2025 (1) TMI 571 - AT - Income Tax

Estimating purchases of imported and sales - Rejection of books of accounts invoking section 145 - AO in estimating Gross profit @30% and confirming addition - HELD THAT - It is pertinent to note that as regards rejection of books of account the AO in the Assessment Order has not given any detailed finding while rejecting the books of account of the assessee. In fact at one threshold the AO is rejecting the same and on the other aspect of opening balance and closing balance the Assessing Officer is adopting the said books of account itself while making the addition on account of Gross Profit. Therefore rejection of books of account are not justified by the Assessing Officer. Thus ground no.2 of the assessee s appeal is allowed. GP Estimation - The observation of the AO that the stock register was not maintained by the assessee cannot be the sole criteria for rejecting the books but in fact the details were very much available with the AO to take cognisance and without assigning any cogent reason rejected the books. The assessee has already taken the Gross Profit rate of 25.38% in the present A.Y. which is less than the difference of 10% to that of 30% adopted by the CIT(A) and therefore the observation of the CIT(A) to take 30% of Gross Profit rate is also not justifiable. Thus Gross Profit rate already declared by the assessee for A.Y. 2016-17 is justified through the evidences at 25.38%. Thus ground nos.3 4 are allowed.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses several core issues:

Whether the rejection of the assessee's books of accounts by the Assessing Officer (AO) under Section 145 of the Income Tax Act was justified.
The correctness of the AO's estimation of purchases and sales figures, and the gross profit percentage applied.
The legitimacy of disallowing the set-off of business losses claimed by the assessee.
The appropriateness of denying deductions under Chapter VIA of the Income Tax Act.
Whether the procedural aspects, such as providing necessary material to the assessee and adherence to principles of natural justice, were followed by the lower authorities.
The validity of interest levied under Sections 234A/B/C and the initiation of penalty proceedings under Section 271(1)(c) of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Rejection of Books of Accounts

Relevant Legal Framework and Precedents: Section 145 of the Income Tax Act allows the AO to reject books of accounts if they are not maintained properly. Precedents include cases where non-maintenance of stock registers was not solely sufficient for rejection.
Court's Interpretation and Reasoning: The court found that the AO did not provide a detailed rationale for rejecting the books and inconsistently relied on them for certain calculations.
Key Evidence and Findings: The AO noted discrepancies in the quantitative details provided by the assessee but did not find specific defects in the books or documentary evidence.
Application of Law to Facts: The court held that the rejection was unjustified as the AO failed to substantiate the rejection with cogent reasons.
Treatment of Competing Arguments: The assessee argued that the books were audited and discrepancies were addressed, while the AO's rejection lacked a detailed basis.
Conclusions: The court allowed the appeal on this ground, stating the rejection was not justified.

Estimation of Purchases, Sales, and Gross Profit

Relevant Legal Framework and Precedents: The AO's power to estimate figures must be based on reasonable grounds and evidence.
Court's Interpretation and Reasoning: The court found the AO's estimation arbitrary, lacking material basis, and not considering the actual figures provided by the assessee.
Key Evidence and Findings: The AO estimated a higher purchase figure without sharing ITS data with the assessee and adopted a 50% gross profit markup without justification.
Application of Law to Facts: The court determined that the actual figures, supported by documentation, should be considered, and the 25.38% gross profit rate declared by the assessee was justified.
Treatment of Competing Arguments: The assessee provided detailed records and argued against arbitrary estimations, while the AO's basis for estimation was deemed insufficient.
Conclusions: The court allowed the appeal, rejecting the AO's estimations and accepting the assessee's declared figures.

Set-off of Business Loss and Deductions under Chapter VIA

Relevant Legal Framework and Precedents: Provisions under the Income Tax Act allow for set-off of genuine business losses and deductions under Chapter VIA.
Court's Interpretation and Reasoning: The court found that the AO did not provide adequate reasons for disallowing the set-off and deductions claimed.
Key Evidence and Findings: The assessee provided evidence supporting the business loss and deductions, which the AO failed to adequately dispute.
Application of Law to Facts: The court held that the set-off and deductions should be allowed in the interest of justice.
Treatment of Competing Arguments: The assessee argued for the legitimacy of the claims, which the court found credible.
Conclusions: The court partly allowed the appeal, granting the set-off and deductions.

Procedural Aspects and Natural Justice

Relevant Legal Framework and Precedents: Principles of natural justice require that all necessary materials be provided to the assessee, and fair procedures be followed.
Court's Interpretation and Reasoning: The court noted procedural lapses, such as not sharing ITS data with the assessee.
Key Evidence and Findings: The assessee claimed that necessary materials were not provided, impacting the fairness of the proceedings.
Application of Law to Facts: The court emphasized the need for adherence to procedural fairness.
Treatment of Competing Arguments: The assessee's claims of procedural lapses were supported by evidence.
Conclusions: The court acknowledged procedural shortcomings, impacting the overall fairness of the assessment process.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The rejection of books of account is not justified by the Assessing Officer."
Core Principles Established: Arbitrary estimations without material basis are not permissible; adherence to procedural fairness is crucial.
Final Determinations on Each Issue: The court allowed the appeal on the grounds of unjustified rejection of books, arbitrary estimations, and procedural lapses, while partly allowing claims for set-off and deductions.

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