9911796707
TMI Blog2012 (5) TMI 841X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out for cultivation of land. Further the decision of the Hon'ble ITAT in assessee's case has not been accepted by the Department and appeal U/S.260A of the I.T. Act has already been filed." 2.1 Both the sides agreed that this issue is identical to ground No.1(a) of the revenue in assessment year 2006-07 and 2007-08 in I.T.A.No. 129 and 1856/Ahd/2010 and in the present year also, this issue may be decided on similar lines. In those two years, this issue has been decided by the tribunal as per order dated 11.05.2012 in favour of the assessee as per para 12.2, which is reproduced below: "12.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the tribunal decision cited by the Ld. A.R. We find that the decision of Ld. CIT(A) is by following tribunal order in assessee's own case for the assessment year 2002-03, 2003-04 & 2004-05 and the Ld. D.R. could not show us as to how this tribunal decision is not applicable in the present year by pointing out any difference in facts and hence, under these facts, we do not find any reason to interfere in the order of Ld. CIT(A) on this issue. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), to this extent, these two judgements of Hon'ble Apex Court will not be applicable where the assessee has written back the liability but where assessee has not written back the liability in the books, Section 41(1) cannot be invoked as per these two judgments of Hon'ble Apex Court even after the insertion of Explanation (1) in Section 41(1). These two judgements of Hon'ble Apex Court will not be applicable where the assessee has written back the liability but where assessee has not written back the liability in the books, Section 41(1) cannot be invoked as per these two judgments of Hon'ble Apex Court even after the insertion of Explanation (1) to Section 41(1) of the Act. Since in the present case, assessee has not written back the liability in question, provisions of Section 41(1) cannot be invoked and hence, we decline to interfere in the order of Ld. CIT(A) on this issue. Ground No.1(d) of the assessment year 2006-07 and ground No.1(c) for assessment year 2007-08 are rejected." 2.2.2 Since no difference in the facts could be pointed out buy the Ld. D.R., this issue is decided in favour of the assessee in the present year also by respectfully following the tribunal order in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses. 2.4 Ground No.4 is as under: "[4] On the facts and circumstances of the case and in law, the Ld. CIT(A)-I, Surat has erred in deleting the addition of ₹ 4,95,000/- made on account of unexplained creditors without appreciating the fact the assessee failed to discharge the onus cast upon it to prove the genuineness of the creditors." 2.4.1 Regarding his issue, it was agreed by both the side that similar issue was raised by the revenue in earlier two years i.e. assessment year 2006-07 and 2007-08 as per ground 1(d) and 1(c) respectively and therefore, in the present year also, this issue may be decided on similar lines. In those two years, this issue was decided by the tribunal in favour of assessee as per para 15.2 of the tribunal order of earlier two years which is reproduced below: "15.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that this is an admitted fact in both these years that in the books of the assessee, the amount in question is shown as liability and it was not written back by the assessee by way of credit to the P & L account. In the light of these facts, when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iffered revenue expenditure, without appreciating the fact that the expenses incurred were for enduring benefits and can not be claimed in a single year. Further, the Ld. CIT(A) has not appreciated the fact that decision of Hon'ble ITAT is not accepted by the Department and appeal U/S.260A of the I.T. Act is filed." 2.5.1 It was submitted by the Ld. D.R. that this is new issue in the present year. He supported the assessment order whereas Ld. A.R. of the assessee supported the order of Ld. CIT(A). He further submitted that Ld. CIT(A) has followed the tribunal order in assessee's own case for the assessment year 2005-06. Relevant para of the tribunal order was reproduced by Ld. CIT(A) in his order. 2.5.2 We have considered the rival submission, perused the material on record and have gone through the orders of authorities below. We find that this issue was decided by Ld. CIT(A) by following the tribunal order in assessee's own case for the assessment year 2005-06. No difference in the facts in the present year could be pointed out by Ld. D.R. and hence, we do not find any reason to take a contrary view in the present year. By respectfully following the tribunal order in assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the circumstances of the case and in law, Commissioner of Income Tax (Appeals)-1 Surat erred in :- 2.0 Upholding the disallowance of ₹ 315000 and in not appreciating that the said expenditure was incurred wholly and exclusively for the purposes of business and that these were not related to agricultural activities. 3.0 Upholding the disallowance of ₹ 1613897 without appreciating that the said expenditure was fully allowable in the year under consideration. 4.0 Upholding an addition of ₹ 1296788 by making reference to Sec.145A and in not appreciating that the figure of ₹ 33375312 since represents Excise Duty on closing stock of raw materials the same is not comparable with ₹ 34672100 which represents the closing balance of Modvat Recoverable and that in view of appellants facts / ICWA's guidance Note, Sec.145A has no impact on the profit as shown in the Profit & Loss Account 5.0 Without prejudice to Ground No.4.0 above, and the fact that ₹ 1296788 addition has been confirmed by CIT(A), being contested by the appellant, not directing the Assessing Officer that the Opening Stock on the first day of the previous year relevant to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61. In support of this contention, reliance was placed on the following decisions: (a) CIT Vs Chetan Chemicals (P) Ltd. 267 ITR 770 (Guj.) (b) Logitronics P. Ltd. Vs CIT 333 ITR 386 (Del.) (c) Iskraemeco Regent Ltd. Vs CIT 331 ITR 317 (Mad.) 3.3.2 He further submitted that even if loan was obtained by the assessee for purchase of fixed assets, waiver of this loan cannot result into reduction in the book value of the fixed assets because cost of fixed assets once determined in accordance with law, cannot undergo a change mainly because of loan borrowed for this purpose is partly waived off by the lender. In support of this contention, reliance was placed on the following three judgements: (a) CIT Vs Tata Iron and Steel co. Ltd. 231 ITR 285 (S.C.) (b) CIT Vs Cochin Co.(P) Ltd. 184 ITR 230 (Ker.) (c) Steelco Gujarat Ltd. Vs ACIT 33 SOT 437 (Ahd.) 3.3.3 He further submitted that the amount of waiver of loan, in relation to working capital loan cannot be regarded as income and in support of this contention, reliance was placed on the tribunal decision of Ahmedabad bench of the Tribunal rendered in the case of Steelco Gujarat Ltd. Vs ACIT as reported in 33 SOT 437 (Ahd.). R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case are different and, therefore this tribunal decision is not directly applicable in the present case. 3.3.5 Now, we consider the applicability of various judgements cited by the Ld. A.R. with regard to reduction of waiver of loan amount form the cost of fixed assets. The main judgment cited by the Ld. A.R. is the judgement of Hon'ble apex Court rendered in the case of Tata Iron & Steel Co. (supra). In that case, the issue before the Hon'ble Apex Court was as to whether the gain in respect of fluctuation in the rates of foreign exchange while repaying the installments of foreign loan will reduce the actual cost of asset for the purpose of computation of depreciation and similarly whether the loss from the fluctuation in the rates of foreign exchange after excluding the payment attributable to the interest will go to increase the actual cost of depreciable asset. Under these facts, it was held by the Hon'ble Apex Court that it is difficult to understand as to how, the manner of repayment of loan can effect the cost of asset acquired by the assessee. The relevant par of this judgement is reproduced below: "Coming to the question raised, we find it difficult to follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961. Regarding Section 41(1), we would like to observe that only this portion of rebate allowed by the lender can be brought to tax in the year when liability ceases to exist which was earlier allowed by the A.O. as a deduction while computing taxable income of the assessee. In respect of this, no finding is given by the A.O. that any portion of waiver allowed by the lender is in respect of interest portion on such loan. He has proceeded to make the addition on this basis that the loan in question was used by the assessee for purchasing the fixed assets and on such fixed assets, assessee claimed deduction in the form of depreciation and, therefore, this waiver by the lender can be indirectly treated as trading liability and accordingly, it can be taxed u/s 41(1) of the Income tax Act, 1961.We do not find any merit in this contention of the A.O. because depreciation was allowed on the cost of the fixed asset and as per the judgment of Hon'ble Apex Court rendered in the case of Tata Iron & Steel Co. (supra), remission in the loan amount cannot go to reduce the value of the fixed asset for the purpose of computation of depreciation allowable to the assessee. Hence, it cannot be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure or trading liability which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed to be the profits and gains of business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. In the facts of the case on hand, without entering into the aspect as to whether the liability to repay the loans would be a trading liability or not, it is an admitted position that there had been no allowance or deduction in any of the preceding years and, hence, there is no question of applying the provision as such. Section 28 of the Act deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under the head "Profits and gains of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Proceeding to enhance appellant income by ₹ 44,95,37,000 and in ignoring appellant's submission read with Statutory Auditors clarification / figures recorded in Certificate dtd.30.06.2011, making wrong observations inter-alia relating to account maintenance, back dating of records, month-wise figures and Gross Profit figures & Ratios." 3.4.1 Brief facts of the case are that it is noted by Ld. CIT(A) in para 15 of his order that on going through the records of the assessee company during appellate proceedings, it was noted that there was fall in GP in the present year for which no proper explanation was furnished by the assessee. Ld. CIT(A) issued letter dated 11.03.2011 to the assessee asking the assessee to furnish year-wise yield and weight showing consumption of raw material in quantity and production of finished goods in quantity for all the three units. Assessee was also asked to furnish the number of units of electricity consumed. He also asked the assessee to indicate the GP margin for the last three years in respect of all the three units. In reply, the assessee submitted before him the yield percentage of two units i.e. CPM and JKPM units. It was submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.2011 in respect of JKPM unit. In reply to this show cause notice, assessee furnished a certificate form the auditor M/s. Lodha & Co. Chartered Accountants, in which they have certified that if the yield % is computed for JKPM unit on net weight basis by excluding moisture content, as per the record available and explanation made, the figures would have been 87218 ADMT. Ld. CIT(A) observed that the auditor's certificate is not reliable because it is based on the explanation given by the management and they do not mention to have fully checked the primary records. Ld. CIT(A) rejected the books of account and increased the GP percentage by 5% by adopting average GP for the last 5 years. In this manner, he made addition of ₹ 4495.37 lacs as against originally proposed by him of ₹ 139 crores. Now, the assessee is in appeal before us. 3.4.3 Regarding ground no.1 challenging jurisdiction of Ld. CIT(A), it was submitted by the Ld. A.R. that enhancement notice given by Ld. CIT(A) is not within his powers because this issue was not discussed by the A.O. and, therefore, he has given this enhancement notice for a new source of income which is beyond his jurisdiction and in suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aintained, why they were not produced. Under these facts, it was held by Hon'ble Delhi High Court that this action of Ld. A.R. is of taxability of income for a new source of income and it has not been considered by the A.O. and so, the jurisdiction to decide with the same in appropriate case may be dealt with u/s147/148 of the Income tax Act, 1961 or under Section 263 of the Income tax Act, 1961 if requisite conditions are fulfilled. It was also held that in the presence of such specific provision, a similar power is not available to the 1st appellate authority. In the present case, no new source of income is being examined by Ld. CIT(A) as in that case, when he wanted to examine the source of finance for making purchases, which was never subject matter before the A.O. Hence, this judgement of Hon'ble Delhi High Court is not applicable in the facts of the present case. 3.4.6 Now, we examine the judgement of Hon'ble Apex Court cited by Ld. D.R. having been rendered in the case of Nirbheyram Daluram (supra). In that case, it was held by the Hon'ble Apex Court that the Hon'ble High Court was in error in holding that the appellate powers conferred to the AAC u/s 251 was confined to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 - ENHANCEMENT OF INCOME BY ₹ 44,95.37.000 ASSESSEE'S APPEAL - ITA NO.2262 / Ahd-2011 ASSESSMENT YEAR 2008-09 The ground under appeal arises from CIT(A)'s order dtd.08.07.2011 and the relevant observations / findings etc starts from Para 15 at Page 31 and ends at Page 44(Second Para). In the hearing before the Hon'ble Tribunal on 27.04.2012 assessee's counsel had made detailed submissions to substantiate for allowing relief which was objected by Ld.Sr.DR in the submissions made at the time of hearing. The submissions made by Ld.Sr.DR stands included in the written submissions (WS) filed and the Hon'ble Tribunal agreed to assessee's counsel prayer for filing a rejoinder to the points made by Ld.Sr.DR. It is in this background that this note has been made and before making further submissions the following needs to be highlighted:- 1. CIT(A)'s relevant paras which deals with this issue have been typed below in this font 2. Assessee's observations / comments / submissions have been given after each observations / findings of CIT(A) in this font. Rejoinder to the Ld.Sr.DR points has been covered at the appropriate place since this mainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an improvement by 0.42% as would be seen in following paras) The appellant was asked to explain the reasons for decline. In response to above query, a letter dated 23.06.2011 was filed which is reproduced hereafter-Further to the discussion we had with you on last date of hearing, information / documents asked are being submitted as under:- 1. Chart(s) giving figures of Raw Materials consumed, Finished Goods Produced & Yield in respect of each of our unit named Central Pulp Mills (CPM) and JK Paper Mills (JKPM) for the relevant years (Year wise & Month wise) is enclosed (Annex A-1 & B-1). In these Chart(s) it would be observed that our CPM unit, there is no decline in Yield. However, in JKPM unit, the yield for Asstt. Year 2008- 09 is lower than yield for Asstt. Year 2007-08. The reasons for decline in yield are broadly due to following:- (i) More Moisture in the Bamboo which is one of the Raw Material for production of Fiber through which paper of different quality are being produced. (ii) More bark in the Bamboo which has no use while making fiber for paper product. (iii) Thin material which did not produce any fiber as the same has been lost during the process of coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich has been referred by CIT(A) in the subsequent Par as. In view of this the above referred chart (Yield column excluded) has to be read as under:- Asstt Year Gross /Net Raw Material Consumed Finished goods Paper & Board production Bamboo Hardwoo d Pulp & Others Total 2004-05 Qty/MT Qty/MT Qty/MT Qty/MT Qty/MT Qty/MT MT (Gross) 78693 337326 653 416672 109838 2005-06 MT (Gross) 81596 320888 61 402545 123683 2006-07 ADMT(Net) 60045 233365 - 293410 112803 2007-08 ADMT(Net) 77255 239325 - 316580 122240 2008-09 MT(Gross) 100135 295282 12 395429 121363 At this stage it is important to highlight some of the important points which are as under:- 1. The term ADMT (Air Dried Metric Ton) is used worldwide for material balance and accounting purpose. This is to bring uniformity in material management system. Raw-material (With moistures) is called on Gross Basis Reporting raw-material consumption figures in the Accounts could be either on ADMT or on Gross. The appellant has been following since last two years ADMT basis which was adopted while reporting the figures of its CPM unit. The respective units of the appellant company reports raw-ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld of 2 years, month wise figures not reproduced here] (5) As per Annex F the appellant has given gross profit ratio of JKPM unit for the last three years as under:- SN Particulars Assessment Year 2006-07 2007-08 2008-09 A. Sale Lac/Rs. Lac/Rs. Lac/Rs. 56987.96 65604.25 66554.94 B. 1. Other Direct Expenses (299.80) 464.06 62.72 2. Stock Variation Manufacturing Expenses 33399.69 39377.32 40697.28 Total ( 1 to 2) 33099.89 39841.38 40760.00 C. Gross Profit (A-B) 23888.07 25762.87 25794.94 D. Gross Profit Ratio (C/A*100) 41.92% 39.27% 38.76% [CPM Unit figures of GP Ratio submitted to CIT(A) are 39.20% for Asstt Year 2006-07, 37.44%forAsstt Year 2007-08 and 34.67% of Asstt Year 2008-09 though are lower than JKPM GP Ratio have been accepted by CIT(A) in his Order. The CPM Unit GP Ratio figures were submitted vide Annex. F-l of letter dtd.23.06.2011 and the relevant portion is as under:- SN Particulars Assessment Year 2006-07 2007-08 2008-09 D. Gross Profit Ratio (C/A *100) Lac/Rs. Lac/Rs. Lac/Rs. 39.20% 37.44% 34.67% 6) During the course of hearing by order sheet entry dated 23.06.2011 appellant company was asked to show cause [Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is also a factual observation which has been ignored by CIT(A) in his order] 1.6 On the basis of above, we are enclosing a chart showing calculation of yearly and month-wise yield (Annex A-1 & Annex. A-2). [This statement clearly records "The month-wise consumption of raw material, production of finished goods and yield has been computed / apportioned on the basis of yearly yield". In view of this note, comparison of any yield percentage for any purpose is not warranted and in any case the actual yield gets disclosed in the annual yield which stood at 39.03% in the year under appeal as compared to 38.61% in the immediately preceding year] Along with the said letter the appellant has filed revised statement of unit wise raw material consumed, finished goods produced and yield which is reproduced below:- Asstt Year Measurement of qty of raw material Raw Material Consumed Finished goods Paper & Board production Yield Bamboo Hardwood Pulp & Others Total 2004-05 MT (Gross) Qty/MT QTY/MT Qty/MT Qty/MT Qty/MT % 78689 337316 653 416658 109838 26.40 2005-06 MT (Gross) 81584 320865 61 402510 123683 30.73 2006-07 ADMT(Net) 60045 233365 23941 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of consumption as given in the audit report and vide letter dated 2:3.06.2011 and 28.06.2011 differs as shown in the following chart:- Asstt Year As per letter dtd.23.06.2011 As per letter dtd.28. 06.2011 Consumption as per Audit Report Unit-CPM Unit-JKPM Total Unit-CPM Unit-JKPM Total 2004-05 108574 78693 187267 108574 78689 187263 Not available 2005-06 95650 81596 177246 95650 81584 177234 Not available 2006-07 84778 60045 144823 84778 60045 144823 L Not available 2007-08 97025 77255 174280 97025 77255 174280 174280 2008-09 95518 100135 195656 95518 87218 182736 195653 [The difference in change of the figures from 100135 MT to 87218 MT is bound to be there since the former is Gross MT while later is Net MT; This aspect has been earlier clarified and would also be dealt in the subsequent paras] (11) During the course of hearing at the request of Shri Vinit Marwaha a telephonic conversation with Shri Vishwajit Deb, GM of JKPM in the presence of Shri Vinit Marwaha was held. The relevant conversation was written in the order sheet which was confirmed and signed by Shri Vinit Marwaha is reproduced below:- "Telephonic convers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... high as 38.76% (Was 39.27% in immediately preceding year) and even higher than its CPM unit which was 34.67% and has been accepted by CIT(A)] of this year. You may like to give reasons with evidences for this shortfall in G.P. If your are giving any auditor certificate [Authors Certificate was submitted with all the primary evidence / records] it must be supported by primary evidence which will be seen by the undersigned. Give your submission by 4.7.2011". On 04.07.2011, the appellant filed auditor's certificate regarding raw material consumption:- TO WHOM SO EVER IT MAY CONCERN We, Lodha & Co., Chartered Accountants, the Statutory Auditors of JK Paper Mills, Rayagada (A Unit of JK Paper Ltd) have been asked by the Company to comment / certify on Note No. 31 appearing under Schedule 20 of the Signed Accounts dtd.11.09.2008 for Financial Year 2007-08 (Being the previous year relevant to the Assessment Year 2008-09 which also shows figures of the immediately preceding year i.e. Financial Year 2006-07 (Being the previous year relevant to the Assessment Year 2007- 08) which are as under:- The particulars of raw-material consumed reported in Note No.31 of Schedule 20 of F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mption of 195653 MT (100135 of JKPM + 955189 CPM) is shown by auditors on gross weight basis and not the net weight. [Yes, this is correct since the figure of 100135 MT is gross weight]. Thus, corresponding figure for A.Y. 2006-07 of 174280 MT has to be necessarily of gross weight and not net weight. (Not necessary and actually also it is not. The figure of 195653 MT includes 100135 MT which is on gross basis and the figure of 174280 MT includes JKPM Unit 77255 MT which is on Net basis). Secondly, the auditors have relied on the explanation given by Management that the figure of Gross weight of Bamboo for JKPM Unit is 100135 MT and net weight is 87218 MT (Para 2 of auditor's certificate). They do not mention to have fully checked the primary records. [The certificate has been given by the statutory auditors and its contents have to be accepted unless some mistakes are pointed out in the impugned order which has not been found. Auditors have their own basis / records to certify correctness of the figures and the figures so reported / certified are as per the records of the appellant.] [Admittedly, the figures reported in the Annual Accounts warrants revision in several inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coming into the factory premises. It is like a job card which necessarily records all the factual aspects in the same sheet irrespective of the fact that the job is carried out either on the same day of days after the job to be done was recorded in the said card. Therefore, it is incorrect to say that there was any back date entries which was clearly highlighted / clarified in the personal hearing before CIT(A) by the operating persons], The appellant was asked to produce the records for Feb and March of 2007. However, the appellant did not produce it. The appellant also could not explain whether gross and net weight is entered in stock register or it remains only on stray working sheet. [Not only the relevant records were produced but the appellant offered that the Department may depute Sr. Officers to understand the system, procedures, voluminous / detailed records being maintained by the appellant and this was offer in writing the contents on which is attached - Annexed. 'A'. CIT(A) did not consider it appropriate to take this route for checking neither the offer so made has been recorded in the impugned order] (14) In view of the above, it is clear that appellant had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis. The comparative figures so given are reproduced in para - 10 above. The figure itself shows that the adjustment upto 10% of moisture is never reflected correctly in the figure arrived at for ADMT. There are wide variations. It can be seen from the chart in para 10 above that the variation is ranging from (+) 12.49% to (-) 44.81% for which there is no explanation. It will be seen that in the month of April the reduction is 23.44%, whereas in September it is 2.27%. In February it is 44.81% and in March there is surplus of 12.49%. Thus, the logic of adjustment of moisture up to 10% itself is incorrect. Even appellant has not explained with supporting evidence to justify its claim of gross basis and ADMT consumption given into two different letter referred supra. It is also noticed that in the letter dated 23rd June, 2011 the appellant has firstly accepted [This acceptance has to be ignored since on looking into the voluminous record it was noticed that lower yield in JKPM Unit was appearing on wrong comparison of 2 years figures i.e. for A.Y.2007-08 figures which were on Net basis was being compared with the A. Y.2008-09 figures which are on gross basis. Once this anomaly was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of JKPM unit has declined as referred supra. [Appellant had placed the facts before CIT(A) alongwith supporting records / auditors certificate and irrespective of the days taken to clarify the same the facts have to be accepted] The explanation of appellant company in short span of 5 days has changed & contradicts itself and all the reasons & revised figures submitted for consumption & yield are without any supporting evidences. It is further observed that even in telephonic conversation with Shri Bishwajit Deb, DGM in presence of Shri Vinit Marwaha, it has been explained that when truck comes, gross weight of Bamboo is taken and after 4-5 bamboos are picked up sample basis and test is carried out to ascertain whereas in its reply dtd 28th June 2011, only one day before, it was explained that all the raw materials are converted into a common determinant by a process is also contradictory and suggest that a make believe misleading story [This observation is contrary from the facts emerging from the appellants records] has been developed by the appellant company to hide concealed yield as well as concealed income. [In view of detailed submission this finding is incorrect] Furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not supported with books. However, it is to be noted that ultimately, lower yield goes to reduce the GP and suppress the real income. Therefore, a specific show cause was given as to why the GP of the Company be not enhanced by 5% to make it in line with Company's average GP for the last five years. The appellant again gave very general arguments in defence of low GP in this year. Having regard to the facts that there are vital defects in the books of appellant and also the appellant failed to furnish quantitative records of raw materials consumed, it is categorically held that books of account maintained by appellant do not give full and true picture of its income and, therefore, the same is being rejected by invoking the provisions of Sec. 145(3). [In view of detailed submissions made to each observation, the action of CIT(A) for rejecting Books of Account is totally unwarranted.] [At the time of hearing before the Hon'ble Bench Assessee's counsel had submitted that though there is no case for rejecting Books of Account by invoking Se.145 but Ld.CIT(A) has not been fair enough in comparing the yield for the 2 years i.e. for the year under appeal and for the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further found that the assessee showed a G.P. Rate 37.43 % for the current year in his books of account whereas the average of last five years of G.F. rate is 42.39 %. The assessee stated that there is fall in the yield because in the current year the yield was measured on gross basis (M.T.) whereas for the immediately proceedings year i.e. A.Y. 2007-08 the same was measured and submitted on ADMT basis i.e. net basis and if this is considered than the current year yield would amount to 39.03 % on ADMT basis and hence there is no decrease. The assessee filed a certificate from the Chartered Accountant in this regard before the CIT(A) vide letter dated 04.07.2011. 1.12 The CIT(A) did not accept the above explanation for the following reasons (Please see the discussion from page 39 to page 44 of his order):- 1. The Auditor's certificate is of no help in the matter. Auditors say in his certificate that reporting of consumption of bamboo in F.Y. 2006-07 is on net basis, but the fact is to the contrary. In F.Y. 2007-08, the gross bamboo consumption of 195653 M.T. (100135 of JKPM + 955189 CPM) is shown by the auditor on gross weight basis and not on net basis. Thus the corresponding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on gross basis and ADMT basis. This clearly shows that the adjustment upto 10 % of moisture is never reflected correctly in the figure arrived at for ADMT. There are vide variation. It can be seen from the chart in para 10 page 36 of the CIT(A) order that the variation is ranging from (+) 12.49 % to (-) 44.81 % for which no explanation has been given by the assessee. The CIT(A) further stated that in the month of April the reduction is 23.44 % whereas in September it is 2.27 %. In February it is 44.81 % and there is March surplus of 12.49 %. Thus, the logic of adjustment of moisture upto 10 % itself is incorrect. The appellant has failed to explain or justify its claim of gross basis and ADMT consumption with supporting evidence. 4. Vide letter dated 23.06.2011 (page 41 of CIT(A) order) the appellant had accepted that there was decline in the yield due to the following reasons:- (i) More moisture in the bamboo which is one of the raw material. (ii) More bark in bamboo which is of no use for making paper. (iii) Thin material which did not produce any fiber is lost in the process. (iv) Higher Yard which has been used first while making fiber for paper product. Since, last year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the appellant. The CIT(A) stated that the assessee has failed to explain the reduction in the yield as well as fall in G.F. rate. The above fatal defects of back dating the records show that the books of accounts cannot be relied upon. The G.P. rate is current year is 37.43 % as against the average gross profit rate of last five years being 42.39 %. In view of this reasons CIT(A) held that the books of accounts prepared and maintained by the appellant do not show true and fair picture of income and he therefore rejected the books of accounts u/s. 145. He, thereafter, adopted the G.P. rate of 42 % and made the addition of ₹ 44,95,37,0007-. From the above it can be seen that the CIT(A) has rejected the books of accounts because of major defects of books of accounts and also failure in explaining the fall in the yield with supporting evidences. The assessee has also failed in explaining the fall in G.P. rate with supporting evidence. The legal position in respect of rejection of books of accounts and making the addition on account of low G.P. rate is supported by the following decisions of Supreme Court and Allahabad High Court- S.N. Namasivayam Chettiar [19601 38 ITR 579 (SO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for other materials purchased by the appellant, which were ground into powder, turned into fodder, packed in different sizes and then sold. It was not possible, according to the Tribunal, to accept the books of account, where the turnover was as large as about seventeen lakhs of rupees, without a quantitative tally; (3) a fairly big sum of money was alleged to have been paid towards purchasing of licenses for export from India; and ₹ 19,000 worth of purchases were made in Titticorin when only a small sum of money in cash was shown in the assessee's account; (4) several outsiders' cheques had been entered in the accounts of the assessee without any proof as to why those cheques were paid to the assessee; and (5) a fairly big sum of money had been invested in India in the purchase of property without money being received form Colombo. After giving this finding the Tribunal accepted the turnover as shown in the appellant's books. In making the computation of profits, the Tribunal took into consideration the following matters: that the export of food grains from India was prohibited except under a licence, that there was an acute shortage of cattle fodder in Ceylon a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of ₹ 78,350 for the assessment year 1954-55, The ITO in his assessment order, did not accept the trading accounts on the ground that the profits disclosed in comparison with the earlier years were too low and there were no day-today stock details for the purpose of verification and there was small withdrawals for personal expenditure in the partners' accounts, and accordingly made addition. On appeal the AAC deleted the addition of ₹ 75,000, but as the closing stock of certain goods was under valued to the tune of ₹ 4,490, he only allowed a deduction of ₹ 70,510. On revenue's appeal, the Tribunal upheld the addition made in assessees income. On reference, the High Court upheld (fie order of the Tribunal. On appeal to the Supreme Court: HELD Regarding the finding of the Appellate Tribunal that the income, profits and gains could not properly be deduced from the method of accounting employed by the assessee reasons given by the Tribunal was that the assessee was doing business in the main on wholesale basis and there, should have been no difficulty in tallying quantities in respect of major items of trading account. That certainly was a rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness carried on by the assessee. It was difficult to catalogue the various types of defects in the account books of an assessee which might render rejection of account books on the ground that the accounts were not complete or correct from which the correct profits could not be deduced Whether presence or absence of stock register is material or not, would depend upon the type of the business. It is true that absence of stock register or cash memos in a given situation might not per se lead to an inference that accounts were false or incomplete. However, where a stock register, cash memos, etc., coupled with other factors like vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, it may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee. In such a situation the authorities would be justified to reject the account books under section 145(2) and to make the assessment in the manner contemplated in those provisions. Taking all these aspects and the material into consideration, the Tribunal had found as a fact that the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Thus, there was no force in the instant appeal and the same was to be dismissed accordingly. [Para 11] In view of the above factual and legal position, these grounds of appeals may kindly be dismissed and the enhancement of income may kindly be sustained." 3.5.2 After going through these submissions from both the sides and after going through the order of ld. CIT(A) and other material available on record, we find that initially, the objection of the Ld. CIT(A) was that the yield percentage reported by the assessee in respect of JKPM unit is on the lesser side by 7.92% in the present year being 30.69% as against 38.61% in the preceding year. He issued first show cause notice to the assessee on 26.03.2011 asking the assessee to show cause as to why the yield in respect of JKPM unit not be enhanced by 8% resulting in addition of about ₹ 139 crores. In reply, various submissions were made by the assessee including furbishing auditor's certificate in respect of JKPM unit in which it was certified by the auditors that the quantity of raw material consumption of JKPM unit for this year was reported on gross basis whereas the same for CPM unit was reported on net basis. It was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the column of net weight, net weight is entered afterwards on the basis of testing report, it cannot be said that the record is not maintained by the assessee on real time basis and there is defect in the maintaining of such record and books of account. Moreover, the net weight factor is only for the purpose to monitor the yield percentage for the purpose of effective control of management because different lots of raw material have, different level of moisture content, yield percentage cannot be effectively controlled if raw material consumption quantity is not uniform. The raw material quantity can be uniform only if the same is on the basis of uniform moisture content in the quantity of raw material. No doubt, there is a mistake committed by the auditors as well as by the company management in reporting of consumption quantity of raw material of JKPM unit on gross basis in the present year whereas, the consumption quantity of CPM unit for the present year was reported on ADMT basis and consumption quantity of both the units for the preceding year was reported on ADMT basis and because of this mistake, the yield percentage of this year in respect of JKPM unit is lesser as comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of around 2-3% in the preceding year i.e. in assessment year 2007-08 was accepted by the revenue and comparing to this in the present year, the fall in GP rate of JKPM unit where there is allegation of fall in yield is almost negligible because the GP rate reported for this unit for the present year is 38.76% as against 39.27% reported in assessment year 2007-08. The fall in GP rate in the present year for CPM unit is more than fall in GP rate for JKPM unit because for CPM unit, GP rate is reported @ 34.67% as against 37.44% for the same unit in assessment year 2007-08. It means, there is a fall in GP of this unit of around 3% in the present year although there is no allegation for this unit regarding any fall in the yield percentage. These working of unit wise G.P. for the present year and the preceding year show that the alleged fall in yield percentage of JKPM unit is not found reflected in fall of GP percentage in the present year of JKPM unit and CPM unit. In JKPM unit there is allegation of fall in yield percentage of around 8% but the fall in GP percentage is only marginal around 0.51% whereas for CPM unit, where there is no allegation of fall in the yield percentage, fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion we are of the considered opinion that in these facts and circumstances of the present case, the action of Ld. CIT(A) for rejecting the book records itself is not justified because his only basis is that there is fall in yield percentage of JKPM unit but even he was also not sure about this objection after various explanations were furnished by the assessee along with auditors certificate and, therefore, he did not make the addition on the basis of fall in yield percentage which was proposed by him earlier to the extent of 139 crores and he finally proceeded to make addition on the basis of fall in GP percentage. For this purpose also, instead of comparing the GP with the immediately preceding year, he has taken average of last five years and on this basis, he made addition of only ₹ 44.95 crores. The basis of Ld. CIT(A) is as noted by him on page 43 of his order that ultimately lower yield goes to reduce GP and suppress the real income but this is not coming out from the figure of alleged fall in yield of JKPM unit and fall in GP percentage of this unit and CPM unit. We have seen that the allegation regarding fall in yield percentage of JKPM unit is this that the fall in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt year, opening stock has to be increased by the same amount. In the present case, no such direction is given by Ld. CIT(A) to increase opening stock of the next year although he is giving reason for making GP addition that low yield results into lower GP. This allegation that low yield resulted into low GP is not supported by the fact as discussed above and moreover, even if it is a fact, then the effective addition is on account of low yield and in the absence of any allegation regarding bogus purchases or out of books sales, effective addition in that case will be on account of increase in closing stock and as a result, opening stock has to be increased in the next year. No such direction is given by Ld. CIT(A) in this regard. It was also submitted before us in the course of hearing that in the next year also, the assessment is completed by the A.O. u/s 143(3) and no deduction was allowed by the A.O. in respect of increase in opening stock of that year to the extent of addition made by Ld. CIT(A) in the present year. Although this cannot be a basis to delete the addition in the present year and we are deleting the same for other reasons as discussed above but this factor also s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and, therefore, even if this figure of March is rectified after due examination of mistake in calculation, it will result into increase of yield and not decrease of the yield and, therefore, on account of this mistake in calculation in the month of March, no adverse inference is called for. 3.5.6 Apart form this, reliance has been placed by the Ld. D.R. on various judicial pronouncements in support of this contention that rejection of books of account and addition on account of low GP can be made even in those cases where there is fall in GP. We have already seen that rejection of books of account in the present year by Ld. CIT(A) is not proper because in our considered opinion, the assessee has satisfactorily explained the fall in yield with supporting evidence in the form of auditors certificate and production of register before Ld. CIT(A) in respect of Augusts 2007 and no defect could be pointed out by Ld. CIT(A) in the auditor's certificate and in the register for August 2007 except the objections that auditors certificate is not on the basis of actual examination of records but only on the basis of submissions of the management of the assessee and register for August 2007 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether there was bogus purchases, it was finding of fact that there was no need to interfere with the same in that case and regarding the rejection of books, cogent reason had been given by the income tax authorities for doing so and there was no reason to take a different view. In the present case, we have seen that there is no allegation regarding any bogus purchase and no cogent reasons are given by Ld. CIT(A) in the present case for rejection of books of account and, therefore, this judgment of Hon'ble Apex Court is also not applicable in the present case. 3.5.8 As per above discussion, we have seen that Ld. D.R. could not satisfy us as to why the order of Ld. CIT(A) should be sustained. We have seen as per above discussion that the basis adopted by Ld. CIT(A) for rejecting the books of accounts i.e. fall in yield percentage of JKPM unit itself was not existing because the fall in yield is satisfactorily explained by the assessee along with independent evidence in the form of auditors certificate in which no valid defect could be pointed out by Ld. CIT(A) or by Ld. D.R. and the same was also supported by the register for the month of august 2007 in which also no acceptable defe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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