DCIT, LUDHIANA vs. M/S JAIN UDHAY APPARELS PVT. LTD., LUDHIANA

PER DR. B.R.R.KUMAR, AM

The present Appeal has been filed by the Revenue and Cross Objection filed by the Assessee.

declared a net loss of Rs. 63.18 lacs. There is a fall in G.P. to 10.16% vis-à-vis 16.03% and 17.06% during the earlier previous year and the claim of old stock was bogus. This clearly indicates that the assessee has suppressed its sales by under invoicing the sales bills. 2. That the Ld. CIT(A)-5, Ludhiana has erred in restricting the addition of Rs. 2,60,000/- to Rs./ 1,50,000/- made on account of travelling expense of Directors without appreciating the fact that the assessee failed to produce proper vouchers for these expenses. 3. That the Ld. CIT(A)-5, Ludhiana has erred in restricting the addition of Rs. 1,00,000/- to Rs. 50,000/- made on account of vehicle expense without appreciating the fact that the assessee has not maintained proper vouchers. 4. The assessee has raised following ground in its Cross Objection : 1. That the Ld. CIT(A)-5, Ludhiana has erred in law and on the facts of the case:- a) By arbitrarily and wrongly sustained partly the addition for Rs. 81,19,207/- out of total addition of Rs. 1,70,85,936/- made on account of under invoicing of stocks/sales and low G.P. Rate. b) By arbitrarily and wrongly sustained partly the addition for Rs. 1,50,000/- out of total addition of Rs. 2,60,000/- on account of excessive travelling expenses of directors on adhoc basis. c) By arbitrarily and wrongly sustained partly the addition for Rs. 50,000/- out of total addition of Rs. 1,00,000/- on account of vehicle expenses on adhoc basis.

Ground No. 1 pertains to the addition of Rs. 1,70,85,936/-on account of under invoicing of stocks and low G.P. rate. The AO has mentioned that at the time of search on 01.03.2011 inventory of 178478 Kg of Knitted cloth was found which was valued at Rs. 4,54,33,772/- after considering the reply of the assessee, giving the average rate of Rs. 254/- per Kg. Further the assessee purchased knitted cloth weighing 170774 kg for Rs. 4,04,57,369/- during the month of March 2011, giving average rate of Rs. 237/- per Kg. AO further mentions that during the month of March, 2011, the assessee has sold 203404 Kgs of Knitted cloth for Rs. 3,17,50,073/- giving average sale rate of Rs. 156/- per Kg. Based upon the above figures, the AO concluded that the assessee has sold cloth below average cost price during the month of March, 2011 and there was under invoicing of sale by Rs. 98 per kg (Rs 254-156) in respect of the stock found as on 01.03.2011 and by Rs. 80 per kg(Rs. 236-156) in respect of cloth purchase during the month of March, 2011. The AO also mentions that the assessee has made cash sales of Rs. 7.31 lacs which were un-verifiable and further that the sale of Rs. 60.47 lac has been made to the sister concern of the assessee. As per AO, the genuineness of such sales on very low rate to the sister concern is not free from doubt. The assessee was issued a show cause by the AO as to why the average cost rate may not be applied to such under invoiced sales. The assessee in reply submitted that majority of stock of cloth as on 01.03.2011 was old and left over, not useful for manufacturing of garments and therefore, fresh cloth was purchased in the month of Feb and March, 2011 onward. As per the assessee, the valuation of Knitted cloth was done as per FIFO basis in respect of closing stock on the basis of purchase bills. It was argued that the fresh stock have good market price however, the left over stock are sold at discount which is a known universal fact. It was further argued that during the year the assessee has cleared its old stock of knitted cloth in the month of March, 2011 so as to lessen the financial and other cost burden of keeping the huge stock in hand. As per the submissions, assessee had huge interest cost and banks were pressing for deposit of funds, therefore, the assessee resorted to selling the old stock at whatever price was available in market. The reply of the assessee was not found convincing by the AO who observed that there was a fall in G.P also. On confronting with these facts by the AO during the assessment, the assessee submitted that the turnover of the company had increased from Rs. 1842.58 Lacs to Rs. 3437.34 Lacs which could be possible by making the sales at lower margin. The assessee submitted that though there was fall in GP percentage but amount wise there was increase in gross profit from Rs. 296.21 lacks to Rs. 349.13 lacs giving an increase of Rs. 52.92 lacs. It was argued that all the purchases and sales are duly supported by the bills and no discrepancy of the same was found during search except that the assessee could not explain the difference in valuation of closing stock, (which as per assessee was mainly due to estimated valuation) for which sufficient amount was surrendered to cover up leakage of revenue. The AO found the explanation unacceptable and Observed that assessee has not got any old stock and the purchases have been " made three to four months back only and gave a discount of Rs. 5 per kg out of average cost price of Rs. 245 (i.e. 254+237=491/2) in respect of stock found as on 01.03.2011 and purchased during the month of March, 2011. The AO applied a rate of Rs. 240/Kg on the total sale of cloth of 203404 Kg made during the month of March, 2011 & assessed the under invoicing on the sale of knitted cloth at Rs.84 per kg totaling to Rs.1,70,85,936 (i.e. Rs. 84 per kg X 203404 kg). The AO accordingly, made addition of Rs. 1,70,85,936/- on account of under invoicing of sale which as per AO will also increase the GP Rate. The facts of the case, the basis of addition made by the A.O. and the arguments of the AR during the appellate proceedings have been considered. The AR argued that the main reason stated by the AO for presuming under invoicing is that the cash sales made during March 2011 are unverifiable and the sales of Rs.60.47 lacs have been made to sister concern which are doubtful. On these observations the AR has argued that the majority of the stock sold during month of

March, 2011 consisted of cloth in hand found as on 01.03.2011 which was old, in lots and left over of cloths, faded cloth in old texture/design & different colors accumulated over a number of year thus not be used in the manufacturing of quality garments for next summer/pre winter seasons. As per AR, for the new season fresh cloth was purchased in Feb/March, 2011. It is argued that to clear the leftovers stock, clearance sales etc are organised by Manufacturer and Traders of cloth in the line of business of assessee. During this year the assessee has cleared its old stock in March, 2011 so as to lessen the financial burden. The AR argued that copy of extract of sale register and some bills showing sales at lower rate were filed with the AO, who has not found any defects in the same. Further to lessen the interest cost the assessee cleared the cloth at any rate at which it could be sold in the market irrespective of cost. The AR submitted, the credit limit peak at Rs.684.37 lacs as on 12.03.2011 was brought down to Rs.487.83 lacs on 31.03.2011 which was possible only by making sales of old Knitted cloth in hand at whatever rate it fetched. Regarding the fall in GP the AR has argued that since there was increase in turn over which almost doubled during the year, leading to fall in GP which is normal phenomena. It was further argued that the case of the sister concern to which sales at the average rate of 185 per kg were made, was also being assessed with the same AO but no addition on account of very low rate of purchase or purchases made outside books of accounts etc., was made by the AO, therefore, the sales made to the sister concern should not be doubted. It is further argued by the AR that the AO has not pointed out even a single discrepancy in the books of accounts or sale bills etc., issued during the month of March, 2011. The AR has filed the details of the purchases made during the month of March, 2011 and party wise ledger of sales made during the month of March, 2011. It is argued that a perusal of the same shows that the receipts are mostly through Banks and the parties are identifiable except in respect of cash sales which are 51374 Kgs during the month of March, 2011 at total value of Rs. 60,35,510/- giving an average rate of Rs.117 per kg. The sales made to the sister concern during the month of March, 2011 are 32731 kgs for Rs. 60,48,103/- giving an average rate of Rs. 185 per kg. There may be merit in the argument of the AR that the AO has not brought on record any instance where the fact of under invoicing was noticed by way of calling the information from the parties to whom the sales were made. But this argument does not hold good for cash sales where the parties are not identifiable. However, in respect of identifiable parties, the sales below the cost price was a good reason for initiating the inquiry and making verification from the parties, to find out the true rate of sales made by the assessee. In respect of these parties, the argument of the AR that if the AO was having any doubt regarding the sale price then he was required to call information from the parties to whom sales were made, carries weight. In the absence of any positive evidence found during the search or brought on record by the Assessee Officer during the course of assessment, it cannot be assumed that there was under invoicing of sales to the identifiable parties when the assessee is producing the complete details and bills for the sales. The AR argued that the AO has arbitrarily and wrongly rejected the books and made addition by resorting to mathematical calculations on presumption that sales cannot be made below cost. The AO did not make any independent enquiry of the alleged under invoiced sales if any made to sister concern & other customers. As per AR, there is no thumb rule that GP rate earning should be constant year after year and that in Hosiery Trade, there is always left over stock which piles up over a period of time and loses their value over a time gap. It is further argued that the assessee is maintaining regular books of accounts along with bills & vouchers and quantity wise stock tallies which are duly audited under the provisions of Companies Act and Income Tax Act. After careful consideration of the facts mentioned by the AO and the submissions / arguments of the AR, the conclusion of the AO with regard to doubting the sale price are found to hold good in respect of cash sales and also to the sales made to the sister concern. The arguments of the AR are found acceptable only in respect of other customers where the details were available £ with the AO but nothing has been brought on record to substantiate the allegation of under invoicing of sales to those parties. As per the details filed during the appellate proceedings, the assessee had made cash sales at an average rate of Rs. 117 per kg and by adopting the value of Rs. 240 taken up by the AO, the

under invoicing of sales to the extent of Rs. 123 per kg is found sustainable for cash sales and accordingly, the addition to the extent of Rs. 63,19,002/- (Rs.123 X 51374 Kg) is confirmed in respect of cash sales. The average rate in respect of sales to sister concern is Rs. 185/- and the under invoicing which can be attributed by adopting the rate taken by the AO comes to Rs. 55 per kg and accordingly, the addition to the extent of Rs. 18,00,205/-(Rs.55 X 32731kg) is confirmed in respect of sales made to sister concern. The balance addition made by the AO on account of under invoicing is not found sustainable and thus the appellant gets a relief of Rs. 89,66,729/-.

Before us the Ld. AR submitted that Rs. 5,00,000/- has already been offered for expenses hence no further disallowances are required. The Assessing Officer may go through the computation of income to verify this fact and may allow after due verification. Therefore Ground No. 2 & 3 of the Revenue’s appeal are allowed for statistical purposes.

Order pronounced in the Open Court.

Sd/- Sd/- (SANJAY GARG) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 19/03/2018 AG Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR