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Judgment
J.K. Ranka, J—This instant appeal under Section 260A of the Income Tax Act (for short ''the Act'') is directed against the order dated 5.11.2014 passed by Division Bench of the ITAT, and is relevant for the assessment year 2003-04.
Brief facts which can be noticed in the present appeal, are that the respondent-assessee is a Private Limited company and is deriving income by way of export of ready made garments. The assessee maintains closed and adjusted Books of Account and accounts are stated to be audited.
During the course of assessment proceedings, the Assessing Officer noticed that the Trading Results declared by the assessee were not proper and the Gross Profit rate had declined sharply from 28.14% to 16.22%. An explanation was sought, and it was narrated by the assessee that during the previous year, relevant to the year under appeal, the assessee had made 100% export of ready made garments, that it had purchased mostly Grey fabric, and after purchasing Grey fabric the same was got printed/processed from process houses/printers etc., incurring additional cost as compared to the immediately preceding assessment year, and it was further explained that the average cost per meter as compared to preceding year had increased sharply. Other factors were also narrated, however, the Assessing Officer was not satisfied with the explanation so offered and rejected the Books of Account under Section 145(3) of the Income Tax Act, 1961 (for short ''the Act'') and applied a G.P. rate of 25% and made a Trading addition of Rs. 32,86,536/-. Other additions were also made.
The matter travelled before the Commissioner of Income Tax (Appeals), who went into detailed facts and after considering the arguments raised by the respondent-assessee in the light of judgment of this court in the case of CIT v. Gotan Lime Khanij Udyog reported in 2002 (256) ITR 243, came to the conclusion that mere rejection of Books of Account by resorting to Section 145 of the Act, will not necessarily lead to addition to the Returned income, and accordingly deleted the Trading addition.
The Revenue carried the matter in appeal before the Tribunal, who also vide impugned order, concurred with the findings of the CIT(A), and in the light of several other authorities upheld the order of CIT(A) who had deleted the addition. Hence this appeal.
Learned counsel for the revenue contended that when there was a sharp decline in the G.P. rate, as also the Books of Account were rejected being defective, and once the finding had been reached by the Assessing Officer that the books had to be rejected for so many reasons mentioned in the assessment order, then there was no material before the Assessing Officer except to resort to estimation to arrive at a proper assessment and to deduce proper profits, and even the Assessing Officer gave leverage and applied G.P. rate of only 25% as against 28.14% in the immediate preceding year. He contended that the material placed on record about rates being higher this year were not supported by adequate material and thus, the appellate authorities erred in deleting the addition which was fair and reasonable. He further contended that in the assessment year 2004-05 again a G.P. rate of 22.92%) was shown and this year there is a sharp decline which had not been proved by acceptable evidence. He further contended that substantial questions of law arise out of the order of Tribunal, which needs consideration.
We have considered the arguments advanced by the counsel for the revenue and have perused the impugned order as also the other orders. In our view the CIT(A) as well as the Tribunal, after appreciation of evidence on record and considering the facts have come to a definite finding of fact that the trading results were not required to be interfered with merely because G.P. rate had decreased to an extent. The assessee has pin-pointedly placed material on record that the turn over stood increased from about 2 crore in the assessment year 2002-03 to 3.74 crore in the assessment year 2003-2004, and apart from this fact the Assessing Officer has not controverted or observed contrary to the claim of the assessee that cost had increased, when specific material was placed, before the Assessing Officer. Though the Books of Account have been rejected, and proper estimation can certainly be made but it is no ground to make an addition in a case where the Assessing Officer was not able to come to further material or controvert the facts narrated by the assessee during the course of assessment proceedings. The Assessing Officer was unable to pinpoint as to any specific defect noticed during course of the proceedings except that the Books of Account were rejected on certain discrepancies. It was for the Assessing Officer to come out clearly as to the basis for rejection of the Book of Accounts. Though both the appellate authorities have concurred with the finding of the Assessing Officer that rejection of Books of Account under Section 145(3) of the Act is found justifiable but whether in each and every case where Books of Account are rejected, does it entitle the Assessing Officer to make an addition to the Trading results? This court has taken into consideration similar issue in the case of CIT v. Gotan Lime Khanij Udyog (supra) which has been considered by the Tribunal wherein it has been held ad infra:-
"The Assessing Officer had found that the trading accounts of the assessee for the assessment year 1986-87 were not backed up with the quantitative and qualitative stock details and that there was a considerable fall in the gross profit rate and invoked the provisions of Section 145(1) of the Act. The Assessing Officer was not convinced by the reason given by the assessee that the assessee had employed a method of accounting regularly which was accepted by the Department and made an addition of Rs. 3,34,960 by increasing the gross profit rate. The Commissioner (Appeals) while substantially accepting the explanation of the assessee for reduction in gross profit rate was of the view that the addition was on the higher side and sustained an addition of Rs. 34,000 only to cover up the possible leakage in the books of account. The Tribunal upheld the invocation of the provisions of section 145(1) but did not sustain the additions retained by the Commissioner (Appeals). On a reference:
Held, that the Tribunal had reached the finding on the ground that, in the absence of any finding recorded by the Commissioner (Appeals) that the expenses incurred on any account appeared to be unreasonable or excessive, the additions sustained merely on suspicion of pilferage or leakage were not justified. This conclusion was a finding of fact keeping in view that the additions in the profits and gains returned by the assessee were not a necessary concomitant of an order made under sections 145(1) or 145(2). Therefore, there was no error in the order of the Tribunal deleting the entire additions to the trading results after holding that the proviso to section 145(1) was applicable."
This court, in the case of Malani Ramjivan Jagannath Vs. Assistant Commissioner of Income Tax, (2007) 207 CTR 19 : (2009) 316 ITR 120 : (2007) 163 TAXMAN 731 , has held as under:-
"Mere deviation in GP rate cannot be a ground for rejecting books of account and entering realm of estimate and guesswork. Lower GP rate shown in the books of account during current year and fall in GP rate was justified and also admitted by the AO as well as CIT(A) as well as the Tribunal. Therefore, fall in GP rate lost its significance. Having accepted the reason for fall in GP rate, namely, stiff competition in market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated GP by rule of thumb merely for making certain additions. We are, therefore, of the opinion that the findings arrived at by the Tribunal suffers from basic defect of not applying its mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except what has been shown by the assessee in the books of account. We are, therefore, unable to sustain the order of the Tribunal."
In the instant case as well we notice that even the Assessing Officer applied the G.P. Rate of 25% as against 28.14% in the preceding year. Therefore, the Assessing Officer also resorted to estimation. Accordingly in view of what we have observed hereinabove is basically a finding of fact based on the appreciation of evidence and this being essentially a finding of fact no substantial question can be said to arise out of the order of Tribunal. Accordingly, the instant appeal is dismissed in limine.