Partial Doubt on Trading Segment Loss Does Not Justify Total Rejection of Books u/s 145

ORDER

Khettra Mohan Roy, Accountant Member. – The cross appeals preferred by the assessee and the revenue are directed against the different order dated 20.11.2017 & 29.01.2020 passed by the Ld. CIT(A) Delhi, arising out of the Assessment Order dated 15.03.2016 & 30.12.2016, passed by the AO, under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the Assessment Years 2013-14 & 2014-15.

“1. That under the facts and circumstances, the Ld. CIT(A) grossly erred in law as well as on the facts in estimating the G.P. @6% against declared by assessee at 1.98% resulting into trading addition of Rs.10,97,85,880/-.

2. That under the facts and circumstances, rejection of books of accounts is unwarranted and illegal and also for the reason that there existed a reasonable cause for the assessee for not producing the books of accounts and supporting during Asstt., moreso, they were not in access and control of the assessee at that time.”

2. The sole issue in this case is whether the estimation of profit is at all justified.

3. The AO had estimated the profit to 10%, the Ld. CIT(A) had considered the matter in details and held as follows:

4.3.2 The remand report was sent through ITBA portal, DIN No. TBA/APL/S/91/2019-20/1020689547(1) dated 19.11.2019 to the assessee for a rejoinder. The rejoinder is reproduced as below:-

In A. Y. 13-14, the return was filed at a loss of (-)34.90 Cr. The addition was made for Rs.39.12 Cr. However CIT(A) has already deleted the said addition. The copy of asstt. order and CIT(A) already stands filed.

In this regard, in the earlier year, the declared G.P. of (-) 1.91% stood accepted in appeal by CIT(A) against 1.99% in this year, hence G.P. declared in this year is better than last year.

Similarly, the declared N.P. of (-) 12.03% stood accepted in appeal by CIT(A) in A. Y. 13-14 against which, the declared N.P. of this year is (-) 7.71% which is better than last year.

Hence the above facts also do not call for any interference in the declared results.

1. The reasons in justification of losses is the same as in the last year, which stood accepted by CIT(A) in A. Y. 13-14. The reasons for the losses in this year have also been explained vide earlier submissions Datd. 08.01.18. The Ld. A.O. has not rebutted any of the facts and contentions taken in support of losses being claimed by the assessee.

In view of above, it is humbly submitted that the complete addition made be please deleted.

There is no justification for rejecting books of accounts for the reasons already mentioned in Para- 1 above.

Also there is no justification and basis for estimating in G.P. @10% against declared @1.99% for the reasons already mentioned above and especially keeping in view the fact that the declared G.P. and N.P. of this year is better then as it stands accepted / assessed after CIT(A) order of A. Y. 13-14, as per details given in Para-1 of earlier submissions Dtd.08.01.18.”

4.3.3 I have gone through the impugned order, facts of the case, submissions filed by the appellant, remand report and rejoinder filed by the assessee. It is seen that the appellant was not been able to produce documents/books of accounts during assessment proceedings. During appeal proceedings, the appellant filed additional evidence under Rule 46A which were remanded to the Assessing Officer. It is seen from the remand report that assessee has not submitted any details to enable the Assessing Officer to examine the veracity of trading result. This led to the estimation of profit by the Assessing Officer. Looking at the trading results of the past years, it can be seen that the estimation of profit made by the Assessing Officer is on the higher side. Therefore, I estimate 6% of the trade turnover (6% of Rs.2,73,43,57,931/-) i.e. Rs. 16,40,61.475/- as the profit during the year. Therefore, the ground of appeal is partly allowed.”

4. The ld. AR did not made any submission whatsoever to attend that the rejection of books of account was improper. When the assessee repeatedly failed to submit evidence and documents it was incumbent upon the assessee to estimate the result. The AO had estimated the gross profit addition of Rs.21.92 crores which has been pruned down by the CIT(A) to Rs.10.98 crores.

5. We find that even after the addition of ld. CIT(A) the assessee still in a loss of Rs.9.59 crores. We do not find any reason to interfere in the order of the Ld. CIT(A). The appeal of the assessee is dismissed.

6. The ld. DR relied on the Assessment Order, relevant portion which is extracted below:

“7. The above factual position very clearly shows that the assessee company has failed to justify he fall in G.P despite various opportunities given to it. No effort was made by the assessee company to furnish the necessary details which justify its case. No compelling reasons with evidence were put forward. Section 145(3) provides that where the AO is not justified about the correctness or completeness of the accounts of the assessee or where the method of accounting provided in section 145(1) or 145(2) have not been regularly followed by the assessee the AO may make an assessment u/s.144 of the I.T. Act. The Hon’ble Supreme Court has held in the case of CIT v. British Paints India Ltd, (1991) 188 ITR 44(SC) that is the duty of the AO to consider whether or not the books disclose the true state of accounts and the correct income of the assessee therefrom. It is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee, the correctness of which had not been questioned in the past. The officer is not bound by the method followed by the assessee in earlier years.

7.1 It was further held in the case of Awadesh Pratap SinghAbdul Rehman and Bros v. CIT (AIl) that where absence of a stock register, cash memos etc. if coupled with other factors like absence of vouchers in support of expenses and purchases and existence of low profit. may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income. profit or gain of an assessee. the authoritieies would be justified in rejecting the account books u/s. 145(2) and in making the assessment in the manner contemplated in that provision.

7.2 In the case of S.N.N Mamasivayam Chettiar v. CIT (1960) 38 ITR 579 (SC) it has been held that keeping of a stock register is of great importance because that is a mean of verifying the assessee’s accounts by having a ‘quantitative tally’ if, after taking into account all the materials including the want of a stock register, it is found that the method of accounting the correct profits of the business are not deductible, the operation of section 145(3) of the Act would be attracted.

7.3 In the case of CIT v. Mc.Millan and Co. (1958) 33 ITR 182 (SC) it was held that the ITO, even when he accepts the assessee’s method of accounting, is not bound by the figure of profits shown in the accounts.

8. The replies of the assessee were general in nature and self-contradictory. The transactions of trading segments with majority of the parties could not be verified. The assessee made no effort to substantiate the transactions or put forward the necessary evidence in support of genuineness of the transactions. No reasons were stated as to why to the same party the assessee is purchasing at a higher rate and selling at a lower rate. The entire transactions remain dubious and unverified. The assessee failed to give instances where it incurred losses and cogent reasons for the same on bill to bill basis. Surprisingly in the manufacturing activities where the assessee was giving various reasons of adverse circumstances has shown very good pelts whereas in the trading activity it has suffered huge losses. In view of the factual position discussed above. I hold that the assessee has failed to substantiate its trading results and I am left with no choice but to reject the trading results of the assessee company u/s 145(3) of the Act. Based on the past history of the assessee the overall G.P Rate is adopted at 12% of the Turnover of Rs.281,29,41,698/- i.e. Rs.33.75,53.003/- in place of negative G.P. of Rs. 5,36,74,336/- declared by the assesee company. Thus this would call for an addition of Rs.39,12,27,380/-to the taxable income of the assessee.

In view of the facts and reasons discussed above, I am satisfied that the assessee company has filed inaccurate particulars of income and concealed the income with respect to the additions/ disallowances made on all the issues. Penalty proceedings u/s 271(1)(c) are being initiated separately.

(Addition Rs.39,12,27,380/-)

7. The ld. CIT(A) on the other hand has granted the relief by holding as follows:

“3.3 I have carefully perused the submissions of appellant and the remarks of assessing officer on this ground of appeal in the assessment order. In the course of appeal proceedings it was submitted that due to various reasons, like slump sale in Rice Mill industry, the rejection of large export to Europe due to pesticide issue, discount of Rs. 1 Cr. given to Soufflet Alinentaire – France on the sales already effected, issue of Khapra Beetle for sales made to USA on account of which heavy discounts had to be offered and ultimately, on account of pesticide issue and khapra beetle issue, more than 6 containers were returned by these importers. For these and many other reasons, fluctuation in prices, huge unsold stocks of earlier years from A.Y.2013-14, the business started incurring losses. Thereafter, w.e.f. A.Y.2014-15, the position went from bad to worse. Huge financial crises made the banks treat loans to appellant as NPA. The turnover in all subsequent years upto A.Y. 2016-17, substantially came down with losses increasing in geometric progression. Ultimately, the factory got auctioned by the banks in September 2016 for recovery of outstanding dues. The business was closed. As on date, there is no business, huge outstanding liabilities and no sources for repaying loans/liabilities. Had the business been running profitably, there was no reason for closing the business and for auction the factory. All personal properties of the directors have been attached by banks. The cases are going on in DRT (Debt Recovery Tribunal). This state of affairs clearly shows that the business venture became loss making and ultimately the appellant as well as its directors became bankrupt. The operational data for A.Y.2014-15 to A.Y.2016-17 is given below in support of above facts:-

Sale GP/NP Ratio

3.4 The ld.AO has also incorporated these reasons in the assessment order. However, he has rejected these reasons without pointing out any deficiency / discrepancy in the reasons mentioned with cogent reasons. The fact that at present these losses continue and there has been closure of business, auction of business assets including land, building, plant & machinery and cases going on in DRT for recovery of outstanding liabilities is not in dispute. Thus, there existed proper reasons for the losses. The A.O. simply rejected these reasons without bringing on record any such material which may justify his conclusion. The evidences filed in support of these facts proves the genuineness of the reasons on account of which heavy losses took place. Further, the issue of pesticide in basmati rice exported to USA, Europe and other countries from India and consequential reduction in exports of basmati rice has also published in various journals. Huge bank loans were taken for business which could not be repaid in time as a result of which the bank installments were also in default. Hence the State Bank of India got “Due diligence report” from M/s Ashwani K. Gupta & Associates which among other facts reported that during the period was made and it was found that bulk of the sales was made at a lower rate when compared to opening valuation since the company had to off load the material at lower rate in view of the prevailing market conditions and also in accordance with the actual quality of material. Regarding depletion of Rs.17.56 Cr. it reported that there is high degree of volatility associated with the prices of rice due to its commoditized nature. The industry is characterized by high degree of Govt. Controls both in the domestic as well as International Market. It is also observed during the course of the due diligence exercise that certain purchases of rice were made by the company in the range of Rs.5,000/-per qt. During the period April and May, 2012 which is higher than the average market rates adopted for the purpose of valuation as on 31.05.2012. There have been varying rates of sales and purchase during the period and it has been explained to us by the Company that after careful analysis of rates and various other factors affecting the Industry, the average rate of Rs.3528/- per Qtl has been adopted for valuation. In the opinion of M/s Ashwani K. Gupta & Associates, considering the market conditions and based upon the actual average realization price of Rs.2880/- per Qtl coupled with the fact some sales/purchase are also being affected at price of over Rs.5000/- per Qtl., the rate adopted at Rs.3528/- per Qtl as on 31.05.2012 based on Market Price was held to be reasonable.

3.5 The transactions of sale purchase took place in F.Y.2012-13. The notices u/s 33(6) were issued by assessing officer in F.Y.2015-16. In some cases replies has been received. However, in some cases the notices came back un-served. In four cases, the notices stood served but no reply has been received. Two parties out of 16 parties in the first block and again 2 parties in the second block of 11 parties, although in receipt of the notices did not furnish the reply. Non furnishing of reply cannot be viewed with adversity. The appellant also issued proper sales bills to these parties, who are registered with VAT Department and their VAT/TIN no. is also mentioned on the invoices. There is no other material to show that these sales/purchases have not taken place. Further, the books were produced, supporting including purchase/ sale vouchers were produced and no discrepancy was found therein. Hence simply because notice u/s.133 (6) was not served on a few parties, assessing officer was not justified in rejecting the trading results u/s.145 (3) and for disturbing the declared GP rate which is supported by audited financial statement of accounts, books of accounts and supporting vouchers. The A.O. has not doubted the sales/purchases. He has accepted the figure of sales/purchases. He has only adopted a higher GP rate on the declared sales and purchases even though he has examined the purchase and sales invoices and found no discrepancy.

3.6 The assessing officer had a very good reason for suspicion, but that suspicion could not be held to be proved in the light of evidence furnished by assessee. Nowhere in the assessment order the assessing officer has pointed out any defects in the books of accounts and the same have not been rejected u/s 145(3) of the I.T. Act. Without rejecting books of accounts u/s 145(3), the trading results cannot be disturbed. The assessee has explained the circumstances leading to losses and ultimate closure of business and sale of factory. The bank to whom the amount was payable obtained due diligence report from independent auditors, who also certified the reasons of losses. In the light of all these facts, I hold that the addition of Rs.39,12,27,370/- by applying estimated GP rate of 12% is not warranted. The same is therefore deleted. Accordingly, these grounds are allowed.”

8. In the course of assessment order the following averments is made by the Ld. AO:

“6.5.1 The assessee furnished the segmental trading results vide its reply dated 14.01.2016 which reflect that on a manufacturing turnover of Rs.73,92,01,843/- it had earned Gross profit of Rs.13.03.99,325/- whereas on Trading Turnover of Rs.184.17.38.716/- it incurred a loss of Rs.18,42,12,657/. Thus on the total turnover of Rs.281,28.02,791/- the assessee incurred Gross loss of Rs.5,38,13,331/-.”

9. It is clear that the AO has doubted the loss in the trading segment of Rs.18.42 crores. However, he has gone to make and addition of Rs.39.12. crores. We fail to comprehend as to when he has not expressed any doubt in the manufacturing segment how he can go for overall rejection of the books of account. The rejection of the books of account is improper and as such there is no scope of estimation of gross profit.

10. We do not find any reason to interfere in the order of the Ld. CIT(A). Hence, the appeal of the revenue is dismissed being devoid of any merit and bereft of any reasoning.

11. In result, the appeal of the assessee is dismissed and appeal of the Revenue is also dismissed.