S. Kushalchand & Co, Mumbai vs Department Of Income Tax

The Joint Commissioner of Income-tax M/s.S.Kushalchand & Co. Circle 21(2) बना म/ B-1 & 2, Jay Apartments Mumbai. Vs. Service Road, Opp:W.E.Highway Vile Parle (East), Mumbai -400 054. PAN : AABFS2433G. (अपीला थ /Appellant) ( यथ/Respondent)

अपी लाथ क ओरसे /Appellant by : Shri Neil Philip यथ क ओरसे /Respondent by : Shri V.G.Ginde

सन ुवा ई क ता रख / घोषणाक ता रख/ Date of Hearing : 09.03.2015 Date of Pronouncement : 09.03.2015.

आदे श/ ORDER

Per Amit Shukla (JM) :

This appeal has been preferred by the Revenue against the order dated 14.08.2012, passed by the Commissioner of Income-tax (Appeals)-32, Mumbai, for the quantum proceedings u/s 143(3) for the assessment year 2009-2010, on the following grounds of appeal.

"1. On the facts & in the circumstances of the case and in law, the Ld.CIT(A) has erred in not considering the fact that the addition of Rs.28,63,816/- on account of income from joint venture was made by the assessing officer for the reason that the assessee failed to prove satisfactorily the reason of variations in profit on some transactions and loss in respect of other transactions for the same commodities sold on same date to different parties which was purchased at same price.

2 ITA No.6585/Mum/2012. M/s.S.Kushalchand & Co.

2. On the facts & in the circumstances of the case and in law, the Ld.CIT(A) has erred in not appreciating that the assessing officer has applied average of maximum rate of profit on each item of goods traded on a single day to arrive at the correct income of the assessee from joint venture.

3. On the facts & in the circumstances of the case and in law, the Ld.CIT(A) has erred in ignoring that all the sales are on credit and the profit fluctuates with a margin ranging between 4.5% to 8.42% in respect of one produce and 13.4% to 19.6% on the other produce which is inexplicable."

2. Brief facts of the case are that, the assessee is a partnership firm engaged in the business of trading in chemicals and essence. During the year, the assessee had done business activity on its own as well as through a joint venture with M/s.Essen Corporation. On the perusal of the details furnished by the assessee, the Assessing Officer (AO) noted that in the joint venture account, the assessee had shown variations in the profits on some of the transactions and loss in respect of some other transactions for the same commodity sold on the same date to different parties. In short, the same commodity has been sold at different prices to different parties on the same date. In response to the show cause notice, the assessee has given its detailed explanation as to how the prices get varied from party to party depending upon several factors. The assessee' s detailed explanations have been incorporated by the AO from pages 2 to 5 of the assessment order. However, the AO did not accept assessee' s explanation and worked out the profit margin in various items after incorporating the purchase rate, purchase cost, sales bill date and sales value, and thereafter, worked out the profit and loss in each and every transaction and also the profit margin. His detailed analysis has been incorporated from pages 5 to 10 of the assessment order. From the said analysis, he noted that the profit varied from 4.5% to 8.42% for 3 ITA No.6585/Mum/2012. M/s.S.Kushalchand & Co.

a particular item and in another item, the profit varied from 13.4% to 19.6%. He also observed that the assessee has failed to prove satisfactorily, as goods were sold at a different rate of profit / loss on a single day out of goods purchased at the same price. Accordingly, he worked out the maximum rate of profit on a single day and applied the same to determine the profit on such sales. This was worked out at Rs.28,63,816 as per the chart appearing at page 10 of the assessment order and was added to the income of the assessee.

3. Before the learned CIT(A), the assessee submitted that, it is carrying on the business in a joint venture with M/s.Essen Corporation, which deals with essential oils and aromatic chemicals. These items are imported in bulk from various countries and sold locally to various parties, who are mainly the actual users in food, pharmaceutical, perfumery and flavour manufacturers. It was submitted that all the sales have been made to proper parties and are duly supported by sale bills, payment received through cheques and relevant entries in the books of account. The details of cost including import duty, and other direct expenses were also elaborated and submitted that no defect has been pointed out by the AO in these accounts. Apart from various legal grounds to challenge the addition, on merits also, the assessee submitted that the main reason for price variation had occurred due to foreign currency fluctuation, and also the selling rates depends upon whether it is inclusive or exclusive of excise component, quantity of the items sold to various parties, nature of buyers, i.e., whether they are regular buyers or random buyers, terms of credit and creditworthiness of the customer and host of other factors. Regarding foreign currency fluctuation, the assessee submitted that 4 ITA No.6585/Mum/2012. M/s.S.Kushalchand & Co.

in the financial year 2008-09 itself, the exchange rate between the dollars and rupees was extremely volatile inasmuch as it fluctuated from Rs.39.75 to Rs.52.18. Month-wise prevailing rate of exchange was also submitted. The assessee' s detailed submissions in this regard have been incorporated by the CIT(A) from pages 7 to 19 of the appellate order.

4. The learned CIT(A), after considering the entire material and assessee' s submissions, observed that the AO has not given any proper comment or rebuttal as to how the explanation given by the assessee before him regarding variation in the sale price is not correct. All the supporting documents like purchase bills, sale bills, vouchers / bills for expenses, stock registers giving complete quantitative details of goods purchased and sold were given before him. All the sales have been made through cheques only and thereafter without pointing out any specific defect either in the method of accounting or on the correctness and completeness of the account, the AO cannot disturb the trading result. He also observed that the AO has not made any inquiry with the parties to whom sales were made in order to verify, whether the sale price mentioned by the assessee in its books are correct or not. The AO has also not doubted any specific party to whom sales can be said to be suppressed and what benefit was transferred to the assessee over and above the sales price. He held that the sales are made on commercial business requirements considering the market force at the time of booking the sale order and those at the time of making the actual sales. The variation may be on account of various factors such as nature of buyer, terms of credit, whether the sales have been arranged through broker, whether the sales are inclusive of excise duty or not, fluctuation in foreign exchange rate, 5 ITA No.6585/Mum/2012. M/s.S.Kushalchand & Co.

etc. The AO, without considering these factors and without any inquiry cannot allege that the assessee might have earned more profit from his trading transaction. Further the AO does not have any power to substitute the market value in place of actual price charged by a trader for sale of goods, unless it is found and established that the sale was sham or not bonafide. Accordingly, he deleted the said addition.

5. Before us, the learned Departmental Representative, heavily relied upon the order of the AO and submitted that such a huge variation of price for the same item sold to different parties is not possible in normal circumstances. The AO has clearly brought out date-wise, consignment-wise transactions and has analyzed the percentage of the profit. The factors which have been elaborated before the learned CIT(A) are only general in nature sans any specific instances. Thus, the addition made by the AO is based on proper analysis of the books of account and other material on record and therefore, should be confirmed.

6. On the other hand, the learned Counsel, reiterated the submissions made before the CIT(A) and submitted that one of the biggest factor in the fluctuation of the sale price was on account of fluctuation of foreign exchange rate, because all the items which have been sold were imported from various countries. The other main factor were the nature of the buyers, because if the assessee has sold on spot market then the margin is more and if the material has been sold to regular parties, then the margin is quite less. There cannot be any uniform sales rate in such an item, which depends upon negotiations and commercial contract between the two parties. Therefore, 6 ITA No.6585/Mum/2012. M/s.S.Kushalchand & Co.

the conclusion drawn by the learned CIT(A) is legally and factually correct and the same cannot be disturbed.

7. We have heard the rival submissions, and also perused the relevant finding as discussed by the AO as well as the CIT(A). The main reason for making the addition in the profit of the assessee by the AO was that, the assessee has sold its product on different rates to various parties and there is a huge variation in the profit margin in different kinds of material sold. He worked out the average profit of each item and applied the maximum profit of the product on a single day to determine the profit of the various items sold by the assessee. It is undisputed fact that all the items have been imported by the assessee and the payment of the same have been made in foreign exchange. In support, the assessee has brought on record that there was a huge foreign exchange fluctuation in the financial year 2008-2009, which varied up to 33%. This is a major factor for determining the purchase and sale price. The other factors which have been noted by the CIT(A) like nature of buyers, i.e., whether material has been sold to bulk buyers or retail buyers or spot buyers etc., terms of credit, i.e., whether the assessee has received the payment immediately or after a credit period of few months, whether the sales are inclusive of excise duty or not and host of other factors taking into consideration commercial and market factors are relevant for determining the sale price. The AO cannot disturb the sales figure as mentioned in the sale bill and substitute with his own price without carrying out any inquiry from the buyers as to whether the sale prices as mentioned in the bills have been inflated or suppressed. Even the net profit margin of the assessee as compared to earlier years is also ranging between 7.88% and 8.37%. If the 7 ITA No.6585/Mum/2012. M/s.S.Kushalchand & Co.

over all profit margin is taken into consideration, then there cannot be any reason to disbelieve the assessee' s margin on the sales in this year, which is in conformity with the past results. We thus, agree with the conclusion and finding arrived by the CIT(A) that, once all the sales have been made through banking channel, i.e., through account payee cheques and there is no specific inquiry by the AO to rebut the assessee' s explanation, then no addition on account of differential sale price and variation in the profit margin can be made. Thus, the entire finding of the CIT(A) is not only legally correct but also factually correct based on the material on record, and therefore, we do not find any reason to deviate from such a finding. Accordingly, the order of the CIT(A) is affirmed and the grounds raised by the Revenue stands dismissed.

8. पर णामतः र ाज व क अपी ल खार ज क जा तीह ै। In the result, Revenue' s

appeal is dismissed.

Order pronounced on this 09th day of March, 2015.

आदे श क घो षणा दना क ंः कोक गई ।

Sd/- Sd/- (D.Karunakara Rao) (Amit Shukla) ले खासद य/ ACCOUNTANT MEMBER या ियक सद य/ JUDICIAL MEMBER

मं ब ुईMumbai; दना क ं Dated : 09th March, 2015. Devdas* 8 ITA No.6585/Mum/2012. M/s.S.Kushalchand & Co.

आदेशक ितिलप अ े षत/Copy of the Order forwarded to : 1. अपी लाथ / The Appellant 2. यथ / The Respondent. 3. आयकरआयु(अपी ल) / The CIT, Mumbai. 4. आयकरआयु / CIT(A)-32, Mumbai 5. वभागी य ि तिनि ध, आयकरअपीली य अि धकर ण, मु बई / DR, ं ITAT, Mumbai 6. गाड फा ईल / Guard file. आदे शानु सार / BY ORDER, स यापत ि त//True Copy//

उप/सहा यक पं जीका र(Dy./Asstt. Registrar) आयकरअपी लीय अि धकर ण, मु बई/ ITAT, Mumbai ं