THE ITO-3(3), INDORE vs. M/S. MUNGAD STRIPS & ALLOYS PVT. LTD., INDORE

PER O.P. MEENA, ACCOUTANT MEMEBR. This appeal is filed by the Revenue against the order of ld. Commissioner of Income tax (Appeals)-I, Indore,[hereinafter referred

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 2 of 13

to as the CIT (A)] dated 30.12.2015. This appeal pertains to

Assessment Year 2010-11 as against appeal decided in respect of

assessment order dated 28.03.2013 passed u/s 143(3)/147 of

Income Tax Act, 1961(herein after referred to as "the Act) by the ITO

Ward 1(2) Indore [hereinafter referred to as the AO]. The Revenue

has taken following grounds of appeal:-

(i) On the facts and the circumstances of the case, the ld.

CIT(A) :-

(1) erred in deleting the addition of Rs. 44,68,220/- whereas the same addition was made by the AO invoking the provision of Section 145(3) of the IT Act and estimated NP @ 8% on gross sales.

(2) erred in deleting the addition of Rs. 18,70,579/- made by the AO treating assessee’s income from other sources whereas the same income was shown by the assessee in profit and loss account.

1.0 We are deciding both the grounds together. Ground no. 1

relates to deletion of addition of Rs. 44,68,220/- made by applying

net profit rate of 8% after invoking the provisions of Section 145(3)

of the Income-tax Act, 1961 and ground no.2 relates to addition of

Rs.18,70,579/- by treating income from other sources.

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 3 of 13

1.1 Succinctly, facts as culled out from the orders of lower

authorities are that the assessee is a Private Limited Company and

deals in trading of aluminum conductor and aluminum scraps and

makes sales on account of exports as well as domestic. The return

of income was filed on 26.04.2011 declaring total income of Rs.

6,25,650/- under normal provisions of the Act and income of Rs.

4,00,419/- u/s 115JB of the Act. During the course of assessment

proceedings, the assessee was asked to produce original books of

accounts, copies of sale bills and purchase bills, audit report, bank

statements etc. However, the assessee could not produce the sale

bills, purchase bills, vouchers of expenses, property documents,

expenses bills on the ground that these were lost in theft, while

their Accountant was travelling by Train, for which FIR was also

lodged with GRP at Ratlam. In support of his contention, the AO

asked the assessee to produce the original copy of FIR, details

regarding theft of books of accounts, original copy of audit report

and all books of accounts, but the assessee could filed only copies

of purchase and sales bills, audit report, ledger account, copy of

FIR. But the assessee could not file originals of these documents.

The copy of audit report filed by the assessee was also bearing

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 4 of 13

signature of C. A. only but signature of Director of the company was

not there. Therefore, the AO expressed his doubt on the veracity of

the audit report. It was also noticed that total sales during the year

were at Rs. 5,58,52,756/- as per the profit and loss account,

whereas as per sales register, sales were appearing at Rs.

5,94,35,212/-. Thus, three was a difference in sales figure

amounting to Rs. 35,82,456/-. Further, the AO has also got

verification of sales through Commercial Tax Officer. The CTO vide

his letter dated 26.03.2013 stated that the assessee company is

registered with the Commercial Tax Department as on 03.03.2010

and for the period from 03.02.2010 to 31.03.2010. The assessee

has shown total sales at Rs. NIL. Therefore, keeping in view all the

above facts and non-production of original FIR in connection with

the theft of books of accounts and important documents in

connection with business activities i.e. the sales bills, purchase

bills, vouchers, stock registers, cash memo and expenses bills. The

books of accounts were rejected by the AO u/s 145(3) of the

Income-tax Act, 1961. In support of rejection of books of accounts,

the AO relied in the case of S.N.Namasivayam Chettiar vs. CIT,

(1960) 38 ITR 579 ( S. C. ) and Awadesh Pratap Singh Abdul

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 5 of 13

Rehman & Brothers vs. CIT, (1994) 76 Taxman 106 ( Alld.)

Accordingly, the AO has estimated the total income of the assessee

by applying net profit rate of 8% on total sales of Rs. 5,58,52,756/-,

which was worked out at Rs. 44,68,220/-. Accordingly, the same

was added to the total income of the assessee. The AO also noticed

that the assessee has shown income of Rs.18,70,576/- in profit and

loss account, hence, same was also added to total income.

1.2 Being aggrieved, the assessee has filed an appeal before the ld.

CIT(A). Before the ld. CIT(A), the assessee has placed copy of FIR

stating that the original FIR could not be found. The assessee also

produced all details of sales and purchase and has emphasized the

fact that the trading activities were only taken during December to

March, which were limited with only two parties, namely, M/s.

Krishna Profile Private Limited Company and M/s. Overseas Metal

Trading Company, U.A.E. The assessee also placed copy of the

order of the Commercial Tax Authority contending that there was

no variation in the sales declared by the assessee. As per the order

of CTO, the sales of the assessee was same as shown by the

assessee in its return of income. It was also contended that other

income shown at Rs. 18,70,579/- was on account of DEPB licence,

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 6 of 13

which was duly documented and shown in the profit and loss

account. It was also contended that the rates of purchase and sales

from M/s. Krishna Profiles Limited were comparable with non other

related parties. Considering all these facts, the ld. CIT(A) held that

the rejection of books of accounts u/s 145(3) and estimated income

@ 8 % on total sales is without any basis, hence, the addition of Rs.

44,68,220/- was deleted. As regards addition of Rs. 18,70,579/-,

the ld. CIT(A) held that this is an income represented on account of

DEPB incentive received on exports sales of Rs. 4,94,69,076/- for

the exports made by the assessee, which has already been shown

by the assessee in the profit and loss account as income from other

sources. Hence, this addition was also deleted. Similarly, addition

of Rs. 1 lakh made on account of unexplained share capital of the

Director was also deleted.

1.3 Being aggrieved, the Revenue has filed this appeal before the

Tribunal. The ld. DR contended that the assessee has failed to

produce original copy of sale bills, purchase bills, vouchers, stock

registers during the course of assessment proceedings. The

contention of the assessee that books of accounts were stolen

during travelling by their representative in Train for which FIR was

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 7 of 13

also lodged with GRP Ratlam, but the assessee has failed to

produce original copy of FIR lodged with GRP, Ratlam, to establish

that there was theft, wherein original documents like books of

accounts, sale bills, purchase bills, vouchers of expenses and stock

registers were stolen. Further, the audit report was also not filed in

original and copy of audit report produced during the assessment

proceedings were also not signed by the Director of the assessee

company. Therefore, the authenticity of books of accounts was

remained as doubtful. Further, the AO has also found variation in

the sales disclosed to the Sales Tax Authorities and as disclosed by

the assessee. Therefore, in absence of these original documents,

which are very vital and material evidence, the AO was correct in

invoking the provisions of Section 145(3) of the Act and estimating

the income of the assessee by applying net profit rate of 8% on the

disclosed sales of Rs. 5,58,52,756/-. As regards addition of Rs.

18,70,579/-, the ld. Authorized Representative of the assessee

relied on the findings of AO and submitted that this is an income

shown by the assessee in its profit and loss account and the same

was considered by the AO for computation of income. Hence, the ld.

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 8 of 13

CIT(A) was not justified in deleting the same while deleting the total

estimated sales made by the assessee.

1.4 The ld. Authorized Representative of the assessee submitted

that the ld. CIT(A) was correct in deleting the addition of Rs.

44,68,220/- made by invoking the provisions of Section 145(3) and

estimating the profit at 8 % pm disclosed sales. The ld. AR

submitted that the books of accounts were rejected by the AO as

there was variation in the sales shown in the sales register and as

shown in the profit and loss account. However, the sales shown in

the sale registers were including of excise duty and cess. Therefore,

the same were shown at Rs. 5,94,35,212/- in sales register,

whereas the actual sales excluding excise and cess are at Rs.

5,58,52,756/-. Further, the assessee has also filed copies of orders

of Commercial Tax Authorities, which also shows the sales of

assessee as declared by the assessee in his audit report and profit

and loss account. The information obtained by the AO from Sales

Tax Authorities was not correct as the same does not contain the

sales shown by the assessee, whereas correct sales are disclosed to

sales tax, which is reflected in their assessment order dated

04.11.2010. Therefore, rejection of books of accounts by the AO was

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 9 of 13

not justified and hence, the ld. CIT(A)’s finding in this regard is

correct. As regards estimation of income @ 8% on total sales, the ld.

Authorized Representative of the assessee submitted that there is

no basis to adopt 8% as the profit on sales as the assessee is mainly

engaged in the export sales, wherein profit margin is very low.

Therefore, the ld. AR supported the order of the CIT(A).

1.5 We have considered the facts, rival submissions and perused

the material available on record. We find that the assessee has

failed to produce original copies of sale bills, purchase bills, stock

registers and vouchers for expenses and also original copy of audit

report. Further, the assessee has also failed to produce original

copy of FIR lodged with the GRP, Ratlam and detailed note

regarding theft of books of accounts and other documents and audit

report as all the books of accounts evidencing that these were not

available due to theft. We also find that the AO vide his

questionnaire dated 10.12.2012 and 07.03.2013 had asked to

produce the original books of accounts and other documents so

that authenticity of its claim can be examined. It was also noticed

by the AO that the copy of audit report were only signed by the

C.A., but the same was not signed by the Director of the Company.

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 10 of 13

We further found that the reports submitted by the Commercial Tax

Officer vide letter dated 26.03.2013 also showed that the assessee

company was registered with them on 03.02.2010 and no sales for

the period from 03.02.2010 to 31.03.2010 was shown. Further, the

sales shown as per the sales register were at Rs. 5,94,35,212/-,

whereas sales in profit and loss account were shown at Rs.

5,58,52,756/-. Hence, there was a difference of Rs. 35,82,456/-. We

also find from the copy of the order of Sales Tax Authority dated

04.11.2010, wherein the assessee has shown gross sales in

computation sheet at Rs. 6,03,44,734/-, which also shows that

there is a variation in the sales shown by the assessee in profit and

loss account and as per sales registers as well as sales to the Sales

Tax Authorities. Further, the Sales Tax Authorities has also pointed

out the variation of sales amounting to Rs. 4,72,299/- in their

assessment order dated 04.11.2010. In the light of these facts and

circumstances of the case, we are of the considered opinion that the

AO was correct in invoking the provisions of Section 145(3) of the

Act, as in absence of non-production of original documents, audit

report, sales and purchase bills, vouchers of expenses and FIR,

profit from the books of accounts cannot be deduced properly.

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 11 of 13

Therefore, we are of the view that the AO was justified in invoking

the provisions of section 145(3) of the Act.

1.5.1 As regards the application of net profit rate at 8 % on the

total sales, we find that the assessee has shown net profit at Rs.

4,00,419/- profit before tax on total sales at Rs. 5,58,52,756/-, in

its profit and loss account which gives the net profit rate of 0.72 %,

which appears to be on lower side. We also find from the

submission made by the assessee before the CIT(A) that the

assessee has given certain examples of sales and purchases and

gross margin according to which gross profit comes to 2.01 % on

some export sales and 1.96% on transaction with reference to

domestic sales (page 12 of appeal order). We also find from the

submission of the assessee as appearing at page 21 of appellate

order, which reads as under :-

“This net margin has to be practically considered after the DEPB to be received by the company which is Rs. 18,70,579/-, if we add this DEPB the gross margin of the company works out to [ (10,35,980 + 18,70,576)/5,59,47,136/-) which is 5.20% of the total sales. This show that the gross profit margin of a trading concern showing at 5.20% is a reasonable margin and requires no addition.”

Thus, the assessee has claimed that the gross profit of the trading

concern is at 5.2 % as against net profit of 8% considered by the AO

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 12 of 13

after rejection of books of accounts. We also find that the assessee

has shown net profit in profit and loss account at Rs. 4,00,419/- on

the total sales of Rs. 5,58,52,756/- in the profit and loss account

which gives net profit rate at 0.72 % only. Therefore, considering all

these facts, we are of the considered opinion to adopt the gross

profit rate at 6% which in our view would be just, fair and

reasonable in the case of the assessee. Accordingly, gross profit is

worked out at Rs.33,51,165/- by applying 6% gross profit on total

sales of Rs. 5,58,52,756/-. Considering the claim of the assessee,

the deduction/ set-off on account of DEPB income of Rs.

18,70,576/- would also be available to the assessee as set-off as

the assessee has already shown this income in profit and loss

account. Therefore, net income is worked out at Rs. 14,80,589/-

(33,51,165-18,70,576) as against the income computed at Rs.

44,68,220/-by the AO as per the assessment order and Rs.

6,25,650/- disclosed in return of income by the assessee under

regular provision of Act. As regards, the deletion of Rs. 18,70,576/-

on account of addition of DEPB income by the AO, we are of the

view that the ld. CIT(A) has wrongly deleted the same while deleting

total addition of Rs. 44,68,220/- made on application of net profit

ITO 3(3) Indore vs. M/s. Mungad Strips & Alloys P.Ltd.,Indore.I.T.A.NO. 326/Ind/2016 Page 13 of 13

as the said income is shown by the assessee in its profit and loss

account. However, the set off of the same is available to the

assessee as given above by us from the estimated income as

computed above by taking the gross profit at 6% estimate of gross

profit rate. Therefore, we make it clear that the net taxable income

after this order would be at Rs. 14,80,589/- as against returned

income of Rs. 6,25,650/- as shown by the assessee. Accordingly,

ground nos. 1 & 2 are treated as partly allowed.

(2) In the result, the appeal of the Revenue is partly allowed.

The order pronounced in the open court on 28.02.2017.

Sd/- Sd/- (सी.एम.गग�) (ओ.पी.मीना) �याियक सद�य लेखा सद�य (C.M.GARG) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER

�दनांक /Dated : 28th February , 2017