TMI Blog2023 (11) TMI 732X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit margin from business of assessee for the AY 2013-14. Income from Interest and commission to added separately as directed by the order of Ld CIT(A). No infirmity in the order of Ld CIT(A) apart from rate of profit adopted for estimation of net profit margin while rejecting books of accounts u/s 145(3) of the Act, thus, we modify the order of Ld CIT(A) by scaling down the percentage of net profit margin to 2.21% on sales turnover for estimating the same while determining the total assessable income. Ld AO is directed to work out the estimated income from business accordingly. In the result appeal of the assessee is partly allowed . - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI ARUN KHODPIA, ACCOUNTANT MEMBER For the Appellant : Mr. Arjun Raj, CA For the Respondent : Mr. R. Clement Ramesh Kumar, CIT ORDER PER ARUN KHODPIA, AM: These cross-appeals filed by the assessee and the revenue are directed against the order of the Ld. CIT (Appeals)-19, Chennai dated 27.02.2023 for A.Y. 2013-14. Grounds of appeal raised by the assessee as well as by the revenue are as under: Grounds of appeal (by Assessee) 1. The order of the CIT(Appeals) -19 da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would support the plea for adjudication of the issues raised on additions forming part of the computation of taxable total income in the search assessment order passed by the JAO. 8. The CIT (Appeals) erred in not adjudicating the issue of disallowance of production and processing expenses aggregating to a sum of Rs. 3,97,46,424/- as per para 18(iii) of the assessment order without assigning proper reasons and justification. 9. The CIT (Appeals) erred in not adjudicating the issue of disallowance of production and processing expenses aggregating to a sum of Rs. 15,41,63,770/- as per para 19(ii) of the assessment order without assigning proper reasons and justification. 10. The CIT (Appeals) erred in not adjudicating the issue of disallowance of repairs and maintenance expenses aggregating to a sum of Rs. 16,57,75,468/- as per para 20(iii) of the assessment order without assigning proper reasons and justification. 11. The CIT (Appeals) erred in not adjudicating the issue of disallowance of salary charged under the head 'vehicle spare parts others' aggregating to a sum of Rs. 4,05,43,898/- as per para 21(iii) of the assessment order without assigning proper rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation/statements was completely misplaced, thereby vitiating the addition made as part of the computation of taxable total income. 21. The CIT (Appeals) failed to appreciate that the audited / completed books maintained in tally (`accounted tally') should be considered as correct and ought to have appreciated that having not given any justifiable reasons for rejection of the books as maintained, the rejection of such books without examining the correctness of the same was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law. 22. The CIT (Appeals) failed to appreciate that having accepted the sales turnover as per the audited financials / complete set of books, the presumption of profit at the rate of 30% by impliedly confirming the charge of expenses in the said books as bogus without conducting necessary cross verification should be considered as unreasonable and in this regard further ought to have appreciated that the mechanical approach in adopting the incomplete books had distorted the true profits for taxation thereby vitiating the related findings in the impugned order. 23. The CIT (Appeals) failed to appreciate that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation for the discrepancies between the two sets of accounts during 153A assessment proceedings. Further, the present assessment is based on the entirely new set of facts arising out of materials seized during the search. 2.5 The Ld. CIT(A) erred in observing that the books of accounts of assessee, which are inaccurate, do not facilitate arriving at true and correct profits of the appellant and they are required to be rejected by invoking provisions of Sec.145(3) of the Act, without appreciating that the assessing officer did not find fault with the method of accounting but additions were made in the order u/s. 143(3) r.w.s.153A on the basis of incriminating seized materials and for the reason that the assessee had not given proper explanation in respect of inflated expenses and unexplained credit entries found in the set of accounts relied on for the purpose of filing income tax return. 2.6 The Ld. CIT(A) erred in directing the assessing officer to estimate the business income 30% of total sales turnover in the search assessment, especially when there were seized materials unearthed during the search, which were further corroborated by sworn statement recorded u/s. 132 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servations, the appeal of the assessee was partly allowed by the Ld. CIT(Appeals). 4. Because of such decision of the Ld. CIT(Appeals), now both, the assessee as well as the revenue has carried the matter before us ton assail the grounds of appeal raised in the present cross-appeals. First we shall take up the appeal of the assessee in ITA No. 366/chny/2023. 5. At the very inception of the arguments, the Ld. AR of the assessee has submitted that the A.O has made addition on independent issues whereas, the Ld. CIT(Appeals) has rejected books of the assessee and estimated profit of the assessee @30% based on assessee s on profit in the immediately preceding years wherein, the assessee has earned net profit @29.77%. It was submitted by the Ld. AR that Ld. CIT (Appeals) while deciding the issue of estimating profit based on profit of the assessee s own case, was unable to appreciate the fact that this was only year in which, assessee s profits were high because there was some change in the mix of production wherein ratio of certain products which includes garnet and ilmenite was in a different proportion. It was, therefore, submitted by the Ld. AR that ratio of immediately pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessee had disallowed a sum of Rs. 3,94,90,679/- for want of documents/vouchers and determined the taxable total income at Rs. 4,04,46,439/- (which works out to 2.21% on the total turnover). In consequence to the search, the Assessing Officer relying on the provisional / unaudited accounts had disallowed various expenses claimed by the Assessee in the final books of accounts mainly including the expenses duly recorded at various locations/sites compiled and accounted while finalizing the books of accounts. In the search assessment order, the Assessing Officer had determined the taxable total income at Rs. 104,73,64,282/- (which works out to 57.12% on the total turnover). VALIDITY of the seized materials: The various disallowance(s) and addition(s) made by the Assessing Officer is solely based on the provisional/unaudited accounts maintained by the Assessee and the statements recorded at the time of search. The additions made by the Assessing Officer in the search assessment proceedings is mainly on the presumption of inflation of expenses and group concern transactions not forming of the provisional/unaudited accounts. As stated earlier, the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the books of accounts for the assessment year under consideration is wholly unjustified and not sustainable in law insofar as the deficiencies in the books of accounts were already considered and brought to tax during the completion of original assessment. As a consequence, it is prayed for restoring the original position namely the income quantified and assessed in the original scrutiny assessment for the assessment year under consideration and thus render justice. ESTIMATION OF PROFIT: In any event, the assessee submits that the estimation of the profit at an exorbitant rate of 30% on the total turnover by the First Appellate Authority is erroneous, arbitrary and without any basis. As stated in the earlier paragraphs, the net profit reported by the Assessee is at 0.052% and the same was enhanced to 2.210/0 in the original scrutiny assessment based on the final books of accounts forming part of the return of income filed by the Assessee. The First Appellate Authority while rejecting the books of accounts maintained by the Assessee had wrongly adopted an exorbitant rate of 30% based on the income reported for the assessment year 2011-12 and however ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld. AR and reproduced (supra.). 7. Contrary to the submissions of the Ld. AR, the Ld. CIT-DR argued and drew our attention to Para 3 and 4 of the assessment order passed u/s. 153A of the Act wherein it was observed by the A.O that when the assessee s premises was searched and evidence were collected during the course of search, it was revealed that the assessee was maintaining parallel set of accounts concealed in hard disk and laptops, certain loose sheets were impounded from the assessee s premises evidencing unaccounted receipts/payments. It was further submitted by the Ld. CIT- DR that originally said accounts were maintained by the assessee in folder named Ori and the accounts maintained for income tax purpose were maintained in a folder named IT . It was submitted by the Ld. CIT-DR that such practice of the assessee to maintain two parallel accounts itself shows that there was something which shows the assessee s modus-operandi to conceal the facts from the department in order to evade taxes. The Ld. CIT-DR drew our attention to Page 29 of the A.O wherein under Point No.16 (i), a screen shot of ledger of one entry dated 15.03.2013 was extracted by the A.O wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment order. It was submitted by the Ld. CIT-DR that the Ld. CIT(A) had erred in appreciating the fact that the assessment was made based on incriminating material seized during the course of search in the form of two sets of accounts for the F.Y.2012-13, one for the purpose of ascertaining actual profit from the business and other for the purpose of filing income tax return. Accordingly, the CIT-DR submitted that the CIT(Appeals) had failed to appreciate that the assessee had made inflation of expenses under the head production and processing expenses , land development expenses, unexplained cash credit entries in the name of group companies with the intention to suppress the actual profit in the return of income filed. The Ld. CIT-DR also advanced an argument that the order of the CIT(Appeals) was erroneous in so far as observing that the reasons given by the assessee for discrepancies in the accounts are reasonable and acceptable, without appreciating that the modus operandi adopted by the assessee (i.e) maintaining two sets of accounts and inflation of expenses in the books of accounts considered for the purpose of filing IT returns was accepted by Shri. P. Senthil M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vation, it was submitted by the Ld. AR that proper verification of all the books of accounts and vouchers of the assessee was carried out in the original assessment by the A.O contrary to the submission of the Ld. DR that it was only test check basis. 13. It was further submitted by the Ld. AR that the CIT(Appeals) had appreciated the facts of the case and has decided the appeal of the assessee rightly on the basis of overall facts and circumstances of the case wherein addition made by the A.O were exorbitantly higher which cannot be the case in any business. According to the Ld. AR that top line figures of the assessee s business were never disputed by the Ld. A.O and the same was accepted by the CIT(A) also. However, the percentage of profit adopted by the CIT(Appeals) for the assessee was also very exorbitant and high as compared to the profits of the assessee firm as were achieved in the earlier financial years. It was, therefore, prayer of the Ld. AR that percentage of profit should be taken at the average of the profit in A.Y. 2011-12 to 2017-18 leaving apart A.Y.2011-12 wherein, profit was high due to several factors which were not there in other assessment years so as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant. At the same time, it is not possible to accept the correctness of the claims in the books of account unless the discrepancies pointed out in the Assessment Order are subjected to necessary reconciliation. Ld CIT(A) decided the appeal with the following observations: 43. In this context, it is pertinent to observe that this is not a case where the appellant is attempting to give incorrect reasons for its inability to produce the supporting bills and vouchers. The case of the appellant for the instant Assessment Year was subjected to regular scrutiny assessment u/s. 143(3) vide order dated 08.03.2016. As evident from the contents of the said Assessment Order, the AO required the appellant to produce the bills and vouchers in support of the expenditure debited towards mining, production and processing and other expenses during the course of the said Assessment proceedings. The appellant produced the supporting bills and vouchers before the AO in response to the same. The AO stated in the Assessment Order that he carried out the verification of the said bills and vouchers and he found that the vouchers to the extent of Rs. 2.80 Crores were beyond proper verification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 145(3) of the Act. It is held that the business income of the appellant is required to be estimated under the said provisions, consequent to rejection of the books of account. 46. For the purpose of estimating the business income, it is considered that the business income admitted by the appellant itself in its return of income for AY 2011-12 before claiming exemption of the said income u/s. 10B of the Act constitutes a fair, logical and reasonable indicator of true and correct profits of the appellant. Since the appellant claimed exemption u/s. 10B in the said Assessment Year, it is reasonable to infer that the business income disclosed in the return of income for the said Assessment Year represents the correct profits of the appellant for the said year. The said assessment year is the last year of claiming exemption u/s 10B by the appellant and there is only one intervening year be Veen the said assessment year and the instant assessment year. Having regard to the same, I am of the considered view that the net profit margin of 29.77% disclosed by the appellant the said AY 2011-12 is a reliable indicator of the true profits of the appellant for the instant assessment year al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s arrived at 57.12%, this % was considered as absolutely abnormal and high by the Ld CIT(A). Ld CIT(A) has very rightly commented that such a huge profit margin is abnormally high in any line of business and thus indicative that the discrepancies pointed out in the accounts by the Ld AO cannot be considered to be arising wholly from the wrong claims of expenditure by the assessee/appellant. Ld CIT(A) thus after considering the books of accounts of the assessee firm, as inaccurate which do not facilitate to arrive at true and correct profit of the appellant have rejected the same by invoking the provisions of section 145(3) of the Act. Under the facts of the present case, we approve the observation of Ld CIT(A) relating to rejection of the books of assessee and uphold the same. Ld CIT(A) consequently, estimated the profit of the firm @30% of the sale turnover, the basis for 30% was returned income of AY 2011-12, wherein the assessee has earned a profit of 29.77% before claiming exemption u/s 10B of the Act. On perusal of the order of Ld CIT(A), it is not transpired that while estimating the profit taking the base year as AY 2011-12 (FY 2010-11), whether this fact was confronted to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in the order of Ld CIT(A) apart from rate of profit adopted for estimation of net profit margin while rejecting books of accounts u/s 145(3) of the Act, thus, we modify the order of Ld CIT(A) by scaling down the percentage of net profit margin to 2.21% on sales turnover for estimating the same while determining the total assessable income. Ld AO is directed to work out the estimated income from business accordingly. In the result appeal of the assessee is partly allowed . Departments cross appeal no ITA 532/chny/2023. 18. As, we have decided the appeal of the assessee in ITA 366/chny/2023 in case of the assessee M/s Beach Minerals Company for the assessment year i.e AY 2013-14, wherein order of the Ld CIT(A) is upheld with certain modifications in terms of our observations herein above, our findings in ITA 366/chny/2023 shall mutatis-mutandis apply to the appeal of department in ITA 532/chny/2023. Consequently, appeal of the revenue stand dismissed. 19. Since, the issue raised by the assessee and revenue in captioned cross appeals under various grounds have been dealt with in terms of our observations herein above. Contentions if any which were not argued or dealt wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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