2012 (9) TMI 155 - AT - Income Tax

Trading addition rejection of books of accounts and application of higher G.P. rate assessee not an EOU in the first period of year under consideration disclosing G.P. rate of 20.51% and was an EOU in the second period disclosing G.P. rate of 40.01% - CIT(A) upheld the rejection of books of account but reduced the GP addition to Rs.1 lakh - Held that - Though assessee has claimed that the rejection of books of account was not justified but he was unable to satisfy us how the rejection of books of account was not justified. In fact, his main thrust of the arguments was also on the application of proper rate of gross profit rather than the rejection of books of account. We, therefore, uphold the rejection of books of account. However, it is a settled law that even after the rejection of books of account, a reasonable rate of GP is to be applied. Admittedly, the GP rate of preceding two years is lower than the GP rate disclosed by the assessee in the first period and GP rate of second period is more than G.P. rate of first period. However, business of the assessee in the second period is different from that of first period. Therefore, GP of the first period is to be compared with the GP of preceding three years, which shows that GP rate disclosed by the assessee is better than the average rate of preceding three years. Hence, even after the rejection of books of account, no trading addition is required to be sustained Decided against Revenue

Summary

Issues:
1. Discrepancy in gross profit rate between two periods.
2. Rejection of books of account and addition of Rs.29,21,219.
3. Reduction of addition to Rs.1 lakh by CIT(A).
4. Justification for rejection of books of account.
5. Comparison of gross profit rates with preceding years.

Analysis:
1. The case involved a challenge regarding the difference in gross profit rates between two periods, one before and one after the business became an Export Oriented Unit (EOU). The Assessing Officer rejected the books of account for the first period and applied a gross profit rate of 25%, resulting in an addition of Rs.29,21,219.

2. The CIT(A) reduced the addition to Rs.1 lakh. The Revenue appealed against this reduction, while the assessee cross-objected against the sustained addition. The main argument revolved around the rejection of books of account and the application of the proper gross profit rate.

3. The Revenue contended that since the rejection of books of account was upheld, the reduction in the gross profit rate by CIT(A) was unjustified. On the other hand, the assessee argued that the rejection of books of account was unwarranted and that there was no basis for sustaining the Rs.1 lakh addition.

4. The Tribunal upheld the rejection of books of account, emphasizing the need for a reasonable gross profit rate even after rejection. The comparison of gross profit rates from preceding years showed that the rate disclosed by the assessee for the first period was better than the average of the preceding three years, justifying the deletion of the Rs.1 lakh addition.

5. Ultimately, the Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, ruling that no trading addition was necessary after considering the comparison of gross profit rates and the nature of business in different periods.