ITO 4(3)(3), MUMBAI V. P. KISHANCHAND TEXTILES P. LTD, MUMBAI

ITA 5187/MUM/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3749 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-05-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 03-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 24-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: OM PRAKASH MEENA
• Keywords: Rejection of books of accounts
• Section: 133A; 144

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F MUMBAI . . , / !' , ! BEFORE SH. I.P. BANSAL, JUDICIAL MEMBER /AND SH. RAJENDRA, ACCOUNTANT MEMBER . / ITA NO. 5186/MUM/2010 # # # # $ $ $ $ / ASSESSMENT YEAR 2007-08 I.T.O. 4(3)(3), MUMBAI. VS. M/S. UNICORN TEXTILES PVT. LTD., 51, AGARWAL SADAN, DADI SHETH AGAIRY LANE, KALBADEVI, MUMBAI PAN: AAACU 4180 G C.O. NO. 87/MUM/2011 (ARISING OUT OF ITA NO. 5186/MUM/2010) ASSESSMENT YEAR 2007-08 M/S. UNICORN TEXTILES PVT. LTD., 51, AGARWAL SADAN, DADI SHETH AGAIRY LANE, KALBADEVI, MUMBAI. VS. I.T.O. 4(3)(3), MUMBAI. PAN: AAACU 4180 G . / ITA NO. 5187/MUM/2010 # # # # $ $ $ $ / ASSESSMENT YEAR 2007-08 I.T.O. 4(3)(3), MUMBAI. VS. M/S. P. KISHANCHAND TEXTILES P. LTD., 51, AGARWAL SADAN, DADI SHETH AGAIRY LANE, KALBADEVI, MUMBAI. PAN: AACCP 0073 D C.O. NO. 88/MUM/2011 (ARISING OUT OF ITA NO. 5187/MUM/2010) ASSESSMENT YEAR 2007-08 M/S. P. KISHANCHAND TEXTILES P. LTD., 51, AGARWAL SADAN, DADI SHETH AGAIRY LANE, KALBADEVI, MUMBAI. VS. I.T.O. 4(3)(3), MUMBAI. PAN: AACCP 0073 D ( %& / APPELLANT ) ( '(%& / RESPONDENT ) REVENUE BY : SH. OM PRAKASH MEENA ASSESSEE BY : SH. RAKESH JOSHI DATE OF HEARING : 02-04-2013 DATE OF PRONOUNCEMENT : 15-05-2013 ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 2 !) / O R D E R PER RAJENDRA, A.M./ !' , ! . . AO AS WELL AS THE ASSESSEE HAS CHALLENGED THE ORDER DATED 27-04-2010 OF THE CIT(A)-8, MUMBAI RAISING FOLLOWING GROUNDS OF APPEA L/CROSS OBJECTIONS: GROUNDS OF APPEAL ITA NO. 5186/MUM/2010 1)(I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE U/S 69A AMOUNTING TO RS. 15,50,000/- ON ACCOUNT OF BLANK SIGNED CHEQUES FOUND AT THE PREMISES OF THE ASSESSE E COMPANY DURING SURVEY PROCEEDINGS. II) ON THE FACTS AND CIRCUMSTANCES, THE LD.CIT(A) ERRED IN HOLDING THAT SINCE THE A.O. HAS REJECTED THE BOOKS OF ACCOUNTS OF THE ASSESSEE COMPANY, BLANK SIGNED CHEQUES CANNOT BE CONSIDERED AS INCOME U/S 69A. (III) ON THE FACT AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD.CIT(A) ERRED IN IGNORING THE FACT THAT THE CHEQUES FOUND IN THE PRE MISES OF THE ASSESSEE WERE NOT REFLECTED IN THE BOOKS OF ACCOUNTS. (IV) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN IGNORING THE FACT THAT THE CHEQUES WERE ENDORSABLE BUT THE ASSESSEE FAILED TO IDENTIFY THE TRANSACTIONS IN RESPECT TO WHICH THE CHEQUES WE RE UTILIZED. 2)(I) ON THE FACT AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN DELETING THE ESTIMATION OF GROSS PROFIT @ 20% OF TH E TOTAL TURNOVER AND RESTRICTING THE ESTIMATION TO 8% OF THE BOOK SALES. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE CIT(A) ERRED IN IGNORING THE FACT THAT THE GROSS PROFIT RATE OF 20% WAS BASED ON THE ACTUAL RATES DERIVED FROM PURCHASE & SALE REGISTER, STOCK STATEM ENT AND SALES & PURCHASE BILLS PRODUCED BY THE ASSESSEE DURING THE COURSE OF ASSES SMENT PROCEEDINGS. (III) ON THE FACTS IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A ) ERRED IN IGNORING THE FACT THAT THE ESTIMATION IS BASED ON I NCREASE IN ACTUAL WEIGHTED AVERAGE OF PURCHASE & SALES FIGURES APPEARING IN THE BOOKS OF THE ASSESSEE 3)(I) ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING DISALLOWANCES OF 40% OF SELLING AND ADMINI STRATIVE EXPENSES AND RESTRICTING IT TO 10% OF THE EXPENSES. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN IGNORING THE FACT THAT THE ASSESSEE COULD NOT PRODU CE ANY DOCUMENTARY EVIDENCES IN SUPPORT OF HIS CLAIM. 4) ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE IMPUGNED ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW AND CONSEQUENTLY ON M ERITS IT DESERVES TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 5) THE APPELLANT CRA VES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 3 GROUNDS OF APPEAL C.O. NO. 87/MUM/2011 1. ON THE FACT AND CIRCUMSTANCES OF THE CASE AS WELL A S IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE REJECTION OF THE BOOKS OF A CCOUNTS AND PASSING THE ASSESSMENT ORDER U/S. 144 OF THE INCOME TAX ACT 1961. 2. ON THE FACT AND CIRCUMSTANCES OF THE CASE AS WELL A S IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ADDITION TO THE EXTENT OF T HE ESTIMATION OF THE GROSS PROFIT MARGIN OF THE APPELLANT @ 8% WHEN THE BASIS OF ARRI VING AT THE SAID WORKING WAS THE SALES & PURCHASES AS POSTED IN THE BOOKS OF ACCOUNT S ITSELF WHICH WHEN TOTALED AND COMPARED ARRIVED AT A GROSS PROFIT MARGIN OF 5.54% WITHOUT CONSIDERING AND APPRECIATING THE FACTS & CIRCUMSTANCES OF THE CASE. 3. ON THE FACT AND CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ESTIMATION OF THE CLOSING S TOCK OF THE APPELLANT AS SOLD DURING THE YEAR WITHOUT CONSIDERING AND APPRECIATIN G THE FACTS & CIRCUMSTANCES OF THE CASE. 4. THE APPELLANT CRAVES LEAVE TO ADD, AMEN D, ALTER OR DELETE THE SAID GROUND OF APPEAL. ITA NO. 5186/M/10 (AY. 2007-08) (M/S. UNICORN TEXTI LES PVT. LTD) 2. ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF TRADIN G IN FABRICS AND TEXTILE BUSINESS, FILED ITS RETURN OF INCOME ON 29-10-2007 DECLARING TOTAL INCOME AT RS. 2,66,440/-. ASSESSMENT WAS FINALISED U/S.144 OF TH E INCOME TAX ACT, 1961 (ACT) ON 29-12-2009 BY THE ASSESSING OFFICER (AO) DETERMININ G TOTAL INCOME AT RS. 93.68 LAKHS. BRIEF FACTS OF THE CASE : A SURVEY ACTION U/S. 133A OF THE ACT WAS CARRIED OUT ON 22-03-2007 AT THE OFFICE PREMISES AND GODOWNS OF THE ASSESSEE. DURIN G THE SURVEY PROCEEDINGS ONE OF THE DIRECTORS OF THE COMPANY SH. PAWAN KUMAR AGARWA L ADMITTED THAT ASSESSEE- COMPANY WAS NOT MAINTAINING ANY STOCK REGISTER AND OFFERED AN AMOUNT OF TO RS.50 LAKHS FOR THE GROUP ENTITIES AS ADDITIONAL INCOME TO COVER THE DISCREPANCIES IN THE BOOKS OF ACCOUNTS AND STOCK. BUT, SAID ADDITIONAL INCOME WAS NOT DISCLOSED, WHILE FILING ITS RETURN OF INCOME FOR THE YEAR UNDER CONS IDERATION. DURING THE COURSE OF SURVEY PROCEEDINGS, STATEMENTS OF SH. PAWAN KUMAR A GARWAL AND GODOWN-MANAGERS WERE ALSO RECORDED. INVENTORY OF THE STOCK/BOOKS O F ACCOUNTS AND DOCUMENTS WERE PREPARED BY THE MEMBERS OF THE SURVEY TEAMS. 3. FIRST GROUND OF APPEAL IS ABOUT ADDITION MADE U/S. 69A OF THE ACT OF THE SUM OF RS.15.5 LAKHS. DURING THE COURSE OF SURVEY A NUMBER OF BLANK SIGNED CHEQUES ISSUED BY VARIOUS PARTIES WERE FOUND AT THE BUSINES S PREMISES OF THE ASSESSEE- COMPANY. AO DIRECTED THE ASSESSEE TO EXPLAIN THE B LANK SIGNED CHEQUES WITH APPROPRIATE DOCUMENTARY EVIDENCES TO DETERMINE THE NATURE OF THE CHEQUES. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, AO HELD THAT ASSESSEE WAS NOT ABLE TO FURNISH ANY DOCUMENTARY EVIDENCE TO SUPPORT ITS CAS E, THAT CHEQUES WERE NOT REFLECTED IN ITS BOOKS OF ACCOUNTS, THAT THE ASSESSEE HAD NOT BEEN ABLE TO IDENTIFY THE CORRESPONDING SALES TO SUPPORT ITS CLAIM, THAT ASSE SSEE HAD FAILED TO IDENTIFY THE TRANSACTION IN RESPECT OF WHICH SAID CHEQUES HAD BE EN UTILISED, THAT ASSESSEE HAD NOT FURNISHED DETAILS OF THE MODES ADOPTED BY HIM OR HO W THE SAME WERE REFLECTED IN THE ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 4 BOOKS OF ACCOUNTS. IN THIS BACKGROUND, THE AO REJE CTED THE BOOKS OF ACCOUNTS AND A SUM OF RS.15.5 LAKHS WAS ADDED U/S.69 OF THE ACT UN DER THE HEAD INCOME FROM OTHER SOURCES BY HOLDING THAT THE AMOUNT APPEARING IN THE SIGNED BLANK CHEQUES, FOUND AT THE TIME OF SURVEY, WAS THE INCOME OF THE ASSESSEE. 3.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY (FAA). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND THE ASSESSMENT ORDER, HE HELD THAT BLANK CHEQUES FOUND IN THE COURSE OF SURVEY WE RE NOT DEPOSITED IN THE BANK A/C, THAT THE CHEQUES WERE OBTAINED BY THE APPELLANT TO ENSURE RECOVERY OF THE SALE AMOUNTS WITH RESPECT TO SALE MADE THROUGH BROKERS, THAT BLA NK CHEQUES WERE NOT ANY MONEY/ BULLION/JEWELLERY OR OTHER VALUABLE ARTICLES, THAT PROVISIONS OF SECTION 69A OF THE ACT WERE NOT APPLICABLE, THAT THE BOOKS OF ACCOUNTS OF THE APPELLANT WERE REJECTED BY THE AO, THAT HE WAS CONFIRMING THE ACTION OF THE AO OF REJECTING THE BOOKS OF ACCOUNTS AND ESTIMATING THE GROSS PROFIT, THAT ADDITION MADE SEPARATELY U/S. 69A OF THE ACT COULD NOT BE ENDORSED BECAUSE OF THE ABOVE MENTIONE D REASONS. AS A RESULT, HE DELETED THE ADDITION MADE BY THE AO. 3.2. BEFORE US, DEPARTMENTAL REPRESENTATIVE (DR) S UBMITTED THAT UN-ENDORSED CHEQUES WERE VALUABLE OR ARTICLE, THAT AO HAD RIGHT LY INVOKED THE PROVISIONS OF 69A OF THE ACT. AUTHORISED REPRESENTATIVE (AR) SUBMITT ED THAT AO HAD COMPLETED THE ASSESSMENT U/S. 144 OF THE ACT, THAT ONCE BEST JUDG MENT ASSESSMENT WAS PASSED U/S. 69A COULD NOT BE MADE. HE FURTHER SUBMITTED THAT N O QUESTION WAS ASKED TO THE DIRECTOR OF THE COMPANY DURING SURVEY PROCEEDINGS A BOUT THE CHEQUES, THAT THE CHEQUES WERE BLANK, THAT THE CHEQUES WERE NOT IN NA ME OF THE ASSESSEE, THAT NO ADVERSE INFERENCE COULD BE DRAWN AGAINST THE ASSESS EE. HE RELIED UPON THE CASES OF THIAGARAJAN R. (239 ITR 557) AND C.T.LAXMANDAS (208 ITR 859) DELIVERED BY THE HONBLE HIGH COURTS OF MADRAS. 3.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PUT BEFORE US. IT IS A FACT THAT BLANK SIGNED CHEQUES WERE FOUND A T THE BUSINESS PREMISES OF THE ASSESSEE AND SAME WERE INVENTORIED BY THE SURVEY TE AM. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES, WE ARE OF THE OPIN ION THAT BLANK CHEQUES CANNOT BE CONSIDERED AS MONEY/ BULLION/JEWELLERY OTHER AVAILA BLE ARTICLES AND PROVISIONS OF SECTION 69A ARE NOT APPLICABLE. SECONDLY, WE ENDOR SED VIEW OF THE FAA THAT ONCE BOOKS OF ACCOUNTS ARE REJECTED AND INCOME IS ESTIMA TED U/S.144 OF THE ACT, NO ADDITION CAN BE MADE U/S. 69A OF THE ACT. GROUND NO.1 IS DECIDED AGAINST THE AO. 4. NEXT GROUND OF APPEAL IS ABOUT DELETING ESTIMATED R ATE OF GROSS PROFIT FOR THE YEAR UNDER CONSIDERATION. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, AO FOUND THAT ASSESSEE WAS DELETING 8 TO 10 TYPES OF I TEMS. HE EXAMINED THE GROSS PROFIT MARGINS IN THE SAID ITEMS ON THE BASIS OF THEIR WEI GHTED AVERAGES TO GET THE TRUE GP MARGIN. HE CONSIDERED ONLY THOSE ITEMS WHICH HAD A CTUALLY BEEN PURCHASED AND SOLD DURING THE YEAR BY THE ASSESSEE-COMPANY. HE FOUND THAT MAJORITY OF THE SALES HAD BEEN IN THE GP RANGE OF 10 TO 20% OR 20% AND ABOVE. AFTER CONSIDERING THIS, HE HELD THAT THE BOOKS OF ACCOUNTS OF THE ASSESSEE COULD NO T BE RELIED UPON FOR GETTING A TRUE PICTURE OF ITS PROFIT, THAT THE GROSS PROFIT OF THE ASSESSEE FROM ITS TRADING ACTIVITY WAS TO BE ESTIMATED AT AVERAGE RATE OF 20% OF ITS TURN -OVER. CONSIDERING THE SALES AS PER THE P&L A/C AND UN-ACCOUNTED SALES OF STOCK, HE EST IMATED THE RATE OF GROSS PROFIT ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 5 @20% FOR THE AY UNDER CONSIDERATION. AS A RESULT A N ADDITION OF RS.93,37,633/- WAS MADE TO THE INCOME THE ASSESSEE. 4.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA. AF TER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, FAA HELD THAT ESTIMATE D GROSS PROFIT BY THE AO (20%) AND ASSESSEE (5.5%) WERE TOO HIGH OR TOO LOW. HE H ELD THAT AO HAD NOT CONSIDERED DIRECT EXPENSES INCURRED BY THE ASSESSEE, THAT FOR ARRIVING AT THE TRUE GP RATE, HE SHOULD HAVE TAKEN IN TO CONSIDERATION FACTORS LIKE CUSTOMS DUTY, FREIGHT, OTHER SHIPPING EXPENSES, THAT DIRECT EXPENSES FOR THE YEA R UNDER CONSIDERATION AMOUNTING TO RS. 21.63 LAKHS WERE NOT CONSIDERED BY THE AO, THAT BASIS OF ESTIMATION OF PROFIT @ 20% WAS NOT RELIABLE. HE FURTHER HELD THAT ESTIMAT ED GROSS PROFIT SHOWN BY THE ASSESSEE WAS EXTREMELY LOW, THAT THE BOOKS OF ACCOU NTS OF THE ASSESSEE WERE NEITHER COMPLETE NOR CORRECT NOR RELIABLE AT ALL, THAT APPE LLANT HAD NOT MAINTAINED BOOKS OF ACCOUNTS IN REGULAR COURSE OF BUSINESS, THAT IT HAD NOT BEEN MAINTAINING STOCK REGISTERS IN THE REGULAR COURSE OF BUSINESS. FINAL LY, HE HELD THAT THE ESTIMATED GROSS PROFIT SHOULD BE TAKEN @ 8%. 4.2. BEFORE US, DR SUBMITTED THAT AO HAD TAKEN ACTUAL PURCHASE/SALE RATES FOR DETERMINING THE GROSS PROFIT RATE, THAT FAA HAD IGN ORED RELEVANT FACTS, THAT REDUCTION IN GP RATE BY THE FAA WAS NOT BASED ON ANY REASONAB LE FOOTING.AR SUBMITTED THAT REDUCTION MADE BY THE FAA WAS HIGHER SIDE, THAT ASS ESSEE WAS SHOWING GP @5.5% AND SAME WAS BASED ON BOOKS OF ACCOUNTS, THAT NO SH OW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE FOR MAKING ADDITION UNDER THE HEAD GR OSS PROFIT RATE, THAT AO HAD ADOPTED THE RATE FROM THE SISTER CONCERN, THAT GP R ATE OF SISTER CONCERN COULD NOT BE APPLIED TO THE CASE UNDER CONSIDERATION, THAT IN TH E C.O, ONE OF THE GROUNDS IS ABOUT ADDITION UPHELD BY THE FAA UNDER THE HEAD GROSS PR OFIT RATES. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT WHILE ADOPTING THE GP RATE OF 20% AO HAD NOT CONSIDERED THE DIRECT EXPENSES INCURRED BY THE ASSESSEE AND IN OUR OPINIO N WITHOUT CONSIDERING SUCH A VITAL FACTOR GP RATE CANNOT BE DETERMINED.FAA HAS AFTER C ONSIDERING ALL THE RELEVANT FACTS ESTIMATED THE RATE OF GROSS PROFIT AT 8%.IN OUR OPI NION HIS ORDER DOES NOT NEED ANY INTERFERENCE FROM OUR SIDE ESPECIALLY CONSIDERING T HE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE. UPHOLDING THE ORDER OF THE FAA, WE DECIDE GROUND NO.2 AGAINST THE AO. 5. NEXT GROUND OF APPEAL PERTAINS TO DISALLOWANCE OF S ELLING AND ADMINISTRATIVE EXPENSES. DURING THE ASSESSMENT PROCEEDINGS, AO FO UND THAT ASSESSEE-COMPANY HAD CLAIMED SELLING AND ADMINISTRATIVE EXPENSES RS.17.0 2 LAKHS AND FINANCIAL EXPENSES OF RS.5.33LAKHS RESPECTIVELY FOR THE YEAR UNDER CONSID ERATION. AFTER CONSIDERING THE VARIOUS FACTORS LIKE; FAILURE TO PRODUCE BOOKS OF A CCOUNTS ON THE DATE OF SURVEY, INCONSISTENCIES WITH RESPECT TO PHYSICAL STOCK AND ITS QUESTION, ABSENCE OF ANY STOCK REGISTER/RECORDS AS PER THE ACCEPTABLE ACCOUNTING S TANDARDS, BLANK CHEQUES SIGNED BY VARIOUS PARTIES FOUND AT THE PREMISES OF THE ASSESS EE, UN-ACCOUNTED SALES AND UN- EXPLAINED CASH; HE HELD THAT BOOKS OF ACCOUNTS MAIN TAINED BY THE ASSESSEE WERE NOT CORRECT, THAT ASSESSEE HAD NOT PRODUCED ALL THE BOO KS OF ACCOUNTS FOR VERIFICATION DURING THE COURSE OF SURVEY. FINALLY, HE DISALLOWE D 40% OF THE SELLING AND ADMINISTRAT -IVE EXPENSES I.E., RS. 6.81 LAKHS. ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 6 5.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA. A FTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, FAA HELD THAT THE EXPE NSES CLAIMED BY THE APPELLANT INCLUDED BANK CHARGES, AUDITORS REMUNERATION, CLAI M MADE AS PER THE PROVISIONS OF SECTION 35AC OF THE ACT, SERVICE CHARGES, GODOWN-RE NT AND MOTOR CAR EXPENSES ETC. CONSIDERING THE EXPENSES INCURRED UNDER THE HEADS B ROKERAGE TO BANK, SALARY AND WAGES FAA HELD THAT DISALLOWANCE @ 40% WAS EXCESSIV E. HE RESTRICTED THE DISALLOWANCE TO 10% I.E. TO RS. 1,17,259/-. 5.2. BEFORE US, DR SUBMITTED THAT ASSESSEE HAD NO T PRODUCED BOOKS OF ACCOUNTS, THAT DISALLOWANCE OF 40% OF THE SELLING A ND ADMINISTRATIVE EXPENSES WERE REASONABLE. AR SUBMITTED THAT WITHOUT POINTING ANY DEFECT, AO HAD DISALLOWED 40% OF THE LEGITIMATE EXPENDITURES INCURRED BY THE ASSE SSEE, THAT MOST OF THE PAYMENTS WERE THROUGH CHEQUES, THAT AO HAD NOT ISSUED ANY SH OW CAUSE NOTICE TO DISALLOW THE EXPENDITURE CLAIMED BY THE ASSESSEE. 5.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL. IT IS FOUND THAT AO HAD DISALLOWED 40% OF SELLING AND ADMINISTR ATIVE EXPENSES AMOUNTING TO RS. 6.81 LAKHS ON THE BASIS THAT BOOKS OF ACCOUNTS OF T HE ASSESSEE WERE NOT PRODUCED FOR VERIFICATION. WE ARE OF THE OPINION THAT EVEN BOOK S OF ACCOUNTS ARE NOT RELIABLE, THE EXPENDITURE CLAIMED HAVE TO BE ALLOWED, IF SAME IS INCURRED FOR RUNNING THE BUSINESS. FAA HAS GIVEN A FINDING OF FACT THAT EXPENSES CLAIM ED BY THE APPELLANT WERE BANK CHARGES,AUDITORS REMUNERATION, SERVICE CHARGES, GO DOWN RENT, BROKERAGE TO BANK, SALARY AND WAGES.IN OUR OPINION, IF THE AMOUNTS INC URRED ON THE SAID ITEMS ARE VERIFIAB -LE, NO DISALLOWANCE CAN BE MADE. WE ARE OF THE OP INION THAT THIS ASPECT NEEDS FURTHER VERIFICATION. SO, IN THE INTEREST OF JUSTICE, WE R EMIT BACK THE MATTER TO THE FILE OF THE AO TO ALLOW THE ASSESSEE THE EXPENSES INCURRED WHOL LY AND EXCLUSIVELY BY IT FOR RUNNING ITS BUSINESS. AO IS DIRECTED TO AFFORD A R EASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. GROUND NO.3 STANDS PARTLY ALLOWED IN FAVOUR OF THE AO. C.O. NO. 87/MUM/2011 6.1. FIRST GROUND OF CROSS OBJECTION FILED BY THE ASSESSEE-COM PANY IS ABOUT REJECTION OF BOOKS OF ACCOUNTS AND PASSING ASSESSME NT ORDER U/S. 144 OF THE ACT. AFTER CONSIDERING THE VARIOUS FACTORS, AS DISCUSSED IN PARAGRAPH NO.5 ABOVE, AO HELD THAT BOOKS OF ACCOUNTS OF THE ASSESSEE WERE NOT REL IABLE AND THEREFORE HE HAD TO PASS A BEST JUDGMENT ASSESSMENT. DURING THE COURSE OF A SSESSMENT PROCEEDINGS, AO DIRECTED THE ASSESSEE TO FILE CERTAIN DETAILS. AFT ER CONSIDERING THE SAME, HE HELD THAT THERE WERE MANY A DISCREPANCIES/ INCONSISTENCIES IN BOOKS OF ACCOUNTS AND STOCK- RECORDS MAINTAINED BY THE ASSESSEE-COMPANY, THAT AC COUNTS MAINTAINED BY THE ASSESSEE COULD NOT BE TAKEN AS RELIABLE SOURCE OF I NFORMATION. ACCORDINGLY, HE ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE FOR REJECTING T HE BOOKS OF ACCOUNTS. AFTER DELIBERATING UPON THE SUBMISSIONS OF THE ASSESSEE, HE HELD THAT IT HAD FAILED TO PRODUCE THE STATUTORY BOOKS OF ACCOUNTS ON THE DATE OF SURV EY, THAT ASSESSEE HAD CLAIMED THAT IT WAS MAINTAINING BOOKS OF ACCOUNTS LIKE PURCHASE REGISTER, SALES REGISTER, BANK BOOK, CASH BOOK, JOURNAL REGISTER, LEDGER, STOCK BO OK, THAT DURING THE COURSE OF SURVEY PROCEEDINGS ONE OF THE DIRECTORS SH. PAWAN K UMAR AGARWAL WAS INSTRUCTED TO PRODUCE THE BOOKS OF ACCOUNTS, THAT TILL THE CONCLU SION OF THE SURVEY BOOKS OF ACCOUNT, AS MENTIONED IN THE TAX AUDIT REPORT, WERE NOT PRODUCED, THAT SURVEY TEAM ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 7 HAD IMPOUNDED SOME OF THE DOCUMENTS FOUND AT THE PR EMISES OF THE ASSESSEE- COMPANY, THAT THE ASSESSEE FAILED TO PRODUCE ANY OF THE REGULAR BOOKS OF ACCOUNTS FOR VERIFICATION, THAT BOOKS OF ACCOUNTS WERE NOT MAINT AINED AT ALL BY THE ASSESSEE. HE FURTHER FOUND THAT DOCUMENTS IMPOUNDED BY THE SURVE Y TEAM INCLUDED BANK STATEMENT FILE. IT ALSO CAME TO HIS NOTICE THAT BANK BOOK, NA KAL VAHI BOOK, ROKAD VAHI BOOK, SALES FILE, STATEMENT OF STOCK FILE AND DELIVERY CH ALLAN BOOK WERE INVENTORISED, BUT SAME WERE NOT IMPOUNDED BY THE SURVEY TEAM. HE HEL D THAT DOCUMENTS/STATEMENTS IMPOUNDED RELATED TO BANKING TRANSACTION ONLY, THAT REGULAR STATUTORY BOOKS OF ACCOUNTS WERE NOT MAINTAINED/IMPOUNDED BY THE ASSES SEE. 6.2. DURING THE ASSESSMENT PROCEEDINGS, AO AGAIN D IRECTED THE ASSESSEE TO PRODUCE BOOKS WHICH WERE INVENTORIED, SO AS TO EXAMINE IF T HE SAME COULD BE CONSIDERED AS FORMING PART OF THE MAIN AND STATUTORY BOOKS OF ACC OUNTS FOR THE BUSINESS CONDUCTED BY THE ASSESSEE. IN RESPONSE THE ASSESSEE DID NOT PRODUCE ANY OF THE INVENTORIED BOOKS. IT ADMITTED THAT INVENTORIED BOOKS/DOCUMENT S WERE MAINTAINED FOR THE PERSONAL CONTROL OF THE MANAGEMENT AND DID NOT FORM PART OF THE REGULAR AND STATUTORY BOOKS OF ACCOUNTS. THEREFORE, THE AO HELD THAT ASS ESSEE HAD NOT PRODUCED ITS REGULAR BOOKS OF ACCOUNTS FOR VERIFICATION, THAT THE SURVEY TEM ALSO DID NOT FIND ANY OF ITS STATUTORY BOOKS OF ACCOUNTS, THAT THE ASSESSEE DID NOT HAVE A CONSISTENT AND ACCEPTABLE PRACTICE OF MAINTAINING ITS BOOKS OF ACC OUNTS, THAT AUTHENTICITY AND VERACITY OF THE BOOKS OF ACCOUNTS PRODUCED BEFORE H IM COULD NOT BE PROVED. HE FURTHER FOUND THAT THERE WERE INCONSISTENCIES IN RE SPECT OF THE PHYSICAL STOCK AND ITS VALUATION. 6.3. DURING THE COURSE OF SURVEY PROCEEDINGS, STAT EMENT OF SH. PAWAN KUMAR AGARWAL, WAS RECORDED AND A SPECIFIC QUESTION ABOUT STOCK WAS PUT TO HIM. IN HIS REPLY, HE STATED THAT STOCK WAS LYING AT VASU WAREH OUSE, 354, VANMALA COMPOUND, BEHIND BATRA PETROL PUMP, BHIWANDI. HE FURTHER STA TED THAT VALUE OF THE STOCK WOULD BE GIVEN BY ONE SH. KISHANCHAND AGARWAL, DIRECTOR W HO WAS LOOKING AFTER THE STOCK OF THE COMPANY. AO FOUND THAT ONE SURVEY TEAM HAD SIMULTANEOUSLY COVERED THE WAREHOUSES OF THE ASSESSEE-COMPANY. STATEMENTS OF THE GODOWN KEEPERS WERE RECORDED BY THE SURVEY TEAMS. AFTER CONSIDERING QU ESTION NO.4-7 OF THE GODOWN KEEPERS, HE HELD THAT STOCK OF THE ASSESSEE WAS NOT AVAILABLE IN THE WAREHOUSES, THAT THE ASSESSEE WAS NOT ABLE TO SHOW AS TO WHERE ITS G OODS WERE LYING. DURING THE ASSESSMENT PROCEEDINGS ALSO ASSESSEE HAD NOT GIVEN ANY PLAUSIBLE EXPLANATION ABOUT THE ABSENCE OF ITS PHYSICAL STOCK IN THE GODOWNS.AO ISSUED A SHOW CAUSE NOTICE IN THIS REGARD. ASSESSEE VIDE ITS REPLY DT. 09-12-200 9 SUBMITTED THAT THERE WAS POSSIBILITY OF BEING STOCKED AT SOME OTHER WAREHOUS ES.AO HELD THAT ASSESSEE HAD NOT BROUGHT TO THE NOTICE OF THE SURVEY PARTY THAT GOOD S WERE STORED AT SOME OTHER PLACES, THAT FROM THE DATE OF SURVEY TILL THE COMPLETION OF ASSESSMENT PROCEEDINGS IT HAD NOT BROUGHT ON RECORD AS TO WHERE THE GOODS WERE PHYSIC ALLY LYING WHEN SURVEY PARTIES HAD VISITED THE BUSINESS PREMISES. IN THESE CIRCUMS TANCES, HE HELD THAT THE VALUATION OF THE CLOSING STOCK GIVEN BY THE ASSESSEE COULD NOT B E RELIED UPON. 6.4. AO FURTHER FOUND THAT ASSESSEE HAD NOT OFFERED ANY EXPLANATION ABOUT MAINTENANCE OF STOCK RECORDS, THAT DURING THE ASSES SMENT PROCEEDINGS ALSO NO SATISFACTORY EXPLANATION WAS TENDERED, THAT AS PER COLUMN NO. 9(B) OF THE TAX AUDIT REPORT, ASSESSEE WAS MAINTAINING A STOCK BOOK, THAT THE SAID STOCK BOOK NEVER PRODUCED FOR VERIFICATION AT ANY STAGE. HE FOUND TH AT ON 13-03-2007, SH. PAWAN KUMAR AGARWAL, IN HIS STATEMENT, ADMITTED THAT STOC K REGISTERS WERE MAINTAINED AT ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 8 THE WAREHOUSES, THAT ON 23-02-2007, NO STOCK REGIST ER WAS FOUND AT THE WAREHOUSES WHEN THE SURVEY TEAM VISITED THE GODOWNS. HE FURTH ER FOUND THAT ON 22-03- 2003,ASSESSEE HAD FILED A LETTER WHEREIN IT WAS ADM ITTED THAT NO STOCK REGISTER WAS BEING MAINTAINED BY IT. VIDE HIS OFFICE LETTER DT. 23-11-2009, AO ASKED THE ASSESSEE TO EXPLAIN AS HOW IT MONITORED AND MANAGED ITS MOVE MENT OF STOCK IN THE ABSENCE OF STOCK REGISTER. IN REPLY TO SAID QUESTION, ASSESSE E SUBMITTED THAT THE MEMBERS OF THE FAMILY WERE KEEPING FULL CONTROL OVER THE GOODS, TH AT THEY WERE ABLE TO MANAGE THE MOVEMENT OF STOCK EVEN WITHOUT THE STOCK REGISTER. CONSIDERING THE ABOVE FACTS, AO ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE FOR REJE CTION OF ITS BOOKS OF ACCOUNTS .FINALLY HE HELD THAT STOCK REGISTER PRODUCED BY TH E ASSESSEE AFTER 09-12-2009 COULD NOT BE TREATED A RELIABLE SOURCE OF INFORMATION FOR DETERMINING THE TAX LIABILITY. DURING THE COURSE OF SURVEY, A NUMBER OF BLANK CHEQ UES ISSUED BY VARIOUS AUTHORITIES WERE ALSO FOUND FROM THE PREMISES OF THE ASSESSEE-C OMPANY. CONSIDERING ALL THE ABOVE FACTS AND CIRCUMSTANCES, AO REJECTED THE BOOK S OF ACCOUNTS PRODUCED BY THE ASSESSEE AND COMPLETED THE ASSESSMENT U/S. 144 OF T HE ACT. ASSESSEE CHALLENGED THE REJECTION OF BOOKS OF ACCOUNTS AS WELL AS PASSING O F ORDER U/S. 144 OF THE ACT BEFORE THE FAA. 7. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, FAA HELD THAT ASSESSEE HAD FAILED TO PRODUCE BOOKS OF ACCOUNTS IN THE COURSE O F SURVEY PROCEEDINGS, THAT DURING THE COURSE OF SURVEY, ASSESSEE HAD ACCEPTED THE NON -MAINTENANCE OF STOCK REGISTER, THAT CURRENT BOOKS OF ACCOUNTS WERE NOT PRODUCED BE FORE THE SURVEY TEAM, THAT DOCUMENTS IMPOUNDED WERE ONLY BANK STATEMENTS, THAT INCONSISTENCIES WERE FOUND IN THE PHYSICAL STOCK, THAT VALUATION AND THE STOCK WA S FOUND SHORT BY RS. 93.08 LAKHS, THAT BOOKS OF ACCOUNTS MAINTAINED IN REGULAR COURSE OF BUSINESS WERE ADMISSIBLE EVIDENCE, THAT THE APPELLANT HAD NOT BEEN MAINTAINI NG BOOKS OF ACCOUNTS IN THE REGULAR COURSE OF BUSINESS. FOLLOWING THE FINDING OF FACT GIVEN BY THE FAA, I) APPELLANT HAD NOT MAINTAINED BOOKS OF ACCOUNTS IN T HE REGULAR COURSE OF BUSINESS; II) ASSESSEE HAD NOT MAINTAINED STOCK REGISTER; III) BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE (OF-CO URSE NOT MAINTAINED IN THE REGULAR COURSE OF BUSINESS) WERE NEITHER CORRECT NOR COMPLETE IV) DURING THE COURSE OF SURVEY, IT WAS FOUND THAT STOC K OF APPELLANT WAS SHORT BY 43,621 METRES AMOUNTING TO RS. 13,08,630/ -, V) THAT IT WAS A FIT CASE WHERE PROVISIONS OF SECTION 145(3) OF THE ACT WERE APPLICABLE. 7 .1. HE FINALLY HELD THAT AO HAD VALIDLY REJECTED THE BO OKS OF ACCOUNTS AND THE BEST JUDGMENT AND ASSESSMENT PASSED BY THE AO U/S. 144 WAS AS PER LAW. HE FURTHER HELD THAT AO HAD FOLLOWED THE PROCEDURE OF MAKING B EST JUDGMENT ASSESSMENT AS LAID DOWN IN PROVISO U/S. 144 BY ISSUE OF SHOW CAUSE NOT ICE ON 04-12-2009 FOR REJECTING THE BOOKS OF ACCOUNTS. HE ALSO NOTICED THAT AO HAD CLEARLY ASKED THE ASSESSEE AS TO WHY ITS BOOKS OF ACCOUNTS SHOULD NOT BE REJECTED. HE FINALLY HELD THAT ORDER PASSED BY THE AO U/S. 144 OF THE ACT WAS VALID, THAT THE A O WAS RIGHTLY NOT SATISFIED ABOUT THE CORRECTNESS AND COMPLETENESS OF THE ACCOUNTS, T HAT THE AO HAD GIVEN OPPORTUNITY TO THE APPELLANT, THAT AO HAD CONSIDERED ALL THE RE LEVANT MATERIAL FACTS. THEREFORE, ISSUE WAS DECIDED AGAINST THE ASSESSEE-COMPANY. ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 9 7.2. BEFORE US, AR SUBMITTED THAT REASON FOR REJECTING T HE BOOKS OF ACCOUNTS WAS ABSENCE OF STOCK REGISTER, THAT AO DID NOT HOLD THA T TRUE PROFIT COULD NOT BE DEDUCED FROM THE BOOKS OF ACCOUNTS PRODUCED BEFORE HIM, THA T FAA HAD NOT CONSIDERED THE FACTUAL POSITION, THAT ASSESSEE WAS MAINTAINING REG ULAR BOOKS OF ACCOUNTS. HE RELIED UPON THE CASES OF DEEPAK DALELA (128 ITD 225) DELIV ERED BY THE JAIPUR BENCH OF THE TRIBUNAL AND AR RELIED UPON THE CASES OF VISHWANATH PRASAD GUPTA(129ITD95), TRIVENI PHARMA (92 ITD125),JACKSONS HOUSE (39DTR212 ), BINDALS APPARELS (332ITR 410) & POONAMRANI (326 ITR 223). DR SUBMIT TED THAT ASSESSEE HAD NOT PRODUCED BOOKS OF ACCOUNTS/DOCUMENTS DURING THE COU RSE OF SURVEY PROCEEDINGS/ASSESSMENT PROCEEDINGS, THAT BEST JUDG MENT ASSESSMENT WAS NOT PASSED ONLY BECAUSE OF NON-AVAILABILITY OF BOOKS OF ACCOUN TS, THAT THERE WERE SO MANY REASONS FOR REJECTING THE BOOKS OF ACCOUNTS. 7.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PUT BEFORE US. WE FIND THAT FAA HAD UPHELD THE ORDER OF REJECTING THE BOOKS OF ACCOUNTS OF THE ASSESSEE ON A SOUND FOOTING. ASSESSEE HAD NEVER DE NIED THE FACT THAT BOOKS OF ACCOUNTS WERE NOT PRODUCED BEFORE THE SURVEY TEAM. IT IS ALSO A FACT THAT ASSESSEE ADMITTED THAT STOCK REGISTER WAS NOT MAINTAINED. I N THE LETTER DISCUSSED AT PARA NO.9(IV) IT HAS BEEN SPECIFICALLY MENTIONED BY THE ASSESSEE THAT MOVEMENT AND MANAGEMENT OF STOCK WAS DONE BY THE MEMBERS OF THE FAMILY AND THAT STOCK REGISTER WAS NOT MAINTAINED. IT IS ALSO FOUND THAT THERE WA S DEFICIENCY IN PHYSICAL STOCK OF 43,621 MTRS. AO HAD POINTED OUT MANY A DISCREPANCIE S FOR REJECTING THE BOOKS OF ACCOUNTS AND PASSING A BEST JUDGMENT ASSESSMENT U/S . 144 OF THE ACT AND ONE OF THE REASONS WAS ABSENCE OF REGULAR BOOKS OF ACCOUNTS AN D STOCK REGISTER. 7.3.(I). IN OUR OPINION IT IS THE DUTY OF THE ASSESSEE TO PR ODUCE BOOKS OF ACCOUNTS DURING THE ASSESSMENT PROCEEDINGS BEFORE THE AO FOR DETERMINING THE RIGHT TAX LIABILITY. IN THE CASE UNDER CONSIDERATION, NEITHE R BEFORE THE SURVEY TEAM NOR BEFORE THE AO REQUIRED BOOKS OF ACCOUNTS WERE PRODUCED. I N THESE CIRCUMSTANCES, UPHOLDING THE ORDER OF THE FAA, WE DECIDE GROUND NO .1 AGAINST THE ASSESSEE. WE HAVE PERUSED THE CASES RELIED UPON BY THE AR IN THE SE CASES, BOOKS OF ACCOUNTS WERE MAINTAINED BY THE ASSESSEE. BESIDES STOCK REGISTER WERE ALSO MAINTAINED BY THE ASSESSEES OR THERE WERE NEGLIGIBLE DIFFERENCE IN TH E STOCK. HONBLE HIGH COURT OF DELHI HAS DECIDED THE ISSUE AGAINST THE DEPARTMENT ON DIFFERENT REASONS. IN THE CASE UNDER CONSIDERATION, CONSIDERING THE PECULIAR FACTS AND CIRCUMSTANCES, WE ARE OF THE OPINION THAT CASES CITED BY THE AR ARE OF NO HELP A S THE FACTS OF THE CASE ARE TOTALLY DIFFERENT. IN THE CASE OF BINDALS APPARELS (SUPRA) , ADDITION WAS DELETED ON THE GROUND THAT DEFICIENCY FOUND IN THE STOCK DURING THE SURVE Y WAS NEGLIGIBLE. IN THE PRESENT CASE, FACTS ARE ENTIRELY DIFFERENT. IN THE CASE OF JACKSONS HOUSE (SUPRA), AO HAD NOT POINTED OUT A SPECIFIC DEFECT IN THE BOOKS OF ACCOU NTS. BUT IN THE PRESENT CASE, AO AS WELL AS FAA HAS POINTED OUT MANY A DISCREPANCIES FO UND DURING THE SURVEY/ASSESSMENT PROCEEDINGS. THUS, THE CASES DO NOT HELP THE ASSESSEE. THEREFORE, GROUND NO.1 OF CROSS APPEAL IS DECIDED A GAINST THE ASSESSEE. 8. SECOND GROUND OF APPEAL ON CROSS OBJECTION IS ABOUT ESTIMATION OF GROSS PROFIT MARGIN BY THE FAA @ 8% AS DISCUSSED AT PARA NO.4.1. BEFORE US, AR SUBMITTED THAT, AO HAD NOT FOUND ANY DISCREPANCY IN THE GP SHOWN BY THE ASSESSEE, THAT FAA WAS NOT JUSTIFIED IN ENHANCING THE GP RATE TO 8%.DR SUBMITTED SAME ARGUMENTS WHICH WE HAVE DISCUSSED AT PARA NO.4.3. ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 10 8.1. AS FAR AS GP RATE TO BE ADOPTED BY THE AO IS CONCER NED, WE FIND THAT AO HAD NOT TAKEN INTO CONSIDERATION DIRECT EXPENSES LIKE C USTOMS DUTY, FREIGHT AND SHIPPING EXPENSES ETC., FOR DETERMINING THE GROSS PROFIT MAR GIN. IT IS ALSO FACT THAT ASSESSEE HAS DECLARED GP RATE AS HIGH AS 8.95% DURING THE AY . 2004-05.FAA HAS HELD THAT GP RATE ADOPTED BY THE AO AS WELL AS THE ASSESSEE WAS NOT REASONABLE AND HAS ESTIMATED IT AT 8%.IN OUR OPINION, IT IS A CASE OF ESTIMATION OF GROSS PROFIT ONLY AND THE DECISION OF THE FAA DOES NOT SUFFER FROM ANY INFIRMITY. UPH OLDING HIS ORDER, WE HAVE DECIDED THE ISSUE AGAINST THE AO. FOLLOWING THE DISCUSSION AT PARA NO. 4.3, WE DECIDE GROUND NO.2 OF THE C.O. AGAINST THE ASSESSEE. 9. THE LAST GROUND OF APPEAL OF CROSS OBJECTION IS ABO UT ESTIMATION OF CLOSING STOCK OF THE ASSESSEE-COMPANY. DURING THE ASSESSME NT PROCEEDINGS AO CALLED FOR THE DETAILS OF THE CLOSING STOCK. ON PERUSAL OF THE DE TAILS FILED BEFORE HIM AND THE STOCK FOUND DURING THE SURVEY PROCEEDINGS HE FOUND THAT T HERE WAS DIFFERENCE IN THE STOCK OF DORMAT OF 43,621 METERS, THAT WAS NOT FOUND IN THE GODOWNS OF THE ASSESSEE. AS THE ASSESSEE COULD NOT IDENTIFY AS TO WHERE THE GOODS W ERE LYING ON THE DATE OF SURVEY, SO, HE HELD THAT GOODS WERE SOLD BY THE ASSESSEE OUTSID E THE BOOKS OF ACCOUNTS AND SAME DID NOT FORM THE PART OF ITS SALES TURN-OVER FOR TH E YEAR UNDER CONSIDERATION. HE FURTHER FOUND THAT DURING THE COURSE OF ASSESSMENT PROCEEDI NGS FOR THE AY. 2005-06,HUGE CASH DEPOSITS WERE FOUND IN THE BANK A/C OF SH. PAW AN KUMAR AGARWAL, THAT ON INVESTIGATION IT WAS ADMITTED THAT THE CASH DEPOSIT IN THE BANK A/CS.WERE GENERATED FROM CASH SALES OF THE ASSESSEE AND ITS SISTER CONC ERN, THAT THE CASH REACHED INTO THE COMPANY BY ISSUING CHEQUES, THAT THE ASSESSEE AND I TS DIRECTORS WERE INDULGING IN SALES OUTSIDE BOOKS OF ACCOUNTS. CONSIDERING THE A BOVE, HE MADE ADDITION OF RS. 13.08 LAKHS AS UNDER: POLYESTER DYED FABRICS AS ON 31 - 03 - 2007 LESS: PURCHASE MADE AFTER 22.3.2009 ADD: SALES MADE AFTER 22.32007 STOCK OF POLYESTER FABRICS AS ON 22.3.2007 (AS PER DETAILS FILED DURING ASSTT) STOCK OF DORMAT (AS PER DETAILS FILED DURING ASSTT) 1,25,238 METERS 72,383 METERS 52,855 METERS 2,000 METERS 72,855 METERS 43,621 METERS 9.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HE HELD THAT THE STOCK OF THE APPELLANT WAS SHORT BY 43621 METERS, THAT THE APPELLANTS SUBMISSION THAT THE AO HAS NOT PROVIDED OPPORTUNITY TO APPELLANT AS TO WHY THIS MUCH QUANTITY OF STOCK SHO ULD NOT BE TREATED AS UNACCOUNTED SALE WAS BASELESS, THAT RIGHT FROM THE SURVEY OPERA TION TILL FINALISATION OF ASSESSMENT NUMEROUS OPPORTUNITIES WERE GIVEN TO APPELLANT, THA T THE APPELLANTS ARGUMENT THAT METHOD OF ESTIMATION OF UNACCOUNTED SALE ITSELF WAS WRONG AND BASELESS AS THE STOCK FOUND SHORT BASED ON FACTS GATHERED IN COURSE OF SU RVEY OPERATIONS AS DETAILED IN PARA 9 OF THE ASSESSMENT ORDER, THAT THE AO HAD CORRECT LY TREATED STOCK FOUND SHORT AS UNACCOUNTED SALE. 9.2. BEFORE US, AR SUBMITTED THAT THERE WAS NO EVIDENCE OF UN-RECORDED SALES, EVEN IF THERE WAS DIFFERENCE IN CLOSING STOCK DIFFERENCE OF GP SHOULD HAVE BEEN ADDED. DR SUPPORTED THE ORDERS OF THE AO AND THE FAA. ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 11 9.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PUT BEFORE US. ASSESSEE HAS NO WHERE DENIED THAT ON THE DATE OF SU RVEY THERE WAS SHORTAGE OF STOCK. DURING ASSESSMENT OR APPELLATE PROCEEDINGS BEFORE T HE AO/FAA, HE HAD NOT EXPLAINED THE DEFICIENCY OF STOCK NOT FOUND DURING THE SURVEY OPERATIONS. IN THESE CIRCUMSTANCES, DEPARTMENTAL AUTHORITIES WERE RIGHT IN HOLDING THAT THERE WERE UN- RECORDED SALES DURING THE ASSESSMENT YEAR UNDER CON SIDERATION. AR HAS SUBMITTED THAT ONLY GP COULD BE ADDED AND NOT THE ENTIRE SALES. A RGUMENT OF THE ASSESSEE THAT ONLY GP SHOULD BE ADDED IS A CLEAR ADMISSION THAT ASSESS EE WAS INDULGING IN SELLING GOODS OUT OF THE BOOKS. THEREFORE, UPHOLDING THE ORDER O F THE FAA, WE DECIDE GROUND NO.3 OF C.O. AGAINST THE ASSESSEE. AS FAR AS THE ALTERN ATIVE SUBMISSION OF THE ASSESSEE TO CONSIDER THE GP ONLY FOR MAKING ADDITION, WE ARE OF THE OPINION THAT WHOLE OF SALE PROCEEDS CANNOT BE TREATED AS INCOME OF ASSESSEE. AO IS THEREFORE DIRECTED TO RE- CALCULATE THE PROFIT @ 8% FOR DETERMINING THE EXACT ADDITION UNDER THE HEAD UN- RECORDED SALES AS HELD BY THE FAA DURING THE YEAR UNDER CONSIDERATION. AS A RESULT, APPEAL FILED BY THE AO AND C.O. FILED BY THE ASSESSEE STAND PARTLY ALLOWED. ITA NO. 5187/MUM/10 (AY. 2007-08) (M/S. P. KISHANCH AND TEXTILE P. LTD) 10. AO AS WELL AS THE ASSESSEE HAS CHALLENGED THE ORDER DATED 27-04-2010 OF THE CIT(A)-8, MUMBAI RAISING FOLLOWING GROUNDS OF APPEA L/CROSS OBJECTIONS: GROUNDS OF APPEAL ITA NO. 5187/MUM/2010 1)(I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN RESTRICTING THE ESTIMATION OF GROSS PROFIT R ATE TO 7% OF BOOK SALES. II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD.CIT(A) ERRED IN IGNORING THE FACT THAT THE GROSS PROFIT RATE OF 15% WAS BASED ON THE ACTUAL RATES DERIVED FROM PURCHASE AND SALE REGISTER, STOCK STAT EMENT AND SALE & PURCHASE BILLS PRODUCED BY THE ASSESSEE DURING THE COURSE OF ASSES SMENT PROCEEDINGS. III) ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) ERRED IN IGNORING THE FACT THAT THE ESTIMATION IS BASED ON I NCREASE IN ACTUAL WEIGHTED AVERAGE OF PURCHASE & SALE FIGURES APPEARING IN THE BOOKS OF THE ASSESSEE. 2)(I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN RESTRICTING OF SELLING AND ADMINISTRATIVE EXPENSES AND RESTRICTING IT TO 10% OF THE EXPENSES. II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN IGNORING THE FACT THAT THE ASSESSEE COULD NOT PRODU CE ANY DOCUMENTARY EVIDENCES IN SUPPORT OF HIS CLAIM. 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE IMPUGNED ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW AND CONSEQUENTLY ON MERITS IT DESERVES TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 4) THE APPELLANT CRAVES LEAVE TO AMEND OR AL TER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 12 GROUNDS OF APPEAL C.O. NO. 88/MUM/2011 1. ON THE FACT AND CIRCUMSTANCES OF THE CASE AS WELL A S IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE REJECTION OF THE BOOKS OF A CCOUNTS AND PASSING THE ASSESSMENT ORDER U/S. 144 OF THE INCOME TAX ACT 1961. 2. ON THE FACT AND CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ADDITION TO THE EXTENT OF T HE ESTIMATION OF THE GROSS PROFIT MARGIN OF THE APPELLANT @ 7% WHEN THE BASIS OF ARRI VING AT THE SAID WORKING WAS THE SALES & PURCHASES AS POSTED IN THE BOOKS OF ACCOUNT S ITSELF WHICH WHEN TOTALED AND COMPARED, ARRIVED AT A GROSS PROFIT MARGIN OF 5.60% WITHOUT CONSIDERING AND APPRECIATING THE FACTS & CIRCUMSTANCES OF THE CASE. 3. ON THE FACT AND CIRCUMSTANCES OF THE CASE AS WELL A S IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ESTIMATION OF THE CLOSING S TOCK OF THE APPELLANT AS SOLD DURING THE YEAR WITHOUT CONSIDERING AND APPRECIATIN G THE FACTS & CIRCUMSTANCES OF THE CASE. 4. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR DELETE THE SAID GROUND OF APPEAL. 10.1. BACKGROUND : ASSESSEE, A SISTER CONCERN OF UNICORN TEXTILES PVT. LTD. (UTPL) WAS CARRYING OUT ITS BUSINESS FROM THE PREMISES OF UTPL. DURIN G THE SURVEY PROCEEDINGS OF 22- 03-2007 INVENTORIES OF THE DOCUMENTS AND STOCK OF T HE ASSESSEE WERE PREPARED BY THE MEMBERS OF SURVEY TEAM. 10.2. IN PURSUANCE OF SURVEY, AO REJECTED THE BOOKS OF AC COUNTS OF THE ASSESSEE WHILE PASSING BEST JUDGMENT ASSESSMENT. HE MADE AD DITIONS UNDER THE HEADS GROSS PROFIT MARGIN, UNACCOUNTED SALES OF STOCK, SELLING AND ADMINISTRATIVE EXPENSES. EXCEPT FOR THE FIGURES; OF RATE OF GROSS PROFIT MARGIN AND SALE PROCEEDS OF UNACCOUNTED SALES; FACTS AND ARGUMENTS OF THE AO ARE IDENTICAL TO THE FACTS AND ARGUMENTS ADVANCED IN THE CASE OF UTPL. 10.3. ASSESSEE PREFERRED APPEAL BEFORE THE FAA. AFTER CO NSIDERING THE SUBMISSIONS OF THE ASSESSEE HE UPHELD THE REJECTION OF BOOKS OF ACCOUNTS AND ENDORSED THE ORDER PASSED BY THE AO U/S.144 OF THE ACT. AO HAD ADOPTE D THE GROSS PROFIT RATE OF 20% FOR THE AY UNDER CONSIDERATION.FAA REDUCED IT TO 7%. H E UPHELD THE ADDITION OF RS.95.27 LAKHS UNDER THE HEAD UNACCOUNTED SALES, MA DE BY THE AO. DURING THE ASSESSMENT PROCEEDINGS AO DISALLOWED 40% OF SELLING AND ADMINISTRATIVE EXPENSES. AO HAS CHALLENGED THE REDUCTION OF RATE OF GROSS PR OFIT. DR/AR HAVE MADE THE SAME SUBMISSION AS MADE IN THE CASE OF UTPL WHILE ARGUIN G THE APPEAL/CO. WE HAVE HEARD THEM AND CONSIDERED THE MATERIAL AVAILABLE. WHILE DECIDING THE APPEAL OF UTPL WE HAVE DECIDED THE ISSUE AGAINST THE AO. FOL LOWING THE SAME WE UPHOLD THE ORDER OF THE FAA ESTIMATING THE GROSS PROFIT AT 7%. GROUND NO. 1 IS DECIDED AGAINST THE AO. 10.4. SECOND EFFECTIVE GROUND OF APPEAL BY THE AO IS ABOU T RESTRICTING THE SELLING AND ADMINISTRATIVE EXPENDITURE BY THE FAA. WHILE D ECIDING THE SAME ISSUE IN THE CASE OF UTPL WE HAVE RESTORED BACK THE MATTER TO TH E FILE OF THE AO FOR FRESH ADJUDICATION (PARA 5.3). FOLLOWING THE SAME, AO IS DIRECTED TO DECIDE THE ISSUE AFRESH AFTER HEARING THE ASSESSEE, AS HELD IN THE MATTER O F UTPL. ITA NOS. 5186 & 5187/MUM/2010 C.O. NOS. 87 & 88/MUM/2011 13 AS A RESULT, APPEAL FILED BY THE AO STANDS PARTLY A LLOWED. 11. IN THE CO ASSESSEE HAS RAISED THREE GROUNDS (I) EST IMATING GROSS PROFIT RATE AT 7% IN PLACE OF 5.5% AS SHOWN BY THE ASSESSEE; (II) REJECTION OF BOOKS OF ACCOUNTS; (III) ADDITION ON ACCOUNT OF SALES MADE OUTSIDE THE BOOKS OF ACCOUNTS. WHILE DECIDING THE CO OF UTPL WE HAVE DEALT ALL THE THREE ISSUES AT LE NGTH. FOLLOWING THE SAME WE UPHOLD THE ORDER OF THE FAA ABOUT REJECTION OF BOOK S OF ACCOUNTS AND PASSING OF ORDER U/S.144 OF THE ACT. WE ARE OF THE OPINION THAT EST IMATE MADE BY THE FAA OF GROSS PROFIT DOES NOT REQUIRE ANY INTERFERENCE FROM US. SO, FOLLOWING THE ORDER OF UTPL WE DECIDE GROUND NO.1 AND 2 OF CO AGAINST THE ASSESSEE . AS FAR AS GROUND OF ADDITION ON ACCOUNT OF SALES OUTSIDE THE BOOKS ARE CONCERNED WE ARE OF THE OPINION THAT ALTERNATE PLEA OF THE AR IS ACCEPTABLE.AO IS DIRECT ED TO CALCULATE GP @7% ON THE TOTAL UNRECORDED SALES AND RESTRICT THE ADDITION TO THAT EXTENT ONLY. AS A RESULT CO IS ALLOWED IN PART. AS A RESULT, APPEALS (ITA NOS. 5186/MUM/2010 AND 5187/M/2010 -AY.2007- 08) FILED BY THE AOS AND COS (CO. NOS. 87/MUM/2011A ND 88/MUM/2011) FILED BY THE ASSESSES STAND PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH MAY, 2013 !) * +,$ ! - .# 15 ,2013 , * 4 5 SD/- SD/- ( . . / I.P. BANSAL ) ( !' / RAJENDRA ) / JUDICIAL MEMBER ! / ACCOUNTANT MEMBER / MUMBAI, .# / DATE: 15 TH MAY, 2013 TNMM !) !) !) !) * ** * '67 '67 '67 '67 8!7$6 8!7$6 8!7$6 8!7$6 / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT/ %& 2. RESPONDENT/ '(%& 3. THE CONCERNED CIT(A)/ 9 : 4. THE CONCERNED CIT/ 9 : 5. DR F BENCH, ITAT, MUMBAI / 7;4 '6# , . . . 6. GUARD FILE/ 4 (76 '6 //TRUE COPY// !)# !)# !)# !)# / BY ORDER, = == = / > > > > DY./ASST. REGISTRAR , / ITAT, MUMBAI