TMI Blog2010 (3) TMI 937X X X X Extracts X X X X X X X X Extracts X X X X ..... ving description of different varieties of cloth along with the sale price attached to each one of them. Had the Assessing Officer restricted herself to the sale price of Rs. 3,86,14,825 as was worked out by the excise officials, there was no need for her to make unwarranted addition of the balance amount of Rs. 72,42,049. The addition to the extent of Rs. 72,42,049 (Rs. 4,58,56,874-Rs.3,86,14,825) thus goes off straight away. What treatment should be given to the unrecorded sales? - After making such comparison, the stock physically wherever found to be short in comparison to its availability in the stock register, has been treated to be sold outside the books of account. In this view of the matter, the investment in acquiring these stocks has undoubtedly come from the declared sources of the appellant. In other words, the entire amount of unrecorded sales of Rs. 58,85,530 cannot be added as their income and only the profit element involved therein needs to be taxed after applying the gross profit at the rate of 6.09 percent on such sales. The addition of Rs. 3,58,428, i.e., Rs.58,85,530 divided by 100 x 6.09 percent is thus liable to be sustained and balance amount of Rs. 55 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reducing the additional income declared by the assessee - It may also be noted that the assessee claimed set off which are not part of the record of the Excise Department on the basis of which the entire addition is made. The addition made by the Assessing Officer on the basis of the record prepared by the Excise Department is an independent addition which has no co-relation with the survey conducted by the Income-tax Department. CIT(Appeals) was not justified in giving set off of Rs. 11,91,746 to the assessee. We, accordingly, set aside the order of the learned Commissioner of Income-tax (Appeals) to that extent and direct that no such benefit of set off of Rs. 11,91,746 be given to the assessee. - Order The order of the Bench was delivered by Bhavnesh Saini (Judicial Member).-Both these cross-appeals are directed against the order of the Commissioner of Income-tax (Appeals)-XIII, Ahmedabad, dated December 26, 2006 for the assessment year 2003-04. The assessee in its appeal has raised the following ground : "The learned Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining the addition of Rs. 63,88,777 out of the addition of Rs.4,58,56,874." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k which was also sold by the assessee during the period December 19, 2002 to January 8, 2003 was also prepared which was marked as annexure D, 26,44,904 L metres of man made fabrics valued at Rs. 3,26,29,295 was also to be sold by the assessee without recording its sale in the books of account so as to evade payment of excise duty. Another inventory marked as annexure C was also prepared by the excise authorities in which 21,65,777 L metres of processed man made fabrics valued at Rs. 25,98,924 was found to be in excess in comparison to its availability as per the books of account. During the course of assessment proceedings the Assessing Officer noticed that the assessee has disclosed its total sales of Rs. 12,09,98,328 whereas the turnover of the sales shown to the Sales Tax Department was Rs.10,98,21,717. Though the sales recorded by the assessee for the purpose of income-tax were more than as compared to the disclosed to the Sales Tax Department, the Assessing Officer treated it as a defect in the books of account so as to apply the provisions of section 145 of the Income-tax Act. The Assessing Officer has also observed that because of discrepancies noticed during the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dditional liability of excise duty of Rs. 41,37,302 before the excise authorities in respect of the goods which have been sold without recording the same as per the annexure prepared by the excise officials. The Assessing Officer accordingly rejected the book results and the entire amount of undisclosed sales so worked out at Rs. 4,58,56,874 was treated as unaccounted income of the assessee instead of applying gross profit rate of 6.09 percent on such unaccounted sales as was originally proposed by the Assessing Officer. For excess stock valued at Rs. 25,98,924 as per annexure prepared by the excise authorities the Assessing Officer noted that telescoping effect was given so as to apply unaccounted receipts to the extent of unaccounted excess stock physically found by the excise authorities for which no separate addition was made by the Assessing Officer. Ultimately, addition was made on account of sales made outside the books of account in a sum of Rs. 4,58,56,874 being unaccounted income of the assessee. The addition was challenged before the learned Commissioner of Income-tax (Appeals) and same submissions were reiterated before him. It was explained that the main plan is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the authorised representatives. In so far as their contention regarding the rejection of the books of account by the learned Assessing Officer is concerned, the same is liable to be rejected as it does not appeal to any reason. Survey under section 133A of the Act was conducted in this case on January 20, 2003. The inventory of cash as well as of the stock physically available was prepared. The appellant was found to be in physical possession of stock valued at Rs. 73,47,458 as against the availability of such stock to the value of Rs. 75,00,114 as per their books of account. The stock physically found was thus short by Rs. 1,52,656. Excess cash of Rs. 4 lakhs was also found as a result of survey. The appellant was also found to have made unexplained investments of Rs. 3,50,000 and of Rs. 6 lakhs in plant and machinery and factory building respectively. All these discrepancies were duly confronted to the appellant who in turn volunteered to disclose additional income of Rs. 15,02,656 to cover up the same. It is also a matter of record that prior to the date of survey by the Income-tax Department, a raid was conducted by the Central Excise Department at their factory premises on J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration by the central excise authorities on January 9, 2003. In order to prove that the appellant was indulging in unrecorded sale transactions of its manufactured cloth, the search party has prepared detailed inventories of not only of the stocks available but also of various other documents which have duly been confronted to the appellant by way of a show-cause notice. The inventory of stock has been prepared in the presence of Shri Suresh C. Sharma who was one of the partners and other witnesses. In order to corroborate the allegation that the appellant-firm was indulging in unaccounted sales, the excise authorities have recorded the statements of various persons who were in one way or the other found associated with the working of the appellant-firm. The statement of Shri Fareedbhai Ibrahimbhai Sheik who happened to be the folding and packing contractor of the appellant was recorded. Another statement of Shri Vinod Govindbhai Patel, excise in-charge of the appellant-firm was recorded. The statement of Shri Boduram Jodaram Yadav who happened to be the manager of the National Transport Corporation which used to transport the goods manufactured by the appellant from its factory p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooking at these inventories, one would find that different varieties of cloth are mentioned with their lot numbers and their sale value also varies from one item to the another depending upon the quality of the fabrics. The sale value of the items mentioned in these inventories appears to have been adopted on the basis of their actual sale rates. At the time of framing the assessment however, the Assessing Officer has altogether ignored the value of stock so taken by the excise officials. The Assessing Officer has proceeded to substitute her own valuation by taking the declared turnover of Rs.12,33,64,251 of the appellant which has been divided by 82,45,245 L metres of cloth manufactured during the year thereby yielding an average sale rate of Rs. 14.96 per L metre. The average sale rate of Rs.14.96 per L metre has further been uniformly applied to 30,65,299 L metres of unaccounted sales as were quantified by the excise officials as per their inventories prepared as per annexures B and D. In this manner, the value of unaccounted sales has been hiked to Rs.4,58,56,874 by the learned Assessing Officer. 3.5 In my considered opinion, the Assessing Officer was not justified to substit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d outside the books as per annexure D are given in paragraph 2.5 above. As per these details, 2,08,030 L metres of cloth valued at Rs. 25,37,331 is stated to be wrongly taken as sold outside the books of account in annexure D because the same quantity of stock was available in the stock register whose comparison was made in annexure B. This argument of the authorised representatives is practically not acceptable for the simple reason that there is no evidence to support their claim that whatever sales are shown in Column 4 of the chart or are included in annexure D were made only out of the stock available as per annexure B and are shown in Column 5 of the chart. The excise officials have given complete description of the cloth, its trade name along with its sale price whereas the details provided by the authorised representatives in the chart under consideration are inconsistent in as much as that the quantity mentioned in Column 5 does not tally with the same quantity shown in Column 4. Apparently looking, the figures given in Column 4 and 5 do not show any correlation in between themselves. In the absence of any cogent evidence to prove that there was a direct link between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready observed in paragraph 3.3 above that the appellant was systematically indulging in unrecorded production over a long period to time. In view of this background, the element of investment involved in such unrecorded sales becomes a very material fact. The appellant has recorded turnover of Rs. 12,33,64,251 and in order to achieve such turnover, the following funds have been employed : Rs. (i) Fixed capital 10,000 (ii) Current account of partners capital 21,80,248 (iii) Secured loans 10,83,435 (iv) Unsecured loans 68,80,081 Total 2,01,53,764 The appellant has thus employed recorded funds of Rs. 2,01,53,764 in order to achieve the recorded turnover of Rs. 12,33,64,251. The ratio of funds employed vis-a-vis the total turnover comes to 16.33 percent In this manner, in order to achieve the turnover of Rs.3,22,12,736, the appellant may require a minimum capital investment of Rs. 52,60,340, i.e. (16.33 percent x Rs. 3,22,12,736 divided by 100). The addition of Rs. 52,60,340 is thus required to be sustained on this score. The e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery and factory building as on the date of survey. Keeping into consideration the fact that the appellant has paid taxes on income representing unexplained investment of Rs. 9,50,000 in the asset and excess cash of Rs. 4,00,000 out of which credit of Rs. 1,58,274 has already been given, it would be fair and reasonable to allow the credit of this declared income against the unaccounted receipts of Rs.75,80,523 available with the appellant as on January 9, 2003. It may be mentioned here that the unaccounted receipts of Rs.75,80,523 are the total sum of additions as are discussed in paragraphs 3.6 and 3.10 above. After setting off the declared income of Rs. 11,91,746 (Rs.6,00,000 + Rs. 3,50,000 + Rs. 2,41,746) against the unaccounted receipts of Rs. 75,80,523, the balance addition of Rs. 63,88,777 is required to be made in this case. To sum up, the addition to the extent of Rs. 63,88,777 is confirmed." Learned counsel for the assessee reiterated the submissions made before the authorities below and submitted that entire unaccounted sales cannot be the profit of the assessee. Therefore, the learned Commissioner of Income-tax (Appeals) rightly applied gross profit rate of 6.09 percen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rival submissions and material on record very carefully. There is no dispute about the discrepancies noted during the course of survey by the Income-tax Department. The assessee surrendered additional income of Rs. 15,02,656 on account of shortage stock and unaccounted investments made in plant and machinery, building and excess cash found during the course of survey by the Income-tax Department. The assessee has not placed any material on record to show that if the assessee made any claim before the income-tax authorities either at the time of survey or at the stage of assessment proceedings that the additional income so declared was on account of unaccounted profits earned on being sales made outside the books of account as noticed by the excise authorities. The assessee has not disputed the unaccounted sales found by the excise authorities outside the books of account without paying any excise duty. The assessee admittedly paid the excise duty to the excise authorities as per their annexure prepared during the course of raid by the excise authorities. Since the record of the excise authorities have not been disputed by the assessee, therefore, at this stage it is difficult to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax (Appeals) to that extent. Considering the facts and circumstances noted above, we are of the view that the learned Commissioner of Income-tax (Appeals) was justified in applying gross profit rate as against undisclosed sales made by the assessee for the purpose of making the addition against the assessee. To that extent the findings of the learned Commissioner of Income-tax (Appeals) are maintained. The learned Commissioner of Income-tax (Appeals) on proper appreciation of facts and material on record rightly came to the conclusion in making addition on account of profit earned on undisclosed sales. The Assessing Officer also proposed to make addition initially on the same line but the Assessing Officer changed his mind later on and treated the entire undisclosed sales as undisclosed income of the assessee. Therefore, there was no need to give any further opportunity to the Assessing Officer with regard to the calculation of the undisclosed income of the assessee. We accordingly, do not find any merit in the contention of the learned Departmental representative. The same is accordingly rejected. However, we may note that the learned Commissioner of Income-tax (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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