2011 (2) TMI 759 - AT - Income Tax

Reliability of Computer Records - Held that where purchases were shown in stock register and as closing stock in books - Assessing Officer is not justified in rejected the stock register merely because the copy produced thereof was a computer printout. Computation of Profit as per GP Rate - Held That - Determination of GP rate cannot be made in the air. It has to be based on some material. when no comparable case or instance has been cited by the ld. CIT(A) to arrive at an estimate of 8.5%, we find the assesse to be justified in contending that an estimate of the Gross Profit be made at the average rate of the preceding three years. Thus cross objection filed by assessee is allowed.

Summary

Issues:
1. Addition of Rs. 47,95,526/- by AO on account of bogus purchases.
2. Application of Gross Profit (GP) rate by ld. CIT(A) at 8.5% of turnover.
3. Dispute over the GP rate applied by ld. CIT(A) in absence of comparable cases.
4. Rejecting the books of account and estimation of GP by ld. CIT(A).

Analysis:
1. The AO made an addition of Rs. 47,95,526/- due to alleged bogus purchases from two parties. The purchases were reflected in the closing stock but not sold, leading to suspicion. The ld. CIT(A) confirmed the addition to the extent of Rs. 22,81,572/-, citing unreliable books of account due to unconfirmed purchases.

2. The ld. CIT(A) applied a GP rate of 8.5% to incorporate likely profit suppression due to manipulated purchases/sales. The assessee argued for a lower GP rate based on better previous year's performance. The AO and the assessee disagreed on the justification for the GP rate.

3. The dispute centered on the justification for applying a GP rate of 8.5% without citing comparable instances. The assessee proposed estimating GP based on the average rate of the preceding three years (A.Y. 2006-07 to 2004-05). The lack of specific reasoning for the 8.5% rate raised concerns.

4. The rejection of books of account by ld. CIT(A) and the subsequent estimation of GP at 8.5% was challenged by the assessee. The Tribunal found the absence of a basis for the 8.5% rate and directed the AO to apply GP estimated at the average rate of the preceding three years. The appeal of the department was dismissed, and the cross objection by the assessee was allowed.