2012 (7) TMI 761 - AT - Income Tax

Unverifiable purchases - addition by estimating the gross profit (G.P.) rate at 30% - Held that - On accepting the assessee s trading results, i.e., except qua unverifiable purchases (Rs. 8.34 lacs) which have already disclosed a gross profit at the reflected rate of 18.62% on those purchases additional gross profit of 5% on such purchases would be justified, so that an addition to that extent becomes sustainable. The gross profit rate is with reference to the sales, i.e., as relatable to such purchases (approximated at 75% of sales), which is worked out at Rs. 11.12 lacs (834199 x 100/75), so that the trading addition works out to Rs. 55613/- i.e., Rs. 11.12 lacs x 5% . Adhoc addition in each of the two proprietary concerns - It is apparent that the same is without relation to the assessee s disclosed trading results, which are progressive, as well as the quantum of unverifiable purchases, thus there is no basis for disturbing the assessee s trading results for the year, which have been itself accepted despite the rejection of books of accounts in respect of the intervening year. Disallowance effected @ 10% qua certain expenses, viz. on staff welfare, conveyance, telephone, repair and maintenance, general office expenses. The reason stated, which is the same for all the assessment years, is lack of proper supporting vouchers, being self-made, and without proper authentication - where a disallowance qua such expenses has been made earlier, or subject to examination under sec. 143(3) assessment there can be no review of the matter in sec. 153A proceedings

Summary

Issues Involved:
1. Unverifiable Purchases
2. Invocation of Section 145(3) of the Income Tax Act
3. Disallowance of Expenses

Issue-wise Detailed Analysis:

Unverifiable Purchases:
The principal issue in these appeals is regarding unverifiable purchases. The Assessing Officer (AO) made additions by estimating the gross profit (G.P.) rate at 30% for unverifiable purchases, which was confirmed by the first appellate authority. The assessee contended that better trading results negated the need for disallowance or addition. For the assessment year (A.Y.) 2002-03, the AO found the assessee not maintaining stock records with qualitative and quantitative details, rendering the trading results unverifiable. Purchases from M/s. Triveni Gems were considered not genuine as the party was known for providing accommodation entries and could not be produced. The AO rejected the books of accounts and estimated a G.P. rate of 30% for unverifiable purchases. The tribunal upheld this estimation, leading to a trading addition of Rs. 94,932/- as suppressed profit. For A.Y. 2003-04, no unverifiable purchases were observed, and the trading addition of Rs. 50,000/- was deleted in appeal. For A.Y. 2004-05, unverifiable purchases were found at Rs. 4,00,045/- from three concerns. The assessee disclosed better results, and a trading addition of Rs. 50,000/- each was made in both concerns, which was restricted to 25% of such unverifiable purchases by the CIT(A).

Invocation of Section 145(3) of the Income Tax Act:
The Revenue's action in invoking Section 145(3) was confirmed. The assessee's books of accounts were not considered correct and complete due to the absence of proper stock records. The assessee admitted that it was not possible to maintain a quality-wise stock register due to the varying characteristics of each stone. However, the tribunal found this justification insufficient, stating that proper stock records are essential for determining the cost of goods sold and trading profit. The tribunal upheld the rejection of the books of accounts, citing various decisions, including Kachwala Gems vs. Jt. CIT and Namasivayam Chettiar (S.N.) v. CIT. The tribunal also noted that unverifiable purchases, though a minor part of the turnover, added to the infirmities of the accounts.

Disallowance of Expenses:
The next issue involved disallowance of 10% of certain expenses, such as staff welfare, conveyance, telephone, repair and maintenance, and general office expenses, due to lack of proper supporting vouchers. The CIT(A) confirmed this disallowance, referring to his earlier decisions for preceding and succeeding years. The assessee argued that no fresh material was found in the search to justify these disallowances under Section 153A. The tribunal noted that the assessee could not controvert the specific findings of the authorities below. However, the tribunal reduced the disallowance to 7.5%, consistent with its decision for A.Y. 2003-04.

Decision:
For A.Y. 2002-03, the tribunal justified an additional gross profit of 5% on unverifiable purchases, resulting in a trading addition of Rs. 55,613/-. For A.Y. 2004-05, the tribunal upheld an additional markup of 5% on unverifiable purchases, providing partial relief to the assessee. The disallowance of expenses was confirmed at 7.5%. The assessee's appeals for all years were partly allowed.