IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: G : NEW DELHI
BEFORE SHRI I. C. SUDHIR, JUDICIAL MEMBER
AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
ITA No. 6304/Del/2012
Assessment Year: 2009-10
Surender Jain vs. ACIT
A-24, Street No. 20, Circle-36(1)
Madhu Vihar New Delhi.
New Delhi.
(PAN AEBPJ6586P)
(Appellant) (Respondent)
Appellant by : Shri P. Roychaudhuri, Advocate
Respondent by : Shri B.R.R. Kumar, Sr. DR
ORDER
PER I.C. SUDHIR, JUDICIAL MEMBER
The assessee has questioned first appellate order on the following
grounds :-
1. " That in the facts and circumstances of the case the Ld CIT(A)
had erred in upholding the Order of the Ld AO by which the Ld
AO had rejected the books of accounts and made additions by
assuming a higher rate of gross profit.
2. That in the facts and circumstances of the case the appellant has
been prejudiced as the Ld CIT CA) had erred by ignoring the
grounds raised by the appellant and confirmed the Order of the
Ld AO.
3. That in the facts and circumstances of the case the
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rejection of the GP rate as reflected in the books of accounts by
the Ld AO and upheld by the Ld CIT(A) is bad in law and not
evidenced.
4. That in the facts and circumstances of the case the Ld CIT (A)
failed to observe that the addition made by Ld AO by rejecting
the books of accounts was made without observing the
principles of natural justice and without giving any show cause
notice to the appellant.
5. That in the facts and circumstances of the case the Ld.
CIT(A) failed to appreciate that the Ld AO had erred in estimating
gross profit @ 11% without observing the principles of natural
justice.
6. That in the facts and circumstances of the case the Ld.
CIT(A) failed to appreciate that the Ld AO had erred in adding
back Rs. 39,31,192/- by estimating a higher rate of gross profit
while completing the assessment under section 143(3)."
2. We have heard and considered the arguments advanced by the parties
order in view of the orders of the authorities below and the decisions relied
upon.
3. The facts in brief are that the assessee, a proprietor of M/s. Ahinsa
Textiles, M/s. Khoobsoorat design fabrics is also one of the directors in
Khoobsoorat Fabrics Pvt. Ltd. All the firm and companies are dealing in trading of
fabrics since its inception. During the year under consideration the assessee has
shown gross profit rate at 4.22 % on the turn over of Rs. 5,79,82,181/- against
the GP rate at 11.25 % in asstt. year 2008-09 and 11.73% in asstt. year 2007-
08. The AO noted certain defects as the assesee did not produce all the sale and
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purchases bills of items purchased, some of the bills filed do not contain any TIN
No., the debit note against sales issued in two cases were not produced before
the AO, the percentage of sundry credit to the total turn over was quite high, the
figure percentage of purchases to the total turn over was 104% and that against
the purchases of Rs. 6.01 crores, the assessee has shown expenses incurred on
cartage was only Rs. 80,000/-. The AO also called for the explanation of the
assessee for showing lower GP rate during the year but she was not satisfied
with the reasons shown by the assesee in this regard. The AO thereafter found it
proper to reject the books of accounts and estimate the profit by applying GP
rate of 11% resulting into the addition of Rs. 3931192/-. The Ld. CIT(A) has
upheld the same against which the assesee is in appeal before us. In support of
the grounds the Ld. AR submitted that the authorities below have doubted
purchases only and not the sales. They have not shown any reason for disbelief
the explanation of the assessee for showing lower GP rate during the year in
comparison to the last two assessment years. The explanation shown by the
assessee in this regard was that it is a wholesale dealer of different types of
fabrics, the purchase and sales rates of which fluctuates with the supply and
demand situation in the market. The same material fetches different rate of GP
at different point of time. To survive in the market and to keep rotating its
capital one has to take decisions as per the market conditions on particular time.
The Ld. AR contented further that no notice for rejection of books of account u/s
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145 (3) of the Act was ever issued by the AO before making the addition of profit
on estimation basis. Thus principle of natural justice has been violated. He
placed reliance on the decision of Hon'ble Jurisdiction Delhi High Court in the
case of CIT vs. Smt. Poonam Rani (2010) 326 ITR 223 (Delhi).
4. Ld. DR on the other hand tried to justify the orders of the authorities
below with this submission that no bills and vouchers as required by the AO were
produced by the assessee. Hence the AO was having no option but to work out
the profit by estimation after rejecting the books of accounts.
5. Having gone through the orders of the authorities below and the decisions
relied upon, we find that the Ld. CIT(A) has produced the comparative chart of
the trading result of the assessee for the current year and two preceding years
as under :-
Assessment Turnover G.P. % N.P. %
year
2009-10 5,79,81,181/- 4.22% 2.28%
2008-09 2,80,08,342/- 11.25% 3.49%
2007-08 1,58,26,733/- 11.73% 2.36%
6. Undisputedly the assessee has shown lower GP rate in comparison to
earlier two assessment years but on the higher turn over. NP rate of the year
under consideration is however almost similar to that of the assessment year
2007-08. It is a settled proposition of law that showing a lower GP rate cannot
be a basis for rejection of books of accounts nor non-maintenance of stock
register can be basis to justify the rejection of books of accounts. The AO in the
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present case before rejecting the books of accounts u/s 145(3) of the Act has
also not given opportunity to the assessee to meet out the defects pointed out
by the AO to justify the invocation of the provisions u/s 145 (3) of the Act. The
reason for showing lower GP rate during the year explained by the assessee
before the AO that it is a wholesale dealer of different kinds of fabrics, the
purchase and sale rates of which fluctuate with the supply and demand situation
in the market. The same material fetches different rate of GP at different point of
time and to survive in the market and to keep rotating its capital one has to take
decisions as per the market conditions on particular time has not been rejected
by the AO with proper ground for the same. The Hon'ble Jurisdictional Delhi High
Court in the case of CIT vs. Smt. Poonam Rani (supra) has been pleased to hold
that a low rate of gross profit, in the absence of any material pointing towards
the books could not by itself be a ground to reject the accounts books u/s 145(3)
of the Act. There is no reason before us to doubt the explanation of the assessee
showing the lower GP rate during the year. Keeping in view the totality of the
fact of the present case on the issue as discussed above we are of the view that
there was no justification before the AO to reject the books of accounts of the
assessee that too without affording opportunity of being heard to the assessee
before rejection of books of accounts and estimation of profit by applying GP at
11% of the turn over. We thus while setting aside orders of the authorities below
direct the AO to accept the trading result shown by the assessee. The trading
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addition in question is accordingly directed to be deleted. The grounds involving
the issue are thus allowed.
7. In the result appeal is allowed.
Order pronounced in the open court on 30th April, 2015.
sd/- sd/-
(INTURI RAMA RAO) ( I.C. SUDHIR )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date 30th April, 2015
*Veena
Copy of order forwarded to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
By Order
Assistant Registrar, ITAT
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