2016 (3) TMI 447 - AT - Income Tax

N.P. determination - Held that - AO adopted net profit rate of 6%. No reason has been given by the AO to adopt this figure. And AO while working out the closing stock had ignored all other expenses debited by the assessee in P&L account and only included the construction expenses. The AO erred in adopting net profit rate at 6% without valid reasons and exclusion of other expenses as pointed out to value the closing stock, makes the order of the AO erroneous and not sustainable. We concur with the finding and reason given by the ld. CIT (A) to delete the said addition of ₹ 39,20,490/-, so we uphold the order of the CIT (A) and dismiss these grounds of revenue s appeal.

Summary

Issues Involved:
Appeal against CIT (Appeals) order for assessment year 2009-10 regarding addition of suppressed sales and inflated closing stock.

Analysis:

1. Grounds of Appeal by Revenue:
The revenue appealed against the CIT (Appeals) order for the assessment year 2009-10. The grounds of appeal included challenging the deletion of an addition of Rs. 39,20,490 in relation to suppressed sales and inflated closing stock. The revenue contended that the CIT (A) erred in law by not considering the actual closing stock value declared by the assessee.

2. Background of the Case:
The assessee, engaged in the construction business, filed a return of income declaring net taxable income of Rs. 9,80,890. The Assessing Officer (AO) completed the assessment at an income of Rs. 64,31,564 after making various additions. The CIT (A) partially allowed the appeal, leading to the revenue's appeal.

3. Disputed Grounds:
The disputed grounds (2 to 4) were interconnected and focused on the deletion of the addition of Rs. 39,20,490 concerning suppressed sales and inflated closing stock. The AO calculated the value of closing stock at a lower amount compared to what the assessee declared, leading to the addition. However, the CIT (A) disagreed with the AO's methodology and reasoning.

4. CIT (A) Decision:
The CIT (A) observed discrepancies in the AO's calculations, including the arbitrary application of a higher net profit rate and the exclusion of various expenses while valuing the closing stock. The CIT (A) found the AO's approach arbitrary and not in line with accounting principles, leading to the deletion of the addition.

5. Tribunal's Decision:
The Tribunal upheld the CIT (A)'s decision to delete the addition of Rs. 39,20,490. It noted that the AO had not provided valid reasons for adopting a higher net profit rate and had inaccurately valued the closing stock by excluding relevant expenses. The Tribunal found the AO's order erroneous and unsustainable, supporting the CIT (A)'s reasoning.

6. Conclusion:
Both the revenue's appeal and the cross objection of the assessee were dismissed by the Tribunal. The order of the CIT (A) to delete the addition related to suppressed sales and inflated closing stock was upheld, emphasizing the importance of valid reasoning and adherence to accounting principles in such assessments.