KAIZEN ENGINEERING PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX-6(3)(2), MUMBAI

The two inter-connected issues raised by assessee in this appeal is against the order of CIT(A) confirming the action of the AO in rejection of books of accounts under section 145(3) of the Act and thereby estimating the profit at the rate of 39%. For this assessee has raised the following two grounds: -

Briefly stated facts are that the assessee is a IT Software Company which is engaged integrated transport Management system which covers several areas namely Smart card based automatic ticketing/ fair collection system, point of sales Terminals, GPS based bus tacking system and control room consisting system of settlement server, MIS reporting for their BRTS corridor to be set up in Ahmedabad. The assessee obtained contract of Ahmedabad Municipal Corporation (AMC) floated a tender for their 100 per cent owned subsidiary Ahmedabad Janmarg Ltd. (AJL). The AO noticed from the Gross Profit ratio and NP ratio of the past three years and simply rejecting the books of accounts under section 145(3) of the Act only on the basis that the assessee did not furnish any stock register for verification and there is fall in Gross Profit (in short GP). Accordingly, he applied GP ratio of 39% which is average of two previous years. Aggrieved, assessee preferred the appeal before CIT(A) who also confirmed the action of the AO by observing as under : -

I have heard the rival contentions and gone through the facts and circumstances of the case. I find from the facts of the case that the AO during the course of assessment proceeding asked the assessee to furnish the details of G.P. and N.P ratios for the past three years which is as follows: - I find that the AO noted that the assessee belongs to I.T. Industry and there is no scope of downfall in such a growing Industry made addition of Rs.1,24,40,510/- @39% of Gross Profit by taking average of previous two years and CIT(A) simply confirmed the addition. I have gone through the facts and noted that the assessee company discontinued its operations after five months. During these five months the operating cost which was 59.46% of the total sales in last year increased to 72.51% and as a result, the assessee company started making losses. The AO by merely relying on the assumption that stock register is not maintained rejected the books of accounts and proceeded to make addition of Rs.1,24,40,510/-. I am of the view that stock register can't be considered as an indicative of whether proper books of accounts are maintained or not, and for this assessee placed reliance on the Judgment of Hon’ble Delhi High Court in the case of Pandit Brothers vs. CIT [1954] (26 ITR 159) (Del), in which it was held that there must be material before the ITO to lead him to the conclusion that the method employed is defective or that the case requires reconsideration and a new computation must be made. The mere fact that the profits are low is not material upon which finding under section 13 (Corresponding to section 145 of the Indian Income-tax Act, 1961) can be based, because the assessee may be incompetent or his method of business may be uneconomic. Also merely because there is no stock register the account books cannot be said to be false. Even otherwise in the present case before me, the Revenue could not point out any defect in the books of accounts except that assessee has not produced the stock register. Respectfully, following the Hon’ble Delhi High Court in the case of Pandit Brothers (supra), I allow the issue of rejection of books of accounts in favour of assessee for the reason that there is no mistake or no defects in the books of accounts. Accordingly, this issue of the assessee’s appeal is allowed. Once the issue of rejection of books is allowed in favour of assessee, the estimation of profit rate will not survive. The appeal of the assessee is allowed.

In the result, the appeal of assessee is allowed.