2015 (1) TMI 598 - AT - Income Tax

Rejection of books of accounts - trading addition of ₹ 35,40,410/- made by the assessing officer by applying average gross profit rate of 4.90% upheld by CIT(A) - non proving of adequate opportunity of being heard to the appellant - Held that - It is pertinent to note that AO has not rejected the books solely on account of non maintenance of stock register but also because the AO was not satisfied about the correctness and completeness of the accounts of the assessee also because of the relevant details not being mentioned in the sales invoices though in the purchase invoices all such details were available. Therefore, the AO rightly rejected the assesee s books of account. The AO s finding regarding incorrectness or incompleteness of the accounts is to be examined considering the various factors obtaining in a particular case keeping in view the nature of the assesse s business. However, the broad principle is that if it is impossible or infeasible to maintain the stock register, keeping in view the nature of assessee s business, then the maintenance of stock register can be dispensed with else not. - Decided against assessee. Considering the entire conspectus of the case including the comparables cases relied upon by the assessee as well as the decisions of Tribunal in the case of Suresh Jindal Prop. (2015 (1) TMI 618 - ITAT DELHI), we are of the opinion that it would serve the interest of justice if the GP rate of the assesee is taken at 3.53% as was in the case of Suresh Jindal Prop. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Rejection of books of account under section 145(3) of the Income Tax Act, 1961.
2. Application of average gross profit rate of 4.90% by the Assessing Officer.
3. Adequate opportunity of being heard.
4. Charging of interest under section 234B/234D of the Act.

Detailed Analysis:

1. Rejection of Books of Account under Section 145(3):
The Assessing Officer (AO) rejected the assessee's books of account because there was no narration of the quality of timber on the sale vouchers, despite the timber being purchased at different rates according to quality. The AO observed that the assessee did not maintain an item-wise stock register, making it impossible to ascertain which type of timber had been sold against the purchased timber. The AO issued a show-cause notice requiring the assessee to prepare an item-wise trading account, but the response was not satisfactory. The AO concluded that the books of account were not reliable due to the absence of item-wise inventory of opening and closing stock, leading to the rejection of the books under section 145(3).

The CIT(A) upheld the AO's decision, noting that the trading results were not verifiable due to the lack of quantitative tally of purchase/sale of goods and correct valuation of closing stock. The CIT(A) emphasized the importance of maintaining a stock register and rejected the assessee's argument that it was impractical to maintain such details.

2. Application of Average Gross Profit Rate of 4.90%:
The AO applied an average gross profit rate of 4.90% based on the operating results of other entities in the timber business. The assessee contended that this rate was applied without confronting them with the relevant documents and that their results were not comparable with those entities. The CIT(A) confirmed the AO's action, finding no submission from the assessee to counter the AO's estimation.

The Tribunal, however, found that the AO's estimation was not justified. The assessee's gross profit rate for the assessment year 2007-08 was 1.97%, compared to 2.8% for the previous year. The decline was attributed to increased freight expenses, which, if excluded, would result in a gross profit rate of 3.21%. The Tribunal referred to similar cases where the gross profit rate was accepted at around 3.53% to 3.63%. Consequently, the Tribunal concluded that a gross profit rate of 3.53% would serve the interest of justice.

3. Adequate Opportunity of Being Heard:
The assessee claimed that the CIT(A) erred in passing the order without affording adequate opportunity of being heard. However, no specific arguments were advanced during the hearing on this ground, leading to its dismissal by the Tribunal.

4. Charging of Interest under Section 234B/234D:
The assessee contested the charging of interest under sections 234B and 234D of the Act. However, the Tribunal did not provide a separate discussion on this issue, implying that the interest was charged in accordance with the provisions of the Act.

Conclusion:
The Tribunal partly allowed the assessee's appeal, modifying the gross profit rate to 3.53% instead of 4.90% as applied by the AO. The rejection of the books of account under section 145(3) was upheld due to the lack of item-wise inventory and proper recording of sales and purchases. The ground regarding the opportunity of being heard was dismissed due to lack of arguments, and the charging of interest under sections 234B and 234D was implicitly upheld.