2022 (11) TMI 1475 - AT - Income Tax

Tax officer's Rs. 7.58 crore sales enhancement rejected due to insufficient sample size and minor delivery memo variations

The ITAT Jaipur rejected the AO's enhancement of sales by Rs. 7.58 crores based on alleged suppression, finding the sample size of 113 cases out of 1459 ... Estimation of income/GP determination - unexplained sales - difference in the sale amount as appeared in the delivery memo / sale bill issued by the assessee and purchase amount stated by the customers in reply to notices issued u/s 133(6) - difference in term of percentage was of 12.15% - HELD THAT:- Suppression of sale, it is seen that such an enhancement was not justified which is not based on any cogent material placed on record and in the light of rival contentions - we find that looking to the quantum of sale of Rs.40 cr and no. of customers 1459, the sample size of 113 cases, is grossly insufficient so as to draw a justifiable inference to be applied on all the cases. As carefully pursued the chart submitted before us and also the related material and find that except a minor variation, there is no case successfully made out by the AO of suppression of sale. Behind the minor variations there may be various reasons however, merely based on some small cases, without anything more, the AO was not justified in enhancing the sale to a huge Rs. 7.58 cr. There was no difference between the total amount as accounted for by the assessee and those paid by the customer hence there is no suppression at all - Except a minor variation, there is no case successfully made out by the AO of suppression of sale. Behind the minor variations there may be various reasons however, merely based on some small cases, without anything more, the AO was not justified in enhancing the sale. We find nothing on the record to justify the case of suppression of sale i.e., though amount was received but was not recorded. To effect the sale to such an extent, corresponding purchases of the vehicles are also required by the assessee, however, neither the claimed purchases have been discussed nor it is alleged so. At the best, it was a case of mere suspicion which was not substantiated with the help of strong evidences, wherein the revenue has completely failed. The authorities below this year also alleged the deferment of the sale which is not justified. Correctness of the application of the GP rate of 3.25% by the AO - We find that the AO in this year, taking the declared GP rate at 0.05% and considering the case of Rellan Motors Pvt. Ltd for AY 2013-14 which has declared GP rate of 3.92%, applied 3.25%. Firstly, we find that it was a case of AY 2013-14 which is later to the year under consideration. Needless to say that the result of the subsequent year cannot be applied in the preceding year. Otherwise also the case of Rellan Motors could not be used against the assessee because a perusal of the orders does not show that the assessee was ever confronted with the material used against him hence no reliance can be placed on the so called comparable case. Secondly, we find force in the contention of the ld. AR that the correct and revised GP rate stood at 4.20% and not mere 0.05% because the assessee has been consistently considering the target incentives, turnovers, cash discounts, warranty etc. as a part of the receipts directly related to the trading activities and accordingly such direct income credited to the P/L account should have been considered with the declared turnover resulting into the revised gross profit of Rs.1,70,55,357/- and 4.20% in terms of percentage to Sales. As decided in the case of Gotan Lime Khaniz Udyog [2001 (7) TMI 19 - RAJASTHAN HIGH COURT] that where the accounts are rejected, it is not always necessary for the AO to make addition over and above the declared income, if considering the books of accounts, past history and material collected by the AO, no interference is warranted. Thus, we don’t find any justification on the application of enhanced GP rate of 3.25% which is completely without furnishing any justified grounds hence, the trading results as declared by the assesseeare hereby accepted. Therefore, the authorities below were completely unjustified in applying higher GP rate of 3.25%. Thus, the enhancement of the sale (due to suppression and deferment) and application of GP rate of 3.25% is not approved and the resultant addition to the extent of Rs.2,26,41,521/- is hereby deleted. However, in the peculiar facts of the case and the reasoning adopted by the authorities below, we upheld the rejection of the accounts and taking an overall view of the entire matter it is felt justified that an ad hoc addition of Rs. 2,00,000/- shall cover up the possible leakage of the income, if any. This ground of the appeal No. 1 is therefore partly allowed. Addition of advances taken from customers - no corresponding sale have been shown either in the current year or in the subsequent years - HELD THAT:- Admittedly vide letter assessee had furnished the complete name and address of all the 7 persons. However, as stated, no sale of vehicle could be effected to these customers and ultimately the amount had to be refunded back. It is not uncommon in this trade that some of the customers for one reason or other take back the amount of advance. Looking to the declared turnover which is of more than Rs.40 cr, the advances are of very small amount simply because the amount had to be refunded in absence of sale, could not have been considered as undisclosed income of the assessee, more particularly, when admittedly complete name and address of all such customers are already on record and no contrary material has been brought on record by the AO after making enquiries. Hence, all the advances are to be considered as trade advances. Moreover S.68 uses the word ‘may’ which confers a discussion to be exercised judiciously the amount received. The AO was having some doubt, he could have made enquiries, which he has not done therefore, we do not find any justifiable reason and the subjected addition is directed to be deleted. Disallowance of Expenses - CIT(A) restricted part addition - HELD THAT:- As some disallowance out of various expenses was required to be made by the AO. However, the disallowance made by the AO appears to be on higher side. CIT(a) is of considered view that it would be fair and reasonable to restrict the disallowance out of these expenses Hence the disallowance sustained by the ld. CIT(A) is hereby confirmed. Issues Involved:1. Addition of Rs. 2,06,46,489/- by estimating gross profit percentage.2. Addition of Rs. 3,03,000/- as unexplained advance from customers.3. Disallowance of Rs. 1,07,366/- (initially Rs. 2,14,731/-) for non-verification of expenses.4. Disallowance of Rs. 26,095/- for delay in deposit of employees' contribution for PF and ESI.Issue-wise Detailed Analysis:1. Addition of Rs. 2,06,46,489/- by Estimating Gross Profit Percentage:The AO alleged delayed invoicing and under-invoicing of sales, leading to a rejection of the books of account under Section 145(3). The AO estimated the turnover at Rs. 69,99,20,191/- against the declared Rs. 40,48,20,629/- and applied a GP rate of 3.25%, resulting in an addition of Rs. 2,06,46,489/-. The CIT(A) confirmed this addition, stating that the assessee could not controvert the AO's findings and that the sale must be shown in the year the vehicles were sold.The assessee argued that the AO's basis for invoking Section 145(3) was invalid and that the correct GP rate should be 4.20% after considering other direct incomes. The Tribunal found that the AO's sample size was insufficient and that the alleged suppression of sales was not substantiated. The Tribunal also noted that the correct GP rate was 4.20%, which compared favorably with the cited case of M/s Relan Motors. Consequently, the Tribunal deleted the addition of Rs. 2,06,46,489/- but upheld the rejection of accounts, making an ad hoc addition of Rs. 2,00,000/-.2. Addition of Rs. 3,03,000/- as Unexplained Advance from Customers:The AO added Rs. 3,03,000/- as unexplained income, stating that the assessee failed to prove the identity, creditworthiness, and genuineness of the amount credited. The CIT(A) upheld this addition, noting the absence of confirmatory letters from the customers.The assessee contended that the advances were trade advances for vehicle purchases, which were later refunded. The Tribunal found that the advances were trade advances and that the AO should have made inquiries if there were doubts. The Tribunal deleted the addition, noting that the advances were small relative to the turnover and that the AO had complete names and addresses of the customers.3. Disallowance of Rs. 1,07,366/- for Non-verification of Expenses:The AO disallowed Rs. 2,14,731/- for non-verification of expenses, which the CIT(A) reduced to Rs. 1,07,366/-. The assessee argued that the disallowance was made on mere suspicion and that the expenses were reasonable given the turnover.The Tribunal upheld the disallowance of Rs. 1,07,366/- as sustained by the CIT(A), finding no reason to interfere with the lower authorities' decision.4. Disallowance of Rs. 26,095/- for Delay in Deposit of Employees' Contribution for PF and ESI:The assessee did not press this ground during the hearing. Consequently, the Tribunal dismissed this ground as not pressed.Conclusion:The Tribunal partly allowed the appeal, deleting the major addition of Rs. 2,06,46,489/- but making an ad hoc addition of Rs. 2,00,000/- for possible income leakage. The addition of Rs. 3,03,000/- was deleted, while the disallowance of Rs. 1,07,366/- was upheld. The disallowance of Rs. 26,095/- was dismissed as not pressed.