M/s Anil Kumar & co, Bijapur V. ITO, Bijapur

ITA 956/BANG/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73388 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 2 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 28-01-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 31-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BIJOY KUMAR
• Assessee Lawyers: V CHANDRASHEKAR
• Keywords: Gross profit estimation; Corroborative evidences
• Section: 131; 145; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.956/BANG/2011 ASSESSMENT YEAR : 2007-08 M/S. ANIL KUMAR & CO., COTTON MERCHANTS & COMMISSION AGENTS, INDI ROAD, BIJAPUR 586 101. PAN : AAFCA 2641K VS. THE INCOME TAX OFFICER, WARD 1, BIJAPUR. APPELLANT RESPONDENT ITA NO.986/BANG/2011 ASSESSMENT YEAR : 2007- 08 THE INCOME TAX OFFICER, WARD 1, BIJAPUR. VS. M/S. ANIL KUMAR & CO., COTTON MERCHANTS & COMMISSION AGENTS, INDI ROAD, BIJAPUR 586 101. PAN : AAFCA 2641K APPELLANT RESPONDENT ASSESSEE BY : SHRI V. CHANDRASHEKAR, ADVOCATE REVENUE BY : SHRI BIJOY KUMAR PANDA, ADDL.CIT(DR) DATE OF HEARING : 28.01.2014 DATE OF PRONOUNCEMENT : 30.01.2014 ITA NOS. 956 & 986/BANG/2011 PAGE 2 OF 17 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER ITA 956/BANG/2011 IS AN APPEAL BY THE ASSESSEE, W HILE ITA 986/BANG/2011 IS AN APPEAL BY THE REVENUE. BOTH TH ESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 30.08.2011 OF THE CIT(APPEA LS), BELGAUM RELATING TO ASSESSMENT YEAR 2007-08. 2. FIRST WE SHALL TAKE FOR CONSIDERATION THE APPEAL FILED BY THE REVENUE. GROUNDS NO.1 & 2 RAISED BY THE REVENUE READ AS UNDE R:- 1. THE LD CIT(APPEALS) ERRED IN NOT CONFIRMING TH E ADDITIONS TO THE TUNE OF RS.2,27,39,700, COMPRISING OF UNVERI FIABLE SUNDRY CREDITORS AND EXCESS OUTSTANDING BALANCE OF SUNDRY CREDITORS ON THE BASIS OF FINDINGS RECORDED BY THE AO IN HIS REM AND REPORT. 2. THE LD CIT(APPEALS) ERRED IN IGNORING THE FACT THAT THE ASSESSEE FAILED TO SUBSTANTIATE ITS CLAIM OF OUTSTA NDING SUNDRY CREDITORS BY NOT PRODUCING PROPER ADDRESSES DURING THE COURSE OF REMAND PROCEEDINGS AS A RESULT, THE AO WAS PREVENTE D FROM DISCHARGING HIS STATUTORY DUTIES OF EXAMINING THESE CREDITORS. 3. THE ASSESSEE IS A PARTNERSHIP FIRM. IT CARRIES ON BUSINESS AS COTTON MERCHANTS AND COMMISSION AGENTS. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD SHO WN SUNDRY CREDITORS (TRADE CREDITORS) TOTALING TO RS.10,37,33,867 IN TH E BALANCE SHEET. THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO FILE CONFIRMATION WITH ACCOUNT EXTRACT IN RESPECT OF THE CREDITORS. THE AS SESSEE DID NOT FILE THE CONFIRMATION AS DEMANDED BY THE AO, NOR COULD THE A SSESSEE GIVE DETAILED ITA NOS. 956 & 986/BANG/2011 PAGE 3 OF 17 POSTAL ADDRESSES OF THE CREDITORS FOR VERIFICATION OF THE BALANCES. ACCORDING TO THE AO, LATER ON THE ASSESSEE FILED AUDIT REPORT AND CONFIRMATION FROM SOME OF THE SUNDRY CREDITORS. THE AO THEREFORE OBS ERVED AS FOLLOWS:- . IN VIEW OF THE NON FURNISHING OF ALL THE ACCOU NT EXTRACT AND CONFIRMATION OF SUNDRY CREDITORS, I HAVE NO OPTION EXCEPT TO ADD TO THE TOTAL INCOME OF THE ASSESSEE FIRM A SUM OF R S 3,60,00,000/, OUT OF TOTAL SUNDRY CREDITORS OF RUPEES TEN CRORES THIRTYSEVEN LAKHS INCLUDING URD CREDITORS OF ATHANI KAPAS PURCH ASE CREDITORS AMOUNTING TO RS.60,19,941/- WHICH ARE DIS CUSSED SEPARATELY IN THE ASST. ORDER. 4. ON THE AFORESAID ADDITION, THE ASSESSEE SUBMITTE D BEFORE THE CIT(APPEALS) THAT PROPER OPPORTUNITY WAS NOT GIVEN BY THE AO TO PRODUCE CONFIRMATIONS AND SOUGHT TO FILE BEFORE THE CIT(A) LEDGER EXTRACTS OF ALL THE SUNDRY CREDITORS ALONG WITH POSTAL ADDRESSES AND CO NFIRMATION. THE EVIDENCE SO FILED BEFORE THE CIT(A) WAS CONFRONTED BY THE CIT(A) TO THE ASSESSING OFFICER AND REMAND REPORT WAS CALLED FOR FROM THE AO. THE CIT(A) SPECIFICALLY DIRECTED THE AO TO VERIFY THE L EDGER EXTRACT AND CONFIRMATIONS WHICH WERE PRODUCED BEFORE HIM AND SU BMIT COMMENTS ON THE ADMISSIBILITY OF THE SAME. THE AO FILED THREE REMAND REPORTS BEFORE THE CIT(A). THE FIRST REMAND REPORT FILED BY THE AO BE FORE THE CIT(A) IS DATED 21.04.2010 WHICH IS NOT RELEVANT IN RESPECT OF THIS GROUND OF APPEAL. THE SECOND REMAND REPORT IS DATED 28.09.2010 AND THE TH IRD REMAND REPORT IS DATED 20.01.2011 AND THOSE REMAND REPORTS ARE RELEV ANT IN THE CONTEXT OF GR.NO.1 AND 2 RAISED BY THE REVENUE. AFTER THE REM AND REPORT, THE ISSUE ITA NOS. 956 & 986/BANG/2011 PAGE 4 OF 17 FOR CONSIDERATION BEFORE THE CIT(A) BECAME NARROW. THE AO BIFURCATED THE SUNDRY CREDITORS INTO THE FOLLOWING THREE CATEGORIE S:- ANNEXURE-A : WHERE NO VARIATION IN THE AMOUNT OF OUTSTANDING BALANCES IS FOUND NIL ANNEXURE-B : THE LETTERS ISSUED TO SOME OF THE CREDITORS ARE NOT SERVED ON SUNDRY CREDITORS, SINCE THE ASSESSEES ARE NOT AVAILABLE/ DOOR LOCKED HENCE RETURNED BY THE POSTAL AUTHORITY AND ALSO IN SOME O F THE CASES WHERE THE LETTERS HAVE BEEN DULY SERVED ON THE CREDITORS THE CONFIRMATION LETTERS ARE NOT RECEIVED. RS.1,40,51,910 ANNEXURE-C : SUNDRY CREDITORS WHEREIN EXCESS AMOUNT OF OUTSTANDING BALANCES SHOWN RS. 86,87,710 TOTAL AMOUNT RS.2,27,39,700 IT CAN BE SEEN FROM THE AFORESAID TABLE THAT IN RES PECT OF THE CREDITORS GIVEN IN ANNEXURE A , THE AO HAS ACCEPTED THAT THE CONFIRMATIONS WERE IN ORDER AND THERE WAS NO NEED TO MAKE ANY ADDITION U/S.68 O F THE ACT. IN RESPECT OF CREDITORS SET OUT IN ANNEXURE-B TO THE REMAND REPORT, SOME LETTERS HAD BEEN SERVED ON THE SUNDRY CREDITORS AND SOME LETTER S WERE RETURNED UNSERVED FOR THE REASON THAT THE DOOR WAS LOCKED OR THE CREDITORS WERE NOT AVAILABLE AT THAT ADDRESS. IT CAN ALSO BE SEEN FRO M THE ABOVE TABLE THAT THE IN RESPECT OF THE CREDITORS LISTED AT ANNEXURE-C , THE AO FOUND THAT THOSE CREDITORS HAVE CONFIRMED THE OUTSTANDING BALANCES, BUT THE BALANCES CONFIRMED BY THEM WAS LESS THAN WHAT THE ASSESSEE H AD SHOWN AS OUTSTANDING AND PAYABLE IN ITS BOOKS TO THE SUNDRY CREDITORS. ITA NOS. 956 & 986/BANG/2011 PAGE 5 OF 17 5. IN RESPECT OF SUNDRY CREDITORS LISTED AT ANNEXURE-C , THE ASSESSEE FILED RECONCILIATION AND THAT RECONCILIATION WAS AL SO FORWARDED TO THE AO. IN THE REMAND REPORT, THE AO HAS NOT SAID ANYTHING ADV ERSE ABOUT THE RECONCILIATION FURNISHED BY THE ASSESSEE. IN RESPE CT OF ANNEXURE-C SUNDRY CREDITORS, THE ASSESSEE SUBMITTED THAT JUST BECAUSE THERE ARE DISCREPANCIES IN THE ACCOUNTS BETWEEN THE ASSESSEE AND THAT OF TH E SUNDRY CREDITORS, NO ADDITION CAN BE MADE AND RELIED ON THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT V. MULTI SYSTEM SECURITIES PVT. LTD., 305 ITR 2 98 (DEL) . THE ASSESSEE TOOK A PLEA THAT ALL THE SUNDRY CRE DITORS WERE RUNNING ACCOUNTS AND THERE IS NO REASON WHATSOEVER TO DOUBT THE GENUINENESS OF THE SUNDRY CREDITORS. 6. THE CIT(A) ON A CONSIDERATION OF THE ABOVE SUBMI SSIONS CAME TO THE FOLLOWING CONCLUSION:- 4. I HAVE GONE THROUGH THE RECORDS AND THE VOLUMI NOUS INFORMATION FURNISHED BY THE APPELLANT AS WELL AS R EMAND REPORTS SUBMITTED BY THE ASSESSING OFFICER. THE ASSESSING O FFICER HAS EXAMINED ALL THE SUNDRY CREDITORS IN REMAND PROCEED INGS, AND COME TO THE CONCLUSION THAT THE SUNDRY CREDITORS TO THE TUNE OF RS.1,40,51,910 ARE NOT VERIFIABLE ON THE GROUND THA T THE LETTERS ARE NOT SERVED/NOT REPLIED (AS PER ANNEXURE-B OF REMAND REPORT) AND SUNDRY CREDITORS AMOUNTING TO RS.86,87,790 (AS PER ANNEXURE-C OF REMAND REPORT), ARE SHOWN EXCESS BY THE APPELLAN T AS COMPARED TO THESE PARTIES ACCOUNTS. HOWEVER, THE APPELLANT O N THE OTHER HAND, HAS CONTENDED IN RESPECT OF SUNDRY CREDITORS IN WHOSE CASES, LETTERS WERE NOT SERVED/NOT REPLIED AS UNDER :- IN THE ABOVE SUNDRY CREDITORS/DEBTORS, WE HAVE TO SUBMIT YOUR HONOUR THAT WE HAVE BEEN ASKED TO SUBMI T FULL ADDRESSES OF SUNDRY CREDITORS/DEBTORS BY ITO W ARD- 1, BIJAPUR LETTER DATED 6.1.20I0. WE HAVE SUBMITTED FULL ITA NOS. 956 & 986/BANG/2011 PAGE 6 OF 17 ADDRESSES ALONG WITH INVOICE COPY OF THE SAME. FURT HER, WE HAVE TO SUBMIT YOUR HONOUR THAT WE HAVE SENT REGISTERED POST AND 2 TO 3 PERSONS (TWICE) FOR COLL ECTING ACCOUNT EXTRACT IN THEIR BOOKS OF ACCOUNT. BUT WE A RE UNABLE TO COLLECT THE SAME. FEW PARTIES CONVEYED US THAT THEIR CONFIRMATION LETTERS WILL BE SENT DIRECTLY TO THE ITO, WARD-1, BIJAPUR. FEW OF THE SUNDRY CREDITORS MIGHT HAVE CHANGED THEIR BUSINESS ACTIVITIES AND CHANGED THEIR ADDRESSES ALSO BUT THEY HAVE NOT INFORMED US SINCE MORE THAN 2 YEARS HAVE LAPSED. IN THOSE CASES, WE HAVE SUBMITTED 2 YEARS ACCOUNT EXTRACT COPY IN OUR BOOK S OF ACCOUNT BEFORE THE ITO WARD-1, BIJAPUR, FOR WHICH PAYMENTS ARE MADE IN SUBSEQUENT PERIOD THROUGH CHEQ UE AND ALL ACCOUNTS ARE RUNNING ACCOUNTS AND WE HAVE A LSO PRODUCED BOOKS OF ACCOUNTS, RELEVANT VOUCHERS ETC. MOREOVER, WE DO NOT HAVE ANY DIRECT/INDIRECT CONTRO L OVER THEM. ALL THE PURCHASES/ SALES ARE FULLY SUPPO RTED BY THE INVOICE/SALES BILL. ALL THE SUNDRY CREDITORS/DE BTORS ARE RUNNING ACCOUNT WITH US AND GENUINE. THUS, IT IS SEEN THAT THE APPELLANT HAS FURNISHED F ULL AND COMPLETE POSTAL ADDRESSES WHICH WERE MENTIONED IN T HE INVOICES/BILLS OF THE RESPECTIVE CREDITORS AND ALSO SUBSTANTIATED THE TRANSACTIONS WITH PURCHASE BILLS AND ALSO THE P AYMENTS WERE MADE BY WAY OF BANK CHEQUES THROUGH FOLLOWING BANK ACCOUNTS: 1. UNION BANK OF INDIA, HUBLI BRANCH, A/C NO.331701010011144 2. LAKSHMI VILAS BANK, RANEBENNUR BRANCH CA A/C NO .46 14 3. LAKSHMI VILAS BANK, RANEBENNUR BR A/C NO.06063510000001246 4. SYNDICATE BANK, BAILHONGAL BRANCH A/C NO.051830 30000023 5. UNION BANK OF INDIA, BIJAPUR BRANCH CC A/C NO.5 0001 6. UNION BANK OF INDIA, BIJAPUR BRANCH CD A/C NO.33190101011036 4.2. THUS, FROM THE ABOVE BANK ACCOUNTS AS WELL A S THE LEDGER ACCOUNTS OF THE RESPECTIVE PARTIES IT IS SEEN THAT THESE ARE RUNNING TRADE ACCOUNTS AND THE APPELLANT HAS MADE PAYMENTS NOT ONLY IN THE PREVIOUS YEAR RELEVANT TO THE ASST YEAR IN QUES TION BUT ALSO IN SUBSEQUENT YEAR BY WAY OF CHEQUE ONLY. BESIDES, FRO M THE ITA NOS. 956 & 986/BANG/2011 PAGE 7 OF 17 RECONCILIATION STATEMENT IN RESPECT OF ANNEXURE-B O F THE REMAND REPORT, IT IS SEEN THAT THE APPELLANT HAS RECONCILE D THE PARTYS ACCOUNT WHEREVER DIFFERENCE IS FOUND AND IN MANY CA SES PAYMENTS HAVE BEEN MADE IN SUBSEQUENT YEARS. THUS, FROM THE ABOVE IT IS SEEN THAT THE APPELLANT HAS DISCHARGED ITS ONUS THAT LAY UPON IT UNDER THE LAW AND THEREFORE, IT IS NOT PROP ER ON THE PART OF THE ASSESSING OFFICER TO TREAT THE CREDITORS AS NOT VERIFIABLE BRUSHING ASIDE THESE VITAL EVIDENCES TO PROVE THAT THE TRANSACTIONS AS WELL AS OUTSTANDING BALANCES ARE GENUINE AND VER IFIABLE FROM THE BOOKS OF ACCOUNT AND THE BANK ACCOUNTS OF THE A PPELLANT FIRM. AS STATED ABOVE, EVEN THE ASSESSING OFFICER HAS ADM ITTED THESE FACTS IN HIS REMAND REPORT BUT FOR NON-RECEIPT OF R EPLY/NON SERVICE OF LETTERS HE HAS RECOMMENDED FOR ADDITION. I AM IN AGREEMENT WITH THE COUNSEL OF THE APPELLANT THAT MERELY BECAU SE SOME OF THE CREDITORS DID NOT RESPOND TO THE LETTERS ISSUED OR SOME OF THE LETTERS REMAINED UNSERVED DUE TO THE REASONS GIVEN BY THE APPELLANT AS ABOVE, IT CANNOT BE HELD THAT THESE CR EDITORS ARE NOT VERIFIABLE. THEREFORE, THE REASONING GIVEN BY THE A SSESSING OFFICER FOR REJECTING THESE CREDITORS ARE STRANGE T O SAY THE LEAST. MOREOVER, THE ASSESSING OFFICER OUGHT TO HAVE ISSUE D SUMMONS UNDER SECTION 131 TO THOSE CREDITORS BEFORE COMING TO THE CONCLUSION THAT THE AMOUNTS ARE NO MORE REQUIRED TO BE MADE BY THE APPELLANT NOR HE HAS DISPROVED THE TRANSACTIONS AND THE PAYMENTS MADE TO THESE CREDITORS BY THE APPELLANT W HICH ARE THROUGH BANK ACCOUNTS ONLY DULY REFLECTING IN ITS B OOKS OF ACCOUNT. THE FACT THAT THE LETTERS WERE NOT SERVED DOES NOT PROVE THAT THE CREDITORS ARE BOGUS OR THE TRANSACTIONS AR E NOT GENUINE AS THE APPELLANT HAS PROVIDED ALL THE DETAILS INCLUDIN G LEDGER EXTRACT AND THE BANK ACCOUNT EXTRACT TO INDICATE THAT THE S UNDRY CREDITORS ARE RUNNING TRADE PARTIES TO WHOM ALL THE PAYMENTS HAVE BEEN MADE THROUGH BANK CHEQUE AND NO CASH PAYMENTS WERE MADE. THIS CLEARLY SHOWS THAT THE ASSESSING OFFICER HAS R EJECTED THE EVIDENCE PRODUCED BY THE APPELLANT ON FLIMSY GROUND S. IN MY OPINION, THE ASSESSING OFFICER HAS BASED HIS ENTIRE ASSESSMENT ON THE PRESUMPTIONS THAT THE SAID OUTSTANDING BALANCES ARE NOT VERIFIABLE AS ACCORDING TO HIM, THE SUNDRY CREDITOR S TO WHOM LETTERS WERE ISSUED EITHER DO NOT RESPOND OR NOT SE RVED UPON THESE CREDITORS BY THE POSTAL AUTHORITIES. IN THIS CASE, THE ACCOUNTS OF THE APPELLANT ARE AUDITED UNDER SECTION 44AB AND THE BO OKS OF ACCOUNT WERE PRODUCED BEFORE THE ASSESSING OFFICER WHO HAS NOT DOUBTED THE PURCHASE TRANSACTIONS AND THEREFORE, HI S CONCLUSION BASED ON NON SERVICE OF LETTERS ETC CANNOT BE TAKEN AS CESSATION OF ITA NOS. 956 & 986/BANG/2011 PAGE 8 OF 17 LIABILITY AS THESE ARE RUNNING ACCOUNTS AND PAYMENT S HAVE ALSO BEEN MADE IN SUBSEQUENT YEAR BY WAY OF BANK ACCOUNT CHEQUES ONLY. 7. THE CIT(APPEALS) GAVE THE FOLLOWING FINDING:- 4.3 THUS, FROM THE ABOVE FACTS, FOLLOWING CONCLUS IONS CAN BE DRAWN: (I) THE APPELLANT HAS PROVED IDENTITY OF THE PERSON S AND ALSO GENUINENESS OF THE TRANSACTIONS BY PRODUCING CONFIR MATIONS AS WELL AS LEDGER EXTRACTS IN ITS BOOKS AND EVIDENCE I N THE FORM OF BANK ACCOUNT EXTRACT TO SHOW PAYMENTS ARE MADE T HROUGH BANK ACCOUNT ONLY. THE APPELLANT HAS MAINTAINED REG ULAR BOOKS OF ACCOUNT WHICH ARE SUBJECTED TO AUDIT UNDER SECTION 44AB. (II) ONCE THE APPELLANT HAS DISCHARGED HIS INITIAL BURDEN, THE BURDEN SHIFTS UPON THE DEPARTMENT AND THE ASSESSING OFFICER, WAS NOT ABLE TO BRING ANYTHING ON RECORD THAT COULD SHOW THAT THESE OUTSTANDING BALANCES ARE NOT GENUINE. ON THE OTHER HAND, THE APPELLANT BY PRODUCING COGENT MATERIAL INCLUDIN G RECONCILIATION WHEREVER, DIFFERENCE BETWEEN AMOUNT OUTSTANDING AS PER ITS BOOKS AND THE PARTIES BOOKS AND THE EVIDENCE TO INDICATE ALL PAYMENTS BY CHEQUES IN SUB SEQUENT YEAR, HAS DISCHARGED ITS BURDEN THAT LAY UPON IT TO PROVE THESE OUTSTANDING BALANCES AS GENUINE AND OF COURSE, VERI FIABLE. 8. FOR THE ABOVE REASONS, THE CIT(APPEALS) WAS OF T HE VIEW THAT THE ADDITION OF RS.3,60,00,000 MADE BY THE AO CANNOT BE SUSTAINED AND ACCORDINGLY DELETED THE SAID ADDITION. 9. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E HAS RAISED GROUND NOS.1 & 2 BEFORE THE TRIBUNAL. ITA NOS. 956 & 986/BANG/2011 PAGE 9 OF 17 10. WE HAVE HEARD THE RIVAL SUBMISSIONS MADE BY THE LD. DR AND THE LD. COUNSEL FOR THE ASSESSEE. THE LEARNED DR SUBMITTED BEFORE US THAT THE RECONCILIATION GIVEN BY THE ASSESSEE IN RESPECT OF ANNEXURE-C CREDITORS WAS NOT COMPLETE. IN RESPECT OF ANNEXURE-B CREDITO RS IT WAS SUBMITTED THAT THE MERE FILING OF CONFIRMATION BY THE ASSESSEE WIL L NOT DISCHARGE THE BURDEN THAT LAY ON THE ASSESSEE U/S.68 OF THE ACT. IT WAS SUBMITTED THAT THE CIT(A) HAD GIVEN RELIEF TO THE ASSESSEE WITHOUT PROPER VERIFICATION AND WITHOUT CALLING UPON THE ASSESSEE TO DISCHARGE THE BURDEN THAT LAY ON THE ASSESSEE U/S.68 OF THE ACT. THE LEARNED AR REITERA TED SUBMISSIONS MADE BEFORE CIT(A). 11. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO T HE RIVAL SUBMISSIONS. IT IS SEEN FROM THE RECORDS THAT OUT OF TOTAL SUNDR Y CREDITORS, THERE IS NO DISPUTE WITH REGARD TO SUNDRY CREDITORS LISTED IN ANNEXURE-A TO REMAND REPORT OF THE AO WHEREIN HE HAS ACCEPTED THE PLEA O F THE ASSESSEE THAT THESE CREDITORS WERE GENUINE. AS FAR AS ANNEXURE-B SUNDRY CREDITORS ARE CONCERNED, THESE CREDITORS TOTAL ABOUT 47 IN NUMBER AMOUNTING TO RS.1,92,31,910. IT IS SEEN FROM THE ANNEXURE-B PRE PARED BY THE AO TO HIS REMAND REPORT THAT ON THE NOTICES ISSUED TO THESE 4 7 CREDITORS, SOME HAD BEEN SERVED BUT THERE WAS NO REPLY FROM THE CREDITO RS. IN RESPECT OF SOME OF THE CREDITORS, NOTICES HAD NOT BEEN SERVED. IN RESPECT OF THE CREDITORS TO WHOM NOTICES WERE SERVED, BUT REPLIES WERE NOT RECE IVED; THE AO DID NOT CHOOSE TO ISSUE SUMMONS U/S. 131 OF THE ACT AND COM PEL THEIR ATTENDANCE BEFORE HIM. MORE OVER, THERE IS NO BREAK-UP IN ANN EXURE-B CREDITORS GIVEN ITA NOS. 956 & 986/BANG/2011 PAGE 10 OF 17 BY THE AO IN HIS REMAND REPORT AS TO WHICH OF THE C REDITORS WERE SERVED BUT NOT REPLIED AND WHICH OF THE CREDITORS ON WHOM NOTI CES WERE NOT SERVED. IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINI ON THAT IN RESPECT OF CREDITORS ON WHOM NOTICES WERE SERVED AND WHO DID N OT SEND ANY REPLY TO THE AO, THE ADDITION MADE BY THE AO WAS RIGHTLY DEL ETED BY THE CIT(A), SINCE THE AO DID NOT ISSUE SUMMONS TO THESE CREDITO RS U/S. 131 OF THE ACT AND COMPEL THEIR ATTENDANCE BEFORE HIM. IN RESPECT OF THE CREDITORS OF ANNEXURE-B ON WHOM NOTICES COULD NOT BE SERVED BECAUSE THEY W ERE EITHER NOT RESIDING OR CARRYING ON THE BUSINESS AT THE ADDRESS GIVEN BY THE ASSESSEE; WE ARE OF THE VIEW THAT THE ASSESSEE SHOU LD BE GIVEN AN OPPORTUNITY TO ASCERTAIN THE WHEREABOUTS OF THOSE C REDITORS AND ALSO FILE SOME OTHER EVIDENCE TO SUBSTANTIATE THE GENUINENESS OF THOSE CREDITS. WE ARE OF THE VIEW THAT FOR THIS LIMITED PURPOSE, THE ISSUE SHOULD BE REMANDED TO THE AO FOR FRESH CONSIDERATION. WE HOLD AND DIR ECT ACCORDINGLY. 12. AS FAR AS ANNEXURE-C SUNDRY CREDITORS ARE CONCERNED, THE SUM OF RS.86,87,710 ADDED BY THE AO IS IN RESPECT OF DISCR EPANCIES FOUND BETWEEN THE FIGURES SHOWN BY THE ASSESSEE AS DUE TO THE SUNDRY CREDITORS AND FIGURES SHOWN BY THE SUNDRY CREDITORS AS DUE FR OM THE ASSESSEE. THE ASSESSEE HAS SHOWN DUE AND PAYABLE TO THE SUNDRY CR EDITORS MUCH MORE THAN THE FIGURES THE SUNDRY CREDITORS HAD SHOWN AS RECEIVABLE FROM THE ASSESSEE. SUCH DIFFERENCES APPEAR ONLY IN THE CASE OF 36 SUNDRY CREDITORS OUT OF 120 SUNDRY CREDITORS SET OUT IN ANNEXURE-C . IT IS SEEN THAT THE ASSESSEE HAD FILED RECONCILIATION OF SOME OF THESE ACCOUNTS BEFORE THE AO ITA NOS. 956 & 986/BANG/2011 PAGE 11 OF 17 AND THE SAME IS AT PAGES 4 TO 6 OF THE ASSESSEES P APERBOOK. THIS RECONCILIATION IS IN RESPECT OF 10 SUNDRY CREDITORS OUT OF 36 SUNDRY CREDITORS IN WHOSE ACCOUNTS DISCREPANCIES WERE FOUND BY THE A O. FOR READY REFERENCE, THE RECONCILIATION SO FILED BY THE ASSES SEE IN RESPECT OF 10 SUNDRY CREDITORS IS ENCLOSED AS ANNEXURE-I TO THIS ORDER . DESPITE THIS RECONCILIATION, IN THE REMAND REPORT FILED BY THE A O AFTER RECEIPT OF THIS RECONCILIATION, THERE IS NO WHISPER REGARDING THE C ORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE NOR DID THE AO DEMAND ANY FURT HER DOCUMENTARY EVIDENCE TO SUBSTANTIATE THE RECONCILIATION. IN SU CH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE RECONCILIATION FURNISHED IN RE SPECT OF THESE 10 CREDITORS HAS TO BE ACCEPTED. WITH REGARD TO THE REMAINING 2 6 CREDITORS, WE ARE OF THE VIEW THAT THE ASSESSEE SHOULD BE AFFORDED AN OP PORTUNITY TO EXPLAIN THE DISCREPANCIES AND IN THIS REGARD THE ASSESSEE SHOUL D ALSO BE GIVEN LIBERTY TO FILE ANY OTHER SUPPORTING EVIDENCE TO SUBSTANTIA TE ITS CASE. ACCORDINGLY, WE REMAND THE ISSUE TO THE AO FOR THIS LIMITED PURP OSE AS SET OUT ABOVE. THE LIST OF ANNEXURE-B & ANNEUXRE-C SUNDRY CREDITOR S AND THE EXPLANATION OF THE ASSESSEE WITH REGARD TO EACH OF THE SUNDRY C REDITORS ARE ENCLOSED AS ANNEXURE-II TO THIS ORDER . 13. THUS, GROUND NOS.1 & 2 RAISED BY THE REVENUE AR E PARTLY ALLOWED. 14. GROUND NO.3 RAISED BY THE REVENUE AND THE GROUN DS RAISED BY THE ASSESSEE IN ITS APPEAL ARE INTER-RELATED AND DEALT TOGETHER. THE GROUND BY THE REVENUE IS AS FOLLOWS:- ITA NOS. 956 & 986/BANG/2011 PAGE 12 OF 17 3. THE LD. CIT(APPEALS) ERRED IN ESTIMATING AVERA GE GP PERCENTAGE WHEN THE GP ADOPTED BY THE AO @ 4% IS JU ST AND REASONABLE COMPARED TO SIMILAR TRADERS IN THE LOCAL ITY. 15. THE EFFECTIVE GROUNDS OF APPEAL BY THE ASSESSEE READ AS UNDER:- 2. THE LEARNED CIT(APPEALS) ERRED IN SUSTAINING TH E G.P. ADDITION PARTIALLY TO THE EXTENT OF RS.5,99,101 BY MERELY COMPARING THE AVERAGE G.P. DECLARED BY THE APPELLAN T IN THE LAST THREE ASSESSMENT YEARS WITH THE G.P. DECLARED DURIN G THE CURRENT YEAR. 3. THE LEARNED CIT(APPEALS) OUGHT NOT TO HAVE SUSTA INED THE G.P. ADDITION EVEN PARTIALLY WHEN HE HIMSELF WAS SA TISFIED ABOUT THE PROPER MAINTENANCE OF ACCOUNTS. 16. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE G.P. DECLARED BY HE ASSESSEE FOR THE EARLIER ASSESS MENT YEARS AND PRESENT ASSESSMENT YEAR WAS AS FOLLOWS:- ASST. YEAR TURNOVER GP DECLARED % AGE 2004-05 31,49,88,655 87,21,899 2.77% 2005-06 28,49,79,144 96,37,325 3.38% 2006-07 26,35,76,257 91,50,661 3.47% 2007-08 33,47,96,579 10,14,7869(SIC) 3.03% 17. THE AO CALLED UPON THE ASSESSEE TO SHOW CAUSE A S TO WHY THE GP HAS FALLEN DURING THE PREVIOUS YEAR. THE ASSESSEE SUBMITTED THAT IT PURCHASED KAPAS THROUGH COMMISSION AGENTS WHICH RES ULTED IN ADDITIONAL EXPENDITURE. THE ASSESSEE ALSO POINTED OUT THAT KA PAS WERE GINNED AND PRESSED THROUGH DIFFERENT FACTORIES AFTER TRANSPORT ING TO HUBLI WHICH ITA NOS. 956 & 986/BANG/2011 PAGE 13 OF 17 INVOLVED ADDITIONAL EXPENDITURE. IT WAS ALSO POINT ED OUT THAT SOME CUSTOMERS HAD TO BE ACCOMMODATED AT LESSER PRICE BE CAUSE THEY WERE PROMPT IN PAYMENT. BESIDES THE ABOVE, INCREASE IN WAGES AND LABOUR AND OTHER ELEMENTS WAS ALSO POINTED OUT. THE ASSESSEE ALSO SUBMITTED THAT IT MAINTAINED REGULAR BOOKS OF ACCOUNTS WHICH WERE DUL Y AUDITED BY THE CHARTERED ACCOUNTANT. UNDER THE CIRCUMSTANCES, BOO K RESULTS CANNOT BE DOUBTED. WITH REGARD TO LOW YIELD, THE ASSESSEE SU BMITTED THAT SUCH DIFFERENCE IN YIELD IS NORMAL IN THE LINE OF BUSINE SS. 18. THE AO, HOWEVER, DID NOT AGREE WITH THE SUBMISS IONS MADE BY THE ASSESSEE AND HE HELD AS FOLLOWS:- THE EXPLANATION OF THE ASSESSEE FIRM HAS BEEN GO NE THROUGH AND IS NOT SATISFACTORY IN REGARD TO LOW GP & LOW YIELD AND THE SAME IS HEREBY REJECTED ON FACTS OF THE CAS E. IN THE MEANWHILE, IT IS ALSO STUDIED THAT THE SIMILAR BUSI NESSES IN THE NEARBY LOCALITY, HAVE BEEN VERIFIED AND EXAMINED IN DETAIL. AND THE GROSS PROFIT, SHOWN BY THE OTHER ASSESSEE, IN T HE SIMILAR LINE OF BUSINESS, QUITE MORE AND HIGHER THAN THAT OF THE ASSESSEE FIRM IN QUESTION. HENCE, THE CONTENTION ASSESSEE FIRM, I S NOT ACCEPTABLE. ACCORDINGLY, THE GROSS PROFIT, IS PROPO SED TO BE ADOPTED AT 4% OF THE TOTAL TURNOVER OF RS.33,47,96, 579/, WHICH WORKS OUT TO RS.1,33,91,863/-. THE DIFFERENCE OF GP ADOPTED AS ABOVE AND THAT OF THE GP SHOWN BY THE ASSESSEE FIRM , ARRIVED AT RS.32,43,994/-. AND THE SAME IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE FIRM. 19. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) RED UCED THE ADDITION MADE BY THE AO TO RS.5,99,101 OBSERVING AS FOLLOWS: - ITA NOS. 956 & 986/BANG/2011 PAGE 14 OF 17 6.4 I HAVE GONE THROUGH THE RECORDS AND THE SUBM ISSIONS OF THE APPELLANT AND I FIND THAT ON THE BASIS OF COMPARATI VE GP, THE A.O. HAS ESTIMATED GP IN THE APPELLANTS CASE @ 4%. THE APPELLANT FIRM HAS MAINTAINED REGULAR BOOKS OF ACCOUNT AND AL SO STOCK REGISTER WHICH ARE DULY AUDITED UNDER SECTION 44AB OF THE I.T. ACT, 1961. THE DETAILS OF STOCK HAVE BEEN GIVEN IN SCHEDULE-I TO TRADING ACCOUNT SCHEDULES AND NO VARIATION OR DEFEC TS WERE FOUND BY THE ASSESSING OFFICER IN THE QUANTITATIVE DETAIL S OF STOCK FURNISHED BY THE APPELLANT. ALL THE PURCHASES AND S ALES ARE STATED TO BE SUPPORTED BY BILLS AND THE APPELLANT HAS ALSO MAINTAINED DAY-TO-DAY STOCK INVENTORY. HOWEVER, THE ASSESSING OFFICER HAS TAKEN PAINS TO POINT OUT THAT THE PROFIT MARGIN SHO WN BY OTHER 2 ASSESSEES WHICH ARE MENTIONED IN HIS REMAND REPORT DATED 21.4.2010 VIZ M/S.MOTHILAL BHAGIRATHI AND M/S.RONAK COTTON CO WHEREIN, THE GP HAS BEEN SHOWN @3.59% AND 4.38% RESPECTIVELY. THE APPELLANT HAS HOWEVER POINTED OUT THAT THE TURNOVER DISCLOSED BY THESE TWO ASSESSEES ARE RS.69 ,54,686 AND RS.7,59,93,530 RESPECTIVELY WHEREAS, IN THE APPELLA NTS CASE THE TURNOVER IS SUBSTANTIAL I.E. RS.33,47,96,579 AND DU E TO HIGHER TURNOVER AND ADDITIONAL TRANSPORTATION COST THE GP IS SLIGHTLY LOWER AT 3.03% FOR THE YEAR. NOTWITHSTANDING APPELL ANTS SUBMISSIONS IT CANNOT BE DENIED THAT THE APPELLANT S GP HAS GONE DOWN FROM IMMEDIATE 2 PRECEDING YEARS. AS MENTIONED IN THE REMAND REPORT DATED 2 1-4-2010, THE APPELLANTS GP IN LAST 3 YEARS I.E. A.Y. 2004-05, 2005-06 AND 2006-07 ARE 2.77%, 3 .38% AND 3.47% RESPECTIVELY. WHEN CASES OF THE SAME LOCALITY HAVE REPORTED HIGHER GP, THE APPELLANTS EXPLANATION FOR LOW GP IS NOT TENABLE. DURING LAST THREE ASSESSMENT YEARS THE AVE RAGE GP OF THE APPELLANT COMES TO RS. 10746970 AT THE AVERAGE RATE OF 3.21%. THE APPELLANT HAS SHOWN GP 3.08% AT RS.1,01,47,869 DURING THE YEAR. THEREFORE, THE DIFFERENTIAL GROSS PROFIT OF R S.5,99,101 IS SUSTAINED AS AGAINST THE ADDITION OF GP OF RS.32,43 ,994 MADE BY THE AO. 20. AGGRIEVED BY THE RELIEF GIVEN BY THE CIT(A), TH E REVENUE HAS RAISED GR.NO.3 BEFORE THE TRIBUNAL. AGGRIEVED BY THE ORDE R OF THE CIT(A) IN NOT DELETING THE ENTIRE ADDITION MADE BY THE AO, THE AS SESSEE HAS FILED APPEAL BEFORE THE TRIBUNAL. ITA NOS. 956 & 986/BANG/2011 PAGE 15 OF 17 21. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. D R REITERATED THE STAND OF THE AO AS REFLECTED IN THE ORDER OF ASSESS MENT. WHEN A QUERY WAS PUT TO THE LEARNED DR AS TO WHETHER AN ESTIMATI ON OF INCOME CAN BE MADE WITHOUT REJECTING THE BOOK RESULTS ON THE PARA METERS LAID DOWN IN SEC.145(3) OF THE ACT, THE LEARNED DR SUBMITTED THA T IN THE REMAND REPORT FILED BY THE AO BEFORE CIT(A) HE HAS MENTIONED THAT THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE NOT COMPLETE. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, WHILE REITERATING THE SUBMISSIONS AS WE RE MADE BEFORE THE AO ALSO SUBMITTED THAT BOOKS OF ACCOUNTS OF THE ASSES SEE HAVE NOT BEEN FOUND TO BE INCORRECT OR INCOMPLETE AND THEREFORE B OOK RESULTS CANNOT BE REJECTED. IN THIS REGARD, RELIANCE WAS PLACED BY T HE LD. COUNSEL FOR THE ASSESSEE ON THE DECISIONS IN THE CASE OF PYARELAL MITTAL V. ACIT, 291 ITR 214 (GAU), DHAKESHWARI COTTON MILLS V. CIT, 26 ITR 775 (SC) AND NARSINGHDAS RAMAKRISHNA PUNGLIA V. ACIT, 271 ITR 46 9 (RAJ) . 22. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SECT ION 145 OF THE ACT READS AS FOLLOWS:- SEC.145: METHOD OF ACCOUNTING. (1) INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND G AINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURCES' SHALL, S UBJECT TO THE PROVISIONS OF SUB-SECTION (2), BE COMPUTED IN ACCOR DANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY E MPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. ITA NOS. 956 & 986/BANG/2011 PAGE 16 OF 17 (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WH ERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1) OR ACCOUNTIN G STANDARDS AS NOTIFIED UNDER SUB-SECTION (2), HAVE NOT BEEN REGUL ARLY FOLLOWED BY THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSM ENT IN THE MANNER PROVIDED IN SECTION 144. 23. A READING OF THE AFORESAID SECTION CLEARLY SHOW S THAT THE AO IS BOUND TO COMPUTE INCOME UNDER THE HEAD PROFITS & G AINS OF BUSINESS IN ACCORDANCE WITH THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE WHICH IMPLIES THAT THE BOOKS OF ACCOUNTS M AINTAINED BY THE ASSESSEE IN THE REGULAR COURSE OF BUSINESS WOULD BE THE PRIME CONSIDERATION FOR SUCH COMPUTATION. SECTION 145(3) OF THE ACT LAYS DOWN THAT THE AO CAN MAKE AN ASSESSMENT TO THE BEST OF H IS JUDGMENT U/S. 144 OF THE ACT ONLY WHEN HE IS NOT SATISFIED WITH THE C ORRECTNESS OF COMPLETENESS OF THE ACCOUNTS BY THE ASSESSEE OR OTH ER FACTORS REFERRED TO IN SECTION 145(3) OF THE ACT. 24. A PERUSAL OF THE ORDER OF ASSESSMENT SHOWS THAT THE AO HAS NOT MADE ANY REFERENCE TO ANY OF THE FACTORS REFERRED T O IN SECTION 145(3) OF THE ACT. LAW IS WELL SETTLED THAT AO IS NOT ENTITLED T O RESORT TO ESTIMATION OF INCOME WITHOUT REJECTING THE BOOK RESULTS OF THE AS SESSEE. FOR REJECTING THE BOOKS RESULTS OF THE ASSESSEE, THE AO HAS TO MAKE O UT A CASE THAT THE CONDITIONS LAID DOWN IN SECTION 145(3) ARE SATISFIE D. IN THE PRESENT CASE, THE ORDER OF THE AO AS WELL AS THE CIT(A) IS SILENT ON THESE ASPECTS. MERE REFERENCE TO ABSENCE OF SOME SUPPORTING EVIDENCE IN RESPECT OF ENTRIES IN THE BOOKS OF ACCOUNTS IN THE REMAND REPORT OF THE A O BEFORE CIT(A) IN OUR ITA NOS. 956 & 986/BANG/2011 PAGE 17 OF 17 VIEW WOULD NOT BE SUFFICIENT TO INVOKE THE PROVISIO NS OF SEC.145(3) OF THE ACT. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THA T THE PRIMARY CONDITION FOR RESORTING TO AN ESTIMATION OF INCOME BY THE AO IS NOT SUSTAINABLE. IN OUR VIEW, THE CIT(A) OUGHT TO HAVE DELETED THE ENTIRE A DDITION MADE BY THE AO. WE ARE, THEREFORE, OF THE VIEW THAT THE ADDITION SU STAINED BY THE CIT(A) SHOULD ALSO BE DELETED. ACCORDINGLY, WE ALLOW THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE AND DISMISS THE GROUND RAISED BY TH E REVENUE. 25. IN THE RESULT, THE APPEAL BY THE REVENUE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES, WHILE THE APPEAL BY THE ASSES SEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF JANUARY, 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 30 TH JANUARY, 2014 . /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.