IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. I.T.A. No.767 of 2010 & other connected case being I.T.A. No.768 of 2010 Date of decision: 10.1.2011 Commissioner of Income Tax. -----Appellant. Vs. M/s Sunrays Exports Pvt. Ltd. -----Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. Rajesh Katoch, Advocate for the appellant. --- ADARSH KUMAR GOEL, J. 1. This order will dispose of I.T.A. Nos.767 and 768 of 2010, as both the appeals involve common questions of law. 2. I.T.A. No.767 of 2010 has been preferred by the revenue under Section 260-A of the Income Tax Act, 1961 (for short, “the Act”) against the order of the Income Tax Appellate Tribunal, Chandigarh in I.T.A. No.562/CHD/2009 for the assessment year 2005-06 claiming following substantial questions of law:- “(i) Whether on the facts and circumstances of the case, the Hon’ble Income Tax Appellate Tribunal is justified in law in holding that Assessing Officer was not justified in rejecting the books of accounts merely because there is fall in G.P. rate as compared to I.T.A. No.767 of 2010 previous year and increase in wastage rate with respect to consumption of raw material especially by overlooking the judgement of Hon’ble Punjab & Haryana High Court in the case of Harcharan Dass Textiles 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 that there is no basis for estimating the wastage with respect to the raw material consumed when no proper evidence was produced before Assessing Officer explaining the increase in wastage from 25.12% to 31.66%? (iii) Whether on the facts and circumstances of the case, the Hon’ble ITAT is justified in law in holding that assessee has explained the fall in G.P. rate as compared to the preceding year whereas actually no proper evidence was produced before Assessing Officer explaining the fall in G.P. rate?” 2. The assessee is engaged in manufacture and export of hosiery goods. During assessment, the Assessing Officer doubted the authenticity of the books of account on the ground that there was fall in G.P. rate compared to previous year and increase in wastage rate. Accordingly, best judgment assessment 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) did not accept the wastage, as claimed. On further appeal, the Tribunal accepted the genuineness of the books of account of the 2 I.T.A. No.767 of 2010 assessee and held that doubt raised on the basis of comparison of the G.P. rate and wastage as compared to the previous year was without any valid basis. It was held that the assessee had given due explanation for the fall in G.P. rate and also for increased claim for wastage. The finding recorded by the Tribunal is as under:- 12. Now coming to the reasons for fall in GP rates and their rejection, we find that the assessee is showing higher GP rate than the GP rate shown by other manufacturers and exporter of hosiery goods in the same line of activity. The Assessing Officer in his remand report has accepted that the GP rate shown by the other allied concerns was in the range of 12 to 23%. The assessee during the year under consideration had shown GP rate of 25.89% (as worked out in para 10) during the year, which in any case is higher than the GP rate shown by other parties engaged in the similar line of manufacturing activity. The profits shown by the assessee are backed by complete books of account as prescribed by the authorities. Further, the assessee has also maintained quantitative details including production register and wastage register in order to maintain a control over its manufacturing activities. The assessee has shown a lower GP rate than the preceding year and merely because there is a fall in GP rate does not justify the action of the Assessing Officer in holding that the books of account are to be rejected u/s 145(3) of the Act. Some discrepancy should be noted by the Assessing Officer before the books of account are rejected. 3 I.T.A. No.767 of 2010 The assessee by way of facts and figures has explained the reasons for fall in GP rate and the increase in wastage by 6.5% with respect to the consumption of raw material, as compared to the earlier years. The explanation of the assessee is backed by the evidence produced in the shape of the records maintained during the course of carrying on the business and in the absence of any discrepancy found in the maintenance of such records, the same cannot be rejected merely because of the decrease in GP rate and increase in wastage. Each year of assessment is an independent year and the results shown from year to year can be comparable but cannot be constant. There are many factors involved in carrying on the business activity and the burden is upon the assessee to justify the results shown by the assessee from year to year. However, merely because the assessee has shown lower GP rate in any year of assessment, the results shown by the assessee cannot be rejected as the same are at variance with the preceding year. We find that the results shown by the assessee during the year under consideration are comparable to the results/trends shown in the industry and similar results are accepted in the hands of other assessees being assessed in the same Ware before the same Assessing Officer. The manufacture and export of item is a highly competitive field and the persons carrying on the business has to keep himself abreast of the trends in the market and have to maintain its affairs in such a manner as to be both competitive and profitable. 4 I.T.A. No.767 of 2010 13. The assessee before the authorities below had elaborately explained the reasons for the fall in GP rate, which are referred by us in paras here-in- above. The main reason for decrease in GP rate was the change in items manufactured by the assessee. The assessee was manufacturing higher and fashionable items during the year as compared to low end garments manufactured during the preceding year. The margin of profits decreased due to increased production costs. Other reason was the increase in manufacturing expenses due to increase in wage rate and increase in wastage. The assessee had furnished the quantitative details and produced the stock register and production register to justifiably explain the wastage shown in the production of articles produced for export purposes. In the absence of any specific defects being found in the accounts maintained by the assessee and in the absence of any material brought on record to indicate any discrepancy in the records maintained by 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 books of account maintained by the assessee. The Assessing Officer has failed to bring on record any evidence to prove any discrepancy in the production records and the sales made by the assessee. In the absence of any evidence found to the contrary, merely because there is a fall in GP rate as compared to the preceding year and there is increase in wastage with respect to the consumption of raw material, there is no basis for making adhoc trading addition by estimating the gross profit ratio 5 I.T.A. No.767 of 2010 and the wastage ratio. We are of the view that the books results shown by the assessee merits to be accepted in entirely and the gross profits as reflected in the books of account and the wastage as shown in the book results is to be adopted as shown by the assessee. We find support from the judgment in the case of CIT Vs. K.S. Bhatia 269 ITR 577 (P&H), wherein it has been held that in the absence of any definite finding that the case of the assessee falls within the first proviso to section 145 (1) of the Act, and that there were low profits as compared to earlier years would not be a material justifying and estimate of book results. The CIT(A) has given a finding that the books of account in the present case had been rejected on two grounds i.e. low GP and higher wastage. The CIT(A) further observed that “the Assessing Officer has, of course, not given a categorical finding that the proviso to section 145(1) was attracted”. The CIT(A) however, placed reliance on the judgment in the case of Bajaj Steel Traders [164 Taxman 611 (P&H)] for the proposition that the proviso to section 145(1) may be invoked not only when the method of accounting was not proper, but also where the accounts were not correct or complete. As per the CIT(A) the assessee not maintaining day to day record of wastage makes the accounts of the assessee unreliable. In the facts of the present case, where the assessee is maintaining production records, we find no justification in the rejection of book results. There is no basis for estimating the wastage with respect to the raw material consumed and as the assessee is showing higher profits than in the case 6 I.T.A. No.767 of 2010 of comparable cases and as the fall in GP rate as compared to the preceding year has been explained by the assessee, the same merits to be accepted in entirety. Thus, the grounds of appeal raised by the assessee are allowed and those raised by the Revenue are dismissed.” The above observations show that explanation of the assessee was based on G.P. rate shown by other allied companies and also other factors. Similarly, there was valid explanation for increased wastage. There was, thus, no valid material to support the suspicion that decreased G.P. rate and the increased wastage were not genuine. 3. We have heard learned counsel for the appellant. 4. Question whether there are discrepancies justifying rejection of books of account, has to be gone into from case to case by applying the test of probabilities. No doubt if reduction of G.P. rate, compared to earlier year, was claimed or if higher wastage, compared to earlier year is claimed, it may call for explanation but if explanation is duly furnished and there is no other material in the form of empirical data or any study indicating falsity of the claim, mere deviation in trading results compared to the previous year may not by itself be always enough to reject the books of account. In the present case, the Tribunal has duly considered the explanation and held that addition made by the Assessing Officer was not justified. This finding, in the facts and 7 I.T.A. No.767 of 2010 circumstances of the case, is not shown to be perverse. No substantial 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, 2011 ( AJAY KUMAR MITTAL ) ashwani JUDGE 8