2013 (7) TMI 195 - AT - Income Tax

Addition to income - estimation of income - rejection of books of accounts - GP Rate - search and seizure u/s 132 conducted - Held that - As per the own findings of the CIT(A) this gross profit rate was in consonance with the gross profit rate shown by the assessee in the earlier years. It is also not disputed that the AO has not rejected the books of account or the sales turnover and even the CIT (A) has also not rejected the books of account. Thus once the CIT(A) has accepted that the sales and purchases are verifiable for the reasons that firstly the entire purchase and sales have been made through account payee cheques and are fully verifiable from the bank statements and pass books secondly the confirmation letters which were filed before the AO and also before him has not been disapproved even after calling for two remand reports and lastly the gross profit shown by the assessee is also in consonance with the earlier years then he could not have proceeded to apply the higher gross profit rate. The gross profit rate is the balancing figure in the trading account and if none of the variables on debit side and credit side are disturbed the gross profit also cannot be disturbed. While coming to the conclusion of application of gross profit rate of 6.5% he has made observation that the traders in steel industries generally disclose gross profit rate between the range of 6% and 9%. This conclusion is without any material on record or based on any comparable case. Thus the application of such a gross profit rate cannot be upheld & under these circumstances once the books of account have not been rejected sales have been accepted no addition on account of gross profit rate or any addition on account of unexplained purchases can be made thus delete the addition made in the for by the CIT (A). - Decided in favor of assessee. Addition being sundry creditor for goods u/s 68 - CIT(A) deleted the addition - Held that - Revenue on account of addition made u/s 68 for the amount shown under the sundry creditors of goods also cannot be sustained for the reason that firstly sales made on account of the purchases made from the said party has been accepted secondly in the next year the payment has been made to this party by account payee cheques as it was a running account and for which there is no dispute in the next year and lastly confirmation letter from the said party has not been rebutted. Therefore there is no case of any addition on account of balance shown under the head Sundry Creditors . Thus the ground raised by the assessee for the year under appeal is treated as allowed and Revenue s appeal is treated as dismissed.

Summary

Issues Involved:
1. Addition on account of Gross Profit (GP) ratio.
2. Deletion of addition under Section 68 of the Income Tax Act for unexplained balance in the account of sundry creditors.

Detailed Analysis:

1. Addition on account of Gross Profit (GP) Ratio:

For the assessment years 2004-05 and 2005-06, the assessee challenged the addition made by the learned Commissioner of Income Tax (Appeals) [CIT(A)] on account of a lower Gross Profit (GP) ratio. The CIT(A) had confirmed an addition of Rs. 57,36,000 for the year 2004-05 and Rs. 2,06,12,982 for the year 2005-06 by applying a GP ratio of 6% on the total turnover. The CIT(A) justified this by stating that the GP ratio shown by the assessee was lower than the industry standard for a trader in the steel industry, which was presumed to be between 6-9%. The assessee argued that the GP ratio of 0.5% was consistent with previous years and that the books of account were not rejected by the Assessing Officer (AO).

The Tribunal noted that the entire purchases and sales were made through account payee cheques, and the transactions were verifiable from bank statements and passbooks. The Tribunal also observed that the confirmation letters filed by the assessee were not disputed by the AO in his remand report. The Tribunal concluded that since the books of account were not rejected, and the sales were accepted, the addition on account of GP ratio was unwarranted. Consequently, the Tribunal set aside the orders of the CIT(A) and deleted the addition of Rs. 57,36,000 for the assessment year 2004-05.

2. Deletion of Addition under Section 68:

The Revenue challenged the deletion of an addition made under Section 68 of the Income Tax Act for unexplained balances in the account of sundry creditors. For the assessment year 2004-05, the AO had added Rs. 5,01,88,500 to the income of the assessee, treating it as unexplained credit since no confirmation from the creditors was filed. The CIT(A), however, deleted this addition, accepting the assessee's explanation that the account was a running account and payments were made in the subsequent year through account payee cheques.

The Tribunal upheld the CIT(A)'s decision, noting that the sales made on account of the purchases from the said party were accepted, payments were made in the next year, and the confirmation letters from the creditors were not rebutted. Therefore, the Tribunal concluded that there was no case for any addition on account of the balance shown under the head "Sundry Creditors".

The Tribunal applied the same findings for the assessment year 2005-06, wherein similar issues were raised by both the assessee and the Revenue. Accordingly, the Tribunal allowed the assessee's appeals and dismissed the Revenue's appeals for both assessment years.

Order pronounced in the open Court on 30 April 2013.