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Facts
The Revenue appealed against an order by the CIT(A) that deleted an addition made by the AO. The AO had rejected the assessee's books of accounts and estimated the profit by applying the average Gross Profit ratio of the preceding three years, citing a failure to provide quantitative stock details. The assessee, engaged in wholesale and retail trading of edible oil, declared a loss for the assessment year 2018-19.
Held
The Tribunal held that the rejection of books of accounts by the AO was not justified, as the assessee had provided quantitative details, albeit not in the format requested by the AO. The Tribunal found that the AO's estimation of profits based on previous years' GP ratios was inappropriate given the significant increase in turnover and shift towards wholesale business with lower margins.
Key Issues
Whether the Assessing Officer was justified in rejecting the assessee's books of accounts and estimating profit based on past GP ratios when quantitative details, though not in the prescribed format, were provided, and the business model had significantly changed.
Sections Cited
145(3), 143(3), 144B, 143(1), 142(1), 68, 115BBE, 44AB
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Income Tax Appellate Tribunal, PUNE BENCHES “B”, PUNE
Before: DR.MANISH BORAD & SHRI VINAY BHAMORE
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
This appeal filed by the Revenue pertaining to the Assessment Year 2018-19 is directed against the order dated 21.07.2024 passed by the National Faceless Appeal Centre, Delhi [in short ‘NFAC’) arising out of the Assessment order passed u/s.143(3) r.w.s.144B of the Act, dated 20.04.2021.
Revenue has raised following grounds of appeal :
“1. On the facts and circumstances of the case, the Ld CIT(A) erred in holding that the rejection of books of accounts by the AO by invoking provisions of Sec 145(3) not proper and accepting the books results shown by the assessee by holding that assessee has fulfilled all the requirements as mandated by the statutory laws by submitting explanations with supporting evidences before the AO, ignoring the fact that assessee had failed to provide the quantitative stock details in the audit report as well as during the assessment proceedings to justify the instances of purchases of items at higher rates and selling the same at lower rates.
2. On the facts and circumstances of the case, the Ld. CIT(A) erred in entirely deleting the addition of Rs. 3,99,71,124/-made by the AO by adopting gross profit ratio 1.24% thereby ignoring the fact that such a rate was arrived at by the AO on the basis of average gross profits disclosed by the assessee itself in the immediately preceding four assessment years.
3. On the facts and circumstances of the case, the Id. CIT(A) failed to appreciate that even during the remand proceedings, the assessee furnished only partial data and failed to furnish the details relating to Actual date of delivery and Rate on date of delivery for the purchases as well as sales vis a-vis the goods which were claimed to have been sold sustaining losses.
4. On the facts and circumstances of the case, the Ld. CITA) failed to appreciate that the assessee has failed to substantiate its claim that majority of the business has been done in wholesale sector where the margin of profit is lower as compared to retail sector where the assessee has done business in lesser quantities, when by its own admission the Turnover of the wholesale and retail sectors cannot be bifurcated as the dealer has not kept the record to track the tankers utilized for wholesale and retail sale of goods. 5. The appellant craves leave to add, to amend, to alter any of the above grounds of appeal.”
Brief facts anent to this appeal are that the assessee is a firm engaged in the business of wholesale trading of edible oil by purchasing the oil in Tanker and sale of oil in tins. Loss of (-)Rs.45,55,731/- was declared in the return of income filed for the A.Y. 2018-19 on 31.10.2018. The said return was processed u/s.143(1) of the Act accepting the return. Thereafter, the case was selected for Complete Scrutiny through CASS for examination of Quantitative Details and Unsecured Loans. Statutory notices u/s.143(1)/142(1) were issued to the assessee to which the assessee made its submissions. The Assessing Officer noticed that the assessee has not submitted any quantitative details in Form No.3CD Report. Ld. AO called for the month-wise quantitative details and the asseesee furnished the requisite details, but exactly not in the proforma required by the AO. In response to the show cause notice with regard to Gross Profit addition, the assessee furnished the reply which is reproduced below :
"....The dealer used to purchase the tanker and supply the same in the market after repacking with the margin thereon but during the year 2017-18 as the GST was introduced the dealer got the market open and was able to purchase from any state and sale to any state at the same level of trading which was not available previously with the help of the brokers. The dealer took this as the opportunity to enter the new market but he was not aware of the risk in the segment or the working in the wholesale sector. The dealer has done almost 250 crores business in the segment on wholesale basis and where the margin is approx 0.20% and other sales in retail where the margin is around 2.4% whereas after deducting the direct expenses the Gross Profit is lower than the margin. The turnover of the wholesale and retail composition is not able to bifurcate as the dealer has not kept the record which tanker is sold in wholesale and which is taken for retail repacking. The Gross Profit is derived after deducting the direct expenses which accounts to around 0.72% of the total turnover. The Gross Profit percentage during eh year is lower than the previous year due to the quantum of wholesale trade.”
Not convinced with the assessee’s submissions, ld. AO rejected the books of accounts and proceeded ahead to complete the assessment by estimating the average of the Gross Profit ratio for the last three assessment years and made addition of Rs.3,99,71,124/-. While doing so, ld. AO observed that the turnover of assessee for the current year is Rs.355.82 crore which is 10 times higher than the total turnover for A.Y. 2017- 18. Ld. AO also observed that the profit ratio in the current year is much higher than the profit ratio shown in earlier years. Thus, he estimated the Gross Profit ratio @1.24% by considering the Gross Profit ratio shown by the assessee in the earlier three assessment years, i.e., 2015-16, 2016-17 and 2017-18.
So far as the unsecured loans is concerned, the assessee in response to notice u/s.142(1) furnished confirmation from the Shanti Oil Industries parties. Ld. AO issued another notice u/s.142(1) to furnish the confirmation from the remaining parties along with return of income and bank statements. The assessee furnished the confirmations of the parties, but without return of income and bank statements of some creditors. In the circumstances, ld. AO made addition of Rs.1,60,57,980/- on account of explained unsecured loans u/s.68 and also invoked the provisions of section 115BBE of the Act. While doing so, ld. AO accepted the unsecured loans obtained from Renuka Lalit Bokariya only.
Dissatisfied assessee preferred appeal before the ld.CIT(A)/NFAC. The ld. CIT(A)/NFAC allowed the appeal of the assessee deleting both the additions made by the AO. However, the Department is not in appeal against the addition of Rs.1,60,57,980/- deleted by the AO on account of unsecured loans. Therefore, we confine ourselves to adjudicate the issue relating to addition of Rs.3,99,71,124/- made by the AO, averaging the Gross profit ratio @1.24%.
Now the Revenue has approached the Tribunal that the ld.CIT(A) erred in deleting the addition as the assessee has failed to provide the quantitative stock details asked for by the AO from time to time either in the audit report as well as during the course of assessment proceedings. Therefore, ld. AO has rightly rejected the books of account and estimated the profits of the assessee. During the course of hearing, Ld. Departmental Representative vehemently argued supporting the order of the Assessing Officer. He submitted that the assessee has not submitted the quantitative details which made the AO sceptical about the turnover projected by the assessee. Ld. DR submitted that the assessee ought to have furnished the quantitative Shanti Oil Industries details basing on the books of accounts maintained by it. In absence of same, the ld. AO was right in rejecting the books of account and estimating the GP rate @ 1.24% which was arrived at by the AO after taking cognizance of the GP rate shown by the assessee in the preceding three assessment years. He therefore submitted that the order of the AO be confirmed.
Ld. Counsel for the assessee submitted that quantitative details are maintained and the stock in hand was furnished before the AO. However, inflow and outflow of the quantity during the year were not furnished being voluminous in nature. Since the nature of business carried out by the assessee is same as in the past with an addition that the assessee entered into wholesale transaction and the quantum of turnover increased manifold. Therefore, application of net profit of the retail business on the wholesale business was totally unjustified in the hands of the assessee. He further submitted that ld.CIT(A)/NFAC has rightly deleted the addition by considering the submissions of the assessee after calling the remand report from the AO. He accordingly submitted that the order of the ld.CIT(A)/NFAC be upheld and the grounds raised by the Revenue be dismissed as devoid of any merit.
We have heard the rival contentions and perused the record placed before us. The solitary issue arises for our consideration is whether the ld. Assessing Officer was right in estimating the profits of the assessee on the facts and circumstances of the instant case. In this regard, we have given our thoughtful consideration to the finding given by the ld.CIT(A)/NFAC which reads as under :
“8. DETERMINATION: The facts and grounds of the case, arguments of the appellant backed with evidences, remand report and the rejoinder have been gone through carefully. As is evident from the above, one of the reasons of the selection of the case in CASS was to verify the quantitative details of the principal items of the goods traded or raw material as well as finished goods. During the course of the assessment proceedings, the AO verified the return of income along with the audit report in Form No. 3CD, wherein, it has been pointed out by him that the Raw No. 35b to 35bC of Tax Audit report were left blank by the appellant and also the GP ratio was shown lesser as compared to the previous AYs. In view of this, the AO called for explanations from the appellant firm and having not found plausible explanations, he rejected the book results u/s.145(3) of the Act and proceeded with computing the GP ratio @ 1.24% instead of 0.12% by averaging out the GP ratios of the previous three AYs. Accordingly, GP for the year under consideration computed @ Rs.4,41,22,019/- (i.e. 1.24% of turnover i.e. Rs.355,82,27,303/-) instead of GP shown of Rs. 41,50,895/- (0.12% of Rs. 355,82,27,303/-) and the differential GP amount of Rs.3,99,71,124/- (Rs.4,41,22,019/-minus Rs.41,50,895/-) was added to the total income. The AO called for month wise quantitative details (sale/purchase) of the commodity traded in prescribed proforma and the appellant complied to as under:- xxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxx
8.1 The appellant further argued before the AO that during the year under consideration, it had undertaken wholesale and retail business of edible oils such as soyabean and Palm oil by purchasing in tankers and subsequently sold them after repackaging in tankers and tins as well, keeping margin thereon and also incurred some losses in transit unlike previous years, wherein, it was engaged only in retail businesses. It was further submitted before the AO that it had booked the oils in advance for later delivery and subsequently sold at the market rates prevalent at the time of delivery and due to the fluctuations of the oil prices in the international and domestic markets, it had incurred huge losses. However, the AO was not in consonance with the argument of the appellant and believed that the contention and the information of the appellant was incorrect. The AO further rejected the books of accounts u/s.145(3) of the Act without actually pointing out any material defects in it. The AO in para 4.8 of the order has stated that the appellant could not furnish the required quantitative details in prescribed proforma, and therefore, it is alleged that no loss could be ascertained from the details furnished by the appellant. From these findings of the AO, it appears that the AO required the details and observed that the information furnished is inaccurate vis-à-vis contention of the appellant. He further compared the GP with the previous AYs as under:-
A.Y. Gross Profit Turnover Ratio 2018-19 4150895 3558227303 0.12% 2017-18 3078216 351035792 0.88% 2016-17 2424517 1706828501 1.42% 2015-16 2384389 1666881881 1.43%
8.2 The AO also called for explanations for the variance of the GP and proposed to adopt the average GP of previous AYs, and believed that no explanation was submitted. However, from the evidences available on record, it is seen that the appellant has submitted before the AO that the GP of the previous years are not comparable to that of the year under consideration as the GPs of the sales of the wholesale and repacked sales i.e. retail are not the same and hence it is not justified to compare the same with the year under consideration. It is also argued that during the year under consideration, the wholesale was around 70% of the Total Sales where the margin is approximately 0.20% and only 30% sales were in repacked sales wherein the margin is around 2.4% after deducting the direct expenses which were accepted by the AO. The appellant argued before the AO and during the course of the appeal proceedings as well, that the turnover of the Wholesale and retail components cannot be bifurcated as it had not kept the record for the tankers i.e. which tankers were used in wholesale and which was taken for retail repacking. The appellant further submits that the Gross Profit is derived after deducting the direct expenses which accounts to around 0.72% of the Total Turnover and GP% during the year is lower than the previous year due to the quantum of the Wholesale Trade which is also evident from the aforementioned table as the turnover is multifold as compared to previous AYs.
8.3 The appellant further argues that during the previous AYs, he only carried out retail business and the Gross margin for Wholesale business and retail business are not same. I find merit in the arguments of the appellant firm that in a business policy. It is not possible to increase the sale without curtailing the profit margins. The turnover of the year under consideration has increased 10 folds as the appellant has started dealing in wholesale trade and the profit margin of wholesale business is much more on the lower side as compared to that of the retail business. A wholesaler keeps the margin at the lower side and tries to sale more with higher turnover. From above, it is also evident that the appellant has substantially increased his turnover from Rs. 35,10,35,792/- in the earlier year to Rs.355,82,27,303/- in the year under consideration. The AO without appreciating the fact that the books of accounts are duly audited u/s 44AB of the Act by an independent auditor and mere non furnishing of the details in his desired format does not entitle the same to be rejected u/s 145(3) of the Act. Other than the details in format, the AO had not pointed out any discrepancy or error in the books of accounts of the appellant. In this regard, appellants reliance on the decision of the Hon'ble Delhi Tribunal is relevant in the case of Brij Lal Goyal v. ACIT reported in [2004] 88 ITD 413, wherein, Hon'ble Tribunal held that the Books of Account mean those books of account whose main object is to provide credible data and information to file the tax returns.
8.3.1 The appellant has also relied on the judgement of the Hon'ble ITAT: i) Hon'ble Allahabad High Court in the case of ITO Vs. Daya Chand Jain Vaidya reported in [1975] 98 ITR 280 has held that "When a particular explanation furnished by the assessee and evidence in support thereof is adduced, the onus shift of the AO to falsify the said material or bring new material on record. Mere rejection of good explanation does not convert good proof into no proof." ii) Hon'ble ITAT Indore in the case of HimanshuBotadara, HUF VS. ITO in & 156/Ind/2023 dated 11/12/2023 held that merely making assumptions without any concrete evidence is legally unsustainable. iii) ITAT Ahmedabad in the case of Chirag Nareshbhai Soni vs ITO in dated 11/10/2023, wherein, Hon'ble Tribunal has nullified the action of the AO in rejecting the books of accounts by holding as under:- iv) It has further relied on the decision of the jurisdictional tribunal order in the case of ACIT Vs Champalal Mukanchand Jain in dated 31/01/2013, wherein, Hon'ble Tribunal has dismissed the action of the AO in rejecting books of accounts without giving any clear and concrete findings and also on the basis of lower GP compared to previous year.
8.4 It is further reiterated that from the aforesaid findings and discussion that it is evident that Column nos.35b to 35bC is applicable for the manufacturing concern and the appellant is a wholesale cum retail trader in oil. In view of this, it appears that the auditor has not filled the quantitative details as it was not required to fill these columns in the audit report in the appellant's case. This very fact has not been captured in totality and in essence to the point of fact by the AO both during the course of assessment proceedings and during the remand proceedings as well. The quantitative details called for by the AO was submitted before him as under:- xxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxx
8.5 Without considering these details, the AO rejected the books of accounts merely because these details were not furnished in the format provided by him during the course of assessment. Besides the above, the appellant has also submitted sample bills for purchase and sales transactions (above Rs.10 Lakhs) as required by the AO, month wise purchase and sales details, details of the commodity contracts made with brokers, contract/delivery notes & confirmations of the brokers, sauda transactions samples etc. However, the AO was not convinced with these details and rejected books of accounts, which is in my considered opinion is not justified. In view of the totality of the facts, discussions/findings noted above and also relied on the decisions of the Hon'ble Courts including bindings jurisdictional tribunal orders, I am of the opinion that the appellant has furnished the quantity-wise and rate-wise details of purchases and sales of the commodity traded by it and there remained no scope for the Assessing Officer to arrive at the conclusion that the appellant had not furnished the quantitative details to deduce the profit element. It is the AO who has to unearth the camouflaged profit component if at all done so by an assessee. Merely not filing the information in the desired format cannot be the ground of rejection of the audited books of accounts. It is a well-accepted principle in tax jurisprudence that the AO cannot step in the shoes of businessman assessee to replace his business strategy to suit his own convenience. Even, on perusal of the remand report, it appears that the AO for the sake of arguments, has submitted his comments without even verifying the contention of the appellant made in the written arguments. He has only reiterated the arguments of the appellant firm in the remand report. In para 5.4, it is submitted by the AO that there might be the case that even audited books may contain various defects, however, the nature of defects in the audited report has not been highlighted. He further corroborates in Para 5.5 and casts the responsibility on the appellant to maintain the quantitative details as called by him to justify his inability to unearth the wrongdoings if at all done by the appellant. It is worthy to mention here that no prudent business man can predict the future requirements of the details by an assessing officer. In the instant case as mentioned above, the appellant has fulfilled all the requirements as mandated by the statutory laws by submitting explanations with supporting evidences before the AO. It is only the issue that the appellant fails to provide the quantitative details in the desired format of the AO that cannot be the sole ground of making the impugned addition. Considering the above discussions, I find no reason to sustain the action of the AO in rejecting the books of accounts and subsequent averaging out the GP%. In view of this, the addition made by the AO with regard to the GP deserves to be deleted and the respective grounds nos. 1 to 5 are accordingly treated as allowed.
On going through the finding of ld.CIT(A) along with the perusal of details filed by the assessee in the paper book containing 296 pages, we note that the only ground on which the ld. AO has estimated higher amount of profit is by applying the profit rates of preceding years to the turnover of the current year and also taking note that assessee has not maintained quantitative details. We however find that firstly the turnover of the assessee which was Rs.35.10 crore during the preceding financial year has increased abnormally to Rs.355.82 crore. This increase in the turnover is mainly on account of Wholesale trading and also other commodity transactions. By no stretch of imagination the Gross Profit/Net Profit rate of the turnover of Rs.35.10 crore can be applied to the turnover of Rs.355.82 crore considering the fact that the business volume are of different nature, i.e. Retail Vs. Wholesale and other commodity transactions where the profits decrease as the turnover increases. The huge difference in the turnover of current vs. Preceding year has been further explained by the assessee with the help of following detail :
Particulars 2016-17 2017-18 Sales 351035792 3558227303 Credit Sales 243622709 3492219166 No. of Dealers 194 363 No. of Invoices 1583 6606 Cash Sales 107413083 66008137 Purchases 345546166 3494934712 No. of Invoices 426 3334 No. of Suppliers 33 83 Sales above 30 Lakhs per dealer 141016561 3286445887 (Dealers) (Dealers 19) (Dealers 169)
% of Sales Above 30 Lakhs to 40.17% 92.36% Total Sales Purchases Above 1 Crore 270626426 3341077073 (No. of Suppliers) (6 Suppliers) (35 Suppliers) % of Purchases Above 1 crore per 78.32% 95.60% Supplier to Total purchases
The above details give a clear picture that in the preceding year the percentage of sales above Rs.30 lakhs to Total Sales was only 40.17% but in the year under consideration the sales above Rs.30 lakhs have grown to 92.36% to the Total sales which means that Sales Invoices of huge amount/volume has been issued during the year and certainly once the invoice value increases and the nature of sales claims to be wholesale in nature then profit margins are bound to decrease.
So far as the allegation of not maintaining the quantitative details alleged by the AO is concerned, we note that during the remand proceedings itself assessee has furnished complete quantitative details of goods Inward/Outward and the summary of the purchase and sales in Quantity along with the rates submitted by the assessee before the ld. AO in the remand proceedings are as under :
Purchase Sales Quantity Rate Value Quantity Rate Value Finished Goods 90421457.00 1004830215.13 Others 23536835.95 25927458.82 RBD Palmolien Oil Loose 28369645.000 kgs 60.02 1702830304.88 2217832.000 kgs 61.47 1363001930.90 RBD Palmolien Oil Loose (R) 1497900.000 kgs 64.38 96429740.48 273510.000 kgs 52.26 14294308.00 Refined Soyabean Oil Loose 21983605.000 kgs 67.09 1474970266.12 16195113.600 kgs 67.45 1092375130.11 Refined Soyabean Oil Loose (R) 1066115.000 kgs 69.49 74080345.05 161400.000 kgs 67.09 10828284.00 Refined Sunflower Oil Loose 874080.000 kgs 70.19 61348877.46 652170.000 kgs 72.02 46969976.00 Total 3523617826.94 39454025.600 kgs 3558227302.96
The above details have been extracted by the ld.CIT(A) also and ld. AO had not found any discrepancy in these details. The above chart clearly indicates that the assessee has maintained the quantitative details in Kgs for various items in which it regularly deals. So far as other item of purchase and sale are concerned, they pertain to commodity transactions. Sample bills of purchase and sales have also been furnished. Under these given facts and circumstances where the claim of the assessee of having incurred lower margin of profits/loss during the year are duly supported by material evidence and regular books of account and majorly explained with quantitative details, the estimation made by the ld. AO are merely on assumptions and not based on concrete evidence and also not finding any specific Shanti Oil Industries error in the documents filed by the assessee including the purchase/sale details and quantitative records of Inward and Outward. Therefore, we fail to find any infirmity in the finding of ld.CIT(A) holding that the ld. AO erred in rejecting the books of account and also erred in estimating profits. Accordingly, Grounds of appeal No. 1 to 4 raised by the Revenue are dismissed.
In the result, the appeal of the Revenue is dismissed. Order pronounced on this 18th day of February, 2025.