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2016 (5) TMI 54 - ITAT CHANDIGARH

2016 (5) TMI 54 - ITAT CHANDIGARH - [2016] 45 ITR (Trib) 33 - Application of average of the net profit of assessed income for the purpose of determining the profit of the assessee - Held that:- Since in the subsequent years, the Revenue Department accepted net profit rate in the case of the assessee at 2.53 per cent. and 2.99 per cent., therefore, the learned Commissioner of Income-tax (Appeals) was justified in applying the average of the net profit of assessed income of subsequent two years fo .....

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er of the learned Commissioner of Income-tax (Appeals) Shimla dated May 2, 2014 for the 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 .....

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clared 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 the profit and loss account, balance-sheet and details of the month-wise purchases and sales as supplied by the assessee. The assessee was asked to substantiate the figure of closing stock in the balance-sheet as .....

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oted in para 2.2 of the assessment order, the Assessing Officer observed that the assessee has tried to furnish the month-wise closing stock which it failed to produce/ justify/explain/substantiate during the period of assessment. The assessee also stated that gross profit cannot be uniform throughout the year specifically when the assessee was maintaining proper stock records. This claim of the assessee was not accepted by the Assessing Officer on the ground that the auditors of the company hav .....

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of the years because the assessee was deal ing with so many branches where the purchases were made by the branches directly and after getting the details from the said branches the assessee booked the same in its books of account as purchases. The Assessing Officer found that the claim of the assessee is incorrect because of the fact that as per information supplied by the assessee, it made purchases during the year through Central Warehouse, Calcutta and Central Warehouse, New Delhi amounting t .....

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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 profi .....

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urnish the details of valuation of closing stock as appearing in the balance-sheet which was not furnished due to large number of items. The Assessing Officer concluded that month-wise trading account filed by the assessee was self contradic tory. The Assessing Officer prepared a trading account according to which the gross profits came out to ₹ 36,39,54,887.88 against the sales of ₹ 71,24,69,335.88 which results in a gross profit rate of 51.08 per cent. Therefore the addition as pro .....

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sumable items through multi level marketing system by virtue of which the orders/sales are booked and after having booked the sales/ orders the goods against large number of common orders are purchased and supplied against said sales booked by agents. In this way, sales are booked first then the purchases and all the purchases/sales are settled and posted up to the close of year even the goods which are supplied, sold and booked and are received against challans and purchase bill are received qu .....

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ipts of goods is regularly made on tentative basis and the final payment is made at the end of year. The assessee further relied upon the judgment of the Hon ble Income-tax Appellate Tribunal, Bangalore Bench, in the case of Industrial Trading Co. v. ITO I.T.A. No. 158/Bang/1989, 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 ass .....

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h-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 the consequential amount wa .....

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in some cases. From the copies of account of the supplier the fact of regular payments of the purchase of goods were verified by the learned Assessing Officer. The copies of the bank statements were produced before the learned Assessing Officer for the verification of the payments. The entries of purchase bills received with the goods during the whole year were made in the month of February and March just for settling the accounts of the different suppliers. Bank accounts with corresponding ent .....

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ase regarding the disputed purchases and in this trading account the learned Assessing Officer has admitted that the correct gross profit rate comes to 51.08 per cent. in place of 51.16 per cent. adopted earlier. The Assessing Officer has also accepted the figure of sales at ₹ 71,24,69,336 and the opening and closing stock. Now if the contention of the learned Assessing Officer is accepted then the purchases will be reduced by ₹ 14.48 crores which will result in reducing the purchase .....

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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 purcha .....

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ench in the appeal of ITO v. New Card Board Industries reported in [1992] 40 ITD 50 (Cal). (iv) The assessee further submitted that this is settled principles of law that the assessment is to be made on the basis for complete year and piece meal assessment is not permissible under law. The Assessing Officer has tried to sketch month-wise trading account and has worked out negative stock at a particular point of time and has tried to justify addition on the basis of that negative stock. This is a .....

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instance, to be assumed that the gross profit rate of the asses see would be uniform throughout the year. In the case of Bhalla Brothers [1981] 10 TLR 215 (P&H), such an exercise was made and it was found that on a particular date there was negative stock. The Assessing Officer made an addition in this regard. The Tribunal, how ever, deleted the addition and the High Court held that the addition had been properly deleted and no question of law arose, so far as the first period is concerned, .....

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dgment of the Hon ble Punjab and Haryana High Court in the case of Bhalla Brothers [1981] 10 TLR 215 (P&H) and also that of the Income-tax Appellate Tribunal, Jabalpur Bench in the case of Tara Chand Shanti Lal. In this regard kind attention is also drawn to the judgment of the Hon ble Punjab and Haryana High Court in I.T.R. No. 117 of 1999 decided on December 4, 2006 in the case of CIT v. Bansal Sons, Ludhiana, wherein the Hon ble Punjab and Haryana High Court has observed as under : " .....

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d 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) .....

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it is also true that no sales can be made without goods and as such it is amply clear that the assessee has been receiving the goods regularly from their suppliers and effecting the sale and the purchases against the same were booked in the last quarter of year. The appellant has been consistently maintaining that it has been making regular payments by account payee cheques throughout the year and the same is verifiable from our bank accounts and the purchases were booked in the last quarters. A .....

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In this regard, the assessee relied upon the judgment of the Hon ble Income-tax Appellate Tribunal, Delhi "F" Bench in the case of Rama Dairy Products Ltd. v. Department of Income tax pronounced on June 8, 2012 and the Hon ble Income-tax Appellate Tribunal Ahmedabad Bench [2004] 85 TTJ (Ahd) 481 in the case of Asst. CIT v. D. L. Choudhry. (viii) In the light of the above facts and circumstances, it is brought to notice that the facts and circumstances and other material brought by the .....

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net profit rate as to the best of your judgment in accordance with the law in all fairness 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 j .....

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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 of account were not found to be totally reliable and additions were made which gave to net profit rate of 2.53 per cent. and 2.99 per cent. against declared net profit rate of 1.57 per cent. and 2.23 per cent. for the .....

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year. The Income-tax Act defines only two situations, the Assessing Officer has followed none, firstly where the books of account are reliable then the net profit declared by the assessee as on end of year is to be accepted subject to minor addition and disallowances and secondly where the books of account are not reliable then the Assessing Officer is authorised to estimate the profits judicially. The Assessing Officer cannot adopt both the situations and hence assessment completed by the Asse .....

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ing Officer has not offered any comments on the legal pronouncements and different judgments of various High Courts and the Income-tax Appellate Tribunal relied upon by the appellant. These in fact tantamount to acceptance of legal opinion expressed by the Tribunal and courts. These judicial pronouncements and appellate order can be relied on by any of parties at any time. They are referable, persuasive and binding in nature. The decisions of the jurisdictional Tribunal and that of the Hon ble S .....

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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 .....

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ng Officer has mentioned that the books of account were test checked except the relevant stock records and stock registers which were not produced. On the basis of figures available in profit and loss account and details of month-wise purchases and sales provided by the assessee, the Assessing Officer computed a gross profit of 51. 16 percent. By applying gross profit rate of 51.16 per cent., the Assessing Officer computed month-wise and quarter-wise trading account for the financial year 2008-0 .....

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issued, iv) Though there were consistent sales of about ₹ 5 to ₹ 7 crores every months but the purchases in the beginning of year from April to December were lower and from January to March, the purchases were high, v) The opening and closing stock during the year were more or less same. Based on the above, the Assessing Officer issued show cause to explain that why addition of ₹ 1450.95 lakhs (peak) should not be made for understatement of profit by entering in genuine purcha .....

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rch, the gross profit was minus 161.05 per cent. The Assessing Officer on the basis of his observations as enumerated in para 2.8 of the assessment order concluded that month-wise trading account filed by the assessee in response to the show cause 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 gro .....

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oughout 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 produced before the Assessing Officer from time to time. H .....

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he assessment order. The appellant further submitted that the assessment has to be made on the basis of complete year and not on the basis of piecemeal assessment. The Assessing Officer had tried to sketch the month-wise trading account and has worked out negative stock at a particular point of time and has tried to justify additions on the basis of negative stocks. The appellant has relied on the decision of the jurisdictional Tribunal in I.T.A. No. 279/Chd./1990 in the case of Saqi Brothers v. .....

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ave computed the income in the manner laid down under section 144 of the Act. 4.15 After considering the submissions and various facts, it is found that the basic presumption to arrive at computation of gross profit arose in the mind of the Assessing Officer on the ground that gross profit rate in the earlier period of the financial year was higher which tapered to lower side from the month of January onward and gave rise to a gross profit of minus 161.05 per cent. in the month of March. The Ass .....

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e 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 n .....

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t rate was irrelevant and erroneous. The assessment of income is to be made on the basis of accounts prepared for the entire financial year as the entries of purchases, sales and expenses may not be available for entering into books of account on a real time basis. Looking at the business operations of the appellant, it cannot be doubted that the purchases have been entered in the last three months of the year where the closing of accounts in the year end is required for settlement of accounts w .....

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d be uniform throughout the year. This decision was later upheld by the Punjab and Haryana High Court following its own judgment in the case of Bhalla Brothers. Respect fully following the decision of the jurisdictional Tribunal on the similar issue the computation of negative peak stock of 1450.95 lakhs which was made basis for addition of ₹ 14.48 crores is found to be not justified. 4.16 However, on perusal of assessment order it is noticed that the Assessing Officer has found certain de .....

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Designers, New Delhi were serially numbered having no sales tax registration number on the bill and notice issued under section 133(6) could not be served on it. iv) The assesses was asked to furnish the relevant details of valuation of closing stock which was never furnished till the last submission. v) The ingenuineness of the trading results along with the incorrect claim of the assesses regarding the maintenance of stock records proves the mala fide of the assessee. In view of the above def .....

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see 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 .....

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current year is estimated at 2.76 per cent. By applying a net profit of 2.76 per cent. on the sales of the year under consideration, i.e., ₹ 71,24,69,335, the net profit is computed at ₹ 1,96,64,154. The assessee has shown net profit as per return of income of ₹ 1,06,69,510. So the balance amount of ₹ 89,94,644 is added to the income. Here the reliance is also placed on the decision of the Hon ble Supreme Court in the case of Kachwala Gems v. Joint CIT [2007] 288 ITR 10 .....

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e learned Departmental representative relied upon the order of the Assessing Officer, on the other hand, learned counsel for the assessee reiterated the submissions made before the authorities below and submitted that the issue is covered in favour of the assessee by the order of the Income-tax Appellate Tribunal, Chandigarh Bench in the case of Saqi Brothers v. ITO [1996] 54 TTJ (Chandigarh) 306. The same is also confirmed by the Hon ble Punjab and Haryana High Court in I. T. R. No. 70 of 1998 .....

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ed 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 .....

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e 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 prepared the trading account for enhancing the gross profit despite the fact that it is well settled that book results are drawn on annual basis. The Assessing Officer did not find any unrecorded purchases. No sales were found outside the books of account. Therefore, the extra profit arrived at by the ass .....

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ition can be made on the ground that the Assessing Officer found negative stock of analysis of month-wise trading results, the assessee itself having offered ₹ 50,000 for addition, further addition is not sustainable as gross profit on unaccounted sales, if any, would be far less". This order of the Tribunal has been confirmed by the Hon ble Punjab and Haryana High Court vide judgment dated October 31, 2006 (supra). Copies of the orders are placed on record. The learned Commissioner o .....

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nt by the learned Commissioner of Income-tax (Appeals) under section 145(3) of the Act have not been challenged by the Revenue as well as by the assessee. Therefore, finding of fact recorded by learned Commissioner of Income-tax (Appeals) for rejection of the books of account under section 145(3) has become final. Therefore, the question left for consideration would be whether the learned Commissioner of Income-tax (Appeals) has correctly applied the average of net profit of assessed income in s .....

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