Garden Silk Mills Limited, Surat V. The Addl.CIT,Range-1, Surat

ITA 651/AHD/2009

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0306 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 20-09-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 27-02-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D P GUPTA
• Assessee Lawyers: J P SHAH
• Keywords: Gross profit estimation; Depreciation; Opportunity of being heard; Additional depreciation; Earning of tax free income; Notional interest; Tax effect; Commercial expediency
• Section: 43B; 14A; 115JB; 145; 27; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH AHMEDABAD BEFORE SHRI D.K.TYAGI , JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEMBER ITA NOS. 220/AHD/2008& 651/AHD/2009 ASSESSMENT YEARS :2004-05 & 2005-06 GARDEN SILK MILLS LIMITED GARDEN MILLS COMPLEX, SAHARA GATE, SURAT 395010 V/S . ADDL. COMMISSIONER OF INCOME TAX, RANGE-1, SURAT. PAN NO. AAACG8932C (APPELLANT) .. (RESPONDENT) ITA NO. 720/AHD/2009 ASSESSMENT YEAR : 2005-06 & C.O. NO. 68/AHD/2009 ASSESSMENT YEAR : 2005-06 ADDL. COMMISSIONER OF INCOME TAX, RANGE-1, SURAT. GARDEN SILK MILLS LIMITED GARDEN MILLS COMPLEX, SAHARA GATE, SURAT 395010 V/S . V/S. GARDEN SILK MILLS LIMITED GARDEN MILLS COMPLEX, SAHARA GATE, SURAT 395010 ADDL. COMMISSIONER OF INCOME TAX, RANGE-1, SURAT. (APPELLANT) .. (RESPONDENT) BY REVENUE SHRI D.P. GUPTA, CIT D.R. /BY ASSESSEE SHRI J.P. SHAH, A.R. /DATE OF HEARING 30.11.2012 /DATE OF PRONOUNCEMENT 15.02.2013 O R D E R PER : T.R.MEENA, ACCOUNTANT MEMBER AMONG THESE THREE APPEALS, TWO APPEALS I.E. ITA NOS . 220/AHD/2008 FOR A.Y. 2004-05 & 651/AHD/2009 FOR A. Y. 2005-06 ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 2 ARE FILED BY THE ASSESSEE AND ONE I.E. ITA NO.720/A HD/2009 FOR A.Y. 2005-06 IS FILED BY THE REVENUE & C.O. NO. 68/AHD/2009 FOR A.Y. 2005-06 FILED BY THE ASSESSEE WHICH HAVE EMANATED FROM THE ORDERS OF THE LEARNED CIT(A)-I, SURAT, DATED 01-11-2007 FOR A.Y. 04-05 & 24.12.2008 FOR A.Y. 05-06. THESE ASSESSEES APPEALS & C.O. & REVENUES APPEAL WERE H EARD TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS COMMON ORDER FOR T HE SAKE OF CONVENIENCE. 2. THE EFFECTIVE GROUNDS OF ITA NO. 220/AHD/2008 ARE AS UNDER: 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTI ON OF THE ASSESSING OFFICER IN DISALLOWING AN EXPENDITURE OF RS.93,00,000 BEING COMMISSION OF RS.90,00,000 PAID TO MR. PRAFUL A. SHAH, THE CHAIRMAN & MANAGING DIRECTOR AND RS.3,00,000 PAID T O MR. ALOK P. SHAH, THE NON EXECUTIVE DIRECTOR OF THE COMPANY UND ER SECTION 37 OF THE INCOME-TAX ACT (THE ACT). 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER IN DISALLOWING THE DEDUCTION OF R S.2,47,57,900 UNDER SECTION 80IA OF THE ACT ON THE GROUND THAT DE MAND CHARGES, TIME USE CHARGES AND OTHER CHARGES SHOULD NOT BE CO NSIDERED BY THE COMPANY FOR DETERMINING THE TRANSFER VALUE OF POWER . 3. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER IN MAKING AN ADDITION OF RS.84,11 ,949 ON ACCOUNT OF ADJUSTMENTS UNDER SECTION 145A OF THE ACT, TO TH E OPENING STOCK OF RAW MATERIAL. 4. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER IN MAKING AN ADDITION OF RS.128,8 2,787 UNDER SECTION 145A OF THE ACT, BEING DIFFERENCE BETWEEN E XCISE DUTY IN CLOSING STOCK OF RAW MATERIAL AND UNUTILIZED MODVAT /CENVAT CREDIT AS AT THE YEAR END ON PURCHASE. ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 3 5. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER IN MAKING AN ADDITION OF RS.17,93 ,339 TO THE BOOK PROFITS UNDER SECTION 115JB OF THE ACT, BEING LOSS ON ACCOUNT OF DIVIDEND STRIPPING DISALLOWED BY THE COMPANY UNDER SECTION 94(7) OF THE ACT, TREATING THE SAME AS EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME. 6. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER IN MAKING NOTIONAL DISALLOWANCE O F RS.19,20,000 UNDER SECTION 14A OF THE ACT IN COMPUTING THE NORMA L PROVISION OF THE ACT AS WELL AS UNDER SECTION 115JB, ON ACCOUNT OF INTEREST EXPENSE ON INVESTMENTS IN SECURITIES ON WHICH DIVID END INCOME IS EARNED. 7. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER IN DISALLOWING THE DEPRECIATION O F RS.16,28,11,000 CLAIMED BY THE COMPANY BECAUSE OF CHANGE IN THE MET HOD OF DEPRECIATION FROM SLM TO WDV. 8. THE LEARNED CIT(A) ERRED IN NOT ADMITTING ADDITI ONAL GROUND OF APPEAL FILED BY THE APPELLANT IN RESPECT OF DEDUCTI ON FOR DEFERRED TAX LIABILITY OF RS.2,65,96,475 AND DIVIDEND DISTRIBUTI ON TAX OF RS.1,22,64,945 FROM THE BOOK PROFITS UNDER SECTION 115JB. 3. THE FACTUAL MATRIX OF THE CASE IS THAT THE ASSES SEE MANUFACTURES AND DEALS IN MAN-MADE TEXTILES AND POY. THE APPELLANT HAD SHOWN SALES AND JOB CHARGES AT RS.467.22 CRORES DURING THE YEAR. THE ASSESSEE HAS ALSO SHOWN INCOME FROM FINANCIAL OPERATIONS AT RS.3.97 CRORES AND OTHER INCOME OF RS.5.16 CRORES. THE GROSS PROFIT HAD DECLARED AT T HE RATE OF 14.86% AS AGAINST LAST YEAR GROSS PROFIT AT THE RATE OF 16.01 %. 4. THE FIRST GROUND OF APPEAL IS AGAINST DISALLOWI NG AN EXPENDITURE OF RS.93 LACS BEING COMMISSION OF RS.90 LACS PAID TO S HRI PRAFUL A. SHAH AND ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 4 RS.3 LACS TO SHRI ALOK P. SHAH. THE LD. A.O. OBSER VED THAT THE APPELLANT HAD PAID COMMISSION TO SHRI PRAFUL A. SHAH AND SHRI ALO K P. SHAH AT RS. 93 LACS DURING THE YEAR UNDER CONSIDERATION. THE LD. A.O. GAVE THE SHOW CAUSE NOTICE ON THIS ISSUE AND ALSO ASKED TO EXPLAIN THE SERVICE RENDERED BY THE BOTH DIRECTORS. THE APPELLANT REPLIED VIDE LETTER DATED 16.11.2006 WHICH WAS CONSIDERED BY THE A.O. THE LD. A.O. OBSERVED THAT THE APPELLANT HAS NOT INCURRED THIS EXPENDITURE WHOLLY AND EXCLUSIVELY FO R BUSINESS PURPOSE. FURTHER, SHRI PRAFUL A. SHAH HAD ALLOWED HANDSOME S ALARY AND PERQUISITES. THE APPELLANT HAD NOT EXPLAINED THAT WHAT EXTRA EFF ORTS AND EXTRA TIME DEVOTED BY HIM. THE COMPANY HAD ALSO OTHER DIRECTORS AND S ENIORS FOR THE RUNNING OF THE BUSINESS. SHRI AMICHAND SHAH (FATHER OF SHRI P RAFUL A. SHAH) HOLD CONTROL, BOTH, OVER EQUITY SHARES AND VOTING POWER IN RESPEC T OF THE COMPANIES BELONGING TO GARDEN GROUP. IT IS, THEREFORE, VERY MUCH CONVENIENT FOR ANY MEMBER OF THE FAMILY OF SHRI AMICHAND SHAH TO ARRAN GE AFFAIRS TO THEIR MUTUAL BENEFITS IN THE BOARD OF DIRECTORS OR EVEN IN THE M EETINGS OF SHAREHOLDERS. THE RESULT PASSED BY THE DIRECTOR OF THE FAMILY MEM BERS OF SHRI AMICHAND SHAH. NOTHING HAS BEEN BROUGHT OUT AS TO WHAT EXTR A SHRI PRAFUL A. SHAH HAD PERFORMED WHICH MADE HIM ENTITLED TO ALLOW HIM EXTR A PAYMENTS/COMMISSION TO WHICH MR. BHENSANIA AND OTHER SENIOR DIRECTORS W ERE NOT ENTITLED. THUS, HE HELD THE EXPENDITURE OF RS.93 LACS WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSES. 5. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE AS SESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO HAD CONFIRMED THE ORD ER. THE OPERATIVE PORTION IS AS UNDER: ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 5 2.4 I HAVE CONSIDERED THE SUBMISSION MADE BY THE A PPELLANT AND OBSERVATION OF THE A.O. THIS ISSUE IN THE CASE OF SHRI PRAFUL A. SHAH HAS ALREADY BEEN DECIDED IN THE APPELLATE ORDE R OF A.Y.2003-04 IN APPEAL NO.CAS-I/81/05-06 DATED 16/10 /2006. SINCE THE FACTS IN THE CURRENT YEAR ARE SAME AS IN THE LAST YEAR, THEREFORE, THE LAST YEARS ORDER IS FOLLOWED AND TH E DISALLOWANCE MADE BY THE AO IN RESPECT OF COMMISSION PAID TO PRA FUL A. SHAH IS CONFIRMED . AS REGARDS FEE PAID TO SHRI ALOK SHAH THE APPELLANT HAS NOT GIVEN ANY EVIDENCE REGARDING SERV ICES HAVING BEEN RENDERED EXCEPT SAYING THAT SHRI ALOK SHAH IS AN MBA (FINANCE) AND HAS GAINED ELECTRICAL ENGINEERING. H E IS ACTING AS A NON-EXECUTIVE DIRECTOR. BESIDES SAYING THIS, NOTHI NG ELSE HAS BEEN STATED. HENCE, THE DISALLOWANCE MADE BY THE AO SAY ING THAT THE PAYMENT IS NOT FOR THE PURPOSE OF BUSINESS IS CORRE CT ESPECIALLY WHEN IT HAS BEEN STATED THAT SHRI ALOK SHAH IS ONLY A NON-EXECUTIVE DIRECTOR. IN VIEW OF THIS REASON THIS GROUND OF AP PEAL IS DISMISSED AND THE ACTION OF THE A.O. IS UPHELD. 6. NOW THE ASSESSEE IS BEFORE US. LD. COUNSEL FOR THE APPELLANT CONTENDED THAT THE ASSESSEES CASE IS COVERED BY OW N CASE IN ITA NO. 2877/2006 FOR A.Y. 2003-04, AHMADABAD D BENCH, DT D. 08.05.2009 AND IN FAVOUR OF THE ASSESSEE. HE ALSO FILED PAPER BOOK O N THIS ISSUE FROM PAGE NO.1 TO 71 AND CONTENDED THAT UNDER THE DYNAMIC AND EFFE CTIVE LEADERSHIP OF THE ASSESSEE COMPANY ACHIEVED AS UNDER: I. CASH PROFIT HAS GROWN FROM 18.95 CRORES TO 77.27 CRORES FROM A.Y. 2001-02 TO 2004-05. II. THE SALE VALUE ALSO INCREASE FROM RS.25477.78 L ACS TO RS.28825.58 LACS. III. THE COMPANY HAS UNDER TAKEN ITS FACED TO PROJE CT INVOLVING INCREASE IN POY CAPACITY BY 33000 TPA. ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 6 IV. THE COMPANY HAS ALSO SET UP DOWN SCHEME CAPACIT Y SUCH AS DRAW WARPING, WEAVING, 2 X 1 TWISTING MACHINES, CAPTIVE POWER GENERATION, ETC. HE ALSO DRAWN OUR ATTENTION ON PAGE NOS. 18,19 & 20 AND ARGUED THAT THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY INCURRED FOR BUSINESS PURPOSES. AT THE OUTSET, LD. CIT DR RELIED ON THE ORDER OF THE C IT(A). 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL BEFORE US. IN A.Y. 03-04, THE SIMILAR ISSUE WAS HEARD BY THE CO-ORDINATE D BENCH ON IDENTICAL ISSUE WHEREIN SIMILAR DISALLOWANCE OF RS.1.25 CRORE WAS MADE BY THE A.O. WHICH HAS BEEN HELD IN FAVOUR OF THE ASSES SEE BY OBSERVING THAT THE SIMILAR COMMISSION WAS ALLOWED BY THE A.O. IN A.Y. 02-03, TOTAL TURN OVER HAD GONE UP DURING THE YEAR. THE BOARD HAD INCREASED T HE SALARY ON THE BASIS OF EXTENSIVE KNOWLEDGE, BUSINESS SKILL, MANAGERIAL EXP ERIENCE AND CAPABILITY INCREASING IN NET PROFIT AND COMMERCIAL EXPEDIENCY. THE REVENUE HAD NOT BROUGHT ANY MATERIAL ON RECORD WHICH CONTRADICTS TH E FACTUAL FINDING OF THE YEAR UNDER CONSIDERATION TO A.Y. 03-04. THUS, WE ALLOW THE APPEAL OF THE ASSESSEE ON THIS GROUND. 8. THE SECOND GROUND OF APPEAL IS AGAINST NOT ALLOW ING THE 80IA DEDUCTION OF RS.2,47,57,900/-. THE LD. A.O. OBSERVED THAT TH E ASSESSEE HAD CLAIMED 80IA DEDUCTION AT RS.9,91,77,642/- ON GENERATION OF POWER. THE APPELLANT HAD GENERATED THE POWER AND UTILIZED / TRANSFERRED THE SAME TO ITS OTHER UNITS. THE APPELLANT HAD CHARGED THE TRANSFER VALUE WHILE APPLYING THE RATE PER UNIT RS.5.40 AND CLAIMED ITS AS MARKET VALUE. AS PER T ARIFF CHART OF GEB, THE RATE HAS BEEN CLASSIFIED IN THE FOLLOWING CATEGORIES: ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 7 ENERGY CHARGE @ RS. 4.10 DEMAND CHARGE @ RS. 0.40 TIME USE CHARGES @ RS.0.75 OTHER CHARGES @ RS. 0.19 REBATE (-) @ RS. 0.02 NET @ RS. 5.40 THE LD. A.O. GAVE SHOW CAUSE NOTICE ON 15.12.2006 O N NOTIONAL SALE VALUE WHICH INCLUDES DEMAND CHARGE AND ENERGY CHARGE WHIC H WAS REPLIED BY THE APPELLANT. HE OBSERVED THAT THE DEMAND CHARGE IS P ENALTY CHARGED BY THE GEB IN CASE THE CONSUMER DOES NOT USE THE 85% OF EN ERGY AS HE AGREED TO USE. THIS AGREEMENT IS COMPULSORY FOR INDUSTRIES. TIME USE CHARGE IS A CHARGE AGAINST THE SUPPLY OF ENERGY DURING PEAK HOU RS. DUE TO SHORTAGE OF ENERGY THE GEB ENCOURAGE THE INDUSTRIES TO MINIMIZE THE USE OF ENERGY DURING PEAK HOURS. SO, IT IS AGAIN ONE TYPE OF PEN ALTY. OTHER CHARGE AS STATED BY THE ASSESSEE THAT IN CASE HE TAKES ENERGY FROM G EB THAN HE HAS TO DEPOSIT SOME AMOUNT. BY USING THE SELF ENERGY THIS NEED NOT TO DEPOSIT HIS AMOUNT. IT IS COST TO THE ASSESSEE. THIS CHARGE I S NOTIONAL INTEREST OF THAT DEPOSIT. THESE CHARGES IN THE SHAPE OF PENALTY TO USE OR NOT USE THE ENERGY. THE LD. A.O. HELD AS UNDER: I. THE ASSESSEE IS USING SELF GENERATED ENERGY, MEA NS HE PROVIDING ENERGY FROM ONE HAND TO HIS ANOTHER HAND. II. NOW THE ASSESSEES ONE HAND CAN NOT SAY TO ANOT HER ONE THAT IN CASE HE WILL NOT USE AGREED ENERGY THAN FIRST ONE WILL C HARGE EXTRA CHARGES FROM THE OTHER ONE. III. THE GEB GENERATE SO MUCH OF ENERGY SO HE WANT GUARANTEE FROM THE INDUSTRIES FOR USE OF ENERGY SO THAT HE WILL BE ABL E TO UTILIZED THE SPARE ENERGY FOR BETTERMENT OF THE COUNTRY. ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 8 IV. IN THE CASE OF THE ASSESSEE THERE IS NO SURPLUS OF ENERGY BECAUSE THE PLANT WAS INSTALLED AS PER THE REQUIREMENT OF THE A SSESSEE. V. IN CASE THERE IS SURPLUS, THAN HE CAN NOT SALE I N THE MARKET. VI. THE ASSESSEE CAN NOT DIVERT HIS ENERGY, IN CASE HIS ONE HAND REFUSED TO USE THE ENERGY OF THE OTHER HAND. VII. THE TIME USE CHARGES CONCEPT IS ALSO NOT APPLI CABLE IN THE CASE OF THE ASSESSEE. VIII. IN CASE THE ONE HAND OF THE ASSESSEE SAYS TO OTHER THAT YOU GIVE ME TIME USE CHARGE OTHER ISE ONE WILL NOT PROVIDED ENE RGY TO SECOND ONE THAN IT CAN NOT BE DONE. IX. THE ASSESSEE HAS NO OPTION TO NOT USE THE ENERG Y BECAUSE HE GENERATES THE SAME FOR SELF USE. SO BOTH THE DEMAN D CHARGE AND TIME USE CHARGE FACTORS ARE NOT APPLICABLE IN THE CASE O F THE ASSESSEE. X. THE THIRD ONE IS NOTIONAL CHARGES. WHEN THE ASS ESSEE HAS NOT DEPOSITED ANY AMOUNT, THAN THERE IS NO QUESTION OF THIS ADDITIONAL COST TO THE ASSESSEE. THESE CHARGES ARE NOT APPLICABLE IN CASE OF APPELLA NT AS IT HAD INSTALLED THE CAPACITY OF THE POWER PLANT AS PER HIS REQUIREMENTS AND GENERATED ELECTRICITY AS PER ITS REQUIREMENT, HOWEVER, GEB GENERATES HUGE QUANTITY OF ELECTRICITY. THE A.O. FINALLY DISALLOWED THE DEMAND CHARGE, TIME USE CHARGE AND OTHER CHARGE OF RS.2,47,57,900/- AND DEDUCTION U/S. 80IA WAS ALLOWED LESS ON THIS DISALLOWANCE. 9. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE AS SESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO HAS DISMISSED THE ASSE SSEES APPEAL BY OBSERVING AS UNDER: 3.5 I HAVE CONSIDERED THE SUBMISSION MADE BY THE A PPELLANT AND OBSERVATION OF THE AO. THE FACTS IN THIS CASE ARE CLEAR AS STATED ABOVE. THE APPELLANT HAS GENERATED ELECTRICITY IN A CAPTIV E ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 9 POWER PLANT AND TRANSFERRED THE SAME TO ITS OTHER U NITS. THE APPELLANT HAS ADOPTED THE RATE OF TRANSFER AT THE S AME RATE AS GEB SUPPLIES POWER TO ITS CUSTOMERS. THE AO HAS ST ATED THAT THE POWER SUPPLIED BY GEB CONSISTS OF FOUR FACTORS THREE OF WHICH ARE NOT APPLICABLE TO THE ASSESSEE. ONLY ENE RGY CHARGE OF RS.4.1 IS APPLICABLE WHICH CONSISTS OF COST OF E NERGY SUPPLIED. THE DEMAND CHARGE CONSISTS OF ADDITIONAL CHARGE IF THE CUSTOMER DOES NOT USE THE ENERGY AS PER THE INS TALLED ENERGY METRE. THE TIME USED CHARGE IS LEVIED BY TH E GEB FOR PEAK POWER USE OF ENERGY AND OTHER CHARGES ARE NOTI ONAL CHARGES WHICH ARE ALSO NOT APPLICABLE TO THE ASSESS EE. THE CONTENTION OF THE AO IS CORRECT. THE APPELLANT IS GENERATING ENERGY IN ITS OWN POWER PLANT AND HENCE THE CONCEPT OF DEMAND CHARGE AS LEVIED BY GEB DOES NOT EXIST IN TH E CASE OF THE APPELLANT. THERE IS NOTHING LIKE MINIMUM USE O F ENERGY WHICH THE APPELLANT WANTS ITS OTHER UNITS TO USE, F AILING WHICH IT WILL SUFFER LOSS. SIMILARLY, THERE IS NOTHING LIKE PEAK HOUR USE OF ENERGY IN THE CASE OF ITS OWN CAPTIVE PLANT. THERE FORE I AGREE WITH THE AO THAT THESE THREE CHARGES ARE NOT APPLIC ABLE IN THE CASE OF THE ASSESSEE. IN THE CASE OF WEST COAST PA PER (SUPRA) THESE THREE CHARGES WERE NOT UNDER DISCUSSIONS AND HENCE THE DECISION OF HONBLE ITAT BOMBAY IS NOT APPLICABLE. THIS GROUND OF APPEAL IS THEREFORE DISMISSED. 10. NOW, THE ASSESSEE IS BEFORE US. LD. COUNSEL FO R THE APPELLANT CONTENDED THAT DURING THE COURSE OF ASSESSMENT PROC EEDING THE DEMAND CHARGE, TIME USE CHARGE AND OTHER CHARGE HAD EXPLAI NED VIDE LETTER DATED 20.12.2006 BEFORE THE A.O. WHERE ACTUAL USAGE OF PO WER IS IN EXCESS OF CONTRACT DEMAND, RS.335/- PER KVA PER MONTH IS RECO VERED WHICH CAN BE CONSIDERED AS IN THE NATURE OF PENALTY. THE COMPAN Y IS IN THE MANUFACTURING ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 10 BUSINESS AND IT CANNOT BE CLOSED DOWN DURING THE PE AK HOURS OF ELECTRICITY DEMAND. THE DIFFERENTIAL RATE CAN BE CHARGED BY TH E ELECTRICITY BOARD AS IT HAS MONOPOLY TO GENERATE AND TRANSMITTING THE POWER . THE WORKING OF THE POWER BILL AS PER THE GEB TARIFF FOR CONSUMPTION OF ELECTRICITY GENERATED BY THE APPELLANT COMPANY, WAS DONE BY CHARTERED ENGINEER A ND GOVERNMENT APPROVED VALUER FOR ENERGY PURPOSES VIDE LETTER DAT ED 20.12.2006. AS PER SUB-SECTION 8 OF SECTION 80IA, WHERE ANY GOODS HELD FOR THE PURPOSE OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSI NESS CARRIED ON BY THE ASSESSEE, THE PROFIT AND GAIN OF SUCH ELIGIBLE BUSI NESS IS TO BE COMPUTED ON MARKET VALUE. HE FURTHER HAS DRAWN OUR ATTENTION ON PAGE NOS. 2/1 TO 2/13 OF THE PAPER BOOK. LD. COUNSEL ALSO PLACED RELIANCE O N ITA NO. 844/2006 AND ITA NO. 856/2010 OF CO-ORDINATE AHMADABAD D BENCH DECISION IN CASE OF SHAH ALLOYS LTD. FOR A.Y. 05-06, WHEREIN IDENTICAL ISSUE HAS BEEN HELD BY THE CO-ORDINATE BENCH IN FAVOUR OF THE ASSESSEE ON THE BASIS OF FINDINGS GIVEN FOR A.Y. 02-03, 03-04 & 04-05. THE OPERATIVE PORTION O F THE ORDER IS AS UNDER: 5. WE HAVE HEARD BOTH THE PARTIES AND HAVE GONE TH ROUGH THE AFORESAID DECISION OF THE ITAT WE FIND THAT WHILE ADJUDICATING A SIMILAR ISSUE IN THE AY 2002-03 , THE ITAT VIDE THE IR AFORESAID ORDER DATED 8-1-2010 CONCLUDED AS UNDER:- '12. THE LD. CIT(A) HELD THAT GUJARAT ELECTRICITY B OARD (GEB) IS SUPPLYING ELECTRICITY AT AN AVERAGE RATE OF RS.5.40 PER UNIT WHICH IS INCLUSIVE OF 8 PAISE PER UNIT FOR THE ELECTRICITY D UTY. SINCE THE ASSESSEE IS NOT REQUIRED TO CHARGE ELECTRICITY DUTY , THEREFORE, APPLICABLE RATE WOULD BE RS.5.32 PAISE PER UNIT. I N THIS REGARD THE LD. A.R. SUBMITTED THAT THE ELECTRICITY IS GENERATE D AND DOES NOT COME WITHIN THE MISCHIEF OF SECTION 80IA (VIII) WHI CH COVERS ONLY ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 11 GOODS AND SERVICES WHICH ARE PRODUCED BY ONE UNIT A ND ACQUIRED BY THE OTHER UNIT. ELECTRICITY IS NEITHER GOODS NOR S ERVICES. FURTHER, RATES CHARGED BY GEB IS NOT A LANDMARK. IN ANY CAS E, IF GENERAL UNIT WAS TO PURCHASE ELECTRICITY FROM GEB, IT WOULD HAVE PAID RS.5.40 PAISE PER UNIT, THEREFORE, IT CANNOT BE SAI D THAT THE ELECTRICITY SOLD BY CCP UNIT TO GENERAL UNIT WAS AT A PRICE WHI CH IS MORE THAN MARKET RATE. IN FACT, THE MARKET PRICE IS WHAT THE GEB CHARGES,. THE LD. A.R. FURTHER SUBMITTED THAT SIMILAR ISSUE HAD A ROSE BEFORE THE ITAT, AHMEDABAD BENCH-B IN ITA NO.3594/AHD/20078 AN D OTHERS IN THE CASE OF ALEMBIC LIMITED, DECIDED ON 6-6-2008. IN THIS CASE IT HAS BEEN DECIDED BY THE TRIBUNAL FOLLOWING THE DECI SION OF THE ITAT DELHI BENCH IN THE CASE OF ACIT VS. JINDAL STEEL & POWER LTD., (2007) 16 SOT 509 (DEL) THAT THE MARKET RATE POSTUL ATED BY SECTION 80IA (VIII) SHALL BE THE PRICE AT WHICH THE ASSESSE S PURCHASES ELECTRICITY FROM THE ELECTRICITY BOARD. IN THIS REG ARD, WE REFER TO PARA- 32 OF THE JUDGMENT AS UNDER:- 'WE HAVE HEARD THE PARTIES AND CONSIDERED THE RIVAL SUBMISSIONS. THE CONTROVERSY IN QUESTION IS SQUARELY DECIDED BY THE TRIBUNAL, DELHI BENCH, IN THE CASE OF JINDAL STEEL & POWER LT D. (SUPRA) AND MUMBAI BENCH IN THE CASE OF WEST COAST PAPER MILLS LTD. (SUPRA) HOLDING ON UNEQUIVOCAL TERMS THAT THE MARKET VALUE POSTULATED BY THE PROVISIONS OF SECTION 80IA SHALL BE THE PRICE A T WHICH THE ASSESSEE PURCHASES ELECTRICITY FROM ELECTRICITY BOA RD AND NOT THE ONE WHICH IS FIXED BY THE LEGISLATIVE MANDATE. THER EFORE, RESPECTFULLY FOLLOWING THE ABOVE TRIBUNAL DECISIONS, WE DIRECT T HE AO TO ALLOW GRANT OF DEDUCTION U/S. 80IA TO THE ASSESSEE BY FAK ING THE PRICE OF ELECTRICITY SUPPLIED BY GEB TO ASSESSEE AS A CONSUM ER AS MARKET VALUE FOR THE PURPOSE OF DEDUCTION U/S. 80IA. THE A SSESSEE SUCCEEDS ON THIS GROUND.' ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 12 RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE HOLD THAT THE MARKET VALUE FOR ELECTRICITY WOULD BE ONE AT WHICH IT IS SUPPLIED BY GEB TO OTHER ASSESSEES INCLUSIVE OF DUTY. THEREF ORE, THE RATES TAKEN BY THE ASSESSEE FOR THE PURPOSE OF SUPP LYING ELECTRICITY FROM CPP UNIT TO GENERAL UNIT IS UPHELD . THE ASSESSEE SUCCEEDS ON THIS POINT.' 5.1. THE AFORESAID DECISION HAS BEEN FOLLOWED BY TH E ITAT IN THEIR DECISIONS FOR THE AYS 2003-04 AND 2004-05. IN THE L IGHT OF THE VIEW TAKEN IN THESE DECISIONS .ESPECIALLY WHEN FACTS AND CIRCUMSTANCES IN THE YEAR UNDER CONSIDERATION ARE INDISPUTABLY PARAL LEL TO THE FACTS AND CIRCUMSTANCES IN THE EARLIER YEARS, WE HAVE NO ALTERNATIVE BUT TO ALLOW THE CLAIM OF THE ASSESSEE. THUS, GROUND NOS.1 TO 3 ARE ALLOWED. AT THE OUTSET, LD. CIT D.R. VEHEMENTLY RELIED UPON THE ORDER OF CIT(A). 11. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IS IDENTICAL AS REFERRED BY THE LD. COUNS EL IN CASE OF SHAH ALLOYS LTD. (SUPRA). DURING THE YEAR, WE DO NOT FIND ANY EXCESS CHARGED PLACED BY THE APPELLANT FOR CLAIMING DEDUCTION U/S. 80IA AS M ARKET PRICE OF PER UNIT OF ELECTRICITY WAS BUILD ON THE BASIS OF GEB CHARGES. THE CO-ORDINATE DELHI BENCH IN CASE OF JINDAL STEEL & POWER LTD. (SUPRA) ALSO DECIDED MARKET RATE WHICH POSTULATED BY THE SECTION 80IA(VIII) OF THE I T ACT. THEREFORE, RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCH DECISION, WE ALLOW THE ASSESSEES APPEAL ON THIS GROUND. 12. GROUND NOS. 3 & 4 ARE AGAINST ADDITION ON ACCOU NT OF MODVAT CREDIT IN OPENING STOCK AND CLOSING STOCK AT RS.84,11,949/- & RS.1,28,82,687/- RESPECTIVELY. LD. A.O. OBSERVED THAT THE APPELLANT HAD NOT ADDED EXCISE DUTY ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 13 IN OPENING STOCK AT RS.84,11,949/-. THEREFORE, AFT ER REDUCING UNUTILIZED MODVAT CREDIT, THE APPELLANT HAS SHOWN CLOSING STOC K LESS BY RS.1,28,82,787/-. FURTHER, THE ADDITION ALSO HAD BEEN MADE OF RS.84,1 1,949/- ON OPENING STOCK. 13. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE A SSESSEE CARRIED THE MATTER BEFORE CIT(A) WHO HAD DISMISSED THE ASSESSEE S APPEAL BY RELYING UPON THE CO-ORDINATE MUMBAI BENCH DECISION IN CASE OF WEST COAST PAPER MILLS LTD. VS. ACIT [286 ITR AT 0252], WHEREIN IT WAS HELD THAT OPENING STOCK IS TO BE TAKEN AS CLOSING STOCK OF PRECEDING YEAR. THE SUM AND SUBSTANCE OF SECTION 45A CAN BE ACHIEVED BY THE ADDING TAXES IN THE CLOSING STOCK OF THE EARLIER YEAR AND BY DOING SO, THERE IS BOUND TO BE TAX EFFECT IN THE YEAR OF CHANGE. THEREFORE, HE CONFIRMED THE ADDITION OF RS .84,11,949/-. ON REMAINING ADDITION, THE LD. CIT(A) OBSERVED AS UNDE R: 4.6 AS REGARDS ADDITION OF RS.1,28,82,787/- BEING THE NET EFFECT OF EXCISE DUTY IN THE CLOSING STOCK OF RAW MATERIAL, I T IS STATED THAT AS STATED BY THE AO THE DECISION OF INDO NIPPON CHEMIC ALS SUPRA OF SUPREME COURT IS NOT APPLICABLE AS THE SUPREME COUR T REFRAINED FROM DISCUSSING THIS ISSUE SINCE THE A.Y. WAS 1998- 99 AND SECTION 145A WAS INSERTED FROM A.Y. 1999-2000. COMING TO T HE MERIT OF ADDITION, IT IS SEEN THAT AS PER THE SETTLED POSITION OF LAW THE ASSESSEE IS REQUIRED TO ADD EXCISE DUTY IN THE CLOS ING STOCK BUT AT THE SAME TIME THE SAME AMOUNT OF EXCISE DUTY IS ALLOWED AS EXPENDITURE BY DEBITING THE SAME IN THE P&L A/C. T HE EFFECT OF BOTH COMES IS NIL AS FAR AS P&L A/C. IS CONCERNED. HOWEVER, THE MOMENT THE EXCISE DUTY IS DEBITED TO P&L A/C. SECTION 43B COMES INTO PLAY. THE APPELLANT CAN BE ALLOWED THE CLAIM OF THAT EXCISE DUTY ONLY IF THE SAME IS PAID BEFORE THE DUE DATE OF FILING OF RETURN. NEITHER DURING THE ASSESSMENT PROCEEDIN GS NOR ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 14 DURING THE APPELLATE PROCEEDINGS THE APPELLANT HAS MADE AN EFFORT TO SHOW THAT THE EXCISE DUTY CONTAINED IN TH E CLOSING STOCK HAS BEEN PAID BEFORE THE DUE DATE OF FILING O F RETURN. HENCE, THIS DISALLOWANCE MADE BY THE AO IS ALSO SUS TAINED. 14. NOW THE ASSESSEE IS BEFORE US. LD. COUNSEL FOR THE APPELLANT CONTENDED THAT THIS ISSUE IS COVERED IN FAVOUR OF T HE ASSESSEE IN CASE OF 297 ITR 77, HONBLE DELHI HIGH COURT. HONBLE APEX COU RT HAS DISMISSED THE SLP OF THE DEPARTMENT IN 307 ITR 4 (ST). HE FURTHER AR GUED THAT THE APPELLANT HAD FOLLOWED THE GUIDELINES PRESCRIBED BY THE CHARTERED ACCOUNTANT INSTITUTE AND FOLLOWING THE EXCLUSIVE METHOD OF ACCOUNTING FOR MO DVAT CREDIT, WHICH WAS REGULARLY FOLLOWED BY THE APPELLANT FOR COMPUTING T HE INCOME. IF THE A.O. ADDS EXCISE DUTY IN PURCHASE, SALE AND CLOSING STOCK, TH E EXCISE DUTY IN OPENING IS ALSO TO BE ADDED. THEREFORE, HE REQUESTED TO DELET E THE ADJUSTMENT MADE BY THE A.O., WHICH WAS CONFIRMED BY THE CIT(A). FROM THE SIDE OF THE REVENUE, LD. CIT D.R. VEHEMENTLY RELIED UPON THE ORDER OF TH E CIT(A) AND ARGUED THAT NOW SECTION 145A HAS BEEN AMENDED AND ALL THE VALUA TION OF CLOSING AS WELL AS OPENING STOCK IS TO BE MADE ON THE BASIS OF INCL USIVE METHOD. 15. WE HAVE HEARD THE RIVAL CONTENTIONS OF THE ASSE SSEE AND PERUSED THE MATERIAL ON RECORD. SECTION 145A HAS BEEN AMENDED AND AS PER SECTION ALL THE TAXES OR CESS WHATEVER NAME IT IS CALLED IS TO BE ADDED IN THE VALUATION OF THE CLOSING STOCK IN PREPARING THE ACCOUNTS OF THE APPELLANT. THE A.O. ONLY ADDED EXCISE DUTY / MODVAT CREDIT IN PURCHASE, SALE AND CLOSING STOCK BUT HAS NOT ALLOWED ANY ADJUSTMENT IN OPENING STOCK. THERE FORE, TO MAINTAIN THE CONSISTENCY IN THE ACCOUNTING SYSTEM, AND VARIOUS C ASE LAWS CITED BY THE ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 15 APPELLANT IN ITS FAVOUR, BIND US TO ALLOW THE APPEA L IN FAVOUR OF THE APPELLANT. ACCORDINGLY, GROUND NOS. 3& 4 ARE ALLOWED IN FAVOUR OF THE ASSESSEE. 16. GROUND NO.5 IS AGAINST MAKING ADDITION OF RS.17 ,93,339/-. THE A.O. OBSERVED THAT THE APPELLANT HAD DECLARED BOOK PROFI T OF RS.2784.34 LACS FOR THE YEAR UNDER CONSIDERATION. THE APPELLANT HAD IN CURRED LOSS OF RS. 17.93 LACS U/S. 94(7) OF THE IT ACT. THE APPELLANT HAD A LSO EARNED DIVIDEND ON THESE SECURITIES OF RS. 20.05 LACS AND HAD BEEN REDUCED F ROM THE BOOK PROFIT AS EXEMPT INCOME U/S. 10 OF THE IT ACT. ON THIS ISSUE , THE A.O. GAVE REASONABLE OPPORTUNITY OF BEING HEARD. THE APPELLANTS REPLY WAS CONSIDERED AND OBSERVED BY THE A.O. THAT THIS LOSS IS RELATED TO T HE EARNING OF THE DIVIDEND AS PER PROVISION OF CLAUSE (2) OF SECTION 115JB AND EX PENDITURE RELATED TO EXEMPT INCOME ARE TO BE ADDED BACK TO THE NET PROFI T FOR COMPUTING BOOK PROFIT. THE A.O. RELIED UPON FOLLOWING CASES: I. 37 ITR 66 SC INDIAN MOLASSES CO. PVT LTD. II. 62 ITR 638 SC NAINITAL BANK LIMITED III. 191 ITR 667 SC ATTAR SINGH GURMUKH SINGH IV. 103 ITR 706 ORISSA SAJOWANLAL JAISWAL THE LD. A.O. AFTER DISCUSSING THE WHOLE ISSUE ON PA GE NOS. 23 TO 25 HELD THAT LOSS CLAIMED ON STRIPPING OF THE DIVIDEND IS EXPEND ITURE DIRECTLY RELATED TO THE EARNING OF DIVIDEND WHICH IS EXEMPTED U/S. 10 OF TH E IT ACT. THUS, HE MADE ADDITION OF RS. 17,93,339/-. 17. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE A SSESSEE CARRIED THE MATTER BEFORE CIT(A) WHO HAS CONFIRMED THE ADDITION BY OBSERVING AS UNDER: ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 16 5.5 I HAVE CONSIDERED THE SUBMISSION MADE BY THE A PPELLANT AND OBSERVATION OF THE A.O. THE FACTS ARE ADMITTED BY BOTH AO AND APPELLANT AND THERE IS NO DISPUTE OVER THE SAME. N EITHER OF THEM DISAGREES THAT THIS IS A CASE OF DIVIDEND STRI PPIN. FURHTER IT IS CLEAR THAT THE TRANSACTIONS HAVE BEEN ENTERED INTO BY THE APPELLANT BY KEEPING IN MIND THE RECORD DATE WHICH MEANS THAT THE APPELLANT KNEW THAT THE NAV OF THE UNITS HAS DI VIDEND PREGNANT IN IT. THIS DID NOT CHANGE THE PURCHASE P RICE BECAUSE THE NAV WAS DISCLOSED. BUT THE MOMENT THE RECORD D ATE PASSES THE DIVIDEND WOULD BE DISTRIBUTED TO THE HOL DER OF THE UNIT ON THE RECORD DATE. THE MOMENT THE DIVIDEND I S DISTRIBUTED THE MUTUAL FUND LOSES THE MONEY AND THE NAV OF THE UNITS FALL ALMOST IN SUCH A MANNER THAT THE LOSS CAUSED TO THE HOLDER WOULD BE ALMOST THE SAME AS THE DIVIDEND RECEIVED B Y HIM. THERE WOULD BE SLIGHT DIFFERENCE IJN THE TWO FIGURE S. DURING THE F.Y. RELEVANT TO THE CURRENT A.Y. THE APPELLANT WAS AWARE OF THE FACT THAT SECTION 94(7) PROVIDES FOR DISALLOWANCE O F SUCH A LOSS FROM THE COMPUTATION OF INCOME. THE APPELLANT WAS HOWEVER AWARE THAT THE LEGISLATURE CONSIDERS THE EARNING OF DIVIDEND AND INCURRING OF LOSS ON SUCH TRANSACTIONS AS A COMPOSI TE TRANSACTION AND THEREFORE HAD MADE AN AMENDMENT TO THE INCOME-TAX AND PROVIDED FOR SECTION 94(7) SO THAT THE ASSESSES DO NOT TAKE THE BENEFIT OF LOSS WHILE NOT OFFERING THE DIVIDEND INCOME FOR TAX BECAUSE THE DIVIDEND INCOME WAS EXEM PT U/S 10. WITH A VIEW TO CONSIDER THESE TWO I.E. DIVIDEND AND THE LOSS TOGETHER THE LEGISLATURE HAD PROVIDED FOR DISALLOWA NCE FOR LOSS ALSO U/S.94(7). HENCE IT IS VERY CLEAR THAT THE LO SS IS INCURRED IN RELATION TO EARNING OF THE DIVIDEND. IN FACT PRIOR TO THE INSERTION OF SECTION 94(7) SUCH A TRANSACTION HAS BEEN HELD T O BE NON- COLLUSIVE BY THE HONBLE ITAT IN THE CASE OF WALFOR D SHARES & STOCK BROKERS LTD. [96 ITD 1] BUT AFTER THE INSERTI ON OF SECTION ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 17 94(7) IT IS VERY CLEAR THAT THE APPELLANT IS AWARE THAT THE LEGISLATURE HAS TREATED BOTH THE EFFECTS I.E. DIVID END AND LOSS AS RELATING TO EACH OTHER BUT STILL THE APPELLANT HAS ENTERED INTO THIS TRANSACTION THINKING THAT THE LOSS WOULD BE AL LOWED IN THE CALCULATION OF BOOK PROFIT. AS STATED BY THE AO IN SEVERAL CASES THE HONBLE SUPREME COURT HAS HELD THAT SOMETIMES T HE EXPENDITURE NEED NOT BE SAME AS PHYSICAL DELIVERY O F PAYMENT. IN THE CASE OF NAINITAL BANK LTD. (SUPRA)THE HONBL E SUPREME COURT STATED THAT IF THERE ARE CROSS CLAIMS ONE BY THE ASSESSEE WITH MONEY OR PROPERTY AND IF THERE ARE CROSS CLAIM S ONE BY THE ASSESSEE AGAINST A STRANGER AND OTHER BY THE STRANG ER AGAINST THE ASSESSEE AND AS A RESULT OF ACCOUNTING THE BALA NCE DUE ONLY IS PAID. THE AMOUNT WHICH IS DEBITED AGAINST THE ASSESSEE IN THE SETTLEMENT OF ACCOUNTS MAY APPROPRIATELY BE TERMED AS EXPENDITURE. FURTHER IN THE CASE OF ATTAR SINGH (S UPRA) THE HONBLE SUPREME COURT STATED THAT THE EXPENDITURE I NCURRED BY THE ASSESSEE IN RESPECT OF WHICH PAYMENT IS MADE ME ANS THAT ALL OUTGOINGS ARE BROUGHT UNDER THE WORD EXPENDITUR E. THE EXPENDITURE OF PURCHASE IN STOCK IN TRADE IS ONE OF SUCH OUTGOING. THE PAYMENTS MADE FOR PURCHASES WOULD AL SO BE COVERED BY THE WORD EXPENDITURE. THEREFORE READING THIS CASE ALONG WITH THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF NAINITAL BANK LTD. THE NET OF PURCHASE AND SALE CAN ALSO BE TREATED AS EXPENDITURE IF THE TRANSACTION APPEARS T O BE COMPOSITE. IN THE PRESENT CASE IT IS CLEAR THAT TH E LEGISLATURE ALSO TREATS THESE TRANSACTIONS AS COMPOSITE AND THE REFORE INSERTED SECTION 94(7) SO THAT IF THE DIVIDEND IS O UTSIDE THE PURVIEW OF TAXATION THEN THE LOSS IN RELATION TO TH AT SHOULD ALSO BE OUTSIDE THE PURVIEW OF CLAIM. THEREFORE THE LOS S INCURRED ON THESE TRANSACTIONS ARE EXPENDITURE IN RELATION TO T HE EARNING OF DIVIDEND AND HENCE THE SAME HAS TO BE REMOVED FROM THE P&L ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 18 A/C. FOR COMPUTING THE BOOK PROFIT IN VIEW OF THE P ROVISIONS OF CLAUSE (F) OF SECTION 115JB. IN VIEW OF THESE REASONS THE DISALLOWANCE MADE BY AO IS CORRECT AND THIS GROUND OF APPEAL IS DISMISSED. 18. NOW THE ASSESSEE IS BEFORE US. LD. COUNSEL FOR THE APPELLANT SUBMITTED THAT THE COMPANY HAD ENTERED INTO 52 TRANSACTIONS O F SALE AND PURCHASE OF MUTUAL FUNDS OUT OF WHICH THE LD. A.O. HAD CHOSEN O NLY THREE TRANSACTIONS WHEREIN THE COMPANY HAD RECEIVED DIVIDEND BUT HAD S UFFERED LOSSES. THE COMPANY HAD ALSO SUO MOTTO ADDED BACK THE LOSS ON A CCOUNT OF DIVIDEND STRIPPING U/S. 94(7) WHILE COMPUTING THE TOTAL INCO ME. THE APPELLANT HAD SUBMITTED THAT IT HAD OFFERED SHORT TERM CAPITAL GA IN OF RS.69,71,387/- UNDER THE NORMAL PROVISIONS OF THE ACT AND HAD ALSO OFFER ED RS.51,78,047/- AS SHORT TERM CAPITAL GAIN WHILE COMPUTING THE BOOK PROFIT. ACCORDINGLY, THE OBSERVATION OF THE LD. A.O. THAT THE ENTIRE TRANSAC TION OF PURCHASE AND SALE OF SECURITY IS INEXTRICABLY LINKED WITH THE EARNING OF DIVIDEND AND INCURRING LOSS AS IS CLEAR FROM THE TABLE AS FACTUALLY INCORRECT. TH E COMPANY HAD SUBMITTED THAT RS. 17,93,339/- WHICH WAS AN ARTIFICIAL DISALLOWANC E OF SHORT TERM CAPITAL LOSS U/S. 94(7) WAS ONLY THE NORMAL PROVISION OF TH E ACT. AS PER SECTION 115JB OF THE ACT, ONLY EXPENDITURE INCURRED FOR EAR NING EXEMPT INCOME IS REQUIRED TO BE ADDED BACK. THERE IS NO PROVISION U NDER THE EXPLANATION WHICH JUSTIFIES THE ADDITION OF LOSSES WHILE COMPUTING TH E BOOK PROFIT. LD. A.O. HAD ADDED BACK THE ABOVE LOSS ON ACCOUNT OF DIVIDEND ST RIPPING UNDER CLAUSE (F) OF THE EXPLANATION TO SECTION 115JB. HE FURTHER RELIE D IN CASE OF APOLLO TYRES LTD. (2002) 255 ITR 273 (SC), WHEREIN THE HONBLE APEX COURT HAS HELD THAT ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 19 THE A.O. HAS NOT POWER TO SCRUTINIZE THE BOOK PROFI T EXCEPT AS PROVIDED IN EXPLANATION. HE FURTHER RELIED IN CASE OF CIT VS. WALFORT SHARE & STOCK BROKERS (P) LTD. (2010) 326 ITR 1 (SC) , WHEREIN HONBLE SUPREME COURT HELD THAT IT WAS ESTABLISHED THAT THERE WAS A SALE, THE ASSESSEE RECEIVED A DIVIDEND AND THAT DIVIDEND WAS TAX FREE. THE ASSESSEE HAD M ADE USE OF THE PROVISIONS OF SECTION 10(33) OF THE ACT AND SUCH USE COULD NOT BE SAID TO BE ABUSE OF LAW. EVEN ASSUMING THAT THE TRANSACTION WAS PRE-P LANNED, THERE WAS NOTHING TO IMPEACH THE GENUINENESS OF THE TRANSACTION. IN THE CASE OF ASSESSMENT BEFORE APRIL 1, 2002 I.E. BEFORE THE INSERTION OF S ECTION 94(7) LOSSES PERTAINING TO EXEMPTED INCOME COULD NOT BE DISALLOWED. HOWEVE R, AFTER APRIL 1, 2002, SUCH LOSSES TO THE EXTENT OF THE DIVIDEND RECEIVED BY THE ASSESSEE COULD BE IGNORED BY THE ASSESSING OFFICER IN VIEW OF THE SEC TION 94(7). APPLYING SECTION 94(7) OF CASES FOR ASSESSMENT ORDER FILING AFTER APRIL 1, 2002, THE LOSS TO BE IGNORED WOULD BE ONLY TO THE EXTENT OF THE DI VIDEND RECEIVED AND NOT THE ENTIRE LOSS. IN OTHER WORDS, LOSS OVER AND ABOVE, THE AMOUNT RECEIVED WOULD STILL BE ALLOWED FROM WHICH IT FOLLOWED THAT PARLIA MENT HAD NOT TREATED THE DIVIDEND STRIPPING TRANSACTION AS SHAM OR BOGUS. A FTER APRIL 1, 2002, LOSSES OVER AND ABOVE, THE DIVIDEND RECEIVED WOULD NOT BE IGNORED U/S. 94(7). THUS, THE LD. COUNSEL FOR THE APPELLANT HAS REQUESTED THA T THE ADJUSTMENT MADE BY THE A.O. IS NOT JUSTIFIED. AT THE OUTSET, LD. CIT D.R. VEHEMENTLY RELIED UPON THE ORDER OF THE CIT(A). 19. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE DIVIDEND INCOME IS EXEMPTED U/S.10 AS PER EXPLANATION (F). LD. ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 20 A.O. CAN MAKE ADJUSTMENT IN BOOK PROFIT U/S. 115JB WHICH IS REPRODUCED AS UNDER: THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME TO WHICH [SECTION 10 (OTHER THAN THE PROVISIONS CONTAI NED IN CLAUSE (38) THEREOF) OR SECTION 11 OR SECTION 12 APPLIED] IS TO BE INCREASED BY HIM. AS PER SECTION 94(7), ANY LOSS ON SECURITY OR UNIT IS TO BE IGNORED FOR THE PURPOSES OF THE COMPUTING HIS INCOME CHARGEABLE TO TAX WHERE THE TRANSACTIONS MADE WITHIN A PERIOD OF 3 MONTHS PRIOR TO THE RECORDED DATE AND SALES THESE SECURITIES WITHIN 3 MONTHS OR WITHIN 9 MONTHS AFTER SUCH DATE. LD. A.O. HAD GIVEN DETAILS OF SECURITY PURCHASED AND SO LD AT PAGE NO. 21 OF THE ASSESSMENT ORDER, WHICH WERE MADE WITHIN 3 MONTHS B EFORE THE RECORDED DATE. THE EXPLANATION (F) OF SECTION 115JB IS CLEA RLY APPLICABLE IN CASE OF THE APPELLANT. THE CASE LAW CITED BY THE APPELLANT IS WITH RESPECT TO LOSS OF UNDERTAKING, COVERED U/S. 10A AND IS NOT APPLICABLE IN CASE OF THE APPELLANT. THEREFORE, WE DISMISS THE APPEAL ON THIS GROUND. 20. GROUND NO.6 IS AGAINST DISALLOWANCE OF RS. 19.2 LACS U/S. 14A OF THE IT ACT. THE LD. A.O. OBSERVED THAT THE APPELLANT HAD EXEMPTED INCOME U/S. 10A ON ACCOUNT OF DIVIDEND OF RS.20.22 LACS. LD. A.O. HAD GIVEN REASONABLE OPPORTUNITY OF BEING HEARD ON THIS ISSUE. THE APPE LLANT ALSO RESPONDED BY LETTER DATED 19.12.2006. THE APPELLANT HAD INVESTE D FOR EARNING OF THE DIVIDEND AND SECURITIES WERE SOLD WITHIN A SHORT PE RIOD WHICH COMES U/S. 94 OF THE IT ACT. THE APPELLANT HAD INVESTED 160 LACS FO R A SHORT PERIOD. THE FUND WAS UTILIZED FOR THE ABOVE PERIOD FOR EARNING OF TH E DIVIDEND. THE APPELLANT ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 21 HAD ALSO TAKEN A LOAN FROM THE BANKS AND FINANCIAL INSTITUTIONS AT A HIGHER RATE OF INTEREST. THE INTEREST ON THE INVESTMENT WAS CA LCULATED BY THE A.O. @ 12% AT RS. 19.2 LACS AND SAME WAS ADDED BACK UNDER BOTH THE COMPUTATION OF INCOME I.E. NORMAL COMPUTATION OF INCOME AS WELL AS BOOK PROFIT U/S. 115JB. 21. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE A SSESSEE CARRIED THE MATTER BEFORE CIT(A) WHO HAD SET ASIDE THE ISSUE TO RE-CALCULATE THE INTEREST OF RS. 160 LACS BY OBSERVING AS UNDER: 6.3 I HAVE CONSIDERED THE SUBMISSION MADE BY THE A PPELLANT AND OBSERVATION OF THE AO. THE AO HAD CLEARLY ASKED THE APPELLANT TO GIVE DETAILS OF INVESTMENT WITH PROOF OF AVAILABILI TY OF FUND ON THE DATE OF INVESTMENT. THE APPELLANT NEITHER GAVE THESE DETAILS DURING THE ASSESSMENT PROCEEDINGS NOR APPELLATE PRO CEEDINGS. THE APPELLANT HAD BORROWED FUNDS WHICH WERE INTERES T BEARING. THEREFORE IT CAN BE SAID THAT IF THERE WERE SURPLUS FUNDS THEN THE APPELLANT COULD HAVE REDUCED ITS INTEREST BURDE N AND BY NOT DOING SO IT IS VERY CLEAR THAT THE INTEREST BEARING FUNDS ARE IN FACT UTILIZED FOR THE PURPOSE INVESTMENT AND THEREF ORE THE DISALLOWANCE OF INTEREST FOR EARNING OF DIVIDEND IN COME U/S.14A IS IN ORDER. AS REGARDS THE CALCULATION OF INTEREST IS CONCERNED IT SEEMS THAT THE DISALLOWANCE SHOULD BE MUCH LESS AND NOT RS.19,20,000/- SINCE THE FUNDS USED WERE ONLY RS.16 0 LACS. THE AO HOWEVER MAY VERIFY THIS CALCULATION AND DISALLOW TH E INTEREST PERTAINING TO THE FUNDS INVESTED ONLY FOR THE PERIO D OF INVESTMENT TILL THE SALE PROCEEDS WERE RECEIVED. SUBJECT TO THESE REMARKS THE DISALLOWANCE OF INTEREST MADE BY THE AO IS CONFIRMED U/S 14A AND FOR SECTION 115JB. SINCE THIS EXPENDIT URE HAS BEEN INCURRED IN RELATION TO EARNING OF EXEMPT INCOME, T HEREFORE THE DISALLOWANCE UNDER CLAUSE (F) OF SECTION 115JB IS A LSO IN ORDER. HENCE THIS GROUND OF APPEAL IS DISMISSED. ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 22 22. NOW THE ASSESSEE IS BEFORE US. LD. COUNSEL FOR THE APPELLANT CONTENDED THAT BEFORE DISALLOWING THE EXPENDITURE U /S. 14A, THE REVENUE HAS TO PROVE THAT THE INVESTMENT MADE OUT OF BORROWING ON INTEREST. HE RELIED IN CASEL OF CIT VS. HERO CYCLE (2010) 323 ITR 518 (DEP T) AND DISHMAN (2011)45 SOT 37 (AHD) (URO). GODREJ & BOYCE 328 ITR 81 (BOM) , WHEREIN HONBLE BOMBAY HIGH COURT HAS HELD THAT PRESUMPTION THAT IN VESTMENT IN SHARES ARE OUT OF INTEREST FREE FUNDS. HE FAIRLY CONCEDED THE DISALLOWANCE AT RS.1.6 LACS @ 12% ON 160 LACS FOR 1 MONTH. AT THE OUTSET, LD. CIT D.R. RELIED UPON THE ORDER OF THE CIT(A). 23. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE MATTER HAS BEEN ALREADY ALLOWED BY THE CIT(A), PARTICULARLY, ON THE CALCULATION OF INTEREST WHICH HAS BEEN ACCEPTED BY THE LD. COUNSEL IN HIS ARGUMENT. THEREFORE, THIS ISSUE IS RESTORED BACK T O THE A.O. TO RE-CALCULATE THE DISALLOWANCE AS PER THE SUBMISSION MADE BY THE APPELLANT. THUS, THIS GROUND OF APPEAL IS RESTORED BACK TO THE A.O. 24. GROUND NO.7 IS AGAINST DISALLOWING THE DEPRECIA TION OF RS. 16,28,11,000/- CLAIMED BY THE APPELLANT BECAUSE CHA NGE IN THE METHOD OF DEPRECIATION FROM STRAIGHT LINE METHOD (SLM) TO WRI TTEN DOWN VALUE (WDV) METHOD. THE A.O. OBSERVED THAT THE APPELLANT HAD C HANGED THE METHOD OF DEPRECIATION FROM SLM TO WDV METHOD FOR FACTORY BUI LDINGS, PLANT & MACHINERIES PERTAINING TO ITS SPECIFIC POWER PROJEC T SITUATED AT JOLWA DRAW WARPING SECTION & GAS BASED POWER PROJECT SITUATED AT VARELI. THE DEPRECIATION HAD BEEN RECALCULATED IN ACCORDANCE WI TH THE NEW METHOD FROM ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 23 THE DATE OF THE ASSETS COMING INTO USE. CONSEQUENT LY, DEPRECIATION FOR THE CURRENT YEAR IS HIGHER BY RS.1628.11 LACS (INCLUDIN G RS.1101.15 LACS DEFICIENCY IN DEPRECIATION IN RESPECT OF PREVIOUS Y EARS) AND PROFIT FOR THE YEAR IS LOWER BY THE SAME AMOUNT. THE ASSESSEE WAS GIVE N REASONABLE OPPORTUNITY OF BEING HEARD ON THIS ISSUE, WHICH WAS REPLIED BY IT VIDE LETTER DATED 22.12.2006, BUT, THE A.O. HAD NOT FOUND CONVI NCING TO HIM ON THE GROUND THAT THERE WAS NO CONCRETE AND BONAFIDE REAS ON FOR CHANGE OF THE METHOD OF DEPRECIATION. THE APPELLANT DID NOT FURN ISH ANY DETAIL REGARDING THE DATE ON WHICH THE MACHINERIES WERE PURCHASED, NATUR E OF MACHINERIES AND REASONS PROVISIONS OF IT BECOMING OBSOLETE THE CHAN GE IN METHOD IS REDUCING THE TAX LIABILITY WHICH IS VIOLATION OF ACCOUNTING STANDARD 6 ISSUED BY ICAI. IT IS A COLOURABLE DEVICE OF THE APPELLANT. THERE IS NO STATUTE IN THE IT ACT THAT THE APPELLANT CAN CHANGE THE METHOD OF DEPRECIATION . THE APPELLANT RELIED UPON APOLLO TYRES (SUPRA) BEFORE THE A.O., BUT, HE DID NOT FOUND APPLICABLE IN CASE OF THE APPELLANT, AS THIS JUDGMENT WAS DELIVER ED IN CONTEXT OF SECTION 115J AND SECTION 115JA. THE LD. A.O. HAD RELIED I N CASE OF ESSORPE MILLS LTD. AS REPORTED IN 265 ITR 637 ON METHOD OF ACCOUNTING. THE APPELLANT IS TO PREPARE THE ACCOUNT AS PER PARTS II & III OF SCHEDU LE VI OF THE COMPANIES ACT. ACCORDINGLY, THE A.O. MADE ADDITION OF RS. 16,28,11 ,000/- U/S. 115JB. 25. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE A SSESSEE CARRIED THE MATTER BEFORE CIT(A) WHO HAD CONFIRMED THE ADDITION BY OBSERVING THAT THERE WAS NO CONCRETE AND BONAFIDE REASONS FOR CHANGING T HE METHOD FOR SLM TO WDV METHOD. THE APPELLANT HAD MADE THIS CHANGE FOR ONE DIVISION NOT OTHERS. IT WAS FOR REDUCING THE TAX LIABILITY AND WAS FOUND COLORABLE DEVICE AS ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 24 HELD BY THE HONBLE APEX COURT IN CASE OF MCDOWELL & CO. 154 ITR 148. THE CHANGE OF DEPRECIATION WAS NOT AS PER LAW. THE APP ELLANT HAD NOT DECLARED PROFITS AS PER PROVISIONS OF AS-6 AND IT IS IN VIOL ATION OF THE PROVISIONS OF PART-II AND III OF SCHEDULE-VI OF THE COMPANIES ACT. AS PE R SECTION 211 OF THE COMPANIES ACT WHICH EMPOWERED TO THE A.O. TO RE-CAL CULATE THE NET PROFIT AND DRAW THE P&L ACCOUNT IN ACCORDANCE WITH THE PROVISI ONS OF PART II AND III OF SCHEDULE- VI OF THE COMPANIES ACT. HENCE, THE DECI SION OF APOLLO TYRES (SUPRA) WAS NOT FOUND APPLICABLE IN CASE OF THE APP ELLANT. HE FURTHER RELIED IN CASE OF ESSORPE MILLS LTD. (SUPRA) AND HELD AS UNDE R: 7.7 IN VIEW OF THE ABOVE DISCUSSION THE P&L A/C OF THE ASSESSEE IS NOT IN ACCORDANCE WITH PART II AND III AS PER VITH SCHEDULE OF COMPANIES ACT THE ASSESSEE HAS CHANGED THE METHOD OF DEPRECIATION WHICH IS NOT BONAFIDE. BY D OING SO THE ASSESSEE HAS CLEARLY SHIFTED/EVADED ITS TAX LIABILI TY IN THE YEAR UNDER CONSIDERATION. THUS THE CHANGE IN THE METHOD IS IN CLEAR CUT VIOLATION OF ACCOUNTING STANDARD 6 ISSUED BY ICAI. THEREFORE THE DISALLOWANCE MADE BY THE AO IS CONFIR MED AND THIS GROUND OF APPEAL IS DISMISSED . 26. NOW THE ASSESSEE IS BEFORE US. LD. COUNSEL FOR THE APPELLANT CONTENDED THAT THE APPELLANT COMPANY HAS CHANGED TH E SLM TO WDV METHOD IN RESPECT OF DRAW WARP DIVISION POWER PLANT AT VAR ELI & JOLWA. THIS HAS RESULTED INTO ADDITIONAL DEPRECIATION CHARGE OF RS. 526.96 LACS TO THE P&L ACCOUNT FOR THE YEAR AND A CHARGE OF RS. 1101.15 LA CS TOWARDS ARREARS OF DEPRECIATION FOR EARLIER YEARS. THE APPELLANT HAD STATED THAT THE ABOVE CHANGE IN METHOD ON DEPRECIATION FROM SLM TO WDV METHOD HA D ALSO BEEN SHOWN IN ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 25 THE ANNUAL ACCOUNTS AND THE COMPANY HOLD THE FINANC IAL YEAR RELEVANT TO ASSESSMENT YEAR 2002-03 IN RESPECT OF OTHER TWO DIV ISIONS I.E. DRAW TWISTING & TEXTURISING DIVISION & DRAW WINDING DIVISION. TH E SAID CHANGE IN METHOD OF ACCOUNT FOR DEPRECIATION HAD BEEN ACCEPTED BY THE I NCOME-TAX DEPARTMENT IN ASSESSMENT PROCEEDING FOR THE ASSESSMENT YEAR 2002- 03. THE APPELLANT HAS FOLLOWING IN FUTURE WDV METHOD FOR DEPRECIATION ON NEW POWER PLANTS ESTABLISHED AFTER YEAR UNDER CONSIDERATION. THUS, THE APPELLANT HAD BEEN CONSISTENTLY FOLLOWED IN SUCCEEDING YEAR ALSO IN RE SPECT OF NEW POWER PLANTS ESTABLISHED BY THE COMPANY. THIS CHANGE OF METHOD ON DEPRECIATION WAS AS PER AS 3, WHICH ALLOWED THE PERIODICAL REVIEW OF DEPRECIATION ON THE GROUND THAT TECHNOLOGICAL CHANGE, IMPROVEMENT IN PRODUCTIO N METHOD, CHANGE IN THE MARKET DEMAND FOR THE PROJECT OR SERVICE OUT-PUT OF THE ASSETS OR LEGAL OR OTHER RESTRICTIONS. THE MANAGEMENT HAD DECIDED TO CHANGE THE METHOD OF DEPRECIATION ON THE BASIS OF TECHNOLOGICAL ENVIRONM ENT, FREQUENT CHANGE IN THE PROJECT DEMAND TO BRING REALISTIC VALUE OF THE ASSE TS. THE WDV METHOD ADOPTED ON OTHER TWO DIVISIONS, RISK OF OBSOLESCENC E OF ASSETS. THUS, THE APPELLANT HAD CLAIMED THE ADDITIONAL DEPRECIATION A S PER AS-3 DURING THE YEAR UNDER CONSIDERATION. THIS CHANGE IS APPLICABLE IN CASE OF PROFIT CALCULATED U/S. 115JB WHICH IS PERMISSIBLE AS PER SUB-SECTION 2 OF SECTION 115JB. HE FURTHER RELIED UPON IN CASE OF DCIT VS. FARMSON PHARMACEUTICALS (2011) 55 DTR 364 (GUJ) 115J. HE FURTHER RELIED IN CASE OF KINETIC MOTOR 262 ITR 330 (BOM), WHEREIN, HONBLE BOMBAY HIGH COURT HELD THAT THE AP PELLANT HAD FOLLOWED THE SLM UNDER COMPANIES LAW BUT IT CHANGED THE SLM TO W DV METHOD FOR CALCULATING INCOME U/S. 115J OF THE IT ACT. THE HO NBLE COURT HELD THAT IT WAS ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 26 NOT IN DISPUTE THAT UNDER THE COMPANIES ACT, BOTH T HE SLM AND WDV METHODS ARE RECOGNIZED, THEREFORE, ONCE AMOUNT ON DEPRECIAT ION ACTUALLY DEBITED TO THE PROFIT AND LOSS ACCOUNT WAS CERTIFIED BY THE AUDITO RS. IT WAS NOT PERMISSIBLE FOR THE ASSESSING OFFICER TO MAKE BOOK ADJUSTMENT. FUR THER IN CASE OF DCIT VS. SURAT TEXTILE 317 ITR 367 (GUJ), HONBLE GUJARAT DI SMISSED THE APPEAL OF THE REVENUE ON THE GROUND THAT THERE WAS NOTHING ON REC ORD TO DISPROVE THE FINDING THAT THE P&L ACCOUNT PRESENTED ALONGWITH TH E APPELLANT AND THE INCOME WAS INCONSONANCE WITH II & III OF THE SCHEDU LE VI OF THE COMPANIES ACT, 1956 AND IT WAS DULY AUDITED BY THE CHARTERED ACCOUNTANT. THE TRIBUNAL WAS JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO WORK OUT THE BOOK PROFIT U/S. 115J BY ALLOWING THE DEPRECIATION UNDER THE WDV MET HOD. AT THE OUTSET, LD. CIT D.R. RELIED UPON THE ORDER OF THE AUTHORITIES B ELOW. 27. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. AS CLAIMED BY THE APPELLANT THAT ON TWO DI VISIONS, THE APPELLANT HAD CHANGED THIS METHOD OF DEPRECIATION IN A.Y. 02-03, WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT. NOW HE HAD CHANGED THE METHOD O F DEPRECIATION FROM SLM TO WDV METHOD ON VARELI AS WELL AS JOLVA POWER PLANT. AS PER SUB- SECTION 2 OF SECTION 115JB, THE APPELLANT CAN ADOPT THE METHOD AND RATE FOR CALCULATING THE DEPRECIATION, THIS SHALL BE SAME AS HAVE BEEN ADOPTED FOR THE PURPOSE OF PREPARING SUCH ACCOUNT INCLUDING P&L ACC OUNT AND LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVISIONS OF SECTION 210 OF THE COMPANIES ACT, 1956, WHICH WAS C ONDUCTED ON 28.09.2004 BY THE MANAGEMENT. AS PER VARIOUS DECISIONS, ON AD JUSTMENT U/S. 115JB, IT WAS HELD THAT THE A.O. DOESNT HAVE ANY POWER TO MA KE ADJUSTMENT EXCEPT ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 27 PROVIDED IN SECTION 115JB ITSELF. THUS, WE DIRECT THE A.O. TO CALCULATE THE BOOK PROFIT U/S. 115JB ON THE BASIS OF DEPRECIATION WDV METHOD. ACCORDINGLY, THIS GROUND OF ASSESSEES APPEAL IS ALLOWED. 28. GROUND NO.8 IS AGAINST DEFERRED TAX LIABILITY H AS NOT BEEN PRESSED BY LD. COUNSEL FOR THE APPELLANT. THEREFORE, THE SAME IS DISMISSED, AS NOT PRESSED. 29. THE ASSESSEE HAS TAKEN ADDITIONAL GROUND, WHIC H IS REPRODUCED AS UNDER: HAVING HELD THAT THE EXCISE DUTY CAN BE ALLOWED ON LY IF THE SAME IS PAID BEFORE THE DUE DATE OF FILING RETURN O F INCOME. THE C.I.T. (A) OUGHT TO HAVE CONSIDERED THE FACT THAT T HE ASSESSEE HAD INFACT SUBSTANTIAL CENVAT CREDIT AND THAT THE DUTY IS IN FACT PAID AND THIS OUGHT TO HAVE ALLOWED THE GROUNDS OF APPEAL. 30. WE HAVE HEARD BOTH THE PARTIES AND ADDITIONAL G ROUND ADMITTED FOR HEARING IN VIEW OF THE DECISION OF THE HONBLE APEX COURT IN CASE OF NTPC. SINCE AT THE TIME OF HEARING, THE LD. COUNSEL DID N OT SERIOUSLY ARGUE THIS GROUND, THE SAME IS DISMISSED. 31. EFFECTIVE GROUNDS OF ASSESSEES APPEAL & C.O. A ND REVENUES APPEAL FOR A.Y. 05-06 ARE AS UNDER: ITA NO. 651/AHD/2009 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF COMMISSIONS PAID TO T HE CMD SHRI PRAFUL A. SHAH RS.85 LACS AND TO ANOTHER DIREC TOR SHRI ALOK A. SHAH RS.3 LACS. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN HOLDING THAT ANY ADDITION IS WARRANTED FOR THE A LLEGED UNDER- VALUATION OF WORK-IN-PROGRESS IN A SUM OF RS.1,15,6 3,596/-. ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 28 3. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER IN MAKING AN ADDITION OF RS.52,73 0/- TO THE BOOK PROFITS UNDER SECTION 115JB OF THE ACT, BEING LOSS ON ACCOUNT OF DIVIDEND STRIPPING DISALLOWED BY THE COM PANY UNDER SECTION 94(7) OF THE ACT, TREATING THE SAME A S EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME. C.O. NO. 68/AHD/2009 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE CIT(A) SHOULD HAVE REALIZED THAT WHEN THE ASSESSING OFFICE R MADE VERY BIG ADDITIONS IN THE ASSESSMENT ORDER AND UNAB SORBED DEPRECIATION WHICH WAS COMPUTED BY THE ASSESSEE IN ITS RETURN OF INCOME GOT CONVERTED INTO POSITIVE TOTAL INCOME THE ASSESSEES CLAIM FOR DEDUCTION U/S.80IA FOR ITS MMB POWER GENERATION UNDERTAKING AT JOLVA WAS REQUIRED TO BE CONSIDERED AND ALLOWED. ITA NO. 720/AHD/2009 1. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE ADDITIONS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ESTIMATION OF PROFIT BY REJECTING THE BOOKS OF ACCO UNTS U/S.145 OF THE I.T.ACT WHEN THE DEFECTS IN THE BOOKS OF ACC OUNTS WERE CLEARLY POINTED OUT AND ESTABLISHED BY THE ASSESSIN G OFFICER THAT THERE WERE DEFECTS IN THE BOOKS OF ACCOUNTS MA INTAINED BY THE ASSESSEE. FIRST, WE TAKE ITA NO. 651/AHD/2009. 32. GROUND NO.1 IS AGAINST DISALLOWING THE COMMISSI ONS PAID TO SHRI PRAFUL A. SHAH RS. 85 LACS AND TO ANOTHER DIRECTOR SHRI AL OK A. SHAH RS. 3 LACS. THIS ISSUE HAS BEEN ALLOWED IN FAVOUR OF THE ASSESS EE IN A.Y. 04-05 IN GROUND ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 29 NO. 1. THE FACTS ARE IDENTICAL DURING THE YEAR UND ER CONSIDERATION. THEREFORE, WE ALLOW THE APPEAL OF THE ASSESSEE, ON SIMILAR FIN DING GIVEN FOR A.Y. 04-05. 33. GROUND NO.2 IS AGAINST ADDITION ON ACCOUNT OF U NDER-VALUATION OF WORK- IN-PROGRESS OF RS. 1,15,63,596/-. THE A.O. OBSERVE D THAT THE APPELLANT IS ENGAGED IN MANUFACTURING OF POLYESTER FILAMENT YARN AND GREY FABRICS WITH INSTALLED CAPACITY OF 65,200 MT AND 1314 LOOMS. TH E MANUFACTURING PROCESS FOR POLYESTER FILAMENT YARN INVOLVES MANY STAGES OF PROCESS. THE COMPANY IS OPERATING 1314 LOOMS AND MANUFACTURED 430.52 LACS M ETERS OF CLOTH. IN GENERAL, A BEAM MOUNTED ON A LOOM IS OF 50 KG. OF Y ARN. AS PER THE AVAILABLE RECORD THE WORK IN PROGRESS CAN BE WORKED IN THE FO LLOWING MANNER. BEAMS ON LOOM EACH HAVING WEIGHT OF 50 KGS. 1314 X 50 = 65700 KGS 50% OF THE SAME COMES TO 32850 KGS RS. 95/- PER KG. RS. 31,20,750 CLOTH ON LOOM IN GENERAL GREY TAKA IS OF 100 METERS (1314 X 100 = 131400 METERS) 50% OF THE SAME COME TO 65700 RS. 15/- PER METER RS. 9,L85,500 POLYESTER FILAMENT YARN 57001 M.T. / 365 = 156.00 MT PER DAY 156 MT FOR 1 DAYS 156000 KGS. RS. 50/- PER KG. RS.78,00,000 CLOSING WORK IN PROGRESS 1,19,06,250 AGAINST THIS, THE COMPANY HAS SHOWN RS.3,42,654/- O F STOCK IN PROGRESS WHICH CLEARLY INDICATES MISPRESENTATION OF FACTS AND SUPP RESSION OF TAXABLE INCOME. THE LD. A.O. HAD WORKED OUT THE WORK IN PROGRESS ON SCIENTIFIC METHOD AND ALSO RELIED IN CASE OF : CIT VS. SARANGAPUR COTTON MFG. CO. LTD. (1938) 6 IT R 36 (PC): CIT VS. ACHRULAL (1983) 6 ITR 255 (NAG.) ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 30 ROZA TEXTILES LIMITED VS. CIT (1972) 86 ITR 673 (AL L.) LD. A.O. ALSO ANALYZED THE POSITION ON FOLLOWING PO INTS: I. SUNDERY DEBTORS FIGURE DOES NOT MATCH WITH THE B ALANCE SHEET OF CORRESPONDING COMPANY. II. HUGE DIFFERENCE BETWEEN STOCK DECLARED IN THE B OOKS OF ACCOUNTS AND STOCK STATEMENT SUBMITTED TO BANKS FOR SECURING WORK IN CAPITAL. III. NON FURNISHING OF QUANTITATIVE DETAILS FOR REA DYMADE GARMENTS. IV. NO PROPER DISCLOSURE OF THE PERSON COVERED U/S. 40A(2)(B). V. INTER-GROUP TRANSACTIONS. VI. NON FURNISHING OF SEPARATE TRADING ACCOUNTS. VII. TRANSFER TO GENERAL RESERVE. THE LD. A.O. REJECTED THE BOOKS OF ACCOUNT U/S. 145 (3) OF THE I.T. ACT. BUT THE LD. A.O. MADE ADDITION IN THE HEAD OF G.P. AT RS. 31,31,87,129/-. THEREFORE, NO SEPARATE ADDITION WAS MADE UNDER THE HEAD WORK-I N-PROGRESS. 34. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE A SSESSEE CARRIED THE MATTER BEFORE THE CIT(A), WHO HAD CONFIRMED THE ADD ITION BY GIVING DETAILED FINDINGS FROM PAGE NO.12 TO 83 OF HIS ORDER AND HEL D AS UNDER: THE ASSESSING OFFICER HAS NOT EVEN ONCE DOUBTED OR MADE ANY ADVERSE REMARKS WITH REFERENCE TO THE YIEL D OF YARN/GREY CLOTH OF THE APPELLANT COMPANY. THIS WOU LD MEAN THAT THE ASSESSING OFFICER HAS FULLY ACCEPTED THE P URCHASE, SALES, CONSUMPTION, SHORTAGE, ETC., OF THE APPELLAN T COMPANY. THE ASSESSING OFFICER COULD NOT QUANTIFY ANY PARTIC ULAR ITEM OF DEDUCTION AS DISALLOWABLE ITEM FOR THE TAX PURPOSES . IN OTHER WORDS, ASSESSING OFFICER COULD NOT PINPOINT ANY SPE CIFIC ITEM IN THE WORKING RESULTS FOR A SPECIFIC ADDITION IN T HE ASSESSMENT AS DISALLOWABLE ITEM OF EXPENDITURE ETC. THE ONLY POINT OF ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 31 ADDITION POINTED OUT IS WITH RESPECT TO UNDERVALUAT ION OF WIP. THIS CLEARLY SUPPORTS THE ARGUMENT THAT THE BOOKS R ESULTS WERE REJECTED BY THE ASSESSING OFFICER ON INSIGNIFICANT GROUNDS. THE ONLY GROUND VALID IS WITH RESPECT TO ADDITION IN TH E CLOSING STOCK OF WORK-IN-PROGRESS AS DISCUSSED IN GROUND NO .1 FOR REJECTING THE BOOKS OF ACCOUNT. AS DISCUSSED ABOVE , THE G.P. ADDITION MADE BY THE A.O. IS RESTRICTED TO ONLY ADD ITION ON ACCOUNT OF UNDERVALUATION OF WORK-IN-PROGRESS IN TH E CLOSING STOCK TO THE EXTENT OF RS.1,15,63,596/-. HENCE THE ADDITION IS SUSTAINED ONLY TO THE EXTENT OF RS.1,15,63,596/- AS UNDERVALUATION IN WORK-IN-PROGRESS AND THE BALANCE IS DELETED. THIS GROUND OF APPEAL IS, THEREFORE, PARTLY ALLOWED . 35. NOW THE ASSESSEE IS BEFORE US. LD. COUNSEL FOR THE APPELLANT CONTENDED THAT ALL THE FACTS AND FIGURES WERE PRESE NTED BEFORE THE CIT(A) AND CHALLENGED THE REJECTION OF BOOKS OF ACCOUNT U/S. 1 45(3) OF THE IT ACT. HE HAS DRAWN OUR ATTENTION ON REPLY SUBMITTED BY THE APPEL LANT BEFORE THE CIT(A) ON PAGE NO.42 OF THE CIT(A) ORDER AND CLAIMED THAT THE VALUATION OF THE CLOSING STOCK WORK-IN-PROGRESS HAD BEEN SUBJECTED TO AUDIT, NOT ONLY BY THE APPELLANT INTERNAL AUDIT DIVISION BUT ALSO BY THE STATUTORY A UDITOR. AUDIT CONDUCTED U/S. 44AB OF THE IT ACT AND HAS SHOWN BY THE EXTRACT ON THEIR RESPECTIVE AUDIT REPORT ENCLOSED. THEY HAD ALL FOUND IT TO BE IN OR DER APART FROM BEING SOME CONSISTENT BASIS AS IN THE EARLIER YEAR. HE FURTHE R ARGUED THAT LD. A.O. HAD CHANGED THE CLOSING STOCK BUT NOT THE VALUATION OF WORK-IN-PROGRESS FOR OPENING STOCK. IT IS NOT NECESSARY THAT THE WORK-I N-PROGRESS IS TO BE FOUND AS PER INSTALLED CAPACITY OF THE LOOM AND BEAM. IT CA N BE DIFFERENT ON LAST DAY FROM THE INSTALLED CAPACITY. THERE WAS NO MISTAKE POINTED OUT BY THE LD. A.O. ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 32 IN THE ACCOUNTS BEFORE REJECTING THE BOOKS U/S. 145 (3) OF THE IT ACT. THE APPELLANT HAD SUBMITTED THE COPY OF THE CLOSING STO CK STATEMENT SUBMITTED TO THE BANK AS ON 25 TH MARCH, 2005. THE LD. A.O. HAD COMPARED THE VALUE OF THE FURNISHED GOODS AND W.I.P. SHOWN IN THE ANNUAL ACCO UNTS AS ON 31.03.2005 WITH STATEMENT SUBMITTED TO THE BANK. THE COMPANY HAD SHOWN CLOSING STOCK AS ON 31 ST MARCH, 2005, AT RS. 75 CRORE AS AGAINST CLOSING ST OCK ON 25 TH MARCH, 2005 AT RS. 53.3 CRORE. THE APPELLANT HAD S UBMITTED COMPLETE QUANTITY INFORMATION FOR THE GARMENTS IN ANNUAL ACC OUNTS. THE APPELLANT ALSO RELIED UPON VARIOUS CASE LAWS BEFORE THE CIT(A). F URTHER, HE RELIED UPON CO- ORDINATE D BENCH, AHMEDABAD DECISION IN ITA NO. 2 68/AHD/2009 FOR A.Y. 05- 06 IN CASE OF ARCHNA DYEING & PRINTING MILLS PVT. L TD., WHEREIN SIMILAR ADDITION OF RS.1,82,338/- WAS MADE BY THE A.O. WHICH WERE RE DUCED TO 50% BY THE CO- ORDINATE BENCH BY ANALYZING THE WORK-IN-PROGRESS OF THE METERAGE CLOTH. FROM THE SIDE OF THE REVENUE, LD.CIT D.R. RELIED ON THE ORDER OF THE CIT(A). 36. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. IT IS ADMITTED FACT THAT THE ASSESSEE HAD SHOWN MORE CLOSING STOCK ON 31.03.2005 COMPARED TO BANK STATEMENT SUBMITTED ON 25 TH MARCH, 2005. AS PER WORKING MADE BY THE A.O. IN ASSESSMENT ORDER, T HE MINIMUM REQUIREMENT OF WORK-IN-PROGRESS HAS BEEN CALCULATED AT RS. 1,19 ,06,250/-. LD. COUNSEL HAD NOT CONTROVERTED THE REASONING FOR NOT ACCEPTIN G THE WORK-IN-PROGRESS CALCULATED BY THE A.O. HE SIMPLY RELIED ON THE SUB MISSION MADE BEFORE THE CIT(A) WHICH ARE DIRECTLY NOT APPLICABLE ON THE OBS ERVATION MADE BY THE A.O. THEREFORE, WE DO NOT FIND ANY REASON TO INTERVENE I N THE ORDER OF THE CIT(A). ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 33 37. GROUND NO. 3 IS AGAINST CONFIRMING THE ADDITION ON RS.52,730/-, WHICH IS SIMILAR TO GROUND NO.5 FOR A.Y. 04-05. THE FACTS A RE IDENTICAL, THEREFORE, WE CONFIRM THE ADDITION ON THE BASIS OF FINDINGS GIVEN FOR A.Y. 04-05 & DISMISS THE ASSESSEES APPEAL ON THIS GROUND. NOW WE TAKE C.O. NO. 68/AHD/2009 38. THE GROUND OF ASSESSEES C.O. IS AGAINST THE LO SS INCOME CONVERTED IN POSITIVE INCOME AND NOT ALLOWING DEDUCTION U/S. 80I A FOR ITS MMB POWER GENERATION UNDERTAKING AT JOLVA. THE APPELLANT FIL ED RETURN ON 29.10.2005 FOR A.Y. 05-06 SHOWING NIL INCOME AND BOOKS PROFIT U/S. 115JB AT RS. 2,02,69,269/-, HOWEVER, IN COMPUTATION, THE LD. A.O . HAS SHOWN RETURN INCOME AT RS. (-) 24,44,16,012/- WHICH WAS ASSESSED AT RS. 10,26,78,549/- AND NO DEDUCTION U/S. 80IA WAS ALLOWED BY THE A.O. 39. THIS C.O. DOES NOT ARISE FROM THE ORDER OF THE CIT(A). THUS, WE DISMISS THE C.O. OF THE ASSESSEE. AT LAST, WE TAKE REVENUES APPEAL IN I.T.A. NO. 720 /AHD/2009 40. THE GROUND OF REVENUES APPEAL IS AGAINST ESTIM ATION OF PROFIT AND REJECTING THE BOOKS OF ACCOUNT U/S. 145 OF THE IT A CT . LD. A.O. OBSERVED THAT THE APPELLANT HAD SHOWN SALES AND JOB CHARGES AT RS . 626.37 CRORES AS AGAINST LAST YEAR SALE OF 467.22 CRORES. THE GROSS PROFIT HAD DECLARED @ 8.61% AS AGAINST THE LAST YEAR GROSS PROFIT @ 16.93 %. THE A.O. GAVE REASONABLE OPPORTUNITY OF BEING HEARD WHICH WAS REP LIED BY THE ASSESSEE AND FOLLOWING DEFECTS WERE POINTED OUT: ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 34 I. IMPROPER DISCLOSURE OF WORK IN PROGRESS. II. SUNDERY DEBTORS FIGURE DOES NOT MATCH WITH THE BALANCE SHEET OF CORRESPONDING COMPANY. III. HUGE DIFFERENCE BETWEEN STOCK DECLARED IN THE BOOKS OF ACCOUNTS AND STOCK STATEMENT SUBMITTED TO BANKS FOR SECURING WORK IN CAPITAL. IV. NON FURNISHING OF QUANTITATIVE DETAILS FOR READ YMADE GARMENTS. V. NO PROPER DISCLOSURE OF THE PERSON COVERED U/S. 40A(2)(B). VI. INTER-GROUP TRANSACTIONS. VII. NON FURNISHING OF SEPARATE TRADING ACCOUNTS. VIII. TRANSFER TO GENERAL RESERVE. HE FURTHER HELD AS UNDER: I HAVE GONE THROUGH THE ABOVE CITATIONS SUBMITTED BY THE ASSESSEE, HOWEVER, THE FACTS AND THE ISSUES DEALT I N THESE CITATIONS, ARE NOT DIRECTLY OR INDIRECTLY SUPPORTS THE ARGUMEN TS OF THE ASSESSEE AS THE ISSUES/DISCREPANCIES NOTICED IN THE INSTANT CASE ARE DIFFERENT. IN VIEW OF THE ABOVE DISCUSSION AND TO SUM UP ALL DISCREPANCIES POINTED OUT ABOVE, IT CAN BE SAID THA T THE BOOKS OF ACCOUNTS ARE NOT RELIABLE. HENCE THE BOOKS RESULT SHOWN BY THE ASSESSEE IS REJECTED AS PER PROVISION U/S.145(3) OF THE I.T. ACT. THE GROSS PROFIT IS DETERMINED IN THE MANNER PRESCRIBED U/S.144 OF THE I.T. ACT. NOW COMING OVER TO THE DETERMINATION OF GROSS PROFIT DURING THE YEAR UNDER CONSIDERATION. THERE IS A DECLINE I N THE GROSS PROFIT RATIO FROM THE PREVIOUS YEAR BY 8.33%. THE REPLY O F THE ASSESSEE GIVEN IN SUPPORT OF THE DECLINE OF GP IS CONSIDERED BUT THE FACTS AND ARGUMENTS ADVANCED BY THE ASSESSEE IN ITS SUBMISSIO N IS NOT SATISFACTORILY SUPPORTED. A NUMBER OF DISCREPANCIE S AS NARRATE IN DETAIL IN ABOVE PARAS ARE FOUND IN THE BOOKS OF ACC OUNTS OF THE ASSESSEE. TAKING INTO CONSIDERATION ALL THE DISCUS SION MADE ABOVE AND TO BE FAIR AND REASONABLE, THIS OFFICE IS TAKIN G A CONSIDERABLE VIEW AND TAKE 5% OF THE GP RATIO FOR WORKING OF GRO SS PROFIT. THE ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 35 DIFFERENCE OF RS.31,31,87,129/- (5% OF NET TURNOVER OF RS.626.37 CRORES), IS CONSIDERED SUPPRESSION OF GROSS PROFIT AND ADDED THE SAME ON ACCOUNT OF LOW GP RATIO SHOWN BY THE ASSESS EE IN THE YEAR UNDER CONSIDERATION. SINCE THE ASSESSEE COMPANY HA S FURNISHED INACCURATE PARTICULARS OF ITS INCOME, THE PENALTY U /S. 271 (1) (C) R.W. EXPLANATION 1 IS INITIATED. IT IS HEREBY CLARIFIED THAT THE SUPPRESSED VALUE OF WIP DISCUSSED IN PARA 4(I) IS N OT SEPARATELY ADDED BECAUSE THE SAME IS FORMING PART O F G.P. AND ADDITION ON THIS COUNT HAS ALREADY MADE ABOVE. 41. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE A SSESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO HAD DELETED THE ADDITI ON BY ANALYZING ALL THE SUBMISSION MADE BY THE APPELLANT BEFORE HIM. 42. NOW THE REVENUE IS BEFORE US. LD. CIT D.R. VEH EMENTLY ARGUED THAT LD. A.O. CATEGORICALLY STATED IN ASSESSMENT ORDER THAT ABOVE MENTIONED DEFECTS HAD BEEN FOUND BY HIM IN THE BOOKS OF ACCOUNT OF TH E APPELLANT. HE ARGUED THAT HE HAS RIGHTLY REJECTED THE BOOKS OF ACCOUNT U /S. 145(3) OF THE IT ACT. HE, PARTICULARLY, DRAWN OUR ATTENTION ON STOCK REGISTER SUBMITTED TO THE BANK WITH REFERENCE THE CLOSING STOCK SUBMITTED BY THE APPELL ANT AS ON 31.03.2005 WHEREIN THE APPELLANT HAD DISCLOSED THE STOCK IN PR OCESS BEFORE THE BANK AS ON 25.03.2005 AT RS. 3,22,53,000/- WHEREAS IN THE C LOSING STOCK AS ON 31.03.2005 IN P&L ACCOUNT HAD NOT BEEN DISCLOSED AT RS. 3,42,654/-. THEREFORE, HE ARGUED THAT BOOK RESULTS OF THE APPEL LANT ARE NOT CORRECT. THE APPELLANT HAD NOT GIVEN QUANTITY WISE DETAILS OF TH E READYMADE GARMENTS WITH REFERENCE TO OPENING QUANTITY, PURCHASE QUANTITY, M ANUFACTURING QUANTITY, SALE QUANTITY AND CLOSING STOCK QUANTITY. SIMILARLY, TH E WORK-IN-PROGRESS HAD NOT ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 36 BEEN MATCHED WITH THE TECHNICAL REQUIREMENT OF THE LOOM. FROM THE SIDE OF THE APPELLANT, LD. SR. A.R. CONTENDED THAT LD. A.O. HAD NOT POINTED OUT SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNT. THE RAW MATERIAL IS SUB-PRODUCT OF CRUDE OIL. INTERNATIONALLY, THE CRUDE OIL PRICES HAD GONE UP. THEREFORE, COST OF THE BASIC RAW MATERIAL DMT & MEG HAD GONE UP. BESIDES THIS, THERE IS TOUGH COMPETITION IN THIS LINE OF BUSINESS. THEREFORE, T HE APPELLANT COULD NOT REALIZE THE SALE PRICE. ACCORDINGLY, THE CIT(A) ORDER MAY PLEASE BE CONFIRMED. 43. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. IT IS UNDISPUTED FACT THAT THE APPELLANT H AD SHOWN CLOSING SOTCK IN PROCESS BEFORE THE BANK AT RS.3,22,53,000/- WHEREAS ENCLOSING BALANCE AS ON 31.03.2005 HAD BEEN DISCLOSED AT RS. 3,42,654/- WHI CH HAS NOT BEEN RE- CONCILED BY THE APPELLANT, AT ANY STAGE. FURTHER, QUANTITY DETAIL OF READYMADE GARMENTS WERE NOT SUBMITTED BY THE APPELLANT AT ANY STAGE. THE MINIMUM REQUIREMENT OF LOOM ALSO IS A DETERMINED FACTOR FOR PRODUCTION WHICH HAS ALSO NOT BEEN CONTROVERTED BY THE APPELLANT. THEREFORE, REJECTION OF THE BOOKS U/S. 145 (3) OF THE ACT IS RIGHTLY APPLIED BY THE A.O. HOWEVER, THE LD. A.O. MADE ADDITION OF RS. 31,31,87,129/- @ 5% NET PROFIT ON T URN OVER OF RS. 626.37 CRORES. THE ASSESSEES G.P. RATE WAS 8.61% AGAINST THE GROSS PROFIT RATE OF 16.93% IN PRECEDING YEAR. THE APPELLANT SALE HAD G ONE UP DURING THE YEAR UNDER CONSIDERATION. THEREFORE, IN THE INTEREST OF JUSTICE, WE DECIDE THE 10% GP RATE IS REASONABLE BESIDES THE ADDITION CONFIRME D IN PRECEDING PARAS. THUS, THE REVENUES APPEAL IS PARTLY ALLOWED. THE A.O. IS DIRECTED TO RE- CALCULATE THE INCOME ON THE BASIS OF GP @ 10%. ITA NOS. 220/AHD/08, A.Y. 04-05, 651 & 720/AHD/09 & C.O. NO. 68/AHD/09, A.Y. 05-06 PAGE 37 44. IN THE COMBINED RESULT, THE ASSESSEES APPEAL I N BOTH YEARS AND REVENUES APPEAL FOR A.Y. 05-06 ARE PARTLY ALLOWED & ASSESSEES C.O. FOR A.Y. 05-06 IS DISMISSED. THESE ORDERS PRONOUNCED IN OPEN COURT ON 15.02.2013 SD/- SD/- ( D.K.TYAGI ) (T.R. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- 1. 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