When ITAT Reject of books of accounts u/s 145(3)
ITAT remanded matter on question of rejection of books of account u/s 145 (3) if proper explanation or details were filed before AO
Case Law citation:- ACIT vs. Rahul Pancholi (ITAT Jaipur), ITA No. 949/JP/2013, Date of Decision: 30.09.2015
Brief of the case:
AO find decline in gross profit rate in current year in comparison to previous year. On examination of books of account AO found discrepancies in accounts. He made additions after rejecting books of account u/s 145 (3). Assessee filed appeal before CIT (A) who allowed appeal of the assessee by holding that mere difference in rate of gross profit would amount to rejection of books of account and deleted the additions. Aggrived from the order revenue filed appeal before ITAT. After going through the facts of the case ITAT remanded the matter back to AO for further verification.
Facts of the case:
Assessee deals in purchase and sale of Till. Assessee filed his return at Rs. 57,33,650/-. The AO observed that the assessee had not enclosed the audit report prescribed u/s 44AB of the Act. The assessee has submitted in the return that the case is not auditable.
The AO gave the reasonable opportunity of being heard to assessee whether the assessee’s case was liable to audited or not.
The assessee submitted before the AO that the case was audited by CA but while filing the return computer clerk had not mentioned the name of the auditor and due to heavy rush for submitting the return at last date.
The AO enquired from CA whether he had audited the accounts or not but he has not responded to the AO and neither he confirmed nor he denied having been audited the case of the assessee.
He observed that the audit report is incomplete and many enclosures and schedules are not enclosed with the audit report i.e. quantitative details of goods, audited and certified which is the part of form no. 3CD.
He further observed that assessee didnot maintain the quantitative details of opening and closing stock with valuation of stock and method of valuation and the assessee failed to submit the required information regarding method of valuation of stock.
In view of the above discrepancies pointed out, the AO invoked the provisions of Section 145(3) of the Act and rejected the books and thus applied gross profit rate on total turnover @ 9.55% as shown in the last previous year. Thus the AO made trading addition of Rs. 97,99,900/- on turnover of Rs. 25,61,65,240/-.
Contention of the revenue:
AO has rightly observed that the assessee failed to submit the information regard stock valuation during the assessment proceedings.
The ld. CIT(A) only allowed the appeal on the submissions made by the assessee before him that all the purchases and sales were accounted by the assessee and entry in the books of account and stock register was maintained without verifying the fact.
The assessee’s audit report was defective as per the form prescribed in Form No. 3CD. The AO verified from the CA whether he has made audit in this case. The concerned CA has not responded to the notice issued by the AO which proves that assessee’s books of account were not properly audited.
The salary expenses was not verifiable and even the TDS was not deducted on transportation charges claimed and paid to M/s. Jay Prabha Transport Co., Truck Union, Dausa and M/s. J.K. Transport.
The assessee has shown gross profit rate of preceding year i.e. at 9.98% which has come down to 6.62% in the year under consideration. Thus there was no satisfactory explanation before the AO on this heavy decline in gross profit rate.
Contention of the assessee:
Assessee has maintained day to day correct and complete books of account alongwith the day to day stock register supported by purchase and sale bills. They were produced before the AO and examined by him as affirmed on Page 1 of the assessment order.
No defect is found by AO in these books of accounts. Therefore simply because there is a decline in GP rate during the year cannot be ground for making the trading addition, when no defect as such is found in the trading account of the assessee.
It is a settled law that when assessee has maintained complete and proper books of account from which profits are deductible, section 145(3) cannot be invoked only because there is decline in the GP rate.
Held by CIT (A):
It is seen that assessee has maintained the books of account alongwith the stock register supported by the purchase and sale bills. Though the AO has mentioned that incomplete audit report has been submitted without the quantitative details of goods, that itself cannot made the assessee’s books liable to rejection.
Held by ITAT:
The gross profit rate of the assessee has substantially come down from preceding year which was not explained before the AO.
It is evident from the assessment order that vide letter received on 28-12- 2011 by the AO that gross profit rate has been calculated @ 4.34% whereas actual gross profit rate as declared in this year is 5.73%.
The valuation of the closing stock is made at a higher price which also increased the gross profit meaning thereby that gross profit was lesser than disclosed by the assessee.
CIT(A) simply accepted the submissions without making any verification on the huge addition made by the AO and there is no whisper in his order that on what basis he has accepted the sales and purchases without any verification and just on the submissions of made by the assessee.
The valuation has not been submitted by the assessee before the AO.
The gross profit figure shown by the assessee is also contradictory at every level. There was also discrepancy in the gross profit declared by the assessee in the return form.
The ld. AR has also not submitted the shortage chart as well as quantity chart of last two years. The ld. AR has also not filed the copy of explanation before the Bench. He only filed the copy of the letter without date and without any signature at Serial No. 6 & 7 of the paper book.
In this view of the matter, we set aside the Ground No. 1 of the assessee to the file of the AO to examine it afresh by providing reasonable opportunity of being heard to the assessee and the assessee is also directed to produce the relevant records to verify the quantity of sales and purchases as well as opening and closing stock before the AO and also to produce the books of account to verify the gross profit rate.