2016 (7) TMI 674 - HC - Income Tax

Rejection of books of accounts - valuation of gross profit ratio - Held that - The submission of revenue that the rejection of books of accounts under Section 145(3) of the Act by the Assessing Officer was justified as there was discrepancy in valuation of closing stock of work in progress is not sustainable. This for the reason that the CIT(A) had in his order deleted the addition made on the above account and the Revenue has accepted it. This is evident from the fact that no appeal from it has been preferred by the Revenue to the CIT(A). So far as the other basis viz. fall in gross profit ratio is concerned, we find that the same is found by the Tribunal attributable to increase in turnover by more than 100% with prices of its products remaining stagnant due to increase in competition and no fall in prices of inputs/raw materials. Further, the finding of the Tribunal as recorded herein above in respect of the respondent assessee s accounts shows that it found as a fact that the accounts were correct and complete. In fact, even quantitative details were also mentioned. As the finding of the Tribunal in the impugned order is shown to be perverse or arbitrary, it does not call for any interference. - Decided against revenue

Summary

Issues:
1. Appeal under Section 260A of the Income Tax Act, 1961 challenging the order of the Income Tax Appellate Tribunal for Assessment Year 2005-06.
2. Discrepancy in the valuation of closing stock and fall in gross profit ratio leading to rejection of books of accounts under Section 145(3) of the Act.
3. Appeal to the Tribunal against rejection of books of accounts and estimation of gross profit ratio at 10% by the Commissioner of Income Tax (Appeal) [CIT(A)].

Issue 1:
The appeal under Section 260A of the Income Tax Act, 1961 challenges the order of the Income Tax Appellate Tribunal for Assessment Year 2005-06. The Revenue questioned the Tribunal's decision regarding the rejection of the books of accounts by the Assessing Officer under Section 145(3) of the Act.

Issue 2:
The Assessing Officer rejected the books of accounts due to a discrepancy in the valuation of closing stock and a fall in the gross profit ratio from 10% to 7.83%. This rejection led to an addition on account of the valuation of work in progress and an estimation of profit at a gross profit ratio of 10%. The CIT(A) upheld the rejection of books of accounts and the estimation of the gross profit ratio at 10% but rejected the addition on account of the valuation of closing stock/work in progress.

Issue 3:
The respondent assessee appealed to the Tribunal against the rejection of books of accounts and the estimation of the gross profit ratio at 10%. The Tribunal found that the Assessing Officer had not provided evidence of defects in maintaining the books of accounts by the assessee. It noted that all details were meticulously maintained, including quantitative details of stock. The Tribunal attributed the fall in the gross profit ratio to increased competition and stagnant product prices due to a rise in turnover. The Revenue contended that the rejection of books of accounts was justified due to discrepancies in the valuation of closing stock and the gross profit ratio. However, the Tribunal found the accounts to be correct and complete, leading to the dismissal of the appeal as it did not raise any substantial question of law.

This detailed analysis covers the issues involved in the legal judgment comprehensively.