TMI Blog2022 (6) TMI 1374X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had either concealed sales in quantity or price-wise and, therefore, we do not agree with the action of the Ld.CIT(A) in upholding the rejection of books of account by the AO. Accordingly, ground No.3 of assessee s appeal stands allowed. Restricting gross profit percentage to 20% - CIT(A) did provide some relief to the assessee by restricting the addition on account of gross profit to 20% of sales instead of 38.63% as made by the AO. However, while doing so the Ld.CIT(A) also conveniently ignored that the assessee gross profit rate for financial year 2014-15 was 15.75% and for financial year 2016-17, it was 16.28%. At most, even if the profits had to be estimated, the Ld.CIT(A) could have proceeded to work out an average rate of profit for these three years rather than applying gross profit rate of 20% arbitrarily and without any justification. This adhoc confirmation of addition, in our view, is not sustainable as it lacks any reasoning and is not supported by any data/figures. Therefore, in such a situation, we have no option but to set aside the order of the Ld.CIT(A) on the issue and direct the AO to delete the addition. Addition u/s 68 - unexplained cash cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... introduced by the assessee as sales). Another addition of Rs.3,31,69,133/- was made on account of enhancement of gross profit rate with respect to the jewellery turnover. The Assessing Officer (AO) applied gross profit rate @38.63% as against gross profit rate of 11.65% declared by the assessee. 2.1 Aggrieved, the assessee carried the issues before the Learned First Appellate Authority who was pleased to partly allow the appeal of the assessee. The Ld.CIT(A) deleted the addition of Rs.6,85,735/- in respect of unexplained cash credit added u/s 68 of the Act. The Ld.CIT(A) also restricted the addition made on account of enhancement of gross profit rate from 38.63% to 20% thereby restricting the addition to Rs.1,02,69,581/- on this account. 2.2 Aggrieved by the order of the Ld.CIT(A), both the assessee as well as the Department have approached this Tribunal challenging the action of the Ld.CIT(A) and have raised the following grounds of appeal: ITA No.198/Chd/2021(Assessee s Appeal): 1. That order passed u/s 250(6) of the Income Tax Act, 1961 by the Learned Commissioner of Income Tax (Appeals)-S, Ludhiana is against law and facts on the file in as much as he was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut to 11.65%. It was further pointed out that the AO had also drawn the trading account for assessment years 2015-16 and 2016-17 (as appearing on page 14 of the assessment order) wherein for assessment year 2015-16, the gross profit rate was 15.75% and for assessment year 2016-17, it was 16.28%. It was further submitted that as per the AO, the reason for rejection of books of account was the low gross profit rate as compared to the two immediately preceding assessment years as above. The Ld. AR submitted that the AO had proceeded to apply the gross profit rate of 38.63% for the year under consideration by taking into consideration the price tags on items of jewellery inventorised during the course of search on 01.11.2017. It was further submitted that on appeal, the Ld.CIT was of the view that the gross profit rate applied by the AO was on a higher side and it was held by the Ld.CIT(A) that gross profit rate of 20% should be applied instead. The Ld. AR submitted that the gross profit rate as computed by the AO, was completely faulty and lacking any logic for the simple reason that by the time of search, the assessee had been in the process of winding up jewellery business in as muc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Ld.CIT(A) has upheld the rejection of books of account, no valid reason has been given by the Ld.CIT(A) also for upholding the rejection. The Ld. AR further submitted that the Ld.CIT(A), after giving a finding in favour of the assessee that valuation done at the time of search cannot be made the basis for calculating gross profit on sales, proceeded to arbitrarily apply the gross profiti rate of 20% on an adhoc basis without giving any basis for arriving at the percentage of 20%. It was submitted that the accounts of the assessee were duly audited and the return of income was also duly accompanied by the audited accounts. It was submitted that it is also not in dispute that whatever stock was sold by the assessee during the demonetization period, was a part of the existing stock and that no substantial purchases had been made to effect the sales pertaining to the demonetization period. It was submitted that, therefore, the entire action of the AO as well the Ld.CIT(A) in making the addition on account of suppressed gross profit, was not legally sustainable and was liable to be deleted completely. 4.0 In response to the arguments of the Ld. AR, the Ld.CIT DR submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition of Rs.6,85,735/-, whereas in respect of the 2nd ground of appeal of the departmental appeal pertaining to the restriction of addition to the extent of Rs.1,02,69,581/- on account of suppressed gross profits, the arguments made on the issue by the Ld. AR in assessee s appeal would apply and that the same were not being repeated for the sake of brevity. 7.0 We have heard the rival submissions and have also perused the material available on record. The first issue for our consideration is whether the Ld.CIT(A) was justified in upholding the action of the AO in invoking the provisions of section 145(3) of the Act and rejecting the trading results of the assessee. In this regard, it is seen that the provisions of section 145(3) of the Act provide that where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section(1) has not been regularly followed by the assessee, or income has not been computed in accordance with the Standards notified under subsection(2), the AO may make an assessment in the manner provided in section 144 of the Act. Thus, a plain reading of this sub-section requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferences drawn by the AO are mere surmises and conjectures lacking any sound basis. 7.1 The Hon'ble High Court of Gujarat in the case of PCIT Vs. Garden Silk Mills. Limited, 388 ITR 237 (Guj.) has categorically held that it is a settled position of law that the books of account cannot rejected on insignificant grounds. The AO is required to point out specific defects whereby the accounts of the assessee cannot be treated as correct or complete giving rise to distorted figure of gross profit. The Hon'ble Gujarat High Court went on to hold that the AO is required to make an analysis of each item and factor which has an impact on the profit of the assessee and further assuming that when a particular item of account is found to be not correct or complete, the AO is required to find out its impact on the profit of the assessee. The Hon'ble High Court further held that if it is found that there is little or no impact on profits, such defect becomes insignificant and there would be no need of rejection of entire books of account and the AO would be justified to make addition to the profit to the extent of such item. Thus, the law is well settled that insignificant defect in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clippings. Similar are the observations of the AO in the present case also relating to non-availability of PAN, huge cash bills, non-availability of CCTV footage and we find that the issues raised by the AO are squarely covered in favour of the assessee by the order of the Coordinate Bench of ITAT Vishakhapatnam as aforementioned. 7.4 Also, it is worth-noting that no incriminating material had been unearthed during the course of search which would indicate that the assessee had either concealed sales in quantity or price-wise and, therefore, we do not agree with the action of the Ld.CIT(A) in upholding the rejection of books of account by the AO. Accordingly, ground No.3 of assessee s appeal stands allowed. 7.5 Coming to ground No.2 of the assessee s appeal wherein the Ld.CIT(A) s action of restricting gross profit percentage to 20% is being challenged, it is seen that the Ld.CIT(A) has, in principle, agreed to the submission of the assessee (page No.24 of the impugned order) that there was merit in the arguments of the Ld. AR that the valuation done at the time of search on 01.11.2017 cannot be made the basis for calculating the gross profit on the sales made during the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e remaining ground for adjudication is ground No.1 in departmental appeal wherein the department has challenged the action of the Ld.CIT(A) in deleting the addition of Rs.6,85,735/- made by the AO on account of unexplained cash credit u/s 68 of the Act. In this regard, the Ld.CIT(A) has given a categorical finding in para 4.3 of the impugned order that the bills which were forward dated, had been duly accounted for in the books of account although on a later date and therefore, no undue benefit had accrued to the assessee. The Ld.CIT(A) has observed that there is merit in the arguments of the Ld. AR that once the revenue has been duly recorded in the books of account, the same cannot be treated or said to be unaccounted money or income and that there was no allegation against the assessee that these sales were not recorded in the books at all and the only allegation is that they were entered on a later date. The Ld.CIT(A) has also given a finding that on perusal of the day-to-day cash book, it is seen that there was sufficient cash in hand on those dates and even if the sales were taken out, the cash in hand did not become negative. No perversity has been pointed out by the Ld.CIT ..... 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