2011 (6) TMI 801 - AT - Income Tax

Rejection of Books of Account u/s 145(3) - Addition on account of Low profit Rates - The assessee s business is of sale and purchase of gold and gold jewellery. AO rejected the books of account u/s 145(3) and addition was made on account of alleged low gross profits. HELD THAT - In view of facts of the present case and in the absence of any defects being pointed out in the books of account maintained by the assessee merely because there was a fall in the GP rate as compared to the preceeding year and the nature of the trade being carried on by the assessee being sale and purchase of gold jewellery where the rates of gold had increased we find no merit in the rejection of books of account and the estimation of profits. Accordingly we direct the Assessing Officer to accept the trading results shown by the assessee and delete the addition. Deduction u/s 40A(2) - Assessee in addition to the carrying on its main business had also carried on the business of sale of cloth - As he couldn t succeed in such business the total sales were made at the same rate as of purchase price to its sister concern - As he suffer no losses - AO estimating GP rate at 15% and attached Provision of 40A(2) HELD THAT - It is not apprehensible that the assessee has entered into a new venture and had made investment in the purchase of stock which was sold with no margin of profit to its sister concern. In each line of business some margin of profit is earned by the person trading in the business and in the absence of any such profits we are in agreement with the order of the authorities below that the provisions of section 40A(2) are attracted in the case because the transaction was with a sister concern and not at the market rate as the goods were sold at its cost price. However we find the rate of 15% applied by the AO to be excessive and direct the Assessing Officer to apply net profit rate of 5% to the transactions to determine the additional income in the hands of the assessee. Non genuine Expenses in Profit and Loss Account - CIT(A) confirmed the addition of 10% of expenses as debited to the profit loss account - HELD THAT - In the first instance there is no merit in such disallowance of the expenses in cases where an estimation of income is made by rejecting the books of account. Further the AO has failed to point out the exact expenses which are not verifiable. We have upheld the trading results shown by the assessee in its business and resale of gold and gold jewellery and accepted the book version declared by the assessee. Accordingly we direct the AO to restrict the disallowance to 1/10th out of car expenses car depreciation and telephone expenses. No disallowance is warranted in probability of expenses being unvouched unless it has been established that the expenditure claimed by the assessee are unvouched.

Issues Involved:
1. Non-allowing the benefit of increase in the value of opening stock.
2. Rejection of books of account under section 145(3) and addition on account of alleged low gross profits.
3. Addition under section 40A(2) of the Income-tax Act, 1961.
4. Disallowance of 10% of expenses as debited to the profit & loss account.

Issue-wise Detailed Analysis:

1. Non-allowing the Benefit of Increase in the Value of Opening Stock:
The assessee filed an additional ground of appeal regarding the non-allowing of the benefit of an increase in the value of opening stock pursuant to the assessment order for the assessment year 2006-07. However, this additional ground was not pressed by the assessee and was therefore dismissed as not pressed.

2. Rejection of Books of Account under Section 145(3) and Addition on Account of Alleged Low Gross Profits:
The assessee, a partnership concern engaged in the business of sale and purchase of gold jewellery, declared a GP rate of 12.63% on a turnover of Rs. 1.60 crore for the assessment year 2007-08, compared to a GP rate of 18.61% on a turnover of Rs. 90.75 lakhs in the preceding year. The Assessing Officer (AO) rejected the books of account and applied a GP rate of 18%, resulting in an addition of Rs. 8,59,814/- due to alleged low gross profits. The AO noted discrepancies in stock valuation and concluded that the assessee had made sales out of books of account. The CIT(A) upheld the rejection of books and the application of the GP rate.

The assessee argued that the books of account were properly maintained and audited, and no specific discrepancies were noted by the AO. The fall in GP rate was attributed to varying gold rates and consistent accounting methods. The Tribunal found no merit in the rejection of books based on mere fall in GP rate and emphasized that the GP rate cannot be the sole factor for rejection without specific discrepancies. The Tribunal directed the AO to accept the trading results shown by the assessee and delete the addition of Rs. 8,59,814/-.

3. Addition under Section 40A(2) of the Income-tax Act, 1961:
The assessee also carried on the business of sale of cloth, selling it to its sister concern at cost price. The AO invoked section 40A(2) and estimated a GP rate of 15%, resulting in an addition of Rs. 3,28,200/-. The CIT(A) upheld this addition. The Tribunal found the 15% rate excessive and directed the AO to apply a net profit rate of 5% to determine the additional income, partly allowing the assessee's appeal.

4. Disallowance of 10% of Expenses as Debited to the Profit & Loss Account:
The AO disallowed 10% of the total expenses amounting to Rs. 2,17,690/- on the grounds of non-genuine expenses due to the rejection of books of account. The CIT(A) justified the disallowance citing personal use by partners and unvouched expenses. The Tribunal found no merit in the adhoc disallowance since no specific unverifiable expenses were pointed out. It directed the AO to restrict the disallowance to 1/10th of car expenses, car depreciation, and telephone expenses, partly allowing the assessee's appeal.

Conclusion:
The Tribunal allowed the appeal partly, directing the AO to accept the trading results shown by the assessee, delete the addition of Rs. 8,59,814/-, apply a 5% net profit rate for cloth sales, and restrict the disallowance of expenses to specific items. The decision emphasized the need for specific discrepancies to justify the rejection of books and disallowances.

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