INCOME TAX ACT, 1961

Section 145(3)

Accounting method - Rejection of books of account - No specific defects in the books of account pointed out - Rejection thereof uncalled for

The assessee was a wholesale dealer of spectacle frames, cases and lenses. His premises was subjected to survey under section 133A when an additional sum of Rs. 20 Lacs was offered for taxation in order to cover up various discrepancies in stock. The assessee filed its return of income declaring income of Rs. 6.21 lacs which was taken up for scrutiny by the AO. It was observed by AO that the assessee framed its statement of accounts in such a manner so as to marginalize the tax effect of additional declared amount of Rs. 20 Lakhs. On this premise, AO rejected the books of account of the assessee under section 145 and estimated gross profit @ 42.36% which resulted in addition of Rs. 12 lacs. Matter travelled to ITAT who deleted this addition. However, consequent upon intervention by CIT under section 263, fresh assessment order under section 143(3) read with section 263 was passed by AO making addition of Rs. 25.63 lacs, including the above-mentioned 12 lacs. On appeal, CIT(A) confirmed the order of the AO in making further addition of Rs. 20 lacs and in not reducing Rs. 12 lacs which was the amount of addition already deleted by Tribunal. Held: On perusal of records, it transpired that the books were subjected to Tax Audit and the quantitative details were duly furnished by the assessee during the course of assessment proceedings. It could also be observed that discrepancies were found only in the physical stock of frames. To cover up the same, the assessee had already offered additional income of Rs. 20 Lacs. No discrepancies were found in the stock of lenses. During original assessment proceedings, AO chose to make addition of Rs. 12 Lacs since the closing stock of lenses was valued at Rs. 5 per pair as against cost of Rs. 17 per pair. However, the aforesaid action had already been turned down by ITAT and addition of Rs. 12 Lacs was deleted. In other words, the matter of valuation of closing stock of Lenses had already attained finality. Further, the assessee was maintaining proper books and furnished the requisite details, vouchers, bills, purchase and sales register as called for by AO during the course of assessment proceedings. However, no specific defect could be pointed out by the AO in the documents furnished by the assessee before rejecting the books of account. Rather, the assessee was successful in explaining that fall in gross profit was mainly on account of old stock of lenses for which there was no fresh purchases during the year. There was only disposal of the old stock and the balance closing stock was valued at lower of cost or market price, which action the ITAT had already accepted. In view of this, it was held that the rejection of books of account under section 145 was not justified and the estimation of Profit as done by AO could not be sustained. Hence, AO was directed to accept the income declared by the assessee as per its computation of income.

Followed:M/s. Sunrise-Optics Vs. ITO [ITA No. 3524/Mum/2011 Order, dated 3-4-2013]

REFERRED :

FAVOUR : In assessee's favour

A.Y. : 2002-03

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