2016 (5) TMI 54 - AT - Income Tax

Application of average of the net profit of assessed income for the purpose of determining the profit of the assessee - Held that - Since in the subsequent years, the Revenue Department accepted net profit rate in the case of the assessee at 2.53 per cent. and 2.99 per cent., therefore, the learned Commissioner of Income-tax (Appeals) was justified in applying the average of the net profit of assessed income of subsequent two years for the purpose of determining the profit of the assessee. The Assessing Officer was, therefore, not justified in adopting the gross profit rate of 51.08 per cent. for making addition against the assessee.

Summary

Issues Involved:
1. Whether the learned Commissioner of Income-tax (Appeals) erred in allowing relief by relying on the average of net profit of the preceding two years.
2. Whether the Assessing Officer correctly computed the gross profit rate and made additions based on month-wise and quarter-wise trading accounts.
3. Whether the rejection of books of account under section 145(3) was justified.
4. Whether the estimation of net profit at 2.76% by the Commissioner of Income-tax (Appeals) was appropriate.

Issue-wise Detailed Analysis:

1. Relief by Relying on Average Net Profit of Preceding Two Years:
The Revenue appealed against the order of the Commissioner of Income-tax (Appeals) which allowed relief by relying on the average net profit of the preceding two years. The Commissioner of Income-tax (Appeals) found defects in the maintenance of the books of account and rejected them under section 145(3) of the Act. He applied an average net profit rate of 2.76% based on subsequent two years' assessments. The Commissioner's findings were that the Assessing Officer's method of computing gross profit by month-wise and quarter-wise trading accounts was irrelevant and erroneous.

2. Computation of Gross Profit Rate and Additions by Assessing Officer:
The Assessing Officer computed a gross profit rate of 51.16% from the figures available in the profit and loss account and details of month-wise purchases and sales. He observed discrepancies in the purchases and sales figures, leading to a negative stock in March 2009. The Assessing Officer prepared a trading account which resulted in an addition of Rs. 14.48 crores. However, the Commissioner of Income-tax (Appeals) found that the Assessing Officer's method of month-wise trading accounts led to distorted results and was not justified.

3. Rejection of Books of Account under Section 145(3):
The Commissioner of Income-tax (Appeals) noted that the auditors did not mention the maintenance of stock records or gross profit rate in the audit report. The Assessing Officer found certain defects, such as unverifiable purchases and serially numbered purchase bills without sales tax registration numbers. These defects justified the rejection of the books of account under section 145(3). The Commissioner of Income-tax (Appeals) held that the assessment should be based on the entire financial year and not on month-wise trading results.

4. Estimation of Net Profit at 2.76%:
The Commissioner of Income-tax (Appeals) applied an average net profit rate of 2.76% based on the subsequent two years' assessments, where net profit rates of 2.53% and 2.99% were observed. This estimation was found to be more appropriate than the gross profit rate of 51.08% used by the Assessing Officer. The Commissioner of Income-tax (Appeals) relied on judicial precedents, including the decision of the Hon'ble Supreme Court in Kachwala Gems v. Joint CIT, to justify the estimation of net profit.

Conclusion:
The Appellate Tribunal upheld the order of the Commissioner of Income-tax (Appeals), dismissing the Revenue's appeal. The Tribunal agreed that the Assessing Officer's method of month-wise trading accounts was incorrect and that the estimation of net profit at 2.76% was appropriate. The Tribunal also noted that the rejection of books of account under section 145(3) was justified due to the defects observed. The relief of Rs. 13.60 crores allowed by the Commissioner of Income-tax (Appeals) was found to be proper, and the Departmental appeal was dismissed.