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Income Tax Appellate Tribunal - Hyderabad
Shanthi Fire Works, Hyderabad vs Assessee on 24 August, 2012

IN THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD BENCH "B", HYDERABAD

BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER

ITA No. 393/Hyd/09

Assessment Year: 2004-05

Shanthi Fire Works, ... Appellant Hyderabad

(PAN - ABBFS0977N)

Vs.

Income Tax Officer, ...Respondent Ward 9(1), Hyderabad

ITA No.535/Hyd/2009

Assessment Year: 2004-05

Income Tax Officer, ... Appellant Ward 9(1), Hyderabad

Vs.

Shanthi Fire Works, ... Respondent Hyderabad

(PAN - ABBFS0977N)

Assessee by : Shri S. Rama Rao

Revenue by : Smt. Amisha S. Gupt

Date of Hearing : 08/08/2012

Date of Pronouncement : 24/08/2012

ORDER

PER ASHA VIJAYARAGHAVAN, J.M.:

These are the cross appeals directed against the order of CIT(A)-VI, Hyderabad, dated 30/01/2009 for the assessment year 2004-05.

2 ITA NOs. 393 & 535/Hyd/2009

Shanthi Fire Works

2. Briefly stated the facts of the case are that the assessee is a partnership firm having a business of trading in crackers. A survey u/s 133A was conducted on 10/11/2004 at the business premises of the assessee. As the assessee had not filed his return of income u/s 139(1), a notice u/s 142(1) was issued on 10/12/2004 and served on 16/12/2004 calling for the return. In response thereto the assessee had filed his return of income on 28/01/2005 admitting total income at Rs. 68,614/-. Thereafter, notice u/s 148 was issued on 22/11/2006 and the same was served on 24/11/2006, to which the assessee did not respond. Subsequently, a notice u/s 142(1) was issued and served on 06/11/2007 requiring the products of books, documents etc. Since there was no compliance, another opportunity was afforded. The partner Mr. Sanjay Kumar Bopay attended on 19/12/2007 requesting for time until 28/12/2007. The AO observed that on the appointed day no one attended and the information asked for was also not supplied. The AO passed the assessment order estimating the profit at 8% of the sales while adding Rs. 21,97,000/- as income from unexplained sources. While doing so, the AO held that as per A-2 Returns the turnover is Rs. 32,65,486/- and without drawing any profit & loss a/c, assessee estimated income @ 6% on the turnover worked out to Rs. 1,95,929/- and deducted therefrom interest & remuneration to partners and finally computed the net income at Rs. 78,615/-. The AO observed that the assessee has not produced the books to verify the correctness of payment of interest & remuneration. Further, he pointed out that the assessee adopted net profit before remuneration and interest paid to partners taken at 6% of the turnover, which is against the conventional mode of estimation. He observed that once income from business u/s 28 is estimated, it is deemed that all deductions u/s 30 to 38 are 3 ITA NOs. 393 & 535/Hyd/2009

Shanthi Fire Works

allowed. After estimating going back to claim another deduction, in this case deduction u/s 37(1), is not permissible. The AO finally concluded that the profit rate adopted by assessee for his business of purchase and sale of crackers is much less and therefore he proceeded to estimate the net profit clear of all admissible deductions and allowances including depreciation, at 8% of the turnover of Rs. 32,65,486/-, which worked out to Rs. 2,61,238/-.

3. On further appeal before the CIT(A), the CIT(A) confirmed the order of the Assessing Officer for initiating proceedings u/s

147.

4. With respect to the estimation of net income at 8% of the sales by the Assessing Officer, the AR of the assessee submitted before the CIT(A) that the AO is not justified in estimating the net income from trading activity at 8%. When the books are not available, the provisions of section 44AF apply and according to the said provisions, the income would be 5% of the turnover subject to deduction of salary and remuneration to the partners. It was submitted that the assessee admitted income at 6% of the sales effected and, therefore, the AO ought to have accepted the percentage of profit. It is further submitted that the appellant is carrying on the activity of purchase and sale of crackers. It was pointed out by the AR of the assessee that the purchases are effected from Sivakasi and most of the sales were made on wholesale basis to the traders at Hyderabad and therefore, the margin of the profit for the appellant herein is less. Further it was argued that the stock remaining after the day of festival has to be stock at throwaway prices and, therefore, the profit rate of 8% net is not justifiable.

4 ITA NOs. 393 & 535/Hyd/2009

Shanthi Fire Works

5. After considering the submissions of the assessee, the CIT(A) held that section 44AF pertains to small retail business and the assessee on the other hand is a wholesaler. The CIT(A) opined that it is not in clear from the replies and information provided by the appellant as to the exact nature of the business of the appellant because no books or supporting documents have been produced. The CIT(A) was of the view that section 44AF provides for a turnover limit of Rs. 40 lakhs and the AO has clearly estimated the sales turnover above Rs. 40 lakhs and hence the provisions of section 44AF are not applicable. It was pointed out by the CIT(A) that the assessee in his return of income has neither enclosed the profit and loss account nor any balance sheet or any other statement of accounts. Neither during the assessment proceedings, nor during the appellate proceedings, any information regarding sales, purchases or expenses was provided by the assessee and, hence, there was no option with the AO, but to estimate the net profit of the assessee. The CIT(A) concurred with the AO that the assessee has randomly estimated its net profit at 6% of the turnover and also claimed further deductions without providing any proof for the same and confirmed the estimation of net profit at 8% of the turnover as made by the AO.

Aggrieved by the order of the CIT(A), the assessee is in appeal before us.

6. We have heard the arguments of both the parties and perused the record. We find that section 44AF shall apply to the case of the assessee, which read as under:

"44AF. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee engaged in retail trade in any goods or merchandise, a sum equal to five per cent of the total turnover in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by 5 ITA NOs. 393 & 535/Hyd/2009

Shanthi Fire Works

the assessee in his return of income shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" :

Provided that nothing contained in this sub-section shall apply in respect of an assessee whose total turnover exceeds an amount of forty lakh rupees in the previous year.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed : Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40. (3) The written down value of any asset used for the purpose of the business referred to in sub-section (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) The provisions of sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in sub-section (1) and in computing the monetary limits under those sections, the total turnover or, as the case may be, the income from the said business shall be excluded.]

[(5) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in sub-section (1), if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.]"

7. According to the section 44AF of the Act, the income would be 5% of the turnover where the turnover is less than Rs. 40,00,000/- subject to the deduction of salary and remuneration to the partners. The assessee is a retailer and not a wholesaler as held by the CIT(A), since from the order of the Assessing Officer a mention is made regarding purchases made by the assessee from Standard Fire Works Sivakasi. The Assessing Officer has accepted that the partnership firm is carrying on trading in crackers.

8. The assessee himself has admitted 6% income on the sales effected which is more than that provided u/s 44AF. Hence, we estimate the income of the assessee at 6% on the sales effected 6 ITA NOs. 393 & 535/Hyd/2009

Shanthi Fire Works

as against 8% made by the Assessing Officer and confirmed by the CIT(A). Thus, this ground of appeal is partly allowed.

9. Ground No. 4 is with regard to levying interest u/s 234A, 234B and 234C of the Act. Charging of interest under these sections is consequential in nature, therefore, the Assessing Officer is directed accordingly.

10. In the result, Appeal is partly allowed.

ITA NO. 535/HYD/09 FOR AY 2004-05 - APPEAL BY REVENUE

11, The revenue is in appeal against the action of the CIT(A) in deleting the addition of Rs. 21,70,000/-, as ground No. 1.

12. The Assessing Officer was of the view that the assessee could not explain the sources for making the purchases of Rs. 21,97,000/-, which were outside the books of account. On appeal before the CIT(A), the assessee submitted that what was found by the Assessing Officer is information regarding DDs sent and there is no information that the said remittance is an addition to the turnover admitted. The assessee further submitted that during the calendar year 2003 and the festival of Diwali fell on 25/10/2003 and the DDs were sent after Diwali i.e. after sales were effected. The Assessee furnished the returns of income of both the partners and the initial capital of about Rs. 17.48 lakhs was there in the firm for carrying out the purchase of goods. Hence, it was pleaded that the Assessing Officer cannot make any addition on account of unexplained purchases.

13. The CIT(A), after considering the submissions of the assessee, held that in the absence of books of account and in the 7 ITA NOs. 393 & 535/Hyd/2009 Shanthi Fire Works

absence of related documents, the issue has to be decided taking human probability into account. Further, he observed that the Assessing Officer has not produced any evidence to indicate that the purchases corresponding to the disclosed turnover where in addition to those evidenced by the DD of Rs. 21,97,000/-. Further, GP rate of 25% on the turnover of 32,65,486/- comes to Rs. 8,16,731/-. The submission of the assessee that the purchases to the tune of Rs. 24,49,115/- would have been made by the assessee closely tallies with the figure of DDs purchased by the assessee. Hence, the CIT(A) deleted the addition of Rs. 21,97,000/-.

14. The Assessing Officer also made an addition of Rs. 4,94,325/- being gross profit on sale of unaccounted purchases. The CIT(A) deleted the same as consequential to the deletion of addition of Rs. 21,97,000/-.

15. Aggrieved, the revenue is in appeal before us.

16. The learned counsel for the assessee submitted that the assessee has not denied that the demand drafts were sent by them. However, it has been clearly stated that on 25/10/2003, the festival of Diwali was celebrated. Since most of the sales takes place in cash during this season, the sources of the DDs was the cash available from pre diwali8 and diwali sale of crackers. He further submitted that although the AO has confirmed with M/s Standard Fire Works Ltd., Sivakasi that purchase of Rs. 21,97,000/- were made by the assessee, nothing has been placed on record to indicate that the purchases relevant to the turnover shown by the assessee i.e. Rs. 32 lakhs approximately were made from manufacturers other than M/s Standard Fire Works. It was pointed out that no evidence was 8 ITA NOs. 393 & 535/Hyd/2009

Shanthi Fire Works

available which indicates that the turnover shown by the assessee is less by Rs. 21,97,000/-. It is submitted that on the last page of the assessment order the AO states that the GP rate in this business ranges from 20 to 25%. On a turnover of Rs. 32,65,486/-, 25% GP works out to Rs. 8,16,371/-. This implies that the assessee would have made total purchases to the tune of Rs. 24,49,115/-, which is less than and also close to the figure of demand drafts purchased by the assessee.

17. We have heard both the parties. It has been stated by the assessee that the purchases are mostly made on credit basis and the amounts were paid after the sales were affected. Diwali fell on 25/3/97 and the DDs were sent after Diwali. As stated by the Assessing Officer, the GP on the turnover works out to Rs. 8,16,371/- and it is probable that the purchases to the tune of 24,49,115/- have been made, which is close to the figure of DDs and hence, the explanation given by the assessee is plausible explanation and the CIT(A) has rightly deleted the addition of Rs. 21,97,000/- made by the AO, therefore, we confirm the order of the CIT(A).

18. Since the addition of Rs. 4,94,325/- is consequential to the addition of Rs. 21,97,000/-, which has been deleted, this addition is also deleted.

19. In the result, Revenue appeal is dismissed. 9 ITA NOs. 393 & 535/Hyd/2009

Shanthi Fire Works

20. To sum up, appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.

Pronounced in the open court on 24 th August, 2012.

Sd/- Sd/-

(D. KARUNAKARA RAO) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 24 th August, 2012.

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Copy to:-

1) Shanthi Fire Works, 16-2-674/4, Malakpet, Hyderabad. 2) ITO, Ward-9(1), Hyderabad

3) The CIT (A)-VI, Hyderabad

4) The CIT-VI, Hyderabad

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

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