2025 (7) TMI 1222 - AT - Income Tax

Estimation of business income - non maintenance of stock register - rejection of books of accounts - HELD THAT - CIT(A) considering the decision of Tribunal in assessee s own case for AY 2013-14 2020 (8) TMI 7 - ITAT CHANDIGARH held that non maintenance of stock register could not be a ground for rejection of the books of accounts when no other defect was pointed out in the same. Therefore there was no question of estimation of profit and accordingly the impugned addition was deleted which has led to appeal by revenue before us. We fail to understand how the non-maintenance of stock register has affected the determination of true and correct profits of the assessee in the circumstance. The Revenue has found no other defect in the books of the assessee. All purchase and sale vouchers and other records have been found to be in order. The Revenue has not demonstrated before us as to how the non maintenance of stock register has been a hindrance in determining the true and correct profits earned by the assessee and also what was the infirmity in the method adopted by the assessee of physically verifying its stock at the end of the year. Therefore in our opinion the mere fact of non maintenance of stock register cannot be the basis for rejection of books of accounts. We set aside the order of the CIT(A) upholding the rejection of books of accounts of the assessee u/s 145(3). We further direct the AO to determine the value of stock after applying the correct method of valuation and thereafter determine the taxable profits earned by the assessee. For this limited purpose the issue is restored back to the AO who is directed to determine the value of stock after giving due opportunity of hearing to the assessee.

Summary

ISSUES:

Whether the books of accounts can be rejected under section 145(3) of the Income Tax Act solely on the ground of non-maintenance of stock register and incorrect stock valuation method'Whether estimation of income by applying a gross profit rate is justified when books of accounts are not rejected'Whether the Assessing Officer is required to apply the correct method of stock valuation before determining taxable income?

RULINGS / HOLDINGS:

The Court held that the power to reject books of accounts under section 145(3) is to be exercised only when the books are found "incorrect or incomplete for determining the true and correct profits." Non-maintenance of stock register alone, without other defects, is insufficient ground for rejection.The Court ruled that an incorrect method of stock valuation does not render the books unreliable or incomplete; instead, the correct accounting standard or valuation method should be applied by the Revenue to determine true profits.Since the books were not rejected, the estimation of income by applying a gross profit rate was unwarranted, making such additions unsustainable.The Court directed that the Assessing Officer must determine the value of stock by applying the correct method of valuation and thereafter compute taxable profits, giving the assessee an opportunity of hearing.Given the identical facts and a prior consequential order where the Assessing Officer accepted the assessee's stock valuation, the deletion of additions was upheld and the appeal by the Revenue dismissed.

RATIONALE:

The Court applied the statutory framework under section 145(3) of the Income Tax Act, emphasizing that rejection of books is a remedial power to ensure determination of "true and correct profits" and cannot be exercised arbitrarily.Precedent was relied upon wherein the Tribunal held that non-maintenance of stock register is not unusual for businesses dealing with numerous small items and does not affect the reliability of books if physical stock verification is consistently done.The Court distinguished between defects that render books unreliable and those that relate to non-compliance with accounting standards, holding that the latter should be corrected rather than used as a basis for rejection.The decision reflects a doctrinal position that estimation of income is a last resort and cannot be applied if books are accepted as reliable.No dissenting or concurring opinions were noted; the Court adhered to established principles ensuring fairness and accuracy in income determination.