2010 (9) TMI 935 - AT - Income Tax

Rejection of the books of account - estimation of income - ad hoc addition - Bogus purchases - trading addition made by the Assessing Officer by invoking the provisions of section 145(3) - CIT (A) found that the addition made by the assessee is on the higher side thus held that it would be reasonable and fair to make an addition of Rs. 20 lakhs which would give rise to gross profit rate of 14.34 percent which is reasonable and fair - HELD THAT - In the present case there is no other independent enquiry from M/s. Manvi Exports or from M/s. Creative Gems as the Assessing Officer has drawn inference on the basis of enquiry made on some other cases. The assessee has filed confirmation from both the parties along with complete details of purchases mentioning description of items. Both the parties are assessed to tax and they are registered under the Sales-tax Act also. All these information were given to the Assessing Officer. However no enquiry was made by the Assessing Officer directly. There was no cogent reason to attract the provisions of section 145(3) and hold that the purchases shown by the assessee are bogus. Undisputedly the trading results shown by the assessee are better as in the immediately preceding year the gross profit rate shown by the assessee was 12.3 percent whereas in the year under consideration the gross profit rate shown is 13.03 percent thus no basis to make any addition. Accepted past history is the best guide to consider the gross profit rate of the year under consideration. Past history reveals gross profit accepted by the Department at 12.08 percent and in the year under consideration the same is 13.03 percent therefore there was no reason to make any addition or sustain the addition in part. Commissioner of Income-tax (Appeals) has accepted the contentions of the assessee. However without giving any reason he sustained part addition of Rs. 20 lakhs - we delete the addition as sustained by the learned Commissioner of Income-tax (Appeals). The ground of the assessee is allowed. TP Adjustment - addition of the arm s length price in view of the provisions of section 92C - international transaction with M/s. Rawat Gems New York which is an associated enterprise within the meaning of section 92A(2)(i) as the concern relates to the assessee s elder brother - AO noted that the assessee has not maintained the required details as provided under rule 10D(g) and 10D(h) - AO applying a profit rate of 15 percent on cost price against 14.89 percent shown by the assessee made an addition - HELD THAT - We find that differential rate of sales made to associated concern i.e. Rawat Gems and other concerns are below 5 percent and therefore the provisions of section 92C (2) are not applicable as the assessee s case falls under the exception clause where it was provided that if there is a difference up to 5 percent then no addition is required to be made on account of the arm s length price. DR has fairly accepted that difference is less than 5 percent therefore we delete the addition made and confirmed by lower authorities. In the result the appeal of the assessee is allowed and the appeal of the Department is dismissed.

Issues Involved:
1. Sustaining the estimated ad hoc addition of Rs. 20 lakhs under section 145(3) of the Income-tax Act, 1961.
2. Reducing the trading addition by Rs. 45 lakhs made by the Assessing Officer under section 145(3).
3. Addition of Rs. 18,726 under section 92C of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Sustaining the estimated ad hoc addition of Rs. 20 lakhs under section 145(3) of the Income-tax Act, 1961:

During the assessment proceedings, the Assessing Officer (AO) noted that the assessee made purchases from M/s. Creative Gems and M/s. Manvi Exports, which were found to be bogus in related cases. The AO rejected the books of account by invoking section 145(3) and made an addition of Rs. 65 lakhs to the profits, stating that the purchases were inflated. The assessee contended that the purchases were genuine, supported by bills, payment through account payee cheques, and confirmations from the parties. The Commissioner of Income-tax (Appeals) found the addition of Rs. 65 lakhs excessive and reduced it to Rs. 20 lakhs, considering a fair gross profit rate of 14.34%.

The Tribunal found that the assessee's gross profit rate was better than the previous year (13.03% vs. 12.08%). It was noted that the Tribunal had previously held the purchases from M/s. Creative Gems and M/s. Manvi Exports as genuine in similar cases. The AO did not conduct direct enquiries with the concerned parties, and the proprietor of M/s. Creative Gems had passed away before the enquiries. Thus, the Tribunal concluded that there was no cogent reason to invoke section 145(3) and hold the purchases as bogus. Consequently, the Tribunal deleted the addition of Rs. 20 lakhs sustained by the Commissioner of Income-tax (Appeals).

2. Reducing the trading addition by Rs. 45 lakhs made by the Assessing Officer under section 145(3):

The Department objected to the reduction of the trading addition by Rs. 45 lakhs made by the AO. The Tribunal observed that the AO's inference was based on enquiries made in other cases and not directly with the assessee's transactions. The Tribunal emphasized that the assessee's trading results were better than the previous year, and there was no basis to make any addition. The Tribunal upheld the deletion of the Rs. 45 lakhs reduction by the Commissioner of Income-tax (Appeals), finding no substance in the Department's ground.

3. Addition of Rs. 18,726 under section 92C of the Income-tax Act, 1961:

The AO made an addition of Rs. 18,726 on account of the arm's length price under section 92C, noting that the assessee had international transactions with an associated enterprise, M/s. Rawat Gems, New York. The AO applied a profit rate of 15% on the cost price, against 14.89% shown by the assessee. The Commissioner of Income-tax (Appeals) confirmed this addition.

The Tribunal found that the differential rate of sales to the associated concern and other concerns was below 5%, falling under the exception clause of section 92C(2). Therefore, no addition was required on account of the arm's length price. The Tribunal deleted the addition of Rs. 18,726 made and confirmed by the lower authorities.

Conclusion:

In conclusion, the Tribunal allowed the appeal of the assessee, deleting the addition of Rs. 20 lakhs and Rs. 18,726, and dismissed the appeal of the Department, upholding the reduction of Rs. 45 lakhs by the Commissioner of Income-tax (Appeals). The order was pronounced in the open court on September 3, 2010.

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