2023 (11) TMI 1147 - AT - Income Tax

Addition on account of purchase return - variation of G.P. and N.P ratio - assessee is selling the products on consignment basis on sale of Sabyasachi products - goods are received by the assessee on consignment basis - as argued as per the double entry accounting principles, if there is an increase in cost of purchase, then there is a corresponding increase in valuation of closing stock and there will not be any impact on income - HELD THAT - Assessee is in the business of trading as well as trader of Sabyasachi products for which assessee receives commission on the basis of consignment sale. We observe from the record that assessee s main as well as major income is from commission. It is very much visible from the statement of profit and notes forming part of the financial statements in particular Note - 14 and Note 16. It clearly shows that the assessee s main income is commission income which matches with the revenue from operation declared by the assessee. Assessee has to declare purchases and sales received from Sabyasachi products which is on consignment basis. However, as per the requirement of VAT, assessee has to declare both the purchases as well as sales in its Books of Accounts and assessee has to declare the goods kept under its control i.e., opening goods on consignment basis and total purchases for the year less purchase returns during the year under consignment. Since the goods are received by the assessee on consignment basis assessee may have to return consigned goods back to Sabyasachi in case of defective or unsold stocks. In the line of trade particularly with respect to consignment sales assessee is not the owner of the goods and he is responsible to make the sales on behalf of the other party and in return assessee is eligible to get only the percentage of agreed commission. Assessee has squared up the purchases and sales in its financial records and no doubt assessee has declared substantial amount as purchases return back to Sabyasachi. It is the responsibility of Sabyasachi to declare the above activities in its Books of Accounts. Since assessee is only a commission agent assessee has recorded the transactions to square up the sales and purchases in its Books of Accounts and declared only the commission income as its main source of income. Therefore, we are not inclined to accept the findings of the Assessing Officer in this regard. Variation in G.P and N.P ratio - As we observe that assessee has received percentage of commission lesser than the previous year turnover and also the assessee has declared additional employee cost compared to previous year, since these issues were not contested before us, we are not inclined to make further comments on these issues. Accordingly, Ground No. 1 raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of purchase return of Rs. 6,98,35,282.
2. Violation of principles of natural justice due to lack of show cause notice and opportunity for hearing.

Issue 1: Disallowance of Purchase Return

The assessee, engaged in trading apparels and accessories under its own brand "Muse" and as a consignment agent for "Sabyasachi" products, filed its return for A.Y. 2013-14 declaring NIL income after setting off brought forward losses. During scrutiny, the Assessing Officer (AO) questioned the assessee's accounting treatment of purchases and returns, particularly the exclusion of purchase returns of Rs. 6,98,35,282 and goods on consignment in the profit and loss account. The AO concluded that this led to suppression of taxable profits and disallowed the purchase return, adding Rs. 6,98,35,282 to the income.

The assessee argued that the AO misunderstood the accounting principles for consignment sales, where purchases are recorded only upon actual sale to third parties, and that the purchase return was correctly accounted for VAT purposes. The assessee provided audited financial statements and Form F under the VAT Act to support its claims. However, the CIT(A) upheld the AO's findings without addressing the assessee's submissions.

Upon appeal, the ITAT noted that the assessee's main income was commission from consignment sales, and the purchases and sales were reconciled in the financial statements. The ITAT found that the AO's disallowance was incorrect as the assessee had not claimed the purchases as an expense. Thus, the ITAT allowed the assessee's appeal on this ground.

Issue 2: Violation of Principles of Natural Justice

The assessee contended that the AO made the addition without issuing a show cause notice or providing an opportunity for hearing, violating the principles of natural justice. The assessee cited several rulings supporting the need for proper notice and opportunity to respond before making additions.

The ITAT acknowledged the assessee's argument but did not separately address this issue in detail as the primary ground regarding the disallowance was resolved in favor of the assessee. Consequently, the related grounds were dismissed as not argued.

Conclusion

The ITAT allowed the appeal partly, primarily on the ground that the AO's disallowance of the purchase return was incorrect, and dismissed the related grounds concerning the violation of natural justice as not argued. The order was pronounced on 25th October, 2023.