By K. B. Bhujle
Advocate
The
Pr. CIT vs. Yes Power and Infrastructure. Pvt. Ltd. [AY 2005-06] [Income tax
Appeal no. 813 of 2015 dated:20/02/2018 (Bombay High Court)]. [ACIT vs. Yes Power and Infrastructure. Pvt.
Ltd.[ITA No.7026/Mum/2012; dated 17/12/2014 ; Mum. ITAT ]
The assessee is engaged in
trading of steel and other engineering items. The A.O during year found that
the assessee had sales of Rs. 52.17 crore while gross profit was only Rs. 26.08
lakh. This led the A.O. to call for an explanation for such low profits from
the Assessee.
In response, the Assessee
pointed out that the company, is a concern mainly engaged in trading of steel
& engineering products. The company
purchase and sale these goods on very competitive low margin but our
volume are very high. Normally, company purchases the goods and resale them at
the minimum time gap. It is a known fact that rates of steel keep fluctuating
and it is a very volatile item. To avoid any risk due to market price
fluctuation, company has to take the
fast decision to sell at the available rate received from the market, some time
it may be sold on a low price or some times at a higher price. During the year,
some of the transactions are sold at lower price because of the expectation of
the rate of steel going lower and lower. Moreover, due to fact that assessee
works with a very small capital and no borrowing from banks, assessee does not
have capacity to hold stock for longer periods. Hence, company has to take
decision to sell and purchase, keeping the time gap at the minimum.
However, the A.O. did not
accept the explanation for low profits and rejected the books of accounts. This
on the ground that the purchase price of goods was much higher than the selling
price of those very items. On rejection of the books of accounts, the A.O.
estimated the gross profit on the basis of 2 percent of the sales. This
resulted in enhancement of gross profits from Rs. 26.08 lakh to Rs. 1.18 crore.
Being aggrieved with the
order, the assessee filed an Appeal to the CIT(A). The CIT(A) dismissed the
assessee’s appeal.
On further Appeal, the
Tribunal allowed the assessee’s Appeal. This inter alia on the ground
that it found that the assessee had along with return of income filed audited
accounts along with audit report for the subject assessment year. Moreover,
during the course of scrutiny, complete books of accounts with item-wise and
month-wise purchase and sales in quantitative details were also furnished. It
found that the A.O. did not find any defect in the books of accounts nor with
regard to quantity details furnished by the assessee. In the above
circumstances, it held that merely because the assessee being a trader has sold
goods at prices lower than the purchase price and/or the prevailing market
price would not warrant rejection of the books of accounts.
Being aggrieved with the
order, the revenue filed an Appeal to the High Court. The grievance of the
Revenue with the impugned order is that the assessee has sold goods at price
lower than its purchase price. Therefore, the books of accounts cannot be relied
upon. Thus, the rejection of the books of accounts and estimation of profits in
these facts should not have been interfered with.
The High Court held that it is not the case of the Revenue that
the amounts reflected as sale price and/or purchase price in the books do not
correctly reflect the sale and/or purchase prices. In terms of section 145(3)
of the Act, the A.O. is entitled to reject the books of accounts only on any of
the following condition being satisfied.
(i) Whether he is not
satisfied about the correctness or completeness of accounts; or
(ii) Whether the method of
accounting has not been regularly followed by the Assessee; or
(iii) The income has been
determined not in accordance with notified income and disclosure standard.
It is not the case of the Revenue that
any of the above circumstances specified in section 145(3) of the Act are
satisfied. The rejection of accounts is justified on the basis that it is not
possible for the assessee who is a trader to sell goods at the prices lower
than the market price or purchase price. In fact, as observed by the Apex
Court, Commissioner of Income Tax, Gujarat vs. A. Raman & Co. and in
S.A. Builders vs. Commissioner of Income Tax – 2, the law does not
oblige/compel a trader to make or maximise its profits. Accordingly, the
revenue Appeal was dismissed.
