Income Tax Appellate Tribunal - Delhi
Delhi Securities Printers vs Dy. Cit on 20 April, 2007
ORDER
R.C. Sharma, Accountant Member
1. This is an appeal filed by the assessee against the order of CIT(Appeals) dated 13-2-2006 for the assessment year 2003-04, in the matter of order passed under Section 143(3) of the Income Tax Act, 1961 wherein following grounds of appeal have been raised :
1. That on the facts and in the circumstances of the case, the learned CIT (Appeals) as also the assessing officer erred in making an addition of Rs. 4,65,430 on account of job work receipts by disturbing the gross profit ratio on the basis of non-maintenance of stock register, hence the addition made should be deleted.
2. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in reducing the disallowance to Rs. 14,000 from Rs. 30,000. Hence the balance disallowance should be deleted.
3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) as also the assessing officer erred in making an addition of Rs. 1,06,369 on account of car & conveyance expenses on the basis of not maintenance of log book, hence the addition made should be deleted.
4. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in reducing the addition by Rs. 26,680 (50% of Rs. 51,360). Hence the balance of addition should be deleted.
5. That the appellant craves liberty to add, alter, vary or amend any grounds of appeal before the date of hearing or at the time of hearing.
2. Rival contentions have been heard and record perused. Brief facts of the case are that in the course of assessment, the assessing officer found that assessee has not maintained stock register, therefore, the consumption of raw-material during the year could not be verified. He further stated that in the absence of stock register, it is not possible to verify the closing stock as declared by the assessee and the value of the stock of papers consumed and sold is also not verifiable. Accordingly, he rejected the books of account by invoking the provisions of Section 145(1) of the Income Tax Act, 1961 and estimated the g.p. at 37.05 per cent as against g.p. of 35.05 per cent as declared by the assessee, which resulted into addition of Rs. 4,65,430.
3. By the impugned order, the CIT (Appeals) confirmed the action of the assessing officer.
4. It was contended by the learned authorised representative Shri G.N. Gupta that no defects in the books of account was pointed out by the assessing officer. The books of account were fully audited and in all the preceding assessment years, the g.p. shown by the assessee was accepted in the scrutiny assessment and no trading addition was made in spite of the fact that no stock register was maintained even in the preceding assessment years, where scrutiny assessments were undertaken. As per learned authorised representative even though rule of res judicata does not apply to the income-tax proceedings, but at the very same time the rule of consistency is to be adopted by the department. He drawn our attention to the g.p. rate shown by the assessee in the earlier years which were accepted in the scrutiny assessment. As per learned authorised representative, the only raw-material involved in the activity undertaken by the assessee is paper and the assessee was in receipt of job work charges and contract receipts for printing of lottery tickets. He further submitted that business of the assessee was considerably reduced from 4.38 crores in the assessment year 1999-2000 to Rs. 2.32 crores in the assessment year 2003-04 under consideration, which resulted into the marginal increase in the paper cost. The g.p. of the assessee was also reduced correspondingly. As per learned authorised representative, while rejecting books of account, the assessing officer has invoked the provisions of Section 145(1) read with explanation whereas there is no such explanation provided under Section 145(1). He also drawn our attention to the different scrutiny assessment orders passed under Section 143(3) of the Act for different assessment years, as D placed in the record, wherein assessee firm was following the same system of accounting and policy which were duly accepted by the assessing officer. He relied on the decision of the ITAT Bangalore Bench in case of Dy. CIT v. Gajanan Traders [2006] 104 TTJ (Bang.) 1030, in support of the proposition that fall in g.p. rate is not a criteria for rejection of books of account, and there is no provision in the Act which suggests that day to day stock register has to be maintained or in absence thereof F the books of account are liable to be rejected. It was further observed by the Tribunal that what is required to invoke the proviso to Section 145 of the Act or to reject book results, is to establish the incorrectness and incompleteness of the accounts or where method of accounting followed by the assessee was inconsistent with the accepted method of accounting. Since no such case has been made out by the assessing officer, the assessing officer was held to be not justified in rejecting the books of account and making the addition.
5. In support of the contention that department is required to maintain consistency, when the facts and circumstances during the year are pari materia with that of the preceding assessment years, the learned authorised representative relied on the decision of jurisdictional High Court in case of CIT v. A.R.J. Security Printers wherein by relying on the verdict of the Hon'ble Supreme Court in Radhasoawmi Satsang v. CIT , it was held that revenue could not be allowed to turn around, after having accepted at least in three assessment years that the business activities fell within the ambit of Section 80-I and to say that assessee is not entitled to deduction under Section 80-I of the Act.
6. On the other hand, learned Departmental Representative Shri K.C. Badhok submitted that in the absence of stock register, the assessing officer was unable to verify the correctness of value of the stock of papers held and consumed by the assessee during the year, therefore, assessing officer was justified in rejecting the book results and estimating the g.p. rate at 37.05 per cent.
7. We have considered the rival contentions carefully gone through the orders of the authorities below and deliberated on the case law referred by learned authorised representative and Departmental Representative during the course of hearing before us in the context of factual matrix of the instant case. As per our considered view, the books of account regularly maintained in the course of business which are duly audited under the provisions of Income Tax Act, 1961 and are free from any qualification by the auditors should be taken as correct unless there are strong and sufficient reason to indicate that they are unreliable. 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 assessing officer is required to indicate specific defects in the books of account which clinches the profit shown by the assessee or its state of affairs.
8. 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 assessing officer 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 assessing officer while rejecting the books of account 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. The only objection of the assessing officer was that the assessee has not kept stock register except it he had not pointed out any defect in the books of account which persuaded him to reject the book results outrightly and estimate G.P. at higher rate as compared to the G.P. rate shown in the audited books of account which were free from any qualification by the auditor.
9. While examining the books of the assessee, Income Tax Officer 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 are 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, proviso to Section 145(1) or Section 145(2) cannot be invoked. On the perusal of the materials placed on record, in the instant case, we found that answers to all the above four questions were affirmative.
10. The Patna High Court has delivered a very important ruling in Md. Umer v. CIT . In that case, the assessee was individual, who derived income from sale of country liquor. The Tribunal gave five reasons for the purpose of rejection of book profits as follows :
(1) The sale were not verifiable.
(2) From the point of drawing of the liquor from the barrels, no account was maintained and even the normal leakage in the process of drawing and filing in the bottles was not shown.
(3) Year to year, the book results shown have been rejected and profit invariably estimated by the Department.
(4) The percentage of profit shown was low.
(5) Drawings for expenses were inadequate.
However, assessee had produced all his books of account before the Income Tax Officer and only two defects were found by him: (1) absence of cash memos which means sales are not verifiable, and (2) certain transactions were noted in lump sums. But no finding has been recorded by either of the authorities below as to the unacceptability of the method and irregularity of the accounts kept by the assessee. It is well-settled that in the absence of such a finding recorded by the authorities, the book results cannot be ignored or brushed aside. Very important principle of law was laid down by Patna High Court in the following words :
There is no finding in the present case that any of the en tries in the books of account was not correct; there is no finding that the assessee is not employing a method of accounting; and there is no finding that such a method of accounting has been irregularly employed by the assessee. In the absence of any such finding, there being no reason germane to the unacceptability of the book results, it must be held that the Tribunal as well as the revenue authorities below had no materials before them, on the basis of which it could be said that the trading results were not verifiable and that, therefore, they should not be accepted, nor is it their case that the trading results could not be deducible from the entries of the books of account regularly employed.
The Patna High Court, therefore, held that ...the finding of the Tribunal upholding the rejection of the book profit shown by the assessee was vitiated by reason of its reliance upon suspicion, surmises as also irrelevant material. The finding that sales were unverifiable is not based on the materials on record and is an arbitrary finding.
11. The importance of maintenance of stock register of various raw materials used by the assessee in its manufacturing process, is to be judged from the nature of activity the assessee is carrying on. In some industry such stock register plays crucial role whereas in some cases the same is not so important. In some cases stock register plays important role and its non-maintenance may prompt the assessing officer to have a recourse of estimation of profit by showing the adverse effect of such non-maintenance on the determination of correct cost of production and the resultant profit from the manufacturing process. In the instant case the assessee was engaged in printing of lottery ticket, and was not undertaking any manufacturing or production process where numerous raw materials are used in the process and quantitative records regarding various raw materials consumed in the manufacturing process is required to be kept to ascertain the correct cost of production and resultant G.P. thereon. In the instant case the only raw material used by the assessee was paper, the quantity of paper purchase was duly verifiable from the purchase bills, the quantity of paper used was duly verifiable from the sale of lottery ticket, thus the resultant quantity was the closing stock. In all the preceding years also the assessee was not maintaining any such records.
The department has completed the assessment under scrutiny process and the non-maintenance of the stock register was never the made ground for rejecting the books of account or estimating the G.P. at rate higher than the rate declared by the assessee. The contention of the learned authorised representative that unless there are change in the facts and circumstances, the department should not take contrary view, is supported by the decision of Hon'ble Supreme Court in the case of Radhasoawmi Satsang v. CIT , wherein Hon'ble Supreme Court held that if there is no change in the facts, different conclusion is not warranted. Even though doctrine of res judicata does not apply to the proceedings under the Income Tax Act, at the very same time it is clear that unless there is a change of circumstances, the authorities will not depart from their previous decisions at their sweet will in the absence of material circumstances or reasons for such departure. Thus the rule of consistency which applies to the income-tax proceedings has to be followed.
12. In view of the above discussion, we do not find any merit in the action of the lower authorities in rejecting the book results merely because the assessee has not maintained stock register, without pointing out any specific defect in the books of account, of any nature whatsoever, as discussed hereinabove.
13. With regard to disallowance of telephone expenses, the CIT(Appeals) restricted the disallowance to the extent of l/10th of the total expenses. As the use of telephone for personal purposes by the partners cannot be ruled out, we do not find any reason to interfere in the order of the CIT(Appeals) for retaining the addition on account of telephone expenses to the extent of Rs. 14,000. Ground No. 2 is, therefore, dismissed.
14. With regard to the disallowance of motor-car, conveyance and travelling expenses, we found that on an ad hoc basis, the assessing officer has disallowed 1/5th of the total expenses incurred both at Delhi and Bangalore, on the plea that no log book or register was maintained to justify that car was entirely use for business. We have considered the rival contentions and found that partners of the assessee firm was residing at Delhi, therefore, if any disallowance is to be made for non-business purposes and on account of personal use by the partners, the same is required to be confined to the expenses of Rs. 2,40,417 incurred at Delhi Unit. We, therefore, direct the assessing officer to restrict the disallowance to the extent of 1/5th, with respect to the expenses incurred on Delhi Unit. As the partners were not residing at Bangalore, no disallowance on account of personal use by the partners are warranted in respect of expenditure booked at Bangalore Unit. We direct accordingly.
15. With regard to confirming addition to the extent of Rs. 26,680 on account of machinery repairs etc., we do not find any reason to interfere in the order of the CIT (Appeals) insofar as part of the expenses were incurred in cash, which remained unverifiable.
16. In the result, the appeal of the assessee is partly allowed in terms as indicated hereinabove.