JAI DAIRY,AGRA vs. ITO WARD-2(2)(2), FIROZABAD, FIROZABAD

At the outset, we find that there is a delay in filing of appeal by the assessee before us by 84 days. Considering the reason adduced in the condonation petition, we find that assessee was prevented from sufficient cause in not filing the appeal in time before us. Hence, in the interest of substantial justice, we are inclined to condone the delay and admit the appeal of the assessee for adjudication.

The first issue to be decided in this appeal is as to whether the learned CITA was justified in upholding the action of the learned AO in rejecting the book results under section 145(3) of the Act and proceeding to estimate the net profit of the business of the assessee in the facts and circumstances of the instant case. The second issue to be decided in this appeal is as to whether the transactions carried out by the assessee with Hardiyal Milk Products Pvt Ltd could be treated as accommodation entries in the facts and circumstances of the instant case. The third issue to be decided in this appeal is as to whether the Learned CITA was justified in upholding the disallowance of tanker running expenses in the sum of Rs 82,68,557 in the facts and circumstances of the instant case.

We have heard the rival submissions and perused the materials available on record. The assessee is a partnership firm engaged in the business of purchase and sale of milk and milk products and transportation thereof through milk tankers. The firm had filed its return of income on 30-11-2014 declaring total income of Rs 3,62,433 accompanied by audited financial statements and tax audit report. The turnover declared by the assessee in the return was Rs 106,05,76,943 and gross profit of Rs 1,35,59,562 which worked out to 1.27% of turnover and net profit of Rs 3,62,433 which worked out to 0.034% of turnover. The learned AO noted in para 2 of the assessment order that assessee was running a milk chilling plant and had shown gross turnover of Rs 106,77,83,815 which includes turnover of Rs 106,05,76,643 from milk sales and Rs 72,06,872 from tanker running income. The assessee had claimed that milk is purchased / collected from farmers / self-help groups of farmers as well as through small milk suppliers and has also purchased pasteurized / toned/ double milk f/s Nessus Hardiyal milk products Pvt limited and sold in wholesale to various parties. The learned AO noted that assessee in response to notices under section 142(1) of the Act had furnished only part information that were called for. On perusal of the said insufficient details / documents provided by the assessee and taking cognizance of the past behavior of the assessee in assessment year 2013-14, the pattern of transactions, financial flows and method of business which is identical during the year under consideration, the learned AO proceeded to conclude that the books of account of the assessee were unable to represent the true and complete nature and quantum of income accordingly he proceeded to reject the same by applying the provisions of section 145(3) of the Act and proceeded to estimate the net profit of the business. The learned AO directed the assessee to submit the list of milk suppliers / list of advance to suppliers along with their complete addresses, ledger accounts, confirmations and evidences of their existence. The learned AO noted that the assessee had simply submitted the list of advance to suppliers without mentioning the specific addresses and without enclosing the evidences / proof of their existence / genuineness. He also noted that even the copy of the accounts of these parties provided by the assessee neither have been confirmed by the parties nor by the assessee except copy of account of M/s Hardiyal milk products private limited. The learned AO noted that similar details were filed by the assessee during the course of assessment proceedings for assessment year 2013-14. The learned AO on perusal of the ledger account submitted by the assessee noticed that the persons from whom the milk is purchased later on the sale is being made to them to square up their accounts which is evident from the ledger accounts of the farmers as well as of M/s Hardiyal milk products private limited. The learned AO concluded that it is beyond imagination that a farmer who brings milk of his own cattle for sale is purchasing the same from the assessee. Accordingly, the learned AO justified his decision to reject the books of accounts and book results furnished by the assessee and applied the provisions of section 145(3) of the Act and proceeded to estimate the net profit of the assessee. The learned AO also concluded that the transactions with Hardiyal milk products private limited are mere accommodation entries. He noted that as per the ledger account of M/s. Hardiyal milk products private limited, the assessee had made sale of Rs 55,24,76,727 and purchase of Rs 50,46,22,247 and received entries in his bank accounts amounting to Rs 55,12,80,000 from Hardiyal milk products private limited. The learned AO estimated the net profit of the assessee business at Rs 5 per thousand on the entries received from Hardiyal milk products private limited alone of Rs 55,12,80,000 and worked out the net profit at Rs 27,56,400. From this arrived net profit, the net profit declared by the assessee in the sum of Rs 3,62,433 was reduced and the remaining addition of Rs 23, 93, 967 was made in the assessment.

The assessee has shown income of Rs 72,06,872 from tanker running and had claimed expenses of Rs 82,68,557 as tanker running expenses. The Learned AO noted that assessee had not produced complete details with supporting evidences and had not explained the genuineness and reasonability of these expenses and accordingly proceeded to disallow the entire tanker running expenses of Rs 82,68,557 and taxed only the gross receipts from income from tanker running of Rs 72,06,872 in the assessment. The Learned AO however granted allowance on account of depreciation on tanker in the sum of Rs 4,80,488 while computing the total income of the assessee. This action of the learned AO was upheld by the learned CITA.

At the outset, we find that the lower authorities had only sought to treat the transactions with Hardiyal Milk Products Private Limited as accommodation entries and resorted to estimate the net profit at the rate of Rs 5 per 1000 only in respect of amounts received from Hardiyal Milk Products Private Limited. This goes to prove that the lower authorities had accepted the transactions with other customers and suppliers of the assessee as genuine. This itself goes to prove that the Learned AO had only resorted to partial rejection of book results of the assessee under Section 145(3) of the Act. The provisions of Section 145(3) of the Act nowhere mandates the application of partial rejection of book results of the assessee. Once the book results are rejected, the only recourse available to the revenue is to estimate the net profit. But in order to reject the book results, the Learned AO should consciously bring on record with cogent evidences deficiencies in the books of accounts and the book results shown by the assessee. In the instant case, no such deficiencies were even pointed out by the revenue. The assessee factually had made purchase of raw milk from Hardiyal Milk Products and has got a chilling plant where the milk is pasteurized and the pasteurized milk is being sold back to Hardiyal Milk Products Private Limited. This is the reason why there are both purchases and sales reflected in the same ledger account apart from making net payments to the assessee. This modus operandi and business model of the assessee has not been understood and appreciated by the revenue in the instant case. Further, we find that during the course of scrutiny assessment proceedings of assessment year 2013-14, the inspector of income tax had physically visited the factory premises of Hardiyal milk products private limited and had given his report duly confirming that the factory is in operation and there is a milk chilling plant in existence and the business operations were duly carried out there on. Hence, treating the transactions of Hardiyal milk products as mere accommodation entries and the said entity being construed as a shell entity does not draw any support from the facts and records available with the income tax department. The inspector's report is enclosed in pages 221 to 223 of the paper book. The entire ledger account of Hardiyal milk products private limited are enclosed in pages 204 to 207 of the paper book, which was duly filed before the learned AO. Hence, the transactions carried out with Hardiyal Milk Products Private Limited cannot be construed as accommodation entries in the facts and circumstances of the instant case. We find that assessee is engaged in pasteurizing of milk and also in the business of running tankers, which is actually incidental to the main activity of pasteurization of milk. The tanker running is effectively used for transporting the pasteurized milk to the place of the customers. Hence, both the activities carried out by the assessee are inextricably linked and interconnected. The learned AO had noted that assessee could not prove the genuineness and reasonability of incurrence of tanker running expenses with documentary evidences. Hence, to cover up such deficiency also, the overall net profit of the business need to be estimated. But it cannot be brushed aside that assessee had not fully furnished the requisite details that were called for by the Learned AO from time to time vide issuance of various notices under section 142(1) of the Act during the course of assessment proceedings. Hence, in order to cover up all the deficiencies, it would be just and fair to resort to reasonable estimation of net profit of the business of the assessee based on the comparative profitability chart of the assessee which is as under:-

We find from the above table the average of last three years net profit works out to 0.031% and accordingly we estimate the net profit of the overall business of the assessee at 0.031% for the year under consideration. This in our considered opinion, would meet the ends of justice. We make it very clear that the said estimation shall not act as a precedent for other assessment years for the assessee itself and the same is made in the peculiar facts and circumstances of the instant case for the year under consideration. We direct the Learned AO to determine the net profit in the following manner:-

Since assessee itself had declared net profit of Rs 3,62,433 which is more than the net profit determined in the abovementioned manner, no addition is warranted and we direct the learned AO to accept the returned income. Accordingly, the grounds raised by the assessee are allowed.

In the result, the appeal of the assessee is allowed.