w w w . L a w y e r S e r v i c e s . i n



Commissioner of Income-tax v/s Swastik Food Products


Company & Directors' Information:- B. P. FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15311MP1994PTC032994

Company & Directors' Information:- S P P FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15412DL2004PTC128666

Company & Directors' Information:- J S FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15314OR1991PTC002964

Company & Directors' Information:- H R B FOOD PRODUCTS PVT LTD [Active] CIN = U15146WB1988PTC045281

Company & Directors' Information:- V D FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15400DL2012PTC231717

Company & Directors' Information:- P R FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U74899DL1989PTC030483

Company & Directors' Information:- S S FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15310MH2003PTC142530

Company & Directors' Information:- B K FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15312OR1996PTC004541

Company & Directors' Information:- O H P FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U52205DL1999PTC100269

Company & Directors' Information:- K V FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U15122DL2007PTC162739

Company & Directors' Information:- K. C. FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15431JK1982PTC000554

Company & Directors' Information:- K I C FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15316DL1979PTC009757

Company & Directors' Information:- R B FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15313DL2010PTC202753

Company & Directors' Information:- R K B FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15490KL2013PTC033500

Company & Directors' Information:- S K G FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U15419UP1991PTC013771

Company & Directors' Information:- B H FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15134DL1997PTC084273

Company & Directors' Information:- N S FOOD PRODUCTS PVT LTD [Strike Off] CIN = U15412WB1992PTC055591

Company & Directors' Information:- H N FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15146UP1990PTC011540

Company & Directors' Information:- V K FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15412UP1988PTC010023

Company & Directors' Information:- B M FOOD PRODUCTS PVT LTD [Strike Off] CIN = U15419WB1993PTC060386

Company & Directors' Information:- I K FOOD PRODUCTS PVT LTD [Strike Off] CIN = U15412WB1991PTC051852

Company & Directors' Information:- S S V FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15499AP1982PTC003547

Company & Directors' Information:- S Q P FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U15100MH2003PTC139217

Company & Directors' Information:- F S FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15311MH2000PTC126031

Company & Directors' Information:- Z K FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U15400MH2010PTC209818

Company & Directors' Information:- SWASTIK FOOD PRODUCTS PVT LTD [Strike Off] CIN = U15499TG1981PTC003030

Company & Directors' Information:- M B S FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U01112WB2003PTC096375

Company & Directors' Information:- N D FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U15131DL2002PTC115754

Company & Directors' Information:- SWASTIK INDIA PRIVATE LIMITED [Strike Off] CIN = U92110MH1940PTC003226

Company & Directors' Information:- C K M FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U51909KL1998PTC012358

Company & Directors' Information:- G S C FOOD PRODUCTS PVT LTD [Strike Off] CIN = U15316WB1985PTC038398

Company & Directors' Information:- A K G FOOD PRODUCTS PVT LTD [Under Liquidation] CIN = U15412WB1990PTC049789

Company & Directors' Information:- J M D FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15419DL1998PTC097578

Company & Directors' Information:- L K FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15200TG2016PTC103411

Company & Directors' Information:- FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U15431JK1966PTC000304

Company & Directors' Information:- R R FOOD PRODUCTS PRIVATE LIMITED [Active] CIN = U15490PN2015PTC154753

Company & Directors' Information:- A N FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U15400TG2013PTC091969

Company & Directors' Information:- R V S K FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U15490DL2012PTC245851

Company & Directors' Information:- K G Y FOOD PRODUCTS PRIVATE LIMITED [Strike Off] CIN = U15400KA1984PTC005909

Company & Directors' Information:- FOOD PRODUCTS (INDIA) PVT. LTD. [Strike Off] CIN = U15311HR1994PTC032356

Company & Directors' Information:- M K FOOD PRODUCTS PVT LTD [Strike Off] CIN = U15209DL1979PTC009924

    IT Appeal No. 24 of 2009

    Decided On, 25 June 2014

    At, High Court of Himachal Pradesh

    By, THE HONOURABLE CHIEF JUSTICE MR. MANSOOR AHMAD MIR & THE HONOURABLE MR. JUSTICE TARLOK SINGH CHAUHAN

    For the Appellant: Vinay Kuthiala, Diwan Singh Negi, Advocates. For the Respondent: Atul Jhingan, Advocate.



Judgment Text

Tarlok Singh Chauhan, J.

1. The present appeal under s. 260A of the IT Act, 1961 (for short 'Act'), has been preferred by the Revenue against the order of Income-tax Appellate Tribunal, Chandigarh Bench 'B', Chandigarh, passed in ITA No. 186/Chd/2008, dt. 29th Aug., 2008, asst. yr. 2003-04.

2. The facts, in brief, may be noticed. The assessee is a partnership firm engaged in the business of manufacture and sale of wheat products. For the asst. yr. 2003-04, it filed a return showing income of Rs. 34,71,660 and claimed the entire amount as deduction under s. 80-IB thereby returning the total income at nil. This was the fifth year of deduction under s. 80-IB. In the course of assessment proceedings, the AO noticed certain discrepancies in the accounts and also sought to verify the correctness of balances shown in the accounts of about 325 creditors and debtors by issuing inquiry letters to them. While account confirmations were received in respect of about 95 such parties, the letters issued to 143 other parties were returned unserved as the parties could not be found at the addresses given. In other cases, the letters issued did not come back, but no confirmations were received from the parties. Considering all the facts, a special audit under s. 142(2A) was ordered with the approval of the CIT.

3. The report of the special audit was received in September, 2006, pointing out several discrepancies in the books of accounts. The major discrepancies noted by the auditors were as under:

"(a) Depreciation actually allowable to the assessee was only Rs. 9.05 lacs as against Rs. 18.08 lacs claimed in the return.

(b) Some of the unsecured loans taken during the year had not been confirmed by the creditors.

(c) The debit and credit balances in the accounts of various parties were subject to confirmation except in a few cases.

(d) Expenses debited in respect of various items such as consumable stores, travelling, labour welfare, postage, building repairs, truck expenses and rebate and discount were not verifiable in the absence of proper vouchers.

(e) Six purchase bills showing total purchases of Rs. 2.68 lacs were not entered in the cash book.

(f) In some cases excess purchases were recorded in the purchase register as compared to the purchase bills.

(g) With regard to the quantitative accounts of raw materials it was found that raw material stock of 6300 quintals valued at Rs. 39,75,300 had not been included in the closing stock and thereby the profit had been understated by Rs. 39,75,300. Further, in respect of some other local purchases of raw material, the closing stock was overstated by 3.94 quintals.

(h) Purchases aggregating to about Rs. 6.5 lacs were entered in the books but no purchase bills were found.

(i) In respect of sales, the quantity recorded in the sales register was different from that in the sale bills in 21 instances. In certain other instances of sales, the amount of sales had been shown less by an amount of Rs. 21,466.

(j) No brand wise stock register was maintained."

4. Since most of the accounts of debtors and creditors were not confirmed, stock records were not properly maintained, and in view of the findings of the special auditors, and further taking into consideration the fact that the profits declared and expenses shown were not consistent with figures of other years, the AO rejected the books of accounts as unreliable. He also found that in the immediate succeeding asst. yr. 2004-05, where the assessee was eligible for deduction under s. 80-IB at only 25 per cent of profits, the GP rate had been disclosed at 6.32 per cent as against about 8 per cent declared in the current year. Applying the profit rate of 6.32 per cent to the sales of Rs. 15.69 crores declared during the year, the AO completed the assessment under s. 143(3) on 11th Nov., 2006 and found that the reasonable profits should be estimated at a figure lower than the profits declared by a sum of Rs. 26,39,958. This amount of income was taxed as income from undisclosed sources.

5. The assessee filed appeal before the CIT(A) who vide her order dt. 20th Dec., 2007 in Appeal No. IT/296/2006-07/SML allowed the same and held that no concrete basis had been given by the AO for rejecting the books of accounts and, therefore, the profit declared by the assessee could not be disturbed.

6. In the appeal filed by the Revenue, the Tribunal vide order under consideration had agreed with the CIT(A) and dismissed the appeal. In its decision, the Tribunal had noticed that s. 145(3) of the Act empowers the AO to reject the accounts maintained by the assessee if he was not satisfied about their correctness or completeness. However, the Tribunal observed that the AO has merely doubted the trading results declared by the assessee and in fact there is no finding by the AO as to how the accounts maintained Were incomplete or incorrect. It was held by the Tribunal that variation in profit rate and the level of expenses in different years was not sufficient reason to hold that the accounts were defective. It was also noted that a special audit had been conducted under s. 142(2A), but it was observed that the AO has made no reference to any adverse remarks of the auditor in the assessment order. It was also held that non-maintenance of stock records was not shown to adversely affect the correctness or completeness of the accounts. Thus, the Tribunal held that there was no justification on the part of the AO for invoking s. 145(3) and rejecting the books of account in this case and further it was held that the assessee was eligible for deduction under s. 80-IB on the income declared by it in the return.

7. On 12th March, 2009, this Court admitted the appeal on the following substantial questions of law:

"1. Whether the AO could invoke the provisions of s. 145(3) of the IT Act in the facts and circumstances of the case ?

2. Whether the order of the Tribunal is perverse and hence is liable to be set aside?"

8. Since the substantial questions of law are interconnected and interrelated, we dispose of the same through common reasoning.

9. The learned counsel for the appellant has strenuously argued that the findings recorded by the Tribunal that the AO has rejected the books of accounts only because the profits declared in the current year were higher in the subsequent year and the expenses shown were not proportionate to those shown in other years, were factually incorrect because in para 5 of the assessment order, it had been specifically brought out that a large number of accounts of-debtors and creditors could not be confirmed either by the parties or by the assessee inspite of several opportunities. It is further contended that in para 5(11) of the order, the major discrepancy had been pointed out by the special auditor whereby he had recorded that raw material of 6,300 quintals valued at Rs. 39.7 lacs had not been recorded in the closing stock. Therefore, in light of these observations of the AO, the findings returned by the Tribunal were clearly erroneous. It is further claimed that it was the duty of the AO to invoke the provisions of s. 145 and compute the correct profit after rejecting the accounts of the assessee. In the present case, the AO had brought out several discrepancies in the assessment order which showed that the accounts as filed by the assessee did not reflect the correct profit.

10. On the other hand, Shri Atul Jhingan, learned counsel for the respondent has supported the order passed by the Tribunal as being strictly in conformity with law.

11. We have considered the rival submissions of the learned counsel for the parties carefully and meticulously. In this case, the dispute regarding scaling down of deduction under s. 80-IB emanates from the action of the AO under s. 145(3) whereby the accounts of the assessee have been rejected. Sec. 145(3) of the Act reads as under:

"145. Method of accounting.- (1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of sub-s. (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time Accounting Standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-s. (1) or Accounting Standards as notified under sub-s. (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in s. 144."

12. A perusal of the aforesaid section would reveal that an AO can reject the accounts maintained by the assessee if he is not satisfied about their correctness or completeness. Similarly, the AO can reject the method of accounting followed by the assessee if the same is not in accordance with the provisions of sub-ss. (1) and (2) of s. 145. However, in both the situations, the AO is required to make the assessment in the manner provided under s. 144 of the Act. Meaning thereby, that the AO is authorized to make assessment of total income of the assessee on the basis of "best judgment" and, at the same time, disregard the income declared in the return. Therefore, the existence of infirmities and discrepancies in the accounts maintained by the assessee was a pre-requisite for invoking the provisions of s. 145 ibid. However, what appears in the present case is that the AO had merely doubted trading results declared by the assessee. There were no findings as to how the accounts maintained by the assessee were either incomplete or incorrect.

13. The AO in order to hold the accounts as being incomplete and incorrect advanced the logic that there was a variation in the GP rate and level of expenses in comparison to the subsequent year. As per him, the GP rate declared in the subsequent assessment year of 2004-05 was 6.3 per cent as against 8.0 per cent declared in the relevant year. It was for this reason that AO presumed that the gross profit declared in the relevant year was not correct. The reason advanced was that in the relevant year the assessee was eligible for exemption under s. 80-IB @ 100 per cent of its profits, whereas, it was not so in the next assessment year of 2004-05. There appears to be an inherent fallacy in the aforesaid reasoning because for the asst. yr. 2005-06 wherein the assessee was also not eligible for 100 per cent exemption under s. 80-IB, the GP rate declared was 8.48 per cent. Therefore, to say that higher GP rate declared in the relevant year at 8 per cent was incorrect merely on the basis of low rate declared for the asst. yr. 2004-05, was merely based on conjectures and surmises.

14. The AO had also obtained report of the special auditor appointed under s. 142(2A) dt. 11th Sept., 2006 wherein there is no reference made by the AO with resp

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ect to any adverse remarks of the special auditor. In fact, the entire discussion in the assessment order does not even point out to any remark or finding of the special auditor which may reflect adversely on the accounts maintained by the assessee. Therefore, prima facie, the absence of any adverse remarks by the special auditor definitely supports the case of the assessee. The entire action of the AO appears to be based more on suspicion than on ground reality. In such circumstances, the accounts of the assessee could have been got reinvestigated but the same could not have been rejected. 15. The findings recorded by the CIT(A) and the Tribunal are based on true appreciation of facts and correct appreciation of the provisions of law and there is nothing on record to suggest or even infer that the said finding are in any manner perverse. A finding on a question of fact is open to attack only in case the same is erroneous in law or where the said finding can be termed to be perverse. In this case, both the aforesaid ingredients are lacking. The substantial questions of law are answered accordingly. 16. Resultantly, there is no merit in the appeal and the same is dismissed leaving the parties to bear their own costs.
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