2015 (9) TMI 502 - HC - Income Tax

Rejection of books of account merely for absence of stock register - non-fulfillment of ingredients u/s 145(3) - Held that - No substance in the argument raised by the learned counsel. AO passed the assessment order under Section 143(3) of the Act by applying GP rate of 10% on gross sales of 11.74 crores after rejecting the books of account under Section 145(3) of the Act on the ground that no stock register was maintained by the assessee and, thus, made an addition of 41,09,728/-to the total returned income. The CIT(A) held that the figure of closing stock declared by the assessee in the profit and loss account was not verifiable in the absence of stock register and so the GP rate was not verifiable and accordingly restricted the GP rate to 9% and upheld the rejection of books of account. The Tribunal while upholding the orders of the Assessing Officer as well as the CIT(A) qua rejection of books of account, estimated the GP rate at 8% instead of 9% as ordered by the CIT(A). The assessee was trading in the items of well established companies and is also a wholesaler C&F agent. In order to check veracity of the gross profit disclosed by the assessee, maintenance of stock register by the assessee was essential. The Assessing Officer had compared the gross profit rate of the assessee viz-a-viz other similar concerns. No satisfactory explanation had been furnished by the assessee for not maintaining the stock register. The rejection of books of account of the assessee by the Assessing Officer was, thus, justified. - Decided against assessee.

Summary

Issues:
- Appeal under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal regarding rejection of books of account and application of GP rate.

Analysis:
1. The appellant filed an appeal under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal, which upheld the rejection of books of account and directed the application of a GP rate of 8% instead of 9% for the assessment year 2009-10. The main issue was whether the rejection of books of account solely for the absence of a stock register was justified under Section 145(3) of the Act, despite no other defects in sale, purchase, and accounts. The appellant contended that the rejection was unwarranted, citing precedents where non-production of a stock register alone was deemed insufficient to invoke Section 145(3) of the Act.

2. The Assessing Officer initially framed the assessment at 55,14,510/- by adding 41,09,728/- due to the rejection of books of account under Section 145(3) of the Act for lack of a stock register. The Commissioner of Income Tax (Appeals) partly allowed the appeal, restricting the GP rate to 9% but upheld the rejection of books. The Tribunal, in its order, maintained the rejection of books and directed the application of an 8% GP rate. The appellant, dissatisfied with the decision, appealed to the High Court.

3. The High Court, after considering the arguments and precedents cited by the appellant, upheld the decisions of the lower authorities. It was noted that the maintenance of a stock register was crucial for verifying the gross profit, especially for a wholesaler C&F agent like the appellant. The rejection of books of account was deemed justified based on the failure to maintain a stock register, as it hindered the verification of the closing stock and the accurate calculation of the GP rate.

4. The Tribunal concurred with the Assessing Officer's and CIT(A)'s findings, emphasizing the importance of maintaining a stock register for a business dealing with established companies as a wholesaler C&F agent. The Tribunal justified the rejection of books of account due to the inability to verify the gross profit without a stock register. Despite the appellant's reliance on certain judgments, the Court found no merit in the appeal and dismissed it, concluding that no substantial question of law arose from the case.

In conclusion, the High Court dismissed the appeal, affirming the rejection of books of account and the application of an 8% GP rate instead of 9%. The judgment emphasized the significance of maintaining accurate records, particularly a stock register, for businesses to ensure the verifiability of financial transactions and profit calculations.