J C HOME TEX,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE - 7, JAIPUR

per provision of section 139(1) of the Act, the assessee has included

income of Rs. 68,00,000/- disclosed as advance given to various persons.

In the return of income so filed the assessee telescoped the disclosed

bogus expenses of Rs. 10,77,000/- as source of given the advances given

to various persons. The case of the assessee was selected for manual

scrutiny. Notices were issued to the assessee and the same were replied

by the assessee. The ld. AO noted that the assessee submitted details /

explanation / justification which were perused and examined along with the

books of accounts and consequently the assessment was completed u/s.

143(3) of the Act on 28.12.2018. While completing the assessment the ld.

AO made addition on three aspects. First Rs. 10,77,000/- disclosure of

unexplained expenditure telescoped with the disclosure of Rs. 68,00,000/-

was not considered and secondly excess stock of Rs. 1,25,60,000/- was

added as the assessee has not adhered to the disclosure. The third

addition made was for an adhoc trading addition of Rs. 2,00,000/- by

63 ITA No. 292/JP/2024 J C Home Tex vs. ACIT observing that the assessee’s book does not reflect the complete and

correct profit of the business.

CIT(A). The ld. CIT(A) sustained the addition of Rs. 10,77,000/- and as

regards the addition of excess stock and lump sum trading addition he

hold that the profit is to be computed @ 18.94 % and accordingly he

sustained the addition of Rs. 89,94,655 being the difference of gross profit

estimated and declared by the assessee.

where in the ground no. 1 challenges the rejection of the books of

accounts u/s. 145(3) of the Act and ground no. 1.1. & 1.6 deals with the

addition sustained by the ld. CIT(A).

challenging the rejection of the books of accounts. The ld. AO in para 4 of

his order noted that the assessee has not maintained stock register and

the valuation of closing stock is on estimated basis. In the column no.

35(a) and 35(b) in the report of the Chartered Accountant in form no. 3CD

64 ITA No. 292/JP/2024 J C Home Tex vs. ACIT while reporting the quantitative details mentioned nil. Based on this

observation he invoked the provision of section 145(3) and hold that books

of account of the assessee cannot be accepted as compete and correct

and therefore, true profit of the assessee’s business cannot be accepted.

The ld. CIT(A) has confirmed the action of the ld. AO by holding that

assessee does not maintained day to day quantitative stock register and

the stock found physically was found in excess.

19.1 Before us the ld. AR of the assessee submitted that the survey team

physically taken the stock and arrived the working of the excess stock and

there is no dispute so far as the computation of that amount of Rs.

1,25,60,000/- is concerned. In the assessment proceeding as it is evident

from the order of the ld. AO that the assessee has submitted all the details

that were called for and even the books were produced and examined by

the ld. AO. The ld. AO invoked the provision of section 145(3) merely on

the reasons that the stock is valued on estimate basis and no quantitative

records maintained. As regards the valuation of stock we note from the

column 14(a) of the tax audit report the auditor has mentioned the method

of valuation as cost or market price whichever is lower. The stock found

and computed is not disputed by the revenue and the assessee as the

65 ITA No. 292/JP/2024 J C Home Tex vs. ACIT same is based on the regular method of accounting followed and

therefore, there cannot be any reasons to reject the books of account. As

regards the quantitative records not maintained on day-to-day basis, we

note that since the survey was conducted on 16.02.2016 and the stock

calculated physically is not disputed the reasons advanced for non-

maintenance of stock records should not be a reason or basis of rejection

of the book results which are otherwise verified, and no defects were found

by the ld. AO and ld. CIT(A) confirmed the view of the ld. AO. Thus, as the

provision of section 145(3) is invoked, it would be better go through the

provision that section and the same reads as under :

Method of accounting. 145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

19.2 As it is evident that the provision of section 145(3) can be invoked in

the following circumstances:

66 ITA No. 292/JP/2024 J C Home Tex vs. ACIT • When the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee. • When the method of accounting provided in Section 145 (1) has not been regularly followed by the assessee. • When the accounting standards notified under Section 145 (2) have not been regularly followed by the assessee.

19.3 From the observations recorded in the order of the lower authority

none of the condition is satisfied and thus same is not evident from the

finding of the lower authority. Not only that the bench also observed that

when the provision of section 145(3) is to be invoked the assessment is to

be completed as per the manner provided in section 144 of the Act and the

proper opportunity is required to be given by pointing out the defects in the

books of account which we observe that the same is not followed and the

order is passed u/s. 143(3) of the Act which is also not correct. We get

strength to support our view based on the provision of the Act and decision

of the Hon’ble Jurisdiction Rajasthan high court in the case of CIT Vs. Pink

City Developers [99 taxmann.com 422 (Rajasthan) ]. In that case the

Hon’ble High court held that;

67 ITA No. 292/JP/2024 J C Home Tex vs. ACIT

Based on the discussion so recorded we considered ground no. 1 in favour

of the assessee.

excess stock found of Rs. 1,25,60,000/- [ Actual excess stock works out to

Rs. 1,25,59,344/- ] and added by the ld. AO. The brief facts as emerges

related to the addition is that survey u/s. 133A of the Act was conducted on

16.02.2016 at the business premises of the assessee. The survey team

worked out the inventory of the goods found at the business premises at

Rs. 2,96,24,738/-. That working of the stock was confronted to the

assessee vide question no. 33 of the statement recorded at the time of

survey and partner of the firm confirmed that working done by the survey

team. Before that vide question no. 32 the assessee confronted by the

survey team about the completeness and correctness of the books of

account and the relevant question and answer is reproduced here in

below:

68 ITA No. 292/JP/2024 J C Home Tex vs. ACIT iz’u 32 d`i;k crk;s fd vkids [kkrs cfga;ksa esa dc rd dk tek [kpZ Purchase, Sale vkfn dk bUnzkt gks pqdk gS ,oa D;k dEI;wVj ds vykok eSU;wvy [kkrk Hkh j[krs gS \ mÙkj 32 gekjh leLr [kkrk cfga;ka dsoy dEI;wVj ij j[kh tkrh gS] dsoy Section-wise Stock Register esa j[kk tkrk gS pwafd dqN [kpksZa ds fcy tSls tkWc odZ o vU; fofo/k [kpsZa vkfn okmpj vHkh izkIr ugh gq, gS mudk bUnzkat ugh gks ik;k Fkk blds ckjs esa eSa vkidks ckn esa crk nwaxkA HkkSfrd lR;kiu ds fy, c;ku fy, x;s gSA LVkWd ds HkkSfrd lR;kiu ds ckn c;ku iqu% 'kq: fd;s x;sA

20.1 At the time of the survey as per the books available in the computer

the closing stock was at Rs. 1,70,65,394/-. Thus, the said book stock

figure was compared with that of the actual stock taken by the survey

team. The difference of Rs. 1,25,59,344/- was considered as excess stock

in the hands of the assessee. Accordingly, the statement of the partner of

the assessee firm was recorded wherein the partner of the firm admitted

the working and valuation of stock. Based on that the excess stock was

worked out as reproduced here in below :

Stock as per Books of Accounts as on Date of Survey 1,70,65,394/- Add: Excess Stock found during the course of survey 1,25,59,344/- Total Value of Closing Stock as on 19.02.2016 (Just after 2,96,24,738/- survey)

Break up of Excess Stock found during the course of Survey 1,25,59,344/- Less: Pertaining to pending entries of Purchases 82,40,125/- Excess Stock offered for Tax as part of Closing Stock 53,17,973/-

20.2 During the assessment proceeding ld. AO noted that assessee has

not disclosed undisclosed excess stock as income in the return of income

filed by the assessee. That is why the assessee was asked to show cause

69 ITA No. 292/JP/2024 J C Home Tex vs. ACIT as to why the said amount of Rs. 1,25,60,000/- being the amount of

excess stock should not be added to the income of the assessee. The

assessee filed a reply explaining the fact that as on the date of survey as

stated by the partner that books were not complete and thereafter the

survey on verification of the evidences the assessee noted that the

purchases worth Rs. 82,40,125/- for which the goods were received by the

assessee but the bills remained to be recorded in the books of account of

the assessee. The assessee submitted a list of such bills stating the

details of the purchases remained to be accounted for. The assessee also

submitted that all the bills for which the purchases had remained

accounted are supported by the bills and all bills are paid by an account

payee cheque. It was also submitted that the payment for some of the

purchases were made before the date of survey. In this manner after

reduction of that purchase the balance amount of Rs. 53,17,973/-

remained as the ultimate excess stock which the assessee offered in the

closing stock. The ld. AO did not consider this explanation of the assessee

and made the addition of Rs. 1,25,60,000/-. When the matter was

challenged before the ld. CIT(A), the ld. CIT(A) sustained the addition of

Rs. 89,94,655/- holding that;

Considering the totality of facts, trading results shown for the year are not reliable and are rejected. The decision of the ld. AO in the assessment order

70 ITA No. 292/JP/2024 J C Home Tex vs. ACIT regarding rejecting the books of accounts is hereby upheld. The income is to be assessed considering the gross profit ratio of 18.94% (excluding excess stock i.e. the stock will be over and above this G.P.) which is exactly similar as immediately preceding year and also take care for the some expenses left over and not entered in the books of accounts on date of survey. This gives the meaning that had the survey not taken place on 19.02.2016 (which is just 1 month and little over 1 week prior than the end of year) the appellant would have shown a gross profit at the rate of 18.94% (excluding excess stock) considering the best of probabilities and considering judicial pronouncements about using the preceding year G.P. ratio when the books in the current year are rejected. As per the gross profit ratio of 18.94% (excluding excess stock), the details for the year are worked out as under:-

20.3 The ld. AR of the assessee stated that the list of the purchases

remaining to be entered on the date of the survey were placed before the

lower authority and same forms part of the paper book page 84-85 and all

the bills along with the details of the payment made in the paper book filed.

The ld. AR of the assessee placed on record the acknowledgement of the

online response submitted by the assessee whereby the assessee

submitted all those bills before the assessing officer. This fact has not

been controverted by the lower authority and that of the ld. AO through the

ld. DR when the appeal was heard. To verify the contention of the

71 ITA No. 292/JP/2024 J C Home Tex vs. ACIT assessee bench tested the version of the assessee at the time of hearing

of the appeal from the list of purchases made available at page 84-85. The

transaction tested are tabulated herein below:

Date of survey 16.02.2016

Name of party Bill at page in Invoice Payment proof at Payment made paper book & date Amount page in paper with date of invoice book Matushree 461 411153 545 Rs.4,11,153 Dt.15.02.2016 Dt. 15.02.2016 Manglam 394 172589 544 Rs.13,00,000 Dt. 21.1.2016 Dt.12.02.2016 Vikram Traders 435 525868 Submitted vide Rs. 5,25,868 Dt. 05.02.2016 letter dated Dt. 12.04.2016 31.05.2024

As it is seen that the purchases are made before the date of survey and it

is also evident from the chart available at paper book page 84-85 from

where we note that all the bills were before the date of survey. The bills

were placed on record along with the supporting evidences before the ld.

AO. The ld. AO through the ld. DR did not controvert these basic details

placed on record and we note that not a single enquiry with any of the

parties from whom the purchases claimed to have been made were not

made even though all the details placed on record by the assessee.

72 ITA No. 292/JP/2024 J C Home Tex vs. ACIT 20.4 All these instances read with the statement of the partner of the firm

wherein while answering questions no. 32 stated that the books are not

complete. Even the records which were seized shows the advance

payment as per the respective party ledger placed on record and in the

paper book filed. The assessee submitted the purchase bills along with

transport receipt, packing list etc. The chart submitted by the assessee

shows the date of the bill, name of the supplier, bill number and supporting

evidence attached to the bills. All this evidence corroborates with the

accounting records wherein the name of the suppliers is repeated. The ld.

AO as well as the ld. CIT(A) does not feel it to be tested or verified by

using the power vested u/s. 133(6) of the Act. The details submitted to ld.

AO as well as to the ld. CIT(A) has not been controverted. The books of

account produced were not found to be faulty on any of the entries or bills

as referred by the assessee. The version of the assessee that bills

remained to be accounted get strength from the page 18 of the inventory

prepared wherein that inventory sheet prepared by the survey team itself

shows written as “Grey Outside packed” and the goods are in ‘Bale’, this

aspect further proves the contention of the assessee that certain goods

were available with the assessee which was in packed form and was not

yet opened. Thus, this version of the assessee get support for the alleged

73 ITA No. 292/JP/2024 J C Home Tex vs. ACIT difference in value of stock found and remained to be recorded in books of

accounts. The assessee has in the assessment proceeding placed on

record all the possible documentary evidence in support of such claim but

all the evidences furnished were brushed aside, without assigning a single

reason / discrepancy in the same and that too without following the

provision of section 145(3) of the Act. As we have while dealing with the

ground no. 1 held that without finding any faults in the books of account

the same cannot be rejected. Not only that if the revenue intends to invoke

the provision of section 145(3), there is a procedure to be followed which

has not been followed. We note that the addition was made merely based

on the fact that the assessee has disclosed the excess stock and the same

is not adhered to in full by the assessee. The apex court in the case of CIT

Vs. S. Khader Khan Son (Supra) held that statement itself cannot, by itself

be made the basis for making the addition. Thus, merely the assessee has

disclosed the unaccounted excess stock in the statement the purchases

which remained to be accounted and subsequently demonstrated with

evidence that none of the purchases were in cash and is supported by the

relevant evidence, we do not find any single reason not to believe the

contention of the assessee. As we also note that all the parties are regular

from where the assessee has already made purchases and the transaction

74 ITA No. 292/JP/2024 J C Home Tex vs. ACIT are not solitary transactions, all the relevant evidence for purchases made

were submitted showing the bill, transport receipt and freight payment etc.

Merely this list is of 47 parties and the amount was for Rs. 82,40,125/-

based on the documents placed on record that purchases cannot be

considered as undisclosed, and the credit of that purchases cannot be

denied.

20.5 As regards the balance amount of Rs. 53,17,973/- since the

assessee has already based on the affidavit and Chartered Accountant

Certificate demonstrated that the same is forming part of the closing stock

declared by the assessee. The bench noted that this certificate of CA is

of the same CA who has signed the annual audited accounts and that

is why the assessee at the request of the bench submitted that

certificate of the same CA to confirm the contention raised by the

assessee. Since this evidence in the form of the additional evidence called

for from the assessee at the instance of the bench the same is very well

fall within the power of the bench as per rule 29 which reads as under :

75 ITA No. 292/JP/2024 J C Home Tex vs. ACIT 29. [ Production of additional evidence before the Tribunal [Substitued by the Income-tax (Appellate Tribunal) Amandment Rules, 1973] - The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any document to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or , if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced.]

20.6 As the assessee has already raised the contention that they have

disclosed the amount of Rs. 53,17,973/- in the closing stock at the time of

survey and this contention were not examined by the lower authority. The

bench directed to ld. AR of the assessee to justify the claim and for that

the partner of the firm filed an affidavit and the CA certificate to support the

contention raised by the assessee. Considering that additional evidence

were called for by the to enable to pass order and substantial cause of

justice the same is considered for decided the issue on hand. Thus, in

totality of the fact if we considered that the details of the purchase

remained to be entered in the books of accounts and non-disputed working

of the excess stock of Rs. 1,25,59,344/-. The working of the income

disclosed or not is determined as under:

Excess stock [ not disputed by both the parties ] Rs. 1,25,59,344/- Less : Purchases accounted after the date of survey for Rs. 82,40,125/- which stock was available but bills were entered after the

76 ITA No. 292/JP/2024 J C Home Tex vs. ACIT date of survey Less: Purchase related expenses vouchers Rs. 8,58,956/- Add: Sales bills accounted after the date of survey Rs. 18,57,710/- Balance Rs. 53,17,973/- Amount disclosed in the closing stock as certified by CA Rs. 53,17,973/- Balance addition to be made Nil

20.7 As it is seen that the credit for purchase remained to be accounted

for an amount of Rs. 82,40,125/- expenses vouchers of Rs. 8,58,956/- and

sales bills of Rs. 18,57,710/- the actual excess stock figure works out at

Rs. 53,17,973/- is incorporated in the books as part of the closing stock by

the assessee and thereby offered the additional income we hold that there

is no separate addition is required to be made in the hands of the

assessee. Based on these observations ground no. 1.1 & 1.2 are allowed.

10,77,000/- being the alleged bogus expenses declared by the partner of

the assessee firm at the time of survey. During the assessment proceeding

it was contended that the cash generated out of the bogus expenses were

utilized to give advances to various persons. The ld. AO did not accept this

contention of the assessee as the assessee has not proved the nexus

between the amounts of bogus expenses booked and were utilized for the

advances given. Based on that contention telescoping benefit was not

77 ITA No. 292/JP/2024 J C Home Tex vs. ACIT allowed. The ld. CIT(A) confirmed the finding that of the ld. AO stating that

the assessee has not laid down the factual position behind claiming the

telescoping benefit and since that onus is not discharged the addition of

Rs. 10,77,000/- was sustained.

21.1 The assessee challenged the confirmation of addition of Rs.

10,77,000/- by the ld. CIT(A). The brief facts as emerges from the records

related to this issue are that during the course of survey page 14 & 15 of

Annexure AS-7 were found. That two pages are self-made vouchers of

wages dated 31.12.2015 and 04.02.2016 of Rs. 4,97,000/- and Rs.

5,80,000/- respectively. Similarly, page no. 4 of Annexure AS-9 and the

back side of that page, certain advances were found noted. Based on that

evidence the assessee disclosed Rs. 68,00,000/- as advances given to job

worker. The assessee contended that both the vouchers for bogus

expenses and payments as advances made were found in loose papers

and were treated as unexplained and cumulative figure was taken as

additional undisclosed income of the assessee. The assessee contended

that such cash was available on account of bogus expenses as recorded

in books, ultimately formed source in cash for making the advance. The ld.

AO as well as of the ld. CIT(A) not allowed the benefit of telescoping solely

78 ITA No. 292/JP/2024 J C Home Tex vs. ACIT by alleging that assessee has failed to establish the nexus between cash

advances and bogus expenses. As argued that so far as expenses were

treated as bogus, i.e. not incurred, cash to that extent was available with

assessee throughout the period. Moreover, no instance whatsoever has

been brought on record for any such utilization of cash so generated

elsewhere nor any material was found during the survey indicating the use

of such money elsewhere rather these advances favours the contention of

the assessee, therefore denial of telescoping merely alleging that cash

flow trail was not furnished by assessee is not correct. The ld. CIT(A) has

relied upon certain case laws related to peak working and presumed that

assessee could not provide the linking between cash available, and

advances made. As the decision of peak credit are relied on we note that

the peak credit theory is usually applied to compute additional income in

the case assessee has borrowed as well as lent money / made cash

deposits as well as withdrawals. Whereas in the instant case, cash

available with assessee is of its own and though expenses were booked

on paper was in fact not booked and thus, the cash of that expenses was

very well available and remained with assessee to advance the money to

the job worker. Therefore, the contention that the assessee was having the

cash balance to the extent of Rs. 10,77,000/- to make the advances so

79 ITA No. 292/JP/2024 J C Home Tex vs. ACIT disclosed and the benefit of the telescoping cannot be denied merely on

the ground that there is no cash flow statement made available by the

assessee. Based on these observations the ground no. 1.3, 1.4, 1.5 & 1.6

raised by the assessee are allowed.

not require our adjudication.

In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 10/07/2024. Sd/- Sd/- ¼ Mk0 ,l- lhrky{eh ½ ¼ jkBksM deys'k t;UrHkkbZ ½ (Dr. S. Seethalakshmi) (Rathod Kamlesh Jayantbhai) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur fnukad@Dated:- 10/07/2024 *Ganesh Kumar, Sr. PS आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. The Appellant- J. C. Home Tex, , Jaipur izR;FkhZ@ The Respondent- ACIT, Circle-07, Jaipur 2. vk;dj vk;qDr@ The ld CIT 3. 4. vk;dj vk;qDr¼vihy½@The ld CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File (ITA No. 292/JP/2024) vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत