M/S SHIVHARE ASSOCIATES,GWALIOR vs. A.C.I.T., RANGE-1, GWALIOR

IN THE INCOME TAX APPELLATE TRIBUNAL AGRA BENCH, AGRA

BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND DR. MITHA LAL MEENA, ACCOUNTANT MEMBER

ITA No. 47/AGR/2015 (Assessment Year 2010-11) M/s Shivhare Associates, JCIT, Range-1, 44, Sindh Bihar, Nadi Gate, Vs. Gwalior Gwalior PAN ABBFS 6377 G

ITA No. 48 /AGR/2015 (Assessment Year 2011-12) M/s Shivhare Associates, ACIT, Circle-1, 44, Sindh Bihar, Nadi Vs. Gwalior Gate, Gwalior PAN ABBFS 6377 G

ITA No. 71 /AGR/2015 (Assessment Year 2010-11) ACIT, Circle-1, M/s Shivhare Associates, Gwalior Vs. Jinsi Nala No.1, Chhaparwala Pul, Lashkar Gate, Gwalior PAN ABBFS 6377 G

ITA No. 72 /AGR/2015 (Assessment Year 2011-12) ACIT, Circle-1, M/s Shivhare Associates, Gwalior Vs. Jinsi Nala No.1, Chhaparwala Pul, Lashkar Gate, Gwalior PAN ABBFS 6377 G

(Appellant) (Respondent)

ITA No. 47 and 48/Agr/2015 2 ITA No. 71 and 72/Agr/2015

Appellant by: Shri K.C. Agarwal, Advocate Respondent by: Shri Waseem Arshad, Sr. DR And

Date of hearing: 21/03/2018 Date of Pronouncement: 16/05/2018

ORDER PER BENCH:

These Cross appeals are directed against the order of

Commissioner of Income Tax (Appeals), Gwalior in respect of assessment year 2010-11 and 2011-12.

there is a common question of law and facts on the issue of

estimate against estimation of income in these cross appeals,

therefore, they were being heard together and are being disposed of

by this consolidated order.

the facts and circumstance of the cases of Laxmi Narain Shivhare

and others in ITA No. 233/Agr/2014 and ITA No. 285/Agr/2014

where the assessees were a liquor contractor dealing in country

liquor, Indian made foreign liquor (IMFL) and Beer. The AO observed that “in view of the glaring defects of the sales, totally

ITA No. 47 and 48/Agr/2015 3 ITA No. 71 and 72/Agr/2015

unsupported by any day today shop wise register of stock and sales, the true profits cannot be deducted from the books of account maintained by the assessee and accordingly books of accounts are rejected under section 145(3) of the Act.” Thereafter, he has collected information from the excise department and estimated the sales turnover on the basis of the information so collected and estimated the sales turnover as against the sales declared by the assessee and added the amount of the difference between the total sales turnover estimated by the AO and the sales turnover declared by the assessee on account of suppressed sales of Rs. 2,98,60,025/- and Rs.1,88,17,217/- in respect of assessment years 2010-11 and 2011-12 respectively, as income of the assessee. The ld. CIT(A) has confirmed the action of the AO as regards to estimating the turnover on the basis of information received from the excise department, however, he has rejected the AO’s view of assessing the suppressed sales as taxable income of the assessee by holding that the entire suppressed sale cannot be taxed as ‘income’ and only the net profit part can be taxed as income. The ld CIT(A) has reproduced the reply of the assessee at pages 2 to 9 of the impugned order.

ITA No. 47 and 48/Agr/2015 4 ITA No. 71 and 72/Agr/2015

of suppressed sales as income of the assessee, the ld. CIT(A) has

adopted N.P. rate at 3% on the sales turnover estimated by AO,

inter alia observing as under:

“3.3 I have gone through the assessment order, written submissions, case laws relied upon by the appellant and argument put forth during the course of appellate proceedings carefully. It is seen that the appellant, inspite of having been granted more than sufficient opportunities failed to produce sales bills/vouchers before the A.O for verification. In view of the facts discussed by the A.O in the assessment order, I am of the considered view that the action of the A.O rejecting the book results u/s 145(3) and estimating the income is in accordance with the provisions of law. Hence the action of the A.O estimating the income is held to be justified. However, in view of the following facts and decisions of jurisdictional High Court and various benches of ITAT, the estimation of income made by A.O appears to be on higher side. 3.4 The appellant is a liquor contractor and bound to pay the prescribed fee (Duty & basic excise duty) to the Govt, to take the delivery of the material which has to be sold before the end of license period. I find force in the argument of the appellant that if the appellant does not sell the material as per the market trend then by the end of the license period he may be in possession of unsold stock and face huge losses. As the appellant does not have any right to get back the prescribed fee paid to the Govt, in respect of the unsold stock, therefore, he has to sell the goods even at discounted rates. 3.5 The Hon’ble M.P. High Court (jurisdictional High Court) in the case of CIT Vs Balchand Ajit Kumar 263 ITR 610 M.P has held that the total sales cannot be regarded as the profit of the assessee. In the case of Manmohan Sadani Vs CIT 304 ITR 52 M.P the Hon’ble jurisdictional High Court has held that total sales cannot be regarded as profit of the assessee, on the contrary it is a net profit rate which has to be adopted in such cases. In view of the findings of the Hon’ble M.P High Court(jurisdictional High Court) in the above cited two cases I am of the considered opinion that the entire suppressed/undisclosed sale estimated by A.O cannot be taxed as ‘Income’ of the appellant. Only the net profit part can be taxed. 3.6 On the facts similar to the facts of the appellant, the ITAT, Coordinate Bench of Hyderabad, ITAT (ITA No.391/Hyd/2009) in the case of Manjeet Singh Bagga Vs. ITO has held that estimation of profit

ITA No. 47 and 48/Agr/2015 5 ITA No. 71 and 72/Agr/2015

@3% of the purchases made by the appellant(Liquor Contractor) would meet end of justice. In the case of Kanak Durga Wines Hyderabad Vs ITO Hyderabad bench-B of the ITAT (ITA No.591/Hyd./2011) has estimated the net profit of the assessee(Liquor Contractor) @3% of the purchases or stock put for sale during the year under consideration. In the case of G.Sudarshan Hyderabad Vs ITO (ITA No.l26/Hyd./2012) Hyderabad bench-A of the ITAT directed the Assessing Officer to estimate the net profit of the assessee at 3% of the purchases or stock put for sale during the year, subject to the condition that the income shall not go below the returned income. 3.7 After going through the various decisions of jurisdictional High Court and ITAT discussed above, I am of the considered opinion that the entire suppressed/undisclosed sale of the appellant cannot be taxed as income. Only the net profit part can be taxed as ‘income . After taking into account, the argument put forth by the appellant in the written submissions and decisions relied upon by the appellant. 1 am of the considered view that it would be fair and reasonable to estimate the net profit of the appellant @3% of the total purchases cost debited by the assessee. It is seen from the assessment order that the total purchases cost debited by the appellant is Rs.14,83,37,420/-. The amount of net profit on this purchase cost @3% would be Rs.44,51,623/-. The appellant has declared total income of Rs.14,41,940/- from liquor business. Hence the addition of Rs.30,09,683/-(44,5I,623-14,41,940) is confirmed and balance addition of Rs.2,68,50,342/- is hereby deleted.

firm were totally unsupported by day-to-day sales and shop-wise

stock registers and therefore, the true profit cannot be deduced from

the books of accounts maintained by the assessee. He contended

that the assessee has maintained regular books of accounts,

audited every year and the Ld. Assessing Officer has not pointed

out any defect in the books of accounts except the sale vouchers

were not maintained which was not possible in this line of trade. The

ITA No. 47 and 48/Agr/2015 6 ITA No. 71 and 72/Agr/2015

ld. Counsel for the assessee, Sh. K.C. Agrawal, advocate has also

filed a synopsis (Pgs.1 to 9) and a paper book (Pgs.1 to 125) to

support its contentions wherein he has relied on the following

citations.

I. C I T Vs. Avinash Chawla and Company ITA No.150 /2012 decided on 20 June, 2014 (paper book page 75-76) I T A T Indore Bench , Indore in the case of A C I T Vs. II. AvinashChalana& Co. Bhopal ITA No. 570/Ind./ 2012 Asstt. Year 2008- 09 dated 17.04.2013 (paper book page 77-83) Hon’ble Allahabad High Court in the case of CIT V/s Prayag Wines III. (2014) 364 ITR 660 (paper book page 84-85) IV. ITAT Agra Third Member Bench, in the case of I T O Vs. Laxami Narain Ramswaroop Shivhare (2009) 123 TTJ (Agra) ( T M ) 289 ( that paper book page93-113) 6. The ld. counsel has submitted a comparative chart on trading

result showing the sales turnover, GP and NP etc. declared by the

assessees, as extracted hereunder: -

Comparative Chart of Gross and Net Profit on Trading results

Assessme Sales (Rs.) Gross profit Net Profit Rema nt rks Rs. % Rs. % after % without Year deducting deducting interest interest and salary and salary 2006-07 2464568 904581 37.16 35798 1.47 - Accep ted 2007-08 Nil Nil Nil - Nil - - 2008-09 103159162 7420887 7.19 2002427 1.94 2.9 57600 0 2009-10 100095112 8486895 8.48 1090815 1.09 2.1 50100 0 *2010-11 154743908 12633589 8.16 1441940 0.93 1.9 Under *2011-12 246560430 18018328 7.31 2341328 0.95 1.43 appea l

ITA No. 47 and 48/Agr/2015 7 ITA No. 71 and 72/Agr/2015

sales as estimated by the AO and as shown in the P&L account by the assessee, despite the fact that the assessee had already claimed all the expenses in the P&L account and no additional expenses were incurred to effect the suppressed sales.

of the assessee or the comparable case of the same line of business.

On similar facts, in the case of ‘Shri Laxmi Narain Shivhare 9. and Others’, in ITA No. 233/Agr/2014 and 285/Agr/2014, we have observed that application of average net profit rate on the basis of past history of the trading results of the assessee and

the comparable case in the same line of business is justified. The relevant part of the order is extracted hereunder:

“9.0 We have heard the rival contentions, perused the relevant material on record, the impugned orders, the paper book and synopsis filed. The AO had rejected books of account u/s 145(3) of the I.T Act and estimated the total sales turnover of the assessee on

ITA No. 47 and 48/Agr/2015 8 ITA No. 71 and 72/Agr/2015

the basis of information received from the Excise Department. The difference of the amount of Rs.5,93,01,157/- between the total sales turnover estimated by the AO at Rs.40,88,89,797/- and the sales of Rs. 34,95,88,640/- declared by the assessee, was treated as income of the assessee on account of suppressed sales. Though the ld. CIT(A) has agreed with the view of the AO regarding estimation of the turnover on the basis of information received from the Excise Department, he has rejected the AO’s view of assessing the suppressed sales as taxable income of the assessee, by holding that the entire suppressed sale cannot be taxed as ‘income’ and only the net profit part can be taxed as income of the assessee, relying on the decision of Hon’ble M.P. High Court (jurisdictional High Court) in the case of “CIT vs. Balchand Ajit Kumar, 263 ITR 610 (MP) and adopted NP @ 3% following the order of ITAT, Hyderabad Bench in the case of “Manjeet Singh Bagga vs. ITO” (ITA No. 391/Hyd/2009), wherein it has been held as under :- “3.5…..in the case of CIT Vs BalchandAjit Kumar 263 ITR 610 M.P has held that the total sales cannot be regarded as the profit of the assessee. In the case of Manmohan Sadani Vs CIT 304 ITR 52 M.P the Hon’ble jurisdictional High Court has held that total sales cannot be regarded as profit of the assessee, on the contrary it is a net profit rate which has to be adopted in such cases. In view of the findings of the Hon’ble M.P High Court(jurisdictional High Court) in the above cited two cases I am of the considered opinion that the entire suppressed/undisclosed sale estimated by A.O cannot be taxed as ‘Income’ of the appellant. Only the net profit part can be taxed.” 3.6 On the facts similar to the facts of the appellant, the ITAT, Coordinate Bench of Hyderabad, ITAT (ITA No.391/Hyd/2009) in the case of Manjeet Singh Bagga Vs. ITO has held that estimation of profit @ 3% of the purchases made by the appellant (Liquor Contractor) would meet end of justice. In the case of Kanak Durga Wines Hyderabad Vs ITO Hyderabad bench-B of the ITAT (ITA No.591/Hyd./2011) has estimated the net profit of the assessee(Liquor Contractor) @3% of the purchases or stock put for sale during the year under consideration. In the case of G.Sudarshan Hyderabad Vs ITO (ITA No.l26/Hyd./2012) Hyderabad bench-A of the ITAT directed the Assessing Officer to estimate the net profit of the assessee at 3% of the purchases or stock put for sale during the year, subject to the condition that the income shall not go below the returned income.” 10. The ld. Counsel has raised objection to the addition sustained by ld. CIT (Appeals), by applying the NP rate of 3% on the sales as estimated by the AO, contending that while applying the rate of 3%, the CIT (A) has completely ignored the facts of the assessee’s line of business, where the net profit rate varies from 1.5 to 2.5% depending on multiple factors such as geographical area of operation, constitution of

ITA No. 47 and 48/Agr/2015 9 ITA No. 71 and 72/Agr/2015

population and their living standard; that on similar facts and circumstances, the ITAT, Agra Bench, Agra, has sustained the addition of Rs.20 lac in the case of the assessee itself, for the assessment year 2009-10, which comes to 2.7% in terms of the net profit rate; that the lower authorities have not commented whether the net profit declared by the assessee is on the lower side in comparison to the trading results of the earlier years in his own cases or with the other liquor contractors of the very same line of trade on parity of facts; that while estimating the income, the authorities below have also not pointed out that the books of account maintained by the assessee are not correct, or are not maintained as per the principles of accountancy; and that the authorities below, while determining the sales, have completely ignored the fact that the amount of liquor lifted is adjusted with the basic licence fee to the extent of the amount of liquor lifted, because even if no liquor is lifted, the basic licence fee is still to be paid. 11. It has been submitted that in the liquor business, profit depends on several factors like socio economic condition, literacy, drinking habits and prosperity of people of the area of operation, and if it has prosperous agricultural, industrial and commercial business activities, there is every likelihood of consumption of all kinds of liquor being more; and that therefore, the geographic area allotted to the assessee as per the licence awarded by the State Govt is the most important factor in determining a fair and reasonable net profit rate for estimation of the income in addition to the assessee’s past history, or comparable cases under the circumstances where the applicability of section 145(3) is not disputed. 12. The counsel for the assessee contended that according to the terms of license, a liquor contractor is required to lift liquor from the Government for a specified value with the stipulation that if the contractor does not take delivery for the specified value, it is liable to make good the deficiency at the end of the year to the State Government, as “shortfall”. The shortfall payments are directly linked with the profitability, in the sense that when there is less demand of liquor, a contractor prefers to lift less quantity of liquor and prefers to pay the “shortfall”. As per the Excise Rules, the liquor contractor has to maintain complete stock register and record of all its employees as per “Nokarnama” approved by the District Excise Officer. No other person can be recruited as an employee, unless the details of the employees are provided to the District Excise Officer. The liquor contractor has to submit monthly account of receipt of liquor and sale thereof and report the stock balance at the end of the month to the Excise Inspector by the 5th of the following month. In the case of country liquor, the purchases are made from the Excise Department through permits. Accordingly, purchases of IMCL as also purchases of IMFL and Beer can be made from wholesale licensees of IMFL distilleries respectively, after seeking permission of the Excise Department and while the purchases are proved but it is an

ITA No. 47 and 48/Agr/2015 10 ITA No. 71 and 72/Agr/2015

admitted fact that the sale price is not fixed and the assessees have neither issued sale vouchers to the purchasers, nor maintained the same. Therefore, the finding of the ld. CIT(A), concurring with the observation of the AO regarding rejection of books of account u/s 145(3) and thereby, estimation of the turnover on the basis of information received from Excise Office as correct and justified, is in conformity with law, as also it is not being disputed by the assessees. 13. The ld. counsel for the assess further submitted that where the books of account are rejected by invoking of the provisions of Section 145(3), a fair and reasonable estimate Net Profit Rate (NPR) was required to be adopted by the Ld. CIT(A), as in almost all the cases, the Assessing Officer has passed assessment orders in a summary and cryptic manner by treating the difference of total sales as income of the assessee. The Counsel has supported his contention with the past history filed before the ld CIT(A) and the comparative N.P. chart, in support of fair and reasonable NPR in the line of liquor trade, as above. 14. It is contended by the ld. Counsel that on account of tough competition between the liquor dealers to clear their goods and to recover the prices, they have to lift their quota from the excise department for further supply of the goods. If the goods are not sold in time, they will not be able to discharge their commitment of purchase from the Excise Department after depositing the agreed license fee and thereby incurring the huge liability of penalty and other consequences. In the months of February and March, when these new contracts are given, the Liquors are cleared much below the cost price, so that the further contract for the new order may be procured by depositing the bid amount in time. This is a usual feature of the trade. The assessee submitted his contentions in this regard before the AO and the CIT (A). The liquor shops are situated at distant places and in rural areas, where poor people reside. They cannot afford to purchase the costly liquor and they prefer to purchase the liquor locally made even in distant areas at lower prices. For these reasons, the dealer has to clear the goods at a lower price and they cannot hold the stock of liquor and cannot realize even the minimum price fixed by the excise department. It was pointed out that the assessee also had to sell the liquor at less than the minimum selling price. For this reason, in the case of M/s Shivhare Associates, the assessee was also penalized by the District Collector, Gwalior on 09.06.2010, resulting in suspension of the license of the assessee for one day. In view of these facts, it is submitted that application of mathematical formula for sales by the AO, is entirely based on presumption, surmises and conjunctures and adoption of higher NP rate by CIT(A) has no basis. The ld. CIT(A) has rightly followed the decisions of the Hon’ble 15. Jurisdictional Madhya Pradesh High Court given in the cases of ‘Commissioner of Income Tax vs. Balchand Ajit Kumar’, 263 ITR 610 and ‘Manmohan Sadani vs. Commissioner of Income Tax, 304 ITR 52

ITA No. 47 and 48/Agr/2015 11 ITA No. 71 and 72/Agr/2015

while holding that where the books of account are being rejected, the entire sales cannot be charged to tax as income, only the profit rate is to be applied. As such, the finding of CIT(A) on the issue of applying net profit rate on the sales is in conformity with the law. Therefore, the departments ground of appeal that the difference in sales, as estimated by the AO as suppressed sales, be treated as income of the assessee, is hereby rejected. In view of the decision of the Hon’ble Jurisdictional M.P. High 16. Court and the ITAT, Agra in the case of the assessee as above, it is amply clear that where the books of account are rejected under Section 145(2), the net profit rate is to be applied on the basis of the past history of the assessee and the entire sales cannot be added to the income of the assessee. In the assessee’s case, the books of account are rejected under section 145(2). On similar facts and circumstances, the net profit rate has been estimated on the basis of past results, by the ITAT, Agra, in the case of the assessee himself for the assessment years 2005-06 and 2009-10. 17. The ld. Counsel stated that on perusal of orders of the CIT(A), it is apparent and patent that the CIT(A) has not even recorded the facts regarding past history, comparable cases, judicial pronouncements of the jurisdictional High Court and the ITAT nor has he come out with any discernible basis as to why 3% net profit is to be applied for estimating the income of the assessees. It is seen that there is neither recording of facts, nor discussion about any comparable cases or the past history for applying the 3% Net Profit Rate by the CIT(A); that there is no reason assigned as to why the CIT(A) did not agree with the findings of fact recorded in the orders of the High Courts and the ITAT, as relied by the assessee. For this purpose, the judgement relied by the Ld. Counsel are discussed hereunder. In the case of ‘CIT Vs. Avinash Chawla and Company’, ITA 18. No.150 /2012, decided on 20 June, 2014,the Hon’ble M P High Court (jurisdictional) held that(APB, 75-76)- “It is also noticed in this case that the appellant had shown net profit rate 1.77% which was claimed by the appellant to be reasonable considering the prevailing rate in the trade of country liquor and IMFL. It may also be noted that it is not possible to have constant gross profit or net profit in a trade. Since no material was brought on record to show that the sales were made outside the books of accounts of the appellant or amount of sale was understated, the sales shown by the appellant cannot be disturbed. I am in agreement with the submission of the appellant that non issuing of cash memo is a general practice in the line of trade and is generally an accepted and prevalent practice. It may be noted that absence of cash memo of given situation like liquor trade may not per se lead to interference that the accounts are incorrect or incomplete. Here in the case of appellant, the Assessing Officer had not pointed out any

ITA No. 47 and 48/Agr/2015 12 ITA No. 71 and 72/Agr/2015

defect or deficiency in the books of accounts and therefore, there was no sufficient ground with the Assessing Officer for invoking provisions u/s 145(3) of the I T Act. Since provisions of section 145(3) of the I T act are not applicable in this case and the books of accounts have not been validly rejected, the Assessing Officer was not justified in estimating the sales at a higher figure and applying a higher net profit that declared by the appellant.” The ITAT, Indore Bench, in the case of ‘ACIT Vs. Avinash Chawla 19. & Co. Bhopal’, in ITA No. 570/Ind./ 2012, for Asstt. Year 2008-09, vide order dated 17.04.2013, held that (APB, 77-83)- “No major defects pointed out by the Assessing Officer other than the defects of not issuing the sale bills, but the fact remains that sales of the assessee as recorded in the books of accounts were not verifiable. Therefore, keeping in view the totality of facts and circumstances of the case , we modify the orders of both lower authorities and direct the Assessing Officer to work out profit of liquor trade by applying net profit rate of 2% in place of net profit rate 1.89% shown by the assessee , which was estimated by the Assessing Officer at 3% . Once the business profit determined by estimating net profit rate on the sales, no further deduction can be allowed on account of any expenditure including expenditure on account of remuneration of partners.” The Hon’ble Allahabad High Court, in the case of ‘CIT Vs. Prayag 20. Wines (2014) 364 ITR 660 held that (APB, 84-85)- “……….it is not necessary that a cash memo is required to be issuedfor each and every sales and consequently books of accounts could not be rejected on the sole ground that only one consolidated cash memo was issued at the end of the day. That the order of the Assessing Officer rejecting the books of account u/s 145(3) of the Income Tax Act and consequently making an addition of the income on estimate basis was reversed by the Tribunal such addition made on estimate basis is a question of fact.” The ITAT, Agra, Third Member Bench, in the case of ‘ITO Vs. 21. Laxami Narain Ramswaroop Shivhare’, (2009) 123 TTJ ( Agra) ( T M ) 289, held that (APB, 93-113)- “….that in the absence of any significant defect in the books of account of the assessee firm engaged in the business of trading of country liquor and IMFL, the books of account could not be rejected merely on the ground that sales are not supported by proper vouchers ; declared GP rate was to be accepted.” The ITAT, Jabalpur Bench, in the case of ‘M/s Ramesh Chand 22. Ravindra Kumar Rai V/s ITO’, (2010) 14 ITJ 34 held that-

ITA No. 47 and 48/Agr/2015 13 ITA No. 71 and 72/Agr/2015

“Rejection of accounts – U/s 145 of the Income Tax Act, 1961. Liquor Business. Books produced before A O, however, sales bills were not available. Sales shown was as per cash received from the different shops and accumulated in Head Office day by day. Some sales were unrecorded. Further, no vouchers for expenses were available. A O rejected books and estimated turnover 2.5 times of licence fees and applied profit rate of 5% in in view of M/s Badri Prasad Bhagwan Das & Co.(1995)82 Taxman 109 (MP) CIT(A) confirmed rejection of accounts but held that said decision is not applicable. CIT(A) estimated sales and applied profit rate of 2%. Held, Books are liable to be rejected, However, Badri Prasad Bhagwan Das (supra) is not applicable as Excise law that existed earlier has changed from 1996. Comparable case of other liquor contractor cited by A O is different on facts. Estimation of sales done by CIT(A) is upheld and profit rate applied by CIT(A) is reduced from 2% to 1.5%.” In the case of ‘Balch and Ajit Kumar’, (2003) 263 ITR 610 (MP) 23. (APB, 37-40) and in the case of ‘Man Mohan Sadani V.s Commissioner of Income Tax’, (2008) 304 ITR 52 (APB, 41-44)it is held that the total sales could not be recorded as the profit of the assessee. The net profit rate has to be adopted and once it is adopted, the same can be treated as the income of the assessee. In the present case, the finding of the Ld. Assessing Officer with respect to addition of the entire amount of the sales difference and adoption of higher rate of NPR on these estimated sales as discussed above, on the basis of information received from Excise Department, is contradictory to the observations of the Hon’ble jurisdictional MP High Court. 24. Estimation of profit is purely a question of fact, meaning thereby, that no particular rate of profit has universal application and depending upon the facts and circumstances of each case the rate of profit varies. It therefore implies that the past history of the assessee’s own case, or comparable cases on parity of facts is the most relevant guide for estimation of profit. 25. For arriving at the view that past history is the best guide to work out or estimate profit where book profit is, not believable, we derive authority from the Hon’ble jurisdictional M.P High Court Judgement in the case of ‘Vrajlal Manilal & Co. Vs CIT’, (1973) 92 ITR 287 (M.P) holding that “Section 145 of the Income-tax Act, 1961 Method of accounting - Estimation of profit - Assessment year 1957-58 - Whether previous orders of assessment, although they may even be best judgment assessments, would form good material or good evidence for purpose of computing income of assessment year in question - Held, yes.” 26. On perusal of the past history of the trading results of the least 5 years of the assessee’s case, filed before the ld. CIT(A), as above, it is revealed that the net profit rate is varying from 1.12% to 2.62%. Likewise, the analysis of the trading results of the 21 comparable cases

ITA No. 47 and 48/Agr/2015 14 ITA No. 71 and 72/Agr/2015

operating in the same line of liquor trade on parity of facts in the same geographical area, which constitute this bunch of appeals presented as above in tabular form at point no. 6, reveals that the net profit rate is varying from 0.3% to 2.62%. 27. From the above, it is evident that the NPR @ 3% adopted by the ld CIT is on the higher side, as compared to the past history, comparable cases, and the observations of the Jurisdictional High Court and various ITAT Benches. On parity of facts, the Hon’ble MP jurisdictional High Court, in the case of ‘CIT Vs Avinash Chawla’, (supra), decided on 20th June,2014, confirmed a net rate of 1.77%; the ITAT, Indore Bench, in the case of ‘CIT Vs Avinash Chandra and Co’, upheld a net rate of 2% in place of 3% applied by the department; the ITAT, Jabalpur Bench, in case of ‘Ramesh Chand Ravindra Kumar’, has accepted a net rate of 1.5% in place of 2% applied by the department; and the ITAT, Agra Bench, in the case of ‘Laxmi Narayan Ram Swaroop Shivhare’, accepted the books of account of the assessee. 28. We find that the CIT(A) did not assign reasons for not following the orders of the jurisdictional High Court of MP and the jurisdictional ITAT Bench of Jabalpur, the ITAT Indore Bench and even the ITAT, Agra Bench, in which, the net rate of 1.77 to 2.0% was accepted, but he has followed the judgment of the ITAT, Hyderabad Bench, in the cases of ‘Kanak Durga Wines Vs ITO’, (supra) and ‘G. Sudarshan V/s ITO’, in which 3% net rate was applied. Thus, the finding of the CIT (A) in applying 3% net rate, as held by the Hyderabad Bench of the ITAT as against net profit rates of 1.77% and 2%, upheld in the decisions of the jurisdictional High Court of MP and the ITAT Jabalpur/Indore Benches, respectively, on parity of facts is a per se unsustainable finding with reference to the facts and circumstances of the case and it also amounts to violation of judicial discipline by not following the decision of the jurisdictional High Court and ITAT Benches on parity of facts, and wrongly following the decision of other ITAT Benches. The ITAT, Agra Bench, in the case of ‘Laxami Narain Shivhare, 29. Gwalior Vs. Joint Commissioner of Income Tax III’, in ITA No. 419/Agra/2012, for the A.Y. 2009-10 and vice versa, ‘Asstt. Commissioner of Income Tax Vs Laxmi NarainShivhare, Gwalior’, being ITA No. 442/Agra/2012 for the A. Y. 2009-10, held that- “Thus, it is found that estimation made by the AO is based on mathematical formula and simply on mathematical fomula income cannot be estimated. The AO made the addition of entire/gross sales whereas Hon’ble MP High Court in the case Manmohan Sadva vs. CITR, 304 ITR 52 (MP) following CIT Vs Balchand Ajit Kumar, 263 ITR 610 MP held that entire sale proceeds of the assessee cannot be added to the income only net profit is to be added. Thus, the AO’s finding is contrary to finding of judgment of MP High Court. The CIT Appeal on one hand rejected the working of estimation of the AO and on the other hand he relied upon

ITA No. 47 and 48/Agr/2015 15 ITA No. 71 and 72/Agr/2015

rejected working of the AO and addition was sustained. Under the circumstances, both the orders of the AO and CIT (A) cannot be sustained. As stated above that while making best judgment one should have reasonable nexus to the available material and circumstances. In the case under consideration both AO and CIT Appeal have ignored the past history of the assessee and comparable cases. On perusal of above comparative chart, we notice that in year under consideration the assessee has shown comparatively better result as GP is 7.34% and net profit 2.13%. However, after considering totality of the facts and circumstances of the case, it will be fair and just if addition to the extent of Rs. 20,00,000/- is sustained which will cover all deficiencies and lapses noticed by AO. We accordingly confirm the addition to the extent of Rs. 20,00,000 and balance addition of Rs. 6,94,40,512 (7,14,40,512 – 20,00,000) made by the AO is deleted. Thus, ground no. 1 & 2 of the assessee appeal are partly allowed.” 30. Considering the comparative net profit Chart filed before the ld. CIT(A), the comparable cases as tabulated above and the judgement relied by the assessee, it is seen that the net profit rate shown by the assessee is within the range of the net profit prevalent during the period in the liquor trade. It is true that while determining the correct taxable income, even if it is estimate against estimation, it should be supported by some justification, which is the initial duty cast on the AO and when appeals were preferred before the CIT(A), it was obligatory on the CIT(A) to have discussed the factual finding recorded by the AO and placed for consideration by the assessee, as the case may be, in its proper perspective and it is expected of the authority holding appellate jurisdiction to exercise its judicious discretion based on due appreciation of the material on record. 31. The above principles fully hold good for the present case also. In the entire order, the CIT(A) has not recorded any finding of fact, nor any reasons are assigned as to why he does not agree with the past history of the assessee, the comparable cases and the observations of the higher jurisdictional judicial forums on the parity of facts. 32. From the above, it is amply clear that the ld. CIT(A) has not pointed out any specific deficiency in the purchase invoices, or the expense invoices, nor discussed any comparable case on identical facts, to form the basis for application of a particular net profit rate on gross total receipts, in the case of the assessee. On perusal of the comparative ‘Net Profit Chart’ of the assesses’s past history on profit rate, as above, it is evident that the Net Profit Rate is reasonably declared at 2.62%, as against those of 2.09% and 2.12% of the earlier years. After considering the decisions cited and the history of the case, it is factually clear that the

ITA No. 47 and 48/Agr/2015 16 ITA No. 71 and 72/Agr/2015

profit rate applied by the Ld. CIT(A) at 3 % is on the higher side and is unreasonable. 33. In view of the above discussion, judicial pronouncements and factual matrix of the cases, we hold that the suppressed sale cannot be taxed as ‘income’ and only the net profit part can be taxed as income of the assessee. Following the Hon’ble Jurisdictional MP High Court and ITAT 34. orders on parity of facts, in case of retail trader of liquor, as such, we hold that it would be just, fair and reasonable to apply a net profit rate of 2.7% on the sales price as estimated by the AO. Accordingly, the AO is directed to apply 2.7% NP rate on the estimated sales, subject to the minimum returned income.” 10. We observed that the finding of the ld. CIT(A) are concurring

with the observation of the AO, regarding rejection of books of

account u/s 145(3), on the basis of glaring mistake pointed out and

thereby, estimation of the turnover on the basis of information

received from the excise department as correct and justified, and is

in conformity with law.

only the profit rate is to be applied. As such, the finding of CIT(A) on

the issue of applying net profit rate on the sales is in conformity with

ITA No. 47 and 48/Agr/2015 17 ITA No. 71 and 72/Agr/2015

the law. Therefore, the departments ground of appeal that the difference in sales, as estimated by the AO as suppressed sales, be treated as income of the assessee, is hereby rejected.

From the above, it is amply clear that the ld. CIT(A) hasn’t 12. pointed out any specific deficiency in the purchase invoices or the expense invoices, nor discussed any comparable case on identical facts, to form the basis for application of a particular net profit rate on gross total receipts, in the case of the assessee. On perusal of the comparative ‘Net Profit Chart’ of the assesses’s past history on profit rate, as above, it is evident that the Net Profit Rate is reasonably declared at 0.95 and 0.93 in respect of assessment year 2010-11 and 2011-12 respectively as against 1.94% and 1.09% of the previous years after deducting interest and salary to partners. After considering the decisions cited and the history of the case, it is factually clear that the profit rate applied by the Ld. CIT(A) at 3 % is on the higher side and is unreasonable.

Following the Hon’ble Jurisdictional MP High Court and 13. considering our observation in the case of ‘Shri Laxmi Narain Shivhare’, (Supra) of ITAT, Agra Bench, on parity of facts, in case of retail trade of liquor, as such, we hold that it would be just fair and

ITA No. 47 and 48/Agr/2015 18 ITA No. 71 and 72/Agr/2015

reasonable to apply a net profit rate of 2.7% on the sales price as

estimated by the AO. Accordingly, the AO is directed to apply 2.7%

NP rate on the estimated sales after deducting interest and salary to

partners as per law, subject to the minimum returned income.

assessee and ITA No. 48/Agr/2014 of the Department are, mutatis

mutandis, similar to those in other cross appeal titled as above.

Therefore, our observation in ITA No. 47/Agr/2014 and ITA No.

48/Agr/2014 are squarely applicable to the other cross appeal,

hence, in accordance therewith in this appeal also the grievance of

the assessee is found justified and accordingly, the AO is directed

to apply N.P. rate of 2.7% on the estimated sales after deducting

interest and salary to partners subject to the minimum return

income.

and those of the department are dismissed.

(Order pronounced in the open court on 16/05/2018)

Sd/- Sd/- (A. D. JAIN) (DR. MITHA LAL MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 16/05/2018 Aks/Doc

ITA No. 47 and 48/Agr/2015 19 ITA No. 71 and 72/Agr/2015