2018 (12) TMI 678 - AT - Income Tax

Rejection of books of account U/s 145(3) - receipt and payment of the freight - providing transportation work of different parties through the third party vehicles - non-acceptance of a particular claim of expenditure - Held that - The non-acceptance of a particular claim of expenditure cannot be a reason to hold that the books of account of the assessee are defective and suffering from deficiency or discrepancies warranting rejection U/s 145(3). In case, the AO was not satisfied with the claim of freight charges then that particular claim could have been examined and disallowed to the extent of not proved by the assessee instead of resorting to the provisions of Section 145(3) - Even otherwise some other expenditure which is not substantiated by the assessee by filing a supporting evidence, the same can be disallowed but these disallowances cannot be a reason for rejection of books of account - when the assessee has been maintaining regular books of account duly audited by the qualified auditor then in absence of specific discrepancy or deficiency in the books of account, the provisions of Section 145(3) cannot be invoked. Hence we hold that the Assessing Officer was not justified in rejecting the books of account merely because the assessee could not file the confirmation from the parties to whom the freight charges were paid. Hence, this ground of assessee s appeal is allowed. Estimation of income by applying the NP rate - Held that -Since the Assessing Officer has doubted the claim of freight payment as the assessee has not filed any confirmation and the parties have not responded to the notice issued by the Assessing Officer U/s 133(6) of the Act, therefore, the issue of allowability of the said claim can be reexamined by the Assessing Officer only to the extent of scope of any inflation in the quantum of the freight charges paid by the assessee. So far as the outright rejection of freight charges is concerned we note that when the freight income and freight charges are linked one to one for each trip and also found recorded in the books then the entire claim of the assessee cannot be held as bogus. The only issue which can be examined by the Assessing Officer is the quantum of the freight charges inflated by the assessee or not. Accordingly, for limited purpose, we set aside the issue of allowability of the freight charges in the above terms.

Issues Involved:
1. Rejection of books of account under Section 145(3) of the Income Tax Act, 1961.
2. Application of net profit rate for estimating income.
3. Examination and verification of the claim of freight charges paid by the assessees.

Detailed Analysis:

1. Rejection of Books of Account under Section 145(3):
The primary issue revolves around the rejection of the books of account under Section 145(3) of the Income Tax Act, 1961. The assessees, private limited companies engaged in providing transportation services, filed returns declaring their income. The Assessing Officer (AO) scrutinized the books of account and observed that the assessees paid substantial freight charges in cash to truck/trailer owners, with incomplete details regarding the recipients. The AO issued notices under Section 133(6) to verify these payments, but received limited responses. Consequently, the AO rejected the books of account under Section 145(3) and estimated the income by applying a net profit (NP) rate of 2.5%.

The assessees contended that the rejection was unjustified as the books were audited, and no specific defects were pointed out by the AO. They argued that the cash payments were inevitable due to the nature of their business and that they had provided sufficient details, including PAN and vehicle registration numbers, to substantiate the payments. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the rejection but reduced the NP rate to 1.5%.

The Tribunal noted that while the assessees maintained proper books of account and established a direct nexus between freight receipts and payments, the AO's rejection of the books solely based on cash payments and self-made vouchers was not justified. The Tribunal held that the AO should have examined and disallowed specific claims of expenditure rather than rejecting the entire books of account. Therefore, the Tribunal allowed the assessees' appeal on this ground, stating that the rejection of books under Section 145(3) was unwarranted.

2. Application of Net Profit Rate:
The second issue pertains to the application of the NP rate for estimating the income of the assessees. The AO applied an NP rate of 2.5%, which was subsequently reduced to 1.5% by the CIT(A). The assessees argued that their declared NP rates were in line with past averages and that the application of a higher NP rate was excessive and unjustified.

Given the Tribunal's decision to overturn the rejection of the books of account, the issue of applying an NP rate became infructuous. The Tribunal emphasized that any addition or disallowance should be based on specific discrepancies in the claims rather than a blanket application of an NP rate.

3. Examination and Verification of Freight Charges:
The final issue involves the examination and verification of the freight charges claimed by the assessees. The AO doubted the legitimacy of these payments due to the lack of confirmations from recipients and the self-made nature of the vouchers. The Tribunal acknowledged that while the assessees provided substantial documentation, including PAN cards and vehicle registration certificates, the possibility of inflated cash payments could not be entirely ruled out.

The Tribunal directed the AO to re-examine the allowability of the freight charges, focusing on verifying the quantum of the payments rather than outright rejection. The AO was instructed to consider any additional evidence provided by the assessees and limit any disallowance to the extent of proven inflation in the freight charges.

Conclusion:
In summary, the Tribunal allowed the appeals in part, overturning the rejection of the books of account under Section 145(3) and rendering the application of the NP rate moot. The Tribunal remanded the issue of freight charges back to the AO for limited re-examination, emphasizing the need for specific verification rather than a broad disallowance. The order was pronounced in the open court on 17/09/2018.

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