2014 (11) TMI 399 - AT - Income Tax

Trading addition deleted on the ground of non-maintenance of stock register Any defect in books of accounts or not Held that - The assessee s business is for exporting of readymade garments - It requires various stages to produce finished products i.e. from grey fabric to printing, designing, stitching etc., it goes under various processes before final product of the readymade garments - It is difficult for the assessee to maintain stage wise stock register - The assessee was maintaining regular books of account with sales, purchase vouchers and books were audited but the audit report shows that record maintained by the assessee is not in proper manner as explained to them - The assessee changed the strategy of exporting the readymade garments by purchasing the grey fabric and printing it but these defects are not sufficient to reject the books result u/s 145(3) of the Act as held by the various courts and estimate the profit by the AO - CIT(A) has thoroughly examined all the aspects of all the defects pointed out by the Assessing Officer in his order, which has not been controverted by the revenue Decided against revenue. Validity of assessment u/s 147 - Claim of deduction U/s 80IB on Duty drawback - Held that - The assessee s return was only processed u/s 143(1) of the Act and there was no scrutiny assessment - in Assistant Commissioner of Income-Tax Versus Rajesh Jhaveri Stock Brokers P. Limited 2007 (5) TMI 197 - SUPREME Court it has been held that in such case there being no assessment, no opinion has formed by the AO - if a 148 notice is issued, it does not amount to any change of opinion since there was no opinion in existence at all - the AO is duty bound to take due notice of the judgment and give remedial effect in accordance with law - Since there was no opinion, the AO rightly reopened the assessment u/s 147 of the Act - the AO has acted within the parameters of law and reopening of the assessment has been rightly initiated - the validity of the reopening assessment is upheld - the deduction U/s 80IB of the Act is also not allowable to the assessee Decided against assessee.

Summary

Issues Involved:
1. Deletion of trading addition made by the Assessing Officer.
2. Validity of reopening assessment under Section 147.
3. Disallowance of deduction under Section 80IB on duty drawback.

Issue-wise Detailed Analysis:

1. Deletion of Trading Addition:
The Revenue's appeal contested the deletion of a trading addition of Rs. 32,86,536/- by the CIT(A), which was made by the Assessing Officer (AO) due to the non-maintenance of a stock register by the assessee. The AO noted a significant decline in the Gross Profit (G.P.) rate from 28.14% in the preceding year to 16.22% in the current year. The assessee attributed this decline to changes in the nature of readymade garments and increased costs in printing and dyeing. The AO found the explanation unconvincing and noted that the cost of raw materials had decreased while the sales price per piece was less than the manufacturing cost. The AO relied on the decision in CIT Vs. British Paint India Ltd. to reject the books under Section 145(3) of the Income Tax Act, 1961, and applied a 25% G.P. rate, resulting in the addition.

The CIT(A) allowed the appeal, observing that the AO's observations were theoretical without pointing out material discrepancies. The CIT(A) noted that maintaining a stock register was impractical due to the variety of garments. All purchases and sales were vouched, and no defects were found in the books of account. The CIT(A) relied on several judicial precedents, including CIT Vs. Jas Jack Elegance Exports and CIT Vs. Smt. Poonam Rani, to conclude that non-maintenance of a stock register alone was insufficient to reject the books. The CIT(A) found that the G.P. rate decline was due to increased turnover and different cost compositions, and there was no evidence of suppressed sales.

The Tribunal upheld the CIT(A)'s order, agreeing that the defects pointed out by the AO were insufficient to reject the books under Section 145(3). The Tribunal noted the impracticality of maintaining a stage-wise stock register and the regular maintenance of books by the assessee. The Tribunal dismissed the Revenue's appeal.

2. Validity of Reopening Assessment Under Section 147:
The assessee's cross-objection challenged the validity of reopening the assessment under Section 147. The AO reopened the case to disallow the deduction under Section 80IB on duty drawback, based on the Supreme Court's decision in Liberty India Ltd. Vs. CIT. The CIT(A) confirmed the reopening, relying on the Kerala High Court decision in CIT Vs. Best Wood Industry and Saw Mills.

The Tribunal upheld the reopening, noting that the original return was processed under Section 143(1) without scrutiny. Citing the Supreme Court's decision in Rajesh Jhaweri, the Tribunal stated that there was no opinion formed by the AO initially, and thus, reopening did not amount to a change of opinion. The Tribunal found the AO's reliance on Liberty India justified and upheld the validity of the reopening.

3. Disallowance of Deduction Under Section 80IB on Duty Drawback:
The assessee argued that the AO's disallowance of the Section 80IB deduction on duty drawback was unjustified, citing differences in the language of Sections 80I and 80IB and judicial precedents. The Tribunal referred to the Supreme Court's decision in Liberty India, which settled the issue against the assessee. The Tribunal also noted that the Rajasthan High Court in Saraf Seasoning Udhyog had discussed the amendment to Section 28(iiid) and found that profits from DEPB were chargeable under business profits, thus eligible for deduction under Section 80IB.

However, the Tribunal upheld the disallowance, stating that the Supreme Court's decision in Liberty India remained authoritative. The Tribunal dismissed the assessee's claim on merit, aligning with the Supreme Court's ruling.

Conclusion:
The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection, upholding the CIT(A)'s deletion of the trading addition and the validity of the reopening and disallowance of the Section 80IB deduction on duty drawback. The order was pronounced in the open court on 05/11/2014.