Income Tax Appellate Tribunal - Delhi
Neeraj Jain, Karnal vs Assessee on 12 November, 2010
ITA NO. 289/Del/2011
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "E", NEW DELHI
BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. No. 289/Del/2011
A.Y. : 2007-08
Sh. Neeraj Jain, vs. Income Tax Officer,
Prop. M/s Jagdamba Timber Store, Ward-I,
Timber Market, Karnal
Karnal
(PAN : ABIPJ4234G)
(Appellant ) (Respondent )
Assessee by : Sh. Rohit Jain, Adv. & Janpriya, CA
Department by : Sh. R.S. Negi, Sr. D.R.
ORDER
PER SHAMIM YAHYA: AM This appeal by the assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals), Karnal dated 12.11.2010 pertaining to assessment year 2007-08.
2. The grounds raised in the appeal read as under:-
"1. That the Ld. Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the trading addition of ` 24,36,039/- made by the Assessing Officer by applying average gross profit rate of 4.90%.
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ITA NO. 289/Del/2011
2. That the Ld. Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the action of the Assessing Officer in rejecting the books of accounts of the appellant under section 145(3) of the Act, 1961. 2.1 That the Ld. Commissioner of Income Tax (Appeals) erred on facts and in law in holding that the appellant failed to furnish item-wise trading results and quantitative details of opening and closing stock of timber without appreciating that having regard to the nature of the business it was not possible / feasible to maintain such details.
2.2 That the Ld. Commissioner of Income Tax (Appeals) erred on facts and in law in holding that the appellant did not maintain proper books of account and that the turnover was not properly worked out.
3. That the Ld. Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in estimating gross profit rate of 4.90%, relying upon operating results of other entities/ assessee's, without (a) confronting the appellant with 2 ITA NO. 289/Del/2011 the relevant documents/ papers on the basis of which such rate was arrived at; and (b) appreciating that the results of the appellant were not comparable with the said entities/ assesses.
4. That the Ld. Commissioner of Income Tax (Appeals) erred on facts and in law in not holding that the appellant was not able to explain the fall in gross profit rate.
4.1 That the Ld. Commissioner of Income Tax (Appeals) erred on facts and in law in not directing the Assessing Officer to consider gains on account of foreign exchange fluctuation amounting to ` 11,16,743/- as part of the trading result for the purpose of computation of gross profit rate, comparison of trading results.
5. That the Ld. Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of the Assessing Officer in charging interest under sections 234B/234D of the Act.
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ITA NO. 289/Del/2011 The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal at or before the time of hearing."
3. In this case the facts are that the assessee is engaged in the trading of timber. Almost all the purchases are made from Malaysia. The purchase of timber is of different quality which has been specified on the purchase bill and rates vary from quality to quality. The details of quality of timber has, however, not been mentioned in the sale bills though there is substantial difference in the sale prices. In the sale bills, in the column of particulars 'IMPORTED TIMBER SAWN SIZES' has been specified. In view of these facts, the AO noted that for want of description /quality of timber on the sale bills it is not possible to co- relate the purchase of timber with the sale and to ascertain the GP earned thereon and in turn correctness of trading results. These facts were confronted by the AO to the assessee as per show cause notice dated 27.11.2009, which is reproduced by the Assessing Officer from page No. 3-7 of the assessment order. Details of some of the purchase bills and of sale bills were specified in the show cause notice as per which purchase prices vary from US $125 per unit to US $305 per unit and the sale rate varies from ` 4500 per unit to ` 11,000, ` 11500, ` 12,200 and to ` 12,700/- per unit. The AO as per this show cause notice 4 ITA NO. 289/Del/2011 asked the assessee to file, inter alia, trading a/c for different type of timber reflecting the quality wise opening stock as on 1.4.2006, quality wise purchases and sales made during the year and quality wise closing stock as on 31.2.2007, failing which the AO proposed to reject the trading results and to estimate the GP @4.9% on the basis of average GP worked out of the 3 concerns which are in the the similar nature of business. The assessee filed reply on 8.12.2009 but did not address the issues raised by the AO that for want of quality / description of the timber on the sale bills, correctness of the trading results could not be verified. The AO also noted that complete information called for was not furnished.
3.1 Assessing Officer further referred the provisions of section 44A of the Act and held that the assessee has not maintained the proper books of accounts to enable him to compute his total income in accordance with the provisions of the Act and hence, rejected the trading results of the assessee. Assessing Officer concluded that in view of the difficulties books of accounts and also in the absence of non-maintenance of item wise stock register and not maintaining the item wise inventory of opening and closing stock the books of accounts so maintained by the assessee which are not reflecting the proper trading results, deserve to be rejected under the provisions of section 5 ITA NO. 289/Del/2011 145(3) of the IT Act, 1961. Hence, Assessing Officer held that the books of accounts so, maintained by the assessee are hereby rejected. Assessing Officer proceeded to estimate the GP @ 4.90% on the basis of average GP of the three concerns which the Assessing Officer has found to be similar in nature. Thus, addition of ` 24,36,039/- was made.
4. Before the Ld. Commissioner of Income Tax (Appeals) assessee's submissions were as under:-
i) that it had head office at Karnal and branch office at Gandhi Dham (Gujarat) where imported timber was being unloaded from the port for onward treatment. Some portion of the goods were being sold as high sea sales, i.e., sales effective before unloading at the port and which carried profit margin hardly 1-2% and the balance goods were taken to branch office' in logs of different sizes and converted in to sale able sizes after employing manufacturing process by involving labour element, electricity, sawing charges, loading and unloading expenses etc.;
(ii) that the AO, after examining the details w.r.t the books of accounts, did never communicated any defect except that in the absence of maintenance of stock register, it is not possible to ascertain correct profits from the business and, in the absence of mention of specific quality of timber of sale, the verification part was not practicable and as such, he rejected books of accounts;
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(iii) that the turnover has increased in the year under consideration to Rs.10,05,26,659/- as against RS.6,31,66,074/- in the last year which could be possible on account of cut short in the GP;
(iv) that high sea sales in the year under consideration were to the tune of Rs.30,43,329/- as against Rs. 1,26,23,057/- in the immediate preceding year, resulting in reduction in over all GP in comparison to immediate preceding year.
(v) that in view of the fact that the purchase of timber are from foreign countries, the sale proceeds has to pay in foreign currency equivalent to value in Indian rupee. There has been rate difference due to fluctuation in currency amounting to Rs. 11,16,743/- which was directly related to purchase itself and resulted in reduction in the cost of purchases, which the appellant under wrong notion of accountancy credited in the P & L account instead of trading account. After taking the same in the trading account, the trading results works out to 3.59% as against 2.58% already declared. This aspect of the matter were ignored proper consideration by the Assessing Officer in assessment and again in the report submitted in appeal proceedings;
vi) that the stock left has to be valued at cost or market value, whichever is lower. AO's action in not giving benefit of rate currency fluctuation has tentamounted to pay tax on the rate fluctuation amount even not sold till the end of the year and was lying in stock;
vii) that the AO's action of adopting GP @ 4.9% on the basis of results of some other firms, the relevant datas of those firms were, however, not supplied, is not correct;
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viii) that maintenance of stock register was not feasible in the trade carried by the appellant on account of the fact that purchases were been made in logs of different sizes and final products were being sold after converting into small pieces of different sizes and it was not feasible to identify the wooden log in the final shape;
ix) that the rate charged from the customers are as per quality and of the goods as per expertise of the salesman, the quantity of the goods sold and time leg of the receipts of the sale consideration;
x) that every businessman can not earn maximum profits according to his own choice and further the AO estimated GP in other cases lower than the GP applied in its. case and finally submitted as under;
'In the entirety of the facts & circumstances prevailing at the time when purchases & sales were effected, Assessments were done and Appellate Proceedings over-all conduct of the affairs will ensure that books of account of the Appellant have wrongly been rejected as the books of account maintained for the year under consideration and in the preceding year were in alike manner as the maintenance of Stock Register was not possible. No doubt maintenance of Stock Register is a relevant factor for purposes of invoking the provisions of section 145, but where results are progressive and better (In the light of sale of goods at high seas, the export sales & local sales etc.) 8 ITA NO. 289/Del/2011 and more particularly the A.O. did not point out any defect in the tally of Opening Stock/Closing Stock and/or under- statement of selling price in respect of sale invoices called by him, then accounts could not have been disturbed." 4.1 Considering the above, Ld. Commissioner of Income Tax (Appeals) observed that the assessee is engaged in the trading of timber during the year under consideration. The timber was imported form Malaysia. The rates varied from quality to quality which was specified on the purchase bills itself. The quality of timber was, however, not specified on the sale bills though sale prices varied from ` 4500 per unit to ` 11,000, ` 11500, ` 12,200 to ` 12,700 per unit. In view of these circumstances, Ld. Commissioner of Income Tax (Appeals) held that neither quantitative tally of the purchase/sale of goods nor correct valuation of closing stock could be verified. Ld. Commissioner of Income Tax (Appeals) further observed that no stock register has been maintained by the assessee. Further in the Tax Audit Report method of valuation of closing stock has been specified to be cost or net realizable value whichever is less, which is not possible to ascertain for want of maintenance of quality wise / item wise stock register. Ld. Commissioner of Income Tax (Appeals) further noted that assessee was asked by the Assessing Officer during the 9 ITA NO. 289/Del/2011 assessment proceedings to file the item wise / quality wise trading account of the timber dealt with and also of the separate trading account of the High Sea Sales claimed to be made, which were not filed. Ld. Commissioner of Income Tax (Appeals) further noted that assessee has claimed that maintenance of stock register is not feasible. Ld. Commissioner of Income Tax (Appeals) further observed that this plea of the assessee is not tenable.
4.2 Ld. Commissioner of Income Tax (Appeals) further observed that assessee has taken a plea that exchange fluctuation benefit should be considered in the trading account instead of P&L account. The reasons thereof claimed to be ignorance of legal flow and accounting principles. Ld. Commissioner of Income Tax (Appeals) further found that this plea of the assessee was not tenable. Ld. Commissioner of Income Tax (Appeals) concluded as under:-
"In view of the facts discussed above, it is held that trading results declared by the appellant are not verifiable and hence rejection thereof by the Assessing Officer, is, hereby, confirmed. The Assessing Officer further estimated the GP @ 4.9% on the basis of average GP declared by 3 firms in the same line of business. The appellant challenged the same on the ground that basic facts and datas of these 10 ITA NO. 289/Del/2011 concerns were not provided to them. As discussed above, quality of description of wood has not been mentioned on the sale bills and hence, gross profit can not be ascertained by correlating the same with the purchase bills. In any case, the appellant declared GP @5.66% in the last year as against 2.48% in the year under consideration and hence the GP rate applied by the AO is held to be reasonable. The addition made by the AO on this account is, therefore, confirmed. Grounds of appeal no. 2 to 4 are as such rejected."
5. Against the above order the assessee is in appeal before us.
6. We have heard the rival contentions in light of the material produced and precedent relied upon. The assessee in the submissions has mentioned that the thrust of the impugned assessment order has been that the assessee has failed to produce the stock register or supply quantitative details of timber sold. In light of the aforesaid failure, the Assessing Officer, resorted to the provisions of Section 145(3) read with Section 144 of the Act and proceeded to assess the taxable income of the assessee at an adhoc rate of 4.9% of the turnover of the assessee during the relevant previous year. In this regard, assessee submitted that mere absence 11 ITA NO. 289/Del/2011 of a stock register cannot, per se, be basis for framing assessment under section 144/145 of the Act. This would be particularly so when the appellant explained that preparation / maintenance of quantitative details of consumption is not practically feasible. For this proposition, the assessee has relied upon the decision of the Jurisdictional High Court of Delhi in the case of C.I.T. vs. Shere Punjab Silk Stores 1981 Tax 63(1); Veeriah Reddiar vs. C.I.T. : 38 ITR 52 (Ker.); Ashoke Refractories (P) Limited : 279 ITR 457 (Cal.); Bhagwati Emporium vs. ITO (1995) 80 Taxman 227 (Ahd.); Kabir Leathers vs. Addl. C.I.T. 27 SOT 498 (Delhi); C.I.T. vs. Jas Jack Elegance Exports 324 ITR 95; C.I.T. vs. Jacksons House : 198 Taxman 385.
6.1 In light of the aforesaid case laws, assessee submitted that the aforesaid decisions are squarely applicable to the case of the assessee. As explained above in the Timber trading activity of the assessee raw timber is purchased / imported and is thereafter, sawed and sold in wholesale / retail basis. It was therefore, not practically feasible to maintain item-wise stock register of each and every type of timber. It has further been submitted that the Assessing Officer failed to appreciate that nature of business was such that it was not practically feasible for the assessee to maintain stock register containing quantitative item wise tally of the timber. In such 12 ITA NO. 289/Del/2011 circumstances, it has been submitted that mere non-maintenance of stock register cannot be the sole basis for rejecting the books results and estimating the profits. It has further been submitted that Assessing Officer has failed to appreciate that when the books of accounts were duly audited, it was presumed that books of accounts and method of accounting are in order, and, therefore, in order to displace that presumption, it is for the Assessing Officer to establish, by cogent evidence, that the books of the assessee are indeed not correct or complete or the method of accounting is therefore not in order.
6.2 It has further been submitted that there is no allegation by the Assessing Officer that there has been any pilferage or sale outside the books of accounts. It has been further been submitted that on perusal of the assessment order, it will be appreciated that there is no allegation by the Assessing Officer that there has been no suppression of sales, pilferage of stock, etc. The only basis on which the Assessing Officer has proceeded to reject the book results is the non-maintenance and furnishing of item-wise details of stock, due to which the Assessing Officer has rejected the books of accounts. It has been submitted that in the absence of any allegation of suppression of sales / sales outside books, no addition was warranted to the trading results of the assessee. Further, the assessee has placed reliance on catena of case laws, for the proposition that merely on account of fall in the GP rate, the books of accounts could not be rejected and could not be basis for making arbitrary addition on 13 ITA NO. 289/Del/2011 account of fall in the GP rate. In these decisions, it was observed that gross profit rate of business cannot remain static from year to year and is likely to vary based on the prevailing facts and circumstances. In view of the aforesaid, it has been submitted that the Assessing Officer erred in estimating the profits of the assessee on an adhoc basis on the ground that there was fall in the gross profit as compared to profits as shown in the immediately preceding assessment year. 6.3 Ld. Departmental Representative on the other hand relied upon the orders of the authorities below.
6.4 We have carefully considered the submissions and perused the records. We find that assessee is in timber trading activity. The activity involves purchase / import of raw timber, which is thereafter sawed and sold in wholesale / retail basis. In this connection there is considerable cogency in assessee's submission that it is not practically feasible to maintain item-wise stock record of each and every type of timber. We further note that there is no allegation by the AO that there has been any pilferage or sale outside the books of account. Thus there is no case of suppression of sales. Moreover, assessee's books of accounts were duly audited, which signifies that books of accounts and method of accountancy are in order. Moreover, in the case of laws cited by the ld. Counsel of the assessee it has been expounded that mere fall in G.P. and absence of stock register cannot be a reason to reject the books of accounts.
6.5 Furthermore, it is assessee's plea that fluctuation in foreign currency amounting to ` 11,16,743/- is directly related to purchase itself and resulted in reduction in the cost of purchase. But the assessee under wrong notion of accountancy credited it in P&L A/c 14 ITA NO. 289/Del/2011 instead of trading account. After taking into account the same in trading account, the trading result works out to 3.59% as against 2.5% already declared.
6.6 In the light of aforesaid discussion and precedents, we hold that there were no cogent reasons for rejection of the assessee's books, and estimation of GP rate. The details sought by the AO were not practically feasible to be maintained. Hence, we set aside the orders of authorities below and decide the issue in favour of the assessee.
7. In the result, the appeal filed by the Assessee is allowed.
Order pronounced in the open court on 15/6/2012.
Sd/- Sd/-
[A.D. JAIN]
JAIN] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 15/6/2012
"SRBHATNAGAR"
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
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