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2020 (6) TMI 566 - AT - Income TaxEstimation of income - Rate of Gross profit (GP) - rejection of books of account - HELD THAT - GP so declared in the earlier years is not in dispute as there is no finding that in the past, the assessee has obtained any accommodation entries as in the instant year and therefore, the contention of the ld DR that the past history cannot form the basis for estimating current year GP cannot be accepted. Once the past year results have attained finality and not in dispute, the same can form the basis for estimating the GP rate for the current year. It is clear from the details of the GP declared by the assessee for the preceding three years that the average of past three years of GP declared by the assessee comes to 10.22%. GP declared for the year under consideration at 10.04% is lower than the average GP declared by the assessee in preceding three years by 0.18%. The rejection of books of account by invoking provisions of Section 145(3) of the Act shall lead to estimation of income of the assessed based on some reasonable and proper criteria. Since the average of past history of GP declared by the assessee is considered as a proper and reasonable basis for estimation of income for the year after rejection of books of account, therefore, the GP is estimated at 10.22% as against GP declared by the assessee at 10.04% for the year under consideration and differential trading addition equivalent to GP rate of 0.18% on declared turnover is upheld and the appeal of the assessee is partly allowed. For A.Y 2012-13, the assessee has declared GP of 10.57%. If we consider the average GP for past 5 years which has been declared and accepted by Revenue and has attained finality, excluding A.Y 2009-10 where GP so declared has not been accepted by the Revenue on account of accommodation entries, it comes to 10.15%. Thus, the GP declared by the assessee is more than the average GP of past years and even where the books of accounts are rejected, no trading addition is called for and the appeal of the assessee is thus allowed. For A.Y 2013-14, the assessee has declared GP of 9.01% which is lower than the average GP for past 5 years which comes to 10.15%, computed after excluding GP declared for A.Y 2009-10 and A.Y 2012-13, the GP is thus estimated at 10.15% as against GP sustained by the ld CIT(A) at 11.50% and GP of 9.01% declared by the assessee for the year under consideration and differential trading addition equivalent to GP rate of 1.14% on declared turnover is upheld and the appeal of the assessee is partly allowed. For A.Y 2014-15, the assessee has declared GP of 9.54% and we consider the average GP for past 5 years, it comes to 10.15%, computed after excluding GP declared for A.Y 2009-10 and A.Y 2012-13 and A.Y 2013-14, thus the GP for the year is estimated at 10.15% as against GP sustained by the ld CIT(A) at 11.50% and GP of 9.54% declared by the assessee for the year under consideration and differential trading addition equivalent to GP rate of 0.61% on declared turnover is upheld and the appeal of the assessee is partly allowed.
Issues Involved:
1. Validity of proceedings initiated under Section 148 of the Income Tax Act, 1961. 2. Appropriateness of additions made on account of unverifiable purchases. 3. Justification for restricting or deleting additions based on corroborative information from the Investigation Wing. 4. Rejection of books of accounts under Section 145(3) and estimation of Gross Profit (GP) rate. Detailed Analysis: 1. Validity of Proceedings Initiated Under Section 148: The assessee challenged the initiation of proceedings under Section 148 and the consequent assessment under Sections 147/143(3). The argument was that the initiation was wrong and bad in law. However, the Tribunal upheld the initiation of proceedings, noting that the Assessing Officer (AO) had sufficient grounds based on information from the Investigation Wing, Mumbai, indicating bogus purchases. 2. Appropriateness of Additions Made on Account of Unverifiable Purchases: The AO disallowed 25% of the alleged bogus purchases amounting to ?50,79,735, resulting in an addition of ?12,69,933. The CIT(A) reduced this addition to ?4,62,549 by applying a GP rate of 11.5% on declared sales. The Tribunal considered the past GP rates of the assessee, which averaged around 10.22%, and found that the GP rate of 11.5% applied by CIT(A) was excessive. The Tribunal thus revised the GP rate to 10.22%, leading to a differential trading addition. 3. Justification for Restricting or Deleting Additions Based on Corroborative Information: The Revenue argued that the case fell under exception clause 10(e) of Circular 03 of 2018, which allows for appeals in cases involving information from law enforcement agencies. The Tribunal, however, clarified that the Investigation Wing of the Income Tax Department is not an external law enforcement agency as specified in the exception. Therefore, the appeal by the Revenue was dismissed on account of low tax effect. 4. Rejection of Books of Accounts Under Section 145(3) and Estimation of GP Rate: The AO rejected the books of accounts under Section 145(3) due to unverifiable purchases and estimated the income based on a higher GP rate. The Tribunal noted that the rejection of books should lead to an income estimation based on reasonable criteria, typically the past GP rates. The Tribunal found that the average GP rate of the past three years was a reasonable basis for estimation. For A.Y 2009-10, the Tribunal revised the GP rate to 10.22% from the 11.5% applied by CIT(A). Appeals for Other Years: - A.Y 2012-13: The GP rate declared was 10.57%, higher than the average past GP of 10.15%. The Tribunal found no basis for additional trading addition, allowing the assessee's appeal. - A.Y 2013-14: The GP rate declared was 9.01%, lower than the average past GP of 10.15%. The Tribunal estimated the GP at 10.15%, resulting in a differential trading addition. - A.Y 2014-15: The GP rate declared was 9.54%, also lower than the average past GP of 10.15%. The Tribunal estimated the GP at 10.15%, resulting in a differential trading addition. Conclusion: The appeals by the Revenue were dismissed due to low tax effect. The assessee's appeal for A.Y 2012-13 was allowed, while the appeals for other years were partly allowed, with the Tribunal revising the GP rates based on past averages. The order was pronounced on 19/06/2020.
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