2025 (6) TMI 1950 - AT - Income Tax

Rejecting the books of accounts u/s 145(3) - non-maintenance of stock register leads to rejection of books - determination of nature of business - AO noted that the assessee had shown low GP rate as compared to the last two years - HELD THAT - It is to be noted that the nature of the business of the assessee is of construction and maintenances of roads rail bridges tunnels ports habour runways etc. The raw-material consumed in such project is bricks stones sand and other construction material. The project is carried out in many places and in such type of nature of business it is very difficult to maintain day-to-day stock register of the raw-material. The books of accounts of the assessee have been audited and the audit report duly furnished along with return of income. The AO did not point out any defect in the said audit report. Low GP rate for the year under consideration - The case of the assessee is not of trader of movable stock rather the assessee is in the business of construction of infra projects on contract basis. It is not a case of undisclosed sales whereby the assessee can be doubted of showing the GP rate by making out of books sales. The receipts of the assessee as explained and mostly from the Government Authorities and have been routed through the bank channels and the TDS duly deducted on the expenditure. AO has not pointed any defect or infirmity in the books of accounts of the assessee nor about the sales and expenditure recorded by the assessee. Merely because the GP rate for the under consideration is low as compared to the earlier years that itself cannot be the ground to reject the books of accounts. The reliance in this respect can be placed on the decision of Smt.Poonam Rani 2010 (5) TMI 57 - DELHI HIGH COURT as held that in the absence of any finding that the assessee has inflated the cost of raw-material or the cost of processing or that he has made out of books sales of finished goods and suppressed sales the AO could not have increased GP rate merely because it was low as compared to the GP rate of the preceding year. Identical view has been taken in the case of Asian Granito India Ltd. 2019 (10) TMI 1193 - ITAT AHMEDABAD wherein as held that the books of accounts cannot be rejected if the assessee does not maintain stock register unless and until it was coupled with other defects such as sales and purchase out-of-the books of accounts. Assessee appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the rejection of the assessee's books of accounts under section 145(3) of the Income Tax Act, 1961, solely on the ground of non-maintenance of a day-to-day stock register, is justified in the facts and circumstances of the case.

2. Whether the books of accounts can be rejected without pointing out any specific defect in their maintenance or recording of transactions.

3. Whether the addition made by the Assessing Officer (AO) on account of a lower gross profit (GP) rate, by applying an average GP rate from previous years, is sustainable.

4. Whether the application of a uniform GP rate ignoring the assessee's individual expenditure heads, such as machinery hiring and transportation costs, is correct.

Issue 1 and 2: Validity of rejection of books of accounts under section 145(3) on ground of non-maintenance of day-to-day stock register and absence of any pointed defect

The relevant legal framework includes section 145(3) of the Income Tax Act, which empowers the AO to reject the books of accounts if they are not maintained in accordance with the provisions of the Act or if they do not disclose the true income. The AO's power to reject books is subject to the books being found defective or unreliable.

Precedents relied upon include the decision of the Hon'ble Delhi High Court in CIT Vs. Smt. Poonam Rani, which held that mere non-maintenance of a day-to-day stock register is not a ground for rejecting books of accounts in the absence of any finding of inflated costs, undisclosed sales, or concealment of income. The Court further observed that there is no statutory mandate for maintaining a daily stock register, and its absence alone cannot lead to inference of defective accounts.

Coordinate Benches of the ITAT Ahmedabad and Jodhpur have consistently held that rejection of books on the sole ground of non-maintenance of stock register is not justified unless coupled with other defects such as out-of-books sales or purchases.

The Tribunal noted that the assessee is engaged in construction and infrastructure projects where raw materials such as bricks, stones, and sand are consumed at multiple sites, making maintenance of a day-to-day stock register practically difficult. The assessee had furnished audited books of accounts, including cash book, bank book, ledgers, journals, sales and purchase registers, and supporting vouchers. No defect was found in these records by the AO or the CIT(A). The receipts were routed through banking channels and mostly from government authorities, with expenditure subjected to TDS and payments made through banking channels.

The AO's rejection of books was based solely on the absence of a day-to-day stock register and the observation of a lower GP rate compared to earlier years, without any specific defect pointed out in the books or evidence of concealment or manipulation.

The Tribunal held that such rejection was not justified, relying on the cited case laws and the facts that the assessee's books were audited and no infirmity was found in the accounts or transactions. The nature of the business and the practical difficulties in maintaining daily stock records were also considered.

Issue 3 and 4: Sustainability of addition on account of lower GP rate and application of average GP rate ignoring individual expenditure heads

The AO observed that the GP rate declared by the assessee for the year under consideration was significantly lower than in the preceding two years. On this basis, and due to non-maintenance of stock register, the AO rejected the books and applied an average GP rate of 5.69% (average of last three years) to estimate income, resulting in an addition of Rs. 3,59,72,920/-.

The assessee explained that the lower GP rate was due to the nature of the joint venture, with only two projects under execution during the year and increased expenses related to machinery hiring, vehicle, and transportation costs. The assessee furnished detailed accounts and demonstrated that the net profit (NP) rate had actually increased compared to earlier years, despite the lower GP rate.

The Tribunal examined the turnover, GP, and NP rates for assessment years 2016-17, 2017-18, and 2018-19. It was noted that although the GP rate declined in 2018-19 to 2.04%, the NP rate increased to 1.44%, higher than in the previous years. This indicated that the lower GP rate did not translate into lower profitability, supporting the assessee's explanation of increased expenditure impacting GP but not net profitability.

The Tribunal emphasized that the assessee's business is contract-based construction and not trading of movable stock, and there was no evidence of undisclosed sales or inflated costs. The receipts were mostly from government authorities via banking channels, and expenditures were subjected to TDS and proper accounting.

The application of a uniform average GP rate by the AO, ignoring the assessee's detailed expenditure heads, was found to be arbitrary and unjustified. The Tribunal relied on the principle that mere variation in GP rate compared to earlier years is not sufficient ground for rejecting books or making additions, absent any other defect or concealment.

Conclusions and Significant Holdings

The Tribunal concluded that:

"Merely because the GP rate for the year under consideration is low as compared to the earlier years, that itself, cannot be the ground to reject the books of accounts."

"There is no statutory provision requiring the assessee to maintain daily stock register, and that, maintenance of day-to-day stock ledger, in itself, does not lead to inference that the accounts of the assessee is defective or the assessee had concealed its income."

"The books of accounts cannot be rejected if the assessee does not maintain stock register unless and until, it was coupled with other defects, such as, sales and purchase out-of-the books of accounts."

The Tribunal held that the AO's rejection of the books of accounts solely on the ground of non-maintenance of day-to-day stock register and the consequent addition based on an average GP rate was not sustainable. The assessee's explanation regarding the nature of business, the difficulties in maintaining stock register, the increase in expenditure impacting GP rate, and the audited accounts supported by vouchers and banking transactions, were accepted.

The addition of Rs. 3,59,72,920/- was ordered to be deleted, and the appeal was allowed.