TMI Blog2007 (1) TMI 300X X X X Extracts X X X X X X X X Extracts X X X X ..... and thereafter, the assessee produces the positive prints as per the requirement of producers. The assessee has been following mercantile system of accounting. The expenditure incurred are debited as and when incurred but the income is credited when bills are raised on the producers at the time of delivery of positive prints. Further, in the process of preparing negative prints, a by-product namely "Hypo" containing silver contents is generated which is shown as income as and when it is sold. Such system is being followed since inception of business. 3. A survey under section 133(A) of the Act was carried out at the premises of the assessee on 4-12-1992 and the same converted into search action under section 132 of the Act. In the course of the search, certain cash was seized and at the end of search, the assessee estimated the income for the assessment year 1993-94 at Rs. 19 lakhs including the sale of "Hypo". Another search took place at the premises of the assessee on 30-6-1994 in the course of which excess stock worth Rs. 4 lakhs was found. 4. For the assessment year 1993-94, the assessee declared total income of Rs. 22,67,410. In the course of assessment proceedings, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined at Rs. 25,77,556. However, he applied net profit rate of 25% for assessment years 1994-95 and 1995-96 and thus determined income for assessment year 1994-95 at Rs. 53,53,570 and for the assessment year 1995-96 at Rs. 84,39,938 which also included addition of Rs. 4 lakhs on account of excess stock. On appeal, the learned CIT(A) confirmed the rejection of books of account under the first proviso to section 145(1) but reduced the net profit rate to 15%. He further upheld the assessment of sale of "Hypo" as income separately. In addition, it was further held that Assessing Officer failed to assess income by way of lease rent, interest which were assessable separately in addition to business profit assessed under section 145(1). However, he allowed deduction for expenses on pro rata basis against lease rent and interest. Thus income for assessment year 1993-94 was enhanced by Rs. 24,14,023. However, no such enhancement was made for other years. Aggrieved by the same, the assessee has preferred these appeals before the Tribunal. 5. The learned counsel for the assessee has assailed the orders of the lower authorities by submitting that the method of accounting adopted by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out that even in the course of search no specific incriminating material was found against the assessee. Accordingly, it was pleaded that book result shown by the assessee be accepted. 6. On the other hand, the Learned D.R has vehemently relied upon the reasoning given by the Assessing Officer. He pointed out that in the course of search, the assessee agreed that the profit margin was in the range of 32% to 35% and the Assessing Officer was justified in applying the average profit rate of 33.5%. Proceeding further, it was submitted that the method of accounting adopted by the assessee was such that true profit could not be ascertained inasmuch as the assessee was claiming deduction in respect of the expenditure incurred for preparing the negative prints without showing the corresponding receipts for the year under consideration. The expenditure can be allowed only against the receipt. According to him, the assessee was postponing the profits in respect of the negative prints to subsequent years. He relied on the decision of the Hon ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 , for the proposition that if the method of accounting ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue incomes are credited - ( i ) in respect of negative prints and positive prints, when billing is made at the time of delivery of positive prints and ( ii ) when by-product " Hypo " is sold. Considering the method of accounting, we are of the view that it cannot be said that the method of accounting is such that entire true profits cannot be deduced therefrom. Our reasons are as follows : ( i )No defect has been pointed out by the Assessing Officer in respect of the income derived by the assessee from the preparation of positive prints which is the major source of the business income. As soon as the positive prints are prepared, the billing is made along with delivery of such prints. Such method is in consonance with the mercantile system of accounting. ( ii )The income from the sale of " Hypo " is also not disputed by the Assessing Officer. Though casual observation has been made by the Assessing Officer to the effect that there is no control over the yield of the above by-product, yet he has accepted the sale of " Hypo " as shown by the assessee. Hence, no adverse inference can be drawn against the assessee. No other defect has been pointed out by the Assessing Officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the relevant years, it can be said that the system followed by the assessee is partly defective. 10. In view of the above discussion, we are of the view that system of accounting followed by the assessee cannot be rejected in toto . The book result shown by the assessee, in our opinion, should be accepted subject to some modification i.e., the processing charges for negative prints should be assessed in the year in which such prints become ready as per the requirement of the customer. We hold accordingly. The orders of the Learned CIT(A) are, therefore, set aside and the Assessing Officer is directed to accept the book result shown by the assessee subject to the modification mentioned above. However, the Assessing Officer is further directed to ensure that the assessee is not doubly taxed in respect of processing charges for negative prints. 11. Before parting with this issue, it may be mentioned that the Learned Counsel for the assessee has also submitted that in case the action of Assessing Officer has to be upheld, then the estimate made by him would also cover the profits on account of sale of " Hypo " and consequently no separate addition should be made on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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