Judgment:
1. These are the cross appeals in respect of two assessees involving common issue. The only issue arising out of these appeals relates to the addition on account of low G.P. Since the issue is common to all these appeals, these are being disposed of by the common order for the sake of convenience.
2. The facts in respect of both the assessees are similar. Therefore, for the sake of convenience, we would narrate the facts in the case of Shri Mahesh Patodia. The assessee is a dealer in yarn and grey cloth on wholesale basis. The main business is of sale and purchase of yarn of five qualities being count Nos. 24,34,37,40 and 60. The assessee had disclosed profit of Rs. 17,05,714 against the total turn over of Rs. 14,23,45,713 giving G.P. rate of 1.19%. In respect of grey cloth, the assessee had shown profit of Rs. 7,068 against the turn over of Rs. 7,33,624 giving G.P. rate of 1.1%. The Assessing Officer considered such profits on lower side and the assessee was asked to explain the reasons for the same. The explanation of the assessee as quoted in the assessment order was as under:-- "The sales and purchases are supported by bills. The assessee has kept stock register count-wise, date-wise and bill-wise. Hence, quantity details are tallied. It is further, urged that no doubt that assessee has not prepared separate trading account count-wise but can be prepared from the stock register, if further time of one month is granted to him. He further requested to adopt G.P. as shown." The Assessing Officer rejected the above explanation by observing that if the assessee had really intended to prepare and segregate the stock bill-wise and count-wise, he could have done right from the beginning in order to establish correct G.P. According to him the assessment proceedings continued from 3-8-1990 to 10-3-1992 during which assessee remained silent and now asking for time to prepare trading accounts count-wise and bill-wise. Accordingly, he rejected the request of the assessee for preparing separate trading accounts count-wise. It was further observed by him that assessee had not debited Hamali of Rs. 92,263 to the trading account though it was a part of trading expenses and thereby the assessee had shown the higher G.P. by manipulating the accounts. Accordingly, a trading account was reconstructed by him and the G.P. came down to 1.13% as against the 1.19% declared by the assessee. It has been further pointed out by him that sale bills do not bear the full names and addresses of the purchasers. Hence, the sales were unverifiable. According to him, same picture was reflected in the account of grey cloth. In view of the facts mentioned above, he rejected the book results shown by the assessee by invoking the provisions of section 145(1), Thereafter he referred to three transactions of purchases/sales effected by M/s N.H. Jakhotiya showing the G.P. rate of 5% and 6%. But he applied G.P. rate of 3% on the turnover disclosed by the assessee and made an addition of Rs. 24,28,861 in the yarn account and Rs. 13,941 in the account of grey cloth. For the similar reasons, the addition of Rs. 10,44,933 was made in the case of Raghuvir Patodia, the other assessee.
3. The matter was carried before the CIT(A) by both the assessees. It was contended before the CIT(A) that provisions of section 145(1) could not be applied considering the facts on record. According to the assessee, all the sales and purchases as welt as expenses were fully vouched. The stock register in respect of each count of yarn was maintained by the assessee though separate trading accounts were not prepared. It was also contended on behalf of the assessee that private inquiry made by the Assessing Officer was never disclosed to the assessee and he had used the purchase and sale instances in the case of M/s. N.H. Jakhotiya without confronting the same to the assessee and thus, the Assessing Officer had violated the principles of natural justice. It was also submitted by him that Assessing Officer had not referred to the average G.P. rate for the entire year and had picked up only favourable transactions. It was also contended that according to their knowledge, the G.P. rate shown by M/s. N.H. Jakhotiya was 1.31% only. Further insignificant mistakes do not form a ground for rejecting the accounts as held by the Hon'ble Supreme Court in the case of CITv.Padamchand Ramgopal [1970] 76 ITR 719. Further there was no material with the Assessing Officer to show that assessee had really charged more than the price declared in the bills. In this connection, he relied on the decision of the Supreme Court in the case of CIT v. A.Roman & Co. [1968] 67 ITR 11. On merits, it was submitted on behalf of the assessee that in the past, the G.P. rate shown by the assessee and accepted by the department was less than what has been disclosed by the assessee in this year. The G.P. rate declared in assessment years 1984-85 to 1988-89 varied from 0.4% to 0.8496. Accordingly, the G.P.rate declared by the assessee in this year at 1.19% should not be disturbed.
4. After considering the arguments of the assessee as well as the defects pointed out by the Assessing Officer, it was held by him that provisions under section 145(1) were clearly applicable particularly when the addresses of purchasers as well as sellers were not available on the bills. However, on merits, he was of the view that G.P. rate of 3% could not be applied by the Assessing Officer in view of various facts viz, (1) the Assessing Officer had not taken into consideration average rate of G.P. for the whole year in the case of M/s. N.H.Jakhotiya which was shown at 1.31% and had merely picked up some three bills favourable to the department. (2) The past history of the assessee shows that rate of G.P. declared by the assessee was less than what has been declared in the present year. (3) The turnover has increased four times as compared to preceding assessment years. (4) The G.P. rate has also increased from 0.4% in assessment year 1988-89 to 1.296 in the present year. But finally he sustained an ad hoc addition of Rs. 1,00,000 in the case of Mahindra Patodia and Rs. 50,000 in the case of Raghuvir Patodia. Aggrieved by these orders both the parties are in appeal before the Tribunal.
5. Both the parties have been heard at length. The Ld. D.R. has reiterated the reasonings given by the Assessing Officer and therefore, need not be repeated. However, it was contended by him that having held by the CIT(A) that provisions of section 145(1) were applicable, there was no justification for restricting the ad hoc addition particularly when the purchase and sale bills maintained by the assessee did not contain the addresses of the purchasers and sellers. On the other hand, the Learned Counsel for the assessee has vehemently challenged the application of the provisions of section 145(1) itself. According to him, all the sales and purchases are vouched and stock register in respect of each count has been maintained by the assessee and there is complete stock tally available in respect of each count. All purchases are from well-known parties and the list of persons from whom purchases were made is placed on page 16 of the paper book. Therefore, finding of the CIT(A) that names and addresses of the sellers were not mentioned in the purchase vouchers is factually incorrect. Further it is not the case of the Assessing Officer or the CIT(A) that all the sale bills are without names and addresses of the parties. It is only in case of cash sale, the name and addresses of the purchasers were not written since the assessee was not interested in knowing their addresses. In this connection reliance was placed by him on the Bombay High Court judgment in R.B. Jessaram Fatehchand (Sugar Deptt) v. CIT [ 1970] 75 ITR 33.
Further the G.P. rate in this year was better than the rate in the preceding years. In view of these circumstances, it cannot be said that profits could not be deduced from the account maintained by the assessee. Accordingly, the provisions of section 145(1) could not be applied. Regarding the comparable cases, it was contended by him that there was violation of principles of natural justice inasmuch as such instances were never confronted to the assessee. In addition he also reiterated all the submissions which were taken before the CIT(A).
6. Rival contentions of both the parties as well as the factual material placed before us have been considered carefully. In our opinion, the proviso to section 145(1), cannot be applied in the present case for the reasons given hereafter. The first reason given by the Assessing Officer is that the profits, declared by the assessee are on lower side. We have gone through the past history of the assessee and find that G.P. rate declared by the assessee in assessment years 1984-85 to 1988-89 varied between 0.84% to 0.4%. We also find that G.P.rate declared by the assessee at 0.4% in assessment year 1988-89 has been accepted by the Assessing Officer under section 143(3) vide order dated 30th March, 1991. Therefore, there was no basis for coming to the conclusion that profit declared by the assessee in this year was on the lower side. Regarding the instances of comparable cases referred to by him in para 6 of his order, it appears that such instances were never confronted to the assessee. Not even single sentence has been written by the Assessing Officer to indicate that such comparable cases were confronted or shown to the assessee. This point was specifically raised before the CIT(A) and there is no finding of the CIT(A) to the fact that such instances were confronted to the assessee by the Assessing Officer. Therefore there is a clear violation of the principles of natural justice and consequently those instances cannot be considered as admissible evidence/material as held by the Hon'ble Supreme Court in the case of Kishinchand Chellaram v. CIT [1980] 125 ITR 713.
Respectfully following the aforesaid judgment of the Supreme Court, the 3 instances as quoted by the Assessing Officer in his order are hereby excluded from consideration. If such material is excluded then it cannot be said that profits declared by the assessee were on lower side rather the assessee had declared better results as compared to the preceding assessment years.
Even assuming that the abovesaid instances were relevant, in our opinion, the same could not be the basis for holding that the profits declared by the assessee was on lower side. The CIT(A) has accepted the fact that Assessing Officer had not taken into consideration the average G.P. rate of the entire year in the case of M/s. N.H.Jakhotiya. If the average rate is taken into consideration, it would be 1.31% only which is nearer to the results declared by the assessee.
Further it is also not known how much turn over was effected by M/s.
N.H. Jokhotiya. In the absence of the same, it cannot be considered as comparable case. Even on merits, thus transactions cannot be taken into consideration.
7. The second reason given by the Assessing Officer is that the assessee had not prepared separate trading account in respect of each count of yarn. In our opinion, it is not relevant for holding that correct profits cannot be determined from the accounts of the assessee.
Admittedly, all the sales and purchases are vouched and the quantity of each purchase and sale bill is known and duly entered in the stock register maintained by the assessee. Further there is no dispute about the fact that stock register had been maintained by the assessee in respect of each count. Therefore, it is difficult to hold that profits could not be deduced from the accounts of the assessee. It is also pertinent to note that in the course of assessment proceedings, the assessee had offered to prepare separate trading account count-wise, if a time of one month was granted to him. But surprisingly the said request has been turned down by the Assessing Officer. Therefore, no fault can be found with the assessee in this regard.
8. The 3rd reason given by the Assessing Officer is that name and addresses of the customers are not given on the sale bills. The CIT(A) has given a finding that names and addresses are not given both in the purchase as well as sale bills. As far as the purchases are concerned, these are from well-known parties and fist of such persons has been given in the paper book at page 16. Therefore, the finding of the CIT(A) to that extent is factually incorrect and hereby vacated. As far as sales bills are concerned, it is not the case of the Assessing Officer that name and addresses are not given on all the sale bills. It is only the cash sale bills that name and addresses are not given. In this connection reference can be made to the Bombay High Court judgment in the case of R.B. Jessaram Fatehchand (Sugar Deptt.) (supra) wherein it has been held that proviso to section 13 of 1922 Act [corresponding to section 145(1)] cannot be applied on the ground that name and addresses of the purchases are not given in respect of cash sales.
Following the same, these reasonings of the Assessing Officer cannot be considered for deciding the issue regarding the applicability of section 145(1).
9. In view of the above discussion, we find that all the factual aspects taken into consideration by the Assessing Officer as well as CIT(A) are irrelevant for invoking the provisions of section 145(1).
Since all purchases and sales are fully vouched, quantity tally in respect of each bill is available and stock register is maintained in respect of each count of yarn, it is difficult to hold that profits cannot be deduced from the accounts maintained by the assessee.
Consequently, it is held that provisions of section 145(1) cannot be applied to the present case. Therefore, no addition can be sustained in this regard, particularly when trading results are better than the preceding assessment years right from 1984-85 to 1988-89. Accordingly, the additions sustained by the CIT(A) in the case of both the assessees are hereby deleted.
10. In the result, appeals of both the assessees are allowed while both the appeals of revenue are dismissed.