2017 (6) TMI 387 - AT - Income Tax

Rejection of books of accounts - estimation of G.P rate - Held that - AO has rejected the books of accounts holding that firstly, the books of accounts have continuously been rejected in the earlier years and secondly, the assessee is not maintaining stock register. In the earlier years, the matter had come up before the Coordinate Benches and the books of accounts have been accepted.Given that there are change in the facts and circumstances of the case, respectfully following the orders passed by the Coordinate Benches in earlier years, the books of accounts cannot be rejected. Regarding estimation of G.P rate, the assessee has disclosed a G.P rate of 20.79% as against G.P rate of 19.87% in AY 2010-11 and 21.09% in AY 2009-10. The AO has stated that there is set history in the case of assessee where G.P rate of 31% has been applied and also upheld by the ld CIT(A) and accordingly, he substituted the G.P rate of 20.79% disclosed by the assessee with G.P rate of 31%. In the earlier years, the G.P rate of 31% has not been accepted by the Coordinate Benches and the G.P rate offered by the assessee was accepted. In light of above, following the orders of the Coordinate Benches and the assessee s past history, we donot see any justification for AO to interfere with the G.P rate of 20.79% offered by the assessee. In the result, addition of ₹ 21,00,160 is hereby deleted Disallowance made towards travelling, postage, telephone, officer repair and maintenance, etc holding that these were not fully supported by proper bills and also due to the personal element in these expenditure. The ld CIT(A) found the disallowance towards travelling expenses at 15% is on the higher side and restricted it to 10% and rest all disallowances were confirmed.

Issues Involved:
1. Rejection of Books of Accounts and Applicability of Section 145(3).
2. Estimation of Gross Profit (G.P.) Rate.
3. Disallowance of Expenses (Traveling, Postage, Telephone, Office Repair, and Maintenance).

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts and Applicability of Section 145(3):

The assessee challenged the rejection of its books of accounts and the application of Section 145(3) by the Assessing Officer (AO). The AO rejected the books on the grounds that the assessee did not maintain a stock register, which made it impossible to determine the quantity and value of the closing stock reliably. The AO also noted that the assessee's books had been rejected in previous assessment years. The CIT(A) upheld the AO's decision, stating that the facts of the current year were similar to those of previous years where the books were rejected. The CIT(A) emphasized that the assessee failed to provide a valid reason for the decrease in the G.P. rate compared to preceding years.

The Tribunal, however, noted that the Coordinate Bench in the assessee's own case for A.Y. 2008-09 and 2009-10 had upheld the books of accounts and deleted similar trading additions. The Tribunal found merit in the assessee's argument that maintaining a day-to-day production stock register in the readymade garments trade was impractical. The Tribunal concluded that the books of accounts could not be rejected in such a casual and summary manner and that the AO had not pointed out any specific defects in the valuation of the closing stock. Therefore, the Tribunal held that the books of accounts should not be rejected.

2. Estimation of Gross Profit (G.P.) Rate:

The AO estimated a G.P. rate of 31% for the assessee, which was higher than the 20.79% declared by the assessee. The AO based this estimation on the G.P. rate applied in previous years, which had been upheld by the CIT(A). The CIT(A) confirmed the AO's estimation, stating that the facts of the current year were similar to those of previous years, and the assessee had not provided any reason for the decrease in the G.P. rate.

The Tribunal, however, noted that in earlier years, the Coordinate Benches had not accepted the G.P. rate of 31% and had accepted the G.P. rate offered by the assessee. The Tribunal found that the G.P. rate declared by the assessee for the current year (20.79%) was better than the previous year's rate (19.87%). Therefore, the Tribunal saw no justification for the AO to interfere with the G.P. rate declared by the assessee and deleted the addition of ?21,00,160.

3. Disallowance of Expenses:

The AO made disallowances towards traveling, postage, telephone, office repair, and maintenance expenses, holding that these were not fully supported by proper bills and included personal elements. The CIT(A) found the disallowance towards traveling expenses at 15% to be on the higher side and restricted it to 10%, while confirming the rest of the disallowances.

The Tribunal did not find any reason to interfere with the CIT(A)'s order regarding the disallowance of expenses and confirmed the CIT(A)'s decision.

Conclusion:

The Tribunal allowed the appeals of the assessee partly. It upheld the books of accounts, deleted the trading addition by accepting the G.P. rate declared by the assessee, and confirmed the CIT(A)'s decision on the disallowance of expenses.

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