HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 135 / 2017 M/S Sorabh Cement Ltd., Kapil Mandi, Neem Ka Thana, Distt. Sikar, Rajasthan ----Appellant Versus Asstt. Commissioner of Income-Tax, Circle-Sikar, Rajasthan ----Respondent For Appellant(s) : Mr. Tanuj Agarwal For Respondent(s) : Mr. Daksh Pareek for Mr. Sameer Jain HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 05/12/2017 1. By way of this appeal, appellant has challenged judgment and order of Tribunal whereby Tribunal has allowed departmental appeal for statistical purposes and rejected cross-objection filed by assessee. 2. This Court while admitting appeal framed following substantial question of law: (i) Whether in facts and in circumstances of case and in law, learned ITAT has rightly upheld disallowance of service tax expenditure amounting to Rs.1,68,000/- on freight for transportation of goods by holding that assessee is not beneficiary of such transport payment in any manner, therefore, assessee has no liability to bear respective service tax liability, whereas provisions of Finance Act, 1994, relating to service tax read with Rule 2(1) (d) of Service Tax Rules, 1994, provides for payment of service tax by consignor/consignee on reverse charge basis on (2 of 13) [ITA-135/2017] freight for transportation of goods through goods transport agency. (ii) Whether in facts and circumstances of case and in law, learned ITAT has rightly upheld rejection of entire books of account by invocation of provisions of section 145(3) of Income Tax Act, 1961 and that too on minor mistake in supplementary records, whereas, Hon ble Rajasthan Court in case of Uttam Chuna Pathar Udyog vs. ITO reported at 192 ITR 56 (Raj.) has held that minor defects should not lead to rejection of books of account. 3. On first issue, counsel for appellant has taken us to order of Tribunal wherein it has been observed as under: 6.4 We have heard rival contentions and perused materials available on record. We find that AO has rightly observed that since assessee is not beneficiary of such transport payment in any manner, therefore, assessee has no liability to bear respective service tax liability. Accordingly, service tax payment of Rs.1.68 lacs was held as not incurred wholly and exclusively for purpose of business purposes of assessee and same was considered as inadmissible u/s 37 of Act which has also been sustained by ld. CIT(A) also. In view of above deliberations, we feel that ld. CIT(A) has rightly sustained addition. Thus Ground No.3 of C.O. of assessee is dismissed. 3.1 It is contended that Tribunal has not allowed payment made for service tax which was paid to transporter. 3.2 On issue No.2, he has taken us to of order of AO wherein it has been observed as under:- 3.3 explanation filed by assessee, vide para 3 of letter dated 27-12-2010 is as under:- Sir, stock summery given to you on dated 1.11.2010 has same quantity of all purchases as mentioned in details of purchases and books of accounts. All purchases are verifiable from bills of purchases and can be verified. You may kindly verify quantity of both statements. We are producing copy of stock (3 of 13) [ITA-135/2017] registers and purchase bills and all books for your kind verification. It is further submitted that assessee maintains books of accounts in computer. books are maintained at neemkathana office and stock register, excise record, wages register and other factory records are maintained at factory site. stock register is also maintained at factory in computer system. As per company procedure, goods are being received at factory and stock keeper/factory accountant enter quantity at computer. No financial books are being maintained at factory except which are required. Sometimes, stock keeper/factory accountant enter value of goods also. Since goods are being received at factory during day and night. It is responsibility of factory staff to enter goods received at factory immediately. Whenever goods are received at factory day hours or night, entries are made by persons in computer. But due to mistake or due to over sight or lack of account knowledge he also enter value in computer. Even at factory, they are suppose to maintain and control quantitative details. Again when bills of parties are sent to factory for verification whether goods are received or not, then it seems that factory staff are enter value of goods. Thus quantitative has been correctly maintained but lack of knowledge of computer and accounts, factory persons enter value wrongly. When your goodself asked for factory record related to quantity. We submitted computer generated quantitative details which also produced/submitted wrong value figure. wrong figure may be due to computer software average system or malfunctioning/virus in computer system. It is further submitted that coke dust, clinker and bags are excisable items. excise paid on these purchases are input for payment of excise by assessee. We are producing copies of excise monthly return which is also audited/checked from time to time by excise department. quantitative which assessee had purchased/value has been entered and excise input has been claimed. Further we are enclosing photocopy of stock register maintained by assessee which also tally with purchase bills. Purchase bill are being submitted and produced. (4 of 13) [ITA-135/2017] Further we have already submitted copy of sales tax assessment order. This being clerical mistake while feeding computer entering by untrained computer staff who do not have any account background at all. quantitative details of statement of factory and Neemkathana is same. assessee had also filed similar explanation vide letter dated 29-12-2010 stating that some of purchase bills were entered twice. 3.3 He also taken us to remand report which reads as under: 3.5 As regards difference in production figures of 44816 MT as per audit report and 45023 MT as per monthly returns of production, assessee has explained alongwith evidences that by mistake, closing stock of cement of February month of 207 MT was included in production of March, which resulted in reflection of excess production as per excise records. evidences produced by assessee in support of such submission appear to be verifiable and hence are required to be considered accordingly. 3.4 So also observations made by AO and contended that books of accounts were wrongly rejected. 3.5 He further contended that Tribunal has seriously committed error in remanding matter back to AO. 3.6 While considering issue of 145(3), he relied upon following decisions: (i) Commissioner of Income Tax vs. Gotan Lime Khanij Udhyog (21.07.2001 - RAJHC) : MANU/RH/1022/ wherein it has been held as under: 7. Both these provisions do not envisage that by resorting to best judgment assessment assessing authority must reach to different figure of income and profit than what has been disclosed by assessee. Best judgment is also to be based on material available on record. Therefore, notwithstanding rejection of books of account material disclosed by assessee along with other material that may be collected by Income Tax Officer forms basis of (5 of 13) [ITA-135/2017] computation of income. On that basis what conclusions are to be reached is independent of results shown in books of accounts, if any maintained by assessee, section 145 only provides basis on which computation of income is to be made for purpose of determining amount of tax payable by assessee. provision by itself does not deal with additions or deletion in income. Therefore, merely because there is some deficiency in books of account or merely because of rejection of books of account it does not mean that it must lead necessarily to additions in returned income of assessee. What changes in either case is basis for computing income chargeable under head "Profit and gains of business or profession" or "Income from other sources". result would depend on other principles of computing income. Therefore, we hold that merely changing basis or method of arriving at end result of working out computation of taxable income under Income Tax Act, necessarily does result in devising at profit or gains from business or other sources different from one returned by assessee, where he has returned his income and different from result reached by assessee as per method of accounting employed by him, by adopting different basis by assessing authority. (ii) Uttam Chuna Pathar Udyog vs Income-Tax Officer, 1998 65ITD 460 JP on 14 August, 1997 wherein it has been held as under: 11. This brings us to as to what would constitute correct accounts or correct profits as envisaged in Section 145(2). Section 145(2), no doubt, refers to correctness of books. But simply, few clerical errors, lack of some vouchers, non- maintenance of particular record, does not perse render accounts incorrect. In spite of these defects, profits may be deducible. Thus, before involving provisions of Section 145(2), it is duty of Assessing Officer to show how, because of these defects, correct profits are not deducible; and correct books of account do not mean that it should be correct to every pie, or, that each and every record ought to have been maintained with zero error. It is tall order to expect such state of affairs and only utopist is entitled to have such expectation. Correct books of account has to be understood as (6 of 13) [ITA-135/2017] fairly correct books of account. Thus few missing vouchers or few defects here and there, strictly speaking, may render books to be incorrect, but yet, they may be fairly correct. In such case, it is more appropriate to make legitimate disallowances, rather than reject books whole hog. Profits deduced from such fairly correct books are near to real income liable to tax than income determined by wild estimates. Indian Companies Act, 1956 also envisages that profit and loss account of company should reflect true and fair view of profit or loss. Thus, in case of corporate sector, which is supposed to be more organised, taxing authorities, though unconsciously, start computation of income from fair profits or losses, then why that insistence of one hundred per cent accuracy and correctness in case of other assessees. 12. Thus, in instant case, none of reasons mentioned by Assessing Officer are such which could have shaken confidence of person with average wisdom, in books maintained by assessee. provisions of Section 145(2) are wrongly invoked. (iii) aforesaid view was confirmed by this Court in CIT Vs. Uttam Chuna Pathar Udyog, [2001]116TAXMAN524(RAJ) wherein it has been held as under:- 2. We are satisfied that there is no error in order passed by Tribunal, Jaipur, in rejecting application under section 256(1) of Income Tax Act, 1961 and holding that whether in particular facts and circumstances, books of account could have been rejected or not is finding of fact and does not call for interference and no question of law arises. This is more so when no perversity has been shown in reaching such finding so as to raise question of law relating to findings of facts by pointing out that finding of fact stands vitiated and not bindin on this court in reference application. other conclusions are being subordinate to rejection of books also fall in same category. (iv) Malani Ramjivan Jagannath vs. Assistant Commissioner of Income Tax(2007)207 CTR Raj 19 (26.10.2006 - RAJHC) : MANU/RH/0436/ Wherein it has been held as under: (7 of 13) [ITA-135/2017] 10. In face of these undisputed facts and circumstances, Tribunal in our opinion could not have interfered with order of CIT(A). In doing so, it had ignored all admitted facts noticed by us above, in face of which there was no occasion for AO to have resorted to estimate method. GP is primarily result of excess of sales over purchases, opening stock, closing stock, unsold stock at two terminals is only balancing factor. Admittedly out of this four components of trading result, there could not have been any ground for Revenue to arrive at different result. So far as closing stock is concerned, inventories of existing stock were not found to be incorrect by AO i.e. that position of stock as shown in account books was not incorrect. There being no dispute about sales and purchases, non-maintenance of stock register lost its significance so far as arriving at GP is concerned. Therefore, CIT(A) was right in his reasoning about admitted state of affairs. Resorting to estimate of GP rate was founded on no material. It was merely case of making certain additions on basis of certain defects pointed out by AO and which he has shown in different account by giving margin of unvouched expenses. He has disallowed certain expenses. 11. Tribunal committed basic error in not appreciating reasoning given, by CIT(A). It is trite to say that in facts and circumstances of present case, account books are maintained as they were ordinarily maintained years after years and which were found to yield fair result. Mere deviation in GP rate cannot be ground for rejecting books of account and entering realm of estimate and guesswork. Lower GP rate shown in books of account during current year and fall in GP rate was justified and also admitted by AO as well as CIT(A) as well as Tribunal. Therefore, fall in GP rate lost its significance. Having accepted reason for fall in GP rate, namely, stiff competition in market and also that huge loss caused in particular transaction, neither rejection of books of account was justified nor resort to substitution of estimated GP by rule of thumb merely for making certain additions. We are, therefore, of opinion that findings arrived at by Tribunal suffers from basic defect of not applying its mind to existing material which were relevant and went to root of matter. When all data and entries made in trading account were not found to be incorrect in (8 of 13) [ITA-135/2017] any manner, there could not have been any other result except what has been shown by assessee in books of account. We are, therefore, unable to sustain order of Tribunal. (v) Commissioner of Income-Tax, West.. Vs. Padamchand Ramgopal AIR 1970 SC 1575, 1970 76 ITR 719 SC Wherein it has been held as under: 1. These appeals by certificate arise from decision given by High Court of Calcutta in five references made by Income-tax Appellate Tribunal, Bench 'B', Calcutta under Section 66(2) of Indian Income-tax Act, 1922. High Court has answered questions referred to it in favour of assessee. In support of return made by him, assessee, Hindu Undivided Family carrying on business in various items including money lending produced his account books. Income- tax Officer rejected those accounts as unreliable and assessed assessee on basis of best judgment by adding to income returned by him various sums ranging from Rs. 17,951 for assessment year 1956-57, to Rs. 21,536 for assessment year 1954-55. five assessment years with which we are concerned in this case are 1953-54, 1954-55, 1955-56, 1956-57 and 1957-58. Income-tax Officer in his order did not give any reason for not relying on accounts submitted. On appeal, Appellate Assistant Commissioner after going through notes prepared by Income-tax Officer found that in his investigation, Income-tax Officer had found that one of items of interest received by assessee during accounting year relating to assessment year 1953-54 had not been brought to account and another entry relating to receipt of income during that year was not correct. Neither Appellate Assistant Commissioner nor Income-tax Officer found any mistake in accounts relating to other accounting years. two mistakes noticed by Appellate Assistant Commissioner are insignificant mistakes. Further they afforded no basis for rejecting accounts for other years. Both Income-tax Officer as well as Appellate Assistant Commissioner arbitrarily added to total income returned half amount of gross receipts shown by assessee under head "interest" during each year as escaped income. tribunal did not (9 of 13) [ITA-135/2017] examine facts of case afresh. It just adopted findings of Appellate Assistant Commissioner. questions referred to High Court was whether upon facts admitted or found by Appellate Tribunal, it was justified in holding that Income-tax Officer had rightly added income of Rs. 18050 in assessment year 1953-54, Rs. 21536 in assessment year 1954-55, Rs. 18321 in assessment year 1955-56 and Rs. 17951 in assessment year 1956-57 and Rs. 20547 in assessment year 1957-58. (vi) Pr. CIT Vs. Handmade Paper & Board Industries D.B. ITA No.237/2016 (RAJHC) decided on 23.10.2017 wherein it has been held as under: 5. Counsel has also sought our attention to order of Tribunal, wherein t has been observed as under:- 4. Now revenue is in appeal before us. ld DR has vehemently supported order of Assessing Officer. At outset, ld AR of assessee has reiterated arguments made before ld CIT(A). He has further argued that assessee had not maintained stock register and manufacturing process of products manufactured by assessee are so complicated and number of items manufactured are in number of quantities and there are differences, finished process and also size, length and width of production is different, which cannot be possible to maintain stock register, therefore, assessee has not ACIT Vs. M/s Handmand Paper & Board maintained quantitative and qualitative stock register, but assessee had recorded purchase and sale and other expenses on basis of bills vouchers and closing stock was taken on last of previous date, which has been verified and valued property and disclosed in P&L account and balance sheet. He further argued that whatever defects pointed out by Assessing Officer are not sufficient to justify rejection of books of account U/s 145(3) of Act. ld Assessing Officer made addition on ground that in preceding year, GP was higher than GP disclosed during year under consideration but in business line, number of internal and external factors affect performance of business. Some of them are beyond control of assessee. market (10 of 13) [ITA-135/2017] competitive, there is recession in other countries, which affects assessee, demand and supply and also price. ld Assessing Officer applied 33% GP without pointed out any specific defects in books of account or bringing out any material on record. He further relied on decision of Hon'ble Rajasthan High Court in case of Gotan Lime Khanij Udhyog (supra) wherein it has been held that rejection of books of account U/s 145(3) does not always lead to addition in every such circumstances, even if there is fall in GP ratio asACIT Vs. M/s Handmand Paper & Board such. Considering these case laws, ld CIT(A) restricted addition, therefore, he prayed to uphold order of ld CIT(A). 5. We have heard rival contentions of both parties and perused material available on record. Whatever defects pointed out by Assessing Officer is not justified, rejection of books of account U/s 145(3) of Act. assessee's manufacturing processes are so complexed that at every stage, size, length and width of products changed and also number of process in manufacturing of handmade papers but assessee has maintained proper purchase, sale and other expenses on basis of bill/vouchers. Therefore, we uphold order of ld CIT(A). 6. Counsel for respondent has relied upon decision of Gujarat High Court in D.B. Income Tax Appeal No.1249/2017,wherein it has been observed as under:- 6. Insofar as question raised in Tax Appeal No. 1249 of 2007 is concerned, it is matter of record that assessee did maintain all Registers, verification of which had duly been made by A.O. books of accounts of assessee were periodically checked by revenue authorities. It appears that in subsequent year i.e. in assessment year 1995- 96, same G.P. rate has been accepted by Department. It is fact that cost of raw materials has increased. It is also seen that 100% goods are sold to its sister concern and therefore question of GP does not arise. A.O. could not find that assessee had sold finished goods at lesser price to its sister concern. In our opinion, low profits and absence of regular stock register are not sufficient reasons for rejection of accounts of assessee. Hence, CIT (A) and Tribunal were justified in deleting addition. Both authorities below (11 of 13) [ITA-135/2017] have considered materials placed before them and we see no reason to interfere with same. Accordingly, we answer issue raised in Tax Appeal No. 1249 of 2007 in favour of assessee and against Department. 7. Now, insofar as, questions raised in Tax Appeal No. 1250 of 2007 and Tax Appeal No. 1253 of 2007 are concerned, in paragraph No. 14 of its judgment, Tribunal has observed as under: "14. Now coming to second aspect that workers engaged by labour contractors are to be counted while counting number of workers. answer is in affirmative and it is supported by decision of Jurisdictional High Court in case of CIT vs. Prithviraj Bhoorachand (supra) wherein their Lordships have observed as under:- "As can be seen, term employed by statute is, "employs" twenty or more workers. plain dictionary meaning of said term 'employ' is to use services of person in return for payment. Clause (iv) of s. 80I(2) of Act does not contemplate additional requirements which have been read into same by CIT. As long as industrial undertaking manufacturers articles or things; and where manufacturing process is carried on without aid of power, it employs twenty or more workers, requirements of provision are fulfilled. When provision is clear and unambiguous, there is no need to read anything more into same, as is sought to be done by Revenue. This Court in case of CIT v. V.B. Narania & Co. MANU/GJ/0339/2001 : 171 CTR (Guj) 416 : 252 ITR 884 (Guj), where in facts of said case, ITO has disallowed claim for deduction under Ss. 80HH and 80J of Act, on ground that assessee got certain processes done from outsiders on piecemeal basis and that assessee had not provided regular employment to any person in its manufacturing process, held that Tribunal was right in coming to conclusion that persons doing work were employed by assessee because assessee was controlling not only work to be done by those persons but also manner of doing of work. Court further held that Assessing Officer and AAC were not right in holding that concerned persons were not employees because they were being paid on piecerate basis or job work basis. In present case, Tribunal has (12 of 13) [ITA-135/2017] found that assessee has ultimate control over affairs of establishment and that industrial undertaking of assessee was employing more than 20 workers through contractor. Applying principles laid down by aforesaid decision to facts of present case it cannot be said that Tribunal was not justified in holding that assessee is employing 20 workers in its industrial undertaking as contemplated by provisions of cl. (iv) of sub-s.(2) of s. 80-I of Act." There is no dispute to extent that if number of workers employed by labour contractors is included then number of workers employed by see is sufficient for fulfillment of condition laid down in this regard. In our view of situation, we hold that assessee has fulfilled requirement of minimum number workers employed in manufacturing process for purpose of eligibility of deduction under section 80IA. grant of depreciation on items excluded by CIT (A) from plant and machinery become irrelevant in view of decision of Hon. Jurisdictional High Court in case of CIT vs. Prabhudas Kishordas Tobacco Products (P) Ltd. (supra) as depreciation on relevant asset has to be allowed as per provisions of IT Act irrespective of fact that what constitute "plant and machinery" for purpose of determining whether unit is small scale industrial undertaking eligible for deduction under section 80IA. Thus there is no force in said contention of Revenue that it has been wrongly held by CIT (A) that excluded items are eligible for depreciation at different rate. In view of above discussion, grounds No. 4 & 5 are allowed for statistical purposes." (vii) Mehar Chand Jain And Sons Vs. CIT Jaipur & Ors. D.B. ITA No. 191/2010 (RAJHC) Decided on 29.5.2017 Wherein it has been held as under: 3. This court while admitting appeal on 5.5.2010 framed following substantial question of law:- "Whether revenue authorities are permitted to invoke Section 145(3) of Income Tax Act even in cases where varacity and correctness of books of accounts is substantially accepted by them?" 5. We are of opinion that issue is required to be answered in favour of assessee. (13 of 13) [ITA-135/2017] 5.1 However, it will not be treated as precedent for subsequent year. It will be open for department to consider assessment of subsequent year independently. appeal stands allowed. 4. We have heard learned counsel for parties. 5. On first issue, contention raised by appellant is required to be accepted inasmuch as cement industry when transportation is made by manufacturer and transporter has done service on behalf of appellant assessee. In that view of matter, he has to realize all expenses of transporters including tax paid by transporter. In that view of matter, issue No.1 is required to be answered in favour of assessee and against Department. 6. However, on issue No.2, in view of observations made by AO that there are serious discrepancies in stock register, view taken by AO as well as CIT (A) is required to be accepted. However, it will be open for appellant assessee to rely upon decision of this Court in case of books of accounts where this Court has taken view of average GP or NP on basis of last five years. 7. Thus, issue No.2 is answered in favour of Department and against assessee. appeal stands partly allowed to extent as indicated above. (VIJAY KUMAR VYAS) J. (K.S. JHAVERI)J. bm gandhi 81 Sorabh Cement Ltd. v. Asstt. Commissioner of Income-tax, Circle-Sikar, Rajasthan