AAY ESS SILK MILLS, HOSHIARPUR vs. COMMISSIONER OF INCOME TAX, HOSHIARPUR

The appeal was admitted by this Court on May 20, 2008 for determination of the following substantial question of law:- “Whether the Tribunal is justified in arriving at the conclusion towards net profit rate estimation on the basis of fresh and new base never pleaded by the litigants?”

The facts necessary for adjudication as pleaded in the present appeal are that the assessee is doing the business of purchasing yarn from the market and selling the same to the wholesalers after getting it manufactured from outsiders. The assessee filed its return on 31.10.1989 for the assessment year 1989-90 declaring -2- an income of Rs.19,960/-. The Assessing Officer rejected the book results being defective and made an addition of Rs.6,97,976/- by applying G.P. rate of 17.77%. The Assessing Officer disallowed the commission amounting to Rs.92,940/- paid to its two sister concerns under Section 40A(2)(a) of the Income Tax Act, 1961 (in short “the Act”). The assessee challenged both the additions by way of appeal before the Commissioner of Income Tax (Appeals) [hereinafter referred to as ”the CIT(A)”]. The CIT (A) vide order dated 19.1.1993 deleted the said additions. Against the order of the CIT (A), the department filed an appeal before the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (in short “the Tribunal”) who set aside the order of the CIT(A) and directed the Assessing Officer to complete the assessment afresh as per the directions given in the order of the Tribunal dated 28.4.1999. Thereafter, the Assessing Officer passed fresh assessment order on 27.3.2002 as per the directions of the Tribunal and maintained the aforesaid two additions. The appeal carried by the assessee against the said assessment order was accepted by the CIT(A) on 24.2.2005 who deleted both the additions of Rs.7,90,916/- (Rs.6,97,976/- + Rs.92,940/-). The appeal of the revenue was, however, partly accepted by the Tribunal by order dated 23.3.2007. This gave rise to the filing of the present appeal by the assessee.

We have heard learned counsel for the parties.

The Tribunal while partly allowing the appeal of the revenue had held that the net profit rate as per books of accounts of the assessee worked out to 0.34% on sales of Rs.58.50 lacs and the books of accounts had rightly been rejected. The assessee's failure to produce -3- the books of account along with bills and vouchers to justify that the sales made to its sister concern were at the market rate, it was taken to be fair and reasonable to estimate the income by applying net profit rate of 5% of the sales. The relevant observations of the Tribunal are as under:- “However, the Tribunal while sustaining the order of the CIT(A) observed that the case was distinguishable from the case relied upon by the Ld. DR because in that case entire sales were made to outside parties. In the case of the assessee, sales, were made to its sister concerns. Further, the books of account along with other details supported by bills, vouchers and stock register were produced before the AO and he had not pointed out any defects therein. Thus, reliance of the Ld. counsel on this decision is of no help. However, in the case of Sh. Arvinder Pal Singh, the AO had referred to the case of M/s Deesons Silk Mills as in the present case and observed that the G.P. shown was 18.35%. The AO estimated the income by applying G.P. rate of 10.35%. Therefore, even in the present case the application of G.P. rate of 17.77% was arbitrary and unreasonable, taking into account the fact that this was the first year of assessee's business and no addition was made in the block assessment. But at the same time, the fact whether sales made to sister -4- concerns were at market rates or not remained unverifiable. We have also noted that even after showing G.P. rate of 5.82%, the assessee made payments of commission amounting to Rs.92,940/- to its sister concerns. Thus, the income returned on sales of Rs.58.50 lacs was at Rs.19,960/- which in terms of net profit worked out to 0.34%. Thus, taking into account the facts that the book results have been held to be rightly rejected; the assessee's failure to produce the book of account along with bills and vouchers to justify that the sales made to its sister concerns were at market rate; and that this was first year of assessee's business, we are of the considered opinion that it would be fair and reasonable to estimate the income by applying net profit rate of 5%. No further disallowance of commission from the income so computed would be separately made. Accordingly, the order of the CIT (A) is set aside. While the ground of appeal relating to deletion of trading addition is partly allowed, the ground relating to deletion of disallowance is rejected.”

Learned counsel for the assessee was unable to point out any illegality or perversity either in the findings recorded or in the approach of the Tribunal in adopting net profit rate of 5% of the sales made in the facts of the present case, which may warrant interference -5- by this Court. The substantial question of law is, thus, answered against the assessee. Accordingly, there is no merit in the appeal and the same is hereby dismissed. (AJAY KUMAR MITTAL) JUDGE December 8, 2010 (ADARSH KUMAR GOEL) gbs JUDGE