Section 145, read with section 263 – Where Assessing Officer rejects books of account of the assessee due to its defects and applies a particular gross profit rate to derive assessee’s income, after applying his mind and after examining records and details, his order cannot be said to be erroneous or prejudicial to the interest of revenue and consequently it is not permissible for Commissioner to invoke revisionary powers to complete assessment in manner he likes by simply applying different gross profit rate.
FACTS
During the course of assessment proceedings, the Assessing Officer noted that the assessee firm had not maintained stock register and details of material consumed on a dayto- day basis. In the absence thereof, the consumption of material was not fully verifiable. Thus, on noticing various defects in the books of account of the assessee, Assessing Officer rejected the same as per section 145(3).
The Assessing Officer rather than making item-wise additions deemed it appropriate to estimate the gross profit rate considering the past history of the assessee. He accordingly worked out the addition, by applying gross profit rate of 9.5%, which was derived by comparing current year’s turnover with past year’s turnover.
Subsequently, the Commissioner pointing out defects, similar to the defects pointed out by the Assessing Officer, rejected the books of accounts of the assessee and exercising his revisionary power u/s. 263, calculated income of assessee taking gross profit rate of 10% by treating the order passed by the Assessing Officer as erroneous and prejudicial to the interest of revenue. On assessee’s appeal.
HELD
In the year under consideration, the pross profit rate declared by the assessee was 8.5% while in the preceding assessment year gross profit rate of 10% was applied by the Assessing Officer after rejecting the books of account. However, the turnover of the assessee increased in the assessment year under consideration in comparison to the immediately assessment preceding year. The Assessing Officer, therefore, keeping the past history in mind considered it fair and reasonable to apply gross profit rate of 9.5%. Therefore, it cannot be said that the Assessing Officer did not apply his mind while framing the assessment.
The Commissioner did not doubt the turnover shown by the assessee but was of the view that Assessing Officer ought to have applied gross profit rate of 10% instead of 9.5%. However the various defects in the books of account of the assessee on which jurisdiction was assumed by Commissioner u/s. 263, were already considered by the Assessing Officer while rejecting the books of account and determining the income by applying the gross profit rate.
It is well-settled that once the books of account are rejected, the only alternative to determine the income is application of net profit rate. Also, the Assessing Officer framed the assessment after examining the records and the details which were called for by him and also after applying his mind came to the conclusion of applying Gross Profit rate of 9.5%. Therefore, the assessment order passed by him cannot be said to be erroneous or prejudicial to the interest of the Revenue.
Also, when the Assessing Officer as well as Commissioner were of the same view that in the assessee’s case, gross profit rate was to be applied for determining the taxable income, it cannot be said that the order passed by the Assessing Officer by applying a particular gross profit rate, was erroneous or prejudicial to the interest of revenue. Therefore, the order passed by the Commissioner by simply applying a different gross profit is held to be not sustainable.
