ACIT - 1(1)(1), MUMBAI vs. CANNON INDUSTRIES PVT. LTD., MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

ITA No. 6413/M/2016 A.Y.2011-12

2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in deleting the addition of Rs.2,98,00,000/- without appreciating the facts that AO has rejected the books of accounts of assessee as no proper books of accounts were maintained ,Purchase and Sale Bills of Delhi Unit were not produced, details of huge credits & debits in two bank accounts were found to be not reflected in the books of accounts of assessee company, and assessee failed to explain the transactions in the books of accounts?.

ITA No. 6413/M/2016 A.Y.2011-12 The return was processed u/s 143(1) of the I.T. Act, 1961. Thereafter, the case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued and served upon the assessee. The assessee company is engaged in the business of Trading & Manufacturing of garments. It has two branches, one at Ludhiana and the other one at New Delhi. It claims to have a registered office at 109, Churchgate Chambers, 5, New Marine Lines, Mumbai. The details of sale and purchase of the assessee were called but the assessee failed to produce the sale and purchase bills in connection with the Delhi units, therefore, the books of account of the assessee was rejected and the profit ratio estimated on sale in sum of Rs.76.68 crores @ of 3.88% which was assessed on the basis of profit rate of Zodiac Clothing Co. Ltd. The income of the assessee was assessed @ of 2.98 crores. On perusal of the bank-statement of the assessee huge transaction was noticed and peak cash credit was noticed to the tune of Rs.1,92,70,421/-. Since the books of account was rejected, therefore, the peak credit was added to the income of the assessee. The assessee has also shown the sale of property to M/s.Modak Dyeing & Printing Co. Pvt. Ltd. which is a group concern. The assessee has computed capital gain. The assessee failed to establish the ownership of the property so capital gain was reassessed total in sum of Rs.74,50,205/- and added to the income of the assessee. The assessee has shown the creditors an amount of Rs.144,33,83,258/-. The assessee failed to confirmed the transaction in sum of Rs.1,41,11,87,980/-, therefore, the said amount was added to the income of the assessee. The assessee raised the investment in Modak Dyeing & Printing Co. Pvt. Ltd. the total in sum of Rs.7,68,50,000/-. The assessee failed to explain the transaction, therefore, the same was added to the income of the assessee and the total

ITA No. 6413/M/2016 A.Y.2011-12 income of the assessee to the tune of Rs.1,60,30,57,377/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who allowed the claim of the assessee, therefore, the revenue has filed the present appeal before us.

ISSUE NOS. 1 to 3:-

“Ground No. 2 relates income from business of Rs.2,98,00,000/- The AO has added sum of Rs.2,98,00,000/- as income from trading & manufacturing as discussed in Para 7 & 8 of the assessment order. The AO stated: the assessee has returned unrealistically low profit compared to other companies in the same trade. Hence, the AO had adopted the estimated net profit. Accordingly, the AU arrived at net profit of Rs.2,98,00,000/- i.e. 3.88% of the total sales of Rs.76,68,00,000/-. The AR of the appellant argues that the addition of the NP rate @3.88% is not tenable and has submitted the following submission which is as under: I) That the facts about the making addition of the N.P. differences, as per serial no.1 above ii) That the Ld AO had not pointed out any defects in the books of account and the accounts were also not rejected by the Ld AO, therefore, no addition could have been made by the AO only on account low profit rate the low j NP rate: in absence of any cogent reasons on the basis of defects in books of account. iii) The fall in NP rate is not criteria of rejecting the books of accounts. The fall in NP rate could for various reasons such as increase in purchase

ITA No. 6413/M/2016 A.Y.2011-12 price, decrease in the market price of finished goods, increase in the selling & other expenses during the year. iv) The comparative Gross Profit and Net Profit, NP rates based on turnover of the assessee for three assessment years as under: Assessment Year Sales Gross Profit G.P. Rate Net Profit N.P Rate 2009-10 2,300,800,364 11,640,991 0.51% 223,728 0.01% 2010-11 654,314,393 15,672,347 2.40% 232,768 0.04% 2011-12 766,680,006 2,63,19,608 3.43% 1,90,981 0.03% In the AY 2010-11 the AO has completed assessment by adopting average N.P. of 0.17%. accordingly, an amount of Rs.8,79,568/- added the returned income of the assessee. Therefore, the Ld AO applied N.P. Rate @3.88% is not tenable. The explanation given by the appellant found to be plausible explanation. Similarly, for A.Y. 2010-11 in assessee's own case, the AO had adopted NP at 0.17% of total turnover. Hence, the AO is directed to adopt NP at 0.17% as adopted in A.Y. 2010-11. The said NP works out to Rs.13,03,356/- (0.17% of 76,66,80,006/- Accordingly, Ground No. 2 is partly allowed.”

ITA No. 6413/M/2016 A.Y.2011-12 on this issue and decide these issues in favour of the assessee against the revenue.

ISSUE NOS. 4 & 5:-

“8 Ground No.3 related to unexplained cash credits of Rs.1,92,70,421/- The AO has added Rs.1,92,70,421/- on account of peak cash credit in the bank accounts of the assessee. The AR of the appellant argues that the "the assessee has calculated peck cash credit on the basis of cash received/generated by cash sales and deposited in Bank of Baroda and Karnataka Bank Therefore cash received/generated by cash sales and deposits/transfers into bank accounts cannot be considered for calculation of peak cash credit and addition liable to deleted." I have gone through the assessment order as well as P & L A/c. of the appellant company as on 31.03.2011 wherein the total sales admitted by the appellant company is as Rs. 76,66,80,0064/- as per Schedule 1'. The AR of the appellant company has given the break-up of sales which is as under : Credit Sales Rs.74,19,89,376/- Cash Sales Rs. 2.46.90.630/- Total Rs.76,66,80,006/- The AR of the appellant argues that about 1,92,70,421/- pertains to cash sales which is duly accounted in the sales turnover. Therefore, it cannot be added separately. Further, the AR argues that the cash sales of Rs.1,92,70,421/- which was treated as peak cash credit by the AO is a form part of cash sales of Rs.2,46,90,630/- out of the total sales of Rs.76,66,80,006/- as narrated above. Considering the above, explanation given by the AR of the appellant and also on examination of the P & L a/c. as per Schedule 'L', I am of the opinion that the above addition made of Rs.1,92,70,421/- is not justifiable one and therefore I direct the AO to delete. Accordingly, Ground No.3 is allowed.”

ITA No. 6413/M/2016 A.Y.2011-12

ISSUE NOS. 6 &7- 8. Issue no. 6 & 7 is in connection with the deletion of the addition Bogus creditors in sum of Rs.141,11,87,980/-. Before going further, we deem it necessary to advert the finding of the CIT(A) on record.:-

ITA No. 6413/M/2016 A.Y.2011-12

“10. Ground No. 5 relates to addition of Rs.141,11,87,980/ on account of bogus creditors. The AO has added sum of Rs.141,11,87,980/- on account of bogus creditors as the assessee was asked to furnish the confirmation letter from all the creditors with credit balance of Rs.10 lakh and above. However, the assessee had failed the prove the genuineness of the creditors. Vide letter dt. 29.06.2016, the assessee has stated as under: "That the similar issue had been decided in favour of the assessee by Hon’ble ITAT Bench Mumbai for A.Y. 2006-07 and 2007-08 For Assessment Year 2006-07 Ground No. 2 & 3 are regarding addition on account of bogus purchases. 3.6 We have note that the assessee has placed on record the details and shown from the purchases bills that purchases are matched with the export sale in the case of trading of goods for purpose of export and therefore, there is no: scope of any doubt about the purchases which are directly matching to the sale (export) Even otherwise, when the sales and all other quantitative details and figure regarding stock are accepted by the Assessing Officer then in absence of any direct evidence showing the non-genuineness of purchases in question. The addition is not sustainable on basis of assumption and conjecture relying on the ]bur statements recorded u/s 133A and that too without affording an opportunity of cross examination to the assessee. in view of the facts and circumstances of the case, we are of the opinion that addition in question on account of bogus purchases is not sustainable and accordingly the same is deleted. For Assessment Year-2007-08 Ground No. 6 are regarding addition on account of bogus purchases. 12.5 We have considered the rival submissions and relevant material on record. 7' A0 made addition by suspecting the purchases on the ground that the assessee h shown the purchases from these parties without making any payment during the year. The CIT(A) has confirmed the addition made by the AO by following the record for A.Y 2006-07. Though the impugned order of CIT(A) is sustainable because we have already given the finding on issue of bogus purchases for A. Y. 2006-07, whereby tJ addition made on account of bogus purchases has been deleted, however, in the facts the case except one party which is common for both the A. Yrs. namely SPS enterprise and other parties are ITA No. 6413/M/2016 A.Y.2011-12 not subject matter for the A. Y. 2006-07 We find that treated the purchases from these parties as bogus without disputing the quantitative details and purchases, stock and sales is not justified. Accordingly, in view of A.Y. 2006-07, we decide this issue in favour of the assessee." Ground No. 7 is regarding disallowance on account of bogus purchases of the earlier years. "We have considered the rival submissions and relevant material on record. Since t, issue for A.Y. 2006-07 has been decided in favour of the assessee, therefore, t, disallowance made by authorities below relying upon the orders for A. Y. 2006-07 is n sustainable and accordingly deleted." The above explanation given by the appellant is found to be acceptable. Respectfully following the above decision of the ITAT vide for the AS. 2006-07 and ITA No.5411/Mum/2011 for A.Y.2007-08 dated 17.10.2014, I am of the considerate opinion that the above addition on account of bogus creditors is to be deleted. Accordingly, Ground No. 5 is allowed.”

ITA No. 6413/M/2016 A.Y.2011-12