2018 (5) TMI 1642 - AT - Income Tax

Net profit estimation - CIT-A granted substantial relief to the assessee and sustained the addition towards difference in closing stock - Held that - The survey team itself had made physical valuation of inventories and had arrived at the value as on 30.3.2010 at 34, 71, 533/- only. The difference between purchases and sales thereafter worked out to 23, 61, 057/- (35, 25, 479-11, 64, 422) as observed by both the AO and CIT-A would lead to further increase in closing stock by 23, 61, 057/-. Total closing stock as on 31.3.2010 should be 58, 32, 590/- as against the closing stock of 54, 26, 130/- declared by the assessee in the balance sheet filed in support of return of income thereby leading to a difference of 4, 06, 460/- which has been rightly added by the CIT-A. The survey team valued the closing stock as on 30.3.2010 based on physical verification of inventories at 34, 71, 533/- whereas the closing stock that was reflected in the computerized profit and loss account was 1, 52, 97, 868/-. Hence the computerized statement in the instant case cannot be relied upon as it contained deficiencies due to system getting corrupted. Assessee had also given the statement on oath at the time of survey that the total income for the whole year would be approximately 35 lacs for which due taxes would be paid by him. The returned profit by the assessee was 34, 63, 940/-. Hence there is no much variation in the approximation done by the assessee on the date of survey vis a vis the actual profit. We also find from the Gross Profit and Net Profit Chart of earlier years that assessee had reported higher GP and NP during the year under appeal despite the huge reduction in turnover. The ld CITA had rightly sustained the addition only towards difference in closing stock and the same does not require any interference.- Decided against revenue

Issues Involved:

1. Justification of reducing the net profit of the assessee by ?97,11,023/-
2. Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961
3. Determination of the accurate closing stock value

Issue-Wise Detailed Analysis:

1. Justification of Reducing the Net Profit of the Assessee by ?97,11,023/-:

The core issue in the appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in reducing the net profit of the assessee by ?97,11,023/-. The assessee, engaged in trading electrical goods, declared a total income of ?34,63,940/- for the Assessment Year 2010-11. During a survey conducted under Section 133A of the Income Tax Act, discrepancies were found in the computerized books of accounts. The profit as per books on the date of the survey was ?2,18,47,252/-, but the taxable income was calculated to be ?1,53,26,690/- after necessary adjustments. The Assessing Officer (AO) noted significant expenditures claimed by the assessee post-survey, leading to a declared profit of only 4.22% as against the surveyed profit of 26.84%. The AO rejected the books under Section 145(3) and re-estimated the profit, adding back ?1,01,17,483/- to the total income.

2. Rejection of Books of Accounts Under Section 145(3) of the Income Tax Act, 1961:

The AO rejected the books of accounts under Section 145(3) due to perceived inaccuracies and incompleteness. The assessee argued that the data extracted from the computer during the survey was corrupt and incorrect, particularly the closing stock value. The AO, however, found minimal differences in the figures of purchase and sale between the books as on the survey date and those supporting the return, suggesting that the claim of corrupt data was unsatisfactory. The AO observed that the books did not present a true and correct picture, leading to the rejection of the books and re-estimation of profit.

3. Determination of the Accurate Closing Stock Value:

The CIT(A) reviewed the AO's findings and the assessee's explanations. The CIT(A) noted that if the actual figures of closing stock, as determined by the survey team (?34,71,533/-), were considered, the net profit would be significantly lower than estimated by the AO. The CIT(A) found that the closing stock should have been ?58,32,590/- based on post-survey purchases and sales, but the assessee declared it as ?54,26,130/-, leading to a difference of ?4,06,460/-. The CIT(A) sustained the addition of ?4,06,460/- towards the difference in closing stock but deleted the balance addition, granting substantial relief to the assessee.

Final Judgment:

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision. The ITAT found that the computerized profit and loss account and balance sheet impounded during the survey contained deficiencies, supporting the assessee's claim of corrupted data. The ITAT noted that the survey team’s physical valuation of the closing stock was ?34,71,533/-, and the difference between purchases and sales post-survey justified an additional closing stock of ?23,61,057/-. Thus, the total closing stock should be ?58,32,590/-, leading to a justified addition of ?4,06,460/-.

The ITAT dismissed the revenue's appeal, confirming that the CIT(A) correctly sustained the addition of ?4,06,460/- towards the difference in closing stock and deleted the remaining addition of ?97,11,023/-.

Order Pronounced:

The appeal of the revenue was dismissed, and the order was pronounced in the court on 23.05.2018.

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