Zamindara Timber Traders, Karnal vs Assessee

This appeal at the instance of the assessee is directed against CIT(A)

order dated 12.11.1010. The relevant assessment year is 2007-08.

2. Brief facts of the case are that during the year under consideration the

assessee firm derived income from Timber business. It had filed its return of

income declaring total income of Rs. 52,745/-. The AO rejected the assessee's

books of account and computed the profits by applying the rate of 4.90% on the 2 ITA No. 290/Del/11

turn over and made an addition of Rs. 35,40,409/-. Ld. CIT(A) dismissed the

assessee's appeal.

3. Being aggrieved with the order of the Ld. CIT(A), assessee is in appeal

before us and has taken following grounds of appeal :-

1. That the CIT(A) erred on facts and in law in passing the impugned order dated 12.11.2010 without affording adequate opportunity of being heard to the appellant.

2. That the CIT(Appeals) erred on facts and in law in upholding the trading addition of Rs. 35,40,410/- made by the assessing officer by applying average gross profit rate of 4.90%.

3. That the CIT(A) erred on facts and in law in upholding the action of the assessing officer in rejecting the books of accounts of the appellant under section 145(3) of the Income Tax Act, 1961 ("the Act").

3.1 That the CIT(Appeals) erred on facts and in law in holding that the appellant failed to furnish item-wise trading results and quantitative details of opening and closing stock of timber without appreciating that having regard to the nature of the business it was not possible / feasible to maintain such details.

3.2 That the CIT (Appeals) erred on facts and in law in holding that the appellant did not maintain proper books of account and that the turnover was not properly worked out.

4. That the CIT(Appeals) erred on facts and in law in upholding the action of the assessing officer in estimating gross profit rate of

4.90%, relying upon operating results of other entities / assessee's, without (a) confronting the appellant with the relevant documents/papers on the basis of which such rate was arrived at ; and (b) appreciating that the results of the appellant were not comparable with the said entities / assesses.

5. That the CIT(A) erred on facts and in law in not holding that the appellant was not able to explain the fall in gross profit rate. 3 ITA No. 290/Del/11

5.1 That the CIT(A) erred on facts and in law in not directing the assessing officer to exclude freight expenses amounting to Rs. 14,83,350/- from trading profits while making addition, if any on account of alleged fall in the gross profit rate.

6. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in charging interest under section 234B/234D of the Act.

4. First we will consider ground Nos. 3 to 3.2 raised by the assessee regarding

rejection of books of account. The AO examined the books of account and sale

and purchase vouchers and noted that there was no narration of quality of

timber on the sale vouchers, whereas, the assessee had purchased the timber at

different rates according to quality of timber. He noted that almost all the

purchases were from Singapore except few local purchases. He noted that

assessee simply quoted 'imported timber' in the column of particulars of timer

sold in-stead of quoting the kind/type of timber item wise on the sale vouchers.

The AO further observed that when purchase vouchers were tallied with the sale

vouchers, it was noticed that true picture of gross profit was not reflected. He

further observed that no itemwise stock register had been maintained by the

assessee. The AO examined five bill vouchers for sale and purchase for each

month and concluded that it was not possible to ascertain which exact /kind of

timber had been sold against the different type/kind of timber purchased by the

assessee at different rates. He show caused the assessee, vide notice dated 27th

November, 2009 which has been reproduced from page 3 to 7 of his order in

which he, inter alia, required the assessee to prepare the itemwise trading 4 ITA No. 290/Del/11

account for different type of timber reflecting the opening stock as on 1.4.2006;

itemwise purchases made during the year; itemwise sale made during the year

and balance itemwise closing stock as on 31.3.2007 and further pointed out that

in the absence of stock register and proper recording of sale-purchase

transaction in the books of account the assesee was required to explain how it

would be able to authenticate the trading results from the books of account so

maintained, which were defective. He show caused as to why these books of

account may not be rejected as these were not reflecting the proper trading

results and also required the assessee to explain why the gross profit rate 4.90%

i.e on average basis should not be applied. The average gross profit rate was

worked out on the basis of GP rate which was prevailing in the line of business

and adopted by the different parties for the different asstt. Years of similar

nature of business of timber for the last four years which were as under :-

Name of assessee Asstt. year % gross profit

Jai Parkash M/s. Narwana Timber Store, Karnal 2004-05 6.00%

Jai Parkash M/s. Narwana Timber Store, Karnal 2005-06 4.34%

Neeraj Jain Prop. Jagdama Timber Store, Karnal 2006-07 5.66%

Sat Paul & Sons, M/s. Kaithal Timber Store, 2007-08 3.53% Karnal Total 19.53% Average Rate 19.53/4= 4.90%

5. The assesee in its reply inter alia submitted as under :- 5 ITA No. 290/Del/11

"3. The assessee is in the business of import and wholesale trading of Timber which is being imported from Malaysia to India and the port for destination is Kandla (Gujrat). The stocks having been received are cut and processed (Chirai) into various sizes and shapes which are the sold on whole sale basis from Gandhidham (Gujrat) itself. The part of the stock is transferred to Karnal being the 'Stock Transfer' from where the said sales are being conducted."

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"5. The Vat return filed by the assesee going to show the complete reconciliation the transactions being the records of statutory authority give the determination of the citus of sale and the party thereof alongwith the tax so charged and levied."

6. The reply has been reproduced at page 8 and 9 of the asstt. Order. The AO

observed that the reply received from the assessee was not in accordance with

the queries specifically made with regard to the purchases of different type of

timber as reflected in the table given in the show cause notice dated 27.11.2009

under which it was requested to specify the name and address of the customer

to whom the assessee had sold the particular type of timber alongwith the item

wise specification of quality / kind of timber. The AO has demonstrated that in

the absence of evidence to tally the purchase with sales quantity wise , quality

wise and sale wise, the true and correct picture of profit earned by the assessee

could not be determined. He further pointed out that assessee was not

maintaining stock register itemwise which is also a part and parcel of the books

of account and play a major role in deducing the true and correct picture of the

gross profit. He further pointed out that there was no evidence of record and

document to verify the basis of the valuation of the closing stock shown by the

assessee. He referred to section 44AA as per which assessee is required to keep 6 ITA No. 290/Del/11

and maintain such books of account and other documents as may enable the AO

to compute total income in accordance with the provisions of the Act. He

observed that since assessee has not produced the item wise inventory of

opening stock as well as item wise inventory of closing stock, therefore, assessee

had contravened the provisions of section 44AA. He observed that in the

absence of these inventories, the books of account of the assessee cannot be

treated as reliable. Accordingly he rejected the same . In support of his

conclusion he relied on the decisions i.e. CIT vs. McMillan & Co. (1958) 33 ITR

182 (SC), S.N. Namasivayam Chettiar v. CIT (1960) 38 ITR 579 (SC) wherein

Hon'ble Supreme Court has held that keeping of a stock register is of great

importance because that is 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 is found that from the method of accounting the

correct profits of the business are not deductible, the operation of section 145

(3) of the Act would be attracted.

M/s. Kachhwala, Gems Jaipur vs. Joint Commissioner of Income-Tax,

Jaipur reported in 2006 TIOL-181-SC-IT Appeal (Civil) 5809 of 2006

7. Ld. CIT(A) dismissed the asseseee's appeal interalia observing as under :-

1.08. Further to appreciate the issue, the facts in brief are that the appellant is engaged in the trading of timber. The timber was imported firm abroad. The rates of purchase varied from quality to quality which was specified on the purchase bills itself. The quality of timber was, however, not specified on the sale bills though sale prices varied from 950 per CBM to Rs. 10,887/- per CBM. In view of this fact, neither quantitative tally of purchase/sale of goods nor correct valuation of 7 ITA No. 290/Del/11

closing stock could be verified. There is hardly any need to emphasize that correct valuation of closing stock is very important to work out the correct trading results. No stock register has been maintained by the assesee as has been specified in comments in col. 28(a) of the Tax Audit Report of the Auditors. Further, in the Tax Audit report, method of valuation of closing stock has been specified as cost or net realizable value which ever is less, which is not possible to ascertain for want of maintenance of quality wise/item wise stock register. As discussed above, that the AO asked the appellant during assessment proceedings to file item wise/quality wise trading account of the timber dealt with and also of the separate trading account of the High sea sales, which were not filed.

1.09 In view of the facts discussed above, it is held that trading results declared by the appellant are not verifiable and hence rejection thereof by the AO is hereby confirmed. The AO further estimated the GP @ 4.9% on the basis of average GP declared by three firms which was specified in the order by the AO. Since no submission has been made by the appellant in this regard, no interference is called for in the order of the AO and the addition made by him on this account is hereby confirmed.

8. Ld. Counsel for the assessee submitted that keeping in view the nature of

assessee's business, it was impractical to maintain the quantitative details. He

pointed out that imported stock are cut and processed into various sizes and

shapes and, therefore, it is not possible to maintain the stock register. He

referred to page 8 and 9 wherein assessee's reply is contained. Ld. Counsel for

the assessee further referred to page 32 of the paper book wherein the legal

proposition in regard to rejection of books of account on the grounds of non

maintenance of stock register is contained. He contended and pointed out that in

the case of CIT vs. Jas Jack Elegance Exports : 324 ITR 95 (Delhi), the Tribunal

has observed that none of the provisions of the Act or in the rule required the

assessee to maintain a stock register. He also relied the decisions of CIT vs. 8 ITA No. 290/Del/11

Jacksons House : 198 Taxman 385 (Del), CIT v. Shere Punjab Silk Stores 1981

Tax 63 (1)(Del), Veeriah Reddiar v. CIT : 38 ITR 152 (Ker.), Bhagwati Emporium

v. ITO : (1995) 80 Taxman 227 (Ahd.), Kabir Leathers v. Addl. CIT : (2009) 27

SOT 498 (Delhi), CIT v. Poonam Rani : 326 ITR 223 (Del.), Asoke Refractories

(P) Limited : 279 ITR 457 (Cal.), Pandit Bros v. CIT 26 ITR 159 (P & H), M. Durai

Raj v. CIT, Ernakulam 83 ITR 484 (Ker.), Jhandu Mal Tara Chand Rice Rills v.

CIT (1969) 73 ITR 192 (P & H), Axia Engg. Co. v. ITO : 56 ITD 335 (Chd),

Ganesh Foundry v. ITO (2000) 67 TTJ (Jd) 434, ITO v. Oswal Emporium (1989)

30 ITD 241 (Del), Delhi Securities Printers v. DCIT : 2007 15 SOT 353 (Del.).

9. In the alternative Ld. Counsel submitted that the net profit rate has been

determined at a very high rate and the same should be reduced. In this regard

Ld. Counsel relied on the Tribunal's decisions in the case Suresh Jindal Prop. Vs.

ITO in ITA No. 3590/Del/2011 and Income Tax Officer vs. Suresh Jindal Prop. In

ITA No. 3542/Del/2011. Ld. DR relied on the orders of the authorities below .

10. We have duly considered the rival contentions and gone through the

record carefully. The modus operandi of assessee's business is that it imports the

timber from Singapore and other foreign countries to India and the port of

destination is Kandla (Gujrat). After receiving the logs in Gandhidham, the

assessee get it sawn at saw mill into different sizes and in different items. The

assessee dealt in rough wood. The AO has recorded the finding that purchase

vouchers revealed that the assessee had purchased the different types of timber 9 ITA No. 290/Del/11

for different rates according to the quality of the imported timber. Therefore,

when purchases were clearly identifiable, we do not find any impractibility as

pleaded, regarding maintaining of the stock register of timber qualitywise with

specifications which details were available in purchase invoices. This timber was

cut into with different sizes which were also as per the specifications and,

therefore, there was no impractibility for maintain the stock register of the cut

timber also. When the timber was sold then also it is always sold as per the

quality and, therefore, there cannot be any difficulty in linking the purchase and

sales of timber. As per the tax audit report the auditors are required to certify

the quantitative details and in the absence of the same a qualification is

required in the tax audit report. This clearly shows the importance of stock

register to be maintained by the assessee. The assessee has merely made a bald

submission that it was impractical to maintain the stock register but, as

demonstrated earlier, we do not find any impractability on the part of the

assesee to maintain the stock register. Section 145 deals with the method of

accounting followed by the assessee. As per sub section 3 of section 145, if the

AO is not satisfied about the correctness and completeness of the accounts of

the assessee then it can make the assessment in the manner provided u/s 144.

Section 44AA requires a person, interalia, carrying on business to maintain the

books of account as notified by the Board as per sub section 2. The whole

object of these sections is to enable the AO to deduce true and correct profits of

assessee's business. Maintenance of stock register mainly assumes significance 10 ITA No. 290/Del/11

for this reason only. Ld. Counsel has relied on various case laws to submit that

maintenance of stock register is not part of maintenance of books of account. In

our opinion, this submission has to be considered in the light of the facts

obtaining in the respective cases relied upon by the Ld. Counsel. In all these

cases a finding was recorded that it was impracticable, keeping in view the

nature of business, to maintain the stock register. We may refer to the decision

of Hon'ble Delhi High Court in the case of Jas Jack Elegance Exports (supra). In

this case assessee firm was engaged in the business of manufacturing and

export of readymade garments. Hon'ble High Court upheld the findings of

Tribunal and CIT(A) in observing that maintaining of stock register was not

feasible considering the nature of the business being run by the asseseee,

engaged in the business of manufacturing readymade garments by purchasing

fabric which was then subjected to embroidery, dying and finishing and the

converted into readymade garments by stitching. We do not find any such

impractibility. It is pertinent to note that AO has not rejected the books solely on

account of non maintenance of stock register but also because the AO was not

satisfied about the correctness and completeness of the accounts of the assessee

also because of the relevant details not being mentioned in the sales invoices

though in the purchase invoices all such details were available. Therefore, the

AO rightly rejected the assesee's books of account. The AO's finding regarding

incorrectness or incompleteness of the accounts is to be examined considering

the various factors obtaining in a particular case keeping in view the nature of 11 ITA No. 290/Del/11

the assesse's business. However, the broad principle is that if it is impossible or

infeasible to maintain the stock register, keeping in view the nature of assessee's

business, then the maintenance of stock register can be dispensed with else not.

We, therefore, reject the ground No. 3 to 3.2 raised by the assessee.

11. As far as ground No. 1 is concerned no arguments were advanced in the

course of hearing. The same is dismissed.

12. Ground No. 2, 4, 5 primarily assail the finding of the AO in applying the

rate of 4.90%. In the year under consideration the GP rate was 1.97% as

compared to 2.8% for asstt. Year 2006-07. The assessee's contention is that

slight decline in GP margin in the asstt. Year under consideration was on account

of increased cost of freight incurred by the assessee on transfer of goods from

branch office in Gandhidham to Head Office amounting to Rs. 14,83,350/-. The

submission of Ld. Counsel is that this amount was not a direct expenditure

incurred in relation to purchase of goods but was erroneously debited to trading

account which in turn resulted in decline in the gross profit margin of the

assessee. He pointed out that on excluding this freight-out cost from the trading

account of the assessee, the re-casted gross profit rates works out to 3.21%. Ld.

Counsel further pointed out in asstt. Year 2008-09 the GP rate declared by the

assessee was 2.43% which was accepted u/s 143(3) of the Act. Further in asttt.

Year 2009-10 the GP rate declared was 2.76%. The AO made addition of Rs. 6

lacs and thus the GP rate works out to 3%. He pointed out that assessee 12 ITA No. 290/Del/11

has not challenged this order. Ld. Counsel submitted that considering the GP rate

from astt. Year 2006-07 to 2009-10, the average gross profit is 2.57% Ld.

Counsel relied on following decisions :-

a) Shri Neeraj Jain vs. ITO ITA No. 289/Del/2011

b) Sharda Timber Store vs. ITO ITA Nos. 5717, 5662, 5714 & 5933 of 2010

13. Having heard both the parties we find that Tribunal in the case of Suresh

Jindal Prop. , after considering various decisions of Tribunal, has observed in

para 4 to 4.4 as under :-

"4. Ld. Counsel pointed out that in these two cases exactly on the same facts, using the same comparables for the same assessment year, in the case of individual, engaged in the same nature of business, the additions were made on which partial relief was given by the CIT(A), sustaining the G.P. rate of 4%. In the case of Shri Krishan Kumar (supra), the ITAT in paras 8 to 11 of its order has observed as under:

8. We have carefully considered the arguments of both the sides and perused the material placed before us. The Assessing Officer has given four comparable cases on page 6 of the assessment order. For ready reference, the same is reproduced below:-

Name of Assessee Asstt. % Year Gross Profit Jai Parkash M/s 2004- 6.00% Narwana Timber Store, 05 13

ITA No. 290/Del/11

Karnal Jai Parkash M/s 2005- 4.34% Narwana Timber Store, 06 Karnal Neeraj Jain Prop. 2006- 5.66% Jagdama Timber Store, 07 Karnal Sat Paul & Sons, M/s 2007- 3.53% Kaithal Timber Store, 08 Karnal Total 19.53% Average Rate 19.53/4 4.90% =

9. At page 7 of the assessment order, the Assessing Officer has given the comparative position of sale and gross profit in the case of the assessee. The same is also reproduced herein below for ready reference:-

Partic 2005 2006 2007 ulars/ -06 -07 -08 AY Sales 7319 5887 8400 4816 1050 9166 .00 .00 .00 GP 1737 1560 3049 528. 090. 494. 00 00 00 NP 2322 2397 3672 04.2 71.8 38.4 9 2 0 GP 2.37 2.65 3.63 Ratio % % %

10. The assessment year under appeal is 2007-08. The comparable cases of other assessees are for AY 2004-05 to 2007-

08. If we take the comparable cases of AY 2007-08, then we find that the GP rate for the comparable cases quoted by the Assessing Officer himself is 3.53% whereas in the case of the assessee, the GP rate is 3.63%. If we compare the trading result of the year under consideration as compared to earlier year in assessee's own case, we find that in AY 2006-07, the GP rate was 2.65% which is accepted by the Revenue in the order passed under Section 143(3) wherein the Assessing Officer held as under:-

14 ITA No. 290/Del/11 "Purchases and sales shown have been verified from the books of account. During the course of asstt. proceedings it was noticed that the assessee had shown gross turnover of Rs.58871050/- and G.P. of Rs.1560090/- and G.P. rate of 2.65% against gross turnover of Rs.73194816/-, G.P. of Rs.1737528/- and G.P. rate of 2.37% of immediately preceding year. The G.P. rate is on higher side, whereas gross profit rate in this line of trade shown 2.85% in the case of M/s Janta Timber Store, Timber Market, Karnal."

11. From the above, it is evident that the Assessing Officer himself considered the GP rate of 2.65% in AY 2006-07 to be reasonable. In AY 2005-06, in assessee's own case, the GP rate of 2.37% was accepted by the Revenue. In view of the totality of above facts, we do not find any justification for applicability of GP rate of 4.90%. The gross profit rate disclosed by the assessee at 3.63% is better as compared to earlier two years of assessee's case and also better than the comparable case of Sat Paul & Sons quoted by the Assessing Officer for AY 2007-08. In view of the above, we do not find any justification for sustaining the part of the trading addition by applying GP rate of 4%. The same is deleted.

4.1. In the case of Jai Parkash (supra), the ITAT in para 5 of its order has observed as under:

5. We have considered rival contentions and perused the material available on record. In our considered view the judgment of coordinate Bench in the case of Krishan Kumar (supra) in which assessee's own case has been considered as comparable and holding that thought average rate of g.p. in the case of assessee being 4.9% still, the g.p.

rate of 3.61% earned in the case of Krishan Kumar is justifiable. The ratio of the judgment on the facts is applicable and proposition that assessee's g.p. may vary year to year and books of account should not have been rejected on hypothecated grounds is also applicable. It has not been disputed that no other defects were found in assessee's books except A.O's expectation of a particular way of identification of cut timber with the individual purchase which in our considered view is rather difficult to maintain. In the 15 ITA No. 290/Del/11

circumstances, we uphold the g.p. rate declared by the assessee.

4.2. Relying on the above two decisions, the contention is that since the G.P. rate declared by the assessee for same year is better than earlier, the same should be accepted.

4.3. However, the contention of the Department is that in similar line of business, the G.P. rate, as accepted by the Tribunal, is in the range of 3.61% to 3.63% and, therefore, the same should be accepted. We are inclined to accept the contention of the ld. DR on this count because when G.P. rate is applied for similar line of business, then for same assessment year there could not be any wide variation in the G.P. rate. Merely because assessee has shown better result for the current year cannot be the sole criteria and due regard has to be given to the G.P. rate adopted in same line of business for same assessment year. The G.P. rate in the case of Sat Paul & Sons (supra) has been taken at 3.53%. The AO has considered the case of Sat Paul & sons as one of the comparable cases and we find that in the similar line of business the G.P. rate accepted by the Tribunal in the case of Krishan Kumar is 3.61% and in the case of Jai Parkash 3.63%. Therefore, considering all comparable cases, we are of the opinion that it would serve the interest of justice if the G.P. rate of 3.53% is adopted in the case of the assessee as was in the case of Sat Paul & Sons. We order accordingly.

16 ITA No. 290/Del/11

4.4. In the result, both the appeals, filed by the assessee as well as the Revenue are partly allowed. "

We find that AO has taken the same comparables into consideration which

has been reproduced earlier. Thus, the facts in the present case are similar to

that obtaining in Suresh Jindal's case. Therefore, considering the entire

conspectus of the case including the comparables cases relied upon by the

assessee as well as the decisions of Tribunal in the case of Suresh Jindal Prop.

(supra), we are of the opinion that it would serve the interest of justice if the GP

rate of the assesee is taken at 3.53% as was in the case of Suresh Jindal Prop.

We order accordingly.

In the result, asseseee's appeal is partly allowed.

This decision was pronounced in the open court on 9th January, 2015.

sd/- sd/-

(GEORGE GEORGE K) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Date January, 2015 'veena' Copy of order forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR By Order Deputy Registrar, ITAT