If books of account filed by the assessee not proper AO can reject that and in case of trading in broken rice government also accept levy after allowing 25% on broken rice

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH `F’ : NEW DELHI)

BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND

SHRI A.N. PAHUJA, ACCOUNTANT MEMBER

ITA No.2214/Del./2010

(Assessment Year : 2004-05)

Rajesh Agarwal,

Prop. M/s Hardwarimal Ram Avtar,

AGM-4, Galla Mandi, Rudrapur,

Distt. Udham Singh Nagar,

Rudrapur.

(PAN/GIR No.ABIPA1762A)

(Appellant)

Vs.

ITO, Distt. Udham Singh Nagar,

Rudrapur

 (Respondent)

Assessee by:Shri Amit Kumar Gupta, FCA.

Revenue by:Shri Rohit Garg, Sr.DR

ORDER

PER U.B.S. BEDI, J.M.

This appeal of the assessee is directed against the order passed by the CIT(A)-II, Dehradun, dated 8.2.2010, relevant to assessment year 2004-05 whereby assessee has challenged confirmation of the addition of Rs.2,71,263/-in the income, as extra profit on account of sale of rice after rejecting books of account u/s 145(3) of the I.T. Act, 1961.

2. Assessee filed original return of income on 1.11.2004 declaring an income of Rs.92,076/-. The case was processed u/s 143(1) and later on case was selected for scrutiny. In response to notice u/s 143(2) and 142(1), the assessee’s representative appeared before the Assessing Officer along with the brother of the assessee attended the hearing from time to time, filed written submissions and case was discussed with him.The assessee received income from trading of rice, excel sim prepaid and paddy. During the year under consideration, the assessee has shown purchases of the above items at Rs.5.29 crores and sales of Rs.4.73 crores. The books of account were produced which were put to test check indicate that the assessee has shown combined g.p. of 1.18% on account of trading of excel sim recharge coupon, paddy and rice. However, on drawing trading account of rice separately, it was found that there is a loss of Rs.1,82,955.08 on trading of rice. It is noted by the Assessing Officer that the assessee has not shown any loss in the trading account, but further discounts have been allowed to the customers on sale. In this manner, resultant loss in the trading of rice is much more than indicated in the above drawn trading account. During the course of assessment proceedings, assessee was asked to produce closing stock and valuation thereof. In response, the assessee filed inventory of closing stock along with copies of purchase bills of rice. The Assessing Officer noted that from the details, it was found that closing stock has not been properly valued. Further during the course of assessment proceedings, following observations have been made:

“On analyzing purchases and sales of three kinds of rice i.e. super fine (rice grade ‘A’), common rice and broken rice, it transpired that the assessee has recorded purchase of 4585.05 qtls. Of broken rice. However, the sales of broken rice have been made to the extent of 8584.94 qtls. In this manner, sale of excess quantity of 3998.89 qtls. Of broken rice has been recorded.

On perusal of quantitative details of rice given in the audit report, it was found that the purchase of broken rice has been shown only to the extent of 200 qtls. And there is opening stock of broken rice also at 131.75 qtls. Sales have been indicated at 331.75 qtls. Therefore, there is no conformity in the actual purchases and sales of broken rice and figures shown in the quantatitive details of audit report.”

3. After due notice, proposing rejection of books of account u/s 145(3), as correct profit cannot be deduced from such books of account. So, he was asked to as to why the profit worked out by applying sale rate of superfine and common rice instead of broken rice for the quantity of 3998.89 qtls. The assessee filed reply and submitted before the  Assessing Officer that even Government accepts the fact of broken rice if they accept the levy rice after allowing 25% towards broken rice. So his book result should be  accepted. Various other contentions were also raised and Assessing Officer while rejecting books of account has concluded to make addition of Rs.2,71,263/- as per para 4.3 of his order:

“Therefore, the books of account are liable to be rejected and hereby rejected u/s 145(3) of the I.T. Act, 1961. Accordingly, the sales in respect of fresh rice, recorded as broken rice are estimated. However, it cannot be ruled out that there must have been some broken in the handling of rice bags. Therefore, out of the total sale of 36168.54 qtls. 5% is taken to have been received as broken rice in handling of consignments. This quantity comes at 1808.42 qtls. In this manner, the sales of balance quantity of 2190.47 qtls. (3998.89 qtls. – 1808.42 qtls.) is taken to have recorded as broken rice instead of fresh rice. It is seen that there is substantial difference in the sale of rate of common rice and broken rice. For the sake of illustration the following figures are given are given:

Fresh Common Rice                      Broken Rice                                       Difference

Bill No.         Date           Sale rate per qtl      Bill No.      Date          Sale rate per qtl.

 377            02.11.03              741/-                  379         02.11.03         657/-        84/-

 378            02.11.03              741/-                  380         02.11.03         657/-        84/-

 396            14.11.03              855/-                  395         14.11.03         665/-        190/-

 398            16.11.03              868/-                  399         17.11.03         647/-        221/-

 405            18.11.03              866/-                  400         17.11.03         661/-        205/-

 413            23.11.03              865/-                  412         23.11.03         660/-        205/-

Average rate                        Rs,822/66                                             Rs.657/83  Rs.164/30

From the above, it can be seen that the average sale rate of fresh common rice comes at Rs.822.66 per quintal and average sale rate of broken rice comes at Rs.657.83 per quintal. In this manner, there is difference of Rs.164.30 quintal in the sale rate. However, for the fairness of things the difference i.e. suppression, for the quantity of 1808.42 qntls. Is taken @ Rs.150 per qntl. As discussed above, the value of suppressed sale for the quantity of 1808.42 qntls. @ Rs.150/- per qntl. Comes at Rs.2,71,263/-. Since there is no additional expenditure against this sale, hence the whole amount is taken as an additional income earned by the assessee. This amount is therefore liable to be added to the total declared income of the assessee and addition is made. Addition Rs.2,71,263.00”

4. Against such order, assessee preferred appeal, which came to be dismissed vide order dated 27.12.2007.

5. Aggrieved by the first appellate authority’s order, assessee preferred appeal before ITAT. Vide order 27.3.2009 of the Tribunal, the order of the CIT(A) was set aside on the file of the CIT(A) with the direction that the assessee be given reasonable  opportunity of being heard to decide the appeal afresh. Following the direction of ITAT, CIT(A) considered all the points raised by the assessee and concluded to decide the appeal against the assessee vide para.6 of his order as under:

“6. As also agitated in the grounds of appeal, the ld. Assessing Officer made an addition of Rs.2,71,263/-. The addition is seen to be made after drawing the following conclusions:

(i) Purchase and sale of three kinds of rice reveal that an excess quantity of 3998.89 qtls. of broken rice has been shown.

(ii) Quantitative details of rice in the audit report reveal that the purchase of broken rice was recorded at 200 qtls. and opening stock of broken rice was recorded at 131.75 qtls. Total sales of broken rice were shown at 331.75 qtls.

(iii) The above showed to the Assessing Officer that the quantities of purchase and sale of broken rice were not the same as recorded in the audit report. The ld. Assessing Officer accordingly gave a notice of rejection of books of account in terms of Sec. 145(3) of the Act as he found it difficult to compute correct profits on the basis of the books of account maintained by the appellant and an audit report on the basis of such books. The reply of the appellant to the afore-mentioned quantitative discrepancies has been reproduced by the ld. Assessing Officer at para 4.1 of his assessment order. In the course of appellate proceedings, the ld. AR Shri Rajiv Agarwal, FCA argued the points made by him in his written submissions dated 17.12.2009. He mainly agitated the view of the Assessing Officer who according to him was mainly guided by his notion that there should not be any loss in a trading business. The Assessing Officer has though made this observation in the assessment order, but he has corroborated his notion by affording an opportunity to the appellant to reconcile the quantity of broken rice available with him and the quantity of sale. As regards the percentage of broken rice which according to the ld. AR Shri Rajiv Agarwal, FCA has been accepted by the Govt. at 25%, the ld. Assessing Officer has duly discussed that  aspect at para 4.2 of his assessment order. He has also gone through the Govt. order produced before him which according to the ld. Assessing Officer was relevant in respect of the rice millers from whom 'levy-rice' was purchased by the Govt. The ld. Assessing Officer has, therefore, distinguished the level of broken rice acceptable in the case of levy rice purchased by the Govt. and the level of broken rice where only trading was involved. A perusal of the two-pages long written submissions dated 17.12.2009 shows that the contentions do not overcome or explain quantitative discrepancies pointed out by the ld. Assessing Officer nor disprove the correctness of the percentage of broken rice taken at 5%. The appellant could have utilized the opportunity of being heard given to him by putting up matching rebuttals which could dislodge Assessing Officer's conclusions as wrong. The ld. AR has not even refuted the ld. Assessing Officer's contention that the possibility of 25% broken rice was specified in respect of the rice millers from whom levy rice was purchased. The appellant also had enough time to give a complete working of the opening stock of all kinds of rice handled by him during the year, purchases made and quantities of sales made separately. It is, therefore, apparent that there was much to be desired from the books of account maintained which are claimed to have been audited also. The maintained books were certainly not a sufficient guide for the Assessing Officer to help him to discharge the onerous· task of making a correct assessment. In the light of the handicap faced by the Id. Assessing Officer there was no escape from resorting to a sensible estimation. The addition made by the Id. Assessing Officer of Rs.2, 71,263/- is, therefore, upheld. With this decision, all the grounds, being common, get disposed of.

7. In the result, the appeal is dismissed.”

6. Aggrieved by the order of the CIT(A) in de novo proceedings, the assessee has come up in further appeal and while reiterating the submissions as made before the lower authorities, he has pleaded for deleting the addition as made by the Assessing Officer and c nfirmed by the CIT(A). It was further submitted that when State Regulatory Authorities are accepting generation of broken rice which occurs while handling (inward unloading and loading and outward unloading and loading of full rice, which is accepted up to 25%). So, giving certain quantitative details in quintals, he lays strong stress on deleting of the impugned addition made by the Assessing Officer and confirmed by the CIT(A). He has also filed synopsis and written submissions/contentions and mainly contended that the ITO has not found any faults/discrepancies per se other goods (full rice etc.) and accepted and admitted the purchases and sales as well as closing stock thereof for their quantities as well as prices. Thus, rejection of entire books of account is  against facts, unreasonable, unjustified and unfair and needs to be deleted, which may be deleted.

7. Ld.DR strongly relied upon the orders of authorities below and pleaded that there were lot of discrepancies found in the audited results filed and books of account produced and assessee could not properly explain such discrepancies. Therefore, he has rightly rejected the book result as shown by the assessee and so far as State Regulatory Authorities’ acceptance of broken rice at 25% is concerned, same is applicable to the cases of manufacturing and milling whereas assessee has been dealing in trading of rice and all the details sought for and discrepancies found have not been filed/explained at all before the Assessing Officer or in appeal even. Therefore, addition is called for, which has rightly been made by the Assessing Officer and confirmed by the CIT(A). It was urged for confirmation of the impugned order.

8. We have heard both the sides, considered the material on record as well as synopsis filed, case laws cited and arguments advanced before us. It is found that there were discrepancies in the book result filed, traced on the scrutiny of the books made by the Assessing Officer which could not be properly replied/explained. So, action of the  Assessing Officer in rejecting the book result and confirmation of the same by the CIT(A) in view of the facts and circumstances is found to be justified and proper which action is upheld. But, so far as quantum of trading addition on account of broken rice is concerned, plea of the assessee that State Regulatory Authorities are accepting it up to  25%, such acceptance of rate is true for millers and manufacturers, whereas assessee is trading in rice and paddy. Therefore, same yardstick will not hold good or apply here so far as assessee is concerned. However, in view of facts and the material placed on record, we find that the addition made by the Assessing Officer and confirmed by the CIT(A), though called for yet appears to be higher side Therefore, in view of facts and circumstances, we are of the opinion that it would meet the ends of justice if such addition made by the Assessing Officer and confirmed by the CIT(A) is restricted to 50% of the addition made. We hold and direct accordingly. So, assessee gets relief of Rs.1,35,631.50.

9. As a result, the appeal of the assessee gets partly accepted.

Order pronounced in open court on 27.01.2012.

                                              Sd/-                                               Sd/-

                                  (A.N. PAHUJA)                               (U.B.S. BEDI)

                        ACCOUNTANT MEMBER             JUDICIAL MEMBER

Dated : January , 2012

SKB

Copy of the order forwarded to:-

1. Appellant

2. Respondent

3. CIT

4. CIT(A)-II, Dehradun

5. CIT(ITAT)                                                                                    Deputy Registrar, ITAT