DCIT, CIRCLE-I, LUDHIANA, RISHI NAGAR LUDHIANA V. PARAMOUNT IMPEX, FOCAL POINT LUDHIANA

ITA 642/CHANDI/2024

AI Insights

The case involves the Deputy Commissioner of Income Tax (DCIT), Circle-1, Ludhiana as the appellant and M/s Paramount Impex as the respondent. The dispute arose from the assessment year 2015-16, following a survey conducted on the assessee's premises in 2015, which led to the reopening of the assessment. The primary issue was the valuation of stock, where discrepancies were noted in the methodology used by the assessee. The Assessing Officer (AO) estimated the profits by applying a profit rate of 18%, which was contested by the assessee. The CIT(A) later deleted this addition, leading to the revenue's appeal to the Tribunal. The Tribunal, referencing a similar case for the assessment year 2013-14, upheld the CIT(A)'s decision, noting that the books of accounts could not be rejected solely on the grounds of non-maintenance of a stock register and incorrect stock valuation method.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 397934 (ITAT-CHANDIGARH)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-06-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2015-2016
• Other Referred Cases: ITA No.1097/Chd/2016
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GAURAV SHARMA LD
• Assessee Lawyers: RANJIT KAUR LD.
• Keywords: Set aside; Business income; Rejection of books of accounts; Non compliance
• Section: 143(3)

Judgement Text

"1 IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, CHANDIGARH BEFORE HON’BLE SHRI LALIET KUMAR, JM AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपील सं. / ITA No. 642/CHANDI/2024 (िनधाŊरणवषŊ / Assessment Year: 2015-16 DCIT Circle-1 Ludhiana-141001 बनाम/ Vs. M/s Paramount Impex D-202,203, Focal Point, Ludhiana-141010 ̾थायीलेखासं./जीआइआरसं./PAN/GIR No. AAEFP-3160-G (अपीलाथŎ/Appellant) : (ŮȑथŎ / Respondent) अपीलाथŎकीओरAppellant by : Sh. Gaurav Sharma (CA) – Ld. AR ŮȑथŎकीओरसे/Respondent by : Dr. Ranjit Kaur (Addl. CIT) – Ld. Sr. DR सुनवाईकीतारीख/Date of Hearing : 21-05-2025 घोषणाकीतारीख /Date of Pronouncement : 02-06-2025 आदेश / O R D E R Per Laliet Kumar (Judicial Member) 1. Aforesaid appeal by revenue for Assessment Year (AY) 2015-16 arises out of an order of learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated 27-03-2024 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) r.w.s. 147 of the Act on 27-12- 2018. The sole grievance of the assessee is deletion of addition of Rs.285.54 Lacs. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. The assessee being 2 a resident-firm is stated to be engaged in manufacturing and export of tractor parts, fasteners and other engineering goods. 2. Pursuant to survey action on the assessee on 09-10-2015, the case was reopened by issuance of statutory notices. The main discrepancy arose on account of valuation of stock. During survey, statements of operations manager Shri Kanwaljeet Singh Rekhi, Shri Sunil Kapoor (Partner) and Shri Rakesh Kapoor (Partner) was recorded wherein they could not explain the process of valuation of stock and everyone told a different methodology. In AYs 2012-13, 2013-14 and 2016-17, it was held that that the books were not reliable and the income was to be estimated by applying profit rate of 18%. To make similar assessment in this year, the case was reopened. 3. During the course of assessment proceedings, the assessee was show-caused to make similar estimation of business income. The Ld. AO noted that other entities engaged in similar line of business had operating margin of 15 to 17% which would be computed after deducting operating expenses. The assessee reflected gross margin of 10.05% and net profit of 2.44%. Therefore, the gross margin was less. The same was estimated at 18% and the profits of the assessee were enhanced by Rs.285.54 Lacs. 4. The Ld. CIT(A), considering the decision of Tribunal in assessee’s own case for AY 2013-14, ITA No.1097/Chd/2016, held that non maintenance of stock register could not be a ground for rejection of the books of accounts when no other defect was pointed out in the same. Therefore, there was no question of estimation of 3 profit and accordingly, the impugned addition was deleted which has led to appeal by revenue before us. 5. We find that similar issue arose in assessee’s case for AY 2013- 14, ITA No.1097/Chd/2016 order dated 30-06-2020 wherein the issue was adjudicated by the Tribunal as under: - 9. We shall first take up the issue relating to rejection of books of accounts u/s 145(3) of the Act, whether it was as per law raised in Ground of appeal No.1(a),(b),(c). Undeniably the power to reject books of accounts is to be exercised only when the books are found incorrect or incomplete for determining the true and correct profits earned by the assessee. This power is implied in the Income Tax Officers power to inquire into the total income of the assessee. 10. In the present case, undisputedly the only basis for rejecting the books of accounts is non maintenance of stock register and the incorrect method of valuation of stock adopted by the assessee. No other defect has been pointed out by the Revenue authorities for rejecting the books of accounts. As for the non maintenance of stock register the assessee has explained the non feasibility of maintaining it considering the fact that it was dealing in a large number of small items. It was also explained that the assessee was consistently following the method of physically verifying its stock at the end of the year. 11. Considering the above facts, we are not in agreement with the Revenue that the non maintenance of stock register was sufficient for exercising the power of rejecting the books of the assessee. It is not unusual for businesses dealing in large number of small items and operating at a small or medium scale to do away with the maintenance of any stock register since it is not feasible maintaining movement of stock of every such item. Such businesses usually verify physically their stock at the end of the year and all wastages ,pilferages and other losses therefore get automatically accounted for in the process, reflecting thus the true profits earned by the assesses. In the present case the assessee has been doing the same consistently, following the method of determining its stock at the end of the year by physically verifying the same 8 and not maintaining any stock register since it was dealing in a large number of small items. We fail to understand how the non maintenance of stock register has affected the determination of true and correct profits of the assessee in the circumstance. The Revenue has found no other defect in the books of the assessee. All purchase and sale vouchers and other records have been found to be in order. The Revenue has not demonstrated before us as to how the non maintenance of stock register has been a hindrance in determining the true and correct profits earned by the assessee and also what was the infirmity in the method adopted by the assessee of physically verifying its stock at the end of the year. Therefore in our opinion the mere fact of non maintenance of stock register cannot be the basis for rejection of books of accounts. 12. The only other defect which has been pointed out is the method of valuation adopted for determining the value of the stock. Admittedly the assessee has been applying the Gross Profit Rate of the year to the stock for determining the value. We 4 agree with the Revenue that this is not a correct method of valuation of stock which ideally should be valued at cost of market price whichever is less. But merely because of adoption of an incorrect method of valuation or merely on account of non compliance with the prescribed accounting standard, the books of accounts cannot be rejected. In fact in such cases the correct accounting standard or the correct method of accounting should be applied by the Revenue and the true and correct profits determined. Such defects, relating to method of valuation of stock, do not render the books of accounts unreliable, incorrect or incomplete, in which circumstances alone the Books of accounts can be rejected. On the contrary such defects can be cured and the taxable profits determined by applying the correct method of accounting/valuation. After all the entire exercise of assessment is aimed towards determining the correct taxable income of 9 assesses and the power of rejecting books of accounts therefore must be exercised only towards that end and not arbitrarily. 13. In view of the above we set aside the order of the Ld. CIT(A) upholding the rejection of books of accounts of the assessee under section 145(3) of the Act. We further direct the AO to determine the value of stock after applying the correct method of valuation and thereafter determine the taxable profits earned by the assessee. For this limited purpose the issue is restored back to the AO who is directed to determine the value of stock after giving due opportunity of hearing to the assessee. 14. Ground of appeal No.1(a),(b),(c) raised by the assessee is therefore allowed. 15. Ground No.2(a),(b),(c) relates to the application of estimated Gross Profit Rate. Since we have set aside the rejection of the books of accounts, there arises no occasion for the estimation of GPR. The grounds raised by the assessee are therefore infructuous. 16. In effect the appeal of the assessee is allowed. The Tribunal, on identical facts, held that the books could not be rejected u/s 145(3). Finally, Ld. AO was directed to determine value of stock after applying correct method of valuation. The Ld. AR has placed on record the consequential order of Ld. AO passed on 21-03- 2022 wherein Ld. AO has accepted the valuation of stock as done by the assessee and chose not to make any addition to the returned income of the assessee, on this count. In other words, the action of Ld. AO in rejecting the books and applying GP rate was dismissed by Tribunal. In consequential order, Ld. AO accepted the stock valuation of the assessee. The facts are quite identical in this year. The Ld. Sr. 5 DR argued that similar directions could have been given to Ld. AO in this year. However, considering the consequential order passed by Ld. AO for AY 2013-14 accepting stock valuation of the assessee, such an exercise would be futile exercise only and we see no reason for similar exercise in this year. This being the case, the deletion of impugned additions by Ld. CIT(A) could not be faulted with. We order so. 6. The appeal stand dismissed. Order pronounced on 02-06-2025. Sd/- Sd/- (MANOJ KUMAR AGGARWAL) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated 02-06-2025. आदेश की Ůितिलिप अŤेिषत / Copy of the Order forwarded to : 1. अपीलाथŎ/Appellant 2. ŮȑथŎ/Respondent 3. आयकरआयुƅ/CIT 4. िवभागीयŮितिनिध/DR 5. गाडŊफाईल/GF ASSISTANT REGISTRAR ITAT CHANDIGARH "