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Narayan Glass Works Vs. Assistant Commissioner of Income - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
AppellantNarayan Glass Works
RespondentAssistant Commissioner of Income
Excerpt:
1. both the assessee and the revenue are in cross-appeal against order, dt. 31st july, 1992, of the learned cit(a). the appeals having been heard together are disposed of by this common order for the sake of convenience, as also some of the grounds being common.2. the assessee-firm is engaged in the business of manufacture and sale of glassware, chimneys, lampware, glass bangles, etc. the account period for the relevant assessment year consists of 17 months, the books having been closed on 31st march, 1989. the assessee declared its income at rs. 2,32,910 and the return of its income was accompanied by audit report under s. 44ab. the assessment was completed by the ao on 26th march, 1992, under s. 143(3) of the act at an income of rs. 51,21,690 by making various additions/disallowances......
Judgment:
1. Both the assessee and the Revenue are in cross-appeal against order, dt. 31st July, 1992, of the learned CIT(A). The appeals having been heard together are disposed of by this common order for the sake of convenience, as also some of the grounds being common.

2. The assessee-firm is engaged in the business of manufacture and sale of glassware, chimneys, lampware, glass bangles, etc. The account period for the relevant assessment year consists of 17 months, the books having been closed on 31st March, 1989. The assessee declared its income at Rs. 2,32,910 and the return of its income was accompanied by audit report under s. 44AB. The assessment was completed by the AO on 26th March, 1992, under s. 143(3) of the Act at an income of Rs. 51,21,690 by making various additions/disallowances. On appeal, the learned CIT(A) gave relief of Rs. 18,30,966 and restored back addition of Rs. 22,734 on account of ESI disallowed under s. 43B and the issue relating to inflation in stocks restored to the AO for adjudication afresh. Both the parties are aggrieved and, therefore, are in appeal before us.

3. The first issue raised by the assessee in its appeal is with regard to addition of Rs. 2,56,905 on account of outstanding liabilities in the names of three parties for purchasing coal, namely, (i) Sharda Coal Company, (ii) Ma Durga Coal Company and (iii) Varun Coal Company, all of Varanasi with amounts at Rs. 2,12,214; Rs. 22,065 and Rs. 22,626 respectively or Rs. 2,56,905. The AO added these amounts as the assessee was not found in possession of any evidence in the form of confirmation by these parties. He also noted that the claim of the assessee that these accounts were settled subsequently by sale of coal dust to these parties, was unsubstantiated and was an afterthought. He added these amounts to assessee's income. The learned CIT(A) confirmed the addition primarily on the ground that the assessee had surrendered the amount.

3.1 Shri O. P. Sapra, the learned Authorised Representative for the appellant submitted that the surrender of the above amount in terms of letter, dt. 22nd March, 1991 (pp. 1 and 2 of the paper-book), was conditional to buy peace and to avoid litigation, as also subject to no penalty under s. 271(1)(c). He contended that the AO having not accepted the surrender as made and the addition having been made by the AO on other considerations there was no justification for the learned CIT(A) to confirm the addition merely on the basis of assessee's surrender.

3.2 On merit Shri Sapra drew our attention to monthly quantitative chart of coal purchased and consumed (p. 74 of the paper-book), which is based on day-to-day consumption register of coal maintained by the appellant under the supervision of District Industries Centre, Firozabad, the sponsoring authority for coal. He also drew our attention to purchase day book (pp. 122 to 125 of the paper-book) recording purchase of raw material including coal from the above three parties. According to the learned Authorised Representative the purchase day book has been written in the normal course of business and the same also stands accepted by the Revenue. He contended that there was no ground to doubt about the purchase of coal from these parties, in all aggregating to Rs. 2,56,905 out of total purchases of coal of Rs. 60,79,988, that too after a lapse of more than three years when these parties are not found traceable. He submitted that it is nobody's case that coal is not consumed in this line of business. As a matter of fact Shri Sapra submitted that major component of raw material in this line of business is coal. He pointed out that consumption of coal during the relevant previous year vis-a-vis production achieved compares very favourably with the results of the immediately preceding assessment year. He submitted that during the relevant previous year the assessee consumed 7,145 MT of coal to achieve production of finished goods of 7,506.554 MT with corresponding figures for the last year at 6,389.620 MT and 5,581.111 MT, respectively. He submitted that the accounts of these parties were squared up by sale of coal dust to them in the subsequent year and the sale duly recorded and the same has been duly accepted by the Revenue in the relevant assessment year in which the return has been filed within time, while the assessment for the relevant assessment year was completed on 26th March, 1992. Thus, according to Shri Sapra the allegation of afterthought is wholly unjustified and contrary to facts.

3.3 On the other hand, the learned Sr. Departmental Representative supported the addition made on the ground that the amount had been surrendered by assessee itself and also sale of coal-dust in the subsequent years appears to have been shown on higher rates than even the rates of coal. In reply, Shri Sapra submitted that the sale of coal-dust was at the then prevailing market rate and inclusive of freight payable which was quite substantial.

3.4 The learned representatives are heard and relevant record seen. In our considered view the addition of Rs. 2,56,905 was not called for. It is nobody's case that coal is not required by the appellant in its business. The purchases involved also stand recorded in day purchase book maintained in the normal course of assessee's business recording purchase of various raw material. The consumption of coal vis-a-vis finished goods production is admittedly better as compared to the immediately preceding assessment year which stands accepted by the Revenue. Sale of coal-dust by which these accounts were squared up also stands recorded by the appellant in its books of accounts subsequently, which stand accepted by the Revenue. Therefore, the mere fact that the assessee had surrendered the amount could not be held out against the assessee when such surrender was not accepted. We, therefore, find enough merit in the submission made by the learned Authorised Representative for the assessee and on the facts as detailed above hold that addition made is not justified. Relief - Rs. 2,56,905.

4. The next grievance is against addition of Rs. 8,978 under the head 'Suspense A/c', as sustained by the learned CIT(A). According to the learned Authorised Representative, there is no suspense account in the books of the appellant and as such it is not clear as to how this addition has been made and sustained. He submitted that there was a difference only in the trial balance and as such the same could not be added. The learned Sr. Departmental Representative very fairly conceded that this addition is not called for and appears to have been made under some misconception. As it is, we hold that addition made is not justified. Relief - Rs. 8,978.

5. The next grievance is against addition of Rs. 1,90,528 under the head commission account out of total claim of Rs. 2,31,212. The amount involved is in respect of the following three parties : The amount was disallowed by the AO who noted that the genuineness of commission paid to these parties was not proved and assessee's claim that it was trying to locate the parties was unacceptable when sufficient time was allowed. He further noted that registered letters sent to the three parties have been received back unserved. The learned CIT(A) vide paras 7 to 9 of his order confirmed the disallowance. He also took the view that payments to two parties seems to have been made in cash in violation of the provisions of s. 40A(3).

5.1 According to the learned Authorised Representative the assessee has been paying commission @ 2 per cent on sales of glassware which has been accepted by the Revenue. He invited our attention to p. 73 of the paper-book being comparative chart of payment of commission. He also submitted that opinion formed by the CIT(A) that provisions of s.

40A(3) are violated is formed without affording necessary opportunity of being heard to the appellant. This apart he submitted that time allowed to the appellant to substantiate its claim was quite short. On the other hand, the learned Departmental Representative fully supported the order of the learned CIT(A) and submitted that there is no evidence regarding services rendered by these three parties and while rest of the claim was allowed, the same as relating to these three parties was rightly disallowed. He submitted that no evidence is placed on record with regard to names of the parties to whom sales stood made on which the three parties became entitled to the commission.

5.2 Having heard the learned representative of both the parties, we do not find any merit in the submission made by Shri Sapra and, therefore, agreeing with the learned Sr. Departmental Representative, we confirm the disallowance.

6. The next grievance is against additions sustained by the learned CIT(A) on account of suppressed sales, bogus liabilities and addition under s. 68 of the IT Act. In turn, the Revenue is in appeal against relief allowed by the learned CIT(A) as under :---------------------------------------------------------------------- Addition Sustained Relief allowed---------------------------------------------------------------------- Rs. Rs. Rs.----------------------------------------------------------------------(a) Suppressed sales 1,73,525 77,567 95,958(b) Bogus liabilities 3,30,459 3,20,909 9,550(c) Addition under cash credits 39,20,896 22,01,701 17,19,195---------------------------------------------------------------------- The AO made the above additions discussing accounts of various parties as in paras 5 to 32 of his order, while the learned CIT(A) discussed the above additions vide paras 10 to 18 at pp. 7 to 27 of his order.

6.1 The learned Authorised Representative for the assessee made very detailed and exhaustive submissions and arguments with regard to each and every addition sustained by the learned CIT(A), as also with regard to additions deleted because the learned Departmental Representative also addressed us at great length on the same. Considering the submissions made by both the parties it would be appropriate to discuss each and every account as under : 6.2 This represents the difference noticed by the AO in assessee's accounts in the books of this party as directly obtained by him. This was deleted by the learned CIT(A) with whom we agree because practically all the items tally with each other excepting the minor difference of Rs. 748, which deserve to be ignored. We uphold the view of the learned CIT(A).

6.3 This represents credit balance added by the AO when registered letter sent to this party was received back with the remark "no such business exists at the given address" and the assessee could not furnish any evidence with regard to genuineness of credit entry of Rs. 22,000 in the account of this party as on 8th March, 1988. The learned CIT(A) upheld the addition. We also do not find any reason or material on record justifying interference with the view of the learned CIT(A).

The addition is confirmed.

6.4 The credit balance of Rs. 27,846 in the account of this party (paper-book p. 23) was added by the AO partly as suppressed sales (Rs. 20,217) and partly non-genuine liability (Rs. 7,629). According to the AO the assessee had made sales vide bill No. 86, dt. 3rd March, 1988, at Rs. 20,217 for which payment was received on 8th April, 1988, through bank draft. According to the AO this amount as shown by Laxmi Glass Co. in the account of the assessee, as obtained by the AO directly, is not reflected as sale in its books of account. The learned CIT(A) confirmed this addition. Shri Sapra for the appellant submitted that bill No. 86 is dt. 7th March, 1988 for Rs. 18,463.65 paise, which is debited in the account of Laxmi Glass against 'C' Form No. 727838.

He pointed out that the AO was requested to summon this party under s.

131 of the Act but it was not done. Under these circumstances he submitted having failed to respond to assessee's request no adverse inference could be drawn against the assessee as held by Allahabad High Court in (1962) 46 ITR 561 (sic) and E.M.C. (Works) (P) Ltd. vs. ITO (1963) 49 ITR 650 (All). He further submitted that this party already had an account with the assessee with an opening balance of Rs. 10,000 as on 21st October, 1987. Under these circumstances he submitted the AO was not justified in making addition of Rs. 20,217 as suppression of sale and Rs. 7,629 being further credit liability as non-genuine. The learned Departmental Representative supported the view taken by the learned CIT(A). Having heard the learned representatives of the parties, as also after going through the relevant record, we are of the view that the addition made is not justified. Bill No. 86, dt. 7th March, 1988, for Rs. 18,462 is against 'C' form and is duly recorded in the books of the assessee. The AO had obtained copy of account of the appellant from Laxmi Glass behind the back of the assessee and assessee's request for summoning this party under s. 131 was not acted upon by the AO. As per copy of account of this party at p. 23, we find that there are frequent transactions between the assessee and this party and the account is also an old one with a brought forward balance and the transaction between the two is not even doubted by the AO.Therefore, placing reliance on copy of account as furnished by Laxmi Glass Co. and drawing adverse inference against the assessee without confronting the party to the assessee, the action of the AO was not justified, as also the view taken by the learned CIT(A). Therefore, we delete this addition of Rs. 27,846.

6.5 Rs. 14,289 added by the AO was deleted by the learned CIT(A) who noted that there was an opening balance in this account at Rs. 33,395.

The learned Departmental Representative relied on the order of the AO and submitted that relief allowed by the learned CIT(A) is not justified. Both the parties are heard and relevant record seen. We find ourselves in agreement with the view taken by the learned CIT(A). The transactions recorded in the account of this party periodically stand accepted by the Revenue. The request made by the assessee to summon this party was not accepted by the AO and as such no adverse inference could be drawn against the party unilaterally. The CIT(A) was, thus, justified in deleting the addition of Rs. 14,289.

Gurunank Crockery House, Hissar - Rs. 20,640 (P. 25 of the paper-book) : 6.6 The AO obtained assessee's copy of account in the books of Hissar party and noted that assessee was shown to have made sales through bill No. 77, dt. 27th January, 1988 for Rs. 20,640 while the assessee had not recorded such sale in its books of accounts. The AO did not summon this party as requested by the assessee. The learned CIT(A) confirmed the addition. The learned counsel submitted that bill No. 77 is dt.

26th January, 1988, for Rs. 8,195 which is duly debited in the account of this party and not for Rs. 20,640. He submitted that all the amounts in this account are received by drafts/cheques except cash of Rs. 8,195 on 3rd February, 1988. He submitted that supply vide bill No. 77 has been made against Form 'C' No. 800295. He pointed out that the AO himself has mentioned that draft for Rs. 20,640 received on 15th February, 1988, is duly recorded on the same date in the books of the assessee. It was, thus, urged that there was no occasion for the addition made. On the other hand, the learned Departmental Representative supported the order of the CIT(A).

Heard and relevant record seen. We are inclined to accept the submission made by the assessee when we do not find any evidence of any sale made by the assessee to Hissar party as not recorded by the assessee in its books of account. The Hissar party was not confronted by the AO even when a specific request was made. Therefore, we delete addition of Rs. 20,640.

6.7 This was added by the AO there being no evidence in support of the amount received from this party as advance received and carried forward. The learned CIT(A) confirmed. No material exists on record neither any such material is placed before us compelling us to interfere with the finding of the learned CIT(A). The addition of Rs. 22,000 is, thus, confirmed.

6.8 While the assessee's books showed credit balance of Rs. 5,473 in its books of accounts in the name of this party, the corresponding balance was reflected at Rs. 849.60 by Madan & Co. The AO added Rs. 5,473 and this was confirmed by the CIT(A). Shri Sapra pointed out that on the one hand the commission payable to this party has been allowed by the AO himself, question of liability of Rs. 5,473 being non-genuine did not arise. He submitted that acting behind the back of the assessee the AO obtained copy of account of the assessee in the books of Madan & Co. Learned representatives of the parties are heard and copy of account at p. 27 of the paper-book perused. Since the AO obtained copy of account of the assessee in the books of Madan & Co. behind the back of the assessee, the adverse inference drawn against the assessee is not justified. We, therefore, delete addition of Rs. 5,473.

6.9 This amount was added by the AO and confirmed by the learned CIT(A) on the ground that copy of assessee's account in the books of Ludhiana party, as obtained, showed that the assessee had sold goods through bill No. 69, dt. 22nd January, 1988, for Rs. 22,380 but was not recorded in assessee's books of accounts. The account of Ludhiana party in the books of assessee showed a liability of Rs. 22,380. This was added as suppressed sales. The learned Authorised Representative for the appellant submitted that bill No. 69, dt. 22nd January, 1988 for Rs. 12,389 is against 'C' form No. 720162 and not dt. 22nd January, 1988, for Rs. 22,380, which is duly recorded and debited to the account of Ludhiana party. It was, therefore, argued that there was no suppression of sale. He invited our attention to para 9(iii) of assessee's letter, dt. 9th March, 1992, filed before the AO submitting that against total amount received at Rs. 79,362, goods worth Rs. 56,981 stood supplied and in the absence of copy of account of Ludhiana party, the assessee could not reconcile the same. He submitted that copy of account of Ludhiana party was never supplied to the assessee.

Learned representatives are heard and copy of account at p. 28 of the paper-book seen and we find that in February, 1988, the assessee had received amounts in cash against supply of goods but thereafter all the amounts stood received by drafts against which goods were supplied and balance of Rs. 22,380 remained to the credit of Ludhiana party.

Therefore, on these facts it cannot be held that there is any suppression of sale since bill No. 69, dt. 21st January, 1988, is duly accounted for in the books of the assessee. Addition of Rs. 22,380 is, therefore, deleted.

6.10 Here also the AO obtained copy of assessee's account in the books of Meerut party, which did not reflect any balance as on 31st March, 1989, as against balance carried forward by the assessee at Rs. 10,000.

The AO also examined that sale through bill No. 19, dt. 29th November, 1987, for Rs. 18,886 had not been recorded in the books of the assessee. He did not accept the explanation that sale vide bill No. 19 was of Rs. 10,123.60 paise on 28th November, 1987, which was duly debited in the account of Meerut party. The AO also did not accede to the request of the assessee made on 9th March, 1992, that the party be summoned. He has added Rs. 10,123 received by the assessee on 5th December, 1987, in cash since the assessee failed to prove the genuineness thereof and has further added an amount of Rs. 8,763 being the difference between the sale of Rs. 18,886 shown by Meerut party vide bill No. 19, dt. 29th November, 1987, and sale of Rs. 10,123.60 shown by the assessee. It is the contention of the learned Authorised Representative that bill No. 19, dt. 28th November, 1987, for Rs. 10,123 is duly accounted for and the AO himself having accepted the sale of Rs. 10,123 was not justified in making addition of this amount as part of addition of Rs. 18,886 representing realisation of sale proceeds of goods supplied vide bill No. 19, dt. 28th November, 1987.

He submitted that no opportunity was given to the appellant to examine the party even when a request was made.

Parties are heard and relevant record seen. We are of the view that addition of Rs. 10,123 as cash credit was not justified since the same represents realisation of sale proceeds of the goods supplied vide bill No. 19, dt. 28th November, 1987. The amount of Rs. 10,000 had been received admittedly by demand draft and is duly recorded in the accounts of Meerut party. While no other sale was made by the assessee during the relevant previous year to Meerut party, the addition of Rs. 8,763 on account of suppression of sale is also not justified. Relief Rs. 18,886.

6.11 After hearing the learned representatives of the parties, we agree with the stand of the Revenue that the assessee has not been able to prove the genuineness of receipt of Rs. 20,000 on 8th March, 1989, in cash. We, therefore, confirm the addition.

6.12 The AO obtained copy of assessee's account in the books of Nabha party and found that sale of Rs. 18,810 vide bill No. 103, dt. 15th October, 1988, was not recorded in assessee's books and before the AO the assessee had denied having made any such sales. The AO observed that the assessee had received draft of Rs. 18,810 duly credited in the account of the above party on 15th March, 1989. In the absence of satisfactory explanation from the assessee regarding this draft of Rs. 18,810 the AO added this amount as suppressed sale. This was confirmed by the CIT(A). Shri Sapra submitted that vide bill No. 103, dt. 15th December, 1988, goods were sold to N. Razia & Co., Hyderabad, which is not only supported by the relevant bill but is also recorded in the sale day book.

Heard and relevant record seen. On the facts of the case addition made is held as unjustified since the draft for the said amount credited by the assessee in the account of Nabha party has not been denied by the said party. Further, the assessee made sales of Rs. 24,462 vide Bill No. 103, dt. 15th December, 1988, to Hyderabad party which proves assessee's denial of sale of Rs. 18,810 to Nabha party. It is not in dispute that copy of assessee's account in the books of Nabha party had been obtained behind the back of the assessee. Thus, the addition of Rs. 18,810 is deleted.

6.13 On obtaining copy of assessee's account in the books of Jullandhar party, the AO found nil balance, whereas assessee's account disclosed credit balance of Rs. 25,469. This was added by the AO.On appeal the learned CIT(A) upheld the addition of Rs. 25,000 only when he noted that advance of Rs. 25,000 received on 2nd June, 1988, was not satisfactorily explained. The learned Authorised Representative invited our attention to p. 22 of the paper-book and submitted that the AO had nowhere observed that the amounts in this account by the assessee, which were all by drafts/cheques, except an amount of Rs. 5,613 in cash on 5th December, 1987, had not been actually remitted by the Jallandhar party or any of them did not find place in assessee's account as obtained from Jallandhar party. He submitted that to doubt the genuineness of Rs. 25,000, which was also received by demand draft was not justified when there have been a large number of transactions between the assessee and Jallandhar party and the copy of account has been obtained behind the back of the assessee. It was, therefore, urged that the conclusion drawn against the assessee is not justified.

Learned representatives are heard and relevant record seen. In our view the addition made deserves to be upheld. No doubt the AO had obtained copy of account behind the back of the assessee but all the same it was made available to the appellant and it was for appellant to explain the nature and source of last entry of Rs. 25,000, dt. 2nd June, 1988, as was credited in the books of the assessee in the account of Jallandhar party. Since the assessee failed to explain the nature and source of the amount, the addition is held justified.Mohan Crockery House, Kanpur 21,000Kartar Nath & Bros. Jammu 18,663Kohli Crockery, Delhi 15,000Samrat Trading 12,483 6.14 These amounts were added by the AO on the ground that registered letters sent to these parties were received back being not known and did not exist at the addresses given. The learned CIT(A) confirmed addition of Rs. 21,000 and Rs. 18,663, but deleted addition of Rs. 15,000 and Rs. 12,483 since they represented opening balance brought forward from preceding year. Having heard the learned representatives of the parties, as also after going through copies of accounts of Mohan Crockery House and Kartar Nath & Bros. at pp. 33 and 34 of the paper book, we are of the view that addition made and sustained are justified, there being no evidence in support of these two amounts, not even confirmation and there are not even any transaction between the assessee and these two parties during the relevant previous year. As such while we uphold the order of the learned CIT(A) in deleting Rs. 15,000 and Rs. 12,483 we sustain his order confirming additions of Rs. 21,000 and Rs. 18,663.

6.15 While the assessee is having regular dealings with this party the AO observed that assessee's account in the books of Ludhiana party, as obtained, indicated no balance as against credit balance of Rs. 37,246 shown by the assessee (paper-book p. 37). According to the AO bill, dt.

13th February, 1988, for Rs. 22,163 and bill No. 192, dt. 14th October, 1987, for Rs. 20,040 had not been accounted for by the assessee. He, therefore, held that bill No. 192 would be considered in the asst. yr.

1988-89 but added Rs. 22,163 on account of suppressed sales (bill No.107, dt. 13th February, 1988). The CIT(A) sustained the addition. The learned Authorised Representative submitted that bill No. 107 is dt.

12th February, 1988, for Rs. 12,389 for the goods supplied to above party against Form 'C' No. 165499 duly recorded in the sales day book and is also debited in the account of the party (paper-book p. 37) and this is not controverted by the Revenue. On the other hand, the learned Departmental Representative supported the order of the learned CIT(A).

Both the parties are heard and relevant record seen. Since the bill No.107 is duly accounted for by the assessee in its books, we do not find any justification for the addition made. It is deleted. Relief - Rs. 22,163.

6.16 The AO obtained assessee's account from Amritsar party which revealed that amount of Rs. 23,636 credited by the assessee by draft, dt. 2nd December, 1987, did not appear in the said account because Amritsar party had recorded the purchases of goods through Bill No. 21, dt. 24th November, 1987, for Rs. 23,636 but there was no remittance recorded by that party credited by the assessee in the account of Amritsar party. This was added by the AO and confirmed by the CIT(A).

Shri Sapra pointed out that it was through bill No. 31 and not bill No.21, dt. 24th November, 1987, that goods were supplied for Rs. 23,636 and this amount was received by demand draft No. 148513 of 2nd December, 1987 and Amritsar party had sent another draft No. 148563 received on 11th December, 1987, which was duly credited in its account and if Amritsar party did not debit the said amount in the account of the assessee in their books, no adverse inference could be drawn against the assessee when the AO had obtained copy of account of the assessee behind its back and had not acceded to assessee's request for summoning the party vide letter, dt. 9th March, 1992. Learned representatives are heard and relevant record seen. The AO having obtained copy of account of assessee behind its back and without acceding to the request of the assessee to summon that party under s.

131, in our view, erred in making the impugned addition in violation of the principles of natural justice. The explanation given by the assessee has not been termed as unreasonable either. We delete addition of Rs. 23,636.

6.17 The AO obtained copy of assessee's account in the books of Nakodar party which revealed that purchases through bill No. 13, dt. 20th April, 1988, for Rs. 15,191 are not reflected in the books of the assessee. Nakodar party had shown purchases through bill No. 13, dt.

20th April, 1988, for Rs. 15,191 in the account of the assessee. No corresponding sales were reflected in assessee's books in the account of this party. The AO further noted that while the assessee had shown sales of Rs. 11,375 and Rs. 19,751 to this party on 22nd January, 1988, and 26th February, 1988, the same were not recorded as purchases in the books of that party. Since, however, the assessee was seen to have accounted for these sales in its books and had shown to have received the payments, the same were accepted against sales. However, a credit entry of Rs. 10,000 by way of draft, dt. 13th April, 1988, was recorded in the account of Nakodar party in the books of the assessee and carried forward on 31st March, 1989. The AO noted that sale of Rs. 15,191 on 20th April, 1988, shown as purchase by Nakodar party from the assessee was not recorded even though it had received demand draft for Rs. 10,000. He treated a sum of Rs. 15,191 (wrongly mentioned as Rs. 1,51,191 as suppressed sale which could also take care of credit liability of Rs. 10,000. He rejected assessee's request for summoning Nakodar party. The learned CIT(A) upheld the addition. The learned Authorised Representative submitted that the AO himself concedes that sales of Rs. 11,375 and Rs. 19,751 effected by the assessee against Nakodar party, against which that party had remitted the identical amounts vide separate drafts which are duly credited in the account of Nakodar party though Nakodar party has not accounted for these transactions in its books. He submitted that it was incorrect on the part of the Revenue to make the addition of Rs. 15,191 shown by Nakodar party as purchases from the assessee without confronting Nakodar party.

He submitted that the amount of Rs. 10,000 was also received by way of draft and is recorded in the account of Nakodar party in the books of the assessee like other two drafts which have been accepted and unless Nakodar party was confronted on credence should have been given to the copy of account of the assessee in their books of accounts.

Learned representatives are heard and relevant record seen. In our view, addition of Rs. 15,191 cannot be sustained in view of the facts as pointed out by the learned Authorised Representative. The mere fact that Nakodar party has shown purchases from the assessee could not be termed against the assessee without confronting Nakodar party when assessee denies to have made any such sales to them. As such addition of Rs. 15,191 is deleted.

6.18 While the assessee's books disclosed carried forward balance of Rs. 36,355 there were no such debit balance in the books of Ambala party in the account of the assessee as obtained by the AO. The assessee denied the version of Ambala party and requested the AO to summon them. This was not accepted by the AO. He noted that an examination of party's account revealed that draft of Rs. 22,602 as shown received by the assessee has been issued by that party on 7th April, 1988, while the assessee has shown sales for this very amount on 2nd January, 1988, which is not recorded in its books. He added the amount of Rs. 22,602 as suppressed sale. The learned CIT(A), however, sustained addition of Rs. 12,389 only when he noted that the receipt of payment has been accepted by the AO and addition could be Rs. 12,389 for suppressed sales. He, thus, deleted the difference of Rs. 10,213.

The learned Authorised Representative submitted that the CIT(A) has confused himself. He submitted that remittance of Rs. 22,602 by Ambala party is not in dispute as the same is reflected in this party's account. The sale through bill No. 53, dt. 2nd January, 1988, is for Rs. 12,389 against 'C' form No. 310435, as duly recorded in daily sale day book and as such the question of suppression of sales did not arise, more so when request for summoning the party was denied by the AO. We have heard the learned representatives of the parties and have also seen the copy of account of Ambala party in the books of the assessee which showed a brought forward balance of Rs. 26,142 as on 21st October, 1987, against which there is sale of Rs. 12,389, dt. 2nd January, 1988, leaving a credit balance of Rs. 13,853. The assessee received a sum of Rs. 22,602 by way of a cheque, dt. 29th March, 1988, which is recorded in the account of this very party and this plus Rs. 13,853 or Rs. 36,355 stands carried forward. The amount has been received by way of cheque and the AO having failed to summon the party as requested by the assessee, in our view, committed an error and, therefore, wrongly made the impugned addition. Therefore, the learned CIT(A) was equally wrong in sustaining the addition of Rs. 12,389. We delete this amount.

6.19 Here also copy of assessee's account in the books of this party, as obtained, revealed that sales of Rs. 22,759 vide bill No. 93, dt.

5th February, 1988, has not been recorded, though the payment made by that party to the assessee through two drafts of Rs. 12,000 and Rs. 10,759 or Rs. 22,759 have been duly recorded. The AO, thus, added the amount of Rs. 22,759 as suppressed sale. This was confirmed by the CIT(A). Here again the request of the assessee for summoning the party was rejected. Having heard the learned representatives as also after going through the relevant copy of account at p. 41 of the paper-book, we note that sale made through bill No. 93, dt. 5th February, 1988, was for Rs. 12,359 against 'C' form for which payment had been received on 17th February, 1988. The assessee received a further sum of Rs. 10,759 by way of cheque, dt. 25th February, 1988, from the Muktsar party and the same has been carried forward. Therefore, without acceding to the request of the assessee to summon Muktsar party, the AO was not justified in adding the amount of Rs. 22,759. It is deleted.(a) Badri Chand Suraj Mal, Barsi 35,040(b) Vikas Trading Co., Moga 25,000(c) Naresh Crockery, Kotkapura 17,000(d) Prince Crockery, Basti 21,000 6.20 The abovenoted amounts stand added under s. 68 of the Act by the AO on the ground that no sales had been made to these parties with the exception of Badri Chand Suraj Mal and registered letters as sent were received back with the remarks "not known as incomplete addresses", except Naresh Crockery who had refused service. No satisfactory explanation having been filed by the assessee, these amounts were added by the AO and confirmed by the CIT(A).

6.21 Shri Sapra invited our attention to the account of Badri Chand Suraj Mal (P. 42 of the paper-book), in which all the amounts received are by way of demand drafts of Rs. 5,000, Rs. 8,000 and Rs. 50,000, against which there are regular sales against 'C' form numbers at Rs. 8,494, Rs. 4,860, Rs. 9,807, Rs. 4,797 and balance of Rs. 35,040 carried forward. He submitted that if the letter had been received back because of incomplete address the AO could have made field enquiries when the sales shown in this account are accepted. In other words, this account stand accepted by the Revenue though in part, the liability carried forward by the assessee could not have been added by the AO. He placed reliance in the case of Tarawati Goenka vs. CIT (1980) 122 ITR 14 (Cal). He submitted that failure to make further enquiries did not permit the AO to make the impugned addition when genuineness of the account as a whole has not been doubted. Learned representatives are heard and relevant record seen. We find ourselves in agreement with the submissions made by Shri Sapra. The AO has not doubted the genuineness of the account of this party in the books of the assessee and the amount involved were all received by demand drafts and sales made duly reflected and, therefore, the balance which has been carried forward could not have been disallowed, there being no positive evidence that the amounts did not come from this party. We delete Rs. 35,040.

6.22 As regards additions of Rs. 25,000 and Rs. 21,000 in the name of Vikas Trading and Prince Crockery, we do not find arguments advanced by Shri Sapra as convincing and, therefore, we confirm these additions since the amounts are received by way of cash.

6.23 Regarding Naresh Crockery, we find that against sale of goods vide bill, dt. 5th December, 1987, and 16th January, 1988, the assessee had received the amounts from Naresh Crockery which stood duly credited in this account. On 28th February, 1989, the assessee received a demand draft for Rs. 17,000 and credited this amount in the account of this party, which has been carried forward. Refusal by Naresh Crockery to receive the registered letter could not be held out against the assessee when the sales made to this very party and amounts received there against on earlier occasion stand accepted by the Revenue itself.

We delete addition of Rs. 17,000.

6.24 There is a credit balance of Rs. 21,999 in the account of this party in the books of the assessee as carried forward. This was added by the AO since registered letters sent to this party was received back with the remark 'incomplete address'. The assessee was informed accordingly but did not file any satisfactory explanation. The addition was confirmed by the CIT(A). The assessee is aggrieved. Learned representatives are heard and copy of account at p. 46 of the paper-book seen. While the assessee is having running account with this party on account of sales made to it and amount received, the last amount received is Rs. 22,000, dt. 8th March, 1989, in the form of cash which has been carried forward. There being no explanation, no confirmation with regard to this amount addition made, in our view, is justified.

6.25 The above amounts were added on the ground that registered letters sent to the parties evoked no reply about which the assessee was duly informed but in turn could not furnish any independent evidence to prove the nature and source of the amounts. The CIT(A) deleted addition of Rs. 18,019 in the account of Shri Ram & Co. on the ground that there was an opening balance of more than the closing balance. Therefore, we find ourselves in agreement with the view taken by the learned CIT(A) and endorse the same.

6.26 As regards Om Glass Store, the CIT(A) found that the addition was made twice and, therefore, deleted. We have also confirmed this addition already in this very account earlier and, therefore, we agree with the deletion made by the learned CIT(A).

6.27 As regards addition of Rs. 20,469 in the account of Vishnu Das & Sons and Rs. 25,360 in the account of Janta Crockery, we find no justification for the addition made merely because the letters sent by the AO to these parties were received back when on the other hand, as per evidence on record, i.e., paper-book pp. 49 and 51 the transactions between the assessee and these parties are by way of demand drafts/cheques and sales made to these parties are also duly accounted for. Therefore, we delete the addition of Rs. 20,469 and Rs. 25,360.

6.28 Coming to Gaba Crockery, Navashahr, the same has been deleted by the learned CIT(A) after discussing the account of the party placed at p. 50 of the paper-book. We agree with the reasoning as prevailed with the learned CIT(A) in deleting the addition.

6.29 Therefore, the assessee gets further relief of Rs. 45,829 (Rs. 20,469 plus Rs. 25,360).

6.30 The assessee claimed to have received Rs. 3 lakhs in cash in the account of the above party in two lots of Rs. 1,50,000 each on 1st February, 1988, and 2nd February, 1988. This was added by the AO for lack of proof under s. 68 of the IT Act. In appeal the learned CIT(A) deleted an amount of Rs. 1,92,240 being the sales made by the appellant against this account and duly taken to assessee's trading account vide bill No. 36, dt. 9th March, 1988, against 'C' form. He, therefore, confirmed the remaining amount of Rs. 1,07,760 being the amount carried forward. He further noted that the sales effected by the assessee to this party is not even doubted by the AO. Having heard the learned Authorised Representative, we do not find ourselves in agreement with the view canvassed by Shri Sapra that the remaining amount should also be treated as explained when admittedly there is no evidence in the form of confirmation even from this party and as such we confirm the view of the learned CIT(A) and dismiss assessee's ground of appeal relating to this amount.

6.31 For the same reasons as above we confirm the view of the learned CIT(A) retaining addition of Rs. 1,03,500 out of addition of Rs. 3 lakhs made by the AO in the account of A. K. Bangle, Bangalore, the facts and circumstances being the same with regard to relief allowed by the learned CIT(A) for Rs. 1,96,500 being sales through bill No. 41, dt. 6th March, 1988.

6.32 The AO added a sum of Rs. 3,25,000 being cash receipts in this account. This was confirmed by the learned CIT(A), who though noted that assessee had made sales worth Rs. 1,96,510 to this party on 4th May, 1988, but there was substantial time gap between the receipt and sales made and, therefore, no benefit of sales made could be allowed.

In our view, this approach is erroneous when the sales at Rs. 1,96,510 made by the assessee to this party is against 'C' Form and is duly recorded in assessee's books and is accepted by the Revenue. Therefore, credit for this amount of Rs. 1,96,510 has to be allowed. However, the balance of Rs. 1,28,490 is confirmed.

6.33 In this account also all the receipts aggregating to Rs. 6,40,520 are in cash and were added by the AO under s. 68. This was confirmed by the learned CIT(A). However, there is also sale of Rs. 1,91,510 effected by the assessee to this party vide bill No. 507, dt. 5th March, 1988 against 'C' Form and, therefore, credit for this has to be given. Therefore, we delete addition of Rs. 1,91,510 while confirm the balance addition of Rs. 4,49,010. This plea is, therefore, partly accepted.

6.34 In this account the assessee received seven amounts on different dates in cash, in all aggregating to Rs. 2,45,000, out of which the AO added Rs. 1,70,000 being the amount received in cash upto 9th August, 1988, because according to him, sales against these amounts had been effected after 12th August, 1988. On appeal the learned CIT(A) restricted the addition to Rs. 69,598 being the balance carried forward. We find ourselves in agreement with the view taken by the learned CIT(A).

6.35 This account shows Rs. 1 lakh received in cash on 15th September, 1988. This was added by the AO under s. 68 and confirmed by the CIT(A).

After hearing the learned Authorised Representative we find no ground to interfere with the view taken by the learned CIT(A) when no sales whatsoever to this party stands effected and assessee has also not led any evidence to explain the nature and source of this amount in a satisfactory manner.

6.36 Similar is the position with regard to addition of Rs. 1,60,360 in the account of Sanjeev Kumar of Firozabad and, therefore, we confirm this addition also.

6.37 The appellant is shown to have received cash aggregating to Rs. 6,26,174 on five different dates, against which the AO has added Rs. 3 lakhs under s. 68 on account of cash of Rs. 1,50,000 received by the appellant on 9th February, 1988, and again on 10th February, 1988. On appeal the learned CIT(A) restricted the addition to Rs. 1,09,000 being the amount carried forward and gave relief of Rs. 1,91,000 on account of sales made by the assessee to this party vide bill No. 37, dt. 10th March, 1988, against 'C' form. On facts of the case we find ourselves in agreement with the view taken by the learned CIT(A) and endorse the same. For similar reason we endorse the view of the learned CIT(A) in giving relief of Rs. 1,93,500 out of addition of Rs. 3 lakhs made by the AO in the account of Khan Bangle Store, the fact and circumstances being the same as in the case of Dinesh Kangan House.

6.38 Similar is the position with regard to relief allowed by the CIT(A) at Rs. 1,36,800 out of addition of Rs. 1,50,000 made by the AO in the account of Reeva Bangle Store, Khanna and, therefore, we confirm the finding of the learned CIT(A).

6.38A The AO added Rs. 5,71,116 as appearing in this account but in appeal the learned CIT(A) restricted the addition to Rs. 1,10,300 when he noted that the assessee had also shown sales in this account during the relevant previous year itself leaving only a balance of Rs. 1,10,300. Having heard the learned representatives, we are of the view that there is no infirmity in the reasoning of the learned CIT(A) and, therefore, we confirm his finding.

6.39 Copy of account of this party at p. 63 of the paper-book indicates advances amounting to Rs. 4,78,300, including Rs. 1,65,000 received by demand draft on 24th February, 1988. Against this the assessee effected sales to this party for Rs. 1,63,300 and again Rs. 1,94,710, leaving a balance of Rs. 1,20,290 which was carried forward. The AO, however, added Rs. 2,16,000. In appeal the learned CIT(A) gave credit for sale of Rs. 1,94,710 and, therefore, out of addition of Rs. 2,15,000 he gave relief of Rs. 1,94,710. After hearing the learned representatives of the parties we are of the view that there is no justification for retaining the balance addition of Rs. 20,290 when the last amount of Rs. 1,65,000 was received by demand draft and the same has already been accepted partly. Therefore, we find this account explained and delete the balance of Rs. 20,290.

6.40 Rs. 20,000 shown by the assessee in this account was received in cash on 8th March, 1989, and carried forward. This was added by the AO and confirmed by the learned CIT(A) there being no evidence in support of the nature and source of this amount. We do not find any material on record either to take a different view. We confirm the addition.

6.41 Same is out view with regard to addition of Rs. 1,50,000 in the account of Om Prakash, Firozabad, and Rs. 22,000 in the account of Mahavir Glass House, Gonda.

6.42 The AO has added Rs. 21,000 being the amount received in cash on 28th February, 1989, in this account. In appeal the learned CIT(A) deleted the addition of Rs. 21,000 on the ground that there were as many as five supplies of goods to this party by the assessee and further cash of Rs. 21,000 received on 28th February, 1989, and even thereafter stood adjusted against the sales made. We do not find any infirmity in the reasoning of the learned CIT(A) and confirm his finding.

6.43 This was received by cash on 8th March, 1989, and carried forward.

No satisfactory evidence having been furnished by the assessee the addition was made by the AO and confirmed by the learned CIT(A). We also find no material on record justifying interference with the finding recorded by the learned CIT(A).

6.44 The AO had added Rs. 32,225 being the credit balance carried forward by the assessee in this account on the ground that the assessee had not furnished address of this party nor it had proved the genuineness of the amount. On appeal the CIT(A) deleted the addition after going through the account of the party at p. 69 of the paper-book, which indicated brought forward balance of Rs. 21,323 and further amounts credited on six different occasions, including by demand drafts/cheques and supplies effected, leaving a balance of Rs. 32,225 which represented amount received by demand draft and cheque. In our view, the learned CIT(A) was justified in allowing the relief and, therefore, we uphold his finding.

7. Having dealt with the relevant accounts individually as above on merit, the observation of the learned CIT(A) regarding peak worked out at Rs. 23,60,004 vide para 17.2 of his order is rendered irrelevant since the relevance of working out of peak could be with regard to unexplained credits which we have already sustained in some of the accounts independently as above.

8. Next grievance of the assessee is against action of the CIT(A) in restoring back the issue regarding inflation in the value of stocks to the AO. According to the learned Authorised Representatives all the facts/figures having been placed before the CIT(A) he should not have restored the issue back to the AO when he had decided part of the same issue. The Revenue is in appeal against action of the CIT(A) in directing the AO to allow deduction from the income on account of inflation in stocks of some items. In nutshell, therefore, while the grievance of the assessee is against a part of the issue having been restored to the AO, the grievance of the Revenue is against direction given by the CIT(A) to allow deduction from the income on account of inflation in stocks of some items.

8.1 The relevant facts in brief are that the assessee in its letter, dt. 9th March, 1992 (paper-book p. 77), made the following claim before the AO : "That in fact there was heavy loss in the unit but to show the profits and stocks were highly inflated cover up the loss. Actually there were stocks of Rs. 32,82,675 but shown to Rs. 77,08,524. Only in coal a/c the correct stocks were of Rs. 1,14,870 but shown to Rs. 24,33,463 likewise the stocks of broken glass, Vardana, Kachara, Remia and glass in tank were highly inflated. As such total stocks were inflated to the tune of Rs. 44,25,849 which should be reduced from the income.

It is, therefore, requested that your honour will be pleased to accept the above and give the effect at the time of framing the assessment." Detailed working of inflation made by the assessee aggregating to Rs. 44,25,849 is given at p. 81 of the paper-book.

8.2 The AO, however, did not discuss the above claim of the assessee.

In appeal, the assessee filed letter, dt. 23rd July, 1992, before the CIT(A) vide p. 78 of the paper-book, in which the assessee made the following submissions : "Ground No. 33 : That the AO was not justified in ignoring the written explanation, dt. 9th March, 1992 in which it was stated that the stocks were inflated to the tune of Rs. 44,25,849 which should be reduced from the income. The value of stock in the balance sheet has been shown at Rs. 77,08,524 while the correct value of the stocks held by it is Rs. 32,82,675. This inflation had been attempted to only reduce the genuine losses suffered by the appellant.

It is, therefore, prayed that your honour will be pleased to entertain the above ground at sl. No. 33 and consider the same".

8.3 The learned CIT(A) disposed of assessee's claim in paras 18 to 19.4 at p. 31 to 33 of his order. We consider it appropriate to reproduce para 18 of the appellate order as below : "18. The additional ground was made that the stock in this year had been inflated by Rs. 44,25,849 : Actual Rs. 32,82,675 was inflated to reduce genuine losses Rs. 77,08,524. AO's objections in this regard were as under : (i) The return was filed voluntarily on 30th October, 1989, with the audit report which was certified to be true to the personal knowledge of the partner Shri S. C. Goyal who signed the return on behalf of his HUF. The report was also signed by the managing partner, besides C.A. who took the stock position as certified by the managing partner. The appellant took this plea before me in the letter, dt. 9th March, 1992 but burden was not discharged. On merits, the position was stated as shown in the enclosed chart.

Enquiries were made from Shri D. K. Gupta, Auditor whose reply, dt.

30th July, 1992, had been enclosed to confirm that the figures of the stock given by the managing partner and accepted by him.

Consider this, the request was that the plea should not be accepted." 8.4 From the above observation it is clear that the AO did not object to the admission of additional ground of appeal raised by the assessee before the learned CIT(A) vide his letter, dt. 23rd July, 1992, but objected to the relief being claimed by the assessee. Consequently the learned CIT(A) proceeded to decide the claim of the assessee on merits vide paras 19 to 19.4. In appeal before us also the learned Departmental Representative objected to the relief claimed by the assessee on merits.

8.5 The learned Authorised Representatives for the assessee vehemently contended that the assessee had, in fact, suffered net losses but to reflect favourable financial picture to the creditors/bank, the assessee had on 31st March, 1989, debited the following accounts and credited the same to the trading account, as is evident from the account books produced before us also and copies of the manufacturing and trading account for the period 22nd October, 1987, to 31st March, 1989 (17 months-placed at p. 83 and the relevant statements forming part of the audited balance sheet at pp. 87,88 and 89 of the paper-book) : (i) Broken glass - Rs. 6,19,855 :- Vide p. 87 shown as adjustment, while in the trading account it has been shown on the credit side against raw material and chemicals; (ii) Coal - Rs. 2,90,229 :- Shown at p. 89 as adjustment and on credit side of the trading account against power and fuel Rs.(iii) Bardana 2,55,120(iv) Kachra 5,71,200(v) Renia 6,74,730(vi) Glass in tank 14,393 ----------- These four items appear as adjustments at p. 88 and on credit side of the trading account against miscellaneous store (P. 83 of paper-book).

8.6 The learned Authorised Representative explained that the above adjustments aggregating to Rs. 24,25,527 have been made just to raise the figure of gross profit so that the net result was not loss. He submitted that the income of Rs. 24,25,527 on account of these adjustments neither represented value of such closing stock nor there was actually any such closing stock. He submitted that mere book appreciation in value of such stocks cannot be treated as assessee's income and taxed as such, as held by the Hon'ble Supreme Court in the case of State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC), at p.

106. His argument plain and simple was that since appreciation in value of stock-in-trade cannot be brought to tax then the mere adjustment entries of the amounts of Rs. 24,25,527 on the last day of the accounting period without any such stocks could not be treated as assessee's income when assessee has to be taxed on its real income and not on any hypothetical income which not at all had resulted to the assessee. Advancing his submissions, he explained that for manufacture of glassware the raw material used is soda ash, silica sand and for manufacturing process coal is used as fuel. For all these items the assessee had maintained day-to-day stock/consumption register, which was produced before the Revenue authorities and no defect stand pointed out therein. In support of his contention he took us through the monthly quantitative chart of steam coal (P. 74 of the paper-book) which is based on day-to-day stock register maintained by the assessee, which shows closing stock of coal at 114.870 MT and its value has been shown at Rs. 24,33,463 at p. 89 forming part of the audited balance sheet, which means about 21,340 per MT as against the purchases made by the assessee and accepted by the Revenue in the year under appeal at about Rs. 1,000 per MT. He submitted that such artificial inflation did not bring in any element of real income. Advancing his submissions further Shri Sapra referred to position with regard to Bardana. The same consisted of empty bags obtained on the consumption of soda ash.

From the comparative chart filed the consumption of soda ash during this year was at 2,348.175 MT or 23,482 bags against 16,744 bags of soda ash in the immediately preceding assessment year (It was explained that silica sand was purchased always in loose and the same also comes as loose). Many of such empty bags get turn of and/or were also used in handling hot parts of the machinery, moulds, etc., while some are left behind with the assessee, of which the value in the preceding year was Rs. 5,200 and, therefore, during this year the same could not be as high as 2,55,120 adjusted by the assessee on 31st March, 1989, when on the basis of figure of Rs. 5,200 as accepted by the Revenue in the immediately preceding assessment year the value of Bardana during the relevant previous year could not have been more than Rs. 8,000 or so.

8.7 Similar submissions were made with regard to inflation of value of closing stocks of Renia, Kachra and Khanghri, which are nothing but coal-waste, as also similar inflation with regard to broken glass. He submitted that value of such stocks as also of coal was inflated merely to inflate gross profit while, in fact, no income resulted by this artificial inflation of the value of closing stock. He submitted that such figures are also being carried over year after year. As regards report of the AO obtained by the learned CIT(A) on the above claim of the assessee, it was submitted that copy of such report was not made available to the assessee but what has been observed by the CIT(A) in para 18.1, nothing adverse has been pointed out even by the AO except that he had relied on the audit report, which was certified on the basis of personal knowledge of partner, Shri S. C. Goyal.

The Authorised Representative submitted that nowhere the AO had pointed out that entries aggregating to Rs. 24,25,527 did not represent adjustment entries made on the last day of the accounting period.

8.8 The learned Departmental Representative while not controverting the fact that above entries were merely adjustment entries made on the last day of the accounting period, however, submitted that in case any relief was allowed it would bring down the GP rate, which was disclosed by the assessee at 15.64 per cent after carrying out the adjustment entries aggregating to Rs. 24,25,527. On a query from the Bench as to whether the AO had passed any order under s. 251 of the IT Act, it was submitted by the learned Departmental Representative that while no such order has been passed by the AO, he had declined to give any relief even after the passing of the impugned order by the learned CIT(A) to grant relief to the assessee after verification by passing an order under s. 154 on such application having been filed by the assessee with reference to a show-cause notice under s. 221 of the Act.

9. As both the parties are in appeal before us on the claim made by the assessee before the AO and reiterated before the CIT(A), who restored part of the claim to the file of the AO, but the AO having not passed any order under s. 251 so far, we proceed to decide the issue on merit particularly when the facts as stated above are not in dispute and are also not controverted. Regarding adjustment made in the coal account the learned CIT(A) had declined to give any relief with the following observation in para 19 of his order : "Coal : The value of opening and closing stock are as per the stock register. The value of Khangri were shown in the opening stock.

Since it was not adjusted during the year no reduction could be allowed." 9.1 A perusal of coal account at p. 74 of the paper-book reveals that opening stock amounted to 285.195 MT which constituted closing stock as on 30th September, 1987, relevant to asst. yr. 1988-89, which had been valued by the assessee at Rs. 25,70,142 or Rs. 9,018 per MT, which on the face of it is absurd and ridiculous, when the average purchase rate during that year appeared to be less than Rs. 1,000 per MT. In the year under appeal closing stock of coal is 114.870 MT of which the value has been placed at Rs. 24,33,463, including adjustment of Rs. 2,90,229 made on 31st March, 1989. In other words, the value of closing stock has been shown at Rs. 21,43,234 giving a rate of 18,658 per MT, which again is ridiculous as against the purchase price of nearly Rs. 1,000 per MT.While no relief is available to the assessee with regard to valuation of closing stock, the same coming out of opening stock the adjustment of Rs. 2,90,229 made by the assessee on 31st March, 1989, will have to be considered while considering its claim with regard to Renia and Kachra, inasmuch as all the three, including Khangri represent coal waste on account of which the assessee has made adjustments aggregating to Rs. 15,36,189 by debiting power and fuel account and miscellaneous stores account and crediting the trading account as under :(i) Khangri in power and fuel 2,90,229(ii) Renia in Misc. account 6,74,730(iii) Kachra in Misc. account 5,71,200 ------------ 9.2 During the year under appeal the production achieved by the assessee was Rs. 7,506.554 MT as against 5,581.111 MT; while consumption of coal is 7,145 MT against 6,390 MT in the immediately preceding year. It is nobody's case that the consumption of coal is high while it compared favourably with the immediately preceding assessment year. We also find that value of Renia and Kachra has been shown and accepted at 2,000 and 2,400 for asst. yr. 1988-89. Therefore, on a cumulative consideration of all the facts we feel that the assessee is entitled to the relief; (a) of Rs. 2,90,229 on account of adjustment made in coal on 31st March, 1989; (b) Rs. 6,70,000 out of Rs. 6,74,730 on account of Renia adjusted on 31st March, 1989, keeping in view that in 1988-89 assessment year value of Renia at Rs. 2,000 was accepted out of coal consumption of 6,389.320 MT; and (c) Rs. 5,65,000 out of adjustment of Rs. 5,71,200 made on 31st March, 1989, keeping in view that in 1988-89 assessment year value of Kachra at Rs. 2,400 has been accepted.

9.3 As regards Bardana account also on the facts summarised above, we feel that value of Bardana obtained from soda ash could not be more than Rs. 15,000 or so keeping in view the value of Rs. 5,200 shown and accepted for 16,744 bags in asst. yr. 1988-89. We agree with the learned Authorised Representative that some bag must have gone useless, while some must have been used for various purposes. We, therefore, hold that assessee is entitled to a further relief of Rs. 2,40,000.

9.4 Similarly out of adjustment of Rs. 6,19,855 on account of broken glass, we allow relief of Rs. 6 lakhs keeping in view the value of such broken glass accepted at Rs. 7,000 in asst. yr. 1988-89 on total production of 5,581.311 MT, as against the production during the year under appeal at 7,506.554 MT. The assessee is, therefore, held entitled to a total relief of Rs. 23,65,229 (i.e., 2,90,229 plus Rs. 6,70,000 plus Rs. 5,65,000 plus Rs. 2,40,000 plus Rs. 6,00,000 out of adjustment entries of Rs. 24,25,527 made by the assessee on the last day of the accounting period as discussed above.

10. Before parting with the above issue we would like to observe that certificate of the Chartered Accountant assumed no significance since the same was based on figures given in various statements and balance sheet as per information provided by the managing director. At the same time the Chartered Accountant also has not controverted the fact that the assessee-firm had made mere adjustment entries in its books on 31st March, 1989, and the same have been shown as "adjustments" in the statement forming part of the balance sheet without showing them as value of particular rate of closing stocks. However, a chart appears to have been filed before the CIT(A) forming a part of his appellate order in which both the quantities and the rates are mentioned. A perusal of the said chart makes it clear that weight has been worked out through extrapolation by dividing the adjustment entry i.e., adjusted value made by the assessee on 31st March, 1989, by the opening stock rate meaning thereby that there was no such actual closing stock for which adjustment entries have been made. To illustrate, at sl. No. 14 of the chart opening stock of Bardana was shown at 40,200 for 8,040 bags @ Rs. 5 per bag, including the Bardana being brought forward from earlier years but for this year the number of bags have been shown at 59,064.

Obviously dividing the adjustment entry of Rs. 2,95,320 by Rs. 5 per bag, i.e., at the opening value per bag, thus, showing the addition of 51,024 bags. However, such a large number of bags could not have been obtained from the total number of bags of soda ash consumed i.e., 23,482 bags even if there was no wastage. It, therefore, clearly proves that in the chart filed before the CIT(A) the quantities had been mentioned through extrapolation as mentioned above. Similar is the position with regard to Renia and Kachra (Sl. Nos. 15 and 16 of the chart). It is after taking into account all these facts that we have come to the conclusion that the adjustment entries passed on 31st March, 1989, were not at all in respect of any actual stocks but had been made only to inflate the gross profit and such adjustments by themselves did not represent actual income earned by the assessee.

10.1 The submission made by the learned Departmental Representative that in case any relief is allowed to the assessee out of inflation in stocks represented by adjustment entries, it would affect the gross profit rate as disclosed at 15.64 per cent as against 15.95 per cent in the immediately preceding assessment year, deserve to be taken note of.

We have allowed relief of Rs. 23,65,229 on account of inflation in stocks and deducting this amount from declared gross profit of Rs. 27,92,386, the balance gross profit remains at Rs. 4,27,157. But to this we have to add the additions sustained by us aggregating to nearing Rs. 20 lakhs as above on account of trade advances/cash credits, thus, raising the margin of gross profit to 12.75 per cent, which of course is lower as compared to the immediately preceding assessment year when it was 15.95 per cent. The rate of 15.95 per cent is also as a result of inflated figure of valuation placed on the closing stock of coal, which has been shown by way of Khangri in the chart filed before the CIT(A). All the same, the assessee in his letter, dt. 12th December, 1991, filed before the AO (pp. 117 and 118 of the paper-book and again pp. 119 and 120 of the paper-book) pointed out that during the last three-four years there has been cut-throat competition in this line of business when a large number of semi-automatic presses had been started in the nearby areas. The assessee further submitted that cost of raw material and packing had gone up substantially without corresponding increase in the sale of end product, resulting in fall in margin of gross profit. The assessee supported its submission by giving instances of purchase rate of important raw material, like coal, silica sand, soda ash, packing boxes. The assessee had even worked out the effect of such increase vis-a-vis, the margin of gross profit. We consider it necessary to quote from the letter, dt. 12th December, 1991, of the assessee : "That entire purchases and sales are vouched. Day-to-day consumption of raw material and production and stock registers of raw materials and finished goods have been kept. The fall in gross profit rate was quite genuine.

That it is not out of place to mention here that due to all these adverse factors present partners could not run the factory in the subsequently and have sold out 50 paise share of the business including fixed assets w.e.f. 1st April, 1990, and even then factory could not run and is lying almost closed since more than 1/1-2 years and is suffering heavy loss." 10.2 The above submissions of the assessee made before the AO go to show that the assessee had made its position clear regarding adjustment entries in respect of inflation in stocks which have been related to fall in actual gross profit. All the same, the fact remains that the AO has found no defects in the account books maintained by the assessee and there are no unaccounted purchases and sales either. On these facts, therefore, we are of the view that there is adequate justification on the part of the appellant accounting for fall in margin of gross profit.

11. The only other issue is with regard to charging of interest under s. 234B. This is only consequential.

12. Before closing we would like to observe that in case after giving effect to our order the net income of the assessee works out at loss, or lower than the income as returned, then the assessment will be framed as per returned income. While appeal of the assessee is partly allowed as indicated above, the appeal of the Revenue is dismissed.


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