Income Tax Appellate Tribunal - Jodhpur
Mahaveer Tiles Factory, Bikaner vs Department Of Income Tax on 18 June, 2013
[1]
IN THE INCOME TAX APPELLATE TRIBUNAL
JODHPUR BENCH, JODHPUR
BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER
AND SHRI N. K. SAINI, ACCOUNTANT MEMBER
I.T.A. Nos.282 & 283/Jodh/2009
Assessment Years:2005-06 & 2007-08
A.C.I.T., Vs. M/s Mahaveer Tiles Factory,
Circle-1, Nokha.
Bikaner. PAN:AAKFM4790M
(Appellant) (Respondent)
Appellant by : Shri N. A. Joshi, D. R.
Respondent by : S/Shri U. C. Jain & Gautam Jain
Date of hearing : 18/06/2013
Date of pronouncement : 10/07/2013
ORDER
PER N. K., SAINI:
These two appeals by the Department are directed against the separate orders each dated 27/02/2009 of CIT(A), Bikaner. First we will deal with I.T.A. No.283/Jodh/2009. In this appeal the Revenue has raised the following grounds:
"On the facts and in the circumstances of the case the Ld. CIT(A) has erred in:-
(i) deleting the addition of Rs.13,22,060/- made by the AO on account of trading additions by holding that the books were replete with infirmities and cannot be regarded as correct and complete for the purpose of giving a realistic profit, though the AO has rightly [2] made the said addition on the basis of books of accounts impounded during the course of survey u/s 133A of the IT Act, 1961.
(ii) deleting the addition of Rs.3,13,260/- made by the AO on account of cash purchases u/s 40A(3) of the IT Act by holding that when the books of account are regarded as unreliable then there does not exist any justification for making disallowance u/s 40A(3) of the IT Act, 1961 on account of cash expenditure. Though the AO has rightly made the said addition on the basis of books of accounts impounded during the course of survey u/s 133A of the IT Act, 1961.
(iii) deleing the addition of Rs.2,15,617/- made by the A.O. on account of misc. expenses being personal in nature debited to profit & loss account by holding that the AO made the addition hypothetically by relying upon assumption, presumption, surmises, conjectures and apart from this once net profit rate is adopted and applied there does not remain any room and justification for making further disallowance out of expenditure, though the AO has rightly made the said addition on the basis of books of accounts impounded during the course of survey u/s 133A of the IT Act, 1961."
2. Vide ground No. 1 the grievance of the Department relates to the deletion of the trading addition made by the Assessing Officer by holding that the books were replete with infirmities and cannot be regarded as correct and complete.
3. The facts of the case, in brief, are that the assessee filed the return of income on 05/11/2007 declaring an income of Rs.21,21,380/-. In this case a survey was conducted u/s 133A of the I.T. Act, 1961 (hereinafter referred to as the "Act") in the business premises of the assessee on 21/03/2007 and during the course of survey ledger, cash book and loose [3] voucher containing unaccounted sales/purchases were impounded. During the course of survey on 21/03/2007, actual stock inventory was prepared as under:
Opening stock 2036061 Sale 13493248
Purchase 8533296 closing stock 2480372
G.P. 5404268 15973620
15973620
3.1 The Assessing Officer mentioned that the assessee filed the trading account as on 31/03/2007 along with the returned income as under:
Opening stock 2036061 Sale 15017807
Purchase 10875421 closing stock 2418000
3.2 The Assessing Officer worked out the shortage of stock in the following manner:
Purchase after 21/03/2007 2342125
Sale after 21/03/2007 1524559
Remaining in stock 817566
Add G.P. on sales 29% of 1524559 442122
Total remaining in stock 1259688
Total closing stock as on 31/03/2007
Comes to 3740060
Stock as on21/03/2007=2480372
Add:stock as per sale/purchase
after 21/03/2007 =1259688
3740060
Stock declared by the assessee
as on 31/03/2007 2418000
Short stock declared by the assessee 3740060-2418000=1322060/-
[4]3.3 The Assessing Officer observed that the purchase benefit regarding those sales had already been allowed to the assessee. He, therefore, considered the whole amount of the unaccounted sales as income of the assessee and accordingly made the addition of Rs.13,22,060/-.
4. Being aggrieved, the assessee carried the matter to the learned CIT(A) and submitted that the Assessing Officer has drawn the presumption without there being any material on record to substantiate his theory of unaccounted sales and the entire addition was an offshoot of hypothesis and imagination. The reliance was placed on the decision of Hon'ble Madras High Court in the case of K.M. Adam vs. CIT 56 ITR 605 (Mad.). It was contended that during the course of survey on 21/03/07 memorandum books reflecting the outside books transaction were seized and the assessee filed return taking into account the income as contained in the seized books. It was stated that the entries in cash book were complete up to the 20/03/07, whereas the posting in the ledger account was complete up to 05/03/2007. It was explained that the figures of purchases as taken in the trading account prepared as on 21/03/07 were at Rs.85,33,296/- whereas the said purchases were in fact at Rs.96,28,357/- after updating the posting in ledger account which were upto 05/03/2007. It was contended that since the trading account was prepared for the period upto 21/03/07, there was need to add the purchases effected between the period 06/03/07 to 21/03/2007 and the aggregate of such purchases worked out to Rs.38,84,387-. Thus, the total purchases upto 21/03/07 was reported to Rs.96,28,357/- as against Rs.85,33,296/- considered by the Assessing Officer and the amount of Rs.10,95,061/- was regarded as difference in the purchase. It was contended that the figures as contained in seized material [5] were sacrosanct, as they had got immense evidentiary value and were considered clinching evidence. It was stated that the difference of Rs.10,95,061/- as worked out was the result of casting error and the same deserved to be rectified. The reliance was placed on the following case laws:-
(a) ITO vs. Bhagwati 23 TW 127
(b) K.C. Gupta vs. ITO 32 TW 273
(c) CIT vs. Gokuldas (2002) 172 CTR (Raj.) 4.1 It was further stated that the existence of casting errors can be inferred and judged from the simple glance of trading account as on 21/03/2007 wherein the G.P. was of Rs.54,04,268/- against the sale of Rs.1,34,93,248/- giving the G.P. rate of 40.05% which was considered as astronomical, since neither the past history nor the industry standard justify such enormous rate of gross profit. It was contended that if the purchase figure was propped up by Rs.10,95,060/- consequent upon surfacing of casting error, the amount of G.P. would get reduced to Rs.43,09,208/- and the G.P. rate for the period would come to 31.93%. It was contended that the G.P. rate for the year under consideration was 29% and for the immediately preceding years it hovered in the range of 23% to 29%.
Therefore, removal of infirmity in goods accounts gave more harmonious and consistent results, which were not only in line with the past history but also identical to the working results of the year under consideration. It was stated that the Assessing Officer had considered the difference between purchases after 21/03/2007 on the basis of balancing theory and by subtracting the relevant figures from one out of another trading account. The said figure was Rs.23,42,125/- and after curing the apparent casting [6] error of Rs.10,95,060/- the figure of purchases after 21/03/2007 would also get reduced by the corresponding figures and consequent upon the removal of casting error, the difference in stock would now stand at Rs.2,26,999/- (Rs.13,22,060/- - Rs.10,95,061/-) which was presumed as unaccounted sale by the AO. It was stated that the above difference was attributable to the fact that the gross profit rate does not remain static all through the year and that the nature of sale and type of customer also do not remain same and the profit margin oscillates from transaction to transaction. It was contended that after the period of survey the assessee was grappled with liquidity crunch as there surfaced panic among the creditors and they started to pester for the recovery of their money and the assessee had to sale out its goods under the stress condition which jeopardized the profit margin but G.P. rate on the sale after 21/03/2007 was considered 29% by the Assessing Officer which in the peculiar facts got reduced to 15% which was effected after 21/03/2007. However, the margin of profit on the said sale was considered at Rs.4,42,122/- although the same was at Rs.2,28,683/- which was worked out by applying the G.P. rate of 15%. Thus, a difference of Rs.2,13,439/- stood in the two gross profits and if due allowance was given to the decline in the profitability on the balance sale which was effected after survey period, the difference in the two stocks i.e. one shown by the assessee and the other taken by the Assessing Officer would be Rs.13,560/- (Rs.2,26,999 - Rs.2,13,439) which was very nominal by looking to the volume and nature of business of the assessee. Alternatively, it was stated that disturbance of trading results requires invoking of the provision of section 145 of the Act which conferred the power upon the Assessing Officer to estimate the income but the estimation must not be arbitrary. The assessee contended that the estimation of net [7] profit rate, which gave the better and holistic result, should have been adopted. It was stated that the net profit rate for the year under consideration was at 17.05% as against 9.96% and 4.92% for the assessment years 2006-07 and 2005-06 respectively and that the gross profit rate for the year under consideration was at 30.13% as against 23.40% and 17.78% for the assessment years 2006-07 and 2005-06 respectively. It was stated that the past history is the best guide for the purpose of determination of profit of the given year. It was contended that as the N.P. rate was better than that of the preceding year, there was no justification for making any addition even if the facts and circumstances of the case warranted rejection of books of account. The reliance was placed on the following case laws:
(i) CIT Vs. Gottan Lime 26 TW 205 (RHC)
(ii) Raj Casting Vs. DCIT 22 TW 710
(iii) I.T.O. Vs. Steel India 24 TW 204
(iv) Muktaram & Party vs. DCIT 30 TW 164
4.2 The learned CIT(A), after considering the submissions of the
assessee, observed that there was no doubt about the unreliability of the books containing the transactions on the basis of which return of income was filed. Therefore, the case warranted estimation of profit. The reliance was placed on the following case laws:
(i) Vijay Proteins Ltd. vs. ACIT 55 TTJ 76
(ii) Bitthal Das Maheshwari vs. ITO 27 TW 519
(iii) CIT vs. Agarwal Engineering 206 CTR 648
4.3 The learned CIT(A) observed that for estimating the income first of
all the sale must be estimated and thereafter a suitable rate of net profit be [8] applied to derive the income. He further observed that the sale for the immediately preceding year was Rs.1,22,81,278/- which shot up to Rs.1,50,17,808/- in the year under consideration i.e. the increase was more than 22%. Therefore the past history and the current trend did not warrant any further upward revision in sale. The learned CIT(A) was of the view that in the present case, the application of net profit rate was more appropriate since it took into account the entire gamut of inconsistencies in the various heads of expenditure including purchases. The learned CIT(A) pointed out that the net profit rate for the year under consideration was at 17.05% whereas in the preceding years the same was at 9.96% and 4.92% in the assessment years 2006-07 and 2005-06 respectively. Therefore, no addition was called for even after rejection of books of account since the net profit rate was all time high. The learned CIT(A) accordingly deleted the addition of Rs.13,22,060/-.
5. Now the Department is in appeal. The learned D.R. reiterated the observations made by the Assessing Officer and submitted that the learned CIT(A) was not justified in deleting the impugned addition.
6. In his rival submissions, the learned counsel for the assessee reiterated the submissions made before the authorities below.
7. We have considered the submissions of both the parties and carefully gone through the material available on record. In the instant case it appears that the Assessing Officer made the addition on the basis of difference in the trading account prepared at the time of survey on 21/03/2007 and actual trading account filed with the return of income for the year ending on 31/03/2007. The explanation of the assessee before [9] the Assessing Officer was that at the time of survey conducted on 21/03/2007, the entry in the ledger was posted upto 05/03/2007 and if the actual entries from 06/03/2007 to 21/03/2007 were to be incorporated in the trading account, there remained a negligible difference. The said explanation was found to be correct by the CIT(A). In the instant case it is an admitted fact that the sale declared by the assessee was progressive and increase in the sale was at 22% in comparison to the preceding year. Similarly, the net profit rate declared by the assessee for the year under consideration at 17.05% was better from the net profit rate declared at 9.96% and 4.92% for the assessment years 2006-2007 and 2005-2006 respectively. In the present case, the sale as well as the net profit rate declared by the assessee were better and if the entries pertaining to the period 06/03/2007 to 21/03/2007 were taken into account, then there was negligible difference in the figures of trading account prepared at the time of survey and furnished along with the return of income. We, therefore, considering the totality of the facts, are of the view that the order passed by the learned CIT(A) on this issue does not require any interference on our part.
8. The next issue vide ground No. 2 relates to the deletion of addition made by the Assessing Officer by invoking the provisions of section 40A(3) of the Act on account of cash purchases.
9. The facts related to this issue, in brief, are that the Assessing Officer, during the course of assessment proceedings, noticed that the assessee made cash purchases of Rs.15,66,296/- but no instances of urgency of business have been put forward. Out of these payments, 20% amounting [10] to Rs.3,13,260/- was disallowed by the Assessing Officer u/s 40A(3) of the Act.
10. The assessee carried the matter to the learned CIT(A) and submitted that during the course of survey, a memorandum ledger was seized by the Department which contained the transactions of purchase and sale relating to assessment year 2007-08 which were not recorded in the regular books of account. Thus, the said ledger manifested the outside books purchase and sales transactions. It was contended that the assessee, after survey operation, voluntarily filed a return on 09/05/2007 and made a surrender of income which was emanating from the outside books transactions as contained in the memorandum ledger referred to above. It was stated that the memorandum ledger was not a regular books of account and reflected incomplete details but the assessee, in order to find out the income component underlying in the memorandum ledger, prepared computerized books of account as well as statements and the return was filed and surrender was made on the basis of working made in the computerized books. It was also stated that cash purchases were outside the books transaction as the payments were made in a business outside the books of account, therefore, the payments had to be made in cash and could not be expected to be made by cheques. The reliance was placed in the case of M/s Hynoup Food & Oil Industries (P) Ltd. Vs. ACIT 47 TTJ 556. It was stated that working results were not relied upon and estimation was done to arrive at the income which denoted that the Assessing Officer distrusts the accounts. In these circumstances, the figure of purchases and expenses became irrelevant and there was no justification for separately considering each and every constituent of expenditure which included purchases as well [11] and when the figure of purchases were irrelevant and disregarded, the cash purchases involving a sum exceeding Rs.20,000/- also became meaningless. It was stated that after rejecting books of account no separate addition was warranted by considering every component of trading results in isolated manner. Therefore, the disallowance u/s 40A(3) of the Act after rejection of books of accounts was uncalled for and unwarranted. The reliance was placed on the following case laws:-
(i) CIT vs. Banwari Lai 148 CTR (All) 533
(ii) ITO vs. Kanaram 116 TTJ 289
10.1 The learned CIT(A), after considering the submissions and the decisions relied by the assessee, observed that there was no doubt about the fact relating to unreliability of the books containing the transactions on the basis of which revised return was filed and assessment was subsequently finalized, therefore, there was no justification for making disallowance u/s 40A(3) of the Act on account of cash expenditure. He accordingly deleted the addition made by the Assessing Officer. Now the Department is in appeal.
11. We have considered the submissions of both the parties and carefully gone through the material available on record. In the present case, it appears that the transactions found noted in the memorandum ledger were not part of the books of account maintained in the regular course of business, therefore, the assessee surrendered the income earned outside the books of account. In our opinion, when the transaction was not a part of the regular books of account, the disallowance u/s 40A(3) of the Act in [12] respect of those transactions was not warranted. We, therefore, do not see any infirmity in the order of learned CIT(A) on this issue.
12. The last issue agitated by the Department relates to the deletion of addition of Rs.2,15,617/- made by the Assessing Officer out of misc. expenses.
13. The facts related to this issue, in brief, are that the Assessing Officer during the course of assessment proceedings noticed that the assessee had debited misc. expenses amounting to Rs.2,15,617/- which were mostly expenses of personal nature and were unvouched. The Assessing Officer disallowed all the expenses and made the addition of Rs.2,15,617/-.
14. Being aggrieved, the assessee carried the matter to the learned CIT(A) and submitted that Assessing Officer misunderstood the facts and made the addition based on the basis of assumption and presumption. It was contended that household expenses of the partners had been debited in the account of one of the partners. Therefore, the conclusion of the Assessing Officer that the misc. expenses aggregating to Rs.2,15,617/- included the house hold expenses was unfounded. As such the addition was void ab initio being based on wrong facts. It was contended that the Assessing Officer did not point out even a single instance in support of his allegation that the miscellaneous expenditure had got the element of personal expenses and also did not point out any infirmity in the said expenditure. It was stated that there was no overt or covert evidence or finding on record to justify the astronomical disallowance. The reliance was placed on the following case laws:-
[13] (i) CIT vs. Dalmia Cement 121 Taxman 706
(ii) DCIT vs. T. C. Kuttari 27 TW 24
(iii) Kuldeep vs. ITO 37 TW 127
(iv) ACIT vs. Somani Enterprises 29 TW 245
(v) Narendra Mohan Paliwal vs. ACIT 24 TW 45
(vi) CIT vs. Dalmia Cement 121 Taxman 706
(vii) Maharaja Carpet vs. ITO 28 TW 87
(viii) P. R. Gupta vs. DCIT 36 THE 44
(ix) CIT vs. Agarwal Engineering 206 CTR 648
(x) Naresh Chand Dviwedi vs. ACIT 30 TW 281
14.1 The learned CIT(A), after considering the submissions of the assessee, observed that the house hold expenditure of the partners had been debited in the account of Shri Mahavir Prasad and not in the Misc. Expenses account. Therefore, the addition had been made by the Assessing Officer hypothetically. He further observed that the misc. expenditure also stood covered by the application of net profit rate because once the net profit rate was adopted and applied, there does not remain any justification for making further disallowance out of expenditure. Accordingly, the addition made by the Assessing Officer was deleted. Now the Department is in appeal.
15. After considering the submissions of both the parties and the material on record, it is noticed that the Assessing Officer disallowed whole of the misc. expenses claimed by the assessee by stating that personal element in such type of expenses could not be ruled out. On the contrary the assessee debited all the household expenses of the partners in the account of one of the partners namely Shri Mahaveer Prasad and it was not the case of the Assessing Officer that the household expenses debited therein were not sufficient to meet the requirement of the family to which the partners belong. In the present case the Assessing Officer had not pointed out any [14] specific instance where the impugned expenses were not incurred for the purpose of business. We, therefore, do not see any valid ground to interfere with the finding of the CIT(A).
16. Now we will deal with I.T.A. No.282/Jodh/2009 for the assessment year 2005-2006. In this appeal the Department has raised the following grounds:
"On the facts and in the circumstances of the case the Ld. CIT(A) has erred in:-
(i) deleting the addition of Rs.5,84,494/- made by the AO on account of trading additions by holding that the books were replete with infirmities and cannot be regarded as correct and complete for the purpose of giving a realistic profit, though the AO has rightly made the said addition on the basis of books of accounts impounded during the course of survey u/s 133A of the IT Act, 1961.
(ii) deleting the addition of Rs.2,06,074/- made by the AO on account of cash purchases U/s 40A(3) of the IT Act by holding that when the books of account are regarded as unreliable then there does not exist any justification for making disallowance u/s 40A(3) of the IT Act, 1961 on account of cash expenditure. Though the AO has rightly made the said addition on the basis of books of accounts impounded during the course of survey u/s 133A of the IT Act, 1961.
(iii) deleing the addition of Rs.1,97,977/- made by the A.O. on account of Misc. expenses being personal in nature debited to profit & loss account by holding that the AO made the addition hypothetically by relying upon assumption, presumption, surmises, conjectures and apart from this once net profit rate is adopted and applied there does not remain any room and [15] justification for making further disallowance out of expenditure, though the AO has rightly made the said addition on the basis of books of accounts impounded during the course of survey u/s 133A of the I.T. Act, 1961."
17. It was the common contention of both the parties that the issues involved in this appeal are identical to the issues involved in I.T.A. No.283/Jodh/2009 for the assessment year 2007-08 (supra). Therefore, our findings given in the former part of this order in I.T.A. No.283/Jodh/2009 for the assessment year 2007-08 shall apply mutatis mutandis for the assessment year 2005-06 in I.T.A. No.282/Jodh/2009.
18. In the result, both the appeals of the Revenue are dismissed.
(Order pronounced in the open court on 10/07/2013) Sd/. Sd/.
( HARI OM MARATHA ) ( N. K. SAINI ) Judicial Member Accountant Member Dated:10/07/2013 *CL Singh Copy forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. D.R. Assistant Registrar