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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
ORDER Per Shri A.T.Varkey, JM filed by the revenue is against the order of Ld. CIT(A)-15, Kolkata dated 10.12.2015 for AY 2010-11. ITA No. 359/Kol/2016 filed by the revenue is against the order of Ld. CIT(A)-15, Kolkata dated 10.12.2015 for AY against the deletion of penalty imposed u/s.271(1)(c) of the Income-tax Act,1961 (hereinafter referred to as the “Act”). First we take up ITA No. 358/Kol/2016.
The assessee is a firm which was set up in the year 1930 and the business of the firm was carried out by several partners who are the members of the same family. The nature of business of the firm was mainly the works contract of dyeing and bleaching the textile fabrics. Later, the firm had to make some direct purchase of cloth and subsequently processed the same sold in the market from AY 2009-10 onwards. In the assessment year under consideration, the return was filed on 11.10.2010 by the firm showing total income at Nil. Later the case was taken up for scrutiny. The AO noticed after perusal of the annexure “B” of the form 3CD of the Tax Audit Report that the Gross Profit (GP) rate of the current
2 & 359/Kol/2016 Agarpara Kutir Silpa Pratisthan. AY 2010-11. year has come down to 6.6% whereas in the previous assessment year it was 17.6% whereas the turnover has increased by more than a crore still the assessee has returned only less GP rate which was unbelievable. Since the assessee failed to reconcile, the AO rejected the books and estimated the income by substituting the GP rate of the previous assessment year to the current assessment year and thus computed Net Profit (NP) at Rs.75,98,449/- in place of Nil returned by the assessee. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) , who took note of the fact that the assessee firm could not produce the information sought by the AO because the managing partner who was running the firm had expired during the assessment year. The Ld. CIT(A) while adjudicating the issue of assessment of the NP at Rs.75,98,449/- taking note of the documents produced before him for the first time sought a remand report from the AO. The AO in his remand report which is placed at pages 20 to 21 of the paper book has given his report in respect to the expenses claimed by the assessee as under: “ii) Administrative Expenses: The assessee claimed administrative expenses of Rs.32,26,425/- (vide Sch. 17 of P/L account) under various heads including salaries and wages. In support of above expenses the assessee furnished Cash Book, ledger copy of wages paid etc. The said expenses are test checked on sample basis and found in order. In the sub-head other expenses the assessee has claimed an amount of Rs. 49,024/- for Dog & Cow Care charges, which does not appear to be related with the business of the assessee. iii) Genuineness of Sundry Creditors: The assessee in P/L Account under the head current liabilities (vide Sc. - 12) declared Sundry Creditors for goods of Rs. 1,43,64,311/- and Sundry Creditors (others) of Rs. 15,20,850/-. During the course of remand hearing the A/R furnished list of creditors separately for both heads. The amount are verified and found in order. iv) Labour Charges: As per assessee's books labour charges are related to stitching and folding amounting to Rs. 3,37,030/-. The assessee furnished copy of bills and voucher in favour of the claim and the same is found in order. v) Repair and Maintenance Expenses: The assessee has claimed Repair & Maintenance charges of Rs. 11,89,945/- and produced head-wise Ledger copies of the said expenses maintained in his books. The expenses are test checked on sample basis and found in order. vi) Manufacturing Expenses: The assessee has claimed manufacturing expenses of Rs.5,14,00,509/- (vide Sch. 16 of P /L account). In this segment major expenses are related to cloth purchase of Rs. 2,38,75,986/-. Notices u/s. 133(6) of the I T Act, 1961 was issued to suppliers to verify the purchases. Out of these one made with Mega Trenchless Engineers Pvt. Ltd.; it is found that the assessee has shown purchase of Rs.1,27,32,732/-, whereas the seller has confirmed the purchase to the tune of Rs.1,22,60,894/-. During course of hearing the A/R of the assessee was asked to reconcile the difference of Rs. 4,71,838/- (1,27,32,732-
3 & 359/Kol/2016 Agarpara Kutir Silpa Pratisthan. AY 2010-11. 1,22,60,894); but he failed to produce any documents in support of his claim. Balance purchase are verified and found in order.”
Taking note of the aforesaid remand report of the AO, the Ld. CIT(A) while deleting the addition adjudicated the issue as under: “Ground no. 3 and 4 pertain to application of GP rate of the previous year and also not allowing the expenditure in the P&L Account. The AO has given the following working of computation of NP. "d) In the previous year, the assessee showed a GP rate of 17.6%. Applying the same rate on current year's Turn-over, the GP comes to Rs.95,51, 449/-. The net profit of the assessee is assessed thus: Net profit shown in P&L A/c: (-) 19,53,383/- Computed GP 95,51,449/- Computed Net Profit 75,98,066/- " It is clear from the above calculation that AO had wrongly computed the NP. It should have been Rs.95,51,499/- (GP 17.6%) - Rs.35,62,028/- (GP disclosed in the P&L A/c) = Rs.59,89,471/-. Thus, prima facie, the addition should have been restricted to Rs.59,89,471/- rather than Rs.75,98,449/-. During the appellate proceedings, the assessee filed a paper book explaining the fall in the GP in assessment year 2009-10 as compared to assessment year 2008-09. The paper book was forwarded to the AO during the remand proceedings on 02.09.2014. The AO submitted his report vide letter dated 13.01.2015. The A/R of the assessee contended that the fall in the G.P. in this A.Y. is mainly due to the reason that in earlier year, the substantial portion of the income was on account of job-work charges which yielded higher income and less on account of trading of cloths which yielded lower profit. However, in the relevant A.Y. 2010-11, the job- work charges had declined substantially and major portion of the receipts pertained to trading activity on which the G.P. earned was very less. The assessee submitted all the purchase bills which were verified by the A.O. u/s 133(6) during the remand report proceedings. Similarly, the entire sales was made to the Govt. Department under the DGS&D rates. This had yielded very less profit on the trading activity. The A.O. verified all the evidences and was satisfied with the explanation and evidences submitted by the assessee but for 3 points as under: 1) Disallowance u/s 43B of Rs.2,85,496/-: 2) Disallowance of Rs.49,024/- for dog and cow care charges. 3) Mis-match of account of M/s Mega Trenchless Engg. Pvt. Ltd. of Rs.4,71 ,838/- . The AR of the assessee was given a copy of the remand report to submit his counter reply. As per. this submission, the assessee conceded the disallowance of Rs.2,85,496. Hence, the addition of Rs.2,85,496/- is confirmed. Regarding the expenditure of Rs. 49,024/- claimed under the head dog and cow care charges, the AR or the assessee submitted as under: "The factory site of the assessee firm is vast and for the security purposes a good No. of dogs are nourished in the premises for keeping vigil and security of the factory premises. In fact the expenditure of maintenance of these dogs and the services rendered by them is beneficial to the assessee in comparison to the keeping of security
4 & 359/Kol/2016 Agarpara Kutir Silpa Pratisthan. AY 2010-11. personnel. The firm also maintains a few No . of cows since long, in fact since the inception of its business for the welfare of the laborers residing inside the factory premises. This is for the benefit of the labours and also as a ritual. Therefore, it is submitted before your honour that the expenditure incurred under this sub-head was very much for the welfare of the labourers and related to the business of the assessee.” In view of the above submission, it is held that there is no reason for making disallowance of Rs.49,024/-. Regarding the discrepancy noticed by the AO from the ledger account of M/s Mega Trenchless Engg. Pvt. Ltd., it is seen from the ledger account that the AO had not seen the ledger properly. The ledger account of the assessee procured from M/s Mega Trenchless Engg. Pvt. Ltd. u/s 133(6) clearly showed that the total purchases are Rs. 1,27,32,732/- as disclosed by the assessee and Rs.7,7l,938/- was the cheque amount issued by M/s Mega Trenchless Engg. Pvt. Ltd. to the assessee towards job work charges. Hence, the addition made by the AO of Rs.75,98,449/- is deleted.”
4. Aggrieved by the aforesaid decision of Ld. CIT(A), the revenue is before us.
5. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee firm is running the business from the year 1930 onwards. The managing partner died during the assessment year. During the course of assessment proceedings, the AO taking note of the substantial decrease in the GP rate from 17.6% of the previous assessment year to 6.6% for this year, rejected the books of account and has substituted the GP rate to 17.6% and has made the computation of NP at Rs.75,98,449/-. On appeal, the Ld. CIT(A) after calling for the remand report (supra) has given the relief to the assessee. We note that the AO had wrongly computed the NP as rightly taken note by the Ld. CIT(A). The NP as per AO’s on calculation should have been Rs.59,89,471/- and not as held by the AO at Rs.95,51,499/-. This particular observation of the Ld. CIT(A) is not disputed by the department before us. We note from a perusal of the remand report of AO that the manufacturing expenses claimed at Rs.5,14,00,509/- has been accepted with the exception that the AO has found discrepancy of only Rs.4,71,838/- which has also been reconciled by the assessee before the Ld. CIT(A). In respect of this amount, the Ld. AR brought to our notice that M/s. Mega Trenchless Engg. Pvt. Ltd. has confirmed the purchase to the tune of Rs.1,22,60,894/- for which they are received the payment from the assessee. The sale of the difference of Rs.4,71,838/- has been confirmed by the party by producing
5 & 359/Kol/2016 Agarpara Kutir Silpa Pratisthan. AY 2010-11. the ledger account of Mega Trenchless Engg. Pvt. Ltd. which is placed at pages 26 and 27 of the paper book which shows that the total purchases are at the tune of Rs.1,27,32,732/- as disclosed by the assessee. Therefore, the assessee has reconciled the difference of Rs.4,71,838/-. Therefore, we note that in the remand report the AO had found fault only with regard to the difference of Rs.4,71,838/- which has also been reconciled by the total claim of the assessee of manufacturing expenses of Rs.5,14,00,509/-. We note that the AO has accepted the claim of the assessee in respect of the repair and maintenance charges of Rs.11,89,945/- as well as labour charges of Rs.3,37,030/-. The AO in the remand report has also found the genuineness of the sundry creditors as declared by the assessee for goods at Rs.1,43,64,311/- and other sundry creditors of Rs.15,20,850/- as genuine. The AO has only found fault in the remand report the assessee’s claim for dog and cow care charges to the tune of Rs.49,024/- only. The assessee has given explanation for the expenses for keeping the dogs as well as the cow which are connected with the business of the assessee. Dogs are kept for the security of assessee’s business premises and the cows are for the welfare of the labours of the factory, therefore, we do not find any infirmity in the order passed by the Ld. CIT(A) and, therefore, we uphold the order of the Ld. CIT(A) and dismiss the appeal of the revenue.
Coming next to the appeal of the revenue against the penalty imposed u/s. 271(1)(c) of the Act. Since quantum addition has been deleted penalty does not survive and, therefore, the Ld. CIT(A) has rightly deleted the penalty so we confirm the same.
In the result, both the appeals of the revenue are dismissed.
Order is pronounced in the open court on 10.07.2018.
Sd/- Sd/- (J. Sudhakar Reddy) (Aby. T. Varkey) Accountant Member Judicial Member
Dated : `10th July, 2018 Jd.(Sr.P.S.)
Copy of the order forwarded to:
Appellant – DCIT, Circle-51, Kolkata. 2 Respondent –M/s. Agarpara Kutir Silpa Pratisthan, South Station Road, Agarpara, Kolkata-700 109. 3. CIT(A)-15, Kolkata. (sent through e-mail) 4. CIT, Kolkata. 5. DR, ITAT, Kolkata. (sent through e-mail)