TaxTMI 
TaxTMI 
2022 (4) TMI 1425
X X X X Extracts X X X X
X X X X Extracts X X X X
.....1 Briefly stated the assessee was in the business of trading in Iron and Steel. For the impugned assessment year, i.e A.Y 2010-11, assessment was framed u/s. 143(3) of the Act rejecting the books of accounts of the assesee u/s. 145(3) of the Act and thereafter estimating the net profit @ 7% of the total turnover of Rs. 73,69,68,737/-, resulting in an addition of Rs. 5,04,16,478/- being made to the income of the assesse. 3. The matter was carried in appeal before the ld. CIT(A) who upheld the rejection of books of accounts but reduced the estimation of net profit by applying a rate of 0.5% to the turnover as opposed to 7% applied by the A.O., thus reducing the addition made on account of estimation of net profit to Rs. 19,16,511/- as opposed to 5,04,16,478/- made by the A.O. 4. Aggrieved by the same, the revenue has come up in appeal before us challenging the reduction in estimation of net profit as above by raising the following grounds: 1. The Ld. CIT(A) erred in law and on facts in restricting the addition made by A.O. by estimating Net Profit @7% amounting to Rs.5,04,16,478/- to Rs. 19,16,511/- considering the Net Profit @0.5%. 2. Alternatively, CIT(A) e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....imation of net profit. 9. On going through the order of the A.O., we have noted that the basis of adoption of 7% rate was the profits earned by the assesse on transactions carried out in the first 11 months of the year, which were noted to be 5.2% of the turnover. The background of the case is that the A.O. noted that while in the first 11 months of the year the assesse had shown profits in trading transactions, in the last month of the year it booked huge losses literally wiping out its entire profit during the year. He noted that these transactions were undertaken between the same set of companies i.e. purchases from M/s. Ruchi Global and sale to M/s. Indian Steel and further that a Director in the assessee company Shri Jalani was a salaried employee of M/s. Indian Steel. It was also noted that in this short period of one month approximately 285 such transactions were undertaken which in volume were equivalent to that undertaken in the rest of the year and further that both the parties from whom purchases had been made and to whom it had been sold were located at the same address and further no bills had been produced by the assesse for verification. The A.O. accordingly doubt....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Purchased From Total purchase Cost Sold to Total Sales Value Profit/Loss 137 to 424 18/03/2010 to 25/03/2010 M/s Ruchi Global 37,50,46,484/- M/s Indian Steel 35,73,69,055/- (-) 1 7,67,74,29/- 121 to 136 03/03/2010 M/s Long Island Co. 2,08,90, 172/- M/s Shiv Tarana Co. 2,08,82,616/- (-) 7556/- Total 39,59,36,656/- 37,82,51,671/- (-)1,76,S4,985/- As the company has shown net profit of Rs. 11.71 lacs for the year under consideration, thus it can be presumed that the balance turnover of Rs. 35.87 Cr. ( total turnover Rs. 73.69 Cr.) the company has earned net profit of Rs. 1.87 Cr. ( loss + net profit). The N.P. ration on this balance turnover comes out to @ 5.21% ( profit of Rs. 1.87 Cr. earned on balance turnover of Rs. 35.87 Cr.) As the loss turnover have been made for the transactions made by making purchase as well as sell from one particular group companies. It is also pertinent to mention here that Shri Jhalani, who is director in assessee company is also a salaried employee of M/s Indian Steel. Thus it i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elieve that in these conditions the exact profit of the company can not deduced from the books of accounts produced/submitted. Hence I hereby reject the books of accounts maintained by the assessee company u/s 145(3) and estimate the profit of the company @ 7% as proposed in show cause notice. The total turnover of the company is Rs. 73,69,68,737/-. Thus the N.P. @ 7% comes out to Rs^5,15,87,812A . The N.P. shown by the company is Rs. 11, 71,334/-. Hence as addition of differential amount of Rs. 5,04,16,478/- is made to the total income of the assessee. Penalty proceedings u/s 271(l)(c) r.w.s. 274 are also initiated. (Addition of Rs, 5,04,16,478/-) 10. The Ld.CIT(A) on the other hand we have noted estimated the appropriate net profit ratio @ 0.5% relying on the results of the assesse itself for the preceding and succeeding year and on the basis of his own knowledge of the profits returned in this line of business. His findings at para 6.9 to 6.10 is as under: 6.9 So far as the question of estimation of the gross profit is concerned, I agree with the Ld. AR that A.O. has not done any exercise to arrive at the conclusion of the returned book financials being incorrect and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e main customers/client of the appellant and if certain transactions entered into with these parties in the later period of the year (Feb-March) had resulted into huge loss, then transactions in earlier part of the year had also resulted into huge profit It will not be appropriate to discard one set of transaction only because they had resulted into loss. The appellant has only trading business of the steel items; it is not trading the manufactured goods and in such case, if one agree with the A.O. that supposedly intergroup transactions were sham transaction then the logical conclusion will be that it is in the business of providing entries only and therefore A.O's action of treating of the turnover as genuine and part of the other half the turnover as sham cannot be justified at all. In other words, A.O's action of fixing GP% at 7% by taking cue from the part of turnover (of earlier part of the year) of 5.1% is not sustainable. It is also not the case that these parties are appearing in the appellant's business only this year. They are old customers of the appellant. Appellant is running this business since long. The A.O. had not discussed the financial results of ear....