2018 (11) TMI 1427 - AT - Income Tax

Rejection of books of accounts u/s 145(3) - inventory of opening stock and closing stock and its value are not verifiable due to the reason that the assessee filed the return of income for the A.Y. 2012-13 U/s 44AD - Held that - We find that the AO has pointed out specific defects in the books of account regarding the opening and closing stock and valuation. Further the expenses were not fully vouched and also day to day stock register was not found to be maintained by the assessee. Accordingly we do not find any error or illegality in the orders of the authorities below qua this issue and rejection of books of account is confirmed. Trading addition - Held that - After rejection of books of account, the Assessing Officer was mandated to estimate the income of the assessee on some proper and reasonable basis. The past history of the declared G.P. is considered as a reasonable and proper guidance for estimation of the income. In absence of any estimation made by AO, the ad hoc addition made by the authorities below is not sustainable. Accordingly, in the facts and circumstances of the case when there is no significant or noticeable decline in the G.P. in comparison to the earlier year whereas there is a significant increase of six times in the turnover. The said insignificant decline in the G.P. cannot be a reason for an addition. Accordingly we delete the addition made by the AO.

Summary

Issues:
1. Rejection of books of account under Section 145(3) of the Income Tax Act, 1961.
2. Trading addition made by the Assessing Officer and its reduction by the CIT(A).

Detailed Analysis:

Issue 1: Rejection of books of account under Section 145(3) of the Income Tax Act, 1961.
The Assessing Officer rejected the books of account of the assessee citing unverifiable opening and closing stock, lack of proper maintenance of books, and unvouched production expenses. The assessee challenged this before the CIT(A) but failed. The CIT(A) upheld the rejection by noting specific defects in the books of account. Upon review, the ITAT found no error in the orders of the authorities, confirming the rejection due to the mentioned defects regarding stock valuation and maintenance, leading to the rejection of books of account.

Issue 2: Trading addition made by the Assessing Officer and its reduction by the CIT(A).
The Assessing Officer made a trading addition of ?3,00,000, which the CIT(A) reduced to ?1,50,000. The CIT(A) considered the turnover increase of the assessee and the slight decrease in the gross profit (GP) ratio. The CIT(A) emphasized that even if books are rejected, estimation of profit should be fair and based on facts. The ITAT noted that the GP ratio decline was insignificant compared to the substantial turnover increase. It highlighted that without proper estimation by the authorities, ad hoc additions are impermissible. The ITAT concluded that the insignificant GP decline cannot warrant an addition, deleting the Assessing Officer's addition. The appeal was partly allowed based on these findings.

In conclusion, the ITAT upheld the rejection of books of account due to specific defects and deleted the trading addition made by the Assessing Officer, emphasizing the importance of reasonable estimation in such cases.