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2022 (1) TMI 299 - HC - Income TaxRejection of books of accounts - valuation of the closing stock - gross profit margin - Assessment was complete u/s 143(3) - After that, during survey u/s 133A, assessee could not produce stock register - HELD THAT - How much of it weighed with the AO is anybody s guess. The fact remains that it continued to be referred to in the order of the CIT (A) and, as noted hereinbefore, the ITAT as well. The survey operation took place at a time when the previous year corresponding to AY in question had already ended. Therefore, what transpired during the survey operation could not have been taken into account. Re-working of the Assessee s gross profit rate for the AY in question appears to be based on surmises and conjectures, triggered as it were by the ITAT s rejection of the Assessee s books of account under Section 145 of the Act. Mr. Ray for the Assessee is right in contending that with the assessment having been completed under Section 143 (3) of the IT Act, and after the Assessee had produced its books of account, the question of invoking Section 145 of the IT Act did not arise. Court is satisfied that in rejecting the Assessee s book of account u/s 145 of the IT Act, the ITAT committed a serious error. It proceeded on that basis to re-work the gross profit margin. Question of law framed by this Court by order dated 10th July, 2017 is answered in the affirmative, i.e., in favour of the Assessee against the Revenue by holding that the ITAT erred in affirming the conclusions of the AO and CIT(A) based on materials collected during the period subsequent to the assessment period since each assessment year is separate. The corresponding orders of the AO and the CIT (A) to the above extent, are also set aside.
Issues:
Admission of appeal against ITAT order, Question of law framed, Valuation of closing stock, Non-production of stock register during survey operation, Rejecting valuation of closing stock, Rejection of expenditure claimed, Appeal to CIT (A), Reduction of profit margin, Further appeal to ITAT, ITAT's observations, Rejection of Assessee's accounts, Re-working of gross profit rate, Rejection of books of account under Section 145, Error by ITAT, Answering the question of law framed, Setting aside orders of AO and CIT (A). Analysis: 1. Admission of appeal against ITAT order: - The High Court admitted the appeal against the order passed by the Income Tax Appellate Authority (ITAT) for the Assessment Year 2005-06. 2. Valuation of closing stock: - The issue revolved around the valuation of the closing stock as the stock register was not produced during the assessment period, leading to the rejection of the Assessee's valuation and estimation based on gross profit margin. 3. Non-production of stock register during survey operation: - The stock register was not produced during a survey operation on 8th October, 2007, which was subsequent to the assessment year in question, impacting the assessment process. 4. Rejection of Assessee's accounts and expenditure claimed: - The Assessing Officer (AO) rejected the Assessee's accounts and expenditure claimed against carriage outwards and sales promotion, leading to disputes and subsequent appeals. 5. Appeal to CIT (A) and reduction of profit margin: - The Assessee appealed to the Commissioner of Income Tax (Appeals) and obtained a partial relief with a reduction in the profit margin by &8377; 4,00,000. 6. Further appeal to ITAT and observations made: - The ITAT dismissed the further appeal by the Assessee, citing the failure to substantiate declared results and accounts during survey operations, along with considerations on gross profit estimation. 7. Re-working of gross profit rate and rejection under Section 145: - The re-working of the Assessee's gross profit rate was based on conjectures triggered by the rejection of accounts under Section 145 of the Income Tax Act, which the Court found to be an error. 8. Answering the question of law framed: - The High Court answered the question of law in favor of the Assessee, holding that the ITAT erred in affirming the conclusions based on materials collected after the assessment period, emphasizing the separation of each assessment year. 9. Setting aside orders of AO and CIT (A): - Consequently, the Court set aside the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals) to the extent of their conclusions based on post-assessment period materials. 10. Conclusion: - The appeal was allowed in favor of the Assessee, with no costs imposed, highlighting the importance of adhering to the assessment period's boundaries and the proper application of relevant provisions of the Income Tax Act.
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