Income Tax Appellate Tribunal - Kolkata
Acit,Cc-1(2), Kolkata, Kolkata vs R T Fashion Pvt. Ltd., Kolkata on 10 April, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL "C", BENCH KOLKATA BEFORE SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM आयकरअपीलसं./ITA No.2180/Kol/2016 ( नधा रणवष / Assessment Year: 2013-14) ACIT, Central Circle-1(2), Vs. R T Fashion Pvt. Ltd. Kolkata Aayakar BhawanPoorva, 110, Shantipally, 3rd Floor, Kolkata-
700107. 39, K.K. Tagore Street, Kolkata-700007 थायीले खासं . /जीआइआरसं . /PAN/GIR No.: AACCR 9208 C (Assessee) .. (Revenue) Assessee by :Shri Saurabh Kumar, Addl. CIT (DR) Respondent by : Shri D.S.Damle, FCA सन ु वाईक तार ख/ Date of Hearing : 17/01/2019 घोषणाक तार ख/Date of Pronouncement : 10/04/2019 आदे श / O R D E R Per Dr. A. L. Saini:
The captioned appeal filed by the Revenue, pertaining to assessment year 2013-14, is directed against the order passed by the Commissioner of Income Tax (Appeal)-20, Kolkata, which in turn arises an out an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (in short the Act), dated 30.03.2015.
2.The appeal filed by Revenue, for Assessment Year 2013-14, is barred by limitation by 62 days. The Revenue has moved a petition requesting the Bench to condone the delay.We have heard both the parties on this preliminary issue.
R T Fashion Pvt. Ltd.
ITA No.2180/Kol/2016Assessment Year:2013-14 Having regard to the reasons given in the petition, we condone the delay and admit the appeal for hearing.
3. Ground No. 1 raised by the Revenue reads as follows:
"1.That the ld CIT(A) erred in law as well as facts in entertaining new facts in form of deviated sale, which leads to a deletion of Rs. 1,71,20,924/- and under disclosure of profit estimated."
4. Brief facts qua the issue are that during the assessment year the assessee company has declared gross profit of Rs.7,41,29,757/- @ 12.05% on the total turnover of Rs. 61,48,03,672/-. The said gross profit includes the value of excess stock of Rs. 5,43,26,026/- which was disclosed u/s 132(4) of I.T. Act, 1961, during the course of search & seizure operation. After deducting the above disclosure the gross profit reduced to Rs.1,98,03,725/- which is 3.22% of total turnover. The average gross profit ratio of last 3 years with turnover is 6%. From the above facts, ld AO noted that the assessee has reduced its gross profit ratio to adjust the disclosed amount, which was disclosed as an additional income of the assessee for the year under consideration. The assessee has reduced its gross profit ratio by 2.78%. The assessee company could not offer any justification for the same. In these circumstances the gross profit ratio @ 6% is applied for the year under consideration. The difference amount of Rs. 1,70,91,542/- which is 2.78% ( 6% - 2.78%) of the total turnover, that is (2.78% of Rs. 61,48,03,672)was treated as undisclosed income of the assessee company. Thus, AO made addition of Rs.1,70,91,542/-.
5. Aggrieved the stand so taken by the Assessing Officer the assessee carried the matter in appeal before the ld. CIT(A), who has deleted the addition made by the Assessing Officer. Aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us.
6. The ld. DR for the Revenue, has submitted before us that after deducting the disclosure made during the search, the gross profit reduced to Rs.1,98,03,725/- which is 3.22% of total turnover. The average gross profit ratio of last 3 years with Pa g e | 2 R T Fashion Pvt. Ltd.
ITA No.2180/Kol/2016Assessment Year:2013-14 turnover is 6%. Therefore, the assessee has reduced its gross profit ratio by 2.78% (6%-3.22%). The assessee company could not offer any justification for the same. In these circumstances the gross profit ratio @ 6% is applied for the year under consideration by the AO to compute the difference amount of Rs. 1,70,91,542/-. Therefore, the addition made by AO should be sustained.
7.On the other hand, the ld. Counsel for the assessee defended the order passed by the ld CIT(A).
8. We have given a careful consideration to the rival submissions and perused the material available on record. We note that in the instant case, the addition to the tune of Rs.1,70,91,542/- was made by the Assessing Officer as undisclosed income for low gross profit ratio. The Assessing Officer noted that the assessee had never incurred losses during the previous assessment years 2007-08 to 2012- 13, and had declared income ranging from Rs. 22lakhs to 33 lakhs. However, during the assessment proceedings, the assessee company submitted before the ld. Assessing Officer that the decrease in the gross profit is because of discounted sale ranging from 40% to 70% of their standard price list. It is a regular feature of the business that the discounted sale is organized seasonally every year. However, the Assessing Officer noted that the assessee has not proved whether the discounted sale was organized in earlier years and therefore the Assessing Officer made addition.
9. We note that the main grievance of the Ld DR for the Revenue is that the assessee company did not produce evidence to explain the loss. We note that considering the nature of business the discounted sale is a regular feature of the business and the discounted sale is organized seasonally every year. The AO was of the view that there is no proof whether the assessee has organized the discounted sale in earlier years or not. However, we note that assessee has submitted following evidences and explanations before the ld AO as well as before the ld CIT(A):
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Assessment Year:2013-14
1) The assessee had furnished complete book records, party-wise purchases and sales details before the AO during the assessment proceedings.
2) The AO did not reject details filed by the AR and books of accounts during the assessment proceedings.
3) There was no discounted sale by the assessee in FY 2010-11 and 2011-12.
4) Party-wise details, sales ledger and supporting sales invoices in respect of the saries sold during the stock clearance period in financial year 201-13 and also the corresponding purchase invoices of such non-moving stock pertaining to FYs 2010-11 and 2011-12 was furnished before the AO.
5) After excluding the 'cost and sale value relatable to obsolete stock, the gross profit of the appellant was Rs.5,64,29,878/- in relation to sale value of Rs.57,84,92,439/-; which is in percentage terms comes to 9.75%. Thus, the effective GP rate of the appellant for AY 2013-14 was 9.75% and not 3.22% as allegedly calculated by the Assessing Officer.
We note that the AO could not appreciate the situation and circumstances under which discounted sales were made in FY 2012-13. It also seems that AO has not considered the fact that discounted sale was not done by the assessee in previous two financial years. The AO has also not considered the corresponding purchases of sarees in FY 2010-11 and 2011-12, which were sold on discount of 40% to 70% during the period of discounted sale. We note that the assessee had explained the reasons before the Assessing Officer and justified the low gross profit in the relevant year in comparison to earlier years. The assessee also submitted before the Assessing Officer the details of old, non-moving and defective sarees which is the part of the opening stock as on 01.04.2012 and the sale stock clearance period which was also furnished before the Assessing Officer.
10. We note that AO made gross profit addition, based on estimation, without rejecting books of accounts of the assessee.We note that the AO could have ventured into estimation only after rejecting the books of accounts of the assessee company u/s 145(3) of the Act and thereafter by making best judgment assessment u/s 144 of the Act. Here in this case, the AO has not passed any order u/s 144 of Pa g e | 4 R T Fashion Pvt. Ltd.
ITA No.2180/Kol/2016Assessment Year:2013-14 the Act. The AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its gross profit ratio. While scrutinizing the purchases and sales, if the purchases claimed are not having any nexus to the business of the assessee or if there is deficiency in the vouchers or there is no bills supporting the incurrence of purchases/expenditure, at the most purchase expenses to the extent that are not supported by the vouchers can be held to be non-genuine and can be disallowed by the AO; and item-wise the AO could have disallowed the purchases and sales rather than going for disallowance of percentage basis.For that we rely on the judgment Hon`ble Bombay High Court in the case of CIT Vs Teletronics Dealing Systems Ltd (228 taxmann 194). The relevant findings of the High Court is reproduced below:
"It is that by section 145 of the Income Tax Act, 1961, the Assessing Officer has to record satisfaction about correctness or completeness of the Account of assessee or where ,the method of accounting provided in sub- section (1) of section 145 or accounting standards as notified under sub- section (2), have not been regularly followed by the assessee, then, the assessing officer may make an assessment as provided in section 144. Mr. Tejveer Singh submits that when the assessee was not coming forward, not giving any explanation then the assessing officer cannot be faulted for recording that he is not satisfied about correctness or completeness of account of the assessee. Such finding should not have been reversed by the tribunal. More so, when it was upheld by the Commissioner of Income Tax (Appeals). In relation to these questions what we find is that the assessing officer has been faulted for not following section 145(3) of the Act. The tribunal has held that before the assessing officer about the correctness or completeness of the accounts of the assessee, he ought to have given proper opportunity to the assessee. The books of account could not have been rejected casually. The tribunal in paragraph 5 has held that rejection of books of account was not itself correct. It was not done by giving proper opportunity to the assessee. The rejection is high handed, There was an affidavit filed even before the Commissioner of Income Tax (Appeals) and the revenue did not controvert the contents thereof. However, the assessing officer made addition of gross profit and that was a matter clarified by the assessee in this Affidavit. The Commissioner of Income Tax has not upheld this gross profit addition. The comparison by the assessing officer and by looking at the very document, namely, the profit and loss account was improper. The merits of addition have been gone, into in paragraphs 5 and 6 of the impugned 'order. The tribunal has termed the approach of assessing officer as unfortunate. It is termed as arbitrary, high handed and cannot be sustained. Without examining the basic parameters for rejection of the books of accounts the revenue goes in appeal before the tribunal, this is what is faulted by the tribunal. To our mind, the complaint of the assessee before the tribunal was wholly justified. Not only did the assessing officer fail to record the requisite Pa g e | 5 R T Fashion Pvt. Ltd.ITA No.2180/Kol/2016
Assessment Year:2013-14 satisfaction in term of section l45(3) but proceeded to make addition and that was estimate which was also not sound. In such circumstances the other questions are also not substantial questions of law enabling us to interfere in our appellate jurisdiction. The appeal is devoid of merits. It is dismissed."
Therefore, based on the entirety of the facts and circumstances of the case and the case laws cited above we are of the view that there is no infirmity in the order passed by the ld. CIT(A). That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue, is hereby upheld and the ground raised by the revenue is dismissed.
11. Ground no. 2 raised by the revenue relates to addition of Rs. 29,382/- on account of membership fee.
12. Brief facts qua the issue are that during the assessment year theassessee company has debited an amount of Rs. 29,832/- under the head subscription & membership charges. During the assessment proceedings, the assessee company was required to file the details of expenses and explanation how the same is business expenditure. No plausible explanation has been offered by assessee. Therefore, AO treated that the membership charges of Rs. 29,832/- were paid for the benefit of the directors and therefore are of personal nature and accordingly, the same was disallowed and added to the total income of the assesseecompany .
13. On appeal, the ld. CIT(A) deleted the addition. Aggrieved the revenue is in appeal before us.
14. Before us, the ld. DR has primarily reiterated the stand taken by the Assessing Officer which we have already discussed in our earlier para and the same is not being repeated for the sake of brevity. On the other hand the ld. Counsel for the assessee has defended the order passed by the ld CIT(A).
15. We have given a careful consideration to the rival submissions and perused the material available on record. We note that the Assessing Officer disallowed the said payment holding that it was not related to the business of the assessee but for Pa g e | 6 R T Fashion Pvt. Ltd.
ITA No.2180/Kol/2016Assessment Year:2013-14 the personal benefit of the directors. The counsel submits before us that the observation of the Assessing Officer was wholly contradictory to the jurisdictional facts of the case. The assessee is engaged in the business of dealing in sarees. The assessee has obtained membership of certain prestigious club at Kolkata. Considering the nature of business of the assessee company, it is also necessary for the directors to interact with suppliers, brokers, and customers in order to finalize deals and market & sell their products. The directors of the assessee company are also required to maintain cordial business relations with its business associates. Such clubs provide a perfect platform for interactions exchange of information and to conduct business. The membership & subscription expenses are therefore wholly and exclusively for business purposes and allowable as deduction from the business profits of the assessee. We note that various courts have held that membership fees paid to clubs or organizations is revenue in nature and should be allowed as business expense in computing business income. Some of the relevant decisions are as below:
CIT vs. GrozBeckert Asia Limited (351 ITR 196) (P&H HC) CIT vs. Lubrizol India Ltd. (37 taxmann.com 294) (Bom HC) Gujrat State Export Corpn. (209 ITR 649) (Guj HC) Attention was further invited to the decision of the Hon`ble Madras High court in the case of CIT vs. Sundaram Industries Ltd. (240 ITR 335). In that case the assessee company had paid subscription amounts to Rotary Club, Gymkhana Club and Mylapore Club which was claimed as business expenditure. The Tribunal held that the expenditure was not incurred for personal benefit of director but in order to promote business, The High Court concurred with the view of the Tribunal and held the subscription to club is allowable business expenditure. Similar view was expressed by the Bombay High Court in the decision of Otis Elevator Co. (India) Limited (195 ITR 682). Keeping in view facts of the case and case laws cited above, we are of the view that there is no infirmity in the order of ld CIT(A). That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue, is hereby upheld and the ground raised by the revenue is dismissed.
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Assessment Year:2013-14
16. In the result, the appeal of the revenue is dismissed.
Order pronounced in the Court on 10.04.2019
Sd/- Sd/-
(S.S.GODARA) (A.L.SAINI)
या यकसद य / JUDICIAL MEMBER लेखासद य / ACCOUNTANT MEMBER
कोलकाता /Kolkata;
दनांक/ Date: 10/04/2019
(SB, Sr.PS)
Copy of the order forwarded to:
1. ACIT, Central Circle-1(2), Kolkata
2. R T Fashion Pvt. Ltd.
3. C.I.T(A)- 4. C.I.T.- Kolkata.
5. CIT(DR), Kolkata Benches, Kolkata.
6. Guard File.
True copy
By Order
Assistant Registrar
ITAT, Kolkata Benches
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