Brief of the case
In the case of of Pr. CIT vs. M/s Hues India Pvt. Ltd., High court of Rajasthan bench at Jaipur held that that quantum and penalty proceedings under the Act stand on a different footing and relying on decision in case of CIT v. Gotan Lime Khanij Udyog reported in 2002 (256) ITR 243 and Malani Ramjivan Jagannath v. Assistant Commissioner of Income Tax 2007 (207) CTR 19 held that only decline in GP ratio could not be the ground to made addition.
Facts of the case
Assessee is a Private Limited company and is deriving income by way of export of ready made garments. The assessee maintains closed and adjusted Books of Account and accounts are stated to be audited. Trading Results declared by the assessee were not proper and the Gross Profit rate had declined sharply from 28.14% to 16.22%.
AO asked n explanation was sought, and it was narrated by the assessee that during the previous year, relevant to the year under appeal, the assessee had made 100% export of ready made garments, that it had purchased mostly Grey fabric, and after purchasing Grey fabric the same was got printed/processed from process houses/printers etc., incurring additional cost as compared to the immediately preceding assessment year, and it was further explained that the average cost per meter as compared to preceding year had increased sharply. Other factors were also narrated, however, the Assessing Officer was not satisfied with the explanation so offered and rejected the Books of Account under Section 145(3) of the Income Tax Act, 1961 (for short ‘the Act’) and applied a G.P. rate of 25% and made a Trading addition of Rs.32,86,536/-.
Aggrieved by the order of AO, assessee preferred an appeal before CIT(A) who after considering detailed facts and after considering the arguments raised by the respondent-assessee in the light of judgment of this court in the case of CIT v. Gotan Lime Khanij Udyog reported in 2002 (256) ITR 243, came to the conclusion that mere rejection of Books of Account by resorting to Section 145 of the Act, will not necessarily lead to addition to the Returned income, and accordingly deleted the Trading addition
Aggrieved by the order of CIT(A), revenue preferred an appeal before ITAT who also vide impugned order, concurred with the findings of the CIT (A), and in the light of several other authorities upheld the order of CIT (A) who had deleted the addition.
Aggrieved against the said decision, the Revenue preferred an appeal before High Court
Whether order passed by ITAT of deleting addition made on a/c of estimation basis when there is sharp fall in GP ratio is justifiable?
Contention of Assessee
The Assessee has conteded that the books of accounts shows the lower GP ration with the reason of high prices of material cost. The export of ready made garments is outshape of Grey febric purchased from market. The assessee has contended that the prices of grey material in comparision to last year relevant to the previous year is higher thus the average cost increased sharply , but the AO did not convince with the fact and has made the addition by rejecting the books of accounts and considered the GP ration as 25% and made the trading addition of Rs. 32 lacs.
Contention of Revenue’s
1. That when there was a sharp decline in the G.P. rate, as also the Books of Account were rejected being defective, and once the finding had been reached by the Assessing Officer that the books had to be rejected for so many reasons mentioned in the assessment order, then there was no material before the Assessing Officer except to resort to estimation to arrive at a proper assessment and to deduce proper profits, and even the Assessing Officer gave leverage and applied G.P. rate of only 25% as against 28.14% in the immediate preceding year.
2. That the material placed on record about rates being higher this year were not supported by adequate material and thus, the appellate authorities erred in deleting the addition which was fair and reasonable. that in the assessment year 2004-05 again a G.P. rate of 22.92% was shown and this year there is a sharp decline which had not been proved by acceptable evidence.
High Court decision / observations
1. In our view the CIT(A) as well as the Tribunal, after appreciation of evidence on record and considering the facts have come to a definite finding of fact that the trading results were not required to be interfered with merely because G.P. rate had decreased to an extent.
2. Though the Books of Account have been rejected, and proper estimation can certainly be made but it is no ground to make an addition in a case where the Assessing Officer was not able to come to further material or controvert the facts narrated by the assessee during the course of assessment proceedings. The Assessing Officer was unable to pinpoint as to any specific defect noticed during course of the proceedings except that the Books of Account were rejected on certain discrepancies. It was for the Assessing Officer to come out clearly as to the basis for rejection of the Book of Accounts.
3. Main question here is that whether in each and every case where Books of Account are rejected, does it entitle the Assessing Officer to make an addition to the Trading results? This court has taken into consideration similar issue in the case of CIT v. Gotan Lime Khanij Udyog (supra) which has been considered by the Tribunal wherein it has been held ad infra –
“The Assessing Officer had found that the trading accounts of the assessee for the assessment year 1986-87 were not backed up with the quantitative and qualitative stock details and that there was a considerable fall in the gross profit rate and invoked the provisions of Section 145 (1) of the Act. The Assessing Officer was not convinced by the reason given by the assessee that the assessee had employed a method of accounting regularly which was accepted by the Department and made an addition of Rs.3,34,960 by increasing the gross profit rate. The Commissioner (Appeals) while substantially accepting the explanation of the assessee for reduction in gross profit rate was of the view that the addition was on the higher side and sustained an addition of Rs.34,000 only to cover up the possible leakage in the books of account. The Tribunal upheld the invocation of the provisions of section 145(1) but did not sustain the additions retained by the Commissioner (Appeals).
Held, that the Tribunal had reached the finding on the ground that, in the absence of any finding recorded by the Commissioner (Appeals) that the expenses incurred on any account appeared to be unreasonable or excessive, the additions sustained merely on suspicion of pilferage or leakage were not justified……………………………….
4. This court, in the case of Malani Ramjivan Jagannath Assistant Commissioner of Income Tax 2007 (207) CTR 19, has held as under:
“Mere deviation in GP rate cannot be a ground for rejecting books of account and entering realm of estimate and guesswork. Lower GP rate shown in the books of account during current year and fall in GP rate was justified and also admitted by the AO as well as CIT(A) as well as the Tribunal. Therefore, fall in GP rate lost its significance. Having accepted the reason for fall in GP rate, namely, stiff competition in market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated GP by rule of thumb merely for making certain additions. We are, therefore, of the opinion that the findings arrived at by the Tribunal suffers from basic defect of not applying its mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except what has been shown by the assessee in the books of account. We are, therefore, unable to sustain the order of the Tribunal.”
5. In the instant case as well we notice that even the Assessing Officer applied the G.P. Rate of 25% as against 28.14% in the preceding year. Therefore, the Assessing Officer also resorted to estimation. Accordingly in view of what we have observed hereinabove is basically a finding of fact based on the appreciation of evidence and this being essentially a finding of fact no substantial question can be said to arise out of the order of Tribunal. Accordingly, the instant appeal is dismissed in limine.