2021 (2) TMI 542 - AT - Income Tax

Rejection of books of accounts - estimation of Profit - assessee s premises was subjected to survey action wherein combined physical stock was taken and to cover up the discrepancies, the assessee offered additional income which has, in fact, credited to its financial statements for the year under consideration - Allegations of Ld. AO that the assessee tried to nullify the declaration so made by valuing the closing stock at lower rates and also by resorting to sell the frames at abysmally lower rates. Consequently, the books were rejected u/s 145 and the Gross profit rate of 42.36% has been applied to determine the income of the assessee. HELD THAT - We find that the books were subjected to Tax Audit and the quantitative details were duly furnished by the assessee during the course of assessment proceedings. It could also be observed that discrepancies were found only in the physical stock of frames. To cover up the same, the assessee has already offered additional income of ₹ 20 Lacs. No discrepancies were found in the stock of lenses. During original assessment proceedings, Ld. AO chose to make addition of ₹ 12 Lacs since the closing stock of lenses was valued at ₹ 5/- per pair as against cost of ₹ 17/- per pair. However, the aforesaid action has already been turned down by the Tribunal in assessee s appeal wherein the addition was deleted. In other words, the matter of valuation of closing stock of Lenses has already attained finality. Assessee was maintaining proper books and furnished the requisite details, vouchers, bills, purchase and sales register as called for by Ld. AO during the course of assessment proceeding - no specific defects have been pointed out by Ld. AO in the documents furnished by the assessee before rejecting the books of accounts. Rather the assessee was successful in explaining that fall in Gross profit was mainly on account of old stock of lenses for which there was no fresh purchases during the year. There was only disposal of the old stock and the balance closing stock was valued at lower of cost or market price, which action the Tribunal has already accepted. Therefore, the lower authorities, in our considered opinion, were not justified in rejecting the books of accounts in the second round of assessment proceedings. Loss in the case of the present assessee is arising only due to lower valuation of closing stock of lenses which has been accepted by the Tribunal in assessee s own case and we see no reason to deviate from the same. We are inclined to hold that the rejection of books u/s 145 was not justified and the estimation of Profit as done by lower authorities could not be sustained. The Ld. AO is directed to accept the income declared by the assessee as per its computation of income.

Summary

Issues involved:
Quantum appeal challenging the confirmation of certain additions and penalty under section 271(1)(c) for Assessment Year 2002-03.

Analysis:

Quantum Appeal:
1. The appeal contested the order of the CIT(A) confirming the rejection of books of accounts and estimating the gross profit of the appellant.
- The AO based the action on surmises, suspicion, and conjectures, ignoring relevant material submitted by the appellant.
- The estimation of income made by the AO was deemed arbitrary and excessive.
2. The CIT(A) confirmed further additions of ?20 Lacs and did not reduce the addition by ?12.00 Lacs, which was already deleted by the ITAT.

3. The assessee, a wholesaler dealer of spectacle frames, cases, and lenses, was in the process of merging with another entity during the year under consideration. The assessment framed under section 143(3) resulted in certain additions to the returned income, including depreciation and disallowance out of closing stock. The assessee's books were duly audited, and the closing stock was valued at the lower of cost price or market price. The assessment also involved discrepancies in stock quantities and valuation issues.

4. The AO rejected the books under section 145, applied a gross profit rate, and determined the income of the assessee. However, the Tribunal found that the rejection of books was unjustified, and the estimation of profit by the lower authorities could not be sustained. The AO was directed to accept the income declared by the assessee.

Penalty Appeal:
5. The penalty under section 271(1)(c) was imposed on the assessee, which was challenged after the quantum additions were deleted. The penalty was deemed not sustainable after the quantum additions were disallowed, and the penalty appeal was allowed.

6. In conclusion, both the quantum appeal and the penalty appeal were allowed in favor of the assessee based on the findings and orders pronounced by the Tribunal on 9th February 2021.