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2014 (7) TMI 178 - HC - Income TaxDeduction u/s 80IB of the Act Invocation of section 145(3) of the Act Method of accounting Held that - AO can reject the accounts maintained by the assessee if he is not satisfied about their correctness or completeness - the Assessing Officer can reject the method of accounting followed by the assessee if the same is not in accordance with the provisions of subsections (1) and (2) of Section 145 - the AO is authorized to make assessment of total income of the assessee on the basis of best judgment and, at the same time, disregard the income declared in the return - the existence of infirmities and discrepancies in the accounts maintained by the assessee was a pre-requisite for invoking the provisions of Section 145 the AO had merely doubted trading results declared by the assessee - There were no findings as to how the accounts maintained by the assessee were either incomplete or incorrect. The reason advanced was that in the relevant year the assessee was eligible for exemption u/s 80IB @ 100% of its profits, whereas, it was not so in the next AY 2004-05 - There appears to be an inherent fallacy in the reasoning because for the AY 2005-06 wherein the assessee was also not eligible for 100% exemption u/s 80IB, the G.P. rate declared was 8.48% - to say that higher G.P. rate declared in the relevant year at 8% was incorrect merely on the basis of low rate declared for the AY 2004-05, was merely based on conjectures and surmises - prima facie, the absence of any adverse remarks by the Special Auditor definitely supports the case of the assessee - The entire action of the AO appears to be based more on suspicion than on ground reality - the accounts of the assessee could have been got reinvestigated but the same could not have been rejected the order of the Tribunal is upheld Decided against Revenue.
Issues:
1. Rejection of accounts under Section 145(3) of the Income Tax Act, 1961. 2. Correctness of profits declared by the assessee. 3. Discrepancies in the accounts and findings of the special audit. 4. Application of Section 80IB deduction on the income declared by the assessee. Issue 1: Rejection of accounts under Section 145(3) of the Income Tax Act, 1961 The Assessing Officer (A.O.) invoked Section 145(3) to reject the accounts of the assessee based on doubts about their correctness or completeness. However, the High Court noted that the A.O. did not provide concrete evidence of incompleteness or incorrectness in the accounts. The A.O. doubted the trading results without specifying how the accounts were defective. The A.O. also compared the Gross Profit (G.P.) rate with the subsequent year, but the reasoning was deemed flawed as it relied on conjectures rather than solid evidence. Issue 2: Correctness of profits declared by the assessee The A.O. questioned the correctness of the profits declared by the assessee, citing discrepancies in the G.P. rate and expenses compared to other years. However, the High Court found the A.O.'s reasoning to be based on assumptions and not on substantial evidence. The A.O. failed to establish how the accounts were incomplete or incorrect, leading to doubts about the validity of rejecting the accounts under Section 145(3). Issue 3: Discrepancies in the accounts and findings of the special audit The special audit revealed various discrepancies in the accounts, including depreciation, unconfirmed loans, unverifiable expenses, missing purchase bills, stock discrepancies, and sales inconsistencies. Despite these discrepancies, the A.O. did not highlight adverse remarks from the special auditor in the assessment order. The absence of adverse remarks supported the assessee's case, indicating that the A.O.'s actions were more based on suspicion than concrete evidence. Issue 4: Application of Section 80IB deduction on the income declared by the assessee The CIT (A) and the ITAT upheld the assessee's claim for deduction under Section 80IB, stating that the A.O. lacked justification for rejecting the accounts. The High Court concurred with these findings, emphasizing that the A.O. did not provide sufficient grounds to reject the accounts. The courts found no perversity in the decisions of the lower authorities, leading to the dismissal of the appeal and upholding the deduction under Section 80IB for the assessee.
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