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Income Tax Appellate Tribunal, AMRITSAR BENCH, AMRITSAR.
Before: SH. SANJAY ARORA & SH. N. K. CHOUDHRY
THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR. BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER I. T. A. Nos. 738 & 739/(Asr)/2017 Assessment Years: 2009-10 & 2010-11
Subhash Chander Aggarwal, Vs. Asstt. C. I. T., Prop. M/s. Prabh Dayal Om Range-II, Jalandhar Parkash, 157, Gulab Devi Hospital Road, Jalandhar [PAN: AAKPA 7004L] (Appellant) (Respondent)
Appellant by : Sh. J. S. Bhasin (Adv.) Respondent by: Sh. Gautam Deb (D.R.) Date of Hearing: 31.07.2018 Date of Pronouncement: 29.10.2018
ORDER Per Sanjay Arora, AM: This is a set of two Appeals by the Assessee directed against the separate Orders by the Commissioner of Income Tax (Appeals)-1, Jalandhar (‘CIT (A)’ for short) of even date (30.10.2017), partly allowing the assessee’s appeal contesting his assessments u/s. 143(3) of the Income Tax Act, 1961, ('the Act' hereinafter) for Assessment Years (AYs.) 2009-10 & 2010-11.
The brief facts of the case, largely undisputed, are that the assessee’s proprietary business (in the name, instead of M/s. Prabh Dayal Om Prakash) was subject to survey proceedings under section 133A of the Act on 22/2/2008, whereat an income disclosure for Rs. 100 lacs, including on account of unexplained
2 ITA Nos. 738 & 739/Asr/2017 (AYs 2009-10 & 2010-11) Subhash Chander Aggarwal v. Asstt. CIT (excess) stock (at Rs. 41 lacs), was made. The years under reference are the following two years, for which the assessee’s accounts disclose a gross profit (trading margin) of 3.87 % and 3.93 % respectively, i.e., in conformity with that for the preceding years, for which the disclosed gross profit (GP) rate varies in the range of 3.8% to 3.85% (on trading in pipes). The trading results for the preceding as well as the current years is reproduced as under for ready reference:
Total Gross A. Y. Total Gross A. Y. GPR % GPR % turnover Profit turnover Profit PIPES CHINA-WARES
2008-09 443310404 17067433 3.85 2008-09 - - - 2009-10 480865688 18609491 3.87 2009-10 1839027 147155 8.00 2010-11 546741404 21538594 3.93 2010-11 10072514 805801 8.00 2011-12 4.0.0 2011-12 166,70014 849162 5.09 2012-13 589667975 25776386 4.37 2012-13 19380605 969053 5.00 2013-14 604006516 26535093 4.39 2013-14 26046928 1302427 5.00
The assessee, in the business of trading in chinaware and pipes, i.e., apart from submersible pumps, was found not to be maintaining any stock records, stated to be not practical in view of the large number of items, with each having its own set of sizes and dimensions. The assessee’s trading results were, in the absence thereof, found not verifiable. The assessee’s accounts, being regarded as not correct or complete, the Assessing Officer (AO) disregarded the assessee’s trading results of the pipe business, relying on the decisions in, inter alia, CIT v. British Paints India Ltd.[1991] 188 ITR 44 (SC); Investment Ltd. v. CIT [1970] 77 ITR 533 (SC); S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579 (SC); Bombay Cycle Stores Co. Ltd. v. CIT [1958] 33 ITR 13 (Bom); Ghanshyamdas Permanand v. CIT [1952] 21 ITR 79 (Nag.); and Ratanlal Omprakash v. CIT [1981] 132 ITR
3 ITA Nos. 738 & 739/Asr/2017 (AYs 2009-10 & 2010-11) Subhash Chander Aggarwal v. Asstt. CIT 640 (Ori). – also noting their ratio, and made an addition for Rs. 5 lacs and Rs. 4.5 lacs (for each of the two years under reference respectively) to the declared gross profit, which stood confirmed in appeal for the same reason/s. Aggrieved, the assessee is in second appeal.
Before us, the assessee’s principal contention, relying on the decisions in CIT v. Om Overseas [2009] 315 ITR 185 (P&H) and CIT v. Ludhiana Steel Roll Mills [2007] 295 ITR 111 (P&H), was that no specific defect had been pointed out by the AO in rejecting the assessee’s books of account, so that the said rejection is not valid in law. On being questioned by the Bench about the correctness of the closing stock, the principal ingredient for arriving at the trading results, i.e., in the absence of stock records, so that the same could not be ascertained, as explained in many decision, as in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC), the ld. counsel, Sh. Bhasin, Advocate, would submit that, even so, rejection of accounts would not per se entitle the Revenue to make an addition, much less at an arbitrary sum. That is, an addition is not a concomitant of rejection of accounts, as explained in CIT v. Gotan Lime Khanij Udhyog [2002] 256 ITR 243 (Raj). The assessee’s book results for the following two years, i.e., AYs. 2012-13 and 2013-14, have been accepted. Merely because there has been a survey at the assessee’s business premises (some time prior to the first year under reference), whereat an undeclared stock – which could in fact represent undisclosed earnings for more than one year, was found, would not by itself imply that an addition to the declared results shall, for the following periods, follow as a result. The ld. Departmental Representative (DR) would, on the other hand, rely on the orders by the Revenue authorities, stating that the addition as made, as well as its’ quantum, is justified in the facts and circumstances the case. The assessment for the current year/s could not possibly be guided by that for the subsequent years,
4 ITA Nos. 738 & 739/Asr/2017 (AYs 2009-10 & 2010-11) Subhash Chander Aggarwal v. Asstt. CIT so that nothing turns on the assessment for the subsequent years having been finalized without making any addition on trading account.
We have heard the parties, and perused the material on record. 4.1 The respective cases The assessee’s case is that his accounts, notwithstanding the non- maintenance of any stock records, are correct and complete, from which the true profits of his business can be deduced. The Revenue contests this. The assessee’s accounts, in its view, could not be said to be reliable and are liable for rejection, i.e., in the facts and circumstances of the case. The law in the matter is trite, as explained and applied in several decisions, to a number of which, in fact, reference stands made by the Revenue (AO), to no rebuttal. This is to be coupled with the fact that the assessee’s stock, upon physical verification during the survey proceedings, was found to be in excess than that determined on the basis of the trading results being disclosed by the assessee, and toward which, therefore, the assessee disclosed an income of Rs.41 lacs as his business income, and which works to about 0.92% of his turnover for the relevant assessment year, i.e., AY 2008-09 (i.e., the pipe business). The trading results (on sale of pipes), which are the same as that for the immediately preceding year and, in fact, the preceding years, therefore, cannot be accepted and are liable to be estimated. The same stand estimated at an increase of Rs.5 lacs from that declared, i.e., at Rs.191.09 lacs, on a turnover of Rs.4808.66 lacs, yielding a gross profit of 3.97%, as against a declared gross profit of Rs.186.09 lacs (at 3.87%). The net profit, despite the addition, works to 0.61%, as against a declared net profit of 1.51% for the immediately preceding year. No explanation for the decline in the trading margin, i.e., when reckoned upon including the addition of Rs.41 lacs admitted on being found in excess (for AY 2008-09), is advanced. For AY 2010-11, the addition made and
5 ITA Nos. 738 & 739/Asr/2017 (AYs 2009-10 & 2010-11) Subhash Chander Aggarwal v. Asstt. CIT sustained is at Rs.4.50 lacs, increasing the gross margin to Rs.219.89 lacs (on a turnover of Rs.5467.41), i.e., a margin of 4.02%, which is again consistent with that assessed for the immediately preceding year (AY 2009-10), with the asseessee’s disclosed results being comparable and inflicted with the same infirmity as that for the said preceding year. The trading addition for both the years is to be accordingly upheld.
4.2 It may be, to begin with, relevant to delineate the law in the matter, as explained by the higher courts of law, that is, qua the non-acceptance (euphemistically also called ‘rejection’) of accounts. Section 145 of the Act read as under: Method of accounting.
‘Section 145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.' Clearly, therefore, the rejection of accounts can only follow a finding, based on cogent reasons, that the assessee’s accounts are not correct or complete, so that income, as a result, cannot be properly deduced therefrom. The provision is mandatory (Nalinikant Ambalal Mody v. CIT [1966] 61 ITR 428 (SC)). It is nevertheless a machinery provision meant to effectuate the charge. It cannot qualify the charging section, so as to make the latter otiose, nor can be given an overriding effect so as to defeat the charge (CIT v. Standard Triumph Motor Co.
6 ITA Nos. 738 & 739/Asr/2017 (AYs 2009-10 & 2010-11) Subhash Chander Aggarwal v. Asstt. CIT Ltd. [1979] 119 ITR 573 (Mad)). The Revenue is entitled to judge the accounts of the assessee each year on its merits. There is no question of estoppel in such a case (Jamna Das Rameshwar Das v. CIT [1952] 21 ITR 109 (Punj)). Keeping of a stock register is of great importance because that is a means of verifying the assessee’s accounts by having a ‘quantitative tally’. If, after taking into account all the material, including want of a stock register, it is found that from the method of accounting the correct profits of the business are not deducible, the operation of section 145(3) of the Act would be attracted (S.N. Namasivayam Chettiar (supra)). Valuation of closing stock, which therefore includes its quantity as well, on which the per unit is to applied, is integral to any accounting process. We may conclude the discussion on the legal aspect of the matter by alluding to the following observations by the Apex Court in Chainrup Sampatram (supra), to draw home the significance of correct valuation of closing stock in arriving at correct profits, and which includes the twin aspects of quantity and the per unit value:
‘It is a misconception to think that any profit “arises out of the valuation of the closing stock” and the situs of its arising or accrual is where the valuation is made. Valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the “source” of such profits. Nor can the place where such valuation is made be regarded as the situs of their accrual. The source of the profits and gains of a business is indubitably the business, and the place of their accrual is where the business is carried on. As such profits can be correctly ascertained according to the method adopted by an assessee only after bringing into the trading account his closing stock wherever it may exist, the whole of the profits must be taken to accrue or arise at the place of carrying on the business.’
4.3 Thus, while the assessee insists on his accounts being, despite the non- maintenance of stock records, correct and complete, the Revenue emphasizes on the primacy of the stock record, drawing further support from the fact of the assessee’s accounts yielding an inventory which, on physical verification, was found to be far lower than that reflected per his accounts, i.e., on the basis of the
7 ITA Nos. 738 & 739/Asr/2017 (AYs 2009-10 & 2010-11) Subhash Chander Aggarwal v. Asstt. CIT trading margin disclosed thereby. Clearly, therefore, a stock register is of prime relevance in first determining and, then, verifying the assessee’s trading results, the absence of which therefore makes the same, i.e., the trading results, unverifiable. The question, very simply, is, how have the accounts for the year been closed, arriving at a figure of closing stock, i.e., in the absence of any stock register, which only would give a quantitative account of the goods traded in, bearing details of the goods (of each type) brought forward, bought and sold during the year, giving a balance, valuation of which, again at cost or market value – whichever is less, would yield the valuation of the closing stock? Rather, the cost, which is generally less than the market value, is itself, in the absence of a quantitative record, difficult to ascertain in most cases. There is no explanation? In fact, the quantitative figures reflected by the stock register should be cross verified through physical examination, as indeed the business houses do and, in fact, periodically, so as to confirm and validate the book figure as well as ensure the correctness of its accounts as, without doubt, it is only the stock physically available that represents the actual asset of the firm (business entity), and must therefore enter the accounts. This is also relevant as there is also the possibility of leakage, shortage, etc. necessitating periodic adjustments, as by way of write back or write off in accounts the minor differences that may arise or are determined on physical verification (PV). No wonder, PV forms an essential part of the internal checks, integral to any robust accounting process. No such checks are clearly in place. All this constitutes a serious defect, particularly considering that there is no corroborative or circumstantial evidence to support the assessee’s disclosed results. The next best, in the absence of a stock register, is a quantitative tally, providing, as an aggregate for the year, a quantitative account for each item traded in. Though not as detailed as a stock register, which exhibits day to day movement,
8 ITA Nos. 738 & 739/Asr/2017 (AYs 2009-10 & 2010-11) Subhash Chander Aggarwal v. Asstt. CIT it yet provides a sound basis for closing the accounts. Clearly, none of this is done or made available. How, then, can the accounts be said to be correct or complete, or said to yield the correct business profit/loss for the accounting period, which is fixed for income-tax purposes as the financial year immediately preceding the relevant assessment year. When coupled with the fact that the stock, on physical verification on 22/2/2008, i.e., shortly prior to the commencement of the current year, was found to be at an excess by Rs.41 lacs with reference to the book figure disclosing a GP rate of 3.85%, leaves one in no manner of any doubt that the assessee’s gross profit is in fact higher than that disclosed figure. That is, the same proves the assessee’s accounts to be not yielding the correct or true profits, also in fact, indicating the extent thereof and, thus, liable to be rejected. Nothing has been brought on record to rebut this. Surely, there can be under the circumstances little doubt that the veracity of the assessee’s accounts or the reliability of its operating results cannot be verified or, in other words, accepted as reliable. It may at this stage be relevant to consider the assessee’s reliance on case law. In CIT v. Om Overseas [2009] 315 ITR 185 (P&H), the rejection of accounts was found not valid as there was, apart from a marginal fall in the profit rate, no specific defect pointed out by the AO, so that all the authorities; the first appellate authority onwards, regarded the same as not sustainable. The raw material consumption in respect of each item produced could not be reflected in the accounts as the production was in pieces of different designs and sizes. In fact the assessee was a 100% export house, with its’ entire income being exempt, so that no purpose was served by making an addition. We have already clarified that the rejection is to be made where on an overall view of the matter it is found that the correct income, i.e., the true profits and gain of business, is not deducible from the assessee’s accounts. The present case is of a trading where one to one
9 ITA Nos. 738 & 739/Asr/2017 (AYs 2009-10 & 2010-11) Subhash Chander Aggarwal v. Asstt. CIT correspondence between what is bought and what is sold. That apart, the assessee has not led or shown any basis for closing his accounts or even otherwise sought to validate the cost of the goods sold, as reflected in his accounts, in any manner. The matter is primarily factual, even as evident from the fact that the Hon’ble Court clarified that no substantial question of law arose for its determination. The said decision would not be of any assistance to the assessee. In Ludhiana Steel Roll Mills (supra), the rejection of accounts was reversed by both the first and the second appellate authority, finding no discrepancy in the maintenance of accounts by the assessee. The matter is again based on factual findings. No perversity being pointed out in the impugned order, the Hon’ble Court declined to interfere, dismissing the Revenue’s appeal. We are again unable to see as to how any assistance could be drawn from the said case in the instant case.
4.4 The next question is qua the profit that is to be estimated; assessee’s accounts being decidedly not amenable to deducing the correct operating results. In this regard, the disclosed result for the past years may be looked at, which though suffer from the same infirmity/s. The same, however, are available only for trading in pipes, the chinaware trade, as it appears, commencing only in AY 2009-10. As per the chart submitted by the assessee, detailing the trading margin for the two categories separately on a year-wise basis, the Revenue has accepted the trading margin of 8% qua chinaware. As afore-noted, that for pipes ranges between 3.8% ot 3.85%. The addition for Rs.41 lacs to the closing stock, i.e., would increase the GP, as the balancing figure, to 4.77% (on the disclosed turnover of Rs.4433.10 lacs). We say so as no material or evidence of sale out-of-books was found during survey or is otherwise alleged by the Revenue. That, however, would presume that the excess income of Rs.41 lacs has been earned in its entirety during the previous year relevant to AY 2008-09. This may well be true, though, at the same time, it
10 ITA Nos. 738 & 739/Asr/2017 (AYs 2009-10 & 2010-11) Subhash Chander Aggarwal v. Asstt. CIT could also be that the same represents accumulated profit for more than one accounting period. An inference as to the latter gets refurbished in the absence of any purchase and sale outside books being found, so that the profit get accumulated in the firm by way of under-reporting of stock value. Again, without doubt, it is neither feasible to, given the data available, determine the accounting period/s for which the excess profit pertains to nor indeed the exact extent of the profit in-as-much as this profit is also liable to be siphoned off, so that the under- valuation of the closing stock may not necessarily capture the exact magnitude of the under-reporting of profit. The issue, under the circumstances, in our view, is to be seen from the stand-point of the reasonability of the estimation of profit at an excess of Rs.5 lacs and Rs.4.50 lacs for the two assessment years under reference, being AYs. 2009-10 and 2010-11. The same yields a gross profit rate of 3.97% and 4.02% respectively on the disclosed turnover for the relevant years, i.e., as against a declared margin of 3.85% for the preceding year, found short by close to 1%. The net profit rate, as found by the ld. CIT(A), is also comparable with the preceding year/s. The same, in our view, is, therefore, and clearly, reasonable. This also meets the assessee’s reliance on Gotan Lime Khanij Udhyog (supra), even as the trading results of the chinaware business have been accepted, making no addition to the trading results disclosed in its respect. The assessee’s contention that no addition has been made for the subsequent years, i.e., AY 2011-12 and 2012-13. How would, one wonder, that be relevant? As explained in Jamna Das Rameshwar Das (supra), there is no estoppel in such cases. Even otherwise, each year is a independent unit of assessment. There is thus, valid basis for estimating the assessee’s gross margin at the amounts assessed.
4.5 We decide accordingly, so that the impugned order/s warrants no interference.
11 ITA Nos. 738 & 739/Asr/2017 (AYs 2009-10 & 2010-11) Subhash Chander Aggarwal v. Asstt. CIT 5. In the result, the assessee’s appeals are dismissed. Order pronounced in the open court on October 29, 2018 Sd/- Sd/- (N. K. Choudhry) (Sanjay Arora) Judicial Member Accountant Member Date: 29.10.2018 /GP/Sr. Ps. Copy of the order forwarded to: (1) The Appellant: Subhash Chander Aggarwal, Prop. M/s. Prabh Dayal Om Parkash, 157, Gulab Devi Hospital Road, Jalandhar (2) The Respondent: Asstt. C. I. T., Range-II, Jalandhar (3) The CIT(Appeals)-1, Jalandhar (4) The CIT concerned (5) The Sr. DR, I.T.A.T. True Copy By Order