ITO 12(3)(2), MUMBAI V. NEELAM INDUSTRIES, MUMBAI

ITA 8133/MUM/2011

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 3134 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 05-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR SANTOSH MANKOSKAR
• Keywords: Rejection of books of accounts; Question of law; Non compliance
• Section: 143(3); 145

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI B BENCH , , BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMBER & SAKTIJIT DEY ,JUDICIAL MEMBER /. ITA NO. 8133 /MUM/201 1 , / ASSESSMENT YEAR - 2008 - 09 INCOME TAX OFFIER - 12(3)(2) ROOM NO.114, 1 ST FLOOR AAYAKAR BHAVAN MUMBAI - 400 020 . VS M/S. NEELAM INDUSTRIES 607, EMBASSY CENTRE NARIMAN POINT , M UMBAI - 400 021 . PAN: AACFN 6263 G ( / APPELLANT ) ( / RESPONDENT ) /ASSESSEE BY : MS. A ASIFA KHAN / REVENUE BY : DR. SANTOSH MANKOSKAR / DATE OF HEARING : 2 4 - 09 - 2015 / DATE OF PRONOUNCEMENT : 30 - 09 - 2015 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DT.17.10.2011OF CIT(A) - 23, MUMBAI THE ASSESSING OFFICER(AO), HAS FILED FOLLOWING GROUNDS OF APPEAL : 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW, DELETING THE DISALLOWANCE OF 10% OF THE PURCHASES AMOUNTING TO RS.16,95,653/ - WHICH BEING NOT GENUINE AS HELD BY THE A.O. 1A.WHILE DELETING THE DISALLOWANCE, THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN N OT APPRECIATING THE FACTS THAT THE ASSESSEE HAS NOT MAINTAINED OF STOCK REGISTER WHICH THE ASSESSEE ITSELF ADMITTED BEFORE THE A.O. IN THE COURSE OF ASSESSMENT PROCEEDINGS. 2. THE LD CIT(A) HAS ERRED ON FACTS - AND IN LAW, IN NOT APPRECIATING THE FACT THAT THE A.O. HAS RIGHTLY REJECTED THE BOOKS OF A/C U/S 145 OF THE I.T. ACT IN VIEW OF THE NON - MAINTENANCE OF STOCK REGISTER AND THE FIGURES OF PURCHASES ARE ADJUSTED TO REDUCE THE ACTUAL NET PROFIT. 3. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW, IN IGNORING THE FACT THAT THE ASSESSEE HAS NOT COMPLIED WITH THE PROVISION OF SECTION 145 OF THE I.T. ACT FOR NOT MAINTAINING STOCK REGISTER PERTAINING TO DAY TO DAY RECORDS OF THE RAW MATERIAL AND WORK IN PROGRESS. 4. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THE FACT THE REGISTER PRODUCED BY THE ASSESSEE CONTAIN MATERIAL INWARD REGISTER AND MATERIAL GIVEN TO WORKERS FOR GETTING THE WORK DONE AND THE SAME CANNOT REFLECT THE PICTURE OF OPENING/CLOSING STOCK NOR THE DETAILS OF STOCK AVAILABLE AT PARTICULAR POINT OF TIME. 5. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX(APPEALS) ON THE ABOVE GROUND(S) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 6. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ASSESSEE - FIRM,ENGAGED IN THE BUSINESS OF FABRICATION OF MACHINE FILED RETURN OF INCOME ON 17.09. 2008,DECLARING INCOME OF RS.4.96 LACS.THE AO COMPLETED THE ASSESSMENT ON 24.12.2010 U/S. 143(3) O F THE ACT,DETERMINING THE INCOME OF THE ASSESSEE AT RS.21.92 LACS. 2. EFFECTIVE GROUND OF APPEAL IS ABOUT DELETING DISALLOWANCE OF 10% OF PURCHASE AMOUNTING TO RS.16.95 LACS AND IGNORING THE FACT THAT THE AO HAD REJECTED THE BOOKS OF ACCOUNT U/S. 145 OF TH E ACT.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT IN THE AUDIT REPORT THE AUDITOR HAD A MADE REMARK,VIDE ANNEXURE - VII, IN RESPECT OF CLAUSE - 28(B) OF FORM 3CD,AS UNDER : ITA/ 813 3 /M/11 NEELAM ,AY. 08 - 09 2 THE SUBMISSION MADE BY ONE OF THE PARTNER IS AS UNDER: WE ARE MANUFACTURER OF PLANTS AS PER SPECIFICATION PROVIDED BY THE CUSTOMER. SO EVERY PLANT IS DIFFERENT AND NO IDENTICAL PRODUCT IS PRODUCED.WE REQUIRE VARIOUS TYPES OF RAW MATERIALS, SO IT IS NOT POSSIBLE TO MAINTAIN DAY TO DAY RECORDS OF SUCH RAW MATERIAL.HOWEVER, AT THE YEA R END INVENTORY IS PHYSICALLY VERIFIED AND VALUE IS ARRIVED AT. AFTER CONSIDERING THE ABOVE NARRATION,HE HELD THAT THE ASSESSEE WAS NOT MAINTAINING STOCK REGISTER AND DAY TO DAY RECORD OF RAW MATERIAL AND WORK IN PROGRESS. HE DIRECTED THE ASSESSEE TO PROD UCE STOCK REGISTER ALONGWITH THE INVENTORY OF OPENING AND CLOSING STOCKS.VIDE ITS LETTER,DT.19.7.2010, THE ASSESSEE FURNISHED THE DETAILS .AFTER GOING THROUGH THE LETTERS OF THE ASSESSEE,HE HELD THAT THE DETAILS WERE INCOMPLETE, THAT IT DID NOT CONTAIN TH E TYPE OF RAW MATERIAL NUMBER OF PIECES AND THE DESCRIPTION, THAT THE ASSESSEE HAD ADMITTED THAT IT WAS NOT MAINTAINING STOCK REGISTER.HE ASKED THE ASSESSEE AS TO WHY THE BOOKS OF ACCOUNTS SHOULD NOT BE REJECTED IN VIEW OF THE NON MAINTENANCE OF THE STOCK REGISTER AND AS TO WHY THE ADDITION ON ACCOUNT OF PURCHASES AND EXPENSES SHOULD NOT BE MADE.THE ASSESSEE,VIDE ITS LETTER DT.8.12.2010,EXPLAINED THAT IT WAS NOT A MANUFACTURING UNIT WHERE MASS PRODUCTION OR REPETITIVE ITEMS WERE MANUFACTURED,THAT MANUFACTUR ING ACTIVITY CARRIED OUT WERE DIFFERENT FROM OTHER UNITS,THAT IT FABRICATED ENGINEERING ITEMS AND SAME WERE MADE TO ORDER IN ACCORDANCE WITH THE INDIVIDUAL DRAWINGS, THAT IT WOULD RECEIVE FABRICATION ORDERS FROM CUSTOMERS,THAT IT WAS REQUIRED TO FOLLOW SPE CIFICATION AND STANDARDS AS PER DRAWINGS,THAT BASED ON PRODUCTION SCHEDULE AND REQUIREMENT OF RAW MATERIAL AS PER INDIVIDUAL DRAWINGS IT WOULD PURCHASE MATERIAL FROM THE MARKET,THAT MATERIAL RECEIVED WOULD DIRECTLY BE HANDED OVER TO THE SHOP FLOOR,THAT DUR ING FABRICATION VARIOUS STEPS WERE INVOLVED INCLUDING GAS CUTTING,WELDING DRILLING AND ASSEMBLING,THAT AT THE END OF THE YEAR IT WOULD TAKE PHYSICAL INVENTORY OF THE SURPLUS AND UNUTILISED MATERIAL TO WORK OUT CLOSING STOCK,THAT IT WAS CONSISTENTLY FOLLOWI NG THE ABOVE METHOD FOR SO MANY YEARS,THAT IT WAS MAINTAINING REGISTER TO NOTE DOWN THE INCOMING MATERIAL AND MATERIAL COMING TO SHOP FLOOR.IT PRODUCED 3 REGISTERS BEFORE THE AO FOR VERIFICATION.AS PER THE AO,THE REGISTERS CONTAINED THE DETAILS OF MATERIAL PURCHASED AND ISSUED TO THE WORKERS, THAT THE REGISTERS WERE CALLED MATERIAL INWARD REGISTER AND MATERIAL GIVEN TO SHOP FLOOR,THAT THE REGISTER WERE NOT GIVING THE PICTURE OF OPENING/CLOSING STOCK,THAT THEY WERE NOT SHOWING THE STOCK AVAILABLE AT A PARTIC ULAR POINT OF TIME,THAT IT WAS REQUIRED TO MAINTAIN STOCK REGISTER IN ORDER TO COMPUTE EXACT PROFIT,THAT THE AUDITOR HAD POINTED OUT THAT THE OPENING AND CLOSING STOCK HAD BEEN TAKEN AS CERTIFIED BY THE MANAGEMENT,THAT THERE WAS NO CHECK ON OPENING AS WELL AS THE CLOSING STOCK, THAT THE FIGURES WERE TAKEN ON MERE HYPOTHECATION, THAT THE PROFIT/LOSS COULD BE DETERMINED ON THE BASIS OF OPENING AND CLOSING STOCK,THAT THE PROFIT SHOWN BY THE ASSESSEE WAS NOT RELIABLE AS IT WAS NOT POSSIBLE TO CROSS CHECK THE ST OCK POSITION.HE REJECTED THE BOOKS OF ACCOUNT OF THE ASSESSEE.HE FURTHER FOUND THAT THE ASSESSEE HAD SHOWN PURCHASES OF RS.1.69 CRORES DURING THE YEAR UNDER CONSIDERATION.CONSIDERING THE FACT THAT IT WAS NOT MAINTAINING STOCK REGISTER AND HAD FAILED TO FU RNISH DETAILS OF OPENING /CLOSING STOCK,HE CONCLUDED THAT FIGURE OF PURCHASE WERE ADJUSTED TO REDUCE THE ACTUAL NET PROFIT.HE HELD THAT 10% OF THE TOTAL PURCHASES WERE NOT GENUINE.ACCORDINGLY,HE DISALALLOWED RS.16,95,653/ - AND ADDED THE SAME TO THE TOTAL IN COME OF THE ASSESSEE . 3. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM,THE ASSESSEE ARGUED THAT IT WOULD FABRICATE ENGINEERING ITEMS WHICH WERE TAILOR - MADE AND WERE MANUFACTURED IN ACCORDANCE WITH THE INDIVIDUAL DRAWINGS/DESIGNS GIVEN BY THE INDIVIDUAL CUSTOMERS.THE SPECIFICATION GIVEN BY THE PARTIES ALONGWITH SOME OF THE DRAWINGS WERE FILED BEFORE THE FAA.ON PERUSAL OF THE PURCHASE ORDER AND THE DESIGNS,THE FAA ITA/ 813 3 /M/11 NEELAM ,AY. 08 - 09 3 FOUND THAT EVERY ORD ER WAS DISTINCT FROM EACH OTHER,THAT EVEN THE RAW MATERIAL USED IN EACH MACHINERY WAS DIFFERENT.HE HELD THAT TO MAINTAIN A STOCK REGISTER FOR EACH AND EVERY ITEM WAS NOT POSSIBLE,THAT THE ASSESSEE WOULD TOOK PHYSICAL VERIFICATION OF THE STOCK AT THE END OF THE YEAR, THAT IT WAS FOLLOWING THE METHOD CONSISTENTLY AND THE DEPARTMENT HAD ACCEPTED THE METHOD IN THE EARLIER YEARS, THAT IT HAD SUBMITTED QUANTITATIVE DETAILS OF THE OPENING AND THE CLOSING STOCKS, THAT IT HAD BEEN FILING VAT RETURNS REGULARLY,THAT T HE DETAILS OF EACH AND EVERY PURCHASE AND SALE HAD BEEN REPORTED TO SALES TAX DEPARTMENT,THAT A COPY OF THE VAT RETURN FOR THE YEAR UNDER CONSIDERATION WAS GIVEN TO THE AO, THAT THE BOOKS OF ACCOUNT WERE DULY AUDITED AND THE AUDITOR HAD ISSUED A CERTIFICAT E,THAT THE AUDITOR HAD NOT MENTIONED ANY DISCREPANCY OR NON COMPLIANCE BY THE ASSESSEE IN MAINTENANCE OF ITS RECORDS,THAT THE AO HAD NOT FAULT WITH THE BOOKS OF ACCOUNT, THAT THE SALES TAX DEPARTMENT HAD ACCEPTED THE ENTIRE SALE AND PURCHASE OF THE ASSESS EE AS CORRECT, THAT AFTER REJECTING THE BOOKS OF ACCOUNT,THE AO COULD NOT RELY ON THE SAME BOOKS AND MADE DISALLOWANCE ON SPECIFIC ITEM OF EXPENDITURE.REFERRING TO THE ORDER OF THE EARLIER YEAR,THE FAA HELD THAT THE METHOD IF BUSINESS AND MAINTAINING BOOK S CONTINUED IN THE SAME MANNER THEN IN ABSENCE OF SPECIFIC INSTANCE OF NON - GENUINE PURCHASES THE ACTION OF AO IN MAKING ADHOC DISALLOWANCE OF 10% OF THE PURCHASE WAS UNJUSTIFIED.IN SHORT,HE ALLOWED THE APPEAL FILED BY THE ASSESSEE. 4. DURING THE COURSE OF HEARING BEFORE US, THE DR SUPPORTED THE ORDER OF THE AO.AR STATED THAT METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE WAS ACCEPTED BY THE AO IN THE SUBSEQUENT YEARS I.E. AY 11 - 12 AND 12 - 13, THAT THE AO HAD PASSED THE ORDER U/S. 143(3) OF THE ACT FOR THOSE YE ARS, THAT THE IT HAD FILED ITEM WISE DETAILS FOR THOSE YEARS.SHE REFERRED TO PG NO.67 TO 73 AND PG - 14 AND 15 OF THE PAPER BOOK. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD.WE FIND THAT THE AO HAD APPLIED THE PROVISIONS OF SECT ION 145(3)AND HAD REJECTED THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND HAD HELD THAT 10% OF THE PURCHASES MADE BY THE ASSESSEE HAD TO BE ADDED TO ITS INCOME,THAT THE ASSESSEE WAS FABRICATING MACHINES AS PER THE SPECIFICATIONS AND DRAWING SUPPLIED BY THE CUST OMERS,THAT HE WAS PURCHASING GOODS FROM THE MARKET AS PER THE REQUIREMENT OF THE PARTICULAR DRAWINGS,THAT RAW MATERIAL WAS SUPPLIED TO THE WORKERS AND AT THE END OF YEAR PH YSICAL STOCK OF GOODS WAS TAKEN,THAT IT WAS MAINTAINING REGISTER TO NOTE DOWN THE IN COMING MATERIAL AND MATERIAL GOING TO SHOP FLOOR, THAT NO DEFECT IN THE ACCOUNTS BOOKS WAS FOUND BY THE A O AND THE GROSS PROFIT RATE FOR THE AY. IN QUESTION WAS ALMOST SIMILAR TO THE GROSS PROFIT RATE DECLARED IN THE IMMEDIATE PRECEDING YEAR ,THAT THE FAA HAS GIVEN A CATEGORICAL FINDING OF FACT THAT THE BOOKS OF ACCOUNT OF THE ASSESSEE WERE AUDITED AND NO DISCREPANCY IN THOSE BOOKS HAD BEEN POINTED OUT BY THE A O.THUS,IT IS CLEAR THAT THE ASSESSEE WAS MAINTAINING RECORDS OF THE GOODS THAT WERE PURCHASED BY IT,S UPPLIED BY IT TO THE SHOP FLOOR AND UNUTILISED GOODS REMAINED WITH IT AT THE END OF THE AY.THE METHOD OF ACCOUNT WAS FOLLOWED BY IT IN THE EARLIER AND SUBSEQUENT AY.S.THE AO HAS NOT POINTED OUT AS TO HOW THE FACTS OF THE CASE FOR THE YEAR UNDER CONSIDERATI ON WERE DIFFERENT FROM THE EARLIER YEARS TO JUSTIFY THE REJECTION OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE . HERE, WE WOULD LIKE TO REFER TO THE CASE OF JAS JACK ELEGANCE EXPORTS(324ITR95)OF THE HONBLE DELHI HIGH COURT.FACTS OF THE CASE WERE THAT TH E ASSESSEE ENGAGED IN THE BUSINESS OF MA NUFACTURING AND EXPORT OF READY - MADE GARMENTS , THAT T HE BOOKS OF ACCOUNT AS WELL AS CERTAIN VOUCHERS WERE PRODUCED, BUT THE S TOCK REGISTER WAS NOT PRODUCED, CLAIMING THAT NO SUC H REGISTER WAS BEING MAINTAINED,THAT T H E AO REJECTED THE BOOKS OF ACCOUNT PRODUCED BY THE ASSESSEE ,THAT ITA/ 813 3 /M/11 NEELAM ,AY. 08 - 09 4 THE FAA HELD THAT ESTIMATION OF GROSS PROFIT ON THE BASIS OF GROSS PROFIT RATE DECLARED BY THE ASSESSEE TWO YEARS AGO, WAS NOT JUSTIFIED AND DELETED THE ADDITION MADE BY THE A O,THAT THE ORDER OF THE FAA WAS CONFIRMED BY THE TRIBUNAL .DECIDING THE APPEAL FILED BY THE DEPARTMENT,THE HONBLE COURT HELD AS UNDER: IT WAS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAD NOT FOLLOWED EITHER THE CASH OR MERCANTILE SYSTEM OF ACCOUNTING STIPULATED IN SUB - SECTION (1) OF SECTION 145 OF THE ACT. IT WAS ALSO NOT THE CASE OF THE REVENUE THAT THE CENTRAL GOVERNMENT HAD NOTIFIED ANY PARTICULAR ACCOUNTING STANDARDS TO BE FOLLOWED BY MANUFACTURERS AND EXPORTERS OF READY MADE GARMENTS. HENCE, THE SECOND PART OF SUB - SECTION (3) OF SECTION 145 DID NOT APPLY. AS NOTED BY THE COMMISSIONER (APPEALS) AS WELL AS BY THE TRIBUNAL, THE ASSESSING OFFICER HAD NOT POINTED OUT ANY DEFECT IN THE ACCOUNT BOOKS MAINTAINED BY THE ASSESSEE, WHICH, ADMITTEDLY, WERE PRODUCED BEFORE THE ASSESSING OFFICER FOR HIS CONSIDERATION. AS REGARDS NON - PRODUCTION OF STOCK REGISTER, THE ASSESSEE HAD GIVEN AN EXPLANATION WHICH HAD BEEN ACCEPTED NOT ONLY BY THE COMMISSIONER (APPEALS) BUT ALSO BY THE TRIBUNAL AND BOTH OF THEM HAD GIVEN A CONCURRENT FINDING OF FACT THAT MAINTAINING A STOCK REGISTER WAS NOT FEASIBLE CONSIDERING THE NATURE OF THE BUSINESS BEING RUN BY THE ASSESSEE WHICH WAS ENGAGED IN THE BUSINESS OF MANUFACTURING READY MADE GARMENTS BY PURCHASING FABRIC WHICH WAS THEN SUBJECTED TO EMBR OIDERY, DYEING AND FINISHING AND THEN CONVERTED INTO READY MADE GARMENTS BY STITCHING. THE FAILURE OF THE ASSESSEE TO PRODUCE THE PERSONS TO WHOM PAYMENTS WERE MADE BY THE ASSESSEE FOR FABRICATION, EMBROIDERY AND DYEING AND FINISHING, ETC. COULD NOT HAVE B EEN A GROUND FOR REJECTING THE ACCOUNTS UNDER SECTION 145(3) OF THE ACT. THE ASSESSING OFFICER, INSTEAD OF APPLYING THE GROSS PROFIT RATE DECLARED IN THE IMMEDIATE PRECEDING YEAR, APPLIED THE GROSS PROFIT RATE DECLARED IN THE ASSESSMENT YEAR 2002 - 03, THERE BY FAILING TO MAINTAIN THE ACCEPTED PRINCIPLE OF CONTINUITY AND CONSISTENCY. THE QUESTION WHETHER FALL IN GROSS PROFIT STOOD EXPLAINED BY THE ASSESSEE OR NOT WAS A QUESTION OF FACT. BOTH THE TRIBUNAL AS WELL AS THE COMMISSIONER (APPEALS) HAD ACCEPTED THE E XPLANATION GIVEN BY THE ASSESSEE. NO SUBSTANTIAL QUESTION OF LAW AROSE FOR CONS IDERATION. IN OUR OPINION,FACTS OF THE CASE UNDER APPEAL ARE ALMOST SIMILAR TO THE FACTS OF THE CASE REFERRED BY US.WE ARE ALSO OF THE OPINION THAT ONCE T HE AO HAD APPLIED PRO VISIONS OF SECTION 145(3) OF THE ACT, HE COULD NOT HAVE RELIED UPON THE SAME BOOKS OF ACCOUNTS FOR MAKING AD - HOC DISALLOWANCE. CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL INFIRMITY.SO,CONFIRMING HIS O RDER WE DECIDE EFFECTIVE GROUND OF APPEAL AGAINST THE AO. AS A RESULT,APPEAL FILED BY THE AO STANDS DISMISSED. . ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH SEPTEMBER,2015. 30 , 2015 SD/ - SD/ - ( / SAKTIJIT DEY ) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 30 .09. 2015 . . . JV . SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / ITA/ 813 3 /M/11 NEELAM ,AY. 08 - 09 5 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , / ITAT, MUMBAI.