TMI Blog2015 (1) TMI 689X X X X Extracts X X X X X X X X Extracts X X X X ..... over which also resulted in increase in gross profit. In this view of the matter also the gross profit disclosed by the assessee cannot be said to be unacceptable. In this regard it is also to be noted that despite its efforts the assessee could not repay its lenders and ultimately had become defunct and the unit was taken over by the bank. In the background and aforesaid discussion in our considered opinion the estimation of gross profit by the AO @ 20.89% of the turn over was not at all justified. Hence the ld. CIT(A)'s rejection of the assessment made by the AO is fully justified. Non production of books of accounts was beyond the control of the assessee. The reason for decrease in gross profit rates has been duly explained by the assessee. There has been substantial increase in the profits in absolute terms as compared to preceding assessment year. In this view of the matter the result declared by the assessee can be accepted subject to minor adjustment. Accordingly we hold that gross profits declared by the assessee should be taken at 8.50% which would meet the ends of justice. - Decided against revenue and cross objection filed by the assessee stand partly allowed. - I.T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s submissions the ld. CIT(A) held as under :- The arguments canvassed on behalf of the appellant have been considered carefully in light of the materials adduced on record. It is observed that the appellant became defunct since 2010 for its inability to repay the bank loan, the factory and office premises of the company and the entire assets therein had been seized and remained under the possession of lending bank, Punjab National Bank, Midnapore. It has been contended that no notice u/s 143(2) was issued or served on the appellant. Prima facie, it appears that the submission of the A/R is forceful. Further, it is observed that no notice u/s 142(1) or even assessment order passed u/s 144 of the Act for the assessment year under dispute could be received by the appellant. From the assessment order itself it is evident that even by issuing summons u/s131 of the Act to the said lending bank, no books of account of the appellant was produced before the AO. Thereafter, the AO did not pursue the matter further. In such circumstances, there was hardly any scope for the AO to verify the books of account and other consequential information/details to examine the fall in rate of G.P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier assessment year, but the undisputed facts remain that the books of accounts were not available to the AO and the items of expenditure could not be verified. The entire thing is based on estimate. It is well-settled in the case of Kachwala Gems vs JCIT (2006) 288 ITR 10 (SC) that in a best judgment assessment, there is always a certain degree of guess work. No doubt, the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment, and should not act totally arbitrarily. As stated above, in the instant case, I find no basis for the estimate as made by the AO. In fact, the estimate is thoroughly capricious. The addition of income by way of gross profit is not a concomitant of the rejection of books of account. Therefore, considering the affairs of the instant case, huge turnover and higher quantum of gross profit in comparison to earlier assessment year, in my considered opinion, it would meet the ends of justice if the rate of G.P. for the assessment year under dispute on the turnover shown and accepted by the AO is taken @10%. I, therefore, direct the AO to take G.P. @10% on the admitted turnover instead and place of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gross profit being primarily due to the increase in the cost of raw material and its consumption which had risen to the extent of 14.24%. In this regard the ld. Counsel drew our attention to the comparative study with the preceding assessment year filed before the AO at page 10 of the paper book produced before us. The ld. Counsel further submitted that the assesse was operating in a very competitive market. The assessee had to resort to under cutting in the sale price as a result of which the turn over of the company during the preceding year which was only ₹ 13,02,12,946/- increased to ₹ 34,63,55,301/- in the present assessment year. The ld. Counsel submitted that it was due to such effort by the assessee that gross profit in absolute terms increased by ₹ 10,50,636/- from the preceding assessment years. The ld. Counsel further submitted that despite the best efforts of the assessee company it still could not repay the bank loan and became defunct. Since 2010 the office premises and the factory of the company and the assets therein were seized and remained in the possession of the lending bank. The ld. ,counsel further submitted that the AO has made the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assets and the books of accounts were in the possession of the bank. The AO was duly aware of this fact. The AO has also issued notice u/s 131 of the Act to the lending bank but despite that they have not produced the necessary books of accounts. In such a situation in our considered opinion adverse inference cannot be drawn against the assessee on the ground that books of accounts were not produced by the assessee. As apparent from the undisputed facts narrated above the assessee could not have been asked to perform an impossible task. When the assessee's books of accounts were in the possession of the lending bank and the said bank had not produced this books of accounts to the AO despite the AO issuing notice u/s 131 the assessee could not be said to have failed to produce the books of accounts. In such a situation we note that the decision of the Hon'ble Delhi High Court in the case of Addl.CIT vs Jay Engineering Works Ltd. Supra is germane. In the said case the books of accounts of the assessee company were destroyed in fire. The issue arose as to whether audited accounts and the auditors report would be taken as supportive of the results declared by the assessee. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were to be used to prove any fact. The external auditors of the assessee companies had, however, made their annual reports under section 227(2) of the Companies Act, 1956, to the members of the company on the accounts examined by them and on the balance-sheets and profit and loss accounts for those two years. Those reports did not doubt the correctness of the expenses, deductions of which were claimed by the assessees. Unlike the proof required of such reports as also of the account books under the Indian Evidence Act, it is quite competent for the income-tax authorities not only to accept the auditors' report, but also to draw the proper inference from the same. The income-tax authorities could, therefore, come to the conclusion that since the auditors were required by the statute to find out if the deductions claimed by the assessees in their balance-sheets and profit and loss accounts were supported by the relevant entries in their account books, the auditors must have done so and must have found that the account books supported the claims for deductions, when the deductions were disallowed, by the ITO on the ground that detailed information regarding them was not available, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi Court above the evidence in the shape of auditors report can be relied upon by the income tax authorities. It has already been found above that it was not possible for the assessee to produce the books of accounts since the same was in possession of the lending bank who did not produce the same before the AO despite notice u/s 131 issued. From the other material which were supported by the auditors report from which it can be inferred that gross profit declared by the assessee was supported by the entries in the books of accounts and the concerned papers. Hence in view of the above precedents also we find that disregard of the assessee's audited accounts is not justified and such a high pitched assessment in complete disregard of gross profit disclosed in the audited accounts is not sustainable. 7.3. Now when the books of accounts are not available and estimating the gross profit is to be resorted to the situation prevailing in the industry has to be taken in account. It has been brought out by the ld. Counsel of the assessee that in the report of Govt. of India, Ministry of Small Scale Industry in the rice mill industry the average gross profit on sales was considered ..... X X X X Extracts X X X X X X X X Extracts X X X X
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