2016 (2) TMI 663 - AT - Income Tax

Tribunal overturns rejection of trading results, emphasizes international standards for exports

The Tribunal allowed the appeal of the assessee, overturning the rejection of trading results and books of accounts under section 145(3). The Tribunal ... GP Rate adoption - rejection of books of accounts - Held that:- Records show that the contention of the DR that books of accounts were not produced before Assessing Officer was not correct. As relates to rejection of books of accounts maintained by the assessee by the Assessing Officer without assigning any proper reason is not proper. The Assessing Officer has not taken into account all the invoices, bills related to the export orders, which should have been taken into account by the Assessing Officer. The Ld. CIT(A) also failed to look into this aspect and without giving a practical reason has adopted 5% of GP rate that it is clear that the fabric supplied as an export requires the international standards of material and size. Merely depending upon the domestic requirements cannot be the threshold of questioning the proper GP Rate adopted by the assessee. In view of this the assessee’s contentions sustain - Decided in favour of assessee Issues Involved:1. Rejection of trading results and books of accounts under section 145(3).2. Adoption of the rate of gross profit for determining total income.3. Justification of payments made to specified persons under section 40(a)(2b).4. Failure to produce books of accounts and attend proceedings.5. Discrepancies in valuation of closing stock inventory and export orders.Issue 1: Rejection of Trading Results and Books of Accounts under Section 145(3):The appeal was filed against the rejection of trading results and books of accounts by the Assessing Officer under section 145(3). The Assessing Officer rejected the trading results based on the disparity in gross profit rates and excessive claims in the costing sheet. The Assessing Officer quantified extra profit and added it to the income of the assessee. The CIT(A) upheld the rejection of trading results and the adoption of a 15% gross profit rate. The Tribunal found that the Assessing Officer did not consider all invoices and bills related to export orders, leading to an improper rejection of books of accounts. The Tribunal held that the Assessing Officer's rejection without proper reason was incorrect and allowed the appeal.Issue 2: Adoption of the Rate of Gross Profit for Determining Total Income:The CIT(A) confirmed the adoption of a 15% gross profit rate for determining the total income of the assessee. The Assessing Officer justified this rate based on the nature of goods exported during the year. The Tribunal noted that the fabric supplied for export required international standards, and domestic requirements should not be the sole basis for questioning the adopted gross profit rate. The Tribunal upheld the assessee's contention, emphasizing the importance of considering international standards.Issue 3: Justification of Payments Made to Specified Persons under Section 40(a)(2b):The CIT(A) held that the assessee failed to justify the reasonableness of payments made to specified persons under section 40(a)(2b) in terms of section 40A(2a). The Tribunal did not specifically address this issue in the detailed analysis provided.Issue 4: Failure to Produce Books of Accounts and Attend Proceedings:The appellant argued that the Assessing Officer did not consider the books of accounts maintained by the assessee, which were duly audited and produced during assessment proceedings. The Tribunal found that the Assessing Officer's failure to consider all relevant documents amounted to denying the assessee the opportunity to substantiate claims. The Tribunal criticized the CIT(A) for not clearly explaining the rejection of the assessee's costing sheet and found no valid reason against the production of invoices and bills.Issue 5: Discrepancies in Valuation of Closing Stock Inventory and Export Orders:The Assessing Officer raised concerns about the valuation of closing stock inventory and the inability of the assessee to produce corresponding export orders. The Tribunal noted that the assessee provided invoices and bills for the transactions, which were not found to have discrepancies by the Assessing Officer. The Tribunal did not delve into this issue in detail but considered the overall rejection of trading results and books of accounts in its decision.In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing the importance of considering all relevant documents and international standards in assessing trading results and gross profit rates.