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2016 (4) TMI 997 - ITAT DELHI

2016 (4) TMI 997 - ITAT DELHI - TMI - Rejection of books of accounts - GP determination - Held that:- As in absence of any latent, patent and serious defect in the books of account of the assessee it cannot be rejected. Furthermore as per office note attached with the order of the AO it is noted that confirmation of sundry creditors has been obtained by issuing notice u/s 133(6) of the Income Tax Act. This shows that all third party enquiries also confirms proper booking of purchases and mainten .....

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is publication of the books and assessee submitted that it is not feasible for maintenance of regular stock account, this facts was not controverted by AO. Further merely non maintenance of stock register cannot be the basis of rejecting the books of accounts of the assessee when the complete details of purchases, sales and stock is available and on verification no defects are noticed. In view of the above facts, we do not any infirmity in the order of the ld.CIT (A) and confirm the deletion of .....

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0-11 and 2011-12 against the order dated 25 September 2014 passed by ld.CIT (A), Meerut deleting the addition made by AO rejecting the books of accounts and applying gross profit ration of 35 % to the turnover for both the years. Assessee has filed cross objections for AY 2010-11 which are mainly supportive in nature. 2. For AY 2010-11, Revenue has raised substantially two grounds which are against deletion of addition of ₹ 5,12,58,801/- made by the AO by adopting gross profit rate of 35% .....

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he books of account, which was examined by the AO. During the year, the assessee has turnover of ₹ 183669894/- and has shown gross profit of ₹ 13025661/- which is 7.09%. However, the assessee does not maintain stock register. During the assessment proceedings, the assessee was asked to produce the various bills and vouchers of various expenses and on verification of them it was found by the AO that vouchers of various expenses were self-made but contain the complete details of the pa .....

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eld that the rejection of the books of account and consequent estimation of profit is unsustainable. Therefore, revenue is in appeal before us. 5. Before us, the ld. DR vehemently supported the order of the AO and submitted that in absence of the stock register AO has rightly estimated the gross profit at 35%. 6. Against this the ld. AR submitted written submission along with paper book and also advanced oral arguments and submitted that the assessee has maintained regular books of account which .....

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ases, opening stock and closing stock was filed. With the details of purchase of papers, its valuation has also been provided to the AO vide letter dated 21st March 2013 and further comparative chart of sales and GP is also placed. He further drew our attention to various submission made before the AO vide Page 33 to 133 of the PB. In view of this, he submitted that ld.CIT (A) has rightly deleted the addition. 7. We have carefully considered the rival contentions. Ld. CIT(A) has deleted the addi .....

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ent proceedings as were the books of accounts. During the examination of the books of accounts, the AO required the assessee to furnish month wise stock register, opening and closing stock register, books of accounts etc. the assessee produced various documents/books but could not produce any stock register. The AO has stated that in the absence of the stock register, the quantitative and qualitative details of stock cannot be verified. It is also stated that sale and purchase registers were pro .....

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r various expenses were self-made containing incomplete details of the payee. Therefore, the genuineness of these vouchers could not be ascertained and consequently the genuineness of the books of accounts also could not be proved. The AO has then proceeded to reject the books of accounts and cited certain case laws. Having done so, the AO has adopted a gross profit rate of 35% instead of 7.09% declared by the assessee and applied this rate to the turnover of the assessee thereby making an addit .....

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plained that the GP rate of 7.09% compares favorably with the GP rate declared and accepted in the earlier year. The AO had never issued any notice under section 145 (3) and the books of accounts produced before the AO were neither shown as incorrect or incomplete nor the method of accounting adopted by the assessee was shown as not having been regularly followed by the assessee. Assessee had furnished details of opening stock and closing stock and also produced all invoices in support of the pu .....

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books of accounts. Moreover, even where books of accounts were found unreliable, the assessment cannot be made arbitrarily and in order that an assessment can be sustained, it must have nexus to the material on record. The order of the AO should be a speaking order and it must disclose the basis and the manner of computation of income. The AO is not entitled to make guess work and make an assessment without reference to any evidence or any material at all. The assessment for any particular year .....

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atute that an assessee carrying on business shall maintain a specified set of accounts. In the case of Advance Construction Company (275 ITR 30), the Gujarat High Court had held that the Department is bound to accept the method of accounting regularly employed by an assessee, except for a situation where the AO is able to demonstrate that income, profits and gains cannot be arrived at by the method employed by the assessee. In the case of McMillan and Co. (33 ITR 182), the Honorable Supreme Cour .....

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ther doubted the correctness or completeness of the accounts nor has concluded that the method of accounting was not regularly followed by the assessee. Even in the tax audit report, the auditors have confirmed that there was no change in the method of accounting by the assessee during the relevant assessment year. Reference has been made to clause 14 of the Guidance Note on Audit of Inventory issued by the ICAI in August 1994 which states that there are two principal methods of stocktaking, per .....

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ccepted by the Department year after year. The AO has not even discussed or made observation regarding the submissions made by the assessee for the increase in gross profits. The AO has not passed a speaking order inasmuch as there is no basis whatsoever for adopting a gross profit rate of 35% instead of the declared was profit rate. It is also reiterated that details of opening and closing stock were furnished. There is no finding recorded by the AO that the purchase or sale invoices are not ma .....

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ried on by the appellant, it was not physically possible to maintain a stock register. Even though no stock register was maintained in the earlier year, the trading results stand accepted by the AO as is evident from the comparative chart of trading results which was placed before the AO. It was also argued that that the appellant during this year had declared GP rates of 7.09% on much higher turnover as declared in the earlier years. Such GP rate favourably compares with the GP rate declared an .....

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ster in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where the absence of stock register, cash memo, etc is coupled with other factors like vouchers in support of expenses and purchases made not being forthcoming and the profit being low, 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 the case under consideration, no su .....

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the case of Ram Chand Singh Ramnik Lal (42 ITR 780) is concerned, in that case the decision was given against the assessee because the court held that, in view of the findings of the AO, CIT (A) and the Tribunal that the rejection of books of accounts in the absence of stock register was proper, no question of law arose. There is no finding that merely on account of the absence of stock register, the books of accounts can be rejected. Similarly, the facts of the case of Rainbow Metals (India) ( .....

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of low gross profit cannot justify rejection of books. It has been further held in Ravi Kumar Rawat Vs ITO (2011) 7 ITR (Trib) 539 (Jaipur) that accounts regularly kept cannot be rightly rejected specially when there is no short fall in gross profit but actually there has been increase during the year. Without any independent enquiry the rejection of accounts itself and the consequent addition was held unjustified. The issue related to estimate of income by way of best judgment in a case where .....

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ng to the accounting system regularly employed by the assessee as is required by section 145 of the Act. It was further held in CIT Vs Dr. A.P. Banal 2010 322 ITR 71 (Raj) that even where rejection of accounts was justified for defects in accounts, the estimate of income should be based upon some materials in support of same. Where there is none, such estimate cannot be upheld. 3.5 The AR has also referred to the order passed by the Ld. CIT(A), in the case of M/s Arihant Publication India Ltd. f .....

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n on the basis of stock register, has been regularly followed by the assessee and the accounts based on such system have been accepted in the scrutiny proceedings in earlier assessment years. The AO has not specified why he has departed from the principle which had been accepted by the earlier AO. Secondly, it is noted that apart from the non-maintenance of the stock register, the AO has not pointed out any other deficiency in the maintenance of books of accounts or the production of the relevan .....

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ourthly, the nature of business is extremely relevant for determining whether or not non-maintenance of stock register could prove fatal for the assessee. In the case under consideration, the assessee is engaged in publishing business. The multiplicity of specifications of raw material (paper) and the fact that the final product (publication) is valued mainly on account of its content and authorship (and not on the raw material used for printing of books), makes the maintenance of a regular stoc .....

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re allowed and consequently addition of ₹ 5,12,18,801/- is deleted. 8. The ld. DR could not point out any infirmity in the order of ld.CIT (A). Further, we are also of the view that in absence of any latent, patent and serious defect in the books of account of the assessee it cannot be rejected. Furthermore as per office note attached with the order of the AO it is noted that confirmation of sundry creditors has been obtained by issuing notice u/s 133(6) of the Income Tax Act. This shows t .....

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s 143(3) of the Act. Further, the nature of the business of the assessee is publication of the books and assessee submitted that it is not feasible for maintenance of regular stock account, this facts was not controverted by AO. Further merely non maintenance of stock register cannot be the basis of rejecting the books of accounts of the assessee when the complete details of purchases, sales and stock is available and on verification no defects are noticed. In view of the above facts, we do not .....

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