M/s Karol Brothers, Shimla v. ACIT, Shimla

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES A CHANDIGARH BEFORE SHRI D.K.SRIVASTAVA ACCOUNTANT MEMBER AND MS SUSHMA CHOWLA JUDICIAL MEMBER ITA NO. 1410/CHD/2010 ASSESSMENT YEAR: 2006-07 M/S KAROL BROTHERS VS THE ACIT CIRCLE SHIMLA SHIMLA PAN NO. AABFK2036K (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI TEJ MOHAN SINGH RESPONDENT BY: SHRI S.S.KHEMWAL ORDER PER SUSHMA CHOWLA JM THE APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF CIT(A) SHIMLA DATED 9.11.2010 RELATING TO ASSESSMENT YEAR 2006-07 AGAINST THE ORDER PASSED UNDER SECTION 143(3) / 144 OF THE I.T. ACT. 2. THE GROUND NO.1 WAS NOT PRESSED BY THE LD. AR FO R THE ASSESSEE HENCE DISMISSED. 3. THE ISSUE RAISED IN GROUND NOS. 2 & 3 ARE AGAIN ST REJECTION OF BOOKS OF ACCOUNT AND APPLICATION OF NET PROFIT RATE OF 1.5% ON TOTAL SALE OF RS. 19 45 88 740/- RESULTING IN ADDITION OF RS. 18 15 821/-. THE ISSUE IN GROUND NO.4 IS IN RESPECT OF NON ALLOWANCE OF DEDUC TION ON ACCOUNT OF INTEREST AND SALARY PAID TO THE PARTNERS AS WELL AS DEPRECIATION. 2 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A FRUIT AND VEGETABLE COMMISSION AGENT WITH HEAD OFFICE AT SUBZ I MANDI SHIMLA AND BRANCH AT DHALLI NEAR SHIMLA. SURVEY OPERATIONS U /S 133A OF THE INCOME TAX ACT WERE CARRIED OUT AT THE BUSINESS PREMISES O F THE ASSESSEE ON 4.10.2005. THE BOOKS OF ACCOUNT WERE FOUND TO BE I NCOMPLETE ON THE DATE OF SURVEY. THE ASSESSING OFFICER DURING THE ASSES SMENT PROCEEDINGS SHOW CAUSED THE ASSESSEE TO EXPLAIN WHY THE BOOKS O F ACCOUNT BE NOT REJECTED AND NET PROFIT RATE OF 2% BE APPLIED IN VI EW OF THE FOLLOWING REASONS:- A) AS PER THE CHART SUBMITTED THE COMMISSION INCOME AN D MARKET FEES WERE DEBITED TO PURCHASE ACCOUNT. ALSO OTHER EXPENSES OF RS. 1.37 CRORES WERE DEBITED TO PURCHASE ACCOUNT. THIS IS NOT IN CONSONANCE WITH NORMAL ACCOUNTING PRINCIPLES. B) THE COMMISSION EARNED FROM SHIMLA SHOP IS OF RS. 3. 8 LACS. HOWEVER NO DETAILS OF SALES AND PURCHASE HA VE BEEN BROUGHT IN THE P&L ACCOUNT OR TRADING ACCOUNT IN RESPECT OF THIS COMMISSION EARNED WHEREAS THE PURC HASE / SALES AGAINST COMMISSION INCOME EARNED FROM DHALL I SHOP (RS. 75.14 LACS) HAVE BEEN SHOWN IN THE TRADIN G AND P&L ACCOUNT. C) NO STOCK REGISTER IS MAINTAINED BY THE ASSESSEE. D) THE ACCOUNT BALANCE OF HP STATE CO-OP BANK SHIMLA IS NOT IN CONFORMITY WITH THE FIGURE AS SHOWN IN THE BALANCE SHEET. 5. THE ASSESSING OFFICER ALSO NOTED THAT NP RATE HA D DIPPED FROM 2.1% IN THE PRECEDING YEAR TO 0.56% IN THE INSTANT YEAR AND NP RATE SHOWN BY OTHER CONCERNS OF AREA WERE 2.73%. REJECTING THE E XPLANATION OF THE 3 ASSESSEE THE ASSESSING OFFICER ASSESSED THE NET PR OFIT @ 1.5% OF THE SALES SHOWN AT RS. 19.45 CRORE. 6. IN APPEAL THE CONTENTION OF THE LD. AR FOR THE A SSESSEE WAS THAT IN ASSESSMENT YEAR 2005-06 NET PROFIT OF 2.1% WAS BEF ORE INTEREST AND SALARY AND IF SAME FORMULA IS APPLIED TO THE ASSESSMENT YE AR 2006-07 THEN NP RATE WAS 1.12% AS AGAINST 0.56% MENTIONED BY ASSESS ING OFFICER. THE CIT(A) UPHELD THE ORDER OF ASSESSING OFFICER IN VIE W OF (A) FALL IN GP RATE FROM 2.1 % IN THE PRECEDING YEAR TO 0.56% IN T HE INSTANT YEAR AND (B) BECAUSE OF NP RATE OF 2.78% DECLARED BY A COMPARABL E CASE OF M/S OM PARKASH DINESH KUMAR SABZI MANDI SHIMLA. 7. SHRI TEJ MOHAN SINGH APPEARED ON BEHALF OF THE A SSESSEE AND SHRI S.S. KHEMWAL APPEARED ON BEHALF OF THE REVENUE AND PUT FORWARD THEIR CONTENTIONS. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF FOOD AND VEG ETABLE COMMISSION AGENT AT SUBZI MANDI SHIMA AND AT DHALLI NEAR SHI MLA. DURING THE COURSE OF SURVEY OPERATION CARRIED ON AT THE BUSINE SS PREMISES OF THE ASSESSEE U/S 133A OF THE ACT ON 4.10.2005 THE BOOK S OF ACCOUNT OF THE ASSESSEE WERE FOUND TO BE INCOMPLETE. THE ASSESSI NG OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS CONFRONTED THE ASS ESSEE WITH VARIOUS DISCREPANCIES FOUND ON THE EXAMINATION OF THE BOOKS OF ACCOUNT AND ALSO SHOW CAUSED AS TO WHY THE BOOKS OF ACCOUNT BE NOT R EJECTED AND NET PROFIT RATE BE APPLIED. THE ASSESSING OFFICER REJECTED TH E BOOKS OF ACCOUNT WHICH WAS CONFIRMED BY CIT(A). ON THE PERUSAL OF THE RECORD AND THE ORDER OF THE ASSESSING OFFICER WE ARE IN CONFORMIT Y THAT BECAUSE OF THE 4 DISCREPANCIES POINTED OUT AND REFERRED BY US IN PAR A 4 ABOVE WHICH HAVE NOT BEEN CLARIFIED BY ASSESSEE THE REJECTION OF BO OKS OF ACCOUNT UNDER THE PROVISIONS OF SECTION 145(3) OF THE ACT IS UPHELD. 9. THE SECOND ISSUE WHICH ARISES IN THE PRESENT APP EAL IS THE ADOPTION OF NET PROFIT RATE FOR DETERMINING THE INCOME OF TH E YEAR UNDER APPEAL. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD SH OWN SALES OF 19.45 CRORES ON WHICH NET PROFIT OF RS. 11 01 510/- WAS D ECLARED. THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS HAD COMPA RED THE TRADING RESULTS SHOWN BY THE ASSESSEE WITH THE TRADING RESU LTS SHOWN BY ANOTHER CONCERNS OPERATING IN SUBZI MANDI DHALLI. THE SAI D CONCERN M/S OM PARKASH DINESH KUMAR HAD DECLARED SALES OF RS. 4.78 CRORES ON WHICH NET PROFIT RATE OF 2.78% HAD BEEN DECLARED. THE SALES SHOWN BY THE ASSESSEE DURING THE YEAR ARE RS. 19.45 CRORES. IT IS AN EST ABLISHED PRINCIPLE THAT WHERE A COMPARISON IS TO BE MADE THE SAME SHOULD B E BETWEEN LIKE ENTRIES. WE FIND NO MERIT IN THE OBSERVATIONS OF CIT(A) AND ASSESSING OFFICER IN RELYING ON THE RESULTS SHOWN BY A CONCER N WHOSE TURN OVER DO NOT MATCH WITH THAT OF THE ASSESSEE AND ESTIMATING THE INCOME OF THE ASSESSEE ON THE BASIS OF THE TRADING RESULTS SHOWN BY SUCH A CONCERN. 10. NOW COMING TO THE FACTS OF THE PRESENT CASE THE ASSESSEE HAD DURING THE PRECEDING YEAR DECLARED NP RATE OF 2.01% BEFORE INTEREST AND SALARY AS IS EVIDENCED FROM THE RELEVANT PART OF AUDIT REPORT RELATING TO ASSESSMENT YEAR 2005-06 FURNISHED BEFORE US AT PAGE 6 OF THE P APER BOOK. SIMILARLY FOR THE YEAR UNDER APPEAL THE NET PROFIT RATE ON T URN OVER DECLARED BEFORE INTEREST AND SALARY PAID TO THE PARTNER WAS 0.98% AS REPORTED BY THE AUDITOR RELEVANT PORTION OF WHICH IS ENCLOSED AT P AGE 8 OF THE PAPER BOOK. THE ASSESSING OFFICER WHILE MAKING THE ADDITION HAD OBSERVED THE 5 ASSESSEE TO HAVE DECLARED NP RATE OF 0.56% IN THE I NSTANT YEAR AS COMPARED TO THE 2.1% DECLARED IN THE PRECEDING YEAR . THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT HAD APPLIED THE RATE OF 1.5% TO THE SALES SHOWN AT RS. 19.45 CRORES AND ASSESSED TH E INCOME AT RS. 29 18 831/- AND NOT ALLOWED THE DEDUCTION OF SALARY AND INTEREST PAID TO PARTNERS. WE FIND THAT THE NP RATE OF 2.1% WAS DEC LARED IN THE PRECEDING YEAR AND DURING THE YEAR THE SAME IS 0.98%. THE AS SESSEE HAS FURNISHED THE COMPARATIVE CHART OF NP RATE DECLARED IN THE SU CCEEDING YEARS AS COMPARED TO THE SALES SHOWN AND THE SAME IS 0.73% F OR ASSESSMENT YEAR 2007-08 AND 1% FOR ASSESSMENT YEAR 2008-09. THE N P RATE THUS IN THE CASE OF THE ASSESSEE IS ADMITTEDLY VARYING FROM YEA R TO YEAR AND IT IS AN ACCEPTED RULE THAT THE SAME VARIES FROM YEAR TO YEA R. THE ONUS IS UPON THE ASSESSEE TO JUSTIFY ITS TRADING RESULTS AND IN THE ABSENCE OF THE SAME RESORT IS TO BE MADE TO ESTIMATION OF INCOME. IN T HE INSTANT CASE AFTER SURVEY OPERATIONS THE TRADING RESULTS WERE REJECTE D BECAUSE OF THE DISCREPANCIES IN THE BOOKS OF ACCOUNT AND A NET PRO FIT RATE OF 1.5% HAS BEEN APPLIED TO WORK OUT THE INCOME OF THE YEAR. WE UPHOLD THE ORDER OF THE ASSESSING OFFICER IN APPLYING THE NET PROFIT RA TE OF 1.5%. HOWEVER WE FIND MERIT IN THE CLAIM OF THE ASSESSEE THAT AFT ER ESTIMATING THE INCOME IN THE HANDS OF THE ASSESSEE THE DEDUCTION ON ACCO UNT OF INTEREST AND SALARY PAID TO THE PARTNERS MERITS TO BE ALLOWED. FROM THE PERUSAL OF THE ORDER OF CIT(A) WE FIND THE ASSESSEE TO HAVE CLAIM ED SALARY TO PARTNERS AT RS. 8 22 682/- AND INTEREST TO PARTNERS AT 2 59 796 /-. THE OTHER CLAIM OF THE ASSESSEE IS VIS-A-VIS ALLOWANCE OF DEPRECIATION . WE FIND NO MERIT IN THE CLAIM OF DEPRECIATION AS THE SAME IS DEEMED TO BE ALLOWED WHILE ESTIMATING THE INCOME WHILE APPLYING A NET PROFIT R ATE. HOWEVER WE DIRECT THE ASSESSING OFFICER TO ALLOW THE DEDUCTION ON ACCOUNT OF INTEREST AND SALARY PAID TO THE PARTNERS IN ACCORDANCE WITH LAW. THUS GROUND NO. 6 2 RAISED BY THE ASSESSEE IS DISMISSED AND GROUND N O. 3 & 4 RAISED BY THE ASSESSEE ARE PARTLY ALLOWED. 11. THE ONLY OTHER ISSUE RAISED IN THE PRESENT APPE AL IS CHARGING OF INTEREST U/S 234 B OF THE ACT WHICH IS CONSEQUENTIA L IN NATURE AND HENCE THIS GROUND IS DISMISSED. 12. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF FEBRUARY 2011. SD/- SD/- (D.K.SRIVASTAVA) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 28 TH FEBRUARY 2011 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR