2014 (4) TMI 426 - AT - Income Tax

Tribunal adjusts income computation, upholds rejection of book results, directs re-computation

The Tribunal partially allowed the appeal, modifying the Gross Profit rate for income computation based on the average rate from preceding years. The ... Rejection of book results – Estimation of Gross profit @ 22% instead of 21.15% - Held that:- The loss of fire and expenses are debited by the assessee in its Profit & Loss Account and not in the Trading Account - the items do not affect the working of the Gross Profit of the assessee – the AO as well as the CIT(A) has observed that the yield of the assessee was not verifiable - No material has been brought on record by the assessee to show that the yield of the assessee was verifiable from the books of accounts and records maintained by the assessee. The AO has estimated the gross profit of the assessee after rejecting the books of accounts at the rate of 23.04% which was the gross profit rate shown by the assessee itself in the immediately preceding assessment year 2005-06 - The CIT(A) estimated the rate of gross profit of the assessee at 22% without any basis - the rejection of books of accounts by the AO was fully justified as no material was brought on record to show that the yield of the assessee was verifiable - the average of gross profit rate shown by the assessee in the immediately preceding two assessment years i.e. 2004-05 and 2005-06, and after including the gross profit rate for the assessment year 2006-06, works out to 21.79% - thus, the order of the CIT(A) is modified and the AO is directed to re-compute the income of the assessee by adopting the Gross Profit rate of the assessee at 21.79% - Decided partly in favour of Assessee. Issues:- Rejection of book result and estimation of Gross Profit rate- Verifiability of yield ratio and working out true profitsAnalysis:1. The appeal was filed against the CIT(A)-II's order confirming the Assessing Officer's rejection of the book result and estimation of Gross Profit @ 22% instead of the 21.15% shown by the assessee in the manufacturing business.2. The Assessing Officer rejected the book result due to a lower Gross Profit rate compared to the previous year, citing reasons like fire incident causing factory closure and expenses related to workers' settlement. However, the Assessing Officer found discrepancies in the explanation provided by the assessee regarding production and sales figures post-fire incident, leading to the rejection of the explanation and addition of Rs.11,81,194/- to the income of the assessee.3. The CIT(A) upheld the Assessing Officer's decision, emphasizing the unverifiability of the yield ratio by the Assessing Officer, which was crucial for determining the true profits. The CIT(A) found flaws in the initial reasons given by the assessee for the lower Gross Profit rate, such as factory closure due to fire, which were contradicted by the actual production and sales data post-fire incident.4. The assessee argued that the rejection of book results was improper as no defects were found in the maintained accounts, and similar yield ratios in previous years were accepted by the Department. The assessee also highlighted excise duty liabilities, MODVAT credit claims, and proper record maintenance to support the verifiability of yield. The assessee contended that the average Gross Profit rate for the preceding years and the current year justified the slight deviation in the Gross Profit rate shown.5. Upon review, the Tribunal acknowledged the loss and expenses debited by the assessee did not impact the Gross Profit calculation. The Tribunal found no evidence supporting the verifiability of the yield ratio, leading to the justified rejection of book results. However, considering the average Gross Profit rate of the preceding years, the Tribunal directed the Assessing Officer to re-compute the income using a Gross Profit rate of 21.79%, partially allowing the assessee's appeal.6. Ultimately, the Tribunal partially allowed the appeal, modifying the Gross Profit rate for income computation, based on the average rate from preceding years, while upholding the rejection of book results due to unverifiable yield ratio.