2015 (5) TMI 998 - AT - Income Tax

Estimation of the income - rejection of book result of the assesse - fall in G.P. rate - CIT(A) deleted the addition - Held that - Fall in GP cannot be a ground for rejecting the book result shown by the assesse. It is one of the corroborative fact for the Assessing Officer to doubt the books but the Ld. Assessing Officer ought to have pointed out the defects in the accounts, only thereafter he can estimate the GP. Ld. First Appellate Authority reappreciated the material available and only then deleted the addition. After going through the order, we do not find any reason to interfere with it. - Decided in favour of assessee.

Summary

Issues:
1. Addition of income by estimating profit after rejecting book results.

Analysis:
The appeal before the Appellate Tribunal pertained to the deletion of an addition of Rs. 42,87,880 made by the Assessing Officer by estimating income after rejecting the book result of the assessee for the assessment year 2008-09. The primary contention of the revenue was that the CIT(A) had erred in deleting the said addition.

The assessee had initially declared an income of Rs. 7,00,260 and was engaged in trading grey cloth with a turnover of Rs. 18.64 crores, showing a meager Gross Profit (GP) of 0.20%. The Assessing Officer, upon scrutiny, rejected the book result and estimated the profit at a GP rate of 2.5%, resulting in the addition of Rs. 42,87,880. However, the CIT(A) deleted this addition, stating that the Assessing Officer failed to point out any defects in the books of account, thus precluding him from estimating the GP.

During the appeal, the revenue argued that the assessee's lack of maintenance of closing stock details hindered the accurate determination of income. On the contrary, the assessee contended that due to the nature of its business operations, which involved bulk orders without opening or closing stock, maintaining stock statements was unnecessary. The tribunal examined Section 145 of the Income Tax Act, emphasizing the requirement to compute income in accordance with the method of accounting regularly employed by the assessee, unless the Assessing Officer identifies defects in the accounts that hinder the determination of true income.

The tribunal concluded that the Assessing Officer's objection regarding the absence of closing and opening stock did not indicate any defects in the accounts that would justify rejecting the book results. The fall in GP alone was insufficient grounds for such rejection. The tribunal upheld the CIT(A)'s decision to delete the addition, as it found no reason to interfere with the order. Consequently, the revenue's appeal was dismissed, affirming the deletion of the addition.

In summary, the judgment focused on the proper computation of income in alignment with the method of accounting employed by the assessee, emphasizing the necessity for the Assessing Officer to identify specific defects in the accounts before estimating income based on his judgment.