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2022 (3) TMI 345 - AT - Income TaxRejection of books of accounts - as per AO gross profit rate declared by the assessee is very low and the books are not reliable - CIT-A deleted the addition - HELD THAT - Assessee in the instant case has maintained its books of accounts and such books of accounts were duly audited and the auditors have not pointed out any mistakes in the books of accounts. Such audited books of account along with bills and vouchers were produced before the AO and no specific defects were pointed out by the AO in the books of accounts. The submission of the ld. Counsel for the assessee that out of 199 retail outlets, the company has closed down 84 outlets could not be controverted by the ld. DR. The submission of the ld. Counsel for the assessee that the turnover of the assessee consists of the three streams i.e. retail sale of garments, trading of fabric and wholesale trading of garments, also could not be controverted by the Ld. DR. Under these circumstances, we are of the considered opinion that merely because there is a fall in the gross profit rate cannot be a ground for rejection of the book results in absence of any specific defects being pointed out by the AO. Even in his remand report also, as mentioned by the Ld. CIT(A), the AO has not found any discrepancy in the data furnished by the assessee and no adverse remarks have been made by the AO except objecting to the submission of the data on the ground that during the course of assessment proceedings such explanation was not furnished by the assessee. Although, the ld. CIT(A) has called for a remand report from the AO and has given an opportunity to the AO to make his submission, however, the AO has not pointed out any defects or mistakes in the various details furnished by the assessee. See WINNER CONSTRUCTIONS PVT LTD 2012 (5) TMI 394 - DELHI HIGH COURT , M/S PARADISE HOLIDAYS 2010 (4) TMI 111 - DELHI HIGH COURT and JACKSON HOUSE 2010 (8) TMI 1156 - DELHI HIGH COURT Thus book results cannot be rejected or addition of gross profit cannot be made on the sole or mere fact that the gross profits are very low - Decided in favour of assessee.
Issues Involved:
1. Justification for the increase in production expenses despite a decline in gross profit. 2. Validity of the rejection of books of accounts under Section 145(3) of the Income Tax Act. 3. Appropriateness of the addition of ?25,50,30,422/- to the total income of the assessee. 4. Consistency in the method of accounting and acceptance of book results in subsequent assessment years. 5. Legal precedents regarding the rejection of books of accounts and addition to gross profits based on low gross profit rates. Issue-wise Detailed Analysis: 1. Justification for the Increase in Production Expenses Despite a Decline in Gross Profit: The assessee, engaged in the manufacturing and trading of readymade garments and accessories, reported a significant decline in gross profit for the assessment year 2011-12. The Assessing Officer (AO) questioned the increase in production expenses despite this decline. The assessee justified the increase in production expenses due to higher raw material costs and wage rates. The AO, however, noted irregularities in the books of accounts, particularly a sharp decline in production charges compared to the previous financial year, leading to a show-cause notice for rejecting the books of accounts under Section 145(3). 2. Validity of the Rejection of Books of Accounts under Section 145(3): The AO rejected the books of accounts, stating that they did not present a true and correct picture of the facts. The AO observed that the production expenses fluctuated significantly and were not consistent with the purchases made. The assessee argued that the production expenses were only relevant to the first stream of turnover (retail sale of garments manufactured and purchased) and not to the entire turnover, which included trading of fabric and wholesale trading of garments. The Ld. CIT(A) found that the AO did not point out specific defects in the books of accounts and that the rejection was based on a mere decline in gross profit, which is not a sufficient ground for rejection under Section 145(3). 3. Appropriateness of the Addition of ?25,50,30,422/- to the Total Income of the Assessee: The AO, after rejecting the books of accounts, made an addition of ?25,50,30,422/- to the total income of the assessee by applying an average gross profit rate of 49.37%. The Ld. CIT(A) deleted this addition, stating that the AO had incorrectly correlated production expenses to the entire turnover and had not considered the decline in gross profit due to the closure of several retail outlets and market recession. The Ld. CIT(A) also noted that the AO had accepted similar losses in subsequent assessment years without rejecting the books of accounts. 4. Consistency in the Method of Accounting and Acceptance of Book Results in Subsequent Assessment Years: The assessee's method of accounting was consistent and accepted in subsequent assessment years (2012-13 and 2013-14), where the AO did not reject the books of accounts despite significant losses. The Ld. CIT(A) emphasized the importance of consistency and noted that the AO had accepted the assessee's explanations for the decline in gross profit in subsequent years. 5. Legal Precedents Regarding the Rejection of Books of Accounts and Addition to Gross Profits Based on Low Gross Profit Rates: The Ld. CIT(A) and the Tribunal relied on several legal precedents to support the decision to delete the addition and uphold the assessee's book results. The Hon'ble Delhi High Court in cases such as CIT vs Winner Construction Pvt. Ltd., CIT vs Paradise Holidays, and CIT vs Jacksons House has held that low gross profit rates alone cannot justify the rejection of books of accounts. The onus is on the Revenue to show specific defects or discrepancies in the books of accounts. The Tribunal found that the AO had not provided sufficient grounds for rejecting the books and making the addition based solely on a decline in gross profit. Conclusion: The Tribunal upheld the Ld. CIT(A)'s decision to delete the addition of ?25,50,30,422/- and dismissed the Revenue's appeal. The Tribunal emphasized that the rejection of books of accounts under Section 145(3) requires specific defects or discrepancies, which were not pointed out by the AO. The Tribunal also highlighted the importance of consistency in the method of accounting and the acceptance of book results in subsequent assessment years.
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