Neither before the assessing officer nor before the learned Commissioner (Appeals), the assessee could prove the source of investment, in fact, no explanation was offered. Thus, additional evidence filed for the first time, cannot be entertained, more particularly on the ground that even the confirmation letters are not sufficient to prove the investment. It is the duty of the assessee to prove the creditworthiness of the parties also, which is absent in the instant case. Having regard to these circumstances, the addition made by the
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This appeal is directed against the order passed by the learned Commissioner (Appeals), Visakhapatnam and it pertains to assessment year 2011-12.
2. Estimation of income on sale of IMFL and addition towards unexplained investment are the issues in dispute before the tribunal.
3. The assessee is engaged in the business of purchase and sale of IMFL. For the year under consideration, assessee declared total income of Rs. 5,94,023. Though, return was originally processed under section 143(1) of the Act, the same was reopened subsequently, since the matter was selected for scrutiny. During the course of hearing, it was noticed that the assessee was engaged in the business of stone crushing and also carried on business of purchase of IMFL from Andhra Pradesh Beverages Corporation Ltd. in respect of IMFL products. As per the records, the assessee made purchases of quantity worth Rs. 1,37,23,908. The assessee admitted sales of Rs. 1,87,61,260. Against the sales, income of Rs. 4,41,263 was offered to tax, which works out to net profit rate of 2.3%.
4. Since the profit declared from business of IMFL is too low, the assessee was called upon to justify the claim of deriving such a low profit, with the help of books of account, sale bills and vouchers etc. Admittedly, the assessee did not maintain any stock register, and the sale bills maintained did not contain quantitative and qualitative details. Under these circumstances, the assessing officer rejected the book results and estimated the net profit at 20% on stock put to sale.
5. The assessee tried to justify low gross profit by contending that in the year under consideration, the volume of sale is more leaving Rs. 1,23,768 as closing stock. The gross profit rate varies depending upon the brands and hence, net profit estimation at 20% is on higher side since the assessee has to spend for administrative costs in addition to the license fee paid to APBCL which is major expenditure.
6. The assessing officer rejected the contention of the assessee on the ground that low profit declared is not substantiated with proper material. In this regard, assessing officer observed that IMFL is a seller’s market; though MRP is fixed by the Government and the dealers have always sold the liquor at a price substantially higher than MRP, going by the media reports. On special days and festive occasions, the sale rate would be higher and thus, assessing officer treated that it is a fit case for estimating profit at 20%.
7. During the year, the assessee paid license fee of Rs. 44,23,125 besides pre- paid license of Rs. 14,77,375. The total license fee, thus works out to Rs. 59,09,500, which was paid in installments. Out of which, an investment of Rs. 7,92,954 was not properly explained with regard to source. Therefore, the addition of Rs. 7,92,954 was made by observing as under :–
“5. During the year the assessee claimed to have paid license fee of Rs. 44,32,125 besides pre paid license of Rs. 14,77,375. Thus, the total license fee paid was Rs. 59,09,500. Out of this, the first installment of license fee was Rs. 19,69,833 being 1/3 of the total amount. Besides this, he has also made investment towards FDR of Rs. 5,91,000 and 1st Purchase of Rs. 3,00,000 and 8G Commission of Rs. 3,21,681. Thus, the total investment made during the month of June, 2010 before the commencement of the business comes to Rs. 31,23,549. The assessee claimed that he is assessed to tax regularly and besides wine business, he has also carried crusher business. He further stated that he has used certain amounts from his crusher business also for the purpose investment in the wine business. He therefore, filed a cash flow statement to prove certain amounts relating to crusher business were also used. Such amount was arrived at Rs. 29,73,195 as cash on hand available which he sought credit from the above investment. On verification of the cash flow statement it is found that among other amounts, he claimed an amount of Rs. 6,42,600 as amounts received by way of Misc. Advances from friends/well wishers to submit wine bidding. Except stating so he could not furnish any details whatsoever to prove such credits. Therefore, no credence could be given to this claim and after allowing credit for an amount of Rs. 23,30,595 as cash available, the balance investment to be explained works out to Rs. 7,92,954 (Rs. 31,23,549– Rs. 23,30,595) for which no explanation could be offered by the assessee from the sources invested. Hence, the amount of Rs. 7,92,954 is treated as assessee’s unexplained income and added under the head Income from other sources.”
Assessment was, accordingly, computed on a total taxable income of Rs. 37,51,490.
8. Aggrieved, assessee contended before the learned Commissioner (Appeals) that there is a difference in arrack business and Indian Made Foreign Liquor. In the case of country liquor, the seller can fix the price according to the demand in the market, whereas in IMFL the MRP is fixed by the Government and all expenses such as, license fee, salaries, shop rents and other miscellaneous expenses have to be borne by the dealer leaving net profit of 2% to 3% only. He relied upon several decisions of the ITAT, Visakhapatnam Bench in support of his plea that net profit rate of 3%, in this line of business, is reasonable.
9. Similarly, with regard to addition of Rs. 7,92,954, the main contention of the assessee is that when books are rejected, there cannot be any separate addition towards unproved cash credits. In this regard, he placed reliance on the decision of the Jurisdictional High Court in the case of Indwell Constructions v. CIT (232 ITR 776) and also the decision in the case of Maddi Sudarshanam Oil Mills Co. v. CIT (37 ITR 369).
10. The learned Commissioner (Appeals) observed that there is a rampant practice of sale of liquor above the MRP which was rightly taken into consideration by the assessing officer However, profit estimated 20% was found to be excessive and thus estimated the profit at 10% of purchase price.
11. As regards unexplained investment, the learned Commissioner (Appeals) observed that the assessing officer is not precluded from treating the amounts of credit entries as income from undisclosed source, merely because income was computed on percentage basis. Since assessee could not prove the source of Rs. 7,92,954, the addition made by the assessing officer was confirmed.
12. Further aggrieved, assessee is in appeal before the tribunal by raising, in all, 7 grounds.
13. Learned counsel submitted that estimate of income at 10% is higher and relied upon the decisions of the ITAT, Visakhapatnam Bench in the case of Meka Ramamurthy in ITA No. 66/Vizag/2016 to submit that profit rate of 5%, in this line of business, clear of all deductions, is reasonable.
14. As regards addition of Rs. 7,92,954, learned counsel filed a detailed paper book consisting of confirmation letters from 56 persons and requested for admission of additional evidence.
15. The contention of the assessee is that the loans were borrowed from several parties, but collecting confirmation letters from all the persons is time consuming job. Hence, it could not be placed before the tax authorities. It may be noticed that most of them are not tax assessees and they are claimed to be petty vegetable vendors and daily labourers etc. who would not have been in a position to give loans.
16. Learned Departmental Representative submitted that this additional evidence need not be admitted at this stage, since it is very difficult even to cross verify, since it was filed for the first time and even the confirmation letters do not prove their creditworthiness.
17. I have considered the rival submissions and carefully perused the records.
18. In IMFL business, few newspapers have no doubt mentioned about considered sale of liquor at a higher price i.e. at a price higher than the rate fixed by the Government, but the fact remains that in the assessee’s case, there is nothing on record to suggest that he has flouted the norms and sold liquor at a higher price. The Government of Andhra Pradesh through AP Beverages Corporation Ltd. is the only agency authorized to sell IMFL. Sale rate is fixed by A.P. Beverages Corporation. However, having regard to the huge licence fee payable and other incidental expenditure, the ITAT, Visakhapatnam Bench consistently held that profit rate at 5% of purchase price, clear of all deductions is reasonable. Consistent with the view taken therein, I am of the view that estimate of profit at 5% of purchase price is reasonable and directed assessing officer, accordingly.
19. The next issue is with regard to unexplained investment of Rs. 7,92,954.
20. Neither before the assessing officer nor before the learned Commissioner (Appeals), the assessee could prove the source of investment, in fact, no explanation was offered. Thus, additional evidence filed for the first time, cannot be entertained, more particularly on the ground that even the confirmation letters are not sufficient to prove the investment. It is the duty of the assessee to prove the creditworthiness of the parties also, which is absent in the instant case. Having regard to these circumstances, the addition made by the assessing officer and confirmed by the learned Commissioner (Appeals) under section 69 of the Act is upheld.
21. In the result, appeal filed by the assessee is partly allowed. Pronounced in the open Court on this day of 6-12-2017.