DCIT, Ludhiana V. M/s Jain Udhay Fabrics Pvt. Ltd., Ludhiana

ITA 551/CHANDI/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6746 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 06-09-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 20-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: E PASS LUDHIANA PAN AAACJD
• Keywords: Rejection of books of accounts; Business income; Search and seizure; Documents seized
• Section: 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH A, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.551/CHD/2015 (ASSESSMENT YEAR : 2011-12) THE D.C.I.T., VS. M/S JAIN UDAY FABRICS PVT. LTD., CENTRAL CIRCLE-III, B-XXXIII/212, G.T. ROAD (WEST), LUDHIANA. JALANDHAR BYE PASS, LUDHIANA. PAN: AAACJ7940D) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SANDEEP DAHIYA, CIT DR RESPONDENT BY : SHRI ASHWANI KUMAR DATE OF HEARING : 25.07.2017 DATE OF PRONOUNCEMENT : 17.10.2017 ORDER PER ANNAPURNA GUPTA, A.M. : THIS APPEAL FILED BY THE REVENUE HAS BEEN PREFERRED AGAINST THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX(APPEALS)-5, LUDHIANA (HEREINAFTER REFERRED TO A S CIT(APPEALS)) DATED 20.02.2015 RELATING TO ASSESS MENT YEAR 2011-12. 2. BRIEFLY STATED, SEARCH AND SEIZURE OPERATION U/S 132 OF INCOME TAX ACT, 1961 (IN SHORT THE ACT) WAS CONDU CTED ON 01.03.2011 IN THE CASE OF THE ASSESSEE. THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF KNITTED CLOTHES AND READYMADE GARMENTS. DURING SEARCH PROCEEDINGS, SEVERAL DISCREPANCIES WERE FOUN D VIS-- VIS STOCK AND DOCUMENTS SEIZED. THEREAFTER ASSESSME NT PROCEEDINGS WERE CONDUCTED AND ORDER PASSED WHEREIN THE BOOKS OF ACCOUNTS OF THE ASSESSEE WERE REJECTED AND 2 ADDITION MADE ON ACCOUNT OF UNDER INVOICING OF SALE S TO THE EXTENT OF RS.1,83,77,760/- AND ON ACCOUNT OF UNDER VALUATION OF STOCK TO THE EXTENT OF RS.4,76,88,938/ -. THE MATTER WAS CARRIED IN APPEAL BEFORE THE LD CIT(APPE ALS), WHO UPHELD THE ACTION OF THE ASSESSING OFFICER OF R EJECTING THE BOOKS OF ACCOUNT BUT AT THE SAME TIME DELETED T HE ADDITIONS MADE. 3. AGGRIEVED BY THE SAME THE REVENUE HAS FILED THE PRESENT APPEAL CONTESTING BOTH THE ADDITIONS DELETE D BY THE CIT(APPEALS). 4. GROUND NO.(I)(A) AND (I)(B) RAISED BY THE REVENU E IS AGAINST THE ACTION OF THE LD.CIT(APPEALS) IN DELETI NG THE ADDITION MADE ON ACCOUNT OF UNDER INVOICING OF SALE S TO THE EXTENT OF RS.1,83,77,760/- AND READS AS UNDER: (I)(A) WHETHER THE DECISION OF CIT(A) IS RIGHT IN D ELETING THE ADDITION OF RS.1,83,77,760/- MADE BY THE AO ON ACCOUNT OF UNDER INVOICING OF SALES, BY IGNORING TH E DETAILED FACTS & REASONS AS MENTIONED IN THE ASSESSMENT ORDER. (I)(B) WHETHER THE DECISION OF CIT(A) IS RIGHT IN D ELETING THE ADDITION OF RS.1,83,77,760/- MADE BY THE AO ON ACCOUNT OF LOW G.P. RATE BY IGNORING THE DETAILED F ACTS 85 REASONS AS MENTIONED IN THE ASSESSMENT ORDER. 5. BRIEF BACKGROUND LEADING TO THE ADDITION ARE THA T DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD SOLD KNITTED CLOTH OF 4,96,252 KGS FOR RS.12,85,12,832/- AT AN AVERAGE RATE OF 259 PER KG. IN THE MONTH OF MARCH, 2011, WHEREAS IT WAS PURCHAS ED @ OF RS. 253 PER KG. IN THAT MONTH THUS SHOWING GROS S PROFIT OF 2%. THE ASSESSING OFFICER FOUND THAT THE ASSESS EE HAD 3 SHOWN A GROSS PROFIT OF 16.5% DURING THE YEAR. HE, THEREFORE, HELD THAT THE ASSESSEE HAD UNDER INVOICE D HIS SALES FOR THE MONTH AND APPLYING A GP RATE OF 15% O N THE SALES FOR THE MONTH OF MARCH, THEREBY INCREASING TH E SALE RATE FROM RS.259 PER KG. TO RS.296 PER KG, HE ARRIV ED AT THE TOTAL SALES FOR THE MONTH AT RS.14,68,90,592/- AS A GAINST RS.12,85,12,832/- DECLARED BY THE ASSESSEE. THUS AN ADDITION OF RS.1,83,77,760/- WAS MADE TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF UNDER INVOICING OF SALES FOR THE MONTH OF MARCH, 2011. 6. THE LD.CIT(APPEALS) DELETED THE ADDITION ON THE BASIS THAT THE GP RATE PICKED UP BY THE AO WAS BOTH FOR MANUFACTURING AND TRADING ACTIVITIE S OF THE ASSESSEE AND THE GP RATE IN THE TRADING ACTIVITY OF THE ASSESSEE ACTUALLY SHOWED A FALL ONLY TO THE EXTENT OF 0.22% AND, THEREFORE, THE ADDITION COULD HAVE BEEN ENHANC ED ONLY BY A MARGIN OF SAY 0.3% ONLY. HE, THEREFORE, CONFI RMED ADDITION TO THE EXTENT OF 0.3% OF THE GP, DELETING THE REST. AT THE SAME TIME, LD.CIT(APPEALS) FOUND THAT THE AD DITION CONFIRMED STOOD SUBSUMED IN THE SURRENDER MADE BY T HE ASSESSEE OF RS.2 CRORES AT THE TIME OF SEARCH OPERA TION. THEREFORE, HE HELD THAT NO SEPARATE ADDITION WAS CA LLED FOR ON THIS ACCOUNT. THE RELEVANT FINDINGS OF THE LD.CIT(APPEALS) AT PARA 2.11 OF HIS ORDER ARE AS UN DER: 2.11 THE A.O. HAS MADE ADDITION BY PICKING UP THE SALES ONLY IN THE MONTH OF MARCH 2011 AND APPLYING THE GP RATE OF 15% ON THE SAME. IT IS SEEN THAT THE GP RATE OF 15%, BASED UPON LAST YEAR'S RESULTS, IS A COMBINED GP RATE OF TRADING AND MANUFACTURING. IT IS AN ACCEPTABLE PROPOSITION THAT TH E GP IN 4 RESPECT OF TRADING IS USUALLY OF MUCH LOWER RANGE TH AN IN RESPECT OF MANUFACTURING. THE FALL IN GP RATE OF TRADIN G VIS-A- VIS LAST YEAR IS ONLY TO THE EXTENT OF 0.22% WHICH HAS BEEN ABSOLUTELY IGNORED BY THE A.O. BY MAKING THE IMPUGNED ADDITION. THEREFORE, THE ADDITION TO BE MADE WITH RESP ECT TO THE SALES OF THE KNITTED CLOTH COULD BE ENHANCED ON LY BY A MARGIN OF SAY .3% BASED UPON THE COMPARATIVE GP RAT ES IN RESPECT OF TRADING DONE BY THE APPELLANT. THEREFORE, THE ADDITION MADE BY THE A.O. GETS CONFIRMED TO THE EXTE NT OF .3% OF THE GP. THE SAID INCREASE IN PROFITS HAS ALREADY BEEN TAKEN INTO ACCOUNT BY WAY OF DISCLOSURE OF RS.2 CRORES AT THE TIME OF SEARCH OPERATION WHICH STANDS CREDITED IN ASSESSEE' S PROFIT AND LOSS ACCOUNT ACCORDINGLY. HENCE NO SEPARATE ADDITI ON IS CALLED FOR IN TRADING ACCOUNT ON THIS BASIS. 7. BEFORE US LD. DR RELIED UPON THE ORDER OF THE ASSESSING OFFICER WHILE THE LD. COUNSEL FOR THE ASS ESSEE RELIED UPON THE ORDER OF THE LD.CIT(APPEALS) AND RE ITERATING THE SUBMISSIONS MADE BEFORE THE LD.CIT(APPEALS) STA TED THAT THE ADDITION HAD BEEN MADE ARBITRARILY AND ON ENTIRELY WRONG PREMISES. LD.COUNSEL FOR THE ASSESSEE POINTE D THAT THE ADOPTION OF GP RATE OF 16% ON TRADING SALE OF K NITTED GARMENTS ITSELF WAS WRONG HAVING BEING PICKED FROM THE CONSOLIDATED RESULTS OF THE ASSESSEE WHICH INCLUDED MANUFACTURING SALES ALSO. LD.COUNSEL FOR THE ASSESS EE DREW OUR ATTENTION TO THE TRADING RESULTS OF TWO ACTIVIT IES AS POINTED OUT TO THE LD.CIT(A REFLECTING GP RATE OF 1 .77% TO 1.99% IN THE TRADING SECTOR AND HIGHER GP RATE IN THE MANUFACTURING SECTOR OF THE ASSESSEES BUSINESS. LD.COUNSEL FOR THE ASSESSEE, THEREFORE, STATED THAT IT WAS INCORRECT FOR THE AO TO PRESUME THAT THERE HAD BEEN A DRASTIC FALL IN THE GP RATE OF SALE OF KNITTED GARM ENTS MADE DURING THE MONTH OF MARCH, 2001. LD. COUNSEL FOR T HE ASSESSEE FURTHER STATED THAT THERE WAS NO REASON AT ALL FOR 5 PICKING UP ONLY THE SALES FOR THE MONTH OF MARCH, 2 011 THAT TOO WHEN THERE WAS NO EVIDENCE OR SEIZED MATERIAL P OINTING TO THE FACT OF UNDER INVOICING DONE BY THE ASSESSEE . 8. HAVING HEARD THE CONTENTIONS OF BOTH THE PARTIES , WE FIND NO INFIRMITY IN THE ORDER OF THE LD.CIT(APPEAL S). UNDOUBTEDLY, THE BASIC PREMISE WITH THE ASSESSING O FFICER FOR HOLDING THAT THE ASSESSEE HAD INDULGED IN UNDER INVOICING OF SALES WAS THE FACT THAT THE ASSESSEE H AD SHOWN A GP RATE OF 2% ON SALES OF KNITTED GARMENTS IN THE MONTH OF MARCH, 2011 AS AGAINST GP RATE OF 16.5% DURING T HE PRECEDING ASSESSMENT YEAR. NOW THIS BASIC PREMISE H AS BEEN DEMONSTRATED BY THE ASSESSEE TO BE FALSE BY PO INTING THAT THE GP RATE OF 16.5% REFLECTED THE GROSS PROFI T EARNED ON BOTH TRADING AND MANUFACTURING ACTIVITIES. FURTH ER THE ASSESSEE HAD DEMONSTRATED THAT IT WAS EARNING A GP RATE OF 1.7% TO 1.99% ONLY TO ITS TRADING ACTIVITIES OF KNI TTED GARMENTS AND IN VIEW OF THE SAME 2% OF GP RETURNED IN THE MONTH OF MARCH WAS APPROPRIATE. ALL THESE CONTENTI ONS OF THE ASSESSEE HAVE NOT BEEN CONTROVERTED BY THE REVE NUE. WE, THEREFORE, AGREE WITH THE LD.CIT(APPEALS) THAT THERE WAS NO UNDER INVOICING OF SALES REFLECTED BY FALL IN GP RATE ON THE SAME FROM 16.5% TO 2%. MOREOVER, WE AGREE WITH THE LD.COUNSEL FOR THE ASSESSEE THAT THE ENTIRE EXERCIS E APPEARS TO BE ARBITRARY RIGHT FROM THE FACT THAT ONLY THE S ALES FOR THE MARCH, 2011 HAVE BEEN TAKEN INTO CONSIDERATION THAT TOO WITHOUT ANY OTHER EVIDENCE SUPPORTING THE UNDER INV OICING OF SALE EXCEPT THE ALLEGED FALL IN GP RATE. IN ANY CASE, WE 6 FIND THAT THE LD.CIT(APPEALS) HAS RESTRICTED THE A DDITION TO THE EXTENT OF 0.3% OF THE GP WHICH HAS BEEN ACCEPTE D BY THE ASSESSEE ALSO. IN VIEW OF THE ABOVE, WE UPHOLD THE ORDER OF THE LD.CIT(APPEALS) DELETING THE ADDITION MADE ON ACCOUNT OF UNDER INVOICING OF SALES TO THE EXTENT O F RS.1,83,77,760/-. GROUND OF APPEAL NO.(I)(A) AND(I) (B) ARE THEREFORE DISMISSED IN ABOVE TERMS. 9. GROUND NO.(II) RAISED BY THE REVENUE READS AS UN DER: (II) WHETHER THE DECISION OF CIT(A) IS RIGHT IN DE LETING THE ADDITION OF RS.4,76,88,938/- MADE BY THE AO ON ACCOUNT OF UNDER VALUATION OF STOCKS, BY IGNORING THE DETAILED FACTS & REASONS AS MENTIONED IN THE ASSESSMENT ORDER. 10. THE REVENUE IN THE ABOVE GROUND HAS CHALLENGED THE DELETION OF ADDITION MADE ON ACCOUNT OF UNDERVALUAT ION OF STOCK TO THE EXTENT OF RS.4,77,88,938/-. 11. BRIEF FACTS LEADING TO THE ADDITION ARE THAT TH E ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD VALUE D ITS CLOSING STOCK OF KNITTED CLOTHS AT AN AVERAGE VALUE OF RS.140 PER KG., WHILE ON THE DATE OF SEARCH IT WAS VALUED AT RS.287 PER KG. AND PURCHASES IN THE MONTH OF MARCH, SUBSEQ UENT TO THE SEARCH WAS MADE AT AN AVERAGE RATE OF RS.253 PER KG. ON CONFRONTING THE SAME TO THE ASSESSEE, THE ASSESS EE SUBMITTED THAT THE STOCK CONSISTED OF OLD AND LEFT OVER KNITTED CLOTHS WHICH COULD NOT BE USED SINCE THE DE SIGNS AND STYLES HAD BECOME OUTDATED AND, THEREFORE, HAD TO BE SOLD AT VERY LOW PRICE IN THE MONTHS AFTER 31.3.201 1. THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTIO NS STATING 7 THAT THE EXPLANATION WAS GENERAL IN NATURE AND MADE AN ADDITION OF RS.4,77,88,938/- TO THE INCOME OF THE A SSESSEE ON ACCOUNT OF UNDERVALUATION OF KNITTED CLOTHS BY VALUING THE CLOSING STOCK OF KNITTED CLOTHS AT RS.253 PER K G. FOR RS.4,22,26 KGS. AS AGAINST THE RATE OF RS.140 KG. A DOPTED BY THE ASSESSEE. THE LD.CIT(APPEALS) DELETED THE ADDI TION MADE BY HOLDING THAT ADDITION, IF ANY, HAS TO BE B ASED UPON ACTUAL STOCKS AFTER TAKING INTO ACCOUNT PURCHA SE AND SALES SUBSEQUENT TO SEARCH AND WHICH COMES TO 98091 KGS. AND EVEN AFTER APPLYING THE VALUE OF RS.253 PER KG. AS ADOPTED BY THE ASSESSING OFFICER THE STOCK FIGURES WOULD COME TO RS.1,11,74,683/- WHICH WAS MUCH LOWER THAN THE STOCK SHOWN BY THE ASSESSEE AT RS.5.9 CRORES. THE RELEVANT FINDINGS OF THE LD.CIT(APPEALS) ARE AT PARA 3.2 AND 3.3 ARE AS UNDER: 3.2 I HAVE CONSIDERED THE FACTS OF THE CASE, THE BAS IS OF ADDITION MADE, THE ARGUMENTS OF THE AR DURING THE ASSESS MENT AS WELL AS APPELLATE PROCEEDINGS. IT IS SEEN THAT THE A .O. HAVING REJECTED THE BOOKS OF ACCOUNTS OF THE APPELLA NT IS AGAIN GOING BACK TO RELY UPON THE SAME TO MAKE THE I MPUGNED ADDITION BY PICKING UP THE STOCKS AS ON 31.03.2011 AS PER BOOKS OF ACCOUNTS WEIGHING 422026 KG. IF THE INVENTO RISATION DONE DURING THE COURSE OF SEARCH OPERATION IS TAKEN AS RELIABLE BASIS, WHICH IT SHOULD BE, THEN THE CLOSING STOCK AS O N 31.03.2011 COMES TO AS UNDER: QTY STOCK AS ON 01.03.2011 34506 ADD PURCHASE DURING MARCH 2011 560545 595051 LESS: SALES 496160 CLOSING STOCK ON 31.03.2011 @ RS.253/- 98891 3.3 THE ISSUE HERE IS EITHER THE BOOKS OF ACCOUNTS ARE REJECTED OR ACCEPTED BUT PICKING PARTS OF THE SAME AS RELIABLE AND THE OTHER AS UNRELIABLE WOULD NOT BE T HE 8 CORRECT COURSE OF ACTION. THE PHYSICAL STOCK TAKING DONE AS DURING THE COURSE OF SEARCH OPERATION IS A RELIABLE W ITHOUT ANY CONTROVERSY EXCEPT THE CLAIM OF THE ASSESSEE TO THE CONTRARY. THEREFORE, THE ADDITION IF ANY HAS TO BE BASED UPON ACTUAL STOCKS AFTER TAKING INTO ACCOUNT THE PURC HASING/ SALES IN THE MONTH OF MARCH WHICH COMES TO 98091 KG. IF THE UNDER VALUATION OF 113 KG. APPLIED TO THE SAID FIGURE THEN THE FIGURE OF STOCK COMES TO RS.1,11,74,683/-W HICH IS MUCH LOWER AS COMPARED TO THE CLOSING STOCK FIGURE SHOWN BY THE ASSESSEE AT RS.5,90,55,129/-. IN THE CIRCUMSTANCES, THERE IS NO LOGIC IN A.O.'S ACTION IN MAKING THE IMPUGNED ADDITION OF RS. 4,76,88,938/- BY IGNOR ING THE FACT OF PHYSICAL INVENTORY AS DRAWN BY THE DEPARTMENT , THE SAME IS THEREFORE, DIRECTED TO BE DELETED. 12. BEFORE US, LD. DR RELIED UPON THE ORDER OF THE AO, WHILE LD.COUNSEL FOR THE ASSESSEE RELIED UPON THE O RDER OF THE LD.CIT(APPEALS). 13. HAVING HEARD BOTH THE PARTIES AND HAVING PERUSE D THE ORDERS OF THE BELOW AUTHORITIES WE FIND NO INFIRMIT Y IN THE ORDER OF THE LD.CIT(APPEALS). UNDISPUTEDLY, THE BO OKS OF ACCOUNT OF THE ASSESSEE WERE REJECTED. SO THERE WA S NO REASON TO RELY UPON THE SAME FOR CONSIDERING THE QU ANTUM OF STOCK AVAILABLE AS ON 31.3.2011. FURTHER WE AGR EE WITH THE LD.CIT(A) THAT THE QUANTUM AS AT THE END OF THE YEAR OUGHT TO BE CALCULATED BASED ON THE ACTUAL STOCKS F OUND DURING SEARCH ON 1.3.2011 AS ADJUSTED BY THE SALES AND PURCHASE MADE SUBSEQUENTLY. THE REVENUE ALSO HAS POINTED NO INFIRMITY IN THE AFORESAID CALCULATION . HAVING ACCEPTED THE SAID STOCKS OF 98,091 KGS AS ON 31.03. 2011, AND EVEN AFTER APPLYING THE RATE AS RECOMMENDED BY THE ASSESSING OFFICER OF RS.253 PER KG. THE VALUE OF ST OCK UNDENIABLY COMES FAR BELOW THAT WHICH WAS REFLECTED BY THE 9 ASSESSEE IN ITS BOOKS OF ACCOUNT. THEREFORE, THERE IS NO REASON AT ALL FOR MAKING ANY ADDITION ON ACCOUNT OF UNDERVALUATION OF STOCK AND WE UPHOLD THE ORDER OF THE LD.CIT(APPEALS) DELETING THE AFORESAID ADDITION. GROUND OF APPEAL NO(II) OF THE REVENUE STANDS. 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 17 TH OCTOBER, 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A)S 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH