GLOBAL INDIA HOSPITALITY SERVICES P. LTD,MUMBAI vs. ASST CIT 8(1), MUMBAI

This appeal has been filed by the assessee against order dated 26/03/2014 passed by the Ld. CIT(Appeals)-16 Mumbai for the Asst. Year 2006-07, whereby the Ld. CIT(A) partly allowed the appeal of the assessee filed against penalty order dated 27/03/2012 passed u/s 271(1)(c) of the Income Tax Act, 1961 (for short ‘the Act’).

“1. On the facts and circumstances of the case the Hon’ble Commissioner of Income Tax (Appeals)-16, was totally arbitrary and unjustified in levying the penalty u/s. 271(1)(c) of the Income Tax Act, 1961. 2. On the facts and circumstances of the case the addition were made simply on the basis of estimation of gross profit based on average of last four years.”

income was not declared . The case of the assessee is that in the return of income total sales declared by the assessee was Rs.15,55,40,281/- which was more than total sales found by the survey party. The profit was also declared more than the total profit shown at the time of survey. The AO has however not accepted the claim on the ground that in the P&L account filed with the return of income, the assessee had also claimed additional expenses including purchases amounting to Rs.2,81,87,045/-. The AO has not accepted the claim of these expenses as the assessee could not file any reconciliation towards the figure of purchase and sales shown in the P&L Account found at the time of survey and P&L account filed at the time of return. He, therefore, added a sum of Rs.71,17,808/- as declared by the director as additional income at the time of survey. CIT(A) had taken a view that only the net profit on sales found excess at the time of survey could be added as there was no material to show that the corresponding investment in the purchases was unaccounted. He has thus confirmed the addition of Rs.2,84,712/- being 4% of Rs.71,17,808/-.

On careful consideration of all aspects of the matter, we are unable to sustain the order of CIT(A). Once, certain sales were found to be unaccounted in the P&L Account at the time of survey, the burden lay on the assessee to show that the corresponding purchases had been accounted which has not been done. The assessee had also claimed additional expenses including purchases of Rs.2,81,87,045/-. Despite the specific requisition by AO, the assessee had not given any re-conciliation between the purchases and sales which were not accounted in the P&L Account found at the time of survey. Though the director at the time of survey had also stated that some purchase bills were also unaccounted, the assessee was required to give reconciliation between all the purchases and sales which remained unaccounted even after passage of seven months after the close of the accounting year when the survey was conducted. Therefore, in our view, the accounts of the assessee cannot be taken as reliable and in the absence of complete reconciliation between purchases and sales, the accounts have to be rejected as not reliable and gross profit has to be estimated. The total sales declared by the assessee is much more than the total sales found by the survey party and, therefore, no addition can be made on account of sales. However, GP rate has to be estimated after considering the past record of the assessee. On query raised by the Bench, the ld. AR filed comparative rate of GP and NP from which it is found that GP rate for the impugned assessment year was 28.83% whereas in the immediate preceding assessment year i.e. 2005-06, the GP rate was 36.81%. The assessee is required to explain the steep fall in GP rate with supporting material and thereafter a view has to be taken about addition if any to be made on account of GP rate. Since this aspect has not been examined by the lower authorities and comparative statement was also not available before them, we consider it appropriate to set aside the order of CIT(A) and restore the matter back to him for passing a fresh order after necessary examination in the light of observations made above, if required, by remanding the mater back to AO and after allowing opportunity of hearing to the assessee.”

“The ITAT has pointed out that the accounts are not reliable and gross profit has to be estimated after considering the record of the assessee, also that the steep fall in GP rate needs to be explained. For the former, the appellant has furnished its audited figures for A.Ys 2005-06 to AY 2008-09, and as regards the fall in GP rate over the preceding year it has been stated that the assessee company is engaged in the providing hospitality service, which is highly specialized services like catering on board through skilled and qualified man power who are recruited specifically for a particular job from time to time. That the selling rate are always fluctuating depending on demand and supply of services. Further the profitability of the business depends upon the client being serviced whether in India or abroad as the amounts may be received in foreign currency and margin of profits are higher compared to local sales. Therefore the gross profit margin are not constant and are not comparable every year. The gross profit of the appellant is thus required to be estimated. During the course of appeal proceedings, the AR of the appellant stated that the appellant is agreeable to addition on the basis of average GP rate of the four AYs 2005-06 to 2008-09. However, since the ITAT have themselves concluded that the accounts for AY 2006-07 are not reliable, the average of the three AYs AY 2005-06, 2007-08 and 2008-09 is taken. Taking the average of the three AYs other than AY 2006-07, on the basis of figures furnished by the appellant itself, the average GP rate of AYs 2005-06, 2007-08 and 2008-09 works out to 30.37%. The appellant has declared turnover for AY 2006-07 at Rs. 15,55,40,281/- on which applying the average GP rate as worked out, the GP comes to Rs. 4,72,37,583/-. The appellant has declared GP of Rs.

4,45,91,628/-. The difference in two, of Rs. 26,45,955/- is directed to be added to the appellant’s income as additional income understated by the appellant.”