2013 (2) TMI 50 - HC - Income Tax

Disallowance of loss - average loss rate at 1.883% instead of the loss declared at 5.29% invoking sec 145(3) - Tribunal deleted the addition - Held that - As no specific defect has been pointed out by AO as to why the books of accounts is liable to be rejected and therefore, the question of invoking the provision of Section 145(3) does not arise. And if the books of accounts cannot be rejected, there is no question of not accepting the loss declared by the assessee. In a business, sometimes the business runs in profit and sometimes runs in loss. Merely because in a particular year, the loss was higher, that would not empower AO to reject the books of accounts, unless some specific defect is pointed out in it s maintenance - in favour of assessee.

Summary

Issues:
1. Disallowance of loss without appreciating material and evidence
2. Application of average loss rate instead of declared loss percentage

Analysis:
1. The appeal was filed against the Tribunal's order confirming the deletion of disallowance of loss of Rs. 71,57,834 without appreciating the material and evidence brought on record by the Assessing Officer (A.O.). The respondent assessee had declared an income of Rs. 5,43,450 for the Assessment Year 2006-07, but the A.O. assessed the income at Rs. 67,74,539. The A.O. disallowed the loss of Rs. 71,75,834 from the newspaper business by limiting the loss at 1.883% instead of the 5.29% declared by the assessee. The Commissioner of Income Tax (Appeals) allowed the appeal and deleted the addition, stating that the A.O. did not point out any defect in the maintenance of the books of accounts, hence the loss was accepted. The Tribunal upheld this decision, emphasizing that without specific defects in the books of accounts, the loss cannot be rejected.

2. The second issue revolved around the application of the average loss rate by the A.O. instead of the loss percentage declared by the assessee. The Revenue argued that the high loss declared in the newspaper business justified the A.O.'s decision to use the average loss rate at 1.883%. However, the Court noted that unless specific defects in the maintenance of the books of accounts were identified, the A.O. cannot reject the loss declared by the assessee. The Court emphasized that the mere fact of higher loss in a particular year does not warrant rejection of books of accounts without specific defects being pointed out. The Tribunal's decision was upheld, stating that the order did not suffer from any legal infirmity.

In conclusion, the High Court dismissed the appeal, affirming the Tribunal's decision regarding the disallowance of loss and the application of the average loss rate, highlighting the importance of specific defects in the books of accounts for any rejection to be valid under the Income Tax Act, 1961.