M/S Vonamala Jagadishwaraiah,, ... vs Department Of Income Tax

(Assessee) (Respondent)

C.O. No. 54/Hyd/14 (in ITA No. 1783/Hyd/2013 Assessment Year: 2009-10)

M/s Vonamala Income-tax Officer, W ard - Jagadishwaraiah, 10(1), Hyderabad. Secunderabad. PAN - AAEFV8917B

(Cross Objector) (Respondent)

Revenue by Shri Ramakrishna Bandi Assessee by Shri C.P. Ramaswamy

Date of hearing 11-02-2015 Date of pronouncement 08-04-2015

O RD E R

PER ASHA VIJAYARAGHAVAN, J.M.:

This appeal by the Revenue is directed against the order of ld. CIT(A)-VI, Hyderabad dated 23/09/2013 for AY 2009-10. Assessee also filed C.O. against the said order of CIT(A).

2 ITA No. 1783/Hy d/ 2013 & C.O. 54/Hy d/ 14 M/s Vonamala J agadis hwaraiah

2. The cross objection filed by the assessee was delayed by 234 days. The reason for the delay has been stated in the Affidavit filed by the assessee dated 30.09.2014 as follows:

"2. I have received the copy of Form No.36 along with notice of hearing on 14 April 2014 sometime in March, 2014. I do not know the exact date of receipt as I did not preserve the postal envelop. When the notice for the next date of hearing of 14 July 2014 was received in May, 2014 I have handed over the same to my Chartered Accountant Sri P.M. Venkatesan of M/s V. Narasimha Iyer and Company, who further requested Dr. C.P. Ramaswami, Advocate to appear on behalf of my firm.

3. I have been advised to file a cross objection, which should have been filed by middle of April, 2014. The delay of about 234 days has been caused due to misplacement of the postal envelop, heart attach suffered by my Chartered Accountant Sri P.M. Venkatesan due to the proposed demolition of his office by GHMC and consequent writ petition etc., to safe guard his office and my inability to precisely give the date of service of Form No.36 to be filled in the Cross Objection memo, besides frequent hospitalization of my mother who has been suffering from a fracture of the leg for the last one year".

3. Considering the reasons stated in the affidavit, we condone the delay of 234 days in filing the cross objection by the assessee and take up the same for consideration along with Revenue's appeal.

4. Briefly the facts of the case are that assessee firm is engaged in the business of trading in pure gold and silver ornaments. It had filed return of income for the year under consideration admitting total income of Rs. 15,97,648. The Assessing officer from the sale bills, books of account, bills/vouchers produced found that the sales are mostly cash sales and the pure gold rates differed in a single day. In this regard, a show cause notice was issued to the assessee calling for information on the differences in the rates varied in a single day and why the difference in rates should not be treated as the unexplained income for the year under consideration. The assessee in response submitted that the bullion trade is volatile market and the 3 ITA No. 1783/Hy d/ 2013 & C.O. 54/Hy d/ 14 M/s Vonamala J agadis hwaraiah

rate changes according to international market. The assessee had submitted a copy of the 'graph' showing the fluctuations in rates for the dates 29 t h and 30the November, 2011 and 30 th November, 2011 and 1 s t December, 2011 and stated that the graph showing the rates reflects the fluctuations varying for every second and hence it is not possible to charge the same rate for the whole day. It was stated that as their volume of trade is large they try to dispose of the goods at the earliest and make quick turnover and deposit the receipts in their loan account with the bank by which the interest burden can be reduced. It was submitted-that the rates would be constant only on holidays otherwise, as in the case of stock exchange, the rates change from morning to evening. The assessing officer observed that the assessee had not furnished the details of rate fluctuations at different timings and have not produced any details except furnishing a graph related to other countries indicating the fluctuations. It was opined by the A.O that though the price depends on varying conditions of international market, the rates of pure gold are differing from place to place in India as well, hence the submissions of the assessee are not acceptable. The assessing officer after considering the explanation and graph submitted by the assessee opined that through the particulars of the sales, assessee had concealed the income chargeable to tax and hence rejecting the books of account estimated the profit @0.5% of the total turnover of pure gold of Rs. 309,21,97,256/- which worked out to Rs. 1,54,60,986/- and brought the same to tax. Aggrieved by the order of Assessing Officer, assessee carried the matter in appeal before the CIT(A).

5. Before the CIT(A) assessee filed petition for admission of additional evidence being in the nature of graphic details of the relevant period for the AY under consideration. The assessee stated that the assessing officer had sought this information during assessment proceedings, which could not be produced due to non availability at that time and had sought for admitting the same as 4 ITA No. 1783/Hy d/ 2013 & C.O. 54/Hy d/ 14 M/s Vonamala J agadis hwaraiah

additional evidence and consideration of same in deciding the appeal. The assessee also furnished a copy of the assessment order for the asst. year 2008-09 dt. 25.11.2010 u/s. 143(3) of the Income-tax Act, wherein the income returned by the assessee of Rs. 11,54,535/- was accepted by the assessing officer. As sought by the assessee, the additional evidence was admitted and. was forwarded to the assessing officer for submission of remand report. The assessing officer on examination of the graph stated that there are rate fluctuations in a day, however to ascertain the genuineness on other dates where the sale rates were reported to be constant, the AR of the assessee was asked to furnish the graphic details pertaining to the dates on 02.04.2008, 05.04.2008, 19.04.2008, 08.05.2008, 15.05.2008, 02.06.2008, 06.06.2008 and 27.06.2008. It was stated that he AR had furnished the details of 02.04.2008, 15.05.2008, 2.06.2008 and 06.06.2008 only and on verification of the same, it was found that there are rate fluctuations in a day for the given dates but on verification of books of accounts and sales invoices of the assessee, it was found that the assessee had sold .the gold at a uniform rate on same day, though there is a rate fluctuation and opined that the stand taken by the AO in rejecting the books is affirmed. The AO further stated in the remand report dt 08/08/2013 as under:

"The additional evidence produced by the assessee has no sanctity for the following reasons:

a) Though the graphic details reveals rate fluctuation, the assessee has sold at uniform rates on the dates mentioned above, which confirms that the assessee has not complied the standards of / market rates that are prevailing in day-to-day affairs.

b) on verification of the graph produced, it is found that at a particular point of time in a day, the graph is uniform. But the assessee could not corroborate any evidences to ascertain the time at which the assessee has sold.

Factually it is not applicable to assessee, as he not followed the rates as per the rates prevailing in the 5 ITA No. 1783/Hy d/ 2013 & C.O. 54/Hy d/ 14 M/s Vonamala J agadis hwaraiah

international standard rate.

c) The rates in dollars that are reflecting in the graph are not tallying with the equivalent conversion rates in selling the gold in the above mentioned dates.

d) The assessee has produced the inaccurate information.

e) The 'assessee stated that the rates are varying' basing upon the international markets. As seen from the daily news papers, the rates of pure gold and silver vary from place to place i.e. the rates are different at Hyderabad, Chennai, Mumbai, Vijayawada, Visakhapatnam and Proddutur. Hence, the objection raised by the assessee regarding the rate variation depending upon the rates of the international markets is not correct. If the assessee's contention is correct, then the rates at all these above mentioned places should be in uniform, but are not.

f) The assessee himself has stated that the rates vary from second to second. As seen from the books of accounts, bills, the rates on 02.04.2008, 05.04.2008, 19.04.2008, 08.05.2008, 5.05.2008, 02.06.2008, 06.06.2008, 27.06.2008 etc. the rates are uniform. But as seen from the graph on the dates mentioned above, the rates are fluctuating. Therefore, the assessee's contention is not correct".

6. The CIT(A) after considering the submissions of assessee observed that assessee had a huge turnover of Rs. 309.21 Crores under the head of trade in bullion itself, for the year under reference, on which the profit of Rs. 30,38,314/- was offered, as per the details brought on record. It was observed that during the course of the assessment proceedings, the A.O has observed that the assessee was recording the purchases as per the market rates, which were shown to be fluctuating constantly, including on the intraday basis, where as the sales are recorded at uniform price and most of the sales are in cash. CIT(A) observed that for the said reasons and other reasons as enlisted in assessment order, such as over writing on the second copy of sales invoices and failure to furnish the rates at different times, except furnishing the graph on the rate fluctuations at international levels, the Assessing Officer had to reject the books of accounts and estimate the gross profit @ 6 ITA No. 1783/Hy d/ 2013 & C.O. 54/Hy d/ 14 M/s Vonamala J agadis hwaraiah

0.5 0 /0 on gold bullion sales of Rs. 309,21,97,256/- resulting in net addition of Rs. 1,24,22,672/- (Rs.1,54,60,986 - Rs.30,38,314). The CIT(A) further observed that assessee's objection on the issue was that where the rate is fluctuating, the sale rate cannot be stable or uniform, for which the assessee was relying on the graphic details on price variation. . The CIT(A) noted that the main complaint of the AO including the observations in the Remand Report is that the assessee was making the sales at uniform rate, on the days of such observations on 02.04.2008, 05.04.2008, 19.04.2008, 08.05.2008, 15.05.2008, 06.06.2008 and 27.06.2008 etc. The CIT(A) pointed out that the sales in cash has compounded the doubts of the Assessing Officer for not relying on the books of account maintained and the basic fact remains that, where the gold rate is fluctuating in international markets, it is not elaborated by the assessee on the feasibility of maintaining uniform sale price, throughout the day, if not on all the days, but on few days as pointed out by Assessing Officer. CIT(A) observed that it is clear that where the sale prices are not in consonance with the purchase prices and where the sales are taking place in cash, such transactions are becoming vulnerable for suspicion or doubts, with lack of veracity. CIT(A) was of the view that the AO is justified in adopting the gross profit on the bullion different from the rates shown by the assessee in books, by rejecting the books of account. In view of the above observations, the CIT(A) finally held as follows:

"In the instant case, the assessee is into the business of bullion and other related items on wholesale basis, where the turnovers recorded are more than 300 Crores, for the year under reference. The gross profits under the trade of gold bullion, where the turnover recorded was shown at Rs. 309.21 Crores, was shown around 0.098% (Rs. 30,38,314 on Rs. 309.21 Cr.), where as the A.O has estimated the same at 0.5%, resulting in additional profits of Rs. 1.24 Crores to the assessee.

7 ITA No. 1783/Hy d/ 2013 & C.O. 54/Hy d/ 14 M/s Vonamala J agadis hwaraiah

It is a fact that the margins are quite low in trading in bullion and specially in the wholesale trading, such margins are bound to be much lower. However, the assessee failed to exercise the option/opportunity for explaining on the observations made in the Remand Report, on the issue. Keeping all the above facts in mind, it is held that there is scope for manipulations of the profits, where the sales are effected in cash and sale prices are not in tandem with the purchase prices. Under the circumstances, it may be reasonable to put the gross profit at 0.20% as against 0.098% shown by the assessee in his books, and as against the rate of 0.5% adopted by the A.O. Accordingly, the A.O is directed to re-compute the total income of the assessee by adopting the gross profit on bullion trade receipts of Rs. 309.21 Crores at 0.20 0 /0, which may meet the justice at both the ends. Thus, this ground of appeal is treated as Partly Allowed."

7. Aggrieved by the order of the CIT(A) the revenue is in appeal before us raising following the grounds of appeal:

"1. The ld. CIT(A) is not correct in fact and in law in reducing the margin of estimated profit in situation when the books of account of the assessee/firm have been rejected.

2. The Ld. CIT(A) is not correct in fact and in law in reducing the profit margins without any comparable cases in the same line of trade."

8. Assessee also filed C.O. against the order of CIT(A) raising the following cross objections:

"1. The order of the CIT(A) in so far as it is against the interest of the respondent/assessee, is against law, weight of evidence and probabilities of the case.

2. The CIT(A) failed to appreciate that no specific defects in the accounts of the assessee were pointed out by the Assessing Officer except by way of generalisation and consequently erred in making an estimate of GP of more than double the figure declared by the assessee. He ought to have accepted the book results.

3. The CIT(A) failed to appreciate that in bullion trade rate fluctuation is the rule and uniform rate is an exception and 8 ITA No. 1783/Hy d/ 2013 & C.O. 54/Hy d/ 14 M/s Vonamala J agadis hwaraiah

consequently erred in estimating GP on the higher side without finding any comparable case and without finding any specific defects in the accounts of the assessee."

9. Before us, the ld. DR contended that the CIT(A) is not correct in reducing the margin of estimated profit in situation when the books of account of assessee have been rejected. He further contended the CIT(A) was wrong in reducing the profit margins without any comparable cases in the same line of trade.

10. The assessee has filed gross profit ratio from A.Y 2007-08 to A.Y 2011-12 which is placed in the paper book as follows:

F.Y A.Y Turnover of Gross Gross pure gold Profit Profit ratio

2006-07 2007-08 3341977961 3204474 0.096%

2007-08 2008-09 3779050510 2952724 0.078%

2008-09 2009-10 3092197266 3109447 0.1%

2009-10 2010-11 4319393923 2975709 0.068%

2010-11 2011-12 5776888462 5133161 0.089%

From the above, we find that the average gross profit as a percentage of turnover of Pure Gold was less than 0.098% as returned by the assessee for the current A.Y except for the assessment year 2008-09 where the gross profit return was 0.1%. In view of the consistent profitability of the assessee is less than the percentage offered for this year (except for a marginal increase in the AY 2008-09), no specific circumstances was brought to our notice by the Revenue for adopting a higher rate of gross profit as adopted by the AO or the CIT (A). Therefore, we allow the cross objection filed by the assessee and dismiss the 9 ITA No. 1783/Hy d/ 2013 & C.O. 54/Hy d/ 14 M/s Vonamala J agadis hwaraiah

appeal of the Revenue.

11. In the result, appeal of Revenue is dismissed and C.O. filed by assessee is allowed.

Pronounced in the open court on 8 t h April, 2015 Sd/- sd/-

(P.M. JAGTAP) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 8 th April, 2015 Kv/pv Copy to:-

.1.ITO, W ard - 10(1), Room No. 516, 5 th Floor, A Block, IT Towers, AC Guards, Hyderabad.

2. M/s Vonamala Jagadishwaraiah, D.No. 3-4-12, Sri Mahakali Street, Secunderabad

3. CIT(A)-VI, Hyderabad

4. . CIT-VI, Hyderabad

5. The DR, ITAT, Hyderabad