2011 (6) TMI 801 - AT - Income Tax

Tribunal directs AO to accept trading results, apply 5% net profit rate for cloth sales, limit expense disallowances

Babu Jewellers Versus Income-Tax Officer, Ward Sirhind

Babu Jewellers Versus Income-Tax Officer, Ward Sirhind - TMI Issues Involved:1. Non-allowing the benefit of increase in the value of opening stock.2. Rejection of books of account under section 145(3) and addition on account of alleged low gross profits.3. Addition under section 40A(2) of the Income-tax Act, 1961.4. Disallowance of 10% of expenses as debited to the profit & loss account.Issue-wise Detailed Analysis:1. Non-allowing the Benefit of Increase in the Value of Opening Stock:The assessee filed an additional ground of appeal regarding the non-allowing of the benefit of an increase in the value of opening stock pursuant to the assessment order for the assessment year 2006-07. However, this additional ground was not pressed by the assessee and was therefore dismissed as not pressed.2. Rejection of Books of Account under Section 145(3) and Addition on Account of Alleged Low Gross Profits:The assessee, a partnership concern engaged in the business of sale and purchase of gold jewellery, declared a GP rate of 12.63% on a turnover of Rs. 1.60 crore for the assessment year 2007-08, compared to a GP rate of 18.61% on a turnover of Rs. 90.75 lakhs in the preceding year. The Assessing Officer (AO) rejected the books of account and applied a GP rate of 18%, resulting in an addition of Rs. 8,59,814/- due to alleged low gross profits. The AO noted discrepancies in stock valuation and concluded that the assessee had made sales out of books of account. The CIT(A) upheld the rejection of books and the application of the GP rate.The assessee argued that the books of account were properly maintained and audited, and no specific discrepancies were noted by the AO. The fall in GP rate was attributed to varying gold rates and consistent accounting methods. The Tribunal found no merit in the rejection of books based on mere fall in GP rate and emphasized that the GP rate cannot be the sole factor for rejection without specific discrepancies. The Tribunal directed the AO to accept the trading results shown by the assessee and delete the addition of Rs. 8,59,814/-.3. Addition under Section 40A(2) of the Income-tax Act, 1961:The assessee also carried on the business of sale of cloth, selling it to its sister concern at cost price. The AO invoked section 40A(2) and estimated a GP rate of 15%, resulting in an addition of Rs. 3,28,200/-. The CIT(A) upheld this addition. The Tribunal found the 15% rate excessive and directed the AO to apply a net profit rate of 5% to determine the additional income, partly allowing the assessee's appeal.4. Disallowance of 10% of Expenses as Debited to the Profit & Loss Account:The AO disallowed 10% of the total expenses amounting to Rs. 2,17,690/- on the grounds of non-genuine expenses due to the rejection of books of account. The CIT(A) justified the disallowance citing personal use by partners and unvouched expenses. The Tribunal found no merit in the adhoc disallowance since no specific unverifiable expenses were pointed out. It directed the AO to restrict the disallowance to 1/10th of car expenses, car depreciation, and telephone expenses, partly allowing the assessee's appeal.Conclusion:The Tribunal allowed the appeal partly, directing the AO to accept the trading results shown by the assessee, delete the addition of Rs. 8,59,814/-, apply a 5% net profit rate for cloth sales, and restrict the disallowance of expenses to specific items. The decision emphasized the need for specific discrepancies to justify the rejection of books and disallowances.