ACIT, JODHPUR vs. M/S. HASWANI HANDICRAFTS, JODHPUR

O R D E R PER BENCH The present appeal has been filed by the Revenue against the order of the ld. CIT(A)-2, Jodhpur dated 20/02/2017 for A.Y. 2012-13 wherein the Revenue has raised following grounds of appeal:

“1. Whether on the facts and in the circumstances of the case the CIT(A) was right in deleting the addition of Rs. 2,48,49,185/- made by the Assessing Officer u/s 69B of the IT. Act, on account of excess stock found during the course of search & seizure proceedings. 2. Whether on the facts and in the circumstances of the case the CIT(A) was right in holding that the excess stock of Rs.

2 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. 2,48,49,185/-surrendered by the assessee during the course of search represents business profit of the assessee in view of the decision of the Hon'ble High court in assessee's case for the A.Y. 2002-03 when the Hon'ble High Court has only held that the excess stock found during the course of survey and surrendered as business income, has to be treated as profits of the business for the purpose of deduction u/s 80HHC of the Act.

3. Whether on the facts and in the circumstances of the case the CIT (A) was right in deleting G. P. addition of Rs. 59,50,538/- made by the Assessing Officer by applying average GP of the last three previous years after duly rejecting the books of accounts of the assessee when the Ld. CIT(A) has not commented adversely on rejection of Books of accounts by the Assessing Officer and thus impliedly approving the action of the Assessing Officer in rejecting Books of accounts."

2. The hearing of the appeal was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic.

4. Grounds No. 1 and 2 of the appeal are interrelated and interlinked and relate to challenging the order of the ld. CIT(A) in deleting the addition of Rs. 2,48,49,185/- on account of excess stock found during the course of search and seizure proceedings, therefore, the same are heard together and are being disposed off by this common order.

5. The ld. DR has relied on the order of the A.O. and further submitted that search and seizure action was carried out at the premises of the assessee group and various assets had been found and seized at the time of search and seizure action. He has further submitted that statement of partners of assessee were recorded and after making

4 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. detailed enquiry and verifications, the A.O. made addition on the basis of excess stock found during the course of search.

6. At the outset, the ld. AR appearing on behalf of the assessee has reiterated the same arguments as were raised before the ld. CIT(A) and has further submitted that excess stock of Rs. 2,48,49,185.00 had been surrendered and the same has been declared in the return so filed for the year under consideration. The assessee had disclosed the said surrendered excess stock in the manufacturing and trading account below the regular closing stock, the AO has appreciated the same in the assessment order itself. He has submitted that the AO has wrongly mentioned that the assessee has offered the said stock as its undisclosed investment separately and offered the same for taxation during the search. Whereas the assessee has not accepted and offered the said stock as its undisclosed investment. The assessee has accepted that the said excess stock as undisclosed income of the year under consideration for the concern firm. He has further submitted that the excess stock as his income along with income as computed normally. But the A.O. has nowhere accepted that it is his undisclosed investment. He has further submitted that in assessee’s own case in D.B. Income Tax Appeal No. 101/2007 decision dated 29/01/2013, the Hon’ble Jurisdictional High Court has held that the excess stock

5 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. surrendered during survey is to be treated as business income. He has relied on the order of the ld. CIT(A).

“4.2 I have considered the order of the AO and the arguments of the A/R. In my view there is merit in the arguments of the A/R.

4.2.1 As mentioned above the appellant has brought the excess stock found during search into the books of account in manufacturing and trading account. Thus, the appellant has honoured his surrender made u/s 132(4). Normally stock is piled up from the profits earned from the regular business. There is nothing on record to indicate that excess stock found during search is not acquired from the profits earned by the appellant from the business. Therefore, there is no logic is holding the excess stock is investment from undisclosed sources attracting Sec. 69B of the Act.

4.3 In this connection it may be pointed out that in the case of the appellant a survey u/s 133A of the Act was conducted during the previous year relevant to assessment year 2002- 03 during the course of which, excess stock of the value of Rs. 10,49,066/-. The same was disclosed by the appellant in the books of account as surrendered income. The AO however, denied deduction u/s 80HHC on the amount of 6 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. excess stock valuation as mentioned above. In appeal the ITAT decided the issue in favour of the appellant. In appeal by the Revenue u/s 260A of the Act the Hon'ble High Court vide order dated 29/01/2013 in DBITA no.101/2007 confirmed the order of ITAT and dismissed Revenue's appeal. Relevant portion of the decision is reproduced below:-

"

13. Therefore, we are of the considered opinion that the learned ITAT was justified in allowing the deduction under section 80HHC of the Act on the excess stock valuation of Rs. 10,49,066/- found during the course of survey and surrendered as business income of the assessment year and the same being treated as 'profits of business' for the relevant year, were eligible for the deduction under section 80HHC to the extent prescribed under sub-section (1B) of Section 80HHC of the said Act. The appeal of the Revenue, therefore, is liable to be dismissed and substantial question of law framed above, is accordingly answered in favour of respondent and against the appellant Revenue." 4.4 The crux of the issue involved in the year under appeal is similar to that involved in the A.Y. 2002-03. As in the case of survey in the year relevant to the A.Y. 2002-03 excess stock was found during search. The Hon'ble High Court (supra) has held that the excess stock found and surrendered has to be treated as 'profits of business'. Therefore, following the said judgment of the jurisdictional Court in appellant's own case I hold that the AO was not justified in treating the excess stock valuation as unexplained investment u/s 69B and making addition separately. Addition so made is deleted and 7 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. the AO is directed to treat the impugned stock as profits of business and re-compute the total income accordingly.” In view of the above facts and circumstances and considering the decision of the Hon’ble Jurisdictional High Court in assessee’s own case wherein the Hon’ble High Court has held that the excess stock surrendered during survey is to be treated as business income. The ld. CIT(A) has passed a reasoned and speaking order dealing with all material facts, therefore, we do not find any reason to interfere in the order of the ld. CIT(A) qua this issue. Hence, up hold the same.

8. Ground No. 3 of the appeal raised by the Revenue relates to challenging the order of the ld. CIT(A) in deleting the G.P. addition of Rs. 59,50,538/-. The ld DR has relied on the order of the A.O. and has further submitted that the A.O. in his assessment order has observed that the assessee has included the surrendered stock in the credit side of the manufacturing and trading account. He has further submitted that the amount of surrendered stock is to be excluded from the trading account and to be considered separately. Such amount of stock is therefore excluded out of the amount of gross profit. The ld DR has further submitted that the A.O. has observed that the book result of the assessee cannot be accepted. The rate of the G.P. disclosed by the assessee also cannot be relied upon. The 8 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. fair amount of G.P. calculated at the average of the last 3 previous years is to be applied. The ld. DR has relied on the order of the A.O.

9. On the contrary, the ld AR of the assessee has reiterated the same arguments as were raised before the ld. CIT(A) and also relied on the written submissions filed before the Bench and the same are reproduced below:

3. Quantum and value of purchases and sales were not disputed inasmuch as they were found to be fully vouched-Value of opening stock also cannot be disputed as it is the closing stock of the previous year-Inventory of closing stock was also not found to be incorrect- Thus, there being no dispute regarding purchases and sales.

9 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. As the last years assessment was completed U/s 143 (3) and the trading results has been accepted as it is, hence the value of opening stock is found to be correct, we have submitted that Inventory of closing stock during the assessment proceedings before and also submitted before your honor during previous date of hearing and no defect has been pointed out in such inventory list.

The assessment for all the preceding years has also been completed U/s 153A/143 (3) of Income Tax Act, with the same set of books of account and facts and circumstances, and no treading addition was made by the AO.

a. Value of Opening and Closing Stock is found to be correct (As no defect has been pointed out) b. The value of purchases and sales were not disputed inasmuch as they were found to be fully vouched. c. None of the Direct Expenses found to be fully vouched and accepted as genuine.

There is no evidence with the AO that the Assessee sold the goods over and above the price recorded in the books of accounts. The value of Opening Stock and Closing stock is accepted. All the expenses are found to be correct and genuine. Therefore, there is no justification in rejection of the books of account under the provisions of section 145 of the Income Tax Act.

Therefore, there is nothing on record to arrive at contrary finding as regards correctness, completeness of the books. Under such circumstances, there was no justification in rejection of the books of 10 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. accounts of the Assessee u/s. 145. With regard to above submissions, the ld AR has relied on the following decisions (i) Malani Ramjivan Jagannath v/s Assistant Commissioner of Income Tax 207 CTR 19 (Raj)

(ii) CIT vs Modi Enterprises 2 DTR 47 (RAJ)

7. The Assessee is maintaining complete regular books of accounts, vouchers i.e. cash book, ledger, purchase book, sales book, journal, Vouchers for Purchases and Sales, Vouchers for Exp,

11 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. which were being produced before the AO during the course of assessment proceedings. Your honor can also verify this fact from the assessment order. It is clearly mentioned by the AO himself at Page 2 Para No 3 of the assessment order that ...and filed relevant details and produced the computerized books of accounts comprising of cash book, journal, ledger etc. and the same where test checked w.r.t. the bills/documents/other material etc. produced

The AO has not pointed out any defect in such inventory list, and proceed for the estimation of GP.

10. In respect excess stock found at the time of search we have already surrendered and disclosed the same in return of income therefore

12 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. there was no reason for relying on the same for application of the provisions of section 145 of the Act.

When assessing officer had made separate addition n account of unrecorded expenses, he could not proceed to apply gross profit rate without pointing out any suppression on purchases and sales and without mentioning unrecorded sales and purchases. Therefore, for want of defects in regular books accounts, assessing officer was not justified in invoking provisions of section 145 (2).

He has relied on the following case laws: (i) ITO Vs. Shri Sanjeev Kumar Lodha 30 DTC 484 (Jod Trib) (ii) CIT v/s Jacksons House (Delhi) reported in 198 Taxman 385 (Delhi)

12. Before we come to the arguments for low GP we would like to explain how we calculate the GP, in case where the day to day stock register is being maintained then the calculation of closing stock is very easy but in case where the day to day stock register is not maintained. In such circumstances to calculate the GP first we have to calculate the Closing stock and according to the normal principle of accounting a list of goods/articles/items available on the last day of financial year has been prepared then the same is to be valued at cost or market price whichever is higher, the figure calculated will be the value of the closing stock. The same method has been adopt by the assessee that he prepare the list of stock at the end of the year and valued it and calculated the value of the closing stock, which reflected in trading account as closing stock and the Balance comes Gross Profit and on that basis he file return of income. We have 13 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. submitted that said inventory list before the AO during the assessment proceedings.

12. With reference to the low G. P. rate as compare to the preceding years it is submitted that we are maintaining the complete books of accounts and vouchers for purchases and sales are supported by the vouchers and all the purchases were made through account payee cheques only. It is further submitted that the decline in the GP rate is mainly due to sharp decline in our Export Turnover, and the fixed expenses are all most same as compare to the last year. Moreover the rate of power and fuel, labor, transportation and Raw material has been also increased, that all the above reasons cumulatively affected adversely to G. P. Rate.

(i) XX Taxworld 529 (Jaipur)

15 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. (ii) XX Taxworld 82 (Jaipur)

(iii) XX Taxworld 2 (Jaipur) (iv) 68 TTJ 027 (Jodhpur) (v) 66 TTJ 482 (Jodhpur)

(ii) Bank of Banda v/s H.C. Shrivastava, 122 Taxman 330 (Born)

16 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. authorities. From perusal of the record, we found that the ld. CIT(A) has deleted the addition so made by the A.O. by observing as under:

“5.2 I have considered the order of the AO and the submissions of the A/R.

5.2.1 At the outset it may be pointed out that even after excluding the surrendered stock value from the GP, how the remaining GP of Rs. 45,70,755/- on sales of Rs. 3,97,63,015/- is unreasonable and understated has not been brought out by the AO. For this very reason there is no basis for applying average GP rate of 3 previous years. 5.2.2 There is no material to suggest that sales were under-stated or purchases were inflated. AO has not pointed out any such transaction. There may be many reasons for decrease in turn over but it does not mean that the appellant has been understating sales especially when the appellant is engaged in export business.

5.2.3 Another important point to be noted is that the AO has excluded the surrendered excess stock value from the GP. The same is also not tenable in view of the High Court decision (supra) in appellant's own case where in it has been held that the surrendered stock value has to be treated as 'profits of business' for the relevant year. It cannot be ruled out that out of the excess stock declared, sales were not made during the year itself. I have already held above that the surrendered stock value has to be treated as business profits of the year. If the surrendered stock value is considered as business income then the GP rate on the declared & accepted sales would be more than 73%. May be such a GP is high but having regard to the principle laid down by the 17 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. Hon'ble Rajasthan High Court we cannot ignore such finding of the judiciary.

5.2.4 In my considered view there was no need or justification to disturb the manufacturing & trading account of the appellant and apply average GP rate as done by the AO.

5.2.5 Having regard to the facts and circumstances of the case, various judicial pronouncements cited by the A/R (supra) and above discussion, it is held that the trading addition made by the AO is not justified and same is hereby deleted.”

“The Assessing Officer had not pointed out any specific defect or discrepancy in the account books maintained by the assessee. The account books, admittedly, were produced before the Assessing Officer for his consideration. It was also not the finding of the Assessing Officer that the accounts of the assessee were not complete. As regards the assessee not maintained stock register in the form expected by the Assessing Officer, the assessee had given explanation which had been accepted not only by the Commissioner (Appeals) but also by the Tribunal and both of them had given a concurrent finding of fact that maintaining stock register of that nature was not feasible considering the nature of the business being run by the assessee engaged in the business of manufacturing readymade garments by purchasing fabric which was then subjected to embroidery, dyeing and finishing and was then converted into readymade garments by stitching. There is no provision in the Act or in the 18 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. Rules framed there under, requiring the assessee engaged in the business of manufacturing and export of garments or all the assessee in general having business income to maintain stock register in a particular form. As found by the Tribunal, the income of the assessee was clearly discernible from the accounting method followed by it. Hence, the accounts of the assessee could not be said to be defective or incomplete, merely because the stock register was not maintained in a particular form. Section 145(3), therefore, could not have been invoked by the Assessing Officer in the instant case. [Para6] The Question whether the accounts maintained by the assessee were defective and/ or incomplete, or not was a question of fact. Neither the Commissioner (Appeals) nor the Tribunal found the accounts to be defective or incomplete. Both, the Commissioner (Appeals) as well as the Tribunal, were satisfied with the stock register maintained by the assessee and appreciated the fact that the raw material, i.e., the fabric purchased by the assessee was to be measured in meters, whereas the finished products were to be counted in numbers. No reasonable ground had been made out to go into that question and revisit the finding returned by the Commissioner (Appeals) and the Tribunal. [Para 7]

6. As noted by the Commissioner of Income-tax (Appeals) as well as by the Income-tax Appellate Tribunal, the Assessing Officer has not pointed out any specific defect or discrepancy in the account books maintained by the assessee. The account Books, admittedly, were produced before the Assessing Officer for his consideration. This is also not the finding of the Assessing Officer that the accounts of the assessee were not complete. As regards the assessee not maintaining stock Register in the form expected by the Assessing Officer, the assessee has riven an explanation which has been accepted not only by the Commissioner of Income-tax (Appeals) but also by the Tribunal and both of them have given a concurrent finding of fact that maintaining stock register of that nature was not feasible, considering the nature of the business being run by the assessee which was engaged in the 19 ITA 235/Jodh/2017 ACIT Vs M/s Haswani Handicrafts. business of manufacturing readymade garments by purchasing fabric which was then subjected to embroidery, dyeing and finished and was then converted into readymade garments by stitching. Our attention has not been drawn to any provision of the Act or to Rules framed thereunder, requiring the assessee engaged in the business of manufacturing and export of garments or all assesses in general having business income, to maintain Stock Register, in a particular form. As found by the Tribunal, the income of the assessee was clearly discernible from the accounting method followed by it. Hence, the accounts of the assessee cannot be said to be defective or incomplete, merely because the Stock Register was not maintained in a particular form. Section 145(3) of Income-tax Act, therefore, could not have been invoked by the Assessing Officer to the present case.” From perusal of the impugned order, we opined that the ld. CIT(A) has passed a reasoned and speaking order dealing with all material facts as well as the judicial precedents, therefore, in the view of the above facts and circumstances and judicial pronouncements referred above, we do not find any reason to interfere in the order of the ld. CIT(A) qua this issue, hence, we uphold the same.