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Facts
The assessee, engaged in the business of fashionable job-work of cotton textile materials, filed its return of income for Assessment Year 2017-18. The Assessing Officer (AO), doubting the correctness of the books of accounts, rejected them and estimated the gross profit at 6.86%, making an addition of Rs. 30,94,464. The CIT(A) confirmed this addition.
Held
The Tribunal noted that the AO did not point out any specific defects or discrepancies in the assessee's books of accounts, nor did it conduct independent inquiries. The auditor also mentioned that the decline in Gross Profit Margin was due to market competition and increased costs. Therefore, the rejection of books of account and the addition were deemed unsustainable.
Key Issues
Whether the rejection of books of accounts and estimation of gross profit by the AO and confirmed by the CIT(A) is justified based on the facts and evidence presented.
Sections Cited
143(3), 145(3), 144, 270A, 40A(2)(b)
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI, AM. &
आदेश / O R D E R
PER DINESH MOHAN SINHA JM;
Captioned appeal filed by assessee pertaining to Assessment Year 2017-
1. 1. 18, is directed against order passed by Commissioner Of Income Tax (Appeal), vide order dated 01/12/2023, which in turn arises out of an order passed by the Assessing Officer dated 09/12/2019 u/s 143 (3) of the Income Tax Act, 1961.
2. Grounds of appeal s:
1. The grounds of appeal mentioned hereunder are without prejudice to one another.
2. The Id. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as the "CIT(A)"] erred on facts as also in law in confirming the action of the AO in rejecting books of account and estimation of gross profit @ 6.86% as against 4.47% shown by the appellant and thereby making an addition of Rs.30,94,464/-on turnover of Rs.12,94,75,482/-. The addition confirmed by the learned CIT(A) is totally unjustified on facts as also in law and may kindly be deleted.
3. Your Honour's appellant craves leave to add, to amend, alter, or withdraw any or more grounds of appeal on or before the hearing of appeal.
Facts Of The Case as recorded by The Ld CIT(A)
“(a) The appellant, an individual, is assessed to tax by the Income-tax Officer, Ward-1(2)(3), Rajkot [hereinafter referred as to the "Act"]. He is engaged and in the business of fashionable job-work of cotton textile materials under the name and style as Amul Prints since years. The nature of the business is that of the fashion industry in the cotton prints and sewing the pearls, Jari etc. thereon as per the changing pattern in the field of ladies' wear. its books of account are regularly maintained and duly audited as per provision of section 44AB of the Income-tax Act, 1961 (hereinafter referred to as the "Act").Return of income for the assessment year under consideration was filed on 25.07.2017declaring therein total income at Rs.8,65,370/-. The return of income was processed u/s.143(1) of the Act without any modification. The AO, on suspicion doubted the correctness of books of accounts and required appellant to show cause as why the books of account should not be rejected and average gross profit for last three year @ 6.86% should not be adopted. The appellant submitted detailed clarification on each issues, in reply the assessee submitted Handwork on kaftan, which is one type of cloth like dresses, sarees, chunaris, gowns, etc.) includes several types of work on the same cloth as, stitching includes fixing peals, jaree, satari, stone, Page | 2 hallmark, ironing, folding etc.and as such the work has been done as per the latest fashion. Since the one cloth has to pass through multiple people for different work on one piece of kapitan, the person to whom payment made has also to get the services of other people to complete the job. As such interpretation that the description is not mentioned in the bills. Payments made by the persons covered u/s 40A(2)(b) for getting various work through outsiders have also been made available to the AO along with their ITR.
Since the parties to whom raised bills are in conformity with the work assigned to them and the bills have been followed by payments duly supported. The payment for job work on one piece of item is passing through various procedures like printing, stitching, fixing pearls, attaché Jari etc. the payments have to be made to various persons which are below Rs. 20,000/- each and hence was incurred in cash.
However, complete books of accounts were produced before the AO which include the cash books, ledger and the concerned vouchers etc.
The Assessment Completed With Following Observation:
The provisions of Sub-section (3) of Section 145 are therefore invoked and the book of accounts of the assessee are rejected and I proceed to compute the total income from business or profession of the assessee in the manner provided in Section 144 of the Act. The total average gross profit ratio of last 03 years comes to @6.86% [(7.33+6.87+6.39)/3], however, the assessee has shown total gross profit @ 4.47% only of total turnover Rs. 12,94,75,482/-, therefore average gross profit for last three years which comes @6.86% is hereby adopted and accordingly an addition of Rs.30,94,464/- [6.86% average G.P of last three years less G.P Shown @ 4.47%)* 12,94,75,482/- (Total Turnover)] is hereby made to the total income of the assessee. I am satisfied this is fit case for penalty u/s.270A, therefore penalty proceeding u/s.270A of the Act In respect of under reporting of income. (Addition of Rs.30,94,464/-) Subject to the above remarks and after considering the totality of the facts and circumstance of the case as well as the submissions of the assessee and the material available on record, the total income of the assessee, is as under.
Total income as per return of income Rs.8,65,370/- (i)Addition on a/c of G.P. Estimation Rs.30,94,464/- Assessed Total Income Rs.39,59,834/- Rounded off to Rs.39,59,830/-
The assessee has filed an appeal before the Ld CIT(A). The Ld CIT(A) as disposed of the appeal by order dated 01/12/2023.
The AO has taken up genuine and justified approach towards estimating the GP rate based on last three years results of the Gross profit shown by the appellant. Accordingly I hereby confirm the addition of Rs. 3094464/- made by the AO on account of estimated gross profit for the year under consideration. Therefore these grounds of appeal are dismissed.
6) The assessee is an appeal before us. Against the impuned order dated 01.12.2023 of the Ld CIT(A).
7) During the course of argument the Ld AR has submitted that assessee maintain books of accounts for regularly and books of accounts of the assessee are Audited by CA. All the details of printing, washing and labour expensive and details of payment made to person is specified vide u/s 40A(2)(b) of the Act. were recorded in books of accounts and the same were filed during the course of assessment.
8) On the contrary Ld DR has submitted that business of the assessee is the same, Business dealing with parties are same , no change in activities DR relied on the order the lower Authority. In support of his argument the Ld SR DR has also submitted copy of judgement “S.A. builder Ltd. vs commissioner of Income Tax (appeal) Chandigarh, [2007] 158 Taxman 74 (SC)”
9) We have heard both the representative of the party and perused all the material available on record before us. i) We note that the AO of the assessment order has confirmed that the assessee has also produced the books of accounts for verification as also the details of Page | 4 payments made to parties covered u/s 40a(2)(b) and outsiders have been provided supra.
(ii) We note that the appellant vide his replies dated 17.09.2019, 19.09.2019 and 25.11.2019 explained the nature of business right converting the plain cloth in to ornamental Kapitan by making various process thereon. Hence it is not a case of making a universal product from plain cloth. It depends on the fashion and the work done thereon. The entire process of manufacturing Kapital through job-work is duly recorded in the audited books of accounts and the Audit report.
(iii) We further note that complex process of manufacturing detail submitted by the assessee supra handwork on kaftan includes several types of work on the same cloth like, iron, folding after iron, stitching (stitching includes pearls, jaree, satari, stone, hallmark etc.), etc. Sometime the assessee has given a single type of works to some parties on job-work basis. Sometime the assessee has given bulk types of work like, iron, folding after iron, stitching, to single party on job-work basis. By and large bulk works given to related parties covered u/s 40A(2)(b) for timely compliance. Details of payments made to these parties have already been made available.
(vi) We note that the appellant's business is covered by the provisions of VAT Act and the said department has not found any irregularity. Copy of the VAT return has been made available to the AO.
(v) We note that the estimation of the average GP of three years the AO did not bring on record any contrary material justifying his action. The Appellant in fact has explained as to how there is variation in the expenses particularly due to change in use of fuel, rise in expenses on electricity, transportation etc. duly supported. In this line of business everything depends on the change in fashion in ladies' wear. It cannot be constant.”
(vi) We note that the auditor has made remark in the audit report in respect of low GP ratio:
(vii) That the auditor has given a note for declined of GP in the relevant year in is audit report (page 13) where in it was mentioned that Gross Profit Margin is declined due to competition prevailing in the market so firm has applied the policy to do business with lower margin and also there is increase in the cost of purchase and major direct expense l.e. labour expense because some time it may happen that work is not there due to recession and we have to pald Idle for labour expenses, further there is increase in labour cost also due to shortage of labour forces.
(10) Thus, before rejecting the books of account the AO is duty bound to record the satisfaction that the assessee has not fulfilled the requirements of section 145 of the Act. Any single specific defect or discrepancy in the books of account, any instance of suppression of sales value or inflation of cost or expenditure, rejected the appellant's books light heartedly on presumption that the payments made to parties covered by section 40A(2)(b) are not verifiable must be pointed out in the order of assessment.
(11) That AO did not found any manipulation in books of accounts. AO has rejected the book of accounts u/s. 145(3) of the Act. only on the bases and conjunctions and no defect work pointed out in purchase sale opening stock and closing stock. Expenses debited in book of account.
(12) That AO did not make any independent inquiry or did not bring any comparable cases to strengthen is suspicious into sound fact. However it is undisputed fact that the assessee has been consistently following mercantile method of accounting and the same is certifying by CA in Audit report, that the assessee has been regularly followed the method of accounting (13) we are of the view that the order of the AO duly confirmed by Ld CIT(A) order dated 01.12.2023 are not sustainable therefore the ground raised by the assessee in appeals is acceptable we therefore quash the order on dated 01.12.2023 passed by CIT(A) and order dated 09.12.2019 of Ld AO Page | 6 14) In result the appeal of the assessee allowed.
Order pronounced in the open court on 06 / 03 /2025.