2022 (2) TMI 237 - HC - Income Tax

Rejection of books of accounts and estimation of profit - Whether the ITAT is legally correct in holding that rejection of books of accounts solely on the ground of non-issuance of sale memos is proper and justified ? - HELD THAT - Mere non-issuance of production of sale memos could not have been a ground to reject the entire books of account particularly since it pertained to sale of country liquor to tribal populations. Also the ITAT appears to have overlooked the fact that the books of account of the Assessee were not rejected by the Excise Department and that the ITAT itself had accepted them for the subsequent AY 2001-02. For all of the aforementioned reasons, the two questions formulated by this Court are answered in favour of the Assessee and against the Department.

Summary

Issues:
1. Rejection of books of accounts and estimation of profit legality.
2. Rejection of books of accounts solely on the ground of non-issuance of sale memos legality.

Analysis:
The judgment by the Orissa High Court, delivered by Chief Justice S. Muralidhar and Judge R. K. Pattanaik, dealt with three appeals arising from similar facts and legal questions, consolidated for a common judgment. The appeals (ITA No.221, ITA No.222, and ITA No.223 of 2004) were related to orders passed by the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 1998-99. The primary issue revolved around the rejection of books of accounts by the Assessing Officer (AO) based solely on the non-issuance of sale memos. The Court framed two questions of law for determination in each appeal, focusing on the legality and propriety of such rejections.

In the impugned assessment orders, it was observed that the AO and the Commissioner of Income Tax (Appeal) (CIT(A)) rejected the books of accounts without specific instances of irregularities or supporting material, relying on conjectures and surmises. The rejection was based on the possibility of inflation in purchases or suppression of sale prices, lacking concrete evidence. Notably, the Assessees were partnership firms deriving income from the sale of country liquor, and the ITAT had previously accepted their accounts for the subsequent Assessment Year 2001-02, raising questions about the inconsistency in treatment.

The Court emphasized that expecting the Assessees to issue sales memos for the sale of country liquor to tribal populations was unrealistic, especially when the Excise Department had accepted their books of accounts. Legal precedents were cited to support the Assessees' contentions, highlighting that low profits alone cannot justify rejecting properly maintained books of accounts. The Court referenced cases where rejections based on suspicion, surmises, or irrelevant material were deemed unjustified, reinforcing the need for concrete evidence to support such decisions.

Ultimately, the Court ruled in favor of the Assessees, setting aside the impugned orders of the AO, CIT(A), and ITAT. The rejection of books of accounts solely on the ground of non-issuance of sale memos was deemed improper, considering the specific circumstances of the case. The appeals were allowed, with no order as to costs. The judgment also addressed procedural aspects related to accessing the order due to COVID-19 restrictions, allowing parties to utilize a printout from the High Court's website subject to specified conditions.