The DCIT, Circl-10,, Ahmedabad v. M/s. Associated Petroleum Corporation, Ahmedabad

ITA 2308/AHD/2008 | 2004-2005
Pronouncement Date: 31-08-2010 | Result: Dismissed

Appeal Details

RSA Number 230820514 RSA 2008
Bench Ahmedabad
Appeal Number ITA 2308/AHD/2008
Duration Of Justice 2 year(s) 2 month(s) 13 day(s)
Appellant The DCIT, Circl-10,, Ahmedabad
Respondent M/s. Associated Petroleum Corporation, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 31-08-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 31-08-2010
Date Of Final Hearing 26-07-2010
Next Hearing Date 26-07-2010
Assessment Year 2004-2005
Appeal Filed On 17-06-2008
Judgment Text
- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE S/SHRI MUKUL KR. SHRAWAT JM AND D.C.AGRAWAL AM DY. CIT CIRCLE-10 AHMEDABAD. VS. M/S ASSOCIATED PETROLEUM CORPORATION C.G. ROAD AHMEDABAD. (APPELLANT) .. (RESPONDENT) AND M/S ASSOCIATED PETROLEUM CORPORATION C.G. ROAD AHMEDABAD. VS. DY. CIT CIRCLE-10 AHMEDABAD. (APPELLANT) .. (RESPONDENT) REVENUE BY :- SHRI K. MADHUSUDAN SR.D.R. ASSESSEE BY:- SHRI S. N. SOPARKAR & SHRI BANDISH SOPARKAR ARS O R D E R PER D. C. AGRAWAL ACCOUNTANT MEMBER . THESE ARE TWO CROSS APPEALS ONE FILED BY THE DEPA RTMENT AND THE OTHER BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT( A) DATED 28.3.2008. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUND IN I TS APPEAL :- ITA NO.2308/AHD/2008 ASST. YEAR :2004-05 ITA NO.2333/AHD/2008 ASST. YEAR :2004-05 ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 2 (1) THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS BY RES TRICTING THE DISALLOWANCE ON ACCOUNT OF SHORTAGE OF PETROL/DIESE L TO THE EXTENT OF RS.1 83 200/- GIVING RELIEF OF RS.5 85 47 6/-. WHEREAS THE ASSESSEE HAS RAISED FOLLOWING GROUNDS : - 1) LD. CIT(A) HAS ERRED IN FACTS AND IN LAW IN CONF IRMING ACTION OF AO IN REJECTING BOOK RESULTS OF THE ASSESSEE WITHOU T REJECTING BOOKS OF ACCOUNTS AS THERE IS NOT A SINGLE DEFECT I N THE BOOKS OF ACCOUNTS. 2) LD. CIT(A) HAS ERRED IN FACTS AND IN LAW I N ADOPTING SHORTAGES OF LAST 3 YEARS AS A BASE TO HOLD SHORTAGE IN SALE OF PETROL AT 0.87% AND DIESEL AT 0.38% TO BE REASONABLE AND FURTHER ERRED IN CONFIRMING DISALLOWANCE OF EXCESS SHORTAGE. 3. THE FACTS OF THE CASE ARE THAT ASSESSEE IS RUNNI NG A PETROL PUMP AT WHICH IT IS SELLING PETROL AND DIESEL. DURING THE Y EAR UNDER CONSIDERATION ASSESSEE DECLARED SALES OF PETROL TO THE TUNE OF RS .19 18 87 640/- SALE OF PREMIUM PETROL AT RS.6 49 43 393/-. TOTAL SALES OF ITEMS INCLUDING DIESEL SUPER DIESEL OIL AND KEROSENE AND LDO HAS BEEN DEC LARED AT RS.37 86 22 483/- GIVING GP OF RS.87 29 367/- WHICH IS ABOUT 2.3 PERCENTAGE AS COMPARED TO 2% IN THE LAST YEAR ON A TURNOVER OF RS.1 37 42 247/- GIVING GP OF RS.1 01 33 947/-. THE AO EXAMINED SHORTAGE IN PETROL AND DIESEL AND FOUND THAT ASSESS EE HAS SHOWN SHORTAGE OF 0.94% IN PETROL 0.47% IN PREMIUM PETROL 0.70% IN DIESEL AND 0.08% IN SUPER DIESEL. ACCORDING TO THE AO SHORTAGE SHOWN BY THE ASSESSEE IN PETROL AND DIESEL WAS FOUND TO BE EXCESSIVE AS COMP ARED TO SIMILAR PRODUCTS SOLD BY THE ASSESSEE OR BY OTHER PETROL PU MP DEALERS. THE ASSESSEE EXPLAINED TO THE AO WHY THERE IS SUCH SHOR TAGE AND WHY IT SHOULD BE ACCEPTED. THE REASONS ARE SUMMARISED AS P ER LD. CIT(A) AS UNDER :- (A) THE SHORTAGE IN PREMIUM PETROL HAS BEEN SHOWN AT 0. 47% WHEREAS IN THE NORMAL PETROL IT HAS BEEN SHOWN AT 0.94% FOR ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 3 WHICH THERE IS NO EXPLANATION. AS PER THE MARKETING DISCIPLINE GUIDELINES OF THE PETROL MARKETING COMPANIES EVAPORATION/HANDLING LOSS IS AT MAXIMUM OF 0.60% IN PETROL AND 0.20% IN DIESEL. (B) THE CIRCULARS OF FOOD CONTROL & CIVIL SUPPLY DEPTT. ARE FOR MAKING THE SEIZURE AND CONFISCATION OF THE STOCK IN CASE OF EXCESS DISCREPANCY AND ADULTERATION WHICH ARE NOT A PPLICABLE IN THE CASES OF NORMAL SHORTAGE AND THEY DO NOT JUSTIF Y EXCESSIVE SHORTAGE. (C) THE RESULTS OF COMPARABLE CASE OF MAHENDRA MOTORS A RE RELEVANT IN THE APPELLANTS CASE. (D) DUE TO AUTOMATION OF PETROL PUMPS THERE IS NO QUEST ION OF OVER FLOW OR MISHANDLING AS CLAIMED BY THE ASSESSEE. (E) THE ASSESSEES DAILY REPORTS OF PHYSICAL STOCK ARE STATEMENTS PREPARED AT A PARTICULAR TIME ONLY. THIS DOES NOT P ROVE ANY STOCK TAKING ON DAILY BASIS. THE ASSESSEE IS AT LIBERTY T O ADJUST THE SALE AS IS EVIDENT FROM VARIATION OF SHORTAGE WHICH EXTE NDS FROM 0.6% TO 1.3% SHOWN BY THE ASSESSEE. (F) ASSESSEES CLAIM THAT FOOD CONTROL & CIVIL SUPPLY D EPTT. HAS ACCEPTED THE SHORTAGE UPTO 1% IN THE PETROL AND 0.4 % IN THE DIESEL IS NOT RELEVANT AS THIS IS FOR THE PURPOSE O F PREVENTION OF ADULTERATION AND SHORT DELIVERY. THESE MARGINS ARE ALWAYS SET AT THE HIGHER LEVEL. THE REPRESENTATION OF PETROL DEAL ERS TO GOVT. OF GUJARAT TO ACCEPT THE SHORTAGE OF 1% IN PETROL A ND 0.4% IN DIESEL IS ONLY TO AVOID THE SEIZURE AND CONFISCATIO N IN EXCEPTIONAL CASES AND IS NOT THE NORMAL EVAPORATION AND HANDLING LOSS. (G) THE OPINION OF PROFESSOR OF I.I.T. SUBMITTED BY THE APPELLANT IS NOT BASED ON THE ACTUAL MEASUREMENT OF LOSS/WASTAGE AND CANNOT BE RELIED UPON. (H) THE MARKETING DISCIPLINE GUIDELINES PREPARED BY THE PUBLIC SECTOR OIL COMPANIES IN INDIA CLEARLY SHOWS THAT PE RMISSIBLE LOSS IS 0.6% IN PETROL AND 0.25 TO 0.25% IN DIESEL. THESE GUIDELINES ARE PREPARED AFTER THE DETAILED STUDY AN D LOSS GIVEN ARE MAXIMUM LOSSES AND ARE APPLICABLE TO THE PETROL DEALERS. ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 4 (I) IN COMPARABLE CASE OF MAHENDRA MOTORS THE LOSS OF PETROL IS 0.58% AND THAT OF DIESEL IS 0.23% WHICH IS OPERATIN G UNDER THE SAME CONDITIONS AS APPELLANT. MOREOVER THE LOSS ON EVAPORATION AND HANDLING IS MORE IF THE QUANTITY SOLD IS LESS. SO ASSESSEES LOSS SHOULD BE LESS THAN THAT OF M/S MAHENDRA MOTOR S. (J) THE AO HAS REJECTED THE CONTENTION OF THE APPELLANT THAT HON. GUJARAT HIGH COURT VIDE THEIR ORDER DATED 11.06.96 HAS RELEASED THE STOCK OF APPELLANT CONFISCATED BY THE CIVIL DEP ARTMENT. IT HAS BEEN MENTIONED THAT ISSUE FOR ACTUAL LOSS IN PE TROL AND DIESEL WAS NOT EXAMINED BY THE HON. GUJARAT HIGH COURT AND THE STOCK WAS RELEASED ON THE GROUND THAT NO ADULTERATION OR ILLEGALITY WAS DETECTED. (K) IT WAS ALSO MENTIONED THAT ASSESSEES PLEA THAT NO ADDITIONS ON THIS ACCOUNT WERE MADE IN EARLIER YEARS IS NOT ACCE PTABLE AS EVERY YEAR IS SEPARATE ASSESSMENT..CONSIDERING ALL THE ABOVE FACTORS IT WAS TREATED THAT SHORTAGE TO THE EXTENT OF 0.58% IN PETROL AND 0.32% IN DIESEL AS IN THE COMPARABLE CAS E OF M/S MAHENDRA MOTORS IS REASONABLE AND BALANCE CLAIM OF THE APPELLANT OF EXCESS SHORTAGE WAS DISALLOWED. THE AO HOWEVER DID NOT AGREE WITH THE ABOVE CONTE NTIONS OF THE ASSESSEE. HE NOTED AS UNDER :- (1) PETROL AND PREMIUM PETROL ARE SAME. SHORTAGE IN PREMIUM PETROL IS 0.47% WHEREAS IN DECLARING THERE IS NO LOGIC OR EXP LANATION. (2) AS PER PETROLEUM MARKET GUIDELINES MAXIMUM SHOR TAGE IN PETROL WOULD BE 0.60% AND IN DIESEL 0.20%. (3) THE CIRCULAR ISSUED BY THE FOOD & CIVIL SUPPLIE S DEPARTMENT IS NOT APPLICABLE TO DETERMINE THE EXCESS LOSS IN PETROL A ND DIESEL SUPPLY BUT TO FIND OUT THE STOCK AND CARRY OUT CONFISCATIO N FOR EXTRAORDINARY DISCREPANCY. (4) THE ASSESSEE IS NOT MANUFACTURER OF PETROL. THE ASSESSEE IS LIKE ANY OTHER DEALERS THEREFORE LOSSES/SHORTAGE SUFFERED SHOULD BE COMPARABLE TO THOSE OF OTHER DEALERS. ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 5 (5) MEASUREMENT OF PETROL AND DIESEL IS DONE ELECTR ONICALLY. THERE IS NO QUESTION OF OVERFLOW OR MISHANDLING IF AT ALL T HERE IS LOSS IT IS PASSED ON TO THE CUSTOMERS. (6) THE ASSESSEE IS NOT PREPARING DAILY PHYSICAL ST OCK REPORT. THE STATEMENTS SUBMITTED ARE PREPARED AT A SINGLE POINT OF TIME. THEY ARE NOT PROOF OF STOCK ON DAILY BASIS. (7) SALE OF PETROL AND DIESEL IS EVEN DONE WITHOUT BILL SINCE CUSTOMERS MAY NOT NEED IT. THE ASSESSEE IS AT LIBERTY TO SHOW AND ADJUST THE SALE AS PER ITS SWEET WILL. IN THE MONTH OF JULY 2 003 SHORTAGE WAS 1.15% IN AUGUST 2003 SHORTAGE WAS 1.3% AND IN JAN UARY 2004 SHORTAGE WAS 0.65%. THUS THERE IS A LARGE VARIATION IN SHORTAGE. THE REPORT PREPARED BY IIT PROFESSOR IS ON BEHALF O F PETROL/DIESEL ASSOCIATION AND WAS MEANT TO CLAIM HIGHER COMMISSIO N FROM THE PETROLEUM COMPANIES WHICH DOES NOT JUSTIFY ACTUAL L OSS OR WASTAGE. (8) GUIDELINES ISSUED BY OIL COMPANIES ARE PREPARED BY ALL PUBLIC SECTOR OIL COMPANIES OF INDIA CONSIDERING THE OVERA LL SITUATION IN THE COUNTRY AND MAXIMUM LOSS THAT MAY OCCUR BUT IT WILL NOT APPLY TO ACTUAL AND INDIVIDUAL PETROL DEALER. (9) A SIMILAR DEALER IN PETROLEUM I.E. MAHENDRA MOT ORS HAS SHOWN LOSS OF 0.58% IN PETROL AND 0.23% IN DIESEL. ACCORDINGLY THE AO REJECTED THE CLAIM OF LOSS. HE A LLOWED LOSS TO THE EXTENT OF 0.58% IN PETROL AND 0.23% IN DIESEL AND W ORKED OUT THE EXCESS WASTAGE CLAIMED. HE ACCORDINGLY MADE THE ADDITION O F RS.7 68 476/-. 4. THE LD. CIT(A) CONSIDERED THE PAST HISTORY OF TH E ASSESSEE ACCORDING TO WHICH LOSS IN PETROL WAS AS UNDER :- ASST. YEAR PERCENTAGE 2001-02 0.85% 2002-03 0.83% 2003-04 0.88% AND THAT IN DIESEL WAS AS UNDER :- ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 6 ASST. YEAR PERCENTAGE 2001-03 0.27% 2002-03 0.31% 2003-04 0.38% CONSIDERING THE HISTORY OF THE CASE LD. CIT(A) DIRE CTED THE AO TO ALLOW A LOSS OF 0.87% IN PETROL AND 0.38% IN DIESEL ON ACCO UNT OF SHORTAGE AND WORK OUT THE ADDITION. AS PER DIRECTION OF THE LD. CIT(A) THE ADDITION WORKED OUT ON ACCOUNT OF EXCESS CLAIM OF LOSS WAS R S.1 83 200/-. 5. BEFORE US THE LD. AR FOR THE ASSESSEE SUBMITTED THAT LD.AO HAS NOT POINTED OUT ANY DEFECT IN THE MAINTENANCE OF BOOKS OF ACCOUNT. THEREFORE WITHOUT REJECTING THE BOOKS HE CANNOT PROCEED TO ES TIMATE THE INCOME OF ASSESSEE. THE DISALLOWANCE OF LOSS IS IN FACT ESTIM ATION OF INCOME WHICH CANNOT BE DONE WITHOUT FIRST INVOKING THE PROVISION S OF SECTION 145. ON MERIT THE LD. AR REPEATED THE SAME ARGUMENTS AS WER E ADVANCED BEFORE THE LD. AO AND BEFORE THE LD. CIT(A). 6. ON THE OTHER HAND THE LD. DR POINTED OUT THAT A O HAS POINTED OUT SEVERAL DEFECTS IN THE BODY OF HIS ASSESSMENT ORDER . THEY ARE NOT ISSUING ANY BILL AND VOUCHER IN RESPECT OF SEVERAL SALES AN D PREPARING DAILY REPORT IN ONE SITTING. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE ARE NO REAS ONS FOR REJECTING THE BOOKS. EVEN THOUGH AO HAS NOT GIVEN ANY SPECIFIC FI NDING AS TO WHETHER HE IS INVOKING SECTION 145 AND REJECTING THE BOOKS BUT EVEN IF WE ACCEPT THE LEGAL ARGUMENT THAT IT IS NOT NECESSARY TO SPEC IFICALLY MENTION IN THE BODY OF THE ORDER THAT BOOKS ARE REJECTED AND IT WO ULD BE ENOUGH IF IT IS DISCERNIBLE FROM THE ORDER OF THE AO THAT HE HAS NO T RELIED ON THE BOOKS AS THERE ARE DEFECTS STILL WE ARE NOT SATISFIED TH AT THERE ARE ADEQUATE ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 7 DEFECTS WHICH WOULD WARRANT REJECTION OF BOOKS. THE MAIN PLANK OF AO IN RESORTING TO ESTIMATING THE WASTAGE IN PETROL AND D IESEL IS THAT ASSESSEE HAS SHOWN HIGHER WASTAGE/LOSSES AS COMPARED TO WHAT IT OUGHT TO HAVE BEEN IN THE EYES OF AO. SECONDLY ASSESSEE IS NOT ISSUIN G BILLS AND VOUCHERS IN RESPECT OF SALES MADE BY THE ASSESSEE TO THE CUSTOM ERS AND THEREFORE ASSESSEE HAS OPPORTUNITY TO MANIPULATE THE SALES AS PER HIS WILL AND THIRDLY THE DAILY STOCK REPORT IS APPARENTLY WRITT EN IN ONE SITTING. 8. WE ARE NOT CONVINCED WITH ANY OF THE ABOVE DEFEC TS. IT IS BECAUSE NOT A SINGLE INSTANCE HAS BEEN POINTED OUT BY THE A O THAT ASSESSEE IS NOT ISSUING VOUCHERS TO THE CUSTOMERS FOR SALE OF PETRO L AND DIESEL ETC. MERELY MAKING A GENERAL STATEMENT WITHOUT ACTUALLY LOOKING INTO THE BOOKS WOULD NOT BE SUFFICIENT TO ARRIVE AT A FINDING THAT ASSES SEE IS ISSUING OR NOT ISSUING VOUCHERS AGAINST ITS SALES. REGARDING DAILY STOCK REPORT WE ARE NOT CONVINCED THAT IT HAS BEEN PREPARED IN ONE SITTING. IF THE DEPARTMENT HAD ANY DOUBT IT COULD HAVE SUBMITTED THE ORIGINAL DAIL Y REPORTS AND PRODUCED BEFORE US. IT HAS NOT BEEN DONE. EVEN OTHERWISE APP ARENTLY PHOTOCOPIES OF SUCH DAILY REPORTS INDICATED THAT THERE ARE ENOU GH VARIATIONS IN THE WRITING AND IMPRESSION OF THE INK WHICH IN TURN IN DICATE THAT IT COULD NOT HAVE BEEN WRITTEN IN ONE SITTING. SO FAR AS THE CLA IM OF LOSS IS CONCERNED IT IS NOT A CONSEQUENCE OF WRITING OF THE BOOKS BUT A CONSEQUENCE OF DOING BUSINESS IN A PARTICULAR MANNER AND THEREFORE EXC ESS CLAIM OF LOSSES OR LOW GP CANNOT BE A BASIS FOR REJECTING THE BOOKS. I T HAS BEEN HELD IN CIT VS. JAS JACK ELEGANCE EXPORTS (2010) 324 ITR 95 (DE L) THAT IF ACCOUNTS ARE NOT DEFECTIVE PROFITS CANNOT BE ESTIMATED. SIMI LARLY HON. PUNJAB & HARYANA HIGH COURT IN CIT VS. K. BHATIA (2004) 269 ITR 577 (P & H) HELD THAT IT IS NOT POSSIBLE TO REJECT THE BOOKS OF ACCOUNT MERELY BECAUSE PROFITS ARE LOW AS COMPARED TO EARLIER YEARS. ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 8 9. SECTION 145 REQUIRES THE AO TO GIVE A FINDING AS TO WHETHER METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE IS SUCH THAT IT WILL NOT ENABLE THE AO TO COMPUTE THE INCOME OF THE ASSESSEE CORRECTLY OR THAT THERE ARE SERIOUS DEFECTS IN THE MAINTENANCE OF ACCOUNTS WHIC H WILL NOT ENABLE THE AO TO WORK OUT THE INCOME OF THE ASSESSEE. THUS SEC TION 145 ONLY RELATES TO METHOD OF ACCOUNTING OR RECORDING OF THE EVENTS WHICH TAKE PLACE DURING THE COURSE OF BUSINESS. SECTION 145 CANNOT B E INVOKED FOR CARRYING OUT BUSINESS IMPRUDENTLY OR VERY GOOD RESULTS IN T HE BUSINESS ARE NOT SHOWN. IT IS FOR THE ASSESSEE TO CARRY OUT THE BUSI NESS AS PER HIS OWN PRUDENCE. EFFICIENT BUSINESSMAN MAY GIVE BETTER RES ULTS AND HIGHER INCOME WHEREAS IMPRUDENT OR INEFFICIENT BUSINESSMAN MAY NOT BE ABLE TO EARN THE PROFIT TO THAT EXTENT. THE BOOKS OF AN IMP RUDENT BUSINESSMAN CANNOT BE REJECTED BECAUSE IN THE EYES OF AO HE HAS NOT DECLARED THE PROFITS AS IT OUGHT TO HAVE BEEN. IN THE SIMILAR MA NNER BOOKS OF ACCOUNTS OF A PRUDENT BUSINESSMAN GIVING HIGHER INCOME CANNO T BE ACCEPTED MERELY BECAUSE IT HAS GIVEN HIGHER PROFIT EVEN THOU GH BOOKS OF ACCOUNT CONTAINED SERIOUS DEFECTS. IN FACT EXAMINATION OF A CCOUNTS IS AN INITIAL STEP. ONLY AFTER CROSSING THIS HURDLE AND GIVING A FINDING ON THE NATURE OF ACCOUNTS BY POINTING OUT THAT VARIOUS INGREDIENTS MENTIONED IN SECTION 145 ARE NOT SATISFIED THE AO GETS JURISDICTION/POW ER TO ESTIMATE THE PROFITS. 10. PROVISIONS OF SECTION 145(3) CAN BE INVOKED FOR REJECTING THE BOOKS IF AO GIVES A FINDING THAT (I) ASSESSEE IS NOT FOLL OWING REGULARLY ANY ACCOUNTING STANDARD NOTIFIED BY THE CENTRAL GOVERNM ENT IN ACCORDANCE WITH SECTION 145(2) OR (II) AO IS NOT SATISFIED ABO UT CORRECTNESS OR COMPLETENESS OF THE ACCOUNT OR (III) WHERE ASSESSE E IS NOT FOLLOWING ANY METHOD OF ACCOUNTING REGULARLY. IF NO SUCH FINDING IS GIVEN THEN INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS HAS TO BE ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 9 COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTIN G REGULARLY EMPLOYED BY THE ASSESSEE. FOR REJECTING THE BOOKS B Y INVOKING CONDITION NO.1 THE AO HAS TO SHOW THAT WHAT WAS THE ACCOUNTIN G STANDARD REQUIRED TO BE FOLLOWED COMPULSORILY OR WHAT WAS FOLLOWED IN EARLIER YEARS AND HAS NOT BEEN FOLLOWED THIS YEAR. THE AO HAS ALSO TO SHO W THAT BY NOT FOLLOWING AN ACCOUNTING STANDARD OR NOT FOLLOWING T HE ONE FOLLOWED EARLIER THE COMPUTATION OF CORRECT INCOME CANNOT B E DONE. FOR REJECTING THE BOOKS UNDER CONDITION NO.2 THE AO HAS TO SHOW THAT THE ACCOUNTS ARE NOT CORRECT AND COMPLETE AS THERE EXIST SERIOUS DEF ECTS IN MAINTENANCE OF ACCOUNTS IRRESPECTIVE OF WHETHER ACCOUNTING METHOD OR ACCOUNTING STANDARDS ARE REGULARLY FOLLOWED. THE AO HAS TO SHO W HERE THAT THE WAY ACCOUNTS ARE WRITTEN OR KEPT (AND NOT ACCOUNTING ME THOD ADOPTED LIKE CASH OR MERCANTILE) PROFITS CANNOT BE CORRECTLY DE DUCED THEREFROM. FOR REJECTING THE BOOKS BY INVOKING CONDITION NO.3 THE AO HAS TO SHOW THAT THE ASSESSEE IS ABRUPTLY CHANGING METHOD OF ACCOUNT ING FROM CASH TO MERCANTILE OR FOR DIFFERENT TRANSACTIONS IT IS ADOP TING DIFFERENT METHOD OF CASH OR MERCANTILE. FOR THIS THE AO HAS TO IDENTIFY THE TRANSACTIONS RECORDED IN DIFFERENT METHODS OR IDENTIFY THE ASST. YEARS IN WHICH DIFFERENT ACCOUNTING METHODS (CASH OR MERCANTILE) H AVE BEEN FOLLOWED. EVERY FINDING RELATING TO THREE CONDITIONS HAS TO B E BASED ON EVIDENCE AND SHOULD NOT BE MERELY AN OPINION OF THE A.O. FURTHER IT IS NOT ALWAYS CORRECT TO RESORT TO ESTIMATION AFTER REJECTING THE BOOKS IF ADEQUATE MATERIAL IS NOT AVAILABLE TO SUPPORT THE ESTIMATION OF HIGHER INCOME AS COMPARED TO WHAT ASSESSEE HAS SHOWN. THUS REJECTION OF THE BOOKS IN ACCORDANCE WITH SECTION 145 IS THE INITIAL STEP BEF ORE AO RESORTS TO NEXT STEP I.E. ESTIMATION OF INCOME. THUS THE REJECTION OF BOOKS CANNOT BE DONE WITHOUT POINTING THE DEFECTS IN ACCOUNTS OR AC COUNTING METHOD. AS WE HAVE HELD ABOVE THE AO HAS NEITHER GIVEN ANY FI NDING ABOUT REJECTION OF BOOKS NOR IT IS DISCERNIBLE FROM HIS ORDER THE WORKING OF HIS MIND FOR ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 10 REJECTION OF THE BOOKS. IN VIEW OF THIS WE HOLD THA T AO HAS FAILED TO DISCHARGE THE ONUS OF REJECTING THE BOOKS AND INVOK ING SECTION 145(3). WE ARE SUPPORTED BY THE DECISION OF HON. GAUHATI HI GH COURT IN MADNANI CONSTRUCTION CORPORATION P. LTD. VS. COMMIS SIONER OF INCOME- TAX (2008) 296 ITR 45 (GAU) WHEREIN IT IS HELD THA T ACCOUNTS CANNOT BE REJECTED IF AO DID NOT FIND BOOKS OF ACCOUNT INCORR ECT OR ANY INFIRMITY IN THE AUDIT REPORT. IN CIT VS.RAJNI KANT DAVE [2006] 281 ITR 0006- (ALL) IT IS HELD THAT IF THERE IS NO FINDING THAT BOOKS OF A CCOUNTS ARE INCOMPLETE OR INCORRECT ACCOUNTS CANNOT BE REJECTED. IN ASHOKE R EFRACTORIES P. LTD. VS. COMMISSIONER OF INCOME-TAX [2005] 279 ITR 0457- [CA L] IT IS HELD THAT EVEN THOUGH THERE MAY BE ABSENCE OF STOCK REGISTER OR ITEMWISE ACCOUNTING OF STOCK BUT IF THERE IS NO FINDING THA T INCOME COULD NOT BE DEDUCED FROM THE METHOD OF ACCOUNT FOLLOWED ACCOUN TS CANNOT BE REJECTED AND SECTION 145 CANNOT BE INVOKED. SIMILAR VIEW WAS TAKEN BY HON. CALCUTTA HIGH COURT IN JUGGILAL KAMLAPAT UDYO G LTD. VS. COMMISSIONER OF INCOME-TAX [2005] 278 ITR 0052- [CA L] WHEREIN IT IS HELD THAT IF THERE IS NO FINDING THAT INCOME COULD NOT BE DEDUCED FROM THE ACCOUNTS MAINTAINED BY THE ASSESSEE THEN REJECTION OF ACCOUNTS WOULD BE INVALID. HON. GUJARAT HIGH COURT IN COMMISSIONER OF INCOME-TAX VS. VIKRAM PLASTICS [1999] 239 ITR 0161- [GUJ] HAS HELD THAT WHERE BOOKS OF ACCOUNTS HAVE BEEN MAINTAINED REGULARLY AND NO DEFE CTS HAVE BEEN FOUND IN THE ACCOUNTS THEN THE TRIBUNAL WOULD BE JUSTIFIE D IN HOLDING THAT ACCOUNTS CANNOT BE REJECTED UNDER SECTION 145. ACCO RDINGLY WE HOLD THAT BOOKS OF ASSESSEE CANNOT BE REJECTED AND THEREFORE AO CANNOT RESORT TO ESTIMATION OF INCOME BY ESTIMATING LOSSES. ACCORDIN GLY THE APPEAL FILED BY THE DEPARTMENT IS DISMISSED. ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 11 ASSESSEES APPEAL 11. GROUND NO.1 OF ASSESSEES APPEAL RELATES TO REJ ECTION OF BOOKS. WE HAVE HEARD THE PARTIES. WHILE DISPOSING OF THE DEPA RTMENTAL APPEAL WE HAVE HELD THAT WITHOUT POINTING OUT ANY DEFECT AO C ANNOT RESORT TO REJECTION OF BOOKS AND WITHOUT REJECTING THE BOOKS AO CANNOT ESTIMATE THE PROFITS. WE HAVE DECIDED THIS ISSUE IN FAVOUR O F THE ASSESSEE WHILE DISPOSING OF THE DEPARTMENTAL APPEAL. ACCORDINGLY THIS GROUND OF ASSESSEE IS ALLOWED. 12. THE SECOND GROUND IN ASSESSEES APPEAL IS ABOUT ESTIMATION OF SHORTAGE IN PETROL AND DIESEL. THESE TWO ITEMS RELA TE TO TRADING ACCOUNT AND ESTIMATION OF SHORTAGE ETC. WHICH HAVE THE EFF ECT OF ENHANCING TRADING RESULTS WHICH CAN BE DONE ONLY AFTER BOOKS ARE REJECTED BY THE AO. THUS ONCE IT IS HELD BY US THAT BOOKS CANNOT B E REJECTED BY THE AO FOR THE REASONS DISCUSSED IN DEPARTMENTAL APPEAL T HEN HE CANNOT RESORT TO ESTIMATION OF PROFITS EITHER BY APPLYING GP RATE OR BY ESTIMATING SHORTAGE OR LOSS IN PETROL AND DIESEL. THEREFORE ONLY COURS E OPEN TO THE AO IS TO ACCEPT THE BOOK RESULTS AS HE HAS NO GROUND TO REJE CT THE BOOKS. ACCORDINGLY THE ADDITION RETAINED BY THE LD. CIT(A) IS ALSO DELETED. THIS GROUND OF ASSESSEE IS ALSO ALLOWED. 13. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER WAS PRONOUNCED IN OPEN COURT ON 31.8.2010. SD/- SD/- (MUKUL KR. SHRAWAT) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEM BER AHMEDABAD DATED : 31.8.2010. ITA NOS.2308 & 2333/AHD/2008 ASST. YEAR 2004-05 12 MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD