2009 (4) TMI 949 - AT - Income Tax

Summary

Issues Involved:
1. Rejection of books of account by the AO.
2. Addition of Rs. 2,41,70,279 by estimating gross profit at 1% of total turnover.
3. Validity of the assessee's explanation for the incurred losses.
4. Acceptance of the closing stock valuation method.

Summary:

1. Rejection of Books of Account by the AO:
The AO rejected the books of account of the assessee, citing that the profit and loss shown were not correctly deduced. The AO observed that the assessee showed a gross loss of 16.7% in the diamond business, which is rare. Despite the assessee providing detailed explanations and inventory records, the AO found the records insufficient and unreliable, leading to the rejection of the books of account.

2. Addition of Rs. 2,41,70,279 by Estimating Gross Profit at 1% of Total Turnover:
The AO estimated the gross profit at 1% of the total turnover, resulting in an addition of Rs. 2,41,70,279. The AO compared the case to Samir Diamonds Export (P) Ltd. vs. A.K. Gautam, ITO and Anr., where a similar estimation was made. The CIT(A) upheld this decision, stating that the assessee's continuous losses in the diamond export business were not justifiable.

3. Validity of the Assessee's Explanation for the Incurred Losses:
The assessee argued that the losses were due to the valuation of closing stock as per market value or purchase value, whichever was lower, a consistent method adopted by the company. The assessee also highlighted that the AO accepted similar losses in the previous assessment year (2002-03) under s. 143(3). The Tribunal found that the assessee's method of accounting and explanations were consistent and justified, noting that no specific defects were pointed out by the AO.

4. Acceptance of the Closing Stock Valuation Method:
The Tribunal observed that the closing stock valuation method used by the assessee was consistent and accepted in previous years. The AO's rejection of the closing stock valuation was deemed unjustified as the same method was accepted in the immediately preceding year and the subsequent year. The Tribunal concluded that the AO and CIT(A) were not justified in rejecting the books of account and disallowing the loss claimed by the assessee.

Conclusion:
The Tribunal set aside the orders of the AO and CIT(A), directing the AO to allow the claim of the assessee as per the books of account. The appeal of the assessee was allowed.