1. 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. Subsection 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.
2.
It may be pointed out that Section 145 of the I.T Act 1961, prior to its
substitution by the Finance Act 1995 effective from April 1, 1997,
permitted an assessee having income from ‘business’, ‘profession’ or ‘other
sources’ to follow either the cash or mercantile or the hybrid system
of accounting to arrive at its profit but it also empowers the A.O to reject
the accounts and estimate the assessed income if the sytem followed by the
assessee was such that his true profits were not ascertainable from it. The
present Section 145 restricts the choice of system to either the cash or
mercantile system and also invests the Central Government with powers to lay
down accounting standards to be followed by the assessee. In order to
appreciate completely the intent and operation of Section 145 in the
present form, it is necessary to have a cursory look on the provisions of
Section 145 which were effective upto 31st March 1997. The
understanding of old provision of Section 145 is also necessary for
appreciating the various judgments of the Supreme Court which have been
rendered on the basis of those provisions. A number of decisions have been
discussed in the following paragraphs upholding the rejection of books of
accounts or otherwise have been rendered keeping in view the provisions of old
Section 145. Though these decisions have been rendered on the basis of old
provisions yet they are relevant in sum and substance in respect of the
provisions of Section 145(3).
2.1
It is relevant to quote from the Memorandum to the Finance Bill, 1995 through
which Section 145 was amended which explained the provisions as under :-
“The
existing section 145(1) of the Income-tax Act provides for computation of
income from business or profession or income from other sources in accordance
with the method of accounting regularly employed by the assessee. Income is
generally computed by following one of the three methods of accounting,
namely, (i) cash or receipts basis, (ii) accrual
or mercantile basis, and (iii) mixed or hybrid method which
has elements of both the aforesaid methods. It has been noticed that many
assessees are following the hybrid method in a manner that does not reflect the
correct income. It is proposed to amend Section 145 to provide that income
chargeable under the head ‘Profits and gains of business or profession’ or
‘Income from other source’ shall be computed only in accordance with either the
cash or the mercantile system of accounting, regularly employed by an assessee.
The
Institute of Chartered Accountants of India (ICAI) have directed its members to
ensure that the Accounting Standards formulared by it are followed in the
presentation of financial statements covered by their audit reports. It is seen
that there is a flexibility in the standards issued by ICAI which makes it
possible for an assessee to avoid the payment of
correct taxes by following a particular system. Therefore, there is
an urgent need to standardize one or more or the alternatives in various
standards so that the income for tax purposes can be computed precisely and
objectively.
The
Bill proposes to amend the Income-tax Act to empower the Central Government to
prescribe by notification in the Official Gazette, the accounting standards
which an assessee will have to follow in computing his income under the head
‘Profits and gains of business or profession’ or’ ‘Inocme from other sources’
The
proposed amendements will take effect from April 1, 1997, and will,
accordingly, apply in relation to assessment year 1997-98 and
subsequent years.”
2.2
The new provisions were explained in the Board’s Circluar No.717 dated August
14, 1995. The relevant paras 44.1 to 44.3 of the circular are as under :
44.1
“Section 145(1) of the Income-tax Act prior to its amendment by the
Finance Act, 1995, provided for computation of income from business or
profession or income from other sources in accordance with the method of
accounting regularly employed by the assessee. Income is generally
computed by following one of the three methods of accounting namely, (i)
cash or receipts basis, (ii) accrual or mercantile basis, and (iii) mixed or
hybrid method which has elements of both the aforesaid methods. It was noticed
that many assessees are following the hybrid method in a manner that does not
reflect the correct income. The Finance Act, 1995, has amended Section 145 of
the Income-tax Act to provide that income chargeable under the head ‘Profits
and gains of business or profession’ or ‘Income from other sources’ shall be
computed only in accordance with either the cash or the mercantile system of
accounting, regularly employed by an assessee. The first proviso to sub-section
(1) of section 145 has been deleted.”
44.2
The Finance Act, 1995, has empowered the Central Government to prescribe by
notification in the Official Gazette, the accounting standards which an
assessee will have to follow in computing his income under the head ‘Profits
and gains of business or profession’ or ‘Income from other sources.’. These
accounting standards will be laid down in consultation with expert bodies like
the Institute of Chartered Accountants.
44.3
The amendement will take effect from April, 1 1997 and will, accordingly, apply
in relation to assessment year 1997-98 and subsequent years.”
Old
and new provisions
Old
provisions. – The existing
Section 145 had two subsections and three proviso to sub-section (1) of
Section 145. Sub-section (1) provided that income from business or profession
or income from other sources shall be computed in accordance with the method of
accounting regularly employed by the assessee. The first proviso provided that
where the accounts are correct and complete but the method of accounting is
such from which income cannot be properly deduced, the computation of income
shall be done by the Assessing Officer on such basis and in such manner as he
may determine. The second proviso provided that where no method of accounting
is regularly employed, any income by way of interest
on securities shall be chargeable as the income of the previous year
in which such interest is due to the assessee. The third proviso provided that
nothing shall preclude an assessee from being charged to income-tax in respect
of any interest on securities received by him in the previous year, if such
interest had not been charged to income-tax for any earlier year. Sub-section
(2) of section 145 provided that where the Assessing Officer is not satisfied
about the correctness or completeness of the accounts or where no method of
accounting has been regularly employed, the Assessing Officer may make an
assessment in the manner provided in Section 144 of the Act.
New
provisions The choice of selecting the method
of accounting – cash, mercantile or hybrid – was with the assessee. The choice
still remains with the assessee, but the new subsection (1) of Section 145
restricts the choice to the cash system or the mercantile system. The concept
of the hybrid system has been done away with. Sub-section (2) now authorizes
the Central Government to notify from time to time accounting standards to be
followed by any class of assessees or in respect of any class of income, while
sub-section (3) authorizes the Assessing Officer to make an assessment in the
manner provided in Section 144 in three contingencies – (i) where
the Assessing Officer is not satisfied with the correctness or completeness of
accounts, or (ii) where the cash or mercantile sytem of
accounting has not been regularly followed; or (iii) where the
accounting standards as notified have not been regularly followed.
3.
Two methods of accounting, the cash system and the mercantile system
3.1 Cash
system. 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. In Morvi Industries Ltd. v. CIT [1971]
82 ITR 835, the Supreme Court said that under the cash system, it is only
actual cash receipts and actual cash payments that are recorded. In CIT v .
A. Krishnaswami Muda liar [1964] 53 ITR 122 , the Court observed that
in the cash system record is maintained on actual cash receipts and actual
disbursements, entries being posted when money or money’s worth is actually received,
collected or disbursed. It was further stated that under the cash system, no
account of what are called the outstandings of the business either at the
commencement or at the close of the year is taken. It was further observed that
where the cash system is adopted, there are no bad debts or outstandings.
In CIT v. K.R.M.T.T. Thiagaraja Chetty & Co. [1953]
24 ITR 525 , the Supreme Court 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. The cash system will cover cases where
accounts are not maintained on the mercantile basis, as held by the Orissa High
Court in CIT v. Bijoy Kumar Das [1972] 84 ITR
351 . It may even cover cases where no proper accounts are kept as per the
decision of the Gauhati High Court in N.R. Sirker v. CIT [1978]
111 ITR 281. 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). In Raja Mohan
Raja Bahadur v. CIT [1967] 66 ITR 378, the Supreme
Court 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.
In Raja Raghunandan Prasad Singh v. CIT [1933]
1 ITR 113 (PC), the Supreme Court 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.
The
foregoing discussion explains, in brief, the salient features of cash system of
accounting.
3.2 Mercantile
system. The mercantile system of accounting or the double entry system
is different in substance from the cash system of accounting. The basic
features of the mercantile system of accounting were explained by the Supreme
Court in Morer Industries Ltd. ‘s case ( supra )
as follows :
“…
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.” (p.
836)
Earlier
in CIT v. A. Gajapathy Naidu [1964] 53 ITR
114, the Supreme Court 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. A contingent and conditional
liability cannot be taken cognizance of, as held by the Allahabad High Court
in Swadeshi Cotton Mill Co. Ltd. v. CIT [1980]
125 ITR 33 / 3 Taxman 280. 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.
3.3 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.
3.4
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.
3.5 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 mercanticle 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. The
Department is accepting 97 per cent of the returns under section 143(1) of the
Act (subject to prima facie admustments). The scrutiny is now confined to only
random selection of 3 per cent cases and a few specified categories of
companies. The transparency of the financial statements accompanying the
returns of income will enable the Department to locate cases of fraudulent
change of accounting policies.
4.
The A.O may proceed under Section 145(3) under any of the following
circumstances :
(a)
Where he is not satisfied about the correctness or completeness of the
accounts; or
(b)
Where method of accounting cash or mercantile has not been regularly followed
by the assessee ; or
(c)
Accounting Standards as notified by the Central Government have not been
regularly followed by the assessee.
4.1 Though the broad parameters have
been laid down in the Section itself under which the provisions are
required to be invoked for rejection of books of account in a particular case,
yet, a definite ground work is sine-quanon on part of the
Assessing Officer before resorting to the provisions of section.
It is noted that in a large number of cases the
provisions of Section are invoked on the pretext of fall in gross profit rate.
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.
4.2
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/s. 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.
4.3
In a case, where accounts were rejected on the gound 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 [2008] 296 ITR 45 (Gauhati) held, that the Tribunal was not justified in
merely confirming the addition without considering assessee’s case for
acceptance of return.
4.4
In yet another case decided by the Tribunal in ITO v. Girish M
Mehta [2008] 296 ITR (AT) 125 (Rajkot), 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.
4.4
Merely because the value of goods by the customs authorities was higher than
the invoice price, the accounts cannot be rejected as found in CIT v. Central
Provinces Manganese Ore Co.Ltd. (2008) 296 ITR 217 I
(Bom).
4.5
In the case of CIT v. Smt. M.Thankamma [2010] 326 ITR 249
(Ker), where an undisclosed income based upon a single document was deleted,
the High Court felt that a remand is necessary because the Tribunal had merely
confirmed the order of the first appellate authority by referring to the
decision of the Supreme Court in CIT v. P.V
Kalyansundaram [2007] 294 ITR 49 (SC), when according to the High
Court there were several corroborative materials as alleged on behalf of
revenue, which were not examined.
5.
REJECTION OF BOOKS OF ACCOUNT IS JUSTIFIED
Hon’ble
Allahabad High Court in the case of Awadhesh Pratap Singh Abdul Rehman &
Bros v/s. CIT 201 ITR 406(All) held that “It is difficult to catalogue the various types of defects in the
account books of an assessee which may render rejection of account books
on the ground that the accounts are not complete or correct from which the
correct profit cannot 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 may not per se
lead to an inference that accounts are false or imcomplete. However, wher 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 these provisions.
In
this case, the Tribunal’s finding was held giving rise to no question of law
and the said finding confirming rejection of books of accounts was held
justified because no stock register was maintained nor were the sales found
verifiable in the absence of 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.
5.1
Hon’ble Supreme Court in the case of Kachwala Gems V/s. JCIT, Jaipur 288 ITR 10
(SC) held 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
semi-precious 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.
5.2
In the case of Champa Lal Choudhary vs DCITCent. Cir. 2 ,Jaipur the ITAT Bench-
‘A’
54 SOT398(JP) 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 can they 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 yearend 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, evens 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 berequired 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? [Para
5.1]
5.3
Similarly , the ITAT Chandigar Bench ‘A’ in the case of Pawan Kumar vs ITO,
Range IV(4), Malerkotla, 137 ITD 85 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 groundnut 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 per
cent and 83.91 per cent 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 different 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 groundnut 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 is 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 perspective. [Para
11]
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. [Para 13]
6. Rejection of Books of Account under Section
145(3) and Assessment in the manner under Section 144 Connotation thereof
In
a case where the provisions of Section 145(3) are attracted, although the
assessment is made in the manner provided in Section 144, nevertheless the
assessment is made under Section 143(3) of the Act. A clearcut distinction
between Best Judgement Assessment and in the manner provided under Section 144
is required to be understood while resorting to the provision of Section
145(3). Under Section 145(3) the assessment is required to be in the manner
under Section 144 of the Act only. However, it is well known that in the case
of Best Judgement where resort is taken to Section 144, the Assessing Officer
excercising his jurisdiction cannot act arbitrarily or capriciously. The
assessment must proceed on judicial considerations in the light of relevant
material that may be brought on record. The Hon’ble Allahabad High Court in the
case of CIT V/s. Surjeetsingh Maheshkumar (1994) 210 ITR 83 has held that in
every case of Best Judgement, the element of guess work cannot be eliminated so
long as Best judgement has a nexus with material on record and discretion in
that behalf has not been exercised arbitrarily or capraciously.
6.1
Bombay High Court in the case of Bastiram Narayandas V/s. CIT (1994) 210 ITR
438 held the rejection of books of accounts justified under Section 145 and the
Best Judgement assessment under Section 144 where the assessee had not produced
relevant records relating to its day to day manufacture of ‘bidis’ including
the quanitity 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 fairness or correctness of the accounts of the assessee.
6.2 Although the words “Best of the
Judgement” are used in Section 144 alone, the only difference between the
assessment under Section 143(3) where books are found to be unreliable and
an assessment under Section 144 is that the Act has contemplated a more summary
method when the Assessing Officer is acting under Section 144 and that on
account of deliberate default of the assessee. [Gunda Subahiya v/s. CIT (1939)
7 ITR 21 Mad-FB.]
6.3 It may further be noted that the
assessment that has to be made after rejection of books under Section
145(3), of the evidence or books produced is not an assessment under Section
144, but is only an assessment under Section 143(3) which is to be made “in the
manner provided in Section 144”. In such cases, the Assessing Officer has to
give an opportunity to the assessee to contradict the materials upon which the
Assessing Officer wants to base his estimate. [Addl. ITO V/s. Ponkunnam Traders
(1976) 102 ITR 366 (Ker)]
7. 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
Karnataka High Court in the case of Karnataka State Forest Industries
Corporation Ltd., V/s. CIT (1993) 201 ITR 674 has held that the Assessing Officer’s
powers under the Section are not arbitrary and he must exercise his discretion
and judgment judicially.
A
clear finding is necessary before invoking the Section 145(3) of the Act.
8. 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 Sections 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.
9. LOW
GROSS PROFIT, WHETHER BOOK RESULTS CAN BE REJECTED
In
the business of definite finding that the case fall 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.
10. NON
MAINTENANCE OF STOCK REGISTER
The
fact that 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 account books must be false
“Pandit Brothers v/s. CIT (1954) 26 ITR 159”. In Chhabildas Tribhuvandas Shah
V/s. CIT (1966) 59 ITR 733, the Supreme Court 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/s.
CIT(1971 81 ITR 609 (Bombay). The Bombay High Court found the 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.
Similarly, in the case of CIT v/s. Pareck Brothers (1987) 167 ITR 344 (Patna)
it has been held that invocation of Section 145 was justified as the assessee
was not maintaining day to day stock account and did not furnish any
distinctive numbers either of purchases or sales to the Income Tax Officer.
10.1
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 assessees accounts by
having a quantitative tally. If in any case, after taking into account the
absence of a stock register coupled with other materials, it is felt that
correct profits and gains cannot be deduced from the accounts, resort to the
provisions of Section 145(3) can be taken (S N Namashivayam Chettiyar v/s. CIT
(1960) 38 ITR 579 (SC); Bombay Cycle Stores Co. Ltd., v/s. CIT (1958) 33 ITR 13
(Bombay).
10.2
The Calcutta High Court in the case of Amiya Kumar Roy and Brothers v/s. CIT
(1994) 206 ITR 306 held that failure to maintain stock accounts by the assessee
was a substantial defect in the accounts. It upheld the decisions of Tribunal
holding that the estimate which was made in the case and the addition made on
such estimate was quite reasonable and fair taking cumulative view of all the
factors present in the case.
10.3
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/s. Girija Shankar Awanish Kumar (1997) 104 STC 130
(SC).
11.
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 Pvt.
Ltd., v/s. CIT (1979) Tax LR 775 (All).
12. POWER
OF THE FIRST APPELLATE AUTHORITY IN THE MATTER OF REJECTION OF BOOKS OF
ACCOUNTS
It
is well settled position of law that the CIT(A) during the appellate
proceedings exercises all the powers vested with Assessing Officer to be
exercised while framing the assessment order. Therefore the CIT(A) can reject
the books of accounts of the assessee by invoking the provisions of Section
145(3) of the I.T.Act. For the first time, while framing the appellate order
provided with all other conditions exist warranting rejection of such books of
accounts. In this regard, the decision of Supreme Court in the case of CIT
v/s. Mc Millan and Company (1958) 33 ITR 182 (SC) is quite
relevant. The decision has been rendered in respect of the old provisions of
Section 145 neverthless it is equally applicable to the present provisions of
Section 145 also.
13. REJECTION
OF ACCOUNTS IN EARLIER YEAR(S) CANNOT JUSTIFY REJECTIONFOR 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. In this regard the decision of Allahabad High Court in the case of Ram
Avtar Ashokumar v/s. CST (1980) 45 STC 366 (All) is quite relevant.
14. 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 AO 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/s. CIT (1944) 12 ITR 393
and the Supreme Court in the case of Dhakeswari Cotton Mills Ltd., v/s. CIT
(1954) 26 ITR 775.
15. ESTIMATES
BASED ON COMPARABLE CASES
The
estimate of turnover and fixation of gross profit rate are two important 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. The rule of law on this
subject has been well settled that estimates framed without giving the basis
for their fixation or without furnishing to the assessee the material on which
the rate of gross profit is arrived at or without giving an opportunity to the
assessee to rebut it are bad. [Dhakeswari Cotton Mills Ltd., v/s. CIT (1954) 26
ITR 775]
No
reliance can be placed on rejected account books for working out Peak Credit.
Madras High Court in the case of CIT v/s. KMN Naidu (1996) 221 ITR 451 has 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.
16. THE 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-a-viz the
turnover acheived 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/s.
CIT (1975) 101 ITR 721 (J & K) ]
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/s. CIT(1973) 92 ITR
287 (MP)]
17.
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/s. 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.
17.1
Supreme Court in the case of Sargam Cinema v/s. CIT (2010) 328 ITR
513 has held that the 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. In this regard, reference
can also be made to the other judgements e.g., CIT V/s. Lucknow Educational
Society (2011) 339 ITR 588 (All) and CIT v/s. Hotel Joshi (2000) 242 ITR 478
(Raj)
Section 145A of the Income Tax laid that the valuation
of purchase, sale of goods and inventory for the purposes of determining the
income chargeable under the head "Profits and gains of business or
profession" shall be adjusted to include the amount of any tax, duty, cess
or fee (by whatever name called) actually paid or incurred by the assessee to
bring the goods to the place of its location and condition as on the date of
valuation.
As
per the guidance note issued by the ICAI “Guidance Note on Tax Audit u/s 44AB
of The Income Tax Act, 1961” there will be no impact of the section 145A on the
computation of total income.
With
due respect I am of the opinion that the example given in the Guidance Note is
not fully correct and required to be further analysis. There is impact on the
total income due to impact of credit of indirect taxes.
As
per my analysis there are two issues which required further analysis:
Regarding
increasing the value of closing stock of finished goods for the duty to be
levied/collectable at the time of actual sale.
·
Regarding impact of section 145A of
Income Tax Act on the computation of total income.
Further
following are issues which are not considered in the Guidance Note but required
to be considered for the proper working of impact of section 145A:
·
Regarding impact of VAT or any other
tax [In the guidance note only the impact of Excise Duty is discussed]
·
Regarding impact of duty paid on the
purchase of capital goods on which depreciation cannot be claimed due to
Explanation 9 to section 43(1).
Regarding increasing the value of closing stock of finished goods
for the duty to be levied/collectable at the time of actual sale.
·
In the example given in the Guidance
Note excise duty to be collected on the closing stock of finished goods as and
when sold is taken into consideration. In my opinion as the excise duty is
levied / collectable at the time of clearance of goods, inclusion of the same
in the closing stock, without incurring any expenditure of such nature is not
correct.
·
The exact sale value of the finished
goods cannot be ascertained and there need to be presumption of sale.
·
In such case whether the sale price
as on balance sheet date or actual sale price of the goods, if sold prior to
the date of finalization of financial statement should be taken into
consideration. If actual sale value is to be taken into consideration and all
the closing stock of finished goods not sold till the date of finalization,
then how to value etc. question arises.
·
The necessity and impact of closing
stock in the financial statement while computing the profit was discussed by
the Supreme Court in the case of Chainrup Sampatram v. Commissioner of
Income-tax [24 ITR 481 (SC) (1953)]. In this case it was held that:
“It
is wrong to assume that the valuation of the closing stock at market rate has,
for its object, the bringing into charge any appreciation in the value of such
stock. The true purpose of crediting the value of unsold stock is to balance
the cost of those goods entered on the other side of the account at the time of
their purchase, so that the cancelling out of the entries relating to the same
stock from both sides of the account would leave only the transactions on which
there have been actual sales in the course of the year showing the profit or
loss actually realised on the year's trading. As pointed out in paragraph 8 of
the Report of the Committee on Financial Risks attaching to the holding of
Trading Stocks, 1919, "As the entry for stock which appears in a trading
account is merely intended to cancel the charge for the goods purchased which
have not been sold, it should necessarily represent the cost of the goods. If
it is more or less than the cost, then the effect is to state the profit on the
goods which actually have been sold at the incorrect figure . . . . . . From
this rigid doctrine one exception is very generally recognised on prudential
grounds and is now fully sanctioned by custom, viz., the adoption of market
value at the date of making up accounts, if that value is less, than cost. It
is of course an anticipation of the loss that may be made on those goods in the
following year, and may even have the effect, if prices rise again, of
attributing to the following year's results a greater amount of profit than the
difference between the actual sale price and the actual cost price of the goods
in question " (extracted in paragraph 281 of the Report of the Committee
on the Taxation of Trading Profits presented to British Parliament in April
1951). While anticipated loss is thus taken into account, anticipated profit in
the shape of appreciated value of the closing stock is not brought into the
account, as no prudent trader would care to show increased profit before its
actual realisation. This is the theory underlying the rule that the closing
stock is to be valued at cost or market price whichever is the lower, and it is
now generally accepted as an established rule of commercial practice and
accountancy. As profits for income-tax purposes are to be computed in
conformity with the ordinary principles of commercial accounting, unless of
course, such principles have been superseded or modified by legislative
enactments, unrealised profits in the shape of appreciated value of goods
remaining unsold at the end of an accounting year and carried over to the
following year's account in a business that is continuing are not brought into
the charge as a matter of practice, though, as already stated, loss due to a
fall in price below cost is allowed even if such loss has not been actually
realised.”.
·
Following the judgment referred
above Hon’ble Supreme Court in the case of CIT vs Dynavision Ltd. [348 ITR 380
(2012) (SC)] held that:
“At the outset, it may be stated, that, it is not in dispute
that the assessee has been following consistently the method of valuation of
closing stock which is "cost or market price, whichever is lower."
Moreover, the Assessing Officer conceded before the Commissioner of Income-tax
(Appeals) that he revalued the closing stock without making any adjustment to
the opening stock (see page 50 of the paper book). Lastly, though under section
3 of the Central Excise Act, 1944, the levy of excise duty is on the
manufacture of the finished product the same is quantified and collected on the
value (i.e. selling price). Before concluding, we may rely on the judgment of
this court in the case of Chainrup Sampatram v. CIT reported in [1953] 24 ITR 481 (SC) in which it has been held that,
"valuation of unsold stock at the close of the accounting period was a
necessary part of the process of determining the trading results of that
period. It cannot be regarded as source of profits. That, the true purpose of
crediting the value of unsold stock is to balance the cost of the goods entered
on the other side of the account at the time of the purchase, so that on
cancelling out of the entries relating to the same stock from both sides of the
account would leave only the transactions in which actual sales in the course
of the year has taken place and thereby showing the profit or loss actually
realized on the year's trading. The entry for stock which appears in the
trading account is intended to cancel the charge for the goods bought which
have remained unsold which should represent the cost of the goods". (see
also : para. 8 of the judgment of this court in the case of CIT v. Hindustan
Zinc Ltd. reported in [2007] 291 ITR 391 (SC).
For
the above reasons, we hold, that, the addition of Rs. 16,39,000 to the income
of the assessee on the ground of undervaluation of the closing stock was wrong
and that the order of the Commissioner of Income-tax (Appeals) is accordingly
upheld. Consequently, this civil appeal filed by the Department is dismissed
with no order as to costs.”
In
this case the AO made addition by increasing the value of closing stock on the
ground that the assessee had not included in the closing stock the element of
excise duty.
·
Therefore increasing the value of
closing stock for duty to be collected and paid at the time of sale is not
proper.
·
Though in the guidance note impact
of the duty on finished goods is nullify by claiming the expenditure allowable
when the duty discharged to govt. But such methodology, firstly increasing the
value of inventory and then claiming expenditure to reverse such impact of
increase is not appropriate. Further if the finished goods not actually sold by
the due date of filing of return of income, such expenditure cannot be claimed
and therefore assessee is liable to pay tax on unreal income.
Regarding impact of section 145A of Income Tax Act on the
computation of total income.
·
Though as per example given in the
Guidance Note, there is no impact on the profit. For correct impact of the
input and output duty on the profit only the figure which appears in the
accounts required to be taken on account. When accounting made on exclusion
basis duty on input/ duty on output and payment of the duty to govt. will not
be considered for the computation of profit. But all these accounted for in the
books of account. For the purpose of working out the impact of section 145A we
have to give impact of all these amounts which are part of books of account and
no other adjustment required.
1. To demonstrate the impact of section 145A I take following
example:
|
Particulars
|
Qty
|
Rate
|
Duty
|
|
Opening
Stock
|
10
|
10
|
2
|
|
Purchase
Raw Material
|
90
|
10
|
2
|
|
Other
Manufacturing Cost
|
90
|
10
|
|
|
Finished
Goods Manufactured
|
90
|
||
|
Sale
of Finished Goods
|
60
|
25
|
5
|
|
Closing
Stock of Raw Material
|
10
|
10
|
2
|
|
Closing
Stock of Finished Goods
|
30
|
20
|
2
|
·
Considering these figures Input Tax
Credit A/c and Output Duty A/c in the books of account will be as under:
Input Tax Credit A/c
Dr
Cr
|
Particular
|
Amount
|
Particular
|
Amount
|
|
To Opening Balance
|
20
|
By Output Duty A/c
(Input Credit Used against output duty)
|
200
|
|
To Creditor/ Bank
(Input on Purchase)
|
180
|
By Closing Balance
|
NIL
|
|
200
|
200
|
Output Duty A/c
Dr
Cr
|
Particular
|
Amount
|
Particular
|
Amount
|
|
To Input Tax Credit
(Input Credit Used against output duty)
|
200
|
By Debtor/ Bank
(Duty Payable on Sale)
|
300
|
|
To Bank
|
100
|
||
|
300
|
300
|
·
When effect of these figures
incorporated in the Table Given in the Para 23.15 of Guidance Note the same
will be as under:
|
Sl.
No.
|
Particulars
|
(Rupees)
Increase
in Profit
|
(Rupees)
Decrease in Profit
|
|
1
|
Increase
in cost of opening stock on inclusion of excise duty on which MODVAT credit
is available/availed (j - a)
|
20
|
|
|
2
|
Increase
in purchase cost of raw material on inclusion of excise duty on which MODVAT
credit is available/availed (k - b)
|
180
|
|
|
3
|
Increase
in sales of finished goods on inclusion of excise duty (s - h)
|
300
|
|
|
4
|
Excise
duty paid on sale of finished goods as a result of its inclusion in sales
(p-f)
|
100
|
|
|
5
|
Increase
in closing stock of raw material on inclusion of excise duty (l - c)
|
20
|
|
|
6
|
Increase
in closing stock of finished goods on inclusion of excise duty (t - i)
|
60
(Excise
Duty on Raw Material Included in Finished Goods)
|
|
|
7
|
Increase
in excise duty on closing stock of finished goods as a result of its
inclusion in closing stock of finished goods (q)
|
||
|
8
|
Accounting
of MODVAT credit availed and utilised on raw materials consumed in payment of
excise duty on finished goods accounted on the basis of raw material consumed
(m)
|
Since
accounting of availing credit has nullify by debiting the Output Duty A/c and
crediting Input Tax Credit A/c, there is no adjustment required for availing
input credit.
Otherwise
adjustment required in both side i.e. point 4 value will be 300 instead of
100 and value 200 appeared in this raw.
|
|
|
Total
|
380
|
300
|
|
|
Profit
Increased by 80
|
·
Reason for difference in profit:
.
Legislation intention is very clear that the expenditure of tax will be allowed
only when the same was actually paid to the Govt.
.
In the given example tax was not paid to the extent of Rs. 80/-. Input credit
is available at the time of purchase of goods irrespective of the actual
consumption of goods or sale of goods. In this case tax collected on sale to
the extent of Rs. 80/- was not paid to Govt. but adjusted against the input
credit of Closing stock laying with the assessee.
.
The impact was due to increase in closing stock and reduction of balance of
input tax credit. There was no change in closing stock of raw material and
therefore no impact due to raw material. Closing stock of finished goods
increased by 30 unit in which 30 unit of raw material consumed on which Rs.
60/- duty was paid claimed as expenditure (point 2 of table above), included in
the closing stock (point 6 of the table above), but since such Rs. 60/- was
adjusted against the output tax the payment of output tax to Govt. was lessor
in this year (point 4 of the table above). The remaining difference of Rs. 20/-
was due to presuming opening balance of Input Tax Credit which was claimed as
expenditure in the earlier year and adjusted from the output tax of the year.
.
That the increase in profit in the year is temporary and will be reversed when
the stock reduced.
·
Continuing the same example for
another year
|
Particulars
|
Qty
|
Rate
|
Duty
|
|
Opening
Stock of Raw Material
|
10
|
10
|
2
|
|
Opening
Stock of Finished Goods
|
30
|
20
|
2
|
|
Purchase
Raw Material
|
90
|
10
|
2
|
|
Other
Manufacturing Cost
|
100
|
10
|
|
|
Finished
Goods Manufactured
|
100
|
||
|
Sale
of Finished Goods
|
130
|
25
|
5
|
|
Closing
Stock of Raw Material
|
NIL
|
10
|
2
|
|
Closing
Stock of Finished Goods
|
NIL
|
20
|
2
|
·
Considering these figures Input Tax
Credit A/c and Output Duty A/c in the books of account will be as under:
Input Tax Credit A/c
Dr
Cr
|
Particular
|
Amount
|
Particular
|
Amount
|
|
To Opening Balance
|
NIL
|
By Output Duty A/c
(Input Credit Used against output duty)
|
180
|
|
To Creditor/ Bank
(Input on Purchase)
|
180
|
By Closing Balance
|
NIL
|
|
180
|
180
|
Output Duty A/c
Dr
Cr
|
Particular
|
Amount
|
Particular
|
Amount
|
|
To Input Tax Credit
(Input Credit Used against output duty)
|
180
|
By Debtor/ Bank
(Duty Payable on Sale)
|
800
|
|
To Bank
|
620
|
||
|
800
|
800
|
·
When effect of these figures
incorporated in the Table Given in the Para 23.15 of Guidance Note the same
will be as under:
|
Sl.
No.
|
Particulars
|
(Rupees)
Increase
in Profit
|
(Rupees)
Decrease in Profit
|
|
1
|
Increase
in cost of opening stock on inclusion of excise duty on which MODVAT credit
is available/availed (j - a)
|
80
(20+60)
|
|
|
2
|
Increase
in purchase cost of raw material on inclusion of excise duty on which MODVAT
credit is available/availed (k - b)
|
180
|
|
|
3
|
Increase
in sales of finished goods on inclusion of excise duty (s - h)
|
800
|
|
|
4
|
Excise
duty paid on sale of finished goods as a result of its inclusion in sales
(p-f)
|
620
|
|
|
5
|
Increase
in closing stock of raw material on inclusion of excise duty (l - c)
|
NIL
|
|
|
6
|
Increase
in closing stock of finished goods on inclusion of excise duty (t - i)
|
NIL
|
|
|
7
|
Increase
in excise duty on closing stock of finished goods as a result of its
inclusion in closing stock of finished goods (q)
|
||
|
8
|
Accounting
of MODVAT credit availed and utilised on raw materials consumed in payment of
excise duty on finished goods accounted on the basis of raw material consumed
(m)
|
Since
accounting of availing credit has nullify by debiting the Output Duty A/c and
crediting Input Tax Credit A/c, there is no adjustment required for availing
input credit.
|
|
|
Total
|
800
|
880
|
|
|
Profit
Decreased by 80
|
Regarding impact of VAT
·
The impact of section 145A is not
restricted to impact of excise duty only and the VAT or any other tax should
also be taken into consideration while determining the impact of Section 145A.
Regarding impact of duty paid on the purchase of capital goods on
which depreciation cannot be claimed due to Explanation 9 section 43(1).
·
Since by explanation 9 to section
43(1) restrict the cost of asset to be taken before the impact of duty of
excise or additional duty of custom, therefore no depreciation can be claimed
on such duty of excise or additional duty of custom. Due to section 145A excise
duty on sale against which credit of excise duty or additional custom is
adjusted treated as income, such payment of duty can be claimed as expenditure
while computing total income.
·
It may pertinent to note that
explanation 9 to section 43(1) restrict for only excise duty and additional
custom duty, therefore VAT or any other tax paid on such capital assets is
required to be added to the cost irrespective of any credit of such tax
allowable.
Given
below few recent case laws judgments in respect of section 145 and 145A.
·
Obligation is cast on the assessee to include
the excise duty in the closing stock and thereafter claim deduction. As the excise duty is not included
in the purchase price and therefore, assessee has not claimed any deduction, same requires to be remitted
back to assessing authority to consider the contentions of the assessee. Refer, CIT .v. Jayanthilal Surana, 222
Taxman 180.
·
Court held that it is not necessary that a
cash memo is required to be issued for each and every sale and, consequently, books of account could not be
rejected on the sole ground that only one consolidated cash memo was issued at the end of the day. Refer,
CIT .v. Prayag Wines, 364 ITR 660.
·
Assessee consumed Heptene and Catalyst for
its manufacturing process. AO having noticed that during previous year assessee consumed larger
quantity of Heptene and Catalyst compared to earlier years made matching addition in income of assesse. CIT
(A) following order of Tribunal made in assessee's own case for earlier assessment years 1994-95 and
1995-96 deleted impugned addition. Tribunal upheld order of CIT(A). Revenue had not carried order of
Tribunal made in earlier assessment years in further appeal. On appeal by revenue the Court up held the order
of Tribunal. Refer, CIT .v. Indu Nissan Oxo Chemical Industries Ltd, 43
taxmann.com 416.
·
Question pertaining to net profit rate
on estimation basis is a question of
fact. Refer, CIT.v. U.P. Co-operative Federation Ltd, 222 Taxman 179.
·
Assessing Officer is not entitled to reject books of account in a casual and
high-handed manner. Refer, CIT v. Teletronics Dealing Systems P. Ltd, Bombay
HC..
·
Since there was an apparent contradiction in
proposed draft order and final order without explaining any reason for same,
matter required examination. Refer, Cabot India Ltd. .v.Dy.CIT, 149
ITD 802.
·
Change of method of accounting to value the
stock of its investments / securities at lower of cost or market value is
valid.[S.28(i)]. Refer, ACIT .v. Bank of Maharashtra, Pune ITAT.
·
Profit being low cannot be a ground for
rejection of books of accounts. Refer, Dy. CIT .v. Hanuman Sugar (Khandsari)
Mills (P.) Ltd, 221 Taxman 156 (All.)(HC).
·
Method of accounting -Search and
seizure-Books of account not rejected-Unaccounted cash consideration found in the courses of
search and credited by the assessee in the books of account was to be assessed as income and not
the net profit of 20% offered by the assesse. [S.132, 145(3)]. Refer, ACIT v.
Rushabh Vatika, 149 ITD 46.
·
Method of accounting-Even if assessee is
following mercantile system, income cannot be
assessed if its collection/ receipt is not certain- “real income” v.
“hypothetical income” . Refer, Maruti Securities Ltd. .v. ACIT, Hyd ITAT.
·
Assessee was maintaining accounts on actual
receipt basis. He had shown interest income from fixed deposit receipts and mutual funds on receipt
basis. Tribunal observed that interest income must be taken on receipt basis. Order of Tribunal was
held to be justified. Refer, CIT v. Singh K.P. (Dr.), 97 DTR 289.
·
The assessee had produced sale bill of
minimum rate where as the AO took sale bill of maximum rate for working out the gross profit. The CIT(A)
applied rate of 22 per cent as against 18 per cent shown by assessee and directed to allow interest and
remuneration to the partners. The Department and the assessee both challenged the order of CIT(A). The
Tribunal deleted the addition sustained by the learned CIT(A) on account of
estimation by applying the GP rate at the rate of 22 per cent. The Tribunal
dismissed the appeal of the Department and allowed the appeal of the assessee .
Refer, ITO .v. Bharat Int. Udhyog, 159 TTJ 1.
·
The assessee had been valuing finished goods
at market value taking sale price of items in month of April of following accounting year while raw
material and semi-finished goods were valued on a cost basis in its books of account. The AO rejected the
books of accounts as the assessee was following two different methods. On an appeal before the High Court,
the latter held that there was no other discrepancy in accounts; hence, the books of accounts could
not be rejected. Refer, CIT .v. Sanspareils Greenlands (P) Ltd, 221 Taxman 193.
·
Method of valuation accepted by department
for earlier assessment years cannot be
disallowed for current year. Refer, CIT .v. Samsung India Electronics Ltd., 222
Taxman 21.
·
Loss on account of depreciation in value
of securities held as stock is not
notional & is allowable as a deduction. Refer, CIT .v. HDFC Bank Ltd, Bom
HC.
·
There was unaccounted consumption of raw
materials. However, there was no direct evidence of unaccounted sales outside the books of
account. Profit estimated at 35% of such extra consumption of raw materials. Refer, CIT .v. Leo Formulations P.
Ltd, 363 ITR 322.
·
When the net profit is determined on estimate
basis after rejecting the books of account, then no deduction including depreciation is allowed. Refer,
CIT .v. Sahu Construction P. Ltd, 362 ITR 609.
·
Land purchased by assessee was in dispute
before civil court. The dispute had an adverse impact on market value of land. Assessee reduced the
value of closing stock and there was no change in method of valuation. The Department accepted the value
as value of opening stock in subsequent year. Held, addition on account of undervaluation of
closing stock is not proper. Refer, CIT
.v. Satish Estate P. Ltd, 361 ITR 451.
·
Valuation of closing stock was to be made
excluding the amount of cess paid by the assessee. Refer, CIT .v. McLeod Russel
(India) Ltd, 361 ITR 663.
·
Assessee sold its drug manufacturing unit but
retained certain stock. On finding that drugs in stock were not saleable, valuation of stock at "nil"
was held to be justified. Refer, CIT .v. Wintac Ltd, 360 ITR 614.
·
No addition could be made on account of
undervaluation of stock in the current year due to finding by Tribunal that changed method was more
scientific and that no addition was made in prior years on account of undervaluation of stock. The
changed method was more scientific and did not result any evasion of payment of tax. Refer, CIT .v.
Dhampur Sugar Mills Ltd, 360 ITR 82.
·
Unverifiable expenses and non-maintenance of
stock register-Provision for foreseeable
losses is allowable as allowable. [S.37(1)]. Refer, ACIT .v. ITD Cementation
India Ltd, 98 DTR 452.
·
Closing stock of inventories valued at cost
or market value, whichever was lower. Provision for slow moving and obsolete inventory being net
increase in such inventory was debited to P&L account. Held, it was practically not possible to
determine market value of each and every part and necessity to maintain adequate inventory. Matter remanded.
Refer, General Motors India P. Ltd. .v. DCIT, 27 ITR 373.
·
Assessee had been regularly following system
of declaring interest as income during the year when it was actually realized. Yearly accrued
interest on FDR’s was calculated and credited in profit and loss account but while filing return of income, an
adjustment of actual interest realized during year was made and total taxable income was computed
accordingly. This method was accepted by the
department in earlier years. However, for relevant assessment year, the
A.O. included amount of interest not
realized during year in assessee’s chargeable income. When assessee had been
following a particular method of
accounting for interest on FDR’s, the A.O. could not include amount of unrealized interest to the assessee’s income.
Refer, Chaman Vatika Educational Society .v. Dy.CIT, 145 ITD 105.
·
Assessee changed method of accounting to
follow mandatory requirement of A.S.-15 Employee Benefits, issued by ICAI - which required
assessee to make provision for estimated liability on account of medical reimbursement and leave
travel allowance. The Tribuanl held that the liability could not be disallowed on ground of accrue /
crystallise only on receipt of claim by employee. Refer, Hero MotoCorp Ltd. .v.
ACIT, 60 SOT 25.
·
In prior years, the Department had accepted
the assessee’s method of accounting. Closed assessments were reopened, and reassessment orders were
passed, rejecting the method. On a writ petition filed by the assessee challenging the reassessment
orders, held, dismissing the petition:
Admittedly, an appellate remedy is available to the assessee as the reassessment
orders have been passed. Whether the
mandate of s. 145 has been followed or not and whether the Revenue was right
in its treatment of the accounts are
matters which can be gone into by the appellate authorities. As there is an efficacious alternative remedy in the
form of statutory appeals, writ petition cannot be entertained. Refer, Kone Elevators v. ACIT, 94
DTR 723.
·
Since AO as well as Appellate authorities had
not considered matter in proper perspective and
rejected books only on the basis of low profit ratio as compared to
earlier years, matter was to be remitted
back for fresh decision. Refer, Mahakoshal Pottaries .v. CIT, 218 Taxman 9.
·
When determination of turnover and profit was
based on various factors and all relevant materials had been taken into consideration while fixing
turnover at Rs. 2.30 crores, there was no legal infirmity in order of Tribunal. Refer, CIT .v. Modern
Rubber Industries, 218 Taxman 70.
·
Assessee was in the business of biri
manufacture. There was fall of consumption of tendu patta from 17-67 percent to 17.21 percent. Huge wastge
was shown of Rs 1.10 crores. AO made addition of Rs 82.46 lakhs. Since there was no sufficient
explanation for fall in gross profit rate, Commissioner (Appeals) sustained ad hoc addition of Rs.
27.48 lakhs being 1/3 of addition made by AO. The Tribunal affirmed order of Commissioner
(Appeals). Held on facts, there was no error of law in order of Tribunal. Refer, CIT .v. Shyam Biri Works
Ltd, 219 Taxman 151.
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