PR COMMISSIONER OF INCOME TAX vs. M/S KAYAKALP HERBAL PVT LTD

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 293 / 2017 Pr. Commissioner of Income Tax-Central, New Central Revenue Building, Statue Circle, Jaipur (Raj.) ----Appellant Versus M/s. Kayakalp Herbal Pvt. Ltd., 73, Suraj Nagar East, Civil Lines, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sameer Sharma with Mr. Gaurav Gaur for Mr. Anil Mehta _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 20/11/2017 1. By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby tribunal has dismissed the appeal of the department. 2. Counsel for the appellant has framed following substantial questions of law:- “Whether on the facts and in the circumstances of the case the learned ITAT was right in reducing the GP rate from 62% to 58% ignoring the fact that the Assessment Officer has given strong cogent reason from estimation of GP rate @ 72% in the assessment order.” 3. The facts of the case are that the return of income for A.Y. 2011-12 is filed by the assessee on 30.09.2011 declaring total income of Rs.22188789. Notice u/s 143(2) was issued on

(2 of 9) [ITA-293/2017] 15.3.2012 the assessee file a revised return modifying its total income from Rs. 22188798 to Rs.8818798. The assessee has submitted reasons for revising that in original return income of Rs.1.75 crores was disclosed on account of admission of over all total surrender during the course of search. It is explained by the assessee that during search total surrender of Rs. 3.50 crores was made which was divided in equal parts by the company and main director Smt. Kulsum Malik as evidences were found in respect of these two persons in search and accordingly return was filed for AY 2011-12 including surrender of Rs. 1.75 crores in the case of company and Rs. 1.75 crores in the individual case of Smt Kulsum malik. However later it is noticed that surrender, during the course, was based on specific issues related to different years and it was not entirely for the current year in respect of the company the disclosure during the course was made for unexplainee share application money of Rs 49,45,000 in three different year i.e. AY 2006-07, 2007-08 and 2008-09. A further disclosure of suppressed sales of Rs. 28 lacs and undisclosed investment in property Rs. 5625000 was made in AY 2010-11. The assessee filed revised returns for all these years and accordingly the income of current year was reduced by the same amount. 4. We have heard counsel for the appellant. 5. The CIT(A) while considering the matter observed as under:- (b) Estimation of profit by applying GP rate of 72% on the sales disclosed in the books of account for post search period as well as estimation of profit for earlier years:-

(3 of 9) [ITA-293/2017] The AO mentioned that the assessee has disclosed lesser GP rate for the sales effected during the post search period in comparison of GP calculated by him by adding of Rs.66,75,676/- by applying GP rate of 72% on the sales effected after the search. I have held that entire unaccounted sale cannot be added to the income. Therefore, I held that profit cannot be estimated for the post search period and earlier years (AY 2005-06 to AY 2010-11) by taking the GP rate of 72% Further, the department has carried out intensive search over the assessee and no evidence was fopund for unaccounted sales for the AY 2005-06 to AY 2009-10. The evidence of unaccounted sales was found for AY 2010-11 to the extent of Rs. 28,00,000/- only. Therefore by extrapolating the GP rate of 72% calculated by AO for the AY 2011-12, suppressed sale out of suppressed production cannot be estimated for Ay 2005-06 to AY 2010-11. The same AO has completed the assessment of director of assessee company Smt. Kulsum malik. Kulsum, Malik runs beauty parlor at various places. I have gone through the assessment made by the same AO for Ay 2009-10 u/s 153A in her case. In this case also suppressed receipts were found. The department found documents showing suppressed receipts of Mahaveer Nagar Parior for April 2008 to march 2009, hanuman Nagar Parlor for Nov 2008, January 2009 and March 2009 and Bani park Parlor from 7.10.2008 to 6.11.2008. In this case, the AO restricted the addition upto evidence found as the result of search. In this case the AO has not estimated the suppressed receipts for whole period for FY 2008-09 as well as for earlier years by extrapolating the income/cost as done in the case under consideration. So far as the undisclosed investment in own shares and property to the tune of Rs. 1,05,70,000/- in previous years (AY 2006-07, AY 2007-08, AY 2008-09, AY 2008-09 and Ay 2010-11) is concerned, the assessee has offered its income in the return filed under section 153A and in absence of any evidence, such income cannot be enhanced merely on surmises and conjectures. The department has no evidence of unaccounted sales during the post search period. The AO mentioned that the customer base of the assessee was same in all the previous year. The assessee has submitted a chart showing year wise list

(4 of 9) [ITA-293/2017] of parties to whom it sold goods. I found only 16 parties were common out of total 145 parties. Therefore, it cannot be presumed that all the parties were purchasing the goods from the assessee without bill. The AO has not made any inquiry from the buyer parties of the assessee to establish the unaccunted sales by the assessee. Merely on the basis of search statement of the directors of the assessee stating that the assessee was making unaccounted sales in past also and estimate slips against the unaccounted sales were destroyed after setting the account unaccounted sales cannot be estimated without having corroborative evidence. (c) Now the question arise how to estimate the profit. The assessee has prepared the Consolidated Trading Account for the period 01.04.2004 to 11.11.2010. All the ingredients of this trading account are verifiable. The figure against the opening stock as on 01.04.2004 was taken from the figure against purchases and Manufacturing expenses were taken as per books of account. The AO has not pointed out any defect/deficiency in the purchases and expenses recorded by the assessee in its books of account for the period 1.4.2004 to 11.11.2010. Hence, the figures mentioned against the purchases and expenses are verifiable. The sales mentioned in this consolidated Trading Account are also verifiable from the books of account and there is no allegation of suppression of value of the goods sold by the assessee. Further, the assessee has credited the unaccounted sales of Rs. 1,41,00,000/- in this trading account on the basis of seized records/evidenes found by the department. The figure of closing stock was taken on the basis of valuation of inventory made by the search party. This consolidated Trading Account shows the Gross Profit of Rs.10,11,82,687/- on the total sales [Recorded

Unrecorded]

Rs. 16,37,74,363/- for the period 01.04.2004 to 11.11.2010 and this gives GP rate of 61.78%. Therefore, it would be justify to compute the Gross Profit and addition on the basis of GP rate of 62%. On the basis of GP rate of 62% the profits and addition of the assessee can be computed as under:- Asstt. Year Sales disclosed in books of account (Rs) Unaccounted sales as per seized Records (Rs) Sales after post search period (Rs) Total Sales (Rs) GP @ 62% (Rs) GP Declared in regular books (Rs) Shortfall in GP (Rs) Income declared by assessee in return filed Addition sustained (Rs)

(5 of 9) [ITA-293/2017] u/s 153A(Rs) 2005-06 9780619 0 9780619 6063984 4944613 1119371 0 1119371 2006-07 13670714 0 13670714 8475843 7273292 1202551 2050000 Income Surrendered is more than addition to be made for trading results, therefore no further addition deserves to be made 2007-08 16292362 0 16292362 10101264 8586549 1514715 2200000 Income Surrendered is more than addition to be made for trading results, therefore no further addition deserves to be made. 2008-09 18447586 0 18447586 11437503 9838049 1599454 695000 904454 2009-10 23734690 0 23734690 14715508 12126102 2589406 0 2589406 2010-11 38170620 2800000 40970620 25401784 22044082 3357702 8425000 Income surrendered is more than addition to be made for trading results, therefore no further addition deserves to be made 2011-12 29577772 11300000 3206750 72945281 45226074 38282925 6943149 4130000 2813149 Total 149674363 14100000 61645281 195841872 121421961 18326349 17500000 7426380 Therefore, in view of facts and circumstances of the case as discussed above, the unaccounted business profit for the year is calculated at Rs. 69,43,149/- as against Rs.1,79,75,676/-(Rs.1,13,00,000/-

on account of unaccounted sale for the period 01.04.2010 to 11.11.2010 + Rs. 66,75,676/- for the post search period). The assessee has surrendered additional income of Rs. 41,30,000/- on account of unaccounted business income in the revised return filed by it, Therefore addition of Rs.28,13,149/- is sustained to the income declared by the assessee in return and the rest of the additions deleted. Accordingly, AO is directed to compute the income of the assessee accordingly.

(6 of 9) [ITA-293/2017] 5.1 The same was also considered by the tribunal in appeal no.634/JP/2016 (AY 2008-09) which reads as under:- 2.17 In ground no 1, the assessee has challenged the validity of assessment framed u/s 153A on the ground that no incriminating documents was found in search. But the fact remains that the assessee has surrendered additional income of Rs. 6,95,000/- in the revised return filed u/s 153A of the Act on 17/08/2012. The AO made addition by estimating the gross profit rate and out of the addition the telescoping benefit was given by the AO for estimated amount. The ld. CIT(A) reduced the estimation of profit but upheld the rejection of books of account. In the Ground No. 2, the assessee has challenged the confirming of the finding of AO by ld. CIT(A) as regards rejection of books of account. It is admitted fact that the assessee is not maintaining the stock records of consumption of raw material. The assessee has also not furnished alternative method for verification of figures mentioned against opening and closing stock in Trading Account. Considering all the aspect, we hold that the ld. CIT(A) has rightly confirmed the findings of AO as regards rejection of books of account. With regard to Ground No 3, the assessee has challenged the addition of Rs. 9,04,454/- confirmed by CIT(A) by applying GP rate of 62% on the declared sales as against GP rate @ 53.33% declared by the assessee in its books of account. In this case, the department has found evidences of unaccounted sales in some of the years. The estimation of unaccounted sales made by AO in absence of any incriminating documents was not sustained by ld CIT(A) and wherever evidence was found it has been sustained in A.Y. 2010-11 and 2011-12. This findings of ld CIT(A) with regard to estimating sales in absence of any incriminating documents has not been disputed by the Revenue in appeal. Thus issue remains only estimation of g.p. on the recorded sales wherever no incriminating evidences were found. The gross profit rate declared by the assessee on the recorded sales vary from 50% to 60% during A.Y. 2005-06 to 2010-11. The Hon'ble Rajasthan High Court in the case of CIT vs. Popular Art Palace (P) Ltd. (2017) 391 ITR 352 has

(7 of 9) [ITA-293/2017] approved the estimation of profit on the basis of average profit of past years. The held portion of the order is as under:- ‘’Held, that adoption of gross profit by the Assessing Officer at 35 per cent was high. The average of profit shown by the assessee from the year 1991-92 to 1996-97, was 31.4 per cent and for that the estimate of 32 per cent could be adopted instead of 35 per cent by the Assessing Officer. The Assessing Officer was to make calculations by adopting estimated profit of 32 per cent.’’ The assessee has also made certain disclosure of income during certain assessment years. The AO has also found defects in the books of account and we have sustained the rejection of books of account. Considering all these aspects, we are of the view that estimating the profit @ 58% on the declared sales shall meet the ends of justice. In the result, the Ground No. 3 of the assessee's appeal is partly allowed. However, wherever the disclosure made in the return of claim u/s 153A of the Act is over and above the estimated income on the basis of profit @ 58%, same shall be maintained.. The appeal filed by the assessee in ITA No 634/JP/2016 (AY 2008-09) stands partly allowed. 5.2 Further the tribunal has observed as under:- 3.5 We have heard the rival contentions and perused the materials available on record. As regards this issue, it is worthwhile to mention following relevant findings of ld CIT(A) which is in para 3.1.3. (b) of order of ld CIT(A) “….. Further, the department has carried out intensive search over the assessee and no evidence was found for unaccounted sales for AY 2005-06 to AY 2009-10. The evidence of unaccounted sales was found for A.Y. 2010-11 to the extent of Rs. 28,00,000/- only. Therefore, by extrapolating the gross profit rate of72% calculated by the AO for the A.Y. 2011-12, suppressed sale out of suppressed production cannot be estimated for A.Y. 2005- 06 to 2010-11. The same AO has completed the assessment of director of assessee company Smt. Kulsum Malik. Kulsum Malik

(8 of 9) [ITA-293/2017] runs beauty parlor at various places. I have gone through the assessment made by the same AO for A.Y. 2009-10 u/s 154A in her case. In this case also suppressed receipts were found. The department found documents showing suppressed receipts of Mahaveer Nagar Parlor for April 2008 to March 2009, Hanuman Nagar Parlor for Nov. 2008, Jan 2009 and March 2009 and Bani Park Parlor from 07-10-2008 to 6-11-2008. In this case, the AO restricted the addition upto evidence found as the result of search. In this case the AO has not estimated the suppressed receipts for whole period for F.Y. 2008-09 as well as for earlier years by extrapolating the income/ cost as done in the case under consideration. So far as the undisclosed investment in own shares and property to the tune of Rs. 1,05,70,000/- in previous year (A.Y. 2006-07, A.Y. 2007-08, A.Y. 2008-09 and A.Y. 2010-11) is concerned, the assessee has offered its income in the return filed u/s 153A and in absence of any evidence, such income cannot be enhanced merely on surmises and conjectures. The Department has no evidence of unaccounted during the post search period. The AO mentioned that the customer base of the assessee was same in all the previous year. The assessee has submitted a chart showing yearwise list of parties to whom it sold goods. I found only 16 parties were common out of total 145 parties. Therefore, it cannot be presumed that all the parties were purchasing the goods from the assessee without bill. The AO has not made any inquiry from the buyer parties of the assessee to establish the unaccounted sales by the assessee. Merely on the basis of search statement of the directors of the assessee stating that the assessee was making unaccounted sales in past also and estimate slips against the unaccounted sales were destroyed after settling the account unaccounted sales cannot be estimated without having corroborative evidence.’’ It may be further noted that the CIT(A) in para 3.1.3 (c) tabulated a chart showing sales taken by him and shortfall in GP on the basis of GP rate of 62% applied by him and addition sustained by him. It may be further noted that Revenue has taken the common following grounds in its all appeals (supra)

(9 of 9) [ITA-293/2017] “Whether on the facts and in the circumstances of the case the CIT(A) was right in reducing the GP rate from 72% to 62% ignoring the fact that AO has given strong cogent reasons for estimation of GP rate in the assessment order.” 3.5.1 After hearing both the parties and perusing the materials available relating to the grounds taken by the Revenue, it is clear that the revenue has questioned only reduction of GP rate. The Revenue has not questioned the reduction of sales made by ld CIT(A). Furthermore, the Revenue has not questioned the quantum of relief given by ld. CIT(A). In view of the above facts and circumstances, it is held that the grievance of the revenue is on the reduction of GP rate made by the ld. CIT(A) from 72% to 62% and the tax effect should be calculated on the basis of grounds of appeal raised by the Revenue. We noticed from the above chart that the tax effect is not more than Rs. 10 lacs in the appeal filed by the revenue ITA No. 609 /JP/16, (AY 2005-06), 627/JP/16, (AY 2006- 07), 628/JP/16, (AY 2007-08), 629/JP/16, (AY 2008-09), 630/JP/16, (AY 2009-10) and 631/JP/16, (AY 2010-11) which are dismissed in limine, in view of Circular No. 21/2015 F No 279/Misc. 142/2007-ITJ (Pt) 10th December, 2015. Thus the above appeals of Revenue are dismissed. 6. We are in complete agreement with the view taken by the tribunal. Hence, no substantial question of law arises. 7. The appeal stands dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Brijesh 27.