Commissioner Of Income Tax, Jaipur-Iii, Jaipur v. M/S. Abdul Latif

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 391 / 2009 Commissioner of Income Tax, Jaipur-III, Jaipur. ----Appellant Versus M/s. Abdul Latif, Proprietor, M/s. A.L. Paper Housse, Sanganer, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sameer JainFor Respondent(s) : Mr. Gunjan Pathak _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VINIT KUMAR MATHURJudgment Per Hon’ble Jhaveri J. 01/02/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal hasdismissed the appeal of the department and allowed the appeal ofthe assessee modifying the order of the CIT(A). 2.This court while admitting the appeal on 16.09.2009 hasframed the following substantial question of law: “(i)Whetherinthefactsandcircumstances of the case, the Hon’ble ITATwas right in law in deleting the additionssubstantially without any reason inspite ofbeing last fact finding body and havemaintained the application of Section145(3) of the Income Tax Act making theorder perverse, violative of principles ofnatural justice and self contradictory?” 3.Counsel for the appellant Mr. Jain has taken us to the orderof the Tribunal whereby the Tribunal while concluding the issuehas observed in para 8 as under: “8.We have heard the rival contentionsand perused the facts of the case. Theassessee is maintaining the books ofaccount which have been produced exceptthe stock register. In the absence of stockregister, the Ld. CIT(A) has rightlyconfirmed the action of the AO with regardto applicability of Section 145(3) of the Actsince in the absence of stock register, thebooks of account cannot be said to becomplete and correct income cannot bededuced therefrom. As regard estimationof income, the AO mainly has comparedratio of the expenditure as compared to thepreceding years and no specific defect hasbeen pointed out except the assessee is notmaintaining the stock register. As regardsthe estimation of income, the assessee hasdeclared a gross profit rate of 23.13% equalto gross profit rate declared in theimmediately preceding year. Following thedecision of Jurisdictional High Court in thecase of CIT vs. Gottan Lime Khanij Vdyog256 ITR 243, even if the books of accountare rejected as in the present case, noaddition is called for in the circumstancesand facts of the case. Therefore, theaddition sustained by the ld. CIT(A) isdirected to be deleted. Thus ground No.1of the Revenue is dismissed and GroundNo.1 of the assessee is allowed. Ground No.2 of the assessee: The Ld.CIT(A) has erred in confirming the action ofAO in treating the interest income ofRs.1,35,436/- as Income from othersources as against income from businessdeclared by the assessee.” 4.Then he has taken us the submission made by thedepartment in para 3 & 4 which have not been considered in itstrue spirit. Being the fact finding authority, it ought to have either accepted or rejected the reasons which are required to be enumerated by the Tribunal. Para 3 & 4 reads as under: Ground No.2 of the assessee: The Ld.CIT(A) has erred in confirming the action ofAO in treating the interest income ofRs.1,35,436/- as Income from othersources as against income from businessdeclared by the assessee.” 4.Then he has taken us the submission made by thedepartment in para 3 & 4 which have not been considered in itstrue spirit. Being the fact finding authority, it ought to have either accepted or rejected the reasons which are required to be enumerated by the Tribunal. Para 3 & 4 reads as under: “3. On the basis of the above observation,the AO issued show cause notice to theassessee that why the difference of ragsconsumed as calculated above on the basisof the consumption pattern of electricityconsumed should not be added as hisinvestment and why the books of accountsshould not be rejected. In reply to thesame, the assessee has explained theelectricity consumption at various stagesand also explained that it depends upon thevarious types of the papers manufactured.Further the purchase, sales and theexpenses are fully vouched. The AOhowever stated that the reply of theassessee is not acceptable. Stockdiscrepancy found in survey itself provesthat the accounts are defective. Othervariable such as color and chemical,manufacturing expenses and stock turnoverratio are also found mismatching. Hefurther observed that:- (i) The suppression is further strengthen onthe ground that in survey assessee hassurrendered Rs. 10,00,000/- as hisunaccounted investment in house property.Similar surrender was made by his two sonsnamely Shri Abdul Javed and Shri AbulHussain for Rs.8 lacs and Rs.6 lacsrespectively. Assessee's AR vide order sheetdated 28-12-2005 has agreed to accept theamount surrendered by his two sons in thehands of assessee. Both the sons alsofurnished affidavit that in case any additionin building is made than the same maykindly be added in the hands of theassesse. (ii) The assessee is purchasing the ragsmainly from illiterate parties. Which do nothave bank account or PAN No. Transactionswith them are in cash. Therefore there is allpossibility that the rugs have beenpurchased in cash. (iii) The assessee has neither produced day-to-day closing stock nor any records maintained for in house production. In theabsence of the same the wide variationcan't be verified. (iv) During the year assessee has showngross profit of 23% as against gross profitof 25.75% in A.Y. 2001-02. No justifiablereason for low gross profit was given.However considering the unaccountedpurchases and sales, no inference is madein the g.p. Rate declared by the assesseeand the lower g.p. claimed is accepted. 4. Accordingly, he rejected the books ofaccounts by applying the provisions ofsection 145(3). Thereafter, he estimatedthe unaccounted profit of Rs. 2,08,26,152/-on unaccounted consumption, productionsales of finished goods as under:- (i) On comparison from last year, themanufacturing expenses have gone up by2.53 times whereas the turnover has goneup only by 1.04 times. Further the ratio ofmanufacturing expenses to turnover hasgone up form 3.57% to 8.67% givingincrease of 143%. This shows that theturnover has been highly suppressed. Onthis basis if the turnover for the year iscomputed than it works out toRs.7,44,92,318/- (turnover of last year 82.53) (29443604 * 2.53). On this basis thesuppressed turnover for the year works outto Rs.4,28,43,567/- (74442318-30765443).However for the purpose of the estimatingunaccounted purchases, the electricityexpenses in the right parameter, the sameis taken as a base. (i) On comparison from last year, themanufacturing expenses have gone up by2.53 times whereas the turnover has goneup only by 1.04 times. Further the ratio ofmanufacturing expenses to turnover hasgone up form 3.57% to 8.67% givingincrease of 143%. This shows that theturnover has been highly suppressed. Onthis basis if the turnover for the year iscomputed than it works out toRs.7,44,92,318/- (turnover of last year 82.53) (29443604 * 2.53). On this basis thesuppressed turnover for the year works outto Rs.4,28,43,567/- (74442318-30765443).However for the purpose of the estimatingunaccounted purchases, the electricityexpenses in the right parameter, the sameis taken as a base. (ii) As per the chart given on page No.3 ofthe assessment order regarding month wiseelectricity units consumed and ragsconsumed wherein second highest ratio is11.46 but by giving further benefit of 25%,75% of the second highest figure of rags toelectricity unit ratio is taken i.e.11.46X0.75=8.595. Two third of 8.595 istaken to calculate the total consumption ofrags during the year. Two third of 8.595 is5.73. On this basis the consumption of ragsworks out to 116352 (total electricity unitsconsumed the year) X 5.73=666697 kgs. On this basis the excess rags consumedworks out to 307715 kg as under:-Rags consumption calculated as discussedabove 666697 kgs.Less: Rags shown to have been consumedby the assessee 358982 kgs.Rags consumed and not accounted for 307715 kgs. (iii) On this basis he computed theunaccounted purchase, sales and estimated unaccounted profit as under:- ParticularQty/Value/RateTotal Purchase qty. of rags as admitted in the 3,56,160 kgs.returnTotal Purchase value of rags as per the returnRs. 65,25,803/-Average purchase rate of rags (per kg.)Rs. 18/- per kg.Total sales turnover of finished goods admitted Rs. 3,07,65,442/-in the returnAverage output of finished goods from 70 kg. per 100 kg. processing of rags, as submitted by the of rags processedassesseeTotal quantity of rags processed3,58,982Estimated quantity of finished goods sold (Total 3,58,982 X 0.7= qty. of rags processed & the corresponding 2,51,287 kgs.finished goods sold as per return X 0.7=358982x0.7=251287 Kgs.)Average sale rate of finished goods (per kg.)3,07,65,442/2,51,287=Rs/122.4 per kg.Unaccounted quantity of rags processed (as 3,07,715 kgs.estimated above)Total investment in unaccounted purchase of 3,07,715 X 18 =Rs. rags (unaccounted qty. of rags processed X per 55,38,869/-kg. Purchase rate of rag)Unaccounted qty. of finished goods produced 3,07,715 X 0.7 = out of unaccounted processing of rags2,15,400 kgs. Unaccounted sale turnover of finished goods 2,15,400 X 122.4= (unaccounted qty. of finished goods produced Rs. 2,63,65,021/-out of unaccounted processing of rags x averagesale rate of finished goods)Estimation of undisclosed profitsTotal unaccounted sales of finished goodsRs. 2,63,65,021/-Total unaccounted purchase of ragsRs. 55,38,869/-Undisclosed ProfitsRs. 2,08,26,152/- (unaccounted qty. of finished goods produced Rs. 2,63,65,021/-out of unaccounted processing of rags x averagesale rate of finished goods)Estimation of undisclosed profitsTotal unaccounted sales of finished goodsRs. 2,63,65,021/-Total unaccounted purchase of ragsRs. 55,38,869/-Undisclosed ProfitsRs. 2,08,26,152/- 5.The contention raised by the department is required to beaccepted. No finding of fact has been arrived at by the Tribunal.Only on the ground on which this appeal was admitted, we remitback the matter to the Tribunal which would arrive at a conclusionafter considering the contentions which may be raised by both thesides. 6.Therefore, the issue is answered in favour of department and against the assessee. However, we make it clear that we have notmade any opinion on the merits of the case and we have remittedthe matter only on factual matrix. 7.The appeal is accordingly allowed. (VINIT KUMAR MATHUR)J. (K.S. JHAVERI)J. Asheesh Kr. Yadav/89