PODDAR YARN AGENCIES, Jaipur V. ITO, Jaipur

ITA 9/JPR/2013

• Counselvise Citation: 923114 RSA 2013
• Duration Of Justice: 1 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-03-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 02-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D C SHARMA
• Keywords: Rejection of books of accounts; Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELALTE TRIBUNAL : JAIPUR BENCH : JAIPUR BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.K. SAINI, ACCOUNTANT MEMBER. ITA NO. 09/JP/2013 (A.Y. 2008-09) M/S. PODDAR YARN AGENCIES, VS. THE ITO,WARD-1(2) , KATLA PUROHIT, JOHRI BAZAR, JAIPUR. JAIPUR. PAN NO. AABFP 5654 L (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI MANISH AGARWAL DEPARTMENT BY : SHRI D.C. SHARMA - D.R. DATE OF HEARING : 29/01/2014. DATE OF PRONOUNCEMENT : 13/03/2014. O R D E R PER N.K. SAINI, A.M THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 07/11/2012 OF LD. CIT (A)-I, JAIPUR. THE FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) HAS GROSSLY ERRED IN UPHOLDING THE REJECTION OF BOOKS O F ACCOUNTS U/S 145(3) MADE BY LD. AO BY IGNORING THE FACT THAT ASS ESSEE HAS MAINTAINED COMPLETE BOOKS OF ACCOUNTS INCLUDING STO CK REGISTER, THUS THE REJECTION OF BOOKS OF ACCOUNTS DESERVES TO BE H ELD AS BAD IN LAW. 2 1.1 THAT THE LD. CIT(A) HAS FURTHER ERRED IN NOT AP PRECIATING THE FACT THAT IN PRECEDING ASSESSMENT YEARS, BOOKS OF ACCOUNTS MA INTAINED UNDER SIMILAR CIRCUMSTANCES WERE ACCEPTED IN THE ASSESSME NT COMPLETED U/S 143(3), THUS THE ACTION OF LD. CIT(A) IS WITHOUT AN Y BASIS AND THEREFORE THE TRADING RESULTS BASED ON THE BOOKS OF ACCOUNTS MAINTAINED DESERVES TO BE ACCEPTED. 1.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, LD. CIT(A) HAS GROSSLY ERRED IN UPHOLDING THE TRADING ADDITION OF RS. 13,79,806/- MADE BY LD. AO ARBITRARILY, THUS THE SAME DESERVES TO BE DELETED. 2. THAT THE LD. CIT(A) HAS FURTHER ERRED IN UPHOLDI NG THE TRADING ADDITION MERELY FOR NON MAINTENANCE OF DETAILED STOCK RECORD S WITHOUT POINTING OUT ANY SPECIFIC DEFECT NOR HAS APPRECIATE D THE REASON GIVEN FOR LOW G.P. THOUGH HE HIMSELF ACCEPTED THAT NO SAL ES WERE MADE TO RELATED PARTIES, THUS THE TRADING ADDITION OF RS. 1 3,19,806/- AS SUSTAINED BY LD. CIT(A) DESERVES TO BE DELETED IN T OTO. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS GROSSLY ERRED IN UPHOLDING THE DISALLOWANCE @ 10% M ADE OUT OF FOLLOWING EXPENSES ARBITRARILY: NATURE OF EXPENSES AMOUNT CLAIMED AMOUNT DISALLOWED (10%) GENERAL EXPENSES 24,533.00 2,453.00 CONVEYANCE EXPENSES 35,061.00 3,506.00 4. THAT THE APPELLANT CRAVES THE RIGHT TO ADD, DELE TE, AMEND OR ABANDON ANY OF THE GROUNDS OF APPEAL EITHER BEFORE OR AT TH E TIME OF HEARING OF APPEAL. 2 FIRST ISSUE VIDE GROUND NOS.1 TO 2.1 RELATES TO TH E CONFIRMATION OF TRADING ADDITION OF RS. 13,19,806/- MADE BY THE ASS ESSING OFFICER AFTER REJECTING THE BOOKS OF ACCOUNTS UNDER SECTION 145(3 ) OF THE I.T. ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT IN SHORT). 3 3. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE F ILED RETURN OF INCOME ON 29/09/2008 DECLARING AN INCOME OF RS. 4,5 4,050/- WHICH WAS PROCESSED UNDER SECTION 143(1) OF THE ACT ON 02/07/ 2009. LATER ON, CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF AS SESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE COMPARATIVE GROSS PROFIT RATES OF THE ASSESSEE WERE AS UNDER:- A.Y. SALES G.P. G.P. RATE IN % 2006 - 07 RS. 13,52,61,214/ - 24,19,173/ - 1.78% 2007 - 08 RS. 13,32,29,478/ - RS. 30,98,009/ - 2.33% 2008 - 09 RS. 24,53,85,409/ - RS. 35,87,902/ - 1.46% FROM THE ABOVE TABLE, THE ASSESSING OFFICER NOTICE D THAT THE SALES HAVE INCREASED BY 84% BUT THE G.P. RATE DECREASED B Y 0.87% FOR THE YEAR UNDER CONSIDERATION IN COMPARISON TO THE PRECEDING YEAR. THE ASSESSING OFFICER ALSO NOTICED THAT THE ASSESSEE STARTED TRAD ING IN NEW FIBERS SOLD AT RS. 8,01,65,740/- AND EARNED G.P. OF RS. 5,51,900/- I.E. G.P. RATE OF 0.65% ONLY AND ON THE BALANCE SALES OF RS. 16,52,19 ,719/-, THE G.P. RATE EARNED WAS AT 1.84%. THE ASSESSING OFFICER NOTED T HE FOLLOWING FACTS:- 1. THE ASSESSEE MAINTAINED COMPUTER GENERATE D BOOKS OF ACCOUNTS. 2. THE BOOKS OF ACCOUNTS MAINTAINED WERE CASH BOOK, LEDGER, BANK BOOK, JOURNAL, SALES REGISTER, PURCHASES REGISTER AND STO CK REGISTER ALONGWITH 4 VOUCHERS, BILLS ETC OF PURCHASES, SALES AND EXPENSE S ETC. 3. A STOCK REGISTER WAS MAINTAINED BUT ONLY Q UANTITATIVE DETAILS OF GOODS WERE ENTERED WITHOUT IDENTITY OF PURCHASES LOTS AND RATES. THEREFORE DAY TO DAY BASIS OF VERIFICATION OF PURCHASES QUANTITIES W ITH RATE IDENTIFICATION WITH SOLD QUANTITY WITH RATE IDENTIFICATION WAS NOT POSS IBLE. IT WAS NOT POSSIBLE TO TALLY THE SOLD QUANTITY WITH PURCHASES QUANTITY WIT H RATE IDENTIFICATION. IT WAS ALSO NOT POSSIBLE THAT THE SALE OF A PARTICULAR QUANTITY WAS OUT OF WHICH LOT AND RATE OF PURCHASES. SO IT WAS NOT POSSIBLE T O TALLY THE SOLD QUANTITY AND RATE WITH THE PURCHASES QUANTITY AND RATE. 4. THE SALES PRICES RATES OF GOODS SUPPLIED TO SI STER CONCERNS AND INTERLOCKING FIRMS (M/S YARN AND YARN, M/S PODDAR Y ARN P. LTD. ETC.) WERE CHARGED AT LOWER RATES EVEN AT COST AND DISCOUNT AL SO ALLOWED ON SUCH SALES AND SOMETIMES THE GOODS WERE SUPPLIED TO SUCH CONCE RNS BELOW COST RATES ALSO THE OBJECT OF SUCH SALES SEEMS TO KEEP G.P. RA TE IN ASSESSEE FIRM LOW AND TO BENEFIT THE FIRMS OF RELATIVES OF PARTNERS A ND CONCERNS WHO ARE OWNERS OF SUCH CONCERNS. HENCE, G.P. RATE FROM THE TRADITIONAL AND REGULAR ITEMS OF TRADING SHOWN LOW COMPARED TO PRECEDING YE AR AND THE NEW TRADING ITEMS OF FIBRE FETCH G.P. RATE. 5. THE DEFECTS, DEFICIENCIES AND INCOMPLETENESS NO TED IN MAINTAINING STOCK REGISTER NOT ONLY AFFECTS IN MEASURING THE CO ST OF GOODS SOLD BUT ALSO AFFECTS THE VALUATION OF CLOSING STOCK. HENCE NEITH ER THE COST OF GOODS SOLD WAS RELIABLE NOR VALUATION OF CLOSING STOCK WAS REL IABLE AND BELIEVABLE. ON THE BASIS OF THE AFORESAID DEFECTS, THE ASSESSI NG OFFICER ASKED THE ASSESSEE TO EXPLAIN REASONS OF SHOWING LOW G.P. RATE AND AS TO WHY THE BOOKS OF ACCOUNTS BE NOT REJECTED BY INVOKING T HE PROVISIONS OF SECTION 145(3) OF THE ACT. IN RESPONSE TO THE ABOV E, THE ASSESSEE, VIDE LETTER DATED 26/11/2010, SUBMITTED AS UNDER:- '3. AS REGARDS FALL IN GP RATE FROM 2.33% IN ASSTT. YEAR 2007-08 TO 1.46% IN ASSTT. YEAR 2008-09 WE ENCLOSE HEREWITH COMPLETE QU ANTITATIVE SUMMARY OF 5 OPENING STOCK, PURCHASES, SALES AND CLOSING STOCK F OR THE WHOLE YEAR. THE QUANTITATIVE DETAILS ARE RECONCILED IN TERMS OF EVE N GRAMS OF PURCHASE AND SALE. DURING THE YEAR UNDER REVIEW THE ASSESSEE HAS STARTED TRADING OF NEW ITEMS INCLUDING FIBRE ON WHICH THE GP RATE IS VERY LOW AS COMPARED TO REGULAR PRODUCTS TRADED BY THE ASSESSEE. IT IS EVID ENT FROM THE ENCLOSED STATEMENT THAT ON A SALES OF RS.8,01,65,740/- IN RE SPECT OF NEW PRODUCTS THE GROSS PROFIT IS RS.5,51,900/- COMING TO 0.69% IN TE RMS OF PERCENTAGE WHEREAS GROSS PROFIT FOR REGULAR PRODUCTS IS 1.84%. WE ENCLOSE HEREWITH COPY OF SOME PURCHASE AND SALE BILLS IN SUPPORT OF OUR SUBMISSION. THERE ARE SOME TRANSACTION ON WHICH THE ASSESSEE TO INCUR GROSS LOSS. THE ENCLOSED CHART EXPLAINS SUCH TRANSACTIONS. THE GP R ATE IS NOT UNDER THE CONTROL OF THE ASSESSEE. IT IS DRIVEN BY RULES OF D EMAND AND SUPPLY AND MARKET FORCES. WITH THE INCREASE IN DEALERS OF PROD UCTS OF RELIANCE INDUSTRIES LTD. IN BHILWARA THE COMPETITION IS RISI NG DAY BY DAY RESULTING INTO FALL IN GP RATE MARGINS. FURTHER THERE IS ALWAYS PR ESSURE OF THE SUPPLIER I.E. RELIANCE INDUSTRIES LTD. TO INCREASE THE SALES AT W HATEVER COST AND CONDITIONS. IF THE ASSESSEE DOES NOT FOLLOW DICTATE S OF THE SUPPLIERS THE ASSESSEE MAY EVEN LOSE DEALERSHIP OF RELIANCE INDUS TRIES LTD. THEREFORE TO SAVE THE DEALERSHIP AND ACHIEVE THE GROWTH THE ASSE SSEE HAS TO COMPROMISE IN GP RATE. THUS THAT FALL IN GP RATE IS NOT AT ALL UNDER THE CONTROL OF THE ASSESSEE. THE MARKET OF YARN AND FIBRE IS BUYERS MA RKET GOVERNED BY INTERNATIONAL PRICING MECHANISM. THERE IS SUBSTANTI AL INCREASE IN THE SALES FROM RS.1332.29 LACS IN THE PRECEDING YEAR TO RS.24 53.85 LACS IN THE YEAR UNDER REVIEW. IN VIEW OF THE ABOVE TRADING RESULTS ARE REQUESTED TO BE ACCEPTED.' 4. THE ASSESSING OFFICER DID NOT FIND MERIT IN THE SU BMISSIONS OF THE ASSESSEE BY OBSERVING THAT THE MAIN REASON OF FALL IN G.P. WAS DUE TO SALES AT LOW PRICES TO THE SISTER CONCERNS. HE FURTHER O BSERVED THAT SOMETIMES GOODS SUPPLIED TO SUCH CONCERNS WERE LESS THAN THE COST TO BENEFIT THEM AND THE GAINS OF BULK PURCHASES WAS ALSO TRANSFERRE D TO SUCH CONCERNS. HE ALSO OBSERVED THAT DUE TO DEFECTS AND DEFICIENCI ES IN STOCK REGISTER 6 MAINTAINED THE TRUE AND RELIABLE POSITION OF PROFIT COULD NOT BE ASCERTAINED. THE ASSESSING OFFICER REJECTED THE BO OKS OF ACCOUNTS BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE AC T. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS:- 1. RAINBOW METALS (INDIA) (1995) 83 TAXMAN 160, 166 (B OM-HC) 2. JCIT VS.KANCHWALA GEMS (2007) 288 ITR 10 (SC) AFTER REJECTING THE BOOKS OF ACCOUNTS, THE ASSESSI NG OFFICER ESTIMATED THE GROSS PROFIT BY APPLYING THE GP RATE OF 2% AND ACCORDINGLY MADE THE ADDITION OF RS. 13,19,806/-. 5. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER:- THE LD. AO WITHOUT APPRECIATING THESE FACTS HAS RE JECTED THE BOOKS OF ACCOUNTS AND OBSERVED AT PAGE 4 IN PARA 2 OF THE OR DER AS UNDER: '............IT IS AN UNDISPUTED FACT THAT THE ASSE SSEE DID NOT MAINTAIN DAY TO DAY COMPLETE AND RELIABLE STOCK REGISTER AND TRUE QUANTITATIVE DETAILS OF THE STOCK WERE ALSO NOT MAINTAINED BY HI M. THEREFORE, IT IS CLEAR THAT THE CLOSING STOCK WAS VALUED ON ESTIMATE BASIS BY THE ASSESSEE AND THE PROFIT IS NOT COMPUTED IN CORRECT MANNER '. WHILE OBSERVING SO THE LD. AO HAS FULLY IGNORED THE FACT THAT WHEN COMPLETE QUANTITATIVE DETAILS WERE MAINTAINED BY TH E ASSESSEE IN TALLY SOFTWARE THEN ON WHICH BASIS HE ALLEGED THAT TRUE Q UANTITATIVE DETAILS OF STOCK WERE NOT MAINTAINED. AS REGARDS THE OBSERVATI ON THAT CLOSING STOCK WAS VALUED BY THE ASSESSEE ON ESTIMATE BASIS IT IS SUBMITTED THAT QUANTITY OF CLOSING STOCK IN DULY VERIFIABLE FROM BOOKS OF A CCOUNTS AND STOCK WAS 7 VALUED AT COST WHICH IS DULY BACKED BY SUPPORTING B ILLS OF ITEM INCLUDED IN CLOSING STOCK WHICH WERE SUBMITTED BEFORE THE LD. A O VIDE REPLY DATED 20.08.2010, HOWEVER THE LD. AO WITHOUT POINTING OUT ANY DEFECT AND DEFICIENCY IN THE DETAILS SUBMITTED HAS ARBITRARILY ALLEGED THAT CLOSING STOCK WAS VALUED ON ESTIMATED BASIS THUS THE OBSERVATION OF THE LD. AO DESERVES TO BE IGNORED AND EXCLUDED. (II) SALES WERE MADE TO SISTER CONCERNS AT LOW PRICE RESULTED INTO LOW G.P. RATE. IN THIS REGARD IT IS SUBMITTED THAT THE LD. AO HAS ALLEGED THAT THE ASSESSEE HAS SOLD GOODS TO SISTER CONCERNS AT LOWER RATES EVEN AT COST, HOWEVER WHILE ALLEGING SO THE LD. AO HAS MADE A SER IOUS ERROR OF FACT THAT NO SALES WHATSOEVER OF A SINGLE ITEM WAS MADE TO SISTER CONCERNS DURING THE YEAR UNDER APPEAL, THUS THE ALLEGATION O F LD. AO IS WITHOUT ANY BASIS. THIS FACT CAN ALSO BE VERIFIED BY THE TA X AUDIT REPORT WHERE THE TRANSACTION WITH PARTIES RELATED U/S 40A(2)(B) WERE DULY REPORTED AND CERTIFIED BY THE AUDITORS WHICH CONTINUED ANY S UCH TRANSACTION. COPY OF LEDGER ACCOUNTS AS APPEARING IN THE BOOKS O F ACCOUNTS OF THE ASSESSEE IS ENCLOSED. WITH THE ABOVE BACK GROUND, IT IS SUBMITTED THAT IN THE ENTIRE ASSESSMENT ORDER, LD. AO TRIED TO JUSTIFY HIS STAND BY SOLELY ALLEGATING THAT ASSESSEE HAS MADE SALES TO ITS SISTER CONCERNS NAMELY PODDAR YAR NS PVT. LTD. AND YARN & YARN AT ANY LOW MARGIN OR IN SOME CASES AT LOSS WIT H THE MOTIVE TO DEFLATE THE GROSS PROFIT EARNED ON REGULAR SALES MADE TO NO N RELATED PARTIES. SINCE NOT A SINGLE PENNY ITEM WAS SOLD TO RELATED PARTIES DURING THE YEAR UNDER APPEAL, THE WHOLE AND SOLE BASIS OF ALLEGATION MADE BY LD. AO IS TOTALLY BASELESS, MISGUIDING AND FAR FROM THE TRUTH AND THU S DESERVES TO BE IGNORED AND EXCLUDED WHILE ARRIVING AT ANY CONCLUSI ON IN THE MATTER. FURTHER DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE HAS EXPLAINED THE REASONS OF FALL IN GROSS PROFIT RATE WITH EVERY POSSIBLE EVIDENCE. DURING THE YEAR UNDER APPEAL THE ASSESSEE HAS STARTED TRADING OF NEW ITEMS INCLUDING FIBER ON WHICH G.P. RATE IS VER Y LOW AS COMPARED TO REGULAR PRODUCTS TRADED BY THE ASSESSEE WHEREIN ON TOTAL SALES OF RS. 8,01,65,740/-, A G.P. MARGIN OF 0.69% COULD BE ACHI EVED WHEREAS GROSS PROFIT IN RESPECT OF REGULAR ITEMS TRADED WAS 1.84% . A CHART CONTAINING 8 NECESSARY DETAILS IN RESPECT OF G.P. RATE EARNED BY THE ASSESSEE ON DIFFERENT ITEMS AS SUBMITTED BEFORE LD. AO IS ENCLOSED. IT IS EVIDENT FROM THE AFORESAID CHART THAT IN SOME TRANSACTIONS ASSESSEE SUFFERED GROSS LOSS ALSO. THE BASIC REASON BEHIND S UCH VARIANCE G.P. WAS EXPLAINED TO LD. AO VIDE LETTER DATED 26.11.2010 (R EPRODUCED IN ASSESSMENT ORDER) WHEREIN IT WAS EXPLAINED THAT THE GROSS MARGIN IN CASE OF BUSINESS OF ASSESSEE IS DRIVEN BY RULES OF DEMAN D AND SUPPLY AND FURTHER GOVERNED BY INTERNATIONAL PRICE MECHANISM. ASSESSEE IS A DEALER OF RELIANCE INDUSTRIES LTD. AND DUE TO INCREASE IN NUM BER OF DEALERS OF COMPANY IN BHILWARA, THE ASSESSEE HAD TO REDUCE ITS GROSS MARGIN IN ERA OF STIFF COMPETITION IN MARKET. FURTHER, DUE TO CONTIN UOUS PRESSURE OF COMPANY FOR INCREASE IN SALE AND IF THE ASSESSEE DO ES NOT FOLLOW DICTATES OF THE SUPPLIER, THE ASSESSEE MAY EVEN LOSE DEALERSHIP OF RELIANCE INDUSTRIES LTD. THUS IN ORDER TO COPE UP WITH THE SALES TARGET S, THE GOODS WERE SOLD AT VERY LOW MARGINS. FURTHER ASSESSEE IN ADDITION TO G ROSS MARGIN, RECEIVED A FIXED PERCENTAGE OF COMMISSION FROM THE COMPANY WHI CH IS SEPARATELY CREDITED TO PROFIT & LOSS ACCOUNT AND DOES NOT FORM ING PART OF THE G.P. DECREASED. THIS COMMISSION IS COMPENSATORY IN NATUR E AND AWARDED TO DEALER ON ACHIEVING BETTER SALES. THUS FALL IN G.P. RATE IS BEYOND THE CONTROL OF THE ASSESSEE AND IS PURELY GOVERNED BY MARKET FO RCES. THE ASSESSEE WAS ENGAGED IN WHOLESALE TRADING OF AL L TYPES OF YARNS AND FIBERS FOR WHICH THE NECESSARY QUANTITATIVE DETAILS IN TERMS OF THE QUANTITY OF DIFFERENT TYPES OF YARNS / FIBERS WERE DULY MAIN TAINED CONTAINING THE DETAILS LIKE OPENING STOCK, PURCHASES, SALES AND CL OSING STOCK HOWEVER, LD. AO HAS BRUSHED ASIDE THE DETAILS SUBMITTED AND INVO KED THE PROVISION OF SECTION 145(3) OF THE I. T. ACT. AFTER INVOKING THE PROVISIONS OF SECTION 145(3), TH E LD. AO HAS APPLIED G.P. RATE OF 2% AS AGAINST G.P. 1.46 % DECLARED BY THE A SSESSEE. FROM THE PERUSAL OF TRADING RESULTS DECLARED FOR THE YEAR UN DER APPEAL AND OF PRECEDING ASSESSMENT YEARS FROM THE TABLE BELOW, YO UR GOODSELF WOULD APPRECIATE THE FACT THAT THE ASSESSEE HAS BEEN ABLE TO ACHIEVE BETTER TRADING RESULTS AS UNDER: 9 ASSESSMENT YEAR TURNOVER G.R G.P. RATE 2008 - 09 24,53,85,409 / - 35,87,902 / - 1.46% 2007 - 08 13,32,29,478 / - 30,98,009/ - 2.33% 2006-07 13,52,61,214/- 24.19.173/- 1.78% IT IS AN ESTABLISHED PRINCIPLE OF MARKETING THAT HI GHER TURNOVER CAN BE ACHIEVED BY LOWERING THE GROSS MARGIN IN THE COMPET ITIVE MARKET. THE PURCHASES AND SALES ARE FULLY BACKED BY RESPECTIVE BILLS AND VOUCHERS AND WERE NOT DOUBTED BY LD. AO. IN THE CIRCUMSTANCES, T RADING RESULTS DECLARED BY THE ASSESSEE DESERVES TO BE ACCEPTED. BUT THE ID . AO WITHOUT APPRECIATING THESE FACTS MADE THE ADDITION WITHOUT ANY BASIS AND BY WRONGLY ALLEGING THAT ASSESSEE HAS SOLD GOODS TO IT S SISTER CONCERNS ON LOWER PROFIT MARGINS. HON 'BLE RAJASTHAN HIGH COURT IN THE CASE OF M/S GO TAN LIME KHANIJ UDYOG REPORTED IN 256 ITR 243' HAS HELD THAT REJECTION OF BOOKS OF ACCOUNTS NEED NOT NECESSARILY LEAD TO ANY ADDITION TO THE INCOME. THE AO HAS REJECTED THE BOOKS OF ACCOUNTS U/S 145(3 ) OF THE INCOME TAX ACT, 1961 MERELY ON THE BASIS OF ALLEGED DEFECT IN MAINTENANCE OF STOCK REGISTER WITHOUT INDICATING ANY SPECIFIC DEFECTS. A SSESSEE HAS BEEN ABLE TO MAINTAIN THE GP RATE @ 1.46 % COUPLED WITH INCREASE IN TURNOVER, THEREFORE, NO ADDITION CAN BE MADE WITHOUT ANY ADVE RSE MATERIAL / EVIDENCE AVAILABLE ON RECORD. IT IS ALSO A MATTER OF FACT THAT THE ASSESSMENTS FO R PRECEDING ASSESSMENT YEARS WERE ALSO COMPLETED U/S 143(3) WHEREIN NO DOU BTS WERE RAISED ON THE MODE AND MANNER OF MAINTAINING THE STOCK RECORD S THOUGH THE NATURE OF BUSINESS IS IDENTICAL THUS UNDER SIMILAR CIRCUMS TANCES A DIVERGENT VIEW TAKEN WITHOUT ANY COGENT BASIS DESERVES TO BE HOLD AS BAD. COPY OF ASSESSMENT ORDERS OF PRECEDING ASSESSMENT YEARS ARE ENCLOSED HEREWITH. IN THE CIRCUMSTANCES, IT IS HUMBLY SUBMITTED THAT T HE TRADING ADDITION MADE AT RS. 13,19,806/- WITHOUT ANY MATERIAL AFTER EXAMINATION OF THE 10 BOOKS OF ACCOUNTS, DESERVES TO BE DELETED. RELIANCE WAS ALSO PLACED ON THE FOLLOWING CASE LAWS :- 1. ST. TERESAS OIL MILLS VS. STATE OF KERALA (1970) 76 ITR 365. 2. CIT VS. VIKRAM PLASTICS (1998) 147 TAXATION 699, 7 01 (GUJ.) 3. MD. UMER VS. CIT 101 ITR 526 (PAT.) 4. M/S. SHREE HARI INDUSTRIES VS. ACIT 47 TW 241 (ITA T-JAIPUR) 5. BRIJ BHUSHAN LAL PARDUMAN KUMAR VS. CIT 115 ITR 52 4 (SC) 6. JAI PULSE MILLS VS. ITO (2010) 5 TAXMANN.COM (ITAT - AHD.) 6. THE LEARNED CIT(A), AFTER CONSIDERING THE SUBMISSI ONS OF THE ASSESSEE CONFIRMED THE ADDITION MADE BY THE ASSESSI NG OFFICER BY OBSERVING AS UNDER:- I HAVE CONSIDERED THE FACTS OF THE CASE AND THE SUB MISSIONS MADE. IT IS A MATTER OF FACT THAT THE APPELLANT HAS NOT MAINTAINE D DAY TO DAY STOCK REGISTER OF ALL TYPE OF FIBRE AND YARNS WHICH FACT IS ALSO ADMITTED BY HIM DURING THE COURSE OF ASSESSMENT PROCEEDINGS BEFORE THE AO VIDE LETTER DATED 26-11-2010. DURING THE COURSE OF HEARING BEFORE ME, THE COUNSEL SUBMIT THE STOCK REGISTER WHEREIN THE INFLOW AND OUTFLOW OF TH E GOODS WAS DULY RECORDED HOWEVER, SINCE COMPLETE QUANTITATIVE DETAI LS IN RESPECT OF ALL TYPE OF YARN AND FIBRE WAS NOT MAINTAINED SEPARATELY, TH EREFORE, THE AO HAS RIGHTLY INVOKED THE PROVISION OF SECTION 145(3) WHI CH IS HEREBY UPHELD. WITH REGARD TO THE TRADING ADDITIONS BY APPLYING THE G.P . RATE OF 2 %, I FIND THAT THE AO WHILE APPLYING THE G.P. RATE HAS HOLD THAT T HE APPELLANT WAS SELLING GOODS TO ITS SISTER CONCERNS NAMELY M/S PODDAR YARN PVT. LTD. AND M/S YARN AND YARN AT LOW MARGIN OF PROFIT OR IN SOME CASES A T A LOSS WITH THE PRIMARY MOTIVE TO DEFLATE THE GROSS PROFIT EARNED ON REGULA R SALES MADE TO NON- RELATED PARTIES. BEFORE ME, THE COUNSEL FILED THE C OPY OF THE ACCOUNTS OF THESE TWO SISTER CONCERNS AS APPEARING IN THE APPEL LANT'S BOOKS OF ACCOUNTS WHEREIN NO SALES WERE MADE TO THEM DURING THE YEAR UNDER APPEAL WHICH 11 FACT IS FURTHER PROVED FROM THE COPY OF THE TAX AUD IT REPORT SUBMITTED BEFORE ME WHEREIN NO SALES WAS POINTED OUT BY THE AUDITORS WHICH WAS MADE TO THESE TWO SISTER CONCERNS, THEREFORE, IT IS NOT UND ERSTANDABLE AS TO HOW THE AO HAS MADE REFERENCE TO THE SALES MADE TO SISTER C ONCERNS. THIS FACT IS ALSO PROVED THROUGH AO'S LETTER DATED 29.10.2012. THE IT AT, JODHPUR IN THE CASE OF AJAY GOYAL V/S ITO (99 TTJ 164) HAD HELD THAT TH E POSITION OF LAW IS WELL SETTLED THAT THE BEST GUIDE FOR ESTIMATION OF THE T RADING RESULTS AFTER REJECTING THE BOOKS IS EITHER THE PAST HISTORY OF T HE ASSESSEE OR ANY OTHER COMPARABLE CASE. THE PAST HISTORY OF THE ASSESSEE T AKES PREFERENCE OVER A COMPARABLE CASE. THE PAST HISTORY OF THE APPELLANT IS AVAILABLE IN THE INSTANT CASE. THE COMPARATIVE CHART OF GP RATE IS AS UNDER :- A.Y. SALES GP GP R ATE IN % 2006 - 2007 RS.13,52,61,214/ - RS.24,19,173/ - 1.78% 2007 - 2008 RS. 13,32,29,478 / - RS.30,98,009 / - 2.33 % 2008 - 2009 RS.24,53,85,409/ - RS.35,87,902 / - 1.46% FROM THE ABOVE CHART IN THE A.Y. 2006-07 THE SALES IS RS.13.53 CRORE AND G.P. RATE IS 1.78% WHILE IN THE A.Y. 2007-08 THE SA LES IS RS. 13.32 CRORE AND G.P. RATE IS 2.33%. IN BOTH THESE YEARS THE SALES I S APPROXIMATELY SAME BUT THE G.P. HAS INCREASED BY 0.55% BUT IN THE CURRENT YEAR THE SALE IS RS. 24.54 CRORE BUT THE G.P. IS 1.46% ONLY. SO I ASSUME THAT THE G.P. RATE ADOPTED BY THE APPELLANT ARBITRARILY LOWER. HENCE, IT IS CLEAR THAT DURING THE PREVIOUS YEAR THE SALES INCREASED BY 84 % BUT THE GP RATE DE CREASED BY 0.87 % COMPARED WITH THE PRECEDING YEAR. AS COMPARED TO TH IS THE GP IN CURRENT YEAR WAS ONLY 1.46 %, IT IS ALSO SEEN THAT THE DEFE CT NOTICED IN THE BOOKS OF ACCOUNTS WERE SERIOUS ENOUGH. HENCE, THE ESTIMATION OF GP BY THE AO AT 2 % IS HELD TO BE JUSTIFIED. CONSEQUENTLY, THE TRADIN G ADDITION MADE HAS TO BE SUSTAINED. NOW THE ASSESSEE IS IN APPEAL. 7. LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT THE ASSESSEE IS IN 12 THIS LINE OF TRADE SINCE INCEPTION AND IS MAINTAINI NG REGULAR BOOKS OF ACCOUNTS CONSISTING OF CASH BOOK, LEDGER, PURCHASE BOOK, SALES BOOK, BANK BOOK AND PURCHASE AND SALE VOUCHERS AS WELL AS VOUC HERS FOR EXPENSES AND DAY TO DAY ITEM-WISE STOCK REGISTER BY FOLLOWING T HE METHOD OF ACCOUNTING REGULARLY EMPLOYED ON YEAR TO YEAR BASIS AND THE BOOKS OF ACCOUNTS WERE DULY AUDITED BY A REPUTED FIRM OF CHA RTERED ACCOUNTANTS WHO HAD NOT POINTED OUT ANY IRREGULARITY IN THE BOO KS OF ACCOUNTS AND IN THE PRECEDING YEARS, TRADING RESULTS DECLARED BY TH E ASSESSEE HAS BEEN ACCEPTED BY THE DEPARTMENT UNDER SECTION 143(3) OF THE ACT. IT WAS FURTHER STATED THAT THE ASSESSING OFFICER ALLEGED T HAT QUANTITATIVE DETAIL OF STOCK WAS MAINTAINED WITHOUT IDENTIFICATION OF P URCHASES LOTS AND RATES, THEREFORE, DAY TO DAY BASIS OF VERIFICATION OF PURCHASES, QUANTITIES AND RATES WITH THE QUANTITY AND RATE OF THE ITEM SO LD WAS NOT POSSIBLE. IT WAS STATED THAT DURING THE COURSE OF ASSESSMENT PRO CEEDINGS, A DETAILED REPLY WAS FURNISHED WHEREIN THE COMPLETE QUANTITATI VE SUMMARY OF OPENING STOCK, PURCHASES, SALES AND CLOSING STOCK O F EACH ITEM FOR WHOLE YEAR DULY RECONCILED IN TERMS OF EVEN GRAMS OF PURC HASES AND SALE WAS SUBMITTED. A REFERENCE WAS MADE TO THE PAGES NO. 2 9 & 30 AND 35 & 36 OF THE ASSESSEES PAPER BOOK. IT WAS FURTHER STATE D THAT A DETAILED ITEM- WISE TRADING ACCOUNT CONTAINING THE QUANTITATIVE RA TE AND VALUE FOR 13 OPENING BALANCE, INWARD, OUTWARD AND CLOSING BALANC E WITH CORRESPONDING G.P. RATE WAS SUBMITTED. REFERENCE WAS MADE TO PAG ES 37 TO 39 OF THE ASSESSEES PAPER BOOK. IT WAS CONTENDED THAT THE A SSESSING OFFICER WITHOUT APPRECIATING THE DETAILS FURNISHED BY THE A SSESSEE REJECTED THE BOOKS OF ACCOUNTS AND FULLY IGNORED THE FACT THAT W HEN THE COMPLETE QUANTITATIVE DETAILS WERE MAINTAINED BY THE ASSESSE E IN TALLY SOFTWARE THEN ON WHICH BASIS HE ALLEGED THAT TRUE QUANTITATI VE DETAILS OF STOCK WERE NOT MAINTAINED. AS REGARDS THE OBSERVATION OF THE ASSESSING OFFICER THAT CLOSING STOCK WAS VALUED BY THE ASSESSEE ON ES TIMATE BASIS, IT WAS SUBMITTED THAT QUANTITY OF CLOSING STOCK IN DULY VE RIFIABLE FROM BOOKS OF ACCOUNTS AND STOCK WAS VALUED AT COST WHICH WAS DUL Y BACKED BY SUPPORTING BILLS OF ITEM INCLUDED IN CLOSING STOCK WERE ALSO SUBMITTED BEFORE THE ASSESSING OFFICER. HOWEVER, THE ASSESSI NG OFFICER WITHOUT POINTING OUT ANY DEFECT AND DEFICIENCY IN THE DETAI LS SUBMITTED BY THE ASSESSEE, ARBITRARILY REJECTED THE BOOKS OF ACCOUNT S AND THE LD. CIT(A) ALSO WITHOUT POINTING OUT ANY SPECIFIC DEFECT, UPHE LD THE APPLICATION OF PROVISIONS OF SECTION 145(3) OF THE ACT. IT WAS FU RTHER STATED THAT THE LD. CIT(A) AFTER APPRECIATING THE FACTS ON THE SALES AD MITTED AT PAGE 12 OF THE IMPUGNED ORDER THAT NO SALES WERE MADE TO SISTE R CONCERN DURING THE YEAR. THUS, SOLE BASIS TAKEN BY THE ASSESSING OFFI CER FOR LOW G.P. WAS 14 REJECTED BY THE LD. CIT(A) AND AGAINST SUCH OBSERVA TION, NO APPEAL WAS FILED BY THE DEPARTMENT. IT WAS FURTHER STATED THA T THE TURNOVER OF THE ASSESSEE INCREASED TO RS. 24.53 CRORES IN THE YEAR UNDER CONSIDERATION FROM RS. 13.32 CRORES IN THE EARLIER YEAR, WHICH WA S MORE THAN 85% AND IT IS ESTABLISHED PRINCIPLE OF MARKETING THAT HIGHER T URNOVER CAN BE ACHIEVED BY LOWERING THE PROFIT MARGIN. FURTHERMORE, PURCHA SE AND SALES WERE DULY BACKED BY RESPECTIVE BILLS WHICH WERE NOT DOUB TED BY THE ASSESSING OFFICER. IT WAS FURTHER STATED THAT THE GROSS MARG IN IN CASE OF BUSINESS OF ASSESSEE WAS DRIVEN BY RULES OF DEMAND AND SUPPLY A ND FURTHER GOVERNED BY INTERNATIONAL PRICE MECHANISM. IT WAS EXPLAINED THAT THE ASSESSEE IS A DEALER OF RELIANCE INDUSTRIAL LTD. IN BHILWARA WHER E OTHER DEALERS WERE APPOINTED BY THE COMPANY, THE ASSESSEE HAD REDUCED ITS GROSS MARGIN IN STIFF COMPETITION IN MARKET AND DUE TO CONTINUOUS P RESSURE OF COMPANY FOR INCREASE IN SALE AND IF THE ASSESSEE DID NOT FO LLOW DICTATES OF THE SUPPLIER, IT MIGHT HAVE LOST DEALERSHIP OF THE RELI ANCE INDUSTRIES LTD. THUS IN ORDER TO COPE UP WITH THE SALE TARGETS, THE GOODS WERE SOLD AT VERY LOW MARGIN AND DUE TO INCREASE IN SALE, THE AS SESSEE RECEIVED MORE COMMISSION AT RS. 29,10,096/- AS AGAINST RS. 26,75, 707/- IN THE PRECEDING YEAR. THEREFORE, THE ADDITION MADE BY THE ASSESSIN G OFFICER AND SUSTAINED BY THE LD. CIT(A) WAS NOT JUSTIFIED. REL IANCE WAS PLACED ON THE 15 JUDGMENT OF THE HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF M/S. GOTAN LIME KHANJI UDYOG REPORTED IN 256 ITR 243. 8 . IN HIS RIVAL SUBMISSIONS, LEARNED D.R. STRONGLY S UPPORTED THE ORDER OF THE ASSESSING OFFICER AND REITERATED THE OBSERVATIO NS MADE IN THE ASSESSMENT ORDER. 9. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PAR TIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT THE TURNOVER OF T HE ASSESSEE DURING THE YEAR UNDER CONSIDERATION INCREASED TO RS. 24.54 CRO RES IN COMPARISON TO 13.32 CRORES IN THE EARLIER YEAR. THEREFORE, THE I NCREASE IN THE SALES WAS 84%. IN THE INSTANT CASE, THE ASSESSEE EXPLAINED T HAT ANOTHER DEALERS WERE APPOINTED BY THE COMPANY IN THE SAME AREA, WHE RE THE ASSESSEE WAS ALSO GIVEN DEALERSHIP, SO COMPETITION WAS STIFF IN THE MARKET AND THE ASSESSEE WAS COMPELLED TO REDUCE ITS GROSS MARGIN T O ACHIEVE THE SALE TARGETS. THE SAID EXPLANATION OF THE ASSESSEE HAD NOT BEEN REBUTTED AT ANY STAGE. THEREFORE, IT CAN BE SAID THAT INCREASE IN THE TURNOVER WAS ON ACCOUNT OF LOWERING THE PROFIT MARGIN. IN THE PRES ENT CASE, THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE IN REGULAR COUR SE WERE AUDITED AND NO DEFECT WAS POINTED OUT IN THOSE BOOKS. THE ASSE SSEE FURNISHED THE 16 QUANTITATIVE SUMMERY OF STOCK TO THE ASSESSING OFFI CER AS WELL AS THE LD. CIT(A), COPY OF WHICH IS PLACED AT PAGES 35 & 36 OF THE ASSESSEES PAPER BOOK. THE ASSESSEE ALSO FURNISHED THE QUANTITATIVE & ITEM WISE TRADING ACCOUNT BEFORE THE AUTHORITIES BELOW, COPIES OF THE SAME ARE PLACED AT PAGES NO. 37 TO 39 OF THE ASSESSEES PAPER BOOK. I N THOSE DETAILS, NO DISCREPANCY WAS POINTED OUT EITHER BY THE ASSESSING OFFICER OR BY THE LD. CIT(A). AS REGARDS TO THE ALLEGATION OF THE ASSESS ING OFFICER FOR REJECTING THE BOOKS OF ACCOUNTS THAT QUANTITATIVE DETAILS OF STOCK WAS MAINTAINED WITHOUT IDENTITY AND PURCHASE LOTS AND RATES, THE A SSESSEE EXPLAINED THAT IT WAS NOT POSSIBLE TO MAINTAIN THE DETAILS REGARDI NG THE IDENTITY OF PURCHASE LOTS AND RATES WITH SOLD QUALITY OF RATES WITH EACH ITEM AS PURCHASES AND SALES WERE FROM/TO VARIOUS PARTIES AN D MIGHT HAVE BEEN ON DIFFERENT DATES AND RATES, AS PREVAILING IN THE MAR KET ON THAT TIME. BUT THE DETAILS, ITEM-WISE TRADING ACCOUNT CONTAINING Q UANTITY AS WELL AS THE RATE AND VALUE FOR OPENING BALANCE, INWARDS, OUTWAR DS AND CLOSING BALANCE WITH CORRESPONDING G.P. RATE WERE SUBMITTED , COPIES OF THE SAME ARE PLACED AT PAGES NO. 37 TO 39 OF THE ASSESSEES PAPER BOOK. IN THESE DETAILS, NO DEFICIENCY OR DEFECT WAS POINTED OUT EI THER BY THE ASSESSING OFFICER OR BY THE LD. CIT(A) . IN THE PRESENT CASE , NOTHING IS BROUGHT ON RECORD TO SUBSTANTIATE THAT THE ASSESSEE SUPPRESSED THE SALES OR INFLATED 17 THE PURCHASES AND IT IS ALSO NOT THE CASE OF DEPART MENT THAT THE ASSESSEE WAS TRADING IN THE ITEMS WHICH WERE NOT ENTERED IN THE BOOKS OF ACCOUNTS. IT IS ALSO NOT THE CASE OF THE DEPARTMEN T THAT THE PURCHASE RATE OR THE SALES RATES SHOWN BY THE ASSESSEE WERE NOT REAL. THEREFORE, THE TRADING ADDITION MADE BY ESTIMATING THE G.P. RA TE OF 2% WAS NOT JUSTIFIED PARTICULARLY WHEN NOTHING WAS BROUGHT ON RECORD TO SUBSTANTIATE THAT THE G.P. RATE OF 2% WAS ACHIEVED BY ANY OTHER PARTY DEALING IN SIMILAR TYPE OF ITEMS AND HAVING THE IDENTICAL FACT S AS THAT OF THE ASSESSEE. WE, THEREFORE, ARE OF THE VIEW THAT THE ADDITION MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE LD. CIT(A) W AS NOT JUSTIFIED. ACCORDINGLY, SAME IS DELETED. 10 . VIDE GROUND NO.3, THE ONLY GRIEVANCE OF THE ASSES SEE RELATES TO THE DISALLOWANCE AMOUNTING TO RS. 2,453/- AND RS. 3,506 /- @ 10% ON THE GENERAL EXPENSES AND CONVEYANCE ALLOWANCE RESPECTIV ELY. 11 . AS REGARDS TO THESE DISALLOWANCES, FACTS IN BRIEF ARE THAT THE ASSESSING OFFICER DISALLOWED 20% OF THE AFORESAID E XPENSES BY CONSIDERING THE INVOLVEMENT OF PERSONAL ELEMENT. THE LD. CIT(A ) REDUCED THE DISALLOWANCE TO 10% OF THE EXPENSES. NOW THE ASSES SEE IS IN APPEAL. 18 12 . LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT G ENERAL EXPENSES WERE PETTY EXPENSES INCURRED ON TEA, COFFEE ETC. IN THE NORMAL COURSE OF BUSINESS AND THE CONVEYANCE EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE AND THE ASSESS ING OFFICER MADE THE DISALLOWANCE WITHOUT POINTING OUT ANY INSTANCE TO E STABLISH THAT EITHER THE EXPENSES CLAIMED WERE FOR NON-BUSINESS PURPOSE OR EXCESSIVE. THEREFORE, DISALLOWANCE SUSTAINED BY THE LD. CIT(A) DESERVES TO BE DELETED. 13. IN HIS RIVAL SUBMISSIONS, LEARNED D.R. SUPPORTED TH E ORDER OF LD. CIT(A). 14 . AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PAR TIES AND THE MATERIAL ON RECORD, IT APPEARS THAT THE ASSESSING O FFICER MADE THE IMPUGNED DISALLOWANCE ON ACCOUNT OF PERSONAL USES, HOWEVER, NOTHING WAS BROUGHT ON RECORD TO SUBSTANTIATE THAT THOSE EX PENSES WERE INCURRED FOR PERSONAL PURPOSES. IN THE PRESENT CASE, THE LD . CIT(A) ALTHOUGH ADMITTED THAT THE ASSESSEE HAD INCURRED PETTY EXPENSES AND PAID FRINGE BENEFIT TAX (F.B.T.) ON THE EXPENSES RELATING TO SA LES PROMOTION, TRAVELLING AND REPAIRS & MAINTENANCE ETC. WHEN THE ASSESSEE HIMSELF FILED 19 THE F.B.T. RETURN AND NO DEFECT WAS POINTED OUT IN THE SAID RETURN FURNISHED BY THE ASSESSEE. THEREFORE, DISALLOWANCE SUSTAINED BY THE LD. CIT(A) WAS NOT JUSTIFIED. ACCORDINGLY, THE SAME IS DELETED. 15. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. (ORDER PRONOUNCED IN THE COURT ON 13 TH MARCH, 2014). SD/- SD/- (HARI OM MARATHA) (N.K.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 13 TH MARCH, 2014. VR/- COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE LD.CIT 4. THE CIT(A) 5. THE D.R ASSISTANT REGISTRAR, ITAT, JAIPUR.