Income Tax Appellate Tribunal - Amritsar
Punjab Hide Company, Amritsar vs Income Tax Officer Ward 3 (3), Amritsar on 25 February, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
AMRITSAR BENCH, AMRITSAR.
BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER
AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER
I.T.A. No. 190/Asr/2018
Assessment Year: 2014-15
Punjab Hide Company, vs. Income Tax Officer,
307, Hide Market, Ward-3(3), Amritsar, Punjab
Amritsar-143001, Punjab
[PAN: AAEFP 6654P]
(Appellant) (Respondent)
Appellant by : Sh. P. N. Arora (Adv.)
Respondent by: Sh. Charan Dass (D.R.)
Date of Hearing: 10.01.2019
Date of Pronouncement: 25.02.2019
ORDER
Per Sanjay Arora, AM:
This is an Appeal by the Assessee agitating the Order by the Commissioner of Income Tax (Appeals)-1, Amritsar '(CITA)' for short) dated 15.01.2018, dismissing the assessee's appeal contesting its' assessment under section 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) dated 29.12.2016 for Assessment Year (A.Y.) 2014-15.
2. The assessee, a partnership firm, is a dealer in hides and skins, also processing and finishing them, i.e., besides trading therein. The Assessing Officer (AO) rejected the assessee's accounts observing the following defects therein:
'05. I have carefully considered the submissions of the assessee. The following defects are found in the books of account of the assessee is as under:-2 ITA No. 190/Asr/2018 (AY 2014-15)
Punjab Hide Company v. ITO
(i) Separate details of purchases, sales and closing stock for head office and branches are not maintained.
(ii) Assessee firm purchases hides and skins of different animals such as cows, goats, buffalos etc., which have different purchase and sale rates but no separate records are maintained.
(iii) No record is maintained as to how much raw hide and skin was sold and how much was sold after processing.
(iv) A large part of purchases of hides/skins of the assessee is not supported by bills but merely by self-prepared vouchers on which only name of seller is mentioned.
Payments for these purchases have also been made in cash. Therefore, neither quantity purchased nor rates of purchase can be verified.
(v) In the valuation of stock, only pieces are mentioned but no distinction as to the quality or to which animal it belongs and no justification to the rates applied to stock in hand.
(vi) Some of the expenses claimed by the assessee are supported only by self-prepared vouchers and are paid in cash for example: wages, purchase of hides, firewood, fuel etc. the assessee has failed to substantiate his contentions. Therefore, it is not possible to verify the genuineness / correctness of gross profit rate declared by the assessee.
And, estimated the assessee's gross profit (GP) rate, disclosed at 6.68% for the current year, at the average of the immediately two preceding years, i.e., Assessment Years (AYs.) 2012-13 and 2013-14, i.e., at Rs.8.45%. The same stands confirmed in first appeal for principally the same reasons; the relevant part of the impugned order reading as under:
'The firms deals in purchase of raw hides and skins and sells it both in raw form and in processed form after processing these. It purchases hides and skins of different animals such as cows, goats, buffalos etc., which have different purchase and sale rates. But the appellant was found to have maintained no separate records in respect of each type. Further, no record was maintained of as to how many of the hides and skins were sold raw and how many were sold after processing. In the valuation of stock, only the number of pieces is mentioned but no type or quality of skin/hide is mentioned. For example:
Mall Account (2) Unit : Pieces
Date Opening Purchases Sales Closing .
01.04.2013 62226 - 40 62186
3 ITA No. 190/Asr/2018 (AY 2014-15)
Punjab Hide Company v. ITO
06.04.2013 61100 - 438 60662
08.04.2013 60662 1374 - 62036
09.04.2013 62036 2500 2982 61554
10.04.2013 61554 924 - 62478
31.03.2014 73117 243 - 73360
Apparently, in the absence of particulars mentioning type and quality of hides/skins, mere number of the same is not enough to verify the gross profit/valuation of stock adopted by the appellant. Further, a large part of purchases of hides/skins was found supported only by self- prepared vouchers on which only name of the seller had been mentioned. Payments for these purchases were also made largely in cash. A large part of the wages, purchase of hides, firewood, fuel etc had been paid in cash. Upon due consideration of the above, it is held that Ld A.O was justified to hold that it was not possible to verify the genuineness/correctness of gross profit rate declared by the assessee from its books of accounts. The trading results/ books of accounts were rightly rejected by Ld. AO u/s. 145(3) of the Act. The application of provision of section 145(3) is upheld. Grounds of appeal 6 and 7 are dismissed.
Having rejected the books of accounts / trading results, the AO is entitled to estimate the income of the appellant as if it were an assessment u/s 144 of the Act. Only the estimate has to be reasonable and based upon material on record. Ld. AO has estimated the G.P. rate at 8.45% as against the G.P. rate of 6.68% declared by the appellant on the basis of the average of the G.P. rates of 9.22% and 7.69% declared by the appellant in the two preceding A.Yrs.
2012-13 and 2013-14. The main argument of Ld. AR during appeal is that the G.P. rate was low during the current year as there was substantial increase in sales and that both G.P. & N.P. in money terms are more than those of earlier years. Sales during the year were Rs. 16.69 Crore as against 12.50 crore and 14.25 crore in A.Y. 2012-13 and 2013-14 respectively. Reference was made to assessment completed u/s 143(3) of the Act for A.Y. 2007-08 in the case of the appellant where G.P. rate of 6.30% was accepted.
I have considered the issue. The history of GP rate declared by an assessee itself in other years is one of the reasonable criteria for estimating profits u/s. 145(3) of the Act. Ld. AO has applied NP rate of 8.45% which is the average of the GP rates declared by the appellant 4 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO in the two preceding A.Yrs. 2012-13 and 2013-14. The same cannot be called unreasonable or excessive in any manner. A reference to the GP rates mentioned by the appellant in the written submissions above shows that the GP rate declared in the two succeeding years too is more than 8.45%. It is 8.72% in A.Y. 15-16 and as high as 13.89% in A.Y. 16-17 though the turnover in these years was much lower. During the year under appeal, the appellant had higher turnover, but it does not necessarily imply or justify lower GP. Apart from making a general statement, the appellant has not brought any material on record to substantiate its explanation. An increase in turnover can also bestow the benefits of economies of scale. Keeping in view the totality of above facts, the addition of Rs. 29,54,717/- made by Ld AO is upheld.
Grounds of appeal 3, 4, 5 and 9 are dismissed.' Aggrieved, the assessee is in second appeal.
3. Before us, it was explained that it was incorrect to say that the assessee has not maintained proper records. On being questioned by the Bench about the non maintenance of stock separately for different types and varieties of skins and hides, i.e., of cows, goats and buffaloes, dealt in, as stated by the Revenue authorities, the ld. counsel for the assessee, Sh. Arora, would explain that the assessee deals in only two varieties, i.e., hides - which are of cows and buffaloes, and skins, which are of calves, termed as 'Mall', which are accounted for separately. The difference in prices is on account of some difference in quality, which is bound to obtain. The stock is valued on first-in-first-out (FIFO) basis, as applied to the units in which the goods are purchased and sold, i.e., pieces. The purchases in cash are from unregistered dealers, which is an incident of the trade, also prevalent in earlier years, with reference to the gross profit rate for which the assessee's GP rate (for the current year) stands bench marked. Similarly, purchase of fuel and firewood is again largely from unregistered dealers, which by itself does not mean that the purchase is not genuine or, in any case, excessive. No specific defects, thus, stand 5 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO pointed out or, in any case, hold. The invocation of section 145(3) in the instant case is not maintainable; it being even otherwise well-settled that the same shall not follow merely on a decline in the GP rate, which is not a constant and, governed by market forces, is bound to vary from year to year, as has indeed happened in the assessee's case, ranging from as low as 6.30% (for AY 2007-08), accepted u/s. 143(3), to as high as 13.89% (for AY 2016-17) (refer table at pg. 6 of the impugned order).
The ld. Departmental Representative (DR), Sh. Charan Dass, would, on the other hand, draw our attention to columns 11 and 35 of the tax audit report dated 24.08.2014 for the relevant year (at PB pgs.78-93), which is reproduced as under:
FORM NO. 3CD [See Rule 6G(2)] STATEMENT OF PARTICULARS REQUIRED TO BE FURNISHED UNDER SECTION 44AB OF THE INCOME-TAX ACT, 1961 PART - B
11. (a) Whether books of account are prescribed under section NO 44AA, if yes, list of books so prescribed.
(b) List of books of account maintained and the address at CASH BOOK, LEDGER, which the books of accounts are kept. (In case books of JOURNAL, 307, HIDE account are maintained in a computer system, mentioned the MARKET, AMRITSAR books of account generated by such computer system. If the books of accounts are not kept at one location, please furnish the addresses of locations along with the details of books of accounts maintained at each location.)
35. (a) In the case of a trading concern, give quantitative THE ASSESSEE FIRM details of principal items of goods traded: HAS NOT PRODUCED STOCK REGISTERS
(i) Opening stock; BEFORE US. STOCKS IN
(ii) Purchases during the previous year HAND ARE STATED TO
(iii) Sale during the previous year; BE PHYSICALLY TAKEN
(iv) Closing stock; UP BY THE
(v) Shortage/excess, if any. MANAGEMENT AT YEAR 6 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO END.
(b) In the case of manufacturing concern, give quantitative N.A. details of the principal items of raw materials, finished products and by-products:
No reliance, therefore, he would add, could be placed on the stock register as produced before the AO during the assessment proceedings, being not maintained in the regular course of business. Sh. Arora, on being questioned in the matter, could not furnish any satisfactory reply, only stating that the stock register, though maintained, was not produced before the Auditor, for which (non-production), again, he could not state any plausible reason. He was also unable to explain as to why, then, the stock as at the year-end was physically determined, i.e., when the stock register had indeed been maintained. Rather, the physical stock taking, where so, could in that case only be toward confirming the book figures, not disclosed (to the Auditor), making adjustments for any variances, if any. Continuing further, Sh, Dass would submit that the purchases of hides and skins to a large extent in cash are not denied or shown to be not so. The same, as well as other expenditure stated by the AO as incurred thus, makes the same unverifiable, constituting a substantial defect. As regards the estimation, the same is indeed reasonable as it is based on the assessee's own disclosed results for the preceding two years.
4. We have heard the parties, and perused the material on record. The appeal, though raising several grounds, disputes the invocation of section 145(3) and the concomitant estimation of income. The ground toward levy of mandatory interest u/s. 234B, being even otherwise compensatory and consequential, was not pressed.
4.1 The first thing to consider is if the assessee's books of account as maintained satisfy the test of section 145(3), i.e., are correct and complete, from which the true or correct income of the assessee's business can be deduced. This is as, where so, 7 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO the book results cannot be disturbed. This also agrees with, and is in consonance with the proposition which Sh. Arora was at pains to emphasize during hearing, and also clarified per several decisions, that low profit cannot, by itself, form the basis for the rejection of the accounts. We may though clarify that in the present case, as would be apparent, the Revenue authorities have not found the assessee's accounts as not reliable on that basis, even as the same, and as indeed ought to be the case, that does form the starting point of the enquiry in the matter. On the merits of the invocation of section 145(3) by the Revenue, which forms the substance of the assessee's grievance before us, our first observation in the matter is whether the stock register as produced in the assessment proceedings could be said to be a record maintained by the assessee in the regular course of its' business, and on which, therefore, reliance could be placed in view of section 34 of the Indian Evidence Act, 1872. In our view, clearly not. Column 11(a) of the Auditors' Report mentions the books of account maintained by the assessee-auditee, i.e., Cash-book, Journal and Ledger. Again, at Column 35, where the assessee is required to furnish the quantitative details as per the audited accounts, the Auditor issues, and rightly so, a disclaimer, i.e., in view of no quantitative details furnished before and, therefore, audited by, him, further clarifying that the closing stock is as per the stock certified by the Management, stated to be physically taken by it. Why was the record not maintained or, if maintained, as claimed by Sh. Arora before us, not produced before the Auditor, remains unanswered. Why, one may ask, should the assessee not disclose the correct position to the auditor, to which again there is no answer. The observations by the auditor at column 35 of his report are in the nature of a disclaimer, to which due credence, being an expert, has to be given in view of section 45 of the Evidence Act. The physical stock taking, as afore-noted, confirms the absence of the stock register in-as-much as in that case the same would only be a confirmatory exercise, and the stock figures adopted as per the 8 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO records maintained, duly audited. Why, physical stock taking, where stock records are maintained, being essentially a verification exercise, could be undertaken at any time during the year, i.e., periodically, making adjustments for the variances, if any, observed, which we find as absent. As regards the objection by Sh. Arora that no credence could be given to the Auditor's report in-as-much as this was a new point raised by the ld. DR, not raised by the Revenue authorities, the same only needs to be stated to be rejected. The material to which our attention stands drawn by the ld. DR is on record; being a document furnished by the assessee itself, i.e., its' audited accounts - of which the auditor's report is a part, and which in fact it claims to be correct and complete and, therefore, liable to be accepted as such.
Even otherwise, tax proceedings are not adversarial proceedings or in the nature of a lis (S.S. Gadgil v. Lal & Co. [1964] 53 ITR 231 (SC); Deepak Agro Foods v. State of Rajasthan (in CA Nos. 4327-29 of 2008, dated 11.07.2008). The appellate proceedings, it is well-settled, are a continuation of the assessment proceedings, which are not, strictly speaking, in the nature of judicial proceedings, but only toward making adjustment/s to the assessee's returned income; the whole premise of the exercise being to arrive at his correct total income liable to tax under the Act. The plea of the ld. DR is only in furtherance of the Revenue's case that the assessee's accounts, as maintained, are not correct and complete and, therefore, cannot be regarded as reliable, i.e., to yield it's correct income, so as to be relied upon for the purpose. Why, counsels for the assessees, day in and day out, assume arguments in defence or in furtherance of the assessee's case before us. There is, further, no limitation in the power of the Tribunal in this regard, case law on which is legion, and for which we may, as an example, refer to the decision in Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 232 (SC), the facts of which are also telling, wherein the Apex Court clarified that even rules 11 & 27 of the Income Tax (Appellate Tribunal) Rules, 1963 ('the Rules') are not exhaustive of the 9 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO powers of the tribunal. The objection raised is wholly without basis, both on facts and in law. How, in the absence of stock records, does the assessee close it's accounts for an account period, to arrive at the correct operating income for the said period? The same is an integral part of accounts, ensuring that all that is traded in is taken into account and properly valued in arriving at the profit or loss for the year. Reference in this regard may be made to some decisions by the Apex Court, as CIT v. McMillan & Co. [1958] 33 ITR 182 (SC); Namasivayam Chettiar (S.N.) v. CIT [1960] 38 ITR 579 (SC); Chhabildas Tribhuvandas Shah v. CIT [1966] 59 ITR 733 (SC).
4.2 We may, without prejudice, also consider the assessee's case on the basis of the unaudited stock record as produced in the assessment proceedings, even though not maintained in the regular course of business. Though, strictly speaking, not required to do so in view of our observations at para 4.1, we do so only for the sake of completeness of our order. The Revenue's objection, which meets our approval, as also observed during hearing, is two-fold. One, that the stock register is not maintained with reference to the type or quality of the skin/hide being purchased or sold. Two, the same does not reflect if the same is raw, processed (semi-finished) or finished. This is apparent from the stock details furnished (PB pgs. 32-63). The latter two categories, i.e., finished and semi-finished, should without doubt include the component of value addition, which it does not, being valued at purchase cost, as explained to us during hearing, which is clearly incorrect (refer:
CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC)). This may result in an increase in stock valuation and, thus, profit, to that extent. We shall refer to this aspect later. The basic defect, however, is that the assessee does not record and, accordingly, its accounts do not reflect the different types and varieties of hides and skins being bought and sold, which have been, as admitted before us, clubbed 10 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO into one uniform class for that of cows/buffaloes (hide) and of calf (Mall). The wide variation in the cost thereof, i.e., from bill to bill, for each category, as revealed on the perusal of the valuation details during hearing, bears out the Revenue's claim, i.e., that the same is not a proper record. To exemplify, the cost price of 3493 basis of hides at the Jalandhar Unit (valued at Rs.3,40,900/-) is as under (PB pgs. 7, 8):
DETAILS OF CLOSING STOCK AS ON 31-03-2014 Pcs. Amount (as) Rate 630 88200 140.0 1136 137456 121.0 942 75360 80.0 785 39884 50.8 3493 340900 97.6 How could the same, varying so widely in cost price, be regarded as one, single item to be grouped together, and the quantity obtaining at the year-end valued on FIFO basis? The difference becomes all the more acute when seen in the context, as it has to be for correct appreciation, of the fact that the GP rate, signifying the difference in the purchase and sale rates, varies over a range; the 10 year period ending with the current year witnessing a low of 6.30% (AY 2007-08) and a high of 11.82% (for AY 2009-10) (refer table at page 6 of the appellate order). A good bought at Rs.50 apiece would stand to be sold for a price, depending on the fluctuation of the market price - that too over a 10 year period, between the extremes of Rs. 53 and Rs. 57. In fact, being a perishable product, as also emphasized by Sh. Arora during hearing, the same cannot be withheld to capitalize 11 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO on the increase in the market price, even if imminent, and has to be sold without delay, lest it looses its' value. The different pieces constituting the closing stock of hide (as above), thus, cannot be regarded as one item, to be valued on the basis of the last purchase price, as the FIFO method (of valuation) signifies. The variation in cost of different pieces of Mall (676) and hide (159) in another unit, is no less wide, being as under (PB pgs. 7, 9):
Category Pcs/Rate Low (L) High (H) Average Ratio (L:H) Mall 676 45 700 367.9 1:15 Hide 159 1231 4900 2177.5 1:4
This is despite the fact that the pieces in stock at the year-end would represent the purchase over a very small period of time; the relevant purchase for the year being at 80,906 and 37,483 pieces for Mall and Hide respectively (PB pg. 31). The difference in the cost price for the purchases during the year would, therefore, only be more, if not much more. In fact, a much low difference (variation) would oust the assessee's case of the item, for which the quantitative record is being maintained, i.e., assuming so, are of comparable products or represent a uniform category. Merely categorizing it as Hide or Mall (calf skin) is not enough, which only describes it generically. As observed by the Bench during hearing, a person dealing in cotton (say), qualities of which in the market vary from less than Rs. 100 per metre to as high as Rs. 1000 per metre (if not more), cannot possibly contend of it as constituting one single item, valuing closing stock as per the quantity (metres of cloth) reflected in the stock register on a particular (FIFO, LIFO or even average) basis. Examples could be multiplied. The only 'allowance' that could be made for the variation in the price, i.e., increase or decrease therein, is for the same 'quality' or 'type' of skin/hide. In this regard, it needs to be appreciated that a stock register based on actuals, i.e., the same basis on which a particular skin/hide 12 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO is purchased or sold in the market by the people dealing therein, could be said to be a proper record thereof. There is, after all, clearly, a distinction between a skin/hide being purchased for Rs.45, with that for Rs. 60 or Rs. 65 (say), while in the instant case the same goes up to Rs. 700/- (again, in a small sample size of that constituting the closing stock, valued on the basis of last purchases). Their sale price, which is again market driven, would again stand to be determined accordingly; there being essentially no difference in the nature of a purchase and sale transaction - one man's purchase is another's sale. On what basis, for example, a good is purchased for Rs.50 (say), as against another for Rs.80 or Rs.120 or Rs.150, and so on; the differences being in fact even higher? The difference becomes all the more pronounced when juxtaposed with the fact that the market price, including that due to value addition on account of processing, varies generally between 7% to 10%. The market price cannot explain the difference, as the good bought for Rs. 50 is being sold for rs. 55 (say), while another is, at the same time being bought at Rs. 80/- or higher. On being asked during hearing if the weight was also one of the determinants (of price), Sh. Arora would, without giving a firm or straight answer, state that the same is not relevant as the skin/hide is both purchased and sold in units of pieces. Clearly, therefore, the same would include the weight of the piece as well. That is, the difference in the unit price is also due to its' weight, as it does get manifest therein, getting reflected in the price, being sold as such, i.e., as one, indivisible unit. This, however, would constitute a flaw in book-keeping as the pieces are actually bought and sold distinctly, on the basis of their characteristics, including weight, and cannot be unitized, as done, and the pieces held in stock at the year-end, regarded as those bought latest. A simple exercise would demonstrate the said flaw. The pieces are bought at Rs. 40/- and Rs. 100/- (say). The former is sold for Rs. 45/- (say). However, if bought later than the other piece, it is the latter piece which would get included in the stock, yielding 13 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO a loss of Rs. 55/- as against an actual profit of Rs. 5/-. It could be the other way round as well, again leading to an incorrect result. This is further assuming proper accounting of all the goods purchased and sold during the year. No doubt, the assessee was unable to reconcile the average disclosed gross profit with the difference in the purchase and sale rates; it arguing for the decline in the gross profit for the year to be due to the variation therein, when asked to do so during hearing, giving instead four sets of price differences and, therefore, profit (PB pgs.
179-180).
4.3 The other issue qua the assessee's accounting observed by us is the non- reflection of the stage of processing at which the goods are stationed at any given point of time and, thus, at the end of the account period. The same gets manifest in the Auditor's report (Col. 35(a) (& (b)) regarding the assessee as a trading concern, so that it sells what it purchases, without any processing, even as the assessee admittedly has a finishing unit as well as a leather division. Further, and which also agrees with our finding of the assessee regarding all its' purchases and sales as of one uniform class - a single good, independent of the specific characteristics of each unit, is the lack of the basis on which the pieces are transferred from one unit (division) to another. The transfer being unit specific, and not in the order of their purchase, there is no basis to identify the units transferred. Further still, the concomitant of the assessee being a trading concern is that the processed and semi-processed pieces as at the year-end, as also afore-noted with reference to the decision in British Paints India Ltd. (supra), are valued at the cost of purchase, i.e., without value addition.
4.4 The afore-discussed two defects in the assessee's accounts observed by the Revenue are, thus, on examination, found valid. Section 145(3) stands, 14 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO accordingly, rightly invoked by the Revenue in the facts and circumstances of the case. We are not inclined to pursue the other grounds taken by it for applying section 145(3), viz. a large part of the purchases, and also expenses on wages and fuel, are not verifiable. The assessee has, on a suggestion by the Bench, bifurcated its' purchases from registered and un- registered dealers, with a view to show that the purchase rates from unregistered dealers are comparable with that from the registered dealers (PB pg. 182-183). The same would require verification, as would the claim of the said expenses being properly vouched. As we have already upheld the invocation of section 145(3), we do not think it necessary to get the data furnished in support of its' case, as well as the other claims, verified.
4.5 The next question before us is the estimation of the assessee's gross profit (margin); the same working to Rs.36.59 apiece (Rs.1,11,47,744/304682 pcs. - PB pgs. 95, 27) or at 6.68% for the year. The same has been estimated at 8.45% (or Rs.46.30 per piece), by averaging the GP rates for the immediately two preceding years, i.e., AYs. 2012-13 and 2013-14, the same being also, as observed by the ld. CIT(A), lower than the GP rate disclosed for the succeeding two years, i.e., 8.72% (for AY 2015-16) and 13.89% (for AY 2016-17), i.e., at an average of 11.305%. The same is therefore only to be regarded as reasonable. The same merits our approval, being in conformity with the principles guiding the same, i.e., by taking all the relevant material, as gathered, i.e., which has a nexus or bearing in the matter, into account, and reasonable, and for which reference is made to the decision in Kachwala Gems v. Jt. CIT [2007] 288 ITR 10 (SC), also relied upon by the ld. DR before us; CST v. H.M. Esuf Ali, H.M. Abdul Ali [1973] 90 ITR 271 (SC). Continuing further, as afore-observed, the closing stock of the finishing unit and the leather division is valued at purchase cost (PB pg. 7, 8, 10-11), i.e., without including the conversion cost. The same, as debited to the trading account for the 15 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO year, is at Rs.123.304 lacs (PB pg. 195). Averaging the same over the 99,962 (95,474 + 4,488) pieces included in these categories during the year (PB pgs. 28,29), gives a unit cost of Rs.123.35 per piece. Applying the same on 76,853 (73,360 + 3,493) pieces in stock at the year-end, which ought to be the case, their value would increase by Rs.94,79,818, increasing the gross profit for the year to Rs.2,06,27,562, i.e., at 12.36%. It could be argued that the value of the processed and semi-processed goods in opening stock must be similarly valued. This is as, unless there is a change in the method of valuation of stock during the year, the inventory as at the beginning and the end must be valued on the same basis. The counter argument could be of the closing stock for one year being the opening stock for the following year. The same carries an ominous consequence of an increase in the gross profit for the year by Rs. 94.80 lacs. The point, however, sought to be brought forth by highlighting the under-valuation of the closing stock of the two units is the under reporting of profit (per the P&L account) and, two, its extent. The trading account is debited only with the undervalued opening stock. The same (65,644 pieces) would on sale therefore yield a higher profit, so that the book result would yield a gross profit of 12.4%. Under-valuation of closing stock only operates to absorb this additional profit. Further, the conversion cost is only distributed on the units processed during the year, i.e., as included in that category. The same has to be therefore included in the value of the closing stock if the profit is not to be under-reported. The gross profit as per books, even assuming a correct valuation of raw material, or the raw material cost of the processed goods, gets justified at Rs.206.27 lacs. If the under-valuation in the opening stock is to be similarly taken into account for determining the profit for the year, the data on the conversion cost for the preceding year would be required. For the sake of discussion, assuming a 20% increase therein, i.e., for the current year vis-a-vis the preceding year, yields a per unit cost of Rs.102.80, which results in a net increase 16 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO in the gross profit by Rs.30,01,615 (94,79,818 - 64,78,203), or at 8.48%, i.e., very close to do that estimated. We may hasten to add that we are not in any manner suggesting an increase in or disturbing the valuation of the closing stock; the same having penalty implications as well, but only that, other things being equal, an increase to this extent gets validated. That is to say, that the profit as estimated by the Revenue is reasonable and merits being upheld.
4.6 The assessee has in justification of the fall in the gross profit, claimed increase in turnover for the year, i.e., Rs.1669 lacs, as against Rs.1425 lacs for AY 2013-14, as the reason. We are unable to understand the basis of the said argument. By own admission and, in fact, case, the purchase and sale rates, the difference between which yields the gross margin, are market driven and, therefore, the gross profit stands to vary from year to year. What value, then, the reliance on the lower gross profit for AY 2007-08, even as the principle of res judicata is not applicable to proceedings under the Act. It is, we may clarify, not the unacceptability of this argument, but the absence of proper accounting, so that the books of account have been found as not correct and complete and, therefore, not reliable for deducing the true income of the business, that forms the basis of the invocation of s. 145(3) in the present case. The market price has apparently nothing to do with the assessee's sale, which could also increase in nominal terms, i.e., without an actual increase in quantity (volume) of the sale, as in fact is the position in the present case; the sale for the current year, at 3,04,682 pieces (PB pg. 27), being in fact lower than that for the preceding year (AY 2013-14) (3,83,467 pieces/PB pg. 26). Rather, an increase in the turnover, as observed by the ld. CIT(A), has generally a positive impact on margin in view of economies of scale. The assessee is not selling any branded product, wherein, to beat the competition, it lowers its' price to gain in terms of market share. On the contrary, the sale price for the year is at an increase, 17 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO as is the purchase price, with reference to that for the immediately preceding year (PB pgs. 24-27). Again, the assessee's argument is contradicted by its' own record of the gross profit, viz. for AY 2009-10 (sale: Rs.927.55 lacs), at 11.82%, being higher than that for AY 2008-09, at 9.33% (sale: Rs.908.92 lacs).
4.7 The assesseee has placed a number of decision in its' compilation, without referring to those decisions during hearing. The same were accordingly not perused during hearing nor, consequently, responded to by the other side. The same, accordingly, are not considered part of the record as also, for the same reason, are the other papers of the 'paper-book', in terms of rule 18(6) of the Rules. The same have yet been perused. The decisions (as in Dy. CIT v. Vishwanath Prasad Gupta [2011] 10 taxmann.com 74 (Jab. - TM)) to the effect that low profit cannot be regarded as a defect per se, so as to validate or form a basis for applying sec. 145(3), state a well-accepted position of law. Similarly, the proposition that the books of account cannot be rejected without specifying defects, as also clarified in CIT v. Om Overseas [2009] 315 ITR 185 (P&H), is, again, well-settled. As, however, a reading of the foregoing would reveal, the said principles have not been violated in the instant case. The issue arising in the instant case is primarily factual. That is, whether the assessee's accounts, as maintained, are correct and complete, for the true income of its' business to be deduced there-from, which is the premise of section 145(3). The same is a matter of fact, as indeed clarified in Om Overseas (supra), so that our decision is based principally on findings of fact (paras 4.1 thro' 4.3 of this order). This, then, meets the decisions cited toward the said principles. The decision in Vishwanath Prasad Gupta (supra) is not applicable even on facts. The tribunal's decision in that case rests on the auditor's report, while in the instant case the relevant books of account have admittedly not been produced before the Auditor (refer para 4.1). There is, however, one decision in the compilation that 18 ITA No. 190/Asr/2018 (AY 2014-15) Punjab Hide Company v. ITO may require being discussed, though not obliged to in view of non-reference thereto during hearing, i.e., Balbir Kaur v. ITO (in ITA No. 151/Asr/2016, dated 23.05.2016). It is said that in-as-much as the obligation of the AO is to assess the net income of the business, accounts of which are rejected, the addition by estimating a higher gross profit is not tenable. We are, again, unable to understand the basis of the said argument. The AO, where he disturbs the assessee's gross profit upon invoking 145(3), is only stating that he is not satisfied with the assessee's trading results, as disclosed. Which could be, as indeed it is most likely to be, for the reason that he finds, as in the present case, the accounts as not correct and complete in-so-far as they relate to the manner of accounting for the various direct costs and revenues that go into the working of the gross profit. Net profit cannot be computed or arrived at independent of or de hors the gross profit, being only derived there-from. The AO may also estimate some indirect costs and/or revenues as well, i.e., along with estimating the gross profit; the whole purport being to estimate those areas of income determination for which the assessee's accounts are not regarded as reliable. At the same time, he, finding no defect therein, may not consider it necessary to disturb the indirect income/cost. How, therefore, we wonder, the invocation of sec. 145(3) be impugned on the basis that the assessee's income is estimated by estimating the gross profit alone, allowing other costs and revenues as claimed? There are decisions galore where income estimated thus, have been upheld. Why, in Kachwala Gems (supra) and, to cite another example, in Harish Ahuja v. CIT by the Hon'ble jurisdictional High Court (in ITA No. 196 of 2015, dated 24/8/2015), the income was estimated thus.
4.8 We decide accordingly.
19 ITA No. 190/Asr/2018 (AY 2014-15)Punjab Hide Company v. ITO
5. In the result, the assessee's appeal is dismissed.
Order pronounced in the open court on February 25, 2019
Sd/- Sd/-
(N. K. Choudhry) (Sanjay Arora)
Judicial Member Accountant Member
Date: 25.02.2019
/GP/Sr Ps.
Copy of the order forwarded to:
(1) The Appellant: Punjab Hide Co., 307, Hide Market, Amritsar-143001, Pb. (2) The Respondent: Income Tax Officer, Ward 3(3), Amritsar, Punjab (3) The CIT(Appeals)-1, Amritsar (4) The CIT concerned (5) The Sr. DR, I.T.A.T. True Copy By Order