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Facts
The assessee approached the tribunal for the second time, with appeals concerning assessment years 2011-12, 2013-14, and 2014-15. The core issue revolves around the rejection of the assessee's books of accounts and the subsequent estimation of income by the Assessing Officer and CIT(A).
Held
The tribunal held that the methodology of estimating income after rejecting books of accounts is correct, but the basis for the Gross Profit (GP) rate applied by the CIT(A) was not substantiated. The tribunal allowed the grounds on merits, confirming the assessee's offered GP rate of 7.25% and disallowing further additions.
Key Issues
Whether the GP rate applied by the lower authorities for estimating income after rejecting books of accounts was substantiated, and if not, what is the appropriate GP rate to be applied. The issue of reassessment proceedings initiated under Section 148 was also raised.
Sections Cited
148, 145(3), 154, 144, 250
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Income Tax Appellate Tribunal, JAIPUR BENCH “B”, JAIPUR
Before: SHRI GAGAN GOYAL & SHRI NARINDER KUMAR
These three appeals by the assessee are directed against the order of CIT (A) – 04, Jaipur dated 15.04.2024& 31.05.2024passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’). the assessee has raised the following grounds of appeal: -
1. That in law and in the facts and in circumstances of the case, the Ld. Assessing Officer grossly erred in issuing notice u/s. 148 of the Income-tax Act, 1961 and entire proceedings of reassessment deserves to be quashed.
2. That in law and in the facts and in circumstances of the case the Ld. Lower Authorities grossly erred in applying provisions of section 145(3) of the I.T. Act ignoring that assessee has maintained regularly books of accounts, quantitative details are available backed by stock register and the accounts are audited.
2.1. That in law and in the facts and in the circumstances of the case the ld. Lower Authorities grossly erred in holding that purchases made from M/s. Karnawat Impex Pvt. Ltd. and M/s. Kriya Impex at Rs. 10,1,64,537/- is bogus, is non-genuine is a sham transaction and that no actual purchases were made from both the parties.
2.2. That in law and in the facts and in circumstances of the case the Ld. Lower Authorities grossly erred in disallowing 25% of the aforesaid purchase of Rs. 1,01,64,537/- amounting to Rs. 25,41,134/- and in making a trading addition of the said amount.
2.3. That in law and in the facts and in circumstances of the case the Ld. Lower Authorities grossly erred in making addition of Rs. 20,329/- on account of commission paid for so called accommodation entries.
3. That on the facts and circumstances of the case the Ld. CIT(A) grossly erred in not following the directions issued by the by the Hon’ble ITAT Bench vide its order dated 31.12.2019.
3.1. That on the facts and circumstances of the case the Ld. CIT (A) grossly erred in not following the directions issued by the Hon’ble ITAT Bench to consider the application u/s. 154 of the Act filed by the assessee before the CIT (A) and to re-adjudicate the matter.
3.2. That on the facts and circumstances of the case the Ld. CIT(A) grossly erred in confirming the addition made by the Ld. Assessing Officer and ignoring the facts that in the 1st round of litigation itself, addition was reduced by his predecessor to 10% of Turnover and further benefit of GP declared was given to the assessee appellant.
3.3. That on the facts and circumstances of the case the Ld. CIT(A) grossly erred in not following binding Instruction No. 2/2008 dated 22.02.2008 issued by the CBDT which prescribed the maximum rate of GP in cases of assessee engaged in the business of manufacturing and/or trading of diamonds.
4. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing.
The brief facts of the case are that the assessee approached this Tribunal second time, i.e. it’s a second round of tribunal. We deem it fit to take up the matter from the point where the coordinate benches left last time vide 412 to 416/JPR/2019 for A.Y.s 2009-10 to 2014-15. Three years are there for our consideration, i.e. 2011-12, 2013-14 to 2014-15. Relevant direction as issued by the coordinate bench earlier on the issue of the assessee is reproduced as under: “4.5 We have considered the rival submissions as well as relevant materials available on record. Once the AO has rejected the books of account u/s. 145(3) of the Act, the income of the assessee is required to be estimated in terms of section 144 of the Act. Since the AO has to pass the best judgment and to estimate the income of the assessee then such estimation of the income should be based on some reasonable and proper criteria. Generally, the past history of the gross profit declared by the assessee is taken as proper and reasonable criteria for estimation of the income after rejection of books of accounts. However, in the case in hand, since there are six Assessment Years involved and in all six Assessment Years, the ld. CIT(A) has estimated the income of the assessee by applying the g.p. at 10%. We find that the ld. CIT (A) though has taken a right approach of estimating the income of the assessee after upholding the rejection of books of accounts. However, the basis of applying the g.p. at 10% has not been substantiated either by any comparable case being prevailing g.p. in the said line of business or by taking the average of g.p. declared by the assessee in preceding years which are not in dispute or has attained finality. Therefore, the adoption of g.p. at 10% is without any basis and hence not proper for estimation of income of the assessee. The assessee has also filed an application u/s. 154 of the Act on 23-09-2019 for rectification of mistake in the impugned order regarding calculation of the addition sustained by the ld. CIT (A). The said application of the assessee is still pending for adjudication before the ld. CIT (A). Accordingly, in the facts and circumstances of the case, the issue of estimation of income raised by assessee is set aside to the record of the ld. CIT(A) for re- adjudication after considering the mistake as pointed out by the assessee in the application filed u/s 154 of the Act. Thus Ground No. 2.1 of the assessee is allowed for statistical purpose.”
In view of the above, it is established that the as per the directions of the coordinate bench at that time categorically hold that the methodology adopted by the Ld. CIT(A) is correct, but the only deficiency is w.r.t. the G.P. rate adopted, as the same was found without any basis, i.e. ad-hoc. In view of this they set-aside the matter for limited purpose and a specific reference was also there about the application filed by the assessee u/s. 154 of the Act. We have gone through the application of the assessee u/s. 154 of the Act filed before the Ld. CIT(A) in the first round of hearing after his order. The assessee himself offered G.P. Rate of 7.25% based on the average of his six years G.P. Rate.
4 The coordinate bench was satisfied with the arguments of the assessee that G.P. adopted by the Ld. CIT (A) @ 10% is not only ad-hoc but at higher side and without considering the application of the assessee filed u/s. 154 of the Act. In the second round of hearing before the Ld. CIT (A), he brushed aside the directions of the coordinate bench and de-novo calculated the G.P. of the assessee by restoring back the original figure @ 25% as calculated by the AO and against which the assessee was in appeal before the First appellate Authority and Tribunal. Certainly, the Ld. CIT (A) has violated the terms of reference settled by the coordinate bench by restoring the original G.P. Rate adopted by the AO. The Ld. CIT (A) has exceeded the mandate given to him by the coordinate bench earlier. In view of this grounds on merits of the case are allowed and original G.P. rate as offered by the assessee, i.e. @7.25% is confirmed and no further addition is allowed on account of commission paid for arranging the bogus purchase as the income has already been calculated after applying the provisions of section 145(3) of the Act.
In the result, the appeal of the assessee is partly allowed. the assessee raised the following grounds of appeal: -
1. That in law and in the facts and in circumstances of the case, the Ld. Assessing Officer grossly erred in issuing notice u/s. 148 of the Income-tax Act, 1961 and entire proceedings of reassessment deserves to be quashed.
2. That in law and in the facts and in circumstances of the case the Ld. Lower Authorities grossly erred in applying provisions of section 145(3) of the I.T. Act ignoring that assessee has maintained regularly books of accounts, quantitative details are available backed by stock register and the accounts are audited.
2.1 That in law and in the facts and in the circumstances of the case the Ld. Lower Authorities grossly erred in holding that purchases made from M/s. Karnawat Impex Pvt. Ltd. and M/s. Avi Exports at Rs. 2,77,58,869/- is bogus, is non-genuine is a sham transaction and that no actual purchases were made from both the parties.
2.2 That in law and in the facts and in circumstances of the case the Ld. Lower Authorities grossly erred in disallowing 25% of the aforesaid purchase of Rs. 2,77,58,869/- amounting to Rs. 63,39,717/- and in making a trading addition of the said amount.
2.3 That in law and in the facts and in circumstances of the case the Ld. Lower Authorities grossly erred in making addition of Rs. 55,518/- on account of commission paid for so called accommodation entries.
3. That on the facts and circumstances of the case the ld. CIT (A) grossly erred in not following the directions issued by the by the Hon’ble ITAT Bench vide its order dated 31.12.2019.
3.1 That on the facts and circumstances of the case the Ld. CIT (A) grossly erred in not following the directions issued by the Hon’ble ITAT Bench to consider the application u/s. 154 of the Act filed by the assessee before the CIT(A) and to re-adjudicate the matter.
3.2 That on the facts and circumstances of the case the Ld. CIT(A) grossly erred in confirming the addition made by the ld. Assessing Officer and ignoring the facts that in the 1st round of litigation itself, addition was reduced by his predecessor to 10% of Turnover and further benefit of GP declared was given to the assessee appellant.
3.3 That on the facts and circumstances of the case the Ld. CIT(A) grossly erred in not following binding Instruction No. 2/2008 dated 22.02.2008 issued by the CBDT which prescribed the maximum rate of GP in cases of assessee engaged in the business of manufacturing and/or trading of diamonds.
5. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing.
As the issue involved in this appeal is identical to what we have decided (supra), our finding will apply mutatis mutandis to this appeal also. In view of this grounds on merits of the case are allowed and original G.P. rate as offered by the assessee, i.e. @7.25% is confirmed and no further addition is allowed on account of commission paid for arranging the bogus purchase as the income has already been calculated after applying the provisions of section 145(3) of the Act.
In the result, the appeal of the assessee is partly allowed. the assessee raised the following grounds of appeal: -
1. That in law and in the facts and in circumstances of the case, the Ld. Assessing Officer grossly erred in issuing notice u/s. 148 of the Income-tax Act, 1961 and entire proceedings of reassessment deserves to be quashed.
2. That in law and in the facts and in circumstances of the case the Ld. Lower Authorities grossly erred in applying provisions of section 145(3) of the I.T. Act ignoring that assessee has maintained regularly books of accounts, quantitative details are available backed by stock register and the accounts are audited.
2.1 That in law and in the facts and in the circumstances of the case the Ld. Lower Authorities grossly erred in holding that purchases made from M/s. Karnawat Impex Pvt. Ltd. and M/s. Avi Exports at Rs. 93,92,532/- is bogus, is non-genuine is a sham transaction and that no actual purchases were made from both the parties.
2.2 That in law and in the facts and in circumstances of the case the Ld. Lower Authorities grossly erred in disallowing 25% of the aforesaid purchase of Rs. 93,92,532/- amounting to Rs. 23,48,133/- and in making a trading addition of the said amount.
2.3 That in law and in the facts and in circumstances of the case the Ld. Lower Authorities grossly erred in making addition of Rs. 18,785/- on account of commission paid for so called accommodation entries.
3. That on the facts and circumstances of the case the Ld. CIT(A) grossly erred in not following the directions issued by the by the Hon’ble ITAT Bench vide its order dated 31.12.2019.
3.1 That on the facts and circumstances of the case the Ld. CIT(A) grossly erred in not following the directions issued by the Hon’ble ITAT Bench to consider the application u/s. 154 of the Act filed by the assessee before the CIT(A) and to re-adjudicate the matter.
3.2 That on the facts and circumstances of the case the Ld. CIT(A) grossly erred in confirming the addition made by the ld. Assessing Officer and ignoring the facts that in the 1st round of litigation itself, addition was reduced by his predecessor to 10% of Turnover and further benefit of GP declared was given to the assessee appellant.
3.3 That on the facts and circumstances of the case the Ld. CIT(A) grossly erred in not following binding Instruction No. 2/2008 dated 22.02.2008 issued by the CBDT which prescribed the maximum rate of GP in cases of assessee engaged in the business of manufacturing and/or trading of diamonds.
The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing.
As the issue involved in this appeal is identical to what we have decided (supra), our finding will apply mutatis mutandis to this appeal also. In view of this grounds on merits of the case are allowed and original G.P. rate as offered by the assessee, i.e. @7.25% is confirmed and no further addition is allowed on account of commission paid for arranging the bogus purchase as the income has already been calculated after applying the provisions of section 145(3) of the Act.
In the result, the appeal of the assessee is partly allowed. 10. In nutshell all the three appeals are partly allowed.
The Order is pronounced in the open court on the 24th day of April 2025.