2010 (5) TMI 57 - DELHI HIGH COURT

Decline in gross profit ratio - When asked to explain, the assessee submitted that after drawing wire, the process goes on to put the wire for enameling, as a result of which the weight of the wire increased by 2-3%. The Assessing Officer felt that in the absence of adequate supporting evidence, the explanation given by the assessee could not be accepted. He, therefore, rejected the account books of the assessee under Section 145(3) of Income Tax Act and held that it would be fair and reasonable to take the gross profit rate at 5.59%, which was also the rate for the preceding assessment year. – CIT(A) and ITAT decided in favor of assessee.

Held that: even if no such register (stock register) was being maintained by the assessee as is contended by the learned counsel for the appellant (revenue), that by itself does not lead to inference that it was not possible to deduce the true income of the assessee from the accounts maintained by her, nor the accounts can be said to be defective or incomplete for this reason alone. If stock register is not maintained by the assessee that may put the Assessing Officer on guard against the falsity of the return made by the assessee and persuade him to carefully scrutinize the account books of the assessee. But the absence of one register alone does not amount to such a material as would lead to the conclusion that the account books were incomplete or inaccurate. Similarly, if the rate of gross profit declared by the assessee in a particular period is lower as compared to the gross profit declared by him in the preceding year, that may alert the Assessing Officer and serve as a warning to him, to look into the accounts more carefully and to look for some material which could lead to the conclusion that the accounts maintained by the assessee were not correct. But, a low rate of gross profit, in the absence of any material pointing towards falsehood of the accounts books, cannot by itself be a ground to reject the account books under Section 145(3) of the Act.