Matter of addition based on low net profit remanded to re-examine books of account

DCIT Vs M Z Enterprise (ITAT Ranchi)

ITAT Ranchi matter of addition based on low net profit remanded the matter back to the file of CIT(A) for re-examination of facts based on books of accounts and other related documents produced.

Facts- During the course of survey proceedings, the statement of one of the partners of the firm Mr. Zinu, was recorded, who had stated that he earns commission @ 5.5% from M/s Shapoorji Pallonji for supply of manpower. However, from ITR filed by the assessee it was observed that the assessee has shown only 0.84% as his profit. It is pertinent to note that the assessee has failed to produce his books of accounts during the course of survey proceedings. Therefore, it is clear that the assessee has failed to show his true income in his ITR filed and his books of accounts are liable to be rejected. Thus, the net profit of the assessee is calculated at 5.5% of his turn over i.e. at Rs. 3,95,51,000/-. The assessee has shown mere profit of Rs. 60,29,926/-. Based on the facts and circumstances of the case, the difference i.e. Rs. 3,35,21,075/- is added back to the total income of the assessee.

CIT(A) restricted the addition to the net profit of 1.25% of the total turnover. Being aggrieved, revenue has preferred the present appeal.

Conclusion- Held that the Ld. CIT(A) has stated that the assessee has produced books of accounts and other related documents during the assessment proceedings which, according to the revenue, is not correct. We therefore, think it proper to set aside the impugned order and remand the matter back to the file of the Ld. CIT(A) to re-examine this fact whether books of account were actually produced and examined. And if yes, then what was the need to estimate the profit. Thus, the appeal of the revenue is allowed for statistical purpose.

FULL TEXT OF THE ORDER OF ITAT RANCHI

This appeal filed by the Revenue and Cross Objection filed by the assessee isagainst the order of the Ld. Commissioner of Income Tax (Appeals), Patna-3[hereinafter referred to as “the Ld. CIT(A)”] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 1994-95, dated 28.09.2021.

2. The revenue has raised the following grounds of appeal:

“1. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in reducing the net profit percentage to 1.25% from 5.5%.

2. During survey, Shri Zinu, partner of the firm had stated that he earns commission at the rate of 5.5% from M/s Shapoorji Pallonji for supply of manpower. However, in the ITR the assessee shown only 0.84% as his profit. The Books of Accounts were neither the assessee shown only 0.84% as his profit. The Books of Accounts were neither produced at the time of survey not at the time of assessment by the assessee. The Ld. CIT(A) has accepted the submissions of the assessee that it had filed various documents such as cash book, sales register, purchase register, party wise ledgers, bank statement etc. during the assessment proceeding which is not correct as per the assessment record.

3. The year under consideration was a year in which survey was conducted that brought out some facts which were not in consideration in the earlier assessment years. Therefore, the comparison of income declared in earlier years with the year under consideration is misplaced.

4. That the order of the Ld. CIT(A) being erroneous in law and on facts to be vacated and the order of the A.O be restored.

5. That the applicant craves leave to add, alter, delete, modify the grounds of appeal before the Hon’ble ITAT.”

2.1 The assessee has raised the following grounds of Cross Objections:

“1. For that the grounds of cross objection hereto are without prejudice to each other.

2.1 For that in the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) is fully justified in working out as that Net Profit @ 1.25% at Rs. 67,58,210/- in respect of estimated entire gross Receipts of Supply of Manpower of Rs 71,91,09,108.70/-

2.2 For that the grounds raised by the Department in this regard is frivolous.

3.1 For that in the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) is fully justified in deleting the addition of Rs. 3,05,62,136/- as added by the Assessing Officer being the amount of Commission received by the assessee being gross Receipts of Rs. 71,91,09,108.70/- in the form of Supply of Manpower.

3.2 For that the grounds raised by the Department in this regard is frivolous.

The learned Commissioner of Income Tax (Appeals) granted the relief after full appreciation of the facts of the case and after examining the genuineness of the case.

3.3 For that the case laws as mentioned in departmental grounds of appeal are not at all applicable.

4. For that the cross objector reserves her right to file detailed submission at the time of hearing.

5. For that the appellant craves leave to urge, add or alter any other ground or grounds of cross objection at the time of hearing.”

3. The facts of the case, in brief, are that a survey operation was conducted u/s 133A of the Act by the ITO-Ward-1(5), Jamshedpur on 26.02.2018in the business premises of the assessee, M/s M Z Enterprises. During the course of survey proceedings documents vide ID mark MZ-01 to MZ-14were impounded. The assessee filed its return of income on 31.10.2018 showing total income of Rs. 37,99,270/-. The case was selected for compulsory scrutiny as per the CBDT guidelines. Notice u/s 143(2) and 142(1) of the Act were issued from time to time and necessary compliance was made by the assessee.

4. It was noted in the assessment order under consideration that “during the course of survey proceedings, the statement of one of the partners of the firm Mr. Zinu, was recorded, who had stated that he earns commission @ 5.5% from M/s Shapoorji Pallonji for supply of manpower. He had also provided documentary evidence in this regard. However, from ITR filed by the assessee it was observed that the assessee has shown only 0.84% as his profit. It is pertinent to note that the assessee has failed to produce his books of accounts during the course of survey proceedings. Therefore, it is clear that the assessee has failed to show his true income in his ITR filed and his books of accounts are liable to be rejected. Thus, the net profit of the assessee is calculated at 5.5% of his turn over i.e. at Rs. 3,95,51,000/-. The assessee has shown mere profit of Rs. 60,29,926/-. Based on the facts and circumstances of the case, the difference i.e. Rs. 3,35,21,075/- is added back to the total income of the assessee.”

5. Aggrieved by the order of the AO, the assessee filed appeal before the Ld. CIT(A) on 28.09.2021 who restricted the addition to the net profit of 1.25% of the total turnover on following ground:-

“On perusal of the written submission filed by the appellant, it is observed that during the course of survey proceedings books of accounts, stock inventory and details of bank accounts were found and impounded. Appellant had produced/submitted the following details during the course of assessment proceedings.

1. Cash Book

2. Party wise ledger in all places

3. Purchase Register

4. Sales Register

5. Master Roll or labour payment

6. All Bank Statement of labour payment (individually)

7. Ledger of Indirect expenses such as Ledger of staff salary, Site expenses and other expenses

8. Service Tax Return.

Appellant had received service charges for deployment of temporary staff at different sites of M/s Shapoorji Pallonji Company Pvt. Ltd @ 5.5% as gross commission While completing the assessment, Assessing Officer had not considered the over head expenses incurred by the appellant for running of day-to-day business and considered the gross commission as net profit of the appellant. In the instant case appellant has provided the service of manpower supply and in turn earned commission on it. On perusal of the details, it is observed that the appellant case had been selected for scrutiny in earlier years also and Assessing Officers has completed the assessments of earlier years after considering the over head expenses. A chart showing assessment year wise net profit percentage is as under: –

On perusal of the above chart, it is found that Assessing Officer has considered the gross commission received by the appellant @5.50% as net profit without considering the over head expenses like Staff Salary, Conveyance Expenses, Misc. Expenses, Postage & Courier, Telephone & mobile, Printing & Stationery, Staff House Rent, Site Expenses, Bank Charges, Accounting Charges, Legal Fees, Audit Fees & Depreciation. All such expenses are directly related to business of the appellant.

However, on perusal of the return filed by the appellant, it is found that appellant has disclosed net profit @0.84% which appears to be low. In earlier years ie, AY. 2016-17 and 2017-18 assessed net profit percentage was 1.25%. Appellant has accepted net profit percentage @1.25% in the earlier years, therefore, the net profit percentage for the relevant year should be taken as 1.25%.

Assessing Officer without giving any cogent and valid reason just rejected the books of account of the appellant and estimated entire gross commission as net profit of the appellant.

In view of the discussion made above I restrict the net profit percentage for the relevant year @ 1.25% Remaining amount of estimated net profit (5.50%-1.25%) is hereby deleted. Accordingly, Assessing Officer is directed to act.”

6. Aggrieved by the order of the Ld. CIT(A), the Revenue has preferred this appeal. During the appellate proceedings before us, it was submitted by the Ld. CITDR that the books of accounts of the assessee were never found or impounded during the course of survey proceedings and the same was also not produced before the Ld. AO during the assessment proceedings and that is the reason why income of the assessee was estimated at 5.5% of the turn-over. Thus, the contention of the Ld. CIT(A),that the books of account and other documents such as cash book, sales register, purchase register, party-wise ledgers, bank statements etc., were produced before the AO during the course of assessment proceedings, is not correct. Further, if the books of account and other documents were really produced before the Ld. CIT (A), then why did Ld. CIT(A) estimate the profit?

7. The Ld. Counsel for the assessee, on the other hand, reiterated that the relevant documents and books of accounts were produced before the Ld. AO and the Ld. CIT(A) and therefore, rejection of the book results by the AO is not proper. It was also submitted by the Ld. AR that in the business of manpower supply the profit rate is very less and therefore, the profit rates applied both by the Ld. AO and the Ld. CIT (A) is unreasonable.

8. We have considered the rival submissions and the impugned order. It is found that the Ld. CIT(A) has stated that the assessee has produced books of accounts and other related documents during the assessment proceedings which, according to the revenue, is not correct. We therefore, think it proper to set aside the impugned order and remand the matter back to the file of the Ld. CIT(A) to re-examine this fact whether books of account were actually produced and examined. And if yes, then what was the need to estimate the profit. Thus, the appeal of the revenue is allowed for statistical purpose.

CO No. 02/Ran/2022

9. The assessee on the other hand, has also filed the cross objections. However, since the appeal filed by the department has been set aside to the file of Ld. CIT(A), the grounds raised by the assessee by way of CO No. 02/Ran/2022 are also set aside to the file of the Ld. CIT(A) for adjudication.

10. In the result, the appeal filed by the Revenue is allowed for statistical purposes and Cross Objection filed by the assessee is dismissed.

Order pronounced on 28.11.2024.