.E. ASSESSMENT YEARS 2007-08 AND 2009-10. THE RELEVANT OBSERVATION OF THE AO IS TABULATED AS UNDER: 3 ITA NO. 1894/AHD/2013 AY: 2008-09 PARTICULARS ASSESSMENT YEAR 2007/08 2008/09 2009/10 FINANCIAL YEAR 2006/07 2007/08 2008/09 LAST YEAR CURRENT YEAR NEXT YEAR SALES [A] 16798335 24547218 57765174 RAW MATERIALS CONSUMED [B] 5050536 14074560 1964180 0 DIRECT EXPENSES [C] 3775789 3660219 5039431 GROSS PROFIT (SALES LESS COST OF GOODS SOLD) [A-D] 7972010 6812439 33083943 GROSS PROFIT PERCENTAGE 47.46% 27.75% 57.27% PAPER PURCHASE 2752598 6785785 9386109 % OF PAPER PURCHASE TO SALES 16.386% 27.644% 16.249% 16.38% 27.64% 16.24% THE AO ALSO NOTED THAT THE ASSESSEE IS NOT MAINTAI NING QUANTITATIVE DETAILS OF THE ITEMS PURCHASES AND SALES MADE BY IT . 6. ON QUESTION BY THE AO, THE ASSESSEE VIDE LETTER DATED 3 RD NOVEMBER 2010 SUBMITTED THAT IT IS DEALING IN VARIETY OF ITEMS WH ICH ARE PLENTY IN NUMBERS, THEREFORE, IT WAS NOT PRACTICABLE TO MAINTAIN THE S TOCK/QUANTITY DETAILS OF THE ITEMS IN WHICH IT WAS DEALING. 7. THE ASSESSEE FURTHER VIDE LETTER DATED 25 TH NOVEMBER 2010 SUBMITTED THAT IT HAS CHANGED ITS ENTIRE BUSINESS MODEL AND TECHNO LOGY IN THE YEAR UNDER CONSIDERATION BY ACQUIRING LATEST PLANT AND MACHINE RY HAVING VERY ADVANCED TECHNOLOGY. ACCORDINGLY, THE TRAINING WAS PROVIDED TO THE STAFF ON SUCH MACHINES WHICH HAS RESULTED WASTAGE OF RAW MATERIAL S AND ULTIMATELY IT CONTRIBUTED IN THE REDUCTION OF GROSS PROFIT. 4 ITA NO. 1894/AHD/2013 AY: 2008-09 8. THE ASSESSEE ALSO CONTENDED THAT IT HAS PROVIDED A LOT OF FREE SAMPLING TO ITS CUSTOMERS TO MAKE THEM AWARE OF THE NEW PRIN TING TECHNOLOGY WHICH HAS RESULTED IN REDUCTION IN THE GROSS PROFIT IN THE YE AR UNDER CONSIDERATION. HOWEVER, THE ASSESSEE IN THE SUBSEQUENT YEAR WAS AB LE TO ACHIEVE HIGHER GROSS PROFIT BY REDUCING THE WASTAGE OF MATERIALS AND CHA RGING THE COMPETITIVE PRICE FROM THE CUSTOMERS. 9. THE ASSESSEE BESIDES THE ABOVE ALSO SUBMITTED TH AT DUE TO CHANGE IN THE TECHNOLOGY IN THE ACTIVITY, THERE WERE EXPENSES INC REASED SIGNIFICANTLY SUCH AS BLANKET PURCHASE, CHEMICAL PURCHASE, COATING FILM, INK PURCHASE AND PAPER PURCHASE, BUT THERE WAS NO CORRESPONDING INFLATED S ALES PRICE CHARGED FROM THE CUSTOMER IN THE YEAR UNDER CONSIDERATION WHICH HAS ALSO CONTRIBUTED IN THE REDUCTION IN THE GROSS PROFIT IN THE YEAR UNDER CON SIDERATION. 10. HOWEVER, THE AO DISAGREED WITH THE CONTENTION O F THE ASSESSEE BY OBSERVING THAT EVEN THE CONTENTION OF THE ASSESSEE IS ASSUMED CORRECT THAT THERE WAS CHANGE IN THE BUSINESS MODEL IN THE YEAR UNDER CONSIDERATION VIZ A VIZ IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR, THEN ALSO, GROSS PROFIT OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION IS SIGNIF ICANTLY LOW IN COMPARISON TO THE IMMEDIATE SUCCEEDING ASSESSMENT YEAR. ACCORDING LY, CONTENTION OF THE ASSESSEE WAS DISREGARDED BY THE AO IN VIEW OF THE F ACT THAT THE ASSESSEE IS NOT MAINTAINING QUANTITATIVE/STOCK REGISTERS OF THE ITE MS IN WHICH IT WAS DEALING. HENCE, THE AO REJECTED THE BOOKS OF ACCOUNTS OF THE ASSESSEE BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE ACT. 11. NEVERTHELESS, THE AO CONSIDERING THE CONTENTION OF THE ASSESSEE FOR THE CHANGE OF ITS BUSINESS MODEL, HAS CONSIDERED THE GP RATE AT 50% OF THE TURNOVER FOR THE YEAR UNDER CONSIDERATION, DESPITE GP RATE OF THE SUBSEQUENT 5 ITA NO. 1894/AHD/2013 AY: 2008-09 ASSESSMENT YEAR AT 57.27% OF THE TURNOVER, AND WORK ED OUT THE SUPPRESSED GROSS PROFIT AMOUNTING TO RS.1,40,79,756/- AND ADDE D TO THE TOTAL INCOME OF THE ASSESSEE. 12. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT-A. 13. THE ASSESSEE BEFORE THE LEARNED CIT (A) SUBMITT ED THAT IT HAS VIDE LETTER DATED 6 TH DECEMBER 2010 FILED BEFORE THE AO DURING THE ASSESS MENT PROCEEDINGS CLAIMED THAT IT WAS MAINTAINING THE STO CK REGISTERS/QUANTITATIVE DETAILS BUT THE AO FOR THE REASONS BEST KNOWN TO HI M HAS NOT CONSIDERED ITS SUBMISSION. BUT HE (THE AO) HAS CONCLUDED BASED ON THE LETTER DATED 3 RD NOVEMBER 2010 THAT ASSESSEE IS NOT MAINTAINING ANY STOCK/ QUANTITATIVE DETAILS. ACCORDINGLY, THE ASSESSEE CONTENDED THAT I TS BOOKS OF ACCOUNTS CANNOT BE REJECTED MERELY ON THE REASONING THAT THE ASSESS EE WAS NOT MAINTAINING THE STOCK REGISTERS WHICH IS WRONG FINDING OF THE AO. 14. THE ASSESSEE ALSO SUBMITTED THAT IT HAS JUSTIFI ED BASED ON DOCUMENTARY EVIDENCE FOR THE REASONS OF INCREASE IN THE COST OF CERTAIN MATERIALS WHICH HAS CONTRIBUTED IN THE REDUCTION OF GROSS PROFIT RATIO IN THE YEAR UNDER CONSIDERATION. AS SUCH THE AO HAS NOT POINTED OUT A NY DEFECT IN THE JUSTIFICATION SUBMITTED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS. THE FACT THAT THE ASSESSEE HAS FILED THE QUANTITY DETAI LS CAN BE ESTABLISHED FROM THE FINDING OF THE AO WHEREIN THE AO HAS COMPARED CONSU MPTION OF RAW MATERIALS FOR THE YEAR UNDER CONSIDERATION WITH THE SUBSEQUENT ASSESSMENT YEARS. 15. THE ASSESSEE ALSO CONTENDED THAT THE GROSS PROF IT OF THE SUBSEQUENT ASSESSMENT YEAR CANNOT BE COMPARED TO THE GROSS PRO FIT FOR THE YEAR UNDER 6 ITA NO. 1894/AHD/2013 AY: 2008-09 CONSIDERATION FOR HOLDING THAT THERE WAS THE REDUCT ION IN THE GROSS PROFIT RATIO. IT IS BECAUSE SUCH PRACTICE IS NOT FOLLOWED AND THE REFORE THE SAME IS NOT DESIRABLE. 16. THE ASSESSEE ALSO BROUGHT TO THE NOTICE THAT AO HIMSELF HAS ADMITTED THE CHANGE IN THE BUSINESS MODEL OF THE ASSESSEE IN THE YEAR UNDER CONSIDERATION AND BEING THE 1 ST YEAR WHICH IS MOST CRUCIAL AS IT ALWAYS BRINGS DIF FICULTY IN OPERATING. AS A RESULT, THE ASSESSEE COULD NOT ACHI EVE HIGHER GROSS PROFIT IN THE YEAR UNDER CONSIDERATION BUT IT WAS ABLE TO ACHIEVE HIGHER GROSS PROFIT IN THE SUBSEQUENT YEAR I.E. ASSESSMENT YEAR 2009-10. 17. THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS HAS FURNISHED ALL THE NECESSARY DETAILS WHICH WERE NOT DOUBTED BY THE AO DURING THE ASSESSMENT PROCEEDINGS AND NO SINGLE DISCREPANCY WAS POINTED O UT WITH RESPECT TO THE SAME. ACCORDINGLY, THE ASSESSEE CONTENDED THAT ITS BOOKS OF ACCOUNTS CANNOT BE REJECTED AND THEREFORE NO ADDITION IS WARRANTED. 18. THE LEARNED CIT (A) AFTER CONSIDERING THE SUBMI SSION OF THE ASSESSEE OBSERVED THAT HIGHER CONSUMPTION OF RAW MATERIAL CA N BE A GROUND FOR MAKING FURTHER AND DEEPER INVESTIGATIONS BUT THE SAME CANN OT BE A GROUND FOR REJECTING THE BOOKS OF ACCOUNTS. THE AO HAS NOT DISCHARGED HI S DUTY BY POINTING OUT ANY SPECIFIC DEFECT IN THE FINANCIAL STATEMENTS OF THE ASSESSEE WHICH ARE DULY AUDITED BY THE QUALIFIED AUDITORS. 18.1 LEARNED CIT (A) ALSO FOUND THAT THE ASSESSEE H AS FURNISHED THE QUANTITATIVE DETAILS VIDE LETTER DATED 6 TH DECEMBER 2010 BEFORE THE AO DURING THE ASSESSMENT PROCEEDINGS BUT THE AO FAILED TO TAK E ANY COGNIZANCE OF THE SAME IN THE ASSESSMENT ORDER. 7 ITA NO. 1894/AHD/2013 AY: 2008-09 19. IN VIEW OF THE ABOVE THE LEARNED CIT (A) HELD T HAT THE BOOKS OF ACCOUNTS OF THE ASSESSEE CANNOT BE REJECTED WITHOUT BRINGING ANY COGENT DEFECTS IN THE BOOKS OF ACCOUNTS UNDER THE PROVISIO NS OF SECTION 145(3) OF THE ACT. ACCORDINGLY, THE LEARNED CIT (A) ALLOWED THE G ROUND OF APPEAL OF THE ASSESSEE. 20. BEING AGGRIEVED BY THE ORDER OF LEARNED CIT (A) , THE REVENUE IS IN APPEAL BEFORE US. 21. THE LEARNED DR BEFORE US VEHEMENTLY SUPPORTED T HE ORDER OF THE AO WHEREAS THE LEARNED AR BEFORE US FILED A PAPER BOOK RUNNING FROM PAGES 1 TO 151 AND REITERATED THE CONTENTIONS AS MADE BEFORE T HE AUTHORITIES BELOW. THE LEARNED AR VEHEMENTLY SUPPORTED THE ORDER OF THE LE ARNED CIT (A). 22. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. AS PER SECTION 145(3 ) OF THE ACT, THE AO IS EMPOWERED TO REJECT THE BOOKS OF ACCOUNTS OF THE AS SESSEE AND MAKE BEST JUDGMENT ASSESSMENT IN THE MANNER AS SPECIFIED UNDE R SECTION 144 OF THE ACT, IF HE IS NOT INTER-ALIA SATISFIED WITH THE COMPLETE NESS OR CORRECTNESS OF THE BOOKS OF ACCOUNTS OF THE ASSESSEE. GENERALLY, THE I NSTANCES FOR THE REJECTION OF BOOKS OF ACCOUNT INCLUDE WHEN ENTRIES IN RESPECT OF CERTAIN TRANSACTIONS ARE ALTOGETHER OMITTED OR INCORRECT OR WHERE THE ACCOUN TS SHOW AN ABNORMALLY LOW RATE OF PROFIT OR WHERE THERE IS AN INHERENT LACUNA IN THE SYSTEM OF ACCOUNTING. HOWEVER, THE AO CANNOT USE THIS POWER AS A TOOL TO REJECT THE BOOKS OF ACCOUNTS MERELY DUE TO NON-MAINTENANCE OF THE STOCK REGISTER, VARIATION IN GROSS PROFIT AND NON-FURNISHING OF CERTAIN VOUCHERS OR ITS EXPLANATION OR NON- CONFIRMATION OF SUNDRY CREDITORS. ANYWAY, BEFORE RE JECTING THE BOOKS OF ACCOUNTS, THE AO MUST RECORD THE SPECIFIC REASON FO R REJECTING THE BOOKS OF 8 ITA NO. 1894/AHD/2013 AY: 2008-09 ACCOUNTS. SUCH SATISFACTION HAS TO BE ESTABLISHED A ND SUBSTANTIATED BASED ON FACTS AND FIGURES, WHICH FURTHER DEPENDS ON THE CIR CUMSTANCES OF EACH CASE. MERE MINOR MISTAKES/TYPOLOGICAL ERRORS/ABSENCE OF S TOCK REGISTERS/LOWER GP MAY NOT IPSO FACTO AMOUNT TO INCORRECTNESS/INCOMPLE TENESS OF ACCOUNTS IN TERMS OF SECTION 145(3) OF THE ACT. BUT THE CASE WO ULD BE DIFFERENT WHERE THE ABOVE-MENTIONED MISTAKES ARE COUPLED WITH OTHER FIN DINGS. 23. IN THE GIVEN CASE, AO HAS REJECTED THE BOOK RES ULTS OF THE ASSESSEE BASED ON THE FACTS AND FIGURED CULLED OUT BY HIM THAT LOW ER GROSS PROFIT FOR THE YEAR CONSIDERATION IS SIGNIFICANTLY LESS IN COMPARISON T O THE IMMEDIATE PRECEDING AND SUCCEEDING ASSESSMENT YEAR AND NON-MAINTENANCE OF QUANTITY-WISE STOCK REGISTER. HOWEVER, IN OUR CONSIDERED VIEW THE DECLI NE IN THE GP RATE IN COMPARISON TO THE IMMEDIATELY PRECEDING AND SUCCEED ING ASSESSMENT YEAR CANNOT BE CRITERIA TO REJECT THE BOOKS. IT IS BECAU SE THE ASSESSEE EXPLAINED THE REASONS FOR DECLINING THE GP WHICH WERE NOT CONTROV ERTED BY THE AO. FURTHERMORE, THE LOWER GROSS PROFIT AS COMPARED TO EARLIER AND SUCCEEDING YEAR CANNOT BE THE GROUND TO REJECT THE BOOKS OF ACCOUNT S. IN HOLDING SO WE DRAW THE SUPPORT FROM THE ORDER OF THE HONBLE RAJASTHAN HIGH COURT IN CASE OF MALANI RAMJIVAN JAGANNATH VS. ASSTT. COMMISSIONER O F INCOME TAX REPORTED IN 316 ITR 120 WHERE IT WAS HELD BY HONBLE RAJASTH AN HIGH COURT AS DETAILED UNDER: THE TRIBUNAL COMMITTED BASIC ERROR IN NOT APPRECIA TING THE REASONING GIVEN BY THE COMMISSIONER (APPEALS). IT WAS TRITE TO SAY THAT IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, ACCOUNT BOOKS WERE MAINTAINED AS THEY WERE ORDINARILY MAINTAINED YEAR AFTER YEARS AND WHICH WERE FOUND TO YIELD A FAIR RESULT. MERE DEVIATION IN GROSS PROFIT RATE CANNOT BE A GROUND FOR REJECTING BOOKS OF ACCOUNT AND ENTE RING REALM OF ESTIMATE AND GUESSWORK. LOWER GROSS PROFIT RATE SHOWN IN THE BOOKS OF ACCOU NT DURING CURRENT YEAR AND FALL IN GROSS PROFIT RATE WAS JUSTIFIED AND ALSO ADMITTED BY THE ASSESSING OFFICER AS WELL AS COMMISSIONER (APPEALS) AS WELL AS THE TRIBUNAL. THEREFORE, FALL IN GROSS PROFIT RATE LOST ITS SIGNIFICANCE. HAVING ACCEPTED THE REASON FOR FALL IN GROSS PROFIT RATE, NAMELY, STIFF COMPETITION IN MARKET AND ALSO THAT HUGE LOSS CAUSED IN PARTICULAR TRANSA CTION, NEITHER THE REJECTION OF BOOKS OF 9 ITA NO. 1894/AHD/2013 AY: 2008-09 ACCOUNT WAS JUSTIFIED NOR RESORT TO SUBSTITUTION OF ESTIMATED GROSS PROFIT BY RULE OF THUMB MERELY FOR MAKING CERTAIN ADDITIONS WAS JUSTIFIED. THEREFORE, THE FINDINGS ARRIVED AT BY THE TRIBUNAL SUFFERED FROM BASIC DEFECT OF NOT APPLYING ITS MIND TO THE EXISTING MATERIAL WHICH WERE RELEVANT AND WENT TO THE ROOT OF THE MATTER. W HEN ALL THE DATA AND ENTRIES MADE IN THE TRADING ACCOUNT WERE NOT FOUND TO BE INCORRECT IN A NY MANNER, THERE COULD NOT HAVE BEEN ANY OTHER RESULT EXCEPT, WHAT HAD BEEN SHOWN BY THE ASSESSEE IN THE BOOKS OF ACCOUNT. THEREFORE, THE ORDER OF THE TRIBUNAL, WAS UNSUSTAIN ABLE. [PARA 11] WE ALSO NOTE THAT THE AO HAS NOT POINTED OUT ANY S PECIFIC DEFECT IN THE DETAILS SUBMITTED BY THE ASSESSEE AND IN THE AUDITE D FINANCIAL STATEMENTS FURNISHED BY THE ASSESSEE. THEREFORE, IN OUR CONSID ERED VIEW, THE BOOKS OF ACCOUNTS OF THE ASSESSEE CANNOT BE REJECTED UNTIL A ND UNLESS THE AO POINTS OUT THE SPECIFIC MISTAKES. A SIMILAR PRINCIPLE HAS BEEN LAID DOWN BY THE HONBLE ALLAHABAD HIGH COURT IN CASE OF AWADHESH PRATAP SIN GH ADBUL REHMAN& BROS V/S. CIT 201 ITR 404(ALL) WHICH READS AS; IT IS DIFFICULT TO CATALOGUE THE VARIOUS TYPES OF DEFECTS IN THE ACCOUNT BOOKS OF AN ASSESSEE WHICH MAY RENDER REJECTION OF ACCOUNT BOOKS ON THE GROUND THAT THE ACCOUNTS ARE NOT COMPLETE OR CORRECT FROM WHICH THE CORRECT PROFIT C ANNOT BE DEDUCED. WHETHER PRESENCE OR ABSENCE OF STOCK REGISTER IS MATERIAL OR NOT, WOULD DEPEND UPON THE TYPE OF THE BUSINESS. IT IS TRUE THAT ABSENCE OF STOCK REGISTER OR CASH MEMO S IN A GIVEN SITUATION MAY NOT PER SE LEAD TO AN INFERENCE THAT ACCOUNTS ARE FALSE OR INCOMPLE TE. HOWEVER, WHERE A STOCK REGISTER, CASH MEMOS, ETC., COUPLED WITH OTHER FACTORS LIKE VOUCHE RS IN SUPPORT OF THE EXPENSES AND PURCHASES MADE ARE NOT FORTHCOMING AND THE PROFITS ARE LOW, IT MAY GIVE RISE TO A LEGITIMATE INFERENCE THAT ALL IS NOT WELL WITH THE BOOKS AND T HE SAME CANNOT BE RELIED UPON TO ASSESS THE INCOME, PROFITS OR GAINS OF AN ASSESSEE. IN SUC H A SITUATION THE AUTHORITIES WOULD BE JUSTIFIED TO REJECT THE ACCOUNT BOOKS UNDER SECTION 145(3) AND TO MAKE THE ASSESSMENT IN THE MANNER CONTEMPLATED IN THESE PROVISIONS. WE ALSO NOTE THAT THE BOOKS OF ACCOUNTS CANNOT BE REJECTED IF THE ASSESSEE DOES NOT MAINTAIN THE STOCK REGISTERS UNTI L AND UNLESS IT IS COUPLED WITH OTHER DEFECTS SUCH AS IT IS FOUND THAT SALES/ PURCHASE MADE OUTSIDE THE BOOKS OF ACCOUNTS. BUT IN THE INSTANT CASE, WE NOTE THAT THERE WAS NO SUCH ALLEGATION BY THE AUTHORITIES BELOW. WE ALSO FIND S UPPORT AND GUIDANCE FROM THE ORDER OF ITAT BENCH IN THE CASE OF HARIDAS PARI KH VS. ITO REPORTED IN 113 TTJ 274 WHEREIN IT WAS HELD AS UNDER: 10 ITA NO. 1894/AHD/2013 AY: 2008-09 UNLESS THE ASSESSING OFFICER IS ABLE TO POINT OUT CERTAIN TRANSACTIONS WHICH HAVE BEEN LEFT TO BE ENTERED IN THE BOOKS OF ACCOUNT OR THAT THE A SSESSEE HAS SOLD SOME OF THE ITEMS AT A PRICE HIGHER THAN WHAT IS DISCLOSED IN THE BOOKS OF ACCOUNT OR IF PROPER PARTICULARS, BILLS, VOUCHERS ARE NOT FORTHCOMING, ETC., THE BOOKS OF AC COUNT CANNOT BE REJECTED WITHOUT ASSIGNING SPECIFIC REASONS. IN THE INSTANT CASE MER ELY BECAUSE DIFFERENT RANGE AND NATURE OF ITEMS WERE BEING DEALT WITH BY THE ASSESSEE AND THE MAINTENANCE OF QUANTITATIVE STOCK OF EACH AND EVERY ITEM WAS NOT PRACTICALLY POSSIBLE, T HE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE WHICH WERE FREE FROM ANY DEFECT COULD NOT BE REJECTED MERELY BECAUSE THE AVERAGE GP RATE WAS SLIGHTLY LOWER THAN THE AVERAGE GP RATE OF THE EARLIER YEAR. IN THE INSTANT CASE, THE SALES OF THE ASSESSEE DURING THE YEAR UNDER CON SIDERATION HAD INCREASED SUBSTANTIALLY FROM RS. 1.24 CRORES TO RS. 1.54 CRORES WHICH RESUL TED IN MARGINAL DECLINE IN GP RATE FROM 11.51 PER CENT TO 9.94 PER CENT, THE SAME COULD NOT BE MADE REASON FOR REJECTING THE BOOK RESULTS. IT IS WELL-SETTLED BUSINESS PROPOSITION TH AT FOR HAVING INCREASE IN SALES, A BUSINESSMAN HAS TO SACRIFICE A SMALL MARGIN OF PROF IT RATE. DURING THE YEAR THE TOTAL SALES OF THE ASSESSEE HAD INCREASED FROM RS. 1.24 CRORES TO RS. 1.54 CRORES. NO DEFECT WAS FOUND IN THE BOOKS OF ACCOUNT. THERE WAS NO VALID REASON FOR REJECTION OF BOOKS OF ACCOUNT DURING THE YEAR UNDER CONSIDERATION AND THEREBY APPLYING H IGHER GP RATE OF 11.51 PER CENT, WHICH WAS EARNED BY THE ASSESSEE ON LOW SALES OF RS. 1.24 CRORES IN THE PRECEDING YEAR. THE OTHER REASON STATED BY THE ASSESSING OFFICER OF MAKING TR ADING ADDITION WAS THAT IN THE ASSESSMENT YEAR 2001-02, GP RATE DECLARED BY THE AS SESSEE AT 9.64 PER CENT WAS NOT ACCEPTED AND TRADING ADDITION SO MADE BY REJECTING THE BOOKS OF ACCOUNT WAS CONFIRMED BY THE COMMISSIONER (APPEALS), THEREFORE, BY FOLLOWING THE ORDER OF THE EARLIER YEAR THE ASSESSING OFFICER HAD MADE AN ADDITION BY REJECTING THE GP RATE OF 9.64 PER CENT DECLARED DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE P LACED ON RECORD THE ORDER OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE IN THE ASSESSME NT YEAR 2001-02 WHEREIN ADDITION MADE BY THE ASSESSING OFFICER BY APPLYING GP RATE OF 10. 14 PER CENT WAS DELETED BY THE TRIBUNAL AND THE GP RATE OF 9.64 PER CENT DECLARED BY THE AS SESSEE WAS FOUND TO BE REASONABLE AND CORRECT. AS THE FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER CONSIDERATION WERE THE SAME, THE ISSUE WAS SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL IN THE PRECEDING YEAR. RESPECTFULLY FOLLOWING THE SAME, THE FINDINGS AND C ONCLUSION OF THE LOWER AUTHORITIES WERE TO BE REJECTED AND THE ASSESSING OFFICER WAS TO BE DIRECTED TO DELETE THE IMPUGNED TRADING ADDITION MADE BY HIM. IN VIEW OF THE ABOVE, WE OPINED THAT THE AO CANNOT REJECT THE BOOKS OF ACCOUNTS FOR THE REASONS AS DISCUSSED ABOVE IN A SI TUATION WHERE THE ASSESSEE DOES NOT MAINTAIN THE STOCK REGISTER. ACCORDINGLY, WE NOTE THAT THE REASONS WHICH WERE BASED BY THE AO FOR REJECTING THE BOOKS OF ACCOUNTS ARE NOT SUFFICIENT ENOUGH AND COGENT. THUS IN THE BACKDROP OF THE FACTS AS STATED ABOVE AND AFTER CONSIDERING THE FACTS IN TOTALITY, WE ARE OF THE VIEW THAT THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE NOT LIABLE TO BE REJEC TED AS PER THE PROVISIONS OF SECTION 145(3) OF THE ACT. ACCORDINGLY, WE CONCLUDE THAT ONCE THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE NOT LIABLE TO BE REJEC TED THEN ITS BOOK PROFIT SHOULD 11 ITA NO. 1894/AHD/2013 AY: 2008-09 BE ACCEPTED IN THE GIVEN FACTS AND CIRCUMSTANCES. A CCORDINGLY, IN THE BACKDROP OF THE AFORESAID DISCUSSION AND PRECEDENT, WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT (A) AND DIRECT THE AO TO DELETE THE ADDITION MADE BY HIM. HENCE THE GROUND OF APPEAL OF THE REVENUE IS DISMIS SED. 24. THE SECOND ISSUE RAISED BY THE REVENUE IS THAT THE LEARNED CIT (A) ERRED IN REDUCING THE DISALLOWANCE OF INTEREST EXPE NSES MADE BY THE AO FROM RS.8,04,747/-TO RS.4,93,853/- TO BE CAPITALIZED UND ER SECTION 36(1)(III) OF THE ACT. 25. THE AO DURING THE ASSESSMENT PROCEEDINGS FOUND THAT THE ASSESSEE HAS ACQUIRED A MACHINERY LOAN WHICH WAS PUT TO USE ONLY AFTER 2 ND JULY 2007. ACCORDINGLY, THE AO WAS OF THE VIEW THAT THE INTERE ST PAID BY THE ASSESSEE UP- TO THE DATE I.E. 2 ND JULY 2007 WHEN THE MACHINERY WAS PUT TO USE SHOULD BE CAPITALIZED UNDER SECTION 36(1)(III) OF THE ACT. ON QUESTION, BY THE AO THE ASSESSEE FAILED TO MAKE ANY REPLY. ACCORDINGLY, THE AO WORKED OUT THE PROPORTIONATE AMOUNT OF INTEREST EXPENSES UP TO THE DATE 2 ND JULY 2007 WHEN THE MACHINE WAS PUT TO USE AMOUNTING TO RS.16,41,61 1/- AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 26. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A). 27. THE ASSESSEE BEFORE THE LEARNED CIT (A) SUBMITT ED THAT THE AMOUNT OF INTEREST ATTRIBUTABLE IN THE PURCHASE OF SUCH MACHI NERY STANDS AT RS.42,08,928/- ONLY WHICH SHOULD BE CONSIDERED FOR THE PURPOSE OF THE DISALLOWANCE. FURTHER, OUT OF SUCH AMOUNT THERE WAS AN OPENING WRITTEN DOW N VALUE OF THE MACHINERY AMOUNTING TO RS.2,46,51,138/-, THEREFORE, THE AMOUN T OF INTEREST PERTAINING TO SUCH OPENING WRITTEN DOWN VALUE SHOULD BE IGNORED. 12 ITA NO. 1894/AHD/2013 AY: 2008-09 28. THE ASSESSEE FURTHER SUBMITTED THAT THE MACHINE WAS INSTALLED ON 2 ND JUNE 2007 THEREFORE IF THE INTEREST NEEDS TO BE DIS ALLOWED THEN IT SHOULD BE LIMITED TO THE EXTENT OF RS.3,02,129/- FOR THE PERI OD OF TWO MONTHS ONLY INSTEAD OF THREE MONTHS AND THAT TOO AFTER CONSIDERING THE FACT OF ITS OWN FUND UTILIZATION. 29. THE SUBMISSION OF THE ASSESSEE WAS FORWARDED TO THE AO FOR THE REMAND REPORT WHO ADMITTED THE CONTENTION OF THE ASSESSEE IN PART BY OBSERVING AS UNDER: 4. THUS THE TOTAL INTEREST PAID ON MACHINERY LOAN IS RS.42,08,928/-ONLY. FURTHER IT CAN BE SEEN THAT OPENING WDV OF MACHINERY WAS RS.2,46,5 1,138/- AND ADDITIONS OF MACHINERY AND PLANT DURING THE YEAR WAS OF RS.10,42,23,301/- . THUS THE OPENING VALUE OF PLANT AND MACHINERIES CONSTITUTED 19.12% OF ENTIRE PLANT AND MACHINERY AND THE ADDITION DURING THE YEAR OF PLANT AND MACHINERIES CONSTITUTED 80.88% OF ENTIRE PLANT AND MACHINERY. THUS THE INTEREST PAYMENT DURING THE YEAR WAS FOR THE MACHIN ERIES ALREADY IN USE AND FOR THE MACHINERIES WHICH WERE PUT TO USE FROM JULY 2007 ON WARDS. ON WORKING OF PROPORTIONATE INTEREST EXPENDITURE FOR ALREADY EXISTING MACHINERI ES, IT COMES TO RS.8,04,747/- (19.12% OF RS.42,08,928/-). THE BALANCE AMOUNT OF RS.34,04,181 /- OF INTEREST EXPENDITURE CAN BE TERMED AS HAVING BEEN PAID FOR THE MACHINERIES PURC HASED DURING THE YEAR AND WERE PUT TO USE IN JULY 2007. AS THE MACHINERIES PURCHASED DURI NG THE YEAR WERE PUT TO USE ON 02.07.2007, INTEREST PAID FOR THE PERIOD APRIL, 200 7 TO JUNE, 2007 NEEDED TO BE CAPITALIZED. THEREFORE, IN MY OPINION 1A OF RS.34,04,181/- BEING RS.8,51,045/- SHOULD HAVE BEEN CAPITALIZED INSTEAD OF RS.16,41,611/-. 30. THE LEARNED CIT (A) AFTER CONSIDERING THE SUBMI SSION OF THE ASSESSEE AND THE REMAND REPORT OF THE AO HAS CONFIRMED THE O RDER OF THE AO IN PART BY OBSERVING AS UNDER: .IN THE INSTANT CASE THE A.O. HAS NOT BROUGHT COG ENT EVIDENCES ON RECORD TO PROVE THE QUANTUM OF BORROWED CAPITAL AS WELL AS THE INTEREST LIABILITY HAS ALSO NOT BEEN QUANTIFIED. THE A.O. HAD SIMPLY PROPOSED TO CAPITALIZE ONE FOUR TH OF INTEREST EXPENSES INCURRED AGAINST MACHINERY LOAN ACCOUNT. THE FACT OF INCLUSION OF OLD PLANT & MACHINERY IN THE MACHINERY LOAN ACCOUNT HAS NOT BEEN EXAMINED BY T HE A.O. THE A.O. HAS ALSO NOT EXAMINED THE FACT OF PURCHASING PLANT & MACHINERY F ROM NON INTEREST BEARING FUNDS. SINCE THE PROPORTIONATE CAPITALIZATION OF INTEREST IS NOT PRESCRIBED BY THE PROVISIONS OF PROVISO TO SEC.36(1)(III), ACCORDINGLY, I AM NOT INCLINED TO A GREE WITH THE CONTENTIONS OF LD, A.O. 3.6 PERUSAL OF FACTS AVAILABLE ON RECORD INDICATE T HAT THE APPELLANT HAS AGREED FOR CAPITALIZATION OF INTEREST ON BORROWED CAPITAL TO P URCHASE PLANT & MACHINERY OF RS. 13 ITA NO. 1894/AHD/2013 AY: 2008-09 4,93,853/-. THE APPELLANT HAS MADE THIS COMPUTATION STRICTLY AS PER THE PROVISIONS OF PROVISO TO SEC.36(1)(III). THIS COMPUTATION HAS BEE N FILED BEFORE THE A.O. AND THE A.O. HAS NOT BROUGHT ANY EVIDENCE TO CONTROVERT THIS COMPUTA TION IN VIEW OF ABOVE, I AM OF THE CONSIDERED OPINION THAT INTEREST EXPENSES TO THE EX TENT OF RS. 4,93,853/- SHOULD BE CAPITALIZED AS PER THE PROVISIONS OF PROVISO TO SEC .36(1)(III). THE A.O. IS FURTHER DIRECTED TO ALLOW DEPRECIATION ON CAPITALIZATION OF INTEREST AS PER THE PROVISIONS OF INCOME-TAX ACT. 3.7 IT IS ALSO SEEN THAT IN THE ASSESSMENT ORDER TH E A.O. HAD DISALLOWED INTEREST UNDER SECTION 36(1)(III) OF THE I. T. ACT, 1961. THE INTE REST EXPENSES ARE ALLOWABLE U/S.36(1)(III) OF THE I. T. ACT, IF THE FOLLOWING CONDITIONS ARE FULF ILLED:- (A) THE CAPITAL MUST HAVE BEEN BORROWED BY THE ASSESSEE. (B) IT SHOULD HAVE BEEN BORROWED FOR THE PURPOSES OF (C) THE ASSESSEE SHOULD HAVE PAID THE AMOUNT O F INTEREST CLAIMED AS AN ALLOWANCE UNDER CLAUSE (III) OF SECTION 36(1). PERUSAL OF THE RECORD REVEALS THAT THE A.O. HAS NO T BROUGHT ANY EVIDENCE ON RECORD TO PROVE THAT THE ABOVE MENTIONED CONDITIONS WERE N OT FULFILLED. SINCE IN THE CASE OF APPELLANT ALL THE ABOVE MENTIONED CONDITIONS ARE FU LFILLED AND ACCORDINGLY, I AM OF THE FIRM VIEW THAT THE INTEREST EXPENSES CLAIMED ARE ALLOWAB LE EXPENSES AS PER THE PROVISIONS OF SECTION 36(1)(III) OF THE I.T. ACT, 1961 AND THERE IS NO JUSTIFICATION FOR DISALLOWANCE OF INTEREST EXPENSES. 3.8 AS A RESULT THIS GROUND OF APPEAL IS PARTLY ALL OWED. 31. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), THE REVENUE IS IN APPEAL BEFORE US. 32. BOTH THE LEARNED DR AND THE AR BEFORE US VEHEME NTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW TO THE EXTENT FAVORA BLE TO THEM. 33. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE PRESENT CASE THE AO IN THE REMAND REPORT HAS PROPOSED TO RESTRICT THE DISALLOWANCE OF INTERE ST EXPENSES TO THE EXTENT OF RS.8,51,045/- AGAINST THE DISALLOWANCES OF RS.16,41 ,611/- MADE IN ASSESSMENT ORDER. HOWEVER, THE LEARNED CIT (A) WAS PLEASED TO RESTRICT THE DISALLOWANCE OF INTEREST EXPENSES TO THE EXTENT OF RS.4,93,853/- ONLY WHICH HAS NOT BEEN CHALLENGED BY THE ASSESSEE IN THE APPEAL BEFORE US . THUS, THE ISSUE IN THE CASE 14 ITA NO. 1894/AHD/2013 AY: 2008-09 ON HAND IS LIMITED TO THE EXTENT OF RS.3,57,192/- W HETHER IT SHOULD BE CAPITALIZED UNDER THE PROVISIONS OF SECTION 36(1)(I II) OF THE ACT. 34. IN THE CASE ON HAND, THE FIRST ISSUE ARISES FOR OUR CONSIDERATION WHETHER THE DATE 2 ND JUNE 2007 OR 2 ND JULY 2007 SHOULD BE TAKEN AS THE DATE PUT TO USE. ON PERUSAL OF THE INSTALLATION REPORT PLACED ON PAG E 115 OF THE PAPER BOOK, WE NOTE THAT THE MACHINE WAS INSTALLED ON 2 ND JUNE 2007 WHICH IMPLIES THAT IT WAS READY TO USE ON THAT DATE. THEREFORE, THE DISALLOW ANCE OF THE INTEREST EXPENSES SHOULD BE LIMITED TO THE EXTENT PERTAINING TO TWO M ONTHS ONLY. BESIDES THE ABOVE, WE ALSO NOTE THAT THE ASSESSEE HAS ALSO UTILIZED ITS OWN FUNDS IN THE PURCHASE OF MACHINERIES IN ADDITIO N TO THE BORROWED FUND FROM THE BANK. ACCORDINGLY, THE LEARNED CIT (A) EXC LUDED THE AMOUNT OF OWN FUND UTILIZED BY THE ASSESSEE WHILE WORKING OUT THE AMOUNT OF INTEREST EXPENSES TO BE CAPITALIZED. THESE FACTS, HAVE NOT B EEN DISPUTED BY THE LEARNED DR AT THE TIME OF HEARING. ACCORDINGLY, WE DO NOT F IND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT (A). HENCE, THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 35. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 22 ND OCTOBER,2020 AT AHMEDABAD. SD/- SD/- (MAHAVIR PRASAD) JUDICIAL MEMBER ( WASEEM AHMED ) ACCOUNTANT MEMBER AHMEDABAD; DATED 22/10/2020 TANMAY, SR. PS TRUE COPY 15 ITA NO. 1894/AHD/2013 AY: 2008-09 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. !! ' # / CONCERNED CIT 4. ' # ( ) / THE CIT(A)- 5. &'() **+ , , / DR, ITAT, AHMEDABAD. 6. ),- ./ / GUARD FILE. / BY ORDER, & * //TRUE COPY// / ! ( DY./ASSTT.REGISTRAR) ! '# $, &' / ITAT, AHMEDABAD 1. DATE OF DICTATION 19.10.2020 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DI CTATING MEMBER 19.10.2020 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P.S. /P.S 21.10.2020 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DI CTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P.S ./P.S. 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 22.10.2020 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE OR DER