2017 (7) TMI 36 - AT - Income Tax

Rejection of boos of accounts - n.p. determination - Held that - As assessee had given reasonable justification for the decline in GP and NP rate and, therefore, books of account should not be rejected u/s 145(3) of the I.T. Act

Summary

Issues:
1. Difference of opinion between the learned Members of the Division Bench of ITAT, Jaipur.
2. Rejection of books of account under section 145(3) of the Income Tax Act.

Analysis:

Issue 1: Difference of opinion between the learned Members
The judgment addresses a situation where there was a difference of opinion between the learned Members constituting a Division Bench of ITAT, Jaipur. To resolve this, a Third Member was nominated by the Honorable President. The Third Member concurred with the findings of the Judicial Member, focusing on the explanation provided by the assessee regarding the decrease in Gross Profit (GP) and Net Profit (NP) ratios. The assessee company was engaged in manufacturing products in the health food and Ayurvedic sector, with no change in business compared to earlier years. The Assessing Officer found a low GP and NP ratio in the year under consideration, attributing it to increased material and excise duty costs. The assessee provided detailed explanations, including recasted trading/manufacturing accounts and reconciliation of accounts with other parties. The Third Member emphasized that a mere fall in GP rate is not sufficient grounds to reject the books of account. The Third Member concluded that the assessee had justified the decline in GP and NP rates satisfactorily, leading to the allowance of the assessee's appeal and dismissal of the Departmental appeal.

Issue 2: Rejection of books of account under section 145(3)
The judgment extensively cites precedents from various High Courts to support the position that a mere decline in GP rate is not a valid reason to reject books of account or apply a higher GP rate. The judgment highlights that maintaining a stock register may not always be feasible based on the nature of the business. The Tribunal and Commissioner (Appeals) accepted the explanations provided by the assessee, emphasizing the importance of continuity and consistency in applying GP rates. The Judicial Member justified the rejection of the Departmental appeal, while the Accountant Member directed a remand to the Assessing Officer, a decision not agreed upon by the Third Member. The Third Member held that the books of account should not be rejected under section 145(3) of the Income Tax Act, as the assessee had provided reasonable justifications for the decline in GP and NP rates. The Third Member, concurring with the Judicial Member, allowed the appeal of the assessee and dismissed the Revenue's appeal, emphasizing the need for sufficient material to justify the rejection of books of account.

In conclusion, the judgment provides a detailed analysis of the issues involved, emphasizing the importance of justifications provided by the assessee in the face of a difference of opinion and the rejection of books of account under section 145(3) of the Income Tax Act.