2010 (6) TMI 658 - AT - Income Tax

Rejection of books of account - non-verifying of few purchases - HELD THAT - We find that assessee has maintained regular books of account and they were audited u/s 44AB also. AO drew an adverse inference against the assessee and rejected the books of account. In our considered view only on account of non-verifying of few purchases the rejection of books of account was not justified as there was no other defect found by the AO in maintaining books of account. It is also not the case of the Department that there is any material outside the books which indicates that these purchases are bogus. Payments were made through proper banking channel. There is a possibility that sometimes after a gap of 1/2 years the party may not be available at the address given or that they did not bother to reply the summons issued by the Department. It is also a matter of fact that sales made against those purchases have been accepted by the AO himself. Therefore, in our considered view rejection of books of account were not justified. Accordingly, we allow this ground of the assessee. Disturbing trading result - addition in GP rate - marginal decline in the GP rate as compared to earlier year - HELD THAT - As seen that there is a marginal decline in the GP rate as compared to earlier year as in earlier year the GP rate shown by the assessee was 19.93 per cent and in the year under consideration the GP rate was 17.89 per cent. This is a small variation in the GP rate. In our considered view, due to a small variation of GP rate, disturbance in the trading result was also not justified. The High Court in the case of Malani Ramjivan Jagannath v. Asstt. CIT 2006 (10) TMI 145 - RAJASTHAN HIGH COURT held that merely on account of deviation in GP rate it cannot be a ground for rejecting the books of account and disturbing the trading result. The AO has relied upon two cases for disturbing the trading result whereas assessee has cited four cases including the two cases relied upon by AO and it is seen that GP rate shown by all these assessees were less than the GP rate declared by the assessee. Therefore, for this reason also, in our considered view, disturbance in the trading result was unjustified. Accordingly, we direct the AO to accept the GP rate declared by the assessee. The AO is also directed to delete the addition. TP Adjustment - Addition by applying ALP - difference in the price declared - DRP has vehemently argued that there was an amendment to the provisions of sub-section (2) of section 92C by which it was provided that where more than one price is determined by the most appropriate method, the ALP shall be taken to be the arithmetical mean of such prices, or at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.HELD THAT - As per amended provision to sub-section (2) of section 92C, it does not say that Board s circular has been withdrawn. The Board s circular issued in 2001 is still applicable as the same has not been withdrawn. Even the amended provision does not say that the arithmetical price adopted by the Assessing Officer as per ALP does exceed 5 per cent. then the price adopted by assessee should be disturbed. Therefore, adopting ALP at the end of the Assessing Officer on the fact of the present case, in our considered view, was not justified. There should be some material to suggest that the price shown by the assessee is not justified. Merely on the basis that material has been sold to one of the associates, does not prove that the price shown by assessee is on lower side. In view of these facts and circumstances, we are of the view that addition made on the basis of ALP at the end by the Assessing Officer was not justified and the learned CIT(A) was also not justified in confirming the addition made by Assessing Officer. Accordingly, the addition is deleted. Addition of telephone and vehicle expenses - HELD THAT - We are of the view that if addition on account of telephone expenses and addition on account of vehicle expenses is sustained, that all meet the ends of justice. Accordingly, we restrict the addition to that extent. In the result, appeal of the assessee is partly allowed.

Summary

Issues:
1. Applicability of provisions of section 145(3) of Income-tax Act
2. Trading addition and ALP under section 92
3. Disallowance of telephone and vehicle expenses

Analysis:

1. Applicability of section 145(3):
The issue revolved around the applicability of section 145(3) of the Income-tax Act. The Assessing Officer invoked this provision due to discrepancies in the closing stock verification and unverified purchases. The appellant, a jewelry and stones dealer, failed to verify certain purchases and produce relevant parties for verification. Despite maintaining regular books of account, the Assessing Officer rejected the books and applied a higher GP rate, resulting in an addition. The CIT(A) upheld this decision, citing unsatisfactory explanations from the appellant. However, the Tribunal found the rejection of books unjustified, as there were no other defects, and the purchases were made through proper channels. Consequently, the Tribunal allowed this ground of the assessee.

2. Trading addition and ALP under section 92:
Regarding trading additions and ALP under section 92, the Assessing Officer made significant additions based on international transactions with an associate concern. The appellant's method of determining ALP was questioned, leading to substantial additions. The CIT(A) supported the Assessing Officer's decision, disregarding the appellant's arguments and reliance on circulars. However, the Tribunal disagreed, emphasizing that the appellant maintained all required information, and the difference in ALP was within permissible limits as per the Board's circular. The Tribunal concluded that the Assessing Officer's ALP adjustment was unjustified, and the addition was deleted.

3. Disallowance of telephone and vehicle expenses:
The Assessing Officer disallowed certain telephone and vehicle expenses, which were upheld by the CIT(A). The appellant contended that these expenses were solely for business purposes, given their status as a 100% exporter. The Tribunal considered a partial disallowance to meet the ends of justice, restricting the additions to a certain extent. Consequently, the Tribunal partly allowed the appeal of the assessee.

In summary, the Tribunal's detailed analysis focused on the rejection of books, trading additions, ALP determination, and expense disallowances. The Tribunal overturned certain decisions, emphasizing compliance, justifiability, and adherence to legal provisions and circulars in reaching its final judgment.