2016 (4) TMI 658 - AT - Income Tax

Estimation of income - G.P. rate determination - basis of which the AO has rejected the books of account was on account of the assessee s failure to produce the confirmations of the accounts from the purchasers of the goods from the assessee - Held that - Rejection of books of account by the AO was without any rhyme and reason or the justification. In our view, once the assessee was maintaining books of account, purchases and sales were duly vouched, there was sufficient compliance in maintaining the records and there was no justification on the part of the AO to reject the books of account. Decided in favour of the assessee and against the revenue. Since we have held that the books of accounts were duly maintained by the assessee and no specific defect has been pointed out by the AO, therefore, in our view, the AO has no reason to estimate the income of the assessee by applying the GP rate of 8.54%. The authorities below have failed to bring on record the basis of arriving at the GP rate of 8.54% which is contrary to the GP shown by the assessee to the extent of 4.99%. Since we have held that the books of accounts were duly maintained by the assessee, therefore, the estimation brought on record by the AO and confirmed by ld. CIT (A) is without any basis. Accordingly the addition made by the authorities below is hereby directed to be deleted. As books of accounts were duly maintained by the assessee and all the sales and purchases are duly vouched and maintained by it, therefore, we do not find any justification for disallowing 5% of the expenses towards Conveyance, Deepawali, General, Telephone, Transport and Car. Accordingly the disallowance made by the authorities below on these heads is also directed to be deleted.- Decided in favour of assessee

Summary

Issues Involved:
1. Rejection of Books of Accounts
2. Estimation of Gross Profit Rate
3. Change in Business Line and Turnover Increase
4. Disallowance of Various Expenses
5. Validity of the Assessment Order

Detailed Analysis:

1. Rejection of Books of Accounts:
The assessee contended that the CIT (A) erred in sustaining the AO's rejection of the books of accounts without specific reasons. The AO rejected the books due to the non-maintenance of a stock register and discrepancies in sales confirmations from various parties. Despite the assessee providing substantial documentation, including Form No. 3CB and 3CD, audit reports, and sales invoices, the AO found the explanations unsatisfactory. The Tribunal concluded that the AO's rejection was unjustified as the assessee maintained proper records, and no specific defects were identified. Therefore, the rejection of the books was overturned.

2. Estimation of Gross Profit Rate:
The CIT (A) estimated a gross profit (GP) rate of 7%, while the AO had estimated 8.54%, compared to the assessee's declared GP of 4.99%. The Tribunal noted that the authorities failed to justify the basis for their estimations, especially given the significant increase in turnover and change in business line. The Tribunal found the assessee's GP rate reasonable and directed the deletion of the addition made by the authorities.

3. Change in Business Line and Turnover Increase:
The assessee argued that the change from running cloth production to Kaftan (unstitched nighty cloths) and the significant increase in turnover justified the lower GP rate. The Tribunal accepted this explanation, noting the competitive market conditions and the need to reduce profit margins to achieve higher sales. This change was considered a valid reason for the reduced GP rate.

4. Disallowance of Various Expenses:
The AO disallowed expenses related to conveyance, Deepawali, general, telephone, transport, and car, citing inadequate records and potential personal use. The CIT (A) upheld these disallowances but limited them to 5% of the expenses. The Tribunal, however, found that since the books of accounts were maintained properly and all transactions were vouched, there was no justification for any disallowance. Consequently, the disallowances were directed to be deleted.

5. Validity of the Assessment Order:
The assessee claimed that the assessment order was bad in law. The Tribunal's findings on the rejection of books and estimation of GP rate inherently addressed this issue, leading to the conclusion that the assessment order was not valid as it was based on unjustified grounds.

Conclusion:
The Tribunal allowed the appeal, overturning the rejection of books of accounts, the estimation of GP rate, and the disallowances of expenses. The detailed analysis highlighted the lack of specific defects in the assessee's records and the failure of the authorities to justify their estimations and disallowances. The Tribunal's decision emphasized maintaining proper documentation and the need for authorities to provide clear justifications for their actions.