ITO, CHENNAI vs. PAUL DEVARAJ, CHENNAI

PER N.R.S. GANESAN, JUDICIAL MEMBER:

This appeal of the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-IV, Chennai, dated

on 18.12.2008, the credit was `285/- and the assessee again debited `25,000/-. Because of the negative balances in the account, the Assessing Officer found that there was unaccounted purchases.

According to the Ld. counsel, the purchase invoices contained the sales and dates on which the payments were made. On 26.03.2009, the assessee withdrew a sum of `10,00,000/- from the bank and utilized the same to make payment to agriculturists. The withdrawal of money from the bank was shown on 26.03.2009. The payments made to agriculturists were not separately shown as paid

on 11.03.2009. The Assessing Officer has verified this. Since

there are no mistakes in accounting the purchases, sales and expenses, the Assessing Officer is not justified in rejecting the books of account. Referring to page 6 of the order of the CIT(Appeals), the Ld.counsel submitted that the negative balance by adopting peak credit comes to only `1,29,716/-. Therefore, the CIT(Appeals) has rightly restricted the same to `1,29,716/-.

in the books of account is a result of introduction of unaccounted

money in the books of account. The CIT(Appeals) by considering

the peak of deficit cash balance restricted the addition to `1,29,716/- instead of `10,52,899. 96. The CIT(Appeals) has also found that introduction of unaccounted cash in the books of account

or the negative cash balance have no impact on the profit of the business. No doubt, the profit of the business is calculated on the sales, purchases and other expenses incurred during the year

under consideration. The question arises for consideration is whether the assessee has introduced any unaccounted money for purchases? If the assessee introduced unaccounted cash for purchases or the sales were not recorded in the books of account,

then this will definitely have impact on the profit of the assessee. In the case before us, the assessee appears to have purchased

turmeric through Agricultural Market Committee. The turmeric being

an agricultural produce, the assessee has to necessarily make

payment in cash to the agriculturists. It is not the case of the Revenue that purchases and sales were not recorded in the books

of account. As rightly submitted by the Ld.counsel for the assessee,

the negative balance was withdrawal of funds from the bank and payments were made to agriculturists in cash in a later date.

Therefore, rejection of books of account is not justified at all. In such circumstances, adopting peak credit is the only method to find

out the cash balance. Therefore, the CIT(Appeals) has rightly restricted the negative balance to `1,29,716/-. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly, the same is confirmed.

creditors confirmed the credit in the name of Raj Enterprise. The balance credits to the extent of `33,04,179/- was not confirmed.

The Assessing Officer, after considering the reply filed by the assessee, found that all the 76 closed creditors to whom cash was given, the assessee has not furnished the address of the creditors

and the confirmation of the creditors was also not furnished. The assessee has not proved the genuineness of the transactions of purchase. Therefore, the Assessing Officer treated the transactions of purchase to the extent of `35,06,923/- as non-genuine purchases and `33,04,179/- claimed in respect of credit purchases was not confirmed. Therefore, the Assessing Officer totally added a sum of `68,11,102/- towards unproved purchases. The CIT(Appeals),

however, deleted the addition made by the Assessing Officer on the ground that the assessee was purchasing turmeric from Agricultural Market Committee and the entire transactions were monitored by the Committee. Accordingly, he deleted the addition. The Ld. D.R.

submitted that in the absence of any confirmation from the respective suppliers of the product and the creditors, the Assessing

Officer has rightly made the addition.

which are in possession of the Revenue disclosed the same. Since

the entire purchases and transactions had to be made only through

Agricultural Market Committee, the Assessing Officer cannot claim

that the purchases were outside the books of account. According to the Ld. counsel, the purchases made by the assessee can be verified through Agricultural Market Committee. Since such an exercise was not made by the Assessing Officer, the CIT(Appeals)

has rightly deleted the addition made by the Assessing Officer.

before the Assessing Officer that the purchases were made from Government regulated market committee. The fact that the turmeric

was purchased through regulated markets is not in dispute. When

the regulated market committee was monitoring the transactions

and purchases of turmeric, this Tribunal is of the considered opinion

that the Assessing Officer could have very well examined the actual

purchases made by the assessee and the details of the agriculturists. Inspite of the fact that the assessee has disclosed the details of the purchases of turmeric and the fact that the Agricultural

Committee is monitoring the transactions of the assessee, the Assessing Officer has not taken any steps to examine the genuineness of the transactions. In those circumstances,

disallowing the claim of the assessee as non-genuine is not justified. Therefore, the CIT(Appeals) has rightly deleted the addition made by the Assessing Officer. This Tribunal do not have any reason to interfere with the order of the lower authority and accordingly, the same is confirmed.

Representative, submitted that the assessee has claimed publicity expenses of `33,15,000/-. According to the Ld. D.R., the assessee

is manufacturing turmeric powder and supplying the same to his

own related concern, namely, Aachi group. Therefore, there is no need for the assessee to incur any publicity expenses. According to the Ld. D.R., when the product was marketed in the name of Aachi

group, there is no necessity for the assessee to incur any publicity

expenses. Therefore, the CIT(Appeals) is not justified in allowing

the claim of the assessee.

market the same along with their own product like masala. The advertisements are basically for the Aachi products. According to the Ld. counsel, if the brand name Aachi spreads into the market,

the product manufactured by the assessee, namely, turmeric would

also penetrate the market and resultantly the assessee would be benefited by increasing its turnover. The advertisement for Aachi

products would definitely benefit the assessee for sale of his own

product. The fact is that the assessee’s product was sold in the market in the brand name of Aachi. Therefore, incurring the the assessee and not for the benefit of anybody else. Merely

because incidentally it would benefit Aachi group of concern that cannot be a reason for disallowing the claim of the assessee.

powder in the brand name of Aachi. Aachi group is marketing the turmeric powder manufactured by the assessee in their own brand

name along with other products manufactured by them. The claim

of the assessee is that advertisement made by the assessee to promote the brand name “Aachi” would directly benefit the assessee

in increasing the turnover. This Tribunal is of the considered

opinion that when the assessee is manufacturing turmeric powder

and marketing the same in the brand name of “Aachi” through Aachi

group, promoting the brand name “Aachi” in the market would

increase the market share of the assessee. This would directly

increase the turnover in the market. Consequently, the profit of the assessee would go up. Therefore, the expenditure incurred by the assessee is only for the business purpose. Merely because the disallow the claim of the assessee. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly, the same is confirmed.

Representative, submitted that the Assessing Officer by comparing

the packing material consumed by the assessee vis-à-vis the actual

quantity of turmeric powder sold, estimated the gross profit. The assessee claimed that 19,75,167.60 Kgs of turmeric powder was sold in the market. However, the Assessing Officer calculated the probable sale of turmeric powder in the market at 37,90,500 Kgs.

This calculation of the Assessing Officer was based on the packing

material consumed by the assessee. The Assessing Officer

accordingly estimated the total sales for the year under consideration at `18,19,44,000/- as against the sale declared by the assessee at `11,83,40,941/-. After considering the total sales, the Assessing Officer estimated the gross profit on the enhanced

turnover at the rate of 18%. After allowing the overhead expenses, the Assessing Officer determined the net profit at `2,57,81,465/- as against `11,82,054/- declared by the assessee. According to the Ld. D.R., since the assessee has consumed large quantity of packing material, the Assessing Officer has rightly computed the gross profit by increasing the total turnover on the basis of packing

material consumed. Therefore, according to the Ld. D.R., the CIT(Appeals) is not correct in deleting the addition made by the Assessing Officer.

errors in the calculation made by the Assessing Officer. The Assessing Officer considered some of the secondary packing

material as packing material consumed for the purpose of estimating the probable sales. The Assessing Officer, in fact,

arrived the sales at 37,90,500 Kgs. The Assessing Officer, vide his

remand report dated 09.12.2012 confirmed that there was an error

in the probable sales calculated in the assessment order. In fact,

the total quantity of the sales is 1,25,500 Kgs. However, the Assessing Officer added one more “0” and treated the same as 12,55,000 Kgs. This was accepted by the Assessing Officer in the remand report dated 09.12.2012. Therefore, the calculation of the Assessing Officer was inflated by 11,29,500 Kgs which need to be reduced. The Ld.counsel further submitted that there are two types

of packing materials. Certain packing materials were used to pack

turmeric powder like sachets, etc. Therefore, other packing material

is called primary packing material. The Assessing Officer confused

himself between the two types of packing materials used by the assessee. The assessee explained before the Assessing Officer

that all the purchases of packing material were made from M/s

Pondy Plastic Industries and M/s Micro Polypack. Without

understanding the basic difference between the secondary packing

material and primary packing material, the Assessing Officer

committed mistake in estimating the probable sales. Therefore, the CIT(Appeals), after analysing all the material facts, found that no prudent businessman will add more weight to the packing material

when the contents are of less value. The CIT(Appeals) found that the purchase cost of packing material ranged from `72/- to `180/-

per Kg. Whereas, the average sale price of turmeric powder is `48/- per Kg. Therefore, no prudent businessman would intend to add more weight to the packing material. According to the Ld.

counsel, the assessee always tried to reduce the weight to the packing material consumed to minimize the inflation. Therefore, the Assessing Officer’s approach was not correct in adopting the uniform weight for the sachets of different sizes and different

weights for the same size. Therefore, the purchase price remained

the same. Therefore, according to the Ld. counsel, the CIT(Appeals) has rightly found that the estimation of turnover was not scientific. Hence it cannot be taken into consideration for the purpose of determination of actual sales for the year under consideration. The estimation and enhancement of turnover,

according to the Ld. counsel, is imaginary. Therefore, the CIT(Appeals) has rightly deleted the addition.

Officer estimated the probable sales on the basis of packing

material said to be used by the assessee. The fact remains that the assessee has used two types of packing material, one is secondary

packing material and another is primary packing material. The cost of packing material ranged from `72/- to `180/- per Kg. Whereas the average sale price of the turmeric powder is `48/- per Kg.

Therefore, the CIT(Appeals) came to a conclusion that no prudent

businessman would add weight to packing material when the contents are of lesser value. The CIT(Appeals) further found that there is an arithmetical error in computing the packing material. The Assessing Officer has committed mistake by himself adding one

more “0”. In fact, the actual sale of turmeric powder was 1,25,500

Kgs. However, the Assessing Officer has taken the same as 12,55,000 Kgs. The Assessing Officer confirmed the arithmetic

mistake made by him, in the remand report dated 09.12.2012. Therefore, the estimation of the Assessing Officer with regard to sale of turmeric powder was reduced to 26,61,000 Kgs. After

elaborately considering the quantity of packing material, the CIT(Appeals) came to a conclusion that some of the packing

material consumed during the year under consideration should not be considered for the purpose of calculating the quantity of sales

made during the year. Some of the packing material consumed

during the year was actually used for turmeric powder manufactured

and packed and was lying in the closing stock. The volume of such closing stock as on 31.03.2009 was 1,15,345 Kgs. The opening

stock as on 01.04.2008 was 6,856 Kgs. Therefore, the net closing the packing material consumed during the year under consideration.

Therefore, the Assessing Officer’s calculation of 37,90,500 Kgs

actually represents the finished product manufactured by the assessee during the financial year 2008-09. To arrive at the probable sales effected during the year, the net increase in the closing stock is to be reduced from the goods manufactured during

the year. In view of the above, this Tribunal is of the considered

opinion that in the absence of any material on record that the assessee has inflated the purchases or sales, the estimation of probable sales on the basis of the packing material consumed by the assessee is not justified. This Tribunal is of the considered

opinion that the estimation of total sales without considering the actual purchases would inflate the sale, therefore, the CIT(Appeals)

has rightly found that the total turnover was 19,75,167.60 Kgs as against 37,90,500 Kgs estimated by the Assessing Officer.

Therefore, the CIT(Appeals) has rightly deleted the addition made

by the Assessing Officer. This Tribunal do not find any reason to interfere with the order of the CIT(Appeals) and accordingly the same is confirmed.

Pathlavath Peerya, the Ld. Departmental Representative, submitted that the Assessing Officer enhanced the turnover by reducing gross profit margin of 18% as unaccounted purchases. According to the Ld. D.R., the Assessing Officer, after considering the assessee’s own reconciliation statement, found that the assessee has purchased turmeric to the extent of `14,91,94,080/-. However, the CIT(Appeals) deleted the addition made by the Assessing Officer on the ground that there was no unaccounted sales. According to the Ld. D.R., the addition was made on the basis of assessee’s own reconciliation. Therefore, the CIT(Appeals) is not justified in deleting the addition.

2008-09, the total purchase made by the assessee was `9,09,84,189/- and the total sales was `11,85,30,525/-. The Assessing Officer, while arriving at the purchases at `14,91,94,080/-

was of the opinion that sales would have been `18,19,44,000/-. by the Assessing Officer. According to the Ld. counsel, the turnover

declared by the assessee has to be reduced from the turnover

estimated by the Assessing Officer. Thus, determining the unaccounted purchases, if at all anything, shall be at `5,82,09,891/-.

This reconciliation was brought to the notice of the Assessing

Officer. The Assessing Officer, however, without considering the explanation of the assessee, estimated the unaccounted sales at `14,91,94,080/- without reducing the sales declared by the assessee in the return of income. Since the enhanced purchase

was deleted by the CIT(Appeals), he found that the enhanced sales

also would automatically become deleted. Therefore, according to the Ld. counsel, the CIT(Appeals) has rightly deleted the addition.

submitted by the Ld. counsel for the assessee, the enhanced

addition of purchase was deleted by the CIT(Appeals), which was confirmed by this Tribunal in the earlier part of this order. Once the enhanced purchase was deleted, the enhanced estimation on sales would also automatically get deleted. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly deleted the addition. Furthermore, when the Assessing Officer estimated the turnover, it is obligatory on his part to reduce the turnover declared by the assessee. On one hand the Assessing Officer estimated the turnover and on the other hand, the turnover declared by the assessee was not reduced. This inflated the turnover of the assessee arbitrarily. Therefore, the CIT(Appeals) has rightly found that the turnover declared by the assessee has to be reduced from the turnover estimated by the Assessing Officer. In view of the above, we do not find any infirmity in the order of the lower authority and accordingly the same is confirmed.

Order pronounced on 24th March, 2016 at Chennai. (ए. मोहन अलंकामणी) (एन.आर.एस. गणेशन) (A. Mohan Alankamony) (N.R.S. Ganesan) लेखा सद"य/Accountant Member "या"यक सद"य/Judicial Member

चे"नई/Chennai, "दनांक/Dated, the 24th March, 2016. Kri. आदेश क" ""त"ल"प अ"े"षत/Copy to: 1. अपीलाथ"/Appellant