A.O. may reject Books of Account if Assessee does not furnish proper records of production

IN THE ITAT CHANDIGARH BENCH ‘A’

Pawan Kumar v. ITO

IT APPEAL NOS. 1119 & 1145 (CHD.) OF 2011

[ASSESSMENT YEAR 2008-09]

MAY 17, 2012

ORDER

H.L. Karwa, Vice-President

These cross-appeals by the assessee and Revenue are directed against the order of CIT(A)-II, Ludhiana dated 20.9.2011 relating to assessment year 2008-09.

2. Ground Nos. 1 & 2 of the assessee’s appeal reads as under:-

 1.  That the Ld. CIT(A)-II, Ludhiana has erred in confirming the action of the Assessing Officer (Assessing Officer) in rejecting the books of account u/s 145(3) of the Income-tax Act, 1961.

 2.  That the Ld. CIT(A)-II, Ludhiana has erred in sustaining addition of Rs. 2 lacs out of addition of Rs. 8,68,000/- made by the Assessing Officer on account of so-called low yield of oil in cotton seed by adopting the yield at 11% on estimation by rejecting the books of accounts u/s 145(3) of the Act.

3. Ground No. 1 of the Revenue’s appeal reads as under:-

 1.  That the Ld. CIT(A)-II Ludhiana on facts as well as in law, has erred in reducing the addition made by the Assessing Officer on account of low yield of oil in cotton seed by holding that 192 qtls. Cotton seed oil sold outside his regular books of account maintained by the assessee from 8,68,800/-to Rs. 2,00,000/-.

4. The assessee is in appeal against the addition of Rs. 2 lakhs sustained by the CIT(A) and Revenue is in appeal against the order of CIT(A) in reducing the addition form Rs. 8,68,800/- to Rs. 2,00,000/-

5. Briefly stated, the facts of the case are that the assessee derives income from manufacture and sale of cattle feed, oils, oil cakes etc. From the perusal of the quantitative details filed with the Audit report, the Assessing Officer found that although the quantities of cotton seed, mustard and groundnut crushed during the previous year have been separately shown but the yield of oil and oil cakes have been given in consolidated form at 13.02% and 83.91% respectively. The Generation of gad is given at 1.74% and shortage claimed at 1.34%. The Assessing Officer vide notice dated 3.12.2010 asked the assessee to rework the yield of oil and oil cakes separately from different types of oil seeds crushed by him. The assessee was also asked to explain the reasons for mixing up the cotton, mustard and groundnut oil seeds in the same category, when he was aware of the fact that there was vast variation in market price of these types of oil seeds and their products. The assessee was asked to submit yield of oil obtained on the crushing of three types of oil seeds separately and which he has given as under:-

6. The Assessing Officer noticed that the yield of oil and oil cakes was low and referred the matter to the Punjab Agriculture University, Ludhiana for the expert opinion. In response to Assessing Officer’s letter, the Head, Department of Plant Breeding & Genetics, Punjab Agriculture University, Ludhiana under his office letter No. 47434 dated 20.12.2010 has informed as under:-

“Cotton – The Binola Chiki is no scientific item (if seems to be trade term). As far oil content of American Cotton and Desi cotton is concerned, it varies in the range of 16-21% and 15-20% respectively. Rest of the product is cotton seed cake (Khal). The oil content varies with variety hybrid, environment factors at ball stage and fresh or old stocks.

Oilseeds – in Sarson, it is being informed that the content of various seed components varies with the lot since these components are directly influenced by date of sowing and time of harvesting. The recovery of oil also tends to vary with the quality/type of extraction mill, traditional Gahni’s yield lower old recovery than solvent extraction. As such it is very difficult to comment on the components without actual assessment of the produce. Imported sarson is generally Brassica napus type and normally possess more oil content than traditional Indian sarson. The shortage might result from the moisture content that also varied from 6-8 per cent. “

7. After the receipt of the above letter, the Assessing Officer asked the assessee to explain why yield of oil from cottons seeds be not taken at 17.5% as against 9.85% intimated by the assessee. In response to the above, the assessee appeared before the Assessing Officer on 27.12.2010 and filed analysis reports of cotton seed, cotton seed cakes,’ mustard seeds, mustard cakes from National Analytical Laboratory, Nabha, which was discarded by the Assessing Officer. The Assessing Officer then discussed about the gross turnover and net profit disclosed by the assessee during the assessment year under consideration and the preceding two years, which are mentioned in para 14 of the assessment order. The Assessing Officer found that over a period of three years the assessee has disclosed to the Department a very negligible income of Rs. 8,71,490/- on total sales of Rs. 18,65,79,772/-. According to the Assessing Officer, books of account maintained by the assessee were not reliable and, therefore, he rejected the books of account u/s 145(3) of the Income-tax Act, 1961 (in short ‘the Act’) and adopted the yield of oil from cotton seeds at the rate of 11% as against yield of 9.85% declared by the assessee and worked out 192 Quintals of cotton seeds oil sold outside the books of account without recording the sale proceeds and made an addition of Rs. 8,68,800/-.

8. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A). The CIT(A) allowed a relief of Rs. 6,68,800/- to the assessee and sustained the addition of Rs. 2 lakhs.

9. We have heard the rival submissions and have also perused the materials available on record. Shri Sudhir Sehgal, Ld. Counsel for the assessee vehemently argued that CIT(A) has not considered that return was filed on the basis of audited books of account and complete quantitative details were given and no defects whatsoever has been pointed out by the Assessing Officer. As such, confirmation of the Ld. CIT(A) in rejecting the books of account u/s 145(3) of the Act by the Assessing Officer is uncalled for and is against the facts and circumstances of the case. He further reiterated the submissions made before the lower authorities.

10. Shri Akhilesh Gupta, Ld. DR heavily relied on the order of Assessing Officer.

11. In our view, the discrepancies pointed out by the Assessing Officer while rejecting the book results has not been satisfactorily explained by the assessee. The Assessing Officer has observed that although the quantity of cotton seed, mustard and groundnut crushed during the previous year were shown separately but the yield of oil and oil cakes have been given in consolidated form at 13.02% and 83.91% respectively. Further, the sales of oil and oil cakes have been shown in the manufacturing account in consolidated form although there was a wide variation in the market price of these products. It is also true that there is always a wide variation in the percentage of yield of oil and sale rates of oil and oil cakes in the market. However, the assessee has preferred to put up a consolidated account of different types of oil seeds for the reasons best known to him. The assessee was asked by the Assessing Officer to rework the yield of oil and oil cakes separately from different types of oil, oil seeds crushed by him. The assessee was also asked to explain the reasons for mixing up the cotton, mustard and groundnut oil seeds in the same category when there was vast variation in market price of these types of oil seeds and other products. When Assessing Officer asked the assessee to give the explanation, the assessee stated that there was not much difference in the market price of both these oils and, therefore, he has made the sales of khal and oil of both these varieties jointly. In our view, the Assessing Officer has correctly rejected the above explanation of the assessee stating that assessee’s statement in this behalf is not correct, therefore, under no circumstances is acceptable. We fully agree with the above observation of the Assessing Officer. Unless the yield of oil obtained on the crushing of three types of oil seeds is separately given, the manufacturing results cannot be appreciated in their proper perspective.

12. It is also observed that the assessee submitted the analysis reports of cotton seed, cotton seed cakes, mustard seeds, mustard cakes from National Analytical Laboratory (NAL), Nabha. In our view, the Assessing Officer has correctly rejected the analysis report and other products from NAL, Nahba, observing as under:-

(11) Above all the material for testing is shown as provided by the assessee himself. The yield of oil from cotton seeds is shown at 17.40% and moisture at 11.14%. The yield of oil is within the range as reported by Punjab Agriculture University authorities. Further the yield of oil from mustard seeds is reported at 39.70% and moisture at 5.9%. The test reports are also in respect of the oil contents contained cotton and mustard cakes which have been reported as high as 9.6% and 8.25% respectively. It is something practically impossible to believe that only 50% of the oil is extracted from the cotton seeds and the balance 50% is contained in the cotton seed cakes.

(12) Even if it is presumed only for the sake of argument that testing was actually done, then the cotton seed cakes and mustard cakes were provided for testing by the assessee himself which could have been picked up at any stage of extraction of oil/crushing of oil seeds.

(13) In his reply the assessee has referred to environment factor in the yield of oil from oil seed. In this connection it may be pointed out that it is exactly for this reason that the P.A.U. authorities have reported the yield of oil from cotton seeds at 15% to 20%. The assessee has been in this line of business for long. It is certainly not expected not only from the assessee but even from an ordinary businessman that he did use the latest technology for the extraction of oil from cotton seeds and allowed almost 50% of oil to go waste will the oil cakes. Test reports filed by the assessee are also rejected on’ this account as well because material for testing was supplied by the assessee from his own stocks at unknown stage of processing.”

13. In our view, there were sufficient reasons to hold that the books of account maintained by the assessee are unreliable, incorrect and incomplete. Therefore, the books of account of the assessee have correctly been rejected u/s 145(3) of the Act. We also observe that the CIT(A) has correctly upheld the action of the Assessing Officer in rejecting the books of account.

14. As regards, the low yield of oil from cotton seeds, the Assessing Officer has adopted the yield at 11% and made the addition of Rs. 8,68,800/-on account of suppression of sales proceeds of cotton seed oil. On appeal, the CIT(A) reduced the addition to Rs. 2 lakhs.

15. In view of the comments given by Punjab Agriculture University Authority, it is crystal clear that yield of oil from cotton seeds depends upon many factors and cannot be fixed, such as date of sowing and time of harvesting, quality of seeds, quality / type of extraction mill. Traditional Ghanis yields lower oil recovery than solvent extraction and yield also depends upon the fact that whether extraction is made from kohlu or through skilled or unskilled labour. The above authority has also clearly stated that he cannot certify the exact yield during the year under consideration. Keeping in view the entire facts and circumstances of the present case, we are of the opinion that the addition of Rs. 3 lakhs in this case will meet the ends of justice. Consequently, we allow ground No. 1 of Revenue’s appeal partly and dismiss ground Nos. 1 & 2 of the assessee’s appeal.

16. Ground No. 3 of the assessee’s appeal reads as under:-

3. That the Ld. CIT(A)-II Ludhiana has also erred in sustaining addition of Rs. 2 lacs out of addition of Rs. 10,71,467/- made by the Assessing Officer on account of so-called low gross profit rate of cattle feed by estimation by rejecting the books of account.

17. Ground No.2 of the Revenue’s appeal reads as under:-

2. That the Ld. CIT(A)-II Ludhiana on facts as well as in law, has erred in reducing the addition on account of resale and manufacturing of cattle feed by applying low GP rate from 10,71,467/- to Rs. 2,00,000/-

18. The facts relating to above issue are that during the relevant assessment year under consideration the assessee sold 13055 quintals of self manufactured cattle feed for a total sum of Rs. 75,52,066/- (after reducing resale of 4990 quintals for Rs. 30,24,337/-). The assessee has shown to have sold almost the entire self manufactured feed in cash on varying rates between Rs. 619/- to Rs. 738/- or even more per quintal. The Assessing Officer opined that the sale rates can still be higher or lower but he has picked up two instances of sales. According to Assessing Officer, the assessee disputed sale rate of Rs. 738/- per quintal on the ground that the sale of cattle feed is 280 quintals as against 237 quintals given in the notice. The assessee further stated that the rate of raw material and finished goods change from time to time and there is hard competition in the trade. The assessee further stated that GP rate was 3.34% as compared to 2.57% or even 3.34% declared year after year in a manufacturing unit is undoubtedly manipulated and no such unit can survive for long in any trade. The Assessing Officer observed that the entire sales of cattle feed made by the assessee were in cash at verifying rates, was not open to verification. The Assessing Officer also took the view that there was no reason for declaring low gross profit rate of 2.5% or 3% in each year. Thus, the Assessing Officer was not satisfied about the genuineness and correctness of the cattle feed manufacturing account, which was rejected. The Assessing Officer applied a GP rate of 15% on estimated sales of Rs. 86,23,533/- and made an addition of Rs. 10,71,467/-. On appeal, the CIT(A) reduced the addition to Rs. 2 lakhs.

19. We have heard the rival submissions. We find force in this contention of Shri Akhilesh Gupta, Ld. DR that the GP rate of 2.57% or even 3.34% declared year after year in a manufacturing unit is undoubtedly manipulated and no such unit can survive for long in any trade. Furthermore, the assessee has shown to have sold almost the self manufactured feed in cash on varying rate between Rs. 619/- to Rs. 738/- or even more per quintal. The Assessing Officer has correctly observed that the entire sales of cattle feed in cash at varying rates cannot be verified. It is also observed that the assessee could not give any reason for declaring too low GP rate i.e. 2.5% or 3% in each year. Considering the entire facts and circumstances of the present case, we are of the view, that some addition is definitely called for. However, it is a fact that the Assessing Officer has not cited any comparable case while applying GP rate of 15% on the estimated sales of Rs. 86,23,533/-. The Assessing Officer has not given any working while determining the estimated sales at Rs. 86,23,533/-. At this point of time we are also of the opinion that the addition sustained by the CIT(A) at Rs. 2 lakhs is on lower side. Thus, keeping in view the entire facts and circumstances of the present case, the addition of Rs. 3 lakhs on this count will meet the ends of justice. The Assessing Officer is directed to recompute the income of the assessee accordingly. Ground No. 2 of Revenue’s appeal is allowed partly while ground No. 3 of assessee’s appeal is dismissed.

20. Ground No. 5 of the assessee’s appeal reads as under:-

5. That Ld. CIT(A)-II, has also erred in upholding the addition made by the Assessing Officer disallowing proportionate interest paid to the bank relevant to so called interest free advances made by the appellant, though the disallowance has been restricted to 12% instead of 15% charged by the Assessing Officer.

21. Ground No.3 of the Revenue’s appeal is as under:-

3. That the Ld. CIT(A)-II Ludhiana on facts as well as in law, has erred in holding that interest free advance have been made out of unsecured loan without appreciating that the Assessing Officer has clearly established that these have been made out of CC A/c which carries interest rate of 15%.

22. The Assessing Officer has discussed this issue in para 19 of the assessment order. According to Assessing Officer, the assessee had advanced two interest free advances of Rs. 1,60,000/- and Rs. 10 lakhs to R.R. Foods out of which the assessee received back Rs. 13,75,000/- and the balance amount of Rs. 12,25,000/- was still receivable as on 31.3.2008. The concern R.R. Foods is owned by the son of the assessee namely Shri Ashutosh Goyal. The Assessing Officer observed that the assessee had made these interest free advances from his CC account which carried interest, therefore, he disallowed interest at the rate of  15% and made an addition of Rs. 2,89,270/- On appeal the CIT(A) held as under.-

“19. The assessee had made two interest free advances of Rs. 1,60,000/-, Rs. 10,00,000/- to RR Foods on 18.4.2007 and 30.5.2007 respectively out of which the assessee received by back Rs. 13,75,000/- in parts from 24.09.2007 to 24.3.2008 and the balance of Rs. 12,25,000/- was still receivable as on 31.3.2008. R.R. Food is a business concern owned by assessee’s son, Shri Ashutosh Goyal. Since the assessee had made these interest free advances from his CC account, which carried interest, I see no reason for him to. have made such interest free advances, interest @ 15% is disallowed on these advances which works out at Rs. 2,89,220/-. “

23. After hearing the Ld. representatives of both the parties, we do not find any infirmity in the findings of the Ld. CIT(A) on this issue. The plea taken by the assessee before the CIT(A) was that they were paying interest at the rate of 12% on the unsecured loans and the CIT(A) directed the Assessing Officer to verify the interest paid on the unsecured loans and apply the same rate for the purpose of disallowing of interest. We do not see any valid ground in interfering with the order of CIT(A) on this issue. Accordingly, we uphold the same and dismiss ground No. 5 of the assessee’s appeal and ground No. 3 of the Revenue’s appeal.

24. In the result, assessee’s appeal is dismissed while Revenue’s appeal is allowed partly as indicated above.