THE ITO, WARD-1(1)(4),, SURAT vs. M/S. MEGA COLLECTION PVT. LTD.,, SURAT

Captioned appeal filed by the Revenue, pertaining to the Assessment Year (AY) 2012-13, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals)-3, Surat [in short “the ld. CIT(A)”] in Appeal No. CAS-3/TRFD/394/2015-16 dated 27.03.2017 which in turn arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as the “Act”]. The grievances raised by the Revenue are as follows: “1. Whether, on the facts and circumstances of the case and in law, Ld. CIT(A) was justified in deleting the addition made on account of unexplained share Capital and Share Premium amounting to Rs.5,21,31,100/- without appreciating the fact that the assessee failed to prove identity of the investors, genuineness and creditworthiness of investors by not producing the investors before the A.O during the assessment proceedings though he was requested to do so? 2. Whether, on the facts and circumstances of the facts and in law, Ld. CIT(A) was justified in deleting the addition made on account of estimation of GP amounting to Rs. 71,71,873/- without appreciating the facts that books of Assessment Years.2012-13 Mega Collection Pvt. Ltd. [ accounts, original bills/vouchers were not produced for examination though those were called for during the course of assessment proceedings? 3. On the facts and circumstances of the case, Ld. CIT(A) ought to have upheld the order of the assessing officer. 4. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of assessing office may be restored to the above extent.”

The Assessing Officer observed that all above persons/firms which have advanced loan to investors who were doing trading transactions with assessee, M/s Megha Collection (P) Ltd. The Megha collection (P) Ltd has made purchases from majority of above concerns and has paid its purchases amounts receive from assessee, against purchases were given to investors for making investment with assessee. Few concerns who are not doing direct transactions with assessee are doing transactions with creditors of assessee and receive amounts for their sale. Those received amount were advanced to investor for making investment with assessee. Transaction details and creditworthiness of each investor is explained in a table given in assessment order page no. 7 to13. On the perusal of details following facts were found by Assessing Officer. (1) Each investor has transfer the same amount received on same date as unsecured loan to assessee.

Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before ld. CIT(A) who has deleted the addition made by the Assessing Officer. Aggrieved, the Revenue is in appeal before us.

Shri Ritesh Mishra, Learned CIT- DR vehemently assailing the action of the Ld. CIT(A) has reiterated the contentions raised by the AO to justify the addition made against the assessee. According to Ld. CIT, DR, the share applicants in this case have common shareholding funds which have been again

On the other hand, Shri Suresh K. Kabra, ld Counsel for the assessee has primarily reiterated the stand taken by the learned Commissioner of Income Tax (Appeals) and defended the order passed by him.

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. The relevant material facts which were recorded by the ld CIT(A) during the appellate proceedings are as follows: (i).The seventeen share applicants are all individuals.

In the light of the above facts of the assessee, let us examine, whether assessee has satisfied the three ingredients of section 68, that is, identity, creditworthiness and genuineness of the share applicants. The argument made by ld DR about Cash credit, mean journal entries too, under mercantile system of accounting is irrational and logically false. The section 68 speaks about receipt of money for invocation of the provision. The accounting method is for maintenance of accounts to determine the income of the year u/s 145 of the Act and is computing provision. Section 68 is deeming provision to Charge the receipt as income not declared and disclosed to be eligible for tax. Thus, the super imposition of word 'entries' or "Accounting entries" in section 68 in place of "Sum" is to confuse the issue and against the legislative intention. No tax can be imposed on the assessee without words in the Act clearly showing an intention to lay a burden upon him. The assessee cannot be taxed unless he comes within the letter of law. In a taxing Act, one has to look merely what is clearly said. There is no room for any intendment. No tax can be imposed by inference or analogy. Section 68 gives the statutory recognition to the principle that cash credit which are not satisfactorily explained by an assessee may assessed as Income. The provision is to defeat the proliferation of black money and introduction in books of accounts as camouflage being as receipt of sum form third party or introduction as own capital. The basic point is the introduction of a sum of money in books. Logically too, unless there is a receipt of actual money there is no chance of introduction of unaccounted money. Mere

The prime facie evidence is receipt of money for logical steps to invoke the jurisdiction of section 68 of the Act. The Section puts the assessee under a cloud and must dispel that cloud to the reasonable satisfaction of the assessing authorities, upon the establishing the prime cause of receipt of money. The assessee had to prove that the money he has received in his books has either not under the scope of taxation or it had already suffered tax. In case, the assessee fails to satisfy, the AO, about any of the conditions, then said sum is treated as his income from undisclosed source or unexplained source. During the appellate proceedings, the ld CIT(A) noticed that assessee has submitted documentary evidences, including ITR, bank accounts, assessment orders passed by the jurisdictional AOs of the share applicants as well as the loan creditors (sources) of the share applicants, the subsequent conduct of share applicants in selling the shares at a profit, coupled with the fact that, share applicants are the very promoters and members of their family ( who already hold shares in appellant - company) go on to prove the 3 elements of section 68 of the Act, viz: (i) identity, (ii) creditworthiness and (iii) genuineness of the transactions. The genuineness of the subscription to new shares of a Company by existing shareholders / promoters can be safely presumed to be established, unless some conclusive or irrefutable evidence is found to contrary. No such evidence or finding has been made in the case. As against the above overwhelming evidences and facts, the single fact of non - appearance of the share - applicants before the Id AO ( in response to his direction in order sheet entry) cannot be solely relied upon to say the said transactions are bogus. When the share applicants are the very promoters of the appellant - company, independently assessed to tax, their identity cannot be denied just for non - appearance before the Id A. O. If their identity is false, then the identity of appellant - company, which has made a turnover of Rs.112 crores for the year and has paid Rs 4 lacs as income tax for the year will also have to be held as fake.

On the fixed date neither reason for falling gross profit was furnished nor any books of accounts were furnished before Assessing Officer. On 05.03.2015 Shri S K Kabra, AR of assessee attended and discussed the case. He was again requested to produce books of accounts with supporting bills and vouchers. But again on fixed date 12.03.2015 neither any one attended nor any adjournment was called for. Sufficient opportunity was given to the assessee during the assessment stage to furnish the books of accounts for verification but books of accounts were never produced. Vide show cause letter of AO dated 20.03.2015, assessee was asked to show cause as to why assessee's books of accounts should not be rejected u/s 145 of the IT Act and gross profit should not be estimated on the basis of GP ration of preceding year. Relevant portion of show cause is as under: "Vide submission furnished dated 21.08.2014. You have shown your gross profit ratio at 0.24% which was 0.88% in A.Y. 2011-12. No reason for this downfall of GP furnished. Vide letter dated 09.01.2015 you have requested to furnish detailed reason with supporting documentary evidences for the abnormal fall of GP rate. Vide reply received dated 15.01.2015 your AR stated that explanation with respect to fall in GP is under preparation and will be submitted shortly. Till date no explanation for fall in GP received. Vide letter dated 09.01.2015 you have requested to produce books of account with supporting bills and vouchers. But books of accounts were not produced. Vide order sheet entry dated 05.03.2015 your AR was again requested to produce books of accounts with supporting bills and vouchers on 12.03.2015 but again no books of accounts were produced for verification. Vide order sheet entry dated 05.03.2015 your AR was asked to furnish purchase bills, delivery challans, transport bills, purchase order copies of M/s R J square Link, Dirg Sales, Torrent Pollyster, Colourful fabrics and Wintech fashions but details were not furnished. Summons u/s 131 were issued to colourful fabrics, Dirg sales, Torrent Pollyster, Siddhi International and Wintech fashion. In case of colourfuls fabrics summon could not be served as persons is not available on given address. Other person did not comply the summon issued. In view of the above facts, you are requested to please show cause as to why your books of accounts should not be rejected as per provisions of section 145 Assessment Years.2012-13 Mega Collection Pvt. Ltd. [ of the IT Act and gross profit should not be estimated as shown in the preceding year."

On the fixed date i.e. on 26.03.2015, no one attended. On 28.03.2015 assessee furnished his reply before Assessing Officer and stated that assessees business is based on orders of customers and the orders are directly delivered by suppliers. Delivery challans and transport details are available with suppliers. During the year under consideration assessee has jumped its turnover by 10 times and to achieve the higher volume of business his gross profit ratio is decreased. With the show cause reply assessee stated that assessee has complete record with regard to books of accounts and computer prints out are produced before Assessing Officer. Assessee further stated that complete quantitative information are available with assessee and are submitted but neither the computer printout nor books were produced nor quantitative details were furnished before Assessing Officer. Books of accounts were never furnished. Bills and vouchers related to purchase and sales were never furnished though those were called for again and again and assessee was given sufficient opportunity for the same. No details in form of books of accounts and supporting bills and vouchers were furnished. The provisions u/s 145 was invoked by Assessing Officer. As no supporting evidence in support of expenses was furnished before Assessing Officer, therefore book result shown by assessee was rejected. For the A.Y. 2012-13 assessee has shown gross profit ratio of 0.24%. In immediate preceding year GP ratio was 0.88%. In absence of any details of assessee GP ratio was estimated on the basis of GP ratio shown in preceding year. Accordingly, GP was calculated @ of 0.88% which worked out at Rs. 98,75,150/-. Difference of Rs.71,71,873/- (Rs.98,75,150 - Rs.27,03,277) was added to total income of assessee.

Aggrieved by the order of 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 observing as follows: “10.1 The ld AO rejected the books of account and estimated the gross profit at 0.88 % as against 0.24 % shown by the appellant - company. The matter is discussed. The main reason for rejecting books of account appears to be non - production of books before the ld AO. The AR however, furnished copy of his Page | 12 Assessment Years.2012-13 Mega Collection Pvt. Ltd. [ letter dated 28.03.2015 (also referred by the ld AO in para 4.3 and 5.11) wherein the AR has (in para 1) state that computer print outs of the books of accounts are produced for verification. Again in para 6 of this letter, it is written that complete quantitative information of sales and purchases have already been submitted. There is a conflict in statements of Id AO says vis- a-vis statement of the AR. However, records are in favour of the AR. 10.2 The AR explained the fall in Gross Profit rate in his above letters (para 3- 5). As per this the GP rate is reduced, but in absolute terms both GP and NP has increased. The turnover of the appellant -company jumped 10 times during this year and hence, there is reduction of G P percentage. Turnover has increased from Rs 11.90 crores to Rs 112. 22 crores and the GP has also increased from Rs.10.61 lakhs to Rs 27.03 lakhs. (Y O Y) The AR further argued that businessmen are more interested in higher volumes and increase absolute terms as against the percentage (%). The AR before me explained that, no addition can be made on the GP rate shown by the appellant, when such a huge jump in turnover justifies reduction in margins and when the accounts are subjected to Tax Audit and Audit under the Companies Act. 10.3 The AR pointed out that books of accounts can be rejected only on cogent finding of defects in the books of accounts, when the Id AO has not examined the books of accounts, there is no question of rejection of same. The Id AO could have invoked sec. 144 of the Act in the absence of books of accounts, which the Id AO has not done. The AR in para 22 (a) of submission (reproduced above) argues that copies of bank statement ledger a/c of creditors, major expenses, cash book, etc. were produced before the Id AO. 10.4 In view of the above facts and circumstances, I am of the opinion that, the rejection of books of accounts as well as estimation of Gross Profit is uncalled for. The ld assessing officer is directed to delete the addition of Rs.71,71,875/- made on this account. Consequently, the ground no 2 is decided in favour of the appellant.”

Aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us.

Learned DR submits before us that the decision of the CIT(A) is not acceptable on this issue because bills and vouchers related to purchase and sale were never furnished before AO though these were called for examination. Hence, ld AO has rightly rejected the books of accounts of the assessee. Therefore, it is prayed that the order of the CIT(A) be set-aside and that of the AO be restored.

On the other hand, Learned Counsel for the assessee defended the order passed by the ld. CIT(A).

We have heard both the parties and gone through the order of ld CIT(A). We note that while deleting the addition of Rs.71,71,873/- on account of estimation of Gross Profit, the CIT(A) held that books of accounts can be rejected only on cogent finding of defects in the books of accounts, when the AO has not examined the books of accounts, there is no question of rejection of the same. We note that there is no infirmity in the conclusion reached by the ld CIT(A). The conclusions arrived at by the ld CIT(A) are, therefore, correct and admit no interference by us. We, approve and confirm the order of the CIT(A).

In the result, appeal of the Revenue is dismissed.