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Income Tax Appellate Tribunal, DELHI BENCH “A”, NEW DELHI
Before: SHRI R. K. PANDA & MS. SUCHITRA KAMBLE
O R D E R
PER R. K. PANDA, AM :
This appeal filed by the assessee is directed against the order dated 11.07.2013 of the CIT(A), Karnal relating to assessment year 2009-10.
Facts of the case, in brief, are that the assessee is an individual and derives income from wholesale trading of timber under the name and style of M/s Shree Rama Nand Timbers. He filed his return of income on 03.03.2010 declaring total income of Rs.2,65,810/-. During the course of assessment proceedings, the Assessing Officer on examination of the documents and stock register noted that during the period 01.04.2008 to 12.06.2008 the assessee had made total purchases of Rs.1,73,27,912/ - which were sold for Rs.l,82,42,622/ - and the closing stock as on 12.06.2008 was declared at NIL. He noted that the total gross profit earned out of these transactions from 01.04.2008 to 12.06.2008 comes to Rs.9,14,710/- which gave a G.P. rate of 5%.
He noted from the books of accounts that in order to bringing down the G.P. rate the assessee started managing its accounts which was evident from the fact that the next entry made in the stock register was on 13.06.2008. On this date the assessee had purchased timber of 1407.0238 CFT for Rs.4,93,865/- from Shree Amarnath Timber, Delhi. However, he noticed a very strange fact that the closing stock of this timber of 1407.0238 CFT was reflected at Rs.3,99,183.70/- in the stock register.
Further the A.O. noted that as per the stock register there was NIL closing stock as on 28.03.2009 and, thereafter, the purchases were made only on 31.03.2009. The A.O. made an examination of quantitative details of timber purchases on 31.03.2009 and noted that the total of 4989.9671 CFT was purchased by the assessee, whereas he sold 4960.3171 CFT on the same date and reflected NIL closing stock as on 31.03.2009 in the stock register. Mathematically, this entry of NIL in the closing stock by the assessee on 31.03.2009 was wrong as the assessee should have had 30 CFT timber with him on 31.03.2009. Therefore, both, the stock register and the closing stock reflected in the balance sheet were erroneous.
On enquiry from the assessee, during the course of scrutiny proceedings the assessee came up with an explanation that there was short-supply of timber of 30 CFT from the supplier from whom the purchase were made. Further, the assessee also admitted that it did not raise any debit-note against the supplier and no such debit entry was made in the trading account. The assessee contended that this was the sole transaction which was not accurately reflected in the books and on this sole account the books of accounts cannot be rejected.
As regards the reflection of G.P. rate of 5% earned by the assessee from 14.04.2008 to 12.06.2008, he contended that there is a variation as sale rates to different parties vary and there is a variation in the rates of timber for quality, size, colour, variety, shape etc. The Assessing Officer further noted that the total value of timber purchased from 13.06.2008 to 27.06.2008 is Rs.22,67,936/- whereas as per the closing stock shown in the stock register as on 27.06.2008 the same was shown at Rs.20,63,664.74/-. The details of this are tabulated by the A.O. in the assessment order and the same is reproduced below:-
Date Name of the party Quantity Amount 13.06.2008 Shree Amarnath Timber Delhi 1407.0238 CFT 493865 21.06.2008 Naveen Timber Delhi 1467.7055 CFT 491681 23.06.2008 -do- 1700.1595 CFT 493046 27.06.2008 -do- 1710.0441 CFT 465913 -do- -do- 943.5073 CFT 293431 Total 2267936
Accordingly, the A.O. noted that the assessee has shown a difference in figure of Rs.2,04,272/- which is not reflected in the books of accounts. The Assessing Officer noted that 90% of the timber was purchased by the assessee from his 3 sister concerns namely M/ s Naveen Timbers, Delhi, Shree Amarnath Timbers, Delhi and M/s Naveen Timbers (P) Ltd., Delhi and therefore, it was very easy for the assessee to manage the bills as per his convenience and manage the G.P. rate also. The Assessing Officer further noted that the books of account of the assessee did not give a true picture of the business and that the trading results were not verifiable as the assessee had not maintained any record in respect of the quality, variety, colour, size and shapes and different kinds of wood/timber sold by him when the assessee himself had admitted that price of timber varies on account of these factors. In view of the above, the Assessing Officer rejected the book results and applied the G.P. rate of 5% which was the G.P. rate suo-motu reflected by the assessee for the sales made from 01.04.2008 to 12.06.2008. The Assessing Officer accordingly made an addition of Rs.44,77,601/- to the total income of the assessee.
Before the ld. CIT(A), the assessee challenged the action of the Assessing Officer in invoking the provisions of section 145(3) and thereby framing the GP at the flat rate of 5% for the entire year. It was argued that the observations made by the Assessing Officer in the body of the assessment order are merely surmises and conjectures although there are some type of minor errors while making accounts which is possible in case of an assessee who has started business for the first time without having sufficient resources and meager capital. However, the same cannot be the basis for rejecting the book result. So far as the observations of the Assessing Officer that in the audit report in the Form No.3CD, there is no mention of the stock register is concerned, it was argued that it was a clerical error. So far as allegations of the Assessing Officer that non-maintenance of stock record in respect of quality, variety, colour, size and shape is concerned, the assessee admitted the same. However, it was argued that since the assessee has only one item i.e. timber, therefore, it is not required to maintain the stock register on the basis of quality, size, colour, variety and shape etc.. It was further argued that the assessee has not violated any provision of the Income-tax Act so as to attract the provision of section 145(3). It was accordingly argued that the order of the Assessing Officer be set- aside and the book result be accepted.
However, the ld. CIT(A) was not satisfied with the explanation given by the assessee. He examined certain invoices along with the stock register and observed that these are not maintained quality wise. Further, in column no.28 in Form No.3CD of the tax audit report, the assessee failed to furnish the quantity details. He held that the rates of timber vary substantially from quality to quality and therefore correct valuation of closing stock cannot be done without maintaining the stock register quality wise. He further observed that as per the provision of section 44AB, the assessee was required to maintain such books of account and other documents as may enable the Assessing Officer to determine correct income of the assessee in accordance with the provisions of the Act.
The closing stock is one of the important item of the trading account and, therefore, the correctness of trading results depends on the correctness of the valuation of closing stock also. Since the assessee in the instant case has not maintained the stock register quality wise of timber which vary from quality to quality, therefore, correct position of closing stock cannot be determined.
Relying on various decisions including the decision of the Hon'ble Supreme Court in the case of CIT vs. British Paints India Ltd. reported in 188 ITR 44, he upheld the addition made by the Assessing Officer amounting to Rs.47,77,601/-.
He also relied on the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT vs. M/s Majestic Auto Ltd. in of 2004 order dated 22.05.2013 wherein the Hon'ble High Court held that proper maintenance of stock is required to be maintained by an assessee however similar the stock is.
Aggrieved with such order of the ld. CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds :-
“1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts. 2(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of AO in rejecting the books of accounts by invoking the provision of section 145(3) of the Act. (ii) That the books have been rejected despite the assessee maintaining proper books of accounts. (iii) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in ignoring the fact that the books of account have been duly audited under the provisions of Section 44AB and have been certified by the auditor that the books of accounts have been properly maintained.
3(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of AO in making addition of Rs.47,77,601/- applying an arbitrary G.P. rate of 5%. (ii) That the G.P. rate has been estimated without there being any basis for the same. 4(i) On the facts and circumstances of the case, the estimation of the gross profit at Rs.61,32,347/- as against gross profit of Rs.13,54,746/- as per the books of account is based on purely surmises and conjectures and as such unsustainable in law. (ii) That the above said addition is unsustainable in the absence of any evidence or material on account of any sale or purchase outside the books of account.
5. That the appellant craves leave to add, amend or alter any of the grounds of appeal.”
11. Ld. counsel for the assessee strongly challenged the order of the ld. CIT(A). Referring to page 29 to 49 of the Paper Book, ld. counsel for the assessee submitted that the purchase and sale along with quantity is matching.
There is absolutely no cash sale and there is also no allegation on the part of the Revenue that the assessee has received something more than what has been disclosed. He accordingly submitted that merely because of some clerical errors, the Assessing Officer cannot reject the book results and apply the GP rate of 5% and thereby make huge addition of Rs.47,77,601/-. Relying on various decisions, he submitted that where the books of account of the assessee were duly audited and the Assessing Officer has not pointed out any specific defect or discrepancy therein and the income of the assessee was clearly discernable from the accounting method followed by it, accounts of the assessee could not be said to be defective or incomplete, merely because stock register was not maintained in a particular form. He also relied on the following decisions :-
(i) CIT vs. Jacksons House, (2011) 198 Taxman 385. (ii) CIT vs. Bindals Apparels, (2011) 332 ITR 410. (iii) Ashoke Refractories (P.) Ltd. vs. CIT, (2005) 279 ITR 457. (iv) Harlal Hemraj vs. ITO, (1982) 14 TTJ 505. (v) Pandit Bros. vs. CIT, (1954) 26 ITR 159. (vi) DCIT vs. Paras Dyeing & Printing Mills (P.) Ltd., (2010) 4 ITR 29. (vii) Pushpanjali Dyeing & Printing Mills (P.) Ltd. vs. JCIT, (2001) 72 TTJ 886.
He accordingly submitted that the addition made by the Assessing Officer and sustained by the ld. CIT(A) be deleted.
Ld. DR on the other hand heavily relied on the order of the ld. CIT(A).
He submitted that when the assessee has not maintained stock register as per quality, shape, colour, size etc., therefore, correct valuation of closing stock is not possible. The price of timber depends on the above items. Therefore, when the correct profit cannot be determined in absence of computing the correct closing stock, the books of account have to be rejected and estimation has to be made. Further, the rate of 5% applied by the Assessing Officer and upheld by the ld. CIT(A) under the facts and circumstances of the case is justified. He accordingly argued that the order of the ld. CIT(A) be upheld and the grounds raised by the assessee should be dismissed.
We have carefully considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and ld. CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case is engaged in the business of whole-sale trading of timber under the name and style of M/s Shree Rama Nand Timbers. Since the assessee has not maintained its stock register on the basis of quality, shape, size, colour, variety etc. and since the audit report does not mention the maintenance of any stock register, the Assessing Officer, invoking the provisions of section 145(3) of the I.T. Act rejected the book results and adopted net profit of 5% of the turnover which has been upheld by the ld. CIT(A). It is the submission of the ld. counsel for the assessee that since the purchase and sale and quantity is matching and there is no evidence that the assessee has received anything more than what has been sold as sale the addition is uncalled for by estimating the net profit at the rate of 5%. It is also his submission that the mere non-maintenance of stock register in a particular form cannot be a ground to reject the book results and estimate profit especially when the accounts of the assessee are audited and the auditors have not pointed out any defect. It is also his submission that merely because of some marginal discrepancy which happens in normal course in a new business like that of the assessee with meager capital, the same cannot be a ground to disturb the trading results. We find some force in the argument of the ld. counsel for the assessee.
Admittedly, there is no defect in the books of account maintained by the assessee. There are certain discrepancy in the valuation of stock during the middle of the year which has been pointed out by the Assessing Officer and not properly explained by the ld. counsel for the assessee. It is an admitted fact that the assessee has maintained books of account which were duly audited and the auditors have not pointed out any defect in the books of account. There is also no qualification by the auditors regarding any defect on account of non- maintenance of stock register in a particular manner. It is also an admitted fact that the valuation of stock on a particular date cannot be correctly determined in absence of maintenance of stock resister of timber on the basis of shape, size, quality, colour, etc.. Therefore, rejection of book results under the facts and circumstances of the case is justified. At the same time adoption of net profit rate of 5% in the instant case without bringing any comparable case/cases of similar nature in the same locality is also highly arbitrary under the facts and circumstances of the case. The argument of the ld. counsel for the assessee that since the purchase and sales along with quantity are matching and there is no evidence that the assessee has received anything more than whatever has been shown as sale cannot be accepted in absence of maintenance of the stock register on the basis of quality, shape, size, colour, etc.. Considering the totality of the facts of the case, we are of the considered opinion that lump sum addition of Rs.5,00,000/- on estimate basis for possible leakage of revenue under the facts and circumstances of the case as against the estimation of net profit at 5% by the Assessing Officer and upheld by the ld. CIT(A) in the instant case will meet the ends of justice. We hold and direct accordingly. The grounds raised by the assessee are accordingly partly allowed.
In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open Court on this 15th day of December, 2017.