Commissioner Of Income Tax, Jaipur-Ii ,Jaipur v. M/S Arihant Industries

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 436 / 2011 COMMISSIONER OF INCOME TAX, JAIPUR-II ,JAIPUR ----Appellant Versus M/S ARIHANT INDUSTRIES, 136, BASUNDHARA COLONY, TONK ROAD, JAIPUR ----Respondent _____________________________________________________ For Appellant(s) : Mr. R.B. MathurFor Respondent(s) : Mr. Prakul Khurana for Mr. Sanjay Jhanwar _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHJudgment 29/08/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal hasdismissed the appeal of the department. 2.While admitting the appeal on 26.9.2016, this Court hasframed the following substantial question of law:- "1.whether in the facts and circumstances ofthe case the ITAT was justified in law in holdingthe assessee eligible for deduction u/s 80ICdespite of the facts that all documents andmaterial suggested that during the year therewere no production. 2. whether in the facts and circumstances of thecase the ITAT was justified in law in notconfirming the rejection of books of accounts u/s145 (3) and not confirming the trading additionsdespite of the facts that no books of accountswere submitted for verification before AssessingOfficer." 3.The brief facts of the case are that The assessee filed itsreturn of income on 31.10.2005 declaring nil Income. Thereafterthe case was selected for scrutiny and accordingly notice undersection 143(2) was issued to assessee on 25.10.2006, whichstands served. Later notice under section 142(1) along with queryletter was issued on 10.08.2007 and served upon the assessee. Inresponse thereto, Sh. Arvind Mathur C.A. & A/R and Sh. SureshPareek Partner, of the assessee firm attended from time to timeand submitted requisite details. The facts of the case werediscussed with them. 2. The brief facts of the case are that the assessee firm isengaged in the business of Production and Manufacturing of Wiresaw beeds and other marble cutting tools at Baddi HimachalPradesh. During the year the assessee has declared income of Rs.1,06,16,197/- against which it has claimed deduction of Rs.1,06,16,197/- us 80IC of the IT Act 1961. 3.It was further observed that assessee has claimed tocommence its business activity in Baddi Himachal Pradesh w.e.f.Decemeber, 2004 for the purpose of claiming deduction undersection 80 IC. It was also gathered that it is the third unit ofassessee's group in this field that is Diamond Cutting Tools. Theother two units are being run at Newai (M/s Arawali Industries)and Sita Pura, Jaipur ( M/s Simond Tools (P) ltd.). 4.Counsel for the appellant has taken us to para 3 of the orderof Assessing Officer and also the finding arrived at in para 3.2.which reads as under:- 3.It was further observed that assessee has claimed tocommence its business activity in Baddi Himachal Pradesh w.e.f.Decemeber, 2004 for the purpose of claiming deduction undersection 80 IC. It was also gathered that it is the third unit ofassessee's group in this field that is Diamond Cutting Tools. Theother two units are being run at Newai (M/s Arawali Industries)and Sita Pura, Jaipur ( M/s Simond Tools (P) ltd.). 4.Counsel for the appellant has taken us to para 3 of the orderof Assessing Officer and also the finding arrived at in para 3.2.which reads as under:- 3. During the course of assessment proceedings,the assessee vide this office quarry letter dated18.08.2007 was required to produce its books ofaccounts along with supporting evidences forexpenditure claimed on 17.08.2007, however thebooks were not produced by the assessee. On therequest of the assessee hearing was furtheradjourned to 22.08.2007. On 22.08.2007 againbooks were not produced and adjournment wassought by the assessee, which was granted to itfor 10.09.2007. As books were not produced onthat day therefore assessee vide this office ordersheet entry dated 10.09.2007 was again asked toproduce its books of accounts along withsupporting evidences on 21.09.2007 so as toenable the undersigned to verify the tradingresults as shown by the assessee and also toverify the expenses claimed by it, but resultremained the same. Assessee failed again toproduce its books of accounts on given date i.e21.09.2007. In view of this another opportunitywas provided to assessee for production of itsbooks of accounts along with supportingevidences on 10.10.2007, it however did notproduce its books on that day. One moreopportunity was allowed to the assessee vide thisoffice order sheet entry dated 10.10.2007 toproduce its books of accounts on opportunity on19.10.2007, but it could not produce its books.Despite giving ample opportunities as statedabove the assessee could not turn up to produceits books of accounts. On being asked it wassubmitted that books of accounts are at Baddi(H.P.) and are being called from there, it howevercould not produce them till last date of hearing forthe reasons best known to it only. It also not produced the books, had the same been producedthen truth will come out and then it would not bepossible for it to satisfy the queries raised on itsworking/ books maintenance. It will not be out of place to mention here thatthe assessee has allegedly started its productionin the month of December, 2004 and made asale of Rs 1,60,80,848/- just in 3 and 1/2months time and declared a G.P. @ 72.60% andN.P. @66.02%, which is exorbitanly excessive ascompare to its sister concern Ms ArawaliIndustries and M/s Simond Tools (P) Ltd.involved in the same line of business and hadshown GP @ (around) 40% during the yearunder review. With its reply dated 28.12.2007 the assessee hasfurnished the copy of its so called Stock Register.On examination of such stock register it wasobserved that consumption of raw material withthat of finished good is not ascertainable, as rawmaterial used is in grams and finished product isin unit. Further, in absence of books of accountsand supporting evidences, the entries made in socalled. Register are not subject to verification. Q- tally of the stock manufactured and trading offinished good was not made available. In view of these facts and other facts which arebeing discussed in coming paras and also on thebasis of material available on record, theassessee vide this office order sheet entry dated26.12.2007 was required to show cause as towhy its books may not be rejected and profit beworked out accordingly. In reply there to the the A/R of the assesseevide its letter dated 28.12.2007 has submittedas under: - Q- tally of the stock manufactured and trading offinished good was not made available. In view of these facts and other facts which arebeing discussed in coming paras and also on thebasis of material available on record, theassessee vide this office order sheet entry dated26.12.2007 was required to show cause as towhy its books may not be rejected and profit beworked out accordingly. In reply there to the the A/R of the assesseevide its letter dated 28.12.2007 has submittedas under: - 1. The production in the unit of Baddi wasstarted on 13.12.2004. We have already provedthe same during assessment proceedings andrelevant documents as desired by you weresubmitted. We again submit following facts toprove that production was commenced duringfinancial year 2004-05 i. That the shed for installation offactory was taken on rent vide rentdeed dated 14.09.2004. The coveredarea at plot No. 165 HPSIDC industrialarea, Baddi was 2000 Sq, feet which issufficient for installation of machinesetc and taking production. Copy of rentdeed has already been submitted toyou. ii. That the major machines werereceived in the Baddi on 18.11.2004 asper check post entry at BaddimaintainedbyExciseTaxationDepartment, Himachal Pradesh. Copy ofsame is enclosed at (Annexure-E) iii That the power connection wassanctioned by the Himachal PradeshElectricity Board vide letter No. HC-ll Cs0-1/55B/04-946063 dated 19.10.2001enclosed AT (Annexure-D) iv. That the appointment of labour wasmade on 08.11.2004 before start ofproduction at Baddi. Copy of register ofadult workers with date of appointmenthas already been submitted to you. v. That the raw material for producing finished goods was purchased videvarious bills before start of productionas per bills enclosed enclosed atAnnexure-F. The same are entered atExcise and Taxation Department checkpost, slips for which are enclosed atAnnexure-G. vi. Finally the produced material wassold to various parties for whichoutgoing entries also recorded at checkpostofExciseandTaxationDepartment, Himachal Pradesh. Checkpost puts its stamp on dispatch invoice& issue a slip in which full particulars ofinvoice are recorded alongwith date andtime of dispatch. Since, there stampedinvoice and slips are sent to buyers, wedo not keep any record. However, thesame can be obtained the Excise andTaxation Department Himachal Pradeshdirectly by your honour. We havemanaged to get photocopy of somestamped invoice and check post slipsfrom our buyers and the same areenclosed in Annexure-I. vii. Regarding verification of date ofproduction, we have some officialdocumentsissuedbyvariousauthorities, which we enclosed herewith i) Certificate of Department ofIndustrices in which date of productionis shown 13.12.2004 (Annexure-A) ii) Order of sales tax authority for thefinancial year 2004-05 passed on 31.08.2006 in which sale for 2004-05 (Annexure-B) iii) Power sanction certificate issued byHPSEB (Annexure-D) viii. Regarding your observation thatproduction day to day are not availableviii like to submit that we maintainstock register of raw material andfinished goods and the same wasproduced before you for verificationduring assessment proceedings. Inform 3CD of the audit report also theauditor has mentioned that stockregister is maintained. We enclose copyof stock register of raw material and finished goods in Annexure-C. i) Certificate of Department ofIndustrices in which date of productionis shown 13.12.2004 (Annexure-A) ii) Order of sales tax authority for thefinancial year 2004-05 passed on 31.08.2006 in which sale for 2004-05 (Annexure-B) iii) Power sanction certificate issued byHPSEB (Annexure-D) viii. Regarding your observation thatproduction day to day are not availableviii like to submit that we maintainstock register of raw material andfinished goods and the same wasproduced before you for verificationduring assessment proceedings. Inform 3CD of the audit report also theauditor has mentioned that stockregister is maintained. We enclose copyof stock register of raw material and finished goods in Annexure-C. 2. You have already examined the seller ofmachine M/s. Nowo Engineers u/s 134 of theIncome Tax Act, 1961. You have not raised anyobjection on his statement and his books ofaccounts were also accepted by you. Since youhave no adverse point against him and no suchpoint was raised by you which shows that youwere not satisfied by his statement or his booksof accounts, we are unable to understand whatproof you need to satisfy that machines weresupplied by him. The supplier has submitted allthe required documents which were necessary toprove that the new machines were build andsupplied by him at our Baddi unit. In Baddi acheck post is made by Excise and taxationdepartment where incoming of goods is recorded.We enclose herewith slip of excise check postwhich shows that machines were transported on1811.2004 at our Baddi factory sent by NowoEngineers. (Annexure-E). It is not against law if one made machines only for its group concerns. In case of NowoEngineers, he has supplied machines to otherbuyers also and a list of buyers was submitted incontinuation to his statement u/s 131 of24.12.2007. 3. You have stated in your show cause noticethat the raw material of finished product wasfound being purchased in months January toMarch 05 whereas produduction was allegedlystarted earlier (13.12.2004). It is very surprisingthat in books of accounts produced before youand examined by you, all the entries wereavailable regarding purchase of raw material butyou ignored this crucial fact. We again produceherewith the copy of purchase bills of rawmaterial purchased before start of production inthe month of Dec.2004 for your kind perusal.(Annexure-F) we also enclose the excise checkpost slips which shows that the material wasbrought to our factory in the month of Dec-04i.e. before start of production (Annexure-G). 4. M/s. National Trading Company who is our dealer in Rajasthan has his office at 1Kha 14,Jawahar Nagar, Jaipur which is paternalresidence of one partner Shri Suresh Pareek.There is nothing against law in this point and weare unable to understand what your honourwants to prove. It is immaterial where one hashis working place. It is not mentioned in theshow cause notice that no such business exist atthat address. If your honour had any adversereport regarding M/s National Trading companynotice u/s 131 should have been issued to himfor personal appearance. 5. ESI certificate survey was carried out in Jan- 2005 which was conducted after start ofproduction. It proves that production wascommenced before survey i.e. in December,2004. We have also produced Register of adultworkers in which appointment of workers isshown from 08.12.2004. 5. ESI certificate survey was carried out in Jan- 2005 which was conducted after start ofproduction. It proves that production wascommenced before survey i.e. in December,2004. We have also produced Register of adultworkers in which appointment of workers isshown from 08.12.2004. The conveyance deed executed with HimachalPradeshStateIndustrialDevelopmentCorporation Limited (HIDC) has nothing to dowith the date of production. The plot which wasinitially taken by us on rent was later onpurchased by us and this conveyance deed wasexecuted. In this conveyance deed a reference ismade of agreement dated 14.09.2005 and asper that agreement the vendee was bound tocomplete the creation and installation ofmachinery and commence production asmentioned in the agreement dated 14.09.2005.Since production was already started in rentedpremises on 13.12.2004, this date is irrelevantin our case. Copy of agreement dated on14.09.2005 is enclosed in Annexure-J. 6. Transportation evidence of machines purchased have been shown in the book ofaccounts the photocopy of the same wassubmitted to your honour alongwith details ofmachines submitted by us during assessmentproceedings which should be in your file. Weagain enclose the copy of transportationevidence here with for your kind perusal(Annexure-H) i. that the premised for installation of factory was taken on rent on 14.09.2004from M/s Duggal Expoprt which wasallotted to the landlord by HSIDC asindustrial plot. ii. that certificate of registration issuedby Member secretary, Single windowclearing Agency, Baddi, Baronwala andNalagarh, Baddi, Distt. Solan (HP) showsthe date of manufacturing is w.e.f13.12.2004. iii. that the major machineries werereceived at Baddi on 18 11.2004 and wereinstalled for carrying production. iv. that the power connection wassanctioned vide letter No.HC-IICS 01/55-B/04-946063 dated 19.10.2004 by ChiefEngineer, HP State Electricity Board, Solan.First electricity bill for 2 months was paidfor vide cheque no.373665 dated24.02.2005 for Rs.30357. v. That the raw material waspurchased before start of production andwas used for production as per day to daystock register maintained. vi. That the labours were appointedfor production on 08.12.2004 vii. That the manufactured goods wassold from Baddi and the sale is recorded atcheck post of Excise & TaxationDepartment, Himachal Pradesh. All above point prove that production and salewas carried at Baddi and we are eligible fordeduction u/s 80IC of the Income Tax Act, 1961. There is a system at Baddi whereby everyincoming & outgoing of material is recorded atGovt. check post maintained by Excise &Taxation Department, Himachal Pradesh.Therfore, detail of every sale & purchase canalso be obtained from them. Therefore, there isno scope of any doubt regarding production &dispatch at Baddi. 7. You have also mentioned that G.P. shown by us is extra ordinarily high in comparison to othersister concern i.e. M/s. Simond Tools P (Ltd.)and M/s. Arawali Industries. In this connectionwe would like to inform you that we havespecialisation in soft stone cutting tools which isdeveloped by us in India first time. Our toolsgive maximum cutting output. Hitherto, onlynormal tools were used for cutting soft stones,i.e. why, very little output was generated bysuch tools. By introduction of this tool, themarble industries got better output. We areproviding this special tool at the nearly sameprice while we have curtailed its cost byinnovation research. 7. You have also mentioned that G.P. shown by us is extra ordinarily high in comparison to othersister concern i.e. M/s. Simond Tools P (Ltd.)and M/s. Arawali Industries. In this connectionwe would like to inform you that we havespecialisation in soft stone cutting tools which isdeveloped by us in India first time. Our toolsgive maximum cutting output. Hitherto, onlynormal tools were used for cutting soft stones,i.e. why, very little output was generated bysuch tools. By introduction of this tool, themarble industries got better output. We areproviding this special tool at the nearly sameprice while we have curtailed its cost byinnovation research. Machinery installed at Baddi are of the latesttechnology and consume less power and requireless labour. Therefore, the consumption perpiece of power & labour is less as compared toother sister concen. Secondly, the consumptionof metal powder for soft stone cutting tool asraw material is less as compared to metalpowder consumed for other stone tools. As perdata available per piece consumption of metalpowder at Baddi unit is 2.42 gram per piece in Simond Tools Pvt. Ltd. the consumption is 4.85gram per piece and in Arawali Industries it is3.94 gram per piece Therefore G.P. rate is highat Arihant Industries, Baddi. Due to latest technology, we can produce thissoft stone tool only at Arihant Indust5ries and itis not feasible to produce this type of tool atArawali & Simond Tools. Production capacity ofmachines at Arihant Industries is very high. Wecan produces 250 pieces per hour at ArihantIndustries while in Simond Tools. We can produceonly 100 piece per hour and in Arawali industries150 piece per hour. Due to above reasons the GP rate of ArihantIndustries is high as compared other sisterconcern. We have also produced our audited books ofaccounts before your honour for verification andno such deficiency was noticed by your honourduring examination of books of account andother records. Without proving any error in thebooks the same cannot be rejected. No specificmistake or deficiency is being pointed out duringassessment proceeding, therefore, it will beagainst law to reject the books of accountproperly maintained and audited by competentaccountant. We have also maintained day to daystock register and all the details of stock andconsumption are maintained by us. We submitfollowing judgments in this connection- i. In Ganesh foundry Vs. ITO (2000) 67(JD) 434, it was held that no specificmistake or deficiency being pointed outand assessee having explained reasonfor decline in gross profit rate, there was no justification for rejecting accounts. ii. In ETCO Engineeriong Co. Vs. ITO(1987) 27 TTJ (Hyd) 350, it was heldthat department must show defect inthe books such as that it is notposssible to determine the incomeproperly G.P. rate by itself is no groundfor rejection of accounts. iii. In ITO Vs. Amar Singh Jain (1992) 43 TTJ (JP) 11, it was held that unlessthe system of accounting is rejected orthe books of accounts are rejected onproper basis, the income disclosed can not be disturbed. On the basis of facts narrated by us, you arerequested to allow us claim u/s 80IC of theIncome Tax Act, 1961 and allow the GP shown byus as per books of accounts. 3.2 I have perused the reply filed by the A.R. ofthe assessee and found it not convincing. Beforethat it will be worthwhile to mention here thefacts of the case:- (i) Vide this office letter dated10.08.2007 the assessee was requiredto produce its books on 17.08.2007. (ii) On 17.08.2007 adjournment soughtgranted for 22.08.2007. (iii) On 22.08.2007 again adjournmentsought adjourned to 10.09.2007 (iv) On 10.09.2007 again books notproduced, asked to produce on 21.09.2007. (v) On 21.09.2007 books not producedrequested for adjournment, adjournedto 10.10.2007. not be disturbed. On the basis of facts narrated by us, you arerequested to allow us claim u/s 80IC of theIncome Tax Act, 1961 and allow the GP shown byus as per books of accounts. 3.2 I have perused the reply filed by the A.R. ofthe assessee and found it not convincing. Beforethat it will be worthwhile to mention here thefacts of the case:- (i) Vide this office letter dated10.08.2007 the assessee was requiredto produce its books on 17.08.2007. (ii) On 17.08.2007 adjournment soughtgranted for 22.08.2007. (iii) On 22.08.2007 again adjournmentsought adjourned to 10.09.2007 (iv) On 10.09.2007 again books notproduced, asked to produce on 21.09.2007. (v) On 21.09.2007 books not producedrequested for adjournment, adjournedto 10.10.2007. (vi) On 10.09.2007 again books notproduced. Asked to produce on19.10.20017 (vii) On 19.10.2007 books not producedhearing adjourned to 26.10.2007. (viii) On 26.10.2007 none attended.(ix) Hearing in the case were furtherconducted on 19.12.2007, 22.12.2007,26.12.2007 and 28.12.2007, howeverbooks of accounts were not producedon these dates also. From the above it is clear that more than 10opportunities were afforded to the assessee toproduce its books of accounts alongwithsupporting evidences, but it did not produce thesame. Surprisingly vide it reply dated28.12.2007 it is mentioning as if books ofaccounts wereproduced so many times and nodefects were delectated therein. All the abovefacts that books of accounts were never produceare evident from the aforesaid order sheetentries and are placed in the assessment record.The said order sheet entries are signed by theA/R of the asssessee and partner also. Despitethis fact the A/R is trying to mislead the case bymentioning that books of accounts wereproduced. This fact also proves in itself thateither complete books of accounts were notmaintained or were not in conformity with thetrading results shown by the assessee. Apart from above it is also observed that:-A. As books of accounts along with supportingvouchers were not produced, the trading resultsare not subject to verification. Though theassessee has submitted a copy of stock register,however in absence of complete books ofaccounts the same is not subject to verificatin. B. No reply to this office query was filed/givenwhen enquired about the consumption of rawmaterial in its manufacturing process; as rawmaterial is in grams and finished goods are innumbers. The details related to consumption ofraw material, wastage, scrape etc. have notbeen maintained by the assessee. C. No work in progress has been noticed in thecase of the assessee as from the details sofurnished it was observed that assessee hasissued raw material for the first time on09.12.2004 and first entry of so called finishedgood was entered in itsj books on 13.12.2004.Since as per this it took 4 days to get rawmaterial converted in finished goods then thereshould be some work in progress as at the endof the F.Y. i.e. raw material issued for productionon 29./30/31 of March, 2004 and no work inprogress has been shown by the assessee,however no such thing was noticed in the caseof the assessee. On being asked no proof wasnoticed. D. No details to this effect were producedwherefrom consumption vis-a-vis finished goodsratio can be ascertained; E. Closing Stock is not subject to verification; F. No details of wastage/defective/scrape aremade available. Had etc., The assessee is usingdiamond, cobalt, Tungsten Carbide Powder etc.as its raw material, which are comparativelyexpensive items, it is therefore inevitable thatsuch items have certain value even if they arenot used in the produce and are part ofwastage/scrape etc. G. The case law quoted by the A.R. has norelevance as the facts of the instant case arequite different from those cases. D. No details to this effect were producedwherefrom consumption vis-a-vis finished goodsratio can be ascertained; E. Closing Stock is not subject to verification; F. No details of wastage/defective/scrape aremade available. Had etc., The assessee is usingdiamond, cobalt, Tungsten Carbide Powder etc.as its raw material, which are comparativelyexpensive items, it is therefore inevitable thatsuch items have certain value even if they arenot used in the produce and are part ofwastage/scrape etc. G. The case law quoted by the A.R. has norelevance as the facts of the instant case arequite different from those cases. As no details were furnished by the assesseetherefore an effort was made by this office tocheck the veracity of assessee’s trading results,but it could not been done due to defectsmentioned hereinabove. From the above it is clear that the assessee hasnot maintained its books of accounts in a waywherefrom proper profit can be deduced. Inabsence of such vital records how assessee'sbooks of accounts can be treated as correct &true. As such l have no alternative but to rejectthe books of accounts of the asssessee for whichreliance is placed on the Hon’ble Supreme Courtdecision in the case of CIT V/s British PaintsIndiaj Ltd. 188 ITR 44 which reads as follows:- “The question to be determined by theAssessing Officer in exercise of his powerunder Section 145 is whether or not incomecan properly be deducted from the accounts maintained by the assessee, even if theaccounts are correct and complete to thesatisfaction of the officer and income hasbeen computed in accordance with themethod regularly employed by theemployer. It is not only the right but alsothe duty of the AO to consider whether ornot the books disclose the true statement ofaccounts and correct income can bededucted wherefrom. It is incorrect to saythat the office is bound to accept thesystem of accounting regularly employed bythe assessee, the correctness of which hasnot been questioned in the past. There areno estoppels in these matters officer andthe officer is not bound by the methodfollowed in the earlier years. In the light of the above discussion, it is held thatthe books of accounts maintained by theassessee do not reflect complete and correctprofits & gains of assessee's business. Therefore,I have no a alternate but to reject the books ofaccounts of the assessee us 145(3) of the IT Act,1961. According the books of accounts of theassessee are rejected. 5.Counsel for the appellant therefore contended that the viewtaken by the AO is justified. 6.He has also taken us to the para 4 of the order of the CIT(A)which reads as under:- 4. Assessee has not been able to substantiatethat production was started during the yearunder scrutiny at Baddi (AO page 9 point 1): Explanation: (APB I-3. I4-22, 61-81, 120-144) In the mailer it is submitted that the assesseehas proved beyond doubt that production wasstarted by him during the year under scrutiny atBaddi. To put the facts straight forward thefollowing points are submitted: (i) That the premises for installation of factorywas taken on rent on 14.09.04 from M/s DuggalExport which was allotted to the landlord byHSIDC as industrial plot. (ii) That certificate of registration issued bymember secretary, Single window clearingAgency, Baddi, Baronwala & Nalagarh Baddi,Dist. Solan (H.P) shows the date ofmanufacturing is w.e.f 13.12.2004 (iii) That the major machineries were received atBaddi on 18.11.2004 and were installed forcarrying production. (iv) That the power connection was sanctionedvide letter No. Hc.-II CS01/55B/04-946063dated 19.10.2004 by Chief Engineer H.P. StateElectricity Board, Solan. First electricity bill for 2months was paid vide cheque no. 373665 dated24.02.2005 for Rs.30357/- (i) That the premises for installation of factorywas taken on rent on 14.09.04 from M/s DuggalExport which was allotted to the landlord byHSIDC as industrial plot. (ii) That certificate of registration issued bymember secretary, Single window clearingAgency, Baddi, Baronwala & Nalagarh Baddi,Dist. Solan (H.P) shows the date ofmanufacturing is w.e.f 13.12.2004 (iii) That the major machineries were received atBaddi on 18.11.2004 and were installed forcarrying production. (iv) That the power connection was sanctionedvide letter No. Hc.-II CS01/55B/04-946063dated 19.10.2004 by Chief Engineer H.P. StateElectricity Board, Solan. First electricity bill for 2months was paid vide cheque no. 373665 dated24.02.2005 for Rs.30357/- (v) That the raw material was purchased beforestart of production and was used for productionas per day to day stock register maintained. (vi) That the labours were appointed forproduction on 08.12.2004. (vii) That the manufactured goods was sold fromBaddi and the sale recorded at check post ofExcise & Taxation Department, HimachalPradesh. All above point prove that production and salewas carried out at “BADDI, HIMACHALPRADESH" and assessee is eligible for deductionu/s 801c of the Income Tax Act, 1961. It has been held by various courts that forrejecting the explanation of the assessee,department has to be in possession of sufficientand adequate material and that there has to betangible material which should be brought onrecord. No such material is brought on record bythe AO. The AO has not collected any evidenceto disprove the claim of Sec 801C. The AO hasnot collected any evidence to disprove the claimof Sec.801C. The AO has has convenientlyignored the relevant documentary evidence produeced. There is no direct or indirectdocumentary, oral or circumstantial evidence toshow that no production was carried out atBaddi. The AO has not been able to bring outany tangible material on record to demonstratethe fact that no production was cam out atBaddi. 6.While concluding the matter, the CIT (A) in para 1.7 has observed as under:- produeced. There is no direct or indirectdocumentary, oral or circumstantial evidence toshow that no production was carried out atBaddi. The AO has not been able to bring outany tangible material on record to demonstratethe fact that no production was cam out atBaddi. 6.While concluding the matter, the CIT (A) in para 1.7 has observed as under:- 1.7 I have considered the facts of the case andarguments taken by Sh. Agarwal quite carefully. Whileexamining the evidence furnished in the assessmentproceedings as well as in the appellate proceedings itis seen that the factory at Baddi was taken on rent on14.09.2004, power connection was sanctioned to theappellant on 19.10.2004, machineries were purchasedon 8.11.2004, various required raw material werepurchased on 8.12.2004 and minimum labour wereemployed on 8.12.2004. Further, there is a certificateof department of industries Himachel Pradeshaccording to which date of production has been shownas 13.12.2004. There is a order from sales-taxauthority for the F.Y. 2004-05 has been assessed.There is power sanction certificate issued by HimachalPradesh State Electricity Board. I also agree with Sh.Agarwal that when total block of Plant and Machineryin installed for running the said unit then it is notpossible to mention the name of each and everymachine by the staff of check post in HimachelPradesh and in any case the till number, date, amountand name of supplier is mentioned in the slip itselfwhich is cross verifiable. Further, it is for the appellantto decide that what type of labours are required for itsmanufacturing activity and what type of trainingwhether formal or informal is required to be given.The A.O. has also recorded the statement of supplierof the machines namely of Sh. Rakesh Sharma whowas manufacturer in the name of M/s Nowo Engineerswho has confirmed before A O. regardingmanufacturing of the machine. Further, considering theevidence of incoming and outgoing items issued byexcise check post when no irregularity had beenpointed out the veracity of the same cannot bedoubted. Further, the assessing officer is having nobusiness that how by use of advance machine theproduction of other sister unit had increased by merely5%. As far as 90% of sale to M/s National Trading Co.is concerned, considering the fact that in Rajasthanthere is entry tax on diamond cutting tools @ 8% andthe same is exempted if local law is paid on thatgoods. Therefore, if according to commercialexpediency if the material is first bought in Rajasthanthrough the dealer then no entry tax is payable sincethe dealer has to pay RST 3% against the declarationform and therefore, in my considered view there isnothing wrong in saving 5% tax incidence keeping inview the commercial expediency. Further the ratecomparison between Simond Tools vis-a-vis appellantfor the purchase of Tungsten powder was due to localpurchase and imported purchase and the fact of suchpurchase was not in dispute. Further, as per copies ofelectricity bills it is confirmed that there was genuineelectricity consumption from the date when the production has been shown to have commended i.e.w.e.f. 13.12.2004. Further, sales-tax certificate underCST and HPGST were granted by same authority on11.10.2004. Both the certificates were renewed bysales-tax department which is evident fromsubsequent assessment with same CST and HPGSTnumber. Further there was proper NOC from HPPollution Control Department which was earlierprovisional subsequently it was renewed. Further theESI registration and certificate granted by LabourDepartment shows that there genuine employment ofthe workers which is verified from wages registerhaving noting of day to day attendance by differentworkers with the aforesaid discussions and onexamination of various documentary evidence in myconsidered view there was a genuine manufacturingactivity at Baddi (Himachel Pradesh) where theappellant has started the manufacturing activity w.e.f.13.12.2004 and certainly when the appellant fulfils allother necessary conditions in order to claim deductionu/s 80 IC of I.T. Act therefore, the A.O. was notjustified in disallowing the said claim of deduction U/s80 IC of I.T. Act for which he is directed to allow thesame. 7.It is also contended that the findings arrived at by the CIT(A) in para 2.3 are correct. Para 2.3 reads as under:- 2.3I have considered the case and argumentstaken by Sh. Agarwal quite carefully. It is seenthat there is no proper record on day to day basisfor use of different raw material vis.a.vis dailyproduction of finished goods. Further, there is noproper details for the wastage/scrap andconsidering no work in progress which has to belooking to the complex manufacturing activity ofthe appellant and when closing stock shown wasalso not subject to proper verification therefore,in my considered view the A.O. was fully justifiedin rejecting books of accounts by invokingprovisions of S.145(3) of I.T. Act. Here it is alsoseen that there is comparatively abnormallylower claim on consumables, wages and onpower and fuels when compared to the othergroup concern, namely Araveli Industries andSimond Tools Jaipur where similar manufacturingactivities are carried out which means thatdefinitely in order to avail higher deduction U/s80IC where 100% of the buiness profits are subjectto deduction the appellant has understated thecost for consumables/wages for which there wereno proper bills for full proof verification. As perprovisions of S.80 IA (10) where it appears that for any other reason more than ordinary profitshas been shown which might be expected toarise in such eligible business, the A.O. shall incomputing the profits and gains of such eligiblebusiness for the purpose of deduction take theamount of profit as may be reasonably deemedto have been derived there from. Since, 41%profit has been shown by other two sisterconcerns but considering the fact that new andadvance technique is used by the appellant in itsBaddi plant and considering certain economy ofhaving industry in Himachal Pradesh vis.a.vis. inRajasthan as well as considering the bulkproduction as compared to other sister concern,in my considered view it shall be justifiable toadopt a G.P. rate of 64% on the turnover shownat Rs.1,60,80,848/- on which the G.P. is workedout at Rs.1,02,91,742/-. Since, the appellant hasshown G.P. of Rs.1,16,75,481/- therefore, thedifferential amount of Rs.13,83,739/- isconsidered as inflated G.P. which has to betreated as income from other source. 8.He has also taken us to the order of the Tribunal where the Tribunal has observed as under:- 8.He has also taken us to the order of the Tribunal where the Tribunal has observed as under:- 12. The first appellate order on the issue iscomprehensive and reasoned one, we are thusnot inclined to interfere therewith. The same isupheld. The ground No.1 of the appeal preferredby the department is thus rejected.13.So far as issue raised in ground No.2 of theappeal preferred by the revenue and those raisedin the grounds of appeal preferred by theassesseeregarding applicability of the provisionsof s.145(3) and estimation of profit is concerned,we after considering the above submissions inthis regard are of the view that when theassessee before the Ld. CIT(A) questioned thecorrectness of the observations of the AO thatbooks of accounts were never produced inspite ofrepeatedopportunityandtherewereirregularities due to absence of no work inprogress, no details of wastage etc. and theLd.CIT(A) in the interest of justice soughtcomments of the AO with specific direction (paraNo.1.4. at page No.26 of first appellate order)that in the remand proceedings necessary booksof accounts may be called for before sending thereport, the same was defied by the AO with thisremarks that the assessee has not given any sufficient reasons/grounds as to why books ofaccounts were not furnished earlier during thecourse of assessment proceedings and since noadditional evidence were furnished therefore, hepreferred not to examine the books of accounts.Such action of the AO indirectly supports thecontention of the Ld.AR that books of accountswere properly maintained and there were noirregularities as alleged by AO. The Ld. CIT(A)though has appreciated that reduction ofapplication of GP rate at 41% against 72.6%declared by the assessee was not proper but heagain erred in restricting the application of GPrate at 64% without any sufficient reason as thereason that the assessee had enhanced theincome to claim the available benefit of deductionu/s 80-IC on the eligible unit, is not enough tointerfere with the GP rate shown by the assesseeespecially when the Ld.CIT (A) remarked thatdue to installation of advanced machinery thewas possibility of achieving higher GP. We thuswhile setting aside orders of the lowerauthoritiesin this regard hold that invocation of section145(3) of the Act to estimate the income byapplying a different GP rate by the AO andupholding the same by the Ld.CIT(A) even atdifferent GP rate was not justified. Weaccordingly direct the AO to delete the addition ofRs.13,87,739/- sustained by the Ld.CIT(A). Thegrounds of the appeal preferred by the assesseeare thus allowed. 9.Counsel for the respondent has contended that the books ofaccounts and everything were produced before the authority butfrom the order, it seems that for the books of accounts, referenceis not made. 10.We have heard counsel for the parties. 11.Taking into account the overall facts, we are not interferingin the order of the Tribunal on merits, but we make it clear thatthe order passed by authority is not supported by well reasoningand therefore it will be appropriate to remit back the matter toCIT(A). We also make it clear that it will be open for the assessee to produce all the documents to justify his claim. We further makeit clear that the CIT(A) will decide the same on meritsindependently. 12.In that view of the matter, the appeal of the department ispartly allowed and we remit back the matter to CIT(A) to decidethe same on merits without being influenced by the fact that theHigh Court has set aside the order of the CIT(A) and the Tribunal.While considering the matter, both the authorities will consider thematter afresh and the documents which will be produced by theassessee will also be considered to counter the finding given bythe AO. Till these proceedings are decided by the Tribunal, therewill be no demand from the assessee. to produce all the documents to justify his claim. We further makeit clear that the CIT(A) will decide the same on meritsindependently. 12.In that view of the matter, the appeal of the department ispartly allowed and we remit back the matter to CIT(A) to decidethe same on merits without being influenced by the fact that theHigh Court has set aside the order of the CIT(A) and the Tribunal.While considering the matter, both the authorities will consider thematter afresh and the documents which will be produced by theassessee will also be considered to counter the finding given bythe AO. Till these proceedings are decided by the Tribunal, therewill be no demand from the assessee. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Pdaiya/10