2017 (2) TMI 1360 - AT - Income Tax

N.P. estimation - rejection of books of accounts - Held that - Assessing Officer has himself agreed in his latter remand report that assessee s books are indeed fabricated. This made the CIT(A) to reject the same and adopt net profit @ 3% hereinabove. We come to Section 251 at this stage to notice that the same contains an explanation as well to all clauses thereof that a CIT(A) may also consider and decide any matter in which the order appealed against was passed notwithstanding that such matter was not raised by the concerned appellant - Assessee s case in the facts narrated hereinabove is much stronger since he has indeed raised the issue of rejection of books during the course of the lower appellate proceedings. Revenue further fails to prove any genuineness element in assessee s books of account by leading cogent supportive material. We thus find no reason to interfere with CIT(A) s order rejecting assessee s books of account thereby estimating his net profit @ 3%. Section 40A(3) disallowance - Held that - We deem it appropriate at this stage to quote hon ble jurisdictional high court s judgment in CIT vs. Dhiraj R. Rungta 2014 (4) TMI 711 - GUJARAT HIGH COURT holding that in a case where an assessee s books of accounts are rejected being defective, the very books could not be relied upon to make disallowances/additions. Estimating much higher net profits @ 3% as against 1.5% already declared - Held that - We find that the same involve raddiwala suppliers instead of waste paper suppliers to paper mills as is the instance involved in assessee s case. It has further come on record that the assessee has even fabricated his books of account whereas he had duly maintained the same in earlier assessment years. We accordingly observe that the CIT(A) has rightly estimating assessee s net profit @ 3% in the given facts of this batch of six appeals. The assessee s identical sole substantive ground in all the impugned assessment years is rejected.

Summary

Issues Involved:
1. Validity of Section 153A proceedings.
2. Deletion of Section 40A(3) disallowance/additions by CIT(A).
3. Enhancement of assessee’s net profit rate by CIT(A).
4. Jurisdiction of CIT(A) under Section 251 of the Income Tax Act, 1961.
5. Rejection of assessee’s books of account and estimation of net profit.

Detailed Analysis:

1. Validity of Section 153A Proceedings:
The assessee initially challenged the validity of Section 153A proceedings for the assessment years 2005-06 to 2010-11. However, the assessee later decided not to press this legal plea, leading to the dismissal of this ground as not pressed.

2. Deletion of Section 40A(3) Disallowance/Additions by CIT(A):
The Revenue contested that CIT(A) erred in deleting the Section 40A(3) disallowances/additions made by the Assessing Officer (AO) for the assessment years 2005-06 to 2010-11. The AO had made these disallowances because the assessee’s cash payments exceeded ?20,000 without justifiable reasons as per Rule 6DD of the Income Tax Rules. The CIT(A) deleted these disallowances, which the Revenue argued was incorrect, especially since the CIT(A) himself held that the assessee’s case did not fall under the exceptions to Section 40A(3).

3. Enhancement of Assessee’s Net Profit Rate by CIT(A):
The CIT(A) estimated the assessee’s net profit rate at 3% of the total turnover, which the assessee contested, arguing it should be 1.5% as disclosed in the return of income. The CIT(A) justified the 3% rate based on discrepancies in the assessee’s books and the nature of the business.

4. Jurisdiction of CIT(A) under Section 251 of the Income Tax Act, 1961:
The Revenue argued that CIT(A) exceeded his jurisdiction under Section 251 by rejecting the assessee’s books and adopting a 3% net profit rate, which was not pleaded by the assessee in the original grounds of appeal. However, it was noted that the assessee had raised the issue of the rejection of books during the appellate proceedings, and the CIT(A) acted within his jurisdiction as per the explanation to Section 251.

5. Rejection of Assessee’s Books of Account and Estimation of Net Profit:
The CIT(A) rejected the assessee’s books of account, citing them as fabricated and unreliable, and estimated the net profit at 3%. The AO’s remand reports confirmed the fabrication of the books. The CIT(A) relied on the jurisdictional high court’s judgment which held that defective books could not be relied upon for making disallowances/additions. The Tribunal upheld CIT(A)’s decision, noting that the assessee’s books were indeed fabricated, and the estimation of net profit at 3% was justified.

Conclusion:
The Tribunal dismissed all twelve appeals, upholding the CIT(A)’s orders. The Tribunal found no merit in the Revenue’s grounds for reviving Section 40A(3) disallowances/additions and rejected the assessee’s plea for a lower net profit rate of 1.5%. The CIT(A)’s actions were deemed appropriate and within jurisdiction, given the circumstances and evidence of fabricated books. The judgment emphasized the principle that defective books could not be relied upon for disallowances/additions, aligning with the jurisdictional high court’s precedent.