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Facts
The assessee, a cold storage business, filed a return declaring nil income. The AO rejected the books of accounts under Section 145(3) due to discrepancies in rental receipts and expenses, particularly loading, unloading, and grading charges. The AO estimated a higher net profit rate of 25% based on increased bag quantity and hire charges per bag, leading to an addition to income.
Held
The tribunal upheld the rejection of books of accounts but found the AO's estimation of bag quantity and hire charges per bag arbitrary. It directed that the actual quantity of bags and the assessee's declared hire charges per bag be used, while retaining the 25% net profit rate. It also allowed deductions for interest on partners' capital and partners' remuneration.
Key Issues
Whether the rejection of books of accounts was justified, and if so, whether the estimation of higher receipts, bag quantity, and net profit rate by the AO was arbitrary and illegal.
Sections Cited
Section 143(3), Section 145(3), Section 40(b)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, AGRA BENCH “SMC”: AGRA
for AY 2011-12, arises out of the order of the ld. Commissioner of Income Tax (Appeals)-2, Agra [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 29.02.2016 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 20.03.2014 by the Assessing Officer, ITO, Ward-4(4), Agra (hereinafter referred to as ‘ld. AO’).
The assessee has raised the concise grounds on 5-7-2018 as under:-
“1. That merely because in the opinion of A.O. the profit is low. The invoking of provisions of sec. 145(3) sustained by C.I.T. (A) is illegal and arbitrary.
That C.I.T. (A) has erred on facts and in law in holding that results of comparable cases are not relevant or cannot be applied in the case of rejection of books of accounts as done in the case of the appellant.
That estimate of higher receipts for 185788 bags stored beyond the capacity of the cold storage i.e. 184017 bags (92008.80 Quintal) as certified by the Licensing Authority and 182959 bags of 50 Kg each stored during the year is arbitrary and unjust.
That estimate of net profit at Rs. 3251290/- by applying estimated net profit rate at the rate of 25% on estimated higher charges receipts at Rs. 13005160/- by applying an estimated rate of higher charges at the rate of Rs. 70/- per bag confirmed by C.I.T. (A) against the net profit shown at 1327502/- giving a net profit rate of 12.39% on higher charges receipts disclosed at Rs. 10710174/- at the rate of Rs. 58.60 per bag inclusive of interest ignoring the evidence furnished by the appellant is arbitrary and illegal.
That the interest charge from farmers on the advances made in expediency of business which was already included in higher charges disclosed at Rs. 10710174/- and again the separate addition sustained at Rs. 464470/- is unjust, arbitrary and illegal.
That the expenses incurred on loading, unloading and grading at Rs. 869055/-, 789599/- and Rs. 914755/- respectively distributed to laborers through the supervisor of the assessee were not covered by sec. 40A(3) and by sec. 40(a)(ia) and thereby to draw any adverse inference to justify the estimate of the net profit rate of 25% is unjust, illegal and arbitrary.
That the payment made to DVNL U.P. Government undertaking at Rs. 2183900/- paid under compelling circumstances for consumption of electricity were not covered by sec. 40A(3) and adverse conclusion drawn to justify the net profit rate of 25% is unjust, illegal and arbitrary.
That the appellant craves to add or alter any other ground of appeal as may be warranted.”
I have heard the rival submissions and perused the materials available on record. The assessee is a partnership firm engaged in the business of running and operation of cold storage under the name and style of Shri Kaila Devi Ice and Cold Storage. The return of income for the assessment year 2011-12 was filed by the assessee firm on 29-09- 2011 declaring total income at Rs Nil. The case was selected for scrutiny. During the course of scrutiny assessment, the Learned AO rejected the books of accounts and determined the total income at Rs 25,37,910 in the assessment framed under section 143(3) of the Act on 20-3-2014. The reasons given by the Learned AO for rejecting the books of accounts are as under :-
1) In the totally of the circumstances, the trading results of the assessee is not backed up with proper accounting of rental receipts as well as claim of expenses particularly under the head grading, loading and unloading expenses. 2) The payments made under the head grading, loading and unloading expenses were made for the first time and no confirmation with regard to receipt claimed to have been made to Shri Omkar has been furnished. (3) The books of accounts have been maintained in a very tentative style and in the manner with which suits to the assessee, particularly the expenses claimed under the head, grading loading and unloading expenses. (4) The trading results remained improper as comparison to last two preceding years and the payments vouchers under the head grading, loading and unloading expenses were maintained according to the convenience of the assessee, which are prima facie considered to be a managed one or a structured one story just to reduce the net profit a compared to last two preceding years. (5) On the face of record, it is noticed that the payment vouchers, as regards grading loading and unloading charges have been prepared in one sitting once the assessee came to know that a detailed investigation is being made in its case and when cornered the alleged payment vouchers in one sitting wherein vital discrepancies, defects noticed as discussed in hereinabove. (6) The rental receipts were also suppressed substantially on the facts stated hereinabove, and therefore, the N.P. rate went down drastically as compared to last two previous years. (7) As per written reply dated 26.2.2014, expenditure on a/c of loading, unloading and grading charges amounted to Rs. 25,73,499/- i.e Rs. 4.75+4.25+5.00=Rs. 14/- per bag of 50 kg. Assessee itself accepted that if interest element is excluded form the total hire charges, then hire charges amounted to Rs. 1,02,45,704/- being the charges @ Rs. 56 per bag of 50 kg. Since, this year the assessee has inflated the expenses under the head loading, unloading and grading charges and claimed for the first time, the overall burden of such expenses should have been cast on the farmers or rather the same was liable to be included in the hire charges i.e. total charges per bag of 50 kg should have been charges at Rs.70/- per bag of 50 kg. (ie. 56+14), therefore in all fairness and equity, the hire charges per bag of 50 kg on the assesses result and the expenses claimed which were to be realized or to be considered from the farmers. (8) What is more the assessee at the stage of assessment proceeding had not substantiated the payment claimed to have been paid under the head lading, unloading and grading charges at least to individual laborers and the subsequent reply dated 12.3.2014 in the context carry no weight because no vouchers were produced for verification on one hand and Secondly the payment were earlier claimed to have been made in cash to one Shri Omkar, the claim thereof has not been entertained as the payment was in cash, and the payments vouchers produced have no authenticity because of the defects noticed herein above.
The ld AO invoked the provisions of Section 145(3) of the Act and proceeded to estimate the net profit rate by taking the average of last two preceding years as declared by the assessee which is around 25% and worked out the profit as under:-
Total bags unloaded 1,85,788/- Hire charges per bag of 50kg=Rs 70/-per bag Amount received for hire charges: 1,85,788 *70=Rs, 1,30,05,160:00 Net Rate of profit applied before deduction u/s 40(b) of the act=25% Net Profit = 1,30,05,160*25% = Rs. 32,51,290:00"
The Learned AR before me pointed out that the average of net profit declared in preceding two years was not 25% as observed by the Learned AO. The Learned AR pointed out that the Learned AO had arbitrarily increased the quantity of bags from 182959 to 185788 bags and also arbitrarily increased the rate per bag from Rs 56 to Rs 70 per bag and adopted net profit rate of 25% before partners’ remuneration and interest on capital account paid to partners. All these estimations were carried out by the Learned AO due to the fact that the net profit had reduced considerably during the year under consideration when compared to Page | 4 preceding two years. The assessee had actually explained before the Learned AO the reason for reduction in net profit during the year by stating that operating expenses, namely loading, unloading and grading expenses were incurred by the assessee to provide better services to the customers. Moreover, the rate of hire charges per bag was increased from Rs 50 to Rs 56 per bag during the year and further interest was also charged from the farmers on advances given to them, which was not charged in earlier year. As a consideration of interest on advances and increase in hire charges, the expenses on grading, loading and unloading were borne by the assessee.
The Learned AR furnished the comparative chart of financials for various years as under:-
Comparative Chart
Assessment Year S.No Particulars 2009-10 2010-11 2011-12 2012-13 A Hire Charges Hire Charges per Bag No. 52 50 56 56 of Bags Stored 1,78,125 1,85,788 1,82,952 1,43,262 Total 92,62,500 92,89,400 1,02,45,704 80,22,672 B Operating Expenses Loading Charges 8,69,055 Unloading Charges 7,89,599 5,57,130 Grading Charges Power 9,14,795 8,23,311 and Fuel Other Op. 19,62,675 18,55,434 21,83,900 21,37,307 Expenses 13,648 1,93,818 42,840 1,47,324 Total 19,76,323 20,49,252 48,00,189 36,65,072 C Gross Profit (A-B) 72,86,177 72,40,148 54,45,515 43,57,600 GP Ratio (% of A) 78.66 77.94 53.15 54.32 D Other Income Interest 6,02,650 4,64,470 - Insurance Claim Received 50,512 Total 6,02,650 50,512 4,64,470 - E Other Expenses 12,20,515 19,89,796 12,79,227 9,69,101 Selling & Admin Exp Financial 22,50,938 18,08,248 20,00,076 17,99,408 Charges Depreciation 16,70,771 14,72,377 13,03,180 11,51,574 Total 51,42,225 52,70,421 45,82,483 39,20,083 F Net Profit (C+D-E) 27,46,602 20,20,239 13,27,502 4,37,517 NP Ratio (% of A) 29.65 21.75 12.96 5.45
In principle, I uphold the rejection of books of accounts and book results of the assessee by the Learned AO. I find that the Learned AO after estimating the net profit from business @ 25% on estimated sale and adding Rs 32.51,290, further added the sum of Rs 4,64,470 on account of interest charged from farmers on advances separately and granted deduction only for interest on partners’ capital of Rs 11,77,847 and did not grant deduction for partners’ remuneration amounting to Rs 1,49,655. However, considering the totality of the peculiar facts and circumstances of the instant case, I hold as under:-
a) The action of the Learned AO in increasing the hire charges from Rs 56 to Rs 70 per bag is found arbitrary, without any basis, and hence directed to be deleted. Only Rs 56 per bag (which is already increased rate during the year) should be considered for working out the net profit. b) The action of the Learned AO in increasing the quantity of bags stored from 182959 to 185788 bags is absolutely without any basis and hence directed to be ignored. Only the actual quantity of 182959 bags should be considered for working out the net profit. c) The net profit should be adopted at the rate of 25% being the average of preceding two years. d) Net profit of the total business shall be worked out as under:- Hire Charges (182959 bags * Rs 56 per bag)- Rs 1,02,45,704 Net profit @ 25% thereon before 40(b) Rs 25,61,426 Less: Interest on Partners Capital Rs 11,77,847 Less: Partners’ Remuneration Rs 1,49,655 Net Profit to be taxed Rs 12,33,924
In my considered opinion, the determination of net profit in the aforesaid manner would meet the ends of justice given the behavior of the assessee and the Learned AR had also agreed to the same at the time of hearing. Accordingly, the grounds raised by the assessee are partly allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 03/02/2026.