Non-maintenance of item/month stock register insufficient to reject audited books; arbitrary 11% gross-profit estimate deleted

Whether AO could reject books of account solely for non-maintenance of an item-wise/month-wise stock register and estimate gross profit. The Tribunal held that where audited books, year-end physical verification and valuation of closing stock exist, and no finding of inflated purchases, suppressed sales or off-book transactions is recorded, mere non-maintenance of a particular stock register format (impracticable given business nature and multiplicity of items) does not justify rejection under section 145; estimation of gross profit at 11% was arbitrary. Consequently the rejection was unsustainable and the addition based on estimated gross profit was deleted and the appeal allowed.

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Issues: Whether the rejection of books of accounts under section 145 of the Income-tax Act, 1961 on the sole ground of non-maintenance of item-wise and month-wise stock registers and the consequential estimation of gross profit at 11% is sustainable.

Analysis: The Tribunal examined the facts that the assessee is engaged in fabric job-work with a large variety of consumables running into thousands of items, that regular audited books were maintained, that physical verification of closing stock was carried out and reported by the tax auditor, and that no specific defect was pointed out by the Assessing Officer such as inflation of purchases or suppression of sales. The Tribunal relied on precedents holding that mere non-maintenance of a particular form of stock register, without any other infirmity or finding of suppression/exaggeration, is not a valid ground to reject books of accounts. Applying those principles, the Tribunal found the Assessing Officer's adoption of an 11% gross profit rate to be arbitrary and not based on concrete material or comparables.

Conclusion: The rejection of books of accounts under section 145 is unsustainable and the addition of Rs. 48,67,190 made by estimating gross profit is deleted; the appeal of the assessee is allowed.

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