2016 (1) TMI 242 - AT - Income Tax

Estimation of income done by AO at 1% of the turnover - CIT(A) cancelled the estimation - Held that - The opinion that CIT(A) is correct in setting aside the estimation of income. Even though certain mistakes are pointed out by the AO, in our opinion, they are not good enough to reject the Books of Accounts. In fact as contested by assessee, many of them are considered on wrong perceptions. AO was of the opinion that the stock purchased with cartel group are entered in the stock register, whereas it was found that they were not entered in the stock register and what assessee has accounted was only its share of purchases through the cartel. There are explanations given by assessee for separate entries in different ink and how assessee has suffered losses in its manufacturing activity. With reference to purchase of goods also, since none of the transactions are there with any associate or group companies or firms, as rightly pointed out by the CIT(A) the profits earned by the third parties should not be basis for disallowing cost of purchase in assessee s hands. Be that as it may, since assessee s books of accounts are maintained and audited and most of the additions are made on the basis of books of accounts other than this estimation of income, we are of the opinion that Revenue has not made out proper case for rejection of books of accounts and estimating the income at 1%. Even the Revenue in Ground No. 4 accepts that percentage of estimation of income defers from year to year depending on the circumstances of the case. This also indicates that assessee s business profits or losses also fluctuate on year to year basis. There is no need to reject the Books of Accounts which are maintained and on which defects are not pointed out so as to reject them. In view of this, we uphold the order of CIT(A) - Decided against revenue

Issues Involved:
1. Rejection of Books of Accounts by the Assessing Officer (AO).
2. Estimation of Income at 1% of the turnover by the AO.
3. Observations and conclusions drawn by the AO regarding the appellant's business transactions and books of account.
4. Counterarguments presented by the assessee against the AO's observations.
5. Decision by the Commissioner of Income Tax (Appeals) [CIT(A)] on the rejection of books and estimation of income.
6. Review and final decision by the Appellate Tribunal.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts by the Assessing Officer (AO):
The AO rejected the books of accounts of the assessee, who is in the steel re-rolling business, citing various discrepancies. The AO's observations included:
- Inconsistent gross profit ratios over the years.
- Unusual transactions involving bulk purchases from Rastriya Ispat Nigam Ltd (RINL) and sales at negligible or no profit.
- Instances of sales at prices lower than the purchase price.
- Purchases from sister concerns without transportation bills.
- Handwritten serial numbers on purchase bills.
- High profits earned by some suppliers.
- Huge unsecured loans and interest payments.
- Entries in the cash book and ledger in different handwritings.
- Significant credit balances written off and transferred to the Tijori account.
- No separate trading and manufacturing accounts maintained.
- High shortages in raw material consumption.

2. Estimation of Income at 1% of the Turnover by the AO:
The AO estimated the income of the assessee at Rs. 55,37,219, which is 1% of the turnover of Rs. 55.37 Crores, after rejecting the books of accounts.

3. Observations and Conclusions Drawn by the AO:
The AO's detailed observations included:
- Gross profit ratios for AY 2004-05, 2005-06, and 2006-07.
- Bulk purchases from RINL and subsequent sales to other parties without profit.
- Sales of raw materials and pig iron at negligible or lower prices.
- Purchases from sister concerns without proof of transportation.
- Handwritten serial numbers on purchase bills.
- High profits earned by suppliers.
- Interest payments on unsecured loans.
- Discrepancies in cash book and ledger entries.
- High credit balances written off and transferred to the Tijori account.
- No separate trading and manufacturing accounts.
- High shortages in raw material consumption.

4. Counterarguments Presented by the Assessee:
The assessee contested the estimation of income and the rejection of books before the CIT(A), presenting various counterarguments, including:
- Correct computation of gross profit ratios for preceding years.
- Reasons for the fall in gross profit during the year.
- Explanation for cartel purchases and sales at negligible profit.
- Business decisions leading to lower sales prices.
- Genuine purchases from sister concerns and availing of Cenvat credit.
- Acceptability of handwritten serial numbers on purchase bills.
- Explanation for high profits earned by suppliers.
- Interest payments on unsecured loans.
- Acceptable explanation for different handwritings in books of accounts.
- Justification for credit balances written off and transferred to the Tijori account.
- No legal requirement for separate trading and manufacturing accounts.
- Comparable shortages in raw material consumption with previous years.
- Voluntary crediting of Rs. 2,30,00,000 to the P&L account.

5. Decision by the Commissioner of Income Tax (Appeals) [CIT(A)]:
The CIT(A) did not approve the rejection of books of accounts and the estimation of income by the AO, stating:
- Lower profit rates alone cannot justify the rejection of books.
- The appellant's business decisions, such as cartel purchases and trading transactions with narrow margins, cannot be questioned.
- No mandatory requirement for printed serial numbers on bills.
- No evidence of fraudulent or manipulative transactions with suppliers.
- Genuine purchases indicated by entries in excise and stock registers.
- Acceptable explanation for different handwritings and entries in books.
- No lack of genuineness in purchases or evidence of suppression of sales.
- Directed the estimation of net profit at Rs. 55,37,219 to be set aside.

6. Review and Final Decision by the Appellate Tribunal:
The Tribunal, after considering the rival contentions and submissions, upheld the CIT(A)'s decision to set aside the estimation of income. It concluded:
- The AO's observations were not sufficient to reject the books of accounts.
- The assessee's explanations were acceptable, and the books were maintained and audited.
- The AO's basis for rejecting the books and estimating income at 1% was not justified.
- The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order.

Conclusion:
The Tribunal concluded that the AO's reasons for rejecting the books of accounts and estimating the income at 1% of the turnover were not justified. The CIT(A)'s order to set aside the estimation of income was upheld, and the Revenue's appeal was dismissed.

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