Income Tax Appellate Tribunal - Jodhpur
Haridas Parikh vs Income Tax Officer on 8 November, 2007
Equivalent citations: (2008)113TTJ(JODH)274
ORDER
R.C. Sharma, A.M.
1. This is an appeal filed by the assessee against the order of the CIT(A) on "18th Dee., 2006 for asst. yr. 2003-04 in the matter of order passed under Section 143(3) of the IT Act, 1961.
2. The only grievance of the assessee relates to the trading addition of Rs. 2,41,955 by rejecting the books of account under Section 145(3) of the Act.
3. Rival contentions have been heard and record perused. Facts in brief are that the assessee derives income from trading of machineries, electrical goods and accessories on wholesale and retail basis. During the year under consideration on total sales of Rs. 1.54 crores, the assessee has declared GP of Rs. 15.40 lakhs thereby giving GP rate of 9.94 per cent. During the course of scrutiny assessment the AO stated 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 stated that the assessee did not maintain quantitative stock of the goods, therefore, gross profit of each and every item of sales cannot be correctly verified. Accordingly he rejected the book results and applied GP rate of 11.51 per cent and made trading addition of Rs. 2,41,955. The action of the AO was confirmed by the learned CIT(A).
4. We have considered the rival submissions and gone through the orders of the lower authorities and found from record that the assessee's books of account were subject to tax audit. Along with the return of income the assessee has filed audited P&L a/c and balance sheet along with Annexures. During the course of scrutiny assessment the assessee produced books of account comprising cash book, ledger and vouchers of expenses, which were examined by the AO and no defect of any nature was found in the books of account. The only allegation of the AO was that the assessee was not maintaining stock register due to which it was not possible to find out the exact GP rate on various items dealt with by the assessee. As per the details of various goods dealt with by the assessee, we found that the assessee was dealing in machineries, tools, PVC pipes, fittings and electrical goods on wholesale and retail basis. The GP rate on each item was different and the assessee was able to sell the goods in the market as per prevailing market rates in the competition prevailing therein. There was tough competition in the market and the machinery was liable to be sold even at a low margin of 3 per cent. There is no dispute to the well settled legal proposition that the books of account regularly maintained by the assessee in the normal course of business which are subject to audit as per the provisions of IT Act, 1961, should be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. Such books of account cannot be rejected light-heartedly without pointing out any specific defect therein. For rejecting the books of account, it is Revenue's onus to prove that either the books of account maintained by the assessee are not correct and complete or the method of accounting adopted is such that true profits cannot be deduced therefrom. As the onus to make out a case for rejection of books of account is on the Revenue, the AO is required to indicate specific defects in the books of account, which clinches the profit shown by the assessee or its state of affairs.
5. After production of books of account and submission of explanation by the assessee, if any asked for, with respect to the contents of the return and books of account, the Revenue may accept the same or after pointing out the specific defect may reject the books of account and proceed to determine the assessee's income as per the provisions of Section 145. Income-tax provisions nowhere either authorize the AO or cast an obligation on the assessee to prove the negative result, i.e., to prove as to why he failed to make a profit at a particular rate. Before rejecting the books of account, the Department has to prove that accounts are unreliable, incorrect or incomplete. Even though, it is not possible to lay down the exact circumstances in which accounts should be rejected as unreliable or incorrect, yet the accounts may be rejected as unreliable if important entries and transactions are omitted therefrom or if proper particulars and vouchers, bills, etc. are not forthcoming or if they did not include entries relating to particular class of business transaction. The assessee should invariably be given opportunity for offering explanation regarding defects in accounts and on his failure to satisfactorily explain the defects, the Department would be justified in rejecting the books of account. Thus, books of account should not be rejected light-heartedly. In the instant case the AO has also not indicated any defect in the system of accounting regularly followed by the assessee, or its correctness, nor there was any change in the method of accounting during the year under consideration as compared to the earlier years to indicate any intention of assessee to show low profit.
6. While examining the books of the assessee, ITO has to consider the following aspects:
(i) Whether the assessee has regularly employed a method of accounting?
(ii) Even if regular adoption of a method of accounting is there whether the annual profits can properly be deduced from the method employed?
(iii) Whether the accounts arc correctly maintained?
(iv) Whether the accounts maintained are complete in the sense that there is no significant omission therein?
If the answers to above four questions are in the affirmative, assessee's profits are to be computed on the basis of his accounts. In such cases, provisions of Section 145(3) cannot be invoked. On the perusal of the materials placed on record, in the instant case we found that answer to all the above four questions were affirmative.
7. Unless the AO 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. In the instant case the sales of the assessee during the year under consideration have increased substantially from Rs. 1.43 crores to Rs. 1.54 crores which resulted in marginal decline in GP rate from 11.51 per cent to 9.94 per cent, the same cannot be made reason for rejecting the book results. It is well settled business proposition that for having increase in sales, a businessman has to sacrifice a small margin of profit rate. During the year the overall gross profit of the assessee has increased from Rs. 1.43 crores to Rs. 1.54 crores. No defect was found in the books of account. There is no valid reason for rejection of books of account during the year under consideration and thereby applying higher GP rate of 11.51 per cent, which was earned by the assessee on low sales of Rs. 1.24 crores in the preceding year. The other reason stated by the AO of making trading addition was that in asst. yr. 2001-02, GP rate declared by the assessee at 9.64 per cent was not accepted and trading addition so made by rejecting the books of account was confirmed by the learned CIT(A), therefore, by following the order of the earlier year the AO has made addition by rejecting the GP rate of 9.94 per cent declared during the year under consideration. The learned Authorised Representative placed on record the order of the Tribunal in assessee's own case in asst. yr. 2001-02 wherein addition made by the AO by applying GP rate of 10.14 per cent was deleted by the Tribunal and the GP rate of 9.64 per cent declared by the assessee was found to be reasonable and correct. As the facts and circumstances during the year under consideration are same, the issue is squarely covered by the order of the Tribunal dt. 17th March, 2006 in the preceding year, respectfully following the same, we reverse the findings and conclusions of the lower authorities and direct the AO to delete the trading addition so made by him by rejecting the books of account.
In the result the appeal of the assessee is allowed.