2016 (5) TMI 752 - AT - Income Tax

Rejection of books of accounts - addition to book profits - addition towards difference in balances of sundry creditors - Held that - AO on one hand had rejected the books of account and on the other hand resorted to make various additions by relying on the same rejected books of account u/s. 145(3) of the Act. In these circumstances, the ld.AO ought to have resorted to estimate the business profit in a rational manner. To meet the ends of justice, we deem it fit and appropriate , to direct the ld.AO to adopt 8% of the turnover of the assessee s business as taxable business profits

Issues Involved:
1. Admission of additional ground.
2. Difference in running accounts of regular suppliers.
3. Presumption of unexplained expenditure.
4. Confirmation of additions related to previous years' transactions.
5. Application of legal precedents.
6. Confirmation of addition regarding investment in land.
7. Disregard of evidence concerning banking facilities.
8. Disallowance under Section 40A(3).
9. Separate addition towards unexplained investments.

Issue-wise Detailed Analysis:

1. Admission of Additional Ground:
The assessee raised an additional ground stating that the assessment order, which included additions to the book profit and disallowances after rejecting the books of accounts under section 145(3) of the Act, was not in accordance with the law. The Tribunal admitted this additional ground citing its relevance to the root of the matter and the lack of need for fresh fact investigation, referencing the Supreme Court judgment in NTPC Ltd Vs. CIT.

2. Difference in Running Accounts of Regular Suppliers:
The assessee contested the CIT(A)'s decision regarding discrepancies in running accounts with suppliers without proper confrontation. The Tribunal found that the Assessing Officer (AO) had rejected the books of account due to discrepancies including differences in ledger accounts and opening balances. Since the books were rejected, the AO should not have made separate additions based on the same rejected books.

3. Presumption of Unexplained Expenditure:
The AO added amounts as unexplained expenditure due to discrepancies in payments to suppliers. The Tribunal held that once the books are rejected, the AO should not rely on them for making further additions, referencing the decision in Prafulla Kumar Ghosh Vs. ITO and the Andhra Pradesh High Court in Indwell Constructions vs CIT.

4. Confirmation of Additions Related to Previous Years' Transactions:
The Tribunal addressed the addition of ?2,25,627 and ?30,775 related to payments to suppliers. It reiterated that such additions should not be made once the books of account are rejected, aligning with the principle that the AO should estimate business profits instead.

5. Application of Legal Precedents:
The assessee argued that the CIT(A) failed to apply the ratio from the Orissa High Court decision in Aurobindo Sanitary Stores. The Tribunal did not find this argument compelling enough to change the outcome of the case.

6. Confirmation of Addition Regarding Investment in Land:
The AO added ?87,000 as unexplained investment related to land purchase and other expenses not recorded in the books. The Tribunal directed the AO to verify if the payments were made from withdrawals and if the investments were from cash credit facilities. It allowed the AO to make separate additions for unexplained investments unrelated to business, even if the books were rejected.

7. Disregard of Evidence Concerning Banking Facilities:
The assessee claimed difficulties in maintaining a bank account due to the distance from the business location. The Tribunal found force in the argument that the AO should not have made separate additions under Section 40A(3) after rejecting the books. It directed the AO to estimate business profits at 8% of turnover.

8. Disallowance Under Section 40A(3):
The AO disallowed 20% of payments made in cash exceeding ?20,000, totaling ?5,18,163. The Tribunal held that such disallowance was not appropriate after rejecting the books of account. It referenced decisions from various High Courts and the Tribunal itself, emphasizing that once books are rejected, specific disallowances like those under Section 40A(3) should not be made.

9. Separate Addition Towards Unexplained Investments:
The Tribunal allowed the AO to make separate additions for unexplained investments if they are not connected to the business. It set aside the issue for verification, allowing the assessee to provide necessary evidence.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to estimate business profits at 8% of turnover and verify the unexplained investments. The decision emphasized that once books are rejected, further additions based on those books should not be made, aligning with established legal precedents.

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