Rajasthan High Court - Jaipur
Shree Gautam Textiles vs Ito on 21 May, 2001
Equivalent citations: (2001)72TTJ(NULL)169
ORDER
P.M. Jagtap, A.M. These two appeals one by the assessee being ITA No. 226/Jd/1999 and the other by the revenue being ITA No. 318/Jd/1999 are cross-appeals directed against the order of learned Commissioner (Appeals), Jodhpur, dated 11-3-1999 and hence the same are being disposed of by this common order for the sake of convenience.
2. First we take up the assessees appeal being ITA No. 226/Jd/1999, in which the assessee has raised the solitary grounds disputing the trading addition of Rs. 2,07,506 confirmed by learned Commissioner (Appeals).
3. The facts of the case, in brief, are that assessee-firm carrying on a business of textile processing and printing, filed its return of income on 30-10-1996 in compliance to a notice issued under section 148 declaring a total income of Rs. 22,370. This return was initially processed under section 143(1)(a) on 21-4-1997. A survey under section 133A was carried out at the business premises of the assessee on 6-8-1993, and consequently the case was taken up for scrutiny by issuing notice under section 143(2). In the course of assessment proceedings, the assessing officer found that the gross profit rate shown by the assessee is the lowest compared to the gross profit rates declared by the assessee in the preceding as well as succeeding two years. He also pointed out certain defects in the books of account and other records maintained by the assessee and on the basis of the same rejected the trading results shown by the assessee. Looking to the nature of assessees business, past history of the assessees own case, defects in the books of account pointed out by him and the findings of the survey carried out at assessees business premises, the assessing officer applied the gross profit rate of 15 per cent to the total turnover of the assessee which resulted in the trading addition of Rs. 2,07,506. The assessee carried this matter in appeal before the learned Commissioner (Appeals) challenging the applicability of provisions of section 145 in the facts of the case as well as disputing the quantum of trading addition on merits of the case. The learned Commissioner (Appeals) upheld the application of provisions of section 145 in the assessees case on the basis of the defects pointed out by the assessing officer in the books of account maintained by the assessee. He also confirmed the trading addition made by the assessing officer observing that the assessee has not satisfactorily explained the fall in gross profit rate in the year under consideration. Aggrieved by the same, the assessee is in appeal before us.
4. We have considered the arguments of both the sides and also perused the relevant material on record. We have also considered the written submission furnished by the learned counsel for the assessee together with the decisions cited by him in support of his contentions. It is observed that the learned counsel for the assessee has disputed the trading additions made by the assessing officer by challenging the applicability of the provision of section 145 to the facts of the assessees case. In this regard it is relevant to refer to the defects pointed out by the assessing officer in the books of account maintained by the assessee in order to justify the rejection of the book resulted and application of provision of section 145 in the present case. The same as given by the assessing officer in his order are reproduced below :
(1) It was noticed during the survey that the assessee was not maintaining books of account regularly;
(2) Purchases and sales were not found well vouched;
(3) Some of the expenses claimed in the manufacturing account, i.e. wages, water charges, factory expenses, freight and carriage were not fully vouched:
(4) The assessee has not maintained any stock register;
(5) The closing stock shown by the assessee was not correct as apparent from the report of the survey under section 133A.
5. As regards the defect No. 1 mentioned above it is observed that the survey was carried out at the assessees business premises on 6-8-1993 and the books of account of the assessee were impounded by assessing officer on 10-8-1993 which were found to be written and completed upto 7-8-1993. We find that the assessing officer has not recorded any adverse findings in support of his observation that the assessee was not maintaining the books of account regularly. There is no specific mention in his order about any irregularity in the maintenance of the. books of account noticed during the survey. As regards the defect pointed out by assessing officer in respect of purchases and sales as mentioned in point No. 2, we are unable to understand what actually the assessing officer wants to convey while observing that the purchases and sales were not found well vouched. The term "well vouched" used by the assessing officer seemingly does not specify/convey the deficiency purported to be pointed out by the assessing officer especially in the absence of any specific instances indicated by him in this regard. The learned counsel for the assessee has furnished the bill-wise details of the entire sales and purchases effected by the assessee during the year under consideration in the paper-book filed before us and after carefully going through the same we find it difficult to agree with the findings of the assessing officer that the purchase and sales of the assessee were not well vouched. Similarly the learned counsel for the assessee has also furnished complete details of other manufacturing expenses stated to be not fully vouched by the assessing officer, giving all the relevant details in respect of each individual items of such expenses (relevant p.p. 53 to 65 of assessees paper-book). Here also the assessing officer has not pointed out any specific instances where manufacturing expenses were found to be not fully vouched. As regards the correctness of the closing stock shown by the assessee it is observed that the assessee had filed detailed submission before the assessing officer under letter dated 30-9-1993, forwarded by his learned counsel for the assessee (copy placed on pg. 83 to 87 of assessees paper-book) explaining the difference in the stock shown by the assessee and the inventory prepared during the survey. We also find that the learned Commissioner (Appeals) has already deleted the addition made by the assessing officer on account of unexplained investment in excess stock found during the survey observing that the assessee had satisfactorily explained the excess stock found on the date of survey and the order of learned Commissioner (Appeals) on this issue impugned before us has been upheld by the Bench while disposing of ground No. 2 of revenues appeal in ITA No. 318/Jd/1999 in the subsequent paras of this order. As regards the maintenance of stock record admittedly the assessee has not maintained the stock register due to practical difficulties in maintaining such record due to involvement of various process which include certain process being carried out outside the assessees factory premises. Nevertheless the assessee filed all the necessary details in respect of opening stock and closing stock required by assessing officer.
6. In view of the above-mentioned facts and circumstances of the case, the only defect pointed out by the assessing officer survives on merits is regarding the non-maintenance of stock record by the assessee and the question which remains for our consideration is that whether the non-maintenance of stock record coupled with fall in gross profit rate can justify the rejection of book result and application of provision of section 145. In the case of Vinod Kumar Promod Kumar v. ITO (2000) 15 DTC 380 (Jod-Trib) : (2000) 66 TTJ (Jod-Trib) 722 involving the identical facts, this Bench has held that in the absence of specific mistake or deficiency pointed out by the assessing officer in the assessees books of account, the correctness of book results cannot be challenged merely on the basis of lack of quantitative details and minor variation of gross profit rate declared by the assessee. Explaining further this Bench has observed that the assessing officer is required to give a firm finding that the books are incomplete or incorrect in certain manner and unless such a specific finding is given, no addition in the declared trading result can be validly made. In the case of Uttam Chunapathar Udyog v. ITO 20 Tax World 422 (Jp-Trib) the Jaipur Bench of Tribunal has held that lack of some vouchers and non-maintenance of a particular record do not render the account of the assessee unreliable or incorrect, as envisaged in section 145(2) and it is the duty of the assessing officer to show that how correct profits are not deductible because of these defects. In the present case the assessing officer has not pointed out any specific defects nor has he recorded any firm finding to show that the books of the assessee are incomplete or incorrect in such manner that it is impossible to deduce the true and correct profit of the assessees business from such books of account. As such considering all the facts and circumstances of the case we are of the opinion that the learned Commissioner (Appeals) was not justified in upholding the action of the assessing officer to reject the book result declared by the assessee and to apply the provisions of section 145 in the present case. We, therefore, cancel his impugned order on this issue and delete the trading addition made by the assessing officer on this legal ground.
7. We also find that the assessee has a good case on merits too inasmuch as the assessees sale of own fabric giving lower gross profit margin was increased substantially from 19.8 lakhs in the immediately preceding year to Rs. 42.57 lakhs during the year under consideration. Moreover there were sale return to the tune of Rs. 5,11,550 comprising of 26,892 mts. of finished fabric during the relevant year due to defective and poor quality of printing and these rejected fabrics of inferior quality was resold by the assessee at a loss of Rs. 1.59 lakhs. Furthermore the assessee also received certain debit notes from its customers on account of reduction in rates due to poor quality of printing in the job work account. The learned counsel for the assessee has furnished copies of relevant debit notes received from its customers at paper-book page Nos. 17 to 32 which substantiate the explanation offered by the assessee while justifying the fall in gross profit rate. As such considering all the facts and circumstances of the case we delete the trading addition made by assessing officer and confirmed by learned Commissioner (Appeals) on merits also.
8. Now we take up the revenues appeal being Income Tax No. 318/JdJ1999.
9. Ground No. 1 relates to the deletion of Rs. 75,000 added by assessing officer on account of supervision charges paid to M/s Vijay Shree Enterprise.
10. After considering the rival submissions and perusing the relevant material on record it is observed that the assessee claimed the expenditure of Rs. 75,000 on account of payment made to M/s Vijay Shree Enterprise, proprietor Shri Motilal Bhansali on account of hire charges of six tables and for supervising the production of the assessee. However, no supporting evidence to substantiate this claim was produced by the assessee before the assessing officer during the assessment proceedings and in the absence of the same the assessing officer could not examine the claim of the assessee to ascertain its business expediency. It is observed that the learned Commissioner (Appeals) has allowed this expenditure treating the same as incurred wholly and exclusively for the purpose of business without giving any sound reasoning in support of his finding. The learned counsel for the assessee has contended before us that the assessee achieved higher turnover of Rs. 81.21 lakhs during the year under consideration which warranted use of six printing tables available with M/s Vijay Shree Enterprises in addition to 16 printing tables installed in the assessees own factory premises. It is, however, observed that the assessee-firm achieved a turnover of Rs. 79.56 lakhs during the previous year relevant to assessment year 1992-93 without paying any such supervision charges. Moreover the assessee-firm itself has shown substantial job work having been done for the other parties using its own production facilities and in such circumstances the payment of hire charges for additional printing tables is hardly justifiable. It is also observed that M/s Vijay Shree Enterprise, the recipient of processing charges was a related concern and the necessary details about its income-tax assessment were not furnished by the assessee before assessing officer in the statement recorded on 13-10-1993, Shri Paras Mal, partner of the assessee-firm agreed that M/s Vijay Shree Enterprise is a proprietary concern of his brother and the same was closed one year back. We also find from the relevant details furnished by the learned counsel for the assessee before us that no such supervision charges have been paid by the assessee-firm either in the immediately succeeding year or in the immediately preceding year. As such considering all the facts and circumstances of the case we are of the opinion that the learned Commissioner (Appeals) was not justified in holding that the supervision charges were paid by the assessee-firm wholly and exclusively for the purpose of the business and accordingly allowing the deduction on account of the same. We, therefore, set aside his impugned order on this issue and restore that of the assessing officer.
11. In ground No. 2 the revenue has challenged the action of learned Commissioner (Appeals) in deleting the addition of Rs. 4,68,672 made by assessing officer on account of unexplained excess stock found during the survey holding that the assessee had satisfactorily explained the same.
12. At the time of survey carried out under section 133A at the business premises of the assessee-firm the stock inventory was prepared by the survey team showing that the assessee was in possession of 1,25,896 mts. of cloth on 6-8-1993. Out of this quantity 98,880 mts. of cloth were found to be owned by the assessee. The exact quantity of stock as per the books of account of the assessee was worked out on the basis of actual figures of opening stock at the beginning of the relevant year as well as considering the purchases and sales of the relevant period and as per the said working, the stock as per the books of account of the assessee as on 6-8-1993 was arrived at 69,824 mts. as against 98,880 mts. found during the survey. Considering the prices of different types of cloth in the range of Rs. 8 to Rs. 14 per mt. the assessing officer applied an average rate of Rs. 12 per mt. to determine the value of excess stock of 39,056 mts. at Rs. 4,68,672. Thereafter he issued a show-cause notice to the assessee seeking explanation about the unexplained investment in the excess stock found during the survey and considering that the reply given by the assessee in this regard was not based on any facts and evidence the assessing officer concluded that the excess stock found during the survey is an unexplained investment of the assessee and accordingly made the addition to the income of the assessee to that extent under section 69 of the Act. The assessee carried this matter in appeal before the learned Commissioner (Appeals) who held that the assessing officer was not justified in making the addition at Rs. 4,68,672 on account of maintained investment in excess stock found during the survey because the assessee had satisfactorily explained the same. Aggrieved by the same the revenue is in appeal before us.
13. The learned Departmental Representative submitted before us that the stork inventory was prepared during the survey by survey team in the presence of Shri Suresh Singhvi and on the basis of the information given by him the quantity and rates of different types of cloth were included in the stock inventory, He further submitted that considering that the cloth was at different stages of the production the assessing officer quite fairly and reasonably adopted the average price of Rs. 12 per mt. to work out the value of the stock found at the time of survey. He further submitted that the stock statement prepared during the survey was retracted by the assessee by raising various objections in this regard only after the period of 2 months from the date of the survey and contended that the various objections raised by the assessee have not been substantiated by any supporting evidence. He also contended that the learned Commissioner (Appeals) has given relief to the assessee on this issue relying entirely on the submissions made by him before the assessing officer while retracting the stock inventory prepared during the survey which in fact were not supported by any documentary evidence. He, therefore, urged that his impugned order on this issue may be set aside and that of the assessing officer be restored back. The learned counsel for the assessee, on the other hand, relied on the written submission furnished by him on this issue,
14. We have considered the rival contentions also perused the relevant material on record. It is observed that the stock of cloth as per inventory prepared during the survey was found to be excess than the stock worked out as per the books of the assessee. It is also observed that the said survey was carried out at the assessees business premises on 6-8-1993 and immediately after that a show-cause notice was issued by the assessing officer on 6-9-1993, seeking explanation regarding the excess stock found during the survey. A copy of the stock inventory prepared during the survey was also forwarded to the assessee along with notice. In reply the assessee filed a detailed submission vide its letter dated 30-9-1993, offering itemwise explanation. A perusal of the said letter, placed at p.p. 15 to 19 of the paper-book reveals that the assessee specifically pointed out various mistakes committed by the survey team while preparing the stock inventory and an attempt was made to reconcile the difference in stock pointed out by the assessing officer on the basis of relevant packing slips indicating the actual quantities. The major quantity gap as in different items of stock were also brought to the notice of the assessing officer by the assessee giving specific instances. Subsequently during the assessment proceedings initiated after a gap of about 5 years the assessee relied on the submission made vide its letter dated 30-9-1993, while explaining the difference in stock. The assessing officer however simply brushed aside this explanation of the assessee stating that the reply of the assessee has not been based on facts and evidence and only a reference to a letter dated 30-9-1993, has been made. From the perusal of the observations of the assessing officer recorded in his order it appears that the reply filed by the assessee vide its letter, dated 30-9-1993, was not duly considered by the assessing officer as not a single word has been found to be uttered in the said order by the assessing officer regarding the elaborate submission made by the assessee in the said letter highlighting the various defects and quantity gap evident in the stock inventory prepared during the survey. On the other hand, in the first appeal before him, the learned Commissioner (Appeals) has duly considered the explanation offered by the assessee on this issue vide its letter dated 30-9-1993, and also reproduced the relevant portion of the said submission reiterated before him by the assessee in his impugned order before coming to the conclusion that the excess stock found during the survey had satisfactorily been explained by the assessee by making detailed submission in respect of various discrepancies and errors made by the survey team in working out the stock inventory. In our opinion, the impugned order of the learned Commissioner (Appeals) on this issue being well reasoned and well discussed, suffers from no infirmity requiring any interference on our part. We, therefore, dismiss this ground raised by the revenue and confirm the deletion made by learned Commissioner (Appeals) on this count.
15. Ground No. 3 raised by the revenue in this appeal reads as under :
"On the facts and in the circumstances of the case the learned Commissioner (Appeals) referred in holding that no separate addition on account of excess stock is required to be made being covered by the trading addition, despite there being no direct nexus between the two."
16. We have considered the rival submission and also perused the relevant material on record. It is observed that the learned Commissioner (Appeals) has decided the issue of excess, stock in para 6.2 of his impugned order and we find if worthwhile to reproduce the relevant portion of the same hereunder :
"After due consideration of the matter, I hold that the assessing officer was not justified in making the addition of Rs. 4,68,670 on account of unexplained investment in excess stock found because the appellant had satisfactorily explained the excess stock worked out by the assessing officer at 39,065 mts. on the date of survey. Admittedly, the stock was not measured physically, it was worked out on the basis of assumption. Moreover, the appellant had given detailed explanation in respect of various discrepancies and errors made by the survey party in working out the excess stock. Accordingly, in my view, the assessing officer was not justified in making this addition on account of unexplained investment in stock. If there was any minor discrepancy still left, since addition was made by the assessing officer by rejecting the books of accounts. and by applying a gross profit rate of 15 per cent in the trading account. no separate addition is required to be made on account of excess stock."
From the perusal of the aforesaid observation made by the learned Commissioner (Appeals) it is evident that he allowed the relief to the assessee on this issue considering the merits of the case and duly rendered his decision to the effect that the assessing officer was not justified in making the addition on account of unexplained investment in stock, before making further comments/observations to the effect that if any minor discrepancy is still left the same may be treated as covered by the trading addition made by the assessing officer and confirmed by him. In our opinion these observations of the Commissioner (Appeals) mainly constitute passing remarks/comments having no direct bearing on the decision of the learned Commissioner (Appeals) on this issue raised before him. It is clear that the learned Commissioner (Appeals) arrived at his conclusion on the merits of the case and accordingly gave his verdict even before recording further observation. In these circumstances we find that these passing remarks/observations of the learned Commissioner (Appeals) have no direct bearing on his ultimate decision on the issue involved as the same was decided on the merits of the case and this being the position no grievance can be said to have been caused to the revenue by such observations. We, therefore, dismiss this ground raised by the revenue.
17. In the result, the assessees appeal being ITA No. 226/Jd/1999 is allowed, whereas the revenues appeal being ITA No. 318/Jd/1999 is allowed in part.