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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI VIJAY PAL RAO, JM & SHRI BHAGCHAND, AM vk;dj vihy la-@ITA No. 889/JP/2017
PER VIJAY PAL RAO, J.M.
This appeal by the assessee is directed against the order dated 28TH September, 2017 of ld. CIT (A)-3, Jaipur for the assessment year 2012-13. The assessee has raised the following grounds of appeal :-
“ 1. That on the facts and in circumstances of the case, the ld. Lower authorities grossly erred in rejecting the books of accounts of the assessee appellant u/s 145(3) of the Income-tax Act, 1961. 2 Shri Tara Chand Jain, Tonk.
That on the facts and in circumstances of the case, the ld. Lower authorities grossly erred in making a trading addition of Rs. 10,96,511/- by applying GP% of 10.21% as against 6.49% declared by the assessee appellant without any proper and cogent reasons.
The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing.”
Ground No. 1 is regarding rejection of books of accounts under section 145(3) of the IT Act.
The assessee is a sole proprietor of M/s. Mahaveer Trading Company and engaged in the business of trading of commodities as well as iron sheets. During
the assessment proceedings, the AO has noted that the gross profit declared by the assessee for the year under consideration is substantially low in comparison to the earlier years. The AO accordingly asked the assessee to prepare separate trading
account of its trading activities in different commodities. The AO further noted that the assessee has recorded purchase of Mustard seeds in the month of March, 2012
from Vikray Parchi at a rate which is higher in comparison to the rate at which the corresponding sale has been made. The sales are done at an average rate of Rs.
3400/- per quintal whereas the closing stock was valued by the assessee at Rs.
3500/- per quintal. The AO found that the purchases which were made in cash from agriculturists are at enormously high rate of Rs. 4000/- per quintal. Accordingly, the AO questioned the correctness of the assessee’s books of accounts and particularly
the higher purchase price of Rs. 4000/- per quintal as against the corresponding sale
at Rs. 3400/- per quintal. The AO noted that such a significant difference in the purchase price is not verifiable in the absence of complete address of the agriculturists and absence of any lab-receipts etc. Accordingly, the AO rejected the 3 Shri Tara Chand Jain, Tonk.
book results by invoking the provisions of section 145(3) and adopted the average
GP rate of last three years arrived at 10.21% for estimating the income of the assessee. The assessee challenged the action of the AO before the ld. CIT (A),
however, could not succeed.
Before us, the ld. A/R of the assessee has submitted that the AO has not pointed out any defect in the books of accounts but only doubted the purchase price
and sale price of Mustard seeds which is not in the control of the assessee but is gone by the market conditions. The assessee has produced the documentary
evidence in support of the purchase price which is doubted by the AO and,
therefore, merely there is variance in the purchase price which is higher than the sale price, the same cannot be a reason for rejection of books of accounts. The ld.
A/R has further submitted that the assessee has produced the lab test reports
regarding the quality of the commodity and due to the variance in the quality, the rates of purchase price as well as sale price vary from time to time. Thus the ld. A/R
has submitted that the assessee produced all the supporting evidences to show the correctness of the purchase price, sale price and valuation of the closing stock. In support of his contention, he has relied upon a series of decisions and submitted
that merely because the GP rate is declared low during the year under consideration,
the same cannot be a reason for rejection of books of accounts. He has pointed out
that the turnover of the assessee for the year under consideration has increased to more than two times from the immediately preceding year and more than three
times for the assessment year 2010-11. Therefore, the decline in GP is a natural
outcome when the assessee has substantially increased his turnover.
4 Shri Tara Chand Jain, Tonk.
On the other hand, the ld. D/R has relied upon the orders of the authorities
below and submitted that the assessee has not disputed the discrepancy in the purchase price which is shown Rs. 4,000/- per quintal as against the corresponding
sale price of Rs. 3400/- per quintal. The closing stock was also valued at about Rs.
3,500/- per quintal which is also not matching either to the purchase price or to the sale price and even is not based on the accounting principles of cost or realization
value whichever is less. Thus the ld. D/R has submitted that when the AO has specifically detected the significant variation in the purchase and sale prices as well
as valuation of closing stock, then the books of accounts of the assessee were rightly rejected.
We have considered the rival submissions as well as the relevant material on record. During the course of assessment proceedings, the AO noted that the GP
rate for the year under consideration has declined significantly in comparison to the earlier years. The comparative details of the GP rates and sales are given by the AO
in para 3 as under :-
S.No. A.Y. Sales Gross Profit GP Rate 1. 2012-13 Rs. 2,94,55,164/- Rs. 19,10,861/- 6.49% 2. 2011-12 Rs. 1,20,08,335/- Rs. 12,37,076/- 10.30% 3. 2010-11 Rs. 80,35,378 Rs. 10,91,550/- 13.85%
Accordingly, the AO undertook the enquiry to find out the reasons for such decline in the GP rate for the year under consideration. The AO found that the assessee has shown the purchase in the month of March @ Rs. 4000/- per quintal of Mustard
seeds and the corresponding sale has been shown by the assessee at Rs. 3400/- per
quintal. Similarly, the assessee has valued the closing stock at approximately Rs.
3500/- per quintal. All the three rates for purchase, sale and closing stock are at 5 Shri Tara Chand Jain, Tonk.
variance and there is a significant difference in the purchase price and sale price of the commodity being Mustard seeds in the month of March itself. It is pertinent to note that the agricultural commodity is purchased only during the procurement
season in the months of March and April and therefore, the price of purchase is generally at lowest during the month of March. Thus we find that the AO has made
out the case of significant variation in the purchase price and sale price of Mustard
seeds in the month of March itself which is an unusual nature of transactions.
Therefore, we find that this significant variation in the purchase price which is around Rs. 600/- per quintal higher than the selling price during the month of March is a sufficient reason for doubting the correctness of the books of accounts of the assessee and accordingly we upheld the rejection of books of accounts under section 145(3) of the Act.
Ground No. 2 is regarding trading addition made by the AO by adopting the GP rate at 10.21% as against the declared GP rate of 6.49%.
We have heard the ld. A/R as well as the ld. D/R and considered the relevant
material on record. At the outset, we note that the average GP which is adopted by the AO for the assessment years 2010-11 to 2012-13 comes to 8.56% instead of 10.21% taken by the AO. Therefore, there is a mistake in computing the average
GP for these three years. Further, we note that the AO has asked the assessee to prepare the separate trading account for each segment of trading commodity which was produced by the assessee and the AO found defect only in respect of the trading activity of Mustard seeds and no other defect or discrepancy was found by the AO regarding the trading activity of the assessee in other commodities. Thus in these peculiar facts and circumstances of the case, the GP rate declared by the 6 Shri Tara Chand Jain, Tonk.
assessee in respect of the trading segment of Mustard seeds has to be taken into consideration and the average GP rate to be adopted for estimation of income is also to be considered only from the Mustard seeds trading segment of the assessee for the past assessment years as well as current assessment year. After computing the average GP rate for the three years as applied by the AO in respect of the trading in Mustard seeds segment, the income of the assessee has to be estimated by applying
the said average GP on the turnover of the Mustard seeds trading. The remaining
results of the assessee on other trading segments need not to be disturbed.
Accordingly, we set aside this issue to the record of the AO to re-compute the income of the assessee on estimation basis by taking the average GP only in respect
of Mustard seeds trading segment and applying the same on the turnover of the Mustard trading segment. The addition in the income of the assessee has to be computed only by taking the average GP of Mustard seeds trading segment.
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 21/06/2018. ¼ HkkxpUn½ ¼ fot; iky jkWo ½ (BHAGCHAND) ( VIJAY PAL RAO ) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 21/06/2018. das/
7 Shri Tara Chand Jain, Tonk.
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