2010 (4) TMI 83 - HC - Income Tax

Best Judgment assessment - Rejection of books of accounts u/s 145(3) drop in gross profit determination of gross profit on the basis of previous year s figure - The drop in gross profit ratio was attributed to increase in fabric consumption, increase in processing cost such as fabrication, embroidery, dyeing and bleaching and comparatively low increase in the average sale price. The Assessing Officer rejected the accounts under Section 145(3) of Income Tax Act and computed the gross profit at the estimated rate of 28%, considering that the gross profit declared in the immediate preceding year was 27% and made addition accordingly - held that - In any case, the question whether the accounts maintained by the assessee were defective and/or incomplete, or not, was a question of fact. Neither the CIT(A) nor the ITAT found the accounts to be defective or incomplete. Both, CIT(A) as well as the Tribunal were satisfied with the Stock Register maintained by the assessee and appreciated the fact the raw material, i.e., the fabric purchased by the assessee was to be measured in metres, whereas the finished products were to be counted in numbers. No reasonable ground has been made out for this Court to go in to this question and revisit the finding returned by the CIT(A) and the ITAT. - It is not as if the assessee did not give any plausible explanation for the fall in gross profit during year in question. He gave a number of reasons in this regard and the explanation given by the assessee having been accepted by the CIT(A) as well as by the Tribunal, it is not for this Court to go into such a question of fact. decided in favor of assessee

Summary

Issues:
Appeal against ITAT order for A.Y. 2003-2004 regarding gross profit ratio computation under Section 145(3) of Income Tax Act.

Analysis:
1. The assessee firm declared a lower gross profit ratio for the Assessment Year 2003-2004, attributing it to increased fabric consumption and processing costs. The Assessing Officer rejected the accounts under Section 145(3) and estimated the gross profit rate at 28%, leading to an addition to the income.

2. The Commissioner of Income Tax(Appeals) found that the assessee provided detailed analysis and samples for verification, highlighting discrepancies in fabric consumption for different products. The CIT(A) noted that the audited accounts showed no discrepancies and deleted the addition made by the Assessing Officer.

3. The Tribunal, following the Supreme Court decision, emphasized that the assessee's accounting method was regularly employed and reliable. It noted the absence of discrepancies in the audited accounts and the verifiability of stock movements. The Tribunal upheld the method of maintaining stock registers and found the income discernible from the accounting method.

4. Section 145(3) of the Act was analyzed, stating that the Revenue did not challenge the assessee's accounting method or compliance with accounting standards. The absence of defects in the accounts was highlighted by both the CIT(A) and the Tribunal.

5. The Court concluded that no substantial question of law arose as the accounts were found to be complete and the explanation for the drop in gross profit ratio was accepted by the lower authorities. The appeal against the ITAT order was dismissed.