INCOME TAX OFFICER-14(2)-3, MUMBAI v. M/S. HARCOH ENTERPRISES, MUMBAI

ITA 6608/MUM/2008 | 2005-2006
Pronouncement Date: 31-05-2010 | Result: Allowed

Appeal Details

RSA Number 660819914 RSA 2008
Assessee PAN AAAFH0508C
Bench Mumbai
Appeal Number ITA 6608/MUM/2008
Duration Of Justice 1 year(s) 6 month(s) 16 day(s)
Appellant INCOME TAX OFFICER-14(2)-3, MUMBAI
Respondent M/S. HARCOH ENTERPRISES, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 31-05-2010
Appeal Filed By Department
Order Result Allowed
Bench Allotted H
Tribunal Order Date 31-05-2010
Date Of Final Hearing 24-05-2010
Next Hearing Date 24-05-2010
Assessment Year 2005-2006
Appeal Filed On 14-11-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI R.K. PANDA (AM) AND SMT. ASHA VIJAYARA GHAVAN (JM) ITA NO.6608/MUM/2008 ASSESSMENT YEAR-2005-06 THE ITO-14(2)-3 306 EARNEST HOUSE NARIMAN POINT MUMBAI-400 021 VS. M/S. HARCOH ENTERPRISES 421 TANTIA JOGANI INDL. PREMISES J.R. BORICHA MARG LOWER PAREL (E) MUMBAI-400 011 PAN - AAAFH0508C (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI VIRENDRA OJHA RESPONDENT BY: SHRI SUNIL HIRAWAT O R D E R PER SMT. ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED A GAINST THE ORDER DT. 5.9.2008 PASSED BY THE LD. CIT(A)-XIV MUMBAI F OR THE ASSESSMENT YEAR 2005-06 AGAINST THE DELETION BY THE LD. CIT(A) OF VARIOUS DISALLOWANCES MADE BY THE AO. 2. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURE A ND TRADING IN GREY CLOTH & DYED FABRICS AND DURING THE YEAR THE A SSESSEE STARTED CONSTRUCTION ACTIVITY IN THE NAME OF M/S. GINI CONS TRUCTIONS. THE ASSESSEE HAD UNDERTAKEN A PROJECT CALLED GINI PARK AT NEW PANVEL CONSISTING OF SHOPS AND RESIDENTIAL FLATS. ASSESSEE FILED THEIR RETURN OF INCOME FOR THE ASSESSMENT YEAR 2005-06 ON 26.10.200 5 DECLARING A TOTAL INCOME OF NIL AFTER SETTING OFF CARRIED FORWARD LOS S OF RS. 11 22 753/-. THE ASSESSMENT U/S 143(3) WAS COMPLETED ON 27.12.20 07 DETERMINING THE TAXABLE TOTAL INCOME AS RS. 70 47 710/- AFTER S ETTING OFF OF BROUGHT FORWARD LOSS AND DEPRECIATION OF RS. RS. 47 81 050. ITA NO. 6608/M/08 2 3. THE FIRST GROUND OF APPEAL IS AGAINST THE ADDITI ON OF RS.30 560/- OUT OF TRAVELLING EXPENSES ON THE GROUND THAT THEY ARE PERSONAL IN NATURE. THE AO DISALLOWED THE SAME ON THE GROUND THAT THE E XPENSES WERE INCURRED IN CONNECTION WITH VISIT OF FAMILY MEMBERS TO SINGAPORE AND MALAYSIA IN MARCH 2005 AND THE ASSESSEE HAD FILED N O EXPLANATION ABOUT THE SAME. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT FULL DETAILS OF TRAVELLING EXPENDITURE WERE AVAILABLE BEFORE THE AO . IT WAS NOT IN RESPECT OF TRAVEL OF ANY PARTNER OR FAMILY MEMBER TO MALAYS IA AND SINGAPORE IN MARCH 2005. IT WAS INCURRED IN RESPECT OF PARTNERS WHO TRAVELLED IN DEC 2004 AND FEB 2005 AND WAS FOR THE PURPOSE OF BUSINE SS ONLY. HENCE NO DISALLOWANCE WAS CALLED FOR. THE LD. CIT(A) HELD T HAT AS PER THE DETAILS OF THE TRAVELLING EXPENSES AMOUNTING TO RS.30 560/- FU RNISHED BEFORE THE AO AS WELL AS HIMSELF IT IS NOTED THAT NO TRAVELLI NG TO SINGAPORE AND MALAYSIA BY THE PARTNERS AND THEIR FAMILY MEMBERS A RE REFLECTED BUT THE TRAVELLING BY THE PARTNERS ARE REFLECTED WITHIN IND IA ONLY WHICH ARE CLAIMED AS FOR BUSINESS PURPOSES. THE AO HAS SIMPLY ON PRESUMPTION AND NOT BASED ON ANY MATERIAL BROUGHT ON RECORD THA T THE EXPENSES INCURRED WERE IN THE NATURE OF PERSONAL EXPENSES HA S MADE THE DISALLOWANCE WHICH IS NOT JUSTIFIED. ACCORDINGLY H E DELETED THE DISALLOWANCE AND DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 4. AGGRIEVED THE REVENUE IS ON APPEAL BEFORE US. AS THE ISSUE INVOLVES MERE EXAMINATION OF FACTS THE MATTER IS REMITTED B ACK TO THE FILES OF THE AO TO VERIFY WHETHER THE EXPENDITURE INCURRED WERE ONLY IN RESPECT OF PARTNERS TRAVELLING WITHIN INDIA AND IF SO ALLOW TH E CLAIM OF THE ASSESSEE. IN CASE EXPENSES OF CHILDREN OR SPOUSES OF THE PART NERS HAS BEEN CLAIMED THE SAME MAY BE DISALLOWED. 5. THE NEXT ISSUE IS REGARDING THE DELETION OF RS. 1 92 000/- ADDED BY THE AO . THE AO FOUND THAT CONVEYANCE EXPENSES WERE PAID TO 5 PEOPLE OF WHOM SALARY WAS NOT PAID TO 4 PERSONS. ASSUMING TH EIR SALARY TO BE ITA NO. 6608/M/08 3 ABOUT RS. 4000/- PER MONTH THE AO ADDED RS. 1 92 0 00/-. PRESUMABLY AS UNEXPLAINED EXPENDITURE. 6. ON APPEAL IT WAS SUBMITTED BEFORE THE LD.CIT(A) THAT THE FINDINGS OF THE AO ARE NOT ONLY INCORRECT BUT ALSO MERELY IN THE NATURE OF FIGMENT OF IMAGINATION AND CONTRARY TO THE FACT. IT WAS SUB MITTED BEFORE THE CIT(A) THAT OUT OF THE FOUR PERSONS REFERRED TO BY THE AO ONE WAS AN EX EMPLOYEE ONE WAS BROKER AND THE OTHER TWO WERE EMP LOYEES OF SISTER CONCERN. THEY WERE PAID CONVEYANCE EXPENSES IN CONN ECTION WITH DELIVERY OF THEIR OWN DOCUMENTS. HENCE THERE IS NO QUESTION OF PAYING SALARY TO THESE PERSONS AND HENCE ADDITION IS NOT C ALLED FOR. 7. AGGRIEVED THE REVENUE IS ON APPEAL BEFORE US. TH E EXPLANATIONS WERE NOT BEFORE OR CONSIDERED BY THE AO. THEREFORE WE REMIT THE MATTER BACK TO THE FILES OF THE AO TO CONSIDER THE EXPLANA TION OF THE ASSESSEE AND ACCEPTED BY THE CIT(A). IF FOUND CORRECT THE C LAIM OF THE ASSESSEE MAY BE ALLOWED. 8. THE NEXT GROUND IS AGAINST THE DELETION OF THE ADDITION BY AO OF RS. 5 62 347/- OUT OF VARIOUS EXPENSES. THE AO FOU ND THAT THE ELECTRICITY EXPENSES TELEPHONE EXPENSES CARRIAGE AND FREIGHT AND CONVEYANCE EXPENSES WERE LOWER AS A PERCENTAGE OF T OTAL PURCHASES AS COMPARED TO THE EARLIER YEAR. ACCORDINGLY APPLYING THE SAME RATE OF EXPENSES AS A PERCENTAGE OF PURCHASES AS FOUND FOR THE EARLIER YEAR THE AO ADDED RS. 5 62 347/- . 9. ON APPEAL BEFORE THE LD. CIT(A) THE ASSESSEE S UBMITTED THAT THERE IS A QUALITATIVE CHANGE IN THE PREVIOUS YEAR THE C LOTH PURCHASED WERE PROCESSED AND THEN SOLD. WHEREAS IN THE CURRENT YEA R 90% OF THE GREY CLOTH PURCHASED WERE DELIVERED FROM THE SELLERS DIR ECTLY TO THE PURCHASERS CLIENTS. HENCE THERE WAS ADDITIONAL PROPORTIONATE E XPENDITURE INCURRED BY THE ASSESSEE. FURTHER AO HAD ESTIMATED THE EXPEN DITURE AT RS. ITA NO. 6608/M/08 4 4 74 000/- IN THE BODY OF THE ORDER BUT ADDED RS. 5 62 347/- WHILE DETERMINING THE INCOME. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT NO DISCREPANCY OR DEFECTS WAS FO UND IN THE BOOKS HENCE THE ADDITION MADE ON PRESUMPTION CANNOT BE SU STAINED. 10. THE REVENUE IS ON APPEAL. THE AO HAS GIVEN A FI NDING THAT THE EXPENDITURE IS NOT COMMENSURATE WITH THE TURNOVER. IT HAS NOT ABOUT ANY DEFECT IN THE BOOKS BUT ABOUT OMISSION TO ACCOU NT SOME EXPENDITURE. HOWEVER THE ASSESSEE HAD FILED A COGEN T EXPLANATION. BUT THE SAME WAS NOT BEFORE THE AO OR CONSIDERED BY HIM . THEREFORE WE REMIT THE MATTER BACK TO THE FILES OF THE AO TO CONSIDER THE EXPLANATION OF THE ASSESSEE ACCEPTED BY THE LD. CIT(A). IF FOUND CORR ECT THE CLAIM OF THE ASSESSEE MAY BE ALLOWED. 11. THE NEXT GROUND IS AGAINST THE DELETION OF THE ADDITION MADE BY THE AO OF RS. 16 75 474/- ON ACCOUNT OF LOW GP RATE. TH E AO FOUND THAT THE GP RATE FOR THE CURRENT YEAR WAS 7.68% WHILE IT WA S 16.05% IN THE EARLIER YEAR. HE FELT THAT THE MARGIN IN FACT SHOUL D HAVE BEEN HIGHER THIS YEAR AS THE GREY CLOTH PURCHASED DURING THE YEAR CL OTH PURCHASED IS PROCESSED WHILE THE IN THE EARLIER YEAR MORE THAN 2 5% OF THE GOODS PURCHASED WERE FINISHED GOODS. ACCORDINGLY HE ADOPT ED THE GP RATE OF 16.05% OF THE EARLIER YEAR AND ADDED RS. 16 74 474/ -. 12. IN THE APPEAL BEFORE THE LD. CIT(A) THE ASSESS EE HAD DISTINGUISHED BETWEEN THE BUSINESS OF EARLIER YEAR AND THAT IN TH E CURRENT YEAR. IN 2004-05 THE ASSESSEE HAD PURCHASED GREY CLOTH AND S OLD AS FINISHED GREY CLOTH AFTER PROCESSING. WHILE IN THE CURRENT YEAR 80% OF THE GREY CLOTHES PURCHASED WERE SOLD AS GREY CLOTH. THE GP IN MANUFA CTURING ACTIVITY IS 13.88% ON A TURNOVER OF RS. 27 LAKHS WHILE THE GP IN TRADING WAS ONLY 6.72% ON A TURNOVER OF RS. 173 LAKHS. THE ASSESSEE SUBMITTED: ITA NO. 6608/M/08 5 THE STATEMENT SHOWING GP RATIO DECLARED BY THE APP ELLANT IN VARIOUS ORDERS FROM A.Y. 1998-99 ONWARDS TO A.Y 200 5-06 WAS ENCLOSED. IT MAY BE SEEN THAT GP DECLARED IN THE Y EAR UNDER APPEAL IS MUCH MORE THAN GP DECLARED IN MANY OF THE EARLIE R A.Y.S WHICH HAD BEEN ACCEPTED BY THE A.O. THE A.O NEVER CALLED FOR ANY EXPLANATION WITH REGARD TO FALL IN GP DURING THE YE AR. THEREFORE THE ADDITION MADE BY THE AO IS ARBITRARY ADDITION. HOWE VER FROM THE COPY OF MANUFACTURING AND TRADING ACCOUNT IN THE A .Y. 2004-05 IT MAY BE NOTED THAT ALL THE GREY CLOTH AVAILABLE WITH THE APPELLANT WAS PROCESSED AND THEN SOLD AS FINISHED GOODS AND N O GREY CLOTH AS SUCH WAS SOLD. FROM THE COPY OF MANUFACTURING AND TRADING ACCOUNT FOR A.Y. UNDER APPEAL IT MAY BE SEEN THAT 90% OF GREY CLOTH WAS SOLD AS GREY CLOTH. IN THE A.Y. 2004-05 THE AP PELLANT SOLD 1.15.498.95 METRES. OF FINISHED CLOTH FOR A SUM OF RS.39 20 986/- WHEREAS DURING THE A.Y. 2005-06ONLY 86 976.70 MTRS. OF FINISHED CLOTH WAS SOLD FOR A SUM OF RS.28 80 436/- THE AO D ESPITE HIS ADMITTED FACT THAT THE PROFIT MARGIN ON SALE OF FIN ISHED CLOTH IS MORE AS COMPARED TO THE PROFIT MARGIN THAT GREY CLOTH IS SOLD AS GREY CLOTH MERELY BECAUSE THE GP IS LESS HAS MADE THE ADDITION . HOWEVER FROM THE COPY OF THE STOCK SUMMARY OF GREY CLOTH AS WELL AS FINISHED CLOTH FURNISHED BOTH FOR THE A.Y. 2004-05 AND 2005-06. I T MAY BE SEEN THAT EACH AND EVERY METER OF GREY CLOTH AS WELL AS DYED CLOTH HAS BEEN DULY ACCOUNTED FOR BY THE APPELLANT IN THE QUA NTITATIVE DETAILS. THE SAID DETAILS WERE ALSO VERIFIED BY THE A.O. AND NO DEFECT OR DEFICIENCY HAD BEEN FOUND OR POINTED OUT DURING TH E ASSESSMENT PROCEEDINGS THE AO WAS DULY INFORMED THAT ALL THE S ALES PURCHASES ARE DULY SUPPORTED BY THE BILLS OF THE PARTIES CONC ERNED PAYMENTS FOR THE PURCHASES HAD BEEN MADE BY ACCOUNT PAYEE CH EQUES AND THE SALES AMOUNT HAD ALSO BEEN RECEIVED BY ACCOUNT PAYE E CHEQUES. ALL THE QUANTITATIVE DETAILS PERTAINING TO THE STOCKS P URCHASED AND SALES ETC. ARE ALSO MAINTAINED BY THE APPELLANT. DESPIT E ALL THESE FACTS AND THE ACCOUNT OF THE APPELLANT HAD BEEN AUDITED THE GP ADDITION MADE BY THE AO IS NOT JUSTIFIED. 13. ON THE BASIS OF THE ABOVE SUBMISSIONS AND FURNI SHING OF ADDITIONAL EVIDENCE UNDER RULE 46A OF I.T. RULES 19 62 THE A.O. WAS REQUIRED BY THE LD. CIT(A) TO SUBMIT HIS COMMENTS O N MERITS ALONG WITH OBJECTIONS IF ANY WITH REGARD TO THE ADMISSIBI LITY OF ADDITIONAL EVIDENCE. THE AO VIDE LETTER DATED 21.7.2008 HAS SU BMITTED HIS REPORT AS UNDER: THE VARIOUS CONTENTIONS MADE IN THIS RESPECT IS NO T ACCEPTABLE IN VIEW OF THE FOLLOWING FACTS: ITA NO. 6608/M/08 6 A. ON PAGE 4 PARA 6.2(A) THE ASSESSEE HAS CALCULATE D G.P. ON SALES T.O. OF RS.10 17 612/- WHICH IS TOTALLY WRONG AND MISLEADING. IN FACT THE CORRECT SALES T.O. AS PER T HE AUDITED P & L A/C FILED ALONG WITH RETURN OF INCOME IS RS.2 00 17 612/- AND NOT RS.10 17 612/- HENCE THE ADDITION WORKED OUT ON G.P . RATIO OF 8.37% IN THE ASSESSMENT ORDER IS IN ORDER. B. VIDE PARA 6.2 OF THE GROUNDS OF APPEAL THE ASSES SEE CONTENDED THAT THE A.O. NEVER CALLED FOR EXPLANATIO N WITH REGARD TO THE FALL IN G.P. WHICH IS TOTALLY FALSE. THE A. R. WAS ASKED TO EXPLAIN THE FALL IN G.P. DURING THE ASSESSMENT PROC EEDINGS AS PER ORDER SHEET NOTING DATED 10.12.2007 WHICH IS ON RE CORD. C. THE ASSESSEES PLAUSIBLE EXPLANATION FOR FALL IN G. P. VIDE PARA 6(I) TO (V) IS ALSO NOT ACCEPTABLE FOR THE FOLLOWI NG REASONS. A. THE ASSESSEE HAS CLAIMED VIDE PARA 6.2(I) THAT THE NATURE OF BUSINESS IS QUITE DIFFERENT FROM THAT CARRIED OUT I N THE PREVIOUS YEAR. HOWEVER CLAUSE 8(A) OF AUDITORS REPORT (FOR M 3CD) FOR THE YEAR UNDER CONSIDERATION CONFIRMS THAT THE NATURE O F BUSINESS IS SAME I.E. MANUFACTURING TRADING OF CLOTH/FABRIC. B. FURTHER ON GOING THROUGH THE VARIOUS DETAILS SUBMI TTED ALONG WITH THE GROUNDS OF APPEAL IT IS SEEN THAT THE ASS ESSEE IS INTO THE BUSINESS OF MANUFACTURING TRADING OF CLOTH/FABRIC AS WAS IN THE PREVIOUS YEAR. THE RATIO MAY HAVE BEEN CHANGED REGARDING TRADING AND MANUFACTURING ACTIVITIES BUT THE BUSIN ESS IS FOUND TO BE THE SAME . C. IN FACT DURING THE YEAR UNDER CONSIDERATION THE A SSESSEE HAS PURCHASED YARN WHICH IS MANUFACTURED TO GREY CLOTH AND THEN TO DYED CLOTH IN WHICH PROFIT PERCENTAGE WOULD BE EVEN HIGHER. A COPY OF THE ABOVE REMAND REPORT IS ALSO SUBMITTED TO THE APPELLANT. THE ASSESSEE HAS IN REPLY MADE THE SUBMI SSIONS VIDE LETTER DATED 30.8.2008. GR.NO.6 REGD ADDITION MADE OF RS.16 75 474/- ON A /C OF FALL IN GP:- 1. THE WRITTEN SUBMISSIONS (DATED 15.4.2008) STATED IN PARA 6.2(A) MAY KINDLY BE CONSIDERED AS WITHDRAWN BECAUSE THE S AME ARE BASED ON TYPOGRAPHICAL MISTAKE IN PARA 6.1 IN THIS CONNECTION WE INVITE THE KIND ATTENTION OF YOUR HONOUR TO PAGE 13 9(GP RATIO) AND OTHER STATEMENTS OF OUR WRITTEN SUBMISSIONS WHEREIN THE TURNOVER IN ITA NO. 6608/M/08 7 RESPECT OF THE A.Y. 2005-06 HAD BEEN CORRECTLY SHOW N AT RS.2 00 17 612/- 2. IN PARA 3(II) THE ASSESSING OFFICER HAS STATED TH AT THE APPELLANTS SUBMISSIONS IN PARA 6.2(I) TO (V) ARE NOT ACCEPTAB LE TO HIM FOR THE REASONS STATED IN PARA A B & C. IN THIS CONNECTION WE SUBMIT AS UNDER: IN PARA A) HE IS STATING THAT THE NATURE OF BUSI NESS OF THE APPELLANT IS THE SAME I.E MANUFACTURING TRADING OF CLOTH/FA BRIC. THEREAFTER IN PARA B HE HIMSELF IS STATING THAT RATIO MAY HAVE C HANGED REGARDING TRADING AND MANUFACTURING OF BUSINESS BUT THE BUSI NESS IS FOUND TO BE THE SAME. THE ASSESSING OFFICER HAS SIMPLY STATE D ABOUT THE NATURE OF THE BUSINESS BUT HAS NOT GIVEN ANY REASO NS ARGUMENTS FOR NOT ACCEPTING THE G.P. DECLARED BY THE APPELLAN T. THE VARIOUS STATEMENTS SHOWING THE QUANTITY AND VALUE OF MANUFA CTURING AND TRADING ACTIVITY UNDERTAKEN BY THE APPELLANT SUBMIT TED AT PAGE NO. 141 TO 152 APPEARS TO HAVE BEEN FOUND CORRECT BY TH E ASSESSING OFFICER BECAUSE NOWHERE IN HIS REMAND REPORT HE HAS DISPUTED THE CORRECTNESS OF THESE STATEMENTS. II. WITH REGARD TO PARA 3(II) WE SUBMIT AS UNDER : (A) TO APPRECIATE THE DETAILS OF BUSINESS ACTIVITY OF THE YEAR UNDER APPEAL I.E. A.Y. 2005-06 AS COMPARED TO A.Y. 2004- 05 PLEASE NOTE THAT IN A.Y. 2005-06 THE APPELLANT HAD PURCHASED G REY CLOTH OF AROUND 8.69 LAKH METERS WHICH WAS SOLD AS IT IS (PA GE 141 OF PAPER BOOK DATED 15.4.2008). AS COMPARED TO THE SAME IN THE A.Y. 2004- 05 ALL THE GREY CLOTH PURCHASED DURING THE YEAR INC LUDING THE OPENING GREY CLOTH WAS PROCESSED INTO FINISHED GOOD S AND NOT EVEN A SINGLE METER OF GREY CLOTH WAS SOLD AS GREY CLOTH I N OTHER WORDS ALL THE SALES MADE IN THE ACCOUNT PERIOD RELEVANT TO A. Y. 2005-06 OUT OF THE TOTAL SALES MADE OF RS.2 17 00 612/- SALE OF GR EY CLOTH AMOUNTING TO RS.1 73 37 176/- I E. ABOUT MORE THAN 80% OF THE TOTAL TURNOVER. (B) IN A.Y. 2005-06 ALL THE YARNS PURCHASED WERE GOT FI RST PROCESSED INTO GREY CLOTH THEREAFTER PROCESSED INTO FINISHED CLOTH. HOWEVER IN A.Y. 2004-05 GREY CLOTH WAS PURCHASED WHICH WAS SO LD AS FINISHED CLOTH AFTER PROCESSING. AS REGARDS THE FIRST ACTI VITY OF TRADING OF GREY CLOTH AND SECOND ACTIVITY I.E. WEAVING PROCESSING RESULTING INTO FINISHED CLOTH WE ARE ENCLOSING HERE WITH THE TWO SEPARATE TRADING ACCOUNTS (ANNEXURE A) WHICH CLEARLY SHOWS THAT IN T HE MANUFACTURING ACTIVITY THE GP COMES TO 13.88% ON SA LES TURNOVER OF AROUND RS.27 LAKHS. AS AGAINST THE OTHER ACTIVITY OF TRADING I.E ITA NO. 6608/M/08 8 PURCHASE AND SALE OF GREY CLOTH THE GP WAS 6.72% O N SALES TURNOVER OF RS.173 LAKHS. (C) THE ASSESSING OFFICER WAS ALSO HAVING THE VARIOUS D ETAILS STATEMENTS AT PAGE NO.139 TO 154 OF PAPER BOOK DATE D 15.4.2008 WHICH SHOWS THE DETAILS WORKING MADE BY THE APPELLA NT IN RESPECT OF THE VARIOUS ACTIVITIES OF THE YEAR UNDER APPEAL I.E . A.Y. 2005-06 AS WELL AS EARLIER YEAR. HOWEVER THE ASSESSING OFFIC ER HAS NOT MADE ANY ADVERSE COMMENT ON THE SAID STATEMENTS WHICH SH OWS THAT HE COULD NOT FIND ANY FAULT IN ALL THE STATEMENTS SUBM ITTED VIDE PAGE NOS. 139 TO 152 OF OUR PAPER BOOK DATED 15.4.2008. (D) SINCE ALL THE PURCHASES AND SALES ARE FULLY VOUCHED FULL QUANTITATIVE DETAILS WITH REGARD TO YARN GREY CLOTH AND FINISHE D GOODS ARE AVAILABLE WHICH WERE ALSO FURNISHED TO THE ASSESSIN G OFFICER AND NO DEFECT DEFICIENCY OR DISCREPANCY HAD BEEN FOUND BY THE ASSESSING OFFICER IN ANY OF THE PURCHASE MADE SALES MADE OR QUANTITATIVE DETAILS MAINTAINED BY THE APPELLANT IN THE ACCOUNT PERIOD RELEVANT TO THE A.Y. 2005-06 YOUR HONOUR IS REQUESTED THAT THE ASSESSING OFFICER MAY KINDLY BE DIRECTED THAT THE TRADING RESULTS DEC LARED BY THE APPELLANT MAY KINDLY BE ACCEPTED. 3. WE MAY ALSO LIKE TO STATE THAT THE GROSS PROFIT OF APPELLANT WAS RS.6.29 LAKHS IN A.Y. 2004-05 WHICH HAS INCREASED S UBSTANTIALLY (MORE THAN DOUBLED) TO RS.15.37 LAKHS IN A.Y. 2005- 06. 4. IN VIEW OF THE ABOVE YOUR HONOUR MAY KINDLY SEE TH AT THERE WAS NO CASE FOR ANY ADDITION OF RS.16 75 474/- TO THE TOT AL INCOME OF THE APPELLANT BOTH ON FACTS AS WELL AS ON LAW. IT IS N OTHING BUT A CASE OF ARBITRARY ADDITION AND HENCE NOT SUSTAINABLE IN THE EYES OF LAW. IT IS THEREFORE REQUESTED THAT THE ADDITION OF RS.16 75 4 74/- MADE BY THE ASSESSING OFFICER MAY KINDLY BE DELETED. 14. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE HO LDING AS UNDER: I HAVE CAREFULLY CONSIDERED THE FACTS AND SUBMISSIO NS OF THE APPELLANT AND ALSO GONE THROUGH THE MATERIAL BROUGH T ON RECORD AS WELL AS THE ASSESSMENT ORDER AND THE AOS REMAND RE PORT. ADMITTEDLY THE GP ADDITION IS MADE BY THE AO ON TH E FINDING THAT THE GP DURING THE YEAR UNDER APPEAL WAS CONSIDERABL Y LOW AS COMPARED TO THE GP DECLARED IN THE IMMEDIATELY PREC EDING YEAR. I FIND THAT THE AO AFTER NOTICING THESE FACTS HAS SOU GHT CLARIFICATION AND IN THE ABSENCE OF ANY CLARIFICATION FROM THE AP PELLANT MADE THE ADDITION OF DIFFERENT PERCENTAGE OF THE GP RATIO. I N THE ABOVE SUBMISSIONS THE APPELLANT HAD EXPLAINED THE REASON S FOR FALL IN GP RATIO AND ALSO CONTENDED THAT THE AO IN THE REMAND REPORT HAS NO ITA NO. 6608/M/08 9 WHERE DISPUTED THE CORRECTNESS OF THE VARIOUS STATE MENTS OF ACCOUNTS FURNISHED ALONG WITH THE SUBMISSIONS RELA TING TO THE TRADING AND MANUFACTURING ACTIVITIES. I FURTHER FI ND THAT THE AO IN THE ASSESSMENT ORDER HAS STATED THAT GP PERCENTAGE SHOULD HAVE BEEN HIGHER DURING THE YEAR UNDER CONSIDERATION AS DURING THE PREVIOUS YEAR MORE THAN 25% OF THE GOODS PURCHASED WERE FINISHED GOODS IN WHICH THE MARGIN WOULD BE LOW WHEREAS IN THE CURRENT YEAR ALL GREY CLOTH IS PROCESSED. TO THIS OBSERVATI ON OF THE AO THE APPELLANT HAS CONTENDED THAT FROM THE COPY OF MANUF ACTURING AND TRADING ACCOUNT IN THE YEAR ENDED 31.3.2004. IT MAY BE NOTED THAT ALL THE GREY CLOTH AVAILABLE WITH THE APPELLANT WAS GOT PROCESSED AND THEN SOLD AS FINISHED GOODS AND NO GREY CLOTH W AS SOLD AS GREY CLOTH WHEREAS IN THE ACCOUNTING PERIOD RELEVANT TO ASSESSMENT YEAR UNDER APPEAL 90% OF GREY CLOTH WAS SOLD AS GREY CL OTH. THEREFORE THE AOS OBSERVATION THAT MARGIN OF PROFIT IS LOWER ON THE SALES OF GREY CLOTH AS SUCH IS CORRECT AS A RESULT OF WHICH THE GP IS REDUCED SUBSTANTIALLY DURING THE YEAR UNDER APPEAL THE AO IN THE REMAND REPORT HAS ALSO NOT DETECTED AND POINTED OUT ANY DI SCREPANCY AND DEFECTS IN THE STATEMENTS QUANTITATIVELY OR QUALITA TIVELY OF THE MANUFACTURING AND TRADING GOODS AND STOCK STATEMENT ETC. THEREFORE THE GP ADDITION MERELY ON THE BASIS OF DECREASE IN THE RATIO DURING THE YEAR AS COMPARED TO EARLIER YEARS WITHOUT CORRO BORATING OR SUBSTANTIATING THE SAME WITH FURTHER SUPPORTING MAT ERIAL AND EVIDENCE CANNOT BE SUSTAINED I THEREFORE FIND CO NSIDERABLE FORCE AND MERITS IN THE SUBMISSIONS OF THE APPELLANT THAT THERE WAS NO NEED FOR MAKING ANY ADDITION ON ACCOUNT OF FALL IN GP DURING THE YEAR ACCORDINGLY THIS GROUND OF APPEAL IS ALLOWED I N FAVOUR OF THE APPELLANT. 15. AGGRIEVED THE REVENUE IS ON APPEAL BEFORE US. W E FIND THAT THE ADDITION MADE BY THE AO ON ACCOUNT OF LOW G P IS BA SED PURELY ON SURMISES AND SUSPICION. MERELY BECAUSE THE GP OF TH E EARLIER YEAR WAS LOWER ADDITION CANNOT BE MADE TO THE PROFITS. THE AO WAS ALSO FURNISHED WITH FULL EXPLANATION FOR THE FALL IN GP IN THE CO URSE OF APPEAL PROCEEDINGS. HE HAS MERELY REJECTED THE ASSESSEES EXPLANATION AND HAS NOT GIVEN ANY REASONS BASED ON EVIDENCE FOR DOING S O. FURTHER THE AO HAS MADE ADDITION IN RESPECT OF PROCESSING CHARGES AND OTHER EXPENSES ON THE GROUND THEY WERE VERY LOW AND AT THE SAME TI ME MADE AN ADDITION ON THE GROUND GP IS LOW (I.E .EXPENSES ARE HIGH). T HESE TWO ARE CONTRADICTORY. WE FIND THAT THE EXPLANATION OF THE ASSESSEE IS REASONABLE ITA NO. 6608/M/08 10 AND NOTHING IS ON RECORD OR SUBMITTED BEFORE US TO REBUT THE SAME. IN THE CIRCUMSTANCES WE CONFIRM THE ORDER OF THE CIT(A) ON THIS GROUND AND DELETE TH ADDITION OF RS. 16 75 474/- ON ACCOUNT OF LOW GP RATE FOR THE YEAR. THE REVENUES APPEAL IS DISMISSED ON THIS GRO UND. 16. THE NEXT ISSUE IS THE DELETION BY THE CIT(A) OF THE ADDITION OF RS.20 25 826/- ON ACCOUNT OF BOGUS PURCHASES MADE F ROM S. S. TEXTILES AND ALSO ADDITION OF RS.36 61 803/- ON ACCOUNT OF B OGUS PURCHASES MADE FROM BAJRANG TEXTILES ADDED BY THE AO. THE AO ISSUED A NOTICE U/S 133(6) ON 22.10.07 WHICH WAS RETURNED BY THE PO STAL DEPARTMENT. AGAIN SUMMONS U/S 131 WERE ISSUED TO BOTH THE PARTI ES ON 14.12.2007 WHICH WERE RETURNED. UNDER THE CIRCUMSTANCES HE TRE ATED BOTH THE PARTIES AS FICTITIOUS AND ADDED THE PURCHASES OF RS .20 25 826/- AND RS.36 61 803/- FROM THE TWO PARTIES AS BOGUS AND TH ESE WERE ADDED TO THE INCOME OF THE ASSESSEE. 17. ON APPEAL BEFORE THE LD. CIT(A) THE ASSESSEE SUBMITTED THAT THEY PURCHASED GREY CLOTH FROM THESE TWO PARTIES DURING THE YEAR UNDER APPEAL. WITH REGARD TO S.S. TEXTILES A COPY OF LED GER ACCOUNT AS APPEARING IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE DULY CONFIRMED BY THE SAID PARTY WAS FURNISHED AS WELL AS THEIR PAN N O. THE ENTIRE PAYMENT OF RS.20 25 826/- WAS MADE BY ACCOUNT PAYEE CHEQUE DRAWN ON CITIBANK. A COPY OF BANK ACCOUNT WAS FURNISHED. AS REGARDS BAJRANG TEXTILES COPY OF LEDGER ACCOUNT DULY CONFIRMED BY THE SAID PARTY WAS FILED. THEIR PAN NO WAS ALSO FILED. CLOSING BALANCE IN RESPECT OF BAJRANG TEXTILES AS ON 31.3.2005 IN THE APPELLANTS BOOKS O F ACCOUNT WAS RS.1 93 630/- WHEREAS THE CLOSING BALANCE IN THE BO OKS OF ACCOUNT OF BAJRANG TEXTILES WAS RS.23 18 296/- THE SAID PARTY HAD FURNISHED THE NECESSARY RECONCILIATION (COPY ENCLOSED AS PER DETA ILS BELOW:- BALANCE OF HARCOH ENTERPRISES AS PER BOOKS OF ACCOUNTS AS ON 31.3.2005 23 18 296/- ITA NO. 6608/M/08 11 LESS: CHEQUES RECEIVE3D BUT NOT DEPOSITED 21 24 686/- BALANCE AS PER BOOKS OF ACCOUNT OF --------------- HARCOH ENTERPRISES 1 93 630/- 18. THE PAYMENT FOR THE SAID SUM OF RS.36 61 803/- HAD BEEN MADE BY ACCOUNT PAYEE CHEQUES. AS REGARDS CHEQUES AMOUN TING TO RS.21 24 686/- WHICH WAS RECEIVED BY BAJRANG TEXTIL ES IN THE ACCOUNTING PERIOD RELEVANT TO A.Y. UNDER APPEAL BUT WERE DEPO SITED IN ITS BOOKS OF ACCOUNT WITH OBC IN THE ACCOUNTING PERIOD RELEVANT TO A.Y. 2006-07 THE SAME HAD BEEN DULY CREDITED IN THEIR BANK ACCOUNT W ITH OBC WITH COPY ENCLOSED). OVER 90% OF GREY CLOTH PURCHASED FROM TH E SAID TWO PARTIES HAD BEEN SOLD AS GREY CLOTH. A STATEMENT SHOWING TH E DETAILS OF GREY CLOTH PURCHASED FROM THEM AND THE NAMES AND ADDRESSES OF THE PARTIES TO WHOM THE SAID GREY CLOTH HAD BEEN SOLD WAS FURNISHE D. IT CAN BE SEEN THERE FROM THAT FOR EACH AND EVERY GREY CLOTH PURCH ASED FROM THE SAID TWO PARTIES THERE WAS A CORRESPONDING SALE. IN VIEW OF THESE FACTS THE PURCHASES MADE FROM THESE PARTIES ARE ESTABLISHED T O BE GENUINE. THE ADDITION MADE THEREFORE IS NOT SUSTAINABLE. 19. AS REGARDS NON SERVICE OF NOTICE SENT BY THE AO IT WAS SUBMITTED THAT EVEN NOW THE BHAIWANDI ADDRESS OF THE SAID TWO PARTIES IS THE SAME AS GIVEN TO THE AO. THE AO NEVER INFORMED THE APPEL LANT THAT SECOND NOTICE SENT BY HIM HAD ALSO BEEN RETURNED UNSERVED. IF THE AO HAD INFORMED THE APPELLANT IT WOULD HAVE GOT THE NECES SARY CONFIRMATIONS OF THE SAID PARTIES AND HAD FURNISHED THE SAME TO THE AO IN WHICH CASE THERE WOULD HAVE BEEN NO NECESSITY TO MAKE ANY ADDI TIONS ON THESE TWO ACCOUNTS. 20. WHEN THESE FACTS WERE FURNISHED TO THE AO IN H IS REMAND REPORT DATED 21.7.2008 THE AO HAS FURNISHED HIS REASONS TO SUPPORT THE ADDITIONS. THE CIT(A) ALLOWED THE ASSESSEES CLAIM OBSERVING AS UNDER: ITA NO. 6608/M/08 12 I FIND CONSIDERABLE FORCE IN THE ABOVE COUNTER A RGUMENT OF THE APPELLANT ON THE OBSERVATIONS OF THE AO IN HIS REPO RT. FROM THE AOS OBSERVATIONS I FIND THAT HE HAS MERELY RAISED SUSPI CION REGARDING THE GENUINENESS OF PURCHASES BY POINTING OUT CERTAI N FLAWS BUT HAS NOT BEEN SUCCESSFULLY ABLE TO ESTABLISH THAT THESE PURCHASES WERE CERTAINLY FICTITIOUS/BOGUS AS TREATED BY HIM IN THE ASSESSMENT ORDER. THE AO IN THE REPORT THOUGH HAS NOT STATED ANYTHING ABOUT THE SUMMONS HAVING BEEN ISSUED TO THESE TWO PARTIES DUR ING THE REMAND PROCEEDINGS. SINCE THE APPELLANT IN THE ABO VE SUBMISSIONS AND COUNTER ARGUMENTS HAS REPEATEDLY BEEN CLAIMING THAT THE AO HAD ISSUED SUMMONS TO THESE TWO PARTIES AND THEY AL SO APPEARED BEFORE HIM I FOUND IT APPROPRIATE TO CALL FOR THE A SSESSMENT RECORDS. FROM THE ASSESSMENT RECORDS I FIND THAT THE AO HAS MAINTAINED THREE FOLDERS ONE CONTAINING ORIGINAL ASSESSMENT A ND SUBSEQUENT CORRESPONDENCES ONE CONTAINING NOTICES U/S 133(6) AND THE THIRD ONE CONTAINING REMAND REPORT AND RELATED DOCUMENTS. FROM THE THIRD FOLDER I FIND THAT DURING THE REMAND PROCEEDINGS A LSO THE AO HAS ISSUED SUMMONS U/S 131 OF THE I.T. AC DATED 12.5.2 008 TO THESE TWO PARTIES. I ALSO FIND THAT THESE TWO PARTIES VI DE THEIR LETTER DATED 16.5.2008 RECEIVED BY THE AO ON THE SAME DATE HAD R ESPONDED TO THE SUMMONS ISSUED THEN AND ALSO FURNISHED THE REQU ISITE DETAILS AND DOCUMENTS AND ALSO GIVEN THEIR NEW ADDRESS FOR FUTURE CORRESPONDENCE. THE AO HAS NOT MADE ANY COMMENTS IN RESPECT OF THESE TWO PARTIES HAVING ATTENDED BEFORE HIM AND FU RNISHED THE DETAILS AND DOCUMENTS. SINCE THE PARTIES CONCERNE D HAVING BEEN APPEARED BEFORE HIM AND ALSO FURNISHED THE REQUISIT E DETAILS AND DOCUMENTS PERTAINING TO THE TRANSACTIONS IN QUESTIO N I DO NOT FIND ANY REASON FOR NOT TREATING THE PURCHASES AS GENUIN E . THEREFORE THE ADDITION MADE BY THE AO ON ACCOUNT OF FICTITIOUS AN D BOGUS PURCHASES FOR AN AMOUNT OF RS.20 25 826/- FROM S. S . TEXTILES AND RS.36 61 803/- FROM BAJRANG TEXTILES IS DELETED. T HEREFORE THIS GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE APPELL ANT. 21. AGGRIEVED THE REVENUE IS ON APPEAL BEFORE US. I N THE COURSE OF THE REMAND PROCEEDINGS THE AO DID NOT CALL FOR THE PART ICULARS FROM THE PARTIES DIRECTLY. THE ASSESSEE HAD FURNISHED THE PA N NOS. OF THESE SUPPLIERS AND THEREFORE VERIFICATION SHOULD HAVE BE EN DONE BY THE AO. FURTHER THESE PURCHASES HAVE BEEN ACCOUNTED IN THE STOCK AND THEY HAVE BEEN SOLD ALSO. WE ARE OF THE OPINION THAT TH E AO HAS NOT CARRIED OUT THE PROPER EXAMINATION OF PURCHASES FROM THESE TWO DEALERS. IN THE ITA NO. 6608/M/08 13 CIRCUMSTANCES WE REMIT THE ISSUE TO THE FILES OF T HE AO FOR REDOING IN ACCORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTU NITY TO THE ASSESSEE. 22. THE NEXT ISSUE IS AGAINST THE DELETION BY LD.CI T(A) OF THE DISALLOWANCE MADE BY THE AO BEING INTEREST ON DEBIT BALANCE OF RS.4 28 877/- WHILE REDUCING THE WIP. THE AO FOUND THAT THE DEBIT BALANCE IN THE PARTNERS ACCOUNTS WERE RS. 73 49 65 9/- AT THE BEGINNING OF THE YEAR WHILE IT STOOD AT RS. 97 06 506/- AT T HE END OF THE RELEVANT PREVIOUS YEAR. ON THE DIFFERENCE OF RS. 17 47 171/ -. HE HAS HELD THAT BORROWINGS TO THIS EXTENT WERE UTILISED FOR PARTNER S PERSONAL PURPOSES. HENCE THE AO WORKED INTEREST OF RS. 4 28 877/- RATE AT 18% ON THIS AMOUNT AND DISALLOWED. THIS AMOUNT WAS REDUCED FROM THE WIP AT THE END OF THE YEAR. 23. ON APPEAL THE LD.CIT(A) ALLOWED THE ASSESSEES APPEAL OBSERVING AS UNDER: IN THE ASSESSMENT ORDER VIDE PARA 9 ARE FACTUALLY PROVED TO BE INCORRECT BY THE APPELLANT IN THE ABOVE SUBMISSIONS . ON GOING THROUGH THE COPIES OF ACCOUNTS FURNISHED BY THE APP ELLANT I FIND THE SAME TO BE CORRECT. THE CLAIM OF THE APPELLANT THA T FOR THE CLOTH BUSINESS IT HAD UTILIZED INTEREST FREE LOANS RAISED BY IT FROM VARIOUS PERSONS ARE ALSO FOUND TO BE CORRECT. THE AO NOWHE RE IN HIS ORDER HAS FOUND HAVING ESTABLISHED ANY NEXUS OF HAVING UT ILIZED THE BORROWED FUND FOR CONSTRUCTION ACTIVITIES AGAINST I TS CLOTH BUSINESS OR BY THE PARTNERS FOR THE PURPOSES OTHER THAN THE BUS INESS. HE HAS MERELY ON A MISTAKEN FIGURES ARRIVED AT THE DEBIT B ALANCES AS ON THE YEAR ENDING 31.3.2004 AND 31.3.2005 RESPECTIVELY CO NCLUDED THAT THE BORROWED FUNDS FOR CONSTRUCTION ACTIVITY WERE U TILIZED BY THE PARTNERS FOR THEIR OWN PURPOSES. SUCH TYPE OF DISAL LOWANCE MERELY ON SUSPICION AND SURMISES CANNOT BE SUSTAINED. THER EFORE THIS DISALLOWANCE MADE BY THE AO AT RS.4 28 877/- IS NOT JUSTIFIED HENCE DELETED. THIS GROUND OF APPEAL IS THEREFORE PARTLY ALLOWED. 24. AGGRIEVED THE REVENUE IS ON APPEAL. HERE AGAIN WE FIND THAT THE AO HAS FOUND THAT THERE IS HUGE DEBIT BALANCE IN THE A CCOUNTS OF THE PARTNERS. IT HAS THEN TO BE EXAMINED WHETHER ANY OF THE BORROWED FUNDS ITA NO. 6608/M/08 14 HAVE BEEN WITHDRAWN BY THE PARTNERS IN WHICH CASE D ISALLOWANCE OF INTEREST ON SUCH DIVERTED FUNDS HAVE TO BE CONSIDER ED. WE FIND THAT NEITHER THE AO NOR THE LD.CIT(A) HAS BROUGHT ON REC ORD THE CORRECT FACTS RELATING TO THIS ISSUE. IN THE CIRCUMSTANCES WE RE MIT THE ISSUE TO THE FILES OF THE AO FOR REDOING IN ACCORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTUNITY TO THE ASSESSEE. 25. IN THE RESULT THE APPEAL FILED BY THE REVENUE A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 31 ST DAY OF MAY 2010 SD/- SD/- (R.K. PANDA) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED 31 ST MAY 2010 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR H BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR I.T.A.T MUMBAI ITA NO. 6608/M/08 15 DATE INITIALS 1 DRAFT DICTATED ON: 26.5.2010 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 28.5.2010 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: _________ ______ 9. DATE OF DISPATCH OF ORDER: _________ ______