M/s. Bhat Carpets, Srinagar V. The Income tax Officer, Srinagar

ITA 436/ASR/2010

• Counselvise Citation: 43620914 RSA 2010
• Duration Of Justice: 3 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 18-03-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 15-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRIK CHAND
• Assessee Lawyers: S K KAUL
• Keywords: Business income; Principle of natural justice
• Section: 44AD; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. B.P. JAIN, ACCOUNTANT MEMBER I.T.A. NO. 436 (ASR)/2010 ASSESSMENT YEAR: 2007-08 PAN: AADFB5986H M/S BHAT CARPETS, VS. THE INCOME TAX OFFICER, AHMED NAGAR, SRINAGAR, KMR WARD-I, SRINAGAR (APPELLANT) (RESPONDENT) APPELLANT BY: SH. S.K. KAUL, ADVOCATE RESPONDENT BY: SH. AMRIK CHAND, DR DATE OF HEARING: 18.03.2014 DATE OF PRONOUNCEMENT: 18.03.2014 ORDER PER BENCH 1) THE ASSESSEE HAS FILED THE PRESENT APPEAL AGAINST IMPUGNED ORDER DATED 16.07.2010 PASSED BY THE COMMISSIONER O F INCOME TAX (APPEALS), JAMMU, FOR THE ASSESSMENT YEAR 2007-08 O N THE FOLLOWING GROUNDS: I. THE ORDER OF THE AUTHORITY BELOW IS UNJUST, ILLEGAL AND AGAINST THE FACTS OF THE CASE AND THE SAME IS BAD IN LAW APART, AS NO NOTICE U/S 143(2) HAS NEITHER BEEN ISSUED NOR RECEIVED BY THE APPELLANT. II. THAT REJECTION OF BOOK RESULTS WITHOUT ANY SPECIFIC DEFECTS IS UNJUST AND ARBITRARY AND THE ORDER AS SUCH IS NOT MAINTAIN ABLE. THE CIT(A) HAS WRONGLY BEEN GUIDED BY THE COMPARABLE CASES AND NOT BY THE BOOKS RESULTS OF THE APPELLANT WHEREIN THE ITO EVEN IN REMAND 2 REPORT HAS NOT FOUND ANY THING WHICH COULD ALTER TH E BALANCE IN FAVOUR OF REVENUE AND JUSTIFY THE APPLICATION OF RA TE. III. THE AUTHORITY BELOW HAS NOT PASSED A SPEAKING ORDER WITH RESPECT TO THE ACCOUNTS MAINTAINED BY THE APPELLANT AND APP LICATION OF RATE TO TAX THE APPELLANT IS UNJUST & ARBITRARY. THE ADD ITION ON ACCOUNT OF ESTIMATION NEEDS COMPLETE DELETION. IV. THAT THE APPELLANT CRAVES LEAVE TO ADD/AMEND ANY GR OUND OF APPEAL AT THE TIME OF HEARING. V. THEREFORE, IN THE PREMISES, IT IS PRAYED THAT THE O RDER PASSED BE SET ASIDE AND ADDITIONS DELETED IN FULL AND RESULTS DEC LARED BY THE APPELLANT BE ACCEPTED IN FULL. 2) THE FACTS NARRATED BY THE REVENUE AUTHORITY ARE NOT DISPUTED BY BOTH THE PARTIES; THEREFORE, THERE IS NO NEED TO RE PEAT THE SAME FOR THE SAKE OF CONVENIENCE. 3) AT THE TIME OF HEARING, LEARNED COUNSEL FOR THE ASSESSEE STATED THAT DUE TO UNAVOIDABLE CIRCUMSTANCES, THE ASSESSEE COULD NOT APPEAR BEFORE THE ASSESSING OFFICER AND THE ASSESSING OFFI CER HAS COMPLETED THE ASSESSMENT UNDER SECTION 144 OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) ON 18.12.2009 BY ESTIMATING THE NET PROFIT @ OF 5% ON THE TOTAL TURNOVER OF THE ASSESSEE PLUS THE AMOUNT OF RS. 2,2 8,264/- ON ACCOUNT OF INTEREST EARNED BY THE ASSESSEE. 4) AGGRIEVED BY THE ASSESSMENT ORDER DATED 18.12.20 09, THE ASSESSEE FILED AN APPEAL BEFORE LEARNED CIT(A), JAM MU, WHO VIDE IMPUGNED ORDER DATED 16.07.2010, PARTLY ALLOWED THE APPEAL OF THE ASSESSEE BY UPHOLDING THE ACTION OF THE ASSESSING O FFICER UNDER SECTION 3 144 OF THE ACT AND FINALLY DETERMINED THE NET PROFI T @ 1.75% ON THE TOTAL TURNOVER OF THE ASSESSEE PLUS THE INTEREST INCOME O F RS. 2,28,264/-. 5) LEARNED COUNSEL FOR THE ASSESSEE STATED THAT THE LEARNED FIRST APPELLATE AUTHORITY HAS APPLIED THE COMPARABLE CASE S, MENTIONED IN THE IMPUGNED ORDER, BUT THE SAME HAVE NOT BEEN CONFRONT ED TO THE ASSESSEE AND THE LEARNED COUNSEL FOR THE ASSESSEE HAS ESTIMA TED THE NET PROFIT @ 1.75% ON THE TOTAL TURNOVER, WHICH IS ARBITRARY AND AGAINST THE PRINCIPLES OF NATURAL JUSTICE. HE REQUESTED THAT THE ISSUES IN DISPUTE MAY BE SET ASIDE TO THE ASSESSING OFFICER TO DECIDE SAME AFRESH UNDE R THE LAW AFTER GIVING OPPORTUNITY TO THE ASSESSEE BECAUSE THE ASSESSEE IS HAVING EVIDENCE IN POSSESSING AND CAN SUBSTANTIATED ITS CLAIM BEFORE T HE ASSESSING OFFICER. 6) ON THE CONTRARY, LEARNED DR RELIED UPON THE ORDE R PASSED BY LEARNED CIT(A), JAMMU. 7) WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE R ELEVANT RECORDS AVAILABLE WITH US, ESPECIALLY THE RELEVANT PARAGRAP HS OF THE IMPUGNED ORDER I.E. PARA NOS. 8 TO 8.2, PAGE NOS. 4 TO 6, I N WHICH LEARNED CIT(A), JAMMU, HAS CONCLUDED THE ISSUES IN DISPUTE BY ESTIM ATING THE NET PROFIT @ 1.75% PLUS THE INTEREST INCOME OF RS. 2,28,264/- IN THE CASE OF THE ASSESSEE. FOR THE SAKE OF CONVENIENCE THE RELEVANT PARA NOS. 8 TO 8.2, AT PAGE NOS. 4 TO 6, ARE REPRODUCED AS UNDER: 4 8. DURING THE COURSE OF APPELLATE PROCEEDINGS, S HRI AMIR JAN, AC, ATTENDED AS LEARNED COUNSEL FOR THE APPELLANT AND F ILED WRITTEN SUBMISSIONS. IT HAS BEEN CONTENDED THAT THE BOOKS O F ACCOUNTS WERE AUDITED AND THE RETURN OF INCOME WAS FILED THROUGH E-FILING. THE APPELLANT HAS TAKEN UP FIRST GROUND OF APPEAL REGAR DING PASSING OF THE ASSESSMENT ORDER U/S. 144 OF THE ACT. IN VIEW OF TH E FACTS OF THE CASE DISCUSSED IN PARA 4 OF THIS ORDER THAT THERE WAS CO NTINUED NON- COMPLIANCE BY THE ASSESSEE DURING THE COURSE OF ASS ESSMENT PROCEEDINGS, THE A.O. WAS FULLY JUSTIFIED IN PASSING THE ORDER E X-PARTE UNDER SECTION 144 OF THE ACT. HENCE, THIS GROUND OF APPEAL IS DIS MISSED. 8.1 THE APPELLANT HAS TAKEN UP GROUND NO. 2 OF THE APPEAL ON THE ESTIMATION OF INCOME BY APPLYING NP RATE OF 5%. IT HAS BEEN CONTENDED THAT THE A.O. HAS FAILED TO DISCLOSE ANY BASIS ON W HICH THE INCOME OF THE APPELLANT WAS DETERMINED @ 5% OF GROSS SALES. THE L EARNED A.O. HAS FURTHER FAILED TO REALIZE THAT THE FIRM HAS BEEN IN THE BUSINESS SINCE 1980 AND THE AVERAGE NET PROFIT RATIO BEFORE ALLOWING IN TEREST AND SALARY TO THE PARTNERS HAS BEEN 0.40%, 0.60% AND 0.51% IN A.Y. 2 004-05, 2005-06 AND 2006-07, RESPECTIVELY. UNDER THE CIRCUMSTANCES, THE NET PROFIT RATION OF 5% ADOPTED BY THE A.O. WAS ILLOGICAL AND IRRATIO NAL. THE LEARNED COUNSEL HAS RELIED UPON THE CASES OF M/S MIR GULAM RASOOL & SONS, M/S SRINAGAR CARPET FACTORY AND M/S S.S. SHAWLS IN WHIC H NET PROFIT RATE OF 0.94%, 0.59% AND 0.45%, RESPECTIVELY, HAS BEEN DECL ARED. IT IS CORRECT THAT THE A.O. HAS APPLIED NET PROF IT RATE OF 5% FOR ESTIMATION OF INCOME IN PURSUANCE OF SHOW CAUSE NOT ICE IN WHICH THE A.O. PROPOSED TO ESTIMATE INCOME AT SUCH RATE. AS A MATT ER OF FACT WHEN NO OPPORTUNITY WAS AVAILED AND THERE WAS NO OBJECTION BY THE APPELLANT TO SUCH PROPOSAL OF ESTIMATION, NO FAULT CAN BE FOUND ON THE PART OF THE A.O. IT IS ALSO A MATTER OF FACT THAT WHILE PROPOSING TO ESTIMATE THE INCOME AT NET PROFIT RATE OF @ 5% IN THE SHOW CAUSE NOTICE AS WELL AS WHILE MAKING THE ASSESSMENT, THE A.O. HAS NOT GIVEN ANY BASIS SO AS TO JUSTIFY THE ADDITION ON THE BASIS OF NET PROFIT RATE OF 5%. EVE N IN THE CASE OF BEST JUDGMENT ASSESSMENT FINALIZED FOR TOTAL NON-COMPLIA NCE ON THE PART OF ASSESSEE, THE HON'BLE SUPREME COURT IN THE CASE OF BRIJ BHUSHAN LAL PRADUMAN KUMAR VS. CIT (115 ITR 524) HAS HELD THAT THE AUTHORITY MAKING A BEST JUDGMENT ASSESSMENT MUST MAKE AN HONE ST AND FAIR ESTIMATE OF THE INCOME. THOUGH ARBITRARINESS CANNOT BE AVOIDED IN SUCH ESTIMATE, THE SAME MUST NOT BE CAPRICIOUS BUT SHOUL D HAVE A REASONABLE 5 NEXUS TO THE AVAILABLE MATERIAL AND CIRCUMSTANCES O F THE CASE. IT IS ALSO A SETTLED PRINCIPLE OF LAW THAT ESTIMATION MUST NOT B E ARBITRARY, VAGUE AND FANCIFUL BUT MUST BE LEGAL AND REGULAR. THE LAW SAY S THAT THE BEST JUDGMENT ASSESSMENT MUST BE MADE ACCORDING TO THE R ULES OF REASON AND JUSTICE, AS HELD BY HON'BLE MADRAS HIGH COURT IN TH E CASE OF MYSORE FERTILIZER CO. VS. CIT (59 ITR 268). THE ASSESSMENT SHOULD ACCORD A FAIR PLAY AND JUSTICE AND NOT WITH A VIEW TO PUNISH THE ASSESSEE FOR NON- COMPLIANCE AND SHOULD TAKE INTO CONSIDERATION ASSES SEES CIRCUMSTANCES WHICH WILL ASSIST IN ARRIVING AT PROPER ESTIMATE. S UCH ESTIMATE MUST BE BASED ON ADEQUATE AND RELEVANT MATERIAL AND IT IS T HE DUTY OF THE A.O. TO OBSERVE THE PRINCIPLE OF NATURAL JUSTICE. THUS, FOR MAKING THE ADDITION, THE A.O. OUGHT TO HAVE MADE COMPARISON WITH THE NET PROFIT RATE DECLARED BY THE OTHER ASSESSEE IN THE SIMILAR LINE OF BUSINE SS. FROM THE SUBMISSIONS OF THE APPELLANT AS WELL AS THE COMPARA BLE CASES RELIED UPON, IT IS SEEN THAT ALL SUCH ASSESSEES ARE ENGAGED IN T HE BUSINESS OF LOCAL TRADE WHEREAS THE CASE OF APPELLANT IS THAT OF EXPO RTER. HENCE, THE NP RATE DECLARED IN THE CASES RELIED UPON BY THE APPEL LANT CANNOT BE APPLIED TO ESTIMATE THE INCOME OF APPELLANT. IN THIS REGARD S, THE NET PROFIT DECLARED AND ACCEPTED BY THE CONCERNED A.O.S IN AS SESSMENTS HAS BEEN ASCERTAINED. IT IS SEEN THAT M/S. FARAGHAN CARPET C OMPANY, M/S BABA COTTAGE INDUSTRIES AND M/S. SRINAGAR CARPET FACTORY HAVE DECLARED NET PROFIT RATE OF 3.44%, 1.88% AND 3.10% BEFORE INTERE ST AND SALARY TO PARTNERS ON THE TURNOVER OF RS. 1.14 CRORES, RS. 5. 36 CRORES AND RS. 2.83 CRORES, RESPECTIVELY. THEIR PROFIT RATES HAVE BEEN ACCEPTED BY THE RESPECTIVE A.O.S IN THE SCRUTINY ASSESSMENTS FOR A .Y. 2007-08. ALL THESE ASSESSEES ARE ENGAGED IN THE BUSINESS OF EXPORT OF CARPETS I.E. THE BUSINESS ACTIVITY SIMILAR TO THAT OF APPELLANT. IT WOULD, THEREFORE, BE LOGICAL AND JUSTIFY COMPARING AND APPLYING THE AVE RAGE NET PROFIT RATE DISCLOSED BY THE ABOVE CONCERNS. THE AVERAGE NP RA TE IN THE CASES OF ABOVE THREE CONCERNS BY CONSIDERING THE QUANTUM OF GROSS PROFIT AND GROSS TURNOVER IN AGGREGATE WORKS OUT TO 2.44%. HOW EVER, IN THE CASE OF M/S BABA COTTAGE INDUSTRIES, THE SAME A.O. HAS ACCE PTED THE NET PROFIT RATE OF 1.88% AGAINST THE TURNOVER OF RS. 5.36 CROR ES IN THE SCRUTINY ASSESSMENT. CONSIDERING THE FACT THAT THE APPELLAN TS TURNOVER IS MUCH HIGHER WHEREIN PROFIT MARGINS ARE LIKELY TO DECLINE AND THE FACT THAT NET PROFIT RATE OF EVEN 1.88% HAS BEEN ACCEPTED BY SAME A.O., IT WOULD BE FAIR AND REASONABLE THAT NET PROFIT RATE OF 1.75% I S APPLIED IN THE CASE OF APPELLANT FOR THE PURPOSE OF ESTIMATION OF INCOME. THE TURNOVER IN TWO OTHER CASES IS QUITE LOW AS COMPARED TO THE APPELLA NT AND THEREFORE, THE 6 MEAN NET PROFIT RATE MAY NOT BE STRICTLY APPLIED. A S REGARDS CONTENTION OF THE APPELLANT THAT NET PROFIT AT LOWER RATES DECLAR ED BY THE APPELLANT IN THE EARLIER YEARS BE CONSIDERED, THE PRINCIPLE OF R ES-JUDICATA DOES NOT APPLY TO THE INCOME TAX PROCEEDINGS. THEREFORE, THE INCOME OF THE APPELLANT BY APPLYING THE NET PROFIT RATE OF 1.75% WORKS OUT TO RS. 12,98,755/-. THE APPELLANT HAS FILED A COPY OF THE PARTNERSHIP DEED IN WHICH THE PAYMENT OF INTEREST AND REMUNERATION TO P ARTNERS HAS BEEN AUTHORIZED. KEEPING IN VIEW THE RATIONALE LAID DOW N IN THE PROVISO TO SUB-SECTION (2) OF SECTION 44AD WHEREIN THE INTERE ST AND REMUNERATION TO PARTNERS IS STATUTORILY ALLOWED AFTER ESTIMATION OF INCOME BY APPLYING PROFIT RATE AS WELL AS THE FACT THAT COMPARATIVE NE T PROFIT RATE HAS BEEN APPLIED BEFORE THE INTEREST AND REMUNERATION TO PAR TNERS, THE INTEREST AND REMUNERATION TO PARTNERS SHALL BE ALLOWABLE AND DED UCTED FROM THE INCOME SO ESTIMATED. AFTER DEDUCTION OF THE INTERE ST AND REMUNERATION TO PARTNERS AMOUNTING TO RS. 3,54,801/-, THE INCOME UN DER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION WORKS OUT TO R S. 9,43,954/-. HENCE, THE ADDITION TO THIS EXTENT IS CONFIRMED AND BALANC E ADDITION OF RS. 27,66,775/- IS DELETED. THIS GROUND OF APPEAL IS PA RTLY ALLOWED. 8.2 THE GROUNDS NO. 3 RELATES TO THE ADDITION OF I NTEREST OF RS. 2,28,264/-. THE A.O. HAS TREATED THE INTEREST SEPAR ATELY AS INCOME FROM OTHER SOURCES AND MADE ADDITION ACCORDINGLY. THE AP PELLANT HAS CONTENDED THAT THE SAME IS ALREADY INCLUDED IN THE P&L ACCOUNT AND NO SEPARATE ADDITION WAS REQUIRED TO BE MADE. HOWEVER, IN PARA 8.1 ABOVE, THE BUSINESS INCOME OF THE APPELLANT HAS BEEN ESTIM ATED BY COMPARING THE THREE CASES AS MENTIONED ABOVE. IN NONE OF THE ABOVE CASES, THE ASSESSEE HAVE DISCLOSED ANY INTEREST INCOME MEANING THEREBY THAT THE INTEREST INCOME HAS NOT GONE INTO THEIR PROFIT MAKI NG. KEEPING IN VIEW THE PRINCIPLE OF PARITY AND FAIRNESS, THERE IS NO JUSTI FICATION TO CONSIDER THE INTEREST AS PART OF BUSINESS PROFIT IN THE CASE OF APPELLANT. HENCE, THE ADDITION OF RS. 2,28,264/- MADE BY THE A.O. IS SUST AINED AND THIS GROUND OF APPEAL IS DISMISSED. 8) AFTER GOING THROUGH THE RELEVANT PORTION OF THE IMPUGNED ORDER, MENTIONED ABOVE, WE ARE OF THE CONSIDERED OPINION T HAT THE LEARNED FIRST APPELLANT AUTHORITY HAS CITED SOME COMPARABLE CASES I.E. M/S. FARAGHAN 7 CARPET COMPANY, M/S BABA COTTAGE INDUSTRIES AND M/S SRINAGAR CARPET FACTORY, WHO HAVE DECLARED NET PROFIT RATE OF 3.44% , 1.88% AND 3.10% BEFORE INTEREST AND SALARY TO PARTNERS ON THE TURNO VER OF RS. 1.14 CRORES, RS. 5.36 CRORES AND RS. 2.83 CRORES, RESPECTIVELY B UT WE HAVE SEEN THAT THE LEARNED FIRST APPELLATE AUTHORITY HAS NOT CONFR ONTED THESE COMPARABLE CASES TO THE ASSESSEE FOR CONTROVERTING AND HAS NOT GIVEN ANY OPPORTUNITY TO THE ASSESSEE TO SAY SOMETHING ON THE COMPARABLE CASES CITED BY HIM IN THE IMPUGNED ORDER. 9) WE ARE NOT COMMENTING UPON THE MERIT OF THE CASE AS IT WILL PREJUDICE THE MIND OF THE REVENUE AUTHORITY. WE THI NK THAT THE ISSUES IN DISPUTE REQUIRE RECONSIDERATION AT THE LEVEL OF ASS ESSING OFFICER. ACCORDINGLY, IN THE INTEREST OF JUSTICE, WE SET ASI DE THE ISSUES IN DISPUTE TO THE ASSESSING OFFICER TO DECIDE THE SAME AFRESH UND ER THE LAW AFTER AFFORDING OPPORTUNITY TO THE ASSESSEE AND AFTER CON FRONTING ALL THE COMPARABLE CASES TO THE ASSESSEE AND SEEK THE ASSES SEES OPINION ON THE SAME. ASSESSEE IS ALSO DIRECTED TO CO-OPERATE IN TH E ASSESSMENT PROCEEDING BEFORE THE ASSESSING OFFICER AND FILE EV IDENCE, IF ANY, FOR SUBSTANTIATING ITS CLAIM BEFORE THE ASSESSING OFFIC ER AND DO NOT SEEK UNNECESSARY ADJOURNMENTS. LEARNED COUNSEL FOR THE A SSESSEE ALSO UNDERTAKES TO CO-OPERATE IN THE ASSESSMENT PROCEEDI NGS. 8 10) IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE I S ALLOWED FOR STATISTICAL PURPOSES, AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH MARCH, 2014 SD/./- SD/./- (B.P. JAIN) (H.S. SIDHU) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 18 TH MARCH, 2014 /RK/ COPY OF THE ORDER FORWARDED TO: 1. THE ASSESSEE: M/S BHAT CARPETS, AHMED NAGAR, SRIN AGAR, KMR 2. ITO, WARD-I, SRINAGAR 3. THE CIT(A), 4. THE CIT, 5. THE SR DR, I.T.A.T., TRUE COPY BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, AMRITSAR BENCH: AMRITSAR.