2018 (5) TMI 429 - AT - Income Tax

Disallowance on account of gross profit estimated @ 2% of the turnover - Held that - Assessee in order to achieve higher turnover has reduced its margin on sale. There is no dispute that the turnover of the assessee has gone high from ₹ 60,26,520/- to ₹ 4,67,58,142.55 which resulted higher amount of gross profit in absolute figures. There is cut throat competition in the market and therefore to survive in the market the assessee has to drive profit as per the prevailing market rate. Thus, it appears that assessee to achieve higher amount of sale and customers base has worked during the year at very low margin which resulted reduction in the gross profit ratio but higher amount of gross profit in absolute figures. We are inclined to estimate the profit @ 1% of the turnover. Thus, the ground of assessee is partly allowed in terms of above. Disallowance u/s 68 on account of capital introduction by the partners - Held that - It is undisputed fact that fresh capital was introduced by the partner of assessee-firm and in such case no addition can be warranted in the hands of assessee. It is because the fresh capital was introduced by the partner of the assessee-firm if any addition used to be made then it has to be added in the hands of partner. Therefore we reverse the order of Authorities Below. This ground of appeal assessee is allowed. Disallowance on account of non-existence creditors - Held that - Profit was determined on estimated basis due to the fact that assessee failed to produce books of account during the assessment proceedings. Once then profit has been determined on estimated basis then in our considered view no disallowance can be made on account of sundry creditors. It is undisputed fact that these sundry creditors were arising from the purchases made by assessee and therefore the same cannot be added without disturbing the purchases. Moreover in the instant case the profit has been determined on estimated basis. Thus in our considered view there cannot be any disallowance of sundry trade creditors. Therefore we reverse the order of Authorities Below. This ground of appeal of assessee is allowed.

Summary

Issues:
1. Disallowance of gross profit estimated at 2% of turnover.
2. Disallowance under section 68 of the Act for capital introduction.
3. Disallowance of alleged nonexistent sundry creditors.

Issue 1: Disallowance of Gross Profit:
The appellant challenged the addition of ?5,26,350 made by the Assessing Officer (AO) on account of gross profit estimated at 2% of the turnover. The appellant, a partnership firm engaged in wholesale trading of pulses, failed to provide evidence for the declared gross profit ratio of 0.87%. The AO, therefore, estimated the gross profit ratio at 2% and made the addition. The Commissioner of Income Tax (Appeals) upheld the AO's decision, noting discrepancies in the appellant's claims regarding lost books of accounts. However, the Appellate Tribunal observed a direct correlation between the reduced gross profit ratio and increased turnover, indicating a strategic reduction in profit margin to boost sales. Considering the market competition and business strategy, the Tribunal estimated the profit at 1% of turnover, partially allowing the appellant's appeal.

Issue 2: Disallowance under Section 68 for Capital Introduction:
The appellant contested the disallowance of ?2.75 lakh under section 68 of the Act for capital introduction by the partners. The AO treated the undisclosed capital as income due to lack of documentary evidence. The Commissioner (Appeals) upheld this decision, leading the appellant to appeal before the Tribunal. The appellant argued that since the capital was contributed by the partners, any addition should be in the partners' hands, not the firm's. Citing a relevant High Court judgment, the Tribunal ruled in favor of the appellant, reversing the lower authorities' decision.

Issue 3: Disallowance of Non-Existent Creditors:
The appellant challenged the disallowance of ?33,83,197 for alleged non-existent creditors. The AO presumed these creditors to be non-existent and added the amount to the appellant's income. The Commissioner (Appeals) upheld this disallowance, prompting the appellant to appeal. The appellant argued that as profit was estimated at 2%, no further disallowance on creditors should occur. The Tribunal agreed, stating that once profit is estimated, disallowance on trade creditors arising from purchases is unwarranted. Consequently, the Tribunal reversed the decision, allowing the appellant's appeal.

In conclusion, the Appellate Tribunal ITAT Kolkata addressed the issues of gross profit estimation, capital introduction, and alleged non-existent creditors in a detailed judgment, providing relief to the appellant on all counts.