ITO, WD-53(2), KOLKATA, KOLKATA vs. SHRI GOUTAM KUMAR KUNDU, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH ‘A’, KOLKATA [Before Shri P.M. Jagtap, AM & Shri N.V. Vasudevan, JM] I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 ITO, Ward-53(2), Kolkata.............................………………………………………Appellant Aayakar Bhawan Dakshin 2, Gariahat Road (South) Kolkata – 700068. Shri Goutam Kumar Kundu.………………………………………………......Respondent 172, N.S. Road, Kolkata - 700149 [PAN: AFTPK2528M] Appearances by: Shri Sallong Yaden, Addl. CIT appearing on behalf of the Revenue. Shri A.K. Tulsiyan, FCA appearing on behalf of the Assessee. Date of concluding the hearing : September 05, 2017 Date of pronouncing the order : October 25, 2017 ORDER Per P.M. Jagtap, AM This appeal is preferred by the revenue against the order of Learned CIT (Appeals) – 33, Kolkata dated 22.01.2014. 2. Ground No. 1 raised by the revenue in this appeal is general while the common issue involved in ground no 2 to 4 relates to the deletion by the Ld. CIT (A) of the disallowance of Rs. 29,57,000/- made by the AO out of carriage inward and delivery charges. 3. The assessee in the present case is an individual who is engaged in the business of dealing in cement, iron rods and building materials on wholesale basis besides hiring of mini trucks. The return of income

2 I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 Shri Goutam Kumar Kundu for the year under consideration was filed by him on 13.10.2010 declaring a total income of Rs. 10,70,062/-. In the profit and loss account filed along with the said return, carriage inward charges of Rs. 46,18,747/- and delivery charges of Rs. 12,95,256/- were debited by the assessee. On examination of the relevant details, it was found by the AO that the payments towards carriage inward and delivery charges were mainly made in cash and the same were not fully verifiable. He also noted that the assessee has two mini trucks from which annual income of Rs. 42,000/- each was declared by the assessee under section 44AA of the Act. He held that the said mini trucks were used by the assessee for the transportation of cement, iron rods and other building material in which he was dealing and while inflating the expenses on account of transportation, the assessee had avoided scrutiny of the same by claiming the of section 44AA. He, therefore, disallowed the carriage inward and delivery charges claimed by the assessee to the extent of Rs. 29,57,000/- being 50% of the total expenses claimed by the assessee. 5. The disallowance made by the AO out of carriage inward and delivery charges was disputed by the assessee in the appeal filed by the Ld. CIT (A) and after considering the submission made by the assessee as well as the material available on record, the Ld. CIT (A) deleted the said disallowance for the following reasons given in paragraph no 4 of his impugned order: “I have considered the facts of the case and the appellant’s submission. The main reason given by the Assessing Officer for the disallowance is that the payments towards delivery charges and carriage inward were in cash and not verifiable. The Assessing Officer was also of the opinion that the charges were recovered mainly from the buyers in cash and not

3 I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 Shri Goutam Kumar Kundu accounted for and therefore the transportation cost was inflated. The appellant has submitted that the supplier of cement M/s. Lafarge India Pvt. Ltd. does not bear any expenditure in respect of delivery, loading and unloading etc. The Assessing Officer has not brought any material on record to prove that the supplier has borne part of the charges incurred by the appellant towards delivery, loading and unloading of the supplies made to it. The Assessing Officer has only passingly commented that the appellant recovers delivery charges on sales from the buyers in cash and does not account for the same. Needless to add, even in respect of this comment of the Assessing Officer there is no evidence brought on record. There is also considerable force in the appellant’s submission regarding the reasonableness of the total carriage inward expenses of Rs. 4618747/- in the light of the total delivery of 454102 bags of cement to the appellant from New Alipore Railway Sidings, the subsequent carriage to the godown of the appellant at Raipur and the applicable rates of the truck owners association of that locality. The appellant has also contended that the delivery charges of Rs. 1295256/- are quite reasonable in view of the total sales of 453699 bags of cement. It is also correctly stated by the appellant that the Assessing Officer has not found any defect in its audited books of account and therefore not rejected the same under section 145 of the Income Tax Act, 1961. The Assessing Officer has not been able to back the apprehension regarding the transportation cost being inflated with any cogent evidence. Huge disallowances cannot be made merely on the ground that expenses have been incurred in cash and are not verifiable when they appear to be reasonable in the context of the attendant facts and circumstances. In view of the fact that the Assessing Officer has not brought any evidence on record regarding inflation of the delivery charges and carriage inward, the nature and scale of business of the appellant and the inevitability of the need to incur such charges which have to be incurred in cash and cannot be backed by regular bills, the addition made by the Assessing Officer cannot be sustained. Hence, the addition of Rs. 29,57,000/- on account of alleged inflation of transportation cost is deleted. 6. At the time of hearing before us, the learned DR relied on the order of the Assessing Officer in support of the revenue’s case on this issue while the learned counsel for the assessee strongly relied on the order of the Ld. CIT (A) and submitted that the written submission

4 I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 Shri Goutam Kumar Kundu filed by the assessee on this issue before the Ld. CIT (A) and reproduced by him in the impugned order may be taken into consideration while deciding this issue. 7. We have considered the rival submissions and also perused the relevant material available on record. It is observed that a huge disallowance out of carriage inward and delivery charges was made by the AO mainly for the unverifiable element allegedly involved in the said expenses without pointing out any specific instances in support. No case was also made out by him to show that the expenses claimed by the assessee on carriage inward and delivery charges were excessive or unreasonable having regard to the nature of the assessee’s business. In his submissions made before the Ld. CIT (A), the assessee could satisfactory establish that the expenses incurred by him on carriage inward and delivery charges were quite fair and reasonable having regard to the total quantum of material handled by him. At the time of hearing before us, the learned DR has not been able to raise any material contention to dispute the facts and figures furnished by the assessee in this regard. Keeping in view these facts and figures furnished by the assessee as well as having regard to the other aspects of the matter, we find ourselves in agreement with the Ld. CIT (A) that adhoc disallowance of 50% made by the AO out of carriage inward and delivery charges was not sustainable and upholding his impugned order deleting the same, we dismiss ground no 2 to 4 of the revenue’s appeal.

5 I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 Shri Goutam Kumar Kundu 8. The issue involved in ground no 5 of the revenue’s appeal relates to the deletion by the Ld. CIT (A) of the addition of Rs. 3931175/- made by the AO on account of understatement of cement sale made in cash. 9. During the course of assessment proceedings, it was noticed by the AO that the gross profit and net profit shown by the assessee from the business of purchase and sale of cement was ridiculously low at 3.3% and 0.56% respectively. On further scrutiny, he found that 157247 cement bags were sold by the assessee in cash out of the total sale of 453699 bags. According to him, the sales of cement made in cash by the assessee were not fully verifiable from the cash memos and there was an average difference of Rs. 25 per bag between the basic rate plus 12.5% VAT and the MRP. He, therefore, arrived at the conclusion that there was understatement of sales of cement made in cash by the assessee by Rs. 25/- per bag in respect of 157247 cement bags and value of worked out of Rs. 39,31,175/- was added by the AO to the total income of the assessee. 10. The addition made by the assessee on the alleged understatement of cement sale was challenged by the assessee in the appeal filed before the Ld. CIT (A) and a detailed submission was made by the assessee before the Ld. CIT (A) giving all the relevant facts and figures to support and substantiate his stand that there was no understatement of sale of cement bags in cash as alleged by the AO. The Ld. CIT (A) found merit in the said submission made by the assessee and deleted the addition made by the AO on account of

6 I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 Shri Goutam Kumar Kundu alleged understatement of sale of cement in cash for the following reasons given in paragraph no 6 of his impugned order: “I have considered the facts of the case and the appellant’s submission. The Assessing Officer came to the conclusion that in respect of 157247 cement bags which were sold by way of cash, the appellant had manipulated the cash memos at will and understated the consideration by Rs. 25/- per bag on an average. The reasons given included the fact that the gross profit margin and net profit margin were very low and the sale price in respect of cash sales on certain dates examined on a test check basis was lower than the credit sales on the same dates for which cheque payments were received. As regards the low gross profit and net profit, the appellant has contended that the trading results for the year under consideration were better than those in the earlier years, the GP margin for the A.Y. 2010-11 being 3.34% as against 2.88% and 1.73% declared respectively for the A.Y. 2009-10 and 2008-09 respectively. The assessing Officer has not pointed out a single defect in books of account and not rejected the books of account. The appellant has also placed reliance upon the decision of Hon’ble ITAT, C-Bench, Kolkata in ITA No. 1685/Kol/2009 in the case SRK Tea Processing Industries vs ACIT – II, Jalpaiguri wherein it was held that ‘there is no finding in the assessment order in respect of to the fact that the assessee’s method of accounting is not a regularly employed method or whether his income, profits or gains cannot be deducted or accounts are incomplete or incorrect in the present case. In the absence of this finding and in the absence of rejection of books of account, we are unable to accept that the Assessing Officer has rightly estimated the gross profit’. As evident from the appellant’s submissions reproduced above, some of the cash sales were also affected at rates higher than the rates at which sales were made on the same dates for which cheque payments were received. The appellant has also disputed the Assessing Officer’s finding that major part of the sales was made in Rajpur Sonarpur Municipality and Ramkrishna Mission Residential Cottage and explained why the credit sales to Rajpur Sonarpur Municipality were at higher rates i.e. in view of delayed payments by them. It has been pointed out that 33.2% of the total sales amounting to Rs. 36451610/- were made to M/s. Ashok Exporters and Importers in respect of whom the sale price was invariably lower although the payments were received by cheques only. As regards credit sales, 50.86% of them have been made to M/s. Ashok Exporters and Importers as against only 3.94% to Rajpur Sonarpur Municipality. The appellant has also stated that the difference in prices charges may also be due to the

7 I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 Shri Goutam Kumar Kundu two different types of cement traded in by the appellant namely, Pozzolan Sing Cement (PSC) and Contreto. It is clear from the price data extracted by the appellant that it is not as if cash sales haves always been made at a lower rate which is the main reason given by the Assessing Officer for arriving at the conclusion that cash sales figures were manipulated by the appellant. I also find force in the appellant’s submission that major part of the credit sales for which payments have been received by way of cheque have been made to M/s. Ashok Exporters and Importers at a rate which is certainly no higher than the price at which cash sales have been made. It is also a normal occurrence in business that sales which are immediately paid for by cash are invariably made at a lower or a discounted price than credit sales for which payments are received after passage of time. It can also not be denied that two different kinds of cement will be traded at different prices. The finding of the Assessing Officer that majority of the cheque sales have been made to Rajpur Sonarpur Municipality and Ramkrishna Mission Residential College has also been shown to be incorrect by the appellant. I also find that the Assessing Officer has also been shown to be incorrect by the appellant. I also find that the Assessing Officer has not been able to bring on record any concrete evidence regarding manipulation of cash memos by understating the selling price therein. Therefore, the Assessing officer’s action to doubt the entire cash sales by merely indicating lower sale price of cash sales. In general (without listing any specific instances), on a few dates and to arrive at a figure of understatement of cash sales is not correct in view of the absence of any tangible evidence to support the theory that the cash sales were manipulated and recorded at lower than the actual sale price and the appellant’s submissions to show that the selling price was variable depending upon the kind of cement said and other factors wherein the selling price in respect of cash sales was also higher in some instances, the addition made by the Assessing Officer of Rs. 3931175/- by assuming that the selling price of 157247 cement bags sold in cash was understated by Rs. 25/- per bag cannot be justified and is deleted.” 11. The learned DR strongly relied on the order of the Assessing Officer in support of the revenue’s case on this issue. He submitted that there was an understatement of sale price by the assessee in case of sale of cement in cash as specifically pointed out by the AO. He contended that the Ld. CIT (A) however overlooked this vital aspect

8 I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 Shri Goutam Kumar Kundu and allowed relief to the assessee on this issue by accepting the submissions of the assessee as it is. The learned counsel for the assessee, on the other hand, strongly supported the impugned order of the Ld. CIT (A) giving relief to the assessee on this issue and submitted that the detailed submission made by the assessee before the Ld. CIT (A) duly supported by the relevant facts and figures may be taken into consideration while deciding this issue. 12. We have considered the rival submissions and also perused the relevant material available on record. It is observed that no material or specific defects were pointed out by the AO in the books of accounts of the assessee. Although he recorded in the assessment order that the rate charged by the assessee in case of sale of cement bags in cash was lower than the rate changed in case of credit sale, the relevant details furnished by the assessee before the Ld. CIT (A) clearly established that this finding recorded by the AO was not factually correct, in as much as some of the cash sales were affected by the assessee at the rate higher than the rates charges in case of credit sales. The relevant data furnished by the assessee thus revealed that cash sale was not always made by the assessee at a lower rate as alleged by the AO. Moreover, as rightly observed by the Ld. CIT (A), it is a normal occurrence of business that sales in cash are made invariably at lower rate than credit sales due to cash discount offered. The allegation of the Assessing Officer regarding the understatement of cash sales by the assessee thus was not well founded and the same was not based on any concrete or cogent material. Keeping in view all these facts of the case, we find no

9 I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 Shri Goutam Kumar Kundu infirmity in the impugned order of the Ld. CIT (A) deleting the addition made by the AO on account of the alleged understatement of cash sales by the assessee and upholding the same, we dismiss ground no 5 of the revenue’s appeal. 13. The issue raised in ground no 6 relates to the deletion by the Ld. CIT (A) of the addition of Rs. 17,57,796/- made by the AO on account of the alleged low gross profit shown by the assessee on the sale of TMT Bars. During the course of assessment proceedings, it was noticed by the AO that the assessee has declared a GP of only 5% on the total sales of 1.75 crores of TMT Bars. According to him, TMT Bars were not sold below 15% of GP and the assessee thus had understated the sale of TMT Bars by 10% to reduce its GP from 15% to 5%. Accordingly, an addition of Rs. 17,57,796/- was made by the AO to the total income of the assessee being 10% of the total sales of TMT bars amounting to RS. 17,57,796/-. 14. The addition made by the AO on account of low GP on sale of TMT Bars was disputed by the assessee and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the said addition made by the AO for the following reasons given of his impugned order: “I have considered the facts of the case and the appellant’s submission. I find that the Assessing Officer has absolutely no basis for making the huge addition of Rs. 1757796/- on account of alleged understatement of gross profit margin. No evidence has been brought on record by the Assessing Officer that the trading results have been manipulated, purchases have been inflated or sales have been suppressed in respect of the TMT Bars. The only reason given by the Assessing Officer for making the addition is that it is common knowledge that Durgapur Manufactured TMT Bars are

10 I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 Shri Goutam Kumar Kundu not sold below a price which will ensure 15% GP margin. Such an addition cannot be anything more than a conjecture or surmise. In view of the established position of law as also enunciated in the case laws cited by the appellant, assessments cannot be made on mere suspicions or bare guess and gross profit cannot be estimated in the absence of proper rejection of books of account. Hence, the addition of Rs. 1757796/- on account of alleged low GP from sales of TMT Bars declared by the appellant is deleted.” 15. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that gross profit of 5% shown by the assessee on the sale of TMT Bars as per his books of accounts was rejected by the AO and the income of the assessee from the business of dealing in TMT Bars was estimated by him by applying higher GP of 15% without pointing out any material or specific defects in the books of accounts of the assessee. As right held by the Ld. CIT (A), the same is not permissible in law as held inter alia by the coordinate bench of this Tribunal in the case of M/s. S.R.K. Tea Processing Industries Ltd. vs ACIT II (ITA No. 1685/K/2009 dated 11.03.2011). Moreover, no basis whatsoever was given by the AO for applying the GP rate of 15% except stating that it is a common knowledge that TMT bars are not sold below 15% of GP. This addition thus was made by the AO arbitrarily on the basis of the conjectures and surmises and the Ld. CIT (A), in our opinion, is fully justified to delete the same. We, therefore, uphold the impugned order of the Ld. CIT (A) on this issue and dismiss ground no 6 of the revenue’s appeal.

11 I.T.A. No. 592/Kol/2014 Assessment Year: 2010-11 Shri Goutam Kumar Kundu