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TMI Blog2019 (2) TMI 1811X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in deleting the disallowance of Rs. 2,66,81,850/- on account of increased profit after invoking provision of section 145(2) of the I.T. Act, 1961. 3) In the facts and circumstances of the case, the Ld. CIT(A) has erred in not appreciating the facts that books of accounts were not rejected merely because of low profit rate, rather they were rejected because the assessee did not furnish any documentary evidence to explain the abrupt fall in net profit rate. 4) On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 2,66,81,850/- on the grounds of non-following the principle of natural justice, when it has co terminus power as of AO. 5) The appellant craves leave to add, amend any / all the grounds of appeal before or during the course of hearing of the appeal. 3. The grounds raised in ITA No. 5306/Del/2015 (AY 2012-13) read as under:- 1) The order of Ld. CIT(A) is not correct in law and on facts. 2) On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 3,82,42611/- on account of increased profit after invoking provision of section 145(2) of the I.T. Act, 1961. 3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company is engaged in the business of manufacturing and trading in soft drinks under the brand name Pepsi, Mirinda, 7up etc. and deriving income from business and profession. On examination of the net profits of the assessee for the relevant financial year vis a vis the net profits of the immediately last 3 preceding years, AO observed that the net profit for the year under consideration is abysmally low. AO observed that assessee had not furnished any details whatsoever in reply to question no. 43 of the questionnaire dated 1.11.2013 regarding the details for expenses claimed in the P&L account with documentary evidences, however, after repeated reminders, the assessee had furnished part details which also include only list of major expenses without any bills and vouchers to verify the same. AO further observed that assessee had not produced the books of accounts. Hence, he observed that it is clear that the assessee has not been able to substantiate the trading results in P&L account by not producing any details of expenses, confirmations or ledger accounts of the parties. He also observed that assessee has made willfully surrender on account of disallowance of expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to addition on account of rejection of books of accounts and estimation of profit:- 1. M/s Punjab Sind Dairy Products Pvt Ltd Vs DCIT 2017-TIQL-83-SC-IT (Supreme Court) rejection of books was sustainable, where the Assessee had failed to produce the Registers indicating Production, Issuance and Consumption. It also upheld the estimation of income on the basis of the material on record and the statements made by the employees and directors during search and survey proceedings 2. M/s Punjab Sind Dairy Products Pvt Ltd Vs DCIT 2016-TIQL-3116-HC-MUM-IT (Bombay High Court) 1. rejection of books is sustainable, where the Assessee failed to produce the Registers indicating Production, Issuance and Consumption. 2. estimation of income on the basis of the material on record and the statements made by the employees and directors during search and survey proceedings is not arbitrary 3. Smt Dayawanti Vs CIT f20161 75 taxmann.com 308 (Delhi)/[2017] 245 Taxman 293 (Delhi/[2017] 390 ITR 496 (Delhi)[2016] 290 CTR 361 (Delhi) (Copy Enclosed) where Hon'ble Delhi High Court, in para 22 of its order, upheld order of Hon'ble ITAT estimating GP @15% and estimating sales at Rs. 1 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audited in compliance of the provisions of the Companies Act, 1956 and also tax audit under section 44AB of the Income tax Act, 1961 was conducted by chartered accountant and the auditors have reported the about correctness and completeness of the books of account and also not qualified their reports. It was further submitted that AO has neither pointed out any defect or discrepancy in the books of account nor mentioned his dissatisfaction regarding correctness and completeness of the books of account. So, the conditions prescribed under section 145 of the Income tax Act, 1961 for rejection of books of account has not been satisfied in the case of the assessee and the books of account of the assessee have been wrongly rejected arbitrarily and capriciously. It was further submitted that AO has erred in alleging that the assessee has failed to furnish the required details and to produce the books of account which has been corroborated from two facts. Firstly the AO framed assessment under section 153A read with section 143(3) of the Income tax Act, 1961 instead of 153A read with section 144 of the Income tax Act, 1961 which proves beyond doubt that the assessee has filed the require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AR alongwith paper book was forwarded to the A.O. seeking his comments on various submissions of the AR. The contents of the letter seeking A.O's report is reproduced below In the above case the AO has made NP addition of Rs. 2,66,81,850/- on the ground that the NP declared by the appellant was very much on the lower side. The appellant has made a detailed written submission and filed paper book substantiating the financial results declared by them. The AO is hereby given an opportunity to offer his comments, if any, on the various submissions made during the appeal proceedings. 4.1.6 The A.O. has submitted his report through his JCIT. The relevant contents of the report are as under: The case of above named assessee has been centralized in CC-12 (Now Central Circle 07), New Delhi consequent to search in the case of assessee on Jaipuria Group of cases. The assessee has taken ground of appeal before CIT(A) that:- "On the fact and circumstances of the appellant's case, the learned assessing officer erred both in fact and in law in estimating profit of Rs. 3,82,42,611/- by rejecting the books of account / book results by invoking provisions of section 145 of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,717,628 722,793,930 531,951,783 EXPENDITURE Increase/ Decrease in stocks (8,701,407) (4,300,694) (156,707) (5,169,627) Excise Duty on Op/ Closing FG Stock 792,922 (572,721) (487,898) 449,916 Purchases of Traded Goods 117,329,314 232,283,485 149,608,038 115,346,667 Cost of Raw Material Consumed 480,526,067 315,939,248 224,553,873 153,375,188 Stores Consumed 22,114,116 15,743,774 12,627,492 7,687,991 Power & Fuel 50,106,834 29,623,318 20,881,508 15,478,518 Employees Benefit Expenses 77,140,066 67,218,464 57,128,470 50,673,843 Transportation, Handling & distribution cost 83,354,397 96,003,364 65,140,513 47,994,459 Total Manufacturing Expenses 822,662,309 751,938,236 529,295,289 385,836,955 Gross Profit 197,490,370 227,509,002 184,456,502 139,431,088 Other Expenses Administrative & Other Expenses 33,640,855 35,203,039 26,843,620 26,360,189 Repair & Maintenance 34,595,241 26,074,024 21,752,749 16,990,517 Selling & Other Expenses 52,54 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,699 Loss on Sale of Fixed Assets - - Total Other Expenses 255,279,676 173,668,253 Net Profit (54,670,444) 20,796,034 GP Ratio on Total Sale 19.36% 24.85% NP Ratio on Total Sale -5.36% 2.81% 3. On perusal of the above table, it is quite evident that GP rate of the appellant company has fallen by 5.49% and NP rate by 8.1 7% as compared to average GP / NP rate of last three preceding financial years. The fall in GP rate as compared to average GP rate of last three preceding years is just because of increase in cost of purchase / cost of raw material consumed. The cost of purchase / cost of raw material consumed of Rs. 59,78,55,381/- and sale / turnover of Rs. 1,02,01,52,679/- for the financial year 2010 - 11 as against average cost of purchase / cost of raw material consumed of Rs. 39,70,35,499/- and sale turnover of Rs. 73,94,89,024/- for last three preceding years i.e. from 2007 - 08 to 2009 - 10. The percentage of cost of material to sale for the financial year 2010-11 works out at 58.60% against average cost of material to sale 53.69% for last three preceding years. Hence, the percentage increase in cost of purchase / cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany has been decreasing over the years and the Ld. AO himself has accepted the said facts in the assessment framed under section 153A read with section 143(3) of the Income tax Act, 1961 for the last three assessment years i.e. 2008 - 09, 2009 - 10 and 2010 -11. The GP rate has been decrease gradually from 26.54% to 23.23% in the last three assessment years. Detail of GP rate of the last three assessment years is as under: Assessment year GP rate (%age) 2008 - 09 26.54 2009-10 25.84 2010-11 23.23 7. On perusal of the above table, it is quite evident that historical data of the audited financial statements substantiated the fact that the constant fall in GP rate over the years is mainly due to increase in cost per unit of major raw materials over the years and therefore fall in GP rate is not abnormal. The fall in GP rate is quite explainable and justifiable from the audited financial statement prepared as per requirement of the Companies Act, 1956 and particulars already furnished in the tax audit report as per the provisions of section 44AB of the Income tax Act, 1961 and books of accounts being produced before yourself. 8. It is worth mentioning here t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the books of account produced. Financial Cost Chart for AY 2011-12 - S. No. Particulars Financial year 2010-11 Average Financial Charges of last three financial years 1. Oriental Bank of Commerce Cash Credit 61,776,118 Term Loan 20,292,037 2. Yes Bank Limited Cash Credit 19,727,647 Working Capital Demand Loan 80,000,000 Term Loan 240,000,000 3. Pepsico India Holding Private Limited 10,061,298 4. Limited Companies against Vehicles 15,378,695 5. Interest accrued but not due Total Secured Loan 447,235,794 Financial charges 55,876,756 26,911,524 Net Turnover 1,020,152,679 73,94,89,024 % of financial charges over net turnover 5.48% 3.64% ' % increase in financial charges 1.84% In view of the facts narrated above, it is requested that the appeal of the assessee may kindly be deleted on merits. 4.1.7 The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld like to submit that the learned assessing officer in his remand report submitted that the contention of the assessee in respect of decrease in NP ratio was mainly on account of increase in the Input cost, Fixed Costs along with the increase in the finance cost due to increased borrowings over the years, whereas there is no proportionate increase in the Selling price of the beverages is found to be as per the books of account produced. Hence, the learned assessing officer in his remand report has accepted the contentions of the appellant company in respect of Grounds of Appeal No 1 to 6 raised by the appellant on verification of books of account produced before him and completely satisfied about completeness and correctness of the books of account of the appellant company. Since, books of accounts have been duly examined by the learned assessing officer and found to be correct and complete, so the appellant stands by the submission made earlier before your good self that the learned assessing officer erred in fact and in law in estimating profit of Rs. 2,66,81,850/- by rejecting the books of account / book results by invoking provisions of section 145 of the Income tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 95,717,628 722,793,930 531,951,783 EXPENDITURE Increase/ Decrease in stocks (8,701,407) (4,300,694) (156,707) (5,169,627) Excise Duty on Op/ Closing FG Stock 792,922 (572,721) (487,898) 449,916 Purchases of Traded Goods 117,329,314 232,283,485 149,608,038 115,346,667 Cost of Raw Material Consumed 480,526,067 315,939,248 224,553,873 153,375,188 Stores Consumed 22,114,116 15,743,774 12,627,492 7,687,991 Power & Fuel 50,106,834 29,623,318 20,881,508 15,478,518 Employees Benefit Expenses 77,140,066 67,218,464 57,128,470 50,673,843 Transportation, Handling & distribution cost 83,354,397 96,003,364 65,140,513 47,994,459 Total Manufacturing Expenses 822,662,309 751,938,236 529,295,289 385,836,955 Gross Profit 197,490,370 227,509,002 184,456,502 139,431,088 Other Expenses Administrative & Other Expenses 33,640,855 35,203,039 26,843,620 26,360,189 Repair & Maintenance 34,595,241 26,074,024 21,752,749 16,990,517 Selling & Other Expenses 52,548,446 55,183,838 43,158,306 36,53 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by 5.4% (24.85% to 19.36%) and net profit rate by 18.17% (i.e. 2.81% to (-) 5.36%) was on account of increase in cost of purchase and cost of raw material consumed. 4.1.13 There is a fall in G.P. by 5.49%. Out of 5.49%, 4.91% fall in G.P. has been attributed to increase in cost of raw material consumed and purchases of traded goods. The balance fall in G.P. (5.49% (-) 4.91% - 0.58%), was attributable to increase in salary, wages, repairs & maintenance expenses. 4.1.14 The comparative chart showing percentage increase in cost per unit of major raw materials as per the audited financial statements of the appellant's company, as submitted by the AR, for the F.Yrs. 2007-08 to 10-11 is reproduced below: Particulars of major Raw material Unit Cost per unit in Rs (2011) Cost per unit in Rs (2010) Cost per unit in Rs (2009) Cost per unit in Rs (2008) Average Cost per unit in Rs(2008 - 2010) %age increase Concentrate Units 20,712 21,408 18259 18189 19285 7.40 Pulp Kg 82 63 63 29.04 Crown Cork Gross 46 38 36 29 34 32.77 Sugar Kg 30 28 18 14 20 52.63 C02 Kg 14 13 14 13 13 6.95 4.1.15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account. Further, even though the A.O. has noted the fall in N.P. ratio in the assessment order, no effort has been made by him to ascertain the appellant's version about the reasons for fall in GP/NP rates. The questionnaire dated 1.11.13 issued by him does not seek any clarification or explanation for the fall in N.P. rate. As noted in the previous paragraphs, the appellant did have its own justification for the fall in N.P. ratio. It has been submitted that the G.P. rate has been falling over the years and the same was attributable to the increase in the cost of raw material and cost of purchases of traded goods without commensurate increase in the selling price of beverages due to stiff competition . 4.1.18 Thus from the explanation given by the appellant, it is clear that the fall in G.P. is due to increase in cost of raw materials. It is also seen that over the years, the financial charges have seen a growth of 1.84% from average of 3.64% (for the past 3 years) to 5.48% during the current previous year. Further, the fall in N.P. rate has been attributed to the increase in input cost and finance cost. 4.1.19 All the above justifications have been examined by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of surrender of income made during search & seizure proceedings. As is evident from the detailed letter dated 28.02.2014, submitted before the AO. The group had surrendered Rs. 10 crore during the search and initially it had given the following breakup of the said surrender. Name of the assessee Amount (Rs.) Sh. C.K. Jaipuria 1000000 Sh. Ruchirans Jaipuria 2500000 M/s. Pearl Drinks Ltd. and others 91500000 M/s. Jaipuria Beverages & Food Industries Pvt. Ltd. 5000000 Total 100000000 4.1.22 The above surrendered amount has been reworked out on the basis of study and analysis of the seized documents. In their letter dated 28.02.2014 submitted before the AO on 07.03.2014, a detailed explanation of surrendered income in hands of different entities and different assessment years has also been provided. The total surrendered amount infact exceeds Rs. 10 crore by Rs. 16 lacs the breakup of which is as under: - Name of the assessee Income surrendered (amount in Rs.) Tax paid (amount in Rs.) M/s Jaipuria Beverages and Food Industries Pvt. Ltd. 27665794 11321359 M/s Pearl Drinks Ltd. 33759400 5762680 M/s Pearl Bottling Pvt. Ltd. 32210 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l years. We further AO has not found any discrepancies in the books of accounts produced before him. During the assessment proceedings, AO has however, not sought any explanation nor confronted with the adverse evidences. It is also observed that the AO has resorted to rejection of books, all of a sudden without any indication to the assessee. No show cause notice has been issued to the appellant before rejecting the books of account. Further, even though the A.O. has noted the fall in N.P. ratio in the assessment order, no effort has been made by him to ascertain the appellant's version about the reasons for fall in GP/NP rates. The questionnaire dated 1.11.13 issued by him does not seek any clarification or explanation for the fall in N.P. rate. It is further noted that that the fall in G.P. is due to increase in cost of raw materials and over the years, the financial charges have seen a growth of 1.84% from average of 3.64% (for the past 3 years) to 5.48% during the current previous year. Further, the fall in N.P. rate has been attributed to the increase in input cost and finance cost. Since this is a search & seizure case and the Previous year of the present assessment year f ..... 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