2025 (7) TMI 1222 - AT - Income Tax

Non-maintenance of stock register alone cannot justify rejection of books under Section 145(3) when other records are complete.

DCIT Circle-1, Ludhiana Versus M/s Paramount Impex

DCIT Circle-1, Ludhiana Versus M/s Paramount Impex - TMI ISSUES: Whether the books of accounts can be rejected under section 145(3) of the Income Tax Act solely on the ground of non-maintenance of stock register and incorrect stock valuation method'Whether estimation of income by applying a gross profit rate is justified when books of accounts are not rejected'Whether the Assessing Officer is required to apply the correct method of stock valuation before determining taxable income? RULINGS / HOLDINGS: The Court held that the power to reject books of accounts under section 145(3) is to be exercised only when the books are found 'incorrect or incomplete for determining the true and correct profits.' Non-maintenance of stock register alone, without other defects, is insufficient ground for rejection.The Court ruled that an incorrect method of stock valuation does not render the books unreliable or incomplete; instead, the correct accounting standard or valuation method should be applied by the Revenue to determine true profits.Since the books were not rejected, the estimation of income by applying a gross profit rate was unwarranted, making such additions unsustainable.The Court directed that the Assessing Officer must determine the value of stock by applying the correct method of valuation and thereafter compute taxable profits, giving the assessee an opportunity of hearing.Given the identical facts and a prior consequential order where the Assessing Officer accepted the assessee's stock valuation, the deletion of additions was upheld and the appeal by the Revenue dismissed. RATIONALE: The Court applied the statutory framework under section 145(3) of the Income Tax Act, emphasizing that rejection of books is a remedial power to ensure determination of 'true and correct profits' and cannot be exercised arbitrarily.Precedent was relied upon wherein the Tribunal held that non-maintenance of stock register is not unusual for businesses dealing with numerous small items and does not affect the reliability of books if physical stock verification is consistently done.The Court distinguished between defects that render books unreliable and those that relate to non-compliance with accounting standards, holding that the latter should be corrected rather than used as a basis for rejection.The decision reflects a doctrinal position that estimation of income is a last resort and cannot be applied if books are accepted as reliable.No dissenting or concurring opinions were noted; the Court adhered to established principles ensuring fairness and accuracy in income determination.