2017 (8) TMI 558 - AT - Income Tax

Rejection of books of accounts - suppression of sales - Held that - The law is well settled, the Assessing Officer is within its power to reject books of accounts, if he finds that from the books so placed before him, true profit cannot be deduced. In the present case, the Assessing Officer in his wisdom finding that the facts are identical in the Assessment Year 2007-08. The assessee has not placed any material suggesting that there is change into facts and circumstances in this year. Therefore, he rejected the books of accounts, on the reasoning of the Assessment Year 2007-08. We do not see any reason to interfere in this finding of the Assessing Officer. However, we find merit into the contention of the assessee that the estimation should not be based merely on the guesswork, it should be based on the material gathered by the Assessing Officer during the Assessment proceedings. In the present case, the Ld. CIT(A) made an adhoc addition of ₹ 5 lacs on the ground for possible suppression of sale. In our view, this finding of the Ld. CIT(A) is not justified. He ought to given specific reasoning for sustaining such addition. In our view, addition cannot be made purely on the basis of conjecture. Therefore, this additional ground of the Cross Objection of the assessee is allowed

Issues Involved:

1. Deletion of disallowance of ?12 lakhs made by the Assessing Officer (AO) on account of indirect expenses.
2. Deletion of addition of ?19,32,946/- made by the AO in respect of the assessee’s income from electrical business.
3. Invoking Section 145(3) of the Income Tax Act by the CIT(A) and enhancement of income by ?5 lakhs on account of alleged suppression of sales.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of ?12 Lakhs:

The Revenue contested the deletion of ?12 lakhs disallowance by the CIT(A) despite the rejection of books of account under Section 145(3). The CIT(A) had deleted the disallowance based on a similar issue in the Assessment Year (AY) 2007-08, where the Tribunal had deleted the disallowance. The CIT(A) followed the principle of judicial discipline, citing decisions from Dunlop India Ltd. and Bank of Baroda, which emphasize following higher judicial authorities' decisions in similar matters. The Tribunal found no change in facts and circumstances for the current year compared to AY 2007-08 and affirmed the CIT(A)’s decision, dismissing the Revenue’s appeal on this ground.

2. Deletion of Addition of ?19,32,946/-:

The Revenue appealed against the deletion of ?19,32,946/- addition made by the AO regarding the assessee’s income from the electrical business. The CIT(A) had deleted this addition, referencing a similar decision in AY 2007-08, where the Tribunal had ruled in favor of the assessee. The Tribunal noted that the AO’s disallowance was based on the Department’s pending appeal for AY 2007-08. However, since the Tribunal had already decided in favor of the assessee for AY 2007-08, and the Revenue did not present any new facts, the Tribunal affirmed the CIT(A)’s decision and dismissed the Revenue’s appeal on this ground.

3. Invoking Section 145(3) and Enhancement of Income by ?5 Lakhs:

The assessee contested the CIT(A)’s invocation of Section 145(3) and the enhancement of income by ?5 lakhs for alleged suppression of sales. The assessee argued that the AO rejected the books of account without pointing out specific defects for the current year, relying instead on the previous year’s assessment. The assessee maintained complete stock records, and the accounts were audited without any adverse comments. The Tribunal noted that the AO had not independently examined the current year’s accounts and had based the rejection on the previous year’s findings. The Tribunal held that the AO is within his rights to reject books if true profit cannot be deduced, but the estimation should be based on material evidence, not conjecture. The CIT(A) had made an ad-hoc addition of ?5 lakhs without specific reasoning, which the Tribunal found unjustified. Therefore, the Tribunal deleted the ad-hoc addition of ?5 lakhs, allowing the additional ground of the Cross Objection, but dismissed the grounds related to the rejection of books of account.

Conclusion:

The Tribunal dismissed the Revenue’s appeal and partly allowed the assessee’s Cross Objection, specifically deleting the ?5 lakhs ad-hoc addition made by the CIT(A). The decisions were based on the principle of judicial discipline, adherence to higher judicial authorities' rulings, and the requirement for estimations to be based on material evidence rather than conjecture.

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