9911796707
TMI Blog1988 (9) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... d cloth measuring 1,17,629.15 meters and manufactured 22,578 garments. According to the assessee the price of the raw material was Rs. 3,06,495 and stocks and stores at Rs. 2,44,543. The purchase of raw material had been made from M/s Saraf Textiles Mills, M/s Vimal Trading Corporation and one Jamil Ahmed. The ITO accepted the purchase so fas as Saraf textiles Mills was concerned but noticed that the bill of Jamil Ahmed was not signed by anybody. No sale-tax number or registration number of the seller concern was mentioned in the bill. He, therefore, rejected the claim for payment in respect of this amount of Rs. 34,139. Out of various purchases made from M/s Vimal Trading Corporation, he noticed that 7 bill had not been signed by any partner or employee of the said Corporation but were signed by Shri S.M. Saraf who was nobody else than the director the assessee company. According to the ITO these bills were not issued by the said Corporation. This Corporation VTC was a sister concern of the assessee but inspite of that the books of accounts of this concern were never produced and it was contended that they had been mis-placed. Therefore, the corresponding sale entries were not ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the husband of Smt. Sharda Devi who was a partner in M/s Vimal Trading Corporation and besides that Shri G.L. Saraf brother of Shri S.M. Saraf was another partner in the said firm. Further the purchases were duly recorded in the assessee's books and these goods were actually processed and sold by the assessee in the shape of garments. The assessee had, maintained quantitative tally which was annexed as schedule "B' to the Profit Loss Account. The IAC had not made any verification from M/s Vimal Trading Corporation to show that that concern had denied having made the sales to the assessee. Although there was good deal of force in the arguments of the ITO to reject the payments alleged to have been made to M/s Vimal Trading Corporation, he was of the opinion that it could not be said that the assessee had not made purchases at all from M/s Vimal Trading Corporation and, therefore, he deleted the proposed addition by the ITO on this account. At the same time he observed that this fact could be considered while estimating the assessee's income. 5. Regarding the disallowance of expenses, the CIT(A) noticed that corresponding vouchers regarding these expenses had been traced from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchased by the assessee or not. The basic question for our consideration is on whom the onus of proving the genuineness of these payments should lie. It the parties were strangers, even wrong signatures of somebody on printed bills may be sufficient. The argument that Shri S.M. Saraf was signing cheques in dozens for M/s Vimal Trading Corporation could be plausible, but here in this case the position is slightly different. Both M/s Vimal trading Corporation and assessee are concerns in which members of the Saraf family are interested. Therefore, the onus of proving genuineness of these bills was higher. At any rate the most important evidence about the genuineness of the bills and the correctness of the amounts mentioned therein wee the books of M/s Vimal Trading Corporation. Ordinarily one party is not expected to produce the books of another party. But in the present case if Shri S.M. Saraf could sign bills for M/s. Vimal Trading Corporation which was mainly a concern of his wife and brother, there is apparently on reason as to why the assessee could not make available for satisfaction of the ITO the books of M/s Vimal Trading Corpn. Before the CIT(A) it was contended that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about Rs. 5 to 6 lacs. As against this the assessee has shown expenses on tailoring etc, at Rs. 9,38,923. It is a matter of common knowledge that the price of cloth particularly good quality of cloth is always higher than its stitching and tailoring charges. The ITO had further pointed out that out of the total expenses of Rs. 9,38,923 expenses amounting to Rs. 5,68,397 were not supported by vouchers. The IAC had already allowed the claim for expenses at Rs. 3,70,526. She has also pointed out that entries regarding these items had been passed through journal on the last date of the previous years. Most of these bills were not printed whereas other bills for similar type of expenses accounted throughout the year were regularly printed. None of these bills mention the sales tax number, Registration number or telephone number of the alleged seller or the job worker from which it could be verified. Many of these were not even typed. They have been just filled with hand from which it was obvious that the concerned parties were not during any regular business. Simple analysis of these entries and photostat copies of these bills were enclosed with the assessment order for illustration an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re by different parties but typed by the same typewriter. Some were not dated. The most important factor in this behalf as already pointed out above that although the bills were stated to have been prepared during the year, the assessee has failed to make regular entries in its books of accounts and entries were made on the last day of the year through Journal which would cast serious debut on their genuineness. 9. By all these observations we do not mean to say that the assessee did not incur any expenses. What we mean to say is that it should be considered to be a case of unvouched accounts. Therefore, the books as such cannot be accepted and the only way course open to the assessing authorities was to estimate the income in accordance with s. 145(2) of the IT Act. 10. We now come to the estimate of profits. According to the assessing authorities after rejecting the entire payments the assessee's gross profits would come to about 55 per cent and the net profit to about 52 per cent. This was reasonable because the assessee's own sister concern M/s Shroffs had been showing a profit of 35 per cent on tailoring alone whereas the assessee was also getting the job of printing and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents were available to the assessee. In fact they used to get the clothes stitched through the assessee and that itself was a sister concern. No doubt Saraf Textile Mills has got other shareholders and directors of outside families but the two concerns are certainly interrelated. After all, all the garments of the assessee were duly sold and there was no question of suffering any loss due to any back-log. At the time of arguments, it was stated before us that M/s Registhan Pvt. Ltd had shown a gross profit of about 25 per cent though on the record there is nothing, this fact was not seriously disputed by the assessee's representative whose only contention was that the case of M/s Registhan Pvt. Ltd was entirely different. Keeping all these facts in view, we are of the opinion that the assessee's gross profit should atleast be estimated at 20 per cent of its sales which of course are not disputed. The net profit would then be computed after allowing the over-head expenses claimed by the assessee which were not seriously in dispute. 11. In the result, the departmental appeal is allowed in part as above and the assessee's cross objection shall stand dismissed. A. KALYANSUNDARAM, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders are also related. The assessee-company manufactured garments which garments were sold to M/s Saraf Textile Mills. It is also an accepted fact that the contract of purchase and sale being between two companies, the price at which the goods had to exchange hands have been agreed to by the Directors, and it has been found as a fact and accepted as such that the price so charged by the assessee-company from M/s Saraf Textile Mills is reasonable. 4. The only issue which is disputed is about the quantum of expenditure incurred by the assessee. The doubt or suspicion in the minds of the Department while disallowing most of the expenditures was based on the journal entry which was made at the close of the year. According to the assessee, the journal entry was in respect of the last few transactions of the last quarter or so for which payments were made subsequent to the close of the year. The Department doubted that the provision has been made in respect of non-genuine purchase and, therefore, it did not represent the liabilities. 5. The CIT (A) was aware of the fact that it was a case where a search was conducted by the Department and the various records of the assessee were s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses account; and (b) by journal entry on the basis of bills received from the parties. In respect of the bills received from the parties a journal entry could be passed for each bill or it could be consolidated for each month or every two months or each quarter or once in two years or once a year depending upon the quantify of bills. If the transaction are too many, then it may be necessary for the accounting Department to pass journal entry in respect of each bill or have separate purchase register. However, in case the transactions are too few, the bills may be kept together and one consolidated entry may be passed once in a quarter or so, which would depend upon the manner of settlement with these parties. Therefore, for the mere reason that a journal entry has been passed in respect of certain transactions at the close of the year does not necessarily give rise to any suspicion which could be said to be casting serious doubts on their genuineness. Such a blatant statement would only mean closing one's eyes to the realities of life and the accounting of it. Therefore, I am of the opinion, for the reason discussed above and on the basis of the facts above holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls are bogus bills in view of their confirmed view that M/s Saraf Textiles Mills has floated all these bogus concerns with a view to transfer or divert profit. The Department on the basis of this suspicion in their mind did not care to carry out and further exercise of examining the facts of the case. Having started the case with a perverse view and having based only on suspicion they came to the conclusion that the books are not reliable and applied Sec. 145. Even my learned brother in his order has only mentioned that the manner of keeping the books merely arises a doubt in the minds, but does not confirm the doubt. Therefore, on such doubts alone applying Sec. 145 to my mind is improper. The doubt must be supported invariable by reasons and materials such as that the bills are in fact bogus which could have been substantiated by obtaining statements from the various suppliers whose bills were in their possession for over two years, while exercise was never carried out at all by the Department. 7. Since proviso to s. 145 does not apply to the situation, according to me, the estimation of across profits is improper. Even assuming for a moment that estimation is called for in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own by the assessee is lower. While comparing another case with that of an assessee, it is necessary to see that the similarities of the two are to such an extent that they could be called to be identical. For the mere reason that two of them are exporters does not necessarily mean that they could be compared. One may be having regular contract with certain job workers, where everything has been so systematised on the basis of time and even the amounts payable for the job work is pre-determined. In the other case it may not be so and it may also be that the job work is pre-determined. In the other case it may not be so and it may also be that the job work done may be from a place where the assessee may have to pay more. There can be number of such dis-similarities. 8. In view of what I have stated above, since the rejection of the accounts is entirely based on suspicion and not on any material and no specific defect has been pointed out which could lead to the conclusion that the accounts maintained are improper or that the income shown by the accounts is false, I am of the view that the book results have to be accepted and only such additions can be made which are in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making these disallowances and also by adding several expenses to the extent of Rs. 5,58,397 as bogus, the assessing Officer determined a gross profit which came to about 55%. The assessing Officer had not determined the profit on the basis of sales but had just disallowed what he considered to be bogus purchases and bogus expenses. The ITO discussed at some length the reasons for making these additions. 4. When the matter came before the CIT(A), he not only considered the objections raised by the ITO but also other surrounding circumstances and he held that the purchases from Jamil Ahmed could not be considered to be bogus, he deleted that addition. 5. In respect of the purchases from Vimal Trading Corporation the ITO had considered purchases to the extent of Rs. 1,10,941 out of total of Rs. 4,20,445 to be bogus. The main reason given by the ITO was that several bills were not signed by the partners or employees of that firm. He also mentioned that the books of Vimal Trading Corporation had not been produced before the ITO. It was pointed out to him that the purchases were of grey cloth from both M/s Vimal Trading Corporation and Jamil Ahmed and these goods were processed and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been disallowed. Similarly in the case of buttons and thread an expenditure of only Rs. 277.85 P. had been allowed. It was pointed out that with only this much of linings and buttons it was not possible to make such a much large variety of sales of about Rs. 15 lakhs. It was argued that garments of poorest quality could not be produced with the help of the small linings, buttons and thread expenses. It was pointed out that the sales of the assessee were gradually increasing from year to year and in the next following year the sales were more than Rs. 25 lakhs. The CIT (A) considered the matter at length and held that whereas the ITO could be justified in not accepting the book results as such it was not possible to disallow the entire claim of expenses. 8. Regarding the journal entry towards the end of the year, the CIT(A) observed that passing the entries like this at the end of the year was unusual. Regarding the point that expenditure of Rs. 3,70,526 was considered reasonable on purchases of Rs. 3 lakhs to Rs. 4 lakhs whereas the assessee had shown purchases at more than Rs. 5 lakhs. The CIT (A) also referred to the fact that vouchers were not printed with the names of par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence which could be verified by the ITO. The CIT(A) came to the conclusion that having regard to the circumstances it could not be held that the books results were acceptable and this was a case where provisions of s. 145(2) were applicable. However, the CIT(A) held that no arbitrary estimate could be made regarding the income of the assessee. In this regard he considered the disallowance of expenses to be arbitrary. There was no basis for taking the gross profit at 55 per cent as taken by the ITO. He considered the case of M/s Shroff's to be not a comparable case. The CIT(A) thus concluded his order like this: "27. Taking all these factors into account, I am of the opinion that since the Department has accepted the sales of the appellant as disclosed by it at Rs. 14,71,897 and since while the appellant had been able to file copies of assessment orders of the cases where the net profit rate ranging from less than 3 per cent to less than 4 per cent has been accepted by the Department, the ITO has not been able to produce any comparable case where a higher net profit rate has been disclosed or applied and sustained by the Department, I am of the view that it would be reasonabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of gross profit of 4 per cent should not have been adopted. According to the assessee, the CIT(A) erred in invoking the provisions of s. 145(2). The Department had challenged the deletion of various additions and it was urged that the CIT(A) was not justified in deleting the various additions. 11. The learned Judicial Member pointed out that the CIT(A) himself had not accepted the book results. He referred to the close relationship between the Managing Director of the company and the partners of M/s Vimal Trading Corporation. In view of this close relationship, he held that the onus of proving the genuineness of the various bills was on the assessee. He also pointed out that if Shri S.M. Saraf signed the bill for Vimal trading Corporation, he could certainly produce their books of accounts of that firm. According to him, it is only the account books of M/s Vimal Trading Corporation which could confirm the genuineness of all the sales and their amounts. 12. The learned Judicial Member considered the various expenses disallowed and referred to the fact that the assessee was keeping blank forms and filled in them the names of different parties. The Judicial Member, however, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o their genuineness and they were presumed to be bogus. In the absence of such inquiry into the genuineness, the assessment made the Department was based only on suspicion. He, therefore, held that the proviso to s. 145 does not apply and estimate of profit was improper. 14. The learned Accountant Member proceeded to observe that even if the estimate was to be called for, the estimate made by the learned Judicial Member was not proper. He referred to the various requirements in producing the garments and they would differ from piece to piece depending on market condition. These factors go on fluctuating while the sale price remains constant. The learned Accountant Member, therefore, came to the conclusion that the rejection of the accounts was entirely on the basis of suspicion was not justified and it must be shown that the accounts maintained are improper and incorrect. He, therefore, accepted the book results subject to the disallowance of expenses claimed by the assessee under the various heads. The Accountant Member has not indicated that if estimate was to be made what would be the proper estimate of income. 15. The main question which arises for consideration is whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to get the confirmations from this party by writing to the ITO at Bombay. The purchases from Vimal Trading Corporation were doubted only on the ground that the bills had been signed by Shri S.M. Saraf, the Director of the assessee-company. The ITO, who was assessing the assessee-company was also assessing the firm M/s Vimal Trading Corporation and he has observed that the books were not produced during the 144B proceedings on the ground tha it was misplaced. From this he came to the conclusion that these purchases by the assessee have not been verified. To add to this doubt, the bills were signed by Shri S.M. Saraff. It is on this basis that the ITO proceeded to add all the bills as bogus purchases. The CIT(A) considered this matter and in respect of these additions, he held that they were not called for. While CIT(A) held that the additions as such could not be made fully, he further held that it was clearly a case where the assessee had not been able to substitute all the purchases or the various expenses incurred in the course of his manufacturing business. The learned Account Member has referred to the principles of accountancy and has held that this was not a case where the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties had passed his order dt. 29th April, 1988 and has opined that book results could not be accepted but to what extent the addition is called for considering the comparable cases cited by the parties, he left it for the Bench to decide the issue. Accordingly, the matter was heard on 1st Aug., 1988 only to decide to what extent the addition to the book results shown by the assesses is called for. 2. The learned Senior Departmental Representative, Mr. K.K. Boliya, referred to certain statistical figures from out of the files of M/s Shroffs, which was referred to by the ITO as well as by the Judicial Member in the normal proceedings. Mr. Bolia fairly conceded that the various statistical figures, which he desired to be considered are not coming out of the orders of either the ITO or the CIT(A) or out of the Judicial Member's orders. He, however, emphasised that the fact the book results are not acceptable having been established that it is a case of reasonable estimate or the results, which is a reasonable comparable case has to be seen in the light of the facts as are existing. According to him, the sales are mainly to Saraf Textiles Mills, which is another related concern and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable cases referred to by the learned counsel for the assessee show a profit of 3.5 per cent to 4 per cent. After having indicated it, I would stop and hold that on the facts as discussed above, this was a case where book results could not be accepted as such and provisions of s. 145(2) were applicable but a reasonable addition has to be made having regard to the comparable cases cited by the parties. It is for the Bench to decide this issue as otherwise there would be no majority decision on this question of estimate." 5. The case of Raj International in view of its sales being only Rs. 5,22,000 cannot be said to be a comparable one. However, the Purnima Handicrafts has a close proximity with that of the assessee in view of the sales and similar is a case of Pawan International. At the same time it cannot be overlooked that the ITO while considering various expenses claimed by the assessee as deduction in its trading account has disputed most of them, which were considered by the CIT(A) in extenso, the assessee had claimed a loss. Considering the over-all situation in regard to the doubtful nature of the expenses, we find that the CIT(A) was very reasonable in applying a net pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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