2005 (2) TMI 751 - AT - Income Tax

Summary

Issues:
1. Rejection of books of account and estimation of income based on turnover.
2. Validity of assessment under section 158BC read with section 158BD for the block period.
3. Application of Section 145 for computing income.
4. Justification for rejecting book results and estimating income.

Issue 1: Rejection of books of account and estimation of income based on turnover:
The assessee, a liquor trading firm, filed a return of income declaring a loss. The original assessment estimated income at Rs. 40,000, ignoring the loss, and added Rs. 92,000 for understatement of closing stock. The Assessing Officer conducted a survey during a set-aside assessment, estimating total income at 2% of turnover for the years under appeal. The CIT(A) confirmed the assessments, noting lack of evidence to substantiate the profit and loss account. The assessee argued against the rejection of books of account and the high net profit estimation of 2%, emphasizing the verifiability of expenses and lack of justification for the rejection.

Issue 2: Validity of assessment under section 158BC read with section 158BD for the block period:
The Assessing Officer completed the assessment under section 158BC read with section 158BD for the block period, including the years under appeal. The assessments were based on estimating total income at 2% of turnover and adding Rs. 92,000 for understatement of closing stock for one year. The CIT(A) upheld the assessments, considering the net profit disclosed by similar businesses and lack of material evidence from the assessee.

Issue 3: Application of Section 145 for computing income:
Section 145 empowers the rejection of book results and income estimation under certain circumstances. The Assessing Officer must assess if the method of accounting is regular, if profits can be deduced properly, if accounts are maintained correctly and completely. If findings are affirmative on all questions, profits are computed based on accounts. If negative on question 2, the first proviso to section 145(1) applies. If negative on any of questions 1, 3, or 4, section 145(2) allows for best judgment assessment. In this case, as no defects in the accounts were pointed out, the rejection of book results was deemed unjustified, leading to the direction to accept the declared loss.

Issue 4: Justification for rejecting book results and estimating income:
The rejection of book results and high net profit estimation without justification led to the setting aside of the assessment order. The lack of defects in the accounts and the absence of proper reasoning for rejecting the book results resulted in the direction to accept the declared loss by the assessee. Consequently, both appeals were allowed based on these grounds.