ACIT, Sangrur V. M/s Aggarsain Fibres Ltd., Samana

ITA 829/CHANDI/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 2460 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 year(s) 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2020
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 01-07-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ARVIND SUDARSHAN SR DR
• Keywords: Gross profit estimation; Rejection of books of accounts; Business income; Opportunity of being heard; Principle of natural justice; Corroborative evidences; Onus to prove; Set aside
• Section: 143(1); 192; 43; 73; 13; 145(3); 22; 131

Judgement Text

1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BE NCH B, CHANDIGARH .., ! '# #$ %, & '( BEFORE: SHRI. N.K.SAINI, VP & SHRI , SANJAY GARG, J M ITA NO. 829/CHD/2016 ASSESSMENT YEAR : 2011-12 THE ASST. CIT CIRCLE, SANGRUR M/S AGGARSAIN FIBRES LTD. BHAWANIGARH ROAD, SAMANA PAN NO: AAFCA4005P APPELLANT RESPONDENT !' ASSESSEE BY : SHRI TEJ MOHAN SINGH, ADVOCATE #!' REVENUE BY : SHRI ARVIND SUDARSHAN, SR. DR $ %! & DATE OF HEARING : 11/12/2019 '()*! & DATE OF PRONOUNCEMENT : 27/02/2020 ')/ ORDER PER N.K. SAINI, VICE PRESIDENT THIS IS AN APPEAL BY THE DEPARTMENT AGAINST THE ORD ER DT. 07/04/2016 OF THE LD. CIT(A), PATIALA. 2. THE ONLY GRIEVANCE OF THE DEPARTMENT IN THIS APP EAL RELATES TO THE DELETION OF ADDITION OF RS. 2,57,52,310/- MADE BY T HE A.O. BY APPLYING THE GROSS PROFIT RATE OF 18% BY INVOKING THE PROVISIONS OF SE CTION 145(3) OF THE ACT, 1961. 3. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME ELECTRONICALLY ON 02/07/2011 BY DECLARING AN INCOME OF RS. 32,13,120/- WHICH WAS PROCESSED UNDER SECTION 143(1) OF THE INCOME TA X ACT, 1961 (HEREINAFTER REFERRED TO AS ACT) LATER ON THE CASE WAS SELECTE D FOR SCRUTINY. 2 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE A.O. OBSERVED THAT THERE WERE SOME UNUSUAL VARIATION AND DISCREPANCIES AND THERE WAS SHARP DECLINE IN GROSS PROFIT RATE (FROM 20.37% TO 12.10% ), DECLINE IN YIELD OF COTTON YARN (FROM 86.11% TO 73%), INCREASE IN COTTON WASTE (FROM 11.49% TO 22%) AND INCREASE IN INVISIBLE DUST ETC (2.41% TO 5%). HE AS KED THE ASSESSEE TO PRODUCE DAILY PRODUCTION REGISTER AND DETAIL OF SALE OF COT TON AND COTTON WASTE DURING THE PRECEDING TWO YEARS AND ONE SUBSEQUENT YEAR. IN RESPONSE THE ASSESSEE SUBMITTED AS UNDER: OVER A PERIOD OF TIME, A NUMBER OF NEW UNITS HAVE COME INTO PRODUCTION ESPECIALLY IN THIS BELT AND COMPETITION HAS BEEN IN CREASED A LOT PUTTING PRESSURE ON OUR MARGINS AND TO REMAIN IN MARKET WE HAVE TO O FFER COMPETITIVE RATES. MOREOVER, WE ARE MAINTAINING PROPER STOCK RECORDS A ND ALL OUR SALES AND PURCHASES HAVE BEEN DULY RECORDED IN OUR ACCOUNT BO OKS. 5. AFTER CONSIDERING THE ASSESSEES SUBMISSION THE A.O. OBSERVED THAT NO EVIDENCE IN SUPPORT OF THE CONTENTION THAT DECLINE IN GP RATE WAS ATTRIBUTABLE TO THE MARKER FORCES HAD BEEN FURNISHED BY THE ASSE SSEE, AND THAT THERE WAS UNREASONABLE INCREASE IN PRODUCTION OF COTTON WASTE AND IN INVISIBLE DUST ETC. THE A.O. POINTED OUT THAT PRODUCTION OF COTTON WAST E WAS SHOWN AT 22% OF THE TOTAL COTTON CONSUMED AT 34,92,133/ KGS FOR THE YEA R UNDER CONSIDERATION AS COMPARED TO 11.49% OF COTTON CONSUMED AT 25,81,388 KGS FOR THE A.Y. 2010-11 AND 15.33% OF THE TOTAL COTTON CONSUMED AT 26,23,37 9 KGS FOR THE A.Y. 2009-10 AND SIMILARLY THE LOSS ON ACCOUNT OF INVISIBLE DUST ETC. HAD BEEN SHOWN @ 5% FOR THE YEAR UNDER CONSIDERATION AS COMPARED TO 2.41% & 0.92% FOR THE A.Y. 2010-11 & 2009-10 RESPECTIVELY. THE A.O. WAS OF THE VIEW TH AT A SHARP INCREASE SHOWN IN PRODUCTION OF COTTON WASTE AND LOSS ON ACCOUNT OF D UST ETC, THE PRODUCTION OF COTTON YARN HAD SHOWN SHARP DECLINE WHICH WAS AT 73 % ONLY FOR THE YEAR UNDER CONSIDERATION AS COMPARED 86.11% & 83.75% FOR THE A .Y. 2010-11 & 2009-10 RESPECTIVELY. THE A.O. POINTED OUT THAT THE ASSESSE E HAD APPENDED A NOTE ON THE CHART OF DETAILS OF PRODUCTION VIDE LETTER DT. 15/01/2014 AS UNDER: 3 ' YIELD OF COTTON YARN AND COTTON WASTE IS DEPENDEN T UPON THE QUALITY OF COTTON AND YARN PRODUCED. WE ARE ENGAGED IN THE MANUFACTUR ING OF COTTON YARN VARYING FROM 20C TO 36C. HIGHER COUNT IS THE FINE V ARIETY OF COTTON YARN AND FINE COUNT LEADS TO LESSER PRODUCTION RECOVERY OF COTTON YARN AND CORRESPONDING HIGHER PRODUCTION OF COTTON WASTE AND DUST AND HIGH ER CONSUMPTION OF ELECTRICITY.' 6. THE A.O. OBSERVED THAT THE ASSESSEE HAD NOT FURN ISHED ANY SUPPORTING EVIDENCE FOR ITS CONTENTION THAT THE INCREASE IN CO TTON WASTE AND INCREASE IN INVISIBLE LOSS DUE TO DUST ETC. WAS ON ACCOUNT OF I NFERIOR QUALITY OF COTTON PURCHASED OR DUE TO HIGHER PRODUCTION OF SUPERIOR C OTTON YARN. THE A.O. ASKED THE ASSESSEE TO FURNISH INFORMATION REGARDING SALE OF COTTON AND COTTON WASTE FOR THE EARLIER TWO YEARS AND AS WELL AS FOR ONE SUBSEQ UENT YEARS. HE ALSO ASKED TO PRODUCE DAILY PRODUCTION REGISTER FOR THE YEAR UNDE R CONSIDERATION. HOWEVER NO SUCH INFORMATION WAS FURNISHED BY THE ASSESSEE. THE A.O. ALSO OBSERVED THAT THE COTTON AND COTTON WASTE HAD BEEN SOLD BY THE ASSESS EE ON VERY LOWER RATES, FEW INSTANCES WERE BROUGHT TO THE NOTICE OF THE ASS ESSEE WHICH WERE AS UNDER: SR. NO BILL NO DATE PARTY TO WHOM SOLD AMOUNT/ITEM REASONS 1 495 24/03/2011 M/S AMARJEET & CO, 990835/- THE VE HICLE NUMBER ON BHUCHU MANDI /SALE OF YOUR SALE BILLS IS COTTON MENTIONED AS PCI- 9737. ON ENQUIRY, IT IS LEARNT THAT THERE IS NO TRUCK WITH THE NUMBER PCI-9737 AND THIS NUMBER IS OF BAJAJ CHETAK SCOOTER. 2 504 24/03/2011 M/S BHUBNESHWARI OIL & COTTON MILLS, KACHA PAHA ROAD, SUNAM 9,99,996/- /SALE OF COTTON THE VEHICLE NUMBER ON YOUR SALE BILLS IS MENTIONED AS PB 11 N- 6018. ON ENQUIRY, IT IS LEARNT THAT THERE IS NO TRUCK WITH THE NUMBER PB-11N- 6018 AND THIS NUMBER IS OF SCOOTER. 3 468 15/03/2011 M/S BR SPINTEX PVT. LTD, PATIALA ROAD, SAMANA 46446/- / SALE OF COTTON WASTE THE VEHICLE NUMBER ON YOUR SALE BILLS IS MENTIONED AS PB 11M- 1130. ON ENQUIRY, IT IS LEARNT THAT THERE IS NO TRUCK WITH THE NUMBER PB 4 11M- 1130 AND THIS NUMBER IS OF MOTOR CAR. 4 476 20/03/2011 SH. PANKAJ DEEP, MAIN ROAD, SAMANA 5764/- / SALE OF COTTON WASTE (MITTI) THE VEHICLE NUMBER ON YOUR SALE BILLS IS MENTIONED AS PB 13Q 4467. ON ENQUIRY, IT IS LEARNT THAT THERE IS NO TRUCK WITH THE NUMBER PB 13Q- 4467 AND THIS NUMBER IS OF HERO HONDA MOTORCYCLE. 6.1 THE A.O. ALSO ISSUED NOTICE UNDER SECTION 131(1 ) OF THE ACT TO S/SH. PANKAJ DEEP, MAIN ROAD, SAMANA, MANDEEP SINGH S/O KARTAR S INGH, VILLAGE BAMNA, TEHSIL SAMANA AND SATISH KUMAR, CHEEKAJ ROAD, PEHOW A TO WHOM SALE OF COTTON WASTE WAS SHOWN NEARLY @ 50 PAISA PER KG. 6.2 IN RESPONSE ONLY ONE SHRI PANKAJ DEEP ATTENDED WHOSE STATEMENT WAS RECORDED WHICH REVEALED THAT HE HAD NOT ACTUALLY UN DERTAKEN ANY FINANCIAL TRANSACTION WITH THE ASSESSEE THEREFORE THE GENUINE NESS OF THE TRANSACTION OF PURCHASE OF COTTON WASTE FROM THE ASSESSEE COULD NO T BE ESTABLISHED FOR THE FOLLOWING REASONS: A. HE HAD NOT PRODUCED ANY BOOKS OF ACCOUNT. B. HE HAD NOT PRODUCED COPIES OF SALE/PURCHASE BILL S OF COTTON WASTE (MITTI) C. HE HAD NOT TAKEN DELIVERY OF THE COTTON WASTE F ROM YOUR CONCERN. D. HE HAD NOT ENGAGED ANY TRUCK FOR TRANSPORTATION OF COTTON WASTE (MITTI) FROM YOUR CONCERN. E. HE HAD NOT VISITED YOUR CONCERN TO INSPECT THE Q UALITY BEFORE THE PURCHASE. F. HE DID NOT KNOW ABOUT THE PERSON TO WHOM THE COT TON WASTE (MITTI) ALLEGEDLY PURCHASED FROM YOUR CONCERN WAS S OLD. G. HE HAD NO DOCUMENTARY EVIDENCE REGARDING RECEIPT AND PAYMENT OF THE AMOUNT OF CONSIDERATION OF THE COTTON WASTE (MITTI) . H. HE HAD NOT DISCLOSED INCOME ALLEGEDLY EARNED FRO M THE SALE OF COTTON WASTE (MITTI) IN HIS INCOME TAX RETURNS ALTHOUGH HE WAS FILING HIS INCOME TAX RETURNS. I. HE HAD ONLY MENTIONED THAT THE COTTON WASTE (MIT TI) WAS PURCHASED FROM YOUR CONCERN ONLY DURING THE YEAR UNDER CONSIDERATI ON AND NEITHER BEFORE THE 5 SAID YEAR NOR AFTER THIS YEAR, THE SAID SH. PANKAJ DEEP HAD MADE ANY TRANSACTION WITH YOUR CONCERN OR WITH ANY OTHER CONCERN ON ANY OCCASION. J . SH. PANKAJ DEEP IN FACT WAS EMPLOYED WITH M/S SSS F IBRES, BHAWANIGARH ROAD, SAMANA AS AN ACCOUNTANT AND HE COULD NOT PROVE GENU INENESS OF UNDERTAKING ANY TRADING ACTIVITY OF COTTON WASTE (MITTI). K. IN ONE BILL NUMBER 476 DATED 20/03/2011 FOR RS.5 764/- ISSUED BY YOUR CONCERN IN THE NAME OF THE SAID SH. PANKAJ DEEP VIDE WHICH COT TON WASTE (MITTI) WEIGHING 7210 KG HAS BEEN SOLD AT THE RATE OF PAISA 75 PER K G, THE TRUCK NUMBER MENTIONED IS PB 13Q 4467. THE ENQUIRIES MADE FROM T HE DTO, SANGRUR REVEALED THAT THERE IS NO TRUCK WITH THE NUMBER PB 13Q 4467 AND IN FACT PB 13Q 4467 IS THE NUMBER OF HERO HONDA MOTORCYCLE LOOCC, MODEL 2005 IN THE NAME OF SH. SUKHBIR SINGH S/O SH. AMARJIT SINGH. 6.3 THE A.O. OBSERVED THAT THE DETAILS OF SALE OF C OTTON FURNISHED BY THE ASSESSEE REVEALED THAT THE SALE WAS SHOWN IN THE MO NTH OF MARCH TO M/S AGGARWAL TEXTILES, NEW GRAIN MARKET, SUNAM AND M/S AMARJIT & CO. BUCHHO MANDI, BUT THOSE CONCERNS DID NOT EXIST AT THE GIVE N ADDRESSES AND THAT THE HUGE LOSS HAD BEEN INCURRED BY THE ASSESSEE BECAUSE THE LARGE QUANTITY OF COTTON AT VERY LOWER RATE HAD BEEN SHOWN TO BE SOLD TO THE AFORESAID CONCERNS IN THE MONTH OF MARCH. THE A.O. MENTIONED THAT THE FOLLOWING FACTS EMERGED IN ASSESSEES CASE: I. THERE IS A SHARP DECLINE IN THE GP RATE FOR WH ICH THERE IS NO PLAUSIBLE EXPLANATION OFFERED. II. THERE IS A SHARP DECREASE IN THE YIELD OF COTTO N YARN AND SHARP INCREASE IN COTTON WASTE AND INVISIBLE LOSS OF COTTON FOR WHICH THERE IS NO SATISFACTORY EXPLANATION. III. GENUINENESS OF SALE OF COTTON HAS NOT BEEN EST ABLISHED IN RESPECT OF WHICH YOUR COMPANY HAS CLAIMED TO HAVE INCURRED LOSSES. IV. GENUINENESS OF SALE OF COTTON WASTE IS NOT ESTA BLISHED, THE SALE OF WHICH HAS BEEN SHOWN AT UNBELIEVABLE RIDICULOUS LOW RATES . V. THE SALE OF COTTON AT LOSS AND THE SALE OF COTTO N WASTE AT WHOPPING LOW PRICE HAS BEEN UNDERTAKEN ONLY TO DEFLATE THE PROFI TS OF THE COMPANY AS THE SALES ARE NON-GENUINE. VI. THE INCREASE IN PRODUCTION OF COTTON WASTE AND THE INCREASE IN INVISIBLE LOSS HAS BEEN DONE JUST TO REDUCE THE GROSS PROFITS OF THE COMPANY. VII. SHARP DECLINE HAS BEEN SHOWN IN PRODUCTION OF COTTON YARN FOR WHICH NO EXPLANATION HAS BEEN FURNISHED TO ACCOUNT FOR THE S AME. 6 6.4 ON THE BASIS OF THE AFORESAID FACTS THE A.O. WA S OF THE VIEW THAT THE BOOKS OF ACCOUNTS OF THE ASSESSEE FOR THE YEAR UNDER CONS IDERATION WERE NOT RELIABLE. HE THEREFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WH Y THE BOOKS OF ACCOUNTS FOR THE YEAR UNDER CONSIDERATION MAY NOT BE REJECTED BY INVOKING THE PROVISIONS SECTION 145(3) OF THE ACT. HE ALSO ASKED THE ASSESS EE TO EXPLAIN AS TO WHY THE GROSS PROFIT RATE (G.P.) MAY NOT BE APPLIED @ 22% I .E. THE AVERAGE G.P RATE OF THE LAST TWO YEARS AS AGAINST DECLARED GP RATE OF 1 2.10% ON THE GROSS SALE. 6.5 IN RESPONSE THE ASSESSEE FURNISHED THE FOLLOWIN G WRITTEN SUBMISSIONS: 1. (REPLY TO POINT NO. 2-6, 11,12) FALL IN G.P RATE - YOU HAVE OBSERVED THAT IN SPITE OF INCREASE IN SALES THE G.P. RATE HAS SHOWN DOWNWA RD TREND. THE COMPARATIVE CHART FOR LAST THREE YEARS IS GIVEN BELOW: PARTICULARS 31.03.2011 31.03.2010 31.03.2009 RAW MATERIAL PURCHASE COTTON PURCHASE (RS. IN LACS) 3819.00 1564.68 1723. 17 COTTON PURCHASE (KGS) 3327702.30 2281777.29 2974296 .80 AVERAGE RATE (RS. / KG.) 114.76 68.57 57.94 SALES COTTON YARN SALE (RS. IN LACS) 4113.93 2572.02 2113 .10 COTTON YARN SALE (KGS.) 2530865.28 2271030.48 20706 11.82 AVERAGE RATE (RS. / KG.) 162.55 113.25 102.05 CONTRIBUTION PER KG. RS. 47.79 RS. 44.68 RS. 44.11 FROM THE PERUSAL OF THE AFORESAID FIGURES IT MAY BE OBSERVED THAT THE RATES OF COTTON AND COTTON YARN HAVE NEARLY DOUBLED, THEREBY INCREASING THE VALUE OF SALES WHEREAS THE PRODUCTION VOLUMES HAVE ONLY MARG INALLY INCREASED. THE PRICES OF COTTON AND COTTON YARN ARE MARKET DRIVEN BUT THE PROCESSING CHARGES FOR CONVERTING/MANUFACTURING COTTON YARN FROM COTTON DO NOT VARY THAT MUCH RATHER THEY REMAIN CONSTANT OR SOMETIMES WE HAVE TO REDUCE MARGINS TO REMAIN COMPETITIVE IN THE MARKET. THE CONTRIBUTION HAS MAR GINALLY GONE UP FROM RS.44.68 PER KG IN 2009-10 TO RS.47.79 PER KG. IN OUR INDUSTRY IF THE PRICE OF COTTON VARIES IT RE SULTS IN SIMILAR VARIATION IN THE PRICE OF COTTON YARN BUT THE VARIATION HAS MARGINAL OR NO EFFECT ON THE OTHER MANUFACTURING EXPENSES AND OUR PROFIT MARGINS WHICH REMAIN CONSTANT OR SHOW MARGINAL CHANGE. THE EFFECT ON GROSS PROFIT RATE ON ACCOUNT OF VARIATION IN PURCHASE OF COTTON PRICES HAS BEEN EXPLAINED HEREIN ABOVE. 7 SINCE THE PRICES OF COTTON AND COTTON YARN HAVE INC REASED WITHOUT INCREASING THE PROFIT MARGINS WHICH ARE MARKET DRIVEN, THUS EFFECT ING THE GROSS PROFIT RATIO ADVERSELY. ALTHOUGH THERE WAS LITTLE CHANGE IN THE AMOUNT OF GROSS PROFIT BUT THE RATIO WAS BADLY HIT RESULTING IN FALL OF ABOUT 10%. HAD THERE BEEN FALL IN COTTON PRICES AND YARN THE G.P. RATIO SHOULD HAVE IMPROVED . KEEPING IN VIEW THE AFORESAID SUBMISSION YOU ARE REQUESTED TO CONSIDER THE FALL IN G.P. RATE IN ORDER. 2. (REPLY TO POINT.NO .7) IT HAS BEEN POINTED OUT THAT COTTON AND COTTON WASTE WAS SOLD AT VERY LOWER RATES AND SOME OF THE ENQUIRIES MADE BY YOUR OFFICE POINTED OUT CERTAIN DISCREPANCIES WHICH LEAD YOU TO BELIEVE THAT THESE TRANSACTIONS ARE NOT GENUINE. WE HAVE TO SUBMIT AS UNDER :- A. M/S AMARJEET & CO., BUCHO MANDI, IS A GENUINE DE ALER COPY OF ACCOUNT DULY CERTIFIED BY HIM IS ENCLOSED FOR YOUR PERUSAL. SINCE THE FREIGHT ON COTTON AND COTTON WASTE IS PAID BY THE BUYER IT IS POSSIBLE TH AT VEHICLE NUMBER IS INADVERTENTLY MENTIONED WRONGLY. THE COPY OF ACCOUN T SHOWS THAT THE SALES HAVE BEEN DULY ENTERED IN THEIR BOOKS. (ANNEXURE I) B. M/S BHUBNESHWARI OIL & COTTON MILLS, SUNAM THE VEHICLE NUMBER MENTIONED IN THIS CASE IS PN-11N-6018. THIS VEHICLE NUMBER IS ALSO ADVERTENTLY MENTIONED THE CORRECT REGISTRATION NUMBER IS PB-11A N-6018. A CERTIFICATE FROM M/S JANTA ROAD CARRIER, GHAGGA ROAD, SAMANA IS ENCLOSED CONFIRMING THE VEHICLE NUMBER AND ALSO THAT THEY HAVE SENT THE VEHICLE FOR CARRYING THE GOODS TO SUNAM.( ANNEXURE-II) C. M/S BR SPINTAX PVT. LTD. SAMANA IS AN EXISTING P ARTY LOCATED AT PATIALA ROAD, SAMANA. THE AMOUNT OF BILL STATED IN YOUR OBS ERVATION IS RS.46,446.00 WHEREAS THE CORRECT AMOUNT IS RS.46,846.00 AND THE SAME IS BEING REFLECTED IN THE COPY OF ACCOUNT OF M/S BR SPINTEX PVT. LTD. ENCLOSED FOR YOUR REFERENCE. THE VEHICLE NUMBER PB-11M-1130 IS CORREC T. A CERTIFICATE FROM THE KISSAN MINI TRUCK OPERATORS UNION, SAMANA. CONFIRMIN G THE VEHICLE NUMBER AND THAT IT IS RUNNING WITH THE TRUCK UNION IS ENCLOSED . (ANNEXURE-III & IV) D. SH. PANKAJ DEEP- THIS IS A GENUINE TRADER BASED AT SAMANA. IT IS POSSIBLE THAT SOME DIGIT ALPHABET HAS BEEN WRONGLY MENTIONED IN THE SALE BILL OTHERW ISE IT IS A GENUINE SALE AND THE PARTY HAS APPEARED AND GI VEN A STATEMENT BEFORE YOU. IT IS FURTHER SUBMITTED THAT FREIGHT ON YARN IS PAI D BY US AND ON COTTON / COTTON WASTE IS PAID BY THE BUYER. THERE ARE ABOUT 600 PLUS SALE BILLS AND DISCREPANCY HAS BEEN OBSERVED BY YOUR OFFICE ONLY IN FOUR BILLS. OUT OF THE FOUR WE HAVE E XPLAINED THE CORRECT POSITION IN TWO BILLS. THUS THE DISCREPANCY REMAINS IN TWO BILL S ONLY. THERE CAN BE CLERICAL MISTAKE IN NOTING DOWN THE VEHICLE NUMBER, SALES AR E GENUINE AND AS SUCH NO ADVERSE INFERENCE BE DRAWN FROM CLERICAL MISTAKES. 3. (REPLY TO POINT NO.8 & 9) SH. PANKAJ DEEP, WHO H AD PURCHASED A COTTON WASTE FROM OUR COMPANY WAS CALLED IN YOUR OFFICE AND HIS STATEMENT WAS RECORDED. AS PER YOUR OBSERVATION THE GENUINESS OF THE TRANSACTI ON OF PURCHASE BY SH. PANKAJ DEEP COULD NOT BE ESTABLISHED ON ACCOUNT OF THE REA SONS STATED IN YOUR NOTICE. YOU HAVE OBSERVED IN POINT 8 (I) THAT SH. PANKAJ DE EP HAD PURCHASED COTTON WASTE FROM OUR CONCERN ONLY DURING THE YEAR UNDER C ONSIDERATION AND NEITHER 8 BEFORE THE SAID YEAR NOR AFTER THIS YEAR, THE SAID SH. PANKAJ DEEP HAD MADE ANY TRANSACTION WITH YOUR CONCERN OR WITH ANY OTHER CON CERN ON ANY OCCASION. IT CLEARLY SHOWS THAT TRANSACTION DURING THE YEAR UNDE R CONSIDERATION WAS ACTUALLY UNDERTAKEN AND THE GENUINENESS OF THE SAME SHOULD N OT BE DOUBTED. IF THERE WAS NO TRANSACTION WITH THE PARTY IN EARLIER YEARS OR SUBSEQUENT YEARS THAT DOES NOT IMPLY THAT THE SALES TRANSACTION ENTERED INTO D URING THE YEAR ARE NOT GENUINE. IF HE HAS FAILED TO PRODUCE BOOKS OF ACCOUNTS AND O THER RELEVANT RECORD OR NOT SHOWS ANY PROFIT/ LOSS THAT DOES NOT CONCLUDE THAT WE HAVE NOT MADE ANY SALES TO SH. PANKAJ DEEP. MOREOVER THE PRINCIPAL OF NATURAL JUSTICE WERE NOT FOLLOWED AS WE WERE NOT ALLOWED TO CROSS EXAMINE SH. PANKAJ DEEP. 4. (REPLY TO POINT NO. 10) SALE OF COTTON IN THE MO NTH OF MARCH TO M/S AGGARWAL TEXTILE, NEW GRAIN MARKET, SUNAM AND M/S AMARJIT & CO., BHUCHO MANDI HAVE BEEN SHOWN AT VERY LOW RATES RESULTING IN HUGE LOSS . IT IS SUBMITTED THAT BOTH THE PARTIES ARE GENUINE, COPY OF ACCOUNT DULY CONFIRMED BY M/S AMARJIT & CO. ARE ENCLOSED FOR YOU R PERUSAL. IT APPEARS THAT M/S AGGARWAL TEXTILE, SUNAM HAS SHIFTED HIS BUSINESS TO SOME OTHER PLACE AND WE ARE NOT ABLE TO LOCATE HIS NEW ADDRESS. THE COMPANY HAD PURCHASED COTTON FROM M/S AGGARWAL TEXTILES, SUNAM DURING 2009-2010. THE AMOUNT WAS PAID BY ACCOUNT PAYEE CHEQUES. COPIES OF PURCHASE BILLS ARE ENCLOSED (ANNEXURE-V) TO PROVE THE GENUINENESS OF M/S AGGARWAL TEXTILE, SUNA M. IN CASE THE PARTY EXISTED AND ENTERED INTO SALES / PURCHASE TRANSACTIONS WITH THE COMPANY FOR THE LAST TWO YEARS, ITS GENUINENESS SHOULD NOT BE DOUBTED. THE S ALES / PURCHASE ENTERED INTO WITH M/S AGGARWAL TEXTILE, SUNAM MAY BE VERIFIED FR OM SALES TAX RETURNS OF THE CONCERN. COPY OF MISMATCH REPORT FROM SALES TAX DEP ARTMENT FOR 2009-10 IS ENCLOSED (ANNEXURE-VI) TO PROVE THAT THE FIRM WAS G ENUINE AND EXISTED DURING THE RELEVANT YEAR. THE BUSINESS SCENARIO IN INDIA PARTI CULARLY IN PUNJAB HAVE RESULTED IN CLOSURE OF MANY BUSINESSES DUE TO LOSSES AND INDEBT EDNESS. THE OWNER MAY HAVE SHIFTED THE PLACE WITHOUT DISCLOSING HIS WHEREABOUT S, TO ANYONE DURING THE SUBSEQUENT PERIOD. IT IS SUBMITTED THAT DEPARTMENT SHOULD NOT TAKE ANY ADVERSE VIEW IF IT IS UNABLE TO FIND THE WHEREABOUTS OF M/S AGGARWAL TEXTILE, SUNAM. THE SALES WERE MADE TO THESE TWO PARTIES AT THE PRE VAILING MARKET PRICE APPLICABLE TO THAT QUALITY OF COTTON, WHICH WAS DIS COLORED AND EXPOSED TO WATER. THE PARTIES ARE GENUINE AND EXISTED DURING THE RELE VANT PERIOD. COTTON WAS WATER EFFECTED DUE TO FIRE AND SUBSEQUENTLY OF WATER BY F IRE BRIGADE. 5. (REPLY TO POINT NO.11) THE YIELD IN OUR INDUSTRY VARIES FROM 65% TO 85%. IN EXTRAORDINARY CASES IT MAY GO UP TO 90% DEPENDING O N THE QUALITY OF COTTON YARN PRODUCED. THE QUALITY OF COTTON YARN VARIES FROM 10 COUNT TO 100 COUNT BUT WE GENERALLY MANUFACTURE COTTON YARN OF 20 COUNT TO 40 COUNT WHICH GIVES AN YIELD VARYING BETWEEN 70% TO 85%. DURING THE RELEVANT YEA R THE YIELD IS ON LOWER SIDE WHICH MAY BE ATTRIBUTED TO QUALITY OF COTTON YARN P RODUCED AT THAT TIME WHICH ALSO RESULTS IN ACHIEVING BETTER SALE PRICES. THERE ARE ABOUT 25 SPINNING MILLS IN AND AROUND SAMANA AND ENQUIRIES FROM THEM CAN REVEAL TH E YIELD PERCENTAGE AND THEIR AVERAGE SELLING PRICE DURING THE RELEVANT YEA R. KEEPING IN VIEW THE AFORESAID SUBMISSION YOU ARE RE QUESTED NOT TO REJECT OUR BOOKS OF ACCOUNT AND DRAW ANY ADVERSE INFERENCE IN RESPECT OF FALL IN G.P. RATIO OR FALL IN YIELD.' 9 6.6 THE A.O. AFTER CONSIDERING THE SUBMISSION OF TH E ASSESSEE OBSERVED THAT THE SUBMISSION OF THE ASSESSEE WERE NOT ACCEPTABLE BEING DEVOID OF STRENGTH DUE TO THE FOLLOWING REASONS: 1. FIRST OF ALL, THE ASSESSEE HAS FAILED TO PRODUCE THE REQUISITE PRODUCTION REGISTER. IT IS IRONICAL TO ACCEPT ASSESSEE'S PLEAS IN THE ABSEN CE OF PRODUCTION REGISTER. THE ASSESSEE HAS NOT FURNISHED ANY DETAILS OF COTTON YA RN OF VARIOUS QUALITIES AS CLAIMED BY IT AND ALSO THE DAY TO DAY DETAILS OF CO TTON WASTE AND DUST. THE ASSESSEE'S CONTENTIONS ARE NOT BASED BY DOCUMENTARY EVIDENCE. THE ASSESSEE ITSELF IS NOT SURE AS TO WHAT WAS THE REASON OF HIG HER INVISIBLE LOSS. 2. AS REQUIRED, THE ASSESSEE HAS NOT FURNISHED THE DET AIL OF YIELD AND WASTAGE ETC FOR THE LAST TWO YEARS AND ONE SUBSEQUENT YEAR TO THE YEAR UNDER CONSIDERATION. 3. THE ASSESSEE IN HIS REPLY HAS ADMITTED THAT THE YIE LD OF ITS CONCERN IS ON THE LOWER SIDE FOR THE YEAR UNDER CONSIDERATION BUT, TH E ASSESSEE HAS ATTRIBUTED THE LOWER YIELD DUE TO THE BETTER QUALITY OF YARN PRODU CED WHICH GOT BETTER SALE PRICE. HOWEVER, THE AVERAGE SALE PRICE SHOWN BY THE ASSESSEE DO NOT GIVE AN INDICATION OF SUCH BETTERMENT OF SALE PRICE. THE IN CREASE IN THE AVERAGE SALE PRICE OF YARN AS COMPARED TO SALE OF LAST YEAR (FRO M 113.25 TO 162.55) IS LESSER THAN THE AVERAGE INCREASE IN PURCHASE RATE OF THE COTTON WHICH IS FROM 68.57 TO 114.76. THUS, THE INCREASE IN THE PURCHASE PRICE OF RAW MAT ERIAL IS 67% WHEREAS THE INCREASE IN THE PRICE OF THE FINISHED GOODS IS ONLY 43%. THIS CLEARLY SHOWS THAT THE INCREASE IN THE PRICE OF FINISHED GOODS I.E YARN IS NOT ATTRIBUTABLE TO THE QUALITY OF THE YARN BUT, IT IS DUE TO THE INCREASE IN THE PRIC E OF THE RAW MATERIAL. SO THE ASSESSEE'S SUBMISSION FOR LOW YIELD IS ABSOLUTELY B ASELESS. 4. THE ASSESSEE HAS NOT FURNISHED ANY EXPLANATION REGA RDING HIGH INCREASE IN THE CLAIM OF THE INVISIBLE COTTON WASTE WHICH IS MO RE THAN DOUBLE OF THE LAST YEAR I.E 5% WHICH WAS 2.4% IN THE ASSESSMENT YEAR 2010-1 1 AND ONLY 0.92% IN THE ASSESSMENT YEAR 2009-10. 5. THE ASSESSEE HAS NOT FURNISHED ANY PLAUSIBLE EXPLAN ATION REGARDING THE INCREASE IN COTTON WASTE WHICH IS 30.13% AS COMPARE D TO 13.34% FOR THE IMMEDIATE PRECEDING YEAR. 6. ASSESSEE'S SUBMISSION THAT HE HAD BEEN FACING COMPE TITIVE MARKET IS NOT SUPPORTED BY ANY FACT. RATHER DURING THE YEAR UNDER CONSIDERATION ASSESSEE'S SALE HAS INCREASED FROM 26.38 CRORE TO 44.56 CRORE. AS S UCH THERE IS AN INCREASE OF 68% IN THE SALES OF THE ASSESSEE. IN QUANTITATIVE TERMS ALSO, THE PRODUCTION OF COTTON YARN HAS INCREASED FROM 2222705.68 KG TO 2549248.56 KG. FROM THIS FACT IT IS CLEAR THAT THE ASSESSEE HAD BEEN ENJOYING GOOD FAVORABLE MARKET CONDITIONS . FROM THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE ASSESSEE , THE MAIN REASON FOR THE DECLINE IN GP OF THE ASSESSEE IS SHARP DECLINE IN Y IELD FROM 86.11% TO 73% OF THE FINISHED GOOD I.E COTTON YARN AND THE ASSESSEE HAS NOT BEEN ABLE TO BRING ON RECORD ANY SATISFACTORY EXPLANATION AS TO WHY ITS Y IELD HAS DECLINED SHARPLY AND WASTAGE INCREASED WHOPPINGLY FROM 13.34% TO 30.13%. THERE IS NOTHING TO DO WITH 10 THE MARKET CONDITIONS AS FAR AS DECLINE IN GP RATE IS CONCERNED WHICH COULD BE DISCERNED FROM THE FACTS AND CIRCUMSTANCES HEREIN. 7. THE ANALYSIS OF THE DETAILS OF COTTON CONSUMPTION, YIELD OF YARN, COTTON WASTE AND INVISIBLE LOSS OF THE COTTON CLEARLY INDI CATE THAT THE ASSESSEE'S YIELD HAS DECREASED CONSIDERABLY WITH THE RESULT THERE IS SHA RP INCREASE IN THE COTTON WASTE AND INVISIBLE LOSS OF COTTON. THE ENQUIRIES MADE BY THIS OFFICE INDICATED SOME BOGUS SALES MADE BY THE ASSESSEE OF COTTON WASTE(MI TTI) AT UNBELIEVABLE LOW PRICE I.E JUST AT THE RATE OF RS.0.60 PAISA PER KG, RS.0.70 PAISA PER KG, RS.15 PER KG ETC AS AGAINST THE AVERAGE PURCHASE PRICE OF COTTON SHOWN BY THE ASSESSEE AT RS. 114.76 PER KG. 8. SOME OF THE ENQUIRIES WERE MADE ABOUT THE VEHICLES NUMBERS MENTIONED ON THE SALEBILLS ISSUED BY THE ASSESSEE BY WHICH TH E COTTON AND COTTON WASTE WAS ALLEGEDLY SOLD AT A VERY LOW PRICES. MANY OF SUCH V EHICLES NUMBERS HAVE BEEN FOUND TO BE OF SCOOTERS, MOTORCYCLES WHICH CLEARLY INDICATED THAT NO SUCH SALES WERE ACTUALLY DONE BY THE ASSESSEE AND ONLY THE BIL LS WERE ISSUED TO CLEAR THE STOCKS AT VERY LOW RATES. 9. ASSESSEE'S SUBMISSION THAT DISCREPANCY HAS BEEN POI NTED OUT REGARDING THE FOUR SALE BILLS ONLY WHEREAS THE ASSESSEE HAD ISSUE D SIX HUNDRED BILLS. THE ASSESSEE FURTHER CLAIMS THAT OUT OF THE FOUR BILLS, THEY HAV E EXPLAINED THE CORRECT POSITION OF THE TWO BILLS AND ADMITTED DISCREPANCY IN RESPECT O F TWO BILLS ONLY. IN THIS REGARD, THE PLEA OF THE ASSESSEE HOLDS NO WATER AS THE BOOK S OF ACCOUNT AND THE VOUCHERS CAN BE TEST CHECKED ONLY. IF DURING THE TE ST CHECK OF 8 BILLS, THE DISCREPANCY IS FOUND IN FOUR BILLS, THE PERCENTAGE OF DISCREPANCY WOULD BE 50% AND THE ASSESSEE HAS ADMITTED THE SAME. 10. FROM THE ENTIRE DISCUSSION OF FACTS, ASSESSEE' S CA SE IS A CLEAR CASE IN WHICH THE ASSESSEE REDUCED ITS YIELD BY INCREASING THE WA STAGES. THE YIELD HAS COME DOWN TO 73% AS COMPARED TO 86.11% FOR THE LAST YEAR . THE INCREASE IN WASTAGE WAS CLEARED BY THE ASSESSEE BY THE BOGUS BILLING. T HE ASSESSEE'S GP IN VALUE TERMS KEPT NEARLY CONSTANT BUT, IN PERCENTAGE TERM IT HAS SHARPLY DECLINED FROM 20.37% TO 12.10%. THE ASSESSEE HAS NOT BEEN ABLE TO ADDUCE ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE THAT :- I) WHY ITS WASTAGE INCREASED? II) WHY THE BAD QUALITY OF COTTON WAS ONLY SOLD IN THE MONTH OF MARCH? III) WHY THERE WAS WHOPPING DECLINE IN YIELD FROM 8 6.11% FROM THE PRECEDING YEAR TO 73% DURING THE YEAR UNDER CONSIDERATION? IV) WHY NO DAY TO DAY RECORD OF CONSUMPTION OF RAW MATERIAL, PRODUCTION OF FINISHED GOODS AND WASTAGE WHICH INCREASED SHARPLY VIS-A-VIS LAST YEAR HAS BEEN MAINTAINED? 11. THE ASSESSEE HAS NOT FURNISHED ANY REASONS FOR NON-PRODUCTION OF DAILY PRODUCTION REGISTER AND THE DETAILS OF THE SALE OF COTTON AND COTTON WASTE ETC FOR THE EARLIER TWO YEARS AND ONE SUBSEQUENT YEAR. 12. DURING THE ASSESSMENT PROCEEDINGS, YIELD AND WA STAGE RESULT OF M/S CHAHAL SPINTEX LTD, BATHINDA WERE LOOKED INTO WHICH INDICATED YIELD OF 85.31% AND COTTON WASTE12.96% AS AGAINST ASSESSEE'S RESULT OF YIELD OF 73% OF COTTON AND COTTON WASTE YIELD OF 30.13%. 11 13. THE ASSESSEE'S CONTENTION OF INFERIOR QUALITY O F COTTON AS THE REASON FOR DECLINE IN THE YIELD IS NON-TENABLE ON THE FACTS AN D CIRCUMSTANCES OF THE CASE. FIRSTLY, THE ASSESSEE HAS NOT PRODUCED PRODUCTION R EGISTER TO SUBSTANTIATE ITS CLAIM. SECONDLY IF THE AVERAGE RATE OF PURCHASE OF COTTON BY THE ASSESSEE IN LAST THREE YEARS IS TAKEN INTO CONSIDERATION, THE PLEA OF THE ASSESSEE IS CONTRADICTORY. THE AVERAGE RATE PER KG OF COTTON WAS RS.57.94/- DURING THE A.Y. 2009-10 AND WAS RS.68.57/- DURING A.Y. 2010-11 AND RS.114.76/- DURING THE A.Y . UNDER CONSIDERATION I.E 2011-12 WHICH MEANS THE AVERAGE PURCHASE RATE O F COTTON HAS INCREASED BY 100% VIS-A-VIS A.Y. 2009-10. THIS CLEARLY INDICATES THAT THERE IS NOTHING TO DO WITH THE QUALITY OF THE COTTON. FURTHER, THE ASSESSEE HA S BEEN PURCHASING THE SAME COTTON FROM THE SAME SOURCES AND ONCE THERE WAS SHA RP DECLINE IN YIELD FROM 86.11% TO 73% I.E WHOPPING 13.11% DROP IN YIELD, WH Y IT KEPT ON BUYING SAME QUALITY OF COTTON FROM THE SAME SOURCES WHERE AS OT HER MANUFACTURERS IN THE BUSINESS HAD YIELDS IN EXCESS OF 85%. A PRUDENT BUS INESSMAN SHALL NEVER PURCHASE INFERIOR QUALITY OF COTTON ON THE RATES WHICH ARE C OMPARABLE FOR THE BEST QUALITY OF COTTON IN THE MARKET DURING THE PERIOD UNDER CONSID ERATION. 14. THE ASSESSEE'S EXPLANATION REGARDING THE TRUCK NOS. ARE AFTER THOUGHT. THE TRUCK NO. WAS CLEARLY MENTIONED IN THE BILLS AND TH E ASSESSEE HAS NOT ADDUCED ANY CORROBORATORY EVIDENCE IN THE FORM OF GATE REGI STER OR OTHERWISE. FURTHER, THE ASSESSEE'S EXPLANATION REGARDING M/S AGGARWAL TEXTI LES, M/S AMARJEET & CO., BHUCHU MANDI AND M/S BHUBNESHWARI OIL & COTTON MILLS IS HIGHLY ERRONEOUS AS THE INSPECTOR OF THIS OFFICE MADE ENQUIRIES AT THE ADDR ESSES GIVEN BY THE ASSESSEE. THE PERSONS AVAILABLE ON THESE ADDRESSES HAVE CATEG ORICALLY STATED THAT NO SUCH CONCERN HAVE EVER OPERATED FROM THESE PREMISES AND THEY HAVE NEVER HEARD OF ANY SUCH CONCERNS IN THE VICINITY WHICH BELIES THE PLEA OF THE ASSESSEE THAT THEY MAY HAVE LEFT THE PREMISES. SIMILARLY, THE STATEMEN T OLSPANKAJ DEEP WAS RECORDED. HE COULD NOT ADDUCE EVEN A SINGLE DOCUMEN TARY EVIDENCE OF HAVING EVER PURCHASED COTTON WASTE FROM THE ASSESSEE. THE ASSESSEE HAS OFFERED NO EXPLANATION REGARDING THE VEHICLE NO. PB-13Q-4467 M ENTIONED IN BILL ISSUED BY THE ASSESSEE TO SH. PANKAJ DEEP WHICH HAS BEEN CONFIRME D BY THE DTO, SANGRUR AS HERO HONDA MOTORCYCLE. THE ASSESSEE'S PLEA ON LETTE R HEAD OF KISSAN MINI TRUCK OPERATOR UNION DOES NOT HAVE ANY DOCUMENTARY EVIDENC E SUCH AS RC TO PROVE THAT PB-11M-1130 IS A TRUCK. FURTHER, SH. MANDEEP S INGH S/O KARTAR SINGH WHOM THE ASSESSEE HAS CLAIMED TO HAVE SOLD COTTON WASTE FAILED TO APPEAR IN RESPONSE TO THE NOTICE U/S 131. SIMILARLY, THE ASSESSEE FAIL ED TO FURNISH THE COMPLETE ADDRESS OF SH. SATISH KUMAR AS ON THE INCOMPLETE ADDRESS FU RNISHED BY THE ASSESSEE, THE NOTICE U/S 131 REMAINED UNSERVED. 6.7 ON THE BASIS OF THE AFORESAID DISCUSSION THE A. O. OBSERVED AS UNDER: I. THERE IS A SHARP DECLINE IN THE GP RATE FOR WHIC H THERE IS NO PLAUSIBLE EXPLANATION OFFERED. II. THERE IS A SHARP DECREASE IN THE YIELD OF COTTO N YARN AND SHARP INCREASE IN COTTON WASTE AND INVISIBLE LOSS OF COTTON FOR WHICH THERE IS NO SATISFACTORY EXPLANATION. III. GENUINENESS OF SALE OF COTTON HAS NOT BEEN EST ABLISHED IN RESPECT OF WHICH ASSESSEE COMPANY HAS CLAIMED TO HAVE INCURRED LOSSES. 12 IV. GENUINENESS OF SALE OF COTTON WASTE IS NOT ESTA BLISHED, THE SALE OF WHICH HAS BEEN SHOWN AT UNBELIEVABLE RIDICULOUS LOW RATES . V. THE SALE OF COTTON AT LOSS AND THE SALE OF COTTO N WASTE AT WHOPPING LOW PRICE HAS BEEN UNDERTAKEN ONLY TO DEFLATE THE PROFI TS OF THE COMPANY AS THE SALES ARE NON-GENUINE. VI. THE INCREASE IN PRODUCTION OF COTTON WASTE AND THE INCREASE IN INVISIBLE LOSS HAS BEEN DONE JUST TO REDUCE THE GROSS PROFITS OF THE COMPANY. VII. SHARP DECLINE HAS BEEN SHOWN IN PRODUCTION OF COTTON YARN FOR WHICH NO EXPLANATION HAS BEEN FURNISHED TO ACCOUNT FOR THE S AME. 6.8 THE A.O. OBSERVED THAT DURING THE YEAR UNDER CO NSIDERATION THERE HAD BEEN CONSTANT AND CONTINUOUS INCREASE IN PRICE OF R AW MATERIAL AND OF FINISHED GOODS AND THAT THE ASSESSEE BEING MANUFACTURING UNI T, THERE HAD ALWAYS BEEN TIME GAP BETWEEN PURCHASE OF RAW MATERIAL AND SALE OF FINISHED GOODS THEREFORE IN THE EVER INCREASING MARKET CONDITION, THE ASSESSEE REAPED A GOOD HARVEST. THE A.O. HELD THAT THE BOOKS OF ACCOUNTS O F THE ASSESSEE WERE NOT CORRECT AND HENCE NOT RELIABLE TO COMPUTE BUSINESS INCOME THEREFROM. HE THEREFORE REJECTED THE BOOKS OF ACCOUNTS BY INVOKIN G THE PROVISIONS OF SECTION 145(3) OF THE ACT. THE RELIANCE WAS PLACED ON THE F OLLOWING CASE LAWS: CIT VS. BRITISH PAINTS INDIA LTD. (1991) 188 ITR 44 (SC) DONDIRAM DALICHAND VS. CIT(1971) 81 ITR 609 (BOM) BHARAT MILK PRODUCTS VS. CIT (1981) 128 ITR 682 (AD ) PUNJAB TRADING CO. LTD. VS. CIT HOWRAH TRADING CO. (P) LTD. VS. CIT (1968) 67 ITR 5 82 (CAL.) ORISSA FISHERIES DEVELOPMENT CORPORATION LTD. VS. C IT (1978) 111 ITR 923 (ORI) S.N. NAMASIVAYAM CHETTIAR VS. CIT [1960] 38 ITR 579 (SC) BHARAT MILLS PRODUCTS VS. CIT (1981) 128 ITR 682 (A LL) CIT VS. MCMILLAN & CO. (1958) 33 ITR 182 (SC) CIT VS. K.Y. PILLIAH AND SONS [1967] 63 ITR 411 (SC ) JHANDU MAL TARA CHAND RICE MILLS VS. CIT [1969] 73 ITR 192 (P&H) R.B. BANSILAL ABIRCHAND SPINNING AND WEAVING MILLS VS. CIT [1970] 75 ITR 260 (BOM) BHARAT MIL PRODUCTS VS. CIT 81 ITR 609 (BOM) STEELWORTH LTD. VS. CIT 69 ITR 36 (GAU) B.N. MAHESHWARI VS. CIT 210 ITR 438 (BOM) 6.9 THE A.O. OBSERVED THAT THE NATURE OF RAW MATERI AL CONSUMED AND FURNISHED GOODS MANUFACTURED BY THE ASSESSEE FOR TH E YEAR UNDER CONSIDERATION WERE THE SAME AS WAS IN THE LAST YEAR AND THAT THE GP RATE DECLARED BY THE 13 ASSESSEE FOR THE A.Y. 2010-11 AT 20.3% ON THE TOTAL SALE OF 26.38 CRORES AND 23.40% ON THE TOTAL SALE OF 21.64 CRORES FOR THE A. Y. 2009-10. HOWEVER DURING THE YEAR UNDER CONSIDERATION THE GP RATE WAS MERELY 12. 10% ON THE TOTAL SALE OF 44.56 CRORES. THE A.O. WORKED OUT THE AVERAGE GP RA TE OF THE AFORESAID THREE YEARS WHICH CLAIM THE 18.62%. HE THEREFORE CONSIDER ED IT FAIR AND REASONABLE TO APPLY THE GP RATE OF 18% ON THE TOTAL SALE OF RS. 4 4.56 CRORES WHICH WORKED OUT TO 8,02,16,732/- AS AGAINST THE DECLARED GP BY THE ASSESSEE AT RS. 5,44,64,422/-. ACCORDINGLY THE ADDITION OF RS. 2,57,52,310/- (RS. 8,02,16,732/- - RS. 5,44,64,422/-) WAS MADE IN THE HANDS OF THE ASSESSEE. 7. BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER: 'REJECTION OF BOOKS OF ACCOUNTS THE LEARNED ASSESSING OFFICER HAS REJECTED THE BOOK S OF ACCOUNTS OF THE COMPANY WHICH WERE DULY AUDITED BY CHARTERED ACCOUNTANT UNDER THE COMPANY L AW. EVERY SALES TRANSACTION IS FULLY VOUCHED AND VERIFIABLE. THE REASONS GIVEN FOR THE REJECTION OF BOOKS ARE GIVEN HEREUNDER IN SUMMARIZED FO RM ALONGWITH OUR EXPLANATION: 1. THERE IS A SHARP DECLINE IN THE CP. RATE FOR WHICH THERE IS NO PLAUSIBLE EXPLANATION: A COMPARATIVE CHART SHOWING THE G.P. RATE FOR THE C URRENT YEAR AND TWO LAST PRECEDING YEARS IS GIVEN HEREUNDER: ASSTT.YEAR 2011-12 2010-11 2009-10 1) SALES VALUE 445,648,511.00 263,800,428.00 216,42 7,881.00 2) G.P. RATE 12.10% 20.37% 23.40% 3) N.P. RATE 0.67% 10.39% 0.78% YOU HAVE OBSERVED THAT INSPITE OF INCREASE IN SALES THE G.P. RATE HAS SHOWN DOWNWARD TREND. ONE OF THE REASONS IS THAT THE SALE PRICE OF YARN A ND PURCHASE PRICE OF COTTON HAVE GONE UP CONSIDERABLY WITHOUT CORRESPONDING INCREASE IN MARG IN, THUS RESULTING IN FALL IN G.P. RATE. IN SUPPORT OF OUR CONTENTION WE GIVE BELOW A COMPARATIVE CHART SHOWIN G INCREASE IN SALE / PURCHASE PRICE BUT ONLY MARGINAL INCREASE IN THE MARGIN/ CONTRIBUTION :- PARTICULARS 31.03.2011 31.03.2010 31.03.2009 RAW MATERIAL PURCHASE COTTON PURCHASE (RS. IN LACS) 3819.00 1564.68 1723. 17 14 COTTON PURCHASE (KGS) 3327702.30 2281777.29 2974296 .80 AVERAGE RATE (RS. / KG.) 114.76 68.57 57.94 SALES COTTON YARN SALE (RS. IN LACS) 4113.93 2572.02 2113 .10 COTTON YARN SALE (KGS.) 2530865.28 2271030.48 20706 11.82 AVERAGE RATE (RS. / KG.) 162.55 113.25 102.05 CONTRIBUTION PER KG. RS. 47.79 RS. 44.68 RS. 44.11 FROM THE PERUSAL OF THE AFORESAID FIGURES IT MAY BE OBSERVED THAT THE RATES OF COTTON AND COTTON YARN HAVE NEARLY DOUBLED, THEREBY INCREASING THE VALUE J OF SALES WHEREAS THE PRODUCTION VOLUMES HAVE ONLY MARGINALLY INCREASED. THE PRICES OF COTTON AND COTTON YARN ARE MARKET DRIVEN BUT THE PROCESSING CHARGES FOR CONVERTING \ MANUFACTURING COTTON YARN FROM COTTON DO NOT VARY THAT MUCH RATHER THEY REMAIN CONSTANT OR SOMETIMES WE HAVE TO REDUCE MARG INS TO REMAIN COMPETITIVE IN THE MARKET. THE CONTRIBUTION HAS MARGINALLY GONE UP FROM RS.44.68 P ER KG IN 2009-10 TO RS.47.79 PER KG. IN OUR INDUSTR Y IF THE PRICE OF COTTON VARIES IT RESULTS IN SIMILAR VA RIATION IN THE PRICE OF COTTON YARN BUT THE VARIATI ON HAS MARGINAL OR NO EFFECT ON THE OTHER MANUFACTURING EX PENSES AND OUR PROFIT MARGINS WHICH REMAIN CONSTANT OR SHOW MARGINAL CHANGE. THE EFFECT ON GRO SS PROFIT RATE ON ACCOUNT OF VARIATION IN SALE AND PURCHASE PRICE HAS BEEN EXPLAINED HEREINABOVE. SINCE THE PRICES OF COTTON AND COTTON YARN HAVE INC REASED WITHOUT INCREASING THE PROFIT MARGINS WHICH ARE MARKET DRIVEN, THUS EFFECTING THE GROSS PROFIT RATIO ADVERSELY. ALTHOUGH THERE WAS LITTLE CHANGE I N THE AMOUNT OF GROSS PROFIT BUT THE RATIO WAS BADLY HIT RESULTING IN FALL OF ABOUT 10%. HAD THERE BEEN FALL IN COTTON PRICES AND YARN THE G.P. RATIO SHOULD HAVE I MPROVED. KEEPING IN VIEW THE AFORESAID SUBMISSION YOU ARE REQUESTED TO CONSIDER THE FALL IN G.P. RATE IN ORDER. FROM THE PERUSAL OF THE ABOVE IT MAY BE OBSERVED TH AT THE AVERAGE SALE PRICE OF COTTON YARN HAS GONE UP CONSIDERABLY WITHOUT SIMILAR INCREASE IN MA RGINS, THIS WILL RESULT IN FALL IN GROSS PROFIT RAT IO, THERE IS ONLY MARGINAL INCREASE IN QUANTITY OF COTTON YARN S OLD. THE MARGIN AVAILABLE I.E. THE DIFFERENCE BETWE EN THE PRICE OF RAW MATERIAL AND SALE OF COTTON YARN H AVE ONLY MARGINALLY INCREASED AS COMPARED TO THE PRICE FLUCTUATION IN RAW MATERIAL AND COTTON YARN, THUS RESULTING IN FALL IN G.P. RATE. THE LEARNED AS SESSING OFFICER DID NOT CONSIDER OUR SUBMISSION AS HIS OBJE CTIVE WAS TO REJECT THE BOOKS AND APPLY GROSS PROFI T RATE. IT IS FURTHER SUBMITTED THAT VARIOUS HIGH COURTS IN THE COUNTRY HAVE HELD THAT FALL IN G.P. RATE CANNO T BE THE REASON FOR REJECTING THE BOOKS OF ACCOUNTS. WE DRAW SUPPORT FROM THE FOLLOWING JUGDEMENTS : > DCIT, LUCKNOW VS. HANUMAN SUGAR (KHANDSARI) MILLS P VT LTD. [2013] 38 TAXMANN.COM 53(ALLAHABAD) > CTT- IV VS. SYMPHONY COMFORT SYSTEM LTD. [2013] 35 TAXMANN.COM 533 (GUJARAT) THERE IS SHARP DECREASE IN THE YIELD OF COTTON YARN AND SHARP TEASE IN COTTON WASTE AND INVISIBLE LOSS OF COTTON FOR WHICH THERE IS NO SATISFACTORY EXPLANATION. A COMPARATIVE CHART SHOWING THE YIELD OF COTTON YAR N, COTTON WASTE AND INVISIBLE LOSS/SHORTAGE IS GIVE N BELOW :- 31.03.2009 31.03.2010 31.03.2011 COTTON CONSUMED 27,46,956.00 25,81,388.10 34,92,13 0.14 YARN PRODUCED 21,97,149.27 22,22,705.68 25,49,248.5 6 COTTON WASTE 4,02,223.21 2,96,514.60 7,68,278.51 15 UNRECOVERABLE WASTE 85,637.52 41,879.72 1,39,991.32 YARN PRODUCED% 81.83% 86.78% 73.75% COTTON WASTE% 14.98% 11.58% 22.23% UNRECOVERABLE WASTE% 03.19% 1.64% 4.05% NO DOUBT THERE IS FALL IN THE YIELD OF COTTON YARN CORRESPONDINGLY RESULTING IN INCREASE IN PRODUCTION OF COTTON WASTE AND SHORTAGE. FROM THE PERUSAL OF THE FIGURES GIVEN HEREINABOVE IT MAY BE OBSERVED THAT THE YIELD OF FINISHED PRODUCT IS NOT CONSTANT IT HAS VARIED IN THE EARLIER YEARS ALSO. ANY VARIAT ION IN PRODUCTION OF FINISHED PRODUCT WILL CERTAINLY RESUL T IN VARIATION OF OTHER OUTPUTS. THIS YEAR'S RESULT S SHOW DRASTIC FALL IN THE YIELD OF COTTON YARN. ONE OF TH E REASON FOR THE FALL IN YIELD CAN BE ATTRIBUTED TO THE QUALITY OF INPUT I.E. RAW MATERIAL. SOMETIMES THE V ARIATION IS ON ACCOUNT OF THE QUALITY OF YARN PRODU CED. BUT IN OUR CASE IT APPEARS TO BE MAINLY DUE TO THE QUALITY OF COTTON PROCURED FROM THE MARKET. [AS PER PRACTICE BULK OF THE COTTON IS PURCHASED DURING THE PEAK SEASON AND IF THERE IS ANY DEFECT IN IT OR TH E QUALITY IS NOT UP TO THE MARK WILL BE DISCOVERED ON LY AT THE TIME OF PRODUCTION OF YARN]. ALTHOUGH DUE PRECAUTIONS ARE TAKEN BY THE PERSONS ENGAGED IN PRO CURING COTTON FOR THE COMPANY BUT SOMETIMES MISTAKES DO HAPPEN RESULTING IN LOWER YIELD OF YARN . THERE IS NO MALAFIDE INTENTION TO SHOW LOWER YIEL D AS SUCH NO ADVERSE INFERENCE BE DRAWN. 3. GENUINENESS OF SALE OF COTTON HAS NOT BEEN ESTAB LISHED IN RESPECT OF WHICH THE ASSESSEE COMPANY HAS CLAIMED TO HAVE INCURRED LOSSE S : NORMALLY THE COTTON PURCHASED IS USED IN THE BUSINE SS OF MANUFACTURE OF YARN AND MAY BE SOLD IF ONE GETS HIGHER RETURN ON THE INVESTMENT. IN THE PRESEN T CASE THE COTTON WAS SOLD AS IT WAS NOT FIT FOR PRODUCTION OF GOOD QUALITY YAM. IT IS SUBMITTED THA T THERE WAS A FIRE IN THE FACTORY PREMISE ON 06.11.2010. (COPY OF DDR ENCLOSED SR.NO . 1 IN INDEX) FIRE TENDERS WERE CALLED FROM PATIALA AND SANGRUR FOR FIRE FIGHTING. THEY USED WATER TO E XTINGUISH THE FIRE, WHICH IN TURN RESULTED IN FLOOD ING OF GODOWN\ STORE WHERE COTTON WAS STORED. BECAUSE OF T HE WATER ENTERING THE STORES, THE COTTON BECOME UNFIT FOR MANUFACTURING GOOD QUALITY FIBRE. MOREOVER, AS THE COTTON PURCHASED WAS NOT GIVING THE DESIRED RESULT OF PRODUCTION, IT WAS DEC IDED TO SELL IT. THE LOSS ON SALE OF COTTON IS LOWE R THAN THE LOSS THE UNIT WOULD HAVE SUFFERED HAD IT GONE AHEAD WITH THE PRODUCTION OF FIBRE FROM THAT COTTON. THE COTTON WAS SOLD TO THE FOLLOWING THREE PARTIES : SR. NO. NAME OF PURCHASES AMOUNT(RS.) QUANTITY (KG) 1. AGGARWAL TEXTILES, SUNAM 51,61,378.00 46,984 2. AMARJEET & COMPANY, BUCHO MANDI 1,11,34,198.00 1,08,884 3. BHUVANESHWARI OIL AND COTTON MILLS, SUNAM 68,89,415.00 65,045 TOTAL 2,29,84,991.00 2,20,913 ALL THE AFORESAID THREE PARTIES ARE GENUINE AND REG ISTERED WITH SALES TAX DEPARTMENT OF PUNJAB. THE LEARNED ASSESSING OFFICER HAS DOUBTED THE GENUINENN ESS OF SALE TRANSACTIONS WITH THESE PARTIES. WE HAD SUBMITTED THE DETAILS ALONGWITH EVIDENCE REGARD ING THE GENUINENESS OF THE PARTIES AND TRANSACTIONS, BUT THE SAME WERE NOT CONSIDERED BY T HE LEARNED ASSESSING OFFICER AS HE ASSESSED THE FACTS WITH BIASED OPINION. WE AGAIN GIVE HEREIN BEL OW THE FACTS FOR YOUR KIND CONSIDERATION: 16 SALE OF COTTON IN THE MONTH OF MARCH TO M/S AGGARWA L TEXTILE, NEW GRAIN MARKET, SUNAM AND M/S AMARJIT & CO., BHUCHO MANDI HAVE BEEN SHOWN AT VERY LOW RATES RESULTING IN HUGE LOSS. IT IS SUBMITTED THAT BOTH THE PARTIES ARE GENUINE, COPY OF ACCOUNT DULY CONFIRMED BY M/S AMARJIT & CO. ARE ENCLOSED FOR YOUR PERUSAL (SR.NO .2 IN INDEX). THE COMPANY HAD PURCHASED COTTON FROM M/S AMARJIT & CO. AND THESE TRANSACTIONS ARE VERIFIABLE FROM THE COPY OF ACCOUNT ENCLOSED. IN CASE THE PARTY HAS GIVEN ITS PAN NUMBER AND SALES TAX NUMBER ON ITS BILLS. THE EXISTENCE OF THESE FIRM CAN BE VERIFIED FROM THE VARIOUS OTHER GOVERNMENT DEPARTME NT. MOREOVER THE RATES AT WHICH THE COTTON WAS SOLD TO THESE PARTIES WERE THE PREVAILING MARKET RA TES AT THAT TIME FOR THAT QUALITY OF COTTON WHICH W AS AFFECTED BY THE WATER ( AS EXPLAINED EARLIER). THE SALE OF COTTON WAS MADE IN THE MONTH OF MARCH AS BY THAT TIME THE COMPANY HAS REPLENISHED ITS STOCK AND GOT GOOD PRICE FOR THAT QUALITY OF COTTON. A. IT APPEARS THAT M/S AGGARWAL TEXTILE, SUNAM HAS SHIFTED HIS BUSINESS TO SOME OTHER PLACE AND WE ARE NOT ABLE TO LOCATE HIS NEW ADDRESS. THE COMP ANY HAD PURCHASED COTTON FROM M/S AGGARWAL TEXTILES, SUNAM DURING 2009-2010. THE AMOUNT WAS PA ID BY ACCOUNT PAYEE CHEQUES. COPIES OF PURCHASE BILLS ARE ENCLOSED TO PROVE THE GENUINESS OF M/S AGGARWAL TEXTILE, SUNAM. IN CASE THE PARTY EXISTED AND ENTERED INTO SALES / PURCHASE TRANSACTI ONS WITH THE COMPANY FOR THE LAST TWO YEARS, ITS GENUINESS SHOULD NOT BE DOUBTED. THE SALES / PURCHA SE ENTERED INTO WITH M/S AGGARWAL TEXTILE, SUNAM MAY BE VERIFIED FROM SALES TAX RETURNS OF THE CONCE RN. COPY OF MISMATCH REPORT FROM SALES TAX DEPARTMENT FOR 2009-10 IS ENCLOSED (SR.NO . 3 IN INDEX) TO PROVE THAT THE FIRM WAS GENUINE AN D EXISTED DURING THE RELEVANT YEAR. THE BUSINESS SCEN ARIO IN INDIA PARTICULARLY IN PUNJAB HAVE RESULTED IN CLOSURE OF MANY BUSINESSES DUE TO LOSSES AND INDEBT EDNESS. THE OWNER MAY HAVE SHIFTED THE PLACE WITHOUT DISCLOSING HIS WHEREABOUTS, TO ANYONE DURIN G THE SUBSEQUENT PERIOD. IT IS SUBMITTED THAT DEPARTMENT SHOULD NOT TAKE ANY ADVERSE VIEW IF IT I S UNABLE TO FIND THE WHEREABOUTS OF M/S AGGARWAL TEXTILE, SUNAM. B. M/S AMARJEET & CO., BUCHO MANDI, IS A GENUINE D EALER COPY OF ACCOUNT DULY CERTIFIED BY HIM IS ENCLOSED FOR YOUR PERUSAL. SINCE THE FREIGHT ON COTTON AND COTTON WASTE IS PAID BY THE BUYER IT IS POSSIBLE THAT VEHICLE NUMBER IS INADVERTENTLY MENTI ONED WRONGLY. THE COPY OF ACCOUNT SHOWS THAT THE SALES HAVE BEEN DULY ENTERED IN THEIR BOOKS. C. M/S BHUBNESHWARI OIL & COTTON MILLS, SUNAM - THE VEHICLE NUMBER MENTIONED IN THIS CASE IS PN- 11N-6018. THIS VEHICLE NUMBER IS ALSO ADVERTENTLY M ENTIONED THE CORRECT REGISTRATION NUMBER IS PB-11AN - 6018. A CERTIFICATE FROM M/S JANTA ROAD CARRIER, GH AGGA ROAD, SAMANA IS ENCLOSED CONFIRMING THE VEHICLE NUMBER AND ALSO THAT THEY HAVE SENT THE VEH ICLE FOR CARRYING THE GOODS TO SUNAM. (SR.NO.4 IN INDEX) 4. GENUINESS OF SALE OF COTTON WASTE IS NOT ESTABLI SHED THE SALE OF WHICH HAS BEEN SHOWN AT UNBELIEVABLE RIDICULOUS LOW RATES : THE COMPANY IS IN THE BUSINESS FOR THE LAST MANY YE ARS. THE MAIN PRODUCT IS THE YARN AND THE PROFITABI LITY OF THE UNIT DEPENDS ON THE RATE OF YARN ONLY. COTTON WASTE IS ONLY A BYE-PRODUCT AND SALE REALIZA TION FROM IT FORMS ONLY A FRACTION OF THE TOTAL SAL ES. THE LEARNED ASSESSING OFFICER HAS STRESSED IN HIS O RDER THAT THE SALE OF COTTON WASTE HAS BEEN SHOWN A T UNBELIEVABLE RIDICULOUS LOW PRICE, BUT NOWHERE HAS HE MENTIONED THE AVERAGE MARKET RATE ON WHICH IT SHOULD HAVE BEEN SOLD. IN THE ABSENCE OF ANY COM PARATIVE MARKET PRICE QUOTED BY THE LEARNED ASSESSING OFFICER. NO COGNIZANCE ' SHOULD BE TAKEN OF THE GENERAL REMARK. 17 ALL THE COTTON WASTE PRODUCED BY THE UNIT IS NOT TH E SAME IN QUALITY, IT HAS GOT DIFFERENT GRADES. THE GOOD GRADE WASTE GETS GOOD MARKET PRICE AND THE POO R QUALITY WASTE GETS MUCH LOWER RATE AND SOMETIMES ONE HAS TO PAY FROM POCKET TO GET SUCH WA STE REMOVED. THE GOOD QUALITY WASTE IS USED BY SMALL UNITS ENGAGED IN MANUFACTURING LOW QUALITY YARN WHEREAS THE POOR QUALITY WASTE IS USED BY THE BRICK KLIN OWNERS ETC. FOR BURNING. THUS A PROD UCT USED IN MILL AS RAW MATERIAL AND OTHER USED AS FUEL CANNOT HAVE THE SAME SALE VALUE. THE COMPANY HAS SO LD COTTON WASTE WEIGHING 4,31,640 KGS FOR RS. 1,12,70,912/- GIVING AN AVERAGE PRICE OF 26.11. THE PRICE VARIES FROM RS.60.50 PER KG (MILL GRADE) TO RS.0.58 PER KG (BURNING GRADE). THE LEARNED ASSESSING OFFICER HAS POINTED OUT THE T HREE PARTIES TO WHOM BURNING GRADE COTTON WASTE WAS SOLD ARE NOT GENUINE. THE DETAILS ARE DISCUSSED AS UNDER: 'IT HAS BEEN POINTED OUT THAT COTTON AND COTTON WAS TE WAS SOLD AT VERY LOWER RATES AND SOME OF THE ENQUIRIES MADE BY YOUR OFFICE POINTED OUT CERTAIN D ISCREPANCIES WHICH LEAD YOU TO BELIEVE THAT THESE TRANSACTIONS ARE NOT GENUINE. WE HAVE TO SUBMIT AS UNDER:- D. M/S BR SPINTAX PVT. LTD. SAMANA IS AN EXISTING P ARTY LOCATED AT PATIALA ROAD, SAMANA. THE AMOUNT OF BILL STATED IN YOUR OBSERVATION IS RS.46, 446.00 WHEREAS THE CORRECT AMOUNT IS RS.46,846.00 A ND THE SAME IS BEING REFLECTED IN THE COPY OF ACCOUNT OF M/S BR SPINTEX PVT. LTD. ENCLOSED FOR YOUR REFERENCE. THE VEHICLE NUMBER PB- 11M-1130 IS CORRECT. A CERTIFICATE FROM THE KISSAN MINI TRUCK OPERATORS UNION, SAMANA. CONFIRMING THE VEHICLE NUMBER AND THAT IT IS RUNNING WITH THE TRUCK UNION IS ENCLOSED. (SR.NO . 5 IN INDEX) E. SH. PANKAJ DEEP- THIS IS A GENUINE TRADER BASED AT SAMANA. IT IS POSSIBLE THAT SOME DIGIT/ALPHABET HAS BEEN WRONGLY MENTIONED IN THE SA LE BILL OTHERWISE IT IS A GENUINE SALE AND THE PART Y HAS APPEARED AND GIVEN A STATEMENT BEFORE YOU. IT IS FURTHER SUBMITTED THAT FREIGHT ON YARN IS PAI D BY US AND ON COTTON / COTTON WASTE IS PAID BY THE BUYER. THERE ARE ABOUT 600 PLUS SALE BILLS AND DISCREPANCY HAS BEEN OBSERVED BY YOUR OF FICE ONLY IN FOUR BILLS. OUT OF THE FOUR WE HAVE EXPLAINED THE CORREC T POSITION IN TWO BILLS. / THUS THE DISCREPANCY R EMAINS IN TWO BILLS ONLY. THERE CAN BE CLERICAL MISTAKE IN NOTING DOWN THE VEHICLE NUMBER, SALES ARE GENUINE AND AS SUCH NO ADVERSE INFERENCE BE DRAWN FROM CLER ICAL MISTAKES.' THE STATEMENT OF SH. PANKAJ DEEP WAS TAKEN BEHIND O UR BACK AND WE WERE NOT ALLOWED TO CROSS EXAMINE HIM. AS SUCH NO ADVERSE INFERENCE SHOULD BE DRAWN FROM THE STATEMENT. WE DRAW SUPPORT FROM THE FOLLOWING CASES. (2008) ITR TAXMANN 440ACIT VS. GEETANJALI EDUCATION SOCIETY (2008) 174 TAXMANN 206 LATE LAXMAN BHAI S. PATE/ VS CTT (1981) 127ITR 816 (P&H) CTT VS. SHAOM LAI IT MAY NOT BE OUT OF PLACE TO MENTION HERE THAT BUR NING GRADE COTTON WASTE WAS SOLD TO CHEEKA SOLVENT (P) LTD. FOR RS. 0.70 PER KG. THE COMPANY HAS NOT CLAIMED ANY SPECIFIC LOSSES AGA INST SALE OF COTTON WASTE, AS THERE CAN NOT BE ANY DIRECT LOSSES. THE COTTON WASTE IS A BYE-PRODUC T AND ANY SALE REALIZATION WILL HELP IN REDUCING TH E COST OF INPUT. FROM THE PERUSAL OF THE AFORESAID SUBMISSIONS IT MA Y BE OBSERVED THAT THE LEARNED ASSESSING OFFICER HAS DECIDED THE CASE WITH BIASED MIND. THE SUBMISSI ONS MADE IN RESPONSE TO HIS OBSERVATIONS WERE 18 EITHER IGNORED OR WRONG INFERENCE WAS DRAWN FROM TH E SAME TO SUPPORT HIS VIEW OF REJECTING THE BOOKS OF ACCOUNTS. IN HIS ORDER HE HAS TIME AND AGAIN STR ESSED THAT THE SALES ARE NOT GENUINE. THE A/LEGATIO N IS NOT SUPPORTED BY ANY EVIDENCE ONLY SOME CLERICAL MISTAKES HAVE BEEN BLOWN OUT OF PROPORTION TO JUSTIFY HIS VIEW. INSTEAD OF WORKING OUT THE PROFIT S SUPPRESSED HE HAS DECIDED THE EASY WAY OUT TO REJ ECT THE BOOKS OF ACCOUNT AND APPLY AVERAGE G.P. RATE. N O JUSTIFICATION HAS BEEN GIVEN FOR APPLYING THE G.P. RATE. NO REFERENCE HAS BEEN GIVEN TO THE AVERA GE G.P. RATE IN THE INDUSTRY. EVEN THE CASE OF CTT VS. BRITISH PAINTS INDIA LTD. (1991) 188 ITR 44 (SC ) IS NOT APPLICABLE IN OUR CASE. THAT CASE RELATED TO THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED. IT WAS OBS ERVED BY THE APEX COURT THAT THERE WAS NO ESTOPPELS IN TAXATION MATTERS AND THE OFFICER WAS N OT BOUND BY THE METHODS FOLLOWED IN THE EARLIER YEARS. IN OUR CASE, THERE IS NO CHANGE IN METHOD OF ACCOUNTING. WE DRAW YOUR ATTENTION, TO THE DECISION IN THE CASE OF 'CTT VS. DHIRAJ R.RUNGTA [2013] 40 TAXMANN.COM 224 (GUJARAT). 'WHERE ASSESSEES BOOKS OF ACCOUNTS W ERE REJECTED BEING DEFECTIVE IN NATURE, SAME SET OF BOOKS COULD NOT BE RELIED UPON TO MAKE ADDITIONS TO ASSESSEES TAXABLE INCOME.' IN OUR CASE, THE LEARNED ASSESSING OFFICER HAS OBSERVED THAT THERE I S SUPPRESSION OF SALES AND THEN G.P. RATE HAS BEEN APPLIED ON THE SAME SALES VALUE TAKING IT TO BE COR RECT. WE ALSO BRING TO YOUR NOTICE THE DECISION IN THE CASE OF CTT VS. DASS'S FRIENDS BUILDERS PRIVATE LTD . [2013] 38 TAXMANN.COM 358 (ALLAHABAD). 'SPECIFIC DEFECTS ARE REQUIRED TO BE POINTED OUT IN ASSESSMENT PROCEEDINGS FOR INVOKING PROVISIONS UNDER SECTION 145(3).'IN OUR CASE THE FALL IN G.P. RATE WAS ON ACCOUNT OF LOWER YIELD OF FINISHED COTT ON YARN. NO OTHER MAJOR DEFECT HAVE BEEN POINTED OUT I N THE BOOKS OF ACCOUNTS TO SHOW ANY LINK BETWEEN THE ALLEGED SALES SUPPRESSION TO LOWER YIEL D. AS SUCH THERE IS NO VALID GROUND TO REJECT THE BOOKS OF ACCOUNTS. WE ALSO DRAW SUPPORT FROM THE FOLLOWING CASES DECID ED BY OTHER HIGH COURTS IN THE COUNTRY : G V.D.I & CO. VS. DOT, SPL. RANGE COIMBATORE (2014) 43 TAXMANN.COM 246 (MADRAS) CTT VS. CARPET PALACE (2014) TAXMANN. COM 340 (ALLA HABAD) CIT, VARANASI VS. JANANAMANDAL LTD. (2013) 31 TAXMA NN.COM 51 (ALLAHABAD) IN HIS ORDER, THE LEARNED ASSESSING OFFICER HAS OBS ERVED THAT TEST CHECKING WAS DONE TO JUSTIFY HIS ALLEGATION OF SUPPRESSED SALES. IT MAY BE BROUGHT T O YOUR NOTICE THAT THE SUBMISSION MADE BY US IN THA T REGARD WAS NOT CONSIDERED. THE NUMBER OF ENTRIES SE LECTED DOES NOT COMMENSURATE WITH THE VOLUME OF BUSINESS OF THE COMPANY. AS SUCH NO ADVERSE INFE RENCE SHOULD BE DRAWN. THE LEARNED ASSESSING OFFICER HAS ALSO QUOTED THE Y IELD SHOWN BY M/S CHAHAL SPINTEX LIMITED, BATHINDA. THE WORKING RESULTS, OF THE COMPANY-HAVE NOT BEEN PROVIDED AS SUCH AS WE CANNOT COMMENT ON THIS OBSERVATIOR WE ARE NOT AWARE THAT W HETHER THE WORKING OF THAT COMPANY IS COMPARABLE WITH US OR NOT. KEEPING IN VIEW THE SUBMISSIONS YOU ARE REQUESTED T O SET ASIDE THE ORDER REJECTING THE BOOKS OF ACCOUNTS AND APPLICATION OF G.P. RATE WHICH IS ARBI TRARY AND ON VERY HIGH SIDE AND WITHOUT ANY BASIS.' 8. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE ASSESSEE HAD MAINTAINED DULY AUDITED BOOKS OF ACCOUNTS AND COMPLETE QUANTITATIVE & QUALITATIVE INFORMATION WIT H RESPECT TO RAW MATERIAL, COTTON YARN AND WASTE ETC. HE FURTHER OBSERVED THAT THE ASSESSEE IS A UNIT COVERED UNDER CENTRAL EXCISE ACT AND IT WAS OBLIGAT ORY TO MAINTAIN QUANTITATIVE 19 RECORDS OF RAW MATERIAL, PRODUCTION OF PRINCIPAL PR ODUCT AND BY PRODUCT / RESIDUAL PRODUCT AND THERE WERE NO ADVERSE FINDINGS OF EXCISE DEPARTMENT IN REGARD TO THOSE RECORDS. 8.1 THE LD. CIT(A) FURTHER OBSERVED THAT THE ASSESS EE HAD FULLY DISCLOSED THE YIELD OF GOODS PRODUCED IN DULY AUDITED BOOKS OF AC COUNT AND FURNISHED RELEVANT DOCUMENTS INCLUDING NEWS PAPER CUTTING TO ESTABLISH THAT THERE WAS A FIRE IN THE PREMISES OF THE ASSESSEE IN WHICH DAMAG E TO GOODS (RAW MATERIAL, FINISHED PRODUCTS ETC.) STOOD ESTABLISHED AND THERE WAS NO DENIAL OF THE FACT THAT FIRE IN THE FACTORY HAD RESULTED IN DAMAGE TO THE QUALITY OF FINISHED GOODS AND BY PRODUCTS BECAUSE OF HIGHER MOISTURE CONTENTS DUE TO USE OF WATER TO CONTROL FIRE AND RAW MATERIAL BECOMING UNFIT TO PRO DUCE YARN. THUS, THE DISTRESS SALE AT LOWER RATE COULD NOT BE RULED OUT. THE LD. CIT(A) OBSERVED THAT DUE TO FIRE INCIDENT INCREASE IN VISIBLE WASTE VIS--VIS I NVISIBLE COTTON WASTAGE WAS ALSO PROBABLE. HE POINTED OUT THAT THE A.O. QUOTED THE C ASE OF M/S CHAHAL SPINTEX LTD. BHATINDA WHICH HAD SHOWN YIELD OF 85.31% AGAIN ST 73% IN THE ASSESSEES CASE. HOWEVER THE DETAILS OF THE SAID CONCERN WERE NOT BROUGHT TO THE ASSESSEE FOR A SUITABLE REBUTTAL AND THAT THERE MAY BE SEVER AL DISTINGUISHING FACTORS IMPACTING THE PRODUCTION RESULTS SUCH AS QUALITY OF RAW MATERIAL, EFFICIENCY OF PLANT AND MACHINERY AND QUALITY OF MANPOWER ETC. HE ALSO OBSERVED THAT THERE WERE NUMBER OF SIMILAR UNITS LOCATED IN AND AROUND SAMANA WHERE THE ASSESSEES UNIT WAS LOCATED, THEREFORE, NO VALID CO MPARISON COULD BE MADE WITH A UNIT LOCATED OUTSIDE. 8.2 THE LD. CIT(A) POINTED OUT THAT THE A.O. FAILED TO SINGLE OUT UNACCOUNTED TRANSACTIONS MADE BY THE ASSESSEE TO DOUBT INCREASE IN WASTAGE. HE ALSO OBSERVED THAT THE A.O. HAD DOUBTED THE TRANSPORTATI ON AND THE RATES AT WHICH SALES WERE MADE BY THE ASSESSEE WHICH WERE EXPLAINE D AND CLARIFIED BY THE ASSESSEE. 20 8.3 THE LD. CIT(A) ALSO OBSERVED THAT THE A.O. DID NOT OFFER ANY COMMENTS ON MULTIPLE USAGE OF COTTON WASTE I.E, GOOD QUALITY WA STE USED BY SMALL UNITS AND LOW QUALITY COTTON WASTE USED FOR BURNING BY BRICK KILNS AND RATES OF THE TWO COULD NEVER BE EQUAL UNDER ANY CIRCUMSTANCES AND TH AT THE A.O. COMPLETELY OVERLOOKED THE IMPACT OF FIRE INCIDENCE. ACCORDING TO THE LD. CIT(A) THE A.O. RAISED THE DOUBTS ON MERE ASSUMPTIONS AND PRESUMPTI ONS IN THE ABSENCE OF ANY POSITIVE MATERIAL TO JUSTIFY HIS CONTENTION WHICH W AS NOT PERMISSIBLE AND THAT THE DECISION CITED BY HIM WERE MISPLACED AS THE FACTS O F THE ASSESSEES CASE WERE DISTINGUISHABLE AS THE NECESSARY INFORMATION WERE F URNISHED, STOCK RECORDS WERE DULY MAINTAINED UNDER CENTRAL EXCISE ACT AND THE A. O. DID NOT BROUGHT ON RECORD ANY POSITIVE MATERIAL TO REBUT THE FACTS AS PLACED ON RECORD BY THE ASSESSEE. THE LD. CIT(A) MENTIONED THAT THE STATEME NT RECORDED AT THE BACK OF THE ASSESSEE WAS NOT CONFRONTED DURING THE ASSESSME NT PROCEEDINGS AND THAT THE ASSESSEE HAD FURNISHED DETAILED REPLY REGARDING THE POINT RAISED BY THE A.O., REFERENCE WAS MADE TO THE FOLLOWING CASE LAWS: CIT VS. EASTERN COMMERCIAL ENTERPRISES (1994) 210 I TR 103, (CAL), SWADESHI COTTON MILLS CO. LTD. VS. UNION OF INDIA ( 1981) 51 COMP CAS 210, 255 (SC) = AIR 1981 SC 818 MANEKA GANDHI VS. UNION OF INDIA, AIR 1978 SC 597 8.4 THE LD. CIT(A) FURTHER OBSERVED THAT THE ASSESS EE FURNISHED JUSTIFICATION WITH REASONING FOR FALL IN GP RATE WHICH WAS DUE TO FIRE AT THE FACTORY THEREFORE THE CURRENT RESULTS COULD NOT HAVE BEEN COMPARED WITH T HOSE OF THE EARLIER YEARS AND ALSO WITH THOSE OF THE OTHER UNIT. ACCORDING TO HIM THE A.O. FAILED TO PUT FORTH ANY MATERIAL TO PROVE THAT THERE WAS FALSIFIC ATION OF ACCOUNTS OR THERE WAS UNDER INVOICING OF SALES AND THAT THE MINOR DEFECTS DID NOT TURN GENUINE TRANSACTIONS INTO INGENUINE ONE. HE WAS OF THE VIEW THAT THE A.O. FAILED TO DISCHARGE HIS ONUS TO PROVE THE UNRELIABILITY OF BO OKS OF ACCOUNTS AND THAT THE 21 TURNOVER OF THE ASSESSEE HAD INCREASED SUBSTANTIALL Y IN COMPARISON TO THE PRECEDING TWO YEARS AND THE RISING IN PRICE OF YARN IN COMPARISON TO INCREASE IN THE PRICE OF RAW MATERIAL WAS LESS, THUS FALL IN GP RATE WAS A NATURAL FALL OUT. 8.5 LD. CIT(A) ALSO OBSERVED THAT THE A.O. HAD NOT POINTED OUT ANY SPECIFIC DEFECT WITH SUPPORTIVE EVIDENCE IN THE AUDITED BOOK S OF ACCOUNTS AND HAD NOT GIVEN ANY FINDINGS WITH THE PROOF RELATING TO THE A SSESSEES COST OF RAW MATERIAL OR COST OF PROCESSING OR THAT IT HAD MADE SALES OF FINISHED PRODUCT OUTSIDE THE BOOKS OF ACCOUNT AND SUPPRESSED THE SALES. THEREFOR E, THE ADDITION MADE BY THE A.O. ON ACCOUNT OF LOW GP RATE WAS DELETED BY O BSERVING THAT THE AUDITED BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE HAD BE EN WRONGLY REJECTED. THE RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE HIGH COURT IN THE CASE OF CIT VS. OM OVERSEAS(2009) 315 ITR 185 (P&H). 9. NOW THE DEPARTMENT IS IN APPEAL. 10. THE LD. SR. DR REITERATED THE OBSERVATIONS MADE BY THE A.O. AND STRONGLY SUPPORTED THE ASSESSMENT ORDER DT. 27/03/2014. IT W AS FURTHER SUBMITTED THAT THE ASSESSEE HAD NOT PRODUCED THE PRODUCTION REGISTER E VEN WHEN THE AMPLE OPPORTUNITIES WERE GIVEN BY THE A.O. AND THAT THE N OTICES ISSUED TO THE PARTIES UNDER SECTION 131(1) OF THE ACT WERE NOT COMPLIED W ITH AND EVEN THE COMPLETE ADDRESSES OF THE PERSON TO WHOM THE COTTON WASTE WA S SOLD AT LOWER RATE WERE PROVIDED. IT WAS FURTHER SUBMITTED THAT THE TRUCK N UMBER MENTIONED THROUGH WHICH THE COTTON WASTE WAS SOLD WERE OF THE MOTORCY CLE AND THERE WAS SHARP DECLINE IN THE GP RATE AS WELL AS YIELD OF COTTON Y ARN IN COMPARISON TO THE PRECEDING YEARS. THEREFORE, BY CONSIDERING ALL THOS E FACTS, THE A.O. WAS JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNTS AND WAS FAIR ENO UGH IN APPLYING THE AVERAGE GP RATE CONSIDERING THE GP RATE OF THE YEAR UNDER C ONSIDERATION AS WELL AS THOSE OF THE PRECEDING YEARS. SO, THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITIONS MADE BY THE A.O. 22 11. IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR TH E ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND F URTHER SUBMITTED THAT THE ASSESSEE MAINTAINED THE PROPER BOOKS OF ACCOUNTS WH ICH WERE DULY AUDITED. IT WAS STATED THAT THOSE BOOKS OF ACCOUNTS WERE ALSO R EQUIRED TO BE MAINTAINED UNDER THE CENTRAL EXCISE ACT IN WHICH NO SPECIFIC D ISCREPANCY WAS POINTED OUT BY THE A.O., THEREFORE, MERELY ON THE BASIS OF REDU CTION IN GP RATE IN COMPARISON TO THE EARLIER YEARS, THE BOOKS OF ACCOUNTS CANNOT BE REJECTED. THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: CIT VS. JAS JACK ELEGANCE EXPORTS (2010) 324 ITR 95 (DEL) CIT VS. FARIDABAD ENTERTAINMENT PVT. LTD. 336 ITR 1 29(P&H) CIT VS. R.K. RICE MILLS (2009) 319 ITR 173 (P&H) 12. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT TH E LD. CIT(A) RIGHTLY DELETED THE ARBITRARY ADDITIONS MADE BY THE A.O. 13. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CA SE THE A.O. INVOKED THE PROVISIONS OF SECTION 145(3) OF THE ACT AND REJECTE D THE BOOKS OF ACCOUNTS FOR THE FOLLOWING REASONS : I. THERE IS A SHARP DECLINE IN THE GP RATE FOR WHI CH THERE IS NO PLAUSIBLE EXPLANATION OFFERED. II. THERE IS A SHARP DECREASE IN THE YIELD OF COTTO N YARN AND SHARP INCREASE IN COTTON WASTE AND INVISIBLE LOSS OF COTTON FOR WHICH THERE IS NO SATISFACTORY EXPLANATION. III. GENUINENESS OF SALE OF COTTON HAS NOT BEEN EST ABLISHED IN RESPECT OF WHICH ASSESSEE COMPANY HAS CLAIMED TO HAVE INCURRED LOSSES. IV. GENUINENESS OF SALE OF COTTON WASTE IS NOT ESTA BLISHED, THE SALE OF WHICH HAS BEEN SHOWN AT UNBELIEVABLE RIDICULOUS LOW RATES . V. THE SALE OF COTTON AT LOSS AND THE SALE OF COTTO N WASTE AT WHOPPING LOW PRICE HAS BEEN UNDERTAKEN ONLY TO DEFLATE THE PROFI TS OF THE COMPANY AS THE SALES ARE NON-GENUINE. VI. THE INCREASE IN PRODUCTION OF COTTON WASTE AND THE INCREASE IN INVISIBLE LOSS HAS BEEN DONE JUST TO REDUCE THE GROSS PROFITS OF THE COMPANY. 23 VII. SHARP DECLINE HAS BEEN SHOWN IN PRODUCTION OF COTTON YARN FOR WHICH NO EXPLANATION HAS BEEN FURNISHED TO ACCOUNT FOR THE S AME. 13.1 IN THE PRESENT CASE, THE EXPLANATION OF THE AS SESSEE BEFORE THE A.O. FOR LOW YIELD OF COTTON WAS THAT YARN OF BETTER QUALITY WAS PRODUCED WHICH GOT THE BETTER SALE PRICE AND THAT THERE WAS ALSO INCREASED IN THE PURCHASE RATE OF COTTON, HOWEVER THE A.O. POINTED OUT THAT THE INCRE ASE IN PURCHASE PRICE OF RAW MATERIAL WAS 67% WHEREAS THE INCREASE IN THE FINISH ED GOODS WAS ONLY OF 43%, THEREFORE, THE EXPLANATION OF THE ASSESSEE WAS NOT PLAUSIBLE. THE A.O. AFTER REJECTING THE BOOKS OF ACCOUNTS APPLIED THE AVERAGE GP RATE OF THE THREE YEARS AND MADE THE IMPUGNED ADDITION WHICH WAS DELETED BY THE LD. CIT(A) BY ACCEPTING THIS CONTENTION OF THE ASSESSEE THAT THER E WAS A FIRE IN THE PREMISES OF THE ASSESSEE WHICH CAUSED DAMAGE TO THE GOODS I.E; RAW MATERIAL AS WELL AS FINISHED PRODUCTS. HOWEVER THIS PLEA WAS NOT TAKEN BEFORE THE A.O. DURING THE COURSE OF ASSESSMENT PROCEEDINGS. IT IS ALSO NOTICE D THAT THE LD. CIT(A) ONLY ON THIS BASIS THAT THE FIRE IN THE FACTORY RESULTED IN THE DAMAGE TO THE QUALITY OF GOODS AND BECAUSE OF FIRE, MOISTURE CONTENTS DUE TO USE OF WATER TO CONTROL FIRE WERE MORE IN THE RAW MATERIAL WHICH BECAME UNFIT TO PRODUCE YARN. ON THE CONTRARY THE CONTENTION OF THE ASSESSEE BEFORE THE A.O. WAS THAT THE LOW YIELD OF COTTON YARN WAS DUE TO BETTER QUALITY PRODUCED. IT IS ALSO NOTICED THAT THE FIRE IN THE PREMISES OF THE ASSESSEE TOOK PLACE ON 06/11 /2010 WHICH IS EVIDENT FROM THE DDR NO. 10 DT. 07/11/2010 REGISTERED IN POLICE CHOWKI, SAMANA POLICE STATION, SAMANA DISTRICT PATIALA (COPY OF WHICH IS PLACED AT PAGE NO. 9 IN GURUMUKHI AND ENGLISH VERSION IS AT PAGE NO. 10 & 1 0A OF THE ASSESSEES PAPER BOOK). THEREFORE THE REASONING GIVEN BY THE LD. CIT (A) TO DELETE THE ADDITION THAT THE FIRE IN THE FACTORY OF THE ASSESSEE WAS A MAJOR CAUSE OF LOSS, DOES NOT APPEARS TO BE SOUND, PARTICULARLY WHEN NO BIFURCATI ON HAS BEEN GIVEN FOR THE PERIOD FROM 01/04/2010 TO 07/11/2010 WHICH WAS UNDI STURBED & SMOOTH. IT IS ALSO NOT CLEAR HOW MUCH STOCK WAS AVAILABLE WITH THE ASS ESSEE AT THE TIME OF FIRE DUE TO WHICH THE RAW MATERIAL / FINISHED PRODUCT GO T DAMAGED. IN OUR OPINION 24 THE LD. CIT(A) WITHOUT APPRECIATING THE FACTS IN RI GHT PERSPECTIVE DELETED THE IMPUGNED ADDITION MADE BY THE A.O. WE THEREFORE DEE M IT APPROPRIATE TO SET ASIDE THIS ISSUE BACK TO THE FILE OF THE LD. CIT(A) TO ADJUDICATE THE SAME AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONA BLE OPPORTUNITY OF BEING HEARD TO BOTH THE PARTIES. 14. IN THE RESULT, APPEAL OF THE DEPARTMENT IS ALLO WED FOR STATISTICAL PURPOSES. (ORDER PRONOUNCED IN THE OPEN COURT ON 27/02/20 20 ) SD/- SD/- #$ % .., (SANJAY GARG ) ( N.K. SAI NI) & '(/ JUDICIAL MEMBER ! / VICE PRESIDENT AG DATE: 27/02/2020 (+! ,-.- COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. $ / CIT 4. $ / 01 THE CIT(A) 5. -2 45&456789 DR, ITAT, CHANDIGARH 6. 8:% GUARD FILE