2014 (11) TMI 214 - AT - Income Tax

Tribunal rules in favor of assessee, deletes GP addition and interest disallowance, upholds stock valuation deletion.

The Tribunal allowed the assessee's appeal, directing the deletion of the GP addition of Rs. 16,04,408 and the interest disallowance of Rs. 12,996. It ... Rejection of books of accounts u/s 145(3) – Estimation of profit - Confirmation of GP addition – Low GP in comparison to previous year – Interest disallowed – Expenses incurred wholly and exclusively for the purposes of business or not – Held that:- The assessee had declared GP rate of 1.88% as against GP rate of 2.83% declared during the preceding year - The reason for fall in GP rate in the concern was explained to be on account of non-receipt of any government Tender during the year as against the government Tender of ₹ 10.16 crores received during the preceding year – the contention of the assessee is accepted that because of the variation in the markets, there may be variations in the GP rate and no trader in food grains items can declare the same GP rate from year to year as the items dealt in by the assessee are market dependent - Another reason for fall in GP rate during the year was the non-receipt of the government Tender which was approximately sales of ₹ 10.16 crores during the preceding year - The marginal fall in GP rate in the other two concerns i.e. trading of Sony products and trading of ITC products was too marginal and merits to be accepted being fall in market trend especially, where the assessee has maintained complete stock records vis-à-vis purchases, sales, opening stock and closing stock - In the absence of any evidence found to establish that the assessee had made any sales outside the books of account and the stock being completely tallied, there was no merit in the addition. In the absence of any defects being pointed out in the books of account maintained by the assessee merely because there was a fall in the GP rate as compared to the preceding year and the nature of the trade being carried on by the assessee being sale and purchase of gold jewellery, where the rates of gold had increased, there was no meir in the rejection of books of account and the estimation of profits – Decided in favour of assessee. Valuation of the closing stock – Held that:- The CIT(A) has rightly given a finding that the AO had not controverted the valuation of the stock shown in the books of account which was valued on the basis of the last purchase price - no evidence of out of books investment in stock-in-trade had been brought on record by the AO - the valuation given to the bank was on estimate basis – Decided against revenue. Issues Involved:1. Gross Profit (GP) addition of Rs. 16,04,408.2. Disallowance of interest of Rs. 12,996.3. Deletion of addition of Rs. 22,46,288 on account of difference in valuation of closing stock.Issue-wise Detailed Analysis:1. Gross Profit (GP) Addition of Rs. 16,04,408:The assessee challenged the GP addition of Rs. 16,04,408, arguing that they maintained regular books of accounts, which were duly audited under section 44AB of the Income-tax Act. The CIT(A) upheld the addition, stating that the assessee failed to provide documentary proof for the fall in GP rate and noted discrepancies in the valuation of closing stock given to the bank versus the books of account. The Tribunal, however, found merit in the assessee's explanation that the fall in GP rate was due to the absence of a government tender sale of approximately Rs. 10.16 crores, which was present in the preceding year. The Tribunal noted that the marginal fall in GP rate in other divisions was acceptable due to market conditions and that the assessee maintained complete stock records. The Tribunal concluded that there was no evidence of sales outside the books of account and directed the deletion of the GP addition.2. Disallowance of Interest of Rs. 12,996:The assessee contested the disallowance of interest of Rs. 12,996, arguing that the interest expense was incurred wholly and exclusively for business purposes. The CIT(A) upheld the disallowance, but the Tribunal found that the Assessing Officer failed to establish a nexus between interest-bearing funds and the advances made by the assessee. The Tribunal noted that the assessee had sufficient interest-free funds and directed the deletion of the interest disallowance.3. Deletion of Addition of Rs. 22,46,288 on Account of Difference in Valuation of Closing Stock:The Revenue appealed against the deletion of Rs. 22,46,288 made on account of the difference in the valuation of closing stock. The Assessing Officer had added this amount, arguing that the stock shown to the bank was higher than in the books of account. The assessee explained that the higher valuation was to retain the cash credit facility and that the quantity of stock was identical in both statements. The CIT(A) accepted this explanation, noting that the Assessing Officer did not provide evidence of out-of-books investment. The Tribunal upheld the CIT(A)'s decision, finding no merit in the addition and dismissing the Revenue's appeal.Conclusion:The Tribunal allowed the appeal of the assessee, directing the deletion of the GP addition of Rs. 16,04,408 and the interest disallowance of Rs. 12,996. It dismissed the Revenue's appeal, upholding the deletion of the addition of Rs. 22,46,288 on account of the difference in valuation of closing stock. The order was pronounced in the open court on October 30, 2014.