INCOME TAX OFFICER, WARD 1(3)(1), SURAT, SURAT vs. DHIRAJ SONS SUPER MARKET, SURAT

2. Brief facts of the case are that assessee is a partnership firm namely “Dhiraj Sons Super market” engaged in the business of running of chain of departmental store. The assessee filed its return of income for assessment year 2017-18 declaring loss of Rs.1,83,220/-. The case was selected for complete scrutiny to examine the issue of “reduction in profit because of application of income computation & disclosures standard”. During assessment, the Assessing Officer (AO), on perusal of details furnished and from audit report and balance sheet schedule in P&L account noted there was a difference of Rs.52,60,999/-, which is not explained by the assessee. The AO further noted that assessee as per submissions of assessee as per Annexure C, the has shown valuation of closing stock, sale price of its closing 2 Dhiraj Sons Super Market, Surat stock and MRP at Rs.2.43 crore and sales price of closing stock at Rs.3.06 crore and MRP of closing stock at Rs.3.32 crore, the AO was of the view that assessee has earned gross profit at Rs.25.61% (30639594 – 24392379 = Rs.62,47,215/-), however, the assessee has shown gross profit @ 11.03%. Thus, there is difference of 14.58%, thereby reduced profit to evade tax. The AO worked out the figure of reduced profit of Rs.1.54 crore and proposed as to why books of account should not be rejected. The AO further noted that there is substantial increase in fixed asset. The assessee has not furnished any ledger, bills and not explained source of fund in fixed asset. The Assessing Officer was of the view that there was increased of Rs.67,99,486/- in the fixed asset. The AO issued show cause notice on all the above three issues in his show cause notice dated 11.12.2019 and asked assessee to make compliance by 16.12.2019. In para-4 of assessment order, the AO recorded that assessee furnished part-reply through e-assessment module without referring the contents of such reply. The AO recorded that as per sale register, assessee made credit sales of Rs.5.17 crore and cash sale of Rs.5.92 crore. Thus, total sales came to Rs.11.10 crore. But in audited trading account, assessee has shown total sale at Rs.10.58 crore. Thus, assessee has suppressed sales of Rs.52,60,999/-. The AO scanned details in his order and recorded that assessee has not furnished reply thereby a difference of actual sales shown by assessee in its return of income and in the audited report i.e., Rs.52,60,999/- was added to the income of assessee. The AO rejected the books of account and worked out figure of suppressed profit as per the show cause and added Rs.1.54 crore. While estimating such profit, the AO took his 3 Dhiraj Sons Super Market, Surat view that assessee has not furnished any ledger, bills, nor explained the source of fund so that rice of fixed asset. The AO also held that there is substantial increase in the fixed asset during the year. And that in response to the show cause notice on such issue, the assessee has not furnished any ledger, bills and not explained source of funds. Hence, in absence of any reply, the AO also added Rs.67,99,486/- on account of unexplained investment in fixed asset. The AO passed assessment order under section 143(3) of the Act on 21.12.2019.

4 Dhiraj Sons Super Market, Surat 4. Against addition on account of addition of Rs.52,60,999/- on account of difference in sales, the assessee stated that AO erred in making addition on account of difference in sales particularly, when assessee was not aware as to how the AO derived the figure of Rs.11.10 crore. The assessee in its letter dated 19.12.2019 requesting the Assessing Officer to provide the details of difference in sales arrived by him for their explanation. The AO, thereafter finalized assessment recklessly. The Ld.CIT(A) on considering the submission of assesse held that show cause notice issued by Assessing Officer contained the difference arrived by AO, the assessee filed its submission on 16.12.2019 and not asked for any clarification rather clarification was sought in letter dated 19.12.2018. The assessee has not provided any evidence in submitting such letter. The Ld.CIT(A), however further recorded that during appellate proceedings, assessee furnished reconsideration and explained the difference between sales shown in the audited financial statement and details provided during the course of assessment proceedings. The Ld. CIT(A) recorded the reconciliation on pages 20 to 25 of his order. The assessee also contended that difference was noted by AO by committing mistake in considering the entire cash received as “cash sales”. Cash sales and the amount of cash received contained various entries which were not cash sales. The assessee submitted that sales reflected in the audited financial statements were exclusively of tax and tax being separately accounted in the books of account. The Ld.CIT(A) noted that reconsideration was not furnished during assessment proceedings which required verification by AO and directed AO to verify the reconciliation of sales to allow relief to the assessee. Thus, said 5 Dhiraj Sons Super Market, Surat grounds of appeal was treated allowed subject to verification by Assessing Officer i.e., for “statistical purposes”. On the rejection of books of account, the Ld. CIT(A) held that AO has not recorded his finding as to why books are found incorrect and thus Assessing Officer was not justified in rejecting the books of account.

5. On the estimation of gross profit and suppressed profit, assessee submitted that AO erred in making addition of Rs.1.54 crores to the gross profit of income only on the basis of closing stock statement submitted during assessment, which only indicates how the assessee would be putting references sales price in subsequent year against its closing inventory in current investment. The assumption was made in conjecture and surmise required to be deleted. The AO erred in extract and independent of sales in subsequent period to the current year without any evidence that assessee earned higher gross profit then the disclosed profit. The Ld. CIT(A) on considering the submission of assessee recorded that AO made addition by rejecting the books of account under section 145 of the Act. That Assessing Officer has committed arithmetic error in computing gross profit. The Ld.CIT(A) held that AO worked out the difference in gross profit on the basis of MIS report. The AO considered potential sales value of closing stock, which could be realized by assessee in a best scenario. It is evident that gross profit worked out by AO which was based on assumption sale rate which assessee hope to realise by selling closing stock in subsequent year. The AO assumed that potential sales are also realized on the sales made during the year. It was finally held that the AO has not brought on record any evidence to show that sales have been 6 Dhiraj Sons Super Market, Surat understated by the assessee. The addition is based thoroughly on assumption basis, which is not justified thereby deleted the entire addition.

6. On the addition on account of unexplained expenditure in fixed asset, assessee stated that in response to show cause notice, assessee has explained that assessee did not own any immovable property, in any case with the fixed asset already shown in the audited balance-sheet. The assessee without prejudiced submission that section 69A of the Act is not applicable as the section deals with only those cases where amount is not recorded in the books of account. The Ld. CIT(A) on considering the submission of assessee noted that section 69A deals with the situation where a person is found to possess money, jewellery, or valuable items that are not accounted for in their books of account and they fail to provide a satisfactory explanation for the source of their possessions. In order to invoke section 69A, it is necessary that assessee is found to be owner of any money, bullion, jewellery or other valuable articles and the same is not recorded in the books of account maintained by the assessee. In this case, fixed asset are recorded in the books of account which is not disputed by AO. The AO called a detailed based on the schedule of fixed asset, forming part of the audited financial statements. Thus, necessary conditions of invoking section 69A is not satisfied in the facts of the present case of assessee. For invoking section 69A, Assessing Officer should first come to a finding that assessee has made investment and same are not recorded in the books of account and thereafter he can call for the assessee for an explanation about the nature and source of such investment. As fixed asset has been recorded in the books of account, hence, section 69A is not 7 Dhiraj Sons Super Market, Surat applicable. On the basis of such observation, Ld.CIT(A) deleted the addition of unexplained investment. Aggrieved by the order of Ld.CIT(A), the revenue has filed present appeal before this Tribunal.

7. We have heard the submission of Ld. Senior Departmental Representative (Ld. Sr-DR) for the Revenue and Ld. Authorized Representative (Ld.AR) for the assessee and have gone through the orders of lower authorities carefully. Ground No.1 relates to addition made on account of unexplained investment in fixed asset. The Ld. Sr-DR for the Revenue supported the order of lower authorities. Ld. Sr-DR for the Revenue supported the order of Assessing Officer and submits that despite issuing show cause notice, assessee failed to furnish source of fund / investment in fixed asset. The Assessing Officer in absence of any explanation made such addition. The Ld.CIT(A) has simply accepted the explanation furnished by assessee before him.

8. On the other hand, Ld.AR of the assesse supported the order of Ld.CIT(A) and submits that Assessing Officer has wrongly selected section 69A for making addition. The assessee has already recorded investment in immovable property of Rs.67,99,486/- which is shown in the audited books of account and all such details were furnished before Ld.CIT(A). The assessee also furnished ledger account along with voucher to support the addition made in the immovable property. During assessment, Assessing Officer required the details of immovable property owned by assessee and not regarding investment in immovable property. The assessee already shown all details of audited books account and Ld.CIT(A) appreciated the fact and allowed relief to assessee.

8 Dhiraj Sons Super Market, Surat 9. We have considered the rival submissions of both the parties and have gone through order of lower authorities carefully. We find that AO made addition by taking view that there is substantial increased in the fixed asset during the year under consideration and that assessee has not produced any bills ledger account or other evidence to prove such source of funds. We find that Ld.CIT(A) deleted the addition by taking view that in order to invoke section 69A of the Act, that AO first come to satisfaction that assessee made investment and the same is not recorded in the books of account and then call for explanation about nature and source of fixed asset. The assessee has recorded fixed asset in its books of account. Thus, the provisions of section 69A is not applicable. We find that assessee has already shown fixed asset in the balance-sheet. Thus, provisions of section 69A is not applicable. Hence, we affirm the order of Ld.CIT(A). This ground No.1 of the appeal is dismissed.

9 Dhiraj Sons Super Market, Surat 11. On the other hand, Ld.AR of the assesse supported the order of Ld.CIT(A). The Ld.AR of the assessee submits that assessee has maintained complete set account, which is duly audited all information and evidence called for or furnished in compliance despite the fact that data was voluminous. The AO has not pointed out any specific defect in the books of account. Thus, rejection of books of account without any specific defect is not justified. On the addition of suppression of book profit, Ld.AR of the assessee submits that difference of gross profit (GP) worked out by AO, is based on MIS report, which were inadvertently furnished. The summary of closing stock, which compare closing stock at cost and management adopted forecast of potential sale value inclusive of indirect taxes specific to items lying in closing stock, which could be targeted to be realized in best case scenario in subsequent year. The stock registers have been accurately maintained and the valuation stock is perfectly in line with ICDS-II i.e., cost or Net Reliable Value (NRV) whichever is lower. The gross profit ratio estimated by AO inflated due to composition of items as well as fact that sales value in the chart is inclusive of indirect taxes. The audited financial statement of financial year 2017-18, the gross profit in subsequent year worked out to be only 12.39% on sales, demonstrating clearly how management forecasts, were not accurate and reliable basis for estimation of gross profit. The AO computed gross profit at 25.61% on closing stock at cost against gross profit ration in fast moving consumer goods (FMCG) around 11 to 13%. Thus, gross profit shown by assessee was in line with market.