Commissioner Of Income Tax-Ix. vs M/S Jas Jack Elegance Exports.
2010 Latest Caselaw 2161 Del

              THE HIGH COURT OF DELHI AT NEW DELHI

%                               Judgment Delivered on: 26.04.2010

+            ITA 681/2010

COMMISSIONER OF INCOME TAX-IX.                          ... Appellant

                                - versus -

M/S JAS JACK ELEGANCE EXPORTS.                      ... Respondent

Advocates who appeared in this case:

For the Appellant : Ms Suruchii Aggarwal For the Respondent :

CORAM:-

HON'BLE MR JUSTICE BADAR DURREZ AHMED HON'BLE MR JUSTICE V.K. JAIN

1. Whether Reporters of local papers may be allowed to see the judgment? Yes

2. To be referred to the Reporter or not? Yes

3. Whether the judgment should be reported in Digest? Yes

V.K. JAIN, J.(ORAL)

1. This is an appeal against the order of the Income Tax

Appellate Tribunal dated 11.9.2009, in ITA No. 1818/Del/2009

pertaining to the A.Y. 2004-2005 whereby the appeal filed by

the Revenue against the order of CIT(A), was dismissed.

2. The respondent/assessee filed return showing income

of Rs.49,40,500/- for the A.Y.2004-2005. The return was

picked up for scrutiny and notice under Section 143(2) of

Income Tax Act, 1961, (hereinafter referred to as the Act) was

issued to the assessee. The assessee firm is engaged in the

business of manufacturing and export of readymade garments

and had declared gross profit @ 12.08% during the A.Y.2004-

2005 as against gross profit of 12.37% declared by it for the

A.Y. 2003-2004 and gross profit of 17.58% declared for the

A.Y.2002-2003. The assessee claimed that the fall in gross

profit ratio was due to reduction in margin, in order to increase

sales. The assessee was asked to produce Books of Account

and relevant registers. The Books of Account as well as certain

vouchers were produced, but, the stock register was not

produced, claiming that no such register was being

maintained. The assessee had claimed fabrication charges

amounting to Rs.37,54,215, finishing & dyeing charges

amounting to Rs.25,00,989 and embroidery expenses of

Rs.55,85,683/-, details of which were furnished to the

Assessing Officer. It was asked to produce the parties to whom

charges amounting to Rs.20,000/- or more were paid on

account of fabrication, embroidery, finishing & dyeing. The

assessee, however, did not produce any of those parties on the

ground that it had closed down its business and was not in

contact with any of them. The Assessing Officer rejected the

Books of Account produced by the assessee and computed

income of the assessee, taking the gross profit ratio at 17.58%,

which was the gross profit percentage declared for the

A.Y.2002-2003. Addition of Rs.24,40,898/- was, accordingly,

made by the Assessing Officer.

3. In the appeal filed by the assessee, it is was pointed

out to the Commissioner of Income Tax(Appeals) that no defect

in the accounts books was found by the Assessing Officer and

the gross profit rate for the assessment year in question was

almost similar to the gross profit rate declared in the

immediate preceding year. CIT(A) noted that the Books of

Account of the assessee were audited and no discrepancy in

those books had been pointed out by the Assessing Officer. He

held that the gross profit ratio assumed by the Assessing

Officer was vitiated, since the Department itself had accepted

gross profit ratio of 12.37% in the immediate preceding year

and the principle of continuity and consistency had been

ignored. Relying upon the decision of Punjab & Haryana High

Court in CIT Vs. Om Overseas: (2008) 173 Taxman 185 (P&H)

and CIT Vs. Ludhiana Steel Roll Mills: (2007) 295 ITR 111

(P&H), it was held that estimation of gross profit on the basis of

gross profit ratio declared by the assessee two years ago, was

not justified. Accordingly, the addition made by the Assessing

Officer was deleted.

4. While dismissing the appeal filed by the Revenue

against the order of CIT(A), the Tribunal noted that the

Assessing Officer had not found any defect in the books of

accounts maintained by the assessee. The Tribunal was of the

view that maintenance of Stock Register, which shows

consumption of raw material and production of finished goods

by applying the same measurement was not feasible,

considering the nature of the business of the assessee. It was

further noted that the fabric was measured in metres and was

thereafter stitched to make garments which have to be counted

in pieces. The Tribunal also pointed out that the Assessing

Officer had not been able to point out any difference in the

consumption of raw material and production of finished goods,

when compared to the earlier years. The Tribunal, therefore,

concluded that the finding recorded by Commissioner of

Income Tax(Appeals) was on the right footing.

5. Section 145(3) of Act provides for assessment in the

manner prescribed in Section 144 of the Act, where the

Assessing Officer is not satisfied about the correctness or

completeness of the accounts of the assessee or where either

the method of accounting provided in sub-Section (1) or the

accounting standards as notified under sub-Section (2) have

not been regularly followed by the assessee. This is not the

case of the Revenue that the assessee had not followed either

cash or mercantile system of accounting stipulated in sub-

Section (1) of Section 145 of the Act. This is also not the case

of the Revenue that the Central Government had notified any

particular accounting standards to be followed by

manufacturers and exporters of readymade garments. Hence,

the second part of sub-Section (3) of Section 145 does not

apply to this case. As noted by the Commissioner of Income

Tax(Appeals) as well as by the Income Tax Appellate Tribunal,

the Assessing Officer had not pointed out any defect in the

Accounts Books maintained by the assessee, which,

admittedly, were produced before the Assessing Officer for his

consideration. This is also not the finding of the Assessing

Officer that the account of the assessee was not complete. No

provision either in the Act or in the rules requiring an assessee

carrying business of this nature, to maintain a Stock Register,

as a part of its accounts has been brought to our notice. As

regards non-production of Stock Register, the assessee has

given an explanation which has been accepted not only by the

Commissioner of Income Tax(Appeals) but also by the Tribunal

and both of them have given a concurrent finding of fact that

maintaining Stock Register was not feasible considering the

nature of the business being run by the assessee which was

engaged in the business of manufacturing readymade

garments by purchasing fabric which was then subjected to

embroidery, dyeing and finishing and then converted into

readymade garments by stitching. Section 145(3) of the Act

therefore could not have been applied by the Assessing Officer

to the present case.

6. As regards failure of the assessee to produce the

persons to whom payments were made by the assessee for

fabrication, embroidery and dyeing & finishing, etc., the

Assessing Officer was at liberty to summon any or all of them

in case he wanted to verify the genuineness of the payments

made to them. No such course of action was, however,

adopted by him. Failure of the assessee to produce those

persons could not have been a ground for rejecting the

accounts under Section 145(3) of the Act.

7. The Assessing Officer did not point out any difference

in the consumption of raw material and production of finished

goods when compared to earlier years. The Assessing Officer

did not say that after comparing the raw material consumed

and finished goods produced in the previous years with the raw

material consumed and the finished goods produced in the

year in question, he had found that the number of finished

goods pieces actually produced by the assessee should have

been more than the number of pieces declared in the account

books produced before him.

8. Another important aspect of this case is that,

admittedly, the gross profit percentage declared by the

assessee in the assessment year 2003-2004 which was the

immediate preceding year, was more or less the same as was

declared in the assessment year 2004-2005, to which this

appeal pertains. However, the Assessing Officer, instead of

applying the gross profit ratio declared in the immediate

preceding year, applied the gross profit ratio declared in the

assessment year 2002-2003, thereby failing to maintain the

accepted principle of continuity and consistency. No ground at

all has been given by the Assessing Officer for deviating from

this accepted principle of assessment.

9. In any case, the question whether fall in gross profit

stood explained by the assessee or not is a question of fact.

Both, the ITAT as well as CIT (Appeals) have accepted the

explanation given by the assessee. This Court cannot disturb

finding of fact unless some perversity is pointed out in the

finding of the Tribunal which is otherwise the final authority

on facts. No substantial question of law arises for our

consideration in this case. The appeal is, accordingly,

dismissed.

(V.K. JAIN) JUDGE

(BADAR DURREZ AHMED) JUDGE APRIL 26, 2010 RS/