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CA Ram Bajaj CA Ram Bajaj

145(1) Income Chargeable under the head “Profit 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 accounting statndards to be followed by any class of assessee 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) or accounting standards as notified under sub section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in sec 144.

Problem Faced by Business man as well as Professional :- Stock register as well as details of closing stock in quantitive and rate wise is a major hurdle for both of them. In some business i.e. Labour intensive Work, wholesale and Retail of construction goods releted business, readymade garment business and some other business, it is not practible possible to maintain stock register day wise as well as valuation of closing stock item wise and quantity wise. When their case come in assessment under 143(2) of income tax act i.e. securinity assessment, AO used to reject books of account due to non maintance of above and framed best judgement assessment under sec 144. In that type case, AO used to use GP rate as per his consideration and it ultimatlely result huge tax liability of innocent businessman. Here I woule like to mentioned the case law in which due to non maintance of stock register as well as closing stock details, Tribunal as well as HC give decision in favour of assessee.

# Haridas Parikh V ITO [2009] 29 SOT 13 (JODH.)(URO) During the relevant assessment year, the assessee derived income from trading of machineries, electrical goods and accessories on wholesale and retail basis. He had declared a gross profit rate of 9.94 per cent on total sales of Rs. 1.54 crores. During the course of scrutiny assessment the Assessing Officer found that in the immediately preceding year the assessee had declared GP rate of 11.51 per cent on sales of Rs. 1.24 crores. He further noticed that the assessee did not maintain quantitative stock of the goods, therefore, gross profit of each and every item of sales could not be correctly verified. Accordingly, he rejected the book results and applied GP rate of 11.51 per cent and made trading addition. The action of the Assessing Officer was confirmed by the Commissioner (Appeals).

Tribunal held that Unless the Assessing Officer is able to point out certain transactions which have been left to be entered in the books of account or that the assessee has sold some of the items at a price higher than what is disclosed in the books of account or if proper particulars, bills, vouchers, are not forthcoming etc., the books of account cannot be rejected without assigning specific reasons. In the instant case merely because different range and nature of items are being dealt with by the assessee and the maintenance of quantitative stock of each and every item is not practically possible, the books of account maintained by the assessee which are free from any defect cannot be rejected merely because the average GP rate was slightly lower than the average GP rate of the earlier year. we reverse the findings and conclusions of the lower authorities and direct the Assessing Officer to delete the trading addition so made by him by rejecting the books of accounts.

# Absence of vouchers or the supporting evidence in respect of a particular item of expenditure cannot by itself empower an Assessing Officer to invoke provision of Section 145(3) in rejecting the books of account. Amritsar Bench of the Hon’ble Tribunal in Ashok Kumar & Co. v. ITO [2004] 2 SOT 518 (Asr.) (SMC) held that rejection of books cannot be restored to simply on the basis of absence of some vouchers and failure to produce the same by the assessee.

# The Kerala High Court in the case of CM. Francis & Co. (P.) Ltd. v. CIT held that where purchase vouchers for agricultural produce purchased from agriculturists could not be produced, books of account cannot be rejected in total on the basisof such finding.

# Allahabad High Court in the case of Imran Ahmed v. CIT [1982] Tax LR (NOC) 111 (All.) held that on account of mere absence of vouchers to substantiate entries for the accounts, accounts in total cannot be rejected. It is well-settled that reasonableness of    expenditure should be judged from the view point of the business carried on by the assessee and not from the view point of the revenue authorities

# It was held by the Madhya Pradesh High Court in the case of Hemraj Nebhomal & Sons v. CIT [2005] 146 Taxman 345 (M.P.) that the assessee is not under obligation to satisfy the Assessing Officer as to the legitimacy and necessity of expenditure.

# Asstt. CIT v. L.M.P. Tractors (P.) Ltd. [2005] 148 Taxman 52 (Mag.) the

Ahmedabad Bench of the ITAT held that non-maintenance of quantitative details of spare parts could not be a ground for rejection of books of account and the Assessing Officer is not justified in rejecting the books of account without pinpointing specific defects and thereby making an ad hoc addition when discrepancies were duly reconciled before lower authorities.

#Commissioner Of Income Tax-Ix. vs M/S Jas Jack Elegance Exports (Delhi HC)The respondent/assessee filed return showing income of Rs.49,40,500/- for the A.Y.2004-2005. The return was picked up for scrutiny and notice under Section 143(2) of Income Tax Act, 1961, (hereinafter referred to as the Act) was issued to the assessee. The assessee firm is engaged in the ITA No.681/2010 Page 1 of 8 business of manufacturing and export of readymade garments and had declared gross profit @ 12.08% during the A.Y.2004- 2005 as against gross profit of 12.37% declared by it for the A.Y. 2003-2004 and gross profit of 17.58% declared for the A.Y.2002-2003.

The assessee claimed that the fall in gross profit ratio was due to reduction in margin, in order to increase sales. The assessee was asked to produce Books of Account and relevant registers. The Books of Account as well as certain vouchers were produced, but, the stock register was not produced, claiming that no such register was being maintained. The assessee had claimed fabrication charges amounting to Rs.37,54,215, finishing & dyeing charges amounting to Rs.25,00,989 and embroidery expenses of Rs.55,85,683/-, details of which were furnished to the Assessing Officer. It was asked to produce the parties to whom charges amounting to Rs.20,000/- or more were paid on account of fabrication, embroidery, finishing & dyeing. The assessee, however, did not produce any of those parties on the ground that it had closed down its business and was not in contact with any of them. The Assessing Officer rejected the Books of Account produced by the assessee and computed income of the assessee, taking the gross profit ratio at 17.58%, ITA No.681/2010 Page 2 of 8 which was the gross profit percentage declared for the A.Y.2002-2003.

Addition of Rs.24,40,898/- was, accordingly, made by the Assessing Officer.

While dismissing the appeal filed by the Revenue against the order of CIT(A), the Tribunal noted that the Assessing Officer had not found any defect in the books of accounts maintained by the assessee. The Tribunal was of the view that maintenance of Stock Register, which shows consumption of raw material and production of finished goods by applying the same measurement was not feasible, considering the nature of the business of the assessee. It was further noted that the fabric was measured in metres and was thereafter stitched to make garments which have to be counted in pieces. The Tribunal also pointed out that the Assessing Officer had not been able to point out any difference in the consumption of raw material and production of finished goods, when compared to the earlier years. The Tribunal, therefore, concluded that the finding recorded by Commissioner of Income Tax(Appeals) was on the right footing.

# Malani Ramjivan Jagannath v. Asstt. CIT (Rajasthan- HC – The AO found that purchases and sales were properly vouched and verifiable though stock register was not kept, but the assessee had furnished inventories of opening and closing stocks which were not found to be incorrect. It also found that position regarding books of account continued to be same as in the past. Thus, the inward carriage, loading and unloading and transportation expenses were partly unvouched and unverifiable. With this admitted position, the AO noticed that there is fall in GP rate in the business as a whole as compared to GP rate shown by the assessee during last asst. yr. 1991-92. The assessee has shown in the previous year GP rate of 4.63 per cent by taking entire business as a whole, but this year he has shown GP rate of 2.38 percent only. With this premise, he decided to reject the books of account and asked for explanation of the assessee about the fall in GP rate.

It is trite to say that in the facts and circumstances of present case, account books are maintained as they were ordinarily maintained years after years and which were found to yield a fair result. Mere deviation in GP rate cannot be a ground for rejecting books of account and entering realm of estimate and guesswork. Lower GP rate shown in the books of account during current year and fall in GP rate was justified and also admitted by the AO as well as CIT(A) as well as the Tribunal. Therefore, fall in GP rate lost its significance. Having accepted the reason for fall in GP rate, namely, stiff competition in market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated GP by rule of thumb merely for making certain additions. We are, therefore, of the opinion that the findings arrived at by the Tribunal suffers from basic defect of not applying its mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except what has been shown by the assessee in the books of account.

(Author is associated with a A CA Firm in Jaipur and can be contacted at 0141-5195402, 09929762067)

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June 2024