Commissioner Of Income Tax-Xii vs Smt. Poonam Rani
2010 Latest Caselaw 2453 Del

            THE HIGH COURT OF DELHI AT NEW DELHI

%                               Judgment Delivered on: 07.05.2010

+            ITA. 406/2009

COMMISSIONER OF INCOME TAX-XII                         ... Appellant


                                    - versus -


SMT. POONAM RANI                                      ... Respondent

Advocates who appeared in this case:

For the Appellant : Sh N.P. Sahni For the Respondent : None

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 appeal is directed against the order dated 26 th

September, 2008 passed by the Income Tax Appellate Tribunal

dismissing the appeal being in ITA No. 338/Del/2006, filed by

the Revenue, against the order passed by Commissioner of

Income Tax (Appeals) setting aside the assessment order for

the Assessment Year 2003/04.

2. The assessee is engaged in the business of

manufacturing copper wire. For the assessment year 2003-

04, the assessee filed a return, declaring gross profit at the rate

of 1.4% as against gross profit rate of 5.91 % for the preceding

year. On being asked to explain the fall in gross profit rate, the

assessee attributed the fall in gross profit rate to the increase

in the purchase price. The Assessing Officer rejected the

explanation given by the assessee, on the ground that no

supporting evidence was produced to show increase in the

purchase price and decrease in sales. He also noticed that the

weight of finished products declared by the assessee, was

319264 kg as against the weight of raw material, which was

declared as 311578 kg. When asked to explain, the assessee

submitted that after drawing wire, the process goes on to put

the wire for enameling, as a result of which the weight of the

wire increased by 2-3%. The Assessing Officer felt that in the

absence of adequate supporting evidence, the explanation

given by the assessee could not be accepted. He, therefore,

rejected the account books of the assessee under Section

145(3) of Income Tax Act and held that it would be fair and

reasonable to take the gross profit rate at 5.59%, which was

also the rate for the preceding assessment year.

3. While allowing the appeal filed by the assessee, CIT

(Appeals) noted that the assessee had furnished complete

details, including comparative details in respect of purchase of

raw-materials, and manufacture of copper wire as well as in

respect of sale during the year in question, as compared to the

earlier years. He also felt that the assessee had explained the

marginal increase in the weight of wire alongwith supporting

data of the year in question as well as of the preceding years.

He also took note of the fact that the assessee was duly

registered under Central Excise Act and was maintaining

proper quantitative details in the prescribed manner. He,

therefore, held that the assessee had adopted consistent and

regular method of accounting and valuation of stock during the

year in question as was done by her in the preceding years.

He, accordingly, held that the Assessing Officer was not

justified in rejecting the books of account and in applying the

enhanced gross profit ratio.

4. The Tribunal, while rejecting the appeal filed by the

Revenue, noted that since no defects in the account books were

pointed out, the accounts could not have been rejected and no

addition could have been made merely on account of lower

profit declared by the assessee.

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) having

been regularly followed by the assessee. It is not the case of

the Revenue that the assessee had not followed either cash or

mercantile system of accounting. It is also not the case of the

Revenue that the Central Government had notified any

particular accounting standards to be followed by tour

operators. Hence, the second part of sub-Section (3) of

Section 145 does not apply to this case.

6. On a perusal of the assessment order, we find that

the Assessing Officer has not pointed out any particular defect

or discrepancy in the account book maintained by the

assessee. During the course of hearing before the

Commissioner of Income Tax (appeals), it was pointed out by

the assessee that the account books of the assessee were duly

audited under Section 44 AB of the Excise Act and the

quantitative details as required by Clause 28 (b) of Form

No.3CD regarding raw material and finished products (i.e.

opening stock of raw material, raw material issued to

production department, raw material consumed and closing

stock of raw material, opening stock of finished goods, finished

goods produced during the year, finished goods sold and

closing stock of finished goods) were prepared and audited by

certified accountant and were enclosed with Form 3CD which

had been placed on record but, the Assessing Officer had

ignored the factual figures, both in qualitative and quantitative

terms, enclosed with the return and filed during the course of

assessment proceedings. It was for this reason that CIT

(Appeals) was satisfied that the assessee had furnished

complete details, including quantitative details in respect of

purchase of raw material, manufacture of copper wire and sale

of the furnished products. In these circumstances, we fail to

appreciate how the accounts, maintained by the assessee,

could have been said to be incomplete or inaccurate. In fact,

the Assessing Officer had no material before him to treat the

accounts of the assessee as defective or incomplete.

7. As regard the marginal increase in the weight of the

finished product, the explanation given by the assessee has

been accepted not only by Commissioner of Income Tax

(appeal) but also by the Income Tax Appellate Tribunal. The

Assessing Officer had no material before him on the basis of

which it could be said that the weight of the wire does not

increase even marginally during the process of enameling.

Therefore, he had no justification in law to reject the

explanation given by the assessee in this regard.

8. The fall in gross profit ratio, in the absence of any

cogent reasons could not, by itself, have been a ground to hold

that proper income of the assessee cannot be deduced from the

accounts maintained by her and consequently, could not have

been a ground to reject the accounts invoking Section 145(3) of

the Act.

9. The fall in gross profit ratio could be for various

reasons such as increase in the cost of raw material, decrease

in the market price of finished product, increase in the cost of

processing by the assessee etc. There is no finding that the

actual cost of the raw material purchased by the assessee was

less than what was declared in the account books. There is no

finding that the actual cost of processing carried out by the

assessee was less than what had been declared in her account

books. No particular expenditure shown in the account books

has been disallowed by the Assessing Officer. There is no

finding by the Assessing Officer that the actual quantity of

finished product produced by the assessee was more than

what it was shown in the accounts books. There is no finding

that the assessee had made any such sale of the finished

product which was not reflected in the accounts books. There

is no finding by the Assessing Officer that the finished product

was sold by the assessee at a price higher than what was

declared in the accounts books. In these circumstances, the

Commissioner of Income Tax (Appeals) and the Income Tax

Appellate Tribunal, in our view, were justified in holding that

the Assessing Officer could not have increased the gross profit

ratio merely because it was low as compared to the gross profit

ratio of the preceding year.

10. During the course of arguments before us, it was

submitted by the learned counsel for the appellant that the

assessee was not maintaining the Daily Stock Register. We,

however, find no such finding in the assessment order. On the

other hand, we note that the Assessee had submitted before

the Commissioner of Income Tax (Appeals) that Form 3CD

containing all the quantitative details in respect of raw

materials as well as the finished goods, duly audited by the

Certified Accountant had been placed on record, but, the

Assessing Officer ignored those actual figures enclosed with the

return. In any case, no statutory provision under the Income

Tax regime requiring the assessee to maintain the Daily Stock

Register has been brought to our notice. Hence, even if no

such register was being maintained by the assessee as is

contended by the learned counsel for the appellant, that by

itself does not lead to inference that it was not possible to

deduce the true income of the assessee from the accounts

maintained by her, nor the accounts can be said to be

defective or incomplete for this reason alone. If stock register

is not maintained by the assessee that may put the Assessing

Officer on guard against the falsity of the return made by the

assessee and persuade him to carefully scrutinize the account

books of the assessee. But the absence of one register alone

does not amount to such a material as would lead to the

conclusion that the account books were incomplete or

inaccurate. Similarly, if the rate of gross profit declared by the

assessee in a particular period is lower as compared to the

gross profit declared by him in the preceding year, that may

alert the Assessing Officer and serve as a warning to him, to

look into the accounts more carefully and to look for some

material which could lead to the conclusion that the accounts

maintained by the assessee were not correct. But, a low rate of

gross profit, in the absence of any material pointing towards

falsehood of the accounts books, cannot by itself be a ground

to reject the account books under Section 145(3) of the Act.

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

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

Both, ITAT and CIT(A) having accepted the explanation given

by the assessee and the finding of fact recorded by them

having not been shown to be perverse in any manner, 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 May 07, 2010 'ss'