Principal Commissioner Of Income Tax Ii vs. Shri Praveen Kumar Jain

1 HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE (I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) Income Tax Appeal No.220 of 2017 Indore, Dated:- 05/03/2018 Ms. Veena Mandlik, learned Counsel for the appellant. Heard on the question of admission. 2. This income tax appeal has been filed under Section 260-A of the Income Tax Act, 1961 against the order dated 26.5.2017 passed in I.T.A. N0.842/Ind/2016 whereby learned I.T.A.T. partly allowed the appeal of the respondent- assessee and directed that the net profit ratio of 2.5% of total turnover would be just, appropriate and directed the Assessing Officer to calculate the net profit accordingly. 3. The facts of the case are that the respondent – assessee has been purchasing cotton and cotton seed through Krishi Upaj Mandi Samiti, Badwah, District— Khargone. It was observed by the Assessing Officer from the purchase register that the same amount was not found reflected in the cash book whereas the payment bills bear the signature of the seller of cotton confirming that the purchases were made and the payments were made on the same day. The Assessing Officer has found number of infirmity of delayed payment in regard to more than 80 persons and the default continued throughout the year. The Assessing Officer proceeded to reject the books of account and proceeded to apply the rate of 5% on total purchases to 2 HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE (I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) work out the net profit of the respondent—assessee. 4. The respondent challenged the said order by filing first appeal before the Commissioner Income Tax (Appeals). The Commissioner of Income Tax confirmed the action of the Assessing Officer and dismissed the appeal of the respondent on 31.5.2016. He challenged the above observations of the Commissioner of Income Tax (Appeals) by filing an appeal before the Income Tax Appellate Tribunal. An argument was advanced before the learned Tribunal that the respondent—assessee has maintained proper books of accounts and all the books with supporting voucher, etc. have been produced before the Assessing Officer and he did not find any defect except mis-match in the dates of actual payments recorded as compared with the dates mentioned in “Bhugtan Patra”. It was also submitted that the entire in the cash book is done only when the actual payment is made to the farmers and the same need not be compared with “Bhugtan Patra” which is prepared just to show compliance with Mandi Rules. The books of accounts cannot be rejected as there is no dispute about the financial results or amount of purchase and the aggregate of disputed purchases is hardly 5% of total purchases. The rejection of books of accounts and estimation of profit consequently is not valid and sustainable. 5. The reply of the Department was that once books of accounts are rejected, the Assessing Officer is empowered 3 HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE (I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) to estimate the NP on the total turnover considering the material available with him and prayed for rejection. 6. The learned I.T.A.T relying on the decision in the case of Telelinks versus CIT reported in 377 ITR 158 (P&H) the Punjab & Haryana High Court has held that rejection of books of accounts is a pre-condition and sine qua non for making estimation of net profit. 7. Relying on the aforesaid decision, the learned I.T.A.T. upheld the finding of the Assessing Officer wherein he has rejected the books of accounts of the assessee. The Tribunal after appreciating the record of the case, came to the conclusion that undisputedly, net profit ratio of the assessee was 5.26% and 1.86% in the assessment years 2009-10 and 2010-11 while the net profit ratio declared by the respondent - assessee for the assessment year 2011-12 i.e. for the present year is .96% which is the nucleus of the action of the Assessing Officer estimating the profit at 5% of the turnover and considering the past tax history of the assessment year 2009-10 and 2010-11 fixed the net profit ratio of 2.5% of the turn over and directed the Assessing Officer to calculate the net profit accordingly. 8. Paras 14 to 19 of the order are relevant which reads as under:- “14. On careful consideration of the above rival submissions, we are of the view that in the recent judgment of Hon'ble Punjab & Haryana High Court in the dcase of Telelinks vs. CIT; 377 ITR 158 (P&H) their Lordships have held that rejection of books of accounts is a pre-condition and sine qua non for making estimation of net profit. In the present case, by the 4 HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE (I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) earlier part of this order we have upheld the action of the Assessing Officer wherein he has rejected the books of accounts of the assessee and we have upheld the first appellate order on this count. 15. In the case of Telelinks (supra) their Lordships in para 10 held thus - “The discretion to determine a net profit rate must necessarily be exercised on the basis of relevant factors which we shall enumerate but before doing so, would clarify that these factors are neither exhaustive nor a final word on relevant factors that may be considered while determining the net profit rate. A few significant factors are the past tax history of the assessee, if available, assessment orders that may have been passed and accepted by the department, the nature of the assessees' KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 business, an appraisal of the value of the contract, prevailing economic conditions vis-a-vis the assessee's business, the price of raw material, labour etc. the rise in price index as notified by the Central Government from time to time if applicable and if the Assessing Officer proceeds to rely upon assessments of other assessees engaged in similar business to do so only after determining points of similarity etc. At this stage, it would be appropriate to clarify that the word similar is not synonymous with the word 'identical'. Factors referred to above are merely illustrative and not exhaustive of the circumstances that may or may not be taken into consideration. At this stage, it would be appropriate to reproduce a few words from Dhakeswari Cotton Mills Ltd. Vs. CIT (1954) 26 ITR 775 (SC) so as to place our conclusions in their correct perspective:- ".....The ITO is not barred by technical rules of evidence and pleadings, and he is entitled to act on material which may not be accepted as evidence in a Court of law, but in making the assessment under sub-s.(3) of s. 23 the ITO is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under S. 23(3). In this case the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the Departmental Representative. Next, it did not give any opportunity to the company to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result is that 5 HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE (I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) the KANCHAN assessee had not had a fair hearing. The estimate of 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 the gross rate of profit on sales, both by the ITO and the Tribunal, seems to be based on surmises, suspicions and conjectures. It is somewhat surprising that the Tribunal took from the representative of the Department a statement of gross profit rates of other cotton mills without showing that statement to the assessee and without giving him an opportunity to show that statement had no relevancy whatsoever to the case of the mill in question. It is not known whether the mills which had disclosed these rates were situate in Bengal or elsewhere, and whether these mills were similarly situated and circumstanced. Not only did the Tribunal not show the information given by the representative of the Department to the appellant, but it refused even to look at the trunk load of books and papers produced before it by assessee. The ITO and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. The order of the Tribunal was set aside and the matter was remanded to it with directions that in arriving at its estimate of gross profits and sales it should give full opportunity to the assessee to place any relevant material on the point that it has before the Tribunal, whether it is found in the books of account or elsewhere and it should also disclose to the assessee the material on which the Tribunal is going to found its estimate and then afford him full opportunity to meet the substance of any private inquiries made by the ITO if it is intended to make the estimate on the foot of those enquiries." (emphasis supplied) 16. In the present case, undisputedly rather admittedly, net profit ratio of the assessee was 5.26% and 1.86% in the assessment years 2009-10 and 2010-11 while the net profit ratio declared by the assessee for the present year is .96% which is the nucleus of the action of the Assessing Officer estimating the profit at 5% of the turnover. 17. The main claim of the learned DR is that the facts and circumstances of the case of Amar Agrawal (supra) are identical with the present case. However, we may point out that from a 6 HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE (I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) careful and vigilant reading of the order of the ITAT in the case of Amar Agrawal (supra), we observe that the history of previous years' results was not placed before the Tribunal and thus the same could not be considered by the Tribunal while upholding 5% of NP rate. In the present case we cannot ignore that there are huge job work receipts during the assessment years 2009-10 to 2011-12 which was reduced to 0% in the assessment year 2013-14 and the impact of such receipt on the GP ratio cannot be ignored and wiped out. It is also pertinent to mention that in the present case, the Assessing Officer has classified the delayed payment of Rs.1,25,71,083/- out of total cash purchases of Rs.19.88 crores wherein detailed facts regarding earlier and subsequent NP ratio and disputed sales have been placed by the assessee on record then the ratio of the order in the case of Amar Agrawal (supra) in toto cannot be applied blindly for upholding the action of the Assessing Officer wherein he has estimated the net profit rate of the assessee @ 5% of the total turnover by ignoring the entire relevant facts and circumstances, as stated above, for estimation of NP rate @ 5% of turnover as per the ratio of the various judgments and decisions including the decision of the Punjab & Haryana High Court in the case of Telelinks (supra). 18. In this decision of Hon'ble High Court in the case of Telelink (supra) it was held that a few significant factors are the past tax history of the assessee, if available, assessment orders that may have been passed and accepted by the department, the nature of the assessees' business. In the present case, the past tax history of the assessment years 2009-10 and 2010-11 has been placed on record of the assessee which has not been controverted by the learned DR, clearly shows that the net profit ratio of the assessment year 2009-10 was 5.26% and for the assessment year 2010-11 it was 1.86% and average of these two comes to 3.56%. On careful consideration of the entire facts and circumstances such as average of net profit ratio of immediately and preceding two years i.e. 3.56% huge job work receipts in the earlier assessment years, which substantially reduced during the present assessment year 2011-12, increase in turnover of the assessee, in our considered view, the net profit ratio of 2.5% of total turnover would be just, appropriate and we direct the Assessing Officer to calculate the net profit accordingly. Consequently, ground no.3 of the assessee's appeal is partly allowed with the direction to the Assessing Officer as indicated above. 19. In the result, the appeal of the assessee stands partly allowed.” 9. On due consideration of the aforesaid so also the law laid down in the case of Telelinks versus CIT (Supra), we are of the view that learned Tribunal has rightly 7 HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE (I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) assessed the net profit at the rate of 2.5% of total turnover instead of 5.2% and directed the Assessing Officer to calculate the net profit accordingly. No substantial question of law arises in this appeal. Income Tax Appeal No.220 of 2017 filed by the appellant has no merit and is, accordingly, dismissed.

(P. K. Jaiswal) (Virender Singh) Judge Judge pp/ Digitally signed by Pankaj Pandey Date: 2018.03.07 11:29:32 +05'30'