KANGRA EXPORTS LIMITED,DELHI vs. ITO WARD 14(1), DELHI

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ITA 6518/DEL/2025Status: DisposedITAT Delhi24 July 2026AY 2018-197 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal upheld the AO's action of invoking Section 145(3) due to unverified creditors. However, it directed a re-computation of the addition by applying a G.P. rate of 4% on the turnover, considering the low declared rate and comparable entities.

What were the facts?

The assessee's business expenses were selected for scrutiny due to high revenue and lack of prior scrutiny. The AO found unverified creditors and discrepancies in outstanding amounts versus purchases, leading to income estimation under Section 145(3). The CIT(A) confirmed the AO's order.

What were the issues?

Whether the AO was justified in invoking Section 145(3) for unverified creditors and if the estimation of income based on GP rate was reasonable.

Which sections of the Income-tax Act were involved?

Section 145(3),Section 143(3),Section 144B,Section 250

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI “A” BENCHES, NEW DELHI

Before: SHRI ANUBHAV SHARMA & SHRI MANISH AGARWAL

PER MANISH AGARWAL, A.M.: The present appeal is filed by assessee against the order dated 12.08.2025 passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. NFAC/2017- 18/10049273 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 19.04.2021 passed u/s 143(3) r.w.s. 144B of the Act pertaining to Assessment Year 2018-19.

2.

Brief facts of the case are that the assessee company is engaged in the business of manufacturing and trading of menthol and its related products, declaring total income of INR 4,97,120/-. The case of the assessee was selected

ITA 6518/DEL/2025 KANGRA EXPORTS LIMITED for complete scrutiny on the issue of examination of business expenses as there was high revenue from operation and no scrutiny was taken in Five years. The AO asked the assessee to file various details which include the party-wise and month-wise details of purchase and sales. The assessee was further asked to file the details of debtors and creditors and on perusal of the details filed by the assessee of Sundry creditors it was observed by the AO that in some cases neither their addresses nor particulars were filed. Therefore, AO framed the opinion that creditors are not verifiable. The AO further observed that amount outstanding are not matching with the purchases made from then respective parties and there was sharp decrease in the profit thus after invoking the provision of section 145(3) of the Act, income was estimated by applying G.P. rate of 13% as against 0.80% declared by the assessee. This has resulted into an addition of INR 15,70,50,888/- to the total income of the assessee.

3.

Against the said order, assessee is in appeal before ld. CIT(A) who vide impugned order dated 12.08.2025 has confirmed the observations of the AO and dismissed the appeal of the assessee.

4.

Aggrieved by the order of ld. CIT(A), the assessee is in appeal before the Tribunal by taking various Grounds of appeal mentioned in the appeal memo.

5.

During the course of hearing, Ground of appeal No.2 taken by the assessee is not pressed hence, the same is dismissed.

6.

Remaining Grounds of appeal are with respect to the application of provisions of section 145(3) and estimation of income therefore, they are taken together for consideration.

ITA 6518/DEL/2025 KANGRA EXPORTS LIMITED 7. Before us, in support of Grounds of appeal taken, ld. AR for the assessee filed detailed submissions wherein it is claimed that the assessee is maintaining complete books of accounts which are subject to audit and no error was pointed out by the Auditors in the books of accounts so maintained. As per ld.AR, during the course of assessment proceedings, assessee had filed month-wise details of sales and as purchases made. Besides this, reconciliation of the sales as per books of accounts and as per GST return was also filed. The assessee further filed copy of the bank statements, details of creditors and debtors and complete details were filed with respect to the stock maintained. Ld.AR submits that the AO has failed to appreciate these details filed and wrongly invoked the provision of section 145(3) of the Act. As per ld. AR , the AO has failed to appreciate the fact that closing balance of the creditors was inclusive of GST paid on purchases made from them whereas in the purchase account, net amount of purchase is debited and GST is separately accounted for therefore, the figure of purchases appearing the ledger account of respective creditor was not matched with the purchases shown in the purchases account. Ld. AR further submits that except this discrepancy, no specific error was pointed out by the AO and therefore, the trading results based on the books of accounts maintained in regular course should be accepted. With respect to fall in G. P. rate, Ld.AR drew our attention to the results of the comparative cases where the GP ranges from 1% to 5% and further submits that as per the Essential Oil Association of India, the G.P. rate in trading of Menthol ranges from 1% to 5%. As per Ld.AR, goods were also traded at MCX and therefore, the assessee could not charge the higher prices resulting into the low G.P. rate. Ld.AR further drew our attention to the turnover of the assessee which has increased from INR 7.14 crores to 129.52 crores from Assessment Years 2016-17 to AY 2018-19 and it is established principal that increase in turnover could be achieved by lowering the profit margin. He therefore submits that addition made be deleted. Ld.AR further placed reliance on the various judicial pronouncements including the

ITA 6518/DEL/2025 KANGRA EXPORTS LIMITED judgments of Hon’ble Delhi High Court in the case of PCIT vs IBLT Technologies Ltd. reported in [2018] 10 TMI 63 wherein Hon’ble Jurisdictional High Court has held that mere fall in the gross profit could not be the reason for framing the best judgment.

8.

Ld.AR further placed reliance on the judgment of Hon’ble Supreme Court in the case of CIT vs Orissa Corporation P. Ltd. reported in 159 ITR 78 (SC). wherein it is held that when the assessee has furnished name and addresses of the parties, it is the duty of AO to make further inquiry before drawing inference against the assessee. Further, with respect to the arguments that without pointing out any specific advance rejection of books of accounts u/s 145(3) of the Act, is not sustainable, reliance is placed on the following judgments:- [i] CIT vs Smt. Poonam Rani, 2010 (5) TMI 57-Delhi High Court dated 07.05.2010; [ii] ACIT vs Friends Medicos 2023 (10) TMI 1269-ITAT, Delhi dated 10.10.2023; [iii] DCIT vs M/s. IRIS Computers Ltd. 2024 (8) TMI 173-ITAT, Delhi dated 31.07.2024; and [iv] DCIT vs M/s. TNG Retail Pvt. Ltd. 2022 (3) TMI 345-ITAT, Delhi dated 28.02.2022 8.1. Ld.AR therefore, requested for the deletion of the additions made.

9.

Per contra, ld. CIT DR vehemently supported the orders of the lower authorities and submits that the assessee has not filed complete particulars of the creditors from whom purchases were made therefore, AO was not in the position to verify the genuineness of the purchases made and the creditors. He further submits that before ld. CIT(A), assessee has filed additional evidences wherein complete details were filed. Ld. CIT DR drew our attention to the Remand Report reproduced in the appellate order at page 19 to 21 wherein AO has categorically stated that assessee was provided sufficient opportunity however,

ITA 6518/DEL/2025 KANGRA EXPORTS LIMITED has not opted to file the complete details. Ld. CIT DR submits that the assessee though had claimed that the closing balances of the creditors are inclusive of GST whereas purchases were recorded net of GST however, no confirmations were filed of any of the supplier, therefore, balances outstanding remained unsubstantiated. Regarding application of G. P. rate, ld. CIT DR submitted as against G.P. rate of 16.88% declared in Assessment Year 2016-17, 7.35% in Assessment Year 2017-18 and the G. P. rate of only 0.87% was declared in the year under appeal for which no plausible explanation was given. Ld. CIT DR submits that though the turnover has increased however, such a lower profit margin cannot be acceptable more particularly, when the assessee itself has given the comparative data where the G.P. ranges from 1% to 5% and G.P. declared by comparable concern namely, Kaizen Organics Pvt.Ltd. was 4.61% and Banwari Aromas Pvt. Ltd. was of 4.53%. He therefore, submits that looking to the comparative G.P. rate, estimation done by the AO is correct and requested for the confirmation of the additions made.

10.

Heard the contention of both the parties at length and perused the material available on record. The assessee was engaged in the business of manufacturing and trading menthol and its related products. It is observed that during the course of assessment proceedings, AO asked the assessee to file confirmations etc. of the suppliers however, the assessee has even failed to file their complete addresses and PAN Nos. of certain suppliers. Even no confirmations were filed from the creditors therefore the AO was of the opinion that purchases remained unverified. It is further observed that before Ld. CIT(A), assessee has filed all the relevant details alongwith the prayer made under Rule 46A of the Income Tax Rules, 1962 and a Remand Report was called for from the AO. In the Remand Report, the AO observed that assessee has filed complete ledger accounts and also filed re-conciliation statement of purchases made from the parties. Since the purchases were recorded net of GST therefore, the amount

ITA 6518/DEL/2025 KANGRA EXPORTS LIMITED shown in the purchase account and the corresponding credit entry in the ledger account of respective supplier accounts differs. However, the facts remained that no confirmations were filed of the creditors and even before ld. CIT(A) as additional evidences, assessee has filed copy of the ledger accounts of the creditors as appearing in its books of accounts which are placed at pages 232 to 242 of the Paper Book. In absence of confirmation from each individual supplier, purchases remained unverified and therefore, we are of the considered opinion that this defect would results into application of provision of section 145(3) of the Act and accordingly, the action of the AO is hereby, upheld to this extent.

11.

Coming to the estimation of the income, it is observed that assessee has declared progressive turnover where the Turnover was increased from INR 7.14 crores in Assessment Year 2016-17 to INR 129.52 crores in the year under appeal whereas the G.P. rate of corresponding period had reduced from 16.88% to 0.87% only. It is further observed that assessee itself filed the results of comparable entities engaged in the similar business namely Kaizen Organics Pvt. Ltd. who had shown G.P. rate of 4.61% and Banwari Aromas Pvt. Ltd. showing 4.53%. Further, the assessee has filed certificate from Essential Oil Association of India alongwith MCX rates for the year under appeal, according to which, G.P. rate ranges from 1 % to 5%. However, in the instant case, G.P. rate was declared at 0.87% which is very low as compared to comparable entities operated in same industry. Accordingly, in our considered opinion, G.P. rate of 4% on the declared turnover would be fair and reasonable which is inclusive of G.P. rate of 0.87% declared by the assessee. The AO is thus directed to recomputed the addition accordingly. With these directions, Grounds of appeal Nos. 6 to 10 raised by the assessee are partly allowed.

ITA 6518/DEL/2025 KANGRA EXPORTS LIMITED 12. The Ground of appeal No. 3 is with respect to conversion of limited scrutiny into complete scrutiny and Ground of appeal No.4 is with respect to issue of travelling beyond the limited scrutiny and Ground of appeal No.5 is with respect to confirming the order passed by AO rejecting the contention of the assessee without following the mandatory procedure prescribed u/s 144B of the Act.

13.

Before us, no specific submissions were made in respect to Grounds of appeal Nos. 3 to 5 raised by the assessee, therefore, they are dismissed as not pressed.

In the result, appeal filed by the assessee is partly allowed. 14.

Order pronounced in the open court on 24.07.2026. Sd/- Sd/- ANUBHAV SHARMA MANISH AGARWAL JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 24.07.2026 *Amit Kumar, Sr. P.S* Copy to: KANGRA EXPORTS LIMITED, 1 E-657, 658, NARELA INDUSTRIAL PARK DSIDC, NEW DELHI-110040 ITO WARD 14(1), 2 NEW DELHI-, DELHI 3 THE PCIT / CIT, 4 THE D.R., ITAT, DELHI BENCH 5 GUARD FILE TRUE COPY ASSISTANT REGISTRAR / SR. PRIVATE SECRETARY I.T.A.T., DELHI

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