2025 (7) TMI 177 - AT - Income Tax

GP Estimation - Rejection of books of accounts - assessee is dealing with live stock and purchases the animals from farmers sell the same to slaughter house - HELD THAT - We observed that assessee is dealing in the live stock. He purchases the live stock from the farmers and sell the same to slaughter house. Since assessee purchases the live stock from the farmers it is not possible to maintain bills or vouchers and it is fact on record that these kind of transactions are historically done through cash. We observed that similar issue was came up before the coordinate Bench in the case of Salauddin Saifi 2024 (10) TMI 1674 - ITAT DELHI and the coordinate Bench has after considering the facts available on record sustained the addition of 0.5% as reasonable profit in this line of business. We further observed that CIT (A) also enhanced the GP ratio based on the comparable study of the same assessee s i.e. Salauddin Saifi and Shamim Ahmad and cases reached finality. Therefore we are inclined to follow the same and direct the AO to restrict the GP @ 0.5%. In the given case assessee has already declared 0.6% therefore we direct the AO to retain the same in the current assessment year. Accordingly grounds raised by the assessee are allowed.

Summary

Issues Presented and Considered

1. Whether the books of account maintained by the assessee for AY 2013-14 and AY 2014-15 can be rejected under section 145(3) of the Income-tax Act, 1961, in absence of verifiable purchase bills and supporting documentary evidence, given the nature of the assessee's business of trading in live stock sourced from rural farmers.

2. Whether the Assessing Officer (AO) and Commissioner of Income-tax (Appeals) [CIT(A)] were justified in estimating and enhancing the gross profit (GP) and net profit (NP) ratios for the assessee's business at rates higher than those declared by the assessee, based on comparables and the absence of verifiable purchase bills.

3. Whether the AO and CIT(A) erred in rejecting the books of account without specifying defects or impossibility to ascertain correct income, and whether such rejection was arbitrary and unjust.

4. Whether the CIT(A) erred in relying on comparables which were not applicable to the assessee's facts and circumstances and ignoring comparables submitted by the assessee.

5. Whether the addition made under section 69A of the Act on account of unexplained cash credits-specifically, gifts received from the mother of the assessee and amounts received from LIC policies-was justified, considering the evidence furnished by the assessee.

6. Whether the interest levied under sections 234A and 234B was correctly applied given the disallowances and additions made during assessment.

Issue-wise Detailed Analysis

1. Rejection of Books of Account under Section 145(3)

Legal Framework and Precedents: Section 145(3) permits rejection of books of account if the Assessing Officer is of opinion that the accounts do not truly or correctly represent the income. The rejection must be based on tangible defects or impossibility to ascertain correct income from the books.

Court's Interpretation and Reasoning: The AO rejected the books primarily because the assessee failed to produce purchase bills for live stock, which were claimed to be purchased in cash from rural farmers who do not maintain bank accounts. The AO found the declared GP and NP rates unrealistically low and unsupported by verifiable evidence. The CIT(A) concurred, enhancing the GP based on comparables where similar businesses had their books rejected due to unverifiable cash purchases.

Key Evidence and Findings: No purchase bills were produced; the nature of business involved cash transactions with villagers; the declared GP was 0.6% for AY 2013-14 and 0.32% for AY 2014-15, which was considered abnormally low.

Application of Law to Facts: The Tribunal noted that the nature of the business makes it difficult to maintain purchase bills. However, the AO and CIT(A) relied on precedents where similar businesses had books rejected due to unverifiable cash purchases. The Tribunal referred to a coordinate Bench decision in a similar case (Salauddin Saifi) which accepted a reasonable GP rate of 0.5% despite cash dealings.

Treatment of Competing Arguments: The assessee argued that rejection was arbitrary as no defects in books were pointed out and that the business nature justified lack of purchase bills. The Revenue emphasized the need for verifiable evidence and comparables where books were rejected. The Tribunal balanced these views and accepted the difficulty in maintaining purchase bills but upheld the need for reasonable estimation of GP.

Conclusions: The Tribunal directed the AO to retain the GP declared by the assessee at 0.6% for AY 2013-14 and apply the same for AY 2014-15, thus allowing the appeal in AY 2013-14 and partly allowing it in AY 2014-15.

2. Estimation and Enhancement of Gross Profit and Net Profit Ratios

Legal Framework and Precedents: The AO and CIT(A) have the authority to estimate profits under the Act when books are rejected or unreliable. Estimation should be based on relevant comparables and facts on record. Arbitrary or excessive estimation without basis is impermissible.

Court's Interpretation and Reasoning: The AO initially estimated GP at 1% and CIT(A) enhanced it to 3.5% for AY 2013-14 based on comparables. For AY 2014-15, AO estimated 8%, CIT(A) reduced to 3%. The Tribunal, however, found these enhancements excessive and not supported by material on record. The Tribunal relied on the coordinate Bench decision in Salauddin Saifi, which accepted a GP of 0.5% as reasonable for such business.

Key Evidence and Findings: Comparable cases involved similar businesses with rejected books and estimated GP of 2.75% to 3.5%. The assessee's declared GP was significantly lower. The Tribunal found that the CIT(A) did not adequately consider the nature of the business and the comparables submitted by the assessee.

Application of Law to Facts: The Tribunal applied the principle that estimation must be fair and reasonable, reflecting the business realities and evidence. It directed the AO to retain the declared GP of 0.6% for AY 2013-14 and apply the same for AY 2014-15, rejecting the higher estimates.

Treatment of Competing Arguments: The assessee contended that the GP declared was realistic and supported by the nature of business and comparables. The Revenue relied on higher GP rates from other cases. The Tribunal balanced these and found the assessee's figures more appropriate.

Conclusions: The Tribunal allowed the assessee's appeal on this issue for AY 2013-14 and partly allowed it for AY 2014-15, directing AO to retain the GP at 0.6%.

3. Validity of Rejection of Books Without Pointing Defects

Legal Framework and Precedents: Rejection of books under section 145(3) requires the AO to point out specific defects or impossibility in ascertaining correct income.

Court's Interpretation and Reasoning: The assessee argued that no defects were pointed out and that the books were test checked without adverse observations. The AO and CIT(A) based rejection on absence of purchase bills and unverifiable cash purchases. The Tribunal observed that while the nature of the business explains absence of bills, the AO's reliance on precedents and the low declared GP justified rejection for estimation purposes.

Key Evidence and Findings: No specific defects other than absence of purchase bills were pointed out. The Tribunal accepted the difficulty in maintaining bills but upheld the rejection for estimation based on comparables.

Application of Law to Facts: The Tribunal found the rejection not arbitrary given the circumstances and the need to estimate income fairly.

Treatment of Competing Arguments: The assessee's argument of arbitrary rejection was considered but outweighed by the need for reliable income estimation.

Conclusions: Rejection of books was upheld for estimation purposes but with directions to retain declared GP at 0.6%.

4. Applicability of Comparables and Opportunity of Being Heard

Legal Framework and Precedents: Comparables used for estimation must be relevant and applicable. The principle of natural justice requires that the assessee be given proper opportunity to contest such comparables.

Court's Interpretation and Reasoning: The assessee contended that CIT(A) ignored comparables submitted by it and relied on irrelevant comparables. The Tribunal found that CIT(A) relied on cases involving the same assessee and similar business, which had reached finality, thus making them relevant. The Tribunal did not find any denial of opportunity or violation of natural justice.

Key Evidence and Findings: Comparables involved the same line of business and similar issues. Assessee's comparables were not found sufficiently convincing.

Application of Law to Facts: The Tribunal upheld the use of relevant comparables and found no procedural infirmity.

Treatment of Competing Arguments: The assessee's objections were considered but found unpersuasive.

Conclusions: CIT(A)'s reliance on comparables was justified and no violation of natural justice occurred.

5. Addition under Section 69A on Unexplained Cash Credits (Gifts and LIC Receipts)

Legal Framework and Precedents: Section 69A applies to unexplained cash credits where the assessee fails to explain the nature and source of such credits. Documentary evidence and source proof are key to rebutting additions.

Court's Interpretation and Reasoning: The AO added Rs. 49 lakhs as unexplained cash credits on account of gifts from the assessee's mother and LIC receipts. The assessee submitted bank statements and documents showing receipt of LIC maturity proceeds and gift deeds. CIT(A) allowed part of the claim (Rs. 17.78 lakhs reconciled) and sustained addition of Rs. 31.21 lakhs for unexplained portion. The Tribunal analyzed bank statements showing carry forward balances, LIC maturity receipts, and payments made by the donor, concluding that the donor had sufficient source and the gift was genuine.

Key Evidence and Findings: Bank statements of the donor showing opening balance of Rs. 13 lakhs, LIC maturity receipts of Rs. 9.68 lakhs and Rs. 8.10 lakhs, and maintenance of adequate cash balance throughout the year. The assessee's bank statements corroborated receipt of funds from LIC.

Application of Law to Facts: The Tribunal held that the source of the gift was satisfactorily explained and the addition under section 69A was not justified.

Treatment of Competing Arguments: The Revenue argued absence of documentary evidence during assessment and inability to verify. The Tribunal found that evidence was furnished before CIT(A) and was sufficient to establish source.

Conclusions: Addition under section 69A was deleted; grounds raised by the assessee were allowed and Revenue's appeal on this issue was dismissed.

6. Levy of Interest under Sections 234A and 234B

Legal Framework and Precedents: Interest under sections 234A and 234B is levied for defaults in advance tax payment and non-payment of tax, respectively. If additions are unforeseen and not includible in advance tax computations, interest may be challenged.

Court's Interpretation and Reasoning: The assessee contended that interest was wrongly charged as disallowances were unforeseen. The Tribunal did not elaborate extensively but noted that this ground was consequential and did not separately decide it.

Key Evidence and Findings: No specific findings recorded.

Application of Law to Facts: Not addressed in detail.

Treatment of Competing Arguments: Not detailed.

Conclusions: Ground treated as consequential; no separate relief granted.

Significant Holdings

"Since the nature of the business involves purchase of live stock from farmers in rural areas, it is not possible to maintain purchase bills or vouchers. However, the gross profit declared by the assessee at 0.6% is reasonable and in line with the coordinate Bench decision in the case of Salauddin Saifi, which accepted 0.5% as reasonable profit in similar business."

"The rejection of books of account under section 145(3) is upheld for estimation purposes, but the gross profit ratio declared by the assessee is to be retained as it reflects the business reality and is supported by relevant precedents."

"Addition under section 69A on account of unexplained cash credits is not justified where the assessee furnishes sufficient documentary evidence, including bank statements and source of funds of the donor, establishing the genuineness of the gift and receipts from LIC maturity."

"The CIT(A)'s reliance on comparable cases involving the same assessee and similar business is justified and does not violate the principles of natural justice."

"The appeals for AY 2013-14 are allowed by directing the AO to retain the declared gross profit of 0.6%. For AY 2014-15, the appeal is partly allowed on the same lines, and the addition under section 69A is deleted."