M/S KRISHNA GRAM UDYOG SAMITI,SANGRUR vs. DCIT, CC-II, LUDHIANA

per order dated 21 .08.2009. However, the CIT as per its order dated

12.03.2013 set-aside the order of assessment with the directions to make

fresh assessment de-novo after conducting proper enquiry

and verifying and analyzing seized material and comments of the Special

Auditor.

6.3 The Assessing Officer, as per Para 11.3 of its order dated

28.03.2013 made a further addition of Rs. 20,42,575/- with the following

observations:-

" 11.3 Now on having a fresh look to the fact and circumstances of the case having particular regard to the observation made by the special Auditor and Worthy CIT, (Central), Ludhiana through his order u/s 263 dated 12.02.2012, it is decided that books of the assessee is unreliable in absence of the basis documents. However, one cannot afford to loose sight of the meticulousness with which the books have been maintained and produced. I am of the opinion that the books as produced verification at this end. could have been manufactured without having the aid of basic documents. Thus, taking into consideration all these facts I am of the consider opinion that G.P. rate of 15% may be adopted for arriving at the true Gross profit of the assessee on manufacturing items. Similarly, G.P rate of 3% be adopted for ascertaining gross profit on trading items."

6.4 It was argued before us by the Ld. AR that the Assessing Officer,

though did not categorically held the basis for arriving at the conclusion

of adopting the Gross Profit ratio of 15% from Manufacturing Items and 3%

from Trading Items but adopted the same and completed the assessment

accordingly. This is against the settled principle of law.

6.5 The Ld. AR argued that further, as per order, in such business, the

gross profit @8% from manufacturing items and 1% from trading items not

held as unreasonable. The Gross Profit ratio adopted by the Assessing

Officer is without basis and based merely on conjecture, surmises, and as

such, is not sustainable in the eye of law.

6.6 It was argued that the assessee, at the time of initial assessment,

keeping in view the nature of business, had agreed to be assesseed @ 8%

from manufacturing items and 1% from trading items of the turnover to

buy peace of mind otherwise there was no extra income from such

business. However, the Assessing Officer, as per order dated 28.03.2013

has made a further addition of Rs. 20,42,575/-(now stands at Rs.

14,49,382/- after order of the CIT(A)) by enhancing the gross profit ratio

at 15% from manufacturing items and 3% from trading items though the

assessee is maintaining regular books of account in respect of his business

of rice Sheller and these books of accounts had already been audited u/s

44AB of the Act. and the assessee in its return of income had declared

Gross profit @ 2.40% and Net Profit @ 0.09% out of its sale proceeds.

6.7 It was argued that in the course of assessment proceedings, the

assessee produced the books of accounts but some of the supporting

vouchers could not produce due to the reason that these have been lost

in transit and in support of its contention; the assessee produced a copy

of the FIR registered with the police authorities.

6.8 The ld. AR argued that in the given circumstances, as per settled

law, it is the duty-of the Ld. Assessing Officer to estimate the profit in a fair

and reasonable manner either by following the history of the assessee’s

own case or by following the comparable cases of the area. As is evident

from the assessment order itself, the estimation of profit based neither on

the assessees' own case nor on the comparable cases of the area. The

gross profit of 2.40% declared by the assessee is quite reasonable and is in

accordance with the gross profit ratio normally expected out of such

business. The assessee, at the time of initial assessment, keeping in view

the nature of business, had agreed to be assesseed at such profit ratio of

the turnover to buy peace of mind otherwise there was no extra income

from such business to that as declared in the return of income.

6.9 Hence , it was argued that the assessing officer has enhanced the

estimation of gross profit in revised assessment made in pursuant of

directions u/s 263 from 8% to 15% in case of Mfg turnover and 3% in case

of trading turnover with out any independent enquiry or comparative

results of third party ought to be deleted.

6.10 It was argued that in addition the Assessing officer has estimated net profit

@ 20%. It is an established accounting / assessment principle that only net profit

is assessable in case of estimation of income so gross profit addition in uncalled

for hence the gross profit addition ought to be deleted.

6.11 Ld. DR in addition to placing reliance on the orders of the lower

authorities has submitted his further arguments in written form which are

as under:

“ In the above case, it is humbly submitted the date of search is 12.10.2006 and FIR referred and heavily relied by the Assessee in all the cases is dated 13.11.2006. This FIR is post search and is referring to "all the relevant documents of vehicle and SOME other valuable documents were in the vehicle". No list of such documents was reported to the police. It is clear from the wording i.e. SOME other valuable documents were in the vehicle that filing of FIR is after thought and misleading. No result of FIR was ever submitted before any authority below. Supporting documents were not produced before the AO and the CIT (A). Hence, CIT (A) has rightly upheld the addition on account of GP and NP. It is further submitted that the following decisions may kindly be considered with regard to addition on account of GP/NP rate:

Enclosed) where Hon'ble Delhi High Court, in para 22 of its order, upheld order of Hon'ble ITAT estimating GP @15% and estimating sales at Rs.1 crore.

6.12 We have heard the arguments of both the parties and gone through

the orders of the lower authorities. The following facts emerged from the

perusal of the records.

6.13 The assessee has filed his return declaring total profits @ 3.75%

During the assessment proceedings the assessee has offered 1% on

trading goods and 8% on manufacturing goods. The Ld. CIT invoked

jurisdiction of Section 263 and in the consequent order the profit was

estimated @3% on trading goods and 15% on manufacturing goods. The

assessee could not submit books of account in the subsequent

proceedings before the Assessing Officer which necessitated the

estimation of profits. A definite ground work is sine-quanon on part of the

Assessing Officer before resorting to the provisions of section.

6.14 Where the assessee is unable to reconcile the quantities handled by it as

between purchases and sales, subject to adjustment as between opening and

closing stocks or where no quantity accounts are kept, the accounts are to be

taken as unproved, so that the income returned may well be rejected and

income estimated. In the case of ITO v. Girish M Mehta [2008] 296 ITR (AT) 125

(Rajkot), it was pointed out, that the pre-condition for estimating business

income of the assessee, where an assessee keeps accounts is that the

assessee’s books should have been found to be unreliable or otherwise not

capable of proving the assessee’s income.

6.15 We have considered the profit percentage of the assessee in the earlier

years as declared in the regular returns. And also the case law cited by the Ld.

DR in the case of Dayawanti Vs. CIT wherein the assessee in the business of

perfumery used in production of Gutka declared G.P. of 8.6% to 10.7% the

Hon’ble High Court directed to estimate G.P. @ 15%. Similarly in the case of

Kachwala Gems Vs. JCIT 288 ITR 10 (Supreme Court) the Hon’ble Supreme Court

upheld the estimation of G.P. in the absence of any other material and held

that the estimation should be honest and fair and should not be arbitrary though

it contains certain degree of guess work.

6.16 Hence keeping in view the original profits, revised profits declared by the

assessee and the estimation done by the Assessing Officer and keeping in view

the history and the earlier profits declared by the assessee we hereby feel it fit

and justice would be met if the G.P is estimated at 2% for trading goods and

12% for manufacturing goods. The Assessing Officer is directed to recomputed

the profits @ 2% on trading goods and 12% on manufacturing goods.

6.17. This ground of appeal of the assessee is allowed for statistical purposes.

undisclosed Net Profit:

7.1 Brief facts of the issue are that the Ld. Assessing Officer has made a

further addition of Rs. 5,99,696/-( now stands at Rs. 5,33,886/- after the Ld.

CIT(A)’s order ) with the following observations:-

"12. Since, the assessee admitted of not having the ground documents on the basis of which the net p r of i t was arrived at, on estimation of net profit percentage is similarly called for. In the Profit & Loss A/c, the assessee disclosed net profit % with respect to gross profit of 3.75%. Having regard to the total facts and circumstances, it is decided to adopt a

figure of 20% which works out to Rs. 5,99,696/- (29,98,470 x 20%). This sum is added to the disclosed total income of the assessee.'' 7.2 Before us it was submitted by the Ld. AR that it would also not be

out of place to mention that at the time of initial assessment, as per order

dated 21.08.2009, an addition of Rs. 65,810/-was made by disallowing

various expenses debited to P&L Account. The Assessing Officer has made

further disallowance of expenses of Rs. 5,99,696/-. Thus, the disallowance

of total expenses debited to P&L comes to Rs. 6,65,506/- (65,810 +

5,99,696). Thus, apparently, the disallowance of expenses debited to P&L

Account unreasonable and not in consistent with its own findings, as

stated supra.

7.3 In this connection, it was argued that at the outset, the estimation

of net profit of 20% on the Gross Profit is without bringing any comparable

case in support thereof and /or bringing any positive evidence on record

to arrive at such ratio.

7.4 The Ld. AR vehemently argued that the income of the assessee from

the Rice Mill has assesseed on estimate basis by rejecting the books of

accounts of the assessee. Therefore, as per the settled principle of law,

when the assessees' books of accounts have rejected and a profit has

estimated, then, as per the accounting principle, no separate addition of

net profit percentage is called for.

7.5 Ld. DR relied on the order of the Assessing Officer and order of the

Ld. CIT(A).

7.6 We have heard the arguments of both the parties and perused the

facts on record.

7.7 In addition to the estimation of G.P. the Assessing Officer has also

further estimated Net Profit @ 20% on trading items. Regarding the

estimation of Net Profit in addition to G.P. we are unable to agree with

the arguments of Ld. DR and also the findings of the Ld. CIT(A) as the

double estimation of profits are contrary to the established accounting

principles and also contrary to the principles of estimation of profits in the

absence of books of accounts and even by invoking the provisions under

section 145(3) which can be invoked (a) where Assessing Officer is not

satisfied about the correctness or completeness of the accounts; or (b) where

method of accounting cash or mercantile has not been regularly followed by

the assessee ; (c) Accounting Standards as notified by the Central Government

have not been regularly followed by the assessee. Even this doesn’t give any

power to the Assessing Officer to estimate the Net Profit separately in addition to

estimation of gross profit. Hence the addition made by the Assessing Officer on

account of estimation of profits towards net profit on trading items is liable to be

deleted on merits as well as on established principles.

7.8 As a result ground no. 2 of the appeal of the assessee is allowed.

purposes.

Order pronounced in the open Court.

Sd/- Sd/- (SANJAY GARG) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated : 25/05/2018 AG

Copy to: 1. The Appellant, 2. The Respondent, 3. The CIT, 4. The CIT(A), 5. The DR