Navneet Kumar Agarwal,, Hyderabad vs Assessee

Navneet Kumar Agarwal, Income-tax Officer, Ward - Hyderabad. 8(2), Hyderabad. PAN - AEXPA2244P

(Appellant) (Respondent)

Assessee by Shri Madhu Sadan Mantri Revenue by Shri Rajat Mitra

Date of hearing 10-12-2014 Date of pronouncement 07-01-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal of the assessee is against order dated 15/01/14 passed by ld. CIT(A)-III, Hyderabad pertaining to AY 2009-10.

2. The issue in this appeal is confined to the decision of ld. CIT(A) in sustainingaddition of Rs. 15 lakhs.

3. Briefly the facts are, assessee an individual derives income from cloth business. For the AY under dispute, assessee filed his return of income on 26/09/09 declaring total income of Rs. 8,46,060. During the assessment proceeding, AO after examining the books of account and vouchers, bills, etc. issued a show cause notice to assessee proposing to make the following additions/disallowances:

1. On account of low GP Rs. 13,55,903

2. Disallowance of 20% of brokerage claimed Rs. 28,37,092 2 ITA No. 552/ Hyd/201 4 Navneet Ku mar Ag arwal

3. Disallowance of bad debts written off Rs. 7,09,270

4. Disallowance of cash payments made above Rs. 20,000 u/s 40(a)(3) - Rs. 40 lakhs

5. Difference between sales figure Rs. 80,19,590

As noted by AO in the assessment order, in response to the show cause notice, assessee filed a letter dated 14/12/11 objecting to the proposed addition. Further, it has been mentioned by AO, in course of assessment proceeding, assessee's AR agreed for addition of an amount of Rs. 15 lakhs for avoiding further litigation. AO, however, did not accept assessee's offer of additional income of Rs. 15 lakhs and ultimately made the additions as proposed by him in the show cause notice as a result of which total income was determined at Rs.

1,49,97,385. Being aggrieved of the assessment order, so passed, assessee preferred appeal before ld. CIT(A).

4. Ld. CIT(A) after considering the submissions of assessee in the light of facts and materials on record, deleted the addition of Rs. 40 lakhs made on account of disallowance u/s 40(A)(3) and the amount of Rs. 80,19,590 on account of difference in sales. However, so far as other three items of additions made by AO such as brokerage, bad debts written off and low GP, ld. CIT(A), though, upheld the rejection of books of account, but, observed that once, AO has estimated the turnover and net profit, no additions relating to trading can be made. Further, considering the fact that assessee has offered additional income of Rs. 15 lakhs, over and above the returned income, ld. CIT(A) held that addition to the extent of Rs. 15 lakhs (wrongly mentioned as Rs. 50 lakhs in para 5.6 of the order of CIT(A) ) over and above returned income, should be sustained. Being aggrieved of the findings of ld. CIT(A), assessee is before us.

5. Ld. AR submitted before us that assessee maintained proper books of account being supported by vouchers, Books of accounts are 3 ITA No. 552/ Hyd/201 4 Navneet Ku mar Ag arwal

also audited u/s 44AB. It was submitted that assessee purchases textile goods in meters and sells in numbers. Though, no stock register is maintained considering the large varieties and sizes, however, as per the physical stock taken at the end correct GP is derived and accounted for. It was further submitted, assessee is purchasing only from Sri Mahalaxmi Tex Prints(P) Ltd., an associate concern. In other words, it can be considered as a distributor for this company. AO without properly appreciating the facts has increased the GP ratio. It was submitted that though AO has increased GP on the ground of non-maintenance of stock register, but, in scrutiny assessment proceeding in the earlier AY, GP declared by assessee was accepted. Ld. AR further submitted that there is fall in GP ratio from 4.39% to 3.74%, but, net profit has increased from 7.13 lakhs to 9.91 lakhs due to larger volume of sales with increase of 48%. It was contended by ld. AR that policy of increasing sales by slightly reducing, GP gave good results and profit was increased. To substantiate such claim, following working was submitted:

2008-09 FY 2007-08 FY Diff. (Rs. in lakhs) Sales 2009.27 1361.41 +47.58% GP derived 75.25 59.77 +15.48 lakhs GP ratio 3.75% 4.39% -0.64% NP 9.91 7.13 2.78 lakhs

It was submitted by ld. AR, though ld. CIT(A) deleted the major

additions and also did not find any reasonable basis for additions made on account of brokerage and bad debts written off, but being carried away by the additional income offered by assessee of Rs. 15 lakhs, ld. CIT(A) sustained the addition to that extent. Contesting the addition of Rs. 15 lakhs, ld. AR submitted only to cover up any discrepancies assessee in course of assessment proceeding had agreed to offer an additional income of Rs. 15 lakhs. Ld. AR submitted that only because of practical difficulties, assessee has not maintained stock register, which was well explained before the departmental authorities, but, all other financial records have been 4 ITA No. 552/ Hyd/201 4 Navneet Ku mar Ag arwal

fully maintained which has not been disputed by AO. It was submitted, in fact, AO has not rejected books of account. It was further submitted, the increase of 48% in turnover has not been disputed by AO. Thus, it was submitted that when there is no defect and discrepancies in the books of account, ld. CIT(A) was not justified either in observing that rejection of books of account was proper or sustaining the addition of Rs. 15 lakhs. It was submitted, the only reason assessee agreed for addition of Rs. 15 lakhs was to avoid litigation in spite of the fact no discrepancies were found in the books of account. However, when AO rejected offer of agreed addition of Rs. 15 lakhs and made additions according to his own will, ld. CIT(A) should have decided the additions on their merits alone without referring to the additional income offered by assessee.

6. Ld. DR, on the other hand, relied on the order of ld. CIT(A).

7. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. It is evident from the assessment order that in course of assessment proceeding, assessee had agreed for additional income of Rs. 15 lakhs, but, AO did not accept that offer and proceeded to make additions as proposed in the show cause notice. It is further evident that AO has not specifically rejected books of account nor has pointed out any specific defect or discrepancy in the books of account. Only because stock register is not maintained, AO has made addition to GP. It is a fact on record that in course of proceeding before the first appellate authority, after considering the submissions of assessee and perusing the facts and materials placed before him, ld. CIT(A) had found the major additions of Rs. 40,00,000 and Rs. 80,19,590 made by AO to be unsustainable, against which, the department is not in appeal. Even as far as other three items of additions, Viz., on account of low GP, bad debts written off and brokerage also, ld. CIT(A) has not found any valid ground to sustain those additions. It is 5 ITA No. 552/ Hyd/201 4 Navneet Ku mar Ag arwal

evident from the order of ld. CIT(A) that only because, assessee agreed for addition of Rs. 15 lakhs during the assessment proceeding, he chose to sustain the addition to that extent. However, it is obvious from the order of ld. CIT(A) that there is no other valid ground for sustaining such addition. It needs to be observed that when the agreed addition failed and AO proceeded to make additions as per his own decision, ld. CIT(A) should have considered each of the additions on its own merits without taking cognizance of the offer made by assessee at the time of assessment proceeding. As there is no basis for sustaining the addition of Rs. 15 lakh, we are of the view that addition made is required to be deleted. Accordingly, we do so.

8. In the result, appeal of assessee is allowed.

Pronounced in the open court on 07/01/2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 7 th January, 2015 kv Copy to:-

1) Shri Navneet Kumar Agarwal, c/o Sri Madhu Sudan Matri, Madhu Mantri & Associates, 3-5-873, C-103, Matrushreee Apartments, Hyderguda, Hyderabad - 500 029

2) ITO, Ward - 8(2), 8 th Floor, Income tax towers, AC Guards, Masab Tank, Hyderabad - 500 004

3) CIT(A)-III, Hyderabad

4) CIT-II, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.

6 ITA No. 552/ Hyd/201 4 Navneet Ku mar Ag arwal

Description Date Intls 1. Draft dictated on Sr.P.S. 2. Draft placed befor e auth or Sr.P.S Draft pro posed & placed before the secon d AM 3 Mem ber 4 Draft discussed/appr oved b y second Mem ber VP 5 Appro ved Draft com es to the Sr.P.S./PS Sr.P.S. 6. Kept for pro nou ncem ent on Sr.P S. 7. File sent to the Bench Clerk Sr.P.S. 8 Date on which file go es to the Head Cle rk 9 Date of Dispatch of or der