2010 (8) TMI 755 - AT - Income Tax

Rejection of books of account - Estimation of income - onus of rejecting the books - HELD THAT - In our considered view there are no reasons for rejecting the books. Even though AO has not given any specific finding as to whether he is invoking section 145 and rejecting the books. The main plank of AO in resorting to estimating the wastage in petrol and diesel 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 issuing bills and vouchers in respect of sales made by the assessee to the customers and therefore, assessee has opportunity to manipulate the sales as per his will and thirdly, the daily stock report is apparently written in one sitting. We are not convinced with any of the above defects. If the department had any doubt it could have submitted the original daily reports and produced before us. It has not been done. Even otherwise apparently photocopies of such daily reports indicated that there are enough variations in the writing and impression of the ink, which in turn indicate that it could not have been written in one sitting. It is because not a single instance has been pointed out by the Assessing Officer that assessee is not issuing vouchers to the customers for sale of petrol and diesel etc. Merely making a general statement without actually looking into the books would not be sufficient to arrive at a finding that assessee 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 daily reports and produced before us. It has not been done. So far as the claim 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, excess claim of losses or low GP cannot be a basis for rejecting the books. The rejection of the books in accordance with section 145 is the initial step before 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 accounting method. the AO has neither given any finding about rejection of books nor it is discernible from his order, the working of his mind for rejection of the books. In view of this we hold that AO has failed to discharge the onus of rejecting the books and invoking section 145(3). We are supported by the decision of in Madnani Construction Corpn . (P.) Ltd. v. CIT 2006 (12) TMI 79 - GAUHATI HIGH COURT . Accordingly we hold that books of assessee cannot be rejected and, therefore, AO cannot resort to estimation of income by estimating losses. Accordingly, the appeal filed by the Department is dismissed. Estimation of shortage in petrol and diesel - disallowance of excess shortage - CIT(A) adopted shortages of last 3 years as a base to hold shortage in sale of petrol at 0.87 per cent and diesel at 0.38 per cent to be reasonable - HELD THAT - These two items relate to trading account and estimation of shortage etc., which have the effect 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 be rejected by the AO for the reasons discussed in departmental appeal, then he cannot resort to estimation of profits either by applying GP rate or by estimating shortage or loss in petrol and diesel. Therefore, only course open to the AO is to accept the book results as he has no ground to reject the books. Accordingly the addition retained by the ld. CIT(A) is also deleted. This ground of assessee is also allowed. In the result, the appeal filed by the Revenue is dismissed and the appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance on account of shortage of petrol/diesel.
2. Rejection of book results without rejecting books of account.
3. Estimation of shortage in petrol and diesel.

Detailed Analysis:

1. Disallowance on Account of Shortage of Petrol/Diesel:
The Revenue contended that the CIT(A) erred in restricting the disallowance related to the shortage of petrol/diesel to Rs. 1,83,200, thereby giving relief of Rs. 5,85,476. The Assessing Officer (AO) noted that the assessee showed a shortage of 0.94% in petrol and 0.70% in diesel, which was deemed excessive compared to other dealers. The AO allowed a loss of 0.58% in petrol and 0.23% in diesel, based on comparable cases like Mahendra Motors, and made an addition of Rs. 7,68,476. The CIT(A), considering the past history, allowed a loss of 0.87% in petrol and 0.38% in diesel, resulting in an addition of Rs. 1,83,200.

2. Rejection of Book Results Without Rejecting Books of Account:
The assessee argued that the AO erred in rejecting the book results without pointing out any defects in the books of account. The Tribunal observed that the AO did not specifically invoke Section 145 to reject the books. It was noted that merely making general statements without evidence is insufficient to reject the books. The Tribunal referenced various judgments, including CIT v. Jas Jack Elegance Exports and CIT v. K.S. Bhatia, which state that books cannot be rejected merely because profits are low compared to earlier years. The Tribunal concluded that the AO failed to discharge the onus of rejecting the books under Section 145(3).

3. Estimation of Shortage in Petrol and Diesel:
The assessee contested the estimation of shortage in petrol and diesel, claiming it was based on the AO's subjective view. The Tribunal held that since the AO did not validly reject the books, he could not estimate the profits or the shortages. The Tribunal emphasized that the AO must provide a finding that the method of accounting is incorrect or that there are serious defects in the maintenance of accounts to invoke Section 145. The Tribunal cited several judgments, including Madnani Construction Corpn. (P.) Ltd. v. CIT, which support the view that accounts cannot be rejected without evidence of defects.

Conclusion:
The Tribunal dismissed the Revenue's appeal, stating that the AO did not provide sufficient grounds to reject the books or estimate the shortages. Consequently, the Tribunal allowed the assessee's appeal, holding that the AO must accept the book results as there were no valid grounds to reject the books or estimate the shortages.