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TMI Blog1994 (2) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by accepting the returned income under s. 143(1) of the IT Act, 1961 (hereinafter referred to as "the Act") on 26th Feb., 1987. Subsequently, the ITO took up the case for selective scrutiny and issued a notice under s. 143(2)(b) of the Act after obtaining the due approval of the IAC. The ITO also made enquiries from the sales-tax office and ascertained that during the course of the sales-tax proceedings, the assessee had produced the day-book, ledger, purchase and sales book, etc., before the sale-tax authorities on 14th Aug., 1986. The sales-tax assessment for the relevant period was also found to have been completed duly. 3.1 The ITO caused a survey under s. 133A of the Act in the business premises of the assessee on 17th Sept., 1987 and came across a purchase invoice file containing invoices of rice bran oil. He could thus get from the said papers the figures of purchases of rice bran oil made by the assessee during October, 1985, the total of which for that month came to Rs. 3,50,920. The ITO noticed that in the account books (account books were available for the period after the date of fire accident) sale of the rice bran oil during the month of October, 1985 was shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undisclosed purchases corresponding to the above mentioned amount of excess sale at Rs. 4,85,981. This amount was also added back to the adjusted net profit as mentioned above and finally, the net total income of the assessee was arrived at Rs. 7,48,315. 4. In the detailed grounds of appeal, the assessee challenged the very basis of subjecting the assessee's case to selected scrutiny by issue of notice under s. 143(2)(b). We do not find much merits in the said ground. It was open to the ITO, at the relevant time, to select any case for scrutiny under s. 143(3) by issuing a notice under s. 143(2)(b). There was no procedural or legal defect in the method adopted by the ITO. This particular ground was also not vehemently pressed at the time of the hearing of the appeal before us. We, therefore, hold that the ITO acted correctly in finally completing the assessment under s. 143(3) after having issued a valid notice under s. 143(2)(b). 5. The assessee has challenged the entire assessment as framed by the ITO. It may be mentioned in this connection that in the first appeal, the CIT(A) virtually confirmed the assessment order by allowing a small relief only in respect of addition m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sales had been considered by the ITO as per the sales tax assessment without making any change and, hence, the correct amount of purchases to be given credit for should be the amounts of the purchase as per books and also the further amount of Rs. 4,85,981 as considered by the Assessing Officer to represent undisclosed purchases. 6.4 Finally, he concluded that looking to the enormity of the total additions as made in the impugned assessment and taking note of the fact that much lower gross profit and net profit rates had been disclosed and also accepted by the Department in the earlier years, it would be in fitness of things to estimate the gross profit, on the figure of turnover as considered by the ITO, at the rate of 10 to 15% and net profit at 2 to 5%. 7. The learned Departmental Representative, on the other hand, reminded us of the background of the case. He stated that the survey undertaken by the ITO under s. 133A on 17th Sept., 1987 actually led to the procedure of estimating the income of the assessee by taking recourse to various methods of calculation. He also pointed out that the sales-tax assessment orders clearly stated that all the relevant books of account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration these excess amounts of sales and held that these had come out of purchases outside the books. The aggregate figures of the estimated amounts of such purchases being Rs. 4,85,981 were separately added back by him. We shall consider the following two hypothetical cases to show that such a separate addition is totally unwarranted: (i) Let us take the simple case of a dealer who sold goods worth Rs. 300 in a particular period, when there was neither any opening stock nor any purchases. Let us also assume that the rate of profit on the purchases was 20%. In the instant case, according to the ITO's theory, the entire amount of Rs. 300 should represent the profit to be calculated in the normal way inasmuch as this is the difference between the figure of sale and the aggregate of opening stock and purchases. Over and above the same, a further amount of Rs. 250 being the purchase component in the said figure of sale should also be added back as unaccounted purchases. The total addition as per the ITO in such a case would thus come to Rs. 300 plus Rs. 250, i.e., Rs. 550. Actually, however, since the assessee made unaccounted purchases of Rs. 250, it will be required to allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a case where a part of the business consisting of the purchase and sales operations totally are outside the books. 8.2 Hence, in view of the above considerations, we finally hold that the separate addition of Rs. 4,85,981 as made by the ITO is totally unwarranted. This is evident from the enormity of the total figure of profit as considered by the ITO in the assessment. Hence, we delete this particular addition. 9. This leaves us to the consideration of the other amount taken by the ITO by way of estimating the net profit at Rs. 2,34,613 after having determined the closing stock of rice bran oil and mobile oil on the reconstructed figures at Rs. 2,04,071 and Rs. 33,402 respectively. We feel that in the circumstances of the case, when the assessee was unable to produce its books of account, day-book, etc., the ITO was right in reconstructing the trading and P L account on the basis of whatever materials he could lay his hands upon. He must be considered to have acted correctly in working on the figures of purchases and sales as adopted in the corresponding sales-tax assessment. So far as estimation of closing stock is also concerned, the ITO worked on the basis of the fig ..... X X X X Extracts X X X X X X X X Extracts X X X X
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