2020 (7) TMI 213 - AT - Income Tax

Rejection of books of accounts u/s 145(3) - trading addition - assessee is a liquor contractor and doing the business at a very remote area - HELD THAT - Assessee was asked to submit his books of accounts and he has admitted to have not maintained any day to day stock register, sales vouchers, expenses vouchers and as a result, the AO has held that the sales and other expenses are not verifiable and the books of accounts maintained by the assessee were held not reliable and were rejected by the Assessing Officer by invoking the provisions of section 145(3) of the Act. Nothing has been brought on record which substantiate the price at which the sales has been made during the year, what price the individual goods have been purchased, their MRP and actual sale price. Further, maintenance of stock register is essential not just for determining the opening and closing stock but for establishing the necessary linkage with the goods purchased and sold during the year. The assessee may plead for non-maintenance of sale bills being involved in retail sale of liquor however, at the same time, the assessee cannot plead non-maintenance of stock register. Being the first year of operation cannot be a ground for non-maintenance of proper books of accounts. Therefore, in the entirety of facts and circumstances of the case, we uphold the rejection of books of accounts under section 145(3) of the Act and the ground of appeal so taken is rejected. Once the books of accounts are rejected, the AO is required to estimate the gross profit in the hands of the assessee and for the purposes, the prior history of the assessee in his own case or contemporaneous third party data has been held as a reliable basis for estimation of profits. In the instant case, this being the first year of operation, one has to consider the comparable third party data of assessee engaged in similar line of business pertaining to year under consideration. In absence of any contemporaneous data available on record, we decline to interfere in the findings of the ld CIT(A) where he has already reduced the trading addition to ₹ 2,59,620/- from ₹ 5,18,728/- made by the AO and the fact that the Revenue is not in appeal against the said findings and the ld DR has supported the said findings. Assessee appeal is dismissed.

Summary

Issues:
1. Rejection of books of accounts under section 145(3) of the Income Tax Act.
2. Challenge to the sustenance of trading addition by the CIT(A).

Issue 1: Rejection of books of accounts under section 145(3) of the Income Tax Act:
The appellant, a liquor contractor, challenged the rejection of books of accounts under section 145(3) of the Act. The appellant contended that despite being new to the business and lacking formal education in the field, the profitability was low but the cash profits were significant. All purchases were made from government departments, making them verifiable. The appellant argued that the books were audited under section 44AB, and stock details were unnecessary due to no opening or closing stock. The Assessing Officer (AO) noted deficiencies in maintaining stock registers and sales vouchers, leading to the rejection of books. The appellant's failure to maintain essential records for verifying sales and expenses was a key factor in the rejection. The Tribunal upheld the rejection, emphasizing the importance of maintaining proper records, especially in the liquor business, to establish the linkage between purchases and sales.

Issue 2: Challenge to the sustenance of trading addition by the CIT(A):
The appellant contested the trading addition sustained by the CIT(A) out of the total addition made by the AO. The appellant argued that the declared gross profit was accurate based on actual purchases and sales, with no opening or closing stock. Discrepancies in applying gross profit rates were highlighted, comparing the appellant's case with others in similar businesses. The CIT(A) reduced the trading addition, considering comparable cases but lacked contemporaneous data for the year under consideration. The Tribunal declined to interfere with the CIT(A)'s decision, as the reduction was reasonable and uncontested by the Revenue. Consequently, the challenge to the trading addition was dismissed, affirming the CIT(A)'s decision.

In conclusion, the Tribunal upheld the rejection of the appellant's books of accounts under section 145(3) of the Income Tax Act due to inadequate record-keeping practices. Additionally, the challenge to the trading addition was dismissed, as the CIT(A)'s reduction was deemed reasonable in the absence of contemporaneous data. The appeal of the assessee was ultimately dismissed by the Tribunal.