TMI Blog2010 (3) TMI 1113X X X X Extracts X X X X X X X X Extracts X X X X ..... the correctness and completeness of the account cannot be accepted and invoking the provisions of section 145(3) of the Income Tax Act, proceeded to estimate the GP. Vide Para 6 of the assessment order he noticed that the assessee s GP in earlier year was at 47.51%, whereas in this year it was at 38.11%. Therefore, he adopted the same ratio. However, while doing so he grossed up the turnover and arrived at undisclosed sales of ₹ 2,84,89,101/- and took that figure as addition to gross profit. The issue was contested before the CIT (A). The assessee also filed additional evidence before CIT(A), which was sent to the Assessing Officer on remand. The CIT (A) after admitting the additional evidence and considering the submissions of the assessee, upheld the rejection of books of account, but deleted the GP addition. His reasoning for upholding the rejection of books of account in Para 6 of the order, is as under: 6.I find no merit in the contention of the appellant. The Assessing Officer rightly exercised the powers given under section 145(3). Section 145(3) provides that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: 10. I find merit in the contention of the appellant. The relevant data given above are not in dispute. In my opinion, the GP rate of last year is no match when the turnover of the current year has gone up five times by ₹ 12.8 crores as compared to last year. I agree with the appellant that the GP reduces when turnover increases. Not only this, there is fivefold increase in quantum of net profit as well from ₹ 1.19 crores last year to ₹ 5.48 crores this year. It would, therefore, be not reasonable to disturb the gross profit ratio of the current year. I, therefore, delete the addition made on this account of ₹ 2,84,89,101/- . Since these issues are inter-related, the arguments of the learned Counsel and the learned Departmental Representative were considered. We find that there is no reason to reject the books of account as was done by the Assessing Officer and confirmed by the CIT (A). There is no discussion at all why the books of account are not complete and correct. The assessee has furnished lot of details before Assessing Officer and as additional evidence furnished further details asked by AO before the CIT (A) which were sent on remand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld compile various details tried to furnish the same on 10.12.2009, which according to the affidavit on record, was rejected by the Assessing Officer. Even though the Assessing Officer stated to have rejected such information, the order was passed on 16.12.2009 rejecting the books of account on the reason that information called for was not furnished. The assessee had no other option than to file them as additional evidence before the CIT (A) with an affidavit of what transpired before the Assessing Officer on 8.12.2009 and 10.12.2009 and the CIT did admit the additional evidence and sent information on remand. Keeping these facts in mind and also noticing that the assessee was able to furnish all the information whatever was required by the Assessing Officer, we are of the opinion that there is no need to reject the books of account. 4. The provisions of 145(3) can only be invoked in the following conditions. Section.145(3): (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other income will yield only 40.15% GP ratio is compared to 38.62% in the current year. However, the turnover was 5 times more than the earlier year thereby there is some fall in the GP. So the Assessing Officer comparison of GP itself was wrong as he took in to account gross income but not the operational profits of the assessee. The other incomes which also were there in the Profit Loss A/c were not excluded by the Assessing Officer. Therefore, the amounts taken for comparison itself was basically wrong. As seen, the fall in GP marginally was due to increase in turnover. 6. After considering that comparison for gross profit, the Assessing Officer went on a different method. On a turnover of `100/- if the GP is considered at 47.51%, and in another year, if the GP was at 38.11%, the GP addition would be 47.5% minus 38.11% on ₹ 100/-turnover. However, the Assessing Officer as per his own working arrived at the GP as undisclosed sales by grossing up the turnover which is not correct. Therefore, even while working the addition under GP, instead of adding the difference of 9.4%, in GP on the turnover which comes to ₹ 1,49,53,929/-, Assessing Officer made an addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the order of the Assessing Officer and the CIT (A), we do not find any reason to differ from the findings of the CIT (A). In fact, as rightly pointed out by the CIT (A), the Assessing Officer has acted unreasonably in making the impugned disallowance without considering the increase in turnover and extent of the activity of the assessee. Therefore, Revenue ground is accordingly rejected. 9. Issue No.3: Depreciation on intangible assets: The assessee raised this as Ground No.2 in its appeal. Briefly stated, the assessee claimed depreciation of ₹ 27,90,958/- on addition to fixed assets amounting to ₹ 1,39,54,792/- under the head Intangible assets . The Assessing Officer observed that Appendix-1 to Rule 5 under the Income Tax Rules shows that depreciation for intangible assets is allowable only in respect of know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature . He observed that the assessee was unable to show, how Network was included within the meaning of intangible assets and that the claim was also not verifiable in the absence of books of account, he disallowed the deduction claimed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement dated 17-05- 2006. The business was acquired for a lump sum sale consideration of ₹ 1,51,00,000/-. The appellant has attributed ₹ 1,39,54,792/- to intangible assets. The agreement does not specify any intangible assets nor does assign any value to that. I fail to understand as to how the appellant has acquired intangible assets worth ₹ 1,39,54,792/-. The nature of the intangible asset has not been explained or described. The facts above show that the appellant acquired a business as a going concern for lump sum consideration. Since there was transfer of entire business, the acquired business constituted the capital asset. The assets transferred constituted running business. The parties did not intend to make a sale of itemized assets. The appellant also never intended to purchase individual items. The slump sale agreement merely mentions all tangible and intangible assets and properties of Pioneer Telephones without even identifying or describing them. A slump sale contemplates sale of a going concern lock, stock and barrel plus transfer of all assets and liabilities plus absence of an itemized sale. In the case of a slump sale it is not possible to assign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the other concern. Since these aspects were not examined by the Assessing Officer and the CIT (A), we are of the opinion that the matter requires re-examination at the level of Assessing Officer. Keeping in mind the fact that the concern acquired was a sister concern of the assessee company and the Assessing Officer has to examine the price paid for acquiring the company, the assets acquired and other aspects so as to verify the cost of assets both tangible and intangible and whether the claim of the assessee for depreciation is allowable both legally and factually. Since this issue was not examined in its perspective with reference to the record of the concern which was acquired and the entries made in the books of account of the assessee which were also not before us, we without going into the merits of the claim and various case law relied, restore the issue to the file of the Assessing Officer for fresh examination on facts and decide according to the facts and law on the issue. Therefore, the issue in Ground No.2 raised by assessee on the issue of depreciation on the intangible assets is restored to the file of the Assessing Officer. The Assessing Officer is directed t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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