Aay Ess Silk Mills v. Commissioner Of Income Tax

ITA No. 327 of 2007 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Aay Ess Silk Mills Versus Commissioner of Income Tax ITA No. 327 of 2007 Date of Decision: 8.12.2010 ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Rishab Kapoor, Advocate for the appellant. Mr. Vivek Sethi, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.The appeal was admitted by this Court on May 20, 2008 fordetermination of the following substantial question of law:- “Whether the Tribunal is justified in arriving at theconclusion towards net profit rate estimation on thebasis of fresh and new base never pleaded by thelitigants?”conclusion towards net profit rate estimation on thebasis of fresh and new base never pleaded by thelitigants?” 2.The facts necessary for adjudication as pleaded in thepresent appeal are that the assessee is doing the business ofpurchasing yarn from the market and selling the same to thewholesalers after getting it manufactured from outsiders. The assesseefiled its return on 31.10.1989 for the assessment year 1989-90 declaring an income of Rs.19,960/-. The Assessing Officer rejected the bookresults being defective and made an addition of Rs.6,97,976/- byapplying G.P. rate of 17.77%. The Assessing Officer disallowed thecommission amounting to Rs.92,940/- paid to its two sister concernsunder Section 40A(2)(a) of the Income Tax Act, 1961 (in short “theAct”). The assessee challenged both the additions by way of appealbefore the Commissioner of Income Tax (Appeals) [hereinafter referredto as ”the CIT(A)”]. The CIT (A) vide order dated 19.1.1993 deleted thesaid additions. Against the order of the CIT (A), the department filed anappeal before the Income Tax Appellate Tribunal, Amritsar Bench,Amritsar (in short “the Tribunal”) who set aside the order of the CIT(A)and directed the Assessing Officer to complete the assessment afreshas per the directions given in the order of the Tribunal dated 28.4.1999.Thereafter, the Assessing Officer passed fresh assessment order on27.3.2002 as per the directions of the Tribunal and maintained theaforesaid two additions. The appeal carried by the assessee againstthe said assessment order was accepted by the CIT(A) on 24.2.2005who deleted both the additions of Rs.7,90,916/- (Rs.6,97,976/- +Rs.92,940/-). The appeal of the revenue was, however, partly acceptedby the Tribunal by order dated 23.3.2007. This gave rise to the filing ofthe present appeal by the assessee. 3.We have heard learned counsel for the parties. 4.The Tribunal while partly allowing the appeal of the revenuehad held that the net profit rate as per books of accounts of theassessee worked out to 0.34% on sales of Rs.58.50 lacs and the booksof accounts had rightly been rejected. The assessee's failure to produce the books of account along with bills and vouchers to justify that thesales made to its sister concern were at the market rate, it was taken tobe fair and reasonable to estimate the income by applying net profit rateof 5% of the sales. The relevant observations of the Tribunal are asunder:- 3.We have heard learned counsel for the parties. 4.The Tribunal while partly allowing the appeal of the revenuehad held that the net profit rate as per books of accounts of theassessee worked out to 0.34% on sales of Rs.58.50 lacs and the booksof accounts had rightly been rejected. The assessee's failure to produce the books of account along with bills and vouchers to justify that thesales made to its sister concern were at the market rate, it was taken tobe fair and reasonable to estimate the income by applying net profit rateof 5% of the sales. The relevant observations of the Tribunal are asunder:- “However, the Tribunal while sustaining the order ofthe CIT(A) observed that the case wasdistinguishable from the case relied upon by the Ld.DR because in that case entire sales were made tooutside parties. In the case of the assessee, sales,were made to its sister concerns. Further, the booksof account along with other details supported by bills,vouchers and stock register were produced beforethe AO and he had not pointed out any defectstherein. Thus, reliance of the Ld. counsel on thisdecision is of no help. However, in the case of Sh.Arvinder Pal Singh, the AO had referred to the caseof M/s Deesons Silk Mills as in the present case andobserved that the G.P. shown was 18.35%. The AOestimated the income by applying G.P. rate of10.35%. Therefore, even in the present case theapplication of G.P. rate of 17.77% was arbitrary andunreasonable, taking into account the fact that thiswas the first year of assessee's business and noaddition was made in the block assessment. But atthe same time, the fact whether sales made to sister concerns were at market rates or not remainedunverifiable. We have also noted that even aftershowing G.P. rate of 5.82%, the assessee madepayments of commission amounting to Rs.92,940/- toits sister concerns. Thus, the income returned onsales of Rs.58.50 lacs was at Rs.19,960/- which interms of net profit worked out to 0.34%. Thus, takinginto account the facts that the book results have beenheld to be rightly rejected; the assessee's failure toproduce the book of account along with bills andvouchers to justify that the sales made to its sisterconcerns were at market rate; and that this was firstyear of assessee's business, we are of theconsidered opinion that it would be fair andreasonable to estimate the income by applying netprofit rate of 5%. No further disallowance ofcommission from the income so computed would beseparately made. Accordingly, the order of the CIT(A) is set aside. While the ground of appeal relatingto deletion of trading addition is partly allowed, theground relating to deletion of disallowance isrejected.” 5.Learned counsel for the assessee was unable to point outany illegality or perversity either in the findings recorded or in theapproach of the Tribunal in adopting net profit rate of 5% of the salesmade in the facts of the present case, which may warrant interference ITA No. 327 of 2007 by this Court. The substantial question of law is, thus, answeredagainst the assessee. Accordingly, there is no merit in the appeal andthe same is hereby dismissed. (AJAY KUMAR MITTAL) JUDGE December 8, 2010gbs (ADARSH KUMAR GOEL)JUDGE