ITO, Wd-12(4), Kolkata, Kolkata V. M/s Shee Sen Leather Pvt. Ltd., Kolkata

ITA 1044/KOL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 1813 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 8 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 16-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SAURABH KUMAR
• Assessee Lawyers: V N PUROHIT; S M SURANA
• Keywords: Rejection of books of accounts; Unexplained investment; Principle of natural justice; Earning of tax free income
• Section: 143(3); 133A; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B, BENCH KOLKATA BEFORE SHRI S.S. VISWANETHRA RAVI, JM & DR. A.L. SAINI, AM ./ITA NO.1044/KOL/2014 ( / ASSESSMENT YEAR: 2010-11) I.T.O, WARD-12(4), KOLKATA AAYAKARBHAVAN (7 TH FLOOR), P-7, CHOWRINGHEE SQUARE, KOLKATA 69. VS. M/S SHEE SEN LEATHER PVT. LTD. 114/C, MATHESWARTOLLA ROAD, KOLKATA 700 046. ./ ./PAN/GIR NO. : AAECS 3938 C (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI SAURABH KUMAR, ADDL. CIT(DR) RESPONDENT BY : SHRI S.M. SURANA, ADVOCATE & V.N. PUROHIT, FCA / DATE OF HEARING : 18/10/2017 /DATE OF PRONOUNCEMENT : 17/01/2018 / O R D E R PER DR. ARJUN LAL SAINI, AM: THE CAPTIONED APPEAL FILED BY THE REVENUE, PERTAINING TO ASSESSMENT YEAR 2010-11, IS DIRECTED AGAINST AN ORDER PASSED BY THE CIT(A)-XII, KOLKATA, IN APPEAL NO.111/XII/CIR-12/13-14, DATED 19.02.2014, WHICH IN TURN ARISES OUT OF AN ORDER PASSED BY THE ASSESSING OFFICER U/S.143(3) OF THE I.T. ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), DATED 28.03.2013. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS FOLLOWS: 1. THAT IS THE FACTS AND IN LAW OF THE CASE THE LD. CIT(A) ERRED IN DELETING THE ADDITION AMOUNTING TO RS.29,84,786/- MADE THE AO ON ACCOUNT OF DIFFERENCE IN VALUATION IN CLOSING STOCK AND G.P. ON UNACCOUNTED SALES OF CHEMICALS WHICH WAS DETECTED ON THE BASIS OF FINDINGS OF SURVEY U/S 133A. M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 2 2. THAT IS THE FACTS AND IN LAW OF THE CASE THE LD.CIT(A) ERRED IN DELETING THE ADDITION AMOUNTING TO RS.1,26,80,681/- MADE BY AO ON ACCOUNT OF UNDISCLOSED CASH SALES AND G.P. THEREON WHICH WAS DETECTED ON THE BASIS OF FINDINGS OF SURVEY U/S.133A. 3. THAT IN THE FACTS AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.55,724/- U/S.14A AS PER MECHANISM DEVISED BY RULE 8D OF THE I.T. RULES. LD.CIT(A) RESTRICTED THE DISALLOWANCE TO 10% OF THE EXEMPT INCOME. 4. THAT IN THE FACTS AND IN LAW THE LD.CIT(A) ERRED IN CALCULATING AVERAGE VALUE OF INVESTMENT REQUIRED FOR CALCULATING DISALLOWANCE U/S.14A READ WITH RULE 8D. 5. THAT THE APPELLANT CRAVES FOR LEAVE TO ADD, DELETE OR MODIFY ANY OF THE GROUNDS OF APPEAL BEFORE OR ALL THE TIME OF HEARING. 3. GROUND NO. 1 RAISED BY THE REVENUE RELATES TO ADDITION OF RS. 29,84,786/- ON ACCOUNT OF DIFFERENCE IN VALUATION IN CLOSING STOCK AND G.P. ON UNACCOUNTED SALES OF CHEMICALS. 3.1 THE FACTS APROPOS OF THIS GROUND ARE THAT ASSESSEE HAD FILED HIS RETURN OF INCOME ON 30.09.2010 DECLARING TOTAL INCOME OF RS.51,76,900/-. THE RETURN OF INCOME OF THE ASSESSEE WAS PROCESSED U/S 143(1) ON 15-04-2011 WITH TOTAL INCOME OF RS.51,76,900/-. LATER, THE ASSESSEE`S CASE WAS SELECTED FOR SCRUTINY UNDER SECTION 143(2) OF THE ACT. IN THE ASSESSEE`S CASE A SURVEY WAS ALSO CONDUCTED ON 10.03.2010 AND THE SURVEY TEAM TOOK THE INVENTORY OF HIDES AND CHEMICALS AND CERTAIN DISCREPANCIES WERE NOTED BY THEM. IN THE ASSESSEE`S CASE, ASSESSMENT WAS COMPLETED U/S 143(3) ON 28.03.2013 DETERMINING ASSESSED INCOME OF RS.74,91,190/-. THE ASSESSING OFFICER MADE THE ADDITION BASED ON THE FINDINGS OF SURVEY TEAM. ONE OF THE ADDITIONS MADE BY THE ASSESSING OFFICER WAS TO THE TUNE OF RS.29,84,786/-, WHICH WAS MADE ON ACCOUNT OF DIFFERENCE IN VALUATION OF CLOSING STOCK AND GROSS PROFIT ON UNACCOUNTED SALES OF SUCH CHEMICALS. AT THE TIME OF ASSESSMENT PROCEEDING U/S.143(3), FROM THE IMPOUNDED DOCUMENTS, UNACCOUNTED CASH SALES, IN TERMS OF QUANTITY, OF 1,92,316 SQ.FT. WAS FOUND. AT THE TIME OF HEARING IN RESPECT OF ASSESSMENT PROCEEDING U/S.143(3), THE ASSESSEE WAS ASKED TO EXPLAIN THE SALE OF THE ITEMS IN, WHICH WAS IN SALES M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 3 REGISTER. THE ASSESSEE EXPLAINED THAT THE SALE OF SALE REGISTER WAS REFLECTED ON THE BASIS OF ACTUAL QUANTITY OF GOODS DELIVERED. BUT THE A.O. DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS TO SHOW ITEM WISE SALE IN SALES REGISTER, AND IN ABSENCE OF THE SAME, THESE WERE CONSIDERED AS UNRECORDED SALES AND TAKING THE AVERAGE PRICE AS PER TAX AUDIT REPORT @65.16 PAISE, THE TOTAL UNRECORDED SALES WAS ESTIMATED AT RS.1,25,31,774/- ( THAT IS,1,92,316SQ.FIT X RS.65.16) TAKING THE G.P. AT THE RATE OF 9.43% (AS PER TAX AUDIT REPORT), THE PROFIT FROM THE SALES HAVE BEEN ESTIMATED AT RS.11,81,746/- ( THAT IS,9.43% OF RS.1,25,31,774/- ). THE CAPITAL FOR THIS UNRECORDED SALES HAVE BEEN CALCULATED AT RS.18,03,040/-. THIS WAY, THE ASSESSING OFFICER ADDED (RS.11,81,746/-+ RS,18,03,040/-) RS.29,84,786/-,TO THE TOTAL INCOME OF THE ASSESSEE. 3.2 AGGRIEVED BY THE ADDITION MADE BY THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER TO CIT(A), WHO ALLOWED THE CLAIM OF THE ASSESSEE PARTLY. THE CIT(A), OUT OF THE TOTAL ADDITION OF RS.29,84,786/-, DELETED THE ADDITION TO THE EXTENT OF RS. 25,08,579/- AND RESTRICTED THE ADDITION TO RS.4,76,207/-. THE LD. CIT(A), IN HIS ORDER POINTED OUT THAT DURING THE COURSE OF SURVEY OR DURING THE ASSESSMENT PROCEEDINGS, THE A.O. HAS NOT FOUND ANY MATERIAL TO ESTABLISH THAT THE ASSESSEE HAS SUPPRESSED PURCHASES OR FOUND ANY FINISHED GOODS OUTSIDE THE BOOKS OF ACCOUNT. LN THE ABSENCE OF ANY COGENT MATERIAL, BROUGHT ON RECORD TO DOUBT THE INVESTMENT/COST IN MANUFACTURING OR TRADING ACCOUNT AND WITHOUT REJECTING THE BOOKS OF ACCOUNT REGULARLY MAINTAINED BY THE ASSESSEE, THE A.O. WAS NOT JUSTIFIED IN MAKING ADDITION ON ACCOUNT OF UNRECORDED PURCHASES/COST CORRESPONDING TO THE UNRECORDED SALES, TO THE TUNE OF RS.18,03,040/-. FURTHER, THE A.O. RESORTED TO MAKE SEPARATE ADDITION ON ACCOUNT OF UNEXPLAINED EXCESS STOCK SEPARATELY. THEREFORE, THERE WAS NO REASON TO WORK OUT INVESTMENT/COST ON THE ESTIMATED UNRECORDED SALES. THE CIT(A) HELD THAT IT IS WELL SETTLED POSITION THAT ONLY INCOME CAN BE TAXED AND SO FAR THE TOTAL TURNOVER OF THE ASSESSEE IS CONCERNED, ONLY ELEMENT OF PROFIT ON THE SAME COULD BE TAXED. THEREFORE, THE ADDITION OF RS.18,03,040 /- WAS DELETED BY THE CIT(A). M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 4 3.3 IN RESPECT OF ADDITION IN TERMS OF UNRECORDED SALES AND ESTIMATE OF GROSS PROFIT THEREON @9.43% AND ADDITION OF RS.11,81,746/-, THE CIT(A), HAD POINTED OUT THAT THE ASSESSEE COULD NOT RECONCILE THE DATA FOUND DURING THE SURVEY WITH SALE REGISTERS DURING THE ASSESSMENT PROCEEDINGS. THE CIT(A) NOTED THAT THE MAIN GRIEVANCE OF THE ASSESSEE WAS ALSO THAT THE ASSESSEE HAVING DECLARED NET PROFIT OF 3.8% IN THE CURRENT YEAR AS AGAINST 1.12% DECLARED IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, AND THE AO HAVING NOT BROUGHT ON RECORD ANY MATERIAL TO INDICATE SUPPRESSION OF SALE, THE ADDITION SO MADE WAS NOT JUSTIFIED. HOWEVER, THE DISCREPANCIES IN THE ACCOUNTS AS POINTED OUT BY THE AO, AND THE FACT THAT THE ASSESSEE COULD NOT RECONCILE THE ITEMS OF SALES AS PER SALE REGISTER, THE AO WOULD BE JUSTIFIED IN ESTIMATING AND ADDING PROFIT ON SUCH ESTIMATED SALE TRANSACTIONS IN ORDER TO PLUG ANY LEAKAGE OF PROFIT. HOWEVER, THE APPLICATION OF GROSS PROFIT RATE ON SUCH ESTIMATED SALES IS CONSIDERED EXCESSIVE AND APPLICATION OF NET PROFIT RATE INSTEAD OF GROSS PROFIT RATE ON SUCH ENHANCED SALES WOULD BE JUSTIFIED. HENCE, CIT(A), APPLIED NET PROFIT RATE OF 3.8% ON THE SALES AS AGAINST ADOPTED BY THE AO AT RS.1,25,31,774/-. THEREFORE, THE ADDITION WAS RESTRICTED BY CIT(A) TO RS.4,76,207/- (I.E 3.8% OF RS.1,25,31,774/-) . 3.4 NOT BEING SATISFIED WITH THE ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US.THE LD. DR FOR THE REVENUE HAS PRIMARILY REITERATED THE STAND TAKEN BY THE ASSESSING OFFICER, WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 3.5 ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE HAS SUBMITTED BEFORE US THAT, FIRST OF ALL, THE SURVEY TEAM DID NOT HAVE TECHNICAL EXPERTISE TO TAKE THE INVENTORY OF CHEMICALS AND HIDES. THE SURVEY TEAM PREPARED THE INVENTORY BASED ON AVERAGE PRICE, THEREFORE, THE INVENTORY TAKEN BY THEM CAN NEVER BE TALLIED WITH THE INVENTORY OF THE ASSESSEE AND THEREFORE THE ADDITION MADE BY THE AO BASED ON AVERAGE INVENTORY IS NOT ACCEPTABLE. MOREOVER, THE AO HAS NOT REJECTED THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND MADE THE ADDITION BASED ON ESTIMATE, WHICH IS AGAINST THE SETTLED POSITION OF LAW. M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 5 THE LD COUNSEL POINTED OUT THAT DURING THE COURSE OF SURVEY PROCEEDINGS, ALL ORIGINAL BILLS FOR PURCHASE OF MATERIALS, SALES BILL, ALL OTHER BILLS FOR PRODUCTION EXPENSES, PRODUCTION RECORDS, SALES DESPATCH RECORDS AND ALL OTHER BOOKS AND PAPERS WERE IMPOUNDED BY THE INCOME TAX DEPARTMENT. THEREFORE, QUANTITY PRODUCED, QUANTITY SOLD ARE DULY CORROBORATED TO EACH OTHER AND THERE WAS NO QUESTION OF UNDERSTATEMENT OF GOODS PRODUCED AND OR GOODS DELIVERED BY WAY OF SALES. FURTHER, THE LD. A.O. DURING THE COURSE OF SCRUTINY ASSESSMENT COULD NOT FIND ANY SALE BILL IMPOUNDED BY HIM NOT BEING RECORDED IN THE BOOKS.THEREFORE, ANY QUESTION OF UNRECORDED SALES COULD NOT COME INTO EXISTENCE WITH REFERENCE TO ORIGINAL BILLS AND VOUCHERS FOUND SEIZED AT THE TIME OF SURVEY. DURING THE COURSE OF SCRUTINY PROCEEDINGS, THE LD. A.O. COULD NOT FIND OUT ANY MISTAKE IN THOSE SALES TAX INVOICE, SALES REGISTER, PARTY'S (SUNDRY DEBTORS) LEDGER ETC. THE LD. A.O. CREATED ARTIFICIAL STORY OF CASH SALES, WITHOUT BASE, WHICH IS NOT ACCEPTABLE. FURTHER, THE SAID SALES TURNOVER WAS SUBJECT TO VAT AUDIT AND SCRUTINIZED BY THE SALES TAX DEPARTMENT (OTHER GOVT. DEPARTMENT). THEY COULD NOT FIND ANY UNDERSTATEMENT OF SALES TURNOVER.IN ADDITION TO THIS, THE LD COUNSEL FOR THE ASSESSEE HAD DEFENDED THE ORDER PASSED BY THE LD CIT(A) AND RELIED ON THE SUBMISSIONS MADE BEFORE THE LD CIT(A). 3.6 WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD, WE NOTE THAT THE ASSESSING OFFICER MADE THE ADDITIONS ON THE BASIS OF DATA REFLECTED IN THE PEN-DRIVE BEARING IDENTIFICATION MARK SSI-15, WHICH WAS IMPOUNDED DURING SURVEY. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE COMPANY THAT THE DATA INCLUDED IN PEN DRIVE WERE SOME ROUGH NOTHINGS BASED ON DIARY ENTRIES. WE NOTE THAT DURING THE COURSE OF SURVEY OR DURING ASSESSMENT PROCEEDINGS FOR THAT MATTER, THE ASSESSING OFFICER HAS NOT FOUND ANY MATERIAL TO ESTABLISH THAT THE ASSESSEE HAS SUPPRESSED PURCHASES OR FOUND ANY FINISHED GOODS OUTSIDE THE BOOKS OF ACCOUNT. IN THE ABSENCE OF ANY COGENT MATERIAL BROUGHT ON RECORD TO DOUBT THE INVESTMENT/COST IN MANUFACTURING OR TRADING ACCOUNT, AND WITHOUT REJECTING M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 6 THE BOOKS OF ACCOUNT REGULARLY MAINTAINED, THE ASSESSING OFFICER, WAS NOT JUSTIFIED IN MAKING ADDITION ON ACCOUNT OF UNRECORDED PURCHASES/COST CORRESPONDING TO THE UNRECORDED SALES TO THE TUNE OF RS.18,03,040/-. FURTHER, THE ASSESSING OFFICER RESORTED TO MAKE SEPARATE ADDITION ON ACCOUNT OF UNEXPLAINED EXCESS STOCK SEPARATELY. THEREFORE, THERE IS NO REASON TO WORK OUT INVESTMENT/COST ON THE ESTIMATED UNRECORDED SALES. IT IS WELL SETTLED POSITION THAT ONLY INCOME CAN BE TAXED AND THE TOTAL TURNOVER OF THE ASSESSEE EVEN IF SOME OF THE SALES WERE NOT RECORDED, ONLY ELEMENT OF PROFIT ON THE SAME COULD BE TAXED. THEREFORE, THE ADDITION OF RS.18,03,040/- WAS RIGHTLY DELETED BY CIT(A). SO FAR, THE ESTIMATE OF UNRECORDED SALES AND ESTIMATE OF GROSS PROFIT THEREON AT 9.43% AND ADDITION OF RS.11,81,746/- IS CONCERNED, WE ARE INCLINED TO AGREE WITH THE FINDINGS OF CIT(A) BECAUSE THE ASSESSEE COULD NOT RECONCILE THE DATA FOUND DURING SURVEY WITH THE SALE REGISTERS DURING THE ASSESSMENT PROCEEDINGS. WE NOTE THAT THE MAIN GRIEVANCE OF THE ASSESSEE WAS THAT HAVING DECLARED NET PROFIT OF @ 3.8% IN CURRENT YEAR AS AGAINST 1.12% DECLARED IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, AND THE ASSESSING OFFICER HAVING NOT BROUGHT ON RECORD ANY MATERIAL TO INDICATE SUPPRESSION OF SALES, THE ADDITION SO MADE IS NOT JUSTIFIED. HOWEVER, LOOKING TO THE DISCREPANCIES IN THE ACCOUNTS AS POINTED OUT BY THE ASSESSING OFFICER, AND THE FACT THAT THE ASSESSEE COULD NOT RECONCILE THE ITEMS OF SALES AS PER SALE REGISTERS, THE ASSESSING OFFICER WOULD BE JUSTIFIED IN ESTIMATING AND ADDING PROFIT ON SUCH ESTIMATED SALE TRANSACTIONS IN ORDER TO PLUG ANY LEAKAGE OF PROFIT. HOWEVER, THE APPLICATION OF GROSS PROFIT RATE ON SUCH ESTIMATED SALES IS CONSIDERED EXCESSIVE. THE HONBLE M.P HIGH COURT IN THE CASE OF CIT VS. BALCHAND AJIT KUMAR REPORTED IN (2003) 263 ITR 610 HAS HELD THAT APPLICATION OF NET PROFIT RATE INSTEAD OF GROSS PROFIT RATE ON SUCH ENHANCED SALES WOULD BE JUSTIFIED. IN MAN MOHAN SADANI VS. CIT, (2008) 304 ITR 52, IT HAS BEEN HELD BY THE HONBLE MP HIGH COURT THAT ONLY NET PROFIT HAD TO BE ADOPTED. THIS DECISION HAS BEEN FOLLOWED BY THE ITAT INDORE BENCH IN THE CASE OF A.S.NBAGRI GENETIC P. LTD. VS. DCIT (ITA NO.303/IND(2010) 15 ITJ 160-ED. THEREFORE, HAVING M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 7 REGARD TO THE FACTS AND THE RATIO LAID DOWN IN THE REPORTED CASES, THE CIT(A) WAS RIGHT IN APPLYING NET PROFIT RATE OF 3.8% ON THE SALES AS ADOPTED BY THE ASSESSING OFFICER AT RS.1,25,31,774/-. THEREFORE, THE ADDITION RESTRICTED TO RS.4,76,207/-( THAT IS, 3.8% OF RS. 1,25,31,774/-) BY THE CIT(A) IS QUITE JUSTIFIABLE. CONSIDERING THE PRINCIPLE OF NATURAL JUSTICE, WE ARE OF THE VIEW THAT ADDITION RESTRICTED BY THE LD CIT(A) AT RS.4,76,207/- IS JUST PROPER AND DOES NOT REQUIRE ANY FURTHER INTERFERENCE. THUS, WE CONFIRM THE ORDER PASSED BY LD CIT(A). 3.7 IN THE RESULT, THE APPEAL FILED BY THE REVENUE (GROUND NO.1), IS DISMISSED. 4. GROUND NO. 2 RAISED BY THE REVENUE RELATES TO ADDITION OF RS. 1,26,80,681/- MADE BY THE AO ON ACCOUNT OF UNDISCLOSED CASH SALES AND GROSS PROFIT THEREON. 4.1 THE BRIEF FACTS APROPOS THIS GROUND ARE THAT AFTER GOING THROUGH THE INVENTORY MADE BY THE SURVEY TEAM AS WELL AS THE LIST OF STOCK AS SUBMITTED BY THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE LD. A.O. MADE AN ADDITION OF RS.1,26,80,681/- ON ACCOUNT OF UNEXPLAINED INVESTMENT MADE ON THE FOLLOWING STOCK ITEMS AND UNDISCLOSED G.P. IN THE FOLLOWING STOCK ITEMS / CATEGORIES AS AT THE DAY OF SURVEY:- SL. NO. PARTICULARS: AMOUNT (RS.) A 13 ITEMS OF CHEMICALS INVENTORIZED BY THE SURVEY TEAM WHERE PHYSICAL STOCK IS IN EXCESS (VIDE TABLE-I OF THE ASSESSMENT ORDER) 38,13,964/- B 9 ITEMS OF CHEMICALS AND PRESERVATIVES INVENTORIZED BY THE SURVEY TEAM WHERE STOCKS AS PER BOOKS IS IN EXCESS (VIDE TABLE - II OF THE ASSESSMENT ORDER) GROSS PROFIT RATE AS APPEARING IN THE AUDITED BOOKS @ 6.19% HAS BEEN TAKEN. 1,11,237/- C IN SOME ITEMS THE RATE TAKEN BY THE ASSESSEE IN ITS BOOKS WERE ALLEGEDLY LESS THAN THE VALUE TAKEN BY SURVEY TEAM (VIDE TABLE - III OF THE ASSESSMENT ORDER) 5,48,840/- D IN SOME ITEMS RATES TAKEN BY THE ASSESSEE IN ITS BOOKS ALLEGEDLY MORE THAN THE VALUE TAKEN BY THE 14,800/- M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 8 SURVEY TEAM (TABLE - IV OF THE ASSESSMENT ORDER) E 5 ITEMS OF ALLEGED EXCESS PHYSICAL STOCKS 81 ,91 ,840/- TOTAL: 1,26,80,687/- 4.2 AGGRIEVED BY THE ADDITION MADE BY ASSESSING OFFICER, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A), WHO HAS DELETED THE ADDITION. THE LD. CIT[A), HAD POINTED OUT THAT THE ADDITION ON ACCOUNT OF EXCESS STOCK AND PROFIT ON UNRECORDED SALES HAS BEEN MADE BY AO NOT ON ACCOUNT OF THE DIFFERENCE AND DISCREPANCIES FOUND FROM THE INVENTORY PREPARED BY THE SURVEY PARTY, BUT ON ACCOUNT OF DIFFERENT QUANTITY AND RATE AS ALSO QUALITY ADOPTED BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS.THE VALUE OF STOCK AS PER SURVEY TEAM WAS ARRIVED AT RS.2,64,34,417/- WHEREAS AS PER BOOKS OF THE ASSESSEE, THE TOTAL VALUE OF STOCK CAME TO RS.2,72,87,969/- LEAVING DEFICIT STOCK OF RS.8,53,552/-. THE AO HAS NOT REJECTED THE BOOKS OF ACCOUNT, AND HAS NOT DOUBTED THE OPENING STOCK OR THE PURCHASE OF THE ASSESSEE. THE AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO ESTABLISH ANY UNRECORDED PURCHASES OR SALES. APPARENTLY, THE DIFFERENCE WAS ON ACCOUNT OF ADOPTION OF DIFFERENT RATES FOR DIFFERENT QUANTITIES OF CHEMICAL AND OTHER RAW MATERIALS. THE DISCREPANCIES IN THE SURVEY REPORT AS POINTED OUT BY THE ASSESSEE HAS NOT BEEN VERIFIED OR TAKEN CARE OF BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS WHILE WORKING OUT THE EXCESS STOCK IN DIFFERENT CATEGORIES. FURTHER, THE AO WORKED OUT AND ADDED GROSS PROFIT AT THE RATE OF 6.19% AS APPEARING IN THE AUDITED ACCOUNT IN RESPECT OF 9 ITEMS OF CHEMICALS AND PRESERVATIVES INVENTORIED BY THE SURVEY TEAM WHERE STOCK AS PER BOOKS WAS IN EXCESS OF RS.1,11,,237/-. THE ASSESSEE COMPANY IS RUNNING A TANNERY WHERE CHEMICALS ARE USED FOR MANUFACTURING PURPOSES. THE ASSESSEE IS NOT A TRADER IN CHEMICALS. THEREFORE, THE INFERENCE DRAWN BY ASSESSING OFFICER THAT SHORT STOCK OF CHEMICALS COULD HAVE BEEN SOLD OUTSIDE THE BOOKS IS NOT RIGHT. THEREFORE, THE ENTIRE ADDITION ON ACCOUNT OF UNEXPLAINED EXCESS STOCK AND GROSS PROFIT ON UNRECORDED SALES AGGREGATING TO RS.1,26,80,681/- WAS DELETED BY CIT(A). M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 9 4.3 NOT BEING SATISFIED WITH THE ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US.THE LD. DR FOR THE REVENUE HAS PRIMARILY REITERATED THE STAND TAKEN BY THE ASSESSING OFFICER, WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE HAS DEFENDED THE ORDER PASSED BY THE LD CIT(A) AND ALSO RELIED ON THE SUBMISSIONS MADE BEFORE THE LD CIT(A). 4.4 WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD, WE NOTE THAT THE ASSESSING OFFICERAFTER ARTIFICIALLY ARRIVING AT THE EXCESS STOCK AS PER HIS OWN IMAGINARY CALCULATION, WHICH HAS NO RELEVANCY WITH THE VALUE OF STOCK ASCERTAINED BY THE SURVEY TEAM, ADDED BACK A SUM OF RS.1,26,80,681/- TO THE TOTAL INCOME OF THE ASSESSEE. WE NOTE THAT THIS ADDITION IS BASED ON GUESS WORK DONE BY THE ASSESSING OFFICER. FOR THAT, WE RELY ON THE JUDGMENT OF THE HON`BLE SUPREME COURT IN THE CASE OF DHAKESWARI COTTON MILLS LTD, 26 ITR 775 (SC), WHEREIN IT WAS HELD THAT T HE ASSESSING OFFICER IS NOT BARRED BY TECHNICAL RULES OF EVIDENCE AND PLEADINGS, AND HE IS ENTITLED TO ACT ON MATERIAL WHICH MAY NOT BE ACCEPTED AS EVIDENCE IN A COURT OF LAW, BUT IN MAKING THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT, THE ASSESSING OFFICER IS NOT ENTITLED TO MAKE A PURE GUESS AND MAKE AN ASSESSMENT WITHOUT REFERENCE TO ANY EVIDENCE OR ANY MATERIAL AT ALL. THERE MUST BE SOMETHING MORE THAN BARE SUSPICION TO SUPPORT THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT. WE NOTE THAT IN THE ASSESSEE`S CASE UNDER CONSIDERATION, A SURVEY U/S 133A OF THE INCOME TAX ACT, 1961 WAS CONDUCTED ON 10.03.2010. DURING THE COURSE OF SURVEY, THE SURVEY TEAM PREPARED A LIST OF INVENTORY OF STOCK OF CHEMICALS AND HIDES. THE ASSESSING OFFICER ON GOING THROUGH THE SURVEY REPORT VIS-A-VIS BOOKS OF ACCOUNTS OF THE ASSESSEE, ARRIVED AT THE ARBITRARY DISCREPANCIES IN THE VALUATION OF STOCK, AS PER HIS OWN ARBITRARY AND IMAGINARY CALCULATION. THE ASSESSING OFFICER HAS FULLY DISREGARDED THE VALUE M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 10 ASCERTAINED BY THE SURVEY TEAM AS WELL AS THE VALUE OF STOCK AS PER BOOKS OF THE ASSESSEE DULY CORROBORATED/CROSS CHECKED WITH THE PURCHASE BILLS OF GOODS IMPOUNDED BY THE DEPARTMENT. WE ARE OF THE VIEW THAT ADDITION MADE BY THE ASSESSING OFFICER BASED ON GUESS WORK IS NOT ACCEPTABLE. WE ALSO NOTE THAT INVENTORY PREPARED BY THE SURVEY TEAM IS ALSO BASED ON GUESS WORK BECAUSE THE SURVEY TEAM FOLLOWED ROUGH, EYE ESTIMATE DUE TO ABSENCE OF MEASURING INSTRUMENTS FOR MEASURING CHEMICALS AND ABSENCE OF WEIGHING MACHINE FOR SUCH ITEM AND ABSENCE OF REQUIRED MEASURING INSTRUMENT AND TECHNICAL MANPOWER FOR MEASURING PROCESSED 'HIDE AND SKIN' WHICH ARE OF DIFFERENT QUALITIES, SIZES AND SPECIFICATION. WE NOTE THAT THE ADDITION ON ACCOUNT OF EXCESS STOCK AND PROFIT ON UNRECORDED SALES HAS BEEN MADE BY THE ASSESSING OFFICER NOT ON ACCOUNT OF THE DIFFERENCE AND DISCREPANCIES FOUND FROM THE INVENTORY PREPARED BY THE SURVEY PARTY, BUT ON ACCOUNT OF THE DIFFERENT QUANTITY AND RATE AS ALSO QUALITY ADOPTED BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE VALUE OF STOCK AS PER SURVEY TEAM WAS ARRIVED AT RS.2,64,34,417/-, WHEREAS AS PER THE BOOKS OF THE ASSESSEE, THE TOTAL VALUE OF STOCK WITH FULL DETAILS, E.G. QUALITY, QUANTITY AND RATE WAS SUPPORTED BY BILLS AND PURCHASE CAME TO RS.2,72,87,969/-, LEAVING DEFICIT STOCK OF RS.8,53,552/-. THE ASSESSING OFFICER HAS NOT REJECTED THE BOOKS OF ACCOUNT. HE HAS NOT DOUBTED THE OPENING STOCK, NOR THE PURCHASES. HE HAS NOT BROUGHT ANY MATERIAL ON RECORD TO ESTABLISH ANY UNRECORDED PURCHASES OR SALES. APPARENTLY, THE DIFFERENCE IS ON ACCOUNT OF THE ADOPTION OF DIFFERENT RATES FOR DIFFERENT QUANTITIES OF CHEMICALS AND OTHER RAW MATERIALS. THE DISCREPANCIES IN THE SURVEY REPORT AS POINTED OUT BY THE ASSESSEE HAS NOT BEEN VERIFIED OR TAKEN CARE OF BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS WHILE WORKING OUT THE EXCESS STOCK IN DIFFERENT CATEGORIES. M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 11 CONSIDERING THE FACTUAL POSITION DISCUSSED ABOVE, WE ARE OF THE VIEW THAT ORDER PASSED BY THE LD CIT(A) DOES NOT REQUIRE ANY INTERFERENCE, HENCE WE HEREBY CONFIRM THE ORDER PASSED BY CIT(A). 4.5 IN THE RESULT, THE APPEAL FILED BY THE REVENUE (GROUND NO.2), IS DISMISSED. 5. GROUND NO. 3 AND 4 RAISED BY THE REVENUE RELATE TO ADDITION OF RS.55,724/- MADE BY THE ASSESSING OFFICER UNDER SECTION 14A READ WITH RULE 8D OF THE RULES. 5.1 THE BRIEF FACTS APROPOS THIS GROUND ARE THAT ASSESSING OFFICER MADE ADDITION OF RS.55,724/- UNDER SECTION14A OF THE ACT, BECAUSE THE ASSESSEE HAD EARNED EXEMPTED INCOME BUT HE HAD NOT DISALLOWED ANY EXPENSES AGAINST EXEMPTED INCOME. THE ASSESSEE HAS, DURING THE YEAR EARNED EXEMPTED INCOME OF RS.2,90,872/- BY LONG TERM SALE OF MUTUAL FUND (LONG TERM GAIN). THE SALES WERE SHOWN TO HAVE BEEN MADE THROUGH ITS DEMAT AGENT AND THE AGENT AFTER DEDUCTING ITS CHARGES, COMMISSION AND STT TRANSFERRED THE NET PROCEEDS TO THE BANK ACCOUNT OF THE ASSESSEE. THE ASSESSING OFFICER, BY APPLYING RULE 8D, WORKED OUT THE DISALLOWANCE OF EXPENDITURE UNDER SECTION14A OF THE ACT, AT RS.55,724/- AND ADDED THE SAME TO THE NET PROFIT. 5.2 AGGRIEVED BY THE ADDITION MADE BY ASSESSING OFFICER, THE ASSESSEE FILED AN APPEAL BEFORE THE LD CIT(A), WHO HAS PARTLY DELETED THE ADDITION. BEFORE THE LD CIT(A), THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING THE IMPUGNED DISALLOWANCE, PARTICULARLY WHEN THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE IN THIS REGARD. THE LD. A/R FURTHER SUBMITTED THAT THE ASSESSEE COMPANY HAS INTEREST FREE FUND IN THE FORM OF SHARE CAPITAL OF RS.146.07 LAKHS, RESERVE & SURPLUS OF RS.685.58 LAKHS AND INTEREST FREE DIRECTOR LOAN OF RS.3.50 LAKHS (AS PER AUDITED BALANCE SHEET ON 31.03.2010 FILED RELEVANT TO A.Y 2010-11, YEAR UNDER APPEAL) TOTALING TO RS.835.15 LAKHS WHEREAS INVESTMENT IN MUTUAL FUND AND M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 12 SHARES WAS OF RS.27.52 LAKHS. IT IS STATED THAT THE ASSESSEE COMPANY HAS ONLY INTEREST BEARING VEHICLE LOAN OF RS.6.96 LAKHS WHICH WAS PURELY AGAINST HYPOTHECATION OF VEHICLE AND, THEREFORE, VEHICLE LOAN WAS USED EXCLUSIVELY FOR VEHICLE PURCHASE AND NOT FOR MUTUAL FUND AND SHARES. THEREFORE, INTEREST FREE FUND IN THE FORM OF SHARE CAPITAL, RESERVE & SURPLUS AND INTEREST FREE DIRECTORS LOAN WERE FULLY USED AND WAS MORE THAN SUFFICIENT FOR MAKING TAX FREE DIVIDEND YIELDING MUTUAL FUND AND SHARES. THUS, THERE IS NOTHING ON RECORD TO SUGGEST THAT THE ASSESSEE HAD INCURRED ANY EXPENDITURE FOR THE PURPOSE OF EARNING ANY EXEMPT INCOME. THE ASSESSEE ALSO RELIED ON THE JUDGMENT OF BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM.), WHEREIN IT WAS HELD THAT IF THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUND TO MEET ITS TAX FREE INVESTMENT YIELDING EXEMPT INCOME, THEN IT COULD BE PRESUMED THAT SUCH INVESTMENT HAVE BEEN MADE FROM INTEREST FREE FUND AND NOT FROM LOAN FUND. IN THE INSTANT CASE, NO INTEREST BEARING LOAN WAS USED FOR INVESTMENT IN TAX FREE INCOME YIELDING INVESTMENT. THEREFORE, INTEREST COMPONENT SHOULD BE REMOVED FROM THE WORKING OF RULE 8D. THE LD. CIT(A), POINTED OUT THAT EVEN IF THE ASSESSEE HAS NOT INVESTED BORROWED CAPITAL FOR INVESTING MUTUAL FUNDS AND THE DISALLOWANCE OF PART OF INTEREST WAS NOT JUSTIFIED, STILL, SOME EXPENDITURE HAD TO BE INCURRED FOR EARNING THE EXEMPT INCOME. THEREFORE, DISALLOWANCE RESTRICTED TO 10% OF THE EXEMPTED INCOME. THUS, ADDITION WORKED OUT TO RS.29,087/- (10% OF RS.2,90,872/-) AND BALANCE AMOUNT HAS BEEN DELETED. 5.3 WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD, WE NOTE THAT LD CIT(A) MADE AN AD HOC DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE AND OFFICE EXPENSE TO MANAGE THE INVESTMENT PORTFOLIO, WHICH IS REQUIRED UNDER RULE 8D (2) (III) OF THE RULES, READ WITH SECTION 14A OF THE ACT. THE DISALLOWANCE UNDER RULE 8D (2) (II) IS NOT REQUIRED BECAUSE ASSESSEE HAS ITS OWN FUNDS TO MAKE INVESTMENTS. WE ARE OF THE VIEW THAT UNDER RULE 8D(2) (III) IS TO BE MADE @ 0.5% OF THE M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 13 AVERAGE INVESTMENTS OF DIVIDEND BEARING SECURITIES. AS FAR AS RULE 8D(2)(III) OF THE RULES IS CONCERNED IT HAS BEEN HELD BY THE HONBLE ITAT KOLKATA BENCH IN THE CASE OF DCIT VS. REI AGRO LTD. IN ITA NO.1331/KOL/2011 DATED 19.06.2013, THAT IT IS ONLY THE INVESTMENT WHICH YIELDED TAX FREE INCOME THAT SHOULD BE CONSIDERED FOR WORKING OUT THE AVERAGE VALUE OF INVESTMENT WHILE APPLYING THE RULE 8D(2)(III) OF THE RULES. THIS ORDER OF THE TRIBUNAL HAS BEEN CONFIRMED BY THE DECISION OF HONBLE CALCUTTA HIGH COURT IN G.A. NO.3022 OF 2013 JUDGMENT DATED 23.12.2013. IN VIEW OF THE AFORESAID LEGAL POSITION WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) ON THIS ISSUE CANNOT BE SUSTAINED. IT HAS ALSO BEEN HELD BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD VS. CIT (2015) 378 ITR 33 (DEL) THAT WHEN THERE IS NO EXEMPT INCOME THEN THERE CAN BE NO QUESTION OF DISALLOWANCE U/S 14A OF THE ACT. IN THE LIGHT OF THE JUDICIAL PRONOUNCEMENTS, WE ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE TO EXCLUDE INVESTMENTS WHICH HAD NOT YIELDED ANY EXEMPT DIVIDEND INCOME DURING THE PREVIOUS YEAR WHILE WORKING OUT THE AVERAGE VALUE OF INVESTMENTS FOR THE PURPOSE OF APPLYING RULE 8D(2)(III) OF THE RULES, SHOULD BE ACCEPTED. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO COMPUTE THE DISALLOWANCE UNDER RULE 8D(2)(III) AFTER TAKING AVERAGE INVESTMENTS OF DIVIDEND BEARING SECURITIES. 5.4 IN THE RESULT, THE APPEAL FILED BY THE REVENUE (GROUND NO. 3 AND 4) ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER IS PRONOUNCED IN THE OPEN COURT ON 17/01/2018. SD/- (S.S. VISWANETHRA RAVI) SD/- (DR. A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /KOLKATA; DATED 17/01/2018 [ RS SPS] M/S SHEE SEN LEATHER PVT. LTD ITA NO.1044/KOL/2014 ASSESSMENT YEAR: 2010-11 PAGE | 14 / COPY OF THE ORDER FORWARDED TO : 1. / THE ASSESSEE- I.T.O, WARD-12(4), KOLKATA 2. / THE RESPONDENT- M/S SHEE SEN LEATHER PVT. LTD 3. ( ) / THE CIT(A), 4. / CIT 5. , , / DR, ITAT, KOLKATA 6. / GUARD FILE. TRUE COPY BY ORDER, SR. P.S, HEAD OF OFFICE/DDO, ITAT, KOLKATA BENCHES, KOLKATA.