2018 (5) TMI 1379 - AT - Income Tax

Rejection of books of accounts - estimation of income - rejection of trading results - Held that - The trading result declared in previous years based on the accounts maintained in the same fashion, has been accepted by the department either under section 143(3) or 143(1) of the Income Tax Act. Moreover, once the account books were rejected under section 145 of the Act, no show cause notice was issued to the assessee to make the best judgment assessment as per provisions of section 144 of the Act on estimation. In presence of these facts we are of the considered opinion that the ld. CIT(A) has rightly discarded the findings reached by the Assessing Officer in the assessment order. AO has rejected the trading results of the assessee by adopting various methods of calculating the profit margins - method based on consumption of fabric per unit worked out by AO - Held that - The assessee vide letter dated 15.09.2010 had explained the wastage totaling to 3,26,116 mtrs. and it was contended that if this wastage is considered, the profit margin would tally with that declared by the assessee. A reconciliation statement of fabrics purchased and consumed during the year was filed by the assessee before the revenue authorities, which stands un- rebutted on behalf of the department. The assessee further objected that the AO did not take into account the consumables worth ₹ 1,74,67,046/- which were consumed during the year. The assessee has further pointed out major discrepancies in the calculation of fabric consumption per piece, which too doesn t stand countered on behalf of the revenue. Therefore, in our opinion, the conclusions made by the Assessing Officer cannot be supported at all. The next method based on stock balances given to the bank, in our opinion, is also not tenable. While adopting this method the Assessing Officer appears to have dissected the trading account from 1.04.2007 to 31.08.2007 and worked out the gross profit @ 33.9% for the whole year. On this the assessee objected that the trading account has been re-casted till the month of August, 2007 and the AO has taken the duty drawback at ₹ 1,27,71,073/- whereas the assessee has shown the duty drawback of ₹ 96,75,401/- for the whole year and the amount was receivable till August, 2007 of ₹ 38,97,073/-. Even after this objection, it has not been made clear as to from where the AO lifted the above figure of duty draw back. The ld. DR could also not make it clear before us. - Decided against revenue

Issues Involved:
1. Deletion of addition made by A.O. on account of unverifiable purchases.
2. Estimation of profit by A.O. and rejection of books of accounts.
3. Admission of additional evidence by CIT(A) in violation of Rule 46A.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by A.O. on Account of Unverifiable Purchases
The primary issue in the appeals for all three assessment years (2008-09, 2009-10, and 2010-11) was the deletion of additions made by the Assessing Officer (A.O.) on account of unverifiable purchases. The A.O. had disallowed purchases from several parties, treating them as non-genuine based on the non-service of summons and the report of the Ward Inspector, who could not locate these parties at the given addresses. However, the assessee countered these findings by providing substantial evidence, including audited accounts, confirmations, and VAT returns of the concerned parties. The CIT(A) accepted these submissions and deleted the additions, emphasizing that the A.O.'s conclusions were based on suspicion and conjecture rather than concrete evidence. The CIT(A) also noted that the sales made by the assessee were not challenged by the A.O., and the goods could not have been exported without the purchase of fabric and manufacture of garments.

2. Estimation of Profit by A.O. and Rejection of Books of Accounts
The A.O. rejected the books of accounts of the assessee under Section 145(3) of the IT Act, citing various discrepancies such as non-maintenance of stock register, incorrect method of valuation of work-in-progress, and unverifiable expenditure. The A.O. estimated the profit of the assessee at a higher rate based on different theories, including the consumption of raw material and production of finished products, stock balances given to the bank, and unverifiable purchases. The CIT(A) found these methods arbitrary and not supported by concrete evidence. It was noted that the A.O. had failed to issue a show-cause notice to the assessee before making a best judgment assessment under Section 144 of the IT Act. The CIT(A) concluded that the A.O.'s rejection of the books of accounts and the consequent estimation of profit were not justified, and the additions were deleted.

3. Admission of Additional Evidence by CIT(A) in Violation of Rule 46A
In the appeal for the assessment year 2010-11, the Revenue contended that the CIT(A) had erred in admitting additional evidence in violation of Rule 46A of the Income Tax Rules, 1962. However, the CIT(A) had sought a remand report from the A.O. on the submissions and evidence filed by the assessee, and the A.O. had conducted extensive enquiries during the remand proceedings. Therefore, the ground of violation of Rule 46A was found to be without merit and was dismissed.

Conclusion:
The Tribunal upheld the findings of the CIT(A) for all three assessment years, noting that the CIT(A) had made a reasoned order based on substantial evidence and judicial pronouncements. The appeals of the Revenue were dismissed, and the deletions of additions made by the A.O. were affirmed. The Tribunal emphasized that the A.O.'s conclusions were based on suspicion and conjecture, and the assessee had successfully rebutted these findings with credible evidence. The Tribunal also noted that the consistent method of accounting followed by the assessee had not been found faulty by the A.O., and the trading results declared in previous years had been accepted by the department.

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