Raj Auto Wheels (P) Ltd Vs ACIT (ITAT Jaipur)
Introduction: In the recent case of Raj Auto Wheels (P) Ltd vs. ACIT (Income Tax Appellate Tribunal, Jaipur), the Tribunal carefully examined the facts, arguments from both parties, and relevant legal precedents. The case primarily revolves around the addition of advances received from customers in the assessment years 2010-11 to 2013-14, totaling Rs. 2,19,27,275/-. The assessing officer enhanced the declared sale amount of Rs. 40.48 crore by 12.15%, resulting in an impugned addition of Rs. 2,06,46,689/-.
Suppression of Sale Allegation: The Tribunal found that the enhancement made by the assessing officer was not justified, as it was based on a grossly insufficient sample size of 113 cases out of a total of 1459 customers. The assessee argued that there was no suppression of sale, citing differences in the representation of sale considerations in invoices and ledger accounts. The Tribunal agreed, stating that the minor variations presented did not substantiate the substantial enhancement made by the assessing officer. The authorities failed to provide strong evidence to support the claim of suppression of sales.
Deferment of Sale: The Tribunal rejected the contention of the revenue regarding the deferment of sales, citing previous findings in the appeal for the assessment year 2010-11. It emphasized that the mere suspicion of such deferment, without substantial evidence, was not sufficient to support the revenue’s case.
Application of Gross Profit (GP) Rate: The assessing officer applied a GP rate of 3.25% based on the declared GP rate of 0.05% and a case of Rellan Motors Pvt. Ltd for AY 2013-14. The Tribunal found the application of a subsequent year’s result unjustified and, even in that case, the assessee was not confronted with the material used against them. The Tribunal supported the assessee’s claim of a revised GP rate of 4.20%, considering target incentives, turnovers, cash discounts, warranty, etc. The GP rate declared by the assessee was considered justified, and the enhanced rate of 3.25% was rejected.
Conclusion on Sale Enhancement and GP Rate Application: The Tribunal concluded that the enhancement of the sale amount and the application of a higher GP rate of 3.25% lacked justification. The resultant addition of Rs. 2,26,41,521/- was deleted. However, to cover possible income leakage, an ad hoc addition of Rs. 2,00,000/- was allowed.
Advance Received for Sale of Vehicles: The assessing officer added Rs. 3,03,000/- to the total income, considering advances received from customers for the sale of vehicles, which were later refunded due to canceled deals. The Tribunal found that these advances, representing a small amount in comparison to the overall turnover, could not be considered undisclosed income. Complete details, including names and addresses of the customers, were provided by the assessee, and no adverse material was presented by the assessing officer after making inquiries. The addition was directed to be deleted.
Disallowance of Expenses: The assessing officer disallowed various expenses of Rs. 2,14,731/-, which the CIT(A) restricted to Rs. 1,07,366/-. The Tribunal found no reason to interfere with this decision and confirmed the sustained disallowance.
Conclusion: In conclusion, the Tribunal partly allowed the assessee’s appeal, deleting additions related to sale enhancement, GP rate application, and advances received for the sale of vehicles. It confirmed the disallowance of expenses as restricted by the CIT(A).
This case highlights the importance of substantiated evidence and proper application of legal provisions in income tax assessments, emphasizing the need for justifiable grounds in making additions or disallowances.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This is an appeal filed by the assessee against order of the ld. CIT(A), Ajmer dated 22-08-2016 for the assessment year 2009-10 raising therein following grounds of appeal.
ITA NO. 929/JP/2016 – A.Y. 2009-10
The ld. CIT(A) has erred in confirming the addition for:-
1. 2,06,46,489/- by estimating gross profit percentage at 3.25% on estimated sales at Rs.69,99l,20,191/- against declared gross profit at 0.52% and against sales at Rs. 40,67,17,076/-.
2. 3,03,000/- by considering advance received from customer for sales as unexplained and making the addition.
3. Disallowance a sum of 2,14,731/- being 10% of expenses claimed of Rs.21,47,731/- for non-verification.
4. Disallowance of 26,095/- for delay in deposit of employees contribution for PF and ESI.’’
2.1 In Ground of Appeal 1 of the assessee, the Addition of Rs.2,26,41,521/- is under challenge.
2.2 Brief facts of the case are that during the assessment proceedings, the AO alleged that the assessee is engaged in the practice of delayed invoicing and under invoicing of sales in its books of accounts. The assessee is taking advance from customers against the sale of vehicles. In most of the cases the delivery of goods has been given to the customers, the vehicles are also registered with RTO, delivery memo have been issued for the year under consideration. However, the sales bills are prepared in the subsequent years and recorded the sale in its books of account in the subsequent years but not in the subjected year. The AO alleged that there is a difference of 43,35,138/- in the sale amount as appeared in the delivery memo / sale bill issued by the assessee of Rs.3,56,72,909/- and purchase amount Rs.4,00,08,047/- stated by the customers in reply to notices issued u/s 133(6). Such difference in term of percentage was of 12.15%. Therefore, he inferred that the assessee might have suppressed the sale to that extent. (AO pg. 6)Thereafter, he worked out the advances of Rs.21,92,72,275/- for which the assessee booked sales in A.Y. 2010-11 to 2013-14 i.e. in subsequent years and considering the amount of Rs.21,92,72,275/- (out of new advances of Rs.24,00,87,965/- during the year) as turnover, added the same to the declared turnover of Rs.40,48,200,629/- and thereafter enhanced the same by applying 12.15% (alleged suppressed sale as per his calculation) on total turnover of Rs.62,40,92,904/- (Rs.21,92,72,275/- + Rs.40,48,200,629/-) and worked out the alleged suppressed sale of Rs.7,58,27,287/- in addition to Rs.62.41 Cr. as stated above. Thus, as per AO the total sale should have been Rs. 69,99,20,191/- (Rs.40.48 Cr. + Rs.22 Cr. + 12.15% being Rs. 7.58 Cr.). Finally, the AO rejected the Books of Account u/s 145(3) and as per calculation at Pg 6 of the impugned order, he applied G.P. rate of 3.25% [as per 3.92% declared in the case of M/s Relan Motors (P) Ltd.] as against 0.05% (but correctly revised GP rate at 4.20%) declared by the assessee], on 69.99 Cr. so worked out and made the resultant trading addition of Rs.2,06,46,689/-. vide assessment order passed u/s 143(3) / 147 dated 30.03.2015.
2.3 In the first appeal the ld. CIT(A) confirmed the action of the AO vide order dated 08.2016 in appeal no. 29/2015-16 holding as under:
“4.3 I have gone through the assessment order, statement of facts, grounds of appeal and written submission carefully. It is seen that the book results of the appellant have been rejected by the AO mainly on the ground that at the assessee was engaged in the practice of delayed invoicing and under invoicing of sales in its books of accounts. The assessee after taking advances from the customers against the sales of vehicles, in most of the cases, delivered the vehicle to the customer, the vehicles were also registered with RTO and delivery memo were also issued in the previous year relevant to A.Y 2009-10 but sales bills were prepared in the subsequent years and sales was also recorded in the books in the subsequent years. Further, there was difference in the sales amount appearing in the delivery memo/sales bills issued by the assessee and purchase amount shown by the customers. The assessee either during the course of assessment proceedings or appellate proceedings could not controvert the above finding of the AO. The assessee has contended that since it has already declared the sales of the vehicle sold in the previous year relevant to A.Y. 2009-10 (the assessment year under consideration) in the subsequent years, therefore, the same cannot be taken into account in the A.Y. 2009-10. I do not find this argument of the appellant acceptable. The assessee cannot choose the year in which he wants to show the sale. The sale has to be shown in the year in which the vehicles have been sold by the assessee. As the vehicles have been sold by the assessee in the previous year relevant to A.Y. 2009-10, hence, the assessee was required to show the entire sale in the previous year relevant to A.Y. 2009-10 only. Therefore, the action of the AO estimating the turnover at Rs. 69,99,20,191/- as against the sale of Rs. 40,48,20,629/- shown by the appellant in the books of accounts, is held to be fully justified and in accordance with the provisions of law. The AO has estimated the GP @3.25%, citing the comparative case of Relan Motors Pvt. Ltd., who was also engaged in the same line of business and dealer of Maruti Car. The GP rate shown by M/s Relan Motors Pvt. Ltd. Ltd. was 3.92%. Hence, I am of the considered view that the AO had been more than reasonable by estimating the GP of the appellant @ 3.25%. In view of the above discussion, the action of the AO rejecting the book results u/s 145(3) and estimating the profit at Rs. 2,27,47,406/- is held to be fully justified and in accordance with the provisions of law. Accordingly, addition of Rs.2,06,46,689/- made by the AO is hereby confirmed.”
2.4 During the course of hearing, the ld. AR of the assessee placed following submissions.
“A. Invalid application of S.145 (3) of the Act: 1. The AO in this case, invoked S.145(3) of the Act mainly alleging the case of suppression and deferment of sale as also low GP declared by the assessee in comparison to M/s Relan Motors (P) Ltd. The dispute appears w.r.t. the basis to invoke the S.145(3) of the Act i.e. (i) Where the AO is not satisfied about the correctness/completeness of the accounts and (ii) where the method of accounting provided in Sub S. (1), is not followed. The AO though alleged some deficiencies however, none of them are such so as to be based for invoking S.145 and more particularly when they are contrary to facts and the submissions of the appellant were not considered judiciously.
2. It is not disputed that the appellant has maintained all the books of account consisting of Cash Book, Bank Book, Bank, Journal, Sales Book (Generated by Computer System) (refer audit report u/s 44AB PB-11). The entire sales, purchases and expenses are fully vouched. The accounts are audited u/s 44AB of the Act (PB 10-28) as also under the Companies Act (PB 2-9) and Rajasthan VAT Act (PB 39-51). The same were produced before the AO also along with other details from time to time.
3. With regard to the allegation of suppression of the sale w.r.t. certain examples, the of which is given by the AO at Pg. 3 to 6 based on the notices issued u/s 133(6) of the Act and replies thereto, we have made our submissions separately. Hence kindly refer para 5 at Pg. 9-10 of this written
4. Minor irregularities, even assuming were there, cannot be made a basis of the rejection of the books of accounts or of trading addition. Kindly refer Padampath Ramgopal 76 ITR 719 (SC).
Thus, there was no valid basis at all to apply S. 145 of the Act in this case. Hence the same may please be quashed and the entire trading addition be deleted here itself.
B, On merit: Alternatively, on merits also, there was no case with the AO to have made this addition, as submitted herein below:
1. Fair estimation required – Legal Position:1.1In these circumstances a pertinent question arise whether after the rejection of account and invoking of S.145(3) of the Act, is there any scope of again referring to the same books of account finding various deficiencies, defects and faults and then to estimate the income on that basis. Although after rejecting the account it is not disputed that what is all required is a fair estimation. However, invoking of S.145 of the Act does not confer blind powers upon the AO and he is not at liberty to assess the income at whatever figure he wants. He is bound to make an honest estimation of income, keeping in view of the material available on record, past history of the case, local knowledge and repute of the assessee. He is also supposed to collect necessary material for the purpose, if so required.
The law is settled that in making fair estimation, one needs some cogent material to justify estimations. An arbitrary, capricious and wild estimation, as done in the present case, is not at all permitted in the eyes of the law. The AO however, did not conform to its settled requirement. Kindly refer Jotram Shershing vs. CIT 2 ITR 119 (All).
1.2 Addition Need Not Be Made, Even if S.145 of the Act Invoked: In the case of CIT v/s Gotan Lime Khaniz Udyog 256 ITR 243(Raj), it has been held that mere rejection of books of account need not necessarily lead to additions to the returned income. It was also held that the books of account, together with past history of the case as also material collected by the AO should be considered for estimation of income.
2.1 Better Results: It is submitted that the correct and revised G.P. rate declared this year by the appellant stands at 4.20% (and not 0.05% only) in as much as the assessee has been consistently in the practice of considering the target incentives, turnovers, cash discount and warranty income, etc. which are directly related to the trading activity only as a part of its gross profit. Based on the same, the correct and revised working of the G.P. comes to 4.20%, as per the following chart:
