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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition made by the AO for alleged concealment of income and unexplained investment. The AO had made an addition of Rs. 8,02,00,613/- based on a lower GP rate of a comparable manufacturing entity and Rs. 5,46,00,000/- as unexplained investment from demonetized currency.
Held
The Tribunal held that comparing the GP of a manufacturing entity with a trading entity was inappropriate. It also ruled that taxing the same amount (cash deposits from sales) twice, once as business income and again as unexplained investment, is against tax principles. The Tribunal upheld the CIT(A)'s deletion of both additions.
Key Issues
Whether the addition made on account of alleged income concealment based on an inappropriate comparable entity and the addition for unexplained investment from demonetized currency were justified.
Sections Cited
143(3), 69, 145(3), 68, 115BEE
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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI JAGADISH
The captioned appeal filed by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals), Chennai-19 [CIT(A)] dated 19.09.2024 for Assessment Year 2017- 2018. 2. The grounds raised by the Revenue read as under: -
1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.
The Ld. CIT (A) erred in deleting the addition made by AO for concealment of income of Rs.8,02,00,613/- arrived at by determining the Gross profit (GP) @ of 3.1 % of the Total turnover of Rs.401,90,27,247/- based on transactions reported for VAT purposes.
2.1 The Ld.CIT(A) erred in not appreciating the fact that the Gross profit was arrived at 3.1% by taking a comparative study of similar entity viz. J. R. Foods Ltd. which is in similar business and geographically near to the assessee as the books of account of the assessee did not reflect the true nature of business as they were not maintained contemporaneously.
2.2 The Ld.CIT(A) erred in taking the Net profit of the assessee for AY 2014- 15 to 2016-17 by not appreciating the fact that the assessee did not maintain their books of account and the incomes reported were circumspect and not reliable.
3. The Ld.ClT(A) erred in deleting the addition of Rs.5.46 crores under unexplained investment u/s 69 by not appreciating the fact that the total turnover of Rs.401,90,27,247/- was on account of entries in VAT returns and did not include the deposits in cash in SBNs of this impugned amount of Rs.5.46 crores.
For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the Order of Ld.CIT(Appeals) may be set aside and that of Assessing Officer may be restored.
Brief facts are as under:
The assessee is an individual carrying on the business of trading in edible oil in the name & style of M/s.Raman Traders filed his return of income for A.Y 2017-18 on 06.11.2017 admitting total income of Rs.2,03,62,810/-. A survey was conducted at the business premises of the assessee on 21.11.2019 and tally database in respect of Pondicherry unit has been found and impounded during the course of survey. The AO on detailed analysis of accounts maintained in tally of Pondicherry unit wasof the view that the books of account was not maintained properly and no stock register was maintained. The AO was also of the view that in the sworn statement recorded during course of survey, the assessee admitted that he destroyed all cash sales bills after collecting cash, however, the assessee maintained sale bills of credit sales. Further, on verification of bank account statements, it was noticed by the AO that total deposits in bank accounts were Rs.441,28,52,131/-, whereas total turnover admitted by the assessee out of cash sales and credit sales was Rs.3,91,24,19,636/- and thus, the AO was of the view that the assessee has suppressed sales in its books of account. Therefore, the AO made addition of Rs.8,20,07,236/- on account of concealment of income of the assessee. Further, the Assessing Officer was of the view that cash deposits shown in the bank accounts were not reflected in the cash book. Accordingly, the AO made addition of amount of Rs.5,46,00,000/- as unexplained investment in banks u/s.69 of the Act.
4. Issue No.1: Addition of Rs.8,02,00,613/-: Assessee further challenged order of assessment u/s. 143(3) of the Act before the ld.CIT(A), who partly allowed appeal of the assessee by holding as under: - 6.10 The AO while arriving at the net profit has adopted the gross profit ratio @ 3.1%by comparing the gross profit margin of an entity similar in trade in the name and style of "M/s J R Foods limited". During the course of appellate proceedings, the AR has raised additional grounds of appeal by contending that the learned AO erred to compare the GP of a manufacturing entity with a trading entity carried out by the appellant. The AR strongly contended that the action of the AO in choosing the comparable "M/s J R Foods limited" is a manufacturing entity as against the trading activity carried out by the appellant. The AR. has strongly objected the action of the AO in picking up such irrational comparison, which is in no way acceptable at any point of time. The undersigned has carefully examined the issue under consideration.
6.11 The AO in the assessment order has simply relied upon the trading results of another entity who is involved in a different line of business (manufacturing) even though the goods dealt are similar. Generally, in a manufacturing line of business, the profit margin is high whereas in the trading line of business, the turnover is high and profit margin is less. Therefore, the additional grounds by the appellant upon this issue is genuine and merits consideration. At this juncture, the next question, arises i.e. what will be the net profit of the appellant for the year under consideration and the basis to arrive at the net profit.
6.12 The AO in the assessment order, to arrive at the gross sales has taken into consideration the cash sales reported as well as all the bank credits as the total sales. The appellant on the other hand has disputed the action of the AO in taking all the bank credits as sales to be erroneous on account of the fact that the bank credit also constituted the advances received and receipts from sundry debtors. The appellant during the course of appellate proceedings has made available copy of VAT returns for the year under consideration and claimed that the relevant details were made available before the AO during the course of assessment proceedings. On verification of the statutory returns, it can be seen that the total sales as per the VAT return for both the units (Tamilnadu & Pondicherry) is Rs. 401,90,27,247/- and the total VAT paid amounts to Rs. 4,44,54,580/- during the FY 2016-17. As the sales reported in the statutory returns are not disputed, the same is considered in arriving at the Gross sales.
6.13 During the course of appellate proceedings the AR made available the profit and loss account of the assessee for the previous assessment years which were accepted by the AO viz.
Turnover (in AY GP % NP % Crores) 2014-15 Rs.53.02 2.01 0.60 2015-16 Rs.113.34 2.00 0.57 2016-17 401.90 1.95 0.51 Average 0.56
6.14 The AR has strongly contended that the turnover of the appellant is increasing year-wise and the net profit is declining and the corresponding returned income is more on account of the increase in turn over. The undersigned has carefully examined the issue brought out by the AR. As contended by the AR, it is not fair enough to compare with the financials of another entity who is not involved in a similar line of business activity as carried out by the appellant. It is prudent, in the interest of justice the net profit disclosed by the appellant for the earlier years and accepted by the AO can be taken as a yardstick to determine the NP for the year under consideration. Therefore, the undersigned is of the view that the average NP declared in the AY(s) 2014-15 to 2016-17 i.e. (0.60 + 0.57 + 0.51)1/3 which works out to 0.56% will be appropriate in the determination of the NP of the appellant for the AY 2017-18 rather than adopting the GP ratio.
6.14 Accordingly, on the total turnover of Rs. 401,90,27,247, the NP @ 0.56 % works out to be at Rs. 2,25,06,552/-, which will be taxable business income of the appellant for the A Y 2017-18. The appellant has admitted an income of Rs. 2,06,99,929/-as business income in the return of income filed for AY 2017-18 which requires to be reduced from the determined Net Profit of Rs. 2,25,06,552/-. Thus, the net amount that requires to be sustained is Rs. 18,06,623/- for the AY 2017-18 as against the undisclosed business income as against the concealed income determined by the AO at Rs. 8,20,07,236/-. In view of the above discussion all the grounds raised by the appellant upon the issue of concealment of income are hereby treated as partly allowed and the AO is directed to delete the addition of Rs. 8,02,00,613 /- made as concealment of income for the AY 2017-18.
Aggrieved, revenue filed appeal before us. The ld. DR Mr. V. Justin, CIT for the revenue read out the entire order of the AO and pleaded that the assessee has not furnished the data on indirect expenses. He further pleaded that source of cash deposit is not clear. He furthermore, submitted that the ld. CIT(A) ought not to have accepted the explanation of the assessee.
Per contra, the ld. counsel for the assessee relied on the findings of the ld. CIT(A) and read out the submissions what was argued before the ld. CIT(A). Our findings on addition of Rs.8,02,00,613/-:
We have heard the both parties and perused the appeal file. From the rival contentions, we find that the ld. AO erred in comparing the GP of a manufacturing entity with a trading entity as carried out by the appellant. For determining GP, comparison should be between ‘pari materia’ line of business. In this case, the AO has arbitrarily chosen comparable "M/s J R Foods limited" which is a manufacturing entity as against the trading activity of the assessee. The comparable must be cogent and prudent one. It must not be irrational comparison. Producing goods is quite different from buying and selling good. Usually, it is seen that in a manufacturing line of business, the profit margin is high whereas in the trading line of business, the turnover is high and profit margin is less. We also find that the appellant before the ld. CIT(A) has made available copy of VAT returns for the year under consideration. The relevant details were made available before the AOalso. The ld. CIT(A) specifically note that on verification of the statutory returns, it can be seen that the total sales as per the VAT return for both the units (Tamil Nadu & Pondicherry) is Rs. 401,90,27,247/- and the total VAT paid amounts to Rs. 4,44,54,580/- during the FY 2016-17. As the sales reported in the statutory returns are not disputed, the same is considered in arriving at the Gross sales. In fact, the turnover of the appellant is increasing year-wise and the net profit is declining and the corresponding returned income is more on account of the increase in turn over. Therefore, we are of the considered view that it is not fair enough to compare with the financials of another entity who is not involved in a similar line of business activity as carried out by the appellant. In the aforesaid scenario, in the interest of justice, courts generally call for the GP and NP rate for past 2-3 years and make a reasonable view. Therefore, the net profit disclosed by the appellant for the earlier years and accepted by the AO can be taken as a yardstick to determine the NP for the year under consideration. Hence, we endorse the view of ld. CIT(A) who has taken a reasonable yardstick and considered the average NP declared in the AY(s) 2014-15 to 2016-17 i.e. (0.60 + 0.57 + 0.51)1/3 which works out to 0.56% will be appropriate in the determination of the NP of the appellant for the AY 2017-18 rather than adopting the GP ratio.
We further add herein that the revenue has not controverted the assertions of the assessee that the bank credit also constituted the advances received and receipts from sundry debtors. 8. Therefore, in the light of above factual matrix, we are not inclined to interfere in the impugned order of the ld. CIT(A). For aforesaid given reasons, we dismiss the ground Nos.1, 2, 2.1, and 2.2 of the revenue.
Issue No. 2:Unexplained investment u/s 69 of the Act Rs. 5,46,00,000/- :
Brief facts are as under:
The AO in the assessment order has treated the SBN(s) deposited to the tune of Rs. 5,46,00,000/- during the demonetization period. The AO observed that the assessee had deposited Rs. 5,74,71,000/- in Specified Bank Notes (SBNs) after demonetization, of which Rs. 5,46,00,000/- was treated as unexplained investment under section 69 of the Act, as the assessee was not authorized to collect demonetized currency post 08.11.2016. This amount was added to the returned income of the assessee as unexplained investment u/s 69 of the Act.
The assessee before the CIT(A) has contended that the AO after having considered the entire cash deposit made in the bank accounts as sale receipts has erred to consider the same once again as unexplained investment is not appropriate to the facts and circumstances of the case. The ld. CIT(A) has carefully examined this issue. He notes that as evident in the assessment order, the AO while working out the turnover of the appellant, has considered all the cash credits made in the bank accounts as sales receipts during the demonetisation period.
The ld. CIT(A) having relied upon the various case laws citations has held as under:
6.20 In the case of the appellant, the AO has once again considered the same amount that was deposited during the demonetization period as unexplained u/s 69 of the Act purely on the basis of the findings that the amount was deposited in SBN(s). Considering the same amount twice for the purpose of taxation is against the basic principles of taxation. The AO, after having rejected the books of accounts has proceeded to estimate the income of the appellant by adopting the gross profit ratio and further added the cash deposits made in the bank accounts as unexplained u/s 69 of the Act. The legal position in this regard is very clear that, once the income is determined on estimation basis by rejecting the books of accounts u/s 145(3) of the Act, there exists no scope to make any other addition.
Aggrieved, revenue filed appeal before us. The ld. DR Mr. V. Justin, CIT for the revenue read out the order of the AO on this issue and pleaded that the ld. CIT(A) has failed to appreciate that the total turnover of Rs.401,90,27,247/- was on account of entries in VAT returns and did not include the deposits in SBNs of this impugned amount of Rs.5.46 crores.
Per contra, the ld. counsel for the assessee relied on the findings of the ld. CIT(A) and reiterated the submissions as argued before the ld. CIT(A).
We have heard the rival submissions on this issue. We find that the ld. CIT(A) is right in relying various judicial decisions mentioned in his order and held that on the one hand, AO has attempted to tax entire cash deposits made out of sale receipts in determination of taxable business income of the assessee and on the other hand, taxing the same amount deposited into bank accounts during demonetization period as unexplained investment is devoid of merits. The co-ordinate bench in the case of Deputy Commissioner of Income-tax Vs M.C. Hospital [2022] 142 taxmann.com 122 (Chennai - Trib.) has held as under: 9.6 In furtherance to the above observation and finding, we note that balance of cash in hand as on 8-11-2016 is out of opening cash balance (duly subject to assessment in AY 2016- 17) and receipts during the year on account of sale of medicines and hospital receipts. Income derived from sale of medicines and hospital receipts have been subject to tax while accepting the income returned at Rs. 84.71 lakhs. Thus, we find that cash balance being part of sale of medicines and hospital receipts, cannot be brought to tax at the hands of the assessee again which will otherwise lead to taxing the same amount twice. In this respect, coordinate bench of ITAT, Visakhapatnam in the case of Asstt. CIT v. Hirapanna Jewellers [2021] 128 taxmann.com 291/189 ITD 608 held that - "9. In view of the foregoing discussion and taking into consideration of all the facts and the circumstances of the case, we have no hesitation to hold that the cash receipts represent the sales which the assessee has rightly offered for taxation. We have gone through the trading account and find that there was sufficient stock to effect the sales and we do not find any defect in the stock as well as the sales. Since, the assessee has already admitted the sales as revenue receipt, there is no case for making the addition u/s. 68 or tax the same u/s. 115BEE again. This view is also supported by the decision of Hon'ble Delhi High Court in the case of Kailash Jewellery House (supra) and the Hon'ble Gujarat High Court in the case of Vishal Exports Overseas Ltd. (supra). Hence, we do not see any reason to interfere with the order of the Ld. CiT(A) and the same is upheld." It is trite law that "taxing the same income twice under different heads of income is contrary to the principles of taxation. The court emphasized that no income should be doubly taxed unless expressly provided for in the Act".
Therefore, we do not find any infirmity in the order of the ld. CIT(A) directing the AO to delete addition of Rs.5,46,00,000/- made as unexplained investment u/s.69 of the Act. Accordingly we confirm his order and dismiss the appeal filed by the Revenue.
In result, appeal of the revenue is dismissed.