Income Tax Appellate Tribunal - Chennai
Suriya Sweets, Trichy vs Department Of Income Tax on 8 March, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' CHENNAI
Before Shri Abraham P. George, Accountant Member and
Shri George Mathan, Judicial Member
.....
I.T.A. No. 850/Mds/2010
Assessment Year : 2005-06
The Assistant Commissioner of M/s. Suriya Sweets,
Income-tax, Company Circle-I, v. No.45, NSB Road,
Trichy. Trichy-620 002.
PAN : AAUFS1378R
(Appellant) (Respondent)
AND
C.O. No. 51/Mds/2010
(In ITA No. 850/Mds/2010)
Assessment Year 2005-06
M/s. Suriya Sweets, The Asst. Commissioner of
No.45, NSB Road, Income-tax, Co. Circle-I,
Trichy-620 002. Trichy.
(Cross Objector) (Responden)
Department by : Shri P. B. Sekaran
Assessee by : Shri N. Devanathan
ORDER
PER GEORGE MATHAN, JUDICIAL MEMBER :
ITA No. 850/Mds/2010 is an appeal by the Revenue against the order of
the learned CIT(A), Tiruchirappally in ITA No. 390/07-08 dated 8-3-2010 for the 2 I.T.A. No.850/Mds/2010 & CO No. 51/Mds/2010 assessment year 2005-06. C.O. No. 51/Mds/2010 is the cross objection filed by the assessee against the Revenue's appeal in ITA No. 850/Mds/2010.
2. Shri P.B. Sekaran, learned CIT-DR represented on behalf of the Revenue and Shri N. Devanathan, Advocate represented on behalf of the assessee.
3. In the Revenue's appeal, the Revenue has raised the following grounds:
"1. The order of the CIT(A) is contrary to law, facts and in the circumstances of the case.
2. The CIT(A) has erred in deleting the addition of `. 53,24,724/-.
2.1. The CIT(A) has failed to note that the G.P. was fixed at 38.5% based on the inputs given by the assessee only.
2.2. The CIT(A) has erred in allowing additional evidence without giving sufficient opportunity to the department by calling for remand report. 2.3. The CIT(A) has erred in not following principle of res judicata is not applicable to income tax proceedings and wrongly fixed the G.P. based on the other assessment years.
2.4 Without prejudice to the other grounds urged, the CIT(A) ought to have confirmed the addition at least to the extent of `. 56,26,460/- as the estimation was purely based on the facts given by the assessee, as prayed by the AO in the Assessment order in Para 5.1.3
I.T.A. No.850/Mds/2010 & CO No. 51/Mds/2010
3. For these and other reasons that may be adduced at the time of hearing, the order of the CIT(A) may be cancelled and that of the Assessing Officer be restored."
4. It was submitted by the learned DR that the assessee is a partnership firm which is in the business of manufacture and sale of sweets and savories. For the relevant assessment year the assessee had filed its return of income admitting a total income of `. 3,64,590/-. The return filed by the assessee was taken up for scrutiny and the assessment was completed on 31.12.2007. In the course of assessment it was noticed that the assessee had reported a total turnover of `. 3,32,55,209/- and the gross profit was disclosed at 20% and net profit at 2%. As it was observed that the quantity and value-wise sales of various products traded by the assessee were not available and as it was noticed that there were no separate details showing the activity-wise purchase and sales and separate books were not maintained for all the incomes of different shops and large variety of items dealt with by the assessee and on the ground that the profit shown by the assessees who are having lower turnover and in the similar business were showing gross profit ranging from 28 to 32%, the Assessing Officer had proposed to reject the books of accounts. After rejecting the books of accounts the Assessing Officer had proposed to estimate the gross profit of the assessee by taking into consideration 4 model items for estimation. It was 4 I.T.A. No.850/Mds/2010 & CO No. 51/Mds/2010 the submission that the Assessing Officer had taken 4 model items being Halwa, Mysorepak, Dudhpeda and Kajukatli and had estimated the input and the output ratios and had also made independent enquiries with the head chefs of some of the sweet makers in regard to the quantity and value of ingredients and the out turn given by the assessee. It was the submission that as the independent enquiries in respect of the quantity and value of the ingredients were matching the Assessing Officer accepted the same and had arrived at the gross profit ratio of the 4 items at 38% average. The assessee had replied to the same. After considering the reply of the assessee the Assessing Officer had estimated the gross profit of the assessee in para 5 of his order at `. 61,22,849/-. It was fairly agreed by the learned DR that even though the Assessing Officer had shown in the show cause notice only 4 samples for computing the gross profit at 38%, when estimating the gross profit of the assessee a quantitative analysis had been further made. Consequently the estimated gross profit in respect of Halva which was originally estimated at 40% as per the chart in page 3 of the assessment order was revised to 57% in page 12 of the assessment order. Similarly, Mysorepak gross profit was estimated at 48% in the show cause notice as mentioned in page 3 of the assessment order was revised to 55% in page 13 of the assessment order. Dhudhpeda gross profit was estimated at 24% in the show cause notice and was revised to 61% in page 13 of the assessment order and Kajukatli gross profit was estimated at 38% in the show cause notice and 5 I.T.A. No.850/Mds/2010 & CO No. 51/Mds/2010 the same was reworked at 52% in page 13 of the assessment order. It was the further submission that even the other varieties of sweets as manufactured and sold by the assessee had been estimated and an average of all the various gross profits of the various sweets and savories were taken at 57% in page 16 of the assessment order. It was the further submission that after giving room for wastages at 9% in the final computation the gross profit ratio has been arrived at 38.5%. It was the submission that on appeal the learned CIT(A) had reduced the estimation of gross profit to 22.5%. It was the submission that the learned CIT(A) erred in making such reduction.
5. In reply, the learned authorised representative submitted that the books of accounts of the assessee were not liable to be rejected at all. He placed before us a chart showing the various calculations of the gross profit. It was the further submission that in the cross objection the assessee has challenged the action of the learned CIT(A) in pegging the gross profit of the assessee at 22.5%.
6. We have considered the rival submissions. Shorn of all the frills, the facts in this case are that the assessee's books were rejected. The income of the assessee was estimated by making a gross profit addition. The assessee filed appeal to the CIT(A). The CIT(A) in para 8.4 at page 13 of his order held that the rejection of the books of the assessee was unwarranted. This finding of the learned CIT(A) has not been challenged. As long as this issue remains 6 I.T.A. No.850/Mds/2010 & CO No. 51/Mds/2010 unchallenged and the books of accounts of the assessee remains in tact, in view of the finding of the learned CIT(A) any amount of estimation as done or as increased or as reduced would not result in an addition nor can a demand be raised on the assessee on this count. In the circumstances, on this ground alone the returned income of the assessee is liable to be accepted. Consequently the appeals preferred before the Tribunal on the issue of estimation of the gross profit in this case becomes academic in nature.
7. As an appeal has been filed by the Revenue and a cross objection by the assessee before us, we are bound to give a finding in regard to the grounds raised in the appeal and consequently we adjudicate on the appeal as follows.
8. A perusal of the assessment order in page 3 which is the copy of the show cause notice, shows that the Assessing Officer has made independent enquiries with various other sweet makers and has found that the quantification of the ingredients as also the value of the ingredients as disclosed by the assessee is correct. However, he has still proceeded to estimate the gross profit in the show cause notice. A perusal of the assessment order at page 13 shows that after making a lot of calculations as to the quantity of ingredient that goes into the making of various sweets and savories, the Assessing Officer has come up with a gross profit ratio which is far higher than that shown in the show cause notice. This far higher gross profit ratio has been attempted to be reduced to the average gross profit in respect of the 4 items shown in the show cause notice by 7 I.T.A. No.850/Mds/2010 & CO No. 51/Mds/2010 coming out with a wastage reduction at 9%. How this wastage has been estimated at 9% is not known. How an average gross profit of 57% could be applied to the turnover is also not known. This is because the Assessing Officer himself in the show cause notice has mentioned that the items dealt with by the assessee are innumerable in number. Then how can it be assumed that an average gross profit computed on the basis of 11 items be applied to a total turnover of ` 3,32,55,209/-. How can it be said that the turnover of ` 3,32,55,209/- is equally split between the innumerable items or even between the 11 items which have been used for quantification of the gross profit. Normally once the books are rejected it is advisable to adopt a gross profit on the basis of the earlier records or the subsequent records. These are the best indicators. Even if a comparison is made with another entity even if it is under the same management the comparison of the gross profit would be highly arbitrary insofar as the running of the business is different for different people under different circumstances. Consumption of power, the equipment used, the location, the clientele to which the shops or the businesses deal with, the manpower and the qualification thereof, the type of material used etc. all would vary. Here the assessee has brought out the justification for the gross profit as disclosed by it. A perusal of the order of the learned CIT(A) also clearly shows that the assessee has categorically shown the errors committed by the Assessing Officer when computing the gross profit. It has been categorically brought out in 8 I.T.A. No.850/Mds/2010 & CO No. 51/Mds/2010 para 9.3 of the order of the learned CIT(A). A perusal of page 16 of the order of the learned CIT(A) also shows that the gross profit as disclosed by the assessee during the earlier years and subsequent years match quite reasonably and there is no major increase or decrease in the same. A perusal of the order of the learned CIT(A) also clearly shows that even after the learned CIT(A) had given a finding that the books of accounts need not be rejected and the rejection of the same was unwarranted, he has not given any reason for fixing the gross profit of the assessee at 22.5%. In the circumstances, the addition as confirmed by the learned CIT(A) in respect of the gross profit addition stands deleted and the deletion of the gross profit addition as made by the learned CIT(A) stands upheld. In the circumstances, the appeal of the Revenue is dismissed and the cross objection of the assessee is allowed.
9. The order was pronounced in the court on 31.08.2010.
Sd/- Sd/-
(Abraham P. George) (George Mathan)
Accountant Member Judicial Member
Chennai,
Dated the 31st August, 2010.
H.
Copy to: Assessee/AO/CIT (A)/CIT/D.R./Guard file