D.b. Income Tax Appeal v. Sh. Sita Ram Sopra, 17

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 628 / 2009Commissioner of Income Tax, CIT-III, Jaipur. ----Appellant Versus Sh. Sita Ram Sopra, 17-18, Sanga Setu Road, Sanganer, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Daksh Pareek for Mr. Sameer JainFor Respondent(s) : Mr. Mahendra Gargieya _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJudgment 14/09/2017 1. By way of this appeal, the appellant has assailed thejudgment and order of the tribunal whereby tribunal has dismissedthe appeal of the department and confirmed the order of theCIT(A). 2.This court while admitting the appeal on 11.11.2009 framedfollowing substantial question of law:- “Whetherinthefactsandcircumstances of the case, the learnedITAT was right in law in deleting theaddition in entirety inspite of beingmade upon logical basis when it hasspecifically maintained the applicationof Section 145(3) i.e. rejection of booksof accounts for not portraying true andcorrect accounts?” 3.The facts of the case are that the assessee firm continues toderive income from manufacturing and export of garments. During the year under consideration, on the total turnover of6,68,48,332, the assessee had declared gross profit ofRs.50,45,638/- giving a G.P. rate of 7.54% and net profit ofRs.53,03,507/- @ 7.93%, as compared to gross profit of Rs.21.30lacs @ 7.59% on the total turnover of Rs.2.81 crores and NP @6.27% in the immediate preceding year. 3.1 During the course of assessment proceedings, assesseefurnished that there is not maintained any quantitative or month-wise tally of purchase and sales. The AR of the assessee alsosubmitted that the closing stock is incomplete and unverifiable. Onperusal of the Audit Report, as per Form No. 3CB, the auditor videclause 28(a) has noted that “the relevant records of quantitativedetails are not maintained by the assessee.” Thus, the major itemsin the trading account, i.e. closing account, are not amenable toverification. The assessee on 8-12-2005 produced the books ofaccounts which were re-verified by test check. On examination ofthe bills of PP Fashions, house No. 659 section-6, R.K. PurramNew Delhi 110022, it was found that 484 pieces were given forstitching on various dates. 4.Counsel for the appellant has contended that the CIT(A) haswrongly allowed the appeal preferred by the assessee which hasbeen confirmed by the tribunal. 5.He further contended that the AO while considering thematter observed as under:- “Thus, the costing produced during the astt.Proceedingshasnumerousdiscrepancies/deficiencies and appears to have been calculated with the GP result declared inmind. The costing has no reasonable basis isbased on conjecture and surmises and noevidence is offered as to the mode of arrivingat the figures of costing. In fact, the same isalso not sustainable and the AR during thecourse of asstt. Proceedings on 14.12.2005himself agreed that a gross profit of 15 to16% was a possibility. Thus, in the absence of requisite details asdiscussed above, the profits of the businesscannot be ascertained. Therefore, the grossprofit rate of 23% is applied in the case of theassessee.” 6.Counsel for the respondent has relied on the observationmade by CIT(A) which reads as under:- been calculated with the GP result declared inmind. The costing has no reasonable basis isbased on conjecture and surmises and noevidence is offered as to the mode of arrivingat the figures of costing. In fact, the same isalso not sustainable and the AR during thecourse of asstt. Proceedings on 14.12.2005himself agreed that a gross profit of 15 to16% was a possibility. Thus, in the absence of requisite details asdiscussed above, the profits of the businesscannot be ascertained. Therefore, the grossprofit rate of 23% is applied in the case of theassessee.” 6.Counsel for the respondent has relied on the observationmade by CIT(A) which reads as under:- “I have carefully considered the facts of thecase and submissions of the Ld. AR. However,I do not find any merit in the contentions ofthe Ld. AR against the rejection of books ofaccounts by the AO. In this regard, it is seenthat, admittedly, the assessee is notmaintaining the day to day stock register. Inaddition the auditor have also noted in theaudit report submitted by the assessee himselfthat the relevant records of the quantitativedetails were not maintained by the assessee.Further, it is observed that the AO has pointedout various specific defects in the books ofaccounts, as discussed in para 3 and 4 of theassessment order, which have also not beencontraverted by the appellant. Therefore, inthe absence of the day to day stock registerand specific defects pointed out by the AO inthe books of accounts, the AO was fullyjustified in rejecting the books of accounts.Hence, the contentions of the Ld. AR againstthe rejection of books of accounts by the AOwere not found acceptable and thus rejected.However, so far as the contentions regardingthe estimation of G.P. @ 23% of the turnover,on the basis of a comparable case of M/s.Avon Creations is concerned, I find force in thesubmissions made by the Ld. AR pointing outthat the case of M/s. Avon Creations was notcomparable with the case of the assessee. Ifind that there is a substantial difference in the quantum turnover, nature of business, goodsmanufactured/traded, countries of export, etc.of M/s. Avon Creations and that of theappellant assessee, as mentioned by the ld.AR and noted in the preceding para 2.2(ii).Therefore, it is found that the case of M/s.Avon Creations, taken by the AO as acomparable case, for estimating the g.p. in thecase of the assessee, was not a fit case forcomparison with the case of the assessee.Hence, the G.P. rate declared by M/s. AvonCreations cannot, be applied to the case of theassesse. (i) The Ld. AR has objected to the action of AOin considering the interest earned on FDRssubmitted for quota allotment to AEPC,amounting to Rs. 1,53,935/-, as income fromother sources instead business income. Ld. ARargued that without those FDRs, the assesseecould not be allotted quota and without whichno export could have been made. However, Ido not find any merit in the contentions of theLd. AR because for the purpose of the benefitof section 80HHC, the income should bederived from the export business, whereas theimmediate and direct source of interestincome was the FDRs, and not the exportbusiness of the assessee. Hence, though theFDRs were made by the assessee for thepurpose of allotment of quota for exportpurposes, the interest earned on that FDRcannot be held to be an income “derived from”the export business. This view is supported bythe decision of Hon’ble Kerala High Court inthe case of K. Ravindranathan Nair vs. DCIT,262 ITR 669. Accordingly, this ground ofappeal is rejected. (ii) The next ground is against the hypotheticaldiscussion of the AO made in para 8 of theassessment order, whereby the AO has statedthat if at any stage the trading addition isdeleted, then no deduction u/s 80HHC wouldbe allowable to the assessee as the assesseehad no positive profit after deduction of 90%of the interest and duty draw back. However,in view of he findings given with reference tofirst effective ground of appeal, this groundhas become infructuous and, hence, standsdismissed.” 6.1The same was confirmed by the tribunal with the reasoning as under:- “We have heard the rival contentions andperused the facts of the case. The assessee isnot maintaining the day today stock registerand specific defects were also pointed out bythe AO in the books of account. In suchcircumstances and facts of the case, we find noinfirmity in the order of the ld. CIT(A) who hasrightly confirmed the application of Sec.145(3)of the Act. As regards estimation of income,the ld. CIT(A) has rightly directed the AO toapply the gross profit rate of 11.5% on thebasis of the past history of the assessee.” 7.We are in complete agreement with the view taken by the tribunal. 8.In that view of the matter, the issue is answered in favour of the assessee and against the department. 9.The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S.JHAVERI)J. Brijesh 90.