M/S. PEARL DRINKS LTD.,NEW DELHI vs. ACIT, NEW DELHI

Appellant by Sh. P. C. Yadav, Advocate Respondent by Smt. Sushma Singh, CIT DR Date of hearing: 29/01/2020 Date of Pronouncement: 25/02/2020 ORDER PER R.K PANDA, AM: These are cross appeals. The first one is filed by the assessee and the second one filed by the revenue and are directed against the order dated 10.06.2015 of the CIT(A) – 24, New Delhi relating to A.Y. 2012-13. For the sake of convenience these were heard together and are being disposed of by this common order.

by the assessee are as under :-

1. The order passed by the Hon’ble CIT(A) is bad in Law, wrong on facts and against the principles of natural justice.

2. (a) The Ld CIT(A) has erred both in law and on facts in confirming the addition of Rs.6,26,000/- made by Ld AO u/s 40A(3) without appreciating the fact that the payment represents only advance / imprest given to the employees of the appellant company for incurring the expenditure. Hence the addition of Rs.6,26,000/- u/s 40A(3) deserves to be deleted in full. (b) The Ld CIT(A) has failed to appreciate that the expenditure incurred by the employees in each case was less than Rs.20,000/- and therefore the provisions of section 40A(3) are not applicable at all. The appellant craves leave to add, alter amend, delete forego or modify any of the grounds of appeal before or at the time of hearing.

by the revenue are as under :-

1. The order of Ld. CIT(A) is not correct in law and on facts.

2. On the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 8,58,68,992/- on account of increased profit after invoking provision of sec. 145(2) of the I.T. Act, 1961.

3. On the facts and circumstances of the case, the CIT(A) has erred in not appreciating the facts that books o f accounts were not rejected merely because of low profit rate, rather they were rejected because the assessee did furnish any documentary evidence to explain the abrupt fall in net profit rate.

4. On the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 8,58,68,992/- on the grounds of non-following of principle of natural justice, when it has co-terminus power as of A.O.

5. On the facts and circumstances of the case whether the CIT(A) has justified in holding that the 'additional income' of Rs. 3,37,59,400/- surrendered by the assessee during search can be included in regular P & L account of the assessee.

6. The appellant craves leave to add, amend any/ all the grounds of appeal before or during the course of hearing of the appeal.

Sl. Particulars Amount (in Rs.) No. 1 On account of investment in shares 2,97,19,000/- of M/s. Pearl Bottlings Pvt. Ltd. 2 On account of Fixed Assets 40,40,400/- Total 3,37,59,400/-

In this regard it is important to analyze the manner in which the surrender of above Rs. 3,37,59,400/- has been made by the assessee in the return of income. It is seen from the above chart, that the assessee has surrendered Rs. 2,97,19,000/- under the head “Investment in shares” and to Rs. 40,40,400 under the head “Fixed Assets”. However, the same have been found to be credited in the P&L account under the Page | 4 head “Additional income”. The credit entry of Addl income of Rs. 3,37,59,400/-. in the P & L A/c appears just before claiming the expenses. However, by crediting the ‘additional income’ just before claiming the expenses in the P&L account, the assessee has set it off against the expenses for arriving at the net profit. By following this methodology the assessee has derived profits of Rs.29 Crore (0.79%) from the P & L account. Let us examine the net profits of the assessee in the last 3 immediately preceding financial years. This is given below :

Sl. F.Y. Turnover Net Profit Net Profit % No. (In Crore) ( In crores) 1 2008-09 189.01 8.24 4.37% 2 2009-10 234.92 6.19 2.63% 3 2010-11 260.79 3.45 1.32%

From the above, it is seen that the N. P. of the assessee has ranged, from 1.32% to 4.27% in the last three financial years. It may be noted that these net profits have arisen to the assessee in these financial years without declaring any additional income in the P & L account. This means that the assessee has earned profits in these financial years in the range of 1.3% to 4.37% in its regular course of business.”

S. F. Y. Turnover Net Profit (In crore) Net Profit% No. (In crore) 1 2008-09 189.01 8.24 4.37% 2 2009-10 234.92 6.19 2.63% 3 2010-11 260.79 3.45 1.32% 4 2011-12 309.99 - 0.87 (Without -0.28% additional income)

a. First, it has to be seen what would be the net profits of the assessee if the search had not taken place. As per the financials filed by the assessee, an additional income of Rs. 3,37,59,400/- has been credited in the P&L account as income declared due to unaccounted and undisclosed documents found during search. This means that the assessee has taken the net undisclosed income to the P & L account without bothering to make any consequential changes to its profit and loss account otherwise. If “no search” situation is being applied, then the additional income has to be taken out from the P&L account, and the regular profits of the assessee will have to be computed with respect to the remaining amounts debited and credited in the P&L account and the balance Page | 6 sheet. b. By taking out the additional income of Rs. 3,37,59,400/- from the P&L account, the net profits of the assessee are reduced from Rs. 2,49,63,663/- to Rs. (-)87,95,737/- being 0.79% and (- )0.28% of the gross turn over respectively. The latter (-)0.28% represents the state of affairs of the regular financials of the assessee in the absence of search. c. The net profit of (-)0.28% is phenomenally low as compared to the immediately preceding 3 financial years (Supra) which have been drawn without any additional income. d. As already stated above the low percentage of net profit cannot be substantiated by the assessee despite various opportunities provided during the assessment proceedings. The assessee could not produced any details, confirmations, bills & vouchers or books of accounts to substantiate the financial result in the P&L account. Even proper details were submitted till the fag end of the year i.e. on 14.03.2014. No books of accounts were also produced for verification. The assessee also did not appear inspite of being provided a final opportunities on 18.03.2014. e. In the above background the financial results shown by the assessee (after excluding the additional income) cannot be accepted and are rejected u/s 145 of the I.T. Act, 1961. f. The strategy adopted by the assessee to camouflage the actual financial results by crediting the additional income to the P&L account is not acceptable. By doing this the assessee has annulled the entire effect of the surrender made during the course of search as well as in the return of income. g. It is pertinent to mention that the assessee has not retracted the surrender made by it during the course of search. It is only the manner in which the surrender has been made that is objectionable, as it nullifies its effect by increasing the net profits that should have been there in any case if the search/surrender had not taken place. The assessee has artificially reduced its net profits by inflating Page | 7 expenses and there after camouflaging them by crediting the additional income in the P & L account. h. The surrender of Rs.3,37,59,400/- will therefore be separately added to the net profits, after bring the later at par with the net profits of the immediately preceding years as has already been done in the para above. This is the income earned by the assessee from its undisclosed sources. The net profit (without additional income) is therefore, taken at Rs.8,58,68,992/-. The undisclosed income of Rs.3,37,59,400/- as declared by the assessee itself, will therefore be added to it.

Profits & gain of business and profession as discussed above: 8,58,68,992 Add: “ Additional income” as discussed above 3,37,59,400 Add: Depreciation disallowed 148555340 Excise Duty on Closing Stock of Raw 7836164 Material Breakage of Bottle/ Shells debited in 1380366 Profit & Loss Loss on Sale of Fixed Asset 643198 Breakage of Wooden Pallets debited in ' 661104 P&L 2094380 Disallowed Expenses Related to Exempt Income Disallowed u/s 37 1103955 Disallowed u/s 43B 2671076 164945583 Less: Excise Duty on opening stock of raw 5300687 material Scrap Sale of Bottles 1499219 Page | 8 Allowed u/s 43B 2291523 Allowed depreciation 300572805 -309664234 Total Taxable Income (-) 25090259 Rounded Off (-) 25090260

4.1.4 I have considered the submission of the AR, assessment order and the remand reports as well as the remarks of the JOT. From the assessment order, it is observed that the A.O. has taken note of net profit ratio of 0.79% for the current previous year as compared to net profit rate of 1.32% to 4.37% for the past three financial years. Further he has also noted that if the surrendered amount of 3.37% is taken out from the P&L account, the net profit ratio comes to (-) 0.28%. Thus he has concluded that there is a steep fall in net profit declared by the assessee and it was necessary for him to examine the claim of various expenses debited to P&L account. He has, issued a detailed questionnaire on 1.11.13. The appellant has furnished information as required by the questionnaire, in parts. AO has cited certain inadequacies on the part of the appellant in complying with the requirements of the questionnaire. He has noted that on 18.3.14, no one appeared from the assessee’s side. Thereafter, he has proceeded to reject the books of account and assessed the income on estimation by adopting the net profit rate equivalent to average of the past 3 years net profit. The main conclusion drawn by the A.O. as found at pages 9 to 11 of the assessment order are as under:- a. First, it has to be seen what would be the net profits of the assessee if the search had not taken place. As per the financials filed by the assessee, an additional income of Rs. 3,37,59,400/- has been credited in the P&L account as income declared due to unaccounted and undisclosed documents found during search. This means that the assessee has taken the net undisclosed income to the P&L account without bothering to make any consequential changes to its profit and loss account otherwise. If “no search” situation is being applied, then the additional income has to be taken out from the P&L account, and the regular profits of the assessee will have to; be computed with respect to the remaining amounts debited and credited in the P&L account and the balance sheet. b. By taking out the additional income of Rs. 3,37,59,400/- from the P&L account, the net profits of the assessee are reduced from Rs. 2,49,63,663/- to Rs. (-)87,95,737/- being 0.79% and (-)0.28% of the gross turn over respectively. The latter (-)0.28% represents the state of affairs of the regular financials of the assessee in the absence of search. c. The net profit of (-)0.28% is phenomenally low as compared to the immediately preceding 3 financial years (Supra) which have been drawn without any additional income. d. As already stated above the low percentage of net profit cannot be substantiated by the assessee despite various opportunities provided during the assessment proceedings. The assessee could not produce any details, confirmations, bills & vouchers or books of accounts to substantiate the financial result in the P&L account. Even proper details were submitted till the fag end of the year i.e. on 14.03.2014. No books of accounts were also produced for Page | 9 verification. The assessee also did not appear inspite of being approved a final opportunities on 18.03.2014. e. In the above background the financial results shown by the assessee (after excluding the additional income) cannot be accepted and are rejected u/s 145 of the I.T. Act, 1961. f. The strategy adopted by the assessee to camouflage the actual financial results by crediting the additional income to the P&L account is not acceptable. By doing this the assessee has annulled the entire effect of the surrender made during the course of search as well as in the return of income. g. It is pertinent to mention that the assessee has not retracted the surrender made by it during the course of search. It is only the manner in which the surrender has been made that is objectionable, as it nullifies its effect by increasing the net profits that should have been there is any case if the search/surrender had not taken place. The assessee has artificially reduced its net profits by inflating expenses and there after camouflaging them by crediting the additional income in the P&L account. h. The surrender of Rs. 3,37,59,400/- will therefore be separately added to the net profits, after bring the later at par with the net profits of the immediately preceding years as has already been done in the para above. This is the income earned by the assessee from its undisclosed sources. The net profit (without additional income) is therefore, taken at Rs. 8,58,68,992/-. The undisclosed income of Rs. 3,37,59,400/-, as declared by the assessee itself, will therefore be added to it. 4.1.5 It is noted here that there has been definite delay on part of the assessee in complying with the requirements of the questionnaire of 1.11.13. This questionnaire contains more than 50 questions, which are very elaborate and touch upon almost all heads of expenditure and balance sheet items. As per the various letters and appellant has furnished replies to almost all questions in the said questionnaire. However, the same have been furnished in parts over a period of time. It is noted here that even the question No. 43 of questionnaire dated 1.11.2013 assessment order has been replied vide letter dated 28/02/2014 which is a very large bunch containing 317 pages. 4.1.6 It is noted here that even though the A.O. mentions that he has embarked upon verifying the claim of various expenses debited to P&L account in the background of steep fall in net profit ratio, he has not sought any justification or explanation for the fall in net profit rate in the questionnaire issued on 1.11.13.when he has decided to reject the books of accounts, he has not given any show cause notice seeking justification of fall in net profit ratio. 4.1.7 In the remand proceedings, the A.O. has examined the justification for the fall in net profit ratio as submitted during the appeal proceedings. A.O. has also examined the books of accounts produced before him. It is noted that as per the comparative profitability statement submitted by the appellant, the G.P. rate has fallen down to 12.49% as compared to previous 3 years average G.P. rate of 16.26%.

The net profit ratio has dipped to (-) 0.3% from 2.71% for the corresponding period. The major reason for fall in G.P. & N.P. has been attributed to continuous increase in cost of material without proportionate increase in the selling price cost the stiff competition in the market and also due to tremendous increase in finance cost. The relevant chart showing the increase or decrease net profit due to the various factors as noted in the remand report is reproduced below :

Particulars Financial Year Average of FY Factor for 2011 -12 2008 - 09 to Increase / 2010-11 decrease in Net Profit Turnover net of Excise 2,954,466,905 2,206,868,948

2,182,361,822. 1,553,483,254 Total cost of raw material consumed and purchase of traded goods % over Turnover 73.87% 70.39% 3.47%o 402,978,643 294,601,388 Other Manufacturing / Operating cost % over Turnover 13.64% 13.35% 0.29% Other Expenses 523,418,909 359,513,497 % over Turnover 17.72% 16.29% 1.43% Total decrease in Net Profit 5.19% Less: Other Income 145,496,732 60,492,763 % over Turnover 4.92% 2.74% 2.18% 3.01% Net decrease in net profit during the year 4.1.8 It has also been submitted that the company was unable to handle the competition in the marked due to huge financial cost and therefore, it had ultimately sold off its beverage business under slump sale in January, 2013 i.e. the next year. It has also been submitted keep the promise made evidences in respect of undisclosed sale/ bogus expenses that surrender of Rs. 3,37,59,400/- has been made only to by the promoters/director even though no incriminating evidences in respect of undisclosed sale/ bogus expenses etc. were found in the appellant’s case. It has also been pointed out that even the AO has not brought on record any incriminating evidences in the assessment order. 4.1.9 It is noted here that the A.O. has completed the assessment without seeking any explanation for fall in GP/NP ratio from the appellant. During the appellant proceedings, the justification/explanation provided by the assessee has been examined by the A.O. with regard to the books of account. He has not found any discrepancies nor raised any counter grounds. The JCIT, who has forwarded the AO’s report has remarked that the assessee has inflated the expenses and has nullified the fact of surrender of additional income by crediting the same to P&L account. He has also stated that the additional income is the income from undisclosed sources and cannot be treated for the purpose of allowing expenses. In this regard, it is noted that by crediting undisclosed income on the credit side of P&L account, the same does not get nullified. No doubt, the same must have been done to buttress the net profit figure in the books. However, there is no substance in the argument that merely because undisclosed income credited in the P&L account, its effect gets nullified. Whether undisclosed income is shown at the time of final computation of income or it is credited to P&L account, the effect would be one and the same. It is noted here that the appellant has been filing loss returns over the years and has unabsorbed old & current deprecation loss of more than 20 crores. The Page | 11 appellant is paying taxes u/s 115JB. Thus any undisclosed income would have got set off against the depreciation loss. That would result in non-payment of taxes. But it would not mean there was no surrender of income. 4.1.10 In the above background it has to be concluded that no ground survives for rejection of books and estimation of income. The result of remand proceedings support the stand of the appellant. The appellant group have also honoured there declaration of surrender of income made during search & seizure proceedings. As is evident from the detailed letter dated 28.02.2014 submitted before the AO, the group had surrendered Rs. 10 crore during the search and initially it had given the_ following breakup of the said surrender.

Name of the assessee Amount (Rs.) Sh. C.K. Jaipuria 1000000 Sh. Ruchirans Jaipuria 2500000 M/s. Pearl Drinks Ltd. and others 91500000 M/s. Jaipuria Beverages & Food Industries Pvt. Ltd. 5000000 Total 100000000 4.1.11 The above surrendered amount has been reworked out on the basis of study and analysis of the seized documents. In their letter dated 28.02.2014 submitted before the AO on 07.03.2014, a detailed explanation of surrendered income in hands of different entities and different assessment years has also been provided. The total surrendered amount infact exceeds Rs. 10 crore by Rs. 16 lacs the breakup of which is as under:- Name of the assessee Income surrendered Tax paid (Amount (Amount in Rs.) in Rs.)

M/s. Jaipuria Beverages & 27665794 11321359 Food Industries Pvt. Ltd. 4A/S. Pearl Drinks Ltd. 33759400 5762680 M/s. Pearl Bottling Pvt. Ltd. 32210000 2174160 Sh. Ruchirains Jaipuria 3500000 2000000 M/s. Ganpatie Traders Pvt. 1668000 0 ' Ltd. Sh. C.K. Jaipuria 2816140 881364 Total 101619334 22139563 1 4.1.12 Considering the above, I find merit in appellant’s ground and delete the addition of Rs. 8,58,68,992/-. The grounds on the issue are allowed.

6.1 After perusing the aforesaid findings of the Ld. CIT(A), we find that the return of income filed before the A.O. on the issue are contains report of the auditors u/s 44AB of the Act. The auditors, who have audited the books of account, were fully satisfied that all the accounting standards have been followed and he did not make any adverse remarks in the audited report. The provisions of section 145 describes certain conditions for rejection of books of account but non furnishing of details is not one of the prescribed conditions for rejection of books of account. We also find that all the details called for vide questionnaire dated 1.11.13 have been furnished. As regards fall in net profit ratio, a comparative chart of financial results for the current assessment year and for the three preceding assessment years has been provided The fall in G.P. and Net profit ratio has been attributed to increase in cost of purchases and raw material and due to increase in financial cost. The fall in G.P. by 5.4% (24.85% to 19.36%) and net profit rate by 18.17% (i.e. 2.81% to (-) 5.36%) was on account, of increase in cost of purchase and cost of raw material consumed. It is further noted that there is a fall in G.P. by 5.49%. Out of 5.49%, 4.91% fall in G.P. has been attributed to increase in cost of raw material consumed and purchases of traded goods. The balance fall in G.P. (5.49% (-) 4.91% - 0.58%), was attributable to increase in salary, wages, repairs & maintenance expenses. The fall in net profit ratio has been attributed to fall G.P. rate which in turn was clue to increase in cost of raw material and increase in purchase of credit goods. The net profit rate has been severely affected by increased financial cost by 107.63% during the current previous year as compared to average financial cost of last three preceding years. The loan liability has almost doubled over the years from 25.79% as on 31.3.08 to 44.72% as on 31.3.11. The increase in financial charges was 1.84% during the current previous year as compared to the average of previous three financial years. We further AO has not found any discrepancies in the books of accounts produced before him. During the assessment proceedings, AO has Page | 15 however, not sought any explanation nor confronted with the adverse evidences. It is also observed that the AO has resorted to rejection of books, all of a sudden without any indication to the assessee. No show cause notice has been issued to the appellant before rejecting the books of account. Further, even though the A.O. has noted the fall in N.P. ratio in the assessment order, no effort has been made by him to ascertain the appellant's version about the reasons for fall in GP/NP rates. The questionnaire dated 1.11.13 issued by him does not seek any clarification or explanation for the fall in N.P. rate. It is further noted that that the fall in G.P. is due to increase in cost of raw materials and over the years, the financial charges have seen a growth of 1.84% from average of 3.64% (for the past 3 years) to 5.48% during the current previous year. Further, the fall in N.P. rate has been attributed to the increase in input cost and finance cost.

Since this is a search & seizure case and the Previous year of the present assessment year falls within the block period of 6 years. A.O. has not brought on record any adverse material. AO has rejected the books of account merely on the basis of fall in N.P. ratio. There is no rule of law that an enterprise cannot incur losses or it cannot declare lesser net profit that what is shown in the previous year. The same is permissible as long as the same is supported by proper books of account, bills and vouchers. During the remand proceedings, the A.O. has examined the justification for fall in net profit submitted by the assessee and has not reported any discrepancies nor taken any counter arguments. We have also noted that this is not a fit / case for rejection of books of account and estimation of profits as the search has not thrown up any specific discrepancies in the accounts regularly maintained by the appellant. The A.O. has rejected the books of account and Page | 16 estimated the profits of the business only based upon NP ratio without confronting the same to the appellant. This is completely in violation of principles of natural justice. A.O. has adopted a very simplistic approach in completing the assessment. Such action of the A.O. cannot be sustained. In view of the above, we agree with the finding of the Ld. CIT(A) that no ground survives books and estimation of income. The result of remand proceedings support the stand of the assessee. The assessee group have also honoured there declaration of surrender of income made during search & seizure proceedings. As is evident from the detailed letter dated 28.02.2014, submitted before the AO surrendered Rs. 10 crore during the search. Therefore, the Ld. CIT(A) has rightly deleted the addition of Rs.2,66,81,850/- and allowed the appeal of the assessee, which does not interference on our part, therefore, we uphold the action of the Ld. CIT(A) on the issue in dispute and reject the ground raised by the Revenue. In view of above facts and circumstances, it is noted that the case laws cited by the Ld. CIT(A) are distinguished to the facts of the present case, hence, the same are not applicable in the present case. In the result, the (AY 2011- 12) stands dismissed.

Order pronounced in the open court on 25.02.2020.