Commissioner Of Income Tax v. M/S Sunrays Exports Pvt. Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. I.T.A. No.767 of 2010 & other connected case beingI.T.A. No.768 of 2010 Date of decision: 10.1.2011 Commissioner of Income Tax. Vs. M/s Sunrays Exports Pvt. Ltd. -----Appellant. -----Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOELHON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:-Mr. Rajesh Katoch, Advocatefor the appellant. --- ADARSH KUMAR GOEL, J. 1. This order will dispose of I.T.A. Nos.767 and 768 of2010, as both the appeals involve common questions of law.2. I.T.A. No.767 of 2010 has been preferred by therevenue under Section 260-A of the Income Tax Act, 1961 (forshort, “the Act”) against the order of the Income Tax AppellateTribunal, Chandigarh in I.T.A. No.562/CHD/2009 for theassessment year 2005-06 claiming following substantialquestions of law:- “(i)Whether on the facts and circumstances of the case,the Hon’ble Income Tax Appellate Tribunal is justifiedin law in holding that Assessing Officer was notjustified in rejecting the books of accounts merelybecause there is fall in G.P. rate as compared tothe Hon’ble Income Tax Appellate Tribunal is justifiedin law in holding that Assessing Officer was notjustified in rejecting the books of accounts merelybecause there is fall in G.P. rate as compared to previous year and increase in wastage rate withrespect to consumption of raw material especially byoverlooking the judgement of Hon’ble Punjab &Haryana High Court in the case of Harcharan DassTextiles Mill (Knitters) Vs CIT (supra)? (ii) Whether on the facts and circumstances of the case,the Hon’ble ITAT is justified in law in holding thatthere is no basis for estimating the wastage withrespect to the raw material consumed when no properevidence was produced before Assessing Officerexplaining the increase in wastage from 25.12% to31.66%? (iii)Whether on the facts and circumstances of the case,the Hon’ble ITAT is justified in law in holding thatassessee has explained the fall in G.P. rate ascompared to the preceding year whereas actually noproper evidence was produced before AssessingOfficer explaining the fall in G.P. rate?” 2. The assessee is engaged in manufacture and exportof hosiery goods. During assessment, the Assessing Officerdoubted the authenticity of the books of account on the groundthat there was fall in G.P. rate compared to previous year andincrease in wastage rate. Accordingly, best judgmentassessment was made at gross profit rate of the previous year,resulting in addition to the declared income. On appeal, the CIT(A) set aside the addition partly on the basis of estimate,accepting the G.P. rate declared by the assessee, but CIT(A) didnot accept the wastage, as claimed. On further appeal, theTribunal accepted the genuineness of the books of account of the assessee and held that doubt raised on the basis of comparisonof the G.P. rate and wastage as compared to the previous yearwas without any valid basis. It was held that the assessee hadgiven due explanation for the fall in G.P. rate and also forincreased claim for wastage. The finding recorded by theTribunal is as under:- assessee and held that doubt raised on the basis of comparisonof the G.P. rate and wastage as compared to the previous yearwas without any valid basis. It was held that the assessee hadgiven due explanation for the fall in G.P. rate and also forincreased claim for wastage. The finding recorded by theTribunal is as under:- 12. Now coming to the reasons for fall in GP ratesand their rejection, we find that the assessee isshowing higher GP rate than the GP rate shown byother manufacturers and exporter of hosiery goodsin the same line of activity. The Assessing Officer inhis remand report has accepted that the GP rateshown by the other allied concerns was in the rangeof 12 to 23%. The assessee during the year underconsideration had shown GP rate of 25.89% (asworked out in para 10) during the year, which in anycase is higher than the GP rate shown by otherparties engaged in the similar line of manufacturingactivity. The profits shown by the assessee arebacked by complete books of account as prescribedby the authorities. Further, the assessee has alsomaintained quantitative details including productionregister and wastage register in order to maintain acontrol over its manufacturing activities. Theassessee has shown a lower GP rate than thepreceding year and merely because there is a fall inGP rate does not justify the action of the AssessingOfficer in holding that the books of account are tobe rejected u/s 145(3) of the Act. Somediscrepancy should be noted by the AssessingOfficer before the books of account are rejected. The assessee by way of facts and figures hasexplained the reasons for fall in GP rate and theincrease in wastage by 6.5% with respect to theconsumption of raw material, as compared to theearlier years. The explanation of the assessee isbacked by the evidence produced in the shape ofthe records maintained during the course of carryingon the business and in the absence of anydiscrepancy found in the maintenance of suchrecords, the same cannot be rejected merelybecause of the decrease in GP rate and increase inwastage. Each year of assessment is anindependent year and the results shown from yearto year can be comparable but cannot be constant.There are many factors involved in carrying on thebusiness activity and the burden is upon theassessee to justify the results shown by theassessee from year to year. However, merelybecause the assessee has shown lower GP rate inany year of assessment, the results shown by theassessee cannot be rejected as the same are atvariance with the preceding year. We find that theresults shown by the assessee during the yearunder consideration are comparable to theresults/trends shown in the industry and similarresults are accepted in the hands of otherassessees being assessed in the same Warebefore the same Assessing Officer. Themanufacture and export of item is a highlycompetitive field and the persons carrying on thebusiness has to keep himself abreast of the trendsin the market and have to maintain its affairs in sucha manner as to be both competitive and profitable. 13. The assessee before the authorities belowhad elaborately explained the reasons for the fall inGP rate, which are referred by us in paras here-in-above. The main reason for decrease in GP ratewas the change in items manufactured by theassessee. The assessee was manufacturing higherand fashionable items during the year as comparedto low end garments manufactured during thepreceding year. The margin of profits decreaseddue to increased production costs. Other reasonwas the increase in manufacturing expenses due toincrease in wage rate and increase in wastage. Theassessee had furnished the quantitative details andproduced the stock register and production registerto justifiably explain the wastage shown in theproduction of articles produced for export purposes.In the absence of any specific defects being foundin the accounts maintained by the assessee and inthe absence of any material brought on record toindicate any discrepancy in the records maintainedby the assessee with regard to its production,purchase and consumption on day to day basis,there is no merits in the rejection of the said booksof account maintained by the assessee. TheAssessing Officer has failed to bring on record anyevidence to prove any discrepancy in the productionrecords and the sales made by the assessee. Inthe absence of any evidence found to the contrary,merely because there is a fall in GP rate ascompared to the preceding year and there isincrease in wastage with respect to the consumptionof raw material, there is no basis for making adhoctrading addition by estimating the gross profit ratio and the wastage ratio. We are of the view that thebooks results shown by the assessee merits to beaccepted in entirely and the gross profits asreflected in the books of account and the wastageas shown in the book results is to be adopted asshown by the assessee. We find support from thejudgment in the case of CIT Vs. K.S. Bhatia 269ITR 577 (P&H), wherein it has been held that in theabsence of any definite finding that the case of theassessee falls within the first proviso to section 145(1) of the Act, and that there were low profits ascompared to earlier years would not be a materialjustifying and estimate of book results. The CIT(A)has given a finding that the books of account in thepresent case had been rejected on two grounds i.e.low GP and higher wastage. The CIT(A) furtherobserved that “the Assessing Officer has, of course,not given a categorical finding that the proviso tosection 145(1) was attracted”. The CIT(A) however,placed reliance on the judgment in the case of BajajSteel Traders [164 Taxman 611 (P&H)] for theproposition that the proviso to section 145(1) maybe invoked not only when the method of accountingwas not proper, but also where the accounts werenot correct or complete. As per the CIT(A) theassessee not maintaining day to day record ofwastage makes the accounts of the assesseeunreliable. In the facts of the present case, wherethe assessee is maintaining production records, wefind no justification in the rejection of book results.There is no basis for estimating the wastage withrespect to the raw material consumed and as theassessee is showing higher profits than in the case of comparable cases and as the fall in GP rate ascompared to the preceding year has been explainedby the assessee, the same merits to be accepted inentirety. Thus, the grounds of appeal raised by theassessee are allowed and those raised by theRevenue are dismissed.” The above observations show that explanation of theassessee was based on G.P. rate shown by other alliedcompanies and also other factors. Similarly, there was validexplanation for increased wastage. There was, thus, no validmaterial to support the suspicion that decreased G.P. rate andthe increased wastage were not genuine. 3. We have heard learned counsel for the appellant. of comparable cases and as the fall in GP rate ascompared to the preceding year has been explainedby the assessee, the same merits to be accepted inentirety. Thus, the grounds of appeal raised by theassessee are allowed and those raised by theRevenue are dismissed.” The above observations show that explanation of theassessee was based on G.P. rate shown by other alliedcompanies and also other factors. Similarly, there was validexplanation for increased wastage. There was, thus, no validmaterial to support the suspicion that decreased G.P. rate andthe increased wastage were not genuine. 3. We have heard learned counsel for the appellant. 4. Question whether there are discrepancies justifyingrejection of books of account, has to be gone into from case tocase by applying the test of probabilities. No doubt if reduction ofG.P. rate, compared to earlier year, was claimed or if higherwastage, compared to earlier year is claimed, it may call forexplanation but if explanation is duly furnished and there is noother material in the form of empirical data or any study indicatingfalsity of the claim, mere deviation in trading results compared tothe previous year may not by itself be always enough to reject thebooks of account. In the present case, the Tribunal has dulyconsidered the explanation and held that addition made by theAssessing Officer was not justified. This finding, in the facts and circumstances of the case, is not shown to be perverse. Nosubstantial question of law arises. The appeal is dismissed. A photocopy of this order be placed on the file of other connected case. (ADARSH KUMAR GOEL) JUDGE January 10, 2011ashwani ( AJAY KUMAR MITTAL ) JUDGE