2019 (9) TMI 546 - AT - Income Tax

Appeal granted, income addition reduced. Maintain stock records for accurate profit calculation.

The Tribunal partially allowed the appeal, reducing the addition to the total income and emphasizing the importance of maintaining stock records for ... GP estimation - non maintenance of stock records - AO estimated the GP rate at 10% as against 5.73% shown by the assessee on the ground that assessee has not maintained any stock register and the closing stock was certified by the partners on the basis of verification of physical stock - CIT(A) relying on various decisions upheld the action of the AO - HELD THAT:- Assessee who is not maintaining any stock register cannot be equated with an assessee who maintenances a stock register on day today basis giving quantitative details of items traded. Further in the instant case find the GP rate has fallen although the turnover has significantly gone up to ₹ 2.09 crores as against 76.46 lacs in the preceding year. When the turnover goes up substantially it is quite possible that the GP rate may come down. As mentioned earlier an assessee not maintaining any stock register cannot be equated with an assessee maintaining stock register giving full details. Therefore, deleting the entire trading addition as argued by assessee cannot be accepted - addition of ₹ 50,000/- on estimate basis for possible leakage of revenue due to non maintenance of stock records will meet the ends of justice. The grounds raised by the assessee are accordingly partly allowed. Issues:1. Addition to total income based on GP rate.2. Rejection of book results under section 145 of the IT Act.3. Non-maintenance of stock records and its impact on profit estimation.Issue 1: Addition to total income based on GP rate:The Assessing Officer made an addition of &8377; 8,92,653 to the total income of the assessee by adopting a GP rate of 10%. The CIT(A) sustained this addition. The assessee challenged this addition, arguing that no defects were found in the books of accounts except for non-maintenance of stock records. The Ld. Counsel for the assessee highlighted that the past trading additions made by the Assessing Officer were deleted in previous years. The Tribunal noted the substantial increase in turnover but a decrease in GP rate. Considering the facts, the Tribunal directed the Assessing Officer to restrict the addition to &8377; 50,000 due to possible revenue leakage from non-maintenance of stock records.Issue 2: Rejection of book results under section 145 of the IT Act:The Assessing Officer rejected the book results of the assessee under section 145 of the IT Act due to non-maintenance of stock records. The CIT(A) upheld this decision, emphasizing the necessity of a stock register for accurate profit calculation. The Ld. Counsel for the assessee argued that the accounts were maintained in a way that allowed quantitative details to be determined despite the lack of a stock register. The Tribunal differentiated between an assessee maintaining a stock register and one not doing so, ultimately allowing a partial reduction in the addition made by the Assessing Officer.Issue 3: Non-maintenance of stock records and its impact on profit estimation:The Ld. Counsel for the assessee contended that the absence of a stock register did not invalidate the accuracy of the accounts, as quantitative details were available through purchase and sales registers. The Ld. DR, on the other hand, supported the CIT(A)'s decision, stating that a stock register is crucial for determining the correct profit of a business. The Tribunal acknowledged the fall in GP rate despite increased turnover but emphasized the importance of maintaining stock records for accurate profit estimation. Considering all aspects, the Tribunal reduced the addition to &8377; 50,000, citing possible revenue leakage due to non-maintenance of stock records.In conclusion, the Tribunal partially allowed the appeal filed by the assessee, reducing the addition to total income and emphasizing the significance of maintaining stock records for accurate profit calculation under section 145 of the IT Act.