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2022 (9) TMI 405 - AT - Income TaxRejection of books of accounts - Estimation of income - application of gross profit of 10.5% by the Ld. CIT(A) as against 9.8% disclosed by the assessee in his audited books of account - assessee has breeding centre for growing chicks and deals in poultry products - HELD THAT - While rejecting the books of account, conditions stipulated u/s. 145(3) had not been referred to by the Ld. CIT(A). The basis for disturbing the gross profit adopted by the ld. CIT(A) is in reference to the decision of Co-ordinate Bench of ITAT, Bangalore 2015 (11) TMI 1750 - ITAT BANGALORE wherefrom he himself had noted that the G.P. ratio ranges between 9 and 12% in the business of hatchery and poultry. We note that Ld. CIT(A) without giving any finding that account books are unreliable, incorrect or incomplete, has rejected the audited books of account. Books of account of the assessee have not been rejected in compliance to the provisions of section 145(3) and assessment having not been framed u/s. 144 - Action of Ld. CIT(A), in such a situation, is erroneous in resorting to an estimation of income and the exercise undertaken by him of adopting the G. P. rate of 10.5% without any basis, is not sustainable. We find force from the decision of CIT Vs. Anil Kumar Co. 2016 (3) TMI 184 - KARNATAKA HIGH COURT wherein it has been held that when the books of accounts are maintained by the assessee in accordance with the system of accounting, in the regular course of his business, same would form the basis for computation of income. It was also held that section 145(3) of the Act lays down that the AO can proceed to make assessment to the best of his judgment u/s. 144 only in the event of not being satisfied with the correctness of the account produced by the assessee. We are inclined to accept the contention made to restore the GP ratio @ 9.8% as claimed by the assessee and direct the Ld. AO to delete the addition made by the Ld. CIT(A) by adopting the rate of 10.5% - Decided in favour of assessee.
Issues Involved:
1. Application of gross profit rate by the CIT(A). 2. Verification of expenses under "Staff Salary & Bonus". 3. Rejection of books of account by CIT(A). 4. Estimation of income without rejecting books of account under Section 145(3). Issue-wise Detailed Analysis: 1. Application of Gross Profit Rate by the CIT(A): The primary issue raised by the assessee was the application of a gross profit (GP) rate of 10.5% by the CIT(A) as against 9.8% disclosed in the audited books of account. The CIT(A) had resorted to estimating the income by applying a higher GP rate without rejecting the books of account and without bringing any comparative material on record. 2. Verification of Expenses under "Staff Salary & Bonus": The assessee had debited significant expenses under "Staff Salary & Bonus", which increased substantially from the preceding year. The AO questioned the realism of these expenses, noting a significant increase in turnover but a decrease in net profit. The assessee explained that payments to breeders/farmers were wrongly included under "Staff Salary & Bonus" and provided detailed submissions to correct this classification. The CIT(A) observed that the AO had not given adequate reasons for rejecting the explanations provided by the assessee and had failed to offer a real opportunity for the assessee to explain the abnormal figures under "Staff Salary & Bonus". 3. Rejection of Books of Account by CIT(A): The CIT(A) rejected the books of account without pointing out specific defects and without referring to the conditions stipulated under Section 145(3) of the Act. The CIT(A) noted that the AO had not rejected the books of account, and the assessment was completed under Section 143(3) without invoking Section 144. The CIT(A) also noted that the assessee consistently showed a similar percentage of gross and net profit and provided detailed submissions substantiating the expenses claimed. 4. Estimation of Income without Rejecting Books of Account under Section 145(3): The CIT(A) resorted to estimating the income by applying a GP rate of 10.5% based on a decision of a Coordinate bench of ITAT, Bangalore, which suggested a GP percentage range of 9% to 12% for the poultry business. However, the CIT(A) did not provide a basis for rejecting the audited books of account or for the estimation. The Tribunal noted that the CIT(A) had accepted the explanations provided by the assessee regarding the discrepancy in "Staff Salary & Bonus" but still proceeded to estimate the income without rejecting the books of account as per Section 145(3). Conclusion: The Tribunal found merit in the assessee's contention that the CIT(A) had erred in rejecting the books of account and estimating the income without a proper basis. The Tribunal emphasized that the books of account were maintained regularly, audited, and not rejected by the AO. The Tribunal referred to the decision of the Karnataka High Court in the case of CIT Vs. Anil Kumar & Co., which held that the AO could only resort to best judgment assessment under Section 144 if the books of account were rejected under Section 145(3). Consequently, the Tribunal directed the AO to restore the GP ratio to 9.8% as claimed by the assessee and delete the addition made by the CIT(A) by adopting the rate of 10.5%. Judgment: The appeal of the assessee was allowed, and the order was pronounced in the open court on 6th September 2022.
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