2006-VIL-464-RAJ-DT

Equivalent Citation: [2009] 316 ITR 120 (Raj), 207 CTR 19

RAJASTHAN HIGH COURT

62 of 2001

Date: 26.10.2006

MALANI RAMJIVAN JAGANNATH

Vs

ASSISTANT COMMISSIONER OF INCOME-TAX

Anjay Kothari for the appellant.
Sangeet Lodha for the respondent.

BENCH

RAJESH BALIA and GOPAL KRISHNA VYAS JJ.

JUDGMENT

The judgment of the court was delivered by

RAJESH BALIA J. - Heard the learned counsel for the parties.

2. At the time of admission of this appeal under section 260A of the Income-tax Act, 1961, the following question was framed as substantial question of law :

"Whether, in the facts and circumstances of the case, once it was accepted by the assessing authority that heavy loss to the tune of Rs. 6,45,620 has been caused to the assessee in the business of supari, accepting the explanation furnished by the assessee that the total fall in the gross profit rate of the assessee is due to heavy loss in one of the segments of his business, it was reasonably open for the Tribunal to have restored the order of assessing authority, rejecting the result shown by the assessee on the total business by separating the business of supari and applying thereto increased the gross profit rate on the turnover of remaining business on the basis of the last year's result which included the turnover of the supari business also and to arrive imaginary estimated figure of gross profit from other business only and thus, reducing net loss computed by the assessee on overall business conducted by him ?"

3. The facts of this case are that the assessee-appellant is doing business of trading in pan masala and other connected commodities. The assessee has furnished return of income showing Rs. 4,48,280 as taxable income along with the audit report.

4. The Assessing Officer found that purchases and sales were properly vouched and verifiable though stock register was not kept, but the assessee had furnished inventories of opening and closing stocks which were not found to be incorrect. It also found that position regarding books of account continued to be the same as in the past. Thus, the inward carriage, loading and unloading and transportation expenses were partly unvouched and unverifiable. With this admitted position, the Assessing Officer noticed that there is fall in the gross profit rate in the business as a whole as compared to the gross profit rate shown by the assessee during the last assessment year 1991-92. The assessee has shown in the previous year gross profit rate of 4.63 per cent, by taking entire business as a whole, but this year he has shown the gross profit rate of 2.38 per cent. only. With this premise, he decided to reject the books of account and asked for explanation of the assessee about the fall in the gross profit rate.

5. The assessee has mainly dealt with sales tax paid goods account wherein the turnover was Rs. 2,70,57,317. In the sales tax paid goods account, the gross profit rate has improved from 4.5 per cent to 4.8 per cent. current year.

6. He also informed that the turnover in the trading account of 12 per cent. taxable, 6 per cent, taxable, ST-17 taxable account and 5 per cent. taxable account was nominal and had hardly any effect on the consolidated turn-over and gross profit rate. Fall in the gross profit rate was stated to be due to heavy loss suffered in 10 per cent, taxable supari account in which the assessee has suffered loss of Rs. 6,45,620 on sale of 220 bags of supari being difference in purchase price and sale price. The assessee has also stated that pan masala had become very common now-a-days so there was boom in this trade and various brands and products had come in the market. In the circumstances, he could not increase his sale prices in the face of cut-throat competition, whereas the cost price had gone up as per normal hike in the price. In spite of such stiff competition, he had only maintained the gross profit rate in normal trading but increased the turnover also by puffing up their best. In the circumstances, he had submitted that the trading results shown were correct and should be accepted.

7. The Assessing Officer had also accepted this part of explanation about there being stiff competition in the trade and loss suffered in sale of 220 bags of supari. In these premises, the Assessing Officer while rejecting the books of account on the basis of the gross profit rate relating to total turn-over had segregated STP sales account, 12 per cent. taxable, 6 per cent. taxable account ST-17 taxable and 5 per cent. taxable account having nominal turnover 10 per cent, taxable account, the Assessing Officer computed 10 per cent. taxable income separately by applying 4 per cent, gross profit rate on estimated turnover of Rs. 67,10,000 and from the said result allowed deduction of loss sustained in supari consignment as claimed by the assessee. By increase in estimated sale and applying estimated gross profit rate, addition of Rs. 1,17,956 was made. In addition thereto, additions were made in respect of each of the expenses account on estimate basis.

8. The Commissioner of Income-tax (Appeals) on appeal found that there being no change in the system of books of account, sales and purchases being fully vouched and explained and inventories of stock having been produced and not found to be incorrect and the Assessing Officer, accepted the explanation about the sustenance of loss and stiff competition which may affect the gross profit rate, the Assessing Officer was not justified in applying the gross profit rate to the estimated turnover. However, it was found that since the stock register was not maintained, therefore, some addition of amount needs to be sustained. Consequently, out of the additions made in the trading account on the basis of applying the gross profit rate, addition of Rs. 17,956 was sustained. The Commissioner of Income-tax (Appeals) also did not disturb the disallowance of expenses under various counts except to the extent of Rs. 1,000 in ship expenses.

9. On further appeal by the Revenue before the Tribunal, the Tribunal after reproducing the orders from the Income-tax Officer's and the Commissioner of Income-tax (Appeals) order held that elaborate working given by the Assessing Officer in his order was not fully appreciated by the Commissioner of Income-tax (Appeals) and sustained the addition made by applying 4 per cent. gross profit rate. However, the Tribunal accepted that there could not be any estimation when the turnover was duly vouched and was not found to be incorrect and sustained the gross profit rate of 4 per cent. only in respect of turnover shown by the assessee. In the aforesaid circumstances, this appeal is before us.

10. The trading account produced before the Assessing Officer was placed for our perusal which shows that in each trading account, only four entries were there of opening stock, purchase on the debit side, sales and closing stock of the credit side. The quantum and value of purchases and sales had not been in dispute inasmuch as they were held to be fully vouched. Value of opening stock also cannot be disputed as it came from dosing stock of the previous year. The inventories of closing stock was also not found to be incorrect. That is to say actual stock position was not in dispute. The previous year's books of account were not found to be incorrect.

11. In the face of these undisputed facts and circumstances, the Tribunal in our opinion, could not have interfered with the order of the Commissioner of Income-tax (Appeals). In doing so, it had ignored all the admitted facts noticed by us above, in the face of which there was no occasion for the Assessing Officer to have resorted to the estimate method. The gross profit is primarily result of excess of sales over purchases, opening stock, closing stock, the unsold stock at two terminals is only a balancing factor. Admittedly, out of this four components of trading result, there could not have been any ground for the Revenue to arrive at different result. So far as closing stock is concerned, inventories of the existing stock were not found to be incorrect by the Assessing Officer, i.e., that position of stock as shown in the account books was not incorrect. There being no dispute about the sales and purchases, non-maintenance of stock register lost its significance so far as arriving at the gross profit is concerned. Therefore, the Commissioner of Income-tax (Appeals) was right in his reasoning about the admitted state of affairs. Resorting to estimate of the gross profit rate was founded on no material. It was merely a case of making certain additions on the basis of certain defects pointed out by the Assessing Officer and which he has shown in different account by giving margin of unvouched expenses. He has disallowed certain expenses.

12. The Tribunal committed the basic error in not appreciating the reasoning given by the Commissioner of Income-tax (Appeals). It is trite to say that in the facts and circumstances of the present case, account books are maintained as they were ordinarily maintained year after year and which were found to yield a fair result. Mere deviation in the gross profit rate cannot be a ground for the rejecting the books of account, and entering the realm of estimate and guesswork. Lower gross profit rate shown in the books of account during the current year and fall in the gross profit rate was justified and also admitted by the Assessing Officer as well as the Commissioner of Income-tax (Appeals) as well as the Tribunal. Therefore, fall in the gross profit rate lost its significance. Having accepted the reason for fall in the gross profit rate, namely, stiff competition in the market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated gross profit by rule of thumb merely for making certain additions. We are, therefore, of the opinion that the findings arrived at by the Tribunal suffers from the basic defect of not applying its mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except what has been shown by the assessee in the books of account. We are, therefore, unable to sustain the order of the Tribunal.

13. Accordingly, the appeal is allowed. The order of the Tribunal is set aside. The order passed by the Commissioner of Income-tax (Appeals) is restored. No order as to costs.

 

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