SHYAM BIDI WORKS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE appellant is engaged in the business of manufacture and sale of bidis having various products in the State of Uttar Pradesh, Madhya Pradesh, Bihar and West Bengal. According to the appellant, its products is an excisable commodity under the Central Excise Act. The records relating to stocks, raw materials, etc., are required to be maintained and subjected to inspection from time to time by the Central excise authorities. For the assessment year 1986 -87, the Assessing Officer rejected the books of account and assessed the income at Rs. 42,21,498. The asses -see, being aggrieved, filed an appeal, which was allowed by an order dated March 29, 1993, and the assessment order was set aside with a direction to the Assessing Officer to decide the matter afresh. Based on the said direction, the Assessing Officer passed a fresh order under section 143(3) of the Income -tax Act, 1961 (hereinafter referred to as the Act) dated February 29, 1996, again rejecting the books of account under section 145(2) of the Act. The Assessing Officer noticed that the gross profit of rate shown for the year in question by the assessee at 9.46 per cent, was less as compared to the previous years. The assessee was accordingly asked to explain the low gross profit rate. The assessee submitted that the gross profit rate for the previous year was 7.95 per cent, which was accepted by the Assessing Officer and, therefore, the gross profit rate of 9.46 per cent, shown for the year in question was correct indicating an increase in the gross profit rate roughly by 1.5 per cent. The Assessing Officer after comparing the gross profit rates for the last seven years from the assessment year 1980 -81 onwards found that the gross profit rate for the assessment year 1982 -83 was 10.38 per cent, and for the assessment year 1984 -85 it was 9.98 per cent, and, therefore, held that the average gross profit rate for the year in question has to be treated above 9.46 per cent. The Assessing Officer accordingly estimated that the gross profit rate for the assessment year 1986 -87 would be 10 per cent, and, consequently, added a sum of Rs. 6,05,421 on the turnover holding that this amount would also cover the likely additions towards income on account of certain specific defects pointed out by the Assessing Officer in its order, such as the absence of stock register for the tobacco leafs, packing material like bardana, craft paper, tissue papers, consumption of raw material, etc. The Assessing Officer found that the assessee had not maintained day -today stock register of various raw materials consumed by it for its manufacturing activity and that the scrutiny of books revealed that certain bills were posted on a later date.

(2.) THE assessee, being aggrieved, filed an appeal, which was allowed by an order dated April 12, 1996, deleting the addition of Rs. 6,05,481. The appellate authority deleted the addition on the reasoning that in the immediately preceding assessment year, the gross profit rate disclosed was 7.95 per cent, which was virtually accepted by the appellate authority in that year in which various additions made on account of excess consumptions of tobacco leafs, craft papers, labels, gunny bags were deleted. On that reasoning, the appellate authority found that there was no reason to sustain the addition made by the Assessing Officer for the year in question on the same basis.

(3.) THE assessee being aggrieved, filed the present appeal under section 260A of the Act, which was admitted on the following questions of law: