2019 (8) TMI 362 - HC - Income Tax

Rejection of the books of account of the Assessee - AO alleged that assessee shown higher profit to claim deduction u/s80IC - estimate addition of expenses u/s 69C - AO had not examined any comparable units before concluding that the Assessee has shown more than ordinary profits given that the consumption of stock did not match with the items produced by the Assessee - HELD THAT - Assessee s appeal was allowed by the CIT(A) by an order dated 3rd March, 2015 inter alia on the ground that before invoking Section 145, the AO had not given any opportunity to the Assessee and therefore, could not have drawn an adverse influence against it. The ITAT observed on merits that to show the higher profit the assessee either might have inflated the assets or have understated certain liabilities, in absence of this, the profitability cannot be shown at higher figure. The corresponding effect of the higher profit has not been identified by the learned assessing officer. No indication has also been drawn by the assessing officer that how the assessee has inflated its profit and correspondingly inflated its assets or deflated its liabilities. The reasoning of both the CIT (A) as well as the ITAT in disagreeing with the AO s rejection of the Assessee s books of accounts appears to be on sound legal basis consistent with the law. The said orders, therefore, do not call for interference. No substantial question of law arises.

Summary

Issues:
1. Appeal against ITAT order regarding rejection of books of account by AO.
2. Disallowance of deduction under Section 80IC.
3. Allegation of higher profit by the Assessee.
4. Dismissal of Revenue's appeal by ITAT.
5. Disagreement with AO's rejection of Assessee's books of accounts.

Analysis:

1. The Revenue appealed against the ITAT order dated 10th December, 2018, concerning the rejection of the Assessee's books of account by the Assessing Officer (AO) for Assessment Year 2010-11. The ground of appeal was that the AO did not properly examine comparable units before concluding that the Assessee showed more than ordinary profits, as the consumption of stock did not align with the items produced by the Assessee.

2. The AO had determined the total income of the Assessee to be &8377;4,03,25,140/-, alleging a suppression of production expenses by 8% to enhance profits for claiming a deduction under Section 80IC of the Income Tax Act, 1961. The AO disallowed the deduction under Section 80IC, questioned the reliability of the Assessee's books of account, and made an estimate of expenses under Section 69C of the Act.

3. The Commissioner of Income Tax (Appeal) allowed the Assessee's appeal, citing that the AO did not provide an opportunity to the Assessee before invoking Section 145 of the Act, leading to the inability to draw an adverse inference. The ITAT, in the impugned order, dismissed the Revenue's appeal, highlighting that the AO failed to demonstrate how the Assessee inflated profits or assets to claim excess deduction under Section 80IC, emphasizing the need for proper accounting principles to be followed.

4. The ITAT's dismissal of the Revenue's appeal was based on the sound legal basis presented by both the CIT (A) and the ITAT, which were consistent with the law. The orders did not warrant interference, and no substantial question of law arose, leading to the dismissal of the appeal.

5. The disagreement with the AO's rejection of the Assessee's books of accounts was justified by the legal reasoning provided by the CIT (A) and the ITAT. The proper application of accounting principles was emphasized, and the ITAT's decision was upheld, resulting in the dismissal of the appeal by the High Court.