M/s Babu Jewellers, Sirhind V. ITO, Sirhind

ITA 126/CHANDI/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5368 (ITAT-CHANDIGARH)
• Duration Of Justice: 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 01-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K SAINI
• Assessee Lawyers: SUDHIR SEHGALASHOK GOYAL
• Keywords: Business income; Depreciation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI D.K.SRIVASTAVA, ACCOUNTANT MEMBER AND MS.SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.126 /CHD/2011 (ASSESSMENT YEAR : 2007-08) M/S BABU JEWELLERS, VS. THE INCOME-TAX OFFICER, FOUNTAIN CHOWK, WARD SIRHIND. SIRHIND. PAN: AACFB4187H (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI SUDHIR SEHGAL/ASHOK GOYAL RESPONDENT BY : SHRI N.K.SAINI, DR O R D E R PER SUSHMA CHOWLA, J.M, : THE APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORD ER OF THE COMMISSIONER OF INCOME-TAX(A), DATED 13.12.2010 REL ATING TO ASSESSMENT YEAR 2007-08 AGAINST THE ORDER PASSED UN DER SECTION 143(3) OF THE I.T. ACT, 1961. 2. DURING THE COURSE OF HEARING THE ASSESSEE HAD FI LED AN ADDITIONAL GROUND OF APPEAL IN RESPECT OF NON-ALLOW ING THE BENEFIT OF INCREASE IN THE VALUE OF OPENING STOCK PURSUANT TO THE ASSESSMENT ORDER PASSED U/S 143(3) OF THE ACT RELATING TO ASSE SSMENT YEAR 2006- 07. HOWEVER, THE ADDITIONAL GROUND OF APPEAL RAISE D BY THE ASSESSEE WAS NOT PRESSED AND HENCE THE SAME IS DISMISSED AS NOT PRESSED. 3. THE GROUND NOS. 1 & 2 RAISED BY THE ASSESSEE, BE ING GENERAL, ARE DISMISSED. 2 4. THE GROUND NOS. 3 TO 5 RAISED BY THE ASSESSEE AR E AGAINST THE REJECTION OF BOOKS OF ACCOUNT U/S 145(3) OF THE INC OME TAX ACT AND ADDITION OF RS. 8,69,814/- ON ACCOUNT OF ALLEGED LO W GROSS PROFITS. 5. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E WAS A PARTNERSHIP CONCERN ENGAGED IN THE BUSINESS OF SALE AND PURCHASE OF GOLD JEWELLERY. DURING THE YEAR UNDER CONSIDERATIO N, THE ASSESSEE HAD DECLARED GP RATE OF 12.63% ON TOTAL TURN OVER O F RS. 1.60 CRORE AS AGAINST GP RATE OF 18.61% DECLARED ON TOTAL TURN OVER OF RS. 90.75 LAKHS IN THE PRECEDING YEAR I.E. ASSESSMENT YEAR 20 06-07. THE ASSESSEE EXPLAINED THE SHORTFALL IN GP RATE TO BE O N ACCOUNT OF VARYING RATES OF GOLD ON DAY TO DAY BASIS AND CONTR OL OF THE GOLD RATES BY THE INTERNATIONAL MARKET. THE ASSESSEE CL AIMED TO HAVE MAINTAINED PROPER BOOKS OF ACCOUNT WHICH WERE AUDIT ED U/S 44AB OF THE ACT. THE ASSESSING OFFICER NOTED FROM THE PURC HASE BILLS AND THE DETAILS OF VALUATION OF STOCK THAT MOST PART OF THE JEWELLERY WAS PURCHASED DURING THE YEAR 2005. AS PER THE ASSESSI NG OFFICER THE RATES IN FINANCIAL YEAR 2005-06 OF GOLD HAD INCREAS ED YEAR BY YEAR AND THERE WAS NOT A SINGLE INSTANCE THAT THE RATE O F GOLD / JEWELLERY CAME DOWN. THE ASSESSING OFFICER NOTED FROM THE TR ADING ACCOUNT OF THE ASSESSEE UNDER GOLD JEWELLERY, THAT ASSESSEE HA D OPENING STOCK OF GOLD JEWELLERY MORE THE PURCHASES MADE DURING THE Y EAR AND OBSERVED THAT THE PURCHASES MADE IN THE EARLIER YEA RS WERE AT LOWER RATES AS COMPARED TO THE CURRENT YEAR. 6. SIMILARLY, THE ASSESSEE HAD SHOWN THE SALES LESS ER THAN AS COMPARED TO THE CLOSING STOCK AVAILABLE WITH THE AS SESSEE AT THE END OF THE YEAR. IN HIS REPLY DATED 7.12.2009, THE ASS ESSEE CLAIMED THAT IT WAS ENGAGED IN TRADING OF GOLD JEWELLERY WHERE R EADY MADE JEWELLERY WAS PURCHASED AND SOLD AS SUCH AS COULD B E VERIFIED FROM 3 THE PURCHASES AND SALE BILLS. THE ASSESSING OFFICE R NOTED THE ASSESSEE TO HAVE SHOWN INCOME FROM LABOUR CHARGES A T RS. 7,36,693/- AND CONCLUDED THAT THE ASSESSEE DURING THE YEAR HAD MANUFACTURED ABOUT 6139 GMS OF JEWELLERY HIMSELF WHEREAS IN ITS REPLY, THE ASSESSEE HAD STATED TO PURCHASED ONLY READYMADE JEW ELLERY. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE HAD SHOWN INCOME OF LABOUR CHARGES BUT HAD NOT SHOWN THE CORR ESPONDING SALES OF THE MANUFACTURED JEWELLERY AND HELD THE ASSESSEE TO HAVE MADE SALES OUT OF BOOKS OF ACCOUNT AMOUNTING TO RS. 51,9 3,594/- AS THE RATE OF GOLD DURING THE YEAR WAS BETWEEN RS. 850/- PER GM TO RS. 846/- PER GM. ANOTHER PLEA WAS RAISED BY THE ASSESS EE THAT VALUE OF THE OPENING STOCK BE INCREASED DURING THE YEAR AS T HE VALUE OF CLOSING STOCK RELATING TO ASSESSMENT YEAR 2006-07 W AS INCREASED BY RS. 3,38,346/-. THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE AS THE VALUE OF CLOSING STOCK IN THE PRECE DING YEAR WAS FOUND TO BE DEFECTIVE AND THE ADDITION WAS MADE ON ACCOUNT OF SUCH DEFECT. IN VIEW THEREOF THE ASSESSING OFFICER REJE CTED THE TRADING RESULTS SHOWN BY THE ASSESSEE AND ALSO THE BOOKS OF ACCOUNT WERE REJECTED AND APPLYING GP RATE OF 18% OF THE PREVIOU S YEAR, AN ADDITION OF RS. 8,59,814/- WAS MADE. THE CIT(A) UP HOLD THE REJECTION OF BOOKS OF ACCOUNT AND THE APPLICATION O F GP RATE OF 18%. THE ASSESSEE IS IN APPEAL AGAINST THE SAME. 7. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT ALL T HE PURCHASES AND SALES DURING THE YEAR WAS VOUCHED AND THE BOOKS OF ACCOUNT WERE TEST CHECKED AND EXAMINED AND NO SPECIFIC DISCREPAN CY WAS NOTED BY THE ASSESSING OFFICER. THE LD. AR FURTHER POINTED OUT THAT THE ASSESSEE WAS MAINTAINING CONSISTENT METHOD OF ACCOU NTING AND WAS ALSO PREPARING THE OPENING AND CLOSING LIST OF STOC K AND IN THE ABSENCE OF ANY DISCREPANCY BEING POINTED OUT EITHER BY THE ASSESSING 4 OFFICER OR CIT(A) IN THE VALUATION OF STOCK OF JEWE LLERY WHICH WAS PURCHASED IN DIFFERENT YEARS, THERE IS NO MERIT IN THE REJECTION OF BOOKS OF ACCOUNT. FURTHER, THE BOOKS OF ACCOUNT WE RE AUDITED AND MERELY BECAUSE THE GP RATE DECLARED DURING THE YEAR WAS LOWER THAN THE PRECEDING YEAR IS NO BASIS FOR REJECTION OF BOO K RESULTS. THE LD. AR FURTHER POINTED OUT THAT THE OBSERVATION OF THE ASSESSING OFFICER IN RESPECT OF THE QUANTUM OF OPENING STOCK VIS-A-VI S PURCHASES AND QUANTUM OF CLOSING STOCK VIS-A-VIS SALES HAS NO REL EVANCE FOR THE PURPOSE OF REJECTION OF BOOKS OF ACCOUNT. THE ASSE SSEE HAD MAINTAINED COMPLETE STOCK LIST OF ITEMS OF JEWELLER Y WHICH WERE PURCHASED IN THE YEARS 2005 & 2006 AND WAS AVAILABL E WITH THE ASSESSEE AND THE SAME BASIS OF VALUATION OF OPENING AND CLOSING STOCK HAS BEEN FOLLOWED BY THE ASSESSEE AND ACCEPTE D FROM YEAR TO YEAR. FURTHER, IN RESPECT OF THE LABOUR CHARGES, I T WAS POINTED OUT THAT SUCH CHARGES ARE CHARGED IN EACH AND EVERY SAL E BILL AND THE SAME ARE SHOWN AS PART OF ITS RECEIPTS. IN THE ABS ENCE OF ANY EVIDENCE FOUND OF PURCHASE / SALES BEING MADE OUTSI DE THE BOOKS OF ACCOUNT THERE WAS NO MERIT IN THE REJECTION OF ACCO UNTS. 8. FURTHER, IT WAS EXPLAINED THAT IF JEWELLERY WAS PURCHASED IN THE YEAR 2005-06, THE SAME IF NOT SOLD, IS LYING WITH T HE ASSESSEE IN ITS STOCK AND EVEN IF THERE IS INCREASE IN THE RATE OF GOLD, THE PROFIT ON THE SAME WOULD BE REFLECTED IN THE YEAR WHEN IT IS SOLD. FURTHER, RELIANCE WAS PLACED ON VARIOUS JUDICIAL PRONOUNCEME NTS WHICH SHALL BE REFERRED BY US IN THE PARAS HEREIN BELOW. THE L D. DR FOR THE REVENUE RELYING ON THE ORDER OF THE ASSESSING OFFIC ER AND CIT(A) POINTED OUT THAT THE ASSESSEE WAS MAINTAINING CASH BOOK AND LEDGER AND NO STOCK REGISTER WAS MAINTAINED BY THE ASSESSE E. THE LD. DR FURTHER POINTED OUT THAT THOUGH ASSESSEE CLAIMS TO HAVE MAINTAINED BILL WISE DETAILS OF THE STOCK BUT NO SUCH RECORD W AS PRODUCED. 5 FURTHER, IT WAS POINTED OUT BY THE LD. DR FOR THE R EVENUE THAT FROM THE PERUSAL OF THE ORDER AT PAGE 13, IT IS CLEAR TH AT THE ASSESSEE HAS NOT FURNISHED ANY MANUFACTURING DETAILS THOUGH AT P AGE 26 OF THE PAPER BOOK, THE ASSESSEE HAD FURNISHED THE MANUFACT URING, TRADING AND PROFIT AND LOSS ACCOUNT. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE ASSESSEE IS CARRYING ON THE BUSINESS OF SALE AN D PURCHASE OF GOLD AND GOLD JEWELLERY. DURING THE YEAR UNDER CONSIDER ATION, THE ASSESSEE HAD SHOWN TOTAL TURN OVER OF RS. 1,60,23,2 83/- ON WHICH GROSS PROFIT OF RS. 20,24,376/- WAS SHOWN REFLECTIN G A GP RATE OF 12.63%. DURING THE PRECEDING YEAR, THE ASSESSEE HA D SHOWN TOTAL TURN OVER OF RS. 90,75,686/- DECLARING A GP RATE OF 18.61% AND IN ASSESSMENT YEAR 2005-06, THE ASSESSEE HAD SHOWN TOT AL TURN OVER OF RS. 59.97 LAKHS AND GP RATE OF 34.08%. IN THE SUCC EEDING YEAR I.E. ASSESSMENT YEAR 2008-09, THE TOTAL TURN OVER DECLAR ED BY THE ASSESSEE WAS RS. 1.47 CRORES ON WHICH GP RATE OF 19.46% HAD BEEN DECLARED. FROM THE PERUSAL OF THE ABOVE SAID DETAILS, IT IS R EVEALED THAT THE ASSESSEE IS DECLARING DIFFERENT GP RATES FROM YEAR TO YEAR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN THE REASONS FOR FALL IN THE GP RATE KEEP ING IN VIEW THE RISING PRICE OF THE GOLD. THE ASSESSING OFFICER NO TED THAT SINCE 2005, THE PRICE OF GOLD HAD CONSISTENTLY GONE UP. THE ASSESSEE HAD FURNISHED ON RECORD THE MANUFACTURING, TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. THE PERU SAL OF THE SAME REVEALS THAT THE OPENING STOCK OF GOLD WAS 22537.55 5 GMS VALUED AT RS. 1.25 CRORES. THE ASSESSEE DURING THE YEAR HAD PURCHASED GOLD JEWELLERY WEIGHING 13343.41 GMS VALUED AT RS. 1.14 CRORES AGAINST WHICH THE ASSESSEE HAD SHOWN SALE OF GOLD JEWELLERY WEIGHING 15614.711 GMS VALUED AT RS. 1.15 CRORES. IN THE CLO SING STOCK, THE 6 ASSESSEE HAD SHOWN QUANTITY OF GOLD AT 21178.91 GMS VALUED AT RS. 1.45 CRORES. THE SAID GOLD WAS IN ADDITION TO THE DIAMOND JEWELLERY, SILVER AND GEM STONES DEALT IN BY THE ASSESSEE. TH E ASSESSEE HAD SHOWN MANUFACTURING EXPENSES ON ACCOUNT OF WAGES AN D SALARY, OTHER EXPENSES, PACKING ETC. THE ASSESSEE IN ADDITION TO THE GROSS PROFIT ON THE SALE PURCHASE OF ITEMS DEALT IN HAD ALSO SHO WN INCOME FORM JOB WORK AT RS. 1,70,868/- IN ITS PROFIT AND LOSS A CCOUNT. THE STOCK AS PER THE ASSESSEE IS VALUED AT COST OR MARKET PRI CE, WHICHEVER IS LESS. THE ASSESSEE IN ITS NOTES OF ACCOUNTS HAD DE CLARED THE VALUATION OF STOCK AT COST OR MARKET PRICE, WHICHEV ER IS LESS. THE BREAK UP OF THE VALUATION OF CLOSING STOCK IS PLACE D AT PAGES 30 & 31 OF THE PAPER BOOK, IN WHICH THE ASSESSEE HAS FURNIS HED THE DETAILS OF WEIGHT/QUANTITY, ITS VALUE, DATE OF PURCHASE, BILL NUMBERS AND THE NAME OF THE PARTY/SUPPLIERS. THE PERUSAL OF THE LIS T OF STOCK OF GOLD REFLECTS THAT THE STOCK SHOWN BY THE ASSESSEE WAS P URCHASED EITHER IN THE PRECEDING YEAR OR DURING THE CORRESPONDING YEAR . EVEN IF WE ACCEPT THE OBSERVATION OF THE ASSESSING OFFICER THA T THE RATE OF GOLD HAD INCREASED FORM 2005 TO 2007, BECAUSE THE ASSES SEE WAS DECLARING CERTAIN STOCK WHICH WAS PURCHASED IN 2005 AS PART OF ITS STOCK, DOES NOT WARRANT THE ADDITION ON ACCOUNT OF RISE IN THE PRICE OF GOLD. THE STOCK SHOWN BY THE ASSESSEE IS BEING VAL UED EITHER ON COST OR MARKET PRICE, WHICHEVER IS LESS AND IN CASE THE RE IS A RISE IN THE GOLD PRICE, THE STOCK WOULD CONTINUE TO BE VALUED A T COST AND WOULD NOT EFFECT THE CURRENT PROFITS SHOWN BY THE ASSESSE E. 10. THE NEXT OBJECTION OF THE ASSESSING OFFICER WAS THAT DESPITE THE INCREASE IN THE RATE OF GOLD FROM THE PRECEDING YEAR TO THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD SOWN LOWER GP RATE AT 12.63% AS AGAINST 18.61%. THE GP RATE OF THE BUSINESS R EFLECTS PROFITS MADE BY THE SAID CONCERN ON ITS TRANSACTIONS CONDUC TED DURING THE 7 YEAR. IN THE FACTS OF THE PRESENT CASE BEFORE US A S POINTED OUT BY THE ASSESSING OFFICER, OPENING STOCK OF THE ASSESSEE IN RESPECT OF THE GOLD CONTINUES TO BE HELD BY THE ASSESSEE AS ITS HO LDING OF CLOSING STOCK. IN CASE THE SAID CONDITION OF THE ASSESSIN G OFFICER IS ACCEPTED, THEN THE RISE IN THE PRICE OF GOLD WOULD NOT BE A CONSIDERATION FOR THE GROSS PROFIT EARNED BY THE AS SESSEE. THE GP RATE DECLARED BY THE ASSESSEE DURING THE YEAR IS ON ACCOUNT OF ITEMS OF GOLD JEWELLERY SOLD BY THE ASSESSEE PART OF WHIC H IN TURN WERE EITHER OUT OF ITS OPENING STOCK AND PARTLY OUT OF P URCHASES MADE DURING THE YEAR. MERELY BECAUSE THERE IS A FALL IN THE GP RATE, THERE IS NO MERIT IN THE REJECTION OF BOOKS OF ACCOUNT AN D ADOPTION OF GP RATE OTHER THAN DECLARED BY THE ASSESSEE, UNLESS SO METHING IS FOUND CONTRARY. ADMITTEDLY, IN THE CASE OF JEWELLERY BUS INESS IT IS DIFFICULT TO COMPREHEND THAT THERE IS FALL IN GP RATE BUT IF WE EVALUATE THE RESULTS SHOWN BY THE ASSESSEE OVER PERIOD OF YEARS, THE ASSESSEE HAS REFLECTED VARIANCE IN THE GP RATES IN THE DIFFERENT ASSESSMENT YEARS, WHICH IN TURN ESTABLISHES THE BONAFIDE OF THE ASSES SEE IN DECLARING TRUE STATE OF FACTS. WE FIND NO MERIT IN THE REJEC TION OF BOOKS OF ACCOUNT ON SURMISES AND CONJECTURES ESPECIALLY IN V IEW OF THE FACT THAT THE RECORDS WERE MAINTAINED BY THE ASSESSEE IN CLUDING THE DETAILS OF VALUATION OF STOCK SUBMITTED BY THE ASSE SSEE. FURTHER, THE ASSESSEE CLAIMS TO HAVE REGULARLY FILED ITS VAT RET URNS, WHICH HAVE BEEN ACCEPTED AND IS ALSO REGISTERED IN EXCISE AND TAXATION DEPARTMENT, PUNJAB. IN THE ABSENCE OF ANY EVIDENCE FOUND TO THE CONTRARY OR ANY DEFECT BEING POINTED OUT IN THE BOO KS OF ACCOUNT MAINTAINED BY THE ASSESSEE, THERE IS NO MERIT IN RE JECTING THE SAME AND APPLYING THE GP RATE OF THE PRECEDING YEAR FOR DETERMINING THE INCOME OF THE YEAR IN APPEAL. THE GP DECLARED IN A PARTICULAR YEAR CANNOT BE A GUIDING FACTOR FOR COMPUTING THE INCOME OF THE PRECEDING YEAR OR SUCCEEDING YEAR. 8 11. THE NEXT ISSUE RAISED BY THE ASSESSING OFFICER IS THE LABOUR CHARGES REFLECTED IN THE PROFIT AND LOSS ACCOUNT. T HE ASSESSEE HAD SHOWN LABOUR CHARGES OF RS. 7,36,693/- IN ITS PROF IT AND LOSS ACCOUNT AND THE ASSESSING OFFICER WAS OF THE VIEW T HAT AS THE ASSESSEE WAS ENGAGED IN THE TRADING OF GOLD AND JEW ELLERY AND THERE WAS NO RELEVANCE OF INCOME SHOWN FROM LABOUR CHARGE S. THE ASSESSING OFFICER WAS THUS OF THE VIEW THAT THE ASS ESSEE HAD ENGAGED IN THE MANUFACTURING OF GOLD JEWELLERY, WHICH WAS S OLD OUTSIDE THE BOOKS OF ACCOUNT FOR WHICH THE SAID LABOUR CHARGES WERE RECEIVED. THE EXPLANATION OF THE ASSESSEE IN THIS REGARD WAS THAT IN ADDITION TO THE SALES REFLECTED IN ITS SALE BILLS, THE ASSESSEE SOMETIMES WAS RECOVERING JOB CHARGES, WHICH WAS SHOWN AS PART OF ITS RECEIPTS IN THE TRADING ACCOUNT. THE ASSESSEE DURING THE YEAR HAD SHOWN SALE OF DIAMOND JEWELLERY AT RS. 12.87 LACS, GOLD JEWELLERY AT RS. 1.15 CRORES, SILVER JEWELLERY AT RS. 2.66 CRORES AND HAD AGAINST THE ABOVE SAID SALE CONSIDERATION HAD RECEIVED LABOUR CHARGES AT 7,36,693/-. THE SAID LABOUR CHARGES WERE DULY REFLECTED IN THE SALE BILLS ALONGWITH THE SALE OF JEWELLERY ITEMS AND WE FIND N O MERIT IN THE OBSERVATION OF THE ASSESSING OFFICER IN ESTIMATING THE VALUE OF GOLD JEWELLERY MANUFACTURED BY THE ASSESSEE AND SOLD OUT SIDE THE BOOKS OF ACCOUNT, IN RELATION TO THE LABOUR CHARGES RECEIVED BY THE ASSESSEE, IN THE ABSENCE OF ANY EVIDENCE IN THIS REGARD. THE RE IS NO JUSTIFICATION OF SUCH ADDITIONS BEING MADE ON MERE SURMISES AND CONJECTURES. 12. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CIT VS OM OVERSEAS [315 ITR 185 (P&H)] HAVE LAID DOWN THE PRO POSITION THAT IN THE ABSENCE OF ANY SPECIFIC DEFECT BEING POINTED OUT IN THE BOOKS OF ACCOUNT, THERE IS NO JUSTIFICATION FOR THE REJEC TION OF ACCOUNT AND 9 MAKING THE ADDITION BY APPLYING THE HIGHER GP RATE THAN THE ONE DECLARED BY THE ASSESSEE. 13. THE CHANDIGARH BENCH OF THE TRIBUNAL IN M/S RAJ & SAN DEEPS LTD VS ACIT IN ITA NO. 1853/CHANDI/1992 RELATING TO ASSESSMENT YEAR 1989-90 HAVE LAID DOWN THE PROPOSITION THAT IF REVENUE AUTHORITIES HAD BEEN SUCCESSFUL IN FINDING CHINKS I N THE ARMOUR AND REJECTING THE BOOKS OF ACCOUNT, THEN THEY WOULD HAV E BEEN JUSTIFIED IN LOOKING IN THE PAST HISTORY OF THE CASE AND THE COMPARABLE CASE TO ARRIVE AT A REASONABLE PERCENTAGE OF WASTAGE. THE BENCH FURTHER HELD THAT IN THE ABSENCE OF THE FIRST NECESSARY STEP BEING TA KEN, THE ENTIRE SUPER STRUCTURE BUILT BY THE REVENUE AUTHROTIES IS BUILT ON SANDY FOUNDATION AND IS BOUND TO COLLAPSE AND CRUSHED. 14. THE HON'BLE GAUHATI HIGH COURT IN THE CASE OF PYARELAL MITTAL V ACIT [291 ITR 214(GAU)] HELD THAT WHERE THE METHO D OF ACCOUNTING FOLLOWED WAS NOT FAULTY AND THERE WAS NO SUPPRESSION OF MATERIAL FACTS, THE AUTHORITIES CANNOT EMBARK UPON A SPECULATIVE ASSESSMENT OF NOTIONAL PROFITS. 15. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE P RESENT CASE AND IN THE ABSENCE OF ANY DEFECTS BEING POINTED OUT IN THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE MERELY BECAUSE T HERE WAS A FALL IN THE GP RATE AS COMPARED TO THE PRECEDING YEAR AN D THE NATURE OF THE TRADE BEING CARRIED ON BY THE ASSESSEE BEING SA LE AND PURCHASE OF GOLD JEWELLERY, WHERE THE RATES OF GOLD HAD INCREAS ED, WE FIND NO MERIT IN THE REJECTION OF BOOKS OF ACCOUNT AND THE ESTIMATION OF PROFITS. ACCORDINGLY, WE DIRECT THE ASSESSING OFFI CER TO ACCEPT THE TRADING RESULTS SHOWN BY THE ASSESSEE AND DELETE TH E ADDITION OF RS. 8,59,814/-. THE GROUND NOS. 3 TO 5 RAISED BY T HE ASSESSEE ARE 10 THUS ALLOWED. 16. THE GROUND NO.6 RAISED BY THE ASSESSEE IS AS UN DER :- 6. THAT THE CIT(A) HAS ALSO ERRED IN CONFIRMING THE ADDITION OF RS.3,78,200/- U/S 40A(2) OF THE INCOME-TAX ACT, 1961 17. THE BRIEF FACTS RELATING TO THE PRESENT ISSUE A RE THAT THE ASSESSEE IN ADDITION TO THE CARRYING ON ITS BUSINES S OF SALE AND PURCHASE OF GOLD AND GOLD JEWELLERY HAD ALSO CARRIE D ON THE BUSINESS OF SALE OF CLOTH. THE SAID BUSINESS WAS STARTED DU RING THE YEAR UNDER CONSIDERATION AND TOTAL PURCHASES OF RS. 21,87,993/ - WERE MADE BY THE ASSESSEE. THE SALES WERE MADE TO ITS SISTER CO NCERN M/S BABU DESIGN PVT LTD. AT THE SAME PRICE. THE ASSESSEE WA S SHOW CAUSED AS TO WHY GP RATE OF 15 TO20% ON THE SALE SHOULD NOT B E ADOPTED. THE ASSESSING OFFICER WAS OF THE VIEW THAT THOUGH THE A SSESSEE WAS CARRYING ON THE SAID BUSINESS ON DIFFERENT FLOOR BU T IT WAS REQUIRED TO MAINTAIN SEPARATE ACCOUNTS FOR THE SAID BUSINESS, W HICH WERE NOT DONE. THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 40A(2) OF THE ACT AND OBSERVED THAT INTEREST ON THE ADVANCES MADE TO THE SISTER CONCERN, BEING THE SALE CONSIDERATION OF THE CLOTH SOLD BY THE ASSESSEE WAS CHARGEABLE IN THE HANDS OF THE AS SESSEE. ACCORDINGLY, THE ADDITION OF RS. 3,28,200/- WAS MAD E BY APPLYING THE RATE OF 15% ON THE SALE VALUE OF CLOTH. THE CI T(A) UPHOLD THE ADDITION MADE BY THE ASSESSING OFFICER. THE ASSES SEE IS IN APPEAL AGAINST THE AFORESAID ADDITION. 18. ON THE PERUSAL OF THE RECORD, WE FIND THE ASSES SEE TO HAVE SOLD THE TOTAL CLOTH AT THE COST PRICE ITSELF WITHOUT AN Y ELEMENT OF PROFIT TO ITS SISTER CONCERN. THE CLAIM OF THE ASSESSEE I S THAT IT HAD STARTED THE SECOND LINE OF BUSINESS AND AS IT COULD NOT SUC CEED IN THE SAME, 11 THE TOTAL SALES WERE MADE AT THE SAME RATE AS OF PU RCHASE PRICE TO ITS SISTER CONCERN. THE SAID SALES WERE CLAIMED TO BE B ACKED BY PROPER BILLS. THE CONTENTION OF THE ASSESSEE IN THIS REGAR D ARE THAT NO LOSS WAS SUFFERED BY THE ASSESSEE AND FURTHER THERE WAS NO BASIS FOR ESTIMATING THE GROSS PROFIT RATE AT 15% TO THE TOTA L SALES AS THE GOODS WERE SOLD AT THE MARKET RATE. IN THE ALTERNATIVE, T HE ASSESSEE VIDE ITS WRITTEN SUBMISSIONS FILED BEFORE US HAS CLAIMED THA T IN THE WHOLE SALE BUSINESS OF SALE OF CLOTH, THE MARGIN WAS NOT MORE THAN 3% TO 5%. ADMITTEDLY, THE SAID ITEMS OF CLOTH WERE PURCH ASED BY THE ASSESSEE FOR A TOTAL CONSIDERATION OF RS. 21,87,993 /- AND SALES WERE MADE TO ITS SISTER CONCERN AT THE SAME PRICE. IT I S NOT APPREHENSIBLE THAT THE ASSESSEE HAS ENTERED INTO A NEW VENTURE AN D HAD MADE INVESTMENT IN THE PURCHASE OF STOCK WHICH WAS SOLD WITH NO MARGIN OF PROFIT TO ITS SISTER CONCERN. IN EACH LINE OF B USINESS SOME MARGIN OF PROFIT IS EARNED BY THE PERSON TRADING IN THE BU SINESS AND IN THE ABSENCE OF ANY SUCH PROFITS, WE ARE IN AGREEMENT WI TH THE ORDER OF THE AUTHORITIES BELOW THAT THE PROVISIONS OF SECTIO N 40A(2) ARE ATTRACTED IN THE CASE BECAUSE THE TRANSACTION WAS W ITH A SISTER CONCERN AND NOT AT THE MARKET RATE AS THE GOODS WER E SOLD AT ITS COST PRICE. HOWEVER, WE FIND THE RATE OF 15% APPLIED BY THE ASSESSING OFFICER TO BE EXCESSIVE AND DIRECT THE ASSESSING OF FICER TO APPLY NET PROFIT RATE OF 5% TO THE TRANSACTIONS TO DETERMINE THE ADDITIONAL INCOME IN THE HANDS OF THE ASSESSEE. THE GROUND NO. 6 RAISED BY THE ASSESSEE IS THUS PARTLY ALLOWED. 19. THE GROUND NO.7 RAISED BY THE ASSESSEE IS AS UN DER:- 7. THAT THE CIT(A) HAS ALSO ERRED IN CONFIRMING THE ADDITION OF 10% OF EXPENSES AS DEBITED TO THE PROFIT & LOSS ACCOUNT TO THE TUNE OF RS.2,17,680/- 12 20. THE ASSESSING OFFICER WHILE COMPUTING THE INCOM E IN THE HANDS OF THE ASSESSEE OBSERVED THAT AS THE BOOKS OF ACCOUNT HAVE HAD ALREADY BEEN REJECTED, THE EXPENSES IN THE PROFIT A ND LOSS ACCOUNT WERE FOUND TO BE NON GENUINE AND 10% OF THE TOTAL E XPENSES WERE DISALLOWED AMOUNTING TO RS. 2,17,690/- BY THE ASSES SING OFFICER. THE CIT(A) OBSERVED THAT THERE WAS AN ELEMENT OF PE RSONAL USE IN CAR, TELEPHONE EXPENSES, DEPRECIATION, ETC AND ALSO THERE WAS A LIKELIHOOD OF UNVOUCHED EXPENSES FOR TEA, FOOD, MIS C. EXPENSES ETC AND ACCORDINGLY THE ADDITION MADE BY THE ASSESSING OFFICER WAS HELD TO BE JUSTIFIED. 21. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE ASSESSEE HAS FURNISHED ON RECORD THE PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION UNDER WHICH VARIOUS EX PENSES HAVE BEEN CLAIMED ON ACCOUNT OF THE EXPENSES CLAIMED TO BE INCURRED FOR CARRYING ON OF THE BUSINESS OF THE ASSESSEE. THE A SSESSING OFFICER MADE AN ADHOC DISALLOWANCE OF THE 10% OF THE EXPENS ES SINCE THE BOOKS OF ACCOUNT WERE REJECTED IN THE CASE OF THE A SSESSEE. IN THE FIRST INSTANCE, THERE IS NO MERIT IN SUCH DISALLOWA NCE OF THE EXPENSES, IN CASES WHERE AN ESTIMATION OF INCOME IS MADE BY REJECTING THE BOOKS OF ACCOUNT. FURTHER, THE ASSESS ING OFFICER HAS FAILED TO POINT OUT THE EXACT EXPENSES WHICH ARE NO T VERIFIABLE. TAKING NOTE OF THE EXPENSES CLAIMED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION, WE FIND THAT MAJOR EXPENSES RE LATING TO SALARY, SALARY OF PARTNERS, DEPRECIATION, INTEREST, RENT AC COUNT AND ELECTRICITY WERE CLAIMED AND NO DISALLOWANCE IS WARRANTED OUT T O THE SAID EXPENSES UNLESS SOME ADVERSITY IS POINTED OUT IN TH E SAID EXPENDITURE. THE CIT(A) HAD UPHELD THE DISALLOWA NCE ON ACCOUNT OF PERSONAL USE BY THE PARTNERS OF THE ASSESSEE FIR M. ADMITTEDLY, THE 13 PRESENT ASSESSEE BEFORE US IS A PARTNERSHIP CONCERN AND PERSONAL USE BY THE PARTNERS OUT OF VARIOUS EXPENSES BEING CAR E XPENSES, TELEPHONE AND CAR DEPRECIATION ETC, CANNOT BE RULED OUT. WE HAVE UPHELD THE TRADING RESULTS SHOWN BY THE ASSESSEE IN ITS BUSINESS AND RESALE OF GOLD AND GOLD JEWELLERY AND ACCEPTED THE BOOK VERSION DECLARED BY THE ASSESSEE. ACCORDINGLY, WE DIRECT TH E ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO 1/10 TH OUT OF CAR EXPENSES, CAR DEPRECIATION AND TELEPHONE EXPENSES. NO DISALLOWAN CE IS WARRANTED IN PROBABILITY OF EXPENSES BEING UNVOUCHED UNLESS I T HAS BEEN ESTABLISHED THAT THE EXPENDITURE CLAIMED BY THE ASS ESSEE ARE UNVOUCHED. THE GROUND OF APPEAL RAISED BY THE ASSES SEE IS PARTLY ALLOWED. 22. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST DAY OF JUNE, 2011. SD/- SD/- (D.K.SRIVASTAVA) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 21 ST JUNE, 2011 RKK COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. TRUE COPY BY ORDER ASSISTANT REGISTRAR, ITAT, CHANDIGARH