TaxTMI 
TaxTMI 
2024 (11) TMI 1306
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....ll these appeals by this consolidated order for the sake of convenience. 2. Briefly noted the facts of the case are that, the assessee firm is engaged in the business of mining, processing and refining of beach minerals. A search action u/s 132 of the Act upon the assessee and its group concerns on 25.10.2018. In the course of search, several documents & electronic material were found and seized pursuant to which the AO inter alia initiated proceedings u/s 153A of the Act for the relevant AYs 2013-14 to 2018-19. From the seized electronic material viz., tally data, it was noted that, the assessee was maintaining two sets of accounts, one titled "ori" and other titled "IT". Upon enquiry, the accounts manager of the assessee affirmed in his statement recorded u/s 132(4) of the Act that, the assessee was maintaining parallel sets of accounts for banking & financial purposes and other for income-tax purposes. The AO in the course of assessment inferred that, the accounts maintained under the title "IT" was in form of suppression of income by inflating expenses in the tally data. After calling for explanation from the assessee, the AO observed that, the assessee had inflated the expens....
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.... accounts maintained for tax purpose. According to Ld. CIT, DR the expenditure booked in accounts maintained for tax purposes was higher than the original set of accounts resulting in the net profit to be lower. He contended that, by inflating expenses, the assessee was generating unaccounted funds which were used for on-money payments in relation to property purchases. He pointed out that, the assessee was unable to furnish supporting's for these expenses and therefore the AO rightly held that these expenses were not genuine. He therefore supported the AO's action of not rejecting the books of accounts but making separate additions based on inflation of expenses, on the basis of seized material. He further submitted that, if the Ld. CIT(A)'s action of rejecting the books of accounts is upheld, then the profits ought to be estimated at 53% viz., the profitability of another assessee, M/s Industrial Minerals Company, which according to AO, was comparable to the assessee. The Ld. CIT, DR further argued that, the Ld. CIT(A) having rejected the books of accounts, ought to still have adjudicated the merits of the disallowance of expenses, which according to him, was made on different fo....
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....constituted incriminating material unearthed in the course of search and hence, the preliminary plea of the assessee objecting to the validity of jurisdiction assumed by the AO u/s 153A of the Act for want of incriminating material in all the AYs before us, is hereby rejected. 8. We now come to the merits of the case before us. We take up AY 2013-14 as the lead case whose results shall mutatis mutandis apply to other AYs 2015-16 to 2017-18 as well. It is noted that, the assessee is engaged in the business of mining, processing and refining beach minerals. The books of accounts in relation to this business is noted to have been maintained in the tally software. The assessee however was found to have been maintaining two sets of books of accounts in tally software viz., 'ori' & 'IT'. Upon analysis of the entries found in these parallel books of accounts maintained in the tally software, the AO noted that the expenses debited in the tally accounts maintained for income-tax purposes i.e. 'IT', was comparatively higher than the books maintained under the title 'ori'. The AO also noted that several expenses did not have proper narration or payment details, which led him to believe that ....
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....ave been duly reflected. In the accounts under the title "IT" is the accounts where expenditures have been inflated and the net income is arrived to disclose the same in the return of income filed. However, the Appellant during the course of appellate proceedings has contended that terming the "original" and "IT" is wrong and the appropriate term is "audited" and "unaudited". The undersigned has considered that the terming is inappropriate to arrive a meaningful decision in respect of various issues raised by the Appellant in the grounds of appeal. 7.5.9 The Appellant during the course of appellate proceedings has submitted a detailed reason for the incomplete and erroneous manner in which the books of accounts were maintained. The main reason for the poor maintenance of accounts was the capturing of primary accounting data in the tally accounts by the operational staff who were not well versed in accounting and the absence of qualified accounting staff at multiple remote locations where the processing plant and warehouses of the Appellant are situated. The multiple tally accounts found during the search was due to the fact that making accounting entries at multiple locations. Th....
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....he crediting of ledger accounts of a wrong group entity instead of the correct group entity while debiting the expenditure incurred by a group entity on behalf of the Appellant, it is necessary on the part of the assessee to identify the name of the correct group entity which incurred the expenditure on behalf of the Appellant and adduce evidence to show that the corresponding entry for the same is found in the ledger account of the Appellant in the books of such correct group entity. 7.5.12 In cases where the discrepancy has been explained to be arising from the erroneous crediting of the ledger account of a group entity while debiting the expenditure account though the expenditure has been met by the Appellant itself out of received on transfer through banking channel from the group entity, it is necessary on the part of the Appellant to identify the relevant transactions of transfer of funds through bank from the group entity and incurring of expenditure by the Appellant from such funds by withdrawing the same from the bank. Moreover, in both the categories of discrepancies, it is necessary for the Appellant to produce the bills and vouchers in support of the relevant expendit....
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....ity from this business would be abnormally high as 73.86% to 87.54%, which was not appropriate in the facts and circumstances of the case. He thus held that, although there would indeed discrepancies in the books of accounts as highlighted by the AO but that cannot result in assessee actually making profit in excess of 70% of the turnover. The Ld. CIT(A) is noted to have accordingly estimated the profits at 2.21% of the turnover of the assessee. The relevant findings taken note of by us is as under:- "7.5.15 Even though the claims of the Appellant in the books of account cannot be accepted in toto in the face of the discrepancies brought out by the AO in the Assessment Order, making disallowance of the major portion of expenditure in respect of which such discrepancies were noticed is also not appropriate to the facts of the case. On making disallowance of entire expenditure in respect of which the discrepancies were found as sought to be done by the AO in the Assessment Order, the total income of the Appellant was assessed at Rs. 19,73,18,968/- for the AY 2013-14 as against the turnover Rs. 18,82,97,110/- for the FY(s) 2012-13 relevant to the AY 2013-14. 7.5.16 The said assess....
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....t receipts and commission receipts credited to the P&L account separately for each assessment year 2013-14 respectively. Thus, the various grounds raised upon these issues are treated partly allowed." 10. Having perused these findings in light of the facts on record, it is noted that, identical facts and circumstances were also involved in the case of assessee's sister concern, M/s Beach Minerals Company, which was also in the same line of business and which was also searched along with the assessee. Like the assessee, two parallel books of accounts were unearthed from the electronic data viz., tally software titled 'ori' and 'IT'. Upon comparison, the AO noted that, the accounts titled 'IT' were the accounts maintained for income-tax purposes wherein the expenses debited were higher than the expenses found debited in the books maintained in 'ori' and therefore made disallowance on account of inflated expenses. On appeal, the coordinate bench of this Tribunal upheld the Ld. CIT(A)'s action of rejecting the books of accounts holding it to be unreliable but estimated the profits from this business at 2.21% as opposed to 0.47% returned by the assessee. The relevant findings taken not....
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....me time, it is not possible to accept the correctness of the claims in the books of account unless the discrepancies pointed out in the Assessment Order are subjected to necessary reconciliation. Ld CIT(A) decided the appeal with the following observations: 43. In this context, it is pertinent to observe that this is not a case where the appellant is attempting to give incorrect reasons for its inability to produce the supporting bills and vouchers. The case of the appellant for the instant Assessment Year was subjected to regular scrutiny assessment u/s 143(3) vide order dated 08.03.2016. As evident from the contents of the said Assessment Order, the AD required the appellant to produce the bills and vouchers in support of the expenditure debited towards mining production and processing and other expenses during the course of the said Assessment proceedings. The appellant produced the supporting bills and vouchers before the AO in response to the same. The AO stated in the Assessment Order that he carried out the verification of the said bills a vouchers and he found that the vouchers to the extent of Rs. 2.80 Crores were beyond proper verification and that the claim of the appe....
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....hat the business income of the appellant is required to be estimated under the said provisions, consequent to rejection of the books of account. 46. For the purpose of estimating the business income, it is considered that the business income admitted by the appellant itself in its return of income for AY 2011-12 before claiming exemption of the said income u/s. 108 of the Act constitutes a fair, logical and reasonable indicator of true and correct profits of the appellant. Since the appellant claimed exemption u/s. 108 in the said Assessment Year, it is reasonable to infer that the business income disclosed in the return of income for the said Assessment Year represents the correct profits of the appellant for the said year. The said assessment year is the last year of claiming exemption u/s 108 by the appellant and there is only one intervening year be Veen the said assessment year and the instant assessment year. Having regard to the same, I am of the considered view that the net profit margin of 29.77% disclosed by the appellant the said AY 2011-12 is a reliable indicator of the true profits of the appellant for the instant assessment year also. Hence, I consider it appropriat....
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.... absolutely abnormal and high by the Ld CIT(A). Ld CIT(A) has very rightly commented that such a huge profit margin is abnormally high in any line of business and thus indicative that the discrepancies pointed out in the accounts by the Ld AO cannot be considered to be arising wholly from the wrong claims of expenditure by the assessee/appellant. Ld CIT(A) thus after considering the books of accounts of the assessee firm, as inaccurate which do not facilitate to arrive at true and correct profit of the appellant have rejected the same by invoking the provisions of section 145(3) of the Act. Under the facts of the present case, we approve the observation of Ld CIT(A) relating to rejection of the books of assessee and uphold the same. Ld CIT(A) consequently, estimated the profit of the firm @30% of the sale turnover, the basis for 30% was returned income of AY 2011-12, wherein the assessee has earned a profit of 29.77% before claiming exemption u/s 10B of the Act. On perusal of the order of Ld CIT(A), it is not transpired that while estimating the profit taking the base year as AY 2011-12 (FY 2010-11), whether this fact was confronted to the assessee firm or not to submit their objec....
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....37+0.68+0.81) shall be the most reasonable percentage of profit to be applied on the sales turnover of the assessee for AY 2013-14. However, since the assessment u/s 143(3), wherein certain additions were made, resulting the profit of the assessee assessed at Rs. 4.04 crore i.e. 2.21% of total sales turnover of Rs. 183.35 Crores. We find it appropriate to apply the rate of 2.21% on the sales turnover of the assessee firm to estimate its net profit margin from business of assessee for the AY 2013-14. Income from Interest and commission to added separately as directed by the order of Ld CIT(A). 17. In terms of our aforesaid observations, we find no infirmity in the order of Ld CIT(A) apart from rate of profit adopted for estimation of net profit margin while rejecting books of accounts u/s 145(3) of the Act, thus, we modify the order of Ld CIT(A) by scaling down the percentage of net profit margin to 2.21% on sales turnover for estimating the same while determining the total assessable income. Ld AO is directed to work out the estimated income from business accordingly. In the result appeal of the assessee is partly allowed." 11. Having perused the above, we find that the Ld. CIT(....
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....d only in AY 2013-14, which are now being taken up. The first issue relates to the addition on account of suppression of closing stock made in AY 2013-14. We find that, the AO had observed that, there was suppression of closing stock by Rs. 1.5 crores in FY 2012-13 and consequently the opening stock of subsequent FY 2013-14 was also under-reported by the same amount. It is not in dispute before us that, if the closing stock of the asseessee is enhanced by adding Rs. 1.5 crores in AY 2013-14, then, consequently in the subsequent financial year, there will be a corresponding increase in the opening stock which would reduce the profits for AY 2014-15 to such extent and therefore overall, the net effect would be NIL. Having taken note of these facts, we however find ourselves in agreement with the Ld. CIT(A) that, once the books of accounts have been rejected u/s 145(3) of the Act and the profits for the year is being estimated, then the effect of increase in closing stock in AY 2013-14 & increase in opening stock in AY 2014-15 will get subsumed therein and hence no separate addition in this regard is warranted. The relevant findings of the Ld. CIT(A) taken note of by us, is as follows....
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....Before the Hon'ble High Court, the assessee had inter alia raised the following contentions:- "11. Alternatively, and without prejudice to the preliminary objections raised above, he would submit that, on merits it should be noted that admittedly the books of accounts of the respondent have been rejected by the assessing authority. The profit of the respondent is estimated as provided under Section 145 (3) of the I.T. Act. When the gross profit rate is applied, it would cover any infirmity and there was no need for the Assessing Officer to make a scrutiny of the amounts incurred on the purchases by the respondent. In any event, the revenue would not be in a position to rely on the rejected books of account for making the additions on account of trade creditors and also for the purpose of arriving at a closing stock." 17. Taking note of the above, the Hon'ble High Court is noted to have upheld the order of the Tribunal, deleting the addition made on account of closing stock, when the books of accounts had been rejected, by observing as under:- "15. The principle that if a finding of fact is not challenged as being perverse, the High Court is bound to accept such finding. Theref....
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....ssessee was unable to conclusively substantiate that the aggregate sales of Rs. 643.94 lacs towards which the impugned sum was received, had indeed formed part of the reported turnover and been offered to tax. Having considered the material placed before us and in light of several accounting anomalies found in the books of accounts maintained in tally software, we are in agreement with the foregoing finding of the Ld. CIT(A). At the same time, it is noted that, the Ld. CIT(A) held that, the entire sales value cannot be considered as income and instead only the profit element embedded therein ought to be taxed. Having already rejected the books of accounts of the assessee, it is noted that the Ld. CIT(A) directed the AO to increase the reported turnover by the impugned sum of Rs. 3,54,70,000/- and estimate the profit at the rate of 2.21% on such increased turnover. We find this action of the Ld. CIT(A) to be supported by the decision of the Hon'ble Gujarat High Court in the case of CIT Vs President Industries (258 ITR 654) wherein it was held that the amount of receipts/ sales by itself would not represent the income of the assessee. For this, we gainfully rely on the following find....