Income Tax Appellate Tribunal - Chandigarh
Smart Value Product And Services Ltd., ... vs Department Of Income Tax on 28 October, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH,CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND Ms. RANO JAIN, ACCOUNTANT MEMBER
ITA No. 685/CHD/2014
Assessment Year: 2009-10
The DCIT, Vs M/s Smart Value Product
Circle, & Services Ltd. M-17,
Parwanoo. 2nd Floor,
Lajpat Nagar-II,
New Delhi.
PAN: AAKCS4493C
(Appellant) (Respondent)
Appellant by : Shri Manoj Mishra
Respondent by : Shri Sudhir Sehgal &
Shri Ashok Goyal
Date of Hearing : 20.10.2015
Date of Pronouncement : 28.10.2015
O R D E R
PER BHAVNESH SAINI,JM This appeal by revenue is directed against the order of ld. CIT(Appeals) Shimla dated 02.05.2014 for assessment year 2009-10 on the following ground :
"On the f acts and in the circumstances the Ld. CIT (A) has erred in allo wing relief of Rs.13,60,05,356/-
by relying on the average of net prof it of the preceding two years of the assessee, whereas the A.O. had made the addition by calculating the G.P. from the month wise purchase and sales supplied by the assessee f or the current year, P&L account and from bal ance sheet."
2
2. Brief facts are that a return declaring income of Rs. 65,59,669/- was filed on 30.09.2009 which was subsequently revised at the same income. The assessee company follows a direct marketing business model and derives income from retail trading of various consumer goods. The assessee has declared gross turnover to the tune of Rs.91,90,10,669/-against which net profit has been declared to the tune of Rs. 1,06,69,510/- which gives effective NP rate of 1.16%. On examination the AO noticed that G.P. rate was not mentioned in the audit report. The same was calculated by the AO from the figures available in the P & L Account, Balance Sheet and details of the month wise purchases and sales as supplied by the assessee. The assessee was asked to substantiate the figure of closing stock in the balance sheet as on 31.3.09 amounting to Rs. 1.83 crores on the basis of calculations done on month wise and quarter wise trading accounts by applying the computed GP rate of 51.16%. The AO observed that the company made almost consistent sales but the purchases were not commensurate with the sales. Further, the company tried to make its stock positive by making more purchases from January,2009 to March,2009. 2(i) After consideration of assessee's reply as quoted in para 2.2 of assessment order, the AO observed that the assessee has tried to furnish the month wise closing stock which it failed to produce/ justify / explain/ 3 substantiate during the period of assessment. The assessee also stated that GP cannot be uniform through out the year specifically when the assessee was maintaining proper stock records. This claim of the assessee was not accepted by the AO on the ground that the auditors of the company have not mentioned the maintenance of the stock register/stock records. The auditors did not mention the GP rate as well as quantitative record of stocks in their Tax Audit Report. Thus, the claim of the assessee that the actual month wise trading account based on actual figures after taking into account proper stock records was found baseless. Further, the assessee claimed that in the month of January, February and March the purchases booked were much more than other months of the years because the assessee was dealing with so many branches where the purchases were made by the branches directly and after getting the details from the said branches the assessee booked the same in its books of account as purchases. The AO found that the claim of the assessee is incorrect because of the fact that as per information supplied by the assessee, it made purchases during the year through Central Warehouse, Calcutta and Central Warehouse, New Delhi amounting to Rs. 2,01,46,312/- and Rs. 31,91,87,259.78 respectively, totaling Rs. 33,93,33,571.78 whereas the assessee debited Rs.34,83,48,792.96 as total purchases made during the year in the trading account. The AO 4 negated the contention of the assessee regarding verification of purchases from the bills on the reasons as enumerated in para 2.5 of the assessment order. 2(ii) The Assessing Officer did not accept the submissions of the assessee because of his observation that either they were incorrect or were contrary to the record available on file. On further examination of month wise trading account provided by assessee, the AO raised certain issues as enumerated in para 2.8 of the assessment order. The conclusions were drawn on the basis of figures arrived by computations done on month wise basis. The AO raised the question that purchases were never in consonance with level of sales and when other months are showing gross profit in the rage of 96.65% to 20.45%, how can it be gross loss of 161.05% in the month of March, 2009. Another fact the assessee maintains a closing stock of Rs.1.85 crore as on 31.03.2008 and closing stock of Rs.1.83 crores as on 31.03.2009 whereas in the rest of months the stock level are less than 8 lakhs raises a question that why it is only in the month of March that the stock level goes so high.
2(iii) The Assessing Officer asked the assessee to furnish the details of valuation of closing stock as appearing in the balance sheet which was not furnished due to large number of items. The Assessing Officer concluded that month wise trading account filed by the 5 assessee was self contradictory. The AO prepared a trading account according to which the gross profits came out to Rs.36,39,54,887.88 against the sales of Rs.71 ,24,69,335.88 which results in a G.P. rate of 51.08%. Therefore the addition as proposed by him to be made vide the show cause notice of Rs.14.50 crores at a G.P rate of 51.16% was made at a rate of 51.08%, i.e., Rs. 14.48 crores. Accordingly, an addition of Rs. 14.48 crores was made. Aggrieved by the addition made by the A. O. the assessee has preferred this appeal.
3. The assessee challenged the addition before ld. CIT(Appeals) and assessee submitted that the assessee sells different consumable items through Multi Level Marketing system by virtue of which the orders/sales are booked and after having booked the sales/order the goods against large number of common orders are purchased and supplied against said sales booked by agents. In this way, sales are booked first then the purchases and all the purchases/sales are settled and posted upto the close of year even the goods which are supplied, sold and booked and are received against challans and purchase bill are received quite late on okaying goods received from them and supplied to customers. Sometimes this takes months in actually taking the bills to goods a/c for having sold and supplied goods months before on the strength of order booked through MLM agents to whom commissions are disbursed 6 at different stages. The sales are booked first then the purchases and most of regular goods are acquired/received on the strength of challans and bills are settled on the close of year. Though payments against such receipts of goods is regularly made on tentative basis and the final payment is made on the end of year. The assessee further relied upon the judgment of Hon'ble I.T.A.T. Bangalore Bench, in the case of Industrial Trading Co. Vs. ITO, ITA No. 158/Bang/1989; Asst year 1986-87 (1994) 50 TTJ (Bang) 177, Hon'ble Supreme Court in the case of S.A. Builders Vs. CIT(Appeals) 288 ITR 1 and Kachwala Gems Vs. JCIT [2007] 288 ITR 10 (SC).
4. Further, the assessee was keeping the complete records including the regular books of accounts, stock register, purchase, sales and expenses vouchers etc. duly supported with bill which were produced before the learned A.O. from time to time, While framing the assessment order learned Assessing Officer prepared the monthly trading accounts on his own notions and finally made the addition of Rs.14,48,00,000/- on account of shortage of stock during the year. He just prepared an imaginary month wise trading account and after rejecting all the contentions of the assessee made the addition without mentioning anything. The learned AO had asked the assessee to file the month wise figure of purchase and sales. On the basis of the figures of 7 purchase and sales, learned AO prepared the monthly trading account. For arriving at the figures of closing month, a hypothetical figure of gross profit was placed in the trading account and the consequential amount was treated as deficiency in closing stock. 4(i) The modus operandi of the assessee was that the goods were received, throughout the year, by the different Warehouse at different stations. The goods were received either through bills or through challans. The intimation of the goods received was send to the Head Office. After receipt of the intimation of receipt of goods the assessee used to make the lump sum payments to the different suppliers and part payment or even excess payment were also there in some cases. From the copies of account of the supplier the fact of regular payments of the purchase of goods were verified by Ld. AO. The copies of the bank statements were produced before the learned AO for the verification of the payments. The entries of purchase bills received with the goods during the whole year were made in the month of February and March Just for settling the accounts of the different suppliers. Bank Accounts with corresponding entries in Party ledgers were verified by Ld. AO. This shows that there is nothing in the system which suggests that the assessee has made the purchases at the end of the year or the purchases entered in the month of February and March 8 are not the actual purchases and merely the paper work.
4(ii) At the end of the assessment order on page 13, learned AO has prepared a trading account. This trading account was prepared after considering all the facts of the case regarding the disputed purchases and in this trading account leaned AO has admitted that the correct GP rate comes to 51.08% in place of 51.16% adopted earlier. The AO has also accepted the figure of sales at Rs.71,24,69,336/- and the opening and closing stock. Now if the contention of the learned AO is accepted then the purchases will be reduced by Rs. 14.48 crores which will result in reducing the purchases to Rs. 20,35,48,793/- resulting in a gross profit of Rs. 50,87,54,888/- thus giving a GP rate of 71.40% . This exercise will change the GP rate which has already been accepted. The basic concept taken by the Ld. AO is at all wrong. The trading accounts have 5 elements. Any 4 elements if accepted, then the 5th elements will be resulting figure. The AO has accepted the Opening Stock, Closing stock, sales and GP at 51.08% of the sales then the only element left to be decided is purchases which should be the resultant figure. Once the books are rejected then there remains no reason to consider the monthly figures of the trading accounts. The Assessee relied on the judgement of the 9 Bangalore Bench of the Hon'ble ITAT in industrial Trading Co, V STO reported in (1994)50TTJ 177. 4(iii) The assessee has proved the identity of the parties' from whom the goods were purchased. The payments were made to them throughout the year on different dates. The amounts of payment were almost equal to the amount of purchases entered either during the year or at the end of the year. The payments were made through the banking channel and so it cannot be said that the source of expenditure on the purchase of goods are unexplained. So, the provision of section 69C is also not applicable. The assessee relied on the judgement of Hon'ble ITAT Calcutta Bench in the appeal of ITO V New Card Board Industries reported in (1992) 40 ITD 50.
4(iv) The assessee further submitted that this is settled principles of law that assessment is to be made on the basis for complete year and piecemeal assessment is not permissible under law. The AO has tried to sketch month-wise trading a/c and has worked out negative stock at a particular point of time and has tried to justified addition on the basis of that negative stock. This is a covered matter by the jurisdictional Tribunal in ITA No. 279/Chd/1990 in the case of Saqi Brothers, Ludhiana V/s ITO. The Hon'ble IT AT, 10 Chandigarh has held as under.-
'We have carefully considered the submissions of both the sides as also the facts on record. In our opinion, the whole exercise of working out month-wise trading results was meaningless because certain things had to be assumed by the assessing officer in this regard. It has, for instance, to be assumed that the gross profit rate of the assessee would be uniform throughout year. In the case of Bhalla Brothers (supra), such an exercise was made and it was found that on a particular date there was negative stock. The assessing officer made an addition in this regard. The Tribunal, however, deleted the addition and the high court held that the addition had been properly deleted and no question of law arose, so far as the first period is concerned, we find that the assessing office had arrived at a situation where there was a negative stock. In such a situation, no addition can be made as held by the Punjab & Haryana High Court in the case of Bhalla Brothers (supra)."
This decision later on was upheld by the Hon'ble Punjab & Haryana High Court in ITR No. 70 of 1998 dated 31.10.2006 in the case of CIT v/s Saqi Brothers. Further in arriving at the decision, the ITAT has followed the judgment of Hon'ble Punjab & Haryana High Court in the case of Bhalla Brothers [1981] 10 TLR 215 and also that of ITAT Jabalpur, Bench in the case of Tara Chand Shanti Lai. In this regard kind attention is also drawn to the judgment of Hon'ble Punjab & Haryana High Court in ITR No. 117 of 1999 decided on 04.12.2006 in the case of CIT Jaiandhar V/s M/s Bansai Sons, Ludhiana, wherein the Hon'ble Punjab & 11 Haryana High Court has observed as under :
"Position of stock arrived at in the middle of year was not enough to justify addition. The Hon'ble Punjab & Haryana High Court again has made reliance on its own judgment in the case of Bhalla Brothers mentioned hereinabove."
4(v) The facts of our case are identical to the facts as that of the case before the Hon'ble Supreme Court and as such in our case too at the most provisions of section 145(3) could have been invoked and the AO could compute our income in the manner laid down u/s 144 of the IT Act as warranted by the provisions of section 145(3) of the IT Act. Provisions of section 145(3) of the i.T. Act "Where the AO is not satisfied about the correctness or completeness of the accounts of the assesses, the AO may make an assessment in the manner provided in section 144." The appellant relied upon the following decisions :-
i) CIT V/s Aggarwal Engg. Co. cited as [2008] 302 ITR 246 (P&H)
ii) S.M. Hasan, STO V/s New Gramophone House AIR 1977 SC 1788 (SC)
iii) CIT, Jalandhar V/s M/s Bansal Sons Ludhiana ITR No. 117 of 1999 (P&H)
iv) Bhalla Brothers (1981) 10 TLR 45.
v) CIT Vs. M/s Saqi Brothers, Ludhiana ITR No, 70 of 1998 (P&H)
vi) Tarachand Shantilal (Jaipur Bench 28 TTJ 128) 12 4(vi) The AO could not bring any specific material on the record to prove that there were any unrecorded purchased in the books of accounts which resulted into excess sales and it is also true that no sales can be made without goods and as such it is amply clear that assessee has been receiving the goods regularly from their suppliers and effecting the sale and the purchases against the same were booked in the last quarter of year. The appellant has been consistently maintaining that it has been making regular payments by a/c payee cheques throughout the year and the same is verifiable from our bank accounts and the purchases were booked in the last quarters. All possible details to establish the identity of the parties from whom purchases were made have been placed on the file.
4(vii) The comparative figures of net profit rate with reference to sales as declared by the assessee in the year under consideration and as determined by the AO in subsequent assessment years (after certain additions u/s 143(3)} are 0.92%, 2.53% and 2,99% for the A.Ys. 2009-10, 2010-11 and 2011-12 respectively. In this regard, the assessee relied upon the judgment of Hon'ble IT AT, Delhi F Bench in the case of Rama Dairy Products Ltd V/s Department of Income tax pronounced on 08.06.2012 and Hon'ble ITAT Ahmedabad Bench [2004] 85 TTJ AHD 481 in the case of Assistant CIT V/s D.L. Choudhry.
4(viii) In the light of above facts and circumstances, it 13 is brought to notice that facts and circumstances and other material brought by the AO on file and order passed by the AO, it is amply clear that AO has reached to an erroneous conclusion by making the addition on account of negative stock at any particular of time in toto. Even unmindful of the correctness of facts brought on record, the AO could at the most estimate the profit within the meaning of section 145(3) of the l.T. Act and as such your good self is requested to determine our income by applying suitable net profit rate as to the best of your judgment in accordance with the law in all fairness with the facts of the case. As the worthy CIT (Appeals) can undo what the AO has wrongly done and can do what the AO has failed to do as the powers of ClT(Appeals) under the IT Act are co-terminus with that of AO.
4(ix) The assessee also filed a paper book, containing written submission, copies of judicial pronouncements, copy of assessment order, challan bills with supporting details. Vide this office dated 13.03.2014 a set of the paper books was forwarded to the DCIT, Parwanoo for verification on facts and submission of his report on the objections raised by the appellant and also comments for the justification of the addition made on account of estimated negative stock by applying GP rate. 4(x) The AO filed its reply dated 25.03.2014 where AO has mostly reiterated the findings at the assessment 14 stage. Further, the AO submitted that books of accounts were not reliable in the absence of stock register and unverificable purchases. In the subsequent years also the books of accounts were not found to be totally reliable and additions were made which gave to net profit rate of 2.53% and 2.99% against declared net profit rate of 1.57% and 2.23% for A.Y. 2010-11 and 2011-12 respectively. The Assessing Officer justified the assessment order for A.Y. 2009-10 as fair and reasonable and submitted to be decided on merits. 4(xi) The assessee in its rejoinder submitted that there is no provision in the income tax act which defines the terminology of negative stock and also there is no provision in act which authorizes the AO to make the addition on presumptive negative stock on any particular day of year. The income tax act defines only two situations, AO has followed none, firstly where the books of accounts are reliable then the NP declared by the assessee as on end of year is to be accepted subject to minor addition and disallowances and secondly where the books of accounts are not reliable then the AO is authorized to estimate the profits judicially. The AO cannot adopt both the situations and hence assessment completed by the AO is totally contrary to law. The AO in remand record has conceded that in our like business which is multi level marketing, the goods are perpetually acquired against challans and are delivered 15 to buyers, The regular bills are received at a later date and are accounted for accordingly. These challans as were enclosed in paper-book have been verified from the stock register produced before the AO during remand proceedings. Thirdly, the AO has not offered any comments on legal pronouncements and different judgments of various high courts and ITAT relied upon by the appellant. These infact tantamount to acceptance of legal opinion expressed by the tribunal and courts. These judicial pronouncements and appellate order can be relied by any of parties at any time. They are referable, persuasive and binding in nature. The decisions of jurisdictional tribunal and that of Hon'ble Supreme Court are binding in nature, if facts of the case resemble with situation of a particular case. In the above circumstances, our case may be considered in the light of different judgments relied and quoted by appellant in detailed .arguments. Infact the Ld. AO did not have time to look into stock register and challans at the time of original assessment which was going to be time barred within 2 days of the issue of show-cause notice, how it is an afterthought now, if produced before the Hon'ble CIT(Appeals) during appellate proceedings and also during remand proceedings.
5. The ld. CIT(Appeals), considering the facts and circumstances and material on record, finding defects in the maintenance of the books of account rejected the 16 same under section 145(3) of the Act and average net profit of subsequent two years estimated at 2.76% applied against the turnover for determining the net profit of the assessee and accordingly allowed the appeal of the assessee partly. His findings in paras 4.13 to 4.17 of the appellate order are reproduced as under :
"4.13 I h av e g o n e th r o u g h th e f ac t s o f th e c as e , wr i t t e n s u b mi s s i o n s f iled by th e as s e s s e e , r e man d r e p o r t o f th e A . O . an d r e jo i n d e r f i l e d b y th e a s s e s s e e . I t i s n o te d th a t t h e A O o b s e r v e d th a t the GP rate an d m a i n te n an c e of s to c k r e g i s te r we r e n o t me n t i o n e d i n t h e au d i t r e p o r t. T h e A O h as me n t i o n e d th a t t h e b o o k s o f ac c o u n ts we r e test checked except the relevant stock records and stock registers wh i c h we r e not produced. On the basis of f igures available in P&L account and details of mo n t h - wi s e purchases and sales provided by the assessee, the AO compu ted a gross prof it of 51.16%. By applying GP rate of 51.16%, the AO co mputed m o n t h wi s e a n d q u a r t e r wi s e t r a d i n g a c c o u n t f o r F.Y. 2008-09. On the basis of examination of b o o k s a n d mo n t h wi s e a n d q u a r t e r wi s e t r a d i n g accounts, the AO issued a show cause notice af t e r f inding certain discrepancies. The AO observed that -
i) Purchases could not be verif ied as letters i s s u e d t o p a r t i e s a t t h e i r a d d r e s s we r e e i t h e r r e t u r n e d u n - d e l i v e r e d o r i t wa s ref used to be accepted,
ii) The invoice issued by M/s Grace Designer we r e s e r i a l l y n u m b e r ,
iii) Co mmiss ions not verif iable f rom the p a r t i e s t o wh o m l e t t e r s we r e i s s u e d , 17 i v ) T h o u g h t h e r e we r e c o n s i s t e n t s a l e s o f a b o u t R s . 5 t o R s . 7 C r o r e s e v e r y mo n t h s b u t t h e purchases in the beginning of year f rom A p r i l t o D e c e m b e r we r e l o we r a n d f r o m J a n u a r y t o M a r c h , t h e p u r c h a s e s we r e high,
v) The opening and closing stock during the y e a r we r e mo r e o r l e s s s a me . B a s e d o n above, the AO issued show cause to e x p l a i n t h a t wh y a d d i t i o n o f R s . 1 4 5 0 . 9 5 lacs (peak) should not be made f or u n d e r s t a t e me n t o f p r o f i t b y e n t e r i n g i n genuine purchases. In response to sho w c a u s e , t h e a s s e s s e e r e p l i e d wh i c h h a s been reproduced in para 2.2 of the a s s e s s me n t o r d e r wh e r e t h e a s s e s s e e h a s given reasons f or all the queries raised in the notice. Subsequently, the AO again e x a m i n e d t h e m o n t h wi s e t r a d i n g a c c o u n t provided by the assessee and noted that in the earlier period of f inancial year the GP varied f rom as high 96.65% to 39.97% wh e r e a s i n J a n u a r y , F e b r u a r y , i t wa s around 23 to 20% and in March, the GP was minus 161.05%. The Assessing Off icer on the basis of his observations as e n u me r a t e d i n p a r a 2 . 8 o f t h e a s s e s s me n t o r d e r c o n c l u d e d t h a t m o n t h wi s e t r a d i n g account f iled by the assessee in response to the show cause is self contradictory. The n e g a t i v e G P r a t e i n t h e mo n t h o f M a r c h show the m a l af i d e of assessee in decreasing his taxable prof it by reducing i t s g r o s s m a r g i n . T h e r e af t e r , t h e A O prepared a trading account by applying a GP rate of 51.08% and added Rs.14.48 C r o r e s t o t h e i n c o me a s p r o p o s e d b y h i m i n the show cause notice.
4.14 On the other hand the appellant has s u b m i t t e d t h a t t h e n a t u r e o f b u s i n e s s wa s b a s e d o n mu l t i l e v e l m a r k e t i n g s y s t e m wh e r e t h e g o o d s we r e r e c e i v e d t h r o u g h o u t t h e y e a r b y d i f f e r e n t w a r e h o u s e s a t s e p a r a t e s t a t i o n s . T h e g o o d we r e received either through bills or through challans. Af ter receipt of intimation of goods the lu mp su m payments we r e made to dif ferent suppliers throughout the year. The entries of purchase bills r e c e i v e d wi t h t h e g o o d s d u r i n g t h e wh o l e y e a r 18 we r e m a d e i n t h e mo n t h o f F e b r u a r y a n d M a r c h f or settl ing the accounts of dif f erent suppliers. T h e p u r c h a s e s we r e n o t m a d e a t t h e e n d o f t h e y e a r b u t t h e p u r c h a s e s we r e e n t e r e d i n t h e b o o k s in the mo n t h of February and March. The appellan t h as al so submitted th at co mplete books of accounts, stock register, sale and expense v o u c h e r s a n d b i l l s we r e p r o d u c e d b e f o r e t h e A O f r o m t i m e t o t i m e . H o we v e r , t h e a d d i t i o n wa s made on account of shortage of stock during the year on the basis of imaginary mo n t h wi s e t r a d i n g a c c o u n t s . T h e b a n k s t a t e m e n t s we r e a l s o produced bef ore the AO for verif ications of paymen ts made to d if f erent suppliers during the year. The AO had accepted the opening stock, closing stock, sales and GP @ 51.08% and did an e x e r c i s e t o p r e p a r e a t r a d i n g a c c o u n t . H o we v e r , the b as is of mak ing the addition was not specif ic in the assessment order. The appellant f urther s u b m i t t e d t h a t t h e a s s e s s me n t h a s t o b e m a d e o n the basis of complete year and not on the basis o f p i e c e me a l a s s e s s me n t . T h e A O h a d t r i e d t o s k e t c h t h e mo n t h wi s e t r a d i n g a c c o u n t a n d h a s wo r k e d o u t n e g a t i v e s t o c k a t a p a r t i c u l a r p o i n t o f time and h as tried to jus tif y add itions on the basis of negative stocks. The appellant has relied on the decision of Jurisdictional T ribunal IT A No.279/Chd./1990 in- the case of Saqi Brothers, Ludhiana Vs. ITO wh i c h wa s later upheld by Hon'ble Punjab & Haryana High Court. It has been f urther submitted that AO have not brought o n r e c o r d t o p r o v e t h a t t h e r e we r e u n r e c o r d e d purchases in the books of account resulting into excess sale. Further, by placing various judicial p r o n o u n c e me n t s , t h e a p p e l l a n t h a d s u b m i t t e d o n the f acts of the case that at the mo s t the provisions of section 145(3) could have been 19 i n v o k e d a n d A O c o u l d h a v e c o m p u t e d t h e i n c o me i n t h e m a n n e r l a i d d o wn u / s 1 4 4 o f t h e A c t . 4.15 A f te r considering the submissions and various f acts, it is found that the basic presump tion to arr ive at co mputation of gross prof it arose in the mind of AO on the ground that GP rate in the earl ier period of the f inancial ye ar w a s h i g h e r wh i c h t a p e r e d t o l o we r s i d e f r o m t h e m o n t h o f J a n u a r y o n wa r d a n d g a v e r i s e t o a G P of minus 161.05% in the month of March. The AO resorted to mathematical calculation by month w i s e a n d q u a r t e r wi s e t r a d i n g a c c o u n t s wh i c h resulted in peak negative stock of 1450.95 lacs in the compu ted trading account for quarter October to December, 2008. The appellant has s u b m i t t e d i t s r e a s o n s f o r e n t e r i n g mo s t o f t h e p u r c h a s e s i n t h e mo n t h o f F e b r u a r y a n d M a r c h a s t h e b i l l s we r e r e c e i v e d t o wa r d s l a t e r p a r t o f the ye ar f ro m dif f erent suppliers. It has been explained through the mo d u s operandi of the business that goods Were received either through bills or through challans and on receipt of goods the assessee use to make lu mp su m paymen ts to dif f erent suppliers during the year. T he copies of accounts of suppliers and regular payments f or t h e p u r c h a s e s o f g o o d s we r e a l s o v e r i f i e d b y t h e A O . T h e c o p i e s o f b a n k s t a t e m e n t s we r e a l s o produced f or the verif ications of paymen t made during the year. The AO has not found any def ect regarding unaccounted purchase or sales. Further, there was no f inding either in f orm of a n y i n f o r m a t i o n a v a i l a b l e wi t h t h e A O r e g a r d i n g u n a c c o u n t e d p u r c h a s e s n o r t h e r e wa s a n y r e s u l t of negative stock on physical verif ication of stock during survey etc. at assessee's premises wh i c h c a n s h o w t h a t t h e r e wa s n e g a t i v e s t o c k 20 during various mon ths of f inancial ye ar, in v ie w o f t h e s e f ac t s , I f i n d t h a t c a l c u l a t i o n s o f mo n t h w i s e a n d q u a r t e r wi s e t r a d i n g a c c o u n t s l e a d i n g to a peak negative closing balance based on a c o n s t a n t G P r a t e wa s i r r e l e v a n t a n d e r r o n e o u s . T h e a s s e s s me n t o f i n c o me i s t o b e m a d e o n t h e basis of accounts prepared for the entire f inanc ial ye ar as the entr ies of purchases, sales and expenses may not be available f or entering into books of account on a real t i me basis. Looking at the business operations of the appellant, it cannot be doubted that the purchases have been entered in the last three m o n t h s o f t h e y e a r wh e r e t h e c l o s i n g o f a c c o u n t s i n t h e y e a r e n d i s r e q u i r e d f o r s e t t l e me n t o f accounts wi t h various debtors and creditors. Regarding the calculation of peak negative c l o s i n g s t o c k o n t h e b a s i s o f m o n t h wi s e a n d q u a r t e r wi s e t r a d i n g a c c o u n t t h e a p p e l l a n t h a d cited the decision of jurisdictional Tribunal in the case of Saqi Brothers, Ludhiana (supra) wh e r e i t wa s h e l d t h a t t h e wh o l e e x e r c i s e o f wo r k i n g out m o n t h - wi s e trading results wa s meaningless because certain things have to be a s s u me d by the AO in this regard. It to be a s s u me d t h a t t h e g r o s s p r o f i t r a t e o f a s s e s s e e wo u l d be unif or m through out the year. This decision wa s later upheld by the Punjab & H a r y a n a H i g h C o u r t f o l l o wi n g i t s o wn j u d g me n t in the case of Bhalla Brothers. Respectf ully f o l l o wi n g t h e d e c i s i o n o f j u r i s d i c t i o n a l T r i b u n a l on the simil ar is sue the co mputation of negative peak stock of 1450.95 lacs wh i c h wa s made basis f or addition of Rs.14.48 Crores is f ound to be not jus tif ied. 4.16 H o we v e r , o n p e r u s a l o f a s s e s s me n t o r d e r i t i s n o t i c e d t h a t t h e A O h a s f o u n d c e r t a i n d e f e c t s wh i l e e x a m i n a t i o n o f t h e 21 books of account and audit report. The AO has observed as under :-
"i) The auditors of the company have n o t me n t i o n e d t h e m a i n t e n a n c e o f s t o c k register or stock records in the audit report.
ii) The auditors did not mention the GP r a t e a s we l l a s q u a n t i t a t i v e r e c o r d o f s t o c k in the tax audit report.The complete purchases could not be verif ied through the inf ormation called u/s 133(6) of the Act.
iii) The purchase bills of M/s Grace D e s i g n e r s , N e w D e l h i we r e s e r i a l l y n u mb e r h a v i n g n o s a l e t a x r e g i s t r a t i o n n u mb e r o n the bill and notice issued under section 133(6) could not be served on it.
iv) T h e a s s e s s e s wa s a s k e d t o f u r n i s h t h e relevant details of valuation of closing stock wh i c h wa s n e v e r f u r n i s h e d t i l l t h e l a s t submission.
v) The ingenuineness of the trading results a l o n g wi t h the incorrect claim of the assesses regarding the maintenance of s t o c k r e c o r d s p r o v e s t h e m a l af i d e o f t h e assessee.
In vie w of above def ects, the provisions of section 145(3) are attr ac ted. T he provisions of Section 145(3) stipulates that where the AO is not satisf ied about the correctness or 'completeness of the accounts of the assessee, t h e A s s e s s i n g O f f i c e r m a y m a k e a n a s s e s s me n t in the manner provided in section 144 of the Act. The provisions of section 144 stipulates that the AO af t e r taking into account all relevant m a t e r i a l wh i c h t h e A O h a s g a t h e r e d s h a l l af t e r giving the assessee an opportunity of being h e a r d m a k e t h e a s s e s s me n t o f t h e t o t a l i n c o me t o t h e b e s t o f h i s j u d g me n t a n d d e t e r m i n e t h e such payments by the assessee on the basis of such a s s e s s me n t . On the basis of f indings recorded by the AO and def ects noticed as above wh i c h remained during the appellate 22 proceedings, the provisions of section 145(3) are invoked. The assessee's books of accounts re jected and the net prof it is co mputed to the b e s t o f my j u d g m e n t . I n t h e a s s e s s e e ' s c a s e , i t is noticed that in the current year a net prof it of 0.92% has been declared on the to tal sales of R s . 7 1 , 2 4 , 6 9 , 3 3 5 / - . I n s u b s e q u e n t t wo y e a r s wh e r e the sales have increased to about 89 C r o r e s a n d 8 6 C r o r e s , t h e r e t u r n o f i n c o me h a v e b e e n a s s e s s e d u / s 1 4 3 ( 3 ) wh i c h g a v e r i s e t o n e t prof it of 2.53% and 2.99%. T aking an average of n e t p r o f i t o f a s s e s s e d i n c o me i n s u b s e q u e n t t wo years wh i c h have s a me mo d e of business operations, a net prof it rate f or current year is estimated at 2.76%. By applying a net prof it of 2.76% on the sales of the year under consideration i.e. Rs.71 ,24,69,335/-, the net prof it is co mputed at Rs.1,96,64,154/-. The a s s e s s e e h a s s h o wn n e t p r o f i t a s p e r r e t u r n o f i n c o me of Rs.1,06,69,510/-. So the balance amount of Rs. 89,94,6447- is added to the i n c o me . H e r e t h e r e l i a n c e i s a l s o p l a c e d o n t h e d e c i s i o n o f H o n ' b l e S u p r e me C o u r t i n t h e c a s e o f K a c h wa l a G e ms Vs. D C IT [2007] 288 IT R 1 0 wh i l e m a k i n g t h e e s t i m a t i o n o f t h e n e t p r o f i t t o t h e b e s t o f t h e j u d g me n t .
4.17 T h u s i n v i e w o f t h e af o r e s a i d d i s c u s s i o n and f indings the addition of Rs.14.48 Crores made on the basis of negative peak closing stock is deleted and addition of Rs. 89,94,644/- on account of net prof it co mpu tation is made by applying the provisions of Section 145(3) and 144 of the Act. These grounds of appeal are p a r t l y a l l o we d . "
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6. We have heard ld. Representatives of both the parties. The ld. DR relied upon order of the Assessing Officer, on the other hand, ld. counsel for the assessee reiterated the submissions made before authorities below and submitted that issue is covered in favour of the assessee by order of ITAT Chandigarh Bench in the case of M/s Saqi Brothers Vs ITO 54 TTJ 306. The same is also confirmed by the Hon'ble Punjab & Haryana High Court in ITR 70 of 1998 dated 31.10.2006 (supra).
7. We have considered rival submissions and gone through the material available on record. The Assessing Officer found that GP rate and Stock Register were not mentioned in the audit report. The books of account were, however, test checked but Stock Register was not produced. On the basis of figures available in Profit & Loss Account and details of month-wise purchases and sales provided by the assessee, the Assessing Officer computed the gross profit of 51.16%. The Assessing Officer computed month-wise and quarter-wise trading account for enhancing the GP. The Assessing Officer, however, did not considered that assessee made genuine purchases and sales which were entered into the books of account of the assessee. The Assessing Officer also did not consider the nature of business of assessee, was based on multi level marketing system where the goods were received through-out the year by different warehouses at 24 separate stations. The goods were received either through bills or through challans. After receipt of intimation of goods, the lumpsum payments were made to different suppliers through out the year. No defects in the purchases and sales have been pointed out by the Assessing Officer. The assessee produced complete books of account, sales and purchase vouchers. However, the Assessing Officer, on imaginary basis, prepared month-wise trading account for making addition against the assessee. In this way also Assessing Officer found a negative stock in the books of account of assessee which is not permissible in law. Thus, the Assessing Officer in his own way has prepared the trading account for enhancing the GP despite the fact that it is well settled that book results are drawn on annual basis. The Assessing Officer did not found any unrecorded purchases. No sales were found outside the books of account. Therefore, the extra profit arrived at by the assessee on month-wise could not be sustained. It is also well settled that profit rate cannot be uniform in each month. The assessee is dealing in large number of items which is also not in dispute. The Assessing Officer accepted the Opening Stock, purchases and sales, therefore, where is the question of considering negative stock in the books of account of the assessee ?25
7(i) The ITAT Chandigarh Bench in the case of M/s Saqi Brothers V ITO (supra) held that, " No addition can be made on the ground that Assessing Officer found negative stock of analysis of month-wise trading results, assessee itself having offered Rs. 50,000/- for addition, further addition is not sustainable as gross profit on unaccounted sales, if any, would be far less". This order of the Tribunal has been confirmed by Hon'ble Punjab & Haryana High Court vide judgement dated 31.10.2006 (supra). Copies of the orders are placed on record. The ld. CIT(Appeals), therefore, on proper analysis of facts and material on record correctly came to the conclusion that at the most, the Assessing Officer should have rejected the book results under section 145(3) of the Act. The ld. CIT(Appeals) also correctly did not accept the conclusion arrived at by the Assessing Officer by preparing month-wise trading account for making addition because it would give distorted results. The rejection of the books of account by ld. CIT(Appeals) under section 145(3) of the Act have not been challenged by the revenue as well as by the assessee. Therefore, finding of fact recorded by ld. CIT(Appeals) for rejection of the books of account under section 145(3) has become final. Therefore, the question left for consideration would be whether ld. CIT(Appeals) has correctly applied average of net profit of assessed income in subsequent two years which have same mode of business operation at 2.76%. The 26 assessee in assessment year under appeal has shown NP rate of 0.92%. However, in subsequent assessment years, Assessing Officer passed the orders under section 143(3) in respect of the same business activities of the assessee which gave rise to net profit of 2.53% and 2.99% in subsequent assessment years 2010-11 and 2011-12. No comparable case have been cited by the Assessing Officer in the assessment order. Therefore, history of the assessee would be relevant and should be considered by the authorities below.
8. Hon'ble Privy Council in the case of Laxmi Narain Badri Dass 5 ITR 170 held that, "Estimate of income should be fair. The Assessing Officer should not act dishonestly or vindictively or capriciously. History, knowledge of previous returns, local knowledge, circumstances of the assessee to be considered to arrive at fair and proper estimation". The Hon'ble Punjab & Haryana High Court in the case of Rajinder Prasad Jain 274 ITR 545 held that "Tribunal applying net profit consistent with past history of the assessee justified".
9. Since in the subsequent years, the Revenue Department accepted NP rate in the case of the assessee at 2.53% and 2.99%, therefore, ld. CIT(Appeals) was justified in applying average of the net profit of assessed income of subsequent two years for the purpose of determining the profit of the assessee. The Assessing Officer was, therefore, not justified in 27 adopting GP rate of 51.08% for making addition against the assessee. The ld. CIT(Appeals), on proper appreciation of facts and material on record in the light of the decision of ITAT Chandigarh Bench in the case of M/s Saqi Brothers (supra) as confirmed by the Hon'ble Punjab & Haryana High Court, rightly allowed the relief of Rs.13.60 Cr. We do not find any infirmity in the order of the ld. CIT(Appeals). The departmental appeal is, therefore, dismissed.
10. In the result, the departmental is dismissed.
Order pronounced in the Open Court.
Sd/- Sd/- (RANO JAIN) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 28th Oct., 2015. 'Poonam' Copy to:
The Appellant, The Respondent, The CIT(A), The CIT,DR Assistant Registrar, ITAT/CHD