ACIT CIR 12(3), MUMBAI vs. MALIK, TRADERS, MUMBAI

Date of Hearing –02.05.2017 Date of Order- 01.06.2017

O R D E R PER: SHAMIM YAHYA

This appeal by the revenue is directed against order of Ld. CIT-A dated 26.03.2014 and pertains to assessment year 2009-10.

1. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in holding that the rejection of books is not justified, when there are facts on record which lead to the satisfaction of the AO that the accounts maintained by the assessee are not correct.

Malik Traders ITA no.4304/Mum./2014 2) "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deleting the addition of Rs.47,66,786/- out of Rs.50,00,000/- made by the AO on account of various discrepancies leading to the rejection of books of account". 3) The appellant prays that the order of the AO should be restored and order of the CIT(A) should be set aside".

4. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary."

The facts of the case are that the assessee firm is a manufacture and exporter of leather goods. During the year, total export sales of Rs.39,13,75,567/- had been shown, which includes transfer of goods worth Rs.18,84,90,955/- from the Kanpur Branch. The assessee has gross profit rate of 17.43%. The G.P. rates for the A.Y.2008-09 & 2007-08 were 17.47% and 19.64% respectively, as communicated by the assessee to the A.O.

The A.O. for reasons given in Para 2.2 of the order, was of the opinion that the G.P. rate for the A.Y. 2008-09 worked out to 17.85%. The assessee was, therefore, asked to explain reasons for fall in G.P. rate. Vide a written reply dated 18/11/2011, it was submitted that there was no change in the G.P. rate. The A.O. did not find the submission of the assessee acceptable. He has noted in the assessment order that the assessee did not file all the details 2

Malik Traders ITA no.4304/Mum./2014 called for as a result of which it was not possible to make requisite verifications. It was admitted by the assessee that tax at source had not been deducted on import/export documentation charges amounting to Rs.2,33,214/- which was in violation of sec. 40(a)(ia) of the I.T. Act, 1961. It was also admitted by the assessee that no documentary evidence was available in respect of the expenditure incurred on trade fairs of Rs.43,16,701/- in foreign countries and documentary evidence in part was available and, that too, for purchase of air tickets. The A.O. also observed that there was discrepancy in the valuation of closing stock and purchases of raw materials of Rs.86,705/- and Rs.15,109/- did not appear in the list of closing stock or in sales details, meaning thereby, that these items had been shown in the purchases only. Further, from the figures of closing stock of Kanpur branch, it was seen by the A.O. that there were Rs.15,502 pairs of finished stock whose value has been stated at Rs.89,03,020/- as per which, the value of each pair worked out to Rs.574.31. But in the closing stock details, no pair costing so much had been shown. Further, interest income of Rs.6,000/- which appears in the AIR/ITS details was not included in the total income of the assessee.

From the above observations, the Assessing Officer was of the opinion that the assessee's closing stock had not been properly

Malik Traders ITA no.4304/Mum./2014 valued. While working the valuation of closing stock, only basic value of the goods had been taken and expenses like, consumable store, cooliage and cartage, forwarding charges, establishment expenses, electricity charges etc. were not considered at all for the valuation of the finished goods or semi-finished goods. In the branch office, where the purchases raw/semi-finished/finished leather as raw material is made, no quantitative details of the raw materials purchased had been furnished by the assessee and the Chartered Accountant also failed to furnish the said details in the Tax Audit report and only valuation in money terms had been furnished. No stock register was also produced. He was not in possession of any documentary evidence towards many of the expenses claimed to have been incurred The Assessing Officer was of the opinion that in view of the many defects as pointed out in the books of accounts, non furnishing of details, non production of stock register, non production of vouchers when books are produced and non production of books when vouchers are produced, incorrect method of valuation of closing stock, non deduction of tax at source in respect of the various payments made, non recording of purchase made on 31/03/2009 either in sale or closing stock, fall in G.P., different parameters for working of comparative gross profit in different years, the book results of the assessee could not be Malik Traders ITA no.4304/Mum./2014 accepted and the credit profits of the business could not be determined. He, therefore; applied the provisions of sec.145 of the I.T. Act, 1961.

“To ascertain the income of the assessee, one method is to apply an enhanced G.P. rate to the enhanced sale. But the details furnished by the assessee clearly reflects that different parameter have been applied to work out gross profit rate in different assessment years. Therefore it will not be correct to apply high rate of gross profit to get correct profit. There is no other case similar in nature, whose parameters could be applied to this case to get the gross profit rate. The only option is to estimate his profit.

Looking to the facts of the case and the various defects as pointed out, it will be fare to make an addition of Rs.50,00,000/- to the returned income of the assessee firm. This will take care all the defects point out in the above paras.”

I have considered the facts of the case and the submissions made by the assessee. I find that the Assessing Officer has questioned the gross profit percentage of the assessee’s business during the year on comparing the same with the Malik Traders ITA no.4304/Mum./2014 gross profit of the earlier two preceding years. However, on a perusal of the materials on record, it is seen that there is not much variation in the gross profit margins as compared to the earlier years. The G.P. rate in the A.Y. 2008-09 was 17.47% while the G.P. in the A.Y. 2009-10 is 17.43%. Thus, there is a negligible fall in the G.P. rate over the last year. The G.P. rate cannot be uniform in every year and there will always be a variation in the acceptable range in the different years depending on the facts and circumstances and the quantum and characteristics of the business in the different years. It is not the case of the Assessing Officer that major discrepancies in the purchases and sales or in the expenditures claimed have been found. Non-deduction of tax at source on certain expenditures incurred is only a technical fault which leads to a technical disallowance. This, however, does not affect the actual G.P. of the business. From the assessment order, it appears that the assessee did not furnish the details of expenditure incurred in respect of the foreign tour on account of trade fair. This can, however, lead to the disallowance of the expenditure per se. However, this cannot be a ground for rejecting the books of accounts of the business. One of the grounds considered for rejecting the books of accounts is that Malik Traders ITA no.4304/Mum./2014 in the closing stock of Kanpur branch, 15,502 pairs of closing stock of the value of Rs.89,03,020/- was available which give the cost of each pair of footwear at Rs.574.31. However, no pair costing Rs.574.31 was found in the closing stock statement. As against this, the assessee has explained that Rs.574.31 was the average value of all the pairs of footwear available in the closing stock. It does not mean that each pair of footwear would cost Rs.574.31. The assessee has given a point-wise explanation on the discrepancies pointed out by the Assessing Officer.

“I have also perused the order sheet notings of the Assessing Officer filed by the assessee in the course of the appellate proceedings. As regards the production of ledger, cash book, purchase book, etc., I find that on 04/10/2011, the assessee was required by the Assessing Officer to produce the ledger, cash book, vouchers of purchase and sales and expenses for the period 15/03/2009 to 31/03/2009 .on 12/10/2011. On 12/10/2011, it has been noted by the A. O. that no ledger or cash book as required was produced and only purchase book was produced. The assessee was asked to produce the ledger, cash book, journal, stock register and books audited along with the vouchers of last fortnight of March, 2009. As per the Malik Traders ITA no.4304/Mum./2014 order sheet noting on 18/10/2011, the ledger, cash book and voucher of March, 2009, second fortnight were produced which were test checked by the A.O. No thereafter, there is no noting which would suggest that the A.O. required the assessee to furnish the journal again. Thereafter, further details were called for and on 18/11/2011, it has been noted that various issues raised during the hearing were discussed. The Assessing Officer has not pointed out any specific instance to show as to details of which expenses (other than the expenses on trade fair) were not furnished. He has also not shown satisfactorily as to how the G. P. disclosed by the assessee was on a lower side which would lead to the rejection of the books of accounts. Considering- the facts of the case and the submissions made by the assessee, in my opinion, this is not a fit case for the rejection of the book results of the assessee, the A.O has himself noticed that it will not be correct to apply high rate of gross profit to arrive at the correct profit and there is no other case similar in nature whose parameters could be applied to this case to arrive at the gross profit rate. Thereafter, the Assessing Officer has made an ad-hoc addition of Rs. 50,00,000/- to the returned income of the assessee firm to take care of all the defects pointed out by him. He has,

Malik Traders ITA no.4304/Mum./2014 however, given no basis for such estimation. Under the circumstances, the action of the Assessing Officer of rejecting the book profits cannot be upheld.

As regards the addition of Rs.50,00,000/- to the total income of the assessee, as stated earlier, the Assessing Officer has given no basis for such estimation. He has simply stated that such estimation of addition would be good enough to take care of the defects pointed out by him. This approach of making the addition, in the facts and circumstances of the case, is not correct. Having held so, I find that the assessee has admitted that tax has not been deducted at source on the expenditure of Rs.2,33,214/- in respect of import/export documentation charges paid to M/s. Venuta Agencies India although tax was required to be deducted at source on such expenditure under the provisions of the Act. Hence, the expenditure of Rs.2,33,214/- shall not be allowed as a deduction in computing the business income of the assessee in view of the provisions of sec.40(a)(ia) of the LT. Act, 1961. The said expenditure is, therefore, to be disallowed by the A.O.

As regards the interest income of Rs.6,000/-, the assessee has submitted that the said interest income is in respect of interest earned on the security deposit maintained by the appellant

Malik Traders ITA no.4304/Mum./2014 with Reliance Energy. The said interest has been adjusted by Reliance Energy in its bill for the month of Month 2008. The copy of the bill is enclosed at pg- 145 of the PB. Thus, the said income of Rs.6000/- has been adjusted by the Appellant to reduce its claim for electricity expenses during the year. Hence, in totality, the appellant has rightly offered the interest income of Rs.6000/- to tax by way of claiming less expenditure and as such there is no income of the appellant which has not been offered to tax as claimed by the Appellant.

I have perused the electricity bill for the month of March, 2008 and find that the amount of Rs.6,000/- on account of S. D. interest has been reduced from the current month's bill amount of Rs.61,469.19. Hence, the contention of the assessee is found to be correct. Instead of- claiming the gross expenditure on account of the electricity bill for the month, the interest income on account of the electricity deposit has been reduced from the electricity bill amount and only the net expenditure has been, claimed by the assessee. Hence; no addition of this amount of Rs.6,000/- is to be made to the total income of the assessee.

As regards the expenditure on trade fair, out of the total expenditure claimed of Rs.43,16,701/-, the Assessing Officer

Malik Traders ITA no.4304/Mum./2014 has, after verifying the expenditure, reported that the expenditure of Rs.41,83,3821- has been incurred on trade fairs. He has, however, observed that expenditure of Rs.1,33,319/- seems to have been incurred towards personal expenses and is disallowable. He has, however, not given a categorical finding on the same and has given no reasons as to why these are disallowable. The nature of expenditures relate to food in restaurants, customers hospitality, etc. When the person has gone abroad to participate in a trade fair relating to the business of the assessee, there is no reason to disallow these expenditures on food, customer hospitality, etc. because these expenses are required to be incurred. The Assessing Officer has not brought any facts or material on record to suggest that these were not genuine or were not incurred in the course' of the business of the assessee. Hence, the entire expenditure of Rs.43,16,701/- is required to be allowed.”

Malik Traders ITA no.4304/Mum./2014 for assessment year 2008 - 09 was 17.47% while the gross profit in the assessment year 2009-10 is 17.43%. Hence there is a very negligible fall in the gross profit which doesn't warrant any adverse inference. Furthermore learned CIT-A has given elaborate finding on all the adverse findings of the assessing officer. We find that the finding of the learned CIT-A are convincing and do not require any interference on our part. Furthermore even after rejecting the books of account the assessing officer has not found it suitable to make any addition of gross profit ratio. He has made an addition of lump sum amount of Rs.50 lakh. Learned CIT-A is quite correct that when the gross profit ratio compares favourably with the past data no addition for gross profit is warranted, much less an ad hoc addition of Rs.50 lakh. This addition has been solely based upon conjecture and surmises have rightly been found by the learned CIT- A to be not sustainable. Even thereafter in the above order learned CIT-A has sustained some addition /disallowance being expenditure of Rs.2,33,214 under section 40 (a)(ia). In our considered opinion there is no infirmity in order of learned CIT-A.

Malik Traders ITA no.4304/Mum./2014

Order pronounced in the Open Court on 01.06.2017