Income Tax Appellate Tribunal - Chandigarh
Ito, Patiala vs Assessee on 18 January, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES, CHANDIGARH
BEFORE SHRI H.L.KARWA, HON'BLE VICE PRESIDENT &
MS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER
ITA No. 892/Chd/2014
(Assessment year : 2010-11)
The ITO, Ward-2, Vs. M/s Jiwan Agricultural Implements
Patiala Workshop Co-operative Industrial
Societ y Ltd, Patiala
PAN No. AAAAJ069L
C.No. 47/Chd/2014
(in ITA No. 892/Chd/2014)
(Assessment year : 2010-11)
M/s Jiwan Agricultural Implements Vs. The ITO, Ward-2,
Workshop Co-operative Industrial Patiala
Societ y Ltd, Patiala
PAN No. AAAAJ069L
(Appellant) (Respondent)
Appellant By : Mrs Rajinder Kaur
Respondent By : Sh. Tej Mohan Singh
Date of hearing : 15.12.2015
Date of Pronouncement : 18.01.2016 .
ORDER
PER H.L.KARWA, VP The appeal filed by the Revenue and Cross objection by the assessee are directed against the order of C IT(A), Patiala dated 22.8.2014 relating to assessment year 2010-11. Ground No.1 of the appeal reads as under:- 2
"1. In the facts and circumstances of the case, Ld. CIT(A) has erred in estimating G.P. at 12.05% as a measure of fair estimation without any basis after ignoring the fact that the AO had estimated G.P. at 13.50% on the basis of comparable cases, without appreciating that other factors being same, the G.P. rate of comparable businesses having higher turnover would normally be expected to be lower than businesses having lower turnover on account of pressure on margins to increase sales.
2. Ground Nos. 1 & 2 of the Cross objections are as under:-
1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding the rejection of books of account which is illegal, arbitrary and unjustified.
2. That without prejudice to the above, the Ld. Commissioner of Income Tax (Appeals) has further erred in sustaining the addition of Rs. 5,72,457/- out of total addition of Rs. 14,01,480/- made by the assessing officer applying GP rate of 13.5% as which is arbitrary and unjustified.
The Revenue is in appeal against the order of C IT(A) in reducing the GP rate from 13.50% to 12.o5% and the assessee is aggrieved with the addition of Rs. 5,72,457/- sustained by the CIT(A). The assessee is engaged in the manufacturing of Harvester Combines and agricultural implements and sales thereof. The Assessing officer while examining the books of account and corresponding documents produced by the assessee noticed several discrepancies which are mentioned in para 2A of the assessment order. In view of the defects noticed b in the books of account, the Assessing officer required the assessee to give reasons as to why its books of account should not be rejected by appl ying 3 the provisions of section 145(3) of the Income-tax Act, 1961 (in short 'the Act'). In response to the questionnaire issued by the Assessing officer, the assessee submitted its repl y on 14.12.2012. The Assessing officer did not find any force in the submissions made by the assessee. The Assessing officer came to the conclusion that books of account maintained by the assessee were not reliable and true income could not be deduced therefrom for the following reasons:-
(i) No quantitative details of the opening stock of goods as on 01-4-2009 was furnished by the assessee even the method of valuation of opening stock was also not furnished on the plea that the assessee had not maintaining quantitative details of the number of items used to the manufacturing of harvester combines and its parts are large.
(ii) No quantitative details of the closing stock of goods as on 31/03/2010 was furnished by the assessee even the method of valuation of opening stock was also not furnished on the plea that the assessee had not maintaining quantitative details of the number of items used to the manufacturing of harvester combines and its parts are large.
In view of the above reasons, the Assessing officer rejected the books of account of the assessee u/s 145(3) of the Act. The Assessing officer made the addition on account of low GP rate. The assessee had shown total turn over of Rs. 5,71,74,095/- declaring GP of Rs. 63,17,011/-. The GP rate declared by the assessee was at 11.05% of the gross turn over. Thus, the GP rate of 11.05% declared by the assessee was on lower side as compared to other manufacturer of the Harvester combines. The Assessing officer proposed to appl y GP rate of 14.21% which was declared by the M/s Standard Corporation of India Barnala. After considering the assessee's repl y, the Assessing officer estimated the GP rate of 13.5% on the turnover of Rs. 5,71,74,000/- by taking into consideration the repl y of the assessee. By appl ying the above ratio, the GP came to Rs. 4 77,18,490/- as against GP of Rs. 63,17,010/- disclosed by the assessee. Thus, there was a difference of Rs. 14,01,480/-, which was added to the returned income of the assessee.
3. On appeal, the C IT(A) upheld the order of the Assessing officer as far as rejection of books of account are concerned. In this regard, the Ld. C IT(A) has observed as under:-
"5.3.........However, the actual consumption of the material for the production of combines could not be authenticated by the appellant in absence of any input or output statement of raw materials. Rather, it is submitted that the raw materials are issued in bulk to the shop floor and the closing stock is physically verified at the end of the year. The weight of the combines manufactured is also not given to co-relate the consumption of raw material and generation of scrap. Thus, the consumption of raw material & generation of scrap could not be qualified in term of quantity / weight etc. by way of any cogent evidence or document / report etc. Therefore, in view of this deficiency, I am of the opinion that the books of accounts are rightly rejected by the A.O."
As regards the GP rate, the Ld. C IT(A) has estimated the same at 12.05% as against 13.50% applied by the Assessing officer, observing as under:-
"As regards, estimation of GP, it is submitted by the appellant both during the assessment proceedings and the appellate proceedings that the actual GP in this year is 12.99% compared to 12.46% in A.Y. 2008-09 and 12.35% in A.Y. 2009-10. The GP shown at 11.05% in this year was actually due to different accounting treatment given to certain expenses in this year in comparison to earlier two years. During this year, the consumable expenses of Rs. 4,79,491/-, oil and lubricant of Rs. 3,68,640/- and Toll Accessories Rs. 2,60,430/- were charged to manufacturing 5 account instead of P&L A/c as done in the proceeding years resulting in decrease in GP rate by 1.94%. The contention is not rebutted by the A.O. Thus, it is noted that the GP is actually progressive with respect to the two earlier years. The A.O. has however contended that as per correct accounting system, consumable expenses etc should be debited in manufacturing account and, therefore, the actual GP in this case is 11.4%. The A.O. has further selected average rate of 13.5% on the basis of GP rate declared by M/s Standard Corp. India at 14.21% and M/s Preet Agro Industries at 12.72%. Thus, the facts of the case shows that though the GP is progressive vis-à-vis earlier year on the basis of same accounting system, yet it is low compared to the two comparable cases taken by the A.O. In this connection, the appellant has further contended that the turnover in these two comparable cases are very high compared to the case of the appellant. It is noted that the turnover in these cases are in the vicinity of 100 crore in comparison to 5.72 crores for the assessee as contended in the submission by the appellant. Looking into the totality of the case, in my opinion, it will be fair to increase the GP by 1% over and above GP rate of 11.05% declared by the appellant. Thus, the addition to this extent is confirmed and the balance addition is hereby deleted. Accordingly, the gross profit will come to Rs. 68,89,467/- compared to Rs. 63,17,010/- declared by the appellant and the addition sustained, therefore, is Rs. 5,72,457/-."
4. We have heard the rival submissions and have also perused the materials available on record. Ms. Rajinder Kaur, Ld. DR heavil y relied on the order of the Assessing officer in support of Revenue's case. Shri Tej Mohan Singh, Ld. Counsel for the assessee, on the other hand, reiterated the submissions made before the authorities below. After perusing the orders of the lower authorities and considering the entire facts and circumstances of the present case, we are of the view that Assessing officer has correctl y rejected the books of account of 6 the assessee. In our view, the Ld. CIT(A) has rightl y upheld the action of the Assessing officer as regards the rejection of books of account. We full y agree with this observation of the Assessing officer that in view of the deficiencies pointed out in books of account maintained by the assessee, it can safel y be held that the same are not reliable and true income could not be deduced therefrom. Admittedl y, the assessee had no records regarding the annual consumption of the material for the production of Combines. Further, there were no records of raw material consumed. Rather, it is claimed that the raw materials were being issued in bulk to the shop floor and the closing stock was being physicall y verified at the end of the year. The authorities below have also pointed out that the weight of the combines manufactured was also not provided to co-relate the consumption of raw material and generation of scrap. Admittedl y, even the GP declared by the assessee was on lower side and no plausible explanation has been given by the assessee in this regard. Taking into consideration the entire facts and circumstances of the present case, we uphold the order of CIT(A) regarding rejection of books of account.
5. As regards, estimation of GP also, we do not find any infirmit y in the order of the CIT(A). In this case the Assessing officer has cited two comparable cases where GP rate declared by the said concerns was 14.21% and 12.72%. However, the contention of the assessee was that the turnover in these two comparable cases were very high as compared with the case of the assessee. According to the assessee, the turnover in these cases was in the vicinit y of 100 crores in comparison to 5.72 crores in the case of assessee. Admittedl y, the assessee has declared GP rate of 11.05% for the year under consideration which cannot be accepted in view of the several discrepancies noticed in the books of account. In our opinion, the CIT(A) was fair enough to increase the GP by 1% over and above the GP rate of 11.05% declared by the assessee. We observe that 7 the Ld. CIT(A) has applied GP rate of 12.05% after taking into consideration the nature of assessee's business and relevant facts of the present case. Therefore, we do not see any valid ground in interfering with the order of C IT(A) on this issue. Consequentl y, we dismiss ground No.1 of the Revenue's appeal and ground Nos. 1 & 2 of the Cross objections preferred by the assessee.
6. Ground No.2 of the appeal reads as under:-
2. In the facts and circumstances of the case, Ld. CIT(A) has erred in deleting the addition of Rs. 30,39,000/- made by the AO without appreciating that the assessee had failed to discharge its onus in respect of amounts claimed to be received as trade advances, especially when the AO had made efforts to independently examine the explanation of the assessee regarding the nature and source of the credits.
7. The Assessing officer observed that as per the balance sheet the assessee had shown advances from customers to the tune of Rs. 30,39,000/-. The Assessing officer required the assessee to prove the genuineness of the advances as the onus of proving source of amount credited in its books of account in the form of advances from customers was on the assessee. In response to the said query, the assessee submitted that the sales of Combines were made during the next year to all the customers from whom advances were received. The particulars of bills issued and the copies of the bills are as under:-
Sr. Name of Outstanding Bill No. Bill Amount
No. the as on and Date In Rs.
Customer 31/03/2010
1 Ajmer 14,20,000/- 052 dated 1420,000.00
Singh 02/04/2010
2 Haleshwar 5,19,000/- 085 dated 1430,000.00
Kumar 07/03/2011
8
3 Kuldeep 10,30,000/- 051 dated 1350,000.00
Singh 02/04/2010
4 Ram 20,000/- 053 dated 1480,000.00
Niwas 06/04/2012
Yadav
5 Sharvan 50,000/- 355 dated 116,050.00
Kumar 17/04/2010
Total 30,39,000/
The Assessing officer rejected the repl y of the assessee for the reasons sated at pages 33 & 34 of the assessment order and made the addition of Rs. 30,39,000/- u/s 68 of the Act.
8. On appeal, the CIT(A) deleted the addition stating that the assessee had furnished the names and complete addresses of the customers, copies of the account and copies of the sale bills countersigned by the customers during assessment proceedings. The Ld. CIT(A) further observed that Assessing officer never desired the copies of the Registration Certificates and temporary number of machines sold by the assessee. The Ld. C IT(A) also stated that for non-compliance of notices u/s 131 and 133(6) of the Act, by trade customers, the assessee could not be held responsible. The Ld. C IT(A) has categoricall y stated that the Assessing officer made the addition u/s 68 on the ground that source of the credits is not explained and on the presumption that if advance is taken in this year then the sales should also be executed in this year. According to the C IT(A) no defect in the sale bills / books regarding execution of sale subsequentl y was pointed out by the Assessing officer. Accordingl y, the C IT(A) held that there was no justification in making the addition u/s 68 of the Act,.
9. We have heard the rival submissions. Shri Tej Mohan Singh, Ld. Counsel for the assessee pointed out that the amount in question was received in 9 normal course of business. These are trade advances / deposits and not in the nature of a loan / borrowing and cash credits. He further pointed out that the Assessing officer was informed that these advances were adjusted against sale of goods made in the next financial year. The assessee dul y furnished names / complete addresses of customers, their respective copies of accounts as per books of account and copies of the sale bills countersigned by customers. It is apparent from the records that the assessee had sold goods to the customers and sale bills were produced before the lower authorities. The assessee had also furnished names / complete addresses of customers and their respective copies of account as per books of account and copies of the sale bills countersigned b y the customers. Thus, the assessee has established the identit y of customers and also the genuineness of the transactions. Copies of account of aforesaid five parties for the assessment year 2011-12 as per the books of account showing that Harvest combines have been supplied by sale payments and adjustments of advances during the year under appeal. These documents are available at pages 28 to 44 of the assessee's compilation. It is also apparent from the records that in two cases namely S. Ajmer Singh and Ram Niwas Yadav, the assessee received 100% advance in March, 2010 but vehicles were delivered in April 2010 and accordingly booked sales in books of account. Thus, there was no justification in rejecting the explanation of the assessee. We may also observe here that the Assessing officer was not justified in invoking the provisions of section 68 of the Act in this case because section 68 is not applicable to advance deposit received from debtors against future sales. In a sale of goods transaction, the seller has no business to verify / establish creditworthiness of the customers. The facts of the present case are clear that the amounts received by the assessee from trade creditors during the course of business cannot be considered loan or cash credit for the purposes of section 68 of the Act. Thus, considering the entire facts and circumstances of the present case, we decline to 10 interfere with the findings of C IT(A) on this issue. Accordingl y, we uphold the order of C IT(A). Consequentl y, we reject ground No.2 of the Revenue's appeal.
10. In the result, the appeal of the Revenue and the Cross objections by the assessee are dismissed.
Order pronounced in the Open Court on 18.01.2016
Sd/- Sd/-
(ANNAPURNA MEHROTRA) (H.L.KARWA)
ACCOUNTANT MEMBER VICE PRESIDENT
Dated 18 t h January, 2016
Rkk
Copy to:
1. The Appellant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR