2014 (1) TMI 1367 - AT - Income Tax

Unaccounting stock - rejection of books of accounts - Whether income surrendered during survey is assessable as income u/s 69 or business income - Held that - The Assessing Officer has pointed out discrepancies/defects in the books of accounts and thereafter rejected the book result - The survey team has taken the physical inventory and after comparing the inventory recorded in the regular books of accounts came to the conclusion that the assessee has unaccounted stock of Rs. 95,94,251 - Physical cash found during survey, when compared with the cash balance shown in the regular cash book, the same was found to be excess by Rs. 9,00,749 - The Assessing Officer has also pointed out certain instances, which indicated discrepancies in the books of accounts. - The Assessing Officer s action in rejecting books of accounts was correct. Addition on account of low G.P. rate - The sale of assessee has increased to Rs. 13.31 crores as compared to sale of immediately preceding assessment year at Rs. 11.65 crores - It is a well settled proposition that increase in turn over can be achieved only by sacrificing some margin in gross profit rate - Taking into account increase in sale vis- -vis gross profit rate shown in the earlier years, the Tribunal found it suitable to apply gross profit rate of 2.50 % - The Assessing Officer is directed to work out trading addition by applying gross profit rate of 2.50 % on the sales of Rs. 13,31,26,701 - Decided in favour of Revenue.

Summary

Issues:
1. Addition of Rs. 9,95,812 in respect of gross profit.
2. Characterization of surrendered income during survey as assessable under section 69.

Issue 1: Addition of Rs. 9,95,812 in respect of gross profit:
The appeal filed by the Revenue challenged the deletion of the addition of Rs. 9,95,812 made by the Assessing Officer based on the gross profit rate. The Assessing Officer rejected the book results due to defects and added the amount based on the profit rate of the preceding year. The CIT(A) deleted this addition, stating that considering unaccounted stock in the manufacturing account would substantially increase the gross profit rate, thus justifying the deletion. The Revenue contended that the additional income surrendered during the survey would not impact the gross profit. The Tribunal found discrepancies in the books of accounts and upheld the Assessing Officer's rejection of the books. The Tribunal disagreed with the CIT(A)'s reasoning that including unaccounted stock in the manufacturing account would significantly raise the gross profit rate. It clarified that the gross profit rate would only increase if the unaccounted stock was sold at a higher rate.

Issue 2: Characterization of surrendered income during survey as assessable under section 69:
The Assessing Officer treated the source of investment in excess assets found during the survey as income under section 69, not from business. The CIT(A) deleted the addition of Rs. 9,95,812 by the Assessing Officer, emphasizing that the unaccounted stock, if considered in the manufacturing account, would lead to a higher gross profit rate. The Revenue appealed this decision. The Tribunal noted that the assessee had surrendered additional income during the survey, but discrepancies in the books of accounts were identified, justifying the rejection of the books by the Assessing Officer. The Tribunal directed the Assessing Officer to calculate the trading addition by applying a gross profit rate of 2.50% on the increased sales for the year under consideration, thus allowing the Revenue's appeal.

In conclusion, the Tribunal upheld the Revenue's appeal, directing the calculation of the trading addition based on a gross profit rate of 2.50% on the increased sales for the relevant year. The decision highlighted the importance of accurate bookkeeping and the impact of unaccounted stock on gross profit rates in determining tax liabilities.