ACIT, Varanasi V. Smt. Nila Devi Prop. M/s Superior Carpet Palace, Bhadohi

ITA 168/ALLD/2011

• Counselvise Citation: 16820714 RSA 2011
• Duration Of Justice: 1 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 02-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: A ASSESSMENT YEARS; PD L ITA NOS
• Keywords: Capital asset converted into stock in trade; Search and seizure; Loose papers; Corroborative evidences
• Section: 143(3); 153A; 145; 27; 56; 132; 28; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ALLAHABAD BENCH, ALLAHABAD BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A.L. GEHLOT, ACCOUNTANT MEMBER ITA NOS.167, 168 & 169/A/2011 ASSESSMENT YEARS: 2005-06, 2006-07 & 2007-08 RESPEC TIVELY ASSTT. COMMISSIONER OF INCOME TAX, VS. SMT. NILA DE VI, CENTRAL CIRCLE, VARANASI. PROP. M/S. SUPERIOR CA RPET PALACE, RAJPURA, BHADOHI. (PAN : ABYPD 3671 L). ITA NOS.190, 191, 192, 193 & 194/A/2011 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-0 9 & 2009-10 RESPECTIVELY ASSTT. COMMISSIONER OF INCOME TAX, VS. M/S CARPET P ALACE, CENTRAL CIRCLE, VARANASI. RAJPURA, BHADOHI. (PAN : AABFC 9781 D). (APPELLANT) (RESPONDENTS) APPELLANT BY : SHRI SANDEEP CHAUHAN, CIT D.R. RESPONDENTS BY : SHRI BHUPENDRA SHAH, C.A. & SHRI A.K. THUKRAL, C.A. DATE OF HEARING : 06.11.2012 DATE OF PRONOUNCEMENT : 10.12.2012 ORDER PER A.L. GEHLOT, ACCOUNTANT MEMBER: THESE ARE APPEALS FILED BY THE REVENUE AGAINST TWO DIFFERENT ASSESSEES. ITA NOS.167, 168 & 169/A/2011 HAVE BEEN FILED AGAINST T HREE SEPARATE ORDERS, ALL DATED 23.06.2011, PASSED BY THE LD. CIT(A), VARANASI FOR THE ASSESSMENT YEARS 2005-06, 2006-07 & 2007-08 RESPECTIVELY AND ITA NOS.190, 191 , 192, 193 & 194/A/2011 ITA NOS.167, 168, 169 & 190 TO 194/A/2011 2 HAVE BEEN FILED AGAINST FIVE SEPARATE ORDERS, ALL D ATED 23.06.2011, PASSED BY THE LD. CIT(A), VARANASI FOR THE ASSESSMENT YEARS 2005-06 T O 2009-10 RESPECTIVELY. 2. COMMON GROUNDS RAISED IN THESE APPEALS BASED ON IDENTICAL SET OF FACTS EXCEPT FOR AMOUNT OF ADDITIONS. FOR KNOWING EXACT GROUNDS OF APPEAL, WE ARE REPRODUCING GROUNDS RAISED BY THE REVENUE IN ITS AP PEAL FOR A.Y. 2005-06 IN ITA NO.167/A/2011 AS UNDER :- 1. THE LD. CIT(A) WAS NOT JUSTIFIED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.19,34,764/- MADE UNDER THE HEAD EXTRA PROFIT ADDITION IN GROSS PROFIT, WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE WAS NOT MAINTAINING REGULAR BOOKS OF ACCOUNT IN USU AL COURSE OF BUSINESS, SPECIALLY THE STOCK REGISTER. 2. THE LD. CIT(A) WAS NOT JUSTIFIED IN LAW AND ON F ACTS IN DELETING THE ADDITION OF RS.19,34,764/- MADE UNDER THE HEAD EXTRA PROFIT ADDITION IN GROSS PROFIT, WITHOUT APPRECIATING THE FACT THAT THE A.O. HAS SPECIFICALLY REJECTED THE ASSESSEES ACCOUNTS I N TERMS OF PROVISIONS OF SECTION 145(3) OF THE ACT, AS THE ACCOUNTS WERE NOT FOUND TO BE CORRECT AND RELIABLE. 3. THE LD. CIT(A) WAS NOT JUSTIFIED IN LAW AND ON F ACT IN DELETING THE ADDITION OF RS.19,34,764/- MADE UNDER THE HEAD EXTRA PROFIT ADDITION IN GROSS PROFIT, WITHOUT APPRECIATING THE FACT THAT AO WAS ENTITLED TO MAKE AN ASSESSMENT TO THE BEST OF HIS J UDGEMENT IN A CASE WHERE THE BOOKS OF ACCOUNT HAVE BEEN REJECTED IN TE RMS OF SECTION 145(3) OF THE I.T. ACT. 4. THE LD. CIT(A) WAS NOT JUSTIFIED IN LAW AND ON F ACT IN DELETING THE ADDITION OF RS.19,34,764/- MADE UNDER THE HEAD EXTRA PROFIT ADDITION IN GROSS PROFIT, WITHOUT APPRECIATING THE FACT THAT THE ESTIMATION OF EXTRA PROFIT @ 15% ON GROSS PROFIT OV ER AND ABOVE PROFIT SHOWN BY THE ASSESSEE WAS ON THE BASIS OF SPECIFIC FINDING RECORDED BY HIM THAT IN ABSENCE OF STOCK REGISTER THE POSITION OF STOCK CONSUMED AND PRODUCTION YIELDED COULD NOT BE CORRELATED. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 3 5. THE ORDER OF THE LD. CIT(A) DESERVES TO BE VACAT ED AND THE ASSESSMENT ORDER PASSED BY THE A.O. BE RESTORED. 6. THAT THE APPELLANT CRAVES LEAVE TO AMEND ANY ONE OR MORE OF THE GROUNDS OF THE APPEAL AS STATED ABOVE AS AND WH EN NEED FOR DOING SO MAY ARISE. 3. THE EFFECTIVE GROUND RAISED BY THE REVENUE IN IT S APPEALS PERTAINS TO G.P. ADDITION. THE DISPUTED AMOUNTS IN DIFFERENT YEARS OF BOTH ASSESSEES ARE AS UNDER:- NAME OF PARTY I.T.A. NO. A.Y. AMOUNT SMT. NILA DEVI 167/A/2011 2005-06 19,34,764/- SMT. NILA DEVI 168/A/2011 2006-07 34,67,116/- SMT. NILA DEVI 169/A/2011 2007-08 19,54,745/- M/S CARPET PALACE 190/A/2011 2005-06 83,90,70 9/- M/S CARPET PALACE 191/A/2011 2006-07 1,05,98,524/ - M/S CARPET PALACE 192/A/2011 2007-08 1,42,93,157/ - M/S CARPET PALACE 193/A/2011 2008-09 49,82,394 /- M/S CARPET PALACE 194/A/2011 2009-10 2,08,54,333/ - 4. THE BRIEF FACTS OF THE CASE ARE THAT A SEARCH AN D SEIZURE OPERATION UNDER SECTION 132 OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) WAS CONDUCTED IN THE RESIDENTIAL AND BUSINESS PREMISES OF M/S CARPET INTERNATIONAL, M/S. CARPET INTERNATIONAL PVT. LTD., BHADOHI, ITS DIRECTORS, IT S PARTNERS, ITS SISTER CONCERNS AND OTHER GROUP CASES ON 11.12.2009. THE WARRANTS OF A UTHORIZATION FOR SEARCH OF RESIDENTIAL AND BUSINESS PREMISES WERE ISSUED BY TH E DIRECTOR OF INCOME TAX (INV.), KANPUR ON 03.02.2009 & 20.02.2009. DURING THE COURSE OF SEARCH, LOOSE PAPERS, DOCUMENTS, FDRS AND COMPUTERS, ETC. AS PER ANNEXURE TO THE VARIOUS PANCHNAMAS DRAWN, WERE FOUND AND SEIZED. THEREAFTE R, NOTICE UNDER SECTION ITA NOS.167, 168, 169 & 190 TO 194/A/2011 4 153A(A) OF THE ACT DATED 07.07.2009 REQUIRING THE A SSESSEE TO FURNISH THE RETURN OF INCOME WAS ISSUED AND DULY SERVED FOR COMPLIANCE BY 24.08.2009. IN RESPONSE TO THE NOTICE THE ASSESSEE FILED RETURN OF INCOME ON 2 1.08.2009 DECLARING TOTAL INCOME AT RS.1,33,27,106/-. SUBSEQUENTLY, NOTICE UNDER SE CTION 143(2) READ WITH SECTION 153A AND 153C(1) OF THE ACT DATED 31.08.2009 WERE I SSUED DULY SERVED UPON THE ASSESSEE FOR COMPLIANCE ON 05.10.2009. 5. THE A.O. NOTICED THAT THE REGULAR BOOKS OF ACCOU NTS WERE NOT FOUND DURING THE COURSE OF SEARCH AND SEIZURE OPERATION CONDUCTE D ON 11.02.2009. ALTHOUGH BOOKS OF ACCOUNTS WERE PRODUCED BY THE ASSESSEE DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS BUT THE SAME WERE NOT SUPPORTED BY THE BASIC DOCUMENTS ON THE BASIS OF WHICH THEY WERE PREPARED. THE A.O. FURTHER NOTI CED THAT IT IS APPARENT THAT ASSESSEE DOES NOT MAINTAIN DAY-TO-DAY BOOKS OF ACCO UNT. IT IS ALSO NOTED THAT THE BOOKS OF ACCOUNT WHICH WERE PRODUCED BEFORE THE A.O . WERE PREPARED SUBSEQUENT TO THE SEARCH AND SEIZURE OPERATION. 6. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURING AND EXPORT OF CARPETS. AFTER PERUSAL OF TRADING AND P&L ACCOUNT FILED ALONG WITH AUDITORS REPORT FOR THE YEAR ENDED 31/03/2005, THE A.O. NOTE D THAT FOLLOWING MAJOR EXPENSES ARE DEBITED TO IT :- ITA NOS.167, 168, 169 & 190 TO 194/A/2011 5 HEAD AMOUNT (RS) SUPPORTING DOCUMENTS SUBMITTED PURCHASE 19860429 BILLS PRODUCED MANUFACTURING EXPS: A. WEAVING CHARGES 7002912 NO BASIC DOCUMENTS PRODU CED B. CLIPPING CHARGES 560234 NO BASIC DOCUMENTS PRODU CED C. DYEING CHARGES 1859374 CASH MEMO PRODUCED D. MAPS AND DESIGNING CHARGES 560232 NO BASIC DOC UMENTS PRODUCED E. WASHING CHARGES 980407 NO BASIC DOCUMENTS PRODUC ED F. STRETCHING & LATEXING CHARGES 1400583 NO BASIC D OCUMENTS PRODUCED G. FINAL BACKING CHARGES 326803 NO BASIC DOCUMENTS PRODUCED H. YARN OPENING CHARGES 393699 NO BASIC DOCUMENTS P RODUCED 7. THE A.O. DID NOT ACCEPT THE ASSESSEES SUBMISSIO NS IN RESPECT OF EXTRA PROFIT ESTIMATION BY APPLYING 15% PROFIT RATE ON THE FOLLO WING REASONS:- (PAGE NOS.5 & 6) (I) NO BOOKS OF ACCOUNT WERE FOUND OR PRODUCED DUR ING THE SEARCH AND SEIZURE OPERATIONS AT THE VARIOUS PREMISES OF THE A SSESSEE. (II) NO BOOKS OF ACCOUNT OR DOCUMENT WERE PRODUCED DURING THE POST SEARCH ENQUIRIES. (III) AS DISCUSSED, THE SO CALLED BOOKS OF ACCOUNT THAT WERE PRODUCED LACK EVIDENTIARY VALUE IN THE ABSENCE OF BILLS/VOUC HERS/BASIC DOCUMENTS ON THE BASIS OF WHICH THE BOOKS OF ACCOUNTS ARE GEN ERALLY PREPARED. (IV) MOREOVER, THE ASSESSEE FAILED TO ESTABLISH ANY CORRELATION BETWEEN CARPET MANUFACTURER BY IT AND THE MANUFACTURING EXP ENSES CLAIMED. THE ASSESSEE PRODUCES HUNDREDS OF VARIETIES OF CARPETS AND UTILIZES VARIOUS QUALITIES OF RAW WOOLS/COTTON YARNS, WHOSE RATES HA VE SUBSTANTIAL VARIATIONS. IT IS A WELL KNOWN FACT THAT CARPETS A RE MANUFACTURED BY THE WEAVERS AT THEIR RESIDENCES AND THEY OBTAIN WOOL AN D OTHER RAW MATERIALS FROM THE EXPORTERS/CONTACTOR AND AFTER WEAVING THE CARPETS THEY RETURN BACK THE SAME TO THE EXPORTERS/CONTRACTORS. ON NAY DATE, PARTICULARLY ON 31 ST MARCH OF EACH YEAR, THERE SHOULD BE AVAILABILITY O F RAW WOOL/SEMI FINISHED/HALF WOVEN CARPETS. NO SUCH STOCK HAS BEE N SHOWN IN THE AUDIT REPORT AND PROFIT AND LOSS ACCOUNT OF THE ASSESSEE- FIRM FOR THE RELEVANT ASSESSMENT YEAR. IN THE LIGHT OF THESE FACTS, IT I S MANIFEST THAT THE ASSESSEE FIRM HAS SUPPRESSED ITS CLOSING SOCK. IT HAS BEEN SETTLED IN NUMEROUS ITA NOS.167, 168, 169 & 190 TO 194/A/2011 6 JUDICIAL PRONOUNCEMENTS THAT SUPPRESSION OF CLOSING STOCK IN ITSELF CONSTITUTES A SUFFICIENT GROUND FOR REJECTION OF BO OKS OF ACCOUNT. (V) IN AWADHESH PRATAP SINGH ABDUL REHMAN & BROS. V S. CIT (1994) 78 TAXMAN 106 (ALLD.), THE ALLAHABAD HIGH COURT OBS ERVES WHERE ABSENCE OF A STOCK REGISTER, CASH MEMOS ETC., IF CO UPLED WITH OTHER FACTORS LIKE ABSENCE OF VOUCHERS IN SUPPORT OF THE EXPENSES AND PURCHASES AND EXISTENCE OF LOW PROFIT, MAY GIVE RISE TO A LEGITIM ATE INFERENCE THAT ALL IS NOT WELL WITH THE BOOKS AND THE SAME CANNOT BE RELI ED UPON TO ASSESS THE INCOME, PROFITS OR GAINS OF AN ASSESSEE, THE AUTHOR ITIES WOULD BE JUSTIFIED IN REJECTING THE ACCOUNT BOOKS UNDER SECTION 145(2) AN IN MAKING THE ASSESSMENT IN THE MANNER CONTEMPLATED IN THAT PROVI SION. (VI) ALSO IN S.N. NAMASIVAYAM CHETTIAR VS. CIT (196 0) 38 ITR 579 (SC), THE APEX COURT SAYS KEEPING OF A STOCK REGIS TER IS OF GREAT IMPORTANCE BECAUSE THAT IS A MEANS OF VERIFYING THE ASSESSEES ACCOUNTS BY HAVING A QUANTITATIVE TALLY, IF, AFTER TAKING INTO ACCOUNT ALL THE MATERIALS INCLUDING THE WANT OF A STOCK REGISTER., IT IS FOUND THAT FROM THE METHOD OF ACCOUNTING THE CORRECT PROFITS OF THE BUS INESS ARE NOT DEDUCTIBLE, THE OPERATION OF SECTION 145(3) OF THE ACT WOULD BE ATTRACTED. (VII) THE ASSESSEE SUPPRESSES CLOSING STOCK TO DEFL ATE PROFIT. THIS ACT PREVENTS THE DEDUCTION OF CORRECT PROFITS FROM THE BOOKS OF ACCOUNTS AND OBFUSCATES THE TRUE PICTURE OF THE BUSINESS OF THE ASSESSEE. THIS IS ALSO A SETTLED LAW THAT THE CORRECT DECLARATION OF CLOSING STOCK IS A SINE QUA NON FOR ARRIVING AT THE CORRECT PROFIT. IN P.M. MOHAMM AD MEERAKHAN VS. CIT (1969) 73 ITR 735 (SC), THE APEX COURT HAS OPINED T HE STOCK-IN-TRADE MUST BE VALUED FOR ASCERTAINMENT OF PRIORS. FURTHE R, IN A.L.A. FIRM VS. CIT (1991) 189 ITR 285 (SC); CIT VS. BRITISH PAINTS INDIA LIMITED (1991) 188 ITR 44 (SC), THE APEX COURT ONCE AGAIN OBSERVES THAT IT IS SETTLED LAW THAT THE TRUE TRADING RESULTS OF A BUSINESS FOR AN ACCOUNTING PERIOD CANNOT BE ASCERTAINED WITHOUT TAKING INTO ACCOUNT T HE VALUE OF THE STOCK-IN-TRADE REMAINING AT THE END OF THE PERIOD . 8. THE A.O. HAS ALSO NOTED THAT GROSS PROFIT AS SHO WN BY THE ASSESSEE IS NOT RELIABLE AND CORRECT INCOME CANNOT BE DEDUCED THERE FROM. THE A.O. REJECTED THE BOOKS OF ACCOUNT BY INVOKING PROVISIONS OF SECTIONS 145(3) OF THE ACT. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 7 9. AFTER REJECTING THE BOOKS OF ACCOUNT, THE A.O. E STIMATED INCOME AND MADE ADDITION OF RS.19,34,764/- AS UNDER:- (PARAGRAPH NO .6.9, PAGE NO.7) 6.9 AFTER CONSIDERING THE MATERIAL AVAILABLE ON RE CORD AND IN THE LIGHT OF THE SUBSTANTIAL INFIRMITIES AS DISCUSSED ABOVE, THE G.P. OF THE ASSESSEE FIRM IS REASONABLE IF INCREASED BY 15% OF THE G.P. WHICH HAS BEEN DECLARED BY THE ASSESSEE. IT IS WELL SETTLED THAT THERE IS NO MATHEMATICAL FORMULA FOR DOING SO AND IN EVERY CASE OF BEST JUDG EMENT, AN ELEMENT OF GUESS WORK CANNOT BE ELIMINATED (VIDE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF KACHWALA GEMS VS. JOINT COMMIS SIONER OF INCOME TAX, JAIPUR, REPORTED IN 158 TAXMAN 71). HOWEVER, ENHANCEMENT OF INCOME BY 15% OF G.P. SHOWN BY THE ASSESSEE IS BEIN G DONE ON THE BASIS OF G.P. SHOWN BY THE OTHER COMPARABLE CASES OF THE SAME GROUP ENGAGED IN THE SIMILAR TRADE IN THE SAME LOCALITY, WHICH CO MES TO 32.75% (28.48% + 15% OF 28.48%), AMOUNT OF ADDITION IS WORKED OUT AS UNDER :- TOTAL TURNOVER 4,53,38,889 G.P. @ 32.75% 1,48,48,486 LESS: G.P. SHOWN BY THE ASSESSEE @ 28.48% 1,29,13 ,722 DIFFERENCE 19,34,764 10. THE CIT(A) DID NOT AGREE WITH THE A.O. REGARDIN G REJECTION OF BOOKS OF ACCOUNT BY INVOKING SECTION 145(3) OF THE ACT. THE FINDING OF CIT(A) IS REPRODUCED AS BELOW:- (PARAGRAPH NO.7, PAGE NOS.10 & 11) 7. I HAVE CONSIDERED THE RIVAL CONTENTIONS OF THE ASSESSEE AS WELL AS THE REASON GIVEN BY A.O. AND FIND THAT THE ASSES SEES CONTENTIONS HAVE SUFFICIENT FORCE. ON THE OTHER HAND, THE A.O. HAS NOT POINTED OUT ANY MISTAKE OR ERROR IN THE BOOKS OF ACCOUNT EITHER FROM THE SEIZED MATERIALS OR THE MANUFACTURING RECORDS PRODUCED BEF ORE HIM DURING THE COURSE OF ASSESSMENT PROCEEDINGS. HE CLOSED TH E PROCEEDINGS ONLY SAYING THAT THE MANUFACTURING REGISTERS DID NO T CORRELATE HOW MUCH THE STOCK CONSUMED AND HOW MUCH PRODUCTION YIE LDED AND IT IS IMPOSSIBLE TO REACH ON ANY CONCLUSION ON THE BASIS OF THOSE REGISTERS. HE HAS NOT BROUGHT ON RECORD ANY OTHER EVIDENCE THA T THE BOOKS WERE WRITTEN SUBSEQUENT TO SEARCH AND RELIED ONLY ON THE SEARCH PARTY. THE A.O. HAS NOT CONSIDERED THE ASSESSEES EXPLANATION THAT THE ITA NOS.167, 168, 169 & 190 TO 194/A/2011 8 CONSUMPTION OF RAW MATERIAL FOR EACH OF THE PRODUCT S CANNOT BE RECONCILED IN ITS CASE BECAUSE THE PRODUCT PATTERN WAS LARGE AND ITEMS OF DIFFERENT DESIGNS AND SIZES ETC. WERE PRODUCED B Y THE ASSESSEE. THERE WAS NO LEGAL OBLIGATION ON THE PART OF THE AS SESSEE TO MAINTAIN SUCH A RECORD. AUDITED BOOKS OF ACCOUNTS COULD NOT HAVE BEEN REJECTED WITHOUT POINTING OUT ANY SPECIFIC DEFECT O R DEFICIENCIES IN THE BOOKS OF ACCOUNT MAINTAINED BY IT. THIS VIEW FINDS SUPPORT FROM THE CASE OF CIT VS. OM OVERSEAS (2008) 173 TAXMAN 185 ( P&H). IN VIEW OF THE MATTER, I AM OF THE VIEW THAT REJECTION OF B OOKS OF ACCOUNT U/S 145(3) WITHOUT DETECTING ANY MISTAKE THEREIN CANNOT BE ACCEPTED AND AS SUCH THE A.O. HAS WRONGLY INVOKED SECTION 145(3) OF THE I.T. ACT. 11. THE CIT(A) ALSO DID NOT AGREE WITH THE A.O. FOR ADDITION ON MERIT AFTER APPLYING FLAT PROFIT RATE OF 15%. THE FINDING OF T HE CIT(A) IS REPRODUCED BELOW:- (PAGE NO.11) WHILE MAKING EXTRA PROFIT ADDITION ON FLAT RATE OF 15% OF THE GROSS PROFIT DISCLOSED, THE A.O. HAS NOT APPLIED HI S MIND AND HAS NOT FOLLOWED NECESSARY INGREDIENTS FOR ESTIMATING THE I NCOME. THE CASE LAW OF R.V.S. & SONS DAIRY FARM QUOTED BY THE ASSES SEE SUPRA IS VERY MUCH RELEVANT WITH PRESENT CASE IN ESTIMATING THE I NCOME BY APPLYING A RATE OF 15% OF THE GROSS PROFIT DISCLOSED IN SEVE RAL ASSESSMENT YEARS. HE HAS NOT CITED A SINGLE COMPARABLE CASE I N SUPPORT OF HIS ESTIMATION AND ON THE OTHER HAND HE HAS NEITHER COU NTERED THE COMPARABLE CASES CITED BY THE ASSESSEE NOR HE WAS J USTIFIED TO ENHANCE THE GP WHEN HE HIMSELF ACCEPTED MUCH LOWER BOOK RESULT IN CASE OF M/S CARPET INTERNATIONAL (P) LTD. AS CITED BY THE ASSESSEE SUPRA. HE HAS ALSO NOT CONSIDERED ASSESSEES REASO NABLE EXPLANATION FOR THE BOOK RESULT WITH REFERENCE TO SO MANY FACTO RS EFFECTING ITS BOOK RESULT FROM YEAR TO YEAR. I FIND NO JUSTIFICATION FOR EXTRA PROFIT ADDITION IN THIS CASE AND, THEREFORE, THE ADDITION OF RS.19,34,764/- IS HEREBY DELETED. THE ASSESSEE GETS R3ELIEF OF RS.19 ,34,764/-. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 9 12. THE CIT(A) DID NOT AGREE WITH THE ASSESSEE THAT THE ADDITION MADE BY A.O. IS BEYOND THE PURVIEW OF SECTION 153A OF THE ACT. THE CIT(A) HELD AS UNDER :- (PAGE NO.11) HOWEVER, I DO NOT AGREE WITH THE ASSESSEES COUNSE L THAT THE IMPUGNED ADDITION IS BEYOND THE PURVIEW OF SECTION 153A AS THERE IS NO PROHIBITION TO MAKE REGULAR ASSESSMENT OR RE-ASS ESSMENT UNDER SECTION 153A/153C AS THERE IS NO REFERENCE TO INCRI MINATING SEARCH MATERIALS AS IN EARLIER SECTION 158BB/158BC AS PER THE LATEST CASE LAW OF HARVEY HEART HOSPITALS LTD. VS. ACIT (2010) 130 TTJ (CHENNAI)-700 13. IN ALL THE APPEALS ADDITIONS ARE ON ACCOUNT OF GROSS PROFIT DETAILED AS UNDER:- SMT. NILA DEVI 167/A/2011 2005-06 19,34,764/- SMT. NILA DEVI 168/A/2011 2006-07 34,67,116/- SMT. NILA DEVI 169/A/2011 2007-08 19,54,745/- M/S CARPET PALACE 190/A/2011 2005-06 83,90,70 9/- M/S CARPET PALACE 191/A/2011 2006-07 1,05,98,524/ - M/S CARPET PALACE 192/A/2011 2007-08 1,42,93,157/ - M/S CARPET PALACE 193/A/2011 2008-09 49,82,394 /- 14. HOWEVER, IN CASE OF M/S. CARPET PALACE FOR A .Y. 2009-10, ITA NO.194/A/2011, APART FROM EXTRA G.P. ADDITION BY AP PLYING 15% PROFIT RATE OF WHICH CALCULATION COMES TO RS.93,77,786/-, THE A.O. FOUND THAT THE ADDITION TO THE EXTENT OF RS.2,08,54,333/- IS WARRANTED ON ACCOUNT OF CLOSING STOCK. THEREFORE, THE A.O., INSTEAD OF SEPARATE ADDITION OF RS.93,77,786/ -, MADE ADDITION OF RS.2,08,54,333/- WHICH COVERS THE G.P. ADDITION. T HEREFORE, THE A.O. DID NOT MAKE SEPARATE ADDITION OF G.P. THE RELEVANT ABSTRACTS A RE REPRODUCED AS UNDER :- (A.O. PAGE NO.2) ITA NOS.167, 168, 169 & 190 TO 194/A/2011 10 6.2. THE PHYSICAL INVENTORY OF THE STOCK TAKEN AT THE TWO PREMISES I.E. CARPET CITY SITE AND THE GUEST HOUSE SITE GIVE THE FOLLOWING FIGURES- (I) FINISHED CARPET (AT PREMISE 67 TO 69 CARPET CIT Y) 11528 SQ. FT. (II) FINISHED CARPET (AT GUEST HOUSE SITE) ------ 676512.43SQ. FT. 6.3 THE ABOVE DETAILS SHOW THAT THERE WERE (35734 P CS) MEASURING 688040.43 SQ. FT. OF FINISHED CARPET. SHRI BHART L AL MAURYA HAS IN HIS STATEMENT DURING THE SEARCH STATED THAT THE READY S TOCK HAD TWO VALUATIONS ONE AT THE RATE OF 40/- PER SQ. FT. (6 18920 SQ. FT.) AND THE OTHER MADE AT SPECIFIC ORDER @ 84/- PER SQ. FT. (69 120 SQ. FT. IN TOTAL). VALUATION OF STOCK AS ON THE DATE OF SEARCH- FINISHED CARPET AT SPECIFIC ORDER --- 69120 X 84/- = 58,06,080 FINISHED CARPET GENERAL - ---- 618920 X 40/- = 2,47 ,56,800 6.4 LP-2 AND LP-4 RECOVERED FROM THE PREMISES GIVE THE DESCRIPTION OF THE CARPETS AS FINISHING REPORT IN T HE FOLLOWING MANNER: ANNEXURE NO. NO. PF PIECES AREA IN SQ. FT. (A) LP-2 10072 96424.82 (B) LP-4 8845 146289.29 18917 242714.11 15. AFTER CONSIDERING ASSESSEES SUBMISSIONS, THE C ALCULATED AMOUNT OF ADDITION ON ACCOUNT OF VALUATION OF STOCK ARE AS UNDER :- (A O PAGE 3) (I) THERE IS NO DOUBT THAT LP-2 & LP-4 ARE FINISHI NG REPORT, BUT THERE IS NOTHING ON RECORD TO PROVE THAT THESE REPO RTS COVER ONLY FEW MONTHS AND IT IS ALSO A FACT THAT STOCK REGISTER W AS NOT FOUND DURING THE COURSE OF SEARCH, ALTHOUGH IT WAS PRODUCED BEFO RE THE UNDERSIGNED DURING THE ASSESSMENT PROCEEDING, BUT IN ABSENCE OF ANY CO-RELATION SHOWN BY THE ASSESSEE BETWEEN THE SAID STOCK REGIST ER AND THE BOOKS OF ACCOUNT, THE SAME IS REJECTED IN THE LIGHT OF THE F ACT AS DISCUSSED ABOVE. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 11 (II) FINISHING REPORT VERY FAIRLY REPRESENTS THE ST OCK OF THE ASSESSEE, BECAUSE FINISHING REPORT AS SUCH MEANS THAT THE MAN UFACTURING HAS BEEN COMPLETED AND THE STOCK IS READY FOR SALE. (III) SINCE THE STOCK AS PER THE DOCUMENTS GIVING D ETAIL OF THE STOCK POSITION IN THE FINISHING REPORT CONTAINED IN THE L P-2 AND LP-4 IS SUPPORTED BY EVIDENCE FOUND IN THE PREMISES AND THE REST OF THE STOCK IS NOT EXPLAINED BY MEANS OF ANY EVIDENCE WHATSOEVE R THE REMAINING STOCK IS TREATED TO BE UNEXPLAINED. THE DIFFERENCE IS CALCULATED IN THE FOLLOWING MANNER :- STOCK OF FINISHED CARPET ON PHYSICAL VERIFICATION 688040.43 SQ. FT. STOCK OF FINISHED CARPETS REFLECTED BY THE LP-2 & L P-4 242714.11 SQ. FT. 445326.32 SQ. FT. 6.7 THUS, FROM ABOVE IT IS EVIDENT THAT TOTAL STOCK OF CARPET PHYSICALLY FOUND DURING SEARCH WAS 6,88,040.43 SQ. FT. (35,734 PIECES). SRI BHARAT LAL MAURYA AT THE TIME OF SEAR CH IN HIS STATEMENT HAS MENTIONED THAT THE READY STOCK OF CARPET ARE CO STING RS.40/- PER SQ. FT. WHILE SOME STOCK WHICH WAS FINISHED WITH SP ECIFIC ORDER OF EXPORT ARE COSTING RS.84/- PER SQ. FT. TOTAL AREA OF CARPET WHICH WAS MANUFACTURED WITH SPECIFIC ORDER AS STATED BY HIM W ORKED OUT AT 69120 SQ. FT. AT THE TIME OF SEARCH. SO AS PER ASS ESSEES VERSION VALUATION OF CARPET IN THE GODOWN ARE WORKED OUT S UNDER :- AT RS.84/- PER SQ. FT. 69120 SQ. FT. 58,06,080 AT RS.40/- PER SQ. FT. 376206 SQ. FT. (445326-69120 ) 1,50,48,253 2,08,54,333 16. THE CIT(A) DELETED THE ADDITION OF RS.2,08,54, 333/- MADE BY THE A.O. ON ACCOUNT OF STOCK ON THE GROUND THAT :- (PAGE NO.14) 7. AS REGARDS THE ISSUE OF ADDITION OF RS.2,08,54, 333/- AS UNDISCLOSED STOCK, I HAVE CONSIDERED THE RIVAL CONT ENTIONS PUT FORTH BY THE ASSESSEE AND THE A.O. AND FIND THAT THE ASSESSE ES CONTENTION HAS SUFFICIENT FORCE. THE A.O. HAS WORKED OUT UNDISCLO SED STOCK BEING THE DIFFERENCE OF THE STOCK PHYSICALLY FOUND DURING THE SEARCH AND SEIZURE OPERATION ON 11.02.2009 AND THE STOCK AS PER FINISH ING REPORTS OF TWO WASHER MEN SEIZED DURING SEARCH MARKED AS LP-1 AND LP-2. THE CURRENT BOOKS OF ACCOUNT COULD NOT BE SEARCHED ON C OMPUTER BY THE ITA NOS.167, 168, 169 & 190 TO 194/A/2011 12 SEARCH PARTY AND THE ASSESSEE WAS ALSO HANDICAPPED AS HIS ACCOUNTANT WORKING ON THE SAID COMPUTER WAS OUT OF STATION. THE SEARCH PARTY HAS ERRED IN TREATING THE SAID FINISHI NG REPORTS OF FINISHED CARPETS FROM THE TWO WASHER MEN AS ASSESSE ES STOCK REGISTER ON THE DATE OF SEARCH. THE AO HAS RELIED ON THE VE RSION OF SEARCH PARTY PUTTING HIS LEGS IN THEIR SHOES AND DID NOT M AKE ANY ENQUIRY AND VERIFICATION OF THE ITEMS WHICH WERE RECONCILED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS. HE DID NOT EVEN TAKE P AIN TO CALL FOR AND EXAMINE THE WASHER MEN BEFORE MAKING ADDITION TO TH E MAGNITUDE OF RS.2,08,54,333/-. HE ALSO DID NOT CARE THAT THE FI NISHING REPORTS MAY FOR FEW MONTHS AND THEY CANNOT REPRESENT THE ASSESS EES ENTIRE STOCK AT ONE POINT OF TIME. I D NOT FIND ANY JUSTIFICATI ON FOR MAKING SUCH ADDITION WITHOUT CONTROVERTING ASSESSEES RECONCILI ATION AND FINDING OUT THAT THE ITEMS OF RECONCILIATION WAS CONCOCTED AND AFTER THOUGHT. IN THE LIGHT OF ABOVE DISCUSSION, THE ADDITION OF R S.2,08,54,333/- IS HEREBY DELETED. 17. THE LD. DEPARTMENTAL REPRESENTATIVE WITH REFERE NCE TO A.O.S ORDER, PAGE NO.5, SUBMITTED THAT BOOKS OF ACCOUNT WERE NOT FOUN D AT THE TIME OF SEARCH. HE FURTHER SUBMITTED THAT EVEN IN POST SEARCH NO BOOKS OF ACCOUNT WERE PRODUCED. THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT SO-C ALLED BOOKS OF ACCOUNT PRODUCED WERE OF NO EVIDENTIARY VALUE IN ABSENCE OF SUPPORTING VOUCHERS. THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSE SSEE DID NOT SHOW WORK-IN- PROGRESS WHICH IS NECESSARY AS PER NORMAL PROCEDURE IN CARPET INDUSTRIES. THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ESTI MATION OF EXTRA PROFIT @ 15% ON GROSS PROFIT OVER AND ABOVE PROFIT SHOWN BY THE ASSESSEE WAS ON THE BASIS OF SPECIFIC FINDING THAT IN ABSENCE OF STOCK REGISTER THE POSITION OF STOCK CONSUMED AND PRODUCTION YIELD COULD NOT BE CORRELATED. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE A.O. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 13 18. THE LD. AUTHORISED REPRESENTATIVE RELIED UPON T HE ORDER OF CIT(A) AND SUBMITTED THAT BOOKS OF ACCOUNTS WERE PRODUCED BEFO RE THE A.O . THE LD. AUTHORISED REPRESENTATIVE DEMONSTRATED HIS SUBMISSI ONS BY REFERRING COPIES OF ORDER SHEETS OF PROCEEDING BEFORE THE A.O. WHICH HA VE BEEN PLACED AT PAGE NOS.8 & 9 OF PAPER BOOK. THE LD. AUTHORISED REPRESENTATIVE HAS ALSO POINTED OUT ORDER SHEET ENTRY DATED 16.12.2010 WHICH CONFIRMED THAT B OOKS OF ACCOUNT WERE PRODUCED BEFORE THE A.O. 19. THE LD. AUTHORISED REPRESENTATIVE REFERRED PAGE NOS.10 TO 29 OF PAPER BOOK WHERE COPIES OF LIST/INVENTORY OF ACCOUNT BOOKS ETC . FOUND/SEIZED HAVE BEEN PLACED. IN THE LIST IT IS MENTIONED ABOUT BOOKS OF ACCOUNT INCLUDING LEDGER, CASH BOOK, ISSUE REGISTERS AND OTHERS, CPU, COMPUTER ALONG WITH BOOK OF COMPUTER. 20. THE LD. AUTHORISED REPRESENTATIVE FURTHER SUBMI T THAT THE A.O. WITHOUT APPRECIATING THE FACTS, DOCUMENTS AND MATERIAL WRON GLY NOTED THAT BOOKS OF ACCOUNT WAS NOT FOUND AT THE TIME OF SEARCH. THE L D. AUTHORISED REPRESENTATIVE REFERRED PAGE NO.93 OF THE PAPER BOOK WHERE DETAILS OF CLOSING STOCK ALONG WITH AUDIT REPORT DATED 27.10.2005 WAS PLACED. THE AUDI T WAS COMPLETED BEFORE THE SEARCH. THE RELEVANT DETAILS OF STOCK FURNISHED BE FORE THE AO ARE ON PAGE NO.93 OF PAPER BOOK. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 14 21. THE LD. AUTHORISED REPRESENTATIVE FURTHER REFER RED PAGE NOS.54 TO 60 OF THE PAPER BOOK WHERE A COPY OF DETAILS SUBMITTED VIDE L ETTER DATED 16/17.12.2010 HAVE BEEN PLACED. THE LD. AUTHORISED REPRESENTATIVE POI NTED OUT PAGE NO.54 OF PAPER BOOK WHERE THE ASSESSEE SUBMITTED DETAILS OF BOOKS OAF ACCOUNTS AND ABOUT CLOSING STOCK. 22. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THA T THE ASSESSEE SUBMITTED COMPARATIVE POSITION OF PROFIT OF OTHER ASSESSEES D EALING IN IDENTICAL BUSINESS. IN THIS REGARDS THE LD. AUTHORISED REPRESENTATIVE POIN TED OUT PAGE NO.59 OF THE PAPER BOOK. 23. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THA T WHEN THE ASSESSEE FOLLOWED A REGULAR METHOD OF ACCOUNTING, THE SAME C ANNOT BE REJECTED WITHOUT POINTING OUT SPECIFIC DEFECTS IN BOOKS OF ACCOUNT M AINTAINED. HE FURTHER SUBMITTED THAT NO MATERIALS WERE FOUND DURING THE COURSE OF S EARCH BASED ON WHICH THE A.O. CAN REJECT THE BOOKS OF ACCOUNT. THE LD. AUTHORISE D REPRESENTATIVE SUBMITTED THAT PRESUMPTIONS UNDER SECTION 292C ARE REBUTTABLE PRES UMPTIONS WHICH HAVE BEEN REBUTTED BY THE ASSESSEE BY VARIOUS EVIDENCES AND D OCUMENTS. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE A.O. HAS MADE ADD ITIONS WITH FOLLOWING CONSISTENCY. THE LD. AUTHORISED REPRESENTATIVE SUB MITTED THAT SAME METHOD OF ACCOUNTING HAVE BEEN FOLLOWED BY THE ASSESSEE IN A. YS 2003-04 & 2004-05 ITA NOS.167, 168, 169 & 190 TO 194/A/2011 15 WHEREIN THE A.O HIMSELF ACCEPTED BOOKS OF ACCOUNT A ND G.P. RATE SHOWN BY THE ASSESSEE WHILE MAKING ASSESSMENT UNDER SECTION 153A /143(3) OF THE ACT. 24. THE LD. AUTHORISED REPRESENTATIVE IN SUPPORT OF HIS CONTENTION RELIED UPON VARIOUS DECISIONS WHICH HAVE BEEN PLACED ON RECORD IN THE FORM OF PAPER BOOK. 25. THE LD. AUTHORISED REPRESENTATIVE REITERATED TH E SUBMISSIONS MADE BEFORE THE CIT(A). HE SUBMITTED THAT THE LEARNED ASSESSI NG OFFICER IN CONTINUATION OF REJECTION OF BOOKS OF ACCOUNT HAS WORKED OUT THE QU ANTUM OF ENHANCEMENT IN GROSS PROFIT APPLYING A FLAT RATE OF 15% OF GROSS P ROFIT DISCLOSED AND MADE AN ADDITION OF RS.19,34,764/-. THE LEARNED AUTHORISED REPRESENTATIVE REFERRED A COMPARABLE G.P. CHART AND SUBMITTED THAT ENHANCEMEN T BY THE A.O. BREAKS ALL THE PRECEDENTS TO ESTIMATE GROSS PROFIT ON BEST JUDGEME NT ASSESSMENT FOR THE REASONS, THE ESTABLISHED FACTOR TO ESTIMATE GROSS PROFIT IS TO GO BACK ASSESSEES PRECEDING RECORDS. NO SUCH EFFORT HAS BEEN MADE. ANOTHER EST ABLISHED FACTOR IS TO ADOPT GROSS PROFIT OF SIMILAR COMPARABLE CASE. THE ASSES SING OFFICER HAS NOT CONSIDERED THE 8 COMPARABLE CASES OF THE SAME LOCALITY AND THE SAME TRADE FURNISHED BY THE ASSESSEE VIDE REPLY DATED 16/17.12.2010 TO THE ASSE SSING OFFICER DURING ASSESSMENT PROCEEDINGS WHICH HAS INTENTIONALLY BEEN OMITTED BY HIM WHILE REPRODUCING THE CONTENTS OF THE SAID REPLY IN PARA NO.7.3 OF ASSESSMENT ORDER . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT TH E ENHANCEMENT HAS BEEN MADE ITA NOS.167, 168, 169 & 190 TO 194/A/2011 16 WITHOUT COUNTERING THE ABOVE COMPARATIVE STATEMENT AND IN THIS STATE OF AFFAIR NO ADDITION IN GROSS PROFIT CAN BE MADE AS PER CASE LA W IN CASE OF CIT VS. EASTERN COMMERCIAL ENTERPRISES (1994) 210-ITR-103 (CAL.). NOTWITHSTANDING ABOVE, IT IS QUITE ASTONISHING THAT THE A.O. HAS HIMSELF ACCEPTE D THE LOWER G.P. RATE IN A VERY SIMILAR CASE I.E., M/S CARPET INTERNATIONAL (P) LTD . IN ASSESSMENTS U/S. 153A PASSED SIMULTANEOUSLY AS PER DETAILS GIVEN ABOVE, COPY OF ASSESSMENT ORDER IS ENCLOSED (PAGE 64 TO 65 OF PAPER BOOK). HE SUBMITTED THAT T HE ASSESSING OFFICER HAS DISREGARDED THE DETAILED WRITTEN SUBMISSION DATED 1 0.12.2010, 16/17.12.2010, 20.12.2010 AND 21.12.2010 FURNISHED TO HIM FROM TIM E TO TIME EXPLAINING THAT THERE ARE SEVERAL FACTORS WHICH GOVERN THE TRADING RESULT OF THE ASSESSEE I.E. RISE IN COST OF PRODUCTION DUE TO STEEP RISE IN PRICES, REV ISIONS OF WEAVERS WAGES, FALL IN AVERAGE SALE PRICE IN INTERNATIONAL MARKET AND FLUC TUATION IN RATE OF FOREIGN EXCHANGE. ALL THESE FACTORS CANNOT BE FABRICATED B ECAUSE THEY ARE SUPPORTED WITH DOCUMENTARY EVIDENCES. BUT THE LEARNED ASSESSING O FFICER HAS NOT ACCEPTED ANY OF THE SUBMISSIONS AND HAS ARBITRARILY APPLIED A FLAT RATE OF 15% OF THE GROSS PROFIT SHOWN FOR ALL THE ABOVE ASSESSMENT YEARS LEAVING AL L NORMS AND PRECEDENCE LAID DOWN BY THE APPELLATE AUTHORITIES FOR ESTIMATING TH E GROSS PROFIT WHERE IT IS NECESSARY TO DO. HE FURTHER SUBMITTED THAT THERE I S AN EMBARRASSING SITUATION WHERE THE MINIMUM GROSS PROFIT RATE ASSESSED IS 15.58% AN D THE MAXIMUM IS 35.05% IN FIVE ASSESSMENT YEARS. APPLICATION OF 35.05% G.P. RATE IS UNBELIEVABLE LOOKING TO THE PAST HISTORY AND IS LIKE A DREAM FOR THE ASSESS EE IN THE YEAR UNDER CONSIDERATION. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 17 THERE IS NO PROPORTION AND NO PARITY OF ESTIMATE AT ALL AND AN AD-HOC BASIS HAS BEEN ADOPTED WHICH ONLY REVEALS THAT ADDITION HAS BEEN M ADE ONLY FOR ADDITION SAKE. HE RELIED UPON A CASE IN THE CASE OF R.V.S. & SONS D AIRY FARM REPORTED AT (2003) 130 TAXMAN 615 (MADRAS) WHERE IN IT IS HELD THAT EA CH YEAR IS AN INDEPENDENT UNIT FOR WHICH LIABILITY FOR TAX HAS TO BE DETERMINED, A ND THIS WOULD BE SO EVEN WHEN ASSESSEES BOOKS ARE NOT ACCEPTED. HE ALSO RELIED U PON A JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SMT. POONAM RANI (DELHI) 326 ITR 223. ESTIMATE TO BE DONE SHOULD BE IN RELATION TO FIGURE S AVAILABLE FOR EACH YEAR AND IT IS NOT LAWFUL TO MAKE AN ADHOC CHOICE OF PERCENTAGE (I .E. 15%) AND APPLYING IT UNIFORMLY FOR SEVERAL YEARS. 26. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED TH AT SUCH ESTIMATE IS NOT LEGALLY ALLOWABLE IN THE ASSESSMENTS U/S. 153A WHER E THE SCOPE IS NARROW AND IS LIMITED TO THE MATTERS ARISING OUT OF SEARCH AND SE IZURE OPERATION. AFTER THE SEARCH, THE TOTAL INCOME OF THE ASSESSEE IS TO BE COMPUTED ON THE BASIS OF THE UNDISCLOSED INCOME UNEARTHED DURING THE SEARCH AND THE SAME IS TO BE ADDED WITH THE REGULAR INCOME ASSESSED U/S 143(3) OR COMPUTED U/S 143(1) F OR EACH OF THE SIX PRECEDING YEARS. IN OTHER WORDS, THERE IS NO MERGER OF THE E ARLIER ASSESSMENTS WITH THE ASSESSMENTS DONE UNDER THE NEW SCHEME I.E., SECTION 153A OR 153C OF THE ACT. THIS IS ALSO SUPPORTED BY CASE LAW OF LMJ INTERNATI ONAL LTD. VS. CIT (2008) 22- SOT-317 (KOL). ITA NOS.167, 168, 169 & 190 TO 194/A/2011 18 27. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PA RTIES AND RECORDS PERUSED. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACT URING AND EXPORTING CARPETS. THE ADMITTED FACTS OF THE CASE ARE THAT A SEARCH UN DER SECTION 132 OF THE ACT WAS CARRIED OUT ON 11.02.2009. NO INCRIMINATING MATERI AL WAS FOUND DURING THE COURSE OF SEARCH. THE CASE OF THE A.O. IS THAT BOOKS OF A CCOUNT WERE NOT FOUND AT THE TIME OF SEARCH BUT THE SAME WERE PRODUCED AT THE TIME OF ASSESSMENT PROCEEDINGS. THE BOOKS OF ACCOUNT DID NOT FIND FULLY SUPPORTED BY VO UCHERS. IT IS PRESUMPTION OF THE A.O. THAT BOOKS OF ACCOUNT WERE PREPARED AFTER SEAR CH. THE A.O. STARTED EXAMINATION WITH VARIOUS EXPENDITURE CLAIMED BY THE ASSESSEE. THE A.O. NOTED THAT ASSESSEE FAILED TO CORRELATE BETWEEN CARPET MA NUFACTURED AND EXPENDITURE CLAIMED ON PRESUMPTION BASIS WITHOUT BRINGING MATER IAL ON RECORD NOTED THAT THE ASSESSEE DID NOT SHOW WORK IN PROGRESS OF RAW WOOL/ SEMI-FINISHED/HALF WOVEN CARPETS. THE FINDING OF A.O IS BASED ON PRESUMPTIO N THAT THE ASSESSEE HAS SUPPRESSED CLOSING STOCK. THE A.O. ENHANCED G.P. B Y 15% TO THE G.P. DECLARED BY THE ASSESSEE. ACCORDING TO A.O. THE G.P. IN THIS T RADE SHOULD BE 32.75%. 28. THE CIT(A) DID NOT AGREE WITH THE A.O. HE FOUN D THAT THE A.O. HAS WRONGLY INVOKED SECTION 145(3) OF THE ACT. ON MERIT, THE C IT(A) FOUND THAT THERE IS NO JUSTIFICATION ON THE PART OF THE A.O. TO ENHANCE TH E G.P. BY 15%, THUS, HE DELETED THE ADDITION MADE BY THE A.O. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 19 29. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ISSUE TO BE EXAMINED BY US IS IN TWO FOLD, WHETHER THE A.O. IS CORRECT IN R EJECTING THE BOOKS OF ACCOUNT UNDER SECTION 145(3) OF THE ACT AND SECONDLY, WHETH ER THE A.O. IS JUSTIFIED IN ENHANCING THE G.P. BY 15%. 30. THOUGH THERE WAS SEARCH OPERATION UNDER SECTION 132 OF THE ACT. THE AO DID NOT MAKE ANY ADDITION ON ACCOUNT OF ANY MATERIA L FOUND AT THE TIME OF SEARCH. THEREFORE, THE CASE UNDER CONSIDERATION IS SIMPLE R EJECTION OF BOOKS OF ACCOUNT AND ESTIMATION OF PROFIT. TO EXAMINE THE ISSUE, WE WOU LD LIKE TO REFER RELEVANT PROVISIONS OF SECTION 145 OF THE ACT WHICH READS AS UNDER:- 145. (1) INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURC ES' SHALL, SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), BE COMPUTED I N ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGU LARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1) OR ACCOUN TING STANDARDS AS NOTIFIED UNDER SUB-SECTION (2), HAVE NOT BEEN REGUL ARLY FOLLOWED BY THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSM ENT IN THE MANNER PROVIDED IN SECTION 144.] ITA NOS.167, 168, 169 & 190 TO 194/A/2011 20 31. IT IS TO NOTE THAT UNDER SECTION 145(1), THE IN COME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR I NCOME FROM OTHER SOURCES HAS TO BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUN TING REGULARLY EMPLOYED BY THE ASSESSEE, UNLESS IN THE OPINION OF THE INCOME-T AX OFFICER, THE INCOME, PROFITS AND GAINS CANNOT PROPERLY BE DEDUCED THEREFROM OR T HE INCOME-TAX OFFICER IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE. UNDER THE SUB-SECTION (3) OF SECTION 145 IN ANY CAS E WHERE THE ACCOUNTS ARE CORRECT AND COMPLETE TO THE SATISFACTION OF THE INCOME-TAX OFFICER BUT THE METHOD EMPLOYED IS SUCH THAT, IN THE OPINION OF THE INCOME -TAX OFFICER, THE INCOME CANNOT PROPERLY BE DEDUCED THEREFROM, THEN THE COMPUTATION HAS TO BE MADE UPON SUCH BASIS AND IN SUCH MANNER AS THE INCOME-TAX OFFICER MAY DETERMINE. HOWEVER, IF THE INCOME-TAX OFFICER IS NOT SATISFIED ABOUT THE C ORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR WHERE NO METHOD OF ACCO UNTING HAS BEEN REGULARLY EMPLOYED BY THE ASSESSEE, THE INCOME-TAX OFFICER MA Y MAKE THE ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144. SECTION 145 IS MAND ATORY AND THE REVENUE IS BOUND BY THE ASSESSEE'S CHOICE OF A METHOD REGULARL Y EMPLOYED UNLESS BY THAT METHOD THE TRUE INCOME, PROFITS AND GAINS CANNOT BE ARRIVED AT. IN OTHER WORDS, SECTION 145 ENACTS THAT FOR THE PURPOSE OF SECTION 28 (PROFITS AND GAINS OF BUSINESS, PROFESSION OR VOCATION) AND SECTION 56 (INCOME FROM OTHER SOURCES), INCOME, PROFIT AND GAINS MUST BE COMPUTED IN ACCORDANCE WITH THE M ETHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. THEREFORE, IF T HE ASSESSEE REGULARLY EMPLOYS A ITA NOS.167, 168, 169 & 190 TO 194/A/2011 21 PARTICULAR METHOD OF ACCOUNTING AND IF NO DEFECTS A RE FOUND IN THE METHOD OR MAINTENANCE OF ACCOUNTS, THE TAXING AUTHORITY IS BO UND TO COMPUTE THE PROFITS AND GAINS OF BUSINESS OR PROFESSION OR VOCATION IN ACCO RDANCE WITH THE METHOD EMPLOYED BY THE ASSESSEE. THEREFORE, IN CASE WHERE THE INCOME-TAX OFFICER OR THE TAXING AUTHORITY FINDS THAT IN MAINTAINING ACCOUNTS , THE ASSESSEE HAS REGULARLY EMPLOYED A PARTICULAR METHOD AND DOES NOT MAKE ANY INVESTIGATION TO FIND OR DOES NOT FIND ANY DEFECT IN THE ACCOUNTS AND ACCEPT THE ACCOUNTS AS THEY ARE, HE IS BOUND TO COMPUTE THE INCOME IN ACCORDANCE WITH THE ACCOUN TS MAINTAINED BY THE ASSESSEE. THEREFORE, WHEN THE ASSESSEE REPRESENTS TO THE TAXI NG AUTHORITY THAT ITS ACCOUNTS ARE MAINTAINED BY A METHOD OF ACCOUNTING REGULARLY EMPL OYED, HE EXPECTS THE INCOME- TAX OFFICER TO ACT UPON SUCH METHOD AND COMPUTE THE INCOME ACCORDINGLY. 31.1 HONBLE THE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. GOTANLIME KHANIJ UDYOG, 256 ITR 243 (RAJ) HELD THAT PROVISIONS DO NO T ENVISAGE THAT BY RESORTING TO BEST JUDGMENT ASSESSMENT, THE ASSESSING AUTHORITY M UST REACH A DIFFERENT FIGURE OF INCOME AND PROFIT THAN WHAT HAS BEEN DISCLOSED BY T HE ASSESSEE. 31.2 THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SMT. POONAM RANI (DELHI) 326 ITR 223 IS APPLICABLE TO TH E FACTS OF THE CASE UNDER CONSIDERATION. THE FACTS OF THAT CASE WERE THAT TH E ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING COPPER WIRES. FOR THE RE LEVANT ASSESSMENT YEAR, SHE ITA NOS.167, 168, 169 & 190 TO 194/A/2011 22 FILED A RETURN DECLARING GROSS PROFIT AT THE RATE O F 1.4 PER CENT AGAINST GROSS PROFIT RATE OF 5.91 PER CENT FOR THE PRECEDING YEAR. ON BE ING ASKED, THE ASSESSEE ATTRIBUTED THE FALL IN GROSS PROFIT RATE TO THE INCREASE IN TH E PURCHASE PRICE. THE ASSESSING OFFICER REJECTED THE EXPLANATION GIVEN BY THE ASSES SEE ON THE GROUND THAT NO SUPPORTING EVIDENCE WAS PRODUCED TO SHOW INCREASE I N THE PURCHASE PRICE AND DECREASE IN SALES. HE ALSO NOTICED THAT THE WEIGHT OF FINISHED PRODUCTS DECLARED BY THE ASSESSEE WAS MORE THAN THE WEIGHT OF RAW MATERI ALS. WHEN ASKED TO EXPLAIN, THE ASSESSEE SUBMITTED THAT AFTER DRAWING WIRE, THE PROCESS WENT ON TO PUT THE WIRE FOR ENAMELLING, AS A RESULT OF WHICH THE WEIGHT OF THE WIRE INCREASED BY 2-3 PER CENT. THE ASSESSING OFFICER FELT THAT IN THE ABSENC E OF ADEQUATE SUPPORTING EVIDENCE, THE EXPLANATION GIVEN BY THE ASSESSEE COU LD NOT BE ACCEPTED. HE, THEREFORE, REJECTED THE ACCOUNT BOOKS OF THE ASSESS EE UNDER SECTION 145(3) AND ESTIMATED INCOME BY APPLYING THE GROSS PROFIT RATE OF THE PRECEDING ASSESSMENT YEAR. ON APPEAL, THE COMMISSIONER (APPEALS) NOTED T HAT THE ASSESSEE HAD FURNISHED COMPLETE DETAILS, INCLUDING COMPARATIVE DETAILS IN RESPECT OF PURCHASE OF RAW MATERIALS AND MANUFACTURE OF COPPER WIRES AS WELL A S IN RESPECT OF SALE DURING THE YEAR IN QUESTION AS COMPARED TO THE EARLIER YEARS. HE ALSO TOOK NOTE OF THE FACT THAT THE ASSESSEE WAS DULY REGISTERED UNDER THE CENTRAL EXCISE ACT AND WAS MAINTAINING PROPER QUANTITATIVE DETAILS IN THE PRESCRIBED MANNE R AND, THEREFORE, HELD THAT THE ASSESSEE HAD ADOPTED CONSISTENT AND REGULAR METHOD OF ACCOUNTING AND VALUATION OF THE STOCK DURING THE YEAR IN QUESTION AS WAS DONE B Y HER IN THE PRECEDING YEARS. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 23 HE, ACCORDINGLY, HELD THAT THE ASSESSING OFFICER WA S NOT JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNT AND IN APPLYING THE ENHANCED GROSS PROFIT RATIO. THE TRIBUNAL DISMISSED THE REVENUES APPEAL, HOLDING THAT SINCE NO DEFECTS IN THE ACCOUNT BOOKS WERE POINTED OUT, THE ACCOUNTS COULD NOT HAVE BEEN REJECTED AND NO ADDITION COULD HAVE BEEN MADE MERELY ON ACCOUNT OF LOWER PROFIT DE CLARED BY THE ASSESSEE. ON THE REVENUES APPEAL, THE HIGH COURT HELD AS UNDER :- (PAGE 225) SECTION 145(3) PROVIDES FOR ASSESSMENT IN THE MANNER PRESCRIBED IN SECTION 144 WHERE THE ASSESSING OFFIC ER IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUN TS OF THE ASSESSEE OR WHERE EITHER THE METHOD OF ACCOUNTING PROVIDED I N SUB-SECTION (1) OR THE ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB-S ECTION (2) HAS BEEN REGULARLY FOLLOWED BY THE ASSESSEE. IT WAS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAD NOT FOLLOWED EITHER CASH OR M ERCANTILE SYSTEM OF ACCOUNTING. IT WAS ALSO NOT THE CASE OF THE REVENUE THAT THE CENTRAL GOVERNMENT HAD NOTIFIED ANY PARTICULAR ACCOUNTING S TANDARD TO BE FOLLOWED BY TOUR OPERATORS. HENCE, THE SECOND PART OF SUB-SECTION (3) OF SECTION 145 WOULD NOT APPLY TO THE INSTANT CASE. [PARA 5] ..THE ASSESSING OFFICER HAD NOT POINTED OUT ANY PARTICULAR DEFECT OR DISCREPANCY IN THE ACCOUNT BOOKS MAINTAIN ED BY THE ASSESSEE. DURING THE COURSE OF HEARING BEFORE THE C OMMISSIONER (APPEALS), IT WAS POINTED OUT BY THE ASSESSEE THAT HER ACCOUNT BOOKS WERE DULY AUDITED UNDER SECTION 44AB OF THE CENTRAL EXCISE ACT AND THE QUANTITATIVE DETAILS AS REQUIRED BY .. (PAGE 227 ..) CLAUSE 28(B) OF FORM NO. 3CD REGAR DING RAW MATERIAL AND FINISHED PRODUCTS (I.E., OPENING STOCK OF RAW MATERIAL, RAW MATERIAL ISSUED TO PRODUCTION DEPARTMENT, RAW M ATERIAL CONSUMED AND CLOSING STOCK OF RAW MATERIAL, OPENING STOCK OF FINISHED GOODS, FINISHED GOODS PRODUCED DURING THE YEAR, FIN ISHED GOODS SOLD AND CLOSING STOCK OF FINISHED GOODS) WERE PREPARED AND AUDITED BY CERTIFIED ACCOUNTANT AND WERE ENCLOSED WITH FORM NO . 3CD WHICH HAD BEEN PLACED ON RECORD, BUT THE ASSESSING OFFICE R HAD IGNORED THE FACTUAL FIGURES, BOTH IN QUALITATIVE AND QUANTITATI VE TERMS, ENCLOSED WITH THE RETURN AND FILED DURING THE COURSE OF ASSE SSMENT PROCEEDINGS. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 24 IT WAS FOR THAT REASON THAT THE COMMISSIONER (APPEA LS) WAS SATISFIED THAT THE ASSESSEE HAD FURNISHED COMPLETE DETAILS, I NCLUDING QUANTITATIVE DETAILS IN RESPECT OF PURCHASE OF RAW MATERIAL, MANUFACTURE OF COPPER WIRE AND SALE OF THE FINISHED PRODUCTS. IN THOSE CIRCUMSTANCES, THE ACCOUNTS MAINTAINED BY THE ASSES SEE COULD NOT HAVE BEEN SAID TO BE INCOMPLETE OR INACCURATE. IN F ACT, THE ASSESSING OFFICER HAD NO MATERIAL BEFORE HIM TO TREAT THE ACC OUNTS OF THE ASSESSEE AS DEFECTIVE OR INCOMPLETE. [PARA 6] AS REGARDS THE MARGINAL INCREASE IN THE WEIGHT OF T HE FINISHED PRODUCT, THE EXPLANATION GIVEN BY THE ASSESSEE HAD BEEN ACCEPTED NOT ONLY BY THE COMMISSIONER (APPEALS) BUT ALSO BY THE TRIBUNAL. THE ASSESSING OFFICER HAD NO MATERIAL BEFORE HIM ON THE BASIS OF WHICH IT COULD BE SAID THAT THE WEIGHT OF THE WIRE DID NOT I NCREASE EVEN MARGINALLY DURING THE PROCESS OF ENAMELLING. THEREF ORE, HE HAD NO JUSTIFICATION, IN LAW, IN REJECTING THE EXPLANATION GIVEN BY THE ASSESSEE IN THAT REGARD. THE FALL IN GROSS PROFIT RATIO, IN THE ABSENCE OF ANY COGENT REASONS COULD NOT, BY ITSELF, HAVE BEEN A GR OUND TO HOLD THAT PROPER INCOME OF THE ASSESSEE COULD NOT BE DEDUCED FROM THE ACCOUNTS MAINTAINED BY HER AND, CONSEQUENTLY, COULD NOT HAVE BEEN A GROUND TO REJECT THE ACCOUNTS BY INVOKING SECTION 145(3). [PA RA 8] THE FALL IN THE GROSS PROFIT RATIO COULD BE FOR VAR IOUS REASONS SUCH AS INCREASE IN THE COST OF RAW MATERIAL, DECREASE IN T HE MARKET PRICE OF FINISHED PRODUCT, INCREASE IN THE COST OF PROCESSIN G BY THE ASSESSEE, ETC. THERE WAS NO FINDING THAT THE ACTUAL COST OF T HE RAW MATERIAL PURCHASED BY THE ASSESSEE WAS LESS THAN WHAT WAS DE CLARED IN THE ACCOUNT BOOKS. THERE WAS NO FINDING THAT THE ACTUAL COST OF PROCESSING CARRIED OUT BY THE ASSESSEE WAS LESS THAN WHAT HAD BEEN DECLARED IN HER ACCOUNT BOOKS. NO PARTICULAR EXPENDITURE SHOWN IN THE ACCOUNT BOOKS HAD BEEN DISALLOWED BY THE ASSESSING OFFICER. THERE WAS NO FINDING BY THE ASSESSING OFFICER THAT THE ACTUAL QU ANTITY OF FINISHED PRODUCTS PRODUCED BY THE ASSESSEE WAS MORE THAN WHA T WAS SHOWN IN THE ACCOUNT BOOKS. THERE WAS NO FINDING THAT THE . (PAGE 228 ) ASSESSEE HAD MADE ANY SUCH SALE OF TH E FINISHED PRODUCTS WHICH WAS NOT REFLECTED IN THE ACCOUNT BOO KS. THERE WAS NO FINDING BY THE ASSESSING OFFICER THAT THE FINISHED PRODUCTS WERE SOLD BY THE ASSESSEE AT A PRICE HIGHER THAN WHAT WAS DEC LARED IN THE ACCOUNT BOOKS. IN THOSE CIRCUMSTANCES, THE COMMISSI ONER (APPEALS) AND THE TRIBUNAL WERE JUSTIFIED IN HOLDING THAT THE ASSESSING OFFICER COULD NOT HAVE INCREASED THE GROSS PROFIT RATIO MER ELY BECAUSE IT WAS ITA NOS.167, 168, 169 & 190 TO 194/A/2011 25 LOW AS COMPARED TO THE GROSS PROFIT RATIO OF THE PR ECEDING YEAR. [PARA 9] THE REVENUE CONTENDED THAT THE ASSESSEE WAS NOT MAI NTAINING THE DAILY STOCK REGISTER. HOWEVER, NO SUCH FINDING WAS FOUND IN THE ASSESSMENT ORDER. ON THE OTHER HAND, THE ASSESSEE H AD SUBMITTED BEFORE THE COMMISSIONER (APPEALS) THAT FORM NO. 3CD CONTAINING ALL THE QUANTITATIVE DETAILS IN RESPECT OF RAW MATERIAL S AS WELL AS THE FINISHED GOODS AND DULY AUDITED BY THE CERTIFIED AC COUNTANT HAD BEEN PLACED ON RECORD, BUT THE ASSESSING OFFICER IGNORED THOSE ACTUAL FIGURES ENCLOSED WITH THE RETURN. IN ANY CASE, THER E IS NO STATUTORY PROVISION UNDER THE INCOME-TAX REGIME REQUIRING THE ASSESSEE TO MAINTAIN THE DAILY STOCK REGISTER. HENCE, EVEN IF N O SUCH REGISTER WAS BEING MAINTAINED BY THE ASSESSEE, THAT, BY ITSELF, WOULD NOT LEAD TO THE INFERENCE THAT IT WAS NOT POSSIBLE TO DEDUCE THE TR UE INCOME OF THE ASSESSEE FROM THE ACCOUNTS MAINTAINED BY HER, NOR T HE ACCOUNTS COULD BE SAID TO BE DEFECTIVE OR INCOMPLETE FOR THAT REAS ON ALONE. IF THE STOCK REGISTER IS NOT MAINTAINED BY THE ASSESSEE, THAT MA Y PUT THE ASSESSING OFFICER ON GUARD AGAINST THE FALSITY OF THE RETURN MADE BY THE ASSESSEE AND PERSUADE HIM TO CAREFULLY SCRUTINIZE THE ACCOUN T BOOKS OF THE ASSESSEE, BUT THE ABSENCE OF ONE REGISTER ALONE DOE S NOT AMOUNT TO SUCH A MATERIAL LEADING TO THE CONCLUSION THAT THE ACCOUNT BOOKS WERE INCOMPLETE OR INACCURATE. SIMILARLY, IF THE RATE OF GROSS PROFIT DECLARED BY THE ASSESSEE IN A PARTICULAR PERIOD IS LOWER AS COMPARED TO THE GROSS PROFIT DECLARED BY HIM IN THE PRECEDING YEAR, THAT MAY ALERT THE ASSESSING OFFICER AND SERVE AS A WARNING TO HIM TO LOOK INTO THE ACCOUNTS MORE CAREFULLY AND TO LOOK FOR SOME MATERI AL WHICH COULD LEAD TO THE CONCLUSION THAT THE ACCOUNTS MAINTAINED BY THE ASSESSEE WERE NOT CORRECT, BUT A LOW RATE OF GROSS PROFIT, I N THE ABSENCE OF ANY MATERIAL POINTING TOWARDS FALSEHOOD OF THE ACCOUNT BOOKS, CANNOT, BY ITSELF, BE A GROUND TO REJECT THE ACCOUNT BOOKS UND ER SECTION 145(3). [PARA 10] 32. AFTER REJECTING THE BOOKS OF ACCOUNT, THE ASSES SING OFFICER IS TO MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144. SECTION 144 PROVIDES BEST JUDGMENT ASSESSMENT. THE SCOPE OF BEST JUDGMENT HA S BEEN EXAMINED BY THE ITA NOS.167, 168, 169 & 190 TO 194/A/2011 26 APEX COURT IN THE CASE OF STATE OF KERALA VS. C. VE LUKUTTY, 60 ITR 239 (SC) AS UNDER :- WHAT IS THE SCOPE OF SECTION 12(2)(B) OF THE ACT ? THE EXPRESSION TO THE BEST OF HIS JUDGMENT IN THE SAID CLAUSE IS PRE SUMABLY BORROWED FROM SECTION 23(4) OF THE INCOME-TAX ACT. THE SAID EXPRESSION IN THE INCOME-TAX ACT WAS THE SUBJECT OF JUDICIAL SCRUTINY . THE PRIVY COUNCIL IN COMMISSIONER OF INCOME-TAX V. LAXMINARAYAN BADRI DAS HAS CONSIDERED THOSE WORDS. THEREIN IT OBSERVED: HE (THE ASSESSING AUTHORITY) MUST NOT ACT DISHONES TLY, OR VINDICTIVELY OR CAPRICIOUSLY BECAUSE HE MUST EXERCISE JUDGMENT I N THE MATTER. HE MUST MAKE WHAT HE HONESTLY BELIEVES TO BE A FAIR ES TIMATE OF THE PROPER FIGURE OF ASSESSMENT, AND FOR THIS PURPOSE H E MUST, THEIR LORDSHIPS THINK, BE ABLE TO TAKE INTO CONSIDERATION LOCAL KNOWLEDGE AND REPUTE IN REGARD TO THE ASSESSEE'S CIRCUMSTANCE S, AND HIS OWN KNOWLEDGE OF PREVIOUS RETURNS BY AND ASSESSMENTS OF THE ASSESSEE, AND ALL OTHER MATTERS WHICH HE THINKS WILL ASSIST H IM IN ARRIVING AT A FAIR AND PROPER ESTIMATE; AND THOUGH THERE MUST NEC ESSARILY BE GUESS- WORK IN THE MATTER, IT MUST BE HONEST GUESS-WORK. I N THAT SENSE, TOO, THE ASSESSMENT MUST BE TO SOME EXTENT ARBITRARY. THE PRIVY COUNCIL, WHILE RECOGNIZING THAT AN ASSESS MENT MADE BY AN OFFICER TO THE BEST OF HIS JUDGMENT INVOLVED SOME G UESS-WORK, EMPHASIZED THAT HE MUST EXERCISE HIS JUDGMENT AFTER TAKING INTO CONSIDERATION THE RELEVANT MATERIAL. THE VIEW EXPRE SSED BY THE PRIVY COUNCIL IN THE CONTEXT OF THE INCOME-TAX ACT WAS FO LLOWED WHEN A SIMILAR QUESTION AROSE UNDER THE SALES TAX ACT. A D IVISION BENCH OF THE CALCUTTA HIGH COURT IN JAGADISH PROSAD PANNALAL V. MEMBER, BOARD OF REVENUE, WEST BENGAL, CONFIRMED THE ASSESS MENT MADE BY THE SALES TAX AUTHORITIES, AS IN MAKING THE BEST JU DGMENT ASSESSMENT THE SAID AUTHORITIES CONSIDERED ALL THE AVAILABLE M ATERIALS AND APPLIED THEIR MIND AND TRIED THEIR BEST TO COME TO A CORREC T CONCLUSION. SO TOO, A DIVISION BENCH OF THE PATNA HIGH COURT IN DOMA SA HU KISHUN LAL SAO V. STATE OF BIHAR REFUSED TO INTERFERE WITH THE BEST JUDGMENT ASSESSMENT OF A SALES TAX OFFICER AS HE TOOK EVERY RELEVANT MATERIAL INTO CONSIDERATION, NAMELY, THE SITUATION OF THE SH OP, THE RUSH OF THE CUSTOMERS AND THE STOCK IN THE SHOP AND ALSO THE ES TIMATE MADE BY THE ASSISTANT COMMISSIONERS IN THE PREVIOUS QUARTERS. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 27 UNDER SECTION 12(2)(B) OF THE ACT, POWER IS CONFERR ED ON THE ASSESSING AUTHORITY IN THE CIRCUMSTANCES MENTIONED THERE UNDE R TO ASSESS THE DEALER TO THE BEST OF HIS JUDGMENT. THE LIMITS OF T HE POWER ARE IMPLICIT IN THE EXPRESSION 'BEST OF HIS JUDGMENT'. JUDGMENT IS A FACULTY TO DECIDE MATTERS WITH WISDOM TRULY AND LEGALLY. JUDGM ENT DOES NOT DEPEND UPON THE ARBITRARY CAPRICE OF A JUDGE, BUT O N SETTLED AND INVARIABLE PRINCIPLES OF JUSTICE. THOUGH THERE IS A N ELEMENT OF GUESS- WORK IN A 'BEST JUDGMENT ASSESSMENT', IT SHALL NOT BE A WILD ONE, BUT SHALL HAVE A REASONABLE NEXUS TO THE AVAILABLE MATE RIAL AND THE CIRCUMSTANCES OF EACH CASE. THOUGH SUBSECTION (2) O F SECTION 12 OF THE ACT PROVIDES FOR A SUMMARY METHOD BECAUSE OF THE DE FAULT OF THE ASSESSEE, IT DOES NOT ENABLE THE ASSESSING AUTHORIT Y TO FUNCTION CAPRICIOUSLY WITHOUT REGARD FOR THE AVAILABLE MATER IAL. CAN IT BE SAID THAT IN THE INSTANT CASE THE IMPUGNE D ASSESSMENT SATISFIED THE SAID TESTS ? FROM THE DISCOVERY OF SE CRET ACCOUNTS IN THE HEAD OFFICE, IT DOES NOT NECESSARILY FOLLOW THAT A CORRESPONDING SET OF SECRET ACCOUNTS WERE MAINTAINED IN THE BRANCH OFFIC E, THOUGH IT IS PROBABLE THAT SUCH ACCOUNTS WERE MAINTAINED. BUT, A S THE ACCOUNTS WERE SECRET, IT IS ALSO NOT IMPROBABLE THAT THE BRA NCH OFFICE MIGHT NOT HAVE KEPT PARALLEL ACCOUNTS, AS DUPLICATION OF FALS E ACCOUNTS WOULD FACILITATE DISCOVERY OF FRAUD AND IT WOULD HAVE BEE N THOUGHT ADVISABLE TO MAINTAIN ONLY ONE SET OF FALSE ACCOUNTS IN THE H EAD OFFICE. BE THAT AS IT MAY, THE MAINTENANCE OF SECRET ACCOUNTS IN THE B RANCH OFFICE CANNOT BE ASSUMED IN THE CIRCUMSTANCES OF THE CASE. THAT A PART, THE MAINTENANCE OF SECRET ACCOUNTS IN THE BRANCH OFFICE MIGHT LEAD TO AN INFERENCE THAT THE ACCOUNTS DISCLOSED DID NOT COMPR EHEND ALL THE TRANSACTIONS OF THE BRANCH OFFICE. BUT THAT DOES NO T ESTABLISH OR EVEN PROBABILIZE THE FINDING THAT 135% OR 200% OR 500% O F THE DISCLOSED TURNOVER WAS SUPPRESSED. THAT COULD HAVE BEEN ASCER TAINED FROM OTHER MATERIALS. THE BRANCH OFFICE HAD DEALINGS WIT H OTHER CUSTOMERS. THEIR NAMES WERE DISCLOSED IN THE ACCOUNTS. THE ACC OUNTS OF THOSE CUSTOMERS OR THEIR STATEMENTS COULD HAVE AFFORDED A BASIS FOR THE BEST JUDGMENT ASSESSMENT. THERE MUST ALSO HAVE BEEN OTHE R SURROUNDING CIRCUMSTANCES, SUCH AS THOSE MENTIONED IN THE PRIVY COUNCIL'S DECISION CITED SUPRA. BUT IN THIS CASE THERE WAS NO MATERIAL BEFORE THE ASSESSING AUTHORITY RELEVANT TO THE ASSESSMENT AND THE IMPUGNED ASSESSMENTS WERE ARBITRARILY MADE BY APPLYING A RAT IO BETWEEN DISCLOSED AND CONCEALED TURNOVER IN ONE SHOP TO ANO THER SHOP OF THE ASSESSEE. IT WAS ONLY A CAPRICIOUS SURMISE UNSUPPOR TED BY ANY ITA NOS.167, 168, 169 & 190 TO 194/A/2011 28 RELEVANT MATERIAL. THE HIGH COURT, THEREFORE, RIGHT LY SET ASIDE THE ORDERS OF THE TRIBUNAL. 33. IN THE LIGHT OF ABOVE DISCUSSIONS, IF WE CONSID ER THE FACTS OF THE CASE, WE FIND THAT THE BOOKS OF THE ASSESSEES WERE FOUND MAINTAIN ED AT THE TIME OF ASSESSMENT. THE A.O. FAILED POINT OUT SUCH DEFECTS IN BOOKS OF ACCOUNTS BASED ON WHICH IT CAN BE SAID THAT BOOKS OF ACCOUNTS CAN BE REJECTED UNDE R SECTION 145(3) OF THE ACT. THE A.O. SIMPLY POINTED OUT THAT THE ASSESSEE FAILED TO PRODUCE SUPPORTING DOCUMENTS IN SUPPORT OF EXPENSES CLAIMED. THE A.O. NOTED THA T THE ASSESSEE DID NOT PRODUCE BOOKS OF ACCOUNT BUT THIS IS INCORRECT FINDING OF T HE A.O. THE LD. AUTHORISED REPRESENTATIVE HAS DEMONSTRATED BY REFERRING COPIES OF ORDER SHEETS OF PROCEEDING BEFORE THE A.O. WHICH HAVE BEEN PLACED AT PAGE NOS. 8 & 9 OF PAPER BOOK. THE RELEVANT ENTRIES OF THE ORDER SHEET DATED 16.12.201 0 IS REPRODUCED AS BELOW: - (PAGE NO.9 OF ASSESSEES PAPER BOOK) 16.12.2010 CA THUKRAL APPEARED AND FILED REPLY WHICH IS KEPT O N RECORD. BOOKS OF ACCOUNT ALONG WITH WEAVING REGISTER, YARN OPENING REGISTER, YARN ISSUE REGISTER, PRODUCTION REGISTER, WASHING REGISTER, CLIPPING REGISTER, STRETCHING & LATEXING REGISTER, FINAL PACKING REGISTER AND MAP & DESIGNING REGISTER WERE PRODUCED AND TEST CHECKED, FURTHER ASKED TO PRODUCE THE SAME FOR FURT HER VERIFICATION ON 20.12.2010. 34. FURTHER, ON PERUSAL OF PAGE NOS.10 TO 29 OF PAP ER BOOK WHERE COPIES OF LIST/INVENTORY OF ACCOUNT BOOKS ETC. FOUND/SEIZED H AVE BEEN PLACED. IN THE LIST IT IS ITA NOS.167, 168, 169 & 190 TO 194/A/2011 29 MENTIONED ABOUT BOOKS OF ACCOUNT INCLUDING LEDGER, CASH BOOK, ISSUE REGISTERS AND OTHERS, CPU, COMPUTER ALONG WITH BOOK OF COMPUTER. THUS, THE RELEVANT BOOKS OF ACCOUNT WERE FOUND AT THE TIME OF SEARCH AND THE SA ME WERE SEIZED. AS REGARDS A.O.S OBJECTION THAT THE ASSESSEE FAILED TO ESTABL ISH ANY CORRELATION BETWEEN CARPET MANUFACTURER BY IT AND THE MANUFACTURING EXPENSES C LAIMED. IN THIS REGARD, WE ARE OF THE VIEW THAT IT IS NOT NECESSARY FOR AN ASSESSE E TO MAINTAIN BOOKS OF ACCOUNT WHAT THE A.O. IS THINKING. SOME TIME THERE MAY BE D IFFICULTIES FOR ASSESSEE TO MAINTAIN STAGE-WISE RECORD AS NATURE OF BUSINESS AN D PROCEDURE OF MANUFACTURING PROCESS IS SO COMPLICATED OR PRACTICALLY NOT POSSIB LE. THEREFORE, UNDER CERTAIN CIRCUMSTANCES, IT IS DIFFICULT TO MAINTAIN STOCK RE GISTER OR OTHER RECORDS AS DESIRED BY THE A.O. IN THE CASE UNDER CONSIDERATION, THE A .O. HIMSELF ADMITTED THE FACTS THAT THE ASSESSEE PRODUCES HUNDREDS OF VARIETIES OF CARPETS AND UTILIZES VARIOUS QUALITIES OF RAW WOOLS/COTTON YARNS, WHOSE RATES HA VE SUBSTANTIAL VARIATIONS. THAT CARPET ARE MANUFACTURED BY THE WEAVERS AT THEIR RES IDENCES AND THEY OBTAIN WOOL AND OTHER RAW MATERIALS FROM THE EXPORTERS/CONTACTO R AND AFTER WEAVING THE CARPETS THEY RETURN BACK THE SAME TO THE EXPORTERS/CONTRACT ORS. AS REGARDS OBSERVATION OF CLOSING STOCK OF THE A.O., ON PERUSAL OF PAGE NOS.5 4 TO 60 OF THE PAPER BOOK WHERE A COPY OF DETAILS SUBMITTED VIDE LETTER DATED 16/17 .12.2010 HAVE BEEN PLACED. THE RELEVANT ABSTRACTS ARE REPRODUCED AS UNDER: - (PAGE NOS.54 & 55 OF ASSESSEES PAPER BOOK) ITA NOS.167, 168, 169 & 190 TO 194/A/2011 30 KINDLY REFER TO ABOVE ASSESSEES SUBMISSIONS TO TH E QUERY ARE AS UNDER : THE ASSESSEE IS PRODUCING THE MANUFACTURING/PRODUCT ION EXPENSES AS MORE SUBSIDIARY REGISTERS, VOUCHERS AND RELEVANT FILES HERE WITH AS CALLED OR VIDE ORDER SHEET ENTRY DATED 15.12.2010 AS FOLLOWS: 1. WASHING REGISTER 2. STRETCHING & LATEXING REGISTER 3. CLIPPING REGISTER 4. YARN OPENING REGISTER 5. WEAVING REGISTER 6. MAP & DESIGNING REGISTER 7. FINAL BACKING REGISTER HOWEVER, IT IS NOT OUT OF PLACE TO MENTION THAT THE DAY TO DAY STOCK IN THE CARPET INDUSTRY IS NOT POSSIBLE AS THE RE ARE HUNDRED VERITIES OF CARPETS AND WOOLEN YARN USED IN MAKING THE CARPETS. ABSENCE OF STOCK REGISTER ALONE IS NOT A GROUND TO INFER THAT ACCOUNT ARE INACCURATE OR INCORRECT AS RELIED IN THE RECENT CASE OF CIT VS. SMT. POONAM RANI (DELHI) 328 ITR 223. THE PRODUCTION OF CARPETS BY THE WEAVERS ALSO TAKEN AMPLE TIME. THUS LIKE MANUFACTU RING UNITS, DAY WISE PRODUCTION REGISTER CANNOT BE MAINTAINED. HOW EVER, PRODUCTION EXPENSES ARE VERIFIABLE FROM THE CORRESPONDING REGI STERS MAINTAINED IN RECORDING THE PRODUCTION COST AS ABOVE WHICH EVI DENCES THE GENUINENESS OF THE EXPENDITURE. MOREOVER, THE QUAN TITATIVE TALLY ARE DULLY AUDITED AND ENCLOSED IN FORM NO.3 CD OF AUDIT REPORT. THE INVENTORY OF OPENING STOCK OF RAW MATERIAL PLUS PRODUCTION MINUS RAW MATERIAL CONSUMED MINUS WASTAGE EQUAL TO CLOSING STOCK OF RAW MATERIAL HAS BEEN ENCLOSED WITH THE BALANCE. T HE VALUATION OF CLOSING STOCK IS DONE ON PHYSICAL VERIFICATION AND AT COST PRICE. THUS, THERE IS NO INSTANCE OF UNDER VALUATION OF CLOSING STOCK. 35. FROM ABOVE IT IS VERY CLEAR THAT THE ASSESSEE H AS EXPLAINED THE CIRCUMSTANCES AND NATURE OF BUSINESS REGARDING MAINTENANCE OF REQ UIRED RECORD BY THE A.O. THAT THE DAY-TO-DAY STOCK IN THE CARPET INDUSTRY IS NOT POSSIBLE AS THERE ARE HUNDRED ITA NOS.167, 168, 169 & 190 TO 194/A/2011 31 VERITIES OF CARPETS AND WOOLEN YARN USED IN MAKING THE CARPETS. ABSENCE OF STOCK REGISTER ALONE IS NOT A GROUND TO INFER THAT ACCOUN TS ARE INACCURATE OR INCORRECT PARTICULARLY IN CASE OF SEARCH AND DURING THE COURS E OF SEARCH NO INCREMENT MATERIAL FOUND IN THIS REGARDS. THE PRODUCTION OF CARPETS B Y THE WEAVERS IS ALSO TAKEN AMPLE TIME. THUS, LIKE MANUFACTURING UNITS, DAY-WI SE PRODUCTION REGISTER CANNOT BE MAINTAINED. THE ASSESSEE FURTHER EXPLAINED THAT PRODUCTION EXPENSES ARE VERIFIABLE FROM THE CORRESPONDING REGISTERS MAINTAI NED IN RECORDING THE PRODUCTION COST AS ABOVE WHICH EVIDENCES THE GENUINENESS OF TH E EXPENDITURE. MOREOVER, THE QUANTITATIVE TALLY ARE DULY AUDITED AND ENCLOSED IN FORM NO.3CD OF AUDIT REPORT. IT WAS ALSO EXPLAINED BY THE ASSESSEE THAT THE INVE NTORY OF OPENING STOCK OF RAW MATERIAL PLUS PRODUCTION MINUS RAW MATERIAL CONSUME D MINUS WASTAGE EQUAL TO CLOSING STOCK OF RAW MATERIAL HAS BEEN ENCLOSED WIT H THE BALANCE SHEET. THE VALUATION OF CLOSING STOCK IS DONE ON PHYSICAL VERI FICATION AND AT COST PRICE. THUS, THERE IS NO INSTANCE OF UNDER-VALUATION OF CLOSING STOCK. THE AUDIT WAS COMPLETED BEFORE THE SEARCH. THE RELEVANT DETAILS OF STOCK F URNISHED BEFORE THE A.O. ARE ON PAGE NO.93 OF PAPER BOOK. THE SAME ARE REPRODUCED A S BELOW:- (PAGE NO 93 OF ASSESSEES PAPER BOOK) M/S. SUPERIOR CARPET PALACE RAJPURA, BHADOHI DETAILS OF CLOSING STOCK AS ON 31 ST MARCH, 2005 PARTICULARS OPENING STOCK PURCHASE/ PRODUCTION TOTAL CONSUM/ SALE EXCESS/ LOSS CLOSING STOCK WOOLEN YARN (KG.) 33,810.90 127,073.00 160,883.90 126,049.75 5,399.8 0 29,434.35 ITA NOS.167, 168, 169 & 190 TO 194/A/2011 32 COTTON YARN (KG) 3,373.00 - 3,373.00 - - 3,373.00 TUFTED 30C 847.05 1,458.63 2,305.68 2,305.68 NIL N IL TUFTED 60C - 10,835.37 45,223.45 56,058.82 56,058.8 2 - - 12/60 NIL 154.34 NIL 154.34 154.34 NIL NIL 10/50 NIL 17.11 NIL 17.11 17.11 NIL NIL 6/36 NIL 564.23 NIL 564.23 564.23 NIL NIL 8/42 NIL 526.16 NIL 526.16 526.16 NIL NIL DETAILS OF CLOSING STOCK AS ON 31 ST MARCH, 2005 PARTICULARS VALUE (IN KGS.) @ AMOUNT RS. PS. WOOLEN YARN 29434.35 100.00 2,943,435.00 COTTON YARN 3373.00 65.00 219,245.00 HESSIAN & POLYTHENE - - 146,681.00 TOTAL 3,309,361.00 36. FROM ABOVE DISCUSSIONS, WE FIND THAT UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE SECTION 145(3) IS NOT APPLICABLE. THE A.O. HAS WRONGLY INVOKED SECTION 145(3) OF THE ACT. THE A.O. HEAVILY RELIED UPON TH E FACT THAT THE BOOKS OF ACCOUNT WERE NOT FOUND AT THE TIME OF SEARCH. THIS BASIS I S ALSO DOES NOT SUPPORT TO THE FINDING OF THE A.O. BECAUSE WE ARE OF THE VIEW THA T EVEN IF THE BOOKS OF ACCOUNT ARE MAINTAINED AFTER THE SEARCH ON THE BASIS OF ACC EPTED ACCOUNTING PRINCIPLE AND ALL MATERIAL AND NO DEFECTS ARE FOUND, SUCH BOOKS O F ACCOUNT ARE ACCEPTABLE. FURTHER EVEN IF BOOKS OF ACCOUNT ARE REJECTED, NO A DDITION IS NECESSARY AS HELD BY THE HONBLE THE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. GOTANLIME KHANIJ UDYOG, 256 ITR 243 (RAJ). THE COURT HELD THAT PROV ISIONS DO NOT ENVISAGE THAT BY RESORTING TO BEST JUDGMENT ASSESSMENT, THE ASSESSIN G AUTHORITY MUST REACH A ITA NOS.167, 168, 169 & 190 TO 194/A/2011 33 DIFFERENT FIGURE OF INCOME AND PROFIT THAN WHAT HAS BEEN DISCLOSED BY THE ASSESSEE. BEST JUDGMENT IS ALSO TO BE BASED ON THE MATERIAL A VAILABLE ON RECORD. THEREFORE, NOTWITHSTANDING THE REJECTION OF THE BOOKS OF ACCOU NT, THE MATERIAL DISCLOSED BY THE ASSESSEE ALONG WITH OTHER MATERIAL THAT MAY BE COLL ECTED BY THE INCOME-TAX OFFICER FORMS THE BASIS OF COMPUTATION OF INCOME. ON THAT BASIS WHAT CONCLUSIONS ARE TO BE REACHED IS INDEPENDENT OF THE RESULTS SHOWN IN T HE BOOKS OF ACCOUNT, IF ANY MAINTAINED BY THE ASSESSEE. SECTION 145 ONLY PROVI DES THE BASIS ON WHICH COMPUTATION OF INCOME IS TO BE MADE FOR THE PURPOSE OF DETERMINING THE AMOUNT OF TAX PAYABLE BY AN ASSESSEE. THE PROVISION BY ITSEL F DOES NOT DEAL WITH ADDITION OR DELETION IN THE INCOME. THEREFORE, MERELY BECAUSE THERE IS SOME MINOR DEFICIENCY IN THE BOOKS OF ACCOUNT OR MERELY BECAUSE OF REJECT ION OF THE BOOKS OF ACCOUNT IT DOES NOT MEAN THAT IT MUST LEAD NECESSARILY TO ADDI TIONS IN THE RETURNED INCOME OF THE ASSESSEE. 37. THE SECOND ASPECT OF THE MATTER IS IN RESPECT O F ESTIMATION OF INCOME ENHANCING GROSS PROFIT BY APPLYING 15% BY A.O. AS STATED ABOVE THAT AFTER REJECTING BOOKS OF ACCOUNT THE ASSESSMENT IS TO MAK E UNDER BEST JUDGMENT. WHETHER UNDER THE FACTS AND CIRCUMSTANCES OF THE CA SE, ESTIMATION MADE BY THE A.O. IS THE BEST JUDGMENT. BEST OF HIS JUDGMENT JUDGMENT IS A FACULTY TO DECIDE MATTERS WITH WISDOM TRULY AND LEGALLY. JUDGMENT DOE S NOT DEPEND UPON THE ARBITRARY CAPRICE OF A JUDGE, BUT ON SETTLED AND IN VARIABLE PRINCIPLES OF JUSTICE. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 34 THOUGH THERE IS AN ELEMENT OF GUESS-WORK IN A BEST JUDGMENT ASSESSMENT, IT SHALL NOT BE A WILD ONE, BUT SHALL HAVE A REASONABLE NEXU S TO THE AVAILABLE MATERIAL AND THE CIRCUMSTANCES OF EACH CASE. 38. WE FIND THAT DURING THE COURSE OF SEARCH OR POS T SEARCH OR AT THE TIME OF ASSESSMENT PROCEEDINGS OR OTHERWISE NO MATERIAL FOU ND BASIS ON WHICH 15% ENHANCEMENT IN PROFIT CAN BE SAID TO BE JUSTIFIED. THE A.O. WHILE MAKING EXTRA PROFIT ADDITION ON FLAT RATE OF 15% OF THE GROSS PR OFIT DISCLOSED, HAS NOT FOLLOWED NECESSARY INGREDIENTS FOR ESTIMATING THE INCOME. T HE A.O. HAS NOT CITED A SINGLE COMPARABLE CASE IN SUPPORT OF HIS ESTIMATION AND, O N THE OTHER HAND, HE HAS NEITHER COUNTERED THE COMPARABLE CASES CITED BY THE ASSESSE E NOR HE WAS JUSTIFIED TO ENHANCE THE G.P. WHEN HE HIMSELF ACCEPTED MUCH LOWE R BOOK RESULT IN CASE OF M/S. CARPET PALACE IN A.Y. 2003-2004 AS CITED BY THE ASS ESSEE IN SYNOPSIS. HE HAS ALSO NOT CONSIDERED ASSESSEES REASONABLE EXPLANATION FO R THE BOOK RESULT WITH REFERENCE TO SO MANY FACTORS AFFECTING ITS BOOK RESULT FROM Y EAR TO YEAR. WE FIND THAT THE CIT(A) BEFORE DELETING THE ADDITION HAS CONSIDERED VARIOUS ASPECTS OF THE MATTER. WE NOTICED A CHART OF GROSS PROFIT SHOWN AND GROSS PROFIT ASSESSED IN ALL OTHER YEARS HAS BEEN CONSIDERED BY THE CIT(A) BEFORE DELE TING THE ADDITION.THE ASSESSING OFFICER HAS FAILED TO CONSIDER COMPARABLE CASES OF THE SAME LOCALITY AND THE SAME TRADE FURNISHED BY THE ASSESSEE VIDE REPLY DATED 16/17.12.2010 TO THE ITA NOS.167, 168, 169 & 190 TO 194/A/2011 35 ASSESSING OFFICER DURING ASSESSMENT PROCEEDINGS. T HE POSITIONS OF COMPARABLE CASES FURNISHED BY THE ASSESSEE BEFORE THE A.O. ARE REPRODUCED BELOW:- SL. NO. NAME OF ASSESSEE A.Y. G.P. REMARKS 1. SHRI QAMARUDDIN ANSARI (PROP. AZIMULLAH CARPETS, BHADOHI) 2004-05 10.86% ACCEPTED BY CIT(A), VARANASI 2. M/S HIMALAYA COLLECTION, BHADOHI 2004-05 21.12% ---- DO --------- 3. M/S ANSARI FLOOR MILLS, BHADOHI 2003-04 10.00% ---- DO --------- 4. M/S SINGH ENTERPRISES, BHADOHI 2003-04 18.77% ---- DO --------- 5. M/S KAPOORS CARPETS, BHADOHI 2004-05 18.20% ---- DO --------- 6. M/S MALIK SAHID UMAR, BHADOHI (PROP. MALIK CARPET MANUFACTURING) 2004-05 09.01% ---- DO --------- 7. M/S KAKA CARPETS, BHADOHI 2003-04 20.02% ---- DO --------- 8. M/S ARTAGE, HARIRAMPUR, AURAI ROAD, BHADOHI 203-04 16.90% ---- DO --------- 39. THE ASSESSEES GROSS PROFIT RATE OF 28.48% HAS BEEN ENHANCED TO 32.75% (28.48% PLUS (15% OF 28.48%) + 4.27% = 32.75%) WHER EAS IN COMPARABLE CASE GP DECLARED IS VERY LOW, 9% TO 21%. IF SEE THE GP D ECLARED BY THE ASSESSEE IN DIFFERENT YEARS WE FIND THAT HE ASSESSEE HAS SHOWN NATURAL GP WHICH COMES OUT ON THE BASIS OF BOOKS OF ACCOUNT FROM YEAR TO YEAR. TH E REVENUE HAS FAILED TO POINT ANY SPECIAL CIRCUMSTANCES FOR ESTIMATION OF SUCH HIGH P ROFIT PARTICULARLY IN CASE WHERE SEARCH HAS TAKEN PLACE AND DURING THE COURSE OF SEA RCH NO INCREMENT METATARSAL ITA NOS.167, 168, 169 & 190 TO 194/A/2011 36 FOUND IN THIS REGARDS. WE FIND THAT THERE WAS NO MA TERIAL BEFORE THE ASSESSING AUTHORITY RELEVANT TO THE ASSESSMENTS AND THE IMPUG NED ASSESSMENTS WERE ARBITRARILY MADE BY APPLYING AN ENHANCED G.P. BY 15 %. THERE ARE NO REASONABLE NEXUS TO THE AVAILABLE MATERIAL AND THE CIRCUMSTANC ES. IT WAS ONLY A CAPRICIOUS SURMISE UNSUPPORTED BY ANY RELEVANT MATERIAL. BEFO RE US THE REVENUE HAS FAILED TO POINT OUT ANY CONTRARY MATERIAL TO THE FINDINGS OF THE CIT(A). IN THE LIGHT OF THE FACT, WE CONFIRM THE ORDERS OF THE CIT(A) ON THE I SSUE. 40. AS DISCUSSED ABOVE THAT IN CASE OF CARPET PALAC E IN A.Y. 2009-10, ITA NO.194/A/2011, THE A.O. HAS MADE MAIN ADDITION OF R S.2,08,54,333/- ON ACCOUNT OF UNDISCLOSED STOCK. THE A.O. DID NOT MAKE ADDIT ION ON ACCOUNT OF G.P. ON THE GROUND THAT THE SAID ADDITION AND G.P. WILL BE COVE RED BY THE SAID ADDITION OF CLOSING STOCK. THE CIT (A) DELETED THE ADDITION ON ACCOUNT OF CLOSING STOCK. AFTER CONSIDERING ASSESSEES SUBMISSION AND RECONCILIATIO N FILED BY THE ASSESSEE, IT WAS EXPLAINED BY THE ASSESSEE THAT THE BOOKS OF ACCOUNT OF THE ASSESSEE FOR THE CURRENT YEAR COULD NOT BE SEARCHED ON COMPUTER IN ABSENCE O F THE ACCOUNTANT. THE SEARCH PARTY ASSUMED THE STOCK AS PER THE BOOKS ON THE BAS IS OF FINISHING REPORT OF THE TWO WASHER MEN AND DIFFERENCE BETWEEN THE SAME AND PHYS ICAL STOCK FOUND WAS ASSUMED TO BE UNDISCLOSED STOCK. THE A.O. WITHOUT MAKING FURTHER VERIFICATION HAS TAKEN THE SAME ASSUMPTION WITHOUT GOING TO SCRU TINIZE THE STOCK AS PER BOOKS PRODUCED DURING THE ASSESSMENT PROCEEDINGS AND THE PHYSICAL STOCK FOUND AT THE ITA NOS.167, 168, 169 & 190 TO 194/A/2011 37 TIME OF SEARCH. BOTH THE WASHER MEN WERE NOT EXAMI NED OR NOT CROSS-EXAMINED BY THE ASSESSEE WHOSE FURNISHING REPORTS WERE MADE ON THE BASIS OF REAL PHYSICAL STOCK AS PER THE BOOKS OF THE ASSESSEE ON THE DATE OF SEA RCH. THERE ARE CERTAIN FUNDAMENTAL ACCOUNTING AND MATHEMATICAL PRINCIPLES OF VERIFICATION OF STOCK AT THE TIME OF SEARCH OR SURVEY STOCK AS PER BOOKS OF ACCO UNT AND STOCK PHYSICALLY FOUND AT THE TIME OF SEARCH. SUCH VERIFICATION IS BASED ON TWO PILLARS, ONE IS BOOKS OF ACCOUNT AND ANOTHER IS PHYSICAL STOCK. IF EITHER O F THE PILLARS IS NOT PROPERLY FOUNDED, THE VERIFICATION OF STOCK BECOMES USELESS, BECAUSE WITHOUT THIS PROCEDURE THE RESULT CANNOT BE SAID TO BE A RESULT OF UNACCOU NTED INVESTMENT IN THE STOCK OR PROFIT. IN OTHER WORDS, IF THERE IS AN ERROR IN TA KING PHYSICAL STOCK, THE NECESSARY COMPARISON MADE WITH THE BOOKS OF ACCOUNT WILL BECO ME USELESS FOR THE PURPOSE OF INCOME TAX PROCEDURE. SIMILARLY, IF BOOKS OF ACCOU NT ARE NOT FOUND PROPERLY A COMPARISON OF PHYSICAL VERIFICATION CANNOT BE MADE. FOR CORRECT VERIFICATION OF PHYSICAL STOCK AND FOR KNOWING UNACCOUNTED INVESTME NT IN ITS STOCK, ONE HAS TO CONSIDER BOTH THE PILLARS DISCUSSED ABOVE. TO HAVE THE CORRECT FOUNDATION OF BOTH THE PILLARS NECESSARY SUITABLE ADJUSTMENTS ARE ALSO REQUIRED EITHER IN PROCEDURE OF PHYSICAL STOCK OR IN BOOKS OF ACCOUNT. IN THE CASE UNDER CONSIDERATION, IT IS ADMITTED FACT THAT AT THE TIME OF SEARCH THE BOOKS OF ACCOUNT WERE NOT FOUND, IN OTHER WORDS, ONE OF THE PILLARS OF PHYSICAL VERIFIC ATION WAS MISSING. THEREFORE, IN THE LIGHT OF ABOVE DISCUSSION, THE VERIFICATION PRO CEDURE OF STOCK WAS ITSELF DEFECTIVE, THEREFORE, ON THE BASIS OF DEFECT BASIS ADDITION CANNOT BE MADE. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 38 HOWEVER, IN THE CASE UNDER CONSIDERATION AT THE TIM E OF ASSESSMENT PROCEEDINGS THE ASSESSEE HAS DISCHARGED THE BURDEN BY FURNISHING A RECONCILIATION OF PHYSICAL STOCK AND STOCK AS PER BOOKS OF ACCOUNT. THE ASSESSEE HA S FURNISHED THE SAID RECONCILIATION STATEMENT AT PAGE NO.16 OF PAPER BOO K WHICH IS REPRODUCED AS UNDER:- PARTICULARS AMOUNT (RS.) STOCK VALUED AS ON 11.02.2009 (QUANTITY AS PER PANC HNAMA) 46,532,101 (PLEASE REFER PAGE NO.8 10 OF II PAPER BOOK) ADD: PURCHASE (FORM 11.02.2009 TO 31.03.2009) COTTON CLOTH 4,813,272 (PAGE NO.17 OF II PAPER BOO K) DIESEL 771,016 (PAGE NO.18 OF II PAPER BOOK) DYES & CHEMICALS 1,311,414 (PAGE NO.19 OF II PAPER BOOK) PACKING MATERIALS 504,050 (PAGE NO.20 OF II PAPE R BOOK) 7,399,752 ------------ -------------- 53,931,853 LESS: SALES (FROM 11.02.2009 TO 31.03.2009) CARPETS 10,317,288 (PAGE NO.21 OF II PAPER BOOK) WOOLEN YARN 716,142 (PAGE NO.22 OF II PAPER BOOK) 11,033,430 ------------ --------------- (BALANCING FIGURES) 42,898,423 CLOSING STOCK AS PER AUDITED ANNUAL ACCOUNTS AS ON 31 ST MARCH, 2009 44,511,391 (PAGE NO.307 OF I PAPER BOOK) 41. AT THE TIME OF HEARING BEFORE US, THE REVENUE H AS FAILED TO POINT OUT ANY ERROR IN THE RECONCILIATION FILED BY THE ASSESSEE. WHEN THERE IS NO DIFFERENCE IN BETWEEN PHYSICAL STOCK AND BOOKS OF ACCOUNT, AFTER CONSIDERING THE RECONCILIATION FILED BY THE ASSESSEE, WE ARE OF THE VIEW THAT NO A DDITION IS WARRANTED. IN THE LIGHT OF THE FACTS AND ABOVE DISCUSSIONS AND IN THE LIGHT OF TECHNICAL REASONS DISCUSSED BY ITA NOS.167, 168, 169 & 190 TO 194/A/2011 39 THE CIT(A), WE FIND THAT THE CIT(A) HAS RIGHTLY DEL ETED THE ADDITION. THE ORDER OF CIT(A) IS CONFIRMED. 42. ONE OF THE COMMON GROUNDS RAISED IN THESE APPEA LS IS IN RESPECT OF PROVISIONS OF SECTION 292C OF THE ACT. THE REVENUE HAS FAILED TO POINT OUT HOW THIS GROUND HELPS TO THE REVENUE WHEN THERE IS FIND ING OF THE A.O. THAT NO BOOKS OF ACCOUNT WAS FOUND DURING THE COURSE OF SEARCH. NO INCRIMINATING MATERIAL WAS ALSO FOUND DURING THE COURSE OF SEARCH AND THE A.O. MADE THE ADDITION AS IF THE CASE IS UNDER GENERAL SCRUTINY BY MAKING ADDITION APPLYING A PROFIT RATE. THE A.O. DID NOT MAKE ANY ADDITION ON THE BASIS OF MATERIAL FOUND AT THE TIME OF SEARCH, IF ANY. WE FAILED TO UNDERSTAND HOW THIS PRESUMPTION UNDER SEC TION 292C OF THE ACT IS APPLICABLE TO THE CASE UNDER CONSIDERATION WHEN THE A.O. DID NOT MAKE ANY ADDITION ON ACCOUNT OF ANY INCRIMINATING MATERIAL, MONEY, BULLION, JEWELLERY AND OTHER VALUABLE ARTICLES. HOWEVER, EVEN IF THE PROV ISION OF SECTION 292C IS APPLICABLE AS THE SAME IS REBUTTABLE AND IN THE CAS E UNDER CONSIDERATION THE ASSESSEE HAS REBUTTED THE SAME BY VARIOUS EVIDENCES , EXPLANATION AND SUBMISSION MADE BEFORE THE REVENUE AUTHORITIES. 43. IN THE LIGHT OF THE FACTS AND ABOVE DISCUSSIONS , WE DO NOT FIND ANY SUBSTANCE IN THE GROUND OF REVENUE. THEREFORE, THE SAME IS D ISMISSED. ITA NOS.167, 168, 169 & 190 TO 194/A/2011 40 44. IN THE RESULT, ALL THE APPEALS FILED BY THE REV ENUE ARE DISMISSED. (ORDER PRONOUNCED IN THE OPEN COURT) SD/- SD/- (BHAVNESH SAINI) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEMBER PBN/* COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT (APPEALS) CONCERNED 4. CIT CONCERNED 5. D.R., ITAT, ALLAHABAD BENCH, ALLAHABAD 6. GUARD FILE. BY ORDER ASSISTANT REGISTRAR INCOME-TAX APPELLATE T RIBUNAL, ALLAHABAD TRUE COPY