Income Tax Appellate Tribunal - Pune
Nainesh M. Nandu, , Pune vs Income-Tax Officer,, on 30 November, 2016
आयकर अपील
य अ धकरण "बी" यायपीठ पण
ु े म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, PUNE
ी आर. के. पांडा, लेखा सद य, एवं ी #वकास अव थी, या%यक सद य के सम& ।
BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA Nos. 1976 & 1977/PN/2014
%नधा(रण वष( / Assessment Years : 2006-07 & 2007-08
Shri Nainesh M Nandu,
Prop. Benzer Design Center,
Amar Manor, 32/3,
Pune-Solapur Road,
Wanowri, Pune - 411013
PAN : AABPN1755E
.......अपीलाथ / Appellant
बनाम/Vs.
Income Tax Officer,
Ward - 11(3), Pune
......
यथ / Respondent
Assessee by : Shri Dharmesh Shah
Revenue by : Shri P.L. Kureel
सन
ु वाई क तार ख / Date of Hearing : 18-10-2016
घोषणा क तार ख / Date of Pronouncement : 30-11-2016
आदे श / ORDER
PER VIKAS AWASTHY, JM :
These two appeals by the assessee are directed against the orders of Commissioner of Income Tax (Appeals)-I, Pune of even date 28-03-2014 for the assessment years 2006-07 and 2007-08, respectively. Since, the issues involved in both the appeals are similar, 2 ITA Nos. 1976 & 1977/PN/2014, A.Ys. 2006-07 & 2007-08 these appeals are taken up together for adjudication and are decided by this common order.
2. The appeal of the assessee in ITA No. 1976/PN/2014 for the assessment year 2006-07 is time barred by 15 days. The assessee has filed a petition seeking condonation of delay citing reasons for delay in filing of the appeal. After perusing the same, we are satisfied that the delay in filing of appeal is unintentional. The delay in filing of appeal is condoned and the appeal is admitted to be heard on merits.
3. The brief facts of the case as emanating from records are : A survey action was carried out at the premises of the assessee on 17-08-2005. During the course of survey, inventory of stock lying at seven godowns of the assessee i.e. M/s. Benzer Design Center was prepared by the survey party. It was observed that the assessee is not maintaining proper stock register and there was discrepancy in stock. The Assessing Officer rejected the books of account of the assessee. The Assessing Officer further observed that during the assessment year 2006-07 the assessee has declared gross profit ratio of merely 19%, whereas in the immediate preceding years i.e. assessment years 2004- 05 and 2005-06 the gross profit rate was 31.7% and 39%, respectively. The Assessing Officer estimated gross profit at 35% and made addition of `44,97,152/- in the income returned by the assessee.
Aggrieved by the assessment order dated 30-12-2008 passed u/s. 144 r.w.s. 145(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), the Assessing Officer preferred appeal before the 3 ITA Nos. 1976 & 1977/PN/2014, A.Ys. 2006-07 & 2007-08 Commissioner of Income Tax (Appeals). In first appeal the Commissioner of Income Tax (Appeals) upheld the rejection of books of account. The Commissioner of Income Tax (Appeals) reduced the gross profit addition from 35% to 30%. However, the Commissioner of Income Tax (Appeals) made addition of `6,70,014/- in respect of difference in stock as unexplained investment.
In assessment year 2007-08 the assessee had declared gross profit of 27.54%. The Assessing Officer estimated the same at 30%. The Assessing Officer further made disallowance of `14,968/- on account of delay in deposit of employee's contribution to Provident Fund and ESI. Aggrieved by the additions made by Assessing Officer vide assessment order dated 18-12-2009, the assessee preferred appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) upheld both the additions made by Assessing Officer. Against the findings of Commissioner of Income Tax (Appeals) in the respective assessment years, the assessee is in second appeal for assessment years 2006-07 and 2007-08 before the Tribunal.
4. Shri Dharmesh Shah appearing on behalf of the assessee submitted that the Commissioner of Income Tax (Appeals) has erred in estimating gross profit at 30% for both the assessment years under appeal. The books of account maintained by the assessee are duly audited. No defect was pointed by the Assessing Officer while rejecting the books of account. No allegation that inputs were inflated or sales were suppressed are leveled against the assessee. Merely for the reasons the gross profit ratio has been gone down, the authorities 4 ITA Nos. 1976 & 1977/PN/2014, A.Ys. 2006-07 & 2007-08 below have made addition. The Assessing Officer in assessment year 2006-07 had estimated gross profit at 35%. In first appeal the Commissioner of Income Tax (Appeals) reduced the gross profit addition to 30% but made addition of `6.70 lacs on account of discrepancy in stock. The fall in gross profit in the assessment years 2006-07 and 2007-08 was on account of increase in cost of inputs, increased cost of sales, overall recession in the market, rise in competition resulting in reduced margin and the change of method of presentation of sales tax. Till assessment year 2005-06 the assessee use to show sales including VAT in trading account. With effect from assessment year 2006-07 the assessee starting showing turnover excluding taxes in the trading account. For the various reasons mentioned above the gross profit ratio reduced considerably. The ld. AR fairly admitted that the assessee was not maintaining stock register but details of stock were available. The ld. AR referred to page 17 of the paper book to show summary of stock maintained by the assessee.
4.1 In respect of assessment year 2007-08 the ld. AR submitted that the assessee without assigning any reason has rejected books of account and estimated the gross profit at 30% as against 27.54% declared by the assessee. The Assessing Officer further disallowed `14,968/- on account of delay in deposit of employee's contribution to Provident Fund and ESI. The said amount was deposited by the assessee before due date of filing of return and thus, the same should be allowed. In support of his submissions the ld. AR placed reliance on the decision of Hon'ble Bombay High Court in the case of 5 ITA Nos. 1976 & 1977/PN/2014, A.Ys. 2006-07 & 2007-08 Commissioner of Income Tax Vs. Ghatge Patil Transports Ltd. reported as 368 ITR 749.
4.2 In respect of gross profit addition the ld. AR contended that decline in gross profit ratio in any particular financial year cannot be a valid reason for making addition. In support of his submissions the ld. AR placed reliance on the following decisions :
i. Pharmalab Engineering India Pvt. Ltd. Vs. ACIT in ITA No. 999/Mum/2014 decided on 22-06-2016;
ii. Sajjankumar Suganchand Agrawal-HUF Vs. ACIT in ITA No. 383/Ahd/2008 decided on 17-09-2010.
4.3 The ld. AR made an alternate submission that if gross profit addition is sustained, no addition on account of discrepancy in stock should be made.
5. On the other hand Shri P.L. Kureel representing the Department vehemently supported the findings of Commissioner of Income Tax (Appeals) in confirming the additions made by Assessing Officer. The ld. DR submitted that the books of account were rejected by the Assessing Officer as the assessee was not maintaining proper stock register. Further, there was drastic fall in gross profit for the period relevant to assessment year 2006-07, the assessee could not justify decline in gross profit with credible evidence and explanation. Merely because books of account for subject to audit it cannot be said that the value of closing stock and gross profit declared by the assessee is 6 ITA Nos. 1976 & 1977/PN/2014, A.Ys. 2006-07 & 2007-08 sacrosanct. The ld. DR pointed that the Auditors in the Tax Audit Report have clearly pointed that change of method in accounting of sale tax/VAT does not have any effect on the profit of the assessee. In so far as other reasons given by the assessee for sharp decline in gross profit ratio is concerned, the same were not substantiated. The ld. DR prayed for dismissing both the appeals of the assessee.
6. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. The first ground in both the appeals is with respect to gross profit addition @ 30%. The gross profit declared by assessee in assessment years under appeal and the immediately preceding assessment years are as under :
A.Y. G.P. Ratio
2004-05 31.7%
2005-06 39%
2006-07 19%
2007-08 27.54%
The fall in gross profit ratio during the assessment year under appeals have been attributed to the following factors :
i. Change in the method of presentation of sales tax in the books of account.
ii. Increased cost of sales iii. Increased cost of imports.
iv. Decrease in sales margin on account of higher discounts. v. Decrease in profit margin on account of increase in competition. 7
ITA Nos. 1976 & 1977/PN/2014, A.Ys. 2006-07 & 2007-08 vi. Overall recession in the market.
7. During the First Appellate proceedings, the Commissioner of Income Tax (Appeals) has considered all the factors pleaded by assessee resulting in decrease in gross profit ratio. In so far as first reason given by the assessee i.e. change in the method of accounting, we observe that in the Tax Audit Report, the Auditors have mentioned that the change in the method of accounting of sales tax/VAT does not have any effect on the profit of the assessee. The other reasons given by the assessee for decline in the gross profit ratio viz. increase in the cost of sales, competitive market, overall recession etc. are generic and are not supported by any cogent evidence. The assessee has further attributed increase of import cost, higher rates of discounts, purchase of goods through agents instead of direct purchases for the fall in gross profit.
However, the assessee has not given any detailed study as to how these factors and to what extent they have contributed in reducing the gross profit ratio. The assessee in assessment year 2007-08 has itself declared gross profit of 27.54%. The general market conditions which the assessee has mentioned resulted in decline in gross profit ratio were subsisting in assessment year 2007-08 as well. Yet the assessee showed substantial improvement in gross profit.
8. The Assessing Officer has rejected books of account primarily for two reasons, firstly the assessee has not maintained proper stock register which has resulted in the aberration of accounting results and secondly sudden fall in gross profit without there being any cogent 8 ITA Nos. 1976 & 1977/PN/2014, A.Ys. 2006-07 & 2007-08 reason. In so far as rejection of books of account, we do not find any infirmity in the findings of authorities below. The Commissioner of Income Tax (Appeals) has reduced gross profit addition from 35% to 30% and at the same time has made addition on account of discrepancy in stock. We are of the considered view that once the addition is made by estimating gross profit, separate addition on account of discrepancy in stock is unwarranted. Keeping in view the entirety of the facts, we are of considered view that gross profit addition @ 28% would be fair and justified for the assessment years under appeal. Thus, ground No. 1 in appeals for respective assessment years is partly accepted and ground No. 2 in the appeal for assessment year 2006-07 is allowed.
9. The ld. AR has contended that merely for the reason that the gross profit percentage has gone down, addition cannot be made and in support of his submissions reliance has been placed on the decision of Mumbai Bench of the Tribunal in the case of Pharmalab Engineering India Pvt. Ltd. Vs. ACIT (supra) and Ahmedabad Bench of the Tribunal in the case of SajjanKumar Suganchand Agrawal-HUF Vs. ACIT (supra). We find that facts in the above two cases are distinguishable. In the case of Pharmalab Engineering India Pvt. Ltd. Vs. ACIT (supra) the assessee duly met with all the objections of the Assessing Officer during the appellate proceedings. There was no cogent material to show that the assessee has manipulated accounts for suppressing the profits. In the backdrop of said facts the Tribunal held that merely fall in gross profit in the absence of any cogent reasons could not be a ground to 9 ITA Nos. 1976 & 1977/PN/2014, A.Ys. 2006-07 & 2007-08 hold that proper income could not be deduced from the audited accounts maintained by the assessee and the book results ought to be rejected and consequently gross profit margin rate of preceding years be applied to the sales of the instant assessment year under appeal.
In the present case we find that the assessee was not maintaining proper stock register. This fact has been admitted by the assessee. Although, the assessee has given various reason for sharp decline in gross profit margin from 39% in assessment year 2005-06 to 19% in assessment year 2006-07 but none of the reasons given by the assessee for decline in gross profit were substantiated with cogent evidence. The reasons given by the assessee for fall in gross profit are general in nature. The assessee in immediately succeeding year has again shown gross profit of more than 27%. There are aberrations in the accounting results for which no valid reasons have been furnished. The books of account were also reject for those very reasons.
10. In the assessment year 2007-08 the assessee has raised additional ground of appeal with respect to disallowance of employee's contribution to provident fund amounting to `14,968/-. The said amount was deposited on 30-06-2006 as against the prescribed due date of 15-06-2006. Undisputedly, the amount was deposited before the due date of filing of return of income under the provisions of the Act. This fact has not been disputed by the ld. DR. We find that this issue is squarely covered by the decision of Hon'ble Supreme Court of India in the case of Commissioner of Income Tax Vs. Alom Extrusions Ltd. reported as 319 ITR 306 and the decision of Jurisdictional High 10 ITA Nos. 1976 & 1977/PN/2014, A.Ys. 2006-07 & 2007-08 Court in the case of Commissioner of Income Tax Vs. Ghatge Patil Transports Ltd. (supra). Accordingly, the additional ground raised by the assessee in appeal for assessment year 2007-08 is allowed.
11. In the result, both the appeals of the assessee are partly allowed in the aforesaid terms.
Order pronounced on Wednesday, the 30th day of November, 2016.
Sd/- Sd/-
(आर. के. पांडा / R.K. Panda) (!वकास अव"थी / Vikas Awasthy)
लेखा सद"य / ACCOUNTANT MEMBER $या%यक सद"य / JUDICIAL MEMBER
पण
ु े / Pune; &दनांक / Dated : 30th November, 2016
RK
आदे श क+ ,%त.ल#प अ/े#षत / Copy of the Order forwarded to :
1. अपीलाथ / The Appellant.
2. यथ / The Respondent.
3. आयकर आयु'त (अपील) / The CIT(A)-I, Pune
4. आयकर आयु'त / The CIT-I, Pune
5. !वभागीय %त%न,ध, आयकर अपील य अ,धकरण, "बी" ब/च, पुणे / DR, ITAT, "B" Bench, Pune.
6. गाड1 फ़ाइल / Guard File.
//स या!पत %त // True Copy// आदे शानुसार / BY ORDER, %नजी स,चव / Private Secretary, आयकर अपील य अ,धकरण, पुणे / ITAT, Pune