9911796707
TMI Blog2023 (8) TMI 963X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-2014 declaring total income at Rs. 24,96,784/-. During security assessment, the Assessing Officer noticed that the closing stock of raw material as on 31-03-2014 was of Rs. 23,77,400/- as compared to closing stock of Rs. 59,58,140/-. In Form 3CA, the Chartered Accountant has mentioned that the assessee company was engaged mainly in rendering overhauling and repairing service of power generation transformers and it had not maintained detailed records of inventory, therefore it was not possible to verify the consumption of stock and closing stock, etc. Therefore the A.O. issued a show cause notice requiring the assessee to submit the details of month-wise purchases and sales in terms of quantity, rate and opening as well as closing stock of each item. The assessee did not responded to the above notice, therefore a second show cause notice was issued by the Assessing Officer specifically pointing out that after excluding other sources of income of Rs. 48,57,180/-, there was a loss from the business activities, why the book result be not rejected u/s. 145(3) and assessment be not finalized u/s. 144 of the Act. 3. In response, the assessee submitted that the business operations are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of job, number of jobs depends on the wear and tear of transformer. Thus the assessee to keep team of workers for whole the year, whether work is there or not. Even there is always keen competition to get the repairs jobs, the assessee required to quote reasonable rate for the job. The quantum of job is not continuous, whereas overheads are constant in nature. Hence the profit margin or profit ratio cannot be directly linked with turnover of the nature of assessee business. The assessee is not engaged in any product driven industry, wherein the margins per product are more or less fixed. There is reduction in turnover from Rs. 5.06 crores in financial year 2012-13 to Rs. 3.25 crores in financial year 2013-14. There is reduction in turnover by 35.77% compared to last year. Overheads and normal business expenditures are incurred throughout the year. Hence there is impact on the profits of the assessee company, and its books of accounts are audited. The transactions are supported by necessary evidences in the form of bills and vouchers. Book results have been accepted in past. Assessee's main revenue is from service & repairing, which is not fixed, it depends on customer requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly lower as compared to the closing stock of immediately preceding assessment year of Rs. 59,58,140/- and there is no documentary evidence available to verify the correctness of the same. The appellant has disclosed income from other sources at Rs. 48,57,180/- which includes interest on FDRS at Rs. 47,85,740/-. In the written submission, the Ld. AR has stated that income from FDRS has to be treated as business income because the fixed deposits were maintained for business purposes only. However, I find that the borrowed funds are very normal as is evident from the financial cost claimed at Rs. 5,27,520/- excluding financial cost, the Net Profit from fixed deposits comes to Even after Rs. 42,58,190/-. Since, there was negligible borrowing, it was clear that the fixed deposits were prepared out of surplus funds and hence, the interest income therefrom cannot be considered as income from business. After excluding the interest income from FDRs, there is a loss of Rs. 17,70,760/- from the business receipts of Rs. 3,25,24,123/- which is not justifiable looking to the nature of business were margins are very high. 4.3. On perusal of Gross Profit rates of four years including the year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not correct and complete, because the consumption of raw material vis-à-vis sales and closing stock are not verifiable Accordingly, I hold that the AO has rightly rejected the book results u/s 145(3). 4.4. It is an established legal position that after rejection of books of account, a reasonable Gross Profit or Net Profit rate has to be applied either on the basis of comparable cases or looking to the past history of the assessee itself. Since, the Net Profit in the case of the appellant also included interest income, it is in the fitness of things to compare the Gross Profit rate based on the past history of the appellant. As already discussed, the average Gross Profit rate of the three years from AY 2011- 12 to AY 2013-14 in the case of the appellant was 24.52% on turnover ranging from Rs. 4.29 crores to Rs. 8.87 crores. Thus, I am of the considered view that application of average gross profit rate of last three years will be legally justified. The Gross Profit at 24.52% on total turnover of Rs. 3,25,24,123/- for the year under consideration comes to Rs. 79,74,915 as compared to shown at Rs. 25,04,207/-. Thus, it emerges that the appellant has suppressed Gross Prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,266 47.93 2,65,31,682 52.43 The reason is that our turnover was growing till A. Y. 2012-13. There is sharp decline in turnover in A.Y. 2013-14. The ratio of material consumption, labour charges and power & fuel expenses are more or less in comparison with last years. But the ratio of overheads expenses is very high compared to last years. The main reason is reduction in turnover by Rs. 3.82 crores i.e. 43% compared to turnover of A.Y. 2012-13 and 75 % compared to turnover for A.Y. 2013-14. When there is so much decline in the turnover, no company could be able to maintain net profit. We did not have anticipation that the turnover will be such lower compared to last year. In the nature of industry in which we are engaged, the quantum of job is not continuous, whereas overheads are constant in nature. Hence profit margin or profit ratio cannot be directly linked with turnover. We are not engaged in any product driven industry wherein the margins per product are more or less fixed. There is reduction in turnover from Rs. 8.88 Crores in financial year 2011-12 to Rs. 5.06 crores in financial year 2012-13. There is reduction in turnover by 43 % compared to last year. Overheads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Year 2013-14 and 51.3% for the Assessment Year 2014-15. Thus there is net profit of 9.52% for the Assessment Year 2013-14, whereas net profit of 7.65% for the present Assessment Year 2014-15. Thus the claim of the assessee is found to be reasonable comparing with the past business transaction of the assessee. It is also placed on record for the immediate Assessment Year 2013-14, when the Assessing Officer issued show cause notice, why not to reject the books of accounts, for non-maintenance of stock register as well as fall in gross net profit ratio comparing with the preceding financial years. Pursuant to assessee's reply and considering the nature of repairing job works carried out by the assessee, the Assessing officer accepted the reply filed by the assessee (which is already extracted in Para 7 of this order) and completed the scrutiny assessment order dated 29-01- 2016 for the Assessment Year 2013-14 without rejection of books. The A.O. for the present Asst. Year 2014-15, has not made any enquiry or verification of other expenses claimed by the assessee, but rejected to books of accounts only on the ground of non-maintaining of regular stock register. 9.1. Further our Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, therefore, no substantial question of law arose out of finding recorded by Tribunal - Held, yes [In favour of assessee]" .............................. "..... On a perusal of the order passed by the Assessing Officer, it is evident that the rejection of books is based upon reasons/grounds stated in the assessment order for the assessment year 2002-2003. In the said assessment year, there was a special audit. The special auditor did not report and state that it was not possible to decipher and compute income/profits from the books of account. The special auditor had examined the books of account, vouchers, invoices etc., but did not suggest that books of accounts should be rejected. The Assessing Officer for the assessment year 2002-03 did not reject the books of accounts. In the said year, the Assessing Officer did make additions/disallowances, but not after rejecting the books of accounts. In the said assessment year, similar disallowance and additions were made for identical grounds/reasons given by the Assessing Officer as in the assessment year 2001-02. Therefore, we do not agree with the counsel for the Revenue that rejection of books of accounts was justified and find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Assessing Officer for his consideration. This is also not the finding of the Assessing Officer that the account of the assessee was not complete. No provision either in the Act or in the Rules requiring an assessee carrying business of this nature, to maintain a Stock Register, as a part of its accounts has been brought to our notice. As regards nonproduction of Stock Register, the assessee has given an explanation which has been accepted not only by the Commissioner of Income-tax (Appeals) but also by the Tribunal and both of them have given a concurrent finding of fact that maintaining Stock Register was not feasible considering the nature of the business being run by the assessee which was engaged in the business of manufacturing readymade garments by purchasing fabric which was then subjected to embroidery, dyeing and finishing and then converted into readymade garments by stitching. Section 145(3) of the Act therefore, could not have been applied by the Assessing Officer to the present case. .............................. 8. Another important aspect of this case is that, admittedly, the gross profit percentage declared by the assessee in the assessment year 2003-04 w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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