Madhya Pradesh H.C : The method of accounting adopted by the assessee is such that the income cannot be properly deduced, the Assessing Officer erred in law in taking recourse to the first proviso to section 145(1)

High Court Of Madhya Pradesh

Mahakoshal Pottaries vs. CIT

Assessment Year : 1994-95

Section : 145

Krishn Kumar Lahoti And M.A. Siddiqui, JJ.

IT Appeal No.79 Of 2000

March 19, 2013

JUDGMENT

1. Heard.

2. This appeal was admitted on May 1, 2001, on the following substantial question of law :

“Whether, in the absence of any finding that the method of accounting adopted by the assessee is such that the income cannot be properly deduced, the Assessing Officer erred in law in taking recourse to the first proviso to section 145(1) of the Income-tax Act ?”

3. The facts of the case are that the appellant had filed its return for the assessment year 1994-95 on the basis of account books maintained by the appellant. The Assessing Officer, while passing assessment order dated December 29, 1995, had recorded a finding that wrong method was applied by the appellant for calculating the gross profit and net profit. The Assessing Officer, while recording such finding, had compared the various datas furnished for the assessment years 1993-94 and 1994-95 and without giving specific finding in respect of account books, the Assessing Officer in paragraph 2(f) of the order had invoked the provisions of section 145(1) of the Income-tax Act, 1961, and the ratio of the profit which was shown by the appellant at the rate of 19.9 per cent. was enhanced to 21.66 per cent.

4. Learned counsel for the appellant submitted that though the Assessing Officer had invoked the provisions as contained in section 145(1) of the Income-tax Act, 1961, for rejecting the account books of the appellant but without assigning any reason, rather specific reason in the impugned order. The figures taken into consideration by the Assessing Officer were also not correct. The appellant herein had placed the correct figures before the Commissioner of Income-tax (Appeals) (CIT(A)), Jabalpur, in the memo of appeal, during the course of arguments on March 20, 1998, but the aforesaid figures were not taken into consideration by the Commissioner of Income-tax (Appeals). By the impugned order annexure A/4 dated March 27, 1998, the Commissioner of Income-tax (Appeals) though had affirmed the order of the Assessing Officer (AO) but in a very cryptic manner without considering the grounds and the objection raised by the appellant in the memo of appeal and also in the written arguments. The Income-tax Appellate Tribunal (ITAT) has also not considered the ground raised by the appellant for rejecting the account books.

5. The appellant is a company maintaining its accounts books regularly. The account books of the appellant were duly audited by the chartered accountant and those account books were also submitted before the Assessing Officer. There is no cogent reason assigned for rejecting them by the authority by invoking the provisions of section 145(1) of the Income-tax Act, 1961. It is submitted by Shri Sumit Nema, advocate, for the appellant that the matter deserves to be remitted back to respondent No. 1, the Commissioner of Income-tax (Appeals), for a fresh decision after considering the aforesaid provisions.

6. Shri Sanjay Lal, advocate appearing for the respondents, has opposed the arguments advanced by learned counsel for the appellant and supported the impugned order. He further submitted that cogent reasons have been assigned by the Assessing Officer in the order dated December 29, 1995, and the reasons have been given in sub-paragraphs (a), (b), (c), (d), (e) and (f) of paragraph 2 of the impugned order, taking cumulatively all the aforesaid grounds and arrived on the conclusion that accounts were not properly maintained by the appellant and the Assessing Officer had rightly rejected them, vide the impugned order invoking the provisions of section 145(1) of the Income-tax Act, 1961. Looking to the aforesaid contentions, it would be appropriate to peruse paragraphs 2(a) of (f) of the impugned order in which the Assessing Officer had recorded the following reasons for rejection of the account books for the aforesaid assessment years under section 145(3) of the Income-tax Act, 1961 :

“(a)
On the perusal of record and discussion during the course of assessment proceedings the following picture emerged :

Item 1993-94 1994-95
Raw material (fire-clay) 3454.5 M. T. 3577.7 M. T.
Coal 2594.0 M. T. 1689.0 M. T.
Finished goods produced 2932.2 M. T. 2995.0 M. T.
Yield .848 .837
Coal required per unit (finished G) .848 M. T. .563 M. T.
Sales 43,94,984 49,43,123
Gross profit (percentage) 24.3% 19%

 

(b) From the above chart, it is clear that the consumption of coal has been drastically reduced by the amount incurred for repairs has gone up to Rs. 3,44,631 as compared to Rs. 2,61,416 and Rs. 2,60,037 claimed in the assessment years 1993-94 and 1992-93, respectively. On being asked, the assessee, vide reply, contended that the gross profit declined due to excessive increase in cost of raw materials and repairs to fixed assets. The above plea of the assessee is not acceptable. The amount claimed to have incurred for repairs did not help the production in that proportion. In other words, the said repairs and maintenance has not reflected either in production or in trading results. Further, the consumption of coal per unit has considerably decreased and, consequently, the cost of production also should have definitely come down. However, this aspect has not been visible.

(c) The average rate of total purchase is less than the average rate of consumed materials. The average rate of closing stock for raw material is 240.2 (Rs.) per M. T. while the average rate of consumed items is 226.40 and average purchase rate (including the opening stock of 1548.100 M. T.) is 230.63. On the above lines, the cost of production should have gone down. The valuation of the closing stock has been made on the basis of cost price which is evident from the audit report and also discussed during the course of assessment proceedings.

(d) Apart from the above deficiency, it is further noticed that the assessee has made purchase from sister concern M/s. Katni Tiles worth Rs. 1,76,778.86. After giving credit to the tax paid sales of the above amount the actual gross profit rate comes to 19.9 per cent. So if the closing stock valuation is taken as base, the cost of production would be much less as disclosed by the assessee in its books of account and, moreover, the estimate of gross profit would be 21.66 per cent., I am also of the opinion that even the valuation of stock is made on the basis of LIFO and LIFO it would not give such type of discrepancy.

(e) Thus, from the above, it is apparent that there is inherent contradiction in facts and figures furnished by the assessee. Had the assessee applied the correct method, the gross profit as per the books and as per the closing stock would have perfectly matched.

(f) All considered, it is established that the assessee has not disclosed the correct gross profit and also could not adduce any authentic reason in support of law gross profit declared this year. Under these circumstances, I adopt the gross profit rate of 21 per cent. on the total sales declared by the assessee, by invoking the proviso to section 145(1) of the Income-tax Act, 1961. This would result in an addition of Rs. 88,239 (Rs. 10,38,056 – Rs. 9,49,817) to the total income of the assessee.”

7. The Commissioner of Income-tax (Appeals) in the order dated March 27, 1998, had not considered the grounds raised by the appellant before it but in paragraph 4 of the order, the addition made by the Assessing Officer was accepted by the Commissioner of Income-tax (Appeals), assigning no reason.

8. The Income-tax Appellate Tribunal has also not considered the reason for rejecting account books but in paragraph 5 of the order has affirmed the order of the Assessing Officer for rejecting the account books by invoking the provisions of section 145(1) of the Act. In the impugned order, the Tribunal nowhere have considered reasons for justifying rejection of the account books.

9. From the perusal of the appeal memo filed before the Commissioner of Income-tax (Appeals), written statement filed before the Commissioner of Income-tax (Appeals) and the impugned order dated March 27, 1998, passed by the Commissioner of Income-tax (Appeals) it is clear that the appellant had raised all these grounds before the authority.

10. For rejection of account books, cogent reasons ought to have been assigned by the Assessing Officer. A Division Bench this court in R.J. Trivedi (HUF) v. CIT [1983] 144 ITR 877/[1982] 10 Taxman 304 (MP) held in paragraph 3 thus (page 879) :

“The argument of the learned counsel for the assessee is that the finding reached by the Tribunal in rejecting the books under section 145(2) is vitiated by taking into account irrelevant and non-existent facts and by omission to consider relevant facts and circumstances. In our opinion, this argument has to be accepted. It appears to have been argued before the Tribunal that the accounts were properly maintained by the assessee and were checked by the Governmental authorities and, therefore, there could be no chance of manipulation in the accounts and that they should be accepted. This argument which is referred to in paragraph 11 of the order of the Tribunal has neither been rejected nor accepted. There is omission to consider this argument. It is relevant in this connection to notice that a mining lessee is required to maintain accounts under clauses (i) and (j) of rule 27 of the Mineral Concessions Rules, 1960. Annual and monthly returns have also to be submitted in accordance with regulations 4 and 5 of the Coal Mines Regulations, 1957. The returns are to be submitted in Forms II and III. The coal produced in the collieries was despatched by rail. That itself is a check against manipulation of accounts. The Tribunal did not consider the argument of the assessee that the statements and returns submitted by the assessee were checked by Governmental authorities under the aforesaid rules and regulations and, therefore, the accounts maintained by the assessee could not be rejected. In our opinion, this was an important factor to be taken into account. Further, the Tribunal committed the error of taking a non-existent fact into consideration by observing that what amount was paid to Siddique, who was one of the contractors, was not clear from the record and that he was also not examined. This is a non-existent fact because Siddique died some time in 1961. He could not, therefore, be a sub-contractor in the relevant previous year, and he could also not be examined. Further, the Tribunal’s observation that the other contractor, Ramlakhan, was paid on the basis of conversion of truck loads into tonnage is also a non-existent fact. The agreement under which Ramlakhan worked states that the payment would be made at Rs. 8.07 per tonne of coal on the basis of weighment recorded at the railway weigh-bridge. In rectification proceedings the Tribunal accepted the mistake to this extent that Ramlakhan was not paid on the basis of conversion of truck loads into tonnage. The Tribunal, however, committed another mistake by stating that he was paid on the basis of conversion of cubic feet into tonnage. There is absolutely no material on record for this finding. The labourers working in the mines may have been paid on the basis of cubic feet but as pointed out by us earlier, Ramlakhan was being paid at the rate of Rs. 8.07 per tonne of coal in accordance with the weighment made at the railway weigh-bridge. The finding reached by the Tribunal in sustaining the rejection of books under section 145(2) is thus vitiated by non-consideration of relevant facts and by taking into account irrelevant and non-existent facts. The finding is, therefore, erroneous in law. The Tribunal will have to reconsider the question and to give a fresh finding by considering all the relevant facts.”

11. A similar view has been taken by the Patna High Court in MD. Umer v. CIT [1975] 101 ITR 525 and also by the Gauhati High Court in Aluminium Industries (P.) Ltd. v. CIT [1995] 80 Taxman 184. Both the High Courts have held that once the profit could properly deduced from the method of accounting which have been regularly employed, that is the end of the matter in the case, there was no finding that the assessee was not employing a method of accounting and that entries in the books were not correct. In the absence of such finding, the Tribunal had no material before it, on the basis of which it could be said that results were not verifiable. Rejection was, therefore, not justified unless the serious defects in maintenance of books of account are noted and reasons are recorded.

12. In the present case, though certain reasons have been given by the Assessing Officer but the entire basis of non-acceptance of the account books was that profit ratio was low in comparison to the earlier year though it is submitted by the appellant that the purchase of coal in both the years 1993-94 and 1994-95 as recorded by the Assessing Officer was not correct and the coal purchased by the appellant was 1664.2 tonnes and 1735 tonnes, respectively, in both the years while finding of the Assessing Officer are contrary. The factual position can be ascertained only from a perusal of the account books. Be that as it may be, all these facts deserve to be looked into by the authority after considering the factual position of the case.

13. Prima facie it appears that the Assessing Officer, the Commissioner of Income-tax and Income-tax Appellate Tribunal have not considered the matter in a proper perspective for rejecting the books of account.

14. In the aforesaid circumstances, the matter deserves to be remitted back to the Commissioner of Income-tax (Appeals) for fresh decision after hearing the appellant in this regard.

15. In view of the aforesaid, we remit the matter to the Commissioner of Income-tax (Appeals), who shall restore Appeal No. J/ACIT.Cir. 1(1)/130/95-96 and to hear and decide the matter afresh after extending due opportunity of hearing to the appellant.

16. Parties present in this court today are directed to remain present before the Commissioner of Income-tax (Appeals), Jabalpur on May 6, 2013, for which no fresh notice would be required. The Commissioner of Income-tax (Appeals) shall make all endeavours to hear and decide the matter expeditiously as early as possible, within six months from the aforesaid date, considering the merits and all the facts of the case. There shall be no order as to costs.

[Citation : 354 ITR 149]

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