ACIT 18(2), MUMBAI V. S.R. ENTERPARISES, MUMBAI

ITA 5299/MUM/2009

• Counselvise Citation: 529919914 RSA 2009
• Duration Of Justice: 2 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 24-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 15-09-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G P TRIVEDI
• Keywords: Rejection of books of accounts; Onus to prove

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR R EDDY (A.M) ITA NO.5299/MUM/2009(A.Y. 2006-07) THE ACIT 18(2), ROOM NO.115, 1 ST FLOOR, PIRAMAL CHAMBERS, PAREL, MUMBAI 400 012. (APPELLANT) VS. M/S.S.R.ENTERPRISES, 201, A TO Z INDL. ESTATE, G.K.MARG, LOWER PAREL, MUMBAI 13. PAN:AALFS 1560L (RESPONDENT) C.O. NO.73/MUM/2010 (ARISING OUT OF ITA NO. 5299/MUM/2009,A.Y. 2006-07) M/S.S.R.ENTERPRISES, 201, A TO Z INDL. ESTATE, G.K.MARG, LOWER PAREL, MUMBAI 13. PAN:AALFS 1560L (CROSS OBJECTOR) VS. THE ACIT 18(2), ROOM NO.115, 1 ST FLOOR, PIRAMAL CHAMBERS, PAREL, MUMBAI 400 012. (APPELLANT IN APPEAL) REVENUE BY : SHRI G.P.TRIVEDI ASSESSEE BY : SHRI RAJAN R. VORA/ SHRI MIRAL SANGHARAJAKU DATE OF HEARING : 24/11/2011 DATE OF PRONOUNCEMENT : ORDER PER BENCH, ITA NO.5299/M/10 IS AN APPEAL BY THE REVENUE AGAIN ST THE ORDER DATED 6/7/09 OF CIT(A) 28, MUMBAI RELATING TO ASSES SMENT YEAR 2006-7. GROUNDS OF APPEAL RAISED BY THE REVENUE READ AS FOL LOWS: ITA NO.5299/MUM/2009(A.Y. 2006-07) C.O.NO.73/MU/2010 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN: I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 36,22, 813/- ON ACCOUNT OF UNDER VALUATION OF STOCK. II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE ORDER OF THE AO BE RESTORED. 2. THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN TH E BUSINESS OF TRADING IN TEXTILES. FOR ASSESSMENT YEAR 2006-07 THE ASSES SEE FILED A RETURN OF INCOME DECLARING A LOSS OF RS. 7,15,61,338/-. IN A NOTE ATTACHED TO THE COMPUTATION OF INCOME THE ASSESSEE HAD MENTIONED TH AT IT IS DISCONTINUING ITS BUSINESS AND THEREFORE, LOSS CLAIMED IN THE RET URN OF INCOME IS NEITHER BEING CLAIMED NOR THE ASSESSEE SEEKS TO CARRY FORW ARD SUCH LOSS. THE PROFIT AND LOSS ACCOUNT FILED BY THE ASSESSEE SHOWED THE F OLLOWING: PROFIT AND LOSS ACCOUNT FOR 31 ST MARCH 2006: PARTICULARS SCHEDULE NO. RUPEES 31.03.06 INCOME:- SALES & OTHER INCOME INCRESE(DECREASE) IN STOCK EXPENDITURE:- PURCHASE DIRECT EXPENSES ADMINISTRATIVE & OTHER EXPENSES INTEREST PAID TO DEPOSITORS NET PROFIT/(LOSS) FOR THE YEAR 08 09 TOTAL 10 11 12 13 TOTAL 288,822,291 37,744,283 326,567,204 396,145,523 226,916 450,914 1,310,189 398,133,542 (71,566,338) ITA NO.5299/MUM/2009(A.Y. 2006-07) C.O.NO.73/MU/2010 3 AS CAN BE SEEN FROM THE AFORESAID PROFIT AND LOSS A CCOUNT THERE WAS CLOSING STOCK OF WORTH RS. 3,77,44,283/-. THE AO WAS OF T HE VIEW THAT THE CLOSING STOCK SHOWN BY THE ASSESSEE AS ABOVE WAS NOT PROPER AND IT HAS BEEN GROSSLY UNDER VALUED. IN THIS REGARD THE AO POINT ED OUT THAT THE ASSESSEE HAD MADE PURCHASES WORTH RS. 39,61,45,523/- AND HAD MADE SALE WORTH RS. 28,88,22,921/-. ACCORDING TO THE AO EVEN IF IT IS ASSUMED THAT THE SALES WERE MADE BY THE ASSESSEE ON COST PRICE THEN THE VA LUE OF THE CLOSING STOCK SHOULD HAVE BEEN RS.11,29,33,432/- (RS. 39,61,45,52 3 - RS.28,32,12,089). THE AO THEREFORE, PROPOSED TO INCREASE THE VALUE OF THE CLOSING STOCK TO RS.11,29,33,432/- AND BY DOING SO ARRIVED AT A PRO FIT OF RS.36,22,813/- AS FOLLOWS. TRADING & PROFIT AND LOSS A/C. TO PURCHASE 39,61,45,523 SALES & OTHER INCOME 28,88 ,22,921 TO DIRECT EXPENSES 2,26,916 CLOSING STOCK 11, 29,33,434 TO ADMN. EXPENSES 4,50,914 TO INT. PAID TO DEPOSITS 13,10,189 NEW PROFIT 36,22,813 _____________ 40,17,56,355 40,17,56,355 3. IN REPLY TO THE PROPOSED ACTION OF THE AO THE AS SESSEE POINTED OUT THAT THE CLOSING STOCK HAS BEEN VALUED AT COST OR MARKET PRICE WHICHEVER WAS LOWER. IN THIS REGARD THE ASSESSEE POINTED OUT THA T THE QUANTITY OF PURCHASE AND SALES MONTHWISE WERE AS PER ANNEXURE 1 TO THI S ORDER. THE PURCHASES AND SALES MONTH WISE IN TERMS OF VALUE WA S ALSO FIELD, WHICH IS ANNEXURE 2 TO THIS ORDER. IN THIS REGARD THE ASS ESSEE ALSO POINTED OUT THAT IT WAS FOLLOWING VALUATION OF CLOSING STOCK AS PER FIFO METHOD. THE COST PER METER OF CLOSING STOCK WAS VALUED AT RS. 92,50 PER METER AS PER THE FIFO METHOD OF VALUATION OF INVENTORY. THE ASSESSEE POI NTED OUT THE REASONS FOR THE LOSS INCURRED BY THE ASSESSEE WAS BECAUSE IT WA S SELLING TEXTILES AT A LOSS EVERY MONTH AS CAN BE SEEN FROM ANNEXURE -2 TO THIS ORDER. IT WAS THE CLAIM OF THE ASSESSEE THAT DUE TO BAD MARKET CONDITIONS I T WAS MAKING SALES AT ITA NO.5299/MUM/2009(A.Y. 2006-07) C.O.NO.73/MU/2010 4 CONSIDERABLE LOSS. THE ASSESSEE SUBMITTED THAT IT MAINTAINS COMPLETE BOOKS OF ACCOUNT SUPPORTED BY PROPER INVOICES AND VOUCHER S. THE ASSESSEE ALSO SUBMITTED THAT IT WAS MAINTAINING PROPER QUANTITATI VE RECORDS OF GOODS PURCHASED AND SOLD. THE ASSESSEE SUBMITTED BEFORE THE AO THAT THE BOOKS OF ACCOUNTS CANNOT BE REJECTED ON THE GROUNDS STAT ED BY THE AO. 4. THE AO HOWEVER, DID NOT ACCEPT THE PLEA OF THE ASSESSEE AND HE HELD THAT THE VALUE OF CLOSING STOCK WAS NOT ADOPTED ARBITRAR ILY BY HIM AT RS.11,29,33,432/-. HE HELD THAT THE ASSESSEE HAS N OT PRODUCED ANY EVIDENCE BEFORE HIM TO SHOW THAT RATE PER METER WAS LESS THAN THE ACTUAL COST OF THE MATERIAL. THE OTHER REASONS GIVEN BY T HE AO WERE GENERAL REASONS WHICH DO NOT REQUIRE ANY DISCUSSION, AS THE WILL NO T HAVE ANY IMPACT ON THE REJECTION OF BOOKS OF ACCOUNTS OF THE ASSESSEE BY T HE AO. THE AO ULTIMATELY CONCLUDED THAT THE BOOKS OF ACCOUNT ARE BEING REJEC TED BECAUSE OF THE GROSS UNDER VALUATION OF CLOSING STOCK. THE AO, THEREFOR E, PROCEEDED TO DETERMINE THE INCOME OF THE ASSESSEE AT RS. 36,22,813/- ON TH E BASIS OF THE TRADING AND PROFIT AND LOSS ACCOUNT PREPARED BY HIM AS WE H AVE EXTRACTED IN EARLIER PART OF THIS ORDER. 5. BEFORE CIT(A) THE ASSESSEE POINTED OUT IT WAS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF TRADING IN TEXTILES. TH AT THE AO REDUCED THE AMOUNT OF SALES MADE DURING THE YEAR FROM THE PURCH ASES TO ARRIVE AT CLOSING STOCK AND WHILE DOING SO, THE AO MADE AN ASSUMPTION THAT ALL GOODS WERE SOLD AT COST, WHICH ASSUMPTION WAS INCORRECT AND CO NTRARY TO THE FACTS DISCLOSED BY THE ASSESSEE IN REPLY TO AOS SHOW CAU SE NOTICE FOR REJECTION OF BOOKS OF ACCOUNTS OF THE ASSESSEE. THAT THE ASSESS EE MAINTAINED PROPER BOOKS OF ACCOUNT WHICH WERE AUDITED U/S.44AB. THA T THE CLOSING STOCK HAS BEEN VALUED AS PER METHOD OF ACCOUNTING REGULARLY F OLLOWED I.E. FIRST IN FIRST OUT METHOD. THAT THE ASSESSEE HAS BEEN MAKING SALE S AT LOSS DUE TO BAD MARKET CONDITIONS AND THE BUSINESS WAS DISCONTINUED BY THE ASSESSEE LATER ON , HENCE THE ASSUMPTION OF THE AO THAT THE GOODS WERE SOLD AT COST WAS ITA NO.5299/MUM/2009(A.Y. 2006-07) C.O.NO.73/MU/2010 5 NOT TENABLE. THAT THE MONTH WISE PURCHASES AND SALE S WERE SUBMITTED BEFORE THE AO. THAT THE ENTIRE CLOSING STOCK REFERS TO P URCHASES MADE IN FEBRUARY AND MARCH,2006. IT WAS ARGUED THAT BEFORE REJECTIN G THE BOOKS OF ACCOUNTS, THE AO MUST POINT OUT SPECIFIC DEFECTS. MERE SUSPIC ION IS NOT ENOUGH FOR REJECTING THE BOOKS OF ACCOUNT. THE ASSESSEE ALSO RELIED ON THE DECISION OF HONBLE RAJKOT TRIBUNAL IN THE CASE OF ITO V. GIRIS H M. MEHTA (105 LTD 585) WHEREIN IT WAS HELD THAT ONUS TO PROVE THAT THE ACC OUNTS ARE TO BE REJECTED LIES ON THE DEPARTMENT. THE ASSESSEE ALSO RELIED O N THE FOLLOWING DECISIONS LAYING DOWN IDENTICAL PROPOSITION. - ST. TERESAS OIL MILLS V. STATE OF KERLA (76 ITR 365) (KER) - INTERNATIONAL FORREST CO. V. CIT (101 ITR 721) (J &K) - CIT V. MODI ENTERPRISES (2 IDTR 47) (RAJ.) - CIT V. SHRI LA.XMIKANT FLOUR I NDUSTRIES (P) LTD. (144 TAXMAN 174) - SHA DEVI KESHVJI GINNING AND TRADING CO. (P) LTD. V. DCIT (3 SOT 803) (BANG). THE ASSESSEE REITERATED THAT DETAILED STOCK REGISTE R WAS ALSO MAINTAINED, THAT THE BOOKS ACCOUNTS WERE COMPLETE IN ALL RESPEC TS. 6. THE CIT(A) DELETED THE ADDITION MADE BY THE AO F OR THE FOLLOWING REASONS:- 5. I HAVE CAREFULLY CONSIDERED THE INFORMATION ON RECORD. THE ASSESSMENT WAS MADE UNDER THE WRONG ASSUMPTION BY T HE AC THAT THE SALE PRICE CAN NEVER BE LESS THAN THE PURCHASE PRIC E. THE AC COULD NOT COMPREHEND THE SITUATION WHERE SALE PRICE CAN BE LE SS THAN PURCHASE PRICE ESPECIALLY WHEN THE MARKET CONDITIONS ARE BAD . FURTHER, THE FACT THAT THE APPELLANT WAS NOT DOING WELL IN HIS BUSINE SS AND WAS INCURRING LOSSES IS EVIDENT FROM THE SUBSEQUENT CLO SURE OF THE BUSINESS. FURTHER, THE AO IS NOT CORRECT IN REJECTI NG THE BOOKS OF ACCOUNT BY DRAWING A GENERAL CONCLUSION THAT THE CL OSING STOCK WAS UNDER VALUED BASED ON HIS WRONG ASSUMPTION THAT SAL E PRICE CAN NOT BE LESS THAN COST PRICE. FURTHER, IT IS LEGALLY WEL L SETTLED THAT BEFORE REJECTING THE BOOKS OF ACCOUNT SPECIFIC D HAVE TO B E FOUND OUT AND THE ASSESSEES EXPLANATION HAS TO BE CALLED FOR ON SU CH DEFECTS. THE ASSESSEE HAS MAINTAINED BOOKS OF ACCOUNT INCLUDING THE STOCK REGISTER WHICH WERE AUDITED, THE AD CAN NOT REJECT THE SAME MERELY ON THE ITA NO.5299/MUM/2009(A.Y. 2006-07) C.O.NO.73/MU/2010 6 GROUND THAT STOCK WAS UNDER VALUED WHEN SUCH CONCLU SION ITSELF WAS ARRIVED AT BASED ON THE WRONG ASSUMPTION OF THE AO, THAT THE SALES CAN NOT BE MADE AT PRICE LESS THAN THE COST PRICE. I SEE NO MERIT IN ADDITION MADE BY THE AO AND THE SAME IS DELETED. 7. AGGRIEVED BY THE ORDER OF THE CIT(A) REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 8. WE HAVE HEARD THE SUBMISSIONS OF THE LD. D.R WHO RELIED ON THE ORDER OF THE AO. THE LD. COUNSEL FOR THE ASSESSEE REITER ATED THE SUBMISSIONS THAT WERE MADE BEFORE THE CIT(A). 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FI ND THAT THE AO ARRIVED AT THE VALUE OF CLOSING STOCK ON THE PRESUM PTION THAT SALES DISCLOSED BY THE ASSESSEE SHOULD BE AT THE COST PRICE OR PURC HASE COST OF THE GOODS. WE HAVE ALREADY SEEN IN ANNEXURE- 2 TO THIS ORDER T HAT THE VALUE OF PURCHASE AND VALUE OF SALES FOR THE VARIOUS MONTHS. A PERUS AL OF THE SAME WOULD SHOW THAT THE ASSESSEE WAS SELLING TEXTILES AT A LO SS EVERY MONTH. IN FACT THE CLOSING STOCK COMPRISED 4,08,046.30 METERS OF MIXE D SHIRTING AND SUITING. THIS IS PART OF STOCK THAT WAS PURCHASED IN FEB.200 6. THE ASSESSEE HAS VALUED THE CLOSING STOCK AT THE COST PRICE. IT IS NOT COMPLAINT OF THE AO THAT THE BOOKS OF ACCOUNTS ARE NOT PROPERLY MAINTAINED. IN FACT THE ASSESSEE GAVE ALL THE DETAILS DEMANDED BY THE AO. THE CONCLUSION S DRAWN BY THE AO CAN BE VALID ONLY IF AO COULD ESTABLISH THAT THE SALES MADE BY THE ASSESSEE WERE AT THE PURCHASE PRICE( COST PRICE). THE ASSESSEES CONTENTION WAS THAT SALES WERE MADE AT A PRICE LESS THAN THE PURCHASE PRICE W HICH RESULTED IN THE LOSS AND CLOSURE OF THE BUSINESS. THE AO HAS NOT BROUGH T ANY MATERIAL ON RECORD TO SHOW THAT THE CLAIM OF THE ASSESSEE WAS WRONG. THE AO HAS NOT EXAMINED ANY TRANSACTION OF SALE TO FIND OUT WHETHER THE SAL E DECLARED BY THE ASSESSEE IS AT THE APPROPRIATE PRICE. THE ASSESSEEE HAD FUR NISHED ALL DETAILS TO ENABLE AO TO MAKE ENQUIRY AND INVESTIGATION, IF HE HAD WAN TED TO DO SO. THUS THERE HAS BEEN NO BASIS FOR REJECTION OF BOOKS OF ACCOUNT S OF THE ASSESSEE. ITA NO.5299/MUM/2009(A.Y. 2006-07) C.O.NO.73/MU/2010 7 10. IT IS ALSO OBSERVED FROM THE RECORDS THAT DURI NG THE YEAR UNDER REVIEW THE FIRM HAS MAINTAINED REGULAR BOOKS OF ACCOUNTS O N DOUBLE ENTRY SYSTEM, BASED ON WELL ESTABLISHED PRINCIPLES OF ACCOUNTING, METHOD OF ACCOUNTING WHICH WAS REGULARLY FOLLOWED AND REVENUE HAS ACCEPT ED IT YEAR AFTER YEAR. THE DETAILED STOCK REGISTER HAS ALSO BEEN MAINTAINE D. THE BOOKS OF ACCOUNTS ARE COMPLETE, TALLIED AND CLOSED. THE ACCOUNTS OF T HE FIRM HAS BEEN AUDITED BY QUALIFIED CHARTERED ACCOUNTANT, AS REQUIRED UNDE R SECTION 44 AB OF THE INCOME TAX ACT., 1961 THE AUDIT REPORT IN FORM 3CB AND THE DETAILS IN FORM 3 CD HAVE BEEN FURNISHED ALONG WITH THE RETURN OF I NCOME WELL WITHIN THE TIME PRESCRIBED. THE ASSESSEE HAD SUBMITTED DETAILS OF MONTH-WISE SALES AND PURCHASES, PARTY-WISE SALES AND PURCHASES AND O THER DETAILS CALLED FOR. THERE ARE NO DISCREPANCIES OR IRREGULARITIES OR FAI LURES REPORTED HENCE IN THE ABOVE CIRCUMSTANCES, THE BOOK RESULTS WOULD BE BIND ING ON THE INCOME TAX DEPARTMENT. 11. THE AO HAS ARRIVED AT THE CLOSING STOCK FIGURE OF RS.11,29,33,434/- BY DEDUCTING FROM THE SALES AMOUNT VALUE OF PURCHASES, WHICH IS NOT THE ACCEPTED METHOD FOR ARRIVING AT CLOSING STOCK AMOUN T. BY DOING SO, THE AO HAS ARRIVED AT AN ARBITRARY RATE PER METER OF RS. 2 76/-. THE CLOSING STOCK NEEDS TO BE ARRIVED BY VALUATION OF CLOSING STOCK ( CLOSING STOCK QUANTITY OF 408046 MTRS ) IN HAND. THE SAID C1OSING STOCK WAS V ALUED AT COST OR REALIZABLE VALUE WHICHEVER IS LOWER, (STATED IN TH E METHOD OF ACCOUNTING, SCHEDULE 14 OF THE AUDITED ACCOUNTS)B Y THE FIRM AT RS. 3,77,44,283/- VALUED AT COST OF RS.92.50 PER METER. THIS VALUE HAS BEEN PROPERLY ARRIVED AT AND VALUED AS PER THE APPLICABL E MANDATORY ACCOUNTING STANDARD. THE QUANTITATIVE DETAILS OF PRINCIPAL ITE MS OF GOODS TRADED WERE DULY GIVEN IN ANNEXUE XL TO FORM 3 CD CLAUSE 28 ( A). IN VIEW OF ABOVE, THERE IS NO REASON FOR REJECTION OF BOOK RESULT. 12. FOR THE REASONS STATED ABOVE WE ARE OF THE VIE W THAT THE CIT(A) WAS JUSTIFIED IN COMING TO THE CONCLUSION THAT THERE WAS NO GROUND FOR REJECTING ITA NO.5299/MUM/2009(A.Y. 2006-07) C.O.NO.73/MU/2010 8 THE BOOKS OF ACCOUNTS AND THE BOOKS RESULT HAVE T O BE ACCEPTED. WE FIND NO REASONS TO INTERFERE IN THE ORDER OF THE CIT(A). CONSEQUENTLY, THE APPEAL BY THE REVENUE IS DISMISSED. CO NO 73/MUM/2010: 13. CROSS OBJECTION FILED BY THE ASSESSEE IS IN SUP PORT OF THE ORDER OF THE CIT(A) AGAINST WHICH THE REVEUE HAS FILED THE PRESE NT APPEAL. THE CROSS OBJECTION IS PURELY SUPPORTIVE OF THE ORDER OF THE CIT(A). IN VIEW OF THE DISMISSAL OF THE REVENUES APPEAL THE CO REQUIRES N O CONSIDERATION. CONSEQUENTLY, THE SAME IS DISMISSED. 14. IN THE RESULT, THE APPEAL AS WELL AS THE CROSS OBJECTIONS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 30 TH DAY OF NOV , 2011. SD/- SD/- (J.SUDHAKAR REDDY) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 30 TH NOV.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RF BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.5299/MUM/2009(A.Y. 2006-07) C.O.NO.73/MU/2010 9 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 25/11/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 28/11/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER