2021 (3) TMI 929 - AT - Income Tax

Rejection of books of accounts - GP addition/estimation - order of the ld. CIT(A) in estimating G.P. rate @ 12.86% on the basis of five years average assessed gross profit rate and sustained GP addition - HELD THAT - The assessee deals in purchase/manufacture and sale of furniture handicraft items. Clause 28 of the form No. 3CD of the audit report requires quantitative details of items traded and also of items manufactured. Shortage in the manufacturing process and percentage of yield in the manufacturing process are required to be given. Quantitative tally of traded items and finished products is also required to be given. However no such details are given. Auditor's remarks against these clauses not maintained.- assessee could not file the required details during the course of assessment proceedings. As during the course of assessment proceedings, it transpired that stock register was not maintained, main raw material i.e. wood is purchased in cft (cubic feet) and finished goods are sold in units (i.e. nos.) and record of shortage is not maintained, physical record of raw material at different stages of production was also not maintained. Non maintenance of records of quantitative details renders the accounts of assessee incomplete. Preparation of the Inventory at the end of year but not keeping it on record and not producing such Inventory for scrutiny can only lead to the inference that accounts are not correct. Quantitative tally of items traded and manufactured by assessee is not only possible but also the requirement of proper accounting system.Adoption of different standards for receipts and production in stock, accounts can justify rejection of accounts. If the stock received are shown in the books by one standard and goods produced from those stocks are shown by another standard it is quite clear that profits cannot be correctly deduced. In such cases the A.O. would be justified in rejecting the method and in estimating the income. The assessee failed to file any evidence against the defect pointed out by the A.O. By following the order of the Coordinate Bench, the ld. CIT(A) has adopt the average Gross profit rate of 5 year which comes to 12.86% (17.2% 12.03% 8.52% 12.96% 13.58%). Hence the ld. CIT(A) restricted the Gross profit rate @1 2.86% instead the Assessing officer applied 17.02%. CIT(A) has given his finding on the basis of five year average G.P. declared by the assessee as well as on the basis of following the decision of the Coordinate Bench passed in assessee s own case 2017 (7) TMI 1380 - ITAT JAIPUR The case laws relied upon the ld. AR are not applicable on the facts of the present case, therefore, we do not find any reason to interfere into or deviate from the findings so recorded by the ld. CIT(A) and we uphold the same qua the issue under consideration. Appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Rejection of Books of Accounts under Section 145(3)
2. Estimation of Gross Profit (G.P.) Rate

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):

The primary issue raised by the assessee was the rejection of books of accounts by the Assessing Officer (A.O.) under Section 145(3) of the Income Tax Act, 1961. The A.O. rejected the books on the grounds that the assessee did not maintain a quantitative tally of finished goods and there were certain observations by the auditor regarding the valuation of inventory. The A.O. argued that these issues had a bearing on the Gross Profit (G.P.) of the assessee. The assessee contended that the rejection was unjustified as the nature of their business, which involved the manufacturing and export of wooden handicraft items, made it difficult to maintain such records. The assessee further argued that more than 90% of sales were in the foreign market, and the purchases and sales were completely vouched.

The CIT(A) upheld the A.O.'s decision, stating that the non-maintenance of quantitative details rendered the accounts incomplete. The CIT(A) noted that the assessee failed to provide the required details of opening and closing stock and did not maintain a stock register. The CIT(A) also highlighted that the auditor's report indicated that the valuation of inventory was not in accordance with accounting standards, and there were other discrepancies in the accounting practices. Given these findings, the CIT(A) concluded that the rejection of books of accounts under Section 145(3) was justified.

2. Estimation of Gross Profit (G.P.) Rate:

The second issue pertained to the estimation of the G.P. rate. The A.O. applied a G.P. rate of 17.20%, based on the G.P. rate of A.Y. 2005-06, resulting in an addition of ?1,00,67,820/-. The assessee argued that this was unreasonable and that the average G.P. rate of the last five years should be considered instead. The assessee cited a previous decision by the ITAT in their own case for A.Y. 2012-13, where it was held that the average G.P. rate should be applied.

The CIT(A) agreed with the assessee and applied the average G.P. rate of the last five years, which came to 12.86%. This resulted in a reduced addition of ?20,43,900/-. The CIT(A) noted that the principle of averaging the G.P. rate over the last five years was a fair and robust basis for estimation, as it took into account the historical performance of the assessee.

The ITAT, upon reviewing the case, upheld the CIT(A)'s decision. The ITAT noted that the assessee's failure to maintain quantitative details and the discrepancies pointed out by the auditor justified the rejection of books of accounts. However, it agreed with the CIT(A) that the average G.P. rate of the last five years was a fair basis for estimation. The ITAT referred to its own previous decision in the assessee's case for A.Y. 2012-13, which supported the use of the average G.P. rate. Consequently, the ITAT dismissed the appeal of the assessee and upheld the CIT(A)'s order.

Conclusion:

The ITAT concluded that the rejection of books of accounts under Section 145(3) was justified due to the non-maintenance of quantitative details and other discrepancies. However, it upheld the CIT(A)'s decision to apply the average G.P. rate of the last five years, resulting in a reduced addition to the assessee's income. The appeal of the assessee was dismissed.