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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against order dated 15/03/2022 for A.Y. 2016-17 passed by Ld.CIT(A)-3, Kochi on following grounds of appeal: “1. The order of the Commissioner of Income Tax (Appeals) is against law and facts.
2. The Commissioner of Income Tax (Appeals) should have appreciated that the appellant had maintained full and proper books of accounts during this year which were duly audited u/s 44AB of the Income Tax Act. Nothing has been brought on record to substantiate any mistake or omission in the return filed as per the above books. Hence the Commissioner of Income Tax (Appeals) is not justified in Page 2 of 9 confirming the action of the assessing authority in rejection of the books of account u/s 145 without any justification and making addition on an estimated basis by increasing the net profit to 20% as against 12.70% returned by the appellant.
3. It is not correct for the Commissioner of Income Tax ( Appeals) in confirming a higher net profit ratio without giving a categorical finding that the industry standard was higher than the profit margin retuned by the appellant or without bringing on record any comparable case, wherein the net profit declared by such assessee was higher. He should have considered the fact that the appellant has commenced business operations only during the year ended 31.03.14 and being the initial years, the establishment expenses will be high and being new in business the selling price was bound to be lower due to competition. The AO had not found any inflation or incorrectness in the expenditure accounted. It should have been noted that it is not correct to assume that in every quarry and crusher activity there will be necessarily a minimum fixed level of profit. The Commissioner of Income Tax (Appeals) has erred in confirming the action of the Assessing Officer in adopting a higher net profit ratio for the entire turnover of the appellant when no finding has been made in his order that any part of the expenditure accounted is fictitious and when the AO has himself concluded that there is no inflation in expenditure claimed by the appellant. The Commissioner of Income Tax (Appeals) has erred in ignoring the fact that during the year production was stopped in the unit due to heavy rain and as per directions from the Village Officer and there was a strike for a period of 15 days from 14.09.15 to 01.10.15. PRAYER For these grounds and such other grounds as may be urged at the time of hearing it is prayed that the addition made in the assessment order be deleted.”
2. Brief facts of the case are as under: 2.1 A search u/s. 132 was conducted on M/s. Reena Group of cases in Kannur District on 10-06-2015. M/s. Reena group is mainly into the Quarry business, Supply of M-Sand, Ready-mix concrete and other materials for construction activities. The Page 3 of 9 group also engaged in Civil Construction and Works Contract of Water Authorities of Kerala and Goa State Government. The Group is mainly owned and managed by Koottanal Family of Ayyankunnu Panchayat, Charal-Dist. Kannur and is led by Shri K C James, and his younger brothers, Shri K C Thomas and Shri K C Jimmy. 2.2 The firm was formed on 19/04/2017 through a deed executed by three partners viz 1. Shri K C James (40%), 2) Shri K C Jimmy (40% share), and 3) Shri K C Thomas (20% share). A search u/s. 132 was conducted at the business / office / crusher of M/s. Reena Metals, and also at the residential premises of partners on 10/06/2015. 2.3 The Ld.AO noted that the quarry and crusher unit of M/s. Reena Metals is promoted by Koottanal Family for manufacturing rock based building materials and the unit is situated at Vaniyapparathettu in Ayyankunnu Panchayat of Kannur District with an installed capacity of 1500 ton of crushed metals per day. The Ld.AO noted that the unit is equipped with Excavators, Breakers, Compressors, Cranes and Power Generator Sets of various designs of Caterpillar make where different sizes of granite are manufactured in cone crusher unit using huge rock boulders of unadulterated black rock. The Ld.AO noted that the quarry is spread in an area of about 120 acres. Further, M-Sand is also manufactured from these rocks in a specially designed wire mesh of VSI by double washing in pure water without silt or slag. The sand manufactured is named as “Reena Rock Sand”, which is approved by Govt. Engineers for various Govt., works as KWA, PWD and Sports Ministry and is regularly supplying the Page 4 of 9 ITA No. 572/Coch/2022 sand to the Govt. contract works. It was also noticed that the purchase of land and development of quarry and crusher unit is done during 2010-11 and 2011-12. The installation of crusher units was completed, and the firm got its quarrying license and is functioning started in full swing since FY 2012-13. 2.4 The details of return of income filed M/s. Reena Metals before the date of search are as under: M/s. Reena Metals – AAKFR1632H Date of Formation : 19/04/2007 FY 2011-12 2012-13 2013-14 SALES 0 8684124 140359744 PURCHASES 0 909660 2124250 OPENING 0 0 27947 STOCK CLOSING 2659663 27947 223025 STOCK Profit Before 0 (-)3431384 12727380 Taxes 2.5 The Ld.AO thereafter from the details filed during the assessment proceedings noted that assessee was maintaining accounts in a software called “Quarry Manager”. It was seen that the software is used for making Gate Pass for all the vehicles leaving the quarry premises. The gate passes so issued contained the details of actual quantity and price of all the material loads leaving the quarry premises. 2.6 The Ld.AO noted that sale bills are not generated for all the loads leaving the premises, and that the sales bills are issued only to a few customers and those are only getting accounted and reported to various departments. It was noted that the sales bills Page 5 of 9 were generated using the same software. The gate passes so issued contained the actual details of sales of the firm was destroyed / burnt on a day to day basis. The partially burnt gate passes of the previous day of search were also found and seized during the search action. 2.7 The Ld.AO noted that the sales details for 2012-13 (November onwards) were not available in the software as the software was installed in 2013-14 only. However, during the search action conducted at the residential premises of Shri K C Thomas, Koottanal House, VaniamParathettu, Charal (P.O), gate passes issued during the said period were obtained. As per the details found and tabulated, the sales for the year worked out to Rs.2,45,08,238/-. 2.8 The Ld.AO noted that the actual sales as per gate passes issued were tabulated by the assessee itself for the year 2014-15 (day wise) were also obtained and seized during the search at office / business premises of M/s. Reena Metals. Sworn statements were recorded from the Key officials – Shri Santhosh Sebastian (Manager since inception of the firm), Shri Juthin James, Shri Mohanan P K and the partners-Shri K C Thomas and Shri K C Jimmy during the search. Further, sworn statement was recorded from Shri K C James also regarding this. Specific questions were put to all of them regarding the difference in sales as per Gate Pass Register and Sales Register. The Ld.AO noted that all of them confirmed the modus explained above and admitted the actual sales as per the above table and explained that the actual sales are as per Gate pass register only and sales bills are not issued to all the sales and this is done as per the Page 6 of 9 instruction from the partners only. Partners also confirmed the same in their respective sworn statements. 2.9 Subsequently the statement of Shri Santhosh Sebastian was recorded who was a Manager incharge of the firm and managing day-to-day affairs of the quarry crusher unit which is as under: “I am the manager and in charge of the firm and am managing the day to day affairs of the quarry/crusher unit. I am working in the firm in the above capacity since 2013-14.1 am personally preparing the gate passes and sales bills using software called "Quarry Manager". Only sales bills are used for accounting purpose. WE ARE ISSUING SALES BILL TO LONG ROUTE TRIPS ALONE AND NO BILLS ARE ISSUED TO SHORT ROUTE TRIPS. This instruction is given by Shri Sashi from Head Office, Kannur on behalf of the management. Apart from me, Shri Juthin and Mohanan are also preparing sales bills in the similar fashion." I have seen the sales register and gate pass register taken from the software and seized. The total difference of Rs. 24,65,79,441/- arises due to the above explained method of accounting by partial billing of the actual sales." We normally generate 4 copies of gate pass for every sale transaction. Off such 4 gate passes, two are given to customer on receipt of cash from him. This includes lorry rent also in case if our vehicle is used for transportation. The customer has to handover one of the two gate passes at the loading point to collect the material. Sales. bill is issued to customer only if they demanded. Every day after closing the gate pass copy given at the loading point is collected back. All the three copies of the gate passes are destroyed on the same day evening. We are not keeping any hard copy of the gate pass which contain actual sales details of the firm. However it is available in the "Quarry Manager" software." 2.10 Based on the above, the assessee was therefore called upon to explain as to why there is a decrease in the turnover and a profit margin compared to the immediate preceding years. Assessee subsequently filed various details which were considered by the Ld.AO. During the assessment proceedings, Page 7 of 9 the assessee accepted the fact that there is a sale suppression and non-maintenance of expenses details and offered an additional income to the extent of 20% of the profit on total sales for the earlier year. The Ld.AO thus made an addition of the difference between the net profit margin at 20% of the total turnover and net profit as per profit and loss account that amounted to Rs.1,11,20,921/-. Aggrieved by the assessment order, the assessee filed appeal before the Ld.CIT(A). 2.11 The Ld.CIT(A) after considering various submissions filed by assessee, upheld the addition by observing as under: “9.8 For the A.Y 2016-17, the Assessing Officer gave a finding that the evidences in support of the expenditure were not submitted. The Assessing officer rightly rejected books of account estimated. The Assessing Officer estimated profit at 20% of the turnover as against the appellant's claim of 12.7%. The appellant failed to produce basis for the estimate of profit at 12.7% of the turnover. The actual turnover for the A.Y 2016-17 was Rs 16.81 crores. The appellant has not fully justified as to why the profit should be low in spite of the significant turnover comparable to that of earlier years. In view of the above reasons, M/s Malabar Sand and Stones Pvt Ltd is held as comparable case and appellant's ground is rejected. M/s Malabar Sand and Stones Pvt Ltd disclosed profit at 20% of the turnover. Hence the action of the Assessing Officer in computing the income by adopting estimated profit at 20% of the actual turnover of the appellant for the AN 2016-17 is upheld.” 2.12 Aggrieved by the order of Ld.CIT(A), assessee is in appeal before this Tribunal.
The Ld.AR submitted that, the assessee maintained proper books of accounts which were duly audited u/s. 44AB of the Act. It is submitted that the Ld.AO without any basis rejected the books of account which has been upheld by the Ld.CIT(A). The Page 8 of 9 Ld.AR submitted that as per the books of accounts, the profit declared by assessee was at 12.7% and the assessing officer has estimated the profit at 20% without any basis. He thus prayed for a judicious approach to be adopted in the present facts.
The Ld.DR on the contrary submitted that the books of accounts were rightly rejected due to non-maintenance of expenses details by the assessee properly and admittedly the assessee had suppressed sales which is recorded in the statement given by the Manager and the modus operandi has been admitted by the employees and the partners. The said statement is not rebutted and admittedly there is a difference in the sale as per the gate pass and the sale as per bill for all the preceding assessment year including the year under consideration. He thus prayed for upholding the order passed by Ld.CIT(A). We have perused the submissions advanced by both sides in the light of records placed before us.
We note that the assessee is in the business of quarry and crusher unit. Admittedly, there is a suppression of sale which has not been countered by the assessee at any point of time. Merely because the books of accounts maintained by the assessee is audited does not imply that the projection are as per the sales made on day-to-day basis in actual. It is only on the search being conducted at the premises that the suppression of sales was unearthed for which the assessee offered an additional income of 20% of the profit on total sales. Be that as it may, considering the nature of business activity carried on by assessee, 20% estimated by the Ld.AO is on much higher side.
Page 9 of 9 In the interest of justice, we restrict the estimation upto 15%. The Ld.AO is directed to compute the income in accordance with the above direction. Accordingly, the grounds raised by assessee stands partly allowed. In the result, the appeal filed by assessee stands partly allowed. Order pronounced in open court on 15th September, 2022.