M/s. Neo Enterprises, Ahmedabad V. The ACIT.,Circle-10, Ahmedabad

ITA 1318/AHD/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 9137 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-03-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 18-06-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DINESH SINGH
• Assessee Lawyers: M K PATEL
• Keywords: Business income
• Section: 145

Judgement Text

, A IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ./ ITA.NO.1318/AHD/2012 / ASSTT. YEAR: 2008-2009 M/S.NEO ENTERPRISES C/2, SIDDHGIRI FLATS PRITAMNAGAR, ELLISBRIDGE AHMEDABAD 380 006. PAN : AAFN 7577 P VS ACIT, CIR.10 AHMEDABAD. ! / (APPELLANT) '# ! / (RESPONDENT) ASSESSEE BY : SHRI M.K. PATEL, AR REVENUE BY : SHRI DINESH SINGH, SR.DR / DATE OF HEARING : 14/03/2016 / DATE OF PRONOUNCEMENT: 16/03/2016 $%/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE ORD ER OF THE LD.CIT(A) DATED 27.1.2012 PASSED FOR THE ASSTT.YEAR 2008-09. 2. THE ASSESSEE HAS TAKEN SIX GROUNDS OF APPEAL, BU T ITS GRIEVANCES BASICALLY REVOLVE AROUND TWO ISSUES VIZ. (A) WHETHE R ESTIMATED GP ADDITION OF RS.15,91,194/- IS JUSTIFIABLE WHEN BOOK S OF ACCOUNTS WERE NOT REJECTED BY THE AO ? AND (B) WHETHER INTEREST I NCOME RECEIVED BY THE ASSESSEE ON LATE REALIZATION OF SALE PROCEEDS IS TO BE ASSESSED AS BUSINESS ITA NO.1318/AHD/2012 2 INCOME AS DISCLOSED BY THE ASSESSEE OR INCOME FROM OTHER SOURCES ? IF IT IS TO BE ASSESSED AS BUSINESS INCOME, THEN, THE REMUNERATION TO THE PARTNERS WOULD BE ADMISSIBLE ON SUCH INTEREST INCOM E AS PER COMPUTATION REQUIRED UNDER SECTION 40(B) OF THE INCOME TAX OR N OT ? 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HA S FILED ITS RETURN OF INCOME ON 12.8.2008 DECLARING TOTAL INCOME AT RS.16 ,45,010/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMEN T AND NOTICE UNDER SECTION 143(2) OF THE INCOME TAX ACT WAS ISSUED AND SERVED UPON THE ASSESSEE. THE ASSESSEE AT THE RELEVANT TIME WAS EN GAGED IN BUSINESS OF TRADING IN COTTON YARN AND MACHINERY. IT HAS SHOWN GP AT THE RATE OF 1.74% OF THE TURNOVER, WHEREAS IN THE IMMEDIATELY P RECEDING YEAR, SUCH GP WAS SHOWN AT 4.70% OF THE TURNOVER. THE LD.AO H AD ISSUED A SHOW CAUSE NOTICE INVITING THE EXPLANATION OF THE ASSESS EE AS TO WHY THE PROFIT SHOULD NOT BE COMPUTED AT THE RATE IT WAS OFFERED B Y THE ASSESSEE IN THE IMMEDIATELY PRECEDING YEAR. IN RESPONSE TO THE QUE RY OF THE AO, THE ASSESSEE HAS FIELD ITS REPLY ON 26.6.2010, 9.9.2010 , 25.9.2010, 19.10.2010 AND 25.10.2010. THE BASIC THRUST OF THE ASSESSEES STAND WAS THAT IN THIS YEAR, IT HAS CHANGED BUSINESS MODULE. THE TOTAL TURNOVER IN THIS YEAR WAS OF RS.17,56,75,361/-. IN THIS YEAR, THE ASSESSEE FIRM HAD MOSTLY SOLD POLYESTER FIBERS OF THE WELL-KNOWN RELI ANCE INDUSTRIES, WHERE THE RATE OF COMMISSION IS WELL-KNOWN TO ALL T HE PURCHASERS AND THE RATES ARE FIXED. THE ASSESSEE OPERATES AT A PROFIT MARGIN RATE OF 0.25% TO 0.50%. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CO NTENTED THAT THE GP IN THE ASSTT.YEAR 2006-07 WAS 9.75%; IN THE ASSTT.YEAR 2007-08 4.70% ITA NO.1318/AHD/2012 3 AND IN THIS YEAR IT IS 1.74%. BUT, IF THE GP IN RE SPECT OF PURCHASE AND SALE OF COTTON SEGMENT IS CALCULATED, THEN, IT WAS 1.43% IN THE ASSTT.YEAR 2007-08 AND 1.18% IN THE PRESENT YEAR. ACCORDING T O THE ASSESSEE, THE DIFFERENCE IS OF ONLY 0.25%. THE LD.AO DID NOT ACC EPT THE CONTENTIONS OF THE ASSESSEE. HE OBSERVED THAT THE FIGURES USED BY THE ASSESSEE TO EXPLAIN THE FALL IN GP DID NOT MATCH WITH THE FIGUR ES OF LEDGER ACCOUNT AND THE FIGURES IN THE AUDIT REPORT. THEREFORE, TH E EXPLANATION OF THE ASSESSEE IS NOT ACCEPTABLE. THE AO HAS ADOPTED THE GP RATE OF LAST YEAR AND APPLIED IT TO COTTON SEGMENT ONLY. THE PURCHAS E AND SALES WITH REGARD TO COTTON DURING THE YEAR WAS 4,52,04,360/-. THE LD.AO WORKED OUT THE GP ON THESE SALES AT THE RATE OF 4.70% AT R S.21,24,605/-. HE DEBITED THIS AMOUNT BY A SUM OF RS.5,33,411/- WHICH IS THE GP AT THE RATE OF 1.18% DISCLOSED BY THE ASSESSEE QUA THE COTTON SALES. THE BALANCE AMOUNT OF RS.15,91,194/- IS ADDED TO THE IN COME OF THE ASSESSEE. 4. THE APPEAL TO THE CIT(A) DID NOT BRING ANY RELIE F TO THE ASSESSEE. 5. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, W E HAVE GONE THROUGH THE RECORD CAREFULLY. SECTION 145 OF THE INCOME TAX ACT IS THE RELEVANT PROVISION FOR THIS ISSUE, THEREFORE, IT IS PERTINENT TO TAKE NOTE OF THIS SECTION. IT READS AS UNDER : 145. (1) INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURCES' SHALL , SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), BE COMPUTED IN ACCOR DANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. ITA NO.1318/AHD/2012 4 (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME [ACCOUNTING STANDARDS] TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WH ERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1) [OR ACCOUNTI NG STANDARDS AS NOTIFIED UNDER SUB-SECTION (2), HAVE NOT BEEN REGULARLY FOLL OWED BY THE ASSESSEE], THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MAN NER PROVIDED IN SECTION 144.] 6. A BARE READING OF SECTION 145 WOULD REVEAL THAT IT PROVIDE THE MECHANISM HOW TO COMPUTE THE INCOME OF THE ASSESSEE . ACCORDING TO SUB- SECTION 1, THE INCOME CHARGEABLE UNDER THE HEAD PRO FIT AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCE SHALL BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTANCY EMPLOYED BY AN ASSES SEE REGULARLY, SUBJECT TO SUB-SECTION 2 OF SECTION 145 OF THE ACT. SUB-SEC TION 2 PROVIDES THAT THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICIAL GAZET TE FROM TIME TO TIME, THE ACCOUNTING STANDARD REQUIRED TO BE FOLLOWED BY ANY CLASS OF ASSESSEE IN RESPECT OF ANY CLASS OF INCOME. THUS, IT INDICATES THAT INCOME HAS TO BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTAN CY FOLLOWED BY AN ASSESSEE I.E. CASH OR MERCANTILE, SUCH METHOD HAS T O BE FOLLOWED KEEPING IN VIEW THE ACCOUNTING STANDARD NOTIFIED BY THE CENTRA L GOVERNMENT FROM TIME TO TIME. SUB CLAUSE 3 PROVIDES A SITUATION, THAT IS , IF THE ASSESSING OFFICER IS UNABLE TO DEDUCE THE TRUE INCOME. ON THE BASIS OF M ETHOD OF ACCOUNTANCY FOLLOWED BY AN ASSESSEE THAN HE CAN REJECT THE BOOK RESULT AND THE ASSESSEES INCOME ACCORDING TO HIS ESTIMATION OR ACCORDING TO HIS BEST JUDGMENT. THE ASSESSING OFFICER IN THAT CASE IS REQUIRED TO POINT OUT THE DEFECTS IN THE ACCOUNTS OF ASSESSEE AND REQUIRED TO SEEK EXPLANATI ON OF THE ASSESSEE QUA THOSE DEFECTS. IF THE ASSESSEE FAILED TO EXPLAIN TH E DEFECTS THAN ON THE BASIS OF THE BOOK RESULT, INCOME CANNOT BE DETERMINED AND AS SESSING OFFICER WOULD ITA NO.1318/AHD/2012 5 COMPUTE THE INCOME ACCORDING TO HIS ESTIMATION KEEP ING IN VIEW THE GUIDING FACTOR FOR ESTIMATING SUCH INCOME. 7. IN THE LIGHT OF THE ABOVE, IF WE EXAMINE THE FAC TS OF THE PRESENT CASE, THEN IT WOULD REVEAL THAT THE FIGURES SUBMITT ED BY THE ASSESSEE FOR RECONCILIATION DID NOT MATCH WITH THE FIGURES IN AU DIT REPORT. THE LD. COUNSEL FOR THE ASSESSEE TOOK US THROUGH PAGE NO.61 OF THE PAPER BOOK, WHEREIN, HE HAS TRIED TO EXPLAIN THE BILL OF RS.9,5 5,953/- ALLEGED TO HAVE BEEN WRONGLY DEBITED IN ITS PURCHASE REGISTER. THE RE IS A DISCREPANCY OF 19,329 KGS. OF PURCHASE AND SALES OF COTTON. THERE ARE OTHER DISCREPANCIES ALSO, FOR WHICH AN EFFORT HAS BEEN MA DE TO EXPLAIN VIDE LETTER DATED 25.10.010 WHOSE COPY AVAILABLE AT PAGE NO.63 OF THE PAPER BOOK. AFTER DUE CONSIDERATIONS OF ALL THESE EXPLAN ATION, WE ARE SATISFIED THAT IT WAS QUITE DIFFICULT FOR THE AO TO DEDUCE TH E TRUE INCOME OF THE ASSESSEE FROM THE ALLEGED ACCOUNT, THOUGH, THE AO H AS NOT SPECIFICALLY RECORDED A FINDING ABOUT REJECTION OF THE BOOKS OF ACCOUNTS, BUT IMPLIEDLY FROM HIS DISCUSSION, IT REVEALS THAT BOOK RESULT WAS NOT ACCEPTED AND THE AO HAS ESTIMATED THE GP AFTER NOT SATISFYING HIMSELF THAT THE INCOME COULD NOT BE DEDUCED FROM THESE ACC OUNTS. 8. THE LD.COUNSEL FOR THE ASSESSEE IN THE ALTERNATE CONTENDED THAT THE AO HIMSELF HAS RESTRICTED THE APPLICATION OF GP ON THE COTTON SALES. MEANING THEREBY, THE LD.AO WAS SATISFIED THAT PROFI T IN POLYESTER YARN COULD NOT BE OF THAT SCALE. THE AO HAS CARVED OUT THE COTTON SALES OF RS.4,52,04,360/- OUT OF THE TOTAL TURNOVER OF THE A SSESSEE AMOUNTING TO RS.17,56,75,361/-. THE LD.AO HAS APPLIED THE GP RA TE ON THESE SALES OF ITA NO.1318/AHD/2012 6 EARLIER YEAR, BUT THAT RATE CONTAINED SALES OF OTHE R ITEMS ALSO. THE AO OUGHT TO HAVE WORKED OUT THE GP RATE FOR COTTON SEG MENTS IN EARLIER YEARS, AND THAT RATE SHOULD HAVE BEEN APPLIED IN TH IS YEAR. THE LD.DR CONTENDED THAT THE AO HAS VERIFIED OTHER ASPECTS, A ND ONLY THEREAFTER, APPLIED THIS RATE. 9. WE HAVE DULY CONSIDERED RIVAL CONTENTIONS AND GO NE THROUGH THE RECORD CAREFULLY. THE ASSESSEE HAS PLEADED SPECIFI CALLY BEFORE THE AO ABOUT THE CHANGE OF ITS BUSINESS MODULE. THIS CHAN GE HAS BEEN ACCEPTED BY THE AO, BECAUSE, HE DID NOT APPLY THE RATE OF GP ON POLYESTER SALES. HE HAS APPLIED THE GP RATE TO COTTON SALES ONLY. T HE ASSESSEE ON PAGE NO.53 OF THE PAPER BOOK SUBMITTED A COMPUTATION. IT ALLEGED THAT THIS CALCULATION WAS GIVEN TO THE AO ALSO. AS PER THIS CALCULATION, THE GP IN ASSTT.YEAR 2007-08 IN COTTON SEGMENTS WAS 1.43%, WH EREAS THE GP IN THE PRESENT YEAR IN COTTON SEGMENT IS 1.18%. THUS, ACCORDING TO THE ASSESSEE, THE GP RATE OF 1.43% SHOULD HAVE BEEN APP LIED ON THE COTTON SALES IN THE PRESENT YEAR. WHEN THIS CALCULATION W AS BROUGHT TO THE NOTICE OF THE LD.DR, HE SUBMITTED THAT HOW THIS RAT E HAS BEEN WORKED OUT IS NOT DISCERNIBLE. THE AO HAS NOT COMMENTED ON TH E ALLEGED SEGMENTAL SALES OF COTTON IN ASTT.YEAR 2007-08. HE SUBMITTED THAT THIS ISSUE BE SET ASIDE TO THE FILE OF THE AO FOR VERIFICATION. 10. ON DUE CONSIDERATIONS OF THE ABOVE FACTS, WE AR E OF THE VIEW THAT THIS ASPECT REQUIRES TO BE VERIFIED AT THE LEVEL OF THE AO. THEREFORE, WE SET ASIDE THIS ISSUE FOR LIMITED PURPOSE. THE LD.A O SHALL FIRST DETERMINE THE RATE OF PROFIT EARNED BY THE ASSESSEE IN ASSTT. YEAR 2007-08 IN COTTON ITA NO.1318/AHD/2012 7 SEGMENTS I.E. THE RATE OF PROFIT FOR PURCHASE AND S ALES OF COTTON ONLY. THAT VERY RATE WILL BE APPLIED TO THE COTTON SALES OF RS.4,52,04,360/-. WHATEVER GP COMES OUT THAT IS TO BE CONSIDERED FOR MAKING ADDITION. 11. AS FAR AS THE SECOND ISSUE IS CONCERNED, THE LD .CIT(A) HAS MADE AN ENHANCEMENT ON THIS ISSUE. 12. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE H AD CLAIMED REMUNERATION TO THE PARTNERS AT RS.11,23,356/- FROM NET PROFIT OF RS.26,77,318/-. THE LD.CIT(A) FURTHER OBSERVED THA T A SUM OF RS.14,57,771/- WAS INTEREST INCOME WHICH WAS EARNED BY THE ASSESSEE ON LATE REALIZATION OF ITS SALE PROCEEDS. ACCORDING T O THE LD.CIT(A), THIS INTEREST INCOME DESERVED TO BE ASSESSED AS AN INCOM E FROM OTHER SOURCES AND NOT BUSINESS INCOME. IF IT IS TO BE ASSESSED A S INCOME FROM OTHER SOURCES, THEN THIS COMPONENT WOULD EXCLUDE FROM COM PUTATION OF PARTNERS REMUNERATION UNDER SECTION 40(B) OF THE I NCOME TAX ACT. THE LD.COUNSEL FOR THE ASSESSEE AT THE VERY OUTSET RELI ED UPON THE DECISION OF THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN T HE CASE OF NIRMA INDUSTRIES LTD. DCIT, 283 ITR 402 WHERE IT IS HELD THAT INTEREST INCOME RECEIVED BY THE ASSESSEE ON LATE REALIZATION OF ITS SALE PROCEEDS WILL BE ASSESSED AS BUSINESS INCOME WHICH WILL QUALIFY FOR DEDUCTION UNDER SECTION 80IA, BECAUSE, IT IS TO BE CONSTRUED AS INC OME DERIVED FROM INDUSTRIAL UNDERTAKING. IF THAT YARDSTICK IS APPLI ED HERE, THEN, THIS INTEREST INCOME IS TO BE ASSESSED AS BUSINESS INCOM E, AND ACCORDINGLY, THE PARTNERS WOULD GET REMUNERATION ON THIS AMOUNT. CONSIDERING THIS ASPECTS, WE ARE OF THE VIEW THAT THE LD.CIT(A) HAS ERRED IN EXCLUDING THIS ITA NO.1318/AHD/2012 8 AMOUNT FOR THE PURPOSE OF CALCULATION OF REMUNERATI ON OF THE PARTNERS UNDER SECTION 40(B). WE ALLOW THE GROUND OF APPEAL RAISED BY THE ASSESSEE, AND DELETE THE ADDITION MADE BY THE LD.CI T(A) ON THIS ISSUE. THIS INTEREST INCOME BE ASSESSED AS BUSINESS INCOME . 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 16 TH MARCH, 2016 AT AHMEDABAD. SD/- SD/- ( N.K. BILLAIYA ) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER