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Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA
Before: Shri S.S.Godara & Dr. A.L. Saini
आदेश /O R D E R PER S.S.Godara, Judicial Member:- This Revenue’s appeal for assessment year 2012-13 arises against the Commissioner of Income Tax (Appeals)-15 Kolkata’s order dated 27.02.2017 passed in case No.289/CIT(A)-15/14-15/Cir-49/Kol, involving proceedings u/s 144 of the Income Tax Act, 1961; in short ‘the Act’. Heard both the parties. Case file perused. 2. The Revenue raised the following twin substantive grounds in the instant appeal:- “1. That on the facts and in respect to the circumstances of the case, the Ld. CIT(A) is not justified in law in directing to take profit of export business at Rs.78,75,893/- A.Y. 2012-13 ACIT Cir-49(1), Kol. Vs. Bablu Das Page 2 (being 1,0075%) of the turnover) instead of Rs.2,34,51,790/- (being 3% of turnover) as adopted by the assessing officer in his assessment order.
That on the facts and in respect to the circumstances of the case, the Ld. CIT(A) is not justified in deleting disallowance of Rs.57,12,319/- holding that when the books of accounts are rejected and profit was estimated no further disallowance u/s 40(a)(ia) is justified, though such disallowances were made on technical grounds on the basis of details available on record.”
Both the learned representatives takes us to the CIT(A)’s detailed discussion directing assess the taxpayer’s export profits at ₹78,75,893/- @ 1.0075% of the turnover as against the Assessing Officer’s action assessing the same @ 3% amounting to ₹234,51,790/- as under:- “3.2 Grounds of appeal
No.3 & 4: Assessee is engaged in the business of export of fresh fruits, fresh fish, fabrics, auto parts, leather shoes and rice to Bangladesh. Besides assessee had also earned some income in jute trading and hire charges on his own lorry. Assessee had also earned interest income. During assessment proceedings,. notices u/s 133(6) were issued to some of the parties on test check basis. However, these parties were not found on the addresses provided by the assessee. Due to some problem in the software, books of accounts could also not be produced for verification. Hence, books of accounts were rejected u/s 145(3) and profit was estimated @ 3% of the total turnover (of Rs. 78,17,26,346/-), at Rs.2,34,51,790/-. In appeal proceedings assessee has submitted that during assessment proceedings, Audited balance sheet alongwith Tax Audit Report, various statements such as party wise purchases, sales and expenses ledgers were produced. However, hard copies of books of accounts were not produced as the hard disk had crashed. It is further submitted that A.O. has arbitrarily estimated net profit @ 3% of turnover, whereas audited accounts are showing profit @ 0.31 % of the turnover, for the current year. If average of 5 years are taken then also average net profit ratio comes to 0.86% of the turnover. That entire addition has been made on guess basis. Assessee is engaged in export and any disallowances of purchases would also render the corresponding export as bogus. Assessee has cited various judgements/decisions which say that estimation should be based on net profit trend and the estimation should be based on the available material on record and should have a reasonable nexus to the available material and circumstances of the case. It is further submitted that no defect has been pointed out in the books of account and the accounts were audited by the auditors. It is also true that no sales and purchases were from outside the books of account. All purchases are being exported and the suppliers have been paid by RTGS/ Ale payee cheques through proper banking channels. That all the exports have been made after complying with all the rules/regulations/laws of the Land i.e. Customes Departments, D.G.F.T., Exchange Control Rules & regulations of Reserve bank of India Banks. After rejecting the book results, the A.O. does not get unfettered powers to make assessment of any income. He is supposed to be guided either by the previous results of the assessee or some comparable cases. In the instant case, the AO estimated the NP @ 3% of Sales Turnover without any cogent material whereas the average Net Profit for last five years is only 0.86%. That ad hoc estimate of NP is divorced from the relevant facts. That the appellant is engaged in business of export of Fabrics, Rice, Fruits & Vegetables, Machinery parts etc. and due to fluctuation of foreign currency & commodity price and fixing the export price by the A.Y. 2012-13 ACIT Cir-49(1), Kol. Vs. Bablu Das Page
3. Govt. etc., the appellant records inconsistent profit margin on year to year basis. Appellant has also submitted the ledger accounts of all purchases, which also show that payments have been made either through cheques of RTGS. I have carefully considered the facts of the case and the submissions of the assessee. As the suppliers were not found at the addresses and assessee was also unable to produce the books of accounts, A.O. is justified in rejecting the books U/S 145(3) and estimating profit of the business. However, at the same time, I also agree with the view of the assessee that estimation of profit should be fair and based on the information available on record. Assessee is an exporter. All his receipts are duly recorded in the books and have been received through banking channels. Quantitative details of the exported items matches with the purchases. Hence, there is no doubt about the corresponding purchases made. Now the only issue which is to be settled is the net profit earned by assessee. A.O. has estimated net profit @ 3% of the turnover but he has not discussed the basis of adopting this ratio, neither has he cited any comparable cases. Under the circumstances, the net profit ratio adopted by the A.O. is open to debate and modification. The items in which assessee is dealing are mostly perishable items (fruits, fish etc.) and also some non-perishable items. But all these items are trading items and none of these have been manufactured by assessee. Under the circumstances, export of these items face heavy competition from the other exporters. Under the circumstances profit margin cannot be huge. But in the absence of any comparable figures, quantum of net profit ratio should be taken by observing the net profit ratio trend of the proceeding years. In the preceding years also books were audited. Appellant has intimated the following net profit ratio of the 5 years: SI No. Assessment Year Net profit ratio (%) 1 2008-2009 0.11 2 2009-2010 1.13 3 2010-2011 2.01 4 2011-2012 0.78 5 2012-2013 0.28 Average net profit ratio 0.86% Assessee has included current year's profit ratio also while arriving at the net profit ratio. However, entire exercise is being carried out for arriving at the profit margin of the current year. Hence, profit ratios of only the preceding years should be considered. Hence, considering the profit ratio of the preceding 4 years, average net profit ratio is 1.0075% of the turnover. Hence, applying this ratio, net profit of the current year is computed at Rs.78,75,893/-. Therefore, instead of Rs.2,34,51, 790/-, A.O. is directed to take profit of export business at Rs.78,75,893. 3.3 Grounds of appeal No. 5 & 6: After estimating net profit, A.O. has observed that assessee did not deduct tax at source on payments made to transporters. Hence, provisions of section 194C are violated. A.O. has further disallowed Rs.57,12,319/- u/s 40(a)(ia). Assessee has contested this disallowance on two grounds. First, assessee has submitted that there was no contract between the assessee and the transporters and secondly, once net profit of the business is estimated any further disallowance either u/s 40(a)(ia) or u/s 37(1) cannot be made. In support of his proposition, assessee has relied upon the following judgements/decisions: a) Indwell Constructions vs CIT (1998) 232 ITR 776 (AP H.C) b) Dabros Industrial Co. Pvt. Ltd. vs CIT (1997) 108 ITR 424 (Calcutta H.C)
ITA No.965/Kol/2018 A.Y. 2012-13 ACIT Cir-49(1), Kol. Vs. Bablu Das Page 4 c) Cir vs Banwarilal Bansidhar (1998) 229 ITR 229 (Allahabad H.C.) d) Cosmopolian Trading Corporation vs ITO, 13 (ITAT Jaipur). e) CIT, Kolkata-XVII, vs Shri Arjun Bhowmick GA No. 2683 of 2014, (Calcutta H.C). f) ITO vs Kenaram Saha and Subhash Saha 301 ITR (AT) 17 (Special Bench, Kolkata ITAT In the judgements/decisions mentioned above it has been held that once the net profit rate is estimated after rejecting the books of accounts, AO cannot rely on the same books for making any further disallowances. In the case of Shri Arjun Bhowmick (Supra), Hon'ble ITAT had held that AO cannot base his disallowance on the same books of accounts for the purposes of invoking the provisions of section 40(a)(ia) or general disallowances u/s 37 of the Income Tax Act, once the books of accounts are rejected and net profit is estimated. Hence respectfully following the judgements/decisions, as cited above, it is held that further disallowances u/s 40(a)(ia) is not justified when the books of accounts is rejected and profit was estimated. Hence, disallowance of Rs.57,12,319/- is deleted.”
It is vehemently contended on the Revenue’s behest that the Assessing Officer had rightly rejected the assessee’s books u/s 145(3) of the Act since the latter head failed to produce some of the parties on test check basis regarding its purchases made involving fresh fruits, fresh fish, fabrics, auto parts, leather shoes and rice Bangladesh. The assessee is fair enough in not questioning the Assessing Officer’s action rejecting its books of account. We observe in this backdrop of rival pleadings that the Assessing Officer had rightly rejected the assessee’s books.
Next comes the issue between parties about rate of assessee’s net profit vis-a-vis its sale turnover. It has come on record that the assessee’s net profit ratio varies from 0.11% to 2.01% from assessment years 2008-09 to 2012-13 as per CIT(A)’s tabulation average and average of the net profits comes to 0.86% only. The CIT(A) has admittedly assessed the assessee’s net profit ratio @ 1.0075% of the turnover. This is not the Revenue’s case that the impugned assessment year involves any distinguishing facts as per its pleadings in former substantive ground. We conclude in this factual backdrop that the CIT(A) has rightly taken the assessee’s net profit ratio @1.0075% of the turnover. The Revenue’s instant former substantive ground fails accordingly.