Income Tax Appellate Tribunal - Rajkot
M/S. Keshodwala Foods,, Veraval vs The Joint Commissioner Of Income Tax, ... on 26 September, 2018
आयकर अपील य अ धकरण, राजकोट यायपीठ, राजकोट ।
IN THE INCOME TAX APPELLATE TRIBUNAL
RAJKOT BENCH, RAJKOT
LkoZJh olhe vgen
vgen]] ys[kk lnL; ,o Ek/
Ek/kqkqferk jkW;] U;kf
U;kf;d
kf;d lnL; ds le{kA
BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER
And SMT MADHUMITA ROY, JUDICIAL MEMBER
आयकर अपील सं./I.T.A.
No.16/Rjt/2013
( नधा रण वष / Assessment Year :2009-10)
M/s. Keshodwala Foods, बनाम/ JCIT,
305 - GIDC Industrial Estate, Vs. Junagadh Range - 1,
Somnath Road, Veraval. Junagadh.
थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. :AADFK 6651 Q
(अपीलाथ /Appellant) .. ( यथ / Respondent)
अपीलाथ ओर से/ Appellant by : Shri D. M. Rindani, A.R.
यथ क! ओर से/Respondent by: Shri R. K. Sinha, CIT- D.R.
ु वाई क! तार ख/
सन Date of Heari ng 02/07/2018
घोषणा क! तार ख /Date of Pronounce ment 26/09/2018
आदे श / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)-IV, Rajkot [CIT(A) in short] vide appeal no.CIT(A)-IV/0226/11-12 dated 30.11.2012 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961(here-in-after referred to as "the Act") dated 28.12.2011 relevant to Assessment Year (AY) 2009-10.
-2-2. The grounds of appeal raised by the assessee are as under:-
"1. The Commissioner of Income Tax (Appeals) - IV, Rajkot erred in upholding the action of the Assessing Officer of rejection of books of accounts u/s. 145(3) of the IT. Act, 1961.
2. The Commissioner of Income Tax (Appeals) - IV, Rajkot erred in estimating the gross profit at 12% as against 11.36% declared by the appellant and thereby sustaining addition of Rs.1,00,00,000/-
3. The Commissioner of Income Tax (Appeals) - IV, Rajkot erred in holding that there was suppression of yield.
4. The Commissioner of Income Tax (Appeals) - IV, Rajkot erred in holding that non-production of some of the creditors led to inflation of purchases.
The appellant craves leave to add, amend, alter, withdraw any ground of appeal anytime upto the hearing of this appeal."
3. The inter-connected issue raised by the assessee is against the rejection of the books of accounts u/s 145(3) of the Act and estimating the gross profit @12% against the gross profit declared by the Assessee @11.36% and sustaining the addition of Rs.1,00,00,000/-.
4. Briefly stated facts are that the assessee is a partnership firm and engaged in the manufacturing and export of Fish. The assessee is also engaged in the trading business of onion and paper board. The assessee for the year under consideration filed its return of income declaring income of Rs. 1,34,93,550/-, which was processed u/s 143(1) of the Act dated 7th March, 2011. The aforesaid total income was declared by the assessee after including other income as detailed under:
-3-(a) DEPB entitlement sale Rs. 19,45,26,824/-
(b) Exchange rate difference Rs. 39,110/-
(c) Forex hedging Profit Rs. 3,34,636/-
(d) Remission of liability Rs. 73,725/-
(e) Interest Income Rs. 2,25,320/-
Total:- Rs. 19,51,99,615/-
Declared gross profit is Rs. 18,75,86,634/- (11.69%)
Declared net profit is Rs. 1,54,08,256/- (0.91%)
Gross income after Rs. 1,35,19,046/-
remuneration to partners
is
Total taxable income is Rs. 1,34,93,550/-
4.1 The AO during the assessment proceedings observed certain facts as detailed under:
i. If other income is excluded from the total income of the assessee then there would be a situation of gross loss as well as net loss. Thus, the AO was of the view that such situation in the export business is very much abnormal. ii. The assessee has shown major purchases from the unregistered parties, therefore the veracity of the same is not variable. Moreover, the assessee is maintaining only internal vouchers in relation to such purchases. iii. The assessee during the year has declared yield from the processing of the fish @74.06% whereas in the immediately preceding year the yield was declared @100%. Furthermore, the assessee has not shown any sale in his income tax return on account of wastage product. iv. The expenses claimed by the assessee during the year under consideration have increased manifolds in comparison to the earlier years.
v. The assessee has also not maintained proper books of accounts.-4-
In view of above, the AO proposed to reject the books of accounts and accordingly a show-caused notice was served upon the assessee.
4.2 In compliance to it, the assessee submitted as under:
i. In the fish Industry the purchases are normally made from the unregistered parties. It is because there is no requirement for the parties dealing in fish business to get registered either under VAT or excise Act. Therefore, the purchases were made from the unregistered parties. However, all the internal purchase bills, general inward/outward register and stock registers were duly maintained.
ii. At the time of purchase, the amount of DEPB to be received on account of the exports has been factored in determining the purchase price of the fish. The Government is providing DEPB in relation to export so that the parties can sale their products at the competitive rate in the international market. Thus, the DEPB was directly linked with the purchases of fish. Therefore, the income from DEPB cannot be treated as separate income over and above the business income of the assessee.
iii. There is no standard criterion for working out the yield from the processing of fish. The yield normally depends on various factors such as processing condition, quality and size of fish and other facilities available with the assessee.
iv. The yield shown by the assessee is within the parameter specified by the industry. Therefore there is no question of having any doubt on the yield from the processing of fish.-5-
v. There was indeed wastage in the processing of fish.
Therefore the yield @ 74% was declared but there was no realizable value of such wastage. As such, the assessee has incurred cost on getting the wastage removed from its processing unit by arranging the people for these work.
vi. The assessee also submitted that the expenses incurred by it for the year under consideration were similar to the expenses incurred in the immediate preceding assessment year. Wherever, there was any increase in the expenses but the same was normal due to increase production level.
vii. The assessee however submitted that in respect of certain expenses there was substantial increase due to unavoidable situation. Such expenses include electricity charges, repair and maintenance charges, and ice & water expenses. 4.3 The assessee explained the above expenses as under:
a. Electricity Charges:-
The electricity charges were paid to the Government Company. In fact the charges have increased due to the fact that a new plant was installed. There was also hike in the rate of electricity charges. Moreover, electricity charges cannot be linked with the production because it has to be incurred to keep its cooling system on irrespective of the quantum of materials stored therein.-6-
b. Repairs and Maintenance charges:-
These charges have increased by about 43% in comparison to the earlier year due to the fact that there was increased in CETP for second plant. Similarly, the major electricity cable was changed and therefore, an expense of Rs.10,00,000/- was incurred.
c. Ice and Water consumed Charges:-
There is increase in the turnover by 33% but there is an increase in the expenses of ice and water about 16.30% which is quite reasonable after having regard to the increase production.
4.4 For other expenses, the assessee justified that these were incurred only and exclusively for the purpose of the business and no relation with the production can be made.
4.5 There was no defect in the books of accounts maintained by the assessee. The GP ratio declared by the assessee is almost at par with the GP rate declared in the preceding years.
4.6 The inspector has not verified the facts during his visit. The visit of the inspector was only for two and half hours. The inspector in his report wrongly mentioned that he stayed in the factory to verify to the books of the accounts of the assessee for the whole day. The assessee also requested for cross examination of the inspector of Income Tax.-7-
4.7 However, the AO disregarded the contention of the assessee by observing as under:-
i. The purchases shown by the assessee has nothing to do with the DEPB provided by the Government. Therefore, the argument of the assessee that the price for the purchase of the fish has been fixed after factoring the amount of DEPB is not correct. Therefore, there is no question of passing on the DEPB to the fisherman.
ii. The AO also observed that the assessee in earlier year was showing GP @34% because in those years the income of the assessee was exempted u/s. 80 HHC of the Act. Thus, the argument of the assessee that the amount of DEPB has passed on to the fisherman was rejected.
iii. The sudden fall in the production/yield to 74% from 100% production in the immediate preceding year is very abnormal and the same was not verifiable from the available records.
iv. The explanations submitted by the assessee were not supported on the basis of evidence.
v. The water expenses were incurred by the assessee on the plant not owned by it. Therefore, these expenses were not verifiable.
vi. There was increase in the production as well as expenses which resulted in higher amount of profit in absolute figure but in terms of percentage of the profit there was decrease from 1.15% to 0.93% of the total turnover.-8-
4.8 In view of above, the AO was of the view that the assessee has suppressed production as well as inflated expenses. Therefore, the AO rejected the books of accounts u/s 145(3) of the Act and estimated the profit @1% of the total sale. The AO accordingly, disallowed the loss claimed by it and worked out the profit by observing as under:
"5.2 Since it is concluded that assessee has suppressed production as well as, inflate expenses net profit is estimated @1% (in addition to DEPB income) on estimated sales Rs.1,70,00,00,000/-. Net profit so estimated comes to Rs.1,70,00,000/- as against declared loss of Rs.18,17,29,368/-. Accordingly, an addition of Rs. 19,87,29,368/-
(Rs.18,17,29,368/- + Rs.170,00,000/-) is made to declared income."
5. Aggrieved, assessee preferred an appeal to ld CIT(A). The assessee before the ld CIT(A) submitted that the AO during the assessment proceedings has not pointed out a single instance of irregularity in the purchase and sales. Thus, the purchase and sales were duly accepted by the AO.
5.1 The AO has not challenged the method of accounting for purchases, sales and recording of stock etc. Thus, the method of accounting was duly accepted. The method of accounting adopted by the assessee was also accepted in earlier years.
5.2 For the verification of the production, the bills of purchases were provided to the AO along with quantity mentioned therein. Thus, the production was very much verifiable by the AO. The yield shown by the assessee was within the standards as specified/prevailing in the fish industries.
-9-5.3 Once the books of accounts were rejected by the AO u/s 145(3) of the Act then the assessment should have been framed u/s 144 of the Act whereas, the assessee has framed assessment under section 143(3) of the Act.
5.4 The GP ratio declared by it was almost at par with the preceding years.
5.5 There was a reduction in net profit ratio due to the fact of higher amount of depreciation claimed on the new processing plant.
5.6 The AO has accepted the increase in price in relation to sales by 27% but doubted on the increase of purchase expenses by 21.35% without pointing out any specific defect. There is a direct relation between the exchange rate and cost of purchase price of the fish. If the change in exchange rate is favourable then it will be reflected in the purchase of fish and vice versa.
5.7 The DEPB is given to the assessee in the form of incentive with the sole purpose to get more export business. It is not given for increase in the profit. There is cut throat competition in the international market. Therefore, DEPB is given so that the assessee can export the goods at the competitive rate.
- 10 -
5.8 The yield always depends upon the types of goods, processing unit and accordingly, there is a variation in the output of the products.
5.9 All the expenses were not increased during the year under consideration in comparison to the earlier year but some expenses were also decreased in comparison to the earlier year. As such all the expenses were duly supported on the basis of evidences. Therefore, the same cannot be rejected without pointing out any defect.
5.10 The ld CIT(A) after considering the submission of the assessee deleted the addition made by the AO in part by observing as under:
"6.1 I have gone through the assessment order, submission of appellant and Assessing Officer. The fall in gross profit and net profit in itself cannot be a reason to reject the books of account unless specific instances of bogus purchases, expenses and unrecorded sales and instances of excess stock or other such specific irregularity is detected. A particular expenditure may be disallowable as per I.T.Act if it is capital in nature and not for the purpose of business, however, if it is correctly recorded in books of account, the books of account cannot be rejected on the ground of its non-allow ability under I.T.Act. The DEPB scheme was started somewhere in Assessment Year 1998-
99. Therefore, it is possible that in early days of this scheme, the benefits derived from such scheme could be a windfall gain. However, in a competitive market, the businessmen sacrifices the profit margin, especially when it is a windfall gain to capture the market or to increase his turnover. This is a simple economics and when all businessmen started doing the same, the benefit of DEPB which could have been a windfall gain in 1998-99, gradually becomes a part of sale price consideration for earning normal profit in subsequent years. It is again a coincidence that when the normal forces of economics were responsible in determining and reducing the sale price due to benefit of DEPB in subsequent years till 2004-05, the deduction u/s 80HHC was also withdrawn from the I.T.Act. Therefore, the reduction in GP of the business of appellant during the period 1998-99 to 2004-05 is
- 11 -
apparently due to economics of sale price determination after gradually absorbing the windfall gain of DEPB started since 1998-99 rather than the withdrawal of 80HHC deduction during the same period. I therefore find that the Gross Profit of Assessment Year 2000- 01 and the Gross Profit of Assessment Year under appeal cannot be compared to reach any conclusion of rejection of books of account. The conclusion reached by the Assessing Officer in respect of excessive expenditure on various expenditures is not, based on any finding that appellant has not incurred such expenditures or such expenditures are bogus. These findings may be considered in disallowance of certain expenditure individually but are not material in rejecting the books of account. The report of the inspector in respect of use of bore-well water is for the period not relevant for the period under appeal. Moreover, if the potable water is purchased by the appellant as per the norms of MPEDA because Bore water is saline then it is a requirement of appellant's business and therefore cannot be called excessive and in any case cannot be a ground to reject books of account. The increase in stores expenditure from Rs 2.74 per Kg to Rs.2.99 per Kg is comparable with normal increase in cost and no adverse inference may be drawn from such increase and definitely not for rejecting the books of account. The note at Para 22 of Notes on Accounts is an explanatory statement and not an adverse Audit Remark having any significant impact on the correctness of the accounts or true and fair view of the affairs or the profit of the firm. At times the buyers deduct a small amount from bills but because the banker issues realisation certificate on the basis of overall balance in the account of the appellant with the banker, such short receipt, if any, in a particular case comes to light belatedly, hence reported late. However, the sales are accounted for full value when the materials are shipped and therefore the audit note at best is a cautionary note rather than showing any such defect in books of account on the basis of which books of account may be rejected. The reference by the Assessing Officer to repair work necessity by appellant is a business decision of appellant and apparently insignificant for the purpose of rejecting the books of account. Appellant had commenced its own cold storage plant during the year and therefore the electricity expenses increased from about Rs. 1.046 crore in preceding year to Rs. 2.088 crore in the year under appeal. However, appellant was earlier outsourcing the production and cold storage, which was performed in appellant's own plant during the year under appeal which resulted in reduction of outsourced job work from 2.75 crore to Rs 2.06 crore in the year under
- 12 -
appeal. The increase in materials processed was 20.76% and production was 9.96 %. I find that no adverse inference may be drawn from the consumption of electricity after considering the reduction in outsourced job work expenses, especially for rejecting the books of account. The decrease in yield during the year to 74% from the yield of 81%-82% or even higher yield in earlier Assessment Years, may be a reason for investigation of inflated purchases and unrecorded sales and therefore may be a ground to reject the books of accounts if the investigations provide corroborative evidences. The corroborative evidences may be in the form of examination of unpaid creditors. If such creditors are not identified or confirmed it may indicate inflated purchases and therefore may be a ground to reject the books of accounts. Similarly, appellant has not accounted for the body parts of fish, which are removed during production process. If, these body parts are fond to have market value that would be another ground to reject the books of accounts. These issues were verified during the remand proceeding by the Assessing Officer and are discussed in next para.
6.2 The Assessing Officer made some enquiries during the remand proceedings and I brought out specific facts discussed in para 4. The Assessing Officer found during the remand proceedings that the material which is produced due to beheading, gutting, skinning, deboning etc of the body of fish is only a wastage after recording the statements of the wastage lifter from the premises of appellant. The remand report of the Assessing Officer shows that this material was lifted by wastage lifter and was not worth anything, This shows that such material does not have any market value in respect of which any sale should have been shown. Therefore no adverse view is taken for non accounting of waste material by the appellant in its books. The appellant also submitted the Category-wise raw Fish purchased and production there from for Veraval and Mumbai units as under:
Veraval Unit Item Name Raw Production Sale C/s Yield material Tiny 528 2439083 876352 670736 206144 36 Ribbon Fish 85853 1657854 1624697 1710550 0 98 Squid 130143 1438574 632972 606160 156955 44 Lizard 269195 1315036 184105 453300 0 14 Croaker 14996 1124893 1124893 1038526 101363 100
- 13 -
Cuttle Fish 179 1064343 594775 557082 37872 56
Skipjack Tuna 61405 943434 943434 1000676 4163 100
King Fish 192632 880985 704788 897419 0 80
Kooth 1570 930379 446582 447970 182 48
Pomfrate (S) 74980 803566 803566 724630 153916 100
Baby Reefcod 32464 599722 566777 545374 53868 95
Yellow Fin 48393 524592 493116 485903 55606 94
Tuna (V.G
B.M.C 125550 299775 299775 425325 0 100
Baby Ghole 21100 309326 309326 288102 42324 100
Katti 26100 300945 300945 306360 20685 100
SeerFish 0 314846 314846 262234 52612 100
Sole Fish 36780 364701 364701 360120 41361 100
T. T. Croaker 98322 417126 291988 390310 0 70
Bulleye 4060 324874 107208 39460 71808 33
B.Pomfret 701 102324 102324 101580 1444 100
Horse 4241 221700 221700 185050 40891 100
Mackerell
Long Tail 53887 248267 248267 302154 0 100
Tuna
Red Snapper 931 217169 217169 213818 4282 100
Sea Bream 1645 151358 151358 130082 22921 100
(Kisi)
Eel Fish 19328 255824 250708 223441 46595 98
Baracuda 2440 133503 106802 85151 24091 80
Octopus 10159 278411 180967 128417 62710 65
JapneseThred 0 198386 119032 60122 58910 60
Fin Bream
Leather Jacket 12839 109484 56931 69770 0 52
MahiMahi 4701 265680 119556 123862 395 45
Suraj 117820 137439 61847 179668 0 45
8/Duck 7444 1280 1280 1140 7584 100
Ch.Pomfret 14819 68231 68231 83050 0 100
Chaksi 0 5409 540 0 5409 100
Crabe 0 1244 1244 0 1244 100
Dorab 14660 6058 6058 6280 14438 100
Emporer 26800 85346 85346 72375 39771 100
Flounder 0 34769 34769 23470 11299 100
- 14 -
(Farva)
Hilsha 13329 73031 73031 86360 0 100
I/Halibut 1180 67 67 0 1247 100
I/Halibut 0 670 670 0 670 100
I/Mackerel 35991 10115 10115 9349 36756 100
Indian 0 20 20 0 20 100
Halibut(Hariy
Kukariya 0 60 60 0 60 100
Magra 0 3 3 0 3 100
Mendali 0 560 560 560 0 100
P/Emporer 0 42707 42707 30989 11718 100
Para 0 60 60 0 60 100
Popat 0 1314 1314 0 1314 100
Sakra 0 1546 1546 0 1546 100
Sardin 0 1679 1679 0 1679 100
Seri 0 226 226 0 226 100
Travally 7435 43724 43724 51071 88 100
Varara 0 2630 2630 0 2630 100
W/Snaper 1351 20531 20531 14765 7118 100
Shole 16890 39174 18804 35550 144 48
Cat Fish 25880 28732 7183 11370 21693 25
Lobster 1270 0 0 1270 0
Onion 0 25040 25030 0 25030 100
Total 1619990 18867818 13273801 13440949 1452842 70
Mumbai Unit
Item Name o/s Raw Production Sale C/s Yield
material
RIBBON 38656 1181483 1158124 1196780 0 98
FISH/seer/H-
mackeral/
SILVER/ 24780 1014580 1014580 1018760 20600 100
YELLOW
CROAKER
LONG TAIL 0 306201 306201 242474 63727 100
TUNA
BABYGHOLE 75 53545 53545 53620 0 100
- 15 -
KATTI FISH 24 53670 53670 52960 734 100
KING FISH 1921 53439 42751 35316 9356 80
BLOOD RED 2610 24530 24530 27140 0 100
SNAPPER
CUTTLE 6934 32191 26906 33840 0 84
FISH
MALABAR 0 18694 18694 18420 274 100
TRAVEL Y
SILVER 6320 23885 23885 28830 1375 100
POMFRET
SOLE FISH 410 18230 18230 18640 0 100
B.M.C. 0 2660 2660 580 2080 100
INDIAN 0 9215 9215 6218 2997 100
MACKEREL
Black 0 49 49 49 100
pomfrate
Total 81730 2792371 2753040 2733578 101192 99
The above list is arranged in order of quantity of fish of different variety consumed in the business of appellant for production. Appellant has shown an average yield of 99% in Mumbai unit and an average yield of only 70% in Veraval Unit. The main contributor to a lower than average yield in Veraval Unit is the processing of Tiny, squid, Lizard fish, cuttle fish, kooth, TT Croaker, and Bulleye. If these fish are removed from the above table, the average yield in other fish would be about 93% in Veraval Unit which is within acceptable range. Therefore, the reason for lower than normal yield in Veraval Unit of appellant is mainly on account of processing of the Fish as under:
Item Name yield Tiny (Shrimps) 36 Squid (Cepholopods) 44 Lizard Fish (FIN FISH) 14 Cuttle Fish 56 (Cepholopods) Kooth (FIN FISH) 48 - 16 - T.T. Croaker (Fin Fish) 70 Bulleye (FIN FISH) 33
The yield in the processing of above fish is responsible for overall low yield in case of appellant. Assessing Officer as well as appellant both have stated that the yields of MPEDA may be applied for correct estimation of yield. However, none of them could provide any list from MPEDA. Therefore, in absence of any further clarification provided by either the Assessing Officer or the appellant the analysis is made based on material made available by appellant, material made available in similar appeals and the information available in internet. It appears that the yield of whole fish sold without any removal of body part may be 100%. The yield of fish sold after removing the head and fins may be 85%-90%. The yield of fish sold after further removing the internal organs such as intestine etc may be 65%-75%. The yield offish after further removing skin and bones may be 45%-60%. There may be further loss of water at the time of "Freezing" in the form of drip loss and in case of Shrimps, this loss is higher because the water content in Shrimps is very high. Moreover, same fish may be sold as whole fish, headless fish or after removal of all non-edible parts. Therefore, the yield in the same fish may vary from 40% to 100%, if the final product is sold as different combination of whole, headless, fillet (only meat) etc to different customers. Therefore, it is not possible to say whether the yield shown by appellant is correct or not unless the appellant has followed a particular process on a particular fish. However, a yield below 40% in case of most of the fish and in case of Shrimps a yield below 35% would be unusual. In case of appellant, Tiny is a shrimp and therefore yield of 36% is a possibility. However, the yield in case of Lizard Fish (14%) and Bulleye (33%) which are not in the category of shrimps, is less than even 40%. Such yield is very unlikely even if the removal of all non edible body parts of fish is considered. Further, there was a long list of creditors out of which Assessing Officer selected 39 creditors and issued summons to them for verification during remand proceeding. These were all the creditors of quite high amount and krefore it was not possible that they could have vanished after a few deals with the appellant. Out of these 39 creditors, 29 creditors confirmed their transactions with appellant and remaining 10 did not appear before the Assessing Officer. Assessing Officer asked the appellant to bring them before the Assessing Officer for examination. However, none of them were produced by appellant before the Assessing Officer. The verification of creditors did not bring out any undisputable negative evidence against the appellant,
- 17 -
however, the non production of remaining 10 creditors by appellant before the Assessing Officer after they did not attend before the Assessing Officer does not absolve appellant of its own obligation to prove the creditors correct. I must say that 10 out of 39 creditors were not proved incorrect by the Assessing Officer at the same time they were also not proved correct by the appellant. In such a situation, due to evidences of yield suppression, the non production of these 10 creditors by appellant before the Assessing Officer gains more value and indicates the possibility of inflation of purchases. I therefore hold that the books of account of appellant are rightly rejected by the Assessing Officer mainly on account of yield suppression. In Assessment Year 2008-09, and even in earlier Assessment Years the yield was about 81%-82% or more. The yield has reduced to about 74% in the Assessment Year under appeal. Normally, if the yield goes down due to selecting a new finished product, which includes any or all of yield losing processes such as head removal, fins removal, internal organs removal, skin removal, bone removal etc, the GP does not vary because the price of finished product also increases accordingly. In case of appellant, the GP has also reduced in the Assessment Year under appeal in comparison to earlier years, which supports the above evidences of yield suppression and subsequently the profit suppression. Assessing Officer has stated that the GP of the business of appellant was 11.43% in Assessment Year 2008-09 in comparison to GP of 11.36% in the Assessment Year under appeal. However, considering the evidence and quantum of suppression of yield mainly in Lizard Fish in the Assessment Year under appeal and the fact that appellant could not prove creditors of about Rs 1.38 crore as genuine during the remand proceeding, GP should be estimated at about 12% instead of 11.36% reflected by the appellant. Therefore, on a turnover of about Rs. 165 crore, estimated addition of Rs.1,00,00,000/- is sustained. I direct the Assessing Officer to reduce the addition from Rs. 19,87,29,368 to Rs. 1,00,00,000/- and reduce the total income of the appellant accordingly.
5. Ground No 1 to 17 of the appeal of assessee are partly allowed."
5.11 Being aggrieved by the order of Ld CIT(A) assessee is in appeal before us.
- 18 -
6. The ld AR before us filed a paper book which is running from pages 1 to 146 and submitted that out of 39 sundry creditors 29 creditors appeared before the AO which have confirmed the transaction with the assessee.
6.1 The assessee with other creditors was purchasing the goods on regular basis and the payment to them has been made in the later years.
6.2 The ld. AR further submitted that the AO was provided with the details of all the purchases and sales as well as opening stock and closing stock and no deficiency was pointed out by the AO during the assessment proceedings.
6.3 The ld AR in support of his claim drew our attention on the details of purchases and sales, which are placed on pages 18-55 and 71- 89 of the paper book.
6.4 The ld AR also filed the details of the daily stock register on the sample basis in respect of certain fishes which are placed on pages 56 to 59 of the paper book, which was duly accepted by the AO during the assessment proceedings.
6.5 The ld AR in further submitted that the details of the payment to the sundry creditors were duly submitted before the ld CIT(A).
- 19 -
7. On the other hand, the ld DR submitted that no stock register was produced before the AO. Therefore, the books were rejected.
7.1 There was no plea taken by the assessee before the ld CIT(A) that creditors were paid in the subsequent years. The ld DR vehemently supported the order of authorities below.
8. We have heard the rival contentions and perused the materials available on record. In the present case, the books of accounts were rejected by the AO on account of several reasons which have already been discussed in the preceding paragraph. However, the CIT(A) upheld the order of the AO for the rejection of the books of accounts due to the following reasons:
i. There was very less yield in the case of lizard fish and bulleye fish which is 14% and 33% respectively.
ii. All the sundry creditors did not appear for their confirmation.
In view of above, we draw inference that the books were rejected only for the reasons as discussed above.
8.1 It is also pertinent to note that the Revenue has not challenged the decision of ld. CIT(A) in the case on hand which implies that the decision of the ld CIT(A) was accepted by the Revenue.
- 20 -
8.2 Thus, the controversy before us revolves for the rejection of the books of accounts and the addition of Rs. 1 crore confirmed by the ld. CIT(A).
8.3 As far as rejection of the books of account is concerned, we note that the ld CIT(A) has accepted all the books of accounts of the assessee except the yield in case of two fishes as discussed above. We note that the assessee was dealing into variety of fishes and there was also a short production but as per the ld CIT(A) such short production in respect of other fishes was within the parameter of the yield rate specified in the fish industry. From the above, we note that the business done by the assessee in case of lizard fish and bulleye fish was not significant enough. It was representing the negligible value of the total business of the assessee therefore we are of the view that the books of accounts of the assessee cannot be rejected on account of short production/yield shown by the assessee in respect of two fishes only out of several fishes in which the assessee was dealing.
8.4 We also note that the creditors were arising from the purchases made by the assessee which were duly accepted by the AO without pointing out any iota of defects. In our considered view, once the purchases has not been disturbed thus, the creditors arising out of such purchases cannot be disallowed merely on the ground that they failed to appear before the AO. The assessee also claimed that it was purchasing fishes from these sundry creditors on regular basis. The details furnished
- 21 -
by the assessee have not been challenged by any of the authorities below during the relevant proceedings.
8.5 After considering the facts in totality, we are of the view that the books of accounts in the given facts and circumstances cannot be rejected. In this regarded, we find support and guidance from the order of Raipur Tribunal in the case of ACIT vs. Balajee Structural (India) Pvt. Ltd. in ITA No.80/RPR/2013. The relevant extract of the order is reproduced below:
"The A.O. has not come across any material defect in account so as to hold that any profit has been suppressed. The appellant has satisfactorily explained that there was no decline in GP rate as alleged by the A.O and the yield was also better. The A.O. has not brought any material on record to disbelieve the book result shown by the appellant. If there is no suppression of material facts, the authority cannot embark upon a speculative lent of notional profits. The assessment should be based on cogent facts and there sufficient reasons must be given to indicate that they are unreliable-mere disparity in consumption of electricity in certain months cannot be the reason for rejection of accounts-such variation can be due to various factors beyond the control of assessee-rejection, therefore, not justified. The A.O examined the audited books of account but had not pointed out any specific discrepancy nor has he detected any suppression in sales or inflation in purchases/expenses. No evidence whatsoever was brought on record to prove that, the appellant, in fact, earned more than that returned as per the books of account kept in the regular course of business. The assessment order is evidence to the fact that there was no specific finding given by the A.O to the effect that the method employed by the appellant was such that correct profits could not be deduced there from. It is also not the case of the appellant that it has not followed the mercantile system of accounting. It is also not the case of the appellant that it has not followed any particular accounting standards which are notified by the Central Government.
- 22 -
6.3 It is also not in dispute that the appellant has maintained books of account regularly and these are duly audited u/s 44AB of the I.T. Act and the quantitative details were prepared and were duly audited. The variation in percentage of GP/NP or payments in cash, in the absence any cogent reasons could not, by itself, have been a ground to hold that proper income of the appellant cannot be deduced from the accounts maintained by it and consequently, could not have been a ground to reject the accounts invoking section 145(3) of the Act. There is no finding in the assessment order of the A.O that the actual cost of finished goods purchased by the appellant was less than what was declared in the account books. There is no finding by the A.O that actual quantity of finished goods sold by the appellant was more than what it was shown in the accounts books. There is no finding by the A.O that the finished goods were sold by the appellant at a price higher than what was declared in the account books. From the Tax Audit Report, it is discernible that the appellant did maintain stock records and the A.O has not pointed out any incorrectness in the same, I am of the considered opinion that merely because the quantity of raw material consumed and finished goods produced have been quantified with some degree of estimation the books of account cannot be said to be unreliable or prone to rejection."
8.6 We also placed our reliance on the judgment of Agra Tribunal in the case of ACIT vs. Ravi Agricultural Industries, reported in 117 ITD 338, where it was held as under:
"It was apparent from the sales chart submitted by the assessee that it had shown better profit percentage. Unless the department had some material to show that there was sale outside the books of account, it was not correct in rejecting the books of account maintained by the assessee. Mere fall in the sales did not justify the rejection of the books of account without any other cogent material. Again, the computation of the stock during the course of survey was based on certain estimations, interpolations and extrapolations. That by itself did not mean that the books of account maintained by the assessee, duly supported by purchase and sale bills which were produced before the Assessing Officer deserved rejection. The blank bills found in the course of survey in the name of persons doing job work did not in any way lead to conclusion that the sales figure disclosed by the assessee required to be rejected. The rejection of the books of account by
- 23 -
invoking provisions of section 145(3) was totally unwarranted and could not be supported in the eyes of law. Having accepted this, the addition based on certain estimation of sales was correctly deleted by the Commissioner (Appeals) as well as by the Judicial Member."
In view of above, we hold that the books of accounts cannot be rejected in the given facts and circumstances.
8.7 Coming to the addition made by the ld CIT(A) for Rs. 1 crore on account of short yield as well as non confirmation of sundry creditors. In this regard, we note that the sundry creditors cannot be disallowed without disturbing the purchases. In the case before us there was no allegation about the genuineness of the purchases therefore in our considered view, the same cannot be disallowed.
8.8 As for as, the short yield is concerned in the case of lizard and Bulleye fish, we note that the short yield has been shown by the assessee in comparison to the prevailing products in the fish industry. Therefore, in our considered view at the most the addition can be sustained in the hands of the assessee on account of short production in the case of lizard and bulleye fish which requires an estimate of the profit on reasonable basis. We also note that there was no allegation of the lower authority that the assessee has either made purchases or sold goods outside the books of accounts. Therefore, we direct the AO to estimate the profit on account of short production in case of lizard fish and bulleye fish. In this regard, we find support and guidance from the judgment of Hon'ble
- 24 -
Gujarat High Court in the case of CIT Vs. President Industries reported in 258 ITR 654wherein, it was held as under:
"The amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales. The sales only represent the price received by the seller of the goods for the acquisition of which it has already incurred the cost. It is the realisation of excess over the cost incurred that only forms part of the profit included in the consideration of sales. Therefore, unless there is a finding to the effect that the investment by way of incurring cost in acquiring goods which have been sold has been made by the assessee and that has also not been disclosed, the question whether entire sum of undisclosed sales proceeds can be treated as income, answers by itself in the negative."
8.9 After having reliance on the aforesaid judgment we direct the AO to make the addition on the basis of gross profit declared by the assessee in earlier years after quantifying the short production in the case of lizard and bulleye fish in comparison to the industry yield. Thus, the ground of appeal of the assessee is partly allowed.
9. In the result, appeal of the assessee is partly allowed.
This Order pronounced in Open Court on 26/09/2018
Sd/- Sd/-
¼e/kqferk jkW;½ ¼olhe vgen½
U;kf;d lnL; Yks[kk lnL;
lnL;
(MADHUMITA ROY) (WASEEM AHMED)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 26/09/2018
Priti Yadav, Sr.PS
- 25 -
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. संबं धत आयकर आयु,त / Concerned CIT
4. आयकर आय,
ु त(अपील) / The CIT(A)- IV, Rajkot.
5. -वभागीय 0त0न ध, आयकर अपील य अ धकरण,राजोकट/DR,ITAT, Rajkot
6. गाड2 फाईल / Guard file.
आदे शानुसार/ BY ORDER, स या-पत 0त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील%य अ&धकरण, राजोकट / ITAT, Rajkot
1. Date of dictation 07/08/2018 (dictation pages : 12)
2. Date on which the typed draft is placed before the Dictating Member 19/09/2018
3. Other Member...
4. Date on which the approved draft comes to the Sr.P.S./P.S ...27/09/2018
5. Date on which the fair order is placed before the Dictating Member for pronouncement......
6. Date on which the fair order comes back to the Sr.P.S./P.S.......
7. Date on which the file goes to the Bench Clerk.....................
8. Date on which the file goes to the Head Clerk..........................................
9. The date on which the file goes to the Assistant Registrar for signature on the order..........................
10. Date of Despatch of the Order..................