Income Tax Appellate Tribunal - DelhiJayanti Metal & Alloys, , New Delhi vs Department Of Income Tax on 7 July, 2009IN THE INCOME TAX APPELLATE TRIBUNAL
                         DELHI BENCH : D : NEW DELHI

                BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER
                                   AND
                 SHRI A.K. GARODIA, ACCOUNTANT MEMBER

                             ITA No. 3765/Del/2009
                          Assessment Year : 2002-03

ACIT,                                  Vs.   M/s Jayanti Metal & Alloys,
Circle 21(1),                                Bawana Road, Shahbad Daultpur,
New Delhi.                                   Delhi - 110 042.

                                             PAN : AACFJ 0998 G

     (Appellant)                                (Respondent)

                Assessee by        :    None
                Revenue by         :    Shri B.K. Gupta, Sr. DR


                                       ORDER


PER I.P. BANSAL, JUDICIAL MEMBER:This is an appeal filed by the revenue. It is directed against the order of
the CIT (A) dated 7th July, 2009 for Assessment Year 2002-03. Grounds of
appeal read as under:-1. The Ld. CIT (A) erred in law and on facts in deleting the
          addition made on account of trading result amounting to
          Rs.7,46,158/- being low GP shown by the assessee.2. The appellant craves leave to amend or alter all or any of
          the aforesaid grounds of appeal and add any other ground of
          appeal.2.     The return in the present case was filed declaring net loss of
Rs.24,13,190/- which has been assessed by the AO at net loss of Rs.15,80,687/-
by making certain additions inter alia trading addition of Rs.7,46,158/- on account2                    ITA No.3765/Del/2009of low GP rate. It was noticed by the AO that GP rate shown during the year had
fallen down to 0.89% from 5.72%. An explanation was sought from the assessee
and it was explained that purchase cost during the year under consideration had
increased and there was fall in sale prices. It was also submitted that US Dollar
rate was increased and market was hit by price fluctuation in US Dollar and
Pound Sterling and because of these adverse conditions, the turnover had fallen
down by almost Rs.5 crore. It was submitted that 75% of sales were to Hero
Majestic India only which was 85% in the previous year and, thus, GP rate was
lower because of increase in purchase cost and decrease in sale price.
Necessary books of account along with vouchers, bills, etc. were produced. A
survey was also conducted at the premises of the assessee on 8th March, 2002
and stock of Rs.38,32,389/- was found which as per books was Rs.37,97,952/-
and there was difference of Rs.30,000/- in the stock and a surplus cash was also
found of Rs.11,65,763/-. It was noted by the AO that certain expenditure on fuel,
diesel and wages, etc. were also increased. The AO estimated the sales of the
assessee at Rs.5,55,00,000/- against 5.49 crore and applied GP rate of 2.25%
and after giving set off of gross profit shown by the assessee, net addition of
Rs.7,46,158/- was made by invoking the provisions ofSection 145of IT Act
1961. The addition was challenged in the appeal filed before the CIT (A) who in
para 5.2 while deciding the issue has observed that the reasons for invokingSection 145by the AO were :(i)     Difference in closing stock of Rs.30,000/- found at the time of
                      survey;(ii)    Difference of cash in hand found at the time of survey;(iii)   Decrease in sales from Rs.10.04 Crore to Rs.5.49 crore; and(iv)    Decline in GP rate from 5.72% to 0.89%.3.         The Ld. CIT (A) observed that before invoking the provisions ofSection
145the AO was required to see:(i)      Whether the assessee has regularly employed a method of
              accounting?;3                  ITA No.3765/Del/2009(ii)       Even if regular adoption of a method of accounting is there, whether
                the annual profits can properly be deduced from the method
                employed?(iii)      Whether the accounts were correctly maintained; and(iv)       Whether the accounts maintained are complete in the sense that there
                is no significant omission therein.4.           He observed that if the answer to these four questions are in affirmative,
then the profits of the assessee were to be computed on the basis of books of
account and he found that answer to these four questions were in affirmative.
Then, Ld. CIT (A), referring to the provisions ofSection 145(3)has observed that
the assessee has been maintaining its account correctly and completely. The
AO did not dispute the method of accounting followed by the assessee and also
the compliance of the accounting standards. The explanation regarding low GP
rate was furnished by the assessee and they were also test checked and the AO
himself had admitted such facts in the assessment order itself. The CIT (A)
observed that in the absence of any particular transaction to be left out to be
entered in the books of account or the fact that the assessee has sold some of
the items at a price higher than what was disclosed in the books of account,
estimation of sale and GP rate could not be applied and for holding so he has
referred to various decisions in para 5.5. In para 5.6 CIT (A) has observed that
assessee's accounts were duly auditedu/s 44ABof the Act in which no defect
whatsoever was found by the AO and, thus, the addition made by the AO could
not be sustained.          The conclusion of CIT (A) as found from para 5.2 to 5.7 is
reproduced below for the sake of convenience:-"5.2 I have carefully considered the submission made on behalf of
             the appellant and the findings of the A.O. The A.O. invoked the
             provisions ofsection 145and disturbed the trading results by
             estimating the sales during the year under consideration at Rs.
             5,55,00,000/- as against Rs. 5,49,19,351/- declared by the assessee
             and applying the G.P. rate of 2.25% thereon which ultimately
             resulted into an addition of Rs. 7,46,158/-. The above action was
             taken by the A.O. on the following grounds: -4                    ITA No.3765/Del/2009(i)     There was a difference in the closing stock as on the date of
        survey amounting to Rs. 30,000/-.(ii)    There was a difference in "cash in hand" amounting to Rs.11,70.000/- found during the survey operations which was
        declared by the assessee in the Profit & loss account as
        additional income.(iii)   When the sales have come down from Rs. 10.04 crores in the
        preceding year to Rs. 5.49 crores during the year under
        consideration, the expenses incurred on fuel, diesel and
        wages have increased or remained almost the same as
        compared to last year.(iv)    The G.P. rate of the assessee has drastically come down from
        5.72% in the preceding year to 0.89% during the year under
        consideration.5.3 While examining the books of the assessee, the A.O. has to
consider the following aspects:(i)     Whether the assessee has regularly employed a method of
        accounting?(ii)    Even if regular adoption of a method of accounting is there,
        whether the annual profits can properly be deduced from the
        method employed?(iii)   Whether the accounts are correctly maintained?(iv)    Whether the accounts maintained are complete in the sense
        that there is no significant omission therein?If the answers to above four questions are in the affirmative,
assessee's profits are to be computed on the basis of his accounts.
On the perusal of the materials placed on record, in the instant case,
I find that answers to all the above four questions were affirmative.5.4 . Though the A.O. has not specifically mentioned the sub-sectionsection 145which has been relied upon by him in this case, it is not
difficult to infer that sub-section 3ofsection 145has been applied by
him.Section 145(3)reads as follows:"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 subsection (1) or accounting5                    ITA No.3765/Del/2009standards 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 insection 144."It is clear from its plain reading that the aforementioned
subsection has the following ingredients:-(a) The assessee is required to regularly employ either cash or
    mercantile system of accounting as per the accounting
    standards and meaning and consequences of not regularly
    following the system of accounting;(b)     The A.O. not being satisfied about the correctness or
      completeness of the accounts of the assessee and the very
      meaning of correctness and completeness of account; and(c) Making of an assessment in the manner providedu/s 144;Regarding the completeness of accounts it refers not only to
the accounting entries for all the transactions done in the previous
year but also to the list of books of accounts. In other words, the
failure to maintain certain register or any other books makes the
accounts of the assessee incomplete. On the other hand, the
correctness of the accounts refers to the quality or accuracy or
reliability of accounts maintained by the assessee and it covers
reconcilable mistakes or errors in accounts. Thus, the completeness
refers to the list of books of accounts and entries therein and the
accuracy refers to the quality of the accounts of the assessee.Regarding the 'Assessing Officer being not satisfied about the
correctness or completeness of the assessee's accounts', the
Calcutta High Court's judgment in the case ofAshoke Refractories
(P) Ltd. V. CIT[20051 279 ITR 457 is relevant. In the said case, the
Hon'ble High Court held that in order to reject the accounts, the
Assessing Officer has to come to an opinion that the income cannot
be properly deduced from the accounts so maintained. In order to
arrive at such conclusion, it must be shown that the Assessing
Officer has taken into consideration relevant factors and not omitted
to consider the material before him. It is the Assessing Officer's
opinion which is important and the said opinion should be about
either the correctness or completeness of the books.5.5 In the light of the above scope ofSection-145(3), if the fact of
the instant case is examined, it may be seen that the rejection was
done merely without any finding on the 'correctness or
completeness' of the books of account. In view of the above and in6                   ITA No.3765/Del/2009my considered opinion, the rejection the books of account undersection 145of the I.T. Act, while accepting the books as correct and
complete, is an invalid assumption of jurisdiction by the Assessing
Officer as he did not dispute the method of accounting followed by
the assessee and compliance of the accounting standard. The facts
of the case clearly indicate that the appellant has furnished
explanation regarding the decline of GP rate, the books of accounts
and stock register were produced by the assessee and they were
test-checked by the A.O. at the time of assessment proceedings.
The A.O. has himself admitted this fact in the assessment order
itself. Unless the AO is able to point out certain transactions which
have been left to be entered in the books of account or that the
assessee has sold some of the items at a price higher than what is
disclosed in the books of account or if proper particulars, bills,
vouchers, are not forthcoming etc., the books of account cannot be
rejected without assigning specific reasons. In the instant case the
books of account maintained by the assessee which are free from
any defect cannot be rejected merely because the GP rate was lower
than the GP rate of the earlier year. In other words, mere decline of
GP rate is not a sufficient ground for rejection of books of accounts.
Reliance is placed on the decisions in the cases of Yog Raj Saini v
ACIT (2008) 108 TTJ 912 (Delhi), Haridas Parikh v ITO (2008) 113
TTJ (Jodh) 274 and ITO Vs. Girish M. Mehta (2007) 105 lTD 585
(Rajkot). In the background of the fact that the reasons for decline in
GP rate were explained by the appellant during the assessment
proceedings, the reasons quoted by A.O. for rejecting the books of
accounts are not justified.Besides that, after the rejection of the
books of accounts, the estimation of income was made by the A.O.
without any concrete basis for doing so. In the case ofDhakeswari
Cotton Mills Ltd. V. CIT(1964) 26 ITR 775 (SC) the Hon'ble
Supreme Court had decided that once the books of accounts of the
assessee are rejected then the profit has to be estimated on the
basis of proper material available. However, the A.O. is not entitled
to make a pure guess & make estimation without reference to any
evidence or any material at all. There must be something more than
mere suspicion to support such addition.The Hon'ble Supreme
Court has reconfirmed the earlier stand in the case ofCIT Vs. K.Y.
Pilliah & Sons(1967) 64 ITR 411 (SC), where it has been decided
that any lump sum add back to the trading result if found justified
must be done in proper exercise of discretion objectively &
judiciously on the basis of relevant material.5.6   In the case on hand, the undisputed fact is that the assessee
has been consistently following a particular method of accounting. Its
accounts are audited undersection 44ABof the Income-tax Act.
Auditors have been consistently certifying that the assessee has
been regularly following the method of accounting and that the7                   ITA No.3765/Del/2009annual profits can be properly deduced from such method of
accounting employed by the assessee. The auditors over the years
have also been certifying that the accounts are regularly maintained
and are complete in the sense that there is no significant omissions
therein. The assessing authority has to look into the substance of the
situation and decide the matter in such a manner that neither is put
to unreasonable liability nor the assessee is subjected to
unreasonable hardship. No doubt it is not only the right but also the
duty of the Assessing Officer to consider whether or not the books
disclosed the true state of accounts and the correct income can be
deduced therefrom. But these right and duty have to be exercised in
such a manner and have to be based on cogent reasons and
sufficient material. The reasons given by the Assessing Officer in this
case on the facts and circumstances is demonstrated, as erroneous
by the assessee. Rejection of books of account should not be done
light heartedly as held by the Kerala High Court in the case of St.
Teresa's Oil Mills v. State of Kerala [1970] 76 ITR 365 and by the
Assam High Court in the case of Tolaram Daga v. CIT [1966] 59 ITR632. Accounts regularly maintained in the course of business have to
be taken as correct unless there are strong and sufficient reasons to
indicate that they are unreliable and incorrect. The A.O. has to prove
satisfactorily that the account books are unreliable or incorrect or
incomplete before he can reject the accounts and this can be done
by showing that important transactions are omitted or if proper
particulars and vouchers are not forthcoming or the accounts do not
include entries relating to a particular class of business.5.7 Thus, for all these reasons and as the assessee has produced
sufficient material justifying its claim and as it has repelled the
contentions advanced by the Assessing Officer with cogent material
and evidence, I am of the considered view that on the facts and in
the circumstances of the case, the Assessing Officer was not correct
in making the lump sum addition of Rs. 7,46,158/- by enhancing the
amount of sales to the extent of Rs. 5.55 crores. Addition if any could
be made to the extent of specific unaccounted sale, difference in
stock, difference in the accounts of the customers, etc. and not in the
general way of enhancing the sale on estimate. Reliance is placed
on a recent judgment of the Gujarat High Court in the case ofCIT V.
Gurubachhan Singh J. Juneja(2008) 302 ITR 63. Addition if any
called for must be restricted to the actual amount of
discrepancy/difference in sales, purchase, stock, declaration to the
bank, customers and suppliers accounts, etc. The entire exercise
done by the A.O. is based on surmises and conjectures and without
any evidence. Therefore, it is held that the Assessing Officer is not
justified in invoking the provisions ofsection 145of the Act and
addition on account of trading result to the extent of Rs.7,46,158/- is
directed to be deleted. Thus, ground No.2, 3 & 4 are allowed."8                    ITA No.3765/Del/20095.     Notice of hearing was sent to the assessee, however, on the date of
hearing none was present. Therefore, we proceed to decide this appeal ex parte
qua the assessee after hearing Ld. DR.6.     Ld. DR vehemently relied upon the findings given by the AO.               He
submitted that the assessee could not explain properly the decline in GP rate
and, thus, the addition was rightly made by the AO and, thus, the addition has
wrongly been deleted by the CIT (A).7.     We have carefully heard Ld. DR and we have carefully gone through the
assessment order as well as the order of the CIT (A). The AO has proceeded o
make addition on the basis that there was a decline in GP rate as compared to
earlier year. Even the AO did not apply the GP rate of last year. The CIT (A) is
right in observing that unless there is specific defect is found in the maintenance
of books of account, addition could not be made. So far as it relates to addition
made on account of surplus cash found during the course of survey, it was
submitted by Ld. DR that the same was declared by the assessee. Therefore, it
is not even the case of the Department that surplus cash found during the course
of survey is also the reason for making the addition. In this view of the situation,
going into the entirety of facts, we are of the opinion that there was no sound
basis for making addition on account of GP rate particularly in view of the finding
that there was no particular defect found in the books of account and department
is unable to bring any material on record that there was any specific defect in the
books of account or in the entries made in the books of account. Therefore, we
decline to interfere in the order of the CIT (A) vide which the impugned addition
has been deleted.8.     In the result, the appeal filed by the Department is dismissed.
.9.     The order pronounced in the open court on 15.01.2010.Sd/-                                      Sd/-
           [A.K. GARODIA]                             [I.P. BANSAL]
      ACCOUNTANT MEMBER                             JUDICIAL MEMBER
Dated, 15.01.2010.9       ITA No.3765/Del/2009dk

Copy forwarded to: -

1.    Appellant
2.    Respondent
3.    CIT
4.    CIT(A)
5.    DR, ITAT


                       TRUE COPY

                                             By Order,


                                      Deputy Registrar,
                                   ITAT, Delhi Benches