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Income Tax Appellate Tribunal - Hyderabad

Manjith Singh Bagga, Hyderabad vs Assessee

        IN THE INCOME TAX APPELLATE TRIBUNAL
            HYDERABAD BENCH 'A', HYDERABAD

 BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
   SHRI CHANDRA POOJARI, ACCOUNTANT MEMEBR

                    ITA No. 371/HYD/2009
                   Assessment year : 2004-05

Mr. Manjith Singh Bagga        Vs.   The Income Tax Officer
Hyderabad-500 051                    Ward 7(4), Hyderabad
PAN: ABYPB1636L
Appellant                            Respondent

                    ITA No. 391/HYD/2009
                   Assessment year : 2004-05

The Income Tax Officer         Vs.   Mr. Manjith Singh Bagga
Ward 7(4), Hyderabad                 Hyderabad-500 051
                                     PAN: ABYPB1636L

Appellant                            Respondent

                   Assessee by: Shri K.A. Sai Prasad
                   Revenue by: Smt. Madhu Vani

                          ORDER

PER NRS GANESAN, JM:

Both the appeals of the assessee and the Revenue are directed against the order of the CIT(A), Vijayawada dated 19.12.2008 and pertains to assessment year 2004-05.

2. The first ground of appeal is with regard to estimation of profit at 5%. Shri Sai Prasad, learned representative for the assessee submitted that the Assessing Officer estimated gross sale at 5% more than the purchases. According to the learned representative for the assessee the assessee purchases wines from AP Beverages Corporation Ltd. The assessee was allowed to sell the wines 30% over and above the purchase price. In other words, according to the learned representative for the assessee the maximum retail price of the wines was 30% over and above the purchase price. According to the learned representative for the assessee merely because the assessee was 2 ITA Nos. 371 & 391/HYD/2009 Shri Manjit Singh Bagga ================= allowed to sell the wine 30% over and above the purchase price it does not mean that the assessee could not sell the same less than 30% margin. According to the learned representative for the assessee the assessee has all discretion to sell the wine at any price even less than the purchase price. Due to stiff competition in the liquor business the manufacturing company gave incentive to the trader to meet the stiff competition. Thus, according to the learned representative for the assessee, the incentives granted by the manufacturer reduced the purchase cost to the trader. Referring to the assessment order the learned representative for the assessee submitted that the Assessing Officer found various discrepancies in the books of account maintained by the assessee. The Assessing Officer estimated the sales at Rs.6,07,02,987 as against the sales declared by the assessee at Rs.5,73,36,805. Accordingly, the difference of Rs.29,66,182 was added by the Assessing Officer as income of the assessee.

3. The learned representative for the assessee further submitted that for the A.Y. 2001-02 an identical addition was made by the Assessing Officer by estimating the sales price at 5% over and above the purchase price and made an addition of Rs.4,08,332. The matter reached the Tribunal for A.Y. 2001-02. This Tribunal after considering the facts and situation in I.T.A. No. 268/Hyd/2005 by an order dated 19.4.2006 found that gross profit of 5% was estimated without taking into consideration the excessive licence fee paid by the assessee to the extent of Rs.12,44,246. After taking into consideration the profit ratio from the A.Ys. 1997-98 to 2002-03 and the licence fee paid by the assessee for those years, the Tribunal deleted the addition of Rs.3,45,000 and sustained the addition only to the extent of Rs.53,322. As per the order of this Tribunal the gross profit ratio for the A.Y. 2001-02 was 3.68%.

Shri Manjit Singh Bagga =================

4. The learned representative for the assessee further submitted that for the purpose of estimating the sales at Rs.6,03,02,927 the Assessing Officer grossed up the purchases. The assessee also got incentive to the extent of Rs.24,94,210 from the manufacturer on the total purchase of Rs.5,69,15,219. Due to incentives given by the manufacturer the net cost of purchases was reduced to Rs.5,44,21,009. The assessee recorded the sales at Rs.5,73,36,805. According to the learned representative for the assessee, as per the computation made by the assessee the profit comes to 5% without reducing the licence fee of Rs.12,20,000 which was debited separately to the Profit and Loss Account. After debiting the licence fee of Rs.12,20,000 the profit rate comes to 2.05%. Therefore, according to the learned representative for the assessee the profit ratio computed by the assessee after taking into consideration the incentive and the licence fee at 2.05% is very reasonable. In case this Tribunal feels that the profit ratio computed by the assessee at 2.05% is very less then the assessee leaves the matter to the discretion of the Tribunal to estimate the profit at any rate between 2.05% to 3.68% as it was estimated by the Tribunal for A.Y. 2001-02 in assessee's own case.

5. On the contrary, Smt. Madhu Vani, the learned DR, submitted that the assessee has not maintained the books of account, bills and vouchers properly. Therefore, the Assessing Officer rejected the books of account. Once the books of account were rejected the Assessing Officer has to estimate the profit at 5%. For the A.Y. 2001-02 also the profit was estimated at 5% by the Assessing Officer which was confirmed by the CIT(A). After referring to the CIT(A)'s order and the grounds of appeal raised by the assessee, the learned DR submitted that for the A.Y. 2001-02 profit was estimated at 5%. In the absence of any material, according to the learned DR, estimation of profit at 5% is very reasonable.

Shri Manjit Singh Bagga =================

6. We have considered the rival submissions on either side and also perused the material on record. Admittedly the assessee disclosed the sale at Rs.5,73,36,805. However, the Assessing Officer estimated the same at Rs.6,03,02,927. The difference between the sales declared by the assessee and estimated by the Assessing Officer was added as income of the assessee. The difference of Rs.29,66,182 comes to 5% of the purchase cost.

7. We have carefully gone through the order of this Tribunal for A.Y. 2001-02 in assessee's own case in ITA. No. 268/Hyd/05 dated 19.4.2006. After comparing the profit ratio for the A.Ys. 1997-98 to 2002-03 this Tribunal has passed the following order:

"5. We have heard the learned representatives of the parties and have perused the material on record. After considering the facts of the case, we notice that the assessee has paid excessive licence fees in the year under consideration in comparison to earlier years. On a comparison of G.P. for financial years 1998-99 and 1999-2000 at 6.86% and 3.43% respectively, the average G.P. rate comes to about 5%. It is also an admitted fact that the assessee had paid excessive licence fees in comparison to earlier two years i.e., Rs.9,00,000/- each in financial years 1998-99 and 1999-2000 whereas in the year under consideration it was Rs.12,44,246/-. We find substance in the submission of the learned AR that the assessee has paid excess licence fees and the assessee deserves relief of that amount. We accordingly delete the addition to the extent of Rs.3,45,000/- in round figures. Thus the assessee gets relief of Rs.3,45,000/-."

8. Thus it is obvious that out of the total addition of Rs.4,08,332, Rs.3,45,000 was deleted by the Tribunal. As rightly submitted by the learned representative for the assessee what was sustained by the Tribunal is only to the extent of Rs.52,322 which comes to the gross profit ratio of 3.68%. Therefore, the reference in the first appellate order by the CIT(A) 5 ITA Nos. 371 & 391/HYD/2009 Shri Manjit Singh Bagga ================= that this Tribunal confirmed the estimation of profit at 5% is misconstrued. As reproduced above what was confirmed by the Tribunal is only to the extent of Rs.3.68% of the profit and not 5%. Therefore, in our opinion, the CIT(A) is not correct in saying that this Tribunal confirmed the estimation of profit at 5%.

9. For the A.Y. 2001-02, the total purchases was Rs.2,50,72,224. The total sales was Rs.2,69,81,342. The assessee declared the profit at 3.48%. The Assessing Officer estimated the profit at 5%. However, the Tribunal after deletion of Rs.3,45,000 sustained the profit at 3.68%. For the A.Y. under consideration the total purchases is Rs.5,44,21,009 after reducing the incentives given by the manufacturer. The sales declared by the assessee was Rs.5,73,36,805. Admittedly the assessee has not maintained proper sales bills for sale of wines. Therefore, we cannot blame the Assessing Officer for rejecting the books of account. The only option available to the Assessing Officer is to estimate the profit on the basis of material available on record. For the purpose of estimation of profit the Assessing Officer has to necessarily take into consideration the factors such as competition in the business, availability of stock, demand in the market, availability of labourers, comparative profit of the similarly placed traders in that locality, comparative profit rate of the assessee in respect of other years, turnover, etc. In this case, the Assessing Officer has not considered any of those factors except to say that the 5% estimated by him for the A.Y. 2001-02 was confirmed by the CIT(A). Profit ratio cannot be a constant figure. The profit ratio would fluctuate depending upon the various factors for every year. Therefore, the lower authorities are expected to estimate the profit depending upon the factors which are essential for estimating the profit ratio. For the A.Y. 2001-02 when the total sales was Rs.2,69,81,342 this Tribunal estimated the profit at 3.68%.

Shri Manjit Singh Bagga ================= When the turnover increases it is common knowledge that profit ratio will decrease automatically. In other words, the profit ratio will decrease when the turnover increases. By taking into consideration of the competition in the business incentives given by the manufacturers and the profit ratio shown by the assessee from the A.Y. 1997-98 and the profit estimated by this Tribunal in assessee's own case for A.Y. 2001-02, in our opinion, estimation of profit at 3% of the purchases made by the assessee would meet the ends of justice. In other words, estimation of profit at 3% of the purchases at Rs.5,44,21,009 would meet the ends of justice. Accordingly, we direct the Assessing Officer to estimate the profit at 3% on the purchases of Rs.5,44,21,009.

10. The assessee has raised one more ground on the ground that the CIT(A) has committed an error in appreciating the order of this Tribunal for A.Y. 2001-02. We heard the learned representative for the assessee and the learned DR. While discussing the estimation of profit, we have referred to the order of this Tribunal and we find that this Tribunal deleted the addition of Rs.3,45,000. The operative portion of the order was extracted in the earlier part of this order. Therefore, as observed earlier what was confirmed by the Tribunal is 3.68% and not 5%. Therefore, the CIT(A) is not justified in saying that this Tribunal confirmed the profit at 5%.

11. Now coming to the Revenue's appeal, the first ground of appeal is with regard to deletion of Rs.4,10,000 being the difference in the licence fee. The learned DR submitted that she is placing her reliance on the grounds of appeal raised by the Department. We heard the learned representative for the assessee also. Admittedly, the books of account were rejected and the profit was estimated. Once the books of account were rejected the very same books cannot be a basis for making any 7 ITA Nos. 371 & 391/HYD/2009 Shri Manjit Singh Bagga ================= addition as held by the jurisdictional High Court in the case of Indwell Constructions vs. CIT (1998) 232 ITR 776 (AP). Moreover, when the profit was estimated after rejecting the books of account, all the expenditure including licence fee are deemed to be allowed. Therefore, once profit was estimated there cannot be any further addition. In our opinion, the CIT(A) has rightly deleted the addition of Rs.4,10,000.

12. The next ground of Revenue is exclusion of Rs.2,53,240,. We heard the learned DR and the learned representative for the assessee. As rightly observed by the CIT(A) when the profit was estimated, the business income already declared has to be excluded. In case the returned income of Rs.2,53,240 consists of income from other sources other than business income then such income has to be brought to tax in addition to the estimated profit of 3% as discussed earlier. In view of the above we do not find any infirmity in the order of the CIT(A). Accordingly the same is confirmed.

13. In the result, the appeal of the assessee in ITA No.371/Hyd/2009 is partly allowed and the appeal of the Revenue in I.T.A. No. 391/Hyd/2009 is dismissed.

Order pronounced in the open court on 30th September, 2010.

              Sd/-                             Sd/-
      (CHANDRA POOJARI)                 (N.R.S. GANESAN)
       Accountant Member                 Judicial Member
Hyderabad, dated 30th September, 2010
tprao

Copy forwarded to:

1. Mr. Manjith Singh Bagga, Prop: Gurmeet Wines, C/o. Ch. Parthasarathy & Co., 1-1-298/2/B/3, 1st Floor, Sowbhagya Avenue, St. No. 1, Ashok Nagar, Hyderabad-20

2. The Income Tax Officer, Ward 7(4), Hyderabad.

3. The CIT(A), Vijayawada.

4. The CIT-VI, Hyderabad.

5. The DR, ITAT, Hyderabad.