2022 (6) TMI 1374 - AT - Income Tax

Rejection of books of accounts - action of the AO in invoking the provisions of section 145(3) of the Act and rejecting the trading results of the assessee - HELD THAT - In the present case, admittedly and undisputedly, there were no major defects pointed out by the AO warranting the rejection of books of account. The entire case of the AO is built around the suspicion of the assessee making huge cash sales of jewellery during demonetization period wherein each cash sale was below Rs.2 lacs each, not requiring submission of Permanent Account Number of the buyer of such jewellery items. However, it remains beyond doubt that all the sales had been routed through regular books of account and there is no dispute regarding availability of stock also. Therefore, there appears no justifiable reason for the AO to reach a conclusion that the books of account had to be rejected. No incriminating material had been unearthed during the course of search which would indicate that the assessee had either concealed sales in quantity or price-wise and, therefore, we do not agree with the action of the Ld.CIT(A) in upholding the rejection of books of account by the AO. Accordingly, ground No.3 of assessee s appeal stands allowed. Restricting gross profit percentage to 20% - CIT(A) did provide some relief to the assessee by restricting the addition on account of gross profit to 20% of sales instead of 38.63% as made by the AO. However, while doing so the Ld.CIT(A) also conveniently ignored that the assessee gross profit rate for financial year 2014-15 was 15.75% and for financial year 2016-17, it was 16.28%. At most, even if the profits had to be estimated, the Ld.CIT(A) could have proceeded to work out an average rate of profit for these three years rather than applying gross profit rate of 20% arbitrarily and without any justification. This adhoc confirmation of addition, in our view, is not sustainable as it lacks any reasoning and is not supported by any data/figures. Therefore, in such a situation, we have no option but to set aside the order of the Ld.CIT(A) on the issue and direct the AO to delete the addition. Addition u/s 68 - unexplained cash credit (being alleged undisclosed money introduced by the assessee as sales) - HELD THAT - CIT(A) has observed that there is merit in the arguments of the Ld. AR that once the revenue has been duly recorded in the books of account, the same cannot be treated or said to be unaccounted money or income and that there was no allegation against the assessee that these sales were not recorded in the books at all and the only allegation is that they were entered on a later date. The Ld.CIT(A) has also given a finding that on perusal of the day-to-day cash book, it is seen that there was sufficient cash in hand on those dates and even if the sales were taken out, the cash in hand did not become negative. No perversity has been pointed out by the CIT DR in this finding of the Ld.CIT(A) even during the course of arguments before us - Decided against revenue.

Summary

Issues Involved:
1. Rejection of books of account and estimation of profit.
2. Addition on account of unexplained cash credit under Section 68 of the Income Tax Act.
3. Enhancement of gross profit rate on the sale of jewelry during the demonetization period.

Issue-wise Detailed Analysis:

1. Rejection of Books of Account and Estimation of Profit:
The assessee challenged the rejection of their books of account and the estimation of profit by the Assessing Officer (AO). The AO rejected the books of account based on a forensic analysis of a seized hard disc, which indicated back-dating of the system during the demonetization period. The AO inferred that the assessee introduced unaccounted money as sales. Additionally, the AO noted discrepancies in the prices of jewelry items and applied a gross profit rate of 38.63%, significantly higher than the declared rate of 11.65%.

The Tribunal found that the AO did not point out any specific defects in the books of account. The AO's conclusions were based on suspicion rather than concrete evidence. The Tribunal referenced the Gujarat High Court's ruling in PCIT Vs. Garden Silk Mills Limited, which emphasized that books of account cannot be rejected on insignificant grounds. Similarly, the Rajasthan High Court in CIT Vs. Pink City Developer held that without pointing out specific defects, books of account could not be rejected. The Tribunal concluded that the AO's rejection of the books of account was unjustified and allowed the assessee's appeal on this ground.

2. Addition on Account of Unexplained Cash Credit under Section 68:
The AO made an addition of Rs. 6,85,735/- on account of unexplained cash credit under Section 68, based on discrepancies in sale bills. The Tribunal noted that the Commissioner of Income Tax (Appeals) [CIT(A)] found that the forward-dated bills were duly accounted for in the books of account, albeit on a later date. The CIT(A) observed that there was sufficient cash in hand on those dates, and the sales were recorded in the books, negating the allegation of unaccounted money.

The Tribunal upheld the CIT(A)'s finding, stating that no perversity was pointed out by the Department in this finding. Consequently, the Tribunal dismissed the Department's appeal on this ground, affirming the deletion of the addition.

3. Enhancement of Gross Profit Rate on the Sale of Jewelry during the Demonetization Period:
The AO applied a gross profit rate of 38.63% on the sale of jewelry during the demonetization period, based on the prices mentioned on the jewelry tags. The CIT(A) reduced this rate to 20%, acknowledging that the valuation done during the search could not be the basis for calculating gross profit. However, the assessee argued that even this rate was arbitrary and not supported by any rationale.

The Tribunal agreed with the assessee, noting that the CIT(A)'s decision was based on general perceptions rather than verifiable facts. The Tribunal emphasized that the gross profit rates for the previous years were below 17%, and there was no justification for applying a 20% rate. The Tribunal set aside the CIT(A)'s order on this issue and directed the AO to delete the addition, allowing the assessee's appeal on this ground.

Conclusion:
The Tribunal allowed the assessee's appeal, rejecting the AO's and CIT(A)'s actions regarding the rejection of books of account and the arbitrary enhancement of the gross profit rate. The Tribunal also dismissed the Department's appeal, upholding the CIT(A)'s deletion of the addition on account of unexplained cash credit. The final result was in favor of the assessee, with the Department's appeal being dismissed.