2016 (3) TMI 1167 - AT - Income Tax

Assessee Appeals Allowed: Books Rejection & Profit Estimation Deemed Arbitrary. Section 153A Proceedings Invalid.

The Tribunal allowed the assessee's appeals, finding the rejection of books under Section 145(3) and the estimation of gross profit to be arbitrary. ... Rejection of the books of the assessee u/s 145(3) - GP addition - Held that:- The assessee has provided a detailed consolidated working as mentioned above based on inventory of physical stock at ₹ 13,73,232/- taken during the course of survey. Physical stock found at the time of survey as closing stock of 27.08.2008 and the consolidated GP of the assessee for the period 01.04.2003 to 27.08.2008 as mentioned above. The consolidated trading account reveals assessee’s total GP for the period from 01.04.2003 to 27.08.2008 comes to ₹ 47,78,075/- resulting in GP @ 11.67%. compared to this assessee’s GP declared in books comes to ₹ 60,69,209/- i.e. GP (@ 14.82%, this parameter indicates that at the end of the day, assessee has offered better GP. Looking from all these angles, in all the impugned years, we see no justification in rejection of the books of the assessee u/s 145(3) which are upheld. - Decided in favour of assessee Validity of assessment u/s 153C - Held that:- There being no valid execution of search authorization on assessee in terms of sec. 132 and there being only valid survey proceedings, no assessments can be framed u/s 153A by AO. The plea of the department that a harmonious construction of record and provisions shall be made which is an implied reference to sec. 292B also cannot be accepted. This is so because jurisdictional errors cannot be cured by such indirect means. A search on director cannot be deemed to be a search on distinct and separate incorporated entity i.e. company. Since assessments are bad in law any admission of undisclosed income by director cannot make any relevance. Consequently we hold that the impugned assessments framed u/s 153A are bad in law not being in consequence to provisions of sec 132. - Decided in favour of assessee Issues Involved:1. Rejection of books under Section 145(3) without pointing out specific defects.2. Estimation of gross profit resulting in additions for assessment years 2003-04 to 2009-10.3. Legality of proceedings under Section 153A of the Income Tax Act, 1961.Detailed Analysis:1. Rejection of Books under Section 145(3):The assessee challenged the rejection of books under Section 145(3) on the grounds that no specific defects were pointed out. The Tribunal noted that the books were audited as per law, and purchases, sales, and trading expenses were duly supported by bills and vouchers. The Tribunal emphasized that the absence of a stock register alone cannot justify the rejection of books. The Tribunal cited several judgments, including CIT vs. Jas Jack Elegance Exports and Haridas Parikh vs. ITO, which supported the view that the absence of a stock register does not automatically render the books unreliable or incomplete. Consequently, the Tribunal upheld the books of accounts and found the rejection by the AO to be arbitrary and without cogent reasons.2. Estimation of Gross Profit:The assessee argued against the arbitrary estimation of gross profit (GP) by the AO, which led to additional assessments. The Tribunal observed that the AO estimated different GP rates for different years without providing any comparable cases or valid justification. The Tribunal found that the AO's methodology was based on conjectures and lacked scientific or objective basis. The Tribunal also noted that the GP declared by the assessee was better than the consolidated GP calculated based on the physical stock found during the survey. The Tribunal cited various judgments, including Dhankeshwari Cotton Mills Ltd v/s CIT and Lal Chand Bhagat Ambica Ram v/s CIT, which emphasized that the rejection of audited books and estimation of profits must be based on cogent reasons and comparable cases. The Tribunal concluded that the GP additions were unwarranted and deleted them.3. Legality of Proceedings under Section 153A:The assessee raised an additional ground challenging the legality of the proceedings under Section 153A, arguing that the department conducted only a survey under Section 133A and not a search under Section 132(1). The Tribunal admitted this additional ground, noting that it was purely legal and did not require fresh verification of facts. The Tribunal found that no valid search was conducted on the assessee's premises, and the assessments were framed based on survey proceedings. The Tribunal cited several judgments, including the Mumbai Bench of the Tribunal in J.M. Trading Corporation vs. ACIT and the Hon’ble High Court of Bombay in CIT vs. J.M. Trading Company, which held that a search conducted on premises not owned by the assessee does not result in a valid search under Section 132. The Tribunal also noted that no action under Section 153C was taken, and the assessments could not be framed under Section 153A in the absence of a valid search. The Tribunal concluded that the assessments under Section 153A were bad in law and annulled them.Conclusion:The Tribunal allowed the appeals of the assessee, holding that the rejection of books under Section 145(3) and the estimation of GP were arbitrary and without basis. The Tribunal also found that the proceedings under Section 153A were invalid due to the absence of a valid search under Section 132. Consequently, the Tribunal deleted the additions and annulled the assessments framed under Section 153A.