VAMA APPARELS (I) PRIVATE LIMITED,MUMBAI vs. ACIT, CENTRAL CIRCLE-42, MUMBAI

The appeal is barred by limitation by one day. The assessee has moved an application requesting the bench to condone the delay. We heard the parties on this preliminary issue. Having regard to the submissions made in the petition, we condone the delay and admit the appeal for hearing.

The facts relating to the case are stated in brief. The assessee is a retail trader in readymade garments, watches and other accessories. The revenue carried out survey operation u/s 133A of the Act on 25.11.2002. During the course of survey operations, the director of the assessee agreed to offer additional income of Rs.70.00 lakhs, Rs.90.00 lakhs and Rs.175 lakhs respectively in assessment years 2000-01, 2001-02 and 2002-03. Accordingly the assessee filed its return of income for AY 2000-01 offering additional income of Rs.70.00 lakhs. However, for the year under consideration, i.e., AY

The assessee carried the matter in appeals before ld CIT(A) and also before ITAT. Subsequently, the assessee filed appeals before the Hon’ble High Court of Bombay. The Hon’ble Bombay High Court, vide its order dated 15.11.2010, set aside all the orders passed and restored the case back to the file of the assessing officer for passing assessment order afresh. Accordingly the assessing officer passed the impugned assessment order on 30-12-2011, wherein he made the addition of Rs.90.00 lakhs only. The assessing officer took the view that the additions made in the original assessment order pertaining to G.P addition of Rs.277.33 lakhs and Rent & service charges of Rs.90.68 lakhs are not warranted. Though the assessee challenged the addition of Rs.90.00 lakhs made by the AO by filing appeal before Ld CIT(A), it could not succeed. Hence the present appeal has been filed by the assessee challenging the order passed by Ld CIT(A).

The facts relating to this addition of Rs.90.00 lakhs need elaboration. In the original assessment order, the assessing officer had made the addition of Rs.90.00 lakhs on the basis of admission made by the director of the assessee in the statement taken from her during the course of survey operations. The assessing officer noticed that the survey team unearthed certain incriminating documents titled as “IOM” (Inter officer memo) and Chitties. The AO had taken the view that the IOM represented unaccounted sales. The chitties contained details of cash withdrawals made by the directors, but not accounted for in the books of accounts. In the original assessment proceedings, the AO took the view that these IOM and Chitties prove the fact that the assessee had

In the set aside proceedings, the AO took the view that the G.P rate declared by the assessee could not be relied for the following reasons:- (a) The various incriminating documents found during the course of Survey operations establish the fact that the directors have siphoned off huge amount of cash and the same has been utilized for various accounted and unaccounted expenses.

In this regard, the observations made by the AO are relevant and extracted below:- “1. From the impounded papers mentioned above it is noticed that the average GP in all the divisions are ranging from 20% to 35% whereas items like Watches & Rayban division has been ranging from 20% to 28%. The average GP of main division in which turnover of the company is very high is shown in Item No.1 to 15. Therefore, taking average of all the

The Ld CIT(A) noticed that the assessee has accepted an addition of Rs.70.00 lakhs in assessment year 2000-01 on identical set of facts. He also noticed that then Ld CIT(A), who disposed of the appeal of the assessee in the first round of proceedings, has confirmed the addition of Rs.90.00 lakhs by observing that the assessee has duly declared the additional income of Rs.70.00 lakhs in AY 2000-01 and hence the addition of Rs.90.00 lakhs made in the year under consideration (AY 2001-02) also needs to be confirmed. Accordingly he took the view that the the addition of Rs.90.00 lakhs made

We have heard rival contentions and perused the record. We notice that the assessing officer has rejected the book results, since he was of the view that the G.P rate declared by the assessee does not reflect true position. Accordingly the AO has computed the average rate of G.P at 28.40% on the basis of the G.P rate shown in a document on various goods. The AO has also taken support of the assessment order passed in the first round of proceedings, wherein the AO had observed that the siphoning of funds through IOMs/Chitties has resulted in reduction of G.P rate of 6.79%. Since the assessee had declared G.P @ 23.95%, the AO observed that the G.P would work out to 30.74%, if the above said 6.79% is added to the G.P rate declared by the assessee. Since the average G.P rate worked out to 28.40%, the AO adopted the same and worked out the difference in Gross profit at Rs.89.04 lakhs. However, the AO rounded off the same to Rs.90.00 lakhs and further observed that the additional income declared by the assessee in the statement would also be taken care of by this addition. In effect, the AO has telescoped the additional income of Rs.90.00 lakhs offered by the assessee in the

We notice that the directors of the assessee have withdrawn funds through Chitties and when they returned back the funds, the chitties were claimed to have been destroyed. Admittedly the transactions carried out through chitties have not been accounted for in the books of account. The real question that arises is whether such kind of withdrawals of funds and their returning back would affect the G.P rate of the assessee? There should not be any doubt that such kind of withdrawals and return of funds would create a difference between cash balance as per books and the physical cash balance. Since cash balance is an item figuring in Balance Sheet, the profit and loss account is not affected by these kinds of transactions, meaning thereby, the Gross profit rate declared by the assessee would not be affected by these transactions. Hence, we are of the view that there is fallacy in the approach of the assessing officer. In any case, it is not the case of the survey officials that they have found any difference between physical cash balance and book balance.

It is pertinent to note that the assessing officer had made an addition of Rs.277.33 lakhs in the original assessment proceeding on account of G.P rate variation. The said G.P rate variation was arrived at on the basis of IOM only. However, in the set aside proceedings, the AO did not make this addition on noticing that the entries found in IOMs have been recorded in the books of account. We have seen in the preceding paragraph that the transactions of withdrawals and deposit of cash would not affect the G.P rate. Hence the observation of the AO that the funds siphoned off by the directors have been used for various accounted and unaccounted expenses, would not affect the G.P rate.

The AO has also referred to the financial results for the year ended 31.3.2002. In our view, the same cannot be taken as a ground to suspect the financial results shown by the assessee. The assessing officer has also stated that the assessee has not maintained day to day stock register. However, it is not shown that the assessee has understated the closing stock value in any of the year.

Finally the AO has computed average rate of G.P by taking into account the normal G.P rate available to the assessee on various products. We notice that the assessing officer has computed average rate of profit under “Simple Average method”, which will not depict true picture. The weighted average method only, in these set of facts, would show the true picture. Hence the simple average method adopted by the AO is liable to be rejected. The Ld A.R also submitted that it is the prerogative of the assessee to offer additional discounts in order to sell the slow moving items. Accordingly it was submitted that there is no such guarantee that the assessee would always earn the G.P rate as stated in the document found during the course of search. In our view, there is merit in this argument of the assessee. Hence there is no justification in adopting the average G.P rate of 28.80%.

We notice that the assessing officer has taken support of the assessment order passed in the first round of proceedings, wherein the fall in G.P rate on account of IOMs and Chitties was worked out to 6.79%. We have noticed that the assessing officer did not make any addition on account of fall in G.P in the present assessment proceedings on observing that the IOMs have been recorded in the books of account. We have also noticed that the cash withdrawals and deposits noted in Chitties would not affect the G.P rate. Hence, there is no merit in taking support of the observations made in the original assessment proceedings in this regard.

During the course of hearing, the Ld A.R furnished a copy of document titled as “Summary of Chitties as per Accounting year”. A perusal of the same

We have noticed that the Ld CIT(A) has confirmed the addition of Rs.90.00 lakhs by observing that the facts are identical to the assessment year 2000-01. In the earlier paragraphs we have noticed that the revenue did not find any chitties pertaining to AY 2001-02. Hence it cannot be said that the facts are identical. Secondly we have observed that the transactions pertaining to Chitties will not affect the G.P rate. In any case, no chitty pertaining to the year under consideration was found during the course of survey. Thirdly, the AO himself did not make any addition on account of IOMs. We have noticed that the Chitties and IOMs have been considered as the incriminating materials found during the course of search. The above said discussions would show that the revenue did not have any incriminating material to support the addition of Rs.90.00 lakhs. Hence, in the absence of any incriminating material to show that the assessee has concealed any income, the assessee has chosen to retract from the admission of Rs.90.00 lakhs made in the statement taken u/s 133A of the Act. In the absence of any incriminating material, it may not also be proper to assess an amount on the basis of mere admission, which is not supported by any material. Hence we are of the view that there is no justification in making the addition of Rs.90.00

In view of the foregoing discussions, we do not find any justification in the addition of impugned amount of Rs.90.00 lakhs in the hands of the assessee during the year under consideration. Accordingly we set aside the order passed by Ld CIT(A) and direct the AO to delete the impugned addition.

In the result, the appeal filed by the assessee is allowed. Order has been pronounced in the Court on 31.1.2018.