In cases of limited scrutiny, an Assessing Officer cannot expand the scope without following prescribed procedures. When books of accounts are rejected due to unverifiable cash expenses, the estimated net profit rate for assessment must be based on the assessee's historical average profit rates rather than arbitrary estimations.

O R D E R

PER NIKHIL CHOUDHARY, A.M.:

These two appeals have been filed by the assessee and the Revenue respectively against the orders of the ld. CIT(A), Allahabad dated 7.12.2018 under section 250 of the Income Tax Act, 1961, wherein the ld. CIT(A) has deleted the additions made by the AO in the assessment order passed under section 143(3) of the Income Tax Act for the A.Y. 2015-16 on 20.12.2017 and substituted his own finding of net profit while upholding the decision of the AO to reject the books of accounts under section 145(3). The grounds of appeal are as under:-

ITA No. 13/ALLD/2019 (Assessee’s appeal)

“1- That in any view of the matter assessment made on income of Rs. 10,81,26,620/ by order dated 20/12/2017 passed u/s 143(3) of the Act is bad both on the facts and in law.

2-That in any view of the matter the addition of Rs 26,27,459.00 as maintained by the CIT (A) as per para 13 of the order is incorrect and simply by applying net rate of 7% addition made is highly unjustified.

3-That in any view of the matter the assessing officer was wrong in applying the provisions u/s 145(3) of the Act by rejecting books of account and the assessing officer on the same rejected books of account made an addition by taking the figure of audit report/books of account and his action as confirmed by CIT(A) is highly unjustified/illegal in the eyes of law.

4- That in any view of matter the dated CIT(A) was wrong in applying net rate 7% on disclosed turnover as against 6.08% as disclosed by the assessee hence without giving any comparable cases nor past history in assessee own case was considered hence addition made in arbitrary manner in highly unjustified.

5. That in any view of the matter the interest charged under difference section of the IT Act is highly unjustified and illegal in the fact and circumstance of the case.

6- That in any view of the matter the appellant reserves the right to take any fresh ground of appeal before hearing of the appeal.

It is therefore respectfully prayed that a suitable order may kindly be passed and relief be allowed accordingly.”

ITA No. 27/ALLD/2019 (Departmental appeal)

“1. That the Ld. CIT(A), Allahabad has erred in law and facts while reducing the addition made by the AO amounting to Rs. 9,96,16,375/ on the ground that the reason given by the AO for making addition is not correct, and, therefore, NP has to be estimated considering the result of A.Y. 2012-13 to 2014-15.

2. The Ld. CIT(A) has erred while substituting his reason against the finding given by the AO in his assessment order, hence order of the Ld. CIT (A) is not based on the evidences on record.”

As both these appeals arise out of the same appellate order, they are being taken up together for the sake of convenience.

The facts of the case are that the assessee is engaged in the business of manufacturing of hand knotted and tufted carpets and durries. It is a 100% export-oriented sales unit with no local sales. During the year under consideration, a return of income was filed on 22.09.2015, showing a total income of Rs. 58,82,790/-. The case was picked up for limited scrutiny on certain points. While investigating these points, the ld. AO observed that the carpets manufactured by the assessee were of two types, namely tufted and knotted and on the basis of information available on records, the ld. AO calculated the area of tufted and knotted carpets manufactured by the assessee during the year. Thereafter, he proceeded to compute the manufacturing cost of carpets and durries and, as a result of his computation, he came to the conclusion that the total cost of production of such carpets and durries, as reflected in the profit and loss account, of Rs. 25,41,59,922.13/- was over inflated and the actual cost of production should be Rs. 15,19,16,088.45/-. He, therefore, rejected the books of accounts by applying the provisions of section 145(3) of the Act and he added back the difference in the cost of production, as worked out by