2022 (12) TMI 1116 - AT - Income Tax

Addition based on estimated additional gross profit - AO on the basis of the difference of gross profit @4.37% as compared to earlier year (i.e. 21.23% for AY 2012 13 - 16.86% for AY 2013 14) made the addition - plea of the assessee that the unaccounted investment in stock of WIP of cranes amounting to Rs. 3,15,32,000, accepted by the partner of the assessee, was valued at sales price - HELD THAT - It is evident that the unaccounted investment in stock of WIP of cranes amounting to Rs. 3,15,32,000, is nothing but a difference of aggregated WIP of Rs. 5,73,00,000, based on sales value, and Rs. 2,57,68,000, i.e. the WIP as per the statement of stock submitted during the survey - The amount of Rs. 5,04,09,595, wherein the WIP was computed on sales value, was offered to tax by the assessee in its return of income. The other component in the aforesaid amount of Rs. 5,04,09,595, is unaccounted investment in raw materials accepted by the assessee amounting to Rs. 1,88,77,595. When the sale value of the cranes, which was considered for computation of WIP, has already included the profit component, the addition made by the AO, by firstly excluding the amount declared by the assessee and estimating the gross profit thereafter, results in double addition. Revenue has not brought anything on record to controvert the findings of the learned CIT(A) that the Sales Tax/VAT assessment order has accepted the assessee s books of account. Appeal by the Revenue is dismissed.

Issues Involved:
1. Rejection of books of account by the Assessing Officer (AO).
2. Deletion of addition based on estimated additional gross profit.
3. Alleged double addition due to determination of Work in Progress (WIP) on account of sale value.

Detailed Analysis:

1. Rejection of Books of Account by the Assessing Officer (AO):
The Revenue contended that the learned Commissioner of Income Tax (Appeals) [CIT(A)] erred in holding that the books of account of the assessee were not required to be rejected. The AO had rejected the books of account under section 145(3) of the Income Tax Act, 1961, due to discrepancies in the stock found during a survey conducted under section 133A. The AO noted that the assessee had not maintained the purchases and sales register, leading to an excess stock of Rs. 1,88,77,595/- which was admitted by the assessee as unaccounted investment in stock of raw materials.

The learned CIT(A) disagreed with the AO's rejection, citing that the recognized method of valuation is cost or market rate, whichever is lower. The CIT(A) referenced the Supreme Court's decision in Sanjeev Woolen Mills v. C.I.T. 279 ITR 434 (SC), emphasizing that the method of accounting should be such that real income, profits, and gains can be properly deduced. The CIT(A) also noted that non-maintenance of a day-to-day stock register is not a valid reason to reject books, as upheld by the Delhi High Court in CIT v/s Jas Jack Elegance Exports (2010) 324 ITR 95 (Del.).

2. Deletion of Addition Based on Estimated Additional Gross Profit:
The AO had made an addition of Rs. 2,09,64,740/- to the income of the assessee as undisclosed profit, based on a difference in gross profit percentage compared to the preceding year. The AO recomputed the gross profit of the assessee at 16.86% after excluding the disclosure amount of Rs. 5,04,09,595/- (unaccounted investment in stock).

The learned CIT(A) allowed the appeal filed by the assessee, stating that the survey party had valued the WIP at the sale value, which already included the profit component. Therefore, excluding the declaration and estimating the gross profit again was unwarranted. The CIT(A) concluded that the addition resulted in double counting of the profit component already included in the sale value of the WIP.

3. Alleged Double Addition Due to Determination of WIP on Account of Sale Value:
The Revenue argued that there was no double addition on account of the valuation of raw material and highlighted a fall in gross profit (GP) of 9.94% in the post-survey period compared to the average GP of the immediately preceding two assessment years.

The assessee contended that the unaccounted investment in stock of WIP of cranes amounting to Rs. 3,15,32,000/- was valued at the sales price, and this amount, along with Rs. 1,88,77,595/- (unaccounted investment in raw materials), was already offered to tax in the return of income. The CIT(A) supported this view, noting that the sales value considered for WIP computation included the profit component, and therefore, the addition made by the AO resulted in double addition.

The tribunal upheld the CIT(A)'s decision, finding no infirmity in the impugned order. The tribunal noted that the Revenue had not provided any evidence to counter the CIT(A)'s findings that the Sales Tax/VAT assessment order had accepted the assessee's books of account. Consequently, the grounds raised by the Revenue were dismissed.

Conclusion:
The appeal by the Revenue was dismissed, and the tribunal upheld the CIT(A)'s decision to delete the addition based on estimated additional gross profit and to reject the AO's action of rejecting the books of account. The tribunal found that the addition made by the AO resulted in double counting of the profit component already included in the sale value of the WIP.

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