2017 (6) TMI 723 - AT - Income Tax

Addition on account of fall in GP - rejection of books of account of the assessee - Held that - A perusal of the assessment order reveals that all discrepancies and incriminating material found during search in relation to stock, cash and debtors, was duly explained to the satisfaction of the assessing officer, who has categorically stated so in his order. The surrender made under various heads, we find, was only to buy peace. We are in agreement with the CIT (Appeals) that since complete records were maintained by the assessee and all defects pointed out by the Assessing Officer were duly explained by the assessee and further no specific defects in the books of account were pointed out by the Assessing Officer, the rejection of books of account was not acceptable more so, solely on the basis of fall in GP rate. We also find that the GP rate had increased in the current year from ₹ 411.64 lacs in the preceding year to 499.55 lacs in the impugned year. It is also admitted fact that the assessee had surrendered additional income during the course of search amounting to ₹ 160 lacs which included ₹ 145 lacs on account of difference in stock and unrealized sales/debtors. Undoubtedly the assessee s surrender on these counts, which form part of GP, is much more than that being made by the AO and for this reason also there is no justification for making any addition on account of fall in GP. No infirmity in the order of the learned CIT (Appeals) in holding the rejection of books of account by the Assessing Officer as unjustified and deleting the resultant addition by applying GP rate of 16%. - Decided against revenue.

Summary

Issues:
Deletion of addition on account of fall in GP after rejecting books of account.

Analysis:
The Revenue filed an appeal against the order of CIT(Appeals) related to the assessment year 2011-12, challenging the deletion of an addition of ?40,55,661 on account of a fall in Gross Profit (GP). During the assessment, the Assessing Officer observed discrepancies in the declared income compared to the surrendered income under various heads. The AO issued a show cause notice to justify the low declared income, attributing it to a decrease in GP rate. The AO also noted increased power and fuel consumption and raw material usage. Consequently, the books were rejected, and an addition was made based on a 16% GP rate.

The CIT(A) deleted the addition, stating that the surrendered income covered the discrepancies, and the GP rate was not unreasonably low to warrant book rejection. The AR argued that all necessary details were provided, and the increase in expenses was justified. The CIT(A) found the AO's rejection of books unjustified, as no specific defects were pointed out, and the GP progression was reasonable. The AR's detailed submissions were accepted, and the addition was deleted.

The ITAT upheld the CIT(A)'s decision, emphasizing that the AO's reasons for rejection were unfounded. The GP had actually increased, and the surrendered income exceeded the AO's addition. The ITAT cited a similar case where rejection of books was deemed unjustified, supporting the CIT(A)'s decision. The ITAT concluded that the rejection of books was unwarranted, and the addition based on GP rate was deleted.

In summary, the ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition based on a fall in GP rate. The ITAT found no flaws in the CIT(A)'s reasoning and upheld the deletion of ?40,55,661.