Income Tax Appellate Tribunal - Chennai
Smt. R. Imbavalli vs Income Tax Officer on 24 February, 2004
Equivalent citations: (2004)83TTJ(CHENNAI)352
ORDER
1. All the above five IT appeals, three by the assessee, and two by the Department, are arising out of the order of learned CIT(A)-X, Madras 34, dt. 26th March, 2003, as per relevant assessment years given above.
2. The only issue in the appeals of the assessee is regarding the adoption of five per cent of the net profit of the turnover for arriving at the income for the relevant assessment years. The brief facts of the case are that the appellant-assessee is the sole propietrix of the firm, M/s Sri Ganesh Electronics, Chennai 600 013. The assessee deals in retail business of electronic appliances, TV, VCRs, refrigerators and similar other home appliances. A survey under Section 133A was conducted in the business premises of the assessee on 3rd April, 1998. During the course of survey, statements of various business activities were recorded and books of accounts for the asst, yr. 1997-98 were impounded. While framing assessment, the AO rejected the books of accounts and applied GP rate at 19 per cent against the admitted GP rate of the assessee at 3-5 per cent. The AO issued notice under Section 142, as well as under Section 148 for calling for return for the respective assessment years. The AO continuously issued various notices under Section 142 along with various letters calling, for information. All the notices were served on Shri S. Raman, husband of the assessee. Ultimately, as there was no response from the assessee, the AO issued a show-cause, notice on 19th March, 2001. In response to this notice, the assessee filed a common reply and she filed returns of income on 26th March, 2001, for the asst. yrs. 1997-98 and 1998-99. However, the return for the asst. yr. 1996-97 was filed in response to notice under Section 142 dt. 22nd March, 1999. Since the returns were filed mainly on 26th March, 2001, the assessment were getting barred by limitation on 31st March, 2001 and hence the AO completed the assessment on 28th March, 2001. While completing the assessment, the AO applied the GP rate of 19 per cent. Aggrieved by this, the appellant-assessee filed appeal before the learned CIT(A), Before the learned CIT(A), the assessee prepared a paper book for each of the three assessment years containing the statements of sales-tax orders, other documents which were never produced before the AO. As there was no compliance during the assessment proceedings and returns were filed in the eleventh hour, the assessment was completed and the AO could not take proper answers or explanations from the assessee due to the assessee's fault. After submission of the paper books, the learned CIT(A) asked for a remand report on the basis of the paper books. The learned CIT(A), after considering the survey report, remand report, miscellaneous reports, confidential records and the explanations adduced by the assessee through her counsel, took a view that the books of accounts were not acceptable as they were defective and incomplete. While taking this view, the learned CIT(A) considered some aspects, which are being reproduced below (from his order).
"(i) Whereas the books for asst. yr. 1996-97 were impounded, it is not known as to why the books for the subsequent two years (atleast the registers for sales and purchase) could not be impounded. The appellant has made some extra entries of purchase, which are supported by invoices of reputed companies and cannot be easily brushed aside as non-reliance. The entire purchase account however has remained beyond verification. At this stage, it is very difficult to decide whether for asst. yr. 1998-99, the correct and complete purchase figure was 1.34 crores as seen on the date of survey or Rs. 1.59 crores as found now from the record (considering the further invoices for the months of February and March, 1998 totalling to about Rs. 25 lakhs) which have been accepted by the sales-tax authorities.
(ii) There is nothing sacrosanct about the opening stock valuation of Rs. 34 lakhs adopted by the survey party for preparing their trading account, particularly, because during the survey itself, they have found a file where the stock valuation as on 1st April, 1997, was recorded as Rs. 39 lakhs and was accordingly returned to the bank.
(iii) The survey report is full of facts precisely emphasizing the defects and anomalies in the books of accounts. The entire report has discussed 'improper maintenances of books' illustrating various types of defects in maintenance of ledger accounts. Similarly, whereas, on one hand, wrong totaling of day book balance has been noticed, on the other hand, cash shortages of certain dates have been alleged.
(iv) The very fact that for two out of three years, without any material, the AO has estimated gross profit which shows that AO had resorted to Section 145 for those two years. In view of the above, it is extremely difficult for me even to presume that books of accounts could be considered to be correct or complete. Correct profits cannot be ascertained if we start from these accounts. Therefore, the only option is to reject the book result as unreliable and to compute an estimate of gross profit or net profit. Since the ledger accounts are not creditworthy even recording of expenses cannot be accepted to be either complete or correct. Therefore, the only prudent choice is to go for an objective and reasonable estimation of net profit based on the turnovers. The assessed turnovers in the sales-tax orders will be the only proper legal basis. Until and unless the sales-tax authorities on some ground reopen or reassess these turnovers, it is always objective to accept the assessed sales as the basis for profit estimation."
Before the learned CIT(A), two comparative cases were given, where net profit was less than one per cent. After considering all the aspects, the learned CIT(A) applied a net profit rate of 3 per cent to the turnover and, in addition to this, he raised the profit by one per cent, for the reasons that the appellant enjoyed certain benefits like long suppliers' credits and of not paying any rent for show room, etc. He further increased one per cent on account of interest by bank borrowals since interest on bank borrowals usually constituted a major charge on retailers' profit and in this case, borrowals from banks had been diverted towards non-business advances, to the husband of the appellant-assessee, as was evident from the order of the AO that the bankers had imposed special conditions for immediately bringing the advanced money back for business and in this way, he considered the net profit rate at five per cent of the turnover for each of the years as reasonable and appropriate. Aggrieved, the assessee is in appeal before the Tribunal.
2.1 Before us, the learned counsel for the appellant fairly conceded that the books were not complete and not reliable and hence he was not contesting the books of accounts. However, he pleaded that in the line of the appellant-assessee's business, the net profit percentage in Chennai had been quite low and he quoted the instances, which are as under :
1. JD Electronics, Raheja Complex, 834 Anna Salai, Chennai 60002 Year ended 31st March (Rs.) 1998 3997 3996 Sales 61,84,152 38,02,515 96,31,270 Net Profit 28,932 27,111 9,395 Net Profit Rate 0.47% 0.71% 0.01%
2. Shalini Enterprise, 99 St. Xavier Steet, Chennai 600 079 Year ended 31st March(Rs.) 1998 1997 Sales 16,68,378 17,69,410 Net Profit 1,139 3,719 Net Profit Rate 0.07% 0.21% The above table shows that the net profit was less than one per cent.
He further argued that nationally and internationally renowned companies usually prescribed maximum margin for the retailers and even the retailers have to part with some discount. He further argued that all the books of accounts of the appellant-assessee were produced before the sales-tax authorities who completed assessment and accepted the book results of the appellant-assessee and stated that the complete sales-tax orders were filed in the shape of paper books and this was also filed before the learned CIT(A) and, on the basis of that, the learned CIT(A) made reference for remand report from the AO. The counsel further filed a bunch of price list of its main products indicating the customer's price and dealer's price and dealer's margin and also filed dealer's and customer's price list for major items during 1998-99. He further argued that for the asst. yr. 1998-99, the total purchase was Rs. 1.59 crores as against Rs. 1.34 crores recorded by survey party; the purchases were from reputed companies, and the invoices can easily be verified and that there was no scope for confabulation in regard to these deals. He further argued that in the sales-tax orders, no discrepancy regarding purchase or sales had been noticed. Therefore, for this assessment year, the AO had adopted incomplete purchase register, which was not related, and the GP rate of 19 per cent was meaningless and even the learned CIT(A) had not doubted the above argued facts. On the other hand, learned Departmental Representative relied on the orders of the learned CIT(A).
2.2 We have heard rival submissions and gone through the assessment order, the order of the learned CIT(A) and the paper book of the assessee containing 34 pages, which include sales-tax orders and P&L a/c for all the assessment years, sample analysis of percentage of margin allowed by companies in the price list based on fast moving items and even analysis of gross profit rate for 11 items after segregation into various categories falling within different profit rates. It is seen that the learned CIT(A) had passed his appellate order after giving due opportunity to the AO and after obtaining remand report. The learned CIT(A) rightly upheld the rejection of books of accounts from the facts that the books of accounts found during the course of survey were incomplete and unreliable. We have also gone through the sales-tax orders for all these years and find that the sales-tax authorities have not detected any defect in the purchase or sales. We have also gone through the analysis of percentage of margin allowed in the price list and gross profit rate of some of the items after segregation into various categories following even different profit rates and the reasoning cited by the learned counsel. We have also gone through some instances in the line of the appellant-assessee business, which was assessed at net percentage of almost one per cent as the learned counsel had also given full details of this case which have been reproduced above in para 2.1. It is seen that the appellant-assessee is a dealer for nationally and internationally reputed companies who usually prescribe maximum margin for retailers and even the retailers have to part with discount from their margin. We have gone through the dealers' and customers' margin and, it is seen that it varies from 4.5 to 16 per cent and the learned CIT(A) had rightly applied net profit of 5 per cent for all the three years as reasonable. However, he had not considered the above-mentioned two or three factors. If we consider these factors, we can give a margin of one per cent and this margin of one per cent can be vis-a-vis adjusted towards the benefit of allowing credit and non-payment of rent for show room. On the whole, after going through all the circumstances and facts of the case, we consider that the net profit percentage of 4 per cent for all the three years is proper and reasonable. Hence, we allow all the three appeals of the appellant partly and direct the AO to recalculate the profits on the basis of net profit of four per cent of the turnover.
2.3. Accordingly, the appeals of the assessee are partly allowed. 3. Departmental appeal (ITA No. 1366/2002).
3.1. The only issue in this Departmental appeal is regarding deletion of the addition by the learned CIT(A), of unexplained cash credit under Section 68. While framing assessment, the AO observed that there was a credit entry in the appellant's bank account in the Indian Overseas Bank for an amount of Rs. 1.8 lakhs as on 3rd April, 1996 and the same was not posted in the books of accounts. It was explained before the AO that the cheque was received from one of the parties who had purchased goods from the appellant's proprietary concern towards part of the sale consideration and the complete details of the payer and from which bank and from whom this cheque was received were provided. Inspite of this explanation, the AO made the addition. Aggrieved by this, the assessee preferred appeal before the learned CIT(A). The learned CIT(A), after going into the facts of the case gave his findings, which are reproduced below :
"In this regard, the appellant has submitted before that in the absence of proper maintenance of books of accounts, fool proof ledgerisation could not be expected to have been made by the part-time accountant However, since the payer of the cheque was identifiable and the drawer bank was known, the AO could have accepted the explanation of the appellant or should have conducted proper enquiry in the bank of payer. Without such enquiry, there should be no allegation for unexplained cash credit. I am not in a position to fully accept that the source of the cheque has been unquestionably established either before the AO or before me. However, this can be easily telescoped against the increased estimated net profit and separate addition under Section 68 will not be required."
3.2. Before us, the learned Departmental Representative relied on the order of the AO and argued that no evidence was produced before the AO at the time of assessment. On the other hand, the learned counsel for the assessee relied on the order of the learned CIT(A) and argued that payment was received by cheque on account of sale consideration, and the payee was identifiable, and it was through the banking channel, and the AO had not made any enquiry in this regard, and further that this addition against the estimated net profit could not be made under Section 68, and he also relied on the order of the learned CIT(A). As per the learned counsel, this was not a subject-matter of Section 68 as this was apart of sale consideration received from the purchaser/debtor.
3.3. We have heard rival submissions on this issue and gone through facts of the case. It is seen that the amount was paid to the appellant-assessee as part of the sale consideration and it was treated as receipt. It cannot be added under Section 68. Even otherwise, the learned CIT(A) had found that this addition could easily be telescoped against the addition of the estimated net profit, and no separate addition under Section 68 was required. We are in total agreement with the findings of the learned CIT(A) and, therefore, we do not wish to interfere in the decision of the learned CIT(A). We, therefore, uphold the order of the learned CIT(A) on this issue.
3.4. In the result, we dismiss the Departmental appeal.
4. Departmental appeal (ITA No. 1367/2002).
4.1. The only issue in this appeal is regarding the deletion of addition made by the learned CIT(A), on account of foreign trip of the assessee and her family members. While framing assessment, the AO went through the report of ITO, CIB n, and recorded as under in the assessment order :
"During the financial year the assessee with her husband had undertaken trip to Singapore, Malaysia, Bangkok and Ceylon for a total stay of 10+7 days away from India and her son Mr. R. Krishnamurthy visited Singapore. The entire expenses relating to travel, stay, foreign currency requirement of the assessee and her husband have been met by MRC Electronics (Onida) in appreciation of the business done for them by the assessee. Mr. R. Krishnamurthy's trip to Singapore was sponsored by M/s Godrej India Ltd. in appreciation of the business done by him on their products. In the absence of any details furnished by the assessee, an addition of Rs. 5 lakhs as suggested by the ITO, CIB II, is made under Section 28(iv) as deemed profit."
4.2. The AO found that Rs. 5 lakhs had been enjoyed by the assessee and her family members on account of business transactions and this deemed profit as per Section 28(iv) of the Act was taxable and he added the amount of Rs. 5 lakhs on this account to the returned income of the assessee. Aggrieved, the assessee moved in appeal before the learned CIT(A). Before the learned CIT(A), it was argued that it was normal practice for companies to give such schemes/ business promotions to encourage leading retailers by announcing some incentives like foreign trips and that such trips were usually given as gifts for the development of business and that this scheme did not fall under Section 28(iv), though the cost of such trips was an expenditure for the companies, because the element involved in this scheme is in the nature of gift. The learned CIT(A) concurred with the view of the assessee and held that:
"Since gifts are acts of gratis, those cannot have the nature of income in the hands of the recipient. There will be no scope for assessment under Section 28(iv)".
Aggrieved by the deletion of this addition by the learned CIT(A), the Department is in appeal before the Tribunal.
4.3. Before us, the learned Departmental Representative relied on the order of the AO and argued that perquisites of business are profit under Section 28(iv) of the IT Act. This section states that the value of any benefit or perquisite received from business or the exercise of a profession irrespective of whether the value of such benefit or perquisite is convertible into money or not, shall be chargeable to income-tax. He further argued that the only condition for inclusion of the same in the chargeable income of the assessee is that it should be arising from the business or exercise of profession and that since the benefit arose from the foreign trip offered by companies like MRC (Onida), Godrej, etc., in appreciation of the business done by the assessee, this scheme/perquisite fell under Section 28(iv) and urged the Bench to restore the order of the AO. On the other hand, the learned counsel for the assessee relied on the order of the learned CIT(A) and argued that these trips were offered in appreciation of the business done and this matter did not fail under Section 28(iv) because the element involved in this transaction is pure gift.
4.4. We have heard rival submissions and contentions and perused the materials placed before us including the orders of the AO and that of the CIT(A). It is a fact that M/s Godrej India Ltd. and MRC Electronics (Onida) are nationally and internationally renowned companies, whose products were being marketed by the assessee's concern. In appreciation of the business done, the above companies offered foreign trips to the assessee and the assessee, alongwith her family including her husband undertook a trip to Singapore, Malaysia, Bangkok, Ceylon, etc. for a total stay of 17 days and her son Shri Krishnamurthy, undertook a trip to Singapore. The entire expenditures relating to the travel, stay and foreign currency requirements were met by these companies and the total expenditure incurred by these companies on the above foreign trips is Rs. 5 lakhs. Before the AO, it was admitted that the foreign trip was a scheme and it was in appreciation of the business done and it is related to business and these factors were explained before the C1T(A) also. We have gone through the provisions of Section 28 (iv). The relevant portion is reproduced below:
"28. The following shall be chargeable to income tax under the head "profits and gains of business or profession" -
(i) .....
(ii) .....
(iii)......
iv) the value of any benefit or perquisite, whether convertible into money or not arising from business or the exercise of a profession;"
From the above, it is clear that perquisites of business are taxable and that Clause (iv) deals with the value of such benefits/perquisites whether convertible into money or not. In the present case, the value of the foreign trip is Rs. 5 lakhs and it had arisen to the assessee in the course of her business and it was directly related to business. Though it is an admitted fact that such trips are usually given by the manufacturing companies to their retailers for the development of business, the plea of assessee that this perquisite did not fall within the purview of Section 28(iv) is of no help as perquisites are chargeable to tax and the benefit which the assessee had derived had a direct nexus between the business of the assessee and the benefits derived and, therefore, these benefits cannot be called "gratis" as held by the learned CIT(A) as it is clear from Section 28(iv) that the value of any benefit which is convertible into money or not should be directly received from the business. The AO had rightly assessed that the value of benefit of perquisites of Rs. 5 lakhs paid by the company in discharge of its obligation to the assessee to meet the expenses of her personal foreign trip along with her husband and son was assessable in the hands of the assessee in the relevant assessment year. In view of this finding, we set aside the order of the learned CIT(A) and restore the order of the AO.
4.5. In the result, the Departmental appeal is allowed.
5. To sum up, the three appeals of the assessee are partly allowed; the first Departmental appeal (No. 1366/2002) is dismissed, and the second appeal (1367/2002) is allowed.