2011 (5) TMI 1048 - AT - Income Tax

Issues Involved:
1. Legality of the order upholding the addition of Rs. 2,24,510.
2. Rejection of the books of account under Section 145(3) of the Income Tax Act.
3. Estimation of Gross Profit (G.P.) at 3.5%.

Analysis of the Judgment:

1. Legality of the Order Upholding the Addition of Rs. 2,24,510:
The assessee contested the order passed under Section 250 on 11.02.2011 for the assessment year 2007-08 by the Commissioner of Income-tax (Appeals)-VI, Ahmedabad, which upheld the addition of Rs. 2,24,510 made by the Assessing Officer (AO) in the order under Section 143(3) dated 07.12.2009. The assessee claimed that the order was "wholly illegal, unlawful and against the principles of natural justice" and that the CIT(A) erred in law and on facts by not fully considering the submissions and evidence produced by the appellant.

2. Rejection of the Books of Account under Section 145(3) of the Income Tax Act:
The AO rejected the books of account under Section 145(3) due to several discrepancies:
- The assessee failed to produce the cash book initially.
- A large amount of purchases were made in cash, with amounts below Rs. 20,000, which appeared suspicious.
- The purchase bills did not bear the address of the suppliers and lacked revenue stamps for amounts exceeding Rs. 5,000.
- The modus operandi described by the assessee was inconsistent with the actual business practices observed, such as hawkers supplying only the required scrap on specific days without any prior communication.
- The AO concluded that the actual purchase price of a significant portion of the purchases (more than 40%) could not be determined reliably.

The CIT(A) upheld the AO's rejection of the books of account, noting that the discrepancies and inconsistencies justified the rejection under Section 145(3).

3. Estimation of Gross Profit (G.P.) at 3.5%:
The AO estimated the Gross Profit (G.P.) at 3.5%, which was higher than the 2.62% shown by the assessee. The AO based this estimation on the G.P. rate of 3.45% from the assessment year 2005-06, arguing that the G.P. rate had fallen in the subsequent years without a clear trend.

The assessee argued that the AO's estimation was unjustified, pointing out that:
- The purchases were made as per the business requirements and the AO's suspicion could not replace actual evidence.
- The absence of address details in the URD purchase bills did not imply that the purchases were not genuine.
- The AO failed to appreciate the business practices of scrap dealers and hawkers.
- The G.P. rate should not be compared in isolation without considering the overall business context and the increase in turnover.

The Tribunal found that while the AO was justified in rejecting the books of account, the estimation of the G.P. should have been more reasonable. The Tribunal directed the AO to re-calculate the income by taking the average of the G.P. rates shown by the assessee during the assessment years 2005-06, 2006-07, and 2007-08, instead of using the G.P. rate of 3.45% from a single year.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the AO to re-calculate the income by averaging the G.P. rates over the three assessment years (2005-06, 2006-07, and 2007-08). This approach aimed to provide a fairer estimation of the assessee's income, considering the variations in G.P. rates over multiple years. The order was pronounced in Open Court on 31/05/2011.

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