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TMI Blog2019 (10) TMI 773X X X X Extracts X X X X X X X X Extracts X X X X ..... the Auditor has furnished unqualified Audit Report certifying the correctness in the accounts. (b)BECAUSE, the authorities below had taken the estimated rate of Gross Profit without considering the facts of the case, explanations furnished by the appellant and evidences as were brought on records during the course of hearing. (c) BECAUSE, in any view of the matter, rejection of accounts do not ispo facto gives rise to the jurisdiction to the 'AO' to make addition in the Gross Profit as fairly shown by the 'appellant' in the light of law laid down by the Hon'ble Rajasthan High Court in the case of CIT Vs Gotan Lime Khanij Udyog reported in (2002) 256 ITR 243(Raj.). 3. BECAUSE, the authorities below erred on facts in making and sustaining addition of Rs. 12,26,645/- on account of notional gain on foreign currency as income without considering the facts that the same is unrealizable and notional. 4. BECAUSE, the authorities below had fallen in error in disallowing prior period expenses amounting to Rs. 13,52,866/- and taxing prior period income without considering the normal prudence accounting system an erroneous interpretation of law and without appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion consumption, sales etc. of yarns has not been maintained by the assessee. 4. Valuation of stock is neither at cost or market price as can be seen from the above tables. 5. Perusal of the above chart reveals that average cost of yarns comes to Rs. 163.66 per kg, whereas the assessee is making sales @ 95.05. Cost of processed fabrics comes to Rs. 317.78 against the average sale prices of Rs. 257.94 per kg. On the facts and in the circumstances of the case as discussed above, Manufacturing/trading results as shown by the assessee cannot be accepted. Books of account are liable to be rejected under section 145(3) of Income Tax Act and sales have to be estimated by adopting appropriate G.P. rate. There is huge fall in G.P. rate as compared to immediately preceding year. This is a fact that cotton prices have increased substantially. Other reasons as stated by the assessee cannot be totally ignored. But the fact remain that the assessee is selling goods at prices lower than its cost. The assessee has also made sales of some items at prices lower thanits purchase price. There is nothing on record to snow the assessee had entered in long term contract to make sales at prices lowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking into account the GP rate disclosed by the assessee(appellant) in the previous assessment year as well as in the subsequent year and hence, I do not find any infirmity in estimation of profit by the AO and making the requisite addition of Rs. 7,31,07,000/- on account of showing low GP rate and, therefore, the addition of Rs. 7,31,07,000/- is confirmed and accordingly, ground no.1 is dismissed." 5. It was submitted that during the assessment proceedings, the assessee had produced the books of account consisting of audited balance sheet and tax audit report, cost audit report and other documents as called upon by the Assessing Officer and there is no reason for the Assessing Officer to reject the books of account. 5.1 Before the ld. CIT(A), the assessee had given point-wise rebuttal to the objection raised by the Assessing Officer. Said objections are forming part of the paper book. The ld. AR has summarized the same in the written submissions in para 6.10 to the following effect : 6.10 In fact, the observations of the assessing officer at Pg 7 are arbitrary, irrational and based on mis-appreciation of facts. The point was rebuttal of the same is hereunder: * It is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 145(3) by the Assessing Officer and secondly, even if there were alleged objections, those objections were duly answered by the Assessee the assessment proceedings as well as in remand proceedings. The ld. AR has taken us to the order passed by the ld. CIT (A) where the contentions of the assessee were duly noticed by the ld. CIT(A). Moreover, our attention was drawn to page 32 of the paper book (Annual Report) where the quantities, cost and value of raw material consumed for the assessment year 2007-08 were mentioned to the following effect : 6.1 It was further submitted that the assessee has been consistently following the same accounting method and there was no reason for the Assessing Officer to reject the books of account. Further, it was submitted that the conclusion of the Assessing Officer is wholly unsustainable. 6.2 It was submitted that on account of fall in GP ratio, the Assessing Officer is not empowered to invoke the provisions of section 145(3). It was submitted that no additions could be made on account of alleged defects pointed out by the Assessing Officer. The ld. AR has relied upon the following decisions : (i). CIT vs. UP State Food and Essential Commodi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30.01.2015. The assessee was failed to file any of these details. In absence of these details the genuineness of the trading result declared by the assessee co. could not be relied upon by the AO and this addition had been made. During the course of remand proceedings assessee co. furnished a detailed submission regarding addition on G.P. rate. It is worthwhile to mention here that AO has not indicated any discrepancy in the books of account, statutory audit report and also in tax audit report already placed on record. The AO has not rejected books of accounts u/s. 145(3) assumption basis applying G.P. Rate without finding any discrepancy in books of account. The assessee co. has maintained proper books of account and are audited under Companies Act and tax audit is also conducted as per the provisions of Income Tax Act. The company is also subject to cost audit and duly maintaining cost record in companies with Companies Act. The decision on this issue may be taken in the light of the above discussion." Submissions of DR 8. On the other hand, the ld. DR relies upon the orders of the lower authorities. It was submitted that the books of account were not maintained by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer has given following reasons for rejection of books of account as Fall in G.P. rate (page 3 of AO). The reasons for fall in GP rate were delineated on account of following reasons: (i). Increasing raw material price (ii). Decrease in sale price The Assessing Officer in tables A,B,C,D&E at page 5 to 7 has mentioned that the production of Gray Fabrics from yarn, production of garments from processed fabrics, cost of different raw material used, average sale price of different items sold by the assessee and average rate of opening and closing stock of different items are shown. After recording all this, the AO has rejected the books of accounts of the assessee. 10.1 The assessing officer had mentioned the reason for coming to the conclusion for increase in raw material by comparing the cost of purchase of raw material for the previous years. No other independent material was brought on record to show that the prices paid for the raw material was not prevalent in the market or there was interrelated party transaction by virtue of which the assessee had paid the higher price to the related party, thereby reduce the profit. Similarly for the decrease in sale price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ients as stipulated u/s. 145 (3) of the Act. 11. We may further mention that the basis of making the addition on the basis of G.P. is also unsustainable, as making the GP addition on the basis of earlier year or future year is not called for when the rejection of books of account was found to be unsustainable. As in the present case, we do not agree with the finding of the lower authorities with respect to the rejection of books of account and in consequence thereof, we have no hesitation to hold that the GP rate of 16% is also erroneous and liable to be set aside. We may further mention that in the similar circumstances, the remand report was submitted by the Assessing Officer for the assessment year 2012-13 and the ld. CIT(A) had deleted the addition of Rs. 82.68 crores based on the remand report of the Assessing Officer. 12. Books of Accounts maintained in regular course of business cannot be rejected unless there are strong and sufficient reasons to indicate that they are unreliable. Hon'ble Supreme Court in the case of Woodward Governor India Private Limited [(2009) 312 ITR 254 SC] = [TS-40-SC-2009-O] held that "...Accounts regularly maintained in the course of business ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order. The same is reproduced for the sake of convenience: "...The above findings were affirmed by the Tribunal vide order dated 29.4.2013, Annexure A.III with the following observations:- "8. We have considered the rival submissions carefully. We find that first of all the assessee is a concern wherein assessee was entitled to deduction under section 80IB of the Act @ 25% which would mean that effective tax rate would be 22.50% whereas the sister concern M/s Darshan Udyog is required to pay tax @ 30%, therefore, there was no incentive to make sales at lower rate. In any case, in the detailed submissions before the Assessing Officer and CIT(A) it demonstrated that practically no sales have been made to outside parties and therefore, comparison is not correct. In any case, the Hon'ble Supreme Court in the case of CIT v. Glaxo Smithkine Asia (P) Limited has clearly held that since there was no provision to make addition on account of receipts which are at less than the fair market value, therefore, such additions are not justified. In these circumstances, we find nothing wrong with the order of learned CIT(A) and we confirm the same...." 12.4 In view of the above and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year." 16. From the perusal of the above, it is clear that the ld. CIT(A) has directed the Assessing Officer to verify from the record whether any prior period income has been taxed in the year under consideration and if it was so then it should be excluded and added to the relevant assessment year after reopening the case for taxing the income of the prior period. In our considered opinion, the income and expenditure are required to be taxed in the year in which it was accrued and if the income is considered to be accrued in the year under consideration, may be relating to the prior period, then any expenditure laid out or expanded wholly and exclusively for the purpose of business is also required to be allowed in this year. In the present case, if we look into the computation of income, then it is clear that the assessee has not taken into account the prior period expenses in computation of income. As the assessee has not taken into account the prior period expenses for the purpose of computation of income, then there was no reason for the Assessing Officer to make disallowance of Rs. 13,52,866/-. In view of the above, the ground raised by the assessee is allowed, as there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2011 for the total consideration of Rs. 2.60 crores based on the cost of machine and rent of machines as placed at page 162 of the paper book. It was submitted that the above said amount received by the assessee was used by the assessee for reducing the block of asset in the assessment year 2010-11. 17.3 The ld. AR relies on the decision of Hon'ble Supreme Court in the case of CIT vs. Excel Industries Ltd., 358 ITR 295 (SC) and also in the matter of CIT vs. Goyal MG Gases (P) Ltd. 303 ITR 159 (Delhi). 18. On the other hand, the ld. DR has submitted that the assessee was following mercantile method of accounting and hence, the rent is required to be shown on accrual basis in the books of account. 19. We have heard the rival contentions and perused the records. The rent was payable by GIL on account of machines let out by the assessee and the said machines were given to GIL after taking consent from the Financial Institution to whom the machines were hypothecated. 19.1 In our view, if GIL was not liable to pay the rent, and that position of GIL was accepted by the assessee, then it was not required to be shown in the books of account. However, once the assessee is claimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic." However, when we look into the record, it is clear that the assessee has let out the machines on lease to GIL and the GIL was under legal obligation to pay yearly rent of Rs. 29.11 lacs. In our considered opinion, there is an obligation of GIL to pay rent to the assessee in terms of lease agreement and further it was under obligation to return back the assets leased to it by the assessee. Further the GIL while entering into amicable settlement had paid an amount of Rs. 2.60 crores towards the value of machines as well as for pending rent which clearly shows that the rental income of the assessee was not a hypothetical or imaginary income, but had accrued on account of use of industrial plant by GIL . Therefore, there was no error in the orders of the authorities below. 20. Ground No. 6 pertains to disallowance of claim of deferred revenue expenses to the extent of Rs. 19,67,582/- in respect of payment made to financial institution on restructuring of loans. The AO considered the disallowance on the ground that deferred revenue expenses are only allowable in terms of provi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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