2018 (3) TMI 225 - HC - Income Tax

Justification for rejection of books of accounts - Assessee has sold goods at price lower than its purchase price - estimation of profit - Held that - It is not the case of the Revenue that the amounts reflected as sale price and/or purchase price in the books do not correctly reflect the sale and/or purchase prices. In terms of Section 145(3) AO is entitled to reject the books of accounts only on any of the following condition being satisfied. (i) Whether he is not satisfied about the correctness or completeness of accounts; or (ii) Whether the method of accounting has not been regularly followed by the Assessee; or (iii) The income has been determined not in accordance with notified income and disclosure standard. It is not the case of the Revenue that any of the above circumstances specified in Section 145(3) of the Act are satisfied. The rejection of accounts is justified on the basis that it is not possible for the Assessee who is a trader to sell goods at the prices lower than the market price or purchase price. In fact as observed by the Apex Court Commissioner of Income Tax, Gujarat Vs. A. Raman & Co. (1967 (7) TMI 2 - SUPREME Court) and in S.A. Builders Vs. Commissioner of Income Tax 2006 (12) TMI 82 - SUPREME COURT the law does not oblige/compel a trader to make maximize its profits. - Decided against revenue

Summary

Issues:
1. Justification for rejection of books of accounts by the Assessing Officer.
2. Deletion of addition made by the Assessing Officer based on the estimation of gross profit.

Analysis:
1. The first issue revolves around the justification for the rejection of books of accounts by the Assessing Officer. The Respondent, engaged in trading of steel and engineering items, explained the low profits by highlighting the competitive low margins, high volume, and the need to quickly sell goods due to market price fluctuations. Despite this explanation, the Assessing Officer rejected the books of accounts, leading to an estimation of gross profit at 2% of sales, significantly increasing the profits.

2. The second issue concerns the deletion of the addition made by the Assessing Officer based on the estimation of gross profit. The Respondent filed an appeal to the Commissioner of Income Tax (Appeals), who dismissed it. However, the Tribunal allowed the Respondent's appeal, emphasizing that the books of accounts were audited and detailed, with no defects found by the Assessing Officer. The Tribunal held that selling goods at prices lower than purchase price does not automatically warrant rejection of books of accounts, especially when the sale and purchase prices were accurately reflected in the books.

3. The High Court noted that the Revenue's grievance was based on the Respondent selling goods at prices lower than the purchase price, leading to doubts about the reliability of the books of accounts. However, the Court highlighted that the rejection of books of accounts can only be justified under specific conditions as per Section 145(3) of the Income Tax Act. Since none of these conditions were met, the rejection of accounts solely on the basis of selling goods at lower prices was deemed unjustified.

4. The Court referenced legal precedents to support its decision, emphasizing that traders are not obligated to maximize profits, as observed in previous judgments. Consequently, the questions raised by the Revenue did not present any substantial question of law, leading to the dismissal of the appeal. The Court concluded by dismissing the appeal and making no order as to costs.

In summary, the High Court upheld the Tribunal's decision, emphasizing that the rejection of books of accounts should be based on specific conditions outlined in the Income Tax Act and not merely on the basis of selling goods at prices lower than the purchase price.