ORDER
N.K. Saini, A.M.
1. These two cross appeals directed against the order of the CIT(A), Jalandhar, dt, 3rd May, 1994, relating to asst. yr. 1989-90, were heard together, so, these are being disposed of by this consolidated order for the sake of convenience.
2. First, we will take up assessee’s appeal i.e., in ITA No. 622/Asr/1994 for the asst. yr. 1989-90. In this appeal, the following grounds have been raised by the assessee :
“1. That the. order of the CIT(A) Jalandhar, is against law and facts of the case on the file.
2. That an addition of Rs. 80,575 sustained by the CIT(A) out of total addition of Rs. 5,29,475 made by the ITO in respect of diversion of profit on sales made to the sister-concern M/s S.B. Saini Bros, Jalandhar, is not warranted by facts and circumstances of the case. The ITO has ignored the fact that no sales were made to the sister-concern below cost. On the facts the addition is prayed to be deleted.
3. That an addition of Rs. 1,30,410 made by the ITO out of installation and commissioning expenses is upheld by CIT(A) ignoring the basic facts. All the expenses and details furnished are fully vouched and verified. Inflation and increase in value of material, labour, etc., ignored. On the facts and circumstances of the case the addition is prayed to be deleted.
4. That an amount of Rs. 44,068 was disallowed by the ITO under Section 40A(3) of the IT Act and sustained by the CIT(A) on flimsy grounds. The genuineness of the transactions was established and are covered by Rule 6-DDJ and Circular No. 220 of the CBDT. The addition is prayed to be deleted.
5. That the assessee begs for leave to add or amend any grounds or appeal before the appeal is finally disposed off.”
3. Ground No. 1 is general in nature, so does not require any comments on our part. While vide ground No. 2 the grievance of the assessee relates to the sustenance of addition of Rs. 80,575 out of total addition of Rs. 5,29,475 made by the AO in respect or diversion of profits made to the sister-concern.
3.1 The relevant facts relating to this issue in brief are that during the assessment proceedings, the AO noticed that the assessee had made sales of D.G. sets to the sister concern namely M/s S.B. Saini Bros., Jalandhar. The AO worked out the difference between the selling rate charged from the sister concern and charged from Government Departments, the sale to whom were mainly through the Executive Engineers of Public Health Divisions at Patiala, Garhshanker, Pathankot and Garrison Engineer, Faridkot. The AO mentioned that the diesel generating set of the same capacity was sold to the sister concern which was sold to the Government Department. The difference came to Rs. 5,29,475 which the AO had worked out at p. 5 of the assessment order. The AO asked the assessee to explain the position and in compliance there to, the assessee submitted that the goods, were also sold to the sister concern at market price and not at lower rates. It was further stated that the price of the D.G. set depended upon the components used therein and the D.G. sets those were sold at lesser price were without certain components. It was further stated that the goods sold to the sister, concern did not carry guarantee or warranty and also installation charges were not included while in other cases the sale price included charges of erectioning and commissioning and testing including the cost of supply etc. However, the AO did not find any merit in the contention of the assessee and treated the difference of Rs. 5,29,475 as the profit diverted to the sister concern.
3.2 The assessee carried the matter to the learned CIT(A) and reiterated the submissions made before the AO. It was also submitted that both the concerns were separate entities and in existence for quite some time. It was explained that D.G. sets supplied to the sister concern were devoid of various benefits of the guarantee-warranty, quality difference of various components and without any installation expenses etc. It was further submitted that the assessee was not maintaining any production register regarding the quality of components used in a particular assembled D.G. set, the components used vary in quality and their price and as such the price of the assembled D.G. set depended on the components used therein. It was pleaded that the goods in question were sold at a profit and it was not the case of the AO that the goods were sold for incurring losses, It was also stated that the AO had not brought any evidence on record that the submission of the assessee was wrong and the explanation furnished was not to be rejected arbitrarily and without there being any material to the contrary. It was also pointed out that the D.G. set of 125 KVA was sold by the assessee for Rs. 2,05,000 and the same was admittedly sold without any profit onwards by the said concern. The assessee further submitted that the sale price of 20 D.G. sets was at Rs. 8,57,925 which the concern namely M/s S.B. Saini Bros. further sold for Rs. 9,38,500. Therefore, the gross profit Rs. 80,575 gave a G.P. rate of 8.58 per cent which was not abnormal gain made by the said concern from the transaction of sale made by the assessee. It was further stated that the concern M/s S.B. Saini Bros, Jalandhar was subjected to tax in respect of profit arising out of those transactions, and the income earned by that concern out of the sale of the said D.G. set in respect of the said transactions was accepted by the AO while framing the assessment under Section 143(3) of the IT Act. The reliance was also placed on the decision of the Hon’ble Supreme Court in the case of CIT v. A. Raman & Co. (1968) 67 ITR 11 (SC).
3.3 The learned CIT(A) after considering the submissions of the assessee found that one Shri Sohan Singh who was manager of the assessee also acted as managing partner in the firm M/s S.B. Saini & Bros. Jalandhar, He further noted that both the firms had common business premises and were having the same accountant. According to the learned CIT(A), the sale bills issued by the assessee in the name of sister concern M/s S.B. Saini Bros and by M/s S.B. Saini Bros. to the customers were merely a billing device. However, the learned CIT(A) observed that the addition made by the AO on comparing the selling rates made to the sister concern with those two other Government Departments was ill-founded. According to him, at the most the addition could have been made for the profit earned by the sister concern through the billing device. He, therefore, sustained the addition of Rs. 80,575 which was the profit earned by the sister concern. Accordingly, the relief of Rs. 4,48,900 was given to the assessee.
3.4 Being aggrieved, the assessee is in appeal. The learned counsel for the assessee, Sh. Anil Miglani, advocate reiterated the submissions made before the authorities below. It was further stated that the sister concern was a separate and distinct entity assessed to income-tax at the maximum rate of income-tax and similarly the assessee was also assessed to maximum rate of income-tax.
Thus, it cannot be held that there was any diversion of profit because there was no benefit for tax as both the concerns were being assessed at the similar rate of tax. It was also submitted that the sister-concern had not earned any abnormal gain on the goods purchased from the assessee. It was vehemently argued that the goods were not sold to the sister concern at the price lower than the market rate, according to the specification and the components used therein as required by them. It was emphasised that the sales could not have been compared with other sales made directly by the assessee to various Government Departments, since the goods sold to the sister concern were devoid of various items and components. It was also pleaded that the learned CIT(A) as well as the AO ignored this fact that the assessee and the sister concern were separate and distinct entities constituted by partnership deed with separate partners having different sales-tax and income-tax number and also maintaining separate bank accounts. It was also stated that both the concerns were maintaining separate books of accounts and the genuineness of the transaction was established as the sales made by the assessee were onwards made to the Government Departments. Accordingly, it was submitted that there was no justification in sustaining the addition of Rs. 80,575. The reliance was also placed on the decision of this Bench of the Tribunal dt. 28th June, 1993, in the case of ITO v. Smt. Mohan Kaur in ITA No. 93/Asr/1989 for the asst. yr. 1982-83.
3.5 In his rival submissions, the learned Departmental Representative strongly supported the orders of the authorities below and submitted that the assessee sold D.G. set to its sister concern at lower rates, as such had diverged its profits, therefore, the AO was justified in making the addition in the hands of the assessee on the basis of diversion of profit to the sister concern.
3.6 We have heard both the parties and carefully gone through the material available on the records. In the instant case, it appears that the AO made the addition on the basis that the sale rate to the sister concern were lower in comparison to the sale rate of the D.G. sets supplied by the assessee to certain Government Departments. It is noted that the assessee sold the D.G. sets to the Government Departments by providing certain facilities with guarantee and warranty. The facilities provided were related to the installation, testing, delivery at various sites etc.; however, such facilities were not provided to the sister concern. It would also be clear from the comparative chart furnished by the assessee which is available at pp. 26 to 29 of the paper book, that the different components were used in the D.G. set sold to the various Government Departments. In that view of the matter, that AO was not justified in comparing the sale rate of the D.G. sets sold to the sister concern with the D.G. sets sold to the various Government Departments and making the addition of Rs. 5,29,475 on account of difference in the sale rate. It is also not in dispute that both the entities i.e., assessee and its sister concern M/s S.B. Saini Bros. Jalandhar, are two different entities, which are separately assessed having the separate sales-tax as well as income-tax number. It is also noticed that the AO compared the sale rate in respect of D.G. sets sold to the sister concern with the sale rate of various Government Departments but not with other customers of the assessee. In other words, the AO compared the sale rate with Government Departments where certain facilities were provided by the assessee but not with other customers of the assessee to whom similar type of D.G. sets were sold by the assessee.
In that view of the matter also, the AO was not justified in considering the difference in sale price as the diversion of profit by the assessee. Similarly, the learned CIT(A) while sustaining the addition of Rs. 80,575 had considered the profit earned by the sister concern as that of the assessee, although the sister concern being a separate entity disclosed the profit and paid the tax thereon. In our view, the learned CIT(A) ought to have deleted the entire addition when he opined that the addition made by the AO on comparing the selling rates made to the sister concern with those to other Government Departments was ill-founded. Moreover, the learned CIT(A) could not establish that the profit earned by the sister concern on account of sale of the D.G. sets was in fact earned by the assessee. It is also not the case of the Department that the assessee had sold the D.G. sets to the sister concern at a loss. However, it was the explanation of the assessee that the goods were sold to the sister concern at the market price and some profit was earned on the said sales. It is also true that the assessee as well as the sister-concern were assessed at the same rate of tax and the sister-concern is being assessed to the income-tax separately and also had accounted for the profits made by it on the transactions related to the D.G. set in question. It is well settled that there is no law which castes an obligation on a trader to make a profit out of a particular transaction. It is also well settled that law does not oblige a trader to make the maximum profit that he can do out of his trading transaction. The only income which is earned or accrued to a trader is taxable but not the income which ought to have been earned.
3.7 We, therefore, considering the entire facts of the present case as discussed hereinabove are of the view that the learned CIT(A) was not justified in sustaining the addition of Rs. 80,575, considering the same as the profit diverted by the assessee to the sister concern. Accordingly, the addition sustained by the learned CIT(A) is deleted.
4. The next issue vide ground No. 3 relates to the addition of Rs. 1,30,410 out of the installation and commissioning expenses.
4.1 For making the addition, the AO found that in the preceding year, the assessee claimed such type of expenses at Rs. 92,558 in comparison to the expenses of Rs. 2,50,750 claimed during the year relevant to the assessment year under consideration. The AO also found that the overall increase in the turnover of the assessee in comparison to the preceding year was at 29.7 per cent. He therefore, considered the expenses claimed by the assessee on higher side and allowed 30 per cent increase from the last year’s expenses. In this manner, the expenses were allowed to Rs. 1,20,325 (Rs. 92,558 plus 30 per cent of 92,558) and remaining expenses of Rs. 1,30,410 were disallowed.
4.2 Before the learned CIT(A), the assessee submitted that the expenses incurred were actual which were verifiable and fully vouched. It was stated that the AO had not pointed out any unreasonable or unvouched expenses, therefore, the addition made was without any basis. It was further stated that the full details was furnished to the AO and the same was verified by him with the respective vouchers and no defect was pointed out in the vouchers. It was explained that the expenses under this head pertained to two types of expenses, firstly, in respect of job work contract wherefrom the receipts were credited to this account, secondly, the expenses incurred in respect of installation, errection and commissioning of D.G. sets and their testing at the sites at various places. The sale bills issued in respect of D.G. sets were credited to the sale account while the expenses incurred for the installation, testing and commissioning etc. were debited to the head installation and commissioning charges. That is why there was a debit balance claimed by the assessee and the same was the position in earlier years also.
It was stated that each and every year is an independent year and since in the case of the assessee the job works contracts were carried out so the expenses incurred in respect of certain job works varied on the basis of different sites. It was also stated that the entire expenses were incurred exclusively and only for business needs. Therefore, the addition made by the AO was nothing but a conjectural surmises. The learned CIT(A) confirmed the action of the AO by stating that there was nothing improper in the disallowance.
4.3 Before us, the learned counsel for the assessee reiterated the submissions made before the authorities below and vehemently argued that complete detail of expenses was filed before the AO which was admitted by him in the assessment order. It was stated that the AO had not pointed out any disallowable item except that those expenses were more as compared to the last year and the same were not properly vouched. However, no defect in the vouchers was pointed out by the AO. It was submitted that the expenses incurred were wholly and exclusively for the business purposes. Therefore, without pointing out any specific defect in the details and vouchers produced, the addition made by the AO and confirmed by the learned CIT(A) was not justified. The reliance was placed on the decision of the Tribunal Allahabad Bench ‘C’ (TM) in the case of Core Health Care Ltd. v. Dy. CIT (2000) 60 TTJ (Ahd)(TM) 490.
4.4 In his rival submissions, the learned Departmental Representative supported the orders of the authorities below.
4.5 After considering the rival submissions and going through the material available on the records, it seems that the AO made the disallowance on the basis that the expenses incurred by the assessee were higher in comparison to the expenses in the preceding year. It is also noticed that the AO curtailed the claim of the assessee on the basis of the last year’s expenses. The AO enhanced the expenses of earlier year proportionately and worked out the expenses at Rs. 1,20,235 instead of Rs. 2,50,750 claimed by the assessee. It appears that the working of the AO was without any basis since there was no evidence available on record that the installation and commissioning expenses were directly related to the turnover of the assessee. It is also true that the AO had not pointed out any specific defect in the details and the vouchers produced by the assessee. It is also not the case of the AO that the expenses incurred by the assessee were not related to the business or the expenses were incurred for any other purposes. It seems that the disallowance made by the AO is based on surmises and conjectures which is not tenable in the eyes of law. Similarly, the learned CIT(A) while confirming the action of the AO has not given any cogent reason. He simply said that there was nothing improper in the disallowance made by the AO. in view of various defects pointed out. However, he had not stated even a single word as to what were the defects pointed out by the AO and even the AO had not mentioned any particular defects while making the disallowance, he simply stated that the expenses claimed by the assessee were on higher side and also were not properly vouched. However, he had not pointed out even a single instance of expenses which was not fully vouched. We, therefore, are of the considered view that the AO was not justified in making the disallowance and the learned CIT(A) wrongly confirmed the action of the AO. In that view of the matter, we delete the addition of Rs. 1,30,410.
5. The last issue vide ground No. 4 relates to the confirmation of disallowance of Rs. 44,068 made by the AO under Section 40A(3) of the Act.
5.1 During the assessment proceedings, the AO noticed that the assessee had made cash purchases of Rs. 44,068 on 14th July, 1988, from M/s S.B. Saini Bros. Adda Hoshiarpur, Jalandhar, the sister concern of the assessee. According to him, the payment in question was hit by the provisions of Section 40A(3) of the IT Act. The assessee submitted before the AO that the goods purchased from M/s S.B. Saini Bros, Jalandhar were on wholesale and discounted price on the condition of cash payment. The assessee also filed a certificate from that concern regarding the fact of cash payment. However, the AO did not find any merit in the explanation of the assessee and made the addition of Rs. 44,068.
5.2 Before the learned CIT(A), the assessee submitted that the. disallowance ought not to have been made as the transaction in question was fully covered in the exceptions laid down by the CBDT Circular No. 220 dt. 31st May, 1977. It was stated that the requisite certificate as required by the said Circular of the CBDT was also furnished before the AO who had not been able to rebut the explanation furnished before him.
5.3 The learned CIT(A) after considering the submissions of the assessee observed that the transactions between the assessee and its sister concern were not genuine. According to him, the AO was fully justified in making the disallowance, since the transaction in question was not covered under Rule 6DD(J) or by the circular of the Board. He, therefore, confirmed the action of the AO.
5.4 Before us, the learned counsel for the assessee reiterated the submissions made before the authorities below and stated that the transaction and payment in question was not doubted at any stage and that the payments had been made under the exceptional circumstances covered by Rule 6DD(J) and CBDT Circular No. 220 dt. 31st May, 1977. The reliance was also placed on the decision of this Bench of the Tribunal dt. 20th July, 1994, in the case of Girdhar Singh Kuldip Singh v. ITO in ITA No. 1278/Asr/1989 for the asst. yr. 1988-89. The reliance was also placed on the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT v. Nikko Auto Ltd. (2002) 256 ITR 476 (P&H).
5.5 In his rival submissions, the learned Departmental Representative supported the orders of the authorities below.
5.6 After considering the rival submissions and perusing the material available on the records, we are of the view that the transaction in question was covered by the exceptions laid down under Rule 6DD(J) and CBDT Circular No. 220 dt. 31st May, 1977. In the instant case, the recipient of the payment had given a certificate that they have insisted on cash payment. It is not the case of the Department that the parties are bogus or not identifiable. The payment in question had also not found to be bogus. It is also not in dispute that the payments stood duly accounted for in the books of the assessee as well as of that concern. It is noticed that the assessee produced a certificate from the concern M/s S.B. Saini Bros., Jalandhar, before the AO, the contents of that certificate (available at p. 43 of the paper book of the assessee) were as under:
“We M/s S.B. Saini Brothers, Adda Hoshiarpur, Jalandhar City do hereby confirm to have sold 1500 Tube 4 TLD Philips at Rs. 22.50 and 2000 Lamp 100 Watt Phillips at 6.70 total worth Rs. 44,068 vide our C/M No. 39/88-89 dt. 14th July, 1988 to M/s Sainico Electronics, Adda Hoshiarpur, Jalandhar City. The payment, was received in cash.
It is further certified that the said goods were sold at discounted price if M/s Sainico Electronics, Adda Hoshiarpur, Jalandhar City made cash payment. The same goods are sold to other parties at a higher price. In fact we were in direct need of cash in those days. The said transaction is entered in our books of accounts at C.B. page No. 89 and ledger page No. 6.
We are registered with the sale-tax Department and our sale-tax No. is 27905112 dt. 16th June, 1967. We are regular income-tax assesses with P.A. No. 29-602-DT-8544 with ITO 2(1), Jalandhar.
Dated : Jalandhar City dt. 11th Jan., 1992″
From the above certificate it would be clear that the seller i.e., M/s S.B. Saini Brothers was in dire need of cash in those days and they confirmed that the goods were sold to the assessee at discounted prices, if the payment was- made on cash. In the aforesaid certificate, the said concern had given its sale-tax number as well as Permanent Account Number which shows that the concern was a genuine concern. It is also noticed that the CBDT in Circular No. 220 dt. 31st May, 1977 stated at p. 4 as under :
“All the circumstances in which the conditions laid down in Rule 6DD(J) would be applicable cannot be spelt out. However, some of them which would seem to meet the requirements of the said rule are :
a to e……….
f. specific discount is given by the seller for payment to be made by way of cash.”
From the above clarification, it is clear that the case of the assessee was covered by the CBDT Circular No. 220 (F. No. 206/17/76/IT(AII)) dt. 31st May, 1977.
5.7 Considering the totality of the facts as narrated hereinabove, we are of the confirmed view that the learned CIT(A) was not justified in confirming the action of the AO. We, therefore, delete the addition made by the AO and sustained by the learned CIT(A).
6. Ground No. 5 is general in nature, so does not require any comments on our
part.
7. Now, we will take up Departmental appeal i.e., in ITA No. 747(ASR)/1994 for the asst. yr. 1989-90.
8. The first issue agitated by the Department relates to the deletion of addition of Rs. 10,72,650 made by the AO on account of difference in stock hypothecated with bank and stock shown in the books of account.
8.1 The relevant facts relating to the issue in brief are that the assessee was enjoying overdrafts facilities on goods hypothecated and pledged with Cooperative Bank Ltd., and Bank of India. During the assessment proceedings, the AO called for the stock statement furnished to the bank for obtaining over-drafts facilities. The AO found certain discreparcies in the stock statement and the stock shown in the books of account. The AO made the addition of Rs. 10,72,650 by observing as under :
“As per Bank of India record the assessee had 34 DG sets fully assembled and I engine mark TDL-8 worth Rs. 1.56 lacs as on 30th May, 1988. Though the assessee is claiming 7 DG sets in the opening stock as per his letter dt, 8th June, 1990, and NIL as per his letter dt. 17th July, 1991, yet assuming availability of 7 DG sets in the opening stock (assumption being favourable to the assessee) then it is seen that only 4 engines were purchased in the month of April, 1988. In the month of May, 1988, the assessee claims to have purchased 34 engines in total, out of which 21 engines were purchased on 29th and 30th May, 1988, and hence, these could not be assembled within a day or on the same date and hypothecated with the bank. Thus, at best, the assessee could have assembled DG sets from 4 engines purchased in April, 1988 and 13 engines purchased upto 21st May, 1988 were assembled and converted into DG sets. This makes availability of 17 DG sets in total. Taking the availability of 7 DG sets in the opening stock as discussed above, the assessee was having 17 plus 7=24 DG sets. However, as per bank statement/record the assessee had 34 DG sets hypothecated with the Bank of India as on 30th May, 1988. This shows that 10 DG sets and as many as six engines (five being in the custody of Bank of India under Lock and key and one hypothecated with the bank as on 30th May, 1988) were kept outside the books of account. When asked to explain the source of availability of excess DG sets 20 in numbers and six engines, the assessee could not explain his position satisfactorily. It is, therefore, held that investment on those 10 DG sets and six engines was made out of the books of account but from undisclosed sources. Coming to the value of these DG sets and engines, the average rate of various sizes of DG sets as per bank statement comes to Rs. 68,765 per set (Rs. 23.38 lacs value divided by the number of 34 DG sets). The value of these 10 DG sets which has not been disclosed by the assessee in his books of account thus comes to Rs. 6,87,650. Similarly, the value of 6 engines comes to Rs. 3,85,000 approx. (taking the value as shown in the bank statement as per engine). Hence, the value of unrecorded and unexplained DG sets and engines are valued, at Rs. 10,72,650. Since the assessee has failed to explain satisfactorily the source of investment on the purchase of these DG sets/engines, the total sum of Rs. 10,72,650 is treated as the assessee’s income from undisclosed sources being the investment on the acquisition of these DG sets/engines. As such an addition of similar amount is being made to the income declared by the assesses.”
8.2 The assessee carried the matter to the learned CIT(A) and submitted that the AO had considered 34 DG sets as complete and assembled which were shown by the assessee in the hypothecation statement to Bank. It was stated that goods were lying in the custody of the assessee as the same were not under lock and key of the bank. It was pointed out that in the statement submitted to the bank, the word D.G. set was used instead of filing long detailed lists of several big and petty items used in the assembling of D.G. sets. It was stated that the position was clarified to the AO vide letter dt. 8th June, 1990 by stating as under:
“Bulk of the stock of the assessee is hypothectated/pledged to the Bank of India, Mai Hira Gate, Jalandhar, where the generating sets are shown which are complete or are lying with us in parts which are to be assembled. The same have also been shown as generating sets to the Bank. Whether a generator set is complete or incomplete the same are shown as Generating sets in the statement furnished to the Bank.”
It was claimed that the aforesaid explanation of the assessee was not controverted by the AO and there was nothing in the statement furnished to the Bank which could be used against the assessee. It was further clarified that the assessee was having components for the assembling of 34 D.G. sets and there were as many as 38 Engines purchased by the assessee in May, 1998. Further, there was a stock of more than Rs. 53 lacs as on 1st April, 1988, and the AO had not been able to point out any omission in purchases although deep scrutiny was made at various levels It was stated that the D.G. sets assembled have to be brought on R.G.I. Register, at once the same were complete. It was further stated that the periodical statements were sent to the qustom and excise department in respect of DG sets. The assessee also furnished a chart of DG sets hypothecated and sold and also the copies of the bills and pleaded that the DG sets complete and shown in the stock register of R.G.I. were verified and checked by the custom & excise department. It was claimed that the stock statement furnished to the custom and excise department tallied with the books of the assessee. On the basis of the aforesaid explanation, it was stated that the AO was not justified in considering that 10 DG sets amounting to Rs. 6,87,650 were kept outside the books of account.
8.3 As regards to the remaining addition of Rs. 3,85,000 in respect of six engines, the assessee submitted that the position was clarified vide letter dt. 17th July, 1991, to the AO by explaining the position of engines purchased and the sale of D.G. sets. It was stated that the opening stock of the assessee at Rs. 53,17,678 as on 1st April, 1988, consisted of various items of goods like engine etc. It was submitted that the assessee explained the monthwise position of purchase and consumption of engines vide letter dt. 17th July, 1991, which was available with the AO. The assessee submitted that the AO ignored the facts available on the records and made the addition of Rs. 3,85,000 by stating that the six engines were neither covered in the opening stock of Rs. 53,17,678 nor in the closing stock of Rs. 57,99,818. The learned CIT(A) deleted the addition made by the AO by observing as under:
“3. The learned counsel has submitted relevant extracts bills, vouchers and compilation of the accounts in support of his contentions. The matter has been discussed with the ITO. So far as the addition for the excess stock hypothecated is concerned the position has been correctly explained and there is no case for any unaccounted stock available with the assessee for hypothecation to the bank. The addition has been made by the AO merely by the guess work and without analysing the facts and submission of the assessee. This addition of Rs. 10,72,650 is, therefore, deleted.”
8.4 Now the Department is in appeal. The learned Departmental Representative strongly supported the order of the AO.
8.5 In his rival submissions, the learned counsel for the assessee reiterated the submissions made before the authorities below and vehemently argued that the assessee was maintaining complete books of account in the form of cash book, ledger, sale and purchase/expenditure vouchers which were duly audited. It was stated that the D.G. sets (Diesel Generating Set) assembled are excisable articles for which the complete day-to-day record in R.G.I. Register and other records as required by the excise and qustom Department were maintained and no discrepancy was pointed out therein. It was further submitted that the assessee filed a chart of generating set assembled and sold . monthwise which were fully recorded in the RGI register and statements were filed before the excise and custom authorities periodically. It was also stated that the AO had not pointed out any omission in the purchase or sale although deep scrutiny was made by him. Moreover, the learned CIT(A) deleted the addition after proper verification from the bills, vouchers and compilation of the accounts, and after proper verification in the presence of the AO, the addition made by the AO was deleted. Therefore, the Department ” ought not to have agitated this issue time and again when the learned CIT(A) was fully satisfied with the explanation of the assessee which was supported by the evidences. He, therefore, prayed that the order of the learned C’IT(A) on this issue may not be disturbed.
8.5.A We have considered the rival submissions and carefully gone through the material available on the record. It is noticed that the learned CIT(A) while deleting the addition categorically stated that the assessee submitted the relevant extracts bills, vouchers and compilation of accounts in support of its contentions and the matter had been discussed with the AO. He further noted that the position in respect of excess stock hypothecated had been explained and there was no case of any unaccounted stock available with the assessee for hypothecation to the bank. The aforesaid observation of the learned CIT(A) had not been controverted by the learned Departmental Representative.
8.6 From the above noted facts, it is clear that the assessee had been able to explain the position in the presence of the AO to the learned CIT(A) in respect of discrepancies pointed out at the assessment stage. We, therefore, do not see any merit in the ground of the Departmental appeal. Moreover, in this case, the assessee was dealing with the excisable goods and the AO was not able to point out any mistake or shortcoming in the statements furnished by the assessee to the custom and Excise Department. The AO has also not pointed out that the assessee inflated its purchases or suppressed its sales. In that view of the matter also, the AO was not justified in rejecting the books of the assessee. Therefore by considering the fats of the present case, we do not see any valid ground to interfere with the findings of the learned CIT(A) and accordingly, we uphold the same.
9. The next issue relates to the deletion of addition of Rs. 4,48,900 out of total addition of Rs. 5,29,475 made by the AO on account of diversion of profits to the sister-concern.
9.1 The similar issue we have dealt in while disposing of the appeal of the assessee i.e., in ITA No. 622/Asr/1994, for the asst. yr. 1989-90. The AO disallowed a sum of Rs. 5,29,475 and the learned CIT(A) sustained the addition of Rs. 80,575. We have already deleted the addition sustained by the learned CIT(A) while disposing of ground No. 2 of the assessee’s appeal i.e., in ITA No. 622/Asr/1994. In that view of the matter, we do not see any merit in this ground of the Departmental appeal.
10. Ground No. 3 & 4 are general in nature, so do not require any comments on our part.
11. In the result, the appeal of the assessee is allowed while that of the Department is dismissed.