ORDER

Bhavnesh Saini, Judicial Member - Both these cross-appeals are directed against the order of the Commissioner of Income-tax (Appeals)-XIII, Ahmedabad, dated December 26, 2006 for the assessment year 2003-04.

2. The assessee in its appeal has raised the following ground :

"The learned Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining the addition of Rs. 63,88,777 out of the addition of Rs.4,58,56,874."

3. The Revenue in their appeal has raised the following grounds :

"1. The learned Commissioner of Income-tax (Appeals)-XIII, Ahmedabad, has erred in law and on facts in reducing the addition made on account of unaccounted sales of man made fabrics from Rs.4,58,56,874 to Rs. 63,88,777.
2. On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals)-XIII, Ahmedabad, ought to have upheld the order of the Assessing Officer."

4. We have heard the learned representatives of both parties, perused the findings of the authorities below and considered the material available on record.

5. Briefly, the facts of the case are that the assessee filed return of income at Rs. 19,45,850 and the assessment has been completed at Rs. 4,78,01,723. The assessee is engaged in the business of manufacture and sale of clothes mainly of man made fabrics. Survey under section 133A of the Income-tax Act was carried out in this case on January 20, 2003. The inventory of the cash as well as of the physical stock available was prepared. The assessee was found to be having actual stock of goods worth Rs. 75,00,114 as per the books of account whereas the stock physically found was valued at Rs.73,47,458. The stock physically found was thus short by Rs. 1,52,656. The assessee was also found to have made unexplained investment in plant and machinery worth Rs. 3,50,000 and its factory building also to the extent of Rs. 6,00,000. Excess cash of Rs. 4,00,000 was also found. The assessee declared additional income of Rs. 15,02,656 in the return of income on account of the above investments, shortage of stock and excess cash. Prior to the date of survey by the Income-tax Department, a raid was conducted by the Central Excise Department at the factory premises of the assessee on January 9, 2003. The excise officials appears to have prepared stock inventory of processed man made fabrics and have also made comparison of the stock physically available with that of the stock availability as recorded by the assessee in its excise records. On the basis of such comparison, the excise officials have prepared a annexure marked as B in which stock to the extent of 4,20,395 L metres valued at Rs. 58,85,530 has been recorded, to be short which according to the excise officials has been sold by the assessee without paying any excise duty thereon. Another inventory of the stock which was also sold by the assessee during the period December 19, 2002 to January 8, 2003 was also prepared which was marked as annexure D, 26,44,904 L metres of man made fabrics valued at Rs. 3,26,29,295 was also to be sold by the assessee without recording its sale in the books of account so as to evade payment of excise duty. Another inventory marked as annexure C was also prepared by the excise authorities in which 21,65,777 L metres of processed man made fabrics valued at Rs. 25,98,924 was found to be in excess in comparison to its availability as per the books of account. During the course of assessment proceedings the Assessing Officer noticed that the assessee has disclosed its total sales of Rs. 12,09,98,328 whereas the turnover of the sales shown to the Sales Tax Department was Rs.10,98,21,717. Though the sales recorded by the assessee for the purpose of income-tax were more than as compared to the disclosed to the Sales Tax Department, the Assessing Officer treated it as a defect in the books of account so as to apply the provisions of section 145 of the Income-tax Act. The Assessing Officer has also observed that because of discrepancies noticed during the course of survey by the Income-tax Department on account of which the assessee disclosed additional income of Rs. 15,02,656, the books of account maintained by the assessee would not disclose true and correct affairs of its business. The Assessing Officer also referred to the panchnama prepared by the excise authorities in which the assessee was found to have made unaccounted sales of Rs. 3,86,14,825 (Rs. 58,85,530 plus Rs. 3,27,29,295). Simultaneously, excess stock of Rs. 25,98,924 was also discovered. Therefore, the Assessing Officer asked the assessee why the total of the above amounts of annexure 3 totalling to Rs. 4,12,13,749 be not treated as its unaccounted sales and the gross profit rate be not applied. The assessee filed detailed reply before the Assessing Officer which is incorporated in the impugned order in which it was briefly explained by the assessee that the assessee-firm is in existence for last more than 8 years and doing the manufacturing activities and there is no change in the production. All excise duties are paid and proper records are maintained. In order to buy peace of mind and to remain in the business and due to threat and harassment the assessee paid excise duty to the Central excise authorities. It was submitted during the aforesaid period of eleven hours it was not practically possible to measure the clothes in the factory of the assessee and that no other adverse material was found against the assessee. There is an increase in the gross profit rate from 5.04 per cent. to 6.09 per cent. Therefore, no addition is to be made on the basis of the third party documents. It was also explained that the assessee was not allowed any cross examination of the documents prepared by the excise authorities. The assessee in the last submitted that since the matter is settled and no abnormal profit could be earned, therefore, no further addition could be made.

6. The explanation of the assessee was not accepted by the Assessing Officer because of the discrepancies noted during the course of survey by the Income-tax Department. The Assessing Officer also noted that search was conducted by the Excise Department who have discovered that the assessee was indulging in large scale evasion of excise duty by clandestine manufacturing and removal of the excisable goods without entering them into the books of account. It was also noted that the assessee has accepted additional liability of excise duty of Rs. 41,37,302 before the excise authorities in respect of the goods which have been sold without recording the same as per the annexure prepared by the excise officials. The Assessing Officer accordingly rejected the book results and the entire amount of undisclosed sales so worked out at Rs. 4,58,56,874 was treated as unaccounted income of the assessee instead of applying gross profit rate of 6.09 per cent. on such unaccounted sales as was originally proposed by the Assessing Officer. For excess stock valued at Rs. 25,98,924 as per annexure prepared by the excise authorities the Assessing Officer noted that telescoping effect was given so as to apply unaccounted receipts to the extent of unaccounted excess stock physically found by the excise authorities for which no separate addition was made by the Assessing Officer. Ultimately, addition was made on account of sales made outside the books of account in a sum of Rs. 4,58,56,874 being unaccounted income of the assessee.

7. The addition was challenged before the learned Commissioner of Income-tax (Appeals) and same submissions were reiterated before him. It was explained that the main plan is that the excise authorities with a view to extract duty concocted the evidence and other materials to prove the evasion of excise duty. It was submitted that there could not be any such excess sales made outside the record and there is no change in electric consumption. No variation is noted and that the gross profit rate of the assessee is enhanced. It was submitted that initially the Assessing Officer proposed to make addition by applying the gross profit rate of 6.09 per cent. but ultimately treated the entire unaccounted sales as profit of the assessee. It was submitted that addition of Rs. 4,58,56,874 is unjustified because the figures of unrecorded sales worked out by the excise authorities are at Rs.3,86,14,825. Therefore, further addition is clearly unjustified. It was further submitted that if at all any addition is to be made, the same is to be restricted to the application of the gross profit rate at 6.09 per cent. only as proposed by the Assessing Officer against unrecorded sales. It was further submitted that value of the clothes which was physically available as per annexure B and claimed to be sold as per annexure D works out to Rs.25,37,331 and since it is already taken into consideration out of unaccounted stock, the addition to that extent should have been deleted. It was, therefore, submitted that no addition should be made in duplicate. It was further submitted that the entire amount of undisclosed sales cannot be added and the assessee relied upon several decisions of the Tribunal in support of the same as well as the decision of the hon'ble Gujarat High Court in the case of CIT v. President Industries [2002] 258 ITR 654 (Guj) ; 158 CTR 372 .

8. The learned Commissioner of Income-tax (Appeals) considering the submissions of the assessee and the material on record restricted the addition to the extent of Rs. 63,88,777 and deleted the remaining addition. The assessee is in appeal challenging the addition of Rs. 63,88,777 and by the Revenue is in appeal challenging the deletion of the remaining addition. The findings of the learned Commissioner of Income-tax (Appeals) in paragraphs 3.1 to 3.12 are reproduced as under for the sake of convenience:

"3.1 In order to decide the various issues involved in the present appeal, I have carefully perused the assessment order of the Assessing Officer and have also deliberated upon the various arguments taken by the authorised representatives. In so far as their contention regarding the rejection of the books of account by the learned Assessing Officer is concerned, the same is liable to be rejected as it does not appeal to any reason. Survey under section 133A of the Act was conducted in this case on January 20, 2003. The inventory of cash as well as of the stock physically available was prepared. The appellant was found to be in physical possession of stock valued at Rs. 73,47,458 as against the availability of such stock to the value of Rs. 75,00,114 as per their books of account. The stock physically found was thus short by Rs. 1,52,656. Excess cash of Rs. 4 lakhs was also found as a result of survey. The appellant was also found to have made unexplained investments of Rs. 3,50,000 and of Rs. 6 lakhs in plant and machinery and factory building respectively. All these discrepancies were duly confronted to the appellant who in turn volunteered to disclose additional income of Rs. 15,02,656 to cover up the same. It is also a matter of record that prior to the date of survey by the Income-tax Department, a raid was conducted by the Central Excise Department at their factory premises on January 9, 2003. It was discovered that the appellant was indulging in the large scale of evasion of central excise duty by clandestine manufacture and removal of the excisable goods without routing them through its books of account. All these factors taken together would lead to the only possible inference that the trading results declared by the appellant in the normal course of its business were not reliable and correct. All these discrepancies are thus sufficient in themselves to justify the action of the Assessing Officer in rejecting the books of account of the appellant under section 145 of the Act.

3.2 The learned authorised representatives have submitted that the excise officials have concocted all the evidences and other material so that the appellant could be held guilty for evasion of excise duty. They have focussed their arguments to stress upon the fact that it was physically not possible to manufacture 32,65,676 L metres of cloth within a short span of time during December 18, 2002 to January 9, 2003. According to the authorised representatives, the manufacturing capacity of their unit was of 7 lakh metres per month on an average and therefore, such a vast quantity of cloth running into lakhs of metres could not be manufactured within such a short period. Their other argument is that all the manufacturing expenses including particularly the electric consumption, have remained commensurate to the quantity of cloth manufactured at 82,45,245 L metres which is duly shown in their books of account. It is also pointed out that no evidence of any unaccounted sales either in the shape of sales invoices or delivery challans, etc., were found nor any evidence relating to the alleged receipt of cash against such unaccounted transactions was found by the search party. All these arguments are advanced to impress upon their point that the appellant did not indulge in any kind of tax evasion as alleged and they were forcibly made to pay the unwarranted excise duty to which the appellant unfortunately had to agree in order to avoid further harassment at the hands of the excise officials.

3.3 These argument of the authorised representatives that there was no attempt on the part of the appellant to evade any payment of excise duty and it was forcibly extracted, these do not appear to be acceptable on the face of it. The appellant was subjected to a search operation by the central excise authorities on January 9, 2003. In order to prove that the appellant was indulging in unrecorded sale transactions of its manufactured cloth, the search party has prepared detailed inventories of not only of the stocks available but also of various other documents which have duly been confronted to the appellant by way of a show-cause notice. The inventory of stock has been prepared in the presence of Shri Suresh C. Sharma who was one of the partners and other witnesses. In order to corroborate the allegation that the appellant-firm was indulging in unaccounted sales, the excise authorities have recorded the statements of various persons who were in one way or the other found associated with the working of the appellant-firm. The statement of Shri Fareedbhai Ibrahimbhai Sheik who happened to be the folding and packing contractor of the appellant was recorded. Another statement of Shri Vinod Govindbhai Patel, excise in-charge of the appellant-firm was recorded. The statement of Shri Boduram Jodaram Yadav who happened to be the manager of the National Transport Corporation which used to transport the goods manufactured by the appellant from its factory premises to outside destinations was also recorded. All these persons have confirmed the modus operandi of the appellant-firm by which it used to suppress its production and also to sell such products without making its entries in their books of account. All these factors clubbed together would undoubtedly leave anyone with the impression that everything was not right at the end of the appellant.

At the same time, there are certain facts pointed out by the learned authorised representatives which however lead to many questions unanswered, e.g., the excess production of 32,65,676 L metres of cloth has been reported by the excise authorities for the period December 18, 2002 to January 9, 2003 whereas no such abnormality in the production has been pointed out for the period earlier to and subsequent to the date of their search. The production capacity of the plant is admittedly of 7 lakhs metres per month on an average and it is not understood as to how the appellant could manufacture such a huge quantity of cloth during such a short span of time which in the normal course, could have been manufactured over a period of 5 months or so. No extra consumption of other inputs like colours, chemicals, stores and particularly the power consumption has been detected by the excise officials so as to link it up with the unrecorded production. It is also strange to find that no evidence of unrecorded sales in the shape of sale bills/ vouchers was found nor any unaccounted cash was found in the custody of the appellant. Since the admitted capacity of cloth was of 7 lakhs metres per month on an average, the production of 32,65,676 L metres of unreported cloth cannot possibly be related only to the period running from December 19, 2002 to January 8, 2003. The only possibility seems to be that the appellant was systematically indulging in unrecorded production over a long period of time which was found accumulated at the time of search by the excise officials.

3.4 I would first address to the issue whether the addition of Rs.4,58,56,874 as made by the Assessing Officer was justified in this case or not. As is mentioned earlier, the excise officials had taken the inventory of 4,28,395 L metres of man made fabrics valued at Rs.58,85,530 as per annexure B. Another inventory of 26,44,904 L metres of fabrics valued at Rs. 3,27,29,295 was prepared as per annexure D. Apparently looking at these inventories, one would find that different varieties of cloth are mentioned with their lot numbers and their sale value also varies from one item to the another depending upon the quality of the fabrics. The sale value of the items mentioned in these inventories appears to have been adopted on the basis of their actual sale rates. At the time of framing the assessment however, the Assessing Officer has altogether ignored the value of stock so taken by the excise officials. The Assessing Officer has proceeded to substitute her own valuation by taking the declared turnover of Rs.12,33,64,251 of the appellant which has been divided by 82,45,245 L metres of cloth manufactured during the year thereby yielding an average sale rate of Rs. 14.96 per L metre. The average sale rate of Rs.14.96 per L metre has further been uniformly applied to 30,65,299 L metres of unaccounted sales as were quantified by the excise officials as per their inventories prepared as per annexures B and D. In this manner, the value of unaccounted sales has been hiked to Rs.4,58,56,874 by the learned Assessing Officer.

3.5 In my considered opinion, the Assessing Officer was not justified to substitute its own sale price and apply the same uniformly to all the items of stock irrespective of their quality and measurements especially when the recorded sale price was never a matter of discussion in the entire assessment proceedings. The Assessing Officer was obliged to take the unaccounted sale value as was worked out by the excise officials on the spot giving description of different varieties of cloth along with the sale price attached to each one of them. Had the Assessing Officer restricted herself to the sale price of Rs. 3,86,14,825 as was worked out by the excise officials, there was no need for her to make unwarranted addition of the balance amount of Rs. 72,42,049. The addition to the extent of Rs. 72,42,049 (Rs. 4,58,56,874 - Rs.3,86,14,825) thus goes off straight away.

3.6 The next question would revolve around the issue as to what treatment should be given to the unrecorded sales of Rs. 3,86,14,825 (Rs. 58,85,530 + Rs. 3,27,29,295). In so far as the unrecorded sales of 4,28,395 L metres of cloth valued at Rs. 58,85,530 are concerned, these have been worked out on the basis of stock physically found vis-a-vis its availability in the stock records maintained in the books of account. After making such comparison, the stock physically wherever found to be short in comparison to its availability in the stock register, has been treated to be sold outside the books of account. In this view of the matter, the investment in acquiring these stocks has undoubtedly come from the declared sources of the appellant. In other words, the entire amount of unrecorded sales of Rs. 58,85,530 cannot be added as their income and only the profit element involved therein needs to be taxed after applying the gross profit at the rate of 6.09 per cent. on such sales. The addition of Rs. 3,58,428, i.e., Rs.58,85,530 divided by 100 x 6.09 per cent. is thus liable to be sustained and balance amount of Rs. 55,27,102 is deleted.

3.7 The next issue relates to the treatment to be given to unrecorded sales of Rs. 3,27,29,295 as per annexure D of the excise officials. The authorised representatives have submitted that the amount of Rs. 25,37,331 is liable to be reduced out of the amount of Rs.3,27,29,295 because the same has been sold out of the accounted for stocks of Rs. 58,85,530. The details of the lot numbers, details of the quantity available in annexure B and shown to be sold outside the books as per annexure D are given in paragraph 2.5 above. As per these details, 2,08,030 L metres of cloth valued at Rs. 25,37,331 is stated to be wrongly taken as sold outside the books of account in annexure D because the same quantity of stock was available in the stock register whose comparison was made in annexure B.

This argument of the authorised representatives is practically not acceptable for the simple reason that there is no evidence to support their claim that whatever sales are shown in Column 4 of the chart or are included in annexure D were made only out of the stock available as per annexure B and are shown in Column 5 of the chart. The excise officials have given complete description of the cloth, its trade name along with its sale price whereas the details provided by the authorised representatives in the chart under consideration are inconsistent in as much as that the quantity mentioned in Column 5 does not tally with the same quantity shown in Column 4. Apparently looking, the figures given in Column 4 and 5 do not show any correlation in between themselves. In the absence of any cogent evidence to prove that there was a direct link between the stock availability as per Column 5 with that of the sales shown in Column 4, no such credit of accounted stock as is demanded by the learned authorised representative, can be granted.

3.8 The authorised representatives have also pointed out that there was a duplication of certain amounts of sales as according to them, the same alleged unrecorded sales have been taken twice simultaneously in annexure B as well as in annexure D. The authorised representatives have pointed out with the help of the chart reproduced in paragraph 2.6 above that 41,756 L metres of cloth valued at Rs. 5,16,559 has been doubly added as unrecorded sales.

3.9 After having gone through the details given in the chart so reproduced in paragraph 2.6 of the order, the contention of the authorised representatives that 41,756 L metres of cloth has been accounted for twice, is found to be correct. There are only two entries which have been repeated in both annexures. As is mentioned earlier, the shortage of stock which is held to be sold outside the books as per annexure B was worked out in comparison to its availability as per the books of account. On such comparison, 41,756 L metres of cloth mentioned at Sr. Nos. 67, 108, 131 and 133 of annexure B was found to be short in comparison to its availability in the books of account. The same amount was consequently taken to be the unrecorded sales in annexure B. While calculating the lot numbers 511, 521, 524 and 527 appearing at Sr. Nos. 39, 44, 47 and 50 of annexure D, 41,759 L metres of cloth has again been taken to be sold outside the books of account. This has definitely resulted into a double addition to the extent of its value at Rs. 5,16,559. The appellant is thus entitled to the benefit of Rs. 5,16,559 which leaves the balance of unrecorded sales at Rs. 3,22,12,736 (Rs. 3,27,29,295 minus Rs. 5,16,559).

3.10 The next issue which requires consideration is whether the total amount of Rs. 3,22,12,736 is required to be treated as income of the appellant as is done by the learned Assessing Officer or only the gross profit at the rate of 6.9 per cent. is to be taken as the income element as is submitted by the learned authorised representatives with the help of various case law. In my considered opinion, neither the entire amount of sales can be the income nor the gross profit only would be the income out of these unrecorded sales. I have already observed in paragraph 3.3 above that the appellant was systematically indulging in unrecorded production over a long period to time. In view of this background, the element of investment involved in such unrecorded sales becomes a very material fact. The appellant has recorded turnover of Rs. 12,33,64,251 and in order to achieve such turnover, the following funds have been employed :

The appellant has thus employed recorded funds of Rs. 2,01,53,764 in order to achieve the recorded turnover of Rs. 12,33,64,251. The ratio of funds employed vis-a-vis the total turnover comes to 16.33 per cent. In this manner, in order to achieve the turnover of Rs.3,22,12,736, the appellant may require a minimum capital investment of Rs. 52,60,340, i.e. (16.33 per cent. x Rs. 3,22,12,736 divided by 100). The addition of Rs. 52,60,340 is thus required to be sustained on this score.

The entire amount of unrecorded sales of Rs. 3,22,12,736 were found to be sold without any records and therefore, the profit element involved therein at the rate of 6.09 per cent. totalling to Rs. 19,61,755 is separately required to be added. Total addition of Rs. 72,22,095 (Rs.52,60,340 + Rs. 19,61,755) is thus required to be made on this account.

3.11 It is a matter of record that excess stock of 2,16,577 L metres of cloth valued at Rs. 25,98,924 was also found by the excise authorities. The Assessing Officer has not added the same on the ground that the said investment of unaccounted stock was available to the appellant in the shape of unaccounted receipts running into crores of rupees. The Assessing Officer has allowed the telescoping effect of application of unaccounted receipts vis-a-vis the investment in excess stock of Rs. 25,98,924. There is no need for my intervention in this regard because the telescoping effect has rightly been given by the learned Assessing Officer keeping into account the availability of massive unaccounted receipts in the hands of the appellant as on the date of search by the excise authorities.

It is further noticed that as on January 20, 2003 when the survey under section 133A was conducted by the Income-tax Department, no such excess stock was physically found. The appellant was rather found to be having short stock of Rs. 1,52,656. Since the excess stock under consideration was not found to be in the physical possession of the appellant on January 20, 2003, the same is presumed to have been sold during the intervening period because such stock was very well in existence as on January 9, 2003. The profit element at the rate of 6.09 per cent. on such sales of Rs. 25,98,924 would work out to Rs.1,58,274. It is also a matter of record that the appellant was found to be having excess cash of Rs. 4 lakhs as on January 20, 2003 which has been offered to tax, no separate addition of Rs. 1,58,274 is therefore proposed because the excess cash to that extent can be attributed to the sales of these unaccounted stocks. In other words, the telescoping effect of Rs. 1,58,274 is given against the disclosed excess cash of Rs. 4 lakhs and this leaves the balance cash of Rs. 2,41,746 with the appellant.

3.12 In addition to this excess cash, the appellant has disclosed undeclared investment of Rs. 9,50,000 allegedly made in its plant and machinery and factory building as on the date of survey. Keeping into consideration the fact that the appellant has paid taxes on income representing unexplained investment of Rs. 9,50,000 in the asset and excess cash of Rs. 4,00,000 out of which credit of Rs. 1,58,274 has already been given, it would be fair and reasonable to allow the credit of this declared income against the unaccounted receipts of Rs.75,80,523 available with the appellant as on January 9, 2003. It may be mentioned here that the unaccounted receipts of Rs.75,80,523 are the total sum of additions as are discussed in paragraphs 3.6 and 3.10 above. After setting off the declared income of Rs. 11,91,746 (Rs.6,00,000 + Rs. 3,50,000 + Rs. 2,41,746) against the unaccounted receipts of Rs. 75,80,523, the balance addition of Rs. 63,88,777 is required to be made in this case. To sum up, the addition to the extent of Rs. 63,88,777 is confirmed."

9. Learned counsel for the assessee reiterated the submissions made before the authorities below and submitted that entire unaccounted sales cannot be the profit of the assessee. Therefore, the learned Commissioner of Income-tax (Appeals) rightly applied gross profit rate of 6.09 per cent. for the purpose of calculating the undisclosed income of the assessee. He has, however, submitted that the assessee shall have to be given set off of Rs.25,37,331 out of the total undisclosed sales worked out by excise authorities. He has submitted that the assessee is entitled for set off of this amount because it was already taken into account for stock and the sales. He has submitted that it is a duplicate addition.

10. On the other hand, the learned Departmental representative relied upon the order of the Assessing Officer and submitted that the learned Commissioner of Income-tax (Appeals) while working out various addition has not given opportunity to the Assessing Officer and wrongly reduced the additions. The learned Departmental representative submitted that addition is mainly made on account of the record prepared by the excise authorities which has not been disputed by the assessee because the assessee ultimately paid the tax to the excise authorities. The learned Departmental representative submitted that assessee is not entitled for any set off of Rs.25,37,331 out of the undisclosed sales worked out by the excise authorities because the assessee accepted the entire figures prepared by the excise authorities. The learned Departmental representative further submitted that the learned Commissioner of Income-tax (Appeals) was not justified in allowing set off of the declared income of Rs. 11,91,746 on account of unexplained investments made in the plant and machinery, factory building and the excess cash found at the time of survey because the assessee never claimed that unaccounted investments in the above properties have been made out of the income earned on account of undisclosed sales as considered by the excise authorities. The learned Departmental representative, therefore, submitted that the set off allowed by the learned Commissioner of Income-tax (Appeals) should be withdrawn.

11. Learned counsel for the assessee in the rejoinder admitted that the assessee settled the matter with the excise authorities by way of settlement and paid the excise duty for the entire unaccounted sales. He has submitted that the assessee is entitled for set off of the declared amount of Rs.11,91,746 because it was the investment made out of the profit earned on account of undisclosed income by way of making sales outside the books of account.

12. We have considered the rival submissions and material on record very carefully. There is no dispute about the discrepancies noted during the course of survey by the Income-tax Department. The assessee surrendered additional income of Rs. 15,02,656 on account of shortage stock and unaccounted investments made in plant and machinery, building and excess cash found during the course of survey by the Income-tax Department. The assessee has not placed any material on record to show that if the assessee made any claim before the income-tax authorities either at the time of survey or at the stage of assessment proceedings that the additional income so declared was on account of unaccounted profits earned on being sales made outside the books of account as noticed by the excise authorities. The assessee has not disputed the unaccounted sales found by the excise authorities outside the books of account without paying any excise duty. The assessee admittedly paid the excise duty to the excise authorities as per their annexure prepared during the course of raid by the excise authorities. Since the record of the excise authorities have not been disputed by the assessee, therefore, at this stage it is difficult to believe that Rs. 25,37,331 was a duplicate addition as argued by learned counsel for the assessee. Since the findings of the Assessing Officer are based upon the record prepared by the excise authorities which has not been disputed by the assessee, therefore, the final figure given by the excise authorities showing undisclosed sales made by the assessee outside the books of account without paying excise duty cannot be disputed at this stage. The assessee is, therefore, not entitled for any set off as claimed by learned counsel for the assessee. The excise authorities have noted that the assessee has made unaccounted sales of Rs. 3,86,14,825 (Rs. 58,85,530 plus Rs. 3,27,29,295). The Assessing Officer without any basis presumed higher sales made outside the books of account. The learned Commissioner of Income-tax (Appeals) was, therefore, justified in taking the figure of unaccounted sales computed by the excise authorities as against the figure taken by the Assessing Officer. Since the Assessing Officer himself has not made any addition on account of excess stock of Rs. 25,98,924 as the telescoping effect is given to the assessee, therefore, such material cannot be used against the assessee for the purpose of enhancing the unaccounted sales. It is settled law that the entire undisclosed sales could not be treated as profit of the assessee. We rely upon the decision of the hon'ble Gujarat High Court in the case of CIT v. President Industries [2002] 258 ITR 654 (Guj) in which it was held that "addition cannot be of entire undisclosed sale proceeds. Only the profit embedded in sale proceeds can be taxed". The learned Commissioner of Income-tax (Appeals) was, therefore, justified in applying the gross profit rate against unaccounted sales for the purpose of making the addition on account of undisclosed income of the assessee. Similarly, the learned Commissioner of Income-tax (Appeals) was justified in considering the issue of deployment of minimum capital investments for the purpose of making and rotating the sales outside the books of account. These facts are sufficient to hold that the book results of the assessee were not reliable and have rightly been rejected by the authorities below. Rejection of book results is also not disputed by the assessee. Learned counsel for the assessee has not pointed out any error in the findings of the learned Commissioner of Income-tax (Appeals) to that extent. Considering the facts and circumstances noted above, we are of the view that the learned Commissioner of Income-tax (Appeals) was justified in applying gross profit rate as against undisclosed sales made by the assessee for the purpose of making the addition against the assessee. To that extent the findings of the learned Commissioner of Income-tax (Appeals) are maintained.

13. The learned Commissioner of Income-tax (Appeals) on proper appreciation of facts and material on record rightly came to the conclusion in making addition on account of profit earned on undisclosed sales. The Assessing Officer also proposed to make addition initially on the same line but the Assessing Officer changed his mind later on and treated the entire undisclosed sales as undisclosed income of the assessee. Therefore, there was no need to give any further opportunity to the Assessing Officer with regard to the calculation of the undisclosed income of the assessee. We accordingly, do not find any merit in the contention of the learned Departmental representative. The same is accordingly rejected.

14. However, we may note that the learned Commissioner of Income-tax (Appeals) has given set off of disclosed income of Rs. 11,91,746 to the assessee while calculating undisclosed income of the assessee. The set off given by the learned Commissioner of Income-tax (Appeals) pertain to the unaccounted investments made in plant and machinery, building, excess cash and shortage of stock of which the assessee independently disclosed additional income of Rs. 15,02,656. The assessee never made any claim before the income-tax authorities or before the excise authorities that the amounts earned on account of undisclosed sales made outside the books of account have been invested in the above properties. In the absence of any evidence on record, or any nexus between unaccounted profit earned by the assessee and the investment made in the properties outside the books of account, it is difficult to believe that the unaccounted profit earned on account of sales made outside the books of account as noticed by the excise authorities was the same amount invested in properties. The decision in the case of R. K. Synthetics v. ITO [2004] 81 TTJ (Jodh) 909 relied upon by learned counsel for the assessee is clearly distinguishable on facts.

15. It may also be noted that the assessee declared additional income on the above properties and in case any set off of undisclosed income is given to the assessee against undisclosed investments, it would amount to reducing the additional income declared by the assessee. It may also be noted that the assessee claimed set off which are not part of the record of the Excise Department on the basis of which the entire addition is made. The addition made by the Assessing Officer on the basis of the record prepared by the Excise Department is an independent addition which has no co-relation with the survey conducted by the Income-tax Department. Therefore, the learned Commissioner of Income-tax (Appeals) was not justified in giving set off of Rs. 11,91,746 to the assessee. We, accordingly, set aside the order of the learned Commissioner of Income-tax (Appeals) to that extent and direct that no such benefit of set off of Rs. 11,91,746 be given to the assessee.

16. Considering the above discussions, we dismiss the appeal of the assessee and partly allow the appeal of the Revenue as indicated above.

17. As a result, the appeal of the assessee is dismissed and the Departmental appeal is partly allowed.

18. The order pronounced on March 22, 2010.