Excess stock found during search cannot be the sole reason for rejection of books of accounts

Brief Facts of the case-

• This appeal has been filed by the revenue.
• Assessments for four years 2002-03 to 2005-06 were made on 29.12.2006 under Section 153A pursuant to a search conducted on 07.10.2004.
• The assessee used to procure and restore rice after due processing. In the course of such procurement, it was contended to retain gunny bags supplied by the Food Corporation of India (FCI) and deal with them.
• After the search and during the assessment proceedings, the assessee had surrendered a sum of ₹1.75 Crores. Apparently, in the course of search, some excess stocks were found.
• The AO rejected the books of account on the following basis:-
  • Absence of stock register;
  • Irregularity or failure to disclose the receipts and transactions pertaining to the gunny bags (“bardana”);
  • The excess stock found in the premises; and
  • A portion of the transport expenses were found to have been transacted in cash with no supporting evidence.
• The assessee appealed to the CIT(A) contending that the AO’s rejecting the books of account and imposing a gross profit margin of 12% was arbitrary. The CIT(A) upheld rejection of books but granted limited relief to the extent that the GP rate was reduced from 12% to 11.6%.
• The ITAT gave a favorable ruling and now the Revenue is in appeal.

Contention of the revenue

The Revenue urges that the ITAT fell into error on the following questions:-

• Disallowance of expenses in the profit & loss account, specifically with respect to transport expenses claimed – only ₹3,38,184 /- out of the total claim of ₹36,01,764/-, sought to be added was actually allowed by the Assessing Officer (AO) ; and
• Deletion of findings with respect to the error in rejection of books and the imposition of 12% GP rate by the AO on account of absence of stock register and other alleged irregularities

Contention of the Assessee

The reasons for rejection of books are totally arbitrary and lack application of mind by AO because of the following reasons, provided by ITAT:

• The sale of bardana (gunny bags) was properly recorded. This can be traced in balance sheet and the accounts and the opening stock, purchases and sale of bardana.
• The assessee had incurred a sum of ₹7,21,16,088/- towards the freight. Out of this huge amount, only ₹36,84,500/- was incurred in cash. this is not such a factor which may prevent the Assessing Officer to compute the true income of the assessee from the accounts…”
• The AO’s observation with regard to not maintaining any stock register was not correct.The assessee in its audit report specifically alleged that it is maintaining stock register.

Held by Respective Court

• The Court held that the ITAT’s reasoning is sound and does not call for interference. Revenue’s appeal does not in any manner reflect how the findings are unreasonable or unsupported by the materials on record.
• The expenses claimed for transportation could not have been a valid ground for rejecting the books of account considering the fact that the transport expenses in doubt was just 5.1% of total Transport Expense.
• Taking into consideration the alleged defects pointed out by the Assessing Officer as well as the explanations of the assessee, we find that Assessing Officer has made a reference to lame excuses for disbelieving the book results of the assessee,
• The excess stock declared by the assessee during the course of search may be one corroborative factor for doubting the accounts of the assessee, but it cannot be a sole criteria.
• The appeal of revenue was therefore dismissed.