2015 (8) TMI 1098 - HC - Income Tax

Rejection of books of accounts - estimation of income - trading addition - applying GP Rate - CIT(A) reduced the trading addition by adopting GP Rate of 1.75% AY 2008-09 and 1.50% for 2009-10 - Tribunal held that the manner in which the record was maintained, the books of accounts could not have been rejected and accordingly even the trading addition, which was sustained and upheld by the CIT(A), was deleted - Held that - Tribunal, which is the ultimate final fact finding authority, after analyzing the material again placed before it and having gone into the issue once again has come to the conclusion that merely because qualitative record was not maintained and on this premise, the books of accounts could not have been rejected. It is also an admitted fact that mustard seed is only single commodity used by the assessee for manufacturing of mustard oil and the Tribunal noticed that the assessee filed yield percentage for two months before the AO in which no discrepancy was found by the AO. The Tribunal has found that the production of mustard oil is a continuous process and the seeds are put into the milling for continuous oil production. The Tribunal has further found that 80% of its mustard oil is by way of trading sale and neither discrepancies were noticed by the AO in either purchase or sale nor any sale or purchase, found unrecorded. The Tribunal also found that the books of accounts had been maintained in the same manner as in the past and the assessee cannot be expected to stop the plant as and when the new lot of mustard seed is subjected to crushing as manufacturing of mustard oil is a continuous process. Once the stock register has been held to be properly maintained and has been held to be proper, no trading addition could have been made and rightly so, even otherwise, minor discrepancies cannot result into rejection of books of accounts. THus no substantial question of law can be said to arise out of the order of the Tribunal. - Decided against revenue.

Summary

Issues:
Challenging the rejection of books of accounts by the AO, validity of trading additions made, and the Tribunal's decision to delete the trading additions.

Analysis:

1. Rejection of Books of Accounts by AO:
The AO rejected the books of accounts due to discrepancies in the maintenance of stock register and production register. The AO concluded that true profits were not deducible due to the unverifiable nature of the trading results. The CIT(A) upheld the rejection but reduced the trading additions. The Tribunal, however, accepted the assessee's contention that the books were improperly rejected and deleted the trading additions. The Revenue argued that the Tribunal erred in its reasoning, claiming that the books were not maintained properly and the assessee manipulated records for profit declaration.

2. Validity of Trading Additions:
The AO made trading additions based on the rejected books of accounts, applying GP Rates different from those shown by the assessee. The CIT(A) upheld the additions but at reduced rates. The Tribunal, after finding the books were improperly rejected, deleted the trading additions. The Revenue contended that the Tribunal's decision lacked basis and evidence, arguing that the AO and CIT(A) had identified discrepancies in the bookkeeping, justifying the trading additions.

3. Tribunal's Decision on Deletion of Trading Additions:
The Tribunal, as the final fact-finding authority, reanalyzed the material and found that the books were improperly rejected. It noted that the production process was continuous, with no discrepancies in purchase or sale records. The Tribunal concluded that the stock register was properly maintained, leading to the deletion of trading additions. The High Court upheld the Tribunal's decision, stating that no substantial question of law arose from the Tribunal's order.

4. Legal Interpretation of Section 145 and Best Judgment Assessment:
The High Court emphasized that Section 145 of the Income Tax Act provides the basis for income computation but does not mandate additions or deletions. It clarified that deficiencies in quality-wise records or book rejection do not automatically lead to income additions. The Court highlighted that even in best judgment assessments, some material basis is required for additions. The Revenue's power to address tax evasion was acknowledged, but it was noted that estimated additions must be supported by prima facie evidence.

In conclusion, the High Court dismissed both appeals, affirming the Tribunal's decision to delete the trading additions and finding no substantial question of law arising from the Tribunal's order. The judgment emphasized the importance of proper assessment based on material evidence and rejected the notion that quality-wise record deficiencies alone justify income additions.