2014 (6) TMI 839 - AT - Income Tax

Estimation of income - increase in GP rate - addition in trading results Rejection of books of accounts Held that - The assessee had turnover and had transaction with 252 different parties - the AO rejected the books of account and increased GP rate by 4% - the AO gathered no additional material that could help him recompute the income of the only a small fraction of appellant s gross turnover of Rs.50.3 crores, the effect of difference on confirmation of account results in the appellant having booked lesser expenses in respect of these five parties compared to what was shown on confirmation from them - the very basis of rejection of books of accounts is faulty as circumstances did not require such a drastic measure by disregarding audited books and vouchers - The AO has not given details of the manner in which any income was not booked or any expenses were over booked - the action of the AO in making the best judgement assessment, thereby increasing the GP of the assessee by 4% was based on incorrect appreciation of the facts, on insufficient facts to reject the books, suffers from lack of natural justice to the assessee u/s 144 - the expenses were clearly in the nature of prior period expenses and need to be disallowed in making the computation of income for the current year - CIT(A) has dealt with the entire issue and has rightly decided the issue in favour of the assessee and there was no infirmity in the order Decided against Revenue.

Summary

Issues involved:
1. Addition of Rs.2,01,38,824 in trading results by Assessing Officer.
2. Rejection of books of account due to discrepancies.
3. Deletion of addition by Ld. CIT(A).
4. Treatment of expenses as prior period expenses.

Detailed Analysis:
1. The appeal was filed by the revenue against the order of Ld. CIT(A) for the assessment year 2008-09, challenging the deletion of an addition of Rs.2,01,38,824 made by the Assessing Officer in the trading results of the assessee. The Assessing Officer had increased the GP ratio by 4% based on discrepancies in accounts, resulting in the addition. The Ld. CIT(A) reviewed the case and found that the Assessing Officer did not follow the proper procedure under Section 144 for best judgment assessment. The Ld. CIT(A) concluded that the addition made by the Assessing Officer was based on incorrect appreciation of facts and lack of natural justice, leading to the deletion of the addition.

2. The discrepancies in the accounts of the assessee with certain supplier parties led to the rejection of books of account by the Assessing Officer. The Ld. CIT(A) noted that out of 252 parties, discrepancies were found in only 5 parties amounting to Rs.6.34 lacs. The Assessing Officer increased the GP rate and made the addition, which was later deleted by Ld. CIT(A) based on the failure of the Assessing Officer to follow the required procedure for best judgment assessment under Section 144. The Ld. CIT(A) emphasized the importance of natural justice and proper assessment procedures in such cases.

3. The Ld. CIT(A) analyzed the case in detail, considering the legal provisions and various judicial decisions related to best judgment assessment under Section 144. The Ld. CIT(A) found that the Assessing Officer did not provide the appellant with the opportunity to reconcile the discrepancies and failed to gather additional material for re-computation of income. The Ld. CIT(A) also highlighted that the appellant had consistently maintained proper books of accounts in previous years, and the rejection of books in the current year was not justified. The deletion of the addition was based on the incorrect approach of the Assessing Officer in making the best judgment assessment.

4. Regarding the treatment of expenses as prior period expenses, the Ld. CIT(A) directed the Assessing Officer to disallow an amount of Rs.8,70,117 as prior period expenses. The Ld. CIT(A) examined the nature of the expenses related to purchases from a specific supplier and concluded that they should be disallowed as prior period expenses based on the accounting principles and the timing of the transactions. The decision to disallow the expenses was made in line with the accounting standards and the mercantile system followed by the appellant.

In conclusion, the Ld. CIT(A) dismissed the appeal filed by the revenue and the Cross-Objection (C.O.) filed by the assessee, upholding the decision to delete the addition and disallow the prior period expenses based on a thorough analysis of the legal provisions and factual circumstances.