1998 (9) TMI 124 - AT - Income Tax

Summary

Issues Involved:
1. Admissibility and relevance of the document (Annexure P) found during the search.
2. Validity of rejecting the books of account based on discrepancies in sales and purchases.
3. Estimation of income based on the document versus the books of account.

Summary:

Issue 1: Admissibility and Relevance of the Document (Annexure P)
The primary issue was whether the document styled as Annexure P, not written by any of the partners or authorized persons of the firm, could be considered in the hands of the assessee and if it could be the sole basis for estimating income while ignoring the books of account. The Tribunal noted that the document reflected the financial affairs of a person for the relevant years but found no material to link the entries with the assessee-firm. The document was found in the registered office of the firm, occupied by one of the partners, but there was no evidence that it pertained to the firm. The Tribunal concluded that the document could not be considered reliable or admissible for assessing the firm's income.

Issue 2: Validity of Rejecting the Books of Account Based on Discrepancies
The Assessing Officer (AO) found discrepancies in sales and purchases for the assessment years 1986-87 and 1987-88, leading to the rejection of the books of account u/s 145 of the Act. The Tribunal emphasized that the accounts maintained by the assessee should be accepted as correct unless proven unreliable. The AO noted discrepancies in sales and purchases, but the Tribunal found that these discrepancies needed verification. The Tribunal restored the matter to the AO to verify the discrepancies before making any addition.

Issue 3: Estimation of Income Based on the Document Versus Books of Account
The Tribunal held that since the document (Annexure P) could not be related to the assessee, no addition could be made based on it. The income should be computed as per the books of account maintained by the assessee. The Tribunal directed the AO to examine the discrepancies in sales and make additions if necessary, but not to base the income estimation solely on the document.

Conclusion:
The Tribunal allowed both appeals, directing the AO to compute the income based on the books of account and verify the discrepancies in sales for both assessment years. The income estimated on the basis of the document (Annexure P) was not sustained.