2012 (12) TMI 744 - AT - Income Tax

Trading Additions rejecting of books of accounts - Held that - The stock is valued on physical verification by the management adopted in the earlier years and has been accepted by the department consistently and there is no change in the method of accounting. In this regard, there is nothing shown by the assessee before any authorities that why the stock register of one thousand items or above cannot be maintained or not possible to be maintained. Therefore, when closing stock and opening stock are valued on the estimated basis, having no relevance with the quantitative details of purchases and sales, then any figure as estimated by the management is on adhoc figure of closing stock and therefore, directly effects the Gross Profit of the assessee and the profits deduced cannot be said to be accurate. In the facts and circumstances of the present case, no infirmity in the order of the A.O. who has rightly invoked the provisions of section 145(3) in rejecting the books of account - in favour of revenue. Estimation of income - Held that - There was fluctuation in the exchange rate, increase in the cost of manufactured items and other over head expenses and the assessee has discarded the export of high value items which attributed to GP rate in the earlier years at 60-62% as compared to the GP rate of 22-24% on regular items. These aspects were not taken into consideration by the AO. The estimates by the AO cannot be on surmises and conjectures. There has to be some material on record to make such estimation. The case of its Sister concern is quite distinguishable on the facts as that in that case, the assessee had been declaring GP rate of about 58% in the preceding three years whereas the assessee had declared 39% during the assessment year 2004-05 and 31.11% in the assessment year 2005-06. Therefore, the percentage of G.P. rate declared in the case of Sister concern is quite different in the preceding years to that of the assessee in the preceding years as has been accepted by the department - thus even if the books having been rejected, no addition is called for - in favour of assessee.

Issues Involved:
1. Addition of Rs. 7,83,7410 by AO under section 145(3) of the Income Tax Act, 1961.
2. Discrepancy in Gross Profit rate and eligibility for deduction on export profits.
3. Maintenance of stock register and valuation methods.
4. Estimation of income and factors affecting Gross Profit rate.
5. Comparison with a group concern's profit margin.
6. Appeal by the Revenue and Cross Objection by the assessee.

Analysis:

1. Addition of Rs. 7,83,7410 by AO under section 145(3) of the Income Tax Act, 1961:
The Revenue contested the deletion of the addition made by the AO by invoking section 145(3) due to discrepancies in the books of accounts. The CIT(A) reversed the AO's decision, emphasizing that no defects in purchase and sales were pointed out, and the stock valuation method was consistent. The CIT(A) considered the explanations provided by the assessee regarding increased sales, cost fluctuations, and change in export basket, leading to the deletion of the addition.

2. Discrepancy in Gross Profit rate and eligibility for deduction on export profits:
The AO rejected the books of accounts based on the lower Gross Profit (GP) declared by the assessee compared to a group concern, M/s. Chand Engineering. The Revenue argued that the GP rate of 30% was an average of the assessee's GP over three years. However, the CIT(A) found that the AO did not consider various factors affecting the GP, such as increased sales, cost fluctuations, and change in export items. The CIT(A) concluded that no addition was warranted, considering the explanations provided by the assessee.

3. Maintenance of stock register and valuation methods:
The dispute arose regarding the maintenance of stock registers and valuation methods. The assessee claimed it was not feasible to maintain records for over a thousand items and valued stock based on physical verification, a method consistently accepted by the department. However, the Tribunal found that the absence of a stock register could impact the accuracy of Gross Profit calculations, leading to upholding the AO's decision to reject the books of accounts.

4. Estimation of income and factors affecting Gross Profit rate:
The AO estimated income by disregarding various factors such as exchange rate fluctuations, increased manufacturing costs, and changes in the export basket. The Tribunal concurred with the CIT(A) that these factors were crucial and should have been considered in determining the Gross Profit rate. The Tribunal found no basis for the AO's estimation and upheld the CIT(A)'s decision to delete the addition.

5. Comparison with a group concern's profit margin:
The comparison with M/s. Chand Engineering highlighted differences in technology, machinery investment, and profit margins, justifying the variations in Gross Profit rates. The Tribunal noted that the circumstances of the two entities were distinct, leading to the rejection of the Revenue's appeal in part.

6. Appeal by the Revenue and Cross Objection by the assessee:
The Tribunal partly allowed the Revenue's appeal while dismissing the Cross Objection of the assessee. The decision was based on the assessment of factors affecting the Gross Profit rate, the estimation of income, and the maintenance of stock records, emphasizing the importance of considering all relevant aspects in tax assessments.

This detailed analysis of the judgment provides insights into the reasoning behind the decisions made by the authorities and the Tribunal, focusing on key legal and factual aspects of the case.

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