ORDER
Per S. S. Mehra, J. M. -The revenue in their present appeal have taken, inter alfa, the following grounds :
'1. The ld. CIT (A) was not justified in accepting the book result and the G. P. rate of 42 per cent as against 44 cent applied by the ITO, under direction of the Inspecting Asstt. Commissioner of Income-tax without properly appreciating the facts of the case.
2. The 1d. CIT (A) was not justified in treating the counter sales of Rs. 11,25,829 at per with the export sales of Rs. 20,612 for allowing weighted deduction under section 35B of the IT Act.'
2. The first ground is to the effect that the 1d. CIT (A) was not justified in accepting the book result and the g. p. rate of 42 per cent as against 44 per cent applied by the ITO. The assessed is a registered firm by status and maintains its accounts on mercantile basis. Accounting period was the year ending 31-3-1980. On a total turnover of Rs. 38,83,847 the assessed appears to have declared a gross profit of Rs. 14,52,165, according to the 1d. ITO giving a gross profit rate of 42 per cent. However such rate in the chart at page 1 of the paper book is mentioned as 43.73 per cent. The 1d. ITO comparing the gross profit rate with the earlier asst. years considered that the same was indeed low and without justification. He also noted that the assessed failed to file details of opening and closing stock and so also the basis of valuation of the stocks. The valuation of the closing stock was seen to be unverifiable. It was also noted that the sale of goods and the price charged were not verifiable. In view thereto the profit earned on particular items could not be ascertained. The 1d. ITO also relied upon several comparable cases where higher gross profit rates had been returned. In view of these specific defects picked up by the 1d. ITO he rejected the books of accounts applying proviso existing under section 145(1) of the IT Act, 1961 and in fact made an addition of Rs. 1,01,060 by applying a gross profit rate of 44 per cent on the estimated and effective sales of Rs. 34 lakhs against the sales of Rs. 33,20,587 shown. The addition was in fact made, inter alia, with the following observations :- 'It may however be pointed out that the assessed failed to file details of opening and closing stock as well as the basis of valuation of stocks and thereforee, the valuation of closing stock is unverifiable and cannot be relied upon. Further the sale of the goods and the price charged thereof is not identifiable and, thereforee, the profit earned on a particular item cannot be ascertained. The provisions of sec. 145(1) of the IT Act, 1961 are, thereforee, clearly attracted. However, it is found that the recessed trading account furnished by the assessed showing a G. P. rate of 43.7 per cent is not correct and the correct recessed trading account is as under :
Rs.
G. P. as per trading account No. 587780
Total turnover as per trading a/c
3883847
Add : Cash incentive credited in P&L; a./c as the same is credited to trading a/c in the comparable case
Less : no profit sales at cost as admitted by the UTI ub order u/s 143(3)/144B
563261
Net effective sales:
33,20587
Credited amount of packing, forwarding & insurance charges which are credited in the account while the receipts for the same are included in sales in the comparable case
3,99,190
Total:
14,42,166
Less: Admissible case incentive @ 10 per cent on no profit sales of Rs. 5,63,261 to compare the rate of g.p. effectiveg.p. on net effective sales:
56,326
13,85,840
Thus on net effect sales of Rs. 33,20,587 the effective G. P. rate comes to 42 per cent as against that of 44.5 per cent in the comparable cases. Considering the above facts the IAC has observed that if G. P. rate of 44 per cent is applied on estimated effective sales of Rs. 34,00,000 in the assesseds case, it will meet the interest of justice and equity as it will give a reasonable margin of tolerance for variance in the trading conditions of the two cases. By applying a G. P. rate of 44 per cent on estimated effective sales of Rs. 34,00,000 extra profit comes to Rs. 1,00,160 which will be added to the disclosed profit of the assessed.'
The ld. ITOs action was contested by the assessed. Before the ld. CIT (A) the following submissions were made :-
(a) that the sales being mostly export sales were verifiable;
(b) that the ld. ITO had not pointed out any omission or discrepancy in the sales;
(c) book results were not disputed;
(d) that the method of accounting remained the same;
(e) proviso of sec. 145(1) of the Act was inapplicable and that the gross profit rate of 42 per cent being reasonable addition should have not been made.
The ld. CIT (A) considering the points made before him deleted the addition, inter alia, with the following observations :-
'The ld. IAC had adopted the G. P. rate of 44 per cent as against 42 per cent worked out in the case of the appellant primarily keeping in view the G. P. rate of 44.5 per cent shown by the firm M/s. Subhash Emporium. He, however, had not kept in view the import facts brought out by the appellant which had a material therein on the profit earned. In the other case, the said firm had an advantage of procuring the raw material at a batter rate than the appellant and also had a better foreign market having excess of the foreign dignitaries and having been a National award in the importable marble goods giving a good reputation in the foreign market. These factors, to my mind, would easily result in a better G. P. rate of 2.5 per cent to my mind, is reasonable in the facts and the circumstances of the case. I, thereforee, hold that the ld. IAC was not justified in adopting the G. P. rate of 44 per cent as against 42 per cent worked out by him. Further the learned IAC was also not justified in estimating the effective sales at Rs. 34 lakhs as against Rs. 33,20,586 shown by the appellant, as no omission has been held by the ITO. The mere fact of non-existence of stock register would not justify such an action.
3. Hence the present appeal by the revenue against the said deletion. On behalf of the revenue Shri P. K. Sridharan, learned departmental representative supported the asstt. order. On behalf of the assessed the Id. counsel placed reliance on the impugned order and also made mention of chart placed at page 1 of the paper book showing the turn over and the G. P. rates during various years including the year under consideration.
4. Submissions have been heard and considered. The Id. ITO made the addition on the ground that the assesseds trading results did not favorably compare with the comparable cases in similar circumstances, relies upon by him. He also noted that the trading results in view of the specific defects did not admit of verification. These defects are not shown to be non-existent before us. The addition was made against that background.
5. In the Id. CIT (A)s view there was no omission on sales and purchase. This inference drawn by the Id. CIT (A) appears to be erroneous as the sale of goods and the price charged was not identifiable and in view thereto profit and on particular items could not be ascertained. If this is not a defect then we do not know in Id. CIT (A)s view what would constitute a defect. The assessed also failed to file details of opening and closing stock. If that also is not a defect we are really surprised. Thus the observation by the Id. CIT (A) that there was no omission of sales and purchases gets negative in view of the points made out by the Id. ITO. The next logic applied by the Id. CIT (A) was that book results were accepted in the part in the similar circumstances. That logic also appears to be illogical as investigations during the year under consideration brought out deficiencies and defect and a lower rate of gross profit as compared with the earlier asst. year. The next reason employed by the Id. CIT (A) that the lower gross profit rate was as a result of the higher turn over. This plea also is not effective because it is not shown from the record that the higher turn over was managed by the assessed by selling at a lower rate. If there was increase in the turn over there should have been corresponding increase in the gross profit also. This parable cases relied upon by the Id. ITO were not relevant. For that also the reasoning employed by the Id. CIT (A) is of no consequence as the assessed could also purchase and procure the raw material from the sources the other dealers were doing. Thus all the reasons adopted and employed by the Id. CIT (A) appear to be of no help in the matter. Thus in view of the totality of circumstances it was not possible to accept the trading results declared by the assessed. During the earlier asst years the gross profit rates were higher as compared to the rate reflected during this year. Also no reasons for such decline are brought on record. Against this background some addition was definitely called for. We see no justification to interfere with regard to the addition but at the same time are of the view that the same is slightly on the higher side. The assessed reflected sales at Rs. 33,20,587 and gross profit at 42 per cent. The Id. ITO estimated the sales at Rs. 34,00,000 and applied a gross profit rate of 44 per cent. We direct that the sales shown at Rs. 33,20,587 be accepted and there on a gross profit rate of 44 per cent be applied. The addition should be computed in the light of these observations. The impugned order is modified to this extent.
6. The paper book has been considered.
7. The next ground taken by the revenue is that the Id. CIT (A) was justified in treating the counter sales of Rs. 11,25,829 at par with export sales at Rs. 20,60,612, for allowing weighted deduction under section 35B of the Act. It is seen that the issue raised by the revenue in this ground has already been decided against the revenue by E Bench of the ITAT, Delhi vide order for the asst. years 1966-67 to 1978-79 in the case of Subhash Emporium [IT Appeal Nos. 1496,1497 and 1365 (Delhi) of 1982 dated 16-9-1983] in the similar circumstances. This issue has also been decided against the revenue in ITA Nos. 1396 and 1397 (Delhi) of 82 for the asst. year 1978-79 and 1979-80. Copies of these orders are placed in the assesseds paper book at pages 64 to 75. There are other copies of the orders which are also placed from pages 94 to 190. In this view of the matter and in fact respectfully following the findings in the said orders, we decline to interfere.
8. In the result the appeal is partly allowed.
Narayanan A.M. - I have read the order proposed by my learned brother. I am unable to agree with him that the ITO was justified in estimating the gross profit at 44 per cent but that the effective sales of Rs. 33,20,587 returned by the assessed need not be enhanced.
2. The assessed-firm carried on business, as recorded by the ITO, in the purchase and sale of Marble Pachhikan goods mostly to foreign tourists who came to India and also exports the same to the foreign countries. The previous year is the year ended 31-3-1980, the method of accounting being mercantile. The ITO did not accept the book results shown this year. Page 1 of the assesseds paper book shows the following :-
'Asst. year
Total sales
Whole sale sales and sales on no profit basis
Effective sales
Import incentive
GP Packing%
Rs.
Rs.
Rs.
Rs
1978-79
20,50,338
349578
17,00,760
285727
47.63% 186578
1979-80
35,60,663
866748
26,39,915
263179
44.25% 338858
1980-81
38,83,847
563261
32,20,586
455196
43.73% 399189
The ITO wrote to the assessed on 30-11-1982. He pointed out there that, as per the assessed;s books, on sales of Rs. 38,83,847, the assessed had shown gross profit of Rs. 5,59,780 only i.e., 15.39 per cent that the P & L A/c showed cash incentives of Rs. 4,55,196 and that even if this was brought to trading account, the G. P. would go up to 27.1 per cent. The ITO further pointed out that the opening and closing stocks shown by the assessed were not verifiable; that a day-to-day stock register was not maintained and hence the correct G. P. could not be ascertained. The ITO then listed some comparable cases (4 in all), where G. P. shown was around 44.44 per cent. He also pointed out that the partners of the assessed had not made any withdrawals for household expenses and that this led to the inference of there being suppressed profits. He proposed to estimated the G. P. at 34.23 per cent on estimated sales of Rs. 49,36,300 (excluding cash incentives) and make an addition of Rs. 11,12,453 as extra gross profit.
3. The assessed objected to this proposed addition of Rs. 11,12,453 (as extra gross profit) by its letter dated 6-12-1982. It made the following major points in this letter :-
(i) All the sales are verifiable with reference to purchase invoices. Complete details of the goods sold, packing charges, date of dispatch, names and addresses of the parties were all available.
(ii) Sales effected in India or outside India against foreign currency (sales were mainly to foreign tourists here and export sales abroad) were under the direct control of the Reserve Bank of India. Monthly statements of sales were sent to the Reserve Bank of India as regards such sales.
(iii) As regards sales in India against rupees, they were on a small scale and were also verifiable with reference to sales bills and cash memos. These sales have been accepted by the Sales tax Deptt. after verification. (iv) The assessed showed good results this year excluding cash incentives, G. P. shown this year was 15.4 per cent on sales of Rs. 38,83,848 as against 16.1 per cent and 16.4 per cent on sales of Rs. 35,06,663 and Rs. 20,50,339 for the assessment years 1979-80 and 1978-79 respectively. The G. P. shown this year was 27.1 per cent as against 23.7 per cent if cash incentives were also included. The net profit shown this year was Rs. 1,31,074 as against Rs. 59.187 disclosed last year.
4. The assessed then commented on the ITOs remark that it was not possible 'to ascertain the goods and number of items sold and as such correct G. P. cannot be worked out' It said :-
'The goods and number of items sold can easily be ascertained from the sales bills as mention of these have been made in all the bills. As stated above, the profit can also be ascertained inasmuch as the profit shown on sales effected is reasonable and is not low compared with the profit shown and accepted for the preceding year. Moreover a detailed list in respect of sales effected of M/s. Facco International & Sales effected in wholesale are enclosed herewith. From these details profit can be ascertained on each and every item sold to these parties.
That our case is not comparable with any of the case, though names not mentioned in the notice. Reliance has been placed on case No. 2 wherein the rate of profit has been mentioned 44.3 per cent. Though the figures of sales have been noticed but the capital employed and the classification of sales have not been mentioned. By the figures given in the notice it appears that these figures name of M/s. Subhash Emporium, Agra. Presuming that the figure of M/s. Subhash Emporium, Gwalior Road, Agra then this case is not comparable with the case of the assessed and the results shown cannot be compared on the following facts :
(a) That this firm is a reputed firm of 20 years standing and the proprietors/partners have experience of this line of business on a wide scale having travelled abroad and having purchase capacity in the shape of quota rights.
(b) Having purchase and sale facilities inasmuch as purchase depot at Makrana, sales depot at Delhi and sales show room at Hotel Clark Shiraz.
(c) Having National award for Marble Trade and wide reputation in foreign markets, resulting in more capacity to earn better profits.
(d) Not effecting sales on wholesale basis and sales on no profit basis.
(e) Having facility of own capital and heavy stock of raw material and finished goods.
The assessed-firm is lacking with the aforesaid facilities and advantages. The assessed-firm is doing business with the aid of borrowed capital and with limited stock and effecting quick sales on reasonable margin of profit. This fact is established from the recorded itself.
The other cases mentioned in notice are also not comparable with the case of the assessed as in the case No. 1 the sales are less and there is no cash incentive which indicates that the business is of other type and in 3 and 4 also they have dealings in other type of business having branches outside Agra. The details of sales effected on wholesale basis and effected to M/s. Facco International on no profit basis and enclosed herewith (Pages 1 to 129) '.
5. The assessed, thereforee, requested the ITO in this letter of 6-12- 1982 to accept the profit shown by its books. It suggested that its case should not be compared with other dealers in the line, who included packing, forwarding and insurance charges received also in the trading account, but debited the expenditure incurred under these heads to the P & L Account and thereby showed an inflated G. P. It would appear that there was no further correspondence between the ITO and the assessed. The assessment was closed finally on 19-9-1983. As per the directions of the IAC, received under section 144B, an addition of Rs. 1,00,160 was made as extra gross profit by the ITO by estimating the G. P. at 44 per cent on the estimated and effective sales of Rs. 34 lakhs as against Rs. 33,20,587 disclosed by the assessed. This addition was in the place of the addition of Rs. 11,12,453 originally proposed by the ITO. The addition was made with the observations already reproduced (in paragraph 2 of my learned brothers order) and which need not, thereforee, be repeated here. Briefly, the ITOs main reasons for the addition seem to be that G. P. of 43.7 per cent, shown by the assessed was not correct on net effective sales of Rs. 33,20,583. The effective G. P. was only 42 per cent, as against 44.5 per cent in the 'comparable cases'. Hence a G. P. of 44 per cent could be estimated here and the effective sales also could be estimated at Rs.. 34 lakhs. This addition was challenged by the assessed before the CIT (Appeals). The basis of this challenge has been noticed in my learned brothers order (paragraph 3) and is worth repeating here.
This was :-
'(i) that the sales being mostly export sales were verifiable :
(ii) that the Id. ITO had not pointed out any omission or discrepancy in the sales :
(iii) book results were not disputed :
(iv) that the method of accounting remained the same;
(v) proviso of sec. 145(1) of the Act was inapplicable and that the gross profit rate of 42 per cent being reasonable the addition should have not been made.'
6. The CIT (Appeals) deleted the addition. Briefly, his reasons were :-
(i) The ITO estimated the gross profit at 44 per cent as against 42 per cent worked out by the assessed in its case primarily because gross of 44.5 per cent was shown by M/s. Subhash Emporium. But the ITO failed to keep in view the importance facts brought out by the assessed which had a material bearing on the profit disclosed.
(ii) M/s. Subhash Emporium had the advantage of procuring raw material at a better rate than the assessed. It also had a better having been a national award winner in marble goods and thus had gained a good reputation in the foreign markets.
(iii) The above factors would easily result in a gross profit which would be higher than 2.5 per cent than the assesseds. Hence the gross profit disclosed by the assessed was reasonable.
(vi) Nor was the ITO correct in estimating the effective sales at Rs. 34 lakhs as against Rs. 33,20,386 disclosed by the assessed. Not a single omission was pointed out by the ITO in this regard. The mere fact of non-existence of stock register would not support such an action.
Against this order, the department came in appeal and the parties were also heard.
7. On a consideration of the submissions before us and the material on record. I am wholly in agreement with the reasoning and the conclusion of the first appellate authority. The ITO does not seem to have been clear in his mind as to the approach he should adopt. He had some suspicion in the matter it appears. He proposed an addition of about Rs. 11,12,453 in the first instance. This was evidently a wholly unrealistic proposal. It only showed the extent of suspicious in the ITOs mind. The assessed replied by its letter of 6-12-1982. It took care in particular to comment on the comparable cases of the ITO. M/s. Subhash Emporium came in for specific comment vide paragraph 12 supra. If indeed the points made by the assessed in its letter of 6-12-1982 had no substance, either wholly or partly, it was the duty of the ITO to have recorded so in his order giving reasons for his not accepting the factual submissions of the assessed raised in its letter of 6-12-1982. No such exercise was undertaken. Instead, the ITO proceeded mechanically (under the instructions of the IAC), taking the case of Subhash Emporium (supra) as a yardstick and estimating the gross profit at 44 per cent. No material worth the name has been brought on recorded by the ITO in support of such an estimate. The undisputed fact remains that not a signal discrepancy in the trading account has been brought on record by the ITO. No doubt, there was no day-to-day stock register. But this circumstance alone, considering the nature and volume of the assesseds business, would not authorise the authorities to reject the books of account and bring to tax extra trading profit on a purely national basis. The plan fact is, the case of Subhash Emporium (supra) was relied upon in this regard and the unrebutted material on record shows than that case was not comparable. I would, thereforee, maintain the order of the CIT (Appeals on this point wholly and would dismiss the Revenues objections in this regard.
8. I am in respectful agreement with the conclusion recorded by my learned brother in paragraph 7 of his order.
REFERENCE UNDER SEC. 255(4) OF THE IT ACT, 1961
A difference of opinion having arisen between the Members who heard this appeal, the following point is referred to the President, for resolution in terms of section 255(4) of the Act :
'Whether on the facts and in the circumstances of the case, the Income- tax Officer is to be directed to estimate the gross profit at 44 per cent but on disclosed effective sales of Rs. 33,20,587 of should the order of the Commissioner (Appeals) which directed acceptance of the book results, be confirmed as correct ?'
THIRD MEMBER