2017 (12) TMI 1252 - AT - Income Tax

Rejection of books of accounts - Unverifiable purchases - bogus transactions - Most of the purchases of the assessee were from persons/ concerns issuing bills without delivery of goods - Held that -books of accounts are rejected by the AO the only course of action left to the AO is to assess the income of the assessee on the basis of best judgment and GP rate is considered as proper and reasonable basis and guidance for the best judgment. Once, the books result are rejected the Assessing Officer cannot proceed to make an addition to the income offered by the assessee as per books result. However, the AO in the case of the assessee instead of applying the GP rate made on addition@ 25% of the purchases to the book results. This act of the Assessing officer itself contradicts the decision of rejecting the books of accounts and books result. AO not given any finding of inflated purchases by the assessee but doubted the very transaction of purchases due to non production of these parties before the AO. The AO has not given the finding that the prices of the goods was inflated by the assessee but the AO doubted the genuineness of the purchases on the ground that the suppliers were found to be accommodation entries providers. When the AO rejected the book results u/s 145(3) of the Act, then the AO after rejection of the books of account can proceed to make the assessment on the basis of best judgment instead of resorting make the addition to the book results. Accordingly, in the facts and circumstances of the case and in view of the decision of this Tribunal in assessee s own case for A.Y. 2006-07 we do not find any error or illegality in the orders of the ld. CIT(A) in restricting the addition to the average GP rate based on the past history. Hence, the grounds raised in the Revenue appeals are rejected being without any substance or merits. Trading addition - Held that - AO issued summons to the parties from whom the assessee made the purchases however, there was no response and no compliance of the notice issued by the AO to these parties. Thus, the Assessing officer has rightly pointed out that the sale to the extent of more than 60% of the assessee was not verifiable. Therefore, in these facts and circumstances of the case when the sales of the assessee to the extent of more than 60% is not verifiable due to the failure of the assessee to produce the relevant evidence and the supplier then the book results of the assessee would not reflected true picture and consequently it was a sufficient and proper ground for rejection of books of accounts by the AO.

Issues Involved:
1. Restriction of trading addition by CIT(A).
2. Reliance on past history despite unverifiable purchases.
3. Rejection of books of accounts by AO.
4. Estimation of income by AO.
5. Confirmation of trading addition by CIT(A).

Detailed Analysis:

1. Restriction of Trading Addition by CIT(A):
The Revenue challenged the CIT(A)'s decision to restrict the trading addition to ?11.54 lacs against the ?96,69,746/- added by the AO for unverifiable purchases. The AO initially found that the assessee made purchases from parties issuing bills without actual sales and rejected the books of accounts under section 143(3). The AO estimated the income by applying a 25% profit rate on the unverifiable purchases, resulting in a significant addition. However, the CIT(A) reduced this addition by considering the average GP rate of past years, applying a 13.60% rate on total sales, and confirming only ?11.54 lacs as the addition.

2. Reliance on Past History Despite Unverifiable Purchases:
The CIT(A) relied on the past history of the assessee's case, despite the AO's findings that most purchases were from parties issuing bills without delivery of goods. The CIT(A) upheld the rejection of books but limited the addition based on historical GP rates. The Tribunal supported this approach, noting that the AO did not find inflated purchases but doubted the transactions due to non-production of suppliers.

3. Rejection of Books of Accounts by AO:
The AO rejected the books of accounts, invoking section 145(3), due to unverifiable purchases and the assessee's failure to produce suppliers for examination. The Tribunal upheld this rejection, emphasizing that once books are rejected, the AO should assess income based on the best judgment, often using the GP rate as a reasonable basis.

4. Estimation of Income by AO:
The AO estimated the income by applying a 25% profit rate on unverifiable purchases, following precedents from the Gujarat High Court. However, the Tribunal found this approach contradictory since the AO had rejected the books of accounts. Instead, the Tribunal supported the CIT(A)'s method of using the average GP rate from past years, aligning with the Tribunal's decision in the assessee's case for A.Y. 2006-07.

5. Confirmation of Trading Addition by CIT(A):
The assessee contested the CIT(A)'s confirmation of the ?11.54 lacs addition. The Tribunal noted that the assessee failed to substantiate the purchases and maintain accurate stock records. Given the unverifiable purchases and estimated stock valuation, the Tribunal upheld the CIT(A)'s decision to reject the books and estimate income based on the average GP rate, consistent with past judgments.

Conclusion:
The Tribunal dismissed both the Revenue's appeals and the assessee's cross objections for all three assessment years, affirming the CIT(A)'s approach to restrict the trading addition based on historical GP rates and uphold the rejection of books due to unverifiable purchases. The Tribunal emphasized the importance of using the GP rate as a reasonable basis for income estimation once books are rejected.

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