2015 (10) TMI 252 - HC - Income Tax

Rejection of Books of Account - Trading addition - whether where Books of Account are rejected, does it entitle the Assessing Officer to make an addition to the Trading results? - CIT(A) held that rejection of Books of Account by resorting to Section 145 of the Act, will not necessarily lead to addition to the Returned income, and accordingly deleted the Trading addition also confirmed by ITAT - Held that - CIT(A) as well as the Tribunal, after appreciation of evidence on record and considering the facts have come to a definite finding of fact that the trading results were not required to be interfered with merely because G.P. rate had decreased to an extent. The assessee has pin-pointedly placed material on record that the turn over stood increased from about 2 crore in the assessment year 2002-03 to 3.74 crore in the assessment year 2003-2004, and apart from this fact the Assessing Officer has not controverted or observed contrary to the claim of the assessee that cost had increased, when specific material was placed, before the Assessing Officer. Though the Books of Account have been rejected, and proper estimation can certainly be made but it is no ground to make an addition in a case where the Assessing Officer was not able to come to further material or controvert the facts narrated by the assessee during the course of assessment proceedings. The Assessing Officer was unable to pinpoint as to any specific defect noticed during course of the proceedings except that the Books of Account were rejected on certain discrepancies. It was for the Assessing Officer to come out clearly as to the basis for rejection of the Book of Accounts. As decided in CIT v. Gotan Lime Khanij Udyog 2001 (7) TMI 19 - RAJASTHAN High Court in the absence of any finding recorded by the Commissioner (Appeals) that the expenses incurred on any account appeared to be unreasonable or excessive, the additions sustained merely on suspicion of pilferage or leakage were not justified. This conclusion was a finding of fact keeping in view that the additions in the profits and gains returned by the assessee were not a necessary concomitant of an order made under sections 145(1) or 145(2). Therefore, there was no error in the order of the Tribunal deleting the entire additions to the trading results after holding that the proviso to section 145(1) was applicable - Decided against revenue.

Summary

Issues:
Assessment of Trading Results based on declined Gross Profit rate and rejection of Books of Account under Section 145(3) of the Income Tax Act for the assessment year 2003-04.

Analysis:

1. The respondent-assessee, a Private Limited company, derived income from exporting ready-made garments. The Assessing Officer observed a sharp decline in the Gross Profit rate from 28.14% to 16.22% and rejected the Books of Account under Section 145(3) of the Income Tax Act. The Assessing Officer made a Trading addition of Rs. 32,86,536 based on an applied G.P. rate of 25%. The Commissioner of Income Tax (Appeals) referred to relevant case law and concluded that rejecting Books of Account does not automatically lead to additional income. The Trading addition was deleted by the CIT(A).

2. The Revenue appealed to the Tribunal, which upheld the CIT(A)'s decision, emphasizing that the trading results should not be interfered with solely based on a decreased G.P. rate. The Tribunal concurred with the finding that rejection of Books of Account does not justify making additions to Trading results. The Revenue argued that the G.P. rate decline was not adequately supported by evidence, leading to substantial questions of law.

3. The High Court analyzed the arguments and orders, noting that the CIT(A) and Tribunal had made a factual finding that the trading results did not warrant interference despite the G.P. rate decline. The court highlighted that the turnover had increased significantly, and the Assessing Officer failed to provide specific reasons for rejecting the Books of Account beyond discrepancies. Referring to precedent cases, the court emphasized that rejection of Books of Account does not automatically justify additions to Trading results.

4. Citing previous judgments, the High Court reiterated that mere deviation in G.P. rate does not justify rejecting Books of Account or resorting to estimates. The court emphasized that if the data in the trading account is found correct, there is no basis for additional assessments. In this case, the Assessing Officer's estimation of G.P. rate at 25% indicated a resort to estimation, and the High Court concluded that this was a factual finding not warranting further legal consideration.

5. The High Court dismissed the appeal, stating that the decision was based on factual findings and no substantial legal questions arose from the Tribunal's order. The court upheld the CIT(A) and Tribunal's decisions to delete the Trading addition, emphasizing the importance of evidence and factual analysis in assessing trading results despite G.P. rate variations.