ARBUDA TEXTILE MILL,AHMEDABAD vs. NFAC, DELHI PRESENT JURIS. DY.CIT, CIRCLE-3(1)(1), AHMEDABAD
Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: DR. BRR KUMAR & SHRI SIDDHARTHA NAUTIYAL
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”),
National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated
08.09.2025 passed for A.Y. 2018-19. 2. The assessee has raised the following grounds of appeal:
“1. Ld. CIT(A) has erred in upholding the addition of AO of Rs.48,67,190/- by rejecting books of accounts of assessee company without pointing out any discrepancy and thereby erred estimating Gross Profit of the assessee company to 11% from 8.5%
already offered by the assessee.
The appellant craves to leave, add, alter, modify and/or withdraw any grounds of appeal either before or during the course of the hearing.” Asst.Year –2018-19 - 2–
The brief facts of the case are that the assessee is a partnership firm engaged in the business of job-work of fabric processing. For the Assessment Year 2018-19, the assessee filed its return of income on 07.10.2018 declaring a loss of ₹72,27,795/-. The return was processed under section 139(1) of the Income-tax Act, 1961 (“the Act”). Subsequently, the case was selected for complete scrutiny and during the course of assessment proceedings, the Assessing Officer asked the assessee to furnish, inter alia, month-wise and item-wise details of opening and closing stock, inventory, purchases and sales. In response, the assessee explained that considering the nature of its business involving job-work of fabrics and the use of a very large variety of colors, chemicals, firewood and spares, it was not possible to maintain month-wise and item-wise stock registers. However, the assessee submitted yearly quantitative details of opening stock, inward, consumption and closing stock in respect of firewood and colors and chemicals, and also furnished details showing the large number of spares used in the business. The Assessing Officer was not satisfied with the explanation furnished by the assessee. According to the Assessing Officer, in the absence of a proper stock register, the correctness and completeness of the books of accounts could not be verified. He therefore rejected the books of accounts under section 145 of the Act and proceeded to estimate the gross profit. By adopting a gross profit rate of 11% on the total turnover of ₹19,53,17,858/-, as against the gross profit rate of about 8.5% shown by the assessee, the Assessing Officer computed gross profit of ₹2,14,84,965/- as against ₹1,66,17,775/- declared by the assessee. The difference of ₹48,67,190/- was added to the income of the assessee. Consequently, the assessed income was determined at a loss of ₹23,60,605/-. Asst.Year –2018-19 - 3–
Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The principal ground of appeal raised by the assessee was against the rejection of books of accounts and the consequential addition of ₹48,67,190/- on account of estimation of gross profit. Before the CIT(Appeals), the assessee contended that the books of accounts were duly maintained and audited, and merely because item-wise and month-wise stock registers were not maintained, the books could not be rejected. It was submitted that due to the nature of job-work business and the wide variety of inputs used, it was impracticable to maintain detailed stock registers for each and every item. The assessee further submitted 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. It was also contended that the Assessing Officer had not pointed out any specific defect in the books of accounts or in the quantitative details furnished, and that the estimation of gross profit at 11% was arbitrary and based merely on assumptions. The assessee relied upon several judicial precedents to argue that non-maintenance of stock register by itself cannot be a ground for rejection of books of accounts.
The CIT(Appeals), after considering the assessment order, the submissions of the assessee and the judicial precedents relied upon, upheld the action of the Assessing Officer. The CIT(Appeals) observed that maintenance of a stock register is a key and essential record for verifying the correctness and completeness of trading and manufacturing results. Asst.Year –2018-19 - 4–
book results. The CIT(Appeals) held that non-maintenance of stock register was a serious lapse and justified the rejection of books of accounts. The CIT(Appeals) further held that the estimation of gross profit at 11% of turnover made by the Assessing Officer was fair and reasonable considering the facts and circumstances of the case. Finding no infirmity in the action of the Assessing Officer, the CIT(Appeals) confirmed the rejection of books of accounts as well as the addition of ₹48,67,190/- and dismissed the appeal filed by the assessee.
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% 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:
The mere non-maintenance of the stock register cannot form the basis of rejection of the Assessee's books of accounts. As rightly pointed out by the Assessee, although a separate stock register may not have been maintained, a physical verification of the stock on yearly basis was undertaken and was reflected in the balance sheet of the Assessee. In a large number of decisions, including Pandit Bros v. CIT [1954] 26
ITR 159 (Punj. & Har.), Bombay Cycle Stores Co. Ltd. v. CIT [1958] 33 ITR 13
(Bom.) and S. Veeriah Reddiar v. CIT [1960] 38 ITR 152 (Ker.), it has been held that the mere non- maintenance of stock register would not lead to the conclusion that profit of the Assessee could not be determined on the basis of the books of accounts maintained by it.
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% Asst.Year –2018-19 - 9–
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 (DR. BRR KUMAR) JUDICIAL MEMBER Ahmedabad; Dated 16/12/2025
TANMAY, Sr. PSआदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to :
1. अपीलाथŎ / The Appellant
2. ŮȑथŎ / The Respondent.
3. संबंिधत आयकर आयुƅ / Concerned CIT
4. आयकर आयुƅ(अपील) / The CIT(A)-
5. िवभागीय Ůितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाडŊ फाईल / Guard file.
आदेशानुसार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt.