2017 (5) TMI 1838 - AT - Income Tax

Revenue's appeal dismissed as addition deleted when trading results rejected without identifying specific defects in books

Deputy Commissioner of Income Tax Central Circle, Amritsar Versus M/s. Sifti Rice Mills,

The ITAT Amritsar dismissed the Revenue's appeal challenging CIT(A)'s deletion of addition made towards trading results. The AO had determined GP at 2% ... Addition made towards trading results - CIT(A) assumed that since the Auditors have not pointed any discrepancies in the books of the assessee, no further investigation/inquiry was required to be made by the AO during the assessment proceedings - CIT(A) deleted the addition quo GP @ 2% as determined by the AO - HELD THAT:-No reasons to interfere with the order passed by the CIT(A) and in our considered view, the appeal filed by the Revenue/Department is liable to be dismissed, specially in view of the fact that the AO proceeded to reject the trading result without pointing out any defects in the books of accounts maintained by the assessee because the assessment has framed u/s 143(3) and secondly the average cost method which is reasonable and justified and followed by the assessee from year after year and recognized as one of the accepted methods for valuation of closing stock by various Co-ordination Benches as well as High Courts. Decided against revenue. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] to delete the addition of Rs. 82,21,420/- made towards trading results was correct, given the detailed reasons recorded by the Assessing Officer (AO) in the assessment order.2. Whether the CIT(A) was correct in assuming that since the auditors did not point out any discrepancies in the books of the assessee, no further investigation or inquiry was required by the AO during the assessment proceedings.3. Whether the CIT(A) correctly appreciated the reasons for the rejection of the trading results of the assessee.ISSUE-WISE DETAILED ANALYSIS1. Deletion of Addition to Trading Results- Legal Framework and Precedents: The AO made an addition of Rs. 82,21,420/- to the trading results based on discrepancies noted in the gross profit (G.P.) rate and other factors. The CIT(A) deleted this addition, prompting the Revenue Department to appeal.- Court's Interpretation and Reasoning: The Tribunal considered the explanations provided by the assessee regarding the fall in the G.P. rate, including international sanctions affecting exports. The Tribunal noted that the AO did not point out specific defects in the books of accounts.- Key Evidence and Findings: The Tribunal found that the assessee had maintained proper books of accounts, and the fall in G.P. rate was reasonably explained by market conditions and international factors beyond the assessee's control.- Application of Law to Facts: The Tribunal applied the principle that without specific defects in the books of accounts, the rejection of trading results is not justified.- Treatment of Competing Arguments: The Tribunal considered the Revenue's argument about the absence of a stock register and the increase in certain expenses but found that these did not warrant the rejection of trading results.- Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the addition, finding no basis for the AO's adjustment to the trading results.2. Assumption Regarding Auditor's Findings- Legal Framework and Precedents: The CIT(A) assumed that no further inquiry was necessary since the auditors did not point out discrepancies.- Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the absence of auditor-detected discrepancies supported the reliability of the assessee's books.- Key Evidence and Findings: The Tribunal noted that the assessment was completed under section 143(3), indicating acceptance of the books of accounts.- Application of Law to Facts: The Tribunal found that the CIT(A)'s reliance on the auditor's findings was reasonable in the absence of contrary evidence.- Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument that further inquiry was necessary, as no defects were identified.- Conclusions: The Tribunal concluded that the CIT(A)'s assumption was justified.3. Rejection of Trading Results- Legal Framework and Precedents: The AO rejected the trading results based on various discrepancies, including the absence of a stock register and variations in production yields.- Court's Interpretation and Reasoning: The Tribunal found that the AO's rejection was not justified as the assessee provided reasonable explanations for the discrepancies.- Key Evidence and Findings: The Tribunal noted that the assessee maintained detailed records and provided explanations for the fall in the G.P. rate.- Application of Law to Facts: The Tribunal emphasized that without specific defects, the AO's rejection of trading results was arbitrary.- Treatment of Competing Arguments: The Tribunal considered the Revenue's reliance on a High Court judgment regarding the absence of a stock register but found it inapplicable as the books were otherwise reliable.- Conclusions: The Tribunal upheld the CIT(A)'s decision to accept the trading results.SIGNIFICANT HOLDINGS- The Tribunal held that the CIT(A) was correct in deleting the addition made by the AO, as the trading results were not shown to be unreliable.- The Tribunal emphasized the principle that without specific defects in the books of accounts, the rejection of trading results is not justified.- The Tribunal concluded that the CIT(A) correctly assumed no further inquiry was necessary due to the absence of auditor-detected discrepancies.- The Tribunal found that the AO's rejection of trading results was arbitrary and not supported by the evidence.- The appeal filed by the Revenue/Department was dismissed.