KANAKA MAHA LAXMI HOUSE,SURYAPET vs INCOME TAX OFFICER, SURYAPET

Income Tax Appellate Tribunal, HYDERABAD BENCHES “SMC”, HYDERABAD

Before: SMT. P. MADHAVI DEVI

BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER Assessment Year: 2007-08 Kanaka Maha Laxmi The Income Tax Officer, Silk House, Vs SURYAPET SURYAPET [PAN: AACFK3668A] (Appellant) (Respondent) For Assessee : Smt. S.Sandhya, AR For Revenue : Shri A.C.Rout, DR Date of Hearing : 27-02-2020 Date of Pronouncement : 19-03-2020 O R D E R This is assessee’s appeal for the AY.2007-08, directed against the order of the Commissioner of Income Tax (Appeals)–10, Hyderabad, dated 20-09-2018.

Brief facts of the case are that the assessee is a firm, trading in cloths. It had filed its return of income for the AY.2007-08 on 15-11-2007 declaring total income of Rs.10,184/-. There was a survey action u/s.133A of the Income Tax Act [Act] on 31-08-2006 in the business premises of the assessee-firm and therefore, the return of income filed by the assessee was taken up for scrutiny.

During the assessment proceedings u/s.143(3) of the Tax Act, various details were called-for. Assessee submitted the details such as Books of Account, original bills of purchases and sales, copy of Partnership Deed, copy of the 3CD report, copies of Trading A/c, Profit & Loss A/c, Balance Sheet and Capital A/cs of partners, list of Sundry Creditors and copies of bank statements. The assessee was also directed to furnish the reconciliation of the closing stock for the period from 01-04- 2006 to 31-08-2006 and 01-09-2006 to 31-03-2007. With regard to this point, assessee submitted that - it is unable to provide reconciliation for valuation of closing stock as they have not made available, the stock valuation made by the Department even though the assessee-firm made a specific request vide letter dt.22-01-2008. Therefore, the assessee was served with a copy of the valuation report made at the time of survey. In the letter dt.21-12-2009, the assessee submitted its business model as under:

On shop is retail shop and not fixed price shop. We used to sell the cloth on bargaining. To facilitate our sales boy/girl, the cost price will be increased by 20% to 25% in the case of sarees and ladies dress materials and made it doubled and will be indicated as code price in telugu language which cannot be understood by the customer. This doubled figure further enhanced to some extent and indicated on tag as sale price. Our Sale boy tries to sell from the price indicate in English and permitted to sell the cloth for half of the code price which is in telugu language. I would like to clarify for the same with a small example. If the cost price of a particular saree is Rs.100/-, this can be increase by say 25% and made it doubled. Then it becomes Rs.250/-. This Rs.250/- will be the code price. This Rs.250/- will further enhanced and indicated on cloth as sale price. Our sales man will start with the sale price and conclude with the half of the code price. The Selling price and time taken to sale will depends upon the bargaining capacity of the customer and convincing capacity of the sales man. At any cost, the sales man is not authorized to sale the product at less than the half of the code price. Even than some of the customers approaches us to further reduction than the half of the amount mentioned as code price. There is possibility to sell at lower than the half of the code price depends on the situation and value of the customer. In case of suitings and shirtings, we don't follow this procedure . The cost price will be increased by profit element and prefixed F before that. For example, if the cost price of shirting is Rs.50/- per metre we used to add 20% as our profit which comes to Rs.60/-. This can be suffixed with F and tagged as F60 on the cloth followed by Rs.100/- or any thing else so as to face the bargaining of the customer. Our sales man, in this case, not allowed to sale below the price prefixed with F. This is the procedure followed by us for coating the code price and selling price. Than adopting code price/selling price to the stock is not reasonable or not prudent method of arriving at the value of stock as per the procedure laid down u/s 145 of the Income tax Act. If you adopt the half of the code price the valuation of stock will get tallied. Hence we request you to kindly adopt the same and which can be acceptable procedure. We would like to bring to your notice some other causes which results in variation in value of stock.

Some stock lying in the shop may not be in salable condition due to damages, obsolesce etc. In this case we have to take the value as nil.

2. Some' stock becomes out of fashion. They cannot be sold even at cost price. Then we have to adopt the realization value. 3. At the introduction of a particular cloth the cost price will be more. After some time the cost price will be reduced by the supplier. Then we have to take the latest cost price even though the stock was purchased at higher rate. 4. In the case of suitings and shirtings some cloth becomes waste for which we cannot adopt any value”.

3.1. After considering the submissions of assessee, the AO was of the opinion that the assessee is making Gross Profit (GP) of at least 25% and more. He therefore rejected the Books of Account and estimated the GP @25% and brought the resultant income to tax. The AO further observed that the assessee has unsecured loans to the extent of Rs.1,95,013/- and since the assessee could not furnish any details of the same, AO treated it as assessee’s income.

3.2. Further, AO also observed that the assessee has made payment to the extent of Rs.47,747/- in cash in violation of provisions of Section 40A(3) of the Act. Therefore, he treated 20% of the sales as ‘income of the assessee’.

Aggrieved, the assessee preferred an appeal before the CIT(A), who confirmed the order of AO and the assessee is in second appeal before the Tribunal, raising the following Grounds:

“1. The order of the learned Commissioner of Income-Tax (Appeals) is erroneous both on facts and in law.

2. The learned Commissioner of Income-Tax (Appeals) ought to have provided opportunity before deciding the appeal, or considered the written submissions filed before him.

3. The learned Commissioner of Income-Tax (Appeals) erred in confirming the action of the Assessing officer in applying the provisions of Sec.145 without rejecting the books of account.

4. The learned Commissioner of Income-Tax (Appeals) erred in confirming adoption of 25% of the turnover as the gross profit and further erred in confirming the addition made of Rs.7,30,392/-.

5. The learned Commissioner of Income-Tax (Appeals) erred in confirming the addition of Rs.1,95,013/- without considering the fact that it does not represent the credits obtained during the year under consideration.

6. The learned Commissioner of Income-Tax (Appeals) erred in confirming the addition of Rs.9,550/- made by applying the provisions of Sec.40A(3) of the I.T. Act.

7. The learned Commissioner of Income-Tax (Appeals) erred in confirming levy of interest u/s 234B of the I.T. Act.

Any other ground that may be urged at the time of hearing”.

Ld.Counsel for the assessee submitted that though the assessee had filed written submissions before the CIT(A) and the CIT(A) ought to have given a personal hearing to explain the same before disposing-of the appeal.

Having regard to the rival contentions and material on record, I find that the CIT(A) had issued notices to the assessee but the assessee did not appear before the CIT(A) and had only filed written submissions. The CIT(A) has considered the same and has disposed-of the appeal. Therefore, there is no merit in Ground No.2, raised by assessee. Hence, the same is dismissed.

6.1. As regards Ground Nos.3 & 4 are concerned, the estimation of GP from the turnover, I find that the Managing Partner of the assessee-firm himself had explained that the sale price of the clothes is fixed @25% margin and thereafter, it is doubled, so as to enable them to decrease the price, so that even if the customer bargains his margin would not go below 25%. He has also submitted that the ready-mades were not sold below the sale price, which is fixed with a margin of 20%. Thus, it is seen that on an average, the assessee is selling the clothes at not less than 25% and the ready-mades at not less than 20%. The turnover of the sarees and the turnover of ready-mades is not shown separately. Therefore, the AO and the CIT(A) have estimated the GP @25% of the total turnover. However, since the assessee is selling the readymade clothes @20% of the turnover and the sarees and other clothes @25%, I deem it fit and proper to restrict the estimation of GP @22% of the turnover, in the interest of justice. Hence, Ground Nos.3 & 4 are treated as partly allowed.

6.2. As regards Ground No.5 is concerned, though the assessee submitted that these are loans pertaining to earlier years and not to the year under consideration, no details of the same were given either before the AO or before the CIT(A). Even before the Tribunal, no details were given. Therefore, Ground No.5 is rejected.

6.3. As regards Ground No.6 is concerned, I find that the AO has disallowed 20% of the payments made in cash in excess of Rs.20,000/-, and the assessee has not given any explanation to justify the payment in cash. Therefore, I find no reason to interfere with the order of CIT(A) on this issue.

6.4. Ground No.7 is consequential in nature. The AO is directed to give relief if any, to the assessee with regard to levy of interest u/s.234B of the Act.

In the result, the appeal of assessee is treated as partly allowed.

Order pronounced in the open court on 19th March, 2020

KANAKA MAHA LAXMI HOUSE,SURYAPET vs. INCOME TAX OFFICER, SURYAPET