Delhi High Court

Raj Sons Jewellers vs Ito on 23 January, 2004

Equivalent citations: 2004 140 TAXMAN 81 Delhi

ORDER

Keshaw Prasad, A.M.

The appeal is directed by the assessed against the order passed by the Commissioner (Appeals) dated 24-6-2002 confirming various additions made by the assessing officer pertaining to assessment year 1998-99.

2. Briefly the facts of the case are that the assessed is a partnership firm engaged in the business of export of jewellery. The assessed makes purchase of gold mainly from MMTC/SBI. Issues that gold to various karigars and get the jewellery manufactured on job work basis. The assessed during the Year has also purchased old jewellery and has got the same remanufactured on job work basis. All sales made during the year were export sales. It filed its return of income declaring export sales of 3,10,00,109. The gross profit declared on such sales was 13 per cent which was better than the GP Rate of 8.6390 in the immediately preceding year. The return of income was accompanied by audited balance sheet, profit and loss account, tax audit report under section 44AB, certificate under section SOHHC for claiming exemption of income from export sales. Since all sales was export sales, the total profit of Rs. 19,61,339 was claimed to be exempt. During the course of assessment proceedings the assessing officer asked for producing the books of accounting. The assessing officer noticed certain discrepancy in the books of account. On the basis of these defects the assessing officer held that the assessed is not maintaining proper books of account. He further held that the assessed is maintaining minimum double set of books of account one meant for auditors, on the basis of which audit report has been issued and the other set of account is meant for the assessing officer. He on the basis of various mistakes stated in the asstt. Order rejected books of account and made addition of Rs. 17,55,882 being total of all totalling and posting errors in the cash books, ledger etc. These amounts were added to the income computed by the assessed as per Profit and Loss account. Further, the assessing officer made an addition of Rs. 15,50,005 by assuming that assessed is doing local business. The above addition was made on the ground that purchase vouchers have not been produced and books of account have been rejected under section 145(3). He estimated that 5 per cent of export turnover of Rs. 3,10,00,109 as local business (Business in India) and added the total turnover as income as the assessed has not declared purchases for the local business. A further addition of Rs. 19,50,231 was also made by the assessing officer on account of unexplained investment on the ground that assessed has not declared wastage in making of jewellery. He estimated 5 per cent should be normal wastage and accordingly worked out a figure of Rs. 19,50,231 by adding closing stock to the export turnover of Rs. 3,10,00,109 and then applying rate of 5 per cent. A sum of Rs. 14,46,510 was added as interest income on the basis of certain debits and credits appearing in the books of account. The claim for deduction under section 80HHC was denied on the ground that assessed has failed to furnish bank certificate of export and realization on Form No. 1 which according to the assessing officer is mandatory. Thus the total income assessed by him was Rs. 86,63,967.

3. The assessed carried the matter in appeal to the Commissioner (Appeals). The Commissioner (Appeals) confirmed the action of the assessing officer so far rejection of books of account was concerned. However, she deleted the addition of Rs. 17,55,882 made for various en ors of totalling and posting in cash book, ledger. However, she confirmed the addition of Rs. 15,50,005 on the ground that under the circumstances estimation of concealed profit at 5 per cent of the turnover is justified. As regards addition of Rs. 19,50,231 on account of unexplained investment by not showing wastage in manufacturing of jewellery, the same was reduced to Rs. 4,00,000 as in her opinion most of the purchases by the assessed are of standard gold are from MWC/S131 which does not contain impurities. T e addition on account o interest was deleted by Rs. 14,3 5, 100 as the same represented reverse entries in the books of account. The rejection of claim of deduction under section 80HHC, however, was upheld by the Commissioner (Appeals) on the ground that the CA certificate is not based on proper auditing of the books of account. The assessed is in appeal before us against the order of the Commissioner (Appeals). The assessed has raised 20 grounds of appeal against the order of the Commissioner (Appeals).

4. The ground Nos. 1 to 4 relate to the rejection of books of account. Mr. Ved Jain, the counsel for the appellant assailed the order of the Commissioner (Appeals) confirming the rejection of the books of account. Mr. Jain argued that there were no reasons for rejection of the books of account. According to him the discrepancies mentioned by the assessing officer in the cash book and ledger are not such which can warrant rejection of books of account. It was argued that all these mistakes are of clerical nature and have been taken into account at the time of preparation of the final audited balance sheet and profit and loss account. He drew our attention to the detailed submission made in writing before the Commissioner (Appeals) explaining each and every error and also the detailed trial balance on the basis of the books of account without carrying out rectification, the entries required for rectification and the final balance sheet and profit and loss account prepared after carrying out the rectification. It was pointed out that after carrying out these rectification in the books, the final balance sheet and profit and loss account is exactly the same as has been audited and attached with the return of income. It was submitted that these errors have been committed by the accountant are of totalling and postings and there is no entry which shows that there is any suppression of sales or purchases. In the books of account written manually these errors often occurs and the auditors while doing the audit traces out such errors and at the time of finalization of accounts, consequential impact/rectification effected in the balance sheet and profit and loss account. The only negligence is that these mistakes and errors have not been corrected in the books which is normally done while signing the Balance sheet. Since in this case each and every mistake has been explained there was no reason for rejection of books of account. Mr. Jain took is through the various discrepancies arid submitted that none of the errors vitiate the profitability and actual state of affairs of the assessed. 1-1c submitted that the assessing officer in her remand report in response to explanation submitted by the assessed submitted to the Commissioner (Appeals) could not give any justification for rejecting the explanation of the assessed. The observation of the assessing officer that the mistake appears day after day, which shows that these were committed systematically with a purpose to inflate the cash balance which was not actually available with the assessed is wrong and goes against his own allegations made in next para itself that assessed has been making withdrawal from the batik despite there being sufficient cash in hand as per books. This observation clearly shows that assessed all along was having sufficient cash in hand, then there was no need of inflating the cash in hand by manipulating the totals. Moreover, if the allegations that it was done with a purpose to inflate the cash in hand, the impact of each totalling error is to be seen with the cash balance in hand. As pet-the chart filed it was explained that the mistake in totalling of cash in hand is of very nominal amount and even if it is taken, into consideration, the cash balance will still be sufficient and there will be never any negating cash balance. As regards Commissioner (Appeals) observation regarding discrepancy in stock register. stated on page 8 of its order, the learned AR explained the issues raised therein. It was stated that learned Commissioner (Appeals) has failed to appreciate the maintenance of stock record maintained by the assessed. It was explained that register G-11 is the stock register o~ finished goods and G12 is the stock register of raw material. Accordingly, when finished goods are exported or given to karigars for remaking or change the same are to be entered in G-11 only. As such the observation of the Commissioner (Appeals) that stock records are not properly maintained as jewellery given to karigars is also entered in the register of export is not correct. Similarly, it was explained that assessed is exporting gold jewellery only. The stock of gold jewellery is maintained by weight only and this is the normal trade practice being followed by all. It was further submitted that it is impossible to maintain stock record itemwise and as such adverse inference drawn on this basis by the Commissioner (Appeals) is unjustified. As regards quantitative discrepancy, it was explained that the Commissioner (Appeals) has again misunderstood the facts. The assessed has submitted complete stock tally. The weight of the gold is to be measured with reference to its purity. As gold is given to karigars and it gets converted into jewellery of different fineness; the debit and credit is done on the basis of gold purities (fineness). It was further submitted that the Commissioner (Appeals) has made out an entirely different, ground for rejection of books of account on the basis of stock record whereas the assessing officers case for rejection of books of account was mistake/errors in the cash book and ledger which the assessed has been able to explain fully.

5. As regards, the statement of auditor recorded under section 181 during the assessment proceedings whereby they have refused to confirm whether these are the same books which have been audited by them or not, it was submitted that this was probably done by the auditor to avoid hassle at their end. As auditors are required after completing the audit and preparation of the balance sheet to ensure that all corrections of the mistake noticed during the audit are made in the books of account. Further closing entries such as provision for audit fees, depreciation, made in the Balance sheet are also to be made in the books. Since in this case the same were not carried out, that is why the auditors have avoided to give definite answer to the question put to them. It was submitted that auditors have not denied that these are the same books of account. Only thing is that they have not confirmed that these are the same books of account. It was further argued that the auditor in the statement have confirmed the fact that they have carried out the audit of the assessed. They have confirmed that the balance sheet, profit and loss account, audit report under section 44AB and certificate under section 80HHC has been issued and signed by them. Even the audit register was produced by them. As such the argument of the AR was that no adverse inference can be drawn against the assessed on the basis of the statement of the auditor. As regards, observation of the assessing officer and the Commissioner (Appeals) that the assessed was maintaining minimum double set of books, one for the assessing officer and the other for the auditors, it was submitted that these observations are illegal and perverse. Why an assessed will like to submit those books of account before the assessing officer which has overwriting, cutting and white fluid? And why it will like to hide those books of account if any from the assessing officer which exactly matches with the Profit and Loss Account and Balance sheet filed with the return of income. It was submitted that the assessed has maintained only one set of books of account which have been maintained on day to day basis. The accountant has been regularly writing it. As the accountant was not very efficient he has committed mistakes in totalling and posting which has been rectified subsequently and that is why there is cutting and overwriting and use of fluid. The errors in the posting from cash book to ledger have been duly carried out and effect taken into account while preparing the Profit and Loss account. It was, further submitted that had the assessed intended to hide facts from the deptt. by using white fluid as has been observed by the assessing officer, the assessed would have got its books rewritten, may be on computer which is otherwise not a costly exercise. The assessed has been sincere and transparent and produced all the facts before the deptt. and has explained each and every difference with facts and figures and accordingly no adverse inference can be drawn. The AR argued that books of account can be rejected when there is evidence of suppression of sale/purchases expenses, income etc. In this case there is not a single evidence to suggest anything like this. There being clerical mistake which the assessed himself has taken into consideration while preparing final profit and loss account, the action of the Commissioner (Appeals) confirming the rejection of books of account is unjustified. To support his argument, the AR referred to the various case laws. It was submitted that in the case of R.R Jessa Ram Fatehchand (Sugar Deptt) v. CIT (1970) 75 ITR 33 (Bom), it has been held by the Bombay High Court, that assesseds books of account are to be accepted unless on verification they disclose any defects and faults which cannot be reasonably explained. Further in the case of Vijaya Traders v. CIT (1969) 74 ITR 279 (Mys), it has been held that so long as it is not impossible to deduce the true income from the accounts, its computation can not made in any other way. It has been held that where accounts are maintained disclosing purchase and sale from which income can be ascertained there is no case for rejection of books of account on the ground of non maintenance of day to day stock register. Mr. Jain the AR pointed out that this case law specifically meets the ground taken by the Commissioner (Appeals) regarding non-maintenance of stocks itemwise for upholding the rejection of the books of account. The AR submitted that the points raised by the assessing officer as well as Commissioner (Appeals) for rejection of books of account stands fully explained and as such rejection of books of account on merit is also unjustified.

6. The learned Departmental Representative supported the order of the Commissioner (Appeals). As per Departmental Representative there are so many mistakes in the books of account and only course in such a situation is to reject such books. He argued that the assessing officer and the Commissioner (Appeals) has elaborately discussed this issue and as such the order of the Commissioner (Appeals) be upheld on this point.

7. On going through the asstt. Order passed by the assessing officer it is seen that the assessing officer has computed income on the basis of the income computed as per profit and loss account and thereafter added the various amounts being the discrepancy pointed out by him in the Cash book & ledger. The explanation of the assessed is that all these mistakes appearing in the books of account have been taken into consideration while preparing the profit and loss account and as such there was no need to reject the books of account and then again to add those amounts which have been considered in the profit and loss account which is also the basis of computation of income made by the assessing officer. On going through the paper book it is noticed that assessed has submitted explanation for each errors/mistakes in the cash book ledger and also explained how that mistake has been rectified later on and taken into consideration with the final profit and loss account. On the contrary, the assessing officer has added each and every figure without ascertaining the impact of the error, whether it will increase the income or reduce the income. The assessed has also filed reconciliation of the books of account with the profit and loss accounts along with explanation in support of its contention that the final profit and loss account filed with the return of income give a true picture of the profit and no further adjustment is required. After going through the paper book, and the detailed explanation filed before the Commissioner (Appeals), we find that the contention of the assessed is correct. The assessing officer has made the addition in an arbitrary manner and in the remand report filed by the assessing officer to the Commissioner (Appeals) to the explanation filed by the assessed before the Commissioner (Appeals), the assessing officer has not given any reason for rejection of the explanation nor he has rebutted the same. The basis for rejection of the books of account by the assessing officer and the Commissioner (Appeals) has been that there are cuttings, overwriting, use of fluid and some of the totals made in pencil besides totalling and posting errors in the cash book, ledger. The assessing officer has also indulged in surmises whereby he has stated that totals in pencils gives a free hand to the assessed to change the figures. The cutting overwriting, use of fluid totals with pencils cannot by itself the basis for rejection of books of account unless these are corroborated with some other material or evidence such as sales, purchases or the expenditure outside the books of account which has been incorporated or adjusted by way of overwriting or cutting. No such instance has been pointed out by the assessing officer or the Commissioner (Appeals) despite the fact that books of account and vouchers were impounded and continues to be in his custody. As regards the second contention of the assessing officer that there are totalling/posting errors in books of account and stock records the assessed has explained these errors and the impact of these errors have already been taken into consideration in the profit and loss account on the basis of which the return has been filed. So on this ground also the results declared by the assessed can not be disturbed. We may further point out the even rejected books of account do not loose the character of material or evidence despite mistakes and assessing officer can not ignore these books of account altogether. Even rejected books of account are valid piece of evidence. Further rejection of books of account is not justified when mistake in the books of account are of general or technical nature and there is no evidence of suppression of sales/purchases income or expenditure as has been held in the case of Vadayattu Jewellery v. State of Kerala (1997) 104 STC 121 (Ker). Accordingly we hold that the Commissioner (Appeals) was not justified in upholding the rejection of books of account.

8. Ground nos. 5 to 8 relate to the addition of Rs. 15,50,005 on account of local turnover. It was stated by the AR that firstly there is a contradiction in the stand taken by the assessing officer and the Commissioner (Appeals). He invited our attention to Para 18, Page 13 of the asstt. order, where the assessing officer has stated 1hold that at least 5% of the assesseds business is a local business (Business in India). The total turnover of the assessed is Rs. 3,10,00,109 therefore 596 of the total turnover which comes to Rs. 15,50,005 which is added to the income of the assessed". The Commissioner (Appeals) while confirming this addition has held

"The net profit rate of 5 per cent is also found reasonable considering the GP Rate of 13% disclosed by the appellant on export sales which carry lower margin of profit". According to the AR, there is contradiction in the stand of the assessing officer and assessed. The assessing officer has estimated 596 of the total turnover as local turnover and has added the whole turnover in the income without applying GP Rate, whereas the Commissioner (Appeals) has upheld the addition on the ground that rate of 5 per cent profit on total turnover of Rs. 3,10,00,109 is justified which means she has applied. the rate on total turnover of Rs. 3,10,00,109 while the assessing officer considers sale of Rs. 15,50,005 as local sales.

9. Besides this, the learned counsel also submitted that the addition has been made purely on surmises and conjectures. The assessed is engaged in export of jewellery since long and there is no material or evidence whatsoever giving any indication that assessed has made any local sales or sales outside the books of account. It was submitted that firstly the observation of the assessing officer for justifying this addition that the assessed has not produced complete purchase bills/vouchers is wrong and against the facts on record. He invited our attention to various pages of the paper book and the letter filed before the assessing officer where purchase bills/vouchers have been produced and even impounded by the assessing officer. Attention was also invited to Commissioner (Appeals) order Page 8 where in Commissioner (Appeals) has confirmed this fact and stated that copies of purchase vouchers have been filed in the paper book. it was further submitted that major/all the purchases are from MNITC/S131 and payments of all purchases have been made by account payee cheque. During the course of examination of books of account and the details the assessing officer could not point out any error in the purchase and sales. The errors pointed out in the asstt. Order for rejection of books of account are in respect of totalling and posting errors and there is no material or instance even to suggest that assessed has made any sales outside the books of account. As such making of presumption that assessed has made local sales is absolutely per verse. Further it was argued that no basis whatsoever has been stated why assessing officer assumes it to be 5 per cent of total turnover. It was further stated that the observation of the assessing officer that assessed has not declared purchases for the local business, itself proves that there were never any local sales. The addition as such is arbitrary and ad hoc addition based purely on surmises and can not be sustained. It was categorically stated by the learned counsel that the assessed has not done any local business and there being no material or evidence to support that there was local sales; the addition is arbitrary and needs to be deleted.

10. As regards addition of Rs. 15,50,005 the learned Departmental Representative contended that the addition has been rightly made. The assessing officer after rejecting books of account has to estimate income and only after rejection he has estimated that the total sales made by the assessed are not export sales and 5% of the sales may be local sales. The Commissioner (Appeals) has confirmed the action only on this basis.

11. We have considered the rival submissions, we find that the assessing officer has made the addition on the basis that assessed has failed to produce the purchase invoices and books of account are not reliable whereas the Commissioner (Appeals) has confirmed the addition on the ground that looking to the facts of the case estimation of 5 per cent of total turnover as concealed profits is more than justified. Thus there are two different basis adopted for sustaining the addition by the assessing officer and the Commissioner (Appeals) respectively. but in our view both the basis adopted by the assessing officer and the Commissioner (Appeals) are wrong and addition on this ground need to be deleted. The learned counsel during the course of hearing has demonstrated that all purchase invoices were produced before the assessing officer and these invoices were impounded and were in the custody of the department. He has invited our attention to various letters written by him to the assessing officer and also the observation of the Commissioner (Appeals) where she has confirmed the fact that copies of purchase vouchers have been filed in the paper book. A copy of the paper book was also sent to the assessing officer for a remand report. Accordingly this assessing officer was not justified in making addition on this account. Further the basis for making the addition adopted by the assessing officer is the local sales, Le. sales in India. No material or evidence has been referred to or indicated on the basis of which it can be inferred that the assessed has made sales within India.

12. For sustaining an addition there has to be some basis. The assessing officer is not supposed to make a pure guess work. The various case laws cited by the AR on this point supports the case of the assessed. As regards the stand of the Commissioner (Appeals) as discussed above the assessed having taken into account all the differences pointed out in the books of account while preparing Profit and Loss Account there were no reason for sustaining the addition. Accordingly we hold that addition of Rs. 15,50,005 is without any basis and the same is deleted.

13. Ground nos. 9 to 12 pertain to addition of Rs. 4,00,000 sustained by the Commissioner (Appeals) out of total addition of Rs. 19,50,231 made by the assessing officer on account of unexplained investment by not showing wastage of gold. The AR submitted that the addition is unjustified and even otherwise the expenditure being of business is allowable under section 37 of the Act. The learned AR submitted that assessed is getting its jewellery manufactured from karigars. It purchases gold from MWC/S131 and issues them to Karigars. The karigars return the jewellery which is exported. The weight of the gold is entered against the name of the karigar and on the basis of a fixed formula the karigar returns the jewellery. Similarly, in the case of old ornaments of which the quantity is very small as against major purchases from MMMSBI, the old jewellery is issued to karigars and new jewellery is received back again on the basis of a fixed formula.

14. Since the whole of the work of making jewellery is being outsourced, there is no loss on its account. He further pointed out that the observation of the assessing officer in para 17 page of 12 of the asstt. order that a gold jewellery weighing 90 gross actually consumes gold of 100 gms. Clearly shows that he has not been able to understand the trade. The statement of President of All India Sarafa Association has been misinterpreted to give a finding that assessed has deliberately not shown the gold wastage. The AR submitted that why the assessed will not like to show the wastage if it has actually incurred. On the contrary, he would get a deduction and can reduce its income. It is not a case of expenditure which is not allowable under the Act. The allegation is not also related to any business outside the books of account. When the assessed has disclosed all transaction of purchases and sales, it was unthinkable that the expenditure if any incurred on wastage will not be shown. He submitted that transaction of the assessed is in the nature of trader getting job work done from outside and as such there is no wastage at its end. Further it was submitted that as per Commissioner (Appeals) order there can be wastage only on old jewellery. The total purchases of which are only 6530 gms. And applying a rate of even 5 per cent the net wastage will be only 345 gms. and the value of 345 gms gold applying an average rate of Rs. 4000 per 10 gm. can not exceed Rs. 1,30,000.

15. In the alternative, it was argued that expenditure is allowable under section 37 of the Act as the same is directly incurred for the purpose of business. In support of its contention the learned AR has relied upon the judgment of Ahmedabad Bench of the ITAT in the case of Ruby Builders v. ITO (1999) 63 TTJ 2021 (Ahd) and M.K. Mathivathanan v. ITO (1989) 31 ITD 114 (Mad). It was further clarified that the proviso inserted in section 69C denying benefits of unexplained expenditure under section 37 has been inserted with effect from assessment year 1999-2000 and as such is not applicable to the year under appeal Learned Counsel, therefore, argued that Commissioner (Appeals) was not justified in confirming the addition. On the other hand, learned Departmental Representative supported the order of the Commissioner (Appeals).

16. We have considered the rival submissions. The Commissioner (Appeals) has sustained the addition on account of 5 per cent wastage of gold in re-making of jewellery from old jewellery the gross weight of which has been computed at Rs. 6530 gms. There is no dispute that this wastage of gold if any will be a business expenditure allowable under section 37 of the Act and the restriction placed under section 69C of allowing such expenditure is not applicable to the year under appeal. As such the assessed should succeed on this reasoning itself. However, on perusal of the records and the arguments advanced by the AR, we are of the view that this addition can not be sustained otherwise. The assessing officer and Commissioner (Appeals) has sustained this addition on the basis of statement of President of All India Sarafa Association and applying a theoretical test without taking into consideration the actual practice adopted by the assessed. assessed himself is not manufacturing any item. The manufacturing is being carried out by the karigars and assessed is supplying the raw material and getting the finished jewellery which is not of same purity as that of the raw material supplied. The assessed is getting the jewellery back by weight under a set formula. So there cannot be a weight loss so far the assessed is concerned. The karigar at its end converts the gold or the old jewellery into the jewellery of particular fineness. In doing so he mixes certain alloys and metal and then makes the jewellery. All this process is being done at the end of the karigar. This is an admitted fact that assessed is getting the jewellery manufactured from karigars and not doing himself. If that be so then the loss in making even if it there has to be, it has to be at the end of the karigar. The Commissioner (Appeals) in her order has held that the appellant has not produced any evidence to support of his claim that wastage is borne by the karigar. However, this is an allegation by the revenue that the wastage has not been shown. The onus is on revenue to prove that there is wastage and that wastage has been borne by the assessed and has been met from unexplained sources. The assessed in his statement has explained the procedure and method being adopted by him. That procedure and method can not be rejected by shifting onus upon him. The addition has been made under section 69C and that be so the onus will be on revenue to establish that there is an unexplained expenditure incurred by the assessed.

17. After taking into consideration the argument and the material before us we hold that addition of Rs. 4,00,000 is unjustified and the same is deleted.

18. Ground Nos. 13 & 14 have not been pressed by the AR, hence these are dismissed.

19. Ground Nos. 15 to 17 are in respect of denial of exemption under section 80HHC of the Act. It was stated by the AR that the Commissioner (Appeals) was not justified in confirming the action of the assessing officer denying exemption under section 80MC. The learned AR stated that the reason given by the Commissioner (Appeals) for denying exemption are entirely different than the reasons given by the assessing officer. He invited our attention to Paras 11 and 12 of the asstt. Order where the assessing officer has given his findings as under :

"11. It is pertinent to mention that the assessed has not furnished the bank certificate of export and realization on Form No. 1, which is mandatory. The assessed claimed that it is doing export sales and receiving export realization in foreign exchange. But the assessed has brought nothing on record to establish that the sale proceeds were received in convertible foreign exchange which is an essential ingredient for claiming deduction under section 80HHC.

12. Under the facts and circumstances discussed above, the claim under section 80HHC amounting to Rs. 19,61,339 is disallowed".

20. It was pointed out that by the AR that the observation of the assessing officer is incorrect both on facts and law. Firstly there is no statutory requirement of furnishing bank certificate of export and realization on Form No. 1. Form No. 1 of foreign exchange manual is meant for claiming cash incentive from Government and with the abolition of cash incentive on export since 1992, no such certificate is being obtained. The only requirement is of obtaining export certificate from the Chartered Accountant, under section 80HHC(4) of the Act which the assessed has obtained and submitted along with the requirement. Secondly, the assessed has furnished complete proof of export and realization of foreign exchange as has been confirmed by the Commissioner (Appeals) on page 18 of the order where she has stated :

"From the documents produced before me, I find that the appellant has exported jewellery and brought the convertible foreign exchange into the country which makes him entitled to deduction under section 80HHC but the deduction under section 80MC is subject to Case certificate and unless the certificate is based on proper auditing of the books of account, the same can not be accepted".

21. Thus the Commissioner (Appeals) has confirmed the assessed having filed all the evidence in support of export and deduction under section 80HHC, which shows that the ground on which the claim for deduction was denied by the assessing officer was unjustified. However the Commissioner (Appeals) after being satisfied of the reply submitted by the appellant to the ground raised by the assessing officer for rejecting 80HHC claim has set out a new case against the appellant that the certificate of CA is not based on proper audit and as such assessed is not entitled to 80HHC deduction.

22. The learned counsel submitted that this action of the Commissioner (Appeals) of setting up a new case is unjustified and illegal. According to him, the Commissioner (Appeals) having got an answer to the allegation of the assessing officer, has tried to come out with the new logic which is against the law and as such on this point itself the issue be decided in its favor. Before Commissioner (Appeals) the asstt. order was being assailed by the assessed. As such once the ground on which the addition has been made gets knocked down the appellate authority can not come out with alternative ground to sustain the addition.

23. He further submitted that action of the Commissioner (Appeals) also deserves to be reversed on merit. The Commissioner (Appeals) has admitted that the assessed is entitled to deduction under section 80HHC. Her only ground is that CA certificate is not based on proper auditing of books. Firstly the law requires the assessed to obtain a CA certificate under section 80HHC(4). The CA has to compute deduction and issue certificate as per his own examination. Section 80HHC(4) requires filing of this certificate that deduction has been rightly claimed in accordance with the provisions of the Act. There is not requirement of audit. Even Form no. 10CCAC on which report is to be given does not state of audit. It only refers to examination of accounts and records. As such assessed having filed the certificate, the provisions of section 80HHC(4) stands complied with and deduction can not be denied. Learned Counsel stated that even the statement of the auditor was recorded under section 131 of the Act has confirmed that he has issued the certificate under section 80HHC(4) of the Act. He has nowhere stated that certificate issued by him is wrong or there is any error. On the contrary he has even produced his audit register. As such the AR argued that denial of a statutory exemption is unjustified. It was further argued though the rejection of books of account in this case is wrong and unjustified, but for the sake of argument even if it is considered that books of account have been rightly rejected (though not conceded) even then the assessing officer is duty bound to allow deduction under section 80HHC of the Act on the income estimated by him which is attributable to export income. He further explained that there is no provision in section 80HHC whereby it has been provided that in case of rejection of books of account or best judgment asstt. benefit of deduction under section 80HHC will not be allowed. It was further pointed out that where the legislation intended to deny benefit or exemption in case of best judgment asstt., same has been expressly provided. For example, in the case of best judgment asstt. benefit of concessional rate of tax to regd. firm has been expressly denied under section 184(5) of the Act. The learned counsel also read out the following provisions :

"80HHC(1) : Where an assessed, being an Indian company or a per-son (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessed, (a deduction to the extent of profits, ref erred to in sub-section (1B)], derived by the assessed from the export of such goods or merchandise".

80HHC(4) : The deduction under sub-section (1) shall not be admissible unless the assessed furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed".

24. To interpret the above section in a manner the way Commissioner (Appeals) has done is absolutely wrong. On the contrary, even certificate is issued by the CA and the assessing officer makes any adjustment to the export computed as per CA certificate, by disallowance of certain expenditure etc. the 80HHC deduction has to be recomputed by the assessing officer in accordance with the provisions of section 80HHC(3)(a) of the Act. The statutory compliance is complete after the return is filed along with the certificate. The learned counsel further argued that in this case even if any of the addition is upheld then the assessed will be entitled to enhanced deduction under section 80HHC of the Act, as that addition will increase the income from export as that is the only business of the assessed. In support of this the AR relied on the judgment in the case of Shriram Pistons & Rings Ltd. v. Asstt. CIT (1995) 81 Taxman 164 (Mag) and Mandhana Exports (P) Ltd. v. Asstt. CIT (2002) 82 ITD 306 (Bom). The AR also argued that the Commissioner (Appeals) was not justified in ignoring the legal position in this regard. He further submitted that the finding of the Commissioner (Appeals) that certificate has been issued by the auditor without auditing of the books is against the facts on record and the statement of the auditor. The auditor has confirmed in his statement that he has audited the books and signed the certificate after auditing. The learned counsel argued that Commissioner (Appeals) has wrongly distinguished the case cited before her and the assessed is entitled to deduction under section 80HHC not only of the amount stated in the certificate but of higher amount in case any enhancement is made to the returned income of the business or profession.

25. On the other hand, learned Departmental Representative supported the actions of the Commissioner (Appeals) and reiterated that certificate without proper auditing is not an acceptable certificate.

26. We have considered the rival submissions. The disallowance of deduction under section 80HHC has been upheld by the Commissioner (Appeals) on the ground that certificate issued by the auditor is not based on proper auditing of the books of account, whereas the assessing officer has disallowed the deduction under section 80HHC on the ground that assessed has failed to file proof of having received convertible foreign exchange, The allegation of the assessing officer stands answered by the observation of the Commissioner (Appeals) where she has confirmed that the assessed has exported jewellery and brought the foreign exchange into the country. The assessed has also filed details and evidence in respect of the export sales and foreign exchange remittance in the paper book before us. As such the reason given by the assessing officer for disallowing the deduction under section 80HHC stands rebutted by the reasoning given by the Commissioner (Appeals). However, she has held that the certificate is not based on proper auditing of the books of account in accordance with the provisions of the law. Section 80HHC(4) of the Act requires the assessed to furnish in the prescribed from the report of an accountant certifying that the deduction has been rightly claimed. As such the obligation of the assessed is to obtain a report and furnish the same with the return of income. There is no obligation on the assessed to ensure that the Chartered Accountant issues such certificate only after proper auditing of accounts. It is for the Chartered Accountant to decide how he issues such report. The assessed cannot enforce anything on the Chartered Accountant. Moreover, as per form 10CCAC which is the prescribed form, the Chartered Accountant is not required to do the audit for issue of this certificate. He is required to examine the accounts and records. In this case the assessed has furnished the report in the prescribed form and the Chartered Accountant, having confirmed in his statement recorded under section 131 having issued the certificate, the requirement of section 80HHC(4) gets complied with and the deduction can not be denied on the basis of certificate being not based on proper auditing of accounts. Accordingly, we hold that Commissioner (Appeals) was not justified in denying benefit of deduction under section 80HHC and the assessed be allowed deduction under section 80HHC of the Act.

27. The assessed has raised in ground number 17 the issue of enhanced deduction under section 80HHC based on the income finally assessed after taking into consideration addition if any. The contention of the AR is that as per provisions of section 80HHC(1) an assessed is entitled to a deduction of the profits derived by the assessed from the export of such goods, or merchandise. Sub-section 3 of section 80HHC prescribed the method of computation of profits derived by the assessed from the exports and clause (a) of this section states that profits derived from export shall be the amount which bears to the profit of the business the same proportion as the export turnover of the business bears to the total turnover. The profits of the business has been defined in explanation (baa) and means profit of the business as computed under the head Profit and gains of business. As such any disallowance or addition made to the business income shall increase the Profit and gains of business and deduction under section 80HHC will be computed on the basis of such assessed income as that is the income as per the assessing officer which has been computed under the head Profit and gains of business or profession. The certificate of Chartered Accountant is based on the Profit and gain as computed by the assessed, and once the assessing officer does not agree with the Profit and gain of business or profession as computed by the assessed, then he is required to suitably modify the deduction under section 80HHC based on the Profit and gain of business or profession computed by him. We are in agreement with the contention of the learned counsel in this regard. The case laws cited by him in the case of Sri Pistons & Rings Ltd.s (supra) and of that of Mandhana Exports (P) Ltd.s case (supra) also supports the above proposition. Accordingly, we direct that the deduction under section 80HHC be computed on the basis of assessed Profit or gain of business as finally assessed after taking into consideration addition if any.

28. Ground Nos. 18 and 19 are for levy of interest under section 234B of the Act without there being any specific direction by the assessing officer in the asstt. order. The AR has placed reliance on the judgment of the Supreme Court in the case of CIT v. Ranchi Club Ltd (2001) 247 ITR 209 (SC) which has been applied by the Delhi Bench of the ITAT in the case of Multi Chemicals v. Asstt. CIT (2001) 76 ITD 367 and also upheld by the jurisdictional Delhi High Court in the case of CIT v. Kishan La1 HUF (2002) 258 ITR 359. The AR argued that the Commissioner (Appeals) was not justified in applying Kalyan Kumar Ray v. CIT (1991) 191 ITR 634 (SC), which judgment is not exactly on the same issue and said judgment is based on concession and much before the judgment of the Supreme Court in the case of Ranchi Club (supra). On the other hand, learned Departmental Representative relied on the order of the Commissioner (Appeals).

29. We have considered the rival submissions. We find from the asstt. Order that there is no direction by the assessing officer for levy of interest, though there is direction for initiation of penalty proceedings under various sections of the Act. Following the judgment of the Honourable Supreme Court in the case of Ranchi Club Ltd. (supra) and the judgment of the jurisdiction High Court in the case of Kishan Lal (HUF) (supra), we hold that the interest can riot be charged under section 234B without there being a specific order to this effect. Accordingly, levy of interest is directed to be deleted.

30. In the result the appeal filed by the assessed is partly allowed.