2014 (12) TMI 882 - AT - Income Tax

Tribunal overturns Assessing Officer's decision, rejects profit estimation, upholds audited accounts

Yes Power and Infrastructure Pvt. Ltd. (formerly Yamuna Engineers and Suppliers Limited) Versus Income Tax Officer

The Tribunal allowed the appeal, holding that the Assessing Officer was unjustified in rejecting the books of account and estimating the gross profit at ... Rejection of books of accounts - Estimation of income @ 2% of gross sales – Disallowance of loss on products traded by assessee – Held that:- No defect was pointed out by the AO in the books of account nor any fault was found with regard to quantity-wise details of purchases, sales opening and closing stock of inventory of various items dealt with, as filed before the AO - Stock was accounted for on FIFO basis and valuation of stock was done as per regular practice followed by the assessee over the years - in ITO V/s Girish M Mehta [2005 (2) TMI 494 - ITAT RAJKOT] it was held that while rejecting books of accounts the onus was on the revenue to prove that either the books of account maintained by the assessee were not correct and complete or the method of accounting adopted was such that the true profit could not be deduced therefrom - as the onus to make out a case for rejection of books of account was on the revenue, the assessee could not be burdened with the responsibility of proving a negative aspect of the matter meaning thereby the assessee could not be held responsible for not having earned profits at a particular rate. Merely because, the assessee was having low gross profit or loss in respect of its trading activities for which due reasons were given before the AO without finding fault in the books of account the AO rejected audited account and estimated profit on sales - nowhere, the AO has stated that particular items were sold at a price below the market price nor it is a case of AO that the assessee has purchased goods at higher price - mere selling of goods at low margin cannot be made the reason for rejection of books of accounts - thus, there was no justification for the rejection of the books of account and adhoc estimation of profit on sales – the AO is directed to delete GP addition made by him – Decided in favour of assessee. Issues Involved:1. Delay in filing the appeal before the Tribunal.2. Estimation of income at 2% of gross sales.3. Disallowance of loss of Rs. 15,19,908/- in respect of four products traded by the assessee.4. Rejection of books of account and estimation of gross profit.Issue-wise Detailed Analysis:1. Delay in Filing the Appeal:The Tribunal acknowledged a delay in filing the appeal. The appellant relied on the Supreme Court's decision in the case of Collector Land Acquisition vs. Mst. Katiji & Ors, which emphasized that 'substantial justice deserves to be preferred over technical considerations.' The Tribunal, considering the reasons for the delay and aiming for substantial justice, condoned the delay and proceeded to hear the appeal on its merits.2. Estimation of Income at 2% of Gross Sales:The main grievance of the assessee was the estimation of income at 2% of the gross sales by the Assessing Officer (AO). The AO observed that the assessee declared a gross profit (GP) of Rs. 26,08,347/- on sales of Rs. 52,17,03,417/-. The assessee explained that they operate on very competitive low margins with high volumes, and due to the volatile nature of steel prices, some transactions were made at lower prices to avoid market risks. The AO, however, concluded that the goods were sold below cost price and estimated the GP at 2% of the gross sales, rejecting the assessee's justification.3. Disallowance of Loss of Rs. 15,19,908/-:The AO also disallowed the assessee's claimed loss of Rs. 15,19,908/- for the four products traded. The AO reasoned that the goods were consistently sold at rates lower than the purchase cost without any cogent explanation, leading to the disallowance of the claimed loss.4. Rejection of Books of Account and Estimation of Gross Profit:The Tribunal examined whether the AO was justified in rejecting the books of account and estimating the GP. The assessee had filed audited accounts along with all necessary details, including item-wise and month-wise purchase and sales records. The Tribunal noted that the AO did not find any defects in the books of account or the quantitative details provided. Citing the case of ITO vs. Girish M Mehta, the Tribunal emphasized that the onus was on the revenue to prove that the books of account were incorrect or incomplete before rejecting them. The Tribunal found that the AO did not provide sufficient reasons to reject the books of account and that mere low margins could not justify such rejection. Consequently, the Tribunal directed the AO to delete the GP addition made.Conclusion:The Tribunal allowed the appeal filed by the assessee, concluding that the AO was not justified in rejecting the books of account and estimating the GP at 2% of the gross sales. The Tribunal directed the deletion of the GP addition and upheld the assessee's audited accounts and declared profits. The order was pronounced in the open court on 17th December 2014.