ARIES DESIGNERS PVT. LTD.,KOLKATA V. I.T.O., WARD - 1(1), KOLKATA

ITA 1876/KOL/2024

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Aries Designers Pvt. Ltd. appealed against the orders of the Commissioner of Income Tax (Appeals) - NFAC, Delhi, which had confirmed the additions made by the AO for the Assessment Year 2017-18. The AO had added Rs. 1,01,80,075 to the assessee's income, citing a significant variance in the gross profit percentage compared to previous years, and another addition of Rs. 39,67,22,381 as an unsecured loan received, which was treated as unexplained money. The Tribunal found the rejection of the books of account under Section 145(3) of the Income Tax Act to be illegal and directed the deletion of the first addition. However, it remanded the issue of the unsecured loan back to the AO for further examination.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 35912 (ITAT-KOLKATA)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2017-2018
• Other Referred Cases: Karnataka State Forest Industries Corporation Ltd. vs. CIT [1993] 201 ITR 674 (Kar)
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Unexplained cash credit; Gross profit estimation
• Section: 142(1); 143(2); 201; 44AB; 145(3)

Judgement Text

"आयकर अपीलȣय अͬधकरण, कोलकाता पीठ “ए’’, कोलकाता IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA Įी राजेश क ुमार, लेखा सटèय एवं Įी Ĥदȣप क ुमार चौबे, ÛयाǓयक सदèय क े सम¢ [Before Shri Rajesh Kumar, Accountant Member &Shri Pradip Kumar Choubey, Judicial Member] I.T.A. No. 1876/Kol/2024 Assessment Year: 2017-18 Aries Designers Pvt. Ltd. (PAN: AAKCA 8447 L) Vs. ITO, Ward-1(1), Kolkata Appellant / ) अपीलाथȸ ( Respondent / Ĥ×यथȸ Date of Hearing / सुनवाई कȧ Ǔतͬथ 12.02.2025 Date of Pronouncement/ आदेश उɮघोषणा कȧ Ǔतͬथ 27.03.2025 For the assessee /Ǔनधा[ǐरती कȧ ओर से Shri Miraj D Shah, A.R For the revenue / राजèव कȧ ओर से Shri Subhendu Datta, CIT DR ORDER / आदेश Per Pradip Kumar Choubey, JM: This is the appeal preferred by the assessee against the order of Commissioner of Income Tax (Appeals)- NFAC, Delhi (hereinafter referred to as the Ld. CIT(A)] dated 19.06.2024 for AY 2017-18. 2. It appears from the report of the registry that the appeal has been filed after a delay of 17 days, for this the assessee has filed a condonation petition., which are as follows- 2 I.T.A. No. 1876/Kol/2024 Assessment Year: 2017-18 Aries Designers Pvt. Ltd. 3 I.T.A. No. 1876/Kol/2024 Assessment Year: 2017-18 Aries Designers Pvt. Ltd. On perusal of the condonation petition, the reason for delay in filing the appeal seems to be genuine and bonafide. The Ld. D.R did not raise any objection in condoning the delay. Keeping in view, the condonation petition as well as judicial pronouncement that the case should be decided on merit not on technical issue, the delay is hereby condoned. 3. Brief facts of the case of the assessee are that the assessee engaged in the business of trading in gray fabrics and investment in real estate projects, filed its return of income for AY 2017-18 declaring total income of Rs. 1,78,150/-. The case was selected for scrutiny, notices u/s 143(2) and 142(1) were issued, in response to the notices the assessee company filed documents. The AO after going over the documents filed by the assessee held that there is a great variance in the gross profit percentage even the product of company remains the same and AO by taking the average gross profit percentage as disclosed for last three years took it around 0.46% an amount of Rs. 1,01,80,075/- added back to the total income of the assessee. The AO further held that the loan amount of Rs. 39,67,22,381/- as received by the assessee company in the previous year 2016-17 as unsecured loan and added the same in the total income of the assessee. 4 I.T.A. No. 1876/Kol/2024 Assessment Year: 2017-18 Aries Designers Pvt. Ltd. 4. Aggrieved by the said order the assessee preferred an appeal before the Ld. CIT(A) wherein also the appeal of the assessee has been dismissed. Being aggrieved and dissatisfied the assessee preferred an appeal before us. 5. The Ld. Counsel of the assessee challenges the very impugned order thereby submitting that the AO erred in rejecting the books of account u/s 145(3) of the Act thereby making an addition of Rs. 1,01,80,075/- by estimating gross profit @ 0.75% as against declared gross profit of 0.1462% amounting to Rs. 24,64,599/- on sales turnover of the assessee company. The ld. Counsel further challenges the impugned order thereby submitting that the AO as well as Ld. CIT(A) has erred in confirming the impugned addition on unsecured loan of Rs. 39,67,22,381/- although the relevant document had already been furnished in support of the genuine loan transaction and no defect/ lacuna was pointed out by the AO on the aforesaid documentary evidences. The Ld. Counsel submits that the AO has erred in holding that unsecured loan of the above amount is an unexplained money. The Ld. Counsel further submits that in fact due to recession and stiff competition in the market, small and medium business are finding almost impossible to survive and textile trade business are almost in the sinking condition. The Ld. Counsel further submits that the order passed by the Ld. CIT(A) to confirm the order of AO is completely based on surmises and conjectures. 6. Contrary to that the Ld. D.R supports the impugned order. 7. Upon hearing the submission of the counsel of the respective parties, the first issue raised by the assessee in this appeal is the addition of Rs. 1,01,80,075/- as the AO has held in this order that in spite of market condition the assessee had been able to earn gross profit of Rs. 24,64,588/- as against the gross profit of Rs. 1614025/- for AY 2016- 17 and gross profit of Rs. 14,17,113/- for AY 2015-16. The AO has further held that during this year, the turnover increases about 3.5 times than that of AY 2016-17 at about 5 times than that of AY 2015-16. The AO after taking into account of gross profit percentage for the last three years rejected the statement of profit and loss account and balance sheet of the company u/s 145(3) of the Act. 5 I.T.A. No. 1876/Kol/2024 Assessment Year: 2017-18 Aries Designers Pvt. Ltd. There is no dispute that fall in gross profit rate definitely provides a ground to AO for invocation of provision of Section 145(3) of the Act but yet it is not a sufficient condition. The AO is required to analysis various other parameters which have the facts on the gross profit rate of the assessee for the relevant period, before drawing any conclusion on the merit of such claim. The fall in GP rate might be a symptom of malice with which the assessee’s account would be suffering. However, it is the duty of AO to pin point the malice and bring it out in the assessment order . In the case of low gross profit rate, there could be inflated purchases or unrecorded sales besides manipulation in the valuation of closing stock. Therefore, the Courts expects that the AO shall bring on record specific defects in the books of account of the assessee before invoking the provision of section 145(3). The rejection books of account simply on lower gross profit rate in comparison to earlier years or with other the assessee placed in similar stance would not suffice and will not stand the test of the appeal. The power vested with the AO u/s 145(3) has to be exercised judiciously not arbitrarily. The Hon’ble Karnataka High court in the case of Karnataka State Forest Industries Corporation Ltd. vs. CIT reported in [1993] 201 ITR 674 (Kar) has held that the AO’s power under the section are not arbitrarily and he must exercise his discretionary power. The clear finding is necessary before invoking the provision of section 145(3) of the Act. The Hon’ble Supreme Court and the various High Courts in number of cases have held that before invoking the provision of Section 145(3) of the Act the AO has to bring in record material on the basis of which he has arrived at the conclusion with regard to the correctness or completeness of the accounts of the assessee of method of accounting implied by it. 8. In the present case, the profit and loss account and balance sheet has been filed by the assessee company and AO has derived his opinion on the basis of chart filed by the assessee extracted from the annual report of the company which is as follows: 6 I.T.A. No. 1876/Kol/2024 Assessment Year: 2017-18 Aries Designers Pvt. Ltd. 9. It is important to mention here that the books of account of the assessee have been audited by the statutory auditors under the provision of Companies Act and also audited under the provision of Section 44AB of the Act. As we have already stated that in the present case books of account of the assessee has been rejected by the AO only on this ground that the gross profit of the assessee is low during the relevant period as compared to the other years. We do not find anything in the order of AO to specify the defects in the books of account for the purpose of rejecting it. The AO has not doubted the sales and purchases made from various parties. The submission of the assessee before the AO regarding the low gross profit in the relevant period are that most of the small and medium business specifically textile trade is almost in the sinking condition due to curtailment in demand increasing overhead expenses, staff reduction in the price 7 I.T.A. No. 1876/Kol/2024 Assessment Year: 2017-18 Aries Designers Pvt. Ltd. realization. It is further important to mention here that no one can dictate a business man how he runs business. Going over the order passed by the AO as well as facts of the case of the assessee, we are in this view that rejection of books of account u/s 145(3) of the Act is illegal. Hence the addition of Rs. 1,01,80,075/- is hereby directed to be deleted. 10. The next issue with regard to addition of Rs. 39,67,22,381/- as unexplained cash credit. It is important to mention here that the assessee has claimed credits as interest free unsecured loan in the FY 2016-17 from the Aneri Fincap Ltd. and Indian infotech & Software Ltd. It is further pertinent to mention here that lender company is an NBFC having main business of funding and investments and the assessee has furnished following documents during the course of assessment proceedings which are as follows: A. Loan from Aneri Fincap Ltd.  Copy of ledger confirmation of said party.  Copy of annual report and audited financial statements for the year ended 31.03.2017.  Copy of acknowledgment of ITR filed by said company for AY 2017-18  Copy of the relevant pages of the bank statements of the said company highlighting transactions with the Appellant.  Details of the Board of Directors of the said company B. Loan from Indian Infotech & Software Ltd.  Copy of ledger confirmation of said party.  Copy of annual report and audited financial statements for the year ended 31.03.2017.  Copy of acknowledgment of ITR filed by said company for AY 2017-18  Copy of the relevant pages of the bank statements of the said company highlighting transactions with the Appellant.  Details of the Board of Directors of the said company 11. The Ld. CIT(A) has confirmed the order of AO only on this ground that there was nothing has been submitted. It is pertinent to mention here that assessee had explained that for survival of the business of the company, they have tried to explore source of income from other revenue and borrowings from lender companies were interest free since income earned in future from investment in properties was to be shared with them. The submission of the ld. Counsel for the assessee is that since he has filed some documentary evidences before the AO that required to be proper 8 I.T.A. No. 1876/Kol/2024 Assessment Year: 2017-18 Aries Designers Pvt. Ltd. verification by the AO. Keeping in view the above facts and submission made by the assessee this issue requires to be re-verification by the AO, as a result of which, the appeal of the assessee is remanded back to the file of AO for proper verification on the issue of addition of Rs. 39,67,22,381/- and passed a reasoned order after going over the facts. In the result, the appeal filed by the assessee partly allowed for statistical purposes. Order is pronounced in the open court on 27th March, 2025 Sd/- Sd/- (Rajesh Kumar/राजेश क ुमार) (Pradip Kumar Choubey /Ĥदȣप क ुमार चौबे) Accountant Member/लेखा सदèय Judicial Member/ÛयाǓयक सदèय Dated: 27th March, 2025 SM, Sr. PS Copy of the order forwarded to: 1. Appellant- Aries Designers Pvt. Ltd. , CA Deepak Agarwal, Fortuna Tower, 11th Floor, Room no. 51, 23A, N. S. Road, Kolkata-700001. 2. Respondent – ITO, Ward-1(1), Kolkata 3. Ld. CIT(A)- NFAC, Delhi 4. Ld. PCIT- , Kolkata 5. DR, Kolkata Benches, Kolkata (sent through e-mail) True Copy By Order Assistant Registrar ITAT, Kolkata Benches, Kolkata "