ITO 32(3)(5), MUMBAI vs. VASUNDHARA CHEMPLAST INDUSTRIES, MUMBAI

O R D E R Per G Manjunatha, AM : This appeal filed by the revenue is directed against the order of the CIT(A)-44, Mumbai dated 23-11-2016 and it pertains to AY 2011-12.

The revenue has raised the following grounds of appeal:-

“1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 82.18.398/- made on account of estimation of Gross Profit margin @22% as against Gross Profit @15.42% disclosed by the assessee without appreciating the fact that the assessee failed to explain the variations in purchase of materials despite ample opportunities given to do so during the course of assessment proceedings.." 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in deleting the addition despite the fact that the assessee did not brought any new facts or material on record during the appellate proceedings with respect to variation in purchase of material/sundry creditors."

2 ITA 401/Mum/2017

During the course of assessment proceedings, the AO called upon the assessee to furnish necessary evidence in support of purchases. The AO has issued various notices on 5 occasions. The assessee neither appeared nor furnished details called for by the AO. The AO also issued notice u/s 133(6) to the parties from whom purchases have been made.

However, no compliance was received from the parties from whom purchases have been made. Therefore, the AO has completed assessment u/s 143(3) on the basis of information available on record and estimated gross profit at 22% on total turnover declared by the assessee as against 15.42% gross profit declared by the assessee and made addition of Rs.82,18,398.

4 ITA 401/Mum/2017

“4.;3 I have carefully gone through the assessment order. I have also perused the written submission filed by the AR. It is seen from a study of the assessment order that the assessing officer has recomputed the gross profit of the appellant mainly for two reasons. The first reason is that the appellant failed to submit details and books of accounts before the assessing officer. The second reason is that no compliance was made by the parties to whom notices under section 133(6) was sent. As far as the first reason is concerned the assessing officer has taken contradictory stand. At one place, he writes that the appellant did not submit details and books before him, however at another place he has mentioned that the appellant has submitted computation of income, audited profit and loss account, balance sheet along with audit report and other details. The assessing officer has also mentioned at para 4 of his order that the appellant had provided details of purchases, sales, creditors, debtors etc. The assessing officer has not pointed out any inconsistencies or defect in the details submitted by the appellant. Moreover the accounts of the appellant are audited and audit report in form 3CD was submitted before the AO as per his own admission. As far as the second reason is concerned, it is seen that The AO in his order -has dealt exclusively with the purchases of the appellant. However, in the case of a manufacturer, if there is no purchases of materials there cannot be any production also. The AO had disallowed part of purchases without at the same time questioning the receipt figure of the assessee. The AO has not brought any material on record to show that there is suppression of receipts also by the appellant. In fact, the AO has not conducted any inquiry on his own. The AO has also not rejected the books of accounts, j Further, from the details submitted by the appellant the AO could have seen that the purchases have been made from the giants of Indian industries like Indian oil Corporation and Reliance industries and these purchases have been made through banking channels. Moreover the appellant has taken care to make its purchases through banking channel and since the banks are required to follow KYC norms the identity of the suppliers cannot be doubted. As far as the issue of reply from suppliers is concerned the appellant cannot be reasonably expected to force the suppliers to reply to the AO or to appear before the AO.

4.5 In a judgment given by the Allahabad High Court in the case of CIT Vs J:jjgdish Prasad Tewari 220 Taxmann 0141 (2014), it has been held that if the payments have been made by cheques and are reflected in the books of account of the assessee, no adverse inference can be drawn.

4.6 In a judgment given by the Calcutta High Court in the case of Diagnostics Vs CIT 334 ITR 111 on a similar question, it has been held by the Hon'ble Court that "if an assessee took care to purchase material by way of account payee cheques from a third party and subsequently, three years after the purchase, the said third party does not appear before the AO pursuant to the notice or even has stopped business, the claim of the assessee on that account cannot be discarded as non-existent", 4.7 In the appeal proceedings, it was submitted that the appellant had maintained regular books of accounts and had submitted its financial accounts along with the tax audit report. The appellant had produced details of 5 ITA 401/Mum/2017 purchases, , creditors, debtors, audit report along with financial statements etc during the assessment proceedings. The appellant has not deviated from the method of accounting employed in regular course of business. The books of accounts in the regular course of business are relevant and afford prima facie proof of the entries and the correctness thereof. Moreover, even where books of accounts are found unreliable, the assessment cannot be made arbitrarily and in order that an assessment can be sustained, it must have nexus to the material on record. The order of the AO should be a speaking order and it must disclose the basis and the manner of computation of income. The AO is not entitled to make guess work and make an assessment without reference to any evidence or any material at all. The assessment for any particular year must be based not on mere suspicion or mere guess but on legitimate material from which a reasonable inference of income during the accounting year could be drawn.

4.8 At this point, it would be useful to make reference to certain principles of law which have evolved in the various judicial pronouncements. It has been held by the Hon'ble Delhi High Court in the case of CIT v. Paradise Holidays (2010) 325 ITR 13, that the sole reason of low net profit cannot be a ground for rejecting such "accounts. It has been laid down in the case of Gamdiwala Dairy Vs ACIT(2011) 7 ITR (Trib) 114 (Ahd.) that mere inference of low gross profit cannot justify rejection of books. The issue related to estimate of income by way of best judgment in a case where the assessee had not produced some records but had other evidence to prove the correctness of books produced was held in favour of the assessee in Eagle Synthetics Pvt Ltd. Vs ITO (2011) 8 ITR (Trib) 211 (Ahd.). It has been held in the case of Prakash Automobile versus CIT 322 ITR 425 (KER) that even where account books are found to be unreliable and therefore requiring to be rejected the estimate of profit has to be on a rational basis. It has also been held in the case of CIT versus Dr A.P. Bahal 322 ITR 71 (RAJ) that even where rejection of accounts was justified for defects in accounts, the estimate of income should be based upon some materials in support of same. Where there is none, such estimate cannot be upheld.xThe law as regards the manner of estimate was reiterated by the High Court in CIT versus R. Narayanrao 338 ITR 625(AP). In this case the Hon. court held that even where books cannot be accepted and estimate has necessarily to be frarete either under section 143(3) or 144, the best judgment has to be made in a reasonable manner and not according to the whims and fancies of the assessing officer.\It has to be based upon materials produced by the assessee and gathered by the assessing officer.

4.9 in the case of the appellant, in the assessment order it is nowhere mentioned that a show cause has been issued to the assessee asking for an explanation as to why books should not be rejected under the provision of section 145(3) of the IT Act. Similarly, no opportunity of explanation seems to have been given to the assessee to explain as to why his gross profit shall not be estimated at the rate of 22%. No comparison has been made with book results of the appellant for previous years or the book results of assesses engaged in similar trade. It is not even the case of the assessing officer that the appellant has shown low gross profit. In view of the above discussion and after considering the totality of facts I have come to a conclusion that the AO was not justified in estimating the gross profit at the rate of 2?% of the turnover. Grounds of appeal number 2,3 & 4 are accordingly allowed and addition of Rs. 82,18,3987-15 deleted.”

6 ITA 401/Mum/2017

7 ITA 401/Mum/2017 called for. The CIT(A) further stated that the assessee has filed various details to prove gross profit declared in its books of account and also produced necessary evidences in support of purchases and sales. No adverse inference can be drawn on the books of account maintained by the assessee. Under these circumstances, the AO was erred in estimating higher net profit than what was declared by the assessee in its books of account. The revenue fails to bring on record any evidence to counter the findings of facts recorded by the Ld.CIT(A). Therefore, we are of the considered view that the AO was erred in estimating higher profit on sales without any adverse comments on the books of account of the assessee, that too, only on the basis of non compliance to notice issued u/s 142(1) of the Act. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and dismiss the appeal filed by the revenue.

Order pronounced in the open court on 27th June, 2018.