2016 (8) TMI 1216 - AT - Income Tax

Reopening of assessment - rejection of books of accounts - trading addition - Held that - As compared to the last year after ignoring the surrendered business income of Rs. 1.10 crores the assessee has shown better net profit. Further the assessee has also explained that during the year it has to incur substantial higher amount of outside job work expenses which is 71.52 lacs compared to 45.37 lacks and rebate on work done of Rs. 20.76 laks compare to 3 lakhs and therefore there is a downfall in the gross profit. The books of account have been produced during the course of assessment proceedings and outside job work rebate on works and sales tax demand of this expenditure have not been found not to have been incurred for the purpose of business. As assessee financial results have shown better performance during the year compared to previous year on which ld AO and CIT (A) both have relied for making addition to the income of the assessee in current year no further addition is possible in the hands of the assessee during the year. In view of this we reverse of the finding of the ld CIT(A) in substituting the addition of Rs. 4345658/- against the addition made by the AO on Rs. 3352078/- rejecting the books of account. Hence we hold that the addition of Rs. 4345658/- is not sustainable in the hands of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Reopening of assessment under Section 148.
2. Addition based on low Gross Profit rate.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 148:

The appellant challenged the reopening of the assessment under Section 148, arguing that the reasons recorded for issuing the notice were not valid. The Assessing Officer (AO) issued the notice based on the belief that Rs. 22,44,790 had escaped assessment due to the assessee not disclosing income fully and truly. The AO's reasoning was that the assessee's income for the Assessment Year (AY) 2011-12 should have been Rs. 1,50,74,040, including the surrendered amount of Rs. 1.10 crore during a survey, but the return filed was for Rs. 1,28,29,250, suggesting an understatement of income.

The Tribunal found several flaws in the AO's reasoning:
- The assessee had indeed included the surrendered amount in its return for AY 2011-12, and the returned income was higher than the surrendered amount.
- The AO incorrectly compared the returned income for AY 2010-11 plus the surrendered amount with the returned income for AY 2011-12.
- The AO's reliance on the Punjab and Haryana High Court decision in the case of M/s Kim Pharma Pvt. Ltd. was misplaced, as the facts of the present case were different.

The Tribunal concluded that the reasons recorded by the AO did not withstand judicial scrutiny and failed to meet the prima facie opinion test. Therefore, the reopening of the assessment was not justified.

2. Addition Based on Low Gross Profit Rate:

The AO had rejected the assessee's books of account and estimated the net profit at 3.34% of the turnover, resulting in an addition of Rs. 33,52,078. Additionally, the AO reclassified an income of Rs. 70,04,386 from "business income" to "income from other sources" and treated Rs. 1.10 crore as deemed income under Section 69C, leading to a total income computation of Rs. 2,20,02,720.

Upon appeal, the CIT(A) disagreed with the AO's estimation of net profit and instead focused on the gross profit rate. The CIT(A) noted a decline in the gross profit rate from 16.70% in AY 2010-11 to 12.37% in AY 2011-12 and made an addition of Rs. 43,45,658 based on the lower gross profit rate.

The Tribunal reviewed the financial results and found that the assessee's net profit ratio for AY 2011-12, excluding the surrendered income and exceptional items, was 3.9%, which was better than the previous year's ratio of 3.3%. The Tribunal also noted that the assessee had incurred higher outside job work expenses and sales tax payments, which justified the lower gross profit rate.

The Tribunal concluded that the assessee's financial performance was better in AY 2011-12 compared to AY 2010-11, and the addition made by the CIT(A) was not sustainable. Therefore, the Tribunal reversed the CIT(A)'s finding and held that the addition of Rs. 43,45,658 was not justified.

Conclusion:

The Tribunal allowed the appeal of the assessee on both counts:
- The reopening of the assessment under Section 148 was not justified.
- The addition based on the low gross profit rate was not sustainable.

Order:
The appeal of the assessee was allowed, and the order was pronounced in the open court on 10/08/2016.