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2011 (6) TMI 801 - AT - Income TaxRejection of Books of Account u/s 145(3) - Addition on account of Low profit Rates - The assessee's business is of sale and purchase of gold and gold jewellery. AO rejected the books of account u/s 145(3) and addition was made on account of alleged low gross profits. HELD THAT:- In view of facts of the present case and in the absence of any defects being pointed out in the books of account maintained by the assessee, merely because there was a fall in the GP rate as compared to the preceeding year and the nature of the trade being carried on by the assessee being sale and purchase of gold jewellery, where the rates of gold had increased, we find no merit in the rejection of books of account and the estimation of profits. Accordingly, we direct the Assessing Officer to accept the trading results shown by the assessee and delete the addition. Deduction u/s 40A(2) - Assessee in addition to the carrying on its main business had also carried on the business of sale of cloth - As he couldn't succeed in such business, the total sales were made at the same rate as of purchase price to its sister concern - As he suffer no losses - AO estimating GP rate at 15% and attached Provision of 40A(2) HELD THAT:- It is not apprehensible that the assessee has entered into a new venture and had made investment in the purchase of stock which was sold with no margin of profit to its sister concern. In each line of business some margin of profit is earned by the person trading in the business and in the absence of any such profits, we are in agreement with the order of the authorities below that the provisions of section 40A(2) are attracted in the case because the transaction was with a sister concern and not at the market rate as the goods were sold at its cost price. However, we find the rate of 15% applied by the AO to be excessive and direct the Assessing Officer to apply net profit rate of 5% to the transactions to determine the additional income in the hands of the assessee. Non genuine Expenses in Profit and Loss Account - CIT(A) confirmed the addition of 10% of expenses as debited to the profit & loss account - HELD THAT:- In the first instance, there is no merit in such disallowance of the expenses, in cases where an estimation of income is made by rejecting the books of account. Further, the AO has failed to point out the exact expenses which are not verifiable. We have upheld the trading results shown by the assessee in its business and resale of gold and gold jewellery and accepted the book version declared by the assessee. Accordingly, we direct the AO to restrict the disallowance to 1/10th out of car expenses, car depreciation and telephone expenses. No disallowance is warranted in probability of expenses being unvouched unless it has been established that the expenditure claimed by the assessee are unvouched.
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