PRAMOD KUMAR GARG,HAPUR vs. ITO, WARD- 3(5), HAPUR

The brief facts qua the issue of rejection of books of accounts and estimation of gross profit are that, assessee is an individual, who is engaged in the business of trading of fertilizer/chemical and pesticides in his proprietorship concern. During the year assessee has shown gross sales of Rs. 6,95,86,892/-, wherein he has declared gross profit of Rs. 33,85,412/- @ 4.86% and net profit of Rs. 6,30,299/- @ 0.91%. Ld. AO noticed that assessee has received net commission of Rs. 36,59,360/- which is more than the gross profit shown by the assessee under the trading activity. He further noted that ‘M/s. Pramod Trading Corporation’ which is manage and owned by HUF in which Shri Pramod Kumar Garg (assessee) himself is Karta and is under ownership of him and is also having same business at the same premises. Hence both the concerns, M/s. Pramod Trading Company and M/s. Pramod Trading Corporation are managed and controlled by the same person, Shri Pramod Kumar Garg either as Proprietor or as Karta of HUF and both the concerns have similar trading activity. On perusal of the P & L Account of M/s. Pramod Trading Corporation he observed that net profit ratio for Assessment year 2014-15 are varying to a great extent. The comparative G.P. and N.P. rates of both the concerns for last two years were as follows as noted by him were as under: - For Assessment year 2014-15 Name of concern Turn Over Gross Profit Net Profit Rate Rate M/s. Pramod 69586892 4.87% 0.91% Trading Co. M/s. Pramod 24154151 2.22% 2.40% Trading Corpn. (adjusted after considering discount 4.52%)

From such a comparison, he concluded that in case of Pramod Trading Corporation the GP rate is lower as compared to the NP rate and the reason being that discount received has been considered for computing the net profit and this indirectly proves that net business activity has resulted in profit and not loss if the discount as claimed by the assessee in Pramod Trading Company is not considered. The net profit rate of Pramod Trading Corporation is very low as compared to the sister concern, M/s. Pramod Trading Corporation which is 3 managed and controlled by the same person i.e., Shri Pramod Kumar Garg having same trading activity at the same place. He further noted that in the audit report, the valuation of stock has been stated to be a ‘FIFO’ basis or valuation cost of NRV whichever is less, however, the assessee before him has stated that he has valued the closing stock on ‘weighted average cost method’ which has been followed consistently from the earlier years and therefore, there is no discrepancy at the valuation of closing stock. AO based on these factors rejected the books of accounts and trading results and estimated the net profit rate at 1.65% which worked out to Rs. 11,48,184/-, resulting into addition of Rs. 5,17,886/-.

Ld. CIT(A) has upheld the rejection of trading results and the books of accounts solely on the ground that valuation of closing stock is an important part of the books of accounts and if there is any kind of difference in valuation of stock affects the determination of GP, then books of account has to be rejected. Instead of applying NP rate as done by the AO, he held that it should be reasonable to estimate the GP @ 5% at the total turnover and consequently reduced the addition at Rs. 93,932/-.

Before us Ld. Counsel for the assessee submitted that before the AO, assessee has given date wise and item wise details of the stock and had also produced stock register and on such details no discrepancy or defect has been pointed out by the AO. Further, the assessee has also given a comparative chart of gross profit and net profit disclosed by the assessee in various years and substantiated each and every entry in the trading account on which again no defect or discrepancy has been specified. Thus, rejection of books of accounts by the AO was completely erroneous. Further, the Ld. CIT (A) also without any cogent reason has simply upheld the order of the AO 4 without considering the material placed on record. In so far as the rejection of books of accounts are concerned Ld. CIT(A) further erred in estimating the GP from 4.87% to 5%, especially when GP disclosed by the assessee in this year was far better than the earlier years.

On the other hand, Ld. DR strongly relied upon the order of the Ld. CIT(A).

We have heard the rival submissions and also perused the relevant finding given in the impugned order as well as material referred to before us. One of the prime reasons for rejecting the books of accounts by the authorities below is that the auditors have shown the valuation of closing stock on FIFO basis or cost or net value whichever is less, whereas assessee before the AO has stated that stock has been valued at ‘weighted average cost basis’. Another reason by given by the AO, though not commented by the Ld. CIT(A) is that assessee was having another concern from the same premises wherein he was the Karta having similar trading activity and the net profit shown in assessee in his own proprietor concern is low as compared to the net profit of the sister concern which was managed by him as Karta. In so far as the second allegation of the AO is concerned his no relevance for rejecting the books of accounts, because both are two different concerns maintaining different set of books of accounts and separately assessed to tax. There is neither any interlacing of funds or prima facie any material brought on record by the AO that there is diversion of profit or income from one concern to other. The trading result has to be seen the activity carried out by the assessee in his proprietary set up on standalone basis unless there is any information or material on record to prove contrary. Further, we find that AO has not taken his observation to any logical conclusion so as to draw any inference that there is any kind of suppression of income or profit due to interlacing of the activities of these two concerns. Simply because one concern is showing more net profit this does not lead to any inference that the same net profit should be the basis adopted for estimating the net profit. AO has to first examine the books of accounts and the entries relating to trading activity and if any defect or discrepancy is found in such entries, then he can tinker with the trading result after rejecting the books of accounts. In this case no such defect has been pointed out by the AO in the books of accounts or trading result, hence such an uncorroborated observation cannot be considered.

In so far as allegation of different method of valuation of closing stock, as reported by the auditor and another stated by the assessee, we find that assessee before the AO and Ld. CIT(A) has given the stock valuation of all the major items which gives the date wise and quantity-wise details, last invoice date and value, etc., the copy of which has been placed before us at pages 91 and 92 of the paper book for the entire month of March, 2013 and March, 2014 to show the basis of valuation of stock. Apart from that, we find that from time to time assessee has also given entire details of opening stock, purchases, sales and closing stock particularly item-wise, quantity- wise and value of the stock before the AO as well as before the Ld. CIT(A). The method of valuation of stock of ‘weightage average cost method’ has been shown to be followed regularly in all the yeas wherein such a method has always been adopted. AO and Ld. CIT(A) has neither examined nor have said that the method adopted by the assessee is either not correct or has not been consistently been followed. Thus, simply because of auditors have mentioned that assessee is following FIFO method, the same cannot be sacrosanct basis if the assessee has been able to demonstrate that no discrepancy or defect has been found either in details of closing stock or opening 6 stock or the same method has not been followed consistently or there is any defect in any of any item of trading activity has been found. Thus, such a basis also is not found sustainable on the facts of the present case. Otherwise also, from the perusal of the comparative gross profit rate from assessment years 2012-13 to 2014-15 wherein in all the earlier years assessment has been completed u/s 143(3), it is seen that, GP rate of 1.11% has been accepted in assessment year 2012-13 and GP rate of 3.09% has been accepted in 2013-14, therefore, GP rate of 4.87% during this year is far better than the earlier year, hence we do not find any reason as to why the higher G.P. rate should have been applied specifically when no defect has been found in any of the items of the trading account. Accordingly, the rejection of books of accounts and thereby estimating the GP rate is set aside and assessee’s trading result is directed to be accepted. Accordingly ground No. 1 and 2 as raised by the assessee is allowed.

Coming to the issue of addition of Rs. 4,25,000/- made u/s 68 on account of fresh loan received from Shri Rajeev Agarwal (HUF), it is seen that assessee has received unsecured loan during the year of Rs. 4,25,000/- by Shri Rajeev Agarwal (HUF) on which assessee has paid interest @ 12% of Rs. 1,11,137/-. Ld. AO noted that there was certain cash deposit on account of Shri Rajeev Agarwal (HUF) before advancing the loan and the said entity has failed to prove creditworthiness of such huge loan especially when loan advance was more than the returned income. Ld. CIT(A) too has confirmed the said addition on the ground that cash deposited in the individual bank account of Shri Rajeev Agarwal (HUF) has not been explained by the said entity and therefore, creditworthiness could not be established as the source of the cash has not been explained.