M/S.P.Satyanarayana And Sons vs Income Tax Officer, Ward 19, Hyderabad
2025 Latest Caselaw 5325 Tel

Telangana High Court

M/S.P.Satyanarayana And Sons vs Income Tax Officer, Ward 19, Hyderabad on 8 September, 2025

Author: P.Sam Koshy

Bench: P.Sam Koshy

     THE HONOURABLE SRI JUSTICE P.SAM KOSHY
                       AND
 THE HON'BLE SRI JUSTICE NARSING RAO NANDIKONDA

      INCOME TAX TRIBUNAL APPEAL NO.209 of 2008

JUDGMENT:

(per Hon'ble Sri Justice Narsing Rao Nandikonda)

This appeal has been preferred by the assessee under

Section 260(A) of the Income Tax Act, 1961 (for short, 'the Act')

against the order, dated 31.03.2005, in I.T.A.No.913/Hyd/2002

passed by the learned Income Tax Appellate Tribunal,

Hyderabad Bench 'B' (SMC) (for short, 'the Tribunal') for the

Assessment Year 1993-1994.

2. The brief facts of the case are that the Assessee is a

partnership firm started its business operations with effect

from 12.10.1992. The appellant firm filed income tax returns

for the Assessment Year 1993-1994,for the part period i.e.,

from 12.10.1992 to 31.03.1993 i.e., 5 ½ months declaring

income of Rs.4,274/-, whereas the Income Tax Officer assessed

the income at Rs.2,24,808/- by making additions. Aggrieved by

the additions made by the Income Tax Officer, which was

confirmed by the Commissioner of Income Tax Appeals, the

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appellant filed appeal before the Income Tax Appellate Tribunal,

who by its order, dated 31.03.2005 dismissed the appeal ex-

parte. Thereafter, the appellant filed Miscellaneous Application

No.67/HYD/2007 to reopen and restore the appeal and

requested for hearing the appeal on merits. But, the same was

rejected by the appellate Tribunal on 05.10.2007.

3. It is stated that the Income Tax Officer issued show-

cause notice, dated 25.03.1996 proposing gross profit at the

rate of 25% i.e., a sum of Rs.52,750/- to which a sum of

Rs.65,088/- was added. It is stated that though the appeal was

posted for hearing on 24.03.2005, the counsel for the appellant

appeared and sought time for taking certain documents to be

furnished by respondent to know the basis of gross profit

arrived by the Income Tax Officer, which was erroneously

rejected by the Tribunal. It is stated that the Income Tax

Officer estimated the gross profit at 26.34 % as against 20.2%

offered by the appellant in return of income. But the Income

Tax Officer neither rejected the books of accounts nor stated in

the assessment order that the regular books of accounts

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maintained by the assessee have been rejected or disbelieved.

It is stated that the income filed by the appellant represents

5 ½ months and not 12 months period and thus the addition of

Rs.65,088/- towards estimation of gross profit was erroneous

one to the total income.

(a) The Gross Profit of assessee is calculated basing on

three aspects and finally on the comparative study of Gross

Profit disclosed by other concerns in the vicinity of the assessee

firm (Abids, Basheerbagh), involved in the same line of

business, which reads as follows:

"G.P. of the assessee is calculated as under:

(b) 72% of standard gold including making charges and

28% of local purchase gold is admitted as the closing stock

available with the firm. The assessee adopted Rs.375/- per

gram treating this as average rate of stocks available. There is

no basis for this figure. As the assessee admitted maximum

value of closing stock to the extent of 72% of standard gold

converted, whose value works out to Rs.390/- per gram

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including making charges as debited by the assessee or at

Rs.387/-per gram after restricting the making charges of the

assessee as narrated in the following paragraphs, the average

rate has got to be more than Rs.380/-.

(c) On the basis of sales made by the assessee only

28% of the standard gold converted is sold and balance is from

out of local purchase gold. The average rate of purchase of gold

from the local market works out to Rs.326/- per gram and

standard gold converted works out to Rs.387/- per gram. The

average rate of sale on the basis of random samples from out of

20 bills works out to Rs.477.50P per Gram. The Gross Profit

earned by the assessee on sale of standard gold converted

works out to 23% and local purchase gold works out to 46%."

(d) Comparative study of Gross Profit disclosed by other

concerns, in the vicinity of the assessee's firm (Abids,

Basheerbagh), involved in the same line of business for the

Assessment Year 1993-1994 is as under:

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Totaram Jewellers 32.8% Sri Kishan Jewellers 30.04% Javeri Jewellers 16.3% Sriram Jewellers 26.4%

4. It is further held that the time taken for service of

the order was 21 years and it cannot be said to be an

unreasonable delay so as to raise a presumption against

passing of the order in time. Therefore, the question of

introduction of cash in any irregular manner in the books of

accounts does not arise. It was also held that the action the

Assessing Officer in estimating the gross profit @ 26.34% and

making an addition of Rs.65,088/- was an erroneous one. In

relation to addition of Rs.62,666/- on account of expenditure

disallowed towards making charges claimed to have paid, the

learned CIT(A) observed as under:

"It cannot be denied that once the books of account have been rejected and the gross profit has been estimated at 26.34% on par with the profit declared by another similar jeweler in the area, the question of further addition on account a direction expenditure such as payment of making charges was not called for. Hence, the addition of Rs.62,666/- is deleted."

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5. After hearing the Department and the assessee

representative has finally decided the appeal upholding the

order passed by the learned CIT (A). The assessee

contended that when the above appeal was posted for

hearing on 24.03.2005, the counsel for the appellant could

not appear before the Tribunal and sought time for

furnishing the documents to be filed by the respondents to

know the basis of gross profit arrived at by the ITO and the

same was refused by the learned Tribunal. The said

refusal led to filing of an MA No.67/HYD/2007 to re-open

and restore the above appeal which was heard ex parte and

requested for hearing the appeal on merits and the same

also was rejected by the learned Tribunal. The present

appeal is filed being aggrieved by the said order on the

following grounds.

6. The appellant preferred an appeal against the said

order before the learned Income Tax Appellate Tribunal on the

following grounds:

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1. The petitioner filed return of income under the status as association of persons for the assessment year 1993-94 and declared the income at Rs.4,274/- which the Income Tax Officer assessed under the status as unregistered firm, for which there is no such status as unregistered firm, the status has been omitted w.e.f. the assessment year 1993-94 as such the assessment order is liable to be set aside as there is no such status.

2. The Income Tax Officer while proposing the notice, dated 25.03.1996 whose copy enclosed herewith, estimating proposal to the gross profit in the assessment at 25% by proposing to add a sum of Rs.52,750/- but while passing the final assessment order estimated gross profit at @ 26.34% the income at Rs.65,088/-. Thus the difference addition of Rs.12,338/- is unwarranted and quite contrary to law.

3. Final assessment order cannot proceed beyond show cause notice which propose estimation of gross profit at 25%.

Thus the excess additional of gross profit is unwarranted and illegal.

4. That the Income Tax Officer failed to reject the regular books of accounts maintained by the assessee which disclosed the gross profit percentage at 20.2%, thus the estimation of gross profit without rejecting the books of accounts or without disbelieving the regular books of quite contrary to law. Thus the estimation if gross profit at @ 26.34% is quite arbitrary and illegal.

5. That the Income Tax Appellate Tribunal ought to have looked into all the documents including the assessment records

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before venturing to pass the ex-parte order. Thus the Income Tax Appellate Tribunal erred in passing the ex-parte order without looking into the facts resulted into arbitrary dismissal.

7. Heard Sri Tejprakash Toshiniwal, learned

counsel for the appellant and Smt. Bokaro Sapna Reddy,

learned Junior Standing Counsel for the Income Tax

Department, appearing for the respondent.

8. Having heard both the counsel, the following

substantial questions have been framed for consideration:

"1. Final assessment order cannot proceed beyond show cause notice which propose estimation of gross profit at 25%. Thus the excess additional of gross profit is unwarranted and illegal.

2. That the Income Tax Officer failed to reject the regular books of accounts maintained by the assessee which disclosed the gross profit percentage at 20.2%, thus the estimation of gross profit without rejecting the books of accounts or without disbelieving the regular books of quite contrary to law. Thus the estimation if gross profit at @ 26.34% is quite arbitrary and illegal."

9. It is pertinent to mention that the Tribunal

dismissed the appeal on the ground that the appellant did

not get ready with the appeal and sought for

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adjournments, number of times, as such the matter was

disposed of without hearing the appellant on merits. It is

also pertinent to mention here that the appellant has also

filed M.A. to reopen the case and to give him an

opportunity to submit his case and the same was also

rejected by the learned Tribunal.

10. During the course of arguments, learned

counsel for the appellant has submitted that the Tribunal

passed the ex parte order contrary to law and that the

petition filed by the appellant to reopen the case and to

hear the appeal on merits was also erroneously rejected by

the Tribunal.

11. It is further contended that Income Tax Officer

issued show cause notice on 25.03.1996 for assessment

year 1993-1994 calling for explanation in respect of

proposed additions and information for finalization of

assessment. In the show cause notice the Income Tax

Officer proposed to adopt the Gross Profit at the rate of

25% on the basis of net estimate, but by actual figures of

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purchase and sale and working out of trading account by

making addition of Rs.52,750/- in the value of closing

stock.

12. The main grievance of the appellant in the

present appeal is that the Income Tax Appellate Tribunal

did not provide an opportunity though he has sought

certain documents to furnish by the respondent. But no

copy provided by the Income Tax Officer. But the same was

rejected and refused. Further contention of the petitioner-

appellant is that the income tax office issued notice on

25.03.1996 proposing gross profit at the rate of 25%

proposing a sum of Rs.52,750/- and added sum of

Rs.65,088/- and arrived at gross profit of Rs.26.34%

taking the basis of Income Tax Officer by comparing the

gross profit percentage arrived at from various dealers of

the vicinity. As contended by the appellant, the Income Tax

Officer estimated at 26.34% as against 20.2% offered by

the appellant in the return of income. The Income Tax

Officer neither rejected the books of accounts nor stated in

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the assessment order that the regular books of accounts

maintained by the assessee has been rejected or

disbelieved and that the income filed by the appellant

represents 5 ½ months and not 12 months period. Thus,

the addition of Rs.65,088/- towards estimation of gross

profit was erroneous one on the total income.

13. He further argued that the Final Assessment

Order cannot go beyond the show cause notice proposing

the estimated gross profit at the rate of 25% and excess

gross profit is unwarranted and illegal. He also further

contended that admittedly, a show-cause notice was issued

by the Income Tax Officer wherein considering the existing

closing stock as committed by the percentage of profit

earned by the appellant on the sales varies between 17% to

31% on standard gold converted jewellery and local

purchased jewellery. The average gross profit works out to

25%. It is also contended in the notice that there are some

traders in the similar line who have admitted gross profit of

25% or more in the relevant Assessment Year, as such the

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Income Tax Officer has proposed to adopt the gross profit

rate at 25% not on the basis of estimate but on actual

figures of purchase and sale and working out of trading

account by making addition of Rs.52,750/- in the value of

closing stock. The main grievance of the appellant is that

the said Final Assessment was passed taking the estimated

Gross Profit of 26.34 % of the income which is beyond the

show notice.

14. This Court is of the opinion that once the

Assessing Officer has taken the Gross Profit at the rate of

25%, the same cannot go beyond the show cause notice

mentioned by the Income Tax Officer/Assessing Officer.

Therefore, the order passed by the CIT (A), which was

confirmed by the learned Income Tax Tribunal are liable to

the set aside.

15. In view of the reasons stated above, the

substantial questions of law framed are answered in favour

of the appellant and against the respondent.

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16. Accordingly, the appeal is partly allowed. The

gross profit which was assessed as per the show-cause

notice, dated 25.03.1996, is hereby confirmed. There shall

be no order as to costs.

Miscellaneous petitions, if any, pending shall stand

closed.

______________________________ JUSTICE P.SAM KOSHY

_________________________________________ JUSTICE NARSING RAO NANDIKONDA

Date: 08.09.2025 YVL