TMI Blog1989 (5) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... clared a gross profit of Rs. 14,52,165, according to the ld. ITO giving a gross profit rate of 42 per cent. However such rate in the chart at page 1 of the paper book is mentioned as 43.73 per cent. The ld. ITO comparing the gross profit rate with the earlier asst. years considered that the same was indeed low and without justification. He also noted that the assessee failed to file details of opening and closing stock and so also the basis of valuation of the stocks. The valuation of the closing stock was seen to be unverifiable. It was also noted that the sale of goods and the price charged were not verifiable. In view thereto the profit earned on particular items could not be ascertained. The ld. ITO also relied upon several comparable cases where higher gross profit rates had been returned. In view of these specific defects picked up by the ld. ITO he rejected the books of accounts applying proviso existing u/s 145(1) of the IT Act, 1961 and in fact made an addition of Rs. 1,01,060 by applying a gross profit rate of 44 per cent on the estimated and effective sales of Rs. 34 lakhs against the sales of Rs. 33,20,587 shown. The addition was in fact made, inter alia, with the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repancy in the sales ; (c) book results were not disputed ; (d) that the method of accounting remained the same ; (e) proviso of sec. 145(1) of the Act was inapplicable and that the gross profit rate of 42 per cent being reasonable the addition should have not been made. The ld. CIT(A) considering the points made before him deleted the addition, inter alia, with the following observations :--- "The ld. IAC had adopted the g.p. rate of 44 per cent as against 42 per cent worked out in the case of the appellant primarily keeping in view the g.p. rate of 44.5 per cent shown by the firm M/s. Subhash Emporium. He, however, had not kept in view the import facts brought out by the appellant which had a material therein on the profit earned. In the other case, the said firm had an advantage of procuring the raw material at a better rate than the appellant and also had a better foreign market having excess of the foreign dignitories and having been a National award in the importable marble goods giving a good reputation in the foreign market. These factors, to my mind, would easily result in a better g.p. rate of 2.5 per cent to my mind, is reasonable in the facts and the circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not. effective because it is not shown from the record that the higher turn over was managed by the assessee by selling at a lower rate. If there was increase in the turn over there should have been corresponding increase in the gross profit also. This logic also appears to be illogical. He also mentioned that the comparable cases relied upon by the ld. ITO were not relevant. For that also the reasoning employed by the ld. CIT(A) is of no consequence as the assessee could also purchase and procure the raw material from the sources the other dealers were doing. Thus all the reasons adopted and employed by the Id CIT(A) appear to be of no help in the matter. Thus in view of the totality of circumstances it was not possible to accept the trading results declared by the assessee. During the earlier asst years the gross profit rates were higher as compared to the rate reflected during this year. Also no reasons for such decline are brought on record. Against this background some addition was definitely called for. We see no justification to interfere with regard to the addition but at the same time are of the view that the same is slightly on the higher side. The assessee reflected sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,00,760 285727 47,63 % 186578 1979-80 35,06,663 866748 26,39,915 263179 44.25 % 338858 1980-81 38,83,847 563261 33,20,586 455196 43.73% 399189 The ITO wrote to the assessee on30-11-1982. He pointed out there that, as per the assessee's books, on sales of Rs. 38,83,847, the assessee had shown gross profit of Rs. 5,59,780 only, i.e. 15.39 per cent that the P L A/c showed cash incentives of Rs. 4,55,196 and that even if this was brought to trading account, the G.P. would go up to 27.1 per cent. The ITO further pointed out that the opening and closing stocks shown by the assessee were not verifiable ; that a day-to-day stock register was not maintained and hence the correct G.P. could not be ascertained. The ITO then listed some comparable cases (4 in all), where G.P. shown was around 41.44 per cent. He also pointed out that the partners of the assessee had not made any withdrawals for household expenses and that this led to the inference of there being suppressed. profits. He proposed to estimate the G.P. at 34.23 per cent on estimated sales of Rs. 49,96,300 (excluding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent. Though the figures of sales have been noticed but the capital employed and the classification of sales have not been mentioned. By the figures given in the notice it appears that these figures name of M/s. Subhash Emporium,Agra. Presuming that the figures of M/s. Subhash Emporium,Gwalior Road,Agrathen this case is not comparable with the case of the assessee and the results shown cannot be compared on the following facts : (a) That this firm is a reputed firm of 20 years standing and the proprietors/partners have experience of this line of business on a wide scale having travelled abroad and having purchase capacity in the shape of quota rights. (b) Having purchase and sale facilities inasmuch as purchase depot at Makrana, sales depot atDelhiand sales show room at Hotel Clark Shiraz. (c) Having National award for Marble Trade and wide reputation in foreign markets, resulting in more capacity to earn better profits. (d) Not effecting sales on wholesale basis and sales on no profit basis. (e) Having facility of own capital and heavy stock of raw material and finished goods. The assessee-firm is lacking With the aforesaid facilities and advantages. The assessee-firm i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion or discrepancy in the sales; (iii) book results were not disputed; (iv) that the method of accounting remained the same; (v) proviso of sec. 145(1) of the Act was inapplicable and that the gross profit rate of 42 per cent being reasonable the addition should have not been made." 6. The CIT(Appeals) deleted the addition. Briefly, his reasons were :-- (i) The ITO estimated the gross profit at 44 per cent as against 42 per cent worked out by the assessee in its case primarily because gross profit of 44.5 per cent was shown by M/s. Subhash Emporium. But the ITO failed to keep in view the important facts brought out by the assessee which had a material bearing on the profit disclosed. (ii) M/s. Subhash Emporium had the advantage of procuring raw material at a better rate than the assessee. It also had a better foreign market having access to foreign dignitaries and having been a national award winner in marble goods and thus had gained a good reputation in the foreign markets. (iii) The above factors would easily result in a gross profit which would be higher than 2.5 per cent than the assessee's. Hence the gross profit disclosed by the assessee was reasonable. (iv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned brother in paragraph 7 of his order. REFERENCE UNDER SEC. 255(4) OF THE IT ACT, 1961 A difference of opinion having arisen between the Members who heard this appeal, the following point is referred to the President, for resolution in terms of section 255(4) of the Act : "Whether on the facts and in the circumstances of the case, the Income-tax Officer is to be directed to estimate the gross profit at 44 per cent but on disclosed effective sales of Rs. 33,20,587 or should the order of the Commissioner (Appeals) which directed acceptance of the book results, be confirmed as correct?" THIRD MEMBER ORDER Per Rangarajan- This is a reference u/s 255(4) of the IT Act, 1961. 2. The assessee is a registered firm, manufacturing and selling marble art goods abroad. For the asst. year 1980-81, corresponding to the previous year31-3-1980. The assessee showed gross profit of Rs. 5,87,780 on total sales of Rs. 38,83.848. The ITO was of the view that the profit shown was low and taking the direction of the IAC u/s 144B, he made an addition of Rs. 1,00,167. On appeal, the ld. CIT (Appeals) was of the view that there was no justification for this addition. When the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with. It was further submitted that merely because the book results in this year was marginally less than the preceding year. It could not be said that there was any suppression of profits by the assessee. It was argued that the results have been accepted in the earlier and subsequent years and that the peculiar circumstances of the assessee explained the profit actually derived and the results shown by the other assessee whose cases were not comparable could not be the basis for making any addition to the profit shown by the assessee. Reliance was placed on the decisions in Pioneer Sports Ltd. v. CIT [1934] 2 ITR 305 (Lahore) and Pandit Bros. v. CIT [1954] 26 ITR 159 (Punj.). It was submitted that in the circumstances, the order of the CIT (Appeals) should be confirmed. 6. On a consideration of the rival submissions, it is clear that the order of the CIT (Appeals) is unexceptional. The assessment was not made u/s 145(2) on any finding but the accounts of the assessee were either incomplete or incorrect. Quite to the contrary the undisputed fact is that no fault has been found with the accounts at all. All the purchases and sales have been vouched and accepted. The valuation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 20 years of business and with liaison offices inDelhiand not comparable to the assessee's case. The assessee has also explained that the partners were independently assessed with their own sources of income and, therefore, there was no drawings for the personal expenditure of the partners from the books of the assesses. The picture which emerges is that in the present case an addition is sought to be made on the sole ground that the profit shown by the assessee is low compared to the profit shown in the earlier asst. years and the Profit shown by the another assessee. Such addition is obviously untenable, and cannot be sustained, particularly when the assessee has explained how the profit shown by other assessee is not comparable and that the difference between the results of the assessee's own business for this year and the asst. year is quite marginal considering the extent of the turnover. It must be remembered that the assessment is being made under the proviso u/s 145 accepting the accounts of the assessee as correct and complete and the revenue has not shown that the method of the accounting of the assessee is such that the income cannot be properly deduced or that the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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