TMI Blog2020 (8) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... or exercising the power of rejecting the books of the assessee. It is not unusual for businesses dealing in large number of small items and operating at a small or medium scale to do away with the maintenance of any stock register since it is not feasible maintaining movement of stock of every such item. Such businesses usually verify physically their stock at the end of the year and all wastages, pilferages and other losses therefore get automatically accounted for in the process, reflecting thus the true profits earned by the assesses. As assessee has been doing the same consistently, following the method of determining its stock at the end of the year by physically verifying the same and not maintaining any stock register since it was dealing in a large number of small items. 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. Therefore in our opinion the mere fact of non maintenance of stock register cannot be the basis for rejection of books of accounts. Method of valuation adopted for determining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s maintained by the assessee under section 145(3) of the Act and had thereafter proceeded to apply the Gross Profit Rate(GPR) of 18% to the turnover of the assessee for estimating the profit earned during the year .That the matter was carried in the appeal before the Ld. CIT(A) who upheld the rejection of books of account but at the same time reduced the estimation of GPR from 18% to 16%. 5. Aggrieved by the same the assessee has came up in appeal before us challenging both the act of rejection of books as well as estimation of gross profit raising the following effective grounds: 1. (a)That the Worthy Commissioner of Income Tax (Appeals) has erred in confirming the order of the Assessing Officer in rejecting the books of accounts as per para 3.2 of his order. (b) That the Worthy CIT(A) has erred in not considering the fact that assessee has maintained proper day to day books of accounts in the normal course of its business and same was also got audited by the Chartered Accountant and no specific discrepancy was found during the course of assessment or in appellate proceedings. (c) That the Worthy CIT(A) has erred in not considering that merely non maintenance of stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of stock is at cost or market value whichever is less and the method adopted by the assessee by applying the GPR for the year to the stock found did not confirm to the accepted modes of valuation. On the contrary the Ld. DR pointed out that the method adopted was only a means for maintaining its GPR from year to year. Ld. DR therefore pleaded that the books of accounts maintained by the assessee had been rightly rejected. He further pointed out that the fact of not maintaining stock record and the incorrect method of valuation adopted by the assessee had been confirmed by the statement recorded by the partner of the assessee firm and the employees during survey conducted at the premises of the assessee in 2015 wherein they had categorically confirmed the fact of not maintaining of stock register and also the fact that the GPR for the year was applied to determine the value of stock at the year end. Ld. DR contended that though this statement were not recorded in the impugned year, but still they were relevant for the purpose of the impugned year also, Since the assessee had not brought anything on record to the contrary. Ld. DR further contended that it did not matter that ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Still further, it has been held in the case of Hira Singh Co. v. CIT (HP) 230 ITR 791 that addition made on the basis of such admission by assessee is justified. From the said statements recorded the AO observed that the valuation is not based on any costing but is just to maintain a certain GP ratio and is arrived at by backward calculation from the GP of the previous year. Thus the value of stock shown by the appellant in the balance-sheet is not reliable. The statement of the manager of the company was also recorded for also stated that no details of stocks such as registers are maintained and that it is difficult to ascertain the method of valuation of stock. The same applies to statements recorded during survey operations also. Moreover, the survey may have been conducted subsequently but the contents of the said statements recorded are very much relevant for the year under consideration as it has not been shown with evidence as to how the state of affairs regarding valuation of stock are different in the year under consideration. It has not been shown that the valuation of stock has been done as per laid down accounting standards in the year under consideration as against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the method of accounting is regularly followed, the Assessing Officer can reject it since there is no estoppel in these matters and each year is a self contained unit. Every assessment year is independent and the Assessing Officer can rectify any error accepted in the earlier years. In income-tax proceedings, each assessment year is independent and the principle of res-judicata does not apply. The fact that the auditor in the audit report has certified that the valuation of stock is as provided by the partners shows that the method of valuation of stock adopted by the appellant is not as per the accounting standards. Merely because this fact was found during the survey operations pertaining to another assessment year, does not mean that the same has been borrowed in the year under consideration. It is equally relevant for the year under consideration. In para 28 of the audit report, the auditor has filled as 'NIL' the quantitative details of raw material and finished goods. Since the method of valuation of stock is not in order, reliance cannot be placed on the G.P of earlier years. Therefore, the appellant's plea that it is showing progressive trading results is not ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld good for the year under consideration. Further, the books of accounts have been rejected by pointing specific defects as discussed above and not merely due to the absence of stock register. Therefore, the case-laws relied upon by the AR to the effect that books of accounts cannot be rejected merely because of the absence of stock register, do not help the appellant's case, the facts being different in the instant case. Thus, in the absence of the quantitative details, the Assessing Officer was justified in not being satisfied about the fairness or correctness of the books of accounts of the appellant and the same were rightly rejected. 8. We have heard both the parties and have carefully gone through the orders of the authorities below. 9. We shall first take up the issue relating to rejection of books of accounts u/s 145(3) of the Act, whether it was as per law raised in Ground of appeal No. 1(a),(b),(c). Undeniably the power to reject books of accounts is to be exercised only when the books are found incorrect or incomplete for determining the true and correct profits earned by the assessee. This power is implied in the Income-tax Officers power to inquire into the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut is the method of valuation adopted for determining the value of the stock. Admittedly the assessee has been applying the Gross Profit Rate of the year to the stock for determining the value. We agree with the Revenue that this is not a correct method of valuation of stock which ideally should be valued at cost of market price whichever is less. But merely because of adoption of an incorrect method of valuation or merely on account of non compliance with the prescribed accounting standard, the books of accounts cannot be rejected. In fact in such cases the correct accounting standard or the correct method of accounting should be applied by the Revenue and the true and correct profits determined. Such defects, relating to method of valuation of stock, do not render the books of accounts unreliable, incorrect or incomplete, in which circumstances alone the Books of accounts can be rejected. On the contrary such defects can be cured and the taxable profits determined by applying the correct method of accounting/valuation. After all the entire exercise of assessment is aimed towards determining the correct taxable income of assesses and the power of rejecting books of accounts theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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