Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs Sh. Imtiyaz Ahmed Ansari, New Delhi on 17 May, 2018
In the Income-Tax Appellate Tribunal,
Delhi Bench 'A', New Delhi
Before : Shri H.S. Sidhu, Judicial Member And
Shri L.P. Sahu, Accountant Member
ITA No. 127, 768 & 1543/Del./2014
Assessment Years: 2008-09, 2009-10 & 2010-11
D.C.I.T. Circle 22(1), vs. Sh. Imtiyaz Ahmed Ansari,
New Delhi. 301, B-4, Govind Puri, Kalkaji,
New Delhi (PAN- AAAPI7849D)
(Appellant) (Respondent)
Revenue by Sh. Ravi Kant Gupta, Sr. D.R.
Assessee by Sh. V.K. Tulsian, F.C.A.
Date of Hearing 24.04.2018
Date of Pronouncement 17.05.2018
ORDER
Per L.P. Sahu, A.M.:
These three appeals, at the instance of Revenue, are directed against separate orders of ld. CIT(A)-XXIII, New Delhi dated 17.10.2013, 22.11.2013 and 19.12.2013 respectively for the assessment years 2008-09, 2009-10 and 2010-11. Following grounds have been raised in respective appeals :
Ground in appeal for A.Y. 2008-09:
"1. Whether on the facts and in the circumstances of the case, Ld CIT(A) has erred in deleting the addition made by A.O. on account of unverifiable purchases to the tune of Rs.6,79,10,221/-."ITA Nos.127, 768 & 1543/Del./2014 2
Ground in appeal for A.Y. 2009-10:
1. Whether on the facts and in the circumstances of the case Ld. CIT(A) was right in deleting the addition made by A.O., on account of estimation of estimation of the profit of the assessee at 30% of gross receipts.
2. Whether on the facts and in the circumstances of the case Ld. CIT(A) was right in deleting the addition made by A.O., on account of estimation of the profit of the assessee when the assessee could neither prove the existence nor the genu9neness of purchases made from the seven parties, either during the assessment proceedings or during the remand report proceedings, despite being given ample opportunities.
3. Whether on the facts and in the circumstances of the case Ld. CIT(A) was right in deleting the addition made by A.O., on account of estimation of profit of the assessee when A.O. was correct in rejecting the books of accounts of the assessee due to various defect, irregularities in maintaining books of accounts like non maintenance of stock register, incorrect method of valuation of work-in-progress, un-vouched and unverifiable expenditure."
Ground in appeal for A.Y. 2010-11:
Whether on the facts and in the circumstances of the case Ld CIT(A) has erred in deleting the addition of Rs.2,51,26,305 made by A.O. after invoking provision of section 145(3) as assessee had failed to substantiate the correctness and completeness of its accounts during the assessment proceedings.
On the facts and in the circumstances of the case Ld CIT(A) has erred in admitting additional evidence in violation of Rule 46A of the Income Tax Rules 1962.
On the facts and in the circumstances of the case Ld CIT(A) has erred in deleting the addition of Rs.2,51,26,305/- by stating that the audited accounts and confirmations was received during the remand report proceedings, whereas no remand report has been called for the Ld. CIT(A) in this case for this year.ITA Nos.127, 768 & 1543/Del./2014 3
2. Since common questions of law and facts are involved in all these three appeals, they were heard together and are being disposed of by this consolidated order. Both the parties agreed with the parity of facts and issues involved in all these appeals, advanced their arguments in appeal for the A.Y. 2008-09 and stated that the decision in appeal for A.Y. 2008-09 shall be equally applicable to other appeals. Therefore, for the sake of convenience and brevity, we first take up the appeal for the assessment year 2008-09.
3. The brief facts leading to this appeal of the Revenue pertaining assessment year 2008-09 are that the assessee is an individual, engaged in the business of manufacturing and export of readymade garments under the name and style of M/s. Ellora Creations. The books of account of the assessee are audited u/s. 44AB of the IT Act and major export sales were shown to have been made to M/s. French Connection Ltd. U.K. and its associate concerns. During the year under consideration, the assessee made export sales worth Rs.22,01,96,172 and domestic sales for Rs.10,27,030. The assessee filed its return of income on 30.09.2008, declaring its total taxable income at Rs.1,58,02,286/-, against which the assessment was completed u/s.
ITA Nos.127, 768 & 1543/Del./2014 4143(3) at an income of Rs.8,37,12,510/-, thereby making addition of Rs.6,79,10,221/-. During the year under consideration, the assessee had shown gross profit @ 9.53% as compared to 9.9% declared in the immediate preceding year. The net profit rate declared by the assessee stood approx at 7% of the total sales turnover.
4. As reveals the assessment order, the Assessing Officer appears to have garnished the above addition with various reasons, which are summarized as under :
(i). That the assessee has shown receipt of bank interest on FDRs to Rs.2,78,24,331/- and paid interest to the bank to the tune of Rs.1,86,41,092/- and, therefore, if interest income is ignored, the net profit would work out to 2.9% which is low as compared to the profit rate in the line of assessee's business.
(ii). That on examination of sundry creditors' details, furnished by the assessee, the AO observed that huge credits have been shown against following creditors :
1. M/s. Bharat Enterprises 11912634
2. M/s. Girraj Overseas 16255206
3. M/s. Kartik Exports 11491376
4. M/s. Keshav Trading Co. 12334222
5. M/s. Riddhi International 15766783 Total 6,77,60,221 ITA Nos.127, 768 & 1543/Del./2014 5 Out of above parties, the assessee had made payments of Rs.2 lacs to M/s. Bharat Enterprises and Rs.1 lac to M/s. Girraj Overseas through cheques and no payment was made to other parties. None of the parties were found available at the given addresses by the Inspector, deputed for spot enquiry. Summons u/s. 131 issued to M/s. Ridhi International and M/s. Keshav Trading Co. were received back un-served and no response was received to other summons issued to two parties, viz., M/s. Bharat Enterprises and M/s. Girraj Overseas. No summons was issued by AO to M/s. Kartik Exports. Enquiries were also made from the assessee's bank to verify the payments made to some of the above creditors through cheques, but the bankers of the assessee did not furnish requisite information. Based on the above enquiries, the Assessing Officer doubted that the above parties were non-existent and as such, the confirmations thereof furnished and purchases made there from by assessee were not worthy of credence, as the assessee also failed to produce any of the above parties for verification.
(iii). That while examining the trading results declared by assessee, the Assessing Officer asked the assessee to furnish month-wise trading account based on monthly closing stock shown to the bank as well as based on fixed average GP on the basis of yearly average Gross Profit. The assessee furnished the trading accounts as required by the Assessing Officer. In order to calculate the GP rate, the Assessing Officer relied on the stock statement furnished to the bank and observed that assessee's GP varies from (-) 180% for the month of December, 2007 to 53% in August, 2007.
ITA Nos.127, 768 & 1543/Del./2014 6(iv). That from the requisite quantitative details of items traded furnished by assessee, the Assessing Officer observed that the assessee had shown high consumption rate of fabric at 6.81 mtrs as against the average rate of consumption of 2 to 4 mtrs. Per piece.
(v). That the assessee was also asked to furnish month-wise consumption of raw material and production of items, which were furnished to him as reproduced in the assessment order itself. From these details, the AO pointed out some discrepancies in the purchase of fabric which was calculated on the basis of consumption of raw material and production of items, which was prepared on the basis of information supplied by the assessee to the banker. It was observed that as per audit report, the assessee had purchased fabrics at 1354188 mtrs. whereas as per details furnished by assessee, the purchase of fabrics came to 1704751.33 mtrs and the assessee failed to explain this difference. Further it was noticed by the Assessing Officer that table D and E was prepared on the basis of stock stoatement submitted to the bank. In view of all these discrepancies, the AO rejected the accounts of assessee u/s. 145(3) of the Act and rejecting the trading results declared by the assessee.
(vi). The Assessing Officer after rejecting the declared trading result of assessee, re-casted the same on the basis of different theories. He calculated the profit margin at the rate of 36.29% based on the theory of use of raw material and production of finished products, 33.9% based on stock balances given to the bank till the month of August, 2007 and ITA Nos.127, 768 & 1543/Del./2014 7 40.1% based on unverifiable purchases of Rs.6,79,10,221/- from five parties, if disallowed.
At the end, the AO chose to disallow the purchases of Rs.6,79,10,221/- made from above five parties treating them to be non-genuine and added the same to the total income of assessee holding that this disallowance would stand in conformity the profit @40% with the general industries average margin.
5. The assessee challenged the above addition in appeal before the ld.
CIT(A), where he filed a detailed written submission, as incorporated in the impugned order. The ld. CIT(A) called for a remand report on the submissions of the assessee vide letter dated 15.02.2013, which was submitted by the Assessing Officer. The assessee also filed rejoinder and relied on several judicial pronouncements. The ld. CIT(A), after considering the facts of the case, submissions of the assessee, remand report of AO, assessee's rejoinder and several case laws cited, deleted the addition vide impugned order. The findings reached by the first appellate authority in the impugned order read as under :
4.7. I have carefully considered the assessment order, the submissions made by the appellant, the Remand Report of the Assessing Officer, the Rejoinder and further submissions made by the ld. AR and the judicial pronouncements relied upon by the ld. AR in support of her client. Keeping in view the facts and circumstances of the case, I have come to the conclusion that the AO has decided to disallow the ITA Nos.127, 768 & 1543/Del./2014 8 purchases made from five different parties on the grounds that the existence of these parties could not be confirmed. The AO arrived at this decision on the basis of the fact that letters issued by him u/s. 133(6) and summons issued by him u/s. 131 of the Act came back un-served with the comment that the parties did not exist at the given address. Further, the enquiries conducted by the Ward Inspector also revealed that these parties were non-existent. However, the appellant and the Ld. AR were able to counter these arguments of the AO by pointing out mistakes made by the Ward Inspector in locating the premises of the said parties. The appellant's case w as bolstered by the fact that the said parties responded to the summons issued by the AO during Remand proceedings by submitting their Audited Accounts and Confirmations by post. The Id. AR was also able to demonstrate that representatives of two of the parties responded to the summons issued by the AO by appearing before him. The case of the appellant has been further strengthened by the production of VAT returns and assessment orders for the year under consideration, along with DVAT-30 forms, giving details of purchases made by the assessee during the year from various parties, including the parties under question. Needless to say, the addition made by the AO with regards to purchases made by the assessee from M/s. Kartik Exports amounting to Rs. 1,20,91,376/- was void ab-initio, for the simple reason that these purchases were not made during the year under consideration. This amount was the opening balance in the account of M/s.
Kartik Exports, representing purchases made during the immediately preceding Assessment Year 2007-08, and therefore, it could not be added in the current year by disallowing the purchases. In a nutshell, the Id. AR has not only been able to effectively prove the existence of M/s. Bharat Enterprises, M/s. Giriraj Overseas, M/s. Keshav Trading Co. and M/s. Ridhi International, but has also been able to rebut the arguments of the AO with regards to average consumption of fabric per garment. Most importantly, the fact remains that the sales effected by the appellant have not been challenged by the AO, since, the sales have been in the form of exports to foreign parties and the sales proceeds have been received by the appellant in convertible foreign exchange. I find merit in the argument of the Id. AR that since the sales remain unchallenged, the goods could not have been exported without purchase of fabric and manufacture of garments.
4.8. I have taken note of the judgments pronounced by Hon'ble Delhi High Court in the case of Smt. Poonam Rani (supra). Jas Jack Elegance Exports (supra), the judgment of Hon'ble Andhra Pradesh High Court in the case of R. Narayana Rao & Ors. (supra) and the judgment of Hon'ble Bombay High Court in the case of M/s. Nikunj Exim Enterprises Pvt. Ltd. (supra). Indeed, the ratio of these judgments weighs in favour of the case of the appellant. In a judgment pronounced by Hon'ble ITA Nos.127, 768 & 1543/Del./2014 9 ITAT, Delhi in the case of YFC Projects Pvt. Ltd. Vs. DCIT in If A No. 4672/Del/2007 for A.Y. 2004-05 on 15.01.2010, the Hon'ble ITAT has held that "Merely non filing of confirmation from two suppliers, it cannot be held that assessee has not received the goods from these persons and the credit balance in the shape of sundry credit appearing in the books of accounts is unaccounted money of the assessee. The assessee has filed certificate front the bank indicating the fact that cheques issued by it were cleared." The Hon'ble ITAT deleted the addition made by the AO and decided the issue in favor of the assessee. In the instant case also, the assessee has been able to prove that he had made payments to the parties questioned by the AO during F.Y. 2011-12 and the cheques issued by him were cleared by the bank and the debits appeared in his bank statement. In another judgment pronounced by Hon'ble Delhi High Court in the case of MOD Creations Pvt. Ltd. Vs. IITO(2013) 354 ITR 0282 (Del), the Hon'bie High Court has held that "The assesses had discharged the initial onus placed on it. In the event the Revenue still had a doubt with regard to the genuineness of the transactions in issue or as regards the credit worthiness of the creditors, it would have had to discharge the onus which had shifted on to it. A bald assumption by the AO that the credits were a circular route adopted by the assessee to plough back its own undisclosed income into its accounts could be of no avail. The Revenue was required to prove this allegation. An allegation by itself which is based on assumption will not pass muster in law. The Revenue would be required to bridge the gap between the suspicions and proof in order to bring home this allegation." In the instant case also, the AO has doubted the veracity of the audited accounts and the confirmations filed before him by the four questioned parties in response to summons u/s. 131 of the Act during Remand proceedings. However, the AO has merely based his conclusions on suspicion, conjectures and surmises. He has not been able to place on record any positive evidence to either disprove the existence of the questioned parties, or to prove that the money spent by the assessee has flown back to him by any circular route. In another judgment pronounced by Hon'ble Delhi ITAT in the case of Continental Carbon India Ltd. Vs. ITO 2012-TIOL-l 13-ITAT-12 dt. 31.10.2011, the Hon'ble ITAT has held that "The assessee had made various purchases from these parties not only in the year but in some cases in earlier or subsequent years also and furnished a detailed comparative chart of each purchase.... Consequently, it cannot be held that such suppliers were not genuine only because summons/notices u/s. 133(6) were not served." It has been further held by the Hon'ble ITAT that "What is being added by the AO is the credit balances of suppliers as on the end of each year, which cannot be done u/s. 68, as long as the purchase is admitted by the department. The Income Tax Act does not cast absolute burden on the assessee, sec. 68 cast a preliminary burden, which has been duly discharged by the assessee by filing the confirmations, bank statements, invoices and ITA Nos.127, 768 & 1543/Del./2014 10 transport details of supplies and goods. The identity of the purchaser is accepted by the department in one year or the other subsequent year. The genuineness of the purchases emerge from the fact that all the goods purchased by the assessee on credit. Purchases have not been disputed by the department in P&L A/c by allowing same as expenditure to the assessee, therefore, assessee has discharged its onus to file evidence for genuineness of suppliers. The issue of creditworthiness will not be applicable in this case as the credit balances are due to purchases made by the assessee from these suppliers. Therefore, the discharge of burden of creditworthiness is implicit from these facts. The assessee cannot be held to be liable for any non- discharge of onus. The additions cannot be made only because the departmental authorities failed to exercise their power and duties for serving and enforcing the summons. The additions made u/s. 68 on account of difference in balances or non-receipt of reply to summons etc. cannot be made in the hands of the assessee." In the instant case also, what has been added by the AO are the credit balances of the five parties in question, one of which had only an opening balance, meaning whereby that the purchases from this party were made in the previous year and were accepted by the department. In the case of rest of the parties also, the purchases have been accepted only where payments have been made during the year. The credit balances appearing at the end of the year had been disallowed and have been added back to the income of the appellant.
4.9. In the light of the above discussion, and also the rebuttal given by the Id. AR with regards to the various theories propounded by the AO in the assessment order, it is held that the AO was not justified in rejecting the books of accounts of the appellant and re-computing his profit at 40%. Although, the AO has mentioned that by all the three theories propounded by him in the assessment order, the GP ratio of the assessee comes to between 30-40% and that it conforms to the general average of this industry. However, he has not been able to place on record any comparative analysis with any concrete examples. Further, on the basis of the discussions in the preceding paragraphs. I am of the considered opinion that adding the credit balances standing in the names of M/s. Bharat Enterprises, M/s. Giriraj Overseas, M/s. Kartik Exports, M/s. Keshav Trading Co. and M/s. Ridhi International and making an addition of Rs.6,79,10,221/- to the income of the appellant was not a judicious decision on the part of the Assessing Officer, particularly in the light of the rebuttal made by the appellant and the evidences placed on record by the ld. AR. Therefore, this addition is hereby deleted."
ITA Nos.127, 768 & 1543/Del./2014 116. The ld. Departmental Representative, relying on the assessment order, submitted that the ld. CIT(A) was not justified in deleting the impugned addition, made by the Assessing Officer on plausible reasons. The summons issued to the sundry creditors, having been received un-served, Inspector's report on spot enquiry, difference in the stock statement submitted to the bank and that submitted in the assessment proceedings, abnormal consumption of fabrics per piece and other discrepancies pointed out by the AO, are such material on record, which are suffice to reject the trading result of the assessee and to disallow the purchases shown to have been made from unverifiable five parties. The ld. CIT(A) has, therefore, wrongly deleted the addition without considering the above material in right perspective. He, therefore, urged to set aside the impugned order and to restore the assessment order.
7. On the other hand, the ld. Authorized Representative of the assessee, reiterating the detailed submissions made before the first appellate authority submitted that the ld. CIT(A) has rightly deleted the addition arbitrarily made by the Assessing Officer. The detailed submissions made are summarized as under :
ITA Nos.127, 768 & 1543/Del./2014 12(i). The no purchases were made by assessee from M/s. Kartik Exports during the year under consideration, hence, the same could not be disallowed, particularly when the trading result for the A.Y. 2007-08, when the purchases from this party were made, stood accepted by the AO.
(ii). Out of the summons issued to four parties, the summons issued to M/s. Bharat Enterprises and Girraj Overseas stood served on the given addresses and only two notices issued to M/s. Ridhi International and M/s. Keshav Trading Company were received un-served. Therefore, non-existence of all the four parties is based on fake assumptions of the AO.
(iii) Letters sent by the assessee to the said parties on the same address on 28.10.2011 through speed post stood duly served, the postal report of which was furnished before the ld. CIT(A), which goes to belie the assumption of the AO about non-existence of the sundry creditors.
(iv). The assessee had furnished all the requisite purchase bills having bulk purchases exceeding 5000 mtrs including the bills of above four parties containing their correct addresses, bill No. date, quantity of fabric, its value and goods receipt note. Their accounts in the books of assessee were also furnished and the account of Kartik Export was not produced, as no purchase was made by assessee from this party during the disputed year.ITA Nos.127, 768 & 1543/Del./2014 13
(v). The Inspector's report regarding non existence of parties is not believable for the simple reason that M/s. Keshav Trading Co. and M/s.
Ridhi International are operating from Katra Saafi and Kuncha Janisaar respectively. Katra Saafi is situated at Fateh Puri and Kuncha Janisaar at Chandni Chowk. The inspector, however, instead of going to Katra Saafi went to locate M/s Keshav Trading Co. at Katra Asharfi and similarly, instead of locating M/s. Ridhi International at Kuncha Janisaar situated at Chandani Chowk, the inspector tried to locate this place at Fateh Puri. No comments have been made by the AO on this explanation of the assessee raising a finger on the Inspector's report.
(vi). The assessee furnished PAN of all these parties along with their address and in the remand proceedings, all the above four parties sent their audited accounts along with audit report for F.Y. 2007-08 and copy of account with assessee through speed post. Copies of ITR for A.Y. 2008-09 were filed only by M/s. Keshav Trading Co. and M/s. Girraj Overseas. On examination, the Assessing Officer himself in the remand report has stated that the books of account of all the four parties were audited by Sh. Sunil Goel, partner M/s. Sunil Anand & Associates and the details as per their trading and P&L account revealed that they were carrying out business at a GP rate of hardly 1% and their major sales were to the assessee on credit. Moreover, the AO preferred to rely on the wrong report of Inspector instead of enquiring their existence through the concerned ranges/wards of the sundry creditors, though the AO was having all the details of the parties on record.
ITA Nos.127, 768 & 1543/Del./2014 14(vii). There being no control of assessee on the bankers, their non- cooperation is not attributable to the assessee to draw any adverse inference on this account. It is also not the case of AO that the amounts paid to two of the above parties during the disputed year returned back to the coffers of assessee nor has the AO made any addition u/s. 68 of the Act.
(viii). The Revenue authorities failed to comment on the contention of the assessee that subsequently, the assessee has made payments to all the above five sundry creditors, aggregating to Rs.73 lacs through account payee cheques, the details of which are given in the impugned order and the latest account from 01.04.2011 to 30.04.2011 was filed for verification.
(ix). That once the export sales made by the assessee have not been disbelieved by the department as also stood accepted by Custom authorities, there was no reason to disbelieve the major part of purchases made from the above parties.
(x) That the suspicion made on the purchases on the premise that current liabilities exceeded to current assets; that majority of assets were of non-business nature and that declared sundry creditors exceeded the sundry debtors, are not based on any material on record and such a vague reason is not tenable in view of comparative chart showing GP/NP/creditors ratio with sales filed before the AO. The AO failed to consider that the assessee GP/NP ratio was almost similar to the earlier years and the assessee could not have more debtors for the ITA Nos.127, 768 & 1543/Del./2014 15 reason that major export sales were to a single party, viz., French Collection.
(xi). That the assumption of AO regarding low profit as compared to the industry average is based on his fantasy, as no comparable instance of any industry/firm or company has been given nor confronted to assessee to support it.
(xii). That the AO has utterly failed to point out any defect in the method of accounting regularly adopted by the assessee as per recognized standard and has also failed to appreciate plethora of evidence before doubting the completeness and correctness of the accounts maintained by assessee for their rejection u/s. 145 of the Act. The accounts maintained in the same fashion stood accepted in earlier years.
(xiii). That the difference observed by AO in purchase of fabrics as shown in Table-D and as per audit report, is vague and based on surmises ignoring the fact that the sales were made by way of export only, which have not been doubted and therefore, there is no possibility to manipulate the purchases. Moreover, the AO himself has categorically stated that the figures of opening and closing stocks were matching with the audit report, but in the same breath he has stated that possibility of manipulation can be in purchase or opening and closing stock. Such a vague observation based on possibilities and whims of AO cannot be appreciated at all. Even otherwise, no addition could be made on the basis of statement of stock produced to the bank, as also held by Hon'ble ITA Nos.127, 768 & 1543/Del./2014 16 Delhi High Court in CIT vs. Capital Tyre Mfg. Unit, 305 ITR 199 and CIT vs. Prem Singh & Co., 163 ITR 434.
8. Raising various objections to different methods of calculating the profit margins by the AO, the contentions of the ld. AR of assessee have been as under:
"For making the trading additions, the Ld. Assessing Officer has tried to recast the trading account by various methods.
a) In method-A, he has taken per unit consumption at 3.34 mtrs, allocated direct expenses per unit at Rs.496- (total expenses of Rs. 9,39,19,518/ 1,88,985) and has worked out the profit at Rs.426.5 per unit, determining the profit margin at Rs. 36.29%.
i) It is submitted that the Assessing Officer has erred in taking the figure of finished quantity as well as consumption of fabric per unit. The assessee has filed 04 page details showing per mtr consumption for each item produced during the year and had worked out the average consumption per unit, which has been totally ignored by the Assessing Officer. The said 04 page details filed by the assessee vide letter-dated 20.12.2010 before the Assessing Officer are enclosed for your kind perusal as Annexure- "E ".
ii). Further Assessing Officer has also ignored the wastage / shrinkage / rejection shown @ 25%. The assessee had explained wastage etc. in detail vide letter-dated 15.09.2010 which had been accepted by the Assessing Officer. The total wastage / shrinkage had been shown by the assessee at 3,26,116 mtr. Had this wastage been considered by the Assessing Officer, the quantity statement would have been tallied. The reconciliation statement of fabric purchased and consumed during the year is enclosed herewith as Annexure-F. iii.). The Assessing Officer had taken the average only of the dyed fabric of 6,32,081 mtr when the assessee was purchasing the grey fabric as well as ITA Nos.127, 768 & 1543/Del./2014 17 dyed fabric and also the printed material as required in the sample. The total fabric consumed by the assessee is 13,04,466 mtr. This shows arbitrariness on the part of Assessing Officer.
iv). Further while computing the profit margin, the Assessing Officer has not taken into consideration the value of consumable of Rs. 1,74,67,046/- which had been consumed during the year. Had all these items been considered by the Assessing Officer, the profit margin would have been the same as declared by the assessee.
v). It is an admitted fact that assessee is engaged in the business of manufacturing and export of high fashion embroidered garments. Vide letter- dated 15.09.2010, it was explained that since the assessee deals in high fashion garments, hand as well as machine embroidered, having small quantities of various styles and sizes, more than 100 in a year, uniform cost per unit is not possible, because every style / size will have different cost depending upon the nature or fabric used / involved and the volume of embroidery work required by the buyer. Production details of garments, style-wise, manufactured by the assessee during the year was furnished vide letter-dated 20.12.2010. These documents have not been considered by the Assessing Officer.
vi). The calculation made by the Assessing Officer can be viewed from another angle also. For the purposes of arriving at per piece margin of Rs.426.5, the Assessing Officer has made following assumptions :
Total purchases Rs.13,54,188 mtrs.
Value of purchases Rs.10,23,58,266
Per mtr cost Rs.75.5
Total finished unit 1,88,985 mtr
Total dyed fabric used in manufacturing 6,32,081 mtr
Consumption of fabric per unit 3.34 mtr
Direct expenses Rs.9,39,19,518
Sale price Rs.1,175
The Assessing Officer has disallowed purchases of Rs. 6.79,10,221/-. If this value is divided by Rs.75.5 (average computed by the Assessing Officer) then ITA Nos.127, 768 & 1543/Del./2014 18 the quantity-wise purchases disallowed by the Assessing Officer comes to 8,99,473 mtr. If this quantity is reduced from the total purchases i.e. 13,54,188 as taken by the Assessing Officer then the quantity-wise consumption comes to 4,54,715 mtr. If this consumption of 4,54,715 mtr is divided by 188985 units (total manufactured units assumed by the Assessing Officer) then per unit consumption comes to 2.4 mtr, whereas the Assessing Officer has taken consumption at 3.34 mtr. It is needless to say that assessee is engaged in manufacturing high fashion embroidered garment. Embroidered garments require upper fabric for embroidery and lining fabric to give strength to upper fabric. Thus average at 3.34 mtr estimated by the Assessing Officer is arbitrary and without any basis. Hence, the calculation made by the Assessing Officer as per method-A is incorrect on is liable to be struck down.
b). The Assessing Officer has also adopted method B to arrive at percentage margin at 33.9%. This method adopted by the Assessing Officer is also apparently incorrect.
i). One of the reason given by the Assessing Officer to reject the books of accounts is that there is a discrepancy in the trading account as well as stock statement submitted to the Department, which were earlier given to the bank, however, no single infirmity has been pointed out. Assessing Officer had directed to the assessee to prepare month- wise trading account on the basis of stock statement given to the bank, which was produced by the assessee. On perusal of this trading account, Assessing Officer observed that GP on sales varies from month to month, (-180% for the month of December 2007 to (+ )53%o for August 2007. Accordingly, Assessing Officer dissected the trading account from 01.04.2007 to 31.08.2007 and applied the said GP to the whole period for making trading additions as per method-B.
ii). Though the Assessing Officer has made trading account till the month of August 2007, he has taken duty draw back at lis. 1,27,71,073 (from where this figure has been taken by the Assessing Officer is not discernible because the assessee has shown the amount of duty draw back at Rs. 96,75,401/- for the entire year), when the amount receivable till August 2007 is only Rs.38,97,073/-. Similarly, the figure of direct expenses taken by the Assessing Officer is also incorrect.
ITA Nos.127, 768 & 1543/Del./2014 19iii). It is further submitted that the Assessing Officer cannot at his sweet will dissect the accounting period and choose any period for determining profit margin. As per the Income Tax Act, the unit Jar arriving at a profit margin is the period of one year i.e. from 01st April to 31s' March of the succeeding year. Month-wise trading account produced by the assessee reveals that the expenditure claimed by the assessee month- wise are not comparable. Moreover, even the trading account for the period from 01.04.2007 to 31.08.2007 and the trading account for the entire year is not comparable. In the later period i.e. from 01.09.2007 to 31.03.2008, assessee has made higher expenditure than the earlier period. Therefore, method B adopted by the Assessing Officer is also not reliable.
iv). Kerala High Court in the case of Koyamman Kutty vs ITO (58 UR
571) have held that the basis on which, the turnover and rate of profit are estimated by the Assessing Officer should be furnished to the assessee and he must be given an opportunity to rebut the same. In the present case, Assessing Officer has not confronted these various methods adopted by him to arrive at a profit margin to the assessee and thus has not given opportunity to him to rebut the same
v). ln CIT vs KY Pilliah & Sons (63 ITR 411), Hon'ble Supreme Court have held that the rejection of book results and estimate of trading addition should be based on some material it cannot be arbitrary.
vi). In CIT vs Ram Chandra Keshardeo (16 ITR 150)(PAT) and in Ganeshi Lal Chappan Lal vs CIT (9 ITR 81) (ALL), it is held that accounts of the assessee cannot be dissected into convenient periods at the option of Assessing Officer. The duty of the Assessing Officer is to find out the income and not to calculate the receipts of the assessee. What the law requires the Assessing Officer to see is whether system of accounting is correct or not.
It is needless to say that in the present case, assessee had adopted method of accounting regularly employed by him; no infirmity has been pointed out by the Assessing Officer. In earlier years, either in 143(3) assessment or in 143(1) assessment, method of accounting adopted by the assessee had been accepted by the Assessing Officer.
vii). It is further submitted that if the accounts of the assessee are rejected u/s 145, assessment has to be made by the Assessing Officer u/s 144 of the ITA Nos.127, 768 & 1543/Del./2014 20 Act. Proviso to Section 144 lays down that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show- cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of this judgement. No such notice has been given by the Assessing Officer to the assessee and thus the primary conditions for best judgement assessment has not been satisfied in this case.
c) Further as per method C, the Assessing Officer has computed profit margin at 40.1% and thereby has made the addition of Rs. 6,79,10,221/- to the income of assessee. In 229 ITR 229, CIT vs Bunwari Lai Bunshidhar, Hon'ble Allahabad High Court have held that when the gross profit rate is applied, there is no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases made by the assessee. There is a fallacy in the method adopted by the AO. Further what field enquiries and the enquiries with respect to general industries are made by the Assessing Officer is not available on record."
9. We have considered the rival submissions of the parties and have gone through the entire material available on record, including the remand report and its rejoinder and various case laws cited, and we find no justification to interfere with the impugned order. It is worthwhile to note that the addition made by the AO by disallowing the purchases from M/s. Kartik Exports amounting to Rs.1,20,91,376/- was, prima facie, not tenable for the simple reason that these purchases were not made during the year under consideration, but were shown as opening balance of Rs.1,16,91,376/- in the account of that party, representing the purchases made during the immediately preceding assessment year 2007-08 and the trading result of assessee for A.Y. 2007-08 stood accepted by the department. In view of these ITA Nos.127, 768 & 1543/Del./2014 21 facts, the inclusion of these purchases for disallowance is void ab initio, as rightly held by the ld. CIT(A). No counter material is placed on behalf of the Revenue to rebut this finding.
10. As regards the purchases from other four parties treated as unverifiable by AO, we find that the addition made is based on the premise that existence of those parties was not confirmed. The non-existence of parties was observed by AO on the basis of letters issued u/s. 133(6) and summons u/s. 131, which came back un-served in case of some of the parties and that the Ward Inspector also could not locate them at the given addresses. In this context, we find substantial force in the contention of the assessee that service of notices on two of the above parties, i.e., Bharat Enterprises and M/s. Girraj Overseas;
service of letters sent by assessee through speed post to the said parties on the same addresses supported by postal service report; furnishing of audited accounts by the said parties through speed post in the remand proceedings in pursuance to the summons u/s. 131 and appearance of representatives of two of the above parties, stand in testimony of the fact that the presumption made by AO about their non-existence is vague and based on his fantasy. There is no contrary material on record to rebut the contentions of the assessee. Besides, we find no material on record to counter the plea of the assessee that in the ITA Nos.127, 768 & 1543/Del./2014 22 subsequent assessment years, the assessee had made substantial payments to the said parties aggregating to Rs.73 lacs through account payee cheques, which was supported by him from the account statement for the period from 01.04.2011 to 30.11.2011 and it has not been the case of the Assessing Officer that the amount so paid to the said parties returned to the coffers of assessee back. In presence of plethora of evidences and above facts, therefore, the purchases made from these parties, in our considered opinion, cannot be disbelieved on this account, as rightly observed by the ld. CIT(A).
11. Apart from the above, the assessee has raised grave objections on the manner of spot enquiries made by Ward Inspector as contended in para (v) of assessee's contentions, as noted in former part of this order. The ld.
Departmental representative has not been able to rebut the wrong localities, where the Inspector had tried to locate the concerned parties. Moreover it is pertinent to note that the export sales declared by assessee have not been questioned by the assessing officer. The assessee has received the sale proceeds in convertible foreign exchange. In such state of affairs, we don't find any justification to disbelieve the purchases of material made by the assessee for manufacturing garments. The confirmations of the parties and the audited accounts sent by them in response to summons issued under section u/s. 131 ITA Nos.127, 768 & 1543/Del./2014 23 of the Income Tax Act can, therefore, not be doubted merely on the basis of surmises and conjectures. The AO has also failed to make any enquiry as to the existence of the above parties through their wards/ranges, particularly when he had all the details including PAN of all the above parties.
12. It is also born out on record that the consistent method of accounting has been followed by assessee. No infirmity has been pointed out by the AO in the method of accounting adopted by assessee. The trading result declared in previous years based on the accounts maintained in the same fashion, has been accepted by the department either under section 143(3) or 143(1) of the Income Tax Act. Moreover, once the account books were rejected under section 145 of the Act, no show cause notice was issued to the assessee to make the best judgment assessment as per provisions of section 144 of the Act on estimation. In presence of these facts we are of the considered opinion that the ld. CIT(A) has rightly discarded the findings reached by the Assessing Officer in the assessment order.
13. A perusal of assessment order further reveals that the AO has rejected the trading results of the assessee by adopting various methods of calculating the profit margins. The method based on consumption of fabric per unit ITA Nos.127, 768 & 1543/Del./2014 24 worked out by AO has been vehemently objected to by the assessee, stating that the AO had ignored the details furnished by assesses showing average consumption per unit as well as the wastage/shrinkage/ rejection of fabrics shown @ 25%. The assessee vide letter dated 15.09.2010 had explained the wastage totaling to 3,26,116 mtrs. and it was contended that if this wastage is considered, the profit margin would tally with that declared by the assessee. A reconciliation statement of fabrics purchased and consumed during the year was filed by the assessee before the revenue authorities, which stands un- rebutted on behalf of the department. The assessee further objected that the AO did not take into account the consumables worth Rs. 1,74,67,046/- which were consumed during the year. The assessee has further pointed out major discrepancies in the calculation of fabric consumption per piece, which too doesn't stand countered on behalf of the revenue. Therefore, in our opinion, the conclusions made by the Assessing Officer cannot be supported at all.
14. The next method based on stock balances given to the bank, in our opinion, is also not tenable. While adopting this method the Assessing Officer appears to have dissected the trading account from 1.04.2007 to 31.08.2007 and worked out the gross profit @ 33.9% for the whole year. On this the assessee objected that the trading account has been re-casted till the month of ITA Nos.127, 768 & 1543/Del./2014 25 August, 2007 and the AO has taken the duty drawback at Rs. 1,27,71,073/-
whereas the assessee has shown the duty drawback of Rs. 96,75,401/- for the whole year and the amount was receivable till August, 2007 of Rs.38,97,073/-.
Even after this objection, it has not been made clear as to from where the AO lifted the above figure of duty draw back. The ld. DR could also not make it clear before us. The assessee has also stated that the figure of direct expenses taken by AO is also incorrect. Moreover, it is not open to the AO to dissect the accounting period and to apply the profit margin worked out for such dissected period for calculating the profit margin for the whole year, as done by the AO in the instant case. We are not inclined to approve the action of AO in view of the decision of Hon'ble Patna and Allahabad High Courts in CIT vs. Ram Chandra Keshardeo, 16 ITR 150(PAT) and in Ganeshi Lal Chappan Lal vs CIT, 9 ITR 81(All), relied by the assessee, wherein it has been held that the accounts of the assessee cannot be dissected into convenient periods at the option of the Assessing Officer. Therefore, the assessee's contention on this count is found worthy of credence. Besides, in view of the decision rendered in CIT vs. Capital Tyre Mfg. Unit, 305 ITR 199 and CIT vs. Prem Singh & Co., 163 ITR 434, relied by the assessee, no addition could be made on the basis of difference in the statement of stock filed to the bank and that recorded in the ITA Nos.127, 768 & 1543/Del./2014 26 books of assessee. Hence, the ld. CIT(A) has committed no error while deleting the addition for want of any contrary material on record.
15. Similarly, the third method based on disallowance of purchase made from five parties noted above, is not found tenable in view of our above discussion made on disallowance of purchases from these parties.
16. A perusal of the impugned order further shows that the ld. CIT(A) has weighed the facts of the present case on the anvil of various judicial pronouncements in favour of the assessee. He has relied on the decision of ITAT, Delhi Bench in YFC Projects Pvt. Ltd. vs. DCIT dated 15.01.2010 for the proposition that merely non-filing of confirmation from two suppliers, it cannot be held that the assessee has not received the goods from those persons. On the discharge of onus by assessee, the ld. CIT(A) has relied on the decision of Hon'ble Delhi High Court in MOD Creations Pvt. Ltd. vs. ITO, 354 ITR 282 (Del.). No contrary material was placed on behalf of the revenue to counter the findings reached by the ld. CIT(A) in the impugned order.
17. In view of what has been discussed above, we don't find any justification to interfere with the impugned order which is based on cogent reasons and various judicial pronouncements considered by the first appellate authority.
ITA Nos.127, 768 & 1543/Del./2014 27No material is placed on record on behalf of the revenue to discard the findings reached in the impugned order. Accordingly, the appeal of the revenue deserves to be dismissed, being devoid of merit.
18. Adverting to the rest two appeals for A.Yrs. 2009-10 and 2011-12, we find that the facts and circumstances attending to them are similar, wherein the Assessing Officer had made additions after estimating the profits of the assessee almost on the same premise as done in the case for A.Y. 2008-09. In these cases also, the Assessing Officer has estimated the profit of the assessee majorly by disbelieving the sundry creditors or purchases made therefrom.
The other reasons for addition are also similar such as downfall in Gross profit rate and non-verifiability of sundry creditors, non-production of stock register, non-service of summons on all the sundry creditors etc. The only difference is that the assessee had shown seven parties as sundry creditors in A.Y. 2009-10 and twelve parties in 2010-11, the details of which are as under :
S.No. Name of Sundry Creditors Assessment Years
2009-10 2010-11
1. M/s. Kunal Enterprises 5866648
2. M/s. Manju Overseas 1642811
3. M/s. Human Textiles 5142887
4. M/s. Girraj Enterprises 6421781
5. M/s. Saurabh Overseas 936239
6. M/s. Usha Textiles 1707236
7. M/s. Shanti Trading 13021647
Company
ITA Nos.127, 768 & 1543/Del./2014 28
Total 3,47,39,249
1. Sushant Trade Mills 70033
2. K.A. Enterprises 2039740
3. Bharat Enterprises 117126624*
4. Bharat Vijay Milk 685968
5. Ashirwad Fashion 202420
6. Anand Dyers 8958
7. Atif Zari House 2224512
8. Girraj Overseas 11655206
9. Keshav Trading Co. 12334222
10. Mazhar Zari House 6416203
11. Pearl Creations 15951457
12. Riddhi International 15766783
Total 184482126**
* Actual figure is Rs.1,17,12,634/- in place of Rs.117126624/- ** Actual figure works out to Rs.7,90,68,136/- in place of Rs.144482126.
19. In appeal for A.Y. 2010-11, the Revenue has challenged the admission of some additional evidence without pointing out as to which of the evidences submitted by the assessee were additional in nature. Moreover, the CIT(A) has sought remand report on each and every submission or evidence filed by the assessee and the Assessing Officer had made extensive enquiries thereon in the remand proceedings. Therefore, this ground does not have any merits and deserves to be dismissed.
20. The arguments of the assessee are also on the same fashion as made in appeal for A.Y. 2008-09 and the findings reached in the impugned orders for these years are almost same based on the same judicial pronouncements on ITA Nos.127, 768 & 1543/Del./2014 29 the issue. The learned CIT(A) has properly dealt with the matter under consideration and has made a reasoned order. Finding no infirmity therein, we do not find any justification to interfere with the impugned order and the same deserves to be affirmed. In such view of the matter, there being parity of facts, our decision reached in appeal for A.Y. 2008-09 as above, shall apply mutatis mutandis in appeals of the Revenue for A.Y. 2009-10 and 2010-11 too.
Accordingly, these appeals of the Revenue also deserve to fail.
21. In the result, all the appeals of the Revenue are dismissed.
Order pronounced in the open court on 17th May, 2018.
Sd/- Sd/-
(H.S. Sidhu) (L.P. Sahu)
Judicial member Accountant Member
Dated: 17th May, 2018
*aks*
Copy of order forwarded to:
(1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative (6) Guard File
By order
Assistant Registrar
Income Tax Appellate Tribunal
Delhi Benches, New Delhi