ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam , , IN INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , 7 . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER . I.T.A.No.179 Vizag 2014 ( Assessment Year: 2007-08) M s. Visakha Wire Ropes Ltd., ACIT, Range-4, Visakhapatnam Vs. Visakhapatnam [PAN: AAACV7326F] ( Appellant) ( Respondent) . I.T.A.No.180 Vizag 2014 ( Assessment Year: 2009-10) M s. Visakha Wire Ropes Ltd., DCIT, Circle-4(1), Visakhapatnam Vs. Visakhapatnam ( Appellant) ( Respondent) Appellant by : Shri G.V.N. Hari, AR Respondent by : Shri S. Ravi Sankar Narayan, DR Date of hearing : 22.08.2016 Date of Pronouncement : 16.09.2016 1 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam ORDER PER G. MANJUNATHA, Accountant Member: These appeals filed by assessee are directed against separate, but identical orders of CIT(A), Visakhapatnam dated 20.2.2014 for assessment years 2007-08 & 2009-10. Since, facts are identical and issues are common, they are heard together and disposed off, by this common order for sake of convenience. 2. brief facts of case are that assessee is Public Limited Company, which is engaged in business of manufacture of steel wire, stranded wire and wire rope, filed its return of income for assessment year 2007-08 on 29.10.2007 declaring total income of ` 1,57,62,430 -. return was processed u s 143(1) of Income Tax Act, 1961 (hereinafter called as 'the Act'). Subsequently, case has been selected for scrutiny and accordingly, notices u s 143(2) & 142(1) of Act were issued. In response to notices, authorized representative of assessee appeared from time to time and filed details and produced books of accounts. 3. During course of assessment proceedings, assessing officer noticed that stock registers maintained by assessee are not susceptible for verification, therefore, issued notice and asked to 2 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam furnish complete details of quantitative details of major raw materials purchased, consumption of raw materials and furnished goods produced. In response to show cause notice, assessee has furnished details of stock along with Central Excise records. As per information furnished by assessee, assessee has disclosed closing stock of steel wire rope of 1,196.79 MT which was valued at ` 2,89,54,890 -. assessee has adopted cost method to value raw material, stores, spares and consumables net of excise duty, and finished goods work in progress are valued at factory cost. Similarly, finished good is valued at lower of estimated cost or not realizable value exclusive of excise duty. A.O. observed from books of accounts, assessee has claimed production loss of 192.144 MT which works out to 1.47 of raw materials consumed. A.O. further observed that production loss claimed by assessee for year under consideration when compared to previous financial year is excessive, therefore, asked to furnish details of production loss arrived along with books of accounts. assessee vide its reply submitted that during year under consideration, cleaning of wire rope was done through introduction of mechanical de-scaling process of wire ropes which involved many process including de-scaling, borex cutting, wire drawing, wind stranding and rope closing. In process of 3 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam manufacture, invisible and irrecoverable losses is high which cannot be collected as scrap as like in earlier process of manual de-scaling of wire ropes. In mechanical process of de-scaling of wire ropes, there are some invisible and irrecoverable losses, particularly in form of rust arising in de-scaling process, which cannot be measured and collected as scrap. Therefore, production loss for year under consideration is higher when compared to previous financial year. assessee further submitted that it is common in this line of industry that production loss is arises because of various process of cutting steel rods and wire into smaller sizes. To support his arguments, furnished write up published by Wire Association International Inc., USA which says that amount of loss on these rods may be approximately 1 or more by weight. Therefore, production loss claimed by assessee is within prescribed norms and also supported by stock registers cannot be disturbed. 4. Similarly, A.O. observed that gross profit declared by assessee for year under consideration is substantially less than gross profit declared for previous financial year. A.O. further observed that assessee has declared gross profit of 9.3 on gross turnover of ` 42,98,18,151 -, whereas gross profit for corresponding previous year is 17.22 on total turnover of ` 4 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam 24,94,25,704 -, therefore, issued notice and asked to justify reduction in gross profit for year under consideration. In response to notice, assessee submitted that during year under consideration, input cost of raw materials has been increased and sale price was reduced, which is main reason for reduction in gross profit. assessee further submitted that percentage of gross profit depends upon various factors such as cost of input raw materials, type of products manufactured, product mix and selling price. It has maintained books of accounts along with stock registers, which was submitted to Central Excise Department on quarterly basis and Central Excise Department has not pointed out any discrepancy in stock registers, therefore, there is no reason for doubting gross profit declared for year under consideration. assessee further submitted that its books of accounts are audited u s 44AB of Act and auditor has issued audit report, wherein auditor has not pointed out any discrepancies in stock registers and valuation of stock, therefore, gross profit declared for year cannot be altered. 5. A.O. after considering explanation furnished by assessee, held that assessee has failed to submit details with regard to valuation of closing stock of steel wire rope. A.O. further observed that assessee has not furnished closing stock details of raw 5 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam materials item-wise and rate-wise and also failed to take physical inventory of closing stock at end of financial year. Therefore, opined that stock register maintained by assessee are not giving true and correct position of quantitative details and valuation of closing stocks, and hence, rejected valuation of closing stock determined by assessee and re-worked closing stock of raw materials at end of year by adopting average price of steel rod purchased for month of March and determined closing stock value of ` 2,95,04,212 - as against value declared by assessee of ` 2,89,54,819 - and arrived at difference of ` 5,49,395 -. As regards production loss, A.O. observed that after verification of stock register furnished by assessee and also after analyzing month-wise purchase and sales, it was noticed that stock register maintained by assessee are not depicting correct position of closing stock of assessee for year under consideration. A.O. further observed that stock register maintained by assessee is having lot of discrepancies. As per stock registers, on analysis of month wise production loss, assessee has declared huge production loss of 1 to 10 in few months and in some of months, assessee s production losses is negative. In some of months, production loss was more than material used for purpose of production and in some months, production loss is 6 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam substantially high, therefore, assessee s contention that due to change of technology in cleaning wire ropes and switch over to mechanical de-scaling process resulted in production loss is far from truth and cannot be relied upon. A.O. further observed that as admitted by assessee, which was supported by wire association international inc., production loss in this industry is varying from 1 or more by weight. Since, stock register maintained by assessee are not susceptible for verification, rejected production loss claimed by assessee and estimated production loss of 1 on total raw material consumed and arrived at production loss of 130.058 MT, as against production loss claimed by assessee of 192.144 MT and quantified difference of 62.09 MT of production loss which works out to ` 17,80,230 - which was added back to total income of assessee. 6. Similarly, A.O. observed that gross profit declared by assessee for year under consideration is substantially less than gross profit declared for previous financial year. assessee has failed to adduce any reasons for declaring low gross profit. Though assessee claims that reason for reduction in gross profit is due to increase in cost of raw materials and decrease in cost of final products, assessee has failed to substantiate reduction in gross 7 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam profit with necessary evidences. Since, stock register maintained by assessee are not showing true and correct position of movement of stocks and also assessee has failed to take physical inventory of closing stock at end of year, correct gross profit cannot be determined based on such books of accounts, with these observations, rejected books of accounts and estimated gross profit by taking into account average gross profit of 3 financial years which works out to 12.59 and applied average gross profit rate to total turnover and determined gross profit of ` 5,41,14,105 - as against gross profit of ` 4,02,67,547 - admitted by assessee. difference of ` 1,38,46,558 - has been considered as suppressed gross profit and after reducing additions made towards difference in valuation of closing stock of ` 5,49,345 - and additions towards production loss of ` 17,80,230 -, remaining amount of ` 1,15,16,933 - has been added to total income of assessee towards difference in gross profit. 7. Aggrieved by assessment order, assessee preferred appeal before CIT(A). Before CIT(A), assessee reiterated submissions made before A.O. As regards additions towards valuation of closing stock, assessee submitted that A.O. was erred in working out closing stock of raw materials by taking into account average price of raw materials purchased for month of 8 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam March without pointing out any defects in stock registers and also manufacturing expenses incurred by assessee. assessee further submitted that A.O. has taken average price of raw materials as against cost price method on FIFO basis adopted by assessee to value closing stock. As regards additions towards production losses, assessee submitted that A.O. was erred in estimating production loss at 1 without pointing out any defects in stock register maintained by assessee. assessee further submitted that A.O. has analyzed month-wise consumption of raw materials without taking into account work in progress available at shop floor which is reason for excess shortage of production losses in few months. fact is that assessee is maintaining stock registers as per Central Excise rules, which was produced before Central Excise authorities on quarterly basis and stock registers maintained by assessee is not having any defects. A.O. without pointing out specific defects in books of accounts, resorted to estimation of production losses ignoring complete details filed by assessee such as Central Excise records and stock registers. Similarly, as regards additions towards gross profit, assessee submitted that A.O. was completely erred in rejecting books of accounts without pointing out any specific defects in books of accounts and estimation of gross profit 9 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam by taking into average gross profit of 3 financial years. assessee further submitted that A.O. was erred in estimation of gross profit, as books of accounts of assessee are audited by accountant under provisions of section 44AB of Act and auditor issued tax audit report with nil comments on stock books maintained by assessee which clearly shows that books of accounts maintained by assessee are true and correct and A.O. has no reasons to doubt books of accounts maintained by assessee. assessee further submitted that it is not case of A.O. that assessee has inflated purchase cost or inflated manufacturing expenses to reduce profit. A.O. has accepted expenditure claimed by assessee and also purchase of raw materials. Once books of accounts have been accepted, there is no reason for A.O. to doubt gross profit declared for year. 8. CIT(A) after considering explanations furnished by assessee, held that assessee has not demonstrated with evidences value adopted by A.O. is wrong. A.O. has adopted average price of March purchases to value closing stock of raw materials. assessee has failed to furnish breakup details of closing stock of raw materials with reference to rates to justify adopting differential rates. Since assessee has failed to furnish breakup of raw materials, 10 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam A.O. was right in taking average price of raw materials purchased for month of March to value closing stock of raw materials for year end. As regards additions towards production loss, CIT(A) observed that assessee has failed to explain production loss with necessary evidences. Though assessee explained reasons for increase in production loss, reasons given by assessee that production loss has been increased due to switch over of mechanical de- scaling process from earlier process of hydraulic bath and pickling cannot be accepted for reason that once production process has been switched over from manual to mechanical, normally production loss should come down. However, assessee claims higher production loss due to switching over to mechanical process of manufacturing which is quite opposite to normal precedent of reduction in production loss, therefore, reason given by assessee is not acceptable. CIT(A) further observed that A.O. has pointed out various discrepancies in books of accounts maintained by assessee, which was not explained by assessee, therefore, stock books maintained by assessee cannot be relied upon to consider production loss. CIT(A) further observed that as claimed by assessee, average production loss in this industry is 1 or more by weight as suggested by wire association international inc., with 11 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam these observations, held that A.O. has rightly estimated production loss of 1 , however, re-quantified production loss of ` 18,01,632 - as against additions made by A.O. of ` 17,80,230 -. 9. As regards additions towards gross profit, CIT(A) observed that assessee has failed to explain reduction in gross profit with necessary evidences. stock register maintained by assessee are not giving true and correct position of movement of stock and valuation of closing stock. A.O. has pointed out number of discrepancies in books of accounts maintained by assessee, as per which assessee s production loss varies from 1 to 10 in some months and in some months, production loss is over and above raw materials issued for production. Though assessee claims to have explained reasons for variance in production loss due to non-consideration of stock available at shop floor, assessee has failed to convince availability of work in progress in shop floor. CIT(A) further observed that assessee has claimed stock to tune of 121.407 MT at shop floor as on 1.4.2006, but financial statement showed such position to be nil as on 31.3.2006. Similarly, assessee has claimed stock at shop floor to tune of 168.864 MT for month of March, 2007 but has not admitted any closing stock of work in progress in financial statements. No such entry for stock in shop 12 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam floor was found recorded in stock register for any of months. With these observations, hold that A.O. has rightly estimated gross profit on average of 12.59 taking gross profit position of last 3 years. However, from details filed, it is noted that A.O. is not justified in adopting such gross profit rate on gross sales of ` 42,98,18,151 - as gross sales considered by A.O. is inclusive of excise duty payable to Government, as such gross profit cannot be estimated on excise duty component, with these observations, directed A.O. to re-compute gross profit by excluding excise duty component included in gross sales. Aggrieved by CIT(A) order, assessee is in appeal before us. 10. assessee has filed common grounds for both assessment years. From these grounds of appeal, assessee has agitated 3 issues i.e. (1) additions towards alleged short valuation of closing stock (2) additions towards disallowance of excess production loss of ` 17,80,230 - (3) additions towards alleged low gross profit admitted by assessee. 11. first issue that came up for our consideration is additions towards alleged short valuation of closing stock. A.O. made additions towards short valuation of closing stock by taking into account average price of raw materials purchased for month of March to 13 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam determine value of closing stock held at end of financial year. A.O. was of opinion that stock registers maintained by assessee are not susceptible for verification and stock registers are found with number of discrepancies, therefore, rejected stock registers maintained by assessee. A.O. has analyzed month- wise consumption of raw materials and production of finished goods. According to A.O., assessee s stock registers are not showing true and correct position of movement of stock and valuation of closing stock. It is contention of assessee that it has maintained stock registers in accordance with Central Excise Rules, which was audited by auditor and auditor has not pointed out any discrepancies in books of accounts, therefore, A.O. was not correct in adopting average price of raw materials purchased for month of March to determine closing stock. assessee further contended that it is following cost price method net of excise duties for determining value of closing stock of raw materials, therefore, A.O. without pointing out any discrepancies in stock registers ignored method of valuation adopted by assessee consistently for past several years and taken average price of raw materials which is not correct. We find force in arguments of assessee for reason that A.O. has not pointed out any discrepancies in books of accounts, except stating 14 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam that there is variance in production loss in few months and in few months production loss is even more than raw materials issued for production. On verification of details furnished by assessee, we find that while analyzing closing stock details, A.O. has taken raw materials issued for production and goods manufactured for particular month without considering brought forward stock available at shop floor, which is reason for arriving at shortage excess production loss on monthly basis. Therefore, we are of opinion that when books of accounts maintained by assessee are accepted without any discrepancies, A.O. was not correct in tinkering with method of closing stock adopted by assessee to determine value of closing stock of raw materials. Hence, we are of view that A.O. was completely erred in adopting average price method to determine closing stock as against consistent method of accounting followed by assessee i.e. cost price method to determine closing stock. Hence, we direct A.O. to delete additions made towards short valuation of closing stock. 12. next issue that came up for our consideration is additions towards alleged excess production loss. A.O. made additions of ` 17,18,230 - towards excess production loss by stating that assessee has claimed excessive production loss when compared to previous 15 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam financial year. According to A.O., production loss for previous financial year is +1.381 MT, whereas for current year, production loss is -192.144 MT. A.O. was of opinion that stock registers maintained by assessee are not showing true and correct movement of stock and valuation of closing stock. As per analysis provided by A.O. in his order, in some of months production loss is 1.69 to 11.91 and in some of months, production is excess production than material used for production. A.O. analyzed month-wise consumption of raw materials and production of finished goods to arrive at conclusion that production loss claimed by assessee is inconsistent with production loss ultimately arrived at end of financial year, therefore, was of opinion that stock books are not depicting true and correct picture and hence, rejected books of accounts and estimated production loss based on assessee s own submission which is supported by wire association international inc., wherein article published by association shows that production loss in this industry is 1 or more by weight. 13. It is contention of assessee that it has maintained regular stock registers in accordance with Central Excise Rules, which were furnished to Central Excise authorities on quarterly basis and 16 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam Central Excise authorities have accepted quantitative details without any modification. assessee further contended that its books of accounts were audited under provisions of section 44AB of Act. auditor audited books of accounts issued tax audit report in form no.3CB & 3CD without any comments on books of accounts or stock registers maintained by assessee. assessee has furnished complete details of quantitative details of raw materials purchased, consumption of raw materials and production of finished goods which is consistent with books of accounts maintained under provisions of Central Excise rules. A.O., without pointing out any errors in books of accounts, based on his own analysis of consumption of raw materials come to conclusion that stock register maintained by assessee are not showing true and correct position of stock. 14. Having heard both parties, we find force in arguments of assessee for reason that assessee has maintained stock registers in accordance with provisions of Central Excise rules and furnished such stock registers on quarterly basis to Central Excise authorities which were accepted without any modifications. We further noticed that books of accounts of assessee were audited under provisions of section 44AB of Act and quantitative details as required by clause 28(b) of form no.3CD regarding raw materials and 17 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam finished goods were prepared and audited by certified accountant and were enclosed with form no.3CD which had been placed on record, but assessing officer analyzed consumption of raw materials in his own wisdom which in our opinion is not correct for reason that A.O. has analyzed consumption of raw materials on monthly basis without taking into account opening stock and closing stock available at shop floor which is essential to arrive at production loss. Though A.O. analysed raw materials consumption according to his own method, method followed by A.O. is inconsistent with accepted principles of calculation of production loss, therefore, in our considered view, A.O. has completely erred in coming to conclusion that stock registers maintained by assessee are not showing true and correct pictures, when assessee has clearly demonstrated with necessary evidence that stock figures declared in financial statements are tallied with stock registers maintained in accordance with Central Excise rules. A.O. after analyzing raw materials, failed to arrive at correct figure of production loss instead, proceeded with estimation of production loss based on certain articles published in some magazine which is not binding nature, ignoring stock registers furnished by assessee which are approved by another authority of revenue department and also certified by certified 18 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam accountant under provisions of Income Tax Act, 1961. Therefore, we are of view that production loss estimated by A.O. is not correct and accordingly, we direct A.O. to delete additions made towards production loss. 15. next issue that came up for our consideration is addition towards alleged low gross profit. A.O. made addition of ` 1,15,16,933 - towards low gross profit by taking into account average gross profit of last 3 financial years and applied on total turnover of assessee for current financial year. A.O. has given his own reasons for applying average gross profit. According to A.O., stock registers maintained by assessee are not showing true and correct movement of stock and valuation of closing stock. A.O. has given his own analysis of consumption of raw materials which is very basis for rejection of books of accounts and estimation of gross profit. It is contention of assessee that gross profit depends upon various factors such as increase in cost of raw materials and processing expenditure, reduction in price of finished products and also change in production pattern of assessee. assessee further contented that during current financial year there were substantial increase in prices of wire ropes, which is major raw materials used for production of finished products, therefore, this is one of 19 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam reasons for slight reduction in gross profit for current financial year. assessee further submitted that actual gross profit depends on host of variable factors such as demand for various products, product mix, market conditions, competition factors, cost of inputs, etc. assessing officer did not go into any of these aspects, determined gross profit on surmises and conjectures on arbitrary basis without pointing out any defects in books of accounts or stock registers. assessee further contended that due to increase in prices of raw materials, average cost of raw materials has been increased about 15 when compared to previous financial year. aforesaid relevant factors have been totally ignored by A.O. and proceed with estimation of gross profit by taking into average gross profit of last 3 financial years, which is totally arbitrary and unwarranted. It is further submitted that assessing officer has accepted cost of raw materials and expenses shown and nothing contrary has been brought on record either by way of inflation of purchases or expenditure to manipulate gross profit. Since sales as well as cost of expenses have been accepted by A.O. as per books of accounts, there is absolute no scope to work out gross profit on different or estimated basis. 16. We have heard both parties, perused materials available on record and gone through orders of authorities below. 20 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam A.O. estimated gross profit @ 12.59 by taking 3 years average gross profit declared by assessee. According to A.O., stock registers maintained by assessee are not showing true and correct movement of stock and valuation of closing stock. A.O. has analyzed month wise consumption of raw materials and production of finished goods. According to A.O., production loss declared by assessee varies from month to month from 1.59 to 11.61 which is contrary to standard production loss declared by wire manufacturer s association inc.,. As per association bulletin, production loss in this industry is about 1 and more by weight, as against this, assessee has declared production loss of 11.61 on few months which is quite abnormal cannot be accepted. assessee contends that its stock registers maintained are in accordance with Central Excise rules, which is furnished to Central Excise authorities on quarterly basis and also its books of accounts are audited under provisions of section 44AB of Act, wherein tax auditor has certified that books of accounts are depicting true and correct financial position of assessee. assessee further contended that it has furnished quantitative details of raw materials consumed and production of furnished goods as required under clause 28(b) of form no.3CD which is consistent with stock register maintained in 21 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam accordance with Central Excise rules. Therefore, A.O. is incorrect in rejection of books of accounts and estimation of gross profit by taking into average of gross profit of last 3 years. 17. We find force in arguments of assessee for reason that actual gross profit depends on host of variable factors such as demand for various products, product mix, market conditions, competition factors, cost of input raw materials and selling price of finished products. assessee has maintained regular books of accounts along with stock registers as required under Central Excise Rules. A.O. has not pointed out any errors in books of accounts maintained by assessee or in stock registers to arrive at conclusion that stock register maintained by assessee are not showing true and correct position of closing stock or consumption of raw materials. basis for A.O. to arrive at conclusion to reject books of accounts is that he had analyzed consumption of raw materials and production of finished goods on monthly basis in his own wisdom and quantified production loss which is more in few months. Based on such analysis of raw materials, A.O. come to conclusion that it is impossible to compute true and correct profit of assessee from books of accounts and hence rejected books of accounts under 22 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam provisions of section 145 of Act and estimated gross profit by taking into account last 3 years average gross profit declared by assessee. 18. assessing officer has not pointed out any particular defect or discrepancy in account books maintained by assessee. Though, A.O. analyzed consumption of raw materials, failed to come to conclusion that what is exact amount of production loss when compared to production loss declared by assessee, which is supported by stock registers. On other hand, assessee clearly demonstrated before authorities with necessary evidence, such as stock records maintained in accordance with Central Excise rules and clarified that closing stock details declared in its financial statements are consistent with stock register. assessee also proved that A.O. has not pointed out any specific defect in financial books of account or in stock registers by way of inflation of purchases or expenditure to manipulate gross profit. assessee has furnished complete details of quantitative details of raw materials which were reproduced in tax audit report clause 28(b), wherein tax auditor has certified that books of accounts maintained by assessee are showing true and correct financial position of assessee for relevant period. assessee also explained reasons for reduction in gross profit before A.O. that during current financial year 23 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam there is increase in cost of raw materials, which is one of reasons for slight reduction in gross profit. 19. fall in gross profit ratio could be for various reasons such as increase in cost of raw materials, decrease in market price of finished products, increase in cost of processing by assessee, etc. There was no finding that actual cost of raw material purchased by assessee was less than what was declared in account books. There was no finding that actual cost of processing carried out by assessee was less than what was declared in its account books. No particular expenditure shown in account books had been disallowed by A.O. There was no finding by A.O. that actual quantity of finished products produced by assessee was more than what was shown in account books. There was no finding that assessee had made any such sale of finished products which was not reflected in books of accounts. There was no finding by A.O. that finished products were sold by assessee at price higher than what was declared in account books. Unless A.O. point outs any of these aspects in his verification, cannot come to conclusion on basis of incorrect estimation of facts ignoring evidences filed by assessee to arrive at conclusion that books 24 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam of accounts maintained by assessee are not showing true and correct position. 20. It is pertinent to discuss case law relied upon by assessee. assessee relied upon decision of High Court of Delhi, in case of CIT Vs. Smt. Poonam Rani (2010) 326 ITR 223. Hon ble High Court of Delhi under similar circumstances held as under: assessee was engaged in business of manufacturing copper wires. For relevant assessment year, she filed return declaring gross profit at rate of 1.4 per cent against gross profit rate of 5.91 per cent for preceding year. On being asked, assessee attributed fall in gross profit rate to increase in purchase price. Assessing Officer rejected explanation given by assessee on ground that no supporting evidence was produced to show increase in purchase price and decrease in sales. He also noticed that weight of finished products declared by assessee was more than weight of raw materials. When asked to explain, assessee submitted that after drawing wire, process went on to put wire for enamelling, as result of which weight of wire increased by 2-3 per cent. Assessing Officer felt that in absence of adequate supporting evidence, explanation given by assessee could not be accepted. He, therefore, rejected account books of assessee under section 145(3) and estimated income by applying gross profit rate of preceding assessment year. On appeal, Commissioner (Appeals) noted that assessee had furnished complete details, including comparative details in respect of purchase of raw materials and manufacture of copper wires as well as in respect of sale during year in question as compared to earlier years. He also took note of the. fact that assessee was duly registered under Central Excise Act and was maintaining proper quantitative details in prescribed manner and, therefore, held that assessee had adopted consistent and regular method of accounting and valuation of stock during year in question as was done by her in preceding years. He, accordingly, held that Assessing Officer was not justified in rejecting books of account and in applying enhanced gross profit ratio. Tribunal dismissed revenue's appeal, holding that since no defects in account books were pointed out, accounts could not have been rejected and no addition could Section 145(3) provides for assessment in manner prescribed in section 144 where Assessing Officer is not satisfied about correctness or completeness of accounts of assessee or where either method of accounting provided in sub-section (1) or accounting standards as 25 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam notified under sub-section (2) has been regularly followed by assessee. It was not case of revenue that assessee had not followed either cash or mercantile system of accounting. It was also not case of revenue that Central Government had notified any particular accounting standard to be followed by tour operators. Hence, second part of sub-section (3) of section 145 would not apply to instant case. [Para 5] Assessing Officer had not pointed out any particular defect or discrepancy in account books maintained by assessee. During course of hearing before Commissioner (Appeals), it was pointed out by assessee that her account books were duly audited under section 44AB of Central Excise Act and quantitative details as required by clause 28(b) of Form No. 3CD regarding raw material and finished products (i.e., opening stock of raw material, raw material issued to production department, raw material consumed and closing stock of raw material, opening stock of finished goods, finished goods produced during year, finished goods sold and closing stock of finished goods) were prepared and audited certified accountant and were enclosed with Form No. 3CD which had been placed on record, but Assessing Officer had ignored factual figures, both in qualitative and quantitative terms, enclosed with return and filed during course of assessment proceedings. It was for that reason that Commissioner (Appeals) was satisfied that assessee had furnished complete details, including quantitative details in respect of purchase of raw material, manufacture of copper wire and sale of finished products. In those circumstances, accounts maintained by assessee could not have been said to be incomplete or inaccurate. In fact, Assessing Officer had no material before him to treat accounts of assessee as defective or incomplete. [Para 6] As regards marginal increase in weight of finished product, explanation given by assessee had been accepted not only by Commissioner (Appeals) but also by Tribunal. Assessing Officer had no material before him on basis of which it could be said that weight of wire did not increase even marginally during process of enamelling. Therefore, he had no justification, in la in rejecting explanation given by assessee in that regard fall in gross profit ratio, in absence of any cogent reasons could not, by itself, have been ground to hold that proper income of assessee could not be deduced from accounts maintained by her and, consequently, could not have been ground to reject accounts by invoking section 145(3). [Para 8] fall in gross profit ratio could be for various reasons such as increase in cost of raw material, decrease in market price of finished product, increase in cost of processing by assessee, etc. There was no finding that actual cost of raw material purchased 26 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam by assessee was less than what was declared in account books. There was no finding that actual cost of processing carried out by assessee was less than what had been declared in her account books. No particular expenditure shown in account books had been disallowed by Assessing Officer. There was no finding by Assessing Officer that actual quantity of finished products produced by assessee was more than what was shown in account books. There was no finding that assessee had made any such sale of finished products which was not reflected in account books. There was no finding by Assessing Officer that finished products were sold by assessee at price higher than what was declared in account books. In those circumstances, Commissioner (Appeals) and Tribunal were justified in holding that Assessing Officer could not have increased gross profit ratio merely because it was low as compared to gross profit ratio of preceding year. [Para 9] revenue contended that assessee was not maintaining daily stock register. However, no such finding was found in assessment order. On other hand, assessee had submitted before Commissioner (Appeals) that Form No. 3CD containing all quantitative details in respect of raw materials as well as finished goods and duly audited by certified accountant had been placed on record, but Assessing Officer ignored those actual figures enclosed with return. In any case, there is no statutory provision tinder income-tax regime requiring assessee to maintain daily stock register. Hence, even if no such register was being maintained by assessee, that; by itself, would not lead to inference that it was not possible to deduce true income of assessee from accounts maintained by her; nor accounts could be said to be defective or incomplete for that reason alone. If stock register is not maintained by assessee, that may put Assessing Officer on guard against falsity of return made by assessee and persuade him to carefully scrutinize account books of assessee, but absence of one register alone does not amount to such material leading to conclusion that account books were incomplete or inaccurate. Similarly, if rate of gross profit declared by assessee in particular period is lower as compared to gross profit declared by him in thepreceding year, that may alert Assessing Officer and serve as warning to him to look into accounts more carefully and to look for some material which could lead to conclusion that accounts maintained by assessee were not correct, but low rate of gross profit; in absence of any material pointing towards falsehood of account books, cannot, by itself, be ground to reject account books under section 145(3). [Para 10] In any case, question whether fall in gross profit stood explained by assessee or not was question of fact. Both, Tribunal and commissioner (Appeals), having accepted explanation given by assessee and finding of fact recorded by them having not been shown 27 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam to be perverse in any manner, no substantial question of law arose in instant case and appeal was, accordingly, to be dismissed. 21. Considering facts and circumstances of case and also following ratio of case laws discussed above, we are of opinion that A.O. was incorrect in estimating gross profit by taking in to account average of last 3 years gross profit declared by assessee, without pointing out any specific error or defect in financial books of accounts or stock registers maintained by assessee. assessee, on other hand clearly demonstrated with evidences that quantitative details furnished by assessee are consistent with stock registers maintained in accordance with Central Excise rules. Therefore, we are of considered view that A.O. was erred in estimating gross profit. Hence, we direct A.O. to delete additions made towards alleged low gross profit. 22. In result, appeals filed by assessee in ITA Nos.179 & 180 Vizag 2014 are allowed. above order was pronounced in open court on 16th Sept 16. Sd - Sd - (V. DURGA RAO) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Visakhapatnam: Dated : 16.09.2016 VG SPS 28 ITA Nos.179&180 Vizag 2014 M s. Visakha Wire Ropes Ltd., Visakhapatnam Copy of order forwarded to:- 1. Appellant M s. Visakha Wire Ropes Ltd., D.No.15&16, Autonagar, Viakhapatnam 2. Respondent ACIT, Range-4, Visakhapatnam 3. Respondent DCIT, Circle-4(1), Visakhapatnam 4. + CIT-2, Visakhapatnam 5. CIT (A), Visakhapatnam 6. . , . , DR, ITAT, Visakhapatnam 7. Guard file BY ORDER True Copy 1 2 . (Sr.Private Secretary) . , ITAT, VISAKHAPATNAM 29 M/s. Visakha Wire Ropes Ltd. v. ACIT, Range-4, Visakhapatnam