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Income Tax Appellate Tribunal, JAIPUR BENCHES “B”, JAIPUR
Before: SHRI SANDEEP GOSAIN, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 180/JP/2018
ORDER PER: SANDEEP GOSAIN, J.M. The present appeal has been filed by the assessee against the order of the ld. CIT(A), Ajmer dated 30/01/2017 for the A.Y. 2009-10, wherein the assessee has raised following grounds of appeal:
“1. The impugned additions and disallowances made in the order U/s 263/143(3) of the Act dated 05/03/2015 are bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted. 2. Rs. 66,35,957/-: The ld. CIT(A) further erred in law as well as in facts of the case in confirming the impugned addition made by the AO (being the difference between the declared sales of Rs. 22,60,16,421/- and the sales as per the VAT return of Rs.
2 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO 23,26,52,378/-) completely ignoring the direct and tangible evidences made available on record that it was a case of consignment sale made by the appellant on behalf of the consigner-appellant (an independent party) and for any other valid reasons. Hence, the addition so made being completely contrary to the provisions of the law and the facts and evidences available on record, the addition so made kindly be deleted in full or alternatively, kindly be reduced only to the extent of the reasonable amount of commission/profit thereon.
3. Rs. 2,63,660/-: The ld. CIT(A) erred in law as well as in the facts of the case in confirming the disallowance of the interest made by the AO of Rs. 2,63,660/- in relation to the unsecured loan of Rs. 8,01,109/-. The unsecured loan was a borrowed capital fully utilized for the purpose of the business and was fully allowable u/s 36(1)(iii) and/or u/s 37(1) of the Act. The disallowance so made and confirmed being contrary to the provisions of law and facts, therefore, kindly be allowed in full.
The ld. AO further erred in law as well as on the facts of the case in charging interest u/s 234A, 234B and 234C of the Act. The appellant totally denies its liability of charging. The interest so charged, being contrary to the provisions of law and facts, kindly be deleted in full.
The appellant prays your honour indulgences to add, amend or alter of or any of the grounds of the appeal on or before the date of hearing.”
The hearing of the appeal was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic.
The brief facts of the case are that the assessee was engaged in the Wholesale Trading of Ghee, Edible Oil, Vanaspati Ghee etc. in the name and style of M/s Kanoria Enterprises. The assessee filed his return
3 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO of income on 28.02.2009 declaring total income of Rs.2,45,980/-. The A.O. completed the assessment u/s 143(3) of the Income Tax Act, 1961 (in short, the Act) vide order dated 27.12.2011 after making lump sum addition of Rs. 80,000. Against the order of the A.O., no appeal was preferred by the assessee before the ld. CIT(A). During the course of audit of case, the Audit Party of I.T. Department observed a difference of Rs. 66,35,957/- between the total turnover declared in the Profit & Loss Account and Sales Tax Assessment Order, hence, order u/s 263 of the Act was passed on 19.02.2014 by the ld. CIT- (Admn) by setting aside the assessment order passed by the A.O. on 27.12.2011 with giving direction to the AO to make necessary verification of total sale/turnover from the books of accounts and other related documents and to verify the genuineness of the claim of loss of Rs.2,63,660/- under the head Income from Other Sources. Pursuant to the direction u/s 263, the AO completed the impugned reassessment u/s 143(3)/263 of the Act vide order dated 05.03.2015 by making addition of Rs.66,35,957 (difference in turnover) and disallowing the loss of Rs.2,63,659/-due to allegation of non- submission of details.
4. Being aggrieved by the order of the A.O., the assessee carried the matter before the ld. CIT(A), who after considering the submissions of 4 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO both the parties and material placed on record, dismissed the appeal filed by the assessee. Against which, the assessee has preferred the present appeal before the ITAT on the grounds mentioned above.
5. Grounds No. 1 and 2 of the appeal are interrelated and interconnected and mainly relates to challenging the order of the ld. CIT(A) in confirming the addition of Rs. 66,35,957/- made by the A.O. (being the difference between the declared sales of Rs. 22,60,16,421/- and the sales as per the VAT return of Rs. 23,26,52,378/-). In this regard, the ld. AR appearing on behalf of the assessee has reiterated the same arguments as were raised before the revenue authorities. It was further submitted that the ld. CIT(A) has grossly erred in law as well as in facts of the case in confirming the impugned addition made by the AO being the difference between the declared sales and the sales as per the VAT return thereby completely ignoring the direct and tangible evidences made available on record. It was further submitted that the assessee has manifestly proved on record that the difference between the declared sales and the sales as per VAT return was “consignment sale” made by the assessee on behalf of the consigner (an independent party), therefore, the additions so made were completely contrary to the provisions of law and the facts and evidences available on record. It was 5 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO submitted that there was a difference of Rs. 66,35,957/- which was overlooked by the A.O. while framing the original assessment order. It was further submitted that this difference in the total turnover was actually a consignment sale which the assessee carried out on the instructions of the Principal i.e. M/s Kedia Overseas Ltd. and M/s R.R Oils, Navi Mumbai and M/s Bhatinda Chemicals. As per the ld. AR, the consignment sale was not considered as part of total sales of the assessee. The ld. AR has further submitted that the assessee has, besides submitting Tax Audit Report to the Income tax Department has also to submit VAT Audit Report U/s 73 of the Rajasthan Value Added Tax Act, 2003 to the Sales Tax Department. In the said report so submitted, this fact has been clearly mentioned in Part IV of the VAT Audit Report. The ld. AR has stressed upon Annexure 'A' of the report, wherein a reconciliation has been made between the difference in sales 'As per VAT Return' and 'As per Books'. The copy of VAT Audit report, copy of `Consignment sales account and copy of accounts of the three principals namely M/S Kedia Overseas Ltd and M/S R R Oils, Navi Mumbai and M/S Bhatinda Chemicals, have already been submitted, as per the ld. AR, to the Assessing Officer Ward 2(1), Ajmer. Thus, according to the arguments of the ld. AR, it is submitted that the assessee had not concealed the sales of Rs. 66,35,957.00 and then the entire amount of 6 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO `Consignment Sales', thus, cannot be treated as the income of the assessee.
However, it was further argued by the ld. AR that, as per the records, the A.O. added the entire consignment sales of Rs. 6635957.00 in the total income by citing the reason that the assessee did not produce the books of accounts and in this regard, it was submitted that the complete books of accounts were thoroughly examined by the A.O. at the time of original assessment and the trading results declared by the assessee were accepted. However, during the subsequent assessment proceedings U/s 143(3) r.w.s 263 of the Act, the assessee was unable to produce books of account due to reasons beyond his control. It was submitted that the assessee was experiencing complete business and personal losses as his business was facing closure and all his staff and in particular the persons looking after his account had left and around this period, father of the assessee had also, therefore, because of these reasons, the assessee could not respond to the various notices issued by the I.T. Department. It was further submitted that even otherwise the entire sale consideration could not be brought to tax but only the profit attributable on the total unrecorded sales consideration can only be subject to income tax and in this regard, the ld. AR has relied upon the 7 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO decision in the case of K Venkatesh vs Income Tax Officer (2016) 47 CCH 0447 Banglore Tribunal and CIT v President Industries (2000) 158 CTR 372 (Guj). Lastly it was submitted that the assessee had declared Net profit Rate of 0.30% on total sales. After detailed examinations, the A.O. had accepted the GP and NP Rate declared by the assessee. Therefore, at best the NP Rate may be applied on the `Consignment Sales' of Rs. 66,35,957.00 and resulting income may be added to the assessed income.
On the contrary, the ld. DR has refuted the arguments of the ld. AR and submitted that in this case, the original assessment u/s 143(3) of the Act was completed at income of Rs 3,25,980/-. However, it was observed by the RAP that the turnover declared by assessee in the return submitted before the sales Tax Authorities and in Income Tax return varied and the assessee failed to disclosed turnover of Rs 66,35,957/-, therefore, the order u/s 263 was passed by the Commissioner of Income Tax giving specific direction to the A.O. to verify the total turnover from the books of accounts and also to verify the genuineness of the loss claimed by the assessee. Thus, during the course of reassessment proceedings u/s 263/143(3) of the Act, the assessee was called to prove the difference in turnover of Rs 66,35,957/-. Since the assessee failed to 8 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO support his claim, therefore the A.O. completed the assessment proceedings by adding the total suppressed sales of Rs. 66,35,957/- and consequently, the claim of loss claimed at Rs 2,63,600/- was also not proved, thus, the same was also not allowed. However, during the appellate proceedings, the assessee again submitted that he was in receipt of the consignment sales and in order to get verify the said consignment sales, the assessee was asked to submit the details in the shape of bills of consignment, ledger account of consignor parties and details of payment made to the consigner parties and their cross verification from the bank accounts. In remand proceedings, the ld. A.R submitted bills of consignment sales issued by the consignor, ledger of the Consignor in the books of assessee and the sales tax return. Thus, in order to confirm the consignment sales, letters were written to the consignor parties calling for information u/s 133(6) of the Act. However all the letters were returned unserved with the remark ‘the party left’, thus in this way, the confirmation could not be obtained regarding the consignment sales from the consignor. As per the ld. DR, only one entry of Bhatinda chemicals for payment made of Rs. 482609/- from PNB could only be verified. However, the audit report of the consignment sales that is said to have been submitted with the sales tax authorities was not bear the seal or receipt of same by the sales tax department. Therefore, as per
9 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO the ld. DR, the authenticity of the audit report for the consignment sales was also doubtful. Thus, in this way, the claim of the assessee with regard to consignment sales of Rs. 66,44,657/- could not be verified.
In rejoinder, the ld. AR has submitted that the notices issued by the A.O. in the remand proceedings could not be served upon the concerned parties U/s 133(6) of the Act on account of the reason that the matter is quite old and the parties to whom notices were served might have closed their businesses. It was further submitted that the contention of the A.O. that copy of VAT Audit Report submitted was not signed by the Sales Tax Department and in this regard, the ld AR has submitted that the Sales Tax Department never gives back the signed Audit Report as receipt of submission of the Vat Audit Report, thus in that eventuality, the A.O. being the investigator, should have written the Sales Tax Department to find out the veracity of the claim of the assessee as this was the most important aspect of the process which the A.O. has completely ignored.
We have considered the rival contentions and carefully perused the material placed on record. From the records, we have meticulously gone through the submissions made by both the parties and as per the records placed before us, it is true that the assessee could not prove the 10 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO difference of Rs. 66,35,957/- on account of consignment sale because of the reasons mentioned in the above paras of our order. However, we are of the view that whether the purported sale is “consignment sale” or “ordinary sale” is immaterial at this stage as even if we treat the said sales undertaken by the assessee as ordinary sale instead of consignment sale then also the entire sales cannot be treated as an income of the assessee. In this regard, we draw strength from the decision in the case of CIT Vs President Industries (supra) wherein the Coordinate Bench had held that entire sales could not be added as income of assessee but addition could be made only to the extent of estimated profits embedded in sales. Further in the case of K Venkatesh Vs ITO (supra) wherein the Hon’ble High Court upheld the order of Tribunal by holding that it not the entire sales consideration which is to be brought to tax but only the profit attributable on the total unrecorded sales consideration which alone can be subject to income tax. Thus, keeping in view the principles laid down by the Hon’ble High Court as well as the Coordinate Bench of the Tribunal, we are of the view that the entire sale consideration cannot be treated as income of the assessee but the addition could be made only to the extent of estimated profits embedded in sales, thus, in that eventuality, we deem it appropriate to restore the matter back to the file of the A.O. with a direction to make addition only to the extent of 11 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO estimated profits embedded in sales of Rs. 66,35,957/- while keeping in view the GP declared by the assessee on the total sales for the year under consideration. Reasonable and adequate opportunity of hearing shall be provided to the assessee before deciding the matter afresh. We order accordingly.
Ground No. 3 raised by the assessee relates to challenging the order of the ld. CIT(A) in confirming the disallowance of interest made by the A.O.
Having considered the rival contentions and carefully perused the material placed on record. From perusal of the record, we observed that the assessee claimed interest paid on borrowed capital amounting to Rs.2,63,659/- under the head Income From Other Sources. Asseseee is maintaining two sets of Books (viz. for the personal and business) and these loans were taken in his personal books but loans were used for his business purpose hence instead of debiting these expenses in the Profit & Loss Account of business books, [in the computation], the assessee claimed the same against Income from Other Sources. In the personal Balance Sheet of assessee, M/s Kanodia Enterprises (Proprietorship of assessee), was shown as debtor. At the time of original assessment, the assessee filed complete details along with confirmation of various parties
12 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO and again in the remand proceedings details were submitted. We observed from perusal of the impugned order that the ld. CIT(A) confirmed the addition made by the AO on two counts i.e. the assessee not utilized the entire interest bearing borrowed funds for the purpose of making investment in M/s Kanodia Enterprises and the interest of Rs.2,63,659/- appears to be very high. In this regard, we observed that the entire interest bearing funds were not utilized for the purpose making investment in M/s Kanodia Enterprises and the assessee is admittedly, maintaining two sets of accounts i.e. personal set of books and business set of books. The assessee is having closing balance of unsecured loans of Rs.8,01,109/-, which is at page No. 1 of paper book and investment in Kanoria Enterprises stood at Rs.20,43,238/-. We also observed that the statement of affair as on 31.03.2009 was filed before the authorities below, thus, it is evidently clear that entire capital of Rs. 20.43 lakhs in Kanodia Enterprises was sourced from the unsecured loan of Rs. 8.01 lakhs which is much lower than the total capital invested in the said proprietary. Further investment in the fixed assets, cash in hand, etc and some amount of shares, etc. with the help of the capital of Rs. 29.19 lakhs. In absence of any contrary evidence, it cannot be said that the unsecured loan so taken were utilized elsewhere then making investment in the said proprietary. We further observed that all these amounts were 13 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO taken from the market with the help of the finance broker to whom finance charges were also paid. The genuineness of the loan so taken is not under dispute and therefore the AO was also satisfied in absence of any addition made u/s 68 of the Act. It is not the allegation that the funds have been utilized for personal use/ non business purposes. The Ld. CIT(A) simply suspected that the claim of interest of Rs. 2,63,659 lakhs appeared to be very high without giving any strong reason. It is not the case that the subjected interest was paid to the related persons u/s 40A (2) (b) of the Act nor it is a finding that the market rate was much higher than what the assessee has paid. Once the loan was taken with the help of finance broker from the market and the amount of interest has been paid in accordance with the prevailing rate to the stranger, there could not have been any ground for suspicion. Further the assessee also deducted TDS from all the payees and amount of interest were also paid to account payee cheque only. Therefore the genuineness of the payment is also not under dispute. Thus the entire unsecured loan so taken of Rs. 8.01 lakhs were utilized towards the investment in the proprietary of Rs. 20.43 lakhs. Moreover the profit earned from the said proprietary of Rs. 60,53,134 /- as per the capital account of the assessee has also been offered for the tax in the computation. Therefore, the entire interest so paid was under the capital borrowed for the purpose of the business and 14 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO was fully allowable u/s 36(1)(iii)/37(1) of the Act. The ld. CIT(A) held that the assessee is having assets amounting to Rs.37,20,351/- and unsecured loans were Rs.8,01,109/- hence it cannot be accepted that the entire interest bearing funds were invested in the Kanoria Enterprises. The ld. CIT (A) completely overlooked the fact that the assessee is having capital balance of Rs.29,19,242/-. The assessee is having building amounting to Rs.12,28,000/- the other assets of the assessee are comprising the PNB Bonds, Mutual Funds and PPF. The assumption of the ld.CIT(A) that all these assets are financed through unsecured loans does not hold any strength as it is the matter of very common knowledge that Bonds, Mutual Funds and PPF carry very lower rate of interest and unsecured loans carry very high rate of interest hence, no prudent businessman will invest his higher interest rate borrowed funds in the lower fixed income investments hence these investment must have been made out of the capital balance of the assessee and investment in M/s Kanoria Enterprises must have been made out of the unsecured loans and interest incurred on these loans deserves a complete allowance. As regards the suspected excessive interest, we are of the view that this is the misconception of the ld.CIT(A) as he is comparing the closing balances of unsecured loans with total amount of interest paid. Out of the total amount of Rs.2,63,659/-, Rs.15,790/- were paid as brokerage for arranging the loans. Rs.53,049/-
15 ITA 180/JP/2018_ Sh. Nikhil Garg Vs ITO were paid to the HDFC Bank Ltd and remaining interest of Rs.1,94,820/- were paid to various parties who were not related to the assessee and all the payment have been made through banking channels only. Therefore, considering the totality of facts and circumstances of the case, we found merit in the contention of the ld. AR and therefore, we direct to delete the addition made qua this issue.