2016 (11) TMI 1714 - AT - Income Tax

Rejection of books of accounts - applying GP rate of 35% as against 18.71% shown by the assessee - non-maintenance of item-wise detail of jewellery purchased and sold - adoption of Weighted Average Cost (WAC) method for valuation of stock was found incorrect and the FIFO method was found to be appropriate as a consequence the stock of gold was found undervalued - HELD THAT - On perusing the order of the I.T.A.T. in the case of M/s Sunny Jewellery House 2016 (5) TMI 1579 - ITAT CHANDIGARH we find that the facts in that case were identical to that in the present case where the books of accounts of the assessee a jeweler were rejected for identical reasons as stated in the assessee s case being non-maintenance of item-wise detail of jewellery purchased and sold and stock of the same as also incorrect method of valuation of stock adopted being WAC as against FIFO adopted by the Assessing Officer. The Hon ble I.T.A.T. in that case after relying on the order of Jagdish Chand 2003 (6) TMI 441 - ITAT CHANDIGARH had held that there was no infirmity in the order of the CIT (Appeals) in deleting the addition made. - Decided against revenue.

Summary

Issues Involved:
1. Rejection of books of accounts under section 145(3) of the Income Tax Act.
2. Application of FIFO method for valuation of closing stock.
3. Comparison of Gross Profit (GP) rates with another jeweller.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The Assessing Officer (AO) rejected the books of accounts of the assessee, a jeweller, under section 145(3) of the Income Tax Act, 1961, citing the primary reason that no item-wise detail of jewellery purchased and sold was maintained, along with the opening and closing stock. The AO argued that in the absence of item-wise detail, it was impossible to correlate the items sold with the corresponding purchases, making it unverifiable which items constituted the closing stock. The AO also found the adoption of the Weighted Average Cost (WAC) method for stock valuation incorrect and preferred the FIFO method, leading to the conclusion that the stock of gold was undervalued. The learned Commissioner of Income Tax (Appeals) [CIT(A)] overturned the AO's decision, stating that the AO did not point out any specific discrepancies that provided positive evidence of sales suppression or bogus purchases. The CIT(A) emphasized that the method of accounting had been consistently followed since the inception and had been accepted in previous assessment years, including under section 143(3) for the assessment year 2005-06.

2. Application of FIFO Method for Valuation of Closing Stock:
The AO applied the FIFO method for the valuation of closing stock, arguing that the WAC method was inappropriate. The CIT(A) disagreed, noting that the assessee had consistently used the WAC method, which had been accepted in prior years. The CIT(A) cited several judicial precedents supporting the consistency of the accounting method, including the cases of ACIT Vs. Jagdish Chand, ITO Vs. Chokshi Hirachand & Bros., and Shantilal Nagardas & Son, which upheld the use of a consistently followed accounting method. The CIT(A) further pointed out that the AO's assumption that only old jewellery was sold first, leaving new jewellery in stock, was baseless and without evidence. The CIT(A) concluded that the AO's rejection of the books of accounts and the valuation of jewellery were incorrect and unsustainable in law and on facts.

3. Comparison of Gross Profit (GP) Rates with Another Jeweller:
The AO compared the GP rate of the assessee, which was 18.71%, with another jeweller, M/s Walaiti Ram Madan Lal, who had a GP rate of 38.23%. The AO found no plausible reason for the lower GP rate shown by the assessee and applied a GP rate of 35%, resulting in an addition of Rs. 41,35,255 to the assessee's income. The CIT(A) held that the assessee had duly explained the reasons for the difference in GP rates, including the higher cost of sale per unit compared to M/s Walaiti Ram Madan Lal. The CIT(A) noted that the GP rate of the assessee was comparable to the previous year and that the Net Profit (NP) was higher. The CIT(A) also referenced the case of R.B. Jessaram Fatehchand vs. CIT, which held that non-inclusion of customer addresses in cash transactions could not be a basis for rejecting the books of accounts. The CIT(A) concluded that the AO's fixation of an arbitrary rate for stones and the addition of 10% gold in diamond jewellery without evidence were incorrect.

Conclusion:
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, dismissing the appeal by the Revenue. The ITAT found no infirmity in the CIT(A)'s order, which relied on judicial precedents and the consistent application of the accounting method. The ITAT noted that the facts of the present case were identical to those in the case of M/s Sunny Jewellery House, where the books of accounts were rejected for similar reasons, and the CIT(A)'s deletion of the addition was upheld. The appeal of the Revenue was dismissed, and the order pronounced in the open court.