2018 (2) TMI 1212 - AT - Income Tax

Rejection of books of accounts - profit estimation - Held that - Income has to be computed in accordance with the method of accountancy followed by an Assessee i.e. cash or mercantile such method has to be followed keeping in view the Accounting Standard notified by the Central Government from time to time. Sub clause 3 provides a situation that is if the Assessing Officer is unable to deduce the true income. On the basis of method of accountancy followed by an Assessee than he can reject the book result and the assessee s income according to his estimation or according to his best judgment. AO in that case is required to point out the defects in the accounts of Assessee and required to seek explanation of the Assessee qua those defects. If the assessee failed to explain the defects than on the basis of the book result income cannot be determined and Assessing Officer would compute the income according to his estimation keeping in view the guiding factor for estimating such income. Additional Rent paid by cheque for using the godown - the assessee failed to show any justification for payment of additional rent because there was no agreement between the assessee and landlord for payment of additional rent. The assessee could obtain a confirmation exhibiting additional space required as well as additional rent paid. But no such steps were taken. Similarly the assessee failed to demonstrate as to what services have been rendered by her husband or the daughter to whom salaries have been paid. Therefore the salary claimed by the assessee towards husband and daughter deserves to be disallowed. Out of total addition confirmed by the ld.CIT(A) hereby confirm addition of 66, 000/- 4, 12, 584 and 2, 16, 000/-. As far as addition with respect to purchase made from Vinod M. Chaudhar are concerned the turnover of assessee is of 19.55 crores. Her sales have been accepted. Therefore a small amount of purchases could not be doubted merely on the ground that farmer was not produced before the ld.AO. It is quite difficult for an assessee to locate each and every small supplier. Therefore delete this addition. - Decided partly in favour of assessee.

Summary

Issues:
1. Discrepancies in income computation and addition of amount by Assessing Officer.
2. Rejection of book results by Assessing Officer and confirmation by CIT(A).
3. Interpretation of Section 145 of the Income Tax Act.

Issue 1: Discrepancies in income computation and addition of amount by Assessing Officer:
The appellant, a trading firm, filed its income return declaring total income. The Assessing Officer (AO) investigated and rejected book results, estimating net profit at 0.91% with an addition of ?9,61,133. The CIT(A) issued a show cause notice for income enhancement, considering the fall in net profit rate as a reason to reject book results. The CIT(A) confirmed the addition equivalent to the AO's. The appellant argued that discrepancies were reconciled, emphasizing the decline in net profit rate does not warrant book results rejection. The appellant cited legal precedents supporting their stance. The Revenue authorities opposed the appellant's contentions.

Issue 2: Rejection of book results by Assessing Officer and confirmation by CIT(A):
Section 145 of the Income Tax Act governs income computation. It mandates computation in accordance with the Assessee's accounting method, subject to Central Government-notified Accounting Standards. If the AO doubts accounts' correctness, he may assess income based on his estimation. The appellant's discrepancies included reduced profit margins, unverified purchases, additional rent, commission payments, and salary disbursements. The CIT(A) accepted some contentions but rejected others. The Tribunal found lack of justification for additional rent payment and unverified services for salary disbursements. It confirmed additions for specific discrepancies while deleting others due to the appellant's inability to verify every small supplier.

Issue 3: Interpretation of Section 145 of the Income Tax Act:
Section 145 outlines the methodology for income computation, emphasizing adherence to the Assessee's accounting method and notified Accounting Standards. The provision allows the AO to estimate income if accounts' accuracy is questionable. The Tribunal analyzed the discrepancies in the appellant's case based on Section 145, highlighting the importance of justifying expenses and verifying transactions to avoid additions to the income. The Tribunal's decision reflected a balanced approach, confirming some additions while acknowledging practical challenges in verifying every transaction.

In conclusion, the Tribunal partially allowed the appeal, confirming certain additions while deleting others based on the appellant's justifications and the legal framework outlined in Section 145 of the Income Tax Act.