2019 (7) TMI 2048 - AT - Income Tax

Disallowance of URD purchases - addition on account of gross profit by applying 3% rate of URD purchases - addition by estimating the gross profit rate of URD purchases without rejection of books of accounts - HELD THAT - As decided in the case of CIT Vs. Anil Kumar Co. 2016 (3) TMI 184 - KARNATAKA HIGH COURT wherein it was held that where the books of accounts of the assessee had not been rejected and assessment having not been framed u/s.144 of entire addition made by AO based on estimation of income was to be deleted. Similarly the ld. Counsel further placed reliance on the decision of Vijay Industries 2017 (3) TMI 1958 - RAJASTHAN HIGH COURT wherein also it was held that addition cannot be justified without rejection of books of accounts. Similarly in the case of ACIT Vs. Ercon Composites 2013 (12) TMI 902 - ITAT JODHPUR wherein it was held that without rejecting books of account addition on estimate basis was not justified. We are of the considered opinion that the AO was not justified in making addition on account of URD purchases hence the same is therefore directed to be deleted - Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question addressed in this judgment is whether the Assessing Officer was justified in disallowing the unregistered dealer (URD) purchases amounting to Rs. 57,73,496/- without rejecting the books of accounts maintained by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Disallowance of URD Purchases without Rejection of Books of Accounts

Relevant Legal Framework and Precedents:

The relevant legal framework involves the provisions under Section 145(3) of the Income Tax Act, which allows the Assessing Officer to reject the books of accounts if they are not reliable. The precedents considered include decisions from the Karnataka High Court in CIT Vs. Anil Kumar & Co., the Rajasthan High Court in Vijay Industries Vs. CIT, and the Jodhpur Tribunal in ACIT Vs. Ercon Composites, which emphasize that additions based on estimation cannot be justified without the rejection of books of accounts.

Court's Interpretation and Reasoning:

The Tribunal noted that the Assessing Officer made an addition by estimating the gross profit rate of URD purchases without rejecting the books of accounts. The court observed that the Assessing Officer did not point out specific defects or discrepancies in the accounts maintained by the assessee. Furthermore, the gross profit and net profit rates disclosed by the assessee were higher than the previous year, which did not warrant an estimation of net profit rate without concrete evidence.

Key Evidence and Findings:

The Tribunal found that the assessee's gross profit rate was 5.05% compared to 3.50% in the previous year, and the net profit rate was 0.88% compared to 0.76% in the previous year. The court also noted that the case cited by the Assessing Officer, Vijay Desai (HUF), involved a search and seizure with incriminating material, which was distinguishable from the current case.

Application of Law to Facts:

The Tribunal applied the legal principles from the cited precedents to the facts of the case, concluding that without rejecting the books of accounts, the addition made by the Assessing Officer based on an estimated gross profit rate was not justified.

Treatment of Competing Arguments:

The Tribunal considered the arguments from both the assessee's counsel and the Senior Departmental Representative. The court found merit in the assessee's argument that the addition could not be made without the rejection of the books of accounts, as supported by various High Court decisions.

Conclusions:

The Tribunal concluded that the Assessing Officer was not justified in making the addition of Rs. 57,73,496/- on account of URD purchases, and thus, the appeal of the assessee was allowed.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

"We do not find any reason to estimate the net profit rate without bringing material on record..."

Core Principles Established:

The judgment reinforces the principle that additions based on estimation of income cannot be justified without the rejection of the books of accounts. It emphasizes the necessity for the Assessing Officer to identify specific defects or discrepancies in the accounts to justify such additions.

Final Determinations on Each Issue:

The Tribunal determined that the disallowance of Rs. 57,73,496/- for URD purchases was not justified without rejecting the books of accounts, and directed the deletion of the addition. The appeal of the assessee was allowed.