Absence of Stock Register As Per Form 3CB can be reason for Rejection of Books?

The appeals pertain to Assessment Years 2010-11, 2011-12, and 2012-13. The assessee was the proprietor of Arihant Enterprises (Ahmedabad), Arihant Organisation (Ahmedabad), and Gaurav Enterprises (Jaipur), engaged in trading scrap, edible oil, and cattle feed. The Revenue reopened assessments under Section 148 based on a search by the Commercial Tax Department and allegations of bogus billing and suppression of sales/ purchases. AO observed discrepancies in declared sales and purchases vs. those assessed by the Commercial Tax Officer. The AO noted the absence of a stock register, lorry receipts, and transportation records, invoking Section 145(3) to reject books of accounts and estimated commission income at 1.25% of Rs. 84.33 Cr, resulting in an addition of Rs. 1,05,41,476 for AY 2010-11.

Appellant argued that the Notice under Section 148 was unsigned and issued without proper sanction under Section 151, rendering reassessment void. Also, the absence of a stock register alone does not justify rejection of books under Section 145(3). It further added that the Quantification of commission at 1.25% of turnover was arbitrary and unsupported by evidence.

As per the Assessee, the supporting documents were seized during the Commercial Tax Department search, explaining non-submission.

On the other hand, the department said that the notice under Section 148 was duly signed, and a sanction under Section 151 was obtained. The assessee failed to substantiate the authenticity of purchases and sales with documentary proof. No stock register or lorry receipts were available. Even the tax audit report (Form 3CB) stated non-maintenance of the stock register. As per the Tax Department, given the scale of transactions and lack of proof, the estimation of commission at 1.25% was reasonable and based on independent analysis.

ITAT Order

13. We have heard both the parties and perused the materials available on record. While rejecting the books of account u/s.145(3) of the Act, the AO has given the details as to the discrepancies related to the books of account as the auditor has given the report in Form No.3CB column No.28 (a) that no stock register is available for verification. But the assessee has filed a copy of order of Metropolitian Magistrate claiming that there is seized material which includes Lorry receipts and transport receipt seized by the Commercial Tax Officer, during the course of search. The assessee has filed the return prior to the search dated 28.01.2012 as the original return was filed on 09.10.2010. If the auditor is recording that no stock register was available for verification, it amounts to that the assessee is not keeping stock registered and the books are not very verifiable to that extent for it completeness and correctness. The AO in para 6.10 of the assessment order has categorically expressed this and therefore the AO has rightly rejected the books of account of the assessee. As regard to net commission at the rate of 1.25% the commission adopted by the AO, the sum of sales and purchases aggregating to Rs.84,33,18,101/- the same needs to be verified as the VAT authorities has accepted the same as per the submission of the assessee during the course of hearing. Hence, this issue is remanded to the file of the AO to verify the assessee’s turnover as accepted by the VAT authorities. The assessee be given opportunity of hearing by following the principle of natural justice. After verifying the details the AO will adjudicate the same as per the Income Tax Law. Thus, the ground no.5 is partly allowed for statistical purposes.