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Income Tax Appellate Tribunal, DELHI BENCH ‘F’, NEW DELHI
Before: Dr. B. R. R. KumarSh. Yogesh Kumar US
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the assessee and the revenue against the orders of ld. CIT(A)-35, New Delhi dated 05.04.2019 and 08.04.2019.
The assessee is an individual and regularly assessed to tax in Delhi. During the relevant previous year the assessee was engaged, through his proprietorship concern M/s S.K Enterprises, in the business of manufacturing and trading in 2 6829 & 6831/Del/2019 Ritu Mishra carpets and durries. The assessee filed Return of Income for A.Y. 2009-10 declaring income of Rs.41,78,820/-. The same was processed u/s 143(1) of the Act and thereafter the Assessing Officer (“AO”) selected the case for scrutiny by issue of Notice u/s 143(2) of the Act dated 13.09.2010. He called for various details vide notices u/s 142(1) of the Act and after examining the details furnished by the Assessee from time to time, including the books of account, purchase and sales ledger, bills and vouchers etc. he passed the Assessment Order u/s 250 of the Act on 05.04.2019 making the following additions / disallowances to the total income thus determining the total income at Rs.3,58,99,760/-:
a. Disallowance of deduction claimed u/s 24(b) of the Act - Rs. 1,50,000/- b. Enhancement of Gross Profit by rejecting books of accounts - Rs.2,59,27,998/- c. Disallowance u/s 40(a)(ia) - Rs.98,21,762/-
In the first appeal filed before the Commissioner of Income Tax (Appeals)-35, New Delhi, the assessee raised the following grounds of appeal:
“1. That the impugned assessment order is not only bad in law and nature but it also whimsical and therefore, the same is liable to be quashed.
2. That on the facts and circumstances of the case, the Ld. Assessing officer has grossly erred in making Disallowance of Deduction u/s 24(b) amounting to Rs. 1,50,000/-, which is illegal and liable to be deleted.
3 6829 & 6831/Del/2019 Ritu Mishra 3. That on the facts and circumstances of the case, the Ld. Assessing officer has grossly erred in making enhancement of Gross Profit by an amount of Rs.2,59,27,998/-, which is illegal and liable to be deleted.
That on the facts and circumstances of the case, the Ld. Assessing officer has grossly erred in making disallowance u/s 40(a)(ia) amounting to Rs.98,21,762/-, which is illegal and liable to be deleted.”
4. The assessee made submissions with the supporting documents and prayed for deletion of the additions made arbitrarily based only and conjectures and surmises. The Ld. CIT(A) has duly reproduced the assessee’s submissions in her order. The Ld. CIT(A) called for and obtained the remand report from the AO and after considering the same as well as the rejoinder of the Assessee, passed a detailed order u/s 250(6) of the Act partly allowing the assesse’s appeal.
The Ld. CIT(A) deleted the following additions / disallowances made by the AO:
a. Disallowance of deduction claimed u/s 24(b) of the Act - Rs. 1,50,000/- b. Enhancement of Gross Profit and by rejecting books of accounts - Rs.2,59,27,998/- c. Disallowance u/s 40(a)(ia) - Rs.62,34,632/- made under the following head: Repairs and maintenance - Rs.8,16,850/-
Ld CIT(A) confirmed the following additions / disallowances made by the AO:
Disallowance of freight expenses u/s 40(a)(ia) - Rs.31,14,549/- Disallowance of postage and courier expenses u/s 40(a)(ia) -Rs. 1,32,583/- Disallowance of legal and professional charges u/s 40(a)(ia) - Rs.3,40,050/-
Aggrieved by the Order of the Ld. CIT(A), the Department as well as the Assessee have filed cross appeals.
The grounds taken by the Revenue in are as under:
“1. On the facts and circumstances of the case. The CIT(A) has erred in deleting the addition of Rs. 1,50,000/- made by the AO, on the basis of disallowance of deduction claimed by the assessee u/s 24(b) of the I. T. Act, inspite of the fact that the property under question was not constructed.
2. On the facts and circumstances of the case, the CIT (A) has erred in deleting the addition of Rs. 2,59,27,998/- made by the AO, on account of suppressed Cross Profit Margin.
3. On the facts and circumstances of the case, the CIT(A) has erred in restricting the addition of Rs. 98,21,762/- made by AO u/s 40(a)(ia) of the I.T. Act to Rs.35,87,182/- inspite of the
The grounds taken by the assessee in are as under:
“1. That Ld. CIT (A) has erred in confirming addition on account of Freight Expenses of Rs.31,14,549/- u/s 40(a)(ia) of the Income Tax Act, 1961 without considering the submissions made during the appellate proceedings that the payments have been have already been shown by the parties in their respective Income Tax Returns and disallowance have been wrongly made in contrary to the provisions of the second proviso to Section 40(a)(ia) read with provisions of first proviso to Section 201(1) of the Income Tax Act, 1961, so it is liable to be deleted.
2. That Ld. CIT (A) has erred in confirming addition on account of Postage & Courier Expenses of Rs.1,32,583/- u/s 40(a)(ia) of the Income Tax Act, 1961 without considering the submissions made during the appellate proceedings that have already been shown by the parties in their respective Income Tax Returns and disallowance have been wrongly made in contrary to the provisions of the second proviso to Section 40(a) (ia) read with provisions of first proviso to Section 201(1) of the Income Tax Act, 1961, so it is liable to be deleted.
3. That Ld. CIT (A) has erred in confirming addition on account of Legal & Professional Charges of Rs.3,40,050/- u/s 40(a)(ia) of the Income Tax Act,1961, without considering the submissions made during the appellate proceedings that the payments have been made to different persons/small payments to different persons, so it is liable to be deleted.”
Disallowance of deduction u/s 24(b):
The AO had disallowed the claim on the basis of the Inspector’s report that the premises were demolished and the construction work was being done. (Ref: Para 2 and 2(a) of Asst Order). The report of the Inspector was for the FY 2011-12 whereas the claim pertained to the self occupation of the property during the FY 2008-09 when the premises was under self occupation: The CIT(A) has allowed the claim duly appreciating this fact. The relevant para on Page 49 of the Order of CIT(A) is as under:
The submissions of the appellant have been considered and in the instant matter, it is seen that the AO has relied upon the report of ITI submitted during the assessment proceedings i.e. in the year 2011, whereas the deduction has been claimed by appellant for the Financial Year 2008-09. The Appellant on the other hand submitted the Telephone Bills for Mobile, as well as Fixed Connection installed at the same premises supporting his view that the appellant was residing in such property during the period under appeal. Based on the facts and submissions made above, the appellant has made his point with supporting evidences that the property was inhabitable condition during the period relevant to A.Y. 2009-10 and therefore, the appellant has correctly claimed the deduction. In these facts and circumstances, the claim of the appellant is found to be correct and therefore, the AO is hereby directed to allow the deduction of Rs. 1,50,000/- as claimed by the appellant in his income tax return, as per the provisions of Section 24(b) of the Act. The Ground no. 3 is accordingly allowed.
It is submitted that in view of the above there is no merit in the ground raised by the Revenue and it is prayed that the same may kindly be dismissed.
GP Addition on Enhanced Turnover:
It is submitted that the assessee has a proprietary concern by the name M/s K.K. Enterprises which is engaged in manufacturing as well as trading in carpets and durries. The assessee during the year has earned a Gross Profit of Rs.2,89,72,002/- on gross sales of Rs.44,57,14,638/- and declared Net Profit from business at Rs.44,43,821/-.
The GP rate for manufacturing was 22.01% for the relevant Previous Year as compared to 25.15% in the immediately preceding assessment year. Similarly the GP rate for trading activity was 2.24% as against 5.21% for the immediately preceding assessment year. [GP figures at para-8 of AO] The combined GP rate for the relevant assessment year was 6.5% as against 18.80% in the immediately preceding assessment year.
The AO compared the combined GP rates achieved by the assessee and called for explanation on the fall in GP. Dissatisfied with the explanation and submission made by the Assessee, the AO rejected the books of account and estimated the GP for the current year at 9% [para-15 of AO], He also enhanced the total turnover to Rs.61,00,00,000/- on an estimate basis [para-14(b) of AO].
A.Y. 2007-2008 2008-09 2009-10 F.Y. 2006-07 2007-08 2008-09 Turnover 3,75,62,348/- 7,80,12,125/- 34,60,30,917/- GP In % 10.66% 9.39% 4.14%
The stand of the AO as duly summarized by Ld. CIT(A) as below:
“15.2.2.2. In the Ground, no.2, the appellant objected to the rejection of books of accounts and framing of assessment u/s 144 of the Act and Ground no, 4 is with regard to enhancement of Gross Profit by an amount of Rs.2,59,27,998/-.
The appellant during the instant year has been in the business of manufacturing and trading of carpets and durries under the name & style of M/s K.K. International. The appellant during the year has shown Gross Sales and Gross Profit of Rs.44,57,14,638/- and Rs.2,89,72,002/- respectively. Net Profit from business has been shown at Rs.44,43,821/-. The AO compared the Gross Profit for the current year with the preceding two years and observed that Gross Profit has marginally declined to 6.50% during the year in comparison to the previous year G.P. ratio of 18.80%, whereas Turnover has increased more than 3 times in comparison to figures for previous year. The AO asked the appellant for the reason for decline in Gross Profit ratio, whereby the appellant submitted that due to tough competition and serious international financial/ trade problems, appellant has been forced to lower its 9 6829 & 6831/Del/2019 Ritu Mishra margins and thereby there has been decline in GP ratio. It was also submitted by the appellant that due to higher trading sales; Gross Profits have been lower because Gross Profits in case of sale of manufactured products, are generally higher in comparison to trading sales. The AO not satisfied with the explanation of appellant observed that appellant has not exporting any of its products and all its buyers are indigenous buyers and therefore, there should not be impact of any international financial/trade problem. The AO further observed that there is no negative impact on the turnover of appellant as the same has increased by almost 3.5 times in comparison to immediately preceding previous year and the percentage realization to total sale is better and there have been no negative impact on the business of appellant.
The AO in order to examine the reason for decline in Gross Profits and in order to verify the purchases, sales and closing stock for the year under consideration, asked the appellant to submit the details. Based on the item wise details of purchase, sales and closing stock and details of profit & loss account for the three financial years filed by the appellant, the AO observed that there has been marginal increase in the purchase rate, which has been compensated by the increase in sale value and increase in the cost of raw material is marginal. For instance, the AO has observed that the carpet Malai Dori 10/14 Jaipur has been purchased at @ Rs.3,500/- per mtr. in A.Y.2008.09 whereas the purchase price for the current year of the said item has been at Rs. 3,410/- per mtr. and Malai Dori Item has been sold in the preceding previous year at price of Rs. 3,682.35 per unit whereas in the year under consideration, the sale price per
10 6829 & 6831/Del/2019 Ritu Mishra unit is Rs.4,311.95. Thus, the AO observed that sale price of one of the major item has increased and better than the immediate preceding previous year.
The AO further observed in the assessment order that the closing stock of 5832.127 mtr of wool durries has been shown @ Rs.862.76 per mtr., whereas the average purchase rate of this item is Rs. 781.25 per mtr. Thus, the value of closing stock shown is not correct since in no case the value of closing stock can be less than the purchase value meaning thereby the closing stock of Wool Durries (FCM) have been undervalued by atleast Rs.81.51 per sq, mtr. [862.76-781.25] and by this way alone the GP has been suppressed by an amount of Rs.4,75,376/- [81.51 x 5832.127].
The AO has further observed that there has been a number of instances proving that the figures given by appellant is incorrect. The AO noted that the details of expenses incurred under the head finishing charges, washing charges and weaving charges shows that all the expenses have been incurred in cash and the appellant during the course of assessment proceeding has neither produced cash book nor the bills of purchases & sales and also pertaining to the expenses debited. The AO also compared the Gross Profit of appellant with Shri Satish Kumar Gupta, other assessee engaged in the similar trade and has shown Gross Profit of 10.09%, alongwith Gross Profits of Shri Swadesh Kumar Mishra, husband of appellant having Grogs Profit @ 10.66 and @ 9.39% for A.Y.2007-08 and A.Y.2008-09 respectively. The AO thus stated that this prove that artificial decline in the gross profit has been reported by appellant. The AO thus show caused the appellant to invoke the provision of 11 6829 & 6831/Del/2019 Ritu Mishra section 145(3) of the Act by rejecting the books of accounts and proposed to estimate the Gross profit @ 15% on the turnover shown by appellant in her financial statements. The AO on various occasions reiterated that despite of asking time to time to produce the books of accounts, however, the books were not produced by the appellant during assessment proceedings.
The AO further compared the quantity and rates of appellant and her husband Shri Swadesh Kumar Mishra and observed that items worth Rs. 19.26 Crores have been bought by appellant from M/s S.K. Enterprises, proprietorship concern of Sh. Swadesh Kumar Mishra. It has also been observed that despite the fact that almost half of the purchases have been made from M/s S.K. Enterprises, neither the quantity nor the price of any item is same in case of both the parties and thus, the AO was fortified that the details of purchases/sales shown by the appellant are not correct. The AO further observed that the details of purchase made by the appellant from her husband's proprietorship concern i.e. M/s S.K. Enterprises has not been reported in the Tax Audit Report u/s 40A(2)(b). The AO further produced the details of purchase, sales and closing stock which have been reproduced as under:
12 6829 & 6831/Del/2019 Ritu Mishra Pa rt i cula rs Ope n ing Bal an ce Pur cha se /ma nu fa ctu red Sale /co ns u med C lo sin g bal an ce Quant Ra te Value Quant it y Ra te Value Quant it Ra te Value Quant it y Ra te Value ity y C arpe ts Tra din g 10. 5 /48 1.9 60 500 0. 980 0.00 1.9 60 500 0. 980 0.00 MT R mt rs 00 mt rs 00
0.5 40 380 0. 205 2.00 0.5 40 380 0. 205 2.00 12 /1 2 mt rs 00 mt rs 00 JA IP UR 2.4 00 550 0. 132 00 .0 2.4 00 550 0. 132 00 .0 12 /6 0 mt rs 00 0 mt rs 00 0 KASHA N 18 /1 8 SI L K
409 .5 2 225 0. 921 42 0. 409 .5 225 0. 921 42 0. 4/25 0 mtr s 00 00 20 mtr s 00 00 GABB EH 5/28 152 0.0 500 2. 760 30 40 500 4. 760 60 80 152 0.0 GABB EH 00 mtr s 00 .00 00 .00 00 mt rs 5/40 3.9 20 380 0. 148 96 .0 3.9 20 380 0. 148 96 .0 BI DJA R mt rs 00 0 mt rs 00 0 9/54 0.9 80 550 0. 539 0.00 0.9 80 550 0. 539 0.00 BI DJA R mt rs 00 mt rs 00 9/60 2.8 00 330 0. 924 0.00 2.8 00 330 0. 924 0.00 KASHA N mt rs 00 mt rs 00 NA PA L I 231 0. 141 31 87 535 3. 134 81 33 143 .0 0 531 0. 759 33 0. 251 8.3 266 1.3 00 4.0 0 20 8.2 9 00 00 70 70 mtr s mt rs TUF FT 149 2.8 428 7. 639 97 28 149 2.8 428 7. 639 97 28 ED 00 mtr s 00 .43 00 06 .43 mt rs WO O L E N 284 .0 319 78 4. 112 6. 284 .0 319 78 4. 112 6.0 HAN D 0 00 000 mtrs 0 00 00 mtr s TUF FE D 10 /1 4 341 0. 656 38 94 370 0. 696 26 96 42. 64 9 341 145 46 6. 188 1.8 192 4.4 Ja ipu r 77 .65 00 .28 mt rs 0.7 7 01 11 60 mtr s (Dur ry) mt rs C HI N D I 220 0. 241 56 .0 10. 98 0 220 241 56 .0 10. 98 0 D URRY 00 0 mt rs 0.0 0 0 mt rs HAN D 198 .6 0 260 0. 516 36 0. 198 .6 00 260 516 36 0. LOO M 0 mtr s 00 00 mt rs 0.0 0 00 JUTE 230 0. 133 88 3. 58. 21 230 133 88 3. 58. 21 0 D URRY 00 00 0 0.0 0 00 mt rs
13 6829 & 6831/Del/2019 Ritu Mishra MAL A I D OR I 170 2. 350 596 01 430 5. 174 41 90 431 1. 179 68 61 16. 67 5 430 235 34 3 405 15 . 416 71 . 890 0.0 0 35. 00 00 89. 74 95 45. 60 mt rs 5.0 0 5.8 8 468 683 mt rs mt rs SAG GY 450 0. 175 31 55 .. .5 9 0 450 175 31 5 389 .5 9 00 .00 mt rs 0.0 0 5.0 0 0 mtr s TWIS T E D 260 0. 424 32 .0 16. 32 0 260 424 32 .0 16. 32 0 D URRY 00 0 mt rs 0.0 0 0 mt rs Mi x F ab ri c 607 8.0 170 .0 103 32 60 875 56 8. 607 8. 170 . 103 32 6 00 mtr s 0 .00 00 000 mtrs 00 0.0 0 Fa bri c 87. 00 875 56 8. 87. 00 938 45 18 100 64 . 100 64 . 00 nnn nnn mt rs mt rs Fa bri c 622 61 135 .5 843 64 60 622 61 135 .5 310 36 28 (P ol ye ste r ) 7 ya rd 0 3.5 0 7 ya rd 0 79. 77 TOTA L 596 01 299 15 68 608 25 75 805 72 6 (A ) 35. 00 27 9 3 MA N UFACT UR I NG DE TA ILS W o ol d Durr y 502 08 195 .3 980 63 84 502 08 195 .3 980 63 84 (FC M ) 4 136 9.2 2 4 136 9.2 2 781 .2 980 63 84 113 0. 135 35 17 862 . 503 17 3 125 52 119 68 583 2. 5 9.2 2 85 58. 48 76 6.1 1.7 27 9.6 00 127 mtrs MT RS mt rs 130 89 0 00. 00 TOTA L 196 12 76 233 41 56 503 17 3 (B ) 98. 4 07. 68 6.0 0 GRA N D 596 01 495 28 45 842 04 13 130 89 0 TOTA L 35. 00 25 67 00 (A +B )
The AO based on the above details, observed that whereas the total of opening and closing stock tallies with the value shown in the trading account, but the value of total of purchases and sale have been totally different from the figures shown by appellant. The total value of purchase & sales as per chart prepared by AO comes to Rs.29,91,56,827/- &.
14 6829 & 6831/Del/2019 Ritu Mishra Rs.60,86,25,759/-, whereas in the trading A/c, these figures have been shown at Rs.39,72,20,676.24 & Rs.44,57,14,638.25 respectively. Further, adding the figures of items purchased for manufacturing i.e. 'Wool Durry (FCM)' of Rs.9,80,63,849/- and another item (not named) ofRs.9,80,63,849/-, the value of total purchases will be Rs. 49,52,84,525/- and adding the value of corresponding sale of these two items will make the gross sate to Rs.84,20,41,367/-. Even if Wool Durry (FCM) and another unnamed item is considered as consumed for manufacturing, then also the gross turnover is Rs.60,86,25,759/-, as against the total sales reported at Rs.44,57,14,368/- in the trading account.
In view of the above, the AO concluded that the quantity and value of purchases and sales are found to be incorrect and the appellant has also suppressed the turnover. Considering the above and factors discussed above, the AO invoked the provisions of Section 145(3) of the Act and rejected the trading results shown by appellant and estimated the turnover of appellant from the business of carpet trading & manufacturing at Rs. 61 crores. The AO further considering the increase in sales and other factors also estimated the Gross Profit @ 9% and applying the Gross Profit rate @ 9% on the turnover of Rs. 61 Crores determined the Gross Profit at Rs.5,40,00,000/- and thereby made addition to the tune of Rs.2,59,27,998/- to the income of appellant.
The submissions of the appellant made before the Ld. CIT(A) as summarized in the appellate order are under:
15 6829 & 6831/Del/2019 Ritu Mishra “During the appellate proceedings, the AR of the appellant made written as well as oral submissions, which have been carefully considered. The AR submitted that all the details and documents were submitted during the assessment proceedings. However, the same were ignored by AO and in some cases wrongly adopted the figures to show that the details filled were incorrect, in order to show that the books of accounts maintained by the appellant are incorrect and to make additions in hands of appellant by rejecting the books of accounts and estimating the turnover as well as Gross Profit of appellant taking imaginary figures based on wrong facts and wrongly typed details.
The appellant further submitted that in para 6(b) and 6(c) of the assessment order, the AO has compared the purchase price of item 10/14 Jaipur of current year of Rs.3410/- per mtr. with the purchase price of item Malai Dori 10/14 Jaipur Rs.3500/- per mtr. for preceding previous year whereas the sale price of Rs.3682.35 per unit of same item Malai Dori 10/14 Jaipur for previous year has been compared with the other item i.e. Malai Dori having sale price of Rs.4311.95, whereas the item 10/14 Jaipur has sale price of Rs.3700/- per unit and the AO has compared the current year sale price of Rs.4311.95 with previous year sale price of Rs. 3 700/-, but not compared the current year purchase price of Rs.4305/- with the previous year purchase price of Rs.3500/-, which shows that the purchase price of the item has been increased by Rs. 805/- per mtr, whereas the sale price has been increased by only Rs. 611.95 per mtr., which has ultimately the main reason for, decline in Gross Profit for the current year in comparison to the preceding previous year. The appellant alleged that the AO manipulated the figures by taking wrong figures to reject the books of appellant and to make additions in her hands.
The appellant has further submitted that the AO has in para 6(e) of assessment order has observed that Closing Stock of 5832.127 mtr. of Wool Durry has been shown at Rs.862.76 per mtr. whereas the Avg. purchase price of such- item is Rs. 781.25 per mtr. and closing stock price has been lower against the avg. purchase price by Rs. 81.51 per mtr. which is not possible and therefore, books of accounts are wrongly maintained, whereas after careful examination of figures, it is found that amount of Rs.862.76 at which closing stock has been valued, is infact
16 6829 & 6831/Del/2019 Ritu Mishra higher in comparison to the Avg. Purchase Price of Rs. 781.25 Mtr. The appellant thus alleged that the AO just for the sake of making additions in the hands of appellant made wrong observations for rejecting the books of accounts and estimating the turnover and Gross Profit results just to make exorbitant additions in the hands of appellant.
The appellant has further submitted that the expenses, such as finishing charges, washing charges and weaving charges have been paid in cash and submitted that such type of bigger manufacturing unit, manufacturing Dari & Carpet, conversion of thread to making of Dari & Carpet, cannot run without involvement of human intervention. It has been submitted that the unit of the appellant is highly labour intensive and the labour is required for washing, dying, weaving & other so many activities required to make the products saleable and marketable and in this regard, the appellant produced the ledger accounts of these expenses as submitted during the assessment proceedings and as discussed in the assessment order. The appellant further submitted that the books of accounts were duly audited by the Chartered Accountant as per the provisions of Section 44AB of the Income Tax Act and submitted during the assessment proceedings, whereas the AO ignored the books of accounts and keeps on stating in the assessment order that books of accounts were not produced, it was also submitted that the act of AO rejecting the books of accounts is contrary to the provisions of law and illegal.
The Appellant further submitted that the Gross Profit result of appellant are not comparable to the Gross Profit results of other assessees i.e. Shri Satish Kumar Gupta and M/s S.K. Enterprises, proprietorship concern of Sh. Swadesh Kumar Mishra, husband of appellant because Shri Satish Kumar Gupta has been in the business of trading of carpets, whereas the appellant has been in the business of manufacturing as well as trading of Durries and carpets. It was argued that source of raw material and the destination of end product very much matters in this field, as Shri Satish Kumar Gupta is an exporter where the profit margins are generally higher whereas the appellant has its buyers based in India, who are also traders and therefore, margins in case of appellant are low due to business to business transactions. Therefore, comparison of appellant gross profit results with other assessee i.e. Shri Satish Kumar Gupta could not be 17 6829 & 6831/Del/2019 Ritu Mishra made as their business is not comparable at all. Further, it was submitted that the AO has been comparing the Gross Profit of appellant of current year i.e. A.Y.2009-10 with the Gross Profit ratios for the A.Y.2007-08 and A.Y.2008-09 of M/s S.K. Enterprises, which are not comparable as every year is a separate year having different circumstances and markets and therefore, not comparable at all. The appellant with regard to the observation of AO that the purchases made from M/s S.K. Enterprises (proprietorship concern of husband of appellant) has not been disclosed in the Tax Audit Report as required u/s 40A(2)(b) of the Act, has submitted that the appellant has made purchases from the relative party M/s S.K. Enterprises and Gross profit ratio of appellant has been higher than of M/s S.K. Enterprises, which shows that appellant has been on better footings and purchases have been made at Arm's length price.
The appellant further submitted that the while typing the item-wise details of purchase, sales and closing stock, the AO wrongly typed the details, where some figures have been missed out and some figures have been misquoted in wrong rows against different items, sub-totals have been again considered in total alongwith other individual items and thus, the appellant submitted the correct details, reproduced hereunder:
Particulars Opening Balance Purchase/ Sale/consumed Closing balance manufactured Quan Rate Value Quanti Rate Value Rate Value Quant Rate Value Quanti tity ity ty ty Carpets Trading 10.5/48 1.960 5000 9800.00 1.960 5000 9800.00 MTR mtrs . mtrs . 00 00 12/12 0.540 3800 2052.00 0.540 3800 2052.00 JAIPUR mtrs . mtrs . 00 00 12/60 2.400 5500 13200.0 2.400 5500 13200.0 0 KASHAN mtrs . 00 0 mtrs . 00 18/18 SILK 4/25 GABBEH 409.5 2250 921420. 409.5 2250 921420. 20 . 00 0 0 20 . 00 00 mtrs mtrs
18 6829 & 6831/Del/2019 Ritu Mishra 1520. 5002 760304 1520. 5004 760608 5/28 GABBE 000 .00 0.00 000 .00 0.00 H mtrs mtrs 5/40 3.920 3800 14896.0 3.920 3800 14896.0 0 BIDJAR mtrs . 00 0 mtrs .00 9/54 0.980 5500 5390.00 0.980 5500 5390.00 BIDJAR mtrs . 00 mtrs .00 9/60 2.800 3300 9240.00 2.800 3300 9240.00 KASHAN mtrs . 00 mtrs .00 NAPALI 2661. 2310 141318 2518. 5353 134813 143.0 5310 759330. 370 . 00 74 .00 370 .20 38 .29 0 .00 00 mtrs mtrs TUFFTED 1492. 4287 639972 1492. 4287 639972 800 .00 8.43 800 m .06 8.43 mtrs trs WOOLEN 1126. 284. 319784. 1126. 284. 319784.00 HAND TUFFE 000 00 00 000 00 D mtrs mtrs Durry 10/14 Jaipur 1924. 3410 656389 1881. 3700 696269 42.64 3410 145466.01 (Durry) 460 .77 4.65 811 .00 6.28 9 .77 mtrs mtrs mtrs CHINDI 10.98 2200 24156.0 10.98 2200 24156.00 DURRY 0 mtrs .00 0 0 .00 mtrs HAND LOOM 198.6 2600 516360. 198.6 2600 516360.00 00 .00 00 00 .00 mtrs JUTE DURRY 58.21 2300 133883. 58.21 2300 133883.00 0 mtrs .00 00 0 .00 MALAI DORI 1702. 3500 59601 40515 4305 174419 41671 4311 179686 16.67 4305 2353435 .88 890 .00 35.00 .468 .00 089.74 .683 .95 145.60 5 .00 mtrs mtrs mtrs SAGGI 389.5 4500 175315 389.5 4500 1753155.00 90 .00 5.00 90 .00 mtrs mtrs
19 6829 & 6831/Del/2019 Ritu Mishra TWISTED 16.32 2600 42432.0 16.32 2600 42432.00 DURRY 0 mtrs .00 0 Omtr .00 s Mix 6078. 170. 103326 6078. 170. 1033260.00 Fabric 000 00 0.00 000 00 mtrs mtrs Fabric Cloth 10064 87.0 875568. 10064 87.0 875568. .000 0 00 .000 0 00 mtrs mtrs Fabric 62261 135. 843646 62261 135. 938451 7 yard 50 03.50 7 yard 50 82 The appellant submitted that from the comparison of the two tables, it could be found that the AO while typing the figures in the assessment order, has wrongly typed the figure of Sale of Carpet "Napali" of Rs.1,34,,81,338.29 as Rs.13,81,338.29, where digit of 4 at 3ra place from left, has been omitted to be typed. The sate figure of item Fabric Cotton of Rs.8,75,568/- has been wrongly typed against sale of "Mix Fabric ”, whereas there have been no sale of item “Mix Fabric" as the total quantity of purchase of6078 mtrs. have been shown as Closing Stock, Similarly, the sale figure of item Fabric (Polyster) " of Rs.9,38,45,182.80 has been wrongly typed against sale of "Fabric Cotton”, whereas the sale of Fabric Cotton has been only Rs.8,75,568/- in comparison to the Qty. and rate of sale of item. Further, the Appellant submitted that the AO has taken the total of Trading Sale of Rs.31,03,62,879.77, as the sale of item "Fabric (Polyster)" instead of sale of Rs.9,38,45,182.80 and thereby making the sub-total of trading sale at Rs. 60,86,25,759/-, instead of correct sale of Rs.31,03,62,879.77. Again, the AO taken the amount of manufacturing purchase of Item "Wool Durry (FCM), of Rs.9,80,63,849.22, as sale whereas the said amount has been transferred to Sale in next row as purchases/manufactured and then the item has been sold at sate price of Rs.13,53,51,758.48; however, the Ld. AO considered the above said amount of Rs.9,80,63,849.22 twice in purchase and wrongly in Sales, whereas the said amount has been purchased and transferred to manufacturing in next row and therefore, the Ld.AO increased the amount of purchases and sales by Rs.9,8063,849.22 and further increased the Thus, the reconciliation of Sales is submitted as under:
Particulars Amount (Rs.) Turnover determined by AO 84,20,41,367.00 Add: Sales decreased due to 1,21,00,00.00 omission of digit “4" (1,34,81,338.29 - 13,81,338.29) Less: Sub-total wrongly considered 31,03,62,879.77 in total Less: Amount of Purchase of Raw 9,80,63, 849.22 Material transferred to Manufacturing Sales Shown in Trading Account by 44,57,14,638.01 appellant The AR of the appellant, based on the submission made above, argued that the appellant has submitted the correct details duly matching with the figures as stated in Financial Statements, whereas the AO has wrongly typed the said figures and based on such wrongly typed figures, the invoking the provisions of Section 145(3) of the act and rejecting the books of accounts is not only illegal and against the provisions act but void ab initio. The AR submitted that all the details, such as books of accounts, bills and vouchers were duly produced by appellant during assessment, as well as appellate proceedings and from the details of item- wise purchase and sales, it can be found that purchase and sales have been duly matching with the Financial statements filed for the year under consideration, payments made to labour have been purely business expenses, where payments have been made on daily basis to labourers, stock has been valued at cost based on the purchase prices at FIFO basis, including expenses incurred on manufacturing and therefore, the AO has wrongly rejected the books of accounts of appellant and estimation of sales at Rs. 61 Crore and estimation of Gross Profit @ 9% is erroneous, which is without any basis and is only an assumption of A.0 and additions
21 6829 & 6831/Del/2019 Ritu Mishra could not be made based on the assumptions and presumptions. The appellant submitted that all these details and documents were submitted to the AO, but he has considered the good proof as no proof and violating the judgment pronounced in the case of Sreelekha Boner gee Fs. CIT (1963) 49ITR 112 (SC) wherein the department cannot, by merely rejecting unreasonably a good explanation, convert good proof into no proof. It was also submitted that contention of the AO has been out of his whims and conjunctures and has been made purely on the basis of suspicion, which is not permitted in the view of the decision of Apex Court in the case of Dhakeswari Cotton Mills Ltd vs. CIT 26 ITR 775, 782 (SC). Based on the above submissions, the appellant finally submitted that books of accounts of appellant have been wrongly, rejected and estimated additions are liable to be deleted.”
As may be noted the main allegation against the appellant was decline in GP Rate from 18.80% in the immediately preceding year to 6.5% for the current A.Y. 2009- 10. The AO was not satisfied with the explanations given by the assessee. However, he did not find any defects in the books of accounts produced before him. The AO’s effort throughout the assessment order has only been to point out supposed deficiencies in the appellant’s explanations. He had not find any suppression of sales or inflation of expenditure from the details available before him. Even though all the details of the parties for purchase and sales as well as purchase and sales register and all the relevant documents were produced before him, the AO did not make any enquiries with the suppliers or with the buyers. It is submitted that all the observations made by the AO have been found to be defective and made on the basis of wrong assumptions - be it on the lowering of the margin in order to achieve higher sales margin or non-availability of discount details or on method of valuation of closing stock or on 22 6829 & 6831/Del/2019 Ritu Mishra the comparison of GP Rates of concerns of Shri Satish Kumar Gupta or of appellant’s husband or the supposed mismatch between the quality and quantity of goods purchased by appellant and as per books of her husband etc. The AO has rejected the books based on wrong details and based on wrong observations such as observing the closing stock at average price of opening stock and purchases instead of at cost or net realizable value. He has rejected the book on the basis of wrong comparables whose business profile as well as supplier and customer base were not comparable to that of the appellant. In these circumstances the Ld. CIT(A), it is respectfully submitted, has rightly allowed the grounds relating to rejection of books of accounts and enhancement of Gross Profit and Gross turnover.
Apart from relying upon and reiterating, before this Bench, the submissions made before the Ld. CIT(A) as summarized by her, the Respondent herein made the following submissions for kind consideration of the Bench: a. It is submitted that the AO has passed the Assessment order without considering the detailed submissions made and explanations given for the fall in GP rate from 18.98% in AY 2007-09 and 18.80% for AY 2008-09 to 6.5% for the relevant AY 2009-10. b. The AO completely ignored the important fact that the turnover for the year had gone up by almost 3.5 times from Rs.13.4 crore to Rs. 44.5 crore and while achieving such a huge rise in a short period, the gross profit margin was bound to be affected. The turnover had increased from Rs.13,42,96,583/- for the A.Y. 2008-09 to Rs.44,57,14,638/- for the current A.Y.
23 6829 & 6831/Del/2019 Ritu Mishra c. The AO also completely ignored the submissions that the trade margin had come down due to focus given to increasing the sales volume and also due to tough competition in the industry. Even though the Assessee time and again submitted that he had not allowed any discount in the bills, but, at the time of accepting the purchase order he had agreed to lower the price so as to increase the sales volume, the AO kept on reiterating that the discount allowed by the assessee was not available. d. The AO has typed the wrong figures in the chart reproduced by him in the order as duly submitted before the Ld CIT(A) and reproduced by her at pages 7 & 8 and pages 14-16 of her order and thus made wrong inferences regarding the correctness of the accounts. e. The basic hypothesis of the AO that the increase in purchase price of items has been compensated by corresponding increase in sales prices was ill founded as for example in the case of Item 10/14 Jaipur the sale price per unit for the current year increased only by 611.95 per meter where as the Purchase price for the same item had increased by Rs.805 per meter as duly explained in Para third para from top on page 8 of Ld CIT(A) order which is one the main reasons for decline in GP rate. f. The AO also wrongly kept on ignoring the settled accounting principle of valuation of closing stock. He held that the value of closing stock inventory can never be less than the average purchase price. This stand of the AO is contrary to the ICDS-II “Valuation of inventories” of Income Computation and 24 6829 & 6831/Del/2019 Ritu Mishra Disclosure Standards (ICDS) issued by the Government of India in exercise of powers conferred to it under section 145(2) of the Act according to which the stock can be valued at cost or at net realizable value, whichever is lower. The AO ignored the fact that accounting has been done, as per the regular accounting system followed by the assessee and there was no question of adopting average purchase price for valuation of the closing stock. The appellant had valued the closing stock at lower of the cost or the market value on FIFO basis whereas the AO has determined the closing stock of durries taking average of opening stock and purchases during the year. Thus he had adopted incorrect figures and methods for valuing the closing stock in order to make out the case for rejecting books of accounts. It is submitted that the AO had again and again considered the wrong details which were submitted due to clerical mistake and even after submitting the correct inventory and purchase details, the AO has kept on adopting the incorrect figures. g. As already submitted, the appellant’s concern was engaged in manufacturing as well as trading activity. The AO completely went wrong in adding the sale value of manufacturing with the sales in the trading account again and thus holding that the sales figure and purchase figures do not tally with the figures given in Form 3 CD report. Further, in spite of intimating him that there was a mistake in the details and in spite of submitting the correct details, the AO kept on adopting the old figures in order to make out a case for rejection of books of account.
25 6829 & 6831/Del/2019 Ritu Mishra h. It is submitted that the AO wrongly compared the appellant’s GP rate with that of other business entities whose business profiles were not comparable. The AO has completely ignored the submission that the assessee’s business involved both manufacturing and trading of carpets and durries, whereas, Shri Satish Kumar Gupta, who’s GP rate had been compared with that of the Appellant, was in the business of trading of carpets. Further he also ignored the fact that Shri Satish Kumar Gupta was an exporter of carpets and his profit margins are generally higher than that of the appellant, who's buyers were based in India. The AO also wrongly compared the appellant’s GP rate with that of her husband’s concern ignoring the submission that his business profile was completely different. The raw materials used in the business of the appellant and that of her husband, as well as the sources of those raw materials were different and hence the results were not comparable. AO ignored his own finding that almost half of the husband’s sales were to the assessee’s concern which would mean that the finished products of her husband’s business were the raw materials for the appellant’s business and thus the two cannot be comparable. i. The AO was also wrong in holding that even though almost half of the sales of her husband’s concern were made to appellant, the quantity and value of any of the items was not matching. The AO tried to compare the banner products (broad classification of the goods), viz., Carpets and Durries mentioned in her husband’s sales ledger with the individual items mentioned in the inventory details of the appellant’s concern. He thus arrived at wrong conclusions.
26 6829 & 6831/Del/2019 Ritu Mishra j. As noted by Ld, CIT(A) in her order, the AO has held at various places in the assessment order that the Assessee did not produce books of accounts which is factually incorrect as the same were duly produced before him during the assessment proceedings as also during the remand /appeal proceedings. The Appellant had also produced the purchase and sales register and bills and vouchers for verification by the AO. The appellant had also produced various details as called for u/s 142(1) of the Act though the Counsel had taken some time to submit all the required details. In the remand report, the AO has changed his stand on submission of books of accounts and bills and vouchers and has submitted that the assessee had not produced the purchase and sale bills for verification. k. It is submitted that all the above aspects have been rightly appreciated by the Ld CIT(A) who has allowed the ground with the following operational portion of her order:
“I have carefully considered the assessment order passed by AO and submissions made by appellant. In this case, the AO has rejected the books of appellant based on the wrongly typed details, wrong- assumptions such as observing closing stock price lower than the purchase price, whereas the facts were opposite, based on wrong comparable such as comparing the purchase price of two items with Sale Prices of different items and therefore, the AO has been on wrong, footings while rejecting the books of accounts and estimating the turn over as well as a Gross Profit, whereas the AO could not pointed out a single instance proving that the sales have been outside books of account. In these facts and circumstances of the case, I am of the considered opinion that rejection of books of account is not correct based on wrong figures adopted by AO and consequently addition made on estimate basis alleging suppression of sale and Gross profit .is not correct accordingly additions made by AO of. Rs.2,59,27,998/- is hereby deleted.
Having heard the arguments of the ld. DR who relied on the Assessment Order, we find no mistake in the order of the ld. CIT(A) in deleting the addition made erroneously on account of the GP.
Disallowance u/s 40(a)(ia):
The disallowances u/s 40(a)(ia) made by the AO which were deleted by Ld CIT(A) are as under: a. Repairs and maintenance - Rs.8,16,850/- b. Printing and stationary - Rs.5,13,090/- c. Packing charges - Rs.24,35,500/- d. Watch and ward - Rs.7,05,190/- e. Rent expenses - Rs. 17,64,000/-
We find that the Ld. CIT(A) has rightly appreciated that the payments made by the Appellant mentioned at “a, b and c” above were in the nature of purchase of materials and the payment mentioned at “d” and “e” were made to different persons and were below the limits prescribed under section 192B and 1941 of the Act. [Ref: middle para on page 69 of order of CIT(A).].
Hence, there is no merit in the grievance of the Revenue.
The ld. CIT(A) confirmed the following additions / disallowances made by the AO:
a. Disallowance of Freight expenses u/s 40(a)(ia) - Rs.31,14,549/- Postage and Courier expenses u/s 40(a)(ia) -Rs. 1,32,583/- Legal and professional charges u/s 40(a)(ia) - Rs.3,40,050/-
The submissions of the ld. AR are as under:
a. Freight expenses: Even though the payment towards freight expenses were made to a number of persons / transporters, mini tempos, hand carts, thela walas, however only one person’s name was mentioned in the voucher giving all the break up as annexure. However, while preparing the data for submission before the AO, the staff had not understood the gravity of the issue and had submitted the payments as made to the single person appearing in the voucher. The same was discovered when the AO raised the query, and the figures had been submitted before the AO which have not been properly appreciated by the AO and the Ld. CIT(A). b. Postage and Courier expenses: As regards the Postage and Courier expenses the same had been incurred in amounts ranging from Rs. 100-200 on Blue Dart, DHL or First Flight [Ref: table above at Para-16(a) of the assessment order and 4th para from top on Page 52 of order of Ld. CITA(A)]
29 6829 & 6831/Del/2019 Ritu Mishra and there was no party-wise accounts maintained in the books as these were incurred on the spot in cash as a petty expenditure. This submission was also not properly appreciated by the AO and the Ld. CIT(A). Further the parties involved are big courier companies and they would have certainly accounted for the receipts in their income and hence second proviso to section 40(a)(ia) r.w.s 201(1) of the Act are clearly applicable which was not looked into by the Authorities below. c. Legal and professional charges: The commission paid to an individual for procuring order, the remuneration paid to Auditors and the fees paid towards legal advice etc have not been appreciated in the proper perspective by the AO as well as the Ld CIT(A).
Further, even in respect of these payments the second proviso to section 40(a)(ia) r.w.s 201(1) of the Act are clearly applicable which was not looked into by the Authorities below. The said proviso is applicable retrospectively from 2005.
The Ld. CIT(A) has rejected the submission w.r.t. applicability of 2nd proviso to section 40(a)(ia) r.w.s 201(1) of the Act by holding that the same was not applicable to AY 2009- 10 as the same was effective w.e.f. 01.04.2013 [last page of order of CIT(A)]. i. The 2nd Proviso to Section 40(a)(ia) of the Act r.w. Proviso to Section 201(1) of the Act provides that disallowance of expenses under Section 40(a)(ia) of the Act cannot be made unless the assessee has been treated as assessee in default under Section 201(1) of the Act for its failure to deduct tax at source. ii. In the event if the amount paid by payer have been included by the payee in its return of income for the relevant assessment year, filed under Section 139 of the Act and has paid the tax due on the income declared in such return, to the extent recipient from such assessee is included the sum in his return of income and filed the same, no disallowance under Section 40(a)(ia) of the Act can be made by the Ld. AO in view of the 2nd Proviso to Section 40(a)(ia) r.w.s. First Proviso to Section 201(1) of the Act.
The 2nd Proviso to Section 40(a)(ia) of the Act inserted by iii. Finance Act, 2012 and on furnishing of certificate in Form 26A as prescribed under Proviso to Section 201(1) r.w. Rule 31ACB of IT Rules, no disallowance under Section 40(a)(ia) of the Act can be made. However this opportunity was denied at the threshold by the authorities below.
The 2nd Proviso to Section 40(a)(ia) of the Act has been iv. inserted in the statute by the Finance Act, 2012 w.e.f. 01.04.2013 but has retrospective effect from 01.04.2005 as held by Hon’ble Delhi High Court in Commissioner of Income
With regard to the addition on account of Rs.35,87,182/- u/s 40(a)(ia), owing to the threshold of payments made on account of freight expenses, postage & courier expenses and legal & professional charges are directed to be deleted.
Owing to the adjudication in & 6829/Del/2019, the penalty levied u/s 271(1)(c) in ITA No. 6831/Del/2019 is liable to be deleted.
In the result, the appeals of the assessee are allowed and that of the revenue is dismissed. Order Pronounced in the Open Court on 19/06/2023.