NATURE BIO FOODS LTD.,NEW DELHI vs. ACIT, NEW DELHI

The assessee has raised as many as 9 grounds of appeal, out of which, Grounds Nos. 1 and 6 to 9 are general in nature and consequential and require no adjudication at our end. Remaining effective ground Nos 2 to 5 of the assessee read as under:

“2. That CIT(A)has failed to appreciate the fact that the alleged difference in stock is due the fact that stock was not weighed during search and it was only by way of estimate that the list of stock was prepared, hence the addition made on the basis of alleged GP rate by the AO is unjust, illegal and bad in law.

Briefly stated, the facts of the case are that search and seizure operation u/s 132 of the Income tax Act, 1961 [for short, 'the Act'] was carried out in Dawat Group of cases including the house company on 10.02.2009. The assessee company E filed the return of income for A.Y 2009-10 on 30.09.2009 declaring an income of Rs. 1,64,90,076/-. The AO, vide his order u/s 143(3) of the Act dated 30.12.2010 has made addition of Rs. 4,97,369/- on three counts and assessed the income at Rs. 1,69,87,445/- as against the said returned income. Aggrieved, the assessee filed appeal before the ld. CIT(A) but remained empty handed as the first appellate authority upheld the additions made by the AO by passing the impugned order. Now the assessee is aggrieve and has come in second appeal with the main effective grounds as reproduced hereinabove.

Replying to the above, the ld. DR strongly supporting the action of the AO and the impugned order, drew our attention towards para 2.3 at page 3 of the impugned order and submitted that there was 10600 kgs as per physical verification done by the Revenue search party which was valued at Rs. 8,65,866/-. The ld. DR submitted that the assessee has been unable to satisfactorily explain the shortage of stock. Therefore, the AO was quite correct and justified in making addition in this regard and the ld. CIT(A) was also correct in upholding the same. The ld. AR also pointed out that the expenses against gross profit estimated by the AO cannot be allowed as all legitimate expenses were already debited in the profit and loss account. Therefore, estimation @ gross profit was correctly made by the AO which requires no interference.

On careful consideration of above rival submissions, at the very outset, from the assessment order as well as the first appellate order, we clearly observe that at the time of search and seizure operations on 10.2.2009, the stock was physically verified by officials of the department in the presence of assessee’s employees and staff and the quantity of 10600 kgs of rice was found short which could not be properly explained by the assessee. In this situation, the allegation of the assessee cannot be held as sustainable that the bags were not physically weighted and counted. Therefore, there was shortage of stock and thus the stock was found lesser than the stock shown in the books of account of the assessee at the time of search and seizure operation. Therefore, we are of the considered opinion that the authorities below were quite justified in concluding that the quantity of rice to the extent of 10600 kgs has to be treated as having been sold outside the books of accounts. At the same time, we are of the view that the AO and the ld. CIT(A) made and upheld the addition @ 32.08% on the average sale price of short stock of Rs. 8,65,866/- by holding that the assessee has already debited all legitimate expenses in the profit and loss account. But we are not in agreement with this approach of the authorities below. When, as per the audited books of account of the assessee which has been accepted by the assessee the net profit earned by the assessee for the year under consideration of 9% of the total turnover, then the addition cannot be made @ 32.08% on the basis of estimated gross profit. On the basis of the foregoing discussion, we uphold the conclusion of the authorities below that there was shortage of stock of rice which was valued at Rs. 8,65,866/- and the authorities below rightly treated the same as sale out of books and this part of conclusion is confirmed.

At the same time, we are of the considered opinion that the estimation of profit on the sale of rice out of stock has to be made @ 9% of turnover which was declared by the assessee and accepted by the department. Therefore, the AO is directed to calculate the net profit accordingly. Finally, the main plea of the assessee is dismissed and alternative plea of the assessee is allowed and the AO is directed to estimate the net profit on the sale of rice outside the books @ 9%. Accordingly, Ground Nos. 2 and 3 of the assessee are partly allowed on alternative plea in the manner as indicated above.

Reply to the above, the ld. DR strongly supported the action of the AO as well as the impugned order of the ld. CIT(A) and contended that there was no evidence to show that the payments actually reached M/s Himanshu Trading Co. Therefore, the addition was rightly made and confirmed by passing impugned order.

On careful consideration of the facts and circumstances of the case and rival submissions, we observe from the operative part of the impugned order that after making addition on this issue, the AO mentioned that penalty u/s 271AAA of the Act would attract accordingly. On the facts, the AO made addition and the ld. CIT(A) upheld, in our humble understanding, the authorities below were intended to invoke the provisions of section 40A(3) of the Act for making the impugned addition but the premise of this addition is that the assessee could not submit any evidence to show that the payments actually reached M/s Himanshu Trading Co. which cannot be illegal basis for making any addition u/s 40A(3) of the Act. From the ledger account of M/s Himanshu Trading Co., and confirmation of the employee of the assessee Shri Aditya Arora, it is amply clear that the employee of the assessee company made payments between 5.3.2009 to 25.3.2009 in 10 equal installments of Rs. 20,000/- each and these payments have been made on various 10 dates and there were no payments of more than Rs. 20,000/- in a day. In this situation, we are inclined to hold that there was no violation of provisions of section 40A(3) of the Act by the assessee and no addition can be made under this provision on the allegation that the assessee could not submit or show evidence to show that the payments reached to M/s Himanshu Trading Co. Therefore, we are of the view that the addition made by the AO and upheld by the ld. CIT(A) is not sustainable on legal footing. Therefore, we demolish the same. Consequently, Ground No. 3 is allowed.

Per contra, the ld. DR supported the action of the AO and submitted that when kaccha and pucca bills were not found satisfactory, then in respect of kaccha bill the AO was not right treating the same as unexplained expenses outside the books and the same would constitute undisclosed income of Rs. 19,600/-.

We have heard the rival submissions and have perused the relevant material on record. On the facts and in the circumstances of the case, we observe that the assessee submitted reply dated 10.12.2010 to the AO during the assessment proceedings but there was no satisfactory reply to this issue of kaccha and pucca bills. In this situation, when the authorities below held that the assessee made sale of rice out of books, then certainly some expenses in this regard has to be made for effecting such sale out of books. In the present case, there was no satisfactory explanation by the assessee during the Rs. 19,600/- which was not entered in the books of assessee, then the AO was right in treating the same as payments made outside the books of account and addition in this regard deserves to be confirmed and thus we uphold the conclusion of the authorities below in this regard. Accordingly, Ground No. 5 of the assessee is dismissed.

In the result, the appeal of the assessee is partly allowed as indicated above.