Delhi High Court
Income Tax Officer vs Texco India. on 13 September, 1995
Equivalent citations: (1996)55TTJ(DEL)672
ORDER
A. SATYANARAYANA, VICE-PRESIDENT :
This appeal filed by the Revenue is against the order of the CIT(A) dt. 23rd Nov., 1990 for the asst. yr. 1986-87 for which the previous year ended on 30th Sept., 1985.
2. The assessee is a partnership of two persons deriving income from manufacture of handloom products.
3. For the asst. yr. 1986-87, the assessee filed a return of income showing an income of Rs. 97,430. The Assessing Officer (AO) noticed that the assessee had shown a gross profit of Rs. 4,91,073 on sales of Rs. 79,20,545 yielding a gross profit rate of 6.19%. He further noticed that in the preceding asst. yrs. 1985-86, 1984-85 and 1983-84, gross profit rates of 6.29%, 6.5% and 11.36% were admitted by the assessee. He also noticed that the assessee had been withdrawing cash from bank even on dates when it had sufficient funds in the form of opening and closing cash balances. Certain examples were given in the assessment order, as withdrawal of Rs. 2,000 on 6th Feb., 1985 from the bank as against the opening cash balance of Rs. 1,21,102 and closing cash balance of Rs. 1,19,202 and withdrawal of Rs. 5,000 on 29th July, 1985 as against the opening cash balance of Rs. 1,29,165 and closing cash balance of Rs. 1,28,845. The assessee was asked to file reasons for the same. The assessee explained that it was a usual practice with it to keep always substantial cash in hand only with a mind to meet any unforeseen and sudden business contingency. It was also explained that cash remained with the partners and the employees had to withdraw money from the bank for day-to-day needs. The AO observed that the explanations given were not satisfactory. He inferred that the assessee invested the opening cash balance in stocks and other investments outside the books of account. The assessee was asked to explain reasons for low gross profit rate. The assessee stated that its sales had increased by Rs. 18 lakhs and the trading results have been consistently progressing. The AO confronted the assessee with the trading result of M/s Pan Fab, Panipat, which were as under :
"Sales Rs. 3,41,638 Gross profit Rs. 2,56,072 (8.15%) Gross profit after transferring electricity, packing and forwarding to the P&L account as in the case of the assessee Rs. 3,15,661 (10.04%)."
4. The assessee explained that there can be a number of reasons for variance in the gross profit rates from assessee to assessee depending upon the nature of product and the nature of the terms and conditions of the business. The AO held that the book results of the assessee were not found to be verifiable in view of the following reasons :
" (i) The assessee had been investing in stocks/other investments outside the books of account as is made out in para 5 above.
(ii) The assessees profit are low when compared to his results in the preceding year. When compared with the trading results shown by another assessee, the case of which has been taken to be a comparable one.
(iii) The details of the opening stock filed by the assessee show that many items have been valued at average price as these items are of different qualities and of different rates. The same is true of details of the closing stock filed by the assessee.
(iv) The purchase and sale vouchers are of such a nature that they cannot be related to find out the profit rate.
(v) No day-to-day manufacturing or production register has been maintained by the assessee."
5. He further held that the explanation offered by the assessee in respect of the fall in the gross profit rate was found to be unsatisfactory. He observed that if the assessee has not maintained any day-to-day stock account, the proviso to s. 145(1) was applicable as held by the Patna High Court in the case of CIT vs. Pareck Bros. (1987) 167 ITR 344 (Pat). He referred to the judgment of Allahabad High Court in the case of Bharat Milk Products vs. ITO (1981) 128 ITR 682 (All) wherein it was held that, in the absence of day to day production or manufacturing record, proviso to s. 145(1) was rightly applied. He also observed that once the book results of the assessee have been rejected, only basis to find out the true income for the assessee is the trading results shown by the assessee in the preceding year after referring to the judgments in the cases of Vraj Lal Mani Lal & Co. vs. CIT (1973) 92 ITR 287 (MP) and Dina Nath Dubey vs. CIT (1986) 57 CTR (MP) 233. After referring to the case of Bharat Milk Products (supra), he observed that another basis for finding out the true profit of the assessee was to compare his results to the results shown by a comparable case. Having regard to the fact that the assessee had shown a gross profit rate of 11.36% in the asst. yr. 1983-84 and gross profit rate of 10.04% shown by M/s Pan Fab, Panipat, a comparable case, he estimated the sales of the assessee at Rs. 80,50,000 and applied a gross profit rate of 8%. This resulted in an addition of Rs. 1,52,927 in the assessment order passed under s. 143(3) on 21st March, 1988. Aggrieved by the same, the assessee preferred an appeal before the CIT(A).
6. Before the CIT(A) it was pointed out that the gross profit rates declared by the assessee for the asst. yr. 1986-87 was comparable to the gross profit rate declared by it in the immediately preceding two assessment years of 6.29% and 6.5% in the asst. yrs. 1985-86 and 1984-85 respectively. The fall in the gross profit rate for the assessment year under consideration was within the normal variation of profit from year to year. It was also pointed out that the sales of the assessee increased by about Rs. 18 lakhs in the assessment year under consideration, i.e., by more than 20% and that this was one of the reasons for the very slight decrease in the gross profit rate. Regarding the gross profit rate disclosed by M/s Pan Fab it was contended that it was not comparable to the assessee and that Pan Fab sold most of its products to its sister concern, namely, M/s Mahajan International. It was also submitted that the assessee supplied its goods to concerns not connected with it. According to the CIT(A), some difference in the goods manufactured by the assessee and sold by M/s Pan Fab was also pointed out. The assessee cited comparable cases as under :
"Sl. No. Name of the firm Sales G.P. G.P. rate i.
M/s Shyam Textiles PPT (Year ending 31st March, 1986) 43,84,750.86 2,56,110.35 5.8% ii.
M/s Richa Weaving Mills, Panipat (Year ending 31st Dec., 1985) 59,88,078.75 3,86,486.50 6.4% iii.
M/s Swati H/L Ind. PPT (Year ending 31st March, 1986) 73,42,851.87 3,11,249.81 4.2% iv.
M/s Sidhartha Handlooms Panipat (Year ending 31st March, 1986) 21,10,716.12 1,21,551.54 5.7% v.
M/s Paliwal Textiles, Panipat (Year ending 31st March, 1986) 2,17,64,058.18 6,77,518.15 3%"
7. It was, accordingly, argued that, generally the gross profit rate being disclosed by the other concern in the same line of business was less than the gross profit rate disclosed by the assessee and so the G. P. rate declared by the assessee was adequate and should have been accepted. Regarding the maintenance of accounts, it was contended that the accounts maintained in the same manner were accepted in the past and so they should not have been rejected in the assessment year under consideration. Regarding the AOs objection to small amounts of money having been withdrawn from the bank in spite of the fact that the assessee was having substantial cash balance, it was explained that one of the partners, Shri Ravinder Malik used to reside at Delhi during the asst. yr. 1986-87 and that the second partner, Shri Pramod Malik was residing at Panipat. It was stated that whenever Shri Ravinder Malik came to Panipat and the second partner, Shri Pramod Malik was out of Panipat for business work, then Shri Ravinder Malik used to withdraw some small amounts of money for the assessees business as the cash-in-hand was under the lock and key of Shri Pramod Malik. Regarding the valuation of the closing stock, it was contended that the same was properly done and the learned AO had not pointed out any specific item, the valuation of which could be said to have been understated. It was explained that the complete qualities details of each item of the closing stock were available and if the ITO felt that the valuation of any particular item was understated, he could have valued the same and made an addition on that basis, but this could not be a ground for rejection of the accounts maintained by it. Regarding the observation of the ITO that the sales could not be co-related with the purchases, it was explained that the business of the assessee consisted of fabrication of exportable items from handloom cloth purchased by it. It was contended that the assessee being a manufacturer and the nature of the finished products being different from the nature of the products purchased, it was only natural that the sales could not be co-related with the purchases. Maintenance of the day-to-day manufacturing-cum-production register was explained to be neither practicable nor possible in the assessees line of business. It was explained that manufacturing process is a continuous process involving several inter-linked processes of production, such as dyeing, weaving, finishing, stitching, etc., and it was stated to be impossible to maintain a detailed record of each stage of manufacture. It was argued that such a record was not being maintained by any other assessee at Panipat in the same line of business and so this could not be called a defect in the accounts of the assessee.
8. The CIT(A) observed that the gross profit rate declared by the assessee for the year under consideration was comparable to the GP rate declared in the immediately two preceding assessment years and that the slight fall in the gross profit rate for the assessment year under consideration was considered to be within the normal range of variation of profit from year to year. The slight fall in the gross profit rate is considered normal as the turn over has increased by Rs. 18 lakhs. The AO is not justified in comparing the gross profit rate of the assessment year under consideration with the gross profit rate of the asst. yr. 1983-84 without stating why it was considered necessary to make a comparison of the gross profit rate of the assessment year under consideration with the gross profit rates in the immediately two preceding assessment years. Ordinarily, comparison of the gross profit rate is made only with the immediately preceding year or at the most with the year before that. The assessees explanation regarding the withdrawal of small amounts of money in spite of there being substantial cash balance in the books of account was considered reasonable. Much significance cannot be attached when there was no evidence of the assessee making use of the cash balance for making investment outside the books of account, as alleged by the AO. Regarding the valuation of the closing stock, the CIT(A) has seen the details of the closing stock and found that complete quantitative details of items were available. He also found that the accounts maintained in the same manner by the assessee were accepted in the past. He also observed that in small manufacturing concerns of the kind of the assessee, where numerous manufacturing stages were involved, day-to-day stock register was not generally maintained as the maintenance of the day to day production record of each stage of manufacture was neither practicable nor possible. The assessees arguments in this regard were considered to have force, particularly in view of the fact that such records have not been shown to have been maintained by any other concern in this line of business at Panipat. He referred to the Punjab High Court judgment in the case of Pandit Bros. vs. CIT (1959) 26 ITR 159 (Punj), where it was held that non-maintenance of day-to-day sock register cannot in itself be a ground for rejection of the accounts maintained by the assessee, where no other serious defect was found. He further observed that all purchases, sales and expenses as claimed by the assessee, are vouched and that no defect in them was found by the AO. Considering the facts, he held that the ITO was not justified in rejecting the accounts maintained by the assessee and in estimating the assessees gross profit by applying a flat rate of 8% and in estimating the sales of the assessee. Accordingly, he deleted the addition of Rs. 1,52,927. The Revenue is aggrieved over this and, hence, the Departmental appeal.
9. The Departmental Representative relied upon the order of the AO while the assessees counsel filed a copy of the order of the Tribunal dt. 18th March, 1993 in the case of Raj Woollen Industries for the asst. yr. 1986-87 in ITA No. 1865/Del/1989 where the AO raised more or less similar objections to reject the assessees books of account and making the addition which was negatived by the Tribunal. He, particularly, drew our attention to para 10 onwards in the said Tribunals order.
10. We have considered the rival submissions, case law cited and perused the papers filed before us. The AO had noticed withdrawals by the assessee from the bank of small amounts when there were huge opening cash balances and closing cash balances and inferred that the assessee invested opening cash balances in stocks or in any other investments outside the books of account. For charging the assessee in the said manner, the AO has not brought on record any material to substantiate his allegation. In the absence of any material brought by him on record, this inference of the AO has to be taken as a suspicion, assumption and presumption only. Suspicion, however, grave cannot be equated to proof. On this ground, the assessees book results cannot be rejected. The AO compared the gross profit rate of 6.19% for the asst. yr. 1986-87 with the gross profit rate of 10.04% on sales of Rs. 31,41,638 in the case of M/s Pan Fab, Panipat. This case cannot be called a comparable case since the turnover of the assessees was Rs. 79,20,545 in the asst. yr. 1986-87. Further it was argued by the assessee before the CIT(A) that M/s Pan Fab was selling most of its products to a sister concern, namely, M/s Mahajan International and that the assessee was selling its goods to outsiders in the competitive market. Further, the assessee has given a list of cases with details as to the turnover and gross profits before the CIT(A). These have been extracted in our order in the earlier paragraphs. In these cases, the gross profit rate ranged from 3% to 6.45%. The case of Swati Handloom Industries, Panipat can be said to be a comparable case turnover wise, since the turnover in that case was Rs. 73,42,851, as against the assessees turn over of Rs. 79,20,545. The gross profit disclosed by that assessee was only 4.24% as against the gross profit rate of 6.19% disclosed by the assessee. Further, the assessees gross profit rate of 6.19% in the assessment year under consideration compares very favorably with the gross profit rates of 6.29% and 6.5% in the asst. yrs. 1985-86 and 1984-85 respectively. The slight fall in the gross profit rate is against gross profit rate in asst. yr. 1985-86 in the assessees own case has to be viewed against the increase of Rs. 18 lakhs in sales in the assessment year under consideration. On these facts and circumstances of the case, the assessees gross profit rate cannot be termed as low. Though the AO alleged that many items in the opening and closing stocks had been valued at average price when the items were of different qualities, he has not given any specific instances in the assessment order. Further no opportunity was given to the assessee to explain the alleged defect. The assessee was asked to explain only the low gross profit rate as mentioned in paragraph 6 and reasons for the withdrawal of money from bank when ample cash balance was available as mentioned in paragraph 4 of the assessment order. Even then the assessees book results cannot be rejected. At the most, he could have valued the closing stock in a manner considered appropriate by him and he should have adopted the same as the opening stock of the next year. The closing stock of asst. yr. 1985-86 has become the opening stock of 1986-87. If the assessment for the asst. yr. 1985-86 has already become final, the AO cannot find fault with the opening stock for the asst. yr. 1986-87 now under consideration. In these circumstances, the book results cannot be rejected by the AO. As mentioned by the AO, the assessees business was manufacture of handloom products. He alleged that the purchases and sale vouchers could not be co-related to find out the profit rate. Before the CIT(A), it was explained by the assessee that the nature of the finished products is different from the products purchased and that the manufacture consisted of dyeing, weaving, finishing, stitching, etc. and, hence, the purchases of raw material cannot be compared with the sales of the finished products. Hence, the question of co-relating the purchase and sale rates does not arise. Hence, on this ground also, the AO is not justified in rejecting the book results of the assessee. The AO further contended that no day-to-day manufacture or production register has been maintained by the assessee. The CIT(A) has given a finding that maintenance of day-to-day production record at each stage of manufacture was neither practicable nor possible, that maintenance of accounts by the assessee in the same fashion in the earlier years was accepted by the Department and that the AO has not shown that such records have been maintained by any other concern in the same line of business at Panipat. In these circumstances, the AO is not justified in rejecting the book results of the assessee. Considering the facts and circumstances of the case, we hold that the CIT(A) was fully justified in deleting the impugned addition of Rs. 1,52,927 made by the AO. We uphold his order in this regard.
11. In the result, the Revenues appeal is dismissed.