CREATIVE GARMENTS,MUMBAI vs. ADDL CIT RG 18(1), MUMBAI

The ClT(A) erred in upholding the addition of Rs. 86,82,488/- on account of suppressed profit on unexplained sales. The appellants contend that on the facts and in the circumstances of the case and in law, the ClT{A) ought not to have upheld the impugned addition in as much as there are no unexplained sales and hence, the impugned addition needs to be deleted.

3. The ClT(A) erred in upholding the addition of Rs. 16,50,000 on account short-term capital gains under section 5OC of the Act. The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the impugned addition in as much the said addition is not as per the prescription of the provisions of section 50C of the Act. 2. Rival contentions have been heard and record perused. Facts in brief are that there was a survey carried out by the Department under section 133A of the Act on various business premises of the appellants on 22nd February, 2011 and a statement on oath was recorded of the managing partner. No incriminating documents are found during the course of survey. The survey party inventorised the physical stocks and verified the same for the quantity and valuation as obtained from the accounts maintained by the appellants. Per physical verification and valuation by the survey party it was Rs 4.17 crores and per accounts Rs 4.26 crores to which the managing partner in the statement on oath in response to Q no 15 stated that the stocks have been valued on estimate basis. The assessee submitted that the difference is around 2% only and hence, ought to be ignored. This has also been explained to the Assessing Officer by letter dated 21st March, 2014. While framing the assessment the Assessing Officer has observed in the 1st paragraph on page 2 of his assessment order that the "assessee surrendered Rs 4.5 crores during the course of survey and agreed to pay the differential 3 amount of tax of Rs 1.35 crores," It was contention of assessee that it is an incorrect observation made by the Assessing Officer inasmuch as the assessees have not surrendered any additional income during the course of survey. From the Q no 16 of the statement on oath and the response thereto, it is crystal clear that the net profit of Rs 4.99 crores referred to therein is as per the provisional trading and profit and loss account as at 22.2.2011 obtained from the accounts. The tax payable on the profit Rs 4.99 crores per provisional profit and loss account on the date of survey is Rs 1.5 crores against which the assessee have paid Rs.15 lacs only; and thereby a shortfall of Rs 1.35 crores which the appellants have agreed to pay before 15th March, 2011, and against which they have given 3 post- dated cheques to the survey party. This is thus, simply a case of non- payment of full advance tax liability that is brought out by the survey party and not of unearthing of concealed income as depicted by the Assessing Officer. The Assessing Officer during the course of assessment proceedings has observed that the net profit as per the provisional profit and loss account is Rs 4.99 crores and 37 days still remaining for the year to end and the profit should have been higher than the aforesaid profit but, per the return of income filed by the appellants the total income is Rs 3.95 crores. Accordingly, addition was made on account of purchases.

We found that sales and other income as per provisional trading account is Rs.4.17 crores but all corresponding purchases are not included which is estimated at Rs.1.78 crores. Furthermore, closing stock valued at Rs.4.26 crores as at the date of survey is on estimate basis; 4 includes stock for which purchases are not recorded till the date of survey. However, the Assessing Officer has concluded that it was not the physical stock value which assessee claims that some purchases were not recorded in books of accounts, the book value of closing stock of is Rs..4.26 crore will be reflected only when the purchases are recorded. The unsold purchases as per books only forms part of closing stocks. Therefore the claim of the assessee while sales corresponding to these purchases are recorded but purchases are not recorded devoid of merit and against the general principle of method of accounting. The closing stock as per books will not be increased unless purchases are recorded. Therefore, the explanation of the assessee appears to be an afterthought to reduce the tax liability, He further stated on page 7 of his order that In view of the above, it is crystal clear that value of closing stock as per books was Rs. 4.26 crores which could not happen without recording the purchases of Rs.1.78 crore which assessee claims to have recorded subsequent to the date of survey. It is pertinent to mention that assessee has not claimed during the course of survey that some sales which are recorded in provisional P&L A/c corresponding purchases are not recorded. Even if the assessee's plea is assumed to be correct even then it will not effect profitability because when the purchases are recorded and increased by Rs.1.78 Cr. instantly closing value which is Rs. 4.26 Cr will be increased by corresponding Rs. 1.78 Cr leaving the profit unchanged.

From the record we found that there are certain purchases to the tune of Rs 1.73 crore in respect of which the goods are received before 5 the date of survey and the accounting is post-survey. Thus, in the inventory of the survey team, such goods are included as they have been considered in physical counting but the same have not been accounted for in the accounts; thus, not included in the purchase figure in the provisional trading and profit and loss account prepared on the date of survey. Further, as seen in 1.2.7(b) that there are some sales in the Pre- survey period for which the purchases are not recorded. Thus, if the said purchases which have been accounted post-survey, there will be no distortion in net profit.

With regard to AO’s allegation regarding rates charged by Creative Chain Stores, which is covered u/s.40(2)(b), we found that assessee had exported the goods purchased from Creative Chain Stores at a gross profit ranging from 5 to 7 percent and hence, there can be no question of accommodation entry and reduction of tax liability from the record, we also found that if the purchases of Rs.1.78 crores in the pre-survey period is recorded as such then the gross profit ratio for the pre-survey and post- survey becomes comparable which further gives credence to the fact that the purchases of Rs.1.78 crores though recorded in post-survey period were unrecorded on the date of survey.

With regard to addition of Rs.86.82 lacs made by AO by estimating G.P. at 4%, we found that assessee by their letter dated 10th March 2014 filed before AO had furnished the details of sales post survey and also furnished columnar profit and loss account for the pre and post-survey period. The Assessing Officer observed that there is a difference between 6 the sales and other income shown per columnar profit and loss account (Rs 5,72,78,650) and that per the details of sales post survey and required the appellants to reconcile the same.

We found that the assessee have reconciled the difference by their letter dated 25th March, 2014. Thus there is no undisclosed sales and hence, the addition on account of gross profit on such undisclosed sales is not tenable and requires to be deleted.

Now, coming to the financial results shown by the assessee during the year under consideration as compared to the earlier and subsequent years, we found that during the year A.Y.2010-11 under consideration, gross profit of assessee is 27% and net profit rata is 11%. However, in the earlier assessment years 2009-10 and 2010-11 gross profit rate was 18% and 17% respectively. In the subsequent assessment year 2012-2013 and 2013-14, gross profit was 20% and 9% respectively. Thus, we found that gross profit shown during the year under consideration is much better than the gross profit rate shown by assessee in all previous and subsequent years.

Now, coming to the net profit rate shown by assessee during the year under consideration, we found that assessee had shown net profit rate at 11%. However, in the earlier assessment years 2009-10 and 2010-11, the net profit rate was 1% in both the years, in the subsequent years 2012-13 and 2013-14, the net profit rate was 2% and (-7%) respectively. Thus, even the net profit rate during year under consideration is much better than the net profit rate shown in earlier and subsequent years. Keeping in 7 view the nature of trade, assessee was involved the net profit rate of 11% and gross profit of 27%, can be considered to be the best rate. In view of these facts, we do not find any merit for the addition made by AO by disallowing purchases and estimating profit on unexplained sales.

In the result, Ground No. 1 & 2 raised by the assessee is allowed.

Next grievance of assessee relates to addition made u/s.50C amounting to Rs.16,50,000/- by estimating the stamp duty valuation of an immovable property, being R.No 304, 3rd Floor, Building No 9, Rajgad Co-operative Housing Society, Lady Ratan Complex, D.S.Road, Worli, Murnabi 400 018 admeasuring 225 sq.ft carpet area.

We found that the said property has been sold by the assessees for Rs 8,50,000 which has been shown as short-term capital gains. An amendment has been brought in Clause (b) of Section 50C(2) by financial Act 2009 w.e.f.1.10.2009, accordingly to which if assessee has not disputed the value so adopted by stamp valuation authority under sub- section (1) of Section 50C. AO may refer the valuation of capital asset to DVO. In the instant case without making any reference to DVO, the AO has invoked provisions of Section 50C for the assessment year 2011-12 under consideration. In all fairness, we restore the matter back to the file of AO for making reference to the DVO in respect of impugned property and for deciding the issue afresh as per law. We direct accordingly.

In the result appeal of the assessee is allowed in part.