ITO, NEW DELHI vs. M/S. R.L. TRADERS, DELHI

The Grounds of appeal are as follows:-

The assessee is dealing in Hing compound. Hing Comound is prepared by mixing hings, gum, oil and starch. The mixture depends on the needs of the client. If more hing is mixed, the price will be more. The assessee also deals in dry fruit and maintains quantitative tally. The Assessing Officer observed that the assessee never produced stock records to prove his contention though as per column no. 28 B of the audit report there is no manufacturing activity mentioned therein. The Assessing Officer in its order clearly stated that the assessee firm is not engaged in manufacturing of hing which is an accepted fact by the assessee. In tax audit report the quantitative details of principal item of goods dealt by the assessee were given as under:-

The Assessing Officer held that the GP at 10% on total sales of Rs.8,29,48,817/- as the same basis was taken by his predecessor and calculated Rs.82,94,882/-. Thus, the addition of Rs.27,76,521/- was made by the Assessing Officer. The Assessing Officer also held that interest of Rs.10,59,721/- was shown as expenses payable on 31/3/2009. The assessee did not file the confirmation of accounts as asked by the Assessing Officer, but the list of party wise interest payable was filed by the assessee. The Assessing Officer disallowed interest of Rs.10,59,721/-. As relates to brokerage expenses of Rs.22,88,547/-, the Assessing Officer has asked the assessee to file details of sale bill on which brokerage was paid to different brokers. The assessee filed confirmation from some brokers. After dealing the details of sale bills on which the commission was paid the Assessing Officer found certain discrepancies in those confirmations. Thus, Rs.8,00,990/- was added to the income of the assessee.

The CIT(A) deleted additions in respect of applying G.P. rate of 10% as against 6.65% declared by the assessee as well as made addition on Interest payable to the old creditors and commission expenses. The CIT(A) in the order under challenge observed that the CIT(A)-II vide order dated 31.08.2010 for A.Y. 2000-01 to 2006-07 has deleted the addition on the ground that no defect were found in the books of accounts, the trading results being vouched and the books of accounts are audited. The Department preferred appeal before the ITAT against the order of the CIT(A). The ITAT “F” Bench Delhi vide order dated 17.06.2011 confirmed the order of the CIT(A) deleting the addition. The relevant para 7 of the order is reproduced as under:-

The DR relied upon the Assessing Officer’s order and stated that the assessee was having manufacturing activity and thus GP at 10% on total sales of Rs.8,29,48,817/- which was calculated to Rs.82,94,882/- and submitted that the addition of Rs.27,76,521/- was rightly made by the Assessing Officer. The DR further submitted that the interest payable has shown expenses by the assessee, was not confirmed by the assessee though the opportunity was given. Therefore, the interest was properly disallowed by Assessing Officer. The DR further submitted that confirmation in respect of commissioner received by brokers did not bear the amount of commission paid and it was only the vouchers which was produced for verification of amount. Thus the Assessing Officer while taking a lenient view 35% of commission expenses disallowed. Therefore, the DR submitted that the appeal be allowed.

The AR submitted that the assessee is dealing in Hing compound which does not amounts to manufacturing but it is the simple mixture method and depends upon the need of client. Though the A.O has mentioned that the assessee has accepted G.P rate of 10%, the same is wrongly mentioned by the Assessing Officer as per AR. The AR further submitted that the profit ratio depends on drawn of the market availability of goods, client age etc. It is on this account the GP rate cannot be the same. Comparative Chart was also submitted by the assessee, since quantitative tally was maintained. The Assessing Officer has wrongly disallowed Rs. 27,76,521/- by applying G.P rate of 10% as against 6.65% declared by the assessee. The AR submitted that the Ld. CIT(A) in its order has rightly mentioned in Para 1 that the A.O has not been able to point out any quantitative defects in the item sold by the assessee. The A.O has not rejected the books of accounts of the assessee and the facts of the case for the A.Y 2006-07 are that when the addition on account of GP Rate adopted at 15%, the same was deleted both by Ld. CIT(A) and ITAT. The addition made by the Assessing Officer on account of G.P during the assessment year does not survive.

The AR further submitted that the addition of Rs.10,59,721/- on account of interest was also not justified since the assessee has not written off this amount in profit and loss account as well as there is no cessation of liability. The AR relied upon the case laws in respect of Hon’ble Punjab & Haryana High Court in the case of CIT VS. G.P International Ltd 325 ITR 25 wherein it was held that where the liability is still shown outstanding addition u/s 41(1) cannot be made. The AR also relied on the order of Mumbai Bench of ITAT in the case of Tulip Hotel Pvt. Ltd. Vs. DCIT 132 TTJ 633 wherein it was held that where the liability of earlier years is shown outstanding in the balance-sheet it cannot be held that the liability has ceased to exist. The Tribunal followed the Apex Court’s judgment in the case of CIT VS. Sughauli Sugar Works 236 TTR 518. The AR further submitted that the assessee was taking loan for the purpose of his business and interest was payable thereon. The assessee claimed interest on accrual basis and TDS was also deducted and loss raised in every year on account of increasing turnover more loss were taken in the current year and for some of the parties interest was not paid. This interest payable was in respect of those parties. These parties were not paid the interest later on, because they did not co-operate in filing confirmation in response to assessee’s claim. It is on this account that interest was not paid on this account litigations started before the Ld. CIT(A) and Tribunal and were finalized only in the year ending 31.03.2012. On above account the interest is was due to various parties and the same was not paid, about which A.O was informed vide letter dated 17/22 November 2011. Outstanding interest were shown as income in the year ending 31/3/2012. Since this amount was already shown as income in year ending 31/3/2012, there was no question of making addition during the year under consideration which is of 2009-10. It is only after March 2011 the decision was taken to show this as income and not to pay the amount to the persons to whom it is due because of their non-co- operation.

The AR further submitted that as relates to brokerage expenses, though the confirmations were filed by the assessee, yet certain amounts were not mentioned on the bills as related to confirmation of the parties which amounts to approximately 40% till 28 % commissions paid to the parties. Hence, the Assessing Officer has wrongly added the income of Rs.8,00,919/-. In fact Assessing Officer only took 5 bills, of which commission comes to Rs.34,000/-. Thus, the difference was because of the Assessing Officer who did not accounted for other bills in regard to confirmation of Shri Anurag as well as Shri Manish Maheshwar. The AR also produced the Hon’ble High Court’s order in assessee’s own case for A.Y. 2010-2011 wherein in Para 9 it was clearly mentioned that the Ld. CIT(A) has to examine books of accounts specifically with regard to whether the quantitative tally was undertaken of the raw material used by the assessee in its business activities and if so the inference is to be drawn from it and the other available material. In this respect the Ld. CIT(A) in this particular case has already taken into account of the relevant materials on record and allowed the appeal of the assessee before the CIT(A).

We have perused all the records and heard both the parties. As relates to first issue of G.P rate, the Assessing Officer has made addition on the ground that the selling price of the Hing was lesser than purchase price. The Assessing Officer held that the activity carried off by the assessee is not manufacturing. The business of the assessee is selling the Hing after mixing with Starch, Oil, Gum and Water as a result of which the average price of the sale was lesser because of the more quantity of mixed Hing. As a result of mixture of cheap article like starch, oil, gum and water. There was profit in Hing account. Therefore, the assessee has rightly adopted G.P rate at 6.65%. The CIT(A) has also rightly pointed out that Assessing Officer has not taken out any quantitative defects in the item sold by the assessee and Assessing Officer also not rejected the books of accounts of the assessee. The G.P rate was also allowed in the assessee’s earlier cases for A.Y 2000-01 to 2006-07. the Hon’ble High Court’s order in assessee’s own case for A.Y. 2010-2011 wherein in Para 9 it was clearly mentioned that the Ld. CIT (A) has to examine books of accounts specifically with regard to whether the quantitative tally was undertaken of the raw material used by the assessee in its business activities and if so the inference is to be drawn from it and the other available material. In this respect the Ld. CIT(A) in this particular case, has already taken into account of the relevant materials on record and allowed the appeal of the assessee before the CIT(A). The CIT(A) has rightly deleted the addition. We hold that the G.P rate adopted by the assessee at 6.65% has been rightly taken into consideration by the CIT(A) as per the chart given by the assessee.

As relates to interest it is found that the assessee has not written off this amount in profit and loss account up till 2012 and there was no cessation of liability. The reliance placed on Punjab and Haryana High Court judgment in the case of CIT VS. G.P International Ltd. (supra) has correctly set out the position that where the liability still shown outstanding and addition cannot be made. In this particular case, the assessee has shown it in the year ending on 31/3/2012. Therefore, this addition was also rightly rejected by the Ld. CIT(A).

As relates to brokerage expenses, the A.O in his remand report has not rebutted the explanation of the assessee that the A.O has calculated the commission merely as a percentage on sales value whereas the commission was also payable on the quantity of sales in addition to the value of sales the details which were filed by the assessee and the confirmation of the brokers has given the complete details as seen from the records. Therefore, the Ld. CIT(A) has rightly deleted the addition on this account.

In result, Ground No. 1, 2, 3 and 4 are dismissed.

Accordingly, the appeal of the revenue is dismissed.