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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH
Before: Ms. Annapurna Gupta
M/s. Kalptaru Packaging Vs The DCIT, Circle- Pvt. Ltd. D-3, Kunj Plaza, 1(1)(2), Vadodara Palace Road, Vadodara- 390001 (Respondent) PAN No: AAECK0259Q (Appellant) Appellant by : Shri Rameshkumar L. Sadhu, Sr. D.R. Respondent by : Shri Anil R. Shah & Ms. Kinjal Shah, A.R. Date of hearing : 07-02-2022 Date of pronouncement : 23-02-2022 आदेश/ORDER PER : ANNAPURNA GUPTA, ACCOUNTANT MEMBER:-
The present appeal by the Revenue and Cross Objection by the Assessee have been filed against the order passed by the Commissioner of Income Tax (Appeals)-1, Vadodara, (in short referred to as CIT(A)), dated 24-07-2018, u/s. 250(6) of the C.O. No. 38/Ahd/2020 A.Y. 2015-16 Page No 2 DCIT vs. M/s. Kalptaru Packaging Pvt. Ltd. Income Tax Act, 1961(hereinafter referred to as the “Act”) pertaining to Assessment Year (A.Y) 2015-16.
The solitary ground raised
by the Revenue reads as under: 1. "On the facts and in the circumstances of the case and in law, the Ld,, CIT(Appeals) erred in directing AO to estimate net profit at 1% of gross turnover of Rs. 10,40,91,416/- (i.e. Rs. 10,40,914/-) as against the income determined at Rs.2,60,22,854/- which ws based on the ration of the decision of Hon'ble jurisdictional High Court of Gujarat in the case M/s. Vijay Protiens Ltd. vs. CIT (2015) 58 taxmann.com
44. (Guj.).
As transpires from the orders of the authorities below, assessment in the present case was framed ex-parte u/s. 144 of the Act since the assessee failed to respond and comply with various notices issued to it during assessment proceedings. Even, the show cause notice issued u/s.144 of the Act remained uncomplied with. While framing the exparte assessment, the A.O. rejected the book results of the assessee, declaring loss of Rs.6,18,78,990/-, in the absence of supporting evidences as well as ledger account and primary books, and estimated the total income at 25% of the gross receipt of the assessee, resulting in income being assessed at Rs. 2,60,22,854/- . The order of the A.O. holding at Para 3 is as under: 3. The date of compliance was fixed on 26.10.2017, however, the assessee did not comply for the reasons best known to it. Thereafter, penalty u/s 271(l)(b) of the Act was also levied on the assessee on 24.11.2017. Despite of afore mentioned facts and notices issued, for the reasons best known to the assessee, the assessee did not come forward to explain/comply the notices issued by this office. Therefore, this office is left with the only alternative to finalize the assessment in the manner provided u/s 144 of the Act. During the year the assessee has earned other income of Rs.3,99,775/-. Out of this income the assessee has declared loss of Rs.6,18,78,990/-. Further, in absence of supporting evidences as well as ledger account and primary books, the book result cannot be considered as true and fair picture of state of affairs of business of the assessee contrary to the provision of section 145(1) of the Act. The book result is rejected and the total income of the assessee is determined in the succeeding paras in the manner provided u/s 144 of the Act. Therefore, by borrowing the ratio and philosophy of judgment of Hon'ble Gujarat High Court in the case of M/s Vijay Proteins Ltd.[2015] 58 taxmann.com 44 (Gujarat), the income of the assessee is considered @ 25% of gross receipt for the C.O. No. 38/Ahd/2020 A.Y. 2015-16 Page No 3 DCIT vs. M/s. Kalptaru Packaging Pvt. Ltd.
purpose of this assessment. In short, income from business is computed at Rs. 2,60,22,854/- ( 25% of Gross receipts of Rs. 10,40,91,416/-).
The assessee carried the matter in appeal before the Ld. CIT(A) who upheld the action of the AO in framing exparte assessment u/s. 144 of the Act and also the rejection of the book results. But at the same time, he held 1% of the gross turnover to be reasonable and justifiable net profit rate in the facts and circumstances of case and accordingly directed the net profit to be estimated at Rs. 10,40,914/- as against 2,60,22,854/- computed by the A.O. It is against this reduction in estimation of net profit of the assessee that the Revenue has come up in appeal before us stating that the A.O. had rightly determined the net profit by applying the rate of 25% to the gross turnover in view of the decision of the Jurisdictional High Court in the case of M/s. Vijay Proteins Ltd. (supra).
The Ld. DR has relied on the order of the AO while the Ld. Counsel for the assessee has relied on the order of the Ld. CIT(A).
We have heard both the parties and have also gone through the orders of the authorities below. The findings of the Ld. CIT(A) restricting the addition by estimating the net profit @ 1% of the total turnover at Para 4.2 to 4.2.2 is as under: 4.2. Ground No. 2 pertains to application of net profit rate of 25% on gross receipts resulting into addition of Rs. 2,60,22, 854/-. To support this ground of appeal
, the Ld AR has furnished written explanation stating that various details called for were also furnished during the course of the assessment proceedings vide letters dated 18.05.2016, 14.06.2017, 31.08.2017 & 18.10.2017. However, the said details have again been furnished during the course of the appellate proceedings as additional evidences. The details furnished consisted of comparison of various expenses, ledger account of 3 years in respect of the parties which had been claimed as bad debts, details of sundry creditors and ledger accounts of major expenses with sample supporting evidences. The submission of the appellant along with details as mentioned above was forwarded to the AO. The AO in the remand report had objected to the admission of additional evidences, C.O. No. 38/Ahd/2020 A.Y. 2015-16 Page No 4. DCIT vs. M/s. Kalptaru Packaging Pvt. Ltd. but also commented upon the merits of the addition s made. I find that the assessment order itself reveals that 5 notices issued between 08.04.2016 to 24.07.2017 were returned unserved. Only one notice dated 17.10.2017 was served through e-mail. Under these circumstance, it is clear that appellant could not get sufficient opportunity to make the compliance as desired by the AO. Moreover, the details/evidences furnished under Rule 46A are nothing but part of books of account and hence, no prejudice will be caused to revenue if the same are considered in the interest of justice. Accordingly, after admitting the same, the remand report of the AO has been obtained. 4.2.1. On perusal of the details furnished at the time of assessment proceedings as well as appellate proceedings, I find that appellant has furnished mainly copy of account of various parties and expenses with some sample evidences. The business of the appellant is claimed to be whole sale trading in packaging material such as paper, paper board, woods etc. On perusal of the details of opening and closing inventory as well as purchases and remand report of the AO on this account, it is noticed that the appellant has claimed cost of goods sold at Rs. 14,33,89,891/- as against sales of Rs.10,36,91,641/-. This has resulted into loss of Rs.3,96,98,250/-. In order to justify this loss, the Ld. AR has referred to the point No.26 of Notes to Account wherein it has been mentioned that the loss of inventory was resulted on account of damage due to water logging of the paper, paper products and woods sold to paper manufacturing industry. However, no evidence of damaged inventory has been furnished such as claim made to the insurance company etc. No quantitative tally and inventory of items damaged in the water logging has also been furnished. Under these circumstances, loss of inventory to the extent of Rs.3,96,98,250/- is not consequently proved. Further, the expenses claimed in the trading and P & L Account are not duly supported by the documentary evidences. Under these circumstances, I am of the considered view that the books of account of the appellant are incorrect and incomplete, and hence, deserve to be rejected u/s 145(3). Accordingly, the action of the AO in considering the results as not true and fair is confirmed including rejection of book results. 4.2.2. Now only issue which needs to be decided is the rate of net profit to be applied for best judgment assessment. It is an established legal position that the best judgment assessment should not be arbitrary or fanciful, but, it should be based on either comparable cases or past history of the appellant or material available on record. The C.O. No. 38/Ahd/2020 A.Y. 2015-16 Page No 5 DCIT vs. M/s. Kalptaru Packaging Pvt. Ltd.
AO has applied 25% net profit rate on total turnover of Rs. 10,40,91,4167- from trading of goods relying upon the decision of the Hon'ble Gujarat High Court in the case of M/s. Vijay Proteins Ltd. vs. CIT (2015) 58 taxmann.com 44 (Guj). The Ld. AR has strongly objected to application of 25% net profit rate on the basis of decision of the Hon'ble Jurisdictional High Court on the ground that in that case bogus purchases on fictitious purchase bills were claimed by the appellant and accordingly, 25% of the purchase price of bogus/inflated purchases was disallowed. Since, in the case of the appellant, issue under consideration is not of disallowance of bogus purchases, the decision of the Hon'ble High Court in the case of M/s. Vijay Proteins Ltd. (supra) is not applicable. The Ld. AR has also referred to the comparative gross profit and net profit for last 3 years which are as under: Sr. No. Assessment Year Gross Profit Net Profit 1. 2015-16 -3.82% -59.79% 2. 2014-15 2.00% 0.05% 3. 2013-14 4.53% 0.01% Average profit of last 2 3.27% 0.03% years
The gross profit rate and net profit rate as mentioned above are duly verifiable from the Tax Audit Report placed on record and the AO has not brought anything on record to dispute the above factual position in his remand report also. In the rejoinder to remand report, after referring to the 3 years gross profit and net profit rate, the Ld. AR has also submitted that in the wholesale trading business of white paper and craft paper used for packaging, the net profit varies from 1% to 3% and gross profit varies from 5% to 7%. In this background, the Ld. AR has also requested for estimation of net profit at 1% of the gross receipts. Before estimation of net profit, it is worthwhile to mention that during the year under consideration, the appellant has claimed bad debts written off to the tune of Rs.l,85,52,149/- in the P & L Account which had further reduced the net profit. As is evident from the record, the appellant has returned income (-) Rs.6,09,42,907/-. In respect of the bad debts claimed, the AO has stated in his remand report that the bad C.O. No. 38/Ahd/2020 A.Y. 2015-16 Page No 6 DCIT vs. M/s. Kalptaru Packaging Pvt. Ltd. debts written off to the extent of Rs. 1,19,95,434/- may be allowed subject to the condition that the income to that extent has been offered by the appellant in any of the previous years. As a matter of fact, from the copy of accounts placed on record as also sent to the AO for the purposes of remand report, clearly revealed that the bad debts written off in the names of following parties were on account of sales made in earlier years:- Sr.No. Name of Debtors Amount (Rs.) 1 Roshni Textile Industries 58,51,153/- 2 Royal Sales Company 2,63,998/- 3 Shri Durga Enterprises 50,36,162/- 4 Surya Fashions 8,44,121/- Total 1,19,95,434/-
Thus, since the conditions of S.36(l)(vii)736(2) are satisfied, these bad debts are allowable as deduction in view of the ratio laid down in the case of TRF Ltd. (supra).Therefore, considering the exceptional items of bad debts written off and also the above mentioned submission and discussion, thus, I am of the considered view that the net profit rate at 1% on gross sales will be quite reasonable and justified under the facts and circumstances of the case. Accordingly, the AO is directed to estimate the net profit at 1% of gross turnover of Rs. 10,40,91,416/- which comes to Rs. 10,40,914/- as against the returned income of (-)Rs.6,09,42,907/-. Accordingly, ground No.2 stands partly allowed.
We have gone through the findings of the Ld. CIT(A) and we do not find any infirmity in the same. The Ld. CIT(A) has rejected the applicability of the ratio laid down by the Hon’ble Gujarat High Court in the case of M/s. Vijay Proteins Ltd. (supra) by pointing out that it was rendered in the background of the facts that there were bogus purchases made in the said case and accordingly 25% of the purchase price was disallowed as inflated/bogus purchases. The Ld. CIT(A) has accordingly C.O. No. 38/Ahd/2020 A.Y. 2015-16 Page No 7 DCIT vs. M/s. Kalptaru Packaging Pvt. Ltd. distinguished the said case on facts stating that in the impugned case, it is not the estimation of bogus purchases but the estimation of net profits. The Ld. D.R. was unable to controvert the above. We therefore agree with the ld. CIT(A) that the decision in the case of M/s. Vijay Proteins Ltd. (supra) of the Hon’ble Gujarat High Court was not applicable to the facts of the present case. Even otherwise, we find that the Ld. CIT(A) has at length considered the facts of the case and arrived at a reasonable estimate, considering the past history of the assessee and the fact of huge bad debts having been written off in the impugned year. The Ld. CIT(A) has noted that the assessee has at an average returned profit of 0.03% in the preceding two years which is verifiable from the Tax Audit Report placed on record and which was not disputed by the A.O. in remand proceedings. The Ld. CIT(A) has also taken note of the submissions of the counsel of the assessee before him that in the line of business in which the assessee indulged in the wholesale trading business of white paper and craft paper used for packaging, the net profit varies from 1% to 3%. The Ld. CIT(A) also took note of the fact that in the impugned year, the assessee had claimed bad debts written off to the tune of Rs. 1,85,52,149/- which further reduced its net profit. He noted that the A.O. had accepted the allowability of this claim to the extent of Rs. 1,19,95,434/- subject to the condition that the income with respect to the same was offered by the assessee in previous year which the A.O. noted that the fact on record. Therefore considering the exceptional item of bad debts written off and the submissions of the assessee, he held a net profit rate of 1% of gross sales to be reasonable and justified. The Ld. D.R. has been unable to controvert any of the facts found by the ld. CIT(A) as above vis-à-vis the net profits returned by the assessee in its line of business as also the claim of bad debts written off. Moreover he was unable to justify 25% net profit rate, in the backdrop of the aforesaid facts.
In view of the above, we find the estimation of net profit by the Ld. CIT(A) @ 1% of the gross turnover to be justified and reasonable and see no reason to interfere in C.O. No. 38/Ahd/2020 A.Y. 2015-16 Page No 8 DCIT vs. M/s. Kalptaru Packaging Pvt. Ltd. the same. We therefore uphold the order of the Ld. CIT(A) estimating the income of the assessee by applying the net profit rate of 1% to be gross turnover of the assessee.
The ground raised by the Revenue is dismissed.
The cross objection of the assessee ,it was contended by the Ld.Counsel for the assessee before us, was merely supportive and did not challenge the order of the Ld. CIT(A) per se. The cross objection, in the circumstances, need not be dealt with by us.
In the result, the appeal of the Revenue is dismissed and the cross objection disposed off as above.