1989-VIL-80-ITAT-DEL

Equivalent Citation: ITD 030, 241, TTJ 035, 225,

Income Tax Appellate Tribunal DELHI

Date: 03.05.1989

INCOME-TAX OFFICER.

Vs

OSWAL EMPORIUM.

BENCH

Member(s)  : T. N. C. RANGARAJAN., DR. S. NARAYANAN., S. S. MEHRA.

JUDGMENT

Per S.S. Mehra, J.M. --- The revenue in their present appeal have taken, inter alia, the following grounds :

"1. The ld. CIT(A) was not justified in accepting the book result and the g.p. rate of 42 per cent as against 44 per cent applied by the ITO, under direction of the Inspecting Asstt. Commissioner of Income-tax without properly appreciating the facts of the case.

2. The ld. CIT(A) was not justified in treating the counter sales of Rs. 11,25,829 at par with the export sales of Rs. 20,60,612 for allowing weighted deduction u/s 35B of the IT Act."

2. The first ground is to the effect that the ld. CIT(A) was not justified in accepting the book result and the g.p. rate of 42 per cent as against 44 per cent applied by the ITO. The assessee is a registered firm by status and maintains its accounts on mercantile basis. Accounting period was the year ending31-3-1980. On a total turnover of Rs. 38,83,847 the assessee appears to have declared a gross profit of Rs. 14,52,165, according to the ld. ITO giving a gross profit rate of 42 per cent. However such rate in the chart at page 1 of the paper book is mentioned as 43.73 per cent. The ld. ITO comparing the gross profit rate with the earlier asst. years considered that the same was indeed low and without justification. He also noted that the assessee failed to file details of opening and closing stock and so also the basis of valuation of the stocks. The valuation of the closing stock was seen to be unverifiable. It was also noted that the sale of goods and the price charged were not verifiable. In view thereto the profit earned on particular items could not be ascertained. The ld. ITO also relied upon several comparable cases where higher gross profit rates had been returned. In view of these specific defects picked up by the ld. ITO he rejected the books of accounts applying proviso existing u/s 145(1) of the IT Act, 1961 and in fact made an addition of Rs. 1,01,060 by applying a gross profit rate of 44 per cent on the estimated and effective sales of Rs. 34 lakhs against the sales of Rs. 33,20,587 shown. The addition was in fact made, inter alia, with the following observations :---

"It may however be pointed out that the assessee failed to file details of opening and closing stock as well as the basis of valuation of stocks and therefore, the valuation of closing stock is unverifiable and cannot be relied upon. Farther the sale of the goods and the price charged thereof is not identifiable and, therefore, the profit earned on a particular item cannot be ascertained. The provisions of sec. 145(1) of the IT Act, 1961 are, therefore, clearly attracted. However, it is found that the recasted trading account furnished by the assessee showing a g.p. rate of 43.7 per cent is not correct and the correct recasted trading account is as under :

Thus on not effect sales of Rs. 33,20,587 the effective g.p. rate comes to 42 per cent as against that of 44.5 per cent in the comparable cases. Considering the above facts the IAC has observed that If a g.p. rate of 44 per cent is applied on estimated effective sales of Rs. 34,00,000 in the assessee's case, it will meet the interests of justice and equity as it will give a reasonable margin of tolerance for variance in the trading conditions of the two cases. By applying a g.p. rate of 44 per cent on estimated effective sales of Rs. 34,00,000 extra profit comes to Rs. 1,00,160 which will be added to the disclosed profit of the assessee."

The ld. ITO's action was contested by the assessee. Before the ld. CIT(A) the following submissions were made : ---

(a) that the sales being mostly export sales were verifiable ;

(b) that the ld. ITO had not pointed out any omission or discrepancy in the sales ;

(c) book results were not disputed ;

(d) that the method of accounting remained the same ;

(e) proviso of sec. 145(1) of the Act was inapplicable and that the gross profit rate of 42 per cent being reasonable the addition should have not been made.

The ld. CIT(A) considering the points made before him deleted the addition, inter alia, with the following observations :---

"The ld. IAC had adopted the g.p. rate of 44 per cent as against 42 per cent worked out in the case of the appellant primarily keeping in view the g.p. rate of 44.5 per cent shown by the firm M/s. Subhash Emporium. He, however, had not kept in view the import facts brought out by the appellant which had a material therein on the profit earned. In the other case, the said firm had an advantage of procuring the raw material at a better rate than the appellant and also had a better foreign market having excess of the foreign dignitories and having been a National award in the importable marble goods giving a good reputation in the foreign market. These factors, to my mind, would easily result in a better g.p. rate of 2.5 per cent to my mind, is reasonable in the facts and the circumstances of the case. I, therefore, hold that the ld. IAC was not justified in adopting the g.p. rate of 44 per cent as against 42 per cent worked out by him. Further the learned IAC was also not justified in estimating the effective sales at Rs. 34 lakhs as against Rs. 33,20,586 shown by the appellant, as no omission has been held by the ITO. The mere fact of non-existence of stock register would not justify such an action.

3. Hence the present appeal by the revenue against the said deletion. On behalf of the revenue Shri P.X. Sridharan, learned departmental representative supported the asstt. order. On behalf of the assessee the ld. counsel placed reliance on the impugned order and also made mention of chart placed at page 1 of the paper book showing the turn over and the g.p. rates during various years including the year under consideration.

4. Submissions have been heard and considered. The ld. ITO made the addition on the ground that the assessee's trading results did not favourably compare with the comparable cases in similar circumstances, relied upon by him. He also noted that the trading results in view of the specific defects did not admit of verification. These defects are not shown to be non-existent before us. The addition was made against that background.

5. In the ld. CIT(A)'s view there was no omission on sales and purchase. This inference drawn by the ld. CIT(A) appears to be erroneous as the sale of goods and the price charged was not identifiable and in view thereto profit and on particular items could not be ascertained. If this is not a defect then we do not know in ld. CIT(A)'s view what would constitute a defect. The assessee also failed to file details of opening and closing stock. If that also is not a defect we are really surprised. Thus the observation by the ld. CIT(A) that there was no omission of sales and purchases gets negatived in view of the points made out by the ld. ITO. The next logic applied by the ld. CIT(A) was that book results were accepted in the past in the similar circumstances. That logic also appears to be illogical as investigations during the year under consideration brought out deficiencies and defects and a lower rate of gross profit as compared with the earlier asst. years. The next reason employed by the ld. CIT(A) that the lower gross profit rate was as a result of the higher turn over. This plea also is not. effective because it is not shown from the record that the higher turn over was managed by the assessee by selling at a lower rate. If there was increase in the turn over there should have been corresponding increase in the gross profit also. This logic also appears to be illogical. He also mentioned that the comparable cases relied upon by the ld. ITO were not relevant. For that also the reasoning employed by the ld. CIT(A) is of no consequence as the assessee could also purchase and procure the raw material from the sources the other dealers were doing. Thus all the reasons adopted and employed by the Id CIT(A) appear to be of no help in the matter. Thus in view of the totality of circumstances it was not possible to accept the trading results declared by the assessee. During the earlier asst years the gross profit rates were higher as compared to the rate reflected during this year. Also no reasons for such decline are brought on record. Against this background some addition was definitely called for. We see no justification to interfere with regard to the addition but at the same time are of the view that the same is slightly on the higher side. The assessee reflected sales at Rs. 33,20,587 and gross profit at 42 per cent. The ld. ITO estimated the sales at Rs. 34,00.000 and applied a gross profit rate of 44 per cent. We direct that the sales shown at Rs. 33,20,587 be accepted and thereon a gross profit rate of 44 per cent be applied. The addition should be computed in the light of these observations. The impugned order is modified to this extent.

6. The paper book has been considered.

7. The next ground taken by the revenue is that the ld. CIT(A) was Justified in treating the counter sales of Rs. 11,25,829 at par with export sales at Rs. 20,60,612, for allowing weighted deduction u/s 35B of the Act. It is seen that the issue raised by the revenue in this ground has already been decided against the revenue by 'E' Bench of the ITAT, Delhi vide order for the asst. years 1966-67 to 1978-79 in the case of Subhash Emporium [IT Appeal Nos. 1496, 1497 and 1365 (Delhi) of 1982 dated 16-9-1983] in the similar circumstances. This issue has also been decided against the revenue in ITA Nos. 1396 and 1397 (Delhi) of 82 for the asst. years 1978-79 and 1979-80. Copies of these orders are placed in the assessee's paper book at pages 64 to 75. There are other copies of the orders which are also placed from pages 94 to 190. In this view of the matter and in fact respectfully following the findings in the said orders, we decline to interfere.

8. In the result the appeal Is partly allowed.

Narayanan, A.M. - I have read the order proposed by my learned brother. I am unable to agree with him that the ITO was justified in estimating the gross profit at 44 per cent but that the effective sales of Rs. 33,20,587 returned by the assessee need not be enhanced.

2. The assessee-firm carries on business, as recorded by the ITO, in the purchase and sale of 'Marble Pachhikan goods mostly to foreign tourists who came toIndiaand also exports the same to the foreign countries'. The previous year is the year ended31-3-1980, the method of accounting being mercantile. The ITO did not accept the book results shown this year. Page 1 of the assessee's paper book shows the following :---

Page I of the assessee’s paper book shows the following:

The ITO wrote to the assessee on30-11-1982. He pointed out there that, as per the assessee's books, on sales of Rs. 38,83,847, the assessee had shown gross profit of Rs. 5,59,780 only, i.e. 15.39 per cent that the P&L A/c showed cash incentives of Rs. 4,55,196 and that even if this was brought to trading account, the G.P. would go up to 27.1 per cent. The ITO further pointed out that the opening and closing stocks shown by the assessee were not verifiable ; that a day-to-day stock register was not maintained and hence the correct G.P. could not be ascertained. The ITO then listed some comparable cases (4 in all), where G.P. shown was around 41.44 per cent. He also pointed out that the partners of the assessee had not made any withdrawals for household expenses and that this led to the inference of there being suppressed. profits. He proposed to estimate the G.P. at 34.23 per cent on estimated sales of Rs. 49,96,300 (excluding cash incentives) and make an addition of Rs. 11,12,453 as extra gross profit.

3. The assessee objected to this proposed addition of Rs. 11,12,453 (as extra gross profit) by its letter dated6-12-1982. It made the following major points in this letter :---

(i) All the sales are verifiable with reference to purchase invoices. Complete details of the goods sold, packing charges, date of despatch, names and addresses of the parties were all available.

(ii) Sales effected inIndiaor outsideIndiaagainst foreign currency (sales were mainly to foreign tourists here and export sales abroad) were under the direct 'control' of the Reserve Bank ofIndia. Monthly statements of sales were sent to the Reserve Bank ofIndiaas regards such sales.

(iii) As regards sales inIndiaagainst rupees, they were on a small scale and were also verifiable with reference to sales bills and cash memos. These sales have been accepted by the Sales tax Deptt. after verification.

(iv) The assessee showed good results this year excluding cash incentives, G.P. shown this year was 15.4 per cent on sales of Rs. 38,83,848 as against 16.1 per cent and 16.4 per cent on sales of Rs. 35,06,663 and Rs. 20,50,339 for the assessment years 1979-80 and 1978-79 respectively. The G.P. shown this year was 27.1 per cent as against 23.7 per cent if cash incentives were also included. The net profit shown this year was Rs. 1,31,074 as against Rs. 59,187 disclosed last year.

4. The assessee then commented on the ITO's remark that it was not possible "to ascertain the goods and number of items sold and as such the correct G.P. cannot be worked out". It said :---

"The goods and number of items sold can easily be ascertained from the sale bills as mention of these have been made in all the bills. As stated above, the profit can also be ascertained inasmuch as the profit shown on sales effected is reasonable and is not low compared with the profit shown and accepted for the preceding year. Moreover a detailed list in respect of sales effected to M/s. Facco International & Sales effected in wholesale are enclosed herewith. From these details profit can be ascertained on each and every item sold to these parties. That our case is not comparable with any of the case, though names not mentioned, mentioned in the notice. Reliance has been placed on case No. 2 wherein the rate of profit has been mentioned 44.3 per cent. Though the figures of sales have been noticed but the capital employed and the classification of sales have not been mentioned. By the figures given in the notice it appears that these figures name of M/s. Subhash Emporium,Agra. Presuming that the figures of M/s. Subhash Emporium,Gwalior Road,Agrathen this case is not comparable with the case of the assessee and the results shown cannot be compared on the following facts :

(a) That this firm is a reputed firm of 20 years standing and the proprietors/partners have experience of this line of business on a wide scale having travelled abroad and having purchase capacity in the shape of quota rights.

(b) Having purchase and sale facilities inasmuch as purchase depot at Makrana, sales depot atDelhiand sales show room at Hotel Clark Shiraz.

(c) Having National award for Marble Trade and wide reputation in foreign markets, resulting in more capacity to earn better profits.

(d) Not effecting sales on wholesale basis and sales on no profit basis.

(e) Having facility of own capital and heavy stock of raw material and finished goods. The assessee-firm is lacking With the aforesaid facilities and advantages. The assessee-firm is doing business with the aid of borrowed capital and with limited stock and effecting quick sales on reasonable margin of profit. This fact is established from the record itself. The other cases mentioned in notice are also not comparable with the case of the assessee as in the case No. 1 the sales are less and there is no cash incentive which indicates that the business is of other type and in 3 and 4 also they have dealings in other type of business having branches outside Agra. The details of sales effected on wholesale basis and effected to M/s. Facco International on no profit basis are enclosed herewith (Pages 1 to 129)."

5. The assessee, therefore, requested the ITO in this letter of6-12-1982to accept the profit shown by its books. It suggested that its case should not be compared with other dealers in the line, who included packing, forwarding and insurance charges received also in the trading account, but debited the expenditure incurred under these heads to the P & L Account and thereby showed an inflated G.P. It would appear that there was no farther correspondence between the ITO and the assessee. The assessment was closed finally on19-9-1983. As per the directions of the IAC, received under sec. 144B, an addition of Rs. 1,00,160 was made as extra gross profit by the ITO by estimating the G.P. at 44 per cent on the estimated and effective sales of Rs. 34 lakhs as against Rs. 33,20,587 disclosed by the assessee. This addition was in the place of the addition of Rs. 11,12,453 originally proposed by the ITO. The addition was made with the observations already reproduced (in paragraph 2 of my learned brother's order) and which need not, therefore, be repeated here. Briefly, the ITO's main reasons for the addition seem to be that G.P. of 43.7 per cent, shown by the assessee was not correct on net effective sales of Rs. 33,20,583. The effective G.P. was only 42 per cent, as against 44.5 per cent in the "comparable cases". Hence a G.P. of 44 per cent could be estimated here and the effective sales also could be estimated at Rs. 34 lakhs. This addition was challenged by the assessee before the CIT(Appeals). The basis of this challenge has been noticed in my learned brother's order (paragraph 3) and is worth repeating here. This was :---

"(i) that the sales being mostly export sales were verifiable;

(ii) that the ld. ITO had not pointed out any omission or discrepancy in the sales;

(iii) book results were not disputed;

(iv) that the method of accounting remained the same;

(v) proviso of sec. 145(1) of the Act was inapplicable and that the gross profit rate of 42 per cent being reasonable the addition should have not been made."

6. The CIT(Appeals) deleted the addition. Briefly, his reasons were :--

(i) The ITO estimated the gross profit at 44 per cent as against 42 per cent worked out by the assessee in its case primarily because gross profit of 44.5 per cent was shown by M/s. Subhash Emporium. But the ITO failed to keep in view the important facts brought out by the assessee which had a material bearing on the profit disclosed.

(ii) M/s. Subhash Emporium had the advantage of procuring raw material at a better rate than the assessee. It also had a better foreign market having access to foreign dignitaries and having been a national award winner in marble goods and thus had gained a good reputation in the foreign markets.

(iii) The above factors would easily result in a gross profit which would be higher than 2.5 per cent than the assessee's. Hence the gross profit disclosed by the assessee was reasonable.

(iv) Nor was the ITO correct in estimating the effective sales at Rs. 34 lakhs as against Rs. 33,20,386 disclosed by the assessee. Not a single omission was pointed out by the ITO in this regard. The mere fact of -non-existence of stock register would not support such an action. Against this order, the department came in appeal and the parties were also heard.

7. On a consideration of the submissions before us and the material on record, I am wholly in agreement with the reasoning and the conclusion of the first appellate authority. The ITO does not seem to have been clear in his mind as to the approach he should adopt. He had some suspicion in the matter it appears. He proposed an addition of about Rs. 11,12,453 in the first instance. This was evidently a wholly unrealistic proposal. It only showed the extent of suspicion in the ITO's mind. The assessee replied by its letter of6-12-1982. It took care in particular to comment on the comparable cases of the ITO. M/s. Subhash Emporium came in for specific comment vide paragraph 12 supra. If indeed the points made by the assessee in its letter of 6-12-1982 had no substance, either wholly or partly, it was the duty of the ITO to have recorded so in his order giving reasons for his not accepting the factual submissions of the assessee raised in its letter of 6-12-1982. No such exercise was undertaken. Instead, the ITO proceeded mechanically (under the instructions of the IAC), taking the case of Subhash Emporium as a yardstick and estimating the gross profit at 44 per cent. No material worth the name has been brought on record by the ITO in support of such an estimate. The undisputed fact remains that not a single discrepancy in the trading account has been brought on record by the ITO. No doubt, there was no day-to-day stock register. But this circumstance alone, considering the nature and volume of the assessee's business, would not authorise the authorities to reject the books of account and bring to tax extra trading profit on a purely notional basis. The plain fact is, the case of Subhash Emporium was relied upon in this regard and the unrebutted material on record shows that that case was not comparable. I would, therefore, maintain the order of the CIT(Appeals) on this point wholly and would dismiss the Revenue's objections in this regard.

8. I am in respectful agreement with the conclusion recorded by my learned brother in paragraph 7 of his order.

REFERENCE UNDER SEC. 255(4) OF THE IT ACT, 1961

A difference of opinion having arisen between the Members who heard this appeal, the following point is referred to the President, for resolution in terms of section 255(4) of the Act :

"Whether on the facts and in the circumstances of the case, the Income-tax Officer is to be directed to estimate the gross profit at 44 per cent but on disclosed effective sales of Rs. 33,20,587 or should the order of the Commissioner (Appeals) which directed acceptance of the book results, be confirmed as correct?"

THIRD MEMBER ORDER

Per Rangarajan- This is a reference u/s 255(4) of the IT Act, 1961.

2. The assessee is a registered firm, manufacturing and selling marble art goods abroad. For the asst. year 1980-81, corresponding to the previous year31-3-1980. The assessee showed gross profit of Rs. 5,87,780 on total sales of Rs. 38,83.848. The ITO was of the view that the profit shown was low and taking the direction of the IAC u/s 144B, he made an addition of Rs. 1,00,167. On appeal, the ld. CIT (Appeals) was of the view that there was no justification for this addition. When the revenue appealed to the Tribunal, the ld. Judicial Member agreed with the revenue that the results of the assessee cannot be accepted and that the addition should be made by applying gross profit rate of 44 per cent on the sales shown at Rs. 33,20,587.

3. On the other hand the ld. Accountant Member was of the view that the trading results shown by the assessee should be accepted. Hence, there being a difference of opinion between two Members, the following question is being referred u/s 255(4) of the Act :

"Whether on the facts and in the circumstances of the case, the Income-tax Officer is to be directed to estimate the gross profit at 44 per cent but on disclosed effective sales of Rs. 33,20,587 or should the order of the Commissioner (Appeals) which directed acceptance of the book results, be confirmed as correct ?"

4. Before me it was contended on behalf of the revenue that the profit shown by the assessee in this year was low not only when compared with the case of the other assessee in the same line of the business, but also shown by the assessee itself for the two earlier asst. years. It was pointed out that the principle of valuation of the closing stock was not discernible and the manufacturing cost of each item could not be ascertained as to find out the profit of margin of each individual item sold by the assessee. It was further pointed out that there has been no drawings from the books of the firm, for the personal expenditure of the partners and, therefore, there was every justification for the ITO to believe that the book results did not show the true profit and that the addition should be made to bring it in line with the profit shown by other assessees in the same line of business. Reliance was placed on the decisions in Dinanath Dubey v. CIT [1986] 160 ITR 1 (MP), Bharat Milk Products v. CIT [1981] 128 ITR 682 (All.), Swadeshi Cotton Mill Co. Ltd. v. CIT [1980] 125 ITR 33 (All.), Kishinchand Chellaram v. CIT [1978] 114 ITR 654 (Bom.), 5 ITR 460 (sic), Ghanshyamdas Permanand v. CIT [1952] 21 ITR 79 (Nag.). It was submitted that in the circumstances, the addition made by the ITO should be restored.

5. It was contended on behalf of the revenue that there was no material on record to question the figures of purchase, sale or opening and closing stock and hence there was no way in which the gross profit shown by the assessee could be interfered with. It was further submitted that merely because the book results in this year was marginally less than the preceding year. It could not be said that there was any suppression of profits by the assessee. It was argued that the results have been accepted in the earlier and subsequent years and that the peculiar circumstances of the assessee explained the profit actually derived and the results shown by the other assessee whose cases were not comparable could not be the basis for making any addition to the profit shown by the assessee. Reliance was placed on the decisions in Pioneer Sports Ltd. v. CIT [1934] 2 ITR 305 (Lahore) and Pandit Bros. v. CIT [1954] 26 ITR 159 (Punj.). It was submitted that in the circumstances, the order of the CIT (Appeals) should be confirmed.

6. On a consideration of the rival submissions, it is clear that the order of the CIT (Appeals) is unexceptional. The assessment was not made u/s 145(2) on any finding but the accounts of the assessee were either incomplete or incorrect. Quite to the contrary the undisputed fact is that no fault has been found with the accounts at all. All the purchases and sales have been vouched and accepted. The valuation of the stock has been on the same basis in the past and subsequent years as in this year. There is no evidence of any sales or purchases outside the books. Even the stock tally is not in dispute. All that is stated is that the principle of valuation of the stock is disputable and that profits derived in any particular item is uncertainable. But, these two criticism are of no avail, when there is no material to establish any suppression of sales, purchases or stock. If the stock valuation is to be reviewed then perhaps a separate addition may be made on the basis of application of correct principles of valuation. Even that would depend upon the question whether the assessee is following a regular method of valuation of the stock in which event the valuation cannot be varied. In any event, that is no reason for making addition to the profit disclosed by the assessee as such without revaluing stock, which would as a consequence have its effect on the assessment for the subsequent and the earlier years. Thus, the matter rests only with the singular fact that the profit shown in this year is less than that shown in the earlier years. It is well settled that merely lowness of profit may provoke an enquiry, but that by itself without more cannot justify an addition to the profit shown. It is not in dispute that the assessee in this case had made certain sales on no profit basis and certain other sales on wholesale basis. Taking this into account and also excluding the incentives, received by the assessee, the gross profit shown by the assessee was tabulated in the following manner :

It is stated that another assesses, namely, Subhash Emporium had shown a gross profit of 44.5 per cent. The assessee had explained that Subhash Emporium was an established assessee with 20 years of business and with liaison offices inDelhiand not comparable to the assessee's case. The assessee has also explained that the partners were independently assessed with their own sources of income and, therefore, there was no drawings for the personal expenditure of the partners from the books of the assesses. The picture which emerges is that in the present case an addition is sought to be made on the sole ground that the profit shown by the assessee is low compared to the profit shown in the earlier asst. years and the Profit shown by the another assessee. Such addition is obviously untenable, and cannot be sustained, particularly when the assessee has explained how the profit shown by other assessee is not comparable and that the difference between the results of the assessee's own business for this year and the asst. year is quite marginal considering the extent of the turnover. It must be remembered that the assessment is being made under the proviso u/s 145 accepting the accounts of the assessee as correct and complete and the revenue has not shown that the method of the accounting of the assessee is such that the income cannot be properly deduced or that the profit shown does not reflect the correct profits of the assessee. In the circumstances, I agree with the learned Accountant Member on the point referred that the book results shown by the assesses has to be accepted and the order of the CIT (Appeals) must be confirmed.

7. This matter may be placed before the Bench for passing orders consequential disposing off the appeal in conformity with the majority decisions.

 

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