M/S. KAVERI BAR & RESTAURANT,MANGALORE vs. THE INCOME TAX OFFICER, WARD- 1(3), MANGALORE

In ground Nos.2 & 3, the assessee has challenged the addition on account of Gross Profit (GP) in the business of sale of food by the assessee and the business of liquor by the assessee.

The assessee is a partnership firm. It is engaged in the business of running a bar and restaurant. For the AY 2015-16, the assessee filed a return of income declaring a total income of Rs.4,52,180. The AO noticed that the GP declared by the assessee for the AY 2015-16 was Rs.24,00,940 on turnover of Rs.2,71,87,495 which was only 8.83% compared to the GP declared by the assessee of 17.81% in the immediately preceding AY viz., AY 2014-15. The AO was of the view that books of accounts were full of inconsistencies. The AO noticed that apart from selling liquor, the assessee started selling food also in a major way during the relevant previous year and therefore the GP margin ought to have been much higher than 17.81% that was declared in AY 2014-15. Thereafter, the AO prepared a segmental profit & loss account for soft drinks, food and liquor segments. The following chart gives the segmental results:-

From the above table, the AO firstly noticed that the GP in sale of liquor was under-stated. The AO also noticed that in the food segments, there were food sales, but there were no corresponding purchase of chicken, fish, grocery or vegetable. Following chart was given by the AO in this regard:-

The conclusion of the AO was that the books of account maintained by the assessee were not correct and complete. The AO also was of the view that normal margin in food industry was about 30% and the margin of 10.87% GP declared by the assessee was very low. For the above reasons, the AO rejected the books of account and estimated the profits of the assessee as follows:-

Aggrieved by the aforesaid additions made to the total income, the assessee preferred appeal before the CIT(Appeals). The assessee reiterated its plea before the CIT(Appeals) that the assessee had in July, 2014 shifted the bar & restaurant from Sulthan Bathery Road to Urwa- Marigudi Road, Ashoknagar, a new location which was a residential and labour class dominated area with stiff competition from other operators selling their products at competitive rates. The assessee had to sell its products at a discount.

The assessee also submitted that the AO was not right in assuming that the assessee cannot sell below the MRP prices fixed by the Govt. for liquor sold by it. The assessee also pleaded before the CIT(A) that consumption of LPG is a factor considered by the AO in estimating profits of the food business. The assessee had pleaded before the CIT(A) that there was pilferage in LPG and that should not be the basis on which addition can be made in the food segment. The CIT(Appeals), however, confirmed the action of the AO for the following reasons:-

Aggrieved by the order of CIT(Appeals), the assessee has raised ground Nos.2 & 3 before the Tribunal.

The ld. counsel for the assessee reiterated the submissions made before the CIT(Appeals). The ld. DR relied on the order of CIT(Appeals).

After considering the rival submissions, I am of the view that the addition made in the liquor segment as well as in the food segment were justified for the various discrepancies pointed out by the AO. However, I am of the view that the quantum of addition made by the AO was excessive. In this regard, as far as liquor segment is concerned, I find that there is no dispute that the assessee shifted its bar & restaurant location from Sulthan Bathery Road to Urwa-Marigudi Road, Ashoknagar. The admitted position is that the new place of business was not an up-market compared to the earlier place and margins had to be compromised for getting the business. The assessee has shifted its business in the month of July, 2014 to the new place. These facts would have had some impact on the profit margins and the earlier year’s profit margin cannot be compared. I am of the view that the GP rate of 12.5 % should be applied and the addition made by the AO is restricted accordingly.

As far as food segment is concerned, I find that the assessee has not been in a position to give proper explanation. There was no food sales reported commensurate with the usage of LPG. The margin shown by the assessee was extremely low. The books of account of food business were found to be not reliable inasmuch as there was no purchase shown, but sales recorded which is not possible in a food industry. I am, however, of the view that the GP rate of 30% adopted by the AO was excessive. In my view, the GP rate of 20% would meet the ends of justice in the given facts and circumstances of the case. I hold accordingly.

The other addition challenged in ground No.4 is the addition of Rs.2 lakhs as unexplained cash credit. This ground was not pressed before the CIT(Appeals) and therefore was dismissed as not pressed. Before us, the ld. counsel for the assessee sought to plead that in ground No.5, he has asked for telescoping the addition on account of GP with the unexplained cash credit added u/s. 68 of the Act. I am of the view that the request for telescoping has to be accepted and the AO is directed to give telescoping effect while giving effect to this order, subject to the quantum of addition that may remain after the directions in this order on ground Nos.2 & 3.

In the result, the appeal by the assessee is partly allowed.