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2024 (10) TMI 1651 - AT - Income TaxRejecting the books of accounts and making trading addition - CIT(A) reducing the G.P. rate to 3% - HELD THAT - It was not justified on the part of the AO to observe that the assessee has nothing to say on the query raised to hold that books of account are not reliable. It appears that before the CIT(A) all these aspects were brought on record. CIT(A) preferred to sustain the observations of the AO with very general observation and showing generosity gave relief to the assessee by reducing the GP rate from 4% as considered by the AO to 3% in those years in which GP rate is not already shown above three years. It seems to be more an act of benevolence rather than an exercise of quasi judicial function. Such ad-hocism has no place in law when otherwise assessee had provided all the relevant pieces of financials and records. Tax authorities seems to have taken a short cut of rejecting the books of accounts instead of showing due indulgence to the material before them and point specific instances of misreporting income or expenses in the books. Thus we are of the considered view that at one end the AO has failed to justify the rejection of books of account and on the other hand the CIT(A) has failed to consider the relevant pleas of the assessee and to make an ad hoc assessment. Assessee appeal allowed.
Issues Presented and Considered
The core legal questions considered by the Tribunal in these appeals arising from assessment orders under sections 143(3)/153A of the Income Tax Act, 1961, are as follows:
Issue-wise Detailed Analysis 1. Validity of Jurisdiction under Section 153A The appeals raised a challenge to the jurisdiction assumed by the AO under section 153A, contending that the mandatory conditions for invoking this provision were not complied with, rendering the assessment order invalid. However, during the hearing, the appellant did not press this ground, effectively waiving this issue. The Tribunal thus did not delve deeper into the validity of jurisdiction in the present appeals. 2. Rejection of Books of Account under Section 145(3) Legal Framework and Precedents: Section 145(3) empowers the AO to reject the accounts maintained by the assessee if they are found to be "not accurate or not reliable" and to estimate income accordingly. The power is to be exercised only when the books are not maintained regularly or are found inaccurate after due inquiry. The principle is that rejection of books should not be arbitrary and must be supported by tangible evidence. Court's Interpretation and Reasoning: The AO rejected the books on the basis that the assessee failed to produce complete details, including vouchers, bills, transportation slips, and other corroborative documents, especially in the context of related party transactions. The rejection was also premised on statements recorded during search and survey operations indicating bogus sales and purchases and under-invoicing practices within the group. The AO found that the books did not reflect the true and correct state of affairs. The CIT(A) upheld the AO's rejection of books, noting the assessee's failure to produce the required details despite multiple opportunities, and the presence of discrepancies and non-production of books during search assessment proceedings. The CIT(A) observed that the assessee's reliance on audited accounts was insufficient to disprove the AO's findings. Key Evidence and Findings: The AO relied on statements recorded under oath during search proceedings, bank statements showing routing of funds among related concerns, and the absence of supporting documents for transactions. The assessee filed voluminous documents and submissions, including audited financial statements, sales and purchase registers, confirmations from related parties, and invoices. However, the AO found these insufficient or not produced in a timely manner for verification. Application of Law to Facts: The Tribunal noted that the AO's rejection was based primarily on lack of information and non-production of requisite details rather than on any intrinsic defect or irregularity found in the books themselves. The Tribunal found that the AO had not pointed out specific discrepancies or misstatements in the books but relied on general allegations and statements from other group entities. The assessee had furnished detailed explanations, documentary evidence, and confirmations to substantiate the transactions and the genuineness of the books. Treatment of Competing Arguments: The assessee contended that the AO's rejection was based on bald assertions without evidence and that statements of third parties were not confronted or cross-examined, thus lacking evidentiary value. The assessee also argued that related party transactions were legitimate and that no transfer pricing provisions applied for the relevant year. The AO and CIT(A) countered that the assessee failed to produce documents as called for and that the statements and evidence were duly considered and provided to the assessee during proceedings. Conclusions: The Tribunal concluded that the AO failed to justify the rejection of books on valid grounds and that the CIT(A) erred in sustaining the rejection without adequately considering the assessee's submissions and evidence. The Tribunal observed that the AO and CIT(A) took a shortcut by rejecting the books wholesale rather than pointing out specific irregularities. The rejection was thus not sustainable. 3. Addition on Estimated Gross Profit Rate Legal Framework: When books are rejected, the AO is empowered to estimate income based on gross profit rates applicable to similar businesses. However, such estimation must be reasonable, supported by data, and not arbitrary or ad hoc. Court's Reasoning: The AO estimated gross profit at 4% based on similar businesses in the iron and steel trading sector. The CIT(A) reduced this rate to 3%, thereby reducing the addition. The Tribunal found this reduction to be an act of benevolence rather than a reasoned quasi-judicial decision, lacking detailed analysis or justification. Application of Law to Facts: Given that the books were wrongly rejected, the basis for estimating gross profit was flawed. The Tribunal held that the addition based on such estimation was not sustainable, especially when the assessee had furnished detailed accounts and explanations for the profit margins. Conclusion: The Tribunal allowed the appeal on this ground, holding that the addition made by estimating gross profit was unjustified and must be deleted. 4. Use of Statements Recorded During Search and Survey Legal Framework: Statements recorded during search or survey under sections 132(4) or 133A must be used with caution. The assessee has a right to confront and cross-examine witnesses whose statements are used against him. Reliance on such statements without opportunity to cross-examine may violate principles of natural justice. Court's Reasoning: The AO relied on statements of employees of related concerns to allege bogus transactions and manipulation of books. The assessee argued these statements were not confronted or cross-examined and hence lacked evidentiary value. The CIT(A) held that all documents and statements were provided during proceedings, and no separate opportunity for cross-examination was necessary, citing judicial precedents. Conclusion: The Tribunal noted the conflicting approaches but emphasized that the AO's reliance on such statements without direct confrontation was problematic. However, since the Tribunal allowed the appeal on other grounds, detailed adjudication on this point was not necessary. 5. Validity of Assessment Order Without DIN The assessee raised a legal ground that the assessment order was invalid as it lacked a Document Identification Number (DIN), a mandatory requirement as per CBDT Circular No. 19/2019 and judicial pronouncements. However, the appellant did not press this ground during the hearing, and the Tribunal did not examine this issue further. 6. Other Grounds: Credit for Prepaid Taxes and Interest under Sections 234B and 234C These grounds were raised but not pressed or elaborated upon during the hearing. The Tribunal did not address these issues in detail. Significant Holdings The Tribunal made the following key determinations: "The ld. tax authorities have rejected the books of account of the assessee on the basis of lack of information and not on the basis that any discrepancy was found in the books of account to show that the same were not maintained in regular course of business." "The AO has primarily relied on the statements recorded during search operation and certain facts as had come up during pre-search inquiry to draw the conclusion that the assessee was indulging in manipulating the books of account by making bogus purchase/sales, under-invoicing, taking bogus advances in order to reduce its profits and to introduce their undisclosed income." "It seems to be more an act of benevolence rather than an exercise of quasi judicial function. Such ad-hocism has no place in law when otherwise assessee had provided all the relevant pieces of financials and records." "The AO has failed to justify the rejection of books of account and on the other hand, the CIT(A) has failed to consider the relevant pleas of the assessee and to make an ad hoc assessment." "The grounds No. 4 and 5 as raised deserves to be sustained. The findings as arrived in AY 2017-18 squarely applies pari materia to all the other assessment years under consideration in respective appeals." Accordingly, the Tribunal allowed the appeals, quashing the rejection of books of account and deleting the additions made on estimated gross profit basis.
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