DCIT, JAIPUR vs. KAYAKALP HERBAL PVT. LTD., JAIPUR

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ITA 609/JPR/2016Status: DisposedITAT Jaipur25 April 2017AY 2005-0639 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal relied on various judicial precedents to hold that the AO cannot reject the assessee's accounts without pointing out specific defects or unreliability. The AO's estimation of sales and application of a higher GP rate was not sustained without proper justification.

What were the facts?

The assessee company, engaged in manufacturing herbal products, was subjected to search and seizure operations. During the search, undisclosed income was admitted, and additional income was declared in revised returns for various assessment years. The Assessing Officer (AO) made significant additions based on estimated sales and disallowances.

What were the issues?

Whether the AO was justified in rejecting the assessee's books of account and making additions based on estimated sales and a higher GP rate without establishing defects in the accounts. Whether disallowances of depreciation and employee contributions were correctly made.

Which sections of the Income-tax Act were involved?

Section 139(1),Section 153A,Section 145(3),Section 144,Section 36(1)(va),Section 2(24)(x)

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Income Tax Appellate Tribunal, JAIPUR BENCHES , JAIPUR

Before: SHRI BHAGCHAND, AM & SHRI KUL BHARAT, JM vk;dj vihy la-@ITA No. 609, 627,628,629,630,631 & 632/JP/2016

Hearing: 20/04/2017Pronounced: 25/04/2017

per the books and such excess stock was not found. The department has

found excess stock only of Rs. 4.16 lacs which has already been covered

by additional income for AY 2011-12 declared by the assessee. Further,

on the basis of increased GP rate if excess book stock is worked out in

comparison to physical stock found by the search party, then it would be

treated as unaccounted sales which has already been considered at Rs.

1,13,00,000/- in AY 2011-12 and Rs. 28,00,000/- in AY 2010-11. As

regards, decisions of Hon'ble Kerala High Court relied upon by ld CIT-

DR, the ld AR submitted that ratio laid down by Hon’ble Rajasthan High

Court in the case of Jai Steel (India) Vs Astt Commissioner of Income

Tax (2013) 259 CTR (Raj) 281 also support the assessee’s contention

that if no incriminating material has been found then in the completed

assessments it is not open for the assessee to seek deduction or claim

expenditure which has not been claimed in the original assessment. Thus

27 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur in non-abated assessment, no action can be taken in proceedings u/s

153A where no incriminating documents are found. The decision of

Hon’ble Delhi High Court in the case of CIT Vs Kabul Chawla 380 ITR

573 (Del) also supports that no addition can be made in AY 2005-06 and

AY 2009-10 where no assessment was abated. The ld AR further

submitted that various benches of ITAT has followed the above referred

decision of Hon’ble Delhi High Court on the issue of assessment u/s

153A where no assessment were abated. The ld AR submitted that the

documents other than AY 2005-06 and AY 2009-10 were found and

seized and on that basis the assessee has declared additional income,

therefore, in absence of any incriminating material and assessments of

these two years were not abated then no addition can be made in these

years. The ld AR further submitted that if income had generated then it

would have been found in the shape of cash, stock or other assets or

unexplained credit or unexplained expenses, but in the case of assessee no

such cash, stock or other assets or unexplained credit or unexplained

expenses were found over and above to what has been disclosed by the

assessee company or its directors. The ld. AR further submitted that

Hon'ble Supreme Court has held that in case of two conflicting views of

28 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur the court, favourable view of the assessee would be taken as held in the

case of CIT Vs Vegetable Products Ltd. (1973) 88 ITR 192 (SC) .

2.15 We have heard rival contentions of both the parties and perused the

material available on record. First we take the appeals filed by the

assessee for adjudication.

ITA No 633/JP/2016 (AY 2005-06) and 635/JP/ 16 (AY 2009-10),

2.16 With regard to AY 2005-06 and AY 2009-10, we observed that

the department has not found any incriminating document or unexplained

cash, stock or other assets or unexplained credit or unexplained expenses.

In these cases the assessee filed return u/s 139(1) on 29/10/2005 for AY

2005-06 and on 21/10/2009 for AY 2009-10. The last date of issue of

notice u/s 143(2) of Income Tax Act was 31-10-2006 and 30/09/2010

respectively. The search was conducted on 11/11/2010. Since no

incriminating documents were found for the AY 2005-06 and AY 2009-

10 and no assessment proceedings were pending before the AO,

therefore, no assessment could have been made in view of the decision of

Hon'ble Rajasthan High Court and Hon'ble Delhi High Court (supra).

The Hon'ble Jurisdictional High Court decision in the case of Jai Steel

India vs. ACIT (supra) has held as under:-

29 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur ‘’Consequently it is held that it is not open for the assessee to seek deduction or claim expenditure which has not been claimed in the original assessment, which assessment already stands completed, only because a assessment under section of the Act in pursuance of search or requisition is required to be made. In view of the above discussion, the answer to substantial question of law (iv) above is in the positive and against the appellant assessee, the other three questions consequently do not arise, and as such, the appeal fails and is, therefore, dismissed. No costs.’’

The Hon'ble Delhi High Court in the case of CIT vs. Kabul (supra) held

as under:-

‘’Held accordingly, that the matter related to the assessment 2002-03, 2005-06 and 2006-07. On the date of the search the assessments already stood completed. Since no incriminating material was unearthed during the search, no additions could have been made to the income already assessed. ‘’ Although the Hon'ble Kerala high Court (supra) held against the

assessee or say contrary to the decision of Hon'ble Delhi High Court in

the case of CIT vs. Kabul Chawla (supra). However, in view of the

decision of Hon'ble Supreme Court in the case of CIT vs. Vegetable

Products Ltd. (1973), the issue to be decided in favour of the assessee.

The relevant observation of the Hon'ble Supreme Court is as under:-

30 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur ‘’There is no doubt that the acceptance of one or the other interpretation sought to be placed on section 271(1)(a)(i) by the parties wilful lead to some inconvenient result, but the duty of the court is to read the section, understand its language and give effect to the same. If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision. It is for the legislature to step in and remove the absurdity. On the other hand, if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted. This is a well accepted rule of construction recognised by this court in several of its decisions. Hence, all that we have to see is, what is the true effect of the language employed in section 271(1)(a)(i). If we find that language to be ambiguous or capable of more meanings than one, then we have to adopt that interpretation which favours the assessee, more particularly so because the provision relates to imposition of penalty.’’

Thus the assessee’s appeal succeeds for AY 2005-06 and AY 2009-10

The appeal filed by the assessee in ITA No 633/JP/2016 (AY 2005-06)

and 635/JP/ 16 (AY 2009-10) stand allowed.

ITA No 634/JP/2016 (AY 2008-09) 2.17 In ground no 1, the assessee has challenged the validity of

assessment framed u/s 153A on the ground that no incriminating

documents was found in search. But the fact remains that the assessee has

surrendered additional income of Rs. 6,95,000/- in the revised return filed

u/s 153A of the Act on 17/08/2012. The AO made addition by estimating

the gross profit rate and out of the addition the telescoping benefit was

given by the AO for estimated amount. The ld. CIT(A) reduced the

estimation of profit but upheld the rejection of books of account. In the

Ground No. 2, the assessee has challenged the confirming of the finding

31 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur of AO by ld. CIT(A) as regards rejection of books of account. It is

admitted fact that the assessee is not maintaining the stock records of

consumption of raw material. The assessee has also not furnished

alternative method for verification of figures mentioned against opening

and closing stock in Trading Account. Considering all the aspect, we hold

that the ld. CIT(A) has rightly confirmed the findings of AO as regards

rejection of books of account. With regard to Ground No 3, the assessee

has challenged the addition of Rs. 9,04,454/- confirmed by CIT(A) by

applying GP rate of 62% on the declared sales as against GP rate @

53.33% declared by the assessee in its books of account. In this case, the

department has found evidences of unaccounted sales in some of the

years. The estimation of unaccounted sales made by AO in absence of

any incriminating documents was not sustained by ld CIT(A) and

wherever evidence was found it has been sustained in A.Y. 2010-11 and

2011-12. This findings of ld CIT(A) with regard to estimating sales in

absence of any incriminating documents has not been disputed by the

Revenue in appeal. Thus issue remains only estimation of g.p. on the

recorded sales wherever no incriminating evidences were found. The

gross profit rate declared by the assessee on the recorded sales vary from

50% to 60% during A.Y. 2005-06 to 2010-11. The Hon'ble Rajasthan

32 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur High Court in the case of CIT vs. Popular Art Palace (P) Ltd. (2017) 391

ITR 352 has approved the estimation of profit on the basis of average

profit of past years. The held portion of the order is as under:-

‘’Held, that adoption of gross profit by the Assessing Officer at 35 per cent was high. The average of profit shown by the assessee from the year 1991-92 to 1996-97, was 31.4 per cent and for that the estimate of 32 per cent could be adopted instead of 35 per cent by the Assessing Officer. The Assessing Officer was to make calculations by adopting estimated profit of 32 per cent.’’ The assessee has also made certain disclosure of income during certain

assessment years. The AO has also found defects in the books of account

and we have sustained the rejection of books of account. Considering all

these aspects, we are of the view that estimating the profit @ 58% on

the declared sales shall meet the ends of justice. In the result, the Ground

No. 3 of the assessee's appeal is partly allowed. However, wherever the

disclosure made in the return of claim u/s 153A of the Act is over and

above the estimated income on the basis of profit @ 58%, same shall be

maintained.. The appeal filed by the assessee in ITA No 634/JP/2016

(AY 2008-09) stands partly allowed.

ITA No 636/JP/2016 (AY 2011-12) 2.18 Ground No 1 is regarding rejection of books of account. It may be

noted that similar issue has been decided against the assessee in Ground 1

33 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur No. 2 of the assessee’s in ITA No. 634/JP/2016 for the assessment year

2008-09. Hence, this ground of the assessee is also dismissed for the

same reasons as the facts remain similar. Ground No. 1 of the assessee

assessee in ITA No. 636/JP/2016 stands dismissed.

2.19 In Ground No 2, the assessee has challenged the addition of Rs.

28,13,149/- confirmed by ld. CIT(A) by applying GP rate of 62%. The

AO has considered the unaccounted Rs. 1,13,00,000/- for AY 2011-12

on the basis of incriminating documents. In this year, the sales includes

the unaccounted sales recorded in the seized material. We have already

decided the issue of estimating the profit rate on the sales declared by

assessee @ 58% for the same reasons mentioned above. For this year

also, we direct to estimate the profit @ 58% on both sales recorded and

also unrecorded sales as per seized material i.e. Rs. 1.13 crores. The AO

is directed to work out the profit accordingly. The appeal filed by the

assessee in ITA No 636/JP/2016 (AY 2011-12) stands partly allowed.

3.0 Now we take up the Revenue’s appeal in ITA No. 609 /JP/16, (AY

2005-06), 627/JP/16, (AY 2006-07), 628/JP/16, (AY 2007-08),

629/JP/16, (AY 2008-09), 630/JP/16, (AY 2009-10) and 631/JP/16, (AY

2010-11) for adjudication.

34 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur 3.1 In these appeals, it is noted that the primary objection raised by ld

AR is that these appeals filed by the revenue for AY 2005-06 to AY

2010-11 are not maintainable and liable to be rejected in limine for the,

reason that tax effect in these appeals is not more than Rs. 10 lacs in

view of Circular No. 21/2015 F No 279/Misc. 142/2007-ITJ (Pt) 10th

December, 2015.

3.2 On the other hand the ld CIT-DR supported the maintainability of

appeals by stating that the tax effect on the relief given by the ld CIT(A)

is more than the limit prescribed in the circular.

3.3 The ld AR in rejoinder submitted a chart showing the tax effect on

the grounds raised by the department having main contents as under:-

As per Order of CIT(A) If GP rate of 72% is applied as against 62% applied by CIT(A)

A.Y Total Sales GP @ 62% GP Shortfall Income Addition Profit if Shortfall Income Addition Addition Additiona Tax (Rs) ( Rs ) Declared in in declared sustained GP in GP declared to be sustained l effect regular GP ( Rs) by (Rs) applied by sustained by CIT(A) additions @30% books (Rs) asssessee 72% asssesse if GP rate on the if GP rate on in return e in is applied basis of 72% is additio filed u/s returns 72% GP rate applied nal 153A (Rs) filed u/s 62% as against income 153A 62% if GP (Rs) rate of 72% is applied

1 2 3 4 5 6 7 8 10 11 12 13 14 15

2005 97,80,619 60,63,984 49,44,613 11,19,37 0 11,19,371 7042046 2097433 0 2097433 1119371 978062 293419 -06 1

35 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur 2006 1,36,70,714 84,75,843 72,73,292 12,02,55 20,50,00 Income 9842914 2569622 2050000 519622 0 519622 155887 -07 1 0 Surrendere d is more than addition to be made for trading results, therefore no further addition deserves to be made

2007 1,62,92,362 1,01,01,26 85,86,549 15,14,71 22,00,00 Income 1173050 3143952 2200000 943952 0 943952 283185 -08 4 5 0 Surrendere 1 d is more than addition to be made for trading results, therefore no further addition deserves to be made

2008 1,84,47,586 1,14,37,50 98,38,049 15,99,45 6,95,000 9,04,454 1328226 3444213 695000 2749213 904454 1844759 553428 -09 3 4 2

2009 2,37,34,690 1,47,15,50 1,21,26,10 25,89,40 0 25,89,406 1708897 4962875 0 4962875 2589406 2373469 712041 -10 8 2 6 7

2010 4,09,70,620 2,54,01,78 2,20,44,08 33,57,70 84,25,00 Income 2949884 7454764 8425000 Income 0 0 0 -11 4 2 2 0 Surrendere 6 Surrender ed is d is more than more addition to than be made addition for trading to be results, made for therefore trading no further results, addition therefore deserves to no be made further addition deserves to be made

2011 7,29,45,281 4,52,26,07 3,82,82,92 69,43,14 41,30,00 28,13,149 5252060 1423767 4130000 10107677 2813149 7294528 218835 -12 4 5 9 0 2 7 8

3.4 The ld AR further submitted that the ld CIT(A) allowed relief by

reducing the sales by not sustaining the estimation on unaccounted sales

over and above the seized documents and also reducing the GP rate from

72% to 62%. The department is not in appeal on the relief allowed by ld

36 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur CIT(A) on account of estimation of unaccounted sales. In revenue’s

appeal quantum of relief given by ld CIT(A) is not under question and

only ground is reducing the GP rate from 72% to 62%.

3.5 We have heard the rival contentions and perused the materials

available on record. As regards this issue, it is worthwhile to mention

following relevant findings of ld CIT(A) which is in para 3.1.3. (b) of

order of ld CIT(A)

“….. Further, the department has carried out intensive search over the assessee and no evidence was found for unaccounted sales for AY 2005-06 to AY 2009-10. The evidence of unaccounted sales was found for A.Y. 2010-11 to the extent of Rs. 28,00,000/- only. Therefore, by extrapolating the gross profit rate of72% calculated by the AO for the A.Y. 2011-12, suppressed sale out of suppressed production cannot be estimated for A.Y. 2005-06 to 2010-11. The same AO has completed the assessment of director of assessee company Smt. Kulsum Malik. Kulsum Malik runs beauty parlor at various places. I have gone through the assessment made by the same AO for A.Y. 2009-10 u/s 154A in her case. In this case also suppressed receipts were found. The department found documents showing suppressed receipts of Mahaveer Nagar Parlor for April 2008 to March 2009, Hanuman Nagar Parlor for Nov. 2008, Jan 2009 and March 2009 and Bani Park Parlor from 07-10-2008 to 6-11-2008. In this case, the AO restricted the addition upto evidence found as the result of search. In this case the AO has not estimated the suppressed receipts for whole period for F.Y. 2008-09 as well as for earlier years by extrapolating the income/ cost as done in the case under consideration. So far as the undisclosed investment in own shares and property to the tune of Rs. 1,05,70,000/- in previous year (A.Y. 2006-07, A.Y. 2007-08, A.Y. 2008-09 and A.Y. 2010-11) is concerned, the assessee has offered its income in the return filed u/s 153A and in absence of any evidence, such income cannot be

37 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur enhanced merely on surmises and conjectures. The Department has no evidence of unaccounted during the post search period. The AO mentioned that the customer base of the assessee was same in all the previous year. The assessee has submitted a chart showing yearwise list of parties to whom it sold goods. I found only 16 parties were common out of total 145 parties. Therefore, it cannot be presumed that all the parties were purchasing the goods from the assessee without bill. The AO has not made any inquiry from the buyer parties of the assessee to establish the unaccounted sales by the assessee. Merely on the basis of search statement of the directors of the assessee stating that the assessee was making unaccounted sales in past also and estimate slips against the unaccounted sales were destroyed after settling the account unaccounted sales cannot be estimated without having corroborative evidence.’’ It may be further noted that the CIT(A) in para 3.1.3 (c) tabulated a chart

showing sales taken by him and shortfall in GP on the basis of GP rate of

62% applied by him and addition sustained by him. It may be further

noted that Revenue has taken the common following grounds in its all

appeals (supra)

“Whether on the facts and in the circumstances of the case the CIT(A) was right in reducing the GP rate from 72% to 62% ignoring the fact that AO has given strong cogent reasons for estimation of GP rate in the assessment order.” 3.5.1 After hearing both the parties and perusing the materials available

relating to the grounds taken by the Revenue, it is clear that the revenue

has questioned only reduction of GP rate. The Revenue has not

questioned the reduction of sales made by ld CIT(A). Furthermore, the

Revenue has not questioned the quantum of relief given by ld. CIT(A). In

38 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur view of the above facts and circumstances, it is held that the grievance of

the revenue is on the reduction of GP rate made by the ld. CIT(A) from

72% to 62% and the tax effect should be calculated on the basis of

grounds of appeal raised by the Revenue. We noticed from the above

chart that the tax effect is not more than Rs. 10 lacs in the appeal filed by

the revenue ITA No. 609 /JP/16, (AY 2005-06), 627/JP/16, (AY 2006-

07), 628/JP/16, (AY 2007-08), 629/JP/16, (AY 2008-09), 630/JP/16,

(AY 2009-10) and 631/JP/16, (AY 2010-11) which are dismissed in

limine, in view of Circular No. 21/2015 F No 279/Misc. 142/2007-ITJ

(Pt) 10th December, 2015. Thus the above appeals of Revenue are

dismissed.

4.0 Now we take up the appeal of the Revenue in ITA No. 632/JP/2016

for the assessment year 2011-12 wherein the solitary ground of the

Revenue is as under:-

“Whether on the facts and in the circumstances of the case the CIT(A) was right in reducing the GP rate from 72% to 62% ignoring the fact that AO has given strong cogent reasons for estimation of GP rate in the assessment order.” 4.1 It may be noted that we have decided this issue raised by the

Revenue in assessee's appeal in ITA No. 636/JP/2016 for the assessment

year 2011-12 under Ground No. 2 of the assessee. Therefore, the solitary

ground raised by the Revenue in its appeal is dismissed.

39 ITA No. 609/JP/2016 The ACIT, Central Circle- 1, Alwar vs. M/s. Kayakalp Herbal (P) Ltd., Jaipur 5.0 In the result, the appeals filed by the Revenue are dismissed and the appeals of the assessee in ITA No. 633 and 635/JP/2016 are allowed and the appeal in ITA No. 634 and 636/JP/2016 are partly allowed. Order pronounced in the open Court on 25-04-2017. Sd/- Sd/- ¼dqy Hkkjr½ ¼HkkxpUn½ (KUL BHARAT) (Bhagchand) U;kf;d lnL; /Judicial Member ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur fnukad@Dated:- 25/04/ 2017 *Mishra आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू vihykFkhZ@The Appellant- The ACIT/ DCIT , Central Circle- 1, 1. Jaipur 2. izR;FkhZ@ The Respondent- M/s. Kayakalp Herbal (P) Ltd., Jaipur vk;dj vk;qDr¼vihy½@ CIT(A). 3. 4. vk;dj vk;qDr@ CIT, विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. 6. xkMZ QkbZy@ Guard File (ITA No. 609/JP/2016) vkns'kkuqlkj@ By order, सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

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