RATAN KUMAR YADAV,JAIPUR vs. INCOME TAX OFFICER, WARD-2(2), , JAIPUR

AO, the assessee preferred appeal before theld. LD. CIT (A). The Learned CIT(A) confirmed the action of the learned AO and up held the rejection of the books of accounts and confirmed the trading addition of Rs. 5,46,329/- made by the learned AO.

Against the said order of the CIT(A), the appellant filed this instant appeal before the Tribunal on the grounds raised hereinabove.

“ First and Second grounds of appeal

The issues involved in first and second grounds are almost identical, inextricably interlinked or in fact interwoven and the facts and circumstances are almost common, therefore, common submissions are made. The said grounds of appeal are challenging, the invoking of provision of section 145(3) of the IT Act 1961 and the trading addition of Rs. 5,46,329/- is made to the declared trading results. In this connection, it is submitted that it is evident from the assessment order that there was neither change in the method of accounting employed and accepted by the department in all the preceding years nor in the valuation of inventory. The closing stock of immediately preceding year has been brought forward as opening stock of the assessment year under appeal and the same has been accepted by the learned AO. No specific defect and / or deficiency has been pointed out by the learned AO. Further, looking to the nature of the appellant’s business, it is not practically possible to maintain a day-to-day stock register of the items consumed in preparation of the various dishes, eatable items, tea, coffee, etc. having petty sale value(s) of Rs. 100/-, 200/-, 400/- etc. etc. Thus, the learned AO asked the appellant to produce the details which are not practically possible in the line of appellant’s business. In view of the above facts and circumstances of the case, the provisions of section 145(3) are inapplicable in appellant’s case ref. [2005] 279 ITR 457 (Calcutta) in case of Ashoke Refractories (P) Ltd. Vs CIT held that “Section 145 of the Income-tax Act, 1961 – method of accounting – Rejection of accounts –

Assessment years 1990-91 and 1991-92 – whether in absence of stock register or failure to maintain item-wise stocks in stock register, books of account could not be rejected unless there was a finding or opinion either that records were incorrect and incomplete or that method of accounting applied was such that income could not be deducted from accounts maintained by assessee – Held, yes.”

3(ii) Further, it is also a known fact that in no business specifically in the restaurant business, there cannot be exactly a same rate of gross profit in every year. Because in restaurant trade, each items yield different-different rate(s) of GP and the overall GP of a year depends on the maximum sales of particular item(s). It is also worthwhile to submit here, if any business man declared trading result same in every year (i.e. same GP) than, the said case is more doubtful then the assessee in who’s case there occurs variation in GP rates year to year. It is also verifiable from the assessment order that learned AO compared GP rate with immediately preceding year and not for 3 years. The appellant submits herein below comparative figures of turnover and GP rate in 3 years including the assessment year under appeal :-

Assessment Turnover (Rs) GP ((Rs.) GP Ratio (%) Year 2015-16 32559436 9143849 28.08 2016-17 29659704 9178525 30.95 2017-18 39304217 11077344 28.18

As per above particulars, it is evident that the GP rate in the assessment year under appeal is better than the assessment year 2015-16. But, the GP rate in the year under assessment is decreased by 2.77% in comparison to the immediately preceding year, whereas, the turnover of the appellant has increased by more than 33% in comparison to the said immediately preceding year. It is a known fact of every trade that the slight decrease in GP rate is attributable to the increased turn over. Thus, the learned AO has only considered one side of the trading account ignoring the another main side turnover. In this regard, it is further submitted that now it is a finally settled position of law that merely because there is some deficiency in books of accounts or merely because rejection of books of accounts does not lead to addition to return income. The submissions are drawing support from the following case laws :-

“ Ref : [2002] 256 ITR 243(Rajasthan) in case of CIT Vs Gotan Lime Khanij Udhyog held that “Section 145 of the Income-tax Act, 1961 – method of accounting – Rejection of account – Assessment year 1986- 87 – Whether section 145(1)/(2) as amended with effect from 1-4- 1997, does not mean that rejection of books of account of an assessee must yield to different conclusion in computation of income as returned by assessee on basis of accounts made by it employing any other method of accounting – Held, yes – Assessee’s trading accounts were not backed up with quantitative and qualitative stock details – Assessing Officer invoked provisions of section 145, increased GP rate and made substantial trading addition – Tribunal, however, deleted additions – Whether merely because there is some deficiency in books of account or merely because there is rejection of books of account, it must necessarily lead to additions to returned income – Held, no ”

Ref : [2021] 131 taxmann.com 331 (Jaipur – Trib.) in the ITAT Jaipur Bench ‘B’ in case of Sanjay Agarwal Vs. ITO, Ward-3(3), Jaipur held that “Section 145 of the Income-tax Act, 1961 – Method of accounting – Estimation of income (GP rate) – Assessment year 2012-13 – Whether once books of account are rejected, Assessing Officer has to estimate profits based on his judgment and either past year results or comparative profits declared in similar line of trade in same commodity would be a guiding factor – Held, yes. However, there was an exceptional circumstances as assessee’s turnover increased by almost 130 times and, thus, past year results were not reflective of state of affairs of current affairs, and past year results could not be made a guiding factor. Whether trading addition made by Assessing Officer estimating higher GP rate was to be deleted – Held, yes [Para23] [ In favour of assessee]”

In view of the above facts and circumstances of the case, the impugned trading addition made by the learned AO may kindly deserves to be deleted. ”

Ref : [2002] 256 ITR 243(Rajasthan) in case of CIT Vs Gotan Lime

Khanij Udhyog held that “Section 145 of the Income-tax Act, 1961 – method of accounting – Rejection of account – Assessment year 1986-

87 – Whether section 145(1)/(2) as amended with effect from 1-4-

1997, does not mean that rejection of books of account of an assessee must yield to different conclusion in computation of income as returned by assessee on basis of accounts made by it employing any other method of accounting – Held, yes – Assessee’s trading accounts were not backed up with quantitative and qualitative stock details –

Assessing Officer invoked provisions of section 145, increased GP rate and made substantial trading addition – Tribunal, however, deleted additions – Whether merely because there is some deficiency in books of account or merely because there is rejection of books of account, it must necessarily lead to additions to returned income – Held, no ”

(i) Ref : [2021] 131 taxmann.com 331 (Jaipur – Trib.) in the ITAT Jaipur Bench ‘B’ in case of Sanjay Agarwal Vs. ITO, Ward-3(3), Jaipur held that “Section 145 of the Income-tax Act, 1961 – Method of accounting – Estimation of income (GP rate) – Assessment year 2012-13 – Whether once books of account are rejected, Assessing Officer has to estimate profits based on his judgment and either past year results or comparative profits declared in similar line of trade in same commodity would be a guiding factor – Held, yes. However, there was an exceptional circumstances as assessee’s turnover increased by almost 130 times and, thus, past year results were not reflective of state of affairs of current affairs, and past year results could not be made a guiding factor. Whether trading addition made by Assessing Officer estimating higher GP rate was to be deleted – Held, yes [Para23] [ In favour of assessee] I find sufficient force in the arguments of the ld. A/R for non maintenance of the raw material register, which is impossible to be maintained in restaurant business. The decline in GP rate is also very minimal in comparison to average GP for last three years considering an increase of over 33% in the turnover as compared to immediately preceding year. Therefore, the decision of the ld. CIT (A) is reversed and application of provision of section 145(3) is quashed and addition in the income for Rs. 5,46,329/-on account of application of GP rate of 29.57% is hereby deleted.

Order pronounced in the open court on 18/10/2024.