M/S HOSPINEEDS INDIA PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

This appeal by the assessee is directed against the order passed by learned CIT(A) on 17.01.2011 in relation to assessment year 2006- 07.

Concise grounds have been filed by the assessee. The first ground about the passing of order against the principles of natural justice was not argued by the learned AR. The same is, therefore, dismissed.

Ground No.2 is against confirmation of addition of `31,12,074/- made by the Assessing Officer by not accepting the trading results and 2 ITA-1893/Del/2011 applying gross profit rate of 20% as against 13.90% declared by the assessee.

Briefly stated, the facts of the case are that the assessee is engaged in the trading of medical equipments and educational goods. During the year under consideration, the assessee declared gross profit of `70,89,542/- on gross turnover of `5.10 crores yielding GP rate of 13.90% as against the preceding year’s turnover of `3.02 crores and GP rate of 22.94%. On being called upon to state reasons for the decline in the GP rate, the assessee could not furnish any specific reasons or adduce any supporting documentary evidence for such a fall in the GP rate. The assessee also failed to give item-wise value of comparison and sales thereof which could prove the reasons for fall in GP rate. The AO further observed that the nature of the business of the assessee was same as in the preceding year. Considering the position in entirety, he refused to accept the trading results and applied GP rate of 20%, which resulted in addition of `31,12,074/-. No relief was allowed in the first appeal.

We have heard the rival submissions and perused relevant material on record. It is a matter of record that the assessee did not maintain any quantitative tally as is apparent from its audit report. There is no mention of any stock register having been maintained as per para 9B of the tax audit report in Form no. 3CD, which requires the mention of books of account maintained by the assessee. Column 28(a) of this audit report clearly provides that “quantitative information is not given since the company is dealing in various range of goods from medical equipments to educational goods and supplying them to various organizations on the basis of tenders in the form of kits and sets”. The above observations of the assessee’s auditor leaves nothing to doubt that the assessee did not maintain any quantitative tally. The mere fact that the purchase and sales were vouched cannot

The ld. AR contended that the books of account were not rejected by the AO and as such he could not have resorted to application of an arbitrary GP rate. There is no weight in the argument advanced by the ld. AR. It is vivid from the assessment order that the AO has given specific reasons for not accepting the gross profit rate declared by the assessee, which was not backed by any worthwhile evidence. The AO has pointed out so many deficiencies in the books of account maintained by the assessee. His action in referring to such deficiencies and then rejecting the gross profit rate is a clear indicator of his implied point of view of not accepting the books of account. What is relevant to see is the substance of the action and not the mere rituals. Except for writing in so many words that he was rejecting the books of account, the entire discussion in the assessment order on this issue is focussed on rejection of accounts.

When books of accounts are not properly maintained and correct profit is not determinable, the best course is to go by the results of the preceding year unless the facts justify departure therefrom. It is noticed that the business activity of the assessee has admittedly remained similar to that of the preceding year, except for the assessee also starting purchase and sale of almirahs, on which it claimed to have earned GP rate of only 7.92%. The ld. CIT(A) examined this contention and found the same to be incorrect. He observed that the steel almirahs were purchased at the rates ranging from `1,990/- to `2,400/- per almirah and were sold at `2,400/- to `2,938/- per almirah. He computed GP rate on almirah from 22.4% to 47.6%. The ld. AR contended that the ld. CIT(A) erred in computing the GP rate from sale of Almirahs by taking purchase cost as denominator. We agree that the gross profit rate is computed by dividing the amount of gross profit with the figure of turnover and then multiplied with 100. If the GP rate

It was also submitted that the learned first appellate authority failed to include the amount of excise duty in the cost of purchases of almirahs. On being called upon to invite our attention towards purchase invoices, the learned AR took us through pages 113 onwards of the paper book. On going through such invoices, it can be seen that the purchase of steel almirahs has been made by the assessee from M/s Chandigarh Industries and M/s A.M. Technologies. None of the invoices from these parties include any amount of excise duty which the assessee claims to have been ignored by the learned first appellate authority. When pointed out, he contended that M/s Chandigarh Industries omitted to include the amount of excise duty in the invoices but, later on, the assessee was obliged to pay such duty. In support of this argument, the assessee placed on record a copy of the ledger account of M/s Chandigarh Industries in its own books of account which was stated to be certified by M/s Chandigarh Industries. We are unable to accept the charging of excise duty at `22.20 lakhs in respect of steel almirahs for the obvious reason that no evidence worth the name has been placed on record to demonstrate that so much excise duty was charged by these parties. It is beyond our comprehension as to how both the parties who supplied steel almirahs omitted to include excise duty in the invoices raised by them. Excise duty is ordinarily required to be paid at the time of removal of goods from bonded warehouse, in which case it forms part of the invoice value. It is not possible to accept the ld. AR’s contention that the suppliers were ignorant about their liability to pay excise duty at the time of issuing invoices and that was the reason for which they allegedly charged it later on. Further, no direct evidence has been brought on record by the ld. AR to the effect

As the facts and circumstances of the current year are admittedly similar to those of the preceding year, except for an additional item of trading, being Almirahs, in respect of which again the average GP rate comes to 25.29%, we are inclined to go with the results of the preceding year. In our considered opinion, the AO was more than reasonable in applying the GP rate of 20% as against the last year’s GP rate of 22.94%. We, therefore, uphold the view taken by the ld. CIT(A) in upholding the addition of `31.12 lakhs. This ground is not allowed.

Ground No.3 is against the confirmation of addition of commission amounting to `9,81,876/-. The facts apropos this ground are that the assessee claimed to have paid a sum of `14,14,252/- as commission to its directors and sister concern covered u/s 40A(2)(b) of the Act. On being called upon to justify such payment, the assessee stated that no remuneration/salary was paid to the directors during the year under assessment and only this commission was paid. The Assessing Officer noticed that none of the parties to whom goods were sold was new or introduced by these directors/companies for the first time. Considering the fact that the commission paid to these persons varied between 2.40% to 4.45% and that no evidence of rendering any services was brought on record, the Assessing Officer made disallowance of the entire amount of commission of `9,81,876/- (Rs.14,14,252 commission paid minus Rs.4,32,376 commission received). The learned CIT(A) upheld the disallowance.

After considering the rival submissions and perusing the relevant material on record, it is noticed that the assessee paid

Now comes the question of reasonableness of the amount of commission. In this regard, we find that as against turnover of `3.02 crores in the preceding year, the assessee paid commission of `7.87 lakhs. This gives percentage of 2.60%. In this year, the assessee has paid commission of `14.14 lakhs against total turnover of `5.10 crores. This gives rate of commission at 2.77%. Considering the fact that the payees are related to the assessee and there is no other evidence of commission payable at arm’s length rate, we are of the considered opinion that it would be just and fair if the deduction for commission is allowed at the same rate on which it was paid and allowed in the preceding year. This would result into disallowance of excess commission to the tune of `86,700/-. We reduce the addition to this level.

In the result, the appeal is partly allowed. Decision pronounced in the open Court on 23.10.2015.