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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Shri R.K. Panda & Shri Laliet Kumar
आयकर अपीलीय अधिकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ B ‘ Bench, Hyderabad Before Shri R.K. Panda, Accountant Member AND Shri Laliet Kumar, Judicial Member ITA No. 1233/Hyd/2019 Assessment Year: 2013-14 Shri Srinath Reddy Nalla, Vs. Income Tax Officer, R/o.Hyderabad. Ward – 6(2), PAN : AAGPN8178E. Hyderabad (Appellant) (Respondent) Assessee by: Shri A. Srinivas, CA Revenue by: Shri Kumar Aditya Date of hearing: 17/10/2022 Date of pronouncement: 18/10/2022 O R D E R Per Laliet Kumar, J.M This appeal filed by the assessee is directed against the order dated 29.03.2019 passed by the learned Commissioner of Income Tax (Appeal) – 6, Hyderabad relating to A.Y.2013-14.
ITA 1233/Hyd/2019
The two effective grounds raised by the assessee read as under :
“1.The Appellate Commissioner erred in confirming the rejection of books, as done by the A.O. 2. The Appellate Commissioner erred in confirming the determining the business income at Rs.2,50,000/- as against the loss claimed by the assessee amounting to Rs.2,14,37,485/-.”
2.1. Facts of the case, in brief, are that the assessee, who is an individual engaged in the business of manufacturing PVC Pipes, filed his return of income belatedly on 05.02.2015 admitting taxable income of Rs.9,47,050/-. In the return of income, the assessee computed the business loss of (-) Rs.2,14,37,484/- and had set off the same with short-term capital gain u/s 50 of the Act amounting to Rs.47,95,677/- and income from other sources of Rs.7,890/-, resulting in net business loss of (-) Rs.1,66,33,918/-. Subsequently, the return of income was processed and selected for scrutiny under CASS, and the scrutiny assessment was completed u/s 144 of the Act vide order dt.09.03.2016, determining the taxable income of the assessee at Rs.63,74,620/- by making the following additions to the returned income : (1) Estimation of business income at Rs.2,50,000/-, as against business loss claimed of (-) Rs.2,14,37,485/-.
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(2) Addition towards short term capital gain on sale of assets u/s 50 of the Act to the extent of Rs.3,74,000/-. As such, total taxable income under STCG has been enhanced to Rs.51,69,677/- (Rs.47,95,677/- + Rs.3,74,000/-).
Feeling aggrieved with the order of Assessing Officer, assessee carried the matter before ld.CIT(A), who partly allowed the assessee's appeal.
Feeling aggrieved with the order of ld.CIT(A), the assessee is now in appeal before us.
GROUND NO.1
At the outset, in respect of ground No.1, it was submitted by the ld. AR that after rejecting the books of accounts, the Assessing Officer had made addition in the hands of the assessee. On appeal, ld.CIT(A) had determined the income of the assessee at Rs.2,50,000/- as against the loss of Rs.2,14,37,485/-. Ld. AR further submitted that the action on the part of lower authorities is not correct.
5.1. It was submitted that the assessee produced the sale bills and vouchers during the course of assessment / appellate proceedings. Therefore, the action on the part of the lower authorities is not correct in rejecting the books of accounts under section 145(3) of the Act.
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Per contra, the ld. DR had drawn our attention to the order passed by the ld.CIT(A) and also the order passed by the Assessing Officer. It was the case of the Revenue that despite various opportunities, the assessee failed to produce the sale bills and vouchers in support of his claim during the course of assessment proceedings or appellate proceedings. Hence, both the authorities were correct in rejecting the books of accounts.
We have heard the rival submissions and perused the material on record. Admittedly, as mentioned in para 7.26 and 7.27, (reproduced elsewhere in the order) the assessee had failed to produce the supporting sale bills and vouchers during the course of assessment proceedings as well as appellate proceedings. Therefore, we do not find any error on the part of the lower authorities in rejecting the books of accounts of the assessee. Accordingly, ground No.1 of the assessee challenging the rejection of books of account by the Assessing Officer and ld.CIT(A) is decided against the assessee.
GROUND NO.2
In respect of ground no.2, it was submitted that the assessee had purchased the raw material after 25.12.2012. As there was delay in handing over the total sale consideration, by the incumbent purchaser, the assessee was forced to sell the raw material / finished
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products at a loss after purchasing it as assessee had completed the transaction on 08.02.2013. Therefore, the assessee suffered the losses. He further submitted that the lower authorities' finding was incorrect as they failed to examine the above submissions. It was the submission of the ld. AR that the assessee has not immediately shut down his business after entering into the agreement, but he continued to run the business to fulfill its pending obligations.
Per contra, the ld. DR for the Revenue had drawn our attention to the reply given by the assessee during the course of assessment proceedings and also the agreement for sale dt.29.11.2012. It was submitted by the ld. DR for the Revenue that at the time of entering into an agreement, the assessee had received a consideration of Rs.70 lakhs out of the total sale consideration of Rs.170 lakhs, the balance amount of Rs.100 lakh has to be paid within 90 days of agreement which was paid on 08.02.2013 i.e., within 90 days of agreement. It was the contention of the ld. DR that there was no breach of the agreement and the possession of the property was given by the assessee to the purchaser on 25.12.2012. It was submitted that the conduct of the assessee to purchase the raw material to the tune of Rs.93,11,704/- even after closing down his business and handing over the possession of industry after 25.12.2012 was abnormal and against the common sense. The ld. DR had also submitted that the assessee had failed to produce
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the supporting purchase and sale bills showing the purchase and sale of the raw-material.
We have heard the rival submissions and perused the material on record. The ld.CIT(A) elaborately discussed the facts of the issue in para 7.17 to 7.27, which are to the following effect.
“7.17 Further, the AO observed that after December 2012, the assessee made sales only to the extent of Rs.89,98,542/- and such sales did not include unfinished products and raw materials. In view of this, the AO reasoned out that the assessee's contention that it sold unfinished stocks and raw materials was factually incorrect. 7.18 Similarly, the AO opined that the assessee did not sell any raw materials, though the assessee bought raw materials worth Rs.91,11,704/- after effective date of transfer of the business unit. In view of this mismatch of transactions between purchases and sales and the nature of materials/goods sold, coupled with non production of purchase and sales bills, the AO came to conclusion that the assessee did not maintain the books of account properly and, therefore, the book results with regard to business loss disclosed of (-) Rs.2,14,37,485/- cannot be relied upon. Thus, the AO rejected the books of account and estimated the business income at Rs.2,50,000/-. 7.19. Under the circumstances, even after presuming, but not admitting, that the transfer of business unit took place subsequent to the effective date, it is not possible to believe the assessee's contention that it had incurred huge amount of business loss subsequent to the effective date. This is precisely because of the reason that, there are no valid and bona fide reasons behind the assessee purchasing raw materials and selling the manufactured good's at a loss after the effective date. Similarly, the assessee has failed to prove with evidence the sale of stocks of raw materials, finished goods and stores available on the effective date at a throw away price. Further, the stands taken by the assessee towards incurring huge Page 6 of 12
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amount of business loss at different stages of proceedings before the AO and CIT(A) are contradicting. In view of this, it is not possible to believe the correct position with regard to nature of the goods/material which were in the possession of the assessee on the effective date of the transfer of the business unit i.e., 25.12.2012, and purchased after that date, if any. Therefore, I do not find fault with the AO in rejecting the books of account and estimating the income. 7.20. Coming to the profitability of the assessee's business for earlier AY vis-a-vis huge amount of loss disclosed in the current AY, as per the details furnished by the AR of the assessee, it is observed that in the first year of operation i.e., year ending 31.03.2011, on a total turnover of Rs.1,63,10,595/-, the assessee disclosed gross profit of Rs.40,25,235/- which worked out to 24.6%, whereas Profit Before the Tax(PBT) is disclosed at Rs.3,48,970/-. For the second year of operation i.e., year ending 31.03.2012, on a gross turnover of Rs.7,45,28,403/-, the assessee disclosed gross profit of Rs. 93,38,561/- which worked out to 12.5%, whereas PBT is disclosed at Rs.1,49,170/-. 7.21. On the other hand, for the FY ending 31.03.2013 relevant to the impugned AY, on a total turnover of Rs.8,78,19,181/-, the assessee disclosed gross loss of Rs.1,65,60,034/- which worked out to negative rate of 18.85%. Accordingly, the assessee disclosed huge loss before tax of Rs.2,14,45,463/- which worked out to negative rate of 24.42%. As such, it is clearly evident that the assessee had disclosed unbelievably huge loss during the impugned AY as against the positive income disclosed in the immediate two FYs/AYs. The relevant portion of the assessee's submissions with regard to profitability for the previous FYs 2010-11 and 2011-12 vis-a-vis FY 2012-13 is reproduced below for ready reference: "Profitability for the previous three years and justification of the loss in the current year 20. The appellant submits that the unit was established in the PY 2010-11 relevant to AY 2012-13 and the unit was sold in the third year of its operations. Hence, the comparative figures are for years ended 31.03.2011 and 31.03.2012.
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The appellant prays to submit in the below table the comparison of the performance of the unit.
31.03.2013 SI. No. Particulars 31.03.2011 31.03.2012 1 Turnover 1,63,10,595 7,45,28,403 8,78,19,181 2 40,25,235 93,38,561 N1,65,60,034 Gross Profit 3 Other 26,18,396 66,10,095 42,84,135 . overheads 14,06,839 27,28,466 H2,08,44,169 4 PBIDT 5 Depreciation 4,57,770 17,88,825 - 9,49,069 9,39,641 H2,08,44,169 6 PBIT 7 Interest 6,00,099 7,90,471 6,01,294 8 PBT 3,48,970 1,49,170 (-)2,14,45,463 Profit on sale 47,95,677 9 of Unit 10 PAT 3,48,970 1,49,170 H1,66,49,786
22.The appellant submits that the first year was part of the year and the appellant made some profit after meeting his overheads."
7.22 Accordingly, In the given set of the facts and circumstances of the case, by any stretch of imagination, it cannot be believed that the assessee had incurred loss to the tune of Rs.2,14,45,463/- on a total turnover of Rs.8,78,19,181/-.This is beyond the realm of commercial expediency as well as preponderance of probabilities. 7.23 Coming to the rationale behind rejection of books of account, in an income tax assessment proceedings u/s.143(3) of the Act, based on facts and circumstances of the case, the AO has a discretionary power to reject the books of account maintained by an assessee and complete the assessment by estimation of income to the best of his judgement. It is well settled legal position that as per subsection (3) of section 145 of the Act, the AO can reject the books of account, if the AO is not satisfied with the correctness or completeness of the books of account maintained by the assessee, apart from others. The relevant portion of the statute is reproduced below for ready reference:
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"Section 145 of the Act: Method of accounting. 145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub- section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144." (emphasis supplied) 7.24 Accordingly, the AO can record his dissatisfaction with regard to the correctness and completeness of the accounts on account of various circumstances as given below: 1. Where entries made in the books of account in respect of certain transactions are found to be factually incorrect. Where the assessee has altogether 2. omitted to record certain transactions in the books of account maintained. Where the books of account show 3. an abnormally low rate of profit. 4. Where the transactions reflected in the books of account are not supported by the primary documentary evidence such as bills and vouchers, bank statements etc., 5. Inherent lacuna in the system of accounting.
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7.25. Also, it may be noted that, if in case, the assessee claims to have maintained the books of account on the basis of the primary documentary evidence, but fails to produce the same for verification before the AO, then the AO can reject the financial results i.e., profit / loss disclosed in the return of income said .to be computed on the basis of maintenance of such books of account. In the instant case, it is an admitted fact that the assessee has not produced the primary documentary evidence such as purchase and sale bills & vouchers before the AO.
7.26. Further, the rate of profit / loss disclosed by the assessee computed on the basis of such books of account is not in commensurate with the rate of profit disclosed by other assessees engaged in similar line of business and also the rate of profit disclosed by the assessee in its own case for the earlier FY/AY. Accordingly, in the instant case, I am of the considered opinion that there are valid grounds in existence warranting rejection of books of account and estimation of income. In this regard, reliance is placed on the following judicial precedents:
Kachwala Gems Vs JCIT [20071288 ITR 10(SC): 2. CIT Vs. McMillan & Co[1958]33 ITR 182(SC) : 3. Bastiram Narayan Das Vs CIT 119941 210 ITR 438 (Bom): 4. Awadesh Pratap Sing Abdul Rahman & Bros. Vs CIT [1994] 76 Taxman106 [All) 5. Champalal Chowdary Vs DCIT [2012154 SOT 398(Jaipur —Trib). 6. CIT Vs Bhawan & Path Nirman (Bohra & Co) [2002]258 ITR 676 (Raj). 7. CIT Vs K. Y. Pillaiah & Sons (19671 63 ITR 411(SC).
7.27 The facts and circumstances involved in this case are similar to that of case laws quoted above. In view of this, the ratio laid down in the case laws is squarely applicable to the case on hand. At this juncture, it is important to note that though the assessee has claimed to have maintained the books of account and got its accounts audited u/s. 44AB of the Act, as it failed to produce the supporting purchase and sales bills & vouchers either during the course of assessment proceedings or during the course of appellate proceedings, coupled with negative net profit / loss rate of 24.42%, it is not possible to believe the financial results declared and certified by the auditor u/s.44AB of the Act.
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7.28 In view of this, I am of the considered opinion that the books of account maintained by the assessee on the basis of which loss has been arrived at cannot be accepted. Further, I don't find fault with the AO in estimating a meagre sum of Rs.2,50,000/- as business income of the assessee, which would work out to a net profit rate of 0.28% of the gross business turnover as against net profit of 2.14% and 0.2% disclosed by the assessee for the earlier AYs 2011-12 and 2012-13, respectively. As such, the estimated net profit rate of 0.28% is less than the average net profit of 1.17% [(2.14 + 0.20)/2] relating to earlier AYs 2011-12 and 2012-13. Thus, the grounds of appeal raised by the assessee on this issue are dismissed.”
In our view, there is no error in the decision of the ld.CIT(A). During the course of arguments, we had specifically enquired as to whether the assessee had produced the bills and vouchers after 25.12.2012, to which the ld. AR replied that the ledger of sale and purchase bills were produced before the lower authorities, which shows that the purchases were made from reputed companies. However, no purchase / sale bills of raw material / finished products are produced. We are of the opinion that it is against the business and commercial prudence for a person like assessee, to purchase raw material even after closing down his industry. It is more improbable in the present case as the assessee had handed over the possession of plant and machinery to new purchaser. In view of the above, we are in agreement that the assessee should not suffer losses from selling of raw material etc. after closing of his business premises. No person would buy raw material from a closed industry, more particularly, when the plant and machinery had been handed over to a new person. In fact, the conduct of the assessee is beyond human probability and natural actions. In view of the above
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reasoning, we do not find any error in the decision of ld.CIT(A). Accordingly, the ground No.2 of the assessee is dismissed.
In the result, the appeal of the assessee is dismissed.
Order pronounced in the Open Court on 18th October, 2022.
Sd/- Sd/- (R.K. PANDA) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, dated 18th October, 2022. TYNM. SR.PS
Copy to: S.No Addresses 1 Srinath Reddy Nalla, 101, 7-1-28/1, Park Avenue Apartments, Ameerpet, Hyderabad. 2 The Income Tax Officer, Ward-6(2), Hyderabad. 3 CIT (A)-6, Hyderabad 4 Pr. CIT-6, Hyderabad 5 DR, ITAT Hyderabad Benches 6 Guard File
By Order
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