Income Tax Appellate Tribunal - Jaipur
Shree Ram Printing Works vs Assistant Commissioner Of Income Tax on 11 March, 1997
ORDER
Pradeep Parikh, A.M.
1. The assessee is in appeal before us against the order of the learned CIT(A), dt. 12th March, 1994 for asst. yr. 1991-92. The first ground relates to the sustenance of the trading addition of Rs. 70,587 and also enhancing the same by Rs. 10,29,494.
2. The assessee is a registered firm doing textile printing work on job work basis. The assessee had returned an income of Rs. 5,24,515 for the year under appeal. In the course of assessment proceedings, the AO took note of certain defects in the records maintained by the assessee. Accordingly the AO invoked the provisions of s. 145. He estimated the job receipts at Rs. 2,06,55,000 as against Rs. 2,06,22,420 declared by the assessee. On the estimated receipts the AO applied a G.P. rate of 10.25 per cent as against 9.92 per cent shown by the assessee and finally made an addition of Rs. 70,587.
3. In the first appeal, the CIT(A) observed that the assessee had shown job work receipts less by Rs. 11,00,081 by entering bogus debit notes and hence, after adjusting the addition of Rs. 70,587 made by the AO, further added a sum of Rs. 10,29,494 to the total income.
4. Shri N. M. Ranka, the learned counsel for the assessee, submitted that the assessee, doing only job work, maintains proper books of accounts and the same are duly audited by a Chartered Accountant. Further, by making addition to the extent of Rs. 11.00 lakhs, the G.P. rate is enhanced to 15 per cent which is too high when compared with the assessee's own history. It was submitted that in earlier years as also in the immediate succeeding year the income of the assessee has been assessed at a G.P. rate lower than 11 per cent. Thus from this viewpoint also, Shri Ranka submitted, the addition was unjustifiable.
5. The main reason, according to Shri Ranka, which prompted the CIT(A) to make such a huge addition, was the entries found in the books in relation to debit notes issued by some customers of the assessee. It was submitted that at times cloth on which printing was done by the assessee, was rejected by the customers on account of certain defects. These goods were taken away by the assessee and was entered in its books as cloth purchase account. It was in respect of these rejections, the customers issued debit notes which were entered in the books. There was nothing on record to show that they were not genuine, and the payments were accordingly received from the customers. Moreover, the rejected goods received by the assessee were sold in the market by the assessee itself, the income from which had also been duly disclosed. Shri Ranka submitted that this was not an unusual phenomena in the assessee's business operations. Such has been the practice from year to year and never before its genuineness has been doubted. Citing the case of Richa & Co., one of the major customers of the assessee, it was submitted that the assessee had done job work worth more than Rs. 1.24 crores and the debit notes issued by it were just above Rs. 12.00 lakhs. So, it was contended, compared to the overall volume, it could not be considered to be substantial and hence no aspersions be cast on these transactions. Thus it was urged by the learned counsel that the entire addition made both by the AO as well as the CIT(A), be deleted.
6. The contention of Shri A. K. Singh, the learned Departmental Representative was that even if a practice had been regularly followed by the assessee, if later it was found to be defective or non-genuine, the same had to be attacked and could not be allowed to perpetuate merely on the ground that the same was not doubted in earlier years. It was further submitted that the entire addition need not be viewed merely from the angle of the genuineness of the transactions. The genuineness of the transactions, the learned Departmental Representative contended, had also to be judged in the background of a number of defects observed by the AO in his order. Thus the stress of the learned Departmental Representative was on the overall state of affairs of the books maintained by the assessee. As regards the issue of the debit notes it was submitted that the CIT(A) has conducted a thorough enquiry and has given elaborate reasons for making the addition and the same be sustained.
7. As regards the defects in books of account, it was submitted by Mr. Ranka that the assessee was not a manufacturer in its own right and hence did not maintain the records usually maintained by a manufacturer. The assessee being a jobber, maintained records as were necessary and sufficient for the nature of activities carried out by it. Records of monthly purchase and sales were available but it was not practicable to maintain the daily or monthly consumption record in respect of chemicals used by it for printing purposes. Thus, it was contended that these so-called defects alleged by the Department did not have any adverse effect on the results declared by the assessee.
8. We have heard the rival submissions and have duly considered the material on record. There are two trading additions, one of Rs. 70,587 made by the AO and the other of Rs. 10,29,494 made by the CIT(A). Firstly, we would deal with the addition made by the CIT(A).
8.1 At the outset, it would be advantageous to narrate the modus operandi of the assessee in order to appreciate the rival contentions in the right perspective. As mentioned earlier, the assessee does only job work of dyeing and printing of cloth. The assessee receives grey cloth from its customers, prints the same and sends it back to the customers. The assessee raises bill for doing the job work. After printing, if the goods are found defective in any respect or short, the concerned customer would raise debit note on the assessee. The assessee will debit this amount to an account styled as 'cloth purchase account'. In substance this means that the assessee itself purchases the cloth rejected by its customers. From the records it is not clear as to whether the rejected cloth was first sent to the customer and then returned to the assessee, or the assessee retained the defective goods at its own and without sending the same to the customer. But the fact is that the assessee did show these goods as its own purchase and also sold the same in the market. The sales of these goods have been reflected in the accounts.
8.2 Now besides accounting for the debit notes in the accounts as cloth purchase, the assessee has also debited job charges account by the amount of printing charges, thereby reducing the job receipts to the extent of the debits.
8.3 The substance of the learned CIT(A)'s lengthy and detailed order is that once having accounted for the debit-notes in full as cloth purchase, further debiting the job charges account by printing charges was superfluous and hence resulted in substantially reducing the income of the assessee.
8.4 We are not agreeable with the views of the learned CIT(A). This can easily be demonstrated from the material on record. Debit-note numbers 289 to 295 are placed before us. They total-up to Rs. 1,33,178. The debit-notes are bifurcated into cost of cloth at Rs. 87,812 and printing charges at Rs. 45,466. Rs. 87,712 is debited as cloth purchase account (p. 13 of paper-book) and Rs. 45,466 is debited to printing charges account (p. 8 of paper-book). Similarly, for the entire year the total of all debit-notes is Rs. 36,51,249. This amount is bifurcated into Rs. 26,03,595 as cloth purchase and Rs. 10,47,654 as job work charges. Upto this stage there is no disagreement with the CIT(A) as is evident from para 2.8 of his order. However, after explaining this position, the CIT(A) has observed as follows in the same para :
"Actually both these figures are hypothetical as no cloth is reality has been received and debit-notes have been raised on account of normal shrinkage.
It is all a collusive arrangement. This fact is further proved from the examination of cloth register, as the debit-notes are not entered on the date when they are received but of (so) the end of the account, i.e. after 31st March, in pencil."
8.5 The CIT(A) considers the figures to be hypothetical because according to him no cloth has been received by the assessee. What makes the CIT(A) say so, we fail to understand. What is the basis to presume that the assessee has not either retained or received the defective cloth. This presumption has to be viewed particularly in the background that the assessee has shown sales of these goods to the extent of Rs. 29,20,243. There is also no basis to presume that it is a collusive arrangement, particularly in the light of the fact that as many as nine firms have raised debit-notes and moreover, none of the nine firms are in any way connected with the assessee firm or its partners..
8.6 One of the factors which weighed heavily for the CIT(A) to make the addition was that the debit notes were not entered on the date when they were received but at the end of the accounting year and that too in pencil. These aspects do raise suspicion at times. But at the most they can be considered only as corroborative evidence when concrete evidence proves that the transaction is not genuine. Entering the debit-notes later at the end of the year, will not by itself make the transaction non-genuine. There may be many reasons in the practical running of the business which may result into inefficiency and procrastination. Thus we do not agree with the CIT(A) on this point.
8.7. Another point raised by the CIT(A) is that most of the debit-notes raised are for shortage in length and not for any defect in printing done by the assessee. If the assessee kept with it part of the printed cloth and sold the same as its own, then the assessee should have realised full price, i.e., price of the cloth plus the printing charges. This point has been discussed by the CIT(A) in para 2.11 of his order. In our opinion, the CIT(A) has not appreciated the transaction at all. There is no question of realising any price by the assessee. To illustrate, a customer of the assessee, say 'X', supplied 100 cms. of cloth to the assessee for printing. The price paid by 'X' for this cloth was say Rs. 50. The assessee prints the same at Rs. 10. These Rs. 10 are credited to jobcharges account. The assessee sends back the printed cloth to 'X'. However, 'X' finds that instead of getting 100 cms. back, he got 98 cms. back. Whether the shortage is on account of normal shrinkage or something else, we shall deal with it later on. But for the moment, 'X' rejects this cloth on account of shortage. 'X' accordingly tells the assessee that he will neither pay the printing charges nor will he keep the fabric, as the entire fabric is useless for him. 'X' further also contends that the entire fabric has been rendered useless on account of the assessee and hence the assessee has to bear that loss also. Accordingly, 'X' raises debit-note on the assessee, both, for the cost of cloth as well as the printing charges, that is, for Rs. 60 (Rs. 50 + Rs. 10). The assessee bifurcates this debit-note into two parts while accounting for the same. Having foregone the printing charges, the assessee debits Rs. 10 to job charges account which was earlier credited by Rs. 10. In the assessee's case, this total upto Rs. 10,47,653. The balance Rs. 50 is debited to cloth purchase account. In the present case, this totals upto Rs. 26,03,595. The assessee then sells this cloth purchased at Rs. 50, say at Rs. 55. In the present case such sales are credited at Rs. 29,20,243. Thus this is the entire accounting aspect of the transaction in which we do not find any discrepancy.
8.8. Now we come to the aspect of shortage. It is contended by the CIT(A) that the shortage in length is nothing but normal shrinkage for which no separate debit-note is necessary. However, a detailed and discreet enquiry would have revealed that the assessee's explanation that when the cloth is folded, at times the fold is not of 100 cms. but of 98 cms. or 98.5 cms. This, to our knowledge, is quite a usual phenomena in this line of business. Probably, there may be something unethical about it also. However, we are not concerned with whether it is ethical or unethical. If the CIT(A) did not believe it, it was imperative for him to enquire about it from the market. We do not see any reason to disbelieve the explanation without making the enquiries. The accounting aspect has already been discussed above. There is nothing to show that there was anything fraudulent about it. Accordingly, we are unable to sustain the addition of Rs. 10,29,494 made by the CIT(A). We direct the deletion thereof.
9. Coming to the next addition of Rs. 70,587 made by the AO, it is observed that the AO estimated the receipts at Rs. 2,06,55,000 as against the receipts shown at Rs. 2,06,22,420. He then applied a G.P. rate of 10.25 per cent against 9.92 per cent shown by the assessee. We see no reason to enhance the receipts in an arbitrary manner. The total receipts, therefore, are retained at Rs. 2,06,22,420. However, keeping in view the assessee's past history and also the totality of circumstances, we retain the G.P. rate applied by the AO at 10.25 per cent. The addition be worked out accordingly and the excess be deleted.
10. The next ground relates to disallowance at 1/5th of car expenses and depreciation. These disallowances are reasonable and hence we do not interfere. The same is upheld.
11. The last ground pertains to deduction under s. 80-I. It is directed that deduction be worked out as per the income finally determined and be allowed accordingly.
12. In the result, the appeal is partly allowed.