Section
145(2) gives powers to the Central Government to notify in the Official Gazette
from time to time income computation and disclosure standards to be followed by
any class of assessees or in respect of any class of income.
Text of section 145
[1][145. Method of Accounting
(1)
Income chargeable under the head “Profits and gains of business or profession”
or “Income from other sources” shall, subject to sub-section (2), is computed
in accordance with either cash or mercantile system of accounting regularly
employed by the assessee.
(2)
The Central Government may notify income in the Official Gazette from time to
time [2][income
computation and disclosure standards to be followed by any class of assessees
or in respect of any class of income.
(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) [3][has
not been regularly followed by the assessee, or income has not been computed in
accordance with the standards notified under sub-section (2), the Assessing
Officer may make an assessment in the manner provided in section 144.
KEY NOTE
1. Substituted by the Finance Act, 1995, with
effect from 01.04.1997.
3.
Substituted for the words “or accounting standards” as notified under
sub-section (2), have not been regularly followed by the assessee” by the
Finance (No. 2) Act, 2014, with effect from 01.04.2015.
What is Method of
Accounting
To maintain a similar
process of recording income, expenses, assets and liabilities of every business
certain standards are designed, known as the methods of accounting.
Methods of Accounting
Recognized
Income
under head ‘Business or Profession’ and Income under head ‘Other Sources’ is to
be calculated on basis of Cash or Mercantile basis of accounting regularly
employed by the assessee. [Section 145(1)]
Prior to 01.04.1997:
Upto 31.03.1997, the
Central Government has allowed to follow either the cash or mercantile or the
hybrid systems.
After 01.04.1997:
Since
the hybrid system does not reflect the correct income, the said section has
been amended vide Finance Act 1995 with effect from 01.04.1997. Consequent to
amendment brought vide Finance Act, 1995 with effect from 01.04.1997, section
145 recognizes only two methods of accounting to compute income chargeable
under the head “Profit & Gains of Business or Profession or Income from
other sources”. Accordingly, the amendment is applicable from the Assessment
Year 1997-98 onwards.
As
said above, upto 31.03.1997, the Central Government has allowed to follow
either the cash or mercantile or the hybrid systems. Consequent to amendment
brought vide Finance Act, 1995 with effect from 01.04.1997, section 145
recognizes only two methods of accounting to compute income chargeable under
the head “Profit & Gains of Business or Profession or Income from other sources”.
Apex Court's Observation
on recognized methods
The
Hon'ble Supreme Court in CIT v. A. Krishna Swamy Mudaliar (1964) 53 ITR 122 observed
that in some cases recognized systems, say cash as well as mercantile system
may not give a clear picture of the true profits earned and certainly not of
taxable profits.
The
section enacts that for the purposes of section 28 (profits of business, profession
or vocation) and section 56 (income from other sources), income, profits and
gains must be computed in accordance with the method of accounting regularly employed
by the assessee.
What are Books of
Account?
According
to P. Ramanatha Aiyar's Concise Law Dictionary, unbound sheets of paper in
whatever quantity, though filled up with one continuous account are not books
of account. The books of account signify a collection of sheets of paper bound
together with the intention that such binding shall be permanent and the papers
used shall be collectively in one volume.
According
to section 2(12A) of the Income Tax Act, 1961, books or books of account,
include ledgers, day-books, cash books, account-books and other books, whether
kept in the written form or as printouts of data.
However,
section 145 does not specify any set of accounts to be maintained by an
assessee. Also, rule 6F of Income Tax Rules, 1962 prescribes certain set of
books only for professionals and not for other assessees or businesses or traders.
Choice and Change in the
Method of Accounting
v An assessee may select
Cash or Mercantile System of Accounting. The choice of method of accounting
lies with the assessee but, he must show that, he has regularly followed the
method of accounting chosen.
v
An
assessee may change the method of accounting for bona fide and
justifiable reasons and then the changed method should be followed
consistently.
v CBDT has notified Income
Computation and Disclosure Standards (ICDS) vide Notification No. 32/2015,
dated 31.03.2015 applicable from the Assessment Year 2016-17 which are to be
followed for the computation of Profits and Gains of Business or Profession and
Income from Other Sources and not for the purpose of maintenance of books of
accounts of the assessee.
Section
145 is couched in mandatory terms and the department is bound to accept the
assessee's choice of method regularly employed, except for the situation
wherein the Assessing Officer is permitted to intervene in case it is found
that the income, profits and gains cannot be arrived at by the method employed
by the assessee. The position of law is further well settled that a regular
method adopted by an assessee cannot be rejected merely because it gives
benefit to an assessee in certain years. [CIT v. Advance Construction Co.
(P) Ltd. (2005) 275 ITR 30 : 143 Taxman 61 (Guj)]
The
assessee’s regular method cannot be rejected as being improper merely because
it gives him benefit in certain years.—[CIT
v. K. Dodabasappa (1964) 54 ITR 221 (Mys)]
Assessee has the choice
on method, but such method should be shown as regularly followed
The choice of the method
of accounting lies with the assessee; but the assessee must show that he has
followed the method regularly for his own purposes. - [CIT v. McMillan &
Co. (1958) 33 ITR 182 (SC)]
Section 145(1) provides that Income under the head
“Profits & Gains from Business & Profession” or Income from Other
Sources shall be either cash or mercantile system of accounting to be regularly
employed by the assessee paying taxes. However, some assessee follows the
combined method of accounting. cash and mercantile method of accounting. This
method is normally not allowed. They have to either use cash or mercantile
method.
The
method of accounting can affect the computation of income only under the heads
of business or profession (Section 28) and income from other sources (Section
56). The provisions of this section do not apply to salaries (Section 15),
income from house property (Section 22) and capital gains (Section 45).
Although dividend income is taxable as income from other sources (Section 56(2)(i)
by reason of the provisions of section 8, it is taxable as the income of the
year in which it is declared, irrespective of the method of accounting employed
by shareholder.
Section 145(1)
:
|
S. No. |
Heads of
Income |
System of
Accounting |
|
1. |
Profits
and gains of business or profession (PGBP) |
It can be
computed on the basis of either “Cash or
Mercantile” system of accounting at the option of the assessee. |
|
2. |
Income from
other sources |
|
|
3. |
Salaries |
Method of
accounting plays no role. These
incomes are taxable as per specific rules applicable |
|
4. |
House
Property |
|
|
5. |
Capital
Gains |
Section 145(2) deals with the provisions related to
the accounting standards which are provided by Central Government from time to
time in the official gazette. In
this sub-section, the Central Government has been empowered to notify ICDS i.e.
“Income Computation and Disclosure Standards” to be followed by the assessee.
This is applicable only to those who are following mercantile system of
accounting. Individuals and Hindu undivided households are excluded from
getting their accounts credited under section 44AB. The notification of ICDS
must be published in the Official Gazette from time to time.
The central government
recently released the 10 new ICDS which will be applicable from 2017-2018
Assessment year. ICDS will not be applicable for maintenance of books of
account but shall be relevant for computation of total income and disclosure of
information in the return.
The 10 ICDS are as
follows: -
ICDS DEALS WITH
I Disclosure of Accounting Policy
II Valuation of Inventories
III Construction Contracts
IV Revenue Recognition
V Tangible Fixed Assets
VI Effects of changes in Foreign Exchange
Rates
VII Government Grants
VIII Securities
IX Borrowing Costs
X Provisions, Contingent Liabilities & Contingent Assets
Section 145(3) - According
to this clause, the following three circumstances Assessing Officer may (or may
not) take up the case and complete the assessment in the manner provided in
section 144 i.e. Best Judgement Assessment:
(i)
If
assessing officer is not pleased with the completeness or correctness of the
Books of Accounts and documents of the assessee;
(ii)
If
assessee did not follow the correct accounting procedure on a daily basis;
(iii) ICDS notified by Central
Government under section 145(2) may have not been followed by the assessee for
computation of income.
If there are any
discrepancies in the books of accounts, the Assessing Officer
has the power to reject it. These are as follows:
§ If the method of
accounting is improperly followed.
§ If the accounts were not
produced for authentication.
§ If no records are
produced.
§ If the accounts were
defective.
§ If stock register was
not maintained.
If the assessing officer
rejected the books of account because he was not satisfied with the accuracy of
the accounts which were produced by the assessee, then the Assessing Officer
must make the best decision possible, taking into account all of the factors
set out in Section 145 of the Income Tax Act of 1961.
Only two systems of
accounting recognised now
Sub-section
(1) of section 145 now recognizes only these two - cash or merchantile -
systems of accounting. Besides these two well known systems of accountancy,
there are several variations prevalent in the business community keeping in
view the nature of particular transaction and commercial expediency. Even the
Supreme Court felt in CIT v. A. Krishnaswami Mudaliar (1964) 53 ITR 122 that
in some cases these methods may not give a clear picture of the true profits
earned and certainly not of taxable profits.
(1) Cash system
The
cash system of accounting is that in which the receipts are accounted for as
and when actually received and the debits are made when actual disbursement is
made.
Broadly, the cash system
of accounting is that in which the receipts are accounted for as and when
actually received and the debits are made when actual disbursement is made.
Time
of recording a transaction in books of accounts is when there is inflow or
outflow of cash. In simple words, cash coming in is called as cash inflow and
cash going out is called as cash outflow.
For
example, Mr. “X” sells 100 fans for Rs. 1000 each to Mr. “Y” on 15.05.2022 and
Mr. “Y” pays the amount at that very moment. Therefore, there is an inflow of
Rs. 1,00,000 in the account of Mr. “X” and is recorded on the same day, i.e.
the time when cash is received.
Benefits of Cash system
§ It is a simple method of
accounting.
§ This method is not
recognized by the Companies Act.
§ The income statement
under this method depicts lower income
§ The matching concept is
not applicable.
§ There are outflows and
inflows of cash.
§ The degree of accuracy
in the cash method is very low.
Cash system – Advance
payment – Advance received from clients cannot be taxed as income in year of
receipt itself
Allowing
the appeal of the assessee the Tribunal held that : assessee-law firm,
following cash system of accounting, received certain advance payments from its
clients for making payment of fees to Senior Advocates to appear on behalf of
them before High Courts and Supreme Court, since said amount was received by
assessee in fiduciary capacity to discharge certain obligations while
representing case of its clients before various courts, same could not be
brought to tax as assessee's income in year of receipt itself. (Related
Assessment year : 2010-11) - [Associated Law Advisers. v. ITO (2017) 167 ITD
695 (ITAT Delhi)]
Cash system may even
cover cases where no proper accounts are kept
It
was found that the assessee has not kept proper accounts. The Hon'ble Gauhati
High Court held that it could not, therefore, be presumed that the assessee has
followed mercantile system of accounting.—[N.R. Sirker v. CIT (1978) 111 ITR
281 (Gau.)]
The
cash system will cover cases where accounts are not maintained on the
mercantile basis. - [CIT v. Bijoy Kumar Das (1972) 84 ITR 351 (Orissa)]
Under
the cash system, it is only actual cash receipts and actual cash payments that
are recorded. - [Morvi Industries Ltd. v. CIT (1971) 82 ITR 835 (SC)]
It
was held that where the accounts are kept on cash basis, receipt of money or
money's worth and not the accrual of the right to receive, is the determining
factor. It was held that if commercial assets are received by a trader
maintaining accounts on cash basis in satisfaction of an obligation, income
which is embedded in the value of assets is deemed to be received: the receipt
of income is not deferred till the asset is realized in terms of cash or money.
- [Raja Mohan Raja Bahadur v. CIT (1967) 66 ITR 378 (SC)]
The
cash system of accounting does not necessarily mean that income is assessable
only when it is reduced to cash; where payment is received in kind, it is
income even though it remains in kind and is not converted into cash. The cash
system of accounting does not require that it will not be treated as income so
long as it is in kind.—[Seth Kishorilal Babu lal v. CIT (1963) 49 ITR 502
(All.)]
It
was held that the fact that certain moneys were drawn in cash from time to time did not necessarily lead to the
inference that the accounts were kept on cash basis. - [CIT v. K.R.M.T.T.
Thiagaraja Chetty & Co. (1953) 24 ITR 525 (SC)]
It
was held that where a property is purchased in the Court sale, the profits will
be deemed to have arisen on the date of confirmation of sale. - [Raja Raghunandan
Prasad Singh v. CIT (1933) 1 ITR 113 (SC)]
(2) Mercantile System
In the mercantile method
of accounting, transactions in the books of accounts are recorded at the time
when the income or expenses accrue. It does not depend on whether cash is
received or not.
For
example , Mr. “A” sells 100 fans for Rs. 1000 each to Mr. “B” on 15.04.2018. Mr
“B” will make the payment of these 100 fans on 15.07.2018. But, in the account
of Mr. “A”, this transaction is recorded on 15.04.2018 itself despite cash
inflow being later.
Benefits of Mercantile System
§ This is a complex method of accounting.
§ This method is recognized by the Companies Act.
§ The income statement under this method depicts higher income.
§ Matching Concept is applicable.
§ There is a concept of revenue earned and expenses incurred.
§ The degree of accuracy is high
All
the assessees following the mercantile system of accounting are required to
follow the Accounting Standards notified by the Central Government. The main
features of these Accounting Standards are as under :—
(i)
Significant policies adopted in the
preparation and presentation of financial statements shall be disclosed at one
place and shall form part of the finanacial statements.
(ii)
Any change in the accounting policy
affecting the financial effect on the current year and subsequent years or in
subsequent year and the impact of the adjustments resulting therefrom, should
be stated in the financial statement of the year in which such change takes
place.
(iii)
Accounting policies adopted should
represent a true and fair view of the state of affairs and the major
consideration in this respect shall be :
(a)
provision should be made for all known liabilities and losses, wherever
necessary, on the basis of estimate in the light of available information;
(b)
the accounting standard should be governed by substance and not merely by legal
form; and
(c)
the financial statements should disclose all material items which might
influence the decision of the user.
(iv)
If any fundamental accounting
assumptions relating to a going concern, consistency and accrual are not
followed, the fact should be disclosed.
(v)
The prior period items should be
separately disclosed in the profit and loss account with their nature and
amount.
(vi)
Extraordinary items of the enterprise
should be disclosed in the profit and loss account separately so that their
effect on the operating results of the previous year can be perceived.
(vii)
A change in accounting policy shall be made only if it is required by statute
or it will result in more appropriate presumptions of financial statements.
(viii)
Any change in accounting policy which has a material effect on the financial
statements of the period in which such change occurs or if it has effect for
the subsequent period, shall be disclosed, indicating its impact.
(ix)
A change in an accounting estimate that has a material effect in the previous
year or the subsequent year shall be disclosed.
(x)
If a question arises as to whether a
change is a change in accounting policy or a change in accounting estimate,
such a question shall be referred to the Board for decision.
The
mercantile system cannot be used for provisional, contingent or notional
payments. The mercantile system implies passing of entries on the date of
transaction and that is the date on which rights accrue or liabilities are
incurred irrespective of the date of payment. In the mercantile system, bad
debts are allowable when they become irrecoverable.
Valuation of Closing
Stock
|
S. No. |
Situations |
Valuation of Stock |
|
1. |
Stock existing in the
business |
Cost or market price,
whichever is less |
|
2. |
Stock acquired by
inheritance, gift or will |
Market price on the
last day of the previous year |
|
3. |
Capital asset
converted into stock in trade |
Market price of such
conversion |
|
4. |
Stock withdrawn from
business |
Withdrawn at price at
which it was recorded in books |
|
5. |
When a firm is
dissolved, and (a) business of firm
is discontinued (b) business of the
firm is continued by the reconstituted firm |
At market price same
mode of valuation as regularly adopted by the firm |
Difference between Cash
Method of Accounting and Mercantile method of Accounting
|
S. No. |
Cash Method of
Accounting |
Mercantile method of
Accounting |
|
(i) |
It is a simple method
of accounting |
It is a complex method
of accounting |
|
(ii) |
This method is not
recognised as per the Companies Act |
This method is recognised
as per the Companies Act |
|
(iii) |
The income statement
derived from this accounting method depicts lower income |
The income statement
derived from this accounting method depicts comparatively higher income |
|
(iv) |
No matching concept is
applicable |
Matching concept is
applicable |
|
(v) |
Cash is received, Cash
is paid |
Revenue is earned,
Expense is incurred |
|
(vi) |
The degree of accuracy
is low |
The degree of accuracy
is comparatively high |
Income Computation and
Disclosure Standards (ICDS) [Section 145(2)]
For
the mercantile system of accounting, the Central Government may prescribe
certain standards for computation of income and its disclosure with respect to
a class of income or assessees. Accordingly, the Central Government, vide
Notification No. S.O. 3078(E), dated 29.09.2016 notified “Income Computation
and Disclosure Standards” which apply to all kinds of assessees except
Individuals and HUFs who are not required to get their accounts audited under
the provisions of section 44AD of the Act. The said Notification will be applicable
from the Assessment Year 2017-18 and subsequent assessment years.
ACCOUNTING
STANDARDS NOTIFIED UNDER SECTION 145(2)
|
Standard |
Description |
|
ICDS-I |
Accounting Policies |
|
ICDS-II |
Valuation of Inventory
|
|
ICDS-III |
Construction Contracts
|
|
ICDS-IV |
Revenue Recognition |
|
ICDS-V |
Tangible Fixed Assets |
|
ICDS-VI |
Effects of changes in
foreign exchange rates |
|
ICDS-VII |
Government Grants |
|
ICDS-VIII |
Securities |
|
ICDS-IX |
Borrowing Costs |
|
ICDS-X |
Provisions, Contingent
Liabilities and Contingent Assets |
Constitutional Validity
of ICDS
It
was held that in order to preserve its constitutionality, section 145(2) of the
Income Tax Act, 1961 has to be read down to restrict power of the Central Government
to notify ICDS that does not seek to override binding judicial precedents or
provisions of the Act. The power to enact a validation law is an essential
legislative power that can be exercised, in the context of the Act, only by the
Parliament and not by the executive. If section 145(2) of the Act as amended is
not so read down it would be ultra vires, the Act and Article 141, read
with Articles 144 and 265 of the Constitution. [Chamber of Tax Consultants
v. Union of India (2017) 87 taxmann.com 92 (Del.)]
The
ICDS is not meant to overrule the provisions of the Act, the Rules thereunder
and the judicial precedents applicable thereto as they stand. The Hon’ble Delhi
High Court, to certain extent has been struck, namely, ICDS-I, II, III, IV, VI,
VII, VIII by stating that ultra vires to the Income Tax Act, 1961.
The Central Government
may change the provisions related to the accounting standards in the Official
Gazette from time to time. These accounting standards must be followed by all
the assessees irrespective of the income slab he or she falls in.
Aim of notified
standards – Transparency in financial statements
The
accounting standards laid down in the notification are not materially different
from the principles of the mercantile system of accounting except that these
are aimed at making the financial statements more transparent and require
certain vital information to be disclosed in the financial statements.
Assessees
following the mercantile system of accounting are required to follow the
Accounting Standards notified by the Central Government
All
the assessees following the mercantile system of accounting are required to
follow the Accounting Standards notified by the Central Government. The main
features of these Accounting Standards are as under:—
(i)
Significant policies adopted in the
preparation and presentation of financial statements shall be disclosed at one
place and shall form part of the finanacial statements.
(ii)
Any change in the accounting policy affecting the financial effect on the
current year and subsequent years or in subsequent year and the impact of the
adjustments resulting therefrom, should be stated in the financial statement of
the year in which such change takes place.
(iii)
Accounting policies adopted should represent a true and fair view of the state
of affairs and the major consideration in this respect shall be : (a) provision
should be made for all known liabilities and losses, wherever necessary, on the
basis of estimate in the light of available information; (b) the accounting
standard should be governed by substance and not merely by legal form; and (c) the
financial statements should disclose all material items which might influence
the decision of the user.
(iv)
If any fundamental accounting assumptions relating to a going concern,
consistency and accrual are not followed, the fact should be disclosed.
(v)
The prior period items should be separately disclosed in the profit and loss
account with their nature and amount.
(vi)
Extraordinary items of the enterprise should be disclosed in the profit and
loss account separately so that their effect on the operating results of the
previous year can be perceived.
(vii)
A change in accounting policy shall be made only if it is required by statute
or it will result in more appropriate presumptions of financial statements.
(viii)
Any change in accounting policy which has a material effect on the financial
statements of the period in which such change occurs or if it has effect for
the subsequent period, shall be disclosed, indicating its impact.
(ix)
A change in an accounting estimate that has a material effect in the previous
year or the subsequent year shall be disclosed.
(x)
If a question arises as to whether a change is a change in accounting policy or
a change in accounting estimate, such a question shall be referred to the Board
for decision.
Accounting standard –
Advance received in current year for service to be rendered in subsequent year
– Income accrued in subsequent year
Accounting
standard provides that income accrues only if the corresponding service has to
be rendered during the same relevant year. In an event where amount received in
advance for a service is to be performed in subsequent year, the advance could
not be taken as income in the year of receipt. (Related Assessment year : 1992-98)
- [CIT v. Dinesh Kumar Goel (2011) 331 ITR 10 : 239 CTR 46 : 197 Taxman 375
: 50 DTR 254 (Del.)]
CBDT’s
clarifications on revised ICDS - Circular no. 10/2017 dated 24.03.2017
Background:
The Central Government
had notified 10 Income Computation and Disclosure Standards (‘ICDS”) vide
Notification No. 32 of 2015 dated 31.03.2015.
The notified ICDS were
applicable to all assessees following mercantile system of accounting for
computation of income chargeable under the head ‘profits and gains from
business or profession’ and ‘income from other sources’ from Assessment year
2016-17 onwards
Subsequent to
notification of the ICDS, owing to various implementation issues, a number of
representations were received which were examined by an Expert Committee. In
response to the same, the Committee recommended a two-fold approach for the
smooth implementation of ICDS viz. amendment to the provisions of ICDS in
respect of certain issues and issuance of clarifications by way of FAQs for the
rest of issues.
Accordingly, the
Ministry of Finance deferred the applicability of ICDS by one year (Press
Release dated 06.07.2016) for considering the recommendations of Expert
Committee and making suitable changes to tax audit forms. As such, the ICDS is
now applicable from Assessment year 2017-18 onwards.
The CBDT, further,
through its Notification no. 86/2016 rescinded the ICDS issued vide
notification no. 32 /2015 on 29.09.2016 and issued revised ICDS (after making
certain significant changes) vide Notification no. 87/2016, also making
suitable changes to tax audit forms vide Notification no. 88/2016.
In furtherance to the
revised ICDS notified, on the recommendations of the expert committee, CBDT
issued certain clarifications vide circular no. 10/2017 dated 23.03.2017.
Section 145 of the Income-tax
Act, 1961 - system of accounting - method of accounting - Clarifications on Income
Computation and Disclosure Standards (ICDS) Notified under section 145(2) of
said Act
Circular No. 10/2017 [F.
NO.133/23/2016-TPL], Dated 23.03.2017
Sub-section (1) of
section 145 of the Income-tax Act, 1961 ('the Act') provides that the income
chargeable under the head "Profits and gains of business or
profession" or "Income from other sources" shall, subject to the
provisions of sub-section (2), be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee. Sub-section
(2) of section 145 provides that the Central Government may notify Income
Computation and Disclosure Standards (ICDS) for any class of assessees or for
any class of income. Accordingly, the Central Government notified 10 ICDS vide Notification
No. S.O.892(E) dated 31st March, 2015 with effect from assessment year 2016-17.
After notification of
ICDS, it has been brought to the notice of the Central Board of Direct Taxes
('the Board') by the stakeholders that certain provisions of ICDS may require
amendment/clarification for proper implementation. The matter was referred to
an expert committee. The Committee after duly consulting the stakeholders in
this regard has recommended a two-fold approach for the smooth implementation
of ICDS i.e. amendment to the provisions of ICDS in respect of certain issues
and issuance of clarifications by way of FAQs for the rest of issues.
Accordingly, vide Notification no. 87 dated 29th September, 2016 Central
Government notified amended ICDS with effect from the assessment year 2017-18.
Further, the issues
which require further clarification has been considered by Board and following
clarifications are issued:
Question 1 : Preamble of
ICDS-I states that this ICDS is applicable for computation of income chargeable
under the head “Profits and gains of business or profession” or “Income from
other sources” and not for the purposes of maintenance of books of account.
However, Para 1 of ICDS-I states that it deals with significant accounting
policies. Accounting policies are applied for maintenance of books of account
and preparing financial statements. What is the interplay between ICDS-I and
maintenance of books of account?
Answer : As
stated in the Preamble, ICDS is not meant for maintenance of books of account
or preparing financial statements. Persons are required to maintain books of
account and prepare financial statements as per accounting policies applicable
to them. For example, companies are required to maintain books of account and
prepare financial statements as per requirements of Companies Act, 2013. The
accounting policies mentioned in ICDS-I being fundamental in nature shall be
applicable for computing income under the heads “Profits and gains of business
or profession” or “Income from other sources”.
Question 2 : Certain
ICDS provisions are inconsistent with judicial precedents. Whether these
judicial precedents would prevail over ICDS?
The ICDS have been
notified after due deliberation and after examining judicial views for bringing
certainty on the issues covered by it. Certain judicial pronouncements were
pronounced in the absence of authoritative guidance on these issues under the
Act for computing Income under the head “Profits and gains of business or
profession” or Income from other sources. Since certainty is now provided by
notifying ICDS under section 145(2), the provisions of ICDS shall be applicable
to the transactional issues dealt therein in relation to assessment year
2017-18 and subsequent assessment years.
Question 3 : Does ICDS
apply to non-corporate taxpayers who are not required to maintain books of
account and/or those who are covered by presumptive scheme of taxation like
sections 44AD, 44AE, 44ADA, 44B, 44BB, 44BBA, etc. of the Act?
Answer : ICDS
is applicable to specified persons having income chargeable under the head ‘Profits
and gains of business or profession’ or ‘Income from other sources’. Therefore,
the relevant provisions of ICDS shall also apply to the persons computing
income under the relevant presumptive taxation scheme. For example, for
computing presumptive income of a partnership firm under section 44AD of the
Act, the provisions of ICDS on Construction Contract or Revenue recognition
shall apply for determining the receipts or turnover, as the case may be.
Question 4 : If there is
conflict between ICDS and other specific provisions of the Income-tax rules,
1962 ('the Rules') governing taxation of income like rules 9A, 9B etc. of the
Rules, which provisions shall prevail?
Answer : ICDS
provides general principles for computation of income. In case of conflict, if
any, between the provisions of Rules and ICDS, the provisions of Rules, which
deal with specific circumstances, shall prevail.
Question 5 : ICDS is
framed on the basis of accounting standards notified by Ministry of Corporate
Affairs (MCA) vide Notification No. GSR 739(E) dated 7 December, 2006 under
section 211(3C), of erstwhile Companies Act, 1956. However, MCA has notified in
February, 2015 a new set of standards called 'Indian Accounting Standards'
(Ind-AS). How will ICDS apply to companies which adopted Ind-AS?
Answer : ICDS
shall apply for computation of taxable income under the head " Profit and
gains of business or profession" or "Income from other sources"
under the Income-tax Act. This is irrespective of the accounting standards
adopted by companies i.e. either Accounting Standards or Ind-AS.
Question 6 : Whether
ICDS shall apply to computation of Minimum Alternate Tax (MAT) under section
115JB of the Act or Alternate Minimum Tax (AMT) under section 115JC of the Act?
Answer : MAT
under section 115JB of the Act is computed on ‘book profit’ that is net profit
as shown in the Profit and Loss Account prepared under the Companies Act
subject to certain specified adjustments. Since, the provisions of ICDS are
applicable for computation of income under the regular provisions of the Act,
the provisions of ICDS shall not apply for computation of MAT.
AMT under section 115JC
of the Act is computed on adjusted total income which is derived by making
specified adjustments to total income computed as per the regular provisions of
the Act. Hence, the provisions of ICDS shall apply for computation of AMT.
Question 7 : Whether the
provisions of ICDS shall apply to Banks, Non-banking financial institutions,
Insurance companies, Power sector, etc.?
Answer : The
general provisions of ICDS shall apply to all persons unless there are sector
specific provisions contained in the ICDS or the Act. For example, ICDS VIII
contains specific provisions for banks and certain financial institutions and
Schedule I of the Act contains specific provisions for Insurance business.
Question 8 : Para 4(H)
of ICDS-I provides that Market to Market ( MTM) loss or an expected loss shall
not be recognized unless the recognition is in accordance with the provisions
of any other ICDS. Whether similar consideration applies to recognition of MTM
gain or expected incomes?
Answer : Same
principle as contained in ICDS-I relating to MTM losses or an expected loss
shall apply mutatis mutandis to MTM gains or an expected profit.
Question 9 : ICDS-I
provides that an accounting policy shall not be changed without 'reasonable
cause'. The term 'reasonable cause' is not defined. What shall constitute
'reasonable cause'?
Answer : Under
the Act, ‘reasonable cause’ is an existing concept and has evolved well over a
period of time conferring desired flexibility to the tax-payer in deserving
cases.
Question 10 : Which ICDS
would govern derivative instruments?
Answer : ICDS
-VI (subject to para 3 of ICDS-VIII) provides guidance on accounting for
derivative contracts such as forward contracts and other similar contracts. For
derivatives, not within the scope of ICDS-VI, provisions of ICDS-I would apply.
Question 11 : Whether
the recognition of retention money, receipt of which is contingent on the
satisfaction of certain performance criterion is to be recognized as revenue on
billing?
Answer : Retention
money, being part of overall contract revenue, shall be recognised as revenue
subject to reasonable certainty of its ultimate collection condition contained
in para 9 of ICDS-III on Construction contracts.
Question 12 : Since
there is no specific scope exclusion for real estate developers and Build
-Operate- Transfer (BOT) projects from ICDS-IV on Revenue Recognition, please
clarify whether ICDS-III and ICDS-IV should be applied by real estate
developers and BOT operators. Also, whether ICDS is applicable for leases.
Answer : At
present there is no specific ICDS notified for real estate developers, BOT
projects and leases. Therefore, relevant provisions of the Act and ICDS shall
apply to these transactions as may be applicable.
Question 13 : The
condition of reasonable certainty of ultimate collection is not laid down for
taxation of interest, royalty and dividend. Whether the taxpayer is obliged to
account for such income even when the collection thereof is uncertain?
Answer : As
a principle, interest accrues on time basis and royalty accrues on the basis of
contractual terms. Subsequent non-recovery in either cases can be claimed as
deduction in view of amendment to Section 36 (1) (vii). Further, the provision
of the Act (e.g. Section 43D) shall prevail over the provisions of ICDS.
Question 14 : Whether
ICDS is applicable to revenues which are liable to tax on gross basis like
interest, royalty and fees for technical services for non-residents under
section 115A of the Act.
Answer : Yes,
the provisions of ICDS shall also apply for computation of these incomes on
gross basis for arriving at the amount chargeable to tax.
Question 15 : Para 8 of
ICDS-V states expenditure incurred on commissioning of project, including
expenditure incurred on test runs and experimental production shall be
capitalized. It also states that expenditure incurred after the plant has begun
commercial production i.e., production intended for sale or captive consumption
shall be treated as revenue expenditure. What shall be the treatment of expense
incurred after the conduct of test runs and experimental production but before
commencement of commercial production?
Answer : As
clarified in Para 8 of ICDS-V, the expenditure incurred till the plant has
begun commercial production, that is, production intended for sale or captive
consumption, shall be treated as capital expenditure.
Question 16 : What is the
taxability of opening balance as on 1st day of April, 2016 of Foreign Currency
Translation Reserve (FCTR) relating to non-integral foreign operation, if any,
recognised as per Accounting Standards (AS) 11?
Answer : FCTR
balance as on 1 April 2016 pertaining to exchange differences on monetary items
for non-integral operations, shall be recognised in the previous year relevant
for assessment year 2017-18 to the extent not recognised in the income
computation in the past.
Question 17 : For
subsidy received prior to 1st day of April 2016 but not recognised in the books
pending satisfaction of related conditions and achieving reasonable certainty
of receipt, how shall the same be recognised under ICDS on or after 1st day of
April 2016?
Answer : Para
4 of ICDS-VII read with Para 5 to Para 9 of ICDS-VII provides for timing of
recognition of government grant. The transitional provision in Para 13 of
ICDS-VII provides that a government grant which meets the recognition criteria
on or after 1st day of April, 2016 shall be recognised in accordance with
ICDS-VII. All government grants actually received prior to 1st day of April
2016 shall be deemed to have been recognised on its receipt in accordance with
Para 4(2) of ICDS-VII and accordingly will be outside the transitional
provision and therefore the government grants received on or after 1st day of
April, 2016 and for which recognition criteria provided in Para 5 to Para 9 of
ICDS-VII is also satisfied thereafter, the same shall be recognised as per the
provisions of ICDS-VII. The grants received prior to 1st day of April, 2016
shall continue to be recognised as per the law prevailing prior to that date.
For example, if out of
total subsidy entitlement of 10 Crore an amount of 6 Crore is recognised in the
books of account till 31st day of March, 2016 and recognition of balance 4
Crore is deferred pending satisfaction of related conditions and/or achieving
reasonable certainty of receipt. The balance amount of 4 Crore will be taxed in
the year in which related conditions are met and reasonable certainty is
received. If these conditions are met over two years, the amount of 4 Crore
shall be taxed over the period of two years. The amount of 6 Crore for which
recognition criteria were met prior to 1st day of April, 2016 shall not be
taxable post 1st day of April, 2016.
But if the subsidy is
already received prior to 1st day of April, 2016, Para 13 of ICDS-VII shall not
apply even if some of the related conditions are met on or after 1 April, 2016.
This is in view of Para 4(2) of ICDS-VII which provides that Government grant
shall not be postponed beyond the date of actual receipt. Such grants shall
continue to be governed by the provisions of law applicable prior to 1st day of
April, 2016.
Question 18 : If the
taxpayer sells a security on the 30th day of April, 2017. The interest payment
dates are December and June. The actual date of receipt of interest is on the
30th day of June, 2017 but the interest on accrual basis has been accounted as
income on the 31st day of March, 2017. Whether the taxpayer shall be permitted
to claim deduction of such interest i.e. offered to tax but not received while
computing the capital gain?
Answer : Yes,
the amount already taxed as interest income on accrual basis shall be taken
into account for computation of income arising from such sale.
Question 19 : Para 9 of
ICDS-VIII on securities requires securities held as stock-in-trade shall be
valued at actual cost initially recognised or net realisable value (NRV) at the
end of that previous year, whichever is lower. Para 10 of Part-A of ICDS-VIII
requires the said exercise to be carried out category wise. How the same shall
be computed?
Answer : For
subsequent measurement of securities held as stock-in-trade, the securities are
first aggregated category wise. The aggregate cost and NRV of each category of
security are compared and the lower of the two is to be taken as carrying value
as per ICDS-VIII. This is illustrated below -
|
Security |
Category |
Cost |
NRV |
Lower of cost or NRV |
ICDS Value |
|
A |
Share |
100 |
75 |
75 |
|
|
B |
Share |
120 |
150 |
120 |
|
|
C |
Share |
140 |
120 |
120 |
|
|
D |
Share |
200 |
190 |
190 |
|
|
|
Total |
560 |
535 |
555 |
535 |
|
|
|
|
|
|
|
|
E |
Debt Security |
150 |
160 |
150 |
|
|
F |
Debt Security |
105 |
90 |
90 |
|
|
G |
Debt Security |
125 |
135 |
125 |
|
|
H |
Debt Security |
220 |
230 |
220 |
|
|
|
Total |
600 |
615 |
585 |
600 |
|
Securities Total |
1160 |
1150 |
1090 |
1135 |
|
Question 20 : There arc
specific provisions in the Act read with Rules under which a portion of
borrowing cost may get disallowed under sections like 14A, 43B, 40(a)(1),
40(a)(ia), 40A(2)(b), etc of the Act. Whether borrowing costs to be capitalized
under ICDS-IX should exclude portion of borrowing costs which gets disallowed
under such specific provisions?
Answer : Since
specific provisions of the Act override the provisions of ICDS, it is clarified
that borrowing costs to be considered for capitalization under ICDS-IX shall
exclude those borrowing costs which are disallowed under specific provisions of
the Act. Capitalization of borrowing cost shall apply for that portion of the
borrowing cost which is otherwise allowable as deduction under the Act.
Question 21 : Whether
bill discounting charges and other similar charges would fall under the
definition of borrowing cost?
Answer : The
definition of borrowing cost is an inclusive definition. Bill discounting
charges and other similar charges are covered as borrowing cost.
Question 22 : How to
allocate borrowing costs relating to general borrowing as computed in
accordance with formula provided under Para 6 of ICDS-IX to different
qualifying assets?
Answer : The
capitalization of general borrowing cost under ICDS-IX shall be done on
asset-by-asset basis.
Question 23 : What is
the impact of Para 20 of ICDS-X containing transitional provisions?
Answer : Para
20 of ICDS X provides that all the provisions or assets and related income
shall be recognised for the previous year commencing on or after 1st day of
April, 2016 in accordance with the provisions of this standard after taking
into account the amount recognised, if any, for the same for any previous year
ending on or before 31st day of March, 2016.
The intent of
transitional provision is that there is neither 'double taxation' of income due
to application of ICDS nor there should be escape of any income due to
application of ICDS from a particular date. This is explained as under -
|
Provision required as
per ICDS on 31 March 2017 for items brought forward from 31st day of March
2016 ... (A) |
INR 3 Crores |
|
Provisions as per ICDS
for FY 2016-17 ... (B) |
INR 5 Crores |
|
Total gross provision
.. .(C) = (A) + (B) |
INR 8 Crores |
|
Less: Provision
already recognised for computation of taxable income in F Y 2016-17or
earlier... (D) |
INR 2 Crores |
|
Net provisions as per
ICDS in FY 2016-17 to be recognised as per transition provision... (E) = (C)
-(D) |
INR 6 Crores |
Question 24: Expenditure
on most post-retirement benefits like provident fund, gratuity, etc. are
covered by specific provisions. There are other post-retirement benefits
offered by companies like medical benefits. Such benefits are covered by AS-15
for which no parallel ICDS has been notified. Whether provision for these
liabilities are excluded from scope of ICDS X?
Answer : It
is clarified that provisioning for employee benefit which are otherwise covered
by AS 15 shall continue to be governed by specific provisions of the Act and
are not dealt with by ICDS-X.
Question 25 : ICDS-I
requires disclosure of significant accounting policies and other ICDS requires
specific disclosures. Where is the taxpayer required to make such disclosures
specified in ICDS?
Answer : Net
effect on the income due to application of ICDS is to be disclosed in the Return
of income. The disclosures required under ICDS shall be made in the tax audit
report in Form 3CD. However, there shall not be any separate disclosure
requirements for persons who are not liable to tax audit.
Rejection of Books of
Accounts [Section 145(3)]
Section
145 of the Income Tax Act, 1961, lays down that income chargeable under the
head “Profit and gains of business or profession” or “Income from other sources”
shall, subject to the accounting standards notified by the Central Government
in the Official Gazette, be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee. Sub-section
(3) of section 145 lays down that where the Assessing Officer is not satisfied
about the correctness or completeness of the accounts of the assessee, or where
the method of accounting namely cash or mercantile systems or accounting
standards as notified by the Central Government, have not been regularly
followed by the assessee, the Assessing Officer may make an assessment in the
manner provided in section 144 of the Act.
Relevant
Legal Provisions
Detection
of deficiencies in accounts is primarily work of investigation. The Assessing
Officer needs to make proper inquiries in respect of the business dealings of
the assessee to find out the correctness of data supplied by the assessee. Once
deficiencies are noted in respect of such data and the assessee is not able to
explain them satisfactorily, legal provisions are available for rejection of
books in such cases. These provisions are contained in sections 144 and 145 of
the Income Tax Act.
Assessing Officer may
proceed under Section 145(3) under any of the following circumstances
(a) Where the Assessing
Officer is not satisfied about the correctness or completeness of the accounts
of the assessee; or
(b) Where method of
accounting provided in (cash or mercantile) has not been regularly followed by
the assessee; or
(c) Where Accounting
Standards as notified by the Central Government have not been regularly
followed by the assessee. In other
words, income has not been computed by the standards notified
Ø
the
Assessing Officer may make an assessment in the manner provided in section 144.
Section 144 provides for best judgment method of assessment by Assessing
Officer. Thus it is clear that before the Assessing Officer goes for best
judgment he is to reject the books of accounts maintained by the assessee.
Assessing Officer’s
Power to Reject Accounts
It
is the duty of the Assessing Officer to consider whether or not the books disclose
the true state of accounts and the correct income can be deduced therefrom. The
officer is not bound to accept the system of accounting regularly employed by
the assessee, the correctness of which had not been questioned in the past.
There is no estoppel in these matters, and the officer is not bound by the
method followed in the earlier years.
But
it is also pertinent here to mention that the Assessing Officer must refer to
the inherent defect in the system followed by the assessee, demonstrate that
the defect has led to clear mis-statement of its income and record a clear finding
that the system of accounting followed by the assessee is such that correct
profits cannot be deduced from the books of account maintained by the assessee.
In
this regard, a factual finding by the Assessing Officer that part of the receipts
or expenses have either not been accounted or wrongly accounted in the books
would constitute a clear evidence of such nature.
If
the Assessing Officer is not satisfied with the book result i.e. gross profit shown
by the assessee, he may reject the books under section 145(3) and estimate
gross profit ratio. But before doing that he has to give a clear finding that
there are defects in books of accounts and hence books of accounts are not acceptable.
Such instances may be:
(a) Purchase, sales, direct expenses, valuation
of stock etc. shown in the books are not correct.
(b)
Accounts written are not full and complete and do not reflect the actual
receipts on sales.
(c)
Actual quantity of finished product produced by the assessee appear to be more
than what it has shown in the accounts books.
(d)
The assessee had made any sale of finished product which has not been reflected
in the accounts books.
(e)
The finished product has been sold by the assessee at a price higher than what
is declared in the accounts books.
(f)
Assessee is not maintaining any stock register and adopting closing stock
without any supporting documents to enable verification.
(g)
The Central Government had notified a particular accounting standards for a
specific trade to be followed by the assessee and the assessee has not followed
it.
(h)
The rate of Gross Profit declared by the assessee is low as compared to other
assessees in the same line of business or with reference to assessee's margins
in earlier years.
The Assessing Officer
can reject the books of accounts concerning the following discrepancies:—
(a)
Improper Accounting Method
(b)
No production of accounts for verification
(c)
Failure to produce records
(d)
Defective accounts
(e)
Non-maintenance of stock register
After
rejecting the books of accounts due dissatisfaction with the correctness of the
accounts produced by the assessee, the Assessing Officer must pass the best
judgement which is complying all the considerations of section 145 of the
Income Tax Act, 1961.
A clear finding is necessary before invoking the
Section 145(3) of the Act
Hon'ble Supreme Court and the
various High Courts in number of cases have held that before invoking the
provisions of section 145(3) of the Act [earlier section 145(1) and 145(2)].
The Assessing Officer has to bring on record material on the basis of which he
has arrived at the conclusion with regard to correctness or completeness of the
accounts of the assessee or the method of accounting employed by it.
Non-maintenance of stock register would amount to
defect in accounts
A number of High Courts have held
that the keeping of stock register is of great importance because it is a means
of verifying the assessee's accounts by having a quantitative tally. In any
case, after taking into account the absence of a stock registered coupled with
other materials, it is felt that correct profits and gains cannot be deducted
from the accounts, resort to the provisions of section 145(3) can be taken.
However, non-maintenance of stock
register on day-to-day basis by itself should not lead to inference that it is
not possible to deduce the true income of the assessee from the accounts
maintained by assessee, nor can the accounts be said to be defective or
incomplete for this reason alone. If the assessee is dealing in such items
where maintenance of stock register is not possible i.e. keeping in mind the
quantity, size, varieties, processes involved in production etc. it cannot be
treated as defect for application of section 145(3) of the Act.
“Followed consistently”
It was held that the accounting
method followed by an assessee continuously for a given period of time has to
be presumed to be correct till the Assessing Officer comes to know the reasons
to be given that system does not reflect correct picture and true profits. - [Woodward
Governor India (P) Ltd. (2009) 312 ITR 254 : 179 Taxman 326 (SC)]
Books of account cannot be rejected while the assessee
is following consistently one method
It was held that the Assessing
Officer rejected the books of account of the assessee rejecting the contention
of the assessee that they had been consistently following the Project
Completion method i.e., the method of booking of the revenue on completion of
the flat when full payment has been made to it by the persons concerned and
possession was delivered to him. The Commissioner (Appeals) accepted the plea
of the assessee and set aside the order of the Assessing Officer. The Tribunal confirmed
the same. The High Court held that the assessee had been consistently following
one of the recognized methods of accounting i.e., Project Completion method. In
the absence of any prohibition or restriction under the Act for doing so, it
could not be held that the approach of the Commissioner (Appeals) and the
Tribunal was erroneously or illegal. - [CIT v. Principal Officer, Hill View
Infrastructure (P) Ltd. (2015) 10 TMI 2059 (P&H)]
Non-production of accounts for verification
The
rejection of books of accounts is justified under section 145 and the Best
Judgment assessment under section 144 where the assessee had not produced
relevant records.
Power to be exercised judicially
When the Assessing Officer does not
accept the assessee’s method of accounting then he has to resort to the
provisions of section 145 to 145(2) [now 145(3)] for computation of income by
adopting such other basis as determined by him. The power to reject the books
of accounts by the Assessing Officer is to be exercised judicially. The
Assessing Officer is to bring on record material on the basis of which he has
arrived at the conclusion with regard to correctness or completeness of the
accounts of the assessee or the method of accounting employed by it.
It was held that the Assessing
Officer’s powers under the section are not arbitrary and he must exercise his
discretion and judgment judicially. - [Karnataka State Forest Industries
Corporation Ltd. v. CIT (1993) 201 ITR 674 (Karn.)]
Opportunity to the assessee
The
Assessing Officer has to give an opportunity to the assessee to contradict the
materials upon which the Assessing Officer wants to reject the books of
accounts.
No presumption
The
Assessing Officer should not presume any material as valid for rejecting the
books of account. He must scrutinise it in every aspect and then reject it.
Defective accounts
The Assessing Officer is having
power to examine the books of accounts submitted by the assessee and also other
supporting materials. If the account is found defective, then the Assessing
Officer may reject the books of account and initiate action according to the
provisions of the Act.
Justification for rejection
In
rejecting the books of accounts of the assessee there shall be justification for
the same.
Power of the Assessing Officer to
estimate profits
Comparison of gross and net margin
shown by an assessee is a normal exercise during the course of assessment
proceedings. While lower gross profit shown by the assessee as compared to the
preceding years is a matter for investigation, mere existence of low margin
cannot be a ground for addition. While the initial burden is on the assessee to
justify the margin shown by it in its books of account, once the Assessing
Officer rejects the contention of the assessee, burden is on him to justify his
rejection of the assessee's margins and basis for estimation of a new gross
margin.
Once the books of account of the
assessee are rejected, profit has to be estimated by proper material available
and nevertheless he is not entitled to make a pure guess and make an assessment
concerning any evidence or any material at all.
The primary requirement before the
Assessing Officer arrives at the stage of estimation of profits, is to
demonstrate the unreliability of the books and consequently, the profit margin
shown by the assessee. If the books are found to be correct and no flaw has
been detected, it would be incorrect on the part of the Officer to reject the
margin computed on the basis of such accounts. The flaw in the accounts drawn
by the assessee can be for a variety of reasons - detection of non-recording of
sales, booking of fictitious purchases, booking of fictitious expenses,
evidence of inflation in expenses, adoption of wrong method of accounting to
reduce taxable profits etc. These deficiencies, coupled with a low gross margin
shown by the assessee provide the perfect platform for rejection of the books
maintained by the assessee and estimate a reasonable profit margin based on
margins of similar other assessees.
Comparing gross profit of earlier years
If there is a heavy loss suddenly
in the business of the assessee, it is his duty to explain the fall, if so
happens and to substantiate the reasons. Even if, thereafter, the Assessing
Officer considers the material placed before him by the assessee to be
unreliable keeping in view the comparative statement of accounts of the earlier
years, he cannot proceed to changes in the accounts purely due to guessing
work. He can do only if he relates to some evidence or material on the records.
If the profit shown by the assessee
in his return is not accepted, it is for the taxing authorities to prove that
the assessee made more profits. The rejection of books of accounts under
section 145(3) cannot be sustained merely on the fact that the gross profit of
the assessee is low during the relevant period as compared to the book results
of other years. Similarly, the system of accounting adopted by the assessee
cannot be rejected merely on the ground that the gross profits disclosed by his
books were low as compared with those of others in the same line of business.
Estimate of turnover
The estimate of turnover and
fixation of gross profit rate are two import parameters which affect the
assessment. If these are fixed or calculated in such a way that they adversely
affect the assessee's case, then he is entitled to know the basis and to be
given an opportunity to rebut the same.
Low gross profit, whether book results can be rejected
In the business of definite finding
that the case falls within the ambit of section 145(3), the rejection of books
of accounts cannot be sustained merely on the fact that the gross profit of the
assessee is low during the relevant period as compared to book results of other
years. Similarly, the system of accounting adopted by the assessee cannot be
rejected merely on the ground that the gross profits disclosed by his books
were low as compared unfavourably with those of others in the same line of
business
Peak credit
No reliance can be placed on
rejected account books for working out Peak credit. An assessee's business
income is estimated after rejecting the books of account produced by the
assessee; it is not reasonable on the part of the Income Tax Officer to work
out the Peak credit on the basis of such books of accounts.
No reliance can be placed on rejected account books
for working out Peak credit
It was held that where assessee's
business income is estimated after rejecting the account books produced by the
assessee, it is not reasonable on the part of the ITO to work out the Peak
credit on the basis of such accounted books. - [CIT v. KMN Naidu (1996) 221
ITR 451 (Mad.)]
Reference to Valuation Officer
The Assessing Officer may, for the
purposes of assessment or reassessment, make a reference to a Valuation Officer
to estimate the value, including fair market value, of any asset, property or
investment and submit a copy of the report to him only after rejecting the
books of accounts.
Section 142A(1) of the Act provides
that the Assessing Officer may, for the purposes of assessment or reassessment,
make a reference to a Valuation Officer to estimate the value, including fair
market value, of any asset, property or investment and submit a copy of report
to him.
Mandatory Rejection of Books of Accounts under Section
145(3) Before Reference Under Section 142A to D.V.O.
Section 142A was inserted by the
Finance (No. 2) Act, 2004 with retrospective effect from 15.11.1972, to confer
power on the Assessing Officer to refer the matter to the Valuation Officer,
which earlier had not been conferred. Earlier, there was a provision being
section 55A to ascertain the fair market value of a capital asset for the
purposes of Chapter IV of the Income Tax Act. The Supreme Court after
considering the scope and ambit of section 55A in the case of Smt. Amiya
Bala Paul v. CIT (2003) 263 ITR 407 held that it would not apply to
proceedings under section 69B. Apparently, section 142A has been introduced to
overcome such situations.
Assessee produced complete books of
account and no sales were found outside books of account and, in subsequent
assessment years, Assessing Officer had passed order in respect of same
business activities of assessee, which gave rise to net profit of 2.53 per cent
and 2.99 per cent, additions to income of assessee as per trading account
prepared by Assessing Officer at gross profit rate of 51.8 per cent was not
justified
Assessee was receiving goods
throughout year from different warehouses, through bills or challans. Lump-sum payments were made to different
suppliers throughout year. All records, i.e., books of account, sales and
purchase vouchers had been fully produced by assessee. Assessee had declared
net profit rate of 1.16 per cent - However, as per trading account prepared by
Assessing Officer, gross profit rate came to 51.8 per cent and accordingly, it
made additions to income of assessee. On appeal, Commissioner (Appeals), partly
allowed appeal filed by assessee. On further appeal, Tribunal dismissed appeal
filed by revenue - It was found that Assessing Officer prepared month wise
trading account and found negative stock in books of account of assessee. Although,
Assessing Officer had not found any unrecorded purchases, but had, in his own
way, prepared trading account for enhancing gross profit. No sales were found
outside books of account - In subsequent assessment years, Assessing Officer
had passed order under section 143(3) in respect of same business activities of
assessee, which gave rise to net profit of 2.53 per cent and 2.99 per cent. Therefore,
Tribunal had righty dismissed appeal filed by revenue. [In favour of assessee] (Related
Assessment year : 2009-10) – [PCIT v. Smart Value Products and Services Ltd.
(2022) 448 ITR 145 138 taxmann.com 508 (HP)]
SLP dismissed against High Court
ruling that where assessee-contractor, undertaking construction work for a
project in Iraq, had entered into a supplementary agreement with contractor for
deferred payment of contract dues in view of war prevailing between Iraq and
Iran, departure from mercantile method to completed contract method of
accounting for said contract was justified in contemporary period
Method of accounting - Change of
(Completed contract method) - Assessee-sub-contractor, engaged in business of
construction, had undertaken a project in Iraq as sub-contractor of a company,
namely IRCON, and claimed to have completed a portion of construction work but
had not received full consideration. During year, he entered into a supplementary
agreement with IRCON for deferred payment of contract dues in view of war
conditions between Iraq and Iran and resorted to completed contract accounting
method. Assessing Officer was of view that departure from mercantile system of
accounting to completed contract method would not reflect a fair and reasonable
picture of profit earned from year to year and, therefore, added difference
between amount of certified bills and expense to assessee’s total income. High Court by impugned order held that assessee
was justified in resorting to completed contract system for contract work under
execution in Iraq in contemporary period and consequently, bills certified as
relating to work completed could not be recognized as receipts and brought to
tax for assessment year under consideration. SLP filed by revenue against
impugned High Court order was to be dismissed. [In favour of assessee] (Related
Assessment year : 1986-87) – [CIT v. Bhageeratha Engineering Ltd. (2022) 289
Taxman 10 : 142 taxmann.com 156 (SC)]
SLP dismissed against High Court
ruling that since production of oil recorded by assessee in its books of
account was completely inconsistent with pattern of power consumed, Tribunal
was justified in rejecting said books of account
Rejection of accounts (Power
consumption) - Books of account of assessee who was engaged in oil extraction
from different oil seeds were rejected by Tribunal for reason that average
production from use of power consumption widely fluctuated from month to month
and was completely inconsistent with pattern of power consumed. High Court
dismissed appeal preferred by assessee against said decision by observing that
no substantial question of law arose as questions proposed were factual. Since
appeal was dismissed by High Court by a reasoned order, there was no reason to
interfere with same, and, thus, Special Leave Petition against said decision
was to be dismissed. [In favour of revenue] (Related Assessment year : 2005-06)
- [Rajmoti Industries v. Joint Commissioner of Income-tax (2022) 286 Taxman
635 : 138 taxmann.com 200 (SC)]
Assessee was engaged in business of
construction and development of property and it had been following project
completion method which had been accepted by department in assessment year
2014-15, principle of consistency should be followed; Assessing Officer was not
justified in adopting percentage completion method for Assessment year 2015-16
Assessee was engaged in business of
development of property. It had been following project completion method which
had been accepted by department in assessment year 2014-15. Assessing Officer
while completing assessment for assessment year 2015-16 held that assessee was
a mere contractor and it ought to have adopted percentage completion method as
per AS-7. Commissioner (Appeals) taking note of factual position that assessee
had been consistently following project completion method which had been
accepted by department reversed order passed by Assessing Officer. Tribunal
following principle of consistency dismissed appeal filed by revenue. It was
noted that AS-7 also recognized position that in case of construction
contracts, assessee could follow either project completion method or percentage
completion method. There was no error in order passed by Tribunal nor any
substantial question of law arose for consideration. [In favour of assessee]
(Related Assessment year : 2015-16) – [PCIT v. Salarpuria
Simplex Dwelling LLP (2022) 289 Taxman 264 : 143 taxmann.com 35 (Cal.)]
Assessee, engaged in business of
trading and manufacturing of diamonds, made purchases from certain tainted dealers,
in view of report of Task Force for Diamond Sector constituted by Ministry of
Commerce and Industry, profit element embedded in value of disputed purchases
for diamond manufacturers was to be estimated in range of 1.5 per cent to 4.5
per cent
Unexplained expenditure (Bogus
purchases) - Assessee was engaged in business of trading and manufacturing of
diamonds. Assessee made purchases from certain tainted dealers. Assessing
Officer concluded that assessee made purchases from grey market to save
indirect taxes and, thus, incidental profit element which was embedded in value
of said purchases was to be brought to tax. He, thus, estimated profit element
embedded in value of disputed purchases at 5 per cent. Commissioner (Appeals)
reduced same to 3 per cent. It was noted that report of Task Force for Diamond
Sector constituted by Ministry of Commerce and Industry recommended that net
profit prevailing in diamond industry engaged in business of trading would be in
range of 1 per cent to 3 per cent and those engaged in business of
manufacturing would be in range of 1.5 per cent to 4.5 per cent. Since Tribunal
had consistently taken stand by estimating profit element on basis of reliance
placed on report of Task Force, Commissioner (Appeals) was duly justified in
estimating profit percentage of 3 per cent. [In favour of revenue] (Related Assessment
years : 2010-11, 2011-12 and 2013-14) – [Oopal Diamond v. ACIT (2022)
197 ITD 827 : 144 taxmann.com 184 (ITAT Mumbai)]
Tribunal and Commissioner (Appeals)
had returned concurrent findings of fact and deleted addition made by Assessing
Officer on account of difference in receipts shown in financial statements of
assessee and credit entries appearing in bank account of assessee and no
material had been placed by revenue on record to contradict aforesaid
concurrent finding of facts, same could not be interfered with
Rejection of accounts (Concurrent
findings of fact) - Assessee, engaged in business of equity trading, derivatives
trading and real estate investment, filed Income-tax Returns declaring an
income of Rs. 42.43 crores. On scrutiny, assessment order was passed making an
addition of Rs. 10.21 crores on ground that there was difference between funds
received and source of income as per books of account which was not disclosed
by assessee in its return. Assessing Officer rejected books of account declared
by assessee on ground that they were not reliable. Commissioner (Appeals)
allowed appeal of assessee, holding that addition was not sustainable in view
of documentary evidences already available on record. It was further held that
Assessing Officer failed to make any sincere effort regarding aforesaid
addition and same was made only on basis of doubt, suspicion, conjecture or
surmises without affording proper opportunity of being heard to assessee which
was in violation of principles of natural justice. Tribunal concurred with
findings in order of Commissioner (Appeals). On appeal, it was found that
Tribunal and Commissioner (Appeals) had returned concurrent findings of fact
and deleted addition made by Assessing Officer on account of difference in
receipts shown in financial statements of assessee and credit entries appearing
in bank account of assessee. Further, revenue had not placed any material on
record to contradict aforesaid concurrent finding of facts returned by Tribunal
and Commissioner (Appeals). Therefore, said concurrent findings could not be
interfered with. [In favour of assessee] – [PCIT v. Conwood
Medipharma (P) Ltd. (2022) 145 taxmann.com 549 (Del.)]
Assessing Officer
rejected books of account of assessee, a wholesale trader, as parties to whom
assessee made sales were untraceable and estimated gross profit at rate of 2
per cent on basis of invoices of sales and purchases filed by assessee, there
was no infirmity in order of Assessing Officer
Rejection of accounts
(Gross profit rate) - Assessee, a wholesale trader, disclosed gross profit at
rate of 0.13 per cent. Assessing Officer issued notices to twenty sundry
debtors of assessee, however nineteen of parties did not respond and only
sundry debtor who did respond to Assessing Officer denied any transaction with
assessee. Thereafter Assessing Officer rejected account books of assessee and
after perusing invoices of sales and purchases filed by assessee found that
assessee had made gross profit in range of 2 per cent to 3 per cent and
determined gross profit at lower rate of 2 per cent on gross sales. Both
Commissioner (Appeals) and Tribunal upheld rate of gross profit at 2 per cent.
Tribunal rejected submission of assessee for deduction of statutory taxes,
i.e., CST by holding that while estimating gross profit all expenditure had
been accounted for and this included expenditure towards taxes. No substantial
questions of law arose for consideration. [In favour of revenue] (Related
Assessment year : 2013-14) – [Narender Kumar Anand v. PCIT (2022) 145
taxmann.com 213 (Del.)]
If books of account are rejected
and section 145(3) applied for determining net profit from business carried on
by assessee, Assessing Officer is free to make
additions under section 68 towards unexplained cash credit
Cash credit (Scope of provisions) -
In respect of ground No. 4 regarding unexplained cash credit, the ld. AR
vehemently argued that once the Assessing Officer applied section 145(3) the
same books cannot be relied by the Assessing Officer for making other additions
whereas the Assessing Officer has made addition u/s 68 for unexplained cash
credit in regard to fixed deposits received from the customers and in respect
of his case he has relied on the judgment which has been cited (supra), the
contention of the assessee is not acceptable. On going through the order of the
assessment we observe that the Assessing Officer has rejected the books of
account for determination of the net profit only from the business carried out
by the assessee . The other additions cannot be made towards the disallowance
of expenses under the profits and gains of business or profession as we have
decided supra by relying on the judgments of two Honb'le High Courts but for
addition under other heads under section 68 towards unexplained cash credit
which is not addition towards computation of business profit can be made by
Assessing Officer and our view is supported by the judgment of Hon’ble Supreme
Court in the case of Basir Ahmed Sisodia v. ITO (2020) 424 ITR 1 : 271
Taxman 247 : 116 taxmann.com 375 (SC), Kale Khan Mohammad Hanif v. CIT
(1963) 50 ITR 1 (SC) and in the case of CIT v. Devi Prasad Vishwanath
(1969) 72 ITR 194 (SC).
During the course of hearing, it
was brought to the notice of both the parties that these above decisions were
not cited by both the parties but it has brought into the notice of both
parties that recent judgment of Hon'ble Supreme Court in the case of Basir
Ahmed Sisodia (cited Supra) but the ld.AR stated that first two judgments of
Hon'ble Supreme Court is very old judgment, therefore, it cannot be accepted
and in the case of Basir Ahmed Sisodia he stated that it is not directly
related to the additions made, therefore, recent judgment of Hon'ble Supreme
Court in the case of Basir Ahmed Sisodia is not applicable because it relates
to penalty. We reject the entire arguments of the ld. AR on the issue of no
further addition can be made after rejecting the books of accounts under section
68 towards unexplained cash credit. The ld. AR also relied on the judgment of
hon’ble jurisdictional High Court and other High Courts also , on perusal of
the same we did not find any reference of the judgement of the Hon’ble Supreme
Court cited by us supra, therefore, it appears that before the Hon’ble High
Courts the judgement of Hon’ble Supreme Court on the very same issue was not
cited by both the parties, therefore, judgement of the Hon’ble High Court will
not be applicable in the case of the assessee, accordingly, considering the
above judgments of Hon’ble Supreme Court, we hold that if the books of accounts
are rejected and applied section145(3) for determining net profit from the
business carried on by the assessee, the Assessing Officer is free to make
additions under section 68 towards unexplained cash credit. Accordingly, this
legal ground raised by the assessee is rejected. [In favour of revenue]
(Related Assessment year : 2018-19) – [Smt. Lizy George v. ACIT (2022)
144 taxmann.com 52 (ITAT Bangalore)]
Books of account cannot be rejected
merely for Non-Issuance of Sale Memos
In the present case, mere non-issuance of production
of sale memos could not have been a ground to reject the entire books of
account particularly since it pertained to sale of country liquor to tribal
populations. Also the ITAT appears to have overlooked the fact that the books
of account of the Assessee were not rejected by the Excise Department and that
the ITAT itself had accepted them for the subsequent Assessment
year 2001-02. Although the Assessing Officer accepted
the fact that there was nothing wrong with the Assessee’s books of accounts,
only on the ground that sales memos were not filed, the books of accounts were
rejected by the Assessing Officer. When the matter went in an appeal to the
CIT(A) it was noted by him in Para 1.3 of the order dismissing the appeals that
“it is true that the Assessing Officer had not pointed out any specific
omission or commission nor cited any specific instance of irregularity in the
books of accounts” and that the only reason for rejection was that “element of
inflation in purchases or incorrectness of purchase could not be ruled out”.
However, it was again surmised that “there was also possibility of suppression
of sale price”. It is therefore plain that both the Assessing Officer and
CIT(A) proceeded on surmises and conjectures with no supporting material to
justify the rejection of the Assessee’s books of accounts. The ITAT having
accepted the Assessee’s accounts for the subsequent Assessment year 2001-02 for
some reason did not accept them as far as the Assessment year in question was
concerned. Where the issue is of sale of country liquor to tribal populations
to expect the Assessees to issue sales memos is not even realistic.
Importantly, since the books of account of the Assessees in the present appeals
have been accepted by the Excise Department, and for the subsequent year
Assessment year 2001-02 by the ITAT, there was no reason to resort to surmises
and conjectures and ‘best judgment assessment’ to reject the Assessee’s books
of account for the Assessment year in question. (Related Related Assessment
year : 2001-02) – [Cresent Co. v. CIT - Date of Judgement : 02.02.2022
(Ori.)]
Assessee-trader
explained substantial fall in GP rate due to fall in price of cardamom by
almost half rate at end of year as compared to beginning of year, and there was
exceptional circumstances of increase in turnover by 130 times, there would be
no rational basis for estimating GP rate by Assessing Officer even though he
had rejected books of account - Once profits have arisen in
accounting year out of transfer of capital asset, it would be sufficient to
attract liability under section 45
Section 145 of the
Income-tax Act, 1961 - Method of accounting - Estimation of income (GP rate) -
The assessee had shown GP rate of 0.38 per cent and while sale was
substantially increased during the year. Once books of account are rejected,
Assessing Officer has to estimate profits based on his judgment and either past
year results or comparative profits declared in similar line of trade in same
commodity would be a guiding factor. Assessee, engaged in trading of cardamom
and other goods, filed return of income. Assessing Officer rejected books of
account and stating that he had failed to give evidence regarding payment of
duties and taxes and had claimed loss and passed impugned ex parte order and
estimated GP rate of 0.69 per cent on declared sales of Rs. 1.57 crores and,
thus, made addition of Rs. 49,56,217 to the total income. However, there was an exceptional circumstances as assessee’s turnover
increased by almost 130 times and, thus, past year results were not reflective
of state of affairs of current affairs, and past year results could not be made
a guiding factor. There was nothing on record in terms of comparative profits
declared in similar line of trade in commodities. Assessee had explained
substantial fall in GP rate due to fall in prices of cardamom by almost half at
end of year as compared to beginning of year. Though there was certain
speculative losses, same did not affect declared trading results. In instant
case, there would be no rational basis for estimating gross profit rate by
Assessing Officer even if books of account were rejected. Trading addition made
by Assessing Officer estimating higher GP rate was to be deleted. [In favour of
assessee] (Related Assessment year : 2012-13) - [Sanjay Agarwal v. ITO
(2021) 131 taxmann.com 331 (ITAT Jaipur)]
There
was difference between assessees books of account and accounts as per TDS
certificate, on said difference, only embedded portion of profits was to be
taken into consideration and addition was to be made thereon; there was no
justification in making addition of entire turnover to income of assessee
The
assessee a proprietorship firm running the business of civil contractor filed
its return of income on 28.10.2013 declaring income at Rs. 22,02,250/-. During
the course of assessment proceedings, it was found by the Ld. Assessing Officer
that as per the ITS details the gross receipts of the assessee is Rs.
12,43,51,107/-, whereas as per the profit and loss account the same is Rs.
11,93,79,537/-. The assessee was asked to reconcile the difference in receipts
amounting to Rs. 49,71,570/-. Since, no plausible explanation in this regard
was provided by the assessee, the said amount of Rs. 49,71,570/- has been
determined as the undisclosed income of the assessee and added to the total
income of the assessee.
It is a settled proposition of law that in case of difference between assessee's books of account and accounts as per TDS certificate, then on said difference, only embedded portion of profits was to be taken into consideration and addition was to be made thereon. Total sale does not represent profit of assessee and only net profit rate has to be adopted and once net profit is adopted, it cannot be said that there was perversity of approach. There are number of judicial pronouncements by which the principle to this effect has been laid down that the total sale cannot represent as the profit of the assessee. Therefore, there was no justification in making addition of entire turnover to income of assessee. Having regard to the peculiar facts and circumstances of the case, we find it justified to restrict the addition at 5% of the net profit on the gross receipt of Rs. 11,93,79,537/-. The Ld. Assessing Officer is directed to grant relief to the assessee as on the above terms. [Partly in favour of assessee] (Related Assessment year : 2013-14) – [Sohan Lal Aggarwal v. ITO (2021) 130 taxmann.com 380 (ITAT Delhi)]
Assessee third party administrator of insurance company could change accounting method from invoice completion method to proportionate completion method
Proportionate completion method) - Revenue
from service transactions is usually recognized when service is performed; such
revenue is to be recognized either by proportionate completion method or
completed service contract method. Assessee was engaged in business as third
party administrator of insurance companies. Till 31.03.2007, assessee used to
recognize revenue immediately on raising of invoice even though service under
contract was not completed; thus, assessee had earlier adopted invoice method. Since
assessee was involved in execution of more than one act of rendering service in
entire year, it adopted proportionate completion method. Assessee was covered
by Accounting Standard-9 as it did not deal with revenue of insurance companies
arising from insurance contracts. Since financial service rendered by assessee
resulted in revenue which, in turn, had to be taken into account having regard
to incidence of costs relating to service, Accounting Standard-9 would apply. Since
revenue had accepted change in method of accounting in subsequent assessment
years, there was no justification on part of Assessing Officer to reject same
and to determine income on estimated basis. [In favour of assessee] (Related
Assessment year : 2009-10) – [CIT, Bangalore v. Medi Assist (India) TPA (P)
Ltd.) : (2020) 429 ITR 586 : (2021) 125 taxmann.com 77 (Karn.)]
Construction business – Percentage
completion method – Brokerage expenditure – Allowable in the year when the
expenditure is incurred
Dismissing the appeal of the
revenue the Court held that, when the assessee follows percentage completion
method, brokerage expenditure is allowable in the year when the expenditure is
incurred. (Related Assessment year : 2008-09) - [CIT v. DLF Home Developers
Ltd. (2019) 411 ITR 378 (Del.)]
Accrual – Surcharge receivable from customers on delay
in payment of electricity bill taxable on receipt basis and not accrual basis
The assessee accounted for and
offered the surcharge income on receipt basis. The Assessing Officer sought to
tax the same on accrual basis, irrespective of collection. Dismissing the
appeal of the revenue the Court held that, that where the assessee, owing to
uncertainty in collection, offered the surcharge income on receipt basis and
the same was accepted in the earlier years, the addition made in the instant assessment
year was also to be deleted and the income is to be taxed on receipt basis.
(Related Assessment year : 2005-06) - [PCIT v. Dakshin Haryana Bijli Vitran
Nigam Ltd. (2019) 307 CTR 709 : 175 DTR 429 (P&H)]
Low gross profit – Books of account
cannot be rejected without pointing out any defects – CIT(A) cannot enhance and
reject the books of account which was not the subject-matter of assessment
Tribunal held that rejection of
books of account in preceding year could not be a reason for rejection of books
of account for year under consideration - Further, where there were no material
defect found in books of account then same could not have been rejected on
reason that assessee had declared less gross profit for year under
consideration or day-to-day moment of material was not reflected in stock
register
Tribunal also held that CIT(A)
cannot enhance and reject the books of account which was not the subject-matter
of assessment. CIT(A) can exercise its power to enhance income under section
251 only on issue which is subject matter of assessment. Thus where aspect of
not accepting book results of assessee was never taken up by Assessing Officer
in scrutiny assessments of assessee, it was not open to Commissioner (Appeals)
to raise same and enhance assessment under section 251 by rejecting books of
account. - [In favour of assessee] (Related Assessment years : 2012-13 to
2014-15) - [Zuberi Engineering Company v. DCIT (2019) 175 ITD 557 : 69 ITR
261 (ITAT Jaipur)]
Valuation of stock – Tribunal
taking only market rate one day later for determining valuation of
stock-in-trade is held to be not consistent with law – Tribunal was directed to
reconsider valuation of closing stock on the basis of principles established by
law
Allowing the appeal of the assessee
the Court held that : Tribunal taking only market rate one day later for
determining valuation of stock-in-trade is held to be not consistent with law.
Tribunal was directed to reconsider valuation of closing stock on the basis of
principles established by law. Cost or market rate whichever is less. (Related
Assessment year : 2010-11) - [Shri Ram Kutir Khandsari Udyog (P) Ltd. v. CIT
(2018) 404 ITR 185 (All.)]
Valuation of stock – Opening and closing stock to be
valued on same basis
Dismissing the appeal of the
revenue, the Court held that : the findings of the Commissioner (Appeals) were
based upon sound principles and an appraisal of not merely the bank stock
statement but also the RG-I registers and Form 3CB duly audited by the assessee’s
auditors and accepted by the Excise Department. The appreciation of evidence
was in no way unreasonable and the findings were in accordance with law. The
Tribunal did not commit any error in affirming the order of the Commissioner
(Appeals). (Related Assessment year : 1999-2000) - [PCIT v. Basti Sugar
Mills Co. Ltd. (2018) 400 ITR 436 (Del.)]
Real income – Lease rental – Interest and loan
recovery – Guidance Note issued by the ICAI carries great weight – An assessee
can only be taxed on “real income”—Lease rental is allowable
Dismissing the appeal of the
revenue, the Court held that : an assessee can only be taxed on “real income”.
The bifurcation of lease rental is not an artificial calculation. Lease
equalization is an essential step in the accounting process to ensure that real
income from the transaction in the form of revenue receipts only is captured
for the purposes of income-tax. The Guidance Note issued by the ICAI carries
great weight. The method of accounting prescribed in such a Guidance Note, in
order to compute real income and offering the same for taxation, cannot be
disregarded by the Assessing Officer unless such action falls within the scope
and ambit of section 145(3) of the Income Tax Act. Lease rental is allowable.
(Related Assessment years : 1996-97 to 2000-01) - [CIT v. Virtual Soft
Systems Ltd. (2018) 302 CTR 65 : 165 DTR 121 (SC)]
Valuation of stock – Not maintaining the stock
register – Consistent method was followed rejection of books of account was
held to be not valid
The assessee for the past 30 years,
had been consistently was valuing the stock-in-trade at cost for the purpose of
statutory balance sheet, and for the income-tax return, valuation was at the
lower of cost or market value. That practice was accepted by the Department in
earlier years. Preparation of the balance sheet in accordance with the
statutory provision would not disentitle the assessee in submitting income-tax
return on the real taxable income in accordance with a method of account
adopted by the assessee consistently and regularly. The High Court held that
this could not be discarded by the departmental authorities on the ground that
assessee was maintaining balance sheet in the statutory form on the basis of
the cost of the investments. There is no question of following two different
methods for valuing its stock-in-trade (investments) because the Bank was
required to prepare balance sheet in the prescribed form and it had no option
to charge it. For the purpose of income tax as stated earlier, what is to be
taxed is the real income which is to be deduced on the basis of the accounting
system regularly maintained by the assessee and that was done by the assessee
in the present case. - [CIT v Unique Builders & Developers (2018) 300
CTR 455 : (2017) 160 DTR 313 (Raj.)]
Transfer pricing – Arm's length price – Method of
accounting – TPO has no jurisdiction to comment on the method of accounting
followed by an assessee
Dismissing the appeal of the
revenue, the Tribunal held that, only role assigned to TPO is to find out as to
whether international transaction is at arm's length or not and he is not
supposed to take decision about accounting policy to be followed by assessee,
nor he should comment upon as to how to compute income if an assessee follows a
particular method of accounting. (Related Assessment year : 2002-03) - [DCIT
v. Hazaria Cryogenic Engineering & Construction Management (P) Ltd. (2018)
168 ITD 344 (ITAT Mumbai)]
Mere fact that books of account
were not supported by vouchers of payments received from patients, same could
not be a ground to reject assessee’s books of account and to make addition on
estimate basis
Assessee was a practising doctor
who had been running a nursing home. A survey under section 133A was conducted
at nursing home of assessee in course of which various account books and
registers were examined and also seized, which included OPD register, Indoor
Patient register and certain other loose papers. Subsequently, assessee filed
his return declaring certain taxable income. Assessing Officer found that there
were some discrepancies between entries recorded in books of account of
assessee and registers and documents seized during survey. He further noted
that books of account were not supported by vouchers of payments received from patients.
He thus rejected assessee’s books of account and made certain addition to
assessee's income on estimation basis. Tribunal granted partial relief to
assessee. It was noted that allegation of discrepancies made in assessment
order was wholly vague inasmuch as Assessing Officer had not recorded nature
and extent of discrepancy. Besides, assessee had also produced his cash book,
ledger as also bank passbook and no specific discrepancy had been pointed out
in those books of account. In aforesaid circumstances, mere absence of vouchers
did not give rise to any presumption that there was any non-disclosure of
income inasmuch as there was no evidence to doubt correctness of entries made
in OPD register as also Indoor Patient register. Therefore, impugned addition
was to be deleted. [In favour of assessee] (Related Assessment year : 2003-04) - [Dr. Prabhu Dayal Yadav v. CIT
(2018) 253 Taxman 191 : 162 DTR 12 : 89 taxmann.com 126 (All.)]
Rejection of books – Assessing Officer has to specify defects,
noncompliance of accounting standards
Assessee followed method of
accounting same as earlier years and the lower authorities never questioned its
books of account. Assessing Officer rejected books of account in impugned year
and made a disallowance under provisions of the Act. Tribunal observed that
there was no change in profit after recasting. Assessing Officer did not point
out any specific defect in maintenance of books of account and did not identify
accounting standard has to be followed by the Assessee. Held rejection books of
account by Assessing Officer was not proper. (Related Assessment year : 2008-09)
- [Google India (P) Ltd. v. Jt. DIT (2018) 194 TTJ 385 (ITAT Bangalor)]
Bogus purchases – If books of
account are not rejected, no addition can be made on presumptions – Merely
returning of notices under Section 133 (6) sent to those suppliers could not be
sufficient to make additions under Section 69C
Allowing the appeal of the assessee
the Tribunal held that : If the Assessing Officer has not rejected the books of
accounts and has only doubted the genuineness of the suppliers but not the
genuineness of the purchases and if the payments are made by account payee
cheques, section 69C is not attracted. section 69C cannot be applied where all
purchase and sales transactions are part of regular books of accounts. The
basic precondition for invoking section 69C is that the expenditure incurred by
the assessee should be out of books of accounts. Merely returning of notices
under section 133(6) sent to those suppliers could not be sufficient to make
additions under section 69C. (Related Assessment years : 2010-11 and 2011-12) -
[Fancy Wear v. ITO (2018) 194 TTJ 125
: (2017) 167 ITD 621 : 87 taxmann.com 183 (ITAT Mumbai)]
Unexplained expenditure (Section
69C) – Bogus purcahses – Estimation of profits embedded in purchases at 12.5%
is reasonable when the assessee failed to prove the purchases to be genuine and
also failed to produce the selling parties during the course of the assessment
proceedings
On appeal the Tribunal held that
the purchases existed in the books of account of the assessee and the onus was
on the assessee to prove that the purchases were genuine. Under these
circumstances, the possibility of the assessee buying the material actually
from the grey market at lower rates and obtaining corresponding bills from the
parties to reconcile the quantitative records and books of account could not be
ruled out. Hence the profits estimated by the CIT(A) at 12.5% was reasonable.
(Related Assessment year : 2007-08) - [(ITO v. Prankit Exports (2018) 62 ITR
243 (ITAT Mumbai)]
Civil contractor – Purchases – No
defect was found in the books of account – No disallowance can be made
It was that the assessee had done
major works for the Government departments and they confirmed the authenticity
of the work. The assessee continuously declared a net profit in the range of
1.71 per cent. to 4.65 per cent. and the disallowance made by the Assessing
Officer if accepted would increase the net profit to the tune of 25.15 per
cent. which was abnormal. The suppliers of these goods had no permanent place
for carrying on the business. There were no defects in the books of account of
the assessee. The disallowance confirmed by the CIT(A) of Rs. 15 lakhs was to
be reduced to Rs. 5 lakhs. (Related Assessment year : 2011-12) - [DCIT v.
IHR Associates (2018) 61 ITR 70 (ITAT Chandigarh)]
If Assessing Officer accepted books
of accounts in preceding and subsequent years – Rejection of books based on
hypothetical calculations was not justified
The nature of business was same in
the current year and books of accounts were accepted by the Assessing Officer
in preceding as well as subsequent assessment years and hence Tribunal was of
the opinion that Assessing Officer should have brought on record some concrete
material to reject the books of accounts following the rule of consistency. The
Tribunal observed that Assessing Officer had rejected the books of accounts
because it showed variation in gross profit margins. It was further observed
that assessee had submitted all the bills and supporting evidence alongwith
computation of raw materials which were recorded in books of accounts. The
Assessing Officer was not able to point out any specific instance of round
tripping of material purchased from different parties. Hence, Tribunal was
convinced that Assessing Officer had rejected the books of accounts without
verifying the books of accounts and provide any just reasons for the same.
Tribunal was of the belief that hypothetical calculations were made by
Assessing Officer on basis of entries in books of accounts for making additions
against the assessee without any jurisdiction. The Assessing Officer had also
not pointed out whether assessee had violated any accounting standards
prescribed for maintenance of books of accounts. In the end, the Tribunal
concluded that CIT(A) was correct on appreciation of facts and materials on
records and correctly did not agree with the findings of the Assessing Officer
and hence there was no justification of Assessing Officer to reject the books
of accounts under section 145(3) of the Act. Thereby the department appeal was
dismissed. (Related Assessment year : 2008-09) - [DCIT v. Prakul Luthra v.
(2018) 53 CCH 607 (ITAT Delhi)]
Where the books of account is
rejected and income is estimated, separate addition under sections 40A(3), 68
or peak credit cannot be made
Allowing the appeal of the assessee
the Tribunal held that : when the books of account is rejected there is no
justification for the authorities below to make addition of Rs. 6,92,25,000/-
under section 40A(3) of the Act and addition of Rs. 7,12,15,150/- under section
68 of the Act. In view of the above discussion, we set aside the orders of the
authorities below and delete both these
additions. (Related Assessment year : 2013-14) - [Deepak Mittal v. ACIT –
Date of Judgement : 23.03.2018 (ITAT Delhi)]
Day to day stock register is not maintained – Applying the gross profit rate on basis of past history was held to be justified
As the assessee was not
maintaining the day-to-day stock register and there were various specific
defects in the books of account, the Assessing Officer rejected assessee's
books of account and applied gross profit rate of 23 per cent to estimate
income.
Held that as the assessee was not maintaining day-to-day stock register
and the Assessing Officer pointed out specific defects in books of account, he
was justified in rejecting books of account; however in view of past history of
the assessee, gross profit rate should be applied at 11.5 per cent instead of
23 per cent as applied by the Assessing Officer.
The application of gross profit rate of 11.5 per cent. on the basis of the past
history of the assessee was also rightly confirmed. [In favour of assessee] - [CIT v. Sita Ram Sopra
(2017) 399 ITR 463 (Raj.)]
Books of account are
genuine hence rejection of books of account was held to be not justified
Unless books of account had been found not genuine and
reasons for rejecting books of account were just and proper, no trading
addition could be made by rejecting books of account. Dismissing the appeal of
the revenue the Court held that : Books of account are genuine, hence rejection
of books of account was held to be not justified. [In favour of assessee] - [CIT v. Shiv Agrevo Ltd.
(2017) 398 ITR 608 : (2018) 99 taxmann.com 402 (Raj.)]
There
was no evidence on record indicating incorrect entries in books of account
hence rejection of books of account was held to be not valid
During assessment
proceedings, the Assessing Officer noted that average cost of purchase of
saleable land came to Rs. 364 per square yard whereas the assessee had sold
plots for Rs. 400 per sq. yard which included a sum of Rs. 165 per sq. yard as
development charges and, therefore, in effect selling price of the land was
only Rs. 235 per sq. yard. The Assessing Officer held that this position did
not reflect true and correct picture of the books of account as selling of plot
at a loss in real estate was absurd and not acceptable. He rejected books of
account and estimated income by making addition on account of suppression of
sale of plots. Held that books of account of the assessee were duly audited and
Assessing Officer had not brought any evidence on record to indicate that the
assessee had charged any money over and above the price recorded in the books
for sale of any of the plots, including those of land, which were sold below
the average cost of purchase, from any of the persons who purchased those
plots. Therefore, the Assessing Officer was not justified in rejecting books of
account and estimating income on ground of suppression of sales. [In favour of
assessee] - [CIT
v. Pink City Developers (2017) 398 ITR 153 : (2018) 99 taxmann.com 422 (Raj.)]
Nothing on record to show
satisfaction of Assessing Officer that books incorrect, incomplete or
unreliable hence best assessment is held to be not justified
The assessee, a public limited
company, was engaged in the business of civil construction and related
services. The assessing Officer had made addition to, income returned by the
assessee by estimating gross profit. The Commissioner (Appeals) held that the
addition could not be made in hands of assessee merely based on the perception
of the Assessing Officer that the assessee had declared low profit margin for
certain projects when books of account had not been rejected. The Tribunal
dismissed the appeal of the revenue by holding that profits of an assessee
could not be estimated without rejecting the books of account. On appeal:
Held : The Tribunal has expressed
its considered opinion that only when an assessee is not maintaining books of
account properly and the correct income cannot be estimated on the basis of the
books of account, then only the books of account can be rejected. The Tribunal
has gone on to hold that the Assessing Officer can estimate profit only
thereafter. It is also seen that the assessee is doing civil construction work
for residential projects, many projects for the Government, Government related
agencies and some for Non-Government Organizations (NGOs) across the country.
Considering this spectrum, there can be certainly low profit margins in
projects for Government and Government related agencies. So can be the case for
NGOs. It becomes obvious that there is no legal position which is debatable.
Equally, no settled position of law has been misapplied by the authorities in
answering the material questions either. Dismissing the appeal of the revenue,
the Court held that : the addition made to the income of the assessee on
estimate basis by the Assessing Officer under section 144 for certain projects
had been done without scrutiny and without rejecting its books of account.
There was nothing on record to show that the Assessing Officer came to the
conclusion that the books of account maintained by the assessee were incorrect,
incomplete, unreliable and consequently had rejected them. Therefore, no
substantial question of law arises in the instant appeal. There is no merit
whatsoever in the appeal filed by the revenue as the addition of income on
estimate basis for certain projects (as admitted/conceded by the revenue before
Tribunal) without scrutiny and without rejecting the books of account of
assessee. Equally, no substantial question of law arises. [In favour of
assessee] (Related Assessment year : 2012-13) - [PCIT v. Marg Ltd. (2017)
396 ITR 580 : 249 Taxman 521 : 84 taxmann.com 52 (Mad.)]
Rejection of accounts When
inconsistency in input/output ratio in various months and higher wastage in
comparison to sister concern, had been duly explained by assessee, they could
not be basis for rejection of books of account – Deletion of additions was held
to be justified
The Assessing Officer rejected the
assessee’s books of account on account of inconsistency in input/output ratio,
higher wastage in comparison of assessee's sister concern ‘B’. He rejected
assessee’s explanation that input/output ratio would depend on number of
factors depending on the quality of the goods produced, quality of furnaces and
machines used, temperature required, tolerable fluctuations and the quality of
raw material used; and that input/output ratio in case of its sister concern
was higher as said concern was manufacturing stoneware crockery while assessee
was manufacturing bone china crockery in which wastage was more than stoneware
crockery.
Held that inconsistency in the
input/output ratio in various months and higher wastage in comparison to sister
concern, the reasons for which had been duly explained by the assessee, could
not be the basis for rejection of books of account. The yield and gross profit
rate declared by the assessee could also not be the basis for rejection of
books of account since ‘B’ was manufacturing maximum of stoneware crockery. The
Assessing Officer had not pointed out any specific defects in the purchase,
sales, opening stock and closing stock of the assessee and had not brought on
record any cogent material to prove that the assessee had sold the
under-production out of the books of account. Therefore, the Assessing Officer
was not justified in rejecting the books of account by invoking the provisions
of section 145(3). [In favour of assessee] - [CIT v. Ceramic Industries
(2017) 396 ITR 50 : 88 taxmann.com 520 (Raj.)]
Method of accounting consistently followed and
accepted by Revenue in earlier years cannot be rejected
Considering the fact that the assessee has followed the
method which is consistent therefore this Court is of the opinion that the view
taken by the tribunal and CIT(A) is not correct in rejecting the project completion
method which was followed consistently by the assessee and instead applying the
work-inprogress method. Since the issue involved in this appeal is identical to
the decision cited by the learned Counsel for the assessee while adopting such
reasons, we allow this appeal and accordingly answer the issue raised in this
appeal in favour of the assessee and against the department. [In favour
of assessee] (Related Assessment year 2001-02) - [Manjusha Estate (P) Ltd.
v. ITO (2017) 393 ITR 644 : 88 taxmann.com 699 (Guj.)]
Gross Profit rate could not be computed with reference
to returns of subsequent assessment years
Allowing the appeal of the assessee
the Court held that : the gross profit rate was computed with reference to the
returns of the subsequent assessment years i.e. 1989-90 to 1991-92. Thus, there
was no positive evidence before the CIT(A) to assess the gross profit rate. The
returns of the subsequent years i.e. 1989-90 to 1991-92 could not have been
taken into account for computing the gross profit rate in respect of Assessment
Year 1986-87. Thus, the finding with regard to gross profit rate was based on
surmises and conjectures and thereby order passed by lower authorities were
quashed. [In favour of assessee] (Related Assessment year : 1986-87) - [Nek
Ram Sharma & Co. v. CIT (2017) 298 CTR 486 : 158 DTR 58 (J&K)]
Merely because the gross profit is low cannot be the ground to reject the books of account
During relevant year assessee
declared Gross profit at 48.39 per cent. Assessing Officer after rejecting
books of account, estimated Gross profit at 53.32 per cent by considering only
overall Gross Profit Ratio declared in earlier years for same project.
Assessing Officer had not properly appreciated whether or not expenditure might
have increased and/or might be for some or other reason profit might have
decreased. Tribunal found that for year under consideration income of assessee
had increased. Tribunal held that there was justification in decrease in gross
profit and, Assessing Officer was not justified in estimating Gross Profit
ratio at 53.32 per cent. Order of Tribunal was justified. [In favour of
assessee]
(Related Assessment
year : 2007-08) - [PCIT v. Purshottam B. Pitroda (2017) 248 Taxman 118 : 82
taxmann.com 18 (Guj.)]
Unexplained expenditure (Section
69C) – Bogus purchases – Purchases of paddy recorded and matched with report of
Agricultural Marketing Committee (AMC) – No disallowance on ground that failed
to maintain proper books of account
The Assessing Officer held that the
assessee has not maintained proper gate passes for recording purchases of
paddy, accordingly disallowed 5 per cent of purchases. CIT(A), deleted the
addition. On appeal the Tribunal held that : the assessee had reconciled
quantity of paddy purchases from the order passed by agricultural marketing
committee (AMC) and its books of account and same were matched with AMC
reports. Since, revenue failed to controvert finding of facts therefore;
addition cannot be sustained as bogus purchase of paddy. (Related Assessment
year : 2009-10) - [ACIT v. Sri Ramalingeswara Rice & Oil Mill (2017) 162
ITD 696 (ITAT Visakha)]
Estimation of income on the basis of material on
record and on the basis of statement is a question of fact
Dismissing the appeal the Court
held that : estimated income of the assessee was arrived at on the basis of the
material on record and on various statements made by the employees and
directors during the search and survey proceedings. The High Court further
observed that subsequent retraction of statements was not found acceptable by
the authorities and therefore, the findings of the authorities below do not
give rise to any substantial question of law. (Related Assessment years :
2006-07, 2007-08) - [Punjab Sind Dairy v. DCIT (2017) 146 DTR 21 (Bom.)]
Assessee had kept self-made vouchers in support of major expenditure and books of account maintained by him did not give true and correct profit from business, Assessing Officer was justified in rejecting said books of account and estimating net profit of 8 per cent of gross receipts
Assessee was
engaged in business of execution of civil works contract - He filed his return
of income for relevant assessment year declaring certain taxable income - In
course of assessment, Assessing Officer noted that assessee had kept self-made
vouchers in support of major expenditure and, accordingly, opined that books of
account maintained by assessee were not amenable for verification - He thus
rejected books of account under provisions of section 145(3) and estimated net
profit of 8 per cent on gross contract receipts net of all deductions. Since
assessee failed to controvert findings of Assessing Officer with any positive
evidence to come to conclusion that books of account maintained by him gave a
true and correct profit from business, Assessing Officer was right in rejecting
books of account. As regards rate of profit, since assessee had disclosed 6.73
per cent to 7.44 per cent net profit in earlier period, impugned estimation
made by Assessing Officer was justified. Even otherwise, since nature of
business carried on by assessee was squarely fit into specified business
referred to in provisions of section 44AD, estimation of net profit at rate of
8 per cent of gross receipts specified in said section was rightly adopted. [In
favour of revenue] (Related Assessment year : 2009-10) - [G. Raja Gopala Rao
v. DCIT, Visakhapatnam (2017) 163 ITD 46 : 78 taxmann.com 61 (ITAT
Visakhapatnam)]
Admission of addition of income – Rejection of books of account was held to be justified – Gross profit could be telescoped to addition made on excess stock
In the course of survey, the
Assessing Officer did not verify all the vouchers and books of account and
arrived at the excess stock for which the assessee admitted that inventory was
taken correctly. The managing partner admitted the additional income of Rs. 30
lakhs in the course of survey, but the assessee offered only an income of Rs.
6,467 in the return of income. The Assessing Officer rejected books of account
and estimated income by applying gross profit rate. Held that there was
reasonable cause for rejection of books of account and estimating the gross
profit. In
the result, appeal of assessee is partly allowed. (Related Assessment
year : 2007-08) – [Mamatha Silk Centre v. ITO, Suryapet (2017) : 88
taxmann.com 776 : 54 ITR(T) 561 (Hyderabad]
Suppliers shown by assessee were
either not traceable or some of those were not found to be genuine, books of
account of assessee were rightly rejected
Rejection of accounts (Suppliers,
non-traceable) - The assessee-company was engaged in manufacturing of
fertilisers. The Assessing Officer made an addition of fertilizer subsidy
received on the ground that the assessee was not found to have been engaged in
the manufacturing of fertilizers, which was based on findings of a survey in
the case of certain companies. The assessee did not produce books of account
for verification. The Assessing Officer rejected the books of accounts. The
Commissioner (Appeals) upheld the order of the Assessing Officer. The Assessing
Officer was directed to estimate the net profit of the assessee at 10%. The
Tribunal found that the Commissioner (Appeals) passed speaking order based on
the evidence. Held that the assessee could not show us as to why the purchases
shown by the assessee be accepted when the supplier shown by the assessee-company
were either not traceable or some were found to be not genuine when survey was
conducted at the premises and the purchases remained verifiable. In view of the
same, the action of the Commissioner (Appeals) in rejecting the books of the
assessee under section 145(3) was to be upheld. [In favour of revenue] (Related
Assessment year : 2000-01) - - [ITO v. Brij Fertilizers Ltd. (2017) 83
taxmann.com 60 : (2016) 48 ITR(T) 125 : 5 TMI 1176 (ITAT Agra)]
Bogus Purchases – Books of account of assessee not
rejected—
Disallowance of purchases not proper
Dismissing the appeal of the
revenue the Tribunal held that : it was held that merely because the suppliers
had not appeared before the Assessing Officer or CIT(A), it could not be
concluded that the purchases were not made by the assessee. This is the case
where books of account of the assessee had not been rejected and the Assessing
Officer had not brought on record anything which may prove that the evidences
submitted by the assessee was bogus. Relying on the Bombay High Court decision
in the case of Nikunj Exim Enterprises (P) Ltd. 372 ITR 619, the Hon'ble
Tribunal deleted the addition of disallowing the purchases made by the
assessee. (Related Assessment year : 2011-12) - [ACIT v. Skylark Builders SSJC
(Ghatkopar) (2017) 58 ITR 77 (SN) (ITAT Mumbai)]
Unexplained
expenditure – Bogus purchases – Additions to be made to make profit comparable
with that of preceding year
The assessee was a
Government electrical contractor. The Assessing Officer had information that
certain hawala dealers were involved in issuing bogus invoices to allow a
trader to claim tax credits and the assessee was one of such beneficiaries. The
assessee submitted copies of purchase bills and also stated that payment had
been made through cheques. However, it could not produce the parties from whom
the material was procured. The Assessing Officer rejected the books of account
and made additions to the tune of unproved entire purchases made under section
69C. On appeal, the Commissioner (Appeals) restricted the disallowance to 12.5
per cent of the net profit ratio.
Held that the Commissioner (Appeals) after considering the replies of
the assessee held that if the sales were there purchases had to be there,
hence, the inference that could be drawn was that the assessee had made
purchases in the open market but had obtained bills from the hawala operators,
but there was no one-to-one correlation with the material so purchased to have
been completely used in the execution of work contracts. The revenue had
accepted the profit rate of 10.43 percent earned by the assessee in the
preceding year while in the instant year the net profit rate was 9.22 per cent.
On facts the interest of justice would be best served if the additions to the
extent were made to the income of the assessee to make the profit comparable
with that of the preceding year of 10.43 per cent. [In
favour of assessee] (Related Assessment year : 2010-11) - [Arun Shimpi v.
ITO (2017) 53 ITR (Trib) 151 : 88 taxmann.com 651 (ITAT Mumbai)]
Books rejection under section 145 does not automatically lead to penalty-proceedings, absent independent findings
Allahabad High Court
upholds ITAT order and deletes penalty under section 271(1)(c) levied on
assessee- company (engaged in business of electrical items) during Assessment
year 2009-10, rules that rejection of books of account under section 145 does
not automatically lead either to necessary additions to the assessed income or
to penalty proceedings under section 271(1)(c); During the relevant Assessment
year, after rejecting books of accounts under section 145, Assessing Officer
imposed penalty treating assessee’s acceptance of net profit rate (subsequent to incriminating materials
revealed during the survey operation) as
'non-voluntary'; States that, finding incriminating documents in the survey
proceedings which led assessee to offer net profit rate does not discharge the
statutory requirement to justify penalty imposed under section 271(1)(c),
remarks that, neither the assessing officer gave any reason how the books of
account etc. impounded during the survey brought out the fact of concealment of
income nor he established how such books of account etc. rendered the regular
books of account maintained by the assessee unworthy of acceptance ; Clarifies
that mere offering of income to tax by assessee, is not decisive of the issue
whether penalty had been validly imposed, further remarks that, The penalty
order does not disclose any independent or other reasoning to prove the
allegation of concealment of income and/or furnishing of inaccurate particulars
of income.”; Relies on Gujarat High Court ruling in Manu Engineering Works. [In
favour of assessee] (Related Assessment year : 2009-10) – [Dee Control And
Electric (P) Ltd. [TS-642-HC-2017(ALL)]
– Date of Judgement : 19.12.2017 (All.)]
Unexplained expenditure (Section
69C) – Bogus purchases – If the assessee has not discharged the onus of
producing the documentation and the suppliers, the Assessing Officer is
entitled to estimate the gross profit
Information was received by
Assessing Officer from DGIT (Inv.), Mumbai that there were some parties who
were engaged in hawala transactions and were involved in issuing bogus bills
for sale of material without delivery of goods, and that assessee was
beneficiary of hawala/accommodation entries from 28 entry providers. Assessing
Officer reopened assessment and assessee was asked to produce parties and also
file documents to substantiate its claim of purchase etc. Assessee did not
submit documentary evidence to show that there was movement of goods and
notices issued to 28 parties were returned unserved. Thus, he concluded
purchases were not genuine purchases and further, Assessing Officer made gross
profit additions at rate of 12.5 per cent over total purchases. On facts, there
was tangible material which clearly indicated assessee to be beneficiary of
bogus purchase entries from 28 bogus entry providers and, thus, reopening was
justified. Further since directors of 28 entities had admitted of issuing only
invoices for sake of entry without delivery of goods Assessing Officer was
justified in treating it as bogus purchases. Ends of justice will be met if GP
ratio of 12.5 per cent on alleged bogus purchases was added to income of
assessee against which credit for declared GP ratio on alleged bogus purchases
be granted by Assessing Officer after verification. On facts, GP ratio of 12.5%
as applied in CIT v. Simit P Sheth (2013) 356 ITR 451 (Guj.) is fair,
reasonable and rational after giving credit for the GP already declared. [Partly
in favour of assessee] (Related Assessment year : 2009-10) - [Ratnagiri
Stainless (P) Ltd. v. ITO (2017) 164 ITD 136 : 80 taxmann.com 265 (ITAT
Mumbai)]
The Assessing Officer examined the
books of account and other supporting materials produced by the assessee. The
Assessing Officer found that the purchases could be said to be vouched as they
were made from Government undertakings or/and other distilleries, the sales
version has totally manipulated. The assessee did not maintain brand wise and
size wise quantitative details of various bottles/pouches. Even registers were
not maintained. The assessee admitted the defects. The Assessing Officer
rejected the books of account. The Commissioner (Appeals), while granting
partial relief, upheld the rejection of books of account. The Tribunal also
upheld the order. The High Court held
that admittedly the books of account had been found to be defective even on the
admission of the assessee. The books of account were rightly rejected for the
reasons assigned by the three authorities. - [Chaturbhuj Major Kumar and
others v. CIT and another (2016) 7 TMI 1230 (Raj.)]
Non-production of parties cannot be
a ground for disallowance of all purchases when sales made out of such
purchases were not disputed or questioned and resultant profit on such sales
had been accepted in toto by Assessing Officer
Non-production of parties cannot be
a ground of disallowance of all the purchases for the following reasons: (i)
The parties from whom purchases are made could not always be in the control of
the assessee specially when they are unrelated parties. (ii) Non-production of
the parties from whom the assessee purchased materials cannot lead to the
conclusion that the purchases are not genuine. Where sales made out of such
purchases were not disputed or questioned and the resultant profit on such sales
had been accepted in toto by the Assessing Officer, Assessing Officer was not
justified in disallowing such purchases as bogus purchases only on ground of
non-production of parties.
It was held that in the absence of
purchases there could not be sales worth of Rs. 4.03 crores. Not only this, the
Assessing Officer also accepted the opening and closing stock as shown by the
assessee in the books of account which were never rejected by him. The
Assessing Officer had not doubted the sales. If the Assessing Officer's version
was accepted then the gross profit works out 83% which was unbelievable.
Non-production of parties could not be a ground for disallowance of all the
purchases because the parties from purchases were made could not always be in
the control of the assessee especially when they were unrelated parties. The
Tribunal held that there was no justification for making the addition of Rs.
3.07 crores on account bogus purchases. [In favour of assessee] (Related
Assessment year : 2009-10) - [Ganesh Dass Piara Lal Jain v. ITO, Ambala
(2017) 82 taxmann.com 354 : (2016) 49 ITR(T) 36 : 7 TMI 686 (ITAT Chandigarh)]
Assessing Officer finding certain
discrepancies in books of account maintained by assessee rejected books of
account as not reliable but could not pinpoint any specific item in working
results for a specified addition in assessment as disallowable item of expenditure,
etc., only addition made on account of undervaluation of work in progress could
not be sufficient to reject books of account of assessee
The Assessing Officer finding
certain discrepancies in the books of account maintained by the assessee rejected
the books of account as not reliable and made addition being 5 per cent of the
net turnover considering the same as suppression of gross profit. On appeal,
the Commissioner (Appeals) deleted addition except the addition made on account
of undervaluation of work-in-progress in the closing stock holding that none of
the grounds taken by the Assessing Officer for rejecting the books of account
was valid. The Tribunal upheld order of the Commissioner (Appeals).
Held that the Assessing Officer had
fully accepted the purchase, sales, consumption, shortage, etc., of the
assessee-company and he could not pinpoint any specific item in the working
results for a specific addition in the assessment as disallowable item of
expenditure, etc. Therefore, the Tribunal was justified in holding that the
book results were rejected by the Assessing Officer on insignificant grounds.
[In favour of assessee] - [PCIT v. Garden Silk Mills Ltd. (2016) 388 ITR 237
: 7 TMI 915 : (2017) 81 taxmann.com 128 (Guj.)]
The Assessing Officer rejected the
books of account of the assessee under section 145 of the Act on the ground
that the assessee had failed to produce any bills or vouchers in respect of
various cash payments made by the assessee and there were mistakes and
discrepancies in the books of account. The Assessing Officer applied the net
profit @ 3% and computed the income. The Commissioner (Appeals) confirmed the
order of Assessing Officer. The Tribunal held that the books of account were
duly audited and no effects had been pointed out regarding the sales, purchase
or profit. The purported defects were confined to cash book which had no nexus
with the trading results. Instances of irregularities in cash payment could not
warrant ipso facto rejecting books of account. - [Samwon Precision
Mould Manufacturing (India) (P) Ltd. v. ITO (2016) 4 TMI 1094 (ITAT Delhi)]
Where assessee’s yield from trading
of rice was commensurate to industrial gross profit, ad hoc addition made was
unjustified
Assessee-company was engaged in
processing and trading in rice, pulses and food products. Subsequent to search,
a notice was issued to assessee under section 153A. Assessing Officer after
considering materials on record, made addition which included 1 per cent of
sale of rice shown in books of account as quality wise day-to-day stock of rice
traded by assessee was not reflected. The Tribunal found that the assessee’s
books of account were regularly maintained, audited and no discrepancies
whatsoever had been indicated by the Assessing Officer in any material terms.
All the books of account were found and seized and there was no quantitative
tally in the account books. Therefore, the conclusion of the Assessing Officer
in this behalf reject the books was purely based on surmises and conjectures,
the ad hoc addition of 1% of sales had been made which was again guess
work based again on conjectures. The High Court held that the Assessing
Officer's narrow basis for rejecting the books of account and addition of 1% of
sales and bringing it to tax was legally untenable. [In favour of
assessee] (Related Assessment years : 2002-03 to 2007-08) - [CIT v. Kohinoor
Foods Ltd. (2015) 373 ITR 682 : 61 taxmann.com 84 : 5 TMI 82 (Del.)]
Rejection of accounts – Civil contractor – Estimate of
income – Estimate should be based on past history and comparative cases – No
evidence to justify additions – Addition was held to be not justified
The assessee carried on business as
a civil contractor. It declared a net profit at the rate of 5.38 per cent. The
Assessing Officer invoked the provisions of section 145. He disallowed expenses
amounting to Rs. 1,17,75,202 and determined the net profit at 13.7 per cent.
The Commissioner (Appeals) sustained an ad hoc addition of Rs. 10 lakhs.
The Tribunal reduced the addition to Rs. 5 lakhs and deleted the addition of
Rs. 1.12 crores. On appeal to the High Court: Held, that in three out of the
past five assessment years, i.e., 2004-05, 2005-06, 2006-07, the Tribunal had
applied the rate of 5 per cent. For the Assessment Year in question though the
contract receipts had sharply increased from Rs. 10.60 crores to Rs. 12.32
crores, the net profit had increased from 5.02 per cent. to 5.38 per cent. or
5.78 per cent. with the addition of Rs. 5 lakhs. The Assessing Officer had
merely disallowed 20 per cent. or 10 per cent., as the case may be, out of the
various expenses, which was not proper and he had to bring on record
justifiable basis or evidence for making an addition. As the Assessing Officer
had failed to bring on record any comparable case so as to justify any
estimation/addition, the addition had been rightly deleted by the Commissioner
(Appeals) as well as the Tribunal. (Related Assessment year : 2009-10) - [CIT
v. Gupta, K.N. Construction Co. (2015) 371 ITR 325 (Raj.)]
Assessing Officer disallowed expenses and estimated income on basis of estimation made in proceeding year, however, it failed to bring on record any comparable case so as to justify higher net profit rate and disallowance of expenses, addition made was to be deleted
Estimation of income (GP Rate) -
Assessee - a partnership firm, was engaged in business of civil contractor and
had furnished his income-tax return along with audit report and other
information. Assessee declared a net profit of 5.38 per cent, subjected to
interest and remuneration to partners. A perusal of order revealed that net
profit rate in immediate preceding year was 5.02 per cent. Assessing Officer
invoked provisions of section 145 and disallowed expenses amounted to Rs. 1.17
crores and determined net profit at 13.7 per cent - Commissioner (Appeals)
sustained an ad hoc addition of Rs 10 lakhs.
It was held that where the
provisions of section 145(3) are invoked one has to consider either the past
history of the assessee or history of similarly situated other businesses or
trades. Out of the past five assessment years, the Tribunal had applied the
rate of 5%. For the assessment year in question though the contract receipts
had sharply increased from Rs. 10.60 crores to Rs. 12.32 crores the net profit
had increased from 5.02% to 5.38% or 5.78% with the addition of Rs. 5 lakhs.
The Assessing Officer had merely disallowed 20% or 10%, as the case may be, out
the various expenses, was not proper and he had to bring on record justifiable
basis or evidence for making an addition. As the Assessing Officer had failed
to bring on record any comparable case so as to justify any estimation,
addition, the addition had been rightly deleted by the Commissioner (Appeals)
as well as the Tribunal. [In favour of assessee] (Related Assessment year :
2009-10) - [CIT v. Gupta K.N. Construction Co. (2015) 371 ITR 325 : 59
taxmann.com 293 : 5 TMI 315 (Raj.)]
Bogus purchase – Where assessee recorded bogus purchases and, moreover, values of opening stock/closing stock were not open for verification, authorities below were justified in rejecting books of account and making addition to assessee’s income by adopting higher GP rate
The assessee was engaged in
business of precious and semi-precious stones. The assessee purchased some
goods from a party 'L' which was found to be non-genuine. It was also found
that the assessee was not maintaining stock register at all and the entire
valuation of the opening as well as closing of the stock was on mere
estimation. The Assessing Officer thus, prima facie, came to the
conclusion that the books of account were to be rejected and a higher GP rate
was to be applied. The CIT(A) and Tribunal confirmed the order of Assessing
Officer. The High Court held that insofar as the issue on trading addition is
concerned, all the three authorities i.e. the Tribunal, Commissioner (Appeal)
as well as Assessing Officer, have categorically arrived at a conclusion that
provisions of section 145(3) are applicable and what should be a reasonable
profit on account of the trading transactions, is a finding of fact. The
assessee has introduced and recorded bogus purchases and values of opening
stock/closing stock were not open for verification in the books of account,
thus the motive was to reduce its profits. The assessee has not been able to
dispel this finding of fact recorded by all the three authorities who in
consonance, have come to the aforesaid conclusion. Consequently, the instant
appeal, being devoid of merit, stands dismissed in limine. (Related
Assessment year : 2008-09) - [Vimal Singhvi v. ACIT (2015) 370 ITR 275 : 273
CTR 322 : 230 Taxman 73 : 113 DTR 157 : 55 taxmann.com 309 (Raj.)]
Estimation of Profit – Question
pertaining to net profit rate on estimation basis is a question of fact
The assessee had shown “nil” income
but the Assessing Officer has completed assessment on the positive income of
Rs.19,49,07,850/-; and Rs. 5,16,04,798/- respectively. Being aggrieved, the
assessee filed appeals before the first appellate authority who allowed the
relief to the assessee on various grounds. Not being satisfied, the department
filed the second appeal before the Tribunal, who vide its impugned order set
aside the order of the CIT(A) and remanded the matter back to the Assessing
Officer for fresh adjudication on all the issues except one where the addition
pertaining to N.P. rate was deleted in each Assessment Year under
consideration. The only ground taken by the appellant-Department related to the
addition of Rs. 4,07,22,749/-; and Rs. 61,16,188/- respectively for the
assessment years under consideration, made by the Assessing Officer on estimate
basis by applying the net profit rate of 1% on total transport/service charges
etc. The same was deleted by the Tribunal vide its impugned order. Being
aggrieved, the department filed the present appeal. The High Court observed
that the department has filed both the appeals against the additions, which
were deleted/restricted by the Tribunal pertaining to N.P. rate, which were
made on estimate basis. High Court stated that estimation was a question of
fact as per the ratio laid down in the case of Commissioner of Customs
(Import) v. Stoneman Marble Industries (2011) 2 SCC 758. Since there was no
question of law involved, both the appeals were dismissed at the admission
stage. (Related Assessment years : 2005-06, 2006-07) - [CIT v. U.P.
Co-operative Federation Ltd. (2014) 222 Taxman 179 (Mag.) : 42 taxmann.com 470
(All.)]
Profit being low cannot be a ground for rejection of
books of accounts
The assessee-company was engaged in
the manufacture and sale of sugar. The assessee conducted its business through
commission agents and made necessary entries in books of account only on
receipt of sale consideration. The Assessing Officer rejected the books of
accounts on the ground that the assessee had shown a low sale/profit amount.
The CIT(A) upheld the Assessment Order however the Tribunal deleted the same.
The High Court observed that the books of account were properly audited,
checked and no specific error was detected and that the sales were fully
verifiable since the copies of challans, mandi tax vouchers, transport bills,
etc. were also made available to the Assessing Officer. The High Court
following other decisions on the subject held that profit being low by itself
cannot be a ground for rejection of the books of account and thereby dismissed
the departmental appeal. [DCIT v. Hanuman Sugar (Khandsari) Mills (P) Ltd.
(2014) 221 Taxman 156 (All.)]
Method of accounting – Advance/token money received
during an earlier year – to be considered as income only in the year in which
work was performed
The assessee, a proprietor was in the business of sale of rights. The Assessing Officer disallowed an amount of Rs. 10 lakhs shown in 'current liabilities' which was an advance received for purchase of negative rights which was to be adjusted on signing a formal agreement, on the ground that the assessee was following cash system of accounting. The CIT(A) confirmed the order of the Assessing Officer. On appeal by the assessee, the Tribunal observed that the amount of advance could not partake the character of income and was to be returned by the assessee. Accordingly, the Tribunal allowing the appeal held that if advance received was considered as income of the assessee in the year of receipt, the Assessing Officer was to verify whether the work was completed in the year under consideration, and thus remanded the matter back to the file of the Assessing Officer. (Related Assessment year : 2008-09) - [Robin Nanabhai Bhatt v. ACIT (2014) 29 ITR 531 (ITAT Mumbai)]
Estimation of profits – Depreciation is not allowable on estimated net profit
The term net profit by its very name is an all inclusive one
or in a nutshell it is the profit which has been arrived at after netting off
of income over the expenditure, meaning thereby that whatever expenses or
notional expenses were due are to be deducted from the income of the firm or
the company prior to deriving the final figure, i.e., profit. When net profit
of civil construction business is computed on estimate basis after rejecting
books of account, then no separate deduction including depreciation has to be
allowed. [In favour of
revenue] (Related Assessment years 1994-1995 to 2003-2004) - [CIT v. Sahu
Construction (P) Ltd. (2014) 362 ITR 609 : 222 Taxman 167 : 42 taxmann.com 419
(All.)]
Non-maintenance of stock register – Rejection was held to be not justified
The assessee is engaged in
manufacturing and trading of bed sheets, cotton clothes, general clothes and
quilts. During the year under consideration, he had shown gross profits of Rs.
8,28,531 and a total turnover of Rs. 1,11,55,235 while giving GP rate at 7.43%.
The Assessing Officer proceeded to complete the assessment while taking the
total income at Rs. 17,42,360/- as against the returned income of Rs. 2,30,830.
The Assessing Officer observed that the assessee has not maintained the stock
register and quantified and qualified details of the goods could not be
verified and sales were also not verifiable. The Assessing Officer rejected the
books of accounts and invoked the provisions of section 145(3) of the Act,
estimated the gross profit per cent on the estimated turnover of Rs. 1.20 Crs.,
resulting into the trading addition of Rs. 1,91,439. Court held that when the
CIT(A) has deleted the addition in the trading result on the relevant
consideration and finding was affirmed by Tribunal,no substantial question of
law arises. (Related Assessment Year 2005-06) - [CIT v. Babulal Agarwal
(2014) 97 DTR 284 (Raj.)]
There
was fall in GP rate, stock register were not maintained and other discrepancies
were not properly explained, addition on account of estimation of GP rate was
justified
- Rejection of books of account – Finding of fact and no question of law
arises
Assessee during the relevant year
assesses Gross Profit rate was 4.73% as against 8.14% in the immediately
preceding year and assessee failed to produce stock register of production and
sale of mustard cake. Assessing Officer rejected the trading results by applying
GP rate @ 6% invoking the provisions of section 145(3). Both CIT(A) and
Tribunal sustained the addition. On further appeal in High Court, High Court
held contentions of lower authorities as findings of fact and held that all the
authorities had categorically pointed out that assessee did not maintain stock
register and further specific finding of lower authorities could not alter the
position by the contrary observation of the Chartered Accountant in its Audit
Report cannot be said to be correct. Further Assessing Officer had pointed out
several deficiencies while making the assessment coupled with the fact for
which there was no appeal explanation. Rejection of books of account after
invoking provisions of section 145(3) was clearly a finding of fact and no
substantial question of law arises out of the order of the Tribunal. In view of
the aforesaid, there is no perversity or illegality in the order of the
Tribunal. It is essentially a finding of fact and no question of law, mush less
substantial question of law, which can be said to arise out of the order of the
Tribunal. [In favour of revenue] - [Mukesh Oil Mills (P) Ltd. v. ITAT (2014)
264 CTR 196 : 49 taxmann.com 410 (Raj.)]
Explanation of the assessee
If the explanation given by the
assessee is not satisfactory according to the Assessing Officer, then he can
reject the books of account. The Tribunal confirmed the rejection of books of
account under section 145(3) holding that the discrepancies pointed out by the
Assessing Officer, while rejecting the book results have not been
satisfactorily explained by the assessee. The Assessing Officer has observed
that although the quantity of cotton seed, mustard and ground nut crushed
during the previous year were shown separately but the yield of oil and oil cakes
have been given in consolidated form at 13.02% and 83.91% respectively. Further
the sales of oil and oil cakes have been shown in the manufacturing account in
consolidated form although there was a wide variation in the market price of
these products. It is also true that there is always a wide variation in the
percentage of yield of oil and sale rates of oil and oil cakes in the market.
However, the assessee has preferred to put up a consolidated account of
difference types of oil seeds for the reasons best known to him. The assessee
was asked by the Assessing Officer to rework the yield of oil and oil cakes
separately from different types of oil, oil seeds crushed by him. The assessee
was also asked to explain the reasons for mixing up the cotton, mustard and
ground nut oil seeds in the same category when there was vast variation in
market price of these types of oil seeds and other products. When Assessing
Officer asked the assessee to give the explanation, the assessee stated that
there was not much difference in the market price of both these oils and,
therefore, he has made the sales of Khal and oil of both these varieties
jointly. It is opined that the Assessing Officer has correctly rejected the
above explanation of the assessee stating that assessee's statement in this
behalf if not correct, therefore, under no circumstances is acceptable. Unless
the yield of oil obtained on the crushing of three types of oil seeds is
separately given, the manufacturing results cannot be appreciated in their
proper prospective. There were sufficient reasons to hold that the books of
account maintained by the assessee are unreliable, incorrect and incomplete.
Therefore, the books of account of the assessee have correctly been rejected
under section 145(3). The Commissioner (Appeals) has correctly upheld the
action of the Assessing Officer in rejecting the books of account. - [Pawan
Kumar v. ITO (2012) 11 TMI 3 (ITAT Chandigarh)]
Assessee’s books of account do not meet the test of
deduction of true and correct profits therefrom in the absence of proper stock
records
In the case of Champa Lal
Choudhary v. DCIT, the ITAT confirmed the rejection of books of account
holding that the addition(s) being agitated would need to be examined, firstly,
from the standpoint of the validity or otherwise of the invocation of section
145(3) of the Act and the concomitant rejection of assessee's book results, and
then on the merits of the addition on quantum. The revenue's action in invoking
section 145(3) is confirmed. This is principally for the reason that the
assessee’s books of account do not meet the test of deduction of true and
correct profits therefrom in the absence of proper stock records, only
whereupon they can be considered as correct and complete. The assessee's case
is that each piece of stone bears different characterstics and composition and,
therefore, it is not possible to maintain the stock register quality-wise.
Firstly, therefore, it admits to its books of account as not bearing the
quality-wise details of the goods purchased and sold and, thus, in stock at any
given point of time and, therefore, not complete. The same may yield or reflect
its quantity but then that by itself is of little moment or value in the
absence of any indication as to its value which is an essential ingredient
in determining the cost of the goods
sold and, thus, trading profit, and which, in turn, is necessary to work out
the net profit. The value of the stock-in-trade as at the year end or the year
of account, thus, becomes an independent variable, which cannot even be
approximated with reference to the books of account as maintained. It is not
the assessee's case that stock is valued at the average (weighted) cost of
purchase, and which, though not a precise measure, even out the profits when applied
from year to year, so that it may be considered as a viable alternative,
employed bona fide. The same, even otherwise, does not offer itself as
an acceptable alternative in the facts and circumstances of the case. This as
the average method would yield approximate and reasonably correct results only
when the conditions for its application exist. That is, the prices of the
various stone pieces vary over a given, small range, with a low co-efficient of
standard variation. When the individual prices (or data points) vary
considerably, which is admitted, employment of such a method would yield
irregular and misleading results. Two stones of the same weight may have
largely different values or say value per unit (weight), where their weight
differs. Further, how would the stock-in-trade as at the year end be valued?
The same is to be at the actual cost of acquisition or production, and which
again requires cost of bought out goods/raw material, i.e., not only would its characterstics and/or composition
be required to be assessed for the purpose, but also its cost ascertained with
reference to the acquisition cost, identifying the relevant purchase bills,
which do not bear any such details in respect of such characterstics or
composition? - [Champa Lal Choudhary v. DCIT (2012) 54 SOT 398 : 7 TMI 761
(ITAT Jaipur)]
Assessing Officer cannot refer the
matter to the DVO under section 142A without rejecting the books of accounts
under section 145(3) of the Act
An assessing authority cannot refer any matter to Departmental Valuation
Officer without books of account being rejected. In the present case, we find
that the Tribunal decided the matter rightly in favour of the assessee inasmuch
as the Tribunal came to the conclusion that the assessing authority could not
have referred the matter to the Departmental Valuation Officer (DVO) without
the books of account being rejected. In the present case, a categorical finding
is recorded by the Tribunal that the books were never rejected. This aspect has
not been considered by the High Court. In the circumstances, reliance placed on
the report of the DVO was misconceived. For the above reasons, the impugned
judgment of the High Court is set aside and the order passed by the Tribunal
stands restored to the file. Accordingly, the assessee succeeds. - [Sargam
Cinema v. CIT (2010) 328 ITR 513 : 241 CTR 179 : 197 Taxman 203 : (2009) 10 TMI
569 (SC)]
Merely because the customs
authorities have taken market value of exported goods for purpose of customs
duty could not be a ground to make additions in case of assessee unless there
was any material to show that the assessee had in fact received more amount
than what was shown in invoices/bills
The assessee, a non-resident
company, derived income mainly from export of manganese ore. Sometime in the
year 1958, the customs authorities initiated proceedings against the
respondent/assessee on the ground that the exports of manganese ore effected by
the assessee were less than the market price which was in contravention of the
customs Act. In the assessment proceedings, the Assessing Officer made
additions on the basis of the amount computed by the authorities under the
Customs Act for payment of the customs duty:
Held that it was not in dispute
that the Assessing Officer has made additions only on the basis of the market
price determined by the customs authorities under the Customs Act. Admittedly,
there was no evidence on recorded to show that the assessee had recovered any
amount in excess of the invoice issued.
The fact that the customs
authorities have taken the market value of the exported goods for the purpose
of customs duty could not be a ground to make additions in the case of the
assessee unless there was any material to show that the assessee had in fact
received more amount than what was shown in the invoices/bills. Therefore, the
addition was not justified. [In favour of assessee] (Related Assessment year :
1953-54) - [CIT v. Central Provinces Manganese Ore Co. Ltd. (2008) 296 ITR
217 (Bom.)]
Rejections of books of account
simply on lower G.P. rate in comparison to earlier years or with other
assessees placed in similar circumstances would not suffice and will not stand
the test of appeal
Though the fall in G.P. rate
definitely provides a ground to the Assessing Officer for invocation of the
provisions of section 145(3) yet it is not a sufficient condition. The
Assessing Officer is required to analyse various other parameters which have
the effect on the gross profit rate of the assessee for the relevant period,
before drawing any conclusion on the merit of such claim. The fall in G.P. rate
might be a symptom of malice with which the assessee's account would be
suffering. However, it is the duty of the Assessing Officer to pin point the
malice and bring it out in the assessment order by marshelling the facts
encompassing the same. In the case of low gross profit rate, there could be
inflated purchases or unrecorded sales besides manipulation in the valuation of
closing stock. Therefore, the Courts expect that the Assessing Officer shall
bring on record specific defects in the books of account of the assessee before
invoking the provisions of section 145(3). The rejections of books of account
simply on lower G.P. rate in comparison to earlier years or with other
assessees placed in similar circumstances would not suffice and will not stand
the test of appeal.
Where the assessee is unable to
reconcile the quantities handled by it as between purchases and sales, subject
to adjustment as between opening and closing stocks or where no quantity
accounts are kept, the accounts are to be taken as unproved, so that the income
returned may well be rejected and income estimated, if the gross profit
declared is low. But where quantities in purchases and sales are different in
character of the stock, such reconciliation is not possible in CIT v. Saatal
Kattha and Chemicals (P) Ltd. (2008) 296 ITR 197 (MP), where the assessee
was purchasing timber on the basis of length, girth and weight, but converted
them into logs and sold the same in different sizes. The High Court found, that
the inference of shortage in the facts of the case was not a sound basis. All
the same, the High Court found, that a reasonable addition sustained by the
Tribunal, which reduced the additions made “capriciously” by the Assessing
Officer, was held justified.
In a case, where accounts were
rejected on the ground that purchases of raw materials were vouched only by
internal debit vouchers, it was found that assessee had explained, that it was
not possible to get third party vouchers for purchase of raw materials from
sundry dealers in respect of a contract work in State of Assam in a disturbed
situation. It was in this context, that the High Court in Madnani
Construction Corporation (P) Ltd. v. CIT held, that the Tribunal was not
justified in merely confirming the addition without considering assessee's case
for acceptance of return. - [Madnani Construction Corporation (P) Ltd. v.
CIT (2008) 296 ITR 45 (Gau.)]
It was pointed out, that the
pre-condition for estimating business income of the assessee, where an assessee
keeps accounts is that the assessee's books should have been found to be
unreliable or otherwise not capable of proving the assessee's income. Without
this first step, the fact that the gross profit is low cannot by itself be a
ground for taking a view that it is open to the Assessing Officer to make good
the alleged deficiency in gross profit.—[ITO v. Girish M Mehta (2008) 296
ITR (AT) 125 (ITAT Rajkot)]
Rejection of books of accounts
under Section 145 justified and the best judgement assessment under Section 144
It was held that the rejection of
books of accounts under section 145 justified and the best judgement assessment
under section 144 of the Act. The facts of this case were that the assessee was
dealing in precious and semiprecious stones. The Assessing Officer noticed
certain defects in books of account of the assessee, viz., that it had not
maintained any quantitative details/ stock register for the goods traded in by
it; that there was no evidence/ document or record to verify the basis of the
closing stock valuation shown by it; that GP rate declared by the assessee at
13.49 per cent during the Assessment Year did not match the result declared by
the assessee itself in the previous assessment years; and that the gross profit
declared by it was much below the rate declared voluntarily by another
assessees engaged in similar business. Thereafter, the Assessing Officer
rejected the books of account of the assessee and resorted to best judgment
assessment under section 144 and estimated the gross profit rate at 40 per
cent. The Assessing Officer, further held that the assessee had shown bogus
purchases for reducing the gross profits. On appeal, the Commissioner
(Appeals), though reduced the quantum of the gross profit, estimated by the
Assessing Officer, yet upheld most of his impugned findings. On further appeal,
the Tribunal had also given further relief to the assessee. On appeal to the
Supreme Court : the assessee himself who is to blame as he did not submit
proper accounts. There was no arbitrariness in the instant case on the part of
the authorities. Thus, there was no force in the instant appeal and the same
was to be dismissed accordingly. - [Kachwala Gems v. JCIT, Jaipur (2007) 288
ITR 10 (SC)]
Assessing Officer, on finding that
assessee had not maintained and kept any quantitative details/stock register
for goods traded in by it; that there was no evidence on record or document to
verify basis of valuation of closing stock shown by assessee; and that GP rate
declared by assessee during assessment year did not match result declared by
assessee itself in previous assessment years, rejected assessee’s books of
account and resorted to best judgment assessment under section 144 - Since
cogent reasons had been given by Assessing Officer for doing so, there was no
reason to take a different view
The assessee was dealing in
precious and semi-precious stones. The Assessing Officer noticed certain
defects in books of account of the assessee. The assessee had not maintained
any quantitative details/stock register for the goods trade in by it. There was
no evidence/document to verify the basis of closing stock valuation shown by
it. The gross profit rate declared by the assessee at 13.49% during the
Assessment Year did not match the result declared by the assessee itself in the
previous assessment years and that the gross profit declared by it was much
below the rate declared voluntarily by another assessee engaged in similar
business. Therefore, the Assessing Officer rejected the books of account of the
assessee and resorted to best judgment assessment under section 144 and
estimated the gross profit at 40%. The Assessing Officer further held that the
assessee had shown bogus purchases for reducing the gross profits. On appeal,
the Commissioner (Appeals) though reduced the quantum of the gross profit,
estimated by the Assessing Officer,yet upheld most of his impugned findings. On
further appeal, the Tribunal had also given further relief to the assessee. The
Supreme Court, on appeal, held that the assessee himself who is to blame as he
did not submit proper accounts. There was no arbitrariness in the instant case
on the part of the authorities. Thus there was no force in the instant appeal
and the same is liable. - [Kachwala Gems v. JCIT, Jaipur (2007) 288 ITR 10 :
158 Taxman 71 : (2006) 206 CTR 585 : 12 TMI 83 (SC)]
Books of Account mean those books of account whose
main object is to provide credible data and information to file the tax returns
The term ‘books of account’
would mean those books of account whose main object is to provide credible data
and information to file the tax returns. The credible accounting record
provides the best foundation for filing return of both direct and indirect
taxes. - [Brij Lal Goyal v. ACIT (2004) 88 ITD
413 (ITAT Delhi)]
In the context of Sales Tax
legislation, it has been held that where the relevant statute mandates the
dealer to maintain stock books in respect of raw materials as well as products
obtained at every stage of production and the dealer does not maintain the
stock of books, it leads to the conclusion that the account books are not
reliable or that particulars are not properly verifiable. If the account books
are rejected, the turnover has to be determined to the best of the judgement of
the assessing authority concerned. In such circumstances, it cannot be said
that a defect in non-maintenance of stock register is only technical and so the
turnover disclosed in account books should be accepted. - [CST v. Girija
Shankar Awanish Kumar (1997) 104 STC 130 (SC)]
Rejection of books of accounts was
justified under section 145 and the Best Judgment assessment under section 144
where the assessee had not produced relevant records relating to its day-to-day
manufacture of ‘bidis’ including the quantity of ‘bidis’ manufactured daily,
the figures of ‘bidi’ leaves consumed per day in each factory and the records
relating to the daily collection of CHAAT and MAPARI bidis the Tribunal has
been held correct in holding that the Income Tax Officer was not satisfied
about the fitness of correctness of the accounts of the assessee
Assessee-company was a manufacturer of bidis. Its workmen
were paid on basis of work done. ITO found that on checking bidis production,
sub-standard bidis called ‘Chhat bidis’ were sorted out and kept separately and
each worker was to give 10 extra bidis known as ‘Mapari bidis’ for which he was
not given any wages. For relevant assessment year assessee showed gross profit
at rate of 13.6 per cent while other manufacturers were showing it at rate of
23.8 per cent to 25.5 per cent. ITO held that book results could not be relied
upon because assessee had not produced day-to-day registers showing quantity of
bidis manufactured and bidi leaves consumed in each factory and it was not
possible to correlate weight of bidi leaves issued to workers and bidis
produced - He also observed that there was absence of record as to total
collection of Chhat and Mapari bidis and record relating to production of Chhat
and Mapari bidis had also not been maintained. He rejected book results and
worked out production an income of assessee by applying proviso to section
145(2). He added Rs. 3,20,000 under head 'Suppressed production of Mapari
bidis' and Rs. 1,64,000 as 'suppressed production of chhat bidis’. On appeal,
Tribunal added Rs. 1 lakh for excess consumption of bidi leaves and reduced
addition in respect of Chhat bidis to Rs. 1,23,210 and of Mapari bidis to Rs.
1,72,494. As assessee failed to produce day-to-day record for consumption of
leaves, production of bidis and record of daily collection of chhat and Mapari
bidis, ITO was justified in applying provisions of section 145(2). Tribunal’s
conclusion in directing addition of Rs. 1 lakh for excess consumption of bidi
leaves was erroneous in law as it was not based on any material on record.
Additions made by Tribunal on account of estimated value of suppressed
production of chhat and Mapari bidis were in accordance with law save and
except that assessee was entitled to get credit for sale proceeds of Chhat
bidis disclosed by assessee in his books of account. (Related Assessment year :
1964-65) - [Bastiram Narayandas Maheshri v. CIT (1994) 210 ITR 438 : 117 CTR
198 : 74 Taxman 454 : (1993) 12 TMI 31 (Bom.)]
Assessing Officer noticed various defects in account books of assessee and concluded that account books maintained by assessee were neither correct nor complete - It was found that no stock registers were maintained nor sales were found verifiable in absence of cash memos - Vouchers of expenses were also not forthcoming and income returned was ridiculously low as compared to exorbitant turnover - Assessing Officer proceeded to make assessment on best judgment - Tribunal upheld action of Assessing Officer of rejecting book result - Order of Tribunal gave no rise to any question of law
The Assessing Officer in
the instant case noticed various defects in the account books of the assessee
on which he came to the conclusion that the account books maintained by the
assessee were neither correct nor complete. It was found that purchases and
corresponding sales were not at all verifiable. No vouchers for the expenses
and the cash memos were kept. No stock register was maintained. The assessee
could not furnish the periodical retail sale price of the liquor. On enquiries,
the Assessing Officer was informed by the District Excise Officer that the
liquor contractors were free to fix the sale price of liquor and there was no
control over the selling price. A clear finding was recorded that the profit
and loss account furnished by the assessee did not depict correct and real
profit earned during the year. On these findings the Assessing Officer rejected
the account books invoking the provisions of section 145(2) and proceeded to
make assessment on best judgment. On appeal, the Commissioner (Appeals)
affirmed the action of the Assessing Officer. On second appeal, the Tribunal
also upheld the action by dismissing the second appeal filed by the assessee. On
an application for reference under section 256(2):
Held : In
the instant case, the account books were rejected because admittedly no stock
register was maintained nor the sales were found verifiable in absence of the
cash memos. The vouchers of expenses were also not forthcoming and the income
returned was ridiculously low as compared to the exorbitant turnover and the
extent of the business carried on by the assessee. It was difficult to
catalogue the various types of defects in the account books of an assessee
which might render rejection of account books on the ground that the accounts
were not complete or correct from which the correct profits could not be
deduced Whether presence or absence of stock register is material or not, would
depend upon the type of the business. It is true that absence of stock register
or cash memos in a given situation might not per se lead to an
inference that accounts were false or incomplete. However, where a stock
register, cash memos, etc., coupled with other factors like vouchers in support
of the expenses and purchases made are not forthcoming and the profits are low,
it may give rise to a legitimate inference that all is not well with the books
and the same cannot be relied upon to assess the income, profits or gains of an
assessee. In such a situation the authorities would be justified to reject the
account books under section 145(2) and to make the assessment in the manner
contemplated in those provisions. Taking all these aspects and the material
into consideration, the Tribunal had found as a fact that the claim of the
assessee for acceptance of the account books was not sustainable. On the
findings of the fact recorded by the Tribunal, its order did not give rise to
any question of law.
[In favour of revenue] - [Awadhesh Pratap Singh Abdul Rehman & Bros v. CIT (1994) 210
ITR 406 : 1991 CTR 1 76 Taxman 106 (1993) 12 TMI 28 (All.)]
Disclosure of low rate of gross
profit combined with further circumstances, viz., absence of quantitative tally
justified rejection of book results of assessee – Therefore, impugned additions
made by ITO were correct
The assessee was a wholesale dealer
in solid spices for the relevant assessment year – Gross profit rate disclosed
was 6-7 per cent. The ITO found that although the books of account were
maintained, no day-to-day stock analysis was found. He also cited a comparable
case of a dealer who, had dealt in powder spices as well as in solid spices and
had shown 22.2 per cent gross profit for solid spices. The ITO, basing his
judgment on the said case, rejected the book version of the profit of the
assessee and applied a flat rate of 10 per cent and added a sum of Rs. 31,056.
On appeal, the Deputy Commissioner
(Appeals) deleted the addition. On revenue’s appeal, the Tribunal held that the
ITO, on the basis of the case cited, had come to the conclusion that the profit
shown by the assessee was low. Therefore, the Tribunal confirmed the addition. On
reference:
Held : It was seen from the
Tribunal’s order that it was quite conscious of the position that the assessee
was not confronted with the comparable case relied upon by the ITO, yet it
found that the estimate that the ITO had made could not be said to have been
guided by such a comparable case. The Assessing Officer mentioned that
particular case merely in passing but, while estimating the profit rate, he
applied altogether a different standard going by the facts of the assessee’s
case. Therefore, it could not be said that the particular case was used against
the assessee merely because of a reference in the order of the case. The
reference was for the limited purpose of showing that the low rate of gross profit
disclosed, combined with the further circumstances, viz., absence of
quantitative tally, justified the rejection of the book results and the resort
to an estimate. Even without said particular comparable instance, the results
of the trading could be rejected since the assessee’s books of account were
such that no proper profit was deducible therefrom.
Further, the assessee merely rested
at contending against the Assessing Officer’s failure to disclose the
comparable case before completion of the assessment but even when the case came
to the knowledge of the assessee, and the assessee was in appeal before the
Deputy Commissioner (Appeals), no attempt was made to challenge the comparable
case and to show the general trend in the market. There are certain trades,
specially in the retail market, where stock tally may be impracticable and the
assessee can reasonably advance the plea that the accounts have been maintained
in the best manner possible in the special circumstances of the case. But such
was not the case with the assessee. The assessee dealt in wholesale spices.
Failure to maintain stock accounts was a substantial defect in the accounts
justifying an inference that the accounts were maintained in a manner from
which the true and correct profits were not deducible.
Therefore, the Tribunal was right in holding that the
estimate and the addition made on such estimate was quite reasonable and fair.
Moreover, the Tribunal’s finding that the assessee’s rate of gross profit was
below the market rate which was ten per cent was a finding of fact which the
assessee had not challenged. In such circumstances, the impugned order passed
by the Tribunal could not be interfered with. [In favour of revenue] (Related
Assessment year : 1982-83) – [Amiya Kumar Roy and Brothers v. CIT (1994) 206
ITR 306 : (1993) 3 TMI 26 (Cal.)]
Section 145 imposes duty on
Assessing Officer to adopt any computation for proper determination of
assessee’s true income
The ITO recalculated the value of
the opening and closing stocks declared by the assessee by adding overhead
expenditure. Supreme Court upheld the action of the ITO, holding that
“valuation of the stock-in-trade at cost or market value, whichever is the
lower, is a matter entirely within the discretion of the assessee. But whichever
method he adopts, it should disclose a true picture of his profits and gains.
If, on the other hand, he adopts a system which does not disclose the true
state of affairs for the determination of tax, even if it is ideally suited for
other purposes of his business, such as the creation of a reserve, declaration
of dividends, planning and the like, it is the duty of the Assessing Officer to
adopt any such computation as he deems appropriate for the proper determination
of the true income of the assessee. This is not only a right but a duty that is
placed on the officer, in terms of the first proviso to section 145, which
concerns a correct and complete account but which, in the opinion of the
officer, does not disclose the true and proper income.” - [In favour of
revenue] – [CIT v. British Paints India Ltd. [TS-5-SC-1990]- Date of
Judgement : 12.12.1990 (SC)]
Assessee-firm was not
maintaining its day-to-day stock register and, farther, distinctive number
either or purchases or sales were not famished to ITO - While arriving at its
profits for relevant assessment years, assessee debited sales tax payments in
profit and loss account and sales tax received from customers was included in
sale price - Proviso to section 145(1) was applicable - To find out real gross
profit, sales tax amount debited in profit and loss account had to be deducted
and then what remained as balance was gross profit
The assessee-firm was not
maintaining any day-to-day stock account. It did not furnish any distinctive
numbers either of purchases or sales to the ITO. The assessee had debited the
sales tax payment in the profit and loss account and not in the trading
account; sales tax received from the customers was included in the sales price.
While completing assessment for the relevant assessment year, the ITO held that
the sales tax paid by the assessee should be debited in the trading account instead
of profit and loss account. He, therefore, estimated the profits on net sales
by applying the proviso to section 145(1) since in his view the assessee's
accounts were not amenable to check. However, on appeal the Tribunal held that
the gross profit rate should be applied on gross turnover including the amount
of sales tax. On reference:
Held : There is no element
of profit on the amount of sales tax and, hence, the application of gross
profit on the amount of sales tax did not arise; rather the surplus or deficit
of the sales tax collection and sales tax paid should be taken as income or
expenditure separately. The sales tax paid or collected cannot form part of the
gross profit, as the same is collected as the agent of the Government. There is
no justification in law, for exclusion of the sales tax amount as part of the
profit of the business. The gross profit is not
cost plus profit plus sales tax but
cost plus profit alone, and the sales tax amount has to be excluded in
order to find out the real gross profit. In the instant case, the gross profits
in the trading account were artificially inflated by debiting the Central and
State sales tax in the profit and loss account. Hence, to find out the real
gross profit, the actual amount of Central and State sales tax debited in the
profit and loss account both from the turnover as well as gross profit shown
had to be deducted. The application of gross profit on the amount of sales tax
collections or the sales tax paid, in law, was not correct and the same should
be taken as income or expenditure. Further, the sales tax amount realised by
the assessee formed part of its trading or business receipts. Thus, to find out
the real gross profits the sales tax received from the customers was to be
deducted and then what remained as the balance was the gross profit. Further,
the proviso to section 145(1) was applicable in the instant case, and the ITO
was justified in applying the aforesaid proviso. - [CIT
v. Pareck Brothers (1987) 167 ITR 344 : 63 CTR 371 : 32 Taxman 278 : 3 TMI 79
(Patna)]
Rejection
of accounts in earlier year(s) cannot justify rejection for current year
It is a well settled position of
law that while making the assessment, the account books for that year have
alone to be considered, as each Assessment Year is independent. There is no
scope of presumption that merely because for some reason the account books in
earlier years were rejected, these stood condemned forever. - [Ram Avtar
Ashok Kumar v. CST (1980) 45 STC 366 (All.)]
Stock register not verifiable at the time of survey –
produced at the assessment stage
Where at the time of survey, a
stock register was not found at the business premises, that circumstances may
create a suspicion about the genuineness of the stock register when it is
produced during the assessment proceedings. But the assessing authority has to
scrutinize the stock reigister so produced and it is only in case he finds it
spurious that a conclusion can be drawn that the assessee had not maintained its accounts
properly. - [Delhi Iron Syndicate (P) Ltd. v. CIT (1979) Tax LR 775 (All.)]
Comparative GP rate of earlier years
The rate of gross profit in a
particular year depends on many factors namely the general market conditions
based on demand and supply position, the rise or fall in market rates,
specially abrupt ones, the capital position viz-aviz the turnover achieved and
many others. It is for the assessee to explain the fall, if so happens and to
substantiate the reasons. Even if, thereafter, the Assessing Officer considers
the material placed before him by the assessee to be unreliable, keeping in
view the comparative statement of accounts of the earlier years, he cannot
proceed to make an arbitrary addition and base his conclusion purely on guess
work. He can do so only if he relates to some evidence or material on the
record. The Courts have held that if the profit shown by the assessee in his
return is not accepted, it is for the taxing authorities to prove that the assessee
made more profits.—[International Forest Company v. CIT (1975) 101 ITR 721
(J & K)]
It was held that where none of the
three situations as provided in subsection (3) of section 145 (discussed above)
exists, a method of accounting regularly followed by the assessee must be
accepted.—[Md. Umer v. CIT (1975) 101 ITR 525 (Pat.)]
Further, once the books are
properly rejected, the income has to be estimated and in making the estimate of
such income, the best record alongwith other things will become the relevant
material. - [Vrajlal Manilal & Company v. CIT (1973) 92 ITR 287 (MP)]
There can
be different methods of accounting for a different source of income
Assessee
leased out its factory premises to ‘J N’ on annual lease rent. It was following
cash system of accounting in respect of income from lease money. Since lease
rent under consideration was not realized in relevant assessment year, assessee
did not offer same for taxation in said assessment year. Tribunal found that in
respect of loan advanced to ‘J N’ assessee was following mercantile system of
accounting and, therefore, assessee was not justified in not offering for
assessment rent which had accrued in its favour. Merely because assessee followed mercantile
system in respect of his money - lending business, it could not be compelled to
adopt same in respect of income from lease money. Therefore, rent due from ‘J N’
could not be included in total income of assessee. – (Related Assessment years
: 1940-41 to 1946-47) - [JK Bankers v. CIT (1974) 94 ITR 107 (All.)]
It was held that there was material
to support the Appellate Tribunals sustaining addition made on the ground that
(i) the assessee's business was on wholesale basis and in the absence of tally
of quantities in respect of major items of the trading account, the fall in
margin of profits could not be satisfactorily explained; and (ii) the fall was
all the more difficult to explain in view of the fact that the assessee had a
substantial import quota which could have been given him a handsome margin of
profit. The Supreme Court, however, made it clear in the concluding portion of
its judgment that it was not concerned with the correctness of the conclusion
but was concerned only with the question whether there was any material in
support of the Tribunal’s findings in the case of Bhundiram Dalichand v. CIT
(1971) 81 ITR 609 (Bombay).
Under the cash system, it is only actual cash receipts and actual cash payments that are recorded. The cash system will cover cases where accounts are not maintained on the mercantile basis. The cash system of accounting also includes receipt of kind as revenue receipt of the year in which kind is received. Under the mercantile system, credit entries are made in respect of the amounts due immediately they become legally due and before they are actually received. Similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. Where accounts are kept on mercantile basis, the profits or gains are credited though they are not actually realized and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. - [Morvi Industries Ltd. v. CIT (1971) 10 TMI 5 (SC)]
Rejection of books of accounts
under section 145 justified in the absence of quantitative tally of purchases
and sales besides unexplained lowness of gross profit
Section
145 of the Income-tax Act, 1961 [Corresponding to section 13 of the Indian
Income-tax Act, 1922] - The assessee carried ton business of dealing in
handloom cloth, primarily retail in nature. The cloth shop was located in the
wholesale area of the Poona bazaar. The assessee produced two sets of accounts
both closed and adjusted for its head office as well as its branch at Bombay.
Balance-sheets were also drawn up. The Income-tax Officer noticed in the
balance-sheet of the head office an excess of assets of Rs. 4,268 over the
liabilities. The assessee had not maintained any quantitative stock record for
the goods dealt with by it. In the head office the assessee had shown sales of
Rs. 7,34,038 and a gross profit of 7-8 per cent as against sales of Rs.
5,83,805 and gross profits of 8 per cent for the immediately preceding year. It
was contended that the business was wholesale as the shop was situated in the
wholesale market. But this contention was not accepted by the Income-tax
Officer as on going through the sales it was found that the sales to the extent
of Rs. 5,00,301 were cash and rest of the sales were credit and on scrutiny of
the cash memos it was found that the business was retail with the consumers. It
was further noticed that the credit sales included sales to consumers. Thus,
out of the total sales of Rs. 7 lakhs and odd, sales to the extent of about Rs.
6 lakhs were retail. On further going through the credit sales the Income-tax
Officer found that the assessee had charged profit of 8 per cent to 10 per cent
on the cost. He noticed, however, that the profit was subject to deduction of
transport charges of about 2 per cent. The Income-tax Officer came to the
conclusion that the assessee's margin of profit on the retail business must be
substantial. The ITO accordingly, rejected the books of account produced by
assessee and held that having regard to retail nature of business, gross profit
earned should be 10 per cent on sales. The AAC as well as the Tribunal upheld
the ITO’s order substantially. On reference :
Held
: It was clear from the orders passed by the authorities below that whilst
exercising the powers available to them under the proviso to section 13 they
had without stating in so many words exercised the powers upon the footing that
they had made a finding in their orders that the method of accounting employed
by the assessee was such that the profits made by the assessee could not be
properly deduced therefrom. These authorities were aware that without making
such a finding the powers available under the proviso could not be exercised.
The law in that connection is clear. It is true that in words such a finding
was not recorded in the orders made by these authorities. Still, it could not
be said that these orders had not the effect of impliedly recording a finding
that these authorities in fact, found that the method of accounting adopted by
the assessee was such that therefrom profits made by the assessee could not
properly be deduced.
In
the instant case, the material of all the surrounding circumstances and facts
as found by the ITO and the AAC induced them to hold that in the absence of the
quantitative tally regarding the sales and purchases made by the assessee, it
was necessary to exercise powers available under the proviso to section 13 of
1922 Act. Consequently, power so exercised by them was justified. The order
passed by them was to be accordingly affirmed. [In favour of revenue] (Related
Assessment year : 1958-59) - [Dhondiram Dalichand v. CIT (1971) 81 ITR 609 :
(1970) (4) TMI 52 (Bom.)]
When an assessee produces before
the Assessing Officer all relevant registers, it is not open to the revenue to
pick and choose some of the registers which are in its favour.
The Assessing Officer, the
Appellate Authority and the High Court only relied upon the entries in the Sale
Contract Register and the Daily Yarn Production Register for the purpose of
ascertaining the unexplained shortage of yarn, though they differed in the
matter of giving allowances for the count deviation, etc. The Assessing
Officer, in his order relating to the assessment year 1940, gives reasons for
discarding the books and records of the assessee in regard to quantitative
particulars. But the Appellate Authority and the High Court did not expressly
reject the said documents, and indeed they relied upon the entries in the Sale
Contract Register as well as those in the Daily Yarn Production Register. For
the subsequent years, even the Assessing Officer did not reject the registers.
Nor did the Appellate Authority or the High Court reject the said registers.
The assessee filed before the authorities concerned all its registers
reflecting the process of the manufacture at the various stages. It was the
duty of the authorities to definitely come to one conclusion or the other in
regard to the reliability of every one of the relevant accounts filed by the
assessee. In the absence of any such finding, it was not open to them to pick
and choose some of the registers which were more favourable to the revenue. In
choosing the Sale Contract Register, where only nominal weight was given, and
ignoring the actuals register, they had accepted notional figures in preference
to the actuals without holding that the actuals were not true figures. In
accepting the figures in the Daily Yarn Production Register they had not
considered the reasons given by the assessee why inflated figures were shown
therein. They could accept the assessee's explanations or reject them or they
could check the entries therein with reference to the other registers. But they
had done none of these things. They had also not considered the explanation
offered by the assessee why the weights in the Sale Contract Register would
necessarily be less than the weights given in the Actual Cloth Production
Register. Being tribunals of fact, it was their duty to consider all the
accounts, having regard to the arguments advanced and the explanations given by
the parties, and come to their own conclusion. But as they had not done so, we
think that this is a fit case to give them another opportunity to do so. The
High Court remanded the matter to the Assessing Officer and directed him to
give opportunity to the appellant-company to produce materials with reference
to the three points mentioned in its judgment. In the aforesaid circumstances,
we think that the scope of the enquiry before the Assessing Officer should not
be limited in the manner suggested by the High Court. The Assessing Officer is
directed to consider afresh the entire material that has already been placed
before him, and such other material, such as registers which have been
maintained but are admittedly not produced, and other relevant evidence as may
be brought before him, and come to a conclusion in regard to the question of
unaccounted yarn in the light of the directions given by this court and those
given by the High Court in other matters. The Assessing Officer shall not in
any case increase the tax liability on this point over and above that he has
initially assessed. In the result, Civil Appeals Nos. 183 to 187 of 1964 are
allowed with costs, one set. - [Indore Malwa United Mills Ltd. v. State of
Madhya Pradesh (1966) 60 ITR 41 (SC)]
Rejection of books of accounts
under section 145 justified in the absence of quantitative tally of purchases
and sales besides unexplained lowness of gross profit rate
Section
145 of the Income-tax Act, 1961 [Corresponding to section 13 of the Indian
Income-tax Act, 1922] - The assessee filed a return showing an income of Rs.
78,350 for the assessment year 1954-55. The ITO in his assessment order, did
not accept the trading accounts on the ground that the profits disclosed in
comparison with the earlier years were too low and there were no day-to-day
stock details for the purpose of verification and there was small withdrawals
for personal expenditure in the partners’ accounts, and accordingly made
addition.
On
appeal the AAC deleted the addition of Rs. 75,000, but as the closing stock of
certain goods was under valued to the tune of Rs. 4,490, he only allowed a
deduction of Rs. 70,510. On revenue's appeal, the Tribunal upheld the addition
made in assessees income. On reference, the High Court upheld the order of the
Tribunal. On appeal to the Supreme Court :
Held
: Regarding the finding of the Appellate Tribunal that the income, profits and
gains could not properly be deduced from the method of accounting employed by
the assessee reasons given by the Tribunal was that the assessee was doing
business in the main on wholesale basis and there, should have been no
difficulty in tallying quantities in respect of major items of trading account.
That certainly was a relevant consideration. In the absence of such a tally,
the next reason given was that the fall in the margin was all the more
difficult to explain in view of the fact that the assessee also had a quota of imports
worth about Rs. 8,00,000 which would have given them a handsome margin of
profit. That again was a relevant fact and it was well-known that imported
goods fetch a very handsome margin of profit. Accordingly, there was material
in support of the impugned finding of the Appellate Tribunal. In view of
aforesaid, the instant appeal was dismissed and order of the High Court
upholding the Tribunal's order was affirmed. [In favour of revenue] (Related
Assessment year : 1954-55) - [Chhabildas Tirbhuvandas Shah v. CIT (1966) 59
ITR 733 : (1964) 9 TMI 8 (SC)]
Irrespective of method of
accounting followed (i.e. either cash or mercantile), assessee has to take into
account the value of stock/inventory at the beginning and end of the year
Assessee-firm which adopted cash
system of accounting, filed a voluntary return declaring certain amount earned
by exploitation of film. In computation of profits of business, assessee did
not take credit for value of unexpired exploitation rights at end of previous
year. However, in course of assessment, ITO estimated value of rights for
unexpired period of exploitation to which firm was entitled and computed net
profits accordingly. AAC as well as Tribunal upheld ITO’s order substantially.
High Court however held that assessee having adopted cash system of accounting,
and Tribunal having assigned no reasons for discarding that system in
computation of profits, Tribunal was in error in making assessment on basis of
mercantile system of accounting. On facts, there was no warrant in instant case
for assuming that revenue authorities and Tribunal had sought to displace
method of accountancy adopted by assessee and, by applying proviso to section
13 of 1922 Act they made computation upon basis and in manner in which in their
opinion profits would be properly deduced. Therefore, High Court was in error
in holding that because assessee had maintained his accounts on cash system it
was not open to ITO to add to receipts from business value of stock in trade at
end of year for purpose of properly deducing profits of business for year in
question. (Related Assessment year : 1949-50) - [CIT v. A. Krishnaswami
Mudaliar (1964) 53 ITR 122 (SC)]
It was observed that the mercantile
system brings into credit what is due immediately it becomes legally due and
before it is actually received; and it brings into debit expenditure the amount
for which a legal liability has been incurred before it is actually disbursed.
The mercantile system, thus, treats profits or gains as arising or accruing at
the date of the transaction, notwithstanding the fact that they are not
received or deemed to be received. It may, however, be noted that the right or
liability must be legally enforceable and must have ripened. [In favour of the
revenue] - [CIT v. A. Gajapathy Naidu (1964) 53 ITR 114 (SC)]
The expression 'in the opinion of
the Income-tax Officer' in the proviso to section 13 of the Indian Income-tax
Act, 1922 does not confer a mere discretionary power ; in the context it
imposes a statutory duty on the Income-tax Officer to examine in every case the
method of accounting employed by the assessee and to see whether or not it has
been regularly employed and to determine whether the income, profits and gains
of the assessee could properly be deduced therefrom
Section 145 of the
Income-tax Act, 1961 [Corresponding to section 13 of the Indian income-tax Act,
1922] - The appellant-assessee was a 'resident and ordinarily resident' in
India and carried on extensive trade in Colombo in grains, fodder, gram and
other food-stuffs for cattle and poultry. For the assessment year 1943-44, the
assessee showed a profit of 3.5 per cent. For the two previous assessment years
the appellant's gross profits were 9 per cent and 8 per cent respectively. The
ITO, by his order, rejected the accounts and estimated the gross profit by
adding back certain amount to the returned income, which was confirmed by the
AAC. On second appeal, the Tribunal after pointing out various defects,
rejected the account books but accepted the appellant's turnover and computed
the profits at 15 per cent on grains imported from India and 12½ per cent on
grains purchased in Ceylon. It held that correct profit for the year under
assessment could not be deduced from the books produced by the appellant. The
excess profits tax for the chargeable accounting periods was decided on the
basis of the income-tax assessment for the year 1943-44. The reference
application was rejected by the Tribunal as well as by the High Court. On
appeal to the Supreme Court :
Held : The power to compute
profits under the proviso to section 13 arises only where no method of
accounting has been regularly employed by the assessee and where the method
employed is such that the income, profits and gains cannot properly be deduced
therefrom. It means that the method adopted by the assessee must prima
facie prevail where it is regularly employed, though the ITO can resort to
the proviso if the method is such that true profits cannot be correctly
determined therefrom. In other words, even if the assessee has regularly
employed a method of accounting it can be discarded under the proviso if the
method does not show correct profits of the year.
In the instant case the
Tribunal held that correct profits could not be deduced from the books produced
by the assessee and therefore the proviso to section 13 of 1922 Act applied.
The reasons it gave were (1) that vouchers for several purchases made in
Colombo had not been produced and for purchases no vouchers were forthcoming
and without the vouchers, the entries in the account books could not be
verified; (2) there was no quantitative tally for the grains and for other
materials purchased by the appellant, which were ground into powder, turned
into fodder, packed in different sizes and then sold. It was not possible,
according to the Tribunal, to accept the books of account, where the turnover
was as large as about seventeen lakhs of rupees, without a quantitative tally;
(3) a fairly big sum of money was alleged to have been paid towards purchasing
of licenses for export from India; and Rs 19,000 worth of purchases were made
in Tuticorin when only a small sum of money in cash was shown in the assessee’s
account; (4) several outsiders' cheques had been entered in the accounts of the
assessee without any proof as to why those cheques were paid to the assessee;
and (5) a fairly big sum of money had been invested in India in the purchase of
property without money being received form Colombo. After giving this finding
the Tribunal accepted the turnover as shown in the appellant's books. In making
the computation of profits, the Tribunal took into consideration the following
matters: that the export of food grains from India was prohibited except under
a licence, that there was an acute shortage of cattle fodder in Ceylon and the
appellant had to resort to dubious means in order to obtain grains, the during
a substantial portion of the year of accounting there was no price control in
Colombo, that as the appellant was a manufacturer of forage by mixing several
kinds of grains and powdering them and sold them in packets of various weights,
the appellant must have made higher profits than persons who deal in grain
only. Keeping all this in view the Tribunal was of the opinion that the rate of
15 per cent adopted in regard to imported grains was not too high but in the
case of local purchases it was, and therefore reduced the rate of profit in the
latter case to 12½ per cent. It was on this material that the Tribunal adopted
the figure of profit as estimated by the ITO and the order to support this
opinion further, the Tribunal remarked that in certain cases which had come to
its notice the rate of profits “went up to 20 per cent”.
In the instant case the
keeping of a stock register was of great importance because that was a means of
verifying the assessee’s accounts by having a “quantitative tally”. If, after
taking into account all the materials including the want of a stock register,
it was found that from the method of accounting the correct profits of the
business were not deducible, the operation of the proviso to section 13 would
be attracted. Even if the ITO accepted the assessee’s method of accounting, was
not bound by the figure of profits shown in the accounts. It was for the
authorities to consider the material which was placed before them and, if,
after taking into account in any case the absence of a stock register coupled
with other materials they were of the opinion that correct profits and gains
could not be deduced, then they would be justified in applying the proviso to
section 13. Therefore, when the Tribunal applied the proviso to section 13
because of the various blemishes which were pointed out by the ITO and accepted
by the Tribunal, it could not be said that there was any error in the order of
the Tribunal justifying the interference by the Supreme Court under article
136. The appeals were dismissed accordingly. [In favour of the revenue] (Related
Assessment years : 1943-44, 1944-45 and 1946-47) - [S.N.
Namasivayam Chettiar v. CIT (1960) 38 ITR 579 (SC)]
Estimates after rejection of books
of account
Once the books of account of
assessee are rejected, then, profit has to be estimated on the basis of proper
material available. An Assessing Officer is not flattered by technical rules of
evidence and pleadings, and he is entitled to act on material which may not be
accepted as evidence in Court of law. Neverthless, the Assessing Officer is not
entitled to make a pure guess and make an assessment with reference to any
evidence or any material at all. There must be something more than mere
suspicion to support an assessment under section 143(3) of the Act. The rule of
law on this subject has been fairly and rightly stated by the Lahore High Court
in the case of Sheth Gurmukh Singh v. CIT (1944) 12 ITR 393 (Lahore) and
the Supreme Court in the case of Dhakeswari Cotton
Mills Ltd. v. CIT.
Section 143 of the Income-tax Act,
1961 [Corresponding to section 23(3) of the Indian Income-tax Act, 1922] -
Though ITO is not fettered by technical rules of evidence and pleadings and he
is entitled to act on material which may not be accepted as evidence on account
of law, but in making assessment under section 23(3) of 1922 Act he is not
entitled to make a pure guess and make an assessment without reference to any
evidence or any material at all. Where, on request of Tribunal, departmental
representative had produced certain material, Tribunal should have given an
opportunity to assessee to rebut such material and should have also taken into
account material produced by assessee on issue in question. [Case remanded
back]. (Related Assessment year : 1944-45) – [Dhakeswari Cotton Mills Ltd.
v. CIT (1954) 26 ITR 775 (SC)]
There is no stock register only cautions the Assessing
Officer against the falsity of the returns made by the assessee. He cannot show
that merely because there is no stock register the accounts books must be false
Section
145 of the Income-tax Act, 1961 [Corresponding to section 13 of the Indian
Income-tax Act, 1922] On examining the accounts of four branches of the
business of the assessee-firm, the ITO found that with regard to two branches
no stock register had been maintained and the profit declared was low. He,
therefore, made additions to the book versions by way of extra profits. In the
course of his order the ITO also observed that the expense ratio for
these two branches was usually high compared to the expense ratio obtaining at
one of its branch. Assessee’s appeal was dismissed by the AAC. On second
appeal, the Tribunal upheld the decision of the ITO. On reference :
Held
: In all cases which fall under section 13 there must be material before the
ITO to lead him to the conclusion that the method employed is defective or that
the case requires reconsideration and a new computation must be made. The mere
fact that the profits are low is not material upon which finding under section
13 can be based, because the assessee may be incompetent or his method of
business may be uneconomic. Also merely because there is no stock register the
account books cannot be said to be false.
In
the instant case, two consideration were responsible for the additions.
Firstly, the income-tax authorities and the Tribunal took the view that the
profits disclosed by the firm were low. Secondly, they were influenced by the
fact that no stock register had been maintained. The assessee had maintained
regular accounts of its purchase and sales and these account books were
accepted as correct, for the ITO did not anywhere say that he rejected these
account books. He did not say that the absence of the stock register was such a
serious defect in the method of accounting employed by the assessee that in his
opinion he could not determine the correct statement of profit and losses. He
also did not adopt any basis and computed the true profit taxable in a manner
which he could determine under the proviso.
The
statute gives the ITO the power to determine his own basis, but there must be a
basis. He must not act in a wholly arbitrary manner. There was, therefore, no
definite finding by the ITO that the case fell within the proviso to section
13, for he did not say that the method of accounting employed by the assessee
was such that in his opinion “the income, profits and gains could not properly
be deducted therefrom. Secondly, even if such a finding were to be implied from
his order it could not be said that there was material before him which would
enable him to come to this finding. The fact that the profits appeared to him
to be insufficient and the fact that there was no stock register maintained by
the assessee were not material upon which such a finding could be given. The
ITO must discover evidence or material aliunde before he can give such a
finding. Thirdly, in increasing the taxable income he did not adopt any method
or basis. Therefore, in the instant case, no addition could be made to the book
version of business profit”. [In favour of the assessee] (Related Assessment
year : 1950-51) - [Pandit Brothers v. CIT (1954) 26 ITR 159 : 3 TMI 70 (P
&H)]
Estimates after rejection of books of account - If
after taking action under section 23(3) read with section 23(2) of 1922 Act,
ITO is not satisfied with correctness of return and unable to accept assessee’s
account books as correct or genuine, section 13 of 1922 Act would come into
play and proviso of this section would enable him to compute income of assessee
upon such basis and in such manner as he may determine
Section 145 read with section 143
of the Income-tax Act, 1961 [Corresponding to section 13, read with section 23
of the Indian Income-tax Act, 1922] - Once the books of account of assessee are
rejected, then, profit has to be estimated on the basis of proper material
available. An Assessing Officer is not flattered by technical rules of evidence
and pleadings, and he is entitled to act on material which may not be accepted
as evidence in Court of law. Neverthless, the Assessing Officer is not entitled
to make a pure guess and make an assessment with reference to any evidence or
any material at all. There must be something more than mere suspicion to
support an assessment under section 143(3) of the Act. The rule of law on this
subject has been fairly and rightly stated by the Lahore High Court in the case
of Sheth Gurmukh Singh v. CIT (1944) 12 ITR 393.(Lahore). (Related Assessment
years : 1934-35 to 1936-37.
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