Asstt. Commissioner of Income Tax-3, Kanpur V. Shri Mohd. Usman , Kanpur

ITA 363/LKW/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83458 (ITAT-LUCKNOW)
• Duration Of Justice: 2 year(s) 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 10-11-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 04-07-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUJEET CHAUDHARY
• Keywords: Gross profit estimation; Opportunity of being heard; Fair market value

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NO.363/LKW/2012 ASSESSMENT YEAR:2008 - 09 SHRI MOHD. USMAN, 92/11, PECH BAGH, KANPUR. PAN:AAEPU4688C VS A.C.I.T. - 3, KANPUR. (RESPONDENT) (APPELLANT) SHRI Y. P. SRIVASTAVA, D. R. APPELLANT BY SHRI SUJEET CHAUDHARY, FCA RESPONDENT BY 10/11/2014 DATE OF HEARING 17 /12/2014 DATE OF PRONOUNCEMENT O R D E R PER A. K. GARODIA, A.M. THIS IS REVENUES APPEAL DIRECTED AGAINST THE ORDER PASSED BY LEARNED CIT(A) - II, KANPUR DATED 23/02/2012 FOR THE ASSESSMENT YEAR 2008 - 2009. 2. GROUND NO. 1 IS AS UNDER: 1 (A) THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - II, KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.6,00,000/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF LOW GROSS PROFIT WITHOUT APPRECIATING THE FACTS BROUGHT ON RECORD BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 1(B) TH E LD COMMISSIONER OF INCOME TAX (APPEALS) - II, KANPUR HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FACTS BROUGHT OUT BY THE ASSESSING OFFICER TO SHOW THAT THE ASSESSEE HAD UNDERVALUED THE CLOSING STOCK TO BRING DOWN THE GROSS PROFIT, AND THEREBY T HE TAX LIABILITY, DELIBERATELY. 3. LEARNED D. R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LEARNED A. R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNED CIT(A). 2 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THE ISSUE IN DISPUTE WAS DECIDED BY THE ASSESSING OFFICER AGAINST THE ASSESSEE BY OBSERVING THAT NOT ONLY THE RATE OF GROSS PROFIT DECLARED BY THE ASSESSEE IN THE PRESENT YEAR AT 3.4% IS LOWER AS COMPARED TO 3.90% DECLARED IN THE PRECEDING YEAR BUT THE ASSESSEE HAS VALUED THE CLOSING STOCK AT A LESSER AMOUNT. ON PAGE NO. 4 OF THE ASSESSMENT ORDER, IT IS OBSERVED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS TAKEN MUCH LOWER COST OF RAW HIDE FOR COMPUTING COST OF WET BLUE AND DRESSED HIDE. HE HAS FURTHER OBSERVED THAT THE REA SON FOR SUCH HUGE VARIATION IS NOT UNDERSTANDABLE IN THE LIGHT OF FACT THAT WET BLUE IS A MUCH PROCESSED STAGE OF RAW HIDE. HE FURTHER OBSERVED THAT THERE IS VERY MARGINAL DIFFERENCE IN THE COST OF WET BLUE AND DRESSED HIDE BUT DRESSED HIDE IS FINAL STAGE OF PROCESSING. THE ISSUE IN DISPUTE WAS DECIDED BY CIT(A) AS PER PARA 3.3 OF HIS ORDER, WHICH IS REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: - I HAVE CAREFULLY CONSIDERED THE CONTENTION OF THE ASSESSEE AND ALSO THOSE OF THE ASSESSING OFFICER. IT IS UNDISPUTED THAT THE TURNOVER OF THE ASSESSEE INCREASED SUBSTANTIALLY FROM RS. 3.84 CRORES IN THE IMMEDIATELY PRECEDING PREVIOUS YEAR TO RS.12.51 CRORES I N THE CURRENT YEAR. IT IS ALSO UNDISPUTED THAT THE GROSS PRO FIT HAS ALSO INCREASED FROM 15.12 LACS IN THE IMMEDIATELY PRECEDING PREVIOUS YEAR TO 43 LACS IN THE CURRENT YEAR. IT IS NOT UNCOMMON FOR BUSINESSES TO ALLOW A DROP IN THE GP RATE TO ACHIEVE A LARGER TURNOVER WHICH IN THIS CASE IS AN INCREASE OF ALMOST 3 TI MES. REGARDING THE VALUATION OF DOSING STOCK, THE AO HAS NOT DISPUTED THAT THE CLAIM OF THE ASSESSEE THAT METHOD OF VALUATION IS BEING CONSISTENTLY FOLLOWED. HE HAS ALSO NOT DISPUTED THAT THE FACT THAT THE METHOD OF VALUATION I S IN ACCORDANCE WITH PROVISI ONS OF SECTION 145A AND THE APPLICABLE ACCOUNTING STANDARDS. THE ASSESSEE HAS ALSO EXPLAINED AND REPLIED TO EACH OF THE OBSERVATIONS MADE BY AO HAS MADE AN ADDITION ON AN ESTIMATED BASIS. 3 IN ABSENCE OF ANY SPECIFIC DEFECT POINTED OUT IN THE BOOKS OF ACCOU NTS OR IN THE METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE A TRADING ADDITION CANNOT BE MADE. MOREOVER IT APPEARS THAT THE TRADING ADDITION HAS BEEN MADE BECAUSE OF VARIATION IN G.P RATE WHICH IS SEEN AT 0.5% . BUT IT IS COMMON KNOWLEDGE THAT THE RATE OF GP CANNOT BE STATIC AND IT VARIES FROM YEAR TO YEAR WHICH HAS BEEN EXPLAINED WITH REASONS (VARIATION IS ONLY 0.5% DURING THE YEAR). THE SAME VIEW WAS UPHELD BY THE HON'BLE I TAT LUCKNOW BENCH IN THE CASE OF HUKUM CHAND AGARWAL, 2005 (6) MTC 119. UNDER THE C IRCUMSTANCES THE AO IS NOT JUSTIFIED IN MAKING THIS ADDITION OF RS 6,00,000. THEREFORE THE ADDITION IS DELETED. 4.1 FROM THE ABOVE PARA FROM THE ORDER OF CIT(A), WE FIND THAT NO FINDING IS GIVEN BY CIT(A) REGARDING THIS OBJECTION OF THE ASSESSING OFFICER THAT THE RATE OF GROSS PROFIT ADOPTED BY THE ASSESSEE AND VALU E OF CLOSING STOCK OF WET BLUE AND DRESSED HIDE IS VERY LOW. THE CIT(A) H AS BRUSHED A SIDE THE OBJECTIONS OF THE ASSESSING OFFICER IN A SUMMARY MANNER BY STATING THAT THE METHOD OF VALUATION OF CLOSING STOCK ADOPTED BY THE ASSESSEE IS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 145A AND THE APPLICABLE ACCOUNTING STANDARDS. WHE N A SPECIFIC OBJECTION HAS BEEN RAISED BY THE ASSESSING OFFICER, THE SAME HAS TO BE REBUTTED BEFORE SAYING THAT THE OBJECTION OF THE ASSESSING OFFICER IS NOT VALID. THE CIT(A) HAS NOT DONE SO. HENCE, IN OUR CONSIDERED OPINION, THE ORDER OF CIT(A) IS NOT SUSTAINABLE AND WE RESTORE THE MATTER BACK TO HIS FILE FOR FRESH DECISION. THE CIT(A) SHOULD PASS A SPEAKING AND REASONED ORDER WITH A CLEAR FINDING ON THE OBJECTIONS OF THE ASSESSING OFFICER AFTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO BOTH THE SIDES. GROUND NO. 1 IS ALLOWED FOR STATISTICAL PURPOSES. 5. GROUND NO. 2 IS AS UNDER: 2. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - II, KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.10,96,910/ - U/S 40A(2)(B) OF INCOME TAX ACT, 1961, OUT OF EXCESS COMMISSION PAID BY THE 4 ASSESSEE TO HIS SON AND SON IN LAW, WITHOUT APPRECIATING THE FACTS BROUGHT ON RECORD BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 6. LEARNED D. R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LEARNED A. R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNED CIT(A). 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT IT IS NOTED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORD ER THAT THE ASSESSEE WAS SPECIFICALLY REQUIRED TO EXPLAIN THE NECESSITY OF PAYMENT OF COMMISSION OF RS.14,46,910/ - IN THE PRESENT YEAR TO TWO RELATIVES I.E. MR. MOHD. HASEEN GAURI, ASSESSEES SON AND MR. JAVED ALAM, ASSESSEES SON - IN - LAW PARTICULARLY IN TH E LIGHT OF THE FACT THAT THERE WAS NO COMMISSION PAYMENT IN THE PREVIOUS YEAR. IN REPLY TO THIS QUERY, IT WAS SUBMITTED BY THE ASSESSEE THAT THIS AMOUNT WAS INCURRED TOWARDS COMMISSION ON SALES EFFECTED TO ORDNANCE EQUIPMENT FACTORY, KANPUR WHICH HAS RESU LTED IN BIG INCREASE IN THE SALES OF THE ASSESSEE FROM RS.358.66 LAC TO RS.1240.03 LAC. THEREAFTER, IT IS NOTED BY THE ASSESSING OFFICER THAT APART FROM THESE TWO PERSONS, TWO OTHER RELATIVES OF THE ASSESSEE I.E. ANOTHER SON MR. MOHD. AMIR GAURI AND HIS D AUGHTER KM. SHAIMA USMAN WERE ALSO PAID ANNUAL SALARY OF RS.1.95 LAC EACH. ON THIS BASIS, THE ASSESSING OFFICER CAME TO CONCLUSION THAT THESE TWO PERSONS I.E. MR. MOHD. HASEEN GAURI, ASSESSEES SON AND MR. JAVED ALAM, ASSESSEES SON - IN - LAW ARE ALSO ENTITL ED FOR THE SAME SALARY AND ON THIS BASIS , HE ALLOWED DEDUCTION OF RS.4 LAC TO THE ASSESSEE BEING SALARY OF THESE TWO PERSONS @RS.2 LAC PER ANUMN EACH AND DISALLOWED THE BALANCE AMOUNT OF COMMISSION. THIS ISSUE WAS DECIDED BY CIT(A) AS PER PARA 4.3 OF HIS ORDER, WHICH IS REPRODUCED BELOW: I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND I AM OF THE VIEW THAT NEITHER COGENT REASONS HAVE BEEN GIVEN BY THE AO WHILE DISALLOWING THE COMMISSION PAID NOR THE EXPLANATIONS GIVEN BY THE ASSESSEE HAVE BEEN CONTR ADICTED. THE AO HAS AGREED THAT THE TWO PERSONS I.E. MR MOHD HASEEN GAURI AND MR JAVED ALAM HAVE DONE WORK FOR THE ASSESSEE. THE 5 TURNOVER OF THE COMPANY DURING THE YEAR HAS INCREASED SUBSTANTIAL L Y COMPAR E D TO THE EARLIER YEARS. FURTHER BOTH THESE PERSONS H AVE BEEN FILING THEIR RETURN OF INCOME SEPARATELY SHOWING THE PAYMENTS MADE BY THE ASSESSEE. THE PAN OF THESE PERSONS AND THE AGREEMENTS REACHED WITH THEM ARE ALSO SUBMITTED TO THE AO. THEREBY THE ASSESSEE HAS DISCHARGED HIS ONUS OF EXPLAINING THE PAYMENT OF COMMISSION. RELIANCE IS PLACED ON CIT VS KAMDHENU STEELS AND ALLOYS LTD 19 TAXMANN.COM 26 (DEL) 2012 AND CIT VS KINETIC CAPITAL FINANCE LTD 2011 - TIOL - 584 - HC - DEL - IT. UNDER THE CIRCUMSTANCES NO DISALLOWANCE CAN BE MADE. EVEN WHILE INVOICING THE PROVISIONS OF SECTION 40A(2)(B) THE AO CAN DISALLOW ANY EXPENDITURE ONLY WHEN HE CAN REASONABLY PROVE BY COMPARING WITH OTHER RELEVANT COMPARABLES THAT SUCH EXPENDITURE WAS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES RE NDERED. IN ABSENCE OF ANY SUCH COMPARABLES, I AM OF THE CONSIDERED VIEW THAT THE ADDITION CANNOT BE SUSTAINED AND THEREFORE THE SAME IS DELETED BUT AT THE SAME TIME ALLOWANCE OF SALARY OF RS . 4,00.000 ALLOWED SUO MOTO BY THE AO ALSO STANDS WITHDRAWN. 7.1 FROM THE ABOVE PARA FROM THE ORDER OF CIT(A), WE FIND THAT THERE IS NO BASIS INDICATED IN THE ORDER OF CIT(A) AS TO WHETHER ANY SERVICES WERE RENDERED BY THESE TWO PERSONS FOR EARNING COMMISSION INCOME. SO FAR RENDERING OF SERVICES IS CONCERNED, REASONABL E AMOUNT OF DEDUCTION IN RESPECT OF ANNUAL SALARY PAYABLE @RS.2 LAC EACH HAS ALREADY BEEN ALLOWED BY THE ASSESSING OFFICER AND FOR MAKING ANY FURTHER ALLOWANCE IN THE FORM OF COMMISSION PAYMENT TO THESE PERSONS, SPECIFIC FINDING IS REQUIRED THAT THESE PERS ONS HAVE RENDERED SERVICES AS COMMISSION AGENT. IT IS NOT CONCLUSIVE THAT THESE TWO PERSONS ARE ALSO ASSESSED TO TAX AND THEY HAVE SHOWN THIS INCOME IN THEIR RETURN OF INCOME. FOR THE PURPOSE OF ALLOWING DEDUCTION ON ACCOUNT OF COMMISSION PAYMENT, THE BA SIC REQUIREMENT IS THAT THE ASSESSEE HAS TO ESTABLISH THAT THE SERVICES WERE RENDERED BY THE RECIPIENT AS COMMISSION AGENT. IN THIS REGARD, WE FIND THAT THE ASSESSEE HIMSELF HAS SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE ASSESSEE WAS ALREADY EFFECTIN G SALES TO ORDNANCE FACTORY, KANPUR, WHICH WAS TO THE EXTENT OF 6 RS.358.66 LAC FOR THE PRECEDING YEAR AND SAME HAS GONE UP TO RS.1, 240.03 LAC IN THE PRESENT YEAR. WHEN THE CUSTOMER IS ALREADY BUYING GOODS FROM THE ASSESSEE THEN PAYMENT OF COMMISSION TO ANY AGENT FOR INCREASE IN SALES TO EXISTING CUSTOMER IS GENERALLY NOT REQUIRED AND TO JUSTIFY SUCH COMMISSION PAYMENT, SPECIFIC EVIDENCE OF RENDERING SERVICES BY THE COMMISSION AGENT HAS TO BE BROUGHT ON RECORD AND IN THE ABSENCE OF THAT, NO DEDUCTION IS ALLO WABLE ON ACCOUNT OF COMMISSION PAYMENT. HENCE, ON THIS ISSUE , WE REVERSE THE ORDER OF CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER. THIS GROUND IS ALLOWED. 8. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS ALLOWED PARTLY FOR STATISTICAL PURPOSES. (ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE) SD/. SD/. (SUNIL KUMAR YADAV) ( A. K. GARODIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 17 /12/2014. *C.L.SINGH COPY OF THE ORDER FORWARDED TO : 1.THE APPELLANT 2.THE RESPONDENT. 3.CONCERNED CIT 4.THE CIT(A) 5.D.R., I.T.A.T., LUCKNOW ASSTT. REGISTRAR