Income Tax Appellate Tribunal - Ahmedabad
Nareshkumar P.Kapadia,, Surat vs Assessee on 20 December, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "B" AHMEDABAD
Before S/Shri Bhavnesh Saini, JM and A.N. Pahuja, AM
ITA No.700/Ahd/2007
Asst. Year: 2003-04
Shri Nareshkumar P. V/s. Asstt. Commissioner of
Kapadia, Prop. Of M/s Incom e-tax, Circle-2,
M. Jivenram, Plot 49, Surat.
S.No.1542 ,Outside
Kamla Darwaja,
Umerwada, Surat.
PAN :ADW PK 8344E
(Appellant) .. (Respondent)
Assessee by :- Shri R.N. Vepari, AR
Revenue by:- Shri M.Mathivanan,DR
ORDER
A.N. Pahuja: This appeal filed by the assessee against an order dated 20/12/2006 of the ld. CIT(A)-II,Surat ,raises the following grounds: :-
I. Rejection of book result (1) On the facts and circumstances of the case, the ld. CIT(A) ought to
have held that there was no basis for rejecting book result in post survey period when no defects were pointed out.
(2) On the facts and circumstances of the case, the book result ought to have been accepted.
II. Addition to Gross Profit Rs.10,32,467/- (1) The ld. CIT(A) erred in estimating gross profit at 17.04% on the
turnover of the post survey period when there was no justification for making the above estimate.
(2) The appellant submits that since all details in respect of sale, quantity tally both for cloths and yarn and reason for lower rate of gross profit provided, the addition ought not to have been confirmed.
(3) On the facts and circumstances of the case, the addition is required to be deleted.
I TA No .7 00/ A hd /2 0 0 7 III Unaccounted Sales-Rs.60,000
1. The ld. CIT(A) ought to have deleted amount of Rs.60,000/- in respect of unaccounted sale of disclosure when the amount made in the investment as per disclosure at the time of survey in excess stock can be considered to have been financed from such amount.
2. The appellant submits that on the facts and circumstances of the case, the ld. CIT(A) was not justified in confirming the addition.
IV Miscellaneous
1. The ld. CIT(A) erred in confirming interest u/s 234B of the Act.
2. The ld. CIT(A) erred in confirming interest u/s 234D of the Act .The appellant carnves leave to add, alter or vary any of the grounds of appeal.
2. Adverting first to ground nos. I & II of the appeal, facts, in brief, as per relevant orders are that the return declaring income of Rs.42,01,396/- filed on 28/11/2003 by the assessee, engaged in manufacturing and sale of art silk cloth as well as trading in yarn, after being processed u/s 143(1) of the Income-tax Act,1961[hereinafter referred to as the 'Act'], was taken up for scrutiny with the issue of notice u/s 143(2) of the Act on 27.4.2004. In this case, a survey u/s 133A of the Act was conducted in the premises of the assessee on 11/9/2002,when the assessee declared additional income of Rs. 27,64,339/- as under :-
(i) Excess stock of yarn Rs.8,32,350/-
Excess stock of grey cloth Rs.15,67,806/- Rs.24,00,156
(ii) Unaccounted sales Rs.60,000/-
(iii) Unaccounted investment in
Construction Rs.3,04,183/- Rs.3,64,183
Total disclosure : Rs.27,04,339/-
2.1 During the course of assessment proceedings, the Assessing
Officer[AO in short] noticed that the assessee reflected net profit of Rs. 38,73,997/-, including additional income of Rs.27,64,39/- and that the income reflected for the entire year was less than the income declared in the middle of the year. The AO was of the opinion that the assesssee did not reflect any profit for the post survey period and had in fact, shown some loss, resulting in reduction of additional income declared during the survey. The AO further 2 I TA No .7 00/ A hd /2 0 0 7 noticed from the comments of the auditors in the audit report that the assessee had not maintained regular stock records and the quantitative details were compiled from the financial books of account. Since it was noticed during the course of survey that the assessee carried on substantial business outside the books of account and consequently,unaccounted stock was detected as also in the absence of stock register, the AO concluded that closing stock shown by the assessee was not amenable to verification. Moreover, GP rate declared in the year was much below vis-à-vis preceding years in the cloth division as revealed from the following details:
Assessment year Turnover Rate of Profit
2001-02 2,12,03,415 15.06%
2002-03 1,47,53,657 19.01%
2003-04 2,20.72,263 9.71%
2.2 Further analysis of the book results revealed that the GP rate for the
pre-survey period worked out to 10.00% on the turnover of Rs.83,07,810/- and 9.54% for the post-survey period turnover of Rs.1,37,64,453/-. The AO noted that in the post survey period, the assessee had disclosed gross profit rate of 9.54%. If the additional income declared during the survey was included, the GP during the pre-survey period worked out to 38.89%. Since the assessee was found to be carrying on substantial business outside the books of accounts while the assessee did not maintain any stock register or quantitative records nor the closing stock was amenable to verification and had declared additional income of Rs. 27,64,339/- in the pre-survey period while no justification was forthcoming for the low GP in the post survey period, the AO rejected the book results, having recourse to provisions of sec. 145(3) of the Act. Consequently, the AO added an amount of Rs. 10,32,467/-, adopting GP rate of 17.04% ( average GP rate for the AYs. 2001-02 and 2002-03 ) on the turnover of the post survey period. Inter alia, the AO relied upon decision dated 30.8.2005 s in the case of Whiteline Chemicals Vs. ITO in ITA no.3509/Ahd./2004,CIT Vs. Harichemicals,ITA no.254/Ahd./1996,Ojas Technochem,ITA no.1394/Ahd./1999 & Super Industries Vs. ACIT,ITA no.1911/Ahd./1999.
3I TA No .7 00/ A hd /2 0 0 7
3. On appeal, the assessee contended that there was substantial increase in the average purchase price vis-à-vis selling price while business of grey cloth manufacturing was highly competitive . The fluctuations in raw material price affected their margins. The stock declared in the course of survey was valued at market value and therefore, could not be sold at a higher margin. However, the ld. CIT(A), after having a remand report from the AO and comments of the assessee thereon, found that undisputedly five concerns of the family operated from the same premises. Since the price of yarn fluctuated on daily basis, considering the average purchase price, increase in purchase price was almost double in M/s Punamchand Kapadia as compared to the other three concerns while in BP Textiles ,there was decrease. GP rate in BP Textiles for the whole year was 17.97%.Admittedly purchases and stock of raw material and finished goods having been kept in the same premises by the five concerns, stock was not identifiable and therefore, the assessee adopted figures purely on estimate, the ld. CIT(A) observed. Keeping in view the observations of the auditors and the fact that goods valued at Rs. 1,20,00,783/- were not accounted for in the books of accounts while therebeing no cogent reasons for fall in GP by almost 10%, following the decisions relied upon by the AO in the case of M/s Whiteline Chemicals(supra) and three other cases referred to by the AO, the ld. CIT(A) upheld the rejection of books and estimation of GP by the AO.
4. The assessee is now in appeal before us. The ld. AR on behalf of the assessee, Shri R.V. Vepari while reiterating their submissions before the lower authorities, relied upon a decision dated 8th September, 2008 of the Tribunal in the case of Bharatkumar P Kapadia in ITA no 699/Ahd/2007 for the AY 2003-04 and ITA No.1550/Ahd/2008 for the AY 2004-05. The ld. AR added that on identical facts and circumstances, the Tribunal was fair enough to reduce the addition made by Assessing Officer and confirmed by CIT(A). He contended that the addition be suitably reduced in view of the above decision of the Tribunal. The ld. AR added that GP rate of 10% in the pre- survey period has been accepted by the AO.On the other hand, the ld. Departmental Representative supported the findings of the ld. CIT(A) and added that GP rate of 10% in the pre-survey period was never accepted by 4 I TA No .7 00/ A hd /2 0 0 7 the AO. It was only because that the assessee surrendered an amount of Rs. 24,00,156/- on account of excess stock that the trading results for the pre- survey period were not disturbed.
5. We have heard both the parties and gone through the facts of the case. Undisputedly, the assessee was found to be carrying on substantial business outside the books of accounts while the assessee did not maintain any stock register or quantitative records. Consequently, the assessee declared additional income of Rs. 27,64,339/- in the pre-survey period, which included excess stock of yarn and grey cloth worth Rs.24,00,156/- . As a result, trading results for the pre-survey period improved considerably and were not disturbed. For the post survey period, GP rate was found to be much lower at 9.54% as compared to 19.01% in the preceding assessment year and 15.06% in the AY 2001-02. The AO and the ld. CIT(A) found that closing stock was not amenable to verification in the absence of stock records and the fact that five family concerns, including the assessee, operated from the same premises and stock of each of these concerns being not identifiable. Therefore, goods valued at Rs. 1,20,00,783/- were not accounted for in the books of accounts, according to the ld. CIT(A). In the light of these facts and there being no material in support of the explanation that increase in selling price was not commensurate with increase in purchase of raw material, the ld. CIT(A) upheld the findings of the AO in rejecting book results and estimation of GP for the post survey period. The ld. AR on behalf of the assessee appearing before us did not dispute the aforesaid findings of facts recorded by the lower authorities. In these circumstances, once the assessee failed to furnish the relevant details and substantiate the trading results for the relevant period under consideration, it was open to the AO and the ld. CIT(A) to reject the book results and estimate the gross profit. It is not a case where books of account are properly maintained and the Assessing Officer has substituted his own estimate ignoring the books of account, without giving any reasons. It may be observed under the circumstances that it is difficult to catalogue various types of defects in the account books of an assessee which may render rejection of accounts on the ground that accounts are not complete and from which the correct profit cannot be deduced.
5I TA No .7 00/ A hd /2 0 0 7 Whether presence or absence of stock register is material or not, would depend upon the type of business. In the case under consideration, undisputedly, substantial stock was found to be unaccounted while no stock register or quantitative records were found to be maintained. Consequently, the closing stock was not amenable to verification. It is true that absence of stock register or cash memos in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where the absence of stock register, etc. is coupled with other factors like excess stock having been found during the course of survey and sharp decline in profit, give rise to legitimate inference that all is not well with the books . Such is the situation in the instant case and hence we hold that the Ld. CIT(A) is quite justified in upholding the findings of the AO in rejecting the book results, having recourse to provisions of sec.145(3) of the Act This view of ours is also fortified by the decision of Hon'ble Orissa High Court in the case of Ratanlal Omprakash Vs. CIT,132 ITR 640(Orissa), Awadhesh Pratapsingh Abdul Raheman & Bros vs CIT (1994) 210 ITR(All) and decision of the Hon'ble Supreme Court in the case of CIT Vs. KY Pilliah And Sons, 63 ITR 411(SC).Even in the decision dated 8th September, 2008 of the Tribunal in the case of Bharatkumar P Kapadia in ITA no.699/Ahd/2007 for the AY 2003-04 and ITA No.1550/Ahd/2008 for the AY 2004-05, relied upon on behalf of the assessee and the ld. AR having admitted that the facts and circumstances in the said decision are identical with the facts in the case under consideration, ITAT upheld the rejjection of book results. In view of the foregoing, ground no. I in the appeal is dismissed.
5.1 As regards ground no. II relating to estimation of profits, no doubt the AO/CIT(A) should try to make an honest and fair estimate of the income even in a best judgment assessment and should not act totally arbitrarily, but there is necessarily some amount of guess work involved in a best judgment assessment, and it is the assessee himself who is to blame as he did not submit proper accounts and details.[ Kachwala Gems Vs JCIT, 288 ITR 10 (2007)(SC) ]. Since the assessee did not substantiate the trading results with cogent evidence before the AO or the ld. CIT(A) nor even any material has been placed before us so as to take a different view in the matter, we do 6 I TA No .7 00/ A hd /2 0 0 7 not find any infirmity in the findings of the learned CIT(A) while upholding rejection of book results and sustaining the addition , applying the average GP rate of the immediate preceding two assessment years. It is true that Assessing Officer or the CIT(A) are not fettered by technical rules of evidence and are entitled to act on materials which may not be accepted as evidence in court of law, nevertheless, the Assessing Officer should adopt a method which must reflect the profits truly and justly[ Gemini Picures Ltd. vs CIT (1958) 33 ITR 547 (Mad).] For estimating the gross profit, the ld. CIT(A) can always have a look at the margin returned in comparable cases or even in assessee's own case. We are of the opinion that in the facts and circumstances of the case, especially when there was abnormal fall in GP rate in the period under consideration vis-à-vis preceding two assessment years and no cogent evidence has been placed before the ld. CIT(A) or even before us in support of book results while huge unaccounted stock was detected during the survey, the ld. CIT(A) is justified in applying the average GP rate[17.04%] of the immediate preceding two assessment years while upholding rejection of book results, having recourse to provisions of section 145(3) of the Act. With respect , we are not inclined to follow the view as regards reduction of addition by almost 50% in the case of Bharatkumar P Kapadia(supra) by the ITAT on the ground that there was slight fall in GP rate, since in the case under consideration GP declined by almost 100%. It was 19.01% in the preceding assessment year and 9.54% in the period under consideration. In this view of the matter and considering the totality of facts and circumstances of the case, we are not inclined to interfere with the findings of the learned CIT(A). Therefore, ground no II in the appeal is also dismissed.
6. Ground No. III relates to an amount of Rs. 60,000 offered to tax by the assessee at the time of survey on account of unaccounted sales. There is no discussion on this aspect in the assessment order. On appeal, the assessee contended that this sum was available with the assessee to meet the investment that was disclosed. However , there is nothing to suggest that unaccounted sales led to the unaccounted investment. In his remand report, the AO contended that there was no direct co-relation between the 7 I TA No .7 00/ A hd /2 0 0 7 unaccounted sales and unaccounted investment. In these circumstances, while referring to the break up of disclosure made by the assessee himself, the ld. CIT(A) rejected the plea of the assessee on the ground that there was no evidence to show that entire income from unaccounted sales was invested either in purchase of yarn or in any other investment.
7. The Assessee is now in appeal before us against the aforesaid conclusion of the ld. CIT(A). We find from the break up of disclosure made by the assessee at the time of survey that an amount of Rs. 60,000 has been offered to tax besides undisclosed investment in yarn and grey cloth and in construction of factory. Not an iota of evidence has been produced either before the AO or the ld. CIT(A) in support of the claim that unaccounted sales have been utilized in unaccounted investment. Even before us situation is no better. We find that a similar ground in the case of Bharatkumar P Kapadia(supra) was not pressed before the ITAT. In these circumstances , we are not inclined to interfere with the conclusion of the ld. CIT(A). Therefore, ground no. III in the appeal is also dismissed.
8. Ground no. IV(1) & (2) relates to charging of interest u/s 234B & 234D of the Act. The ld. AR on behalf of the assessee did not make any submissions before us on this ground while levy of interest u/s 234B & 234D of the Act being mandatory [Commissioner Of Income Tax.vs Anjum M. H. Ghaswala And Others,252 ITR 1(SC)], these grounds are dismissed..
9. No additional ground having been raised in terms of residuary ground no. IV(3), this ground is also dismissed.
10. In the result, appeal is dismissed.
Order pronounced in Open Court on 31 /12 /2009
Sd/- Sd/-
(Bhavnesh Saini) (A.N. Pahuja)
Judicial Member Accountant Member
Ahmedabad,
Dated : 31/12/2009
8
I TA No .7 00/ A hd /2 0 0 7
Mahata/-
Copy of the Order forwarded to:-
1. The Assessee.
2. Asstt. Commissioner of Incom e-tax, Circle-2, Surat..
3. The CIT(Appeals)-II,Surat
4. The CIT concerned.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER, Deputy/Asstt.Registrar ITAT, Ahmedabad 9