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TMI Blog2013 (10) TMI 1334X X X X Extracts X X X X X X X X Extracts X X X X ..... r the facts the Ld. CIT(A) was required to decide the issue of interest u/s 234B himself against remanding the same to the Ld. Assessing officer. 2.1. Revenue s appeal (ITA no. 2934/Del/2001): Based on facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of ₹ 35,23,115/- after holding that AO has exceeded her jurisdiction by adopting the income at ₹ 7,06,885/- for the first period which was the figure as originally determined since the decision of Ld. CIT(A) for the second period has not been accepted by the Department and second appeal has been filed before the ITAT. 3. Brief facts are : The assessee M/s Zohra Emporium was a partnership firm which came to be dissolved on 19-7-1993. A new firm in similar name was constituted by a new partnership deed comprising of of different partners of same family from 19-7-1993. However, the same set of books of accounts was continued by partners. Thus for A.Y. 1994-95 in the same name there existed two distinct partnership firms for following periods : (i)1-4-1993 to 18-7-1993; and (ii) 19-7-1993 to 31-3-1994. 3.1. Two separate returns of income for A.Y. 1994-95 - first for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturned loss of ₹ 98,530/- the total income to be assessed in the hands of the assessee ought to have been at ₹ 1,83,770/-. 3.6. Assessing officer, however, refused to carry out the directions of the CIT(A) while giving the appeal effect order and made the assessment for the first period at ₹ 37,06,885/- by following observations: The successor CIT(A) at the time of passing the order was satisfied that the accounts were neither correct nor complete and therefore invoked the provisions of section 145(2) and rejected the books of accounts. The CIT(A) was thus satisfied that books of account are not correct and went forward with making the best judgment assessment u/s 144. In order to cover various errors and discrepancies in the account the CIT(A) estimated the sales at ₹ 2.5 crores and increased the gross profit by applying G.P. of 25.11% on enhanced sales of ₹ 37,64,730/-. The point to be noted is that at this stage the CIT(A) has not mentioned as to how he has arrived at a figure of ₹ 2.5 crores. In a case where special audit has already taken place and assessment ha been made accordingly, such approximations is not called for. Thus as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct since this is the figure which was determined in the original assessment order dated 7-11-1997 and the said assessment order stands merged in the appellate order dated 4-2-2000, according to which the income for the first period stands determined at ₹ 1,83,770/-. The ld. AR strongly objected to the determination of income at ₹ 37,06,885/- by contending that the A.O. was duty bound to follow the findings of ld. CIT(A) and was not legally competent to again frame the assessment at the same income, which already stands demolished by the ld. CIT(A)-xv. The ld. AR has further submitted that the A.O. has totally overlooked and discarded the findings of the CIT(Appeals) which she was not legally competent to do. The ld. AR pointed out that the Department has already filed an appeal before the ITAT against the appeal order dated 4.2.2000 and the income for the first period will automatically stand adjusted and determined with reference to the appellate order of ITAT whenever it will be pronounced. 3. I have carefully considered the facts and the submissions of the ld. AR and other material on record. As per my order dated 4.2.2000 in appeal no. 577/99-2000 the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of account had to be audited on or before 31.07.1997. Further under clause (iii) of Explanation 1 of section 153, the period commencing from the date on which the Assessing Officer directs the assessee to get his accounts audited under the aforesaid provision and ending with the last date on which the assessee is required to furnish a report of such audit, shall be excluded in computing the limitation period for making the assessment. Thus, according to this provision, period of four months and 13 days starting from 18.03.1997 to 31.7.1997 has to be excluded in reckoning the limitation period for making the assessment. If the extended time of four months and 13 days is taken into account, the last date for making the assessment was 13.07.1997. As against the aforesaid, the assessment has been completed on 07.11.2011. Thus, the assessment is clearly barred by limitation uls 153 of the Act. In view thereof, it is held that the order of assessment is bad in law. 4. In view of the aforesaid finding, there is no need for us to decide various grounds taken in this appeal, the cross appeal and the cross objection on merits. 5. The result of aforesaid discussion is -(i) the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitation. It is submitted that the period of limitation for assessment year 1994-95 expires on 31.3.1997. The Commissioner of Income- tax approved the proposal of the Assessing Officer for getting the case audited u/s 142(2A) m his letter dated 18.03.1997. This is evidenced by the finding of the ld. Cl'T(Appeals) in paragraph no. 5.2 at page no. 13 of the impugned order that the proposal was accepted by the Commissioner of Income-tax under his letter dated 18.03. 1997, whereby M/s Garg Brothers Associates were appointed special auditors. The terms of reference have also been reproduced in this paragraph. The original time limit fixed by the assessing officer is not ascertainable. The date of completion of audit was extended by an order dated 14.04.1997 on account of involvement of the auditor in an accident. The extension was granted up to 31.07.1997. This is evidenced by the finding of the ld. CIT(Appeals) on page no. 15 to the effect that Shri K.P. Garg, the auditor, had met with an accident on 14.04.1997, therefore, the period for conducting the audit was extended till 31.07.1997. This date may be taken as the date fixed by the assessing officer for the completion of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r rejecting its accounts for the year ended 31-3-1996 by invoking the provisions of section 145(2) of the Income-tax Act, 1961. 2. That on the facts and in the circumstances of the petitioner firm's case, the learned Commissioner of Income-tax (Appeals) is wrong in estimating the sales for the year ended 31.3.1996 at ₹ 2,60,00,000 against ₹ 2,43,79,650/- as declared by the petitioner firm. 3. That on the facts and in the circumstances of the petitioner firm's case, the learned Commissioner of Income-tax (Appeals) is wrong in making an addition of ₹ 4,07,355/- for the year ended 31-3-1996 by applying a gross profit rate of 25.14% on the enhanced sales of ₹ 16,20,350/- for the year ended 31-3-1996. 4. That on the facts and in the circumstances of the petitioner firm's case, the learned Commissioner of Income-tax (Appeals) for enhancement of sales by ₹ 16,20,350/- and gross profit by ₹ 4,07,355/- for the year ended 31-3-96 without issuing any notice under section 251(2) of the Income- tax Act, 1961 is wrong and illegal. 5. That on the facts and in the circumstances of the petitioner firm's case, the learned Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Branch office ₹ 12,80,227/- Total: ₹ 83,25,768/- 13.3. Assessee in reply contended that purchases and stock inventories have various issues like plain saries lehngas etc., in which the firm is buying as raw material, they are converted into finished goods after copious artisan work like dying, embroidery is done by various karigars which results into final product i.e. embroideried sari and lehenga. Thus, there is heavy value addition on the finished product and the items of purchases cannot be identically shown in closing stock as they stand converted into value added finished products. Assessing officer, however, did not accept the explanation of the assessee and relied on the order sheet entry dated 11-2- 1999 i.e. submision of one Shri Harpreet Singh, Manager, stating during the course of hearing that firm is maintaining the records which can link the originally purchased plain saries with its value addition product. However, it is subsequently destroyed after embroidery work and cost determination of final product. At present he was not able to pin point the value addition. Rejecting the explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial auditors failed to appreciate that the identity of these finished goods is not similar to the identity of the cloth and dress material purchased by the firm. The learned AR's contention in this regard holds water that while the purchases are of raw material, after the job work is done the shape, style, name, identity and specification of the garment undergoes a sea change. Therefore, there cannot be any question of matching these finished goods with reference to opening stock inventory or the purchases made. The appellant firm has incurred expense of approx. ₹ 58 lakhs on embroidery work. This factor has been totally ignored and both the special auditor and the AO have fallen into error by failing to understand that the embroidered finished goods can, in no case, be traced out from the opening stock inventory and the purchases made. In view of the above I have no hesitation in holding that the manner in which the special auditor and A.O. have tried to link the items of closing stock with the items in the opening stock and the purchases made is totally faulty and irrational. There is no question of linking items of stock only on the basis of valuation. Keeping in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal addition of ₹ 20,93,098/- made by the A.O. an addition of ₹ 4,07,355/- is sustained. The appellant is entitled to a relief of ₹ 16,85,743/- (20,93,098 - 4,07,355). at 25.14%. (iii) Embroidery charges: Ground no. 4 deals with the disallowance of embroidery charges of ₹ 87,429/- out of total embroidery charges of ₹ 54,96,139/- claimed by the appellant-firm. I find that the facts and circumstances on this count are similar to the facts and circumstances of the case for assessment year 1994-95. These payments have all been made to old karigars through banking channels. Just because these parties did not respond to the summons u/s 131 cannot led to the inference that these payments are not genuine. The AO could very well have enforced their attendance and examined them. The appellant has established the identity of these parties and the genuineness of the said transactions and, therefore, his onus on this issue has been discharged. The confirmation of the karigar(s) is also available in his own handwriting in the embroidery register. In view of the above the disallowance of expenses of ₹ 87,429/- is deleted. (iv) Travelling expenses: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arily rejecting the assessee's explanation random check ratio has been extrapolated to the entire closing stock. 15.1. Thus, the rejection of books of account has been resorted on flimsy ground and not on valid considerations. Therefore, assessee's books have been unjustifiably rejected, they deserve to be accepted. CIT(A) has referred to his order for A.Y. 1994-95 to emphasize the findings that no worthwhile discrepancies existed to uphold the rejection of books. Though the original assessment for A.Y. 1994-95 has been technically annulled however the merits of the order of CIT(A) remain. 15.2. Alternatively, it is pleaded that even if rejection of books is upheld, in the absence of any evidence of suppressed purchase any addition in this behalf is set off as the purchase are to be allowed as business expenditure. 15.3. Similarly in absence of detection of any unaccounted sales, sales figures cannot be rejected and estimation cannot be resorted. Thus, when no evidence about any suppressed purchases or sales is available, estimate is to be based on the G.P. and trading results of the assessee. In this year the assessee has disclosed the G.P. rate of 25.14% which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso to Sec. 69C inserted w.e.f. 1-4-1999 therefore not applicable to AY 1987-88. Raj Sons Jwellers Vs. ITO 86 TTJ (Del.) 1106 - holding that restriction placed u/s 69C on allowing such expenditure is not applicable to AY 1998-99. DCIT Vs. Radhe Developers India Ltd. Ors. 329 ITR 1 (Guj.) - holding that proviso below sec. 69C is effective from 1-4-1999 and thus applicable from AY 1999-2000. 15.7. Apropos addition on account of sales and GP it is pleaded that assessing officer and CIT(A) both have accepted the GP rate of 25.14% to be correct. The addition is not a result of G.P. addition but on estimation of sales presumed to be out of books. The fact of the matter is pleaded by the assessee that not an iota of evidence is brought on record by the assessing officer to demonstrate any unrecorded sales. The addition is liable to be deleted as being a pure work of figment of imagination. 15.8. Apropos embroidery expenses challenged by the Revenue while relying on the order of CIT(A)ld. Counsel for the assessee contends as under: (i) Total embroidery expenses of the assessee comprised of Rs. 54,96,139/-. All the parties were issued notice u/s 133(6). All except six ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to special auditor so no adverse comments exist on record about veracity of record. No irregularity, inconsistency or infirmities have been pointed out in the maintenance of books of a/cs. 17.3. The assessing officer's suspicion starts qua the trading results of the assessee as mentioned above on a presumptive basis that the assessee's sales were nearly the opening stock. Inventory of closing stock filed by the assessee was verified by assessing officer on test check basis. Assessing officer then required the assessee to precisely identify the item mentioned in the closing stock and tally it with the purchase vouchers with exactly same description. The assessee in detail explained that it deals in selling furnished lehangas, sarees and other ladies apparels which are finished with zari, embroidery, bead work etc. The raw cloths like sarees, lehengas are dyed in different colours as per requirement and then finished by a lengthy process. Therefore, the exact description of closing stock items with matching cannot be shown from the purchase vouchers. The purchase vouchers contain the description as plain sarees, dupattas or other textile and finishing material, which will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only on the basis of surmises and assumed discrepancies in the closing stock which has been reasonably explained by the assessee. No evidence what so ever indicating non recording of any purchase or sale in books of accounts is brought on record to substantiate A.Os theory. 17.7. It is trite law that undisclosed purchase and sale cannot be attributed to assessee without reliance on proper corroborative evidence. The GP disclosed by assessee having been accepted; no specific instances of deficiency of sale or purchase in a/c books; no proof of unrecorded purchases or sales having been brought on record, we see no justification for rejection of books of the assessee. In view thereof, in the peculiar facts and circumstances of this case we uphold the book results and G.P. disclosed by the assessee being satisfactory no addition is called for. The rejection of books by lower authorities is only on surmises and not supported by any cogent or objective reasons. Consequently, we delete the additions in respect of rejection of books, estimation of sales/ purchases and consequent estimation of GP in the result assessee's ground in this respect succeeds. Revenue's grounds in this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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