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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI CHANDRA MOHAN GARG, JM, & SHRI O.P.MEENA, AM
आदेश /O R D E R PER O.P. MEENA, AM. 1. This appeal by the Revenue is directed against the order dated 29-01-2016 of Commissioner of Income-tax (Appeals)- (in short CIT(A)) and relates to assessment year 2012-13 on following grounds of appeal: Whether the Ld. CIT (A) has erred in deleting the addition of Rs. 56,90,007/- rightly made by the Assessing Officer on account of low gross profit, even when the assessee was not able to substantiate major expenses claimed in the trading and profit and loss account.
ITO Burhanpur v. Pravin Mehta / I.T.A. No.446 /Ind/2016/A.Y. 12-13 Page 2 of 9
Succinctly, facts as culled out from the orders of lower authorities are that the assessee is proprietor of M/s. Rekha Cotton Corporation, which deals in trading of cotton. The assessee has filed his return of income on 21- 09-2012 declaring total income of Rs. 1,51,700/-. The case was selected under scrutiny. During the course of assessment proceedings, the AO noticed that the assessee has begun his business with effect from 24-06-2011 with opening capital of Rs. 1,21,000/- but no evidence in support of opening capital is filed. The assessee has shown gross receipts of Rs.59.55 crores and gross purchase of Rs. 59.52 crores on which gross profit is shown at Rs. 2,63,017/- giving gross profit rate 0.04%. However, the AO found that the assessee has not provided the details of direct, hamali and freight expenses and expenditure, and no expenditure on account of telephone, office, and general expenses was claimed. The AO also noticed that the assessee has taken an office space of 400 Sq. ft. at 42- Javara Compound, Indore on rent @4000/- per month from Smt. Sweta Yogesh Agrawal from 03-06-2011. For which the assessee had incurred rent expenditure of Rs. 40,000/- for ten months i.e. from 03-06-2011 to 31-03- 2012. However, such expenditure has not been debited in trading and profit and loss account. The assessee has also failed to produce copy of VAT tax return and sales tax order. The AO was also of the opinion that books of accounts were not produced. The AO further found that transaction through bank account were only at Rs. 41
ITO Burhanpur v. Pravin Mehta / I.T.A. No.446 /Ind/2016/A.Y. 12-13 Page 3 of 9
lakhs nor there is any unsecured loan in balance sheet nor have any creditors been shown. In view of these facts, the AO doubted that the assessee has provided accommodation entries to the others for their benefit. Therefore, in such circumstances and facts, the AO invoked the provisions of section 145 of the Act and rejected the books of accounts. The AO therefore, noted that in the business of cotton trading the general net profit rate ranges between 1% to 1.5%, accordingly, the AO applied 1% net profit rate on gross receipts of Rs. 59,55,02,383/- and computed gross profit at Rs. 59,55,024/- as against gross profit of Rs. 2,63,017/- shown by the assessee. Accordingly, addition of Rs. 56,92,007/- i.e. ( 59,55,024- 2,63,017) was added to total income. 3. Being, aggrieved, the assessee filed an appeal before the Ld. CIT (A). However, the CIT (A) observing that entire quantity of goods purchased was sold immediately to other parties, hence, there was actually no movement of goods. The books of accounts are rejected solely on ground that no expenditure on account of Hamali, transportation and other direct expenses was claimed, nor there was movement of goods. However, the AO has failed to pinpoint the specific defects, hence, rejection of books of accounts was not justified. The CIT (A) also noted the most of the purchases were made from nine parties, which are being assessed at Burhanpur, therefore, the AO could have verified their genuineness. The purchases subjected to
ITO Burhanpur v. Pravin Mehta / I.T.A. No.446 /Ind/2016/A.Y. 12-13 Page 4 of 9
VAT, of which copies were filed. The CIT (A) was also of the opinion that the AO has doubted that the assessee has provided accommodation entries, but this is a heavy burden lies on the AO to prove it but it was not discharged. Accordingly, the CIT (A) concluded that there was no reason to estimate the net income; consequently, the entire addition made to the income was deleted. 4. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The Ld. Sr. D.R. referring to the assessment order submitted that as per agreement of rent entered in to with Smt. Sweta Agarwal, from 03-06-2011 to 31-03-2012 , he is supposed to have paid rent of Rs. 40,000/- for office premises at Javra Compound. However, there is no such expenditure reflected in trading and profit and loss account. The learned Sr. D.R. also contended that no business such a large turnover of Rs. 59.52 Crores could have be done without incurring any expenditure on Hamali, freight, office expenses and general expense. Even salary expenditure of Rs. 1 lacs is debited on ad-hoc basis. The assessee has also failed to produce books of accounts before the AO. Therefore, the Ld. Sr. D.R. has vehemently argued that there was sufficient reasons for rejection of books of accounts. Therefore, the finding of Ld. CIT (A) are not correct on this point. The learned Sr. D.R. further submitted that the gross profit disclosed at 0.04% is quite low as compared to similar line of business. Therefore, Ld. CIT (A) was not justified to delete the entire addition of income without any valid reasons.
ITO Burhanpur v. Pravin Mehta / I.T.A. No.446 /Ind/2016/A.Y. 12-13 Page 5 of 9
Per contra, the learned counsel for the assessee submitted that the AO rejected books of accounts merely on presumption basis and applied net profit of 1% on actual turnover. The Ld. CIT (A) has dealt with the issue in detail and held that the AO was not justified in rejecting the books of accounts and Department has also not disputed on this point. The books of accounts are audited. The movement of goods were not routed through the assessee as goods were sold immediately as soon as purchases were made. Therefore, these are verifiable hence; the AO is not justified in estimating the net profit on disclosed turnover. The assessee filed copy sale account, purchase account, name of the parties from whom material was purchased. The books of accounts are audited and quantity of goods purchased and sold are maintained as reflected in tax audit report. The learned counsel relying on the decisions in the case of CIT V. Gotan Lime Khanij Udhyog [2002] 256 ITR 243(Raj) / 120 Taxman 779 /169 CTR 318 (Raj), CIT v. Anil Kumar & Co. 67 taxmann.com 278 (Karn), Malani Ramjivan Jaganath v. ACIT 316 ITR 120 (Raj) and others submitted that once rejection of books of accounts, is not justified, no addition can be sustained. 6. We have heard the rival submissions of both the parties and perused the material available on record. The AO has rejected books of accounts on the ground that transportation, hamali, freight and other direct expenses has not been debited in trading and profit and loss account
ITO Burhanpur v. Pravin Mehta / I.T.A. No.446 /Ind/2016/A.Y. 12-13 Page 6 of 9
by the assessee. We find that the Ld. CIT (A) has completely ignored the findings of the AO that the assessee has failed to furnish source of opening capital balance of Rs. 1,21,000/-, even though asked vide letter dated 02-06- 2014; during the course of assessment proceedings. The CIT (A) has also ignored the facts that the assessee has taken an office premises situated at 42 Javra Compound Indore, on rent @ 4000/- per month for the period from 03- 06-2011 to 31-03-2012 as per agreement of rent entered in to with Smt. Sweta Agarwal. Thus, total rent paid or payable for the year comes to Rs. 40,000/- but the same has not been debited in trading and profit and loss account. Therefore, source of Rs. 1, 61,000 i.e. [opening capital balance Rs. 1, 21,000 + rent Rs. 40,000] was remained as unexplained. We further find that the assessee has also failed to produce books of accounts before the AO. The argument of the CIT (A) that there was no movement of goods sold is also not tenable in law and on facts, as how without physical movement of goods it can be traded. It is not a case of the assessee, that transportation, hamali of cotton bales, was borne by purchaser of goods. The assessee has also failed to furnish the details of VAT paid and details of sale tax return wherein the assessee has disclosed the turnover as shown by the assessee. If the theory of the assessee is to be believed that there was no movement of goods, then in that case it gives rise to suspicion that the assessee has acted as mere accommodation entry provider to the concerned
ITO Burhanpur v. Pravin Mehta / I.T.A. No.446 /Ind/2016/A.Y. 12-13 Page 7 of 9
parties. The assessee has shown turnover of Rs. 59.55 lakhs whereas transaction of Rs. 41 lakhs were routed through HDFC account, meaning thereby that the transaction are effected on credit. However, the balance sheet of the assessee shows liability of Rs. 1 lacs only on unsecured loan from Shri Gulab Dumbwani, whether it was explained or not is also not known to us. On going through the account of the assessee with C.K. Oils Pvt. Ltd., placed at Paper Book Page No. 24 and 41, it is noticed that the assessee has made purchases of Rs. 11.65 lacs from this party from 17-11-2011 to 19-07-2011, but the payment of Rs. 11 .65 lacs was made on 27-03-2012 and 28-03-2012 after 10 months. However, no interest debited in trading account on these goods taken on credit for 10 months period. The assessee has taken office premises on rent in which also it must have installed furniture and fixtures, computer, printers, telephone, but no such assets are reflected in balance sheet. Even electricity expenses are not debited in Trading and Profit and Loss Account. In view of above-mentioned circumstances, reasons and facts, we are not inclined to accept the findings of the CIT (A) that books of accounts were maintained in accordance with law. In view of these facts and circumstances, we are of the considered opinion that the correctness of the books of accounts was not established to the satisfaction of the AO, especially when the books of accounts were not produced before the AO. Therefore, the books of accounts if maintained are not to the satisfaction of that Assessing
ITO Burhanpur v. Pravin Mehta / I.T.A. No.446 /Ind/2016/A.Y. 12-13 Page 8 of 9
Officer from which income cannot be deduced properly. Therefore, we are of the view to the AO was justified in rejection of books of accounts. 7. Coming to merits of the addition, we notice that this is the first year of business of the assessee, hence, the net profit rate of earlier are not available, hence, no comparison of preceding year net profit rate is possible. Therefore, there remain other criterion of comparable cases of net profit rate disclosed, but we note that this exercise is also not done by the AO. The assessee has disclosed Gross Profit Rate at 0.04% and net profit rate at 0.03%, which appears to be lower side in such type of trading business. In view of such facts and circumstances, it would be reasonable, if the addition is sustained on apparent discrepancies. We note that the assessee has not been able to explain the source of opening capital balance of Rs. 1,21,000/-. The assessee has also not debited office rent expenses of Rs. 40,000/-. There is no electricity expenses either and other direct expenses of hamali, freight, transportation etc., office general expenses and salary expenses are shown as ad-hoc at Rs. 1 lacs. Considering the totality of facts and circumstances of the case, we deem it fit to sustain an addition of Rs.4 lacs including the income of Rs. 1, 57,700/- disclosed by the assessee in his return of income. Accordingly, the deletion of addition of Rs. 56,92,007/- by the CIT(A) (wrongly mentioned in grounds of appeal at Rs. 56,90,007 ) modified to that extent. This ground is therefore, partly allowed.
ITO Burhanpur v. Pravin Mehta / I.T.A. No.446 /Ind/2016/A.Y. 12-13 Page 9 of 9
In the result, the appeal of Revenue is partly, allowed. 9. The order pronounced in the open Court on 24.05.2017
Sd/- Sd/- ( C.M. GARG) (O.P. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 24th May, 2017/opm