Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Asian Sky Shop Ltd., New Delhi on 30 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A", NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No.4197/Del/2014
Assessment Year : 2010-11
DCIT, Circle- 2(1), Asian Sky Shop Ltd.,
New Delhi. B - 10, Lawrance Road Industrial
Vs.
Area, New Delhi.
PAN : AAACM1887G
(Appellant) (Respondent)
Department by : Shri R. C. Danday, Sr.DR
Assessee by : Shri Sanjiv Sapra, FCA
Date of hearing : 22-08-2017
Date of pronouncement : 30-08-2017
ORDER
PER R. K. PANDA, AM :
This appeal filed by the Revenue is directed against the order dated 08.05.2014 passed by the CIT(A)-V, New Delhi relating to assessment year 2010-11.
2. The only effective ground raised by the Revenue reads as under :-
"1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.41,47,663/- made by the AO by estimating gross profit when the GP declared was very much below the GP rate returned in earlier three years and the random checking of sample from each month revealed much higher average profit rate."
3. Facts of the case, in brief, are that the assessee is a company engaged in the business of trading in goods (tele shopping). It filed its return of income on 2 ITA No.4197/Del/2014 15.10.2010 declaring loss of Rs.2,12,93,974/-. During the course of assessment proceedings, the Assessing Officer observed that the assessee company has disclosed gross sales of Rs.1.38 crores with GP ratio of 0.06% as against sales of Rs.10.30 crores with a GP ratio of 36.02% in the preceding assessment year. On being questioned by the Assessing Officer, the assessee explained the reason for decrease in GP as under :-
"Our business is based on minimizing cost of products procured and maximizing turn over with minimum of expenses. For the year under review we do not have any margin left for doing business which itself has resulted in loss. When procured items do not provide any margin to cover of administrative cost, marketing cost, selling cost and logistic has indirectly almost nil gross profit. These factors had spiral effect on profitable working. These factors has resulted in suspenses of operation at end of financial year."
4. The assessee further submitted that the assessee company is in first to start tele shopping concept in India. The company is known for its quality products and services and maintains its brand image. The products being dealt with by the company are sourced from reputed suppliers and are quality products and thus are expensive as compared to other players in the market who source products from local manufacturers. Further, the product being dealt with have short technological life i.e. there is fast changes in technology of product resulting into obsolescence of product. Due to this assessee company has to sale goods as early as possible to get maximum margin. Further, there is stiff 3 ITA No.4197/Del/2014 completion in the market and hence assessee has to keep very lower margins. Due to these reasons GP has reduced during the year.
5. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee before him. He compared to the GP rate of preceding three years which gave GP ratio of 36.02%, 38.20% and 15.78% for assessment years 2009-10, 2008-09 and 2007-08 respectively. The average GP rate for the last three years came to 30.00% as against the 0.03% in the current year. The Assessing Officer took some selected items and found that the average GP is 39.29%. He, therefore, asked the assessee to explain as to why the book results should not be rejected u/s 145 of the I.T. Act and GP rate of 30% should not be adopted. The assessee vide its reply dated 27.02.2013 submitted that the books of account were audited and no defect had been pointed out by the auditor. Further, there was stiff competition in market during the year. The assessee gave complete stock details and submitted that GP cannot be adopted on the basis of samples selected giving high profit margin and ignoring the loss making items. However, the Assessing Officer did not accept the above contention of the assessee and adopted 30% GP for the current year and consequentially made addition of Rs.41,47,663/- to the total income of the assessee.
4ITA No.4197/Del/2014
6. Before the CIT(A), the assessee reiterated the same arguments as made before the Assessing Officer. It was argued that the assessee maintains books of account which were audited and the Assessing Officer has not found any defect or discrepancy in the books of account. It was submitted that the assessee has furnished month-wise complete details of quantity and value of opening stock, purchase and sales during the year and closing stock. The Assessing Officer has picked up few sample items on his own whims and fancy to arrive at profit earned which is incorrect. It was argued that the gross profit earned by the assessee is based on entire sales and purchases made during the entire year and, therefore, sales transactions are required to be considered for arriving at final profit margin. However, the Assessing Officer selectively picked up only those sample items where good profit was earned by the assessee and did not consider other stock items where company suffered loss. It was further argued that the Assessing Officer while adopting average gross profit of last three years and applied the same in current year's sale has not considered the fact on record that the sale of the company has reduced in assessment year 2010-11. The details of sale of the current year as well as last three years were brought to the notice of the CIT(A) which are as under :-
A.Y. 2007-08 Rs.15,334,288/-
A.Y. 2008-09 Rs.71,821,964/-
5
ITA No.4197/Del/2014
A.Y. 2009-10 Rs.103,035,585/-
A.Y. 2010-11 Rs.13,855,007/-
7. Relying on the various decisions, it was submitted that the rejection of book results by the Assessing Officer is not justified.
8. Based on the arguments advanced by the assessee, ld. CIT(A) deleted the addition made by the Assessing Officer by observing as under :-
"I have considered the written and oral submission of the AR of the appellant. I am of the considered view that before ejecting the books of accounts, the Assessing Officer was required to hold by way of instances that the accounts of the assessee are unreliable, incorrect or incomplete, On the perusal of the assessment order, I find from the assessment order that the AO has not pointed out any single particular defect or discrepancy in the accounts books maintained by the assessee which have been duly audited under the Companies Act, 1956 as well as u/s 44AB of the Income Tax Act, 1961. The assessee also maintained day to day stock record along with value and also filed the same during assessment proceedings and no defect or discrepancy has been pointed out by the AO in the said stock register also. The AO has instead simply selected few samples of sales ( which constitute 3% of the total sales) from the stock register submitted by the assessee and has worked out the profit margin which has been extrapolated to the remaining sales. This approach of the AO is incorrect as profit margin cannot be derived from few samples. The profit margin may well differ from item to item as evident also from the samples selected by the Assessing Officer. The income is assessed for full assessment year hence all sales have to be considered to arrive at profit margin. The lower profit margin for the year under appeal or higher margin on selected samples cannot be reasons for rejecting books of account and estimating average profit at average gross profit of last three years or at average profit of selected samples of sales for the current assessment year. Additionally, I have observed from the assessment order that the AO has also not categorically rejected books of account of the assessee under section 145 of the Income Tax Act, 1961 before estimating profit @ 30% though he had issued show cause notice to do so.
Thus placing reliance on the proposition laid down in the case laws cited by the appellant in ITO V GIRISH M MEHTA (2008) 296 ITR (AT) 125 (RAJKOT) and CIT V. POONAM RANI, ITA NO. 406/2009 at 326 ITR 223 as well as on Commissioner Of Income- Tax vs Jas Jack Elegance Exports 324 ITR 95, of the Delhi High Court, to the facts of the present case, the appeal is allowed and the addition made for Rs. 41,47,663/- is directed to be deleted.
In a result the appeal is allowed."6 ITA No.4197/Del/2014
9. Aggrieved with such order of the CIT(A), the Revenue is in appeal before us.
10. The Ld. DR heavily relied on the order of the Assessing Officer. He submitted that the various defects pointed out by the Assessing Officer and the various reasons given by him for rejecting the book results and going for estimation has not been properly considered by the CIT(A). Therefore, the order of the CIT(A) should be reversed and that of the Assessing Officer be restored.
11. Ld. counsel for the assessee, on the other hand, heavily relied on the order of the CIT(A). Referring to the letter dated 27.02.2013 addressed to the Assessing Officer, copy of which is placed at page 310 - 311 of the Paper Book, he submitted that the assessee had categorically stated before the Assessing Officer that the GP cannot be assessed on items selected from the entire sales and purchases. It was argued that for arriving at GP ratio entire sales and purchase has to be considered. He submitted that the assessee has already furnished entire details of sale and purchase including quantitative details. Therefore, GP needs to be considered on entire sales and related cost. Referring to the said letter, he drew the attention of the Bench to the item-wise quantity and value detail of stocks, purchase, sales, etc. given to the Assessing Officer. Referring to page 312 of Paper Book, ld. counsel for the assessee drew the 7 ITA No.4197/Del/2014 attention of the Bench to loss incurred by the assessee on various items traded during the impugned assessment year. Referring to the copy of the Director's report, placed at pages 313 to 315 of the Paper Book, he submitted that in the year 2010-11, the company had to suspend its business activity. Major part of inventory were liquidated for which the company had incurred a net loss of Rs.2,425,475/- after providing depreciation of Rs.1,009,930/-. He submitted that Director's report itself mentions that the business activities of the assessee company were suspended. Relying on various decisions including the decisions relied on by the assessee before the ld. CIT(A), he submitted that there is no justification for estimating the GP by the Assessing Officer. He submitted that the ld. CIT(A) has correctly deleted the addition. He accordingly submitted that the order of the CIT(A) be upheld and the ground raised by the Revenue should be dismissed.
12. Ld. DR in his rejoinder submitted that the various arguments made by ld. counsel for the assessee were not properly appreciated by the CIT(A). Therefore, matter may be restored to the file of the Assessing Officer for fresh adjudication.
13. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited 8 ITA No.4197/Del/2014 before us. We find the Assessing Officer on the basis of low GP rate declared by the assessee in the current year as compared to the average GP rate of 30% for the three preceding years rejected the book results and estimated the GP rate at 30% of the turnover and made addition of Rs.41,47,663/-. We find the ld. CIT(A) deleted such addition made by the Assessing Officer and the reasons have already been reproduced in the preceding paragraphs. It is the submission of the ld. DR that the ld. CIT(A) has not properly appreciated the findings given by the Assessing Officer while making the addition and, therefore, the order of the CIT(A) be reversed. It is also his alternate argument that the matter may be set-aside to the file of the Assessing Officer. It is the submission of the ld. counsel for the assessee that when the assessee had suspended its business activity during the year and when full details were given of each and every items and no defects were pointed out by the Assessing Officer in the books of account, the Assessing Officer should not have adopted the GP rate of 30%. Since the order of the CIT(A) is fully justified under the facts and circumstances of the case therefore the order should be upheld. We find merit in the arguments made by ld. counsel for the assessee. A perusal of the various details filed by the assessee in the Paper Book shows that the assessee had given entire details of sales and purchases including quantitative details. A copy of the letter addressed to the Assessing Officer on 27.02.2013, copy of which is placed at 9 ITA No.4197/Del/2014 page 310 - 311 of the Paper Book, shows that the assessee had furnished item- wise quantity and value details of stock, purchase and sale. Under these circumstances, when the assessee has given item-wise details, the Assessing Officer, in our opinion, should not have taken up only those items which had shown higher GP ratio. We find he has completely ignored the items on which the assessee has incurred loss. Further, the books of account were audited and Assessing Officer has not pointed out any mistake in the books of account. There is no finding that there is sale outside books of account or that a part of sale proceed has not entered in the books of account. The submissions before the ld. CIT(A) that the turnover has drastically come down for assessment year 2010-11 as compared to assessment years 2008-09 and 2009-10 also could not be controverted by the ld. DR. A perusal of the various details furnished by the assessee shows that during assessment year 2008-09 the sale was Rs.7.18 crores and in 2009-10 the sale was Rs.10.30 crores where as during assessment year 2010-11 turnover had come down to Rs.1.38 crores. The Director's report mentions that the company had to suspend its business activity during the financial year 2010-11. We find the Assessing Officer has overlooked the loss on various items suffered by the assessee and had only gone for items on which the assessee had made profit. He has not pointed any other mistake in the books of account which were duly audited and produced before him. We, therefore, 10 ITA No.4197/Del/2014 find merit in the argument of the ld. counsel for the assessee that merely because there is fall in the GP ratio, the Assessing Officer cannot reject the books of account and go for estimation of profit. In this view of the matter and in view of the reasoning given by the CIT(A) while deleting the addition, we find no infirmity in the order of the CIT(A). Accordingly the same is upheld and the ground raised by the Revenue is dismissed.
14. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on this 30th day of August, 2017.
Sd/- Sd/-
(SUDHANSHU SRIVASTAVA) (R. K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 30-08-2017.
Sujeet
Copy of order to: -
1) The Appellant
2) The Respondent
3) The CIT
4) The CIT(A)
5) The DR, I.T.A.T., New Delhi
By Order
//True Copy//
Assistant Registrar
ITAT, New Delhi