PRACHI EXPOSTS, MUMBAI V. ASST CIT RG 23(1), MUMBAI

ITA 4570/MUM/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0129 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 06-08-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Bogus purchase; Rejection of books of accounts; Business expenditure; Opportunity of being heard; Principle of natural justice; Earning of tax free income
• Section: 143(3); 14A; 133(6); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH C, MU MBAI BEFORE SH. P.K. BANSAL VICE PRESIDENT AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO. 4466/MUM/2015 (ASSESSMENT YEAR- 2011-1 2) DCIT CRICLE-29(2), ROOM NO.202, 2 ND FLOOR, C-10 BLDG., PRATYAKSHAKAR BHAVAN, BKC, BANDRA (E), MUMBAI-400051 VS. M/S PRACHI EXPORTS 82, VISHAL INDUSTRIAL ESTATE, BHANDUP VILLAGE ROAD, BHANDUP (W), MUMBAI-40007 8 PAN: AAAFP2513P (APPELLANT) (RESPONDENT) ITA NO. 4570/MUM/2015 (ASSESSMENT YEAR- 2011-12) M/S PRACHI EXPORTS 82, VISHAL INDUSTRIAL ESTATE, BHANDUP VILLAGE ROAD, BHANDUP (W), MUMBAI-40007 8 PAN: AAAFP2513P VS. DCIT CRICLE-29(2), ROOM NO.202, 2 ND FLOOR, C-10 BLDG., PRATYAKSHAKAR BHAVAN, BKC, BANDRA (E), MUMBAI-400051 (APPELLANT) (RESPONDENT) REVENUE REPRESENTED B Y : SH. RAJAT MITTAL (DR) ASSESSEE REPRESENTED BY : MS. DINKLE HARIA (AR) DATE OF HEARING : 10.08.2017 DATE OF ORDER : 29.08.2017 ORDER UNDER SECTION 254(1) OF INCOME-TAX ACT PER PAWAN SINGH JUDICIAL MEMBER ; 1. THESE CROSS APPEALS UNDER SECTION 253 OF INCOME-TAX ACT (ACT) ARE DIRECTED AGAINST THE ORDER OF LD. COMMISSIONER OF INCOME-TAX (APPEALS)- 40 (THE LD. CIT(A), MUMBAI DATED 28.05.2015 FOR ASSESSMENT YEAR (AY) 2011-12. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : ITA NO.4466 & 4570/M/2015 - M/S PRACHI EXPORTS 2 1. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN CONFIRMING THE ORDER OF LEARNED A.O. IN REJECTING THE BOOKS OF ACCOUNTS U/S 145(3). 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDIT ION OF RS. 90,25,517/- TO GROSS PROFIT, ESTIMATING GROSS PROFIT AT 19% OF TURNOVER. 3. THE LD. CIT(A) ERRED IN SUSTAINING THE ADDITION TO THE EXTENT OF RS.93,660/- OUT OF RS.93,660/- OUT OF RS. 91,19,177/- MADE BY A.O. FOR SHORTAGE OF RAW MATERIAL. LEARNED CIT(A) ERRED IN CONFIRMING AN ARBITRARY ADDITION TO THE EXTENT OF RS.93,660/-. 4. LEARNED CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS.8,41,926/- BEING THE DIFFERENCE BETWEEN STOCK OF YARN AS PER BOOKS AND A S PER STOCK SUMMARY. LEARNED CIT (A) ERRED IN CONFIRMING THE DIFFERENCE BY IGNORING THE PROCESS LOSS. 2. THE REVENUE IN ITS CROSS APPEAL HAS RAISED THE FOLL OWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) ERRED IN ALLOWING RELIEF TO THE ASSESSEE OF RS. 2,20,13,461/- ON ACCO UNT OF ESTIMATING THE GP RATE AT 19% INSTEAD OF 23.44% AS ESTIMATED BY THE AO WITHOU T CONSIDERING THE FOLLOWING FACTS: (I) THE BOOKS OF ACCOUNTS OF THE ASSESSEE WERE REJ ECTED AND DULY CONFIRMED BY THE CIT(A) AND THEREFORE, AVERAGE RATIO OF EARLIER YEAR S TAKEN BY THE LD. CIT(A) CANNOT BE APPLIED FOR THIS YEAR. (II) THE GP SHOWN BY THE ASSESSEE IS MUCH LESS THAN THE COMPETITOR I.E. M/S. MAHAJAN SILK MILLS WHO HAD SHOWN THE GP RATE AT 24. 35% ON TOTAL TURNOVER OF RS. 14.06 CRORES, WHEREAS THE ASSESSEE'S TURNOVER IS 3. 5 TIMES MORE THAN M/S. MAHAJAN SILK MILLS AND WAS FACING THE SAME MARKET SCENARIO. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO U/S. 14A READ WITH RULE 80 WITHOUT ASSIGNING ANY COGENT REASON AND WITHOUT APPRECIATING THE FACT THA T THE PROVISIONS OF SEC. 14A READ WITH RULE 8D ARE MANDATORY. THE LD. CIT(A) DID NOT DISCUSS THE FRESH FACTS BROUGHT IN ASSESSMENT ORDER RELATING TO DISALLOWANCE U/S. 1 4A READ WITH RULE 8D. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN ALLOWING RELIEF TO THE ASSESSEE OF RS. 26,12,613/- FOR NON-G ENUINE PURCHASES WITHOUT CONSIDERING THE FACT THAT THE NOTICE U/S. 133(6) IS SUED TO PARTIES FROM WHOM PURCHASES HAS BEEN MADE WERE RETURNED BACK UNSERVED AND FURTHER ASSESSEE HAD ALSO NOT SUBMITTED THE CONFIRMATION OF PURCHASES AMOUNTI NG TO RS. 26,12,613/- FROM THESE PARTIES. 4. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, SU BSTITUTE OR MODIFY ANY OF THE ABOVE GROUND OR ADD A FRESH GROUND AS AND WHEN FOUN D NECESSARY EITHER BEFORE OR AT THE TIME OF HEARING. 3. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE-COMPANY I S A MANUFACTURER AND EXPORTER OF READYMADE GARMENTS AND ALSO DOING JOB WORK, FILE D ITS RETURN OF INCOME FOR RELEVANT AY ON 28.09.2011. THE ASSESSMENT WAS C OMPLETED U/S 143(3) OF THE ACT ON 26.03.2014. THE ASSESSING OFFICER (AO) W HILE FRAMING THE ASSESSMENT ORDER MADE THE ADDITION ON ACCOUNT OF SH ORTAGE OF RAW-MATERIAL ITA NO.4466 & 4570/M/2015 - M/S PRACHI EXPORTS 3 AS NON-BUSINESS EXPENDITURE OF RS. 91,19,177/- , A DDITION OF RS. 8,41,926/- ON ACCOUNT OF UNACCOUNTED SALE OF YARN, RS. 3,10,38,9 78/- ACCOUNT OF ESTIMATING GROSS PROFIT (GP) @ 23.44%, RS. 26,12,613/- ON ACCO UNT OF UNAPPROVED PURCHASES (BOGUS PURCHASES) AND DISALLOWANCE U/S 1 4A OF RS. 8,09,029/-. ON APPEAL BEFORE THE LD. CIT(A), THE ADDITION OF RS. 3 ,10,38,978/- RESTRICTED TO RS.2,20,13,461/- RE-ESTIMATING GP @ 19%, THE ADDIT ION ON ACCOUNT OF SHORTAGE OF RAW-MATERIAL OF RS. 91,19,177/- WAS ALSO RESTRI CTED TO RS. 93,660/-, DELETED THE ADDITION U/S 14A AND UNAPPROVED PURCHASES/BOGUS PUR CHASES OF RS. 26,12,613/-. HOWEVER, THE ADDITION OF RS. 8,41,926/- ON ACCOUNT OF UNACCOUNTED SALE WAS CONFIRMED. THUS, AGGRIEVED BY THE ORDER OF LD. CIT (A), BOTH THE PARTIES HAVE FILED CROSS APPEAL RAISING THE GROUNDS OF APPEAL AS REFERRED ABOVE. 4. WE HAVE HEARD THE LEARNED (AUTHORIZED REPRESENTATIV E) OF THE ASSESSEE AND THE LEARNED DEPARTMENTAL REPRESENTATIVE (DR) FOR THE RE VENUE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. AT THE OUTSET OF HEAR ING, THE LD. AR OF THE ASSESSEE ARGUED THAT ALL THE GROUNDS OF APPEAL RAISED BY ASS ESSEE AND THE REVENUE ARE COVERED BY THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2010-11 IN ITA NO. 419/MUM/2014 DATED 21.06.2017. THE LD. DR FOR T HE REVENUE NOT DISPUTED THE CONTENTION OF LD. REPRESENTATIVE OF ASSESSEE. 5. WE HAVE SEEN THAT THE ASSESSEE IN ITS APPEAL FOR AY 2010-11 RAISED THE SIMILAR GROUNDS OF APPEAL AS RAISED GROUND NO.1 & 2 OF THE PRESENT APPEAL. THE REVENUE HAS ALSO RAISED ITS GRIEVANCES IN GRO UND NO.1 OF ITS APPEAL. THUS ITA NO.4466 & 4570/M/2015 - M/S PRACHI EXPORTS 4 GROUND NO.1 & 2 OF ASSESSEES APPEAL AND GROUND NO. 1 OF REVENUES APPEAL ARE BEING CONSIDERED TOGETHER. WE HAVE SEEN THAT THE AS SESSEE AS WELL AS REVENUE IN ITS CROSS APPEAL HAS RAISED SIMILAR GROUND OF APPEA L FOR AY 2009-10 AS RAISED IN THEIR CROSS APPEAL UNDER CONSIDERATION. THE TRIBUNA L IN ASSESSEES OWN CASE FOR AY 2009-10 PASSED THE FOLLOWING ORDER: 13. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT ASSESSEE IS A MA NUFACTURER AND EXPORTER OF READYMADE GARMENTS AND IS ALSO DOING JOB WORK. IT PURCHASES YARN, GETS IT KNITTED AND SENDS THEM FOR DYING AND THEREAFTER, THE FABRIC IS DRIED AND COMPACTED ETC. AND USED FOR MANUFACTURING OF THE GARMENTS. WE HAVE OBS ERVED THAT THE ASSESSEE HAS NOT MAINTAINED THE QUANTITATIVE STOCK RECORDS CITING RE ASONS SUCH AS SHORTAGE OF MANPOWER, MULTIPLICITY/COMPLEXITY OF ACCOUNTS ETC. . THERE WAS FALL IN TURNOVER FROM RS. 39.81 CRORES IN THE ASSESSMENT YEAR 2009-10 TO RS. 35.10 CRORES IN ASSESSMENT YEAR 2010-11. THE GP RATIO HAS FALLEN DURING THE IM PUGNED ASSESSMENT YEAR TO 16.37% FROM 27.78% IN ASSESSMENT YEAR 2009-10. THE ASSESSEE HAS ATTRIBUTED THE SAME TO WORLDWIDE ECONOMIC DOWNTREND. THE AUTHORITI ES BELOW REJECTED THE STOCK STATEMENT SUBMITTED BY THE ASSESSEE ON THE GROUNDS THAT IT IS NOT AUDITED. THE AO ALSO COMPARED THE ASSESSEE WORKING WITH ANOTHER CON CERN M/S MAHAJAN SILK MILLS WHO WAS ALSO UNDER JURISDICTION OF SAME AO AND WHIC H REPORTED GP RATIO OF 26.22%. THE AO REJECTED BOOKS OF ACCOUNTS U/S 145(3) OF THE 1961 ACT AND APPLIED AVERAGE GP RATIO OF 23.42% BY AVERAGING THE GP OF THE ASSES SEE FOR THE IMPUGNED ASSESSMENT YEAR, GP OF THE PRECEDING ASSESSMENT YEAR AS WELL G P OF MAHAJAN SILK MILLS. THE LEARNED CIT(A) UPHELD THE REJECTION OF BOOKS OF ACC OUNTS BUT APPLIED GP RATIO OF 19% BY AVERAGING THE GP OF EARLIER YEARS OF THE ASS ESSEE ITSELF. IT IS ALSO BROUGHT TO OUR NOTICE THAT REVENUE HAS NOT REJECTED ITS BOOKS OF ACCOUNTS FOR ANY OTHER YEAR. IN OUR CONSIDERED VIEW, THE ASSESSEE IS REQUIRED UNDER THE ACT TO MAINTAIN PROPER RECORDS TO ENABLE THE AO TO COMPUTE CORRECT INCOME CHARGEABLE TO TAX WHICH ALSO INCLUDE MAINTENANCE OF PROPER STOCK RECORDS WHICH A RE INTEGRAL PART OF THE BOOKS OF ACCOUNTS . THE AUTHORITIES BELOW HAVE REJECTED THE BOOKS OF ACCOUNTS AS THE ASSESSEE HAS SHOWN INABILITY IN MAINTAINING STOCK RECORDS CI TING REASONS SUCH AS MULTIPLICITY OF MANUFACTURING PROCESS, COMPLEXITIES IN MAINTAINI NG STOCK RECORDS AND SHORTAGE OF MANPOWER, WHICH IN OUR CONSIDERED VIEW ARE NOT SUFF ICIENT REASONS AS CITED BY THE ASSESSEE FOR NON-MAINTENANCE OF STOCK RECORDS OTHER WISE IT WILL GIVE LEEWAY TO ALL TAX-PAYERS ENGAGED IN BUSINESS OR PROFESSION NOT TO MAINTAIN STOCK RECORDS AS IN EVERY BUSINESS THERE ARE PECULIAR COMPLEXITIES AND MULTIPLICITY OF BUSINESS PROCESS BUT THAT CANNOT OVER-RIDE THE MANDATE OF SECTION 14 5 OF THE 1961 ACT. THE ASSESSEE WAS OBLIGATED TO PRODUCE SUFFICIENT DETAILS AND REC ORDS BEFORE THE AUTHORITIES BELOW TO ENABLE THEM TO DEDUCE CORRECT INCOME WHICH COULD BE BROUGHT TO TAX. THAT IS THE MANDATE OF THE 1961 ACT WHICH DEDUCE ITS AUTHORITY FROM ARTICLE 265 OF THE CONSTITUTION OF INDIA .THE ASSESSEE HAS MADE AN ATT EMPT TO PRODUCE UN-AUDITED STOCK STATEMENTS TO REFLECT CONSUMPTION OF STOCK WH ICH WERE REJECTED BY THE AUTHORITIES BELOW ON THE GROUNDS THAT THE SA ME IS NOT AUDITED. THE AO IS ITA NO.4466 & 4570/M/2015 - M/S PRACHI EXPORTS 5 DIRECTED TO VERIFY THE SAID STATEMENT TO SEE THE CO NSUMPTION OF STOCK AND VERIFY/RECONCILE THE STOCK. THE ASSESSEE IS DIRECTE D TO APPEAR BEFORE THE AO AND EXPLAIN THE ENTIRE SPECTRUM OF STOCK PURCHASES, CON SUMPTIONS AND INVENTORY IN HAND TO THE SATISFACTION OF THE AO TO ENABLE HIM TO COMP UTE INCOME CHARGEABLE TO TAX AND WE MAY CLARIFY THAT THE ONUS IS ON THE ASSESSEE TO PROVE THE SAME . THE AO SHALL ALSO SEE AND COMPARE CONSUMPTION AND WASTAGE PATTERN NOT ONLY OF THE IMPUGNED ASSESSMENT YEAR BUT ALSO OF PRECEDING YEARS TO SEE PATTERN OF WASTAGES AND CONSUMPTION OF THE ASSESSEE AND IF IT IS FOUND THAT THERE ARE NO DISCREPANCIES OR MANIPULATIONS IN INVENTORY MANAGEMENT TO EVADE TAXE S BY THE ASSESSEE , THEN NO ADDITIONS ARE WARRANTED MORE-SO REVENUE IN THE ASSE SSMENT FRAMED FOR ASSESSMENT YEARS 2011-12 AND 2012-13 (ASSESSMENT ORDERS PLACED ON RECORD BY THE ASSESSEE) HAVE NOT REJECTED THE BOOKS OF ACCOUNTS AND IT IS S TRONGLY CONTENDED BY THE ASSESSEE THAT NO STOCK RECORDS WERE MAINTAINED FOR THOSE YEA RS. IN OUR CONSIDERED VIEW, THIS MATTER NEEDS TO BE SET ASIDE AND RESTORED TO THE FI LE OF THE A.O. FOR PROPER DETERMINATION OF THE ISSUE IN RIGHT PERSPECTIVE BY THE AO AS AND THE A.O. WILL ADJUDICATE THE ISSUE AFRESH IN ACCORDANCE WITH LAW BASES ON OUR ABOVE DIRECTIONS. THIS WILL ALSO COVER THE ISSUE IN DISPUTE WITH RESP ECT TO ADDITIONS MADE ON ACCOUNT OF SHORTAGES OF STOCK AND LOSS OF STOCK DURING PROCESS ING. NEEDLESS TO SAY THAT THE AO SHALL GIVE PROPER AND ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN AC CORDANCE WITH LAW. WE ORDER ACCORDINGLY. WITH RESPECT TO THE ADDITION U/S 14A OF THE 1961 AC T, WE FIND THAT THE TRIBUNAL HAS DECIDED THE ISSUE IN THE PRECEDING YEAR VIDE ORDER IN ITA NO. 859/MUM/2013 FOR A.Y. 2009-10 DATED 19 TH NOVEMBER, 2014 , BY DIRECTING THE A.O. TO DELETE T HE DISALLOWANCE U/S 14A OF THE ACT W.R.T. ADDITIONS MA DE TOWARDS INTEREST INCURRED AFTER VERIFICATION OF THE CONTENTIONS OF THE ASSESSEE THA T INTEREST FREE OWNED FUNDS ARE MORE THAN THE FUNDS DEPLOYED IN INVESTMENTS CAPABLE OF Y IELDING TAX-FREE INTEREST INCOME. WE ARE ALSO INCLINED TO ISSUE SIMILAR DIRECTIONS AS WERE ISSUED BY THE TRIBUNAL IN ITA NO. 859/MUM/2013 FOR ASSESSMENT YEAR 2009-10 AND IF IT IS FOUND BY THE AO THAT INTEREST FREE OWNED FUNDS OF THE ASSESSEE ARE MORE THAN THE FUNDS INVESTED IN INVESTMENTS CAPABLE OF YIELDING EXEMPT INCOME, THEN NO ADDITIONS SHALL BE MADE BY THE AO. THUS, WE RESTORE THIS ISSUE TO THE FILE OF THE AO FOR DE-NOVO DETERMINATION OF THE ISSUE ON MERITS AFTER GIVING OPPORTUNITY OF BEI NG HEARD TO THE ASSESSEE IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN AC CORDANCE WITH LAW. HOWEVER, WITH RESPECT TO DISALLOWANCE OF DIRECT EXPENSES OF RS. 3 ,15,110/- BY THE AO U/S 14A OF THE 1961 ACT BEING EXPENSES INCURRED IN RELATION TO EAR NING OF TAX-FREE INCOME, THE DISALLOWANCE STOOD CONFIRMED AS NO SUCH EXPLANATION /EVIDENCES ARE BROUGHT ON RECORD BY THE ASSESSEE TO DISPROVE THE FINDINGS OF THE AO. WITH RESPECT TO THE NEXT ADDITION OF RS. 36,56,339/- ON ACCOUNT OF VARIATION IN THE STOCK RECORDS WITH RESPECT TO PURCHASES AS RECORDED IN BOOKS OF ACCOUNTS AND A S PER ENQUIRY MADE BY THE AO U/S 133(6) OF THE 1961 ACT , THE EXPLANATION SOUGHT TO BE MADE BY THE ASSESSEE TO BE THE DIFFERENCE ON ACCOUNT OF ACCOUNTING TREATMENT TO V AT IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE AS WELL BY THE VENDORS WHO SOLD THE GO ODS TO THE ASSESSEE, WHEREIN THE ASSESSEE HAS DEBITED TO VAT RECEIVABLE ACCOUNT TO CLAIM INPUT CREDIT/REFUND FROM VAT DEPARTMENT WHILE VENDOR REFLECTED THE SALES INC LUSIVE OF VAT IS A PLAUSIBLE EXPLANATION WHICH REQUIRES VERIFICATION BY THE AO. IN OUR CONSIDERED VIEW THIS ISSUE ALSO NEED TO BE SET ASIDE AND RESTORED BACK TO THE FILE OF THE A.O. FOR DE-NOVO DETERMINATION OF THE ISSUE ON MERITS AFTER VERIFICATION OF THE CONTENTIONS OF THE ASSESSEE. NEEDLESS TO SAY ITA NO.4466 & 4570/M/2015 - M/S PRACHI EXPORTS 6 THAT THE AO SHALL GIVE PROPER AND ADEQUATE OPPORTUN ITY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN ACCORDANCE WITH LAW.WE ORDER ACCORDINGLY. 6. THUS, CONSIDERING THE DECISION OF TRIBUNAL IN ASSES SEES OWN CASE FOR AY 2009- 10 ALL THE GROUND OF APPEAL ARE RAISED BY ASSESSEE AS WELL AS REVENUE ARE RESTORED BACK TO THE FILE OF AO WITH THE DIRECTION AS CONTAI NED IN ORDER DATED 21.06.2017 7. IN THE RESULT, APPEAL FILED BY ASSESSEE AND APPEAL FILED BY REVENUE ARE ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH DAY OF AUGUST 2017. SD/- SD/- (P.K. BANSAL) (PAWAN SINGH) VICE-PRESIDENT JUDICIAL MEMBER MUMBAI; DATED 29/8/2017 S.K.PS COPY OF THE ORDER FORWARDED TO : BY ORDER, (ASSTT.REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY/