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2016 (1) TMI 242 - ITAT HYDERABAD

2016 (1) TMI 242 - ITAT HYDERABAD - TMI - Estimation of income done by AO at 1% of the turnover - CIT(A) cancelled the estimation - Held that:- The opinion that CIT(A) is correct in setting aside the estimation of income. Even though certain mistakes are pointed out by the AO, in our opinion, they are not good enough to reject the Books of Accounts. In fact as contested by assessee, many of them are considered on wrong perceptions. AO was of the opinion that the stock purchased with cartel group .....

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T(A) the profits earned by the third parties should not be basis for disallowing cost of purchase in assessee’s hands. Be that as it may, since assessee’s books of accounts are maintained and audited and most of the additions are made on the basis of books of accounts other than this estimation of income, we are of the opinion that Revenue has not made out proper case for rejection of books of accounts and estimating the income at 1%. Even the Revenue in Ground No. 4 accepts that percentage of e .....

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KOTAIAH, ACCOUNTANT MEMBER For The Revenue : Shri Rama Krishna, Bandi, DR For The Assessee : Shri Kishore Kumar Kabra, AR ORDER PER B. RAMAKOTAIAH, A.M. : This is Revenue s appeal against the order of the Commissioner of IncomeTax (Appeals)-IV, Hyderabad dated 14-03-2014 on the issue of cancellation of estimation of income done by AO at 1% of the turnover. 2. Briefly stated, assessee is in the business of steel re-rolling has admitted income of ₹ 8,98,710/- for the impugned assessment year .....

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of the appellant was as follows: AY Ratio 2004-05 7.26% 2005-06 3.49% 2006-07 Loss b. The purchases included a sum of ₹ 24,32,22,003 for 17,278.57 metric tonnes as a bulk purchase from Rastriya Ispat Nigam Ltd (RINL). This purchase was transferred to 12 parties at the purchase value on which no profit was derived. The appellant explained that it had entered into a cartel purchase from RINL which enabled the appellant to purchase goods at a rate lower than market rate. The Assessing Officer .....

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the purchase bills from RINL, the appellant recorded the quantity in its stock register even though the goods were never physically delivered to it, as a result of which the stock register did not give a correct picture of the appellant's stock. c. The sales included raw material sales of Rs 10,80,30,479 on which negligible profit had been earned. d. The appellant had sold pig iron at rates much less than the rate at which it had purchased pig iron on the same day. Though the appellant clai .....

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ry of material to inflate the purchases in its books. f. The serial numbers on some of the purchase bills/tax invoices were not printed but were handwritten which was not allowed for excisable goods. One of these suppliers, Rayalseema Koganti Steels Pvt. Ltd had effected sales to the assessee from 10.40 AM to 2.50 PfVl vide bill Nos.170 to 178 and had traded only with the appellant and no other party during this time. The Assessing Officer also noted that there was no proof of transportation of .....

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sister concern M/s. S.B. Steel Industries on which interest of ₹ 35,11,557 had been paid. i. The cash book and ledger were found to have been written in two different handwritings on' the same day. In one case, the entries were made at the end of the financial year even though the account has been closed much earlier. j. The appellant had credited a sum of ₹ 2,30,00,000 in its cash book on 20.04.2005 as credit balances written off. A sum of ₹ 2,25,00,000 was transferred to .....

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worked out on a daily basis and the appellant realised at the end of the financial year that it had negative cash balance on that day. k. The appellant had not maintained any separate trading account and manufacturing account. The appellant had booked huge losses in its manufacturing activity for which it had submitted general explanations like increase in purchase cost of raw materials, increase in power consumption etc. The sale price per unit of quantity sold was ₹ 12,959.60 whereas the .....

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o Vs. State of Karnataka [49 STC 275 (Karn)]; v. CST Vs. Devi Saran Lal Prem Chandra Tax LR 3235 (All); vi. Luxco Electronics Vs. CST [48 STC 540 (All)]; vii. Satya Narain Rastogi Vs. CST Tax LR (NOC) 224 (All); viii. Hukum Chand Mahendra Kumar Vs. CST [29 STC 394 (All)]; ix. Vrajlal Manilal & Co. Vs. CIT [92 ITR 287 (MP)]; x. P. Venkanna Vs. CIT [72 ITR 328, 330 (Mys)]; xi. Steelsworth Ltd., Vs. CIT [69 ITR 366 (Assam)]; and xii. Gopinath Naik Vs. CIT [4 ITR 1, 23 (All)] 4. Assessee has con .....

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.29 GP excluding interest and depreciation 6652117 6908824 7483631 Gross profit ratio 1.33 3.35 3.69 Net profit ratio 0.05 0.51 0.44 b. The fall in GP during the year in appeal' was on account of nonincremental increase in the sale price of finished goods as compared to increase in cost of production, use of old and obsolete machinery with high power consumption and other expenditure. c. The turnover included cartel sales of ₹ 24,32,22,003 (on which there was no profit) and sale of raw .....

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to avail benefit of lower price on account of lifting of big quantity of stocks. The payment for the purchase was made directly by the 12 consignees. Delivery was also made directly to them. The observation of the Assessing Officer that the appellant had recorded the entire purchase in its stock register was factually incorrect. f. No profit was made on cartel sales since sale invoices were raised merely as a balancing accounting entry to offset the purchases as per the invoices. g. The observat .....

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t only on a daily basis but on an hourly basis and in any case, no part of the sales had been made to any relative parties. The mere fact that the sales had been made at a lower rate does not lead to a conclusion of suppression of sales since these were business decisions. i. Though the appellant had failed to produce transport bills/proof of delivery of purchases of ₹ 1,61,58,226 from M/s. Bilasraikas Sponge Iron India Pvt. Ltd, the purchases had been recorded in the stock registers after .....

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here was no requirement under the Excise Act that sale invoices should contained printed serial numbers. All the purchases had been entered in the stock/excise registers, excise duty had been paid on them and the appellant had availed Cenvat credit against the excise duty paid. k. The Assessing Officer had observed that one of the suppliers, Koganti Steels Pvt Ltd (erroneously referred to as Rayalseema Koganti Steels Pvt Ltd) had made supplies to the appellant through a series of bill nos. 170 t .....

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elated to the appellant and the margin of profit of the suppliers was not a relevant factor to decide the genuineness of the purchases or the reliability of the books of account. m. The appellant had paid interest of ₹ 35,11,000 on unsecured loans to the following parties: Inderkaran Agarwal (Patner) Rs.18,76,406 Banks Rs.16,35,151 Total: Rs.35,11,557 No interest was paid on the loan received from S.B. Steel Industries. n. The mere fact that the books of account had been written in two dif .....

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₹ 2,30,00,000 to its cash book on 20.04.2005 and transferred a sum of ₹ 2,25,OO,000 to the Tijory account on the same day. The Tijory account was nothing but cash kept at residence of the partners since it was not safe to keep the entire cash at the business premises. As and when required, the requisite amount were credited to Tijory account and used for the business. This did not lead to a conclusion that there was a negative cash balance. p. There was no requirement in law for mai .....

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voluntarily credited the sum of ₹ 2,30,00,000 to its P&L A/c and there was no reason to say that it was undisclosed income u/s 68. t. The case laws cited by the Assessing Officer were distinguishable on facts . 5. After considering the submissions, Ld. CIT(A) did not approve the rejection of books of accounts and estimation of income by stating as under: 5.8 I have considered the facts on record and the submissions of the AR. The AR has pointed out that the net profit of the appellant .....

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f account. A lower profit rate may be an indicator of a deeper malaise or it may be an indicator of genuine difficulties which an assessee may be going through or it may be an indicator of manipulations in the books of account by an assessee with a view to suppress its income. What is necessary for rejection of books is to establish that there were such manipulations and that the lower profit rate was not merely due to adverse business conditions. 5.9 The appellant has pointed out that a substan .....

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ner in which its suppliers carried out their business. The Assessing Officer has pointed out three such categories of suppliers. The first relates to purchase bills which do not contained printed serial numbers. As pointed out by the AR, there is no mandatory requirement for the bill numbers to be printed on the bills. There is no provision to state that handwritten bill numbers are not acceptable. What is relevant is that the purchases were duly entered in the stock and excise registers of the .....

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or had traded only with the appellant cannot be held against the appellant, particularly when the entire purchases were duly recorded in the stock and excise registers. 5.12 The appellant had failed no doubt to produce the transportation bills. The AR has claimed that the purchases were FOB and hence there was no transportation cost. In the absence of the books of account, it is not possible to establish this claim. However, what is of relevance is whether the purchase from Bilasraikas Sponge I .....

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count and back, the Assessinq Officer has accepted that the sum of ₹ 2,25,00,000 was transferred to the Tijory account on 20.04.2005 itself from the cash book. In effect, the appellant split the cash book into two parts. I accept the appellant's explanation in this regard. 5.15 The facts narrated in the assessment order do not establish any lack of genuineness in the purchases made or any evidence of suppression of sales. The AR also produced the excise registers for verification of th .....

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CIT(A) and submitted para-wise observations, which are similar to the submissions made before CIT(A) which are extracted above. 8. After considering the rival contentions and perusing the submissions made on this behalf, we are of the opinion that CIT(A) is correct in setting aside the estimation of income. Even though certain mistakes are pointed out by the AO, in our opinion, they are not good enough to reject the Books of Accounts. In fact as contested by assessee, many of them are considere .....

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