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TMI Blog2016 (7) TMI 943X X X X Extracts X X X X X X X X Extracts X X X X ..... different method, unless there is a clear statutory edict allowing a departure from such accepted standards. We cannot say that assessee had understated its work-in-progress or inventory by not charging interest relating to working capital loan to its valuation. Assessee was well justified in considering interest as a period cost and debiting in its profit & loss account. We do not find any merit in the additions made by the AO - Decided in favour of assessee Rejection of books of account and estimation of business income at 8% - Held that:- Scrutiny assessments were done for AYs 2006-07 & 2007-08 and the net profit rate accepted were much lower than 8%. Submission is that such rates came to 1.7% for AY 2007-08 and 2.21% for AY 2006-07. We, therefore, set aside the orders of authorities below in so far as it relates to the estimation of profit and direct the AO to take the average of net profit of the above two years and apply it to the gross receipts of the assessee and determine its income from business for the impugned assessment year Addition u/s 41(1) - Held that:- AO in his remand report has stated that assessee was unable to give ledger extracts from the books of cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee on notice as to why section 144 should not be invoked. It seems assessee could not justify its inability to produce the books of accounts. Since assessee did not produce books of account nor furnish the specific information called by the AO, he proceeded to make an assessment u/s. 144 of the Act. The action of the AO in invoking section 144 of the Act was confirmed by the CIT(Appeals) considering the non-compliance with the requirement of production of books of account and evidence in respect of its claim of expenditure. 5. Now before us, the ld. AR strongly submitted that invocation of section 144 of the Act was not warranted under the facts and circumstances of the case. Per contra , the ld. DR supported the orders of authorities below. 6. We have perused the records and heard the rival contentions. It is not disputed that assessee failed to produce books of account. It could not furnish various details called for by the AO. Assessee had filed its balance sheet and profit loss account along with the return of income. Once the assessee, despite notices, failed to produce books of account for verification, AO is left with no choice but to proceed with a best judgment as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free funds and interest bearing funds were both available, then a presumption would arise that loans were first given out of interest free funds. Reliance was also placed in the case of M/s. KBD Sugars Distilleries Ltd. v. ACIT, ITA Nos. 1362 1363/Bang/2011 dated 22.11.2013. 10. Per contra , ld. DR strongly supported the orders of authorities below and submitted that no presumption as argued by the ld. AR could be taken. According to him, Hon ble Punjab Haryana High Court in the case of CIT v. Abhishek Industries, 286 ITR 1, had taken a view that proportionate funding principle should be followed while construing interest disallowance relating to interest free loans given by the assessee. 11. Ad interim reply of the ld. AR was that the decision of Hon ble Punjab Haryana High Court in the case of Abhishek Industries (supra) was considered by the Hon ble Apex Court in the case of Munjal Sales Corporation v. CIT, 298 ITR 298 (SC) and the said decision stood overturned. 12. We have perused the orders and heard the rival contentions. Interest free funds available with assessee as on 31.3.2007 and 31.3.2008 were as under:- Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable to work-inprogress. As per AO, Section 145 of the Act required computing cost of stock including all expenditure. As per ld. AO, once the work-in-progress was completed and taken to the revenue account, corresponding material and interest costs could be allowed as expenditure. He considered 50% of the average work-in-progress of ₹ 23,85,53,685 as funded through interest bearing loans. According to ld. AO, interest ascribable to the sum of ₹ 11,92,76,842 at 15% p.a. came to ₹ 1,78,91,526. He disallowed the claim of interest to this extent and made an addition. 17. In appeal before the CIT(Appeals), argument of the assessee was that none of the work-in-progress was capital work-in-progress. As per assessee, it was undertaking road contract works. The work-in-progress and closing stock of ₹ 14,63,91,113, as per assessee, were held as part of its business. Argument of the assessee was that working capital loans taken and interest paid thereon could not be capitalized. Further contention of assessee was that closing stock of work-in-progress could not include interest cost, since work-in-progress represented its trading assets and not capital asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt location and condition. Costs of Purchase 7. The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. Costs of Conversion 8. The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour. 9. The allocation of fixed production ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usually not included in the cost of inventories. 21. It is clear from clause 12 of the Accounting Standards 2 that normal interest and borrowing costs cannot form part of cost of inventory. When an assessee is following method of valuation of inventory which is in accordance with the Accounting Standards prescribed by ICAI, in our opinion, Revenue cannot step into the shoes of assessee and foist on it a different method, unless there is a clear statutory edict allowing a departure from such accepted standards. We cannot say that assessee had understated its work-in-progress or inventory by not charging interest relating to working capital loan to its valuation. Assessee was well justified in considering interest as a period cost and debiting in its profit loss account. We do not find any merit in the additions made by the AO. As such, these additions are deleted and ground No.5 is allowed. 22. Vide its ground Nos.6 to 8, assessee is aggrieved on rejection of books of account and estimation of business income at 8% which was confirmed by the ld. CIT(Appeals). 23. AO, finding that assessee could not produce books of account and evidence in support of claim of expenditure, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR, in assessee s own case for preceding assessment years 2006-07 and 2007-08 where assessments were done u/s. 143(3), net profits were accepted at 1.7% and 2.21% on the contract receipts. Even if average of above was taken, as per ld. AR, it would much less than 8%. Thus, according to him, estimation of profit at 8% was not justified and it had to be scaled down. Reliance was placed on the judgment of jurisdictional High Court in the case of Deluxe Roadlines Pvt. Ltd. v. DCIT in ITA No.213 of 2014 dated 14.10.2014 . 26. Per contra , ld. DR submitted that AO had taken guidance from section 44AD for estimating profit at 8% of gross contract receipts. According to him, assessee had not brought out any details regarding its own income for earlier years neither raised any argument for accepting the rates of profits for earlier years before the lower authorities. Thus, according to him, estimation done by the AO was justified. 27. We have perused the record and heard the rival contentions. It has been not disputed by the Revenue that assessee s own assessments for the AYs 2006-07 and 2007-08 were completed u/s. 143(3) of the Act after scrutiny. As per assessee, the net profit ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal for fresh consideration in the light of the observations made above. In that view of the matter, the substantial question of law is answered in favour of the assessee and against the revenue and appeal is partly allowed. 28. What we find from the above judgment is that in the said case, assessment was completed u/s. 144 of the Act estimating the income of assessee at 8% as done here. The concerned assessee had failed to produce books of account. The CIT(A), on assessee s appeal, had reduced the net profit to 3% of the total turnover. This was reduced by the Tribunal to 2.5%. Their Lordships had held that such adhoc estimate was not warranted, when evidence in the nature of earlier returns filed by the assessee was available. Here in the case before us also, scrutiny assessments were done for AYs 2006-07 2007-08 and the net profit rate accepted were much lower than 8%. Submission is that such rates came to 1.7% for AY 2007-08 and 2.21% for AY 2006-07. We, therefore, set aside the orders of authorities below in so far as it relates to the estimation of profit and direct the AO to take the average of net profit of the above two years and apply it to the gross receipts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly proved that credits did not exist. Hence as per ld. DR, section 41(1) was correctly applied by AO. 34. Per contra , ld. AR submitted that liability remained in the books and had not ceased to exist. Further, as per ld. AR, Hon ble Allahabad High Court in the case of CIT v. Modern Rubber Industries [2013] 37 taxmann.com 394 (IT Appeal No. 431 of 2009 dated 7th November,2012) had held that once profits were estimated and assessment completed u/s. 144 of the Act, there was no question of making any addition on the ground of sundry creditors. 35. We have perused the orders and heard the rival contentions. AO in his remand report has stated that assessee was unable to give ledger extracts from the books of creditors for proving the credit. But this by itself would not show that liabilities had ceased to exist; when the liabilities were appearing in the books of account. AO had not issued any summons on the creditors or obtained any statements from them which would show that liabilities were not existing and had ceased. In any case, we find that assessment was completed u/s. 144 of the Act. When an assessment is completed u/s. 144 of the Act by applying the net profit rate on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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