2007 (11) TMI 345 - AT - Income Tax

Trading addition - rejection of the books of account u/s 145(3) - income from trading of machineries, electrical goods and accessories on wholesale and retail basis - HELD THAT - It is well settled business proposition that for having increase in sales, a businessman has to sacrifice a small margin of profit rate. During the year the overall gross profit of the assessee has increased from Rs. 1.43 crores to Rs. 1.54 crores. No defect was found in the books of account. There is no valid reason for rejection of books of account during the year under consideration and thereby applying higher GP rate of 11.51 per cent. which was earned by the assessee on low sales of Rs. 1.24 crores in the preceding year. The other reason stated by the AO of making trading addition was that in asst. yr. 2001-02, GP rate declared by the assessee at 9.64 per cent was not accepted and trading addition so made by rejecting the books of account was confirmed by the learned CIT(A), therefore, by following the order of the earlier year the AO has made addition by rejecting the GP rate of 9.94 per cent declared during the year under consideration. The ld AR placed on record the order of the Tribunal in assessee's own case in AY 2001-02 wherein addition made by the AO by applying GP rate of 10.14 per cent was deleted by the Tribunal and the GP rate of 9.64 per cent declared by the assessee was found to be reasonable and correct. As the facts and circumstances during the year under consideration are same, the issue is squarely covered by the order of the Tribunal in the preceding year, respectfully following the same, we reverse the findings and conclusions of the lower authorities and direct the AO to delete the trading addition so made by him by rejecting the books of account. In the result the appeal of the assessee is allowed.

Summary

Issues:
Appeal against CIT(A) order for assessment year 2003-04 regarding trading addition under section 145(3) of the IT Act, 1961.

Analysis:
The main issue in this case was the trading addition of Rs. 2,41,955 made by the Assessing Officer (AO) by rejecting the books of account under section 145(3) of the IT Act. The AO rejected the book results and applied a GP rate of 11.51% based on the previous year's GP rate, as the assessee did not maintain a quantitative stock register. The CIT(A) upheld the AO's decision. However, the Tribunal found that the books of account were subject to tax audit, and no defects were found in the books maintained by the assessee. The Tribunal emphasized that books of account maintained in the normal course of business, subject to audit, should be accepted as correct unless there are strong reasons to prove otherwise. The Revenue must demonstrate specific defects in the books of account to reject them.

The Tribunal highlighted that the AO must prove the unreliability or incompleteness of accounts before rejecting them. The Department should provide the assessee with an opportunity to explain any defects in the accounts, and only after a satisfactory explanation can the books be rejected. In this case, the AO failed to point out any defects in the accounting system or any changes in the method of accounting that would justify rejecting the books of account. The Tribunal also emphasized that the AO must consider various aspects while examining the books of the assessee to determine if the profits can be deduced accurately from the method of accounting employed.

The Tribunal further noted that the mere decrease in the GP rate from the previous year, due to an increase in sales, should not be a reason to reject the books of account. The Tribunal referred to a previous order where a similar trading addition was deleted by the Tribunal, indicating that the issue was already settled in favor of the assessee. Therefore, the Tribunal allowed the appeal of the assessee and directed the AO to delete the trading addition made by rejecting the books of account.

In conclusion, the Tribunal's decision emphasized the importance of maintaining accurate books of account, the burden of proof on the Revenue to demonstrate defects in the accounts before rejection, and the need for consistency in applying GP rates based on valid reasons rather than mere fluctuations in sales figures.