2021 (12) TMI 640 - AT - Income Tax

Net profit estimation - Rejection of books of accounts - HELD THAT - Only Reasons for rejection of books of accounts being fact that no reply was received from certain creditors in response to notice u/s 133(6) of the Act could not have resulted into the rejection of books of accounts. Assessee has produced confirmations of those parties and no additions were made on account of creditors. Even otherwise, if a sundry creditor does not provide a confirmation u/s 133(6) of the Act, we do not find any reason to uphold the rejection of the books of accounts on that basis. The assessee has also produced the comparative chart of the gross profit for a block of 5 years starting from assessment year 2012-13 onwards. The assessee has produced assessment orders of other parties and shown a chart wherein the net profit has been accepted in the case of the other assessee in same line of business @ 0.43%. We find that the rejection of the books of accounts by the ld. AO is not proper without finding any latent, patent and glaring defects in the books of accounts of the assessee. Accordingly, we direct the ld. AO to delete the addition made of 8% of the net profit and to accept the book results shown by the assessee. Accordingly, grounds Nos. 1 3 of the appeal of the assessee are allowed.

Summary

Issues:
Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961 and application of net profit rate @ 8% on total turnover for assessment year 2014-15.

Analysis:
The case involved an appeal filed by the assessee against the order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2014-15. The Assessing Officer had applied provisions of Section 145(3) of the Income Tax Act and made an addition of ?1,85,79,495, determining net profit @ 8% on the total turnover of ?23,22,43,698. The assessee, engaged in trading of buffalo meat, had shown a decrease in gross profit rate and net profit rate compared to the previous year. The Commissioner of Income Tax (Appeals) upheld the rejection of books of accounts and addition of 8% profit estimate by the Assessing Officer, leading to dismissal of the assessee's appeal.

The assessee contended that the rejection of books of accounts was improper as audited accounts were filed under Section 44AB of the Act. The assessee argued that complete details were submitted during assessment proceedings, including various financial documents and ledger accounts. The assessee explained the decrease in profit was due to foreign exchange loss, which is an allowable business loss. The assessee maintained that books of accounts were maintained in a computerized system, and all transactions were disclosed to the Assessing Officer.

The Tribunal noted that the assessee's business primarily involved export of buffalo meat, with a significant portion of sales being exports. The decrease in net profit was attributed to foreign exchange losses, which were allowable business losses. The Tribunal emphasized that rejection of books of accounts should be based on patent defects and not merely on non-maintenance of quantitative details. The Tribunal found that the assessee had produced a complete set of books of accounts, including various financial records and ledgers. Despite the non-response from certain creditors to notices, the Tribunal held that this alone could not justify the rejection of books of accounts. The Tribunal directed the Assessing Officer to delete the addition made based on the 8% profit estimate and accept the book results shown by the assessee, allowing the grounds of appeal raised by the assessee.

In conclusion, the Tribunal's decision focused on the proper application of the provisions of Section 145(3) of the Income Tax Act and emphasized the importance of considering all relevant factors before rejecting books of accounts and making profit estimations. The Tribunal's ruling favored the assessee, highlighting the need for a thorough assessment of financial records and justifications for any additions or rejections made during the assessment process.