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TMI Blog2023 (6) TMI 1433X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounts - AO compared the combined GP rates achieved by the assessee and called for explanation on the fall in GP - AO rejected the books of account and estimated the GP for the current year at 9% - HELD THAT:- AO s effort throughout the assessment order has only been to point out supposed deficiencies in the appellant s explanations. He had not find any suppression of sales or inflation of expenditure from the details available before him. Even though all the details of the parties for purchase and sales as well as purchase and sales register and all the relevant documents were produced before him, the AO did not make any enquiries with the suppliers or with the buyers. It is submitted that all the observations made by the AO have been found to be defective and made on the basis of wrong assumptions - be it on the lowering of the margin in order to achieve higher sales margin or non-availability of discount details or on method of valuation of closing stock or on the comparison of GP Rates of concerns of Shri Satish Kumar Gupta or of appellant s husband or the supposed mismatch between the quality and quantity of goods purchased by appellant and as per books of her husband etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2019 making the following additions / disallowances to the total income thus determining the total income at Rs. 3,58,99,760/-: a. Disallowance of deduction claimed u/s 24(b) of the Act - Rs. 1,50,000/- b. Enhancement of Gross Profit by rejecting books of accounts - Rs. 2,59,27,998/- c. Disallowance u/s 40(a)(ia) - Rs. 98,21,762/- 3. In the first appeal filed before the Commissioner of Income Tax (Appeals)-35, New Delhi, the assessee raised the following grounds of appeal: 1. That the impugned assessment order is not only bad in law and nature but it also whimsical and therefore, the same is liable to be quashed. 2. That on the facts and circumstances of the case, the Ld. Assessing officer has grossly erred in making Disallowance of Deduction u/s 24(b) amounting to Rs. 1,50,000/-, which is illegal and liable to be deleted. 3. That on the facts and circumstances of the case, the Ld. Assessing officer has grossly erred in making enhancement of Gross Profit by an amount of Rs. 2,59,27,998/-, which is illegal and liable to be deleted. 4. That on the facts and circumstances of the case, the Ld. Assessing officer has grossly erred in making disallowance u/s 40(a)(ia) amounting to Rs. 98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,14,549/- u/s 40(a)(ia) of the Income Tax Act, 1961 without considering the submissions made during the appellate proceedings that the payments have been have already been shown by the parties in their respective Income Tax Returns and disallowance have been wrongly made in contrary to the provisions of the second proviso to Section 40(a)(ia) read with provisions of first proviso to Section 201(1) of the Income Tax Act, 1961, so it is liable to be deleted. 2. That Ld. CIT (A) has erred in confirming addition on account of Postage Courier Expenses of Rs. 1,32,583/- u/s 40(a)(ia) of the Income Tax Act, 1961 without considering the submissions made during the appellate proceedings that have already been shown by the parties in their respective Income Tax Returns and disallowance have been wrongly made in contrary to the provisions of the second proviso to Section 40(a) (ia) read with provisions of first proviso to Section 201(1) of the Income Tax Act, 1961, so it is liable to be deleted. 3. That Ld. CIT (A) has erred in confirming addition on account of Legal Professional Charges of Rs. 3,40,050/- u/s 40(a)(ia) of the Income Tax Act, 1961, without considering the submissions made duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,14,638/- and declared Net Profit from business at Rs. 44,43,821/-. 14. The GP rate for manufacturing was 22.01% for the relevant Previous Year as compared to 25.15% in the immediately preceding assessment year. Similarly the GP rate for trading activity was 2.24% as against 5.21% for the immediately preceding assessment year. [GP figures at para-8 of AO] The combined GP rate for the relevant assessment year was 6.5% as against 18.80% in the immediately preceding assessment year. 15. The AO compared the combined GP rates achieved by the assessee and called for explanation on the fall in GP. Dissatisfied with the explanation and submission made by the Assessee, the AO rejected the books of account and estimated the GP for the current year at 9% [para-15 of AO], He also enhanced the total turnover to Rs. 61,00,00,000/- on an estimate basis [para-14(b) of AO]. 16. The comparative combined gross profit figures as mentioned in Para 3 of the assessment order is as under: A.Y. 2007-2008 2008-09 2009-10 F.Y. 2006-07 2007-08 2008-09 Turnover 3,75,62,348/- 7,80,12,125/- 34,60,30,917/- GP In % 10.66% 9.39% 4.14% 17. The stand of the AO as duly summarized by Ld. CIT(A) as below: 15.2.2.2. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensated by the increase in sale value and increase in the cost of raw material is marginal. For instance, the AO has observed that the carpet Malai Dori 10/14 Jaipur has been purchased at @ Rs. 3,500/- per mtr. in A.Y.2008.09 whereas the purchase price for the current year of the said item has been at Rs. 3,410/- per mtr. and Malai Dori Item has been sold in the preceding previous year at price of Rs. 3,682.35 per unit whereas in the year under consideration, the sale price per unit is Rs. 4,311.95. Thus, the AO observed that sale price of one of the major item has increased and better than the immediate preceding previous year. The AO further observed in the assessment order that the closing stock of 5832.127 mtr of wool durries has been shown @ Rs. 862.76 per mtr., whereas the average purchase rate of this item is Rs. 781.25 per mtr. Thus, the value of closing stock shown is not correct since in no case the value of closing stock can be less than the purchase value meaning thereby the closing stock of Wool Durries (FCM) have been undervalued by atleast Rs. 81.51 per sq, mtr. [862.76-781.25] and by this way alone the GP has been suppressed by an amount of Rs. 4,75,376/- [81.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Value Carpets Trading 10.5/48 MTR 1.960 mtrs 5000.00 9800.00 1.960 mtrs 5000.00 9800.00 12/12 JAIPUR 0.540 mtrs 3800.00 2052.00 0.540 mtrs 3800.00 2052.00 12/60 KASHAN 2.400 mtrs 5500.00 13200.00 2.400 mtrs 5500.00 13200.00 18/18 SILK 4/25 GABBEH 409.520 mtrs 2250.00 921420.00 409.520 mtrs 2250.00 921420.00 5/28 GABBEH 1520.000 mtrs 5002.00 7603040.00 1520.000 mtrs 5004.00 7606080.00 5/40 BIDJAR 3.920 mtrs 3800.00 14896.00 3.920 mtrs 3800.00 14896.00 9/54 BIDJAR 0.980 mtrs 5500.00 5390.00 0.980 mtrs 5500.00 5390.00 9/60 KASHAN 2.800 mtrs 3300.00 9240.00 2.800 mtrs 3300.00 9240.00 NAPALI 2661.370 mtrs 2310.00 14131874.00 2518.370 mtrs 5353.20 13481338.29 143.0 0 5310.00 759330.00 TUFFTED 1492.800 mtrs 4287.00 6399728.43 1492.800 mtrs 4287.06 6399728.43 WOOLEN HAND TUFFED 1126.000 mtrs 284.00 319784.00 1126.000 mtrs 284.00 319784.00 10/14 Jaipur (Durry) 1924.460 mtrs 3410.77 6563894.65 1881.811 mtrs 3700.00 6962696.28 42.649 mtrs 341 0.77 145466.01 CHINDI DURRY 10.980 mtrs 2200.00 24156.00 10.980 mtrs 2200.00 24156.00 HAND LOOM 198.600 mtrs 2600.00 516360.00 198.6 00 mtrs 260 0.00 516360.00 JUTE DURRY 58.210 mtrs 2300.00 133883.00 58.210 2300.00 133883.00 MALAI DORI 1702.890 mtrs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other factors also estimated the Gross Profit @ 9% and applying the Gross Profit rate @ 9% on the turnover of Rs. 61 Crores determined the Gross Profit at Rs. 5,40,00,000/- and thereby made addition to the tune of Rs. 2,59,27,998/- to the income of appellant. 18. The submissions of the appellant made before the Ld. CIT(A) as summarized in the appellate order are under: During the appellate proceedings, the AR of the appellant made written as well as oral submissions, which have been carefully considered. The AR submitted that all the details and documents were submitted during the assessment proceedings. However, the same were ignored by AO and in some cases wrongly adopted the figures to show that the details filled were incorrect, in order to show that the books of accounts maintained by the appellant are incorrect and to make additions in hands of appellant by rejecting the books of accounts and estimating the turnover as well as Gross Profit of appellant taking imaginary figures based on wrong facts and wrongly typed details. The appellant further submitted that in para 6(b) and 6(c) of the assessment order, the AO has compared the purchase price of item 10/14 Jaipur of current ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red for washing, dying, weaving other so many activities required to make the products saleable and marketable and in this regard, the appellant produced the ledger accounts of these expenses as submitted during the assessment proceedings and as discussed in the assessment order. The appellant further submitted that the books of accounts were duly audited by the Chartered Accountant as per the provisions of Section 44AB of the Income Tax Act and submitted during the assessment proceedings, whereas the AO ignored the books of accounts and keeps on stating in the assessment order that books of accounts were not produced, it was also submitted that the act of AO rejecting the books of accounts is contrary to the provisions of law and illegal. The Appellant further submitted that the Gross Profit result of appellant are not comparable to the Gross Profit results of other assessees i.e. Shri Satish Kumar Gupta and M/s S.K. Enterprises, proprietorship concern of Sh. Swadesh Kumar Mishra, husband of appellant because Shri Satish Kumar Gupta has been in the business of trading of carpets, whereas the appellant has been in the business of manufacturing as well as trading of Durries and carp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.00 14896.00 3.920 mtrs 3800.00 14896.00 9/54 BIDJAR 0.980 mtrs 5500.00 5390.00 0.980 mtrs 5500.00 5390.00 9/60 KASHAN 2.800 mtrs 3300.00 9240.00 2.800 mtrs 3300.00 9240.00 NAPALI 2661.370 mtrs 2310.00 14131874.00 2518.370 mtrs 5353.20 13481338.29 143.0 0 5310.00 759330.00 TUFFTED 1492.800 mtrs 4287.00 6399728.43 1492.800 mtrs 4287.06 6399728.43 WOOLEN HAND TUFFED 1126.000 mtrs 284.00 319784.00 1126.000 mtrs 284.00 319784.00 10/14 Jaipur (Durry) 1924.460 mtrs 3410.77 6563894.65 1881.811 mtrs 3700.00 6962696.28 42.649 mtrs 341 0.77 145466.01 CHINDI DURRY 10.980 mtrs 2200.00 24156.00 10.980 mtrs 2200.00 24156.00 HAND LOOM 198.600 mtrs 2600.00 516360.00 198.6 00 mtrs 260 0.00 516360.00 JUTE DURRY 58.210 mtrs 2300.00 133883.00 58.210 2300.00 133883.00 MALAI DORI 1702.890 mtrs 3500.00 5960135.00 40515.468 mtrs 4305.00 174419089.74 41671.683 4311.95 179686145.60 16.675 mtrs 430 5.00 2353435.88 SAGGY 389.590 mtrs 4500.00 1753155.00 389.590 mtrs 4500.00 1753155.00 TWIST ED DURRY 16.320 mtrs 2600.00 42432.00 16.320 mtrs 260 0.00 42432.00 Mix Fabric 6078.000 mtrs 170.00 1033260.00 875568.00 6078.000 mtrs 170.00 1033260.00 Fabric 10064. nnn mtrs 87.00 875568. 00 10064. nnn mtrs 87.00 9384518 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has submitted the correct details duly matching with the figures as stated in Financial Statements, whereas the AO has wrongly typed the said figures and based on such wrongly typed figures, the invoking the provisions of Section 145(3) of the act and rejecting the books of accounts is not only illegal and against the provisions act but void ab initio. The AR submitted that all the details, such as books of accounts, bills and vouchers were duly produced by appellant during assessment, as well as appellate proceedings and from the details of itemwise purchase and sales, it can be found that purchase and sales have been duly matching with the Financial statements filed for the year under consideration, payments made to labour have been purely business expenses, where payments have been made on daily basis to labourers, stock has been valued at cost based on the purchase prices at FIFO basis, including expenses incurred on manufacturing and therefore, the AO has wrongly rejected the books of accounts of appellant and estimation of sales at Rs. 61 Crore and estimation of Gross Profit @ 9% is erroneous, which is without any basis and is only an assumption of A.0 and additions could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has rejected the book on the basis of wrong comparables whose business profile as well as supplier and customer base were not comparable to that of the appellant. In these circumstances the Ld. CIT(A), it is respectfully submitted, has rightly allowed the grounds relating to rejection of books of accounts and enhancement of Gross Profit and Gross turnover. 20. Apart from relying upon and reiterating, before this Bench, the submissions made before the Ld. CIT(A) as summarized by her, the Respondent herein made the following submissions for kind consideration of the Bench: a. It is submitted that the AO has passed the Assessment order without considering the detailed submissions made and explanations given for the fall in GP rate from 18.98% in AY 2007-09 and 18.80% for AY 2008-09 to 6.5% for the relevant AY 2009-10. b. The AO completely ignored the important fact that the turnover for the year had gone up by almost 3.5 times from Rs. 13.4 crore to Rs. 44.5 crore and while achieving such a huge rise in a short period, the gross profit margin was bound to be affected. The turnover had increased from Rs. 13,42,96,583/- for the A.Y. 2008-09 to Rs. 44,57,14,638/- for the current A.Y. c. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again considered the wrong details which were submitted due to clerical mistake and even after submitting the correct inventory and purchase details, the AO has kept on adopting the incorrect figures. g. As already submitted, the appellant s concern was engaged in manufacturing as well as trading activity. The AO completely went wrong in adding the sale value of manufacturing with the sales in the trading account again and thus holding that the sales figure and purchase figures do not tally with the figures given in Form 3 CD report. Further, in spite of intimating him that there was a mistake in the details and in spite of submitting the correct details, the AO kept on adopting the old figures in order to make out a case for rejection of books of account. h. It is submitted that the AO wrongly compared the appellant s GP rate with that of other business entities whose business profiles were not comparable. The AO has completely ignored the submission that the assessee s business involved both manufacturing and trading of carpets and durries, whereas, Shri Satish Kumar Gupta, who s GP rate had been compared with that of the Appellant, was in the business of trading of carpets. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ped details, wrong- assumptions such as observing closing stock price lower than the purchase price, whereas the facts were opposite, based on wrong comparable such as comparing the purchase price of two items with Sale Prices of different items and therefore, the AO has been on wrong, footings while rejecting the books of accounts and estimating the turn over as well as a Gross Profit, whereas the AO could not pointed out a single instance proving that the sales have been outside books of account. In these facts and circumstances of the case, I am of the considered opinion that rejection of books of account is not correct based on wrong figures adopted by AO and consequently addition made on estimate basis alleging suppression of sale and Gross profit .is not correct accordingly additions made by AO of. Rs.2,59,27,998/- is hereby deleted. Accordingly, the Ground no. 2 and Additional Grounds of appeal are allowed. 21. Having heard the arguments of the ld. DR who relied on the Assessment Order, we find no mistake in the order of the ld. CIT(A) in deleting the addition made erroneously on account of the GP. Disallowance u/s 40(a)(ia): 22. The disallowances u/s 40(a)(ia) made by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oked into by the Authorities below. c. Legal and professional charges: The commission paid to an individual for procuring order, the remuneration paid to Auditors and the fees paid towards legal advice etc have not been appreciated in the proper perspective by the AO as well as the Ld CIT(A). Further, even in respect of these payments the second proviso to section 40(a)(ia) r.w.s 201(1) of the Act are clearly applicable which was not looked into by the Authorities below. The said proviso is applicable retrospectively from 2005. 27. The Ld. CIT(A) has rejected the submission w.r.t. applicability of 2nd proviso to section 40(a)(ia) r.w.s 201(1) of the Act by holding that the same was not applicable to AY 200910 as the same was effective w.e.f. 01.04.2013 [last page of order of CIT(A)]. 28. In this regard, it was submitted that, i. The 2nd Proviso to Section 40(a)(ia) of the Act r.w. Proviso to Section 201(1) of the Act provides that disallowance of expenses under Section 40(a)(ia) of the Act cannot be made unless the assessee has been treated as assessee in default under Section 201(1) of the Act for its failure to deduct tax at source. ii. In the event if the amount paid by payer ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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