INCOME TAX OFFICER vs. ASHOK KUMAR PROP. M/S CHHABRA TIMBER STORE
IN THE ITAT CHANDIGARH BENCH ‘A’
N.K. SAINI, VP & RAJPAL YADAV, JM.
ITA No. 12/Chd/2019
8 Nov, 2019
Section 36(1)(iii), 44AB, 133A, 143(1), 143(3), 144, 145(3
Asst. Year 2014-15
Tej Mohan Singh, Adv. for the Assessee.: M.P. Dwivedi, Sr. DR for the Revenue.
N.K. SAINI, VP.:
This is an appeal by the Department against the order dt. 03/10/2018 of Ld. CIT(A), Patiala.
- Following grounds have been raised in this appeal:
- In the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 1,62,66,878/- made on account of under billing of sales done by the assessee.
- In the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 1,92,346/- as he erred in appreciating the document impounded for the unaccounted sales, which the assessee was unable to reconcile with the books of accounts.
- In the facts and circumstances of the case the Ld. CIT(A) has erred in allowing relief to the assessee on account of unaccounted sales as per entries in impounded material during survey.
- It is prayed that the order of Ld. CIT (A), Patiala be set aside and that of the Assessing Officer be restored.
- The appellant craves leave to add or amend any grounds of appeal before the appeal is heard and finally disposed of.
- The facts of the case in brief are that the Assessee was engaged mainly in wholesale trading in timber and wood under the name and style of M/s Chhabra Timber Store. He also maintained a saw mill. A survey under section 133A of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’) was conducted at the business premises of the Assessee on 09/12/2013 and the inventory of physical stock found at the business premises was compared with the provisional stock as per the books of accounts. The Assessee in his return of income disclosed Rs. 24,56,010/- on account of additional stock, however the A.O. neither mentioned the same in the assessment order nor made any discussions with regard to the disclosure of stock found verified during the survey. The Assessee filed the return of income on 22/11/2014 declaring an income of Rs. 34,08,070/-. The case was selected under compulsory scrutiny as per the guidelines laid by the CBDT. The A.O. framed the assessment under section 143(3) of the Act and made the following additions.
|1.||Addition on account of understated sales by estimating actual sale price||1,62,66,878|
|2.||Unrecorded sales of 2,07,942 based on impounded documents||2,07,942|
|3.||Three other instances of unrecorded sale based on impounded documents (Rs. 65,000/- + Rs. 19125/- + Rs. 25452/-)||1,09,577|
|4.||Business expenditure disallowed||31,758|
Accordingly the assessment was framed at an income of Rs. 2,00,24,225/-.
- Being aggrieved the Assessee carried the matter to the Ld. CIT(A) and challenged the estimation of income without rejecting the books of accounts under section 145(3) of the Act and submitted as under:
“The impugned order is bad in law and not based on the facts, because:
- a) Evidently, the books of account have not been rejected yet best judgment assessment has been framed.
- b) Evidently, not even a single instance of alleged understatement of sales has been detected yet the sales have been estimated by applying some arbitrary sale rates on whims and fancies of the A. O. and
- c) Evidently, the additions of entire amount of alleged unaccounted sales have been wrongly made.
3.2. Ground of Appeal No. 2 relating to the framing of best judgment assessment without rejection of the books of account as envisaged in Sec. 144. :
At the very outset, it may be submitted that the books of account, which are being maintained through Computerised System, consisting of Cash Book, Ledger and Journal, maintained in the regular course of business, supported by the relevant bills and vouchers etc. and duly audited by the qualified Chartered Accountants were produced before the Ld. Assessing Officer and were admittedly checked by him. Neither any specific defect nor mistake or omission or commission had been pointed out therein at any stage of proceedings before the Ld. A.O. but the additions have still been made in the trading results. No positive material has been brought on record to prove the alleged under-pricing which could justify the action of the Ld. A.O. in not accepting the results of the assessee and making the impugned additions by applying some presumptive arbitrary and highly excessive sale rates. The additions made to the returned income, without rejecting the account books as envisaged in Sec. 144 of the Act, ibid, are legally invalid and deserve to be deleted.”
4.1 The Ld. CIT(A) asked the Assessee to show cause as to why the books of accounts should not be rejected in view of the non maintenance of the stock register and other errors. In response, the assessee submitted as under:
“While imported timber/wood is purchased from the parties of Gandhidham in Gujarat, indigenous/local woods are purchased from the parties of Arunanchal Pradesh, Madhya Pradesh and Himachal Pradesh. This timber/wood is segregated quality wise and size-wise. Generally, the timber/wood of medium quality (being easily marketable due to competitive sale rates) is purchased. Pertinent to mention here is the universal fact that the sale rates of timber/wood are based on the quality, size and seasoning quotients. The assessee also has his own saw mill within the business premises to cut the logs to the requirements of customers. There is nominal trading in plywood etc. also. All sales (majority of them being wholesales were made to traders) are evidenced by regularly issued sale invoices, wherein all material particulars of the purchaser, description of timber/wood sold, per unit sale rate, quantity and total sale value thereof, VAT etc. are truly recorded. The books of account/records including purchase/sale invoices, receipt and expense vouchers and supporting evidence are being maintained by the assessee in the normal course of business. The assessee is consistently following the mercantile system of accounting
2.3 The books of account/records for the Financial Year 2013-14 (relevant to the Asst. Year 2014-15), were got audited from the Chartered Accountants in view of the statutory provisions of Sec. 44AB of the Income Tax Act, 1961. Based on the Audit Report and Final Accounts extracted by the Chartered Accountants from the books of account/record, Return (containing requisite information) declaring e return was accepted u/s. 143(1) of the Act, ibid.
… During the course of proceedings, books of account/records including the purchase and sale invoices, expense vouchers etc. were produced for his examination. Various details and information relating to the business of the assessee including confirmations from certain parties regarding the transactions conducted with them during the relevant period, and on issues raised by the Ld.
A.O. during the proceedings had been furnished.”
4.2. The Ld. CIT(A) after considering the submissions of the assessee observed that the A.O. during the course of assessment proceedings asked the Assessee to furnish the quantitative and qualitative details of opening stock as well as closing stock and month wise trading account of Teak wood, Imported sawn (Assam Wood), Malaysian Kaoor, Malaysian Kapoor Bale, Malaysian Marindi, UP Partal, Pine wood, M.K. wood, Barma Teak, Shorea (Red Meranti), Dillenia (Dillenia), Tectonagrandis (Teak), Michelia (Champ), Shorea (Balau group), leguminosai family and any other timber/wood/item purchased or sold during the financial year under consideration which the Assessee could not furnish as the same were not maintained.
- The Ld. CIT(A) also observed that the A.O. had pointed out the variations in sale bills to different customers at different rates of the same item and specifically recalculated the sale figures, the details of the same had been mentioned at page no. 8 to 10 of the impugned order, for the cost of repetition the same is not reproduced herein. The A.O. estimated the suppressed sales for the year under consideration at Rs. 1,62,66,878/-. The Assessee submitted before the Ld. CIT(A) as under:
“The act of Ld. A.O. in making additions to the tune of Rs.1,62,66,878/- by enhancing by 31.57% the sale value of timber/wood/plywood, over and above the actual sales achieved by the assessee, is not tenable in law, as it has been made by applying some presumptive sale rates, while arbitrarily rejecting the sale rate and value recorded in the Sale Invoices issued for each and every individual sale transaction.
3.3.2 Humbly submitted at the outset, that the rates of timber and wood vary with the variation in the quality of timber and it was for this reason that the assessee had purchased different types of timber/wood at varying rates through-out the period under reference. Pertinent to mention here itself, is another well know/fact contributing towards variation of rates that a log bigger in length commands higher rate than the smaller one. Higher the thickness of log, higher will be rate as it results in lower wastage. All these facts are verifiable from the trade and this fact of varying rates had been accepted by the Ld. A.O. while framing assessments under section 143(3) of the Act, ibid, for the earlier Asst. Years 2012-13 and 2013-14.
3.3.3 Kind attention is drawn to the facts of the instant case for the appreciation of Hon’ble Court. During the period under reference, the assessee had conducted total sales to the tune of Rs.5,14,90,381/- (consisting of sales of timber/wood were to the tune of Rs.4,92,44,325/- and of other goods at Rs.22,46,056/-). Out of these total sales, sales to the extent of Rs.4,08,92,209/- (almost 79.41%) had been made to traders and balance sales amounting to Rs.1,05,98,172/- had been made to retail customers. The detailed information of purchasers, while conducting the sales, besides the description of timber/wood sold, per unit rate, quantity and total sale value thereof, had been duly recorded in the Sale Invoices. These records had been produced before the Ld. A.O. and had admittedly been examined by him. Detailed information a long with copies of accounts of parties (duly got confirmed from those parties) to whom total sales exceeding Rs. One Lakh had been made during the period under reference, had also been filed in response to his questionnaire dated 30.09.2016. In response to the query relating to variation in sale rates for same type of timber (raised vide notice dated 21.12.2016), it was brought to his notice that the variation in sale rate depends on the quality of timber sold.
3.3.4 The Ld. A.O. has accepted the submission of assessee that there is variation of sale rates, depending on quality of goods, as has been recorded by him in last para at Page 3 of the impugned order, in his own words-
‘Though the above mentioned presumptions of the assessee are acceptable to some extent. Therefore, variation @ 20% is allowed.’
Acting with pre-determined mindset for making uncalled additions (even after accepting and agreeing to the plea of assessee regarding varying sale rates), the Ld. Officer has taken note of one sale transaction each with the highest sale rate for different types of timber/wood, while drawing tables at his own end (by picking up sale invoices of his own choice out of the sale invoices issued by the appellant during the period commencing from 01.04.2013 and upto almost 30.09.2013). He has worked out some unrealistic rate differences for further calculating alleged suppressed sales by applying some mathematical formula coined by him.
3.3.5 Your appellant has drawn details relating to the purchase and sale of different types of timber/wood purchased during the entire period under reference on the line of Ld. A.O., and these details are being filed herewith for kind appreciation of your goodself with the summary thereof, as under:
|S. No||Item||Quantity Sold in CBM||Average Sale Rate||Rate determined byA.O.|
|1||Imported Sawn Meranti||995.8281||21,658/-||21,222/40|
|2||Imported Mix Wood||498.3545||22,451/-||30,176/-|
|3||Meranti Mix Size||It is part of Imported Sawn Meranti||24,155/20|
|5||Teak Wood||247.4085||38,548/-||Not determined|
|6||Pine Wood||244.7637||18,360/-||Not determined|
Further perusal of these details, when compared with the unrealistic determination of sale rates by the A.O., shall reflect, as under:
(i) ‘Imported Sawn Morindi’ (may please be read as Meranti)
Purchase rates of Imported Sawn Meranti’ ranged from Rs.12,582/- per cbm to Rs.20,500/- per cbm (excluding freight etc.), depending on the quality of wood. The annual average purchase rate comes to Rs. 18,605/-.
The identity of this timber/wood at the time of sale had remained same i.e. imported sawn meranti as it had been purchased and the Sale rates had started from Rs.13,500/- per cbm and the selective pieces had been sold even upto Rs.30,723/-per cbm, with total sales of this quality of timber having been made in the amount of Rs.2,15,67,876/-, with the volume thereof at 995.8281 cbm, constituting 43.79% of total sales of timber.
The annual average sale rate of the above type of timber comes to Rs.21,658/- while the A.O. has presumed the sale rate at Rs.21,222/- per cbm. Evidently, the average rate as per account books is higher than what has been presumed by the A.O. even on unrealistic reasoning for making arbitrary additions,
(ii) ‘Kapoor Sal‘
Purchase rates of the above type of timber ranged from Rs. 19,890/- per cbm to Rs.24,993/- per cbm (excluding freight etc.), with the annual average purchase rate of Rs.23,301/-. The Sale rates started from Rs. 16,500/- per cbm with the annual average sale rate of Rs.24,071/- for total sales during the period under reference, amounting to Rs.24,56,944/-.
The presumptive sale rate has been calculated at Rs.18,920/- per cbm for consequential enhancements and drawing adverse inference for enhancing the sales by 31.57% although the average sale rates as per the account books/records for this type of timber were much higher than the presumptive rates.
The working of the presumptive sale rate at Rs.25,861/- per cbm for this type of timber by the Ld. A.O. reflects that the sales made by assessee were at higher value than what could be ascertained by applying the formula coined by the Ld. A.O. and he has chosen to draw the inference at ML ‘as recorded at Page 5 of the impugned order or rather not to consider it for making arbitrary calculations. Yet the sale value thereof which comes to Rs.28,95,722/-, for the entire year, has been taken into consideration for making enhancements and consequent additions,
(iv) Teak Wood‘
The assessee had also conducted sales of Teak Wood’ during the period under reference, to the tune of Rs.95,37,044/-, with the average purchase rate of Rs.31,442/- per cbm (before freight expensesl and average sale rate of Rs.38,548/-per cbm.. The Ld. Officer has not found any fault with the above and has obviously accepted these sales rates and no case of under-pricing has been made for this type of wood which forms 19.36% of total sales.
(v) ‘Pine Wood’
The assessee had conducted sales of ‘Pine Wood’ during the period under reference, to the tune of Rs.44,93,822/- (being 9.12% of total sales), with the average purchase rate of Rs. 15,915/- per cbm (before freight expenses) and average sale rate of Rs.18,360/- per cbm.. The Ld. Officer has accepted these sales rates and has not made any effort to calculate average sale rates at his end for raising presumptions of under-pricing.
(vi) ‘Imported Sawn Timber Mix Sizes‘
In addition to the identified species of timber like Teak Wood, Meranti, Hollok etc., there are woods which are not familiar by name with the ultimate users. These different species of wood are purchased in lots which are not specifically identified as a particular type of wood and are described as Imported Sawn Timber with mix sizes. Purchase rates of the above mixed lots of timber started from Rs.9,050/- per cbm and were upto Rs.30,090/- per cbm (excluding freight etc.), with the annual average purchase rate of Rs.17,359/-. The Sale rates correspondingly ranged from Rs. 14,250/- per cbm to Rs.57,634/- per cbm with the annual average sale rate of Rs.22,451/-.
The A.O. has presumed the sale rate at Rs.30,176/- per cbm for making arbitrary enhancement.
(vii) ‘Meranti Mix Size‘
The Ld. A.O. has himself indirectly accepted, while drawing the details at his own level, that there is variation in rates with the change in quality and sizes. While rates for ‘Imported sawn Meranti’ have been analysed separately, the rates for ‘Meranti Mix Size’ have been calculated separately without defining the basis for taking such action. The A.O. has presumed the sale rate at Rs.24,155/- per cbm for raising presumptions and consequential enhancements.
3.3.6 The Ld. A.O., although accepting the submission of assessee that sale rates of timber/wood vary, depending on quality of goods, as has been recorded in last para at Page 3 of the impugned order, has worked out some unrealistic rate differences for further raising the presumption of alleged suppressed sales. He has enhanced the total sales by 31.57% although the quantity of timber/wood sold and recorded in the Sale Invoices, has been accepted. This arbitrary estimation of sales has resulted in unrealistic Gross Profit Rate of22.66%, while the same Officer has accepted the Gross Profit Rate of 6.97% for the preceding Asst. Year 2013-14 while finalizing assessment for that period under section 143(3).
3.3.7 On the other hand, the Ld. A.O. has not pointed out even a single specific instance of alleged understatement of sales, in view of the irrebuttable evidence furnished by the assessee by way of duly confirmed copies of accounts received from the purchasing parties i.e. traders. If the Ld. A.O. wanted to make some additions allegedly for under-pricing of sale, he should have brought some positive material on record to prove that the assessee actually realized more than that recorded in the books of account. Such additions could not be made on mere fancy or surmises or on such irrational comparisons of sales rates relating to the sales made to different purchasing parties, as has been made by the Ld. A.O. especially when the books of account have not been rejected. The Ld AO has no cogent documentary evidence to prove the receipt of sales price over and above what has been mentioned in the sales invoices issued as per Punjab VAT Act, 2005 but proceeded merely on presumptions and imaginations to justify his addition. He also ignored the fact that almost 79.41% of the total sales were wholesales and accounts were duly reconciled regularly with such purchasers and no discrepancy whatsoever has been pinpointed by the AO. In this connection, a reference is invited to the decision of Hon’ble Apex Court in the case of M/s. Daulatram Rawatmal reported in 87 ITR 349(SC), according to which, to prove that the apparent is not the real, the onus lies on the party which says so.
It was, therefore, the onus of the Ld. A.O. to prove that the assessee realised more than what was recorded in the books of account and that onus could be discharged only by placing positive material on record. It could not be discharged merely by rejecting unreasonably the explanation of the assessee without pointing out any inherent defect therein or rebutting the evidence produced as has been held by the Hon’ble Apex Court on 49 ITR 112(SC) in the case of Sreelekha Banerjee.
3.3.8 Kind attention is also drawn to the fact that the detailed information relating to the traders (purchasing partiesl had been incorporated in the periodic returns filed under the Punjab Value Added Tax Act, 2005/the Central Sales Tax Act, 1956 and have been accepted by the Authorities concerned as correct as per the assessment framed vide their orders dated 25.07.2016 (copy of assessment order is being filed herewith).
3.3.9 Assuming though not admitting that the assessee could realise as high rates for his products as has been presumed by the A.O. (though actually not realized), no addition could be made to his income in view of the decision of Hon’ble Apex Court in the case of CIT Vs. A. Raman & Co., reported in 67 ITR 11 (SC), wherein their Lordships have held as under:-
“The law does not oblige a trader to make the maximum profit that he could out of the trading transactions. Income which accrues to a trader is taxable in his hands, income which he could earn but has not earned is not made taxable on income accruing to him.”
3.3.10 Kind attention, at the cost of repetition, is further drawn to the very important fact that the same Assessing Officer, while framing assessments for the preceding A. Years 2012-13 and 2013-14, had accepted the varying sale rates of different types of timber/wood on the basis of identical sale records i.e. Sale Invoices, the amount of sales and resultant book results and nothing adverse has been found in the records for the current Assessment Year to depart from that conclusions.
Therefore, the addition made on account of alleged under-pricing is absolutely baseless, factually wrong and illegal and as such invalid.”
- The Ld. CIT(A) after considering the submissions of the Assessee observed that there was some basis in the Assessee’s assertion that in such type of businesses it was not possible to maintain quantitative detail item wise. The Ld. CIT(A) held that the books of accounts of the Assessee were defective and the profit could not be determined accurately. He also observed that the detailed sale bills which were produced before the A.O. revealed that those bills contained the detailed information of purchaser, description of Timber/wood sold, per unit rate, quantity and sale value thereof and the same was recorded in the books of account which had been examined by the A.O. and that the duly confirmed copies of accounts of the buyers with the total sales exceeding Rs. 1,00,000/- had been furnished which was on record. The Ld. CIT(A) mentioned that the net effect of the A.O.’s working had been to enhance the sales by 31.57% and the Gross Profit Rate(GPR) to 22.66% while in the preceding assessment year 2013-14 the GPR accepted in scrutiny assessment was 6.97%. The Ld. CIT(A) also reproduced the GPR of the various assessment years at page no. 19 of the impugned order which read as under:
|Asstt. Year||G.P. Rate (%)|
6.1 The Ld. CIT(A) deleted the trading addition of Rs. 1,62,66,878/- made by the A.O. on account of under declared sales, however, directed to apply the GPR of 7.5% by observing in para 5.5 of the impugned order as under:
5.5 The Ld. AO has not pointed out a single instance of under declared prices/in the books. It is my considered view that the addition is done on the basis surmises that prima-facie appears unreasonable, thus the addition on account of under declared sales of Rs. 1,62,66,878/- is deleted. However, in view that of the GP regularly offered by the Appellant and the nature of the timber trade the AO, the GP of the appellant merits a recast at 7.5 %. The turnover of the appellant for the previous year relevant to the AY of the impugned order is Rs. 5,15,26,381/- of which turnover attributable to timber and wood is Rs. 4,92,44,325/-.If the disclosure of the appellant of Rs. 24,56,010/- is taken into account, the declared GP for the impugned Previous year rises from 6.97% to 11.75% which in my considered view is reasonable given the history of the GP declared by the appellant. On this point the appeal of appellant is the appellant succeeds. Thus ordered.
6.2 The Ld. CIT(A) also restricted the addition by applying the GPR of 7.5% on the unaccounted sales of Rs. 2,07,942/- made by the A.O. by observing as under:
I have carefully examined the submission of the Ld AR, the findings of the Ld AO and contextualized these to the facts of the case. Of around 45 entries of sale mentioned cryptically in the loose sheets, the appellant was unable to reconcile 9 entries Significantly, of these entries 2 related to timber and 7 to plywood. That it is not the argument of the Ld AO that the sales were out of unaccounted purchases. I find considerable merit in the appellant’s submissions that the additions need to be restricted to the GP after giving credit to the purchases. The Addition is restricted to 7.5 % of Rs 2,07,942/- that is restricted to Rs. 15,596. The appellant partly succeeds on this ground of appeal.
- As regards to the another addition amounting to Rs. 1,09,577/- (Rs. 65000/- + Rs. 19125/- + Rs. 25452/-) on account of unaccounted sales. The submissions of the Assessee were as under:
- A) Addition of Rs.65,000/-:
The Ld. Officer has erred in making addition of Rs.65,000/-, as alleged unaccounted sales, based on entries recorded in Page No 15 of Annexure B-2, against the net amount recorded therein at Rs.18,900/-. The adverse inference, for making addition in the amount of Rs.65,000/- while rejecting the explanation of the assessee, has been drawn on the statement of Shri Ram Krishan Tulani, which has been recorded at the back of the assessee. Kind attention is drawn to the fact that the details recorded on the relevant piece of paper make reference to Shri Charanjit Tulani and not Shri Ram Krishan Tulani. In the face of this fact, the above inference has been wrongly drawn and therefore the action has been wrongly taken. Without prejudice to the above, it is humbly submitted that at the most the only amount of Rs.18,900/- pending after scoring off of other two entries, could be considered for making additions and not at Rs.65,000/-.
- B) Addition of Rs. 19,125/-:
The addition of Rs. 19,125/- as alleged unaccounted sales to have been recorded in documents serially numbered as 1 to 3, 5, 7 to 14, 16 and 18 to 47 of Annexure B-2, has also been wrongly made. The perusal of relevant impounded documents shall support the submissions of assessee that these are just some rates quoted by the staff members and do not relate to any business transaction which had taken place to conclude that it represented unaccounted sales of the assessee and that too during the period under reference.
- C) Addition of Rs.25,452/-:
Further addition of Rs.25,452/-, again as unaccounted sale alleged to have been found recorded in Annexure B-4, has been wrongly made. It was brought to the knowledge of Ld. Officer that the details recorded there in were just periodic stock check up and did not relate to any sale transaction. The perusal of this document supports the above submission of assessee as there is neither any rates have been recorded therein nor any amount has been worked out for drawing adverse inference which warranted additions of Rs.25,452/- as unaccounted sales.
As the findings of the Ld. Officer to the contrary, are based on conjectures and surmises only and without any basis, it is submitted that the addition so made, deserve to be deleted. At the cost of repetition, humbly it is submitted that it is not the case of Ld. A.O. that the above referred alleged unaccounted sales of Rs.18,900/- (or Rs.65,000/- as held by A.O.), Rs.19,125/- and Rs.25,452/-, had been made out of some unaccounted purchases. In view of the above fact, the addition only to the extent of Profit Margins, as per the book results, could be made and not the entire amount thereof as by no stretch of imagination it could be held that the entire sale consideration constituted that taxable income of the assessee.
- The Ld. CIT(A) after considering the submissions of the assessee held that unaccounted sale was at Rs. 84125/- (Rs 65000/- + Rs. 19125/-) and that the documents did not mention any date or name of the party for the calculation of Rs. 25,452/-. The said addition was deleted. The Ld. CIT(A) directed the A.O. to restrict the addition @ 7.5% on the unaccounted sale of Rs. 84125/- by observing as under:
I have examined the submission of the Ld AR and the findings of the Ld AO and contextualized these to the facts on this ground of appeal. I have also examined in detail copies of the impounded documents.
With regards to the first amount of Rs, 65,000/- Page 15 of annexure B-2 The Ld AR has submitted that the amount pertains to someone other than the person examined under oath. This does not establish that the amount of Rs.65,000/- paid by Shri Tulani has been recorded in the books. The sale is clearly not recorded.
As regards the addition of Rs. 19,125/- based on Pages 1 to 3, 5, 7 to 14, 16 and 18 to 47 of Annexure B-2of impounded documents, an examination of the papers does not prima facie confirm that they pertain to unaccounted sales. However, since the appellant has during assessment proceedings not contested the Ld AO treating these as unaccounted sales; I see no reason to differ with the findings.
Lastly with regards to the calculation of Rs. 25,451.85/- made from Annexure B-4 of the impounded documents. I find some merit in the submission of the Ld AR that these are routine calculations relating to stock. This document does not mention any date or party and could also be an estimate. The Ld AO has treated the same as undisclosed sale. I do not agree with the finding of the Ld AO.
In view of the above, the total unaccounted sales relating to the above is quantified at(Rs. 65,000+19,125) Rs. 84,125. I also find considerable merit in the appellant’ alternate submission that it is not the argument of the Ld AO that the sales were out of unaccounted purchases. I find considerable merit in the appellant’s submissions that the additions need to be restricted to the GP after giving credit to the purchases. Thus the addition is directed to be restricted to 7.5% of Rs 84,125 or Rs. 6400. The appellant partly succeeds on this ground of appeal.
- The another addition of Rs. 31,758/- was made by the A.O. under section 36(1)(iii) of the Act, on account of interest on advances given for non business purposes. The A.O. observed that the Assessee had given an advance of Rs. 2,64,755/- to M/s Garg Trading Company to whom no goods were supplied during the year. The A.O. disallowed proportionate interest @ 12%. The submissions of the Assessee before the Ld. CIT(A) were as under:
“It is submitted that the Ld. A.O. has also erred in disallowing an amount of Rs.31,758/- out of the Expenses incurred towards Interest Expenses’.
It is stated that the assessee had regular business dealings with M/s. Garg Trading Co. of Phillaur till the Financial Year 2008-09. However, a dispute had arisen and there was an outstanding advance of Rs.2,64,655/- as on 31.03.2010.
This amount (advanced for the purpose of business only and not as loan) has been distinctly reflected under the head ofS. Debtors and this fact has not been controverted by the Ld. A.O.. There was thus no case of raising the presumption of loan and that too in the nature of interest free loan. On the other hand, even if it is presumed that the transaction was in the nature of interest free loan and not in the nature of business advances, the assessee had sufficient interest free funds at his disposal which includes his own capital account balance, which stood at Rs.22,87,452/- at the beginning of the Financial Year. The addition so made by disallowing the above business expenditure, therefore, deserves to be deleted.”
- The Ld. CIT(A) deleted the addition by observing at page no. 25 to 27 of the impugned order as under:
I have carefully perused the AR’s submissions, the findings of the Ld AO and the case laws cited. The issue involved in this ground of appeal is regarding disallowance of interest of Rs. 31,758/- under section 36(1)(iii) of the Act (without mentioning the section) on two propositions by the AO, the first that the advance is for other than business purposes as no goods have been received during the year in lieu of the advance and second that even the appellant is paying interest on borrowed funds. The Ld AR has instead argued that the appellant was having regular business dealings with M/s. Garg Trading Co. of Phillaur till the Financial Year 2008-09 where M/s. Garg Trading Co. of Phillaur was appearing as a sundry debtor. The Ld AR also argued that the advance was in the nature of a trade advance and the advance was in the normal course of business but that there was a dispute which resulted the amount remaining outstanding.
That M/s. Garg Trading Co. of Phillaur was a trade debtor (for supply of goods by the appellant) till the Previous year 2008-09 relevant to the immediately prior Assessment Year of the impugned order is on record and not disputed by the appellant. However M/s Garg Trading Company was in the past a buyer from the appellant. The Ld. AO has agreed that there is no business expediency.
In this connection referring to the the decision of the Hon’ble Apex court in the case of SA Builders Ltd. vs. CIT (2007) 158 Taxman 74 (SC)may be relevant. The relevant part is extracted below:
” However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”
This principle has been further affirmed by Hon’ble Supreme Court in the case of Hero Cycles 379 ITR 347 (SC) wherein the Hon’ble Court has ruled as under:
- “..It would be pertinent to mention that insofar as the advance given to M/s. Hero Fibres Limited is concerned, the case put up by the assessee even before the Assessing Officer was that it had given an undertaking to the financial institutions to provide M/s. Hero Fibres Limited the additional margin to meet the working capital for meeting any cash loses. It was further explained that the assessee company was promotor of M/s. Hero Fibres Limited and since it had the controlling share in the said company that necessitated giving of such an undertaking to the financial institutions. The amount was, thus, advanced in compliance of the stipulation laid down by the three financial institutions under a loan agreement which was entered into between M/s. Hero Fibres Limited and the said financial institutions and it became possible for the financial institutions to advance that loan to M/s. Hero Fibres Limited because of the aforesaid undertaking given by the assessee. It was also mentioned that no interest was to be paid on this loan unless dividend is paid by that company.
- On that basis, it was argued that the amount was advanced by way of business expediency. CTT (Appeals) accepted the aforesaid plea of the assessee.
iii. Insofar as the loan given to its own Directors is concerned at the rate of 10 per cent is concerned, the explanation of the assessee was that this loan was never given out of any borrowed funds. The assessee had demonstrated that on the date when the loan was given that is on 25.03.1987 to these directors, there was a credit balance in the account of the assessee from where the loan was given. It was demonstrated that even after the encashment of the cheques of Rs. 34 lakhs in favour of those directors by way of loan, there was a credit balance of Rs.4,95,670/- in the said bank account.”.
In view of the above finding by Hon’ble Supreme Court, it is settled law that in order to claim interest expenditure u/s 36(1)(iii) of the Act, the appellant has to demonstrate with facts and figures that the interest free advances fulfills the criteria of commercial expediency as laid down by the Hon’ble Supreme Court (supra). In the instant case, it is my considered view that at the time of making the advance of Rs.2,64,655/- there existed a business expediency for making the advance as M/s Garg Trading, Phillaur was a regular trading partner of the appellant.
Due to the above finding I am not examining the alternate submission that in since the appellant has interest free funds credit be given for them as wherever there are mixed funds the assessee has mixed funds i.e. interest bearing funds as well as its own capital (paid up capital/surplus/reserve), then no disallowances u/s 36(1)(iii) of the Act has to be made. The AO is directed to delete the addition u/s 36(1)(iii) of Rs. 31,758/-. Thus ordered. The appellant succeeds on this ground of appeal.
- Now the Department is in appeal.
- The Ld. Sr. DR reiterated the observations made by the A.O. and strongly supported the assessment order. It was further submitted that the additions were made by the A.O. on the basis of the documents found during the course of survey which proved that the Assessee was engaged in the sales outside the books of accounts. Therefore, the additions were rightly made by the A.O, the Ld. CIT(A) was not justified in deleting the same and directing the A.O. to apply the GPR on the sales outside the books of accounts.
- As regards to the addition on account of the notional interest it was stated that the Assesee on the one hand had given interest free advances and on the other hand was paying interest on the loans received by him, therefore the A.O. was justified in making the addition on account of interest on interest free advances.
- In his rival submissions the Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and strongly supported the observations made by the Ld. CIT(A) in the impugned order.
- We have considered the submissions of both the parties and perused the material available on the record. In the present case it is noticed that there were various discrepancies in the value of stock worked out on the basis of books of accounts and the stock inventorised during the course of survey. There were certain other discrepancies in the books of accounts which could not be explained by the Assessee either to the A.O. in the assessment proceedings or to the Ld. CIT(A) in the appellate proceedings. Therefore the books were rightly rejected by the Ld. CIT(A) under section 145(3) of the Act and this action of the Ld. CIT(A) has not been challenged by the department in the grounds of this appeal. It is well settled that in case the books of accounts are rejected the income of the business in which the Assessee was engaged can be determined by estimating the profit rate.
- In the present case the Ld. CIT(A) after considering the gross profit rate of the assessee for the various Assessment Years i.e; from 2006-07 to 2017-18 applied the GPR of 7.5% on the sales outside the books of accounts. The said GPR applied by the Ld.CIT(A) was better than the GPR disclosed by the Assessee and accepted by the Department for the Assessment Year 2014-15 at 6.97% in the scrutiny assessment. The Ld. CIT(A) also mentioned that if the disclosure of the Assessee amounting to Rs. 24,56,010/- is taken into account, the declared GPR rises to 11.75% which was reasonable by considering the history of the GPR declared by the Assessee. We therefore do not see any valid ground to interfere with the findings given by the Ld. CIT(A) for modifying the various trading additions made by the A.O. by considering the entire sales outside the books of accounts as undisclosed income of the Assessee.
- As regards to the another addition made by the A.O. on account of notional interest, it is noticed that the Ld. CIT(A) after examining the records categorically stated that the Assessee was having regular business dealing with M/s Garg Trading Company of Phillaur till the F.Y. 2008-09 and the said concern was appearing as a sundry debtors. Therefore the amount outstanding in the name of M/s Garg Trading Company amounting to Rs. 2,64,755/- was a trading debit balance on account of business expediency. By considering the above facts, we are of the view that the A.O. was not justified in making the disallowance under section 36(1)(iii) of the Act, because the aforesaid outstanding amount was not an interest free advance rather it was a debit balance in the normal course of business and due to a dispute between the Assessee and M/s Garg Trading Company, Phillaur the amount remained outstanding. We, therefore, are of the view that the Ld. CIT(A) rightly deleted the impugned addition made by the A.O.
- In the result, appeal of the Department is dismissed.
(Order pronounced in the open Court on 08/11/2019)