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.

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 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 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;

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

68 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 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 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 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. 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 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 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 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 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.

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 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 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.

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