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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 ..... essee has filed the cross-objection. The first two grounds of appeal of Revenue and the cross-objection filed by the assessee are related to the same issue and hence these are disposed of together. 2. The first two grounds of appeal of the Revenue are as under:- "On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in:- (i) directing to apply the GP rate of 12 per cent against GP rate of 18.44 per cent applied by the AO following the past history of the assessee, (ii) without prejudice above ground of adoption of GP rate of 12 per cent was without any basis. If there was loss in respect of rejected items then at least balance sheet should have been considered for estimation on the basis of past history of the assessee." 2.2 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and outward register for verification. In absence of such registers, day to day production, shortages, sales and purchases cannot be verified. The AO accordingly rejected the books of account as per provisions of s. 145(3) of the Act. The AO examined the expenses debited in the trading account and PandL a/c and noticed that some of the expenses are not supported by proper vouchers. In absence of vouchers, the correctness and genuineness of the expenses is not subject to proper verification. This was also taken a ground for rejecting the books of account. 2.5 The assessee filed the reply dt. 29th Dec., 2009 in which it was stated that all the details required have been submitted and produced. It is also submitted that the evidence 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdictional High Court in the case of Malani Ramjivan Jagannath vs. Asstt. CIT (2007) 207 CTR (Raj) 19 in which it has been held that books of account cannot be rejected in case the books of account are maintained on the same lines as have been maintained in earlier years. Mere deviation in the GP rate cannot be a ground for rejecting the books of account. 9. The assessee stated that the fall in GP rate is on account of change in composition of sale products. This years' sale of ceramic/wooden handicrafts was of only Rs. 7,628 as against Rs. 10.07 lacs of the last year. In the last year export sale of ceramic handicraft items were 30 per cent of the total 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. 25.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rejection of books of accounts by invoking provisions s. 145(3) of IT Act, but considering the increased turnover, increased cost of raw material and the explanation furnished was considered satisfactory and the trading addition made on the basis of last year's GP rate was deleted. In the present case it is seen that there was a separate category of ceramic rejected goods in which there was opening stock of Rs. 91,16,243 having no purchases and manufacturing during the year and the sales was at Rs. 47,72,732 leaving behind closing stock of ceramic rejected goods at Rs. 18,23,249. These figures were fully supported with quantity 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GP rate of asst. yr. 2006-07 17.85% on rejected sale of Rs. 47,72,732 8,51,933 (1.79%) (7.08%) 33,72,195 (ii) 0.72% difference of last years GP rate from current year (17.85% - 17.13) on Rs. 3,85,25,339 2,77,382 90,42,790 Less:- 3.92% Increase in GP rate of wooden handicrafts (30.82% - 26.90) on Rs. 42,59,283 1,66,964 GP rate 18.43% 88,75,826" 2.10 The learned Authorised Representative has reiterated the submissions as were given before the learned CIT(A). The learned Authorised Representative submitted that the AO was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Moreover, the assessee has explained that there has been change in the sale of product mix and therefore, trading results cannot be compared with the immediately preceding year. It will be useful to reproduce the sale account of both the years to see the difference in sale of different items in both the years. Sl. No. Particulars Asst. yr. 2007-08 Asst. yr. 2006-07 Amount Amount 1. Export sale ceramic/wooden handicraft 7,628.00 10,07,321.000 2. Export sale ceramic handicraft 33,20,395.00 36,45,088.56 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inery, furniture and fixture. Further the Supreme Court decision relied upon by the AO is entirely different in the facts because in that case the appellant mill was closed on account of losses and pursuant to the scheme of winding up, the business were let out to exploit commercially, therefore, it was held as business income while in present case there is no continuous and systematic activity in an organized manner to earn the profit but it is a simple 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome received by the assessee by leasing out the factory was business income? The Supreme Court considered some of its earlier decisions and culled out the legal position thus (p. 461):- '(1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under 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 ..... 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