Ita/355/2013 Of M/S Grand Lilly Motels Ltd v. Income Tax Appellate Tribunal Amritsar Bench And Ors

ITA No. 355 of 2013 =|. IN THE HIGH COURT OF PUNJAB & HARYANA AI CHANDIGARH ITA No. 359 of 2013 (O&M)Date of Decision: 9.1.2014 | Grand Lilly Motels Limited ...Appellant 0!)$1$ income lax Appellate Tribunal, Amritsar Bench, Amritsar and others ... Respondents CORAM:-HON BLE MR. JUSTICE AJAY KUMAR MITTAL.HON BLE MRS. JUSTICE ANITA CHAUDRRY. PRESENT: Mr. R.K. Bajaj, Advocate for the appellant, AJAY KUMAR MITTAL, J. 1.The assessee has preferred this appeal under Section 260Aof the Income Tax Act, 1961 (in short “the Act’) against the order dated12.8.2013 passed by the Income lax Appellate Iridbunal, Amritsar BenchAmritsar (hereinafter referred to as ‘the Tribunal’), claiming the followingsubstantial questions of law:- )Whether the impugned orders are result of mis-reading and mis-appreciation of law and!9#*!%"!Creading and mis-appreciation of law and!9#*!%"!C il)Whether the respondent No.1 being final courtof fact ought to have dealt with each and everyaspect/pleadings of the appellant while affirmingand findings of authorities below?of fact ought to have dealt with each and everyaspect/pleadings of the appellant while affirmingand findings of authorities below? iil)Whetner the impugned orders are erroneous, ITA No. 355 of 2013 perverse and not sustainable in the eyes oflaw? Iv)Whetner the respondent No.1 shoulda naveallowed 15% wastage especially when the AOhas allowed 15% wastage in subsequentyears?allowed 15% wastage especially when the AOhas allowed 15% wastage in subsequentyears? v)Whetner the respondent No.1 nas ignored thematerial evidence?material evidence? VI)VWhetner the respondent No.1 nas fallea to refeto tne relevant pleading and evidence on recordwhile passing the impugned order’?to tne relevant pleading and evidence on recordwhile passing the impugned order’? 2.Briefly stated the facts as narrated in the appeal may benoticed. The return of income was filed on 29.9.2008 declaring loss of=1,34,853/-. The said return was processed under Section 143(1) of theAct and the case was selected for scrutiny and notice under Section 143(2) of the Act was issued on 23.9.2009. Subsequently, the case wastaken up for scrutiny by the Additional CIT, Range-lll, Jalandhar andnotices under Sections 143(2) and 142(1) of the Act along withquestionnaire dated 24.11.2009 were issued to the assessee. Theassessee had shown receipts amounting to49,25,265/- on account offood sales. The purchase against the food sales was_439,12,89/7/- andthe opening and closing stock of good items were shown at=12,82,615/- and473,18,326/-, respectively. The Assessing Officervide order dated 29.11.2010 (Annexure A-1) computed the total incomeof the assessee at=40,/71,805/-. Feeling aggrieved, the assessee filedan appeal before the Commissioner of Income Tax (Appeals) [For brevity‘the CIT(A)] who vide order dated 30.3.2012 (Annexure A-2) partly allowed the appeal. ostill dissatisfied, the assessee approacned thTribunal by way of an appeal. Ine [ribunal vide order dated 12.38.201(Annexure A-3) dismissed the appeal. Hence, the present Income laxAppeal. 3 Learned counsel for the assessee-appellant submitted thatthe Assessing Officer, the CIT(A) and the Tribunal had erred in notallowing the claim of the assessee on account of wastage whiledetermining the income of the appellant. According to the learnedcounsel, the Assessing Officer nad allowed 15% on account of wastagein the next year after applying the same formula as has been applied forthe current assessment year and, therefore, the approach of theautnorities below was unsustainable In law. 4 Aiter hearing learned counsel for the appellant, we do notfind any merit in the appeal. The Assessing Officer, CIT(A) and theTribunal had sustained the rejection of books of account under Section145(3) of the Act. The Assessing Officer while disallowing the claim ofthe assessee nad recorded as under': 3 Learned counsel for the assessee-appellant submitted thatthe Assessing Officer, the CIT(A) and the Tribunal had erred in notallowing the claim of the assessee on account of wastage whiledetermining the income of the appellant. According to the learnedcounsel, the Assessing Officer nad allowed 15% on account of wastagein the next year after applying the same formula as has been applied forthe current assessment year and, therefore, the approach of theautnorities below was unsustainable In law. 4 Aiter hearing learned counsel for the appellant, we do notfind any merit in the appeal. The Assessing Officer, CIT(A) and theTribunal had sustained the rejection of books of account under Section145(3) of the Act. The Assessing Officer while disallowing the claim ofthe assessee nad recorded as under': “492From the reply of the assessee's ARreproduced above, It Is obvious that the assessee Isnot maintaining any stock register of dailyconsumption of various items used in the business. Itis stated in the said reply that the details of openingand closing stock were prepared at the end of theyear. However, not even the inventory of opening andclosing stock has been furnished leave aside thevaluation of the same. It is the contention of theassessee's AR that the consumption of grocery items =4. to food sales cannot be worked out because the itemsused by the assessee company are numerous, buteven if this contention is considered, It cannot beunderstood as to why even the inventories of openingand closing stock could not be furnished, and in theabsence thereof, it is absolutely not understandableas to now the figures and valuation of opening andclosing stock Nave been arrived at. It Is, therefore,obvious that the trading account prepared py theassessee company Is Incorrect and incomplete, andcannot be relied upon. Moreover, the assessees ARIhas himself stated in his reply reproduced above thatthe items used for consumption by the assesseecompany are perishable and If not consumed witninthe requisite time, nave to be thrown away. in sucncircumstances, It Is not Understandable as to now andwny the assessee Is maintaining opening and closingstock of huge sums like Rs./72,82,615/- andRs./3,18,3/6/- as against which, sales of onlyRs.92,25,262/- have been shown. The very figures ofopening stock, closing stock and sales are enougn toshow that the books of account of the assesseecompany are being manipulated, and tne tradingresults snown do not present tne true and correctpicture of state of affairs of the assessee. In view ofall these facts, the assessee's AR vide order sheetnoting dated 16[ 5]November, 2010, was required to ITA No. 355 of 2013=5- snow cause as to wny the book results of theassessee may not be rejected u/s 145(3) of theincome Tax Act, 1961. 4aTherefore, in view of the detailed discussion inthe preceding paras, being not satisfied about thecorrectness and completeness of the accounts of theassessee company, | reject the same u/s 145(3) of theincome-tax Act, 1961. Having thus rejected the bookresults of the assessee company, It is fair and logicalto estimate the income of the assessee, keeping inview the past history of the case. The past history ofthe case snows tnat the assessee Is in the napit ofsuppressing and undaer-reporting Its food sales,Further, the facts on record show that the assessee iscontinuing witn the same practice during the yearUnder consideration. In AY. 2005-06 and earlierassessment years, the food sales of the assesseecompany had been estimated by the AO by taking thesame to be 5 times of the grocery/provisions|consumed. However, in appeal before the Hon'bleCIT(A), the assessee had got part relief and the ratioof 1:3 was applied by the CIT(A) as against the ratio1:5 applied by the AO. This ratio of 1:3 wassubsequently confirmed by the Hon'ble ITAT, AmritsarBench, Amritsar, which therefore, became final. Videorder sheet notings dated 21[$ ]October, 2010, 1|[$ ] ITA No. 355 of 2013 -6- ITA No. 355 of 2013 -6- November, 2010 and 11[ 5]November, 2010, theassessees AR was repeatedly given opportunities tosnow cause as to wny the same ratio of 1:3 snouldnot be applied to the year under consideration. [hereply furnished by the assessee's AR vide his writtenSubmission filed on 16[ 5]November, 2010, Isreproduced as under:- “Regarding explanation called for alleging thatwhy no aaadition under nead sales of food bmade by applying the ratio of 1:3 of groceryconsumed as confirmed by ITAT in your case inearlier years. In this regard, it is respecttully,submitted that, firstly, In latest order dated 6June, 2008 of Honble ITAT In appeal No. ITANo. 407/ASR/2008, for A.Y. 2005-06 filed bydepartment against sustaining of addition ofRs.65/785/- in food sales after restricting theexorbitant addition of Rs.56,80,/792/-. In foodsales by CIT(A), this ground of appeal of thedepartment has been rejected and finally onlyaddition of Rs.65/785/- remained sustained anhas become final order as no further appeal ispending against these findings. It is evidentfrom perusal of this judicial order that thisalleged ratio of 1:3 has never been applied, notbeen sustained and further it is evident from theorder that the petty addition of Rs.65/85/- in Tood sales has been sustained only consideringthe subsequent events. So, the application ofalleged grocery to food sales ration of 1:3 doesnot arise from final latest |TAT's order.” The reply of the assessee's AR, aS reproducedabove,is to say the least, ridiculous. [ne assesseesAR. nas referred to the Honble |IAI's order for A.Y.2005-06 put nas contended that the ratio of 1:3 nasnever been applied, anda not been sustained. itappears that the assessee's AR is neither aware ofthe facts of the case or its past history, and nor has hebothered to read the assessment order, CIT(A)'s orderand |IAIs order for the said assessment years. [nerelevant portion of the CII(A)s order for A.Y. 2005-06)Is reproduced hereunder for reaay reference:- “| have carefully considered the submissions ofthe appellant and nave gone through thefindings of the AO as incorporated in the order,It is seen from the order that the facts andmaterial based on which the addition was madeby AO were similar to the one involved in thecase of appellant for the asstt. years 2002-03and 2004-05 appeals wherein were decidedvide order dated 31.03.22006 bearing appealNo. 931/04-05/CIT (A)/Jal and order dated30.05.2007 vide Appeal No. 518/06-07/CIT(A)/Jal. Neither the appellant nor the AO have ITA No. 355 of 2013 -8- pointed out any distinguishing tacts to the tactsas operating in tnis case for the assessmentyears 2002-03 and 2004-05. Therefore,following my decision in the case of appellantdated 30.05.2007 (supra) the ratio of 1:3 Isapplied as against 1:5 applied by the AO andthe sales are estimated ata sum ofRs.1,12,30,014/- which results in addition ofRs.65,/85/- with relief of RS.56,15,007/- to theappellant.| From the order of the Hon'ble CIT(A) reproducedabove, it is clear beyond doubt that the ratio of 1:3nas been sustained by the CII(A) as against ratio of1:5 applied by the AO. It Is this ratio of 1:3 which hasbeen sustained by the Hon bie ITAT vide tts order No,ITA No. 378 (ASR)/2008 dated 23.09.2008, relevantportion of which is reproduced hereunder:- “The AO has recorded the finding of fact thatthe accounts of the assessee are not correctand compiete and as such, the same stoodrejected. This finding stands confirmed by theId. CIT(A). No challenge thereto has beenmade by the assessee in appeal before us......... the Id. CIT(A) can be said to be justified inreaching the conclusion that the estimation ofsales at five times of the consumption ofmaterials is excessive which neededqd a ITA No. 355 of 2013-9.reasonable basis of estimation with reference tomaterial on recora......... woe. I the light of findings reached by the Id.CIT(A), no interfernece is called for in hisdecision as he has merely corrected theestimation made by the assessing authority andadopted reasonable basis In doing so. “The AO has recorded the finding of fact thatthe accounts of the assessee are not correctand compiete and as such, the same stoodrejected. This finding stands confirmed by theId. CIT(A). No challenge thereto has beenmade by the assessee in appeal before us......... the Id. CIT(A) can be said to be justified inreaching the conclusion that the estimation ofsales at five times of the consumption ofmaterials is excessive which neededqd a ITA No. 355 of 2013-9.reasonable basis of estimation with reference tomaterial on recora......... woe. I the light of findings reached by the Id.CIT(A), no interfernece is called for in hisdecision as he has merely corrected theestimation made by the assessing authority andadopted reasonable basis In doing so. 5,The aforesaid findings were affirmed on appeal by the CIT(A) with the following observations:- “BH As per the assessment order for the AZY 2008-09, in respect of receipts from sale of food, the AOnoticed that the assessee nad snown receiptsamounting to Rs.92,25,265/- on account of food sales.The purchase against the food sales’ wasRs.39.12.89//- an opening and closing stock of fooditems were shown” at Rs./2,82,615/- andRs./3,18,326/- respectively. The AQ asked theassessee to furnish the quantitative details of theopening and closing stock and to explain the methodof valuation of the stock with evidence. Since thisinformation was not submitted by the assesseedespite reminders, the AO gave another opportunity tothe assessee to submit the requisite information, aswell as to produce the stock register containing theinventory of opening and closing stock and day to dayconsumption of the provisions and the groceries|purchased and month-wise particulars of opening stock, purchases, consumption and closing stock ofthe groceries or tne provisions. [ne month-wisebreak-up of the purchases and sales was also askedfor along with the month-wise ratio of consumption ofgroceries/provisions to food sales. Ihe assesseesubmitted before the AO that it was not maintainingday to day stock register of consumption of groceriesaque to various reasons. It was submitted thatmaintenance of consumption register was not feasibiefor the reason that there was 250 items which wereconsumed and that there were numerous perishableitems purchased items purchased which if notconsumed within the requisite time, nad to be thrownaway. It was submitted that numerous items becameobsolete and outdated If not consumed within thestipulated time and nad to be destroyed. It wassubmitted that for this reason no consumption registercould be maintained by the assessee during the yearand, therefore, consumption ratios could not bederived. Ihe assessee submitted that though thequantitative details of the opening stock had beenprepared and valued, these details/lists could not befound. 5 2The AO was not satisfied with the assessee'sreply, because, apart from not submitting theconsumption ratios, even the inventory of the openingand closing stocks was not furnished. She, therefore, =11- 5 2The AO was not satisfied with the assessee'sreply, because, apart from not submitting theconsumption ratios, even the inventory of the openingand closing stocks was not furnished. She, therefore, =11- hela that the trading account prepared by theassessee was Incorrect and Incomplete and could notbe relled upon. The AO also noted that though theassessee had contended that the items used forconsumption were perishable and nad to be thrownaway if not consumed within the requisite time, It wasmaintaining huge opening and closing stock of aroundRs./3 Lacs each against wnich sales of only Rs.92.25Lacs had been snown. As per the AO, the figures ofopening stock, closing stock and sales werethemselves enough to show that the books ofaccounts of the assessee were being manipulatedand tnat the trading results snown did not present thetrue and correct picture of tne state of affairs of theassessee. [The AO referred to several judicialdecisions for the proposition that on account of non-maintenance of stock register and not giving details ofopening and closing stock and the day-to-day recordsof consumption of raw material, the trading resultscould not be relied upon and tnat the book resultscould be rejected, and rejected the book results of theassessee u/S 145(3) of the Act. She, thereafter,proceed to estimate the income of the assesseekeeping in view the past history of the case. Shenoted that past history of the assessee showed that Itwas in the habit of suppressing and under-reportingits food sales. She noted that in A.Y. 2005-06 and ITA No. 355 of 2013=17- earlier assessment years, the food sales of theassessee company had been estimated by the AO bytaking the same to be 5 times of the grocery/ provisionconsumed but that the Ld. CIT(A) had allowed partrelief and estimated the sales by applying the ratio of1:3. She noted that the 1:3 ratio was subsequentlyconfirmed py the Honble IIAT, Amritsar Bencn,]Amritsar. Hence, the AO gave a show cause notice tothe assessee to explain as to wny the ratio of 1:3 maynot be applieaq in the assessment year underconsideration. [he assessee suomitted tnat in thelatest order dated 6[ 5]June, 2008 of the ITAT for theA.Y. 2005-06 In its case filed by tne aepartmentagainst sustaining addition of Rs.65,/85/- In foodsales after restricting the exorbitant addition ofRs.56,80,/792/- in food sales by CIT(A), this ground oappeal was rejected and thus only addition ofRs.65,/85/- remained. It was, therefore, contendedthat the alleged ratio of 1:3 had never been appliednor been sustained by the CIT(A) or by the Hon'bleITAT. The AO, however, referred to the relevantportion of the Ld. CIT(A) for A.Y. 2005-06 in which henad clearly mentioned that he was applying the ratioof 1:3 as against the ratio of 1:5 applied by the AOand that the assessee had got relief of Rs.56,15,007/-on the application of the said ratio by the learned CIT(A). The AO further noted that the Hon'ble ITAT had ITA No. 355 of 2013=-13 noted tnat the assessee nad not challenged therejection of the books results py the AO which hadbeen contirmed by the La. CIT(A), and nad upheld theestimation of the sales by the Id. CIT(A) by applyingthe ratio of 1:3 between grocery contention and salesholding that it was a reasonable basis. Hence, the AOnela that the ratio of 1:3 was to be applied forestimating the sales made by the assessee. [akingInto account the value of the purcnases, opening andclosing stock, the consumption by the assessee wasworked out to Rs.38,//,186/- and the sales wereestimated at 3 times this figure at Rs.1,16,31,558/-,Since tnis was In excess of the declared sales ofRsS.92,25,262/-, the difference in two figures wasaqddead to tne total] Income as undeclared sale 6,The Tribunal while rejecting the appeal of the assessee had noticed as under': 6,The Tribunal while rejecting the appeal of the assessee had noticed as under': wD 1The AO being not satisfied with assessee's|reply because apart from not submitting theconsumption ratios, even the inventory of the openingand closing stocks was not furnished. The AO,therefore, held that the trading account prepared bythe assessee was Incorrect and Incomplete and couldnot be relied upon. The AO also noted that thoughthe assessee had contended that the items used forconsumption were perishable and nad to be thrownaway if not consumed within the requisite item, It was =14. maintaining huge opening and closing stock of aroundRs./3 lacs eacn against which sales of Rs.92.25 lacsnad been shown. According to AO, the figures ofopening stock, closing stock and sales werethemselves enough to show that the books ofaccounts of the assessee were being manipulatedand tnat the trading results snown did not present thetrue and correct pictures of tne rates of affairs of theassessee. [ne AO referred to several judicialdecisions for the proposition that on account of non-maintenance of stock register and not giving details ofOpening and closing stock and day to day records ofconsumption of raw material, the trading results couldnot be relled upon and that the book results could berejected and rejected the books results of theassessee u/s 145(3) of the Act. The AO, thereafter,proceeded to estimate the income of the assesseekeeping in view the past history of the case. Shenoted that past history of the assessee showed that Itwas in the habit of suppressing and under-reportingits food sales. It was noted that in A.Y. 2005-06 andearlier assessment years, the food sales of theassessing company had been estimated by the AO bytaking the same to be 5 times of the grocery/provisionconsumed but the Id. CIT(A) had allowed part reliefand estimated the sales by applying the ratio of 1:3.she noted that the 1:3 ratio was subsequently ITA No. 355 of 2013 -15- confirmed by the ITAI, Amritsar Bench. Hence, theAO gave a snow cause notice to the assessee toexplain as to why the ratio of 1:3 may not be appliedIn the assessment year under consideration. [heassessee submitted tnat in the latest order dated 6[ 5]June, 2008 of the ITAT for the A.Y. 2005-06 in ttscase filed by the department against sustainingadaition of Rs.65,/85/- In food sales after restrictingthe exorbitant addition of Rs.56,80,/92/- In food salesby CIT(A), this ground of appeal was rejected andthus only addition of Rs.65,/85/- remained. It was,therefore, contended that the alleged ratio of 1:3 hadnever been applied nor been sustained by the CIT (Aor by the ITAT. The AQ, however, referred to therelevant portion of the order of the Ld. CIT(A) for A. Y2005-06 in which he had clearly mentioned that hewas applying the ratio of 1:3 between grocerycontention and sales holding that It was a reasonablebasis. Hence, the AO held that the ratio of 1:3 was tobe applied for estimating the sales made by theassessee. Taking into account the value of thepurchases, opening and_ closing stock, theconsumption by tne assessee was worked out toRs.38,/7,186/- and the sales were estimated at 3times this figure at Rs.1,16,31,558/-. Since this wasin excess of the declared sales of Rs.92,25,262/- byRs.24,06,296/-, the difference in two figures was ITA No. 355 of 2013-16- added to tne total Income as undeclared sales.” f.Tne aforesaid findings as recorded by the Assessing Officer,the CII(A) and the Iribunal were not snown to be erroneous or perverse.The assessee had not maintained proper books of account and thesame were rejected under Section 145(3) of the Act. The claim ofwastage in each year depends upon various factors and cannot beapplied uniformly unless the comparable circumstances are analyzedand found to be identical. [nis would primarily be a question of fact.Tnus, there is no weignt In the plea tnat the claim of wastage allowed tothe assessee In the subsequent year be adopted. ITA No. 355 of 2013-16- added to tne total Income as undeclared sales.” f.Tne aforesaid findings as recorded by the Assessing Officer,the CII(A) and the Iribunal were not snown to be erroneous or perverse.The assessee had not maintained proper books of account and thesame were rejected under Section 145(3) of the Act. The claim ofwastage in each year depends upon various factors and cannot beapplied uniformly unless the comparable circumstances are analyzedand found to be identical. [nis would primarily be a question of fact.Tnus, there is no weignt In the plea tnat the claim of wastage allowed tothe assessee In the subsequent year be adopted. 8.In view of the above, no substantial question of law arises inthis appeal. Accordingly, finding no merit in the appeal, the same Isnerebpy dismissed (AJAY KUMAR MITTAL)JUDGE January 9, 2014=3$ (ANITA CHAUDHRY)JUDGE