2024 (5) TMI 1166 - AT - Income Tax

Additional income surrendered on account of excess stock - GP Estimation - Treatment of additional income from excess stock - difference in gross profit margin disclosed by the assessee for the year under consideration - additional income offered by the assessee on account of excess stock surrendered by the assessee during the course of survey was not shown by the assessee in the trading account by including it in the closing stock and that same was offered to income tax only as other income. HELD THAT - Though the assessee had stated that there was heavy competition prevailing in the last quarter of the financial year which led the assessee to sell the products at a much lesser rate when compared to other quarters which had evidently contributed to the reduction of gross profit during the last quarter, we find that the same is not supported with any documentary evidence by the assessee. It is pertinent to note that there was excess stock was found during the survey which was accepted by the assessee by way of a declaration. The same also stood offered by the assessee as income in the return of income which was never retracted by the assessee. Obviously the addition on account of excess stock could be made only as unexplained investment taxable u/s 69 of the Act which could never be business income of the assessee. Hence, the income of Rs. 1,75,98,542/- needs to be taxed separately as unexplained investment and accordingly same could not be included in the gross profit computation of the assessee. Hence, the action of the lower authorities in determining the gross profit @8.53% without considering the value of surrendered stock is correct. It is fact that gross profit for the year had declined by 1.39% when compared to that of the immediately preceding year. AO had made extensive verification and found that the gross profit was drastically varying as some of the items were sold at a margin of 10% and some of the items were sold with more than 11%, some on the profit less than 6.9%. It is further, pertinent to note that the assessee having additionally offered 5.18 crores during the survey on 21.01.2010 had ultimately resorted to disclose only 4.36 crores as the returned income. None of the deficiencies pointed out by the ld AO by rejecting the books of account were met by the assessee before us with cogent evidence by giving contrary material. Hence, we uphold the action of the lower authorities for rejecting the books of account u/s 145(3) of the Act and calculating the differential gross profit. In the instant case, the ld AO had not resorted to estimation of the gross profit rather he had retained the gross profit earned by the assessee in the immediately preceding year and made addition for the difference amount in the sum of Rs. 1,08,51,505/-. The behavior of the assessee, deficiencies in the gross profit margins by having varying percentages as explained supra, we hold that addition has been rightly made by the AO in the sum of Rs. 1,08,51,505/- and the same has been rightly confirmed by the CIT(A) and hence the same does not require any interference. Accordingly, grounds raised by the assessee are dismissed.

Summary

Issues Involved:
1. Rejection of books of accounts u/s 145(3).
2. Application of arbitrary Gross Profit (GP) rate.
3. Treatment of additional income from excess stock.
4. Disallowance u/s 40A(2).

Summary:

1. Rejection of Books of Accounts u/s 145(3):
The assessee contested the rejection of its books of accounts by the Assessing Officer (AO) u/s 145(3) of the Income-tax Act, 1961. The AO found discrepancies in the stock records and valuation, leading to the rejection. The Tribunal upheld the AO's decision, noting that the assessee failed to provide contrary evidence to the deficiencies pointed out.

2. Application of Arbitrary GP Rate:
The assessee argued that the AO applied an arbitrary GP rate based on personal conjecture. The AO compared the current year's GP rate of 8.53% with the previous year's 9.92%, leading to an addition of Rs. 1,08,51,505/-. The Tribunal found the AO's method of calculating the differential GP reasonable, given the extensive verification and varying profit margins on different items.

3. Treatment of Additional Income from Excess Stock:
The AO treated the additional income from excess stock found during a survey as "income from other sources" rather than business income, excluding it from the GP computation. The Tribunal agreed, stating that the excess stock should be taxed as unexplained investment u/s 69 and not included in the business income.

4. Disallowance u/s 40A(2):
The revenue's appeal included a dispute over the deletion of an addition of Rs. 53,08,650/- u/s 40A(2) by the CIT(A). The Tribunal dismissed the revenue's appeal, citing the CBDT Circular No.17/2019, which prescribes a monetary limit for filing appeals, and the tax effect in this case was below that limit.

Conclusion:
The Tribunal dismissed both the assessee's and the revenue's appeals, upholding the AO's actions regarding the rejection of books, application of GP rate, and treatment of additional income from excess stock. The decision was pronounced in the open court on 14/05/2024.