2019 (11) TMI 515 - AT - Income Tax

Rejection of books of accounts u/s 145(3) - purchase not genuine and not verifiable - Addition being 15% of alleged unverifiable purchases - HELD THAT - In any case of best judgment, though the element of guess work is involved, however the guess work should have nexus with the material on record and discretion must not be exercised arbitrarily or capriciously. For the purposes of making the best judgment assessment, past history of the assessee has been held as reliable and reasonable basis for estimation of profits. Alternatively, comparable cases in the similar line of business should be considered. In the instant case, being the first year of operations, past history is not relevant and hence, considering the comparable case of M/s Kedia Exports Pvt. Ltd., which has declared the GP rate of 10.04% as against 11.41% declared by the assessee, we are of the considered view that no addition should be made in the hands of the assessee company. As relying on M/S ALLIED GEMS CORPORATION AND VICE-VERSA 2017 (12) TMI 1252 - ITAT JAIPUR additions so made and sustained by the ld. CIT(A) is hereby directed to be deleted and the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the I.T. Act, 1961.
2. Addition of 15% of alleged unverifiable purchases.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3) of the I.T. Act, 1961:

The assessee, engaged in trading semi-precious stones and silver jewelry, had their books of accounts rejected by the Assessing Officer (AO) under Section 145(3) due to alleged bogus purchases amounting to ?1,83,68,232/-. These purchases were claimed to be from five concerns controlled by the Rajendra Jain Group, which were found to be involved in providing accommodation entries rather than genuine business activities. The AO's rejection was based on findings from search operations and statements from key persons of the Rajendra Jain Group.

The assessee contended that they provided complete purchase details, including invoices, VAT registration, PAN numbers, and payment proofs via account payee cheques. They argued that they were unaware of the investigations and were not given the opportunity to cross-examine the individuals whose statements were used against them, citing the Hon'ble Supreme Court decision in the Andaman Timbers case, which renders such assessments a nullity in law. The assessee also referenced the Gujarat High Court decision in CIT vs. Sathya Narayan P. Rathi, arguing that the purchases were genuine and used in manufacturing goods sold and exported.

The Tribunal upheld the rejection of the books of accounts, noting that no specific arguments were made against this rejection. The Tribunal emphasized that the AO must make assessments based on best judgment, using judicial considerations and relevant material, rather than acting arbitrarily. In this case, the Tribunal found that the AO's rejection of the books of accounts was justified.

2. Addition of 15% of Alleged Unverifiable Purchases:

Initially, the AO enhanced the trading profits by 25% of the unverifiable purchases, amounting to ?49,92,058/-. However, the CIT(A) reduced this addition to 15%, amounting to ?45,92,058/-. The assessee argued that the AO did not disbelieve the purchases but doubted the purchase vouchers. They pointed out that the trading account, including opening stock, closing stock, and sales, was accepted by the AO. The assessee also cited the Co-ordinate Bench decision in Bhuramal Raj Mal Surana vs. DCIT, which held that after rejecting the books of accounts, the AO should proceed with a best judgment assessment rather than making additions to the book results.

The Tribunal agreed with the assessee, referencing the case of M/s Allied Gems Corporation, where it was established that once books of accounts are rejected, the AO should assess income based on best judgment, often using the Gross Profit (GP) rate as a basis. The Tribunal noted that the assessee declared a GP rate of 11.41% on total sales, which was higher than the comparable GP rate of 10.04% declared by M/s Kedia Exports Pvt. Ltd. Therefore, the Tribunal concluded that no further additions should be made.

The Tribunal also referenced the decision in ACIT vs. M/s Allied Gems Corporation, which supported the view that after rejecting the books of accounts, the AO should not make arbitrary additions but should rely on past history or comparable cases. The Tribunal found no error in the CIT(A)'s decision to restrict the addition to the average GP rate based on past history and directed that the additions made and sustained be deleted.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the deletion of the additions made by the AO and sustained by the CIT(A). The Tribunal emphasized the importance of judicial considerations and relevant material in making best judgment assessments, highlighting that arbitrary or capricious actions by the AO are not permissible.