2012 (7) TMI 761 - AT - Income Tax

Tribunal allows partial relief to assessee by upholding additional profit and expense disallowance

The tribunal justified an additional gross profit of 5% on unverifiable purchases for A.Y. 2002-03, resulting in a trading addition of Rs. 55,613/-. For ... Rejection of books of accounts under section 145(3) of the Income-tax Act - unverifiable purchases - estimation of gross profit rate as basis for trading additions - onus on the assessee to prove genuineness of purchases - disallowance of business expenses for lack of supporting vouchersRejection of books of accounts under section 145(3) of the Income-tax Act - onus on the assessee to prove genuineness of purchases - Validity of invoking section 145(3) and rejection of the assessee's books of accounts - HELD THAT: - The Tribunal upheld the invocation of section 145(3) because the assessee's books did not meet the test of yielding true and correct profits in the absence of proper stock records showing value- and quality-wise details necessary to value closing stock and compute cost of sales. The assessee's plea that individual characteristics of stones made quality-wise stock records impracticable was rejected: the Tribunal held there are discernible, measurable criteria in the gemstone trade and that market and valuation necessarily depend on such attributes. Although unverifiable purchases were relatively small vis-a -vis turnover, the rejection of books was sustainable on the admitted incompleteness of records and the recurring pattern of suspicious suppliers disappearing when called upon. The Tribunal emphasised that the onus to prove genuineness of purchases lies on the assessee and that prior authorities and settled tests on preponderance of probabilities support the conclusion. [Paras 5]Invocation of section 145(3) and rejection of books of accounts sustained.Unverifiable purchases - estimation of gross profit rate as basis for trading additions - Quantum of trading additions in respect of unverifiable purchases for A.Y. 2002-03 and A.Y. 2004-05 - HELD THAT: - The Tribunal accepted that the Assessing Officer had otherwise accepted the assessee's disclosed gross profit rates except in relation to specific unverifiable purchases. Rather than sustaining the AO's higher estimate in full, the Tribunal applied a uniform additional mark-up of 5% on sales relatable to the unverifiable purchases. For A.Y. 2002-03 the sales relatable to the unverifiable purchases were approximated (834,199 x 100/75) and a 5% mark-up was applied yielding a reduced addition. For A.Y. 2004-05 the adhoc additions previously made were disturbed to the extent that they were not tied to disclosed trading results or the quantum of unverifiable purchases, and a similar 5% mark-up on sales relatable to such purchases was applied. The Tribunal thus modified the quantum of additions while accepting the principle of disallowance qua unverifiable purchases. [Paras 5, 6]Trading additions sustained in part: additional mark-up of 5% on sales relatable to the unverifiable purchases upheld for A.Y. 2002-03 and A.Y. 2004-05, resulting in reduced additions.Disallowance of business expenses for lack of supporting vouchers - Disallowance of certain expenses (staff welfare, conveyance, telephone, repairs and maintenance, general office) for lack of supporting vouchers - HELD THAT: - The Tribunal noted that the disallowance arose from findings of lack of proper authenticated vouchers and that identical findings had persisted in assessments for other years. The assessee was unable to controvert the specific findings below and the Tribunal observed that where such disallowances have been earlier made or examined in a regular assessment, they cannot be reopened in section 153A proceedings. Having regard to the Tribunal's earlier decision for A.Y. 2003-04 which confirmed a similar disallowance at 7.5% and the admitted factual parity, the Tribunal found no reason to disturb that ratio and confirmed the disallowance at 7.5%. [Paras 7, 8]Disallowance confirmed at 7.5% for the stated categories of expenses.Final Conclusion: Appeals partly allowed: rejection of books under section 145(3) sustained; trading additions in respect of unverifiable purchases for A.Y. 2002-03 and A.Y. 2004-05 reduced and sustained to the extent of a 5% additional mark-up on sales relatable to those purchases; disallowance of certain expenses upheld at 7.5%. Issues Involved:1. Unverifiable Purchases2. Invocation of Section 145(3) of the Income Tax Act3. Disallowance of ExpensesIssue-wise Detailed Analysis:Unverifiable Purchases:The principal issue in these appeals is regarding unverifiable purchases. The Assessing Officer (AO) made additions by estimating the gross profit (G.P.) rate at 30% for unverifiable purchases, which was confirmed by the first appellate authority. The assessee contended that better trading results negated the need for disallowance or addition. For the assessment year (A.Y.) 2002-03, the AO found the assessee not maintaining stock records with qualitative and quantitative details, rendering the trading results unverifiable. Purchases from M/s. Triveni Gems were considered not genuine as the party was known for providing accommodation entries and could not be produced. The AO rejected the books of accounts and estimated a G.P. rate of 30% for unverifiable purchases. The tribunal upheld this estimation, leading to a trading addition of Rs. 94,932/- as suppressed profit. For A.Y. 2003-04, no unverifiable purchases were observed, and the trading addition of Rs. 50,000/- was deleted in appeal. For A.Y. 2004-05, unverifiable purchases were found at Rs. 4,00,045/- from three concerns. The assessee disclosed better results, and a trading addition of Rs. 50,000/- each was made in both concerns, which was restricted to 25% of such unverifiable purchases by the CIT(A).Invocation of Section 145(3) of the Income Tax Act:The Revenue's action in invoking Section 145(3) was confirmed. The assessee's books of accounts were not considered correct and complete due to the absence of proper stock records. The assessee admitted that it was not possible to maintain a quality-wise stock register due to the varying characteristics of each stone. However, the tribunal found this justification insufficient, stating that proper stock records are essential for determining the cost of goods sold and trading profit. The tribunal upheld the rejection of the books of accounts, citing various decisions, including Kachwala Gems vs. Jt. CIT and Namasivayam Chettiar (S.N.) v. CIT. The tribunal also noted that unverifiable purchases, though a minor part of the turnover, added to the infirmities of the accounts.Disallowance of Expenses:The next issue involved disallowance of 10% of certain expenses, such as staff welfare, conveyance, telephone, repair and maintenance, and general office expenses, due to lack of proper supporting vouchers. The CIT(A) confirmed this disallowance, referring to his earlier decisions for preceding and succeeding years. The assessee argued that no fresh material was found in the search to justify these disallowances under Section 153A. The tribunal noted that the assessee could not controvert the specific findings of the authorities below. However, the tribunal reduced the disallowance to 7.5%, consistent with its decision for A.Y. 2003-04.Decision:For A.Y. 2002-03, the tribunal justified an additional gross profit of 5% on unverifiable purchases, resulting in a trading addition of Rs. 55,613/-. For A.Y. 2004-05, the tribunal upheld an additional markup of 5% on unverifiable purchases, providing partial relief to the assessee. The disallowance of expenses was confirmed at 7.5%. The assessee's appeals for all years were partly allowed.