In case of rejection of books, estimation of gross profit based on past history justified

Brief of the case

Assesse, a manufacture of harvester combines. In course of assessment , assesse failed to produce books of accounts of its business .There was also a decline in G.P. rate to 10.59% from 11.25% in earlier years. There were also certain discrepancies in figures of closing stock. Therefore, AO thus rejected book results and estimated G.P. at rate of 12.5% of turnover.The assessee pleaded since it is not feasible to maintain stock register, therefore books should not be rejected CIT (A) upheld rejection of books , but considered G.P. rate taken by A.O. of previous year, i.e. 11.5%. Tribunal held that when books of accounts are rejected, estimation of profit is must. Tribunal also noted that there was no increase in turnover during relevant period. Moreover, it was also evident that CIT(A) considered past history of assesse for estimating profit. Tribunal thus upheld G.P. rate adopted by Commisioner (Appeal).

In course of assessment , A.O. made a disallowance of ‘ advertisement and publicity expenses ‘ on account of non-deduction of TDS u/s 194C. CIT(A) upheld AO’s order . Tribunal held that since GP rate had been determined on estimate basis , no other disallowance of any expense separately was called for. Imugned disallowance was therefore deleted.

Facts of the case

• The assessee was a manufacturer of harvester combines. During the assessment proceeding assessee failed to produce the books of accounts as asked for by the Assessing Officer. No quantitative details of opening stock or closing stock was submitted, neither the production register nor stock register for raw material and finished/semi finished goods were produced. No record of monthly scrap was shown.
• Further during relevant year there was a decline in gross profit to 10.59% from 11.28% and 11.09% in assessment year 2008-09 and 2009-10 respectively. Further there were certain differences in the closing balances of certain parties.
• The Assessing Officer on this basis and relying on various case laws rejected the books of accounts under section 145(3) and estimated Gross Profit @12.5% of the turnover.

Contention of Assesse

• The assessee pleaded since details were furnished before AO and it is not feasible to maintain stock register therefore books should not be rejected. However, there is no need to elaborate the same as the AR preferred not to press the ground related to rejection of books. Further assessee cited various comparable cases to justify the fall in N.P. rates.

• Regarding the estimation of Gross Profit rate the assessee submitted that Gross Profit rate for Assessment Year 2008-09 being 11.28% and that of Assessment Year 2009-10 being 11.09% the rate of 10.59% in Assessment year 2010-11 is not a big fall. Further it was submitted that the fall in Gross Profit has been explained to the Assessing Officer as well as CIT(A). This was due to steep increase in turn over of the assessee. In view of the said submissions it was prayed that Gross Profit rate 10.5% shown by the assessee may be upheld.

Held by CIT(A)

• The CIT opined that books of A/c are rightly rejected u/s 145(3) of the Income Tax Act and in this case since the appellant itself has shown Gross Profit rate of 11.28% in the assessment year 2008-09, the Gross Profit rate of 11.5% may be taken for this year compared to the Gross Profit rate of 10.59% shown by the assessee as against 12.5% applied by the AO. In this way, the CIT(A) partly allowed this ground of the assessee.

HELD by ITAT

• Certain other alarming facts were also found by the Assessing Officer, the obvious conclusion made by him was to reject the books of account. The assessee preferred not to press the ground related to rejection of books of accounts before us. In such a scenario the estimation of Gross Profit rate is a must. The assessee cannot plead to accept the Gross Profit rate as declared by him, when books of A/c and details were not produced before authorities below. The CIT(A), in this case has given a very detailed reasoned finding as to the fact that, why a Gross Profit rate of 11.5% may be applied.

• It is clear that there is increase in turnover of assessee as compared to earlier years. The Ld. CIT(A) considered past history of assessee for estimating profit when no books were produced before AO.

• Therefore there was no infirmity in the order of CIT(A) on this issue. The Gross Profit rate 11.5% as estimated by the CIT(A) seems reasonable in the facts & circumstances of the case.