9911796707
TMI Blog2021 (3) TMI 929X X X X Extracts X X X X X X X X Extracts X X X X ..... (i.e. nos.) and record of shortage is not maintained, physical record of raw material 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sales are completely vouched and l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 more than 8 years time difference where cost is increased more than sale price of individual ite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble) 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 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 GP(As Declared) 11 03 8 96 19 75 1.11 We are submitting copies of 10 purchase bills during the year 2004-05 (AY 2005-06),where average cost of wood /timber i.e. the main raw material of the assessee is ₹ 317.90 per CFT in which year GP was 17.20% and 10 purchase bills during the AY 2013-14 where average cost of wood /timber i.e. the main raw material of the assessee is ₹ 491.17 per CFT ( This year GP is 11.75%) , This fact was also summarised as per the chart enclosed vide PB No. 15-70 where all 20 cases are been tabulate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eason 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 of lower yield in comparison to earlier years and applying gross profit rate which is higher than the rate declared by the assessee in the year under consideration, it is pertinent to note that the yield from a particular production / manufacturing activity cannot be expected at same rate as in earlier years or in subsequent years. There is always a possibility of some reasonable/ minor variation in the profit ratio of different years. In the case where the correct results of the activity of the assessee cannot be ascertained from the books of account due to certain defects then the only option left with the AO is to adopt the reasonable gross profit rate . In view of the facts and circumstances of the case, average gross profit rate for earlier years shall be taken as gross profit rate for the year under consideration instead of adopting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this mere ground that quantitative tally of traded / finished goods was not maintained, it is not possible to verify the trading results and apply the provisions of section 145. Section 145 of the Income Tax Act requires that the business income shall be normally, computed in accordance with the method of accounting regularly employed by the assessee, if the assessee has maintained accounts, the section leaves it to the assessing officer to compute the income, profits and gains in accordance the method of accounting regularly employed. Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The department has to prove satisfactorily that account books are unreliable, incorrect or incomplete before it can reject accounts, which may be done by showing that importa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the sales, the target sale price of the exported goods was not increased by the assessee. Thus the gross profit of the assessee is slightly decreased which may kindly be accepted. It is presumed that cost of raw material sale price during Asstt. Year 2005-06 were 100 Average % increase in cost price of raw material during AY 2013-14 as per chart Average % increase in sale price of finished products during AY 2013-14 as per chart 100% 154.50% 125.75% Furthermore, we are enclosing herewith to comparative chart showing % increase in cost of raw material in comparison to Asstt. Year 2005-06 and also % increase in sale price of finished products in export market. As per chart % increase sale price and cost price is as under:- Above figures clearly show that % increase in cost of raw material is much high in comparison to % increase in sale price of finished products and this ultimately resulted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port where payments are fully verifiable and through banking channels. Unless the regular books are found to be not acceptable, there would be no justification for any estimation. Even for any reasons, the books are technically rejected, the same would not justify any addition and in this regard reliance is placed on the decision of Hon'ble Rajasthan High Court in the case of CIT v. Gotan Lime Khaniz Udhyog (2002) 256 ITR 243 (Raj). Enclosed vide PB No.85-89 B. Ram piyare Satish Kumar Vs. ITO 59 TTJ 352 (Delhi): Where it was held that absence of day to day quantity wise stock records or the fact that gross profit rate declared for the years is lower as compared to the earlier years or compared to other dealers, by itself will not justify invoking the provisions of Sec. 145. Here in our case increase in the GP rate from 12.96% to 13.19% Ld AO wrongly applied the provisions of the section 145 and applied wrong old GP. C. Kailash Chand Gupta vs. DCIT, ITAT Jaipur Bench (ITA. no. 153/JP/2005) A.Y.2001-2002: Provisions of section 145 cannot be invoked in a case unless some material is brought on record by AO to disprove the correctness of the books of accounts and the profits declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verify the trading results and apply the provisions of section 145. Section 145 of the Income Tax Act requires that the business income shall be normally, computed in accordance with the method of accounting regularly employed by the assessee, if the assessee has maintained accounts, the section leaves it to the assessing officer to compute the income, profits and gains in accordance the method of accounting regularly employed. Accounts regularly maintained in the Course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The department has to prove satisfactorily that account books are unreliable, incorrect or incomplete before it can reject accounts, which may be done by showing that important purchase, or sales are omitted there from or proper particulars or the accounts do not include entries relating to a particular class of business. Rejection of accounts cannot be done light-heartedly. [St. Teresa's Oil Mills V/s State of Kerala, (1970) 76 ITR 365, 367-8 (Ker.)] but, the Ld AO has not mentioned any reason and even corrected sales/ purchases with supporting vouchers were already submitted to the LD A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alongwith the valuation method adopted to arrive such opening and closing stock. However, the assessee could not file the required details during the course of assessment proceedings. Vide para 20 of letter dated 13/11/2015, the assessee could only give value of opening and closing stock under broad heads like raw material, consumables items, semi finished goods, finished goods, polish material, packing material.; It was further stated that as regards particulars of each type of goods in stock and number of units of each type with value thereof is concerned, it is not feasible looking to the nature of the trade. Assessee further submitted that looking to the nature of the; trade, it is not possible to maintain quantitative tally of raw materials, finished goods, polishing materials, packing materials etc. 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 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in estimating the income- Howrah Trading Co (P) Ltd. V.CIT(1968)67 ITR 582(Cal). There is no record of yield, shortage. Such hooks of accounts and such system of accounting cannot be considered so sacrosanct that trading result cannot be disturbed when the circumstances suggest otherwise. Assessee has done trading business with purchases of more than ₹ 9.62 crores but even in respect of such trading business quantitative details or inventory of stock is not produced. The A/R of the appellant failed to file any evidence against the defect pointed out by the Assessing officer. Therefore I am the view that Assessing officer rightly apply the provision u/s 145(3) of the I.T. Act. Hence I upheld the action -of the Assessing officer to rejected the books of account by applying the provision u/s 145(3) of the I.T. Act. The next issue in the case is estimation of profit rate. The Assessing officer estimated Gross profit of ₹ 3,17,99,865/- by applying the Gross profit rate @ 17.20% and made addition of ₹ 1,00,67,820/-. The A/R of the appellant submitted that the 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 closing stock. However, the assessee could not file the required details during the course of assessment proceedings. We observe that during the course of assessment proceedings, it transpired that stock register was not maintained, main raw material i.e. wood is purchased in cft (cubic feet) and finished goods are sold in units (i.e. nos.) and record of shortage is not maintained, physical record of raw material at different stages of production was also not maintained. On perusal of your audit report, following observation have been made by your auditor:- (i) Valuatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein on similar basis the books of accounts were rejected, we see no reason to interfere with the order of the lower authority in terms of rejection of the books of accounts. 10. Regarding 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. The Id. AR has submitted that average G.P rate of last 5 years comes to 12.29% as against declared G.P. rate of 13.19% in the year under consideration. On perusal of records, the track record of declared Gross profit by the assessee and gross profit as upheld either by AO or by higher appellate authorities is as under: Assessment 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 where applicable) 17.2 17.2 12.03 8.52 12.96 In light of above, the average G.P rate of last 5 years as finally affirmed comes to 13.58%. The AO is accordingly directed to apply the G.P. rate of 13.58% as against G.P rate of 13.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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