INCOME TAX ACT, 1961

Section 145(3)

Accounting method - Rejection - Addition to book results on account of alleged unverifiable purchase -

AO rejected assessee's books of account by invoking provisions of section 145(3) and disallowed 25% of unverifiable purchases and made trading addition of Rs. 52,78,865. Further, CIT (A) upheld the rejection of books of account and estimated G.P. rate at 19.25% restricting the trading addition to Rs. 21,65,807 on account of alleged unverifiable purchase. Assessee submitted that in diamond trade, gross profit margin remains very low in comparison to the other gems stones and he still reported a GP rate of 10%. Further, in respect of stones and studded jewellery, the assessee submitted that he had shown GP rate of 20%, which was better in comparison to preceding assessment years. It was accordingly submitted that the addition so confirmed by the CIT (A) should be deleted. Held: It is settled legal proposition that once the books of account were rejected, the AO can proceed to reassess the income on the basis of best judgment instead of resorting to making the addition to the books results. In instant case, the basis of estimating GP rate of 19.25% as against declared GP rate of 14.99% was not discernable from the order of the CIT (A) where he only stated that 50% of total purchases were found bogus/unverifiable. Further, he did not take into consideration the fact that the assessee disclosed GP rate of 10% in respect of diamond trading, which was stated to be pretty robust as per industry standards. Further, in respect of trading of semi precious stone and studded jewellery, the assessee disclosed GP rate of 20%, which was better than the average gross profit rate of last three assessment years. In such circumstances, even where the books of accounts were rejected, there was no basis for making trading addition in the hands of the assessee. Accordingly, the addition of Rs. 21,65,807 so confirmed by the CIT (A) was deleted.

Followed:CIT v. Gotan Lime Khanij Udhyog (2002) 256 ITR 243 (Raj) : 2002 TaxPub(DT) 0479 (Raj-HC)

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

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