2020 (4) TMI 262 - AT - Income Tax

Tribunal deletes significant tax addition, finds declared GP rate reasonable

The tribunal allowed the appeal of the assessee by deleting the addition of Rs. 23,55,913 made by the AO and upheld by the CIT(A). The tribunal found the ... Rejection of books of account under section 145(3) - Estimation of income after rejection of books by reference to past gross profit - Addition on account of unverifiable purchases / accommodation entries - Comparative gross profit where there is material change in nature of business (large scale export of bullion)Comparative gross profit where there is material change in nature of business (large scale export of bullion) - Estimation of income after rejection of books by reference to past gross profit - Addition on account of unverifiable purchases / accommodation entries - Validity of addition of 25% of alleged unverifiable purchases sustained by the authorities as estimate of undisclosed income - HELD THAT: - The Tribunal examined whether the 25% trading addition of Rs. 23,55,913/- (25% of purchases alleged to be unverifiable) sustained by the CIT(A) and AO could be justified in view of the assessee's turnover composition and declared gross profit. The assessee's turnover for the year under consideration had risen materially to Rs. 53.56 crore, of which 98.77% (about Rs. 52.96 crore) was export of bullion; sales of jewellery comprised only a small fraction. Trading in bullion carries a materially lower gross profit margin (around 1%). The assessee declared a gross profit rate of 1.39% for the year; even after the AO's addition the adjusted gross profit remained far below the gross profit rates of earlier years. In these circumstances the Tribunal held that the authorities erred in applying past GP rates without appreciating the significant change in nature and composition of the business; where the declared profit aligns with the prevailing margin in the trade (bulk bullion export), mere rejection of books does not automatically justify the impugned addition based on a flat percentage of alleged unverifiable purchases. The Tribunal therefore found the addition unsustainable on the facts.The addition of Rs. 23,55,913/- (25% of the alleged unverifiable purchases) is deleted and the appeal is allowed on this ground.Rejection of books of account under section 145(3) - Adjudication on validity of rejection of books of account under section 145(3) - HELD THAT: - The Tribunal noted that the Assessing Officer had invoked section 145(3) after notices under section 133(6) to suppliers produced little or no verification and that the CIT(A) had confirmed rejection of books. However, having deleted the addition on merits on the basis of the assessee's turnover composition and prevailing trade margins, the Tribunal considered the question of rejection of books to be academic and refrained from deciding it. The Tribunal therefore did not express any final view on the correctness of the rejection under section 145(3).The question of rejection of books of account under section 145(3) is left undecided (treated as academic) and was not adjudicated by the Tribunal.Final Conclusion: The appeal is allowed by deleting the trading addition sustained by the authorities; the Tribunal did not decide the separate question of rejection of books under section 145(3) as that issue was rendered academic by the deletion of the addition. Issues Involved:1. Assessment against CBDT Circular.2. Invocation of section 145(3).3. 25% Trading addition on unverified purchases.4. Books of account and entries therein - evidentiary value.5. Assessment based on mere conjecture.6. Failure to issue proper show cause notice.7. Interest levied u/s 234A, 234B, and 234C.Detailed Analysis:1. Assessment against CBDT Circular:The assessee contended that the initiation of proceedings under section 143(2) and the framing of assessment under section 143(3) were not in accordance with CBDT instructions for the financial year 2012-13. However, the tribunal did not address this issue explicitly in the final judgment, focusing instead on the substantive grounds of appeal.2. Invocation of section 145(3):The Assessing Officer (AO) rejected the books of accounts under section 145(3) due to unverifiable purchases amounting to Rs. 94,23,653 from five parties. The CIT(A) upheld this rejection, citing the lack of compliance from suppliers and the assessee's failure to produce them for verification. The tribunal, however, noted that the significant increase in turnover and the nature of the business (mainly export of bullion) justified the gross profit (GP) rate declared by the assessee.3. 25% Trading addition on unverified purchases:The AO made a disallowance of 25% of the unverifiable purchases, totaling Rs. 23,55,913. The CIT(A) sustained this addition but suggested that the income should be estimated based on the average GP from preceding years. The tribunal found that the GP rate of 1.39% for the year under consideration was reasonable given the substantial increase in turnover and the nature of the business (98.77% export of bullion). Consequently, the tribunal deleted the addition, stating that the GP declared was in line with industry standards.4. Books of account and entries therein - evidentiary value:The assessee argued that the books of account maintained in the regular course of business should be accepted as prima facie proof of the entries. The tribunal agreed, noting that the rejection of books does not automatically warrant an addition if the declared profit aligns with industry norms or past history. Given the nature of the business and the substantial turnover, the tribunal found the declared GP rate reasonable and deleted the addition.5. Assessment based on mere conjecture:The assessee claimed that the assessment was based on conjecture, surmise, or suspicion. The tribunal found merit in this argument, emphasizing that the GP rate declared was justified by the nature of the business and the substantial increase in turnover. The tribunal concluded that the addition was not warranted and deleted it.6. Failure to issue proper show cause notice:The assessee contended that the AO failed to issue an appropriate show-cause notice detailing the reasons for the proposed additions, violating the principles of natural justice. The tribunal did not specifically address this procedural issue, focusing instead on the substantive grounds for deletion of the addition.7. Interest levied u/s 234A, 234B, and 234C:The assessee challenged the interest levied under sections 234A, 234B, and 234C. The tribunal's decision to delete the substantive addition implicitly addressed this issue, as the deletion of the addition would affect the computation of interest.Conclusion:The tribunal deleted the addition of Rs. 23,55,913 made by the AO and sustained by the CIT(A), finding that the GP rate declared by the assessee was reasonable given the nature of the business and substantial turnover. The tribunal did not delve into the procedural issues raised, focusing on the substantive grounds for deletion of the addition. The appeal of the assessee was allowed.