2023 (9) TMI 1216 - AT - Income Tax

Tribunal Overturns Tax Additions; Says AO's Higher Profit Rate Unjustified Without Book Rejection.

Kunan Mal Kalu Ram Jain and Company Versus ITO, Tonk

Kunan Mal Kalu Ram Jain and Company Versus ITO, Tonk - [2024] 120 ITR (Trib) 45 (ITAT [Jai]) Issues Involved:1. Jurisdiction and validity of additions and disallowances made under section 143(3).2. Confirmation of trading addition due to low Gross Profit (GP) and Net Profit (NP).3. Application of a higher NP rate by the Assessing Officer (AO).4. Charging of interest under section 234D.Summary:Issue 1: Jurisdiction and Validity of Additions and DisallowancesThe assessee contested the additions and disallowances made in the order under section 143(3), claiming they were 'bad in law and on facts of the case, for want of jurisdiction.' The Tribunal noted that the appeal was delayed by 113 days, but condoned the delay, citing the Supreme Court's liberal approach in condoning delays to serve substantial justice (Collector, Land Acquisition vs. Mst. Katiji & Others, 167 ITR 471).Issue 2: Confirmation of Trading Addition Due to Low GP and NPThe AO observed a significant reduction in GP and NP percentages compared to the previous year and applied an NP rate of 4% instead of the declared 1.75%. The assessee argued that the AO did not find any defects in the books of accounts, which were audited and maintained regularly. The Tribunal found that the AO made the addition without rejecting the books of accounts, which is contrary to the law. The Tribunal cited multiple precedents that emphasize the necessity of rejecting the books of accounts before making any additions (CIT vs. Maharaja Shree Umaid Mills Ltd., 192 ITR 565).Issue 3: Application of Higher NP Rate by AOThe AO applied a higher NP rate of 4% based on the previous year's profit margin, without considering the detailed explanations provided by the assessee regarding the fall in profit rates. The Tribunal noted that the AO did not discuss these explanations in the assessment order and failed to find any fault with the books of accounts. The Tribunal held that estimating profit without rejecting the books of accounts is not permissible, aligning with the jurisdictional High Court's ruling in CIT vs. Maharaja Shree Umaid Mills Ltd., 192 ITR 565.Issue 4: Charging of Interest Under Section 234DThe assessee denied liability for interest charged under section 234D, arguing it was contrary to the provisions of law. The Tribunal found this ground to be consequential and did not require separate adjudication.Conclusion:The Tribunal allowed the appeal, setting aside the additions and disallowances made by the AO and confirmed by the CIT(A). The Tribunal emphasized that without rejecting the books of accounts, no additions could be made, and the AO's application of a higher NP rate was unjustified. The order was pronounced in the open court on 24/08/2023.