2010 (5) TMI 57 - HC - Income Tax

Assessing Officer cannot reject books under section 145(3) solely for missing daily stock register or lower gross profit

COMMISSIONER OF INCOME TAX-XII Versus SMT. POONAM RANI

HC held that the Assessing Officer could not reject the assessee's account books under section 145(3) solely because a daily stock register was not ... Decline in gross profit ratio - Rejection of account books by Assessing Officer u/s 145(3) - no supporting evidence was produced to show increase in the purchase price and decrease in sales - assessee not maintained the Daily Stock Register - Held that:- Even if no such register (stock register) was being maintained by the assessee as is contended by the learned counsel for the appellant (revenue), that by itself does not lead to inference that it was not possible to deduce the true income of the assessee from the accounts maintained by her, nor the accounts can be said to be defective or incomplete for this reason alone. If stock register is not maintained by the assessee that may put the Assessing Officer on guard against the falsity of the return made by the assessee and persuade him to carefully scrutinize the account books of the assessee. But the absence of one register alone does not amount to such a material as would lead to the conclusion that the account books were incomplete or inaccurate. Similarly, if the rate of gross profit declared by the assessee in a particular period is lower as compared to the gross profit declared by him in the preceding year, that may alert the Assessing Officer and serve as a warning to him, to look into the accounts more carefully and to look for some material which could lead to the conclusion that the accounts maintained by the assessee were not correct. But, a low rate of gross profit, in the absence of any material pointing towards falsehood of the accounts books, cannot by itself be a ground to reject the account books u/s 145(3) of the Act. Issues:1. Appeal against order dismissing appeal by Income Tax Appellate Tribunal for Assessment Year 2003/04.2. Explanation for fall in gross profit rate by the assessee.3. Rejection of account books by Assessing Officer under Section 145(3) of Income Tax Act.4. Acceptance of explanation for marginal increase in weight of finished product.5. Justification for rejecting accounts based on fall in gross profit ratio.6. Maintenance of Daily Stock Register by the assessee.Analysis:1. The appeal was against the order of the Income Tax Appellate Tribunal dismissing the appeal by the Revenue regarding the assessment order for the Assessment Year 2003/04. The assessee, engaged in manufacturing copper wire, declared a lower gross profit rate for that year compared to the preceding year, attributing it to an increase in purchase price. The Assessing Officer rejected this explanation, leading to a series of assessments and appeals.2. The Commissioner of Income Tax (Appeals) noted that the assessee provided detailed explanations and supporting data for the fall in gross profit rate, including comparative details of raw material purchase and sales. The consistent accounting method and proper maintenance of records by the assessee were acknowledged, leading to the rejection of the enhanced gross profit ratio applied by the Assessing Officer.3. The Tribunal upheld the appeal, emphasizing that without pointing out specific defects in the account books, the Assessing Officer could not reject them or make additions based solely on lower profits declared by the assessee. Section 145(3) of the Act was discussed, highlighting the necessity for the Assessing Officer to be satisfied about the correctness and completeness of the accounts before taking any action.4. The explanation provided by the assessee for the marginal increase in the weight of the finished product was accepted by both the Commissioner of Income Tax (Appeal) and the Income Tax Appellate Tribunal. The Assessing Officer had no valid justification to reject this explanation, as it was supported by evidence and accepted by higher authorities.5. The judgment emphasized that a fall in gross profit ratio alone cannot justify rejecting the accounts under Section 145(3) of the Act. Various reasons could contribute to such a fall, and without concrete evidence of inaccuracies or discrepancies, the accounts maintained by the assessee should not be deemed incomplete or inaccurate.6. The issue of the Daily Stock Register not being maintained by the assessee was also addressed. The absence of this register, while not ideal, did not automatically render the accounts defective or incomplete. The judgment clarified that the lack of one register should prompt careful scrutiny by the Assessing Officer but cannot be the sole basis for rejecting the accounts.In conclusion, the judgment dismissed the appeal, as both the ITAT and CIT(A) had accepted the explanations provided by the assessee regarding the fall in gross profit rate. The findings were deemed factual and not shown to be perverse, leading to the dismissal of the appeal.