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Income Tax Appellate Tribunal, Delhi Bench“G”, New Delhi
Before: SHRI N.K. SAINI & SHRI KULDIP SINGH
This is an appeal by the Department against the order dated 19.8.2014 of the learned CIT(A), Faridabad. The grounds raised in this appeal read as under:- i. “On the facts andn in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the additions of Rs. 29,65,305/- made by the AO on a/c of low GP rate even though the assessee could not substantiate its claim with corroborative evidence for such a substantial fall in GP ratio. ii. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the additions of Rs. 6,33,000/- made by the Assessing Officer on a/c advance from customers even though the assessee neither filed any confirmations from the customers nor furnished any justification with regard to advances from customers outstanding which were received long back from F.Y. 2003-04 to 2006-07 and were not adjusted till the end of the year which proves that these advances are not claimable by the customers.
Vide ground no. 1, the grievance of the assessee relates to the deletion of addition of Rs. 29,65,305/- made by AO on account of low GP rate. The facts related to this issue in brief are that the assessee filed its return of income on 1.10.2010 declaring an income of Rs. 71,38,460/- which was processed under section 143(1) of the Income Tax Act (hereinafter referred to as the ‘Act’). Later on the case was selected for scrutiny. The AO, during the course of assessment proceedings noticed that the assessee declared less net profit on the sales of Rs. 59.30 Crores during the year under consideration in comparison to net profit shown in last year i.e. A.Y. 2009-10. The AO asked the assessee to justify the decline in net profit ratio and also to submit the valuation of closing stock during the year under consideration. In response, the assessee submitted as under:- “The main reason for dip in NP has been dip in GP ratio. It may kindly be noted that the GP ratio during the year under consideration was 2.39% as compared to 4.28% during the A.Y.2009-10, showing a fall of 1.89%. The reason for the drop in GP ratio as compared to A. Y. 2009-10 are as under: (a) From the chart it may be noted that workshop income to sales during A.Y.2010-11 was 0.63% while it was 1.16% during the A.Y.2009-10, showing a drop of 0.53%. Similarly, the percentage of incentive to sales during the A.Y.2010-11 was 0.87% against 1.57% during the A.Y.2009-10, showing a drop of 0.70%. As such on these two counts the income fell by 1.23%. As profit margin is very high in these two income heads, fall in these incomes resulted in lower GP ratio.
(b) The A.Y.2009-10 was exceptionally good to the company as margins were better. In fact during A.Y.2009-10, there was a recession in truck business as it may be noticed from the sales figures of the years given in the chart that sales during A.Y.2009-10 fell. However the assessee, with its good sales net work, stuck to sales prices while principals sold trucks to the assessee at more remunerative prices. This resulted in much better margins. However the assessee could not keep the strategy any longer successfully, and due to severe competition, it had to bow to the market and in order to increase its sales, sold trucks at lower margins.”
It was also stated that workshop income to sales during the year under the consideration was 0.63% while it was 1.16% during the preceding year. Similarly the percentage for incentives to sales during the under consideration was 0.87% as against 1.57% during the assessment year 2009-10. The AO, however, observed that the assessee failed to submit any documentary evidences in support of his claim for a substantial fall in gross profit ratio from 4.28% to 2.39% i.e. fall by 1.89%. The AO disallowed 0.50% decrease in gross profit ratio of sales accordingly a disallowance of Rs. 29,65,305/- was made.
4. Being aggrieved the assessee carried the matter to the learned CIT(A) and submitted as under:-
“The Ld. Assessing Officer made an addition of Rs. 29,65,305/- by applying a higher GP ratio .50% on the sales, to the returned income on account of lower GP ratio. During the assessment proceedings, the GP ratio was discussed by the appellant vide letters dated 19.12.2012 and 11.02.2013. The following are the explanations regarding the behaviour of GP ratio and / Net Profit: Amount in Rs. ------------Financial Year Ended on 31st March---------------- Particulars 31.03.2008 31.03.2009 31.03.2010 Sale 487579023 352079448 593061015 Workshop (Net) 3011895 4073408 3779046 Incentive (Net) 3496887 5527666 5167690 Turnover (A) 494087805 361680522 602007751 Gross Profit (C) 7739549 15484843 14362690 GP Ratio C*100/A 1.57 4.28 2.39 (i) Business does not work on ratios. It depends on the business scenario and circumstances. Businessman always tries to maximize the profit but it depends upon the market forces like competition, demand and supply, Government’s fiscal policies and further in assessee’s case, the margin provided by the principles.
(ii) The main reason for dip in NP has been dip in GP ratio. It may kindly be noted that the GP ratio during the year under consideration was 2.39% against 1.57% during the assessment year relevant to AY 2008-2009, hence an increase of .82%, However it was 4.28% during the financial year relevant to the AY 2009-2010, showing a fall of 1.89%. the reason for the drop in GP’ ratio as compared to AY 2009-2010 are as under:
(a) From the chart it may be noted that workshop income to sales during A.Y. 2010-2011 was .63% while it was 1.16% during the A.Y. 2009- 2010, showing a drop of .53%. Similarly the: percentage of incentive to sales during the AY 2010-2011 was .87% against 1.57% during the AY 2009-2010, showing a drop: of .70%. As such on these two counts the income fell by 1.23%. The profit margin is very high in these two income heads, fall in these incomes resulted in lower GP ratio.
(b) In the AY 2009-2010 margins were better. In fact during AY 2009-2010, there was a recession in truck business. However the principal allowed better margins so that dealers work harder to achieve sales. Also as sales were likely to fall due to recession, the dealers needed to be supported in bad times. Hence they were allowed better margins and better incentives, which were withdrawn in the next year. During the AY 2010- 2011, the margins were lower. From the perusal of the audited Balance Sheet and Profit & Loss Account, it may be noted that margin on sales decreased during the AY 2010-2011 as compared to AY 2009-2010 as explained hereunder:
Amount in Rs.
Particulars Year ended 31.3.2010 Year ended 31.3.2009 Sale 593061015 352079447 Cost of Goods 578883111 338215941 sold Margin on Sale 14177904 13863506 % to sales 2.39 3.94
As such margin on sale fell by 1.55%. Further as discussed above, the incentive income fell by .70%. All these incomes are provided by principals to the appellant, in which appellant had no role and control. The total margin fell by 1.55% + .70% =2.25%. (c) The assessee is facing competition on two fronts. On the one hand the Eicher Truck of which assessee is a dealer is facing severe competition from Tata and Ashoka Leyland and on smaT price difference, customer shifts to other brand. On the other hand, there are a large number of Eicher Truck dealers in NCR.. The customers flock at the dealer who sells cheapest. This ali explains lower GP. In such scenario there is no option but to remain competitive, i.e. compromise on margins. Had assessee not sold at lower margins, it would have lost business and whatsoever profit it was earning. There was no point in losing the business which would have impacted the future business prospects as well. Appellant in order to achieve more sales, compromised on margins. (iii) The assessee has tried its best to still earn the best possible profit, it could. In this order it made economy in interest expenses which reduced from Rs. 9,42,102/- during AY 2009- 2010 to Rs. 7,61,702/- during A.Y. 2010-2011. Similarly administration expenses reduced from Rs.63,09,429/- to Rs. 58,91,836/-. This all happened when sales jumped. The assessee has done remarkably better than AY 2009-2010 (after ignoring profit on sale of fixed assets) All the above submissions were discussed with the Ld. Assessing Officer. Books of accounts and all the vouchers etc were produced before the Ld. Assessing Officer in support of the working results which were examined by him as he liked. On such examination, he did not bring on record any deficiency, incorrectness or falsification in the record/evidences. It is also not brought on record if any information, document, evidence etc sought by the Id. Assessing Officer was not provided/produced by the appellant during the assessment proceedings. Still he passed and assessment order, making the addition of Rs. 29,65,305/- to the returned income which is not only unjustified, unreasonable, illegal but it is devoid of any finding, mere a guess work and made with a preset mind as discussed hereunder: (i) During assessment proceedings, the GP ratio pattern for AY 2010- 2011, 2009-2010 and 2008-2009 were discussed and it was brought to the notice of the Ld. Assessing Officer that GP ratio during the assessment year under consideration was lower than the last assessment year by 1.89% but higher by .82% with respect to previous to previous assessment year . However while framing the assessment, Ld. Assessing Officer was adverse to the fall in GP ratio with respect to the previous year (though without any substance and justification), he ignored the fact that it was substantially higher to previous to previous assessment year. Had he taken into account this fact, he could appreciate the facts more rationally.
(ii) The order passed is uncertain and full of contradictions. In para 2 of P. No. 3 of the assessment order the Ld. Assessing Officer observed "The AR of the assessee failed to submit any documentary evidences in support of the claim for such a substantial fall in gross profit ratio by 1.89%" but in very next para 3 of the same page, he observed "Further submission relating to workshop income and incentive to sales is accepted to some extent." It is not clear how on the first hand he observed that no documentary evidence was forwarded in support of the lower GP ratio as compared to the last year, then on the other hand in the same breath he acknowledged that upto some extent appellant has explained his case but still failed to disclose how the explanation put by the appellant was accepted partially. Now kindly look at para 4 of the assessment order appearing on P. No. 3 of the assessment order "After considering the above facts, the submission and contention of the assessee is accepted to greater extent and thus only .50% decrease in gross profit ratio of sales is disallowed and added back to the income of the assessee company." Now again it is not clear how documents furnished and explanations offered in justification of lower GP ratio could be accepted upto a large extent but not fully and where it lacked for not accepting it fully. It is also not clear how and on what basis the .50% decrease in GP ratio was added when there was no fault in appellant's explanation and there was no finding the books of accounts, documents etc produced before the Ld Assessing Officer were false, incorrect or deficient. Also Ld. Assessing Officer did not give any finding whether sales were suppressed or expenses were overstated. The reply to each and every query of the questionnaire was submitted. Details of expenses as required by the Ld. Assessing Officer were also filed vide letter dated 19.12.2012.
Kindly refer to para 4 P. No. 3 of the assessment order "Thus, the (iii) disallowance of Rs. 29,65,305/- (i.e. 0.50% of total sales of Rs. 59,30,61,014/-) is to be made on account of low gross profit ratio and is added back to the total income of the assessee company." It may kindly be noted that the addition has been made merely because of lower GP ratio, which is illegal as per law. There is no finding and no material on record to support the addition. In the case of Pandit Brothers v VIT (1954) 26 ITR 159 jurisdictional Punjab and Haryana High Court held that in the absence of definite finding that the case fell within the first proviso to section 145(1), it was not possible to sustain rejection of book results and addition to gross profit and the mere fact that the profits were low is not a circumstance or material alliunde which could justify an estimate. The honorable Allahabad High Court in the case of Laxmi Stores v CST, (1979) 43 STC 167, 168 held that low profit without any other defect being found in the account books is not a sufficient ground for rejection of accounts. All these citations apply to the appellant’s case. Keeping in view the above discussion it is prayed that the addition of Rs. 29,65,305/- to the returned income made by the Ld. Assessing Officer may kindly be deleted and relief may kindly be granted to be appellant accordingly.”
The learned CIT(A), after, considering the submissions of the assessee observed that the AO while making the addition for the low GP rate did not reject the books of accounts by pointing out any deficiency and also did not find any purchase or sale or expenditure to be unvouched / unsupported and even then he held that the fall in GP rate by 1.89% to be too high resulting an adhoc addition equal to 0.5% of total sale amounting to Rs. 29,65,305/-. He further observed that the assessee gave precise reason analysis of the fall in GP rate as per which its share margin fell by 1.55% and incentive income registered a decline to 0.70%. He also observed that the industry was facing a severe recession, in the preceding year high incentives were given to the dealers so that recessionary conditions in the economic did not get translated into a fall in the truck sales. The learned CIT(A) pointed out that in order to substantiate the fact that he incentive income registered a steep fall during the year as compared to the preceding year, the assessee gave a copy of duly audited Balance-Sheet for the year and the five preceding years which revealed that maximum incentive income was received in the preceding year i.e. A.Y. 2009-10 which was 1.53% as compared to 0.83% in the period relevant to assessment year under consideration. The learned CIT(A) also observed that besides explaining the lower profitability in its business during the year under consideration, the assessee pointed out that the AO made an adhoc addition without detecting in deficiency in its books of accounts which could have resulted in their rejection and subsequent rejection by invoking the provisions of section 145 of the Act. The learned CIT(A) held that the AO was not justified in making an adhoc addition on the basis of his observation that GP rate during the year under consideration had fallen as compared to the preceding year. The reference was made to the following case laws: i. Pandit Bros. vs. CIT (1954) 26 ITR 159 (P&H) ii. Laxmi Stores vs. CST (1979) 43 STC 168 (All) iii. CIT vs. Indo Nissan Oxo Chemical Industries Ltd. (2014) 45 Taxmann.com 478 (Gujarat) iv. GVDI & Co. Vs. DCIT Special Range, Coimbatore (2014) 43 Taxmann.com 246 (Madras) v. CIT vs. U.P. State Food and Essential Commodities (2013) 39 Taxmann.com 106 (Allahabad)
Now the Department is in appeal.
The learned Sr. DR strongly supported the order passed by the AO and reiterated the observations made therein. It was further submitted that the assessee could not explain the fall in GP rate in comparison to the preceding year therefore, the AO was fully justified in enhancing the GP rate of the year under consideration by 0.5% and the learned CIT(A) without appreciating the facts in right perspective was not justified in deleting the addition made by the AO. In his rival submissions, the learned counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the learned CIT(A). 8. We have considered the submissions of both the parties and carefully and gone through the material available on the record. In the present case, it is an admitted fact that the incentive income received by the assessee was having a decline and it was 0.83% of the turnover in comparison to 1.53% in the preceding year which was one of the reason for fall in GP rate for the year under consideration as compared to the earlier year. In the instant case, the AO while making an adhoc addition accepted the book result which is evident from this fact that he has not rejected the books of accounts by invoking the provisions of Section 145 of the Act. It is also noticed that the books of accounts of the assessee were duly audited and no specific defect was pointed out by the AO. In the present case, nothing is brought on record to substantiate that the purchases shown by the assessee were inflated or there was any suppressed sale or the expenses claimed by the assessee were not incurred for the business purposes. It is also noticed that there was fall in the workshop income and incentive to the sales in comparison to the preceding year which contributed to the low GP rate for the year under consideration. We, therefore, considering the totality of the facts are of the view that the learned CIT(A) rightly deleted the adhoc addition made by the AO. We do not see any valid ground to interfere with the findings of the learned CIT(A).
Vide ground no. 2, the grievance of the Department relates to the deletion of addition of Rs. 6,33,000/- made by the AO on account of advances from customers. The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had received advances from customer against the booking of vehicles amounting to Rs. 3,87,62,930/- which were shown as part of the current liabilities. He asked the assessee to submit the documentary evidences for sales made against the advances received from customers and also asked to show cause as to why the addition be not made in respect of advances received from customers. In response, the assessee submitted as under:- “The details of advances from customers vis a vis billing later year are already filed vide letter dated 19.12.2012. To elaborate further the figures are summarized as under:-
Particulars Amount (Rs) Advances from parties Rs. 3,73,79,574/- adjusted against future sales Advances from the parties Rs. 3,82,646/- return back Advances lying as such as on Rs. 8,30,191/- 31.3.2009 Advances lying as such as on Rs. 1,70,502/- 31.3.2010 Total Rs. 3,87,62,913/- The advances lying are customer’s money and as and when they appear, this money will be adjusted against sale or refunded to them. This money can never be assessee’s money as it does not belong to it and for maintaining dignity, credibility and image in market; assessee will never even try to forfeit the money. As such there is no occasion to tax the advance received from the customers. It may further be noted that in its profit & loss account and balance sheet, the assessee has treated and recognized the advance from customers as its liability and not an income.”
From the aforesaid details furnished by the assessee, the AO observed that the advances were lying as such as on 31.3.2009 amounting to Rs. 8,30,191/- and as on 31.3.2010 amounting to Rs. 1,70,502/-. He, therefore, again confronted the assessee to submit the details when these advances were received. In response, the assessee submitted as under:- “The details of the advances received from customers, which are still lying outstanding are enclosed. Theh assessee has not obtained confirmations from the customers for their advance money lying with the assessee as it will not be in the interest of its business. It is reiterated and again submitted that the advances will be returned back/adjusted against future sales to them, as and when these customers come.”
The learned AO after considering the submissions of the assessee observed that the advances received from F.Y. 2003-04 to F.Y. 2008-09 were as under:-
S. No. Particulars Amount (Rs) 1. Advances Received in F.Y. 2003-04 15,000/- 2. Advances Received in F.Y. 2004-05 1,32,000/- 3. Advances Received in F.Y. 2005-06 3,11,000/-
Advances Received in F.Y. 2006-07 1,75,000/- Total 6,33,000/-
He accordingly disallowed Rs. 6,33,000/- and added the same to the income of the assessee.
Being aggrieved the assessee carried the matter to the learned CIT(A) and submitted as under:- i. “During the assessment proceedings the details of advances received from customers were provided vide letter dated 11.2.2013 (P. No. 7-9), which was also mentioned in P. No. 3-4 of the assessment order. The breakup of the advance showed that the advances received but still not adjusted / repaid were as under:- Advances received upto 31.3.2009 Rs. 830191 Advances received during the year under consideration Rs. 170502 Total Rs. 1000693 14. The learned CIT(A) after considering the submissions of the assessee observed that the AO made the addition of Rs. 6,33,000/- concerning the advances outstanding for more than three years on the basis of inference derived by him that the said amount was not claimable by the customers. He further observed that the assessee gave the details of advances which included the names and addresses of the persons to whom the said advances were payable and the amount on account of advances was never claimed as deduction by the assessee in any of the years to which those advances were related. The learned CIT(A) held that the addition made by the AO would have been made only under the provisions of Section 68 or Section 41 of the Act but no addition could have been made under section 68 of the Act since those advances did not relate to the year under consideration and as the assessee never claimed the amount on account of the advances payable to the customers as a deduction in any of the earlier years therefore, the disallowance under section 41 of the Act was also ruled out. The learned CIT(A) was of the view that merely because the liability was outstanding for the last many years it could not be presumed with the sale had escaped to exist. Accordingly, the addition of Rs. 6,33,000/- made by the AO was deleted.
Now the Department is in appeal.
The learned Sr. DR reiterated the observations made by the AO and strongly supported the assessment order dated 14.3.2013 passed by the AO. In his rival submissions, the learned counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the learned CIT(A).
We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is noticed that the AO made the adhoc addition only on this basis that the liability shown by the assessee was outstanding for more than three years, no other reason has been given. It is not brought on record that the liability of the assessee ceased or the assessee had claimed any deduction in respect of advances payable in any of the earlier years. Therefore the addition made by the AO was rightly deleted by the learned CIT(A). We do not see any merit in this ground of the Departmental appeal.
In the result, appeal of the Department is dismissed. . (Order pronounced in the open court on 12.07.2018.)