2015 (10) TMI 586 - AT - Income Tax

Rejection of books of accounts u/s 145(3) - assesee was dealing in gems and jewellery - CIT(A) applying GP rate of 20.00% as against 19.20% declared by the assessee - Held that - The assesee was dealing in gems and jewellery including gold jewellery. The 24 carat gold is converted into 22 carat, 20 carat, 18 carat and 16 carat. Similarly, valuation of diamond jewellery depends on clarity, size of diamond, colour. It is difficult to maintain the stock register in this line of business of the assessee. The number of diamond pieces is also differs on size to size and accordingly valuation of diamond jewellery varies from item to item. As relying on case of Malani Ramjivan Jagannath vs. ACIT (2006 (10) TMI 145 - RAJASTHAN HIGH COURT) decision on fall in GP and non-maintenance of stock register support the assessee s case. Therefore, we reverse the order of ld. CIT (A). It is not necessary that where books were rejected certain addition is required to be made to the income of the assessee as held in case of Gotton Lime Khaniz Udyog, (2001 (7) TMI 19 - RAJASTHAN High Court). - Decided in favour of assessee.

Summary

Issues:
1. Rejection of books of accounts under section 145(3) of the Income-tax Act, 1961.
2. Application of GP rate at 20% instead of 19.20% declared by the assessee, resulting in an addition of Rs. 2,09,854.

Analysis:

Issue 1: Rejection of books of accounts under section 145(3):
The assessee, engaged in manufacturing and trading of gold and semi-precious jewellery, filed a return declaring a gross profit (GP) of Rs. 50,07,297 on a turnover of Rs. 2,60,85,762, yielding a GP rate of 19.20%. The Assessing Officer (AO) observed a decline in GP compared to the previous year and requested stock details, which the assessee failed to provide. The AO rejected the book result under section 145(3) and made a lump sum addition of Rs. 5,00,000 to the income. The Commissioner of Income-tax (Appeals) upheld the rejection of books due to unverifiable closing stock. However, the Tribunal noted the complexities in maintaining a stock register for jewellery businesses and reversed the decision, citing precedents supporting the assessee's case.

Issue 2: Application of GP rate at 20%:
The AO applied a GP rate of 20% instead of the declared 19.20%, resulting in an addition of Rs. 2,09,854 to the income. The Commissioner of Income-tax (Appeals) upheld this addition based on the exponential increase in turnover and the decline in GP rate. The Tribunal, considering various factors affecting the GP rate in the jewellery business, such as market competition, management experience, and demand-supply dynamics, found the AO's decision unsustainable. Quoting relevant court decisions, the Tribunal allowed the appeal, emphasizing that rejection of books does not mandate additional income addition, ultimately partially allowing the assessee's appeal.

In conclusion, the Tribunal reversed the rejection of books of accounts and the addition based on the increased GP rate, highlighting the unique challenges in the jewellery business and the need for a nuanced approach in assessing income in such cases.