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Facts
The assessee, a joint venture in infrastructure construction, was selected for scrutiny for AY 2018-19. The AO observed a low GP rate compared to previous years and the non-maintenance of a day-to-day stock register. Despite the assessee's explanations regarding the nature of business and increased expenses, the AO rejected the books of accounts under Section 145(3), estimated GP at 5.69%, and made an addition of Rs. 3,59,72,920/-, which was confirmed by the Ld. CIT(A).
Held
The Tribunal held that in the nature of the assessee's business (infrastructure construction), it is difficult to maintain a day-to-day stock register. Since the assessee furnished audited books, receipts were through banking channels, and no other defects were found by the AO in the books, sales, or expenditure, the rejection of books solely for non-maintenance of stock register was not justified. The Tribunal, relying on precedents, deleted the impugned addition.
Key Issues
Whether the rejection of books of accounts under Section 145(3) and estimation of Gross Profit rate is justified solely on the ground of non-maintenance of day-to-day stock register, especially in the nature of infrastructure construction business.
Sections Cited
250, 145(3), 143(3)
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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: S/SHRI SANJAY GARG & NARENDRA PRASAD SINHA
आदेश आदेश/O R D E R आदेश आदेश
Per Sanjay Garg, Judicial Member
The above appeal has been preferred by the assessee against order passed by the Ld.Commissioner of Income-Tax(Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “ld.CIT(A)] dated 05.02.2024 under section 250 of the Income Tax Act, 1961 ("the Act" for short) for the assessment year 2018-19.
The assessee has raised the following grounds of appeal:
"1 In the facts and circumstances of the case and in law, Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in rejecting the books of accounts u/s 145(3) of the IT Act, 1961 merely on the ground of non- maintenance of stock register.
2 2. In the facts and circumstances of the case and in law, Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in rejecting the books of accounts u/s 145(3) of the IT Act, 1961 without pointing out any defect in the maintenance of books of accounts.
3. In the facts and circumstances of the case and in law, Learned CIT(A) has erred in sustaining the trading addition of Rs.3,59,72,920/- made by the learned AO merely on account of lower GP rate.
4. In the facts and circumstances of the case and in law, Learned CIT(A) has erred in sustaining the application of GP rate of 5.69% as against GP rate of 2.04% declared by the assesse applied on average basis without considering the expenditure under individual heads of machinery hiring & transportation.
5. The assessee craves your indulgence to add amend or alter all or any grounds of appeal before or at the time of hearing."
Brief facts of the case are that the assessee is engaged in the construction and maintenance of roads, rails, bridges, tunnels, ports, harbour, runways etc. During the year under consideration, the assessee carried out two road projects. The case of the assessee was selected for scrutiny assessment under section 143(3) of the Act.
During the assessment proceedings, the AO noted that the assessee had shown low GP rate as compared to the last two years. The AO show-caused the assessee in respect of the low GP rate for the year under consideration. The assessee further explained that the assessee, a joint venture, had executed major projects in earlier years, and that in the year under consideration, only two projects were under execution and only some part of the contract was executed. Therefore, the turnover of the assessee was reduced, and further there were increase in machinery, vehicle and transportation expenses, resulting into reduction of GP rate. The assessee furnished all the relevant details, such as cash book, bank book, ledger, journal ledger, sale and purchase ledgers and supporting vouchers etc. It was also explained to the AO that all the receipts were through banking channels, and 3 mostly from the Government authorities. Further that all the expenditure was subjected to TDS and mostly paid through banking channel.
The AO, however, observed that the assessee has not maintained day-to-day stock register.
The assessee explained to the AO that the assessee was engaged in construction and maintenance of roads, rails, bridges etc., and that in the nature of the business of the assessee, it was not possible to maintain day-to-day stock register.
The AO, however, did not get satisfied with the above reply of the assessee. He observed that the GP rate for the year under consideration was low as compared to the earlier years, and further that the assessee had not maintained day-to-day stock register. He, therefore rejected the books of accounts of the assessee, and estimated the GP rate of the assessee for the year under consideration at 5.69% of the turnover, taking average of the last three years, and made the impugned addition of Rs.3,59,72,920/-.
Being aggrieved by the said order, the assessee preferred appeal before the ld.CIT(A), but remained unsuccessful. Thus, the assessee has come in further appeal before us.
We have heard rival contentions and gone through the record. It is to be noted that the nature of the business of the assessee is of construction and maintenances of roads, rail, bridges, tunnels, ports, habour, runways etc. The raw-material consumed in such project is bricks, stones, sand and other construction material. The project is carried out in many places, and in such type of nature of business, it is very difficult to maintain day-to-day stock register of the raw- material. The books of accounts of the assessee have been audited and the audit report duly furnished along with return of income. The AO did not point out any defect in the said audit report. The assessee had maintained cash book, bank accounts, ledgers, journals, sales & purchase register, but the AO has not found any defect in the same. The AO has not found any out-of-record purchases or sales in this case. The only reasons found by the AO for rejecting the books of accounts is that the assessee had not maintained day-to-day stock register. The assessee in this respect has already explained that in the nature of business of the assessee, it was not possible to maintain such day-to-day register.
So far as the low GP rate for the year under consideration is concerned, the assessee in this respect has relied on the following chart:
A.Y. 2018-19 A.Y. 2017-18 A.Y. 2016-17 S.No Remarks
984899302 2026016329 Turnover (Rs) 645462528 The N.P. rate 51626036~ disclosed by the Gross Profit 20067850 142442200 assessee during the year (Rs) is all time high and is better in comparison to earlier two years. 2.04% 7.03% G.P. Rate 7.99%
14228117 17890265 Net Profit (Rs) 1701681 1.44% 0.88% 0.26% N.P. rate
The ld.counsel for the assessee, referring to the above chart, has submitted that though, the GP rate of the assessee for the year under consideration has reduced, but the NP rate of the assessee has considerably increased. We note that for the year assessment year
5 2016-17, the turnover of the assessee was Rs.64.54 crores, and the assessee had shown net profit of Rs.17.01 lakhs only. For the assessment year 2017-18 the turnover, the total turnover of the assessee was Rs.202.60 crores, but the assessee had shown NP of Rs.1.78 crores. For the year under consideration i.e. Asst.Year 2018- 19, the turnover of the assessee was Rs.98.48 crores, whereupon the assessee had shown NP of Rs.1.42 crores. When compared to the turnover of the assessee with the earlier Asst.Year 2017-18, and the NP shown by the assessee, it reveals that the NP rate of the assessee for the year under consideration is higher than the earlier years, despite, the higher GP in the earlier years. The case of the assessee is not of trader of movable stock, rather the assessee is in the business of construction of infra projects on contract basis. It is not a case of undisclosed sales, whereby the assessee can be doubted of showing the GP rate by making out of books sales. The receipts of the assessee, as explained, and mostly from the Government Authorities and have been routed through the bank channels and the TDS duly deducted on the expenditure. The AO has not pointed any defect or infirmity in the books of accounts of the assessee nor about the sales and expenditure recorded by the assessee. Merely because, the GP rate for the under consideration is low as compared to the earlier years, that itself, cannot be the ground to reject the books of accounts. The reliance in this respect can be placed on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Smt.Poonam Rani, 326 ITR 0223, wherein, the Hon’ble Delhi High Court has held that in the absence of any finding that the assessee has inflated the cost of raw- material or the cost of processing or that he has made out of books sales of finished goods and suppressed sales, the AO could not have increased GP rate, merely because it was low as compared to the GP
6 rate of the preceding year. The Hon’ble Delhi High Court has further observed that there is no statutory provision requiring the assessee to maintain daily stock register, and that, maintenance of day-to-day stock ledger, in itself, does not lead to inference that the accounts of the assessee is defective or the assessee had concealed its income.
Identical view has been taken by the Coordinate Bench of the ITAT, Ahmedabad in the case of Asian Granito India Ltd., vide order dated 23-10-2019, wherein the Coordinate Bench has held that the books of accounts cannot be rejected if the assesse does not maintain stock register unless and until, it was coupled with other defects, such as, sales and purchase out-of-the books of accounts.
Similar view has been taken by the Coordinate Bench of the ITAT, Jodhpur in the case of Haridas Parikh Vs. ITO, (2008) 113 TTJ 0274.
In the case in hand, the assessee has not only explained that in the nature of business of the assessee it will be difficult to maintain day-to-day stock register, but the assessee has also explained, the reasons for low GP rate for the year under consideration. The assessee has duly furnished audited books of accounts along with the details of sales, purchases, cash book, bank book and supported by vouchers. The assessee has further demonstrated that almost all the receipts were from NHAI and that all the receipts were through banking channels, and further that all the expenditure was subjected to TDS, and that most of the payments were also made through banking channel. The books of accounts of the assessee were duly audited. The AO, without pointing out any defect or infirmity in the 7 same, simply rejected the same because of non-maintenance of day- today stock register, which in our view is not justified, in the light of the case laws cited above.
Considering the facts and circumstances of the case, in the light of the case laws, as discussed above, the impugned addition made by the lower authorities, is not sustainable, and the same is accordingly ordered to be deleted.
In the result, the appeal of the assessee stands allowed. Order pronounced on 26th June, 2025.