2014 (12) TMI 1266 - AT - Income Tax

Rejection of books of account - taking into consideration the report of the auditor s obtained u/s 142(2A) and after giving valid reasons for doing so - NP estimation - Held that - As it is noted by special auditor that the assessee has denied to have carried out physical verification of WIP as on 31/03/2004 and hence, it can be reliably confirmed that the WIP is an approximation. It is also observed by the special auditor that they are not in a position to quantify the deviation to the revenue and balance sheet. In our considered opinion, correct figure of closing stock is very important for determining the income of the assessee and since the closing stock has been not properly ascertained by the assessee by physical verification etc., the rejection of book result cannot be faulted. It may be that the reasons for which the assessee could not maintain proper books is that the assessee was working under abnormal business conditions but then also, such improper books cannot be relied upon to assess the income of the assessee and for such a situation, the only course open is to reject the book result and estimate the income of the assessee. The Assessing Officer has adopted the net profit rate of 2.5% for estimating the income of the assessee at ₹ 7,50,112/-. AO also allowed deduction of ₹ 2.28 lac being admissible salary to partners. Adopting net profit rate of 2.28% is not excessive and it could not be shown by the assessee that the rate adopted by the Assessing Officer is excessive and unreasonable. Under these facts, we hold that the order of CIT(A) is not sustainable in the facts of the present case and therefore, we reverse the order of CIT(A) and restore that of the Assessing Officer. - Decided in favour of revenue.

Summary

Issues: Revenue's appeal against the order passed by CIT(A)-II, Lucknow dated 23/12/2011 for the assessment year 2004-2005.

Analysis:
1. The first issue raised by the Revenue was regarding the rejection of the books of account of the assessee by the Assessing Officer. The Revenue contended that the CIT(A) erred in failing to appreciate the valid reasons provided by the Assessing Officer for rejecting the books. The Revenue argued that the net profit rate applied of 2.5% was reasonable and not excessive, citing precedents with higher net profit rates. The Revenue supported the assessment order, while the assessee's representative supported the CIT(A)'s order. The tribunal noted observations from the special audit report regarding the denial of physical verification of Work in Progress (WIP) by the assessee. The tribunal emphasized the importance of accurate closing stock figures for income determination and upheld the rejection of books due to lack of proper verification. The tribunal referred to CIT(A)'s decision, which highlighted the abnormal business conditions but concluded that unreliable book results should be rejected for income estimation. The tribunal found the CIT(A)'s order unsustainable and reversed it, restoring the Assessing Officer's decision.

2. The second issue revolved around the estimation of income and the net profit rate applied by the Assessing Officer. The tribunal found that the CIT(A) had given weight to the abnormal working conditions of the assessee but emphasized that such conditions did not justify unreliable book results. The tribunal upheld the Assessing Officer's net profit rate of 2.5% for income estimation, along with allowing a deduction for admissible partner salary. The tribunal concluded that the CIT(A)'s order was not sustainable in the given circumstances and reversed it in favor of the Revenue. The appeal of the Revenue was allowed, and the original order was reinstated.

In summary, the tribunal analyzed the issues raised by the Revenue regarding the rejection of books of account and the income estimation methodology. The tribunal emphasized the importance of accurate financial records for income determination and upheld the rejection of books due to lack of proper verification. The tribunal found the CIT(A)'s decision unsustainable, considering the abnormal business conditions, and reversed it in favor of the Revenue, reinstating the Assessing Officer's order.