2007 (4) TMI 392 - AT - Income Tax

Method of accounting - rejection of books of account assessee has not maintained stock register - printing of lottery ticket - consumption of raw-material during the year could not be verified - estimated the GP at 37.05 per cent as against GP of 35.05 per cent - HELD THAT - Assessee was engaged in printing of lottery ticket, and was not undertaking any manufacturing or production process where numerous raw materials are used in the process and quantitative records regarding various raw materials consumed in the manufacturing process is required to be kept to ascertain the correct cost of production and resultant G.P. thereon. The only raw material used by the assessee was paper, the quantity of paper purchase was duly verifiable from the purchase bills, the quantity of paper used was duly verifiable from the sale of lottery ticket, thus the resultant quantity was the closing stock. In all the preceding years also the assessee was not maintaining any such records. The contention of the ld. AR that unless there are change in the facts and circumstances, the department should not take contrary view, is supported by the decision in the case of Radhasoawmi Satsang v. CIT 1991 (11) TMI 2 - SUPREME COURT , wherein Hon ble Supreme Court held that if there is no change in the facts, different conclusion is not warranted. Even though doctrine of res judicata does not apply to the proceedings under the Income-tax Act, at the very same time it is clear that unless there is a change of circumstances, the authorities will not depart from their previous decisions at their sweet will in the absence of material circumstances or reasons for such departure. Thus the rule of consistency which applies to the income-tax proceedings has to be followed. The department has completed the assessment under scrutiny process and the non-maintenance of the stock register was never the made ground for rejecting the books of account or estimating the G.P. at rate higher than the rate declared by the assessee. Thus, we do not find any merit in the action of the lower authorities in rejecting the book results merely because the assessee has not maintained stock register, without pointing out any specific defect in the books of account, of any nature whatsoever, as discussed. Disallowance of motor-car, conveyance and travelling expenses - HELD THAT - We found that on an ad hoc basis, the Assessing Officer has disallowed 1/5th of the total expenses incurred both at Delhi and Bangalore, on the plea that no log book or register was maintained to justify that car was entirely use for business. We found that partners of the assessee firm was residing at Delhi, therefore, if any disallowance is to be made for non-business purposes and on account of personal use by the partners, the same is required to be confined to the expenses incurred at Delhi Unit. We, therefore, direct the Assessing Officer to restrict the disallowance to the extent of 1/5th, with respect to the expenses incurred on Delhi Unit. As the partners were not residing at Bangalore, no disallowance on account of personal use by the partners are warranted in respect of expenditure booked at Bangalore Unit. We direct accordingly. In the result, the appeal of the assessee is partly allowed in terms as indicated hereinabove.

Issues Involved:
1. Addition on account of job work receipts due to non-maintenance of stock register.
2. Reduction of disallowance of telephone expenses.
3. Addition on account of car and conveyance expenses due to non-maintenance of log book.
4. Reduction of addition on account of machinery repairs.

Issue-wise Detailed Analysis:

1. Addition on Account of Job Work Receipts:
The Assessing Officer (AO) added Rs. 4,65,430 to the assessee's income due to non-maintenance of a stock register, which prevented verification of raw material consumption and closing stock. The AO invoked section 145(1) of the Income-tax Act, 1961, estimating the gross profit (g.p.) at 37.05% against the declared 35.05%. The CIT (Appeals) confirmed this addition. The assessee argued that no defects were pointed out in the audited books, and the g.p. rates in previous years were accepted despite the absence of a stock register. The Tribunal noted that the AO failed to indicate any specific defects in the books or the method of accounting. Citing precedents, the Tribunal emphasized that books should not be rejected lightly and found no justification for the AO's action. Therefore, the Tribunal did not find merit in the lower authorities' rejection of the book results based solely on the non-maintenance of a stock register.

2. Reduction of Disallowance of Telephone Expenses:
The CIT (Appeals) reduced the disallowance of telephone expenses to Rs. 14,000, considering the possibility of personal use by the partners. The Tribunal upheld this decision, acknowledging the potential for personal use and finding no reason to interfere with the CIT (Appeals)'s order.

3. Addition on Account of Car and Conveyance Expenses:
The AO disallowed 1/5th of the total motor-car, conveyance, and traveling expenses due to the absence of a log book. The Tribunal noted that the partners resided in Delhi, justifying a disallowance for personal use. It directed the AO to restrict the disallowance to 1/5th of the expenses incurred at the Delhi unit (Rs. 2,40,417) and found no basis for disallowance for the Bangalore unit, where the partners did not reside.

4. Reduction of Addition on Account of Machinery Repairs:
The CIT (Appeals) confirmed an addition of Rs. 26,680 for machinery repairs due to unverifiable cash expenses. The Tribunal upheld this decision, finding no reason to interfere as part of the expenses remained unverifiable.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to adjust the disallowance of motor-car expenses as specified and upheld the CIT (Appeals)'s decisions on telephone expenses and machinery repairs. The addition based on non-maintenance of the stock register was deemed unjustified without specific defects in the books.

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