IN INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA No. 1551/Del/2012 Assessment Year: 2008-09 ACIT, Circle-1, G-Block Vs. M/s. Prisma Electronics, B-14, Shopping Complex, Sector-20, Phase-II, Noida. Noida PAN : AAFFP7026A (Appellant) (Respondent) Appellant by Sh. Ankur Garg, CIT(DR) Respondent by Sh. Rohit Jain, Adv. & Ms. Shaily Gupta Date of hearing 22.08.2016 Date of pronouncement 19.10.2016 ORDER PER O.P. KANT, A.M.: This appeal by Revenue is directed against order dated 12/01/2012 passed by learned Commissioner of Income-tax (Appeals), Ghaziabad, for assessment year 2008-09 raising following grounds: 1. That learned CIT(A) has erred in law and on facts in deleting addition of suppressed closing stock-of Rs.40,08,68/- made by Assessing Officer (AO) after rejecting book results and making due enquiries. 2. That learned CIT (A) has erred in law and on facts in deleting addition of Rs.1,01,762/- under head Detention and Demurrage Charges treating expense as normal business expenditure as per section 37 of I.T. Act. detention and demurrage charges are paid over and above normal loading and 2 ITA No. 1551/Del/2012 AY: 2008-09 unloading charges and these penal charges never fall within ambit of section 37 of I.T. Act, 1961. 3. That learned CIT (A) has erred in law and on facts in allowing deduction u/s 80IB resulting in deletion of Rs.5, 97,794/-, without appreciating fact that as per provisions of sub clause-(ii) of section 80IB(2) Industrial undertaking should not be formed by transfer to new business of machinery or plant previously used for any purpose . assessee was running industrial undertaking under proprietor ship which was converted into partnership on 1.4.2004, resulting in transfer of plant & machinery previously used. 4. That learned CIT (A) has erred in law and on facts in deleting trading addition of Rs. 15,69,58,867/- without considering facts put forth by AO in assessment order. In remand report, issue was not answered on merit 5. That learned CIT (A) has erred in law and on facts in accepting submission that M/s Dixon Technologies (India) Pvt. Ltd.(Dixon) had been awarded contract for supply of 9,00,000 colour televisions(CTVs) and out of said contract appellant was sub- contracted 4.70 lakh CTVs, without appreciating fact that Dixon is also partner in assessee firm. 6. That learned CIT has erred in law and on facts in not appreciating fact that Agreement dated 19.9.2007 entered with Dixon and Prisma Electronics, assessee, and Hotline Electronics Limited does not have any clause as to on what price TV sets shall be supplied to Dixon for onward sales to Electronic Corporation of Tamil Nadu (ELCOT) and through which the/ Dixon and assessee used as means of minimizing profitability. 7. That appellant craves leave to, add, alter and amend any of grounds of appeal on or before hearing. 8. That order of Ld. CIT (Appeals) being erroneous in law and on facts deserves to be set aside/cancelled and order of AO to be restored. 2. facts in brief of case are that, assessee, partnership firm, was engaged in business of manufacturing of Colour TVs . During relevant period of time, assessee company had two units i.e. one at 3 ITA No. 1551/Del/2012 AY: 2008-09 Noida and other at Jammu. assessee filed return of income on 30/09/2008, declaring total income of Rs.55,81,664/-. case was selected for scrutiny and notice under section 143(2) of Income-tax Act, 1961 (in short Act ) was issued and served within stipulated period. In assessment completed under section 143(3) of Act, Assessing Officer made various additions/disallowances. On appeal, learned Commissioner of Income-tax (Appeals), referred additional evidences produced by assessee to Assessing Officer and after taking into account comments of Assessing Officer in remand report as well as submission and rejoinder of assessee, allowed relief to assessee on major issues. Aggrieved, Revenue is in appeal before Tribunal raising grounds as reproduced above. 3. ground No. 1, is related to addition towards closing stock of Rs.40,08,683/- stated by Assessing Officer as suppressed. Assessing Officer observed that items worth Rs.40,08,683/-, list of which is produced by Assessing Officer on page 5 of assessment order, were purchased in month of March 2008, however neither consumption of same was shown, nor same were included in closing stock. According to Assessing Officer, assessee did not furnish any explanation in respect of items of Rs.40,08,683/- and thus assessee had suppressed value of closing stock to tune of Rs.40,08,683/-, accordingly, he made addition to returned income of assessee. Before learned Commissioner of Income-tax (Appeals), assessee contended that all items referred by Assessing Officer were duly accounted for in closing stock declared by assessee. assessee furnished additional evidences in this respect which were forwarded by learned Commissioner of Income- tax( Appeals) to Assessing Officer. Assessing Officer after taking into account additional evidences, sent remand report to learned 4 ITA No. 1551/Del/2012 AY: 2008-09 Commissioner of Income-tax (Appeals), in which he admitted that assessee s contention was appeared to be correct. After taking into account remand report of Assessing Officer as well as analyzing submission of assessee, learned Commissioner of Income-tax (Appeals) deleted addition. 3.1 Before us, learned Commissioner of Income Tax (Departmental Representative) relied on findings of Assessing Officer and stated that addition was made by Assessing Officer after making due enquiries and rejecting book result of assessee. 3.2 On other hand, learned Authorized Representative of assessee submitted that all details in respect of items worth Rs. 48,08,683/- were produced before Assessing Officer and explained that same were appearing in closing stock already declared. He further submitted that in remand report, assessing officer himself has admitted that contention of assessee in respect of items appearing in closing stock was found to be correct and thereafter filing further appeal on same issue was not justified. Accordingly, prayed that finding of learned Commissioner of Income-tax (Appeals) might be sustained. 3.3 We have heard rival submissions and perused relevant material on record. We find that learned Commissioner of Income-tax (Appeals) forwarded additional evidences submitted by assessee and Assessing Officer was satisfied with explanation of assessee. learned Commissioner of Income-tax (Appeals) has observed on issue in dispute as under: 3.2.6. After careful consideration of all facts on record and rival submissions as contained in assessment order and in appellant s submission, my observations/conclusions in respect of Ground of appeal No. 2 , are as under:- 5 ITA No. 1551/Del/2012 AY: 2008-09 As can be perused from above; A.O. has himself expressed his satisfaction-after verifying entire details of stock during remand proceedings in original assessment, A.O. had observed discrepancy simply because issue of stock for Jammu Unit had not been taken into account by A.O. Now when full picture has been submitted before A.O.; A.O. has verified same and has stated that . . assessee s contention appears to be correct. Your Honour may consider and take view as per provisions of rule 46A of I.T. Rules .. I have also gone though entire details and submissions and I am fully convinced that appellant has been able to satisfactorily explain discrepancies as observed by A.O. and that there is no suppression in valuation of closing stock. Therefore, addition of Rs. 40,08,683/- is hereby deleted. 3.4 learned Commissioner of Income-tax (Appeals) has also observed that dispute emerged because of reason that issue of stock of Jammu Unit had not been taken into account by Assessing Officer at time of assessment proceedings. We find that in remand proceedings, Assessing Officer himself has analysed submission of assessee and satisfied himself that items worth Rs.48,08,683/, under reference, were appearing in closing stock. In our opinion, once Assessing Officer has himself admitted that there was no understatement of stock and accordingly on basis of his comments, learned Commissioner of Income-tax (Appeals) has allowed relief to assessee and then subsequently filing further appeal on same issue is not justified unless any discrepancy or intentional misreporting of facts by Assessing Officer in remand report is observed. In our opinion, findings of learned Commissioner of Income-tax (Appeals) on issue in dispute is well reasoned, and no interference on our part is required, accordingly, we confirm finding of 6 ITA No. 1551/Del/2012 AY: 2008-09 learned Commissioner of Income-tax (Appeals) on issue in dispute . ground of Revenue is dismissed. 4. ground No. 2 relates to deletion of addition of Rs.1,01,762/- under head Detention and Demurrage Charges . 4.1 Assessing Officer disallowed expenses of Rs.1,01,762/- debited under head Detention and Demurrage Charges in profit and loss account by assessee, on ground that same were penal in nature and assessee did not offer any explanation in this regard. Before learned Commissioner of Income-tax (Appeals), assessee filed details of expenses and submitted that same were contractual payment made to various parties like PAL Road Carriers, Ahuja Road Lines etc., for delay in loading/unloading of material. learned Commissioner of Income Tax (Appeals) forwarded additional evidences submitted with assessee, to Assessing Officer, who after going through additional evidences and submission of assessee did not offer any adverse comments. learned Commissioner of Income-tax (Appeals) after considering submission of assessee, remand report and rejoinder of assessee, deleted disallowance holding that there is no element of any violation of Statutory Acts or laws. 4.2 Before us, learned Commissioner of Income Tax (Departmental Representative) relying on order of Assessing Officer submitted that Detention & Demurrage Charges were paid over and above normal loading and unloading charges and same being penal in nature, were not allowable under section 37 of Act. 4.3 On other hand, learned Authorized Representative of assessee, relied on findings of learned Commissioner of Income- tax (Appeals) and submitted that detail of expenses was submitted before learned Commissioner of Income-tax (Appeals), who forwarded same to Assessing Officer. He further submitted that in 7 ITA No. 1551/Del/2012 AY: 2008-09 remand report, Assessing Officer did not dispute to submission of assessee that detention and demurrage charges were normal business expenditure. 4.4 We have heard rival submission and perused relevant material on record. We find that assessee has given detail of bills in respect of Detention and Demurrage Charges before learned Commissioner of Income-tax (Appeals), which are reproduced by learned Commissioner of Income-tax (Appeals) in impugned order on page 29 as under: For example, bill No. 1536 dated 28.05.2007 for Rs.4,200/- raised by M/s. Pal Road Carriers upon Dixon Technologies India Pvt. Ltd. on account of Prisma Electronics, included sum of Rs.1,000/- paid towards one day detention charges. Similarly, bill no. 1349 dated 01.05.2007 for Rs.8,700/- raised by M/s. Pal Road Carriers upon Dixon Technologies India Pvt. Ltd. on account of Prisma Electronics, included sum of Rs.5,000 paid towards one day detention charges. 4.5 complete detail of expenditure under reference including invoices raised by parties were forwarded to Assessing Officer, who did not dispute expenses were in violation of statutory acts or laws and therefore not allowable under section 37 of Act. 4.6 learned Commissioner of Income-tax (Appeals) has given his finding on issue in dispute as in under: 5.2.6. After careful consideration of all facts on record and rival submissions as contained in assessment order and in appellant s submission, my observations/conclusions in respect of Ground of appeal No.4 , are as under:- On this issue also appellant has brought on record copy of invoices raised in respect of Detention and demurrage charges . same has been verified by A.O. and A.O. has not made any adverse comments in remand report. 8 ITA No. 1551/Del/2012 AY: 2008-09 It is clear from perusal of details and submission that these Detention and demurrage charges represent contractual charges paid for delay in loading/unloading of material and are part of normal business activities. There is no element of any violation of statutory Acts or Laws. Rather these payments are in nature of compensation for breach of contractual obligations. Various court s decisions cited by appellant in its submission above squarely favour view that there is no penal element in this expense. Hence addition of Rs. 1,01,762/- is deleted. (Relief: Rs. 1,01,762/-} 4.7 In our opinion, action of Assessing Officer in filing appeal on issue which has already been admitted or not objected by him, in remand report, is not justified unless some discrepancy or misreporting of facts on part of Assessing Officer is observed. We find that order of learned Commissioner of Income-tax (Appeals) on issue in dispute is well reasoned and no interference on our part is required. Accordingly, we uphold same and ground of Revenue is dismissed. 5. ground No.3 relates to deduction of Rs.5,97,794/- under section 80IB of Act, which was disallowed by Assessing Officer, but allowed by learned Commissioner of Income-tax (Appeals). In ground, Revenue has challenged deletion only on one reason that converting proprietorship into partnership firm resulted into transfer of plant and machinery previously used by undertaking. facts in respect of issue in dispute are that assessee claimed deduction under section 80IB of Act amounting to Rs.5,97,794/- pertaining to Jammu Unit. Assessing Officer disallowed deduction on ground that following two conditions of provisions under section 80IB of Act were not satisfied by assessee: (i) in case where industrial undertaking manufactures or produces articles or things, undertaking employees 10 or 9 ITA No. 1551/Del/2012 AY: 2008-09 more workers in any manufacturing process carried on with aid of power or employs 20 workers in manufacturing process carried on without aid of power. (ii) industrial undertaking is not formed by splitting up, or reconstruction of business already in existence or it is not formed by transfer to new business of machinery plant previously used for any purpose. 5.1 Before learned Commissioner of Income-tax(Appeals) assessee furnished additional evidences in support of claim that it satisfied both conditions. It was explained by assessee that Labourers were hired through labour contractor and Provident Fund (PF) and Employees State Insurance(ESI) in respect of those labourers were paid by assessee, which were sufficient proof in support of employing 10 or more workers. In respect of second condition, assessee submitted that deduction under section 80IB was disallowed in earlier years on this ground but Tribunal in assessment year 2005-06 and 2006-07 has allowed issue in favour of assessee. 5.2 learned Commissioner of Income-tax (Appeals) forwarded submission and additional evidences of assessee to Assessing Officer and after considering remand report, and submission and rejoinder of assessee, learned Commissioner of Income-tax (Appeals) deleted disallowance of deduction under section 80IB of Act. 5.3 Before us, Revenue has challenged disallowance only on second ground that assessee was running industrial undertaking under proprietorship which was converted into partnership on 01/04/2004, which resulted in transfer of plant and machinery previously used and therefore this was in violation of clause (ii) of 10 ITA No. 1551/Del/2012 AY: 2008-09 section 80IB(2) of Act which says that industrial undertaking should not be formed by transfer to new business of machinery or plant previously used for any purpose. 5.4 learned Commissioner of Income-tax (Departmental Representative) relied on on findings of Assessing Officer. 5.5 On other hand, learned Authorized Representative of assessee relying on finding of learned Commissioner of Income- tax (Appeals) submitted that issue in dispute in assessment year 2005- 06 and 2006-07 has also been decided by Tribunal and Hon ble Allahabad High Court in favour of assessee. 5.6 We have heard rival submission and perused relevant material on record. According to assessee, in process of converting proprietorship concern into profit partnership firm entire undertaking has been transferred from proprietorship concern to partnership firm and there is no splitting or reconstruction of business of undertaking. Whereas, according to Assessing Officer this conversion of proprietorship concern into partnership amounted to reconstruction of business of undertaking. We find that issue has already been decided in favour of assessee by judgment of jurisdictional High Court reported in (2015) 377 ITR 207 (All). relevant paragraphs of judgment are reproduced as under: 12. same principle is applicable in instant case. Admittedly, undertaking was in existence since 2002. proprietorship concern changed into partnership firm. benefit under Section 80-IB of Act is available to partnership firm and conditions imposed under Section 80-IB(2)(i) does not come in way. 13. In Commissioner of Income Tax Vs. Bullet International, (2012) 349 ITR (All) Division Bench of this Court held that exemption granted to proprietorship concern, which converted from proprietorship into partnership concern was still entitled for exemption under Section 10A of Act. 11 ITA No. 1551/Del/2012 AY: 2008-09 14. In light of aforesaid, we hold that Tribunal was justified in dismissing appeals of revenue holding that assessee was entitled for deduction under Section 80-IB of Act and was not hit by provisions of Section 80-IB(2)(i) of Act. Tribunal was also justified in holding that upon conversion of proprietorship concern to partnership concern there was no transfer of plant and machinery to partnership firm, inasmuch as there was transfer of industrial undertaking as whole along with its assets and liabilities. Consequently, for reasons stated aforesaid, all appeals fail and are dismissed. questions of law as indicated aforesaid are answered accordingly. 5.7 Thus respectfully, following finding of Hon ble jurisdictional High Court, we uphold finding of learned Commissioner of Income-tax (Appeals) on issue in dispute. ground of appeal is dismissed. 6. grounds No. 4, 5 and 6 of appeal are related to issue of rejection of books of accounts and estimating gross profit which led to addition of Rs.15,69,58,867/- by Assessing Officer. This addition has been deleted by learned Commissioner of Income-tax (Appeals). facts in brief in respect of issue in dispute are that Assessing Officer compared trading results of two units of assessee with respect to trading results of immediately preceding year. Assessing Officer found that in respect of Noida Unit, in immediately preceding year, gross profit rate of 24% was declared on turnover of Rs.1,01,88,242/-, whereas in present year gross profit rate of only 1.85% on turnover of Rs.86,47,15,391/- was only shown. In response to query of Assessing Officer for explaining steep decline in gross profit rate, assessee submitted that in relevant year it got bulk order for Electronics 12 ITA No. 1551/Del/2012 AY: 2008-09 Corporation of Tamilnadu (ELCOT) and margin was very low in that order. According to Assessing Officer, assessee did not produce any documentary evidence in support of decline in gross profit rate except producing copy of agreement between Dixon Technologies (India) Limited. Assessing Officer observed that tender for supply of 30 lacs Colour TV sets was allotted to M/s. Dixon Technologies (India) Limited by Electrics Corporation of Tamil Nadu (ELCOT) and those TVs were to be supplied during period from 01/12/2007 to 30/09/2008 . Assessing Officer further observed that agreement was executed on 19/09/2007 between Dixon Technologies India Ltd. and assessee for supply of Colour TVs to ELCOT but there was neither any clause as to what price TV sets should be supplied to Dixon Technologies India Ltd. for onward sales to ELCOT, nor any clause as how many TV sets should be supplied. Assessing Officer further observed sales of assessee for month from December 2007 to March, 2008 and found that sales of only Rs.86,61,331/- were made by assessee during period. According to Assessing Officer, presuming all sales for month of December, 2007 to March, 2008, were made to Dixon Technologies India Ltd. for onward sales to ELCOT, total sales during year under consideration to ELCOT, were to tune of Rs.86,61,331/- which constituted only 1% of total turnover of Noida Unit of Rs.86,47,15,391/-. In view of these observations, Assessing Officer concluded that sales to ELCOT could not be only factor which reduced gross profit from 24% in last year to 1.85% during year under consideration. Assessing Officer referred to addition of closing stock, and disallowance of deduction under section 80IB of Act and held that he was not satisfied with correctness and completeness of accounts maintained with assessee and accordingly rejected book results of assessee and estimated 13 ITA No. 1551/Del/2012 AY: 2008-09 gross profit rate of 20% on turnover declared by assessee, which resulted into addition of Rs.15,69,58,867/-. 6.1 Before learned Commissioner of Income-tax (Appeals), assessee made detailed submission explaining that there was no fall in gross profit rate during year under consideration as compared to immediately preceding year. submission of assessee had been reproduced by learned Commissioner of Income-tax (Appeals) in impugned order. assessee explained that in immediately preceding year, out of total turnover of Rs.1,01,88,242/- amount of Rs.96,59,400/- was towards job work charges, whereas in year under consideration job work charges constitutes very small amount and major amount out of turnover of Rs.86,47,15,391/- were sales and, therefore, no comparison of results of year under consideration could have been made with immediately preceding year. assessee also challenged rejection of books of accounts only on ground of low gross profit rate. relevant submission of assessee reproduced by learned Commissioner of Income-tax (Appeals) in impugned order are as under: 7.2.2 During appellate proceedings, counsel of appellant attended and has made following written submissions vide his letter dated 30-08-2011 as under: - During relevant previous year, appellant manufactured/assembled bulk television sets on highly subsidized rates for Dixon Technologies India (P) l td. ( Dixon ) under contract from Government of Tamil Nadu, through Electronic Corporation of Tamil Nadu ('ELCOT ), which resulted in fall in gross profit ratio of Noida unit from 24% (in AY 2007-08) to 1.85% (in AY 2008- 09). assessing officer required appellant to explain why there was steep fall in gross profit ratio from 24% in assessment year 2007-08 to 1.85% in assessment year 2008-09 in respect of Noida unit. 14 ITA No. 1551/Del/2012 AY: 2008-09 In response thereto, it was explained to assessing officer that Dixon had been awarded tender by ELCOT under which Dixon was required to supply colour televisions in bulk at highly subsidized rates, which resulted in substantial fall in gross profit rate. assessing officer, without appreciating submission of appellant, proceeded to reject books of accounts of appellant only on ground that there was substantial fall in gross profit rate and estimated income by applying ad-hoc rate of 20% on turnover of appellant. Before dealing with specific allegations of assessing officer, it would be relevant to set out exact nature ef activity undertaken by appellant hereunder: No fall in G.P. rate During year. Dixon had, out of total contract of supplying 9,00,000 colour televisions (CTV) in bulk received from ELCOT at per unit price of Rs.2,571.64, sub-contracted manufacture of CTV s to appellant and another company called Hotline Electronics. appellant was sub-contracted order of manufacture and supplying 4,70,581 CTV s to Dixon. It may also be mentioned here that during assessment year 2007- 08, appellant had undertaken manufacturing of CTV s for Dixon on job work basis only, whereunder appellant received Rs. 95 per set as conversion/ labour charges. Copy of ledger account maintained by appellant in respect of job work carried out for Dixon for AY 2007-08 has been submitted in submissions dated November 22, 2010, attached herewith at pages 26 to 109 (@63 to 73) of Paper book-I. On perusal of aforesaid, it will kindly be appreciated that in assessment year 2007-08, appellant received job charges of Rs.96.59,400, out cf total receipts of Rs. 1,01,88,242 of Noida Unit. During relevant previous year, appellant manufactured 4,70,581 CTV s on subcontract basis, which were sold to Dixon. appellant sold CTV s to Dixon at price of Rs.2,000-2,200 approx per CTV (depending upon model), which was fixed in such 15 ITA No. 1551/Del/2012 AY: 2008-09 manner that after removing cost of raw material and other direct manufacturing cost, appellant was left with agreed margin of Rs.95 per set, as was earned when appellant manufactured television sets for Dixon on job work basis. Due to higher volume of business, appellant, during relevant previous year, earned substantial profit of Rs. 1,59,84,211 in absolute terms, as compared to profit of Rs.24,47,304/- during immediately preceding previous year, i.e. increase of about 653 %. On perusal of nature of activity carried out by appellant, it will kindly be appreciated that simplistic comparison between gross profit ratio of assessment year 2007-08 and assessment year 2008-09 in percentage terms would be totally misleading since business model in two years was completely different. As explained above, while during assessment year 2007-08, appellant had only carried on job work for Dixon, in year consideration, appellant manufactured CTV's on sub-contract basis. This is for simple reason that in assessment year 2007-08, appellant had shown job receipts only as income whereas in year under consideration, amount received towards sales was shown as income. Thus, even though appellant continued to receive same amount of Rs.95 per CTV as profit, since denominator during year under consideration is much larger (being sales value) as compared to much smaller denominator in assessment year 2007-08 (i.e., job receipts), GP ratio computed by dividing gross profit to total receipts was, for obvious mathematical reasons, not at all comparable, resulting in misleading impression. To put it simply, in assessment year 2008-09, year under consideration, GP ratio was derived at by dividing gross profit over total turnover of Rs.86,47,15,391/- much larger base/denominator, as against smaller base of Rs.1.01 crores in year year. On other hand, there was actually no fall in gross profit rate during year under consideration, as explained hereunder: Noida Unit Total CTV s manufactures (A) 4,70,581 Margin Per CTV (B) Rs.95 16 ITA No. 1551/Del/2012 AY: 2008-09 Total margin C= (A) X (B) Rs.4,47,05,195 Gross profit declared D Rs.1,59,84 Gross profit ratio D/CX100 35.75% On perusal of aforesaid, it will kindly be appreciated that gross profit rate, in fact, increased to 35.75%, if one were to take same base as in immediately preceding assessment year, which is much higher than gross profit rate of 24% declared in said year. Assessing Officer, on other hand, compared following fares: Noida Unit Jammu Unit F.Y. 2007-08 2006-07 F.Y. 2007-08 2006-07 Sales 86,47,15,391/- 1,01,88,242/- 9,04,75,218/- 4,04,67,454/ - Gross 1,59,84,211/- 24,47,304 83,07,015/- 40,60,915/- Profit GP Rate 1.85% 24% 9.18% 10.03% aforesaid simplistic comparison of profit rates, without appreciating business model was bound to give misleading results. It is thus, respectfully submitted that there was no fall in gross profit rate as compared to earlier year. Independent comparable instance It is further respectfully submitted that, as stated above, Dixon had sub-contracted part of manufacturing activity to independent third party, viz. M/s Hotline Electronics Ltd. ( Hotline ) under agreement dated 19.09.2007, whereunder, Hotline, too, agreed to manufacture televisions for Dixon at margin/conversion charges of Rs.95 per television. Copies of sample invoices raised by Hotline on Dixon and detailed calculation of working of margin of Rs.95 earned by Hotline under said agreement are placed at pages 408 to 420 of Paper book - II. It would, therefore, be appreciated that assessing officer erred in doubting genuineness of arrangement between appellant and Dixon, which arrangement was also adhered to by independent third party, viz Hotline. price charged and profit 17 ITA No. 1551/Del/2012 AY: 2008-09 earned by appellant was very much comparable with price and profit of independent third party. Rebuttal of AO's allegation assessing officer has, in assessment order, alleged that during relevant previous year gross turnover of Noida unit of appellant was Rs.86,47,15,391, whereas appellant had manufactured television sets worth only Rs. 8 6,61,3 31 /- for ELCOT, which is about 1% of total turnover of said Noida unit and, therefore, this factor alone could not have reduced gross profit from 24% to 1.85% of total turnover. In this regard, it is respectfully submitted that assessing officer failed to appreciate that Dixon had been awarded contract for supply of 9,00,000 CTV s vide purchase order dated 25.01.2007. Out of said contract, appellant was sub-contracted 4.70 lacs CTV s. During year under consideration, appellant manufactured and supplied CTV s worth Rs.97,14,40,285.8/-, details whereof is under: Month Amount (In Rs.) April 3,90,39,387.31 May 15,86,25,543.5 June 13,74,71,987.8 July 13,51,61,338.2 Aug 11,78,55,368.3 Sep 14,01,50,553.4 Oct 15,47,26,826 Nov 3,98,32,618.05 Dec 86,06,099.54 Jan 3,94,03,166.14 Feb 5,59,657.51 Mar 7,740.07 Total 97,14,40,285.8 assessing officer, it is respectfully submitted, erred in referring to subsequent agreement dated 19.09.2007 to hold that CTV s were to be supplied from December, 2007 to September, 2008. assessing officer failed to appreciate that aforesaid contract was basically extension of contract by Dixon in view of ELCOT 18 ITA No. 1551/Del/2012 AY: 2008-09 placing additional order of supplying 4,45,000 CTV s vide purchase order dated 31.07.2008 (refer page 422 of Paper book - II). As explained hereinabove, appellant had carried out aforesaid work of manufacturing CTV s for Dixon/ELCOT since April, 2007. copy of consortium agreement dated 15.11.2006 is enclosed herewith at page 405 of Paper book - II. observation of assessing officer that appellant manufactured CTV s worth Rs.86,61,331/- only for supply to ELCOT is, therefore, factually incorrect. In that view of matter, aforesaid allegation made by assessing officer is, it is respectfully submitted, devoid of any merit and is based on incorrect appreciation of facts. Addition made by AO - totally unrealistic It is further submitted that huge addition of Rs. 15,69,58,867 made by assessing officer leads to unrealistic figures, which further substantiates contention of appellant that assessing officer has proceeded on totally erroneous basis, as explained hereunder: As stated above, appellant sold CTV s to Dixon at price of Rs.2,000-2,200 approx per CTV (depending upon model). Dixon, on other hand, had been awarded contract for supplying 9,00,000 CTV s at per unit price of Rs.2,571.64 vide purchase order dated 25.01.2007, which was further reduced to Rs.2,047 in subsequent purchase order dated 31.07.2008 (refer page 421 of Paper book - II). Addition of Rs. 15,69,58,867, made by assessing officer, on 4,70,581 units supplied by appellant transforms into per-unit addition of Rs.333.50 (approx.). If aforesaid addition per unit of Rs.333 is added to sale price of appellant of Rs.2000-2200, it leads to price range of Rs.2,333 -2533, which would be almost equivalent to final price of Rs.2,571,64 awarded to Dixon by Elcot, and infact, much lower than reduced price of Rs.2,047 as per purchase order. Meaning thereby, Dixon, after addition of Rs.333, is left with nil/ negative margin, which it far from reality. 19 ITA No. 1551/Del/2012 AY: 2008-09 aforesaid calculation also exposes error in calculation/ estimations of assessing officer. Rejection of books of accounts - legally erroneous It is further submitted that it is settled law that merely on account of fall in gross profit, books of accounts cannot be rejected without pointing out any discrepancy in books of accounts and/or specifying as to how on basis of books of accounts maintained by assessee, it is not possible to correctly deduce taxable profit there from. Your Honour s kind attention, in this regard, is further invited to following decisions wherein it has been held that no trading addition can be made on basis of mere fall in G.P rate:- Jodhpur Bench of Tribunal in ITO vs. Arun Kumar Gupta (2006) 103 TTJ 134 (Jd.) held that assessing officer having not pointed out any defect in assessee s books of account and assessee having explained that marginal decline in GP rate was on account of substantial increase in sales during year, books of account could not be rejected. In Bombay Steel Centre v ITO (1995) 83 Taxman 85(Ahd), (AT) assessing officer made addition to declared trading results by estimating sales and applying G.P. rate of 21% thereon as against rate of 16% shown in year under consideration and 15.36% declared by assessee and accepted by assessing officer in immediately preceding year. Tribunal held that assessee had not maintained day-to-day stock records, but declared results were supported by regular books of accounts, vouchers and inventory of stock. addition made in trading results was deleted by Tribunal. Delhi Bench of Tribunal in Chandra Timber Traders v DCIT (1996) 54 TTJ 544 (Del) held that Low profit without any other defect being found in account books is not sufficient ground for rejection of accounts. Chandigarh Bench of Tribunal in ITO v Janta Pharmacy (1996) 84 Taxman 38 (Chd) (Mag) held that books of accounts could not be rejected simply because gross profit 20 ITA No. 1551/Del/2012 AY: 2008-09 was slightly low compared to earlier years and inventory had not been prepared when no defects were found in accounts. In Bhagwati Emporium v ITO: (1995) 80 Taxman 227 (Ahd.) assessee carried on business in cloth of different variety and readymade garments on retail basis. ITO found that cash hook, ledger, purchase register, etc. were duly maintained, but not stock register. ITO observed that though it was true that in business of cloth generally stock register was not maintained, in instant case, there was no way to verify closing stock. Tribunal observed that it was not possible for assessee to furnish details of monthly sales of cloth of each mill. It was impossible to maintain record of this nature. failure to furnish those details could not have been valid ground for rejecting entire book results particularly when no entry in. books of account was found to be erroneous, Tribunal held. Tribunal held that therefore, addition made by adopting G.P. rate of 15% as against 10.55% disclosed by assessee could not be justified. In Smt. Salinderjit Kaur v ITO (1995) 52 TTJ 388 (Chd) AO noted that G.P. rate of assessee has fallen from 21.7% to 15.9% and assessee is not maintaining day to day production register. AO rejected book results and made addition. Tribunal held that mere non-maintenance of production register cannot lead to rejection of book results of assessee. Indore Bench of Tribunal in Jagdish Oil Mills v ITO (1995) 52 TTJ 102 held that rejection of books on account of low G.P. rate, without disclosing any defect in books, is not justified. Jaipur Bench of Tribunal in ACIT v Mewar Polytex Pvt. Ltd. (1995) 51 TTJ 698 held that mere low G.P. rate or one irregularity cannot justify rejection of entire books of account particularly when in past department had never rejected books of account of assessee and had finalized assessments as per book results only. Trading addition deleted as there was no justification for estimating higher turnover or applying higher G.P. rate on basis of preceding year in changed circumstances. 21 ITA No. 1551/Del/2012 AY: 2008-09 Delhi Bench of Tribunal in Miracle Menthol Distillary v ITO (1993) 46 TTJ 13 (Del) deleted additions made by applying higher G.P. rate holding that additions are based on surmises and conjectures. Tribunal observed that G.P. rate cannot remain static and is likely to vary from year to year depending on facts and circumstances prevailing. Hyderabad Bench of Tribunal in Toco Engg. Co. v ITO (1986) 18 ITD 267 held that mere low gross profit rate is not valid reason for rejecting assessee s book results under proviso to section 145. In Arjun Sewing Machine Co. v ITO (1982) 14 TTJ 5 (Jab) ITO applied gross profit rate of 50% to declared rate of 34%. Tribunal observed that ITO was wrong in applying rate of 50% without any particular defect was not justified. Jabalpur Bench of Tribunal in Banarasidas Bhanot & Sons v ITO f19831 16 TTJ 143 held that when assessee has given valid explanation for fall in profit rate, addition made by ITO observing that rate of profit of contractor fell by 20% is unjustified and deleted same. In Harlal Hemraj v ITO (1982) 14 TTJ 505 (Jai) Tribunal held that occurrence of minor discrepancies in normal course and fall in profit rate during previous year would not form basis for rejection of trading results. In ITO v Arun Oil Industries (1985) 13 ITD 769 (JP) assessee carried on business of extraction and sale of groundnut oil. ITO rejected accounts of assessee on ground that stock register maintained by it showing yield of oil from groundnut was imaginary, worked out yield of oil at higher percentage than that shown by assessee. Tribunal observed that no omission, manipulations, etc. was pointed out by ITO nor was there any information on record in respect of other manufacturers regarding purchase, quality, witness, and climate, efficiency of crushing and other relevant variables. Tribunal held that ITO was not justified in rejecting book results of assessee and making addition on account of alleged shortage of yield of oil. 22 ITA No. 1551/Del/2012 AY: 2008-09 Jodhpur Bench of Tribunal in ITO v Prakash Chand : (2006) 100 TTJ 639 (JD) even held that even if stock register is not maintained, that could not be sole'basis of rejecting books of accounts. Tribunal observed that assessing officer had not pointed out any specific defect in books of account and he had also not found any inflated purchase or suppressed sales. Tribunal held that mere non-maintenance of stock register cannot be basis of rejecting books of accounts. assessing officer having not pointed out any specific defect in assessee s books of account, there was no basis for rejecting books of account and applying higher GP rate without citing any comparable case, Tribunal held. In Keystone India (P) Limited V. DCIT: 99 TTJ 386 (Ahd.) Tribunal held that AO having not pointed out any specific defects in maintenance of books of account by assessee, rejection of book results only on ground of fluctuation of G.P. rate is not tenable. It was similarly held by Ahmedabad Bench of Tribunal in Surat District Co- operative Milk Producers Union Ltd: 99 TTJ 390 Rajkot Bench of Tribunal in Girish M. Mehta: 99 TTJ 394 held that before rejecting books of account, Department has to prove that accounts are unreliable, incorrect and incomplete. accounts regularly maintained in course of business, duly audited under provisions of IT Act and free from any qualification by auditors, should be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. Tribunal further held that for rejecting books of account, it is Revenue s onus to prove that either books of accounts maintained by assessee are not correct and complete or method of accounting adopted is such that true profit cannot be deduced therefrom. On perusal of aforesaid, it will, thus, kindly be appreciated that various Courts and Benches of Tribunal have consistently held that mere fall in gross profit rate cannot be reason for making any trading addition. In fact, Courts/Tribunal have gone to 23 ITA No. 1551/Del/2012 AY: 2008-09 extent of holding that in any running business, gross profit rate cannot remain static. In present case, as stated above, gross profit rate, in fact, increased to 35.75%, if one were to take same base as in immediately preceding assessment year, which is much higher than gross profit rate of 24% declared in said year. There was, thus, no fall at all in GP rate as compared to immediately preceding assessment year. That apart, in assessment order assessing officer has not been able to pinpoint any discrepancy, whatsoever, in accounts maintained by appellant. Thus, even assuming without admitting that there was fall in G.P. rate, that fact, by itself, could not have resulted in rejection of books of accounts and estimation of trading profits. In view of aforesaid, it is submitted that assessing officer erred in rejecting books of accounts of appellant that, too, on erroneous basis that there was fall in GP rate of appellant. Conclusion In view of aforesaid, it is respectfully submitted that assessing officer erred in estimating profits of appellant on ad-hoc basis on ground that there was fall in gross profit as compared to profits as shown in immediately preceding year. aforesaid action of assessing officer is, therefore, based on incorrect/erroneous appreciation of facts of case and position in law and deserves to be deleted. It is, thus, respectfully prayed that huge addition of Rs. 15,69,58,867 made by assessing officer calls for being deleted in toto. 6.2 learned Commissioner of Income-tax (Appeals) also forwarded submission of assessee and additional evidences submitted by assessee on issue in dispute to Assessing Officer for his comments, however, Assessing Officer did not offer any comment on submission of assessee whereas admission of additional 24 ITA No. 1551/Del/2012 AY: 2008-09 evidences was not objected by Assessing Officer. After considering remand report, submission and rejoinders of assessee, Ld. Commissioner of Income-tax (Appeals) deleted addition with following observations: 7.2.6. After careful consideration of all facts on record and rival submissions as contained in assessment order and in appellant s submission, my observations/conclusions in respect of Ground of appeal No.6 to 6.3 , are as under:- On this issue, first of all my finding is that it is not case where A.O. found any discrepancy or defect in assessee s books of accounts. On other hand appellant has produced all records, details and copies of accounts to show that books of accounts were correctly and completely maintained. A.O. has also submitted in remand report that he has no objection to evidences brought on record. Thus, I hold that there is no case of rejection of books of accounts. Further I find that appellant has satisfactorily explained change in business circumstances in this year viz-a-viz last year. In earlier year i.e. A.Y. 2007-08, appellant had under taken manufacturing of CTVs for Dixon on Job work basis, wherein appellant used to receive Rs. 95/- for each set as conversion/labour charges. appellant received total job work charges of Rs. 96,59,400/-, out of total receipts of Rs. 1,01,88,242/-. As against that; in present year, appellant was awarded contract for manufacture and supply of 4,70,581/- set of CTVs to Dixon. To re-iterate, this year contract is not for job work but for entire manufacture and supply. Naturally sale volume has zoomed to around Rs. 100 Crore as against pittance amount of sale of Rs. 6,14,857/- last year. appellant had actually earned loss on manufacturing and sale activity last year, but because of huge contract awarded, it earned healthy G.P. of 1.85%, resulting indeed hefty gross profit of 1,48,87,501/- on its manufacturing and sale activities; which,when combined with profit of Rs. 25,44,153/-on job work activity, give overall gross profit of Rs. 1,59,84.211/-. 25 ITA No. 1551/Del/2012 AY: 2008-09 Thus, when entire details and break up of activities in two years are compared minutely; we find that comparison between 24.02% of last year with 1.85% G.F. declared of this year is actually erroneous because two figures are not comparable since they represent different activities. correct comparison is available in chart brought on record by appellant when accounts are separated for (a) manufacturing and sale activities, and (b) job work activity. As mentioned above, major activity this year is of manufacture and sale , on which appellant has earned healthy G.P. rather than loss in last year. After segregation, we find that job work activity has decreased as compared to last year and correspondingly there is decline in G.P. on job work from 26.34% last year to 21.20% this year. But that is not very major decline and is well explained by fact that there are minimum over heads specially in form of wages and workers expenses , which do not decrease proportionately i.e. in proportion to decrease in job work volume. Over-all I find that appellant has done well in its business in terms of profitability and that is evident in form of over-all profit declared. Thus, AO s observation of fall in G.P. is not found to be appropriate. Correspondingly application of section 145A(3) and enhancement of G.P. by A.O. are also not sustainable. I delete addition of Rs. 15,69,58,867/- In result addition of Rs. 15,69,58,867/- is deleted. 6.3 Before us, learned Commissioner of Income Tax (Departmental Representative) addressing grounds submitted that learned Commissioner of Income-tax (Appeals) has not taken into account reasons for falling gross profit rate of assessee pointed out by Assessing Officer. Relying on order of Assessing Officer, learned Commissioner of Income Tax (Departmental Representative) prayed that addition of gross profit made by Assessing Officer might be sustained. 26 ITA No. 1551/Del/2012 AY: 2008-09 6.4 On other hand, learned Authorized Representative of assessee relied on submission made before learned Commissioner of Income-tax (Appeals) as well as on finding of learned Commissioner of Income-tax (Appeals) on issue in dispute. 6.5 We have heard rival submissions and perused relevant material on record. We find that assessee has explained fall in gross profit rate as computed by Assessing Officer. assessee has thereafter for purpose of comparison of results with last year converted result of this year in form of job work and explained that gross profit rate of assessee in year under consideration should have been 35.75%, which is much more than gross profit rate of 24 percent declared by assessee in immediately preceding year. After detailed discussion of submission of assessee and taking into consideration remand report of Assessing Officer, learned Commissioner of Income-tax (Appeals) has deleted addition. After perusal of above submission of assessee, we are also agreed with conclusion of learned Commissioner of Income- tax(Appeals). Assessing Officer failed to notice functions carried out with assessee in immediately preceding year, which assessee explained before learned Commissioner of Income-tax (Appeals). We also agree with finding of learned Commissioner of Income-tax (Appeals) that Assessing Officer has not found any discrepancy or defect in books of accounts of assessee and, therefore, rejection of books of accounts merely on low gross profit rate was not justified. 6.6 In our opinion, order of learned Commissioner of Income- tax (Appeals) on issue in dispute is well reasoned and no interference on our part is required. Accordingly, we uphold finding of learned Commissioner of Income-tax (Appeals) on issue in dispute. grounds No. 4, 5 and 6 of appeal are dismissed. 27 ITA No. 1551/Del/2012 AY: 2008-09 7. Ground nos. 7 and 8 of appeal being general in nature not required to be adjudicated upon by us. 8. In result, appeal of Revenue is dismissed. decision is pronounced in open court on 19th October, 2016. Sd/- Sd/- (H.S. SIDHU) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 19th October, 2016. Laptop/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi ACIT, Circle-1, Noida v. M/s. Prisma Electronic