2018 (4) TMI 1526 - AT - Income Tax

Addition in Biri Account by applying an adhoc rate of profit/commission of 2% on the purchase of Biri - non rejection of books of accounts - Held that - AO had not rejected the books of accounts by invoking the provisions of Section 145. He made the addition by presuming that the assessee might have earned the commission @ 2% on the purchases. At the same time, he had not doubted the sales made by the assessee from the purchases. Even, the AO had considered that the gross profit amounting to ₹ 2,96,758/- was earned by the assessee from the sale of Biri. Thus when the sales has been accepted as genuine then the AO was not justified in presuming that the assessee earned commission on the purchases of goods (Biri) - neither the AO nor the ld. CIT(A) had given any basis for adopting the rate of Commission/Profit at 2%, therefore, the addition made by the AO and sustained by the CIT(A) was not justified. Accordingly, the same is deleted. - Decided in favour of assessee.

Summary

Issues:
Appeal against addition of income based on adhoc profit rate of 2% on Biri purchases.

Analysis:
1. The assessee appealed against the addition of income amounting to ?4,82,252 based on an adhoc profit/commission rate of 2% applied by the Assessing Officer (AO) on Biri purchases. The AO observed a gross profit of ?2,96,758 on sales of ?4,25,10,624, leading to the addition. The assessee contested this addition as the AO did not reject the books of accounts under Section 145 of the Income Tax Act, and there was no evidence to support the commission rate application.

2. The Commissioner of Income Tax (Appeals) upheld the AO's addition, emphasizing the lack of evidence provided by the assessee to establish the authenticity of sales. The Commissioner noted discrepancies in the appellant's submissions regarding sales and commission earnings. The Commissioner concluded that the appellant appeared to be providing accommodation entries to avoid VAT payments, leading to the confirmation of the addition.

3. In the subsequent appeal, the assessee argued that the AO and the Commissioner did not provide a valid basis for applying the 2% commission rate on purchases. The assessee highlighted the maintenance of regular books of accounts, audited by a Chartered Accountant, and submission of details to the Excise & Taxation Department. The assessee presented various documents to prove the genuineness of purchases and sales, urging the deletion of the addition.

4. The Income Tax Appellate Tribunal (ITAT) considered both parties' submissions and the available evidence. The ITAT noted that the AO did not reject the books of accounts and had not provided a basis for applying the 2% commission rate. As the sales were accepted as genuine, the ITAT found the addition unjustified and deleted the same. The ITAT concluded that the AO's presumption regarding commission on purchases lacked substantiation, leading to the allowance of the assessee's appeal.

5. Ultimately, the ITAT allowed the assessee's appeal, overturning the addition of ?4,82,252 based on the adhoc profit rate of 2% on Biri purchases. The ITAT emphasized the lack of justification for the commission rate application and the acceptance of genuine sales, leading to the deletion of the addition.