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Before: Shri I.C. Sudhir & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: These two appeals by the Revenue are directed against the orders of ld. CIT(A), Meerut dated 03.07.2013 and 25.09.2014 for the assessment years 2010-11 and 2011-12 respectively on the following grounds :
Grounds raised in appeal for A.Y. 2010-11: “1. Whether in the facts and circumstances of the case, the Ld. CIT (Appeals), Meerut, has erred in law in deleting the addition of Rs,3,05,56,260/- made by the AO by rejecting the books of account of the assessee u/s 145(3) of the I.T. Act, 1961, since the low G.P. & business results were as such not verifiable from the books of a/cs. which were not properly maintained by the assessee and the quantitative and qualitative details of stock could not be verified in the absence of stock register which was also admittedly not ITA No. 5405/Del./2013 & 6640/Del./2014 2 maintained. The reliance is placed on the following case laws:-
1. Awadhesh Pratap Singh Abdul Rehman & Bros. v. CIT (1994) 210 ITR 406, 408 (All).
2. Rainbow Metals (India), In re, (1995) 83 Taxman 160,166 (ITSC, Bom) 3. Dhondiram Dalichand v. CIT (1971) 81 ITR 609 (Bom). 4. Ram Chandra Singh Ramnik Lal v. CIT (1961) 42 ITR 780 (Pat)
2. Whether in the facts and circumstances of the case, the Ld, CIT (Appeals), Meerut, has erred in law in deleting the addition of Rs.4,83,540/- made by the A.O on account of disallowance of 20% out of several expenses debited to the P & L a/c all of which remained unsupported and unverifiable in the absence of proper vouchers.
3. That the appellant craves leave to add, modify and/or delete any ground(s) of appeal.
4. In the facts and circumstances of the case, the order of the Commissioner of Income-tax (Appeals), Meerut, may be set aside and that of the A.O. restored.
Grounds raised in appeal for A.Y. 2011-12:
1. Whether in the facts and circumstances of the case, the Ld. OT(A) was justified in allowing the appeal of the assessee ignoring the fact that the books of account had been rejected by the A.O. considering the fact that the assessee was not maintaining quantitative details and stock register and the assessee failed to produce the working of verification on the basis of which the closing stock was arrived at and declared. ./2013 & 6640/Del./2014 3
2. Whether in the facts and circumstances of the case, the Ld. C1T(A) was justified in deleting the addition of Rs.4,78,12,468/- that had been made by the A.O. by virtue of adoption of a G.P. rate of 35% after rejecting the books of account without making further inquiries in the matter and mechanically accepting the version of the assessee and ignoring the judgment of the jurisdictional High Court relied upon by the A.O.
3. That the appellant craves leave to add, modify and/or delete any ground(s) of appeal. 4. In the facts and circumstances of the case, the order of the Ld. CIT(A), Meerut, may be set aside and that of the A.O. restored.”
Since the issues involved in both the appeals are similar and the grounds raised by Revenue are also almost similar barring the amounts of additions, both the appeals are being decided by this consolidated order. For the sake of convenience, we first take up the appeal for the assessment year 2010-11, the decision on which shall equally apply to the appeal for the assessment year 2011-12 also.
The brief facts of the case are that the assessee company is engaged in the business of printing and publication of books of competitive examinations and other books. The return of income was filed on 12.10.2010 by the assessee company declaring total ITA No. 5405/Del./2013 & 6640/Del./2014 4 income of Rs.25,96,210/-. The case was selected for scrutiny and statutory notices were served upon the assessee. During the year under consideration, the assessee has shown total turnover of Rs.25.77 crores and gross profit of Rs.5,96,46,347/- which gives G.P. rate of Rs.23.14%. During the scrutiny proceedings, the assessee was asked to produce stock register giving details of month-wise stock and opening & closing stock, books of account etc. The assessee in response, produced cash book, ledger, sale bills, purchase register and sale register, but he could not produce any stock register. The Assessing Officer observed that in the absence of stock register, qualitative and quantitative details of stock could not be verified for determination of actual profit and correct value of stock sold could not be arrived at the year end. The assessee also accepted that the stock register cannot be prepared for the reasons that there are so many varieties of books and the raw materials used by the assessee company. The Tax Auditor of the company has quoted against column 28(a) regarding quantitative details of principal items of opening stock register, purchase and sales during the year, closing stock, shortage – “Company has adopted the periodic ITA No. 5405/Del./2013 & 6640/Del./2014 5 stock taking system instead of routine stock taking system. The stock registers are not maintained”. The assessee was also asked for production of original bills and vouchers in support of genuineness of various expenses claimed by the assessee under various heads. In respect of this, the assessee produced bills and vouchers out of which some of the vouchers were self made. The AO observed that proper records, registers/bills etc. have not been maintained by the assessee, the genuineness of the books of accounts could not be proved and therefore, the books of accounts maintained by the assessee cannot be relied and the trading results declared by the assessee cannot be accepted. He relied on some case laws. Therefore, the books of accounts were rejected u/s. 145(3) of the Act and after applying the G.P. rate of 35% on the turnover of Rs.25,77,21,736/-, worked out the gross profit at Rs.9,02,02,607/- as against gross profit of Rs.5,96,46,347/- declared by the assessee. The difference of Rs.3,05,56,260/- was accordingly added to the income of the assessee. ./2013 & 6640/Del./2014 6
The assessing Officer further noted that the assessee has debited expenses in various heads totaling to Rs.24,17,699/-, but since these expenses were not fully supported by proper bills and some of the expenditures were supported by self made vouchers, the AO made lump sum disallowance of 20% of the total expenditures debited to the profit and loss account, as noted above, which worked out to Rs.4,83,540/- and added to the income of the assessee.
Aggrieved by the above additions, the assessee appealed before the first appellate authority and also made detailed submissions before him rebutting all the objections of the AO and the ld. CIT(A) called for the remand report from the AO on the submissions of the assessee. The ld. CIT(A) after considering the submissions of the assessee, remand report of the AO and relying upon various case laws, allowed the appeal of the assessee. Aggrieved by the order of ld. CIT(A), the Revenue is in appeal before the ITAT. ./2013 & 6640/Del./2014 7
The ld. DR relied on the order of the Assessing Officer and the case laws cited in the grounds of appeal. He drew our attention on the Tax Audit report, in which he has clearly mentioned that no stock register is maintained by the assessee. Therefore, correct profit and loss could not be determined. The assessee has also debited expenses which were not fully supported by outside vouchers. In some cases, self made vouchers have been produced by the assessee. Therefore, the expenses debited into the profit and loss account are not genuine. The AO has rightly rejected the books of account of the assessee. The assessee has also not fully complied with the requirements of the Assessing Officer. The assessee has also not proved before the AO the valuation of the opening and closing stocks. In view of the totality of facts, the Assessing Officer has rightly rejected the books of account of the assessee and rightly applied G.P. rate of 35%. The case laws relied by the assessee as well as the ld. CIT(A) are not applicable in the instant case.
7. On the other hand, the ld. AR relied on the order of the ld. CIT(A) as well as written submissions made before both the ITA No. 5405/Del./2013 & 6640/Del./2014 8 authorities below. He further submitted that the AO has not correctly applied the provisions of section 145(3) of the Act before rejecting the books of account. The assessee has adopted periodic stock taking system for the valuation of closing stock at the year end which has been prescribed by Accounting Standard AS-7 clause 14. The assessee has started business from assessment year 2004-05 and the same procedure for valuation of closing stock is consistently followed since inception and the IT authorities have accepted the said procedure followed by the assessee. The assessee’s case was scrutinized u/s. 143(3) in assessment year 2005-06, 2009-10 and subsequently for A.Y. 2013-14. All the details were submitted before the Assessing Officer as required. However, the AO has wrongly observed that the assessee has not complied with the requirements and the notices. The AO also applied GP rate of 35% which very high whereas during the year there was slight downfall in the GP rate as compared to previous year, as the turnover of the assessee has been increased as compared to the previous year. In assessment year 2012-13, the assessee had shown G.P. rate 21.14% and the AO had applied GP rate of 25% of the turnover in ITA No. 5405/Del./2013 & 6640/Del./2014 9 the absence of stock register and the ld. CIT(A) restricted the same to 23%. The assessee has relied on the following case laws :
(i). Jaytick Intermediates (P) Ltd. vs. ACIT, 73 Taxman.com 195(Guj.) (ii). CIT vs. Smt. Poonam Rani, 326 ITR 223 (Del.). (iii). Ashok Refractories P. Ltd. vs. CIT, 279 ITR 457 (Cal.) (iv). Swapna Rani Sarkar vs. CIT, 320 ITR 70 (Gau) (v). M. Durai Raj vs. CIT, 33 ITR 182 (SC) (vi). CIT vs. M/s. Jas Jack Elegance Exports 324 ITR 95(Del.) (vii). Pandit Bors. Vs. CIT, 26 ITR 159 (Punj) (viii). Madnani Construction Corpn. P. Ltd. vs. CIT, 296 ITR 45(Gau). (ix). Malani Ramjivan Jagannath vs. ACIT, 316 ITR 120 (Raj.) (x). CIT vs. Rajni Kant Dave, 281 ITR 6 (All.) (xi). CIT vs. Om Overseas, 173 Taxman 185 (P&H) (xii). Jaganmohan Reddy P. vs. Narasimham K.V.L. JJ, 62 ITR 528 (xiii). ST. Teresa’s Oil Mills vs. State of Kerla, 76 ITR 365 (Ker). (xiv). Jhandu Mal Tara Chand Rice Mills vs. CIT, 73 ITR 192(P&H) (xv). Dhakeshwari Cotton Mills Ltd. vs. CIT, 26 ITR 775(SC).
The ld. AR further submitted that the AO has not pointed out any specific voucher which was not acceptable in his order. All the expenses entered in the books of accounts were supported by internal/external vouchers. It was submitted that adhoc disallowance is not permissible in the IT Act. Reliance is placed on the following decisions : ./2013 & 6640/Del./2014 10 (i). Rajat Tradecom India Pvt. Ltd. vs. DCIT, 120 ITD 48 (Indore) (ii). Friends Clearing Agency (P) Ltd. vs. CIT dated 04.01.2011 (copy placed in PB) (iii). Matrix Inc. vs. ITO, ITAT Delhi (copy placed in PB)
After hearing both the sides and perusing the material available on record, we observe that the assessee has filed before us a detailed paper book. After going through the paper book, we observe that the objections of the AO regarding failure of assessee to explain the decline in GP is not sustainable for the reason the assessee had explained before the AO that the fall in GP was due to increase in turnover and competitive market. The AO has not commented upon this explanation of the assessee. On going through the remand report, we find that the Assessing Officer has not made any serious objection on the submissions of the assessee made before the ld. CIT(A). The comments of the AO in the remand report are as under :
“A.O.’s comments on above grievances made before CIT( Appeals), Meerut: 6. As per detailed discussion, the A.O. had no other alternative but to make aforesaid additions. Assessee’s submission that the assessee-company came into existence on 30.04.2004 and had been engaged in the business of printing & publication of books ITA No. 5405/Del./2013 & 6640/Del./2014 11 for competitive exams (Entrance Exams to IIT, MBBS & other competitive Exams for Banks etc.) is not a conclusive and correct grievance but only a discussion and making irrelevant propositions. Further, it was also submitted by the assessee that admittedly it had maintained regular books of accounts and submitted financial accounts along with Auditor's Report under Company's Act 1956, making disclosures of all facts in Tax Audit Report u/s 44AB of its C.A. has no relevance with the facts & circumstances brought on record by the assessee. It has further been submitted that assessee duly provided details of opening and closing stocks and also proper bills for each and every purchase & sales, at the time of regular assessment proceedings. Assessee also placed reliance on a number of Case Laws as per the pages NOs 139-140 of its submission before CIT(Appeals), Meerut. It was also its submissions that the A.O. was bound to hear such evidence as was brought on record. It was further submitted in its Paper Book that Section 143(3) of IT Act ordains that the assessment made u/s 143(3) of IT Act made by the A.O. after hearing such evidence produced by the assessee, the A.O. lost sight of assessee’s submission before him. The assessee in its written Submissions claimed that the addition of Rs. 3,05,56,206/- ought to have been deleted because of losing sight of the facts brought on record by the assessee –company.
The A.O., on a careful consideration of the foregoing submissions and other points placed before the CIT(Appeals), duly considered all submissions after considering all material facts brought on record and observed that the order is being passed after due and considerate submission at the material time of passing his order. No new facts or evidence has further been brought by the assessee in its written submissions before the ld. CIT(Appeals), Meerut for claiming relief. The additions made to the assessee’s income were quire justified and were made in accordance with the provisions of IT Act, 1961. As such, the assessment order passed by the A.O. deserves to be sustained.” ./2013 & 6640/Del./2014 12
The ld. CIT(A) after considering the detailed submissions, remand report of AO and rejoinder of assessee has made a reasoned order and it does not require any interference. For the sake of convenience, we reproduce the order of the ld. CIT(A) as under : “2.4 The submissions of the assessee were forwarded to the AO for comments which have been received vide letter dated 03. 06. 2013. The first point made by the AO is that he had "no other alternative but to make aforesaid additions". The second point which the AO makes is that he had "duly considered all submissions after considering all material facts brought on record and observed that the order is being passed after due and considerate submission at the material time of passing the order. No new facts or evidence has been brought by the assessee in its Written Submissions..... The additions made to the assessee are income were quite justified and were made in accordance with the provisions of IT Act. 2.5 At the outset, it is noted that the AO has rejected the books of accounts only on the ground that the assessee had not maintained stock register. It is also noted that the cavalier and summary manner in which the books of accounts have been rejected and the addition had been made, which is evident from the discussion in the assessment order, is not even attempted to be defended in the remand proceedings. It is also noted that all the statements made by the assessee in its submissions have not been disputed by the AO and therefore, it is presumed that such statements are correct and the AO has nothing to say in this regard. 2.6 Assessee, during the appeal proceedings, was requested to give a write up on the manner in which its activities are ITA No. 5405/Del./2013 & 6640/Del./2014 13 conducted with particular emphasis on the system of monitoring stock. In this connection, it was explained as under: A) That the appellant deploys a team which is responsible for content development. This content is either provided by authors to whom appellant pays royalty or same is developed in house by the editorial staff or the appellant. B) That once a book is conceived by the appellant and the content for the book is ready, the appellant is required to take a call as to how many books of a particular subject or particular competitive examination are to be printed. C) That once the content is fully developed included the art of work etc., the appellant takes the same on CD. At this stage the appellant selects an appropriate printer for printing the books in required number. D) That the selected printer works out the quality of paper, its size, its quality which is agreed with the management of the appellant. E) That the appellant normally keeps the stock of paper in its own godown and issues the requisite quantity to the selected printer against a job card. The printer would print the books and deliver the required quality back to the premises of the appellant. F) That the printed books are then sold/issued to various distributors/C&F agents for further sale to retailer/end customers. G) That at the end of the year the appellant carries out the inspection of stock and prepares an inventory of books in hand as well as the raw material in hand i.e. paper in hand. The detailed inventory of each & every books and various size/quality of paper is than prepared which is valued in accordance with the regular method of accounting. ./2013 & 6640/Del./2014 14 H) That from the above detailed description of manufacturing and publishing process it could be seen that the profit of the appellant could be properly ascertained in accordance with periodic system of stock taking. The appellant has been following this method of accounting ever since its incorporation and the Income tax department has duly accepted the results based on books of accounts of appellant. I) That in view of the various quality of paper, its size, thickness, the detailed stock keeping is not economically viable. Similarly the appellant has approximately 400/500 title of books. The books are issued to distributors on the basis of the regular invoices and if distributors return any book, the credit is given to the distributor on the basis of credit note. From time to time the obsolete books are sold as raddi. At the end of the year the appellant prepares an item wise inventory of the books in hand and values the same in accordance with the regular method of accounting. J) That the business of the appellant is being managed by three directors namely 1. Mr Reetesh Jain 2. Mr Deepesh Jain 3. Parvesh Jain along with Sh Y.C. Jain, father of above directors. All the family members live together and have common kitchen. In other words the business of the appellant is run by single large family. The stock of the appellant is kept at the business premises under the direct supervision and full control of family members. Therefore, the periodic system of stock taking is appropriate system of accounting.
K) That in publishing industry because of its peculiar nature and economic viability, all the other publishers employ the same method of accounting and system of stock taking. 2.7. Before discussing the merits of the case, it would be useful tomake reference to certain principles of law which have evolved in the various judicial pronouncements. Firstly, as laid down in the case of H.A. Shah (30 ITR 618), the Income tax Authorities should be extremely slow to depart ITA No. 5405/Del./2013 & 6640/Del./2014 15 from a finding given by it earlier notwithstanding that the principle of res judicata may not be applicable to income tax proceedings. This is so because the principle of natural justice require that if there is prior determination by the Income Tax Department, ordinarily there should be no variation from that decision unless there are fresh circumstances to warrant a deviation from the previous decision (26 ITR 805). Reference may also be made to the principle of stare decisis by which precedents are authoritative and binding and must be followed. Secondly, accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The Department has to prove satisfactorily that the account books are unreliable, incorrect or incomplete before it can reject accounts, which may be done by showing that important purchases are omitted there from or proper particulars or vouchers are not forthcoming and the accounts do not include entries relating to a particular class of business. Rejection of account should not been done lightheartedly (76 ITR 365). The fact that there is no stock register, only cautions the AO against the falsity of the return made by the assessee. He cannot simply say that merely because there is no stock register, the account books must be false (26 ITR 159). In the case of Malani Ramjevan Jagannath (316 ITR 120), it was held that where purchases and sales are found to be fully vouched and no discrepancy is found in the opening or closing stock, non-maintenance of stock register loses significance for the determination of gross profit. In the case of a Ashok Refractories (279 ITR 457), it was held that in order to reject the books of accounts, the AO has to come to opinion that the method applied is such that income cannot be deduced from the accounts maintained. Books of accounts cannot be rejected merely for the want of stock register. In other words, failure to maintain stock register coupled with other relevant factors, which could lead to an opinion that proper profits cannot be determined could lead to rejection of hooks results. The same principle has been followed in the case of Avvadhesh Pratap Singh Abdul Rehman (210 ITR 406). Finally, once the books of accounts are rejected, the AO ITA No. 5405/Del./2013 & 6640/Del./2014 16 is required to determine the total income faith and not arbitrarily. The power to estimate where the accounts are unreliable, must he exercised not arbitrarily but judicially in light of relevant material (63 ITR 411). In estimating the income, the conditions of trade obtaining and the average margin of profit in the particular line of business are to be borne in mind (65 ITR 242). The estimate of turnover and the fixation of gross profit rate are two important elements which affect the assessment, and if these are fixed to the detriment of the assessee (even basing the same on comparable case), the assessee is entitled to know the basis and has to be given an opportunity to rebut the same. Estimates framed without giving the basis for their fixation and without furnishing to the assessee the material on which the rate of gross profit is arrived at or without giving an opportunity to the assessee to rebut it, are bad (62 ITR 528, 26 ITR 775, 12 ITR 393, 19 ITR 102 and 25 ITR 216). 2.8 In light of the above principles, the AO was completely unjustified in rejecting the books of accounts of the assessee and estimating the gross profit at the rate of 35% of the turnover. Firstly, the system of maintaining inventory on the basis of periodical stock inspection rather than on the basis of stock register has been regularly followed by the assessee and the accounts based on such system have been accepted in the scrutiny proceedings in earlier assessment years. The AO has not specified why he has departed from the principle which had been accepted by the earlier AO. Secondly, it is noted that apart from the non-maintenance of the stock register, the AO has not pointed out any other deficiency in the maintenance of books of accounts or the production of the relevant vouchers/bills. The assertion of the assessee that all such vouchers, bills and other documents as also the books of accounts had been produced during the assessment proceedings and at no point in time the AO pointed out any deficiency in any of the above documents/books, has not been disputed by the AO in the remand report. Therefore, why the non-mountainous of stock register was fatal for the acceptance of the book results has never been explained. Thirdly, as regards the observation of the AO that vouchers ITA No. 5405/Del./2013 & 6640/Del./2014 17 for various expenses were self-made, the contention of the assessee that such vouchers were confined only to petty expenses, has also not been disputed by the AO. Fourthly, the observation that no quantitative details of valuation of opening and closing stock had been furnished during the assessment proceedings, has been vehemently disputed by the assessee and has not been controverted by the AO in the remand report. Fiftthly, the nature of business is extremely relevant for determining whether or not non-maintenance of stock register could prove fatal for the assessee. In the case under consideration, the assessee is engaged in publishing business. The multiplicity of specifications of raw material (paper) and the fact that the final product (publication) is valued mainly on account of its content and authorship (and not on the raw material used for printing of books), makes the maintenance of a regular stock register quite unnecessary. It is not as if the assessee is not maintaining any system of monitoring the stock. As stated by the assessee, mentioned in the tax audit report and not disputed by the AO, periodic stocktaking is done by the assessee. As discussed in para 2.6 above, the assessee's activities and the nature of its management are such that periodic stock taking is adequate for the purpose of its business. Finally, no basis whatsoever has been given for adopting the gross profit rate of 35% has been specified nor has it been explained why the same is considered as appropriate and reasonable. 2.9 As regards the case laws cited by the AO are concerned, insofar as the decision of the Allahabad High Court (210 ITR 406) is concerned, in the extract reproduced by the AO in the assessment order, it has been categorically stated that absence of stock the stock register in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where the absence of stock register, cash memo, etc is coupled with other factors like vouchers in support of expenses and purchases made not being forthcoming and the profit being low, may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee. In the case under consideration, no ITA No. 5405/Del./2013 & 6640/Del./2014 18 such other factor has been pointed out by the AO and he has not even stated, either in the assessment order or even in the remand report, that the gross profit rate shown by the assessee is low. It only goes to show that the AO is mechanically referring to certain case laws without appreciating the contents thereof. As regards the reliance placed on the decision in the case of Dhondiram Dalichand (81 ITR 609), it is noted that in that case, there was an of asset over liability according to the balance sheet and this factor, coupled with the non-maintenance of stock register, led to the rejection of books of accounts. Insofar as the decision in the case of Ram Chand Singh Ramnik Lal (42 1TR 780) is concerned, in that case the decision was given against the assessee because the court held that, in view of the findings of the AO., CIT(A) and the Tribunal that the rejection of books of accounts in the absence of stock register was proper, no question of law arose. There is no finding that merely on account of the absence of stock register, the books of accounts can be rejected. 2.10 The assessee has also relied on the decisions rendered in the cases of Smt Poonam Rani (326 ITR 223); M. Durag Raj (83 ITR 484); Vikram Plastics (239 ITR 161), Ludhiana Steel Roll Mills (295 ITR 111) and Madani Construction (296 ITR 45). 2.11 In view of the totality of the above discussion, the rejection of the book of accounts and the consequent estimation of profit cannot be sustained and is directed to be deleted. 2.12 Subject to the above remarks, Ground Nos. 1 to 17 are treated as allowed. 3.1 Ground No. 18 & 19 contest the disallowance of 20% of specified expenses. 3.2 In the assessment order, the AO has stated that the net profit shown by the assessee ''is very low". The AO has not specified what is the benchmark adopted by him for ITA No. 5405/Del./2013 & 6640/Del./2014 19 evaluating the net profit and on what basis is it stated to be low. Thereafter, he alleges that the expenses debited to the profit and loss account are not "fully" supported by "proper" bills. Obviously, the AO has not deemed it necessary to specify, either in the assessment order or in the remand report, what is implied by the terms "fully" and "proper". He expects that that his word in this regard should be taken as final. Thereafter, a remark has been made that "Some' handmade "Incomplete" vouchers have been maintained which are not "fully” verifiable. The AO has not deemed it necessary to specify which of the vouchers were incomplete, in what manner were these incomplete and why these are not verifiable. Considering the contents of the assessment order and of the remand report, it would be obviously unnecessary to expect the AO to specify why 20% has been taken to be the basis for disallowance. In the submissions made, it has been pointed out that the disallowance has been made without any basis and arbitrarily. No query was ever asked relating to the disallowances and no opportunity of being heard or adduce evidence was granted to the assessee. Reference has been made to the decision of the Delhi High Court in the case of Friends Clearing Agency (decision of 04.01,2011 in of 1999) and of the ITAT, Delhi in the case of Matrix Inc (IT A No 54/Del of 2009) and of Indore in the case of Rajat Tradecom (23 DTR 311). 3.3 In view of the fact that the disallowance has been made without specifying the basis thereof, it cannot be sustained.”