Income Tax Appellate Tribunal - Delhi
Jayanti Metal & Alloys, , New Delhi vs Department Of Income Tax on 7 July, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : D : NEW DELHI
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER
AND
SHRI A.K. GARODIA, ACCOUNTANT MEMBER
ITA No. 3765/Del/2009
Assessment Year : 2002-03
ACIT, Vs. M/s Jayanti Metal & Alloys,
Circle 21(1), Bawana Road, Shahbad Daultpur,
New Delhi. Delhi - 110 042.
PAN : AACFJ 0998 G
(Appellant) (Respondent)
Assessee by : None
Revenue by : Shri B.K. Gupta, Sr. DR
ORDER
PER I.P. BANSAL, JUDICIAL MEMBER:
This is an appeal filed by the revenue. It is directed against the order of the CIT (A) dated 7th July, 2009 for Assessment Year 2002-03. Grounds of appeal read as under:-
1. The Ld. CIT (A) erred in law and on facts in deleting the addition made on account of trading result amounting to Rs.7,46,158/- being low GP shown by the assessee.
2. The appellant craves leave to amend or alter all or any of the aforesaid grounds of appeal and add any other ground of appeal.
2. The return in the present case was filed declaring net loss of Rs.24,13,190/- which has been assessed by the AO at net loss of Rs.15,80,687/- by making certain additions inter alia trading addition of Rs.7,46,158/- on account 2 ITA No.3765/Del/2009 of low GP rate. It was noticed by the AO that GP rate shown during the year had fallen down to 0.89% from 5.72%. An explanation was sought from the assessee and it was explained that purchase cost during the year under consideration had increased and there was fall in sale prices. It was also submitted that US Dollar rate was increased and market was hit by price fluctuation in US Dollar and Pound Sterling and because of these adverse conditions, the turnover had fallen down by almost Rs.5 crore. It was submitted that 75% of sales were to Hero Majestic India only which was 85% in the previous year and, thus, GP rate was lower because of increase in purchase cost and decrease in sale price. Necessary books of account along with vouchers, bills, etc. were produced. A survey was also conducted at the premises of the assessee on 8th March, 2002 and stock of Rs.38,32,389/- was found which as per books was Rs.37,97,952/- and there was difference of Rs.30,000/- in the stock and a surplus cash was also found of Rs.11,65,763/-. It was noted by the AO that certain expenditure on fuel, diesel and wages, etc. were also increased. The AO estimated the sales of the assessee at Rs.5,55,00,000/- against 5.49 crore and applied GP rate of 2.25% and after giving set off of gross profit shown by the assessee, net addition of Rs.7,46,158/- was made by invoking the provisions of Section 145 of IT Act 1961. The addition was challenged in the appeal filed before the CIT (A) who in para 5.2 while deciding the issue has observed that the reasons for invoking Section 145 by the AO were :
(i) Difference in closing stock of Rs.30,000/- found at the time of survey;
(ii) Difference of cash in hand found at the time of survey;
(iii) Decrease in sales from Rs.10.04 Crore to Rs.5.49 crore; and
(iv) Decline in GP rate from 5.72% to 0.89%.
3. The Ld. CIT (A) observed that before invoking the provisions of Section 145 the AO was required to see:
(i) Whether the assessee has regularly employed a method of accounting?;3 ITA No.3765/Del/2009
(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 were correctly maintained; and
(iv) Whether the accounts maintained are complete in the sense that there is no significant omission therein.
4. He observed that if the answer to these four questions are in affirmative, then the profits of the assessee were to be computed on the basis of books of account and he found that answer to these four questions were in affirmative. Then, Ld. CIT (A), referring to the provisions of Section 145(3) has observed that the assessee has been maintaining its account correctly and completely. The AO did not dispute the method of accounting followed by the assessee and also the compliance of the accounting standards. The explanation regarding low GP rate was furnished by the assessee and they were also test checked and the AO himself had admitted such facts in the assessment order itself. The CIT (A) observed that in the absence of any particular transaction to be left out to be entered in the books of account or the fact that the assessee has sold some of the items at a price higher than what was disclosed in the books of account, estimation of sale and GP rate could not be applied and for holding so he has referred to various decisions in para 5.5. In para 5.6 CIT (A) has observed that assessee's accounts were duly audited u/s 44AB of the Act in which no defect whatsoever was found by the AO and, thus, the addition made by the AO could not be sustained. The conclusion of CIT (A) as found from para 5.2 to 5.7 is reproduced below for the sake of convenience:-
"5.2 I have carefully considered the submission made on behalf of the appellant and the findings of the A.O. The A.O. invoked the provisions of section 145 and disturbed the trading results by estimating the sales during the year under consideration at Rs. 5,55,00,000/- as against Rs. 5,49,19,351/- declared by the assessee and applying the G.P. rate of 2.25% thereon which ultimately resulted into an addition of Rs. 7,46,158/-. The above action was taken by the A.O. on the following grounds: -
4 ITA No.3765/Del/2009(i) There was a difference in the closing stock as on the date of survey amounting to Rs. 30,000/-.
(ii) There was a difference in "cash in hand" amounting to Rs.
11,70.000/- found during the survey operations which was declared by the assessee in the Profit & loss account as additional income.
(iii) When the sales have come down from Rs. 10.04 crores in the preceding year to Rs. 5.49 crores during the year under consideration, the expenses incurred on fuel, diesel and wages have increased or remained almost the same as compared to last year.
(iv) The G.P. rate of the assessee has drastically come down from 5.72% in the preceding year to 0.89% during the year under consideration.
5.3 While examining the books of the assessee, the A.O. 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. On the perusal of the materials placed on record, in the instant case, I find that answers to all the above four questions were affirmative.
5.4 . Though the A.O. has not specifically mentioned the sub-section section 145 which has been relied upon by him in this case, it is not difficult to infer that sub-section 3 of section 145 has been applied by him. Section 145(3) reads as follows:
"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 subsection (1) or accounting 5 ITA No.3765/Del/2009 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."
It is clear from its plain reading that the aforementioned subsection has the following ingredients:-
(a) The assessee is required to regularly employ either cash or mercantile system of accounting as per the accounting standards and meaning and consequences of not regularly following the system of accounting;
(b) The A.O. not being satisfied about the correctness or completeness of the accounts of the assessee and the very meaning of correctness and completeness of account; and
(c) Making of an assessment in the manner provided u/s 144;
Regarding the completeness of accounts it refers not only to the accounting entries for all the transactions done in the previous year but also to the list of books of accounts. In other words, the failure to maintain certain register or any other books makes the accounts of the assessee incomplete. On the other hand, the correctness of the accounts refers to the quality or accuracy or reliability of accounts maintained by the assessee and it covers reconcilable mistakes or errors in accounts. Thus, the completeness refers to the list of books of accounts and entries therein and the accuracy refers to the quality of the accounts of the assessee.
Regarding the 'Assessing Officer being not satisfied about the correctness or completeness of the assessee's accounts', the Calcutta High Court's judgment in the case of Ashoke Refractories (P) Ltd. V. CIT [20051 279 ITR 457 is relevant. In the said case, the Hon'ble High Court held that in order to reject the accounts, the Assessing Officer has to come to an opinion that the income cannot be properly deduced from the accounts so maintained. In order to arrive at such conclusion, it must be shown that the Assessing Officer has taken into consideration relevant factors and not omitted to consider the material before him. It is the Assessing Officer's opinion which is important and the said opinion should be about either the correctness or completeness of the books.
5.5 In the light of the above scope of Section-145(3), if the fact of the instant case is examined, it may be seen that the rejection was done merely without any finding on the 'correctness or completeness' of the books of account. In view of the above and in 6 ITA No.3765/Del/2009 my considered opinion, the rejection the books of account under section 145 of the I.T. Act, while accepting the books as correct and complete, is an invalid assumption of jurisdiction by the Assessing Officer as he did not dispute the method of accounting followed by the assessee and compliance of the accounting standard. The facts of the case clearly indicate that the appellant has furnished explanation regarding the decline of GP rate, the books of accounts and stock register were produced by the assessee and they were test-checked by the A.O. at the time of assessment proceedings. The A.O. has himself admitted this fact in the assessment order itself. 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 the books of account maintained by the assessee which are free from any defect cannot be rejected merely because the GP rate was lower than the GP rate of the earlier year. In other words, mere decline of GP rate is not a sufficient ground for rejection of books of accounts. Reliance is placed on the decisions in the cases of Yog Raj Saini v ACIT (2008) 108 TTJ 912 (Delhi), Haridas Parikh v ITO (2008) 113 TTJ (Jodh) 274 and ITO Vs. Girish M. Mehta (2007) 105 lTD 585 (Rajkot). In the background of the fact that the reasons for decline in GP rate were explained by the appellant during the assessment proceedings, the reasons quoted by A.O. for rejecting the books of accounts are not justified. Besides that, after the rejection of the books of accounts, the estimation of income was made by the A.O. without any concrete basis for doing so. In the case of Dhakeswari Cotton Mills Ltd. V. CIT (1964) 26 ITR 775 (SC) the Hon'ble Supreme Court had decided that once the books of accounts of the assessee are rejected then the profit has to be estimated on the basis of proper material available. However, the A.O. is not entitled to make a pure guess & make estimation without reference to any evidence or any material at all. There must be something more than mere suspicion to support such addition. The Hon'ble Supreme Court has reconfirmed the earlier stand in the case of CIT Vs. K.Y. Pilliah & Sons (1967) 64 ITR 411 (SC), where it has been decided that any lump sum add back to the trading result if found justified must be done in proper exercise of discretion objectively & judiciously on the basis of relevant material.
5.6 In the case on hand, the undisputed fact is that the assessee has been consistently following a particular method of accounting. Its accounts are audited under section 44AB of the Income-tax Act. Auditors have been consistently certifying that the assessee has been regularly following the method of accounting and that the 7 ITA No.3765/Del/2009 annual profits can be properly deduced from such method of accounting employed by the assessee. The auditors over the years have also been certifying that the accounts are regularly maintained and are complete in the sense that there is no significant omissions therein. The assessing authority has to look into the substance of the situation and decide the matter in such a manner that neither is put to unreasonable liability nor the assessee is subjected to unreasonable hardship. No doubt it is not only the right but also the duty of the Assessing Officer to consider whether or not the books disclosed the true state of accounts and the correct income can be deduced therefrom. But these right and duty have to be exercised in such a manner and have to be based on cogent reasons and sufficient material. The reasons given by the Assessing Officer in this case on the facts and circumstances is demonstrated, as erroneous by the assessee. Rejection of books of account should not be done light heartedly as held by the Kerala High Court in the case of St. Teresa's Oil Mills v. State of Kerala [1970] 76 ITR 365 and by the Assam High Court in the case of Tolaram Daga v. CIT [1966] 59 ITR
632. Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable and incorrect. The A.O. has to prove satisfactorily that the account books are unreliable or incorrect or incomplete before he can reject the accounts and this can be done by showing that important transactions are omitted or if proper particulars and vouchers are not forthcoming or the accounts do not include entries relating to a particular class of business.
5.7 Thus, for all these reasons and as the assessee has produced sufficient material justifying its claim and as it has repelled the contentions advanced by the Assessing Officer with cogent material and evidence, I am of the considered view that on the facts and in the circumstances of the case, the Assessing Officer was not correct in making the lump sum addition of Rs. 7,46,158/- by enhancing the amount of sales to the extent of Rs. 5.55 crores. Addition if any could be made to the extent of specific unaccounted sale, difference in stock, difference in the accounts of the customers, etc. and not in the general way of enhancing the sale on estimate. Reliance is placed on a recent judgment of the Gujarat High Court in the case of CIT V. Gurubachhan Singh J. Juneja (2008) 302 ITR 63. Addition if any called for must be restricted to the actual amount of discrepancy/difference in sales, purchase, stock, declaration to the bank, customers and suppliers accounts, etc. The entire exercise done by the A.O. is based on surmises and conjectures and without any evidence. Therefore, it is held that the Assessing Officer is not justified in invoking the provisions of section 145 of the Act and addition on account of trading result to the extent of Rs.7,46,158/- is directed to be deleted. Thus, ground No.2, 3 & 4 are allowed."
8 ITA No.3765/Del/20095. Notice of hearing was sent to the assessee, however, on the date of hearing none was present. Therefore, we proceed to decide this appeal ex parte qua the assessee after hearing Ld. DR.
6. Ld. DR vehemently relied upon the findings given by the AO. He submitted that the assessee could not explain properly the decline in GP rate and, thus, the addition was rightly made by the AO and, thus, the addition has wrongly been deleted by the CIT (A).
7. We have carefully heard Ld. DR and we have carefully gone through the assessment order as well as the order of the CIT (A). The AO has proceeded o make addition on the basis that there was a decline in GP rate as compared to earlier year. Even the AO did not apply the GP rate of last year. The CIT (A) is right in observing that unless there is specific defect is found in the maintenance of books of account, addition could not be made. So far as it relates to addition made on account of surplus cash found during the course of survey, it was submitted by Ld. DR that the same was declared by the assessee. Therefore, it is not even the case of the Department that surplus cash found during the course of survey is also the reason for making the addition. In this view of the situation, going into the entirety of facts, we are of the opinion that there was no sound basis for making addition on account of GP rate particularly in view of the finding that there was no particular defect found in the books of account and department is unable to bring any material on record that there was any specific defect in the books of account or in the entries made in the books of account. Therefore, we decline to interfere in the order of the CIT (A) vide which the impugned addition has been deleted.
8. In the result, the appeal filed by the Department is dismissed. .
9. The order pronounced in the open court on 15.01.2010.
Sd/- Sd/-
[A.K. GARODIA] [I.P. BANSAL]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 15.01.2010.
9 ITA No.3765/Del/2009
dk
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches