2014 (8) TMI 720 - AT - Income Tax

Rejection of books of accounts u/s 145(3) Estimation of GP @ 8% - Held that - Despite given an opportunity by the AO, the assessee failed to substantiate as to why the same gross profit ratio should not be adopted in its case - CIT(A) was not justified in reducing the gross profit to 8% as against 9% held by the AO - since the purchases from Bharat Steel Company were held to be non-genuine and it was brought to the notice of the assessee by the AO that the price paid to Bharat Steel Company is higher than price charged by other traders for the same product on the same date - the AO has discharged his onus and onus was on the assessee to prove the genuineness of purchases - The assessee has failed to do so relying upon M/s. Fortune Steel Industries Vs. ACIT 2010 (12) TMI 1108 - ITAT MUMBAI - in a case where the purchase prices are not verifiable as the parties were not found and in such cases the books should be rejected and the gross profit rate could be estimated - the CIT(A) was justified in upholding the action of the AO in rejecting the book results Decided against Assessee. Once the AO has established that the price paid to a party is higher as compared to similar products supplied by other parties on the same date and the party to whom higher price has been paid is not traceable and the assessee has not made any efforts to produce the party or give his present address, therefore, the socalled purchases from the said party become suspicious, the AO is fully justified in rejecting the book results and going for estimation. The assessee has categorically explained before the lower authorities that M/s. Asvee Trading Company is not a comparable case since the assessee is a wholesaler whereas the said party is a retailer - No other comparable case was given by the AO - the results of the preceding and succeeding years results were not considered by the AO so as to come to a definite conclusion as to the rate of gross profit in the case of the assessee, vis-a-vis other concerns thus, the matter is to be remitted back to the AO for decision of the rate of GP.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961.
2. Estimation of gross profit rate.
3. Validity of purchases from non-existent suppliers.
4. Comparison of gross profit rates with other entities.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The Assessing Officer (AO) observed that the gross profit declared by the assessee was very low at 2.93% on a gross turnover of Rs. 44.89 crores. The AO found discrepancies in the addresses of suppliers and noted that 14 out of 34 notices issued under Section 133(6) came back unserved. Enquiries revealed that certain suppliers, including Bharat Steel Company, were non-existent. The AO concluded that the assessee obtained accommodation entries from these bogus suppliers, leading to inflated purchases. Consequently, the AO rejected the books of accounts under Section 145(3) for being incorrect and incomplete.

2. Estimation of Gross Profit Rate:
The AO compared the assessee's gross profit with that of a comparable entity, M/s. Asvee Trading Company, which had a gross profit rate of 9.15%. The AO adopted a gross profit rate of 9% for the assessee, resulting in an addition of Rs. 2,72,54,498/- to the total income. The CIT(A) upheld the rejection of the books but reduced the gross profit rate to 8%. Both the assessee and the revenue challenged this in their appeals.

3. Validity of Purchases from Non-Existent Suppliers:
The AO found that Bharat Steel Company, from whom the assessee claimed significant purchases, was non-existent. Payments to Bharat Steel were made by cheque, but equivalent amounts were withdrawn in cash on the same day, indicating accommodation entries. The AO also noted that the purchase rates from Bharat Steel were higher than those from other suppliers. Despite the assessee's explanations, the AO was not convinced and maintained that the purchases were inflated to evade tax.

4. Comparison of Gross Profit Rates with Other Entities:
The assessee argued that M/s. Asvee Trading Company was not a comparable case as it was a retailer while the assessee was a wholesaler. The CIT(A) and the Tribunal noted this distinction and found that the AO did not consider results from preceding and succeeding years or other comparable wholesalers. The Tribunal directed the AO to reassess the gross profit rate by comparing it with identical cases, ensuring that wholesalers are compared with wholesalers.

Conclusion:
The Tribunal upheld the rejection of the books of accounts under Section 145(3) due to unverified purchases and discrepancies in supplier details. However, it set aside the issue of adopting the gross profit rate to the AO for fresh adjudication, instructing the AO to compare the assessee's gross profit rate with that of other wholesalers, not retailers, and to consider results from other relevant years. Both the appeals by the assessee and the revenue were allowed for statistical purposes.