1984 (5) TMI 18 - HC - Income Tax

Issues Involved:
1. Justification of reduction in the cloth account of the assessee.
2. Calculation and rectification of the relief amount.
3. Assessment of gross profit and suppression of sales.
4. Recasting of trading accounts and its repercussions.
5. Applicability of the Supreme Court decision in Chainrup Sampatram v. CIT.

Issue-wise Detailed Analysis:

1. Justification of Reduction in the Cloth Account of the Assessee:
The Tribunal initially granted a reduction of Rs. 24,799 in the cloth account of the assessee. However, upon a miscellaneous application by the assessee, it was found that there was an arithmetical error. The Tribunal corrected this mistake and determined that the correct figure should be Rs. 28,189. The High Court accepted this rectification and reframed the question of law accordingly. The Tribunal's decision was based on the combined trading account maintained by the assessee for both ready-made garments and other cloth. The Tribunal held that a portion of the account could not be interpreted in isolation and that the rate of 12.5% gross profit was reasonable for the cloth account, thus justifying the reduction.

2. Calculation and Rectification of the Relief Amount:
The Tribunal initially calculated the relief based on sales of Rs. 4,95,885, resulting in a reduction of Rs. 24,799. However, the correct sales figure was Rs. 5,63,794, leading to a revised relief of Rs. 28,189. This correction was made under Section 154 of the Income Tax Act, 1961, acknowledging the arithmetical error. The High Court agreed with this rectification, emphasizing the importance of accurate calculations in determining tax liabilities.

3. Assessment of Gross Profit and Suppression of Sales:
The Income Tax Officer (ITO) found the gross profit of Rs. 82,849 on total sales of Rs. 6,69,929 to be low and suspected suppression of sales, particularly in ready-made garments. The Appellate Assistant Commissioner (AAC) enhanced the gross profit margin from 12.5% to 17.2% on the total sales, resulting in an addition of Rs. 42,646. The Tribunal, however, found this enhancement to be excessive and recalculated the addition to Rs. 28,226, giving a reduction of Rs. 14,420.

4. Recasting of Trading Accounts and Its Repercussions:
The AAC recast the trading account for ready-made garments, showing a loss of Rs. 20,535, which he deemed ridiculous. He applied a 20% gross profit rate, resulting in an addition of Rs. 42,646. The Tribunal agreed that the closing stock of ready-made garments was correctly taken at Rs. 13,026 and that the 20% profit rate was fair. However, it recalculated the addition to Rs. 28,226. The Tribunal also accepted the assessee's contention that the combined trading account should be considered in its entirety, leading to a reduction in the cloth account.

5. Applicability of the Supreme Court Decision in Chainrup Sampatram v. CIT:
The Revenue's senior standing counsel argued that the AAC did not touch the cloth account and only addressed the closing stock of ready-made garments. He relied on the Supreme Court decision in Chainrup Sampatram v. CIT, which dealt with the valuation of unsold stock. However, the High Court found this case inapplicable, as the facts and issues were different. The Supreme Court case involved the valuation of silver bars, whereas the present case concerned the correct computation of gross profit and the impact of recasting trading accounts.

Conclusion:
The High Court concluded that the Tribunal was justified in law in giving a reduction of Rs. 28,189 in the cloth account of the assessee. The Tribunal's approach of considering the combined trading account and correcting arithmetical errors was deemed appropriate. The submissions of the Revenue's counsel were found to lack substance, and the Tribunal's decision was upheld in favor of the assessee. The High Court emphasized the importance of accurate calculations and the context in which trading accounts are interpreted.

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