1. This is an appeal by the Revenue against the order dt. 28th June, 1996, of the CIT(A), Ajmer, for the asst. yr. 1993-94.
2. The Revenue agitated on the ground that the CIT(A), Ajmer, erred in deleting the trading addition of Rs. 13,05,606 made by the AO by applying net profit rate of 2.67 per cent against the net profit of 0.74 per cent declared by the assessee.
3. The brief facts of the case are that the main dispute in this appeal relates to the addition of Rs. 13,05,606 rejecting the book results.
The company-respondent is a manufacturer of polyester suitings. During the year under consideration, on total sales of Rs. 6,28,174 net profit of Rs. 5,00,066, giving net profit rate of 0.74 per cent was declared.
The company-respondent was asked to file the detail of purchase and sale of quantity, quality and value. As such details were not filed and the AO felt that book results cannot be verified, he gathered information from the Central excise department about the production, sale and net profit of the company respondent. On the basis of the information collected from the Central excise department he worked out the net profit at 2.67 per cent. As there was wide variation in the net profit as arrived at by the AO on the basis of information collected and the net profit as reflected in the books of account he concluded that provisions of Section 145(2) are clearly applicable. On the basis of 25 instances collected by him and narrated in his assessment order he applied net profit rate of 2.67 per cent on the declared sales which resulted into trading addition of Rs. 13,05,606.
4. The learned CIT(A) had deleted this addition after recording the following reasons at pp. 4 to 6 of his order : (i) The AO has tried novel method to estimate the profit of the appellant. The method adopted by him is not proper as it is bound to give misleading results.
(ii) From the records it appears that all the sales and purchases of the appellant are vouched and even quantitative details are available, though not in the form and manner the AO wanted.
(iii) The inability of the appellant-company to produce the details in the format desired by the AO is understandable in view of the fact that it has produced as many as 618 qualities and it would have definitely taken a long time for classification and grouping the details as wanted by the AO. (iv) The AO who has passed the order had given only 10 to 15 days to the appellant-company for filing such details which obviously was not a sufficient time.
(v). The AO in para 1 has given a long list of notices issues but all these were issued by his predecessor who might have not called the information in the way and format he wanted. Therefore, reference of the earlier notices in the assessment order appears irrelevant.
(vi) As per rules the manufacturers of polyester cloths have to declare wholesale market price of finished goods/fabrics and have to give break-up of wholesale selling price under the heads yarn, cost, wastage, weaving charges, process charges, shrinkage, selling, packing, administrative expenses and then net profit. Obviously while filing this form such information depends on many factors like position of market, acceptance of goods produced by the company, marketing network of the company, competition and demand of a particular fabrics. All these factors cannot be taken into account while giving estimated selling price because at that time everybody thinks of normal profit. Therefore, estimating the total income merely on the basis of excise statement without comparing the same with the book results or other available material can lead to misleading results and wrong assessment.
(vii) During the course of appellate proceedings, the appellant was asked to give details of actual sales price of those 25 items which have been selected by the AO and it was found that in most of the cases the actual selling price was less than estimated at the time of declaration before the excise department. The result is that while as per working of estimated sales price assessee was deemed to have earned net profit in all the 25 items, in reality in more than half the items there is loss. This clearly indicates that the income cannot be estimated on the basis of sales price given in the excise declaration statement. He, therefore, held that the method adopted by the AO for estimating the profit was completely misleading and improper. He held that the AO had no justification to reject the book results.
(viii) The AO has not pointed out serious defects in the books of accounts rather, on the other hand, he has accepted the total sales as declared by the appellant and has also not made any disallowance out of expenses. He would hold that he had no justification to reject the book results.
5. The learned Departmental Representative relied on the order of the AO.6. The learned authorised representative relied on the order of the CIT(A) and also made the following submissions : The AO has made the addition on the basis of declaration furnished to the Central excise department, Bhilwara No addition can be made in view of the following submissions : (i) Under the Excise Act the assessee used to submit declaration in the beginning of every year on estimated cost, estimated selling price and estimated net profits so as to arrive at the valuation of goods for levy of excise duty purposes. This declaration has to be submitted at production stage and not after making the actual sales.
Hence, statements are mere estimates and have no relevancy with actuality. The appellant used to submit the excise declaration statement once in a year for releasing the processed fabric from the process house for every quality processed there. Once such statement is submitted to the process house then throughout the year the process house pays the excise duty accordingly and release the processed goods.
(ii) That the AO has adopted figures in respect of only 25 qualities for making estimation in respect of 618 qualities. The assessee has submitted actual sales price of all the 25 items selected by the AO at the appellate stage, and it was found that actual selling price was less than the estimated selling price declared in the excise declaration. This finding is available at p. 6 of the appeal order, where some examples have been quoted where actual sales price was less than selling price declared in excise declaration. Thus, application - of average net rate on the basis of 25 items is absolutely wrong. In reality sales and selling price of different quality are based on market and it always fluctuate from actual results. It is quite possible that in respect of some of the quantities that value in statement submitted with excise department is lower than the actual price. We have filed declaration of all the 618 qualities before the excise department, if considered all the qualities then the net profit definitely be lower. The AO has not taken into consideration such items, the possibility of existence of the same cannot be ignored. Therefore, there is no justification in the estimation of the AO as the same was made on pick and choose basis.
(iii) The declaration is very theoretical and meant for the purpose of levy of excise duty only. In the present case, declaration was filed taking into consideration the estimated expenditure, sale price and profit figures. The same cannot be relied for the purpose of making addition under the IT Act. It is impossible to presume that throughout the year the selling price, cost as well as profit remain the same. Therefore, it is very theoretical to assume that in the entire year labour cost, material cost and other indirect/direct expenses remain the same, which is true in respect of selling price also which depend on several volatile market factors. The actual expenditure are always more or less than estimation. The details were also filed before the CIT(A) the finding is available at p. 3 of the order. Therefore, there is no reason for adopting the estimate under Excise Act for the purpose of making trading addition.
(iv) That the estimated sales figures in the statement submitted with the excise department are subject to various discounts, etc.
which are not considered in that declaration. In this respect it is further submitted that various expenses viz., sales, commission wastage, damaged fabric quality, depreciation, interest cost, selling and dispatch expenses are either not taken into consideration or considered at an estimated figure which is bound to vary during the year. All these factors result in observation and slow movement of fabric and that has adverse affect on the margin of profit. In some cases it may result in loss. Therefore, the estimation filed under Excise Act is relevant only for the purpose of levy of excise duty on the goods manufactured. The same is completely irrelevant for the purpose of estimation of income under the IT Act.
(v) The method adopted by AO is defective, as he has not considered the quantitative details of the particular quality. If the profit rate in particular quality is higher but sales are negligible then it will effect overall net profit.
7. In addition to above arguments the learned authorised representative also made the following further submissions : (i) The assessee maintained complete regular books of accounts, vouchers for purchases, sales and expenses, manufacturing register, complete quantitative details in respect of total sales which supports the profit declared by the assessee. The stock register has been maintained in strict compliance with statutory requirement of excise department and Schedule IV of the Companies Act. The books of accounts are duly audited by C.A. and quantitative details have been given in audit report. The assessee has produced all the books i.e., cash book, ledger, vouchers, manufacturing register on various dates of hearing and filed various details as required by the AO. The AO has not pointed out specific defects either in books of accounts or quantitative records. The AO has not pointed out any specific item of mistake, discrepancy and manipulation in any of the entries recorded in the books of accounts. It is submitted that if the books of accounts are not rejected no addition can be made in view of the following decisions : 5. ITO v. Rupal Chem Dyes & Metals Sales Corporation (1992) 42 TTJ (Ahd) 245; and (ii) That there is no evidence with the AO that the assessee sold goods over and above the price recorded in the books of accounts.
Further, the AO has not pointed out even a single defect in the expenses recorded in the books and quantity of stock. Moreover, all sales are realised through demand draft/cheques. Therefore, there is no justification in rejection of the books of accounts under the provisions of Section 145(2) of the IT Act. Section 145(2) can be invoked where the AO is not satisfied about the correctness of the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee. Under the circumstances, there was no justification in rejecting of the books of accounts of the assessee under Section 145(2).
8. The provision of Section 145(2) can be applied when the accounts maintained by the assessee are not correct or not complete. The assessee has maintained complete records including quantitative tally.
Hence, the CIT(A) has rightly deleted the trading additions. This view is also supported by Jaipur Bench in Sona Textiles (P) Ltd. v. Asstt.
CIT (1997) Tax World 82 (Jp).
9. Lastly the learned authorised representative contended that the net profit declared by the assessee is better than previous two years. A comparative chart of net profit for the year under consideration and the previous two years was filed. During the year under appeal the assessee declared net profit rate of 0.74 per cent as against net profit rate of 0.62 per cent and 0.46 per cent in the asst. yrs.
1991-92 and 1992-93 respectively. The estimation made by the AO was without any basis, completely misleading, improper and without pointing out any defects in the books of accounts. The AO had accepted total sales as declared by the assessee. Therefore, the learned CIT(A) has rightly deleted the addition.
10. We have considered the rival submissions. The company-respondent is a manufacturer of polyester suitings. During the year under appeal, the assessee has declared net profit rate of 0.74 per cent and the AO had applied net profit rate of 2.67 per cent on the basis of information collected from Central excise department. We have perused the order of the learned CIT(A). The learned CIT(A) had stated that the company was asked to give details of actual sale price of those 25 items which had been selected by the AO for arriving at the net profit rate of 2.67 per cent. It was found that in most of the cases the actual sale price was less than estimated at the time of declaration before the excise department. For example in quantity No. 249 the sale price declared was Rs. 73.53 per mtr. while actually it was sold at 69 per mtr. In quantity No. 255 sales were estimated at Rs. 62.55 per mtr. while actual sales was Rs. 58 per mtr. Quantity No. 257 was sold for Rs. 57 per mtr. while estimated sale price was Rs. 61.53 per mtr. It is only in a few items that the actual sale price tallies more or less with the estimated sale price. The result is that while as per working of estimated sales price the appellant deemed to have earned net profit in all the 25 items. This clearly indicates that the income cannot be estimated on the basis of sale price given in the excise declaration statement. Besides, the learned CIT(A) observed that the AO had not pointed out any serious defects in the books of accounts rather, on the other hand, he has accepted the total sales as declared by the assessee-company. After having perused the record, reasons given by the learned CIT(A) and also the reason given by the learned authorised representative, we are of the opinion that the net profit rate of 2.67 per cent arrived at by the AO on the basis of declaration statement before the excise department was not correct. For the reasons given by the learned CIT(A), we find that the figures given by the assessee before the excise department was on estimate basis and correct profit rate earned by the assesses cannot be arrived at on the basis of this statement. Besides, we also find that the AO had not pointed out any serious defect for invoking the provisions of Section 145 of the Act and net profit rate declared during the year under appeal is better than net profit rate declared during the immediately preceding two years. Therefore, we decline to interfere with the order of the learned CIT(A).