2008-VIL-421-ITAT-MUM

Equivalent Citation: [2008] 24 SOT 556 (MUM.)

Income Tax Appellate Tribunal MUMBAI

IT APPEAL NO. 2689 (MUM.) OF 2004

Date: 25.07.2008

SAURASHTRA BALL PEN (P.) LTD.

Vs

DEPUTY COMMISSIONER OF INCOME-TAX, SPL. RG. -50, MUMBAI

BENCH

D. KARUNAKARA RAO AND RAJPAL YADAV, JJ.

JUDGMENT

D. Karunakara Rao, Accountant Member. - This is an appeal by assessee against the order of the CIT(A) XXIX, dated 12-3-2004 relating to assessment year 1991-92.

2. The grounds read as under :—

"1. The assessment made vide order dated 27-2-1998 is bad in law.

2. The ld. DCIT has erred in law as well as on facts in not considering the evidence and submissions made in the course of original assessment proceedings and appellate proceeding and the contents of the appellate order.

3. The ld. DCIT has erred in law as well as on facts in determining the total income at the rate of Rs. 69,53,380 as against returned income of Rs. 22,25,406 and originally assessed income of Rs. 67,46,436 and raising a demand of Rs. 71,63,085 as against originally raised demand of Rs. 40,25,799.

4. The ld. Assessing Officer erred in law as well as on facts in rejecting books of account and the ld. CIT(A) erred in law as well as on fact in sustaining addition on account of GP at the rate of Rs. 19,50,436 by estimating GP at the rate of 12.5 per cent.

5. The ld. Assessing Officer erred as well as on facts in making addition under section 68 in respect of cash credit and the ld. CIT(A) erred in sustaining the same to the extent of Rs. 35,000 (Rs. 10,000 of Durgh Agencies and Rs. 25,000 of M/s. Hindustan Agencies).

6. The ld. Assessing Officer has erred in law as well as on facts in making addition of Rs. 45,000 being the amount appearing under the head ‘Suspense account’ in the balance sheet and the ld. CIT(A) erred in confirming the same.

7. The ld. Assessing Officer has erred in law as well as in facts making disallowance of Rs. 48,500 being commission paid to Shri M.M. Khatri (Rs. 33,450) and to M/s. R.D.K. Financiers (Rs. 15,000).

8. The ld. Assessing Officer has erred in law as well as on facts in quantifying deduction under section 80HH at the rate of Rs. 10,66,396 and under section 80-I at the rate of Rs. 13,33,000 and the ld. CIT(A) erred in confirming the same.

9. The ld. Assessing Officer has erred in law as well as on facts in charging interest under section 234B and 234C.

10. The ld. Assessing Officer has erred in law as well as on facts in raising the demand of Rs. 71,63,085 as against the demand of Rs. 40,25,799 raised in the original assessment though the total income has increased only from Rs. 67,46,436 to Rs. 69,53,380 only."

3. The briefly stated facts of the case are that the assessee is engaged in the business of manufacturing of Ball Pen, Refill, Sketch Pen, Micro Tip Pen, Sharp Pencil and Pencil Lead. It has sister concerns namely of M/s. Primco Pvt. Ltd., Bicolour Ball Pen Co. Pvt. Ltd. and M/s. Nibs India. The assessee filed the return of income originally and the same was scrutinized under section 143(3) on 30-3-1994 determining the total income at Rs. 67,46,436. The said assessment was set aside by the CIT(A) vide his order dated 25-3-1996. Meanwhile, the Assessing Officer invoked the provision of section 147 and reassessment was computed vide the order dated 4-8-1995 (prior to the setting aside the Assessing Officer’s order by the CIT(A). Assessee filed the return of income in response to the notice under section 148 on 11-9-1995. Various opportunities were given to the assessee i.e., on 24-6-1996, 28-8-1997, 19-1-1998, 5-2-1998 and finally on 12-2-1998 requiring him to submit the details before proceeding to complete the reassessment under section 144, which were ignored by the assessee fully. Finally ex parte reassessment was completed under section 144 read with section 147 and further read with section 250 of the Income- tax Act vide the reassessment order dated 27-2-1998. Assessing Officer relied on the submissions, which were made before the first appellate authority during the first round of appeal, for completing the reassessment. The ex parte reassessment proceedings resulted in (i) Ex parte reassessment order; (ii) Rejections of books of account; (iii) enhancement of total turnover from Rs. 6.01 crores to Rs. 7 crores; (iv) estimation of profit at the rate of 15 per cent of the Rs. 7 crores of the turnover, apart from other additions.

4. The Assessing Officer rejected the books of account for the reasons given as under :—

"1. The sister concerns’ accounts like Primco Pvt. Ltd., M/s. Bicolour Ballpen Co. Pvt. Ltd., M/s. Nibs India, etc., have been credited with expenses on moulding charges, compensation and labour charges, etc., on the last day of the accounting year through J.V. entry.

2. The assessee has not maintained either day-to-day production records or day-to-day stock registers so as to verify the receipts, issue and inventory at the end of the year.

3. As per the books of account, closing stock of Ghaziabad branch as on 31-3-1991 draws up negative stock.

4. No bifurcation had been provided to show the exact inventory at each of the branches and the head office on 1-4-1990 or 31-3-1991.

5. The CIT(A) has confirmed the rejection of books results for assessment year 1989-90 applying the provisions of section 145(2) of the Act. Therefore, in line with the reasons given by the CIT(A) for 1989-90, the book results for assessment year 1991-92 are also rejected."

5. Resultantly, the gross profits as per book of the assessee is Rs. 55,66,233 and as per Assessing Officer basing on the working at the rate of 15 per cent as discussed above, the GP works out to Rs. 1.05 crores. Thus, the effective addition on account of the rejection of books of account works out to Rs. 49,33,767.

6. Aggrieved with the above addition basing on the rejection of books of account the assessee filed an appeal before CIT(A). Before CIT(A), the assessee’s explanation are as under :—

"(a )Transactions with the associate concerns were explained. It was shown that there were no transactions for expenses with Bicolour Ball Pen Co. Pvt. Ltd. (hereinafter called ‘Bicolour’ accounted on the last day except only one entry for Rs. 29,35,377 passed on the last day of the year for payment made by that company on behalf of the appellant. It was also shown that there was no entry passed for any expenses payable to M/s. Nibs India. As regards transactions with M/s. Primco Pvt. Ltd., it was shown that their bills for expenses such as labour charges and moulding charges were accounted from time to time during the year through journal entry as the expenses were not accounted through purchase register. In the year end, a journal entry for the compensation payable to them for the use of their premises was passed, but monthly compensation was fixed. Similar entry was there in the earlier year also. It is thus contended that there was no justification for rejecting the books of account on the ground of transactions with the associate concerns.

(b )As regards the maintenance of production register and stock register, it was submitted that the appellant had satisfying records like record of receipts of raw material, production and sales/transfer. At the year end, physical inventory was taken by management and on the basis of the same, along with other records maintained, the consumption was arrived at on the following lines :—

It was also explained that the consumption so arrived at was further cross-checked and confirmed with the certificate of Chartered Engineer as regards the input-output ratio. Thus, non-maintenance of day-to- day production register and stock register did not impact the validity of the book results. Further, all the quantitative details were furnished in the notes to the accounts as well as in the Tax Audit Report (TAR). Assessing Officer has not raised any query or sought any further information and has not shown how the non-availability of formal stock register comes in the way of deducing the true profits of the business. Appellant has thus stated that non-maintenance of stock register would not be sufficient material for rejecting the books of account. Appellant has place reliance on the following decisions :—

(i )Pandit Bros. v. CIT [ 26 ITR 159 ];

(ii )Jhandi Mal Tara Chand Rice Mills v. CIT [ 73 ITR 192];

(iii) Vijaya Traders v. CIT [ 74 ITR 279 ];

(iv) M. Durai Raj v. CIT [ 83 ITR 484 ].

(c )As regards the Ghaziabad branch, appellant pointed out that it was not known how the Assessing Officer had arrived at the figures. A complete statement of Ghaziabad branch was furnished to show that at no point of time there was no negative stock. Copy of the information furnished has also been filed on pages 60 to 64 of paper book.

(d )In assessment year 1989-90, CIT(A) upheld the rejection of books of account on totally different grounds. In para 12 of his appellate order, he observed that the moulding charges, packing charges and services and machine hire charges paid to sister concerns are excessive and disproportionate to the turnover. However, there was no such ground in the year under appeal. Therefore, merely because in assessment year 1989-90, the books of account were rejected on altogether different grounds, the books of account for the year under appeal cannot be rejected. Further even in regard to assessment year 1989-90, the ITAT has restored the issue back to the file of the Assessing Officer."

7. Regarding reassessment of GP at the rate of 15 per cent which is same for assessment year 1989-90, the assessee stated that the book results are valid and the GP as per the books should be accepted. He also mentioned the Assessing Officer’s decision in increasing the turnover from Rs. 6.01 crores to Rs. 7 crores is not without any basis. Regarding non-compliance the assessee stated that the said non-compliance is attributed to shifting of the office from Vile Parle to Mira Road, MIDC.

8. Further he discussed that substitute record such as records of receipts of raw material, production of sale of transfer is not appropriate enough to substitute for maintaining for day-to-day registration of stock register. On finding that the assessee resorted to ad hoc measures to arrive at the quantity and value of consumption of raw material, the CIT(A) held that the arguments of the assessee, which revolved around the substitute records, is not tenable and cannot be given weightage in the absence of the day-to-day registers for production and for the day-to-day stock register, more so, when the assessee’s business is manufacturing various items as discussed above. Relying on the Apex Court’s judgment in case of S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579-588 (SC) and decision of the Jurisdictional High Court in case of Bombay Cycle Stores Co. Ltd. v. CIT [1958] 33 ITR 13 (Bom.) apart from others, the CIT(A) confirmed the rejection of the books of account. He also discussed the merits and demerits of increasing the turnover from declared Rs. 6.01 crores to Rs. 7 crores and the application of GP at the rate of 15 per cent. On that, the CIT(A) observed that the Assessing Officer has failed to give any basis for the enhancement of turnover to Rs. 7 crores. He analyzed and compared the GP attributable to the manufacturing account for the assessment years 1988-89, 1989-90 and 1990-91. He ignored the GPs relatable to the trading accounts for these years as they were fluctuating badly. The GP’s of manufacturing accounts for the said assessment years are 12.55 per cent, 16.66 per cent, 18.05 per cent respectively. The CIT(A) adopted the GP of the relevant to assessment year 1988-89 i.e., 12.55 per cent on the turnover of Rs. 6.01 crores which comes to GP of Rs. 75,16,670 and against declared GP of Rs. 55,66,233. Thus, CIT(A) confirmed the addition of Rs. 19,50,436.

9. Aggrieved with the above the assessee filed an appeal before the Tribunal with the above grounds. The ld. AR for assessee filed brief synopsis of arguments, which are as follows :—

"(a) Non-maintenance of formal stock register and transactions with sister concerns with respect to purchases, moulding charges, etc., were existing in the immediately preceding year also; (b) Further payment being made to the sister concerns is not a justifiable ground for rejection of book results per se; (c) It has no where been even inferred that payments made to sister concerns are excessive or unreasonable; (d) Even if it is so, disallowance can be made for the unreasonable portion; book results cannot be rejected: (e) Similarly, non-maintenance of formal stock records did not impact the validity of the book results when the quantitative details are available from other records and have been produced and explained; (f) As against the allegation of the learned Assessing Officer regarding negative position of stock, reconciliation was prepared with the available records and explained to the learned CIT(A). There is no instance of negative position of stock; (g) The fall in manufacturing profit as compared to the immediately preceding 3 previous years is due to higher depreciation (almost double) as major investment is done in plant & machinery during the year under consideration."

10. The ld. AR repeated the arguments but forwarded before CIT(A). He has given the details as to how the reasons at 3 and 5 described above on para 4 above are not correct. Regarding other reasons, ld. Counsel argued that this are not grounds on which books can be rejected as the substitute records relied on by the assessee are equally scientific and acceptable. The ld. DR for revenue argued vehemently stating that the failure to maintain the basic registers such as Production Registers and the Stock Registers are adequate ground for invoking the provision of section 145 as held in the cases relied on by the CIT(A). Otherwise, he relied on the orders of the revenue authorities.

11. We have heard rival submissions and perused the order of the lower authorities as well as the paper book filed before us. We have also gone through the brief synopsis submitted before us. The assessee’s case is that the books should not be rejected despite the non-maintenance of formal registers relating to stock of the raw materials and the register relating to raw material consumption, production of finished stocks, when the substitute records are available. Further on adopting 12.5 per cent GP when the GP of the assessee’s case is 9.26 per cent which is higher than that of the immediate preceding year (7.64 per cent) is incorrect. The case of the revenue is that the substitute records are not substitute for the maintenance of formal stock register and the day-to-day production register. There is no dispute on the non-maintenance of the said registers and the assessee’s relying on the ‘principle of balancing’ [refer sub-para (b ) of para 6 of this order] for arriving at the closing stock of raw materials. In this regard, we find it is necessary to discuss the scope of provision of section 145 as amended with effect from.

12. Scope of section 145 : The Assessing Officer assumes jurisdiction in rejecting the books of account of the assessee by virtue of section 145 of the Income-tax Act relating to ‘Method of accounting’. Section 145 as applicable to assessment year 1991-92 reads as under :—

"145. (1) Income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall be computed in accordance with the method of accounting regularly employed by the assessee :

Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine :

Provided further ******

Provided also ******

(2) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." [Emphasis supplied]

(A)Sub-section (2) above is same as the sub-section (3) of the post amended section 145 of the Income-tax Act has following ingredients: (a) Assessing Officer being not satisfied about the correctness or completeness of the accounts of the assessee; (b) the very meaning of the correctness and completeness of the accounts; and (c) making of an assessment in the manner provided in section 145. The above two ingredients (a) and ( b) are relevant for rejection of the accounts of the assessee. Before analysing the phrases of ‘Assessing Officer being not satisfied’ and the correctness and completeness of the accounts’, it is necessary to elaborate on what constitutes the ‘accounts of the assessee’ used in conjunction with the ‘correctness or completeness’. The same has not been defined in the Act in that form. However, the Finance Act, 2001 introduced clause (12A) of section 2 providing for an inclusive definition for "books or books of account". The clause (12A) reads as follows :—

"(12A) ‘Books or books of account’ includes ledgers, day-books, cash books, account-books and other books, whether kept in written form or as print-outs of the data stored in a floppy, disc, tape or any other form of electromagnetic data storage device."

(B)The above definition provides the list of books to be kept and manner of keeping whether any print or electronic forms. The ‘day-books’ is not defined, nevertheless, it is in the common knowledge it refers to certain registrars to be maintained to contain the details of each day particulars with reference to raw materials received or issued or consumed or stock of raw materials remained in stores in respect of both manufacturing or/and trading or any other day-to-day activities of the business. Therefore, the definition given in clause (12A) of section 2 is reasonably important for understanding the phrase ‘accounts of the assessee’ mentioned in the pre-amended section 145(2). The combined reading of the abovesaid provisions read with section 44AB and other guidelines issued in connection with the books of account to be mainted by the class of assessee’s of this kind, adequately advocates for maintenance of the said registers/day-books apart from other books/ledgers enlisted in clause (12A) of section 2. In other words, the requirement of maintaining day-to-day registers for day-to-day production and day-to-day stock registers is thus a statutory requirement of the assessee-company, which is engaged in manufacturing and trading activities during the year. Having upheld the importance of such day-to-day registers, we need to elaborate on the meaning of ‘correctness and completeness’ of assessee’s accounts.

(C)The completeness of accounts refers not only to the accounting entries for all the transaction done in the previous year but also to the list of ledger/books of account as described in clause (12A) above and logically it also refers to the support registers, documents, bills, invoices, etc. In other words, the failure to maintain relevant registers or any other books described in the list makes the accounts of the assessee incomplete. On the other hand, the correctness of the accounts refers to the quality or accuracy or reliability of the accounts maintained by the assessee and it covers the reconcilable mistakes or errors in accounts. Thus, the completeness refers to list of books of account and entries therein and the accuracy refers to the quality of the accounts of the assessee.

(D)Regarding the rejection of books of account, ‘accepting the books of account of the assessee is a rule and rejecting the same is an exception’. This is the principle in existence. Keeping it in mind, we have analysed the assessee’s failure to maintain the day-to-day registers in respect of its manufacturing and trading activities, as the assessee-company various decisions on the issue. In this regard, the Allahabad High Court has held in the cases of Bharat Milk Products v. CIT [1981] 128 ITR 682 , Omex Shoe Factory v. CIT [2006] 281 ITR 268 and Bimal Kumar Anant Kumar v. CIT [2007] 288 ITR 278 that "it is necessary to maintain production registers, a day-to-day records of production and consumption register and raw materials. Unless the consumption for raw material and production register relating to manufactured goods are maintained the production could not be verified..........these reasons are sufficient to invoke.....section 145 of the Income-tax Act, 1961". Hon’ble Jurisdictional High Court, in the case of Bastiram Narayandas Maheswari v. CIT [1994] 210 ITR 438  (Bom.), held that the failure to maintain the day-to-day registers showing the manufacturing of day-to-day products and consumptions of raw material, contributes to the dissatisfaction of the Assessing Officer about the fairness or correctness of the accounts and thus the Assessing Officer is empowered to make the best judgment assessment.

(E)Regarding the ‘Assessing Officer being not satisfied’ about the correctness and completeness of the assessee’s accounts, the Calcutta High Court judgment in the case of Ashoke Refractories (P.) Ltd. v. CIT [2005] 279 ITR 457 is relevant. In the said case, the Hon’ble High Court held that in order to reject the accounts, the Assessing Officer has to come to an opinion that the income cannot be properly deduced from the accounts so maintained. In order to arrive at such conclusion, it must be shown that the Assessing Officer has taken into consideration relevant factors and not omitted to consider the material before him.

(F)Thus, the provisions of section 145 read with section 2(12A) supposes that the assessee’s books of account must include the day-to-day registers for production and stocks and stocks in brokers as the assessee is the manufacturer and trader of Ball Pen, Refill, Sketch Pen, Micro Tip Pen, Sharp Pencil and Pencil Lead. Undoubtedly, such registers are necessary to be maintained by the assessee for arriving at the correct profits. Any substitute records maintained as admittedly is the case with the instant case is no match for the above registers/books which are maintained on actual. In the present case, admittedly, the assessee has not maintained the day-to-day production registers, consumption and production of raw materials. Assessee’s submission is given in sub-para (b) of Para 6 above that non-maintenance of day-to-day registers and stock register do not impact the validity of the books of account shall not made the statutory requirements of maintaining completeness of the accounts of the assessee and the satisfaction of the Assessing Officer in this regard. Accordingly, Assessing Officer failed to apply such statutory requirements.

13. The above scope of the provisions of section 145 conclusively establishing the fact that, what is important for rejection of books is the Assessing Officer being not satisfied about the correctness and completeness of the accounts and it is not the question of assessee establishing the method applied is fit enough to deduce from the accounts the correct profits. But, it is the Assessing Officer’s opinion, which is material and said opinion should be about both correctness and completeness as the conjunction ‘and’ is used. As held by the Hon’ble Calcutta High Court in the case of Ashoke Refractory (P.) Ltd. (supra), however the Assessing Officer is under obligation to take into consideration various factors and not omitted considering the material before him while exercising such discretion. In the light of the above scope, we proceed to examine the fact of the instant case.

14. Assessee manufactures the Ball Pen, Sketch Pens, Refills, Micro tip or Sharp Pencils and Pencil Leads and is engaged in trading of the same. Turn over of the assessee as the impugned books is above Rs. 6 crores. Maintenance of books of account including the day-to-day registers is not only expected of the assessee but also the mandatory responsibility of the assessee. These are very vital registers as they are normally maintained on actuals and day-to-day quantities of raw materials received, issued to the production departments, products manufactures, work-in-progress details etc. In the absence of such registers, arriving at the figures of closing stock of raw materials or others stock details basing on the assessee’s method of balancing principle method is certainly is not free from inaccuracies. Assessee’s method assumes that there shall not be any loss of stocks, wastage, by products, if any, which is not the case in any manufacturing industry.

15. We have also attended to the assessee’s arguments that "substitute records" detailed above in sub-para (b) of para 6 of this order. We have perused the substitute records based statements filed before us. All the charts are essentially based on basic principle of ‘balancing principle’ so far as the stock and production is concerned, which we feel is not free from inaccuracies and therefore, they suffer from accuracy or veracity. Such calculations completely exclude the possibility of spilling, production loss, bye productions, scrap, if any, which is common in any manufacturing industry. More than anything, assessee did not have explanations for its decision not to maintain such vital day-to-day registers. There is no explanation from the assessee for resorting to the "substitute records". In view of the admitted fact that the balance principle is followed by the assessee while arriving at the vital figures relating to stock and certainly not on the basis of actuals determined with the help of the day-to-day registers, which itself supports the Assessing Officer’s adverse opinion about the correctness and completeness of the accounts. Regarding the ‘substitute records’, we find that they are not books or books of account, which is fortified by the subsequently amended provisions of clause (12A) of section 2. We fail to see the point as to why assessee did not maintain the said registers and resort to other unapproved substitutes. AR for the assessee has not brought on record to establish that the maintaining accounts with the help of substitutes is an approved method by itself. Therefore, maintaining the substitute records based on the principle of balancing, is no match for the day-to-day registers maintained basing on the actuals. Therefore, we are of the considered opinion that the failure to maintain the said registers contribute to the completeness of accounts and deducing the stock particulars based on the non-statutory ‘principles of balancing’ contributes to unreliable and inaccurate stock details. The ‘substitute records’ do not make the accounts of assessee complete. In the facts of the case, the Assessing Officer cannot be said to have omitted to consider any particulars place before him to adverse the correct profits of the assessee for the instant year. Thus, we are of the opinion that the said inaccurate and incomplete of accounts of the assessee are adequate enough to contribute to the adverse opinion of the Assessing Officer, which is material in matters of invoking the provisions of section 145 of the Income-tax Act, 1961.

Therefore, we are of the considered opinion that the books are validly rejected and hence, the order of the CIT(A) does not call for any interference in this regard. Having decided the validity of rejection of the books of account for the assessment year 1991-92, we proceed to examine the merits of making of an assessment by estimating the gross profits.

16. The relevant facts are that the assessee declared the turnover of Rs. 6.01 crores, which was increased to Rs. 7 crores by the Assessing Officer. Reassessment order does not mention any basis for such increase. During the appeal before the CIT(A), assessee objected to the same and CIT(A) ignored such increase and confirmed the turn over of Rs. 6.01 crores only for his decisions in the impugned order. The confirmation of the CIT(A) is not contested before us by the revenue. Therefore the turnover as declared by the assessee is final. Assessing Officer estimated the GP at the rate of 15 per cent and he relied on the assessment for the assessment year 1989-90 for this purpose and of course, the said decision is not supported by any reasoning or discussion as evident from the assessment order. During the appeal before the CIT(A), the CIT(A) analysed the issue and found that estimation is on higher side and proceeded to estimate the GP at the rate of 12.5 per cent which is the GP relevant for assessment year 1988-89 as can be made out from the subsequent paragraphs. The relevant para 8 of the impugned order in this regard is as under :—

"As regards GP of 15 per cent it is seen that net GP of 12.57 per cent has been shown in assessment year 1988-89 and 13.29 per cent in assessment year 1989-90. Though the above GP is shown after taking into account the negative GP of 5.11 per cent in assessment year 1989-90 in respect of trading turnover (there was no trading turnover in assessment year 1988-89), it is sent that the net GP was higher for both the years, in assessment year 1990-91 which GP is 7.64 per cent and in the current year under appeal i.e. assessment year 1991-92 GP is 9.26 per cent. Unreliability of the trading GP has already been discussed in the aforesaid paragraphs of this order. As far as manufacturing account is concerned, following GP are shown in the preceding years :—

Taking into account all the facts and circumstances of the case, I am of the opinion that it will be reasonable to adopt GP 12.5 per cent on the turnover of Rs. 6,01,33,357 which comes to Rs. 75,16,670 as against Rs. 55,66,233. Addition of GP on the basis of above working would be of Rs. 19,50,436. Accordingly, Assessing Officer is directed to restrict the addition of Rs. 19,50,436."

17. Aggrieved with the above, the assessee is before the Tribunal. Ground No. 4 of the appeal is relevant in this regard. Relevant proposition of the ld. AR in this regard are given in the written submissions filed, which are as follows: (a) 1. The gross profit has been estimated at 15 per cent [reduced to 12.5 per cent by the learned CIT(A)] on the basis of estimation of gross profit in assessment year 1989-90 which has been set aside by the Hon’ble ITAT; (b) There is no basis whatsoever for estimation of gross profit at the rate of 12.5 per cent when the gross profit for the year under consideration at 9.26 per cent is in fact more than the GP of the immediately preceding year at 7.64 per cent which has been accepted by the learned Assessing Officer while completing the assessment under section 143(3); and (c) Gross Profit margin for the manufacturing activity is 15.23 per cent in year under consideration which more than that estimated by the learned Assessing Officer."

18. The ld. DR argued that the GP declared by the assessee for the instant year is at the rate of 9.26 per cent as against the 12.5 per cent sustained by the CIT(A). He argued that the GP adopted by the assessee is much lesser than the GP’s relevant for assessment year 1988-89 (12.57 per cent) and 1989-90 (13.29 per cent). Although the current GP is higher than that of the assessment year1990-91 (7.64 per cent), the ld. DR made out that the arguments that the combined GP of the current year is much less than that of the assessment years 1988-89 and 1989-90. He further reason that the CIT(A) has rightly adopted GP relevant for manufacturing account and not the trading GP, which are found non-reliable.

19. We have heard rival submissions and perused the orders of the lower authorities in this regard. We have already held in the preceding paragraphs that this is the fit case for rejection of the books of account assessment and consequently, the reassessment has to be made in the manner of the assessment under section 144 of the Income-tax Act, as rightly done by the Assessing Officer for other reasons of non-cooperation too. This approach of the Assessing Officer is validated by various judgments of the Apex Court in the cases of CIT v. H.M. Esufali H.M. Abdulali [1973] 90 ITR 271, State of Kerala v. C. Velukutty [1966] 60 ITR 239 and Kachwala Gems v. Jt. CIT [2007] 288 ITR 10. These judgments upheld making of the best judgment assessments, consequent to the rejection of accounts of the assessee. Further, they also upheld the involvement of certain degree of guess work in making of ex parte assessment. It is a settled law now that estimations have to be done in such cases. Taking the cue from the above judgments, we have examined the action of the Assessing Officer in resorting to estimations relying on assessee’s own case for the earlier assessment years. We have observed that the GP’s relevant for the trading accounts are fluctuating badly giving no pattern helpful for any estimation. Therefore, we have to go for the other alternatives such as the GP relatable to the manufacturing activity. The judgment of the Supreme Court in the case of Kachwala Gems ( supra) approved the rejection of books of account and also making of an assessment by the estimation of GP and relevant Para 7 in this regard is as under :—

"7. It is well-settled in the best judgment assessment there is always certain degree of guess work. No doubt, the authorities concerned should try to make an honest and fair estimate of income even in a best judgment assessment, and should not act totally arbitrarily, but there is necessarily some amount of guess work is involved in the best judgment assessment, and it is the assessee himself who used to blame as he did not submit proper accounts. In our opinion there is no arbitrariness in the present case on the part of income-tax authorities."

20. Accordingly, we proceed to make estimations on the basis of the figures available before us. Having held so, it is noticed that the CIT(A) effectively relied on the GP of manufacturing account applicable to assessment year 1988-89, which was not set aside. Whereas the Assessing Officer relied on assessment year 1989-90 as stated by the assessee in his written submissions. Page 96 of the paper book contains the details of gross profits for manufacturing as well as trading accounts for the years 1988-89 to 1990-91. Applying the GP relevant for assessment year 1988-89 for determining the GP of assessment year 1991-92 is obviously unfair to the assessee as no credit is given to the time factor involved therein apart from others. Taking into consideration the absence data relating to any comparable cases, we find no mistake in the action of the CIT(A) resorting to the data available relating to the assessee itself, but relating to data of yester years. To avoid the arbitrariness, we are of the considered opinion that larger samples of data would minimise such arbitrariness. Taking into consideration the arbitrary decision of the CIT(A) to apply the 12.5 per cent and supporting his decision of making use of the available data belonging to the assessee, we are of the opinion that the average of total GPs relatable to assessment years 1988-89, 1989-90 and 1990-91 would deduce the correct profits of the assessee. The average of all these three GPs involving both the manufacturing and trading activities works out to 10.83 per cent (12.57+13.29+7.64=32.50/3=10.83 per cent). In any case, the GP of 13.29 per cent relatable to assessment year 1989-90 is still relevant, despite the set aside nature of the assessment, as the same is as per the accounts of assessee and assessed GP, whenever the assessment is completed, will not be less than 13.29 per cent. We are of the considered opinion that GP estimated at the rate of 10.83 per cent on Rs. 6.01 crores would meet the ends of justice. Therefore, the order of the CIT(A) is set aside to this extent. Assessing Officer is directed to recompute the gross profit as per the discussion above and make necessary amendments to the relevant order subjected to other directions in this order. Accordingly, the ground 4 is allowed partly.

21. Ground 5 relates to CIT(A)’s decision in sustaining the action of the Assessing Officer of making addition to the extent of Rs. 35,000 i.e., Rs. 10,000 in case of Durgh Agencies and Rs. 25,000 in case of Hindustan Agencies. During assessment proceedings, Assessing Officer disallowed Rs. 2.5 lakhs under section 68 for want of confirmation letters along with the GIR number and other supporting documentary evidences. The amount of Rs. 2.5 lakhs also includes the sum of Rs. 35,000 standing in the names of Durgh Agencies and Hindustan Agencies as detailed above. During the first appeal proceedings, the assessee submitted confirmations, which were send to the Assessing Officer for want of remand report, where the Assessing Officer agreed on the genuineness of the cash credits to the extent of Rs. 2 lakhs. The CIT(A), on re-verification of the facts, deleted the addition to the tune of Rs. 2.15 lakhs out of 2.5 lakhs. He sustained the addition of Rs. 10,000 from Durgh Agencies for want of confirmation letter and other addition of Rs. 25,000 from Hindustan Agencies for want of proper confirmation letter as relevant confirmation does not bear the signature of Hindustan Agencies.

22. Aggrieved with the above the assessee is in appeal before us. As per the written synopsis filed before us, the AR for assessee stated that the said amounts are in the nature of security deposits taken from the distributors in the original course of business. He stated that as far as Hindustan Agencies is concerned addresses can be made out from letter itself. The ld. DR strongly relied on the orders of the lower authorities and stated that as far as Durgh Agencies is concerned, the basic requirement of confirmation letter was never filed before the revenue authorities. Therefore, the identity, creditworthiness and the genuineness of the deposits have not been ascertained. Regarding the deposit from Hindustan Agencies, the ld. DR took us to page No. 103 of the paper book and highlighted the scanty address mentioned on the said letter. All the address available on the letter are M/s. Hindustan Agencies, P.P. Baugh, New Delhi. He mentioned that such an incomplete address does not amount to providing the identity of the person. It is also not evident from the said letter that the Hindustan Agency is borne on the files of the Income-tax Department.

23. We have heard rival submissions and perused the order of the lower authorities as well as the paper book filed before us. It is a settled law that the onus is on the assessee in matter relating to provision of section 68 relating to cash credits. Mere filing a letter of confirmation is not adequate as held by the jurisdictional High Court in case of Lata Mangeshkar v. CIT [1973] 88 ITR 336 (Bom.). Mere payment by Account Payee cheque is also not sacrosanct as held in the case of CIT v. Precision Finance (P.) Ltd. [1994] 208 ITR 465 (Cal.). Therefore, we agree with the ld. DR that the address given on the letter by Hindustan Agencies is insufficient. Thus, the assessee has failed to discharge the onus in regard to these two parties. In view of the above we have not reason to interfere with the order of the CIT(A). Accordingly, ground 5 is dismissed.

24. Ground 6 is raised against CIT(A)’s decision in confirming the Assessing Officer’s action of making addition of Rs. 45,000 which appeared in the suspense account of the Balance Sheet.

25. Brief facts in this regard are that the assessee mentioned the above amount in the suspense account in the Balance Sheet. Assessing Officer disallowed the same as he did not receive any satisfactory explanation. During the appellate proceedings before the CIT(A) and during the remand proceedings, the assessee stated that the Assessing Officer has no jurisdiction to make addition on account of ‘suspense account’ during these set aside proceedings. Whereas, the Assessing Officer stated that the assessment under consideration is the reassessment under the provision of section 144 read with section 147 and the issue that arises during the reassessment proceedings have to be considered and assessed. On merits, assessee had no explanation for the said difference of Rs. 45,000 appearing in the suspense account. Whereas assessee argued before the CIT(A) that the said issue is beyond the scope of the set aside assessment. The CIT(A) after hearing the both parties, rejected the explanation stating that the assessment in question has been made not only under section 250 of the Act but also under section 147 of the Act. The reassessment thus is the resultant of the proceeding under section 144 and also under section 147 read with section 250 of the Income-tax Act.

26. Aggrieved with the above the assessee is in appeal before us. The ld. AR repeated the arguments already mentioned in the impugned order. The synopsis filed before us refers to the same contention as read out by the AR of the assessee. Whereas, the ld. DR argued that the reassessment proceedings were initiated well before the set aside order of the CIT(A) and the impugned ex parte reassessment order in the composite order passed under section 144 read with seciton 147 read with section 250 of the Income-tax Act.

27. We have heard both the parties and perused the order of the lower authorities in this regard. On merits it is fact that assessee has no satisfactory explanation for the said amount appearing in the suspense account. Thus, the revenue authorities is justified in bringing the same to tax. The legal issue of whether the said addition is allowed under the proceedings under section 250 read with section 143, we have perused the facts of the case. Undisputedly the impugned assessment order is the reassessment order, which was made not only under section 250 read with section 144 but also under section 147 of the Income-tax Act. The reassessment proceedings were initiated prior to the order of the CIT(A) setting aside the original assessment order as discussed in the proceedings paragraphs. Therefore, we are of the considered opinion that the order of the CIT(A) does not call for any inference in this regard. Accordingly, ground 6 is dismissed.

28. Ground 7 relates to the CIT(A)’s decision in confirming the Assessing Officer’s action in disallowing Rs. 48,500 being the commission paid to Shri M.M. Khatri (Rs. 33,450) and M/s. R.D.K. Financiers (Rs. 15,000). The Assessing Officer disallowed the same for the want of the (i) confirmatory letters and (ii) any documentary evidence in support of the services rendered by them for which they are entitled for commission from the assessee.

29. The only explanation in this regard by the assessee is that the issue is beyond the scope of the set aside assessment proceedings and relied on the details filed before the Assessing Officer giving names and addresses of the payee and the said amount was paid to Mr. M.M. Khatri for arranging loans in the absence of details, the CIT(A) rejected the above explanation and proceeded to sustained the additions. Aggrieved with the above the assessee is in appeal before us with the said ground. The arguments of the AR for assessee in this regard revolve around, (i) Issue is beyond the scope of said assessment, and (ii) Mr. M.M. Khatri has arranged loans from outsiders to the extent of Rs. 31,95,000. Whereas, the ld. DR underlined the assessee’s failure in filing the confirmation letter and the assessee’s failure in substantiating the services rendered by Shri M.M. Khatri and R.D.K. Financiers for the assessee by filing the details of the loans, names and address of the loans creditors etc.

30. We have heard rival submissions and perused the order of the lower authorities in this regard. It is a fact that so far as Shri M.M. Khatri is concerned the reasonable details relating the extent of loans arranged for assessee were furnished by the assessee. The Assessing Officer failed to act on the information furnished by the assessee in this regard. The Assessing Officer could have invoked the other provisions of the act in examining Shri M.M. Khatri and the books of Shri Khatri if there is any doubt in his mind. Therefore, the commission payment made to Shri Khatri should be deleted. To that extent, the order of the CIT(A) is set aside. So far as R.D.K. Financiers is concerned, the DR stated that no confirmation has been filed and not details of services rendered by them to the assessee were furnished even during the remand proceedings. In the legal issue of valid jurisdiction of the Assessing Officer, we hold that the finding given by us in connection with ground 6 apply. Order of the CIT(A) in this regard does not call for any inference. Accordingly, the ground 7 was partly allowed.

31. Ground 8 relates to CIT(A) decision in confirming the Assessing Officer’s action in respect of the deduction under section 80HH relating ‘to deduction in respect of profits and gains from industrial undertaking like Hotel business in backward area’ and section 80-I relates to ‘deduction in respect of profits and gains to industrial undertaking on certain date etc.’.

32. In quantifying the said deductions, the assessee relied on the actual profits relatable to manufacturing and trading activities. During the reassessment proceedings, the Assessing Officer calculated the said deductions by prorating the total profits on the basis of turnover relatable to trading and manufacturing activities. As per the written submissions before the CIT(A) vide pages 23 to 31, the assessee desired the deduction under sections 80HH and 80-I should be Rs. 14,96,951 and 18,71,189 respectively. Whereas, Assessing Officer allowed the deductions of Rs. 10,66,396 and 13,33,000 as deduction under sections 80HH and 80-I respectively.

33. The arguments of the AR in this regard are that the apportionment of the profits of the assessee between the manufacturing activity and the trading activity, could have been worked out on more scientific way as worked out by him vide pages 30 and 31 of the paper book, according to which, the deductions under sections 80HH and 80-I are Rs. 14,96,951 and Rs. 18,71,189 respectively. Assessee arrived at these figures by making various adjustments considering the direct and indirect expenses. Whereas, the Assessing Officer merely divided the profits by the relatable to manufacturing and trading activities based on their turnover. The CIT(A) confirmed the Assessing Officer’s calculation basing on the facts that the assessee made payments to the specific persons as mentioned in section 40A(2)(b) which was the area of investigation, if the assessee could have co-operated. These payments are made to the specific persons in the context of purchase, sales consumption and production. No investigation was undertaken to this area due to non-co-operation by the assessee for reasons known to him. The CIT(A) proceeded to confirm the calculations of the Assessing Officer in absence of full details in support of the calculations of the assessee in arriving at the manufacturing and trading profits.

34. Aggrieved with the above the assessee is in appeal before us for direction in this regard. In the write up synopsis the ld. AR argued for working out on the basis of profits instead of the profits of the manufacturing activities derived of proportion basis. The DR justified the calculation arrived by the revenue authorities.

35. We have heard rival submissions and perused the order of the lower authorities and the paper book filed before us. In the reassessment order, Assessing Officer allowed the deduction under sections 80HH and 80-I. The amounts of Rs. 10,66,396 and Rs. 13,33,000 were allowed respectively against the assessee’s claims of Rs. 14,96,951 and Rs. 18,71,189 under said sections. We find the assessee’s calculations are based on the total turn over of sales of Rs. 601.34 lakhs which comprises of sales relating to manufacturing activity and the trading activity of Rs. 361.09 lakhs and Rs. 340.25 lakhs respectively. The assessee’s calculations in this regard to arrive at the actual profit also involved the adjustments and they are not actual profits in its original sense. Further, there was none before the Assessing Officer to file evidences and there was no significant development in this regard during the remand proceeding too. In any case, this is the case which books of account are found not correct and complete as discussed in earlier paras of this order. Therefore, we are of the considered opinion that the Assessing Officer has rightly based his working on proportionate basis. Consequent to the directions given above, the profits shall under go changes consequent to our finding on the gross profit. The Assessing Officer need to rework the allowable deductions under sections 80HH and 80-I on proportionate basis basing on the profits estimated at the GP rate of 10.83 per cent of Rs. 6.01 crores of turn over. Thus, the Assessing Officer is directed to recalculate the above deductions after arriving at the profits as per the gross profits decided in the preceding paragraph. Assessing Officer shall give reasonable opportunity of being heard to the assessee. Accordingly, the ground 8 is set aside.

36. Ground Nos. 9 and 10 are consequential, therefore, they are not separately adjudicated.

37. In the result the appeal of the assessee is partly allowed.

 

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