M/S SHUBHAM COTTON MILLS PVT. LTD.,ELLENABAD vs. DCIT, CIRCLE, SIRSA

आदेश/Order

PER N.K. SAINI, VICE PRESIDENT

This is an appeal by the assessee against the order dt. 01/08/2019 of the Ld. CIT(A)-5, Ludhiana.

2.2 That while confirming the addition the learned Commissioner of Income Tax (Appeals) has also erred both in law and on facts in upholding the rejection the trading results made by invoking section 145(3) of the Act. 2.3 That adverse inference drawn by the learned authorities below primarily on the ground that purchase prices are at different rates so as to allege that there is inflated purchase price and likewise even the selling rates are against normal practice and are erratic is based on factually misconceived assumption and presumption legally incorrect proposition and therefore unsustainable. 2.4 That even otherwise the addition sustained is based on inherent contradictory assumptions since the learned Assessing Officer has accepted the trading results while computing the income and yet made the impugned addition which is entirely illogical, illegal and invalid. 3. That the learned Commissioner of Income Tax (Appeals) has further erred both in law and on facts in upholding the levy of interest under section 234 of the Act and u/s 234B of the Act which are not leviable on the facts and circumstances of the case of the appellant company.

"That at the time of survey selling price o f Guwar Gum was Rs. 14.500/- per Otls, which has been reduced to Rs. 11,700/- per Otls within one month of survey. Company has 5173.67 Qtl stock of Guwar Gum and 13858.05 Qtl Guwar at the time of s u rv e y . Fr o m c r u sh i n g of 1 3 858 . 0 5 Qt l G u wa r 4 6 3 0 Qt l s G u wa r G u m wa s manufactured. Due to recession in market average

realization of Guwar Gum was Rs. 13071.63 per Qtl. upto 18.12.2014. In addition to the above submission assessee's counsel has explained that prices o f Guwar Gum was on declined substantially after the date of survey and has been reduced to Rs. 8525/- at the end of the year. He further explained that the prices o f other commodities manufactured by the company has also decline as compared to previous year”

5.1 The A.O. did not accept the above submissions of the assessee by observing that the assessee had shown higher purchase price in respect to some commodities against the market price and had shown lower sale value as compared to market price. He further observed that the G.P rate had declined to 2.35% in comparison to 2.98% shown in the last year and that the decrease in G.P rate had been shown by the assessee even after considering the findings of the survey in respect of unaccounted stock found during the course of survey and against the increase in G.P rate which should have happened as a result of unaccounted stock. The A.O. also observed that the assessee grossly manipulated its books to reduce the G.P rate even below the last year G.P rate and that the rationale given by the assessee for decrease in rate of guwar gum did not seem to hold good as in the succeeding year the assessee had shown G.P rate of 3.48%. The A.O. pointed out that the discrepancy had been found in respect of purchase and sale bills submitted by the assessee. Accordingly, a show cause letter for rejection of books of accounts was issued to the assessee who was required to submit reply by 26/12/2017.

5.2. In response, the assessee submitted that the books of account had been rightly maintained, accounting standard were followed and the books were audited. In respect of rate of commodities, the assessee submitted that it had been in accordance with accounting standard and has been audited by the Chartered Accountant. It was further submitted that in respect of some items i.e; cotton, cotton seed, khal binola, Guwar Giri rates had decreased.

5.3 The A.O. after considering the submissions of the assessee observed that the bills submitted during the course of assessment proceedings revealed that

purchases had been taken at higher rate in comparison to market rate. He pointed out that market rate captured from e-net site i.e; agro market was at Rs. 3720/- on 20/12/2014, whereas the assessee purchased Guar @ Rs. 4263/- & Rs. 4296/- from M/s Ram Lal & Company and Rs. 4281/- on the same date from M/s Ellenabad Trading Company. He also pointed out that the maximum rate from e-net site was Rs. 4325/- in respect of similar Mandi i.e; Ellenabad, which gave average rate of Rs. 4023/-. Thus the assessee had been showing higher purchase price post survey than the market price. The A.O. pointed out certain discrepancies in the rate from different parties on the same date which read as under:

Name of Party from whom purchase Rate Item Sr. Date of No Purchase 1 M/s Madan Lai Kunji Lai, Ellenabad 22.12.2014 4250/- Guwar 2 M/s Hari Singh Narinder Singh, Ellenabad 22.12.2014 4096/- Guwar 3 Shree Shiv trading Co. Ellenabad 22.12.2014 4406/- Guwar 4 M/s Bhikha Ram rakesh Kumar, Ellenabad 22.12.2014 4400/- Guwar 5 BhambhuTrading Co. Ellenabad 14.03.2015 3636/- Guwar 6 M/s Channmal Liladhar, Ellenabad 14.03.2015 3621/- Guwar 7 Talwaria Commission Shop, Ellenabad 14.03.2015 3700/- Guwar

The A.O. also pointed out certain discrepancies in respect of sale bills by observing in para 3.4 & 3.5 of the assessment order as under:

3.4, Similarly, discrepancies have been observed in respect of sales bill also, for instance, on 21.11.2014 sales of Guwar Giri have been shown at Rs. 13,500/- to one party, Rs. 14,125/- to another party and Rs. 14,200/- to third party. Similarly, on 15.12.2014, 18.12.2014,08.01.2015, 24.01.2015, 29.01.2015, 07.02.2015, 14.03.2015 etc. different selling rates have been shown for different parties. This is against the normal market practice as the rate for a day is market driven and remains constant for a day.

3.5 Moreover, against the rationale of the assessee that prices of Guwar were falling, perusal of sales ledger shows that prices have been shown to be erratic. For instance, rate of Guwar on 19.11.2014 has been shown to be Rs. 14250/-, which decreased on 20.11.2014 to Rs. 13700/-, but again increased on 26.11.2014 to Rs. 14360/-, falling again on 18.12.2014 to Rs. 11750/-, rising again on 26.12.2014 to Rs. 12800/-, thereafter decreasing on 10.01.2015 to Rs. 9500/-, rising again on 28.1.2015 to Rs. 11350/-. Thus, the selling price has been shown to be erratic and there has not been a constant decline.

The A.O. did not accept this explanation of the assessee that the decrease in price of Guwar, post survey had impact on the business of the assessee by observing that the G.P rate in the succeeding assessment year 2016-17 was at 3.48% as against G.P rate of 2.98% for the assessment year under consideration i.e; 2014-15.

5.4 The A.O. also observed that there were huge variation in purchase price vis a vis sale price of Guwar churi which yielded profit before survey but resulted loss in post survey. The A.O. pointed out that the assessee was having closing stock of Rs. 13,07,33,970/- as on 31/03/2015 as against the opening stock of Rs. 7,59,98,548/- as on 01/04/2014. Thus there was increase of stock by Rs. 5,47,35,422/- and the major component was of Guwar Giri amounting to Rs. 5,55,09,557/-. He also pointed out that value of stock on the date of survey i.e; 18/11/2014 was at Rs. 12,88,17,570/- which included stock of Guwar unit of Rs. 10,65,88,165/- and the valuation of stock was done at the cost or net receivable value whichever was lower. He therefore was of the view that the decline in profit could not be attributed to the decline in market rate as increase in stock during the Financial Year as well as during the period post survey indicated that the assessee mainly consumed the stock on immediate basis . The A.O. rejected the books of account by invoking the provisions of section 145(3) of the Act by observing that the assessee had manipulated its books of account to offset the findings of the survey and to reduce its taxable income. The A.O. made the addition of Rs. 91,99,543/- by observing in para 4.1 of the assessment order dt. 29/12/2017 which read as under:

A.Y. Turnover G.P. Rate (Rs.) (%) 2013-14 232,89,76,881 2.36 2014-15 275,90,17,151 2.98 2015-16 231,89,87,327 2016-17 144,51,53,735 3.48

Considering the trend of GP being 2.36% for A.Y. 2013-14, 2.98% for A.Y. 2014-15 and 3.48% for A.Y. 2016-17, GP rate of 2.75% is held for A.Y. 2015-16. Thus, on a

turnover of Rs. 231,89,87,327/-, considering GP rate of 2.75%, gross profit is arrived at Rs. 6,37,72,151/-. It may be appreciated that GP rate as per increasing trend comes to around 3.2%-3.25%. However, it is accepted that there has been a decline in the prices of Guwar after 2013, therefore being reasonable, GP is estimated at 2.75%. Thus, there is an addition of Rs. 91,99,543/-to the income of the assessee.

Sub: In the matter of M/s Shubham Cotton Mills (P) Ltd, Appeal No. 187/ROT/IT/CIT(A)-5/LDH/2018-19 Assessment Year: 2015-16 In the pending appellate proceedings, the appellant respectfully seeks to submit as under: 1. Grounds 1 to 4 of Grounds of appeal relate to addition of Rs. 91,99,543/- by applying GP rate of 2.75% on trading in Guar gum in the instant year. 2. The basis of addition is as under:

Particulars Sr. As per As per Assessing No. Assessee Officer* i) Sale 231,89,87,327 231,89,87,327 ii) G.P. Rate 2.35% 2.75% iii) 5,45,72,609 6,37,72,151 Gross Profit (in Rs.) — iv) Addition 91,99,543 (6,37,72,151 - 5,45,72,609)

2.1 The basis of G.P. rate adopted by the learned Assessing Officer is as under:

Sr. Assessment Turnover G. P. Rate No. Year i) 2013-14 232,89,76,881 2.36% ii) 2014-15 275,90,17,151 2.98% — hi) 2015-16 231,89,87,327 iv) 2016-17 144,51,53,735 3.48% 2.3 The learned Assessing Officer has however stated that GP rate as per increasing trend comes to around 3.2%-3.25%. However it is accepted that there has been a decline in the prices of Guwar after 2013. therefore being reasonable GP is estimated at 2.75%. 2.4 It is submitted that learned Assessing Officer while making the above addition has also rejected the books u/s 145(3) of the Act.

2.5 It is submitted that learned Assessing Officer has invoked the aforesaid provision on the following basis: i) That purchases have been taken at higher rate in comparison to market rate as tabulated hereunder;

Sr. No. Name of Party Date Rate per Qtl. A. As per books of assessee i) 20.12.2014 4263 Mani Ram Mohan Lai ii) 20.12.2014 4281 Ram Lai and Company B. As per E-Net Site i.e. Agro Market Minimum Rate 3720 Maximum Rate 4325

ii) That on a single day, purchases made from same Mandi have been shown as different rates as tabulated hereunder;

Rate Item Sr. Name of Party from whom Date "of Purchase No. purchases i) Mani Ram Mohan Lai 22.12.2014 4250/- Guwar ii) 22.12.2014 4096/- Guwar M/s Hari Singh Narinder Singh, Ellenabad iii) 22.12.2014 4406/- Guwar Shree Shiv Trading Co. Ellenabad iv) 22.12.2014 4400/- Guwar M/s Bhikha Ram Rakesh Kumar, Ellenabad v) 14.03.2015 3636/- Guwar Bhambhu Trading Co., Ellenabad vi) 14.03.2015 3621/- Guwar M/s Channmal Liladhar, Ellenabad vii) 14.03.2015 3700/- Guwar Talwaria Commission Shop, Ellenabad

iii) Discrepancies have been observed in respect of sales bill also in as much on one day different selling rates have been shown for different parties: Sr. No. Date Rate Item i) 21.11.2014 13,500/- Guwar Giri ii) 21.11.2014 14,125/- Guwar Giri iii) 21.11.2014 14,200/- Guwar Giri

Note; It has been stated that similar trend was also on 26.11.2014, 15.12.2014, 18.12.2014, 8.1.2015, 24.1.2015, 29.1.2015, 7.2.2015, 25.2.2015 and 14.3.2015

iv) The rationale of the assessee that prices of Guwar were falling; whereas perusal of sales ledger shows that prices have been shown to be erratic

Sr. No. Date Rate i) 19.11.2014 14,250/- ii) 20.11.2014 13,700/- iii) 26.11.2014 14,360/- iv) 18.12.2014 11,750/- v) 26.12.2014 12,800/- vi) 10.01.2015 9,500/- vii) 28.01.2015 11,350/-

v) That version of decrease in price of Guwar post survey and its impact on business of assessee does not hold merit for another reason that as tabulated hereunder: Sr. No. Assessment Year G.P. 2016-17 3.48% i) ii) 2014-15 2.98%

Thus strangely there have been a loss' in the business only for a limited period from 19.11.2014 to 31.3.2015 i.e. the period post survey. vi) Comparison of average rates pre and post survey in respect of purchase and sale of Gwar Churi also reveals discrepancies; Particulars Sr. Rate pre- Rate post- Change as No. survey survey noted by AO i) Purchase 1080/- 2215/- 100% increase ii) Sale 1353/- 1639/- 20% increase viii) That assessee has manipulated its books to offset the income surrendered during the course of survey. The learned Assessing Officer has noted as under: Table I Particulars Increase in Sr. Opening Closing Stock No. Stock Stock i) Stock (Total) 7,59,98,548 13,07,33,970 5,47,35,422 ii) 12,29,50,576 5,55,09,557 Stock includes Guwar Giri Table II

Particulars Increase in Sr. Opening On the date of No. Stock survey i.e. Stock 18.11.2014 i) Stock (Total) 7,59,98,548 12,88,17,570 528,19,022 ii) 10,65,88,165 Stock includes Guwar Giri That further learned Assessing Officer has observed as under:

"As mentioned in the audited books, valuation of stock in respect of finished goods and work-in-progress in done at the cost or NRV whichever is lower. Thus, it is observed that decline in profit cannot be attributed to the decline in market rates, as increase in stock during the Financial year, as well as during the period post survey, indicates that the assessee has mainly consumed the stock on immediate basis. When the stock is consumed on immediate basis, there cannot be a substantial loss in a short period of 4 months post Survey. This confirms that the assessee has manipulated its books to offset the income surrendered during the course of Survey." 3 At the outset it is respectfully submitted that addition made is on fundamental misconception of facts and circumstances of appellant company and statutory provision of law.

3.1 The appellant company during the instant year had made sales of Rs. 231,89,87,327/- which are disclosed in audited financial statement ( page 71 of Paper Book), being part of the balance sheet furnished by the appellant company for the instant assessment year.

3.2 It is submitted that learned Assessing Officer has erroneously hold that purchases have been taken at higher rate in comparison to market rate; and less gross profit is shown by the appellant company. It is respectfully submitted that gross profit is low due to heavy recession in guar gum industry; and therefore, there is low realization on turnover. It is submitted that closing stock as on 18.11.2014 (on the date of survey) was as under:

Product Amount Sr. Quantity Rate as on date of survey No. (In Qtl.) i) Guar Gum 5173.67 14500 7,50,18,215 ii) 4630.00 14500 6,71,35,000 Guar Gum (crushed after post survey from stock of guar seed on the date of survey 13858.05 qtl.) Total 9803.67 14,21,53,215 3.3 It is submitted that after post survey subsequent sale realization of guar gum was as under: Period Amount Sr. Weight (in Average Rate qtls) No. i) 4172.00 5,86,34,800.00 14054.36 18.11.2014 to 30.11.2014 ii) 8456.00 10,47,27,980.00 12385.05 01.12.2014 to 31.12.2014 iii) 7882.10 8,98,94,790.00 11404.93 01.01.2015 to 31.01.2015 iv) 9197.60 8,62,79,460.00 9380.65 01.02.2015 to

28.02.2015 v) 11193.60 9,84,81,196.00 8797.99 01.03.2015 to 31.03.2015 Total 40901.30 43,80,18,226.00 10709.15 Evidence (pages of Paper Book) i) Copy of sale register of Guar Gum of the appellant company (97- 118) ii) Copy of invoices (119-154) iii) Copy of audited financial statement of the appellant company (57 read with 71) iv) Copy of bank statement of the appellant company (600-830) v) Copy of assessment order under sub section (3) of section 15 of HVAT Act 2003 (163-165)

3.4 From the perusal of tabulation above, it is evident that selling prices of guar gum were continuously falling after post survey; and therefore there is no basis to reject the books of accounts u/s 145(3) of the Act.

3.5 It is submitted that above submission is also fortified by tabular chart tabulated hereunder:

I. It is submitted that sale realization of guar gum in the preceding years was as under: Amount Assessment Year Weight (in Sr. Average Rate qtls) No. i) 2012-13 61250.30 112,39,69,126 18350.43 ii) 2013-14 38725.26 134,07,74,670 34,622.74 hi) 2014-15 100990.80 179,09,33,200 17733.63

II. It is submitted that purchase cost of guar seed in the preceding years was as under: Amount Sr. Assessment Year Weight (in Average No. Rate qtls) i) 2012-13 187627.58 110,40,02,920 5884.01 ii) 2013-14 127788.11 145,98,31,366 7780.47 iii) 2014-15 344485.01 207,06,67,668 6010.91

III. It is submitted that sale realization of guar gum in the instant year is as under: Period Amount Sr. Weight (in Average Rate No. qtls) i) 69165.15 105,05,70,605 15189.31 Pre survey upto 17.11.2014 ii) 40397.30 43,10,88,226 10671.21 Post survey (18.11.2014

to 31.03.2015) Total 109562.45 148,16,58,831 13523.42 IV. It is submitted that purchase cost of guar seed in the instant year is as under: Period Amount Sr. Weight (in Average No. qtls) Rate i) 222729.85 117,74,31,254 5286 Pre survey upto 17.11.2014 ii) 132562.92 55,11,24,464 4157 Post survey (18.11.2014 to 31.03.2015) Total 355292.77 172,85,55,719.52 4865

4 It is submitted that the entire purchases of guar seed are duly recorded in the purchase register placed at pages 196 to 496 of Paper Book and the entire purchases have been accepted by the VAT Department. It is submitted that , finding of the learned Assessing Officer that there is the variation of more than Rs. 300 in respect of purchase of same item from same mandi, on same date is misconceived. It is submitted that the purchases are made through auction in mandi from various un-related parties. The auction is monitor by the Market Committee. Ellenabad. which is controlled bv the Harvana Government. It is submitted that prices of guar are depend on the quality of Guwar. It is submitted that guwar has also been purchased on different rates on the same date in pre survey period. The details of some of purchases on the same date are as under:

Sr. No. Date Maximum Rate Minimum Rate Difference C=(A-B) (Per qtl.) (A) (Per qti.)(B) i) 01.04.2014 4579 4171 408 ii) 05.04.2014 4440 4241 199 iii) 11.04.2014 4384 3825 559 iv) 05.05.2014 5384 5186 198 v) 08.05.2014 5164 4665 499 vi) 21.05.2014 4979 4688 291 vii) 23.05.2014 5120 4930 190 viii) 29.05.2014 4985 4685 300 ix) 03.06.2014 4900 4581 319 x) 06.06.2014 4912 4615 297- xi 16.06.2014 4940 4681 259 xii) 23.06.2014 5149 4636 513 xiii) 27.06.2014 5459 5246 213

4.1 From the perusal of tabulation above it is submitted that there are no parameter of fixed price of commodity in the same date. It is submitted that even the learned Assessing Officer, himself admitted that while quoting the market rate captured from E-Net site i.e. agro market rate admitted that minimum rate is Rs. - 3720/- per qtl. and maximum rate is Rs. 4325/- per qtls. Infact above submission is also supported by certificate from office of Market Committee, Ellenabad (Sirsa)

placed at pages 831 to 834 of Paper book. It is also submitted that after post survey appellant company purchased guar seed at market price. The detail of purchases after post survey is as under:

Sr. No Period Amount Weight (in Average Rate qtls) i) 13413.61 6,41,58,607.00 4783.10 18.11.2014 to 30.11.2014 ii) 01.12.2014 to 19549.13 8,91,72,688.00 4561.47 31.12.2014 iii) 18636.85 8,22,00,193.00 4410.63 01.01.2015 to 31.01.2015 iv) 01.02.2015 to 27038.12 10,41,21,892.00 3850.93 28.02.2015 v) 01.03.2015 to 34609.92 13,01,00,766.00 3759.06 31.03.2015 Total 113247.63 46,97,54,146.00 4148.03 Evidence (pages of Paper Book) i) Copy of purchase register of Guar seed of the appellant company (196-496) ii) Copy of audited financial statement of the appellant company (71) iii) Copy of bank statement of the appellant company (600-830) iv) Copy of assessment order under sub section (3) of section 15 of HVAT Act 2003 (163-165)

4.2 It is submitted that appellant company had also purchased through auction in mandi Ellenabad from various un-related parties:

Sr. Period Amount Average Rate Weight (in No. After Mandi Before After Before Mandi qtls.) Exps. Mandi Mandi Exps. Exp. Exps. i) 3054.50 1,39,18,089.00 1,43,00,015.00 4556.59 4681.62 18.11.2014 to 30.11.2014 ii) 7926.08 3,41,56,296.00 3,50,94,463.00 4309.36 4427.72 01.12.2014 to 31.12.2014 iii) 4276.00 1,80,65,967.00 1,85,64,095.00 " 4224.97 4341.46 01.01.2015 to 31.01.2015 iv) 3765.00 1,40,57,850.00 1,44,49,570.00 3733.82 3837.87 01.02.2015 to 28.02.2015 v) 1285.50 45,79,550.00 47,07,575.00 3562.47 3662.06 01.03.2015 to 31.03.2015 Total 20307.08 8,47,77,752.00 8,71,15,718.00 4174.79 4289.92

5 It is submitted that following findings of learned Assessing Officer is also incorrect and, misconceived:

"in respect of Guwar Churi which is purchased as well as sold by the assessee, against more than 100% increase in purchase rate post survey (from Rs. 1080/-pre survey to Rs. 2215/- post survey), there has been only 20% increase in selling rate (from Rs. 1353/- to 1639/-)". 5.1 It is submitted that there are two by- products manufactured by the appellant company i.e. Guar Churi and Guar Korma. The observation of learned Assessing Officer is misconceived that Guar Churi is purchase of Rs. 2215/- per qtl. in post survey period. Infact appellant company only purchased Guar Korma in the month of March' 2015. There is no purchase of Guar Korma and Guar Churi in any other month in the year. Price of Guar Korma was higher in comparison to Guar Churi in the instant year. The learned Assessing Officer has applied joint average rate of Guwar Churi and Guwar Korma. Both are different and distinguished products. The details of purchase and sales of both the products are as under:

i) Purchased of Guar Korma from 18.11.2014 to 31.03.2015

Period Amount Sr. No. Weight (in Average Rate qtls) i) 0 0 0 18.11.2014 to 30.11.2014 ii) 0 0 0 01.12.2014 to 31.12.2014 iii) 0 0 0 01.01.2015 to 31.01.2015 iv) 0 0 0 01.02.2015 to 28.02.2015 v) 2206 44,43,290 2215 01.03.2015 to 31.03.2015 Total 2206 44,43,290 2215

ii) Sale of Guar korma from 18.11.2014 to 31.03.2015

Period Amount Weight (in Average Sr. qtls) Rate

No. i) 4454.50 61,81,993.00 1387.81 18.11.2014 to 30.11.2014 ii) 10708.45 1,71,89,957.00 1605.27 01.12.2014 to 31.12.2014 iii) 10632.45 1,97,86,546.00 1860.96 01.01.2015 to 31.01.2015 iv) 9377.20 1,85,27,809.00 1975.84 01.02.2015 to 28.02.2015 v) 9052.10 2,03,79,357.00 2251.34 01.03.2015 to

31.03.2015 Total 44224.70 8,20,65,662.00 1855.65

iii) Sale of Guar churi from 18.11.2014 to 31.03.2015

Period Amount Sr. Weight (in Average qtls) No. Rate i) 5240.15 5542361.00 1057.67 18.11.2014 to 30.11.2014 ii) 11769.28 13347725.00 1134.12 01.12.2014 to 31.12.2014 i") 9676.93 14066820.00 1453.64 01.01.2015 to 31.01.2015 iv) 10332.70 16460884.00 1593.09 01.02.2015 to 28.02.2015 v) 11894.87 21202569.00 1782.50 01.03.2015 to 31.03.2015 Total 48913.93 70620359.00 1443.36

5.2 In view of above, it is submitted that Guar korma purchased in March 2015 of Rs. 2215 per qtl was sold in march 2015 of Rs. 2251.34 per qtl,; and therefore there was higher realization;

6.1 It was further submitted that the assessee maintained the proper books of accounts which were duly audited under section 44AB of the Act and the quantitative details were summarized, there were sales of Rs. 231.89 crores and purchases of Rs. 213.82 crores. It was stated that there was no direct evidence to dispute or deny any of the transaction, the bills were furnished during the course of assessment proceedings.

6.2 It was further submitted that the assessee, on the basis of the books of account declared net profit as per P&L Account at Rs. 28,66,228/- and such profit had been accepted as such, the purchases were duly supported by the bills and vouchers and the trading result had been accepted in the preceding years under section 143(3) of the Act. The G.P. rate declared by the assessee was at 2.88% and 2.36% in the A.Y. 2012-13 and 2013-14 respectively whereas

the G.P rate for the year under consideration was at 2.98%. Therefore the A.O. was unjustified in invoking the provisions of Section 145(3) of the Act. The reliance was placed on the following case laws:

• CIT Vs. Excel Industries Ltd. 358 ITR 295 (SC) • S.N. Namasivayam Chettial Vs. CIT 38 ITR 579 (SC) • CIT Vs. Paradise Holdiays 325 ITR 13 (Del) • CIT Vs. M/s Rice India Exports Pvt. Ltd. in ITA No. 999/2010 dated 03.08.2010 • CIT Vs. Smt. Poonam Rani 326 ITR 223 (Del) • CIT Vs. Jas Jack Elegance Exports 324 ITR 95 • ITO Vs. Somsons & Co., 148 Taxman 21 (Asr) (Mag) • Pandit Bors. Vs. CIT 26 ITR 159 (Punj) • S. Veeriah Reddiar Vs. CIT 38 ITR 152 (Ker) • P. Venkanna Vs. CIT 72 ITR 328 (Mys) • R.V.S. and Sons Dairy Farm Vs. CIT 257 ITR 764 (Mad) • CIT Vs. Superior Crafts in ITA No. 244/2009, 547/2011, 548/2011 and 615/2011(Del) dt. 06/03/2012 • CIT Vs. Jacksons House 198 Taxman 385 (Del) • CIT Vs. Winner Constructions (P) Ltd. in ITA No. 796/2011(Del) dt. 03/05/2012 • Lunar Electricals Vs. ACIT in ITA No. 195/2006(Del) dt. 22/03/2012 • Uma Charan Shaw & Bros. Co. Vs. CIT 37 ITR 271 (SC) • Omar Salay Mohammad Sait Vs. CIT 37 ITR 151 (SC) • Dhirajlal Girdharilal Vs. CIT, Bombay 26 ITR 736 (SC) • Dhakeshwari Cotton Mills Ltd. Vs. CIT 26 ITR 775 (SC) • Lal Chand Bhagat Ambica Ram Vs. CIT 37 ITR 288 • CIT Vs. Genesis Commet (P) Ltd. 163 Taxman 482 (Del) • Nathu Ram Prem Chand Vs. CIT 49 ITR 561 (All) • EMC Machine Works Vs. CIT 49 ITR 650 (All) • CIT Vs. Orissa Corporation (P) Ltd. 159 ITR 78 (SC) • State of Orissa Vs. Maharaja Shri B.P. Singh Deo 76 ITR 690(SC) • State of Kerala Vs. C. Velukutty 60 ITR 239 (SC) • Kachwala Germs Vs. CIT 288 ITR 10 (SC)

6.3 The assessee also submitted to the Ld. CIT(A) that the replies were furnished to the A.O. during the course of assessment proceedings. The said submission of the assessee has been incorporated by the Ld. CIT(A) at page no. 18 to 21 of the impugned order which is reproduced verbatim as under:

i) Reply dated 15.11.2017 (page of Paper Book) "1. Justification of G.P./N.P. Ratio Assess is running agro based industry and prices of finished goods and raw material fluctuates on day to day basis. These prices depends upon the demand and supply in India as well as in abroad. Further during the year under consideration the prices of Guwar, Guwar Giri, Churi and Korma have been smashed down. Complete quantitative records of raw material and finished goods have been kept. All the purchases are made on competitive prices. Further all the purchases, sales and expenses are fully supported by evidences, therefore declared G.P/N.P should be accepted. Also G.P Ratio is better than from the previous year. 2 . Justification of Yield Yield shown by the assessee is not low at all. During the year under consideration yield was generally low in. the area. Assessee unit is agro based industry and quality of raw materials found to vary from year to year and area to area. Quality of raw material is affected by so many reasons prevailing during the period of ripping of crop. Yield is effected by the quality of raw material crushed/ginned and so many other reasons such as purchase rates of raw material from various shops in the market by various delivery clerks involved in the process of purchases, period and duration of crushing/ginning process, extent of moisture in the raw material and last but not the least condition of Plant 8B Machinery. Yield of raw material vary year to year, area to area and even within the same area depending upon various conditions. Further all the purchases/sales are fully supported by purchase/sales bills and complete quantity records of goods purchased, manufactured and sold have been kept by the assessee. Keeping in view the above facts, yield shown by the assessee should be accepted. Further during the year Yield of finished goods are also better as compared to the previous year." ii) Another reply dated 8.12.2017 (pages of Paper Book)

That on 19/09/2015, the assessee had furnished a return of income declaring an income of Rs. 39,73,107/- for the financial year 2014-15 relevant to assessment year 2015-16. That perusal of the return of income would show that the assessee had offered a sum of Rs. 1,05,19,500/- as income from business on account of statement made in the course of survey under section 133A of the Act. It is thus submitted

that the entire sum declared as income has been offered to tax separately in the Profit & Loss Account furnished alongwith return of income.

2866228 Net Profit as per Profit 8B LOSS Account -10519500 Less: Income Surrender Credited to P 8B L A/c Net Loss -7653272

Net Loss as per Profit 8B LOSS Account 7653272 Less: Depreciation As per companies Act -3189699 Net Loss 4463573 Add. Depreciation As per I.T. Tax 2082820 6546393

"Set off of loss from one source against income from another source under the same head of income. "70.(1) Save as otherwise provided7 in this act, where the net result for any assessment year in respect of any source falling under any head of income, other than " Capital gains", is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. (2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the - income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset. (3) Where the result of the computation made for any assessment year under section 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for

the assessment year in respect of any other capital asset not* being a short term capital asset." 6. It is submitted that there is no restriction for set off of income and loss under the same head as income under the head from business or profession and therefore, since set off of loss of Rs. 65,46,393/- is eligible under section 70 of the Act against income of Rs. 105,19,500/-, therefore, the income declared by the assessee of Rs. 39,73,107/- in the return of income filed in section 139(1) of the Act may kindly be accepted as such. Should your goodself require any further evidence to verify the claim made by the assessee either in respect of loss or in ^ respect of income declared, the assessee still ready to furnish the same. It is submitted that assessee has placed on record everything for your kind perusal. The assessee hastens to add here that your goodself is aware that there was a loss in the manufacturing of Guwar Gum. It is submitted that at the time of Survey selling price of price of Guwar Gum was Rs. 14500/- per qtls. Which has been reduced to Rs. 11700/- per qtl. Within one month of survey, Company has 5173.67 qtl Stock of Guwar Gum and 13858.05 qtls. Guwar at the time of Survey. From crushing of 13858.05 Guwar about 4630 qtls, Guwar Gum was manufactured. Due to recession in market average realization of Guwar Gum was Rs. 13071.63 per qtl. Upto 18.12.2014. The above facts are also verifiable from the sales bills, copies of which are enclosed. It is submitted that the transactions of the assessee are with identifiable and verifiable parties whose names and addresses have also been placed on record and confirmations have also been placed on record. You are therefore, requested to kindly accept the income declared and draw no adverse inference "

11 In view of the aforesaid, it is submitted that, the learned Assessing Officer has proceeded mechanically to reject the books of accounts and, make the impugned addition. 12 Ground No. 4 of the Grounds of Appeal relates to denial of fair and proper opportunity of being heard and as such, the income so determined in an arbitrary manner and on totally unjustifiable, whimsical, subjective and irrelevant consideration which is not in accordance with law. The appellant has already submitted above that the learned Assessing Officer has proceeded in an arbitrary manner and made the highly subjective addition in the impugned order of assessment and therefore, may kindly be deleted. 13 Ground No 5 of Grounds of Appeal relates to levy of interest u/s 234B of the Act and u/s 234C of the Act is not leviable on the facts of the case. 14 In view of the aforesaid submission, it is therefore prayed that it be held that addition made by the learned Assessing Officer alongwith interest levied may kindly be deleted and appeal of the appellant company may be allowed. Should your goodself require any further information, the appellant company shall be too willing to furnish the same."

6.4 The Ld. CIT(A) forwarded the submissions of the assessee to the A.O. for his comments. In response the A.O. reported as under:

6.5 The aforesaid report of the A.O. was provided to the assessee for its comments. In response the assessee submitted in the rejoinder as under:

4.2 It is submitted that the learned Assessing Officer in the aforesaid Remand Report has not objected to the admission of additional evidence under rule 46A of the Income Tax Rules, 1961 and therefore having not so done it is prayed that the additional evidence as furnished may kindly be admitted under rule 46A of the Rules 1962 in terms of the application filed by the appellant company. On merits perusal of the comments of the learned Assessing Officer would show that the learned Assessing Officer has observed that in view of the findings in the order of assessment the learned Assessing Officer both in the order of the assessment and now in the Remand Report had rejected the books of accounts u/s 145(3) of the Act and made an addition of Rs. 91,99,543/- to the income of the appellant company. He has submitted that the recordings to the additional evidence, the market rate of the Guwar on 22.12.2014 was Rs. 3,951/- per quintal to Rs. 4,421/- per quintal. He has alleged that though the lowest rate was 3,951/- per quintal on 22.12.2014 but assessee had purchased the guwar at higher rates of Rs. 4,250/-, 4,096/-, 4,406/- and Rs. 4,400/- per quintal according to him the aforesaid transactions should have been undertaken at the lowest rate though it does not dispute that the rates on which appellant had undertaken transactions were within prevailing market price on the said date even as per the rates quoted by market committee Ellenabad.

The reliance was placed on the following case laws: • Dalmia Cement (P) Ltd. Vs. CIT 254 ITR 377 (Del) • S.A. Builders Ltd. 288 ITR 1 (SC)

6.6 The Ld. CIT after considering the submissions of the assessee and Remand Report of the A.O. sustained the addition by observing as under:

The facts of the case, the basis of addition made by the AO after rejection of books of accounts and the arguments of the AR during the course of appellate proceedings have been considered. The AR has contended that the AO has erroneously held that the purchases have been taken at higher rate as comparison to market rate. As per the AR, the low GP is due to recession in Guwargum industry and all the purchases were duly recorded in the purchase register, debited in the books of accounts and submitted that there is no parameter of fixed price of commodity on the same date. As per the AR, the purchases are duly support by bills and vouchers from identifiable parties. The AR contended that the AO has not pointed out any specific defect or discrepancy in the account books maintained by the appellant company. It is also submitted that there is no basis for GP rate adopted at 2.75% by the AO. The AR has argued that fall in GP only cannot be the reason for rejecting the books and the AO has not pointed out any defect in the books of accounts maintained by the assessee company which were duly audited under the Companies Act and Income Tax Act. It is also submitted that various transactions were undertaken by the assessee company in the ordinary course of its business. The AR placed reliance on the order of Hon'ble Delhi High Court in the case of Dalmia Cement (P.) Ltd. vs. CIT 254 ITR 377 and submitted that the findings have been upheld by the Apex court in the case of S. A. Builders Ltd. 288 ITR 1. The AR has reproduced the observations

whereby it was held that the authorities must not look at the matter from their point of view but that of a prudent businessman. It was also held that the funds were transferred to sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. However in the present case, both these elements are missing and the argument about 'decision as a prudent businessman' is not applicable as the assessee has shown purchases at a higher rate and sale at a lower rate which no prudent businessman would undertake. Also, no commercial expediency involvements, have been reflected in the actions of the company with the parties who are stated/accepted to be independent entities. Thus, the case laws relied upon by the AR is otno^help as the facts of the present case are totally different from the facts in the case of S.A. Builders Ltd. or M/s. Dalmia Cements (P.) Ltd. The AO has mentioned about the prevailing market rate in the remand report submitted in response to additional evidence filed by the Assessee Company during the appellate proceedings which indicate that the alleged transactions undertaken by the assessee were not genuine and the loss booked was a bogus claim, with a view to reduce the tax incidence and avoid payment of due taxes. Another argument of the AR is that the purchase rate were higher because superior quality was purchased by the assessee. If, this argument is accepted, then it is also true that the superior quality will fetch better rates on sale and not lower rate as claimed by the assessee.

It is also relevant to note that there was a survey operation conducted in this case on 18.11.2014 and the AO has mentioned that the assessee offered an additional income of Rs. 1,05,19,500/- on account of discrepancies noticed during the survey operations. However, at the time of filing the return on 19.09.2015, the assessee declared an income of Rs. 39,73,110/- under the head 'income from business & profession'. This was much lower than even the surrender made during the survey. During the assessment, it was noticed from the books that the assessee has shown purchases at higher price in respect of some commodities against the prevailing market rate, similarly the assessee has shown sale at lower price as compare to market rate and thus the GP rate has been shown to have declined by 0.63% (i.e. 2.3% this year as compare to 2.98% shown in last year). It is also relevant that this decline has been shown even after considering the findings of the survey in respect of unaccounted stock found during the course of survey. In the normal course, the GP should have increased as a result of unaccounted stock found during the survey and surrender made by the assessee on this account but the assessee has grossly manipulated its books to reduce the GP rate even below last year's figure. The reasons given by the assessee for decrease in GP rate on account of fall in rate of Guwargum does not seem to hold good as in the next year (i.e. Assessment Year 2016-17) the assessee has shown GP rate of 3.48%. The AO also mentioned that numbers of discrepancies were found in respect of purchase & sale bills submitted during the assessment proceedings and in view of these, it was held that the assessee has manipulated its books to offset the findings of the survey and to reduce its tax liability. In view of these findings> the action of the AO in rejecting the books of accounts u/s 145(3) is justified. It is also relevant to note that the GP rates for Assessment Year 2013-14, 2014-15 and 2016-17, declared by the assessee company itself are 2.36%, 2.98% and 3.48% respectively and by following the trend, the AO was reasonable in applying the GP rate of 2.75% for Assessment Year 2015-16 under consideration. The AO in the remand report has duly explained how the assessee has taken only the higher rate of purchases out of ‘Guwar rate given by Market Committee, Ellenabad' on a particular day which

has vide variation. Similarly, the sales have been shown on a lower rate. No prudent businessman will sell the high quality products (purchased at a higher rate) at lower rate because the better quality should give better rates at the time of sale also. The AO has duly brought on record that the assessee has manipulated its accounts to show loss only for a limited period from 19.11.2014 to 31.03.2015 i.e. 'only during the limited post survey period' of the financial year 2014-15 relevant to assessment year 2016-17 when there was no such loss either in the past (i.e. assessment year 2014-15 where GP rate of 2.98% was declared by the assessee) or in the future (i.e. assessment year 2016-17 when the GP rate declared by the assessee was 3.48%). The AO has rightly mentioned that these facts confirmed that the assessee has manipulated its books of accounts to offset the income surrendered during the course of survey u/s 133A when discrepancies were found including the unaccounted stock. The fact that unaccounted stock was found during the course of survey u/s 133A negate the claim of the assessee that purchases are properly recorded in the books of accounts and also negate the claim that the books of accounts of the assessee give a true and fair picture of affairs of the business of the assessee. The findings of the survey u/s 133A cast doubt about the correctness and completeness of the accounts of the assessee and hence the AO was right in rejecting the books by invoking the provision of section 145(3) of the Income Tax Act, 1961 after giving a show cause to the assessee for rejection of books of accounts. The AO was also right in adopting the GP rate of 2.75% which gives the normal business profits shown year after year other than the surrendered income admitted during the survey u/s 133A of the Act, in respect of Financial Year 2014-15 relevant to Assessment Year 2015-16. In the given circumstances, the results of the assessee for other years are the most appropriate comparable which can be applied to arrive at the income of the year under consideration since the other factors will remains the same year after year. It is also important to mention that the AR has not denied the fact of survey u/s 133A and the findings that the excess stock was noticed during the course of survey which was not found recorded in the books of accounts of the assessee. Further, nothing has been brought on record that the assessee has not made the surrender of Rs. 1,05,19,500/- on the basis of discrepancies found during the course of survey u/s 133A. Once, a surrender was made, which was not retracted later on, the assessee should have honored the same and paid the taxes instead of showing loss during the post survey period to set-off the surrender with a view to avoid payment of taxes. When there was no loss either in past or in future, then the loss only shown during the post survey period is certainly doubtful as noted by the AO also. Under the facts and the circumstances of the case and in view of the discussion above, the action of the AO in rejecting the books of accounts of the assessee and computing the profit after applying GP rate of 2.75% (on the basis of GP rates declared by the assessee during the preceding and succeeding year and also taking into consideration the surrender of Rs. 1,05,19,500/- made by the assessee during survey u/s 133A of the Act) is found sustainable hence confirmed.

7.1. The Ld. Counsel for the assessee reiterated the submissions made before the authorities and further submitted that at the time of survey selling price of

guwar gum was Rs. 14500/- per quintal which had been reduced to Rs. 11,700/- per quintal within one month of survey, due to recession in market average realization price of guwar gum was Rs. 13071.63 per quintal upto 18/12/2014 i.e; the date of the survey.

7.2 It was further submitted that all the details were furnished to the A.O. explaining the reasons for declining in prices which resulted lower valuation of the stock which was beyond the control of the assessee, since there was fluctuation of price in the market. It was further submitted that the A.O. although compared the market rate with the purchase rate from three firms but there was no findings that there was any collusion. It was also submitted that the A.O. although quoted different rates of different parties but no verification was made as to whether the said rates of guwar were for the same quality, reference was made to para 3.3 of the assessment order wherein the A.O. mentioned the purchase rates from different parties. It was stated that no specific defect was pointed out in the books of account and when there was fluctuation in prices, the G.P. rate of different years had no relevance. It was submitted that the A.O. while adopting the G.P. Rate of 2.75% had not given any cogent reason and the estimate of the G.P. rate was without any basis. It was contended that the A.O. had accepted the decline in the rate and there was no reason to doubt the G.P. rate of 2.35% declared by the Assessee on the basis of books of account in which no specific defect was pointed out.

7.3 It was further submitted that the assessee vide letter dt. 08/12/2017 explained to the A.O. that due to recession in the market average realization rate of guwar gum came to Rs 13071.63 per quintal up to the date of survey on 18/12/2014 and the said fact was verifiable from the sale bills, copies of which were furnished to the A.O. and the transactions of the assessee were with the identifiable and verifiable parties whose names and addresses had been placed on record alongwith valuation received from them, however, the A.O. had not taken any step for verification. The Ld. Counsel for the Assesee

submitted that there were fluctuation in the rate of guwar gum, a reference was made to page no. 831 to 834 of the assessee’s compilation which are the copies of the certificates issued by the market committee, Ellenabad, District Sirsa, showing the difference in the rates on various dates which clearly established that the rates were fluctuating and were not constant. It was pointed out that on the said certificates furnished to the A.O. by the assessee there was no adverse comments.

7.4 It was submitted that the average rate of guwar gum during the assessment year 2013-14 was Rs. 34622.74 which came down to Rs. 17,733.63 during the A.Y. 2014-15 and during the period 01/03/2015 to 31/03/2015 it was Rs. 8797.99. The said fluctuation in the rate was beyond the control of the assessee. The Ld. Counsel for the assessee furnished the Chart showing details of the purchases on different dates which reads as under:

Sr. Date Maximum Rate Minimum Rate Difference No. (Per qtl.) (A) (Per qtl.) (B) C=(A-B) i) 01.04.2014 4579 4171 408 ii) 05.04.2014 4440 4241 199 iii) 11.04.2014 4384 3825 559 iv) 05.05.2014 5384 5186 198 499 v) 08.05.2014 5164 4665 4688 vi) 21.05.2014 4979 291 vii) 23.05.2014 5120 4930 190 viii) 29.05.2014 4985 4685 300 ix) 03.06.2014 4900 4581 319 x) 06.06.2014 4912 4615 297 xi) 16.06.2014 4940 4681 259 xii) 23.06.2014 5149 4636 513 xiii) 27.06.2014 5459 5246 213

7.5 It was contended that all the purchase were made through auction in the market from various unrelated parties and the said auction was monitored by the market committee which is controlled by the Haryana Government and the price depends on the quality of guwar. It was stated that even the A.O. himself admitted while quoting market rate captured from E-Net site i.e; Agro market

rate, that the minimum rate was Rs. 3720/- per quintal and the maximum rate was Rs. 4325/- per quintal. The assessee drew our attention towards page no. 196 to 496 of the assessee’s paper book which are the copies of purchase register of Guar seed and submitted that the same were furnished to the A.O. in which no short comings was pointed out.

7.6 It was contended that the assessee was engaged in the business of manufacturing of Cotton seed, oil cake, Guar Giri, Guar Churi and korma etc for last preceding 11 years and maintained in the course of its business following books of accounts:

a) Cash Book b) Journal c) Ledger d) Purchase Book e) Sale Book f) Bank Book g) Stock Register

7.7 It was further stated that the books of accounts were duly, audited under section 44AB of the Act and the quantitative details is placed at page no. 16 of the assessee’s paper book. It was submitted that the A.O. accepted the sale of Rs. 231.89 Crores and purchases of Rs. 213.82 Crores which are recorded in the books of account and the assessee had declared net profit of Rs. 2866228/- in its books of account which has not been doubted, the purchases shown by the assessee were supported by the bills & vouchers, the trading results as per following details were accepted in the preceding year:

Sr.No. Assessment Year G.P. declared by G.P. (in %) Assessment u/s assessee(in Rs.)

i) 2012-13 5,24,15,963/- 2.88 143(3)

Ii) 2013-14 5,48,73,714/- 2.36 143(3)

iii) 2014-15 8,23,51,135/- 2.98 143(3)

Therefore the A.O. was not justified in rejecting the books of account and making the arbitrary addition on the basis of presumption and the Ld. CIT(A) was not justified in confirming the action of the A.O. The reliance was placed on the following case laws:

• CIT Vs. Excel Industries Ltd. 358 ITR 295 (SC) • Parashuram Pottery Works Ltd. Vs. ITO [1977] 106 ITR 1 (SC) • CIT Vs. Berger Paints 266 ITR 99(SC) • UOI Vs. Kuomidini Narayana Dalal and Another 249 ITR 219 (SC) • UOI Vs. Satish Panna Lal Shah 249 ITR 221 (SC) • CIT Vs. J.K Charitable Trust 308 ITR 161 (SC) • S.N. Namasivayam Chettial Vs. CIT 38 ITR 579 (SC) • CIT Vs. Paradise Holidays 325 ITR 13 (Del) • CIT Vs. M/s Rice India Exports Pvt. Ltd. in ITA NO. 999/2010 dt. 03/08/2010 • CIT Vs. Smt. Poonam Rani 326 ITR 223 (Del) • CIT Vs. Jas Jack Elegance Exports 324 ITR 95 (Del) • ITO Vs. Somsons & Co. 148 Taxman 21 (Asr)(Mag) • Pandit Bros Vs. CIT 26 ITR 159 (Punj) • S. Veeriah Reddiar Vs. CIT 38 ITR 152 (Ker) • P. Venkanna Vs. CIT 72 ITR 328 (Mys) • R.V.S and sons Dairy Farm Vs. CIT 257 ITR 764 (Mad) • CIT Vs. Superior Crafts in ITA No. 244/2009, 547/2011, 548/2011 and 615/2011(Del) dt. 06/03/2012 • CIT Vs. Jacksons House 198 Taxman 385 (Del) • CIT Vs. Winner Constructions (P) Ltd. in ITA No. 796/2011(Del) dt. 03/05/2012 • Lunar Electricals Vs. ACIT in ITA No. 195/2006(Del) dt. 2/03/2012 • Uma Charan Shaw & Bros. Co. Vs. CIT 37 ITR 271 (SC) • Omar Salay Mohammad Sait Vs. CIT 37 ITR 151 (SC) • Dhirajlal Girdharilal Vs. CIT, Bombay 26 ITR 736 (SC) • Dhakeshwari Cotton Mills Ltd. Vs. CIT 26 ITR 775 (SC) • Lal Chand Bhagat Ambica Ram Vs. CIT 37 ITR 288 • CIT Vs. Genesis Commet (P) Ltd. 163 Taxman 482 (Del) • Nathu Ram Prem Chand Vs. CIT 49 ITR 561 (All) • EMC Machine Works Vs. CIT reported in 49 ITR 650 (All) • CIT Vs. Jitin Gupta decided on 03.03.2009 • CIT Vs. Orissa Corpn(P) Ltd. 159 ITR 78 (SC)

• State of Orissa Vs. Maharaja Shri B.P. Singh Deo 76 ITR 690 (SC) • State of Kerala Vs. C. Velukutty 60 ITR 239 (SC) • Kachwala Gems Vs. CIT 288 ITR 10 (SC)

purchases & sales and the A.O. himself admitted that there were fluctuation in the rates of purchases made from different parties by the assessee. The said facts have been mentioned in para 3.3 of the assessment order. In the instant case the A.O. neither pointed out any specific defect in the purchase and sale nor the yield declared by the assessee was doubted. So there was no reason to reject the books of account simply on this basis that there was decline in the profit post survey.

9.1 On a similar issue the Hon'ble jurisdictional High court in the case of Pandit Bros Vs. CIT, Delhi(supra) held as under:

“The assessee carrying on a business returned an income and filed a statement of profit and loss. The Income-tax Officer however added a certain sum to the profit as given by the assessee on the ground that the profit disclosed by him was low and there was no stock register. The assessee maintained regular accounts of his purchases and sales and the Income-tax Officer did not say that the method employed by the assessee was such that in his opinion” the income, profits and gains could not properly be deduced therefrom”. Held, that there was no definite finding by the Income-tax Officer that the case fell within the proviso to Section 13. Even if such finding were to be implied from his order it could not be said that there was material before him which would enable him to come to such a finding. The fact that the profits appeared to him to be insufficient and the fact that no stock register was maintained by the assessee were not materials upon which such a finding could be given, but they were circumstances which might provoke an enquiry. The Income-tax Officer must discover evidence or material aliunde before he could give such a finding. In increasing the taxable income the Income-tax Officer did not adopt any method or basis and he was not acting according to the provisions of the statute.”

9.2 Similarly Hon'ble Delhi High Court in the case of CIT Vs. Paradise Holidays (supra) held as under:

“ that the question as to whether the accounts produced by the assessee were defective / incomplete or not was a question of fact. The Commissioner(Appeals) as well as the Tribunal had found that the accounts maintained by the assessee were neither defective nor incomplete. Even the Assessing Officer had not found any fault as such with the system of accounting being followed by the assessee. The Tribunal which was the final fact finding authority had held that considering the nature of the business of the assessee, it was not obligatory to enter into a formal agreement with the foreign principal. Hence, non production of formal agreements with the foreign principals would not render the accounts of the assessee incomplete and would not give justification to the Assessing Officer to reject them under section 145(3) of the Act. Similarly, the explanation given by the assessee for the tour expenses not reconciling with the tour itinerary having been accepted, both by the Commissioner (Appeals) as well as by the Tribunal, the accounts of the assessee could not be said to be defective on this ground and, therefore, could not have been rejected. If any particular expense claimed by the assessee remained unverified, the Assessing Officer could have disallowed that particular expense. But, that

by itself could not be a ground for rejection of accounts as a whole under section 145(3) of the Act. Since the finding of fact recorded by the Tribunal was not perverse no interference was needed.”

9.3 Similar view has been taken by the Hon'ble Delhi High Court in the case of CIT Vs. Smt. Poonam Rani (supra) held as under:

“ that the Assessing Officer had not pointed out any particular defect or discrepancy in the account books maintained by the assessee. The Assessing Officer had no material before him to treat the accounts of the assessee as defective or incomplete. The Assessing Officer had no material before him on the basis of which it could be said that the weight of the wire did not increase even marginally during the process of enamelling. Therefore, he had no justification in law to reject the explanation given by the assessee in this regard. The fall in gross profit ratio, in the absence of any cogent reasons could not by itself be a ground to hold that proper income of the assessee could not be deducted from the accounts maintained by the assessee and consequently, could not have been a ground to reject the accounts invoking section 145(3) of the Act. There was no finding that the actual cost of the raw material or the actual cost of processing carried out purchased by the assessee was less than what was declared in the account books. There was no finding by the Assessing Officer that the actual quantity of the finished product produced by the assessee was more than what it was shown in the account books or that the finished product was sold by the assessee at a price higher than what was declared in the account books. In these circumstances, the Commissioner (Appeals) and the Tribunal were justified in holding that the Assessing Officer could not have increased the gross profit ratio merely because it was low as compared to the gross profit ratio of the preceding year. If the stock register was not maintained by the assessee that may put the Assessing Officer on guard against the falsity of the return made by the assessee and persuade him to carefully scrutinize the account books of the assessee. But the absence of one register alone did not amount to such a material as would lead to the conclusion that the account books were incomplete or inaccurate. Similarly, a low rate of gross profit, in the absence of any material pointing towards falsehood of the account books, could not by itself be a ground to reject the account books under section 145(3) of the Act.” 9.4 In the present case also the assessee maintained proper books of account which were audited and no defect was pointed out in those books of account maintained by the assessee in regular course of its business, no discrepancy was found in the method of accounting followed by the assessee consistently. It was not a case of the A.O. that the purchase were inflated or the sale were suppressed and even no instance was pointed out that either the sale or purchase were without any sale bill / purchase bill, the expenses incurred by the assessee were also accepted, even the yield declared by the assessee was not doubted and no difference was pointed out in the quantitative details relating to the purchases and sales. However, the A.O. doubted the G.P. rate only on this basis that there was fluctuation in the rates of purchases.

9.5 As regards to the fluctuation in the purchase rate of the Guar the assessee furnished the explanation before the A.O. which was not rebutted. The said explanation was supported by the certificate given by the market committee, Ellenabad district Sirsa. Therefore only on this basis that there was some reduction in the G.P. rate for the year under section in comparison to the succeeding year, the rejection of the books of account under section 143(3) of the Act and working out of the income by applying the G.P. rate was not justified. We therefore keeping in view the facts of this case as discussed herein above and the ratio laid down in the aforesaid referred to cases, delete the impugned addition made by the A.O. and sustained by the Ld. CIT(A).

(Order pronounced in the open Court on 11/10/2021)

Sd/- Sd/-

आर.एल. नेगी एन.के.सैनी, (R.L. NEGI ) ( N.K. SAINI) �या�यक सद�य/ Judicial Member उपा�य� / VICE PRESIDENT AG Date: 11/10/2021

आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :

आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar