2022 (3) TMI 1359 - HC - Income Tax

GP estimation - Closing stock estimation - assessee had tried to furnish month wise closing stock and had failed to produce/justify/explain/ substantiate the same during the period of assessment - HELD THAT - AO had computed month wise and quarter wise trading account for enhancing the gross profit. AO had failed to consider the genuine purchases and sales made by the assessee, which had been duly entered in the books of account. The nature of business carried by the assessee was also not considered by the AO. The assessee was receiving goods throughout the year from different warehouses, through bills or challans. Lump-sum payments were made to the different suppliers throughout the year. All the records, i.e., books of account, sales and purchase vouchers had been fully produced by the assessee - Assessing Officer had, however, prepared month wise trading account and had found negative stock in the books of account of the assessee. Although, the Assessing Officer had not found any unrecorded purchases, but had, in his own way, prepared the trading account for enhancing the gross profit. No sales were found outside the books of account. AO could have made the assessment as per the provisions of the Income Tax Act, 1961. In the subsequent assessment years, the AO had passed the order u/s 143(3) of the Act in respect of the same business activities of the assessee, which gave rise to net profit of 2.53% and 2.99%. The learned Tribunal had, thus, rightly dismissed the appeal filed by the department.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal Division Bench, Chandigarh regarding addition to income based on gross profit rate and disallowance of certain expenses.

Analysis:
1. The appellant-department challenged the order of the Income Tax Appellate Tribunal Division Bench, Chandigarh, dated 28th October, 2015. The respondent-assessee, a company engaged in direct marketing, declared a gross turnover and net profit in its return. The Assessing Officer made an addition to the income based on discrepancies in the month-wise trading account filed by the assessee. The Commissioner of Income Tax (Appeals) partly allowed the appeal, and the department further appealed to the Tribunal.

2. The Assessing Officer calculated the gross profit rate at 51.08% based on the trading account, leading to an addition to the income. Additionally, a payment made without deducting TDS was disallowed. The Commissioner of Income Tax (Appeals) deleted the addition based on the negative peak closing stock but added an amount on net profit computation under relevant sections of the Income Tax Act.

3. The Income Tax Appellate Tribunal observed that the Assessing Officer's calculation of gross profit rate was not justified as it did not consider genuine purchases and sales entered in the books of account. The Tribunal highlighted the nature of the business, multi-level marketing system, and the absence of unrecorded purchases or sales. The Tribunal referred to precedents and upheld the Commissioner's decision, considering the average net profit of subsequent years for fair assessment.

4. Both the Appellate Authority and the Tribunal found the Assessing Officer's approach flawed in preparing month-wise trading accounts and enhancing gross profit without proper consideration of business operations. The Tribunal dismissed the department's appeal, emphasizing the correctness of the Commissioner's decision and the consistency with past assessments. The Tribunal's findings were deemed appropriate and not contrary to the evidence on record.

5. The judgment concluded that the Tribunal's decision was justifiable, and the question of law framed was answered accordingly. No grounds for interference were found, leading to the dismissal of the appeal. The Tribunal's findings were upheld as not being perverse or against the material on record.