ARBUDA TEXTILE MILL,AHMEDABAD vs. NFAC, DELHI PRESENT JURIS. DY.CIT, CIRCLE-3(1)(1), AHMEDABAD

The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee.

Before us, the Counsel for the assessee reiterated the arguments taken before CIT(Appeals) which is to the effect that the assessee had declared turnover of 19.5 crores, that the assessee was dealing with over 3,000 varieties of goods and therefore was not practically possible to maintain stock register, that physical stock verification was carried out and the closing stock was arrived at on that basis, which fact was also noted by the auditor in the tax audit report, and that the estimation of gross profit at 11% as against 8.5% declared by the assessee was arbitrary.

In response, the Ld. DR placed reliance on the observations made by the Assessing Officer and Ld. CIT(Appeals) in their respective orders.

We have heard the rival contentions and perused the material on record. At the outset, it would be useful to place reliance on few judicial precedents which have adverted on this issue. In the case of M. Durai Raj Arbuda Textile Mill vs. DCIT Asst.Year –2018-19 - 5– vs. Commissioner of Income-tax [1972] 83 ITR 484 (Kerala)[06-03-1971], the ITO rejected books of accounts of assessee, a dealer in rice on whole sale and commission basis, on grounds that rate of profit shown was low when compared to other similar traders for maintaining stock book on basis of number of bags instead of maintaining it in terms of weight for proper verification and for insufficient addresses of customers given in duplicate sale bills without which verification of sales was not possible. The Assessing Officer estimated higher turnover by applying higher gross profit rate and, accordingly, made additions which were confirmed by Tribunal. Hon'ble High Court held that in a wholesale business like that of assessee, who buys and sells in terms of number of bags assessee was not under any obligation to maintain a stock register of his products by weight and non-maintenance of such a stock register was by itself no ground to reject his accounts. The High Court further held that there was no need to have complete particulars of names and addresses of customers in case of cash transactions, and absence of such particulars in sale bills could not be a ground for not accepting books of account of an assessee. Therefore, since Tribunal neither found assessee's explanation in regard to low profits to be not true nor there was any finding that purchases had been exaggerated or sales had been suppressed, or that any transaction had not come into accounts Tribunal was not justified in rejecting assessee's accounts.

In Paramount Impex vs. Assistant Commissioner of Income-tax, Circle-J, Ludhiana [2020] 117 taxmann.com 802 (Chandigarh - Trib.)/[2020] 183 ITD 556 (Chandigarh - Trib.)[30-06-2020], the ITAT held that where assessee was dealing in a large number of small items and it Arbuda Textile Mill vs. DCIT Asst.Year –2018-19 - 6– was consistently following method of determining stock at end of year by physically verifying same, in view of fact that all purchase and sale vouchers and other records had been found to be in order, mere fact of non- maintenance of stock register could not be basis for rejection of books of account if Revenue had found no other defect in books of assessee and there was no hindrance in determining true and correct profits earned by assessee.

In the case of Maruti Udyog Ltd. vs. Commissioner of Income-tax, Delhi [2017] 88 taxmann.com 98 (Delhi)/[2018] 253 Taxman 60 (Delhi)/[2018] 406 ITR 562 (Delhi)[07-12-2017], the High Court made the following observations:

In the case of Fine Switchgears vs. Additional Commissioner of Income Tax [2017] 88 taxmann.com 779 (Amritsar - Trib.)/[2017] 185 TTJ 488 (Amritsar - Trib.)[02-11-2016], ITAT held that mere absence of stock register, where the fall in GP rate stands explained and where no specific defect has been pointed out, in the case of Ganesh Foundry v. ITO [2000] 67 TTJ (Jd) 434 has been held not detrimental. The ITAT further observed that in the case of M. Durai Ravi v. CIT [1972] 83 ITR 484 (Ker), it has been held that non-maintenance of stock register is not Arbuda Textile Mill vs. DCIT Asst.Year –2018-19 - 7– a ground for rejection of books, particularly when no finding has been recorded that purchases were exaggerated or that sales were suppressed.

The issue before us relates to rejection of books of accounts of the assessee and estimation of gross profit by the Assessing Officer merely on the ground of non-maintenance of item-wise and month-wise stock register. On careful consideration of the facts of the present case, we find that the assessee is a partnership firm engaged in the business of job-work of fabric processing and has declared a substantial turnover of about ₹19.5 crores. It is an undisputed fact that the assessee is dealing with a very large variety of inputs such as colours, chemicals, firewood and spares running into thousands of items. The assessee has consistently explained that, having regard to the nature of its business and the multiplicity of items consumed in the job-work process, it is practically impossible to maintain item-wise and month-wise quantitative stock registers. At the same time, it is also borne out from the record that the assessee has maintained regular books of accounts which are duly audited, that physical verification of stock was carried out and the value of closing stock was arrived at on that basis, and that this practice has been duly reported by the tax auditor in the audit report. We further find that except for the non-maintenance of detailed stock register in the format desired by the Assessing Officer, no specific defect has been pointed out in the books of accounts maintained by the assessee. There is no finding by the Assessing Officer that purchases were inflated, sales were suppressed, or that any transaction was found to be outside the books of accounts. The quantitative details in respect of major consumables such as firewood and colours and chemicals were furnished by the assessee and have not been Arbuda Textile Mill vs. DCIT Asst.Year –2018-19 - 8– shown to be incorrect. In such circumstances, rejection of books of accounts solely on the ground of non-maintenance of stock register, without pointing out any other infirmity, cannot be sustained. The Hon’ble Kerala High Court in the case of M. Durai Raj v. CIT has held that non-maintenance of a particular form of stock register, by itself, is not a valid ground for rejection of books of accounts when there is no finding of suppression of sales or inflation of purchases. Similarly, the decision of the Chandigarh Bench of the Tribunal in Paramount Impex v. ACIT clearly lays down that where the assessee is dealing in a large number of small items and is consistently following the method of physical verification of stock at year end, mere non- maintenance of stock register cannot justify rejection of books if no other defect is found. The Hon’ble Delhi High Court in Maruti Udyog Ltd. v. CIT has also categorically held that mere non-maintenance of stock register cannot form the basis for rejection of books of accounts, particularly when physical verification of stock has been carried out and reflected in the financial statements.

Applying the ratio of the above judicial pronouncements to the facts of the present case, we are of the considered view that the Assessing Officer was not justified in rejecting the books of accounts of the assessee merely on account of non-maintenance of detailed stock register, especially when the nature of business itself makes such maintenance impracticable and when no other defect has been pointed out in the books. Consequently, the estimation of gross profit at 11% of turnover, as against the gross profit of about 8.5% declared by the assessee, is found to be arbitrary and based on assumptions rather than on any concrete material or comparable cases.

In view of the above facts and respectfully following the judicial precedents discussed hereinabove, we hold that the rejection of books of accounts under section 145 of the Act is unsustainable. Accordingly, the addition of ₹48,67,190/- made on account of estimation of gross profit is deleted. The order of the Ld. CIT(Appeals) upholding the action of the Assessing Officer is set aside, and the appeal of the assessee is allowed.

In the result, the appeal of the assessee stands allowed. This Order pronounced in Open Court on 16/12/2025