2025 (9) TMI 612 - AT - Income Tax

Assessee's audited books upheld; AO's 3% GP imposition overturned where no pointed defects found - s.145(3) inapplicable

Mukeshkumar Chandulal Dalwadi, Akshar Trading Versus ACIT, Cir. 1 (3), Now Cir. 1 (1) (1), Vadodara.

ITAT Ahmedabad allowed the assessee's appeal, holding the AO's rejection of books and imposition of a 3% GP rate unjustified where no specific defects in ... Fall in GP rate - rejection of books of accounts - assessee explained that the fall in GP was due to volatility in cattle feed prices and losses suffered in some months - CIT(A) held the action of the AO in applying GP rate of 3% to be justified and dismissed the appeal of the assessee - CIT(A) confirmed the addition primarily on the ground that the assessee had not furnished adequate supporting bills or complete books of account through the e-proceedings portal. HELD THAT:- It is trite law that low profit, by itself, cannot be a ground to reject the books of account or to make an addition, unless specific defects are pointed out in the maintenance of accounts, stock valuation, or method of accounting. AO in the present case has not recorded any finding of inflated purchases, suppressed sales, or defects in stock records. The rejection of book results was made only on the basis of a fall in the GP ratio. This approach is not sustainable in law. As in CIT v. Symphony Comfort System Ltd [2013 (10) TMI 258 - GUJARAT HIGH COURT] has held that the AO was not justified in rejecting the book results and enhancing the gross profit rate merely because the GP ratio had fallen compared to the preceding year, when no specific defects were pointed out in the books of account. The Hon’ble High Court categorically observed that in absence of any defect pointed out in the books of account and the records maintained, the AO was not justified in rejecting the books results, so as to enhance the gross profit rate. The ratio of the said judgment, being that of the jurisdictional High Court, is binding on us and squarely covers the issue in favour of the assessee. The fact that the assessee had filed quantitative details of stock and trading, and that the accounts were duly audited, has not been disproved. The rejection of books under section 145(3) is, therefore, not justified in the present case. Assessee appeal of allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer was justified in invoking section 145(3) to reject books/results and estimate profit by applying an assumed gross profit (GP) rate solely because the GP rate for the year under assessment was lower than in preceding year(s), without pointing out specific defects in books, stock valuation, or method of accounting. 2. Whether maintenance of audited books and submission of quantitative details, monthly summaries, and comparative analyses suffices to rebut an estimate under section 145(3) where the AO has not demonstrated inflated purchases, suppressed sales, or defects in records. 3. Whether confirmations or findings (or lack thereof) by the Commissioner (Appeals) that incomplete records were not filed through the e-proceedings portal can justify sustaining an estimation/addition where substantive documentary material and audited accounts were on record. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of rejection/estimation under section 145(3) based solely on fall in GP ratio Legal framework: Section 145(3) permits the Assessing Officer to compute profits and gains where the books of account are not reliable or where method of accounting is inappropriate; AO may estimate income when books are rejected. Standard principle: rejection/estimation requires specific findings of defects, not mere reliance on comparative fluctuations in profit ratios. Precedent Treatment: The Tribunal follows binding jurisprudence of the jurisdictional High Court that an AO is not justified in rejecting book results and enhancing GP rate merely because GP ratio has fallen vis-à-vis preceding year when no specific defect is pointed out in books or records. Interpretation and reasoning: The Court examined whether the AO recorded any concrete defects (e.g., inflated purchases, suppressed sales, defective stock records, faulty valuation, or impropriety in accounting method). Finding: AO based estimation exclusively on the fall in GP rate and alleged incomplete production of records; no finding of inflated purchases or suppressed sales, nor of defective stock valuation. The Tribunal considered the assessee's audited accounts, quantitative details, and monthly summaries demonstrating the fall in selling rates for a major trading item (cattle feed) despite increase in volumes, establishing a nexus for decline in GP. Ratio vs. Obiter: Ratio - rejection/estimation under section 145(3) cannot be sustained solely on comparative decrease in GP ratio without specific defects in accounts; such action is unsustainable. Obiter - observations on administrative e-filing compliance or desirability of producing all ledger extracts in the portal do not alter the legal requirement for specific findings to reject books. Conclusion: The AO's action of applying an assumed GP rate and making an addition based only on lower GP ratio is legally unsustainable; the trading addition is to be deleted. Issue 2: Sufficiency of audited books, quantitative details and comparative monthly data to rebut AO's estimate Legal framework: When assessee maintains books audited under section 44AB and furnishes quantitative particulars, stock valuation, and month-wise transaction summaries, these form prima facie credible material; burden on AO to point to specific discrepancy to justify rejection/estimation. Precedent Treatment: Tribunal applied the jurisdictional High Court's holding that absence of specific defect in books precludes AO from rejecting results and enhancing GP rate; lower authority decisions upholding estimations based on surmise were distinguished as lacking cogent reasons. Interpretation and reasoning: The assessee produced (a) audited books, (b) comparative GP statements for two consecutive years, (c) cattle feed-specific monthly summaries showing quantity and price movement, and (d) analysis demonstrating increased volumes but decreased sale rates causing contraction in GP margin. These materials substantively explained the fall in GP rate. The AO did not rebut or disprove these documentary explanations nor demonstrate inaccuracies in them. Ratio vs. Obiter: Ratio - audited books combined with specific transactional details that explain variations in GP, when unrebutted by AO, suffice to rebut the presumption warranting estimation under section 145(3). Obiter - the Tribunal's acceptance of the particular cattle feed analysis as persuasive factual explanation is case-specific and not a general rule for all industries. Conclusion: The furnished audited accounts and quantitative/monthly data adequately rebut the AO's estimation; rejection of books was not justified. Issue 3: Role of procedural non-production via the e-proceedings portal and whether it justifies sustaining estimation Legal framework: Procedural compliance (e.g., filing through e-portal) may be relevant in assessing the completeness of production of records, but it cannot substitute for substantive findings required under section 145(3) to reject books. Administrative deficiencies do not automatically validate an estimation absent material defects in accounts. Precedent Treatment: Lower authorities relied on non-production through the portal to sustain estimation; Tribunal distinguished such reliance where substantive documentary material had been filed and audited accounts existed, and no defects were found in those accounts. Interpretation and reasoning: The CIT(A) emphasized incomplete ledger extracts and non-production via the portal. The Tribunal acknowledged the procedural issue but held that it did not constitute a substantive defect in the books. Given that the assessee had placed on record audited accounts and comprehensive comparative and month-wise statements that explained the GP decline, the administrative non-filing through a specific channel could not justify rejection and estimation. Ratio vs. Obiter: Ratio - procedural non-production through a particular portal does not, by itself, justify rejection of books or estimation under section 145(3) where substantive documentation exists and no defect in books is shown. Obiter - administrative compliance with e-proceedings protocols should be observed but cannot override substantive legal standards for rejecting accounts. Conclusion: The procedural non-production via e-portal did not cure the absence of substantive findings by AO and therefore could not sustain the trading addition; deletion is warranted. Cross-reference Issues 1-3 are interrelated: acceptance of the assessee's documented explanation (Issue 2) and the legal requirement for specific findings (Issue 1) together render procedural non-compliance (Issue 3) insufficient to uphold an estimation under section 145(3). Overall Conclusion The trading addition made by estimating GP at 3% and rejecting declared results is unsustainable in law where audited books and detailed quantitative/monthly data explain the fall in GP, and the AO has failed to point to any specific defect in books, stock valuation, or accounting method; the addition is deleted.