2016 (10) TMI 346 - AT - Income Tax

Trading addition - rejection of books of account - Held that - Whatever defects pointed out by the Assessing Officer is not justified, the rejection of books of account U/s 145(3) of the Act. The assessee s manufacturing processes are so complexed that at every stage, the size, length and width of products changed and also the number of process in the manufacturing of handmade papers but the assessee has maintained proper purchase, sale and other expenses on the basis of bill/vouchers. - Decide against revenue

Summary

Issues involved:
- Appeal against order restricting trading addition
- Rejection of books of account and addition by Assessing Officer
- Non-maintenance of stock register and impact on GP rate
- Application of Section 145(3) of the Income Tax Act
- Comparison of GP rates for different assessment years
- Ad hoc addition confirmed by CIT(A)
- Arguments regarding complexity of manufacturing processes
- Decision on appeal by ITAT Jaipur

Analysis:

Issue 1: Appeal against order restricting trading addition
The revenue filed an appeal against the order restricting the trading addition to a nominal amount. The grounds raised by the Revenue included contentions regarding the perceived inadequacies in the CIT(A)'s decision-making process, emphasizing the discrepancy between the actual trading addition and the ad hoc basis used for the restriction.

Issue 2: Rejection of books of account and addition by Assessing Officer
The Assessing Officer observed non-maintenance of stock register by the assessee, leading to the rejection of books under Section 145(3) of the Act. The AO relied on various judicial precedents to support the decision, including the Hon'ble Supreme Court and High Court decisions. Consequently, an addition was made based on the comparison of GP rates over different assessment years.

Issue 3: Non-maintenance of stock register and impact on GP rate
The non-maintenance of a stock register was a crucial point of contention. The Assessing Officer highlighted the absence of a quantitative stock register, leading to doubts about the trustworthiness of the books of account. The GP rate was a significant factor, with the AO applying a specific rate based on past performance and market forces affecting the business.

Issue 4: Application of Section 145(3) of the Income Tax Act
The rejection of books under Section 145(3) was a pivotal issue in the case. The CIT(A) partly allowed the appeal, citing legal precedents to argue that the fall in GP rate and non-maintenance of stock register alone were insufficient reasons to invoke Section 145(3). An ad hoc addition was confirmed based on possible income leakage.

Issue 5: Arguments regarding complexity of manufacturing processes
The complexity of the assessee's manufacturing processes was a key argument. The assessee contended that the nature of their business made it impractical to maintain a detailed stock register due to the diverse range of products manufactured. The reliance on bills, vouchers, and proper valuation of closing stock was emphasized to counter the AO's objections.

Issue 6: Decision on appeal by ITAT Jaipur
The ITAT Jaipur upheld the CIT(A)'s decision, stating that the defects pointed out by the Assessing Officer did not justify the rejection of books under Section 145(3). The ITAT acknowledged the complexity of the manufacturing processes, leading to the dismissal of the revenue's appeal.

This comprehensive analysis covers the key issues raised in the legal judgment, detailing the arguments presented by both parties and the decisions rendered by the authorities involved.