Gem Corporation, Mumbai vs Assessee

BEFORE S/SHRI B.R.BASKARAN (AM) AND VIVEK VARMA (JM) सव ी बी.आर.बा करन, लेखा सद य एवं ववेक वमा , या यक सद य के सम

आयकर अपील सं./I.T.A. No.3573/ Mum/2013 and 5250/Mum/2013 ( नधा रण वष / Assessment Years : 2009-10 and 2010-11)

The Dy.Commissioner of बनाम/ M/s Gem Corporation, Income Tax - Circle 22(1), Vs. 703, Rameshwar, Room No.411, 4th floor, Near Rajawadi, Tower No.6, Ghatkopar (E), Vashi Railway Station Mumbai-400077 Complex, Vashi, Navi Mumbai-400703 (अपीलाथ /Appellant) .. ( यथ / Respondent)

आयकर अपील सं./I.T.A. Nos.7099/Mum/2013 and 5298/Mum/2013 ( नधा रण वष / Assessment Years : 2009-10 and 2010-11)

M/s Gem Corporation, बनाम/ Jt.Commissioner of Income Tax, 703, Rameshwar, Nilkanth Vs. Range -22(1), Valley, Rajawadi, Room No.411, 4th floor, Ghatkopar (E), Tower No.6, Mumbai-400077 Vashi Railway Station Complex, Vashi, Navi Mumbai-400703 (अपीलाथ /Appellant) .. ( यथ / Respondent)

थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. :AAAFG5630Q

अपीलाथ ओर से / Revenue by Shri Pavan Kumar Beerla यथ क" ओर से/Assessee by Shri Rajiv Khandelwal and Shri Pramod Mishra 2 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

सन ु वाई क" तार&ख / Date of Hearing :10.2.2015 घोषणा क" तार&ख /Date of Pronouncement :13.3.2015

आदे श / O R D E R

Per B.R.BASKARAN, Accountant Member:

These cross appeals relate to the assessment years 2009-10 and 2010-11 and they are directed against the orders passed by Ld.CIT(A)-33, Mumbai. All the appeals were heard together and hence they are being disposed of by this common order for the sake of convenience. The appeal of the assessee filed for AY 2009-10 is barred by limitation by 192 days. The assessee has filed a petition requesting the bench to condone the delay. We heard the parties and having regard to the submissions made in the petition; we condone the delay and admit the appeal for hearing.

2. The common issue urged on all the four appeals relate to the estimation of gross profit on sale of almonds. Since the facts relating to the issue are identical in nature in both the years under consideration, we take the AY 2009-10 as the lead case.

3. We heard the parties and perused the record. The assessee firm is engaged in the business of importing and dealing in chemicals and almonds. The assessee imports chemicals named Ditomite, Silica and Aerosil. It also imports "Shelled" and "Unshelled" almonds from USA, besides sourcing the almonds locally also. During the course of assessment proceedings, the AO received information from the Designated officer, investigation wing to the effect that the bank accounts have been opened in the name of Mrs. Aruna H Doshi and six others with M/s Janakalyan Sahakari Bank Ltd. The aggregate amount of deposits made in these six bank accounts during the year under consideration was Rs.3.35 crores. These deposits were found transferred to another account opened in the 3 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

name of M/s Sameer & Co. In the account of M/s Sameer & Co also, cash deposits to the tune of Rs.1.11 crores was found deposited. Thus the aggregate amount of Rs.4.46 crores (Rs.3.35 crores + Rs.1.11 crores) was found deposited in the bank account of M/s Sameer & Co and the same was found transferred to the account of the assessee. When the details about deposits made in the above said bank accounts were enquired, the assessee owned up these bank accounts and further submitted that the cash deposits were made out of proceeds received from cash sales, i.e., the assessee explained that entire cash deposits represents the sales already accounted for in the books of accounts. The assessing officer also verified the books of account and noticed that the cheques received from M/s Sameer & Co. were found credited in the accounts of different debtors to whom sales had already been made. Accordingly, the AO accepted the above said explanations of the assessee and hence he did not make any further addition on cash deposits made by the assessee on others' bank account. For the sake of convenience, we extract below paragraph 7.1 of the assessment order.

"7.1. I have gone through the submissions of the assessee and the facts on record. As already brought out in this order the assessee's offer of 4% extra G.P on almond sales of Rs.4,46,81,778/- is not accepted. The gross profit margin on the entire sale of almonds @ 16.05% has been considered in this order as against the loss of Rs.4,07,29,717/- or about shown by the assessee. The gross profit margin considered at 16.05% also covers the cash sales and the difference in the gross profit is reflected in the computation of income of the assessee made in this order. The Gross Profit margin considered in the order has been based on the sales figure of Rs.22,58,94,971/- on almonds and the sales amount realized contained not only the amounts received through the bank but also substantial cash sales. The assessee had shown almond sales for the entire period of the previous year and its cash sales also considered in the order for forming part of the G.P estimated on sale. Since the G.P estimated and cash sales have been closely interlinked and in the absence of any additional information, no further addition on cash deposits 4 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

made by the assessee on others banks as discussed is made in this order."

4. However, the AO proceeded to examine the sales details reported by the assessee. The AO called for item-wise sales break-up from the assessee. Since the assessee failed to furnish the details, the AO proceeded to compute the Gross Profit arising on sale of each product dealt by the assessee. The AO computed the rate of Gross Profit arising from sale of Diatomite and Silica/Aerosil at 27.71% and 27.20 % respectively. In money terms, the aggregate amount of Gross profit that arose from sale of Diatomite and Silica/Aerosil worked out to Rs.7.53 crores. However, the assessee had disclosed Gross profit of Rs.3.13 crores, which means that the assessee had declared Gross Loss on sale of Almonds. The AO noticed from the sales bills of Almonds that the sales have been made to parties, who could not be identified. Hence the AO took the view that the sales shown against the non-existent parties are not reliable and so also the Gross Profit shown against those sales also. The AO also verified the sales effected on 7.1.2009 and also the related purchases and noticed that the G.P on the same worked out to 16.05%. Accordingly, the AO took the view that the Gross loss (stated as "negative gross profit" by the AO) reported by the assessee is not unacceptable for the following reasons:-

"(i) Assessee has shown sales in almonds in fictitious names as admitted by the partner himself and those sales cannot be held as genuine.

(ii) Bulk quantity of sales has been shown by assessee at very cheap rate of Rs.50 to Rs.60 per kg in several, bills (which constitute hardly 15% to 20% of the sale price of almond at market rates) is not reliable. From the same lot of purchase, assessee has shown sales to others at market rate which shows that the sales shown at very cheap rates has not been genuine. The sale claims to these parties at the low rates have been made up by assessee for creating the negative G.P or loss.

(iii) As mentioned earlier, the assessee continued to resist the request 5 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

for furnishing the data of sales turnover of almonds contained in the overall sales turnover shown in the trading account. The sale turnover of almonds worked out subsequently and has substantial negative G.P or loss. This fact has come to light after completion of the verification carried out by this office on the main items of trade viz. 'Diatomite' and 'Silica/Aerosil'. The sale turnover of almond has been indirectly arrived at after reducing the sales turnover of these two items from the total turnover declared by the assessee.

(iv) The actual sales made by the assessee could have been at market rate sold at a profit to persons other than disclosed in those cases of claim of sales at very low rate. This has resulted in the suppression of actual profit.

(v) The 'modus operandi' adopted by the assessee has been that the real profit from almond has been suppressed and shown as loss to reduce the impact on overall G.P of the super profit earned by it from the sale of 'Diatomite' and 'Silica/Aerosil'. This has resulted in overall G.P margin getting reduced to 7.25%."

Accordingly, the AO computed the sale value of almonds by grossing up the purchase cost of almond by 16.05%. Accordingly, the AO reworked the Gross sales arising on sale of all goods at Rs.50.05 crores. Since the assessee had disclosed the Gross sales at Rs.42.72 crores, the AO held the difference amount of Rs.7.33 crores (50.05 less 42.72) would increase the profit of the assessee.

5. The assessee contended before the AO that the assessing officer has arrived at the conclusion that the Gross profit on sale of almonds was 16.05% by taking few sale bills and it was not to correct to presume that the same rate of gross profit would be realized throughout the year on the entire quantity of purchases. The assessee submitted that it had incurred loss on sale of sub-standard quality almonds. It further submitted that the overall G.P rate reported by it is comparable with the earlier years. The AO noticed that the loss has been incurred by selling almonds at very low rate of Rs.50/- to Rs.60/- per kg and further he did not accept the claim the sub-standard quality items were sold at low rates. The AO took the view that the assessee should have returned the sub-standard quality items to 6 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

the supplier. The AO also noticed that the assessee has imported the almonds from a sister concern and hence the payment of higher purchase cost on sub-standard items would attract disallowance u/s 40A(2)(b) of the Act. The AO also examined some more sale bills and noticed that the G.P rate thereon was in the range of 8.74% to 39.47%. Hence the AO took the view that the G.P. rate of 16.05% determined by him was reasonable. Accordingly, the AO assessed the difference in sales (could also be taken as difference in Gross Profit) of Rs.7.33 crores as income of the assessee.

6. In the appellate proceedings, the Ld.CIT(A) took the view that the peak amount of Cash deposits made in the seven bank accounts /cheque receipts from the account of M/s Sameer & Co. has to be assessed as income of the assessee. The Ld CIT(A) worked out the peak credit at Rs.45,01,668/- and held the same to be the income of the assessee. Before the Ld CIT(A), the assessee submitted the details of sales effected at lesser than the cost of purchase. Hence the Ld. CIT(A) took the view that the claim of loss should be ignored. The cost of purchases of almonds which were sold at loss worked out to Rs.14.21 crores. Since the assessee had declared profit at an average rate of 7.5% in the earlier years, the Ld CIT(A) held that the Gross profit should be estimated @ 8% on the cost of purchase of 14.21 crores, cited above. Accordingly he estimated the profit at Rs.1,13,69,590/- and directed the AO to assess the same along with the peak credit of Rs.45,01,668/- referred above, in the place of Rs.7.33 crores assessed by the AO.

7. The assessee is aggrieved by the decision of Ld CIT(A) in enhancing the income by peak credit amount of Rs.45,01,668/- and also in confirming the gross profit addition by Rs.1,13,69,590/-.

8. The revenue is aggrieved by the decision of Ld.CIT(A) in reducing the Gross profit addition made by the AO.

7 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

9. Before us, the Ld A.R submitted that the almond is a perishable edible product and is liable to be damaged by improper handling and storage, temperature variations, humidity variation, efflux of time and by damage through insects/infections. The almonds are imported from USA and the time taken for transport of almonds from the godown of the supplier to the godown of the assessee would be considerable and sometimes, it would take more time due to operational problems, like delays in loading into Containers, the transportation delay caused by problems of Ships, the delay in getting berth in the port etc. During the course of transportation, the products may lead to infestations. Due to delay, the infections would spread to good almonds also. The assessee has to necessarily examine the quality of the almonds and sort/segregate the same according to its size, quality, broken one (chipped, scratched, broken) etc. The infested almonds are subjected to fumigation process before selling the same in the market. Hence, the selling price of almonds would depend upon all these factors. Further, the assessee has sold both "Shelled" and "In-Shell" almonds during the year under consideration. The In-shell almonds command low price when compared to the shelled almonds. Further, the price of the almonds would also be not static and the same would vary according to the market conditions. Accordingly he submitted that the assessee, as a business man, would be selling the almonds at various rates in order to minimize the loss, so that in average he makes profit on sale of all products dealt by him. The assessee would tend to make more loss if it holds the products. He submitted that the above said practice is the normal trade practice adopted in almost all kinds of trades. Accordingly he submitted that tax authorities are not justified in presuming that the assessee has to realize same rate of gross profit on sale of entire quantity of purchase, which is totally against the normal trading conditions.

8 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

10. The Ld A.R further submitted that the fluctuations in currency rate would also affect the margins realized on sale of almonds. Further, the assessee is in wholesale trade and hence the margin realized by the assessee would always be lower due to high volume of sales. He further submitted that the AO has held that purchases are covered by the provisions of sec. 40A(2)(b) of the Act. However, the AO has not given a finding that the purchase prices paid are in excess of market value. On one hand, the AO has disbelieved the selling price by accepting the purchase price and accordingly computed the gross profit, and on the other hand, he is entertaining the view that the purchase prices are on the higher side. Accordingly, he submitted that there was inconsistency in the approach of the AO. He further submitted that the AO was not justified in holding that the assessee should have returned back the sub-standard items to the supplier. He submitted that the AO is not entitled to step into the shoes of businessman and expect the business to conduct the business in a particular manner. He submitted that the AO has failed to notice that the cost of transportation of sub-standard items to USA would be more and further it would not be possible to send the infested items to that Country, as the food products are required to comply with stringent norms. Accordingly he submitted that the AO has rejected the book results without proving with any tangent material that the assessee has really shown bogus loss in the books of account. Accordingly he submitted that the AO has proceeded to estimate the Gross profit on sale of almonds only on presumptions and on surmises and conjectures. Hence the entire addition is liable to be deleted.

11. The Ld A.R submitted that the ld CIT(A) has accepted the fact that the average rate of gross profit cannot be applied on entire sale value of almonds. Accordingly he held that the sales made above the purchase cost should not be disturbed. However, he has rejected the loss made on sale 9 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

of almonds and estimated the profit at 8% of the purchase cost. He submitted that the Ld CIT(A) has also taken the view that the assessee could not have made loss, without bringing any material on record. Accordingly he submitted that the addition sustained by Ld CIT(A) is also liable to be deleted.

12. The Ld A.R submitted that the AO has accepted the fact that the cash deposits made into the bank accounts of six persons and M/s Sameer & Co. have come from the Cash sales made by the assessee and hence he did not make any addition. The Ld CIT(A) also accepted this fact, but he has taken the view that the assessee has gained by routing the cash through the bank accounts. Accordingly, the Ld CIT(A) has computed the peak credit and held the same to the income of the assessee. The Ld A.R submitted that the assessee has accounted for all the sales in its books of account. Only the cash amount has been deposited into the above said bank accounts and they have been received by way of cheques. Hence, the procedure adopted by the assessee would not give rise to any income element and hence the Ld CIT(A) was not justified in holding that the peak credit represents income of the assessee. He further submitted that the theory of peak credit is applied only in respect of unaccounted transactions, where as in the instant case, the assessee has accounted the sales.

13. On the contrary, the Ld D.R placed strong reliance on the assessment order. He submitted that the assessee has claimed to have incurred gross loss on sale of almond and the said claim was not prima facie acceptable. Hence, the AO has computed the gross profit realized on sale of other products and noticed that the assessee has sold the almonds at very low price, which is not believable. He submitted that the assessing officer has considered certain instances of sales on test check basis and has noticed that the assessee has actually made profits on sale of 10 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

almonds. On the basis of those sale invoices, the AO has come to the conclusion that the average rate of gross profit was 16.05% of purchase value. Hence the AO rejected the claim of loss and accordingly computed the gross profit on sale of almonds. He further submitted that the AO has given proper reasons to reject the book results and for the gross profit rate adopted by him. Hence the Ld CIT(A) was not justified in reducing the addition made by the AO.

14. On consideration of entire spectrum of the matter, we are of the view that there is merit in the contentions of the assessee. Before us, the assessee has furnished the order of assessment of tax made under MVAT Act (Value added Tax - Sales tax). We notice that the commercial tax authorities have accepted the turnover reported by the assessee. When the authorities who are mainly concerned with the amount of 'turnover/ sales' have accepted, then, prima facie, the accounts appear to be correct. However, according to the AO, the assessee has made gross loss on sale of almonds. When we examine the assessment order, we notice that the assessing officer has derived the amount of gross profit realized on sale of chemical items like Diatomite, Silica/Aerosil by making his own calculations, since the assessee has expressed its inability to furnish separate trading account for each of the products. We notice that the average gross profit rate was computed as 27.71% and 27.20% on sale of Diatomite and Silica/Aerosil respectively. It is pertinent to note that there is nothing on record to show that the above said computation of gross profit was accepted by the assessee. The AO has taken Sworn statement from one of the partners of the firm. In question no.31 also, the AO has made certain computation of gross profit in respect of some of the bills. We notice that the gross profit rate computed for Ditomite was 19.76% in one instance and 54% in another instance. The gross profit rate computed for Aerosil was 3.18% in one instance and 15.31% in another 11 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

instance. The gross profit rate computed for Shelled diamonds was in the range of 7.17% to 10%. Thus it is seen that huge variation in the gross profit rate realized by the assessee in various products and it vindicates the contention of the assessee that the G.P. rate would be dependent upon various factors.

15. The assessing officer has arrived at the conclusion that the assessee has incurred Gross Loss on sale of almonds, since he had computed the Gross profit realized on chemical items at a huge figure. Thus the gross profit of all the products would be dependent upon each other under this method of computation, i.e., if the gross profit from chemicals is reduced, then the gross profit on almonds will go up. Hence, unless it is shown that the gross profit computed by the AO from chemical sales is an authenticated one, in our view, one cannot accept his conclusions.

16. We have noticed that the AO has applied the average gross profit rate of 16.05% on the entire cost of purchase of almonds. However, the Ld CIT(A) has noticed that the assessee has incurred loss only on the purchases made to the extent of Rs.14.21 crores. Thus, the remaining sales have been made above the purchase cost. Hence, the Ld CIT(A) has taken the view that the estimated gross profit rate should be applied only the above said purchases of Rs.14.21 crores. In our opinion, this approach of the Ld CIT(A) appears to be reasonable one., i.e., when the AO is suspecting about the claim of loss on sale of almonds, there is no reason to disturb the sales made with profit. Hence, in our view, the AO was not justified in applying the gross profit rate on entire cost of purchase of almonds and to that extent the view of the Ld CIT(A) stands justified. At the same time, the contention of the assessee was that the Ld CIT(A) was also not justified in estimating the gross profit on Rs.14.21 crores without bringing any material on record to disbelieve the books of accounts of the assessee.

12 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

17. Hence, the question as to whether the tax authorities are justified in rejecting the book results would still remains to be addressed. A perusal of the assessment order would show that the assessing officer has not brought any material on record to show that the sales made at below the cost price were not correct. We notice that the AO has simply proceeded to make computations on the basis of book results only. It can be seen that the AO did not use any outside material/information in this regard. Thus, it is seen that the assessing officer did not make any third party enquiries or any other material on record to disprove the book results. More particularly, the claims of the assessee that the almonds are perishable products and subject to vagaries of weather, subject to breakage and other loss, liable to infested etc. and hence would result in reduction of quality were not disproved. The AO has not brought any material on record to show that the products were received from USA in perfect quality and hence the claim of the assessee was wrong. Thus, in our view, the AO has completely failed to disprove the claim of the assessee that it has to sell almonds at lower than the cost rate due to sub- standard quality. Under these set of facts, in our view, the AO has proceeded to reject the book results only on the basis of surmises and conjectures. It is a well settled proposition that the suspicion, howsoever strong it may be, cannot justify the action of the assessing officer. Hence, in our view, there is no enough material on record to warrant or justify the action of rejection of book results. Accordingly we are of the view that the Ld CIT(A) was not justified in upholding the action of rejection of book results.

18. The view expressed by the AO on application of sec. 40A(2)(b), in our view, was not correct, since the assessing officer has not proved by 13 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

way of any material that the purchase price paid by the assessee in excess of market rates.

19. Since, we have set aside the decision of the tax authorities on rejection of book results, the consequent estimate of gross profit is also liable to rejected. The ld A.R also pointed out that the gross profit rate declared by the assessee in the earlier years has been accepted. We have earlier noticed that the tax authorities have proceeded to compute the gross profit on presumptive basis without bringing any material on record. We have also noticed that the claim of sale of sub-standard quality of almonds has not been disproved. Though it is stated that the assessee has sold to non-existant parties, yet the bills relating to cash sales generally do not bear the address of the buyers. Hence, the same cannot be a ground to reject the claim of the assessee. Accordingly, we are of the view that there is no material on record to reject the claim of sales made at lower than the cost price. Accordingly, we set aside the order of the Ld CIT(A) on the issue relating to addition of gross profit and direct the AO to delete the addition made on account of difference in Gross profit/sales amount.

20. The next issue relates to the assessment of peak credit balance in the bank accounts. We have earlier noticed that the AO did not make any addition on this account, since he has accepted that the said deposits have been made out of cash sales only. We notice that the Ld CIT(A) has also accepted the said fact, but he has entertained the view that the assessee has made certain gains in routing the cash sales proceeds through the bank account. We have earlier noticed that the sales effected in cash was shown as credit sales in the books of account. The cash realized on making the cash sales was deposited into the bank accounts of other persons and cheques were received. Those cheques were credited against the debtors. In our view, the above said procedure would not give rise to 14 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

any gain as assumed by the Ld CIT(A). Accordingly, we are of the view that there is no justification in treating the peak credit of bank accounts as income of the assessee. Accordingly we set aside the order of Ld CIT(A) on this issue.

21. Now we shall take up the appeals filed by both the parties for AY 2010-11. We notice that the AO has made addition towards suppressed sales/gross profit on identical grounds. The Ld.CIT(A) has treated the peak credit in bank accounts as income of the assessee and has also determined the gross profit only on sales made in loss. Hence, by following our order rendered for AY 2009-10, we set aside the order of Ld CIT(A) with regard to the issues relating to peak credit addition and the addition relating to suppressed sales/gross profit and direct the AO to delete both the additions.

22. In the result, the appeals filed by the assessee are allowed and the appeals of the revenue are dismissed.

The above order was pronounced in the open court on 13th Mar, 2015.

घोषणा खुले यायालय म) *दनांकः 13th Mar , 2015 को क" गई ।

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( ववेक वमा / VIVEK VARMA ( बी.आर.बा करन / B.R. BASKARAN) या यक सद य / JUDICIAL MEMBER लेखा सदस ्य / ACCOUNTANT MEMBER मुंबई Mumbai: 13th Mar ,2015. व. न.स./ SRL , Sr. PS

आदे श क !"त$ल%प अ&े%षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent.

3. आयकर आय/ ु त(अपील) / The CIT(A)- concerned

4. आयकर आयु/त / CIT concerned 15 ITA Nos.3573/M/2013,5250/M/2013, 5298/M/13 and 7099/M/2013

5. वभागीय त न1ध, आयकर अपील&य अ1धकरण, मुंबई / DR, ITAT, Mumbai concerned

6. गाड फाईल / Guard file.

आदे शानस ु ार/ BY ORDER, true copy सहायक पंजीकार (Asstt. Registrar) आयकर अपील&य अ1धकरण, मुंबई /ITAT, Mumbai