IN INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD D BENCH Before Shri G.D. Agarwal, Vice-President (AZ) and Shri Mahavir Singh, Judicial Member ITA No.1768/ Ahd/2007 [Asstt.Year: 2002-03] Date of hearing:10.6.10 Drafted:29.6.10 Mrs. Sarlaben N Patel -vs- Income Tax Officer Prop. Astha Form ulation W ard-6(4), Ahmedabad 466, Phase III, GIDC Vatva, Ahm edabad P No. AGXPP5685M (Appellant) (Respondent) Revenue by :Shri C.K. Mishra, SR-DR Assessee by:Shri Vivek N Chavda, AR ORDER PER Mahavir Singh, Judicial Member:- This appeal by assessee is arising out of order of Commissioner of Income-tax (Appeals)-XII, Ahmedabad in appeal No.XII/Wd.6(4)/73/05-06 dated 24- 01-2007. assessment was framed by ITO Ward-6(4), Ahmedabad u/s.143(3) of Income-tax Act, 1961 (hereinafter referred to as Act ) vide his order dated 24-03-2005 for assessment year 2002-03. 2. first issue in this appeal of assessee is against order of CIT(A) in confirming rejection of book results and thereby making addition of GP by Assessing Officer on account of low gross profit. For this, assessee has raised following ground No.1.1 to 2.2:- 1.1 order passed by CIT(A)-XII, Ahd. On 24.1.2007 for A.Y. 2002-03 confirming addition of Rs.3,06,367/- towards low GP and Rs.20,000/- as unexplained cash credit is wholly illegal, unlawful and against principles of natural justice. ITA No.1768 & 1657/Ahd/2007 A.Y. 2002-03 Mrs. Sarlaben N Patel v. ITO Wd-6(4), bd Page 2 2.1 ld. CIT(A) has grievously erred in law and or on facts in confirming he rejection of books of accounts by A.O. and addition of R.s.3,06,367/- towards low GP. 2.2 That in facts and circumstances of case as well as in law, ld. CIT(A) ought not to have confirmed rejection of book result shown by appellant and estimating sales at Rs.40 lakhs and GP at 25%. 3. brief facts leading to above issue are that assessee is individual and carrying on proprietary business in name of M/s. Astha Formulations of manufacturing pharmaceuticals formulation and injectible items of her own and on job work / leave & lincense basis. assessee had filed her return of income for assessment year 2002-03 on 29-12-2002 declaring total income of Rs.1,27,210/- and total turnover shown was Rs.37.07 lakh with gross profit of 18.71% as against total turnover of Rs.32.44 lakh and GP of 23.26% in immediate preceding year. During course of assessment proceedings Assessing Officer called upon assessee to explain reasons for fall in GP of 4.55% which assessee explained in detail as reproduced in assessment order. assessee could not produce books of account, sale and purchase bills, expenditure vouchers. Assessing Officer rejected book results in absence of books of account and after comparing fall in GP and consumption of raw material required assessee to explain. assessee filed written submissions giving details as under:- AY 00-01 AY 01-02 AY 02-03 FY 99-00 FY 00-01 FY 01-02 (A) (B) INCOME 3810643 3244685 3707628 879953 2827675 Sales 1009051 803038 609948 0 609948 4819694 4047723 4317576 879953 3437623 EXPENSES:- Op. Stock 1210775 10090051 803038 0 803038 Raw material Consumed 1580870 891969 1464511 6664053 800458 Job charges 266637 374000 447766 45781 401985 Packing material 188795 2180011 124961 25592 99369 Printing charges 234526 162441 146734 0 146734 Analytical exps. 85755 167195 160990 0 160990 Laboraty 7172 11866 3369 0 3369 Block & Design 18700 9800 0 0 0 Excise 578073 448689 472574 123819 348755 4171303 3293022 3623943 8559245 2764698 Gross profit 64891 754701 693533 20708 672925 ITA No.1768 & 1657/Ahd/2007 A.Y. 2002-03 Mrs. Sarlaben N Patel v. ITO Wd-6(4), bd Page 3 Percentage to sales 17.02% 23.26% 18.71% 2.35% 23.80% NOTE:- (A) is total turnover (B) is turnover for Biocini Health care specific transaction for first time dealing (C) total turnover less Biocine turnover GP for which is higher than earlier year. Till FY 2000-01 we were engaged in mainly formulation of tablets and capsules. Whereas from FY 2001-02 we have started manufacturing of injectable items also. As result working of year under review can not be compared with that of previous years. Besides during year under review we have entered into arrangement with M/s. Biocin Healthcare to manufacture under their brand names. In this contract we could not make reasonable profit as this was first of such type of arrangement. In this arrangement as against sales of Rs.879953 cost of production was Rs.859245 resulting into gross profit of Rs.20708 only. This has adversely affected total working for year. However if we exclude specific transaction of M/s. Biocin Health care then gross profit ratio comes to 23.80% which is more than gross profit shown in earlier year. : According to Assessing Officer assessee has shown higher consumption of raw material at 39.9% in year under consideration as against 27.49% in immediate preceding year. According to him, increase in raw material consumption is 11.91% and this high consumption of raw material is not explained and applied previous year s consumption ratio @ 27.49%. production from consumption of raw material worth Rs.14,64,511/- would result in turnover of Rs.53,27,401/- and assessee has disclosed turnover of Rs.37,07,628/- only. Therefore, AO estimated suppressed turnover at Rs.16,19,773/-. In view of these facts, AO rejected book results by holding that book results disclosed by assessee are not reliable and he made addition on account of fall in GP at Rs.3,06,367/- by holding as under:- In view of above, Book results disclosed by assessee in return of income are not reliable. turnover of assessee is therefore, estimated at Rs.40,00,000/- against turnover disclosed at Rs.37,07,028/-0. G.P is estimated at 25% of turnover which is in tune with 23.80% disclosed in immediate preceding year. G.P works out to Rs.10,0,000/- (40,00,000/- x 25% = 10,00,000/-). assessee has disclosed GP at Rs.693,633/-, therefore, addition on this score works out to Rs.3,06,367/-. Penalty proceedings u/s.271(1) are initiated for furnishing inaccurate particulars and concealment of income. ITA No.1768 & 1657/Ahd/2007 A.Y. 2002-03 Mrs. Sarlaben N Patel v. ITO Wd-6(4), bd Page 4 CIT(A) also confirmed action of Assessing Officer exactly on same reasoning. 4. Before us Ld. Counsel for assessee fairly admitted that assessee could not produce books of account, bills and vouchers and accordingly he requested Bench to make fair estimate of GP. He stated that in immediate preceding year GP was 23.26% and in this year GP is at 18.7%. He also narrated that in assessment year 2000-01 GP was 17.02%. In view of these, he stated that reasonable estimate of GP can be made. On other hand, Ld. SR-DR heavily relied on orders of lower authorities. He stated that there is no defect pointed out by assessee either in assessment order or in order of CIT(A), except requesting for reasonable estimate of GP. 5. We have heard rival contentions and gone through facts and circumstances of case. We find that books of account, sale & purchase bills and expenses vouchers were never produced before Assessing Officer or CIT(A). Even now before us, Ld. counsel for assessee fairly admitted that he is not in position to produce books of account and requested for fair estimate of GP. We uphold rejection of book results but we are of view that after rejection of book results, fair estimate of GP should be made. We find that in last two preceding assessment years, GP was at 17.02% and 23.26% as against same current year s GP is at 18.71%. We are of view that if we average out of three years, same will comes to 19.50%, and taking reasonable estimate, we estimate GP at 20% and direct Assessing Officer to re-compute income accordingly. This inter-connected issue of assessee s appeal is partly allowed. 6. next issue in this appeal of assessee is against order of CIT(A) in confirming addition made by Assessing Officer on account of unexplained cash credit of Smt. Kapilaben J Shah amounting to Rs.20,000/-. 7. At outset Ld. counsel for assessee stated that once book results are rejected and profit of assessee is estimated by applying GP rate, separate addition of unsecured loan, which is connected with business of ITA No.1768 & 1657/Ahd/2007 A.Y. 2002-03 Mrs. Sarlaben N Patel v. ITO Wd-6(4), bd Page 5 assessee cannot be made. We find that at no point of time Assessing Officer has asked for identity, genuineness and creditworthiness but even otherwise once book results are rejected and estimate to profits is made by AO, connected cash credit cannot be added separately, unless and until it is proved that this has no connection with earning of business income. This fact has not been proved. In view of above facts and taking into consideration facts in entirety, claim of assessee that this cash credit is out of business income of assessee, addition cannot sustain. Accordingly, this issue of assessee s appeal is allowed. 8. In result, assessee s appeal is partly allowed. Order pronounced on this day of 30 June,2010 Sd/- Sd/- (G.D.Agarwal) (Mahavir Singh) (Vice President) (Judicial Member) Ahmedabad, Dated : 30/06/2010 *Dkp Copy of Order forwarded to:- 1. Appellant. 2. Respondent. 3. CIT(Appeals)-XII, Ahmedabad 4. CIT concerns. 5. DR, ITAT, Ahmedabad 6. Guard File. BY ORDER, /True copy/ Deputy/Asstt.Registrar ITAT, Ahmedabad Mrs. Sarlaben N. Patel v. Income Tax Officer- Ward-6(4)