RAKESH KUMAR GARG, J. - (1.) THIS judgment shall dispose of ITA Nos. 496/2005 and 557/2005 as the common question of law on similar facts arises in all these appeals. However, the facts are taken from ITA No. 496 of 2005.
(2.) THE Revenue has filed the present appeal under s. 260A of the IT Act, 1961 (for short 'the Act') against the order of passed in ITA No. 718/Chandi/2001 for the asst. yr. 1997 -98 raising the following substantial question of law : "Whether on the facts and in the circumstances of the case and in law, the order of the Tribunal is perverse as the Tribunal has failed to appreciate the fact that the CIT(A) restricted the food cost ratio to 55 per cent only on conjectures and surmises and without any evidence, whereas the AO had based its order on the basis of results of 16 hotels/restaurants." assessee had shown receipts from room rent at Rs. 31,39,633 and sales of food and bar at Rs. 54,73,082. The cost of purchase of raw material like milk products, fish, chicken, vegetables, etc. was shown at Rs. 33,85,000, i.e., cost of raw material was shown at around 62 per cent food cost ratio. During the course of assessment proceedings, the AO sought to estimate the excess purchases, which according to him were excessive i.e., 62 per cent in comparison to prevalent norms in the hotel industry at 39 per cent. The AO sought to determine sales, which according to him were suppressed. Accordingly, taking the purchases at Rs. 33.85 lacs and assuming 40 per cent sales made, the AO determined the difference in sales disclosed by the assessee. After considering various clarifications sought by the AO from the assessee and the fact that the assessee was unable to maintain day -to -day stock of raw material consumed and products obtained, the food cost was adopted at 45 per cent after allowing a margin of 5 per cent from various factors. Accordingly, an addition of Rs. 18,37,729 was made by taking the food cost ratio at 45 per cent on account of suppressed sales. It is relevant to mention that before arriving at the above conclusion, the AO also sought information from CITCO about average cost of some of the dishes and average cost of food, liquor, vis -a -vis sales norms accepted in hotel, which according to them in the case of Hotel Shivalik View was 29.85 per cent
(3.) BEING aggrieved against the assessment, the assessee filed an appeal before the CIT(A). It was contended by the assessee that sales were fully vouched, no specific defects were found in the books of accounts maintained by the assessee and therefore, the AO was not justified in enhancing sales on mere presumption. After considering the assessee's contention, the CIT(A) restricted the food cost at 55 per cent and gave relief of Rs. 16,38,996 to the assessee to that extent. While allowing the appeal partly, the CIT(A) held that the assessee has a locational disadvantage as the same is situated at a far end place of the city whereas hotel Shivalik View operates on a much wider scale having all the advantage and benefits of effective economy while working on a large scale. The CIT(A) also held that the AO has not brought any material on record which warrants rejection of books of accounts under s. 145(2). The relevant para of the order of CIT(A) is reproduced here as under : "Therefore, it is held that non -maintenance of day -to -day consumption cannot be a ground for rejecting books of account. The AO has not brought any material on record which warrants rejection of books of account under s. 145(2). No specific defects or inflation of purchase or omission of sale or non -genuine claims in respect of expenses have been found. Sales are fully vouched. Cash memo is issued to each customer and at the end of the day, cash memos are tallied with the order slips and are entered in the cash book. Sales as well as gross profits are progressive. The AO has made addition by comparing the appellant with CITCO and Haryana Tourism Corporation. The status of the two hotels differ. The appellant has a very small hotel and it does not have infrastructure of CITCO, hence comparison between the two businesses is unfair. The CITCO is running a hotel which is a star hotel and is posh and the charges are very high. Further the CITCO hotels have advantage of economics of scale, whereas the appellant is running a restaurant on a very small scale with only 12 tables. The ambiance which is offered by CITCO hotel is different from the appellant hotel and the customer is prepared to pay high price for good ambiance. The CITCO hotel is patronized by elite and the rich people of the town, whereas the appellant's hotel is patronized by ordinary people. Therefore, there cannot be any comparison between the trading results of the two types of hotels.";