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Income Tax Appellate Tribunal, DELHI BENCH “F”: NEW DELHI
Before: SHRI H. S. SIDHU & SHRI PRASHANT MAHARISHI
Assessee by : Sh. S.L. Deepak, CA Revenue by: Sh. R.S.Negi, Sr. DR Date of Hearing 19/04/2016 Date of pronouncement 16/06/2016 O R D E R PER PRASHANT MAHARISHI, A. M. These are the cross appeals filed by the assessee and the revenue against 1. the order of the ld CIT (A), Ghaziabad dated 01.12.2011 for the Assessment Year 2008-09. The assessee has raised sole ground in appeal as under:- 2. “1. The learned CIT-A has erred in estimating the GP Rate of 25% & NP Rate of 15%.”
The revenue has raised the following grounds of appeal:-
1. That the Ld. CIT(A) has erred in law & on facts in deleting the addition made on account of bogus purchases from two parties namely M/s R. K. Traders M/s Shri Ganesh Enterprises amounting to Rs.59,56,574/- & Rs.23,89,8497- respectively, after observing in para 5.1 of his order that Assessing Officer (AO) has done commendable enquiry in respect of the purchases and that the AO after making fool proof enquiries had & 1120/Del /2012 A Y 2008-09 ACIT V Pradeep Kumar Anand & Pradeep Kumar Anand V ACIT Page 2 of 12 established that these two parties had provided accommodation bills to the assessee.
2. That the Ld. CIT (A) has erred in law & on facts in holding that addition on account of bogus purchases amounting to Rs. 59,56,5747- and Rs. 23,39,8497- can be covered by a reasonable enhancement of GP/NP rate ignoring the fact that the assessee had shown bogus purchases from two parties namely M/s R.K. Traders and M/s Shri Ganesh Enterprises through detailed enquiries conducted by the AO.
3. That the Ld. CIT(A) has erred in law & on facts in deleting the addition of Rs.5,29,6157- made by the AO under the provision of section 41(1) of the IT Act on account of liability shown towards M/s Reliance Enterprises and-M/s Mega Sales Corporation ignoring the fact that the AO had made detailed inquiries and established that no such persons existed on the addresses provided by the assessee. On the facts and circumstance of the case the AO was justified in treating the cessation of liability as deemed income u/s 41(1) of the IT act.
4. That the Ld. CIT(A) has erred in law & on facts in deleting the addition of Rs.4,55,0107- made by the AO on account of unexplained liability shown against various persons ignoring the fact that the assessee failed to substantiate these liabilities.
5. That the Ld. CIT(A) has erred in law & on facts in deleting the addition of Rs.2,16,8117- made by the AO on account of unexplained liability shown against various petty vendors ignoring the fact that the assessee failed to substantiate these liabilities.
6. That the Ld. CIT(A) has erred in law & on facts in deleting the addition of Rs.3,97,5007- on account of job charges paid to M/s Dev Electricals without deducting IDS and putting the same into estimation of net profit without any discussion in the body of the appeal order. The AO was justified in making addition u/s 40(a)(ia) of IT Act, which has not been discussed by the Ld. CIT(A).
7. That the Ld. CIT(A) has erred in law & on facts in deleting the addition of Rs.15,00,7507- on account of bogus job charges claimed by the assessee and putting the same into estimation of net profit ignoring the fact that the assessee failed to explain the genuineness of job charges before the AO.
8. That the Ld. CIT(A) has erred in law & on facts in estimating taxable income at Rs. 43,15,5007- , after applying NP rate at 15% to cover all possible leakages ignoring the fact the AO had made various additions as provided under the IT Act after detailed enquiries and discussion in the assessment order and that he has himself admitted that bogus purchases cannot be ruled out, job charges were not fully proved and many other small purchases remained doubtful.”
4. Assessee is an individual carrying on business of trading in electrical goods on wholesale business and electrical job work on contract basis under the name & 1120/Del /2012 A Y 2008-09 ACIT V Pradeep Kumar Anand & Pradeep Kumar Anand V ACIT Page 3 of 12 and style M/s Anand Electricals. He also earned the income from house property and other sources. For the AY 2008-09 assessee filed his return of income on 23.09.2008 showing income of Rs. 1014800/-. During the course of assessment proceedings an addition of Rs. 5956574/- was made with respect to purchases from M/s. RK Traders holding that it is merely an accommodation entry provided to the assessee for inflating its purchases. Similarly an addition of Rs. 2339849/- was also made with respect to purchases from Shri Ganesh Enterprises. A further addition of Rs. 1500750/- was made out of job work charges as assessee failed to furnish name of the person, nature of work done and date on which it was carried out. A further disallowance of Rs. 397500/- was made on account of job work charges paid to M/s. Dev Electricals on the ground that it has not executed any job work. Rs. 529615/- were added with respect to two parties holding them not genuine. Further a sum of Rs. 455010/- was also added in the name of 11 parties whose opening and closing balance remain same holding that these are deemed income-applying provisions of section 41(1) of the Income Tax Act. A further sum of Rs. 216811/- were added with respect to three parties in absence of production of any bill etc. holding them to be not genuine. The last addition of Rs. 1160000/- was made in the hands of the assessee rejecting the books results shown by the assessee stating that the gross profit for the year of the assessee is 10.97% compared to 18.14% and 12.27% in the earlier years and therefore adopting a GP rate of 15% addition of Rs. 1160000/- was made to the total income of the assessee. In the result assessment order u/s 143(3) was passed determining total income of Rs. 13570920/- against the return income of Rs. 1014800/-. Assessee being aggrieved with the order of the ld Assessing Officer filed appeal before the ld CIT(A). ld CIT(A) vide order dated 02.12.2011 deleted all the addition, however in case of gross profit held that the income of the assessee should be determined at 25% of the GP and at 15% at NP. Against the deletion of other addition, revenue is in appeal whereas on the issue of upholding application of gross profit rate the assessee is in appeal.
ITA NO 975 & 1120/Del /2012 A Y 2008-09 ACIT V Pradeep Kumar Anand & Pradeep Kumar Anand V ACIT Page 4 of 12 5. We clarify that though the appeal of the parties are raising different grounds however, the main crux of the appeals is estimation of the profit. Keeping this in mind, we decide the appeals as under.
We first take up the appeal of the revenue.
The ground Nos. 1 and 2 of appeal are against the deletion of addition made on account of bogus purchases from two parties namely M/s. RK Traders amounting to Rs.5956574/- and M/s. Ganesh Enterprise amounting to Rs.2389849/-. Both the additions have been made as the above parties did not respond to notice u/s 133(6) of the Income Tax Act. Further, summonses were also issued u/s 131 of the Act. After assessee purchased the goods cheques were issued to these parties and cash were withdrawn immediately within a day or two. Furthermore, enquiry made with sale tax authorities could also not be corroborated with the figures of sales and purchases and therefore the additions were made. Before us ld DR submitted that ld CIT(A) has deleted the addition merely on facts that sales cannot be made unless purchases are made therefore the goods have been purchased by the assessee and ld CIT(A) inferred that purchases were made from some other party. Against this ld AR relied on the orders of ld CIT(A) and submitted the same arguments, which was submitted before him.
We have carefully considered the rival contentions. The ld CIT(A) has deleted addition holding that the assessee is basically a trader and therefore he sales goods to the parties after purchasing the goods from others. Sales cannot be made unless purchases are made and the sales made by the assessee are not doubted it may be a case that the purchases were made from some third party and therefore disallowance on account of bogus purchases is deleted by him. It is also relevant to consider this ground along with the ground of estimation of gross profit in case of the assessee. As ld CIT(A) has sustained the addition on account of lower GP and purchase is part of the calculation of the gross profit we confirm the order of ld CIT(A) in deleting the above addition as he has upheld the addition on account of Gross profit and therefore this addition is subsumed in the addition of GP/ NP. In the result in & 1120/Del /2012 A Y 2008-09 ACIT V Pradeep Kumar Anand & Pradeep Kumar Anand V ACIT Page 5 of 12 view of our decision in Ground no 8 of the appeal of the revenue and appeal of the assessee, ground Nos. 1 and 2 of the revenue are dismissed.
Ground No. 3 of the appeal is against deletion of addition of Rs. 529615/- on account of liability in the name of two parties. The ld AO has made an addition on account of these parties were not found at the given address. Ld CIT(A) has deleted the addition holding that if the liabilities are bogus then the addition has to be made in the initial year when the credits are received. Ld DR relied on the orders of the Assessing Officer stating that the income is deemed to be taxable u/s 41(1) of the Income Tax Act whereas ld AR submitted that the provision of section 41(1) does not apply.
We have carefully considered the rival contentions and have also perused the orders of ld CIT(A) wherein the above addition has been deleted as under:- “5.4 Regarding addition of Rs. 5,29,615/- Liability shown towards M/s Reliance Enterprises and M/s Mega Sales Corporation were brought to tax by A.O. U/s 41(1) of the Act , on the ground that parties were not found to exist at the given address. No specific contention has been made by the appellant in appeal except oral contention, that section 41(1) was not correctly invoked as the liabilities have not been written off. I find force in the appellant's contention. It is not proper for the A.O. to suo-moto treat any liability, as shown in the books, as written off and bring the same to tax u/s 41(1). If the liabilities are bogus, the addition has to be made in the initial year when credits were received i.e. the liabilities were created. The .O. has also not proved on record as to how old are these liabilities. I hold that in the given facts and circumstances, it was pre-mature on the part of the A.O. to invoke section 41(1) of the Act. This aspect can be re-verified, in some future assessment before arriving at the conclusion that liability has ceased to exist, On the other hand; if the liabilities are bogus, then the A.O. can take remedial measures in respective year. As of now, the addition of Rs. 5,29,615/- is found to be not tenable”
We find no infirmity in the order of the ld CIT(A) in deleting the above addition as the liabilities have not been written off and if the parties are & 1120/Del /2012 A Y 2008-09 ACIT V Pradeep Kumar Anand & Pradeep Kumar Anand V ACIT Page 6 of 12 found to be bogus than the year in which the expenditure is debited should have been disturbed. In the result ground No. 3 of the appeal is dismissed.
Ground No. 4 of the appeal is against deleting the addition of Rs.455010/- and Ground No. 5 is also against the deletion of addition of Rs.216811/- on account of unexplained liability shown against various persons and vendors as assessee has failed to substantiate this liability. During the course of assessment proceeding ld AO noted that an amount of Rs.455010/- outstanding in 12 different account of various persons unchanged. It was further found that in case of five parties purchases made during the year of Rs.216811/- is outstanding and not paid as on 31.03.2008. the assessee could not substantiate the liability as they are the small persons and further they are petty vendors and therefore the ld Assessing Officer made the addition. 13. Before us ld DR submitted that ld CIT(A) has deleted this addition as no transactions has been held during the previous year with respect to Rs. 455010/- and Rs.216811/- as it would take care of addition in gross profit. He submitted that these additions have been separately sustained. 14. Ld AR relied on the order of ld CIT(A). 15. We have carefully considered the rival contentions and also perused the decision of ld CIT(A) who deleted the addition as under:- 5.5 Regarding addition of Rs.4,55,010/- and Rs.2,16,811/- These amounts were shown as liabilities towards petty job workers/labourers. The address were provided during assessment, but notices u/s 133(6.) sent by A.O. were received back un-served. The appellant says that these were petty suppliers /job workers whose postal addresses of Assam, Bihar and other far places, from were they have come, had been provided. Even their the then-present addresses (of slums, were they were supposed to be residing had been provided but the A.O. did not make any enquiry. I find that it has been mentioned in the assessment order itself that in respect of some of these parties, whose balances aggregate to Rs.4,55,010/- no transaction had been held during the previous year under consideration . Only 4 in respect of other parties; purchases had been made in the current year. Thus in respect of amount of Rs. 4,55,010/-, addition was not warranted. As far as the other amount of Rs. 2,16,811/- is concerned; ITA NO 975 & 1120/Del /2012 A Y 2008-09 ACIT V Pradeep Kumar Anand & Pradeep Kumar Anand V ACIT Page 7 of 12 these are doubtful purchases, which would be taken care of the disallowances/additions to be made on account of higher G.P. & N.P. , as in later paragraphs.
We do not find any infirmity in the order of ld CIT(A) in case of deletion of above addition as in case of Rs.455010/- there is no transaction during the year and further with respect to addition of Rs.216811/- it will be taken care of in estimation of GP. In the result in view of our decision in Ground no 8 of the appeal of the revenue and appeal of the assessee , these ground Nos. 4 and 5 of the appeal are dismissed.
Ground No. 6 and 7 of the appeal are against the addition on account of job work charges of Rs.397500/- for non deduction of tax as well as Rs.1500750/- on account of bogus job charges. 18. Ld DR relied on the order of ld Assessing Officer whereas the ld AR relied on the order of ld CIT(A). 19. We have carefully considered the rival contentions. The ld CIT(A) has deleted this disallowance in para 5.2 and 5.3 of his order as under:- “5.2 Regarding addition of Rs. 15,00,750/-- This addition has been made on account of claim of job work charges disallowed. The A.O. asked the assessee to produce the job work invoices and other related vouchers but no information what -so- ever was furnished. In appeal, the appellant has said that the assessee got the installation job work done through the unorganized labourer and petty job workers, who lived in mud houses (Jhuggis) who were not assigned any specific postal addresses. Payments to these persons are generally made in cash. The appellant claims that addresses, although general, were provided to the A.O, during assessment. I find that assessee has genuine difficulty in proving such job work charges, because of the nature of the workers on whom such expenses are incurred. But at the same time, this also cannot be denied that full details and verifiability are not their. Therefore, some extent of disallowance is justified on account of job charges. Again, this issue can be covered by adoption of a suitably higher GP/NP. 5.3 Regarding disallowance of Rs. 3,97,500/- & 1120/Del /2012 A Y 2008-09 ACIT V Pradeep Kumar Anand & Pradeep Kumar Anand V ACIT Page 8 of 12 This amount is claimed to be paid to M/s Dev Electricals on account of job charges as disallowed on the ground that postal verification led to adverse inference that the party did not exist. Also Income Tax Inspector reported that no such firm existed on this address. In appeal, the appellant claims that after the show cause notice of the A.O., received by the assessee, a new address of M/s Dev Electricals had been sent to the A.O. through Speed Post for purpose of verification, but A.O. ignored the same. In appeal, the appellant has not produced any proof of furnishing the new address. The fact that the A.O. did possible enquiry at the given address and made adverse inference, cannot be brushed aside. However, any such disallowance can appropriately be covered by a reasonable enhancement of G.P./N.P. rate.”
The ld CIT(A) has deleted this addition holding that the disallowance deleted on this grounds will take care of the addition sustain on account of addition in gross profit. As the allegation is that the expenses are bogus the net profit of the assessee will take care of this disallowance including the disallowance u/s 40(a)(ia) of the Income Tax Act. In view of this we do not find any infirmity in the order of the ld CIT(A). In the result in view of our decision in Ground no 8 of the appeal of the revenue and appeal of the assessee, ground No.6 and 7 of the appeal are dismissed.
Ground No. 8 of the appeal of the revenue is against adopting the net profit rate of 15%. Similarly the solitary ground of the assessee is that ld CIT(A) is erred in estimating the GP @25% and NP @15%.
The brief fact of the case is that the ld Assessing Officer has made an addition of Rs.1160000/- to the income of the assessee adopting the GP rate of 15%. On appeal before the ld CIT(A) he held that the assessee’s income should have been assessed at adopting 25% gross profit and 15% net profit. Against this both the parties are in appeal. Before us the assessee submitted the gross profit chart of the assessee for past years and subsequent years. For the AY 2007-08 the gross profit of the assessee is 18.14% whereas for the AY 2009-10 the gross profit of the assessee is 17.53%. Therefore it was submitted that GP @25% is too high. The ld DR submitted that GP is appropriate in view of all other additions deleted by ld CIT ()A on the main ground of upholding & 1120/Del /2012 A Y 2008-09 ACIT V Pradeep Kumar Anand & Pradeep Kumar Anand V ACIT Page 9 of 12 addition on account of low GP and the order of Assessing Officer should be upheld.
We have carefully considered the rival contentions of the parties and also perused the order of ld CIT(A) who has dealt with this issue as under:- “5.6. Regarding addition of Rs.11,60,000/- on account of rejection of books. The A.O. after making various disallowances as discussed above, also noticed that there was a fall in G.P. & N.P. rate as per the chart below:- A.Y. 2008-09 A.Y. 2007-08 A.Y. 2006-07 Sales Rs. 2,87,70,000/- Rs. 92,17,000/- Rs. 86,04,000/- Gross profit 10.97% 18.14% 12.27% rate Net profit rate . 3.66% 8.53% - The A.O, concluded that the books of accounts maintained by the assessee suffered from number of defects and hence true and correct profit cannot be detected from the same. According to A.O. it was a fit case for invocation of section 145(3). The A.O, adopted a G.P. rate of 15%, which was the average of G.P. rate shown in A.Y. 2007-08 & 2006-07. 5.7. Conclusion in respect of over-all profit rate. As can be observed, I have not upheld various amounts of additions, although those issues of addition were upheld in principle. This is because of the reason that I find force in the contention that most of these additions are more suited, rather than to be made independently, to go towards the obvious conclusion of rejection of books U/s 145(3). Once A.O. has reached a conclusion that because of various defects as in respect of purchases, job work charges etc; the book results need to be rejected and a higher profit is to be estimated; those disallowances /additions can be telescoped into adoption of higher but a reasonably estimated G,P. & N.P. rate so that to take care of all possible leakages of revenue. The A.O. has made separate additions/disallowances, but the fact that all these disallowances /additions taken together lead to an un-reasonably excessive G.P. and N.P. cannot be brushed aside. A trader of any business field, cannot be expected to earn & 1120/Del /2012 A Y 2008-09 ACIT V Pradeep Kumar Anand & Pradeep Kumar Anand V ACIT Page 10 of 12 such a high ( more than 50%) N.P. needs no emphasis. The estimation, if necessary to be made, must be on a reasonable basis. I hold that it will be in fitness of things, meeting both the ends of justice, if book results are rejected and a higher G.P. that even adopted by A.O. also, is adopted. The G.P. rate of 15% is less than appropriate in the present facts and circumstances. This is because too many evidences of leakages are there. Purchases of big amounts have been found to be bogus. It will be correct to infer that these purchases are made actually from some other party at much lesser rate. However, at the same time the appellant has not co-operated, in giving idea about any such comparable purchases being made from some other genuine parties or any comparable rate for same items prevalent in the general market. Thus, even if entire purchases cannot be disallowed; at the same time a big enough inflation in purchases cannot be ruled out. Similarly the job charges are not fully proved. Many other small purchases also remain doubtful. The fact that not much details and evidences have been brought forth even during appellate proceedings i.e. even after enough time of one or two years was available to the appellant; makes this case fit for conclusion that the true profit had been deflated by a big margin. Considering the entire facts and circumstances in totality, and considering that last year appellant declared more than 18% rate of G.P. and almost 9% rate of N.P.; I hold that it would be extremely reasonable to assess appellant's income adopting 25% G.P. and 15% N.P. Adoption of 15% N.P. on sales of Rs.2,87,70,000/- would imply a taxable income of Rs.43,15,500/- . In my view this would be fair amount of income so as to cover all possible leakages. To clarify, the aforesaid assessed amount of Net Profit would cover all possible disallowances/additions made in the assessment order, and thus would take care of all the grounds of appeal
.”
24. According to the order of the ld CIT(A) he has directed the ld Assessing Officer to assess appellant’s income adopting 25% GP and 15% NP. This finding of the ld CIT(A) is contradictory as both the gross profit and the net profit cannot be determined i.e. it has to be either of them. To this extent we do not agree with the view of ld CIT(A). Further, ld CIT(A) has held that adoption of 15% NP on sales of Rs. 2.87 crores would imply taxable income of & 1120/Del /2012 A Y 2008-09 ACIT V Pradeep Kumar Anand & Pradeep Kumar Anand V ACIT