2021 (12) TMI 435 - AT - Income Tax

Rejection of books of accounts - GP Estimation - non-production of the VAT return of the creditors - assessee has failed to produce any credible evidence with respect to the three major creditors earlier - HELD THAT - We do not approve the finding of the learned assessing officer that though the creditors have filed the confirmation of the account, but the learned assessing officer has rejected the same stating that so-called creditors on the address given by the assessee are not available. It could also not have been the reason that the nonproduction of the VAT return of the creditors can result into rejection of the books of accounts. It is merely because on report of the inspector it was found that the creditors were not available at the address given by the assessee, the learned assessing officer has rejected the books of accounts and estimated the profit comparing the results of three different entities. Merely because the VAT return of the suppliers were not produced assessee cannot be burdened with additional tax liabilities when the quantitative details of material purchased and sold which included the material purchased from the suppliers are also accounted for. Undisputedly the accounts of the assessee are audited Under the provisions of Section 44AB of the act. For the subsequent years the learned assessing officer has assessed the assessee Under the provisions of Section 143 (3) of the act and the books of accounts were accepted.In view of this we do not approve the order of the lower authorities rejecting the books of accounts of the assessee and estimating the profit by taking three different entities though in the similar line of business for estimating the income of the assessee. - Decided in favour of assessee.

Summary

Issues:
Assessment based on net profit rate, Rejection of books of account, Failure to produce evidence, Application of gross profit ratio, Rejection of creditors' confirmation, Estimation of profit, Principles of natural justice.

Analysis:
The appeal was filed against the order passed by the ld CIT(A)-20, New Delhi, where the appeal against the order passed u/s 143(3) read with section 254 of the Act was dismissed. The brief facts revealed that the assessment was based on a net profit rate of 1.34%, leading to the total income being assessed at a specific amount. The appeal before ITAT was the second round of proceedings after an earlier order was set aside. The ld AO issued a show cause notice regarding the rejection of books of account due to unverified creditors and lack of supporting evidence. The assessee submitted certain documents, including creditor confirmations and VAT returns. However, the ld AO rejected these contentions and reiterated the net profit ratio, resulting in the reassessment of total income. The ld CIT(A) upheld the ld AO's order, leading to the appeal before ITAT.

The ld AR argued that the adoption of the gross profit ratio by the ld AO was unjustified, presenting details of net profit ratios for various assessment years. The ld DR contended that specific discrepancies in this year's findings regarding creditors should not be overlooked. Upon careful consideration, ITAT observed that the rejection of books of account was primarily due to the failure to justify the creditors. However, the addition based on net profit ratio was deemed inappropriate. The gross profit ratio of other years was significantly higher, and the quantitative details of purchases and sales were in line with VAT returns. The rejection of books solely based on unavailability of creditors at given addresses was not justified. The confirmations and details provided by the assessee were not adequately considered by the ld AO. The rejection of books and estimation of profit based on unrelated entities in the same business line were deemed incorrect. Consequently, ITAT allowed the appeal, emphasizing the acceptance of ground number 5 and rendering other grounds unnecessary for adjudication.

In conclusion, the appeal was allowed, highlighting the errors in rejecting the books of account and estimating profit based on inappropriate criteria. The decision was pronounced in favor of the assessee on 21/09/2021.