Principal Commissioner Of Income Tax v. Shri Praveen Kumar Jain

HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE(I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) Income Tax Appeal No.220 of 2017 -Indore, Dated: 05/03/2018 Ms. Veena Mandlik, learned Counsel for theappellant. Heard on the question of admission. 2.This income tax appeal has been filed under Section260-A of the Income Tax Act, 1961 against the order dated26.5.2017 passed in I.T.A. N0.842/Ind/2016 wherebylearned I.T.A.T. partly allowed the appeal of therespondent- assessee and directed that the net profit ratioof 2.5% of total turnover would be just, appropriate anddirected the Assessing Officer to calculate the net profitaccordingly. 3.The facts of the case are that the respondent –assessee has been purchasing cotton and cotton seedthrough Krishi Upaj Mandi Samiti, Badwah, District—Khargone. It was observed by the Assessing Officer fromthe purchase register that the same amount was not foundreflected in the cash book whereas the payment bills bearthe signature of the seller of cotton confirming that thepurchases were made and the payments were made on thesame day. The Assessing Officer has found number ofinfirmity of delayed payment in regard to more than 80persons and the default continued throughout the year. TheAssessing Officer proceeded to reject the books of accountand proceeded to apply the rate of 5% on total purchases to HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE(I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) work out the net profit of the respondent—assessee. 4.The respondent challenged the said order by filingfirst appeal before the Commissioner Income Tax(Appeals). The Commissioner of Income Tax confirmed theaction of the Assessing Officer and dismissed the appeal ofthe respondent on 31.5.2016. He challenged the aboveobservations of the Commissioner of Income Tax (Appeals)by filing an appeal before the Income Tax AppellateTribunal. An argument was advanced before the learnedTribunal that the respondent—assessee has maintainedproper books of accounts and all the books with supportingvoucher, etc. have been produced before the AssessingOfficer and he did not find any defect except mis-match inthe dates of actual payments recorded as compared withthe dates mentioned in “Bhugtan Patra”. It was alsosubmitted that the entire in the cash book is done onlywhen the actual payment is made to the farmers and thesame need not be compared with “Bhugtan Patra” which isprepared just to show compliance with Mandi Rules. Thebooks of accounts cannot be rejected as there is no disputeabout the financial results or amount of purchase and theaggregate of disputed purchases is hardly 5% of totalpurchases. The rejection of books of accounts andestimation of profit consequently is not valid andsustainable. 5.The reply of the Department was that once books ofaccounts are rejected, the Assessing Officer is empowered HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE(I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) to estimate the NP on the total turnover considering thematerial available with him and prayed for rejection. 6.The learned I.T.A.T relying on the decision in the caseof Telelinks versus CIT reported in 377 ITR 158(P&H)the Punjab & Haryana High Court has held thatrejection of books of accounts is a pre-condition and sinequa non for making estimation of net profit. 5.The reply of the Department was that once books ofaccounts are rejected, the Assessing Officer is empowered HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE(I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) to estimate the NP on the total turnover considering thematerial available with him and prayed for rejection. 6.The learned I.T.A.T relying on the decision in the caseof Telelinks versus CIT reported in 377 ITR 158(P&H)the Punjab & Haryana High Court has held thatrejection of books of accounts is a pre-condition and sinequa non for making estimation of net profit. 7.Relying on the aforesaid decision, the learned I.T.A.T.upheld the finding of the Assessing Officer wherein he hasrejected the books of accounts of the assessee. The Tribunalafter appreciating the record of the case, came to theconclusion that undisputedly, net profit ratio of theassessee was 5.26% and 1.86% in the assessment years2009-10 and 2010-11 while the net profit ratio declared bythe respondent - assessee for the assessment year 2011-12i.e. for the present year is .96% which is the nucleus of theaction of the Assessing Officer estimating the profit at 5%of the turnover and considering the past tax history of theassessment year 2009-10 and 2010-11 fixed the net profitratio of 2.5% of the turn over and directed the AssessingOfficer to calculate the net profit accordingly. 8.Paras 14 to 19 of the order are relevant which reads asunder:- “14.On careful consideration of the above rivalsubmissions, we are of the view that in the recent judgment ofHon'ble Punjab & Haryana High Court in the dcase of Telelinksvs. CIT; 377 ITR 158 (P&H) their Lordships have held thatrejection of books of accounts is a pre-condition and sine qua nonfor making estimation of net profit. In the present case, by the HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE(I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) earlier part of this order we have upheld the action of theAssessing Officer wherein he has rejected the books of accounts ofthe assessee and we have upheld the first appellate order on thiscount. 15.In the case of Telelinks (supra) their Lordships in para 10held thus - “The discretion to determine a net profit rate must necessarilybe exercised on the basis of relevant factors which we shallenumerate but before doing so, would clarify that these factorsare neither exhaustive nor a final word on relevant factors thatmay be considered while determining the net profit rate. A fewsignificant factors are the past tax history of the assessee, ifavailable, assessment orders that may have been passed andaccepted by the department, the nature of the assessees'KANCHAN 2014.12.11 15:06 I attest to the accuracy andauthenticity of this document Chandigarh ITA No. 269 of 2014business, an appraisal of the value of the contract, prevailingeconomic conditions vis-a-vis the assessee's business, the priceof raw material, labour etc. the rise in price index as notified bythe Central Government from time to time if applicable and ifthe Assessing Officer proceeds to rely upon assessments ofother assessees engaged in similar business to do so only afterdetermining points of similarity etc. At this stage, it would beappropriate to clarify that the word similar is not synonymouswith the word 'identical'. Factors referred to above are merelyillustrative and not exhaustive of the circumstances that may ormay not be taken into consideration. At this stage, it would beappropriate to reproduce a few words from Dhakeswari CottonMills Ltd. Vs. CIT (1954) 26 ITR 775 (SC) so as to place our conclusions in their correct perspective:- conclusions in their correct perspective:- ".....The ITO is not barred by technical rules ofevidence and pleadings, and he is entitled to acton material which may not be accepted asevidence in a Court of law, but in making theassessment under sub-s.(3) of s. 23 the ITO isnot entitled to make a pure guess and make anassessment without reference to any evidence orany material at all. There must be somethingmore than bare suspicion to support theassessment under S. 23(3). In this case theTribunal violated certain fundamental rules ofjustice in reaching its conclusions. Firstly, it didnot disclose to the assessee what informationhad been supplied to it by the DepartmentalRepresentative. Next, it did not give anyopportunity to the company to rebut the materialfurnished to it by him, and lastly, it declined totake all the material that the assessee wanted toproduce in support of its case. The result is that HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE(I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) the KANCHAN assessee had not had a fairhearing. The estimate of 2014.12.11 15:06 Iattest to the accuracy and authenticity of thisdocument Chandigarh ITA No. 269 of 2014 thegross rate of profit on sales, both by the ITO andthe Tribunal, seems to be based on surmises,suspicions and conjectures. It is somewhatsurprising that the Tribunal took from therepresentative of the Department a statement ofgross profit rates of other cotton mills withoutshowing that statement to the assessee andwithout giving him an opportunity to show thatstatement had no relevancy whatsoever to thecase of the mill in question. It is not knownwhether the mills which had disclosed theserates were situate in Bengal or elsewhere, andwhether these mills were similarly situated andcircumstanced. Not only did the Tribunal notshow the information given by the representativeof the Department to the appellant, but it refusedeven to look at the trunk load of books andpapers produced before it by assessee. The ITOand the Tribunal in estimating the gross profitrate on sales did not act on any material butacted on pure guess and suspicion. The order ofthe Tribunal was set aside and the matter wasremanded to it with directions that in arriving atits estimate of gross profits and sales it shouldgive full opportunity to the assessee to place anyrelevant material on the point that it has beforethe Tribunal, whether it is found in the books ofaccount or elsewhere and it should also discloseto the assessee the material on which theTribunal is going to found its estimate and thenafford him full opportunity to meet the substanceof any private inquiries made by the ITO if it isintended to make the estimate on the foot ofthose enquiries." (emphasis supplied) 16.In the present case, undisputedly rather admittedly, netprofit ratio of the assessee was 5.26% and 1.86% in theassessment years 2009-10 and 2010-11 while the net profit ratiodeclared by the assessee for the present year is .96% which is thenucleus of the action of the Assessing Officer estimating the profitat 5% of the turnover. 17.The main claim of the learned DR is that the facts andcircumstances of the case of Amar Agrawal (supra) are identicalwith the present case. However, we may point out that from a HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE(I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) (emphasis supplied) 16.In the present case, undisputedly rather admittedly, netprofit ratio of the assessee was 5.26% and 1.86% in theassessment years 2009-10 and 2010-11 while the net profit ratiodeclared by the assessee for the present year is .96% which is thenucleus of the action of the Assessing Officer estimating the profitat 5% of the turnover. 17.The main claim of the learned DR is that the facts andcircumstances of the case of Amar Agrawal (supra) are identicalwith the present case. However, we may point out that from a HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE(I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) careful and vigilant reading of the order of the ITAT in the case ofAmar Agrawal (supra), we observe that the history of previousyears' results was not placed before the Tribunal and thus thesame could not be considered by the Tribunal while upholding 5%of NP rate. In the present case we cannot ignore that there arehuge job work receipts during the assessment years 2009-10 to2011-12 which was reduced to 0% in the assessment year 2013-14and the impact of such receipt on the GP ratio cannot be ignoredand wiped out. It is also pertinent to mention that in the presentcase, the Assessing Officer has classified the delayed payment ofRs.1,25,71,083/- out of total cash purchases of Rs.19.88 croreswherein detailed facts regarding earlier and subsequent NP ratioand disputed sales have been placed by the assessee on recordthen the ratio of the order in the case of Amar Agrawal (supra) intoto cannot be applied blindly for upholding the action of theAssessing Officer wherein he has estimated the net profit rate ofthe assessee @ 5% of the total turnover by ignoring the entirerelevant facts and circumstances, as stated above, for estimationof NP rate @ 5% of turnover as per the ratio of the variousjudgments and decisions including the decision of the Punjab &Haryana High Court in the case of Telelinks (supra).18.In this decision of Hon'ble High Court in the case ofTelelink (supra) it was held that a few significant factors are thepast tax history of the assessee, if available, assessment ordersthat may have been passed and accepted by the department, thenature of the assessees' business. In the present case, the past taxhistory of the assessment years 2009-10 and 2010-11 has beenplaced on record of the assessee which has not been controvertedby the learned DR, clearly shows that the net profit ratio of theassessment year 2009-10 was 5.26% and for the assessment year2010-11 it was 1.86% and average of these two comes to 3.56%.On careful consideration of the entire facts and circumstancessuch as average of net profit ratio of immediately and precedingtwo years i.e. 3.56% huge job work receipts in the earlierassessment years, which substantially reduced during the presentassessment year 2011-12, increase in turnover of the assessee, inour considered view, the net profit ratio of 2.5% of total turnoverwould be just, appropriate and we direct the Assessing Officer tocalculate the net profit accordingly. Consequently, ground no.3 ofthe assessee's appeal is partly allowed with the direction to theAssessing Officer as indicated above.19.In the result, the appeal of the assessee stands partlyallowed.” 9.On due consideration of the aforesaid so also the lawlaid down in the case of Telelinks versus CIT(Supra),we are of the view that learned Tribunal has rightly HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE(I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) assessed the net profit at the rate of 2.5% of total turnoverinstead of 5.2% and directed the Assessing Officer tocalculate the net profit accordingly. No substantial questionof law arises in this appeal. Income Tax Appeal No.220 of 2017 filed by theappellant has no merit and is, accordingly, dismissed. pp/ (P. K. Jaiswal) Judge (Virender Singh) Judge 9.On due consideration of the aforesaid so also the lawlaid down in the case of Telelinks versus CIT(Supra),we are of the view that learned Tribunal has rightly HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE(I.T.A. No.220 of 2017) (Principal Commissioner of Income Tax versus Shri Praveen Kumar Jain) assessed the net profit at the rate of 2.5% of total turnoverinstead of 5.2% and directed the Assessing Officer tocalculate the net profit accordingly. No substantial questionof law arises in this appeal. Income Tax Appeal No.220 of 2017 filed by theappellant has no merit and is, accordingly, dismissed. pp/ (P. K. Jaiswal) Judge (Virender Singh) Judge Digitally signed by Pankaj Pandey Date: 2018.03.07 11:29:32 +05'30'