Tribunal overturns CIT(A)'s income estimation, restores GP ratio, directs deletion of addition.

The Tribunal allowed the appeal of the assessee, finding that the CIT(A) erred in rejecting the books of account and estimating income without proper basis. The Tribunal directed the AO to restore the GP ratio to 9.8% as claimed by the assessee and delete the addition based on the 10.5% rate applied by the CIT(A). The judgment was pronounced on 6th September 2022.

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Issues Involved:
1. Application of gross profit rate by the CIT(A).
2. Verification of expenses under "Staff Salary & Bonus".
3. Rejection of books of account by CIT(A).
4. Estimation of income without rejecting books of account under Section 145(3).

Issue-wise Detailed Analysis:

1. Application of Gross Profit Rate by the CIT(A):
The primary issue raised by the assessee was the application of a gross profit (GP) rate of 10.5% by the CIT(A) as against 9.8% disclosed in the audited books of account. The CIT(A) had resorted to estimating the income by applying a higher GP rate without rejecting the books of account and without bringing any comparative material on record.

2. Verification of Expenses under "Staff Salary & Bonus":
The assessee had debited significant expenses under "Staff Salary & Bonus", which increased substantially from the preceding year. The AO questioned the realism of these expenses, noting a significant increase in turnover but a decrease in net profit. The assessee explained that payments to breeders/farmers were wrongly included under "Staff Salary & Bonus" and provided detailed submissions to correct this classification. The CIT(A) observed that the AO had not given adequate reasons for rejecting the explanations provided by the assessee and had failed to offer a real opportunity for the assessee to explain the abnormal figures under "Staff Salary & Bonus".

3. Rejection of Books of Account by CIT(A):
The CIT(A) rejected the books of account without pointing out specific defects and without referring to the conditions stipulated under Section 145(3) of the Act. The CIT(A) noted that the AO had not rejected the books of account, and the assessment was completed under Section 143(3) without invoking Section 144. The CIT(A) also noted that the assessee consistently showed a similar percentage of gross and net profit and provided detailed submissions substantiating the expenses claimed.

4. Estimation of Income without Rejecting Books of Account under Section 145(3):
The CIT(A) resorted to estimating the income by applying a GP rate of 10.5% based on a decision of a Coordinate bench of ITAT, Bangalore, which suggested a GP percentage range of 9% to 12% for the poultry business. However, the CIT(A) did not provide a basis for rejecting the audited books of account or for the estimation. The Tribunal noted that the CIT(A) had accepted the explanations provided by the assessee regarding the discrepancy in "Staff Salary & Bonus" but still proceeded to estimate the income without rejecting the books of account as per Section 145(3).

Conclusion:
The Tribunal found merit in the assessee's contention that the CIT(A) had erred in rejecting the books of account and estimating the income without a proper basis. The Tribunal emphasized that the books of account were maintained regularly, audited, and not rejected by the AO. The Tribunal referred to the decision of the Karnataka High Court in the case of CIT Vs. Anil Kumar & Co., which held that the AO could only resort to best judgment assessment under Section 144 if the books of account were rejected under Section 145(3). Consequently, the Tribunal directed the AO to restore the GP ratio to 9.8% as claimed by the assessee and delete the addition made by the CIT(A) by adopting the rate of 10.5%.

Judgment:
The appeal of the assessee was allowed, and the order was pronounced in the open court on 6th September 2022.

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