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2012 (7) TMI 438 - AT - Income TaxWhether CIT erred on facts and in law in upholding the trading addition and upholding the action of the Assessing Officer in rejecting the books of accounts and holding that the appellant failed to furnish item-wise trading results Held that - Assessee is in timber trading activity. The activity involves purchase / import of raw timber, which is thereafter sawed and sold in wholesale / retail basis - assessee s submission that it is not practically feasible to maintain item-wise stock record of each and every type of timber - there is no allegation by the AO that there has been any pilferage or sale outside the books of account - no case of suppression of sales - assessee s books of accounts were duly audited, which signifies that books of accounts and method of accountancy are in order - mere fall in G.P. and absence of stock register cannot be a reason to reject the books of accounts - there were no cogent reasons for rejection of the assessee s books, and estimation of GP rate - details sought by the AO were not practically feasible to be maintained - In favour of the assessee.
Issues Involved:
1. Trading addition of Rs. 24,36,039/- by applying an average gross profit rate of 4.90%. 2. Rejection of books of accounts under section 145(3) of the Income Tax Act, 1961. 3. Estimation of gross profit rate based on other entities without providing relevant documents. 4. Non-consideration of gains from foreign exchange fluctuation in the trading result. 5. Charging of interest under sections 234B/234D of the Income Tax Act. Issue-wise Detailed Analysis: 1. Trading Addition of Rs. 24,36,039/- by Applying Average Gross Profit Rate of 4.90%: The assessee contested the trading addition made by the Assessing Officer (AO) by applying an average gross profit (GP) rate of 4.90%. The AO noted discrepancies in the purchase and sale bills, particularly the lack of quality descriptions in the sale bills, which made it difficult to correlate purchases with sales and ascertain the GP. The AO estimated the GP rate based on the average GP of three similar concerns, leading to an addition of Rs. 24,36,039/-. The assessee argued that the increase in turnover and high sea sales contributed to the reduction in GP and that the AO did not consider the exchange rate fluctuation. 2. Rejection of Books of Accounts Under Section 145(3) of the Income Tax Act, 1961: The AO rejected the assessee's books of accounts under section 145(3) due to the absence of item-wise trading results and quantitative details of opening and closing stock of timber. The AO held that the books did not reflect proper trading results, and thus, the trading results were not verifiable. The Commissioner of Income Tax (Appeals) upheld this rejection, noting that the assessee did not maintain a stock register and failed to provide the required item-wise trading accounts. 3. Estimation of Gross Profit Rate Based on Other Entities Without Providing Relevant Documents: The assessee argued that the AO's estimation of the GP rate at 4.90% was based on the results of other firms, but the relevant data of those firms were not provided to the assessee. The Commissioner of Income Tax (Appeals) held that the GP rate applied by the AO was reasonable, given the significant drop in the GP rate from 5.66% in the previous year to 2.48% in the year under consideration. 4. Non-Consideration of Gains from Foreign Exchange Fluctuation in the Trading Result: The assessee contended that gains from foreign exchange fluctuation amounting to Rs. 11,16,743/- should be considered in the trading account instead of the Profit & Loss (P&L) account. The Commissioner of Income Tax (Appeals) rejected this plea, stating that the assessee's claim was not tenable. 5. Charging of Interest Under Sections 234B/234D of the Income Tax Act: The assessee also contested the charging of interest under sections 234B/234D. However, the Tribunal did not provide a detailed analysis on this issue, as the primary focus was on the rejection of books and estimation of GP. Tribunal's Decision: The Tribunal found merit in the assessee's arguments, particularly the practical infeasibility of maintaining item-wise stock records in the timber trading business. The Tribunal noted that the books of accounts were duly audited, and there was no allegation of pilferage or sales outside the books. The Tribunal held that mere non-maintenance of a stock register and fall in GP rate could not be sole reasons for rejecting the books of accounts. The Tribunal also acknowledged the assessee's point regarding the foreign exchange fluctuation and its impact on the trading results. Consequently, the Tribunal set aside the orders of the lower authorities and decided the issue in favor of the assessee, allowing the appeal. Conclusion: The appeal filed by the assessee was allowed, with the Tribunal setting aside the rejection of books of accounts and the estimation of the GP rate. The Tribunal emphasized the importance of practical feasibility in maintaining records and the need for the AO to provide cogent reasons for rejecting audited books of accounts.
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