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Income Tax Appellate Tribunal, “C” BENCH KOLKATA
Before: SHRI SONJOY SARMA & SHRI GIRISH AGRAWAL
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH KOLKATA आयकर अपीलीय अधीकरण, �यायपीठ – “C” कोलकाता, BEFORE SHRI SONJOY SARMA, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.1333/Kol/2019 Assessment Year: 2014-15 Swapan Das Income Tax Officer, Ward- 3F/1G, Gagan Sarkar Road, Vs. 45(3), Kolkata. Beliaghata, Kolkata-700010. (PAN AGRPD2980P) (Appellant) (Respondent) Present for: Appellant by : Smt. Pinki Shaw, FCA Respondent by : Shri Sudip Kumar Bandopadhyay, Addl. CIT Date of Hearing : 23.06.2022 Date of Pronouncement : 06.09.2022 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal by the assessee is directed against the order of Ld. CIT(A)-13, Kolkata vide Appeal No.10542/CIT(A)-13/Wd- 45(3)/Kol/2016-17 dated 28.02.2019 for A.Y. 2014-15 arising out of order passed u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) by ITO, Ward-45(3), Kolkata dated 28.12.2016.
Smt. Pinki Shaw, FCA appeared on behalf of the assessee and Shri Sudip Kumar Bandopadhyay, Addl. CIT appeared on behalf of the revenue.
The only ground taken by the assessee in the appeal is on the application of gross profit of 10.5% by the Ld. CIT(A) as against 9.8% disclosed by the assessee in his audited books of account.
Brief facts of the case as culled out from records are that assessee is engaged in his proprietary business in the name and style of M/s. Sundaram Agrovet as a trader in chicks and ready birds. Assessee also has breeding centre for growing chicks and deals in poultry products.
2 ITA No.1333/Kol/2019 Swapan Das, A.Y: 2014-15 Assessee filed his return of income on 17.10.2014 reporting a total income of Rs.12,60,000/-. In the course of assessment proceedings, Ld. AO noted that during the year, turnover of the assessee had increased from Rs.9.43 Cr. in the preceding year to Rs.26.23 Cr. in the current year whereas his net profit has reduced from 0.21% to 0.18%, which according to him, was unrealistic and unimaginative as the business has increased almost three times whereas the net profit has reduced. Ld. AO also noted that assessee has debited huge expenses under the head “Staff salary & Bonus” amounting to Rs.2,35,78,857/- which in the preceding year was at Rs.10,42,331/-. Assessee was show caused to give explanation for the same. Ld. AO also noted that in respect of certain expenses, assessee has not done TDS for which also explanations were called for.
4.1 Assessee made his detailed submission and stated that hatched chicks from eggs were handed over to various farmers for breeding and who in turn delivered to the assessee the same as ready birds for sale. The amounts paid to such breeders/farmers were wrongly included in the head ‘salary and wages’. Assessee also submitted that in the subsequent year, these amounts paid to farmers/breeders were correctly accounted under the respective heads of breeding expenses, food purchase, vitamins, medicines and other relevant expenses. In respect of non-TDS on various expenses, it was submitted that expenses individually did not exceed the prescribed limits and majority of them were paid to the farmers/breeders who are out of the purview of the Act. Ld. AO completed the assessment by making the additions for which assessee went in appeal before the Ld. CIT(A).
In the course of first appellate proceedings, Ld. CIT(A) made certain categorical observations on the findings noted by the Ld. AO in the impugned order, which are reproduced as under:
3 ITA No.1333/Kol/2019 Swapan Das, A.Y: 2014-15 (i) The said para seeks evidence of the said expenses and also the necessity of such expenses. The appellant has responded by filing the relevant details and papers as recorded in the order sheet dated 06.12.2016, wherein there is no adverse note as to the failure of the assessee to furnish the details or papers against Salary & Wages. (ii) It is for the first time on 09.12.2016 that the Assessing Officer sought explanation on abnormality of expenses under Staff Salary & Bonus. The relevant portion of the Assessing Officer's said letter has been reproduced on Page 2 of his Order. The appellant responded with the Authorized Representative's letter dated 19.12.2016 which is also mentioned in the order sheet dated 19.12.2016. Strangely there is no observation recorded in the said order sheet on abnormality of Salary & Wages, if any. (iii) Though the Assessing Officer has listed various abnormal aspects of Salary & Wages claimed in the Profit & Loss Account, I am surprised by her failure to give reasons for her summary rejection of the Authorised Representative's claim which is reproduced at the bottom of Page 3 of the Assessment Order. In the top para of Page 4 the Assessing Officer has given her opinion on the impossibility to believe the assessee's contention to the above effect without explaining why she found it impossible to believe. (iv) In view of the above I have the impression that the Assessing Officer failed to properly bring up this issue to the appellant, who rightly claims to have not been offered real opportunity to explain his case on the abnormal figure under Salary & Wages. The Assessing Officer's action amounts to acting behind the back of the assessee. This act is violation of natural justice. This high pitched assessment is not based on any material. The assessment has to be based on material and evidences, even best judgement assessment gives no licence to add on the whims of the AO. The Assessing Officer’s action cannot be upheld. (v) The appellant during the appellate stage produced detailed submission and paper book substantiating his claim. The appellant claimed that Labour charges payment, Hatching Charges payment and Reimbursement of feeding expenses paid to local villagers were wrongly clubbed with the Head Staff Salary and Bonus.” 6. From the perusal of above observations and findings noted by the Ld. CIT(A), we find that on the one hand, Ld. CIT(A) states that assessee has consistently showed more or less same percentage of gross and net profit and on the other hand, he has resorted to estimate the income of the assessee by taking gross profit rate of 10.5% as against 9.8% already shown by the assessee in his audited books of account. Similarly, on the one hand, Ld. CIT(A) notes that merely because a different treatment to grouping of expenses was given in the books of
4 ITA No.1333/Kol/2019 Swapan Das, A.Y: 2014-15 account in respect of salary and wages expenses, it cannot be a factor which would deprive the assessee from claiming the benefit of deduction of genuine expenses incurred during the course of business and contrary to this, on the other hand, he notes that most of the expenses were wrongly clubbed under salary or bonus which are not verifiable and the burden is on the assessee to prove these expenses and thus by taking this factor, he resorted to rejecting the books of account for computing the business profit. Again by referring to a decision of Co- ordinate bench of ITAT, Bangalore in the case of ITO Vs. Karnataka Poultry Farm [citation not mentioned by the Ld. CIT(A)], he observed that in the business of hatchery and poultry, gross profit percentage may hover around 9% to 12%. He also noted that assessee has also produced couple of Balance Sheet of the concerns engaged in the business of poultry and hatching and has re-casted his own gross profit ratio to 9.8%. Contrary to this observation, Ld. CIT(A) took the gross profit ratio of 10.5% for the purpose of current assessment year.
6.1 Also Ld. CIT(A) in para 10 noted that in the appellate stage, assessee had produced detailed submissions and paper book substantiating his claim. He also notes in para 9 that estimation has to be based on material and evidence and even the best judgment assessment gives no licence to add on the whims of the AO whose action cannot be upheld. Ld. CIT(A) has also expressed his surprise on the failure of the Ld. AO to give reasons for her summary rejection of the claims made by the assessee as noted in the assessment order itself. We also observe that Ld. CIT(A) has stated that assessee has responded by filing all the relevant details and papers as recorded in the order sheet dated 06.12.2016 wherein there is no adverse note as to the failure of the assessee to furnish the details or papers against staff salary and wages expenses.
5 ITA No.1333/Kol/2019 Swapan Das, A.Y: 2014-15 7. Before us, Ld. Counsel for the assessee strongly submitted that though all the contentions of the assessee have been accepted by the Ld. CIT(A), he has resorted to rejecting the books of account without complying with the provisions of section 145(3) r.w.s. 144 of the Act and took the gross profit ratio of 10.50% without any basis and also without bringing any comparative material on record. Ld. Counsel submitted that the comparative gross profit and net profit chart of the last two preceding assessment years as well as the re-casted gross profit and net profit were produced before the Ld. CIT(A) which evidently demonstrates that the book profits @ 9.8% in the current year are justified. The comparative gross profit and net profit chart for the last two preceding AYs referred by the Ld. Counsel are reproduced as under: Assessment Year 2012-13 2013-14 2014-15 Turnover 3,78,28,956/- 9,43,37,851/- 26,23,19,627/- Gross Profit 36,13,553/- 1,03,85,137/- 3,13,58,120/- Net Profit 4,19,097/- 1,95,084/- 4,70,000/- G.P (%) 9.55 11.00 11.95 N. P (%) 1.10 0.21 0.18
7.2. Assessee further produced the re-casted G.P and N.P chart for the three assessment years considering the above expenses which is as under: Assessment Year 2012-13 2013-14 2014-15 Turnover 3,78,28,956/- 9,43,37,851/- 26,23,19,627/- Gross Profit 36,13,553/- 1,03,85,137/- 2,56,77,120/- Net Profit 4,19,097/- 1,95,084/- 4,70,000/- G.P (%) 9.55 11.00 9.80 N. P (%) 1.10 0.21 0.18
Ld. Counsel for the assessee further submitted that assessee has been maintaining books of account regularly and were produced before the Ld. AO in the course of assessment, fact of which is noted in the assessment order itself. She also pointed out that books have been subject to audit and have not been rejected in the assessment proceedings. She also stated that the assessment has been completed u/s. 143(3) of the Act without referring to the provisions of section 144
6 ITA No.1333/Kol/2019 Swapan Das, A.Y: 2014-15 by rejecting the books in terms of section 145(3) of the Act. It was also pointed out by her that assessee had submitted all the details and explanations which have been accepted at the first appellate stage and the expenses claimed by the assessee have not been held to be bogus or not genuine. She also stated that it is true that the turnover of the assessee has increased almost three times as compared to preceding year and it is very well recognized in the real business environment that where the volumes are high, the profit margins are bound to be low, though in the assessee’s case, the lowering of GP ratio has been marginal as compared to the preceding two years. Thus, she strongly submitted that the book results re-casted at 9.8% of GP ought to be accepted and the addition made by the Ld. CIT(A) by applying an estimate at 10.5% must be deleted. She also pointed out that there is no appeal by the department in respect of addition deleted by the Ld. CIT(A).
Per contra, Ld. Sr. DR placed reliance on the order of the Ld. CIT(A) and stated that reasonable rate of 10.5% has been adopted since expenses were not verifiable from their bills and vouchers.
We have heard the rival contentions and perused the material available on record. Admittedly, assessee has furnished all the details in respect of the discrepancy noted by the Ld. AO for the staff salary and wages which the Ld. CIT(A) has accepted considering the material placed on record before him. It is also a fact that assessee has explained the mistake which it has committed while accounting for and reporting the expenses under the head ‘Staff Salary & Wages’ and thus re-casted its book results after taking into consideration the correction to the mistake. The comparison given by the assessee for its G.P and N.P. ratios with the preceding two years are also undisputed. We also note that Ld. AO has not rejected the books of account. It is the Ld.
7 ITA No.1333/Kol/2019 Swapan Das, A.Y: 2014-15 CIT(A) who rejected the books of account without pointing out specific defects therein.
10.1 While rejecting the books of account, conditions stipulated u/s. 145(3) had not been referred to by the Ld. CIT(A). The basis for disturbing the gross profit adopted by the ld. CIT(A) is in reference to the decision of Co-ordinate Bench of ITAT, Bangalore (supra) wherefrom he himself had noted that the G.P. ratio ranges between 9& and 12% in the business of hatchery and poultry. We note that Ld. CIT(A) without giving any finding that account books are unreliable, incorrect or incomplete, has rejected the audited books of account. We also note that the books of account of the assessee have not been rejected in compliance to the provisions of section 145(3) and assessment having not been framed u/s. 144 of the Act. Action of Ld. CIT(A), in such a situation, is erroneous in resorting to an estimation of income and the exercise undertaken by him of adopting the G. P. rate of 10.5% without any basis, is not sustainable.
10.2 For our finding, we find force from the decision of Hon’ble High Court of Karnataka in the case of CIT Vs. Anil Kumar & Co. (2016) 67 taxmann.com 278 (Kar.) wherein it has been held that when the books of accounts are maintained by the assessee in accordance with the system of accounting, in the regular course of his business, same would form the basis for computation of income. It was also held that section 145(3) of the Act lays down that the AO can proceed to make assessment to the best of his judgment u/s. 144 only in the event of not being satisfied with the correctness of the account produced by the assessee. Relevant extract from the said decision is reproduced as under: “11. Insofar as the estimation of gross profit made by the Assessing Officer modified by the CIT(Appeals), tribunal has rightly
8 ITA No.1333/Kol/2019 Swapan Das, A.Y: 2014-15 held that when the books of account of the assessee had not been rejected and assessment having not been framed under section 144 of the Income Tax Act the said authorities were in error in resorting to an estimation of income and such exercise undertaken by them was not sustainable. Section 145(3) of the Act lays down that the Assessing Officer can proceed to make assessment to the best of his judgment under section 144 of the Act only in the event of not being satisfied with the correctness of the accounts produced by the assessee. In the instant case the Assessing Officer has not rejected the books of account of the assessee. To put it differently the Assessing Officer has not made out a case that conditions laid down in Section 145(3) of the Act are satisfied for rejection of the books of account. Thus, when the books of account are maintained by the assessee in accordance with the system of accounting, in the regular course of his business, same would form the basis for computation of income. In the instant case it is noticed that neither the Assessing Officer nor CIT(Appeals) have rejected the books of account maintained by the assessee in the course of the business. As such tribunal has rightly rejected or set aside the partial addition made by Assessing Officer for arriving at gross profit and sustained by the CIT(Appeals) and rightly held that entire addition made by the Assessing Officer was liable to be deleted. The said finding is based on sound appreciation of facts and it does not give rise for framing substantial question of law.” 11. Considering the facts on record and submissions made before us and the judicial precedents, we are inclined to accept the contention made by the Ld. Counsel to restore the GP ratio @ 9.8% as claimed by the assessee and direct the Ld. AO to delete the addition made by the Ld. CIT(A) by adopting the rate of 10.5% amounting to Rs.18,36,237/-. Accordingly, ground of appeal of assessee is allowed.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 6th September, 2022. Sd/- Sd/- (SONJOY SARMA) (GIRISH AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 06.09.2022 JD, Sr. P.S.
9 ITA No.1333/Kol/2019 Swapan Das, A.Y: 2014-15
Copy to: 1. The Appellant: 2. The Respondent:. 3. The CIT(A)-13, Kolkata. 4. The CIT , Kolkata. 5. The DR, ITAT, Kolkata Bench, Kolkata //True Copy// [ By Order
Assistant Registrar ITAT, Kolkata Benches, Kolkata