2024 (11) TMI 1306 - AT - Income Tax

Rejection of books of accounts - Estimation of income - addition on account of suppression of closing stock - HELD THAT - We find that, the AO had observed that, there was suppression of closing stock in FY 2012-13 and consequently the opening stock of subsequent FY 2013-14 was also under-reported by the same amount. It is not in dispute before us that, if the closing stock of the asseessee is enhanced by adding Rs. 1.5 crores in AY 2013-14, then, consequently in the subsequent financial year, there will be a corresponding increase in the opening stock which would reduce the profits for AY 2014-15 to such extent and therefore overall, the net effect would be NIL. We however find ourselves in agreement with the Ld. CIT(A) that, once the books of accounts have been rejected u/s 145(3) and the profits for the year is being estimated, then the effect of increase in closing stock in AY 2013-14 increase in opening stock in AY 2014-15 will get subsumed therein and hence no separate addition in this regard is warranted. As noted that the above findings of the CIT(A) is supported by the decision of Bahubali Neminath Muttin 2017 (1) TMI 820 - KARNATAKA HIGH COURT wherein it was held that, once the books of accounts have been rejected, then the same cannot be relied upon for arriving at closing stock. The Hon ble High Court accordingly deleted the addition made on account of suppressed closing stock. Addition of advances received by the assessee - Assessee was unable to conclusively substantiate that the aggregate sales towards which the impugned sum was received, had indeed formed part of the reported turnover and been offered to tax. Having considered the material placed before us and in light of several accounting anomalies found in the books of accounts maintained in tally software, we are in agreement with the foregoing finding of the CIT(A). At the same time, it is noted that, the CIT(A) held that, the entire sales value cannot be considered as income and instead only the profit element embedded therein ought to be taxed. Having already rejected the books of accounts of the assessee, it is noted that the Ld. CIT(A) directed the AO to increase the reported turnover by the impugned sum and estimate the profit at the rate of 2.21% on such increased turnover. We find this action of the CIT(A) to be supported by the decision of CIT Vs President Industries 1999 (4) TMI 8 - GUJARAT HIGH COURT wherein it was held that the amount of receipts/ sales by itself would not represent the income of the assessee. We find that similar view has been taken in the cases of PCIT Vs. Anupam Organiser 2020 (9) TMI 973 - GUJARAT HIGH COURT CIT Vs. Abhishek Corporation 1999 (10) TMI 742 - GUJARAT HIGH COURT and Hon ble Bombay High Court in the case of CIT Vs Sumer Builders 2024 (2) TMI 468 - BOMBAY HIGH COURT In all these decisions, it was held that the entire sale proceeds cannot be brought to tax but only the profit element embedded therein. Following these decisions (supra), we do not see any reason to interfere with the Ld. CIT(A) s finding directing the AO to assess the profit element of 2.21% on the impugned advances.

Summary

Issues Involved:
1. Validity of jurisdiction under Section 153A of the Income-tax Act.
2. Rejection of books of accounts and estimation of profits.
3. Separate addition on account of suppression of closing stock for AY 2013-14.
4. Addition of advances received as sales for AY 2013-14.

Detailed Analysis:

1. Validity of Jurisdiction under Section 153A:

The assessee challenged the validity of the assessment proceedings initiated under Section 153A of the Income-tax Act, arguing that no incriminating material was found during the search. However, the Tribunal noted that during the search, two sets of books of accounts were discovered, indicating discrepancies and raising doubts about the correctness of the accounts. The accounts manager confirmed the existence of parallel accounts. The Tribunal held that these constituted incriminating material, justifying the assumption of jurisdiction under Section 153A. Consequently, the plea of the assessee was rejected.

2. Rejection of Books of Accounts and Estimation of Profits:

The assessee was found to be maintaining two sets of accounts, leading to discrepancies in reported expenses. The CIT(A) rejected the books of accounts under Section 145(3) due to unreliability and estimated the profits at 2.21% of the turnover, following a precedent set by the Tribunal in a similar case involving the assessee's sister concern. The Tribunal upheld this approach, rejecting the Revenue's argument for a higher profit estimation of 53% based on a different entity, which was not comparable. The Tribunal also dismissed the Revenue's plea to adjudicate disallowances separately once the books were rejected, citing legal precedents that all deductions are deemed considered in such estimates.

3. Separate Addition on Account of Suppression of Closing Stock for AY 2013-14:

The AO had made an addition for suppressed closing stock, which the CIT(A) deleted, reasoning that once the books were rejected, the effect of such additions would be subsumed in the estimated profits. The Tribunal agreed, referencing a Karnataka High Court decision that once books are rejected, they cannot be relied upon for such additions.

4. Addition of Advances Received as Sales for AY 2013-14:

The AO added advances received as sales, arguing they were not offered to tax. The CIT(A) found the assessee unable to substantiate that these sales were part of the reported turnover. However, it was held that only the profit element should be taxed, not the entire sales amount. The CIT(A) directed the AO to increase the turnover by the advance amount and apply the 2.21% profit rate. The Tribunal upheld this, citing legal precedents that only the profit element in sales should be taxed.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to reject the books of accounts and estimate profits at 2.21%, dismissing both the assessee's and Revenue's appeals. The separate issues of suppressed closing stock and advances were also resolved in favor of the assessee, affirming the CIT(A)'s approach.