2017 (3) TMI 1546 - AT - Income Tax

Addition on account of fall in GP - proof of defects in books of accounts - Held that - There is only small decrease in the gross profit rate as compared to the earlier year. The assessee has maintained regular books of account supported by purchase and sale bills and vouchers of expenses. No specific defects have been pointed out in maintenance of the books of account and vouchers. All the quantitative details were supplied to the Assessing Officer. Books are audited. Net gross profit has increased as against earlier year. Assessee had already surrendered additional income during the course of search which was towards the discrepancy found during the course of search and for fall in GP which were more than sufficient to meet the above addition. Since no specific defects have been pointed out in the maintenance of the books of account, therefore, Assessing Officer was not justified in enhancing the profit rate of the assessee for the purpose of making the addition. - Decided against revenue

Summary

Issues:
Challenge to deletion of addition on account of fall in gross profit rate.

Analysis:
The issue in this case revolves around the rejection of books of account by the Assessing Officer and the subsequent addition made based on a higher gross profit rate. The Assessing Officer noted a discrepancy between the returned income and the additional income surrendered by the assessee under various heads. The main reasons cited by the assessee for the difference included an increase in depreciation claim due to additions to fixed assets and a rise in financial expenses. However, the Assessing Officer attributed the fall in income to a decrease in the gross profit rate and other factors such as increased power and fuel consumption without adequate documentation of purchases and closing stock. Consequently, the books were rejected, and an addition of ?35,24,925 was made based on a gross profit rate of 37%. Additionally, a disallowance of 15% of vehicle expenses for personal use led to an additional ?2,01,830.

The ld. CIT(Appeals) overturned the additions made by the Assessing Officer. The CIT(A) considered the submissions made by the assessee, which included details of additional income surrendered during a search operation and explanations for the discrepancies in income. The CIT(A) highlighted that the gross profit rate decrease was marginal and within reasonable limits. The assessee maintained proper books of account with supporting documentation, and no specific defects were pointed out by the Assessing Officer. The CIT(A) found the AO's rejection of books unjustified, especially without identifying any specific faults. Detailed quantitative and value-wise information provided by the assessee further supported the credibility of the books. Ultimately, the CIT(A) concluded that the Assessing Officer was not justified in enhancing the profit rate to make the addition, and the deletion of the addition was upheld.

Upon reviewing the arguments and evidence presented, the Appellate Tribunal found no merit in the revenue's appeal. The Tribunal noted the small decrease in the gross profit rate compared to the previous year and acknowledged the proper maintenance of books of account by the assessee. Given that the additional income surrendered by the assessee covered the discrepancies highlighted by the Assessing Officer, and no specific defects were identified in the books, the Tribunal upheld the CIT(A)'s decision to delete the addition. The Tribunal emphasized that without concrete evidence of faults in the books, enhancing the profit rate for additions was unwarranted. Therefore, the departmental appeal was dismissed, affirming the deletion of the addition on account of the fall in the gross profit rate.

This judgment underscores the importance of maintaining accurate and detailed financial records, providing comprehensive explanations for income differentials, and the necessity for Assessing Officers to identify specific defects before rejecting books of account and making additions based on profit rate discrepancies.