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2019 (3) TMI 685 - AT - Income TaxGP estimation - rejection of books of accounts - estimation of income - invocation of Section 145(3) - true or correct income of the assessee s business - assessee has not maintained proper records - non maintenance of stock separately for different types and varieties of skins and hides, i.e., of cows, goats and buffaloes, dealt in - HELD THAT - defects in the assessee s accounts observed by the Revenue are, thus, on examination, found valid. Section 145(3) stands, accordingly, rightly invoked by the Revenue in the facts and circumstances of the case. The gross profit as per books, even assuming a correct valuation of raw material, or the raw material cost of the processed goods, gets justified at ₹ 206.27 lacs. If the under-valuation in the opening stock is to be similarly taken into account for determining the profit for the year, the data on the conversion cost for the preceding year would be required. For the sake of discussion, assuming a 20% increase therein, i.e., for the current year vis-a-vis the preceding year, yields a per unit cost of ₹ 102.80, which results in a net increase in the gross profit by ₹ 30,01,615 (94,79,818 64,78,203), or at 8.48%, i.e., very close to do that estimated. We may hasten to add that we are not in any manner suggesting an increase in or disturbing the valuation of the closing stock; the same having penalty implications as well, but only that, other things being equal, an increase to this extent gets validated. That is to say, that the profit as estimated by the Revenue is reasonable and merits being upheld. In the present case, the accounts as not correct and complete in-so-far as they relate to the manner of accounting for the various direct costs and revenues that go into the working of the gross profit. Net profit cannot be computed or arrived at independent of or de hors the gross profit, being only derived there-from. The AO may also estimate some indirect costs and/or revenues as well, i.e., along with estimating the gross profit; the whole purport being to estimate those areas of income determination for which the assessee s accounts are not regarded as reliable. At the same time, he, finding no defect therein, may not consider it necessary to disturb the indirect income/cost. How, therefore, we wonder, the invocation of sec. 145(3) be impugned on the basis that the assessee s income is estimated by estimating the gross profit alone, allowing other costs and revenues as claimed? There are decisions galore where income estimated thus, have been upheld. - Decided against assessee.
Issues Involved:
1. Rejection of Books of Accounts under Section 145(3) of the Income Tax Act, 1961. 2. Estimation of Gross Profit (GP) Rate. Issue-wise Detailed Analysis: 1. Rejection of Books of Accounts under Section 145(3) of the Income Tax Act, 1961: The Assessing Officer (AO) identified several defects in the assessee's books of accounts, leading to their rejection under Section 145(3). The defects included: - Lack of separate details for purchases, sales, and closing stock for the head office and branches. - No separate records for different types of hides and skins (cows, goats, buffaloes) with varying purchase and sale rates. - Absence of records distinguishing raw hides and skins from processed ones. - Purchases supported by self-prepared vouchers without proper bills, making it impossible to verify quantities and rates. - Stock valuation based on the number of pieces without quality distinction or justification for applied rates. - Expenses such as wages and fuel paid in cash and supported only by self-prepared vouchers. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's rejection of the books of accounts, noting that the trading results were unverifiable due to the aforementioned defects. The CIT(A) highlighted that the assessee's records did not reflect the type and quality of hides/skins, nor did they distinguish between raw and processed goods. The CIT(A) concluded that the AO was justified in invoking Section 145(3) and estimating the income. The Tribunal examined the arguments and evidence presented by both parties. The assessee contended that proper records were maintained and that the stock was valued on a FIFO basis. However, the Tribunal found that the stock register was not maintained in the regular course of business and was not produced before the auditor. The physical stock-taking at year-end further confirmed the absence of a proper stock register. The Tribunal emphasized that the accounts must be correct and complete to deduce the true income, and in this case, the assessee's accounts failed to meet this standard. 2. Estimation of Gross Profit (GP) Rate: Upon rejecting the books of accounts, the AO estimated the GP rate at 8.45%, based on the average GP rates of the two preceding assessment years (2012-13 and 2013-14). The assessee argued that the lower GP rate for the current year was due to a substantial increase in sales. The CIT(A) found the AO's estimation reasonable, noting that the GP rate for the succeeding years was also higher than 8.45%. The Tribunal upheld the estimation of the GP rate at 8.45%, considering it reasonable and based on the assessee's own disclosed results for the preceding years. The Tribunal also noted that the assessee's argument of increased sales leading to a lower GP rate was not substantiated with proper evidence. The Tribunal emphasized that the AO's estimation was based on relevant material and was in conformity with established principles. Conclusion: The Tribunal dismissed the assessee's appeal, upholding the rejection of the books of accounts under Section 145(3) and the estimation of the GP rate at 8.45%. The Tribunal found the AO's actions justified based on the defects in the assessee's accounts and the reasonable estimation of income. The Tribunal's decision was pronounced in the open court on February 25, 2019.
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