2020 (12) TMI 718 - AT - Income Tax

Estimation of income - Bogus purchases - HELD THAT - There is merit in the contentions of the assessee that if quality claim and the discount are taken to the trading account, where they rightly belong as per the accounting principles, then the rate of gross profit comes to 0.52% of sales which compares favourably with the normal rate of gross profit ranging from 0.1% to 0.5% in the assessee s business of trading in HR and CR coils/sheets and galvanized coils/sheets on wholesale basis. Similar level of gross profit has been shown by the assessee in AYs 2008-09, 2009-10 and 2012-13, which has been accepted by the AO in the assessment passed u/s 143(3) of the Act. AO has estimated the profit of the assessee-company at 8% of opening stock held and purchases made during the year on the ground that the sale is not ascertainable with item-to-item purchase and stock held by the assessee. This is the incorrect method adopted by the AO. A perusal of the order of the CIT(A), as mentioned earlier clearly indicates that the assessee filed before the AO the relevant details. AO could have estimated the gross profit margin which is the surplus available out of the sales revenue, after subtracting the cost of goods sold. The correct method is indicated below Gross Profit Sales COGS Gross Profit Margin (GPM) (Gross Profit X 100)/(Sales) AO has resorted to an estimation which is not based on accounting principles. The AO has also disregarded the submissions made by the assessee during the course of assessment proceedings.

Summary

Issues:
- Addition made without appreciating the lack of evidence for sales returns
- Decision on sales turnover without affording an opportunity for remand proceedings

Analysis:
1. Issue 1 - Addition made without appreciating the lack of evidence for sales returns:
The case involved an appeal by the Revenue against the order of the Commissioner of Income Tax (Appeals) regarding the assessment year 2013-14. The Revenue questioned the deletion of an addition made due to the lack of evidence supporting sales returns from a specific company. The assessee failed to appear before the Tribunal on multiple scheduled dates, leading to the disposal of the appeal based on available records and the Departmental Representative's inputs. The Revenue contended that the assessee did not provide sufficient evidence to support the claim of sales returns from a particular company, including details of defective goods and related transactions. The Assessing Officer rejected the claim based on discrepancies in the presented data, estimating a higher gross profit ratio and making an addition to the income.

2. Issue 2 - Decision on sales turnover without affording an opportunity for remand proceedings:
The Revenue also challenged the decision on sales turnover, arguing that the Commissioner of Income Tax (Appeals) erred in deciding the issue without granting an opportunity for remand proceedings to the Assessing Officer. The assessee, engaged in trading activities, had reported sales to a specific company, which later claimed quality issues leading to returns and discounts. The Commissioner, in the appeal process, analyzed the submissions and evidence provided by the assessee, concluding that the addition made by the Assessing Officer was not justified. The Commissioner highlighted discrepancies in the Assessing Officer's approach, including the application of an 8% gross profit rate without considering closing stock and previous years' performance. The Commissioner found the Assessing Officer's estimation method incorrect, emphasizing the need for adherence to accounting principles and supporting documentation.

In conclusion, the Appellate Tribunal upheld the decision of the Commissioner of Income Tax (Appeals), dismissing the Revenue's appeal. The Tribunal emphasized the importance of following accounting principles, providing accurate documentation, and ensuring proper assessment procedures to determine income additions. The judgment highlighted the significance of substantiating claims with evidence and conducting assessments in line with established principles for fair and accurate tax evaluations.