ROYAL SALES & CO.,SURAT vs. INCOME TAX OFFICER, WARD - 1(3)(1), SURAT

raised by the assessee are as follows: “1. On the facts and in circumstances of the case as well as law on the subject, the learned Assessing officer has erred serving the notice u/s 143(2) by way of Affixture, which is not a valid method of delivery of notice.

Brief facts of the issue in dispute are stated as under. The assessee before us is a partnership firm and filed its return of income for the assessment year (A.Y.) 2015-16, on 30.09.2015, showing total income of Rs.18,900/-. The assessee`s case was selected for scrutiny under CASS. Notice under section 143(2) of the Income Tax Act, dated 16.08.2016, was duly served by way of affixture at the Address; 504, Arihant Park, Parle Point, Surat. Further, a notice u/s 142(1) of the Act was issued to the assessee on 13.06.2017 and other dates. In response to the above notices, the assessee attended and submitted details and documents, as required by the assessing officer. During the year under consideration, the Assessee is engaged in the business of trading of sarees, grey and fabrics. The case of the assessee was selected for the purpose of complete scrutiny to verify the reason of low profit before Interest and Tax (PBIT) shown by the assessee.

In order to verify the details submitted by the assessee, notices u/s 133(6) of the Act were issued to the eight concerned parties i.e., Sale Parties and Purchase Parties, out of which two notices were returned unserved and six notices were served. The ledger of the Sale/Purchase parties received in response to notice u/s 133(6) of the ITA.559/SRT/2023/AY.2015-16 Royal Sales & Co. Act from six parties and ledger of the Sale/Purchase parties provided by the assessee were reconciled by the Assessing Officer. After considering the facts of the case, the assessee was issued a show-cause notice by the Assessing Officer, on 13.12.2017, the relevant portion of which is reproduced as under:

On perusal of your Trading Account, it is noticed that no Direct Expenses or Transport Expenses has been incurred by you. You could not furnish any evidence such as communications made with Sale Parties or Purchase Parties for making direct dispatch of goods to purchase parties from seller.

The assessee in its reply to the above show-cause notice, submitted details and documents. The reply of the assessee is reproduced as under:

However, the Assessing Officer rejected the contention of the assessee and observed that assessee has failed to produce details of stock register. Besides, the transportation cost was to be borne by the seller, the assessee could not furnish any agreement/supporting evidence, such as email or letter stating the same. The excess amount/advance received by the assessee- firm is not justified. Considering the above facts, the assessee`s books of accounts were rejected by the Assessing Officer and estimated @ 5% of the Sales Turnover of Rs.5,75,62,137/- which comes to Rs.28,78,106/-. This estimation is over and above the taxable profit shown by the assessee as per audited profit and loss account.

Aggrieved by the order of Assessing Office, the assessee carried the matter in appeal before the ld. CIT(A), who has confirmed the action of Assessing Officer. The ld. CIT(A) held that books of account of the assessee did not render the true and correct picture, therefore Assessing Officer has rightly rejected the books of accounts under section 143(3) of the Act. Aggrieved by the order of ld. CIT(A), the assessee is in further appeal before this Tribunal.

Shri Mehul Shah, Learned Counsel for the assessee, pleaded that Assessing Officer has rejected books of accounts without pointing out any error in the books of accounts. The assessee-firm submitted entire audited books of accounts, stock register, bills and vouchers etc., before the Assessing Officer. To reject the books of accounts, the Assessing Officer compared the earlier year profit with current year profit and find some mismatch and then based on such mismatch, rejected the books of accounts, which is not tenable. It is not necessary in the business that assessee should earn the same profit in current year, as he earned in the previous year. Another reason to reject the books of accounts by Assessing Officer was that assessee did not maintain daily quantitative details/stock. In this regard, ld Counsel submitted that assessee is in the business of trading activities, that is, he is purchasing goods and selling goods, therefore day to day quantitative stock register is not possible to maintain but the assessee has submitted monthly quantitative stock register and yearly quantitative stock register, which are sufficient to meet the requirement of the Assessing Officer, so far quantitative stock maintenance is concerned.

The ld Counsel further pointed out that for assessment year 2013-14, the accounts of the assessee were subject to audit and subject to scrutiny assessment and in scrutiny assessment, the books of accounts were not rejected and whatever gross profit declared by the assessee in A.Y 2013-14, has been accepted by the Assessing Officer. Therefore, considering the past trend, the books of accounts of the assessee, for the current assessment year, should not be rejected.

On the other hand, Learned Senior Departmental Representative (ld. Sr. DR) for the Revenue submitted that assessee has not submitted day to day stock register, and quantitative tally, which is the moot point to reject the books of accounts of the assessee. In trading business, where the assessee does daily purchases and sales, the maintenance of day-to-day stock register is essential. The Assessing Officer has also compared the earlier year results and earlier year submissions of the assessee and then finds some mismatch between the books of account of the current year and earlier year, and that is why, the Assessing Officer rejected the books of accounts, therefore rejection of books of accounts by the Assessing Officer, may be upheld.

In rebuttal, Ld. Counsel submitted that no doubt the Assessing Officer has power to reject the books of accounts, but such power should be exercised in a judicious manner, as the assessee`s books of accounts were audited by Chartered Accountant and the Assessing Officer did not find any specific defects in the books of accounts, hence rejection of books of accounts are not in accordance with law.

I have heard both the sides and gone through the relevant material on record. It is seen that during the assessment proceedings, the Assessing Officer issued notice u/s 142(1) of the Act, which is ITA.559/SRT/2023/AY.2015-16 Royal Sales & Co. placed at page nos.2 to 3 of paper book. In response to the notice u/s 142(1) of the Act, the assessee submitted its reply along with documentary evidences, which is placed at page no.1 of the paper book. The Assessing Officer again issued notice u/s 142(1) of the Act, which is placed at page no.6 to 8 of the paper book. In response to said notice, the assessee submitted its reply along with documentary evidences and details, (vide letter dated 06.11.2017 which is placed at page nos.4 to 5 of the paper book). The Assessing Officer issued again third time, the notice u/s 142(1) dated 13.12.2017, which is placed at page nos.14 to 15 of paper book. In response to the said notice, the assessee submitted relevant documents and explanations through its reply, which is placed at page nos.16 to 17 of the paper book. The assessee also submitted reply to the Assessing Officer on 22.11.2017 and 01.12.2017. While submitting the reply to the Assessing Officer, the assessee has submitted the relevant documents and evidences, as asked by the Assessing Officer, such as, books of account, bills, vouchers, stock register, quantitative tally of stock register on yearly basis and other documents required by the Assessing Officer. The books of accounts of the assessee were audited by Chartered Accountant and assessee submitted the entire set of books of accounts, including balance sheet, profit and loss account, schedules to the profit and loss account, ledger account of various parties, confirmations, and other evidences as asked by the Assessing Officer from time to time. The assessee also submitted the confirmation of the debtors and creditors, hence there was no failure on the part of the assessee in submitting documents and evidences and explanations, as required by the Assessing Officer from time to time. The documents and evidences so collected by the assessing officer were examined by him and assessing officer did not find any mistake

Before me, the assessee submitted, the following documents and evidences along with audited books of accounts, (which were already submitted before Ld.CIT(A) and AO), which are as follows, viz: (i) Details of stock (vide Pb.18), (ii) Ledger account of Transportation expenses (vide Pb.19 – 20), (iii) Confirmation of accounts of Fab Tech Manufacturing Pvt. Ltd. (vide Pb.21 – 23), (iv) Acknowledgement of Return of Income of Fab Tech Manufacturing Pvt. Ltd. (vide Pb.24), (v) Confirmation of accounts of Sunshine Enterprise (vide Pb.25 – 28), (vi) Acknowledgement of Return of Income of Sunshine Enterprise (vide Pb.29), (vii) Confirmation of accounts of Srinathji Engineering (vide Pb.30), (viii) Acknowledgement of Return of Income and Computation of Income (vide Pb.31 – 32), (ix) Audit report along with audited financial statements (vide Pb.33 – 48).

From the above details and documents, as furnished by the assessee before the Assessing Officer, it is vivid that Assessing Officer did not find any defect in the books of accounts and confirmations of ledger accounts and return of income filed by the assessee. The assessee’s books of account are rejected by the assessing officer solely on the reason that the assessee has not submitted day to day quantitative stock detail. I note that it cannot be a reason to reject the books of accounts, particularly, when there is no failure on the part of the assessee to submit entire audited books of accounts, bills and vouchers, confirmations, yearly quantitative stock and other details, as and when required by the Assessing Officer. It is ITA.559/SRT/2023/AY.2015-16 Royal Sales & Co. not the case of the assessee that assessee has failed to produce audited books of accounts, bills, invoices, confirmations, ledger accounts and quantity stock daily on yearly basis. The Assessing Officer has failed to point out any specific defects in the confirmations, ledger accounts and books of accounts, therefore rejection of books of accounts by the assessing officer is not justified.

I also find that for assessment year 2013-14, the accounts of the assessee were subject to audit and subject to scrutiny assessment and in scrutiny assessment, the books of accounts were not rejected by the assessing officer and whatever gross profit declared by the assessee in A.Y 2013-14, has been accepted by the Assessing Officer. The assessee is running the same business, and same facts and circumstances are prevailing in the current year therefore assessee`s books of accounts should not be rejected solely on the reason that assessee is not maintaining day-to-day stock register, particularly when the assessee has submitted monthly and yearly stock register. Moreover, in assessment year 2013-14, the assessee was not maintaining day-to-day stock register (and maintaining only yearly stock register), however, the Assessing Officer did not reject books of accounts of the assessee for assessment year 2013-14. I note that assessee has been doing the same business, therefore when the assessee has submitted entire audited books of accounts, ledger accounts, confirmations, monthly stock and yearly stock details, and whatever other documents required by the Assessing Officer were submitted and explanations were provided by the assessee, hence in this scenario, considering same facts and circumstances, the books of accounts of the assessee should not be rejected.

The main plank on which the Assessing Officer rejected the books of accounts is that assessee was not maintaining day-to-day stock register. In this regard, we note that Hon`ble Jurisdictional High Court of Gujarat in the case of Jaytick Intermediates (P.) Ltd, [2016] 73 taxmann.com 195 (Gujarat) held that non-maintaining of day-to-day stock register is not a ground to reject books of accounts. The findings of the Hon`ble Court is reproduced below:

During the course of arguments before us, it was submitted by the learned counsel for the appellant that the assessee was not maintaining the Daily Stock Register. We, however, find no such finding in the assessment order. On the other hand, we note that the Assessee had submitted before the Commissioner of Income Tax (Appeals) that Form 3CD containing all the quantitative details in respect of raw materials as well as the finished goods, duly audited by the Certified Accountant had been placed on record, but, the Assessing Officer ignored those actual figures enclosed with the return. In any case, no statutory provision under the Income Tax regime requiring the assessee to maintain the Daily Stock Register has been brought to our notice. Hence, even if no such register was being maintained by the assessee as is contended by the learned counsel for the appellant, that by itself does not lead to inference that it was not possible to deduce the true income of the assessee from the accounts maintained by her, nor the accounts can be said to be defective or incomplete for this reason alone. If stock register is not maintained by the assessee that may put the Assessing Officer on guard against the falsity of the return made by the assessee and persuade him to carefully scrutinize the account books of the assessee. But the absence of one register alone does not amount to such a material as would lead to the ITA.559/SRT/2023/AY.2015-16 Royal Sales & Co. conclusion that the account books were incomplete or inaccurate. Similarly, if the rate of gross profit declared by the assessee in a particular period is lower as compared to the gross profit declared by him in the preceding year, that may alert the Assessing Officer and serve as a warning to him, to look into the accounts more carefully and to look for some material which could lead to the conclusion that the accounts maintained by the assessee were not correct. But, a low rate of gross profit, in the absence of any material pointing towards falsehood of the accounts books, cannot by itself be a ground to reject the account books under Section 145(3) of the Act."

My view is also fortified by the judgment of the Coordinate Bench of ITAT Chandigarh, in the case of Paramount Impex, [2020] 117 taxmann.com 802 (Chandigarh - Trib.) wherein it was held that mere fact of non-maintenance of stock register could not be basis for rejection of books of accounts. I note that other stand taken by the assessing officer is that assessee has not produced the bills of transportation charges and assessee has received the excess advance amount from the customers. I note that since assessee has never incurred transportation expenses and the purchasers who purchased the goods used to bear the transportation expenses. Moreover, the assessee has not debited in its profit and loss account and never claimed the transportation expenses in the profit and loss account. Therefore, there is no question to produce the bills for transportation expenses. Apart from this I also note that it is custom of the trade that assessee sometimes receives advances from the customers. Such advances should not be the basis to reject the books of accounts. Hence, I note that rejection of books of account by the Assessing

Since, I have allowed the appeal of the assessee, by allowing ground Nos. 2 and 3, therefore ground No.1 raised by the assessee, in the impugned assessment proceedings, is rendered academic and infructuous therefore, I do not adjudicate the same.

In the result, appeal filed by the assessee is allowed.