AO Failed To Consider Genuine Purchases And Sales Entered In The Books Of Account: Himachal Pradesh High Court Deletes Addition

The respondent/assessee company followed a direct marketing business model and derived income from retail trading of various consumer goods. The assessee had declared gross turnover to the tune of Rs.91,90,10,669 and the net profit was declared to the tune of Rs.1,06,69,510. Thus, the net profit rate was 1.16%. T

The Assessing Officer, after going through the record, observed that the assessee had tried to furnish month-wise closing stock and had failed to explain it during the period of assessment. The Assessing Officer had found that the claim of the assessee was incorrect and had concluded that the month-wise trading account filed by the assessee was self-contradictory.

The Assessing Officer had prepared the trading account, the gross profit of the assessee came out against the sales, and, as a result, the gross profit rate came to 51.8%. Consequently, an addition of Rs. 14.48 crores was made by the Assessing Officer.

The Assessing Officer observed that the assessee had failed to explain why the payment made to Sai Purna Caters without deducting TDS should not be disallowed and added back. The Assessing Officer had concluded that the assessee had failed to explain and, consequently, a payment of Rs. 4,16,405 should be added back to the income of the assessee.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals), Shimla, against the order passed by the Assessing Officer. The CIT (A) partly allowed the appeal. The CIT (A) deleted the addition made on the basis of negative peak closing stock. The addition on account of net profit computation was made by applying the provisions of sections 145(3) and 144 of the Income Tax Act.

The department challenged the order before the Income Tax Appellate Tribunal Division Bench, Chandigarh. The tribunal dismissed the appeal of the department.

The Tribunal held that the assessing officer did not consider that the assessee made genuine purchases and sales which were entered into the books of account of the assessee. The Assessing Officer also did not consider the nature of the business of the assessee, which was based on a multi level marketing system where the goods were received throughout the year by different warehouses at separate stations.

The court upheld the observation of the Tribunal. The court observed that lump-sum payments were made to the different suppliers throughout the year. All the records, i.e., books of account, sales and purchase vouchers, had been fully produced by the assessee. The Assessing Officer had, however, prepared a month-wise trading account and had found negative stock in the books of the account of the assessee. Although the Assessing Officer had not found any unrecorded purchases. The AO, in his own way, prepared the trading account to enhance the gross profit.

"No sales were found outside the books of account. The Assessing Officer could have made the assessment as per the provisions of the Income Tax Act, 1961. The Assessing Officer had passed the order under Section 143(3) of the Act in respect of the same business activities of the assessee, which gave rise to net profit of 2.53% and 2.99%," the court said.

Case Title: PCIT Vs Smart Value Products And Services Ltd.

Case No: Income Tax Appeal No.37 of 2016

Citation: 2022 LiveLaw (HP) 11

Dated: 28.03.2022

Counsel For Appellant: Advocate Vandana Kuthiala

Counsel For Respondent: Advocate Vishak Mohan

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