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Income Tax Appellate Tribunal, DELHI BENCHES, NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
These are two appeal filed by revenue for AY 2010-11 and 2011-12 against the order dated 25 September 2014 passed by ld.CIT (A), Meerut deleting the addition made by AO rejecting the books of accounts and applying gross Page 2 of 10 profit ration of 35 % to the turnover for both the years. Assessee has filed cross objections for AY 2010-11 which are mainly supportive in nature.
For AY 2010-11, Revenue has raised substantially two grounds which are against deletion of addition of Rs.5,12,58,801/- made by the AO by adopting gross profit rate of 35% after rejection of the books of account in absence of quantitative details, stock register and working of closing stock.
The brief facts of the case is that the assessee company is engaged in the business of publication of books and filed its return of income on 19.09.2010 declaring total income of Rs.20,78,640/-. The return of income filed by the assessee is supported by regular books of account which are duly audited. During the course of assessment proceedings, the assessee produced the books of account, which was examined by the AO. During the year, the assessee has turnover of Rs.183669894/- and has shown gross profit of Rs.13025661/- which is 7.09%. However, the assessee does not maintain stock register. During the assessment proceedings, the assessee was asked to produce the various bills and vouchers of various expenses and on verification of them it was found by the AO that vouchers of various expenses were self- made but contain the complete details of the payee. Hence the AO rejected the books of account and applied provisions of section 145(3) of the Act and estimated gross profit @ 35% amounting to Rs. 64284462 consequently made an addition of Rs.51258801/-. Further an addition of Rs.88909/- was also made to the various expenses incurred by the assessee.
Aggrieved by this the assessee preferred appeal before the ld. CIT(A), who in turn deleted the addition on account of rejection of books of account and estimation of the GP. He held that the rejection of the books of account and consequent estimation of profit is unsustainable. Therefore, revenue is in appeal before us.
Page 3 of 10 5. Before us, the ld. DR vehemently supported the order of the AO and submitted that in absence of the stock register AO has rightly estimated the gross profit at 35%.
Against this the ld. AR submitted written submission along with paper book and also advanced oral arguments and submitted that the assessee has maintained regular books of account which are audited. He submitted that during the course of assessment proceedings there is no defect pointed out by the AO by drawing a single instance of incorrect or ingenuine expenditure. He submitted that looking to the nature of the business of the assessee the stock register was not maintained. However, complete details of information with respect sundry debtors and creditors are available. This information has been verified by the AO. He further submitted that meanwhile all the details of purchases, opening stock and closing stock was filed. With the details of purchase of papers, its valuation has also been provided to the AO vide letter dated 21st March 2013 and further comparative chart of sales and GP is also placed. He further drew our attention to various submission made before the AO vide Page 33 to 133 of the PB. In view of this, he submitted that ld.CIT (A) has rightly deleted the addition.
We have carefully considered the rival contentions. Ld. CIT(A) has deleted the addition vide para No.3.1 to 3.8 of his order as under:- 3.1 Ground No. 1 to 6 & 9 relate to the addition of Rs 5,12,18,8017- made to the total income by rejecting the books of accounts of the assessee. The relevant facts of the case are that the assessee company is engaged in the publication of Montessori & Govt. allotted text book for junior classes. The tax audit report, balance sheet, profit and loss account, trading account and other documents were filed/produced during the assessment proceedings as were the books of accounts. During the examination of the books of accounts, the AO required the assessee to furnish month wise stock register, opening and closing stock register, books of accounts etc. the assessee produced various documents/books but could not produce any stock register.
Page 4 of 10 The AO has stated that in the absence of the stock register, the quantitative and qualitative details of stock cannot be verified. It is also stated that sale and purchase registers were produced but it was not possible to work out the quantitative/qualitative details of stocks from these registers. The AO has stated that it was the stand of the assessee that the stock register was not maintained because of the numerous varieties of books/raw materials used by the assessee company. The AO has also observed the narration in the tax audit report that the company had physically verified the stock and that stock register is not maintained. Thereafter, the AO has stated that vouchers for various expenses were self-made containing incomplete details of the payee. Therefore, the genuineness of these vouchers could not be ascertained and consequently the genuineness of the books of accounts also could not be proved. The AO has then proceeded to reject the books of accounts and cited certain case laws. Having done so, the AO has adopted a gross profit rate of 35% instead of 7.09% declared by the assessee and applied this rate to the turnover of the assessee thereby making an addition of Rs 5,12,18,8017- to the total income of the assessee. 3.2 In the appeal proceedings, it was submitted that the assessee company had maintained regular books of accounts and had submitted its financial accounts along with auditor's report and also the tax audit report. Books of accounts were produced during the assessment proceedings which were examined by the AO. The assessee had produced cashbook, Ledger, sales book, vouchers etc during the assessment proceedings and had also explained that the GP rate of 7.09% compares favorably with the GP rate declared and accepted in the earlier year. The AO had never issued any notice under section 145 (3) and the books of accounts produced before the AO were neither shown as incorrect or incomplete nor the method of accounting adopted by the assessee was shown as not having been regularly followed by the assessee. Assessee had furnished details of opening stock and closing stock and also produced all invoices in support of the purchases and sales. The assessee company has regularly adopted the same method of accounting year after year in respect of valuation of stock. The books of accounts maintained in the regular course of business are relevant and afford prime facie proof of the entries and the correctness thereof. The AO is bound to except such books and entries therein barring special and deeming/specific onus provisions or where he has material to the contrary. Despite the above, the AO has proceeded to reject the books of accounts. Moreover, even where books of accounts were found unreliable, the assessment cannot be made arbitrarily and in order that an assessment can be sustained, it must have nexus to the material on record. The order of the AO should be a speaking order and it must Page 5 of 10 disclose the basis and the manner of computation of income. The AO is not entitled to make guess work and make an assessment without reference to any evidence or any material at all. The assessment for any particular year must be based not on mere suspicion or mere guess but on legitimate material from which a reasonable inference of income during the accounting year could be drawn and that the initial burden of finding such material, however slight, is on the income tax authority and not on the assessee. As regards the rejection of books of accounts, it has been argued that the Madras High Court in the case of P. Appavu Pillai (58 ITR 622) held that section 145 does not say, nor is there any provision in the statute that an assessee carrying on business shall maintain a specified set of accounts. In the case of Advance Construction Company (275 ITR 30), the Gujarat High Court had held that the Department is bound to accept the method of accounting regularly employed by an assessee, except for a situation where the AO is able to demonstrate that income, profits and gains cannot be arrived at by the method employed by the assessee. In the case of McMillan and Co. (33 ITR 182), the Honorable Supreme Court held that the choice of method of accounting lies wife the assessee and the assessee should only show that he had followed the method regularly. Similar is the observation of the Apex Court in the case of Investment Ltd (77 ITR 533) that a method of accounting adopted by a trader consistently and regularly cannot be discarded by the Department authority on the view that he should have adopted a different method of keeping account or of valuation. In the case under consideration, the AO has neither doubted the correctness or completeness of the accounts nor has concluded that the method of accounting was not regularly followed by the assessee. Even in the tax audit report, the auditors have confirmed that there was no change in the method of accounting by the assessee during the relevant assessment year. Reference has been made to clause 14 of the Guidance Note on Audit of Inventory issued by the ICAI in August 1994 which states that there are two principal methods of stocktaking, periodic stocktaking and continuous stocktaking. Under the first method, physical verification of inventory is carried out at a single point of time, usually at the yearend or at a selected date before or shortly after the year-end. Under the second method physical verification is carried out throughout the year were different items of inventory being physically verified at different points in time. Since its inception, the assessee had adopted periodic system of stocktaking and the same had been accepted by the Department year after year. The AO has not even discussed or made observation regarding the submissions made by the assessee for the increase in gross profits. The AO has not passed a speaking order inasmuch as there is no basis whatsoever for adopting a gross profit rate of 35% Page 6 of 10 instead of the declared was profit rate. It is also reiterated that details of opening and closing stock were furnished. There is no finding recorded by the AO that the purchase or sale invoices are not maintained or produced. It was also argued that the AO neither controverted nor disproved the submissions made by the appellant before him vide assessee's letter dated 21.03.2013 to the effect that the assessee was not maintaining stock register as in the earlier years and stock is valued after physical verification at cost or market price whichever is less as done in the past. It has also been argued that the AO has not controverter or disproved the fact that in the type of business being carried on by the appellant, it was not physically possible to maintain a stock register. Even though no stock register was maintained in the earlier year, the trading results stand accepted by the AO as is evident from the comparative chart of trading results which was placed before the AO. It was also argued that that the appellant during this year had declared GP rates of 7.09% on much higher turnover as declared in the earlier years. Such GP rate favourably compares with the GP rate declared and accepted in the earlier years. The assesses has also distinguished the various case laws cited by the AO and has also relied on certain case laws. 3.3 As regards the case laws cited by the AO are concerned, insofar as the decision of the Allahabad High Court in the case of Awadhesh Pratap Singh Abdu Rehmam & Brother Vs CIT (1994) 210 ITR 406 (All) 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 such other factor has been pointed out by the AO. It only goes to show that the AO is mechanically referring to certain case laws without appreciating the contents thereof. As regards the reliance the decision in the case of Dhondiram Dalichand (81 ITR 609), itis noted that in that case, there was an excess 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 ITR 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 Page 7 of 10 the absence of stock register, the books of accounts can be rejected. Similarly, the facts of the case of Rainbow Metals (India) (1995) 83 Taxmann 160, (ITSC) (Bom) is different from the case of the appellant. In the Rainbow Metals case, part of the purchases were not allowable as deduction for want of proof and another part was not found allowable as payment was made in cash. 3.4 At this point, it would be useful to make reference to certain principles of law which have evolved in the various judicial pronouncements. Firstly, as laid down in the case of Gamdiwala Dairy Vs ACIT (2011) 7 ITR (Trib) 114 (Ahd.) mere inference of low gross profit cannot justify rejection of books. It has been further held in Ravi Kumar Rawat Vs ITO (2011) 7 ITR (Trib) 539 (Jaipur) that accounts regularly kept cannot be rightly rejected specially when there is no short fall in gross profit but actually there has been increase during the year. Without any independent enquiry the rejection of accounts itself and the consequent addition was held unjustified. The issue related to estimate of income by way of best judgment in a case where the assessee had not produced some records but had other evidence to prove the correctness of books produced was held in favour of the assessee in Eagle Synthetics Pvt Ltd. Vs ITO (2011) 8 ITR (Trib) 211 (Ahd.). It was held in CIT Vs Paradise Holidays (2010) 325 ITR 13 (Delhi), that where an assessee relies on his account book in support of the return, the returned income with reference to the books is bound to be accepted, if the accounts are found to be reliable and had been maintained according to the accounting system regularly employed by the assessee as is required by section 145 of the Act. It was further held in CIT Vs Dr. A.P. Banal 2010 322 ITR 71 (Raj) that even where rejection of accounts was justified for defects in accounts, the estimate of income should be based upon some materials in support of same. Where there is none, such estimate cannot be upheld. 3.5 The AR has also referred to the order passed by the Ld. CIT(A), in the case of M/s Arihant Publication India Ltd. for A.Y. 2010-11 wherein the additions made on same facts in the assessment order passed by the same AO have been deleted. The appellate order as well as the assessment order referred to above has been perused. 3.6 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 Page 8 of 10 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. Therefore, why the non-maintenance of stock register was fatal for the acceptance of the book results has never been explained. Thirdly, the observation that no quantitative details of valuation of opening and closing stock had been furnished during the assessment proceedings seems to be wrong as it is seen that the appellant had submitted month wise details of sales and purchase before the AO vide its submission made on 14.12.2012 and again vide its submission on 21.03.2013. Fourthly, 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. Finally, no basis whatsoever has been given for adopting the gross profit rate of 35% nor has it been explained why the same is considered as appropriate and reasonable. 3.7 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. 3.8 On the basis of above discussion, Ground Nos. 1 to 6 and 9 are allowed and consequently addition of Rs. 5,12,18,801/- is deleted.”
The ld. DR could not point out any infirmity in the order of ld.CIT (A). Further, we are also of the view that in absence of any latent, patent and serious defect in the books of account of the assessee it cannot be rejected. Furthermore as per office note attached with the order of the AO it is noted that confirmation of sundry creditors has been obtained by issuing notice u/s 133(6) of the Income Tax Act. This shows that all third party enquiries also confirms proper booking of purchases and maintenance of accounts. Subsequently, the month wise quantitative details along with opening and closing stock were also verified by the AO. The comparative chart of gross profit is submitted by the assessee at Page 133 of his Paper book wherein Page 9 of 10 starting from Assessment Year 2003-04 to 2010-11 consistently the assessee has shown gross profit from 6.35% to 7.09% and for Assessment Year 2003-04 assessment has been made u/s 143(3) of the Act. Further, the nature of the business of the assessee is publication of the books and assessee submitted that it is not feasible for maintenance of regular stock account, this facts was not controverted by AO. Further merely non maintenance of stock register cannot be the basis of rejecting the books of accounts of the assessee when the complete details of purchases, sales and stock is available and on verification no defects are noticed. In view of the above facts, we do not any infirmity in the order of the ld.CIT (A) and confirm the deletion of addition of Rs.51258801/- by rejecting the books of accounts and estimating GP ratio @ 35 %.
In the result, appeal of the revenue is dismissed. CO- 195/Del/2015 10. The assessee has preferred cross objection, which are against some factual accuracies in the grounds of appeal
raised by the revenue. As we have already dismissed the appeal of the revenue, the cross objections filed by the assessee also become infructuous and hence there are dismissed.
11. In the result appeal of the revenue and cross objections of the assessee for AY 2010-11 are dismissed. (Asstt. Year: 2011-12)
12. This appeal is preferred by revenue against the order dated 20th October 2014 by ld. CIT(A), Meerut against deletion of addition of Rs.36724726/- made by the AO adopting the gross profit ratio @35% after the rejection of books of account of the assessee in absence of stock register, quantitative details and valuation of closing stock.