ITO 32(3)(5), MUMBAI V. VASUNDHARA CHEMPLAST INDUSTRIES, MUMBAI

ITA 401/MUM/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6775 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 18-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: POOJA SWAROOP
• Keywords: Gross profit estimation; Rejection of books of accounts
• Section: 143(3); 142(1); 133(6)

Judgement Text

1 ITA 401/MUM/2017 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F, MUMBAI BEFORE SHRI MAHAVIR SINGH(JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NO.401/MUM/2017 (ASSESSMENT YEAR: 2011-12) ITO 32(3)(5), MUMBAI VS M/S VASUNDHARA CHEMPLAST INDUSTRIES, B-402, ROYAL ACCORD, YOGI NAGAR, EKSAR ROAD, BORIVALI (W), MUMBAI-92 PAN : AACFV1823E APPELLANT RESPONDENT APPELLANT BY SMT. POOJA SWAROOP RESPONDENT BY NONE DATE OF HEARING 18-06-2018 DATE OF PRONOUNCEMENT 27-06-2018 O R D E R PER G MANJUNATHA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST THE ORDER OF THE CIT(A)-44, MUMBAI DATED 23-11-2016 AND IT PERTAINS TO AY 2011-12. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL:- 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 82.18.398/- M ADE ON ACCOUNT OF ESTIMATION OF GROSS PROFIT MARGIN @22% AS AGAINST GROSS PROFIT @1 5.42% DISCLOSED BY THE ASSESSEE WITHOUT APPRECIATING THE FACT THAT THE ASS ESSEE FAILED TO EXPLAIN THE VARIATIONS IN PURCHASE OF MATERIALS DESPITE AMPLE O PPORTUNITIES GIVEN TO DO SO DURING THE COURSE OF ASSESSMENT PROCEEDINGS..' 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION D ESPITE THE FACT THAT THE ASSESSEE DID NOT BROUGHT ANY NEW FACTS OR MATERIAL ON RECORD DURING THE APPELLATE PROCEEDINGS WITH RESPECT TO VARIATION IN PURCHASE OF MATERIAL/SUNDRY CREDITORS.' 2 ITA 401/MUM/2017 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS ENGAGED IN THE BUSINESS OF MANUFACTURING PLASTIC GOODS, FILED ITS RETURN OF INCOME FOR AY 2011-12 ON 29-09-2011 DECLARING TOTAL INCOME OF RS. 11,02,551. THE CASE HAS BEEN SELECTED FOR SCRUTINY AND NOTICES U/S 143(2) AND 142(1) OF THE ACT WERE ISSUED. IN RESPONSE TO NOTICES, THE A SSESSEES AUTHORIZED REPRESENTATIVE APPEARED AND FILED PARTIAL DETAILS, AS CALLED FOR BY THE AO. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO CALLED UPON THE ASSESSEE TO FURNISH NECESSARY EVIDENCE IN SUPPORT O F PURCHASES. THE AO HAS ISSUED VARIOUS NOTICES ON 5 OCCASIONS. THE ASSESSEE NEITHER APPEARED NOR FURNISHED DETAILS CALLED FOR BY THE AO . THE AO ALSO ISSUED NOTICE U/S 133(6) TO THE PARTIES FROM WHOM PURCHASE S HAVE BEEN MADE. HOWEVER, NO COMPLIANCE WAS RECEIVED FROM THE PARTIE S FROM WHOM PURCHASES HAVE BEEN MADE. THEREFORE, THE AO HAS CO MPLETED ASSESSMENT U/S 143(3) ON THE BASIS OF INFORMATION A VAILABLE ON RECORD AND ESTIMATED GROSS PROFIT AT 22% ON TOTAL TURNOVER DECLARED BY THE ASSESSEE AS AGAINST 15.42% GROSS PROFIT DECLARED BY THE ASSESSEE AND MADE ADDITION OF RS.82,18,398. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE HAS FILED VARIOUS DETAILS INCLUDING COMPARATIVE STATEMENT OF GROSS PR OFIT EARNED FOR LAST THREE YEARS, MONTHWISE SUMMARY OF SALES AND PURCHAS ES, NAMES AND 3 ITA 401/MUM/2017 ADDRESS OF PARTIES TO WHOM PURCHASES HAVE BEEN MADE , BOOKS OF ACCOUNT AND OTHER DETAILS. THE SUM AND SUBSTANCE O F THE ARGUMENTS OF THE ASSESSEE BEFORE THE LD.CIT(A) WAS THAT THE AO H AS MADE ADDITION ON ESTIMATED GROSS PROFIT WITHOUT THERE BEING ANY O BSERVATIONS AS TO INCORRECTNESS IN BOOKS OF ACCOUNT ONLY ON THE BASIS OF ASSUMPTION AND SURMISES. THE RELEVANT SUBMISSIONS OF THE ASSESSEE BEFORE THE LD.CIT(A) ARE EXTRACTED BY THE LD.CIT(A) AT PARA 4. 2 ON PAGES 3 TO 6. 4. THE LD.CIT(A), AFTER CONSIDERING RELEVANT SUBMIS SIONS OF THE ASSESSEE OBSERVED THAT THE AO, IN THE ASSESSMENT OR DER, NOWHERE MENTIONED THAT A SHOW CAUSE HAS BEEN ISSUED TO THE ASSESSEE ASKING FOR EXPLANATION AS TO WHY BOOKS SHOULD NOT BE REJEC TED UNDER THE PROVISIONS OF SECTION 145(3) OF THE ACT. SIMILARLY , NO OPPORTUNITY OF EXPLANATION SEEMS TO HAVE BEEN GIVEN TO THE ASSESSE E TO EXPLAIN AS TO WHY HIS GROSS PROFIT SHALL NOT BE ESTIMATED @22%. ON THE OTHER HAND, THE ASSESSEE HAS FILED VARIOUS DETAILS TO PROVE THA T ITS GROSS PROFIT IS ON INCREASING TREND FROM YEAR ON YEAR AND ALSO FILED V ARIOUS DETAILS TO PROVE PURCHASE AND SALES. NO ADVERSE COMMENTS CAN BE TAK EN ON THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. THEREFORE, HE OPINED THAT THE AO HAS MADE ADDITION TOWARDS ESTIMATED GROSS PROFIT ONLY ON THE BASIS OF ASSUMPTION AND SURMISES. THE RELEVANT PORTION O F THE ORDER OF THE CIT(A) IS EXTRACTED BELOW:- 4 ITA 401/MUM/2017 4.;3 I HAVE CAREFULLY GONE THROUGH THE ASSESSMENT ORDER. I HAVE ALSO PERUSED THE WRITTEN SUBMISSION FILED BY THE AR. IT IS SEEN FROM A STUDY OF THE ASSESSMENT ORDER THAT THE ASSESSING OFFICER HAS RECOMPUTED THE GROSS PROFIT OF THE APPELLANT MAINLY FOR TWO REASONS. THE FIRST REASON IS THAT THE APPELLANT FAILED TO SUBMIT DETAILS AND BOOKS OF ACC OUNTS BEFORE THE ASSESSING OFFICER. THE SECOND REASON IS THAT NO COM PLIANCE WAS MADE BY THE PARTIES TO WHOM NOTICES UNDER SECTION 133(6) WA S SENT. AS FAR AS THE FIRST REASON IS CONCERNED THE ASSESSING OFFICER HAS TAKEN CONTRADICTORY STAND. AT ONE PLACE, HE WRITES THAT THE APPELLANT D ID NOT SUBMIT DETAILS AND BOOKS BEFORE HIM, HOWEVER AT ANOTHER PLACE HE HAS M ENTIONED THAT THE APPELLANT HAS SUBMITTED COMPUTATION OF INCOME, AUDI TED PROFIT AND LOSS ACCOUNT, BALANCE SHEET ALONG WITH AUDIT REPORT AND OTHER DETAILS. THE ASSESSING OFFICER HAS ALSO MENTIONED AT PARA 4 OF H IS ORDER THAT THE APPELLANT HAD PROVIDED DETAILS OF PURCHASES, SALES, CREDITORS, DEBTORS ETC. THE ASSESSING OFFICER HAS NOT POINTED OUT ANY INCON SISTENCIES OR DEFECT IN THE DETAILS SUBMITTED BY THE APPELLANT. MOREOVER TH E ACCOUNTS OF THE APPELLANT ARE AUDITED AND AUDIT REPORT IN FORM 3CD WAS SUBMITTED BEFORE THE AO AS PER HIS OWN ADMISSION. AS FAR AS THE SECOND REASON IS CONCERNED, IT IS SEE N THAT THE AO IN HIS ORDER -HAS DEALT EXCLUSIVELY WITH THE PURCHASES OF THE APPELLA NT. HOWEVER, IN THE CASE OF A MANUFACTURER, IF THERE IS NO PURCHASES OF MATERIALS THERE CANNOT BE ANY PRODUCTION ALSO. THE AO HAD DISALLOWED PART OF PURC HASES WITHOUT AT THE SAME TIME QUESTIONING THE RECEIPT FIGURE OF THE ASSESSEE . THE AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO SHOW THAT THERE IS SUPPRESSIO N OF RECEIPTS ALSO BY THE APPELLANT. IN FACT, THE AO HAS NOT CONDUCTED ANY IN QUIRY ON HIS OWN. THE AO HAS ALSO NOT REJECTED THE BOOKS OF ACCOUNTS, J FURTHER, FROM THE DETAILS SUBMITTED BY THE APPELLANT THE AO COULD HAVE SEEN THAT THE PURCH ASES HAVE BEEN MADE FROM THE GIANTS OF INDIAN INDUSTRIES LIKE INDIAN OIL COR PORATION AND RELIANCE INDUSTRIES AND THESE PURCHASES HAVE BEEN MADE THROUGH BANKING CHANNELS. MOREOVER THE APPELLANT HAS TAKEN CARE TO MAKE ITS PURCHASES THRO UGH BANKING CHANNEL AND SINCE THE BANKS ARE REQUIRED TO FOLLOW KYC NORMS TH E IDENTITY OF THE SUPPLIERS CANNOT BE DOUBTED. AS FAR AS THE ISSUE OF REPLY FRO M SUPPLIERS IS CONCERNED THE APPELLANT CANNOT BE REASONABLY EXPECTED TO FORCE TH E SUPPLIERS TO REPLY TO THE AO OR TO APPEAR BEFORE THE AO. 4.5 IN A JUDGMENT GIVEN BY THE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS J:JJGDISH PRASAD TEWARI 220 TAXMANN 0141 (2014), IT HAS BEEN HELD THAT IF THE PAYMENTS HAVE BEEN MADE BY CHEQUES AND ARE REFLECTE D IN THE BOOKS OF ACCOUNT OF THE ASSESSEE, NO ADVERSE INFERENCE CAN BE DRAWN. 4.6 IN A JUDGMENT GIVEN BY THE CALCUTTA HIGH COURT IN THE CASE OF DIAGNOSTICS VS CIT 334 ITR 111 ON A SIMILAR QUESTION, IT HAS BEEN HELD BY THE HON' BLE COURT THAT 'IF AN ASSESSEE TOOK CARE TO PURCHASE MATERIAL BY WAY O F ACCOUNT PAYEE CHEQUES FROM A THIRD PARTY AND SUBSEQUENTLY, THREE YEARS AFTER THE PURCHASE, THE SAID THIRD PARTY DOES NOT APPEAR BEFORE THE AO PURSUANT TO THE NOTICE OR EVEN HAS STOPPED BUSINESS, THE CLAIM OF THE ASSESSEE ON THAT ACCOUNT CANNOT BE DIS CARDED AS NON-EXISTENT', 4.7 IN THE APPEAL PROCEEDINGS, IT WAS SUBMITTED THAT THE APPELLANT HAD MAINTAINED REGULAR BOOKS OF ACCOUNTS AND HAD SUBMITTED ITS FINANCIAL ACCOUNTS ALONG WITH THE TAX AUDIT REPORT. THE APPEL LANT HAD PRODUCED DETAILS OF 5 ITA 401/MUM/2017 PURCHASES, , CREDITORS, DEBTORS, AUDIT REPORT ALONG WITH FINANCIAL STATEMENTS ETC DURING THE ASSESSMENT PROCEEDINGS. THE APPELLANT HAS NOT DEVIATED FROM THE METHOD OF ACCOUNTING EMPLOYED IN REGULAR C OURSE OF BUSINESS. THE BOOKS OF ACCOUNTS IN THE REGULAR COURSE OF BUSI NESS ARE RELEVANT AND AFFORD PRIMA FACIE PROOF OF THE ENTRIES AND THE CORRECTNE SS THEREOF. MOREOVER, EVEN WHERE BOOKS OF ACCOUNTS ARE FOUND UNRELIABLE, THE A SSESSMENT CANNOT BE MADE ARBITRARILY AND IN ORDER THAT AN ASSESSMENT CAN BE SUSTAINED, IT MUST HAVE NEXUS TO THE MATERIAL ON RECORD. THE ORDER OF THE AO SHOU LD BE A SPEAKING ORDER AND IT MUST DISCLOSE THE BASIS AND THE MANNER OF COMPUTATI ON OF INCOME. THE AO IS NOT ENTITLED TO MAKE GUESS WORK AND MAKE AN ASSESSMENT WITHOUT REFERENCE TO ANY EVIDENCE OR ANY MATERIAL AT ALL. THE ASSESSMENT FOR ANY PARTICULAR YEAR MUST BE BASED NOT ON MERE SUSPICION OR MERE GUESS BUT ON LE GITIMATE MATERIAL FROM WHICH A REASONABLE INFERENCE OF INCOME DURING THE ACCOUNT ING YEAR COULD BE DRAWN. 4.8 AT THIS POINT, IT WOULD BE USEFUL TO MAKE REFER ENCE TO CERTAIN PRINCIPLES OF LAW WHICH HAVE EVOLVED IN THE VARIOUS JUDICIAL PRONOUNC EMENTS. IT HAS BEEN HELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. PARADISE HOLIDAYS (2010) 325 ITR 13, THAT THE SOLE REASON OF LOW NET PROFIT CANN OT BE A GROUND FOR REJECTING SUCH 'ACCOUNTS. IT HAS BEEN LAID DOWN IN THE CASE OF GAM DIWALA DAIRY VS ACIT(2011) 7 ITR (TRIB) 114 (AHD.) THAT MERE INFERE NCE OF LOW GROSS PROFIT CANNOT JUSTIFY REJECTION OF BOOKS. THE ISSUE RELATE D TO ESTIMATE OF INCOME BY WAY OF BEST JUDGMENT IN A CASE WHERE THE ASSESSEE H AD NOT PRODUCED SOME RECORDS BUT HAD OTHER EVIDENCE TO PROVE THE CORRECT NESS OF BOOKS PRODUCED WAS HELD IN FAVOUR OF THE ASSESSEE IN EAGLE SYNTHET ICS PVT LTD. VS ITO (2011) 8 ITR (TRIB) 211 (AHD.). IT HAS BEEN HELD IN THE CA SE OF PRAKASH AUTOMOBILE VERSUS CIT 322 ITR 425 (KER) THAT EVEN WHERE ACCOUN T BOOKS ARE FOUND TO BE UNRELIABLE AND THEREFORE REQUIRING TO BE REJECTE D THE ESTIMATE OF PROFIT HAS TO BE ON A RATIONAL BASIS. IT HAS ALSO BEEN HELD IN THE CASE OF CIT VERSUS DR A.P. BAHAL 322 ITR 71 (RAJ) THAT EVEN WHERE REJECTI ON OF ACCOUNTS WAS JUSTIFIED FOR DEFECTS IN ACCOUNTS, THE ESTIMATE OF INCOME SHOULD BE BASED UPON SOME MATERIALS IN SUPPORT OF SAME. WHERE THERE IS N ONE, SUCH ESTIMATE CANNOT BE UPHELD.XTHE LAW AS REGARDS THE MANNER OF ESTIMATE WAS REITERATED BY THE HIGH COURT IN CIT VERSUS R. NARAYANRAO 338 I TR 625(AP). IN THIS CASE THE HON. COURT HELD THAT EVEN WHERE BOOKS CANNOT BE ACCEPTED AND ESTIMATE HAS NECESSARILY TO BE FRARETE EITHER UNDER SECTION 143(3) OR 144, THE BEST JUDGMENT HAS TO BE MADE IN A REASONABLE MANNER AND NOT ACCORDING TO THE WHIMS AND FANCIES OF THE ASSESSING OFFICER.\IT HAS TO BE BASED UPON MATERIALS PRODUCED BY THE ASSESSEE AND GATHERED BY THE ASSESS ING OFFICER. 4.9 IN THE CASE OF THE APPELLANT, IN THE ASSESSMENT ORDER IT IS NOWHERE MENTIONED THAT A SHOW CAUSE HAS BEEN ISSUED TO THE ASSESSEE ASKING FOR AN EXPLANATION AS TO WHY BOOKS SHOULD NOT BE REJECTED UNDER THE PROVISION OF SECTION 145(3) OF THE IT ACT. SIMILARLY, NO OPPORTU NITY OF EXPLANATION SEEMS TO HAVE BEEN GIVEN TO THE ASSESSEE TO EXPLAIN AS TO WH Y HIS GROSS PROFIT SHALL NOT BE ESTIMATED AT THE RATE OF 22%. NO COMPARISON HAS BEEN MADE WITH BOOK RESULTS OF THE APPELLANT FOR PREVIOUS YEARS OR THE BOOK RESULTS OF ASSESSES ENGAGED IN SIMILAR TRADE. IT IS NOT EVEN THE CASE O F THE ASSESSING OFFICER THAT THE APPELLANT HAS SHOWN LOW GROSS PROFIT. IN VIEW O F THE ABOVE DISCUSSION AND AFTER CONSIDERING THE TOTALITY OF FACTS I HAVE COME TO A CONC LUSION THAT THE AO WAS NOT JUSTIFIED IN ESTIMATING THE GROSS PROFIT AT THE RATE OF 2?% OF THE TURNOVER. GROUNDS OF APPEAL NUMBER 2,3 & 4 ARE ACCO RDINGLY ALLOWED AND ADDITION OF RS. 82,18,3987-15 DELETED. 6 ITA 401/MUM/2017 5. THE LD.DR SUBMITTED THAT THE LD.CIT(A) WAS ERRED IN DELETING ADDITION MADE BY THE AO TOWARDS ESTIMATION OF GROSS PROFIT MARGIN OF 22% WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE FAILED TO EXPLAIN THE VARIATIONS IN PURCHASE OF MATERIALS, DESPITE AMPLE OPPORTUNITIES GIVEN TO DO SO DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE LD.CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION DESPITE THE FACT THAT THE ASSESSEE DID NOT BRING ANY NEW FACTS OR MATERIAL ON RECORD DURIN G THE APPELLATE PROCEEDINGS WITH RESPECT TO VARIATION IN PURCHASE O F MATERIAL / SUNDRY CREDITORS. NONE APPEARED FOR THE ASSESSEE. 6. WE HAVE HEARD THE LD.DR AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE AO MADE ADDITION TOWARDS ESTIMATED GRO SS PROFIT ON TWO COUNTS. THE FIRST REASON IS THAT THE ASSESSEE FAIL ED TO SUBMIT DETAILS AND BOOKS OF ACCOUNT BEFORE THE AO. THE SECOND REASON IS THAT NO COMPLIANCE WAS MADE BY THE PARTIES TO WHOM NOTICES U/S 133(6) WERE ISSUED. EXCEPT THIS, NOWHERE IN THE ASSESSMENT ORD ER, THE AO HAS COMMENTED ON BOOKS OF ACCOUNT MAINTAINED BY THE ASS ESSEE OR REASONS FOR ESTIMATING HIGHER NET PROFIT THAN WHAT WAS DISC LOSED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THE LD.CIT(A) HAS GIVEN C ATEGORICAL FINDING THAT THE AO HAS MADE ADDITION TOWARDS ESTIMATED GROSS PR OFIT PURELY ON ASSUMPTION AND SURMISE BASIS ONLY FOR THE REASON TH AT THE ASSESSEE HAS FAILED TO APPEAR ON THE DATE OF HEARING TO PRODUCE NECESSARY EVIDENCES, 7 ITA 401/MUM/2017 CALLED FOR. THE CIT(A) FURTHER STATED THAT THE ASS ESSEE HAS FILED VARIOUS DETAILS TO PROVE GROSS PROFIT DECLARED IN ITS BOOKS OF ACCOUNT AND ALSO PRODUCED NECESSARY EVIDENCES IN SUPPORT OF PURCHASE S AND SALES. NO ADVERSE INFERENCE CAN BE DRAWN ON THE BOOKS OF ACCO UNT MAINTAINED BY THE ASSESSEE. UNDER THESE CIRCUMSTANCES, THE AO WA S ERRED IN ESTIMATING HIGHER NET PROFIT THAN WHAT WAS DECLARED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THE REVENUE FAILS TO BRING O N RECORD ANY EVIDENCE TO COUNTER THE FINDINGS OF FACTS RECORDED BY THE LD .CIT(A). THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE AO WAS ERRED IN ESTIMATING HIGHER PROFIT ON SALES WITHOUT ANY ADVERSE COMMENTS ON THE BOOKS OF ACCOUNT OF THE ASSESSEE, THAT TOO, ONLY ON THE BASIS OF NO N COMPLIANCE TO NOTICE ISSUED U/S 142(1) OF THE ACT. THE CIT(A), AFTER CO NSIDERING RELEVANT FACTS HAS RIGHTLY DELETED ADDITION MADE BY THE AO. WE DO NOT FIND ANY ERROR IN THE ORDER OF THE CIT(A). HENCE, WE ARE INCLINED TO UPHOLD THE FINDINGS OF THE CIT(A) AND DISMISS THE APPEAL FILED BY THE REVE NUE. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JUNE, 2018. SD/- SD/- (MAHAVIR SINGH) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 27 TH JUNE, 2018 PK/- COPY TO : 8 ITA 401/MUM/2017 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER SR.PS, ITAT, MUMBAI