2011 (6) TMI 781 - AT - Income Tax

Summary

Issues Involved:

1. Justification of reducing the trading addition.
2. Rejection of books of account u/s 145(3).
3. Estimation of profit and application of GP rate.

Summary:

1. Justification of reducing the trading addition:
The department objected to the reduction of the trading addition from Rs. 1,05,58,554/- to Rs. 7,35,863/- by the CIT (A), despite upholding the rejection of books of account u/s 145(3). The AO had applied a 25% addition on unverifiable purchases of Rs. 4,22,34,219/- based on the decision of the Hon'ble Gujarat High Court in the case of M/s. Sanjay Oil Cake Industries.

2. Rejection of books of account u/s 145(3):
The assessee, dealing in jewellery and gem stones, failed to produce the books of accounts of M/s. K.M. Exports, from whom purchases were made. The AO rejected the books of account u/s 145(3) due to unverifiable purchases and made an addition of 25% of the unverifiable purchases. The CIT (A) upheld the rejection of books of account but reduced the addition, noting that the GP rate declared was lower than the previous year due to a shift from retail to wholesale sales.

3. Estimation of profit and application of GP rate:
The CIT (A) directed the AO to apply a GP rate of 3% on the declared turnover, reducing the trading addition significantly. The Tribunal found no merit in the department's appeal but partially allowed the assessee's cross objection. The Tribunal upheld the rejection of books of account but sustained a smaller addition of Rs. 4,00,000/- for unverifiable purchases, considering the past history and current events of the case. In a similar case involving M/s. Mohan & Company, the Tribunal sustained a trading addition of Rs. 5,00,000/-.

Conclusion:
The appeals of the department were dismissed, and the cross objections of the assessees were allowed in part. The Tribunal emphasized the need to consider past history and current events when estimating profits and making additions for unverifiable purchases.