ITA No. 374/Asr/2016; Asst. yr. 2009-10

A.D. Jain, J.M.

Sandeep Vij, for the Assessee :
Rahul Dhawan, for the Revenue

ORDER

A.D. Jain, J.M. :- This appeal has been filed by the assessee against the order of the learned CIT(A)-2, dt. 16th may 2016, for asst. yr. 2009-10, contending that the learned CIT(A) has erred in upholding the action of the AO in rejecting the declared trading results by invoking the provisions of s. 145(3) of the IT Act, and in upholding the addition of Rs. 4,32,882 to the declared trading results without properly appreciating the submissions made.

2. While making the addition, the AO has held as follows:

"The return of income in this case was e-filed on 31st Oct., 2009, declaring total income of Rs. 5,0,250. The same was processed under s. 143(1) of the IT Act, 1961. The case was selected for scrutiny and notice under s. 143(2) dt. 28th Sept., 2010 issued by the Asstt. CIT, Phagwara Circle, Phagwara was served upon the assessee on 29th Sept., 2010. On 21st April, 2011, notices under s. 143(2) and 142(1) along with questionnaire were issued and served upon the assessee on 14th May, 2011. Subsequently, the case was taken up for scrutiny by the Addl. CIT, Phagwara Range, Phagwara and notice under s. 143(2) and 142(1) dt. 7th July, 2011 were issued and served upon the assessee on 8th July, 2011.

2. The response to the said notices, Shri Sandeep Vijh, CA Authorised Representative of the assessee along with Sh. Kapil Bhatia, Accountant attended the proceedings from time to time and furnished the requisite information/details. Books of accounts, and bills/vouchers for purchases, sales expenses claimed etc., were produced and examined. The case was discussed and heard.

3. The assessee firm is in the business of manufacturing of electrical goods, mainly swathes. During the year under consideration, the assessee firm has shown gross profit of Rs. 47.13 lacs on sales of Rs. 1.47 crore, thereby giving a GP rate of 32.06 per cent as compared to the gross profit of Rs. 41.33 lacs on sales of Rs. 1.11 crores, giving GP rate of 37.14 per cent returned in the immediately preceding year, thus, during the year under consideration, there is a fall of more than 15 per cent in the GP returned.

During the course of scrutiny proceedings, a number of issues emerged, and the same are discussed is detail hereunder.
4. Low GP Returned.

As pointed out above, there is a significant fall in GP rate returned by the assessee firm during the year under consideration. The comparative

Vide questionnaire dt. 21st April, 2011, and repeatedly thereafter, the assessee's Authorised Representatives were asked to explain this fall in the GP returned. After seeking numerous adjournments, the assessee filed its explanation on the issue, vide its submission dt. 5th Oct., 2011, which was filed on 25th Oct., 2011, stating as under:

Comparative chart of GP /NP. for the last three years

Gross profit ratio for the asst. yr. 2009-10 has decreased to 32.06 per cent as compared to 37.14 per cent in the asst. yr. 2008-09. Since there is no income on account of labour charges in asst. yr. 2009-10 as compared to Rs. 39,34,000 in asst. yr. 2008-09, the GP rate had come down as the level of profit in job work will be higher since no material cost is involved. This convention is also supported by the fact that in the asst. yr. 2007-08 when the labour charges were on the lower side as compared to the asst. yr. 2008-09, the GP rate was only 33.35 per cent

The assessee has therefore tried to explain the fall in its GP rate by giving the reason of non-receipt of labour charges during the year under consideration. Vide order sheet noting dt. 15th Nov., 2011, the assessee was further asked to explain the following.

From whom the income on account of labour charges (Rs. 39,34,000) was received in the preceding year, why this income has not arisen during the year under consideration what were the expenses pertaining to this income during the preceding year.

In its reply dt. 7th Dec., 2011, the assessee stated as under:
Details of labour charges of preceding year is enclosed at Annex. 7 page No. 26. We had done job work for this party in the preceding year during the year under assessment we did not get any order and the party had taken part of our premises as well as equipment on rent

Thus, the assessee stated that no labour charges were received, since the party took part of the premises and equipment on rent. Vide order sheet 'noting dt. 8th Dec., 2011, therefore, the assessee was further asked to explain the following:

(a) Regarding labour charges it is stated that no order was received during the year since the party took your premises on rent. Please specify when the premises was let out as per rent deed, it was let out in December 2005 please explain.

(b) Also state what were the expenses pertaining to this income in the preceding year.
(c) Give reasons for fall in your turnover from Rs. 3.53 crore in asst. yr. 2006-07 : Rs. 1.47 crore in this year
In response to this, vide submission dt. 13th Dec., 2011, the assessee replied as follows:

(a) Regarding labour charges it is submitted that no order was received by us during the year under assessment. It is further submitted that we did job work for M/s Tech Tools Ltd. For the asst. yrs. 2006-07, 2007-08 and 2008-09. A part of premises and machinery was given on rent to M/s Fine Tech Tools (P) Ltd. From December 2005. The correct factual position is that we did not receive and order for the job work from M/s Tech Tools Ltd. During the year under assessment and the words and the party had taken a part of the premises as well as equipment on rent 'were typed through mistake".

(b) Regarding the expenses pertaining to this income i.e. labour charges/income in the preceding year we have not maintained any separate records/accounts for the same. The expenses mainly included wages and salaries paid, electricity charges, consumable stores, machinery maintenance and its wear and tear etc.

(c) Regarding reasons for fall in the turnover from Rs. 3.53 crores in assessment, it is submitted that one of the partners Mr. M.K. Sethi, who was looking after production retired from the firm and this led to a fall in the sales. It was only in the year ending 31st March, 2010. that sales improved.

4.1 From the reply reproduced above, it can be seen that when asked to justify its earlier argument regarding no labour charges having been received because of property and machinery being given on rent, the assessee has conveniently changed its stance. There are, therefore, loopholes in the argument. Further, though repeatedly asked, the assessee has not given the details of the expenses incurred for earning the said income from labour charges in the preceding year. Since the assessee has itself accepted that expenses like salary, wages, consumable stores, machinery maintenance etc were incurred for earning the labour charges, it argument of fall in GP being attributable to non-receipt of labour charges is proved to be faulty. The non- receipt of labour charges obviously cannot result in fall of GP by more than 5 per cent

4.2 Further, the assessee's GP rate does not compare favourably with its own sister concern, M/s Fewa Electrical Corporation, Gagret, which is also engaged in manufacturing of electrical goods, like the assessee. While the GP returned by the assessee during the year under consideration is only 32.06 per cent, the assessee sister concern has returned a GP of as much as Rs. 2,42,943, which works out to 41,1 per cent vide order sheet noting dt. 20th Nov., 2011, the assessee Authorised Representative was therefore asked to explain as under:

(a) it is seen that the GP returned by your Gagret unit is much higher, at 41 per cent, as compared to the GP returned, by Phagwara unit of 32 per cent only. Please explain.
(b) Give the total quantum of sales of thermos flasks (in quantity and value) in Gagret Unit.
(c) Give description of the main electrical items being manufactured at Gagret and at Phagwara.
(d) Comparison of critical/core expense related to manufacturing at Gagret with those at Phagawara.
The reply to this, furnished by the assessee vide its submission dt. 21st Dec., 2011, is reproduced herewith.

(a) No comparison can be made with the Gagret Unit M/s Fewa Electrical Corporation. This unit is located in the different State and is not similarly circumstances as our unit It also has certain advantages is terms of lower cost of manpower, lower electricity cost as well as no excise. Further it is manufacturing these items. Moreover, the electrical switches manufactured by them are different than ours in terms of designs, shape and appearance. The profitability of our unit thus cannot be compared to that of Gagret unit which is being run by Sh. Mohinder Sethi. He has a long experience of looking after production and thus is better off than us in this score.

(b) The details of sale of thermos flasks in terms of value and quantity is enclosed at Annex. 3 p. 14

(c) The list of electrical items manufactured by us is enclosed at Annex. 4 p. 15 to 17. The list detailing the electrical items manufactured by M/s Fewa Electrical Corpn. is enclosed at Annex. 5 p. 18 to 21.

(d) The month-wise details of expenses pertaining to M/s Fewa Electrical Corpn. cannot filed within the given as the information is available at Gagret.
4.3 This reply of the assessee is duly considered, but is not found to be entirely acceptable. The assessee has tried to brush aside the matter by stating that the electrical switches being manufactured in Gagret unit are different, but the list of items manufactured by the two units shows that the products are similar, with only specifications being different. The sale of thermos flasks, as per the details given is only Rs. 83,53,003 i.e. it accounts for only 15 per cent of the entire turnover of the Gagret unit the comparisons of the core/critical expenses related to manufacturing, of the two given do not justify the wide variation in the GP per cent returned by the two units. In fact, a more plausible explanation is that the income of the Gagret unit being exempt under s. 80-IC, the assessee group is showing the correct GP per cent in that unit."

3. The learned CIT(A) confirmed the addition as under :

"5.2 I have considered the observations of the AO as made by her in the assessment order. I have also considered written submissions filed by the assessee vide letter dt. 14th May, 2016. I have further considered various judicial pronouncements relied upon by the assessee as well as the AO and other material placed by the assessee on record. On careful consideration of the rival contentions, I am of the opinion that the AO has pointed out various defects in the maintenance of books of account which are sufficient to reject the trading results declared by the assessee. It is also incorrect on the part of the assessee that the AO has not pointed out any defect in the inventory and valuation of closing stock whereas so many defects have been noticed in the valuation of closing stock. The defects pointed out by the AO are not being repeated here again as the AO has elaborately discussed these defects in the assessment order. Moreover, if we exclude labour charges from the gross profit shown by the assessee, there is no uniformity in the gross profit declared in the earlier years. The assessee has just repeated the submissions during appellate proceedings as were made by it during assessment proceedings. Keeping in view the discussion made by the AO in the assessment order, I am of the opinion that the trading results have correctly been rejected in this case. I am further of the opinion that the gross profits declared by the assessee are comparable with that of the trading results declared by its sister concern as both the concerns are engaged in almost similar business. I also do not agree with the argument of the learned Authorised Representative with regard to earning of higher income by its sister concern as the assessee normally used to earn almost identical profits from different items manufactured by it. I am further of the opinion that if manufacturing cost of sister concern is less than the sale price of the sister concern will also be less. Under such circumstances, no fault can be found in the action of the AO in making impugned trading addition after rejecting the trading results declared by the assessee. The judicial pronouncements relied upon by the assessee have altogether different facts from the facts of the case of the assessee and as such have no application in the case of the assessee.

5.3 In view of the above stated facts and in the circumstances of the case, I am of the opinion that the AO is fully justified in making trading addition of Rs. 4,32,882 in this case after rejecting the trading results declared by the assessee. The addition of 4,32,882 made by the AO in this case is, therefore, upheld. In the result, ground No. 1 of appeal taken by the assessee is dismissed."

4. The learned counsel for the assessee has contended that the learned CIT(A) has erred in upholding the AO's action in rejecting the assessee's declared results by rejecting the assessee's books of account and also in upholding the addition of Rs. 4,32,882 made to the declared trading results without appreciating the submissions made. Written submissions have also been filed, which shall be discussed presently.

5. On the other hand, the learned Departmental Representative has placed strong reliance on the impugned order. It has been contended that it remains undisputedly that the AO pointed out numerous defects in the books of account of the assessee; that it was on the basis of these numerous defects that the books of account of the assessee and the trading results of the assessee were rightly rejected by the AO; that the action of the AO has rightly been upheld by the learned CIT(A); that the assessee has not been able to refute that there were so many defects in the inventory and the valuation of the closing stock; that further, it remains unchallenged that if the labour charges are excluded from the gross profit shown by the assessee, there is no uniformity in the gross profit declared by the assessee in the earlier years; that it also remains unquestioned that the gross profit declared by the assessee during the year is (sic—not) comparable with the trading results declared by its sister concern; that both, i.e., the assessee and its sister concern were engaged in almost similar businesses; that the assessee normally used to earn almost identical profits from different items manufactured by it; that obviously, if the manufacturing cost of the sister concern of the assessee is less, then its sale price will also be less; and that in these facts and circumstances, there being no merit in the appeal of the assessee, the same be rejected and the addition be upheld.

6. Apropos rejection of the trading results by invoking the provisions of s. 145(3) of the Act, the AO observed that there was a fall in GP rate from 37.14 per cent in the preceding year, to 32.06 per cent in the year under consideration. This fall in GP rate was attributed to fall in the labour charges. As available from page 2 of the assessment order, the assessee had furnished GP charts. During the year under consideration, job work was got done by employing workers. The AO observed that stock details had not been maintained by the assessee and the auditor had remarked that quantitative details could not be submitted, as the assessee had not maintained stock register. It is undisputed that no stock register was maintained by the assessee. However, as available from record, quantitative inventory of stock based on physical stock taking was furnished before the AO. The AO did not point out any defect therein. While preparing the annual accounts, inventory as per the stock statement drawn through physical stock taking, was taken into consideration, as was also submitted by the assessee in the written submissions filed before the learned CIT(A) (APB, 1-22). However, the learned CIT(A) has not entered any remark in this regard in the impugned order. Thus, absence of stock register is not detrimental to the case of the assessee, in the presence of the quantitative inventory stock prepared, based on the physical stock.

7. The AO further observed that quantitative details of purchases and sales were not available. Now, it was explained by the assessee before the AO, that the purchases made'by the assessee were by weight and piece-wise. No stock register was maintained, As such, details could not be furnished. However, bills/vouchers and books of account were filed before the AO for verification. The assessee's reply before the AO stands reproduced at p. 7 of the assessment order. The learned CIT(A) has, like the AO, not recorded any adverse finding with regard thereto.

8. The AO also objected that there were no finished goods in the inventory of closing stock. The assessee explained before the AO that the production process was short and it was so as to facilitate the process of stock taking, that no manufacture was carried out on 31st March, 2009. The AO observed, further, that the sale bill of Rs. 57,104 was issued on 31st March, 2009. Still, he refused to accept the explanation offered by the assessee. It remains a fact that even on 30th March, 2009, sales were carried out by the assessee. Copy of sale bill (APB: 20 -21) was produced. All this shows that production was indeed not carried out in order to facilitate stock taking on the last date of the financial year and that it was as such, that no closing stock of finished goods was available. Again, the authorities below have not taken this position into consideration.

9. The AO, further, was not satisfied with the stock lists concerning the opening sales and closing stocks. However, nothing has been brought on record to show that these lists were not genuine. The learned CIT(A) has failed to take cognizance of this shortcoming in the AO's order,

10. The AO had also raised objection with regard to variation in monthly ratio of raw material purchased, wages, consumable stores, etc., to sales. Concerning this, the assessee has maintained that all purchases and consumable stores are not directly linked to the sales made. Since the stock taking was not done at the end of each month, figures of ratio of consumption, which could have been of significance in this regard, could not be provided qua monthly consumption. Moreover, purchases made in one month were utilized in the next month also, which fact has remained unchallenged. Too, the expenses in question related to production, rather than to sales and the AO went wrong in wanting to use the denominator in the ratio, which was, in fact sales. The assessee had duly offered this explanation before the AO, but the same was not considered either by the AO or by the learned CIT(A).

11. The observation of the AO that the assessee's books of account were not being written in the normal course of business and were being manipulated in order to show a lower gross profit rate and to pay lower taxes, is found to be without any basis. Such observation is a result of merely assumptions and presumptions. It was made without taking into consideration the assessee's trading results for asst. yr. 2006-07. These trading results we're close to the assessee's trading results for the year under consideration. The assessee's explanation in this regard was, again, wrongly rejected by both the authorities below.

12. The AO had questioned the assessee's purpose for vacation of the premises on 1st Nov., 2008, along with machines. The assessee explained that the premises was used for keeping the stock and that the machines were used in the assessee's own business, such machines being general purpose machines; that the turnover of February 2009 and March 2009 was higher than the annual average; that the production increased and the closing stock of semi-finished goods was more than the opening stock, which resulted in higher sales in the next assessment year. The AO observed that the sales in July and August 2008 were of Rs. 17.64 lac and 16.22 lac, respectively, whereas those in February and March 2009 were of Rs. 12.53 lac and 14.82 lac, respectively; and that the inventory of closing stock of semifinished goods was 14510 kgs, as against opening stock of 14330 kgs, which was almost the same. The assessee has maintained that after the premises was vacated, the turnover could not increase immediately; that the turnover of February and March 2009, at Rs. 27,36,188, was better than that of the immediately preceding months, which facts remain undisputed. Further, it is also correct that the value of the semi-finished goods depends on the level of completion of the goods. It further remains undisputed that the value of the opening semi-finished goods was Rs. 9.32 lac, whereas that of the closing semifinished goods was of Rs. 13,32 lac. This important point has also not been taken into consideration by either the AO, or the learned CIT(A), though it was made available to both of them, as evident from the record (APB, 6-7).

13. The AO observed that for the last five months, the assessee had not shown any rental income and had stated that the building and machinery had been used for the assessee's own purpose; that this ought to have resulted in increase in production/sales in the last six months; and that the scope of closing stock of finished goods also ought to have increased. Production, however, as rightly contended on behalf of the assessee, is not an immediate process, it requires efforts in order to ensure better sales. Production has to be increased. This takes time. Moreover, undisputedly, the assessee showed better sales and higher value of stock of semi-finished goods in the last two months. Too, in the next assessment year, sales rose to Rs. 24246498, a significant increase over the sales of the year under consideration.

14. The above discussion makes it clear that the fall in the gross profit rate has been properly explained by the assessee before the authorities below. Neither the AO, nor the learned CIT(A) have brought anything on record to justify the rejection of either the assessee's books of account, or its trading results. In Ashok Refractories (P) Ltd. vs. CIT (2005) 199 CTR (Cal) 115 : (2005) 279 ITR 457 (Cal) and in Surinder Kumar Charanjit Kumar vs. CIT (2006) 201 CTR (P&H) 37 , it has been held that where fall in GP rate is properly explained, books cannot be rejected and no addition can be made, even if no stock register has been maintained. No decision to the contrary has been cited.

15. The AO relied on Punjab Trading Company vs. CIT (1964) 53 ITR 335 (P&H) . In that case, the issue pertained to yield of cotton. The facts therein are entirely distinguishable. The explanation offered by assessee for fall in GP rate has been found by us to be plausible.

16. Investment Ltd. vs. CIT (1970) 77 ITR 533 (SC) holds that loss on sale of securities held as stock-in-trade is allowable as a revenue loss. This decision has no bearing on the facts of the present case. The AO has erred in placing reliance thereon.

17. The other decisions relied on by the AO against the assessee are also of no aid to the Department. As discussed, the assessee has been able to satisfactorily explain the fall in GP On the other hand, neither the AO, nor the learned CIT(A) has been able to point out any defect in the books of account of the assessee. The learned CIT(A), particularly, has not delved into the alleged defects pointed out by the AO, which, as considered, are non-existent defects and the learned CIT(A) has merely observed that numerous defects have been pointed out by the AO, without substantiating the correctness thereof.

18. Then, in ITO vs. Arun Kumar Gupta (2006) 103 TTJ (Jd) 134 it has been held that where there is a marginal decline in the GP rate and the AO has not cited comparable cases to show that the normal GP rate is higher in similar units, rejection of books is not justified.

19. Mere absence of stock register, where the fall in GP rate stands explained and where no specific defect has been pointed out, in the case of Ganesh Foundry vs. ITO (2000) 67 TTJ (Jd) 434 has been held not detrimental.

20. In M. Durai Rai vs. CIT (1972) 83 ITR 484 (Ker) , it has been held that non-maintenance of stock register is not a ground for rejection of books, particularly when no finding has been recorded that purchases were exaggerated or that sales were suppressed.

21. In CIT vs. Gotan Lime Khanij Udhyog (2001) 169 CTR (Raj) 318 : (2002) 256 ITR 243 (Raj) , it has been held, even going beyond the above case laws, that mere rejection of books of account need not necessarily lead to additions to the returned income.

22. The above apart, the authorities below further erred in ignoring the past history of the case. As per the G.P. chart (APB 22) (asst. yr. 2000-01), the past history of the case duly supports the cause of the assessee. It stands well settled that past history is a most relevant consideration for application of GP rate. It has been so held in CIT vs. Pawan Kumar (2008) 9 DTR (P&H) 104 .

23. So far as regards the sister concern of the assessee, i.e., M/s Fewa Electrical Corporation, it is patent on record, as explained by the assessee before the authorities below, that Fewa was having lower manpower cost and lower electricity cost as compared to the assessee. Further, it was not covered by excise, since it was based in Himachal Pradesh. Moreover, it was manufacturing thermos flasks and PVC wires, which products were not the manufacture of the assessee. So much so, even the electrical switches manufactured by both the concerns were different so far as regards design, shape, appearance and variety. The assessee's reply in this regard, filed before the AO, has been referred to and incorporated in the assessment order. However, the submissions have been ignored, to the utter detriment of the assessee, which lapse has wrongly been overlooked by the learned CIT(A) also. Evidently, both these concerns are not similarly circumstance and so, they are incomparable, as also held in N. Raja Pullaiah vs. Dy. CTO (1969) 73 ITR 224 (AP) .

24. In view of the above, we hold that the books of the assessee were wrongly rejected and the GP was wrongly estimated at 35 per cent

25. The observation of the learned CIT(A) that in case the labour charges are excluded from the gross profit, there is no uniformity in the GP declared, is unsustainable. While making such observation, as rightly pointed out, the learned CIT(A) has remained oblivious to the fact that even labour charges/income involves costs. If labour charges are reduced from the GP, it will not give the GP for manufacturing items.

26. it is worthy of note that assessment for asst. yrs. 2005-06 to 2007-08 were completed under similar facts and circumstances, without rejection of books of account Therefore, consistency demands a similar view being taken and the trading results of the assessee being accepted on acceptance of the assessee's books of account, for the year under consideration also. It is so ordered.

27. Coming to the issue of addition of Rs. 4,32,882 to the declared trading results of the assessee, the fall in GP rate from 37.14 per cent in the last year to 32.6 per cent to the year under consideration was explained by the assessee as being due to fall in labour charges. The labour charges came down to Nil and the fall in the GP rate was stated to be ascribable to this. The assessee explained that for asst. yr. 2008-09, the labour charges were the highest, and the GP rate was also the highest. For asst. yr. 2006-07, the labour charges were only of Rs. 7,14,800 and the GP rate was 31.15 per cent This, according to the assessee, was in line with the GP rate declared by the assessee for the year under consideration. The details of labour charges for the earlier year were filed. As per these details, job work was done for only one party, i.e., M/s Tech Tools Ltd. In the reply dt. 7th Dec., 2011 filed before the AO, the assessee stated that no order for labour work was received from the party during the year under consideration, since the party had taken a part of the premises and equipment on rent. However, vide reply dt. 13th Dec., 2011, the assessee stated that in the reply dt. 7th Dec., 2011, it had inadvertently been stated that no order for labour work had been received from the party during the year under consideration, as the party had taken a part of the premises and equipment on rent. The assessee clarified that job work had been done for M/s Tech Tools Ltd, but the words "and the party had taken a part of the premises as well as equipment on rent" had been typed through mistake, since this actually pertained to an earlier period. This explanation of the assessee stands accepted by the learned CIT(A).

28. In the reply dt. 13th Dec., 2011, the assessee further explained that separate details of expenses incurred for labour work had not been maintained and that these expenses were in the nature of wages, salaries, electricity charges, consumable stores, machinery maintenance, etc., for which, separate details could not be maintained, since the same employees, equipment and premises were used for manufacture as well as job work/labour work. The AO, however, refused to accept this explanation of the assessee. However, we find that as rightly contended, the AO, while rejecting the explanation, failed to take into account the fact that if some job work is done, the assessee would not obtain and get installed a separate electricity connection so as to know the exact consumption of electricity for the job work. It also remains undisputed that the job was assigned to different workers, depending on their availability and that it was as such, that the exact expenses on job work could not be prepared.

29. The AO observed that non-receipt of labour charges could not result in fall in GP rate by 5 per cent The basis of this observation has not been delineated by the AO, even though the labour charges income and its impact on job rate is evident from the GP chart filed by the assessee before the AO. Further, the figures for the asst. yr. 2006-07 appear to have further escaped the attention of the AO, since these figures find no place in the assessment order. The increase (sic—decrease) in GP rate in the year under consideration as compared to the preceding years is directly relatable to the increase (sic—decrease) in the labour charges income. The labour charges income was of Rs 12 98 lac in asst. yr. 2007-08. This increased to Rs. 39.34 lacs in asst. yr. 2008-09. Likewise, the GP rate increased from 33.35 per cent in asst. yr. 2006-07 to 37.14 per cent in asst. yr. 2008-09, registering an increase of 3.79 per cent Now, in these facts, obviously, if the job work is reduced to Nil, the fall in GP will be much higher. Job work charges have a higher element of profit, as compared to manufacture of goods after purchase of material and sale.

30. It has been discussed in the preceding portion of this order, that non-comparables have wrongly been compared. The GP rate of the assessee concern has been erroneously juxtaposed with that of M/s Fewa Electrical Corporation, Gagret, an associate concern of the assessee. In Fewa, the GP rate declared was of 41.1 per cent. Beside the dissimilarities inter se the two concerns, as discussed, even in the assessment order, the AO has himself admitted that the specifications of the electrical switches produced by the two concerns are different. Thus, even this product was not identically manufactured. However, this is not the only dissimilarity, as seen hereinabove. The other dissimilarities have wrongly been ignored by the authorities below. The products manufactured by the two concerns are technically different. Too, whereas sale of thermos flasks at Fewa is about 15 per cent of its turnover, the assessee is not producing thermos flasks at all. Further, PVC wire is manufactured only by Fewa. These differences have been noted in the assessment order itself. However, these differences have not been taken into consideration either by the AO, or by the learned CIT(A). It has also not been taken into account that electric power, as well as manpower is cheaper in Himachal Pradesh. All these facts stand duly explained by way of a detailed chart filed by the assessee before the AO along with its reply dt. 20th Dec., 2011, which was further explained in the reply dt. 21st Dec., 2011. This explanation has been mentioned in the assessment order. However, no discussion has been made thereon by either of the taxing authorities.

31. In view of the foregoing discussion, finding merit in the grievance sought to be raised by the assessee, the same is accepted. The order under appeal qua Ground No. 2 is also reversed. The GP rate shown by the assessee is accepted, as being in line with the GP rates declared in the earlier years. Accordingly, the addition of Rs. 4,32,882 is also deleted.

32. In the result, the appeal is allowed.