2017 (2) TMI 1379 - AT - Income Tax

Rejection of books of accounts - disallowance u/s. 40A(2)(b) - addition on account of low Gross Profit - payments for purchase of bullion and gold ornaments from its sister concern - Held that - The defects pointed by the Assessing Officer are trivial and some are even non-existent. On account of such inconsequential defects the audited books of the assessee cannot be rejected. Disallowance u/s. 40A(2)(b) - Held that - the method of averaging price on yearly basis followed by the authorities below is erroneous. The authorities below have failed to take into consideration the instances where the assessee has made payment to its sister concerns at a price less than the market price - there are several instances where the assessee has made payment for purchase of gold jewellery at a price less than the market rate. Under such circumstances no addition u/s. 40A(2)(b) is warranted. Decided in favor of assessee.

Summary

Issues Involved:
1. Rejection of books of account by the Assessing Officer.
2. Addition on account of low Gross Profit.
3. Disallowance under Section 40A(2)(b) of the Income Tax Act, 1961.

Detailed Analysis:

1. Rejection of Books of Account:
The Assessing Officer (AO) identified several defects in the books of account, including:
- Inclusion of stock claimed to belong to an associate concern.
- Lack of details for ornament making charges.
- Inability to conclusively prove the movement of goods.
- Genuineness of paid labor charges.
- Non-maintenance of records related to copper/alloy purchases.
- Non-availability of item-wise purity details of manufactured and sold ornaments.

The Commissioner of Income Tax (Appeals) [CIT(A)] discarded these defects, noting that the nature of the assessee's business made it difficult to maintain stock records for each item separately. The CIT(A) emphasized that the assessee maintained a stock register by weight and that no additions were made in scrutiny assessments for earlier and subsequent years with similar facts. The Tribunal concurred with the CIT(A), finding the AO's defects trivial and non-existent, and upheld the deletion of the addition of ?86,14,243/-.

2. Addition on Account of Low Gross Profit:
The AO had made an addition due to low Gross Profit (GP), but the CIT(A) deleted this addition. The Tribunal noted that the assessee's GP for the assessment year under appeal was higher than in previous years (2.96% compared to 1.04% in 2007-08). The books of account were duly audited, and the AO had not pointed out any material defects. The Tribunal upheld the CIT(A)'s deletion of the GP addition, agreeing that the AO's rejection of the books was arbitrary.

3. Disallowance under Section 40A(2)(b):
The AO made a disallowance of ?41,94,060/- under Section 40A(2)(b) for purchases from sister concerns at allegedly higher rates. The CIT(A) restricted this disallowance to ?27,39,191/-. The Tribunal referred to a similar case involving the assessee's sister concern, where the Tribunal had deleted the entire addition under Section 40A(2)(b). The Tribunal found the method of averaging yearly prices erroneous and noted that the authorities had failed to consider instances where the assessee paid less than the market rate. The Tribunal held that no addition under Section 40A(2)(b) was warranted and allowed the assessee's appeal on this issue, dismissing the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, concluding that the rejection of books and the additions/disallowances made by the AO were not justified. The Tribunal's decision was based on the nature of the assessee's business, the maintenance of proper records, and the erroneous methods used by the authorities to determine disallowances.