2010 (12) TMI 1237 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition on account of low Gross Profit (GP) by CIT(A).
2. Deletion of disallowance attributable to provision for foreign exchange rate difference.
3. Upholding of disallowance to the extent of Rs. 4,36,729/- for exchange rate difference provision.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Low GP:
The Revenue contested the deletion of Rs. 61,84,485/- added by the Assessing Officer (AO) due to low GP, which was done by rejecting the books of account under Section 145(3) of the Income-tax Act, 1961. The AO observed a decline in the GP rate from 10.59% in the preceding year to 8.12% in the year under consideration. The AO attributed this decline to the absence of qualitative details of production and closing stock and suspected manipulation to reduce tax liability. The CIT(A) deleted the addition, noting that the assessee maintained import-wise production details and that the AO did not point out specific defects in the books of accounts. The CIT(A) found the AO's method of valuing closing stock backwardly from sales as erroneous and held that the rejection of book results without specific defects was arbitrary. The Tribunal upheld the CIT(A)'s decision, stating that mere decline in GP without specific defects in the books does not justify rejection of book results and addition on account of low GP.

2. Deletion of Disallowance Attributable to Provision for Foreign Exchange Rate Difference:
The AO disallowed Rs. 13,59,427/- claimed by the assessee for exchange rate difference, arguing that the provision was made after the year-end. The CIT(A) allowed relief of Rs. 9,22,698/-, noting that the exchange rate difference was calculated based on the rates prevalent on 31-03-2004, in accordance with Rule 115 of the IT Rules, 1962. The CIT(A) referenced the Gujarat High Court decision in CIT Vs. Amba Impex, which allowed such deductions under Section 80HHC of the Act. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's rulings in Sutlej Cotton Mills Ltd. vs. CIT and CIT vs. Woodward Governer India Pvt. Ltd., which supported the deduction of exchange rate differences calculated as per accounting standards.

3. Upholding of Disallowance to the Extent of Rs. 4,36,729/- for Exchange Rate Difference Provision:
The assessee admitted before the CIT(A) that the outstanding amount in the form of exchange rate difference as on 31-03-2004 was Rs. 55,70,541/-, but the assessee claimed only Rs. 51,33,812/-. Therefore, the CIT(A) upheld the addition of Rs. 4,36,729/-. The Tribunal agreed with the CIT(A)'s findings, noting that the exchange rate difference was correctly calculated as per Rule 115 of the IT Rules, 1962, and upheld the addition of Rs. 4,36,729/-.

Conclusion:
The Tribunal dismissed both the appeals, upholding the CIT(A)'s orders in entirety. The Tribunal emphasized the importance of specific defects in books of accounts for rejecting book results and making additions, and validated the proper calculation of exchange rate differences as per prescribed rules and accounting standards.