Hi Tech Dyeing & Finishing Mills Pvt. ... vs Assessee

Hi Tech Dyeing & Finishing Vs. The A.C.I.T., Mills Pvt. Ltd., Circle I, Phase VIII, Focal Point, Ludhiana. Ludhiana. PAN: AAACH9122R (Appellant) (Respondent)

Appellant by : Shri Jasvinder Singh Respondent by : Shri S.K.Mittal, DR

Date of hearing : 15.04.2015 Date of Pronouncement : 17.04.2015

PER BHAVNESH SAINI, J.M. :

This appeal filed by the assessee is directed

against the order of learned Commissioner of Income

Tax(Appeals)-II, Ludhiana dated 16.6.2014 for

assessment year 2007-08 on the following grounds :

1. That the order of the learned C.I.T, (Appeals) I, Ludhiana is illegal, wrong, arbitrary and against law and the facts of the, case.

2. That having regard to the facts and circumstances of the case, the learned C.I.T (Appeals) has erred in law and on facts 2

in partly confirming the action of the learned A.O. by restricting the estimation of N.P. to 1%.

3. That having regard to the facts and circumstances of the case, the learned C.I.T (Appeals) has erred on facts by ignoring the fact that appellant had failed to produce books of accounts because of the conditions beyond the control of the appellant.

4. That having regard to the facts and- circumstances of the case, the learned C.I.T (Appeals) has erred in Jaw and on facts in disallowing of interest paid on account of non deduction of TDS when such interest was majorly paid against bank loans.

5. That having regard to the facts and circumstances of the case, learned C.I.T. (Appeals) has erred in law and on fact in confirming the action of learned A.O. in treating the interest reimbursed against interest paid on capital assets under the scheme of TUFF and amount written off as income from other sources."

2. We have heard the learned representatives of both

the parties and perused the material available on record.

3. The brief facts are that during the course of

assessment proceedings the Assessing Officer asked the

assessee to produce various copies of accounts, bills etc.

In spite of repeated opportunities the assessee failed to

produce books of accounts and vouchers. The Assessing

Officer asked the assessee to explain why, in the aforesaid

circumstances, the book result may not be rejected and the

profits may not be estimated. The Assessing Officer further

noted that the assessee had shown receipt of Rs.

4,75,074/- under the head subsidy on interest. The

Assessing Officer asked the assessee to explain why the 3

corresponding subsidy pertaining to the said interest be not

estimated and added to the total income. The assessee

submitted that the P&L expenses, as shown in the audit

report, should be accepted on the basis of fact that G.P.

rate of 27.15% was acceptable to the Assessing Officer.

The Assessing Officer considered the assessee's submissions

and rejected the same. The Assessing Officer observed

that as per the show cause notice it was nowhere stated

that G.P. rate of 27.15% was acceptable on the basis of

audit report. The Assessing Officer observed that the

assessee had not produced any books of accounts, vouchers,

bills or supporting evidence to justify his claim of expenses.

The Assessing Officer accordingly estimated the net profit

of the assessee by comparing it with 3 other concerns.

The Assessing Officer accordingly held that it was

reasonable to apply net profit rate of 5% on total turnover of

Rs. 1,18,92,799/-. The net profit was accordingly estimated

at Rs. 5,94,640/-. The Assessing Officer further noted that

the assessee had included the following items in the P&L

Account:-

1. Interest subsidy Rs. 4,75,074/-

2. Amount written off Rs. 5,37,205/-

4. The Assessing Officer held that these two amounts did

not form a part of business turnover of the assessee and

were required to be added separately. The amount of

Rs.10,12,279/- was accordingly added to the total income. 4

5. The assessee challenged both the additions before

the learned CIT (Appeals) and written submission of the

assessee is incorporated in the appellate order in which the

assessee briefly explained that the Assessing Officer should

have accepted the loss suffered by the assessee. The

details of expenses have been ignored and if the expenses

are considered then there would be a loss. The learned CIT

(Appeals) directed the assessee that in the absence of

production of the books of account and related documents

why net profit rate be not applied even against the gross

profit rate. The assessee, however, explained that in the

absence of books of account even the GP rate could be

applied. The learned CIT (Appeals) considering the

explanation of the assessee and material on record directed

to apply the net profit rate at 1% and computed the profit

of the assessee at Rs.1,18,927/-. It was also directed that

the receipts on account of interest subsidy and the amount

written off amounting to Rs.10,12,279/- do not form part of

the operational turnover of the assessee and have,

therefore, to be excluded for the purpose of estimating the

operational profits and have to be accounted for separately.

The addition of Rs.10,12,279/- was accordingly confirmed.

The findings of the learned CIT (Appeals) in paras 4.5 and

4.6 of the appellate order are reproduced as under :

"4.5. I have caref ully considered the appellant's submissions. It is a f act on record that in spite of repeated opportunities the appellant had f ai l e d to produce the books of accounts and vouchers. In the 5

absence of the books of accounts and vouchers, the AO could not h ave verif ied the genuineness of the book r e s u l t s h o wn b y t h e a p p e l l a n t . T h e A O wa s t h e r e f o r e f ully justif ied-in rejecting the books of accounts of the appellant and estimating the prof its. As regards the appellant's contention that the estimation of prof its @ 5 % wa s n o t j u s t i f i e d o n a c c o u n t o f t h e f a c t t h a t t h e major expenses constituted of bank interest and d e p r e c i a t i o n a n d af t e r c o n f i r m i n g t h e s e t wo e x p e n s e s t h e r e wa s a s u b s t a n t i a l l o s s t o t h e a p p e l l a n t , i t m a y b e mentioned here that the appellant's contention would be v a l i d o n l y wh e r e t h e g r o s s p r o f i t s h o wn b y t h e a p p e l l a n t had been, specif ically acce pted to be correct. In the instant case, the AO has clearly pointed out in the a s s e s s me n t o r d e r t h a t i t wa s n o wh e r e me n t i o n e d i n t h e s h o w c a u s e n o t i c e t h a t t h e g r o s s p r o f i t s h o wn b y t h e a p p e l l a n t wa s a c c e p t a b l e t o t h e A O . Moreover, this issue wa s specif ically raised during the course of a p p e l l a t e p r o c e e d i n g s a n d t h e a p p e l l a n t wa s a s k e d t o explain wh y the G.P. of the appellant may not be rejected in the absence of the books of accounts and vouchers. No explanation wh a t s o e v e r i n t h i s r e g a r d wa s given by the appellant except that the AO has accepted the G.P. rate s h o wn by the appellant. It may be m e n t i o n e d h e r e t h a t t h e p o we r s o f C IT ( A ) d u r i n g t h e a p p e l l a t e p r o c e e d i n g s a r e c o m me n s u r a t e wi t h t h e p o we r o f t h e A O a n d t h e C IT ( A ) i s e m p o we r e d t o e x a m i n e a n y issue pertaining to the a s s e s s me n t order. The appellant's contention that the claim of loss wa s jus tif ied is theref ore not ten able.

4.6. The appellant has also contended that wh i l e co mp ar ing the appellant's case it h as been ignored that t h e t u r n o v e r o f t h e u n i t s c o m p a r e d i s mu c h h i g h e r t h a n t h e a p p e l l a n t ' s c a s e b e c a u s e o f wh i c h i t wa s u n a b l e t o meet its expenses and it turned into loss making unit. I a g r e e wi t h t h i s c o n t e n t i o n o f t h e a p p e l l a n t . I t i s s e e n t h a t t h e t u r n o v e r o f t h e c a s e s c o m p a r e d wa s 3 t o 5 6

times the turnover of the appellant and in the c i r c u ms t a n c e s the net prof it of the appellant could jus tif iably be explained to be less th an these units. K e e p i n g i n v i e w t h e af o r e s a i d f a c t s a n d c i r c u m s t a n c e s o f t h e c a s e a n d af t e r r e j e c t i n g t h e g r o s s p r o f i t s h o wn b y the appellant, I deem it f air and reasonable to estimate the operational prof its excluding the subsidy receipt and amount wr i t t e n back @ 1%. The net prof it of the appellant is accordingly estimated at Rs. 1,18,927/- as against the net prof it estimated by the AO at Rs.5,94,640/- Further, the receipts on account of interest subsidy and amounts wr i t t e n off amountingtoRs.10,12,279/- do not f orm the part of the operational turnover of the appellant and have theref ore to be excluded for the purpose of estimating the operational prof its and have to be accounted for s e p a r a t e l y . I n t h e af o r e s a i d c i r c u ms t a n c e s t h e A O wa s f u l l y j u s t i f i e d i n a d d i n g t h e af o r e s a i d a m o u n t s t o t h e e s t i m a t e d N e t p r o f i t af t e r r e j e c t i n g t h e b o o k s o f a c c o u n t . The addition of Rs. 10,12,279/- is accordingly c o n f i r me d . "

6. The Assessing Officer also noted that certain

expenses were debited to the Profit & Loss Account on which

there was a liability to deduct TDS. As per the Audit

Report, the assessee has not deposited the TDS and no proof

of TDS was also filed. Therefore, the addition of

Rs.2,28,615/- was made on account of disallowance of

interest expenditure. The learned CIT (Appeals) noted that

the assessee merely contended that the payments were

mainly to the banks against secured loans on which no TDS

was deductible. However, in the absence of any details of

secured loans and no evidence have been furnished in this 7

regard that no TDS was deductible, the learned CIT

(Appeals) confirmed the addition of Rs.2,28,615/-.

7. We have heard the learned representatives of both

the parties. It is not in dispute that the assessee did not

produce the books of account and related documents before

the authorities below. The assessee on ground No.3 merely

stated that the assessee has failed to produce the books of

account because of the conditions beyond the control of the

assessee. The l earned coun sel for assessee al so stated

duri ng the course of arguments that si nce the management

was changed, t herefore, the bo oks of account and rel ated

documents coul d not be produced. I t i s no ground for non-

producti on. These facts woul d cl earl y sho w that the

authori ti es bel o w were justi fi ed i n re jecti ng the bo ok resul ts o f

the assessee because the assessee fai l ed to produce the books

of account and the rel ated documents before the authori ti es

bel o w. Mere pr oducti on of the Audi t Report i s not enough to

accept the book resul ts of the a ssessee. I n the absence of

books of account and producti on of bi l l s and vouchers, the

authori ti es bel o w were justi fi ed i n esti mati ng the p rofi ts of the

assessee. The l earned CI T ( Appeal s) con si deri ng the

comparabl e cases reduced the net profi t rate of the assessee to

1% as agai nst 5 % esti mated by the Assessi ng Of fi cer. Th e

l earned CI T ( A ppeal s) further noted that th e recei pts of

i nterest subsi dy and the amounts wri tten off amounti ng to

Rs.10,12,279/- do not form t he part of the operati onal

turnover of the assessee and, therefore, shal l have to be 8

excluded for the purpose of estimating the operational

profits and have to be accounted for separately. Since the

assessee has not produced the books of account and related

documents, therefore, the authorities below were justified in

making separate addition of Rs.10,12,279/-. The learned

counsel for assessee has not been able to point out any

infirmity in the order of the learned CIT (Appeals) in

estimating the profit at 1%. Considering the comparable

cases and that the assessee has not been able to show as to

what is the infirmity in the order of the learned CIT

(Appeals) in making separate addition of the amount of

Rs.10,12,279/- on account of interest subsidy and amounts

written off because no details have been furnished before

the authorities below, thus the grounds of appeal of the

assessee are accordingly dismissed.

8. The only issue left is the addition on account of

interest expenditure of Rs.2,28,615/-. The learned CIT

(Appeals) confirmed this addition because the assessee has

not deducted TDS on the amount of interest paid to the

banks. The learned counsel for assessee, however, relied

upon the decision of the Hon'ble Punjab & Haryana High

Court in the case of CIT Vs. Gobind Ram, 229 Taxman 491

in which it was held that "where the income was computed

by applying the GP rate, section 40A(3) of the Act cannot be

invoked". In the case of the assessee the income of the

assessee has been computed by applying net profit rate for

failure of the assessee to produce books of account and 9

related vouchers, therefore, no further addition on account

of disallowance of interest could be made separately.

Following the decision of the Hon'ble Punjab & Haryana

High Court above, we delete the addition of Rs.2,28,615/-.

9. No further point is argued or pressed by the

learned counsel for assessee.

10. In the result, the appeal of the assessee is partly

allowed.

Order pronounced in the open court on this 17th day

of April, 2015.

Sd/- Sd/- (T.R.SOOD) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated : 17 t h April, 2015

*Rati*

Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.

Assistant Registrar, ITAT, Chandigarh