TaxTMI 
TaxTMI 
2013 (11) TMI 471
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....P.) rate of 3.30% in the year under consideration A.Y. 2009-10 as against G.P. rate of 06.17% and 4.73% in A.Y. 2007-08 in earlier years. The assessee was asked to explain and justify the fall in G.P. rate. It was also asked to the assessee to explain that various expenditure claimed in trading account are not verifiable as expenses towards loading and unloading, labour charges & transportation are not found properly vouched and supported by proper bills & vouchers. The payments were made through self-made vouchers. The Assessing Officer, after considering the assessee's submission, rejected the books of accounts by invoking section 145 (3) of the Act and applied G.P. of 4% in place of 3.30% disclosed by the assessee. The Assessing Officer accordingly calculated the amount of addition of Rs.23,63,115/- as under :- (Paragraph nos.5 & 6, page no.3) "5. In view of above discussion the trading expenses are not fully verifiable and provisions of 145(3) is applicable as far as account sets of M/s Subhash Coal Traders are concerned. Considering the details and submission filed before me, non verifiability of books of accounts as discussed above and also past hist....
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....under the head freight to truck drivers and labour for unloading and loading of coal provision of section 145(3) cannot be invoked. It is known facts that the labour are unorganized sector and can not form basis of rejection of books of accounts. Though the appellant already submitted detailed reply before the Assessing Officer and also produced books of accounts and bills/vouchers and other record also. On going through the case records and impugned order under section 143(3), it is observed that it was the Assessing Officer's open contention to reject the books of account and to invoke the provisions of section 145(3) merely on the ground of certain deficiencies in the accounts. In this regard, it is held that while recording the satisfaction on the issue of correctness and completeness of books of account as stipulated in section 145(3), the Assessing Officer cannot trivialize the reason and basic need behind which law requires maintenance of books of account as stipulated in section 44AA of the Income Tax Act. The expression "Whether the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee" made in section 145(3) must be const....
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....t and labour payment has been paid by the assessee on said purchases. The Assessing Officer has accepted in his order the fall of gross profit due to EMD debited Rs.42,47,420/- and entry tax debited at Rs.66,19,909/- and expenditure incurred may be treated that towards business expediency but the payment made to unorganized sector of labours has not been accepted without any material brought on records. I find force in the submission of the assessee that the labour payment has been made for shifting of coals on the basis of Rs.35/- per tone and on payment of freight above Rs.50,000/- TDS has been deducted. And deposited accordingly hence the both expenses are fully verifiable and vouched. I further found force in the submission of appellant Authorised representative that the total expenditure under the head trading account is increased Rs.1,01,96,635/- and if the said expenditure excluded the G.P. will come to 2,09,41,520/- in place of Rs.1,07,44,885/- and which will give G.P. rate of 6.43%. The expenditure debited to the Trading account wholly and exclusively for the business purposes and allowable under section 37 of the Income Tax Act 1961. The addition to the profit of the asse....
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....p; S.NO. PARTICULARS DEBITED TO THE PROFIT & LOSS ACCOUNT DISALLO WANCES 1 Travelling & Conveyance 68445.00 5000.00 2 General Exp. 103023.00 8000.00 3 Vehicle Exp. 136537.00 27300.00 4 Depreciation on car 118492.00 23798.00 SONEBHADRA COKE PRODUCT:- S.NO. PARTICULARS DEBITED TO THE PROFIT & LOSS ACCOUNT DISALLO WANCES 1 Staff Welfare 48574.00 5000.00 2 Travelling & Conveyance 77900 7000.00 3 General Exp. 27195.00 3000.00 4 Generator Maintenance exp. 31137.00 3000.00 It is noticed that disallowances mentioned above have been made on ad-hoc and lump sum basis without assigning any justification or reasoning. It is observed that the Assessing Officer has made disallowance merely on the ground maintained that being not fully verifiable. This working of the Assessing Officer only shown that the disallowances have been made capriciously without properly measuring actual extent of unverifiability. The case clearly gets hit by the de....
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....ployed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation has to be made upon such basis and in such manner as the Income-tax Officer may determine. However, if the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make the assessment in the manner provided in section 144. Section 145 is mandatory and the Revenue is bound by the assessee's choice of a method regularly employed unless by that method the true income, profits and gains cannot be arrived at. In other words, section 145 enacts that for the purpose of section 28 (profits and gains of business, profession or vocation) and section 56 (income from other sources), income, profit and gains must be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, if the assessee regularly employs a particular method of accounting and if no defects are found in the method or maintenance of accounts, the taxing authority is bound to compute the profits and gains o....
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....em of accounting for the one followed by the assessee, flows from the provisions of s. 145 of the I. T. Act. It is, therefore, imperative that before rejecting the system of accounting followed by the assessee, the ITO must refer to the inherent defect in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from the books of account maintained by the assessee. As already observed above, there is no finding to that effect in this case. The ITO's view that there could be a better system of accounting is no reason to the application of the provisions of s. 145 of the I. T. Act, especially in view of the fact that this system of accounting is followed by the assessee uniformly and regularly for the past several years, and was accepted by the Department without quarrel. It is not open to the ITO to intervene and substitute a system of accounting different from the one which is followed by the assessee, on the ground that the system which commends to the ITO is better. There are any number of Court pronouncements where it has been held that provisions of section 145 are mandatory and the proper method ....
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....t a more suitable basis for computation of the true profits." 9.6 In the case of Md. Umer v. CIT [1997] 101 ITR 525 the Hon'ble Patna High Court have categorically stated at page 530, "once, therefore, the method of accounting employed by the assessee has been regularly employed and income, profits and gains can properly be deduced from such regularly employed method of accounting, that is the end of the matter for the purpose of proviso to sub-section (1) of section 145". 9.7 The profit or loss made by the businessman from that business, as aptly described in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W (SC) at page 521 remains in the "Womb of future". The measurement of periodic income is, to that extent, a matter of estimation on the basis of certain acceptable principle of accounting. For this reason, on the same facts and circumstances, the computation of business income may differ depending upon the method of accounting employed. In other words, it is not the legal position that on identical facts, the same amount of income should be assessable in the cases of all the assessees. This position has been clearly recognised by the Hon'ble Supreme Cour....
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....ideration, we find that the Assessing Officer has failed to point out any single defect in the method of accounting followed by the assessee. He failed to point out any inherent defect in books of account maintained by the assessee. The Assessing Officer has simply rejected the books of account on the basis that the assessee has declared lower G.P. Whereas, the assessee has furnished the reasons for fall in G.P. which has been reproduced by the CIT(A) in his order at page nos.15, 16 & 17 as under :- "a. Due to enhancement of sales Rs.325497416.00 in place of 78529214.00 for the A.Y. 2008-09 and which comes to 246968202.00 and increase sales at 314.49% and increase in G.P. Rs.10744885.00 from 4844270.00. It is accepted accounting principle that if the sales will increase percentage of Gross profit will go in decrease. b. That the appellant has already mentioned the reason in fall of gross profit due to reason that :- (a) the appellant has debited EMD amount of Rs.4247420.00 which copy has already submitted during the course of hearing of the case which copy is enclosed as per ....
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....termined and deduced from the accounting method employed by the assessee, is not justified. The mere fact that there was a less rate of gross profit declared by an assessee as compared to the previous year would not bay itself be sufficient to justify the addition. In the light of the aforesaid submission the enhancement of gross profit from 3.30% to 4% and made extra profit addition Rs.2363115.00 is highly arbitrary and fanciful. It is not legal and regular and not according to private opinion. The Hon'ble Madras High Court in the case of Mysore Fertilizer Company v. CIT [1966] 59 ITR 268 has already given finding that the estimate must not be arbitrary beg and fanciful but must be legal and regular it according to the rules of reason and justice not according to private opinion. Hence the addition made by the assessing officer may kindly be deleted in the interest of justice." 11. The CIT(A) after detailed discussion found that the action of the Assessing Officer in invoking section 145(3) was not in accordance with law. The CIT(A) also examined enhancement made in turnover by the Assessing Officer and found that there was no justification in enhancing ....