Subject: Sr. DR relied upon the Order of the AO and reiterated the contentions raised in the grounds of appeal.
Referred Sections:
Section 40A(2)(b)
Section 145(3) of the Act.
Referred Cases / Judgments
CIT Vs. Smt. Poonam Rani
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A", NEW DELHI
BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
I.T.A. No. 5902/DEL/2015
A.Y. : 2011-12
ACIT, CIRCLE 50(1), VS. M/s. S.S. BROTHERS,
NEW DELHI SF-3, 7A/42,
WESTERN CHAMBERS, WEA,
KAROL BAGH, NEW DELHI 5
(PAN:AANFS2475A)
(ASSESSEE) (RESPONDENT)
Revenue by : Smt. Naina Soin Kapil, Sr. DR.
Assessee by : Shri R.K. Kapoor, FCA
ORDER
PER H.S. SIDHU : JM
The Revenue has filed this Appeal against the impugned Order
of the Ld. CIT(A)-20, New Delhi relevant to assessment year
2011-12.
2. The grounds raised in the appeal read as under:-
i) The Ld. CIT(A) has erred in deleting the addition of
Rs. 50,12,111/- on account of variation in NP rate
w.r.t. previous AY 2009-10 in which turnover and
1
nature of business /market condition was
approximately the same. The ld. CIT(A) has erred
in ignoring the various facts of the case that the
assessee has inflated the direct cost including
purchases and non maintenance of stock register
etc.
ii) The Ld. CIT(A) has erred in restricting the addition
of Rs. 19,07,170/- to Rs. 5,00,000/- without
appreciating the fact that the assessee did not
produce proper bills and vouchers of the expenses
during the assessment proceedings.
iii) The Ld. CIT(A) has erred in deleting the addition of
Rs. 7,76,710/- without considering the facts and
circumstances of the case that the assessee failed
to substantiate the bills / vouchers and prpose of
travelling in this regard.
The appellant craves leave to add, alter or amend
any / all the grounds of appeal before or during the
course of hearing of the appeal.
3. The brief facts of the case are that assessee filed its return on
29.9.2011 declaring income at Rs. 70,14,670/-. The return of the
2
assessee was processed u/s. 143(1) of the Income Tax Act, 1961
(in short "Act"). Subsequently, the case was selected for scrutiny
under Compulsory Selection. First notice u/s. 143(2) of the Act was
issued on 25.9.2012 which was served upon the assessee within the
stipulated statutory period. Further, notices u/s. 142(1) of the Act
alongwith detailed questionnaires were issued and served on the
assessee. In response to the same, the AR of the assessee
attended the assessment proceedings from time to time and
requisite information has been filed. Assessee is a firm and
engaged in the business of traders of raw and frozen meant an
export of frozen buffalo meat business. The firm comprising three
partners i.e. Sh. Mohd. Saleem Quereshi, Mohd. Shakir Qureshi and
M/s Al Nasir Export Private Limited having profit sharing ratio of
60%, 30% and 10% respectively. The assessee was asked to
submit comparative chart of GP /NP ratio for the current assessment
year and the previous assessment years. The assessee submitted
the chart for the assessment year 2009-10 to 2011-12. During the
year under consideration, the assessee has shown net profit of Rs.
5,73,93,097/- on gross receipts of Rs. 1,22,24,66,182/- thereby
showing net profit rate of 0.47%. The Assessee was required to
explain the reason for low NP and GP shown by the assessee and in
response to the same the assessee filed its reply, which was
3
considered by the AO but not acceptable. The AO observed that
even during the Assessment year 2009-10, when the turnover of
the assessee was comparable with the current AY assessee was
showing the ratio of total direct expenses with respect to turnover
to the tune of 91.86% against 95.98% during the AY 2011-12.
Hence, 0.41% of the total turnover was disallowed on account of
excess unexplained direct expenses claimed by the assessee and
addition of Rs. 50,12,111/- was added. Further, the AO made the
addition of Rs. 19,02,170/- being 10% of expenses on account of
unexplained expenses for none maintenance of proper bill and
vouchers. AO further observed that though the assessee had
produced the bills of inland travelling totaling to Rs. 26,86,642/-.
The business activities of the assessee are concentrated in the
surrounding areas of Delhi. But the bills of domestic travel were to
several places. But the purpose of the so called business visits could
not be explained by the assessee. No purpose or proof of foreign
travelling expenses of Rs. 4,20,200/- could be furnished by the
assessee. Therefore, in order to prevent leakage of revenue on
account of personal usage, ¼ of the said expenses i.e. Rs.
7,76,710/- was disallowed and added back to the income of the
assessee u/s. 37(1) of the Act. Accordingly, the AO completed the
assessment at Rs. 1,49,45,660/- u/s. 143(3) of the Act vide order
4
dated 30.4.2014. Against the assessment order dated 30.04.2014,
assessee filed an appeal before the Ld. CIT(A), who vide his
impugned order dated 27.08.2015 has deleted the part additions.
Aggrieved with the order of the Ld. CIT(A), New Delhi the Revenue
is in appeal before the Tribunal.
4. Ld. Sr. DR relied upon the Order of the AO and reiterated the
contentions raised in the grounds of appeal. She stated that even
during the Assessment year 2009-10, when the turnover of the
assessee was comparable with the current AY assessee was showing
the ratio of total direct expenses with respect to turnover to the
tune of 91.86% against 95.98% during the AY 2011-12. Hence,
0.41% of the total turnover was rightly disallowed on account of
excess unexplained direct expenses claimed by the assessee and
addition of Rs. 50,12,111/- was added. She further stated that
with regard to addition of Rs. 19,02,170/- being 10% of expenses
on account of unexplained expenses, this was made due to none
maintenance of proper bill and vouchers. As regards addition out of
travelling expenses is concerned, she stated that though the
assessee had produced the bills of inland travelling totaling to Rs.
26,86,642/-. The business activities of the assessee are
concentrated in the surrounding areas of Delhi. But the bills of
domestic travel were to several places. But the purpose of the so
5
called business visits could not be explained by the assessee. No
purpose or proof of foreign travelling expenses of Rs. 4,20,200/-
could be furnished by the assessee. Therefore, in order to prevent
leakage of revenue on account of personal usage, ¼ of the said
expenses ie.. Rs. 7,76,710/- was rightly disallowed and added back
to the income of the assessee u/s. 37(1) of the Act by the AO.
5. On the other hand, Ld. Counsel for the assessee has relied
upon the order of the Ld. CIT(A) and in support of his contention,
he filed the Synopsis in the case, which read as under:-
"This is an appeal filed by the Department against
the Order of the learned CIT(A) granting a relief to
the assessee on certain additions made by the
Assessing Officer.
Our ground-wise submissions on each of the ground
of assessee raised are as under:
GROUND NO. 1 - RELIEF OF RS.50,12,111/- ON
ACCOUNT OF ADDITION MADE DUE TO ALLEGED
LOW GP RATE :
The Assessing Officer has discussed this issue
at Pages 1 to 6 of his Order. The assessee was
required to submit the Comparative Chart of GP/NP
for the year under consideration as compared to
previous two assessment years. This was
accordingly submitted as noted by the Assessing
6
Officer at top of Page-2. The GP rate of the
assessee during the year under consideration was
11.16% as compared to 11.39% with the
immediate preceding Assessment Year and @
11.57% with Assessment Year 2009-10. Since there
was a reduction in the GP rate by 0.41% as
compared to the Assessment Year 2009- 10, the
Assessing Officer required the assessee to explain
the reasons for drop in the GP rate although the
drop in GP rate was not very substantial as
compared to the earlier years.
The assessee amongst others explained that
the sales composition during the year under
consideration was different in as much as the
assessee had to make substantial purchase of
frozen meat as against the raw meat in the earlier
years for meeting its export commitments,
therefore there was slight drop in the GP rate.
The Assessing Officer further noticed that the
major difference occurred at the stage of direct
expenses which includes purchases. The Assessing
Officer noticed in Para-4, Page-4 of his Order that
ratio of direct expenses as compared to turnover in
Assessment Year 2009-10 was 91.86% and during
the year under consideration it was 95.98%. This
variation of increased direct cost was attributed
towards purchase of frozen meat from one related
concern by the Assessing Officer. The Assessing
7
Officer further alleged that Stock Register is not
maintained by the assessee. The Assessing Officer
further noticed that purchase of raw material was @
Rs.82 to 85 per kilogram whereas the purchases
from the related parties have been made at higher
prices.
Thereafter, the Assessing Officer alleged the
violation of provisions of section 40A(2)(b) and
made the addition to the total income @ 0.41% of
its turnover of the current year by comparing the
GP rate of Assessment Year under consideration
2011-12 with Assessment Year 2009-10.
Before the learned CIT(A) all the contentions
pertaining to this issue were explained. It was
explained that there was a material change in the
composition of products purchased and sold by the
assessee during the year under consideration as
compared with the preceding years. It was also
explained that the purchase price of the products
depends upon the demand and supply and at times
raw material has to be purchased from known
sources depending upon commitments of export
orders. Further, complete quantitative details of raw
material purchased and sold and produced during
the year was provided with the contention that
same was also available in the Tax Audit Report. No
discrepancies whatsoever has been pointed out by
the Assessing Officer and only an allegation has
8
been made that quantitative details stock register
has not been kept. A copy of quantitative tally
which reconciles with Tax Audit Report was also
filed before AO & CIT(A) is also being filed as
Annexure-1. It was also explained that entities from
whom the purchase of frozen meat has been made
by the assessee, which are sister concern, are also
being assessed with the same Officer and they are
being taxed at the same rate at which the assessee
is being taxed and therefore no reason for the
assessee to pay higher price to such parties. It was
also explained that while making the addition, the
Assessing Officer has considered freight outward as
direct cost, which is wrong and should have been
considered as indirect cost. If so done, the direct
cost to turnover of the assessee during the year is
92.66% as against 93.56% in the Assessment Year
2009-10 and the difference is less than 1% as
compared to the difference of more than 4% by the
Assessing Officer in Para- 4, Page-4 of his Order.
The learned CIT(A) called for a Remand
Report against all the submissions made by the
assessee and he has reproduced Remand Report of
the Assessing Officer although copy of such Remand
Report was not provided to the assessee.
Amongst various submissions made by the
assessee, certain legal proposition and case laws
were also submitted with additions to the declared
9
income of the assessee cannot be made merely on
the ground of low GP without bringing nothing more
on record. Some of the case laws on this
proposition are noted at Page-9 of CIT(A) Order.
After considering all the submissions of the
assessee, Order of assessment as well as Remand
Report of the Assessing Officer, the learned CIT(A)
concluded the issue as per his judgement in Para
4.5, Page-13 of his Order. The learned CIT(A) has
accepted that merely because there was some
change in the direct cost as compared to the
previous year, the addition cannot be made to the
income of the assessee. The learned CIT(A) has
also accepted the proposition that freight outward
cannot be considered as direct cost as has been
done by the Assessing Officer. When so done, the
difference in the direct cost, which is one of the
main reason for the Assessing Officer to make the
addition, is not justified and therefore the addition
has been deleted by the CIT(A).
Apart from the judgements, we wish to rely
upon a judgement of Hon'ble Delhi High Court as
reported in 326 ITR 223 in the case of CIT Vs. Smt.
Poonam Rani wherein the Hon'ble High Court has
held that the fall in gross profit ratio in the absence
of any cogent reasons cannot be itself to be a
ground to held that proper income of the assessee
cannot be deduced from the accounts maintained
10
by the assessee. Hon'ble High Court at Page 225
held as under:-
"If the stock register was not maintained by
the assessee that may put the Assessing
Officer on guard against the falsity of the
return made by the assessee and persuade
him to carefully scrutinize the account books
of the assessee. But the absence of one
register alone did not amount to such a
material as would lead to the conclusion that
the account books were incomplete or
inaccurate. Similarly, a low rate of gross
profit, in the absence of any material pointing
towards falsehood of the account books, could
not by itself be a ground to reject the account
books under section 145(3) of the Act.
Whether fall in gross profit stood explained by
the assessee or not was a question of fact.
Both the Tribunal and the Commissioner
(Appeals) having accepted the explanation
given by the assessee and the finding of fact
recorded by them having not been shown to
be perverse in any manner, no substantial
question of law arose to interfere with. "
A copy of said judgment is enclosed herewith
for your honour's ready reference and records as
Annexure-2.
11
It would be noted that in the said case, the
Assessing Officer had even rejected the books of
accounts maintained because the GP rate was 1.4%
during the year as against 5.91% in the preceding
year. When the facts of the assessee's case are
compared with this judgement, the assessee's case
stand on much stronger footing in as much as the
drop in GP rate from the immediate preceding year
is 0.23% which has been ignored by the Assessing
Officer and the Assessing Officer has proceeded to
compare the GP rate of Assessment Year 2009-10
where also the difference was only 0.41%.
Moreover, books of accounts of the assessee have
not been rejected by the Assessing Officer in
assessee's case and he has merely disbelieved the
explanation given by the assessee on conjecture
and surmises.
Similarly, Hon'ble Rajasthan High Court in the
case of Pr. CIT v. British Health Products India Ltd.
as reported in (2017) TIOL-2296-HC- Rajasthan-IT
has held that when there is decline in GP ratio and
assessee furnishes no reasons for such decline still
it is not a good case to make addition. A copy of
this judgment of Hon'ble Rajasthan High Court is
also enclosed as Annexure-3.
As against the aforesaid judgment of Hon'ble
Rajasthan High Court, the facts of the assessee is
much stronger as firstly, the decline in a GP ratio
12
was just 0.23% as compared to immediate
preceding year and 0.41% as compared to year
preceding the immediate year. Such difference was
also wrongly calculated as pointed out earlier.
Secondly, the assessee had explained the reasons
for the decline in GP rate which has not been
properly appreciated by the AO and addition has
been made by the AO on surmises and conjectures,
it is respectfully submitted. The order of the CIT(A)
is on correct appreciation of facts and law is prayed
to be upheld.
It is respectively submitted that the Order of
the CIT(A) granting the relief is based on
appreciation of all the facts on record and the same
may please be upheld especially in view of legal
position of case laws given above.
GROUND NO. 2 - AD-HOC ADDITION OF 10% OF
CERTAIN EXPENSES
The Assessing Officer has discussed this issue
at Page-6 of his Order. The Assessing Officer
observed that some of the expenses identified in
the Order, the assessee failed to file the bills and
vouchers. The Assessing Officer estimated 10% of
such expenses towards leakage of possible revenue
on account of non-maintenance of proper details
etc. and made additions.
The learned CIT(A) observed that the
Assessing Officer did not point out any specific
13
details which the assessee has not produced.
Comparative Chart of expenses incurred during the
year under consideration as compared to earlier
year was also submitted to claim that expenses on
these heads were not higher as compared to earlier
years. It was also submitted that no disallowance
can be made without pointing out any specific
defects in the books of accounts. The comparative
expenses for A. Y. 2010-11 and 2011-12 are as
under:-
AY 2010-11 AY 2011-12
Particulars Amount Amount
Ratio to Sale Ratio to Sale
Turnover (FOB) 55,13,25,576.00 1,21,63,22,475.00
Travelling 12,15,626.00 0.220% 31,06,842.00 0.255%
General Expenses 43,63,617.00 0.791% 25,00,000.00 0.206%
Vehicle Running and 21,43,051.00 0.389% 24,13,651.00 0.198%
Maintenance
Repair & Maintenance exp. 18,74,130.00 0.340% 15,31,490.00 0.126%
Genset Running expenses 1,00,86,000.00 1.829% 1,25,76,564.00 1.034%
It would be noticed that expenses of all the
heads have reduced in any case are not abnormally
higher which could trigger any adhoc disallowances
as made by the Assessing Officer.
The learned CIT(A) after considering the
submissions of the assessee, restricted the
disallowance made by the Assessing Officer of
Rs.5,00,000/- and granted the relief for the balance
amount.
14
It is submitted that the Order of the learned
CIT(A) in restricting the disallowance to
Rs.5,00,000/- which has been accepted by the
assessee, is very reasonable especially when it is
clear that expenses of these heads during the year
under consideration are very much comparable
rather less than as compared to the earlier years.
The same is prayed to be upheld.
GROUND NO. 3 - DISALLOWANCE OF RS.7,76,710/-
OUT OF TRAVELLING EXPENSES
The Assessing Officer has discussed this
matter at Page-6 and 7 of his Order. The Assessing
Officer has made the disallowance by observing that
although the business of the assessee is centred
around New Delhi area, the assessee has
undertaken travel to certain other places including
foreign travel. He therefore disallowed 25% of
travelling expenses out of the total travel expenses
incurred by the assessee during the year under
consideration.
15
Before the CIT(A), detailed submissions were
made as also reproduced in his Order. It was
explained that the foreign travel expenses
represent the travel undertaken by the assessee to
those countries where exports takes place.
Total business of the assessee and sales are
mainly export sales and foreign travelling incurred
as observed by the Assessing Officer was only
Rs.4,20,200/-. It was also explained that no defect
has been pointed out by the Assessing Officer in its
books and the addition has been made merely on
conjecture and surmises.
The learned CIT(A) appreciating all these facts
has deleted the addition, which is prayed to be
upheld.
It is, therefore, prayed that the appeal of the
Department may kindly be dismissed because the
learned CIT(A) has granted relief after due
appreciation of the facts and law on the issues
involved.
Pray accordingly."
16
6. We have heard both the parties and perused the records,
especially the impugned order as well as the Synopsis filed by the
Assessee's AR. We find that with regard to deletion of addition of
Rs. 50,12,111/- on account of variation in NP rate is concerned,
the assessee was required to submit the Comparative Chart of
GP/NP for the year under consideration as compared to previous
two assessment years. This was accordingly submitted as noted by
the Assessing Officer at top of Page-2 of his order. The GP rate of
the assessee during the year under consideration was 11.16% as
compared to 11.39% with the immediate preceding Assessment
Year and @ 11.57% with Assessment Year 2009-10. Since there
was a reduction in the GP rate by 0.41% as compared to the
Assessment Year 2009-10, the Assessing Officer required the
assessee to explain the reasons for drop in the GP rate although the
drop in GP rate was not very substantial as compared to the earlier
years. The assessee amongst others explained that the sales
composition during the year under consideration was different in as
much as the assessee had to make substantial purchase of frozen
meat as against the raw meat in the earlier years for meeting its
export commitments, therefore there was slight drop in the GP rate.
The Assessing Officer further noticed that the major difference
occurred at the stage of direct expenses which includes purchases.
17
The Assessing Officer noted in Para-4, Page-4 of his Order that ratio
of direct expenses as compared to turnover in Assessment Year
2009-10 was 91.86% and during the year under consideration it
was 95.98%. This variation of increased direct cost was attributed
towards purchase of frozen meat from one related concern by the
Assessing Officer. The Assessing Officer further alleged that Stock
Register is not maintained by the assessee. The Assessing Officer
further noticed that purchase of raw material was @ Rs.82 to 85 per
kilogram whereas the purchases from the related parties have been
made at higher prices. Thereafter, the Assessing Officer alleged the
violation of provisions of section 40A(2)(b) and made the addition to
the total income @ 0.41% of its turnover of the current year by
comparing the GP rate of Assessment Year under consideration
2011-12 with Assessment Year 2009-10. Before the learned CIT(A)
all the contentions pertaining to this issue were explained. It was
explained that there was a material change in the composition of
products purchased and sold by the assessee during the year under
consideration as compared with the preceding years. It was also
explained that the purchase price of the products depends upon the
demand and supply and at times raw material has to be purchased
from known sources depending upon commitments of export orders.
Further, complete quantitative details of raw material purchased and
18
sold and produced during the year was provided with the contention
that same was also available in the Tax Audit Report. No
discrepancies whatsoever has been pointed out by the Assessing
Officer and only an allegation has been made that quantitative
details stock register has not been kept. A copy of quantitative tally
which reconciles with Tax Audit Report was also filed before AO &
CIT(A). It was also explained that entities from whom the purchase
of frozen meat has been made by the assessee, which are sister
concern, are also being assessed with the same Officer and they are
being taxed at the same rate at which the assessee is being taxed
and therefore no reason for the assessee to pay higher price to such
parties. It was also explained that while making the addition, the
Assessing Officer has considered freight outward as direct cost,
which is wrong and should have been considered as indirect cost. If
so done, the direct cost to turnover of the assessee during the year
is 92.66% as against 93.56% in the Assessment Year 2009-10 and
the difference is less than 1% as compared to the difference of
more than 4% by the Assessing Officer in Para- 4, Page-4 of his
Order. The learned CIT(A) called for a Remand Report against all
the submissions made by the assessee and he has reproduced
Remand Report of the Assessing Officer although copy of such
Remand Report was not provided to the assessee. Amongst various
19
submissions made by the assessee, certain legal proposition and
case laws were also submitted with additions to the declared income
of the assessee cannot be made merely on the ground of low GP
without bringing nothing more on record. Some of the case laws on
this proposition are noted at Page-9 of the Ld. CIT(A) Order. After
considering all the submissions of the assessee, Order of
assessment as well as Remand Report of the Assessing Officer, the
learned CIT(A) concluded the issue as per his decision in Para 4.5,
Page-13 of his Order and has accepted that merely because there
was some change in the direct cost as compared to the previous
year, the addition cannot be made to the income of the assessee.
The learned CIT(A) has also accepted the proposition that freight
outward cannot be considered as direct cost as has been done by
the Assessing Officer. When so done, the difference in the direct
cost, which is one of the main reason for the Assessing Officer to
make the addition, is not justified and therefore the addition has
rightly been deleted by the Ld. CIT(A), which does not need any
interference on our part, hence, we uphold the action of the Ld.
CIT(A) on the issue in dispute and reject the ground no. 1 raised by
the Revenue.
6.1 As regards restricting the addition of Rs.19,07,170/- to
Rs.5,00,000/- without appreciating the fact that the assessee did
20
not produce proper bills and vouchers of the expenses during the
assessment proceedings. We find that the assessee firm is a big
exporter of meat having a turnover of over Rs. 122 crore and
several units have to run round the clock besides the product is
perishable in nature and hence the entire facilities also have to run
round the clock the asseseee has also put forward its point that it
has incurred less expenses on such items as compared to earlier
years. The AO has not quantified the amount for which bill s/
vouchers were not produced but only disallowed 10% of the
expenses claimed under the head on adhoc basis. Hence, on
reasonable basis, the Ld. CIT(A) has restricted the disallowance to a
lump sum of Rs. 5 lacs to cover such bills / vouchers not produced
during assessment proceedings. The total disallowance on account
of Gen Set running expenses, general expenses. Vehicle running
and maintenances expenses and office repair and maintenance
expenses and accordingly, the assessee's ground was partly
allowed, which does not need any interference on our part, hence,
we uphold action of the Ld. CIT(A) and reject the ground raised by
the Revenue.
6.2 As regards ground relating to deletion of disallowance of
Rs.7,76,710/- from travelling expenses is concerned, we find that
assessee's firm being one of the leading meat exporter is required
21
to incur expenses on account of travels of its employees and
partners both inland and abroad. The expenses claimed seem to be
quite reasonable for a firm earning a turnover of over Rs. 122
crores. Therefore, the AO was not justified in disallowing 1/4th of
such expenses without any valid reason. Therefore, the addition of
Rs. 7,76,710/- on account of travelling expenses was rightly
deleted by the Ld. CIT(A), which does not need any interference on
our part, hence, we uphold the action of the Ld. CIT(A) on the issue
in dispute and reject the ground raised by the revenue.
7. In the result, the Revenue's Appeal stands dismissed
Order pronounced on 07/05/2019.
Sd/- Sd/-
[PRASHANT MAHARISHI] [H.S. SIDHU]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date 07/05/2019
SRBHATNAGAR
Copy forwarded to: -
1. Assessee -
2. Respondent -
3. CIT
4. CIT (A)
5. DR, ITAT TRUE COPY
By Order,
Assistant Registrar, ITAT, Delhi Benches
22
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