DELHI SECURITIES PRINTERS v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2007-LL-0420-1]

Citation 2007-LL-0420-1
Appellant Name DELHI SECURITIES PRINTERS
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 20/04/2007
Assessment Year 2003-04
Judgment View Judgment
Keyword Tags rejecting books of account • doctrine of res judicata • system of accounting • method of accounting • rule of consistency • revenue authorities • cost of production • stock register • closing stock • onus to prove • ad hoc basis • personal use • raw material • g.p. rate • job work
Bot Summary: For rejecting the books of account, it is revenue s onus to prove that either the books of account maintained by the assessee are not correct and complete or the method of accounting adopted is such that true profits cannot be deduced therefrom. As the onus to make out a case for rejection of books of account is on the Revenue, the AO is required to indicate specific defects in the books of account which clinches the profit shown by the assessee or its state of affairs. After production of books of account and submission of explanation by the assessee, if any asked for, with respect to the contents of the return and books of account, the Revenue may accept the same or after pointing out the specific defect may reject the books of account and proceed to determine the assessee s income as per the provisions of s. 145. In the instant case the AO while rejecting the books of account not indicated any defect in the system of accounting regularly followed by the assessee or its correctness, nor there was any change in the method of accounting during the year under consideration as compared to the earlier years to indicate any intention of assessee, to show low profit. The only objection of the AO was that the assessee has not kept stock register except it he had not pointed out any defect in the books of account which persuaded him to reject the book results outrightly and estimate GP at higher rate as compared to the G.P. rate shown in the audited books of account which were free from any qualification by the auditor. While examining the books of the assessee, ITO has to consider the following aspects: Whether the assessee has regularly employed a method of accounting Even if regular adoption of a method of accounting is there whether the annual profits can properly be deduced from the method employed Whether the accounts are correctly maintained Whether the accounts maintained are complete in the sense that there is no significant omission therein If the answers to above four questions are in the affirmative, assessee s profits are to be computed on the basis of his accounts. Very important principle of law was laid down by Patna High Court in the following words: There is no finding in the present case that any of the entries in the books of account was not correct; there is no finding that the assessee is not employing a method of accounting; and there is no finding that such a method of accounting has been irregularly employed by the assessee.


This is appeal filed by assessee against order of CIT(A) dt. 13th Feb., 2006 for asst. yr. 2003-04, in matter of order passed under s. 143(3) of IT Act, 1961 wherein following grounds of appeal have been raised: "1. That on facts and in circumstances of case, learned CIT(A) as also AO erred in making addition of Rs. 4,65,430 on account of job work receipts by disturbing gross profit ratio on basis of non- maintenance of stock register, hence addition made should be deleted. That on facts and in circumstances of case, learned CIT(A) erred in reducing disallowance to Rs. 14,000 from Rs. 30,000. Hence balance disallowance should be deleted. That on facts and in circumstances of case, learned CIT(A) s also AO erred in making addition of Rs. 1,06,369 on account of car and conveyance expenses on basis of not maintenance of log book, hence addition made should be deleted. That on facts and in circumstances of case, learned CIT(A) erred in reducing addition by Rs. 26,680 (50 per cent of Rs. 51,360). Hence balance of addition should be deleted. That appellant craves liberty to add, alter, vary or amend any grounds of appeal before date of hearing or at time of hearing." Rival contentions have been heard and record perused. Brief facts of case are that in course of assessment, AO found that assessee has not maintained stock register, therefore, consumption of raw-material during year could not be verified. He further stated that in absence of stock register, it is not possible to verify closing stock as declared by assessee and value of stock of papers consumed and sold is also not verifiable. Accordingly, he rejected books of account by invoking provisions of s. 145(1) of IT Act, 1961 and estimated GP at 37.05 per cent as against g.p. of 35.05 per cent as declared by assessee, which resulted into addition of Rs. 4,65,430. By impugned order, CIT(A) confirmed action of AO. It was contended by learned Authorised Representative Shri G.N. Gupta that no defects in books of account was pointed out by AO. books of account were fully audited and in all preceding assessment years, GP shown by assessee was accepted in scrutiny assessment and no trading addition was made in spite of fact that no stock register was maintained even in preceding assessment years, where scrutiny assessments were undertaken. As per learned Authorised Representative even though rule of res-judicata does not apply to income-tax proceedings, but at very same time rule of consistency is to be adopted by Department. He drawn our attention to GP rate shown by assessee in earlier years which were accepted in scrutiny assessment. As per learned Authorised Representative, only raw material involved in activity undertaken by assessee is paper and assessee was in receipt of job work charges and contract receipts for printing of lottery tickets. He further submitted that business of assessee was considerably reduced from 4.38 crores in asst. yr. 1999- 2000 to Rs. 2.32 crores in asst. yr. 2003-04 under consideration, which resulted into marginal increase in paper cost. GP of assessee was also reduced correspondingly. As per learned Authorised Representative, while rejecting books of account, AO has invoked provisions of s. 145(1) r/w explanation whereas there is no such explanation provided under s. 145(1). He also drawn our attention to different scrutiny assessment orders passed under s. 143(3) of Act for different assessment years, as placed in record, wherein assessee firm was following same system of accounting and policy which were duly accepted by AO. He relied on decision of Tribunal Bangalore Bench in case of Dy. CIT vs. Gajanan Traders (2006) 104 TTJ (Bang) 1030, in support of proposition that fall in g.p. rate is not criteria for rejection of books of account, and there is no provision in Act which suggests that day to day stock register has to be maintained or in absence thereof books of account are liable to be rejected. It was further observed by Tribunal that what is required to invoke proviso to s. 145 of Act or to reject book results, is to establish incorrectness and incompleteness of accounts or where method of accounting followed by assessee was inconsistent with accepted method of accounting. Since no such case has been made out by AO, AO was held to be not justified in rejecting books of account and making addition. In support of contention that Department is required to maintain consistency, when facts and circumstances during year are pari materia with that of preceding assessment years, learned Authorised Representative relied on decision of jurisdictional High Court in case of CIT vs. A.R.J. Security Printers (2003) 183 CTR (Del) 323: (2003) 264 ITR 276 (Del) wherein by relying on verdict of Hon ble Supreme Court in Radhasoawmi Satsang vs. CIT (1991) 100 CTR (SC) 267: (1992) 193 ITR 321 (SC), it was held that revenue could not be allowed to turn around, after having accepted at least in three assessment years that business activities fell within ambit of s. 80-I and to say that assessee is not entitled to deduction under s. 80-I of Act. On other hand, learned Departmental Representative Shri K.C. Badhok submitted that in absence of stock register, AO was unable to verify correctness of value of stock of papers held and consumed by assessee during year, therefore, AO was justified in rejecting book results and estimating GP rate at 37.05 per cent. We have considered rival contentions carefully gone through orders o f authorities below and deliberated on case law referred by learned Authorised Representative and Departmental Representative during course of hearing before us in context of factual matrix of instant case. As per our considered view, books of account regularly maintained in course of business which are duly audited under provisions of IT Act, 1961 and are free from any qualification by auditors should be taken as correct unless there are k and sufficient reason to indicate that they are unreliable. For rejecting books of account, it is revenue s onus to prove that either books of account maintained by assessee are not correct and complete or method of accounting adopted is such that true profits cannot be deduced therefrom. As onus to make out case for rejection of books of account is on Revenue, AO is required to indicate specific defects in books of account which clinches profit shown by assessee or its state of affairs. After production of books of account and submission of explanation by assessee, if any asked for, with respect to contents of return and books of account, Revenue may accept same or after pointing out specific defect may reject books of account and proceed to determine assessee s income as per provisions of s. 145. Income-tax provisions nowhere either authorize AO or cast obligation on assessee to prove negative result, i.e., to prove as to why he failed to make profit at particular rate. Before rejecting books of account, Department has to prove that accounts are unreliable, incorrect or incomplete. Even though, it is not possible to lay down exact circumstances in which accounts should be rejected as unreliable or incorrect, yet accounts may be rejected as unreliable if important entries and transactions are omitted therefrom or if proper particulars and vouchers, bills, etc. are not forthcoming or if they did not include entries relating to particular class of business transaction. assessee should invariably be given opportunity for offering explanation regarding defects in accounts and on his failure to satisfactorily explain defects, Department would be justified in rejecting books of account. Thus, books of account should not be rejected light-heartedly. In instant case AO while rejecting books of account not indicated any defect in system of accounting regularly followed by assessee or its correctness, nor there was any change in method of accounting during year under consideration as compared to earlier years to indicate any intention of assessee, to show low profit. only objection of AO was that assessee has not kept stock register except it he had not pointed out any defect in books of account which persuaded him to reject book results outrightly and estimate GP at higher rate as compared to G.P. rate shown in audited books of account which were free from any qualification by auditor. While examining books of assessee, ITO has to consider following aspects: (i) Whether assessee has regularly employed method of accounting? (ii) Even if regular adoption of method of accounting is there whether annual profits can properly be deduced from method employed? (iii) Whether accounts are correctly maintained? (iv) Whether accounts maintained are complete in sense that there is no significant omission therein? If answers to above four questions are in affirmative, assessee s profits are to be computed on basis of his accounts. In such cases, proviso to s. 145(1) or s. 145(2) cannot be invoked. On perusal of materials placed on record, in instant case, we found that answers to all above four questions were affirmative. Patna High Court has delivered very important ruling in Md. Umer vs. CIT 1975 CTR (Pat) 13: (1975) 101 ITR 525 (Pat). In that case, assessee was individual, who derived income from sale of country liquor. Tribunal gave five reasons for purpose of rejection of book profits as follows: (1) sale were not verifiable. (2) From point of drawing of liquor from barrels, no account was maintained and even normal leakage in process of drawing and filing in bottles was not shown. (3) Year to year, book results shown have been rejected and profit invariably estimated by Department. (4) percentage of profit shown was low. (5) Drawings for expenses were inadequate. However, assessee had produced all his books of account before ITO and only two defects were found by him: (1) absence of cash memos which means sales are not verifiable, and (2) certain transactions were noted in lump sums. But no finding has been recorded by either of authorities below as to unacceptability of method and irregularity of accounts kept by assessee. It is well-settled that in absence of such finding recorded by authorities, book results cannot be ignored or brushed aside. Very important principle of law was laid down by Patna High Court in following words: "There is no finding in present case that any of entries in books of account was not correct; there is no finding that assessee is not employing method of accounting; and there is no finding that such method of accounting has been irregularly employed by assessee. In absence of any such finding, there being no reason germane to unacceptability of book results, it must be held that Tribunal as well as Revenue authorities below had no materials before them, on basis of which it could be said that trading results were not verifiable and that, therefore, they should not be accepted, nor is it their case that trading results could not be deducible from entries of books of account regularly employed". Patna High Court, therefore, held that "...the finding of Tribunal upholding rejection of book profit shown by assessee was vitiated by reason of its reliance upon suspicion, surmises as also irrelevant material. finding that sales were unverifiable is not based on materials on record and is arbitrary finding." importance of maintenance of stock register of various raw materials used by assessee in its manufacturing process, is to be judged from nature of activity assessee is carrying on. In some industry such stock register plays crucial role whereas in some cases same is not so important. In some cases stock register plays important role and its non-maintenance may prompt AO to have recourse of estimation of profit by showing adverse effect of such non-maintenance on determination of correct cost of production and resultant profit from manufacturing process. In instant case assessee was engaged in printing of lottery ticket, and was not undertaking any manufacturing or production process where numerous raw materials are used in process and quantitative records regarding various raw materials consumed in manufacturing process is required to be kept to ascertain correct cost of production and resultant GP thereon. In instant case only raw material used by assessee was paper, quantity of paper purchase was duly verifiable from purchase bills, quantity of paper used was duly verifiable from sale of lottery ticket, thus resultant quantity was closing stock. In all preceding years also assessee was not maintaining any such records. Department has completed assessment under scrutiny process and non-maintenance of stock register was never made ground for rejecting books of account or estimating GP at rate higher than rate declared by assessee. contention of learned Authorised Representative that unless there are change in facts and circumstances, Department should not take contrary view, is supported by decision of Hon ble Supreme Court in case of Radhasoawmi Satsang vs. CIT (supra), wherein Hon ble Supreme Court held that if there is no change in facts, different conclusion is not warranted. Even though doctrine of res judicata does not apply to proceedings under IT Act, at very same time it is clear that unless there is change of circumstances, authorities will not depart from their previous decisions at their sweet will in absence of material circumstances or reasons for such departure. Thus rule of consistency which applies to income-tax proceedings has to be followed. In view of above discussion, we do not find any merit in action of lower authorities in rejecting book results merely because assessee has not maintained stock register, without pointing out any specific defect in books of account, of any nature whatsoever, as discussed hereinabove. With regard to disallowance of telephone expenses, CIT(A) restricted disallowance to extent of 1/10th of total expenses. As use of telephone for personal purposes by partners cannot be ruled out, we do not find any reason to interfere in order of CIT(A) for retaining addition on account of telephone expenses to extent of Rs. 14,000. Ground No. 2 is, therefore, dismissed. With regard to disallowance of motor-car, conveyance and travelling expenses, we found that on ad hoc basis, AO has disallowed 1/5th of total expenses incurred both at Delhi and Bangalore, on plea that no log book or register was maintained to justify that car was entirely use for business. We have considered rival contentions and found that partners of 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 partners, same is required to be confined to expenses of Rs. 2,40,417 incurred at Delhi Unit. We, therefore, direct AO to restrict disallowance to extent of 1/5th, with respect to expenses incurred on Delhi Unit. As partners were not residing at Bangalore, no disallowance on account of personal use by partners are warranted in respect of expenditure booked at Bangalore Unit. We direct accordingly. With regard to confirming addition to extent of Rs. 26,680 on account of machinery repairs etc., we do not find any reason to interfere in order of CIT(A) insofar as part of expenses were incurred in cash, which remained unverifiable. In result, appeal of assessee is partly allowed in terms as indicated hereinabove. *** DELHI SECURITIES PRINTERS v. DEPUTY COMMISSIONER OF INCOME TAX
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