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TMI Blog2010 (12) TMI 720X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 The cross-objections raised by the assessee are as under:- "1. The impugned order under s. 143(3) dt. 30th Dec., 2009 is bad in law and on facts of the case for want of jurisdiction and various other reasons and hence the same kindly be quashed. 2.1 The learned CIT(A) erred in law as well as on the facts of the case in confirming the application of s. 145(3). The provision so invoked by the AO and confirmed by the learned CIT(A) being contrary to the provisions of law and facts, the same kindly be quashed. Consequently the trading addition of Rs. 3,13,669 be deleted in full. Alternatively and without prejudice to above. 2.2 The learned CIT(A) further erred in law as well as on the facts of the case in directing to apply GP rate of 12 per cent as against 11.34 per cent declared by the assessee and thus thereby partly confirming trading addition upto Rs. 3,13,669. The addition so made and partly confirmed by the learned CIT(A) being totally contrary to the provisions of law and facts of the case, kindly be deleted in full." 2.3 The first objection is general and will stand disposed of as per the findings to be given against the second cross-o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidence of the rates adopted for valuation of closing stock is being submitted but actually it did not produce even a single evidence in support of rates adopted for valuation of the closing stock for verification. It was therefore, held by the AO that valuation of the closing stock is not verifiable and it was also considered as a ground for rejecting the books of account. After rejecting the books of account, the AO applied the GP rate of 18.44 per cent as the assessee himself disclosed such net profit rate in the immediately preceding year. For rejecting the books of account, the AO has relied upon following decisions:- 1. Awadhesh Pratap Singh Abdul Rehman and Bros. vs. CIT (1994) 119 CTR (All) 1 : (1994) 210 ITR 406 (All); 2. S.N. Namasivayam Chettiar vs. CIT (1960) 38 ITR 579 (SC). 2.6 The learned CIT(A) has reproduced the submissions made before him by the assessee in pp. 3 to 8 of the order. The submissions in brief filed before the learned CIT(A) are as under:- 1. The provisions of s. 145(3) can be applied in case the AO is not satisfied about the correctness/completeness of the accounts. The AO has not rejected the books of account on the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal turnover while this year, the sale is only 7 per cent of the total turnover. Therefore, the GP rate of the immediately preceding year could not have been applied. The trading results of the immediately preceding year are not comparable to the trading results of the year under consideration. 10. During the year, the assessee reduced the manufacturing of ceramic items and switched over to the wooden handicraft items. 11. During the year, the assessee has made sales of rejected goods and has incurred loss of around Rs. 25.20 lacs. There was no sales in the immediately preceding year and therefore, such loss is to be added to the GP rate if one has to make comparison of GP rate as compared to immediately preceding year. 12. The cost of material in production was 53.72 per cent as against 41.02 per cent of the immediately preceding year while sales rates have not increased to that extent and therefore, it has affected the GP rate. 2.7 After considering the above-referred submissions, the learned CIT(A) directed the AO to apply the GP rate of 12 per cent as against 11.34 per cent disclosed by the assessee after observing as under:- "I have con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tity details, sales bills and valuation of closing stock was also found same as it was opening stock valuation. On this basis the verifiable gross loss for this category of goods itself is coming to Rs. 25,20,262. On the basis of last year's gross profit obviously there is a gross profit component of estimate basis even on such turnover which resulted into gross loss and therefore, in my considered view it shall be justifiable to adopt GP rate of 12 per cent as against declared GP rate of 11.34 per cent on the consolidated aggregated turnover which is worked out at Rs. 57,06,882 as against declared gross profit of Rs. 53,93,213 and on this basis a gross profit addition of Rs. 3,13,669 has been confirmed. Since, the AO has made trading addition of Rs. 33,76,363 therefore, on this account the appellant gets relief of Rs. 30,62,694." 2.8 During the course of hearing before us, the learned Departmental Representative referred to the observations made by the AO in respect of rejected books of account. The assessee has not produced certain registers before the AO and AO has clearly mentioned in his order that the closing stock is not verifiable. It was further argued that the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not justified in rejecting the books of account. Since the assessee has given the reasons for fall in GP rate, therefore, the trading results as disclosed by the assessee should have been accepted. 2.11 We have heard both the parties. In the instant case, the assessee has filed the return on 30th Oct., 2007. A revised return was filed on 27th March, 2009. The notice under s. 143(2) was issued on 4th Nov,. 2009. The assessment was going to be barred by limitation on 31st Dec., 2009 and the assessment order has been passed on 30th Dec. 2009. It is therefore, clear that the assessee was not having sufficient time to get the details verified. The AO in his order has given the cogent reasons for rejecting the books of account. Before the learned CIT(A), the assessee has produced the registers which were not produced before the AO. Similarly verification of the closing stock was produced before the learned CIT(A). Since the AO has clearly mentioned in his order that such documents were not produced before him, therefore, it was incumbent on the learned CIT(A) to have allowed the opportunity to the AO in respect of verification of such registers. Since the learned CIT(A) was of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 088.56 3. Export sale of GI and iron handicraft 36,723.00 57,309.00 4. Export sale of Terra Cotta items 8,27,546.00 38,66,210.00 5. Export sale wooden handicraft items 3,36,64,071.04 5,96,58,287.77 6. Export sale brass and GI handicraft items 0.00 32,30,548.00 Total 3,78,56,363.04 10,24,64,764.33 7. Local sale 54,41,708.00 56,50,847.00 8. Trading sale 42,59,283.00 74,38,176.00 Total sale 4,75,57,354.04 11,44,53,878.33 During the year, there has been substantial sales of wooden handicraft as compared to immediately preceding year in case one compares the turnover vis-a-vis total turnover. We therefore, feel that the learned CIT(A) has rightly appreciated the reasons for fall in GP rate and we feel that the learned CIT(A) was justified in directing the AO to apply the GP rate of 12 per cent. 3.1 The third ground of the Revenue is that the learned CIT(A) has erred in directing to treat rental income under the head income from house property as against business income despite the fact that business asset i.e., factory premises was given on rent. 3.2 The assessee company let out the factory premises and the AO required the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imple case to have the rental income from the factory premises. Under these circumstances in my considered view such rental income is not part of business income and being chargeable to tax under the head income from house property, the appellant is entitled for the deduction under s. 24(a) of IT Act at Rs. 2,34,000 and the AO is hereby directed to allow the same." 3.5 We have heard both the parties. When the assessee exploits the property as owner by leasing out the same and had utilized the income by way of rent then such rental income is to be taxed under the head income from house property. The assessee has not given other assets on lease to the tenant. It has been clearly mentioned that the assessee is utilizing the rental income in subsequent years and there has not been a case that factory has been given on rent in intervening period so as to be utilized subsequently for its own business. If letting is subvenient to the main business then such income from letting out can be taxed under the business. If the letting out of the property is primary or dominant object then the property income has to be taxed under the head income from house property. Reliance is placed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head 'Profits and gains of business or profession'; (2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out; (3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same; (4) if only a few of the business assets are let out temporarily, while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets'." 3.7 Applying the test as laid down by the Hon'ble apex Court, it is clarified ..... 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