Income Tax Appellate Tribunal - Mumbai
Rajendra Kumar & Co. , Mumbai vs Department Of Income Tax on 17 January, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "D", MUMBAI
BEFORE SHRI SANJAY ARORA, A. M. AND SHRI VIJAY PAL RAO, J. M.
ITA No. 5541/Mum/2011
Assessment Year: 2008-09
Asst. Commissioner of Income-tax - Rajendra Kumar & Co.,
13(2), 203, Loha Bhawan,
R. No. 421, 4th Floor, P. D'Mello Road, Carnac Bunder,
Aayakar Bhavan, Mumbai-400 020 Vs. Masjid, Mumbai-400 009
[ PAN: AAFFR 8383 L ]
(Appellant) (Respondent)
Appellant by : Shri Ashim Modi
Respondent by : Shri Vipul B. Joshi
Date of hearing : 17.01.2013
Date of Pronouncement : 12.04.2013
ORDER
Per Sanjay Arora, A.M. :
This is an Appeal by the Revenue directed against the Order by the Commissioner of Income Tax (Appeals)-24, Mumbai ('CIT(A)' for short) dated 31.05.2011, allowing the assessee's appeal contesting its assessment for the assessment year (A.Y.) 2008-09 u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) vide order dated 21.12.2010.
2. The appeal raises a single issue, i.e., the deletion of an addition in the sum of Rs.1,97,47,738/- by the Assessing Officer (A.O.) to the assessee's returned income of Rs.34,21,108/- on account of low trading profit.
2.1 It would be relevant to recount the background facts of the case. The assessee's profit and loss account for the relevant year disclosed a net income of Rs.33.71 lakhs, 2 ITA No. 5541/Mum/2011 (A.Y. 2008-09) Asst. CIT vs. Rajendra Kumar & Co.
which included other income at Rs.28.18 lakhs, which was assessable as such. The assessee had, therefore, only earned the sum of Rs.5.53 lakhs on sales of Rs.46.23 crores, i.e., a return of 0.11%. Also, it had claimed huge expenditure by way of administrative expenses (at Rs.130.31 lakhs); transportation expenses (at Rs.36.07 lakhs) which were paid to a related party; and brokerage expenses at Rs.5.68 lakhs, which were paid mainly to one party, M/s. Radhey Shyam Ispat (P.) Ltd. The assessee was, accordingly, required to submit the purchase and sale bills relating to this broker. The same, on being furnished by the assessee on 01.12.2010, were subject to scrutiny by the A.O., taking care to segregate each item being traded in. The details thereof stand tabulated at pg. 3A of the assessment order. The gross profit shown on each sale transaction was computed separately, and which revealed a wide variation, from as low as (-) 0.45% to a gross profit as high as 17.91%, with an average of 7.096% (stated incorrectly at 7.06% at pg. 4 of the order). The said results were confronted to the assessee on 06.12.2010, requiring it to show as to why the computation of its income for the year be not disturbed by relying on the information culled out from its accounts, discarding the book results u/s.145(3) r.w.s. 144 of the Act. Though the assessee sought time for the same, and was so allowed upto 20.12.2010, as there was still no reply from the assessee, he proceeded to frame the assessment. The extremely low G.P. ratio (of 0.11%) was an indicator that the assessee was acting as a conduit, showing bogus purchases and sales. In fact, the assessee had made purchases from M/s. Prasad Steels (owned by Shri Pradeep M. Shah), whose suppliers had admitted to the said firm being not actually involved in trade, but only providing accommodation entries. Further, even if the transactions with M/s. Prasad Steels were ignored, the assessee's conduct in not explaining its book results with reference to the gross profit ratio culled out from its own accounts could not be ignored. Further, the assessee's accounts revealed the level of sundry creditors at equivalent to more than one year's purchases; the total purchases for the year being at Rs.2883.40 lakhs, while the outstanding to sundry creditors as at the year-end was at Rs.2987.32 lakhs. As the assessee's accounts itself revealed a gross profit as high as 17.91%, the possibility of bloating the purchases, so as to suppress the real profit, could not be ruled 3 ITA No. 5541/Mum/2011 (A.Y. 2008-09) Asst. CIT vs. Rajendra Kumar & Co.
out. He, therefore, adopted the gross profit rate at 5%, making the addition for the difference in the gross profit so determined and that disclosed by the assessee.
2.2 In appeal, the assessee argued along with the following lines:
a) that the assessee had maintained complete records, including quantum details in the form of stock register, which were in fact audited;
b) its gross profit for the year was in fact 1.98% and not 0.11%, as presumed by the A.O. and, further, was in tune with a gross profit ratio for the preceding years;
c) no purchases were made from M/s. Prasad Steels during the year; on the contrary, the assessee had made sales thereto (at Rs.22.11 lakhs), constituting though a fraction (0.47%) of its total sales, payment in respect of which had been received by cheques. In fact, the A.O. has accepted the sale figure, including that to M/s.
Prasad Steels;
d) there is no finding with regard to the entries in the books of account being not correct, or the assessee of not following proper method of accounting, so that its results could not be disturbed or rejected;
e) no inference either way, with regard to the sample bills, could be drawn inasmuch as the assessee is dealing in a number of items (31), and the profit ratio that materializes would depend upon the nature of the product; the market price at the relevant time; the availability of the product, etc. The overall low profit could thus be low for various reasons, and no inference whatsoever toward bloating of purchases, as made by the A.O., is inferable; and
f) the legal principle in the matter is well settled, i.e., that an addition even after the rejection of book results could only be made on the basis of some material and not on the will of the assessing authority. The position as well as the facts have always to be looked at from the businessman's point of view, and the presumption of a uniform profit on each bill is impracticable, against the tenents of commercial realities, which is circumscribed by opportunities, threats and challenges, resulting in risk and reward for the businessman.
The same found favour with the ld. CIT(A). The A.O. had not brought any material on record to treat the assessee's accounts as defective or incomplete to justify any addition on account of low gross profit, i.e., in substitution of that disclosed by the assessee. Merely because the assessee could not produce bill-wise gross profit for the entire sales, 4 ITA No. 5541/Mum/2011 (A.Y. 2008-09) Asst. CIT vs. Rajendra Kumar & Co.
and did not respond to the show cause notice, would not justify imposition of a gross profit (G.P.) ratio culled out on the basis of some transactions, particularly where the assessee's accounts are audited, and which were clearly show a G.P. rate of 1.98%, as against 1.38% for the immediately preceding year, and which infact has been accepted by the Revenue under verification (section 143) proceedings. There is no cause for doubting the genuineness of the purchases, the onus for which is always on the Revenue, and which again has not been discharged by him. The statement of one of the suppliers (M/s. Prasad Steels) as being engaged in providing accommodation entries has not been substantiated, and the addition, thus, was only made on the basis of conjectures, surmises and assumptions, which cannot be upheld in law.
3. Before us, like contentions were raised by either side, each relying on the order of the authority below as favourable to it.
4. We have heard the parties, and perused the material on record, to the relevant parties of which our attention was also drawn during the course of hearing.
4.1 The first question before us is whether the A.O. could, in the facts and circumstances of the case, disturb the assessee's book results. This is as only where so, could he substitute his estimation, which is undoubtedly an intrinsic part of the process of assessment, of the trading profit as against that disclosed by the assessee's accounts. The same, without doubt, could only be u/s.145(3) of the Act, which lays down inter alia the condition of non satisfaction of the A.O. with the correctness and the completeness of the accounts of the assessee before he could invoke the said provision. As such, what is relevant and to be seen is whether the non satisfaction expressed by the A.O. in the instant case with the assessee's accounts is justifiable, so as to be maintainable in law. Toward this, we find that the inability of the assessee itself is to be positively satisfied, as without doubt a mere doubt or suspicion would not empower the assessing authority to reject the assessee's accounts, even as held by the apex court as far as in the case of Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC). Toward this, we find that 5 ITA No. 5541/Mum/2011 (A.Y. 2008-09) Asst. CIT vs. Rajendra Kumar & Co.
the inability of the assessee to explain its overall book results with reference to that obtaining on the basis of the sample bills, coupled with the trade creditors being at an unrealistic of high level of over a year, and which has not been explained by the assessee at any stage, including before us, would constitute valid grounds for invocation of section 145(3). At this stage, it may be relevant to mention that the assessee's entire case, as we understand, and even as observed during the course of the hearing, rests on the reliability and the verifiability, i.e., the truth and the correctness of its books of account. As such, it is not understood as to how it could insist on non-furnishing the relevant details, i.e., the gross profit in a bill-wise manner, before the A.O. In our opinion, the ld. CIT(A) is not correct in considering this lightly by stating that merely because the assessee was unable to furnish the said details, the A.O. could not draw an adverse inference, considering that the books of account itself is an evidence on which the assessee relies. The information culled out is from the assessee's own accounts. The only 'flaw' that we find is that the sample is in respect of transactions through only a single broker, M/s. Radhey Shyam Ispat (P.) Ltd. However, to be fair, the A.O. did not choose to draw it as such, i.e., as a representative sample, but only proceeded to examine the same, being in respect of a principal broker. It is only on the assessee's non furnishing the details subsequently, i.e., on being called upon to explain the said large variation, that he proceeded to apply the ratio as found (with reference to the bills examined by him) to the assessee's entire turnover. The assessee not furnishing any reply to the A.O.'s notice, it does not now lie in its mouth to say that no adverse inference could be drawn by the A.O. from the same, which in fact represents a settled principle of jurisprudence on evidence (refer: CIT vs. Krishnaveni Ammal [1986] 158 ITR 826 (Mad.)). This is particularly so as in the instant case inasmuch as the books of account, including the accompanying vouchers, itself constitute the evidence that the assessee relies upon in substantiation of its book results. The non-furnishing of the relevant details is, thus, incomprehensible.
It can, understandably, state that in view of the voluminous transactions, it may be allowed to justify its book results with reference to the some sample transactions, requiring the A.O. to select such sample on a random basis. This is presuming that the 6 ITA No. 5541/Mum/2011 (A.Y. 2008-09) Asst. CIT vs. Rajendra Kumar & Co.
sample already selected by the A.O. is not representative of its book results, and which charge is implicit in the assessee's argument/case. The ld. CIT(A) clearly failed to appreciate this aspect of the matter. The ld. AR before us would contend that the assessee's only mistake or error has been in not responding to the show cause u/s.145(3), whereby time was initially allowed (on 06.02.2010) up to 10.02.2010, and finally up to 20.02.2010. We are unable to understand the merit of this statement. That being the only show cause notice u/s. 145(3) issued by the A.O., the ld. AR seeking to justify the assessee's case by admitting its non-compliance is not understandable. The finding by the ld. CIT(A) of no show cause notice having been issued by the AO is factually incorrect. The clarification with regard to non-purchase from M/s. Prasad Steels, and the incorrect statement of the assessee's trading results by the A.O. at 0.11%, was also in fact given only before the first appellate authority.
4.2 With regard to the second adverse fact, i.e., the incomprehensibly long credit period against purchases; again, the assessee has offered no explanation before, in fact, either authority. The ld. AR would contend before us that the closing balance of creditors includes creditors as at the beginning of the year, stating of the same to be at a level of Rs.25 crores thereat, presumably suggesting that the same, therefore, must be excluded. Firstly, no such argument has been advanced earlier, so that the same remains to be verified or confirmed. Further, even assuming the same to be correct, i.e., the creditor level (as at 31.03.2007) to be at Rs.25 crores, the same is equally, if not more, impugning. The sales for the preceding year, i.e., for the previous year relevant to A.Y. 2007-08, are at Rs.37.72 crores as against Rs.46.27 crores for the current year. The purchase figure for that year is not available. As such, assuming the purchases for that year to bear a similar correspondence with the sales, i.e., as for the current year, the same would imply the purchases for that year to be to the tune of Rs.23.50 crores. The sundry creditor level for that year (stated to be at Rs.25 crores), thus, exhibits an equally incomprehensible long average credit period of over one year. Now, would the assessee state that the same again represents the creditor's balances as carried over from an 7 ITA No. 5541/Mum/2011 (A.Y. 2008-09) Asst. CIT vs. Rajendra Kumar & Co.
earlier period? In fact, even as there is nothing to suggest that the creditors as outstanding include, to any significant level, credit balances from an earlier year, so that the same continues to outstand for over a year and, perhaps even years, we are unable to see as to how the same helps the assessee's case in any manner. This also underlines the necessity to respond to the A.O., before whom there were no such facts to verify the same and, further, ascertain them or call for any information in the matter as he deemed fit and proper. This explains the clear provision in law to ensure, as far as possible, that the factual matrix before the assessing authority is the same as before the appellate authorities, with the fresh evidence being specifically required to be admitted, in a progressively stringent manner as to procedure, the saving being provided for exceptional circumstances disregard of which would violate the principles of natural justice or cause of equity. The assessee was also enquired of the debtor level during hearing, which, on the basis of the figure of the trade debtors (as on 31.03.2008) as furnished in its respect, found to be at a level of 3.5 months of sales (for the year). This against emphasizes and brings in focus the incongruity that attends the assessee's purchases. This is as the assessee purchases goods (on an average) at a credit period of 12 months, sells them at a credit period of 3.5 months. The assessee, thus, stands to gain a financial cost equivalent to 7.08% on account of financing cost component involved (assuming an interest cost of 10% p.a.). Thus, even if the assessee were not to charge anything over and above the purchase price, its gains to that extent in view of the opportunity cost of funds. Put differently, the assessee's debtors would stand to gain, besides on price, to that extent by buying directly from its suppliers, sources of which are a matter of trade knowledge. In fact, the credit period, as the market price, follows a pattern in any particular trade, and is a matter of common knowledge. The obtaining variables have no correspondence with commercial realities, which are finely tuned on these aspects, as each has a cost element associated therewith.
4.3 We, thus, find the application of section 145(3) by the Revenue as valid in the facts and circumstances of the case and, accordingly, reverse the finding of the ld.
8 ITA No. 5541/Mum/2011 (A.Y. 2008-09)Asst. CIT vs. Rajendra Kumar & Co.
CIT(A) with regard thereto. It needs to be appreciated that what we are principally concerned with at this stage is the validity of the invocation of section 145(3), and for which what is most relevant is the assessee's explanation and conduct. The question is not of the maintenance of books of accounts, which in fact are also audited, but of being able to satisfactorily explain the large variation in the trading result, as disclosed by the sample transactions (7.1%) and that reported, even considering the same to be at 1.98% and, two, the extremely high and disproportionate level of trade creditors, with a average credit period of over a year, which apparently has no correspondence with the realities of the trade, where each factor of the transaction is strongly bargained, having cost implications. We have also observed that the assessee has neither before the first appellate authority nor before us pleaded its case with reference to lack of opportunity, requesting therefore for a suitable opportunity before the assessing authority to state its case, justifying or explaining the reasons for its non-response before the A.O. It is to be noted the A.O. show caused the assessee u/s.145(3) so that the assessee was put to notice that the A.O. shall be both constrained and duty bound, i.e., in case of non-compliance, to apply his best judgment in framing the assessment, i.e., as he would while making an assessment u/s.144, and which he does, on the assessee failing to respond thereto.
We may further clarify that we have, and deliberately at that, ignored the other two aspects which also prevailed with the A.O. in rejecting the assessee's accounts, i.e., purchases from M/s. Prasad Steel and the gross profit rate for the year being at 0.11%. This is as the same stands disputed by the assessee as factually incorrect. Though the ld. CIT(A) should have under such circumstances, in our view, confronted this to the A.O. before treating the same as actually so, i.e., as factually incorrect, the same would assume significance if we were to consider the rejection of its accounts as not maintainable under the given, undisputed facts afore-stated. The book results, even at the admitted figure of 1.98% (i.e., about 2%), are at significant variance with the sample result of over 7%. It is not a case of a few transactions, but a sample spread over 51 transactions, amounting to, by the assessee's own reckoning, 2.81% (or nearly 3%) in value of its total turnover.
9 ITA No. 5541/Mum/2011 (A.Y. 2008-09)Asst. CIT vs. Rajendra Kumar & Co.
Rather, the fact that the results vary from as low as (-) 0.45% to as high as 17.91%, underscore the validity of the said sample as a representative sample.
4.4 We, next, consider the estimation of the assessee's gross profit as done by the AO, employing his best judgement in the matter, i.e., as mandated by section 145(3). The A.O. has adopted the GP rate of 5%, as against a ratio of over 7% disclosed by the sample result. In other words, the assessment on quantum.
Our first observation in the matter is that the A.O. having not disallowed any expenditure, but estimated the trading profit at 5%, it is only the difference between the said estimation, and that the gross profit as disclosed (as per the assessee's trading account), for which the addition could be made by the A.O. Inasmuch as he has deducted the figure of net profit instead of gross profit, he has committed an error, and which would needs correction, which we direct.
The only surviving issue is the estimation of the income by adopting the gross profit rate at 5%. Toward this, we observe that the AO has allowed a further discount of around 30% of the obtaining result of 7.1%, or over 40%, if reckoned on the basis of the adopted rate of 5%, and which, looked at either way, cannot be considered as not reasonable. That is, he has by further scaling down the disclosed result by around 30%, and applying a GP ratio of 5%, sought to act in a fair manner. There is no question of the presumption of a uniform profit rate on the entire sale by the A.O., as alleged, who has in any case to determine and apply a single percentage, i.e., over the entire set of transactions bearing different profit ratios. In adopting the overall percentage arrived at, i.e., on the sample transactions, the Revenue has implicitly accepted the transactions bearing lower profit or even gross loss, as of (-) 0.45%. In fact, any further scaling down of the estimation, as by 30% of the said average, as done, would only imply that there is an implicit acceptance of loss at even higher rates. The assessee's said allegations are, thus, without merit and, therefore, of no moment. As such, the estimation of trading profit ratio at 5%, as applied, appears to be a fair estimate, and cannot be faulted with as arbitrary or capricious.
10 ITA No. 5541/Mum/2011 (A.Y. 2008-09)Asst. CIT vs. Rajendra Kumar & Co.
The assessee, on the other hand, makes out the case with reference to the gross profit rate as disclosed and accepted by the Revenue, including under verification proceedings, for the preceding as well as the succeeding years, for which a comparative chart stands submitted. The same, no doubt made out for the first time before us, is only a matter of record and merits consideration. This is as though the principle of res judicata is not applicable to the proceedings under the Act, the trade results obtaining in the trade as well as in the past, are useful indicators of the trade profits, which have not been considered by the A.O. That is, even as the wide variation in the assessee's trading results over different transactions would also need to be factored and taken into account, so would these factors.
The ld. CIT(A) has, however, not issued any finding in this regard, having in fact not found the rejection of the assessee's book results by the A.O. as valid. We have already vacated his finding with regard to the invocation of section 145(3). In the facts and circumstances of the case, therefore, we only consider it fit and proper that the matter is restored back to his file for fresh adjudication on merits, per a speaking order and in accordance with law, after affording proper opportunity of hearing to both the sides. Our observations in the matter may only be considered as preliminary. We decide accordingly.
5. In the result, the Revenue's appeal is partly allowed and partly allowed for statistical purposes.
Order pronounced on this 12th day of April, 2013
Sd/- - Sd/-
-
( VIJAY PAL RAO ) ( SANJAY ARORA )
JUDICIAL MEMBER ACCOUNTANT MEMBER
MUMBAI, Dated: 12.04.2013
11 ITA No. 5541/Mum/2011 (A.Y. 2008-09)
Asst. CIT vs. Rajendra Kumar & Co.
Copy forwarded to:
1. The Appellant
2. The Respondent
3. The C.I.T.
4. CIT (A)
5. The DR, D - Bench, ITAT, Mumbai
BY ORDER
ASSISTANT REGISTRAR
ITAT, Mumbai Benches, Mumbai
Roshani