DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1, LUDHIANA , LUDHIANA vs. LALIT KUMAR, PROP. LALIT CO., MS BABU RAM HEM RAJ, FARIDKOT

1. a) That the CIT(A) has erred in sustaining the addition of Rs.12,67,264/- by applying gross profit @ 6% on the alleged unaccounted receipts as per the seizeddocuments. b) Notwithstanding the above said grounds of appeal, the submission on gross profit rate of 6% on the said alleged unaccounted receipt is very much of the higher side, since the Kacha Aartiya, percentage of commission is 2.5% only, as per notification of Punjab State Agricultural Marketing Board and, thus estimation of G.P. 6% is very much on the higher side. 2. a) That the Ld. CIT(A) has erred in sustaining the addition of Rs. 10lakh by working out the stock turnover ratio @ 4.56% and making addition of Rs. 10 lakh as ‘initial investment’ as per para (X), page 38 of the order of the CIT(A). b) That the Ld. CIT(A) has filed to appreciate that the said amount of ‘initial capital’ was not required to be made as assessee had tremendous goodwill and reputation in the market and has been in the business for the past more than 20 years and thus, the addition of Rs. 10 lakhs is not justified.

3. That the Ld. CIT(A) has erred in resorting to notice u/s 148 as there was no reason to believe for re-opening of the assessment and also that there was mechanical approval accorded by the higher authorities u/s 151 and the Ld. CIT(A) has erred in dismissing the ground with regard to the re-opening of the case u/s 148. 1.4 The Ld. CIT-DR advanced arguments supporting the assessment as framed by Ld. AO. The Ld. AR, on the other hand, also advanced arguments and pleaded for reasonable estimation of income. Reliance has been placed on various case laws, the copies of which have been placed on record. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. Assessment Proceedings 2.1 The assessee being resident individual has acted as commission agent (Kacha ahrtiya) in his proprietorship concerns. The assessee was assessed u/s 143(3) on 04-07-2016 at Rs.13.45 Lacs. However, the assessee’s business premise was subjected to survey u/s 133A on 07-12-2017 which led to reopening of the case of the assessee. The department found two volumes of cash books (Annexure A-1 day book 01-04-2013 to 25-10-2013 and Annexure A-2, day book 26-10-2013 to 31-03-2014). No other document / material have been found. The whole assessment is based on these two books only. 2.2 These books had receipts and payments. On the basis of the same, impugned additions have been made by Ld. AO as follows: - Annexure Receipts (Rs.) Payments (Rs.) Addition Made Annexure A-1 2,26,82,985/- 81.54.635/- 88,96,234/- Annexure A-2 2,14,05,435/- 1,54,16,674/- 1,22,24,668/- Total 4,40,88,420/- 2,35,71,309/- 2,11,20,902/- The Ld. AO, rejecting assessee’s various submissions, alleged that the assessee was maintaining parallel books of accounts and aforesaid books detailed unaccounted transactions as carried out by the assessee. Finally, the receipts of Rs.211.20 Lacs pertaining to this year as mentioned in the above books but not recorded in regular books were added as unaccounted receipts of the assessee. The payments as noted therein were ignored. Aggrieved, the assessee preferred further appeal against the same. Appellate Proceedings 3.1 The assessee assailed the assessment on legal grounds as well as quantum additions on merits by way of elaborate written submissions which have already been extracted in the impugned order. It was contended that these books were mere ‘Yadasht Note books’ for remembrance and convenience only. All the transactions were not related to the assessee. There was no corroboration of these entries. Alternatively, the assessee acted as Kacha Ahrtiya and therefore, only commission income could be brought to tax which was in the range of 0.50% to 1% only. The Ld. CIT(A) observed that many of the entries were reconciled with regular books of accounts and it could, therefore, not be accepted that other transactions had not taken place. The impounded document was to be read as a whole as per settled legal position. The Ld. CIT(A) further observed that the assessee failed to identify any principal for whom he was acting as commission agent. The assessee was doing retail business also. On these facts, Ld. CIT(A) proceeded to estimate the amount of income which could have been earned by the assessee on these transactions. 3.2 As per Audit Report, the assessee reflected regular Gross Profit (GP) rate of 4.51%. The GP rate on undisclosed transactions would be higher. Considering average GP rate of 4% and presumptive rate of 8% u/s 44AD, the Ld. CIT(A) applied GP rate of 6% on receipts of Rs.211.20 Lacs and estimated the impugned addition at Rs.12.67 Lacs. The Ld. CIT(A) further observed that this was the first year of assessment of the assessee. To carry out unaccounted sale, the assessee must have made some initial investment also. For Lalit & Co., the assessee employed capital of Rs.18.92 Lacs to carry out sale of Rs.414.74 Lacs. Applying the same ratio, the capital required to carry out sales of Rs.211.20 Lacs would be Rs.9.63 Lacs. Rounding-off the same to Rs.10 Lacs, the same was separately added u/s 69. The legal grounds as urged by the assessee were dismissed. The aforesaid adjudication has led to revenue’s appeal and assessee’s cross- objections before us. Our findings and Adjudication 4. We find that the dispute before us is in narrow compass. It is quite clear that the assessee is engaged in retail trade as well as he has acted as a commission agent. The Ld. AO has added entire receipts of Rs.211.20 Lacs to the income of the assessee whereas Ld. CIT(A) has applied GP rate of 6% beside making separate addition of Rs.10 Lacs. We find that the assessee has acted as proprietor of M/s Babu Ram Hem Raj which acts as a commission agent (Kacha Ahrtiya) wherein the commission rate would be very low. The assessee has carried out trading of fertilizers and pesticides in another proprietorship concern i.e., M/s Lalit Kumar & Co. where profit rate would generally be higher. There is no segregation of these two distinct receipts in the impounded day book and accordingly, there would be no option but to make an estimation of profit rate. We are also of the opinion that adding entire receipts in the hands of the assessee could not be held to be justified from any angle since the impounded material which form the very basis of impugned addition contain the details of payment also. Therefore, the only option would be to estimate the income of the assessee on some reasonable basis. The conclusion of Ld. CIT(A), to that extent, could not be faulted with.

Another issue that arises in this year is disallowance of excessive interest to Shri Varinder Pal and Smt. Manju Bansal. It transpired that the assessee paid interest of Rs.7.12 Lacs to these two family members. The Ld. AO alleged that the same was excessive in terms of Sec.40A(2)(b). Accordingly, by applying reasonable rate of 15%, the excessive interest for Rs.3.61 Lacs was disallowed u/s 40A(2)(b). The Ld. CIT(A) confirmed the same against which the assessee is in further appeal before us. It is the contention of Ld. AR that the assessee has actually paid interest of 15% only and Ld. AO has erred in assuming interest rates of 24% and 26%. Considering the same, we restore this issue back to the file of Ld. AO for fresh consideration with a direction to the assessee to plead and prove its case. The grounds as raised in cross-objection stand allowed for statistical purposes. The assessee’s cross-objection stand partly allowed.