2016 (3) TMI 184 - HC - Income Tax

Trading addition - non rejection of books of accounts - ITAT deleted the addition - Held that - Tribunal has rightly held that when the books of accounts of the assessee had not been rejected and assessment having not been framed under section 144 of the Income Tax Act the said authorities were in error in resorting to an estimation of income and such exercise undertaken by them was not sustainable. Section 145(3) of the Act lays down that the Assessing Officer can proceed to make assessment to the best of his judgment under section 144 of the Act only in the event of not being satisfied with the correctness of the accounts produced by the assessee. In the instant case the Assessing Officer has not rejected the books of accounts of the assessee. To put it differently the Assessing Officer has not made out a case that conditions laid down in Section 145(3) of the Act are satisfied for rejection of the books of accounts. Thus when the books of accounts are maintained by the assessee in accordance with the system of accounting in the regular course of his business same would form the basis for computation of income. In the instant case it is noticed that neither the Assessing Officer nor CIT(Appeals) have rejected the books of accounts maintained by the assessee in the course of the business. As such tribunal has rightly rejected or set aside the partial addition made by Assessing Officer for arriving at gross profit and sustained by the CIT(Appeals) and rightly held that entire addition made by the Assessing Officer was liable to be deleted. - Decided in favour of assessee

Summary

Issues:
1. Treatment of sundry creditors in assessment
2. Estimation of gross profit

Sundry Creditors Issue:
The case involves two appeals by the revenue against the ITAT order. The assessee, a partnership firm, filed its return for the Assessment year 2006-07 showing Nil income. The Assessing Officer added a sum of Rs. 3,60,00,000 to the total income due to unverified sundry creditors. The CIT(Appeals) found the assessee proved the genuineness of transactions and maintained regular books of accounts. The Tribunal categorized the creditors into three groups and remanded the issue for fresh consideration. The Tribunal held that certain creditors were genuine, while others required further verification. The High Court affirmed the Tribunal's decision, emphasizing that these were factual issues not involving substantial legal questions.

Estimation of Gross Profit Issue:
Regarding the estimation of gross profit, the Assessing Officer adopted 4% of total turnover, which was modified by the CIT(Appeals). The Tribunal held that since the books of accounts were not rejected, estimation of income was not justified. The High Court noted that as the Assessing Officer did not reject the books of accounts, the computation of income should be based on them. Therefore, the Tribunal rightly set aside the additions made by the Assessing Officer and the CIT(Appeals. The High Court dismissed the appeals and affirmed the Tribunal's decision on this issue, stating that no substantial legal question arose.

In conclusion, the High Court dismissed the appeals, upholding the ITAT order on both the treatment of sundry creditors and the estimation of gross profit. The Court emphasized that these issues were factual and did not raise substantial legal questions.