2020 (5) TMI 481 - AT - Income Tax

Bogus purchases - basis of estimating the gross profit rate of 19.25% - HELD THAT - In the instant case, the CIT(A) has therefore rightly held that after rejection of books of accounts, the past history of the assessee has to be seen for estimating the gross profit rate. At the same time, we find that the basis of estimating the gross profit rate of 19.25% as against declared GP rate 14.99% is not discernable from the order of the CIT(A) where he has only stated that purchases to the tune of ₹ 2,11,15,458/- were found bogus/unverifiable which constitute 50% of total purchases.He has not taken into consideration the fact that the assessee has started diamond trading business during the year under consideration wherein he has disclosed gross profit rate of 10%. Given that the assessee has disclosed gross profit rate of 10% in respect of diamond trading which is stated to be pretty robust as per industry standards and in respect of trading of semi precious stone and studded jewellery, he has disclosed a gross profit rate of 20% which is better than the average gross profit rate of last three assessment years we find that even where the books of accounts have been rejected, there is no basis for making trading addition in the hands of the assessee. See GOTAN LIME KHANIJ UDHYOG. 2001 (7) TMI 19 - RAJASTHAN HIGH COURT . - Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the Income Tax Act.
2. Application of Gross Profit (G.P.) rate of 19.25% by the CIT(A) as against the declared G.P. rate of 14.99%.
3. Addition of ?21,65,807/- on account of alleged unverifiable purchases.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The CIT(A) confirmed the rejection of the assessee's books of accounts by the Assessing Officer (AO) under Section 145(3) of the Income Tax Act. The AO disallowed 25% of unverifiable purchases and made an addition of ?52,78,865/- to the declared loss. The CIT(A) upheld the rejection of books but restricted the addition to ?21,65,807/-.

2. Application of G.P. Rate of 19.25%:
The assessee argued that the CIT(A) erred in applying a G.P. rate of 19.25% instead of the declared G.P. rate of 14.99%. The assessee maintained that the entire sales were export sales, and the books of accounts were audited under Section 44AB of the Act. The segmental results showed a G.P. rate of 10% for diamonds and 20% for stones and studded jewelry. The CIT(A) did not provide a clear basis for estimating the G.P. rate at 19.25%, especially considering the assessee's new diamond trading business, which reported a G.P. rate of 10%, robust by industry standards.

3. Addition of ?21,65,807/-:
The reassessment proceedings were initiated based on a search in the Rajendra Jain Group, which indicated that non-genuine purchases were introduced to reduce profits. The AO rejected the books as unreliable and disallowed 25% of unverifiable purchases, making an addition of ?52,78,865/-. The CIT(A) reduced this disallowance to ?21,65,807/-. However, the Tribunal found no basis for making a trading addition, given the disclosed G.P. rates were consistent with industry standards and better than the average G.P. rates of the last three assessment years.

Judgment:
The Tribunal considered the rival contentions and material on record. It referred to the legal proposition that once books of accounts are rejected, the AO should reassess income based on best judgment, considering past results as a reliable basis for estimating the G.P. rate. The Tribunal found the CIT(A)'s basis for estimating the G.P. rate at 19.25% unclear and unsupported by the facts, especially given the robust G.P. rates disclosed by the assessee.

The Tribunal cited the Rajasthan High Court's decision in CIT vs Gotan Lime Khanij Udhyog, which held that rejection of books does not necessarily lead to different income computation and that best judgment should be based on available material. The Tribunal concluded that there was no basis for the trading addition and directed the deletion of the ?21,65,807/- addition.

Since the addition was deleted on merits, the other grounds raised by the assessee, including challenging the initiation of reassessment proceedings and rejection of books under Section 145(3), were dismissed as academic and infructuous.

Conclusion:
The appeal filed by the assessee was allowed, and the addition of ?21,65,807/- was deleted. The judgment emphasized that rejection of books does not automatically warrant an addition if the disclosed G.P. rates are consistent with industry standards and past results. The order was pronounced in open court on 15/04/2020.