2021 (3) TMI 114 - AT - Income Tax

Rejection of books of accounts - Trading addition - GP estimation - AO estimated G.P. rate of 0.69% on declared turnover as against G.P rate of 0.38% declared by the assessee and made a trading addition in the hands of the assessee - HELD THAT - Once the books of accounts are rejected, the AO has to estimate the profits based on his best judgment and either the past year results or comparative profits declared in similar line of trade in commodities could be a guiding factor. Regarding past year results, it is an admitted position of Revenue that past year results cannot be made a guiding factor and the assessee has also contended that given the exceptional circumstances where the turnover has increased by almost 130 times, the past year results are not reflective of state of affairs of current year. There is nothing on record in terms of comparative profits declared in similar line of trade in commodities. As assessee has explained the substantial fall in G.P rate due to fall in prices of cardamom where the prices have reduced by almost half the rate at the end of the year as compared to beginning of the year. Therefore, we find that there is no rational basis for estimating the gross profit rate by the AO even where the books of accounts are rejected. In fact, in the remand report submitted to the ld CIT(A), the AO has admitted that there is no specific reason mentioned in the assessment order to estimate the gross profit rate of 0.69% as against declared gross profit rate of 0.38%. Further, the AO has acknowledged the fact that turnover has increased substantially during the year and the trading results are duly supported with documentary evidences. Regarding commodity and cardamom trading losses CIT(A) has also recorded a finding that these are speculative losses and are not part of trading account of the assessee and thus, doesn t effect the trading results so declared by the assessee. In the results, the trading additions so made by the AO and confirmed by the ld CIT(A) is hereby directed to be deleted.

Summary

Issues Involved:
1. Validity of assessment order under section 144 due to improper service of notices.
2. Opportunity of being heard and ex parte order.
3. Consideration of remand report by CIT(A).
4. Rejection of books of accounts and application of a higher GP rate.
5. Trading addition made by AO and sustained by CIT(A).

Issue-wise Detailed Analysis:

1. Validity of Assessment Order under Section 144:
The assessee argued that the assessment order passed under section 144 was invalid due to improper service of notices under sections 142(1) and 142(2)/144. However, during the hearing, the assessee chose not to press this ground, leading to its dismissal as not pressed.

2. Opportunity of Being Heard and Ex Parte Order:
The assessee also did not press the ground related to the lack of an opportunity to be heard and the passing of the order ex parte. Consequently, this ground was dismissed as not pressed.

3. Consideration of Remand Report by CIT(A):
The CIT(A) admitted additional evidence under Rule 46A due to the assessment being ex parte. The AO, in the remand report, accepted the trading results and found the supporting documents satisfactory. However, the CIT(A) rejected the remand report, stating that the AO did not analyze the documents properly. The CIT(A) did not provide specific defects in the additional evidence or the remand report, leading to the conclusion that the rejection was unjustified.

4. Rejection of Books of Accounts and Application of a Higher GP Rate:
The AO rejected the books of accounts and applied a GP rate of 0.69% against the declared 0.38%, resulting in a trading addition of ?49,56,217. The CIT(A) upheld this rejection, citing discrepancies and the substantial increase in turnover. However, the Tribunal noted that the AO did not provide a rational basis for the higher GP rate, especially given the exceptional increase in turnover and the fall in cardamom prices. The Tribunal found the AO's estimation of the GP rate to be baseless.

5. Trading Addition Made by AO and Sustained by CIT(A):
The AO's trading addition was primarily based on unverified payments of duties and taxes and speculative losses. The Tribunal highlighted that once books are rejected, profits should be estimated based on best judgment, considering past results or comparative profits in similar trades. The Tribunal found no rational basis for the AO's estimation and noted that the speculative losses did not affect the trading results. Consequently, the Tribunal directed the deletion of the trading addition.

Conclusion:
The Tribunal concluded that the trading addition made by the AO and confirmed by the CIT(A) lacked a rational basis and directed its deletion. The appeal was partly allowed.