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Facts
The assessee, an individual running a wholesale textile business, filed his Income Tax Return manually for AY 2018-19 due to ill health. The AO initiated reassessment proceedings and rejected the books of accounts under Section 145(3) due to discrepancies in purchases, estimating Gross Profit (GP) at 8.5%. The CIT(A) partly allowed the appeal, reducing the GP rate to 8% as per Section 44AD, leading to an addition of Rs.9,87,686/-.
Held
The Tribunal observed that the assessee's declared GP rate of 7.32% for AY 2018-19 was higher than the average GP rate of 5.48% from the preceding four assessment years. Citing a judicial precedent, the Tribunal ruled that when books are rejected, no further addition is warranted if the current year's GP rate is better than previous years. Consequently, the addition sustained by the CIT(A) was deleted.
Key Issues
Whether the rejection of books of accounts and the estimation of Gross Profit (GP) by the Assessing Officer were justified, especially when the assessee's declared GP rate for the current year exceeded the average of previous years, and the applicability of Section 44AD for GP estimation.
Sections Cited
250, 44AB, 148A(b), 148, 148A(d), 133(6), 147, 144, 144B, 145(3), 44AD, 28, 43C, 234A, 234B, 234C, 234F
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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE KAND SHRI JAGADISH
आदेश /O R D E R
PER GEORGE GEORGE K, VICE PRESIDENT:
This appeal at the instance of the assessee is directed against the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi order dated 13.01.2025, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2018-19.
2. The grounds raised read as follows:- 1.1 The order of the CIT (A) is bad in law and is liable to be set aside in so far as it Confirms the addition to the extent of Rs.9,87,686/-, 8% of the turnover. 1.2 The CIT(A) erred by only partially allowing the appeal, reducing the gross profit rate by merely half percent from 8.5% to 8.0%; while dismissing the other grounds without adequately considering the Appellant's submissions in their proper context.
2. The CIT(A) Ought to have seen that the AO did not consider the submissions of the Appellant, and that the assessment order was a non- speaking order, except for addressing the discrepancy in purchases related to M/s. Heera Moti Textiles (India).
3. The CIT(A) failed to see that the AO ought not to have rejected the Appellant's books of accounts, without giving him one more opportunity to be heard.
4. The CIT(A) erred in estimating the gross profit of the Appellant at 8% as against the average gross profit of 5.48% from the last 5 years.
5. The CIT(A) erred in upholding the levy of interest u/ss. 234A, 234B, 234C and 234F of Rs.3,10,552/-, Rs.4, 18,944/-, Rs.8,919 and, Rs.10,000/- respectively by the AO.
6. Any other grounds that may be raised at the time of hearing.
Brief facts of the case are as follows: The assessee, an individual is running a wholesale textile business in the name and style of ‘T.N. Textile’. It is stated that due to ill health of the assessee, he could not co-ordinate with his Accountant and file e- return on time. It is further stated since the time for filing the e- return has lapsed, the assessee had filed the return of income, and audit report in Form 3CB as per Section 44AB of the Act manually on 03.10.2019, declaring total taxable income of Rs.11,96,609/-.
3.1 The AO issued notice u/s.148A(b) of the Act on 17.03.2022 seeking assessee’s response before 21.03.2022, why notice u/s.148 of the Act should not be issued. In the said notice, the AO had stated that assessee had not filed his return of income and as per the information available with the Department, the assessee had deposited cash of Rs.144.31 lakhs and withdrawn cash of Rs.172.67lakhs from his current account and deposited cash of Rs.12.12 lakhs in his accounts other than current accounts. In response to the notice issued u/s.148A(b) of the Act, the assessee filed his response on 22.03.2022. The assessee stated that cash deposits and withdrawals are out of his business and he has already filed his return of income on 03.10.2019 (manually). Therefore, it was submitted that notice u/s.148 of the Act need not be issued. The AO however rejected the explanation of the assessee and held that assessee had not filed his return of income for the relevant assessment year and therefore, the aforesaid amount was considered as escaped income. The AO proceeded to pass an order u/s.148A(d) of the Act on 31.03.2022 and notice u/s.148 of the Act was issued on 31.03.2022.
3.2 In response to the notice issued u/s.148 of the Act, the assessee e-filed his return of income declaring the income of Rs.11,96,610/- (same income declared in return of income filed manually on 03.10.2019, [placed at pages 1 to 21 of the PB-I]). During the course of assessment proceedings, in order to verify the genuineness of purchases, the AO issued notices u/s.133(6) of the Act to five sellers. Out of the five sellers, four of them did not respond. Heera Moti Textiles (India) Pvt. Ltd., replied and stated that they have made total sales of Rs.43,07,613/- to the assessee and received a sum of Rs.23,46,484/- from the assessee and the closing credit balance is Rs.19,61,129/-. The AO noticed that these figures did not match with the ledgers furnished by the assessee which showed that assessee had made total purchases of Rs.27,00,723/- and total payment of Rs.25,13,875/- to M/s. Heera Moti Textiles (India) Pvt. Ltd. Based on the above discrepancy, the AO issued a show-cause notice dated 21.02.2023 proposing to reject the books of accounts of the assessee and to estimate the GP at 8.5% of the total sales of Rs.14,50,06,020/- amounting to Rs.1,23,25,511/- as against 5.48% reported. In response to the show-cause notice, the assessee submitted reply dated 03.03.2023 stating the GP for the past years is well below the GP disclosed in the current year and the estimation of GP at 8.5% is highly excessive. Rejecting the explanation of the assessee, the AO passed the assessment order u/s.147 r.w.s. 144 r.w.s.144B of the Act on
Aggrieved by the assessment order, the assessee preferred an appeal before the First Appellate Authority. Before the First Appellate Authority, the assessee raised contentions with regard to the reopening of assessment as invalid and also on merits. The CIT(A) partly-allowed the appeal of the assessee by reducing the GP rate to 8% instead of 8.5% made by the AO. The relevant finding the CIT(A) reads as under:-
“5.3.3 I have carefully perused the assessment order and submission of the appellant. It is observed that the AO has rejected the books of accounts by invoking provisions of section 145(3) of the Act. In this context, the appellant has claimed that the omission of purchase was due to the mistake of the auditor. From the assessment order, it is noticed that the appellant has not shown correct purchases and also has not shown debtors and creditors correctly for the year under consideration. Accordingly, the AO by observing that the correctness and completeness of the accounts maintained by the appellant was not found satisfactory, has rejected books of the appellant as per provisions of section 145(3) of the Act. Further, the AO has duly given the reason for rejection of books of account of the appellant. It is important to note here that the appellant himself accepted the omission of purchase and has failed to collect reason of omission of the alleged purchase. Accordingly, it is an undisputed fact that there was clearly omission of purchase in books of the appellant. In view of the above, the rejection of books of the appellant by the AO is held to be correct. The contention of the appellant in this regard is hereby dismissed.
5.3.4 Now coming to the issue of addition of Rs.17,12,715/- by estimating profit @8.5%. It is observed that the AO has estimated gross profit @ 8.5% by rejecting books of the appellant and has added the difference of gross profit declared by appellant and gross profit estimated by the AO which comes to Rs. 17,12,715/-. However, the appellant has claimed that the gross profit of the appellant is 6.21% for the year under consideration. Here it is important to note that the appellant has failed to substantiate the correctness and completeness of the accounts maintained by him before the AO as well as during appeal proceedings. Since the action of the AO of rejection of books of account of the appellant for the year under consideration has been held as correct in above para, therefore, the estimation of gross profit by the AO is also held as correct.
5.3.5 The question that remains now is that what should be the estimated profit in the present case. The relevant extract of section 44AD of the Act is reproduced hereunder:
". ... (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession"..."
As per section 44AD of the Act, in case of business rate of profit has been prescribed @8%. Since, the AO has applied the presumptive rate at the rate of 8.5% of total turnover which is not as per section 44AD of the Act. Accordingly, it is held that the rate of gross profit should be estimated @8% as prescribed in section 44AD of the Act. I find this rate to be reasonable in view of the fact that the appellant. The AO is directed to estimate the gross profit @8%. Since the gross receipts of the appellant have been held to be at total turnover of Rs.14,50,06,020/-, the calculation of profit shall be at the rate of 8% of total turnover of Rs.14,50,06,020/- which comes to Rs.1,16,00,482/-. Further, the appellant has shown gross profit of Rs.1,06,12,796/-. Accordingly, the addition is restricted to the difference between gross profit @8% (Rs.1,16,00,482/-) and gross profit declared by the appellant Rs.1,06,12,796/- which comes to Rs.9,87,686/-. In view of the above, the grounds of appeal raised are partly-allowed.
5. Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal. The assessee has filed three sets of paper-book. In the first set of paper-book comprising of 90 pages, the assessee had enclosed submissions made before the AO & CIT(A), notices issued during the course of proceedings before the AO, the manual filing of the audit report, return of income, the death certificate of the assessee’s auditor, etc. In the second set of paper- book, the assessee had enclosed the case laws relied on and in the third set, the assessee had enclosed the turnover for the past five years, the GP ratio and the net profit rate.
5.1 The Ld.AR submitted even in a case of rejection of books of accounts, estimation of income should be based on material on record and cannot arbitrary. It was stated that the GP rate disclosed and accepted by the Department in the past four years is average of 5.48%, whereas for the relevant year it is exceeding the average rate for the past years of 5.48%. Therefore, it was pleaded that the addition sustained by the CIT(A) is to be deleted.
The Ld.DR on the other hand supported the orders of the AO and the CIT(A).
7. We have heard rival submissions and perused the material on record. The books of accounts of the assessee were rejected for the reason that there was a difference in the amount shown in the assessee’s account and information obtained u/s.133(6) of the Act, with regard to the purchases made from Heera Moti Textiles (India) Pvt. Ltd. The AO vide show-cause notice dated 21.02.2023 had proposed the rejection of books of account and estimation of GP at 8.5% as against GP disclosed by the assessee at 5.48%. The AO has not given any internal or external comparative figures of the sector of assessee’s business while arriving at the GP / NP ratio of 8.5%. The CIT(A) had reduced the GP addition to 8% of the total turnover (refer para 5.3.4 of the CIT(A)’s order). The CIT(A) had taken 8% based on the presumptive taxation as per section 44AD of the Act.
7.1 The turnover of the assessee, the Gross Profit, the GP ratio and the Net profit for the assessee’s business from the assessment years 2014-15 to the relevant assessment year namely 2018-19 are detailed below:-
# A.Yr Turnover Gross Profit GP Net profit NP (GP) Ratio (NP) Ratio 1. 2018-19 Rs.14,50,06,020/- Rs.1,06,12,796/- 7.32% Rs.12,46,332/- 0.86% 2. 2017-18 Rs.15,72,47,857/- Rs.92,50,867/- 5.88% Rs.1,46,502/- 0.26% 3. 2016-17 Rs.15,46,58,754/- Rs.79,53,297/- 5.14% Rs.8.08,447/- 0.52% 4. 2015-16 Rs.15,64,03,004/- Rs.77,65,340/- 4.96% Rs.9,80,796/- 0.63% 5 2014-15 Rs.15,03,49,798/- Rs.78,36,130/- 5.21% Rs.11,03,131/- 0.73% Average 5.48% 0.6% 7.2 The Jodhpur Bench of the Tribunal in the case of ITO vs. Hitesh Kumar Panchori in had held that even while rejecting the books of accounts of the assessee, the AO has to adopt the GP rate that has been disclosed in the assessee’s line of business for the immediately preceding assessment years. The relevant finding of the Jodhpur Bench of the Tribunal in the case of Hitesh Kumar Panchori reads as under:- “6. Admittedly and apparently, the GP rate declared in this year is better being at 11.08 per cent as against 10.20 per cent in the immediately preceding year. The consistent view of the Bench is that even when the books of accounts are rejected, addition is not automatic, and if the GP rate declared in the current year is better than the past year, no further addition can be made in the declared results. Therefore, the learned CIT(A) has correctly deleted the trading addition. Hence, we dismiss ground No.(1) of Revenue’s appeal.
7.3 In the instant case, admittedly the GP rate declared for the relevant assessment year namely 2018-19 is more than the GP rate disclosed in the preceding assessment years namely 2014-15 to 2017-18. Even when the books of accounts are rejected, the addition is not automatic and if the GP rate declared in the relevant assessment year is better than the past years, no further addition can be made to the returned income. The omission is only of purchase and not of sales. The turnover and stock disclosed in the P & L account is correct and the GP ratio disclosed is more in the relevant assessment year. Therefore, we see no reason to uphold the addition sustained by the CIT(A). Accordingly, we delete the addition sustained by the CIT(A) and allow the appeal of the assessee.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 1st May, 2025 at Chennai.