C I T JAIPUR vs. M/S RAMA HANDICRAFTS

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 932 / 2008 C I T Jaipur ----Appellant Versus M/S Rama Handicrafts ----Respondent Connected With D.B. Income Tax Appeal No. 306 / 2011 Cit ----Appellant Versus M/S Rama Handicraft ----Respondent _____________________________________________________ For Appellant(s) : Mr. R.B. Mathur. For Respondent(s) : Mr. N.L. Agarwal. _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE DR. JUSTICE VIRENDRA KUMAR MATHUR Order 26/05/2017 1. In both these appeals common question of law and facts are involved hence they are decided by this common judgment. 2. By way of these appeal, the appellant has challenged the judgment of the Tribunal whereby the Tribunal has partly allowed the appeal of the assessee and dismissed the appeal of the Department. 3. While admitting the appeals, this Court framed the following substantial question of law:

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“Whether on the facts and in circumstances of the case the ITAT was justified in law in deleting the trading additions despite of the facts that the rejection of books of accounts u/s 145(3) was upheld?” 4. Mr. Mathur has taken us to the order of AO, relevant part of which reads as under: “(2) During the year under consideration the assessee firm was engaged in export of made-ups, garments and handicrats. On scrutiny of various documents filed with the return and submissions made during the course of hering, discrepancies found are discussed hereunder:- (3) Trading Addition During the year under consideration and earlier years the assessee firm has shown trading results as under:- A.Y. Sales Gross Profit G.P. Rate 2000-01 Rs.135608366/- Rs.33095725/- 32.60% 2001-02 Rs.136864333/- Rs.35102691/- 25.65% 2002-03 Rs.106676396/- Rs.25030204/- 23.46% 2003-04 Rs.92600205/- Rs.22041163/- 23.80% 2004-05 Rs.10,21,04,368/-Rs.1,77,90,056/- 17.24% From the above it can easily be gathered that the assessee firm has shown continuous down fall in the G.P. rate declared in the period under consideration as compared to the A.Ys. 2000-2001 and 2001-02, through there was a slight increase in the immediately proceeding asst. year. (3.2) In order to verify the results of the assessee firm, the assessee was specifically required vide letter dated 03.08.2006 to furnish his submissions in support of the trading results and justification for the downfall in the G.P. rate in the period under consideration, in response to which the assessee submitted a written reply vide its letter dated 17.08.06 without any supporting evidence which reproduced hereunder- “It has been mentioned by you that there has been steep fall in the GP and NP rate over the years and in

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this connection, we have to submit that from the perusal of the comparative chart herewith enclosed it will be observed that there has been no steep fall in the earlier years and there has been no major variation in the GP rate. In the year under assessment assessee has declared GP rate of 17.42% as against a GP rate of 23.8% in the assessment year 03-04 and 23.46% in assessment year 02-03. It will also be observe that the GP rate declared in assessment year 01-02 was 25.65%. Your attention is invited to the fact that the GP rate of 25.65% was accepted in assessment year 01-02 when the assessment was completed under the provisions of section 143(3). Similarly, the GP rate declared has also been accepted in assessment year 02-03 even after the assessment was reopened u/s. 148. In assessment year 03-04 the assessing officer has applied a GP rate of 30% but the same was applied on the basis of various defects pointed out by him and certain wrong observations made making the addition in assessment year 03-04 was that the addition of Rs.21,67,974/- was made for the assessment year 2000-2001 whereas the learned CIT (Appeals) has deleted the said addition except for an amount of Rs.106231/-. The assessee has not accepted the assessment for assessment year 2003-04 and has filed an appeal against the same which is still pending. Looking to the past history of the case starting from assessment year 2001-02 it will be observe that the GP rate of the assessee was ranging from 23.46% to 25.65%. As compared to these GP rate there are valid reasons for decline in the GP rate in the year under assessment. In assessment year 04- 05 there was decline in the conversion rate of dollar as compared to assessment year 2003-04 and so far as assessee’s business is concerned, the order are booked on the prevailing rate of dollar and if there is subsequent lower realization on account of fluctuation in the dollar rate the GP rate will go down. We are herewith furnishing a chart in respect of realization received during the year and it will be observed that on account of exchange rate difference due to reduction in dollar rate the assessee received a lesser amount of Rs.46,68,473/- as compared to the amount he would have received if the same had been received in earlier year. On account of this reduction in dollar rate there has been decrease in the GP rate to the extent of 4.5%. Further slight decline is on account of the fact that the sale price of the various items in which the assessee is dealing have gone down without any decline in cost. The submission made by the assessee appears to be of routine manner, generally given by the assessee for

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the downfall in their G.P. rate and cannot be considered in absence of any detail or documentary evidence. Moreover, in col.28(a) of the tax audit report, the auditors observed that “assessee is engaged in trading and manufacturer activity of garments & made-ups. Since assessee is not maintaining stock register, in absence of information we have neither verified the quantity nor value of closing stock”. 4.1 While considering the case, the tribunal has considered all aspects and after taking into consideration previous year profit has come to the conclusion that average profit will be 30%. 4.2 Taking into consideration, the CIT and tribunal have committed serious error in reducing profit in spite of the fact that books of accounts under Section 145(3) was not disturbed. 5. Counsel for the respondent has supported the order of tribunal and contended that tribunal para 14 observed as under: “(14) We have perused the facts of the case. The explanation submitted by the assessee and arguments made by ld. AR appears to be convincing that the AO has also made wrong observation that most of the payments have been made in cash whereas the correct facts are that out of total payment of Rs.14,74,992/- payment made in cash is only Rs.88,208/- which is only 6% of the total expenses claimed. Major part of the expenditure is with regard to foreign traveling done by the partners and for which the payment of air tickets as well as purchase of foreign currency have been done through cheque. Further, looking to the period of stay outside the country the expenditure claimed by the assessee on such stay cannot be said to be in any manner excessive. Two tours have been undertaken during the year under assessment by the partners and both the tours are to Japan, Major part of assessee’s sale are exports to Japan and whatever bills are available in respect of expenditure incurred outside India the assessee has duly maintained the vouchers and some copies of the same are being produced before the AO. In assessment year 2003-04 AO has made a disallowance of 25% out of traveling expenses and

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the ld. CIT(A) has restricted the disallowance of 25% in respect of expenditure for which vouchers were not available and with regard to the balance expenditure disallowance of 1/10th has been sustained. But the Hon’ble ITAT, Jaipur Bench, Jaipur in ITA Nlo.406/JP/07 has restrict the addition to the extent of 10% of unvouched traveling expenses. Which are only Rs.88,208/- during the year under consideration, so the disallowable expenditure comes only Rs.8,820/- Therefore the AO is not justified in making a disallowance of Rs.5,10,093/- and the same is restricted to 10% of Rs.88.208/- i.e. at Rs.8820/-. The assessee gets the relief accordingly. Thus ground no.2 of the revenue is dismissed and additional ground of the assessee is party allowed. “ 6. We have heard counsel for the parties. 6.1 The consistent practice of this court is to go by average of last 4 to 5 assessment years of assessee. However, taking into consideration the peculiar facts that for the relevant year assessee has suffered huge loss of foreign exchange although average comes to 26.38 but in the facts of the case, we are of the opinion that at least minimum profit for the year 2002-03 is to be considered which comes to 23.60 and we accept the same. The appeals are allowed to the aforesaid extent. (VIRENDRA KUMAR MATHUR),J. (K.S. JHAVERI),J. Mohit Grover Sr. No.43-44.