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Income Tax Appellate Tribunal, KOLKATA BENCH (A
Before: Shri P.M. Jagtap(KZ) & Shri A. T. Varkey, JM]
Per P.M. Jagtap, Vice President (KZ) This appeal is preferred by the revenue against the order of Ld. CIT(A) – XX, Kolkata dated 27.08.2014 on the following grounds: “
1 .On the facts and circumstances of the case, the Ld. CIT(A) erred in restricting the addition to the extent of 10% of the expenditure claimed through self-made vouchers for the post survey period.
2. On the facts and circumstances of the case, the Ld. CIT(A) erred in holding that there was no specific defect pointed out by the AO while rejecting the books of account.
3. On the facts and circumstances of the case, the Ld. CIT(A) erred in holding that expenses claimed during post survey investigation were supported with relevant documents, whereas no such bills/vouchers were found during the course of survey and bill produced were contradictory of the statements made by the partners.
2 M/s. Kedia Pipes Assessment Year: 2010-11
On the facts and circumstances of the case, the Ld. CIT(A) had erred in relying on the G.P./N.P declared in earlier years, whereas in the year under consideration the N.P was estimated on the basis of facts deducted and established during the course of survey.”
The relevant facts of the case giving rise to this appeal are that the assessee is a partnership firm which is engaged in the business of trading in G.I. pipes, fittings and mill stores hardware. The return of income for the year under consideration was filed by it on 28.09.2010 declaring a total income of Rs. 1,12,83,818/-. A survey u/s 133A was carried out in the case of the assessee on 10th February, 2010. As per the books of account found during the course of survey, the net profit of the assessee’s business for the period 01.04.2009 to 10.02.2010 was found to be Rs. 2,10,82,772/-. After making adjustment to the said profit on account of opening stock, closing stock and unrecorded purchases and other expenses, the net profit for the pre-survey period was worked out by the survey team at Rs. 2,26,17,483/-. In the return of income filed for the year under consideration, the total income of only Rs. 1,12,83,818/- was declared by the assessee which was inclusive of interest and other income amounting to Rs. 44,35,590/-. The AO, therefore, found that the business income for the entire year was declared by the assessee only at Rs. 68,80,220/- while the same for the pre-survey period i.e. 01.04.2009 to 10.02.2010 was worked out at Rs. 2,26,17,483/-. He also found that huge expenditure was claimed by the assessee under various heads during the post survey period from 11.02.2010 to 31.03.2010 which was 72% of the total expenses claimed by the assessee for the year under consideration whereas the sale of the assessee during the post-
3 M/s. Kedia Pipes Assessment Year: 2010-11 survey period was only 21% of the total annual sales. According to the AO, the book results shown by the assessee for the year under consideration were not reliable and he required the assessee to explain as to why the same should not be rejected and assessment should not be completed as per the provisions of section 145(3). In reply, it was submitted by the assessee that substantial expenditure on account of purchases and other expenses had remained unrecorded in the books of account for the pre-survey period and this fact was clearly pointed out by the partner of the assessee firm in his final statement recorded after the survey. It was submitted that the said expenditure was duly supported by relevant vouchers / bills and the same were produced before the Assessing Officer at the time of recording of the final statement of Shri Prabhat Kedia, a partner of the assessee firm. It was also submitted on behalf of the assessee that other income of Rs. 44,03,598/- was inclusive of reimbursement of incentive received from M/s. Tata Steel Ltd. and the same constituted the business income of the assessee.
The explanation offered by the assessee was not found acceptable by the AO. According to him, the substantial expenditure claimed to be not recorded in the books of account for the pre-survey period was supported mainly by self-made vouchers and the same was not brought to the notice of the survey team which was present at the assessee’s premises for more than 18 hrs. He held that the unrecorded vouchers found during the course of survey were acceptable, but the self-made vouchers which were not found during the course of survey and submitted by the assessee later could not be 4 M/s. Kedia Pipes Assessment Year: 2010-11 accepted. To arrive at this conclusion, the AO relied on the statement of Shri Dilip Kedia recorded during the course of survey where he had stated that the books of accounts were updated till date barring few entries related to purchases and expenses which were to be recorded. The AO held that there was a contradiction in the stand taken by the assessee during the course of assessment proceedings and the statement recorded during the course of survey. He, therefore, rejected the books of account of the assessee and estimated the income of the assessee by applying a net profit rate of 4% on the total turnover of Rs. 2,69,68,320/- which resulted in the addition of Rs. 1,56,84,502/- to the total income of the assessee.
4. The addition of Rs. 1,56,84,502/- made by the AO was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) restricted the said addition to the extent of 10% of the expenditure claimed by the assessee through self-made vouchers for the following reasons given in his impugned order: “After careful consideration of the appellant’s abovementioned working on apportionment of impugned expenses between the pre-and post-survey periods, I am of the view that the apportionment of expenses pertaining to pre and post survey periods has to be done after considering all the expenses pertaining to pre-survey period which were not recorded in the books of account at the time of survey and vouchers of which were submitted at the time of post-survey investigation and at the time of recording of the final statement of the partner. Further, the preliminary statement recorded during the course of survey has to be considered in totality rather than taking just bits and parts out of it to frame the assessment order. As such the preliminary statement of 5 M/s. Kedia Pipes Assessment Year: 2010-11
one of the partner recorded at the time of survey cannot be considered as conclusive with regard to as to whether the vouchers submitted at the time of post survey were genuine or not when the partner himself had stated that he had to go through his accounts to enable him to conclude in the matter. On the other hand the final statement of the other partner recorded in post survey proceeding detailing all such expenses incurred (paid or remaining unpaid) and copies of supporting vouchers thereof submitted had supported genuineness of the expenses claimed. As far as the legality of the application of Sec 145(3) is concerned , the AR of the appellant has submitted that the rejection of the books of accounts without pointing any specific instance of irregularity in the same is against the intent of section 145(3) and has cited various judicial decisions in this regard. Reference is made to the following: 1. Assistant Commissioner of Income-tax, Raipur v. Roopchand Tharani 208 Taxmann 223 2. Commissioner of Income Tax v. Bharat Rice Mills 122 Taxmann 418 3. ITO v. Amarnath Ram Kumar [1995] 8l Taxman 148 (Chd.) (Mag.) 4. ITO v. Jain Saree House [1995] 82 Taxman 83 (Delhi) (Mag.) It is established law that in order to invoke the provisions of section 145(3), the A.O has to prove his non satisfaction regarding the correctness or completeness of accounts of the appellant. In the present case, this element clearly seems to be absent where the A.O has failed to bring out any specific instances of irregularity in the books of account of the appellant which may justify the rejection of the books of accounts u/s 145(3) as has been pointed out by the appellant. “The completeness of accounts refers not only to the accounting entries for all the transaction done in the previous year but also to the list of ledger/books of accounts as described in clause (12A) above and logically it also refers to the support registers, documents, bills, invoices etc. In other words, the failure to maintain relevant registers or any other books described in the list makes the accounts of the assessee incomplete. On the other hand, the correctness of the accounts refers to the quality or accuracy or reliability of the accounts maintained by the assessee and it covers the reconcilable mistakes or errors in accounts. Thus, the completeness refers to list of books of accounts and entries therein and the accuracy refers to the quality of the accounts of the assessee.”
6 M/s. Kedia Pipes Assessment Year: 2010-11
The A.R further argued that the books of accounts including the day books being regularly maintained and audited cannot be treated as incomplete and incorrect in absence of specific defects as would prevent the A.O from correctly ascertaining the income of the appellant. As such the action of the A.O in rejecting the books of accounts on the sole basis that the vouchers for. The appellant has also raised ground that after rejection of the books of accounts, the A.O has arbitrarily estimated the net profit at 4% of the turnover without making reference to any comparable cases. Without prejudice to above, he further argued that the appellant’s own case is the best comparable case which shows the GP & NP figures for the last 3 years as below: Year TURNOVER GP GP% NP (before NP% tax) F.Y 53,20,91,116.08 2,46,38,083.39 4.63% 21,16,543.88 0.40% 2006-07 F.Y 58,09,37,838.54 2,62,65,544.93 4.52% 24,61,788.27 0.42% 2007-08 F.Y 54,73,58,040.84 2,88,26,475.59 5.27% 28,52,058.50 0.52% 2008-09 F.Y 67,42,07,993.13 4,08,13,138.85 6.05% 1,11,30,979.49 1.65% 2009-10
The appellant also submitted that the cases for the above years were completed under scrutiny and no adverse inference was drawn in the assessment orders regarding the profit figures. In this regard, the appellant has relied on the following case laws: (i) Bombay Steel Centre v. ITO [1995] 83 Taxman 85 (Ahd.) (Mag.) (ii) Murlidhar Corporation v. Asst. CIT [1997] 58 TTJ (Ahd.) 699 (iii) Jhandu Mal Tara Chand Rice Mills v. CIT (1969) 73 ITR 192 (P&H) (iv) CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal.).
7 M/s. Kedia Pipes Assessment Year: 2010-11
(v) Handloom Intensive Development Project (Bijnor) Ltd. v. ITO [1991] 39 TTJ (Delhi) 382 (vi) Badrinath Agarwal v CIT [1967] 65 ITR 242 (All.) (vii) Dabros Industrial Co. (P) Ltd. v. CIT (1977) 108 ITR 424 (Cal). (viii) Joseph Thomas & Bros. v. CIT [1968] 68 ITR 796 (Ker) and B.V. Aswathiah & Bros. v. CIT [1968] 69 ITR 860 (All.) (ix) Commissioner of Income Tax vs Mascot (India) Tools and Forgings Pvt. Ltd. (x) Commissioner of Income Tax vs Pradeep Goel 174 Taxmann 421 (xi) Bathinda Truck Operator Union vs. Income Tax Officer Ward 1(3) (xii) Commissioner of Income Tax Bikaner v. Jaimal Ram Kasturi. (xiii) Assistant Commissioner of Income Tax v. Gendalal Hazarilal & Co. (xiv) Seth Nathuram Munnalal v. CIT [1954] 25 ITR 216 (Nag) (xv) General Commercial Corporation Ltd. v CIT [1966] 62 ITR 459 (MAD) (xvi) Polisetti Subbaraidu & Co. v. CIT [1968] 69 ITR 738 (AP) (xvii) S. Sarabhaiah & Sons v. CIT [1967] 64 ITR 175 (AP) (xviii) Yaggina Veeraraghavulu & Mavuleti Somaraju & Co. v. CIT [1966] 62 ITR 528 (AP) Common principles which emerged from all the above judicial decisions are as under: (i) Rejection of books of accounts without pointing out any specific instance of irregularity is not valid. (ii) An arbitrary estimation of Gross Profits cannot be made in absence of specific instances of irregularities being pointed out. (iii) Estimation of profits, if made, has to be made on the basis of comparable cases which must be confronted to the appellant.
8 M/s. Kedia Pipes Assessment Year: 2010-11
(iv) In cases where trading results have been accepted in the past, the same cannot be rejected in subsequent years without there being any material difference in the nature of business / type of accounts maintained. (v) In cases where profits have been declared and the same are higher than the profit rated accepted by the department in the past, no addition can be made by estimating the profits of the appellant. It has been clarified in a recent judgement in the case of Vishnu Prasad Maharwal vs. Dy. CIT (2014) 162 TTJ (JP) (UO) 18 that in cases where NP rate in the relevant year is better than that in the preceding years, no addition is called for on the facts of the case even if the provisions of section 145(3) are invoked. As regards the estimation of profit, no comparable case has been given by the AO. Further, both the Gross Profit & Net Profit of the appellant have increased in the current year as compared to the earlier years which were also under scrutiny assessments. In view of the decision in the case of CIT v. Bhawan VA Path Nirman (Bohra) & Co. (2002) 175 CTR 160 (Raj), the past history of the assessee is best guiding factor. In the present case, the assessee has declared better results than the preceding years and therefore in view of the judicial pronouncements cited above, even if the provisions of section 145(3) are invoked, no addition is called for. In view of the facts and circumstances of the case as discussed above and also the case laws relied upon by the appellant, I find merit in their arguments. There was no specific defect pointed out by the AO while rejecting the books of account. The reconciliation statement was provided to the AO during the post survey investigation with regard to expenses claimed and the same were supported with relevant details/documents. The GP/NP shown is much higher during the year in comparison to the earlier years. Under these circumstances, the submission/argument of the appellant is found to be sustainable, therefore, I find that the AO was not justified to reject the books of account and estimate the profit at 4%. However, the fact remains that the expenditure towards the heads of expenses discussed (supra) were supported by self-made vouchers but the appellant submitted that during the course of survey action, on the discrepancies pointed out, they admitted the quantum of undisclosed income and offered the same for taxation (Rs. 1 crore) on which due taxes had also been paid. However, there is always possibility to inflate the expenditure on the basis of self-made vouchers. Looking to the nature of expenses and business of the appellant and after taking into account all
9 M/s. Kedia Pipes Assessment Year: 2010-11 the relevant facts, it would be reasonable in this case in the interest of natural justice that the claim of the appellant for expenses for the post survey period with regard to self-made vouchers is disallowed to the extent 10% of the claim made through self-made vouchers. Therefore, the AO is directed to calculate the disallowance accordingly.”
The learned DR submitted that the books of account maintained by the assessee were incomplete as found during the course of survey. He submitted that the partner of the assessee firm in his statement recorded during the course of survey stated that certain expenditure incurred on purchases and other expenses was not recorded in the books of account and details of the same were also furnished by him. He submitted that the survey team, after taking into consideration the said unrecorded expenses and after adjusting the opening stock and closing stock, worked out the profit of the assessee upto the date of survey of Rs. 2.26 crores. He submitted that the assessee in the return of income however declared a profit of Rs. 68,80,220/- only for the entire year and when the matter was examined by the AO, it was found that huge expenditure was claimed by the assessee during the post-survey period which was disproportionate to the sales and was supported mainly by self-made vouchers as pointed out in the assessment order. He contended that the book results declared by the assessee thus were not reliable and the AO was fully justified in rejecting the same. He contended that the Ld. CIT(A) however overlooked the defects pointed out by the AO in the books of account of the assessee and accepted the contention of the assessee that certain expenditure incurred at Godown by the assessee during the pre-survey had remained to be accounted for. He contended that survey was also carried out at the Godown of the 10 M/s. Kedia Pipes Assessment Year: 2010-11 assessee and there was nothing found to show that such huge expenditure incurred at Godown had remained unrecorded. He contended that the action of the AO in rejecting the books of account was fully justified in the facts of the case and since the income of the assessee was estimated by the AO by applying a net profit rate of 4% as worked out during the course of survey on the basis of books of account of the assessee, the Ld. CIT(A) was not justified to allow substantial relief to the assessee on this issue.
The learned counsel for the assessee, on the other hand, submitted that the books of account as found during the course of survey carried out on 10.02.2010 were incomplete in as much as substantial expenditure relating to pre-survey period was not recorded in the books of account. He contended that this factual position was clearly pointed out by the partner of the assessee firm in his statement recorded during the course of survey and it was also duly supported by the fact that there was a huge difference in the cash balance as reflected in the cash book and the cash balance found on physical verification during the course of survey. He contended that this difference in cash balance was explained by the partner of the assessee firm as expenses incurred during the pre-survey period but not recorded in the books of account. He submitted that the books of account were updated by the assessee immediately after the survey and the same were produced before the AO for verification on 23.02.2010 showing a profit of Rs. 92.63 lakhs. He invited our attention to the reconciliation statement of cash placed at page no. 37 of the Paper Book to show that the huge difference of Rs. 1.65 crores
11 M/s. Kedia Pipes Assessment Year: 2010-11 in the cash balance as found during the course of survey was due to the expenses incurred during the pre-survey period which were not recorded in the books of account and the details of such expenses were duly furnished by the assessee. He contended that the books of account for the entire year under consideration, duly completed, were produced by the assessee for verification of the AO during the course of assessment proceedings and after such verification, no specific or material defect was pointed out by the AO in the said books of account or other supporting evidence except that the vouchers were self-made. He contended that the defect pointed out by the AO thus was not sufficient to justify the rejection of books of account as rightly held by the Ld. CIT(A) and keeping in view the fact that the genuineness of the expenses claimed by the assessee was not disputed by the AO, the Ld. CIT(A) was fully justified in restricting the addition made by the AO to the extent of 10% of the relevant expenses for unverifiable element involved therein on account of self- made vouchers. He invited our attention to the relevant details given on page no. 103 of the Paper Book to point out that all the expenses incurred by the assessee under major heads were comparable to the similar expenses incurred in the earlier years and even the net profit declared by the assessee for the earlier year as well as for the year under consideration was consistent.
We have considered the rival submissions and also perused the relevant material available on record. It is observed that the profit declared by the assessee for the entire year under consideration was found to be considerably lower by the AO than the profit for the pre-
12 M/s. Kedia Pipes Assessment Year: 2010-11 survey period (01.04.2009 to 10.02.2010) as computed during the course of survey on the basis of the books of account of the assessee. The books of account of the assessee as found during the course of survey were incomplete and after taking into consideration the unrecorded expenses as well as after making adjustment of opening stock and closing stock, the net profit to the assessee for pre-survey period was worked out during the course of survey at 2.26 crores. The profit finally declared by the assessee for the year under consideration however was much lower than that figure and in this regard, it was explained by the assessee that the reason for such reduction in profit was due to substantial expenditure incurred during the pre-survey period which had remained to be recorded in the books of account. The details of such expenses were also furnished by the assessee. The AO however did not accept the same on the ground that there was nothing found during the course of survey to show that such huge expenditure incurred during the post- survey period had remained unrecorded. He also noted that this huge expenditure claimed by the assessee was mainly supported by self- made vouchers.
As rightly submitted on behalf of the assessee before the Ld. CIT(A) as well as before the Tribunal, the books of account were updated by the assessee immediately after the survey and the same produced for verification on 23.032010 showed a net profit of Rs. 92.63 lakhs for the pre-survey period. Moreover, a huge cash difference of Rs. 1.60 crores was found in the cash balance as reflected in the cash book of the assessee at the time of survey and the 13 M/s. Kedia Pipes Assessment Year: 2010-11 cash balance found on physical verification during the course of survey. While explaining the said difference, the partner of the assessee firm had clearly stated in his statement recorded on oath that it was due to substantial expenditure already incurred during the course of pre-survey period which was not recorded in the books of account.
It is also worthwhile to note here that the total expenditure incurred under the major head during the year under consideration was comparable with the similar expenditure incurred by the assessee in the earlier years and even the net profit declared by the assessee during the year under consideration was consistent with the net profit declared in the earlier years. It is also pertinent to note that the books of account for the year under consideration completed in all respects were produced by the assessee for verification before the AO during the course of assessment proceedings and as rightly submitted by the learned counsel for the assessee, no specific or material defect therein was pointed out by the AO except that the vouchers produced by the assessee in support of its claim for the various expenses were self-made. In our opinion, the defects pointed out by the AO in the books of account of the assessee were not sufficient to justify the rejection of books of account as rightly held by the Ld. CIT(A). The only defect that was pointed out by the AO was that the relevant expenses claimed by the assessee were supported only by self-made vouchers which in our opinion, cannot justify the rejection of books of account. The only inference that can reasonably be drawn on the basis of said defect pointed out by the AO is that the 14 M/s. Kedia Pipes Assessment Year: 2010-11 expenses claimed by the assessee were not fully verifiable and the Ld. CIT(A), in our opinion, was fully justified in restricting the addition made by the AO to the extent of 10% of the expenses claimed by the assessee through self-made vouchers on account of unverifiable element involved therein. We, therefore, find no infirmity in the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and upholding the same. We dismiss this appeal filed by the Revenue.
In the result, the appeal of the revenue is dismissed. Order Pronounced in the Open Court on 10th April, 2019.