2025 (4) TMI 31 - AT - Income Tax

Rejection of books of accounts - assessee has failed to submit the evidence in support of the expenditure claimed in the profit and loss account during the assessment and appellate proceedings - AO Estimated the profit @ 8% of the Commission income shown in the profit loss account - HELD THAT - We note that the AO and CIT(A) have rejected the books of accounts and estimated the net profit of the business @ 8% of the turnover arbitrarily. Assessee had incurred loss in the earlier A.Y. 2017-18 and also next A.Y. 2019-20 apart from incurring the losses during the impugned assessment year. Therefore to meet the ends of justice and reduce the litigation we consider it appropriate to estimate the profit @ 3% of the turnover of the assessee for the A.Y. 2018-19 by setting aside the order of the ld.CIT(A). We direct the AO to restrict the estimation of profit to 3% of turnover which works out to Rs. 16, 13, 065/- (Being 3% of Rs. 5, 37, 68, 840/-) and recompute the income of the assessee. Set off of the carry forward loss of the earlier assessment years we direct the AO to verify the records if the assessee has filed the respective assessment year s return of income within the due dates prescribed under the Act and allow the same if eligible in accordance with law. Appeal filed by the assessee is partly allowed.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the Commissioner of Income Tax (Appeals) was correct in confirming the Income Tax Officer's (ITO) order under Section 143(3) read with Section 144B of the Income Tax Act without providing the assessee sufficient opportunity to present its case and submit relevant details.

2. Whether the rejection of the assessee's books of accounts by the ITO, despite being maintained according to accepted accounting standards and duly audited, was justified.

3. Whether the estimation of the assessee's income at 8% of the total turnover was arbitrary and lacked justification.

4. Whether the ITO's exercise of power under Section 145(3) was judicious and not arbitrary.

5. Whether the extraordinary circumstances of the COVID-19 pandemic and the resultant lockdown were adequately considered in the assessment process.

6. Whether the assessee's claim for carrying forward losses from earlier assessment years was properly addressed.

ISSUE-WISE DETAILED ANALYSIS

1. Opportunity to Present Case and Submit Details

The legal framework involves the principles of natural justice, which require that parties be given a fair opportunity to present their case. The Tribunal noted that the assessee claimed insufficient opportunity was provided to explain its case. The Court examined the procedural history, noting that the assessee had failed to furnish complete details and evidence during the assessment and appellate proceedings. The Tribunal found that the assessee did not adequately substantiate its claims with supporting documents, leading to the confirmation of the ITO's order.

2. Rejection of Books of Accounts

The relevant legal framework includes Sections 143(3) and 145(3) of the Income Tax Act. The Tribunal considered whether the books of accounts, maintained according to accepted standards and audited, were justifiably rejected. The Court observed that the assessee failed to provide necessary documentary evidence to verify expenses, leading to the rejection of the books. The Tribunal upheld the rejection due to the lack of substantiation of expenses.

3. Estimation of Income at 8% of Turnover

Section 144B of the Income Tax Act allows for best judgment assessment. The Tribunal reviewed whether the estimation of income at 8% of turnover was arbitrary. The Court noted the assessee's history of losses and the nature of its business, which typically operates on thin margins. The Tribunal concluded that the 8% estimation was excessive and adjusted the profit estimation to 3% of the turnover, considering the business context and past financial performance.

4. Exercise of Power under Section 145(3)

The Tribunal examined whether the ITO's invocation of Section 145(3) was arbitrary. This section permits the rejection of books if they are not reliable. The Court found that the ITO's decision was based on the absence of supporting evidence for expenses, which justified the invocation of Section 145(3).

5. Consideration of COVID-19 Pandemic

The Tribunal acknowledged the impact of the COVID-19 pandemic on the assessee's operations. However, it determined that the lack of documentary evidence was a significant factor in the assessment process, irrespective of the pandemic's effects. The Court did not find sufficient grounds to alter the assessment based solely on the pandemic.

6. Carry Forward of Losses

The Tribunal addressed the issue of carrying forward losses, directing the ITO to verify if the assessee filed returns within the prescribed due dates under Section 139(1) and to allow the carry forward if eligible. The Court emphasized the need for compliance with procedural requirements for claiming carry forward of losses.

SIGNIFICANT HOLDINGS

The Tribunal made several significant determinations:

- The Tribunal held that the rejection of books of accounts was justified due to the lack of supporting evidence for expenses. "The assessee has failed to submit the evidence in support of the expenditure claimed in the profit and loss account during the assessment and appellate proceedings."

- The estimation of profit at 8% was deemed excessive, and the Tribunal reduced it to 3%, stating, "To meet the ends of justice and reduce the litigation, we consider it appropriate to estimate the profit @ 3% of the turnover."

- The Tribunal directed the ITO to verify the eligibility for carrying forward losses, highlighting the importance of filing returns within the due dates.

In conclusion, the appeal was partly allowed, with the Tribunal adjusting the profit estimation and directing further verification regarding the carry forward of losses. The decision emphasized the necessity of providing adequate evidence to support claims and the impact of procedural compliance on tax assessments.

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