2008 (2) TMI 896 - AT - Income Tax

Survey conducted u/s 133A - Estimation of sale - arrived at based on extrapolation technique - record of earlier 5 days sales - bills and chits of paper found - rejection of books of account - whether the AO could be right in estimating the sales and profits, based on the sales of 5 days recorded in the books of account and making an assessment without rejecting the books in question? - Allegation that sale of liquor which is a controlled item under Excise Act is suppressed cannot be done in a light manner without evidence. This is a case where no investigation whatsoever has been made. The figure of sales of 5 days' was taken and simply multiplied with 350 days and turnovers estimated for five years. HELD THAT - Not finding of the books of account during the course of survey, in the restaurant premises, in our humble opinion, cannot draw a conclusion that the assessee is not maintaining books of account. The assessee's books of account have been audited regularly and returns of income filed along with balance sheets and P L a/c. AO should have pointed out defects and recorded reasons as to why he was inclined to reject the books of account. In this case when there is no rejection of the books of account at all, we are of the opinion that the CIT(A) was in error in coming to the conclusion that impliedly the AO rejected the books of account. What the AO has done is took the income declared as per the return of income and added further the GP rate of 70.79 per cent on the estimated suppression of sale. This, in our considered opinion, is not correct. No material is brought on record to support such an action by the Revenue. Therefore, the assessment orders passed by the sales-tax authorities which record that the turnovers of the assessee are at a particular figure based on the verification of its books of account and in view of the lack of investigation or evidence to contradict the submissions of the assessee or the orders of another Government agency, we are inclined to agree with the arguments of the learned counsel for the assessee and delete the addition made in this regard. Thus the estimation of turnovers for both the assessment years based on only a small sample figure is not well founded and has to be necessarily quashed. In the result, the appeals filed by the assessee for both the assessment years are allowed.

Issues Involved:
1. Estimation of income based on a 5-day sales record.
2. Rejection of books of account under Section 145(3) of the Income Tax Act.
3. Validity of extrapolation technique used by the Assessing Officer (AO).
4. Credibility of audited books of account and their acceptance by other governmental authorities.

Detailed Analysis:

1. Estimation of Income Based on a 5-Day Sales Record:
The AO conducted a survey under Section 133A of the Income Tax Act on 11th February 2005 and found that the total sales on that day were Rs. 39,134. Further, the sales for the preceding 5 days amounted to Rs. 1,96,420, averaging Rs. 39,365 per day. The AO extrapolated this average to estimate the annual sales at Rs. 1,37,77,700 for the financial years 2004-05 and 2005-06, as opposed to the sales of Rs. 19,78,590 and Rs. 54,613 declared by the assessee. The AO also used this extrapolation technique for the assessment years 2001-02, 2002-03, and 2003-04.

2. Rejection of Books of Account Under Section 145(3):
The CIT(A) upheld the AO's decision, stating that the books of account were not found during the survey and were likely destroyed to suppress sales. The CIT(A) inferred that the AO had impliedly invoked Section 145(3) to reject the books of account. The assessee argued that the books were regularly audited and filed with the income tax returns, and no defects were found by the AO. The assessee also contended that the CIT(A) never called for the books of account during the appellate proceedings.

3. Validity of Extrapolation Technique Used by the AO:
The assessee argued that it was incorrect to estimate annual sales based on a 5-day sample, especially considering the period was close to Valentine's Day, a time of increased sales. The assessee provided historical data showing higher sales during this period in previous years. The assessee also pointed out that the sales figures were recorded in the books of account and matched the balance sheet and profit and loss account filed before the date of the survey.

4. Credibility of Audited Books of Account and Their Acceptance by Other Governmental Authorities:
The assessee highlighted that the sales-tax authorities had accepted the books of account during their assessments, which should lend credibility to the records. The Revenue authorities did not consider the sales-tax turnovers and records. The assessee argued that the turnovers accepted by one governmental authority should not be disregarded by another without substantial evidence.

Judgment:
The Tribunal held that the non-finding of books of account during the survey could not lead to the conclusion that the assessee did not maintain them. The books were audited and filed with the income tax returns, and no defects were found. The Tribunal noted that the AO did not explicitly reject the books of account under Section 145(3) and that the CIT(A)'s conclusion of implied rejection was incorrect. The Tribunal also found that the extrapolation of 5 days' sales to estimate annual sales for 5 years was based on guesswork without any incriminating evidence or investigation. The Tribunal emphasized that the sales-tax authorities had accepted the books of account, and no evidence was presented to contradict this.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for both assessment years, holding that the estimation of turnovers based on a small sample was not well-founded and should be quashed. The rejection of books of account and the extrapolation technique used by the AO were deemed legally incorrect.

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