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TMI Blog2012 (12) TMI 1074X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds of appeal, we are reproducing grounds raised by the Revenue in its appeal for A.Y. 2005-06 in ITA No.167/A/2011 as under :- "1. The Ld. CIT(A) was not justified in law and on facts in deleting the addition of ₹ 19,34,764/- made under the head extra profit addition in gross profit, without appreciating the fact that the assessee was not maintaining regular books of account in usual course of business, specially the stock register. 2. The Ld. CIT(A) was not justified in law and on facts in deleting the addition of ₹ 19,34,764/- made under the head extra profit addition in gross profit, without appreciating the fact that the A.O. has specifically rejected the assessee's accounts in terms of provisions of section 145(3) of the Act, as the accounts were not found to be correct and reliable. 3. The Ld. CIT(A) was not justified in law and on fact in deleting the addition of ₹ 19,34,764/- made under the head extra profit addition in gross profit, without appreciating the fact that AO was entitled to make an assessment to the best of his judgement in a case where the books of account have been rejected in terms of section 145(3) of the I.T. Act. 4. The Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 31.08.2009 were issued duly served upon the assessee for compliance on 05.10.2009. 5. The A.O. noticed that the regular books of accounts were not found during the course of search and seizure operation conducted on 11.02.2009. Although books of accounts were produced by the assessee during the course of assessment proceedings but the same were not supported by the basic documents on the basis of which they were prepared. The A.O. further noticed that it is apparent that assessee does not maintain day-to-day books of account. It is also noted that the books of account which were produced before the A.O. were prepared subsequent to the search and seizure operation. 6. The assessee is engaged in the business of manufacturing and export of carpets. After perusal of Trading and P&L account filed along with Auditor's report for the year ended 31/03/2005, the A.O. noted that following major expenses are debited to it :- Head Amount (Rs) Supporting documents submitted Purchase 19860429 Bills produced Manufacturing Exps: a. Weaving Charges 7002912 No basic documents produced b. Clipping Charges 560234 No basic documents produced c. Dyeing Charges 1859374 Cash memo pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon to assess the income, profits or gains of an assessee, the authorities would be justified in rejecting the account books under section 145(2) an in making the assessment in the manner contemplated in that provision." (vi) Also in S.N. Namasivayam Chettiar vs. CIT (1960) 38 ITR 579 (SC), the Apex Court says "keeping of a stock register is of great importance because that is a means of verifying the assessee's accounts by having a 'quantitative tally', if, after taking into account all the materials including the want of a stock register., it is found that from the method of accounting the correct profits of the business are not deductible, the operation of section 145(3) of the Act would be attracted." (vii) The assessee suppresses closing stock to deflate profit. This act prevents the deduction of correct profits from the books of accounts and obfuscates the true picture of the business of the assessee. This is also a settled law that the correct declaration of closing stock is a sine qua non for arriving at the correct profit. In P.M. Mohammad Meerakhan vs. CIT (1969) 73 ITR 735 (SC), the Apex Court has opined the stock-in-trade must be valued for ascertainment of prio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t correlate how much the stock consumed and how much production yielded and it is impossible to reach on any conclusion on the basis of those registers. He has not brought on record any other evidence that the books were written subsequent to search and relied only on the search party. The A.O. has not considered the assessee's explanation that the consumption of raw material for each of the products cannot be reconciled in its case because the product pattern was large and items of different designs and sizes etc. were produced by the assessee. There was no legal obligation on the part of the assessee to maintain such a record. Audited books of accounts could not have been rejected without pointing out any specific defect or deficiencies in the books of account maintained by it. This view finds support from the case of CIT vs. Om Overseas (2008) 173 Taxman 185 (P&H). In view of the matter, I am of the view that rejection of books of account u/s 145(3) without detecting any mistake therein cannot be accepted and as such the A.O. has wrongly invoked section 145(3) of the I.T. Act." 11. The CIT(A) also did not agree with the A.O. for addition on merit after applying flat profit rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the extent of ₹ 2,08,54,333/- is warranted on account of closing stock. Therefore, the A.O., instead of separate addition of ₹ 93,77,786/-, made addition of ₹ 2,08,54,333/- which covers the G.P. addition. Therefore, the A.O. did not make separate addition of G.P. The relevant abstracts are reproduced as under :- (A.O. Page No.2) "6.2. The physical inventory of the stock taken at the two premises i.e. Carpet City site and the Guest House site give the following figures- (i) Finished Carpet (At Premise 67 to 69 Carpet City) 11528 sq. ft. (ii) Finished Carpet (At guest house site) ------ 676512.43sq. ft. 6.3 The above details show that there were (35734 Pcs) measuring 688040.43 sq. ft. of finished carpet. Shri Bhart Lal Maurya has in his statement during the search stated that the ready stock had two valuations - one at the rate of 40/- per sq. ft. (618920 sq. ft.) and the other made at specific order @ 84/- per sq. ft. (69120 sq. ft. in total). Valuation of stock as on the date of search- Finished carpet at specific order --- 69120 X 84/- = 58,06,080 Finished carpet general - ---- 618920 X 40/- = 2,47,56,800 6.4 LP-2 and LP-4 recovered from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of stock on the ground that :- (Page No.14) "7. As regards the issue of addition of ₹ 2,08,54,333/- as undisclosed stock, I have considered the rival contentions put forth by the assessee and the A.O. and find that the assessee's contention has sufficient force. The A.O. has worked out undisclosed stock being the difference of the stock physically found during the search and seizure operation on 11.02.2009 and the stock as per finishing reports of two washer men seized during search marked as LP-1 and LP-2. The current books of account could not be searched on computer by the Search Party and the assessee was also handicapped as his accountant working on the said computer was out of station. The Search Party has erred in treating the said finishing reports of finished carpets from the two washer men as assessee's stock register on the date of search. The AO has relied on the version of Search Party putting his legs in their shoes and did not make any enquiry and verification of the items which were reconciled by the assessee during the assessment proceedings. He did not even take pain to call for and examine the washer men before making addition to the magnitude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93 of the Paper Book where details of closing stock along with audit report dated 27.10.2005 was placed. The audit was completed before the search. The relevant details of stock furnished before the AO are on page no.93 of Paper Book. 21. The ld. Authorised Representative further referred page nos.54 to 60 of the Paper Book where a copy of details submitted vide letter dated 16/17.12.2010 have been placed. The ld. Authorised Representative pointed out page no.54 of Paper Book where the assessee submitted details of books oaf accounts and about closing stock. 22. The ld. Authorised Representative submitted that the assessee submitted comparative position of profit of other assessees dealing in identical business. In this regards the ld. Authorised Representative pointed out page no.59 of the Paper Book. 23. The ld. Authorised Representative submitted that when the assessee followed a regular method of accounting, the same cannot be rejected without pointing out specific defects in books of account maintained. He further submitted that no materials were found during the course of search based on which the A.O. can reject the books of account. The ld. Authorised Representative subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He submitted that the Assessing Officer has disregarded the detailed written submission dated 10.12.2010, 16/17.12.2010, 20.12.2010 and 21.12.2010 furnished to him from time to time explaining that there are several factors which govern the trading result of the assessee i.e. rise in cost of production due to steep rise in prices, revisions of weavers wages, fall in average sale price in international market and fluctuation in rate of foreign exchange. All these factors cannot be fabricated because they are supported with documentary evidences. But the learned Assessing Officer has not accepted any of the submissions and has arbitrarily applied a flat rate of 15% of the Gross Profit shown for all the above assessment years leaving all norms and precedence laid down by the Appellate authorities for estimating the Gross profit where it is necessary to do. He further submitted that there is an embarrassing situation where the minimum Gross Profit rate assessed is 15.58% and the maximum is 35.05% in five assessment years. Application of 35.05% G.P. rate is unbelievable looking to the past history and is like a dream for the assessee in the year under consideration. There is no propor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emi-finished/half woven carpets. The finding of A.O is based on presumption that the assessee has suppressed closing stock. The A.O. enhanced G.P. by 15% to the G.P. declared by the assessee. According to A.O. the G.P. in this trade should be 32.75%. 28. The CIT(A) did not agree with the A.O. He found that the A.O. has wrongly invoked section 145(3) of the Act. On merit, the CIT(A) found that there is no justification on the part of the A.O. to enhance the G.P. by 15%, thus, he deleted the addition made by the A.O. 29. Under the facts and circumstances of the case, the issue to be examined by us is in two fold, whether the A.O. is correct in rejecting the books of account under section 145(3) of the Act and secondly, whether the A.O. is justified in enhancing the G.P. by 15%. 30. Though there was search operation under section 132 of the Act. The AO did not make any addition on account of any material found at the time of search. Therefore, the case under consideration is simple rejection of books of account and estimation of profit. To examine the issue, we would like to refer relevant provisions of section 145 of the Act which reads as under:- "145. (1) Income chargeable und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the method of accounting regularly employed by the assessee. Therefore, if the assessee regularly employs a particular method of accounting and if no defects are found in the method or maintenance of accounts, the taxing authority is bound to compute the profits and gains of business or profession or vocation in accordance with the method employed by the assessee. Therefore, in case where the Income-tax Officer or the taxing authority finds that in maintaining accounts, the assessee has regularly employed a particular method and does not make any investigation to find or does not find any defect in the accounts and accept the accounts as they are, he is bound to compute the income in accordance with the accounts maintained by the assessee. Therefore, when the assessee represents to the taxing authority that its accounts are maintained by a method of accounting regularly employed, he expects the Incometax Officer to act upon such method and compute the income accordingly. 31.1 Hon'ble The Rajasthan High Court in the case of CIT vs. Gotanlime Khanij Udyog, 256 ITR 243 (Raj) held that provisions do not envisage that by resorting to best judgment assessment, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s could not have been rejected and no addition could have been made merely on account of lower profit declared by the assessee. On the Revenue's appeal, the High Court held as under :- "(Page 225) Section 145(3) provides for assessment in the manner prescribed in section 144 where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where either the method of accounting provided in sub-section (1) or the accounting standards as notified under sub-section (2) has been regularly followed by the assessee. It was not the case of the revenue that the assessee had not followed either cash or mercantile system of accounting. It was also not the case of the revenue that the Central Government had notified any particular accounting standard to be followed by tour operators. Hence, the second part of sub-section (3) of section 145 would not apply to the instant case. [Para 5] …………..The Assessing Officer had not pointed out any particular defect or discrepancy in the account books maintained by the assessee. During the course of hearing before the Commissioner (Appeals), it was pointed out by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was no finding that the actual cost of the raw material purchased by the assessee was less than what was declared in the account books. There was no finding that the actual cost of processing carried out by the assessee was less than what had been declared in her account books. No particular expenditure shown in the account books had been disallowed by the Assessing Officer. There was no finding by the Assessing Officer that the actual quantity of finished products produced by the assessee was more than what was shown in the account books. There was no finding that the ……. (Page 228 ) assessee had made any such sale of the finished products which was not reflected in the account books. There was no finding by the Assessing Officer that the finished products were sold by the assessee at a price higher than what was declared in the account books. In those circumstances, the Commissioner (Appeals) and the Tribunal were justified in holding that the Assessing Officer could not have increased the gross profit ratio merely because it was low as compared to the gross profit ratio of the preceding year. [Para 9] The revenue contended that the assessee was not maintainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act was the subject of judicial scrutiny. The Privy Council in Commissioner of Income-tax v. Laxminarayan Badridas has considered those words. Therein it observed: "He (the assessing authority) must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guess-work. In that sense, too, the assessment must be to some extent arbitrary." The Privy Council, while recognizing that an assessment made by an officer to the best of his judgment involved some guess-work, emphasized that he must exercise his judgment after taking into consideration the relevant material. The view expressed by the Privy Council in the context of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... branch office cannot be assumed in the circumstances of the case. That apart, the maintenance of secret accounts in the branch office might lead to an inference that the accounts disclosed did not comprehend all the transactions of the branch office. But that does not establish or even probabilize the finding that 135% or 200% or 500% of the disclosed turnover was suppressed. That could have been ascertained from other materials. The branch office had dealings with other customers. Their names were disclosed in the accounts. The accounts of those customers or their statements could have afforded a basis for the best judgment assessment. There must also have been other surrounding circumstances, such as those mentioned in the Privy Council's decision cited supra. But in this case there was no material before the assessing authority relevant to the assessment and the impugned assessments were arbitrarily made by applying a ratio between disclosed and concealed turnover in one shop to another shop of the assessee. It was only a capricious surmise unsupported by any relevant material. The High Court, therefore, rightly set aside the orders of the Tribunal." 33. In the light of ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /cotton yarns, whose rates have substantial variations. That carpet are manufactured by the weavers at their residences and they obtain wool and other raw materials from the exporters/contactor and after weaving the carpets they return back the same to the exporters/contractors. As regards observation of closing stock of the A.O., on perusal of page nos.54 to 60 of the Paper Book where a copy of details submitted vide letter dated 16/17.12.2010 have been placed. The relevant abstracts are reproduced as under: - (Page nos.54 & 55 of assessee's Paper Book) "Kindly refer to above Assessee's submissions to the query are as under : The assessee is producing the manufacturing/production expenses as more subsidiary registers, vouchers and relevant files here with as called or vide order sheet entry dated 15.12.2010 as follows: 1. Washing Register 2. Stretching & Latexing Register 3. Clipping Register 4. Yarn Opening Register 5. Weaving Register 6. Map & Designing Register 7. Final Backing Register However, it is not out of place to mention that the day to day stock in the carpet industry is not possible as there are hundred verities of carpets and woolen yarn used in m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page no.93 of Paper Book. The same are reproduced as below:- (Page no 93 of assessee's Paper Book) M/s. SUPERIOR CARPET PALACE RAJPURA, BHADOHI DETAILS OF CLOSING STOCK AS ON 31ST MARCH, 2005 Particulars Opening Stock Purchase/ Production Total Consum/Sale Excess/Loss Closing Stock Woolen Yarn (Kg.) 33,810.90 127,073.00 160,883.90 126,049.75 5,399.80 29,434.35 Cotton Yarn (Kg) 3,373.00 - 3,373.00 - - 3,373.00 Tufted 30c 847.05 1,458.63 2,305.68 2,305.68 Nil Nil Tufted 60c - 10,835.37 45,223.45 56,058.82 56,058.82 - - 12/60 Nil 154.34 Nil 154.34 154.34 Nil Nil 10/50 Nil 17.11 Nil 17.11 17.11 Nil Nil 6/36 Nil 564.23 Nil 564.23 564.23 Nil Nil 8/42 Nil 526.16 Nil 526.16 526.16 Nil Nil DETAILS OF CLOSING STOCK AS ON 31ST MARCH, 2005 Particulars Value (in Kgs.) @ Amount Rs. Ps. Woolen Yarn 29434.35 100.00 2,943,435.00 Cotton Yarn 3373.00 65.00 219,245.00 Hessian & Polythene - - 146,681.00 Total 3,309,361.00 36. From above discussions, we find that under the facts and circumstances of the case section 145(3) is not applicable. The A.O. has wrongly invoked section 145(3) of the Act. The A.O. heavil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of each case. 38. We find that during the course of search or post search or at the time of assessment proceedings or otherwise no material found basis on which 15% enhancement in profit can be said to be justified. The A.O. while making extra profit addition on flat rate of 15% of the gross profit disclosed, has not followed necessary ingredients for estimating the income. The A.O. has not cited a single comparable case in support of his estimation and, on the other hand, he has neither countered the comparable cases cited by the assessee nor he was justified to enhance the G.P. when he himself accepted much lower book result in case of M/s. Carpet Palace in A.Y. 2003-2004 as cited by the assessee in synopsis. He has also not considered assessee's reasonable explanation for the book result with reference to so many factors affecting its book result from year to year. We find that the CIT(A) before deleting the addition has considered various aspects of the matter. We noticed a chart of Gross Profit shown and Gross Profit assessed in all other years has been considered by the CIT(A) before deleting the addition.The Assessing Officer has failed to consider comparable cases of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of closing stock. After considering assessee's submission and reconciliation filed by the assessee, it was explained by the assessee that the books of account of the assessee for the current year could not be searched on computer in absence of the Accountant. The search party assumed the stock as per the books on the basis of finishing report of the two washer men and difference between the same and physical stock found was assumed to be undisclosed stock. The A.O. without making further verification has taken the same assumption without going to scrutinize the stock as per books produced during the assessment proceedings and the physical stock found at the time of search. Both the washer men were not examined or not cross-examined by the assessee whose furnishing reports were made on the basis of real physical stock as per the books of the assessee on the date of search. There are certain fundamental accounting and mathematical principles of verification of stock at the time of search or survey stock as per books of account and stock physically found at the time of search. Such verification is based on two pillars, one is books of account and another is physical stock. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no difference in between physical stock and books of account, after considering the reconciliation filed by the assessee, we are of the view that no addition is warranted. In the light of the facts and above discussions and in the light of technical reasons discussed by the CIT(A), we find that the CIT(A) has rightly deleted the addition. The order of CIT(A) is confirmed. 42. One of the common grounds raised in these appeals is in respect of provisions of section 292C of the Act. The Revenue has failed to point out how this ground helps to the Revenue when there is finding of the A.O. that no books of account was found during the course of search. No incriminating material was also found during the course of search and the A.O. made the addition as if the case is under general scrutiny by making addition applying a profit rate. The A.O. did not make any addition on the basis of material found at the time of search, if any. We failed to understand how this presumption under section 292C of the Act is applicable to the case under consideration when the A.O. did not make any addition on account of any incriminating material, money, bullion, jewellery and other valuable articles. How ..... X X X X Extracts X X X X X X X X Extracts X X X X
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