2013 (12) TMI 1197 - AT - Income Tax

Addition on adhoc basis u/s 145(3) Held that - The assessee has maintained proper books of accounts and there is no case for invoking section 145(3) There was huge increase in expenses because cost has come down in respect of various expenses and increase is only in respect of claim and other services - The increase in rent and other services were on account of opening new stores - The entire claim of expenditure is supported from the audited accounts and the Assessing Officer has not found any mistakes or irregularity in respect of any part of the claim of the expenses - Proper stock record is maintained on ERP system - There was no case of any cash deficit and reconciliation statement was duly furnished to the Assessing Officer and Assessing Officer has not disputed the correctness of the same Decided in favour of assessee.

Issues:
1. Application of Sec. 145(3) and trading addition of Rs. 2 crore on adhoc basis.
2. Justification of lower authorities' orders.
3. Rejection of books of accounts by Assessing Officer.
4. Increase in expenses and decline in gross profit.
5. Maintenance of proper stock records and cash deficit found during survey.
6. Invocation of Sec. 145(3) of the I.T. Act.

Analysis:
1. The appeal challenged the application of Sec. 145(3) and the trading addition of Rs. 2 crore. The Assessing Officer rejected the books of accounts due to defects and discrepancies, leading to the addition. The Ld. Commissioner upheld this decision, citing high expenses and decline in gross profit. The appellant argued against these observations, presenting detailed submissions and reconciliations to counter the authorities' findings.

2. The lower authorities' orders were contested on the grounds of improper appreciation of facts and defects in the assessment. The appellant highlighted discrepancies in the observations regarding stock valuation, GP decline, and expense increase. The appellant's reliance on ERP system for maintaining accurate records was crucial in challenging the authorities' conclusions.

3. The rejection of books of accounts by the Assessing Officer was based on defects noticed during a survey, including discrepancies in cash, inventory, and expenses. The Ld. Commissioner supported this rejection, emphasizing the lack of proper records and justifying the addition of Rs. 2 crore. However, the appellant provided detailed explanations and evidence to refute these claims.

4. The increase in expenses and decline in gross profit were key factors in the authorities' decision to uphold the trading addition. The appellant argued that the expense increase was justified due to the opening of new stores, supported by audited accounts. The appellant also demonstrated the improvement in GP rates over the years, countering the authorities' assertions.

5. The maintenance of proper stock records and addressing the cash deficit found during the survey were crucial aspects of the appeal. The appellant clarified that stock records were maintained on the ERP system and provided detailed inventory information. Additionally, the appellant refuted the existence of a cash deficit and highlighted the comprehensive system followed, challenging the authorities' claims.

6. The invocation of Sec. 145(3) of the I.T. Act was a central issue in the appeal. The appellant argued that there was no legal or factual basis for applying this provision, emphasizing the proper maintenance of books of accounts and the use of ERP systems. The Tribunal ultimately ruled in favor of the appellant, setting aside the lower authorities' orders and allowing the appeal.

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