The AO failed to consider genuine purchases and sales recorded in the books of account, hence the court struck the addition: Himachal Pradesh High Court.
The AO failed to consider genuine purchases and sales recorded in the books of account, hence the court struck the addition, upheld by the High Court of Himachal Pradesh through the learned Judge JUSTICE SABINA and JUSTICE SATYEN VAIDYA, in the case of PCIT v. smart value products and services ltd., (Income Tax Appeal No.37 of 2016).
Brief facts of the case:
The respondent/assessee company used a direct marketing business strategy and earned money by selling various consumer items at retail. The assessee recorded a gross profit of Rs.1,06,69,510 and a net profit of Rs.91,90,10,669 in his financial statements. As a result, the net profit rate was 1.16 percent. T
After reviewing the record, the Assessing Officer discovered that the assessee attempted to provide month-by-month closing stock but failed to explain it during the assessment period. The Assessing Officer determined that the assessee’s claim was inaccurate and that the month-by-month trade account provided by the assessee was self-contradictory.
The Assessing Officer had created the trade account, and the assessee’s gross profit was calculated against the sales, yielding a gross profit rate of 51.8 percent. As a result, the Assessing Officer made an addition of Rs. 14.48 crores.
The Assessing Officer noted that the assessee had failed to explain why the payment made to Sai Purna Caters without TDS should not be denied and added back. The Assessing Officer found that the assessee had failed to explain, and hence a payment of Rs. 4,16,405 should be added back to the assessee’s income.
The assessee filed an appeal with the Commissioner of Income Tax (Appeals), Shimla, against the Assessing Officer’s ruling. The CIT (A) granted the appeal in part. The CIT (A) removed the addition based on negative peak closing stock. The net profit increase was calculated using the requirements of sections 145(3) and 144 of the Income Tax Act.
The agency filed an appeal with the Income Tax Appellate Tribunal Division Bench in Chandigarh. The department’s appeal was rejected by the tribunal.
The Tribunal determined that the assessing officer did not believe that the assessee made real purchases and transactions that were recorded in the assessee’s books of account. The Assessing Officer also ignored the assessee’s business model, which was based on a multi-level marketing scheme in which items were received throughout the year by different warehouses at different stations.
JUDGEMENT:
The Tribunal’s remark was supported by the court. The court noticed that many vendors received lump-sum payments throughout the year. The assessee had fully presented all of the documents, including books of account, sales and purchase vouchers. The Assessing Officer, on the other hand, had compiled a month-by-month trading report and discovered negative stock in the assessee’s books. Despite the fact that the Assessing Officer had discovered no unreported purchases. The AO constructed the trading account in his own unique approach to increase the gross profit.
There were no sales discovered outside of the books of account. The Assessing Officer might have assessed the taxpayer in accordance with the requirements of the Income Tax Act of 1961. The Assessing Officer issued the decision under Section 143(3) of the Act in respect of the assessee’s same business operations, which resulted in a net profit of 2.53 percent annum, the court stated that the percentage was 2.99 percent.
JUDGEMENT REVIEWED BY – HARILAKSHMI