2022 (6) TMI 1495 - AT - Income Tax

Rejection of books of accounts - NP estimation - HELD THAT - Adverting to observation of the AO that the assessee had in the course of the assessment proceedings not only failed to produce all the vouchers for verification before him but also by stating that the bills/vouchers supporting its claim for deduction of certain administrative expenses viz. printing and stationary office misc. expenses repair and maintenance expenses transport and hire charges may not match the decorum and level of presentation to which the AO may be accustomed had thus admitted to lack of maintenance of proper records the same in our considered view is nothing better than a vague observation which by no means could have justified triggering the provisions of Sec. 145(3) of the Act for rejecting the books of accounts of the assessee. The mere fact that the bills/vouchers supporting the assessee s claim for deduction of expenses not being as per the expected decorum and level of precision as would be expected by the AO not being in the nature of a serious infirmity would not suffice for subjecting its book results to the rigors of Sec. 145(3) of the Act. Our aforesaid conviction that insignificant mistakes in accounts cannot lead to rejection of books of accounts u/s 145(3) is supported by the judgment of the Hon ble Supreme Court in the case of CIT Vs. Padamchand Ramgopal 1970 (4) TMI 2 - SUPREME COURT wherein held insignificant mistakes in the accounts cannot justify rejection of books of accounts of the assessee under Sec. 145(3) of the Act. Thus in the absence of pointing out of any specific defect in the books of accounts of the assessee there was no justification for the AO to have rejected the same by triggering the provisions of Sec. 145(3) of the Act. Decided in favour of assessee.

Issues Involved:

1. Justification for restricting the addition made on account of income computed from 8% to 7% of gross receipts.
2. Justification for allowing extra relief on account of bank interest and finance cost.
3. Justification for stating the NP of 3.75% for AY 2014-15 when the AO had estimated NP @ 8%.
4. Erroneous nature of the CIT(A)'s order in law and facts.
5. Nexus between the conclusion of fact and primary fact upon which the conclusion is based.
6. Rejection of books of accounts by the AO without pointing out specific defects.

Issue-wise Detailed Analysis:

1. Justification for Restricting the Addition Made on Account of Income Computed from 8% to 7% of Gross Receipts:

The CIT(A) observed that the AO had rejected the audited books of accounts of the assessee based on vague observations without pointing out any substantial lapse. The CIT(A) noted contradictory observations in the assessment order and found no specific defect justifying the rejection of the books. The CIT(A) also highlighted that the AO did not bring any data to justify adopting an 8% NP rate. By referring to the NP rates for AY 2011-12 and AY 2014-15, the CIT(A) concluded that a 7% NP rate would be more consistent and appropriate.

2. Justification for Allowing Extra Relief on Account of Bank Interest and Finance Cost:

The CIT(A) allowed deductions for depreciation, finance charges, and partners' remuneration and interest on capital, which were not considered by the AO. The CIT(A) emphasized that these items do not depend on business results and should be allowed as per records. The CIT(A) computed the business income of the assessee accordingly, providing significant relief.

3. Justification for Stating the NP of 3.75% for AY 2014-15 When the AO Had Estimated NP @ 8%:

The CIT(A) referred to the NP rate of 3.75% accepted for AY 2014-15 and noted that the AO did not provide a basis for adopting an 8% NP rate. The CIT(A) maintained consistency by adopting a 7% NP rate for the year under consideration, subject to further deductions.

4. Erroneous Nature of the CIT(A)'s Order in Law and Facts:

The CIT(A) found the AO's assessment order contradictory and lacking specific defects to justify the rejection of the books. The CIT(A) emphasized that the AO's vague observations could not form a justifiable reason for rejecting the books of accounts.

5. Nexus Between the Conclusion of Fact and Primary Fact Upon Which the Conclusion is Based:

The CIT(A) observed that the AO did not provide any specific instance of bogus claims or unsupported expenses. The CIT(A) concluded that the AO's rejection of the books was based on vague observations without pointing out specific defects.

6. Rejection of Books of Accounts by the AO Without Pointing Out Specific Defects:

The Tribunal concurred with the CIT(A) that the AO rejected the books of accounts without pointing out any substantial lapse. The Tribunal emphasized that the AO must demonstrate serious defects in the maintenance of accounts to justify rejection. The Tribunal cited judicial precedents supporting the view that rejection of books without specific defects is unsustainable.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection. The rejection of the books of accounts by the AO was set aside, and the addition sustained by the CIT(A) was vacated. The Tribunal emphasized the need for specific defects to justify the rejection of books and upheld the CIT(A)'s observations and conclusions. The order was pronounced in open court on June 9, 2022.

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