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Income Tax Appellate Tribunal, AMRITSAR BENCH, AMRITSAR.
Before: DR. M. L. MEENA & SH. ANIKESH BANERJEE
ORDER Per: Anikesh Banerjee, JM: The instant appeal of the assessee was filed against the order of the ld. Commissioner of Income Tax (Appeal), J & K (in brevity ‘the CIT (A)’) order passed u/s 250 (6) of the Income-tax Act, 1961 (in brevity the Act) for assessment year 2012-13. The impugned order was emanated from the order of the ld. Income Tax Officer, Ward-3(5), Baramulla, (in brevity the ld. AO) order passed u/s 143(3) of the Act.
The assessee has taken the following revised grounds:
“1. That the learned CIT Appeals has erred in law and on facts by relying on the order of the AO without confirming facts rebutted by the assessee.
2. That the learned CIT Appeals has erred in law and on facts by agreeing to the AO’s action of applying a presumptive net profit rate of 2% on turnover by rejecting the books of accounts whereas all books of accounts and documents were made available for the purpose of assessment.
The learned CIT Appeals has erred in law and on facts in not considering the submissions and facts relating to net profit rate of previous assessment years which were continuously subjected to assessments u/s 143(3) for arriving at the presumptive rate for the year under assessment. Further the CIT Appeals has erred in law and on facts in relying on the presumptive rate applied by the AO whereas the AO had not given any comparable instances or provided any basis for arriving at the presumptive rate.
4. That the learned CIT Appeals has erred in law and on facts in not allowing advertisement expenditure paid to HMA Udyog Pvt Ltd and only relying on the findings of the AO.
5. That the learned CIT Appeals has erred in law and on facts by only relying on the findings of the AO who has treated credit notes, reimbursement of expenses and other expenses from the parent supplier M/s. GPI Ltd. as unexplained receipts.
6. That the learned CIT Appeals has erred in law and on facts by only relying on the findings of the AO who has questioned the correctness and genuineness of expenses like Salary, Business Promotion, Labour Charges and Freight.
7. The learned CIT Appeals has erred in law and on facts by relying on the order of the AO without taking cognizance of the written submissions and documents made available to the AO as well as him during the appellate proceedings.
The appellant craves the leave to add, amend or delete any clause to the above grounds of appeal and to furnish the documentary evidence in support of the grounds of appeal before the appeal is heard and decided.”
3. Brief fact of the case is that the assessee is a partnership firm dealing with trading of cigarettes on wholesale basis and acted as a dealer of M/s Godfrey Philips India Ltd. i.e. (GPIL). The assessee filed return u/s 139(1) and declared gross profit @ 2.56 % and net profit @ .41% against the sale of Rs.58,51,83,273/- in impugned assessment year. The assessment was completed. The ld. AO rejected the books of account u/s 145(3) the order passed u/s 144. Finally, the ld. AO calculated the N.P. @ 2% on turn over in impugned assessment year. So, the total addition was made amount to Rs.93,26,035/-. The ld. AO calculated the net profit amount to Rs.1,17,05,665/-, after allowing the deduction u/s 40 (b), the net addition was calculated amount to Rs.93,26,035/- which was added back with the total income. Aggrieved assessee filed an appeal before the ld. CIT(A). The ld. CIT(A) decided that the expenses u/s 37(1) related to advertisement, salary and business promotion are higher in nature in the impugned assessment year, so, the calculation of N.P. @ 2% on turnover was upheld. Being aggrieved assessee filed an appeal before us.
The ld. AR filed written submissions which are kept in the record. The ld. AR first pointed out that the ld. AO had enhanced the N.P. without any reason which is arbitrary.
4.1 The ld. AR invited our attention in page 8 of the assessment order para 16 and 17 which are reproduced as below:
“16. After considering the nature of trade and magnitude of the business. the gross profit rate shown at 2.56%, the defects noticed especially the unverified sales, the trade/cash incentives element and other relevant facts and circumstances of the cases, I am of considered view that, a Net profit rate of 2% is just, fair and reasonable in the case, accordingly. the income of the assesse from this business for the year is estimated /computed by applying a Net: profit: rate of 2% on the net sales shown at Rs. 58,51,83.273/- .Thus, the net profits of the assessee firm for the year under- reference is computed and assessed at Rs. 1,17.05.665/.
The assessee is a partnership concern and the partnership deed authorizes the payments of salary and interest to partners. The deduction u/s 40(b) has been claimed at Rs. 17,24,872/, which is allowed, and the net taxable income /profits of the business are thus assessed at Rs.99,80,793/ as against returned income of Rs. 675758/ , thereby, resulting in a net addition of Rs. 9326035/-.”
4.2 The ld. AR further invited our attention in appeal order page 24. The relevant paragraph is reproduced as below: -
“I have considered the expenses booked under the head "Advertisement Expenditure." It is found that a sum of Rs.80,58,849/- has been booked under this head. The entire amount has been paid to M/s HMA Udyog Ltd. The responsibility of advertising was on M/s HMA Udyog Ltd., and the assessee had no knowledge either about the nature of publicity or the way the expenses were made. Thus, the genuineness of the advertisement expenses could not be proved by the appellant except that the payment has been made to HMA Udyog Ltd. Though, the AO has held that the said expenditure was not allowable u/s 37(1) of the Act, no addition was made on this count as the AO has estimated the net profit @2%. I have confirmed the net profit rate of 2% adopted by the AO and there is no reason to interfere with that. However, the payment of Rs.80,58,849/- to HMA Udyog Ltd., on account of Advertisement Expenses appears to be, prima facie, a case of diversion of income to the Company, M/s GPI through HMA Udyog Ltd. The income appears to have been earned by way of cash sales and the actual sales have suppressed. This observation may be forwarded to the concerned AOs of GPI Ltd. and HMA Udyog Ltd.
In view of the above, the addition made by the AO is confirmed and the appeal is dismissed.”
4.3 The ld. AR argued and produced the year wise comparative net profit and gross profit chart with the business expenses which are reproduced as below: -
The ld. DR fully relied on the order of the revenue authorities.
We heard the rival submission and considered the documents available in the record. The ld. AO had rejected the books of account and framed the assessment. There is no defect was found about the purchase of the trading goods. The sale is mostly retail salesand cash sales. The nature of sale of goods showing that the sale performed is fully through cash. The calculation of N.P. by the ld. AO had no basis and had not considered any comparative basis considering the same nature of business in other trader. The ld. AO agitated the issue for the expenses related to salary, business promotion and advertisement and pointed out that the violation is u/s 37(1) of the Act. But on that basis, the N.P. was calculated without considering the assessee’s past history or had not taken any cooperative in same nature of business. The assessee submitted the year wise chart of G.P. and N.P. which clearly indicates that in this impugned assessment year the assessee maintaining the higher G.P. @ 2.56%. In our considered view, the calculation of N.P. @ 2% has no basis. The assessee is maintaining the same net profit in impugned assessment year in comparison to other yearsi.e. @.41%. The ld. CIT(A) accepted the ld. AO’s view only on basis of excess claim of expenses U/s 37(1). The estimation is by way of 'best judgment assessment' and it has been consistently held that there is bound to be an element of guess work and no comparative is taken in finding. On the other hand, the books of accounts of the assessee were not properly represented before the revenue. We remit back the matter in the file of the ld. AO to adjudication a fresh, considering the direction indicated above. We set aside the impugned appeal order and remand back the appeal to the file of the ld. AO.
In the result, the appeal of the assessee bearing is allowed for statistical purpose.
Order pronounced in the open court on 25.08.2023