KNP ASSOCIATES,AGRA vs. WARD 1(1)(1), AGRA

BECAUSE, upon the facts and in overall circumstances of the case, the ld AO has erred in law and on facts in invoking provisions of section 145(3) of the Act. There is no mention in the Assessment order as to which conditions existed in the case of Appellant. Sub section (3) of section 145 states that where the Assessing officer is not satisfied about the correctness or completeness of the accounts or where the method of accounting provided in sub section (1) has not been regularly followed by the assessee. The Id AO failed to mention even a single line as to which limb of sub section (3) was violated by the Appellant. In the absence of specific charge, the invocation of provisions of sub section (3) is bad in law and not enforceable.

BECAUSE, upon the facts and in overall circumstances of the case, the ld AO has erred in law and on facts in invoking provisions of section 145(3) of the Act. The Id AO, even after rejecting the books of account by invoking section 145(3) had passed an order under section 143(3) of the Act and the assessment has not been made in the manner provided under section 144 of the Act, as mandated by sub section (3) of section 145 of the Act.

BECAUSE, upon the facts and in overall circumstances of the case, the ld AO has erred in law and on facts in invoking provisions of section 145(3) of the Act. The Id AO has drawn an inference that the Assessee had inflated sale in its record to reduce the profit of the firm. Surprisingly the inference drawn by the ld AO is patently invalid, incorrect and unjustifiable. How can increase in sale may have an effect of reduction in profit.

BECAUSE, upon the facts and in overall circumstances of the case, the ld AO has erred in law and on facts in invoking provisions of section 145(3) of the Act. The Id AO, even after rejecting the books of account by invoking section 145(3) had accepted the Sale amount disclosed in financial statements and estimated the net profit at 1 percent on declared turnover of Rs. 43,25,48,983.00 in place of 0.15 percent disclosed in audited financial statements.

BECAUSE, upon the facts and in overall circumstances of the case, the ld AO has erred in estimating the net profit at 1 percent on declared Sales without assigning any reason and also nothing has been mentioned as to how this figure of 1 percent has been arrived at.

The Learned AO misconstrued the entire business of the Assessee. He stated in Para 2 of the order that Assessee firm derives income from liquor business instead of Beer. Immediately in the next line, he says that Assessee is engaged in wholesale trading of Beer for Agra District as per licence issued by the Excise Department. The Learned AO found the net profit @ 0.15% declared by the Assessee to be very low. The Learned AO noted that the Assessee firm purchases the Beer from the manufacturers and sell them to retailers at the rates prescribed by the UP Excise Department where MRP of the item is fixed by the Excise Department. Accordingly, he noted that the margin of the Assessee should be higher. The Learned AO noted that the Assessee firm had made sales to various individuals and credited the sales to the firm’s account in which these individuals were partners and Tax Collected at Source (TCS) was also not collected from the party to whom sale invoices were made. During the assessment proceedings, the Learned AO issued notices under section 133(6) of the Act to 48 sundry debtors of the Assessee calling for copy of account of the Assessee firm in their books. The sundry debtors duly replied before the Learned AO. On verification of the copy of account received from few trade debtors, the Learned AO noted the following discrepancies:-

In view of the above said discrepancies from few trade debtors, the Learned AO concluded that the Assessee had inflated the sales in its records to reduce the profit of the firm. The Learned AO also noted that from the bank statement of the Assessee firm, the Assessee had made cash deposit of Rs 2,56,20,500 in its Union Bank of India account. He noted that the Assessee being a wholesaler of liquor products and all his customers have a running account with the Assessee firm, as seen from the sales ledgers submitted by the Assessee firm, directly concluded that source of the cash deposit made in the bank account to be not justified.

Similarly, copy of rent agreement was called for and examined. The Learned AO noted that as per the rent agreement, the rent payable to SMt Charanjeet Kaur, wife of Satnam Singh was Rs 25,000 per month. As per the ledger account of rent expense submitted by the Assessee firm, the rent paid is shown at Rs 2,40,000 i.e. Rs 20,000 per month. It is very obvious that the Assessee had paid the balance amount of Rs 5,000 per month without recording it in its books of accounts as rent paid in excess of Rs 2,40,000 attracts the provisions of Section 194I of the Act and tax at source was required to be deducted on the rent.

In view of these facts, the accounting entries made by the Assessee firm were found to be false and significant amount is involved and AO cannot deduce the correct profit or income from the books of accounts of the Assessee. In view of these factual deficiencies in the books of accounts of the Assessee firm, the book results of the Assessee firm cannot be accepted and accordingly, the Learned AO proceeded to reject the books of accounts Page | 5 of liquor business and the book results under Section 145(3) of the Act. Thereafter, by placing reliance on certain decisions of Tribunals, by comparing the Assessee’s case with people who are engaged in liquor business, the Learned AO estimated the net profit at the rate of 1% of the total turnover and made an addition of Rs 36,74,974 in the assessment completed under 143(3) r.w.s. 144B of the Act on 29-09-2022. This action of the Learned AO was upheld by the Learned NFAC.

The Assessee with regard to deficiencies found in the case of a trade debtor Sapna Gupta submitted before the Learned CITA that the total sales made by the Assessee to that party was Rs 35,39,073 and after reducing the rebate on sale of Rs. 28,073, the party had made payment to the Assessee by cheque in the total sum of Rs. 35,05,000 thereby leaving a closing balance of Rs. 6,000. All the payments were received from Smt Sapna Gupta through account payee cheques. Accordingly, it was submitted that the concerned party Sapna Gupta had not maintained her books of accounts by recording full purchases thereon. Hence, no deficiency could be attributed in the books of accounts of the Assessee. The Assessee also submitted that to the extent of sales made by it, corresponding reduction in the stock register has also been done which has been subjected to audit by an independent chartered accountant.

With regard to other three parties, even though there was difference in the transactions recorded by the said party and the transactions recorded by the Assessee, the closing balance shown by the Assessee duly matched with the closing balance reflected in the ledger account of the Assessee in the books of the concerned parties. It was also pointed out that all the payments were received from all the parties only through account payee cheques. Hence, it was pointed out that no deficiency could be attributed in the books of accounts of the Assessee and in the book results of the Assessee as the closing balance duly matched with all the three parties thereon.

Further, it was pointed out that the Learned AO had made an observation that Assessee had inflated the sales in order to reduce the profits of the firm. It was submitted that this statement is totally illogical as because when the sales are inflated, it would only go to increase the profit of the firm and it will not reduce the profit of the firm.

The Assessee submitted that it is a fact that it had made cash deposits in Union Bank of India to the extent of Rs 2,56,20,500 during the year under consideration. It was submitted that the said cash deposits were made out of available cash balance with the Assessee as per the books of accounts and hence, the source is fully explained thereon.

Further, it was pointed out that Assessee is only a wholesale dealer in beer whereas, the Learned AO misconstrued the Assessee’s business to be dealing with wholesale dealer of liquor. In liquor business, the margins would be slightly higher than the Beer business. This point was completely misunderstood by the Learned AO.

I find that Assessee had not satisfactorily explained the source of cash deposits made in Union Bank of India to prove that the deposits were made from explainable sources. It is the statement of the Assessee that the business receipts in the form of sale proceeds were received from the parties through account payee cheques. Hence, there was no mechanism for the Assessee to receive sale proceeds in cash so as to make it as an explainable source for the cash deposits made in the bank account. Similarly, the Assessee had not given satisfactory explanation for the deficiency pointed out by the Learned AO in the rent expenditure. Hence, in principle, I uphold the action of the lower authorities in rejecting the books of accounts maintained by the Assessee and the book results of the Assessee under Section 145(3) of the Act. Having concluded that the book results of the Assessee are to be rejected, the only recourse available to the Learned AO is to estimate the net profit. It is a fact that Assessee is engaged only in the wholesale business of dealing in beer and not liquor. Obviously, the profit margin for wholesale dealer dealing in beer would be less than the wholesale dealer dealing in liquor. The Assessee had disclosed 0.15 percent net profit after interest on capital and partners remuneration. This net profit is increased to 0.50% for the year under consideration to take care of all the deficiencies pointed out. In my considered opinion, this would meet the ends of justice. Accordingly, the Learned AO is directed to re-compute the net profit of the Assessee at the rate of 0.50% of turnover and re-compute the total income accordingly. Hence, the grounds raised by the Assessee are partly allowed.

In the result, the appeal of the Assessee is partly allowed.