2015 (7) TMI 1360 - AT - Income Tax

Rejection of books of accounts - trading addition - application of gross profit rate of 21.44% as against declared gross profit rate of 19.97% - HELD THAT - There is merit in the arguments of the AR that in semi precious stones and gems trade the number of stones are innumerable which are procured in various shapes, sizes and it is practically impossible to maintain shapewise, size-wise and colour-wise stock of manufacturing wastage as required by the AO. Since no defect whatsoever is pointed out in the sales, purchases and trading results of the assessee consequently, in our considered view the books of account cannot be rejected. Our view is fortified by the judgment in the case of Malani Ramjivan Jagan Nath vs. ACIT 2006 (10) TMI 145 - RAJASTHAN HIGH COURT . We uphold the maintenance of books of account of the assessee and finding of ld. CIT(A) for rejecting them is reversed. Quantum addition, since books of account of the assessee are upheld then nothing material remains to dwell on the estimate of income. It is trite law that if the books of account are proper then lesser earning of gross profit does not attract any addition besides the TO has gone up in this year. There is no justification in retaining addition, looking from other angle also, the issue is only about estimation of closing stock. Assuming an addition on account of closing stock is somehow made, the same is to be allowed to the assessee in the next year as opening stock which will reduce the profits of next year. This exercise is essentially revenue neutral between two years. In the case of CIT vs. Excel India 2013 (10) TMI 324 - SUPREME COURT has held that addition in such revenue neutral exercise should not be made by the Department. Thus on both the counts, there is no justification in retaining the addition which is deleted. - Decided in favour of assessee.

Summary

Issues:
Cross appeals against the order of the ld. CIT(A)-II, Jaipur dated 22-10-2012 for the assessment year 2009-10.

Analysis:

Issue 1: Rejection of Books of Account and Trading Addition
The AO rejected the books of account of the assessee under section 145(3) of the Income Tax Act, 1961, estimating the gross profit rate at 23.87% based on the assessee's declaration in the previous assessment year. The first appeal resulted in a partial relief where the gross profit rate was adjusted to 21.44%, leading to a trading addition of Rs. 12,67,489. The assessee challenged this decision, arguing that the books were properly maintained and audited under section 44AB, and that the rejection was based on flimsy reasons. The Tribunal noted that the records were maintained similarly to previous years, and since no defects were found in sales, purchases, and trading transactions, there was no justification for rejecting the books. The Tribunal upheld the maintenance of books of account and reversed the decision of the CIT(A) to reject them.

Issue 2: Quantum Addition
Regarding the quantum addition, the Tribunal held that if the books of account are proper, a lower gross profit does not warrant any addition, especially considering the increase in turnover for the year. The Tribunal highlighted that any addition on account of closing stock, if made, would be offset in the subsequent year as opening stock, resulting in a revenue-neutral situation. Citing the decision in CIT vs. Excel India, the Tribunal emphasized that such revenue-neutral exercises should not lead to additions. Consequently, the Tribunal found no justification for retaining the addition and ruled in favor of the assessee, allowing the appeal and dismissing that of the Revenue.

In conclusion, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, emphasizing the importance of proper maintenance of books of account and cautioning against unjustified additions based on estimation.