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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: Ms. Annapurna Gupta & Shri TR Senthil Kumar
IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT (Conducted Through Virtual Court) Before: Ms. Annapurna Gupta, Accountant Member And Shri TR Senthil Kumar, Judicial Member ITA No. 240/Rjt/2016 & C.O. No. 01/Rjt/2017 Assessment Year 2010-11 I.T.O., Ward-1, Vs M/s. Kandla Steel Pvt. Gandhidham Ltd. Shop No. 46, patel Chambers P.L. No.41, Sec-9A, Gandhidham- Kutch PAN No. AADCK 1337N I.T.O., Ward-1, M/s. Kandla Steel Pvt. Vs Gandhidham Ltd. Shop No. 46, patel Chambers P.L. No.41, (Respondent) Sec-9A, Gandhidham- Kutch PAN No. AADCK 1337N (Appellant)
Appellant by : Shri Ajay Pratap Singh, CIT/D.R. Respondent by : None Date of hearing : 31-03-2022 Date of pronouncement : 06-04-2022 आदेश/ORDER PER : ANNAPURNA GUPTA, ACCOUNTANT MEMBER:-
The present appeal has been filed by the Revenue against the order passed by the Ld Commissioner of Income Tax (Appeals)-3, Ahmedabad, (in short referred to as CIT(A)), dated 27-04-2016, u/s. 250(6) of the Income Tax Act,
I.T.A No. 240/Rjt/2016 & C.O. 01/Rjt/17 A.Y. 2010-11 Page No 2 ITO vs. M/s. Kandla Steel Pvt. Ltd. 1961(hereinafter referred to as the “Act”) pertaining to Assessment Year (A.Y) 2010-11 and Assessee has also filed C.O.
. None appeared on behalf of the assesse nor was any application filed seeking adjournment before us. We have noted that the assesse has remained unrepresented on several occasions in the past also when the appeal came up for hearing. The assessee does not seem to be interested in pursuing the appeal. Therefore the appeal was proceeded to be heard.
2.1 Briefly stated the assessee was in the business of trading in Iron and Steel. For the impugned assessment year, i.e A.Y 2010-11, assessment was framed u/s. 143(3) of the Act rejecting the books of accounts of the assesee u/s. 145(3) of the Act and thereafter estimating the net profit @ 7% of the total turnover of Rs. 73,69,68,737/-, resulting in an addition of Rs. 5,04,16,478/- being made to the income of the assesse.
The matter was carried in appeal before the ld. CIT(A) who upheld the rejection of books of accounts but reduced the estimation of net profit by applying a rate of 0.5% to the turnover as opposed to 7% applied by the A.O., thus reducing the addition made on account of estimation of net profit to Rs. 19,16,511/- as opposed to 5,04,16,478/- made by the A.O.
Aggrieved by the same, the revenue has come up in appeal before us challenging the reduction in estimation of net profit as above by raising the following grounds: 1. The Ld. CIT(A) erred in law and on facts in restricting the addition made by A.O. by estimating Net Profit @7% amounting to Rs.5,04,16,478/- to Rs. 19,16,511/- considering the Net Profit @0.5%.
I.T.A No. 240/Rjt/2016 & C.O. 01/Rjt/17 A.Y. 2010-11 Page No 3 ITO vs. M/s. Kandla Steel Pvt. Ltd. 2. Alternatively, CIT(A) erred in law and facts by estimating the N.P. @0.5% instead of 7% as estimated by the AO, without comparing the N.P. of other concern engaged in the same nature of business.
4.1. While the assesee has filed cross objections challenging the rejection of books of accounts as also the estimation of net profit by the revenue. The grounds raised by the assessee read as under: 1. Ld. C1T(A) erred in law and on facts confirming action of AO rejecting books of accounts u/s 145 (3) of the Act holding that book results were not convincing due to sharp drop in profitability limited in intra group transactions at year end. 2. Ld. CIT (A) erred in law and on facts in holding that failure to substantiate the purchase price of material with prevailing market price by appellant smacked of intra group adjustment failing to appreciate that appellant due to contractual obligations & commercial expediency had to sell material purchased at a loss. 3. Ld. CIT (A) erred in law and on facts in estimating the net profit @ 0.5 % of turnover based on result declared by appellant as well existing market trend. Ld. CIT (A) ought to have deleted total addition considering that the net profit @ 0.22% for the previous year is higher than preceding or later year.
We shall first we dealing with the cross objection of the assessee since the assessee has opposed the rejection of books of accounts in the same and which needs to be adjudicated first and only thereafter the issue of estimation of books profits, arising in both the assesse and the revenue’s appeal, can be dealt with.
CO-01/RJT/2017
The cross objection filed by the assesse, we have noted has been marked by the registry as being delayed in filing by 126 days. No application has been filed
I.T.A No. 240/Rjt/2016 & C.O. 01/Rjt/17 A.Y. 2010-11 Page No 4 ITO vs. M/s. Kandla Steel Pvt. Ltd. by the assesse seeking condonation of the delay. The cross objection filed by the assesse therefore is dismissed as been barred by limitation.
We shall now deal with the appeal of the revenue in: ITA No. 240/Rjt/2016.
The short question being with regards to the reduction in the estimation of net profits by the Ld. CIT(A) by applying rate of 0.5% to the total turnover of the assesse as opposed to 7% applied by the AO, and the Ld. D.R. vehemently relying on the findings of the A.O, it is pertinent to see and consider the basis adopted by both the revenue authorities for arriving at their estimation of net profit.
On going through the order of the A.O., we have noted that the basis of adoption of 7% rate was the profits earned by the assesse on transactions carried out in the first 11 months of the year, which were noted to be 5.2% of the turnover. The background of the case is that the A.O. noted that while in the first 11 months of the year the assesse had shown profits in trading transactions, in the last month of the year it booked huge losses literally wiping out its entire profit during the year. He noted that these transactions were undertaken between the same set of companies i.e. purchases from M/s. Ruchi Global and sale to M/s. Indian Steel and further that a Director in the assessee company Shri Jalani was a salaried employee of M/s. Indian Steel. It was also noted that in this short period of one month approximately 285 such transactions were undertaken which in volume were equivalent to that undertaken in the rest of the year and further that both the parties from whom purchases had been made and to whom it had been sold were located at the same address and further no bills had been
I.T.A No. 240/Rjt/2016 & C.O. 01/Rjt/17 A.Y. 2010-11 Page No 5 ITO vs. M/s. Kandla Steel Pvt. Ltd. produced by the assesse for verification. The A.O. accordingly doubted the commercial expediency of the transaction, rejected the books of accounts and further noting that the transactions in the first 11 months showed a profit of 5.21%, held that 7% of net profit was appropriate and applied the same to the total turnover of the assesse for estimating the net profit of the year. The relevant portion of the order of the A.O. from para 9 to 10 is as under: 9. Loss booked through another group companies : From the details furnished it was noted that for the period March 2010, the company have purchased the goods from M/'s Ruchi Global and has sold the same goods in ditto quantity to M/s Indian Steel on the same day or next day. . Both these companies M/s Ruchi Global and M/s Indian Steel share the same premises as per the details available from the websites. Further from the share holding pattern of M/s Indian Steel it has been gathered that that M/s Ruchi Global and its associate concerns has a substantial share holding in M/s Indian Steels. From the details gathered it seems that the assessee company has purchased the goods from M/s Ruchi Global and have sold the same to M/s Indian Steel at loss ( it is worth to mention here that one of the director of assessee company is a salaried employee in M/s Indian Steel). It is tough to understand that why two companies operating from, the same added will purchase the goods from the assessee company. It seems that through this routine the assessee company has tried to compensate the profit carried in earlier period of F.Y. 2009-10 through booking loss. In spite of shortage of time and in absence of proper documentary evidences and explanations, a list of approximately 285 transactions have been prepared where transactions ( purchased through M/s Ruchi Global & sold to M/s Indian Steel) have been carried out in the month of March 2010 and the assessee company booked a loss of 1,76 Cr. The total turnover of these transactions comes out to Rs. 35.73 Cr. Further the company has also made purchases from M/s Long Island company and have sold the goods to M/s Shiv Ratna Company at marginal loss. If we summaries the above transactions the total volume of transactions comes out to Rs. 37.82 Cr. on which total loss of Rs. 1.76 Cr. has been shown. The summary of the said transaction made in the month of March 2010 is as under:
I.T.A No. 240/Rjt/2016 & C.O. 01/Rjt/17 A.Y. 2010-11 Page No 6 ITO vs. M/s. Kandla Steel Pvt. Ltd. Inv. No. Period Purchased Total purchase Sold to Total Sales Profit/Loss from Cost value 137 to 18/03/2010 M/s Ruchi 37,50,46,484/- M/s 35,73,69,055/- (-) 1 Indian 7,67,74,29/- 424 to Global Steel 25/03/2010
121 03/03/2010 M/s Long 2,08,90, 172/- M/s Shiv 2,08,82,616/- (-) 7556/- to 136 Island Co. Tarana Co. Total 39,59,36,656/- 37,82,51,671/- (-)1,76,S4,985/-
As the company has shown net profit of Rs. 11.71 lacs for the year under consideration, thus it can be presumed that the balance turnover of Rs. 35.87 Cr. ( total turnover Rs. 73.69 Cr.) the company has earned net profit of Rs. 1.87 Cr. ( loss + net profit). The N.P. ration on this balance turnover comes out to @ 5.21% ( profit of Rs. 1.87 Cr. earned on balance turnover of Rs. 35.87 Cr.) As the loss turnover have been made for the transactions made by making purchase as well as sell from one particular group companies. It is also pertinent to mention here that Shri Jhalani, who is director in assessee company is also a salaried employee of M/s Indian Steel. Thus it is clear that these transactions are sham transactions in order to suppress the profit of the assessee company. For this loss transaction the company has stated as under: The purchase and sales made by the company from party to party defers as per contractual obligation. There are genuine and valid reasons, out of commercial expediency of charging sales price. It is not intended by the company in giving undue advantage to any other company. No company trading with the company is under the same management. There is no logical reason in giving undue advantage to the parties
I.T.A No. 240/Rjt/2016 & C.O. 01/Rjt/17 A.Y. 2010-11 Page No 7 ITO vs. M/s. Kandla Steel Pvt. Ltd. to whom supplies are made at lesser price. However, considering overall relationship and the advantage received by the company, transaction prices are fixed. The above reply is very general in nature and without any evidences of contractual obligations and proof of commercial expediency. Further it is worth to note that loss has occurred not in one transactions but approx.. in 300 transaction taking place in the year end. No person of prudent business skills will book such looses in trading activities where bill to bill goods have been purchased and sold on the same or next day for 15-20 days through approx. 300 transaction. It is also important to mention here that both the companies belongs to same group (from which purchase and in turn sale, have been shown) and has same address. Thus there was no physical transaction of goods involved . These transaction are sham transaction , it is also confirmed by the following facts: i) One of the Director ( Shri Jhalani)of the assessee company is the salaried employee of M/s Indian Steel. No details are available on record about the other director of the assessee company. (ii) No Bills have been produced for verification in support of physical transfer of goods. iii) M/s Ruchi Global & M/s Indian steel have same address in Indore.
Rejection of books of accounts and estimation of N.P. From the above discussion, it is very much evident that t company's books of account have been cooked to suppress the actual profit in conduit of transaction made with one particular group company. Further most of the books of account have not been produced for verification with supporting evidences and whatever data has been submitted, have remained unexplained. Therefore I have genuine reason to believe that in these conditions the exact profit of the company can not deduced from the books of accounts produced/submitted. Hence I hereby reject the books of accounts maintained by the assessee company u/s 145(3) and estimate the profit of the company @ 7% as proposed in show cause notice. The total turnover of the company is Rs. 73,69,68,737/-. Thus the N.P. @ 7% comes out to Rs^5,15,87,812A . The N.P. shown by the company is Rs. 11, 71,334/-. Hence as addition of differential amount of Rs. 5,04,16,478/- is made to the total income of the assessee. Penalty proceedings u/s 271(l)(c) r.w.s. 274 are also initiated.
I.T.A No. 240/Rjt/2016 & C.O. 01/Rjt/17 A.Y. 2010-11 Page No 8 ITO vs. M/s. Kandla Steel Pvt. Ltd. (Addition of Rs, 5,04,16,478/-)
The Ld.CIT(A) on the other hand we have noted estimated the appropriate net profit ratio @ 0.5% relying on the results of the assesse itself for the preceding and succeeding year and on the basis of his own knowledge of the profits returned in this line of business. His findings at para 6.9 to 6.10 is as under: 6.9 So far as the question of estimation of the gross profit is concerned, I agree with the Ld. AR that A.O. has not done any exercise to arrive at the conclusion of the returned book financials being incorrect and insufficient. He has not analyzed the book results of the appellant in earlier as well as later years. Further, as already indicated, he had taken contradictory stands while issuing the show cause notice and while passing the assessment order. More so ever, he has not given any internal or external comparative figures of sector of the appellant's business while arriving at the GP/NP ratio of 7%. The appellant is in business of trading of steel items. The manufacturing activities have almost stopped. Thus, the GP/NP ratio estimated by the A.O. should be compatible with the prevailing market trend in the sector of steel trading. To my knowledge in the relevant period, NP ratio of 7% in this sector is beyond imagination and unbelievable. Most of the trading concerns are operating at miniscule GP ratio of 0.5% to 1%. More so ever, in the absence of the any external /comparable, the A.O. should have analyzed the book results of the appellant in earlier year and later year before arriving at the reasonable estimate of GP/NP. The appellant had submitted details of sales and purchases month-wise, quantity- wise as well as party-wise before the A.O. as well as before the undersigned. It is apparent that transaction with M/s. Indian Steel Corporation Ltd. are not limited to only the alleged sham transactions. The appellant has made other sales also to this party and those sales in the earlier months of the financial year has resulted into significant profit. Month-wise sale-purchase and stock statement (value as well as in quantity) was submitted to A.O. as well as before me. (All these details were submitted to the Assessing Officer) If one has to reject all the sales to M/s. Indian Steel Corporation Ltd., major part of the turnover of the appellant will get wiped out. Needless to say, such exercise is not feasible. The A.O. has not given proper attention to the corresponding purchases from M/s. Ruchi Global which appears to me not in sync with the prevailing market rate. To be fair to the A.O., he has not pondered over the genuineness of the purchase rates as he was disturbed mainly by the low sale rates in comparison to the purchase price. It has already been held by me that these purchase-sale combine between the related parties are not acceptable and therefore the profit needs to be reestimated. It is a fact that parties involved in these transactions are the main customers/client of the appellant and if certain transactions entered into with
I.T.A No. 240/Rjt/2016 & C.O. 01/Rjt/17 A.Y. 2010-11 Page No 9 ITO vs. M/s. Kandla Steel Pvt. Ltd. these parties in the later period of the year (Feb-March) had resulted into huge loss, then transactions in earlier part of the year had also resulted into huge profit It will not be appropriate to discard one set of transaction only because they had resulted into loss. The appellant has only trading business of the steel items; it is not trading the manufactured goods and in such case, if one agree with the A.O. that supposedly inter- group transactions were sham transaction then the logical conclusion will be that it is in the business of providing entries only and therefore A.O's action of treating of the turnover as genuine and part of the other half the turnover as sham cannot be justified at all. In other words, A.O's action of fixing GP% at 7% by taking cue from the part of turnover (of earlier part of the year) of 5.1% is not sustainable. It is also not the case that these parties are appearing in the appellant's business only this year. They are old customers of the appellant. Appellant is running this business since long. The A.O. had not discussed the financial results of earlier as well as later financial year; in brief he had not taken any effort to show that GP% of the appellant had dipped down drastically due to creating sham transactions. The A.O. neither discussed any case of other company dealing in the similar nature of the business for the purpose of comparison of GP, NP nor even produced profit trend of the appellant company for the earlier three years to form scientific basis to arrive at the reasonable rate for estimation and application of net profit rate @ 7%. In fact, the appellant has shown relatively better GP & NP in the relevant previous year. I do not find any justification in A.O's action of fixing the net profit ratio @ 7% which is totally unrealistic, whimsical and without any ground. 6.10 Ld. AR had submitted comparative GP ratios along with the audited books and gist of the same (for three years, including relevant financial year) is as under:-
Total Turnover 250758982 736968737 2595778118
Increase/Decrease in -59959722 50871881 23178182 Stock
Total 190799260 787840618 2618956300
Expenses 207345358 785623143 2617458244
GP -16546098 2217475 1498056
GP% -8.67 0.28 0.06
I.T.A No. 240/Rjt/2016 & C.O. 01/Rjt/17 A.Y. 2010-11 Page No 10 ITO vs. M/s. Kandla Steel Pvt. Ltd. Adm. Expenses 250836 483172 1102259 NP -16627821 1768332 690370 NP% -8.71 0.22 0.03
6.10. In my opinion the net profit rate @ 0.22% though higher than those in the immediately preceding year as well as later year needs reestimation due to the reasons cited above. To meet the ends of justice, the net profit is being fixed @ 0.5% considering the result declared by the appellant as well as the prevailing market trend in the trading of wholesale metal business. The net profit works out to Rs.36,84,843/-(0.50% of turnover of Rs.736968534). Thus, the addition is restricted to Rs. 19,16,511/- (Rs.36,84,843 -. Rs. 17,68,332). The appellant gets a relief of Rs.4,84,99,967 (Rs. 5,04,16,478 - Rs.19,16,511). This ground of appeal is partly allowed.
The Revenue has challenged this basis of estimation of net profits by the Ld.CIT(A).
We are not in agreement with the contention of the Ld. D.R. that the basis adopted by the A.O. was correct. Having rejected the books of accounts of the assessee, the very same set of books could not have been relied upon for revealing the true profitability of the assesse, even though in part ,i.e relating to the period excluding the last month of the year, since admittedly the books were rejected not only for the reason that the transactions in the end of the year were managed to book losses but also on account of booking expenses of loading and unloading throughout the year which were found not verifiable,.
The basis adopted by the ld. CIT(A), on the other hand we find is just and appropriate having considered the assessee’s profitability in preceding year and succeeding years and the profitability in this line of business.
I.T.A No. 240/Rjt/2016 & C.O. 01/Rjt/17 A.Y. 2010-11 Page No 11 ITO vs. M/s. Kandla Steel Pvt. Ltd. 13.1 We therefore uphold the order of the Ld.CIT(A) estimating the net profits of the assessee by adopting net profit rate of 0.5% of the turnover.
13.2 Grounds of appeal of the Revenue are dismissed.
The appeal of the Revenue is dismissed.
In effect both the Revenues appeal and the CO of the assessee is dismissed.
Order pronounced in the open court on 06-04-2022
Sd/- Sd/- (TR SENTHIL KUMAR) (ANNAPURNA GUPTA) JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER Ahmedabad: Dated 06/04/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, राजकोट