2012 (10) TMI 989 - AT - Income Tax

Estimate made for G.P. Rate - AO by rejecting the trading results and by applying G.P. rate of 17.71% as against 14.82% declared by the appellant as per books of account maintained in the regular course of business - Held that - There is no dispute to the fact that the assessee is maintaining purchase/sales register where the stock is recorded in terms of quantity but the assessee is not maintaining any stock register on daily basis. Therefore, the working of the closing stock on estimation basis or by working out the average cost of production cannot be said to have been maintaining the proper books of account. In the absence of the same, assessee s accurate income cannot be deduced. Therefore, we find no infirmity in the order of the Ld. CIT(A), who has rightly upheld the invocation of provisions of section 145(3) of the Act by the A.O. As regards the estimation of income, there is no dispute to the fact that the assessee has submitted the explanation with regard to the increase in the cost of production i.e. increase of the cost of cloth, cost of yarn and expenses as is evident at para 5 of the letter dated 20.4.2009 submitted by the assessee. The said explanation has not been taken in right spirit by the AO as well as by the ld. CIT(A). If this explanation of the assessee is taken into account, we are of the view that no addition on account of trading is called for. We rely upon the decision of the Hon ble Rajasthan High Court in the case of C.I.T. vs. Gotan Lime Khanij Udhyog 2001 (7) TMI 19 - RAJASTHAN High Court wherein it has been held that the addition is not necessary even if the order is passed under sections 145(1) or 145(2) of the Act. Thus the AO is directed to delete the trading addition so made. Decided partly in favour of assessee.

Summary

Issues:
Appeal against addition to Gross Profit Rate and application of section 145(3) of the Income Tax Act, initiation of penalty proceedings under section 271(1)(c), and computation of interest under sections 234B/234C.

Analysis:

1. Addition to Gross Profit Rate and Section 145(3) Application:
The appellant contested the addition of Rs. 3,70,000 by the Assessing Officer (AO) due to the rejection of trading results and the application of a Gross Profit (G.P.) rate of 17.71% instead of the declared 14.82%. The appellant argued that the account books were accurate, complete, and wrongly rejected. The AO invoked section 145(3) of the Income Tax Act, leading to the addition. The CIT(A) upheld the AO's decision. However, the appellant's counsel presented evidence of maintaining purchase/sales registers and explained the basis for valuing closing stock. The Tribunal found that the absence of a daily stock register hindered accurate income determination. Despite the explanation provided by the appellant regarding increased production costs, the AO and CIT(A) did not consider it adequately. Relying on a Rajasthan High Court decision, the Tribunal reversed the CIT(A)'s decision, directing the AO to delete the trading addition.

2. Penalty Proceedings under Section 271(1)(c) and Interest Computation under Sections 234B/234C:
The appellant argued that penalty proceedings under section 271(1)(c) and the computation of interest under sections 234B/234C were wrongly initiated and excessive. The Tribunal did not provide a detailed analysis of these issues in the judgment, indicating that these aspects were not central to the decision. As a result, the Tribunal's focus remained on the primary issue of the addition to the Gross Profit Rate and the application of section 145(3) of the Income Tax Act.

In conclusion, the Tribunal partly allowed the appeal, emphasizing the importance of maintaining proper books of account for accurate income determination. The decision highlighted the significance of considering explanations provided by the assessee, as demonstrated by the reversal of the trading addition based on increased production costs. The judgment showcased the Tribunal's adherence to legal principles and precedents in resolving disputes related to income tax assessments.