M/S. Patel Pharmancy, Jalandhar city V. The A.C.I.T., Jalandhar

ITA 439/ASR/2010

• Counselvise Citation: 43920914 RSA 2010
• Duration Of Justice: 1 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 09-12-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 15-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: Y K SUD
• Keywords: Gross profit estimation; Commercial expediency
• Section: 143(3); 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. H.L. KARWA, HONBLE VICE PRESIDENT AND SH. D.K. SRIVASTAVA, ACCOUNTANT MEMBER I.T.A. NOS. 439(ASR)/2010 ASSESSMENT YEAR:2007-08 M/S. PATEL PHARMACY, VS. THE ASSTT. COMMR. OF INCO ME-TAX, JALANDHAR CITY. RANGE-III, JALANDHAR. PAN:AACFP8301P (APPELLANT) (RESPONDENT) I.T.A. NO.29(ASR)/2011 ASSESSMENT YEAR : 2008-09 M/S. PATEL PHARMACY, VS. THE ASSTT. COMMR. OF INCO ME-TAX, JALANDHAR CITY. RANGE-III, JALANDHAR. PAN:AACFP8301P (APPELLANT) (RESPONDENT) APPELLANT BY: SH. Y.K. SUD, CA RESPONDENT BY:SH. TARSEM LAL, DR DATE OF HEARING : 09/12/2011 DATE OF PRONOUNCEMENT:16/12/2011 ORDER D.K. SRIVASTAVA : WHILE APPEAL BEARING ITA NO.439(ASR)/2010 IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A), JA LANDHAR, ON 28.09.2010 FOR THE ASSESSMENT YEAR 2007-08, THE OTHER APPEAL B EARING ITA 2 NO.29(ASR)/2011 IS DIRECTED AGAINST THE ORDER PASSE D BY THE CIT(A), JALANDHAR ON 19.11.2010 FOR THE ASSESSMENT YEAR 200 8-09. THE MAJOR ISSUE INVOLVED IN BOTH THE APPEALS IS COMMON. WWE, THEREFORE, FIND IT CONVENIENT TO DISPOSE OFF B OTH THE APPEALS BY A CONSOLIDATED ORDER. 2. IN ITA NO.439(ASR0/2010, FOLLOWING GROUNDS HAVE BEEN TAKEN: 1. THAT THE CIT(A) WAS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE A.O. IN REJECTING THE BOOKS OF ACCOUNTS AND THEREFO RE APPLYING THE PROVISIONS OF SECTION 145(3) OF THE INCOME TAX ACT. 2. THAT THE CIT(A) WHILE UPHOLDING THE ACTION OF TH E A.O. HAS FAILED TO APPRECIATE THAT BOOKS OF ACCOUNTS OF THE ASSESSEE WERE AUDITED DULY SUPPORTED BY SALE PURCHASE BILLS AND S TOCK REGISTER. 3. THAT THE CIT(A) HAS WRONGLY UPHELD THE ACTION OF THE AO OF ESTIMATING AND APPLYING THE G.P. RATE OF 20% AGAINS T 17.8% DECLARED BY THE ASSESSEE AND THUS CONFIRMING THE AD DITION OF RS.767561 IN THE TRADING ACCOUNT ON ACCOUNT OF ALLE GED LOW G.P. AT ANY RATE THE G.P. RATE ESTIMATED IS HIGHLY EXCESSIVE. 4. THAT THE CIT(A) WAS NOT JUSTIFIED IN UPHOLDING T HE DISALLOWANCE OF RS.2848889/- OUT OF COMMISSION PAID ON SALES WIT HOUT APPRECIATING THE FACTS OF THE CASE AND COMMERCIAL E XPEDIENCY OF SUCH PAYMENT. 3. THE ASSESSEE, A FIRM, IS ENGAGED IN THE BUSINESS OF TRADING IN MEDICINES. IT FILED ITS RETURN OF INCOME ON 30.10.2 007 RETURNING TOTAL INCOME AT RS.16,17,008/-. AFTER PROCESSING, THE RETURN WAS TAKEN UP FOR SCRUTINY AS A RESULT OF WHICH ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT ON 09.12.2009 ASSESSING THE TOTAL INCOME AT RS.52,34,5 60/- AFTER ADDING A SUM 3 OF RS.7,67,561/- ON ACCOUNT OF LOW GROSS PROFIT RAT E AND DISALLOWANCE OF RS.28,49,989/- MADE ON ACCOUNT OF COMMISSION PAID O N SALES. 4. ON APPEAL, THE LD. CIT(A) HAS CONFIRMED THE ACTI ON OF THE ASSESSING OFFICER IN REJECTING THE BOOKS OF ACCOUNT. HE HAS A LSO CONFIRMED THE ACTION OF THE A.O. IN ADDING A SUM OF RS.7,67,561/- AFTER APPLYING GP RATE OF 20% AS AGAINST THE GP RATE OF 17.8% DECLARED BY THE AS SESSEE. THE LD. CIT(A) HAS ALSO CONFIRMED THE DISALLOWANCE OF RS.28,49,989 /- OUT OF THE COMMISSION PAID ON SALES. THE LD. CIT(A) HAS GIVEN DETAILED REASONS IN SUPPORT OF HIS DECISION. 5. AGGRIEVED BY THE ORDER PASSED BY THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THIS TRIBUNAL. IN SUPPORT OF APPEAL, IT WAS SUBMITTED THAT THE GP RATE OF 20% APPLIED BY THE A.O. AND CONFIRMED BY THE CIT(A) WAS EXCESSIVE AND THEREFORE SHOULD BE SUITABLY REDUCED. IT WAS ALSO SUBMITTED THAT THE BUSINESS PREMISES OF THE ASSESSEE TAKEN ON RENT WAS LOCATED IN THE PREMISES OF M/S. PATEL HOSPITAL PVT. LTD. AS A RESU LT OF WHICH ALL THE MEDICINES PRESCRIBED BY THE DOCTORS OF PATEL HOSPIT AL WERE PURCHASED BY THE PATIENTS AND THEIR RELATIVES FROM THE PHARMACY OF THE ASSESSEE. IT WAS ON THIS ACCOUNT THAT THE ASSESSEE HAD AGREED TO PAY TH E IMPUGNED COMMISSION ON SALES TO M/S. PATEL HOSPITAL PVT. LTD. IT WAS F URTHER SUBMITTED THAT THE ASSESSEE WOULD NOT HAVE BEEN IN A POSITION TO CARRY OUT ITS BUSINESS OF THE 4 PRESENT MAGNITUDE WITHOUT GETTING SUPPORT OF M/S. P ATEL HOSPITAL PVT. LTD. ACCORDING TO THE ASSESSEE, SALES OF THE ASSESSEE WE RE DIRECTLY DEPENDENT UPON PRESCRIPTION OF MEDICINES ISSUED BY THE DOCTO RS IN M/S. PATEL HOSPITAL PVT. LTD; AND THEREFORE, PAYMENT OF IMPUGNED COMMIS SION ON SALES TO M/S. PATEL HOSPITAL PVT. LTD. WAS QUITE GENUINE AND REAS ONABLE. IT WAS ALSO SUBMITTED THAT THE A.O. HAS INVOKED THE PROVISIONS OF SECTION 40A(2) WITHOUT BRINGING ANYTHING ON RECORD TO ESTABLISH T HAT THE COMMISSION BEING PAID BY THE ASSESSEE TO M/S. PATEL HOSPITAL PVT. LT D. WAS EXCESSIVE AND UNREASONABLE. 6. IN REPLY, THE LD. DR SUPPORTED THE ORDER PASSED BY THE CIT(A). 7. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CON SIDERED THEIR SUBMISSIONS. PERUSAL OF THE ASSESSMENT ORDER PASSED BY THE AO AND THE APPELLATE ORDER PASSED BY THE CIT(A) SHOWS THAT THE BOOKS OF ACCOUNT PRODUCED BY THE ASSESSEE BEFORE THEM SUFFERS FROM VARIOUS DEFECTS, WHICH HAVE BEEN ELABORATELY HIGHLIGHTED IN THEIR ORDERS. ON PERUSAL OF THE MATERIAL BROUGHT ON RECORD BY THEM, WE ARE CONVINCED THAT T HE BOOKS OF ACCOUNT HAVE RIGHTLY BEEN REJECTED BY THEM. 8. THE NEXT ISSUE AS TO WHETHER GP RATE DECLARED BY THE ASSESSEE IS REASONABLE OR NOT. AS STATED EARLIER, THE ASSESSEE HAS DECLARED GP RATE OF 17.8%, WHICH HAS BEEN CONSIDERED TO BE LOW BOTH BY THE AO AND THE 5 CIT(A). IN OUR OPINION, THE APPLICATION OF G.P. RAT E OF 20% APPLIED BY THE AO AND CONFIRMED BY THE CIT(A) IS EXCESSIVE AND ON HIGHER SIDE. WE, THEREFORE, RESTRICT THE GP RATE TO 18% AS AGAINST 2 0% APPLIED BY THE AO AND CONFIRMED BY THE CIT(A) AND AS AGAINST 17.8% DECLAR ED BY THE ASSESSEE. WE ORDER ACCORDINGLY. 9. AS REGARDS PAYMENT OF COMMISSION ON SALES TO M/S . PATEL HOSPITAL PVT. LTD. WE FIND THAT THE ASSESSEE HAS AGREED TO P AY THE IMPUGNED COMMISSION TO M/S. PATEL HOSPITAL PVT. LTD; OUT OF COMMERCIAL EXPEDIENCY IN AS MUCH AS THE SALES OF THE ASSESSEE WERE FULLY DEPENDENT ON THE MEDICINES PRESCRIBED BY THE DOCTORS AT M/S. PATEL H OSPITAL PVT. LTD. THE AO ALSO HAS NOT DISALLOWED THE IMPUGNED COMMISSION FOR WANT OF COMMERCIAL EXPEDIENCY. IN FACT, THE AO HAS INVOKED THE PROVIS IONS OF SECTION 40A(2) FOR MAKING THE IMPUGNED DISALLOWANCE. 9.1. THE LD. AR FOR THE ASSESSEE SUBMITS THAT THE P ARTNERS OF THE ASSESSEE- FIRM AND DIRECTORS OF M/S. PATEL HOSPITAL PVT. LTD. WERE RELATED TO EACH OTHER AND, THEREFORE, FELL WITHIN THE AMBIT OF SECTION 40 A(2)(B) OF THE ACT. HE, HOWEVER, SUBMITS THAT THE AO HAS NOT GIVEN ANY FIND ING AS TO HOW THE COMMISSION PAID BY THE ASSEESSEE TO PATEL HOSPITAL OUT OF COMMERCIAL EXPEDIENCY WAS EXCESSIVE OR UNREASONABLE AND, THERE FORE, THE IMPUGNED DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE CI T(A) U/S 40A(2) 6 DESERVES TO BE DELETED. ON PERUSAL OF THE MATERIALS AVAILABLE ON RECORD, WE FIND THAT THE AO HAS INVOKED THE PROVISIONS OF SECT ION 40A(2) FOR MAKING THE IMPUGNED DISALLOWANCE. HE HAS, HOWEVER, NOT BRO UGHT ANY MATERIAL ON RECORD TO SHOW AS TO HOW PAYMENT OF IMPUGNED COMMIS SION IS EXCESSIVE OR UNREASONABLE. IN THIS VIEW OF THE MATER, THE IMPUGN ED DISALLOWANCE IS DELETED. 10. THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESS MENT YEAR 2007-08 IS PARTLY ALLOWED IN TERMS OF THE AFORESAID DIRECTIONS . 11. IN ITA NO.29(ASR)/2011, FOLLOWING GROUNDS HAVE BEEN TAKEN: 1. THAT THE CIT(A) WAS NOT JUSTIFIED IN UPHOLDING THE DISALLOWANCE OF RS.32,23,269/- OUT OF COMMISSION PA ID ON SALES WITHOUT APPRECIATING THE FACTS OF THE CASE AND COMMERCIAL EXPEDIENCY OF SUCH PAYMENT. 2. THAT THE ORDERS OF THE A.O. AND CIT(A) ARE AGAINST LAW AND FACTS OF THE CASE. 12. WE HAVE HEARD BOTH THE PARTIES. FOLLOWING OUR O RDER IN ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2007-08 (SUPRA), THE IMPUGNED DISALLOWANCE OF COMMISSION IS DELETED. THE APPEAL FILED BY THE A SSESSEE IS ALLOWED. 13. IN THE RESULT, THE APPEAL BEARING ITA NO.439(A SR)/2010 IS PARTLY ALLOWED WHILE APPEAL BEARING ITA NO.29(ASR)/2011 IS ALLOWED. 7 ORDER PRONOUNCED IN THE OPEN COURT ON 16TH DECEMBER, 2011. SD/- SD/- (H.L. KARWA) (D.K.SRIVASTA VA) VICE PRESIDENT ACCOUNTANT ME MBER DATED: 16TH DECEMBER, 2011 /SKR/ COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE: M/S. PATEL PHARMACY, JALANDHAR. 2. THE ACIT, RANGE-III, JALANDHAR. 3. THE CIT(A), JLR. 4. THE CIT, JLR 5. THE SR DR, ITAT, ASR TRUE COPY BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH : AMRITSAR.