SACHIN WINES,VADAGAON V. INCOME TAX OFFICER, WARD - 2, BELAGAUM

ITA 137/PAN/2024

AI Insights

The case involves M/s Sachin Wines, a partnership firm engaged in the trading business of liquor, which filed an appeal against the order of the Income Tax Officer, Ward-2, Belgaum, and the subsequent order of the CIT(A). The primary contention was the rejection of the declared Gross Profit (GP) percentage of 6.98% and its substitution with an estimated GP of 10% by the AO, which was upheld by the CIT(A). The ITAT found that the estimation of GP by the AO lacked a rational basis and did not consider industry standards or local market conditions, leading to the decision to remand the issue back to the AO for a more justified determination.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 26318 (ITAT-PANAJI)
• Duration Of Justice: 5 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-11-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: WT(D)
• Next Hearing Date: 06-11-2024
• Assessment Year: 2017-2018
• Appeal Filed On: 27-05-2024
• Other Referred Cases: Dhondiram Dalichand Vs CIT, Bastiram Narayandas Vs CIT, Kachwala Gems Vs Jt. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASSESSEE; RAVINDRA HATTALLI LD.
• Section: 143(3); 250; 145; 145(3)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI ITAT-Panaji Page 1 of 8 BEFORE HON’BLE SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER AND SHRI G. D. PADMAHSHALI, ACCOUNTANT MEMBER ITA Nos. 137/PAN/2024 Assessment Year : 2017-18 M/s Sachin Wines 470/A1, Shahapur Road, Vadagaon, Belgaum-590006. PAN:ABMFS5415N . . . . . . . Appellant V/s Income Tax Officer, Ward-2, Belgaum. . . . . . . . Respondent Appearances Assessee by : None for Assessee Revenue by : Mr Ravindra Hattalli [‘Ld. DR’] Date of conclusive Hearing : 06/11/2024 Date of Pronouncement : 08/11/2024 ORDER PER G. D. PADMAHSHALI, AM; This appeal is filed by the assessee challenging DIN & Order No. ITBA/APL/S/250/2023-24/1063520452(1) dt. 28/03/2024 passed u/s 250 of the Income-tax Act, 1961 [‘the Act’ in brief] by first appellate authority [‘Ld. CIT(A)’ in brief] which in turn arisen out of order of assessment dt. 22/10/2019 passed by Income Tax Officer, Ward-2, Belgaum [‘Ld. AO’ in brief] u/s 143(3) of the Act anent to assessment year 2017-18 [‘AY’ in brief] M/s Sachine Wines Vs ITO ITA Nos.137/PAN/2024 AY: 2017-18 ITAT-Panaji Page 2 of 8 2. The case was called twice; none appeared at the behest of the appellant and there is no letter for adjournment on record. On the primary briefing from the respondent Revenue, we deem it fit to proceed ex-parte in the absence of the appellant u/r 24 of ITAT-Rules 1963 and adjudicate limited issue with able assistance from Ld. DR. Recording the former facts we advanced accordingly. 3. We have heard Revenue’s submission and subject to rule 18 of ITAT-Rules (supra) perused material placed on record, considered the facts in the light of settled legal position. 4. We note that, the assessee is a partnership firm which filed its return of income declaring total income of ₹2,29,130/-. The said return of the assessee was selected for scrutiny and regular assessment in this was completed u/s 143(3) of the Act by estimating gross profit [‘GP’ in brief] @10% as against the GP of 6.98% declared by the assessee. The resultant difference of GP of ₹8,03,933/- was added to retuned income while framing the assessment. The aforestated addition & assessment was unsuccessfully challenged in first appeal before the Ld. CIT(A). Aggrieved thereby the assessee came in present appeal challenging the aforestated solitary addition and substitution of declared GP by enhanced ad-hoc estimation. M/s Sachine Wines Vs ITO ITA Nos.137/PAN/2024 AY: 2017-18 ITAT-Panaji Page 3 of 8 5. We have given out thoughtful consideration to the clinching facts of the case and noted that, the assessee for the year under consideration was engaged in trading business of liquor etc. which accounted total turnover of ₹2,66,41,642/-. In order to vouch the correctness of GP declared by the assessee in relation to turnover achieved by it, the Ld. AO summoned stock/inventory register of the business. The appellant however denied to have maintained any such stock/inventory register for the purpose of its business. In view of the Ld. AO the opening/closing stock/inventory is a key determinant in computing/arriving at real/true GP/income for any business. Therefore, the absence of such stock/inventory derailed trueness and correctness of residual profits/GP etc. declared by the assessee. The non-maintenance of such key records since constitutes a significant defect in the accounts/books therefore the resultant GP declared by the assessee was rejected and for the purpose of taxation by the Ld. AO estimated the GP @10% of total reported turnover. The resultant difference of GP over and above the declared GP was thus added to returned income of and framed the assessment u/s 143(3) of the Act accordingly. Echoing the findings and reasoning, the Ld. CIT(A) upheld the rejection of declared GP and countenanced the addition made vis-à-vis assessment framed. M/s Sachine Wines Vs ITO ITA Nos.137/PAN/2024 AY: 2017-18 ITAT-Panaji Page 4 of 8 6. In this factual matrix let’s first deal with rejection of books, for which we deem it apt to reproduce provision in verbum to gather meaning & plain intent thereof; Section 145 : Method of accounting. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.'. (Emphasis supplied) 7. An austere reading of section 145(3) of the Act envisages existence of three situations where assessing officer can resort to rejection of books. And one of such situations with which we are concerned in the present appeal is satisfaction of the assessing officer about incorrectness or incompleteness of the books/accounts. The rejection on such ground however can only be triggered or considered when accounts are found substantially incorrect or incomplete. That is to say incorrectness or incompleteness of substantial accounts shall only form reasonable basis for rejection of books. The computation of taxable income is based upon books of accounts, where stock records inarguably forms substantial part of books/accounts. Hence determination of taxable income without reference to such stock/inventory records would be meaningless. M/s Sachine Wines Vs ITO ITA Nos.137/PAN/2024 AY: 2017-18 ITAT-Panaji Page 5 of 8 8. We note that, the Hon'ble Jurisdictional Bombay High Court in ‘Dhondiram Dalichand Vs CIT’ [1970, 81 ITR 609] while upholding rejection of books categorically that, absence of quantitative tally/figures regarding sales & purchases, opening & closing inventory/stock balances etc., was such that it was necessary to exercise powers available for rejection of books and determine the income to the best of judgement. Equally in ‘Bastiram Narayandas Vs CIT’ [1994, 210 ITR 438] their Hon’ble Lordships have upheld rejection of books and framing of assessment to the best assessing officers judgment where the assessee Bidi manufacturer, failed to produce relevant inventory/stock records of its day-to-day manufacture of Bidis. An analogous view can be traced in ‘Kachwala Gems Vs Jt. CIT’ [2007, 288 ITR 10 (SC)] wherein the Hon’ble Apex Court also espoused the rejection of books for incompleteness owning to non-maintenance of stock/inventory records. 9. In the instant case, undisputedly non-maintenance/production of item/product-wise trading/stock or inventory records has formed solitary basis in holding accounts of the assessee was substantially suffered from incorrectness or incompleteness, which in turn triggered their rejection u/s 145(3) of the Act. M/s Sachine Wines Vs ITO ITA Nos.137/PAN/2024 AY: 2017-18 ITAT-Panaji Page 6 of 8 10. Since the stock/inventory records/details forms significant part of accounts which severally capable of influencing the determination of taxable income of the assessee, hence the non-maintenance vis-à- vis non-production of stock/inventory records in our considered view is discretely capable of construing that accounts of the appellant were substantially incomplete & incorrect, thus valid reason for rejection of books/GP. Therefore, in view of the former judicial precedents, we upheld the action of tax authorities in rejecting the declared % GP for non-maintenance/production of stock records. 11. Now next comes the estimation of gross profit @10% of turnover by the tax authorities as against the declared GP of 6.98%. In this context we observed that, after rejecting the books/GP in wholesome the Ld. AO simply estimated the gross profit at the rate 10% of turnover/sales achieved to have reported by the assessee and added differential amount of GP as the income of the assessee. We note that, while doing so the Ld. AO did dejectedly fail to bring on record (a) rationale applied in arriving the estimation and (b) basis or material founded in arriving such % of GP. Further the impugned order also failed to narrate justification in confirming the % of GP estimated and consequential addition made by the Ld. AO. M/s Sachine Wines Vs ITO ITA Nos.137/PAN/2024 AY: 2017-18 ITAT-Panaji Page 7 of 8 12. On the other hand, there is no material on record, or no findings & observation in the impugned order which could even remotely suggests that such estimation was made having regard to industry standards, operational size of the appellant, then usual local market conditions and level of competition prevailing during the respective assessment year under consideration etc. This ad-hoc estimation % of GP badly lacks the rationale hence could hardly be persuaded for the purpose of addition & consequential assessment, therefore we deem it fit to untie the former estimation and consequential addition made in the assessment. 13. Considering the totality of facts and circumstances, in our considered view, % of simple average GP earned by the appellant in three assessment years immediately preceding the assessment year under consideration could have formed an acceptable rationale in place of ad-hoc estimation. 14. In view thereof we set-aside the impugned order and remand the limited issue of determination % of GP to the file of Ld. AO who shall determine the same strictly in accordance with former direction with reference to turnover and framed the assessment accordingly after giving three effective opportunity to the appellant assessee. M/s Sachine Wines Vs ITO ITA Nos.137/PAN/2024 AY: 2017-18 ITAT-Panaji Page 8 of 8 15. Needless to mention that, no addition shall be permissible if the % of GP re-computed on the basis of former direction falls lower than the % of GP declared by the assessee. In any other case the addition shall be not exceed the differential amount of GP calculated with reference to % of GP re-computed on the basis of former direction. The solitary ground of appeal thus stands partly allowed. 16. In result, the appeal of the assessee is allowed for statistical purposes in aforestated terms. In terms of rule 34 of ITAT Rules, the order is pronounced in the open court on this Friday 08th day of November, 2024. -S/d- -S/d- PAVAN KUMAR GADALE G. D. PADMAHSHALI JUDICIAL MEMBER ACCOUNTANT MEMBER Panaji/Dt: 08th day of November, 2024. Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)/NFAC Concerned 4. PCIT Concerned 5. DR, ITAT, Panaji Bench, Panaji 6. Guard File By Order, Sr. Private Secretary / AR ITAT, Panaji. "