M/s National Export Industries, Dhoraji V. The ACIT, Circle-2,

CO 28/RJT/2006

• Counselvise Citation: [2011] 122 COUNSELVISE.COM (IT) 6273 (ITAT-RAJKOT)
• Duration Of Justice: 4 year(s) 11 month(s) 16 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 21-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 18-07-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 04-08-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DM RINDANI
• Assessee Lawyers: RN PRASAD
• Keywords: Gross profit estimation
• Section: 145; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT BEFORE SHRI A.L. GEHLOT (AM) AND SHRI N.R.S. GANESA N (JM) I.T.A. NO.294/RJT/2006 (ASSESSMENT YEAR 2004-05) ACIT, CIR.2 VS M/S NATIONAL EXPORT INDUSTRIES RAJKOT 8-B, NATIONAL HIGHWAY DHORAJI (RAJKOT) PAN : AACFN3303P (APPELLANT) (RESPONDENT) C.O. NO. 28/RJT/2006 (ARISING OUT OF I.T.A. NO.294/RJT/2006) (ASSESSMENT YEAR 2004-05) M/S NATIONAL EXPORT INDUTRIES VS ACIT, CIR.2 DHORAJI RAJKOT (CROSS OBJECTOR) (RESPONDENT) REVENUE BY : SHRI RN PRASAD RESPONDENT BY: SHRI DM RINDANI O R D E R PER N.R.S. GANESAN, JM THE REVENUE HAS FILED THE APPEAL AND THE ASSESSEE HAS FILED THE CROSS OBJECTION AGAINST THE ORDER OF THE CIT(A)-III, RAJK OT DATED 30-03-2006 PERTAINING TO ASSESSMENT YEAR 2004-05. THEREFORE, WE HEARD TH E APPEAL AND THE CROSS OBJECTION TOGETHER AND DISPOSE THEM OFF BY THIS COM MON ORDER. 2. THE FIRST GROUND OF APPEAL BY THE REVENUE IS WIT H REGARD TO RESTRICTION OF GROSS PROFIT ADDITION TO RS.8,70,916 INSTEAD OF RS. 75,11,716 MADE BY THE ASSESSING OFFICER. THE ASSESSEE HAS FILED THE CROS S OBJECTION AGAINST THE ORDER OF CIT(A) RESTRICTING THE GROSS PROFIT AT RS.8,70,9 16. 3. SHRI RN PRASAD, THE LD.DR SUBMITTED THAT THERE W AS A SURVEY ACTION AT THE BUSINESS PREMISES OF THE ASSESSEE ON 12-01-2004. D URING THE COURSE OF SURVEY ITA NO.294/RJT/2006 CO NO.28/RJT/2006 2 OPERATION, EXCESS STOCK TO THE EXTENT OF RS.60,50,1 77 WAS FOUND. ONE OF THE PARTNERS, SHRI JETHABHAI BABARIA ADMITTED THE EXCES S STOCK. THE LD.DR FURTHER SUBMITTED THAT THE ASSESSEE HAS DISCLOSED GROSS PRO FIT AT 1.80%. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD DISCLOSED GROSS PROFIT FOR THE ASSESSMENT YEAR 2003-04 AT 5.79% THE ASSESSING OFFICER HAS AL SO FOUND THAT FOR THE ASSESSMENT YEAR 2002-03 THE ASSESSEE HAD DISCLOSED THE GROSS PROFIT AT 7.77%. THEREFORE, THE ASSESSING OFFICER FOUND THAT THE GRO SS PROFIT DISCLOSED @1.80% FOR THE YEAR UNDER CONSIDERATION WAS VERY LOW. ACCORDI NGLY, THE ASSESSING OFFICER REJECTED THE BOOKS OF ACCOUNT U/S 145 OF THE INCOME -TAX ACT AND ESTIMATED THE GROSS PROFIT AT 3.30%. ACCORDING TO THE LD.DR, EVE N THOUGH THE ASSESSEE HAS DISCLOSED 7.77% GROSS PROFIT FOR THE ASSESSMENT YEA R 2002-03 THE ASSESSING OFFICER WAS FAIR ENOUGH IN ESTIMATING THE GROSS PRO FIT AT 3.30% FOR THE YEAR UNDER CONSIDERATION. HOWEVER, THE CITA), WITHOUT ANY BAS IS, HAS RESTRICTED THE SAME AT 2%. THEREFORE, ACCORDING TO THE LD.DR, THE RATE OF GROSS PROFIT OUGHT TO HAVE BEEN ESTIMATED AT 3.30% AS HAS BEEN DONE BY THE ASS ESSING OFFICER. 4. ON THE CONTRARY, SHRI DM RINDANI, THE LD.REPRESE NTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER HAS NOT POINTE D OUT ANY SPECIFIC DEFECT IN THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. HE HA S SIMPLY OBSERVED THAT HE WAS NOT SATISFIED WITH THE CORRECTNESS AND COMPLETE NESS OF THE ACCOUNTS. THE BASIS ON WHICH THE ASSESSING OFFICER COULD NOT SATI SFY WITH THE CORRECTNESS AND COMPLETENESS OF THE ACCOUNTS WAS NOT KNOWN. THEREF ORE, ACCORDING TO THE LD.REPRESENTATIVE FOR THE ASSESSEE, THE REJECTION O F BOOKS OF ACCOUNT IS NOT JUSTIFIED AT ALL. THEREFORE, THE CIT(A) OUGHT TO H AVE ACCEPTED THE BOOK RESULTS DECLARING GROSS PROFIT AT 1.80%. THE LD.REPRESENTA TIVE FOR THE ASSESSEE FURTHER SUBMITTED THAT FOR THE YEAR UNDER CONSIDERATION, TH E COST OF RAW MATERIAL WAS CONSIDERABLY INCREASED. HOWEVER, THE SALE PRICE WA S NOT INCREASED PROPORTIONATELY. THEREFORE, THE GROSS PROFIT RATE FOR THE YEAR UNDER CONSIDERATION DECLINED STEEPLY. THE ASSESSING OFFICER FOUND THAT THERE WAS SOME FORCE IN THE CONTENTION OF THE ASSESSEE THAT THE COST OF RAW MAT ERIAL WAS INCREASED AND THE SALE PRICE HAS NOT INCREASED PROPORTIONATELY, HOWEV ER, FOUND THAT HE WAS NOT ITA NO.294/RJT/2006 CO NO.28/RJT/2006 3 SATISFIED WITH THE DECLINE IN THE GROSS PROFIT RATE . ACCORDING TO THE LD.REPRESENTATIVE FOR THE ASSESSEE, THE ASSESSING O FFICER FOUND FAULT WITH THE FALL IN GROSS PROFIT ONLY ON THE BASIS OF COMPARING THE GRO SS PROFIT WITH THE EARLIER YEARS GROSS PROFIT. ACCORDING TO THE LD.REPRESENTATIVE F OR THE ASSESSEE THE GROSS PROFIT IS NOT A CONSTANT FIGURE; IT WOULD FLUCTUATE DEPEND ING UPON VARIOUS FACTORS. UNLESS THERE IS AN ERROR OR DEFECT IN THE BOOKS OF ACCOUNT, ACCORDING TO THE LD.REPRESENTATIVE FOR THE ASSESSEE, THE BOOK RESULT HAS TO BE ACCEPTED. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND HAVE ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS ADMITTEDLY DISCLOSED GROSS PROFIT AT 1 .80%. THE ASSESSING OFFICER FOUND THAT THE GROSS PROFIT DISCLOSED BY THE ASSESS EE IS VERY LOW. ACCORDINGLY HE ESTIMATED THE GROSS PROFIT AT 3.30%. FOR THE PURPO SE OF ESTIMATING THE PROFIT AT 3.30%, THE ASSESSING OFFICER HAS TAKEN INTO CONSIDE RATION THE GROSS PROFIT RATE OF M/S ATUL OIL CAKE INDUSTRIES AND M/S PATIDAR OIL CA KE INDUSTRIES. THE ASSESSING OFFICER HAS ALSO TAKEN INTO CONSIDERATION THE ASSES SEES OWN GROSS PROFIT RATE FOR THE EARLIER ASSESSMENT YEARS. THE QUESTION ARISES THUS FOR CONSIDERATION IS WHETHER THE ASSESSING OFFICER HAS REJECTED THE BOOK S OF ACCOUNT ON A JUSTIFIABLE GROUND? WE HAVE CAREFULLY GONE THROUGH THE PROVISI ONS OF SECTION 145 OF THE I.T. ACT, 1961. NO DOUBT, SECTION 145 EMPOWERS THE ASSE SSING OFFICER TO PASS AN ASSESSMENT U/S 144 OF THE INCOME-TAX ACT IN CASE HE IS NOT SATISFIED WITH THE CORRECTNESS AND COMPLETENESS OF THE BOOKS OF ACCOUN T MAINTAINED BY THE ASSESSEE OR THE METHOD OF ACCOUNTING AND THE ACCOUN TING STANDARD NOTIFIED BY THE GOVERNMENT HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE. IN THIS CASE, THE ASSESSING OFFICER OBSERVED THAT HE WAS NOT SATI SFIED WITH THE CORRECTNESS AND COMPLETENESS OF THE ACCOUNT OF THE ASSESSEE. THE O NLY REASON GIVEN BY THE ASSESSING OFFICER IS THAT THE ASSESSEE HAS DISCLOSE D A LOW GROSS PROFIT RATE. THEREFORE, HE IS NOT SATISFIED WITH THE CORRECTNESS AND COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE. ITA NO.294/RJT/2006 CO NO.28/RJT/2006 4 6. THE APEX COURT HAD AN OCCASION TO CONSIDER THIS ISSUE IN CIT VS PADAMCHAND RAMGOPAL 76 ITR 719 (SC). IN THE CASE B EFORE THE APEX COURT, THE ASSESSING OFFICER REJECTED THE BOOKS OF ACCOUNT . HOWEVER, HE DID NOT GIVE ANY REASON FOR NOT RELYING ON THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. ON APPEAL BY THE ASSESSEE, THE APPELLATE ASSISTANT COMMISSIONER FOUND THAT THERE ARE TWO MISTAKES IN THE ACCOUNTS OF THE ASSES SEE. ONE OF THE ITEMS OF INTEREST RECEIVED DURING THE ACCOUNTING YEAR WAS NO T BROUGHT IN THE BOOKS OF ACCOUNT AND THE OTHER RELATING TO THE RECEIPT OF IN COME DURING THAT YEAR WAS NOT CORRECT. THE APEX COURT FOUND THAT THE TWO MISTAKE S NOTICED BY THE APPELLATE ASSISTANT COMMISSIONER ARE INSIGNIFICANT MISTAKES, THEREFORE, THEY AFFORDED NO BASIS FOR REJECTING THE ACCOUNTS FOR OTHER ASSESSME NT YEARS. ACCORDINGLY, THE APEX COURT UPHELD THE ADDITION MADE BY THE ASSESSIN G OFFICER FOR THOSE ASSESSMENT YEARS FOR WHICH THE MISTAKES WERE FOUND IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. 7. IN THE CASE BEFORE US, THE ASSESSING OFFICER OBS ERVED IN THE ASSESSMENT ORDER THAT ON VERIFICATION OF VARIOUS ACCOUNTS AND COMPARING THEM WITH LAST YEARS SALES AND PURCHASES SHOWED THAT THE ASSESSEE INTENT IONALLY HAS REDUCED SALES PARTICULARS AND CERTAIN EXPENSES WERE INFLATED. FO R MAKING THIS OBSERVATION, THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD ANY SPE CIFIC SALE INSTANCE OR INSTANCE OF INFLATION OF EXPENSES INCURRED BY THE ASSESSEE. WHEN THE ASSESSING OFFICER CLAIMS THAT THE ASSESSEE HAS INTENTIONALLY REDUCED THE SALE PRICE, IT IS INCUMBENT UPON HIM TO BRING ON RECORD HOW THE ASSESSEE HAS SH OWN THE REDUCED SALE PRICE IN THE BOOKS OF ACCOUNT. SIMILARLY, WHEN THE ASSES SING OFFICER FOUND THAT THE ASSESSEE HAS INFLATED THE EXPENSES, HE HAS TO BRING ON RECORD HOW THE ASSESSEE HAS INFLATED THE EXPENSES. IN OUR OPINION, BRINGIN G THESE FACTS ON RECORD WOULD FACILITATE THE APPELLATE AUTHORITIES TO APPRECIATE HOW THE ASSESSEE WAS SUPPRESSING THE SALE PRICES AND INFLATING THE EXPEN SES IN THE BOOKS OF ACCOUNT. SINCE THE ASSESSING OFFICER HAS NOT MADE SUCH AN EX ERCISE, IN OUR OPINION, THE MATTER NEEDS TO BE RECONSIDERED BY THE ASSESSING OF FICER AND BROUGHT ON RECORD ITA NO.294/RJT/2006 CO NO.28/RJT/2006 5 HOW THE ASSESSEE HAS SHOWN THE REDUCED SALE PRICE A ND HAS INFLATED THE EXPENSE IN THE BOOKS OF ACCOUNT. 8. THE CIT(A) FOUND THAT WHILE COMPARING THE GROSS PROFIT RATE WITH SIMILARLY PLACED TRADERS, THE ASSESSING OFFICER HAS NOT GIVEN ANY OPPORTUNITY TO THE ASSESSEE. WHEN THE ASSESSING OFFICER HAS COMPARED THE GROSS PROFIT RATE WITH OTHER SIMILARLY PLACED TRADERS, HE HAS TO GIVE AN O PPORTUNITY TO THE ASSESSEE TO SHOW CAUSE WHY THE PROFIT RATIO OF THE OTHER TRADER S SHOULD NOT BE ADOPTED IN THE CASE OF THE PRESENT ASSESSEE. IN VIEW OF THE ABOVE , IN OUR OPINION, THE MATTER NEEDS TO BE RECONSIDERED BY THE ASSESSING OFFICER. ACCORDINGLY WE SET ASIDE THE ORDER OF THE LOWER AUTHORITY ON THE ISSUE OF GROSS PROFIT AND REMAND BACK THE ISSUE TO THE FILE OF THE ASSESSING OFFICER. THE AS SESSING OFFICER SHALL EXAMINE THE ISSUE AFRESH AND BRING ON RECORD THE DEFECTS FOUND IN THE BOOKS OF ACCOUNT AND AS TO HOW HE IS NOT SATISFIED WITH THE CORRECTNESS AND COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE AND THEREAFTER SHALL DECID E THE SAME AFRESH IN ACCORDANCE WITH LAW, AFTER GIVING REASONABLE OPPORT UNITY TO THE ASSESSEE. 9. THE NEXT GROUND OF APPEAL IS WITH REGARD TO THE DELETION OF ADDITION ON ACCOUNT OF EXCESS STOCK FOUND DURING THE COURSE OF SURVEY. NO DOUBT, ONE OF THE PARTNERS ADMITTED THAT THERE WAS EXCESS STOCK FOUND DURING THE COURSE OF SURVEY OPERATION. THE ASSESSEE HAS ACCOUNTED THE EXCESS ST OCK IN THE BOOKS OF ACCOUNT AFTER THE SURVEY. THE CIT(A) FOUND THAT ONCE THE EX CESS STOCK WAS ACCOUNTED IN THE BOOKS OF ACCOUNT AFTER THE SURVEY OPERATIONS, T HERE CANNOT BE ANY ADDITION WITH REGARD TO THE EXCESS STOCK. SINCE THE REJECTI ON OF BOOKS OF ACCOUNT WAS REMANDED BACK TO THE FILE OF THE ASSESSING OFFICER WHILE CONSIDERING THE FIRST GROUND OF APPEAL WITH A DIRECTION TO BRING ON RECOR D THE DEFECTS, IF ANY, IN THE ACCOUNTS, IN OUR OPINION, THE ISSUE OF ADDITION ON ACCOUNT OF EXCESS STOCK ALSO NEEDS TO BE RECONSIDERED BY THE ASSESSING OFFICER W HILE EXAMINING THE ISSUE OF REJECTION OF BOOKS OF ACCOUNT. THEREFORE, FOR THE SAKE OF CONSISTENCY AND FOR THE REASONS MENTIONED IN THE EARLIER PARAGRAPHS, WE SET ASIDE THE ORDER OF THE LOWER AUTHORITIES ON THIS ISSUE ALSO AND REMIT THE ISSUE BACK TO THE FILE OF THE ASSESSING ITA NO.294/RJT/2006 CO NO.28/RJT/2006 6 OFFICER. THE ASSESSING OFFICER SHALL REDECIDE THE ISSUE IN THE LIGHT OF ARGUMENT OF THE ASSESSEE AND IN ACCORDANCE WITH LAW AFTER AFFO RDING OPPORTUNITY OF HEARING TO THE ASSESSEE. 10. IN THE RESULT, THE APPEAL OF THE REVENUE AND TH E CROSS OBJECTION BY THE ASSESSEE ARE TREATED AS ALLOWED, FOR STATISTICAL PU RPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 21-07-2011. SD/- SD/- (A.L. GEHLOT) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER RAJKOT, DT : 21 ST JULY, 2011 PK/- COPY TO: 1. ASSESSEE 2. REVENUE 3. THE CIT(A)-III, RAJKOT 4. THE CIT-II, RAJKOT 5. THE DR, I.T.A.T., RAJKOT (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, RAJKOT