ACIT, CIRCLE - 2, BURDWAN, BURDWAN vs. M/S. TULASI RICE MILL, BURDWAN

O R D E R

PER S.S.Godara, Judicial Member:

2. The Revenue raises the following substantive grounds in its instant appeal:- “1. Whether Ld. CIT(A) has erred on facts while giving relief to the assessee by restricting the enhancement of Gross Profit by only about 0.5% whereas the AO estimated the enhancement of Gross Profit by about 3.5% such that the overall Gross Profit was 8.5% in the Assessment Order, while the assessee had returned income with a Gross Profit of only about 5.5% Ld. CIT(A) quashed the reports of the several Government and private organizations that have carried out extensive research in the field of the physical and financial aspects of rice mills situated all over India. Ld. CIT(A) has refuted the results of such report without any other counterproof. Ld. CIT(A) is thus erroneous in his judgement.

2. Whether CIT(A) has erred in facts in estimating the addition to gross profit amounting to only 0.5% while stating that “if the purchases are enhanced through ACIT Cir-2/BWD vs. M/ Tulasi Rice Mill Page 2 bogus entries by 10% then this could lead to a corresponding enhancement in gross profit by roughly 10% keeping all other factors the same and vice versa.”

3. The CIT(A)’s detailed discussion partly upholding the Assessing Officer impugned addition reads as under:- “During appeal the appellant has submitted a set of written submissions as well as produced documentary evidence in support of his submissions In order to check the material relied upon by the AO, the assessment records were also called for and perused. The old cash book and the new one produced by the appellant were examined and compared. The written submissions of the ape are reproduced below for ready reference. 1. That the Ld AO had erred in adding Rs.95,80,579 to the total income of the assessee on account of ingenuine payment towards purchase of paddy when it is apparent from the face of the order vide page no.-3 under para-5, that there is no dispute with the purchase AO himself. Please note that the total purchase of the assessee firm for the year under consideration was of Rs.25,61,22,805 and the same figure being corroborated by the Acknowledgement of the returns filed before the Directorate of the Commercial Taxes, Department of Finance, Govt. of west Bengal, photocopies of which are attached for your kind perusal. 2. That the Ld AO rejected the books of accounts including the cash book because he found some deviation. However, he did not invoke such deviation into addition but estimated the gross profit of the assessee firm based on some research papers that were mostly conducted on hypothetical data and such papers do not have any veracity to be relied upon for the reasons as attached for your kind perusal in a separate sheet and hope your honour will appreciate the fact and delete the addition. 3. That during the, assessment proceedings, the cash book was asked in two parts and they were computer generated by using the software named TALLY. On 24/11/16 the cash book for the month of April 2013, November 2013 and February 2014 was produced and ledgers of some parties from whom purchases were made during the year was produced. And in tally, once a voucher entry is made, it will automatically fit under different heads and there is no scope of manual intervention. And the deviation occurred between the three month's cash book produced and the ledger. As both the ledger and the cash book was produced in the same day and time, the deviation must have occurred due to some technical fault and that is why, the whole cash book in binded form was produced during the assessment proceedings on 08/12/2016 to clarify all the doubts and deviation and that tallied in toto with all the entries. The Ld AO alleged that the new cash book is after thought and the assessee tried to rectify the defects as held vide page no 5 under para - 9, but that is not true. If that was so, then the following balance would not have tallied with the balances of the binded cash book:- Particulars Amount(Rs) Opening cash balance as on 01/05/2013 24,15,938/- Closing cash balance as on 31/10/2013 1,26,92,696/- Opening cash balance as on 01/12/2013 53,30,118/- Closing cash balance as on 31/01/2014 48,16,739/- Opening cash balance as on 01/03/2014 24,17,824/- So ignoring the technical fault and alleging the assessee to have made an afterthought cash book and rejecting the books of account is bad in law as the whole cash book in binding form was given during the assessment stage only on ACIT Cir-2/BWD vs. M/ Tulasi Rice Mill Page 3 0811212016, whereas the order was passed on 2011212016 and hope your honour will appreciate the fact and do the needful.

4. That in page no. - 6, under point - ii of para - 12, the Ld AO contended that payment towards purchase to the tune of Rs 39,55,316 is bogus, ignoring the fact that they were paid by cheque. Please note that the Ld. AO was trying to find out the cheque payments in the cash book and he suo moto took it to be granted that all the purchases were made in cash, which is not true and vide letter dated 12/12/2016 received by the dept. on 13/12/2016, the assessee clarified that part were cheque payments and the Ld AO had the bank details with him to verify the assessee's contention but instead he disallowed a major part of it on vague reasons. Please also find attached a separate sheet having all the details of the cheque payments with corroborating evidences and hope your honour will appreciate the fact and delete the addition.

5. PROJECT REPORT IN RESPECT OF RICE MILLS IN KELADY, KERALA - This report is Incomplete and does not specify the type of rice.

6. DEPARTMENT OF AGRICULTURAL MARKETING, CO-OPERATION AND BUSINESS MANAGEMENT UNIVERSITY OF AGRICUL TURAL SCIENCES BENGALURU-560065 - Under page - 5 of the report, it categorically says that "Further, the expressed opinion with regard to various is. sues of the study may not be totally free from personal bias and prejudice. Hence, 7. CRISIL L TO. - The study is limited to Basmati variety of rice only. I have examined the material on record and the appellant’s submissions and other supporting evidence. The following salient features emerge from this study: • It is quite apparent that there are discrepancies in the ledger accounts of certain parties, amounting to just over 3 lakhs, that haves not been satisfactorily explained by the appellant. • The fact of the matter is that it was the appellant who submitted, first copies of cash book extracts for three months, and thereafter, the entire cash book upon the Assessing Officer's demand. The discrepancies that are noted are very much part of the record. the appellant has no reasonable answer at all to explain why these discrepancies crept in. the discrepancies amounted to about a crore for two months. There are no further discrepancies for the months other than those for which two separate – old and new – cash book extracts were furnished. • There are certain unexplained purchases, payments for which were claimed to have been made in cheque. The AO could not find a justification for these payments. The appellant has however sought to explain these payments during appeal. This has been explained in para 4 of his written submissions reproduced above. He has also produced the bank book as well as other material including details of cheque payments to substantiate his claims. • The discrepancies between the cash outgoes of the cash book and the purchases declared by the appellant remained unexplained in view of the above discrepancies note by the AO. When we evaluate this appeal in the backdrop of the above noted summary of discrepancies, we find that the books of the appellant –the cash book mainly, in this case – is quite unreliable in respect of the three months mentioned above. The AO was quite right in rejecting the books of account even if we partly accept the discrepancies in relation to cheque payments. Having said that, we have to now come to the next question of estimating the gross profits of the appellant has relied upon certain reports enumerated above and taken 8.5% as the gross profit of the appellant.

ACIT Cir-2/BWD vs. M/ Tulasi Rice Mill Page 5 The Appellant has however raised some valid objections and queries in relation to the assumption of the said gross profit on the basis of reports that he says are not validated nor give a realistic picture of the rice milling business when applied to the region in which the appellant operates. He has summarized the reasons as under:- REASONS WHY THE BELOW NOTED RRESEARCH PAPERS CAN NOT BE RRELIED UPON TO MAKE THE UNREALISTIC ESTIMATION OF 8.5% GORSS PROFIT IN THE CFASE OF M/S TULASI RICE MILL FOR THE A/Y 2014-15.

1. NABARD – Date provided in the paper are hypothetical in nature based on a model project. This is because under page-6, it uses the term “tentative””under the heading “Electrical and other items”. Also under pavge no.-7, under heading utilities” and After examining the above reports, we conclude that the fact IS that right from procurement of Paddy, consumption of Paddy, Production of Rice, Sale of Rice, Stock of Paddy and Rice are controlled and monitored by empowered authorities. Statutory Registers are insisted upon by the government's food and public and for supervision movement of Paddy and Rice by each and every Rice Mills. Officials of empowered authorities visit each and every Rice Mill periodically for monitoring of Rice Mill operations. Daily procurement of Paddy are recorded in Statutory Registers which forms an integral part of books of accounts. But despite these safeguards there might have been questions of quantity of paddy actually purchased by the appellant. But, this we find, is not the case. The AO has not found any flaw with the registers, or any of the books maintained by the appellant. The quantities procured by the appellant have not been questioned. It has, in fact, been categorically asserted in the assessment order that there is no dispute as regards quantity of Paddy purchased, consumption of Paddy. Production and Sale of Rice and Rice Bran, and stock of Paddy Rice and cash. Due to absence of name and address, the Assessing Officer held that case Purchases were not verifiable - but not in terms of quantity, or that the parties were bogus, but in terms of the price paid for such procurement. The AO has not brought anything on record to substantiate his assumption that the prices paid for paddy were not reliable or were in some way excessive. He has not made per quintal comparisons for the purchase price of paddy. He has even otherwise not brought any circumstances to bear that the prices at which the paddy was purchased were in any way unreliable. This issue has to be brought on record by the AO, if he asserts that the price of paddy was overstated. This is especially important in the context of the fact that there is a Minimum Support Price for procurement of Paddy which is fixed by the Government of India in each and useful guide to likely price at which purchases of paddy would be made in the open market. I would trend to agree with the appellant when he states, in this connection that “There being no dispute with quantity of Paddy purchased, the total quantity on being multiplied with minimum support price will undoubtedly reflect the amount payable towards Paddy purchase. After deducting the gross value of credit purchase, the actual amount paid against cash purchase, could It we been easily derived. “ Even this exercise has not been entered into by the AO. Having said this, the fact is that the AO has brought on record the fact that the cash boom was unreliable to the extent elucidated by him in the above discussions. Therefore it gross without saying that the estimation of the gross profit of the appellant is in order and called for. Instead if conducting an exercise in which he estimates the amount of discrepancies and therefore try and derive the extent to which the gross profit is ACIT Cir-2/BWD vs. M/ Tulasi Rice Mill Page 6 understated through an analysis of the discrepancies, the AO has picked up some reports that indicated the likely gross profit that a persons in this type of business could be likely to expect. These reports, while undoubtedly relevant, should be utilized with care while deciding issues related to revenue. Since all these reports are region-specific and also depend on several other factors, like the grade of paddy being used, the geographical area, rainfall conditions, logistics lines of paddy supplies, the incidence of power supplies, labour conditions etc., it has to be demonstrated by the AO that any particular report that he is proposing to use. The conditions as laid down in the said reports should be shown to have at least a rough equivalence with the conditions that exist in the case of the appellant. The reports themselves vary considerably from one another and show projected gross profit margins that vary over a range of 6% to 8.5%. This kind of variation over a turnover of about Rs.25 core can create a variation in gross profit of as much as about 65 lakh. This makes it imperative not only for the AO to state clearly which report he is relying on but also how the results of this report would apply to the appellant’s case. Needless to say that there has to be a judicious an careful application of mind in this respect by the Assessing Officer. Coming to the case at hand. The AO has picked up one of several studies that he has quoted. Nowhere has he stated his reasons for doing so. He has not shown how the conditions enumerated in these studies apply to the case of the appellant. It is that the studies quoted by him are studies conducted in controlled environments and therefore would also have to show how their results would e translated the would be serious doubts raised as to the validity of such controlled results upon real-life situations. The quality of rice that is being used, the paddy yields, and rather conditions do not as is it is match up with studies that were conducted mostly in Kerala. Andhra Pradesh, Haryana and such other places. It is not clear from a study of the reports as to whether the conditions enumerated therein would in de d be applicable in the instant case. The appellant has pointed out some very valid reasons, besides those mentioned above for insisting that reliance cold not and should not be placed upon these reports. These are as stated above and cannot, in my opinion be rejected outright. The appellant has pointed- out material reasons like the difference in the type and grade of rice being reported upon and that which is in question the instant case. The questions related to geographical area, weather, soil conditions, markets etc also undoubtedly have relevance Coming to issue of procedures; even if for the sake of argument, it is believed by the AO, or shown by him that one or more of the studies have relevance to the specific case of the appellant, it is incumbent upon him to give the appellant the opportunity to refute this inference of the AO. Any material that is to be used again the appellant has to be at least shown to him. This is the case even if the material to be used is from experts. The appellant, in this case was nut afforded any opportunity to respond in is defence. An addition based upon such a faulty procedure as it s not maintainable in law. Without prejudice to what has already been stated above, even if the AO were to reject the books as unreliable, and proceed to estimate profits, it would be more credible to do so by relying upon the data that virtually abounds around him in Burdwan. There are almost 600 functional rice mills operating in Burdwan. There is an abundance of data available from these mills for making comparisons and forming estimates. The AO, surprisingly, has not quoted even one case as matter of ACIT Cir-2/BWD vs. M/ Tulasi Rice Mill Page 7 comparison. This circumstance would also cast a doubt on the estimates formed by the AO. In the context of the above discussions, I cannot understand as to how the results of he said reports were applied in this case without following procedures for the validation and r liability of this data in relation to this region or without affording the appellant with a reasonable opportunity to rebut the findings. I cannot find merit in the AO's action of relying upon the said reports and assuming that there was a gross profit of 8.5%. It would be much more reasonable to estimate this gross profit by estimating the mount of discrepancy found in the cash book. We find that the amount of discrepancy found is just over 2 crore in the cash books closing and opening balances. Since the other discrepancies also appear within the cash book and that fact that the effect of one discrepancy would carry over - to large extent- to the other discrepancy, one can estimate that the there could be a loss of gross profit amounting to about 0.5% in the overstatement of purchases of looking of bogus purchases. This is because the said discrepancies would telescope into one another. In the interests of justice and for the purposes of revenue, therefore, it would suffice to restrict the estimation of profit to 0.5% over and above that declared by the appellant. The rationale behind this is that the discrepancies found within purchases are reflected - in the negative - in the discrepancies found in gross profit. For example, say, if the purchases are enhanced through bogus entries by 10%, then this would lead a corresponding enhancement in gross profit by roughly 10%, keeping all other factors the same, and vice verse. before, in the instant case, the maximum discrepancies in purchases, even without telescoping would lead to the enhancement in profit by about 10% over and above what was declared by the appellant. This would lead to a gross profit enhancement of only about 0.5% after making some small provision for telescoping effects of the discrepancies in entries found in the cash book. The AO is therefore directed to give effect to this appeal accordingly.