AO couldn’t reject books of account merely on the grounds of decline in gross profit over past year: ITAT

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Income-tax Act 1961; Method of accounting; Estimation of income (GP rate)

Case Details: Sanjay Agarwal v. ITO - [2021] 131 taxmann.com 331 (Jaipur - Trib.)

Judiciary and Counsel Details

    • Sandeep Gosain, Judicial Member and Vikram Singh Yadav, Accountant Member
    • Nikhilesh Kataria, (CA) for the Appellant. 
    • Smt. Runi Pal, (ACIT) for the Respondent.

Facts of the Case

Assessee was engaged in trading of cardamom and various other commodities. He filed return showing gross profit (GP) rate of 0.38 per cent. The case was selected for scrutiny and Assessing Officer (AO) passed impugned ex parte order and rejected the books of account. He estimated GP rate of 0.69 per cent on declared sales and made addition to the total income. The matter listed before the Tribunal.

The assessee submitted complete documents and records before the Commissioner (Appeals) and the same were accepted as additional evidence. The CIT(A) remanded the case. In remand proceedings, AO accepted the trading results of the assessee. However the CIT(A) summarily rejected the remanded report and sustained the original trading addition. Assessee filed appeal before the Tribunal.

ITAT Held

The Tribunal held that it is an admitted position of the revenue that past year results cannot be made a guiding factor to reject book of account. The assessee has also contended that given the exceptional circumstances where the turnover has increased by almost 130 times, the past year results are not reflective of state of affairs of current year.

The assessee had explained the substantial fall in GP rate due to fall in prices of cardamom where the prices had reduced by almost half the rate at the end of the year as compared to beginning of the year. There is nothing on record in terms of comparative profits declared in similar line of trade in commodities. Therefore, there was no rational basis for estimating the gross profit rate by the AO even where the books of account are rejected.

Therefore, AO wasn’t justified in estimating the gross profit rate even where the books of account are rejected. Thus, the trading additions so made by the AO and confirmed by the Commissioner (Appeals) was to be deleted.

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