IN INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR BEFORE SH. B. R. BASKARAN, ACCOUNTANT MEMBER AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER I.T.A. No. 175/Asr/2018 Assessment Year: 2013-14 M/s Mehak Food Limited, vs. Deputy Commissioner of Income 258-Basant Avenue, Amritsar Tax, Circle-II, Amritsar [PAN: AAECM 8853G] (Appellant) (Respondent) Appellant by Sh. Padam Bahl (C.A.) Respondent by Sh. Charan Dass (D.R.) Date of Hearing: 27.08.2019 Date of Pronouncement: 27.08.2019 ORDER Per B. R. Baskaran, Accountant Member: appeal filed by assessee is directed against order dated 22-12- 2017 passed by Ld CIT(A)-1, Amritsar and it relates to assessment year 2013- 14. 2. assessee is aggrieved by decision of Ld CIT(A) in confirming addition of 333.64 lacs made by Assessing Officer by enhancing gross profit. 3. facts relating to above said issue are stated in brief. assessee company is engaged in business of manufacturing, trading of milk and milk product like deshi ghee, skimmed milk product, whole milk powder, concentrated milk etc. AO noticed that assessee has declared gross loss during year 2 ITA No. 175/Asr/2018 (AY 2013-14) Mehak Food Limited v. Dy. CIT under consideration. After examining financial statements and explanations furnished by assessee in support of gross loss incurred by it, AO took view that books of account of assessee are not reliable. AO has summarized is conclusion in this regard as under: From totality of facts & circumstances as discussed above, following inferences are drawn: (i) Inspite of increase in sales, assessee who deals in perishable items like Milk & Milk Products, assessee has shown gross loss which is not possible as on rates of purchase & sale of Milk increase or decrease substantially. At best assessee may incur minor loss in rare consignment due to milk getting spoiled but it cannot be routine and recurring feature for 365 days of year. So assessee apparently understated its milk sales. (ii) assessee has shown large number of cash payments of amount in range of Rs.20,000/- made to regular Husk Suppliers, which reflects financial irregularities in working of Limited Company. (ii)(a) Even most of regular milk suppliers have been given payments in cash on number of occasions by keeping amounts at Rs.20,000/- or below. (iii) assessee has itself admitted that It has not maintained day to day production records & stock register, which is very essential record for nature of assessee's business, because every Milk Consignment purchased has to be paid accordingly to its quality, %age of FAT/5NF(Solid Non Fat) constituted in it. Similarly sale rates have to be determined accordingly. It is not possible that assessee purchases Milk at Higher rate in morning and sells same at lesser rate in afternoon. Sales rates would be directly determined corresponding to purchase rates for every day and every consignment. (iv) assessee has not substantiated even its purchase rates, its direct expenses with complete evidence & proper confirmations whether it was in respect of purchases, freight expenses, wages etc. Similarly sale bills have not been correlated with 3 ITA No. 175/Asr/2018 (AY 2013-14) Mehak Food Limited v. Dy. CIT corresponding cost of purchases and value additions due to direct expenses incurred on chilling and evaporation of milk. (v) assessee has not provided complete details of items wise and corresponding quantity & rate wise valuation of opening & closing stock as also details of nature of work in progress. Accordingly AO rejected books of account and estimated gross profits at rate of 2.9%. AO also estimated sales at Rs.102 crores as against sale of Rs.10.19 crores reported by assessee. Accordingly he made addition of Rs.331.46 lacs to total to total income of assessee. 4. Before Ld CIT(A), assessee submitted that eventhough, it did not maintain day to day stock register, yet it has furnished quantity details of finished products. assessee also gave fresh explanation before Ld CIT(A) with regard to gross loss and observations made by Ld CIT(A) in this regard are extracted below: It is further submitted that main reason for trading loss was fact that skimmed milk power (SMP) manufactured by assesee and lying in stock became unfit for human consumption as it did not conform to food safety and standards (Food Product Standards & Food additives) regulation, 2011. copy of report dated 27.5.2013 is enclosed issued by Bali Laboratories, Ludhiana. report clearly states that sample SMP did not conform to safety standards. It was submitted that there was no occasion to file this certificate at time of assessment as no query in this regard was raised by assessing officer. This is fresh evidence and may kindly be admitted under rule 46A of income tax rules, 1962. assesssee's Bank account had become NPA in May, 2013 & Punjab National Bank had locked premises of assessee in Feb 2004 initiated recovery proceedings 4 ITA No. 175/Asr/2018 (AY 2013-14) Mehak Food Limited v. Dy. CIT against assessee company. evidence in this regard is also enclosed. This resulted in complete stoppage of business and SMP (Skimmed milk Powder) lying in stock became unfit for human consumption and had to be taken out of closing stock list. It is further submitted that total turnover of assessee was Rs.1,01,92,09,997/- and there was no basis for estimating same at Rs.102 crores by learned assessing officer. 5. Ld CIT(A) noticed that report give by Bali laboratories with regard to quality of product pertained to only 500 gms and accordingly took view that same cannot be applied to entire lot. Accordingly he took view of AO was right in rejecting books of account, in estimating sales and als in estimating gross profit. Accordingly, he confirmed addition made by AO. 6. Ld AR submitted that assessee has maintained proper books of account and same has been subjected to audit. said books of account have been adopted in annual general meeting and also filed with Registrar of companies. Ld AR further submitted that assessee has furnished proper explanations before AO/CIT(A) for gross loss incurred by it. He submitted that loan taken from Punjab National Bank had become non-performing asset and bank had locked premises of assessee in its recovery proceedings. This has resulted in complete stoppage of business and skimmed milk powder lying in stock became stale and unfit for human consumption. This was also confirmed by laboratory report. He further submitted that Ld CIT(A) has not appreciated fact that only small quantity, out of total lot, shall be usually sent for lab testing. He submitted that all above said facts are 5 ITA No. 175/Asr/2018 (AY 2013-14) Mehak Food Limited v. Dy. CIT supported by various evidences and also books of accounts. Accordingly he submitted that Ld CIT(A) was not justified in confirming addition. 7. On contrary Ld DR supported order passed by Ld. CIT(A). 8. We have heard rival contentions and perused record. 9. admitted facts are that assessee has maintained books of account and same has been subjected to audit. We notice from assessment order that assessee furnished explanations with regard to gross loss and main reason submitted was that it was suffering from working capital shortage and hence it was constrained to sell its product at lower rate, since products are perishable in nature. It was further submitted that there is variation in selling rates on basis of quality of products. Before Ld CIT(A) assessee has furnished further explanation by stating that skimmed milk powder has become unfit for human consumption and hence no value was given to said stock. assessee has furnished copies of lab report in support of above said contentions. 10. We noticed that both tax authorities have not examined above said submissions of assessee by critically examining books of account and other documents furnished by assessee. There is also merit in contention of assessee that sample from whole lot shall only be sent to lab for testing. Accordingly we are of view that Assessing Officer has rejected books of account by drawing certain inferences and by disregarding books of account of assessee. With regard to non maintenance of stock register, Ld AR submitted that assessee has maintained stock details with regard to finished goods. Hence AO would be in position to correlate finished goods with quantity of purchase of milk made by assessee. 6 ITA No. 175/Asr/2018 (AY 2013-14) Mehak Food Limited v. Dy. CIT 11. In view of foregoing discussions, we are of view that reasons cited for rejection of books of account could not be justified in facts and circumstances of case. Accordingly we are of view that entire issue requires re-examination at end of Assessing Officer by duly considering books of accounts and explanations of assessee. Accordingly we set aside order passed by Ld CIT(A) and restore all issues to file of AO for examining them afresh. assessee is also directed to furnish all documents and information and explanations in support of its contentions and also that may be called for by AO. After affording adequate opportunity of being heard to assessee, AO may take appropriate decision in accordance with law. 12. In result, appeal filed by assessee is treated as allowed for statistical purposes. Order pronounced in open court on August 27, 2019 Sd/- Sd/- (N. K. Choudhry) (B. R. Baskaran) Judicial Member Accountant Member Date: 27.08.2019 Sr. Ps. Copy of order forwarded to: (1) Appellant (2) Respondent: (3) CIT(Appeals) (4) CIT concerned (5) Sr. DR, I.T.A.T True Copy By Order Mehak Food Limited v. Deputy Commissioner of Income-tax, Circle-II, Amritsar