TMI Blog2004 (9) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. Commissioner of Income-tax (Appeals) confirmed the action for the reason that the appellant had not maintained day-to-day stock register and quantitative details of goods purchased and sold. Therefore, the trading results shown cannot be taken as verifiable and the provisions of section 145 are definitely applicable to the appellant's case. The increase in sales was not considered as a reason alone to explain the steep fall in the gross profit rate from 7.34% to 5.47% in the year under appeal. He, therefore, confirmed the action of the Assessing Officer. 4. Assessee's counsel contends that the details of stock have been maintained by the assessee in the ledger account itself. The same was produced before the Assessing Officer. The accounts of the assessee are duly audited. The return was accompanied by the auditors report. Complete quantitative details for opening stock, purchases, sales and closing stock with their valuation were also filed both along with the audit report as well as in the assessment proceedings. The purchases and sales are also fully vouched. The relevant stock account filed are duly verifiable with the quantitative details. The books of account produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further contends that the ld. Commissioner of Income-tax (Appeals) has already given a finding that the assessee has maintained the quantitative details monthly. No day-today account has been kept. No stock register was produced. Non-maintenance of production account can be a reason for rejecting the accounts of the assessee. Reliance has been placed on the decisions of Bastiram Narayandas Maheshri v. CIT [1994] 210 ITR 438 (Mum.), and Ratanlal Om Prakash v. CIT [1981] 132 ITR 640 (Ori.). It has been contended that absence of stock register is one of the factors for rejecting the accounts of the assessee. For this proposition, reliance has been placed on the following decisions: (1) S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579 (SC) (2) CIT v. Pareck Bros. [1987] 167 ITR 344 (Pat.). 7. In rejoinder, the assessee's counsel contends that the assessee is not a manufacturer. He is simply a trader. The two decisions of Bombay and Orissa High Courts do not apply to the facts of the case. Further more, the other two cases relied upon by the ld. Departmental Representative on non-maintenance of stock register are one of the factors for rejecting the accounts, but not the only an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be made applicable to the facts of the case before us. 8. In S.M. Namasivayam Chettiar the Tribunal was found to have held that the correct profits of the assessee could not be deduced from the books produced for several reasons. One of such reasons was that quantitative tally was not available and it was not possible to verify assessee's accounts. Non-maintenance of stock register, therefore, was held to be of great importance amongst other reasons for rejecting the accounts. However, in the case before us, complete quantitative tally is available. Even if the assessee has not maintained a stock register, that cannot be a reason alone to reject the accounts of the assessee as has been held in the case of Pandit Bros. v. CIT [1954] 26 ITR 159 (Punj.). It is only when quantitative tally is not there, provisions of section 145 can be invoked. Even the true profits could be deduced from the accounts maintained by the assessee. Therefore, the decision of the Apex Court relied upon by the ld. Departmental Representative cannot be said to be governing the issue at hand. 9. In the case of Pareck Bros, relied upon by the ld. Departmental Representative the assessee had not main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or may be deputed for the purpose. He relied upon the decision of Hon'ble Supreme Court in the case of Mehta Pareek Co. v. CIT [1956] 30 ITR 181. The Assessing Officer did not pay any heed to the request of the assessee. As regards the third credit in the name of Smt. Neha Joshi a similar request was made. It was, therefore, contended that under the circumstances no addition was warranted. 12. On the other hand, the ld. Departmental Representative contends that the assessee has not discharged the onus of proving its capacity and genuineness of the credits. He relied on the orders of the authorities below. It was further contended that the assessee has already been allowed telescoping and, therefore, there remains no separate addition for adjudication. The ground of the assessee, therefore, needs to be rejected. 13. Parties have been heard with reference to material on record and case laws relied upon by them. The assessee did not file any confirmation from the creditor Smt. Neha Joshi before any of the authorities below, nor before the Tribunal. It has also not stated its inability to procure confirmation from the said lady nor any circumstances thereto have been brought on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artly allowed. ITA No: 133/JP/2001 Per Shri Dinesh K. Agarwal, Judicial Member. - I have gone through the proposed order of ld. Accountant Member. I am unable to concur with the finding arrived at by him in holding that (Para 10): "10.... We, therefore, hold that the rejection of accounts made by the Assessing Officer and confirmed by the Id. Commissioner of Income-tax (Appeals) is without proper appreciation of the correct facts of the case and thus the ld. Commissioner of Income-tax (Appeals) has erred in upholding the action for rejection of the accounts as well as the estimation of income by estimating the sales and applying a gross profit rate of 6.5% which is found to be without any basis or material in his possession. We, therefore, direct the Assessing Officer to delete the trading addition of Rs. 6,14,616." I, after having discussion with my ld. brother, record my dissent and reasons for doing so are given in following paragraphs: 2. I have carefully considered the rival submissions of the parties and perused the material available on record. I find that in this case, the CIT(A) while upholding the rejection of books of account, found that the assessee has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated. If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in any year subsequent to the previous year, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted. (4) Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose, the major considerations governing the selection and application of accounting policies are the following namely:- (i) Prudence - Provisions shall be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information; (ii) Substance over form - The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form; (iii) Materiality - Financial statements should dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting policy is required by statute or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements by an assessee. (10) Any change in an accounting policy which has a material effect shall be disclosed. The impact of, and the adjustments resulting from such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in years subsequent to the previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted. (11) A change in an accounting estimate that has a material effect in the previous year shall be disclosed and quantified. Any change in an accounting estimate which is reasonably expected to have a material effect in year subsequent to the previous year shall also be disclosed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 1st April, 1996 and shall, accordingly, apply to the assessment year 1997-98, i.e., the assessment year under appeal. 4. Therefore, in brief, under the provisions of section 145, the Assessing Officer can reject the accounts and make a best judgment assessment under section 144 in any of the following three circumstances: (i) If the method of accounting adopted is neither pure cash nor pure mercantile, in other words, if a mixed method of accounting is adopted. (ii) If the accounting standards notified by the Central Government are not followed by the assessee. (iii) If the Assessing Officer is not satisfied about the correctness or completeness of accounts of the assessee. 5. Thus, from the above, it is crystal clear that the assessee has to follow the accounting standards as notified by the Central Government as mentioned above. In the case before us, no material was brought on record by the ld. A/R as to show that the assessee has followed the accounting standards as notified by the Central Government, which was his primary duty to follow the same as his income falls under the head 'Profits or gains of business or profession', more particular when the CIT(A) has spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent in the assessment year 1995-96. The Assessing Officer has estimated the sales at Rs. 5,70,00,000 and applied a gross profit rate at 6.5 per cent, which cannot be considered to be unreasonable in view of the various deficiencies as pointed out by the Assessing Officer and non-maintenance of accounts as per notified accounting standards and also the past records of the case. Under these circumstances, no interference is called for in the trading addition made by the Assessing Officer and confirmed by the CIT(A) and, accordingly, the ground taken by the assessee is rejected. 7. In ground No. 3, I fully agree with the findings recorded by the learned Accountant Member and, accordingly, the ground raised by the assessee is partly allowed, as mentioned in Paras 13 and 14 of the order passed by the learned Accountant Member. 8. In Ground No. 4, I fully agree with the finding arrived at by the learned Accountant Member and, accordingly, no interference is called for in the order of the CIT(A) on this account. 9. In the result, the appeal of the assessee stands partly allowed. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 As there is a difference of opinion be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Member Whether on the facts and in the circumstances of the case and also in law, it is justified to hold that "the ld. CIT(A) has erred in upholding the action for rejection of accounts as well as the estimation of income", when the ld. CIT(A), under his co-terminus powers, has specifically invoked the provisions of section 145(3) which is applicable with effect from 1-4-1996, relevant to assessment year 1997-98, the year under consideration and no material was provided by the assessee as to how the provisions of section 145(3) are not applicable? 2. The facts of the case briefly stated are that the assessee firm in the relevant period carried on business of sale and purchase of poultry feed on the wholesale basis. On total sale of Rs. 5,65,17,690.53 the firm showed profit at Rs. 30,90,303.96 giving G.P. rate of 5.74% as against 7.34% on sale of Rs. 3,81,54,883.98 shown in the immediately preceding year. The assessee was asked to explain fall in G.P. rate. The assessee rendered an explanation which was not accepted to by the Assessing Officer and an addition of Rs. 6,14,696 was made with the following observations:- "It was, however, explained that the main reason for fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ep fall in the gross profit from 7.34% in the assessment year 1996-97 to 5.47% in the assessment year 1997-98, in question. The Assessing Officer after taking into consideration the facts and material on record and all other relevant factors, estimated the sales at Rs. 5,70,00,000 and applied the G.P. rate at 6.5% which cannot be considered unreasonable or excessive. In my opinion, the Assessing Officer has been very reasonable in applying the G.P. rate at 6.5% only as against the G.P. shown at 7.34% in the assessment year 1996-97 and there is no scope for any relief to the appellant on this account. Taking into account the totality of facts and circumstances of the case as also the material on record, the trading addition of Rs. 6,14,696 is held reasonable and justified and the same is, accordingly, confirmed." It is to be noted from above that the learned CIT(A) applied provisions of section 145(3) of the Income-tax Act and rejected the accounts on the ground that quantitative details of goods purchased were not available. The month-wise quantitative details submitted by the assessee, were not admitted in evidence. 4. The assessee then carried the matter in appeal before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails were available in the ledger and were filed before the Assessing Officer. He held that the CIT(A) was not justified in confirming the order of the Assessing Officer. The learned AM distinguished the decision of Hon'ble Bombay High Court in the case of Bastiram Naraindas Maheshri as also that of Hon'ble Orissa High Court in the case of Ratanlal Omprakash wherein rejection of books for non-maintenance of production record was held to be justified. The learned AM pointed out that those were cases of manufacturers and not of traders. He relied upon the decision of Punjab Haryana High Court in the case of Pandit Bros. for the proposition that provision of section 145 could not be invoked for non-availability of quantitative tally. He reiterated that true profits of the assessee could be deduced from the accounts maintained by it. 7. In the light of facts found by him, he held that there was no case to reject books of account by invoking provisions of section 145(2) of the Income-tax Act or of section 145(3) as done by the learned CIT(A) without any cogent reason. He held that rejection of books of account by the revenue authorities was without proper appreciation of facts of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs were relied upon and supported by the parties. 10. After careful consideration of the relevant material in the light of submissions advanced before me, I am inclined to agree with the learned AM. The assessee is a dealer of poultry feed on wholesale basis. It submitted its return with the tax audit report. The auditors also filed quantitative details of opening stock, purchases, sales and the closing stock. A copy of above quantitative stock is available at page 85 of the Paper Book and is as under:- Opening stock 3517 Purchases 168088 -------- 171605 Less sales 166965 -------- Closing stock 4640 -------- The above quantity is reflected in bags. In fact the assessee has throughout claimed that it is making purchases of goods in bags and is selling the same in bags on wholesale basis. It neither buys nor sells less than a bag. In support of the claim photo copies of invoices have been made available. Photo copies of ledger account have also been placed on record. Having regard to fact that clear evidence of sale and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, was applicable in this case. He has merely observed that the accounts of the assessee could not be accepted and counsel for the assessee did not address as to how provisions of section 145(3) are not applicable to the case; the assertions not supported by facts on record. 12. On careful consideration of the relevant material, I reiterate that the observations made in the proposed order of the learned JM are not factually correct. As noted earlier, the assessee has recorded purchase and sale of each item in the ledger. The said ledger was admittedly produced before the Assessing Officer. From the said ledger the assessee's auditor prepared quantitative detail and the same was filed with the return. The above statement contains all necessary details of opening stock, purchases, sales and closing stock. When complete ledger account of purchases and sales is maintained, it cannot be said that accounts of the assessee is not subject to verification. Stock available with the assessee on any given date can be found out by making reference to the ledger account. Therefore, books of account in this case could not be rejected on the ground that they were not correct or incomplete or not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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