TMI Blog2016 (5) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2009-10 on the following ground : On the facts and in the circumstances the learned Commissioner of Income-tax (Appeals) has erred in allowing relief of ₹ 13,60,05,356 by relying on the average of net profit of the preceding two years of the assessee, whereas the Assessing Officer had made the addition by calculating the gross profit from the month-wise purchase and sales supplied by the assessee for the current year, profit and loss account and from the balance-sheet. 2. The brief facts are that a return declaring income of ₹ 65,59,669 was filed on September 30, 2009 which was subsequently revised at the same income. The assessee-company follows a direct marketing business model and derives income from retail trading of various consumer goods. The assessee has declared the gross turnover to the tune of ₹ 91,90,10,669 against which net profit has been declared to the tune of ₹ 1,06,69,510 which gives effective net profit rate of 1.16 per cent. On examination the Assessing Officer noticed that the gross profit rate was not mentioned in the audit report. The same was calculated by the Assessing Officer from the figures available in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year in the trading account. The Assessing Officer negated the contention of the assessee regarding verification of purchases from the bills on the reasons as enumerated in para 2.5 of the assessment order. (ii) The Assessing Officer did not accept the submissions of the assessee because of his observation that either they were incorrect or were contrary to the record available on file. On further examination of month-wise trad ing account provided by the assessee, the Assessing Officer raised certain issues as enumerated in para 2.8 of the assessment order. The conclusions were drawn on the basis of figures arrived by computations done on month-wise basis. The Assessing Officer raised the question that purchases were never in consonance with level of sales and when other months are showing gross profit in the range of 96.65 per cent. to 20.45 per cent., how can it be gross loss of 161.05 per cent. in the month of March, 2009. Another fact the assessee maintains a closing stock of ₹ 1.85 crores as on March 31, 2008 and closing stock of ₹ 1.83 crores as on March 31, 2009 whereas in the rest of months the stock level are less than 8 lakhs raises a question that why it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89, assessment year 1986-87 [1994] 50 TTJ (Bang) 177, the Hon ble Supreme Court in the case of S. A. Builders v. CIT (Appeals) [2007] 288 ITR 1 (SC) and Kachwala Gems v. Joint CIT [2007] 288 ITR 10 (SC). 4. Further, the assessee was keeping the complete records including the regular books of account, stock register, purchase, sales and expenses vouchers, etc., duly supported with bill which were produced before the learned Assessing Officer from time to time. While framing the assessment order the learned Assessing Officer prepared the monthly trading accounts on his own notions and finally made the addition of ₹ 14,48,00,000 on account of shortage of stock during the year. He just prepared an imaginary month-wise trading account and after rejecting all the contentions of the assessee made the addition without mentioning anything. The learned Assessing Officer had asked the assessee to file the month-wise figure of purchase and sales. On the basis of the figures of purchase and sales, the learned Assessing Officer prepared the monthly trading account. For arriving at the figures of closing month, a hypothetical figure of gross profit was placed in the trading account and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th element will be resulting figure. The Assessing Officer has accepted the opening stock, closing stock, sales and gross profit at 51.08 per cent. of the sales then the only element left to be decided is purchases which should be the resultant figure. Once the books are rejected then there remains no reason to consider the monthly figures of the trading accounts. The assessee relied on the judgement of the Bangalore Bench of the Hon ble Income-tax Appellate Tribunal in Industrial Trading Co. v. ITO reported in [1994] 50 TTJ (Bang) 177. (iii) The assessee has proved the identity of the parties from whom the goods were purchased. The payments were made to them throughout the year on different dates. The amounts of payment were almost equal to the amount of purchases entered either during the year or at the end of the year. The payments were made through the banking channel and so it cannot be said that the source of expenditure on the purchase of goods are unexplained. So, the provision of section 69C is also not applicable. The assessee relied on the judgment of the Hon ble Income-tax Appellate Tribunal, Calcutta Bench in the appeal of ITO v. New Card Board Industries reported i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served as under : Position of stock arrived at in the middle of year was not enough to justify addition. The Hon ble Punjab and Haryana High Court again has made reliance on its own judgment in the case of Bhalla Brothers mentioned hereinabove. (v) The facts of our case are identical to the facts as that of the case before the Hon ble Supreme Court and as such in our case too at the most provisions of section 145(3) could have been invoked and the Assessing Officer could compute our income in the manner laid down under section 144 of the Income-tax Act as warranted by the provisions of section 145(3) of the Income-tax Act. Provisions of section 145(3) of the Income-tax Act Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessees, the Assessing Officer may make an assessment in the manner provided in section 144 . The appellant relied upon the following decisions : (i) CIT v. Aggarwal Engg. Co. [2008] 302 ITR 246 (P H) ; (ii) S. M. Hasan, STO v. New Gramophone House, AIR 1977 SC 1788 (SC) ; (iii) CIT v. Bansal Sons Ludhiana I.T.R. No. 117 of 1999 (P H) ; (iv) Bhalla Brothers [1981] 10 TLR 215 (P H) ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness with the facts of the case. As the worthy Commissioner of Income-tax (Appeals) can undo what the Assessing Officer has wrongly done and can do what the Assessing Officer has failed to do as the powers of the Commissioner of Income-tax (Appeals) under the Income-tax Act are co-terminus with that of the Assessing Officer. (ix) The assessee also filed a paper book, containing written submissions, copies of judicial pronouncements, copy of assessment order, challan bills with supporting details. Vide this office dated March 13, 2014 a set of the paper books was forwarded to the Deputy Commissioner of Income- tax, Parwanoo for verification on facts and submission of his report on the objections raised by the appellant and also comments for the justification of the addition made on account of estimated negative stock by applying gross profit rate. (x) The Assessing Officer filed its reply dated March 25, 2014 where the Assessing Officer has mostly reiterated the findings at the assessment stage. Further, the Assessing Officer submitted that the books of account were not reliable in the absence of stock register and unverifiable purchases. In the subsequent years also the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent judgments relied on and quoted by the appellant in detailed arguments. In fact the learned Assessing Officer did not have time to look into the stock register and challans at the time of original assessment which was going to be time barred within 2 days of the issue of show-cause notice, how it is an afterthought now, if produced before the Hon ble Commissioner of Income-tax (Appeals) during the appellate proceedings and also during the remand proceedings. 5. The learned Commissioner of Income-tax (Appeals), considering the facts and circumstances and material on record, finding defects in the maintenance of the books of account rejected the same under section 145(3) of the Act and average net profit of subsequent two years estimated at 2.76 per cent. applied against the turnover for determining the net profit of the assessee and accordingly allowed the appeal of the assessee partly. His findings in paras 4.13 to 4.17 of the appellate order are reproduced as under : 4.13 I have gone through the facts of the case, written submissions filed by the assessee, remand report of the Assessing Officer. and rejoinder filed by the assessee. It is noted that the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is self contradictory. The negative gross profit rate in the month of March show the mala fide of the assessee in decreasing his taxable profit by reducing its gross margin. Thereafter, the Assessing Officer prepared a trading account by applying a gross profit rate of 51.08 per cent. and added ₹ 14.48 crores to the income as proposed by him in the show-cause notice. 4.14 On the other hand the appellant has submitted that the nature of business was based on multilevel marketing system where the goods were received throughout the year by different warehouses at separate stations. The good were received either through bills or through challans. After receipt of intimation of goods the lump sum payments were made to different suppliers throughout the year. The entries of purchase bills received with the goods during the whole year were made in the month of February and March for settling the accounts of different suppliers. The purchases were not made at the end of the year but the purchases were entered in the books in the month of February and March. The appellant has also submitted that complete books of account, stock register, sale and expense vouchers and bills were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the bills were received towards later part of the year from different suppliers. It has been explained through the modus operandi of the business that goods were received either through bills or through challans and on receipt of goods the assessee use to make lump sum payments to different suppliers during the year. The copies of accounts of suppliers and regular payments for the purchases of goods were also verified by the Assessing Officer. The copies of bank statements were also produced for the verifications of payment made during the year. The Assessing Officer has not found any defect regarding unaccounted purchase or sales. Further, there was no find ing either in form of any information available with the Assessing Officer regarding unaccounted purchases nor there was any result of negative stock on physical verification of stock during survey, etc., at the assessee's premises which can show that there was negative stock during various months of financial year, in view of these facts, I find that calculations of month-wise and quarter-wise trading accounts leading to a peak negative closing balance based on a constant gross profit rate was irrelevant and erroneous. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he maintenance of stock records proves the mala fide of the assessee. In view of the above defects, the provisions of section 145(3) are attracted. The provisions of section 145(3) stipulates that where the Assessing Officer is not satisfied about the correctness or complete ness of the accounts of the assessee, the Assessing Officer may make an assessment in the manner provided in section 144 of the Act. The provisions of section 144 stipulates that the Assessing Officer after taking into account all relevant material which the Assessing Officer has gathered shall after giving the assessee an opportunity of being heard make the assessment of the total income to the best of his judgment and determine such payments by the assessee on the basis of such assessment. On the basis of findings recorded by the Assessing Officer and defects noticed as above which remained during the appellate proceedings, the provisions of section 145(3) are invoked. The assessee's books of account rejected and the net profit is computed to the best of my judgment. In the assessee's case, it is noticed that in the current year a net profit of 0.92 per cent. has been declared on the total sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed the gross profit of 51.16 per cent. The Assessing Officer computed the month-wise and quarter-wise trading account for enhancing the gross profit. The Assessing Officer, however, did not consider that the assessee made genuine purchases and sales which were entered into the books of account of the assessee. The Assessing Officer also did not consider the nature of business of the assessee, was based on multi level marketing system where the goods were received throughout the year by different warehouses at separate stations. The goods were received either through bills or through challans. After receipt of the intimation of goods, the lump sum payments were made to different suppliers throughout the year. No defects in the purchases and sales have been pointed out by the Assessing Officer. The assessee produced complete books of account, sales and purchase vouchers. However, the Assessing Officer, on imaginary basis, prepared month-wise trading account for making addition against the assessee. In this way also the Assessing Officer found a negative stock in the books of account of the assessee which is not permissible in law. Thus, the Assessing Officer in his own way has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year under appeal has shown net profit rate of 0.92 per cent. However, in subsequent assessment years, the Assessing Officer passed the orders under section 143(3) in respect of the same business activities of the assessee which gave rise to net profit of 2.53 per cent. and 2.99 per cent. in subsequent assessment years 2010-11 and 2011-12. No comparable case have been cited by the Assessing Officer in the assessment order. Therefore, history of the assessee would be relevant and should be considered by the authorities below. 8. The Hon ble Privy Council in the case of CIT v. Laxminarain Badridas [1937] 5 ITR 170 (PC) that, estimate of income should be fair. The Assessing Officer should not act dishonestly or vindictively or capriciously. History, knowledge of previous returns, local knowledge, circumstances of the assessee to be considered to arrive at fair and proper estimation . The Hon ble Punjab and Haryana High Court in the case of Rajinder Prasad Jain 274 ITR 545 held that Tribunal applying net profit consistent with past history of the assessee justified . 9. Since in the subsequent years, the Revenue Department accepted net profit rate in the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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