Income Tax Appellate Tribunal - Jaipur
Triveni Pharma vs Income-Tax Officer on 15 September, 2004
Equivalent citations: [2005]92ITD125(JP)
ORDER
B.R. Jain, Accountant Member
1. This appeal arising from the order of the ld. Commissioner of Income-tax (Appeals), Ajmer came to be heard on priority by orders of the Bench dated 27-3-2002.
2. Ground 1 has not been pressed. The same is dismissed as not pressed.
3. Ground 2 relates to application of Section 145 of the Income-tax Act, 1961 and alternatively confirmation of addition of Rs. 6,14,696 in the trading results of the assessee. The assessee is stated to be engaged in the trading of cattle feed on whole sale basis. It had disclosed total sales of Rs. 5,65,17,690 with gross profit rate of 5. 47% as against sales of Rs. 3,81,54,883 giving gross profit rate of 7. 34% in the immediately preceding year. The Assessing Officer after rejecting the accounts under Section 145 of the Income-tax Act, 1961 estimated the sales at Rs. 5,70,00,000 and applied gross profit rate of 6. 5% thereby making trading addition of Rs. 6,14,696. The ld. Commissioner of Income-tax (Appeals) confirmed the action for the reason that the appellant had not maintained day-to-day stock register and quantitative details of goods purchased and sold. Therefore, the trading results shown cannot be taken as verifiable and the provisions of Section 145 are definitely applicable to the appellant's case. The increase in sales was not considered as a reason alone to explain the steep fall in the gross profit rate from 7. 34% to 5. 47% in the year under appeal. He, therefore, confirmed the action of the Assessing Officer.
4. Assessee's counsel contends that the details of stock have been maintained by the assessee in the ledger account itself. The same was produced before the Assessing Officer. The accounts of the assessee are duly audited. The return was accompanied by the auditors report. Complete quantitative details for opening stock, purchases, sales and closing stock with their valuation were also filed both along with the audit report as well as in the assessment proceedings. The purchases and sales are also fully vouched. The relevant stock account filed are duly verifiable with the quantitative details. The books of account produced before the Assessing Officer find mentioned in the body of the assessment order. There is no change in valuation of stock and the method and basis of valuation has also been duly mentioned in the report of the auditors. The Assessing Officer rejected the accounts merely on the allegation that preceding year's quantitative details have not been filed. No defects with respect to any of the purchases, sales or otherwise of the quantitative details of the year under consideration have been pointed out by him. The ld. Commissioner of Income-tax (Appeals), therefore, is stated to have erred in saying that the assessee has not maintained quantitative details of goods purchased and sold. Under such circumstances, accounts could not have been rejected and there was no scope of applying a higher gross profit rate than what was disclosed by the assessee, more particularly when the sales have increased by 48% in the competitive line of the activity. It was, therefore, urged that the application of provisions of Section 145 and estimation of income so made resulting into an addition of Rs. 6,14,696 needs to be deleted.
5. On the other hand, the ld. Departmental Representative Shri Dilip Shivpuri contends that the words 'preceding year' written in the assessment order is a typographical error only. The Assessing Officer never asked quantitative details of preceding year. The assessment record has been produced. Reference has also been made to para 2 of the assessment order. Reasons for decline in gross profit rate were stated by the assessee. No quantitative details have been furnished in respect of preceding year. The assessee's paper book p. 8 does not mention the quantity whether in bags and of what size. Consequent to the direction of the Tribunal for filing copy of the relevant ledger account, explaining details, the assessee has also written quantity in bags in red ink. This is riot borne out in the details originally filed before the Tribunal. The assessee's counsel was asked to state the correct facts. It was stated by Shri Gargieya that the insertion in writing is only to facilitate the Tribunal to arrive at the proper conclusion. The same should not be read as an evidence to decide the appeal of the assessee. This position was not opposed by the ld. Departmental Representative. The appeal was allowed to proceed further.
6. The ld. Departmental Representative further contends that the ld. Commissioner of Income-tax (Appeals) has already given a finding that the assessee has maintained the quantitative details monthly. No day-today account has been kept. No stock register was produced. Non-maintenance of production account can be a reason for rejecting the accounts of the assessee. Reliance has been placed on the decisions of Bastiram Narayandas Maheshri v. CIT [1994] 210 ITR 4381 (Mum. ), and Ratanlal Om Prakash v. CIT [1981] 132 ITR 6402 (Ori.). It has been contended that absence of stock register is one of the factors for rejecting the accounts of the assessee. For this proposition, reliance has been placed on the following decisions:
(1) S.N. Namasivayam Chettiar v. CIT [I960] 38 ITR 579 (SC) (2) CIT v. Pareck Bros. [1987] 167 ITR 344-1 (Pat).
7. In rejoinder, the assessee's counsel contends that the assessee is not a manufacturer. He is simply a trader. The two decisions of Bombay and Orissa High Courts do not apply to the facts of the case. Further more, the other two cases relied upon by the ld. Departmental Representative on non-maintenance of stock register are one of the factors for rejecting the accounts, but not the only and conclusive factor. Therefore, both these case laws cannot be made applicable for rejecting the accounts of the assessee. Under such circumstances, it was prayed that the ground of the assessee needs to be allowed.
7A. Parties have been heard with reference to material on record and case laws relied upon by the ld. Departmental Representative. Shri Dilip Shivpuri only states that the manner in which the ledger account has been maintained, the true facts cannot be deduced. The Assessing Officer did not express any such inability in the assessment order. Even the enabling provision for resorting to special audit as provided under Section 142(2A) of the Income-tax Act, 1961 were not invoked by the Assessing Officer. It is too late in the day to have raised such a plea and without pointing out any defects therein, no merit is found in the plea raised by the ld. Departmental Representative. Another plea of the ld. Departmental Representative that the mention of the words 'preceding year' is typographical error, is also not found acceptable. The Assessing Officer at para 2 of its order has categorically stated that no quantitative details have also been furnished in respect of preceding year. There is no change in the method of accounting employed by the assessee. Valuation of stock is also duly stated in the report of the auditors filed with the return. Quantity in bags are duly reported in the ledger account in the opening stock. Same is followed in respect of purchases and sales. No sales and purchases have been pointed out which can be stated to be not verifiable. Since all the relevant details are available in the ledger account itself, no separate stock account or register was required to be maintained. In any event, quantitative details were fully available before the assessing authority. The ld. Commissioner of Income-tax (Appeals) has, therefore, erred in giving a finding that the day-to-day quantitative details of goods purchased and sold are not available. The decision of Hon'ble Bombay High Court in the case of Bastimm Naraindas (supra) and the Hon'ble Orissa High Court in Ratanlal Omprakash (supra), were rendered in the context of non-maintenance of production record for rejecting the accounts. The assessee is merely a trader and it is not the case that the day-to-day stock tally cannot be made out from the records maintained by the assessee. Both these decisions cannot be made applicable to the facts of the case before us.
8. In S.M. Namasivayam Chettiar (supra) the Tribunal was found to have held that the correct profits of the assessee could not be deduced from the books produced for several reasons. One of such reasons was that quantitative tally was not available and it was not possible to verify assessee's accounts. Non-maintenance of stock register, therefore, was held to be of great importance amongst other reasons for rejecting the accounts. However, in the case before us, complete quantitative tally is available. Even if the assessee has not maintained a stock register, that cannot be a reason alone to reject the accounts of the assessee as has been held in the case of Pandit Bros. v. CIT[1954] 26 ITR 159 (Punj. ). It is only when quantitative tally is not there, provisions of Section 145 can be invoked. Even the true profits could be deduced from the accounts maintained by the assessee. Therefore, the decision of the Apex Court relied upon by the ld. Departmental Representative cannot be said to be governing the issue at hand.
9. In the case of Pareck Bros, (supra) relied upon by the ld. Departmental Representative the assessee had not maintained any day-to-day stock account. It had also not furnished details of purchases or sales. It is under such circumstances, the application of proviso to Section 145 was upheld. However, in the case before us, the assessee has maintained complete day-to-day stock account and all the details of purchases and sales are available. The facts being different, the ratio of the above judgment is also not found applicable to the present appeal before us.
10. In the light of facts and findings, more particularly when all the sales and purchases are fully vouched, quantitative details of opening stock, purchases, sales and closing stock are available, the stocks are valued at cost and is borne out from the report of the auditors and also as the quantity details are written in the ledger account itself, therefore, even if separate stock register was not maintained, it could not be said that the true profits cannot be deduced. Accordingly there was no case of the revenue to have rejected the accounts by invoking the provisions of Section 145(2) and by referring as 145(3) by the ld. Commissioner of Income-tax (Appeals) is without any cogent reasons. We, therefore, hold that the rejection of accounts made by the Assessing Officer and confirmed by the ld. Commissioner of Income-tax (Appeals) is without proper appreciation of the correct facts of the case and thus the ld. Commissioner of Income-tax (Appeals) has erred in upholding the action for rejection of the accounts as well as the estimation of income by estimating the sales and applying a gross profit rate of 6. 5% which is found to be without any basis or material in his possession. We, therefore, direct the Assessing Officer to delete the trading addition of Rs. 6,14,616.
11. Ground 3 relates to the confirmation of cash credits of Rs. 50,000 as under:
(a) Rs. 15,000 Smt. Neha Joshi;
(b) Rs. 18,000 Smt. Padma Chandwani,
(c) Rs. 17,000 Smt. Poonam Chandwani.
The assessee's counsel Shri Gargieya contends that affidavits duly sworn in by the two ladies, viz. Smt. Poonam and Smt. Padma were filed before the Assessing Officer, copies placed at APB 109 & 110. These affidavits are duly sworn before the Notary at Ajmer. The Assessing Officer was also requested to issue summons through assessee's letter dated 13-3-2000 and offered to charge cost so as to facilitate the examination or in the alternative an Inspector may be deputed for the purpose. He relied upon the decision of Hon'ble Supreme Court in the case of Mehta Pareek & Co. v. CIT [1956] 30 ITR 181. The Assessing Officer did not pay any heed to the request of the assessee. As regards the third credit in the name of Smt. Neha Joshi a similar request was made. It was, therefore, contended that under the circumstances no addition was warranted.
12. On the other hand, the ld. Departmental Representative contends that the assessee has not discharged the onus of proving its capacity and genuineness of the credits. He relied on the orders of the authorities below. It was further contended that the assessee has already been allowed telescoping and, therefore, there remains no separate addition for adjudication. The ground of the assessee, therefore, needs to be rejected.
13. Parties have been heard with reference to material on record and case laws relied upon by them. The assessee did not file any confirmation from the creditor Smt. Neha Joshi before any of the authorities below, nor before the Tribunal. It has also not stated its inability to procure confirmation from the said lady nor any circumstances thereto have been brought on record. The loan was received in cash. In the absence of any explanation from the assessee, the addition so made is upheld.
14. As regards the other two additions, the assessee did file affidavits from Smt. Paclma Chandwani and Smt. Poonam Chandwani for raising loans of Rs. 18,000 and Rs. 17,000 respectively. Affidavits have been perused. The ladies are not assessed to tax. The assessee's request to issue summons was available before the Assessing Officer. The assessee has also offered to pay cost and in the alternative requested to depute the Inspector for verification of the veracity of the assessee. The Assessing Officer, however, chosen-to remain silent and proceeded in making the addition. Both these creditors have stated their source and have confirmed the transaction. The identity was also known. In case the Assessing Officer was not satisfied, the proper procedure as available under the law, could have been resorted. However, the Assessing Officer without bringing any adverse material on record proceeded in making the addition. Under these circumstances the assessee can be said to have discharged his onus. The ld. Commissioner of Income-tax (Appeals) was not justified to reject the claim of the assessee that the earnings have not been substantiated by filing any details by these two ladies. Under the circumstances, when the Assessing Officer has opted not to issue summons or send the Inspector for verification of the deposition made in the affidavits by both these ladies, no addition could have been made. The same is directed to be deleted.
15. The next ground relates to disallowance of Rs. 4,000 out of telephone expenses of Rs. 8,020, Rs. 10,000 out of vehicle expenses of Rs. 88,665 and Rs. 8,000 out of depreciation on vehicles at Rs. 78,257.
16. Parties have been heard. The ld. Commissioner of Income-tax (Appeals) has recorded a finding that the use of the telephones and vehicles by the partners for personal purposes has been admitted before him. Under such circumstances and keeping in view the quantum of business, we consider it reasonable to restrict the disallowance on account of telephone expenses at Rs. 1,500 as against Rs. 4,000 out of total expenses of Rs. 8,020. The other disallowances for vehicle expenses and depreciation, being reasonable, no interference is considered necessary.
17. In the result the appeal of the assessee stands partly allowed. ITA No: 133/JP/2001 Dinesh K. Agarwal, Judicial Member
1. I have gone through the proposed order of ld. Accountant Member. I am unable to concur with the finding arrived at by him in holding that (Para 10):
10.... We, therefore, hold that the rejection of accounts made by the Assessing Officer and confirmed by the ld. Commissioner of Income-tax (Appeals) is without proper appreciation of the correct facts of the case and thus the ld. Commissioner of Income-tax (Appeals) has erred in upholding the action for rejection of the accounts as well as the estimation of income by estimating the sales and applying a gross profit rate of 6. 5% which is found to be without any basis or material in his possession. We, therefore, direct the Assessing Officer to delete the trading addition of Rs. 6,14,616.
I after having discussion with my ld. brother, record my dissent and reasons for doing so are given in following paragraphs:
2. I have carefully considered the rival submissions of the parties and perused the material available on record. I find that in this case, the CIT(A) while upholding the rejection of books of account, found that the assessee has not maintained day-to-day stock register and quantitative details of goods purchased and sold. Therefore, the trading results, as shown, cannot be taken as verifiable and the provisions of Section 145(3) are definitely applicable and he has also approved the gross profit rate at 6. 5% on the estimation of sales at Rs. 5,70,00,000 as reasonable.
3. For resolution of the issue, reference to relevant section as existed at the relevant time would be necessary. It is as follows:
Section 145(1) Income chargeable under the head "Profits 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 standards to be followed by any class of assessees 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 Section 144.
The Central Government, vide Notification No. SO 69(E), dated 25th January, 1996, has notified the following accounting standards to be followed by all assessees following the mercantile system of accounting, namely: -
A. Accounting Standard I relating to disclosure of accounting policies:
(1) All significant accounting policies adopted in the preparation and presentation of financial statements shall be disclosed.
(2) The disclosure of the significant accounting policies shall form part of the financial statements and the significant accounting policies shall normally be disclosed in one place.
(3) Any change in an accounting policy which has a material effect in the previous year or in the years subsequent to the previous years shall be disclosed. The impact of, and the adjustments resulting from, such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in any year subsequent to the previous year, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted.
(4) Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose, the major considerations governing the selection and application of accounting policies are the following namely: - ,
(i) Prudence - Provisions shall be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information;
(ii) Substance over form - The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form;
(iii) Materiality - Financial statements should disclose all material items, the knowledge of which might influence the decisions of the user of the financial statements.
(5) If the fundamental accounting assumptions relating to Going Concerns, Consistency and Accrual are followed in financial statements, specific disclosure in respect of such assumptions is not required. If a fundamental accounting assumption is not followed, such fact shall be disclosed.
(6) For the purpose of paragraphs (1) to (5), the expressions, -
(a) "Accounting policies" means the specific accounting principles and the methods of applying those principles adopted by the assessee in the preparation and presentation of financial statements;
(b) "Accrual" refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate;
(c) "Consistency" refers to the assumption that accounting policies are consistent from one period to another;
(d) "Financial statements" means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance sheet, profit and loss account and other statements and explanatory notes forming part thereof;
(e) "Going concern" refers to the assumption that the assessee has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the forseeable future.
B. Accounting Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies:
(7) Prior period items shall be separately disclosed in the profit and loss account in the previous year together with their nature and amount in a manner so that their impact on profit or loss in the previous year can be perceived.
(8) Extraordinary items of the enterprise during the previous year shall be disclosed in the profit and loss account as part of taxable income. The nature and amount of each such item shall be separately disclosed in a manner so that their relative significance and effect on the operating results of the previous year can be perceived.
(9) A change in an accounting policy shall be made only if the adoption of a different accounting policy is required by statute or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements by an assessee.
(10) Any change in an accounting policy which has a material effect shall be disclosed. The impact of, and the adjustments resulting from such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in years subsequent to the previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted.
(11) A change in an accounting estimate that has a material effect in the previous year shall be disclosed and quantified. Any change in an accounting estimate which is reasonably expected to have a material effect in year subsequent to the previous year shall also be disclosed.
(12) If a question arises as to whether a change in accounting policy or a change in an accounting estimate, such a question shall be referred to the Board for decision.
(13) For the purpose of paragraphs (7) to (12), the expressions:
(a) 'Accounting estimate' means an estimate made for the purpose of preparation of financial statements which is based on the circumstances existing at the time when the financial statements are prepared;
(b) 'Accounting policies' means the specific accounting principles and the method of applying those principles adopted by the assessee in the preparation and presentation of financial statements-;
(c) 'Extraordinary items' means gains or losses which arise from events or transactions which are distinct from the ordinary activities of the business and which are both material and expected not to recur frequently or regularly. Extraordinary items include material adjustments necessitated by circumstances which though related to the years preceding to the previous years are determined in the previous year:
Provided that income or expenses arising from the ordinary activities of the business or profession or vocation of an assessee though abnormal in amount or infrequent in occurrence shall not qualify as extraordinary items;
(d) 'Financial statements' means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance sheet, profit and loss account and other statements and explanatory notes forming part thereof;
(e) 'Prior period items' means material charges or credits which arise in the previous year as a result of errors or omissions in the preparation of the financial statements of one or more previous years:
Provided that the charges or credit arising on the outcome of a contingency, which at the time of occurrence could not be estimated accurately shall not constitute the correction of an error but a change in estimate and such an item shall not be treated as a prior period item.
This notification shall come into force with effect from 1st day of April, 1996, and shall, accordingly, apply to the assessment year 1997-98 and subsequent assessment years. [Notification No. SO 69(E), dated 25th January, 1996].
In view of the above Notification, the accounting standards, as mentioned above, are applicable with effect from 1st April, 1996 and shall, accordingly, apply to the assessment year 1997-98, i. e., the assessment year under appeal.
4. Therefore, in brief, under the provisions of Section 145, the Assessing Officer can reject the accounts and make a best judgment assessment under Section 144 in any of the following three circumstances:
(i) If the method of accounting adopted is neither pure cash nor pure mercantile, in other words, if a mixed method of accounting is adopted.
(ii) If the accounting standards notified by the Central Government are not followed by the assessee.
(iii) If the Assessing Officer is not satisfied about the correctness or completeness of accounts of the assessee.
5. Thus, from the above, it is crystal clear that the assessee has to follow the accounting standards as notified by the Central Government as mentioned above. In the case before us, no material was brought on record by the ld. A/R as to show that the assessee has followed the accounting standards as notified by the Central Government, which was his primary duty to follow the same as his income falls under the head 'Profits or gains of business or profession', more particular when the CIT(A) l-as specifically invoked the provisions of Section 145(3).
6. I also find that in this case, the assessee was required by the Assessing Officer vide letter dated 8th October, 1999 to:
3. Furnish inventories of opening and closing stock and explain the basis of valuation thereof. Also furnish details of month-wise purchases and sales. A comparative chart of gross profit rate for the last three years is also to be filed.
The assessee, vide Point No. 2 of his reply dated 11-2-2000, has submitted as under:
2. Statement of opening, purchases, sales and closing stock along with quantitative & valuation particulars is enclosed.
However, I do not find the copy of the particulars of valuation in the assessee's Paper Book, which was stated to be enclosed with the reply furnished to the Assessing Officer. Despite the query raised by the Bench, the copy of the same was not provided by the ld. A/R. I also find that the assessee has furnished the copy of ledger account as appearing at page Nos. 87 to 108 of the Paper Book showing the details of transactions of poultry feed account only, which does not indicate the day-to-day position of stock. Even the weight of bags of the item dealt with in respect of opening stock, purchases, sales and closing stock has not been mentioned. In the Paper Book at Page No. 8, the assessee has disclosed the opening stock, purchases, sales, closing stock and gross profit in terms of value only of poultry feed account and at Page Nos. 9 to 11, the assessee has furnished month-wise quantity of the commodity dealt with without disclosing the unit of quantity in terms of weight or otherwise. Even the copy of other ledger account of all the items dealt with, except the account of poultry feed has not been furnished. In the absence of these details, particulars of valuation and in view of the fact that the ld. counsel of the assessee has not addressed as to how the provisions of Section 145(3), as applied by the CIT(A) are not applicable, I am of the view that the accounts of the assessee cannot be accepted and the CIT(A) was fully justified in upholding the rejection of books of account and has correctly applied the provisions of Section 145(3) in this case. I also find that the assessee has disclosed gross profit rate at 5. 47 per cent on the total sales of Rs. 5,65,17,690 as against 7.44 per cent in the assessment year 1996-97 and 8.30 per cent in the assessment year 1995-96. The Assessing Officer has estimated the sales at Rs. 5,0,00,000 and applied a gross profit, rate at 6. 5 per cent, which cannot be considered to be unreasonable in view of the various deficiencies as pointed out by the Assessing Officer and non-maintenance of accounts as per notified accounting standards and also the past records of the case. Under these circumstances, no interference is called for in the trading addition made by the Assessing Officer and confirmed by the CIT(A) and, accordingly, the ground taken by the assessee is rejected.
7. In ground No. 3, 1 fully agree with the findings recorded by the learned Accountant Member and, accordingly, the ground raised by the assessee is partly allowed, as mentioned in Paras 13 and 14 of the order passed by the learned Accountant Member.
8. In Ground No. 4, 1 fully agree with the finding arrived at by the learned Accountant Member and, accordingly, no interference is called for in the order of the CIT(A) on this account.
9. In the result, the appeal of the assessee stands partly allowed.
REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 As there is a difference of opinion between the members in the present appeal, the same is required to be resolved by one or more Members of the Tribunal as may be nominated by the Hon'ble President, Income-tax Appellate Tribunal in terms of Section 255(4) of the Act. Also there is a difference in questions amongst the Members. Accordingly, the following questions of difference are referred:
Question per Shri B.R. Jain, Accountant Member - Under the facts, findings and on the basis of material on record and without hearing the assessee on the aspect as to whether he has followed the accounting standards or not or even without pointing out which accounting standard has not been followed, whether the application of provisions of Section 145(3) is justified and if so whether on facts the addition of Rs. 6,14,616 can still be sustained ?
Question per Shri Dinesh K. Agarwal, Judicial Member - Whether on the facts and in the circumstances of the case and also in law. It is justified to hold that 'the ld. CIT(A) has erred in upholding the action for rejection of accounts as well as the estimation of income', when the ld. CIT(A), under his co-terminus powers, has specifically invoked the provisions of section l145(3) which is applicable with effect from 1-4-1996, relevant to assessment year 1997-98, the year under consideration and no material was provided by the assessee as to how the provisions of Section 145(3) are not applicable ?
2. We direct the registry to place the matter before the Hon'ble President, ITAT.
THIRD MEMBER ORDER Vimal Gandhi, President
1. The learned Members of Jaipur Bench of the Tribunal on account of difference between them, have referred this matter to me under Section 255(4) of the Income-tax Act. The learned Members have different perception of controversy as is reflected from different questions referred to by the learned Members. The questions referred are as under: -
Question per Shri B.R. Jain, Accountant Member Under the facts, findings and on the basis of material' on record and without hearing the assessee on the aspect as to whether he has followed the accounting standards or not or even without pointing out which accounting standard has not been followed, whether the application of provisions of Section 145(3) is justified and if so whether on facts the addition of Rs. 6,14,616 can still be sustained?
Question per Shri Dinesh K. Agarwal, Judicial Member Whether on the facts and in the circumstances of the case and also in law, it is justified to hold that "the ld. CIT(A) has erred in upholding the action for rejection of accounts as well as the estimation of income", when the ld. CIT(A), under his co-terminus powers, has specifically invoked the provisions of Section 145(3) which is applicable with effect from 1-4-1996, relevant to assessment year 1997-98, the year under consideration and no material was provided by the assessee as to how the provisions of Section 145(3) are not applicable?
2. The facts of the case briefly stated are that the assessee firm in the relevant period carried on business of sale and purchase of poultry feed on the wholesale basis. On total sale of Rs. 5,65,17,690.53 the firm showed profit at Rs. 30,90,303.96 giving G.P. rate of 5. 74% as against 7. 34% on sale of Rs. 3,81,54,883.98 shown in the immediately preceding year. The assessee was asked to explain fall in G.P. rate. The assessee rendered an explanation which was not accepted to by the Assessing Officer and an addition of Rs. 6,14,696 was made with the following observations: -
It was, however, explained that the main reason for fall in G.P. as compared to last year was on account of increase in sales/turnover and that the purchases and sales are fully vouched. The explanation furnished by the assessee in this regard is of routine nature. No quantitative details have also been furnished in respect of the preceding year to show as to how much quantity of each item was purchased and sold. Considering the above defects, I reject the book results and by applying the provisions of Section 145(2), estimate the total sales at Rs. 5,70,000 and apply a G.P. rate of 6. 5%. The gross profit on this basis works out to Rs. 37,05,000 as against Rs. 30,90, 303. 96 shown. This would result in a trading addition of Rs. 6,14,696.
It is relevant to note here that the Assessing Officer applied provisions of Section 145(2) of the Income-tax Act without making any reference to accounting standards made applicable in the assessment year under consideration.
3. The assessee impugned above addition in appeal before the CIT(A) but remained unsuccessful. The learned, CIT(A) confirmed the addition with the following observations: -
3.1 I have considered the submissions of the learned counsel and I have also perused the details filed in the course of appellate proceedings. I have also perused the decisions cited by him. I am afraid the contentions of the learned counsel are not correct. The appellant has not maintained day-to-day stock register and quantitative details of goods purchased and sold. Therefore, the trading results shown cannot be taken as verifiable and the provisions of Section 145(3) are definitely applicable to the appellant's case. At the appellate stage, the learned counsel has filed month-wise quantitative details of poultry feed, deoiled cake, rice bran, marble chips etc. However, no stock register maintained on day-to-day basis has been produced in support of these details. Moreover, such details were not filed before the Assessing Officer at the assessment stage in spite of sufficient opportunity given to the appellant and, therefore, the same could not be subjected to any scrutiny. The G.P. shown at 5. 47% is very low as compared to G.P. shown in the immediately preceding year at 7. 34%. It is true that there is increase in the turnover from Rs. 3,81,54,883 in the assessment year 1996-97 to Rs. 5,65,17,690 in the assessment year 1997-98, in question. But this fact alone does not explain steep fall in the gross profit from 7. 34% in the assessment year 1996-97 to 5. 47% in the assessment year 1997-98, in question. The Assessing Officer after taking into consideration the facts and material on record and all other relevant factors, estimated the sales at Rs. 5,70,00,000 and applied the G.P. rate at 6. 5% which cannot be considered unreasonable or excessive. In my opinion, the Assessing Officer has been very reasonable in applying the G.P. rate at 6. 5% only as against the G.P. shown at 7. 34% in the assessment year 1996-97 and there is no scope for any relief to the appellant on this account. Taking into account the totality of facts and circumstances of the case as also the material on record, the trading addition of Rs. 6, 14, 696 is held reasonable and justified and the same is, accordingly, confirmed.
It is to be noted from above that the learned CIT(A) applied provisions of Section 145(3) of the Income-tax Act and rejected the accounts on the ground that quantitative details of goods purchased were not available. The month-wise quantitative details submitted by the assessee, were not admitted in evidence.
4. The assessee then carried the matter in appeal before the Appellate Tribunal and contended that the assessee had maintained complete details of stock in the ledger account. The same was produced before the Assessing Officer. The assessee further emphasized that the accounts of the assessee were audited and audited accounts contained quantitative details of opening stock, purchases, ' sales and closing stock. The audit report was filed in the assessment proceedings. Sales and purchases are fully vouched and the stock account could be verified both in quantity and in terms of money. There is no change in the valuation of stock or in method of accounting. The Assessing Officer rejected the accounts without pointing out any material defect in the books of account. The learned CIT(A) was also wrong in stating that the quantitative details of goods purchased and sold was not maintained by the assessee. It has not been appreciated that the sale had increased by 48% and book results shown were quite reasonable having regard to great competition in the market. The assessee accordingly prayed that the addition made be deleted.
5. The learned Departmental Representative opposed the above submissions. It was emphasized that no quantitative details were furnished before the Assessing Officer. As no day-to-day stock register was available, the rejection of books of account was fully justified. Certain case laws were relied upon which are noted in para 6 of the proposed order of the learned Accountant Member.
6. After considering the submissions of both the parties and in the light of material on record, the learned Accountant Member in the proposed order, deleted the impugned addition. He held that the Assessing Officer did not express any inability to gather proof of the case in the assessment order. He did not go for special audit as provided under Section 142(2A) of the Income-tax Act. No defect in the accounts maintained was stated in the impugned order. There was further no change in the method of accounting employed by the assessee. Value of stock was duly reflected in the report of the auditors filed with the return. Quantity in bags is reflected in the ledger account of the opening stock, sales and purchases. No purchase or sale outside the books of account has been reported. The learned AM did not attach any importance to the fact that no separate day-to-day register was maintained by the assessee as in his view all relevant details were available in the ledger and were filed before the Assessing Officer. He held that the CIT(A) was not justified in confirming the order of the Assessing Officer. The learned AM distinguished the decision of Hon'ble Bombay High Court in the case of Bastiram Naraindas Makeshri (supra) as also that of Hon'ble Orissa High Court in the case of Ratanlal Omprakash (supra) wherein rejection of books for non-maintenance of production record was held to be justified. The learned AM pointed out that those were cases of manufacturers and not of traders. He relied upon the decision of Punjab & Haryana High Court in the case of Pandit Bros, (supra), for the proposition that provision of Section 145 could not be invoked for non-availability of quantitative tally. He reiterated that true profits of the assessee could be deduced from the accounts maintained by it.
7. In the light of facts found by him, he held that there was no case to reject books of account by invoking provisions of Section 145(2) of the Income-tax Act or of Section 145(3) as done by the learned CIT(A) without any cogent reason. He held that rejection of books of account by the revenue authorities was without proper appreciation of facts of the case. He, therefore, directed the Assessing Officer to delete the trading addition of Rs. 6, 14, 616.
8. The learned Judicial Member did not agree with the above view of the learned Accountant Member. He noted provisions of Section 145 of the Income-tax Act as amended by the Finance Act, 1995 with effect from 1-4-1997 and quoted three sub-sections. Thereafter took note of Notification No. SO 69(E), dated 25th January, 1996 notifying application of accounting standards in case of all assessees following mercantile system of accounting. The accounting standards are reproduced at pages 3, 4, 5, 6 and 7 of the proposed order of the learned Judicial Member. The learned JM thereafter observed that in the following three circumstances, the Assessing Officer could make best judgment assessment under Section 144 of the Income-tax Act: -
(i) If the method of accounting adopted is neither pure cash nor pure mercantile, in other words, if a mixed method of accounting is adopted.
(ii) If the accounting standards notified by the Central Government are not followed by the assessee.
(iii) If the Assessing Officer is not satisfied about the correctness or completeness of accounts of the assessee.
Thereafter the learned JM noted query put by the Assessing Officer as per his letter dated 8th October, 1999 and the reply of the assessee. He observed that the assessee failed to give particulars of valuation of stocks in the Paper Book. The assessee merely furnished copy of ledger account at pages 87 to 108 of the Paper Book. Even weight of bags of different items was not mentioned. The assessee merely furnished month-wise quantity of a commodity dealt with without disclosing unit of quantity in terms of weight or otherwise. Further counsel for the assessee could not address as to how provisions of Section 145(3) as applied to by the learned CIT(A) were not applicable. He held that rejection of books of account in terms of provisions of Section 145(3) was fully justified. He also held that the rate applied by the revenue authorities to determine the assessee's income was quite reasonable. With the above observations, the learned JM confirmed the addition in dispute as per the proposed order.
9. The hearing of the case was once again fixed and Shri B.L. Meena for the revenue and Shri Mahendra Gargia for the assessee have been heard. Respective orders of the learned Members were relied upon and supported by the parties.
10. After careful consideration of the relevant material in the light of submissions advanced before me, I am inclined to agree with the learned AM. The assessee is a dealer of poultry feed on wholesale basis. It submitted its return with the tax audit report. The auditors also filed quantitative details of opening stock, purchases, sales and the closing stock. A copy of above quantitative stock is available at page 85 of the Paper Book and is as under: -
Opening stock 3517
Purchases 168088
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171605
Less sales 166965
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Closing stock 4640
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The above quantity is reflected in bags. In fact the assessee has throughout claimed that it is making purchases of goods in bags and is selling the same in bags on wholesale basis. It neither buys nor sells less than a bag. In support of the claim photo copies of invoices have been made available. Photo copies of ledger account have also been placed on record. Having regard to fact that clear evidence of sale and purchases in bags is available, the controversy raised relating to non-mention of unit in the quantitative statement is unnecessary. The assertion of the assessee supported by entries in accounts that purchase and sale is made in bags was not refuted before me with reference to material on record. Even otherwise it is unthinkable that a dealer having turnover of Rs. 5. 65 crores would sell goods in kilograms.
11. It is further to be noted that in response to query raised by the Assessing Officer vide letter dated 8th October, 1999 and noted by the learned JM, the assessee replied videiis letter dated 11-2-2000 complying with the requirements of the Assessing Officer. No objection, whatsoever was raised by the Assessing Officer that valuation of closing or opening stock was not available with the assessee. This is evident from the assessment order with relevant extract quoted above. Thus when the Assessing Officer had not raised any query it was unnecessary for the Tribunal to get involved in the controversy not raised by the Assessing Officer. The Assessing Officer further did not challenge that purchases and sales of the assessee are fully vouched. It is difficult to understand how accounts can be rejected when fact of vouched purchases and sales is not disputed. The only objection the Assessing Officer raised was that the assessee did not maintain quantitative details of each item. It is further evident from the assessment order that the Assessing Officer was not aware of amendment made in Section 145 of the Income-tax Act and therefore, applied unamended provision i. e. Sub-section (2) of Section 145 of the Income-tax Act. He did not apply Sub-section (3) of Section 145 which was invoked by the learned CIT(A) for the first time. The basis of rejection of books of account was non-maintenance of day-to-day stock register and quantitative details of goods purchased and sold. No reference whatsoever was made to the Notification applying accounting standards in case of assessee's maintaining books on mercantile basis. Thus when the revenue authorities had not analyzed application of accounting standards, it was not possible for the Tribunal to see application of those standards at its level for the first time. The result is that the learned JM could riot record clear finding as to which of the three circumstances indicated by him in para 4 of his proposed order, was applicable in this case. He has merely observed that the accounts of the assessee could not be accepted and counsel for the assessee did not address as to how provisions of Section 145(3) are not applicable to the case; the assertions not supported by facts on record.
12. On careful consideration of the relevant material, I reiterate that the observations made in the proposed order of the learned JM are not factually correct. As noted earlier, the assessee has recorded purchase and sale of each item in the ledger. The said ledger was admittedly produced before the Assessing Officer. From the said ledger the assessee's auditor prepared quantitative detail and the same was filed with the return. The above statement contains all necessary details of opening stock, purchases, sales and closing stock. When complete ledger account of purchases and sales is maintained, it cannot be said that accounts of the assessee is not subject to verification. Stock available with the assessee on any given date can be found out by making reference to the ledger account. Therefore, books of account in this case could not be rejected on the ground that they were not correct or incomplete or not subject to verification.
13. After addition was made by the Assessing Officer, the assessee before the CIT(A) challenged the finding of the Assessing Officer that the assessee did not maintain correct and complete books of account or that stock position on day-to-day basis was not available with the assessee. The assessee further furnished monthly stock tally before the CIT(A) which in my view was wrongly not taken into account. It is therefore, difficult to accept that application of provision of Section 145(2) [as applied by the Assessing Officer] or Section 145(3) [as done by the learned CIT(A)], was not challenged. Not having met with success, the assessee impugned the addition in appeal and reiterated the submissions. Copy of stock tally filed with the Assessing Officer with the return, copies of ledger account, copies of sale and purchase bills were placed in the Paper Book. The assessee maintained that its purchases and sales were fully vouched and complete detail of opening and closing stock was available with the assessee. The arguments and contention of the assessee are noted even in the impugned order of the learned CIT(A) as also by the learned AM in the proposed order. How else the assessee was required to challenge application of provision of Section 145(3) of the Act ? In the. circumstances discussed above and in the light of material available on record, the books of account in my view could not be rejected in this case. I therefore, fully agree with the order proposed by the learned AM. The addition in dispute is clearly unsustainable under the law. It is liable to be deleted.
14. With the above remarks, the case be now placed before the regular Bench for disposal of the appeal.
ORDER Satish Chandra, Judicial Member
1. There was a difference of opinion between the Members of the Bench and the following questions were referred to the Third Member for his opinion:
Question per Shri B.R. Jain, Accountant Member:
Under the facts, findings and on the basis of material on record and without hearing the assessee on the aspect as to whether he has followed the accounting standards or not or even without pointing out which accounting standard has not been followed, whether the application of provisions of Section 145(3) is justified and if so whether on facts the addition of Rs. 6, 14, 616 can still be sustained ?
Question per Shri Dinesh K. Agarwal, Judicial Member:
Whether on the facts and in the circumstances of the case and also in law, it is justified to hold that "the ld. CIT(A) has erred in upholding the action for rejection of accounts as well as the estimation of income", when the ld. CIT(A), under his co-terminus powers, has specifically invoked the provisions of Section 145(3) which is applicable with effect from 1-4-1996, relevant to assessment year 1997-98, the year under consideration and no material was provided by the assessee as to how the provisions of Section 145(3) are not applicable ?
2. The Hon'ble President, Shri Vimal Gandhi, sitting as Third Member, by his opinion dated 15th September, 2004, has concurred with the view of the ld. Accountant Member, who had deleted the trading addition of Rs. 6, 14, 616.
3. Therefore, in accordance with the majority view, the issue is decided in favour of the assessee.