(1.) THESE two appeals are cross appeals filed by the assessee as well as revenue. These appeals are emanated from the order of the ld. CIT(Appeals) -XVI, Ahmedabad, order dated 01.09.2010 for A.Y. 2007 -
08. Both appeals were heard together and are being disposed of by way of this common order for the sake of convenience. Grounds of both appeals are as under:
Ground of assessee's appeal in ITA No. 2809/Ahd/2010
"1. The Ld CIT(A) XIV has erred in law and on facts in confirming the addition of Rs.64,09,187 made by
the Ld Assessing Officer while making the assessment u/s 143(3), in respect of the GP declared by the
The appellant prays that the order being bad in law and on facts may kindly be quashed and the addition
may kindly be deleted."
Additional Ground of assessee's appeal
"1. The Ld. CIT(A) has erred both in law and on facts of the case in confirming the action of AO in
rejecting the books of account u/s 145 of the Act. The Ld. CIT(A) ought to have held that AO was not right
in rejecting assessee's books of accounts."
Ground of Revenue's appeal in ITA No. 3091/Ahd/2010
"1. The Ld. Commissioner of Income tax (A) has erred in law and on facts in deleting the addition of
Rs.48,04,034/ - made on account of disallowance of Freight Inward, Outward & Octroi expense.
(2.) THE Ld. Commissioner of Income tax (A) has erred in law and on facts in deleting the addition of Rs.1,10,27,492/ - made on account of suppressed conversion charges."
First we take ITA No. 2809/Ahd/2010 (Assessee's appeal)
2. The assessee's sole ground of appeal is against confirming the addition of Rs.64,09,187/ - made by the ld. A.O. u/s. 143(3). The assessee company derives income from the business of job work of
manufacturing of alloys, steel casting as in past. The assessee had declared Gross Profit ofRs.
4,62,27,426/ - on sale of Rs.19,69,19,616/ - which works out to 22.57% asagainst gross profit of Rs.4,75,88,572/ - on sales of Rs.17,67,36,617/ - whichworks out to 26.37% for the preceding year. The
A.O. gave reasonableopportunity of being heard on this issue as GP is declined compared topreceding
year. The assessee replied vide letter dated 10.11.2009. Afterconsidering assessee's reply, the A.O.
observed as under:
"1. The assessee is not maintaining the stock register of raw materials required for it's manufacturing
2. Due to non -maintenance of stock register, the valuation of closing stock is not verifiable in quantum as well as in valuation.
(3.) THE assessee has claimed burning loss at 10.78% which obviously appears to be abnormal which is sufficient for defect in books of accounts.
The assessee has explained that the fall in GP as compared to A.Y.2005 -06 is 7.71% whereas compared with A.Y. 2006 -07%, it is 4.16%.
It is observed from records that the assessee is having entire receipts from its associate enterprise namely
AIA Engineering Co. This means that the receipts fall in controlled category, which can be manipulated by
both the company to suit their business convenience, whereas the expense part is beyond the control of
assessee company. It is pertinent to note that commensurate increase in the conversion charges charged
by assessee to AIA Engineering Co. is not made so as to compensate the assessee for increase in input
cost of the processes. On further analysis of trading account, the following comparison is made: -
Sr.No Name of item/expense A. Y.2006 -07 (% of conversion receipt/sales) A.Y.2007 -08 (% of conversion
1 Material consumption 9.41 10.676 2 Power and Fuel 41.00 44.46 3 Labour charges 11.23 12.63 4 Employee's remuneration 7.15 7.97 The assessee has not furnished the month -wise details of job work rate. It is a fact that assessee is
suffering at the cost of AIA Engineering in as much as despite increase in input cost, commensurate
increase in job charges rate was not neither asked for nor negotiated nor enforced, so as to have better
trading results. All these were happened because of proximity between the management of assessee
company and AIA Engineering Company.
Relying on the decision of the Hon'ble Supreme Court in the case of CIT V/s. S.N. Namasivayam Chettiar
reported at 38 ITR 579, in which it was held that if the assessee is not maintaining the stock register
properly, the application of Sec. 145 is attracted. After application of Sec. 145(3), the G.P. rate is applied
at 26.73% (as declared by the assessee for the preceding year) on the sales of Rs.19,69,19,616/ - for the
year under assessment. Thus, the Gross Profit is worked out as under : -
Sales for the year declared : Rs.19,69,19,616
GP rate applied as discussed above : 26.73%
GP declared : Rs 4,62,27,426
GP works out : Rs 5,26,36,613
Short fall in GP declared
(i.e. 52636613 -46227426) : Rs 64,09,187
In view of the above discussion, the trading addition of Rs.64,09,187/ - is made on account of low Gross
3. Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A) who had confirmed the addition by observing as under:
"2.3 I have considered the submission made by the appellant and observation of the AO. During the
appellate proceeding, the appellant was asked to file the rates of conversion charges and its increase over
the lastthree or four years. The appellant has filed copy of the agreement, and it is seen that the rate of
conversion of the job charges were fixed on first of April 2003 and they have remained the same till date.
It is very interesting that over the last three years there has been no change or revision in the job charges
of the rate of conversion. The appellant does not have any answer to this interesting fact. The principal is
nothing but sister concern of the assessee. The appellant is doing job work mainly for its sister concern.
As admitted by the appellant the expenses on various items like power and fuel, labor charges and
employee remuneration have increased continuously, over the last three years. But still, there is no
increase in the job charges received by the assessee. From this it is clear that the entire receipts have
been manipulated to show less profit over the years. This is the main reason why the GP rate has been
decreasing continuously, over the last three years. The appellant has not filed any documentary evidence
to show that even some efforts were made to revise the rates. In fact, both being sister concern, the
appellant never felt they needed to do so. The job rate agreement dated 25th of March 2003 has a clause
(10), according to which, the agreement came into effect from 1st of April 2003 and shall remain in force
for a period of one year. However, the agreement may be renewed on the same terms or on modified
terms as may be agreed upon between the parties, in writing, for a further period not exceeding one year
at any time. Interestingly, despite this clause, the appellant company has renewed the same job rates
year after year, for the last three years at the same rate. This is a fit case for the application of the
decision of honorable Supreme Court in the case of Macdowell 158 ITR 148 wherein the honorable
Supreme Court stated that corporate veil needs to be lifted in appropriate circumstances and colourable
device cannot be part of legal planning. This is a fit case, where the appellant has decided to fix sale price,
in consultation with its sister concern and not with respect to the market rate. In fact, it is not a simple
sister concern but a holding company as stated by the AO. The expenses have increased continuously, due
to increase in the market rate but thejob charges have remained fixed for the last three years because the
assessee company wanted to transfer the profits to its sister concern. In view of this reason, the addition
of the gross profit made by the AO is correct and this ground of appeal is dismissed."
4. Now the assessee is before us. Ld. Counsel for the assessee submitted that similar additions were made by the ld. A.O. in A.Y. 03 -04 & A.Y. 06 -07 in ground nos. 2 & 3 and Revenue's ground of appeal in A.Y.
06 -07 on identical issues, in both the years, the CIT(A) deleted the addition on GP addition, which were challenged by the Revenue before the Hon'ble ITAT, but Revenue's appeal in both years have been
dismissed. The ld. A.R. further submitted that assessee's books of account are audited which had been
furnished in Form No. 10CCB along with return. The ld. A.O. had wrongly rejected books of account u/s.
145 of the Act as no defects had been pointed out. The A.O. rejected in the books result u/s. 145 of the IT Act on account of non maintaining the stock register of raw material and closing stock. The assessee also
claimed abnormal burning loss during the year and GP rate also have fallen down. The stock register
impounded by the A.O. and was with him. All the required details were submitted before the A.O. Reason
of declined GP had been explaining before both the authorities. The ld. A.O. simply compared the various
datas of the assessee and came to conclusion that assessee had suppressed the income. Thus, he
requested to delete the addition made by the A.O. and confirmed by the CIT(A). At the outset, ld. Sr. D.R.
supported the order of the CIT(A).;