1986 (6) TMI 84 - AT - Income Tax

Summary

Issues:
- Rejection of account books and addition in cloth account based on low Gross Profit (G.P.) rate
- Justification of rejection of accounts under section 145(1) of the IT Act, 1961
- Dispute over the addition made by the assessing officer and confirmed by the CIT (A)
- Appeal against the CIT (A) decision on the addition in trading account

Analysis:
The judgment involves the challenge by the assessee against the order of the ld. CIT (A) regarding the rejection of account books and the consequent addition in the cloth account due to a low Gross Profit (G.P.) rate. The assessee, a registered firm dealing in cloth business, maintained accounts on a mercantile basis for the year ending 14th Nov., 1982. The assessing officer noted a low G.P. rate and specific defects in the accounts, such as the absence of a stock register and incomplete details of purchases and expenses. Consequently, the assessing officer rejected the account books under section 145(1) of the IT Act, 1961, and made an addition of Rs. 29,883 in the trading result.

The assessee contested the addition, arguing that the rejection of accounts solely based on the lack of a stock register and a low G.P. rate was unjustified. The assessee claimed that there was no intention to suppress income and cited previous years' accepted G.P. rates. However, the ld. CIT (A) upheld the addition without a detailed discussion, leading to the present appeal by the assessee against this decision.

During the appeal, the Revenue authorities supported the earlier orders, emphasizing the defects in the account books and the need for estimation due to the rejection of trading results. The Tribunal found the defects in the accounts to be valid and noted the lack of explanation for uniform G.P. rates in wholesale business and the decline in G.P. rate in retail sales. Consequently, the Tribunal agreed that the trading result was rightly rejected under section 145(1) of the Act, leading to the estimation of income. The Tribunal directed the ld. ITO to compute the addition using a G.P. rate of 5% on wholesale sales and 11% on retail sales, resulting in a partial allowance of the appeal.

In conclusion, the Tribunal partially allowed the appeal, emphasizing the importance of maintaining accurate accounts and justifying the estimation of income due to defects in the account books and discrepancies in G.P. rates.