2017 (12) TMI 58 - AT - Income Tax

Rejection of books of account - Trading addition - G.P. determination - CIT(A) has applied the gross profit rate 10.28% instead of 21.96% - Held that - There is no dispute that the auditor as appointed by the CAG had pointed out various discrepancies in their audit report in respect of the stock, inventory as well as non reconciliation of bank account of the assessee. The auditor specifically taken the note of the unverified stock with the weavers as well as stock shown by the assessee in the books of accounts. Though assessee has pointed out that these discrepancies are carried forward from the earlier years however, even if the discrepancies are carrying forward from earlier year when it is part of the books of accounts of the year and the assessee has failed to reconcile and verify the same, then this very fact that these discrepancies has not been removed by the assessee for the years certainly would lead to the inference that there are defects in the books of account. Therefore, the books do not reflect the correct picture of the state of affairs of the assessee. Cross objection of the assessee to the extent of the rejection of books of account are dismissed. It is pertinent to note that when the G.P. rate declared by the assessee for the A.Y. 2007-08 was not accepted by the AO and has not attained finality then the said G.P. rate cannot be applied for the purpose of working out the average rate for estimation of income of current year. Accordingly, we direct the AO to adopt the average of the G.P. rate declared by the assessee which was accepted by the AO and the G.P. rate adopted by the Assessing Officer which has attained the finality. According, we set aside the matter to the record of the Assessing Officer for limited purpose of computing the income based on the average G.P. rate on the basis of the declared G.P. by the assessee as accepted by the AO as well as the G.P. rate for the years which attained finality.

Summary

Issues:
1. Estimation of Gross Profit Rate based on past years' rates
2. Application of provisions of section 145(3) for rejecting books of accounts

Estimation of Gross Profit Rate based on past years' rates:
The appeal by the Revenue challenged the CIT(A)'s estimation of Gross Profit at 10.28%, questioning the veracity of the books of accounts for the year. The Assessing Officer (AO) had rejected the books of accounts under section 145(3) and estimated the income using a Gross Profit (G.P.) rate of 21.96%, the same as declared by the assessee for the assessment year 2006-07 and adopted for 2007-08. The CIT(A) upheld the rejection of books but applied an average G.P. rate of 10.28% based on the rates declared by the assessee for 2006-07 and 2007-08. This resulted in a significant reduction in the addition made by the AO. The Tribunal noted that the AO should estimate income using a reasonable G.P. rate after rejecting the books under section 145(3). It determined that the average of past years' declared or adopted G.P. rates, which have attained finality, would be a proper estimation method. As the G.P. rate for 2007-08 was not accepted by the AO and did not attain finality, the Tribunal directed the AO to compute income based on the average G.P. rate accepted by the AO and the rate that had attained finality for previous years.

Application of provisions of section 145(3) for rejecting books of accounts:
The Revenue contended that discrepancies highlighted by the auditor, including unverified stock, un-reconciled bank balances, and defaults in loan payments, justified the AO's rejection of the books under section 145(3). The assessee, a state-owned company, argued that it maintained all necessary books of account as required by law and that the discrepancies were carry-forwards from earlier years with no change in stock. The Tribunal noted that the auditor pointed out discrepancies in stock and bank accounts, indicating defects in the books of accounts. Despite the carry-forward nature of these discrepancies, the failure to rectify them for the current year reflected inaccuracies in the books. Consequently, the Tribunal upheld the rejection of books under section 145(3) and dismissed the assessee's cross objection on this issue.

In conclusion, the Tribunal partly allowed the Revenue's appeal for statistical purposes and dismissed the assessee's Cross Objection, emphasizing the importance of estimating income using a reasonable G.P. rate after rejecting books under section 145(3) and considering past years' rates that have attained finality.