2024 (12) TMI 504 - AT - Income Tax

Rejection of books of accounts - Addition to Net Profit (NP) rate and Gross Profit (GP) rate - reasons for falling profit compared to earlier assessment years - HELD THAT - As Assessee is in the business of meat exports and purchased the raw meat from various suppliers. From the record, we observed that assessee has purchased 99.67% through bank and only 0.33% through cash payment. The Assessing Officer observed that assessee has purchased huge meat from local vendors and he came up with a figure of Rs. 12.04 crores in cash whereas ld. CIT (A) after verification found that the actual cash payment was only Rs. 2.76 crores which is 0.33% of the total purchases. Since the assessee could not submit the above information, he proceeded to make the addition by observing GP and NP declared by the assessee during the year which is less compared to earlier assessment years i.e. from Assessment Years 2013-14 to 2016-17. Merely on the basis of these observations, he rejected the books of account and proceeded to make the net profit addition by arriving at the average NP of 4% and made the addition of the difference of 4% of the profit declared by the assessee. Assessee is a unit claiming exemption u/s 80IB of the Act. On careful consideration, we observed that even if we consider the findings of the Assessing Officer to be correct, still the assessee is a unit claiming exemption u/s 80IB and any addition in NP will give rise to the exemption u/s 80IB of the Act since there was no other business carried on by the assessee and also Assessing Officer has not brought on record any other activity made by the assessee. In that aspect also, the claim of the assessee can be allowed.

Issues Involved:

1. Rejection of Books of Accounts under Section 145 of the Income-tax Act, 1961.
2. Addition to Net Profit (NP) rate and Gross Profit (GP) rate.
3. Cash payments and compliance with Section 40A(3) of the Income-tax Act.
4. Entitlement to deduction under Section 80IB of the Income-tax Act.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145:

The Assessing Officer (AO) rejected the books of accounts of the assessee, citing discrepancies in the declared NP and GP rates compared to previous years. The AO observed a decline in the GP and NP percentages and alleged incomplete documentation regarding purchases. However, the Commissioner of Income-tax (Appeals) [CIT(A)] found no specific defects in the books of accounts maintained by the assessee. The CIT(A) referenced a landmark decision by the Delhi High Court in CIT vs. Smt. Poonam Rani, which emphasized that a lower GP rate alone, without evidence of falsehood in the account books, cannot justify the rejection of books under Section 145(3). The CIT(A) concluded that the AO's rejection of the books was not substantiated by concrete evidence of inaccuracies or discrepancies.

2. Addition to Net Profit (NP) rate and Gross Profit (GP) rate:

The AO made an addition by estimating the NP rate at 4%, citing a decline in the NP rate from previous years. The CIT(A) found that the assessee had provided reasonable explanations for the decline, including a reduction in export turnover and duty drawbacks. The CIT(A) noted that the assessee's NP rate of 2.35% in the preceding year was accepted by the AO, and the decline to 1.72% was partly attributed to external factors such as reduced export margins. The CIT(A) upheld an addition of Rs. 1,02,81,100/- due to unexplained decline, but deleted the balance addition, directing the AO to compute the deduction under Section 80IB based on the sustained addition.

3. Cash payments and compliance with Section 40A(3):

The AO alleged that the assessee made cash payments in violation of Section 40A(3), which restricts cash payments exceeding Rs. 20,000/-. The AO cited cash payments totaling Rs. 12.04 crores. However, the CIT(A) found that only 0.33% of purchases were made in cash, amounting to Rs. 2.76 crores, which was within permissible limits under Rule 6DD(e)(ii) for purchases of animal husbandry products. The CIT(A) determined that the AO had incorrectly calculated the cash payments and that the majority of transactions were conducted through banking channels, thereby complying with the provisions.

4. Entitlement to deduction under Section 80IB:

The CIT(A) addressed the issue of deduction under Section 80IB, which allows a 100% deduction on profits derived from eligible businesses. The AO had not allowed the full deduction based on the increased NP rate. The CIT(A) directed the AO to compute the deduction under Section 80IB on the profits after considering the sustained addition, as the assessee was eligible for a 100% deduction on profits from the eligible business. The CIT(A) emphasized that the deduction should be based on the assessed income, aligning with the provisions of Section 80IB.

Conclusion:

The appeal by the Revenue was dismissed, with the Tribunal agreeing with the CIT(A)'s findings. The Tribunal noted that the assessee had provided detailed explanations for the decline in NP and GP rates and that the AO's rejection of books and subsequent additions were not justified. The Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 80IB based on the sustained addition, reinforcing the principle that mere decline in profit rates, without substantial evidence of inaccuracies, cannot warrant rejection of accounts or arbitrary additions.

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