2025 (1) TMI 969 - AT - Income Tax

Rejection of books of accounts u/s 145(3) - estimating the Net Profit @ 5% without pointing out any major discrepancies in books of accounts - assessee contended that the complete details of sales including cash sales were filed before AO and also the details of purchases sales and comparative chart was filed before the AO - HELD THAT - Admittedly the assessee has produced bills and vouchers and from the summary of purchase and sales made and duly reflected in the VAT returns clearly shows that assessee purchases are duly reflected in the books of accounts and the bills and vouchers and without verifying the bills and vouchers sales cannot be denied so lightly and so cannot be disbelieved. This can be a good reason for rejection of books of accounts but sales cannot be disbelieved. Hence we are of the view that the assessee s sales as per bills and vouchers is at Rs. 1.24 Cr. and even cash sales during October 2016 to December 2016 quarter during demonetization period has to be accepted. Accordingly we assessed the sale at Rs. 1.24 Cr. and estimate the profit rate at 5%. We accept the rejection of books of accounts but rejection of the turnover is without any basis. Despite the fact that the assessee before AO and CIT(A) has filed complete details of sales as well as purchases and there is no reason not to accept this sale which has been disclosed by assessee. In term of the above ground of assessee s appeal is partly allowed. Cash deposit made during the demonetization period u/s 69A of the Act as unexplained money - As we accepted the cash sales carried out by assessee the cash deposit to the extent of Rs. 57.25 lac is also accepted as explained. The addition of balance cash is sustained. In term of the above this issue of assessee s appeal is partly allowed. Addition restricted to 5% of the gross profit - As we have adjudicated the first issue and restricted the overall additions to the extent of 5% of overall sales offered for a sum we refrain ourselves for adjudicating this ground being academic and without prejudice. Appeal filed by Assessee is partly allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the rejection of the books of accounts under Section 145(3) of the Income Tax Act, 1961, and the estimation of net profit at 5% was justified.
Whether the addition of Rs. 59,78,000 as unexplained money under Section 69A of the Act was appropriate.
Whether the overall additions should be restricted to 5% of the gross profit.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Rejection of Books of Accounts and Estimation of Net Profit

Relevant legal framework and precedents: Section 145(3) of the Income Tax Act allows the Assessing Officer (AO) to reject the books of accounts if they are not complete or correct, and to estimate the income to the best of their judgment.
Court's interpretation and reasoning: The Tribunal noted that the AO rejected the books of accounts based on discrepancies and a lack of supporting evidence for cash sales during the demonetization period. However, the Tribunal found that the AO's suspicion was not substantiated by concrete evidence.
Key evidence and findings: The assessee provided detailed sales and purchase records, including VAT returns, which were not adequately considered by the AO. The Tribunal found that the sales were adequately documented and reflected in the books.
Application of law to facts: The Tribunal determined that while the rejection of the books of accounts was valid due to some discrepancies, the estimation of net profit at 10% by the AO was excessive. The Tribunal upheld the CIT(A)'s decision to estimate the net profit at 5%.
Treatment of competing arguments: The Tribunal considered the Department's argument about the abnormal increase in cash sales but found the assessee's documentation and explanations credible.
Conclusions: The Tribunal concluded that the books of accounts were rightly rejected, but the net profit estimation should be at 5%, not 10%.

Issue 2: Addition of Rs. 59,78,000 as Unexplained Money

Relevant legal framework and precedents: Section 69A of the Income Tax Act pertains to the treatment of unexplained money, where the burden is on the assessee to explain the source of any cash deposits.
Court's interpretation and reasoning: The Tribunal found that the cash sales during the demonetization period were adequately documented and should be considered as explained money.
Key evidence and findings: The Tribunal accepted the cash sales of Rs. 57.25 lakhs as genuine, leaving only Rs. 2.53 lakhs unexplained.
Application of law to facts: The Tribunal applied Section 69A to the unexplained balance of Rs. 2.53 lakhs, sustaining this amount as unexplained money.
Treatment of competing arguments: The Tribunal considered the Department's view that the entire cash deposit was unexplained but found the assessee's records and explanations for the majority of the cash credible.
Conclusions: The Tribunal partly allowed the assessee's appeal, accepting the explanation for Rs. 57.25 lakhs and sustaining the addition of Rs. 2.53 lakhs.

Issue 3: Restriction of Overall Additions to 5% of Gross Profit

Relevant legal framework and precedents: The issue pertains to the reasonableness of profit estimation in light of the documented sales and purchases.
Court's interpretation and reasoning: The Tribunal noted that since the net profit was already estimated at 5% of the turnover, further adjudication on this point was unnecessary.
Key evidence and findings: The Tribunal relied on the already established sales figures and profit estimation.
Application of law to facts: The Tribunal found that the 5% estimation was adequate, considering the nature of the business and documented transactions.
Treatment of competing arguments: The Tribunal did not find it necessary to delve further into this issue as it was addressed in the resolution of the first issue.
Conclusions: The Tribunal refrained from further adjudication on this issue, considering it academic and addressed by the earlier findings.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The assessee before us filed complete details of purchases and sales including purchases & sales register. The assessee produced the comprehensive summary and purchase and sale made during October, 2016 to Dec. 2016 and no discrepancies was pointed out by either AO or CIT(A)."
Core principles established: The rejection of books of accounts can be justified by discrepancies, but profit estimation should be reasonable and based on available evidence. Documented sales during the demonetization period should not be dismissed without concrete evidence of inaccuracies.
Final determinations on each issue: The Tribunal partly allowed the appeal, upholding the rejection of books but reducing the profit estimation to 5%. It accepted the explanation for Rs. 57.25 lakhs of cash deposits and sustained the addition of Rs. 2.53 lakhs as unexplained money.

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