Income Tax Appellate Tribunal - Mumbai
Jaya Marketing , Mumbai vs Assessee on 25 June, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL "J" BENCH, MUMB
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BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND
SHRI RAJENDRA, ACCOUNTANT MEMBER
vk;dj vihy la[;k/ITA NO.6474/Mum/2011
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vk;dj vihy la[;k/ITA NO.6475/Mum/2011
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vk;dj vihy la[;k/ITA NO.5131/Mum/2011
¼fu/kkZj.k o"kZ@Assessment year: - 2005-06
M/s Jaya Marketing Addl. Commissioner of
VTM Building, Gala No. 2, 3 & 4, Mehra Vs. Income Tax 12(3)
Compound, Andheri Kurla Road, Aayakar Bhavan, 2nd Floor
Mumbai - 400 056. M.K. Road, Churchgate,
Mumbai - 400 020.
PAN:-AADFJ5774D
Appellant Respondent
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Assessee By/fu/kkZ Shri S.C. Tiwary
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Revenue By/jktLo Shri S.D. Srivastava
Date of hearing
27.05.2014
Date of pronouncement
25.06.2014
ORDER
Per Vijay Pal Rao, JM
These appeals by the assessee are directed against three separate orders of CIT(A) all dated 25.03.2011 for A.Y. 2003-04 to 2005-06. The lead appeal is for A.Y. 2005-06 and other two appeals for assessment year 2003-04 and 2004-05 are from reopened assessment based on the assessment for A.Y. M/s Jaya Marketing 2005-06. For the A.Y. 2005-06, the assessee has filed the revised grounds of appeal as under:
1. On the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) erred in not setting aside the assessment order even though the reference for special audit as per the provisions of section 142 (2A) was uncalled for and illegal.
2. On the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) erred in not cancelling the assessment which was barred by limitation.
3. On the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) erred in not setting aside the order of the AO who had wrongly invoked the provisions of section 145 (3) and rejected the books of accounts.
4. On the facts and circumstances of the case of the learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.
5,03,47,619/-on account of estimation of gross profit even though it was a part of the purchase price.
5. On the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs. 3,37,50,000/- on account of distribution charges subject to the adjustment of the amount of distribution charges already disclosed by the appellant.
6. On the facts and circumstances of the Case the learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs. 24,00,000/- on account of reversal of bond charges.
7. On the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) erred in upholding the addition of Rs. 16,99,445/- out of various expenses on an ad hoc basis.
8. On the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs. 10,82,122/- being the deemed interest on the advance given to the various parties.
2. Ground no. 1 and 2 is regarding validity of reference of special audit u/s 142 (2A) and thereby the validity of assessment being barred by
2|Page M/s Jaya Marketing `limitation. The assessee is a partnership firm and engaged in the business of distribution of Indian Manufactured Foreign Liquor in short IMFL of M/s BDA Ltd. The assessee and M/s BDA entered into a distribution-ship agreement on 24.07.2002, whereby the assessee was appointed as super distributor w.e.f 10.05.2002 for the territory of Mumbai/Maharashtra regarding the sale of IMFL product of M/s BDA Ltd. A survey action was conducted u/s 133A of the Income Tax Act on 30.11.2004. During the course of survey the statement of Shri Yogendra Kumar Jaiswal partner of the assessee firm was recorded. The said partner of the assessee stated and admitted the income of the assessee in the year under consideration to the tune of Rs. 1.90 crore and for the A.Y. 2003-04 and 2004-05 additional income of Rs. 50 lac and Rs. 10 lac respectively. Certain documents and loose papers were impounded during the course of survey proceedings. The assessee filed its return of income for the A.Y. 2005-06 on 5.12.2005 disclosing net profit of Rs. 1,24,35,660/- from the business of distributor ship of M/s BDA Ltd. The return of income was filed along with audited financial statement. For the A.Y. 2003-04 and 2004-05, the assessee filed revised return offering the additional income of Rs. 50 lac and 10 lac respectively. The assessment for the A.Y. 2003-04 and 2004-05 were completed by accepting additional income declared by the assessee. Since the assessee has declared the income in the return of income for the A.Y. 2005-06 which is less than the income of Rs. 1.90 crore which was offered during the course of survey, the Assessing Officer examined the Profit & Loss Account and other records impounded during the survey proceedings. The assessee was also asked to produce the Books of Accounts along with all bill and vouchers for verification. The Assessing Officer noted that no stock
3|Page M/s Jaya Marketing register was found to be maintained by the assessee and in the absence of which, the Assessing Officer doubted as to how the auditors had quantified the quantity of sales and purchase in the previous year. On the basis of these observations as well as records impounded during the course of survey, the Assessing Officer issued show cause notice dated 10.12.2007 asking the assessee to explain as to why its case for A.Y. 2005-06 should not be referred to special audit as per the provisions of section 142(2A) of the Income Tax Act. In response the assessee vide letter dated 14.12.2007 has submitted that its account have been duly audited u/s 44AB and that each and every entry is fully vouched recorded in the accounts. Ultimately after having regard to the nature and complexity of the accounts of the assessee and in the interest of revenue, the Assessing Officer referred the case of the assessee for A.Y. 2005-06 for special audit u/s 142(2A) of the Income Tax Act vide letter dated 20.12.2007. The date for completion of the special audit was extended by the Assessing Officer upto 31st May 2008. Special audit was conducted by M/s Sharp & Tannon, Mumbai and special audit report dated 30.5.2008 was submitted. After receiving the special audit report, the Assessing Officer framed the assessment by making various additions and disallowances and computed total income on the basis of estimated income.
2.1 The assessee challenged the reference to special audit before CIT(A) and contended that the reference is unjustified, illegal, and uncalled for and it was only a devise to extent the limitation to complete the assessment but could not succeed
4|Page M/s Jaya Marketing 2.2 Before us, the Ld. Counsel for assessee submitted that the assessee is the sole distributor of M/s BDA Ltd in the sate of Maharashtra as appointed vide agreement dated 24.07.2002 w.e.f 10.5.2002. The Ld. Counsel has referred the clauses of the agreement and submitted that the assessee has deposited Rs. 7.50 crores with M/s BDA Ltd as interest free security deposit. As per the terms of the said agreement the assessee is paid distribution charges at the rate of Rs. 25 per case on an estimated sale of Rs. 8 lack cases per annum. In case of variation in sale quantity the annual charges will be fixed at Rs. 2,02,50,000/- per annum. The assessee was also required to obtain requisite excise license and to complete other legal and tax formalities for sale of IMFL in the state of Maharashtra. The assessee is entitled to reimbursement of expenses incurred in this respect inclusive of bond charges, excise license fee, godown rent and supervision charges on actual basis. The assessee was bound to purchase and sell the goods at a pre determined price by the M/s BDA and the sale is only to the distributors nominated by the BDA in the state. The activity of the assessee is only of a distributor and, therefore, any profit or loss arising out of the sell and purchase belongs entirely to M/s BDA Ltd. The Assessing Officer has not pointed out any defect in the purchase and sale of the quantity. The assessee has also maintained all the details of stock. The income of the assessee is only in the shape of distribution charges and, therefore, the profit or loss arising from the sale and purchase is not relevant for determination of the income of the assessee. Even the special auditors have also not disputed the purchase and sale made by the assessee as well as opening and closing stock, therefore, there was no cogent reason with the Assessing Officer to refer the case of assessee to special audit. He has referred to instruction
5|Page M/s Jaya Marketing no. 1076 dated 12.7.1977 issued by the CBDT regarding reference to special auditor and submitted that in the said instruction the situations/circumstances has been explained under which the requirement for reference to special auditor is made out. The Assessing Officer has failed to point out any of the breach of duty on the part of the assessee in managing the affairs of the business of the assessee as well as maintaining the books of accounts. Though the instruction is for the cases of the company, however the same condition should be applied in the case of partnership firm also. He has relied upon the decision of Hon'ble Supreme Court in the case of Rajesh Kumar & Others Vs. CIT (287 ITR
91) and submitted that before invoking the provisions of section 142(2A) of the Income Tax Act, the Assessing Officer is required to form an opinion by considering the nature of accounts, complexity of the accounts and interest of revenue. All these factors are conjunctively required to be considered for formation of an opinion and must be based on objective consideration. He has also relied upon the decision of Hon'ble High Court of Calcutta in the case of West Bengal State Co-operative Bank Ltd. v. Joint CIT .(267 ITR 345) and submitted that the Hon'ble High Court has held that the provisions of section 142(2A) of the Act are to be applied only when it is absolutely necessary to do so or other alternatives are not available. Unless the Assessing Officer examine the books of accounts he cannot have any understanding as to the nature and complexity of the accounts. It is submitted that in the case of the assessee, the Assessing Officer did not make any attempt to examine the books of accounts. The Ld. Authorized Representative has contended that in the case of the assessee the Assessing Officer did not make any attempt to examine the Books of Accounts himself or through any subordinates, therefore, there
6|Page M/s Jaya Marketing was not occasion to form an opinion regarding the nature and complexity of the accounts based on objective consideration. Thus the Ld. Authorized Representative has urged that the reference to special auditor u/s 142(2A) is not sustainable under the law and, therefore, it is liable to be set aside. Consequently the assessment order passed by the Assessing Officer shall be quashed being barred by limitation.
2.3 On the other hand, the Ld CIT(DR) has submitted that the Assessing Officer identified the uncorrelated entries on the basis of the documents impounded during the survey, accordingly the Assessing Officer asked the assessee to explain the discrepancies along with the documentary evidences. Though the assessee produced Books of Accounts along with some details and evidence before the Assessing Officer but required correlation of entries could not be done by the assessee. Further as per the tax audit report, it is clear that the assessee has not maintained stock register which is an essential part of the Books of Accounts, keeping in view the nature of business activity of the assessee. Even during the survey, statement of managing partner of the assessee was recorded wherein specific question was asked as to whether day to day stock register/record is maintained by the assessee or not. The assessee confirmed that only purchase and stock register was maintained as per excise record but the proper stock register was not maintained. Even the special auditor has not confirmed the existence of stock register. He has further submitted that the assessee claimed the sale and purchase of goods in the capacity of distributor where as the Books of Accounts maintained by the assessee are in the nature of trader.
7|Page M/s Jaya Marketing Further the assessee has admitted the nature of activity as trading in the sales tax return and paid the sales tax in its name which shows that the assessee's own record being Books of Accounts are negating the claim of the assessee that the activity of the assessee is only in the capacity of distributor and not trader. When there is a conflict between the assessee's claim of being distributor and the entries made in the Books of Accounts then the Assessing Officer was justified in forming an opinion that the nature of accounts are complex and, therefore, in the interest of revenue, it was a fit case for making reference to special auditor u/s 142(2A) of the Income Tax Act. Before making the reference the Assessing Officer made proper enquiry by issuing the various letters to the assessee for calling upon the various details in support of the entries made in the Books of Accounts. The assessee failed to correlate the entries identified by the Assessing Officer. Further the assessee has claimed the payment of royalty to M/s BDA Ltd., whereas there was not supporting evidence to justify any royalty payment to M/s BDA Ltd. Thus the Ld. CIT(DR) has submitted that the Books of Accounts of the assessee suffered with serious defects and incorrect entries coupled with non maintenance of stock register and contrary claim made by the assessee being distributor are sufficient to justify the action of Assessing Officer to refer the case of assessee to special auditor u/s 142(2A). He has relied upon the orders of authorities below.
2.4 We have considered the rival submissions as well as the relevant material on record. The assessee's sole business activity stated to be purchase and sale of Indian Made Foreign Liquor (IMFL) being super
8|Page M/s Jaya Marketing distributor of M/s BDA Ltd in the sate of Maharashtra. As per the distributorship agreement dated 24.7.2002 placed at page no. 122 to 126 of paper book, the assessee was required to obtain necessary FL-1 license for the purpose of sale of IMFL products manufactured by M/s BDA Ltd. The products shall be sold/supplied to the assessee at the price to be decided and notified by M/s BDA Ltd. In turn the assessee shall supply IMFL product to the distributor nominated by M/s BDA Ltd at the price to be approved by M/s BDA Ltd. The assessee was entitled to a distribution charges of Rs. 25 per case on the entire sale estimated at 8 lakh cases per annum. In case of any variation in the sales quantities achieved, the annual distribution charges were fixed at Rs. 2,02,50,000/-. The assessee was required to deposit interest free/ trade advance of Rs.7.5 crore during the tenure of distributor ship. It was also agreed upon between the parties that the assessee shall be entitled for reimbursement of expenses covering excise, license fee, godown rent, supervision charges on actual basis. Further if any marketing campaigning/advertisement or brand building exercise was carried out as per the requirement of M/s BDA Ltd. then the cost of such exercise will be reimbursed to the assessee. It was also the term of agreement that the assessee was required to settle the dues to M/s BDA Ltd. just after receipt of the amount from the distributors against the sale of IMFL products. To ensure the instant settlement of dues, the assessee was required to operate the bank account in the same branch where M/s BDA Ltd. has its bank account. From the terms and conditions of the agreement between the parties, it is clear without any ambiguity that the assessee was entitled only for distribution charges on the sale of IMFL product of M/s BDA Ltd. to be supplied to the distributors nominated by M/s BDA Ltd plus
9|Page M/s Jaya Marketing reimbursement of expenses incurred by the assessee on license fee, godown rent, supervisions charges as well as marketing, campaigning/advertisement or brand building exercise on actual cost basis. The assessee has maintained its accounts in the manner which reflects the purchase and sale of goods as trading activity. The assessee is maintaining trading and P&L account in which the purchase and sale are coexisted, expenditure is debited and differential amount is shown as royalty to M/s BDA Ltd. It is this nature of the books of accounts maintained by the assessee which led the Assessing Officer to consider the same as complexed in nature. Further the assessee is paying sales tax by filing sales tax return showing the purchase and sale of IMFL. At the first look of the sales tax retrun, it gives an impression that the purchase and sale activities are in the nature of trade and in the capacity of dealer. Though the assessee is maintaining the details of stock for the purpose of excise duty, however, a proper stock register was not maintained by the assessee. For the purpose of reference u/s 142(2A) nature and complexity of the accounts as well as specialized nature of business activity of the assessee are the relevant factors to be considered by the Assessing Officer. For ready reference we quote section 142(2A) as under:-
""If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity of the assessee and in the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288 , nominated by the Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly 10 | P a g e M/s Jaya Marketing signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the [Assessing] Officer may require :
[ Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard.]"
2.5 As we have discussed above and narrated in the facts of the case that the assessee has claimed as a super distributor of M/s BDA Ltd. and it purchases and sales IMFL products to the distributors of M/s BDA Ltd at pre decided price. The assessee is entitled for distribution charges, whereas in the books of accounts, the assessee is showing purchase, sale and other expenses and differential amount to be paid to M/s BDA Ltd as royalty payable. The nature of the accounts incorporating purchase, sale and relevant expenses in the Trading and P&L accounts does not match with the claimed status of the assessee as super distributor and receiving only distribution charges. Further the sales tax return filed by the assessee shown the sale and purchase in the capacity of dealership and not a distributorship, therefore, the factual matrix and the nature of accounts maintained by the assessee gives a complexed state of affairs which requires to be examined by the experts in the field of accounting. When the assessee itself is presenting two different nature of business activity one being super distributor as per the terms and conditions of the dealership agreement and other by maintaining the books of accounts and filing the sales tax return which shows the activity in the nature of trading then the Assessing Officer had cogent and sufficient reasons to form an opinion that the nature of activity and accounts are complexed and it is necessary to find out the correctness of the accounts to be examined by 11 | P a g e M/s Jaya Marketing the special auditor appointed u/s 142(2A). The assessee has not disptued that before referring to the special auditor, the Assessing Officer has given a reasonable opportunity to the assessee of being heard by calling for objections. We are of the view that in this case the requisite conditions for invoking the provisions of section 142(2A) of the Act viz. nature of accounts, complexity of accounts and interest of the revenue are fulfilled for formation of opinion by the Assessing Officer. Though the real nature of transaction and the accounts may not be so intricate or complexed to understand, however the manner in which the accounts are prepared and presented certainly creates confustion and doubt about the true nature of activity of the assessee. Therefore, to ascertain the nature of accounts, the Assessing Officer is justified to invoke the provisions of section 142(2A). Accordingly we hold that the invocation of provisions of section 142(2A) is valid and in accordance with provisions of law and not merely for extension of limitaiton period for completion of assessment. Consequently the ground no. 1 and 2 are dismissed.
3. Ground no. 3 is regarding validity of rejection of Books of Accounts by invoking the provisions of section 145(3).
3.1 After receiving the special audit report, the Assessing Officer proceeded to reject the Books of Accounts of he assessee by invoking the provisions of section 145(3). The assessee strongly objected to the application of section 145(3) to its case. However the Assessing Officer by placing reliance on the special audit report rejected the Books of Accounts of the assessee and estimated the income of the assessee by recasting the trading/ P&L account of the assessee.
12 | P a g e M/s Jaya Marketing 3.2 On appeal, CIT(A) has confirmed the action of Assessing Officer in rejecting the Books of Accounts by invoking the provisions of section 145(3).
3.3. Before us, the Ld Authorized Representative of the assessee submitted that the Assessing Officer has given flimsy reason for rejecting the accounts of the assessee without any major defect in the accounts so as to justify the rejection of the accounts. He has further submitted that the Assessing Officer has mentioned certain minor deficiencies /irregularities and has not questioned the veracity of the purchase and sales which are all supported by evidence. Full quantitative stock tally also exist and no discrepancy was pointed out either by the special auditor or by the Assessing Officer in the stock of the assessee. The accounts of the assessee are subjected to strict excise rules relating to proper maintenance of accounts and registers. The Assessing Officer has made no independent enquiry or observation to arrive at the conlusion that the Books of Accounts of the assessee are unreliable. The Assessing Officer has heavily relied upon the special audit report which has pointed out only deficiencies and not discrepancies. Thus the Ld. Authorized Representative has submitted that merely on the basis of certain deficincies the provisions of section 145(3) cannot be invoked. He has referred para 4 of the chapter IV of special audit report and submitted that the special auditor has made an incorrect observation regarding the proprietory concern of the assessee in the name and style of M/s Jaya Consultancy having separate PAN no. and, therefore, the Books of Accounts should have been maintained separately by both the entities. 13 | P a g e M/s Jaya Marketing Whereas the assessee as well as M/s Jaya Consultancy are having only one PAN and no separate PAN nos, therefore the special auditor has made certain observations on the basis of wrong facts. Even it has been observed in para 4.2 (placed at page 35 of the paper book) that this accounting mechanism has no impact on the business of the assessee. He has then referred chapter VII of the special audit report and submitted that the special auditor has certified the correctness of purchases, sales and inventories of the assessee. In the conclusion the special auditor has specifically mentioned that sales are recorded in the Books of Accounts on the basis of invoices raised on the instruction of M/s BDA Ltd. The assessee does not have any direct excess with the customers nor has the power to determine the selling price. When no discrepancy has been pointed out by the special auditor either in the purchase, sale or inventory then mere minor irregularity in the accounts would not justify the rejectin of books results. The Ld. Authorized Representative then referred chapter X of the special audit report and submitted that the special auditor has expressed his opinion that proper Books of Accounts have been kept by the assessee. The Ld. Authorized Representative has thus forcefully contended that the special auditor has nowhere stated that the accounts of the assessee are untrue. The Assessing Officer has acted on the basis of some vague comments of the special auditor, wherein it is stated that we are unable to express any opinion on the true and fair view in case of balance sheet and profit & loss account. This observation of the special auditor is contrary or contradictory to its opinion that proper Books of Accounts have been maintained and kept by the assessee. The Ld. Authorized Representative has relid upon the following decisions:-
14 | P a g e M/s Jaya Marketing Sr. Particulars Citation Page No. No. Dhakeswari Cotton Mills Ltd. Vs. 26 ITR 775 1-8 1. Commissioner of Income-tax (1954)Court (Supreme of India) Omar Salay Mohamed Sait Vs. 37 ITR 151 9-24 2. Commissioner of Income-tax (1959)Court (Supreme India) Md. Umer Vs. Commissioner of Income-tax 101 ITR 525 25-29 3. (1975) (High Court of Patna) Commissioner of Income-tax Vs. Metro 306 ITR 130 30-34 4. Shoes Ltd - (2008) (High Court of Bombay) Commissioner of Income-tax Vs. Om 315 ITR 185 35-37 (2009) Overseas (High Court of 5. Punjab and Haryana) Commissioner of Income-tax V s. Paradise 325 ITR 13 38-41 6. Holidays (2010) (High Court of Delhi) Commissioner of Income-tax Vs. Bindals 332 ITR 410 42-47 7. Apparels (2011) (High Court of Delhi) Lalji Haridas Vs. Income-tax Officer & Anr 43 ITR 387 48-52 8. (Supreme Court of India) Commissioner of Income-tax Vs. Murlidhar 60 ITR 95 (1966) 53-55 9. Jhawar & Purna Ginning & Pressing (Supreme Court Factory India)
By relying upon the above referred decisions, the Ld. Authorized Representative has submitted that the Assessing Officer cannot act on pure guess and suspicion without any material to show that entries in the Books of Accounts are not correct or the method of accounting employed by the assessee is not acceptable. In the absence of any finding of defect in books of accounts or in the method regularly employed by the assesse, 15 | P a g e M/s Jaya Marketing the book results cannot be ignored on the basis of doubts of the Assessing Officer. The Ld. Authorized Representative has further contended that the accounts of the assessee had already been subjected to tax audit u/s 44AB of the Act and that there was no complexity in the accounts. Furthermore, each and every voucher was duly recorded in the accounts of the assessee 3.4 It is submitted that the action of the Assessing Officer in rejecting the accounts of the assessee by invoking the provisions of section 145(3) of the Act is illegal and unjustified.
3.5 On the other hand, the Ld. CIT (DR) has submitted that the Assessing Officer has listed as many as six reasons in the assessment order for invoking the provisions of section 145(3). These reasons recorded by the Assessing Officer makes it clear that there was enough adverse and sufficient incriminating finding about the Books of Accounts of the assessee prompting the Assessing Officer to take the recourse to the said provisions of Income Tax Act. The Assessing Officer has given a finding by stating that entries of royalty payable to M/s BDA Ltd are mere adjustment entries whereby the assessee has inflated its gross purchases, therefore, the Assessing Officer has questioned the veracity of the purchase and sale of the assessee. No independent separate enquiry is required for the purpose of invoking the provisions of section 145(3) when there was engouh material and special auditor report to indict the veracity of the assessee's Books of Accounts. The Ld. DR has further 16 | P a g e M/s Jaya Marketing submitted that though the imounded papers referred by the Assessing Officer do not pertain to the assessment year under considertion, however, it cannot be denied that the description of these seized material leads one to conclude that the applicants accounts in the year under consideration are untrue or not reliable. The special auditor has pointed out various defects in the special audit report regarding gross profit appears to be nil due the accounting methodology which does not give justifiable trading result by itself. He has further submitted that the special auditor has stated that the information and explanation supplied to them by the assessee were not adequae for the purpose of the audit and accordingly they were not in the position to express opinion in the true and fair in respect of the balance sheet and profit & loss account which is a serious indictment by the special auditor about the defective nature of the assessee's accounts. The assessee did not coperate with the special auditor and, therefore, the original time limit set for special audit was extended after the existing time limit. The cooperation of the assessee to the special auditor in providing the requisitioned evidence and documents remained unsatisfactory. Thus the Ld. DR has submitted that the Assessing Officer is justified in rejecting the Books of Accounts of the assessee by invoking the provisions of section 145(3).
3.6 We have considered the rival submissions as well as relevant material on record. There is no dispute that the Assessing Officer has power to reject the accounts if the books does not disclose the true state of accounts and correct income cannot be deduced there from. However, the Assessing Officer must demonstrate that there is an inherent defect in 17 | P a g e M/s Jaya Marketing the system and record of the assessee and that correct profit cannot be deduced from the Books of Accounts maintained by the assessee. Insignificant defects cannot form the basis of rejection of Books of Accounts as held in the series of decisions as relied upon by the Ld Authorized Representative of the assessee. Further book entries are not the sole basis of claim of the assessee for determination of total income by the Assessing Officer when the Assessing Officer has to examine the claim of the assessee and determine the total income in accordance with the provisions of the Act. In the case in hand, the Assessing Officer has rejected the Books of Accounts of the assessee by considering the special audit report. It is an undisputed fact in this case that the assessee has shown purchases and sales in the trading account, however, the gross profit was shown as nil. The income shown by the assessee in the P&L account is on account of distribution charges received from M/s BDA Ltd. and against the said income the assessee debited the expenses. The trading account prepared by the assessee showing nil gross profit as under:-
Particulars Amount Particulars Amount
To Opening Stock 3253590.00 By sales 541716466.67
To purchase 538462876.67
To gross profit C/D 0.00
541716466.67 541716466.67
The special auditor has examined the Books of Accounts of he assessee and found that the assessee has shown the purchases at Rs. 538462876.67/- which includes an amount of Rs. 5,02,03,083.17/- being 18 | P a g e M/s Jaya Marketing royalty payable to BDA ltd. Thus the assessee has merged two items and shown under the head purchases, thereby arriving at nil gross profit. The special auditor as well as the Assessing Officer has specifically pointed out that the assessee has not produced any material to support the alleged paymet of royalty to M/s BDA Ltd. Even the distributorship agreement does not talk about any payment of royalty. The special auditor has also pointed out that the gross profit shown by the assessee at nil is due the accounting methodology of the assessee and by merging the item of royalty payable in the purchases. As per the agreement the assessee should have recorded his distribution charges income receivable from BDA Ltd, however the Books of Accounts of the assessee envisages purchases, sales and the purchase cost shown in the trading account includes two element, therefore, the correct and true income could not be deduced from the Books of Accounts of the assessee. Further the assessee has admitedly not maintained stock register as well as the expenditures debited to the P&L account were not supported by the proper vouchers. Even before us, the assessee has not produced any record/evidence to support the payment of royalty and supporting evidence of the expenditure. The assessee has contended that the payment of royalty is nothing but difference between the sale price and purchase price payable to BDA Ltd. It is pertinent to note that when the assessee is showing the payment of royalty then assessee is under obligation to prove that the said payment was nothing but the amount payable to BDA Ltd as per the agreement. The assessee has failed to even produce the reconcilliation and confirmation from BDA Ltd to prove the real nature of the payment. Further it is not brought on record how the BDA is treating the said amounts whether part of the gross profit or any 19 | P a g e M/s Jaya Marketing other income. Apart from the system and method of accounting the assessee has also shown the dual status one being trader in the goods by filing the sale tax return and second being only a disitributor as claimed by the assessee for the purpose of Income Tax Act. This system of keeping record also give rise to legitimate inferance that everything is not right in the Books of Accounts and, therefore, the same cannot be relied upon to assess the income of the assessee. In order to verify the correctness of the stae of affairs of the assessee this Tribunal vide order sheet dated 9.5.2012 directed the assessee to produce the details of license procured by assessee if any to market the IMFL and also the TCS received by the assessee in the F.Y. under consideration along with the details of TCS collected by M/s BDA Ltd from assessee if any as per section 206C of Income Tax Act. The assessee was also directed to file the copies of assessment order passed in the case of BDA Ltd. Despite the specific directions nothing has been produced by the assessee except the copy of sale tax return. Apart from various defects as discussed above including the non maintenance of stock registers, the Assessing Officer has also disallowed various expenditure for want of necessary and relevant evidence/vouchers, therefore, the Books of Accounts and the book results of the assessee cannot be relied upon to assess the correct and true income/profit of the assessee. Accordingly we hold that the Assessing Officer is justified in invoking the provisions of section 145(3) in rejecting the Books of Accounts.
4. Ground no. 4 is regarding addition on account of estimation of gross profit. In the trading & P &L account the assessee has shown the 20 | P a g e M/s Jaya Marketing purchase of Rs. 53,84,62,876.67 ps. Since the assessee has shown the gross profit at nil due to the differential amount between the sales and purchases has also been added to the amount of purchases and claimed by the assessee as royalty payable to M/s BDA Ltd. The special auditor has pointed out that as per the agreement the assessee is entitled only for distribution charges as income receivable from BDA and not sales and purchases of the manufacturer. The amount of purchases shown in the trading account includes a sum of Rs. 5,02,03,083/- as royalty for which the assessee failed to produce any evidence or material so as to prove that the said amount was payable to the BDA Ltd. Accordingly the special auditor has commented that they are unable to ascertain the rational of splitting the purchase because of two elements. The Assessing Officer disallowed the claim of royalty payable to BDA Ltd as it is not permissible under the agreement between the parties and further the assessee failed to establish the genuineness of claim. The CIT(A) while confirming the action of the Assessing Officer further held even if this amount of Rs. 5,02,03,083/- is treated as cost of purchase, the same is not allowable as the assessee has not deducted TDS and shown the same as royalty payable to M/s BDA Ltd.
4.3. Before us, the Ld. AR of the assessee submitted that as per the distributor ship agreement dated 24.7.2002, the assessee merely acts as distributor on behalf of M/s BDA Ltd in respect of marketing its products in certain areas. He has further submitted that for compliance of the excise rules relating to the sale of excise products, the products of M/s BDA are transmitted to the godowns of the assessee and the assessee is required 21 | P a g e M/s Jaya Marketing to undertake all the necessary formalities as per the excise rules for dispatch of the products to various distributors under the invoices. He has thus submitted that because of this compliance of excise rules, the assessee is required to make the payment of excise and sale tax in its own name and concerned entries are required to be made in the Books of Accounts. Though due to the reason and requirement of excise act and rule as well as sales tax/VAT, the assessee has to show the purchases and sales of goods in the trading account and P&L account, however the net effect of these entries in the trading account is nil because the profit arising from the sale and purchase activity does not belong to the assessee except the distribution charges payable by M/s BDA Ltd. to assessee in terms of the agreement. Ld. Authorized Representative has forcefully argued that the assessee has acted only in a feudasary capacity. All the transactions of sales and purchases are recorded on the basis of invoices. The assessee does not have any direct nexus with the customers nor has power to determine the selling price as goods are purchased and sold at pre determined rates fixed by M/s BDA Ltd. Assessee's role is only to deliver and execute the instructions of M/s BDA Ltd in terms of the agreement. The assessee has got no latitude in the matter of purchase of goods from the market nor to sale the goods to the parties in general market by making separate bargains. The goods are to be sold at a pre determined price and to the dealers/distributors nominated by M/s. BDA Ltd, therefore, though the assessee has prepared trading and P&L Account for the purpose of compliance of the excise law and sales tax laws but the real nature of activity of the assessee is only distributor. The Ld. Authorized Representative has contended that only real nature of transactions and real income can be taxed on the basis of 22 | P a g e M/s Jaya Marketing entries. The authorities below have picked up only one side of the entries of the trading and P&L account without taking into consideration the corresponding entries and the real nature of activity of the assessee. The Assessing Officer has made a big issue about splitting of purchase cost into actual purchase cost and payments made to M/s BDA Ltd under nomenclature royalty on sales. The Ld. Authorized Representative has submitted that this amount of royalty is nothing but difference between the sale price and purchase price of the goods which was to be refunded back to M/s BDA Ltd. The authorities below failed to understand this peculiar aspect of the transaction and thereby disallowed the royalty i.e. payment made to M/s BDA on this account. He has pointed out that this amount in the nomenclature of the royalty paid by the assessee to M/s BDA Ltd., has been duly recorded in respective Books of Accounts of both the parties and the Assessing Officer has not cared to even examine the same. The payment has been made through cheques only and the authenticity of the payments cannot be challenged at all. Even M/s BDA has offered this amount to tax, therefore, making the addition on this account in the hands of the assessee amounts to double taxation of the same amount. When the entries in the trading and P&L account have no income tax implications but these are for the purpose of indirect taxation then merely on the basis of the manner of entries addition cannot be made without going into the real nature of income and the net effect of such entries. He has further submitted that it was explained before the lower authorities that M/s Jaya Consultancy is just a proprietary concern of assessee's firm and in that way it is nothing but unit of the assessee's firm. The confusions was created by some TDS certificates issued by the parties and a separate but wrong PAN no. has been mentioned in respect of M/s Jaya 23 | P a g e M/s Jaya Marketing Consultancy. The assessee duly explained before Assessing Officer that there was a mistake in the certificate issued by one M/s Candy Wines & Stores, wherein wrong PAN no. of M/s Jaya Consultancy was mentioned. The Ld Authorized Representative has referred page 33 of the assessment order and submitted that the assessee has brought to the notice of Assessing Officer regarding the wrong PAN no of M/s Jaya Consultancy written in TDS certificates. He has further submitted since M/s Jaya Consultancy is constituent unit of the assessee and, therefore the transaction in the name of M/s Jaya Consultancy being contra transaction are shown in the Books of Accounts and have been mutually cancelled with each other. There is no effect of these transactions of of showing the royalty payment and distribution charges as income of M/s Jaya Consultancy. Since the assessee is not entitled for a single paisa out of the sale proceeds and that the excess of the sale price and the pruchase price has got to be refunded to M/s BDA Ltd under the nomenclature of royalty. The Assessing Officer without conducting any enquiry from M/s BDA as to whether they are in receipt of the said money, had added back the same in a whimsical and capricious manner. Only actual income in the hands of the assessee is required to be taken into account rather than its external form. The assessee has rightly offered to tax the distribution charges as shown in the P&L account. No gross profit was show because the purchase and sale was shown in the trading account only to maintain the accounts but does not give any income to the assessee except the distribution charges as per the agreement between the assessee and M/s BDA Ltd.
24 | P a g e M/s Jaya Marketing 4.4 On the other hand, the Ld. CIT (DR) has submitted that the agreement is silent on the royalty payment or the differential amount to be paid back to M/s BDA Ltd. The income has to be taxed in the right hand and the assessee is the right person to be taxed for the differential amount. The payment to M/s BDA Ltd is only an application of income and cannot be allowed to reduce the income of the assessee. The assessee is a trader as clear from the record as well as the observation of the special auditor and not a distributor. He has referred the observations of the special auditor and submitted that the assessee has shown the purchases inclusive of the differential between sales and purchases nomenclated as royalty payable to M/s BDA Ltd. The special auditor has also noted in para 5.1 of the report that as per agreement distribution charges are to be calculated on the basis of no. of cases sold by the assessee during the year. Whereas the amount which was recorded in the P&L account was not on the basis of agreement. The assessee's claim of being distributor cannot be accepted as the assessee itself has shown the activity as trader for the sales tax purpose and in the sales tax return. The assessee has failed to discharge its onus to prove that the distribution charges shown in the P&L Account are as per the agreement. The special auditor has described the assessee as a firm which operates as CNF agent/trader in wine. Thus the special auditor has not considered the assessee's business to be exclusively that of distribution. The payment of royalty is not supported by any evidence or document even the agreement between the parties does not spell out any such payment by the assessee to M/s BDA Ltd. Therefore, the claim of royalty is not genuine and the Assessing Officer's finding is based on the facts of the case and not on the basis of assumptions. He has relied upon the orders of authorities below. 25 | P a g e M/s Jaya Marketing 4.5. We have considered the rival submissions as well as relevant material on record. The moot question arises in this case is whether the assessee's activities are only as a super distributor of M/s BDA Ltd in respect of IMFL products or was in the nature of trading. The assessee was appointed as super distributor by M/s BDA Ltd vide distribution ship agreement dated 24.07.2012. The authorities below have not doubted the genuineness of distributionship agreement between the assessee and M/s BDA Ltd and terms and conditions thereof. The IMFL product of M/s BDA Ltd to be sold in the terms and conditions set out in the agreement as under:-
"1 It will be your responsibility to arrange for duty paid purchase orders/ indents, to be received from distributors nominated by us, to be sent to our unit at Aurangabad or to any other unit specified by us alongwith full details of the products to be dispatched alongwith the place, date and mode of such dispatch.
2. The IMFL products shall be sold at a price to be decided and notified by us directly or through the manufacturing unit that will be supplying the material.
3.You will be responsible in relation to the IMFL products supplied to you, to comply with all necessary excise requirements including but not limited to. obtaining Permits, Excise Verification Certificates wherever necessary, under the Excise Rules from the excise authorities concerned, and will submit all such certificates to us and/or to the concerned unit that supplied the IMFL products within the prescribed time limit.
4 The purchase of IMFL products by you from us and/other units authorized by us shall be on a pricipal to principal basis.
5. a You will supply IMFL products to the distributors nominated by us at a price to be approved as per the provision set off in paragraph 2 above.
26 | P a g e M/s Jaya Marketing b All sales scheme and/or discount as well as marketing and other support approved from time to time by us shal be binding on you and will be honoured by you and the cost of such scheme will be adjusted against the dues payable for cost of goods supplied by our unit/or any other unit. c You shall, after receipt of the amount from the distributors against sale of IMFL products, immediately settle your dues fro such supplies to us and/or the relevant unit that supplied the material.
d For instantaneous settlement of the dues to BDA/ the other units, you shall operate bank account in the same bank and the branch where BDA has its bank accounts.
6. a You will retain with us an interest free deposit/trade advance of Rs. 7,50,00,000/- ( Rupees Seven Crores Fify Lakhs Only) during the tenure of this agreement. b The said deposit shall be paid to us as follows:-
1. Rs. 5 Crore on or before 01st May 2002.
2. Rs. 2.5 Crore on or before 31st May 2002.
c This deposit will be refunded as and when the
agreement is terminated or comes to an end.
7. a. During the tenure of this agreement, you shall be entitled to a
distribution charge of Rs.25/- (Rupees Twenty Five only) per case on the entire Maharashtra sale estimted at 8,00,000 cases per annum. In case of variation in the sales quantities achieved, your annual charge will be fixed at Rs. 2,02,50,000 (Rupees Two Crores Two Lakhs Fifty Thousand Only) Per annum. This amount will be adjustable out of the collections on a monthly basis. During the period in which the interest free deposit/trade advance kept with us is less than Rs. 7,50,00,000/-
(Rupees Seven Crores Fifty Lakhs Only) or the appointment of Super Distributor has not become effective due to delay in obtaining he requisite excise licenses; the distribution charge referred to above will be calculated @ Rs. 3.30 (Rupees Three and Paisa Thirty Only) per case for every Rs. 100.00 Lakhs deposited with us on the sale of IMFL products in the whole of Maharashtra.
b. You will also be entitled to a reimbursement of bond expenses covering Excise license fee, Godown rent, 27 | P a g e M/s Jaya Marketing supervision charges on actual basis during the period of your appointment as super distributor when the FL-1 licence/s are in operation.
c. If you are required by the company to carry out any marketing campaign/advertisement or brand building exercise, then the cost of such exercise will also be reimbursed to your and adjusted against the dues to us.
d. Except reimbursements/remunerations referred to in para7a, 7b and 7c you will not be entitled to any other reimbursements/remunerations.
8. On the payment of Rs. 7.50 crore of interest free/deposit/trade advance and completion of necessary Excise formalities, your appointment as Super Distributor shall become effective.
9. In view of your sales being restricted to distributions nominated by us, it is hereby agreed, that ny bad debts on account of such sales, shall be borne by us.
10. The trademark, brand names, design and the get up in which the IMFL products will be sold, supplied and delivered and in particular but not limited to those listed in Appendix A hereto shall always be our sole property or of our associate or related companies as the case may be. You have acknowledged and accepted that you never had nor have any right whatsoever to the use of the above brand names, design, trademarks and/or get up belonging to us or to ur nominees/associates except under written permission from us.
11. The arrangement entered into hereunder is a non exclusive arrangement.
12. We will be entitled to terminate this agreement at any time by giving 30 days notice.
13. This agreement is effective from 10th May 2002.
4.6 Under the agreement the assessee was respnosible to arrange for the duty paid purchase orders, indents to be received from the distributors nominated by BDA and then to be sent to the BDA unit. The products are sold at the price to be decided and notified by the BDA. The assessee 28 | P a g e M/s Jaya Marketing was respnsible to comply with all necessary excise requirements including obtaining permission, excise verification certificates wherever necessary, under the Excise Rules and to submit all such certificates to BDA unit that supply the IMFL product. The sale of IMFL product was to the distributor nominated by the BDA at a price to be approved and decided by the BDA. As per the terms and conditions of the agreement, the assessee's role is only to take the supply from BDA and to comply with all the excise and other tax formalities and then supply the same to the distributors nominated by the BDA. Thus as per the agreement the assessee's role was limited to received the IMFL product from BDA and then supply the same to the distributors, however, the Books of Accounts maintained by the assessee as well as the sale tax record go to present a different picture. Once a discrepancy in the accounts and actual function of the assessee was pointed out then a heavy burden was cast upon the assessee to prove that there was no income out of sale and purchase of the IMFL product of the BDA. Though as per the distributorship agreement the assessee is entitled only for distribution charges at a rate prescribed therein, however the distribution charges shown by the assessee in the Books of Accounts do not match with the rate provided and agreed between the parties as per the distribution agreement. In such a situation the assessee was required to prove the correctness of the claim by producing the relevant evidence as well as the reconcilliation and Books of Accounts of BDA. When an arrangement was made between the parties for instant settlement of dues by opening the bank in the same branch then the payment of royalty shown by the assessee is not justified. The Assessing Officer has recasted the trading account and P&L account and then computed the income of the assessee by disallowint the claim of 29 | P a g e M/s Jaya Marketing royalty payment. It is not clear from the record produced by the assessee before the authorities below as well as before us, that the difference between the purchases and sales is part of the gross profit of the BDA and not of the assessee. The assessee itself has prsented the Books of Accounts showing purchase and sale and difference of purchase and sale was shown as royalty payable to BDA instead of gross profit, therefore, in the absence of any proof to demonstrate that this amount does not belong to the assessee, it cannot be conclusively decided that the profit on sale of the IMFL product is not assessable in the hands of the assessee. Even before us, the assessee has not produced any material in support of its claim, therefore, in the absence of any evidence to show that the profit arising from the purchase and sale of IMFL product does not belong to assessee, we do not find any reason to interefere with the orders of authorities below in recasting the trading and P&L account of the assessee and making the addition of Rs, 5,03,47,619/- particularly in the facts and circumstances of the case when the assessee is showing itself a dealer for the purpose of sale tax and filing he sales tax return on the trade activities.
5. Ground no.5 is regarding addition of Rs. 1,13,19,126/- on account of distribution charges.
5.1. As per the agreement the assessee is entitled to receive distribution charges at the rate of Rs. 25 per case on an estimated total sale in the state of Maharashtra at 8 lac cases per annum. In case of variation, the annual charges was fixed at Rs. 2,02,50,000/- per annum. For the year under considration, the assessee has shown the distribution charges at Rs. 2,24,30,874/-. The Assessing Officer has recomputed the distribution 30 | P a g e M/s Jaya Marketing charges by applying interest at the rate of 27% on security deposit on Rs. 7.5 crore with the BDA amounting to Rs. 3,37,50,000 resulting an addition of Rs. 1,13,19,126/-. The Assessing Officer has computed the distribution charges on the basis of papers impounded during the survey wherein the assessee's claim of 27% return on the interest free security deposit with BDA Ltd. The assessee challenged the addition before CIT(A) but could not succeed.
5.2 Before us, the Ld. AR of the assessee submitted that the distribution charges were agreed between the parties at the flat rate of Rs. 20,83,383/- per month total amounting to Rs.2.5 crore per annum. He has further submitted that during the year under consideration the total quantity sold was at 251715 cases and, therefore, the assessee forced the BDA to fix Rs. 2.5 crore annualy. The amount of Rs. 2,24,30,874/- shown in the P&L account is after adjustment of bond charges and other reimbursement receivable from the BDA as well as writing off bond charges not received for the Assessment Year 2003-04 and 2004-05. The details as well as explanation were duly furnished before the Assessing Officer vide letter dated 18.07.2008 at page no. 143 to 146 of the paper book. He has referred page 19 of the assessment order and submitted that the assessee clarified the distribution charges for the year under consideration were mutually agreed upon at a flat rate of Rs. 20,83,383/- per month amounting to Rs. 2.5 crore for the year. The Assessing Officer made an addition on the basis of calculation sheet showing the calculation of interest at 27% on the amount paid as security deposit. The Ld. Authorized Representative has submitted that this calculation on the said 31 | P a g e M/s Jaya Marketing paper has nothing to do with the actual receipt of distribution charges. Even the said calculation slip does not pertain to the year under consideration and it was meant for bargaining with M/s BDA Ltd for getting enhanced distribution charges. The Assessing Officer made the addition on the basis of conjuctres and surmises without making any enquiry from BDA Ltd to ascertain the actual distribution charges paid to the assessee. If the Assessing Officer was not satisfied with the explanation of the assessee, he should have conducted a proper enquiry. Hence it is pleaded that the addition made by the Assessing Officer should be deleted.
5.3 on the other hand the Ld. CIT (DR) has submitted that the distribution charges shown by the assessee is not as per the terms of the agreement and the assessee has claimed that the distribution charges were fixed as per the mutual agreement between the parties. However no such record or evidence has been produced by the assessee in support of the claim. Further the assessee has failed to submit any reconcilliation or confirmation from the BDA Ltd to prove that the payment recorded in the Books of Accounts is true and correct. He has relied upon the orders of authorities below.
5.4 We have considered rival submissions as well as relevant material on record. As per the agreement between the assessee and M/s BDA Ltd,l the assessee is entitled for distribution charges at the rate of 25 per case on an estimated sale of 8 lac cases per annum. Further in case of any variation in the sale quantity, the annual charges were stated to be fixed at Rs. 2,02,50,000/-. For the A.Y. under consideration the assessee 32 | P a g e M/s Jaya Marketing has shown distribution charges at Rs. 22430874/-. This amount has been shown by the assessee after adjustment of the bond charges and other reimbursement as well as writing off the bond charges for the A.Y. 2003- 04 and 2004-05. The gross amount of distribution charges received for the year under consideration is at Rs. 2,49,99,996/-. The Assessing Officer has noted that this amount of Rs. 2.5 crore does not match with the distribution charges receivable as per the agreement and further for the A.Y. 2003-04 and 2004-05, the assessee itself has accepted the distribution charges at the rate of 27% of the interest free deposit with M/s. BDA Ltd. We note that durng the course of survey, the debit notes were found showing the calculation of interest at the rate of 27% on the amount deposited with the BDA. The assessee admitted the distribution charges income at the rate of 27% on the amount deposited with the BDA for the A.Y. 2003-04 and 2004-05. However for the A.Y. under consideration the assessee disputed the addition on the ground that the debit note found during the survey do not pertain to the year under consideration and were for the earlier assessment years. The Assessing Officer did not accept the contention of the assessee and calculated the income of the assessee at the rate of 27% on the deposit of Rs. 12.5 crore made with the BDA. Thus the differential amount of Rs. 1,13,19,126/- has been added to the income of the assessee. Though the assessee's entitlement for distribution as provided under the distribution agreement, however the actual amount claimed to have been received by the assessee on account of distribution charges do not match with the rates provided in the agreement. Further the assessee has admitted that for the A.Y. 2003-04 and 2004-05, the assessee's distribution charges income was equivalent to 27% of the deposit made by the BDA. This admission of the assessee is not oral but it 33 | P a g e M/s Jaya Marketing was based on the debit notes found during the survey. Thus there is a valid reason for the Assessing Officer to consider the distribution charges at the admitted rate of 27% per annum on the amount deposited with the BDA. Moreover, when there is no change in the facts and circumstances as well as business activity for the year under consideration in comparison to the A.Y. 2003-04 and 2004-05, then on the totality of the facts of the case, there is no reason to say that the distribution charges for the year under consideration are on a different basis than for the A.Y. 2003-04 and 2004-05 The assessee has failed to prove otherwise as the assessee has not produced any evidence or even the record from the side of the BDA to confirm or reconcilliate the correctness of the distribution charges shown by the assessee in the Books of Accounts. Accordingly in the facts and circumstnaces of the case, we do not find any error or illegality in the orders of authorities below qua this issue.
6. Ground no. 6 is regarding the addition of Rs.24 lac on account of reversal of bond charges. The assessee has shown the bond charges and other reimbursement receivable from BDA 5,76,734/- which are part of the distribution cahrges shown in the P&L account. The Assessing Officer while computing the total income has made an addition of Rs. 24 lac on the ground that the same amount was considered in the immediately preceding year. CIT(A) has confirmed the action of Assessing Officer.
6.1 Before us, the Ld Authorized Representative of the assessee has submitted that in the earlier years the bond charges were admitted on the 34 | P a g e M/s Jaya Marketing basis of a debit note raised by the assessee in the name of BDA which was impounded during the survey. The Assessing Officer made the addition without verification of the correctness of the bond charges for the year under consideration and only on the presumption that the bond charges are same as in the earlier years. The Ld. Authorized Representative has referred the terms of the agreement and submitted that the bond charges are reimbursed on actual basis and, therefore, it cannot be at fix rate of 24 lac per year as assumed by the Assessing Officer.
6.2 On the other hand, the Ld. CIT(DR) has submitted that the addition has been made by the Assessing Officer on the basis of material available on record. Since the bond charges of Rs. 24 lac were admitted by the assessee in the immediately preceding year, therefore, the Assessing Officer has made the addition by considering the fact that the nature of business of the assessee remained unchanged. He has relied upon the orders of authorities below.
6.3 Having considered the rival submissions as well as relevant material on record, we note that the Assessing Officer has made the addition of Rs. 24 lac without any discussion and on the presumption that in the immediately preceding year the same amount was taken into consideration as bond charges. The relevant part of the Assessing Officer's finding on this issue is at page 46 of assessment order is as under:-
35 | P a g e M/s Jaya Marketing "The bond charges have been calculated @ Rs. 24 lac per annum which was the same in the immediately preceding year as per page no. 23 of Annexure S-
18. 6.4 There is no dispute that annexure S-18 as relied upon by the Assessing Officer is a debit note for earlier assesment year and not for the year under consideration. The Assessing Officer has not made any enquiry to ascertain the correctness of bond charges shown by the assessee at Rs. 5,77,734/- as part of the distribution charges. As we have already discussed that the assessee is entitled for reimbursement of the bond charges, godown rent, supervision charges on actual basis, therefore, when the actual expenditure incurred by the assessee has not been disputed then the addition on this account over and above the actual expenditure is not justified. Further except the debit note for the earlier assessment year there was no other material to indicate that the bond charges for the year under consideration was received by the assessee at Rs. 24 Lac as presumed by the Assessing Officer. Accordingly this addition is not justified as the same is without any basis, hence deleted.
7. Ground no. 7 is regarding disallowance of expsnes of Rs 1699445/-. The Assessing Officer has referred the comments of the special auditor in respect of various expenses. The details of expenses are reproduced by the Assessing Officer at page no. 25 and 26 as under:-
Sl. Expense Claimed in P&L Special Audit's report comments No. Account (in Rs.) 1 Lodading & Unloading 16,37,313 All payments in cash, no formal Charges bills and only cash vouchers attached with the handwritten slip 36 | P a g e M/s Jaya Marketing specifying a name and amount paid in cash, available.
2 Freight Expenses 2,90,350 All expenses paid in cash, no supportings at all, the only supportings were printed vouchers stating the amount expended on freight 3 Salary 4,98,142 Salary paid in cash on monthly basis no revenue stamp attached into the salary voucher, printed vouchers for payment of salary to all the 12 employees not available, not possible to conclude that salary expenses are fairly stated. No. supportings for Rs.
48,930/-
4. Bonus 99,625 Bonus paid to emplyees at 20% of the total basi salar in cash.
5. Consultancy charges- 52,000 Paid in cash, and no TDS consultancy fees deducted on same. Supportings available only to the extent of Rs.
64,293 21,000.
Legal Expenses Part payment made by cash,
remaining is provision; no TDS
deducted.
46,261 No agreement available for rental
6. of office premises. All payments in
Office Rent cash, correctness of the amount
paid not verified. No supportings
for Rs. 46,261.
Disallowable (as
7 per special audit
Other Expenses report
Staff welfare 5,730 No Supportings
Conveyance allowance 34,239 No Supportings
Travelling expenses 27,047 No Supportings
Computer expenses 56,750 No Supportings
Printing & Stationary 30,911 No Supportings
Repairs & maintenance 4,085 No Supportings
Electric Expenses 26,950 No Supportings
37 | P a g e
M/s Jaya Marketing
Telephone expenses 2,573 No Supportings
Business Promotion 57,273 No Supportings
Supervisions Charges 1,36,643 No Supportings
General Expenses 81,236 No Supportings
Miscellaneous 13,826 No Supportings
expenses
Pooja & Diwali 13,606 No Supportings
Expenses
Loading & Unloading Expenses
7.1 The Assessing Officer observed that majority of these expenses have been incurred in cash and no proper supportings exist for them. Accordingly the Assessing Officer has made an adhoc disallowance in the range of 20% to 100% amounting to Rs. 16,99,445/- of these expenses. On appeal, CIT (A) confirmed the disallowance made by Assessing Officer.
7.2 Before us, the Ld. Authorized Representative of the assessee has submitted that all the expenses are supported with the vouchers keeping in view the nature of certain expenses wherein small-small payments were made to the labourers. These expenses were audited by the regular auditor of the assessee without any adverse comments. The Assessing Officer has made adhoc disallowance without verifying the correctness of the expenses.
7.3 On the other hand, the Ld. CIT(DR) has relied upon the orders of authorities below and submitted that in the earlier years, the assessee declared undisclosed income of Rs. 50 lac and 10 lac respectively, therefore, the Assessing Officer is justified in disallowing the expenses which are not properly supported by the evidence or vouchers. 38 | P a g e M/s Jaya Marketing 7.4 We have considered the rival submissions and carefully perused the relevant material on record. The Assessing Officer has placed much reliance on the observation of special auditor while disallowing certain expenses on adhoc basis. The Assessing Officer has disallowed 50% of the loading and unloading charges on the basis of special auditors observation. The special auditor has mentioned in the audit report in respect of loading and unloading charges as under;-
"In our opinion, considering the volume of amount involved any businessman out of prudence would have entered into an agreement with the labour contractor. Further he would have insisted on proper supporting and payment by cheque."
7.5 Since the assessee claimed to have been paid these expenses to the labourers, special auditor has observed that the assessee would have entered into an agreement with the labour contractaor instead of paying in cash to individual labourers. It is pertinent to note that though the loading & unloading charges claimed by the assessee are not entirely bogus because of the nature of the business of the assessee, however, the assessee failed to produce the supporting vouchers. Further these expenses were incurred in cash, therefore, the assessee has failed to discharge its onus to prove the claim. Accordingly in view of the facts and circumstances of the case when the assessee has failed to discharge its onus to prove the claim, the Assessing Officer is justified in disallowing the part of the expenses. However, we are of the view that 25% of the 39 | P a g e M/s Jaya Marketing expenses on this account will be proper and justified instead of 50% disallowed by the Assessing Officer.
FREIGHT Expenses
8. Similarly 50% of the freight expenses of rs. 2,90,350/- was disallowed by the Assessing Officer. These expenses were supported by the assessee through the printed vouchers. The special auditor has observed that the payments were made in cash without freight bills from the transporters and applicability of service tax needs to be considered. Though keeping in view the volume of the transactions the expenses claimed by the assessee on account of freight charges may not be bogus, however, when the assessee has failed to discharge its onus by producing the necessary vouchers and further the expenses were made in cash, a part of the disallowance of expenses is justified. The Assessing Officer has disallowed 50% of he freight charges, however, in the facts and circumstances of the case, we are of the view that 25% of the disallowance will be proper and justified, we order accordingly.
SALARY & BONUS Expenses
9. The Assessing Officer then disallowed 20% of the salary and bonus expenses. It is pertinent to note that the special auditor has accepted the payment of bonus at the rate of 20% of total basic salary. The statement of salary and bonus expenses has been obtained by the special auditor and no adverse remarks were made by the auditors in respect of bonus payments. Further non attachment of revenue stamp on the salary payment vouchers was pointed out by the special auditors. The Assessing 40 | P a g e M/s Jaya Marketing Officer has made the adhoc disallowance of 20% on the basis of special audit report without making any enquiry about the no. of employees shown by the assessee and payment of salary. When the Assessing Officer has not doubted the number of employees and further when the special auditor has duly verified the payment of bonus and accepted the payment as genuine then salary payment cannot be doubted. Accordingly adhoc disallowance on account of salary and bonus payment is deleted.
Consultancy and Legal Expenses
10. Consultancy and legal expenses of Rs. 52,000/- and 64,293/- were disallowed by the Assessing Officer on the ground that no TDS was deducted on the same.
10.1 We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. Since the assessee has claimed to have paid these expenses on account of consultancy charges and legal expenses without any supporting evidence and without deduction of TDS, therefore the said claim of expenditure paid in cash was rightly disallowed by the Assessing Officer. Accordingly in the absence of any evidence produced by the assessee, we confirm the disallowance on this account.
Office Rent
11. The Assessing Officer has disallowed the office rent on the ground that all payments were made in cash and there is no supporting of this payment.
41 | P a g e M/s Jaya Marketing 11.1 We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. When the factum of office premises on rent is not disputed then the payment of Rs. 46,261/- cannot be disallowed on the ground that the payment is made in cash. Hence we delete this expenditure.
Other Expenses
12. The Assessing Officer has disallowed various miscellaneous expenses as under:-
Disallowable (as per special Other Expenses audit report Staff welfare 5,730 No Supportings Conveyance allowance 34,239 No Supportings Travelling expenses 27,047 No Supportings Computer expenses 56,750 No Supportings Printing & Stationary 30,911 No Supportings Repairs & maintenance 4,085 No Supportings Electric Expenses 26,950 No Supportings Telephone expenses 2,573 No Supportings Business Promotion 57,273 No Supportings Supervisions Charges 1,36,643 No Supportings General Expenses 81,236 No Supportings Miscellaneous 13,826 No Supportings expenses Pooja & Diwali 13,606 No Supportings Expenses 12.1 We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. As it is clear from the above details that the disallowance has been made purely on the basis of audit report and with the remarks of no supportings. The Assessing Officer has not may any endeavour to verify or examine the genuineness and correctness of these expenses. Even the excessiveness of the expenses has not been pointed 42 | P a g e M/s Jaya Marketing out and no reasoning except the remark "no supportings" has been given by the Assessing Officer for disallowance of these expenses. As it is clear from the nature of the expenses that these are inevitable routine expenditure of day to day business. The action of Assessing Officer in disallowing these expenses is not justified. Accordingly we set aside this issue to the record of Assessing Officer to cunduct a proper investigation and then give a definite finding by giving a proper opportunity of hearing to the assessee .
13. Ground no. 8 is regarding addition of Rs. 10,82,122/- on account of deemed interest on the advance given to the various parties. In the special audit report, it is observed that the assessee has given advances to four non trade parties during the year and in the absence of any evidence they were unable to ascertain whether the advances given are in the normal course of the business. On the basis of these remarks of the special auditor, the Assessing Officer asked the assessee to submit the reply on the issue.
13.1 The assessee submitted its reply vide letters dated 23.06.2008 and 18.07.2008. The assessee mainly contended that the advance was given only for the purpose of business. It was submitted that one of the parties M/s Chadha Paper Limited is conducting the management work till assessment year 2004-05 and the amounts towards their work was paid to them, however after final adjustment of the bill the amount of Rs. 10,00,000/- stood in their account which was recoverable. In case of 43 | P a g e M/s Jaya Marketing another party namely India Carrying Corporation, advance was given to them for availing the services of their Trucks on contract basis for dispatch of goods. The advance to M/s Krishna Petroleum was given for the business purposes to take the diesel from them for trucks to be taken from India Carrying Corporation. The advance to Mr. S.K. Chopra was given to take his services as manager for the business.
13.2 The Assessing Officer was not satisfied with the reply of the assessee and disallowed the interest on these advances calculated at the rate of 11.88% per annum amounting to Rs. 10,82,122/-. On appeal CIT(A) confirmed the disallowance made by Assessing Officer.
13.3 Before us, the Ld. Authorized Representative of the assessee has submitted that the advances were given for the purpose of business of the assessee. He has reitereated the submissisons made before the authorities below and submitted that the advances to parties M/s Chadha Paper Ltd and India Carrying Corporation were given against the services rendered by them. There was an agreement for transportation of goods with India Carrying Corporation. In case of these two parties the opening balance was credit and the assessee has made the payment during the year which was more than their due and opening amount, therefore, the balance amount is receivable at the end of the year. These balances are shown in the running account with the parties. He has submitted that there are no diversion of borrowed funds for advances to these parties, therefore, no disallowance of interest is called for. He has further 44 | P a g e M/s Jaya Marketing submitted that even the amount given to these parties is much less than the credit balance of the partiner's capital account. The payments were made in the course of business.
13.4 On the other hand, the Ld. CIT(DR) has relied upon the orders of authorities below and submitted that the special auditor has observed that the advances were given to the non trade parties and the assessee has failed to justify the advances given to these parties.
13.5 We have considered the rival submissions as well as relevant material on record. The details of opening balance, receipts, payments made during the year and closing balance in respect of four parties extracted by the Assessing Officer at page 35 of the assessment order are as under:-
S.No. Particulars Opening Receipts
Balnce Payments Balance
1 Chadha (18,64, 125) NIL 10,00,000
Papers Ltd 28,64,125
2 Indian (8,50,000) 5,00,000 48,50,000 35,00,000
Carrying
Corpn
3 S K Chopra 10,00,000 7,50,000 0 2,50,000
4 Krishna 2,00,470 NIL 13,94,650 15,95,120
Petroleum
Total 12,00,470 12,50,000 91,08,775 63,45,120
45 | P a g e
M/s Jaya Marketing
13.6 We further note that the special auditor has made the remarks regarding the advances given to these four parties that the assessee has not explained the background of these parties and purpose of giving advances, therefore, they were unable to ascertain whether the advances given in a normal course of business. It was further pointed out that the net cash out flow during the year was Rs. 51,44,650/- to these parties. As it is evident from the details given above the opening balance of two of these parties are credit and not debit, therefore, the assessee had to pay the due to these parties namelly Chadha Papers Ltd. and India Carrying Corporation. The payment made during the period is more that what was due as per the opening balance and, therefore, the closing balance was receivable from these parties. The Assessing Officer has not examined the question whether the assessee has any businees with these parties but simply relied upon the observations of special auditor. It appears from the details that there is running account of these parties and the dues and payments made in the earlier year are brought forward as opening balances in case of all these four parties. Though in some of the cases the opening balance is not receivable but payable to these parties. There is no dispute that the net cash out flow during the year is only Rs. 51,44,650/- whereas the Assessing Officer has calculated the disallowance of interest on a sum of Rs. 91,08,775/- which is not correct because this amount includes the opening payable balance to at least two parties and the amount received during the year from the other two parties. Hence the interest calculated on a sum of Rs. 91,08,775/- is highly arbitrary and incorrect figure because the net cash cash outflow during the year was only 51,44,650/-. Further the Assessing Officer has also not examined the date of out flow and calculated the interest for the 46 | P a g e M/s Jaya Marketing entire year, therefore, the action of the Assessing Officer is not justified in appying the rate on the wrong amount and that too for the entire year without considering the actual date of payment and period for which these advances remained with other parties during the year under consideration. Further we note that credit balance in the partner's capital account as on 31.3.2005 is Rs. 10,28,26,388/- and in comparison to the credit balance of the partner's capital accoount, the amount of Rs. 51,44,650/- which is net out flow during the year, is very negligible. Therefore, without going into the controversy whether these advances were given for the business purpose and in the normal course of business of the assessee, we find that when the assessee is having its own sufficient funds being the credit balance in the partner's capital account then no disalalowance is called for on this account. Accordingly we delete the disallowance made by authorities below.
14. For the A.Y. 2003-04 and 2004-05, the assessee has raised the common grounds. The grounds raised by the assessee for 2003-04 are as under:-
1 On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals)-23, Mumbai, erred in confirming the issuance of notice u/s 148 by the Assessing Officer and in reopening the assessment under the provisions of section 147 of the Act.
2. On the facts and ina the circumstances of the case and in law the Ld. Commissioner of Income Tax (A)-23 Mumbai is erred in confirming the addition made by the Ld. Assessing Officer amounting to Rs. 8,37,02,257/- calculated at average G.P. @ 9.29% of turn over for the relevant previous year under consideration.
47 | P a g e M/s Jaya Marketing 14.1 Ground no. 1 is regarding validity of reopening of the assessment .
14.2 We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. The assessment for these two assessment years were completed u/s 143(3). Subsequently the assessments were reopened u/s 147 on the ground as recorded in the reason that the business of the assessee during the A.Y. 2003-04 , 2004-05 and 2005-06 is same and has not changed and, therefore, for the A.Y. 2005-06 wherein the books results of the assessee were rejected, the income for these assessment years escaped assessment as the assessee has artificially reduced the gross profit. The sole reason for reopening of the assessment for these years is the enquiry made by the Assessing Officer as well as by the special auditor for the A.Y. 2005-06 and finally the income of the assessee was assessed by rejecting the Books of Accounts. Therefore, when the Assessing Officer has found that there is no change in the business of the assessee during these three years then the re-assessment on the basis of assessment passed for the subsequent year where additional material has emerged before the Assessing Officer to lead to the formation of belief that income chargeable to tax has escaped assessment is a valid reason for reopening of assessment. The enquiry made in the subsequent assessment year and the information and material gathered as a result of the enquiry is a tangible material to reopen the earlier assessments.
Therefore, when there is new tangible material gathered on the basis of the enquiry made during the course of subsequent assessment years, then the reopening cannot be said to be based on change of opinion.
48 | P a g e M/s Jaya Marketing Accordingly in the absence of any contrary proposition brought before us by the assessee, we do not find any error in the impugned orders of CIT(A) upholding the validity of reopening of assessments for A.Y. 2003- 04 and 2004-05.
15. Ground no. 2 is regarding the addition made on the basis of average G.P. at 9.29% of turnover taken from the A.Y. 2005-06.
15.1 We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. In view of our finding for the A.Y. 2005-06, we uphold the addition made by Assessing Officer on account of G.P rate for these assessment years.
14. In the result appeal of the assessee is partly allowed.
Order pronounced in the open court today i.e 25-06-2014
Sd/- Sd/-
(Rajendra) (Vijay Pal Rao)
(Accountant Member/ysys[kk lnL;)
lnL; U;kf;d lnL;)
(Judicial Member/U;kf;d lnL;
Mumbai dated 25-06-2014
SKS Sr. P.S,
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "J" Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
49 | P a g e