Bhaktiprasad Nagori Timber & Plywood Pvt. Ltd. V. Asstt. C. I. T.

TAXAP/122/2001

AI Insights

The case involves Bhaktiprasad Nagori Timber & Plywood Pvt. Ltd., the appellant, challenging the judgment and order of the Income Tax Appellate Tribunal, Ahmedabad, which upheld an addition of Rs. 8,41,296 to the appellant's income for the assessment year 1990-91. The addition was based on the Assessing Officer's rejection of the appellant's books of accounts under section 145 of the Income Tax Act, 1961, and the estimation of gross profit at 15%, contrary to the appellant's declared profit of 7.97%. The Tribunal's decision was contested on grounds that it reversed the CIT(A)'s findings without cogent reasons, leading to the High Court's decision to remit the matter back to the Tribunal for a fresh assessment.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 688555 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 01-12-2014
• Assessment Year: misc
• Other Referred Cases: CIT, Guj. v. A. Raman & Co., Calcutta Discount Pvt. Ltd.
• Laws Referred To: Income Tax Act, 1965
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: MAUNA BHATT
• Assessee Lawyers: S N DIVATIA
• Keywords: Addition to income; Assessment Order; Books of Accounts; Gross Profit; Income Tax; Rejection of Books
• Section: 271(1)(c); 145; 44 AB

Judgement Text

"O/TAXAP/122/2001 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 122 of 2001 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ BHAKTIPRASAD NAGORI TIMBER & PLYWOOD PVT. LTD.....Appellant(s) Versus ASSTT. C. I. T.....Opponent(s) ================================================================ Appearance: MR SN DIVATIA, ADVOCATE for the Appellant(s) No. 1 MRS MAUNA M BHATT, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Page 1 of 10 O/TAXAP/122/2001 JUDGMENT Date : 01/12/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. By way of this appeal, the appellant has challenged the judgment and order dated 27.9.2000 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench ‘A’ in ITA No. 856/Ahd/94 for AY 1990-91. 2. While admitting this appeal, this Court has framed the following substantial question of law: “Whether on facts and circumstances of the case, conclusion reached by the Tribunal is contrary to the facts and evidence, and whether the finding recorded is perverse or not ?” 3. The facts of the present case are that the return of income is fled on 13.8.1991 declaring a loss of Rs. 16,546/-. Copies of audited accounts, balance-sheet and tax audit report under sec. 44 AB have been filed. After considering the material on record, the AO has passed the assessment order. 4. Learned advocate Mr. Divatia appearing for the appellant has contended that while passing the assessment order, the AO has observed in para-3 as under: Page 2 of 10 O/TAXAP/122/2001 JUDGMENT “3. Gross Profit: It is seen that the assessee had disclosed sales of 1,19,68,221/- and gross profit of Rs.9,53,937/- i.e.7.97% a against the sales of Rs.49,51,455/- and gross profit of Rs. 5,05,823/- i.e. 10.22%. The gross profit is low asper assessee’s own books of accounts. The assessee’s representative was asked to state as to why G.P. should not be taken at 15% as adopted in past. Shri Patel strongly objected to this and submitted that the purchases and sales have been fully vouched. Quantity details are maintained. It is also submitted that the sale of last year was for 17 months. Considering this the increase in sale is 3.42 times than last year. He also tried to analyse purchase, sales and G.P. in respect of selective purchases i.e. purchases from party sold and G.P. Earned is below 10%. The sale at lower G.P. is almost half of total sales. He also filed month-wise sales and purchases. There is some force in the submission of the assessee. However, it does not justify a big fall in the gross profit. The defects noticed in the past do exist. Monthwise sales and purchases in terms of quantity not furnished. Day- to-day stock register is not maintained. The assessee has not maintained day-to- day stock register itemwise and size- wise. However, the assessee has prepared a statement of quantity of goods. In this statement, certain defects are noticed as under: Item Sale Rate Purchase Page 3 of 10 O/TAXAP/122/2001 JUDGMENT Imported Rs.1,12,36,969 = Rs.2,547/-Rs. 1,34,15,548 = 2679 timber Cm. 4412 Rs. 5007 This indicates a gross loss of Rs. 132/- per cubic meter. It may be highlighted that the cost of timber is so increasing regularly that there cannot be any loss. In an imported timber the customers are ready to pay any higher price. The statement is doubtful. However, in a closing stock in column of the same item the assessee has shown value at Rs. 31,27,179/- for 595.294C.M. i.e. Rs. 5,253/- per C.M. At this rate, the sale should be of Rs. 2,31,76,236/-.If this is taken then the addition would be so much higher that also cannot be accepted as reasonable. Thus, it is clear that there is some mistake in this statement. However, from above, it is very clear that the imported timber is sold at a very high rate and the assessee has earned a very handsome profit. Looking to this position, I cannot accept the plea of the assessee regarding quantity but contrary to it the book results are to be rejected. In view of this and past records, gross profit is adopted at 15% and addition is made as under: Sales Rs. 1,19,68,221/-G.P. 15% estimated = Rs. 17,95,233 Gross profit disclosed …............ Rs. 9,53,937 Difference being less G.P. shown Rs. 8,41,296 The addition is Rs. 8,41,296/-. The assessee has furnished inacurate particulars of income, hence, penalty proceedings u/s. 271(1)(c) of the Act Page 4 of 10 O/TAXAP/122/2001 JUDGMENT are initiated. 4. The learned advocate Mr. Divatia has further contended that in paras-4 & 5, the CIT(A) has observed as under: “4. The learned CA Shri C.F.Patel strongly objected to the entire approach of the Assessing Officer. He submitted that the purchases and sales were fully vouched and quantity details were maintained. The GP of 10.22% on the sales of Rs. 49,51,455/- of AY 1989-90, he maintained was of 17 months. Now if the same has been annualised, then the GP increase would be of about 3.42 times more and when sales had increased to such an extent then the fall in rate was, according to him, understantable. As far as the maintenance of stock register itemwise, sizewise as desired by the department was concerned, the same was according to him not practicable. This is also correct in respect of the monthwise purchase and sales in terms of quantity as pointed out by the department was concerned. Again he pointed out that statement of certain bills to bills, purchases and sales transaction running into about 8 such instances was handed over to the Assessing Officer. This statement indicates that the GP runs from as low as of 0.65% in respect of the sale made by the appellant to the Woodcrafts products Ltd., to as high as that of 11.50% in respect of the sale made to the Western India Ltd. From this statement, the learned CA Shri Patel Page 5 of 10 O/TAXAP/122/2001 JUDGMENT maintained that it was not correct that uniformly the GP rate of 7.97% was being declared by the appellant in respect of all the sales of the entire period. As far as the observations of the learned Assessing Officer in respect of the imported timber were concerned, Shri Patel stated that they were not factually correct. The closing stock of the variety of imported timber of 595.294 C.M. At Rs. 31,27,179/- was concerned, he drew my attention to Schedule ‘05’ of the audited accounts dated 6.9.1990. This schedule gave the details of current assets at Sr. No. 0-1 and loans and advances at Sr. No. 02. The current assets consisted of three different items A,B & C and the first item at A was of closing stock under which in the said schedule it was clearly mentioned that it was taken at cost. Further he drew my attention to schedule 12 under the heading of notes on accounts. These notes consisted of 12 different items, the fourth of which was under the title of stock. The stock pointed out earlier consisted of two groups viz. Opening stock (A) and closing stock (B). Again the closing stock was composed of six different items the last (F) of which was of imported timber which tallied with reference to both the quantity as well as value as declared by the appellant which as used against it by the Assessing Officer. From both these schedules 05 and 12 respectively, he conclusively attempted to establish that the imported timber variety of 595.2949 CM at a (purchase) cost of Rs. 31,27,179/- was still lying with the appellant as a part of its closing stock. From these arguments, the learned Shri Patel further tried to prove that Page 6 of 10 O/TAXAP/122/2001 JUDGMENT the closing stock was being valued by the appellant at cost. Now if this cost price (Rs. 5,253/- per CM) was multiplied with the total sales of imported timber of 4412 CM, then no doubt the figure of Rs. 2,31,76,236/- could have been arrived at by the Assessing Officer, but he emphatically maintained that this would represent the sales (and consequently gross profit also) which an assessee could have earned but in fact did not earn. If this approach of the Assessing Officer was thus not correct, then the GP addition made by the Assessing Officer was also, he submitted; logically not correct inasmuch as for making this GP addition the Assessing Officer was obviously guided by this approach. He lastly pointed out that the GP of 15% was not declared by the appellant but was estimated by the department that too for AY 1987-88 when one of the main reasons (due to which this GP at 15% was adopted) was erasers and overwriting in the books of accounts which factor was singularly absent with the appellant for AY 1990-91.Due to all these reasons he urged for the deletion of this amount. 5. From the earlier discussion of the arguments of both the sides, it appears that firstly the result with reference to which the Assessing Officer himself held that it would not be acceptable (as reasonable) was arrived at if and when the actual sales of imported timber done by the appellant during the entire previous year was multiplied with the figure of value of closing stock as per unit. However, as schedules 05 and 12 have proved that this was the cost of closing stock and the same cannot be Page 7 of 10 O/TAXAP/122/2001 JUDGMENT made applicable to the actual sales because firstly, it would bring to an unreal situation wherein the appellant would have charged to tax with reference to an income upon which it could have earned a profit but in fact it did not earn it. As per the following observations of th Supreme Court in 67 ITR 17 – CIT, Guj. v. A. Raman & Co., it is not permissible:- “But the law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands; income which he could have, but has not earned, is not made taxable as income accrued to him.” This view is then reiterated in 91 ITR 9 (SC) in the Calcutta Discount Pvt. Ltd. Secondly, the G.P. of 15% for AY 1987-88 was for a year wherein there were erasers and overwriting which factors are totally absent in this year. Thirdly, the Assessing officer has stated several reasons in his favour like the cost of imported timber was increasing regularly for which the customers were ready to pay any high price, the statement of the appellant was doubtful, there was some mistake some wherein the appellant’s statement, it was clear (to the Assessing Officer) that the imported timber was sold at a very high price form which the appellants earns a very handsome profit etc. But all these statements made by the Assessing Officer are not supported by any evidence. The Assessing Officer has not given any instance in respect of any sale either of an imported timber Page 8 of 10 O/TAXAP/122/2001 JUDGMENT variety or of any local variety to the effect that the same was reported by the appellant was factually wrong. Due to all these reasons, the addition of Rs. 8,41,296/- cannot be sustained and it is hereby deleted.” 5. The learned advocate for the appellant has contended that while reversing the finding of CIT(A), the Tribunal has observed in para-6 as under: “6. Having heard both the sides, we have carefully gone through the orders of authorities below as well as the written submissions filed by both the sides. Considering the entirety of the facts and circumstances of the case, we are of the opinion that Assessing Officer is legally and factually correct in rejecting the books of accounts u/s. 145 of the IT Act, 1965. Admittedly, the burden is on the assessee to prove that timber imported through a specific bill and quantity is either shown as sold or lying in the closing stock. Before the Assessing officer assessee has not furnished monthwise sales and purchases in quantity. From the details furnished before us, learned department representative has also found various defect as enumerated in his letter reproduced by us hereinabove. Looking to the entirety of the facts and circumstances of the case, reasons recorded by the Assessing officer for making the addition of Rs. 8,41,296/- by rejecting the books of accounts u/s. 145, we are of the opinion that learned CIT(A) erred in deleting the addition. We, therefore, hereby set aside the Page 9 of 10 O/TAXAP/122/2001 JUDGMENT order of the learned CIT(A) and hold that addition of Rs. 8,41,296/- on the facts and circumstances of the case is correctly made by the Assessing officer. This ground of appeal is accordingly allowed. 6. Learned advocate for the respondent has tried to support the order passed by the Tribunal and submitted that the view taken by the Tribunal is just and proper. 7. We have heard the learned advocates appearing for the parties and considered the submissions. While considering the observation of the CIT(A) in para-4 and 5, it appears that the same are reversed by the Tribunal without assigning cogent reasons, and therefore, the order passed by the Tribunal is quashed and set and the matter is remitted back to the Tribunal to consider the matter afresh. It is made clear that we have not expressed anything on the merits of the matter and the Tribunal shall decide the matter afresh. This Tax Appeal is disposed of accordingly. (K.S.JHAVERI, J.) (K.J.THAKER, J) mandora Page 10 of 10 "