Sai Cine Wines, Hyderabad V. ITO, Ward 6(3), Hyderabad

ITA 517/HYD/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98844 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 03-12-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 12-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B KURMI NAIDU
• Assessee Lawyers: S RAMA RAO
• Keywords: Gift; Business expenditure
• Section: 68; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA.NO.517/HYD/2013 ASSESSMENT YEAR 2009-10 SAI CINE WINES, HYDERABAD PAN ABMFS 7415E VS. THE INCOME TAX OFFICER, WARD - 6(3), HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. S. RAMA RAO FOR REVENUE : MR. B. KURMI NAIDU DATE OF HEARING : 03.12.2015 DATE OF PRONOUNCEMENT : 18.12.2015 ORDER PER S. RIFAUR RAHMAN, A.M.: THIS IS ASSESSEES APPEAL FOR THE A.Y. 2011-12. IN THIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE ORDER OF T HE LD. CIT(A) IN CONFIRMING THE ESTIMATION OF INCOME OF TH E ASSESSEE @ 5% ON THE COST OF GOODS SOLD. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FI LED ITS RETURN OF INCOME FOR THE A.Y. 2009-10 ON 30.09.2009 DECLARING LOSS OF RS. 8,75,710/-. DURING THE ASSES SMENT PROCEEDINGS UNDER SECTION 143(3) OF THE I.T. ACT, T HE A.O. ASKED THE ASSESSEE TO PRODUCE THE BOOKS OF ACCOUNT AND BILLS/VOUCHERS. AS THERE WAS A FAILURE ON THE PART OF ASSESSEE TO PRODUCE THE BOOKS OF ACCOUNT AND NECESSARY EVIDE NCE IN SUPPORT OF THE EXPENDITURE CLAIMED, THE AO DID NOT ACCEPT THE PROFIT ARRIVED IN THE P&L ACCOUNT. 2 ITA.NO. 517/HYD/2013 SAI CINE WINES 3. DURING THE COURSE OF ASSESSMENT, THE ASSESSEE FURNISHED WORKING OF GP MARGIN. AS PER THE WORKING, THE COST OF GOODS SOLD WAS RS. 2,83,76,363 AND THE ASSESSEE HAD SHOWN SALES OF RS. 3,38,19,936/-. THE AO NOTED THAT AS PER THE GOVT. OF AP, REVENUE (EXCISE-II) DEPARTMENT ORD ER IN GO MS. NO. 184, DT. 07/02/15, THE RETAILERS MARGIN I. E. GROSS PROFIT IS 27% ON SALE OF ORDINARY LIQUOR PRODUCTS, 20% ON MEDIUM AND PREMIUM VARIETIES OF INDIAN LIQUOR AND 2 5% ON BEER. 4. THE AO OBSERVED THAT IN THE CASE OF ASSESSEE, TH E SALES WERE SHOWN AT RS. 3,38,19,936/- AND THE COST OF GOODS SOLD WERE RS. 2,83,76,363/- I.E. OPENING STOCK + PU RCHASE CLOSING STOCK. THUS, THE MARGIN ADMITTED BY THE ASS ESSEE ON COST OF GOODS SOLD WAS 16%. THE AVERAGE GROSS MARGI N WORKED OUT TO 24% ON THE BASIS OF THE GO ISSUED BY THE GOVT. OF AP. SINCE THE ASSESSEE HAD NOT PRODUCED TH E BOOKS OF ACCOUNT AND THE ACCOUNTS WERE REJECTED, THE AO E STIMATED THE NET PROFIT ON SALES @ 5% AS UNDER: 1. COST OF GOODS SOLD DURING THE YEAR : 2,83,76,36 3/- 2. GROSS SALES @ 24% MARGIN ON COST OF GOODS SOLD WORKED OUT TO : 3,51,86,69 0/- 3. THE NET PROFIT ON SALES OF RS. 3,51,86,690 @ 5% : 17,59,334 5. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE LD. CIT(A) AND THE CIT(A) CONFIRMED THE ACTION OF THE AO FOLLOWING THE DECISION OF THE COORDINATE BENCH OF I TAT, HYDERABAD IN THE CASE OF M/S AMARAVATHI WINE SHOP I N ITA NO. 1196/HYD/2011, DATED 08/06/12. 6. STILL AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFOR E US. 3 ITA.NO. 517/HYD/2013 SAI CINE WINES 7. THE LD. AR SUBMITTED THAT ASSESSEE HAD COMMENCED THIS BUSINESS ONLY ON 24/06/08 AND THIS BEING FIRST FINANCIAL YEAR THE ASSESSEE SUSTAINED LOSS DURING THIS YEAR. HE ALSO SUBMITTED THAT SINCE THE ASSESSEE HAD INCURRED HUGE AMOUNT TOWARDS LICENCE FEES TO THE EXTENT OF RS. 51,87,684 (REFER PAGE 11 OF THE PAPER BOOK), ASSESSEE COULD NOT DO M ORE BUSINESS THIS YEAR, BUT, IT HAS TO ABSORB THE ABOVE LICENSE FEE AS BUSINESS EXPENDITURE. THIS WAS THE MAIN REASON F OR LOSS SUSTAINED BY THE ASSESSEE. LD. AR SUBMITTED THAT IN CASE BOOKS ARE REJECTED, 3% OF THE COST OF GOODS SOLD MA Y BE ACCEPTABLE TO THE ASSESSEE. FINALLY, HE SUBMITTED T HAT THE LOSS SHOULD BE ACCEPTED CONSIDERING THE BURDEN OF L ICENCE FEES. 8. THE LD. DR ON THE OTHER HAND RELIED ON THE ORDER S OF AO AND CIT(A). 9. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD AS WELL AS THE ORDER S OF THE REVENUE AUTHORITIES. WE FIND THAT THE BOOKS OF THE ASSESSEE REJECTED BY THE AO, THEREFORE, THE ESTIMATION OF I NCOME IS JUSTIFIED. IT IS ONLY THE RATE AT WHICH THE INCOME IS TO BE ESTIMATED IS BEFORE US. A.O. HAS ESTIMATED THE INCO ME AT 5% OF THE COST OF GOODS SOLD, WHILE THE ASSESSEE IS CO NTENDING THAT NO ESTIMATION IS REQUIRED TO BE MADE IN ITS C ASE. WE FIND THAT IN THE CASE OF VENKATESWARA WINES, NIZAMABAD I N ITA.NO.725/HYD/2015 DATED 04.09.2015 , THE COORDINA TE BENCH OF THIS TRIBUNAL HAS TAKEN NOTE OF THE DECISI ON OF HONBLE HIGH COURT OF TELANGANA AND ANDHRA PRADESH IN THE CASE OF CIT VS. KAMLEKAR SHANKAR LAL ITTA.NO.21 OF 2013 DATED 23.07.2013 HELD AS UNDER : 4 ITA.NO. 517/HYD/2013 SAI CINE WINES 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND TH E MATERIAL ON RECORD, WE FIND THAT THE AO HAS CALLED FOR BOOKS OF ACCOUNT OF THE ASSESSEE BUT THE ASSESSEE HAD FAILED TO PRODUCE THE SAME. THEREFORE, AO HAD ESTIMATED THE INCOME OF THE' ASSESSEE AT 2.5% OF THE TURNOVER. THE CIT WANTS THE SAME TO BE ESTIMATED AT 5% OF THE TOTAL TURNOVER BECAUSE THE TRIBUNAL IN THE CASE OF AN ASSESSEE CARRYING ON THE SAME BUSINESS OF SALE OF IMFL HAS ESTIMATED THE INCOME AT 5% OF THE TURNOVER. THIS, IN OUR VIEW, IS NOT JUSTIFIED AS HE LD BY THE COORDINATE BENCH OF THIS TRIBUNAL. THE UNIFORM NET PROFIT CANNOT BE ADOPTED IN EACH AND EVERY CASE OF SIMILAR BUSINESS. ESTIMATION OF NET PROFIT MUST BE ON THE BASIS OF FACTS INVOLVED IN EACH AND EVERY CASE. THEREFORE, IN OUR VIEW, THERE IS NO ERROR COMMITTED BY THE AO IN ESTIMATING THE PROFIT AT 2.5% OF THE TOTAL TURNOVER . THUS GROUNDS OF APPEAL NO.2 & 3 ARE ALLOWED. AS THE FACTS BEFORE US ARE SIMILAR TO THE FACTS BEF ORE THE TRIBUNAL IN THE CASE OF VENKATESWARA WINES, NIZAMAB AD (SUPRA) AND THE UNIFORM RATE OF PROFIT CANNOT BE AD OPTED IN THE CASE OF EVERY ASSESSEE IN SIMILAR BUSINESS, WE DIRECT THE AO TO ESTIMATE THE NET PROFIT OF THE ASSESSEE AT 3% OF THE COST OF GOODS SOLD. WITH REGARD TO ASSESSEES CLAIM THAT IT HAD INCURRED LICENCE FEES THAT RESULTED IN NEGATIVE PROFIT THIS YEAR, MAY NOT BE ACCEPTABLE BECAUSE THE ABNORMAL EXPENDITURE INCURRED BY THE ASSESSEE WAS DUE TO THE DECISION TAKEN ON THE COMMERCIAL BASIS. WE CAN RECO GNIZE THE INCOME AND EXPENDITURE BASED ON THE MATCHING PR INCIPLE. MOREOVER, THE BOOKS WERE REJECTED BY AO, THEREFORE, WE CAN ONLY ESTIMATE THE INCOME OF ASSESSEE. ACCORDINGLY, THE GROUND NO. 3 IS PARTLY ALLOWED. 10. AS REGARDS THE SUSTENANCE OF ADDITION OF RS. 9 LAKHS U/S 68 OF THE IT ACT BY THE CIT(A), IT IS OBSERVED THAT A SUM OF RS. 23,54,690/- HAD BEEN INTRODUCED IN THE CAPIT AL ACCOUNT OF SRI G. JEEVAN REDDY, PARTNER, INCLUDING REMUNERA TION OF 5 ITA.NO. 517/HYD/2013 SAI CINE WINES RS. 90,000 AND INTEREST OF RS. 1,86,360/-. THE ASSE SSEE EXPLAINED THAT THE SOURCES OF CAPITAL WERE AS FOLLO WS: I) OWN SOURCE RS. 5,00,000 II) GIFT FROM WIFE RS.12,35,000 III) HAND LOANS FROM FRIENDS RS. 2,70,000 IV) CASH GIFT FROM FATHER RS. 4,00,000 TOTAL RS.24,05,000 ========== 10.1 WITH REGARD TO THE OWN SOURCES OF RS. 5,00,000 , THE ASSESSEE RELIED ON THE RETURNS OF INCOME FILED BY T HE PARTNER FOR AY 2006-07 TO 2009-10. AO OBSERVED THAT THE RET URNED INCOME FOR THE EARLIER YEARS WAS RS. 1,00,000 APPRO XIMATELY FOR EACH YEAR WHICH THE AO HELD TO BE JUST SUFFICIE NT FOR MEETING THE HOUSEHOLD EXPENSES OF THE PARTNER. FOR THE CURRENT YEAR, THE RETURN SHOWED AN INCOME OF RS. 1, 55,900/-. HOWEVER, THE CAPITAL ACCOUNT OF THE PARTNER SHOWED WITHDRAWALS OF RS. 54,545/- ONLY SO THAT EVEN THOUG H THE RETURNED INCOME WAS HIGHER, THE CASH FLOW WAS MUCH LESS. THE AO FURTHER OBSERVED THAT AFTER CONSIDERING THE INVESTMENTS U/S 80C, THE AVAILABILITY OF NET FUNDS WOULD HAVE BEEN NEGATIVE. FURTHER, THE ASSESSEE HAD NOT FURNIS HED ANY EVIDENCE OF THE SAVINGS FROM THE RETURNED INCOME. H E, THEREFORE, REJECTED THE CLAIM OF OLD SAVINGS OF THE PARTNER. THE CIT(A) CONFIRMED THE ACTION OF THE AO. 10.2 THE AO ACCEPTED THE CLAIM OF GIFT FROM WIFE OF RS. 12,35,000/-. 10.3 WITH REGARD TO THE HAND LOANS FROM FRIENDS OF 2,70,000, THE ASSESSEE SUBMITTED CONFIRMATION LETTERS FROM TH E PARTIES CONCERNED. THE ASSESSEE ADMITTED THAT NONE OF THE C REDITORS WERE INCOME-TAX ASSESSES. ALL THE LOANS HAD BEEN A LLEGEDLY GIVEN IN CASH IN AMOUNTS LESS THAN RS. 20,000. NO P ROOF OF 6 ITA.NO. 517/HYD/2013 SAI CINE WINES IDENTITY ETC. WAS FURNISHED. THE AO HELD THAT THE A SSESSEE HAD FAILED TO ESTABLISH THE IDENTITY AND CREDITWORT HINESS OF THE CREDITORS AND THE GENUINENESS OF THE TRANSACTION AN D REJECTED THE CLAIM OF RECEIPT OF LOANS FROM FRIENDS AS A SOU RCE OF THE INVESTMENT. THE CIT(A) ACCEPTED THE CLAIM OF RECEIP T OF LOANS BY OBSERVING THAT MERE FACT THAT THE PARTIES CONCER NED WERE NOT ASSESSED TO TAX OR THAT THE LOANS HAD BEEN GIVE N IN CASH CANNOT BE A REASON TO REJECT THE CLAIM OF THE ASSES SEE. 10.4 WITH REGARD TO THE GIFT FROM THE PARTNER FATH ER, SRI MUTHANNA, THE ASSESSEE CLAIMED THAT THE GIFT HAD BE EN MADE OUT OF HIS RETIREMENT BENEFITS. THE AO DIRECTED THE ASSESSEE TO FURNISH PROOF FOR RECEIPT OF RETIREMENT BENEFITS AND DRAWINGS IN THE BANK ACCOUNT. IN RESPONSE, THE ASSE SSEE FURNISHED COPIES OF RETURN OF INCOME FOR AY 2009-10 OF SRI MUTHANNA INCLUDING CAPITAL ACCOUNT AND STATEMENT OF AFFAIRS FILED ALONG WITH IT. THE AO REJECTED THE CLAIM OF R ECEIPT OF GIFT ON THE GROUND THAT THE GIFT HAD NOT BEEN REFLECTED IN THE CAPITAL ACCOUNT OF SRI MUTHANNA AND THAT HIS BANK S TATEMENT SHOWING CASH WITHDRAWAL FOR MAKING GIFT, WAS NOT FI LED. THE CIT(A) REJECTED THE CLAIM OF THE ASSESSEE BY OBSERV ING AS UNDER: 6.13 IT IS OBVIOUS THAT THERE IS A DRASTIC CHANGE O F STAND OF THE ALLEGED DONOR IN THE TWO CONFIRMATION S. BEFORE THE AO SRI MUTHANNA HAD STATED THAT THE GIF T HAD BEEN MADE OUT OF HIS INCOME FROM PENSION AND OUT OF RETIREMENT BENEFITS WHEREAS HE HAS NOW CLAIMED THAT IT WAS PAID OUT OF HIS AGRICULTURAL INCOME. T HE CONFIRMATION APPEARS TO HAVE BEEN FILED TO CIRCUMV ENT THE FACT THAT THE GIFT HAD NOT BEEN REFLECTED IN H IS CAPITAL ACCOUNT/STATEMENT OF AFFAIRS. WHILE REJECTING ASSESSEES CLAIM THE CIT(A) ALSO RE LIED ON THE DECISION OF HONBLE AP HIGH COURT IN THE CASE O F BABU KHAN VS. CIT [1976] 102 ITR 757. 7 ITA.NO. 517/HYD/2013 SAI CINE WINES 10.5 IN VIEW OF THE ABOVE, THE CIT(A) CONFIRMED THE ADDITION OF RS. 9 LAKHS OUT OF RS. 11,19,690/- MADE BY THE A O. 11. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 12. THE LD. AR SUBMITTED THAT THE FIRM WAS ESTABLIS HED ON 24/06/2008, WHICH WAS ALSO CONFIRMED BY THE AO IN H IS ORDER. THE CAPITAL WAS INTRODUCED BY MR. G. JEEVAN REDDY O N 24/06/08 OF RS. 23,05,653/-. AO HAD ANALYSED THE CA PITAL INTRODUCED BY MR. JEEVAN REDDY AND MADE ADDITION IN THE BOOKS OF ASSESSEE WHICH WAS NOT CORRECT. LD. AR SUB MITTED THAT AO IS EXAMINING THE SOURCE FOR SOURCE. HE PRAY ED THAT THE ADDITION BE DELETED IN THE CASE OF ASSESSEE. 13. THE LD. DR, ON THE OTHER HAND, RELIED ON THE OR DERS OF AO AND CIT(A). 14. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERUSED THE ORDERS OF REVENUE AUTHORITIES AS WELL A S THE MATERIAL FACTS ON RECORD. WE ARE OF THE OPINION THA T THE AO HAD MADE ENQUIRY FOR THE CAPITAL INTRODUCED BY MR. JEEVAN REDDY. THE MONEY INTRODUCED BY MR. REDDY IN THE BUS INESS AS HIS SHARE OF CAPITAL. SINCE, IT WAS INTRODUCED A S CAPITAL IN THE BUSINESS, IT BECOME CAPITAL IN NATURE. FURTHER, THE HONBLE SUPREME COURT, IN THE CASE OF BHARAT ENGINE ERING & CONSTRUCTION CO. REPORTED IN 83 ITR 187 (SC) HAS HE LD THAT EVEN IF THE CASH CREDITS MADE IN THE FIRST YEAR OF BUSINESS ARE NOT PROVED, THEY CANNOT BE TREATED AS INCOME OF THE ASSESSEE AS A COMPANY COULD NOT MAKE PROFITS SOON A FTER IT COMMENCED ACTIVITIES. IN THE CASE BEFORE US, SINCE THE ASSESSEE FIRM ITSELF CAME INTO EXISTENCE ON 24/06/2 008, THE 8 ITA.NO. 517/HYD/2013 SAI CINE WINES UNEXPLAINED CAPITAL CANNOT BE TREATED AS THE UNEXPL AINED INCOME OF THE ASSESSEE AS THE ASSESSEE HAD NOT EVEN STARTED THE BUSINESS. THEREFORE, RESPECTFULLY FOLLO WING THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F BHARAT ENGINEERING & CONSTRUCTION CO. (CITED SUPRA), WE H OLD THAT AO CANNOT MAKE THE ADDITION OF THE SAME IN THE CASE OF ASSESSEE. HENCE, THE ADDITION MADE U/S 68 OF THE AC T IS DELETED. THE GROUND NOS. 2 (I) TO (IV) ARE ALLOWED. 15. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH DECEMBER, 2015. SD/- SD/- ( P. MADHAVI DEVI) (S. RIFAUR RAHMAN ) JUDICIAL MEMBER ACOUNTANT MEMBER HYDERABAD, DATED 18 TH DECEMBER, 2015 KV COPY TO : 1. SAI CINE WINES, C/O SRI S. RAMA RAO, ADVOCATE, FLAT NO. 102, SHRIYAS ELEGANCE, H. NO. 3-6-643, ST. NO. 9, HIMAYAT NAGAR, , HYDERABAD 500 029 2. THE INCOME TAX OFFICER, WARD 6(32), HYDERABAD. 3. CIT(A)-IV, HYDERABAD 4. CIT-III, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE 9 ITA.NO. 517/HYD/2013 SAI CINE WINES DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S. 2. DRAFT PLACED BEFORE AUTHOR SR.P.S 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER VP 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P S. 7. FILE SENT TO THE BENCH CLERK SR.P.S. 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER