TaxTMI 
TaxTMI 
2016 (5) TMI 54
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....5,59,669 was filed on September 30, 2009 which was subsequently revised at the same income. The assessee-company follows a direct marketing business model and derives income from retail trading of various consumer goods. The assessee has declared the gross turnover to the tune of Rs. 91,90,10,669 against which net profit has been declared to the tune of Rs. 1,06,69,510 which gives effective net profit rate of 1.16 per cent. On examination the Assessing Officer noticed that the gross profit rate was not mentioned in the audit report. The same was calculated by the Assessing Officer from the figures available in the profit and loss account, balance-sheet and details of the month-wise purchases and sales as supplied by the assessee. The assessee was asked to substantiate the figure of closing stock in the balance-sheet as on March 31, 2009 amounting to Rs. 1.83 crores on the basis of calculations done on month-wise and quarter-wise trading accounts by applying the computed gross profit rate of 51.16 per cent. The Assessing Officer observed that the company made almost consistent sales but the purchases were not commensurate with the sales. Further, the company tried to make its stock ....
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.... drawn on the basis of figures arrived by computations done on month-wise basis. The Assessing Officer raised the question that purchases were never in consonance with level of sales and when other months are showing gross profit in the range of 96.65 per cent. to 20.45 per cent., how can it be gross loss of 161.05 per cent. in the month of March, 2009. Another fact the assessee maintains a closing stock of Rs. 1.85 crores as on March 31, 2008 and closing stock of Rs. 1.83 crores as on March 31, 2009 whereas in the rest of months the stock level are less than 8 lakhs raises a question that why it is only in the month of March that the stock level goes so high. (iii) The Assessing Officer asked the assessee to furnish the details of valuation of closing stock as appearing in the balance-sheet which was not furnished due to large number of items. The Assessing Officer concluded that month-wise trading account filed by the assessee was self contradic tory. The Assessing Officer prepared a trading account according to which the gross profits came out to Rs. 36,39,54,887.88 against the sales of Rs. 71,24,69,335.88 which results in a gross profit rate of 51.08 per cent. Therefor....
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....ddition of Rs. 14,48,00,000 on account of shortage of stock during the year. He just prepared an imaginary month-wise trading account and after rejecting all the contentions of the assessee made the addition without mentioning anything. The learned Assessing Officer had asked the assessee to file the month-wise figure of purchase and sales. On the basis of the figures of purchase and sales, the learned Assessing Officer prepared the monthly trading account. For arriving at the figures of closing month, a hypothetical figure of gross profit was placed in the trading account and the consequential amount was treated as deficiency in closing stock. (i) The modus operandi of the assessee was that the goods were received, throughout the year, by the different warehouse at different stations. The goods were received either through bills or through challans. The intimation of the goods received was sent to the head office. After receipt of the intimation of receipt of goods the assessee used to make the lump sum payments to the different suppliers and part payment or even excess payment were also there in some cases. From the copies of account of the supplier the fact of regular p....
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.... the goods were purchased. The payments were made to them throughout the year on different dates. The amounts of payment were almost equal to the amount of purchases entered either during the year or at the end of the year. The payments were made through the banking channel and so it cannot be said that the source of expenditure on the purchase of goods are unexplained. So, the provision of section 69C is also not applicable. The assessee relied on the judgment of the Hon'ble Income-tax Appellate Tribunal, Calcutta Bench in the appeal of ITO v. New Card Board Industries reported in [1992] 40 ITD 50 (Cal). (iv) The assessee further submitted that this is settled principles of law that the assessment is to be made on the basis for complete year and piece meal assessment is not permissible under law. The Assessing Officer has tried to sketch month-wise trading account and has worked out negative stock at a particular point of time and has tried to justify addition on the basis of that negative stock. This is a covered matter by the jurisdictional Tribunal in I.T.A. No. 279/Chd/1990 in the case of Saqi Brothers v. ITO [1996] 54 TTJ (Chandigarh) 306. The Hon'ble Income-tax Appe....
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....e provisions of section 145(3) of the Income-tax Act. Provisions of section 145(3) of the Income-tax Act "Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessees, the Assessing Officer may make an assessment in the manner provided in section 144". The appellant relied upon the following decisions : (i) CIT v. Aggarwal Engg. Co. [2008] 302 ITR 246 (P&H) ; (ii) S. M. Hasan, STO v. New Gramophone House, AIR 1977 SC 1788 (SC) ; (iii) CIT v. Bansal Sons Ludhiana I.T.R. No. 117 of 1999 (P&H) ; (iv) Bhalla Brothers [1981] 10 TLR 215 (P&H) ; (v) CIT v. Saqi Brothers I.T.R. No. 70 of 1998 (P&H) ; and (vi) Tarachand Shantilal v. ITO [1987] 28 TTJ (Jaipur) 128. (vi) The Assessing Officer could not bring any specific material on the record to prove that there were any unrecorded purchases in the books of account which resulted into excess sales and it is also true that no sales can be made without goods and as such it is amply clear that the assessee has been receiving the goods regularly from their suppliers and effecting the sale and the purchases against the same were b....
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.... March 13, 2014 a set of the paper books was forwarded to the Deputy Commissioner of Income- tax, Parwanoo for verification on facts and submission of his report on the objections raised by the appellant and also comments for the justification of the addition made on account of estimated negative stock by applying gross profit rate. (x) The Assessing Officer filed its reply dated March 25, 2014 where the Assessing Officer has mostly reiterated the findings at the assessment stage. Further, the Assessing Officer submitted that the books of account were not reliable in the absence of stock register and unverifiable purchases. In the subsequent years also the books of account were not found to be totally reliable and additions were made which gave to net profit rate of 2.53 per cent. and 2.99 per cent. against declared net profit rate of 1.57 per cent. and 2.23 per cent. for the assessment years 2010-11 and 2011-12 respectively. The Assessing Officer justified the assessment order for the assessment year 2009-10 as fair and reasonable and submitted to be decided on merits. (xi) The assessee in its rejoinder submitted that there is no provision in the Income-tax Act w....
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....ppeals), considering the facts and circumstances and material on record, finding defects in the maintenance of the books of account rejected the same under section 145(3) of the Act and average net profit of subsequent two years estimated at 2.76 per cent. applied against the turnover for determining the net profit of the assessee and accordingly allowed the appeal of the assessee partly. His findings in paras 4.13 to 4.17 of the appellate order are reproduced as under : "4.13 I have gone through the facts of the case, written submissions filed by the assessee, remand report of the Assessing Officer. and rejoinder filed by the assessee. It is noted that the Assessing Officer observed that the gross profit rate and maintenance of stock register were not mentioned in the audit report. The Assessing Officer has mentioned that the books of account were test checked except the relevant stock records and stock registers which were not produced. On the basis of figures available in profit and loss account and details of month-wise purchases and sales provided by the assessee, the Assessing Officer computed a gross profit of 51. 16 percent. By applying gross profit rate of 51.16 p....
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....stem where the goods were received throughout the year by different warehouses at separate stations. The good were received either through bills or through challans. After receipt of intimation of goods the lump sum payments were made to different suppliers throughout the year. The entries of purchase bills received with the goods during the whole year were made in the month of February and March for settling the accounts of different suppliers. The purchases were not made at the end of the year but the purchases were entered in the books in the month of February and March. The appellant has also submitted that complete books of account, stock register, sale and expense vouchers and bills were produced before the Assessing Officer from time to time. However, the addition was made on account of shortage of stock during the year on the basis of imaginary month-wise trading accounts. The bank statements were also produced before the Assessing Officer for verifications of payments made to different suppliers during the year. The Assessing Officer had accepted the opening stock, closing stock, sales and gross profit at 51.08 per cent. and did an exercise to prepare a trading account. Ho....
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....oduced for the verifications of payment made during the year. The Assessing Officer has not found any defect regarding unaccounted purchase or sales. Further, there was no find ing either in form of any information available with the Assessing Officer regarding unaccounted purchases nor there was any result of negative stock on physical verification of stock during survey, etc., at the assessee's premises which can show that there was negative stock during various months of financial year, in view of these facts, I find that calculations of month-wise and quarter-wise trading accounts leading to a peak negative closing balance based on a constant gross profit rate was irrelevant and erroneous. The assessment of income is to be made on the basis of accounts prepared for the entire financial year as the entries of purchases, sales and expenses may not be available for entering into books of account on a real time basis. Looking at the business operations of the appellant, it cannot be doubted that the purchases have been entered in the last three months of the year where the closing of accounts in the year end is required for settlement of accounts with various debtors and credit....
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....ing Officer after taking into account all relevant material which the Assessing Officer has gathered shall after giving the assessee an opportunity of being heard make the assessment of the total income to the best of his judgment and determine such payments by the assessee on the basis of such assessment. On the basis of findings recorded by the Assessing Officer and defects noticed as above which remained during the appellate proceedings, the provisions of section 145(3) are invoked. The assessee's books of account rejected and the net profit is computed to the best of my judgment. In the assessee's case, it is noticed that in the current year a net profit of 0.92 per cent. has been declared on the total sales of Rs. 71,24,69,335. In subsequent two years where the sales have increased to about Rs. 89 crores and Rs. 86 crores, the return of income have been assessed under section 143(3) which gave rise to net profit of 2.53 per cent. and 2.99 per cent. Taking an average of net profit of assessed income in subsequent two years which have same mode of business operations, a net profit rate for current year is estimated at 2.76 per cent. By applying a net profit of 2.76 per c....
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....ent warehouses at separate stations. The goods were received either through bills or through challans. After receipt of the intimation of goods, the lump sum payments were made to different suppliers throughout the year. No defects in the purchases and sales have been pointed out by the Assessing Officer. The assessee produced complete books of account, sales and purchase vouchers. However, the Assessing Officer, on imaginary basis, prepared month-wise trading account for making addition against the assessee. In this way also the Assessing Officer found a negative stock in the books of account of the assessee which is not permissible in law. Thus, the Assessing Officer in his own way has prepared the trading account for enhancing the gross profit despite the fact that it is well settled that book results are drawn on annual basis. The Assessing Officer did not find any unrecorded purchases. No sales were found outside the books of account. Therefore, the extra profit arrived at by the assessee on month-wise could not be sustained. It is also well-settled that the profit rate cannot be uniform in each month. The assessee is dealing in large number of items which is also not in dispu....