ITAT Chandigarh Deletes GP Addition; Rejects Audited Book Rejection Without Specific Defects

Roop Square Private Limited Vs ACIT (ITAT Chandigarh)

The Income Tax Appellate Tribunal (ITAT), Chandigarh Bench, adjudicated cross-appeals filed by the assessee (ITA No. 198/Chd/2021) and the Revenue (ITA No. 249/Chd/2021) against the order dated July 30, 2021, passed by the Commissioner of Income Tax (Appeals)-5, Ludhiana [CIT(A)] for Assessment Year 2017–18.

Material Facts & Procedural History

• The assessee was engaged in retail trading of garments and jewellery.
• A search and seizure operation under Section 132(1) was conducted on November 1, 2017 at the business and residential premises of the Roop Square Group, to which the assessee belongs.
• Following the search, a notice under Section 153A was issued. The assessee filed its return declaring an income of ₹31,48,430, which matched its original return filed on October 30, 2017.
• The Assessing Officer (AO) completed the assessment at ₹3,70,03,300, making two additions:
  1. ₹6,85,735 under Section 68 as unexplained cash credit (alleged undisclosed money introduced as sales based on forensic analysis of a seized hard disc).
  2. ₹3,31,69,133 by rejecting trading results under Section 145(3) and enhancing the gross profit (GP) rate on jewellery sales from 11.65% (declared on turnover of ₹12,29,17,614) to 38.63% (based on price tags found during search).
• On appeal, the CIT(A):

• • Deleted the Section 68 addition of ₹6,85,735.
  • Upheld the rejection of books under Section 145(3) but restricted the GP rate addition from 38.63% to 20%, thereby reducing the addition to ₹1,02,69,581.

• Both the assessee and the Revenue appealed to the ITAT against the CIT(A)’s order.

Legal Issues & Statutory Provisions

• Section 145(3) of the Income Tax Act, 1961: Validity of rejecting audited books of account and estimating GP rate without pointing out specific errors, omissions, or defects.
• Section 68 of the Income Tax Act, 1961: Sustainability of unexplained cash credit addition on recorded sales where cash in hand remained positive and revenues were fully accounted for.

Parties’ Submissions

• Assessee’s Submissions:
  • Complete quantitative stock details were maintained and audited (Annexure-9 of Tax Audit Report), without any defect being pointed out by the AO.
  • Cash sales during demonetisation were fully accounted for in the books, with no undisclosed money found.
  • The AO accepted both total sales (₹12,29,17,614) and total purchases; accepting sales while alleging suppressed GP is contradictory.
  • Price tags found during search (a year later on existing stock being wound up) cannot determine actual GP on past sales. No incriminating material showing excess profit was found during search.
• Revenue’s Submissions:
  • Discrepancies between price tags found during search and returned sales, alongside low GP rate (11.65%) compared to preceding years (15.75% in AY 2015-16 and 16.28% in AY 2016-17), justified rejection of books and GP enhancement.
  • Forensic analysis of the seized hard disc showed date manipulation in sale bills, justifying the Section 68 addition.

Tribunal Observations & Findings

• Rejection of Books & GP Enhancement:
  • Rejection under Section 145(3) requires clear evidence that accounts are incorrect or incomplete. The AO failed to point out specific defects in audited books or stock registers.
  • The AO accepted total purchase and sales figures; enhancing GP based on price tags from a subsequent search date was based on pure surmises and conjectures.
  • Panic buying of jewellery during demonetisation is a recognised commercial reality, and non-availability of PAN for sales under ₹2 lakhs or lack of CCTV footage does not invalidate recorded sales.
  • No incriminating material was found during search indicating higher cash realization than recorded. Ad-hoc estimation of 20% GP by CIT(A) was arbitrary and lacking factual foundation.
• Section 68 Addition:
  • Forward-dated bills were duly recorded in books of account on later dates, meaning revenue was fully accounted for.
  • Day-to-day cash book reflected sufficient cash in hand without turning negative even if disputed sales were excluded. Thus, Section 68 was inapplicable.

Directions & Final Decision

• Assessee’s Appeal (ITA No. 198/Chd/2021): Allowed. The ITAT set aside the rejection of books under Section 145(3) and directed the deletion of the restricted GP addition of ₹1,02,69,581.
• Revenue’s Appeal (ITA No. 249/Chd/2021): Dismissed. The deletion of the Section 68 addition of ₹6,85,735 and the relief granted on GP rate were affirmed.

Cases Discussed

• PCIT vs. Garden Silk Mills Limited (Gujarat High Court), 388 ITR 237
• CIT vs. Pink City Developer (Rajasthan High Court), 389 ITR 153
• ACIT vs. M/s Hira Panna Jewellers (ITAT Visakhapatnam), ITA No.253/Viz/2020, 202 DTR 337

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH