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Facts
The assessee, a dentist and trader of dental products, filed a return declaring nil income. The case was selected for scrutiny due to various reasons including low PBDIT ratio and large value transactions. The Assessing Officer (AO) rejected the assessee's books of accounts and estimated purchases, sales, and gross profit, making additions. The CIT(A) partly allowed the appeal.
Held
The Tribunal held that the rejection of the assessee's books of account by the AO was not justified as no detailed findings were provided, and the AO inconsistently used the rejected books for certain calculations. The Tribunal also found that the gross profit rate declared by the assessee was justified. The appeal was partly allowed.
Key Issues
Whether the rejection of the assessee's books of accounts by the AO was justified. Whether the estimation of gross profit by the AO and CIT(A) was arbitrary and lacked basis, and if the assessee's declared gross profit rate is acceptable.
Sections Cited
145, 143(2), 142(1), 234A, 234B, 234C, 274, 271(1)(c), Chapter VIA
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Income Tax Appellate Tribunal, AHMEDABAD “SMC” BENCH, AHMEDABAD
Before: Ms. SUCHITRA KAMBLE & SHRI MAKARAND VASANT MAHADEOKAR
O R D E R This appeal is filed by the assessee against order dated 23.02.2024 passed by the CIT(A), National Faceless Appeal Centre (NFAC), Delhi for the Assessment Year 2016-17.
The assessee has raised the following grounds of appeal :-
“1. The order passed by the Ld. CIT(A) is illegal and bad in law. The Ld. CI(A) has erred both on facts and law. It is submitted that it may be held so now.
2. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in rejecting books of accounts invoking section 145 of the Act. It is submitted that method of accounting is correctly followed by the assessee and books of accounts are audited by Chartered Accountants. It is submitted that order of Id. A.O. be cancelled now. It is submitted that it may he held so now.
3. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. A.O. in estimating purchases of imported at Rs.92,62,756 and sales of Rs.2,04,77,358. It is submitted that these are estimated without any basis and need to be deleted. It is submitted that may be held so now.
4. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in estimating Gross profit @30% and confirming addition of Rs.24,80,333/-. It is submitted that Ld. AO has erred in estimating gross profit without any basis and needs to be deleted. Under the facts and circumstances of the case, the estimation of gross profit needs to be cancelled and actual profit being genuine, ought to have been confirmed.
5. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO not allowing set off of Business Loss of Rs.4,62,863 as claimed by assessee. Under the facts and circumstances of the case, loss being genuine, ought to have been allowed.
6 The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO not allowed deductions of Rs.1,55,735 claimed by assessee under chapter VIA of the Act. Under the facts and circumstances of the case, deduction being genuine, ought to have been allowed.
7 Both the lower authorities have erred in law and on facts of the case in confirming the addition without supplying necessary material to the Appellant on the basis of which impugned addition has been made.
8 Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
9 The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in levying interest u/s. 234A/B/C of the Act.
10 The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in initiating penalty proceedings us. 274 r.w.s. 271(1)(c) of the Act.
11 The Appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
The assessee is a Dentist and doing trading of dental products as well as doing dental practice in partnership firm namely “International Dental Product” and also providing dental practice in his individual capacity. The assessee filed return of income on 13.10.2016 declaring total income of Rs. nil. the case of the assessee was selected for complete scrutiny for the reasons that (i) very low PBDIT ratio in specific business code and turnover range, (ii) large value sale of share or unit reported in securities Transaction Tax return which is settled otherwise than by the actual delivery of transfer (STT Code-3), (iii) large value sale of share or unit reported in Securities Transaction Tax return which is settled otherwise than by the actual delivery or transfer (STT Code-3 and turnover in Part A P&L Account of ITR) and (iv) receipt of large value foreign remittance and low/nil business income (Form 15CA and total income in Part B-TI of ITR). Notice under Section 143(2) of the Act was issued on 03.08.2017. Notice under Section 142(1) read with Section 129 of the Act along with detailed questionnaire was issued on 03.09.2018, 11.10.2018 and 142(1) notice dated 11.10.2018. Show cause notice was issued on 26.11.2018 in respect of producing some evidence like bills and vouchers. The assessee filed reply and the details. The Assessing Officer observed that as per the income tax return of the assessee, the relevant figures in respect of closing stock is Rs.50,32,703/-, opening stock is Rs.31,81,407/-., purchases are shown at Rs.54,15,553/-. The assessee has shown net loss in his business of trading of dental products. The Assessing Officer further noticed that on perusal of Form 3CD, at para 35(a) to 35(bc) the tax auditors have not mentioned quantitative details which are mandatory in case of manufacturing and trading for true and fair disclosure. The assessee vide reply dated 16.11.2018 submitted that the assessee has not maintained stock register. The assessee has submitted quantitative details of dental products subsequently and as per the same, the Assessing Officer observed that quantitative details of dental products showing opening balance quantity 3932 total number of items and closing balance quantity 10881 total no. of items and the listed number of items are more than 350, which is much more than the earlier number of 200 given by assessee as mentioned by the Assessing Officer in the Assessment Order in paragraph no.6.4. The Assessing Officer, after going through the details, held that the assessee was dealing in Dental Products on which huge margins are observed as per common knowledge and it would be reasonable if markup margin of 50% is taken upon these traded goods would meet ends of justice. Thus, the Assessing Officer held that after adding the figures of trading account of all the other expenditure including the opening stock total of left side is Rs.1,36,51,572/- and the same is taken as total purchase plus direct expenditure.
After the amount of purchase of traded goods and adding markup of 50% upon same the revised sales of assessee was estimated at Rs.2.04,77,358/- in which no closing stock was considered being carried forward. Thus, the Gross Profit figure was taken by the assessee at Rs.68,25,786/- in the trading account of the assessee and considering that further held that there was no any closing stock remaining to be sold at the end of the year and revised Gross Profit as per trading account would be Rs.68,25,786/- less Rs.14,92,899/- equal to Rs.53,32,887/- and added the said amount of Rs.53,32,887/-. The Assessing Officer further made addition of Rs.20,875/- on account of Exhibition Expenses.
Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
The Ld. AR submitted that ground no.1 is general, hence not adjudicated.
5.1 As regards ground nos.2, 3 & 4 relating to estimating purchase at Rs.92,62,756/- and sales at Rs.2,04,77,358/- is not justified as well as estimating Gross Profit @ 30% also not justified. The Ld. AR submitted that the CIT(A) while partly confirming the impugned addition after directing the Assessing Officer to adopt the Gross Profit rate @ 30% as against 50% adopted by the Assessing Officer. The Ld. AR submitted that the rejection of books of accounts is not justified as the books of account are audited and the Auditor has not made any adverse remarks in Tax Audit Report. The Ld. AR submitted that quantitative details were furnished before the Assessing Officer which includes: -
- Sales Register - Itemised break-up of closing stock - Ledger of Purchases (Import) - Import bills - Form 15CA - VAT Annual return - Detailed Ledger of sales 4% - Detailed Ledger of sales OGS 2%
- Detailed Ledger of Sales OGS 5% - Acknowledgement of ITR and STI - Trading Account, Profit & Loss Account and Balance Sheet - Tax Audit Report 5.2 The Ld. AR further submitted that no specific defect was found by the Assessing Officer either in the Books of Account or in the above referred documentary evidences. The Ld. AR further submitted that non-maintenance of stock register cannot be the ground for rejection of the Books of Account under Section 145(3) of the Act. The Ld. AR relied upon the following decisions: -
– Jaytick Intermediates P. Ltd. – 242 Taxman 319 (Guj) – CIT vs. Smt. Poonam Rai – 326 ITR 223 (Delhi) – Mansi Prints Pvt. Ltd. – & 872/Ahd/2009 5.3 The Ld. AR further submitted that the Assessing Officer rejected books of account broadly on the count that there was some discrepancy in the earlier submissions made by the assessee vis-a-vis total traded items (200 v. 350 items). However, the Assessing Officer did not verify quantitative details furnished eventually by the assessee has not found any fault in the same. The CIT(A) has erroneously observed that the assessee did not furnish all the purchase bills/vouchers as mentioned in paragraph no. 5.6 of his order. The Inspector of the Assessing Officer had examined all the bills of purchases and sales to verify closing stock valuation with a Chartered Accountant of the assessee and found no discrepancy during the assessment proceedings. Therefore, the Ld. AR submitted that the Assessing Officer’s action of rejecting the books f account is not tenable in the eyes of law. The Ld. AR further submitted that the Assessing Officer erroneously presumed purchases (imports) to be at Rs.92,62,756/- as against the actual amount of Rs.50,32,734/- merely on the basis of some ITS data without even sharing such ITS data with the assessee. Actual purchase amount are worth Rs 50,32,734/-. The assessee had furnished the details and, therefore, adopting purchases (import) of Rs.92,62,756/- is not backed by any cogent material. In fact, purchases (import) must be adopted at Rs.50,32,734/- as are reflected in audited books of account and supported by other documentary evidences. The Ld. AR further submitted that despite rejecting the books of account under Section 145 of the Act, the Assessing Officer adopted opening balance and direct expenditure as reflected in such books of account in determining Gross Profit by application of 50% mark-up. The Ld. AR submitted that once the books of account were rejected, the Assessing Officer ought not to have considered opening balance and direct expenditure as reflected in the said books. Thus, the very basis for determining sum of Rs.1,36,51,572/- (purchases plus opening stock plus direct expenditure) is not tenable in the eyes of law. The Ld. AR pointed out the table containing comparative data of amounts as per books of accounts and amounts adopted by the Assessing Officer. The Ld. AR further submitted that the details of Gross Profit and Net Profit rate of A.Y. 2014-15 to A.Y. 2016-17 categorically gives the idea that the average Gross Profit rate of A.Y. 2014-15 to A.Y. 2016-17 is “-55.81%” (loss), average Gross Profit rate of A.Ys. 2015-16 and 2016-17 is “16.28%” and Gross Profit already declared by the assessee for A.Y. 2016-17 is “25.38%”. Therefore, no further Gross Profit estimation is required. As regards ground no.5, the Ld. AR submitted that the Assessing Officer was not right in disallowing the set-off of business loss of Rs.4,62,863/- as the said set-off must be allowed in the larger interest of justice. As regards ground no.6, the Ld. AR submitted that the disallowance in Chapter VIA in relation to deduction of Rs.1,55,735/- should also have been allowed.
The Ld. DR submitted that the CIT(A) has categorically mentioned in paragraph no. 5.5 that the Gross Profit additions were ought to be Rs.68,25,786/- in the trading account of the assessee, considering that there was no closing stock remaining to be sold at the end of the year. The revised Gross Profit as per trading account should have been Rs.68,25,786/- and less already shown at 14,92,899/- which came to Rs.53,32,887/-. The assessee could not produce the purchase bills/vouchers which were shown in the closing stock in the trading account. Thus, the mark-up margin of 50% has already been given by the Assessing Officer upon these traded goods but these figures have been taken by the Assessing Officer arbitrarily without brining any material to compare with and hence having regard to the material available on record with the Assessing Officer, the CIT(A) has directed the Assessing Officer to take mark- up margin of 30% instead of 50%. Thus, the Ld. DR relied upon the order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that as regards rejection of books of account, the Assessing Officer in the Assessment Order has not given any detailed finding while rejecting the books of account of the assessee. In fact, at one threshold the Assessing Officer is rejecting the same and on the other aspect of opening balance and closing balance, the Assessing Officer is adopting the said books of account itself while making the addition on account of Gross Profit. Therefore, rejection of books of account are not justified by the Assessing Officer. Thus, ground no.2 of the assessee’s appeal is allowed.
7.1 As regards ground nos.3 & 4, the item-wise breakup has been given by the assessee and has been pointed out in paragraph no.6.4 of the Assessment Oder itself and therefore, the observation of the Assessing Officer that the stock register was not maintained by the assessee cannot be the sole criteria for rejecting the books but in fact the details were very much available with the Assessing Officer to take cognisance and without assigning any cogent reason, the Assessing Officer rejected the books. The assessee has already taken the Gross Profit rate of 25.38% in the present A.Y. which is less than the difference of 10% to that of 30% adopted by the CIT(A) and, therefore, the observation of the CIT(A) to take 30% of Gross Profit rate is also not justifiable. Thus, Gross Profit rate already declared by the assessee for A.Y. 2016-17 is justified through the evidences at 25.38%. Thus, ground nos.3 & 4 are allowed.
7.2 As regards ground nos.5 & 6, the same should be taken into account related to set-off of business loss and deduction under Chapter VIA in consonance with the findings given herein above. Ground nos.5 & 6 are partly allowed.
7.3 Ground nos.7 to 11 are consequential and hence not adjudicated at this juncture.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open Court on this 9th January, 2025.