2015 (7) TMI 730 - AT - Income Tax

Addition on account of low GP, after rejecting books of accounts - CIT(A) deleted the addition - Held that - The Assessing Officer, while rejecting the books accounts, has not pointed out that the books of accounts of the assessee is incorrect or incomplete. Similarly, he has no where stated that the assessee did not follow the method of accounting provided u/s 145(1) or accounting standards as prescribed u/s 145(2). Therefore, in our opinion, no adequate reasons have been given by the Assessing Officer for rejection of the books of accounts. Merely because the gross profit is low, it would not be sufficient to reject the books of accounts. The low gross profit can be a reason to probe deep into the accounts so as to ascertain whether the accounts are correct or not. But, that by itself is not sufficient to reject the books of accounts. In fact, the reasons given by the Assessing Officer justify the low gross profit disclosed by the assessee. If the assessee has a meager capital of ₹ 1,25,000/-, she does not have any business premises and she does not have any employees. It only supports the contention of the assessee that she is simply working as an intermediator between the buyer and the seller. She first books the order from the buyer and then arranges for the seller. The goods is supplied directly by the seller to the buyer and the payment to the seller is made after receiving the payment from the buyer. She has also explained that she has kept a very small percentage of margin so as to achieve huge turnover. All the facts narrated by the Assessing Officer for rejection of books of accounts and estimation of profit does not satisfy the conditions prescribed u/s 145(3) for rejection of books of accounts. On the other hand, these facts justified low GP disclosed by the assessee. Moreover, we find that under the identical set of facts, the Assessing Officer in the order passed u/s 143(3) in assessee s own case for Assessment Year 2010-11, accepted the assessee s books of accounts wherein the GP rate of 0.13% is disclosed. - Decided in favour of assessee.

Summary

Issues:
- Appeal against deletion of addition on account of low GP
- Rejection of books of accounts by Assessing Officer
- Application of higher GP rate
- Compliance with Section 145 of the Income Tax Act

Analysis:
- The appeals were filed against orders of the Commissioner of Income-tax (Appeals) involving common issues. The primary issue was the deletion of addition on account of low Gross Profit (GP) made by the Assessing Officer. The Revenue contended that the GP disclosed by the assessee was abnormally low, justifying the rejection of books of accounts and estimation of GP at 2.50% of sales, resulting in the addition of a substantial amount. However, the CIT(A) deleted the addition, emphasizing the nature of the assessee's business model as an intermediator between buyer and seller, with minimal risk involved.

- The Assessing Officer's reasons for rejecting the books of accounts included factors such as low GP, absence of business premises, and minimal capital investment. However, the ITAT held that these reasons were insufficient to justify the rejection of books under Section 145 of the Income Tax Act. The ITAT emphasized that the Assessing Officer failed to demonstrate any defects in the accounts or non-compliance with accounting standards, which are prerequisites for rejecting books of accounts and estimating income.

- The ITAT compared the current case with a previous assessment where the GP rate was accepted at 0.13%, indicating consistency in the assessee's method of accounting. The ITAT also referred to a similar case involving M/s. Vishal Finance Corporation, where the rejection of books based on low GP was deemed unjustified. The ITAT concluded that the CIT(A) rightly deleted the GP addition, as the reasons provided by the Assessing Officer did not meet the conditions for rejecting books of accounts under Section 145(3) of the Act.

- All appeals by the Revenue, including those related to family members of the same group, were dismissed as the issues and arguments were identical to the case of Smt. Satyabhama A. Chiripal. The ITAT upheld the CIT(A)'s decision to delete the GP addition, emphasizing the lack of justification for rejecting the books of accounts and estimating income based on higher GP rates.

In conclusion, the ITAT dismissed all appeals by the Revenue, affirming the CIT(A)'s decision to delete the GP addition in the cases under consideration. The judgment highlighted the importance of justifying the rejection of books of accounts based on specific defects or non-compliance with accounting standards, rather than solely relying on low GP as a reason for estimation of income.