AO must give reason for rejecting books & estimating income by applying higher GP Ratio

Brief about the case

The appellant was running liquor, wine and beer shop and was authorized to operate the liquor shop for the period of one year from April, 2007 to March 2008. The assessee purchased wine from different suppliers and the same is sold in cash. In the return of income, the assessee had shown income under the head “salary” only. During the year under consideration, the assessee was engaged in the business of wine, liquor and incurred a loss of Rs.1,07,746/-.This business loss was not claimed in the return. After examining the books of account of the assessee, the Assessing Officer has noticed certain discrepancies in the books of account of the assessee viz ; non-maintenance of stock register , non-maintenance of sales records, non-maintenance of bills and vouchers of expenses and that the purchases and freight ledger were not in concurrence. The Assessing Officer invoked the provisions of section 145(3) of the Income Tax Act , 1961and as a consequence of which, he rejected the books of account of the assessee and thereby applied the net profit rate of 8% on the sales using his best judgment as per the prevalent conditions in liquor business. Further, the CIT(A) upheld the order of the AO.

The assessee knocked the ITAT’s door to seek justice against such high rate of profit being applied. The ITAT relied upon the view in the case of Luxmi Narian Ramswaroop Shivhare (supra), wherein it was held that as regards the sale, the nature of the assessee’s business was such that it cannot maintain proper sale bills. In this case also, the nature of assessee’s business is such that it cannot maintain proper sale bills. The ITAT pronounced that the declared results are to be accepted and estimation of income by applying the net profit rate of 8% was not proper. Accordingly, it deleted the addition of Rs.12,81,872/- made by the Assessing Officer and confirmed by the learned CIT (Appeals).

Detail

Facts of the case:

• The assessee was running liquor, wine and beer shop in the name of his proprietary concern M/s Hem Raj & Co.
• The assessee purchased wine from different suppliers and the same is sold in cash. In the return of income, the assessee had shown income under the head “salary” only and had not claimed the loss incurred from its liquor business as it couldn’t be set off from salary income.
• After examining the books of account of the assessee, the AO noticed many discrepancies and therefore invoked Section 145(3) of the Income Tax Act, 1961.
• The Assessing Officer applied the net profit rate of 8% on the sales of Rs.1,60,23,400/- as declared by the assessee himself in the Profit & Loss Account.
• Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the learned CIT (Appeals) and the learned CIT (Appeals) upheld the order of the Assessing Officer, and hence the assessee is in appeal before the Tribunal.
• The learned counsel for the assessee pointed out that on similar set of facts, the I .T.A.T. , Agra Bench (TM) held that there was no justification in rejecting the book results and estimating the income by applying GP rate of 5% as against profit rate declared at 3.11% by the assessee. He accordingly, submitted that the impugned addition made by the Assessing Officer and confirmed by the learned CIT (Appeals) may be deleted.
• The main contention of the Assessing Officer while rejecting the books of account was that the assessee has not maintained any sales bills for the sales carried from its liquor shops. However, ITAT observed that the daily sales are recorded on the basis of daily statements given by the employees at tending to the shop. The entries to the said sales are recorded in the books of account maintained at its main office. It was also observed that the assessee has time and again explained that it is impossible to issue sale bills to the customer for sale of liquor and the practice of not issuing bills is prevalent all over the country in this trade.
• The assessee submitted that the books of account cannot be rejected merely on the basis of lack of sale bills. He relied upon the decision of I .T.A.T., Amritsar Bench in the case of Ashok Kumar & Company Vs. ITO (2004) 90 TTJ 666 (Asr).
• Finally the ITAT decided in favour of the assessee, stating that merely due to non-maintenance of cash vouchers for daily sales, the books cannot be rejected. There was no discrepancy in the quantitative details of purchases and sales made by the assessee. Moreover, the cost of goods dealt including purchase price, duties and fees paid, shop license fee and bottling and sealing charges, etc. paid by the assessee stand duly accepted by the AO with no adverse comments thereon.

Contention of the Revenue

• Due to the lack of day- to-day stock register, sale records, discrepancies in purchase and freight ledger and absence of supporting bills/vouchers without any proper justification the books of account are hit by the mischief of section 145 of the Act.
• As per the prevalent conditions in liquor business in Chandigarh and around for the financial year 2004-05 and as per statistics available on internet , a liquor contractor is able to save anywhere between a minimum of around 6% to 8% on bulk sales. Consequently, the AO computed income @ 8% on Sales.

Contention of the Assessee

The assessee has raised the following grounds:

1. That the Ld. CIT (A) is not justified in not providing the proper opportunity of hearing which is against the natural justice.

2. That the Ld. CIT (A) is not justified in upholding the rejection of books and the application of provisions of section 145 (3) of the I. T. Act.

3. That the Ld. CIT (A) is not justified in not giving the set off of loss from the business as claimed by the appellant while computing the total income.

4. a) That the Ld. CIT (A) is not justified in upholding the application of net profit rate @ 8% on gross sales.

b) That without prejudice to above, the appellant disputes the quantum of net profit rate.

Held by ITAT (Chandigarh)

• In our considered view, the Assessing Officer was not justified in doubting the above expenses, particularly the quantum involved therein.
• Furthermore, the nature of expenses is such that incurring of the same for the purposes of business cannot be doubted. The main contention of the Assessing Officer while rejecting the books of account was that the assessee has not maintained any sales bills for the sales carried from its liquor shops.
• We find that the daily sales are, however, recorded on the basis of daily statements given by the employees at tending to the shop.
• No discrepancy is found in the quantitative details of purchase or sales made by the assessee. The entries in the books of account maintained in regular course are considered as relevant and are a prima facie proof or basis to justify the correctness thereof. Reference may be had to the judgment rendered by Hon’ble Assam High Court in the case of Tolaram Daga vs.CIT (1966) 59 ITR 632 (Assam).
• No factual or legal justification was provided by AO for rejecting the book results and estimating income by applying higher profit rate than that was declared by the assessee. Accordingly, the profit rate declared at 3.11 per cent by the assessee is directed to be applied on the declared sales of Rs. 8.33,25,882 as against modified rate applied by learned CIT(A).