Income Tax Officer, Ward -2, Chittoor V. M/s Bhagyalakshmi Granites, Chttoor District

ITA 1343/HYD/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7764 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 25-07-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITRA
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Rejection of books of accounts; Cost of acquisition; Tangible material
• Section: 143(3); 147; 145; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1343/HYD/2014 ASSESSMENT YEAR: 2004-05 INCOME-TAX OFFICER, WARD 2, CHITTOOR M/S BHAGYALAKSHMI GRANITES, MUTHUKURUPALLI VILLAGE, CHITTOR DIST. PAN AAFFB3472J (APPELLANT) (RESPONDENT) C.O. NO. 61/HYD/2014 (IN ITA NO. 1343/HYD/2014 ASSESSMENT YEAR: 2004-05) M/S BHAGYALAKSHMI GRANITES, MUTHUKURUPALLI VILLAGE, CHITTOR DIST. PAN AAFFB3472J INCOME-TAX OFFICER, WARD 2, CHITTOOR (CROSS OBJECTOR) (RESPONDENT) REVENUE BY SHRI RAJAT MITRA ASSESSEE BY SHRI K.A. SAIPRASAD DATE OF HEARING 03-12-2014 DATE OF PRONOUNCEMENT 10-12-2014 O R D E R PER SAKTIJIT DEY, J.M.: THE AFORESAID APPEAL OF THE DEPARTMENT AND C.O. BY ASSESSEE ARE DIRECTED AGAINST ORDER DATED 28/04/2014 OF LD. CIT(A), GUNTUR, PERTAINING TO AY 2004-05. 2 ITA NO. 1343/HYD/2014 M/S BHAGYALAKSHMI GRANITES 2. WHILE THE DEPARTMENT IN ITS APPEAL IS AGGRIEVED BY THE DECISION OF LD. CIT(A) IN RESTRICTING THE ADDITION TO RS. 3. 00 LAKHS AS AGAINST RS. 18,30,818 MADE BY AO, ASSESSEE IN ITS C.O. HAS CHALLENGED VALIDITY OF THE PROCEEDING INITIATED U/S 147 OF THE ACT AS WELL AS QUANTUM OF ADDITION SUSTAINED BY LD. CIT(A). 3. BRIEFLY THE FACTS ARE, ASSESSEE IS A PARTNERSHIP FIRM. FOR THE AY IN DISPUTE, ASSESSEE FILED ITS RETURN OF INCOME ON 01/11/2014 DECLARING TOTAL INCOME OF RS. 1,50,640. ASSESSMENT IN CASE OF ASSESSEE WAS COMPLETED U/S 143(3) OF THE ACT VIDE O RDER DATED 17/07/2006. WHILE COMPLETING ASSESSMENT, AO NOTICED THAT THE GROSS PROFIT (GP) DECLARED BY ASSESSEE WORKS OUT TO 11.69 %, AO BEING OF THE VIEW THAT GP SHOWN BY ASSESSEE IS TOO LOW WHEN COMPARED THE GP SHOWN IN SIMILAR LINE OF BUSINESS, FIXED THE GP RATE AT 15%, WHICH ENHANCED THE GP TO RS. 10,02,347. ACCORDINGLY, THE DIFFERENTIAL AMOUNT OF RS. 12,21,196 WAS ADDED TO THE INCOME OF ASSESSEE. AGAINST THE ASSESSMENT ORDER, ASSESSEE DID NOT PREF ER ANY APPEAL BEFORE THE FIRST APPELLATE AUTHORITY AND SUCH ASSES SMENT ORDER BECAME FINAL. WHEN THE MATTER STOOD LIKE THIS, AO I NITIATED ACTION U/S 148 BY ISSUING A NOTICE U/S 148 TO ASSESSEE ON 18/1 0/2010. AO, AS STATED IN THE ASSESSMENT ORDER, FOUND THAT ASSESSEE HAD ADMITTED RS. 1,44,540 AND RS. 66,82,316 TOWARDS CLOSING STOCK OF 2628 SQFT. OF FINISHED GRANITE SLAB AND SALES OF 1,34,595 SQFT. O F FINISHED GRANITE SLAB RESPECTIVELY. ACCORDING TO AO, ASSESSEE THUS, HAS SHOWN VALUE OF GRANITE AT RS. 49.64 PER SQFT. WHEREAS PER SQFT . VALUE OF CLOSING STOCK WAS SHOWN AT RS. 55 PER SQFT. HE FURTHER OBSE RVED THAT IN THE AUDIT REPORT IT IS MENTIONED THAT FINISHED GOODS AR E VALUED AT LOWER OF COST OR REALIZABLE VALUE. AO, THEREFORE, CONCLUDED THAT THE CORRECT SALE VALUE IS DEFINITELY MORE THAN RS. 55/- PER SQF T. AO OPINED THAT BY CONSIDERING THE COST PRICE AT RS. 55 PER SQFT., COR RECT SALE VALUE MUST BE RS. 63.25 PER SQFT. (RS. 55+ 8.25 BEING GP @ 15 %). ACCORDINGLY, AO WORKED OUT THE SALE VALUE FOR 1,34,595 SFT. OF G RANITE AT RS. 85,13,134. AS ASSESSEE HAS SHOWN THE SALES AT RS. 6 6,82,316, 3 ITA NO. 1343/HYD/2014 M/S BHAGYALAKSHMI GRANITES SHORTFALL OF RS. 18,30,818 WAS TREATED AS SALE SUPP RESSION BY ASSESSEE AND ADDED TO THE INCOME OF THE IMPUGNED AY . BEING AGGRIEVED OF THE ASSESSMENT ORDER SO PASSED, ASSESS EE PREFERRED APPEAL BEFORE LD. CIT(A) CHALLENGING THE ADDITION M ADE. 4. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE IN THE LIGHT OF FACTS AND MATERIALS BROUGHT ON RECORD, THO UGH, WAS OF THE VIEW THAT NO EVIDENCE HAS BEEN BROUGHT ON RECORD, WHICH SUGGEST THE SUPPRESSION OF SALES, BUT, ULTIMATELY, HE UPHELD TH E REJECTION OF BOOKS OF ACCOUNT AND ESTIMATION OF SALES MADE BY AO, OF C OURSE, HE REDUCED THE QUANTUM OF ADDITION TO RS. 3 LAKHS. THE FINDING OF LD. CIT(A) IS EXTRACTED HEREUNDER FOR READY REFERENCE: 5. I HAVE PERUSED THE ASSESSMENT ORDER AS WELL AS THE SUBMISSIONS MADE. THE ASSESSING OFFICER HAS BASED THE ASSESSMEN T ON THE FACT THAT THE AVERAGE VALUE OF THE CLOSING STOCK WORKS OUT TO RS.55/- PER SQ.FOOT AND HAS HENCE HELD THAT THIS IS THE COST PRICE, AND THE SALE PRICE SHALL BE COST + 15%. BASED ON THE SAME, THE A.O. HAS WORKED OUT THE TOTAL SALE PRICE AT RS.85,13,134/- IN RESPECT OF 1,34,595 SQ.F EET OF GRANITE SOLD DURING THE YEAR. THE ASSESSING OFFICER HAS, IN THE ORDER, NOT REFERRED TO THE REJECTION OF BOOKS OF ACCOUNTS OR THE METHOD OF ACCOUNTING BEING FOLLOWED BY THE APPELLANT. HOWEVER, THE A.O. HAS ME NTIONED THAT THE APPELLANT FAILED TO PRODUCE STOCK REGISTER DESPITE BEING SPECIFICALLY ASKED TO DO SO. VALUATION OF OPENING AND CLOSING STOCK IS AN IMPORTANT ASPECT OF ASCERTAINMENT OF TRUE PROFIT AND IMPROPER VALUAT ION OF STOCK CAN BE A GROUND FOR REJECTION OF BOOKS - MURUGAPPA CHETTIAR VS. CIT (1986) 174 ITR 245 (KER.). MOREOVER, IN THE CASE OF J K CHEMICALS VS. CIT (1966) 62 ITR 34 (BOM.), IT HAS BEEN HELD THAT THE PRESENCE O R ABSENCE OF A STOCK REGISTER IS ONE OF THE RELEVANT ASPECTS TO BE TAKEN INTO ACCOUNT IN CONSIDERING THE ACCEPTABILITY OF THE BOOK RESULTS A ND IN CERTAIN BUSINESSES, ABSENCE OF A STOCK REGISTER CAN BE A MA TERIAL GROUND FOR REJECTION OF BOOKS. HENCE, THE ASSESSING OFFICER IS WITHIN HIS POWERS IN REJECTING THE BOOK RESULTS. HOWEVER, SECTION 145 EN JOINS A DUTY ON THE ASSESSING OFFICER TO DETERMINE THE METHOD OF ACCOUN TING REGULARLY EMPLOYED BY AN ASSESSEE AND TO ASSESS THE INCOME, P ROFITS AND GAINS IN ACCORDANCE WITH SUCH METHOD OF ACCOUNTING. A DEPART URE IS PERMISSIBLE IN CASES COVERED BY THE FIRST PROVISO TO SUB-SECTIO N (1) AND SUB-SECTION (2) OF SECTION 145. HOWEVER, BEFORE REJECTION OF TH E ACCOUNTS, THE ASSESSING OFFICER MUST RECORD A CLEAR FINDING THAT THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS SUCH THAT TH E CORRECT PROFITS CANNOT BE DEDUCED THERE FROM. MOREOVER, WHILE EXERC ISING THE POWER TO REJECT THE BOOKS OF ACCOUNTS, THE ASSESSING OFFICER SHOULD ADOPT A 4 ITA NO. 1343/HYD/2014 M/S BHAGYALAKSHMI GRANITES REASONABLE METHOD TO DETERMINE WHAT IS THE TRUE PRO FIT OF THE BUSINESS, IN HIS OPINION. THE ASSESSING OFFICER CANNOT BE ARBITR ARY OR UNREASONABLE IN DETERMINING INCOME. IT IS NATURAL IN THE COURSE OF ANY BUSINESS THAT THE PURCHASE COST OF TRADED GOODS WILL VARY DURING THE COURSE OF THE ACCOUNTING PERIOD. TO DETERMINE THE CORRECT SALES B ASED ON THE VALUATION OF CLOSING STOCK IS, IN MY OPINION, WITHOUT ANY BAS IS AND TOTALLY ARBITRARY. AS POINTED OUT BY THE APPELLANT, NO EVIDENCE HAS BE EN BROUGHT ON RECORD WHICH WOULD SUGGEST SUPPRESSION OF SALES AND FURTHE R, IT HAS BEEN STATED BY THE APPELLANT THAT THE CLOSING STOCK WAS SUPERIO R IN QUALITY AND WAS HENCE VALUED HIGHER THAN THE AVERAGE PURCHASE OR SA LE PRICE DURING THE YEAR. 6. THUS, IN THE ABSENCE OF THE STOCK REGISTER, THE ASSESSING OFFICERS ACTION IN REJECTING THE BOOK RESULTS IS BEING UPHEL D. HOWEVER, HIS DETERMINATION OF AGGREGATE SALES DURING THE YEAR I S FOUND TO BE ARBITRARY AND ERRONEOUS AND THE ADDITION OF RS. 18,30,818 IS BEING RESTRICTED TO A LUMP SUM ADDITION OF RS. 3,00,000/-. 5. THE LD. DR SUBMITTED BEFORE US THAT WHEN LD. CIT (A) HAS UPHELD THE ACTION OF AO IN REJECTING THE BOOK RESULTS AND ESTIMATING THE SALES, THERE IS NO REASON WHY HE COULD HAVE RESTRIC TED THE ADDITION TO RS. 3 LAKHS. 6. THE LD. AR, ON THE OTHER HAND, SUBMITTED BEFORE US THAT THERE IS NO MATERIAL BEFORE AO TO SHOW THAT ASSESSEE HAS SUP PRESSED ITS SALES. THEREFORE, ONLY BY ASSUMPTIONS AND PRESUMPTI ONS, AO CANNOT INFER SUPPRESSION OF SALES AND THEREBY REJECT THE B OOKS OF ACCOUNT. LD. AR REFERRING TO THE MANUFACTURING AND TRADING A CCOUNT SUBMITTED ALONG WITH RETURN CONTENDED THAT AS ASSESSEE HAS PR ODUCED ALL MATERIALS RELATING TO SALES AND PURCHASES, ONLY BEC AUSE ASSESSEE HAS FAILED TO PRODUCE STOCK REGISTER, AO CANNOT ARBITRA RILY COME TO A CONCLUSION THAT ASSESSEE HAS SUPPRESSED THE SALES. LD. AR SUBMITTED THAT WHEN THE LD. CIT(A) WAS ALSO CONVINCED THAT TH ERE IS NO MATERIAL BEFORE AO TO SUGGEST SALE SUPPRESSION, HE WAS NOT J USTIFIED IN SUSTAINING ADDITION OF RS. 3 LAKHS ON PRESUMPTIONS AND SURMISES. FURTHER, CHALLENGING THE VALIDITY OF PROCEEDING INI TIATED U/S 147, LD. AR SUBMITTED AS IN ASSESSEES CASE ORIGINAL ASSESSMENT WAS COMPLETED U/S 143(3), REOPENING COULD NOT BE MADE U/S 147 AFT ER EXPIRY OF FOUR 5 ITA NO. 1343/HYD/2014 M/S BHAGYALAKSHMI GRANITES YEARS FROM THE RELEVANT ASSESSMENT YEAR WITHOUT EST ABLISHING THE FACT THAT ESCAPEMENT OF INCOME WAS DUE TO FAILURE ON THE PART OF ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS. HE SUBMITTED, PERUSAL OF ASSESSMENT ORDER WILL MAKE IT CLEAR THAT THERE ARE NO TANGIBLE MATERIAL BEFORE AO TO FORM THE BELIEF THAT INCOME HAS ESCAPE D ASSESSMENT. ON THE BASIS OF MATERIALS SUBMITTED BY ASSESSEE ALO NG WITH RETURN OF INCOME CONSIDERED IN THE ORIGINAL ASSESSMENT, THE A O HAS REOPENED THE ASSESSMENT. THUS, IT WAS SUBMITTED, HE PROCEEDI NG U/S 147 BEING INVALID, ASSESSMENT ORDER SHOULD BE QUASHED. 7. HAVING HEARD THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF REVENU E AUTHORITIES, WE ARE OF THE VIEW THAT NO ADDITION CAN BE MADE IN THE INSTANT CASE ON ACCOUNT OF SALES SUPPRESSION. AS IS EVIDENT FROM TH E ASSESSMENT ORDER AS WELL AS THE ORDER OF FIRST APPELLATE AUTHO RITY, THERE IS ABSOLUTELY NO BASIS FOR AO TO FORM AN OPINION THAT ASSESSEE HAS SUPPRESSED SALES. ONLY BECAUSE ASSESSEE COULD NOT P RODUCE STOCK REGISTER, FOR WHATEVER MAY BE THE REASON, SALES SU PPRESSION CANNOT BE INFERRED BY ADOPTING THE VALUE OF STOCK AT RS. 5 5 PER SFT. WHEN ABSOLUTELY NO DEFECT OR DEFICIENCY WAS FOUND IN THE BOOKS OF ACOCUNT. MOREOVER, ON PERUSAL OF THE OBSERVATIONS MADE BY LD . CIT(A) EXTRACTED HEREINABOVE, IT IS EVIDENT THAT LD. CIT(A ) ON THE BASIS OF FACTS AND MATERIALS ON RECORD WAS CONVINCED THAT TH ERE IS NO BASIS FOR AO TO PRESUME SALES SUPPRESSION. THAT BEING THE CAS E, IT WOULD HAVE BEEN FAIR AND REASONABLE ON THE PART OF LD. CIT(A) TO DELETE THE ADDITION MADE BY AO ENTIRELY INSTEAD OF SUSTAINING THE AMOUNT OF RS. 3 LAKHS. THERE BEING NO EVIDENCE ON RECORD BROUGHT BY AO TO EVEN REMOTELY ESTABLISHED THE FACT THAT ASSESSEE HAS IND ULGED IN SALES SUPPRESSION, EVEN PART OF THE ADDITION MADE BY AO C ANNOT BE SUSTAINED. IN THE AFORESAID VIEW OF THE MATTER, WE DELETE THE ADDITION OF RS. 3 LAKHS SUSTAINED BY LD. CIT(A). 6 ITA NO. 1343/HYD/2014 M/S BHAGYALAKSHMI GRANITES 8. AS FAR AS VALIDITY OF PROCEEDING U/S 147 IS CONC ERNED, AFTER CONSIDERING THE SUBMISSIONS OF THE PARTIES AND EXAM INING THE FACTS AND MATERIALS ON RECORD WE FOUND, NEITHER IN THE GR OUNDS RAISED NOR IN THE SUBMISSIONS MADE BEFORE LD. CIT(A), ASSESSEE HA S CHALLENGED THE VALIDITY OF PROCEEDING INITIATED U/S 147. HENCE, LD . CIT(A) HAS NOT DEALT WITH THIS ISSUE. WE ALSO CANNOT DECIDE THE IS SUE INDEPENDENTLY AT THIS STAGE IN ABSENCE OF RELEVANT FACTS SUCH AS REASONS RECORDED BY AO, APPROVAL BY SANCTIONING AUTHORITY, ETC. MOREOVE R, AS WE HAVE DECIDED THE ISSUE ON MERIT BY DELETING THE ADDITION SUSTAINED BY LD. CIT(A), GROUND RAISED BY ASSESSEE IN C.O. ON THE VA LIDITY OF PROCEEDING INITIATED U/S 147 IS OF MERE ACADEMIC I NTEREST, HENCE, NOT REQUIRED TO BE ADJUDICATED. 9. IN THE RESULT, DEPARTMENTS APPEAL IS DISMISSED AND C.O. OF ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 10/12/2014. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 10 TH DECEMBER, 2014 KV COPY TO:- 1) ITO, WARD 2, GANDHI ROAD, CHITTOOR 517 001. HYDERABAD 2) M/S BHAGYALAKSHMI GRANITES, MUTHUKURPALLI (V), 189-KOTHAPALLI(P), GUDIPALA (M), CHITTOR (D) 3) CIT(A), GUNTUR 4)CIT, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.