2014 (2) TMI 1160 - AT - Income Tax

Addition on account of low GP rate - rejection of books of accounts - Held that - Once we have held that the books of account were not properly maintained by the assessee which otherwise deserved to be rejected then the income is required to be computed by considering the appropriate gross profit rate on the total sales. As the calculation so made by the A.O are admittedly in correct we are of the considered opinion that it would be in the interest of justice if the impugned order sustaining the disallowance is set aside and the matter is restored to the file of A.O. We order accordingly and direct him to compute correct rate of gross profits for the year in question and the earlier years and thereafter decide afresh as to what GP rate should be applied to the amount of sales by considering the entire because and circumstances of the case. Needless to say the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings.- Decided in favour of assessee for statistical purpose.

Summary

Issues:
Confirmation of addition on account of low GP rate.

Analysis:
The appeal was against the addition of Rs. 45,16,893 on account of a low GP rate. The assessee was engaged in manufacturing and exporting handicraft, handloom, and leather items. A survey was conducted, and discrepancies in stock valuation were noted. The Assessing Officer rejected the assessee's submissions due to lack of evidence, absence of a maintained stock register, and discrepancies in the stock valuation. The Assessing Officer determined the GP for assessment years 2004-05 to 2007-08 and found a decline in GP to 8%, which was considered unacceptable. The addition was calculated based on the declared GP and NP, resulting in the upheld addition of Rs. 45,16,893 by the CIT(A).

Upon review, it was found that the assessee did not maintain a proper stock register, and the figures provided were not substantiated with evidence. The rejection of the books of account was upheld. The computation of income after rejecting the books showed discrepancies in the GP rate calculations by the Assessing Officer. Errors in purchase figures and manufacturing expenses were highlighted. It was concluded that the correct GP rate needed to be computed, and the matter was directed to be restored to the Assessing Officer for a fresh decision, allowing the assessee a reasonable opportunity of hearing.

In summary, the appeal was allowed for statistical purposes, and the matter was remanded for a correct computation of the GP rate based on the entire circumstances of the case. The decision highlighted the importance of maintaining accurate records and proper computation of income in such cases.