MAHENDRA KUMAR MUTHA,JODHPUR vs. DCIT, CIRCLE-3, JODHPUR

The only ground of the assessee in this appeal related to the sustenance of tradition addition by taking GP Rate at 1% as against the GP rate of 1.62% applied by AO. The fact of the case are that the assessee is doing the business under the name and style of M/s R B MUTHA AND CO and is dealing in oil and ghee on wholesale basis. During the year under consideration the assessee has filed its return of income on 21.09.2012, declaring total income of Rs. 23,79,650.00. The AO assessed total income of assessee at 1,14,23,672.00. The AO has made trading addition of Rs. 54,64,022.00 by applying Gross Profit rate 1.62% by observing in page 3 to 7 of the assessment order, the last para is of the assessment order read as under: In view of the above, it may be stated that the assessee has not discharged his onus of producing the complete books of account and in the absence of any books, the veracity of books and bills cannot be examined. Therefore the trading results cannot be accepted as such. Considering the facts and circumstances of the case, the provisions of sec 145 are hereby invoked and considering the past history of the case, average GP rate of last two years i.e. 1.62% (1.89% +1.35% / 2) is here by applied. This would result in a gross profit of Rs. 86,69,750.00 against the declared gross profit of Rs. 32,05,728.00. Therefore an addition of Rs. 54,64,022.00 is hereby made to the total income of the assessee.

Being aggrieved by the order of the A.O., the assessee carried the matter before the ld CIT (A) and submitted that the assessee is maintaining proper books of account, which are subject to audited U/s 44AB of the Income tax Act, 1961 (in short, the Act) and the complete books of accounts including day to day stock register quantitative details are being maintained the submitted before the AO. The AO has stated in order that the assessee sold goods over and above the price, but at the same time no instance of suppression of sales or purchases were pointed out by the AO. The there is no justification on the part of the AO to reject the books of accounts without pointing out any inherent defects. The books of account and quantitative details are part of audit report and have submitted before the AO.

After considering the submissions of the assessee, the Ld CIT (A) restricted the addition and directed to apply 1% of GP rate as against the 1.62% applied by the AO by observing in para 4.3 of the impugned order as under: “4.3 As regards the trading addition of Rs. 54,64,022/-, I find that the AO noted that GP rate declared by the assessee was on lower side as compared to two preceding years. The AO noted that the G. P. rate reduced from 1.35% for AY 2011-12 to 0.61% this year. The appellant has contended that decline in 4 ITA 248/Jodh/2018 Mahendra Kumar Mutha Vs ACIT gross profit was due to various factors such as increased turnover, tough competition in market, fluctuation in rate of commodity etc. I find some force in the appellant’s arguments. It is seen that the turnover of the appellant has increased from Rs. 37,37,13,018/- last year to Rs. 52,86,43,313/- this year. With increase in turnover, the profit percentage is expected to reduce. It is stated that though there was in fall in GP rate, the net profit rate increased from 0.42% to 0.46% as compared to the immediately preceding year. Keeping in view the various factors enumerated by the appellant for fall in the gross profit and particularly the fact that the turnover of the appellant had increased substantially by 49.46% during the year with slightly improved net profit rate, the addition made at Rs. 54,64,022/- (by applying GP rate of 1.62%) appears to be on higher side. However, it is fact that the appellant has not produced proper books of accounts before the AO and various discrepancies as pointed remained to be explained. Therefore, keeping in view the overall facts and circumstances of the case and considering the nature and volume of the appellant’s business, I find that it would be reasonable and most appropriate to apply GP rate of 1.00% as against 0.61% declared by the appellant and 1.62% applied by the AO, which is even on slightly lower side than the average. The AO is directed to re-work out the gross profit by applying GP rate of 1.00%. The appellant gets partial relief on this account. The ground is party allowed.”

Now the assessee is in appeal before us by taking the above mentioned ground. The ld AR for the assessee drew our attention towards the fact that this is undisputed fact that the assessee is maintaining complete books of accounts, vouchers i.e. cash book, ledger, purchase 5 ITA 248/Jodh/2018 Mahendra Kumar Mutha Vs ACIT book, sales book, journal, Vouchers for Purchases and Sales, Vouchers for Exp, further the assessee is also maintaining the complete quantity details. The fact is verifiable from the Audit Report and quantity details submitted along with the Audit report. There is no evidence with the AO that the assessee sold the goods over and above the price recorded in the books of accounts. Therefore, there is no justification in rejection of the books of account under the provisions of section 145 of the Income Tax Act. It is submitted Section 145 can only be invoked where the AO is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee. In the present case there is no dispute as regards method of accounting. Therefore, there is nothing on record to arrive at contrary finding as regards correctness, completeness of the books. Under such circumstances, there was no justification in rejection of the books of accounts of the assessee u/s.

The sole reason for rejecting the books of account and estimating of GP by applying average GP rate of last 2 year is the low GP declared in the year under consideration. It is worthwhile to mention here that the assessee is maintaining the complete quantities details the same has been submitted along with the audit report and also submitted during the assessment proceedings, vide letter which is place at Page No 8 to 41 of paper book. The quantities details have already been 6 ITA 248/Jodh/2018 Mahendra Kumar Mutha Vs ACIT submitted along with the audit report in annexure “D” forming part of Form No 3CD paper books page No 42. Further, we have submitted the month wise quantitative details during the assessment proceedings which are also placed at P. B. Page No. 43 to 54, along with the letter which is placed at paper book page No 1 and 2. The AR has further stated that the detailed reason for low GP has been submitted before the AO and CIT (A) such as increased in turnover, tough competition in market, fluctuation in rate of commodity. The AR of the assessee has also pointed that ld CIT (A) has without appreciating the fact and material available on record has arbitrary sustained the GP addition. The Ld CIT has not stated why the random GP rate of 1% is reasonable. Therefore, the adhoc trading addition may the AO and partly sustained by the Ld CIT (A) was not justified.

On the other hand, the Ld DR in his rival submissions supported the order of the ld.CIT (A).

We have considered the submissions of both the parities and perused the material available on record. In the present case, this is admitted fact that the assessee is maintaining complete books accounts including Day to Day stock register. This cannot be demined that the quantities details have already been submitted along with the audit report in annexure “D” forming part of Form No 3CD paper books page No 42. Further, we have submitted 7 ITA 248/Jodh/2018 Mahendra Kumar Mutha Vs ACIT the month wise quantitative details during the assessment proceedings which are also placed at P. B. Page No. 43 to 54, along with the letter which is placed at paper book page No 1 and 2, the other part of letter has been accepted by the AO. The ld CIT (A) has appreciated that the assessee is dealing highly fluctuating commodity, huge turnover with low margin, tough competition in the market, but has not considered while sustaining the addition. We further found that the AO has not stated a single instance where the assessee has sold the goods over and above price recorded in the books of account, no bogus purchases has been pointed out. Similarly, the decline in the GP rate and NP rate in comparison to the immediately preceding assessment year cannot be criteria to reject the books. It is because the assessee explained it. This reason for fall in GP of the assessee was nowhere controverter by the authorities below. Lower gross profit as compared to earlier year cannot be the ground to reject the books of accounts. We take support from the decision in the case of Malani Ramjivan Jagannath Vs Asstt. CIT reported 316 ITR 120 wherein it was held by Rajasthan High Court as under: “Tribunal committed basic error in not appreciating the reasoning given by the Commissioner (Appeals). It was trite to say that in the facts and circumstances of the instant case, account books were maintained as they were ordinarily maintained year after years and which were found to yield a fair result. Mere deviation in gross profit 8 ITA 248/Jodh/2018 Mahendra Kumar Mutha Vs ACIT rate cannot be a ground for rejecting books of account and entering realm of estimate and guesswork. Lower gross profit rate shown in the books of account during current year and fall in gross profit rate was justified and also admitted by the Assessing Officer as well as Commissioner (Appeals) as well as the Tribunal. Therefore, fall in gross profit rate lost its significance.

We draw strength from the decision of Coordinate Bench of the ITAT Jaipur Bench in the case of Haridas Parikh Vs. ITO reported in 113 TTJ 274 wherein it was held as under: “Unless the Assessing Officer is able to point out certain transactions which have been left to be entered in the books of account or that the assessee has sold some of the items at a price higher than what is disclosed in the books of account or if proper particulars, bills, vouchers are not forthcoming, etc., the books of 9 ITA 248/Jodh/2018 Mahendra Kumar Mutha Vs ACIT account cannot be rejected without assigning specific reasons. In the instant case merely because different range and nature of items were being dealt with by the assessee and the maintenance of quantitative stock of each and every item was not practically possible, the books of account maintained by the assessee which were free from any defect could not be rejected merely because the average GP rate was slightly lower than the average GP rate of the earlier year. In the instant case, the sales of the assessee during the year under consideration had increased substantially from Rs. 1.24 crores to Rs. 1.54 crores which resulted in marginal decline in GP rate from 11.51 per cent to 9.94 per cent, the same could not be made reason for rejecting the book results. It is well- settled business proposition that for having increase in sales, a businessman has to sacrifice a small margin of profit rate. During the year the total sales of the assessee had increased from Rs. 1.24 crores to Rs. 1.54 crores. No defect was found in the books of account. There was no valid reason for rejection of books of account during the year under consideration and thereby applying higher GP rate of 11.51 per cent, which was earned by the assessee on low sales of Rs. 1.24 crores in the preceding year. The other reason stated by the Assessing Officer of making Trading addition was that in the assessment year 2001- 02, GP rate declared by the assessee at 9.64 per cent was not accepted and Trading addition so made by rejecting the books of account was confirmed by the Commissioner (Appeals), therefore, by following the order of the earlier year the Assessing Officer had made an addition by rejecting the GP rate of 9.64 per cent declared during the year under consideration. The assessee placed on record the order of the Tribunal in the assessee's own case in the assessment year 2001-02 wherein addition made by the 10 ITA 248/Jodh/2018 Mahendra Kumar Mutha Vs ACIT Assessing Officer by applying GP rate of 10.14 per cent was deleted by the Tribunal and the GP rate of 9.64 per cent declared by the assessee was found to be reasonable and correct. As the facts and circumstances during the year under consideration were the same, the issue was squarely covered by the order of the Tribunal in the preceding year. Respectfully following the same, the findings and conclusion of the lower authorities were to be rejected and the Assessing Officer was to be directed to delete the impugned Trading addition made by him.

Furthermore, the ld CIT (A) has sustained the addition on ad hoc basis without pointing out any specific material. In our considered view such ad hoc GP rate of 1% is not permissible. As such the learned CIT (A) has given a contrary finding by accepting the books of accounts on the one hand and making ad hoc addition by sustaining the GP rate of 1% instead of 0.61% declared by the assessee, on the other hand. Accordingly, in the backdrop of the aforesaid discussion and precedent, we set aside the order of the ld CIT (A) and direct the AO to delete the entire addition made by him. Hence the ground of appeal of the assessee is allowed.

In the result, the appeal of the assessee is allowed. Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962 by placing the details on the notice board.