1998 (10) TMI 509 - AT - Income Tax

Summary

Issues Involved:
1. Rejection of books of account by the Assessing Officer.
2. Justification for invoking provisions of section 145(2) of the Income-tax Act.
3. Validity of the addition of 5% flat rate on disclosed sales.

Summary:

1. Rejection of Books of Account:
The Assessing Officer (AO) rejected the books of account of the assessee, an exporter of diamonds, on the grounds that the assessee did not maintain specific details regarding the color, clarity, shape, and number of pieces per carat of diamonds. The AO issued a notice u/s 143(2) and a questionnaire to verify the correctness of the returned income. The AO concluded that the book results could not be accepted due to the absence of vital details and the persistent refusal of the assessee to supply the required information.

2. Justification for Invoking Provisions of Section 145(2):
The AO invoked section 145(2) of the Income-tax Act, citing defects in the books of account, such as the destruction of primary documents and the inability to correlate the lots of rough diamonds with the cut and polished diamonds. The AO observed that the prices of diamonds varied significantly, and the uniform labor charges per carat were inconceivable. The AO inferred that the accounts were not correct and complete and assessed the income accordingly.

3. Validity of the Addition of 5% Flat Rate on Disclosed Sales:
The AO made a flat addition of 5% on disclosed sales, resulting in an addition of Rs. 38,75,050 to the disclosed income. The CIT(A) deleted the entire addition, but the ITAT reversed this decision. The ITAT held that the AO was justified in rejecting the books of account and invoking section 145(2). The ITAT observed that the assessee had not maintained quality-wise records of diamonds and had provided inaccurate particulars before the CIT(A). The ITAT concluded that the AO was reasonable in making the estimated addition and restored the addition of Rs. 38,75,050.

Conclusion:
The ITAT upheld the AO's decision to reject the books of account and invoke section 145(2) due to the defects and lack of vital details. The ITAT also restored the addition of 5% on disclosed sales, finding the AO's assessment justified and reasonable. The CIT(A)'s order was reversed, and the AO's addition was reinstated.