The Income Tax Officer, Ward 3(1 v. Om Silk Mills....opponent(S

O/TAXAP/1459/2007 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1459 of 2007 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ?the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ?to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ THE INCOME TAX OFFICER, WARD 3(1)....Appellant(s) Versus OM SILK MILLS....Opponent(s) ================================================================ Appearance: MR SUDHIR M MEHTA, ADVOCATE for the Appellant(s) No. 1 MR RK PATEL, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERIandHONOURABLE MR.JUSTICE K.J.THAKER Date : 11/12/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE K.J.THAKER) 1.By way of this appeal, the appellant-Revenue has challenged the judgment and order dated 23.2.2007 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench ‘C’ in ITA No.2480/Ahd/2006. 2.While admitting this appeal on 7.2.2008, this Court has framed the following substantial question of law: “Whether, on the facts and in the circumstances of the case, and in law, the Income Tax Appellate Tribunal is right in coming to the conclusion that addition made by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals)-II, Surat, on G.P. Rate is not correct ?” 3.The facts of the present case are that the return of income has been filed on 31.10.2003 declaring total income of Rs. 1,10,463/- by the assessee. The return of income was processed u/s. 143(1) of the IT Act and statutory notice u/s. 14392) was issued and served upon the assessee. In response to the said notice, the assessee furnished necessary details. After considering the material on record, the AO has passed the assessment order. Against the said assessment order, the assessee has preferred an appeal before the CIT(A). The CIT(A) has dismissed the appeal preferred by the assessee. Against the order passed by the CIT(A), the assessee has preferred an appeal before the ITAT. The ITAT has partly allowed the appeal preferred by the assessee. 4.Being aggrieved and dissatisfied with the judgment and order passed by the ITAT, the Revenue has preferred the present Tax Appeal before this Court. 5.Heard the learned advocates appearing for the parties and considered the submissions. Learned advocate Mr. Mehta has submitted that the AO after hearing the representative of the assessee, by order dated 20[th] March, 2006 determined total income of the assessee at Rs. 18,19,463/- and has made addition of Rs. 17,09,000/- on account of fall in gross profit than the previous year. However, while going through the record,it appears that the AO and the CIT(Appeals) have not properly analysed the facts. The analysis put forward by the Tribunal in para 14, 15 and 16, read as under: 4.Being aggrieved and dissatisfied with the judgment and order passed by the ITAT, the Revenue has preferred the present Tax Appeal before this Court. 5.Heard the learned advocates appearing for the parties and considered the submissions. Learned advocate Mr. Mehta has submitted that the AO after hearing the representative of the assessee, by order dated 20[th] March, 2006 determined total income of the assessee at Rs. 18,19,463/- and has made addition of Rs. 17,09,000/- on account of fall in gross profit than the previous year. However, while going through the record,it appears that the AO and the CIT(Appeals) have not properly analysed the facts. The analysis put forward by the Tribunal in para 14, 15 and 16, read as under: “14.As we have already stated that while exercising powers u/s. 144 of the Act and estimating the assessee’s income/the reasons for non-production of books of account or for rejection of books of account must be kept in mind and so far as present case is concerned, the failure to produce the books of account being beyond the control of the present partners. It is so because Revenue has nowhere doubted the correctness of their statement that books of account had been taken away by to other partners and had not come back from Surat till date, we are of the opinion that it was not a fit case where Gross Profits could be estimated by applying the decisions of the Tribunal in cases relied upon by the CIT(Appeals) and conversed by the DR. 15. Having held as above, we are of the opinion that so far as justification of the procedure for computing the assessee’s taxable income, adopted by the AO is concerned, the same can not be said to be a best judgment approach as envisaged in the provisions of section 143/144 of the Act,so far as facts of O/TAXAP/1459/2007 JUDGMENT the present case are concerned because, if we consider the facts of assessee’s case from the angle of net profit, the Revenue had accepted net profit rate of 0.42% in the immediate previous year, whereas, in the present year, it is 0.36% and if the Assessing Officer’s procedure for going by Gross Profitrateistakeninto consideration, then the net profit for current year comes to 7.83% {(18.50 – 11.30) + 0.36} as against accepted the net profit rate of 0.42% in the immediate previous year, i.e. when the books of account were available. Such an abnormal higher rate for arriving at the taxable income cannot under any circumstances, be said to be in consonance with the intent and purpose of provisions of section 144 of the Act. 16. In view of above facts and circumstances of the present case and aforesaid discussion as well as in view of the provisions of law discussed herein before, we are of the opinion that since the Assessing Officer’s duty, while proceeding u/s. 144 read with section 145 of the Act, is to make an assessment, i.e. to O/TAXAP/1459/2007 JUDGMENT determine the taxable income; to the best of his judgment the only justifiable re-course was to proceed with the angle of net profit rate because, as we have already depicted in the earlier part of this order that if Assessing Officer’s action for going by Gross Profit rate is concerned, it will give absurd results relatingtotaxableincome. Consequently, we agree with the submission of the ld. Counsel for the assessee that assessee’s taxable income from business should be computed on the basis of comparison of net profit rate shown by the assessee in the immediate previous year and shown in the current year, taxable income from business for this year by applying the net profit rate as accepted in the immediate previous year.” determine the taxable income; to the best of his judgment the only justifiable re-course was to proceed with the angle of net profit rate because, as we have already depicted in the earlier part of this order that if Assessing Officer’s action for going by Gross Profit rate is concerned, it will give absurd results relatingtotaxableincome. Consequently, we agree with the submission of the ld. Counsel for the assessee that assessee’s taxable income from business should be computed on the basis of comparison of net profit rate shown by the assessee in the immediate previous year and shown in the current year, taxable income from business for this year by applying the net profit rate as accepted in the immediate previous year.” 6.The above analysis by the Tribunal shows that the Tribunal has partly allowed the appeal on the basis of reasonings given by the Tribunal. The findings of facts in the peculiar facts and circumstance of the case, go to show that there was fall in gross Profit rate and the justification of profit ought to have been seen from the angle and not net O/TAXAP/1459/2007 JUDGMENT profit rate. Thus, we are in complete agreement with the findings of facts by the Tribunal and the decision of the CIT(Appeals) which is placed reliance on certain authoritative decisions of the Tribunals were misplaced and were misreading of the provisions of law as they were not applicable in the present case. 7.In the facts and circumstances of this case, we hold that the Tribunal was right in coming to the conclusion that addition made by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals)-II, Surat, on G.P. rate is not correct. Hence, the question is answered in favour of the assessee and against the Revenue. The present Tax Appeal is dismissed. (K.S.JHAVERI, J.) mandora (K.J.THAKER, J)