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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM]
ORDER Per Shri Balaganesh, AM:
This appeal by revenue is arising out of order of CIT(A)-XXXIII, Kolkata vide Appeal No. 261/CIT(A)-XXXIII/ItO.Ward-52(3)/Kol/09-10 dated 22.03.2013. Assessment was framed by ITO, Ward-52(3), Kolkata u/s. 144 of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2007-08 vide his order dated 31.12.2009.
The only issue to be decided in this appeal is as to whether the Learned CITA is justified in estimating the net profit of the assessee @ 0.75% in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is engaged in the business of export of rice and mustard cake under the name and style of “M/s Tapan Traders”. A survey was conducted u/s 133A of the Act on 2.8.2006 and accordingly the case was selected for scrutiny. In course of assessment proceedings the assessee did not produce original bank statements, cash book, bank book, general ledger, party ledger, purchase ledger, sales ledger, stock register and other accounts and bills and vouchers of the business of M/s. Tapan Traders for examination and verification and hence the Ld AO was not satisfied about the correctness of the Trading and Profit and loss accounts for the year ended on 31.03.2007 of the said business. The assessee replied vide letter dated
2 Shri Tapan Kundu AY 2007-08 30.12.2009 that the books of accounts were impounded during the course of survey and were not released back to him and hence he is unable to produce the original books and records called for by the Learned AO. However, the Learned AO did not agree with this submission as admittedly the assessee had filed his final accounts and got it audited by a qualified chartered accountant on 25.10.2007 for the Asst Year 2007-08 which would prove that the assessee should be having a copy of the impounded books. Accordingly, he proceeded to reject the trading and profit and loss account filed by the assessee u/s 145(3) of the Act. The Learned AO observed in the assessment order that purchase bills / invoices for July 2006 were furnished by the assessee. He observed that the rate of purchase was Rs. 7.257 per kg and as per sales summary, the rate of sale was Rs. 8.023 per kg. Considering the same, he concluded that the actual purchase for export sales of Rs. 13,56,91,267/- should be Rs. 12,27,36,074/- based on some workings and determined the net profit of the business of M/s Tapan Traders at Rs. 75,21,033/-. The Learned AO further observed that the sundry creditors as on 31.3.2007 amounting to Rs. 8,40,000/- disclosed in the balance sheet by the assessee could not be subjected to any verification for want of details provided by the assessee and hence he added the same to total income in the assessment.
Before the Learned CITA, the assessee argued that the assessee was dealing in mustard oil cake as well as rice and occasionally in dal. The Learned AO had considered only the bills / invoices pertaining to mustard oil cake and that for only one month i.e July 2006 and there too, he had just picked up the bills with lowest rate of purchase. The assessee argued that the Learned AO had taken 10 bills for purchase with quantity of 133740 kgs , whereas sale bills are 17 in number with quantity of 2370000 kgs and stated that in the assessee’s line of business, rate of sale and purchase fluctuate greatly from month to month and position in one month cannot give correct picture for the entire year.
The Learned CITA upheld the validity of rejection of trading & profit and loss account of the assessee u/s 145(3) of the Act in the facts and circumstances of the case. The Learned CIT(A) held as under:-
“5.3. It is however well settled that even in a best judgment assessment the assessment should be made on some reasonable basis. The addition made by the assessing officer in this case is for undisclosed profit. However, it is to be noted that the undisclosed profit worked out by him is not based on any evidence regarding actual suppression. Though a survey action under section 133A had been carried out at the appellant's premises, there is no specific finding that either any purchase had been inflated or sale price was understated. What the assessing officer has done in that he has computed average sale price as per invoices for the month of July 2006 and average price as per bills for the same month. From this, he has arrived at a ratio of rate of purchase and rate of sale. This ratio has been applied by him to the entire sale for the year to arrive at the figure of purchase required for making the sale. Thus, the basic premise is that the ratio of rate of sale and purchase continues to be constant throughout the year. This reasoning ignores the fact, the appellant deals in two different commodities (and occasionally a third commodity, being dal) and their sale and purchase prices keep on fluctuating. This contention has been supported by producing sample bills, where rates of purchase are much higher than taken by the assessing officer. Even otherwise, it is common knowledge that purchase, as well as export prices of commodities like rice, mustard oil cake etc. keep on fluctuating, not necessarily in synchronization and their ratio cannot be expected to be constant. Therefore, it won't be proper to apply ratio in respect of one commodity for one month to the entire sale for the year. Thus, the addition made by the assessing officer is not on sound footing as he has simply extrapolated ratio of purchase and sale for one commodity for one month over the entire year. Rather, it is based on conjectures and surmises. As stated earlier, no specific instance has been brought on record where purchase price was inflated or sale price was suppressed. 5.4. From above discussion it is clear that while the addition made by the assessing officer is not sound and cannot be sustained, the book results of the appellant can also not be fully accepted. A proper way to proceed in such a case, in my opinion, would be applying some suitable rate of net profit. It is seen, that in the immediately succeeding year, i.e. A.Y.2008- 09, the appellant has shown net profit rate of 0.60%. However, no scrutiny assessment was made in that year. Books of accounts have not been produced during the year under appeal for verification. Considering these facts, it would be, in my opinion, reasonable to arrive at net profit by applying net profit rate of 0.75%., which would come to Rs.10,17,684/-. The assessing officer is directed to reduce the addition accordingly.”
With regard to addition towards sundry creditors of Rs. 8,40,000/- is concerned, the Learned CITA held as under:- “6.2. I have carefully considered the facts of the case. Although it has been mentioned by the assessing officer that no details of sundry creditors had been produced, from the copies of submissions made by the appellant during the assessment proceedings, certified by the assessing officer, it is clear that he had given list of creditors. Copies of bills for the major parties on which their addresses were printed had also been given. Thus, the assessing officer could have made verification if considered necessary by him. Therefore, his action of adding all sundry creditors without any verification cannot be upheld. Further, while deciding the preceding ground I have directed that income may be assessed by applying net profit rate on the turnover. Once net profit is estimated, it is supposed to have taken into account all the items of expenditure incurred. The sundry creditors arise out of unpaid balance in respect of purchase and other expenditure debited in profit and 1055 account. Such sundry creditors can be either carried forward from earlier years or arising from the expenditure booked during the year. In former case, no addition can be made in the year under consideration, whereas in the latter case the concerned expenditure has been taken
4 Shri Tapan Kundu AY 2007-08 into account while estimating net profit and separate addition is not warranted from that perspective as well. Considering this the addition of Rs.8,40,000/- is deleted..”
Aggrieved, the revenue is in appeal before us on the following grounds:- “
1. That on the facts and in circumstances of the case the CIT(A) erred in reducing the addition and from Rs. 75,21,033/- to Rs. 10,17,684/- considering the net profit percentage at 0.75% instead of 0.60% as shown by the assessee. 2.That on the facts and in circumstances of the case, the CIT(A) in having accepted the rejection of books u/s 145(3) erred in substituting his own estimation having no basis whatsoever with that of the A.O. which was based on intelligible criteria like, purchase & sales rates, though for a short period .
3. That on the facts and in circumstances of the case, the CIT(A) failed to appreciate that the assessee had not maintained any quantitative details of Purchases & sales as per his own Auditor's Report in Form 3CD dated 25/10/2007 and even failed to produce the purchase bills for verification. 4) That on the facts and in circumstances of the case, the CIT(A) to failed to remand the matter to the A.O. for proper verification of the purchases and their matching sales to have a justified basis for estimation and hurriedly reduced it from 6.09% to 0.75%.”
The Learned DR argued that the rejection of trading & profit and loss account filed by the assessee u/s 145(3) of the Act by the Learned AO had not been contested by the assessee. He reiterated the arguments of the Learned AO in the assessment order. He argued that the Learned CITA ought not to have estimated the net profit @ 0.75% based on subsequent year’s profit declared by the assessee @ 0.60%. He prayed for setting aside of this issue to look into this aspect afresh. In response to this, the Learned AR vehemently supported the order of the Learned CITA and stated that this is the first year of assessee engaged in this line of business and hence there was no past history available with the assessee to understand the profit percentage earned in the earlier years. Hence the Learned CITA is justified in referring to immediately succeeding assessment year wherein assessee had disclosed net profit rate of 0.60%. However, in the absence of production of books of accounts by the assessee, he held that net profit determination @ 0.75% would meet the ends of justice. Hence this higher estimation would take care of all the issues relating to trading and profit and loss account of the assessee and no separate addition could be made for sundry creditors in the sum of Rs. 8,40,000/- and difference in purchases.
We have heard the rival submissions and perused the materials available on record. We find that the assessee had not objected to the rejection of trading & profit
5 Shri Tapan Kundu AY 2007-08 and loss account by the Learned AO u/s 145(3) of the Act. The assessee had not produced any books of accounts and supporting documents before the Learned AO. Under these circumstances, we find that net profit of the business had to be determined only on estimated basis. We find that the Learned CITA in the absence of past history of the assessee, had resorted to refer to subsequent year’s net profit which was disclosed at 0.60% by the assessee. The Learned CITA had determined the net profit @ 0.75% . We find, in the facts and circumstances of the case and the line of business in which assessee is engaged, that the determination of net profit @ 1% would cover up all the other deficiencies in the business of the assessee and we direct accordingly . All other additions made by the Learned AO would stand deleted once income is determined at 1% of turnover. Hence the grounds raised by the revenue are partly allowed.
In the result, the appeal of the revenue is partly allowed.
Order is pronounced in the open court on 01.06.2016