Stock Register Discrepancies Not Grounds for Rejecting Books of Account

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Case Name:

Jaytick Intermediates (P) Ltd. Vs Assistant Commissioner of Income Tax (High Court of Gujarat)

Tax Appeal No. 1196 of 2007

Date: 14th July 2016

Key Takeaways:

1. Not maintaining a day-to-day stock register is not a valid reason to reject books of account.

2. Discrepancies in stock registers alone don't justify rejecting entire accounting records.

3. The court emphasized the importance of specific defects in books of account for rejection.

4. Lower gross profit rates compared to previous years are not automatic grounds for rejection.

5. The case highlights the need for concrete evidence of inaccuracies before rejecting accounts.

Issue:

Was the Income Tax Appellate Tribunal correct in upholding the Assessing Officer's decision to reject the assessee's books of account under Section 145(2) of the Income Tax Act and confirm additions on an estimated basis?

Facts:

1. Jaytick Intermediates (P) Ltd. is a manufacturing unit that pays excise duty.

2. The Assessing Officer rejected the company's books of account, citing discrepancies in the stock register and a fall in gross profit rate.

3. The Commissioner of Income Tax (Appeals) initially allowed the assessee's appeal.

4. The Income Tax Appellate Tribunal reversed the CIT(A)'s decision, upholding the Assessing Officer's actions.

5. The assessee challenged the Tribunal's order in the High Court.

Arguments:

Assessee's Arguments:

- The books of accounts tallied with excise duty payments.

- Stock register discrepancies were due to some items not being deleted.

- Day-to-day stock register maintenance is not a legal requirement.

Revenue's Arguments:

- Serious discrepancies were found in the assessee's accounts.

- There was a significant fall in the gross profit rate.

- The assessee failed to substantiate reasons for the fall in gross profit.

Key Legal Precedents:

1. Commissioner of Income-tax-IV v. Symphony Comfort Systems Ltd. [2013] 35 Taxmann.com 533 (Gujarat) 

  - Held that merely a fall in gross profit rate is not grounds to reject books of account.

  - Emphasized the need for specific defects in books to justify rejection.

2. Commissioner of Income-tax-XII v. Smt.Poonam Rani [2010] 192 Taxman 167 (Delhi) 

  - Noted that no statutory provision requires maintaining a daily stock register.

  - Held that absence of a stock register alone doesn't make accounts defective or incomplete.

Judgement:

The High Court ruled in favor of the assessee, setting aside the Tribunal's order. Key points:

1. Not maintaining a day-to-day stock register is not grounds to reject books of account. 

2. The court emphasized that specific defects must be pointed out to justify rejection of accounts.

3. The Tribunal erred in upholding the rejection of books under Section 145(2) and confirming additions on an estimated basis.

4. The court also allowed the appeal against the penalty imposed under section 271(1)(c) of the Act. 

FAQs:

1. Q: Is maintaining a daily stock register mandatory under income tax laws?

  A: No, the court noted that there's no statutory provision requiring a daily stock register.

2. Q: Can a fall in gross profit rate alone justify rejecting books of account?

  A: No, a lower gross profit rate may alert the Assessing Officer but cannot be the sole ground for rejection.

3. Q: What evidence is needed to reject books of account?

  A: Specific defects or inaccuracies in the accounts must be pointed out, not just general discrepancies.

4. Q: Does computerized record-keeping affect the validity of accounts?

  A: No, the court recognized that computerized records are common and valid, even in government organizations.

5. Q: How does this judgment impact similar cases?

  A: It sets a precedent that tax authorities need concrete evidence of inaccuracies before rejecting books of account, not just discrepancies in auxiliary records like stock registers.

1. By way of Tax Appeal No.1196 of 2007, the assessee has challenged the order of the Income Tax Appellate Tribunal, Ahmedabad Bench “B”, Ahmedabad, (For short, “the Tribunal”) in ITA No.1384/Ahd/1998 dated 12.1.2007, whereby the Tribunal has reversed the order of the CIT (A) and confirmed the order of the Assessing Officer.

2. At the time of admitting this Appeal, following question of law was framed:-

“(i) Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in upholding the action of the Respondent in rejecting the books of accounts of the Assessee under Section 145 (2) of the Act and further erred in confirming the part of the addition on estimated basis?”

3. Mr.B.S.Soparkar, learned advocate for the appellant submitted that the AO has proceeded on the basis that the assessee has not maintained day-to-day stock register and there are serious discrepancies in the stock register. He contended that the AO has wrongly assessed the income on the basis of the stock register, as there were differences as compared to the audited books of account. He submitted that the estimated gross income is wrongly assessed. He further submitted that this order of the AO was carried in appeal before CIT (Appeals), who observed as under:-

“4. I have considered the facts of the case, Section 145 (2) is applicable when no proper accounting method is followed or where the books of account are neither complete nor correct. In this case, the change of method of accounting on account of modvat cannot be a reason for rejecting the books of account especially there is nothing to hold that the change in accounting method of modvat is a malafide act on the part of the appellant. Further, the arguments raised by the appellant in respect of various defects pointed out by the assessing officer are correct. In this case, even if any section was applicable that it was proviso to Section 145 and not section 145 (2). Further, I do not find that there is any major defects in the books of account. In fact various stages, the Assessing Officer has contradicted himself in the order stating that the books were produced and stating that they were not produced. The Assessing Officer has wrongly applied Section 145 (2) of the Income-tax Act because the said provision is not applicable to this case. Therefore on this issue, the argument of the appellant is accepted to the case of the appellant. The first ground of appeal is therefore allowed.”

4. He further contended that the CIT (Appeals) rightly allowed the appeal filed by the assessee. However, the Tribunal has reversed the finding of CIT (Appeals) in the appeal filed before it and observe as under:-

“6. We have heard the rival contentions of both the parties. Looking to the facts and circumstances of the case, we find that the Assessing Officer has verified the consumption as per tax audit figures and as per the consumption given by the assessee. The Assessing Officer has also verified the figures which are on page 4 of the remand report and from this analysis: the assesseee was not able to maintain the yield ratio. The assessee has also not maintained day to day quantitative record of work-in-progress. The assessee has not maintained day to day quantitative record of all the raw materials and the stock register. The assessee has also valued the raw material at average rate and annual consumption of respective raw materials and this year the assessee has changed the method of valuation. The assessee has also not followed any method as regard to finished goods. The Assessing Officer has also observed that the assessee has made pencil entries in the books and the assessee is not keeping and maintaining vouchers. Therefore, we are of the view that the Assessing Officer is justified in rejecting the book result and we uphold the action of the Assessing Officer. We find that there was difference of GP and this year the GP was low of about 6 to 10% and the Assessing Officer has made the addition of Rs.12.25 lakhs but when the book results are rejected and the Assessing Officer has also estimated the GP, in our considered opinion the addition of Rs.6 lakhs would be reasonable. The Assessing Officer is directed to restrict the addition on this count to Rs.6,00,000 (Rupees Six Lakhs).”

5. He submitted that the Tribunal has committed an error in passing the impugned order. In support of his submissions, he has relied upon the decision of this Court in Commissioner of Income-tax-IV v. Symphony Comfort Systems Ltd.

reported in [2013] 35 Taxmann.com 533 (Gujarat), and a decision of Delhi High Court in Commissioner of Income- tax-XII v. Smt.Poonam Rani reported in [2010] 192 Taxman 167 (Delhi).

6. Mr.Parikh, learned counsel for the respondent has taken us through the Assessment Order, wherein a table with regard to Quality Purchase and Quality Consumption is given. He submitted that there was a difference as per the audited books of account compared with the stock register. He contended that serious discrepancies are found by the AO. He contended that after examining the books of account of the assessee, the AO has given these findings and observed as under:-

“(vii) The assessee failed to substantiate reasons for astronomical fall in G.P. Rate. The reasons ascribed by the assessee are not satisfactory and hence I reject the same. Further, the reply to my various notice including last and final show cause notice given by the assessee are also not satisfactory. The assessee failed to substantiate with vouchers and books as required in my aforesaid notice u/s. 282 (I) r.w.s. 143 (3) of the I.T.Act. I also reject submission made by Tax Auditors vide his letter Dtd. 21-1-98, who failed to attend personally but submitted written reply without producing Audit working paper for the reasons mention in para (vi) of the order as also elsewhere in the body of the order.”

7. He submitted that this finding of the AO has been confirmed by the Tribunal by reversing the finding of the CIT (Appeals), and the Tribunal has not committed any error while doing so. In view of above, he contended that the view taken by the Tribunal is just and proper and the same may not be interfered with.

8. It will not be out of place to mention here that the assessee is a manufacturing unit and it has to pay the excise duty. It is the specific contention of the assessee that the books of accounts maintained by it are tallying and the excise duty is paid on that basis. The stock register is not tallying with the other books of account only because some of the items were not deleted from the stock register. Taking into account the decision of this Court, not maintaining the day-to- day stock register is not a ground to reject the books of account. In Commissioner of Income-tax-IV v. Symphony Comfort Systems Ltd. (supra), it is observed as under:- “Question No.1 pertains to the addition made by the Assessing Officer on the basis of low gross profit. The Commissioner (Appeals) as well as the Tribunal, however, deleted such addition after examining the material on record. In particular, the Tribunal while upholding the order of the Commissioner (Appeals) in this respect, made following observations:

“4. On consideration of the rival submissions, we do not find any justification to interfere with the order of the learned CIT(A) in deleting the addition. The AO merely gone by the fact that there was a fall in the gross profit rate as compared to the preceding assessment year which itself is no ground to reject the books of accounts of the assessee. No specific defect in the maintenance of the books of accounts by the assessee has been pointed out AO. The AO further noted that day to day stock and inward and outward registers are maintained on computer. Perhaps, this was the sale reason which swayed the AO to reject the books of accounts and make the addition. Now-a-days it is common knowledge that all the records are maintained on computer including by the government and semi government organizations. Even if, records are maintained on computer is not ground to reject the explanation of the assessee. The AO should have verified the entries from the computerized records also to point out any defect thereon. In the absence of any specific defect pointed out in the books of accounts and the records maintained on computer, the AO was not justified in rejecting the books results, or to enhance the gross profit rate. Accordingly, there is no merit in this ground of appeal of the revenue. The same is accordingly, dismissed.”

From the above, it can be seen that the entire issue is based on appreciation of evidence on record. No question of law, therefore, arises particularly when the Commissioner (Appeals) as well as the Tribunal concurrently held in favour of the assessee.

Issue No.2 pertains to the additions made by the Assessing Officer on account of excessive expenses. The Commissioner (Appeals) as well as the Tribunal, however were of the opinion that such additions were not justified. The Tribunal while upholding the view of the Commissioner (Appeals), made following observations :

“6. On consideration of the rival submissions, we do not find any merit in this ground of appeal of the revenue. The AO merely made comparative study of the expenses for the year under consideration with the preceding assessment year and found that expenses incurred in the preceding assessment year were 2.89% on turnover but in the assessment year under appeal it was 4.78% on the turnover. The expenses were, therefore, found excessive without pointing out as to which of the expenses incurred by the assessee was not connected with the business activity of the assessee. The AO has not pointed out which of the expenditure were not admissible in law. In the absence of any pointing out inadmissible expenses, the AO cannot make addition merely by comparing the expenditure with the preceding year's expenditure. The learned CIT(A) on proper appreciation of the facts and material on record rightly deleted the addition. This ground of appeal of the revenue is accordingly dismissed.”

The entire issue is based on appreciation of evidence. No question of law arises. When the Commissioner (Appeals) as well as the Tribunal concurrently held that on the basis of the evidence, addition as made by the Assessing Officer was not justified, we are not inclined to interfere.”

9. In Commissioner of Income-tax-XII v. Smt.Poonam Rani (supra), it is observed as under:-

“10. During the course of arguments before us, it was submitted by the learned counsel for the appellant that the assessee was not maintaining the Daily Stock Register. We, however, find no such finding in the assessment order. On the other hand, we note that the Assessee had submitted before the Commissioner of Income Tax (Appeals) that Form 3CD containing all the quantitative details in respect of raw materials as well as the finished goods, duly audited by the Certified Accountant had been placed on record, but, the Assessing Officer ignored those actual figures enclosed with the return. In any case, no statutory provision under the Income Tax regime requiring the assessee to maintain the Daily Stock Register has been brought to our notice. Hence, even if no such register was being maintained by the assessee as is contended by the learned counsel for the appellant, 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 under Section 145(3) of the Act.”

10. In view of above observations and considering the facts of the case, we are of the opinion that the view taken by CIT (Appeals) is required to be accepted by setting aside the impugned order of the Tribunal. Accordingly, the question posed for our consideration is answered in favour of the assessee and it is held that the Tribunal has erred in upholding the action of the Respondent in rejecting the books of accounts of the Assessee under Section 145 (2) of the Act and further erred in confirming the part of the addition on estimated basis against the revenue. Accordingly, Tax Appeal No.1196 of 2007 is allowed.

11. So far as Tax Appeal No.1782 of 2010 is concerned, the same is preferred against the order of penalty imposed by the Tribunal by the same impugned order.

12. At the time of hearing of this appeal, Ms.Shah, learned counsel for the appellant has relied upon the decision reported in Commissioner of Income-tax II v. Mamta Machinery Pvt. Ltd. reported in 252 ITR 417 (Gujarat), wherein it is observed as under:-

“For the assessment year 2004-05, the Assessing Officer after disallowing the expenditure under section 14A of the Income Tax Act, 1961, also initiated proceedings under section 271(1)(c) of the Act. CIT (Appeals), deleted such penalty and when this was challenged before the Tribunal, it confirmed the order of the CIT(Appeals). The impugned of the Tribunal is under challenge before this Court proposing aforementioned question of law.

On hearing learned counsel Mrs.Mauna Bhatt and on examination of the orders of the adjudicating authorities, this appeal does not require to be entertained for the reasons to be followed hereinafter.

The Tribunal extensively dealt with the factual and legal aspects presented before it. The Tribunal while concurring with the order of the CIT (Appeals), elaborately dealt with the order of the CIT (Appeals) and reiterated the settled proposition of law with regard to levying of penalty under section 271(1)(c). The Tribunal, thereafter, had noted that when disallowance was made merely on estimate basis, that would not ipso facto require imposition of penalty. The Tribunal also further relied on the decision of this Court in the case of Navjivan Oil Mills v. CIT, 252 ITR 417 wherein it has been held that when the Assessing Officer has estimated the turnover and made additions on the basis of such estimated turnover, that is no ground for levying penalty under section 271(1)(c). In the present case also, when the Tribunal found that there was neither concealment of income on the part of the assessee nor there was furnishing of inaccurate particulars, but the disallowance was made only on the ground of estimation, no case was made out for levying of penalty and therefore the Tribunal concurred with the findings of the CIT (Appeals). Both the authorities concurrently have dealt with the issue giving detailed reasoning with which we find no flaw, nor any question of law having arisen for this Court to determine, this Tax Appeal is dismissed.”

13. In view of the above observations of this Court and considering the fact that the main appeal preferred against the same impugned order is allowed, this appeal is also allowed and it is held that the Tribunal has erred in confirming the penalty under section 271 (1) (c) of the Act. Accordingly, Tax Appeal No.1782 of 2010 is also allowed.

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(K.S.JHAVERI, J.)

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(G.R.UDHWANI, J.)