2008 (12) TMI 290 - AT - Income Tax

Rejection of books of accounts - lack of vouchers - determination of profit - applicability of G.P. rate on total sales - Method of Accounting - firm engaged in the business of trading of country liquor and IMFL - Difference of opinion - Third member Decision - HELD THAT - On a careful consideration it is seen that despite the fact the AO referred to on record by way of comparison with others specifically named concerns existing in this line of business it is seen that the CIT(A) has proceeded in an arbitrary manner to disregard the said comparison. No effort has been made to spell out why the comparison made by the AO keeping all the arguments canvassed by the assessee in mind so as to apply a lesser G.P. rate of 5 per cent is not correct and instead he has proceeded to adjudicate upon the issue in very casual terms. Moreover no reasons or basis of arriving at the G.P. rate of 4 per cent is given. It is seen that the AO has himself given sufficient margin for the fact that this was the first year of the assessee s business and handicap if any on account of the same or on account of operating in a different area he has already tried to factor in these considerations by applying a lesser G.P. rate as compared to 13.13 percent 15.5 percent and 5.88 per cent shown by the concerns specifically named in the Assessment Order. It is seen that no efforts have been made by the assessee either before the AO or before the CIT(A) or for that matter before the Bench to distinguish the area of operation etc. of M/s. Singh Associate Laxmi Narain Shivhare Co. and M/s. S.R. Trading Co. with whom specific comparison has been made by the AO. Therefore rejection of books of account was correctly made. However in regard to the application of rate we are of the view that the comparative case of Gendalal Hazrilal Co. 2003 (7) TMI 70 - MADHYA PRADESH HIGH COURT by the AO maybe taken into consideration by the CIT(A) who shall thereafter as directed above pass a speaking order in accordance with law after giving the assessee an opportunity of being heard. Accordingly ground Nos. 1 2 of the Revenue and ground No. 1 of the assessee which is in support of the impugned order are both restored back to the file of the CIT(A). In the result the appeal of the revenue is partly allowed for statistical purposes and the appeal of the assessee is also allowed for statistical purposes. ld. Accountant Member pointed out that the AO himself accepted the sale value disclosed by the assessee and therefore there was no factual or legal justification in rejecting the book results and estimating the income by applying higher profit than what was declared by the assessee. Accordingly the appeal of the revenue was dismissed and the assessee s appeal stood allowed. Difference of opinion between the ld JM and ld AM - Third member appointment - (i) Whether under the peculiar facts of this case and in law there is any factual or legal justification in the action to reject book results? (ii) Whether on the facts and findings it is justified to delete the addition by applying estimated gross profit rate. or that the issue is to be restored to ld. CIT(A) to decide the application of gross profit rate afresh? HELD THAT - This is the first year of the assessee s business. All its supplies are duly supported by proper vouchers and is regulated by the excise authorities and payment of country liquor is made through Government warehouses against payment made to the Government on the basis of the auction conducted by the Government. In other words the purchases are all supported by valid documents. When it comes to the sale the nature of the assessee s business is such that it cannot maintain proper sale bills. But the assessee has declared 3.11 per cent of gross profit. In fact the AO has given comparative cases wherein the profit of 2.56 per cent in the case of M/s. S.R. Trading Co. Gwalior was shown. Again the profit varies from area to area and the bid money that is paid by the assessee. The accounts of the assessee are subject to regular audit and the small variation in the profit is quite possible. The CIT(A) himself writes in his order that no significant defects are pointed out in the books of account by the assessee except the lack of sale bills. Having regard to these facts in my view the ld. A.M. is right in having given the direction to the department to accept the declared results. I agree with his finding on both the questions. I do not think it is necessary to again set aside the issue for fresh determination by the CIT(A) as done by the ld J.M. The matter is factual and all the facts are already there before the two revenue authorities when they framed the issues. Thus in the light of the majority view the appeal of the assessee stands allowed and the appeal of the Revenue stands dismissed.

Summary

Issues Involved:

1. Applicability of Gross Profit Rate by CIT(A)
2. Rejection of Books of Account by Assessing Officer
3. Disallowance of Travelling and Vehicle Expenses

Issue-wise Detailed Analysis:

1. Applicability of Gross Profit Rate by CIT(A):

The revenue contended that CIT(A) erred by directing the Assessing Officer to determine the profit by applying a gross profit rate of 4 percent on total sales declared by the assessee, thereby giving relief of Rs. 15,76,868. The CIT(A) justified this by considering that it was the first year of business for the firm, the books of account were produced before the Assessing Officer, and no specific defect was found in such books of account. The CIT(A) concluded that a G.P. rate of 4 percent on the total sales declared by the appellant would meet the ends of justice. However, the Tribunal found that the CIT(A) did not provide a basis for arriving at the G.P. rate of 4 percent and had not considered the comparable cases cited by the Assessing Officer, who had applied a G.P. rate of 5 percent. The Tribunal restored the issue back to the CIT(A) to consider the specific facts pointed out by the Assessing Officer and the comparative cases in this line and area of business.

2. Rejection of Books of Account by Assessing Officer:

The Assessing Officer rejected the books of account under Section 145(3) of the Income-tax Act, citing reasons such as all sales being made in cash without supporting vouchers, no evidence of sales through various shops, and the absence of day-to-day maintenance of books in the regular course of business. The assessee argued that the accounts were duly audited, the sales were recorded based on daily statements from employees, and no material defect was found in the books of account. The Tribunal noted that the Assessing Officer had accepted the declared sales and cost of goods sold but rejected the books due to the absence of sale vouchers. The Tribunal found that the rejection of books was justified due to the specific defects pointed out by the Assessing Officer. However, the Tribunal also noted that the CIT(A) had not provided a clear basis for applying a lower G.P. rate and restored the issue back to the CIT(A) for reconsideration.

3. Disallowance of Travelling and Vehicle Expenses:

The revenue challenged the deletion of the addition of Rs. 5,688 on account of travelling expenses and Rs. 24,051 on account of vehicle expenses by the CIT(A). The Tribunal found no good reason to interfere with the relief granted, as no specific reasons were brought in the Assessment Order to make the additions. The Tribunal upheld the CIT(A)'s decision, finding it reasonable.

Separate Judgments Delivered by Judges:

Judicial Member's Order:

The Judicial Member proposed restoring the issue back to the CIT(A) to consider the specific facts and comparative cases pointed out by the Assessing Officer and to decide the application of the G.P. rate afresh.

Accountant Member's Order:

The Accountant Member disagreed with the rejection of the books of account and the application of a higher G.P. rate. He found that the declared sales and cost of goods sold were accepted by the Assessing Officer, and there was no discrepancy in the quantitative details of purchases or sales. He directed the application of the G.P. rate declared by the assessee at 3.11 percent and allowed the assessee's appeal while dismissing the revenue's appeal.

Third Member's Order:

The Third Member agreed with the Accountant Member, finding no factual or legal justification in rejecting the book results and estimating income by applying a higher profit rate than declared by the assessee. He directed the acceptance of the declared results and dismissed the revenue's appeal while allowing the assessee's appeal.

Final Order:

In light of the majority view, the appeal of the assessee was allowed, and the appeal of the revenue was dismissed.