2003 (6) TMI 166 - AT - Income Tax

Method of accounting - rejection of books of account - lack of proper documentation - HELD THAT - It is an admitted position that the assessee had furnished audited accounts along with the return of income. The auditors have not given any adverse comments in the report. Similarly, the assessee was dealing in exciseable items and had maintained statutory registers prescribed by the excise authorities. The AO has not pointed out any material defects in the books of account maintained by the assessee. Even the excise authorities have accepted the books maintained by the assessee. It seems that the AO has made the addition merely on the ground that the assessee could not produce certain sale vouchers and sale bills. The AO has also asked the assessee to file brand-wise details of whisky and beer purchased and sold. In this regard, it was contended by the assessee that there were many brands with so much varieties of whisky and it was not possible to prepare such details. It seems that both the authorities below have not correctly appreciated the nature of the business being carried out by the assessee. In that view of the matter also, the addition was not justified. Furthermore, the GP rate of 2.144 per cent declared by the assessee was considered to be low by the authorities below. However, they have not assigned any cogent reasons while holding so. Keeping in view the total turnover of the assessee, it cannot be said that the GP declared by the assessee was low by any standard. It seems that the AO has estimated the GP rate of 2.7 per cent without any basis. Similarly, the sales were estimated at a figure of Rs. 1,55,00,000 without assigning any reason. It is not discerning from the order of the AO that as to how he had estimated the GP rate 2.7 per cent. As I have already noted hereinabove that no defect has been pointed out in the books of account and the accounts were audited by the auditors. Similarly, the excise authorities have not pointed out any defect in the books of account maintained by the assessee. The assessee was dealing in exciseable items and was being checked periodically by the excise authorities. Thus, I do not see any justification in making the addition. It is also true that no sales and purchases were found outside the books of account. It is also not the case of the Department that the assessee was not showing the correct income in its books of account. Thus, the learned CIT(A) was not justified in upholding the action of the AO. Accordingly, I set aside the impugned order and allow the appeal of the assessee. In the result, the appeal is allowed.

Summary

Issues involved:
The issues involved in this case include the rejection of books of account by the assessing officer, estimation of sales and gross profit, application of section 145(2) of the Income Tax Act, and the reasonableness of the additions made to the income of the assessee.

Rejection of Books of Account:
The assessing officer rejected the books of account of the appellant-firm due to lack of proper documentation and details of daily sales. The AO invoked section 145(2) of the Act and estimated sales at Rs. 1,55,00,000, applying a gross profit rate of 2.7%. The AO noted discrepancies in the recording of sales and lack of proper documentation, leading to the rejection of the books of account.

Estimation of Sales and Gross Profit:
The assessing officer estimated sales at a higher amount than declared by the assessee, leading to an addition of Rs. 96,000 to the income. The gross profit rate applied by the AO was challenged by the assessee as being unreasonable and not based on adequate grounds. The CIT(A) upheld the addition made by the AO, stating that the gross profit rate estimated was reasonable.

Application of Section 145(2) of the Act:
The invoking of section 145(2) by the assessing officer was based on the lack of complete records and documentation provided by the assessee. The CIT(A) found that the records produced were not sufficient for proper verification of transactions, leading to the acceptance of the AO's decision to reject the books of account.

Reasonableness of Additions to Income:
The Tribunal considered the submissions made by the assessee and found that the rejection of books of account and the additions made to the income were not justified. The Tribunal noted that the audited accounts were furnished, and no material defects were pointed out in the books of account. The Tribunal set aside the order of the CIT(A) and allowed the appeal of the assessee, stating that the additions were not justified based on the facts presented.

This judgment highlights the importance of maintaining proper documentation and records for income tax assessment purposes, as well as the need for assessing officers to provide valid reasons for estimations and additions to income.