Brief of the Case
ITAT Chandigarh held In the case of DCIT vs. M/s Smart Value Product & Services Ltd. that no defects in the purchases and sales have been pointed out by the AO. The assessee produced complete books of account, sales and purchase vouchers. However, the Assessing Officer, on imaginary basis, prepared month-wise trading account for making addition against the assessee. In this way also Assessing Officer found a negative stock in the books of account of assessee which is not permissible in law. Thus, the Assessing Officer in his own way has prepared the trading account for enhancing the GP despite the fact that it is well settled that book results are drawn on annual basis. The Assessing Officer did not found any unrecorded purchases. No sales were found outside the books of account. Therefore, the extra profit arrived at by the assessee on month-wise could not be sustained. It is also well settled that profit rate cannot be uniform in each month.
Facts of the Case
A return declaring income of Rs. 65,59,669/- was filed on 30.09.2009 which was subsequently revised at the same income. The assessee company follows a direct marketing business model and derives income from retail trading of various consumer goods. The assessee has declared gross turnover to the tune of Rs.91,90,10,669/-against which net profit has been declared to the tune of Rs. 1,06,69,510/- which gives effective NP rate of 1.16%. On examination the AO noticed that G.P. rate was not mentioned in the audit report. The same was calculated by the AO from the figures available in the P & L Account, Balance Sheet and details of the month wise purchases and sales as supplied by the assessee.
The assessee was asked to substantiate the figure of closing stock in the balance sheet as on 31.3.09 amounting to Rs. 1.83 crores on the basis of calculations done on month wise and quarter wise trading accounts by applying the computed GP rate of 51.16%. The AO observed that the company made almost consistent sales but the purchases were not commensurate with the sales. Further, the company tried to make its stock positive by making more purchases from January,2009 to March,2009.
The Assessing Officer asked the assessee to furnish the details of valuation of closing stock as appearing in the balance sheet which was not furnished due to large number of items. The Assessing Officer concluded that month wise trading account filed by the assessee was self contradictory. The AO prepared a trading account according to which the gross profits came out to Rs.36,39,54,887.88 against the sales of Rs.71 ,24,69,335.88 which results in a G.P. rate of 51.08%. Therefore the addition as proposed by him to be made vide the show cause notice of Rs.14.50 crores at a G.P rate of 51.16% was made at a rate of 51.08%, i.e., Rs. 14.48 crores. Accordingly, an addition of Rs. 14.48 crores was made.
Contention of the Assessee
The ld counsel of the assessee submitted that issue is covered in favour of the assessee by order of ITAT Chandigarh Bench in the case of M/s Saqi Brothers Vs ITO 54 TTJ 306. The same is also confirmed by the Hon’ble Punjab & Haryana High Court in ITR 70 of 1998 dated 31.10.2006.
Contention of the Revenue
The ld counsel of the revenue relied upon order of the Assessing Officer.
Held by CIT (A)
The CIT (A), considering the facts and circumstances and material on record, finding defects in the maintenance of the books of account rejected the same under section 145(3) and average net profit of subsequent two years estimated at 2.76% applied against the turnover for determining the net profit of the assessee and accordingly allowed the appeal of the assessee partly.
It was held that the provisions of Section 145(3) stipulates that where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, the Assessing Officer may make an assessment in the manner provided in section 144 of the Act. The provisions of section 144 stipulates that the AO after taking into account all relevant material which the AO has gathered shall after giving the assessee an opportunity of being heard make the assessment of the total income to the best of his judgment and determine the such payments by the assessee on the basis of such assessment.
On the basis of findings recorded by the AO and defects noticed as above which remained during the appellate proceedings, the provisions of section 145(3) are invoked. The assessee’s books of accounts rejected and the net profit is computed to the best of my judgment. In the assessee’s case, it is noticed that in the current year a net profit of 0.92% has been declared on the total sales of Rs. 71, 24,69, 335/-. In subsequent two years where the sales have increased to about 89 Crores and 86 Crores, the return of income have been assessed u/s 143(3) which gave rise to net profit of 2.53% and 2.99%. Taking an average of net profit of assessed income in subsequent two years which have same mode of business perations, a net profit rate for current year is estimated at 2.76%. By applying a net profit of 2.76% on the sales of the year under consideration i.e. Rs.71 ,24,69,335/-, the net profit is computed at Rs.1,96,64,154/-. The assessee has shown net profit as per return of income of Rs.1,06,69,510/-. So the balance amount of Rs. 89,94,6447- is added to the income. Here the reliance is also placed on the decision of Hon’ble Supreme Court in the case of Kachwala Gems Vs. DCIT  288 ITR 10 while making the estimation of the net profit to the best of the judgment.
Held by ITAT
The Assessing Officer found that GP rate and Stock Register were not mentioned in the audit report. The books of account were, however, test checked but Stock Register was not produced. On the basis of figures available in Profit & Loss Account and details of month-wise purchases and sales provided by the assessee, the Assessing Officer computed the gross profit of 51.16%. The Assessing Officer computed month-wise and quarter-wise trading account for enhancing the GP. The Assessing Officer, however, did not considered that assessee made genuine purchases and sales which were entered into the books of account of the assessee. The Assessing Officer also did not consider the nature of business of assessee, was based on multi level marketing system where the goods were received through-out the year by different warehouses atseparate stations. The goods were received either through bills or through challans. After receipt of intimation of goods, the lumpsum payments were made to different suppliers throughout the year.
No defects in the purchases and sales have been pointed out by the Assessing Officer. The assessee produced complete books of account, sales and purchase vouchers. However, the Assessing Officer, on imaginary basis, prepared month-wise trading account for making addition against the assessee. In this way also Assessing Officer found a negative stock in the books of account of assessee which is not permissible in law. Thus, the Assessing Officer in his own way has prepared the trading account for enhancing the GP despite the fact that it is well settled that book results are drawn on annual basis. The Assessing Officer did not found any unrecorded purchases. No sales were found outside the books of account. Therefore, the extra profit arrived at by the assessee on month-wise could not be sustained. It is also well settled that profit rate cannot be uniform in each month. The Assessing Officer accepted the Opening Stock, purchases and sales, therefore, where is the question of considering negative stock in the books of account of the assessee?
The ITAT Chandigarh Bench in the case of M/s Saqi Brothers V ITO ITA No. 279/Chd/1990 held that, “No addition can be made on the ground that Assessing Officer found negative stock of analysis of month-wise trading results, assessee itself having offered Rs. 50,000/- for addition, further addition is not sustainable as gross profit on unaccounted sales, if any, would be far less” This order of the Tribunal has been confirmed by Hon’ble Punjab & Haryana High Court vide judgment ITR No. 70 of 1998 dated 31.10.2006 . The CIT (A), therefore, on proper analysis of facts and material on record correctly came to the conclusion that at the most, the Assessing Officer should have rejected the book results under sect ion 145(3). The CIT (A) also correctly did not accept the conclusion arrived at by the Assessing Officer by preparing month-wise trading account for making addition because i t would give distorted results. The rejection of the books of account by CIT (A) under sect ion 145(3) have not been challenged by the revenue as well as by the assessee. Therefore, finding of fact recorded by CIT (A) for rejection of the books of account under section 145(3) has become final . Therefore, the question left for consideration would be whether CIT(A) has correctly applied average of net profit of assessed income in subsequent two years which have same mode of business operation at 2.76%..
Since in the subsequent years, the Revenue Department accepted NP rate in the case of the assessee at 2.53% and 2.99%, therefore, CIT (A) was justified in applying average of the net profit of assessed income of subsequent two years for the purpose of determining the profit of the assessee. The Assessing Officer was, therefore, not justified in adopting GP rate of 51.08% for making addition against the assessee.
Accordingly appeal of the revenue dismissed.