DCIT-CC-1, LUDHIANA vs. M/S ROOP SQUARE PRIVATE LIMITED, LUDHIANA

आदेश/ORDER

Per Sudhanshu Srivastava, Judicial Member:

2.0 The brief facts of the case are that during the year under consideration, the assessee was engaged in the business of retail trading of garments and jewellery, etc.

Search and seizure operation u/s 132(1) of the Income Tax Act, 1961 (hereinafter called ‘Act’) was conducted on 01.11.2017 at the various business and residential premises of Roop Square Group of cases. The assessee is the part of the said group. Subsequent to the search, a notice u/s 153A of the Act was issued and in response to the said notice, the assessee filed its return of income declaring income at Rs.31,48,430/- which was the same income as the income reflected in the original return of income filed earlier on 30.10.2017. Thereafter, the assessment was completed at an income of Rs.3,70,03,300/- after making an addition u/s 68 of the Act amounting to Rs.6,85,735/- on account of unexplained cash credit (being alleged undisclosed money introduced by the assessee as sales). Another addition of Rs.3,31,69,133/- was made on account of enhancement of gross profit rate with respect to the jewellery turnover. The Assessing Officer (AO) applied gross profit rate @38.63% as against gross profit rate of 11.65% declared by the assessee.

2.1 Aggrieved, the assessee carried the issues before the Learned First Appellate Authority who was pleased to partly allow the appeal of the assessee. The Ld.CIT(A) deleted the addition of Rs.6,85,735/- in respect of unexplained cash credit added u/s 68 of the Act. The Ld.CIT(A) also restricted the addition made on account of enhancement of gross profit rate from 38.63% to 20% thereby restricting the addition to Rs.1,02,69,581/- on this account.

2.2 Aggrieved by the order of the Ld.CIT(A), both the assessee as well as the Department have approached this Tribunal challenging the action of the Ld.CIT(A) and have raised the following grounds of appeal:

ITA No.198/Chd/2021(Assessee’s Appeal):

“1. That order passed u/s 250(6) of the Income Tax Act, 1961 by the Learned Commissioner of Income Tax (Appeals)-S, Ludhiana is against law and facts on the file in as much as he was not justified to arbitrarily uphold an addition of Rs. 1,02,69,581/-.

ITA No.249/Chd/2021(Revenue’s Appeal):

“1. Whether upon facts and circumstances of the case, the Ld. CIT (A) was justified in restricting the deleting the addition of Rs. 6,85,735/- made by the AO on account of unexplained cash credit u/s 68 of the I. T. Act, 1961? 2. Whether upon facts and circumstances of the case, the Ld. CIT (A) was justified in restricting the addition to the extent of Rs.1,02,69,5 81/- as against Rs.3,31,69,133/- made by the AO on account of GP on sale of jewellery during the demonetization period? 3. Whether upon facts and circumstances of the case, the Ld. CIT (A) was justified in restricting the GP @ 20% as against 38.63% applied by the AO on sale of jewellery during the demonetization period? 4. The appellant craves leave to add, amend, modify, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.” 3.0 The Ld. AR submitted that the assessee’s main ground of appeal relates to rejection of books of account in respect of jewellery business and estimation of profit. It was submitted by the Ld. AR that during the relevant assessment year, the assessee had made substantial cash sales on 07.11.2016 (around the time when the demonetisation process had been announced by the Government of India). It was submitted that during this assessment year, the assessee had a turnover of Rs.12,29,17,614/- in respect of the jewelllery business and cash deposits was to the tune of Rs.11,35,00,000/- in the bank accounts. It was submitted that this cash deposit duly stood accounted for in the books of account and that there has been no allegation either by the AO or by the Ld.CIT(A) that this cash was unaccounted money of the assessee. It was further submitted that gross profit on the sales of Rs.12,29,17,614/- was Rs.1,43,13,941/- which works out to 11.65%. It was further pointed out that the AO had also drawn the trading account for assessment years 2015-16 and 2016-17 (as appearing on page 14 of the assessment order) wherein for assessment year 2015-16, the gross profit rate was 15.75% and for assessment year 2016-17, it was 16.28%. It was further submitted that as per the AO, the reason for rejection of books of account was the low gross profit rate as compared to the two immediately preceding assessment years as above. The Ld. AR submitted that the AO had proceeded to apply the gross profit rate of 38.63% for the year under consideration by taking into consideration the price tags on items of jewellery inventorised during the course of search on 01.11.2017. It was further submitted that on appeal, the Ld.CIT was of the view that the gross profit rate applied by the AO was on a higher side and it was held by the Ld.CIT(A) that gross profit rate of 20% should be applied instead. The Ld. AR submitted that the gross profit rate as computed by the AO, was completely faulty and lacking any logic for the simple reason that by the time of search, the assessee had been in the process of winding up jewellery business in as much as no fresh purchases had been made during the year under consideration and it was only the stock brought forward from earlier years that was being sold and was found and inventorised at the time of search. It was also pointed out that for recalculating the gross profit, the AO had taken the prices as mentioned on various price tags, which at the most, would be the maximum price chargeable from the customers at a future date and had incorporated the same for the purpose of calculating the gross profit earned during the year. It was submitted that this lacked complete rationale and it was complete mis-application of the facts by the AO. It was further submitted by the Ld. AR that during the course of search, no incriminating material had been found which would point out towards the assessee earning gross profit which was more than the profit as shown in the books of account of the assessee. It was submitted that no incriminating material has been stated by the AO to have been found during the course of search which would even remotely indicate that the sales were made at a higher amount than the amount recorded in the books of account. It was further argued by the Ld. AR that the sales, as reflected in the books of account, had been duly accepted by the AO and, therefore, the action of the AO in accepting the sales on one hand and making an addition on account of suppressed gross profit on the other hand, was contradictory to each other. It was further submitted that the AO had also accepted the purchase and even the Ld.CIT(A) had accepted the arguments of the assessee that the valuation done at the time of search cannot be made the basis for calculating the gross profit on the sales made during financial year.

3.1 It was further argued that the assessee maintains complete quantitative details of the jewellery which was also evident from Annexure-9 of the Tax Audit Report filed by the assessee wherein it has been clearly mentioned that the assessee maintains complete quantitative details. It was submitted that even this fact of the assessee maintaining quantitative details, has not been disputed by the AO. The Ld. AR submitted that, therefore, there was no justification in the action of the AO in rejecting the books of account as no specific defect had been pointed out by the AO while arriving at such conclusion.

3.2 It was also submitted that although the Ld.CIT(A) has upheld the rejection of books of account, no valid reason has been given by the Ld.CIT(A) also for upholding the rejection. The Ld. AR further submitted that the Ld.CIT(A), after giving a finding in favour of the assessee that valuation done at the time of search cannot be made the basis for calculating gross profit on sales, proceeded to arbitrarily apply the gross profiti rate of 20% on an adhoc basis without giving any basis for arriving at the percentage of 20%. It was submitted that the accounts of the assessee were duly audited and the return of income was also duly accompanied by the audited accounts. It was submitted that it is also not in dispute that whatever stock was sold by the assessee during the demonetization period, was a part of the existing stock and that no substantial purchases had been made to effect the sales pertaining to the demonetization period. It was submitted that, therefore, the entire action of the AO as well the Ld.CIT(A) in making the addition on account of suppressed gross profit, was not legally sustainable and was liable to be deleted completely.

4.0 In response to the arguments of the Ld. AR, the Ld.CIT DR submitted that as far as the addition pertaining to gross profit was concerned, the AO had given his detailed findings in the assessment order wherein he has analyzed the sudden jump in the quantum of sales during the demonetization period. It was also submitted that there was apparently discrepancy in the prices at which the various items of jewellery were sold and price tags which were found to have been attached to the jewellery-in-stock during the course of search. It was submitted that the assessee could not establish with cogent evidence that there was no suppression of profit during the year. It was also submitted that the assessee’s returned gross profit was much less than the immediately two preceding assessment years, which would point out that the assessee had been suppressing gross profit. It was submitted that it is an accepted practice to compute the gross profit or the net gross profit by considering the past trends and percentages. It was submitted that the Ld.CIT(A) had already given relief to the assessee in this regard, which the Department was also challenging in its cross appeal.

5.0 With reference to the appeal of the Department, the Ld.CIT DR submitted that as far as the issue of deleting the addition of Rs.6,85,735/- on account of unexplained cash credit u/s 68 of the Act was concerned, the AO had arrived at this figure after duly incorporating the forensic analysis of the seized hard disc from the business premises of the assessee, wherein the AO had noticed differences in sale bills date-wise as compared to the system date. In this regard, our attention was drawn to the tables produced by the AO on pages 2, 3 and 4 f the assessment order and it was submitted that from such tables, it was evident that the assessee had manipulated the data. It was submitted that the Ld.CIT(A) had erred in deleting this entire addition without providing any cogent reason.

5.1 On the issue of reducing the addition pertaining to gross profit by applying the rate of 20% as against 38.63% applied by the AO, the Ld.CIT DR submitted that this action of the Ld.CIT(A) was arbitrary as no reasoning had been given by the Ld.CIT(A) while allowing the relieif to the assessee.

6.0 In response to the arguments of the Ld.CIT DR in respect of the departmental appeal, the Ld. AR submitted that he was placing extensive reliance on the findings of the Ld.CIT(A) in respect of addition of Rs.6,85,735/-, whereas in respect of the 2 n d ground of appeal of the departmental appeal pertaining to the restriction of addition to the extent of Rs.1,02,69,581/- on account of suppressed gross profits, the arguments made on the issue by the Ld. AR in assessee’s appeal would apply and that the same were not being repeated for the sake of brevity.

7.0 We have heard the rival submissions and have also perused the material available on record. The first issue for our consideration is whether the Ld.CIT(A) was justified in upholding the action of the AO in invoking the provisions of section 145(3) of the Act and rejecting the trading results of the assessee. In this regard, it is seen that the provisions of section 145(3) of the Act provide that where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section(1) has not been regularly followed by the assessee, or income has not been computed in accordance with the Standards notified under sub- section(2), the AO may make an assessment in the manner provided in section 144 of the Act. Thus, a plain reading of this sub-section requires that the AO should not be satisfied about the correctness or completeness of the accounts of the assessee or alternatively, the assessee should not have followed the method of accounting as prescribed u/s 145(1) of the Act. However, in no part of the assessment order, the AO has pointed out any defect in the books of account of the assessee except that he has referred to some forensic analysis of the seized hard disc, from which it was inferred that there was some back-dating of the system. The AO went on to conclude that by back-dating the system during demonetization period, the assessee had introduced unaccounted money under garb of sale bills. Apart from this, the AO also proceeded to draw an adverse inference from the assessee’s statement that it had made with regard to cash sales of jewellery on 08.11.2016 (the date on which demonetization was announced) in bulk and that each sale bill was below Rs.2 lacs. From this, the AO drew an adverse inference that the sequence of the events was beyond human probability and that it was not practically possible and, therefore, it was a case where the assessee had made huge profits but had disclosed the gross profit after artificially lowering it . The AO also referred to the prices mentioned on tags of jewellery items which were inventorised during the course of search and based on such price tags, proceeded to recompute the gross profit margin at 38.63% after rejecting the books of account. However, the AO accepted the sales returned by the assessee i.e. at a figure of Rs.12,29,17,614/- and also accepted the purchase figures submitted by the assessee and only applied the gross profit rate of 38.63% on sales as disclosed by the assessee. No defect, whatsoever, has been pointed out by the AO while rejecting the books of account and apparently the AO has proceeded on mere suspicion of assessee lowering the gross profit rate. It is also duly noted by the AO that the gross profit rate in assessment year 2015-16 was 15.75and in assessment year 2016-17 it was 16.28. Thus, in both the years, it was below 17% and even if the past trends of the assessee are to be considered, there is no justification or rationale behind computing the gross profit rate at 38.63% for the year under consideration. It is also not in dispute that the assessee has been maintaining stock register of the jewellery items and, therefore, the inferences drawn by the AO are mere surmises and conjectures lacking any sound basis.

7.1 The Hon'ble High Court of Gujarat in the case of PCIT Vs. Garden Silk Mills. Limited, 388 ITR 237 (Guj.) has categorically held that it is a settled position of law that the books of account cannot rejected on insignificant grounds.

The AO is required to point out specific defects whereby the accounts of the assessee cannot be treated as correct or complete giving rise to distorted figure of gross profit.

The Hon'ble Gujarat High Court went on to hold that the AO is required to make an analysis of each item and factor which has an impact on the profit of the assessee and further assuming that when a particular item of account is found to be not correct or complete, the AO is required to find out its impact on the profit of the assessee. The Hon'ble High Court further held that if it is found that there is little or no impact on profits, such defect becomes insignificant and there would be no need of rejection of entire books of account and the AO would be justified to make addition to the profit to the extent of such item. Thus, the law is well settled that insignificant defect in the books of account should not be the basis of rejection of entire books of account. In the present case, admittedly and undisputedly, there were no major defects pointed out by the AO warranting the rejection of books of account.

7.2 Similarly, in the case of CIT Vs. Pink City Developer, reported in 389 ITR 153, the Hon'ble Rajasthan High Court went on to hold that where the AO had not brought any evidence on record to indicate that the assessee had charged any money over and above the price recorded in the books, without pointing out specific defect in the books of account, the books of account could not be rejected. Thus the action of the AO in rejecting the books of account also does not pass the test as laid down by the Hon'ble Rajasthan High Court in the case of CIT Vs. Pink City Developer (supra). In our considered view, the entire case of the AO is built around the suspicion of the assessee making huge cash sales of jewellery during demonetization period wherein each cash sale was below Rs.2 lacs each, not requiring submission of Permanent Account Number of the buyer of such jewellery items. However, it remains beyond doubt that all the sales had been routed through regular books of account and there is no dispute regarding availability of stock also. Therefore, there appears no justifiable reason for the AO to reach a conclusion that the books of account had to be rejected.

7.3 We would also like to make a reference to the order of the Coordinate Bench of ITAT Vishakhapatnam in the case of ACIT Vs. M/s Hira Panna Jewellers in reported in 202 DTR 337 (Vishakhapatnam) wherein the Coordinate Bench had reached a conclusion that they did not find any reason to suspect the sale merely because of some routine observation of suspicious nature such as making sales on 270 bills in the span of four hours, non-availability of KYC documents for sales, non-writing of tag of the jewellery to the sale bills, non-availability of CCTV footage during the rush hours, etc.

The ITAT Vishakhapatnam held that the contention of the assessee that due to demonetization, there was panic in public as the cash available with them in old denomination notes was to become illegal from 09.11.2016 and, therefore, proceeded to invest in jewellery resulting in thronging in jewellery shops , appears to be reasonable and is also supported by newspaper clippings. Similar are the observations of the AO in the present case also relating to non-availability of PAN, huge cash bills, non-availability of CCTV footage and we find that the issues raised by the AO are squarely covered in favour of the assessee by the order of the Coordinate Bench of ITAT Vishakhapatnam as aforementioned.

7.4 Also, it is worth-noting that no incriminating material had been unearthed during the course of search which would indicate that the assessee had either concealed sales in quantity or price-wise and, therefore, we do not agree with the action of the Ld.CIT(A) in upholding the rejection of books of account by the AO. Accordingly, ground No.3 of assessee’s appeal stands allowed.

7.5 Coming to ground No.2 of the assessee’s appeal wherein the Ld.CIT(A)’s action of restricting gross profit percentage to 20% is being challenged, it is seen that the Ld.CIT(A) has, in principle, agreed to the submission of the assessee (page No.24 of the impugned order) that there was merit in the arguments of the Ld. AR that the valuation done at the time of search on 01.11.2017 cannot be made the basis for calculating the gross profit on the sales made during the financial year. The Ld.CIT(A) also went on to hold that either the gross profit should have been calculated by the AO by considering the whole of the jewellery found and valued by the Registered Valuer or the higher rate should have been applied only in respect of the items for which the difference of Rs.42,00700/- had been calculated by the AO.

Thereafter, the Ld.CIT(A) went on to observe that it was a well know fact that during demonetization period, the gold was sold at an exorbitant price and the assessee used this opportunity for its advantage, which is confirmed by the difference in tag price. Thus, on one hand, the Ld.CIT(A) accepted the contention of the assessee and on the other hand, he rejected the assessee’ contention and again went on to draw inference based on mere surmises and conjectures by holding that the assessee would have charged exorbitant prices for gold during the demonetization period.

This observation of the Ld.CIT(A) is not based on any cogent material either appearing from the books of account or from any material found during the course of search but is rather based on the general perception of the state of affairs at that particular point of time. This action of the Ld.CIT(A), thus, cannot sustained as it lacks foundation in terms of verifiable facts or documents. The Ld.CIT(A) did provide some relief to the assessee by restricting the addition on account of gross profit to 20% of sales instead of 38.63% as made by the AO. However, while doing so the Ld.CIT(A) also conveniently ignored that the assessee’ gross profit rate for financial year 2014-15 was 15.75% and for financial year 2016-17, it was 16.28%. At most, even if the profits had to be estimated, the Ld.CIT(A) could have proceeded to work out an average rate of profit for these three years rather than applying gross profit rate of 20% arbitrarily and without any justification. This adhoc confirmation of addition, in our view, is not sustainable as it lacks any reasoning and is not supported by any data/figures.

Therefore, in such a situation, we have no option but to set aside the order of the Ld.CIT(A) on the issue and direct the AO to delete the addition. Since this ground is related to ground Nos.2 and 3 of the departmental appeal, for identical reasoning, we dismiss ground Nos. 2 and 3 of the departmental appeal while allowing ground No.2 of assessee’s appeal.

7.6 The remaining ground for adjudication is ground No.1 in departmental appeal wherein the department has challenged the action of the Ld.CIT(A) in deleting the addition of Rs.6,85,735/- made by the AO on account of unexplained cash credit u/s 68 of the Act. In this regard, the Ld.CIT(A) has given a categorical finding in para 4.3 of the impugned order that the bills which were forward dated, had been duly accounted for in the books of account although on a later date and therefore, no undue benefit had accrued to the assessee. The Ld.CIT(A) has observed that there is merit in the arguments of the Ld. AR that once the revenue has been duly recorded in the books of account, the same cannot be treated or said to be unaccounted money or income and that there was no allegation against the assessee that these sales were not recorded in the books at all and the only allegation is that they were entered on a later date. The Ld.CIT(A) has also given a finding that on perusal of the day-to-day cash book, it is seen that there was sufficient cash in hand on those dates and even if the sales were taken out, the cash in hand did not become negative. No perversity has been pointed out by the Ld.CIT DR in this finding of the Ld.CIT(A) even during the course of arguments before us. In such a situation, we are not in a position to deviate from the action of the Ld.CIT(A) in deleting this addition on account of unexplained cash credit.

Accordingly, ground No.1 of the departmental appeal also stands dismissed.

Order pronounced on 03.06.2022.