2012 (7) TMI 908 - AT - Income Tax

Addition u/s 145 - Held that - According to section 145(1), income chargeable under the head profit and gains of business shall be computed in accordance with the method of accountancy adopted by an assessee subject to the conditions enumerated in sub-sections (2) (3) of section 145. It means that the AO has to determine the income in accordance with the method of accounting adopted by an assessee, provided that method enabled the Assessing Officer to deduce the true income of an assessee. If it emerges out from the record that on the basis of the account maintained by an assessee, it is not possible to deduce true income then he can resort the estimation of the profit. In the present case, the assessee was not maintaining stock register quality-wise. In the absence of such details, it is quite difficult what type of paddy the assessee has purchased which was converted into rice. The assessee can easily manipulate the purchases as well as the sales in the absence of the quality-wise details. AO has rightly rejected the book results and made an ad hoc addition.

Summary

Issues:
1. Addition of Rs. 4 lacs confirmed by CIT(Appeals) for assessment year 2008-09 based on falling gross profit rate.
2. Maintaining stock register quality-wise and its impact on determining true income.
3. Rejection of book results by Assessing Officer and ad hoc addition made.

Analysis:
1. The appellant contested the addition of Rs. 4 lacs confirmed by the CIT(Appeals) for the assessment year 2008-09, citing the fall in gross profit rate from 7.64% to 5.09%. The appellant argued that the increase in turnover and costs, in comparison to the average increase in sales price from the previous year, justified the decline in gross profit. However, the Assessing Officer found discrepancies in the maintenance of stock registers and other details, leading to the rejection of book results and the subsequent addition of Rs. 4 lacs.

2. The appellant maintained that complete books of account, including cash book, ledger, and stock register, were diligently maintained. The appellant explained that maintaining stock registers quality-wise was impractical due to the nature of the business. The absence of quality-wise details in the stock register raised concerns about the transparency of transactions, as it could potentially allow for manipulation of purchases and sales. The Assessing Officer's decision to make an ad hoc addition was based on the inability to deduce the true income of the appellant due to the lack of quality-wise stock register maintenance.

3. The ITAT upheld the decisions of the lower revenue authorities, emphasizing that under section 145(1) of the Income-tax Act, 1961, income computation should align with the accounting method adopted by the assessee. However, if the method used does not enable the determination of true income, the Assessing Officer can resort to profit estimation. In this case, the absence of quality-wise details in the stock register hindered the accurate determination of income, justifying the rejection of book results and the ad hoc addition. With no substantial explanation provided by the appellant, the ITAT concluded that there were no grounds to overturn the CIT(Appeals) order, resulting in the dismissal of the appeal.

In conclusion, the judgment highlights the importance of maintaining accurate and detailed records for income computation and underscores the Assessing Officer's authority to resort to profit estimation in the absence of transparent documentation.