Case Number: ITA 1155/DEL/2020
Appellant: Blue Stampings & Forgings Ltd., Faridabad
Respondent: DCIT Circle-1, Faridabad
Assessment Year: 2013-14
Result: Appeal allowed, addition on account of lower net profits rejected
Case Filed On: 2020-06-02
Order Type: Final Tribunal Order
Date of Order: 2023-01-23
Pronounced On: 2023-01-23
The case involves Blue Stampings & Forgings Ltd., Faridabad (the appellant), appealing against the order passed by the Deputy Commissioner of Income Tax (DCIT) Circle-1, Faridabad, for the assessment year 2013-14. The appellant challenged the addition of Rs.33,11,185/- made by the DCIT on account of a fall in net profits, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Income Tax Appellate Tribunal (ITAT) ruled in favor of the appellant, rejecting the addition made on account of lower net profits.
The appellant, Blue Stampings & Forgings Ltd., is engaged in the business of manufacturing rough iron forgings and machining parts of vehicles. A survey under Section 133A of the Income Tax Act was conducted on 20.12.2012, where certain disclosures were made by the appellant. The appellant filed a return of income declaring Rs.2,78,37,670/- for the assessment year 2013-14, which was subjected to scrutiny assessment.
The Assessing Officer (AO) made certain additions on account of lower net profits by invoking Section 145(3) of the Income Tax Act. The addition was subsequently revised under Section 154 of the Act, and an amount of Rs.33,11,182/- was retained on the grounds of lower reporting of net profit.
The appellant challenged the action of the AO before the CIT(A). The CIT(A) upheld the rejection of the books under Section 145(3) and confirmed the additions made on account of low net profit. Aggrieved by this decision, the appellant preferred an appeal before the ITAT.
The counsel for the appellant argued that the addition of Rs.33,11,182/- on account of a marginal fall in net profit was without basis and made on flimsy grounds. It was pointed out that the AO invoked the provisions of Section 145(3) and rejected the books of account without showing any defect in the audited books of account. The reasons given by the AO for applying Section 145(3) were:
The counsel submitted that the accounts were audited, and the difference between the net profit rate declared by the appellant and the preceding year was marginal. The turnover reported during the year was Rs.90.30 crore, with a profit of Rs.5.49 crore. It was argued that the AO did not point out any specific defect or discrepancy in the expenses and that the photocopies of bills and vouchers produced did not affect the completeness of the books of account.
The ITAT carefully considered the rival submissions. It noted that the AO rejected the books of account solely on the basis of general remarks about the photocopies of bills and vouchers. The AO did not make any independent inquiry into the correctness of the bills from third parties. The ITAT observed that the net profit rate declared by the appellant was 6.15%, compared to 6.52% in the previous year, and there was no striking discrepancy in the net profit ratio. The ITAT found that the gross profit ratio was higher than the previous year, and the decline in net profit was due to higher depreciation and interest on loans for fixed assets.
The ITAT referenced the Delhi High Court judgment in CIT vs. Paradise Holidays, which enunciated the circumstances where invoking Section 145(3) would not be justified. The ITAT concluded that the AO was not justified in rejecting the books of account solely based on the production of photocopies of bills and vouchers. The ITAT found no justification for the addition made by the AO and upheld by the CIT(A).
The ITAT set aside the action of the CIT(A) and directed the AO to restore the position taken by the appellant. The appeal of Blue Stampings & Forgings Ltd. was allowed, and the addition of Rs.33,11,182/- on account of lower net profits was rejected.
Implications: This case underscores the importance of proper justification when invoking Section 145(3) of the Income Tax Act. The decision highlights that minor discrepancies in net profit ratios should not lead to drastic actions such as the rejection of audited books of account without concrete evidence of incompleteness or inaccuracy.
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