Mrs. Sonali A. Shah Raj Parashar,3rd Floor,Flat No. 301,- 2-3,95/F, Indranarayan Road, Santacruz(W),Mumbai-400 054. Vs. Income tax Officer-14(3)(3) Earnest House, Nariman Point Mumbai-400 021.
August, 06th 2015
INCOME TAX APPELLATE TRIBUNAL,MUMBAI "E" BENCH
. ., , ,
Before S/Sh. A.D. Jain,Judicial Member & Rajendra,Accountant Member
/.ITA No.2944/Mum/2013, /Assessment Year-2008-09
Mrs. Sonali A. Shah Income tax Officer-14(3)(3)
Raj Parashar,3rd Floor,Flat No. 301,- Earnest House, Nariman Point
2-3,95/F, Indranarayan Road, Vs Mumbai-400 021.
PAN: ADGPS 6844 D
( /Appellant) ( / Respondent)
/.ITA No.3671/Mum/2013, /Assessment Year-2008-09
Income tax Officer-21(2)(4) Mrs. Sonali A. Shah
Room No.503, 5th Floor, C-10 Mumbai-400 054.
Pratyakshakar Bhavan Vs PAN: ADGPS 6844 D
Bandra Kurla Complex, Bandra (E)
( /Appellant) ( / Respondent)
/Assessee by : Shri Rahul Sarda - AR
/ Revenue by : Shri S.S. Rana-DR
/ Date of Hearing
: 28 -07-2015
/ Date of Pronouncement : 05 -08-2015
, 1961 254(1)
Order u/s.254(1)of the Inco me-tax Act,1961(Act)
PER RAJENDRA, AM-
Challenging the order dated 28.02.2013 of the CIT-28,Mumbai,the Assessing Officer(AO) and
the assessee have filed cross appeals for the year under consideration.
The AO has filed following Grounds of Appeal:
"1.On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in not
following the appellate order for A. Y. 2007-08, passed in the case of the assessee, wherein the
CIT(A)-25, Mumbai, vide order dated 18.02.2011 has confirmed the adoption of G.P. @ 10% for
iron & steel business and 20% for textile business.
2.On the facts and in the circumstances of the case and in law, the ld.CIT(A) has erred in considering
the G.P. @ 3% in respect of iron & steel business and 15.20% in respect of textile business, instead
of 10% for iron & steel business and 20% for textile business as adopted by Assessing Officer.
3.The appellant prays that the order of the Id. CIT(A) on the above grounds be set aside and that of
the Assessing Officer be restored.
4.The appellant craves leave to amend or to alter any ground or add a new ground, which may be
Grounds of appeal filed by the assessee read as under:
"1.The Ld. CIT(A) erred in confirming the rejection of books of account based on conjunctures and
surmises, by relying on the observations of the A.O.which are not relevant to the issues under
consideration, and without pointing out any specific defects in the books of accounts.
2.The Ld. CIT(A) erred in confirming the estimation of the G.P. at 3 % i.e. Rs.51,32,520/ -from Iron &
Steel business without appreciating the fact that all the parties had directly responded to the notices
issued to them,and without appreciating the fact that any trader hardly earns G.P. from the range of 1
% to 2 % only.
3.The Ld.CIT (A) erred in confirming the estimation of G.P. at 15.20% i.e. Rs.72, 39,554/- from
Textile business without appreciating the fact that some parties had directly responded to the notices
issued and for the rest the confirmations were filed by the Assessee. The CIT (A) failed to
appreciate the fact that any trader hardly earns G.P. from the range of 1 % to 2 % only.
4. The Ld. CIT(A) erred in confirming the addition of Rs.2,17,31,574/- u/s 41 (1) without appreciating
the fact that the balance amounts of the creditors were cleared off in the subsequent years, through
account payee cheques, and hence addition made u/ s 41 (1) may be deleted.
5.Without prejudice to above, the Ld. CIT (A) erred in confirming the addition of Rs.2, 17, 31,574/-
u/s 41(1) and also computing the income by estimating the G.P. by rejecting the books, and hence
same would lead to double addition.
6.The Ld. CIT(A) erred in confirming the adhoc disallowance @ 20 % of Rs.1,20,526/- on account of
Motor car expenses, Motor car insurance, Depreciation on car, Telephone expenses, staff welfare
7.The Ld. CIT (A) erred in con fuming the various disallowances and also separately estimating the
8.On merits the appellant denies its liability to the levy of penal interest u/ s. 234A, 234B and 234C.
9.The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal."
Assessee,an individual,is Proprietor of Mannat Enterprise and is engaged in the trading of textile
and iron & steel items.She filed her return on 13.09.2008,declaring income of Rs.1.93 lakhs.The
AO completed the assessment on 30.12.2010,u/s.143(3) of the Act,determining her income at Rs.
2.Effective ground of appeal is about rate of gross profit(GP)in respect of textile business and
iron & steel business carried out by the assessee.During the course of assessment proceedings,
the AO gathered that in the AY 2007-08, the assessee had inflated the purchases by obtaining
bogus purchase bills and transactions routed through banks by illegal means.In that year,the AO
issued notices u/s.133(6) of the Act to various parties with whom the assessee had dealt, but such
transactions could not be proved.The AO rejected the books of accounts and estimated the G.P.
from steel business @ 10% and 20% from textile business.Following the same methodology in
the current year,he issued notice u/s.133(6) of the Act to various parties and thereafter found that
several parties failed to confirm the transactions.He AO tried to verify the purchases from other
parties and found that the purchases in respect of 13 parties as per the assessment order were
not verifiable.Accordingly,he rejected the books of account and adopted the G.P. rate @20% in
respect of textile business on total turnover of Rs.4,76,28,648/-, and G.P. rate of 10% in respect
of Iron and Steel on turnover of Rs.17,10,84,032/ - and worked out the GP at Rs.2,66,34,132/ -
and made the addition accordingly.
2.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate
Authority(FAA),who reduced the GP to 15.20 % in case of textile business and @ 3% for iron
and steel business.
2.2.It was brought to our notice that identical issue has been adjudicated by the Tribunal,while
deciding the appeal for the AY.2007-08(ITA/6931/Mum/2011-dtd.03.04.2013).We find that the
Tribunal has dealt and decided the issue of GP rate in the earlier AY.in following manner:
"8.We have considered the rival submissions and also perused the relevant material available on
record. It is observed that the assessee is in the business of dealing in iron and steel products and
textile products and on the total turnover of the said business amounting to Rs. 20.56 crores, gross
profit of Rs. 20.61 lacs was disclosed by the assessee giving a very low GP rate of about 1%. A survey
u/s 133A was carried out in the case of the assessee wherein the assessee was found to be indulged in
a practice of routing the unaccounted money through illegal ways and channelizing them to be looked
like genuine transactions. She was also found to be in possession of some cheque books which were
signed by various parties without mentioning any date and amount. Keeping in view these findings of
the survey as well as the low gross profit disclosed by the assessee, the A.O. proceeded to verify the
genuineness of the transactions of purchases and sales shown by the assessee. In this regard, he issued
notices u/s 133(6) of the Act to various parties out of which many notices were returned by the postal
authority citing various reasons such as "wrong address", "incomplete address", "left" etc. The
assessee therefore was called upon by the A.O. to produce the said parties along with their books of
account for verification which the assessee failed to do. Although the assessee filed confirmations of
some parties, the A.O. found the same to be unreliable for the various discrepancies specifically
pointed out by him which the assessee again failed to explain. Before the A.O., the assessee produced
computer generated bank book which contained number of entries of withdrawals and deposits which
were without any narration. When this position was confronted by the A.O. to the assessee, the later
failed to offer any satisfactory explanation. Having regard to all these specific and material defects
pointed out by the A.O., we are of the view that the books of account maintained by the assessee were
not reliable and the same were rightly rejected by the authorities below after having satisfied that they
are not correct.
9. At the time of hearing before us, the ld. Counsel for the assessee has submitted that none of the
notices returned back to the A.O. by the postal authority was pertaining to the iron and steel business
of the assessee and therefore the book results of the said business should not be disturbed. However,
as specifically noted by the ld. CIT(A) in his impugned order, the confirmations filed by the assessee of
the parties pertaining to the iron and steel business were also found to be unreliable by the A.O. for
the specific discrepancies pointed out therein which the assessee failed to explain. Moreover, both the
iron and steel business and textile business were carried on by the assessee under the name and style
of his proprietary concern M/s Mannat Enterprises and the copy of balance sheet and P&L account of
the said proprietary concern placed at page 1 to 25 of the assessee's paper book shows that only one
set of books of account was maintained by the assessee for both iron and steel business and textile
business. It is therefore not possible to accept the books of account of the assessee in respect of iron
and steel business and reject the same in respect of textile business as sought to be contended by the
ld. Counsel for the assessee. Even otherwise, some of the material defects pointed out by the A.O. as
well as adverse findings of the survey were related to the overall business activities of the assessee
which fully justified the rejection of combined books of account maintained by the assessee for iron
and steel and textile business.
10. Having held that the rejection of the books of account of the assessee by the authorities below is
fully justified in the facts and circumstances of the case, the next issue that arises for our
consideration is relating to the estimation of income of the assessee from her business of iron and steel
and textile products. In this regard, the ld. Counsel for the assessee has submitted that the GP rate of
20% applied by the authorities below to estimate the income of the assessee from textile business is on
the higher side keeping in view that the overall GP rate in the range of 1 to 1.5% declared by the
assessee in the earlier years was accepted by the A.O. It is however observed that the assessment only
for the A.Y. 2006-07 was completed by the A.O. u/s 143(3) of the Act and a perusal of copy of the
relevant order placed at page 347 & 348 of the paper book shows that the issue relating to trading
results was not at all discussed by the A.O. in the said order. Even the basic details relating to the
trading results shown by the assessee such as quantum of purchases and sales etc. were not given in
the said order. In the absence of such details or any discussion whatsoever made by the A.O. in the
assessment order passed u/s 143(3) of the Act for A.Y. 2006-07, we are of the view that the assessment
order for A.Y. 2006-07 cannot be taken as basis to estimate the income of the assessee for the year
11. At the time of hearing before us, the ld. Counsel for the assessee has relied on the order of the
Tribunal passed in the case of Arya Texturisers and Twisters (supra) wherein the GP rate of 3.2% was
accepted by the Tribunal as fair and reasonable. It is however observed that neither the said case nor
any other comparable case was cited by the assessee before the A.O. so that the relevant aspects could
be considered and verifed by him. Moreover, the A.O. has relied on certain comparable cases of
textile business from his own jurisdiction where the GP rate declared was in the range of 10.62 % and
18.31%. In this regard the ld. counsel for the assessee has contended that the application of highest
GP rate of 20% is not justified keeping in view this range given by the A.O. We find merit in this
contention raised by the ld. Counsel for the assessee. In our opinion, the GP rate of 20% applied by
the A.O. in respect of textile business is on the higher side keeping in view the comparative GP rates
pointed out by himself which were in the range of 10.62 % and 18.31% and it would be fair and
reasonable to adopt the average GP rate to estimate the income from textile business which may be
taken at round figure of 15%.
12. As regards the GP rate to be applied in respect of iron and steel trading business, the ld. Counsel
for the assessee has relied on the decision of the coordinate Bench of the Tribunal in the case of Inel
Trading Company (supra) submitting that the low GP rate of 1.82% was applied in that case in
respect of iron and steel business. It is however observed that although a GP rate of 1.82% was
mentioned in the said order in respect of business of trading in iron and steel business, the income of
the assessee in that case was finally estimated by the Tribunal by applying certain net profit rate.
Moreover, as already noted by us, the facts involved in the present case are peculiar inasmuch as the
assessee was found to be indulged in a practice of routing the unaccounted money through illegal
ways and channelizing them to be looked like a genuine transactions. It is observed that while
applying GP rate of 10% in respect of business of dealing in iron and steel, the reliance was placed by
the A.O. on the comparative GP rates shown in the range of 5 to 10%. However, as admitted by the
A.O. in the remand report forwarded to the ld. CIT(A), there were no specific comparable cases
available on record to show such GP rates and the range of 5 to 10% was stated to be gathered by him
from the information collected from the market. Having regard to all these facts of the case, we are of
the view that it would be fair and reasonable to adopt a GP rate of 5% in respect of business of the
assessee of trading in iron and steel products. We therefore modify the impugned order of the ld.
CIT(A) on this issue and direct the A.O. to recompute the income of the assessee by applying GP rate
of 15 & 5 % in respect of textile business and iron and steel business respectively. The relevant
grounds of the assessee are thus partly allowed."
Respectfully,following the above order,we direct the AO to compute the income of the assessee
by adopting GP rate of 15% and 5% respectively for the textile business and for the iron and
steel business.Effective Ground of appeal,filed by the AO,is partly allowed in his favour.
3.First effective ground of appeal(GOA-2&3)filed by the assessee also pertain to GP rate of both
the businesses.As stated earlier,the FAA had estimated the GP rates of textile business and iron
& Steel business at 15.20% and 3% respectively.
3.1.Respectfully,following the order of the Tribunal for the AY.2007-08,we partly allow the
grounds no.2 and 3 in favour of the assessee and direct the AO to follow the direction as
mentioned in para 2.2 of our order.
4.Next effective ground of appeal(GOA 4-5)is about addition made u/s.41(1)of the Act, amount -
ing to Rs.2.17 Crores.During the assessment proceedings,the AO had issue notices u/s.133(6)of
the Act to sundry creditors.Out of seven cases in four cases notices were not served or the
creditors were found to be not traceable.As per the books of accounts the assessee had to pay Rs.
2.17 Crores to those seven creditors.As per the AO,the assessee could not produce the parties for
cross verification.He held that the since the creditors had not been proved the liability shown by
the assessee to the tune of Rs.2,17,31,574/-was to be treated as ceased u/s.41(1)of the Act.
4.1.Before the FAA the assessee argued that the creditors were paid in subsequent years,that all
the outstanding balances were squared up in later years,that the liability had not ceased.After
considering the submissions of the assessee and the assessment order,the FAA held that the
creditors were not tracable,that the AO had deputed one inspector to enquire about those parties
and the parties were not available on the given addresses,that the creditors appeared to be non
genuine,that the assessee had not produced the evidence that payments were made to the parties
in subsequent years.He referred to the remand report filed by the AO in that regard and held that
the AO was justified in making additions.
4.2.Before us,the Authorised Representative(AR)contended that evidence of payment to various
creditors through banking channels was produced before the FAA,that no inspector was deputed
by the AO,that the remand report is silent about the visit by the inspector,that the AO had not
also not doubted the payment made to the creditors in the subsequent years.He relied upon the
judgment of Bhogilal Ramjibhai Atara of Hon'ble Gujarat High Court.(Tax Appeal no.588 of
2013 dated 04.02.2013).He referred to the page no.33-44,117 and 119-120 of the paper book.
Departmental Representative(DR)supported the order of the FAA.
4.3.We have heard the rival submissions and perused the material before us.We find that the
addition was made by the AO u/s.41(1)of the Act,that the AO had held that the creditors were
not available on given addresses,that the FAA had called for a remand report from the AO with
regard to the claim made by the assessee about payment made to the creditors in subsequent
years,that in the remand report the AO had not mentioned anything about on the spot inquiry by
the inspector,that there was change in office of the FAA,that the new FAA passed the order
where he mentioned about the inquiry conducted by the inspector,that the ledger accounts of the
parties show that the assessee had paid the money to the creditors in subsequent years.Once the
payment to the creditors is proved by necessary documentary evidences there is no justification
for sustaining the order of the FAA.Therefore,reversing his order,we decide grounds no.4-5 in
favour of the assessee.
5.Next ground of appeal is about ad-hoc disallowance of Rs.1.20 lakhs.During the assessment
proceedings,the AO found that the assessee had claimed expenditure of Rs. 6. Lakhs under
various heads including motor car expenses,telephone expenses etc.As per the AO the assessee
had not maintained proper vouchers.He held that personal use of Car and Telephone could not be
denied. He disallowed 1/5 of the total expenditure.
5.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the FAA.The
assessee produced copies of the ledger with regard to the expenses claimed.After considering the
submissions of the assessee and the order of the AO,he upheld the order of the AO,as he was also
of the opinion there was possibility of personal use of phone and car.For other expenses he held
that vouchers were not produced by the assessee.
5.2. Before us,the AR contended that ledger account were produced before the AO and the FAA
evidencing incurring of expenses,that there could not be any personal element in expenses
related to staff welfare expenses.DR supported the order of the FAA.
We have heard the rival submissions.We find that the AO had made a disallowance of 20%of the
expenses incurred under five heads.Out of the five heads four are related with motor car and
telephone.We agree that element of personal use of car and telephone cannot be ruled out.
However,to meet the end of justice disallowance is restricted to 10% for the four items i.e.
except the welfare expenses.Last ground is allowed in favour of the assessee in part.
As a result,appeals filed by the AO and the assessee stand partly allowed.
Order pronounced in the open court on 5th August,2015.
(. . /A. D. Jain) ( / RAJENDRA)
/ JUDICIAL MEMBER / ACCOUNTANT MEMBER
/Mumbai, /Date: 05.08.2015
/Copy of the Order forwarded to :
1.Appellant / 2. Respondent /
3.The concerned CIT(A)/ , 4.The concerned CIT /
5.DR E Bench, ITAT, Mumbai / , ,.. .
/ BY ORDER,
/ Dy./Asst. Registrar
, /ITAT, Mumbai.