ITO, NEW DELHI vs. M/S. SAKSHAM DAIRY INDIA LTD., NEW DELHI

This appeal by the Revenue arises out of the order passed by the CIT(A) X, New Delhi, on 19.05.2010 in relation to the Assessment Year 2006-07.

The first ground of the appeal is against the reduction in the addition on account of net profit. The brief facts of the case are that the assessee is in the business of marketing dairy products. Purchases to the tune of Rs.3.10 crore were shown as against Rs.53.54 lac for the immediately preceding year. Similarly, sales for the year under consideration were shown at Rs.3.64 crore with the corresponding figure of sale during the preceding year at Rs.86.30 lacs. In the like manner, the net profit for the year was shown at Rs.1,30,831/- as against preceding year’s profit of Rs.1,18,321/-. On being called upon to explain as to why the net profit did not increase in tandem with the increase in sales by 4.5 times, the assessee submitted that the purchase price of the milk depends upon Fat and SNF (solids not fat) contents in the milk. It was explained that if milk of 6% fat & 9% SNF cost Rs.12 per litre, the price per fat unit is Rs.1/- (6 fat + 2/3rd of 9 SNF = 12 fat units). It was further explained that SNF below 8.5 means that supplier has mixed water. That is how the assessee tried to justify its low profit rate. The Assessing Officer required the assessee to substantiate its submissions with certain details as enumerated at page 3 of the assessment order. No such information was submitted by the assessee. The assessee admitted that no Purchase register was maintained by it. The Assessing Officer invoked the provisions of Section 145(3) and 3 I.T.A.No.3801/Del/2010 rejected the books of account. By applying net profit rate of 10% on the amount of gross sales, the AO calculated the amount of net profit from sales at Rs.36,40,973/-. The ld. CIT(A) got convinced with the explanation furnished by the assessee and accordingly directed that the net profit rate of 1.37% be applied as against 0.36% declared by the assessee and 10% determined by the Assessing Officer. The Revenue is aggrieved against reduction in the addition.

We have heard the rival submissions and perused the relevant material placed on record. It is evident from the assessment order that the assessee failed to produce necessary books of accounts and also admitted that no Purchase register was maintained by the assessee company. As per the assessee’s own submissions, purchase aspect is very relevant because the purchase price of milk depends upon Fat and SNF contents in the milk. In view of non maintenance of Purchase register and the other reasons discussed in the assessment order, we are satisfied that the Assessing Officer was right in rejecting the books of accounts of the assessee and then resorting to the provisions of Section 145(3) of the Act.

Having held that the provisions of Section 145(3) were rightly applied, the next question arises about the estimation of a 4 I.T.A.No.3801/Del/2010 profit from the sales effected by the assessee. The Assessing Officer has applied 10% net profit rate on the gross amount of sales and no basis whatsoever has been given to support the application of such a profit rate. After rejecting books of account, the AO is required to proceed in some rational manner to estimate the profit. It is not permissible to pick up any ad hoc rate of net profit for application without any basis. In the absence of any other special feature, the profit rate of earlier years constitutes a good basis for adoption. The ld. CIT(A) has noted on page 18 of his order that in the earlier years, net profit rate was ranging between 1.37% to 1.95%, and for the subsequent assessment year, the assessee filed its return declaring net profit @ 1.25%. In our considered opinion, the application of net profit rate, in the given circumstances, @ 1.37% is perfectly in order. We, therefore, uphold the impugned order to this extent.

The only other ground is against the deletion of addition of Rs.1,29,95,727/- made by the Assessing Officer as unexplained cash deposits. The facts apropos this ground are that the Assessing Officer found cash deposits in the assessee’s bank account amounting to Rs.1,29,95,727/-, detail of which is as under : -

He observed that the assessee had made negligible cash sales and it was claimed that the milk was sold to institutional parties, namely, M/s. S M Milkoes, M/s. VRS Foods Ltd. M/s. Sterling India Agro Ltd. and M/s. Bholey Baba only. Treating the entire cash deposits in the banks amounting to Rs.1.29 crore as unexplained, the Assessing Officer made addition for the same. The ld. CIT(A) deleted the addition.

After considering the rival submissions and perusing the relevant material placed on record, it is observed that the calculation of total cash deposits in the bank accounts by the Assessing Officer at Rs.1.29 crore is incorrect, inasmuch as the Inspector of Income-tax in the course of remand proceedings found total cash deposits in various bank accounts of the assessee at Rs.95,48,145 only, detailed as under : -

The above calculation of cash deposited during the year at Rs.95.48 lacs has not been controverted by the ld. D.R. We, therefore, proceed with the presumption that the cash deposited by the assessee in its bank account is only Rs.95.48 lacs and not Rs.1.29 crores as noted by the Assessing Officer. The assessee made total sales amounting to Rs.3.64 crore, out of which sale amounting to Rs.2.46 crore were made on credit to three major buyers as has been mentioned in para 8.1 of the ld. CIT(A)’s order. If this amount of credit sales is excluded from the total sales of Rs.3.64 crore, we get a figure of Rs.1.18 crore, representing the amount of cash sales made by the assessee. Since this amount of cash sales at Rs.1.18 crores is higher than the amount of cash deposited in the bank to the tune of Rs.95.48 lac, there can be no reason to treat the cash deposits in the bank

In the result, appeal filed by the Revenue is dismissed. Order pronounced in the open court on 25th May, 2016.