ITO, NEW DELHI vs. M/S. RAM PAL & PARTY (AOP), NEW DELHI

Date of Hearing : 11.12.2015 Date of Pronouncement : 08.02.2016 ORDER PER BEENA A. PILLAI, JM: 1. These appeals – one by the assessee and the other by the Revenue - arise out of the order passed by the CIT(A)-XXIV, New Delhi on 12.12.2011in relation to the assessment year 2004-05 on the following grounds; ITA no. 1031/D/12:

(i) On the facts and circumstances of the case, the CIT(A) erred in deleting the addition of Rs.1.94 cr. being unexplained cash credit u/s 68 of the IT Act, 1961. (ii) On the facts and circumstances of the case, the CIT(A) erred in restricting the GP rate addition to Rs. 30 lac. (iii) Set aside the order of the CIT(A) and restore the matter back to the Assessing Officer to re-examine fresh evidence in a holistic manner. The appellant craves the right to add any other ground of appeal

.” 1. “That on the facts and circumstances of the case, the CIT(A) was not justified in sustaining trading addition of Rs. 30 lacs without proper appreciation of facts and nature of business;

2. That there is no factual or legal basis for rejecting books of accounts u/s 145(3) and estimation of profit without making reference to any comparable case or any specific defects in respect of purchases and sales supported by audited accounts and Tax Audit Report.

3. That profit declared by the assessee is correct, reasonable and supported from audited accounts and there is no legal basis for estimation and any addition.

4. That orders of the lower authorities are not justified and same are bad in law.”

2. The facts in brief are that the return of income declaring an income of Rs.4,92,336/- was filed on 1.11.2004. The case was selected for scrutiny and statutory notices were issued and served upon the assessee. During the year under consideration, the assessee took a contract for trading of liquor in District Churu, Rajasthan in the month of June w.e.f. 29.06.2003 to 31.03.2004.

The contract/licence taken by the AOP was for purchase/sale of Indian Liquor and Indian made Foreign Liquor.

2.1. The appellant sold liquor from 135 outlets in Churu District as approved by the Excise Department and made a total turnover of Rs.17,25,44,586/-, showing a gross profit of Rs.38,44,446/- at a GP rate of 22.28%. During the course of assessment proceedings, the AO found that the assessee was an AOP (Association of Persons) who had come together to start a liquor business. As per the details given in the return of income, there were nine members of the AOP (three individuals and six companies), who had made initial investment of their capital contribution in the AOP amounting to Rs.1,94,00,000/-.

2.2. In order to get the capital introduction made by the members verified, summons u/s. 131 of the Act were sent to eight members of the AOP since the address of the ninth member namely Sh. Raj Kumar was not available in the return of income. Seven out of eight summons issued to the members of the AOP u/s. 131 by the AO returned back un-served by post. As a result, the Assessing Officer treated the capital introduced in the appellant AOP as unverified and made an addition of Rs.1,94,00,000/- to the income of the assessee u/s. 68 of the Act after recording detailed reasons in the assessment order.

2.3. The AO placed reliance in the case of Kale Khan Mohammad Khanif Vs. CIT, 50 ITR 1 (SC), wherein it has been held that the onus of proving the source of sum of money found to have been received by the appellant is on him. The AO placed reliance in the case of CIT Vs. United Commercial Bank Ltd., 187 ITR 596 (Ca I), wherein it has been held that mere filing of confirmatory letters does not discharge the onus that lies on the assessee. The AO has also quoted the case of Oceanic Products Exporting Company Vs. CIT (2000) 241 ITR 497, as per which the burden is placed on the assessee to prove credits in its books of accounts and that such a burden has to be discharged with positive material.

2.4. The Assessing Officer also noticed that the assessee had declared a GP rate of 22.28% on total sales of Rs.17,25,44,586/-.

The AO noticed that the sales were totally un-vouched and in the absence of the sale bills or daily sales sheets, which were not produced for verification, he concluded that the trading results could not be accepted. He rejected the books of accounts of the assessee u/s. 145(3) of the Act as being unreliable and estimated the gross profit of the assessee at 25%, thus, making an addition of Rs.46,91,681/- to the income of the assessee.

3. Aggrieved by the order of the Ld.AO, the assessee preferred appeal before the Ld.CIT(A). The ld.CIT(A) upheld the actions of the ld.AO in invoking the provisions of section. 145(3) and rejecting the books of accounts. In respect of the unexplained cash credits, the ld.CIT(A) observed as under;

“I have carefully considered the facts and circumstances of the case and the material and evidences placed on record. I have carefully analyzed the assessment order and the logic of the Assessing Officer in making the addition of Rs.1,94,00,000/- u/s, 68. After taking into account all the facts, I am of the opinion that the appellant has clearly been able to establish the identity of each of the nine members of the AOP. The appellant has also been able to prove the source from which they have contributed their initial capital to the appellant. Even the Assessing Officer has not doubted the identity of the members of the AOP who are regular Income Tax assessees. Having done so, the onus was fully discharged by the appellant as far as the credit entries in its books of accounts were concerned. Thus, in my opinion, the Assessing Officer was not correct in invoking section 68 of the Act in this case. The appellant's case is clearly covered by the judgment in the case of M/s. Lovely Exports (supra) and if at all the AO was not sure about the source of source, he should have taken steps to add these amounts in the individual hands of the members of the AOP, which action he has duly taken. In fact, it is seen that protective assessment was made in the case of one member, namely, M/s Noveal Deal, which was deleted by the Hon'ble Tribunal. Therefore, in my opinion there is no justification in the addition of Rs.1,94,00,000/- in the hands of the appellant u/s. 68 and the same is deleted.”

Ground No.(i)

4.1. The ld. DR placed reliance upon the assessment order.

4.2. The ld. AR submitted that the basis of this addition and the conclusions arrived at by the AO are perverse on facts, documents, provision of act and the proposition of law. The ld.AR submitted that the assessee had duly discharged its onus by providing complete details of each of the nine members of the AOP, out of which, six were Limited/Private Limited companies, duly constituted under the Companies Act and registered with the Registrar of companies.

4.3. The ld. AR submitted that that all the nine members of the AOP were regularly assessed to tax with the Income Tax

Department and PAN numbers of each of the members were supplied to the Assessing Authority, along with their names, addresses, profit sharing ratio, capital contribution, source of investment, details of the identity and Income Tax assessment details.

4.4. Ld.AR submitted that supporting evidences in the form of confirmation letters and ledger accounts have also been placed on record. In order to prove the identity, creditworthiness and genuineness of the transactions, the sources of investment by the nine members of the AOP have also been placed on record in the form of capital accounts, certificate of incorporation, copy of bank statements, copy of demand draft and memorandum and article of association in the case of six companies. The proof of the filing of Income Tax returns by each member of the AOP has been a matter of record before the AO. Even affidavits of four members were placed before the AO. A paper-book was filed before the AO, in which the details of Returns of Income filed by each member of the AOP along with the acknowledgments were placed on record. Even the data from the Registrar of Companies including Company

Master Detail and CIN were also supplied to the AO.

5.1. It is also observed that the assessing officer has not doubted the identity of the members of the AOP, whco are regularly being assessed with the Income Tax. The ld. AR placed his reliance on;

5.2. We have observed that the assessee has discharged its onus by giving all the necessary details of the members of the AOP. In the decision of Laxmi Imaging (supra), this Tribunal has dealt with a similar issue. Therein this Tribunal has relied upon the decision of the Hon’ble Rajasthan High Court in the case of CIT vs. Kewal Krishna & Partners reported in (2009) 18 DTR 121, wherein the Hon’ble Rajasthan High Court held as under:-

“It was for the partners to explain the source of deposits and if they failed to discharge the onus then, such deposits could be added in the hands of the partners only and not in the hands of assessee firm. In any case, such capital contributions entered into the books of the accounts of the assessee firm prior to the commencement of the business cannot be treated to be the income of the assessee firm. In considered opinion of this Court, such unexplained credits may be added to the income of the partners concerned in terms of section 69 and not u/s 68 of the Act of 1961.

9. In the present case also, since the amount deposited was from the partners, therefore, by keeping in view the ratio laid down by the Hon’ble jurisdictional High Court in the aforesaid referred to case, at the most the impugned amount could have been added in the hands of the partners, if they failed to discharge the onus but not in the hands of the assessee firm. Moreover, the contribution of the capital by the partners was prior to the commencement of the business, so it could not have been treated as income of the assessee.” 5.3. On the basis of the above discussions and findings, we are in conformity with the decision of the ld.CIT(A). This ground of appeal filed by the Revenue is, therefore, dismissed.

Ground no. (ii)

6.The ld.DR supports the addition made by the assessing officer.

6.1. The ld.AR submitted that the assessee sold liquor from 135 outlets in Churu District as approved by the Excise Department and made a total turnover of Rs.17,25,44,586/-, showing a gross profit of Rs.38,44,446/- at a GP rate of 22.28%. In the absence of sale bills or daily sales sheets, the ld.AO rejected the trading results. He also rejected the books of accounts of the assessee u/s. 145(3) of the Act as being unreliable and estimated the gross profit of the assessee at 25%, thus, making an addition of Rs.46,91,681/- to the income of the assessee. The ld.AR submitted that the ld.CIT(A) restricted the same to Rs.30 Lacs.

6.2. It has been observed that the ld.AO after complete appreciation of the facts and circumstances of the case, has rejected the books of accounts not merely on the ground that sale prices of various brands of liquor were not available, but on the ground that the bills and vouchers for sales of liquor were not available in the books of accounts. The ld.AO has also noted the fact that the appellant had 135 outlets for sale of liquor in the district of Churu, Rajasthan, which were duly approved by the State Excise Department. He has also rightly presumed that the appellant would definitely be having some kind of control mechanism, in order to control the sale of liquor from such a large number of outlets. Even if, bills and vouchers were not completely maintained, a daily sale sheet must have definitely been maintained to enable the members of the AOP to keep track of sales affected at each outlet.

6.3. We do not find any infirmity in the findings of the ld.CIT(A) and restricting the addition to rs.30 lacs.

6.4. In lieu of the above discussion, this ground of Revenue is dismissed.

Ground no. 1

Ground No. 2:

8.1. The ld. CIT(A) upheld the actions of the AO as under:- “I have carefully considered the contention of the appellant and I do not find any merit in the arguments made by him. The AO has not rejected the books of accounts merely on the ground that sale prices of various brands of liquor were not available, but he has rejected the books of accounts after complete appreciation of the facts and circumstances of the case, wherein he has found that bills and vouchers for sales of liquor were not available at all. The AO has also noted the fact that the appellant had 135 outlets for sale of liquor in the district of Churu, Rajasthan, which were duly approved by the State Excise Department. He has also rightly presumed that the appellant would definitely be having some kind of control mechanism, in order to control the sale of liquor from such a large number of outlets. Even if, bills and vouchers were not completely maintained, a daily sale sheet must have definitely been maintained to enable the members of the AOP to keep track of sales affected at each outlet. Despite the directions of the AO, the appellant neither produced the sale bills/vouchers, nor produced the daily sale sheet for the examination of the AO. Therefore, the AO was well within his rights to conclude that the sales of the appellant were not verifiable and therefore, due to this defect, the profit disclosed by the appellant as per his books were not reliable. Thus, in my opinion, there is no illegality in the order of the AO invoking provisions of Section 145(3) and rejection of books of accounts. This ground of appeal is therefore dismissed.

8.2. The assessee is in the business of sale of liquor of various brands. The ld.AO rejected the books of accounts as the sale price, quantitative and qualitative details of the sales made, were not maintained by the assessee. Therefore it was not possible for the ld.AO to verify the sales. The assessee had not even maintained a daily sales sheet for examination and verification. We are agreeable with the findings of the ld.CIT(A).

This ground of assessee therefore stands dismissed.

The order pronounced in the open court on 08.02.2016.