2020 (6) TMI 503 - AT - Income Tax

Understatement of sales price - decline in the gross profit ratio declared by the assessee for the year under consideration - AO has rejected the book results of the assessee - assessee in the year under consideration has shown gross profit ratio at the rate of 1.47% of the turnover whereas the same was shown for the assessment year 2010-11 and 2009-10 at 2.42% and 5.94% of the turnover respectively - HELD THAT - AO has rejected the book results of the assessee based on the facts and figured that the assessee after purchasing the products has sold the same within short span at a price lower than the purchase cost. However, there are certain undisputed facts that the books of accounts were subject to audit under companies Act and under section 44AB under Income Tax Act. As per the assessee the goods were of poor/inferior quality, therefore the same were sold at a lower price. The ld. AR in support of his contention drew our attention on page 38 of the paper book. Similarly, we also find that there was no allegation by the Revenue that the assessee by making the sale at a price lower than the cost of purchase has received some consideration without recording the same in the books of accounts. The necessary details about the parties were available before the AO, but he has not conducted any enquiry from such parties to ascertain the fact that the assessee has sold the goods at a price lower than the purchase price. AO has also not brought any comparable cases showing that the market price was more than the price at which assessee sold the goods. Decline in the GP rate and NP rate in comparison to the immediately preceding assessment year cannot be criteria to reject the books. It is because the assessee explained that it had reduced the sale price due inferior quality. This reason for fall in GP of the assessee was nowhere controverted by the authorities below. Lower gross profit as compared to earlier year cannot be the ground to reject the books of accounts. AO did not point out any defect in the stock statement, purchase and sales, bank statement furnished by the assessee. Therefore in our considered view, the books of accounts of the assessee cannot be rejected until and unless the AO point out the specific mistakes. See AWADHESH PRATAP SINGH ABDUL REHMAN AND BROTHERS VERSUS COMMISSIONER OF INCOME-TAX 1993 (12) TMI 28 - ALLAHABAD HIGH COURT CIT (A) has confirmed the addition on ad hoc basis without pointing out any specific material. In our considered view such ad hoc disallowance is not permissible. CIT (A) has given a contrary finding by accepting the books of accounts on the one hand and making ad hoc addition on the other hand. Accordingly, in the backdrop of the aforesaid discussion and precedent, we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

Summary

Issues Involved:
- Assessment of understatement of sales price leading to addition in total income.

Analysis:
1. The appeal was filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals) concerning the assessment order passed under s. 143(3) of the Income Tax Act, 1961 for the Assessment Year 2011-2012.

2. The primary issue raised by the Assessee was regarding the partial confirmation of an addition of ?10 lakhs out of a total addition of ?1,22,03,041 made by the Assessing Officer (AO) due to alleged understatement of the sales price.

3. The AO observed a decline in the gross profit ratio declared by the Assessee for the relevant year compared to previous years. Additionally, the AO found that the Assessee had sold certain products at a price lower than the cost of acquisition, resulting in a gross loss. Consequently, the AO rejected the books of accounts under section 145(3) of the Act and added the under-invoiced amount to the total income of the Assessee.

4. The Learned Commissioner of Income Tax (Appeals) partly confirmed the AO's order, restricting the disallowance to ?10 lakhs after analyzing the facts, submissions, assessment order contents, and relevant legal decisions. The Assessee, aggrieved by this decision, appealed before the ITAT RAJKOT.

5. During the appeal, the Assessee argued that the disallowance was made on an ad-hoc basis without identifying any defects in the books of accounts or material evidence supporting the alleged suppressed sales.

6. The ITAT considered the arguments of both parties and reviewed the facts and circumstances of the case. It emphasized that the power to reject the books of accounts under section 145 of the Act should be exercised judiciously and based on specific reasons. Mere variations in gross profit may not warrant rejection unless substantiated by other findings.

7. The ITAT noted that the AO rejected the book results based on the Assessee selling products at lower prices due to poor quality, without conducting inquiries with relevant parties or providing evidence of market prices. The decline in gross profit alone should not justify rejecting the books, as explained in legal precedents cited during the proceedings.

8. Ultimately, the ITAT held that the ad-hoc addition of ?10 lakhs without specific material was impermissible. It set aside the decision of the Learned Commissioner of Income Tax (Appeals) and directed the AO to delete the addition. Consequently, the appeal of the Assessee was allowed.

This detailed analysis of the judgment highlights the key issues, arguments presented, legal principles applied, and the final decision rendered by the ITAT RAJKOT in favor of the Assessee.