Validity of Rejection of books of accounts u/s 145
March 8, 20220 Comments
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Validity of Rejection of books of accounts u/s 145
Here is one interesting case on the rejection of the books of accounts of the assessee by the ITAT Ahedabad.
The citation of the case is as under:
PANCHSHIL EXIM PVT. LTD. VS DEPUTY COMMISSIONER OF INCOME TAX-(ITAT)
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-11, Ahmedabad dated 11/03/2015 (in short “Ld.CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) dt. 26/02/2014 relevant to the Assessment Year 2011-2012.
The assessee has raised the following grounds of appeal:
1.0 The grounds of appeal mentioned hereunder are without prejudice to one another.
2.0 The learned Commissioner of Income-tax (Appeals)-l 1 , Ahmedabad erred on facts as also in law in retaining addition of Rs.10,00,000/- out of the total addition of Rs.1,22,03,041/- made on account of alleged understatement of sales price. The action of Id. CIT(A) of retention is merely upon suspicion, conjectures & surmises and is unjustified on facts as also in law and therefore such retained addition deserves to be deleted and may kindly be deleted.
3.0 Your Honor’s appellant craves leave to add, amend, alter, or withdraw any or more grounds of appeal on or before the hearing of appeal.
2. The only issue raised by the assessee is that the learned CIT (A) erred in partly confirming the addition of ₹10 lakhs out of the total addition made by the AO at Rs. 1,22,03,041/- on account of understatement of the sale price.
3. Briefly stated facts are that the assessee in the present case is a private limited company and engaged in the business of import/export of petroleum and chemical products, heavy melting and the scrap, steam coal, barrel items, CR monitor and HR Coil. The assessee in the year under consideration has shown gross profit ratio at the rate of 1.47% of the turnover whereas the same was shown for the assessment year 2010-11 and 2009-10 at 2.42% and 5.94% of the turnover respectively. Thus the AO found that there is decline in the gross profit ratio declared by the assessee for the year under consideration.
3.1 The AO further found that the assessee has sold certain products at a price less than the cost of acquisition which resulted gross loss to the assessee. The AO during the assessment proceedings pointed out certain parties with the details of the products to whom the assessee has sold the goods at the price less than the cost of the purchase. Thus the AO was of the view that the assessee has suppressed sale price by showing sale of the goods at loss. Accordingly, the AO rejected the books of accounts under section 145(3) of the Act and worked out the amount of sale which was under invoiced at ₹ 1,22,03,041/- and added to the total income of the assessee.
4. Aggrieved assessee preferred an appeal to the learned CIT (A) who partly confirmed the order of the AO by observing as under:
The facts of the case, submission of the appellant, contents of the assessment order and the relevance of the facts and law of the decisions relied by the appellant have been carefully analyzed. As discussed above, the comparative gross profit in comparison to earlier years was in the lower side. The turnover was considerably increased during the relevant period. Therefore, after considering the facts and circumstances of the case and findings of the AO, in my considered opinion, it would be in the interest of justice to restrict disallowance to Rs.10 lakh. Thus, appeal on these grounds is partly allowed.
Being aggrieved by the order of the ld. CIT-A, the assessee is in appeal before us.
5. The ld. AR before us submitted that the ld. CIT-A has made the disallowance on ad-hoc basis without pointing out any defect in the books of accounts and any material showing the suppressed sale.
6. On the other hand, the ld. DR vehemently supported the order of the authorities below.
7. We have heard the rival contentions and gone through the facts and circumstances of the case, including the materials available on record. As per section 145 of the Act, the AO is empowered to reject the books of accounts of the assessee and make best judgment assessment in the manner as specified under section 144 of the Act if he is not inter-alia satisfied with the completeness or correctness of the books of accounts of the assessee. Generally, the instances for the rejection of books of account include when entries in respect of certain transactions are altogether omitted or incorrect or where the accounts show an abnormally low rate of profit or where there is an inherent lacuna in the system of accounting.
7.1 However, the AO cannot use this power as a tool to reject the books of accounts merely due to variation in gross profit. Anyway, before rejecting the books of accounts, the AO must record the specific reason for rejecting the books of accounts. Such satisfaction has to be established and substantiated based on facts and figures, which further depends on the circumstances of each case. Mere minor mistakes/typological errors/absence of stock registers/lower GP may not ipso facto amount to incorrectness/incompleteness of accounts in terms of section 145(3) of the Act. But the case would be different where the above-mentioned mistakes are coupled with other findings.
7.2 In the given case, AO has rejected the book results of the assessee based on the facts and figured that the assessee after purchasing the products has sold the same within short span at a price lower than the purchase cost. However, there are certain undisputed facts that the books of accounts were subject to audit under companies Act and under section 44AB of the Act under Income Tax Act. As per the assessee the goods were of poor/inferior quality, therefore the same were sold at a lower price. The ld. AR in support of his contention drew our attention on page 38 of the paper book.
7.3 Similarly, we also find that there was no allegation by the Revenue that the assessee by making the sale at a price lower than the cost of purchase has received some consideration without recording the same in the books of accounts.
7.4 The necessary details about the parties were available before the AO, but he has not conducted any enquiry from such parties to ascertain the fact that the assessee has sold the goods at a price lower than the purchase price. The AO has also not brought any comparable cases showing that the market price was more than the price at which assessee sold the goods.
7.5 Similarly, the decline in the GP rate and NP rate in comparison to the immediately preceding assessment year cannot be criteria to reject the books. It is because the assessee explained that it had reduced the sale price due inferior quality. This reason for fall in GP of the assessee was nowhere controverted by the authorities below. Lower gross profit as compared to earlier year cannot be the ground to reject the books of accounts. We take the support from the case of Malani Ramjivan Jagannath Vs Asstt. CIT reported 316 ITR 120 where it was held by Rajasthan High Court as detailed under:
The Tribunal committed basic error in not appreciating the reasoning given by the Commissioner (Appeals). It was trite to say that in the facts and circumstances of the instant case, account books were maintained as they were ordinarily maintained year after years and which were found to yield a fair result. Mere deviation in gross profit rate cannot be a ground for rejecting books of account and entering realm of estimate and guesswork. Lower gross profit rate shown in the books of account during current year and fall in gross profit rate was justified and also admitted by the Assessing Officer as well as Commissioner (Appeals) as well as the Tribunal. Therefore, fall in gross profit rate lost its significance.
Having accepted the reason for fall in gross profit rate, namely, stiff competition in market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated gross profit by rule of thumb merely for making certain additions was justified. Therefore, the findings arrived at by the Tribunal suffered from basic defect of not applying its mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except, what had been shown by the assessee in the books of account.
Therefore, the order of the Tribunal, was unsustainable. [Para 11]
7.6 We further note that the AO did not point out any defect in the stock statement, purchase and sales, bank statement furnished by the assessee. Therefore in our considered view, the books of accounts of the assessee cannot be rejected until and unless the AO point out the specific mistakes. A similar principle has been laid down by the Hon’ble Allahabad High Court in case of Awadhesh Pratap Singh Adbul Rehman & Bros v/s. CIT 201 ITR 404(All) which reads as;
“It is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be deduced. Whether presence or absence of stock register is material or not, would depend upon the type of the business. It is true that absence of stock register or cash memos in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where a stock register, cash memos, etc., coupled with other factors like vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, it may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee. In such a situation the authorities would be justified to reject the account books under section 145(3) and to make the assessment in the manner contemplated in these provisions.”
7.7 We also find support and guidance from the order of ITAT Bench in the case of Haridas Parikh Vs. ITO reported in 113 TTJ 274 wherein it was held as under:
Unless the Assessing Officer 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 were being dealt with by the assessee and the maintenance of quantitative stock of each and every item was not practically possible, the books of account maintained by the assessee which were free from any defect could not 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 had increased substantially from Rs. 1.24 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 could not 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 total sales of the assessee had increased from Rs. 1.24 crores to Rs. 1.54 crores. No defect was found in the books of account. There was 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 Assessing Officer of making trading addition was that in the assessment year 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 Commissioner (Appeals), therefore, by following the order of the earlier year the Assessing Officer had made an addition by rejecting the GP rate of 9.64 per cent declared during the year under consideration. The assessee placed on record the order of the Tribunal in the assessee’s own case in the assessment year 2001-02 wherein addition made by the Assessing Officer 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 were the same, the issue was squarely covered by the order of the Tribunal in the preceding year. Respectfully following the same,the findings and conclusion of the lower authorities were to be rejected and the Assessing Officer was to be directed to delete the impugned trading addition made by him.
7.8 Furthermore, the learned CIT (A) has confirmed the addition of ₹10 lakhs on ad hoc basis without pointing out any specific material. In our considered view such adhoc disallowance is not permissible. As such the learned CIT (A) has given a contrary finding by accepting the books of accounts on the one hand and making adhoc addition on the other hand. Accordingly, in the backdrop of the aforesaid discussion and precedent, we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
8. In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 17/03/2020 at Ahmedabad.