TaxTMI 
TaxTMI 
2012 (12) TMI 1074
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.... of additions. For knowing exact grounds of appeal, we are reproducing grounds raised by the Revenue in its appeal for A.Y. 2005-06 in ITA No.167/A/2011 as under :- "1. The Ld. CIT(A) was not justified in law and on facts in deleting the addition of Rs. 19,34,764/- made under the head extra profit addition in gross profit, without appreciating the fact that the assessee was not maintaining regular books of account in usual course of business, specially the stock register. 2. The Ld. CIT(A) was not justified in law and on facts in deleting the addition of Rs. 19,34,764/- made under the head extra profit addition in gross profit, without appreciating the fact that the A.O. has specifically rejected the assessee's accounts in terms of provisions of section 145(3) of the Act, as the accounts were not found to be correct and reliable. 3. The Ld. CIT(A) was not justified in law and on fact in deleting the addition of Rs. 19,34,764/- made under the head extra profit addition in gross profit, without appreciating the fact that AO was entitled to make an assessment to the best of his judgement in a case where the books of account have been rejected in terms of sec....
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....eclaring total income at Rs. 1,33,27,106/-. Subsequently, notice under section 143(2) read with section 153A and 153C(1) of the Act dated 31.08.2009 were issued duly served upon the assessee for compliance on 05.10.2009. 5. The A.O. noticed that the regular books of accounts were not found during the course of search and seizure operation conducted on 11.02.2009. Although books of accounts were produced by the assessee during the course of assessment proceedings but the same were not supported by the basic documents on the basis of which they were prepared. The A.O. further noticed that it is apparent that assessee does not maintain day-to-day books of account. It is also noted that the books of account which were produced before the A.O. were prepared subsequent to the search and seizure operation. 6. The assessee is engaged in the business of manufacturing and export of carpets. After perusal of Trading and P&L account filed along with Auditor's report for the year ended 31/03/2005, the A.O. noted that following major expenses are debited to it :- Head Amount (Rs) Supporting documents submitted Purchase 19860429 Bills produced Manufacturing Exps: a. Wea....
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....ash memos etc., if coupled with other factors like absence of vouchers in support of the expenses and purchases and existence of low profit, may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee, the authorities would be justified in rejecting the account books under section 145(2) an in making the assessment in the manner contemplated in that provision." (vi) Also in S.N. Namasivayam Chettiar vs. CIT (1960) 38 ITR 579 (SC), the Apex Court says "keeping of a stock register is of great importance because that is a means of verifying the assessee's accounts by having a 'quantitative tally', if, after taking into account all the materials including the want of a stock register., it is found that from the method of accounting the correct profits of the business are not deductible, the operation of section 145(3) of the Act would be attracted." (vii) The assessee suppresses closing stock to deflate profit. This act prevents the deduction of correct profits from the books of accounts and obfuscates the true picture of the business of the assessee. This is also ....
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....the assessee as well as the reason given by A.O. and find that the assessee's contentions have sufficient force. On the other hand, the A.O. has not pointed out any mistake or error in the books of account either from the seized materials or the manufacturing records produced before him during the course of assessment proceedings. He closed the proceedings only saying that the manufacturing registers did not correlate how much the stock consumed and how much production yielded and it is impossible to reach on any conclusion on the basis of those registers. He has not brought on record any other evidence that the books were written subsequent to search and relied only on the search party. The A.O. has not considered the assessee's explanation that the consumption of raw material for each of the products cannot be reconciled in its case because the product pattern was large and items of different designs and sizes etc. were produced by the assessee. There was no legal obligation on the part of the assessee to maintain such a record. Audited books of accounts could not have been rejected without pointing out any specific defect or deficiencies in the books of account maintained by it.....
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....54,745/- M/s Carpet Palace 190/A/2011 2005-06 83,90,709/- M/s Carpet Palace 191/A/2011 2006-07 1,05,98,524/- M/s Carpet Palace 192/A/2011 2007-08 1,42,93,157/- M/s Carpet Palace 193/A/2011 2008-09 49,82,394/- 14. However, in case of M/s. Carpet Palace for A.Y. 2009-10, ITA No.194/A/2011, apart from extra G.P. addition by applying 15% profit rate of which calculation comes to Rs. 93,77,786/-, the A.O. found that the addition to the extent of Rs. 2,08,54,333/- is warranted on account of closing stock. Therefore, the A.O., instead of separate addition of Rs. 93,77,786/-, made addition of Rs. 2,08,54,333/- which covers the G.P. addition. Therefore, the A.O. did not make separate addition of G.P. The relevant abstracts are reproduced as under :- (A.O. Page No.2) "6.2. The physical inventory of the stock taken at the two premises i.e. Carpet City site and the Guest House site give the following figures- (i) Finished Carpet (At Premise 67 to 69 Carpet City) 11528 sq. ft. (ii) Finished Carpet (At guest house site) ------ 676512.43sq. ft. 6.3 The above details show that there were (35734 Pcs) ....
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....rya at the time of search in his statement has mentioned that the ready stock of carpet are costing Rs. 40/- per sq. ft. while some stock which was finished with specific order of export are costing Rs. 84/- per sq. ft. Total area of carpet which was manufactured with specific order as stated by him worked out at 69120 sq. ft. at the time of search. So as per assessee's version valuation of carpet in the godown are worked out s under :- At Rs. 84/- per sq. ft. 69120 sq. ft. 58,06,080 At Rs. 40/- per sq. ft. 376206 sq. ft. (445326-69120) 1,50,48,253 2,08,54,333" 16. The CIT(A) deleted the addition of Rs. 2,08,54,333/- made by the A.O. on account of stock on the ground that :- (Page No.14) "7. As regards the issue of addition of Rs. 2,08,54,333/- as undisclosed stock, I have considered the rival contentions put forth by the assessee and the A.O. and find that the assessee's contention has sufficient force. The A.O. has worked out undisclosed stock being the difference of the stock physically found during the search and seizure operation on 11.02.2009 and the stock as per finishing reports of two washer....
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....d. Authorised Representative has also pointed out order sheet entry dated 16.12.2010 which confirmed that books of account were produced before the A.O. 19. The ld. Authorised Representative referred page nos.10 to 29 of Paper Book where copies of list/inventory of account books etc. found/seized have been placed. In the list it is mentioned about books of account including ledger, cash book, issue registers and others, CPU, computer along with book of computer. 20. The ld. Authorised Representative further submit that the A.O. without appreciating the facts, documents and material wrongly noted that books of account was not found at the time of search. The ld. Authorised Representative referred page no.93 of the Paper Book where details of closing stock along with audit report dated 27.10.2005 was placed. The audit was completed before the search. The relevant details of stock furnished before the AO are on page no.93 of Paper Book. 21. The ld. Authorised Representative further referred page nos.54 to 60 of the Paper Book where a copy of details submitted vide letter dated 16/17.12.2010 have been placed. The ld. Authorised Representative pointed out page no.54 of Paper Bo....
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....as intentionally been omitted by him while reproducing the contents of the said reply in Para No.7.3 of assessment order . The learned Authorised Representative submitted that the enhancement has been made without countering the above comparative statement and in this state of affair no addition in Gross Profit can be made as per case law in case of CIT vs. Eastern Commercial Enterprises (1994) 210-ITR-103 (Cal.). Notwithstanding above, it is quite astonishing that the A.O. has himself accepted the lower G.P. rate in a very similar case i.e., M/s Carpet International (P) Ltd. in assessments u/s. 153A passed simultaneously as per details given above, copy of assessment order is enclosed (page 64 to 65 of Paper Book). He submitted that the Assessing Officer has disregarded the detailed written submission dated 10.12.2010, 16/17.12.2010, 20.12.2010 and 21.12.2010 furnished to him from time to time explaining that there are several factors which govern the trading result of the assessee i.e. rise in cost of production due to steep rise in prices, revisions of weavers wages, fall in average sale price in international market and fluctuation in rate of foreign exchange. All these factors....
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.... a search under section 132 of the Act was carried out on 11.02.2009. No incriminating material was found during the course of search. The case of the A.O. is that books of account were not found at the time of search but the same were produced at the time of assessment proceedings. The books of account did not find fully supported by vouchers. It is presumption of the A.O. that books of account were prepared after search. The A.O. started examination with various expenditure claimed by the assessee. The A.O. noted that assessee failed to correlate between carpet manufactured and expenditure claimed on presumption basis without bringing material on record noted that the assessee did not show work in progress of raw wool/semi-finished/half woven carpets. The finding of A.O is based on presumption that the assessee has suppressed closing stock. The A.O. enhanced G.P. by 15% to the G.P. declared by the assessee. According to A.O. the G.P. in this trade should be 32.75%. 28. The CIT(A) did not agree with the A.O. He found that the A.O. has wrongly invoked section 145(3) of the Act. On merit, the CIT(A) found that there is no justification on the part of the A.O. to enhance the G.P. ....
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....h manner as the Income-tax Officer may determine. However, if the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make the assessment in the manner provided in section 144. Section 145 is mandatory and the Revenue is bound by the assessee's choice of a method regularly employed unless by that method the true income, profits and gains cannot be arrived at. In other words, section 145 enacts that for the purpose of section 28 (profits and gains of business, profession or vocation) and section 56 (income from other sources), income, profit and gains must be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, if the assessee regularly employs a particular method of accounting and if no defects are found in the method or maintenance of accounts, the taxing authority is bound to compute the profits and gains of business or profession or vocation in accordance with the method employed by the assessee. Therefore, in case where the Income-tax Officer or the taxing authority finds....
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....copper wires as well as in respect of sale during the year in question as compared to the earlier years. He also took note of the fact that the assessee was duly registered under the Central Excise Act and was maintaining proper quantitative details in the prescribed manner and, therefore, held that the assessee had adopted consistent and regular method of accounting and valuation of the stock during the year in question as was done by her in the preceding years. He, accordingly, held that the Assessing Officer was not justified in rejecting the books of account and in applying the enhanced gross profit ratio. The Tribunal dismissed the Revenue's appeal, holding that since no defects in the account books were pointed out, the accounts could not have been rejected and no addition could have been made merely on account of lower profit declared by the assessee. On the Revenue's appeal, the High Court held as under :- "(Page 225) Section 145(3) provides for assessment in the manner prescribed in section 144 where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where either the method of accounting provided in s....
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....ire did not increase even marginally during the process of enamelling. Therefore, he had no justification, in law, in rejecting the explanation given by the assessee in that regard. The fall in gross profit ratio, in the absence of any cogent reasons could not, by itself, have been a ground to hold that proper income of the assessee could not be deduced from the accounts maintained by her and, consequently, could not have been a ground to reject the accounts by invoking section 145(3). [Para 8] The fall in the gross profit ratio could be for various reasons such as increase in the cost of raw material, decrease in the market price of finished product, increase in the cost of processing by the assessee, etc. There was no finding that the actual cost of the raw material purchased by the assessee was less than what was declared in the account books. There was no finding that the actual cost of processing carried out by the assessee was less than what had been declared in her account books. No particular expenditure shown in the account books had been disallowed by the Assessing Officer. There was no finding by the Assessing Officer that the actual quantity of finished product....
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.... rate of gross profit, in the absence of any material pointing towards falsehood of the account books, cannot, by itself, be a ground to reject the account books under section 145(3). [Para 10]" 32. After rejecting the books of account, the Assessing Officer is to make an assessment in the manner provided in section 144. Section 144 provides best judgment assessment. The Scope of best judgment has been examined by the Apex Court in the case of State of Kerala vs. C. Velukutty, 60 ITR 239 (SC) as under :- "What is the scope of section 12(2)(b) of the Act ? The expression "to the best of his judgment" in the said clause is presumably borrowed from section 23(4) of the Income-tax Act. The said expression in the Income-tax Act was the subject of judicial scrutiny. The Privy Council in Commissioner of Income-tax v. Laxminarayan Badridas has considered those words. Therein it observed: "He (the assessing authority) must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships ....
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....unction capriciously without regard for the available material. Can it be said that in the instant case the impugned assessment satisfied the said tests ? From the discovery of secret accounts in the head office, it does not necessarily follow that a corresponding set of secret accounts were maintained in the branch office, though it is probable that such accounts were maintained. But, as the accounts were secret, it is also not improbable that the branch office might not have kept parallel accounts, as duplication of false accounts would facilitate discovery of fraud and it would have been thought advisable to maintain only one set of false accounts in the head office. Be that as it may, the maintenance of secret accounts in the branch office cannot be assumed in the circumstances of the case. That apart, the maintenance of secret accounts in the branch office might lead to an inference that the accounts disclosed did not comprehend all the transactions of the branch office. But that does not establish or even probabilize the finding that 135% or 200% or 500% of the disclosed turnover was suppressed. That could have been ascertained from other materials. The branch office....
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....egards A.O.'s objection that the assessee failed to establish any correlation between carpet manufacturer by it and the manufacturing expenses claimed. In this regard, we are of the view that it is not necessary for an assessee to maintain books of account what the A.O. is thinking. Some time there may be difficulties for assessee to maintain stage-wise record as nature of business and procedure of manufacturing process is so complicated or practically not possible. Therefore, under certain circumstances, it is difficult to maintain stock register or other records as desired by the A.O. In the case under consideration, the A.O. himself admitted the facts that the assessee produces hundreds of varieties of carpets and utilizes various qualities of raw wools/cotton yarns, whose rates have substantial variations. That carpet are manufactured by the weavers at their residences and they obtain wool and other raw materials from the exporters/contactor and after weaving the carpets they return back the same to the exporters/contractors. As regards observation of closing stock of the A.O., on perusal of page nos.54 to 60 of the Paper Book where a copy of details submitted vide letter dated....
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....units, day-wise production register cannot be maintained. The assessee further explained that production expenses are verifiable from the corresponding registers maintained in recording the production cost as above which evidences the genuineness of the expenditure. Moreover, the quantitative tally are duly audited and enclosed in Form No.3CD of Audit Report. It was also explained by the assessee that the inventory of opening stock of raw material plus production minus raw material consumed minus wastage equal to closing stock of raw material has been enclosed with the balance sheet. The valuation of closing stock is done on physical verification and at cost price. Thus, there is no instance of under-valuation of closing stock. The audit was completed before the search. The relevant details of stock furnished before the A.O. are on page no.93 of Paper Book. The same are reproduced as below:- (Page no 93 of assessee's Paper Book) M/s. SUPERIOR CARPET PALACE RAJPURA, BHADOHI DETAILS OF CLOSING STOCK AS ON 31ST MARCH, 2005 Particulars Opening Stock Purchase/ Production Total Consum/Sale Excess/Loss Closing Stock Woolen Yarn (Kg.) 33,810.90 &n....
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....ich computation of income is to be made for the purpose of determining the amount of tax payable by an assessee. The provision by itself does not deal with addition or deletion in the income. Therefore, merely because there is some minor deficiency in the books of account or merely because of rejection of the books of account it does not mean that it must lead necessarily to additions in the returned income of the assessee. 37. The second aspect of the matter is in respect of estimation of income enhancing gross profit by applying 15% by A.O. As stated above that after rejecting books of account the assessment is to make under best judgment. Whether under the facts and circumstances of the case, estimation made by the A.O. is the best judgment. "Best of his judgment" Judgment is a faculty to decide matters with wisdom truly and legally. Judgment does not depend upon the arbitrary caprice of a judge, but on settled and invariable principles of justice. Though there is an element of guess-work in a "best judgment assessment", it shall not be a wild one, but shall have a reasonable nexus to the available material and the circumstances of each case. 38. We find that during the co....
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.... 9% to 21%. If see the GP declared by the assessee in different years we find that he assessee has shown natural GP which comes out on the basis of books of account from year to year. The revenue has failed to point any special circumstances for estimation of such high profit particularly in case where search has taken place and during the course of search no increment metatarsal found in this regards. We find that there was no material before the assessing authority relevant to the assessments and the impugned assessments were arbitrarily made by applying an enhanced G.P. by 15%. There are no reasonable nexus to the available material and the circumstances. It was only a capricious surmise unsupported by any relevant material. Before us the Revenue has failed to point out any contrary material to the findings of the CIT(A). In the light of the fact, we confirm the orders of the CIT(A) on the issue. 40. As discussed above that in case of Carpet Palace in A.Y. 2009-10, ITA No.194/A/2011, the A.O. has made main addition of Rs. 2,08,54,333/- on account of undisclosed stock. The A.O. did not make addition on account of G.P. on the ground that the said addition and G.P. will be cover....
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.... basis of defect basis addition cannot be made. However, in the case under consideration at the time of assessment proceedings the assessee has discharged the burden by furnishing a reconciliation of physical stock and stock as per books of account. The assessee has furnished the said reconciliation statement at page no.16 of Paper Book which is reproduced as under:- Particulars Amount (Rs.) Stock valued as on 11.02.2009 (Quantity as per Panchnama) (Please refer page no.8 - 10 of II Paper Book) 46,532,101 Add: Purchase (form 11.02.2009 to 31.03.2009) Cotton Cloth 4,813,272 (Page No.17 of II Paper Book) Diesel 771,016 (Page No.18 of II Paper Book) Dyes & Chemicals 1,311,414 (Page no.19 of II Paper Book) Packing Materials 504,050 (Page No.20 of II Paper Book 7,399,752 ------------ -------------- 53,931,853 Less: Sales (From 11.02.2009 to 31.03.2009) Carpets 10,317,288 (Page No.21 of II Paper Book) Woolen Yarn 716,142 (Page No.22 of II Paper Book) 11,033,430 (Balancing Figures) 42,898,423 Closing Stock as per Audited Annual Accounts as on 31st March, 2009 44,511,391 (Page No.30....