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TMI Blog2019 (3) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, which results in a net increase in the gross profit by ₹ 30,01,615 (94,79,818 – 64,78,203), or at 8.48%, i.e., very close to do that estimated. We may hasten to add that we are not in any manner suggesting an increase in or disturbing the valuation of the closing stock; the same having penalty implications as well, but only that, other things being equal, an increase to this extent gets validated. That is to say, that the profit as estimated by the Revenue is reasonable and merits being upheld. In the present case, the accounts as not correct and complete in-so-far as they relate to the manner of accounting for the various direct costs and revenues that go into the working of the gross profit. Net profit cannot be computed or arrived at independent of or de hors the gross profit, being only derived there-from. The AO may also estimate some indirect costs and/or revenues as well, i.e., along with estimating the gross profit; the whole purport being to estimate those areas of income determination for which the assessee’s accounts are not regarded as reliable. At the same time, he, finding no defect therein, may not consider it necessary to disturb the indirect income/cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. the assessee has failed to substantiate his contentions. Therefore, it is not possible to verify the genuineness / correctness of gross profit rate declared by the assessee. And, estimated the assessee s gross profit (GP) rate, disclosed at 6.68% for the current year, at the average of the immediately two preceding years, i.e., Assessment Years (AYs.) 2012-13 and 2013-14, i.e., at ₹ 8.45%. The same stands confirmed in first appeal for principally the same reasons; the relevant part of the impugned order reading as under: The firms deals in purchase of raw hides and skins and sells it both in raw form and in processed form after processing these. It purchases hides and skins of different animals such as cows, goats, buffalos etc., which have different purchase and sale rates. But the appellant was found to have maintained no separate records in respect of each type. Further, no record was maintained of as to how many of the hides and skins were sold raw and how many were sold after processing. In the valuation of stock, only the number of pieces is mentioned but no type or quality of skin/hide is mentioned. For example: Mall Account (2) Unit : Pieces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was substantial increase in sales and that both G.P. N.P. in money terms are more than those of earlier years. Sales during the year were ₹ 16.69 Crore as against 12.50 crore and 14.25 crore in A.Y. 2012-13 and 2013-14 respectively. Reference was made to assessment completed u/s 143(3) of the Act for A.Y. 2007-08 in the case of the appellant where G.P. rate of 6.30% was accepted. I have considered the issue. The history of GP rate declared by an assessee itself in other years is one of the reasonable criteria for estimating profits u/s. 145(3) of the Act. Ld. AO has applied NP rate of 8.45% which is the average of the GP rates declared by the appellant in the two preceding A.Yrs. 2012-13 and 2013-14. The same cannot be called unreasonable or excessive in any manner. A reference to the GP rates mentioned by the appellant in the written submissions above shows that the GP rate declared in the two succeeding years too is more than 8.45%. It is 8.72% in A.Y. 15-16 and as high as 13.89% in A.Y. 16-17 though the turnover in these years was much lower. During the year under appeal, the appellant had higher turnover, but it does not necessarily imply or justify lower GP. Apart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FORM NO. 3CD [See Rule 6G(2)] STATEMENT OF PARTICULARS REQUIRED TO BE FURNISHED UNDER SECTION 44AB OF THE INCOME-TAX ACT, 1961 PART B 11. (a) Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed. NO (b) List of books of account maintained and the address at which the books of accounts are kept. (In case books of account are maintained in a computer system, mentioned the books of account generated by such computer system. If the books of accounts are not kept at one location, please furnish the addresses of locations along with the details of books of accounts maintained at each location.) CASH BOOK, LEDGER, JOURNAL, 307, HIDE MARKET, AMRITSAR 35. (a) In the case of a trading concern, give quantitative details of principal items of goods traded: (i) Opening stock; (ii) Purchases during the previous year (iii) Sale during the previous year; (iv) Closing stock; (v) Shortage/excess, if any. THE ASSESSEE FIRM HAS NOT PRODUCED STOCK REGISTERS BEFORE US. STOCKS IN HAND ARE STATED TO BE PH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be apparent, the Revenue authorities have not found the assessee s accounts as not reliable on that basis, even as the same, and as indeed ought to be the case, that does form the starting point of the enquiry in the matter. On the merits of the invocation of section 145(3) by the Revenue, which forms the substance of the assessee s grievance before us, our first observation in the matter is whether the stock register as produced in the assessment proceedings could be said to be a record maintained by the assessee in the regular course of its business, and on which, therefore, reliance could be placed in view of section 34 of the Indian Evidence Act, 1872. In our view, clearly not. Column 11(a) of the Auditors Report mentions the books of account maintained by the assessee-auditee, i.e., Cash-book, Journal and Ledger. Again, at Column 35, where the assessee is required to furnish the quantitative details as per the audited accounts, the Auditor issues, and rightly so, a disclaimer, i.e., in view of no quantitative details furnished before and, therefore, audited by, him, further clarifying that the closing stock is as per the stock certified by the Management, stated to be phy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and day out, assume arguments in defence or in furtherance of the assessee s case before us. There is, further, no limitation in the power of the Tribunal in this regard, case law on which is legion, and for which we may, as an example, refer to the decision in Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 232 (SC), the facts of which are also telling, wherein the Apex Court clarified that even rules 11 27 of the Income Tax (Appellate Tribunal) Rules, 1963 ( the Rules ) are not exhaustive of the powers of the tribunal. The objection raised is wholly without basis, both on facts and in law. How, in the absence of stock records, does the assessee close it s accounts for an account period, to arrive at the correct operating income for the said period? The same is an integral part of accounts, ensuring that all that is traded in is taken into account and properly valued in arriving at the profit or loss for the year. Reference in this regard may be made to some decisions by the Apex Court, as CIT v. McMillan Co . [1958] 33 ITR 182 (SC); Namasivayam Chettiar (S.N.) v. CIT [1960] 38 ITR 579 (SC); Chhabildas Tribhuvandas Shah v. CIT [1966] 59 ITR 733 (SC). 4.2 We may, without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as one, single item to be grouped together, and the quantity obtaining at the year-end valued on FIFO basis ? The difference becomes all the more acute when seen in the context, as it has to be for correct appreciation, of the fact that the GP rate, signifying the difference in the purchase and sale rates, varies over a range; the 10 year period ending with the current year witnessing a low of 6.30% (AY 2007-08) and a high of 11.82% (for AY 2009-10) (refer table at page 6 of the appellate order). A good bought at ₹ 50 apiece would stand to be sold for a price, depending on the fluctuation of the market price that too over a 10 year period, between the extremes of ₹ 53 and ₹ 57. In fact, being a perishable product, as also emphasized by Sh. Arora during hearing, the same cannot be withheld to capitalize on the increase in the market price, even if imminent, and has to be sold without delay, lest it looses its value. The different pieces constituting the closing stock of hide (as above), thus, cannot be regarded as one item, to be valued on the basis of the last purchase price, as the FIFO method (of valuation) signifies. The variation in cost of different piec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again market driven, would again stand to be determined accordingly; there being essentially no difference in the nature of a purchase and sale transaction one man s purchase is another s sale. On what basis, for example, a good is purchased for ₹ 50 (say), as against another for ₹ 80 or ₹ 120 or ₹ 150, and so on; the differences being in fact even higher ? The difference becomes all the more pronounced when juxtaposed with the fact that the market price, including that due to value addition on account of processing, varies generally between 7% to 10%. The market price cannot explain the difference, as the good bought for ₹ 50 is being sold for ₹ 55 (say), while another is, at the same time being bought at ₹ 80/- or higher. On being asked during hearing if the weight was also one of the determinants (of price), Sh. Arora would, without giving a firm or straight answer, state that the same is not relevant as the skin/hide is both purchased and sold in units of pieces. Clearly, therefore, the same would include the weight of the piece as well. That is, the difference in the unit price is also due to its weight, as it does get manifest th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of purchase, i.e., without value addition. 4.4 The afore-discussed two defects in the assessee s accounts observed by the Revenue are, thus, on examination, found valid. Section 145(3) stands, accordingly, rightly invoked by the Revenue in the facts and circumstances of the case. We are not inclined to pursue the other grounds taken by it for applying section 145(3), viz. a large part of the purchases, and also expenses on wages and fuel, are not verifiable. The assessee has, on a suggestion by the Bench, bifurcated its purchases from registered and un- registered dealers, with a view to show that the purchase rates from unregistered dealers are comparable with that from the registered dealers (PB pg. 182-183). The same would require verification, as would the claim of the said expenses being properly vouched. As we have already upheld the invocation of section 145(3), we do not think it necessary to get the data furnished in support of its case, as well as the other claims, verified. 4.5 The next question before us is the estimation of the assessee s gross profit (margin); the same working to ₹ 36.59 apiece (Rs.1,11,47,744/304682 pcs. PB pgs. 95, 27) or at 6.68% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore yield a higher profit, so that the book result would yield a gross profit of 12.4%. Under-valuation of closing stock only operates to absorb this additional profit. Further, the conversion cost is only distributed on the units processed during the year, i.e., as included in that category. The same has to be therefore included in the value of the closing stock if the profit is not to be under-reported. The gross profit as per books, even assuming a correct valuation of raw material, or the raw material cost of the processed goods, gets justified at ₹ 206.27 lacs. If the under-valuation in the opening stock is to be similarly taken into account for determining the profit for the year, the data on the conversion cost for the preceding year would be required. For the sake of discussion, assuming a 20% increase therein, i.e., for the current year vis-a-vis the preceding year, yields a per unit cost of ₹ 102.80, which results in a net increase in the gross profit by ₹ 30,01,615 (94,79,818 64,78,203), or at 8.48%, i.e., very close to do that estimated. We may hasten to add that we are not in any manner suggesting an increase in or disturbing the valuation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly not perused during hearing nor, consequently, responded to by the other side. The same, accordingly, are not considered part of the record as also, for the same reason, are the other papers of the paper-book , in terms of rule 18(6) of the Rules. The same have yet been perused. The decisions (as in Dy. CIT v. Vishwanath Prasad Gupta [2011] 10 taxmann.com 74 (Jab. TM)) to the effect that low profit cannot be regarded as a defect per se , so as to validate or form a basis for applying sec. 145(3), state a well-accepted position of law. Similarly, the proposition that the books of account cannot be rejected without specifying defects, as also clarified in CIT v. Om Overseas [2009] 315 ITR 185 (P H), is, again, well-settled. As, however, a reading of the foregoing would reveal, the said principles have not been violated in the instant case. The issue arising in the instant case is primarily factual. That is, whether the assessee s accounts, as maintained, are correct and complete, for the true income of its business to be deduced there-from, which is the premise of section 145(3). The same is a matter of fact, as indeed clarified in Om Overseas (supra), so that our d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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