Oscar Remedies Pvt. Ltd., Yamunanagar V. DCIT, Yamunanagar

ITA 1383/CHANDI/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80981 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 year(s) 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2014
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 09-10-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 07-12-2010
• Court: TRIBUNAL
• Keywords: Gross profit estimation; Unexplained investment; Depreciation
• Section: 37(1); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES A CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA NO. 1383/CHD/2010 ASSESSMENT YEAR: 2006-07 M/S OSCAR REMEDIES PVT LTD., VS. THE DCIT, YAMUNNAGAR YAMUNANAGAR PAN NO. AAACO3115H (APPELLANT) (RESPONDENT) APPELLANT BY : 09/10/12014 RESPONDENT BY : DATE OF HEARING : SHRI SUDHIR SEGHAL DATE OF PRONOUNCEMENT : SHRI MANJIT SINGH ORDER PER T.R.SOOD, A.M. THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DT 27.09.2010 OF CIT(A), KARNAL. 2. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS:- 1 THE LD. CIT(A) KARNAL HAS ERRED IN LAW AS WELL AS ON FACTS IN UPHOLDING THE ORDER OF DCIT, YAMUNANAGAR O F INVOKING THE PROVISIONS OF SECTION 145(3(3) OF THE INCOME TAX ACT, 1961 AND ESTIMATING SALES OF THE COMPANY AT RS . 6.00 CRORES AGAINST THE ACTUAL SALE OF RS. 46487279/- AN D ESTIMATING THE GROSS PROFIT AT RS. 3900000/- AGAINS T GROSS PROFIT OF RS. 2539595/- DECLARED BY THE ASSESSEE CO MPANY. THE ESTIMATION WAS MADE BY THE LEARNED ASSESSING OF FICER WITHOUT ANY BASIS OR FACTS ON RECORD. 2. THE LD. CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWANCE OF RS. 325000/- ON ACCOUNT OF EXPENDIT URE CLAIMING BY THE ASSESSEE COMPANY ON THE AMOUNT OF B UILDING AT RS. 10.00 LACS AND ON PLANT & MACHINERY AT RS. 1 5.00 LACS 2 WHICH WAS SURRENDERED DURING THE COURSE OF SURVEY. THE DEPRECIATION WERE ALLOWABLE AS PER THE PROVISION O F SECTION 32 OF THE INCOME TAX ACT, 1961 AS THE INVESTMENT WA S RECORDED IN THE BOOKS. 3. THE LD. CIT(A) HAS ERRED IN LAW IN LAW AS WELL A S ON THE FACTS IN UPHOLDING ADDITIONS ON ACCOUNT OF THE FOLLOWING HEAD OF EXPENDITURES:- A) RS. 12114.OO UNDER GENERAL EXPENDITURE. A/C B) RS. 31328.00 UNDER TELEPHONE EXPENDITURE. A/C C) RS. 41718.00 UNDER CAR RUNNING INTEREST ON CAR L OAN AND DEPRECIATION ON CAR A/C 3. OUT OF THE ABOVE, GROUND NOS. 2 & 3 (A) WAS NOT PRESSED BEFORE US AND, THEREFORE, THE SAME IS DISMISSED AS NOT PRESSE D. 4. GROUND NO:1 AFTER HEARING BOTH THE PARTIES WE F IND THAT IN THIS CASE A SURVEY WAS CONDUCTED IN THE PREMISES OF ASSE SSEE ON 18/19-01- 2006. DURING THE SURVEY CASH AMOUNTING TO RS. 26,3 6,,505/- WAS FOUND AGAINST THE CASH BALANCE OF RS. 1,36,505/- SHOWN IN THE BOOKS OF ACCOUNT. SOME OTHER DISCREPANCIES WERE ALSO FOUND. ULTIMATE LY ASSESSEE MADE SURRENDER OF RS. 50 LAKHS AS PER THE FOLLOWING DETA ILS:- I) EXCESS CASH RS. 25 LAKHS II) UNACCOUNTED INVESTMENT IN BUILDING RS. 10 LA KHS III) UNACCOUNTED INVESTMENT IN MACHINERY RS. 15 L AKHS TOTAL RS. 50 LAKHS 5. DURING THE ASSESSMENT PROCEEDINGS IT WAS NOTICED THAT ASSESSEE HAS SHOWN SALE OF RS. 4.65 CRORES AND GP RATE HAS BEEN SHOWN AT 5.46%. IN THE IMMEDIATE PRECEDING YEAR THE ASSESSEE HAD SHOWN SALES OF RS. 6.37 CRORES AND GP RATE OF 6.6 %. IN ASSESSMENT YEAR 20 04-05 ALSO THE ASSESSEE 3 HAD DECLARED RATE OF GP AS 6.34%. THE ASSESSEE WAS ASKED TO EXPLAIN THE FALL IN GP AND IT WAS MAINLY EXPLAINED THAT GP HAS FALLEN BECAUSE OF THE POLICY OF GOVERNMENT OF INDIA BY WHICH GOVERNMENT H AD GRANTED COMPLETE EXEMPTION FROM EXCISE DUTY AS WELL AS THE PAYMENT OF TAXES IN THE NEIGHBORING STATES AND IN HIMACHAL PRADESH AND UTTR AKHAND. IN VIEW OF THESE EXEMPTIONS, UNITS LOCATED IN THE NEIGHBORING STATES ENJOYED AN ADVANTAGE OF 20 TO 22% WHICH LED TO INCREASE IN THE COMPETITION. THE ASSESSING OFFICER DID NOT ACCEPT THIS CONTENTION BE CAUSE THIS WAS NOT SUPPORTED BY PROPER EVIDENCE. FURTHER ASSESSEE HAD FILED DETAILS OF INVENTORY OF OPENING AND CLOSING STOCK BUT NO DETAI LS WERE FILED IN RESPECT OF RAW MATERIAL PURCHASES DURING THE YEAR AND CONSU MPTION DURING THE YEAR. THE ASSESSING OFFICER ALSO REFERRED TO THE V ARIOUS COMMENTS GIVEN BY THE TAX AUDITOR IN COLUMN NO. 28(B)(A) OF THE TA X AUDIT REPORT WHEREIN IT WAS STATED THAT IT HAS BEEN EXPLAINED TO US THAT MAINTENANCE OF QUANTITATIVE DETAILS OF THE STOCK IS NOT POSSIBLE I N SUCH TYPE OF BUSINESS. AGAIN IT WAS STATED THAT QUANTITATIVE DETAILS OF CL OSING STOCK IS NOT PROVIDED TO US. THE ASSESSEE ALSO COULD NOT FILE TRADING AND MANUFACTURING ACCOUNT IN PRE SURVEY AND POST SURVEY PERIODS. DISCREPANCIES WERE ALSO NOTED IN THE OUTSTANDING BA LANCES IN THE CASE OF CERTAIN FIRMS E.G. IN THE CASE OF M/S MERCK LTD THE ASSESSEE HAD SHOWN CREDIT BALANCES AS ON 1.4.2005 AT RS. 1,23,845/- AN D DEBIT OF RS. 19,177/- ON 12.10.2005 WHEREAS THAT COMPANY HAS REPORTED THA T DURING THE PERIOD NO TRANSACTION WERE CARRIED OUT. SIMILARLY, FEW OT HER EXAMPLES WERE GIVEN BY THE ASSESSING OFFICER. IN VIEW OF THESE DI SCREPANCIES, THE ASSESSING OFFICER REJECTED THE BOOKS OF ACCOUNT AND ESTIMATED THE SALES OF ASSESSEE AT RS. 6 CRORES CONSIDERING THE SALES SHOW N IN THE IMMEDIATE PRECEDING YEAR AND GP RATE WAS ESTIMATED AT 6.5%. F ROM THE GROSS PROFIT WORKED OUT BY THIS FORMULA THE GP SHOWN BY THE ASSE SSEE WAS REDUCED AND 4 NET ADDITION OF RS. 13,60,405/- WAS MADE TO THE TR ADING RESULTS DISCLOSED BY THE ASSESSEE. 6. ON APPEAL, THE ACTION OF THE ASSESSING OFFICER I N REJECTION OF BOOK AS WELL AS ESTIMATION OF PROFIT WAS CONFIRMED BY LD . CIT(A). 7. BEFORE US, LD. COUNSEL FOR THE ASSESSEE SUBMITTE D THAT RETURN WAS FILED ON THE BASIS OF AUDITED BOOKS OF ACCOUNT. HE FURTHER CONTENDED THAT THERE IS NO MERIT IN THE ALLEGATION OF THE ASSESSIN G OFFICER THAT ASSESSEE HAS NOT MAINTAINED ANY STOCK REGISTER AND INVENTORY OF RAW MATERIAL AND IN THIS REGARD HE REFERRED TO VARIOUS DOCUMENTS FILED IN THE PAPER BOOK INCLUDING THE DETAILS OF STOCK SHOWN TO THE EXCISE AUTHORITIES. THEREFORE, IN THIS BACKGROUND THE BOOKS HAVE NOT BEEN CORRECTL Y REJECTED. 8. ON THE OTHER HAND, LD. DR STRONGLY SUPPORTED THE ORDER OF ASSESSING OFFICER AND CIT(A). HE FURTHER SUBMITTED THAT VERY FACT THAT DISCREPANCY WERE FOUND DURING THE SURVEY AND THE SU RRENDER WAS ALSO MADE ITSELF SHOWS THAT BOOKS ARE NOT PROPER AND REJ ECTION OF THE SAME IS JUSTIFIED. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY AND WE FIND THAT ASSESSEE HAS FILED THE DETAILS OF CLOSING STOCK BUT ASSESSEE COULD NOT SHOW ANY DETAILS OF QUALITY AND QUANTITY WISE OF RAW MAT ERIAL WHICH WAS PRODUCED BEFORE THE ASSESSING OFFICER OR CIT(A). T HERE ARE CERTAIN DISCREPANCIES IN THE ACCOUNT OF VARIOUS PARTIES FOR HAVING NOT BEEN RECONCILED BEFORE US. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CHARANJIT KUMAR VS. CIT 282 ITR 78 CLEARLY HELD THAT IF THERE IS A LOW GROSS PROFIT AND A SURRENDER HAD ALSO BEEN MA DE DURING THE SURVEY THAT ITSELF INDICATES THAT ACCOUNTS ARE NOT PROPER AND REJECTION OF SUCH 5 ACCOUNTS ARE JUSTIFIED. THEREFORE, AS FAR AS REJECT ION OF BOOKS OF ACCOUNT IS CONCERNED, WE UPHOLD THE SAME. HOWEVER, WE FIND T HAT SOME JUSTIFICATION IN FALL OF GP BECAUSE OF THE EXTRA COMPETITION FACE D BY THE ASSESSEE ON ACCOUNT OF VARIOUS INCENTIVES GIVEN BY THE GOVERNME NT OF INDIA IN THE NEIGHBORING STATES. THE DETAILS OF SALES AND GP AS GIVEN BY THE ASSESSEE AT PAGE 98 IS AS UNDER:- ASSESSMENT YEAR SALE RS. (INCL. EXCISE) GP RS. GP RATE 20004-05 52833296 3353254 6.34% 2005-06 63718864 4314146 6.77% 2006-07 51834381 2539595 4.90% AS FAR AS THE SALES ARE CONCERNED, IN OUR OPINION T HE SAME HAVE BEEN CORRECTLY ESTIMATED CONSIDERING THE EARLIER YEARS S ALES. HOWEVER, AS FAR AS GP IS CONCERNED IN OUR OPINION THE SAME WAS 6.34% A ND 6.77% IN THE EARLIER YEARS AND, THEREFORE THERE CAN BE A CHANCE OF SOME REDUCTION BECAUSE OF THE INCREASED COMPETITION. THEREFORE, W E ESTIMATE THE GP RATE AT 5.5% IN THIS YEAR. THEREFORE, WE SET ASIDE THE ORDER OF LD. CIT(A) AND ASSESSEE GETS RELIEF OF RS. 6 LAKHS ON ACCOUNT OF T RADING RESULTS. THUS, THIS GROUND IS PARTLY ALLOWED. 10. GROUND NO.3 : AFTER HEARING BOTH THE PARTIES WE FIND THAT DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT ASSESSEE INCURRED EXPENDITURE ON TELEPHONE AS WELL AS CAR MA INTENANCE BUT NO TELEPHONE REGISTER OR LOG BOOK WAS MAINTAINED. SINC E THE PERSONAL USAGE COULD NOT BE DENIED, HE DISALLOWED 20% OF THESE EXP ENSES. THE LD. CIT(A) DECIDED THIS ISSUE VIDE PARA 4.7 TO 4.8, WHI CH IS AS UNDER:- 4.07 AS FAR AS THE PLEA OF THE APPELLANT THAT NO DISALLOWANCE ON THIS ACCOUNT CAN BE MADE IN THE CASE OF CORPORATE ENTITY , IT MAY HE OBSERVED 6 THAT THOUGH IT IS TRUE THAT A COMPANY IS A SEPARATE LEGAL ENTITY VIS-A-VIS SHAREHOLDERS, DIRECTORS YET THE GROUND REALITIES AN D APPARENT FACTS ARE THAT THE COMPANIES, WHICH ARE USUALLY CLOSELY HELD BY SHAREHOLDERS OF A FAMILY/ GROUP, ARE RUN BROADLY QUITE AKIN TO FAMI LY CONCERNS. IT WOULD BE MORE JUSTIFIED TO TREAT SUCH COMPANIES FOR THE PURPOSE OF CONSIDERING THE PERSONAL ELEMENT IN EXPENSES INVOLV ED AS PARTNERSHIP CONCERNS. THIS FACT IS GENERALLY NOT IN DISPUTE THA T TELEPHONES AND PASSENGER VEHICLES OWNED BY SUCH COMPANIES ARE USED BY DIRECTORS WHO ARE VIRTUALLY OWNERS OF THE COMPANIES FOR PERSO NAL PURPOSES AND NO PERQUISITES VALUE IS INCLUDED IN THEIR HANDS FOR TAXATION PURPOSES. THUS ON ONE HAND PERSONAL USER OF TELEPHO NE AND VEHICLES IS ADMITTED BUT ENTIRE EXPENSES ARE CLAIMED AS BUSINES S DEDUCTION FULLY ON MERE LEGAL TECHNICALITIES. THOUGH IT IS A SMALL ISS UE BUT THEN IT IS A VERY COMMON AND FREQUENTLY RAISED ISSUE AND HENCE MENTIO N MAY BE MADE OF THE DOCTRINE OF PIERCING OF THE VEIL/ LIFTING TH E MASK OF THE CORPORATE ENTITY FOR ARRIVING AT THE SUBSTANCE OF THE TRANSAC TIONS SO AS TO BE FAIR TO BOTH THE APPELLANT AND REVENUE. HON'BLE ITAT BENCHE S HAVE ALSO UPHELD PARTIAL DISALLOWANCE OF SUCH EXPENSES CONSIDERING T HE FACTS OF THE CASES IN SEVERAL CASES. HERE ALSO, ADMITTEDLY NO DAY TO D AY RECORD OF USE OF TELEPHONES AND CARS ARE MAINTAINED AND FACTS STRONG LY INDICATE TOWARDS PERSONAL USER ALSO. FINALLY, IT MAY BE NOTED THAT E VEN IF, SUCH DISALLOWANCE IS NOT UPHELD ON ACCOUNT OF PERSONAL U SER IN VIEW OF THE TECHNICAL ISSUE OF THE COMPANY BEING A SEPARATE & D ISTINCT LEGAL ENTITY, SUCH DISALLOWANCE SHOULD BE OTHERWISE FULLY JUSTIFI ED IN VIEW OF THE PROVISIONS, OF SECTION 37(1) OF THE IT ACT AS SUCH EXPENSES CANNOT BE HELD TO BE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSES OF APPELLANT'S BUSINESS. REFERENCE CAN BE MADE TO THE FOLLOWING DECISIONS, WHEREIN PARTIAL DISALLOWANCE OF DEPRECIATION ON VEH ICLES FOR PERSONAL USERS HAS BEEN UPHELD:- I. CIT VS. SOBJIARAM JOKHIRAM (1960) 39 ITR 299 ( PAT) II. CIT VS. K.L.BHASIN & CO. (1986) 158 [TR 623 (P AT) III. ETERNAL SALES CORP. VS. ITO (42 TTJ 667) IV. CIT VS. CHITRAM & CO. (P) LTD. (1991) 191 ITR 96 (MAD.) V. M.M.FISHERIES PVT. LTD. V. CIT AND ANOTHER 277 ITR 204 (DE!.) 11. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT ASSESSEE HAS ITSELF INCLUDED THESE EXPENSES IN THE FRINGE BE NEFIT TAX RETURN AND 7 THEREFORE, DISALLOWANCE WAS NOT CALLED FOR. IN ANY CASE THE DISALLOWANCE MADE IS ON HIGHER BASIS. 12. ON THE OTHER HAND, LD. DR STRONGLY SUPPORTED TH E ORDER OF LD. CIT(A). 13. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT COPY OF THE ASSESSMENT ORDER U/S 115WE(3) HAS BEEN FILED DEAL ING WITH FRINGE BENEFIT TAX, HOWEVER, NO DETAILS WERE FILED TO SHO W WHAT WERE THE ITEMS WHICH WERE INCLUDED FOR THE PURPOSE OF THIS RETURN, THEREFORE, NO BENEFIT CAN BE GIVEN ON THIS ACCOUNT. HOWEVER, AT CHANDIGAR H BENCH, WE CONSISTENTLY ARE HOLDING THAT IN CASE OF CAR AND TE LEPHONE EXPENSES, DISALLOWANCE SHOULD BE RESTRICTED TO 10% OF SUCH EX PENSES FOR PERSONAL USAGES. THEREFORE, FOLLOWING THE CONSISTENCY, WE S ET ASIDE THE ORDER OF LD. CIT(A) AND DIRECT THE ASSESSING OFFICER TO DISA LLOW TELEPHONE AND CAR EXPENSES @ 10%. 14. GROUND NO.4 : AFTER HEARING BOTH THE PARTIES WE FIND THAT DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT ASSESSEE HAS OBTAINED LOANS FROM FOLLOWING PARTIES:- SHRI RAJNISH MEHTA RS. 3,00,000/- MS. SURAJI FINANCIAL COMPANY RS. 28,200/- M/S SARAI FINANCE & INVESTMENT CO. RS. 40,800/ - 15. THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HA S NOT FILED ANY EVIDENCE IN RESPECT OF THESE LOANS AND HAS SHOWN IN ABILITY TO OBTAIN FURTHER DOCUMENTS. THE ASSESSING OFFICER ALSO NOTED THAT ASSESSEE HAS MADE REQUESTS FOR ISSUING SUMMONS AT THE FAG END OF THIS ASSESSMENT WHEN THE SAME IS GETTING TIME BARRED, THEREFORE, ITS REQ UEST CANNOT BE 8 ENTERTAINED. IN THIS BACKGROUND THE SUM OF RS. 3,6 5,000/- WAS ADDED TO THE INCOME OF THE ASSESSEE. 16. ON APPEAL BEFORE CIT(A) CERTAIN JUDGMENTS WERE CITED. THE SUBMISSIONS MADE BEFORE HIM DID NOT FIND FORCE WITH THE LD. CIT(A) AND THE ADDITION WAS CONFIRMED. 17. BEFORE US LD. COUNSEL FOR THE ASSESSEE SUBMITTE D THAT A LAON FROM M/S SURJIT FIONASNCIAL & SASRAN FINANCE INDUSTRIES COMPANY WERE NOT THE LOAN BUT IN FACT THE ASSESSEE HAS TAKEN THE CHIT FO R WHICH EARLIER PAYMENTS WERE BEING MADE, THEREFORE, THIS SUM CANNOT BE TREA TED AS LOAN. IN RESPECT OF THE LOAN FROM SHRI RAJNISH MEHTA, HE SUBMITTED T HAT PARTY WAS NOT COOPERATING AND THAT IS WHY THE ASSESSING OFFICER W AS REQUESTED TO ISSUE SUMMONS. HOWEVER, HE FURTHER SUBMITTED THAT IF AN OPPORTUNITY IS GIVEN THE ASSESSEE WAS READY TO PRODUCE THESE PARTIES BEF ORE THE ASSESSING OFFICER. 18. ON THE OTHER HAND, LD. DR STRONGLY SUPPORTED TH E ORDER OF CIT(A). 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. WE FIND FORCE IN THESE SUBMISSIONS THAT IF A CHIT IS TAKEN FROM C HIT FUND COMPANY, THEN SUCH AMOUNT CANNOT BE TREATED AS LOAN. HOWEVER, NO EVIDENCE HAS BEEN FILED BEFORE US TO SHOW THAT AMOUNT HAS COME FROM C HIT FUNDS. WE FURTHER FIND THAT IT SEEMS THAT ASSESSEE DID NOT GET PROPER OPPORTUNITY FROM THE ASSESSING OFFICER BECAUSE THESE ISSUES WERE RAISED AT THE FAG END OF THE ASSESSMENT, THEREFORE, WE SET ASIDE THIS ISSUE TO T HE FILE OF ASSESSING OFFICER WITH A DIRECTION TO RECONSIDER THE SAME IF THE ASSESSEE FILES SOME EVIDENCE TO SHOW THAT AMOUNT HAVE BEEN RECEIVED FRO M CHIT FUND COMPANY THEN DECIDE THE ISSUE AFTER CONSIDERING THE SAME. 9 20. AS FAR AS LOANS FROM SHRI RAJNISH MEHTA IS CONC ERNED, THE ASSESSING OFFICER SHOULD GIVE ONE MORE OPPORTUNITY TO THE ASS ESSEE TO PRODUCE THIS PARTY BECAUSE LD. COUNSEL FOR THE ASSESSEE HAS UNDE RTAKEN BEFORE US THAT HE WOULD PRODUCE THIS PARTY. THE ASSESSING OFFICER MAY DECIDE AFTER RECALLING THE STATEMENT OF THIS PARTY IN ACCORDANCE WITH LAW. 21. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.10.2014 SD/- SD/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 28 OCT 2014 RKK COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR