DCIT, Parwanoo V. M/s Smart Value Product and Services Ltd., New Delhi

ITA 685/CHANDI/2014

• Counselvise Citation: 68521514 RSA 2014
• Duration Of Justice: 1 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 20-10-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 28-07-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANOJ MISHRA
• Assessee Lawyers: ASHOK GOYAL; SUDHIR SEHGAL
• Keywords: Rejection of books of accounts; Business income; Opportunity of being heard; Question of law
• Section: 144; 69C; 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH,CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO. 685/CHD/2014 ASSESSMENT YEAR: 2009-10 THE DCIT, VS M/S SMART VALUE PRODUCT CIRCLE, & SERVICES LTD. M-17, PARWANOO. 2 ND FLOOR, LAJPAT NAGAR-II, NEW DELHI. PAN: AAKCS4493C (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MANOJ MISHRA RESPONDENT BY : SHRI SUDHIR SEHGAL & SHRI ASHOK GOYAL DATE OF HEARING : 20.10.2015 DATE OF PRONOUNCEMENT : 28.10.2015 O R D E R PER BHAVNESH SAINI,JM THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE ORDER OF LD. CIT(APPEALS) SHIMLA DATED 02.05.2014 F OR ASSESSMENT YEAR 2009-10 ON THE FOLLOWING GROUND : ON THE FACTS AND IN THE CIRCUMSTANCES THE LD. CIT (A) HAS ERRED IN ALLOWING RELIEF OF RS.13,60,05,356 /- BY RELYING ON THE AVERAGE OF NET PROFIT OF THE PRECEDING TWO YEARS OF THE ASSESSEE, WHEREAS THE A.O. HAD MADE THE ADDITION BY CALCULATING THE G.P. FROM THE MONTH WISE PURCHASE AND SALES SUPPLIED BY THE ASSESSEE FOR THE CURRENT YEAR, P&L ACCOUNT AND FROM BALANCE SHEET. 2 2. BRIEF FACTS ARE THAT A RETURN DECLARING INCO ME OF RS. 65,59,669/- WAS FILED ON 30.09.2009 WHICH WAS SUBSEQUENTLY REVISED AT THE SAME INCOME. THE ASSESS EE COMPANY FOLLOWS A DIRECT MARKETING BUSINESS MODEL A ND DERIVES INCOME FROM RETAIL TRADING OF VARIOUS CONSU MER GOODS. THE ASSESSEE HAS DECLARED GROSS TURNOVER TO THE TUNE OF RS.91,90,10,669/-AGAINST WHICH NET PROFIT H AS BEEN DECLARED TO THE TUNE OF RS. 1,06,69,510/- WHIC H GIVES EFFECTIVE NP RATE OF 1.16%. ON EXAMINATION TH E AO NOTICED THAT G.P. RATE WAS NOT MENTIONED IN THE AUD IT REPORT. THE SAME WAS CALCULATED BY THE AO FROM THE FIGURES AVAILABLE IN THE P & L ACCOUNT, BALANCE SHE ET AND DETAILS OF THE MONTH WISE PURCHASES AND SALES A S SUPPLIED BY THE ASSESSEE. THE ASSESSEE WAS ASKED TO SUBSTANTIATE THE FIGURE OF CLOSING STOCK IN THE BAL ANCE SHEET AS ON 31.3.09 AMOUNTING TO RS. 1.83 CRORES ON THE BASIS OF CALCULATIONS DONE ON MONTH WISE AND QUARTE R WISE TRADING ACCOUNTS BY APPLYING THE COMPUTED GP R ATE OF 51.16%. THE AO OBSERVED THAT THE COMPANY MADE ALMOST CONSISTENT SALES BUT THE PURCHASES WERE NOT COMMENSURATE WITH THE SALES. FURTHER, THE COMPANY TRIED TO MAKE ITS STOCK POSITIVE BY MAKING MORE PURCHASES FROM JANUARY,2009 TO MARCH,2009. 2(I) AFTER CONSIDERATION OF ASSESSEE'S REPLY AS QUOTED IN PARA 2.2 OF ASSESSMENT ORDER, THE AO OBSERVED TH AT THE ASSESSEE HAS TRIED TO FURNISH THE MONTH WISE CL OSING STOCK WHICH IT FAILED TO PRODUCE/ JUSTIFY / EXPLAIN / 3 SUBSTANTIATE DURING THE PERIOD OF ASSESSMENT. THE ASSESSEE ALSO STATED THAT GP CANNOT BE UNIFORM THRO UGH OUT THE YEAR SPECIFICALLY WHEN THE ASSESSEE WAS MAINTAINING PROPER STOCK RECORDS. THIS CLAIM OF THE ASSESSEE WAS NOT ACCEPTED BY THE AO ON THE GROUND T HAT THE AUDITORS OF THE COMPANY HAVE NOT MENTIONED THE MAINTENANCE OF THE STOCK REGISTER/STOCK RECORDS. TH E AUDITORS DID NOT MENTION THE GP RATE AS WELL AS QUANTITATIVE RECORD OF STOCKS IN THEIR TAX AUDIT RE PORT. THUS, THE CLAIM OF THE ASSESSEE THAT THE ACTUAL MON TH WISE TRADING ACCOUNT BASED ON ACTUAL FIGURES AFTER TAKING INTO ACCOUNT PROPER STOCK RECORDS WAS FOUND BASELESS. FURTHER, THE ASSESSEE CLAIMED THAT IN THE MONTH OF JANUARY, FEBRUARY AND MARCH THE PURCHASES BOOKED WERE MUCH MORE THAN OTHER MONTHS OF THE YEAR S BECAUSE THE ASSESSEE WAS DEALING WITH SO MANY BRANCHES WHERE THE PURCHASES WERE MADE BY THE BRANCHES DIRECTLY AND AFTER GETTING THE DETAILS FRO M THE SAID BRANCHES THE ASSESSEE BOOKED THE SAME IN ITS B OOKS OF ACCOUNT AS PURCHASES. THE AO FOUND THAT THE CLA IM OF THE ASSESSEE IS INCORRECT BECAUSE OF THE FACT TH AT AS PER INFORMATION SUPPLIED BY THE ASSESSEE, IT MADE PURCHASES DURING THE YEAR THROUGH CENTRAL WAREHOUSE , CALCUTTA AND CENTRAL WAREHOUSE, NEW DELHI AMOUNTING TO RS. 2,01,46,312/- AND RS. 31,91,87,259.78 RESPECTIVELY, TOTALING RS. 33,93,33,571.78 WHEREAS THE ASSESSEE DEBITED RS.34,83,48,792.96 AS TOTAL PURCHA SES MADE DURING THE YEAR IN THE TRADING ACCOUNT. THE AO 4 NEGATED THE CONTENTION OF THE ASSESSEE REGARDING VERIFICATION OF PURCHASES FROM THE BILLS ON THE REA SONS AS ENUMERATED IN PARA 2.5 OF THE ASSESSMENT ORDER. 2(II) THE ASSESSING OFFICER DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE BECAUSE OF HIS OBSERVAT ION THAT EITHER THEY WERE INCORRECT OR WERE CONTRARY TO THE RECORD AVAILABLE ON FILE. ON FURTHER EXAMINATION OF MONTH WISE TRADING ACCOUNT PROVIDED BY ASSESSEE, TH E AO RAISED CERTAIN ISSUES AS ENUMERATED IN PARA 2.8 OF THE ASSESSMENT ORDER. THE CONCLUSIONS WERE DRAWN ON THE BASIS OF FIGURES ARRIVED BY COMPUTATIONS DONE O N MONTH WISE BASIS. THE AO RAISED THE QUESTION THAT PURCHASES WERE NEVER IN CONSONANCE WITH LEVEL OF SA LES AND WHEN OTHER MONTHS ARE SHOWING GROSS PROFIT IN T HE RAGE OF 96.65% TO 20.45%, HOW CAN IT BE GROSS LOSS OF 161.05% IN THE MONTH OF MARCH, 2009. ANOTHER FACT T HE ASSESSEE MAINTAINS A CLOSING STOCK OF RS.1.85 CRORE AS ON 31.03.2008 AND CLOSING STOCK OF RS.1.83 CRORES A S ON 31.03.2009 WHEREAS IN THE REST OF MONTHS THE STOCK LEVEL ARE LESS THAN 8 LAKHS RAISES A QUESTION THAT WHY IT IS ONLY IN THE MONTH OF MARCH THAT THE STOCK LEVEL GOES SO HIGH. 2(III) THE ASSESSING OFFICER ASKED THE ASSESSEE T O FURNISH THE DETAILS OF VALUATION OF CLOSING STOCK A S APPEARING IN THE BALANCE SHEET WHICH WAS NOT FURNIS HED DUE TO LARGE NUMBER OF ITEMS. THE ASSESSING OFFICER CONCLUDED THAT MONTH WISE TRADING ACCOUNT FILED BY THE 5 ASSESSEE WAS SELF CONTRADICTORY. THE AO PREPARED A TRADING ACCOUNT ACCORDING TO WHICH THE GROSS PROFIT S CAME OUT TO RS.36,39,54,887.88 AGAINST THE SALES OF RS.71 ,24,69,335.88 WHICH RESULTS IN A G.P. RATE OF 51.08%. THEREFORE THE ADDITION AS PROPOSED BY HIM T O BE MADE VIDE THE SHOW CAUSE NOTICE OF RS.14.50 CRORES AT A G.P RATE OF 51.16% WAS MADE AT A RATE OF 51.08%, I. E., RS. 14.48 CRORES. ACCORDINGLY, AN ADDITION OF RS. 1 4.48 CRORES WAS MADE. AGGRIEVED BY THE ADDITION MADE BY THE A. O. THE ASSESSEE HAS PREFERRED THIS APPEAL. 3. THE ASSESSEE CHALLENGED THE ADDITION BEFORE LD. CIT(APPEALS) AND ASSESSEE SUBMITTED THAT THE ASSESS EE SELLS DIFFERENT CONSUMABLE ITEMS THROUGH MULTI LEVE L MARKETING SYSTEM BY VIRTUE OF WHICH THE ORDERS/SALE S ARE BOOKED AND AFTER HAVING BOOKED THE SALES/ORDER THE GOODS AGAINST LARGE NUMBER OF COMMON ORDERS ARE PURCHASED AND SUPPLIED AGAINST SAID SALES BOOKED BY AGENTS. IN THIS WAY, SALES ARE BOOKED FIRST THEN TH E PURCHASES AND ALL THE PURCHASES/SALES ARE SETTLED A ND POSTED UPTO THE CLOSE OF YEAR EVEN THE GOODS WHICH ARE SUPPLIED, SOLD AND BOOKED AND ARE RECEIVED AGAINST CHALLANS AND PURCHASE BILL ARE RECEIVED QUITE LATE ON OKAYING GOODS RECEIVED FROM THEM AND SUPPLIED TO CUSTOMERS. SOMETIMES THIS TAKES MONTHS IN ACTUALLY TAKING THE BILLS TO GOODS A/C FOR HAVING SOLD AND S UPPLIED GOODS MONTHS BEFORE ON THE STRENGTH OF ORDER BOOKED THROUGH MLM AGENTS TO WHOM COMMISSIONS ARE DISBURSE D 6 AT DIFFERENT STAGES. THE SALES ARE BOOKED FIRST THE N THE PURCHASES AND MOST OF REGULAR GOODS ARE ACQUIRED/RECEIVED ON THE STRENGTH OF CHALLANS AND B ILLS ARE SETTLED ON THE CLOSE OF YEAR. THOUGH PAYMENTS AGAINST SUCH RECEIPTS OF GOODS IS REGULARLY MADE ON TENTATIVE BASIS AND THE FINAL PAYMENT IS MADE ON TH E END OF YEAR. THE ASSESSEE FURTHER RELIED UPON THE JUDGM ENT OF HON'BLE I.T.A.T. BANGALORE BENCH, IN THE CASE OF INDUSTRIAL TRADING CO. VS. ITO, ITA NO. 158/BANG/19 89; ASST YEAR 1986-87 (1994) 50 TTJ (BANG) 177, HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS. CIT(APPEALS) 288 ITR 1 AND KACHWALA GEMS VS. JCIT [2007] 288 ITR 10 (SC). 4. FURTHER, THE ASSESSEE WAS KEEPING THE COMPLETE RECORDS INCLUDING THE REGULAR BOOKS OF ACCOUNTS, ST OCK REGISTER, PURCHASE, SALES AND EXPENSES VOUCHERS ETC . DULY SUPPORTED WITH BILL WHICH WERE PRODUCED BEFORE THE LEARNED A.O. FROM TIME TO TIME, WHILE FRAMING THE ASSESSMENT ORDER LEARNED ASSESSING OFFICER PREPARE D THE MONTHLY TRADING ACCOUNTS ON HIS OWN NOTIONS AND FINALLY MADE THE ADDITION OF RS.14,48,00,000/- ON ACCOUNT OF SHORTAGE OF STOCK DURING THE YEAR. HE JU ST PREPARED AN IMAGINARY MONTH WISE TRADING ACCOUNT AN D AFTER REJECTING ALL THE CONTENTIONS OF THE ASSESSEE MADE THE ADDITION WITHOUT MENTIONING ANYTHING. THE LEARN ED AO HAD ASKED THE ASSESSEE TO FILE THE MONTH WISE FI GURE OF PURCHASE AND SALES. ON THE BASIS OF THE FIGURES OF 7 PURCHASE AND SALES, LEARNED AO PREPARED THE MONTHLY TRADING ACCOUNT. FOR ARRIVING AT THE FIGURES OF C LOSING MONTH, A HYPOTHETICAL FIGURE OF GROSS PROFIT WAS PL ACED IN THE TRADING ACCOUNT AND THE CONSEQUENTIAL AMOUNT WAS TREATED AS DEFICIENCY IN CLOSING STOCK. 4(I) THE MODUS OPERANDI OF THE ASSESSEE WAS THAT TH E GOODS WERE RECEIVED, THROUGHOUT THE YEAR, BY THE DIFFERENT WAREHOUSE AT DIFFERENT STATIONS. THE GOOD S WERE RECEIVED EITHER THROUGH BILLS OR THROUGH CHALL ANS. THE INTIMATION OF THE GOODS RECEIVED WAS SEND TO TH E HEAD OFFICE. AFTER RECEIPT OF THE INTIMATION OF REC EIPT OF GOODS THE ASSESSEE USED TO MAKE THE LUMP SUM PAYMENTS TO THE DIFFERENT SUPPLIERS AND PART PAYMEN T OR EVEN EXCESS PAYMENT WERE ALSO THERE IN SOME CASES. FROM THE COPIES OF ACCOUNT OF THE SUPPLIER THE FACT OF REGULAR PAYMENTS OF THE PURCHASE OF GOODS WERE VERI FIED BY LD. AO. THE COPIES OF THE BANK STATEMENTS WER E PRODUCED BEFORE THE LEARNED AO FOR THE VERIFICATION OF THE PAYMENTS. THE ENTRIES OF PURCHASE BILLS RECEIV ED WITH THE GOODS DURING THE WHOLE YEAR WERE MADE IN T HE MONTH OF FEBRUARY AND MARCH JUST FOR SETTLING THE ACCOUNTS OF THE DIFFERENT SUPPLIERS. BANK ACCOUNTS WITH CORRESPONDING ENTRIES IN PARTY LEDG ERS WERE VERIFIED BY LD. AO. THIS SHOWS THAT THERE IS NOTHING IN THE SYSTEM WHICH SUGGESTS THAT THE ASSES SEE HAS MADE THE PURCHASES AT THE END OF THE YEAR OR TH E PURCHASES ENTERED IN THE MONTH OF FEBRUARY AND MARC H 8 ARE NOT THE ACTUAL PURCHASES AND MERELY THE PAPER WORK. 4(II) AT THE END OF THE ASSESSMENT ORDER ON PAGE 13, LEARNED AO HAS PREPARED A TRADING ACCOUNT. THI S TRADING ACCOUNT WAS PREPARED AFTER CONSIDERING ALL THE FACTS OF THE CASE REGARDING THE DISPUTED PURCHASES AND IN THIS TRADING ACCOUNT LEANED AO HAS ADMITTED THAT THE CORRECT GP RATE COMES TO 51.08% IN PLACE OF 51.16% ADOPTED EARLIER. THE AO HAS ALSO ACCEPTED THE FIGUR E OF SALES AT RS.71,24,69,336/- AND THE OPENING AND CLOSING STOCK. NOW IF THE CONTENTION OF THE LEARN ED AO IS ACCEPTED THEN THE PURCHASES WILL BE REDUCED BY R S. 14.48 CRORES WHICH WILL RESULT IN REDUCING THE PURCHASES TO RS. 20,35,48,793/- RESULTING IN A GROS S PROFIT OF RS. 50,87,54,888/- THUS GIVING A GP RATE OF 71.40% . THIS EXERCISE WILL CHANGE THE GP RATE WHIC H HAS ALREADY BEEN ACCEPTED. THE BASIC CONCEPT TAKEN BY THE LD. AO IS AT ALL WRONG. THE TRADING ACCOUNTS HA VE 5 ELEMENTS. ANY 4 ELEMENTS IF ACCEPTED, THEN THE 5 TH ELEMENTS WILL BE RESULTING FIGURE. THE AO HAS ACCEP TED THE OPENING STOCK, CLOSING STOCK, SALES AND GP AT 51.08% OF THE SALES THEN THE ONLY ELEMENT LEFT TO B E DECIDED IS PURCHASES WHICH SHOULD BE THE RESULTANT FIGURE. ONCE THE BOOKS ARE REJECTED THEN THERE REMA INS NO REASON TO CONSIDER THE MONTHLY FIGURES OF THE TR ADING ACCOUNTS. THE ASSESSEE RELIED ON THE JUDGEMENT OF THE 9 BANGALORE BENCH OF THE HON'BLE ITAT IN INDUSTRIAL TRADING CO, V STO REPORTED IN (1994)50TTJ 177. 4(III) THE ASSESSEE HAS PROVED THE IDENTITY OF THE PARTIES' FROM WHOM THE GOODS WERE PURCHASED. THE PAYMENTS WERE MADE TO THEM THROUGHOUT THE YEAR ON DIFFERENT DATES. THE AMOUNTS OF PAYMENT WERE ALMOST EQUAL TO THE AMOUNT OF PURCHASES ENTERED EITHER DUR ING THE YEAR OR AT THE END OF THE YEAR. THE PAYMENTS WE RE MADE THROUGH THE BANKING CHANNEL AND SO IT CANNOT B E SAID THAT THE SOURCE OF EXPENDITURE ON THE PURCHASE OF GOODS ARE UNEXPLAINED. SO, THE PROVISION OF SECTION 69C IS ALSO NOT APPLICABLE. THE ASSESSEE RELIED ON THE JUDGEMENT OF HON'BLE ITAT CALCUTTA BENCH IN THE APP EAL OF ITO V NEW CARD BOARD INDUSTRIES REPORTED IN (199 2) 40 ITD 50. 4(IV) THE ASSESSEE FURTHER SUBMITTED THAT THIS IS SETTLED PRINCIPLES OF LAW THAT ASSESSMENT IS TO BE MADE ON THE BASIS FOR COMPLETE YEAR AND PIECEMEAL ASSESS MENT IS NOT PERMISSIBLE UNDER LAW. THE AO HAS TRIED TO S KETCH MONTH-WISE TRADING A/C AND HAS WORKED OUT NEGATIVE STOCK AT A PARTICULAR POINT OF TIME AND HAS TRIED T O JUSTIFIED ADDITION ON THE BASIS OF THAT NEGATIVE ST OCK. THIS IS A COVERED MATTER BY THE JURISDICTIONAL TR IBUNAL IN ITA NO. 279/CHD/1990 IN THE CASE OF SAQI BROTHERS, LUDHIANA V/S ITO. THE HON'BLE IT AT, 10 CHANDIGARH HAS HELD AS UNDER.- 'WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF BOTH THE SIDES AS ALSO THE FACTS ON RECORD. IN OUR OPINION, T HE WHOLE EXERCISE OF WORKING OUT MONTH-WISE TRADING RESULTS W AS MEANINGLESS BECAUSE CERTAIN THINGS HAD TO BE ASSUMED BY THE ASSESSING OFFICER IN THIS REGARD. IT HAS, FOR INSTA NCE, TO BE ASSUMED THAT THE GROSS PROFIT RATE OF THE ASSESSEE WOULD BE UNIFORM THROUGHOUT YEAR. IN THE CASE OF BHALLA BROTH ERS (SUPRA), SUCH AN EXERCISE WAS MADE AND IT WAS FOUND THAT ON A PARTICULAR DATE THERE WAS NEGATIVE STOCK. THE ASSES SING OFFICER MADE AN ADDITION IN THIS REGARD. THE TRIBUNAL, HOWEVER , DELETED THE ADDITION AND THE HIGH COURT HELD THAT THE ADDITION HAD BEEN PROPERLY DELETED AND NO QUESTION OF LAW AR OSE, SO FAR AS THE FIRST PERIOD IS CONCERNED, WE FIND THAT THE ASSESSING OFFICE HAD ARRIVED AT A SITUATION WHERE THERE WAS A NEGATIVE STOCK. IN SUCH A SITUATION, NO ADDITION CAN BE MADE AS HELD BY THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF BHAL LA BROTHERS (SUPRA).' THIS DECISION LATER ON WAS UPHELD BY THE H ON'BLE PUNJAB & HARYANA HIGH COURT IN ITR NO. 70 OF 1998 DATED 31.10.2006 IN THE CASE OF CIT V/S SAQI BROTHE RS. FURTHER IN ARRIVING AT THE DECISION, THE ITAT HAS FOLLOWED THE JUDGMENT OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF BHALLA BROTHERS [1981] 10 TLR 215 AND ALSO THAT OF ITAT JABALPUR, BENCH IN THE CA SE OF TARA CHAND SHANTI LAI. IN THIS REGARD KIND ATTEN TION IS ALSO DRAWN TO THE JUDGMENT OF HON'BLE PUNJAB & HARYANA HIGH COURT IN ITR NO. 117 OF 1999 DECIDED O N 04.12.2006 IN THE CASE OF CIT JAIANDHAR V/S M/S BANSAI SONS, LUDHIANA, WHEREIN THE HON'BLE PUNJAB & 11 HARYANA HIGH COURT HAS OBSERVED AS UNDER : 'POSITION OF STOCK ARRIVED AT IN THE MIDDLE OF YEAR WAS NOT ENOUGH TO JUSTIFY ADDITION. THE HON'BLE PUNJAB & HARYANA HIGH COURT AGAIN HAS MADE RELIANCE ON ITS OWN JUDGMENT IN THE CASE OF BHALLA BROTHERS MENTIONED HEREINABOVE.' 4(V) THE FACTS OF OUR CASE ARE IDENTICAL TO THE FACTS AS THAT OF THE CASE BEFORE THE HON'BLE SUPREME COURT A ND AS SUCH IN OUR CASE TOO AT THE MOST PROVISIONS OF SECTION 145(3) COULD HAVE BEEN INVOKED AND THE AO COULD COMPUTE OUR INCOME IN THE MANNER LAID DOWN U/ S 144 OF THE IT ACT AS WARRANTED BY THE PROVISIONS OF SECTION 145(3) OF THE IT ACT. PROVISIONS OF SECTION 145(3) OF THE I.T. ACT 'WHERE THE AO IS NOT SATISFIED ABOU T THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSES, THE AO MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144.' THE APPELLANT RELI ED UPON THE FOLLOWING DECISIONS :- I) CIT V/S AGGARWAL ENGG. CO. CITED AS [2008] 302 I TR 246 (P&H) II) S.M. HASAN, STO V/S NEW GRAMOPHONE HOUS E AIR 1977 SC 1788 (SC) III) CIT, JALANDHAR V/S M/S BANSAL SONS LUDHIANA IT R NO. 117 OF 1999 (P&H) IV) BHALLA BROTHERS (1981) 10 TLR 45. V) CIT VS. M/S SAQI BROTHERS, LUDHIANA ITR NO, 70 OF 1998 (P&H) VI) TARACHAND SHANTILAL (JAIPUR BENCH 28 TT J 128) 12 4(VI) THE AO COULD NOT BRING ANY SPECIFIC MATERIA L ON THE RECORD TO PROVE THAT THERE WERE ANY UNRECORDED PURCHASED IN THE BOOKS OF ACCOUNTS WHICH RESULTED I NTO EXCESS SALES AND IT IS ALSO TRUE THAT NO SALES CAN BE MADE WITHOUT GOODS AND AS SUCH IT IS AMPLY CLEAR TH AT ASSESSEE HAS BEEN RECEIVING THE GOODS REGULARLY FRO M THEIR SUPPLIERS AND EFFECTING THE SALE AND THE PURC HASES AGAINST THE SAME WERE BOOKED IN THE LAST QUARTER OF YEAR. THE APPELLANT HAS BEEN CONSISTENTLY MAINTAINI NG THAT IT HAS BEEN MAKING REGULAR PAYMENTS BY A/C PAY EE CHEQUES THROUGHOUT THE YEAR AND THE SAME IS VERIFIA BLE FROM OUR BANK ACCOUNTS AND THE PURCHASES WERE BOOKE D IN THE LAST QUARTERS. ALL POSSIBLE DETAILS TO ESTAB LISH THE IDENTITY OF THE PARTIES FROM WHOM PURCHASES WERE MA DE HAVE BEEN PLACED ON THE FILE. 4(VII) THE COMPARATIVE FIGURES OF NET PROFIT RAT E WITH REFERENCE TO SALES AS DECLARED BY THE ASSESSEE IN T HE YEAR UNDER CONSIDERATION AND AS DETERMINED BY THE A O IN SUBSEQUENT ASSESSMENT YEARS (AFTER CERTAIN ADDIT IONS U/S 143(3)} ARE 0.92%, 2.53% AND 2,99% FOR THE A.YS . 2009-10, 2010-11 AND 2011-12 RESPECTIVELY. IN THIS REGARD, THE ASSESSEE RELIED UPON THE JUDGMENT OF HO N'BLE IT AT, DELHI F BENCH IN THE CASE OF RAMA DAIRY PROD UCTS LTD V/S DEPARTMENT OF INCOME TAX PRONOUNCED ON 08.06.2012 AND HON'BLE ITAT AHMEDABAD BENCH [2004] 85 TTJ AHD 481 IN THE CASE OF ASSISTANT CIT V/S D.L . CHOUDHRY. 4(VIII) IN THE LIGHT OF ABOVE FACTS AND CIRCUMSTA NCES, IT 13 IS BROUGHT TO NOTICE THAT FACTS AND CIRCUMSTANCES A ND OTHER MATERIAL BROUGHT BY THE AO ON FILE AND ORDER PASSED BY THE AO, IT IS AMPLY CLEAR THAT AO HAS REA CHED TO AN ERRONEOUS CONCLUSION BY MAKING THE ADDITION O N ACCOUNT OF NEGATIVE STOCK AT ANY PARTICULAR OF TIME IN TOTO. EVEN UNMINDFUL OF THE CORRECTNESS OF FACTS BR OUGHT ON RECORD, THE AO COULD AT THE MOST ESTIMATE THE PR OFIT WITHIN THE MEANING OF SECTION 145(3) OF THE L.T. AC T AND AS SUCH YOUR GOOD SELF IS REQUESTED TO DETERMINE OU R INCOME BY APPLYING SUITABLE NET PROFIT RATE AS TO T HE BEST OF YOUR JUDGMENT IN ACCORDANCE WITH THE LAW IN ALL FAIRNESS WITH THE FACTS OF THE CASE. AS THE WORTHY CIT (APPEALS) CAN UNDO WHAT THE AO HAS WRONGLY DONE AND CAN DO WHAT THE AO HAS FAILED TO DO AS THE POWERS O F CLT(APPEALS) UNDER THE IT ACT ARE CO-TERMINUS WITH THAT OF AO. 4(IX) THE ASSESSEE ALSO FILED A PAPER BOOK, CONTAIN ING WRITTEN SUBMISSION, COPIES OF JUDICIAL PRONOUNCEMEN TS, COPY OF ASSESSMENT ORDER, CHALLAN BILLS WITH SUPPOR TING DETAILS. VIDE THIS OFFICE DATED 13.03.2014 A SET OF THE PAPER BOOKS WAS FORWARDED TO THE DCIT, PARWANOO FOR VERIFICATION ON FACTS AND SUBMISSION OF HIS REPORT ON THE OBJECTIONS RAISED BY THE APPELLANT AND ALSO COMMENT S FOR THE JUSTIFICATION OF THE ADDITION MADE ON ACCOU NT OF ESTIMATED NEGATIVE STOCK BY APPLYING GP RATE. 4(X) THE AO FILED ITS REPLY DATED 25.03.2014 WHERE AO HAS MOSTLY REITERATED THE FINDINGS AT THE ASSESSMEN T 14 STAGE. FURTHER, THE AO SUBMITTED THAT BOOKS OF ACCO UNTS WERE NOT RELIABLE IN THE ABSENCE OF STOCK REGISTER AND UNVERIFICABLE PURCHASES. IN THE SUBSEQUENT YEARS AL SO THE BOOKS OF ACCOUNTS WERE NOT FOUND TO BE TOTALLY RELIABLE AND ADDITIONS WERE MADE WHICH GAVE TO NET PROFIT RATE OF 2.53% AND 2.99% AGAINST DECLARED NET PROFIT RATE OF 1.57% AND 2.23% FOR A.Y. 2010-11 AND 2011-12 RESPECTIVELY. THE ASSESSING OFFICER JUSTIFI ED THE ASSESSMENT ORDER FOR A.Y. 2009-10 AS FAIR AND REASONABLE AND SUBMITTED TO BE DECIDED ON MERITS. 4(XI) THE ASSESSEE IN ITS REJOINDER SUBMITTED THAT THERE IS NO PROVISION IN THE INCOME TAX ACT WHICH DEFINES THE TERMINOLOGY OF NEGATIVE STOCK AND ALSO THERE IS NO PROVISION IN ACT WHICH AUTHORIZES THE AO TO MAKE TH E ADDITION ON PRESUMPTIVE NEGATIVE STOCK ON ANY PARTICULAR DAY OF YEAR. THE INCOME TAX ACT DEFINES ONLY TWO SITUATIONS, AO HAS FOLLOWED NONE, FIRSTLY WHERE THE BOOKS OF ACCOUNTS ARE RELIABLE THEN THE NP DECLARED BY THE ASSESSEE AS ON END OF YEAR IS TO BE ACCEPTED SU BJECT TO MINOR ADDITION AND DISALLOWANCES AND SECONDLY WH ERE THE BOOKS OF ACCOUNTS ARE NOT RELIABLE THEN THE AO IS AUTHORIZED TO ESTIMATE THE PROFITS JUDICIALLY. THE AO CANNOT ADOPT BOTH THE SITUATIONS AND HENCE ASSESSME NT COMPLETED BY THE AO IS TOTALLY CONTRARY TO LAW. T HE AO IN REMAND RECORD HAS CONCEDED THAT IN OUR LIKE BUSI NESS WHICH IS MULTI LEVEL MARKETING, THE GOODS ARE PERPETUALLY ACQUIRED AGAINST CHALLANS AND ARE DELIV ERED 15 TO BUYERS, THE REGULAR BILLS ARE RECEIVED AT A LATE R DATE AND ARE ACCOUNTED FOR ACCORDINGLY. THESE CHALLANS A S WERE ENCLOSED IN PAPER-BOOK HAVE BEEN VERIFIED FROM THE STOCK REGISTER PRODUCED BEFORE THE AO DURING REMAND PROCEEDINGS. THIRDLY, THE AO HAS NOT OFFERED ANY COMMENTS ON LEGAL PRONOUNCEMENTS AND DIFFERENT JUDGMENTS OF VARIOUS HIGH COURTS AND ITAT RELIED UP ON BY THE APPELLANT. THESE INFACT TANTAMOUNT TO ACCEPT ANCE OF LEGAL OPINION EXPRESSED BY THE TRIBUNAL AND COUR TS. THESE JUDICIAL PRONOUNCEMENTS AND APPELLATE ORDER C AN BE RELIED BY ANY OF PARTIES AT ANY TIME. THEY ARE REFERABLE, PERSUASIVE AND BINDING IN NATURE. THE DECISIONS OF JURISDICTIONAL TRIBUNAL AND THAT OF HO N'BLE SUPREME COURT ARE BINDING IN NATURE, IF FACTS OF TH E CASE RESEMBLE WITH SITUATION OF A PARTICULAR CASE. IN THE ABOVE CIRCUMSTANCES, OUR CASE MAY BE CONSIDERED IN THE LIGHT OF DIFFERENT JUDGMENTS RELIED AND QUOTED BY APPELLANT IN DETAILED .ARGUMENTS. INFACT THE LD. AO DID NOT HAVE TIME TO LOOK INTO STOCK REGISTER AND CHALL ANS AT THE TIME OF ORIGINAL ASSESSMENT WHICH WAS GOING TO BE TIME BARRED WITHIN 2 DAYS OF THE ISSUE OF SHOW-CAUS E NOTICE, HOW IT IS AN AFTERTHOUGHT NOW, IF PRODUCED BEFORE THE HON'BLE CIT(APPEALS) DURING APPELLATE PROCEEDIN GS AND ALSO DURING REMAND PROCEEDINGS. 5. THE LD. CIT(APPEALS), CONSIDERING THE FACTS AND CIRCUMSTANCES AND MATERIAL ON RECORD, FINDING DEFEC TS IN THE MAINTENANCE OF THE BOOKS OF ACCOUNT REJECTED TH E 16 SAME UNDER SECTION 145(3) OF THE ACT AND AVERAGE NE T PROFIT OF SUBSEQUENT TWO YEARS ESTIMATED AT 2.76% APPLIED AGAINST THE TURNOVER FOR DETERMINING THE NE T PROFIT OF THE ASSESSEE AND ACCORDINGLY ALLOWED THE APPEAL OF THE ASSESSEE PARTLY. HIS FINDINGS IN PARAS 4.13 TO 4.17 OF THE APPELLATE ORDER ARE REPRODUCED AS UNDER : 4.13 I HAVE GONE THROUGH THE FACTS OF THE CASE, WRITTEN SUBMISSIONS FILED BY THE ASSESSEE, REMAND REPORT OF THE A.O. AND REJOINDER FILED BY THE ASSESSEE. IT IS NOTED THAT THE AO OBSERVED THAT THE GP RATE AND MAINTENANCE OF STOCK REGISTER WERE NOT MENTIONED IN THE AUDIT REPORT. THE AO HAS MENTIONED THAT THE BOOKS OF ACCOUNTS WERE TEST CHECKED EXCEPT THE RELEVANT STOCK RECORDS AND STOCK REGISTERS WHICH WERE NOT PRODUCED. ON THE BASIS OF FIGURES AVAILABLE IN P&L ACCOUNT AND DETAILS OF MONTH-WISE PURCHASES AND SALES PROVIDED BY THE ASSESSEE, THE AO COMPUTED A GROSS PROFIT OF 51.16%. BY APPLYING GP RATE OF 51.16%, THE AO COMPUTED MONTH WISE AND QUARTER WISE TRADING ACCOUNT FOR F.Y. 2008-09. ON THE BASIS OF EXAMINATION OF BOOKS AND MONTH WISE AND QUARTER WISE TRADING ACCOUNTS, THE AO ISSUED A SHOW CAUSE NOTICE AFTER FINDING CERTAIN DISCREPANCIES. THE AO OBSERVED THAT - I) PURCHASES COULD NOT BE VERIFIED AS LETTERS ISSUED TO PARTIES AT THEIR ADDRESS WERE EITHER RETURNED UN-DELIVERED OR IT WAS REFUSED TO BE ACCEPTED, II) THE INVOICE ISSUED BY M/S GRACE DESIGNER WERE SERIALLY NUMBER, III) COMMISSIONS NOT VERIFIABLE FROM THE PARTIES TO WHOM LETTERS WERE ISSUED, 17 IV) THOUGH THERE WERE CONSISTENT SALES OF ABOUT RS.5 TO RS.7 CRORES EVERY MONTHS BUT THE PURCHASES IN THE BEGINNING OF YEAR FROM APRIL TO DECEMBER WERE LOWER AND FROM JANUARY TO MARCH, THE PURCHASES WERE HIGH, V) THE OPENING AND CLOSING STOCK DURING THE YEAR WERE MORE OR LESS SAME. BASED ON ABOVE, THE AO ISSUED SHOW CAUSE TO EXPLAIN THAT WHY ADDITION OF RS. 1450.95 LACS (PEAK) SHOULD NOT BE MADE FOR UNDERSTATEMENT OF PROFIT BY ENTERING IN GENUINE PURCHASES. IN RESPONSE TO SHOW CAUSE, THE ASSESSEE REPLIED WHICH HAS BEEN REPRODUCED IN PARA 2.2 OF THE ASSESSMENT ORDER WHERE THE ASSESSEE HAS GIVEN REASONS FOR ALL THE QUERIES RAISED IN THE NOTICE. SUBSEQUENTLY, THE AO AGAIN EXAMINED THE MONTH WISE TRADING ACCOUNT PROVIDED BY THE ASSESSEE AND NOTED THAT IN THE EARLIER PERIOD OF FINANCIAL YEAR THE GP VARIED FROM AS HIGH 96.65% TO 39.97% WHEREAS IN JANUARY, FEBRUARY, IT WAS AROUND 23 TO 20% AND IN MARCH, THE GP WAS MINUS 161.05%. THE ASSESSING OFFICER ON THE BASIS OF HIS OBSERVATIONS AS ENUMERATED IN PARA 2.8 OF THE ASSESSMENT ORDER CONCLUDED THAT MONTH WISE TRADING ACCOUNT FILED BY THE ASSESSEE IN RESPONSE TO THE SHOW CAUSE IS SELF CONTRADICTORY. THE NEGATIVE GP RATE IN THE MONTH OF MARCH SHOW THE MALAFIDE OF ASSESSEE IN DECREASING HIS TAXABLE PROFIT BY REDUCING ITS GROSS MARGIN. THEREAFTER, THE AO PREPARED A TRADING ACCOUNT BY APPLYING A GP RATE OF 51.08% AND ADDED RS.14.48 CRORES TO THE INCOME AS PROPOSED BY HIM IN THE SHOW CAUSE NOTICE. 4.14 ON THE OTHER HAND THE APPELLANT HAS SUBMITTED THAT THE NATURE OF BUSINESS WAS BASED ON MULTILEVEL MARKETING SYSTEM WHERE THE GOODS WERE RECEIVED THROUGHOUT THE YEAR BY DIFFERENT WAREHOUSES AT SEPARATE STATIONS. THE GOOD WERE RECEIVED EITHER THROUGH BILLS OR THROUGH CHALLANS. AFTER RECEIPT OF INTIMATION OF GOODS THE LUMP SUM PAYMENTS WERE MADE TO DIFFERENT SUPPLIERS THROUGHOUT THE YEAR. THE ENTRIES OF PURCHASE BILLS RECEIVED WITH THE GOODS DURING THE WHOLE YEAR 18 WERE MADE IN THE MONTH OF FEBRUARY AND MARCH FOR SETTLING THE ACCOUNTS OF DIFFERENT SUPPLIERS. THE PURCHASES WERE NOT MADE AT THE END OF THE YEAR BUT THE PURCHASES WERE ENTERED IN THE BOOKS IN THE MONTH OF FEBRUARY AND MARCH. THE APPELLANT HAS ALSO SUBMITTED THAT COMPLETE BOOKS OF ACCOUNTS, STOCK REGISTER, SALE AND EXPENSE VOUCHERS AND BILLS WERE PRODUCED BEFORE THE AO FROM TIME TO TIME. HOWEVER, THE ADDITION WAS MADE ON ACCOUNT OF SHORTAGE OF STOCK DURING THE YEAR ON THE BASIS OF IMAGINARY MONTH WISE TRADING ACCOUNTS. THE BANK STATEMENTS WERE ALSO PRODUCED BEFORE THE AO FOR VERIFICATIONS OF PAYMENTS MADE TO DIFFERENT SUPPLIERS DURING THE YEAR. THE AO HAD ACCEPTED THE OPENING STOCK, CLOSING STOCK, SALES AND GP @ 51.08% AND DID AN EXERCISE TO PREPARE A TRADING ACCOUNT. HOWEVER, THE BASIS OF MAKING THE ADDITION WAS NOT SPECIFIC IN THE ASSESSMENT ORDER. THE APPELLANT FURTHER SUBMITTED THAT THE ASSESSMENT HAS TO BE MADE ON THE BASIS OF COMPLETE YEAR AND NOT ON THE BASIS OF PIECEMEAL ASSESSMENT. THE AO HAD TRIED TO SKETCH THE MONTH WISE TRADING ACCOUNT AND HAS WORKED OUT NEGATIVE STOCK AT A PARTICULAR POINT OF TIME AND HAS TRIED TO JUSTIFY ADDITIONS ON THE BASIS OF NEGATIVE STOCKS. THE APPELLANT HAS RELIED ON THE DECISION OF JURISDICTIONAL TRIBUNAL ITA NO.279/CHD./1990 IN- THE CASE OF SAQI BROTHERS, LUDHIANA VS. ITO WHICH WAS LATER UPHELD BY HON'BLE PUNJAB & HARYANA HIGH COURT. IT HAS BEEN FURTHER SUBMITTED THAT AO HAVE NOT BROUGHT ON RECORD TO PROVE THAT THERE WERE UNRECORDED PURCHASES IN THE BOOKS OF ACCOUNT RESULTING INTO EXCESS SALE. FURTHER, BY PLACING VARIOUS JUDICIAL PRONOUNCEMENTS, THE APPELLANT HAD SUBMITTED ON THE FACTS OF THE CASE THAT AT THE MOST THE PROVISIONS OF SECTION 145(3) COULD HAVE BEEN 19 INVOKED AND AO COULD HAVE COMPUTED THE INCOME IN THE MANNER LAID DOWN U/S 144 OF THE ACT. 4.15 AFTER CONSIDERING THE SUBMISSIONS AND VARIOUS FACTS, IT IS FOUND THAT THE BASIC PRESUMPTION TO ARRIVE AT COMPUTATION OF GROSS PROFIT AROSE IN THE MIND OF AO ON THE GROUND THAT GP RATE IN THE EARLIER PERIOD OF THE FINANCIAL YEAR WAS HIGHER WHICH TAPERED TO LOWER SIDE FROM THE MONTH OF JANUARY ONWARD AND GAVE RISE TO A GP OF MINUS 161.05% IN THE MONTH OF MARCH. THE AO RESORTED TO MATHEMATICAL CALCULATION BY MONTH WISE AND QUARTER WISE TRADING ACCOUNTS WHICH RESULTED IN PEAK NEGATIVE STOCK OF 1450.95 LACS IN THE COMPUTED TRADING ACCOUNT FOR QUARTER OCTOBER TO DECEMBER, 2008. THE APPELLANT HAS SUBMITTED ITS REASONS FOR ENTERING MOST OF THE PURCHASES IN THE MONTH OF FEBRUARY AND MARCH AS THE BILLS WERE RECEIVED TOWARDS LATER PART OF THE YEAR FROM DIFFERENT SUPPLIERS. IT HAS BEEN EXPLAINED THROUGH THE MODUS OPERANDI OF THE BUSINESS THAT GOODS WERE RECEIVED EITHER THROUGH BILLS OR THROUGH CHALLANS AND ON RECEIPT OF GOODS THE ASSESSEE USE TO MAKE LUMP SUM PAYMENTS TO DIFFERENT SUPPLIERS DURING THE YEAR. THE COPIES OF ACCOUNTS OF SUPPLIERS AND REGULAR PAYMENTS FOR THE PURCHASES OF GOODS WERE ALSO VERIFIED BY THE AO. THE COPIES OF BANK STATEMENTS WERE ALSO PRODUCED FOR THE VERIFICATIONS OF PAYMENT MADE DURING THE YEAR. THE AO HAS NOT FOUND ANY DEFECT REGARDING UNACCOUNTED PURCHASE OR SALES. FURTHER, THERE WAS NO FINDING EITHER IN FORM OF ANY INFORMATION AVAILABLE WITH THE AO REGARDING UNACCOUNTED PURCHASES NOR THERE WAS ANY RESULT OF NEGATIVE STOCK ON PHYSICAL VERIFICATION OF STOCK DURING SURVEY ETC. AT ASSESSEE'S PREMISES WHICH CAN SHOW THAT THERE WAS NEGATIVE STOCK 20 DURING VARIOUS MONTHS OF FINANCIAL YEAR, IN VIEW OF THESE FACTS, I FIND THAT CALCULATIONS OF MONTH WISE AND QUARTER WISE TRADING ACCOUNTS LEADING TO A PEAK NEGATIVE CLOSING BALANCE BASED ON A CONSTANT GP RATE WAS IRRELEVANT AND ERRONEOUS. THE ASSESSMENT OF INCOME IS TO BE MADE ON THE BASIS OF ACCOUNTS PREPARED FOR THE ENTIRE FINANCIAL YEAR AS THE ENTRIES OF PURCHASES, SALES AND EXPENSES MAY NOT BE AVAILABLE FOR ENTERING INTO BOOKS OF ACCOUNT ON A REAL TIME BASIS. LOOKING AT THE BUSINESS OPERATIONS OF THE APPELLANT, IT CANNOT BE DOUBTED THAT THE PURCHASES HAVE BEEN ENTERED IN THE LAST THREE MONTHS OF THE YEAR WHERE THE CLOSING OF ACCOUNTS IN THE YEAR END IS REQUIRED FOR SETTLEMENT OF ACCOUNTS WITH VARIOUS DEBTORS AND CREDITORS. REGARDING THE CALCULATION OF PEAK NEGATIVE CLOSING STOCK ON THE BASIS OF MONTH WISE AND QUARTER WISE TRADING ACCOUNT THE APPELLANT HAD CITED THE DECISION OF JURISDICTIONAL TRIBUNAL IN THE CASE OF SAQI BROTHERS, LUDHIANA (SUPRA) WHERE IT WAS HELD THAT THE WHOLE EXERCISE OF WORKING OUT MONTH-WISE TRADING RESULTS WAS MEANINGLESS BECAUSE CERTAIN THINGS HAVE TO BE ASSUMED BY THE AO IN THIS REGARD. IT TO BE ASSUMED THAT THE GROSS PROFIT RATE OF ASSESSEE WOULD BE UNIFORM THROUGH OUT THE YEAR. THIS DECISION WAS LATER UPHELD BY THE PUNJAB & HARYANA HIGH COURT FOLLOWING ITS OWN JUDGMENT IN THE CASE OF BHALLA BROTHERS. RESPECTFULLY FOLLOWING THE DECISION OF JURISDICTIONAL TRIBUNAL ON THE SIMILAR ISSUE THE COMPUTATION OF NEGATIVE PEAK STOCK OF 1450.95 LACS WHICH WAS MADE BASIS FOR ADDITION OF RS.14.48 CRORES IS FOUND TO BE NOT JUSTIFIED. 4.16 HOWEVER, ON PERUSAL OF ASSESSMENT ORDER IT IS NOTICED THAT THE AO HAS FOUND CERTAIN DEFECTS WHILE EXAMINATION OF THE 21 BOOKS OF ACCOUNT AND AUDIT REPORT. THE AO HAS OBSERVED AS UNDER :- 'I) THE AUDITORS OF THE COMPANY HAVE NOT MENTIONED THE MAINTENANCE OF STOCK REGISTER OR STOCK RECORDS IN THE AUDIT REPORT. II) THE AUDITORS DID NOT MENTION THE GP RATE AS WELL AS QUANTITATIVE RECORD OF STOCK IN THE TAX AUDIT REPORT.THE COMPLETE PURCHASES COULD NOT BE VERIFIED THROUGH THE INFORMATION CALLED U/S 133(6) OF THE ACT. III) THE PURCHASE BILLS OF M/S GRACE DESIGNERS, NEW DELHI WERE SERIALLY NUMBER HAVING NO SALE TAX REGISTRATION NUMBER ON THE BILL AND NOTICE ISSUED UNDER SECTION 133(6) COULD NOT BE SERVED ON IT. IV) THE ASSESSES WAS ASKED TO FURNISH THE RELEVANT DETAILS OF VALUATION OF CLOSING STOCK WHICH WAS NEVER FURNISHED TILL THE LAST SUBMISSION. V) THE INGENUINENESS OF THE TRADING RESULTS ALONGWITH THE INCORRECT CLAIM OF THE ASSESSES REGARDING THE MAINTENANCE OF STOCK RECORDS PROVES THE MALAFIDE OF THE ASSESSEE. IN VIEW OF ABOVE DEFECTS, THE PROVISIONS OF SECTION 145(3) ARE ATTRACTED. THE PROVISIONS OF SECTION 145(3) STIPULATES THAT WHERE THE AO IS NOT SATISFIED ABOUT THE CORRECTNESS OR 'COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144 OF THE ACT. THE PROVISIONS OF SECTION 144 STIPULATES THAT THE AO AFTER TAKING INTO ACCOUNT ALL RELEVANT MATERIAL WHICH THE AO HAS GATHERED SHALL AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD MAKE THE ASSESSMENT OF THE TOTAL INCOME TO THE BEST OF HIS JUDGMENT AND DETERMINE THE SUCH PAYMENTS BY THE ASSESSEE ON THE BASIS OF SUCH ASSESSMENT. ON THE BASIS OF FINDINGS RECORDED BY THE AO AND DEFECTS NOTICED AS ABOVE WHICH REMAINED DURING THE APPELLATE 22 PROCEEDINGS, THE PROVISIONS OF SECTION 145(3) ARE INVOKED. THE ASSESSEE'S BOOKS OF ACCOUNTS REJECTED AND THE NET PROFIT IS COMPUTED TO THE BEST OF MY JUDGMENT. IN THE ASSESSEE'S CASE, IT IS NOTICED THAT IN THE CURRENT YEAR A NET PROFIT OF 0.92% HAS BEEN DECLARED ON THE TOTAL SALES OF RS. 71, 24,69, 335/-. IN SUBSEQUENT TWO YEARS WHERE THE SALES HAVE INCREASED TO ABOUT 89 CRORES AND 86 CRORES, THE RETURN OF INCOME HAVE BEEN ASSESSED U/S 143(3) WHICH GAVE RISE TO NET PROFIT OF 2.53% AND 2.99%. TAKING AN AVERAGE OF NET PROFIT OF ASSESSED INCOME IN SUBSEQUENT TWO YEARS WHICH HAVE SAME MODE OF BUSINESS OPERATIONS, A NET PROFIT RATE FOR CURRENT YEAR IS ESTIMATED AT 2.76%. BY APPLYING A NET PROFIT OF 2.76% ON THE SALES OF THE YEAR UNDER CONSIDERATION I.E. RS.71 ,24,69,335/-, THE NET PROFIT IS COMPUTED AT RS.1,96,64,154/-. THE ASSESSEE HAS SHOWN NET PROFIT AS PER RETURN OF INCOME OF RS.1,06,69,510/-. SO THE BALANCE AMOUNT OF RS. 89,94,6447- IS ADDED TO THE INCOME. HERE THE RELIANCE IS ALSO PLACED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF KACHWALA GEMS VS. DCIT [2007] 288 ITR 10 WHILE MAKING THE ESTIMATION OF THE NET PROFIT TO THE BEST OF THE JUDGMENT. 4.17 THUS IN VIEW OF THE AFORESAID DISCUSSION AND FINDINGS THE ADDITION OF RS.14.48 CRORES MADE ON THE BASIS OF NEGATIVE PEAK CLOSING STOCK IS DELETED AND ADDITION OF RS. 89,94,644/- ON ACCOUNT OF NET PROFIT COMPUTATION IS MADE BY APPLYING THE PROVISIONS OF SECTION 145(3) AND 144 OF THE ACT. THESE GROUNDS OF APPEAL ARE PARTLY ALLOWED. 23 6. WE HAVE HEARD LD. REPRESENTATIVES OF BOTH THE PARTIES. THE LD. DR RELIED UPON ORDER OF THE ASSES SING OFFICER, ON THE OTHER HAND, LD. COUNSEL FOR THE ASS ESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND SUBMITTED THAT ISSUE IS COVERED IN FAVOUR OF TH E ASSESSEE BY ORDER OF ITAT CHANDIGARH BENCH IN THE C ASE OF M/S SAQI BROTHERS VS ITO 54 TTJ 306. THE SAME I S ALSO CONFIRMED BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN ITR 70 OF 1998 DATED 31.10.2006 (SUPRA). 7. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE ASSESSING OFFICER FOUND THAT GP RATE AND STOCK REGI STER WERE NOT MENTIONED IN THE AUDIT REPORT. THE BOOKS OF ACCOUNT WERE, HOWEVER, TEST CHECKED BUT STOCK REGIS TER WAS NOT PRODUCED. ON THE BASIS OF FIGURES AVAILABL E IN PROFIT & LOSS ACCOUNT AND DETAILS OF MONTH-WISE PURCHASES AND SALES PROVIDED BY THE ASSESSEE, THE ASSESSING OFFICER COMPUTED THE GROSS PROFIT OF 51.1 6%. THE ASSESSING OFFICER COMPUTED MONTH-WISE AND QUARTER-WISE TRADING ACCOUNT FOR ENHANCING THE GP. THE ASSESSING OFFICER, HOWEVER, DID NOT CONSIDERED THAT ASSESSEE MADE GENUINE PURCHASES AND SALES WHICH WER E ENTERED INTO THE BOOKS OF ACCOUNT OF THE ASSESSEE. THE ASSESSING OFFICER ALSO DID NOT CONSIDER THE NATURE OF BUSINESS OF ASSESSEE, WAS BASED ON MULTI LEVEL MARKETING SYSTEM WHERE THE GOODS WERE RECEIVED THROUGH-OUT THE YEAR BY DIFFERENT WAREHOUSES AT 24 SEPARATE STATIONS. THE GOODS WERE RECEIVED EITHER THROUGH BILLS OR THROUGH CHALLANS. AFTER RECEIPT O F INTIMATION OF GOODS, THE LUMPSUM PAYMENTS WERE MADE TO DIFFERENT SUPPLIERS THROUGH OUT THE YEAR. NO DE FECTS IN THE PURCHASES AND SALES HAVE BEEN POINTED OUT BY THE ASSESSING OFFICER. THE ASSESSEE PRODUCED COMPL ETE BOOKS OF ACCOUNT, SALES AND PURCHASE VOUCHERS. HOWEVER, THE ASSESSING OFFICER, ON IMAGINARY BASIS, PREPARED MONTH-WISE TRADING ACCOUNT FOR MAKING ADDITION AGAINST THE ASSESSEE. IN THIS WAY ALSO ASSESSING OFFICER FOUND A NEGATIVE STOCK IN THE BOO KS OF ACCOUNT OF ASSESSEE WHICH IS NOT PERMISSIBLE IN LAW . THUS, THE ASSESSING OFFICER IN HIS OWN WAY HAS PREPARED THE TRADING ACCOUNT FOR ENHANCING THE GP DESPITE THE FACT THAT IT IS WELL SETTLED THAT BOOK RESULTS ARE DRAWN ON ANNUAL BASIS. THE ASSESSING OFFICER D ID NOT FOUND ANY UNRECORDED PURCHASES. NO SALES WERE FOUND OUTSIDE THE BOOKS OF ACCOUNT. THEREFORE, THE EXTRA PROFIT ARRIVED AT BY THE ASSESSEE ON MONTH-WISE COU LD NOT BE SUSTAINED. IT IS ALSO WELL SETTLED THAT PRO FIT RATE CANNOT BE UNIFORM IN EACH MONTH. THE ASSESSEE IS DEALING IN LARGE NUMBER OF ITEMS WHICH IS ALSO NOT IN DISPUTE. THE ASSESSING OFFICER ACCEPTED THE OPENIN G STOCK, PURCHASES AND SALES, THEREFORE, WHERE IS THE QUESTION OF CONSIDERING NEGATIVE STOCK IN THE BOOKS OF ACCOUNT OF THE ASSESSEE ? 25 7(I) THE ITAT CHANDIGARH BENCH IN THE CASE OF M/S SAQI BROTHERS V ITO (SUPRA) HELD THAT, NO ADDITIO N CAN BE MADE ON THE GROUND THAT ASSESSING OFFICER FOUND NEGATIVE STOCK OF ANALYSIS OF MONTH-WISE TRADING RE SULTS, ASSESSEE ITSELF HAVING OFFERED RS. 50,000/- FOR ADD ITION, FURTHER ADDITION IS NOT SUSTAINABLE AS GROSS PROFIT ON UNACCOUNTED SALES, IF ANY, WOULD BE FAR LESS. THI S ORDER OF THE TRIBUNAL HAS BEEN CONFIRMED BY HON'BLE PUNJAB & HARYANA HIGH COURT VIDE JUDGEMENT DATED 31.10.2006 (SUPRA). COPIES OF THE ORDERS ARE PLACE D ON RECORD. THE LD. CIT(APPEALS), THEREFORE, ON PROPER ANALYSIS OF FACTS AND MATERIAL ON RECORD CORRECTLY CAME TO THE CONCLUSION THAT AT THE MOST, THE ASSESSING O FFICER SHOULD HAVE REJECTED THE BOOK RESULTS UNDER SECTION 145(3) OF THE ACT. THE LD. CIT(APPEALS) ALSO CORRE CTLY DID NOT ACCEPT THE CONCLUSION ARRIVED AT BY THE ASSESSING OFFICER BY PREPARING MONTH-WISE TRADING ACCOUNT FOR MAKING ADDITION BECAUSE IT WOULD GIVE DISTORTED RESULTS. THE REJECTION OF THE BOOKS OF A CCOUNT BY LD. CIT(APPEALS) UNDER SECTION 145(3) OF THE ACT HAVE NOT BEEN CHALLENGED BY THE REVENUE AS WELL AS BY TH E ASSESSEE. THEREFORE, FINDING OF FACT RECORDED BY L D. CIT(APPEALS) FOR REJECTION OF THE BOOKS OF ACCOUNT UNDER SECTION 145(3) HAS BECOME FINAL. THEREFORE, THE QUESTION LEFT FOR CONSIDERATION WOULD BE WHETHER LD . CIT(APPEALS) HAS CORRECTLY APPLIED AVERAGE OF NET P ROFIT OF ASSESSED INCOME IN SUBSEQUENT TWO YEARS WHICH HA VE SAME MODE OF BUSINESS OPERATION AT 2.76%. THE 26 ASSESSEE IN ASSESSMENT YEAR UNDER APPEAL HAS SHOWN NP RATE OF 0.92%. HOWEVER, IN SUBSEQUENT ASSESSMENT YEARS, ASSESSING OFFICER PASSED THE ORDERS UNDER SE CTION 143(3) IN RESPECT OF THE SAME BUSINESS ACTIVITIES O F THE ASSESSEE WHICH GAVE RISE TO NET PROFIT OF 2.53% AND 2.99% IN SUBSEQUENT ASSESSMENT YEARS 2010-11 AND 2011-12. NO COMPARABLE CASE HAVE BEEN CITED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. THEREFO RE, HISTORY OF THE ASSESSEE WOULD BE RELEVANT AND SHOUL D BE CONSIDERED BY THE AUTHORITIES BELOW. 8. HON'BLE PRIVY COUNCIL IN THE CASE OF LAXMI NARAI N BADRI DASS 5 ITR 170 HELD THAT, ESTIMATE OF INCOME SHOULD BE FAIR. THE ASSESSING OFFICER SHOULD NOT A CT DISHONESTLY OR VINDICTIVELY OR CAPRICIOUSLY. HISTOR Y, KNOWLEDGE OF PREVIOUS RETURNS, LOCAL KNOWLEDGE, CIRCUMSTANCES OF THE ASSESSEE TO BE CONSIDERED TO A RRIVE AT FAIR AND PROPER ESTIMATION. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF RAJINDER PRASAD J AIN 274 ITR 545 HELD THAT TRIBUNAL APPLYING NET PROFIT CONSISTENT WITH PAST HISTORY OF THE ASSESSEE JUSTIF IED. 9. SINCE IN THE SUBSEQUENT YEARS, THE REVENUE DEPARTMENT ACCEPTED NP RATE IN THE CASE OF THE ASSE SSEE AT 2.53% AND 2.99%, THEREFORE, LD. CIT(APPEALS) WAS JUSTIFIED IN APPLYING AVERAGE OF THE NET PROFIT OF ASSESSED INCOME OF SUBSEQUENT TWO YEARS FOR THE PURPOSE OF DETERMINING THE PROFIT OF THE ASSESSEE. THE ASSESSING OFFICER WAS, THEREFORE, NOT JUSTIFIED IN 27 ADOPTING GP RATE OF 51.08% FOR MAKING ADDITION AGAI NST THE ASSESSEE. THE LD. CIT(APPEALS), ON PROPER APPRECIATION OF FACTS AND MATERIAL ON RECORD IN THE LIGHT OF THE DECISION OF ITAT CHANDIGARH BENCH IN THE CAS E OF M/S SAQI BROTHERS (SUPRA) AS CONFIRMED BY THE HON'B LE PUNJAB & HARYANA HIGH COURT, RIGHTLY ALLOWED THE RE LIEF OF RS.13.60 CR. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(APPEALS). THE DEPARTMENTAL APPEAL I S, THEREFORE, DISMISSED. 10. IN THE RESULT, THE DEPARTMENTAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (RANO JAIN) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 28 TH OCT., 2015. POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR ASSISTANT REGISTRAR, ITAT/CHD