2017 (5) TMI 923 - AT - Income Tax

ITAT decision: Gross profit rate restricted to 4% over 30%. Fair income estimate crucial.

The ITAT Chandigarh dismissed the Revenue's appeal, upholding the ld. CIT(A)'s decision to restrict the gross profit rate to 4% instead of the 30% applied ... G.P. estimation - CIT-A applying the gross profit @ 4% as against the rate of 30% applied by the AO - Held that:- As far as the issue of rejection of books of accounts is concerned, the finding has to be upheld as in the absence of Stock Register etc. which we note has been maintained in the subsequent year, the correctness of the assessee's account, can not be said to be verifiable. The income of the assessee under consideration has to be estimated, the issue is restored back to the file of the A.O. While so directing, it may not be out of place to direct that the estimate has to be based on acceptable judicial standards and the best comparable standard can be assessee's own history. However, since the request for remand is accepted, the issue is left open to the A.O. to estimate the same taking assessee's history and/or by making a comparison with similarly placed persons in the year under consideration as the estimate made without applying judicially acceptable criteria is open to the challenge of being perverse. Thus, in order to avoid the taint of arbitrariness, the ld. AO is directed to pass a just and fair order in accordance with law. Accordingly, the impugned order is set aside back to the file of A.O. in the light of the above directions to estimate gross profit rate. Issues:1. Correctness of applying gross profit rate by the ld. CIT(A)2. Justification of applying section 145 of the I.T. Act3. Rejection of books of account and addition on meritIssue 1: Correctness of applying gross profit rate by the ld. CIT(A)The Revenue filed an appeal against the order of the ld. CIT(Appeals) regarding the application of gross profit rate. The assessee, dealing in honey, disclosed a GP rate of 2.31% on a gross turnover of &8377; 8,24,39,918. The Assessing Officer rejected the book results and applied a GP rate of 30%, resulting in a substantial addition to the taxable income. However, the ld. CIT(Appeals) restricted the gross profit to 4% based on past history and comparative analysis. The ITAT noted that the assessee's business nature made maintaining a stock register impractical. The ITAT found no basis for the Assessing Officer to apply a GP rate of 30% and dismissed the departmental appeal. The ITAT emphasized the importance of making an honest and fair estimate of income, citing the decision in Kachwala Gems V JCIT 288 ITR 10 (SC).Issue 2: Justification of applying section 145 of the I.T. ActThe assessee challenged the application of section 145 of the I.T. Act by the ld. CIT(A), arguing that maintaining regular books of account and inventory of stock should negate its application. The ld. CIT(A) justified applying a gross profit rate of 4% on sales amounting to &8377; 8,24,39,918, despite the assessee showing a lower rate of 2.35%. The ITAT reviewed the facts and circumstances, noting the absence of a stock register and day-to-day records. The ITAT upheld the rejection of books of account due to the lack of verifiable information, emphasizing the importance of maintaining proper records for accurate assessment.Issue 3: Rejection of books of account and addition on meritThe Assessing Officer rejected the books of account and made a substantial addition to the taxable income based on the application of a higher GP rate. The ld. CIT(Appeals) upheld the rejection of books but restricted the GP rate to 4% considering past history. The ITAT observed discrepancies in the transportation expenses claimed by the assessee and the valuation of closing stock. The ITAT directed the issue to be remanded to the Assessing Officer for a fair estimation of income based on acceptable judicial standards, emphasizing the need to avoid arbitrariness in assessments. The departmental appeal was rejected, and the assessee's Cross Objection was partly allowed.This detailed analysis highlights the key issues addressed in the legal judgment by the ITAT Chandigarh, covering the correctness of the gross profit rate application, justification of applying section 145 of the I.T. Act, and the rejection of books of account leading to additions in taxable income.