IT Appeal No. 110 (Jp.) of 2012
[ASSESSMENT YEAR 2008-09]

G.D. AGRAWAL, VICE-PRESIDENT (AS A THIRD MEMBER), R.K. GUPTA AND KUL BHARAT, JUDICIAL MEMBER, SANJAY ARORA AND B.R. JAIN, ACCOUNTANT MEMBER

D.C. Sharma for the Appellant.
P.C. Parwal for the Respondent.

ORDER

Sanjay Arora, Accountant Member - This is an Appeal by the Revenue directed against the Order by the Commissioner of Income-tax (Appeals)-II, Jaipur ('CIT (A)' for short) dated 14-11-2011, allowing the assessee's appeal contesting its assessment u/s. 143(3) of the Income-tax Act, 1961 ('the Act' hereinafter) dated 19-01-2011 for the assessment year (A.Y.) 2008-09.

2. The appeal raises the single issue, i.e., deletion of trading addition in the sum of Rs. 76.75 lakh made by the Assessing Officer ('AO' for short) after rejecting the books of account u/s. 145(3) of the Act. The basis for the AO's action was that the assessee could not explain the persistent decline in its gross profit (g.p.) rate, which, at 18.31%, was the lowest over a span of five years ending with the current year. The assessee's declared results for the relevant years being as under:—

The assessee is not maintaining any stock register, and most of its purchases of Rs. 436.72 lakh were per self made vouchers. He, therefore, applied the gross profit rate of 25.51 %, i.e., as disclosed by the assessee for the assessment year 2005-06; that for the immediately preceding year having been continued by the first appellate authority at 24.51%. Though the same stands deleted in second appeal by the Tribunal, the Department had not accepted its decision and is in further appeal before the hon'ble high court. Reliance was further placed by the AO on various decisions, including by the hon'ble Apex Court and the hon'ble jurisdictional high court. The same, however, stood deleted in appeal by the ld. CIT(A). Similar additions had been also effected by the AO for the immediately preceding years, i.e., assessment years 2006-07 and 2007-08. The matter came up before the Tribunal, which, while upholding the invocation of section 145(3) of the Act, found that no case for sustaining the trading addition was made out, and deleted the entire addition, i.e., as sustained by the first appellate authority. The findings by the Tribunal for the relevant years stand reproduced at pages 6 and 7 (para 3) of the impugned order. Further, on fads, the assessee had been able to explain the marginal decline (at 1.04%) in its gross profit rate, i.e., with reference to the immediately preceding year, on the basis of a higher increase in the purchase price of grey stone and brown stone, which constituted 56.73% of its total sales, than the corresponding increase in their sales price, both reckoned on an average for the year, both with reference to that obtaining for the immediately preceding year; the relevant figures being as under:—

The marginal decline of 1.04% in gross profit rate had thus been satisfactorily explained. There is no law that some addition has to be necessarily sustained on the rejection of books of account, citing some case law in support. As regards the purchases from unregistered dealers ('URD' for short), the same, at Rs. 122.26 lakh, constitute 28% of its total purchase, as against 51.6% and 52.75% for the assessment years 2006-07 and 2007-OK respectively. Though the expenditure on freight has been booked per self made vouchers, the same are vouched by royalty slips; weighment slips, etc., so that there is no reason to doubt the same. The trading addition was accordingly deleted in full. Aggrieved, the Revenue is in appeal.

3. Before us, while the ld. DR relied upon the order of the AO, the ld. AR did that on the impugned order, besides the orders by the Tribunal in the assessee's own case for the assessment years 2006-07 and 2007-08.

4. We have heard the parties, and perused the material on record. The appeal raises two issues, both of which we shall take up in seriatim.

Rejection of Accounts
4.1 The ld. CIT(A) has vacated the rejection of books of account u/s. 145(3) of the Act by the AO and, resultantly, the ensuing trading addition made by estimating the gross profit rate at 25.51%, as against the disclosed gross profit rate of 18.31%. The Tribunal has, for the two immediately preceding years, vide its separate orders (PB pgs. 15-21, 22-30), upheld the rejection of the books of account, though found that the assessee had reasonably explained its declared gross profit, so that the same stood confirmed at the disclosed rate, as against the applied rate of 24.50% and 22.97% respectively for the two consecutive years by the Revenue. The impugned order, therefore, apart from being inconsistent with the Tribunal's decision on this aspect in the assessee's own case, to which no distinguishing feature has been brought to our notice, is thus undisputed; the assessee having not challenged the findings by the Tribunal for the said years. The confirmation of the rejection of accounts is based on the premise that there could be no verification and, thus, satisfaction with regard to the quantity purchased and produced in the absence of the stock records? How could, in its absence, one may ask, the accounts be considered as correct and complete, so as to lead to a satisfaction with regard thereto? We are also unable to subscribe to the view that maintenance of stock record is not feasible. In fact, the details - retrieved only from the assessee's accounts - submitted by the assessee before the ld. CIT(A) in justification of its explanation for the decline in the gross profit rate, itself show that there is no good reason or ground for not being able to maintain the stock register/s. If the purchase cost could be determined for an item sold, one of the functional tests of a stock register stands satisfied (the other, i.e., the stock status of any item of inventory, is not relevant for our purpose here). Rather, the wide variation in the prices of the goods, as apparent from the said details, validates and justifies the need for its maintenance. There is in fact no finding by (he ld. CIT(A) on this aspect to the matter, even as the AO has, and only rightly so, relied on the decision, inter alia, in the case of S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579 (SC). The decision in the case of Narsinghdas Ramakishan Pungaliya v. Asstt. CIT [2005] 272 ITR 467/[2004] 138 Taxman 156 (Raj.) is also squarely on the point. We, accordingly, confirm the rejection of the books of account, reversing the impugned order on this aspect. The decision in the case of CIT v. Smt. Poonam Rani [2010] 326 ITR 223/192 Taxman 167 (Delhi), relied upon by the ld. CIT(A), does not restrain us in doing so; it being not applicable in its ratio, i.e., that the mere fact of a decline in profit is by itself not a circumstance or material for holding the books as not correct and complete, on which there is no, nor could possibly be, any quarrel, as a rejection/non-acceptance has necessarily to arise out of a definite finding of fact of the books being not correct and complete, a finding of fact, and which we have found as so in the instant case.

Addition on quantum
4.2 A rejection of accounts, however, would not necessarily imply a trading addition CIT v. Gotan Lime Khaniz Udhyog [2002] 256 ITR 243/120 Taxman 779 (Raj.), and it is open for the assessee to explain its trading results, even as it, in fact has done for the preceding years. In fact, the books of account are but only the assessee's explanation for its returned (trading) profit. The Tribunal for the immediately preceding year, which would be the most relevant, i.e., insofar as the past history is concerned, upheld a gross profit rate of 19.35%. The assessee, however, has explained the decline with reference thereto as on account of a higher increase in the purchase cost of some of its principal items of sale, i.e., grey stone and brown stone, resulting in the cost of material consumed increasing as a percentage of sales by almost 2%, i.e., from 37.74% for the immediately preceding year to 39.79% for the current year, We are, therefore, disinclined to proceed to estimate the trading result for the current year either by applying a gross profit rate or in terms of a lumpsum addition, without first examining the said explanation, and issuing a finding of fact in its respect. Also, closing the issue on that basis (past results) would be deciding the matter dc hors and without consideration of the facts of the current year, which would be manifestly unjust; each year being an independent unit of assessment, with its own set of facts.

We further observe that the said explanation by the assessee was rendered for the first time only before the first appellate authority; that rendered before the assessing authority being only in generalized terms and, thus, of little moment. Further, even so, the ld. CIT(A) has neither afforded an opportunity to the AO to examine the same and Issue his findings or present his case in the matter, nor himself verified the same (which could only be with reference to the purchase/sale bills for the current year and the previous year), much less issuing any specific finding(s) of facts. Merely stating that the said details are verifiable is of little consequence. The same constitutes not only a breach of the principles of natural justice by the ld. CIT(A), but a serious lapse in procedure at his end, resulting in there being no finding of fact which we could either confirm or reverse or otherwise modify in any manner. Reference in this context is drawn to the decision in the case of ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC) (pg. 351). In fact, considering that the assessee is not in appeal against the rejection of its accounts, which is a matter of fact CIT v. Uttam Chuna Pathar Udhyog [2001] 116 Taxman 524 (Raj.), i.e., against the order by the Tribunal for the preceding years, which is even otherwise binding on him, this aspect of the matter stands concluded as far as he, as a lower appellate authority, is concerned, and we are unable to appreciate his taking a different stand on principally the same set of facts, and to which he has devoted his energies and, resultantly, the bulk of his order. No doubt, it would be a different matter were the assessee to distinguish its case for the current year or otherwise show any infirmity in the order/s by the Tribunal, and which is not so.

Continuing further, the Tribunal is required to draw its inferential findings on the basis of the primary facts as found by the authorities below, except where these are also in challenge. There is, as aforesaid, no finding by the ld. CIT(A), i.e., qua the assessee's explanation on facts, for the matter to fall within the purview of the Tribunal. Under the given facts and circumstances, therefore, we only consider it fit and proper that the matter is restored back to the file of the ld. CIT(A), whose order is under challenge before us, and also represents the stage where the lapse in procedure has taken place. The ld. CIT(A) shall adjudicate this aspect of the matter by observing due procedure, allowing proper opportunity of hearing to both the sides, per a speaking order and in accordance with law. We decide accordingly.

5. In the result, the Revenue's appeal is allowed for statistical purposes.

ORDER

R.K. Gupta, Judicial Member - This is an appeal by department against the order of ld. CIT (A) relating to assessment year 2008-09.

2. This appeal of the department was heard on 1.5.2012 and the case was allotted to ld. Accountant Member Shri Sanjay Arora. I received the order of ld. Accountant Member and after going through the same, I am not able to persuade myself to agree with the finding of ld. Brother. Therefore, I proceed to write a separate order.

3. The department has taken the following ground ;—

"On the facts and in the circumstances of the case and in law the ld. CIT (Appeals) has erred in :
Deleting trading addition of Rs. 76,74,679/- without appreciating the facts of the case and deficiencies pointed out by the A.O."
4. Brief facts of the case discussed in the order of ld. CIT (A) at pages 1 and 2 are as under :—

5. The assessee filed appeal before ld. CIT (A). It was submitted before ld. CIT (A.) that various observations made by AO for invoking provisions of section 145(3) were not correct. Written submissions were filed by which the observations of AO were said to be not correct and they were explained in the following manner :—

5.1 Thereafter ld. CIT (A) after considering the order of AO and the submissions of the assessee found that issue under consideration is covered by the order of Tribunal for assessment years 2006-07 and 07-08. The ld. CIT (A) after considering the submissions and perusing other materials on record found that AO was not justified in invoking provisions of section 145(3) in the present case. Regarding trading addition also, the ld. CIT (A) noted that assessee has explained his case properly and reason for decline in GP rate is also explained successfully. Therefore, he deleted the trading addition made by AO also. The findings of the ld. CIT (A) have been recorded in para 3 at pages 6 to 10 of his order are as under :—

"3. I have duly considered the submission's of the appellant. I find that the issue under consideration is covered by the order of Hon'ble Jaipur Tribunal (ITA No.777/JP/2009 dated 08.01.2010) for AY 2006-07 and (ITA No. 1196/JP/2010 dated 12.08.2011) for AY 2007-OS. The observations of the Hon'ble Tribunal in para 6 of its order dated 08.01.2010 are reproduced as under:

Considering the rival submissions available on record, we uphold the application of section 145(3), since assessee has not maintained stock register and the ld AR could not rebut the findings of lower authorities that ail its purchases and freight charges are not fully verifiable. This part of the ground of the assessee is thus dismissed. However, as to the application of the GP rate, we find substance in the argument of Ld AR that because of the increase in the diesel prices which is evidenced by the diesel bills for the two years placed at PB 71 to 78, mere is increase in diesel and cartage expenses as compared to the last year resulting in a decline in the GP rate by 1.28%. Similarly because of increase in the transportation charges from Bhilwara to Mundra Port as also the levy of service tax on goods transport agency, the transportation charges increased during the year as compared to the last year which has the effect of increase in the transportation cost by 3.4% as compared to the last year. The realization rate of the export sale has also declined to 53.42 Euro as against 56.85 Euro in the last year for which the export realization chart was filed at PB 150 to 151. From analysis of the sales made in respect of purchases made from registered dealers, we find that the GP rate in respect of such sale is 19.89% for which complete analysis was made at PB 152 to 164. These sales almost cover 50% of the total sale. All these reasons for decline in the GP rate are verifiable from the evidence on record and therefore due adjustment for these factors are required to be given from the GP rate of the last year. We note that when the expenses are compared in terms of the sale volume, the increase in expenses to the extent of 4.68% is on account of freight/cartage and transport expenses and the increase on account of cost of purchase is 0.74% as compared to the last year. In other expenses, the assessee has made savings but due to increase in cost in above three heads of expenses, the overall GP has declined by 5.08%. Thus the decline in the GP rate during the year as compared to the last year was fully explained by the assessee. In any business, the GP cannot remain constant and once cogent evidence for decline in the GP rate has been given by the assessee and accepted by the ld CIT(A), his action of application of GP rate of 24.50%, without calculating the effect of these reasons on the GP rate, cannot be approved. In view of the above discussion and the decision of the jurisdictional High Court relied by the ld AR in case of Malani Ramjivan Jagganath v. Asstt. CIT [2007] 207 CTR 19 (Raj.) and CIT v. Gotan Lime Khanij Udhyog [2002] 256 ITR 243 (Raj.), we are fully satisfied and convinced with the reasons for decline in the GP rate as compared to the last year and therefore the addition sustained by the ld CIT (A) is directed to the deleted. Thus ground No. I of the assessee is dismissed and ground No. 1.1 of the assessee is allowed".

The observations of the Hon'ble Tribunal in para 9 of its order dated 12,08.2011 arc reproduced as under:

"The purchases from registered dealers during the preceding year were 48.4% and during the year such purchases are 47.25%. Royalty is debited when purchases are from unregistered dealers. Hence results of the year under consideration are similar to that of preceding year and following the order of Tribunal in the case of the assessee for the preceding year, the trading addition is deleted though rejection of books of account is upheld".

3.1 I find that in AY 2006-07, the AO had made trading addition of Rs 27,88,661/- by applying GP rate of 24.5% after rejection of books of account u/s 145(3). The CIT(A) dismissed the appeal of the assessee. The Hon'ble Jaipur Tribunal though upheld the rejection of books of account yet deleted the trading addition made by the AO. The Hon'ble Tribunal has noted that the appellant had satisfactorily explained the fall in GP by 5.08% with cogent explanation. Further in AY 2007-08, the AO had made trading addition of Rs 54,55,217/- by applying GP rate of 22.97% after rejection of books of account u/s 145(3). The CIT(A) restricted the trading addition to Rs 32,03,488/-. The Hon'ble Jaipur Tribunal though upheld the rejection of books of account yet deleted the trading addition made by the AO. The Hon'ble Tribunal also noted in AY 2006-07 that in any business OP could not remain constant and once cogent evidence for decline in the GP rate had been given by the assessee, the AO could not have applied GP rate of 24.5%. Under these circumstances, when Hon'ble ITAT has not upheld the application of GP rate of 25.51% declared in AY 2005-06, for A. Ys. 2006-07 and 2007-08, there was no reason to apply the same GP rate in the year under consideration. Further in AYs 2006-07 and AY 2007-08, the purchases from unregistered dealers were 5 1.6% and 52.75% respectively out of total purchases. In the current year, the purchases from unregistered dealers stood at 27.9% of total purchases. Further the vouchers for cash payments contained names and complete details in this regard.

3.2 The decline in the GP rate from 19.35% in the preceding year to 18.31% in the current year was mainly on account of the reason that average purchase price of grey and brown sand/slate stone had increased without corresponding increase in the selling price as evident from the following analysis :—

It was farther noticed that sale of these grey and brown stones constituted about 56.73% of total sales. Due to this increase in purchase price without corresponding increase in the sale price, the gross profit margin had declined by 1.04%. This could also be perceived from the fact that cost of material consumed as a percentage of sale had increased from 37.74% in the preceding year to 39.79% in the current year. This had resulted into decline in GP rate by almost 1% as compared to last year and same was fully verifiable. It was held by Hon'ble Delhi High Court in the case of Smt Poonam Rani (supra) that the fall in gross profit ratio, in the absence of any cogent reasons could not by itself be a ground to hold that proper income of the assessee could not be deduced from the accounts ' maintained by the assessee and consequently, could not have been a ground to reject the accounts invoking section 145(3) of the Act. There was no finding that the actual cost of the raw material or the actual cost of processing carried out purchased by the assessee was less than what was declared in the books of account. There was no finding by the Assessing Officer that the actual quantity of the finished product produced by the assessee was more than what it was shown in the books of account or that the finished product was sold by the assessee at a price higher than what was declared in the books of account. In these circumstances, die Commissioner (Appeals) and the Tribunal were justified in bolding that the Assessing Officer could not have increased the gross profit ratio merely because it was low as compared to the gross profit ratio of the preceding year. Further low profit was neither a circumstance nor material to justify the trading addition. Low profit in a particular year by itself could not be a ground for invoking the provisions of section 145(3) of the 1 T Act without the support of any material on record. It was very strange on the part of the AO to expect a standard profit to be earned by the assessee in each export order; it undertook. At the outset, such expectation was unrealistic, impractical and against all the tenets of commercial reality. Any business was circumscribed with opportunities, threats and challenges, which resulted in risk and reward to a businessman. It was impossible to expect same ratio of profit in every export order that was undertaken by the appellant. It was quite possible that in some export orders, the assessee might not earn same margin of profit as it had earned in earlier export orders, still it had to bear with it in the overall interest of its business activity. Absence of vouchers or the supporting evidence in respect of a particular item of expenditure could not by itself empower an Assessing Officer to invoke provisions of section 145(3) in rejecting the books of account. The Hon'ble Amritsar Tribunal held in the case of Ashok Kumar & Co. v. ITO [2004] 2 SOT 518 that rejection of books could not be resorted to simply on the basis of absence of some vouchers and failure to produce the same by the assessee. In other words, any such situation should only warrant a specific addition by the Assessing Officer if he came to a conclusion that such expenditure had not been incurred or was not verifiable. The freight and cartage expenses were supported by truck number, Weighmentslip and receipts for royalty payment. The payment in cash did not mean that these expenses were not genuine. The AO had not pointed out any specific freight charges which was not verifiable. On the other hand, the appellant had duly deducted TDS on these payments. Hence the trading addition made by the AO did not have legs to stand and same was not warranted by the facts of the case. I therefore direct the AO to delete the trading addition of Rs 76,74,679/-, This ground of appeal is allowed.

In the result, the appeal of the assessee is treated as allowed.

6. Now the department is in appeal here before the Tribunal.
7. The ld. D/R placed reliance on the order of the A.O.
8. On the other hand, the ld. Counsel of the assessee placed reliance on the order of ld. CIT (A).

9. After considering the orders of the AO and ld. CIT (A), f find that the order of ld. CIT (A) does not suffer from any infirmity. After noting certain deficiencies in books of account and decline in GP rate, the AO held that provisions of section 145(3) are attracted and, therefore, he rejected the books of account. The AO has further observed that for assessment year 2006-07, Tribunal has restricted the GP rate to 20.43% against 24.51% confirmed by ld. CIT (A). The AO further observed that the decision of Tribunal has not been accepted by the department as appeal has been filed before Hon'ble Rajasthan High Court. Therefore, he applied a GP rate of 24.51% which resulted in a trading addition of Rs. 76,74,679/-. The ld. CIT (A) after discussing the explanation filed on behalf of the assessee and taking into consideration various case laws and the order of the Tribunal for assessment years 2006-07 and 07-08 held that there was no justification in invoking provisions of section 145(3) and thereafter making trading addition by applying GP rate of 24.51%. I have gone through the orders of AO and ld. CIT (A) and submissions of the assessee filed before ld. CIT (A) minutely. I find that accounting system followed by assessee is the same as followed in earlier year. In earlier year i.e. 2006-07, the AO applied a GP rate of 25.51% on the basis of GP rate declared in immediately preceding year i.e. 2005-06. Assessee preferred appeal before ld. CIT (A) who confirmed the application of GP rate of 25.51%. On second appeal before the Tribunal, the Tribunal though confirmed the application of provisions of section 145(3), however, entire trading addition made by AO was deleted and the trading result shown by assessee was accepted. In subsequent year i.e. 2007-08 also, the AO invoked provisions of section 145(3) and made a trading addition by applying GP rate 25.51%. The ld. CIT (A) confirmed the invocation of section 145(3) and applied GP rate of 22.97%. Assessee and department both filed appeal before the Tribunal. The Tribunal after considering the order for A.Y 2006-07, deleted the entire addition though application of provisions of section 145(3) was confirmed. In the present assessment year 2008-09, again AO rejected the books of account and by applying a GP rate at 25.51% has made a trading addition of Rs. 76,74,679/-. The ld. CIT (A), as stated above, taking into consideration the explanation of the assessee and the order of Tribunal for immediately two preceding years, held that provisions of section 145(3) are not applicable and, therefore, he deleted the entire trading addition.

10. The department has not taken any ground against holding that provisions of section 145(3) are not applicable as the department has objected that ld. CIT (A) was not justified in deleting the trading addition. The ld. D/R also could not controvert the finding of ld. CIT (A) as he has placed reliance on the order of AO. Without controverting the finding of ld. CIT (A), in my considered view, the order of any appellate authority should not be disturbed. The ld. CIT (A) has given a detailed finding for holding that provisions of section 145(3) are not applicable on the facts of the present case as assessee has maintained almost all the details. The reason for decline in GP rate has also been explained and in view of ld. CIT (A), the reasons were justifiable. In earlier two assessment years also there was decline in GP rate and Tribunal has categorically given a finding that only on the basis of decline in GP rate trading addition cannot be made and accordingly entire trading addition made by AO was deleted by the Tribunal.

10.1 In the year under consideration also facts are similar. Therefore, I see no reason to interfere with the order of ld. CIT (A) on the given set of facts. The ld. CIT (A) has also recorded a finding by following various decisions of Hon'ble Rajasthan High Court and of the Tribunal that on the facts of the present case, provisions of section 145(3) are not attracted and trading addition made by AO was not justified. As stated above, the finding of ld. CIT (A) which were reproduced hereinabove, remained uncontroverted. In view of the above facts and circumstances and in view of the reasoning given by ld. CIT (A), I confirm his order.

11. In the result, appeal of the department is dismissed.

REFERENCE UNDER SECTION 255(4) OF THE INCOEM TAX ACT, 1961

As there is a difference of opinion between us i.e. Judicial Member and ld. Accountant Member, therefore, the following question is being referred to be answered by a Third Member appointed by your Honour, as per provisions of law.

QUESTIONS FRAMED

1. Whether in the facts and circumstances of the present case, the order of ld. CIT (A) is liable to be confirmed or liable to be restored to his file to pass a fresh order ?

We also request your goodself that if the abovementioned question is not suitable, then you may frame the questions as you think fit.

THIRD MEMBER ORDER

G.D. Agrawal, Vice-President (As a Third Member) - There being a difference between the Members who originally heard this appeal, the Hon'ble President has nominated me as a Third Member to resolve the following point of difference under Section 255(4) of the Income-tax Act, 1961:—

"Whether in the facts and circumstances of the present case, the order of ld. CIT(A) is liable to be confirmed or liable to be restored to his file to pass a fresh order?"

2. The facts of the case are that the assessee is engaged in the business of trading and export of sandstone and slatestone. During the year under consideration, the assessee declared turnover of Rs. 10,66,63,644/- on which gross profit of Rs. 1,95,35,216/- was disclosed.-The rate of gross profit was 18.31%. The rate of gross profit was low as compared to the immediately preceding year which was 19.35%. During the course of assessment proceedings, the Assessing Officer noticed the following discrepancies in the books of account:—

3. The Assessing Officer issued show-cause notice why the books of account should not be rejected under Section 145(3) of the Income-tax Act, 1961. After considering the assessee's explanation, the Assessing Officer rejected the books of account with the following finding:—

"The reply of the assessee is considerable but not found satisfactorily. On going through books of account, various discrepancies found in the books of account, but found to be unsatisfactory because assessee does not maintain proper records as required, in view of non-maintenance of proper stock records and other discrepancies noted above. The books of account are rejected by invoking provisions of section 145(3) of Income tax Act, 1961 to substantial the rejection of books of account the following case laws are quoted."

4. On appeal, learned CIT(A) deleted the addition with the following finding:—

"Low profit in a particular year by itself could not be a ground for invoking the provisions of section 145(3) of the IT Act without the support of any material on record. It was very strange on the part of the AO to expect a standard profit to be earned by the assessee in each export order, it undertook. At the outset, such expectation was unrealistic, impractical and against all the tenets of commercial reality. Any business was circumscribed with opportunities, threats and challenges, which resulted in risk and reward to a businessman. It was impossible to expect same ratio of profit in every export order that was undertaken by the appellant. It was quite possible that In some export orders, the assessee might not earn same margin of profit as it had earned in earlier export orders, still It had to bear with it in the overall interest of its business activity. Absence of vouchers or the supporting evidence in respect of a particular Item of expenditure could not by itself empower an Assessing Officer to Invoke provisions of section 145(3) in rejecting the books of account. The Hon'ble Amritsar Tribunal held in the case of Ashok Kumar & Co. v. ITO [2004] 2 SOT 518 that rejection of books could not be resorted to simply on the basis of absence of some vouchers and failure to produce the same by the assessee. In other words, any such situation should only warrant a specific addition by the Assessing Officer if he came to a conclusion that such expenditure had not been incurred or was not verifiable. The freight and cartage expenses were supported by truck number, weighment slip and receipts for royalty payment. The payment in cash did not mean that these expenses were not genuine. The AO had not pointed out any specific freight charges which was not verifiable. On the other hand, the appellant had duly deducted TVS on these payments. Hence the trading addition made by the AO did not have legs to stand and same was not warranted by the facts of the case. I therefore direct the AO to delete the trading addition of Rs. 76,74,679/-. This ground of appeal is allowed."

5. Aggrieved with the order of learned CIT(A), the Revenue was in appeal before the ITAT with the following ground of appeal :—
"On the facts and in the circumstances of the case and in law the ld. CIT(Appeals) has erred In:

(i) deleting trading addition of Rs. 76,74,679/- without appreciating the facts of the case and deficiencies pointed out by the A.O."

6. ITAT, Jaipur Bench heard both the parties and the learned Accountant Member in his order set aside the matter to the file of the learned CIT(A). However, the learned Judicial Member in his* separate order upheld the order of learned CIT(A). Due to difference of opinion amongst the learned Members constituting the Jaipur Bench at the relevant time, the matter is referred to me as a Third Member.

7. At the time of hearing before me, it was stated by the learned DR that in the earlier two years i.e. AYs 2006-07 and 2007-08, the rejection of books of account has been upheld by the ITAT. He stated that in both the above years, the ITAT deleted the trading addition after the rejection of books of account holding that the assessee had been able to explain the fall in the gross profit rate. However, in the year under consideration, the learned CIT(A) held that the rejection of books of account itself was not justified. He, therefore, stated that the order of learned Judicial Member is contrary to the decisions of ITAT in assessee's own case for immediately two preceding assessment years. He, therefore, submitted that the order of learned Accountant Member should be approved.
8. The learned counsel for the assessee, at the outset, supported the order of the learned Judicial Member and he stated that even in the ground of appeal, the Revenue has only challenged the deletion of the trading addition and it has not challenged the finding of the learned CIT(A) with regard to rejection of books of account. He stated that even in the year under consideration, the assessee has explained the reasons for fall in the gross profit rate and, in the earlier two years, the ITAT had finally accepted the trading result because the trading addition made by the Assessing Officer was deleted by the ITAT. He further submitted that the nature of business of the assessee was such that it purchased goods of different sizes from different locations in pieces whereas the same were sold in metric tonnes. The maintenance of stock register was not possible in such type of business activities. However, the closing stock was physically verified and valued by the assessee. He, therefore, submitted that when the opening stock, purchases, sales and closing stock in terms of quantum and valuation were not disputed merely because of non-maintenance of the day-to-day quantitative details, the rejection of books of account under Section 145(3) was not correct. In support of this contention, he relied upon the decision of Hon'ble Jurisdictional High Court in the case of Malani Ramjivan Jagannath v. Asstt. CIT [2009] 316 ITR 120/[2007] 163 Taxman 731 (Raj). He, therefore, submitted that the order of the learned Judicial Member should be sustained.

9. I have carefully considered the arguments of both the sides and perused the material placed before me. Hon'ble Jurisdictional High Court in the case of Malani Ramjivan Jagannath (supra) have discussed the issue of rejection of books of account. Therefore, it would be most appropriate to consider the same and thereafter apply it to the facts of the assessee's case. In the abovementioned case, at pages 123 & 124 of 316 ITR, their Lordships held as under:—

"The trading account produced before the Assessing Officer was placed for our perusal which shows that in each trading account only four entries were there of opening stock, purchase on the debit side, sales and closing stock of the credit side. The quantum and value of purchases and sales had not been in dispute inasmuch as they were held to be fully vouched. Value of opening stock also cannot be disputed as it came from closing stock of the previous year. The inventories of closing stock was also not found to be incorrect. That is to say actual stock position was not in dispute. The previous year's books of account were not found to be incorrect

In the face of these undisputed facts and circumstances, the Tribunal in our opinion, could not have interfered with the order of the Commissioner of Income-tax (Appeals). In doing so, it had ignored ail the admitted facts noticed by us above, in the face of which there was no occasion for the Assessing Officer to have resorted to the estimate method. The gross profit is primarily result of excess of sales over purchases, opening stock, closing stock, the unsold stock at two terminals is only a balancing factor. Admittedly, out of this four components of trading result there could not have been any ground for the Revenue to arrive at different result So far as closing stock is concerned, inventories of the existing stock were not found to be incorrect by the Assessing Officer, i.e., that position of stock as shown in the account books was not incorrect There being no dispute about the sales and purchases, non-maintenance of stock register lost its significance so far as arriving at the gross profit is concerned. Therefore, the Commissioner of Income-tax (Appeals) was right in his reasoning about the admitted state of affairs. Resorting to estimate of the gross profit rate was founded on no material. It was merely a case of making certain additions on the basis of certain defects pointed out by the Assessing Officer and which he has shown in different account by giving margin of unvouched expenses. He has disallowed certain expenses.

The Tribunal committed the basic error in not appreciating the reasoning given by the Commissioner of Income-tax (Appeals). It is trite to say that in the facts and circumstances of the present case, account books are maintained as they were ordinarily maintained year after year and which were found to yield a fair result Mere deviation in the gross profit rate cannot be a ground for rejecting the books of account, and entering the realm of estimate and guesswork. Lower gross profit rate shown in the books of account during the current year and fall in the gross profit rate was justified and also admitted by the Assessing Officer as well as the Commissioner of Income-tax (Appeals) as well as the Tribunal Therefore, fall in the gross profit rate lost its significance. Having accepted the reason for fall in the gross profit rate, namely, stiff competition in the market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated gross profit by rule of thumb merely for making certain additions. We are, therefore, of the opinion that the findings arrived at by the Tribunal suffers from the basic defect of not applying its mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except what has been shown by the assessee in the books of account. We are, therefore, unable to sustain the order of the Tribunal."

10. From the above, it would be evident that in the above case, their Lordships reversed the order of the Tribunal in which the Tribunal has upheld the rejection of books of account by the Assessing Officer. However, the facts in that case were that the opening stock, purchases, sales and closing stock, all the four ingredients of the trading account, were found to be fully verifiable by the Hon'ble Jurisdictional High Court. Their Lordships have noted "The quantum and value of purchases and sales had not been in dispute inasmuch as they were held to be fully vouched." However, in this case, as we have noted that at page 2 of the assessment order, the Assessing Officer has noted the defects found in the assessee's books of account which has also been reproduced by me at page 2 of this order. The Assessing Officer has noted at item No.3 that the assessee had made purchases of Rs. 4,36,71,773/- mostly in cash on self-made vouchers. After noting the defects in the assessee's books of account, the Assessing Officer had issued show-cause notice to the assessee, reply of which is also reproduced at pages 3 and 4 of the assessment order. From that reply also, it is evident that the assessee has not disputed the above finding of the Assessing Officer that the purchases are mostly in cash and on self-made vouchers. Thus, the purchases made by the assessee are not verifiable unlike in the case of Malani Ramjivan Jagannath (supra) wherein Hon'ble Jurisdictional High Court has' recorded a finding that the purchases are verifiable. At item No.4, again, the Assessing Officer had noted that the freight and cartage expenses of 756.08 lakh are mostly in cash and on self-made vouchers. This has also not been disputed by the assessee in his reply before the Assessing Officer. Similar is the position with 'regard to closing stock because at item No.5, the Assessing Officer has noted that in the absence of stock register, the valuation of closing stock taken by the assessee is not correct. In his reply before the Assessing Officer, the assessee has not controverted the above observation of the Assessing Officer. Thus, the facts of the assessee's case are altogether different than the facts before the Hon'ble Jurisdictional High Court in the case of Malani Ramjivan Jagannath (supra). That in assessee's own case, on the identical facts for AY 2006-07, the ITAT, in ITA No.777/JP/2009 dated 08.01.2010, upheld the rejection of books of account. The facts in that year were identical to the facts in the year under appeal. That in AY 2007-08, again, the ITAT followed its own order for AY 2006-07 and upheld the rejection of books of account. That admittedly, the facts of the year under consideration are identical to the facts before the ITAT in AYs 2006-07 and 2007-08. It is true that in AYs 2006-07 & 2007-08, the ITAT deleted the trading addition because it was satisfied that the assessee was able to explain the reason for fall in the gross profit. However, in the year under consideration, the (earned CIT(A) held that the rejection of books of account by the Assessing Officer was not justified and his order is upheld by the learned Judicial Member. In my opinion, the order of learned CIT(A) is contrary to the decision of ITAT in assessee's own case for AYs 2006-07 & 2007-08. The decision of Hon'ble Jurisdictional High Court in the case of Malani Ramjivan Jagannath (supra) relied upon by the learned counsel does not support the case of the assessee because the facts in the case of the assessee are altogether different. In the assessee's case, the Assessing Officer has noted several defects in the books of account, viz., the purchases as well as freight and cartage expenses are not verifiable because they were paid mostly in cash and supported by only self-made vouchers. Similarly, the Assessing Officer has noted that valuation of closing stock is not verifiable. The assessee could not give satisfactory explanation with regard to any of the defects pointed out by the Assessing Officer despite the specific opportunity given by him to the assessee during the assessment proceedings. Therefore, in my opinion, on these facts, the rejection of books of account by the Assessing Officer was fully justified. However, after the rejection of books of account, the next step is for determination of a proper rate of gross profit. The assessee always has a right to explain that despite the rejection of books of account, no trading addition is required to be made as the gross profit disclosed by him is reasonable. In fact, in assessee's own case for AYs 2006-07 & 2007-08, the ITAT upheld the rejection of books of account but no trading addition was sustained because the assessee was able to explain that the rate of gross profit disclosed by it was reasonable. In view of the above, I agree with the learned Accountant Member that in this case, the matter needs to be set aside to the file of the learned CIT(A) so that after rejection of books of account, he may examine the assessee's contention with regard to reasonableness of the gross profit disclosed in the year under consideration.

11. Before I part with the matter, I may point out that the learned counsel for the assessee has contended that in the ground of appeal, the Revenue has only challenged the deletion of trading addition and no separate ground is taken against the finding of the learned CIT(A) with regard to acceptance of books of account. In my opinion, after rejecting the books of account, the Assessing Officer had made the trading addition which was deleted by the learned CIT(A). Therefore, when the ground raised by the Revenue is against the deletion of the trading addition, it encompasses within it the issue of rejection of books of account also. Moreover, in the ground, the Revenue has also mentioned that learned CIT(A) erred in deleting the trading addition of Rs. 76,74,679/- without appreciating the facts of the case and deficiencies pointed out by the A.O. From this ground, it is evident that they are referring to the deficiencies pointed out by the Assessing Officer for rejection of books of account. Learned CIT(A) deleted the addition because he held that the books of account have not been rejected. Once the Revenue challenges the deletion of the addition, impliedly, it has also challenged the order of the learned CIT(A) holding that the books of account should not be rejected.

12. In view of the above, I agree with learned Accountant Member that the matter needs to be restored to the file of learned CIT(A).

13. The order passed in this case shall now be placed before the regular Bench for passing consequential order in accordance with law.
ORDER

B.R. Jain, Accountant Member - The learned Third Member has concurred with the view entertained by learned Accountant Member to the effect that the matter is set aside to the file of the ld. CIT (A) so that after rejection of books of account, he may examine the assessee's contention with regard to reasonableness of the gross profit disclosed in the year under consideration. Ordered accordingly.