2009 (1) TMI 854 - HC - Income Tax

Rejection of books of accounts - Invoking the provisions of Section 145(3) - estimating the sales and G.P rate - Tribunal has upheld the order passed by the CIT(A) restricting the enhanced sales - assessee had declared GP rate of 25.95 per cent in the AY1995-96, Tribunal held that the same GP rate should be applied to the assessment year in question as well. Whether the Tribunal was justified in confirming the finding of ld CIT(A) ignoring the fact and finding given by the AO that purchase bill of marble blocks showed no weight or measurement and no stock register was maintained and by considering the comparable case of Anil Marbles (P) Ltd., the GP rate 32.12 per cent taken and made addition? - HELD THAT - It is not the law that books of account of assessee having been rejected as unreliable u/s.145(3), the sales returned by the assessee must necessarily be rejected and such sales should be estimated at higher figure than returned by the assessee. Even after, the rejection of the books of account the AO is under obligation to determine as to whether the sales as returned by the assessee should be accepted or higher sales should be estimated. The estimated sales must be determined fairly on the basis of relevant material on record. As noticed by CIT(A), while determining the estimated sales AO had not considered the relevant aspects. Therefore, the estimated sales determined by the CIT(A) appear to be just and reasonable. It is to be noticed that as in the case of AKJ Granites (P) Ltd. 2007 (4) TMI 196 - RAJASTHAN HIGH COURT , the CIT(A) has found that the case of M/s Anil Marbles was not comparable case for the purpose of lifting the GP rate to be applied to the case of the assessee inasmuch as while adopting the said GP rate, the AO has not considered the investments, locality, year of establishment of business, manpower utilized, availability of raw material etc. of both the cases. The Tribunal while determining the GP rate as 25.95 per cent has taken into consideration the GP rate declared by the assessee during the AY 1995-96, which undoubtedly is relevant consideration. Moreover, as laid down by this Court in AKJ Granites (P) Ltd. (supra), the best judgment itself is based on estimate and cannot be scaled at exactitude. Thus, in our considered opinion, the GP rate adopted by the Tribunal as aforesaid also cannot be faulted with. For the aforementioned reasons, we answer the substantial question framed by this Court as aforesaid in favour of the assessee and against the Revenue. In the result, the appeal fails, it is hereby dismissed.

Summary

Issues:
1. Determination of estimated sales and GP rate by the Assessing Officer (AO).
2. Appeal against the AO's order by the assessee to the CIT(A).
3. CIT(A)'s decision on estimated sales and GP rate.
4. Appeals filed by Revenue and the assessee.
5. Tribunal's decision on the appeals.
6. Substantial question of law admitted by the Court.
7. Arguments presented by the Revenue and the respondent assessee.
8. Court's analysis and decision on the issues raised.

Analysis:

The case involved an appeal under section 260A of the Income Tax Act, 1961 against the order passed by the Income-tax Appellate Tribunal, Jodhpur Bench, partly allowing appeals for the assessment year 1996-97. The Assessing Officer (AO) estimated sales at 1.5 times the declared sales due to discrepancies in the purchase bills and lack of stock register, resulting in increased gross profit (GP). The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the rejection of books of account but found the estimated sales and GP rate on the higher side. The CIT(A) considered various factors and applied a GP rate of 25% on estimated sales of Rs. 55,00,000.

The Revenue and the assessee filed appeals against the CIT(A)'s decision. The Tribunal upheld the CIT(A)'s order limiting enhanced sales to Rs. 55,00,000 but applied a GP rate of 25.95% based on the assessee's previous year's GP rate. The Revenue challenged this decision by questioning the comparability of the case referred by the AO and argued for restoration of the AO's order.

The Court considered the submissions and held that the estimated sales must be determined fairly based on relevant material even after rejecting the books of account. The Court found the estimated sales determined by the CIT(A) to be just and reasonable. Regarding the GP rate, the Court noted that the Tribunal's decision to adopt a GP rate of 25.95% was based on relevant considerations, including the assessee's previous year's GP rate. The Court emphasized that the best judgment assessment is an estimate and cannot be exact. Therefore, the Court ruled in favor of the assessee, dismissing the appeal.

In conclusion, the Court dismissed the appeal, upholding the CIT(A) and Tribunal's decisions on estimated sales and GP rate. The Court's analysis focused on the fairness of determining estimated sales and the reasonableness of the GP rate applied in the case.