VALIDITY OF REJECTION OF BOOKS OF ACCOUNTS ON GROUND OF MAINTAINING
SUBSTITUTE RECORDS
RATIO DECIDENDI
Maintenance of substitute records based on the principle of
balancing is no match for the statutory requirement of day-to-day
maintenance of registers by an assessee engaged in manufacturing and
trading activities; failure to maintain said registers contribute to
the completeness of accounts and deducing the stock particulars
based on the non-statutory `principle of balancing' contributes to
unreliable and inaccurate stock details; the `substitute records' do
not make the account of assessee complete and said inaccurate and
incomplete accounts of the assessee are adequate enough to
contribute to the adverse opinion of the AO, which is material in
matters of invoking the provisions of section 145 of the IT Act,
1961
IN THE ITAT, MUMBAI BENCH `I', MUMBAI
Sawrashtra Ball Pen Pvt. Ltd.
v
DCIT
ITA NO. 2689/MUM/2004
JULY 25, 2008
RELEVANT EXTRACTS:
** ** ** ** ** **
** ** ** ** ** **
12. Scope of section 145 : The AO assumes jurisdiction in
rejecting the books of accounts of the assessee by virtue of section
145 of the Income-tax Act relating to "Method of accounting'.
Section 145 as applicable to AY 91-92 reads as under:-
"145 (1) Income chargeable under the head "Profits and gains of
business or profession" or "Income from other sources" shall be
computed in accordance with the method of accounting regularly
employed by the assessee.
Provided that in any case where the accounts are correct and
complete to the satisfaction of the assessing officer but the method
employed is such that, in the opinion of the assessing officer, the
income cannot properly be deduced there from, then the computation
shall be made upon such basis and in such manner as the assessing
officer may determine.
Provided further ....
Provided also.....
(2) Where the Assessing Officer is not satisfied about the
correctness or completeness of the accounts of the assessee, or
where the method of accounting provided in sub-section (1) or
accounting standards as notified under sub-section (2), have not
been regularly followed by the assessee, the Assessing Officer may
make an assessment in the manner provided in section 144."
A. Sub-section (2) above is same as the sub section (3) of
the post amended section 145 of the Income tax Act has following
ingredients: (a) AO being not satisfied about the correctness or
completeness of the accounts of the assessee; (b) the very meaning
of the correctness and completeness of the accounts; and (c) making
of an assessment in the manner provided in section 145. The above
two ingredients (a) and (b) are relevant for rejection of the
accounts of the assessee. Before analysing the phrases of AO being
net satisfied' and the 'correctness and completeness of the
accounts', it is necessary to elaborate on what constitutes
the "accounts of the assessee' used in conjunction with
the 'correctness or completeness. The same has not been defined in
the Act in that form. However, the Finance Act, 2001 introduced
clause 12(A) of section 2 providing for an inclusive definition
for "books or books of accounts". The clause 12(1) reads as follows:-
"(12A) "Books or books of accounts includes" ledgers, day-books,
cash books, account-books and other books, whether kept in written
form or as print-outs of the data stored in a floppy, disc, tape or
any other form of electromagnetic data storage device."
B. The above definition provides the list of books to be
kept and manner of keeping whether any print or electronic forms.
The ^day-books' is not defined, nevertheless, it is in the common
knowledge it refers to certain registrar's to be maintained to
contain the details of each day particulars with reference to raw
materials received or issued or consumed or stock of raw materials
remained in stores in respect of both manufacturing or / and trading
or any other day-to-day activities of the business. Therefore, the
definition given in clause (12A) of section 2 is reasonably
important for understanding the phrase 'accounts of the assessee'
mentioned in the pre-amended section 145(2). The combined reading of
the above said provisions read with section 44AB and other
guidelines issued in connection with the books of accounts to be
mainted by the class of assessee's of this kind, adequately
advocates for maintenance of the said registers/day-books apart from
other books/ledgers enlisted in clause (12A) of section 2. In other
words, the requirement of maintaining day-to-day registers for day-
to-day production and day-to-day stock registers is thus a statutory
requirement of the assessee-company, which is engaged in
manufacturing and trading activities during the year. Having upheld
the importance of such day today registers, we need to elaborate on
the meaning of `correctness and completeness of assessee's accounts.
C. The completeness of accounts refers not only to the
accounting entries for all the transaction done. In the previous
year but also to the list of ledger/books of accounts as described
in clause (12A) above and logically it also refers to the support
registers, documents, bills, invoices etc. In other words, the
failure to maintain relevant registers or any other books described
in the list makes the accounts of the assessee incomplete. On the
other hand, the correctness of the accounts refers to the quality or
accuracy or reliability of the accounts maintained by the assessee
and it covers the reconcilable mistakes or errors in accounts. Thus,
the completeness refers to list of books of accounts and entries
therein and the accuracy refers to the quality of the accounts of
the assessee.
D. Regarding the rejection of books of accounts, `accepting
the books of accounts of the assessee is a rule and rejecting the
same is an exception'. This is the principle in existence. Keeping
it in mind, we have analysed the assessee's failure to maintain the
day to day registers in respect of its manufacturing and trading
activities, as the assessee company various decisions on the issue.
In this regard, the Allahabad High Court has held in the cases of
Bharat Milk Products (20 CTR 164), Omex Shoe Factory (281ITR 268)
and Vimal Kumar Anant Kumar (288 ITR 278) that "it is necessary to
maintain production registers, a day-to day records of production
and consumption register and raw materials. Unless the consumption
for raw material and production register relating to manufactured
goods are maintained the production could not be verified these
reasons are sufficient to invoke. Section 145 of the Income-tax Act,
1961". Hon' ble jurisdictional High Court, in the case of Bastiram
Narayandas Maheswari (210 ITR 438), held that the failure to
maintain the day-to-day registers showing the manufacturing of day-
to-day products and consumptions of raw material, contributes to the
dissatisfaction of the AO about the fairness or correctness of the
accounts and thus the AO is empowered to make the best judgment
assessment.
E. Regarding the 'AO being not satisfied' about the
correctness and completeness of the assessee's accounts, the
Calcutta High Court judgment in the case of Ashok Refractories Pvt.
Ltd (279 ITR 457) is relevant. In the said case, the Hon' ble High
Court held that in order to reject the accounts, the AO has to come
to an opinion that the income cannot be properly deduced from the
accounts so maintained. In order to arrive at such conclusion, it
must be shown that the AO has taken into consideration relevant
factors and not omitted to consider the material before him.
F. Thus, the provisions of section 145 rws 2(12A) supposes
that the assessee's books of accounts must include the day-to-day
registers for production and stocks and stocks in brokers as the
assessee is the manufacturer and trader of Ball Pen, Refill, Sketch
Pen, Micro Tip Pen, Sharp Pencil and Pencil Lead. Undoubtedly, such
registers are necessary to be maintained by the assessee for
arriving at the correct profits. Any substitute records maintained
as admittedly is the case with the instant case is no match for the
above registers/ books which are maintained on actual. In the
present case, admittedly, the assessee has not maintained the day-to-
day production registers, consumption and production of raw
materials. Assessee's submission is given in sub-para b of Para 6
above that non-maintenance of day-to-day registers and stock
register do not impact the validity of the books of accounts shall
not made the statutory requirements of maintaining completeness of
the accounts of the assessee and the satisfaction of the AO in this
regard. Accordingly, AO tailed to apply such statutory requirements.
13. The above scope of the provisions of section 145 conclusively
establishing the fact that, what is important for rejection of books
is the AO being not satisfied about the correctness and completeness
of the accounts and it is not the question of assessee establishing
the method applied is fit enough to deduce from the accounts the
correct profits. But, it is the AO's opinion, which is material and
said opinion should be about both correctness and completeness as
the conjunction 'and' is used. As held by the Hon'ble Calcutta High
Court in the case of Ashok Refractory P. Ltd. (supra), however the
AO is under obligation to take into consideration various factors
and not omitted considering the material before him while exercising
such discretion. In the light of the above scope, we proceed to
examine the fact of the instant case.
14. Assessee manufactures the Ball Pen, Sketch Pens,
Refills, Microtip or Sharp Pencils and pencil leads and is engaged
in trading of the same. Turn over of the assessee as the impugned
books is above Rs 6 crores. Maintenance of books of accounts
including the day-to-day registers is not only expected of the
assessee but also the mandatory responsibility of the assessee.
These are very vital registers as they are normally maintained on
actuals and day-to-day quantities of raw materials received, issued
to the production departments, products manufactures, work in
progress details etc. In the absence of such registers, arriving at
the figures of closing stock of raw materials or others stock
details basing on the assessee's method of balancing principle
method is certainly is not free from inaccuracies. Assessee s method
assumes that there shall not be any loss of stocks, wastages, by
products, if any, which is not the case in any manufacturing
Industry.
15. We have also attended to the assessee's arguments
that "substitute records" detailed above in sub para (b) of para 6
of this order. We have perused the substitute records based
statements filed before us. All the charts are essentially based on
basic principle of `balancing principle' so far as the stock and
production is concerned, which we feel is not free from inaccuracies
and therefore, they suffer from accuracy or veracity. Such
calculations completely exclude the possibility of spilling,
production loss, bye productions, scrap, if any, which is common in
any manufacturing industry. More than anything, assessee did not
have explanations for it decision to not to maintain such vital day-
to-day registers. There is no explanation from the assessee for
resorting to the "substitute records". In view of the admitted fact
that the balance principle is followed by the assessee while
arriving at the vital figures relating to stock and certainly not on
the basis of actuals determined with the help of the day-to-day
registers, which itself supports the AOs adverse opinion about the
correctness and completeness of the accounts. Regarding
the 'substitute records', we find that they are not books or books
of accounts, which is fortified by the subsequently amended
provisions of clause (12A) of section 2. We fail to see the point as
to why assessee did not maintain the said registers and resort to
other unapproved substitutes. AR for the assessee has not brought on
record to establish that the maintaining accounts with the help of
substitutes is an approved method by itself. Therefore, maintaining
the substitute records based on the principle of balancing, is no
match for day to day-to-day registers maintained basing on the
actuals. Therefore, we are of the considered opinion that the
failure to maintain the said registers contribute to the
completeness of accounts and deducing the stock particulars based on
the non-statutory `principles of balancing' contributes to
unreliable and inaccurate stock details. The `substitute records' do
not make the accounts of assessee complete. In the facts of the
case, the AO cannot be said to have omitted to consider any
particulars place before him to deduce the correct profits of the
assessee for the instant year. Thus, we are of the opinion that the
said inaccurate and incomplete of accounts of the assessee are
adequate enough to contribute to the adverse opinion of the AO,
which is material in matters of invoking the provisions of section
145 of the Income tax Act, 1961.
Therefore, we are of the considered opinion that the books are
validly rejected and hence, the order of the CIT(A) does not call
for any interference in this regard. Having decided the validity of
rejection of the books of accounts for the AY 91-92, we proceed to
examine the merits of making of an assessment by estimating the
gross profits.
** ** ** ** ** **
** ** ** ** ** **
VALIDITY OF REJECTION OF BOOKS OF ACCOUNTS ON GROUND OF MAINTAINING
SUBSTITUTE RECORDS
RATIO DECIDENDI
Maintenance of substitute records based on the principle of
balancing is no match for the statutory requirement of day-to-day
maintenance of registers by an assessee engaged in manufacturing and
trading activities; failure to maintain said registers contribute to
the completeness of accounts and deducing the stock particulars
based on the non-statutory `principle of balancing' contributes to
unreliable and inaccurate stock details; the `substitute records' do
not make the account of assessee complete and said inaccurate and
incomplete accounts of the assessee are adequate enough to
contribute to the adverse opinion of the AO, which is material in
matters of invoking the provisions of section 145 of the IT Act,
1961
IN THE ITAT, MUMBAI BENCH `I', MUMBAI
Sawrashtra Ball Pen Pvt. Ltd.
v
DCIT
ITA NO. 2689/MUM/2004
JULY 25, 2008
RELEVANT EXTRACTS:
** ** ** ** ** **
** ** ** ** ** **
12. Scope of section 145 : The AO assumes jurisdiction in
rejecting the books of accounts of the assessee by virtue of section
145 of the Income-tax Act relating to "Method of accounting'.
Section 145 as applicable to AY 91-92 reads as under:-
"145 (1) Income chargeable under the head "Profits and gains of
business or profession" or "Income from other sources" shall be
computed in accordance with the method of accounting regularly
employed by the assessee.
Provided that in any case where the accounts are correct and
complete to the satisfaction of the assessing officer but the method
employed is such that, in the opinion of the assessing officer, the
income cannot properly be deduced there from, then the computation
shall be made upon such basis and in such manner as the assessing
officer may determine.
Provided further ....
Provided also.....
(2) Where the Assessing Officer is not satisfied about the
correctness or completeness of the accounts of the assessee, or
where the method of accounting provided in sub-section (1) or
accounting standards as notified under sub-section (2), have not
been regularly followed by the assessee, the Assessing Officer may
make an assessment in the manner provided in section 144."
A. Sub-section (2) above is same as the sub section (3) of
the post amended section 145 of the Income tax Act has following
ingredients: (a) AO being not satisfied about the correctness or
completeness of the accounts of the assessee; (b) the very meaning
of the correctness and completeness of the accounts; and (c) making
of an assessment in the manner provided in section 145. The above
two ingredients (a) and (b) are relevant for rejection of the
accounts of the assessee. Before analysing the phrases of AO being
net satisfied' and the 'correctness and completeness of the
accounts', it is necessary to elaborate on what constitutes
the "accounts of the assessee' used in conjunction with
the 'correctness or completeness. The same has not been defined in
the Act in that form. However, the Finance Act, 2001 introduced
clause 12(A) of section 2 providing for an inclusive definition
for "books or books of accounts". The clause 12(1) reads as follows:-
"(12A) "Books or books of accounts includes" ledgers, day-books,
cash books, account-books and other books, whether kept in written
form or as print-outs of the data stored in a floppy, disc, tape or
any other form of electromagnetic data storage device."
B. The above definition provides the list of books to be
kept and manner of keeping whether any print or electronic forms.
The ^day-books' is not defined, nevertheless, it is in the common
knowledge it refers to certain registrar's to be maintained to
contain the details of each day particulars with reference to raw
materials received or issued or consumed or stock of raw materials
remained in stores in respect of both manufacturing or / and trading
or any other day-to-day activities of the business. Therefore, the
definition given in clause (12A) of section 2 is reasonably
important for understanding the phrase 'accounts of the assessee'
mentioned in the pre-amended section 145(2). The combined reading of
the above said provisions read with section 44AB and other
guidelines issued in connection with the books of accounts to be
mainted by the class of assessee's of this kind, adequately
advocates for maintenance of the said registers/day-books apart from
other books/ledgers enlisted in clause (12A) of section 2. In other
words, the requirement of maintaining day-to-day registers for day-
to-day production and day-to-day stock registers is thus a statutory
requirement of the assessee-company, which is engaged in
manufacturing and trading activities during the year. Having upheld
the importance of such day today registers, we need to elaborate on
the meaning of `correctness and completeness of assessee's accounts.
C. The completeness of accounts refers not only to the
accounting entries for all the transaction done. In the previous
year but also to the list of ledger/books of accounts as described
in clause (12A) above and logically it also refers to the support
registers, documents, bills, invoices etc. In other words, the
failure to maintain relevant registers or any other books described
in the list makes the accounts of the assessee incomplete. On the
other hand, the correctness of the accounts refers to the quality or
accuracy or reliability of the accounts maintained by the assessee
and it covers the reconcilable mistakes or errors in accounts. Thus,
the completeness refers to list of books of accounts and entries
therein and the accuracy refers to the quality of the accounts of
the assessee.
D. Regarding the rejection of books of accounts, `accepting
the books of accounts of the assessee is a rule and rejecting the
same is an exception'. This is the principle in existence. Keeping
it in mind, we have analysed the assessee's failure to maintain the
day to day registers in respect of its manufacturing and trading
activities, as the assessee company various decisions on the issue.
In this regard, the Allahabad High Court has held in the cases of
Bharat Milk Products (20 CTR 164), Omex Shoe Factory (281ITR 268)
and Vimal Kumar Anant Kumar (288 ITR 278) that "it is necessary to
maintain production registers, a day-to day records of production
and consumption register and raw materials. Unless the consumption
for raw material and production register relating to manufactured
goods are maintained the production could not be verified these
reasons are sufficient to invoke. Section 145 of the Income-tax Act,
1961". Hon' ble jurisdictional High Court, in the case of Bastiram
Narayandas Maheswari (210 ITR 438), held that the failure to
maintain the day-to-day registers showing the manufacturing of day-
to-day products and consumptions of raw material, contributes to the
dissatisfaction of the AO about the fairness or correctness of the
accounts and thus the AO is empowered to make the best judgment
assessment.
E. Regarding the 'AO being not satisfied' about the
correctness and completeness of the assessee's accounts, the
Calcutta High Court judgment in the case of Ashok Refractories Pvt.
Ltd (279 ITR 457) is relevant. In the said case, the Hon' ble High
Court held that in order to reject the accounts, the AO has to come
to an opinion that the income cannot be properly deduced from the
accounts so maintained. In order to arrive at such conclusion, it
must be shown that the AO has taken into consideration relevant
factors and not omitted to consider the material before him.
F. Thus, the provisions of section 145 rws 2(12A) supposes
that the assessee's books of accounts must include the day-to-day
registers for production and stocks and stocks in brokers as the
assessee is the manufacturer and trader of Ball Pen, Refill, Sketch
Pen, Micro Tip Pen, Sharp Pencil and Pencil Lead. Undoubtedly, such
registers are necessary to be maintained by the assessee for
arriving at the correct profits. Any substitute records maintained
as admittedly is the case with the instant case is no match for the
above registers/ books which are maintained on actual. In the
present case, admittedly, the assessee has not maintained the day-to-
day production registers, consumption and production of raw
materials. Assessee's submission is given in sub-para b of Para 6
above that non-maintenance of day-to-day registers and stock
register do not impact the validity of the books of accounts shall
not made the statutory requirements of maintaining completeness of
the accounts of the assessee and the satisfaction of the AO in this
regard. Accordingly, AO tailed to apply such statutory requirements.
13. The above scope of the provisions of section 145 conclusively
establishing the fact that, what is important for rejection of books
is the AO being not satisfied about the correctness and completeness
of the accounts and it is not the question of assessee establishing
the method applied is fit enough to deduce from the accounts the
correct profits. But, it is the AO's opinion, which is material and
said opinion should be about both correctness and completeness as
the conjunction 'and' is used. As held by the Hon'ble Calcutta High
Court in the case of Ashok Refractory P. Ltd. (supra), however the
AO is under obligation to take into consideration various factors
and not omitted considering the material before him while exercising
such discretion. In the light of the above scope, we proceed to
examine the fact of the instant case.
14. Assessee manufactures the Ball Pen, Sketch Pens,
Refills, Microtip or Sharp Pencils and pencil leads and is engaged
in trading of the same. Turn over of the assessee as the impugned
books is above Rs 6 crores. Maintenance of books of accounts
including the day-to-day registers is not only expected of the
assessee but also the mandatory responsibility of the assessee.
These are very vital registers as they are normally maintained on
actuals and day-to-day quantities of raw materials received, issued
to the production departments, products manufactures, work in
progress details etc. In the absence of such registers, arriving at
the figures of closing stock of raw materials or others stock
details basing on the assessee's method of balancing principle
method is certainly is not free from inaccuracies. Assessee s method
assumes that there shall not be any loss of stocks, wastages, by
products, if any, which is not the case in any manufacturing
Industry.
15. We have also attended to the assessee's arguments
that "substitute records" detailed above in sub para (b) of para 6
of this order. We have perused the substitute records based
statements filed before us. All the charts are essentially based on
basic principle of `balancing principle' so far as the stock and
production is concerned, which we feel is not free from inaccuracies
and therefore, they suffer from accuracy or veracity. Such
calculations completely exclude the possibility of spilling,
production loss, bye productions, scrap, if any, which is common in
any manufacturing industry. More than anything, assessee did not
have explanations for it decision to not to maintain such vital day-
to-day registers. There is no explanation from the assessee for
resorting to the "substitute records". In view of the admitted fact
that the balance principle is followed by the assessee while
arriving at the vital figures relating to stock and certainly not on
the basis of actuals determined with the help of the day-to-day
registers, which itself supports the AOs adverse opinion about the
correctness and completeness of the accounts. Regarding
the 'substitute records', we find that they are not books or books
of accounts, which is fortified by the subsequently amended
provisions of clause (12A) of section 2. We fail to see the point as
to why assessee did not maintain the said registers and resort to
other unapproved substitutes. AR for the assessee has not brought on
record to establish that the maintaining accounts with the help of
substitutes is an approved method by itself. Therefore, maintaining
the substitute records based on the principle of balancing, is no
match for day to day-to-day registers maintained basing on the
actuals. Therefore, we are of the considered opinion that the
failure to maintain the said registers contribute to the
completeness of accounts and deducing the stock particulars based on
the non-statutory `principles of balancing' contributes to
unreliable and inaccurate stock details. The `substitute records' do
not make the accounts of assessee complete. In the facts of the
case, the AO cannot be said to have omitted to consider any
particulars place before him to deduce the correct profits of the
assessee for the instant year. Thus, we are of the opinion that the
said inaccurate and incomplete of accounts of the assessee are
adequate enough to contribute to the adverse opinion of the AO,
which is material in matters of invoking the provisions of section
145 of the Income tax Act, 1961.
Therefore, we are of the considered opinion that the books are
validly rejected and hence, the order of the CIT(A) does not call
for any interference in this regard. Having decided the validity of
rejection of the books of accounts for the AY 91-92, we proceed to
examine the merits of making of an assessment by estimating the
gross profits.
** ** ** ** ** **
** ** ** ** ** **
