Dynamic Soft Link Pvt.Ltd., Surat V. The Addl.CIT.,Range-1, Surat

ITA 2842/AHD/2011

• Counselvise Citation: 284220514 RSA 2011
• Duration Of Justice: 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 14-03-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 17-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SAPNESH SHETH
• Keywords: Gross profit estimation; Business expenditure; Corroborative evidences
• Section: 43B; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI A K GARODIA ACCOUNTANT MEMBER AND SHRI KUL BHARAT JUDICIAL MEMBER ITA NO.2842/AHD/2011 (ASSESSMENT YEAR:-2008-09) DYNAMIC SOFT LINK PVT. LTD., 402, EMPIRE STATE BUILDING, RING ROAD, SURAT V/S THE ADDL. COMMISSIONER OF INCOME-TAX, RANGE-1, SURAT PAN: AABCD 3367 K [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI SAPNESH SHETH, AR REVENUE BY:- SHRI VINOD TANWANI, SR. DR DATE OF HEARING:- 14-03-2012 DATE OF PRONOUNCEMENT:- 13-04-2012 O R D E R PER KUL BHARAT (JM) :- THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST AN ORDER DATED 22-09-2011 PASSED B Y THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-I, [HEREINAFTE R REFERRED TO AS THE LEARNED CIT(A)] SURAT FOR ASSESSMENT YEAR (AY) 2008- 09. THE FOLLOWING TWO GROUNDS HAVE BEEN RAISED BY T HE ASSESSEE IN THIS APPEAL:- 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A S WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(A) HAS ERRED IN CONFIR MING THE ACTION OF THE AO IN MAKING ADDITION OF RS.5,27,800/- RELATING TO LATE PAYMENT OF EMPLOYEES CONTRIBUTION TO PF AND ESI U/S 2(24)(X) OF THE ACT. 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A S WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(A) HAS ERRED IN CONFIR MING THE ACTION OF 2 2 THE AO IN REJECTING THE BOOKS OF ACCOUNTS U/S 145 A ND MAKING ADDITION OF RS.4,42,845/- ON ACCOUNT OF ALLEGED LOW GROSS P ROFIT. 2 WITH REGARD TO GROUND NO.1 IN THE APPEAL, THE FAC TS OF THE CASE ARE THAT ON PERUSAL OF ANNEXURE-3 OF CLAUSE 16 (B) OF AUDIT REPORT IN FORM NO.3CD, IT WAS NOTICED THAT THE ASSE SSEE COMPANY HAS NOT DEPOSITED THE AMOUNT RECEIVED FROM EMPLOYEES TOWARDS CONTRIBUTION TO PROVIDENT FUND AND E.S.I. I NTO THE GOVT. ACCOUNT WITHIN THE DUE DATE PRESCRIBED FOR THIS PUR POSE IN CERTAIN CASES, THE BREAK-UP IN TABLE IS GIVEN IN THE ORDER OF THE LEARNED CIT(A). THE ASSESSEE WAS, THEREFORE, ASKED TO EXPLA IN AS TO WHY THE AMOUNT OF RS.5,27,800/- [PF RS.4,27,119 + ESI R S.1,00,681] SHOULD NOT BE TREATED AS INCOME U/S 2(24)(X) OF THE ACT. THE ASSESSEE VIDE LETTER DATED 27-08-2010 SUBMITTED AS UNDER:- 'THE POOR DEMAND AND LOSS OF SALES REVENUE DURING YEAR 2007-08 RESULTED INTO THE LIQUIDITY CRISIS THROUGH OUT THE YEAR. THE LIQUIDITY CRISIS WAS THE MAJOR REASON OF DELAY IN P.P. AND E. S.I, PAYMENTS.' AFTER CONSIDERING THE REPLY OF THE ASSESSEE, THE AO OBSERVED AS UNDER:- THE EXPLANATION FURNISHED BY THE ASSESSEE HAS BEEN CONSIDERED CAREFULLY. ON PERUSAL OF THE EXPLANATION OF THE ASS ESSEE IT IS NOTICED THAT THE ASSESSEE HAS FURNISHED THE EXPLANATION REG ARDING THE REASONS FOR THE DELAY IN PAYMENTS OF EMPLOYEES CONTRIBUTION TO P.P. AND E.SJ INTO GOVERNMENT ACCOUNT. THE ASSESSEE HAS NOT FURNI SHED ANY EXPLANATION AS TO WHY THE SAME SHOULD NOT BE TREATE D AS INCOME U/S.2(24)(X) OF THE IF ACT. SECTION 36(1)(VA) OF THE IT ACT ENVISAGES THAT DEDU CTION SHALL BE ALLOWED IN RESPECT OF THE SUM RECEIVED BY THE ASSES SEE FROM ANY OF THE EMPLOYEES TO WHICH THE PROVISIONS OF SUB-CLAUSE-(X) OF CLAUSE (24) OF SECTION-2 OF THE ACT, APPLY, IF SUCH SUM IS CREDITE D BY THE ASSESSEE TO THE EMPLOYEES ACCOUNT IN THE RELEVANT FUND OR FUNDS N OR BEFORE THE 3 3 DUE DATE. IT IS PERTINENT TO MENTION HERE THAT THE HON'BLE SUPREME COURT IN THE CASE OF ALOM EXTRUSIONS LTD. [319-ITR- 316] HELD THAT OMISSIONS OF SECOND PROVISO TO SECTION 43B BY THE F INANCE ACT, 2003 HAS OPERATED RETROSPECTIVELY W.E.F. 01.04.1988 AND NOT PROSPECTIVELY FROM 01.04.2004. THE SECOND PROVISO HAS PROVIDED TH AT ANY SUM PAYABLE BY THE ASSESSED AS AN EMPLOYER, BY WAY OF C ONTRIBUTION TO P.F. OR SUPERANNUATION FUND OR A GRATUITY FUND OR ANY OT HER FUND FOR THE WELFARE OF THE EMPLOYEES, WOULD BE ALLOWED AS DEDUC TION ONLY IF IT IS PAID WITHIN THE DUE DATE AS PER THE P.F. ACT ETC. I .E. AS PER THE DUE DATE SPECIFIED IN SECTION 36(1)(VA) OF THE ACT. IN VIEW OF THE PROVISION, IF THE PAYMENT WAS MADE AFTER THE END OF THE FINANCIAL YEAR AND BEYOND THE DUE DATES SPECIFIED IN SECTION 36(1)(VA) THE SA ME WAS NOT ALLOWED EVEN IF IT IS WAS PAID BEFORE THE FILING OF RETURN. ALTHOUGH THE PROVISO HAS BEEN DELETED BUT AS REGARDS TO EMPLOYEES CONTRI BUTION THE PROVISIONS OF SECTION 36(1)(VA) ARE STILL ON THIS S TATUTE ACCORDING TO WHICH EMPLOYEES CONTRIBUTION WHICH ARE DEDUCTED BY THE EMPLOYER WHILE GIVING THEIR REMUNERATION ARE PART OF THE EMP LOYER'S, INCOME IN VIEW OF SECTION 2(24)(X) AND WOULD BE ALLOWED DEDUC TION U/S. 36(1)(VA) ONLY IF THEY ARE PAID ON OR BEFORE THE DU E DATE OF THE RELEVANT ACT. THE DECISION OF THE HON'BLE SUPREME COURT IS A PPLICABLE ONLY IN RESPECT OF THE AMOUNTS COVERED BY SECTION 43B(B) AN D NOT INCOMES WHICH ARE COVERED BY SECTION 2(24)(X) R.W.S, 36(1)( VA) OF THE IT ACT. THIS MEANS EMPLOYER'S CONTRIBUTION TO WELFARE FUNDS ETC. IS ALLOWABLE IF IT IS PAID BEFORE THE DUE DATE OF FILING OF INCO ME TAX RETURN BUT THE EMPLOYEE'S CONTRIBUTION IS STILL GOVERNED BY SECTIO N 2(24J)(X) AND SECTION 36(1)(VA) AND HENCE, IT IS ALLOWABLE ONLY I F IT IS PAID ON OR BEFORE THE DUE DATE PROVIDED IN THE RELEVANT ACT, I N THIS CASE, THE ASSESSED COMPANY HAS FAILED TO DEPOSIT THE EMPLOYEE 'S CONTRIBUTION TO P.P. AND E.S.I, AMOUNTING TO RS.5,27,800/-[P.F. RS. 4,27,119 + ESI RS.1,00,681] IN THE RELEVANT ACCOUNT WITHIN THE DUE DATE AS PRESCRIBED UNDER THE RELEVANT LAW / ACT AND, THEREFORE, THE SA ID AMOUNT IS NOT ALLOWABLE AS DEDUCTION. ACCORDINGLY, IT IS HELD THA T THE ABOVE SUM FORMS PART OF THE INCOME OF THE ASSESSEE COMPANY U/ S.2(24)(X) OF THE FT ACT. THE SAME IS, THEREFORE, DISALLOWED AND ADDE D TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. 3 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FI LED AN APPEAL BEFORE THE LEARNED CIT(A). THE LEARNED CIT(A ) HAS CONFIRMED THE ADDITION WITH THE FOLLOWING OBSERVATI ONS:- 4 4 APPELLANT'S ARGUMENTS:- 1 ADDITION OF RS.5,27,800/- RELATED TO LATE PAYMENT OF EMPLOYEES CONTRIBUTION TO PF AND ESI 1.1 THE LD. AO HAS MADE DISALLOWANCES OF RS.5,27,80 0/- ON ACCOUNT OF PF OF RS.4,27,119/- AND ESI AMOUNTING TO RS.1,00,681/- FOR FAILURE TO DEPOSIT THE SAME WITHI N DUE AS PRESCRIBED UNDER THE RELEVANT LAW/ACT TREATED THE S AME AS INCOME OF THE APPELLANT U/S.2(24)(X) OF THE IT ACT. 1.2 THE FACTS OF THE CASE ARE THAT THE APPELLANT CO MPANY RECEIVED PF AND ESI TOWARDS CONTRIBUTION TO PF AND ESI. THE SAM E WAS DEPOSITED BY THE APPELLANT COMPANY INTO THE GOVERNM ENT ACCOUNT BUT IN SOME MONTHS THERE WAS DELAY OF 6 DAY S TO 14 DAYS. BUT THE ENTIRE AMOUNT WAS PAID BEFORE THE FIL ING OF IT RETURNS BY THE APPELLANT COMPANY. THE LD. AO OBSERV ED THAT THE DECISION OF HON'BLE SUPREME COURT IN THE CASE O F ALOM EXTRUSION LTD IS APPLICABLE ONLY IN RESPECT OF THE AMOUNTS COVERED BY SECTION 43B AND NOT INCOME WHICH ARE COV ERED BY SECTION 2(24)(X) R.W.S. 36(1)(VA) OF THE ACT. ACCOR DINGLY TO THE LD. AO, ONLY EMPLOYERS CONTRIBUTION IS ALLOWABLE IF IT IS PAID BEFORE THE DUE DATE OF FILING OF INCOME LAX RETURN BUT THE EMPLOYEES CONTRIBUTION IS STILL GOVERNED BY SECTION 2(24)(X) AND SECTION 36(1)(VA) AND HENCE, IT IS ALLOWABLE ONLY I F IT IS PAID ON OR BEFORE THE DUE DATE PROVIDED IN THE RELEVANT ACT . AS OBSERVED BY THE LD. AO, THE APPELLANT COMPANY HAS FAILED TO DEPOSIT THE EMPLOYEES CONTRIBUTION TO PF AND ESI IN THE RELEVAN T ACCOUNT WITHIN DUE DATE AS PRESCRIBED UNDER THE RELEVANT LA W/ACT AND ACCORDINGLY TREATED THE SAME AS INCOME OF THE APPEL LANT COMPANY U/S.2(24)(X) OF THE FT ACT. 1.3 IT IS RESPECTIVELY SUBMITTED THAT THE APPLICATI ON OF SECTION 36(1)(VA) R.W.S. 2(24)(X) AND TREATING THE UNPAID C ONTRIBUTION AS INCOME COULD BE VALID ONLY WHERE NO PAYMENTS WAS MA DE BY THE APPELLANT AS REQUIRED U/S.43B, NO DEDUCTION WIL L BE ALLOWED FOR THAT AMOUNT, BUT AT THE SAME TIME, THOSE UNPAID EMPLOYER CONTRIBUTION WILL NOT BECOME THE INCOME OF THE APPE LLANT. IN THE CASE OF EMPLOYEES CONTRIBUTION I THE PAYMENTS ARE N OT MADE WITHIN THE PERIOD ALLOWED U/S.43B, THOSE CONTRIBUTI ON ARE NOT ONLY TO BE DISALLOWED IF CLAIMED AS EXPENDITURE BUT ALSO TREATED 5 5 AS INCOME OF THE APPELLANT U/S. 2(24)(X). PROVISION S OF SECTION 36(1)(VA) R.W.S. 2(24)(X) WILL APPLY. IN THE ABOVE CASE THE APPELLANT COMPANY HAD PAID THE AMOUNT WELL WITHIN T HE PRESCRIBED TIME AS REQUIRED U/S.43B. 1.4 SIR, THE LAW IS FAIRLY WELL SET TLED THROUGH VARIOUS JUDICIAL PRONOUNCEMENTS. WE DRAW YOUR KIND* ATTENTI ON TO THE UNDER NOTED DECISION. CIT VS. AIMIL LTD. (2010) 188 TAXMAN 265 / 321/ ITR 508 / 229 CTR 418 (DELHI) THE HONBE DELHI HIGH COURT HAS HELD THAT EMPLOYEES CONTRIBUTION TOWARDS PF AND ESI WOULD QUALIFY FOR D EDUCTION EVEN THOUGH IT WAS PAID AFTER THE DUE DATE PRESCRIB ED UNDER THE PROVIDENT FUND ACT/ESI ACT BUT BEFORE THE DUE DATE OF FILING OF RETURN. IT WAS HELD THAT IF THE EMPLOYEES CONTRIBUT ION IS NOT DEPOSITED BY THE DUE DATE PRESCRIBED UNDER THE RELE VANT ACTS AND IS DEPOSITED LATE, THE EMPLOYER NOT ONLY PAYS INTER EST ON DELAYED PAYMENTS BUT CAN INCUR PENALTIES ALSO FOR WHICH SPE CIFIC. PROVISIONS ARE MADE IN THE PROVIDENT FUND ACT AS WE LL AS THE ESI ACT. THEREFORE THE ACT PERMITS THE EMPLOYER TO MAKE THE DEPOSIT WITH SOME DELAYS SUBJECT TO THE AFORESAID C ONSEQUENCES. IN SO FAR AS THE INCOME TAX ACT IS CONCERNED, THE A PPELLANT GETS THE BENEFIT IF THE ACTUAL PAYMENT IS MADE BEFORE TH E RETURN IS FILED, AS PER THE PRINCIPAL LAID DOWN IN VINAY CEME NT LTD. (2009) 313 ITR (SC) HARRISONS MALAVALAM LTD. VS. ACIT 20091 COCHIN BENCH OF HON'BLE ITAT FOLLOWING THE SUPREME COURT DECISION IN THE CASE OF VINAY CEMENT LTD. (2007)213 CTR 268; (2009) 313 ITR (AT) DIRECTED THE ASSESSING OFFICER TO GIVE DEDUCTION FOR DELAYED PAYMENTS MADE BY THE ASSESSEE BEFORE THE DUE DATE FOR FILING THE RETURN IN RESPECT OF THE EM PLOYEES CONTRIBUTION TO PROVIDENT FUND AND LABOUR WELFARE F UND ...ETC. 1.5 FROM THE ABOVE FACTS AND MERITS OF THE CASE AND VARIOUS LEGAL PRONOUNCEMENTS, YOUR HONOUR WOULD BE CONVINCED THAT ADDITION OF RS.5,27,800/- RELATED TO LATE PAYMENT OF EMPLOYE ES CONTRIBUTION TO PF AND ESI IS NOT JUSTIFIED AND THE IMPUGNED ADDITION MAY KINDLY BE DELETED BY YOUR HONOUR. 6 6 DECISION :- ARGUMENTS OF THE AO AS WELL AS APPELLANT HAVE BEEN CONSIDERED. THERE IS CONSIDERABLE FORCE IN THE ARGU MENTS OF THE AO. RELYING ON THE REASONING GIVEN BY THE AO, THE DISALLOWANCE IS CONFIRMED. 4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL AVAILABLE ON RECORD AND THE JUDGMENTS CITE D ON BEHALF OF THE ASSESSEE. THE ASSESSEE HAS CHALLENGED THE ADDIT ION ON ACCOUNT OF LATE PAYMENT OF EMPLOYEES CONTRIBUTION TOWARDS PF AND ESI. THE LEARNED AR HAS RELIED ON VARIOUS JUDGMENTS. SIN CE THIS ISSUE IS COVERED BY THE JUDGMENT OF THE HONBLE DELHI HIG H COURT IN THE CASE OF CIT VS. AIMIL LTD. (2010) 188 TAXMAN 26 5 (DELHI). RESPECTFULLY FOLLOWING THE RATIO LAID DOWN THEREIN, WE REVERSE THE ORDER OF THE LEARNED CIT(A) AND DIRECT THE AO T O DELETE THE ADDITION MADE ON ACCOUNT OF LATE / DELAYED PAYMENT. 5 AS REGARDS GROUND NO.2 IN THE APPEAL, THE FACTS O F THE CASE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE A SSESSEE HAS SHOWN GROSS PROFIT OF RS.1,86,44,028/- ON TOTAL TUR NOVER OF RS.3,18,59,402/- WHICH WORKS BUT TO 58.52% AS AGAIN ST THE G.P. OF 59.91% ON TOTAL TURNOVER OF RS.3,46,11,057/- SHO WN IN THE IMMEDIATE PRECEDING YEAR. THUS, THERE IS A FALL IN G.P. OF 1.39% DURING THE YEAR AS COMPARED TO IMMEDIATE PRECEDING YEAR. THE ASSESSEE WAS, THEREFORE, ASKED TO EXPLAIN THE FALL IN G.P. WITH SUPPORTING PROOF AND EVIDENCES. IN RESPONSE TO THE SAME, THE ASSESSEE VIDE ITS LETTER DATED 27.08.2010 FURNISHED ITS EXPLANATION FOR THE FALL IN G.P. WHICH IS VERIFIED AND PLACED O N RECORDS. THE AO OBSERVED THAT THE EXPLANATION FURNISHED BY THE A SSESSEE IS NOT SUBSTANTIATED WITH SUPPORTING PROOF AND EVIDENCES. THE AO ALSO 7 7 OBSERVED THAT FURTHER, ON PERUSAL OF THE CASE RECOR DS AND THE DETAILS FURNISHED DURING THE COURSE OF ASSESSMENT P ROCEEDINGS, THE FOLLOWING DEFECTS WERE ALSO NOTICED. [I] ON PERUSAL OF THE RECORDS IT IS SEEN THAT THE C ONSUMPTION OF RAW MATERIAL HAS BEEN INCREASED BY RS.23,12,896/- [49%] I.E. FROM RS.46,50,478/- IN THE PREVIOUS YEAR TO RS.69,63,374 /- DURING THE YEAR UNDER CONSIDERATION DESPITE THE FACT THAT THE TURNOVER OF THE ASSESSEE HAS BEEN DECREASED BY'RS.27,51,655/- [7.95 ] I.E. FROM RS.3,46,11,057/- IN THE PREVIOUS YEAR TO RS.3,18,59 ,402/- DURING THE YEAR UNDER CONSIDERATION, [II] THE ASSESSEE COMPANY IS NOT MAINTAINING ANY DA Y-TO-DAY STOCK REGISTER WHICH HAS BEEN CONFIRMED BY THE ASSESSEE V IDE ITS LETTER DATED 14.07.2010. THE ASSESSEE VIDE ITS LETTER DATE D 14.06.2010 STATED THAT THE COMPANY IS NOT MAINTAINING SUBSIDIA RY RECORDS. THE TAX AUDITOR IN HIS AUDIT REPORT IN CLAUSE 28(B) IN FORM NO.3CD REPORTED THAT QUANTITATIVE DETAILS HAVE NOT BEEN PRODUCED BEFORE US, HENCE WE ARE UNABLE TO REPORT O N THE SAME.' IN THE ABSENCE OF DAY-TO-DAY STOCK REGISTER AND QUA NTITATIVE DETAILS, THE CONSUMPTION OF RAW MATERIALS IS NOT VE RIFIABLE. [III] DURING THE YEAR UNDER CONSIDERATION THE ASSES SEE HAS CLAIMED MODELING & SHOOTING EXPENSES OF R.3,50,389/- AS AGA INST RS.34,450/- CLAIMED IN THE IMMEDIATE PRECEDING YEAR . THUS, THERE IS A DISPROPORTIONATE INCREASE IN THE SAID EX PENSES DURING THE YEAR AS COMPARED TO IMMEDIATE PRECEDING YEAR. T HIS DISPROPORTIONATE INCREASE IN THE SAID EXPENSES IS D ESPITE THE FACT THAT THE TURNOVER HAS BEEN DECREASED FROM RS.3,46,1 1,057/- IN THE LAST YEAR TO RS.3,18,59,402/- IN THE YEAR UNDER CONSIDERATION. THE ASSESSEE WAS ASKED TO FURNISH COMPLETE DETAILS OF THE SAID EXPENSES WITH SUPPORTING PROOF AND EVIDENCES. THE A SSESSEE HAS FURNISHED COPY OF THE LEDGER ACCOUNT OF THE SAID EX PENSES. NO OTHER SUPPORTING PROOF AND EVIDENCES HAS BEEN FURNI SHED. FURTHER, ON PERUSAL OF THE LEDGER ACCOUNT IT IS SEE N THAT MOST OF THE PAYMENTS ARE MADE IN CASH. IN THE ABSENCE OF CO MPLETE SUPPORTING EVIDENCES, THE SAID EXPENSES ARE NOT VER IFIABLE. 8 8 IT WOULD BE APT TO MENTION HERE THAT IN THE CASE OF SAMIR DIAMONDS EXPORTS LTD REPORTED IN 71 ITD 75, THE HON'BLE ITAT , MUMBAI, OBSERVED AS UNDER: AS THIS POINT WE MAY OBSERVED THAT WHAT IS MEANING FUL FOR THE INCOME-TAX OFFICER TO FIND OUT THE CORRECT PROFITS OF AN ASSESSEE, MAY BE MEANINGLESS FOR THE ASSESSEE (AND WHICH WE H AVE MENTIONED CAN NOT AND IS NOT MEANINGLESS IN THE CAS E OF THIS PARTICULAR ASSESSEE), BUT IT IS FOR THE ASSESSING O FFICER TO DETERMINE WHETHER THE BOOKS OF ACCOUNT ARE CORRECT AND COMPLETE ACCORDING TO HIS SATISFACTION OR NOT. WE M AY QUOTE FROM SECTION 145(2) OF THE INCOME-TAX ACT (AS IT ST OOD AT THE RELEVANT TIME.) WHETHER THE ASSESSING OFFICER IS NO T SATISFIED ABOUT THE CORRECTNESS AND COMPLETENESS OF THE ACCOU NTS OF THE ASSESSEE, OR WHERE NO METHOD OF ACCOUNTING HAS BEEN REGULARLY EMPLOYED BY THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN TOE MANNER PROVIDED IN SECTION 144'. OF COURSE THE APPELLANT AUTHORITIES ARE ENTITLED TO JUDGE AS TO WHETHER THE ASSESSING OFFICER WAS JUSTIFIED IN COMING TO THE CO NCLUSION THAT THE BOOKS OF ACCOUNT WERE NOT CORRECT AND COMPLETE, BUT IT MAY NOT GIVE A SIMILAR AUTHORITY TO AN ASSESSEE TO TELL THE ASSESSING OFFICER THAT WHAT THE ASSESSING OFFICER WAS ASKING WAS MEANINGLESS. AS MENTIONED ABOVE, THE WAY IN WHICH T HE ASSESSEE SHOULD HAVE ACTUALLY MAINTAINED THE LOTS O F ITS DIAMOND, AS ADMITTED BEFORE THE COMMISSIONER OF INC OME TAX (A) MENTIONED EARLIER, WOULD ONLY CONFIRM THAT THE ASSESSEE HAD BEEN IN FACT, NOTING DOWN AND MAINTAINING THE DETAI LS REQUIRED BY THE ASSESSING OFFICER WHEN IT RECEIVED BACK THE CUT AND POLISHED DIAMONDS FROM THE LABOUR PARTIES AND WHEN IT WAS SORTING THEM IN DIFFERENT LOTS, SIZES, QUALITY ETC. FROM THIS ALSO WHETHER THAT THE ASSESSEE HAD WITHHELD THE COMPLETE AND CORRECT DETAILS REGARDING ITS ACCOUNTS FROM THE ASSESSING O FFICER AND HENCE, SO FAR AS, THE ASSESSING OFFICER WAS CONCERN ED THE ACCOUNTS WHICH HE WAS ALLOWED TO EXAMINE WERE NOT C ORRECT AND COMPLETE, HENCE HE WAS JUSTIFIED IN INVOKING THE PR OVISIONS OF SECTION 145(2) OF THE INCOME TAX ACT'. FURTHER, THE HON'BLE ALLAHABAD HIGH COURT IN THE CA SE OF AWADHESH PRATAP SNGH ABDUL REHMAN AND BROTHERS REPORTED IN 2 10 ITR 406 AND IN THE CASE OF HARI SHANKAR GOPAL HARI REPORTED IN 97 ITR 716 HAS HELD AS UNDER:- 9 9 'IT IS DIFFICULT TO CATALOGUE THE VARIOUS TYPES OF DEFECTS IN THE ACCOUNT BOOKS OF AN ASSESSEE WHICH MAY RENDER REJEC TION OF ACCOUNT BOOKS ON THE GROUND THAT THE ACCOUNTS ARE N OT COMPLETE OR CORRECT FORM WHICH THE CORRECT PROFIT CANNOT BE DEDUCTED. WHETHER THE PRESENCE OR THE ABSENCE OF A STOCK REGI STER IS MATERIAL OR NOT WOULD DEPEND UPON TYPES OF THE BUSI NESS. IT IS TRUE THAT THE ABSENCE OF A STOCK REGISTER OR CASH M EMOS IN A GIVEN SITUATIONS MAY NOT PER SE LEAD TO AN INFERENC E THAT THE ACCOUNTS ARE FALSE OR INCOMPLETE. HOWEVER, WHERE TH E ABSENCE OF A STOCK REGISTER, CASH MEMOS ETC. IS COUPLED WIT H OTHER FACTORS SUCH AS THAT THE VOUCHERS 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 THE .SAME CANNOT BE RELIED UPON TO AS SESSEE THE INCOME, PROFITS OR GAINS OF THE ASSESSEE'. THE HON'BLE HIGH COURT IN THE CASE OF BHARAT MILK P RODUCTS REPORTED IN 128 ITR 682 CONSIDERED AND HELD AS UNDER: 'THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF COND ENSED MILK, CREAM, KHOVA AND SKIMMED MILK. ON AN EXAMINATION OF THE ACCOUNTS, THE ITO FOUND THAT THE PURCHASES AND CASH SALES WERE NOT VERIFIABLE AND THAT NO DAY TO DAY PRODUCTION AN D MANUFACTURING RECORD HAD BEEN MAINTAINED. ACCORDING LY, HE INVOKED THE PROVISO TO U/S. 145(1) OF THE ACT AND O N THE BASIS OF THE MILK PURCHASES AND SUGAR CONSUMED AS ALSO THE P AST RECORD: HE WORKED OUT THE SHORTAGEIIN PRODUCTION AND THUS M ADE AN ADDITION IN THE SALE PRICE OF LOOSE CONDENSED MILK..............................IN THE ABSENCE OF DAY TO DAY PRODUCTION OR MANUFACTURING RECORD, THE APPLICATION OF THE PRO VISO TO S. 145(1) WAS UPHELD. ............................IN THE INSTANT CASE IT HAS BEEN FOUND AS A FACT AND IT WAS NOT DISPUTED BEFORE US THAT THE ASSESSEE DID ,NOT MAINTAIN ANY DAY TO DAY MANUFACTURING AND PRODUCTIO N ACCOUNT AND THE QUESTION IS WHETHER ON ACCOUNT OF THIS DEFE CT THE ACCOUNTS OF THE ASSESSEE COULD BE REJECTED. IN OUR OPINION, THE ANSWER TO THIS QUESTION HAS TO BE IN THE AFFIRMATIV E. WE DO NOT THINK THAT ANY EXHAUSTIVE LIST OF DEFECTS CAN BE LA ID DOWN WHICH MIGHT JUSTIFY THE REJECTION OF THE BOOKS. THERE MAY BE SOME DEFECTS WHICH EVEN INDIVIDUALLY MAY BE SUFFICIENT F OR REJECTION THE ACCOUNTS. IT WOULD BE USEFUL IN THIS BEHALF TO REFER TO THE DECISIONS OF THE SUPREME COURT IN MCMILLAN & CO. 33 ITR 182. 10 10 THE CORRESPONDING PROVISION IN THE ACT OF 1922 WAS CONTAINED IN S.13 AND THE PROVISO TO IT AND IN MCMILLAN'S CAS E IT WAS OBSERVED THAT THE WORDS' IN THE OPINION OF THE INCO ME TAX OFFICER' IN THE PROVISO S.13 DO NOT CONFER A MERE D ISCRETIONARY POWER, BUT IN THEIR CONTEXT IMPOSE A STATUTORY DUTY ON THE ITO TO EXAMINE IN EVERY CASE THE METHOD OF ACCOUNTING E MPLOYED BY THE ASSESSEE AND TO SEE, (1) WHETHER OR NOT IT IS R EGULARLY EMPLOYED, AND (2) TO DETERMINE WHETHER THE INCOME, PROFITS AND GAINS OF THE ASSESSEE CAN PROPERTY BE DEDUCTED THERE FROM.' IT WAS FURTHERS LAID DOWN THAT THE ITO, EVEN WHEN H E ACCEPTS THE METHOD OF ACCOUNTING, IS NOT BOUND BY THE FIGURE OF PROFITS SHOWN IN THE ACCOUNTS. THE SAME VIEW WAS TAKEN BY T HE SUPREME COURT IN S.N. NAMASIVAYAM CHETTIER 38 ITR 5 79 AND IT WAS LID DOWN (P.588); '....THE INCOME-TAX OFFICE R, EVEN IF HE ACCEPTS THE ASSESSEE'S METHOD OF ACCOUNTING IS NOT BOUND BY, THE FIGURE OF PROFITS SHOWN IN THE ACCOUNTS. IT IS FOR THE INCOME TAX AUTHORITIES TO CONSIDER THE MATERIAL WHICH IS PLACE D BEFORE THEM AND, IF, AFTER TAKING INTO ACCOUNT IN ANY CASE THE ABSENCE OF STOCK REGISTER COUPLED WITH OTHER MATERIALS, THEY A RE OF THE OPINION THAT THE CORRECT PROFITS BAND GAINS CANNOT BE DEDUCTED, THEN THEY WOULD BE JUSTIFIED IN APPLYING THE PROVIS O TO SECTION, 13'. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. BR ITISH PAINTS INDIA LTD REPORTED IN 188 ITR 44 HELD AS UNDER:- IT IS NOT ONLY THE RIGHT, BUT THE DUTY OF THE ASSE SSING OFFICER TO CONSIDER WHETHER OR NOT THE BOOKS DISCLOSED THE TRU E STATE OF ACCOUNTS AND THE CORRECT INCOME CAN BE DEDUCTED THE REFROM. IT IS INCORRECT TO SAY THAT THE OFFICER IS BOUND TO ACCEP T THE SYSTEM CORRECTNESS OF WHICH HAD NOT BEEN QUESTIONED IN THE PAST. THERE IS NO ESTOPPELS IN THESE MATTERS AND THE OFFICER IS NOT BOUND BY THE METHOD FOLLOWED IN THE EARLIER YEARS.' IN VIEW OF THE FACTS , IT CAN BE CLEARLY CONCLUDED THAT THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE NOT CORRECT AND COMPLETE AND HENCE NOT RELIABLE. THEREFORE, THE TRUE PROFIT OF THE BUSINESS OF THE A SSESSEE CANNOT BE DEDUCTED THEREFROM. ACCORDINGLY, THE BOOK RESULT DECLARED BY THE ASSESSEE IS REJECTED, IT IS THE DUTY OF THE ASSESSING OFFICER TO ESTIMATE FAIR AND REASONABLE PROFIT KEEPING IN V IEW THE EXPLANATION OF THE ASSESSEE AND THE FACTS AND CIRCU MSTANCES OF THE CASE. AS STATED IN THE ABOVE PARAGRAPH, THE ASS ESSEE HAS SHOWN G.P. AT 58.22% AS AGAINST THE G.P. OF 59.91% SHOWN IN 11 11 THE IMMEDIATE PRECEDING YEAR. THUS, THERE IS A FALL IN G.P. OF 1.39%. IN VIEW OF DEFECTS/DEFICIENCIES NOTICED AS D ISCUSSED ABOVE AND ALSO CONSIDERING THE EXPLANATION OF THE A SSESSEE AND THE FACTS AND CIRCUMSTANCES OF THE CASE, IT WOULD B E FAIR AND REASONABLE TO ESTIMATE THE G.P. OF THE ASSESSEE AT 59.91% I.E. AT THE SAME PERCENTAGE OF G.P. WHICH WAS SHOWN IN THE IMMEDIATE PRECEDING YEAR. ACCORDINGLY, AN ADDITION OF RS.4,42 ,845/- BEING 1.39% [59.91%-58.52%] OF THE TURNOVER OF RS.3,18,59 ,402/- IS MADE TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF FALL IN G.P. 6 ON APPEAL, THE LEARNED CIT(A) HAS DEALT WITH THE ISSUE IN DETAIL AS UNDER:- 2.2 APPELLANTS ARGUMENTS :- THE APPELLANT IS A PRIVATE LIMITED COMPANY AND IS E NGAGED IN THE BUSINESS OF POSTER & DESIGN SALES AND SOFTWARE DEVE LOPMENTS. THE APPELLANT COMPANY HAS MAINTAINED DETAILED BOOKS OF ACCOUNTS IN THE REGULAR COURSE OF BUSINESS AS PER THE PREVAILING AC COUNTING STANDARDS AND THE SAID BOOKS OF ACCOUNTS ARE AUDITED. BOOKS O F ACCOUNTS, PURCHASE BILL, SALE BILL, EXPENDITURE VOUCHERS ETC. WERE PRODUCED BEFORE THE LD. AO FROM TIME TO TIME. ALL THE EXPENS ES ARE FULLY VOUCHED AND VERIFIABLE. 2.2 THE LD. AO THE REJECTED THE BOOK RESULT DECLARE D BY THE APPELLANT AND ESTIMATED GROSS PROFIT AT, 59.91% INS TEAD OF 58.52% SHOWN BY THE APPELLANT AND MADE AN ADDITION OF RS.4 ,42,845/- ON ACCOUNT OF FALL IN GROSS PROFIT. THE LD. AO MENTION ED IN PARA 4(1) ON PAGE 2 OF HIS ORDER THAT CONSUMPTION OF RAW MATERIA L HAS BEEN INCREASED BY RS.23,12,896/- I.E. FROM RS.46,50,478/ - IN THE PREVIOUS YEAR TO RS.69,63,374/-DURING THE YEAR UNDER CONSIDE RATION AND ALSO ALLEGED THAT MODELING AND SHOOTING EXPENSES WAS MA DE MOSTLY IN CASH AND NO SUPPORTING EVIDENCE HAS BEEN FURNISHED AND I THEREFORE THE LD. AO REJECTED THE BOOK RESULTS AND MADE AN AD DITION OF RS.4,42,845/- ON HIS WHIMS WITHOUT GIVING ANY OPPOR TUNITIES TO THE APPELLANT. 2.3 SIR, IT WAS SUBMITTED TO THE LD. AO THAT THE RE ASON FOR THE INCREASE IN CONSUMPTION OF RAW MATERIAL IS THAT, TH ERE WAS A SHIFT IN THE DEMAND OF DIGITAL OFFSET PRINTING COMPARED TO OTHER PRINTING 12 12 TECHNOLOGY. THIS IS CLEAR FROM DROP IN THE CLICK PR INTING MAINTENANCE, BILL OF XEROX INDIA FROM RS.80,11,986/- IN F.Y.2006 -07 TO RS.63,29,777/- I.E. RS.L6,E2,209/-. 2.4 THE MARKET DEMAND FORCED THE COMPANY TO OUTSOUR CE THE PRINT VOLUME FROM OTHER VENDORS. DURING THE YEAR 2007-08, THE COMPANY OUTSOURCED A PRINT VOLUME OF RS.35,52,713/- FROM TA SVEER AND KLICK. THIS IS THE REASON FOR INCREASE IN CONSUMPTION OF R AW MATERIAL. AT THE SAME TIME THE EXPENSES OF REPAIRS AND MAINTENANCE H AS BEEN DECREASED BY RS.16,74,203/- FROM 64,87,946/- TO RS.48,13,743/ -. 2.5 THE APPELLANT COMPANY HAS ALSO SUBMITTED THE CO MPLETE DETAILS REGARDING MODELING AND SHOOTING EXPENSE FOR RS.3,50 ,389/-. THE IT ACT DOES NOT DEBAR APPELLANT FROM PAYMENTS OF CASH. ALL THE EXPENSES ARE DULY SUPPORTED BY VOUCHERS. ALL THE DESIRED DET AILS (INCL. OF DETAILS OF BUSINESS EXPENDITURE) AND DOCUMENTARY EVIDENCE W ERE PRODUCED BEFORE THE ID. AO FROM TIME TO TIME. BOOKS OF ACCOU NTS AND THEIR SUPPORTING DOCUMENTS WERE PRODUCED BEFORE THE LD. A O SEVERAL TIMES. 2.6 THE LD. AO WITHOUT POINTING OUT ANY DEFECTS IN THE BOOKS OF ACCOUNT MAINTAINED OR IN THE METHOD OF ACCOUNTING R EGULARLY EMPLOYED IN THE PAST, HAS REJECTED THE TRADING RESU LTS FOR THE SIMPLE REASON THAT THE GROSS PROFIT FOR THE YEAR WAS LOW A S COMPARED TO THE IMMEDIATELY PRECEDING YEAR WITHOUT RAISING ANY QUER Y DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 2.7 THE LD. AO STATED THAT THE EXPENSES OF MODELING AND SHOOTING WERE INCURRED IN CASH AND HAS NO SUPPORTING PROOF A ND EVIDENCE. HOWEVER THERE IS NO ALLEGATION OR ASCERTAIN THAT TH E EXPENSES ARE RECORDED AT INFLATED RATES OR NO VOUCHER WAS MAINTA INED BY THE APPELLANT FOR THE ABOVE EXPENDITURE. A PAPER BOOK I S ENCLOSED CONTAINING LEDGER ACCOUNT COPY OF MODELING AND SHOO TING EXPENSES ALONGWITH SUPPORTING EVIDENCES. 2.8 SIR, ALL THE PURCHASES, SALES WERE PROPERLY REC ORDED AND DULY VERIFIED BY THE LD. AO. NOT A SINGLE DISCREPANCY WA S POINTED OUT BY THE LD. AO APART FROM LOW GROSS PROFIT, WHEREAS IN ALL THE CASES RELIED BY THE LD. AO EITHER THE PURCHASE OR SALES ARE NOT VERIFIABLE. IN THE CASE OF APPELLANT ALL THE PURCHASES AND SALES AND E XPENSES ARE DULY RECORDED WITH SUPPORTING EVIDENCES AND ARE VERIFIAB LE. 13 13 NON-MAINTENANCE OF STOCK REGISTER ON DAY TO DAY BAS IS BY ITSELF DOES NOT LEAD TO INFERENCE THAT IT IS NOT POSSIBLE TO DE DUCE THE TRUE INCOME OF THE APPELLANT FROM THE ACCOUNTS MAINTAINED BY THE A PPELLANT, NOR CAN THE ACCOUNT BE SAID TO BE DEFECTIVE OR INCOMPLETE O F THIS REASON ALONE. DECISION :- ARGUMENTS OF THE AO AS WELL AS APPELLANT HAVE BEEN CONSIDERED. THERE IS CONSIDERABLE FORCE IN THE AOS ARGUMENTS. HE HAS GIVEN COGENT REASONS FOR REJECTION OF BOOKS OF ACCOUNT AN D MAKING ADDITION FOR LOW GP. AGREEING WITH THE AO, I CONFIRM HIS ACT ION AND GP ADDITION IS SUSTAINED. 7 WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED THE IR RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ESTIMATION MADE BY THE AO IS AT HIGHER SIDE AND IT WOULD BE SU BSERVE INTEREST OF JUSTICE IF THE ADDITION OF RS.4,42,845/ - IS REDUCED TO RS.2,50,000/-. WE HOLD ACCORDINGLY. 8 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE I S PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT TODAY ON 13-04-2012 SD/- SD/- (A K GARODIA) ACCOUNTANT MEMBER (KUL BHARAT) JUDICIAL MEMBER DATE : 13-04-2012 COPY OF THE ORDER FORWARDED TO: 1. DYNAMIC SOFT LINK PVT. LTD., 402, EMPIRE STATE B UILDING, RING ROAD, SURAT 2. THE ADDL. COMMISSIONER OF INCOME-TAX, RANGE-1, S URAT 14 14 3. CIT CONCERNED 4. CIT(A)-I, SURAT 5. DR, ITAT, AHMEDABAD BENCH-C, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD