TMI Blog2021 (3) TMI 929X X X X Extracts X X X X X X X X Extracts X X X X ..... at different stages of production was also not maintained. Non maintenance of records of quantitative details renders the accounts of assessee incomplete. Preparation of the Inventory at the end of year but not keeping it on record and not producing such Inventory for scrutiny can only lead to the inference that accounts are not correct. Quantitative tally of items traded and manufactured by assessee is not only possible but also the requirement of proper accounting system.Adoption of different standards for receipts and production in stock, accounts can justify rejection of accounts. If the stock received are shown in the books by one standard and goods produced from those stocks are shown by another standard it is quite clear that profits cannot be correctly deduced. In such cases the A.O. would be justified in rejecting the method and in estimating the income. The assessee failed to file any evidence against the defect pointed out by the A.O. By following the order of the Coordinate Bench, the ld. CIT(A) has adopt the average Gross profit rate of 5 year which comes to 12.86% (17.2% + 12.03% + 8.52% + 12.96% + 13.58%). Hence the ld. CIT(A) restricted the Gross profit rate @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent appeal before the ITAT on the grounds mentioned above. 5. The assessee has raised sole effective ground of appeal which is against the order of the ld. CIT(A) in estimating G.P. rate @ 12.86% on the basis of five years average assessed gross profit rate and sustained GP addition of ₹ 20,43,900/-. The ld AR appearing on behalf of the assessee has reiterated the same arguments as were raised before the ld. CIT(A) and also relied on the written submissions filed before the Bench and the same is reproduced below: 1.1 Ld. Ld. AO. wrongly sustained the rejection of Books of u/s 145(3) merely pointing out that assessee is not maintaining quantitative tally of finished goods and some observation of auditor regarding valuation of inventory, however those issues were no bearing on the GP of the assessee and assessee also provided opening and closing stock in term of value only and rejection of books of accounts not dealt giving cogent reasons. 1.2 It is also accepted fact mentioned in the assessment order at Page no. 3 that as this is a case of exporter and more than 90% sales are in foreign market, stock tally of these goods is not much relevant. The purchases and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act? So facts of this case totally different and this case is irrelevant in the case of assessee. 1.6 In the para 3.4 of the AO order at page no. 5 the Ld. AO has himself accepted in order however, it remains a fact that the assessee has successfully achieved a substantial turnover despite severe competition and adverse market condition which could not have been possible unless margins were lowered . so only on this ground even if the books are rejected on stock register issue , no GP addition can be made. 1.7 In the para 3.5 of the AO order at page no. 6 the case laws mentioned by the AO are rather in the favour of the assessee as assessee has major exports all books of accounts are maintained all expenses were properly booked books are made consistently in the same way consistently closing stock of any year is opening stock of next year so there is no tax effect so increase in stock is a tax neutral exercise. 1.8 Para 3.5 of page no. 6 of AO order is rebutted because in this para AO is giving example of A.Y. 2007-08 A.Y. 2008-09 where the G.P. of A.Y. 2005-06 17.20% was adopted in these years. It is factual correct that from AY 2005-06 to AY 2013-14 there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 G.P% (as declared) 13.85 14.11 12.03 8.48 12.96 13.19 G.P. (as affirmed as applicable) 17.20 17.20 12.03 8.52 12.96 13.58 In light of above, the average G.P rate of last 5 years as finally affirmed comes to 13.58%.A0 is accordingly directed to apply the G.P. rate of 13.58% as against G.P rate of 13.19% declared by the assessee. The respective grounds of appeal are accordingly disposed off So as per assessee declared average G.P rate of last 5 years comes to 12.15 % is calculation is as follows. This GP rate is near to actual GP of 11.75 % so this genuine GP rate must be accepted. We are enclosing copy of audited Trading and Profit Loss account for relevant years vide PB No.106-112. A Y 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese are the main reasons of decrease of G.P. from 17.20% to 11.75% which is based on actual facts and figures. Hence declared GP must be accepted. 1.14 Your goodself is also requested to see the concluding part of assessment order of same assesse u/s 143(3) of A.Y 2010-11 vide PB no. 71-72 where the assesse declared GP at the rate of 8.48 % against the G.P of 12.03 % in the immediate preceding year A.Y 2011-12 and Ld AO made only lumsum trading addition of ₹ 1.00,000/- and G.P. remained unchanged at 8.48% . So your honor is requested to accept the genuine G.P. of 11.75% against 12.86% accepted by CIT(A) . There was also very stiff competition from various local exporters as many our type of manufacturers have been crop up during these years who were operating at very low margin to establish their market. Due to this reason Assessee's Gross Profit was dipped during the year under consideration. 1.15 Honorable ITAT as already decided in the case of Shri Mukesh Kumar Jain Vs ITO Tonk ITA No. 1023/JP/2011 and Shri Padam Chand Jain Vs ITO Tonk 1TA No. 1024/JP/2011 (ITAT Online) enclosed vide PB No. 73-81 it was held that As regards the addition made on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied by Ld. A.O. just on the basis of 8 year old G.P. ignoring own assessment of A.Y. 2010-11 and pointing out non maintenance of stock register. The fact is the assessee has made valuation of closing stock by verifying the items physically. In the year end a note on details of inventory/closing stock had been prepared by the supervisors with the help of labours. They have been doing valuation of each and every article, products, furnished/semi furnished/ finished goods in packing/goods in process/goods lying in open grounds, stocked or at saw-mills, woods in paya, gattu, beems and planks, consumable stocks of all working sites of Ramgarh. The factory staff labour count the goods and then the proprietor with the help of supervisors cross-examines it and properly value the Closing Stock. In the nature of such kind of artistic business, where each item has different quality, different shape, different look, different value different dimension, it is not possible to maintain stock register for each raw material . That's why the assessee has physically verified inventory and made valuation of inventory. 1.18 In-spite of above submission, the Ld A.O. has made an opinion on thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .000/- was made. The extract of assessment order of AY 2010-11 is as follows:- Reason of low GP rate: The reason of low G.P. rate is sudden increase in cost of raw material during the relevant period. The assessee offered low rates of its goods to the purchasers to compete with the existing exporters. Further to capture the market, the assessee had to work at more competitive rates. Furthermore, the assessee faced more competition in his business from other competitors during the relevant period. Here, it is pertinent to note that in the present case, orders from foreign buyers are received in advanced and sales price is determined and settled at that time. As requested in my earlier written reply, goods are then manufactured as per specifications of the importers. During this gap of time, some time, cost of raw material is increased and sometime rate of Indian currency is valued down. This result in low gross profit. During the relevant period, the cost of the assessee has also increased because of increase in transportation, cost of raw material, cost of power and increase in wages due to inflation. There is a tough competition in assessee's business and to achieve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of exporter and more than 90% sales are in foreign market, stock tally of these goods is not much relevant. The purchases and sales are completely vouched and looking to the nature of the business, it is very difficult for the assessee to affect the sales without bills. Under such circumstances, the figures of raw materials, finished goods, polishing materials, and packing materials shown in regular books of accounts may kindly be accepted. We are submitting some case laws which are highlighted here to further supports that AO cannot resort to provisions of the section 145(3) of the IT Act,1961, in case of non maintenance of stock register and other issues as already decided in many cases but G.P. addition can not be made, such as : A. CIT Vs Gotan Lime Khaniz Udhyog (2002) 256 ITR 243 (Rajasthan High Court). The assessee had maintained regular books of account, which are supported by regular bills and vouchers, and no defect or discrepancy had been observed by the learned assessing officer in the records so maintained. The sales are also export where payments are fully verifiable and through banking channels. Unless the regular books are found to be not acceptable, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Commissioner (Appeals) was perfectly justified. The learned Commissioner (Appeals) has considered the nature of business activity, market conditions, quality of raw material used, and the fact that the assessing officer laid no material on record to suggest that there has been any suppression of income nor that the assessee carried any activity outside the books. Hence in the light of above all cases, it is not justifiable to reject the books of accounts on the ground of non maintenance of day to day Closing Stock Register and no G.P. rate can be applied arbitrarily without any basis. There was also very stiff competition from various local exporters as many our type of manufacturers have been crop up during these years who were operating at very low margin to establish their market. Due to this reason our sales was dipped during the year under consideration. In-spite of agreed with the above facts and submission, the learned assessing officer has made an opinion on this mere ground that itemwise stock register are not available with the assessee and it is not possible to verify the trading results and apply the provisions of section 145. Section 145 of the Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve perused the material placed on record. We have also deliberated upon the decisions cited in the orders passed by the authorities below as well as cited before us and we have also gone through the orders passed by the revenue authorities. From perusal of the record, we observe that the ld. CIT(A) has dealt with the issue in para 4.3 of his order and the same is reproduced below: 4.3 I have carefully considered the material before me. I find that Assessee deals in purchase/manufacture and sale of furniture handicraft items. Clause 28 of the form No. 3CD of the audit report requires quantitative; details of items traded and also of items manufactured. Shortage in the manufacturing process and percentage of yield in the manufacturing process are required to be given. Quantitative tally of traded items and finished products is also required to be given. However no such details are given. Auditor's remarks against these clauses is details not maintained. Vide notice u/s 142(1) dated 27/07/2015 alongwith detailed questionnaire, the assessee was asked to file complete details of opening stock closing stock alongwith the valuation method adopted to arrive such opening and clos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeping it on record and not producing such Inventory for scrutiny can only lead to the inference that accounts are not correct. Quantitative tally of items traded and manufactured by assessee is not only possible but also the requirement of proper accounting system. Today when books are maintained on computer and advanced software like tally are available and used, maintenance of quantitative details is very easy and convenient. Assessee's failure to provide the quantitative details is thus deliberate. Assessee is not maintaining day to day stock register. He has not maintained inventory of closing stock. Assessee deals in manufacture/trading of wooden furniture items. Purchases of wood are in volume i.e. cft / m cube measurement but sales are in nos. of various items. Adoption of different standards for receipts and production in stock, accounts can justify rejection of accounts:- If the stock received are shown in the books by one standard and goods produced from those stocks are shown by another standard it is quite clear that profits cannot be correctly deduced. In such cases the assessing officer would be justified in rejecting the method and in estimating the income- Howr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding estimation of G.P. rate, wherein the books of accounts are rejected, a fair estimate is required to be made by the Assessing Officer. The principle of average taking into consideration last 5 years past history is clearly a robust and fair basis of estimation to determine the gross profits for the year under consideration. Therefore following the decision of the Hon'ble ITAT in the appellant own case and considering the above observation I adopt the average Gross profit rate of 5year which comes to 12.86% (17.2% + 12.03% + 8.52% + 12.96% + 13.58%). Hence I apply the Gross profit rate @12.86% instead the Assessing officer apply 17.02%. Thus the Gross profit comes to ₹ 2,37,75,945/-. The appellant shown Gross profit of ₹ 2,17,32,045/-. The addition comes of ₹ 20,43,900/-. The Assessing officer made the addition of ₹ 1,00,67,820/-. I confirm addition of ₹ 20,43,900/- and balance amount of ₹ 80,23,920/- is deleted. This ground is partly allowed. 8. Having considered the rival contentions and from perusal of the record, we observe that the assessee deals in purchase/manufacture and sale of furniture handicraft items. Clause 28 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not maintained inventory of closing stock. Assessee deals in manufacture/trading of wooden furniture items. Purchases of wood are in volume i.e. cft/m cube measurement but sales are in numbers of various items. Adoption of different standards for receipts and production in stock, accounts can justify rejection of accounts. If the stock received are shown in the books by one standard and goods produced from those stocks are shown by another standard it is quite clear that profits cannot be correctly deduced. In such cases the A.O. would be justified in rejecting the method and in estimating the income. The assessee failed to file any evidence against the defect pointed out by the A.O.. 9. The ld. DR has drawn our attention towards the decision of the Coordinate bench of this Tribunal in assessee s own case for the A.Y. 2012-13 wherein the Coordinate Bench has held as under: 9 We have heard the rival contentions and perused the material available on record. In view of the specific observations of the auditors in terms of inconsistency in maintaining the books of account and not following the well accepted accounting principles and the Coordinate Bench decision in assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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