2025 (4) TMI 402 - AT - Income Tax

Rejection of books of accounts - non-production of bills and vouchers and other documents - Estimation of income - HELD THAT - AO was justified in rejecting the books of account and estimating the net profit but the estimate has been made at a higher side. Therefore it was considered appropriate that in place of the net profit rate of 0.31% shown (which was 1.07% in the immediately preceding year) and as against the net profit rate of 2% applied by the AO it would be justified if net profit rate of 0.75% is applied on the turnover (which is higher this year) as the same was 1.07% in the immediate past year and no supporting bills and vouchers could be filed to justify the fall in the net profit rate to which the ld. Counsel for the assessee also agreed and the Ld. DR also did not raise any serious objection. Hence the order of the Ld. AO is modified and he is directed to apply the net profit rate of 0.75% on the gross turnover in place of net profit rate of 2% applied and recompute the additional estimated income after giving allowance for Rs. 29, 78, 146/- as made by him while estimating the income. The net addition thus works out to Rs. 43, 29, 907/- in place of Rs. 1, 65, 09, 996/- made by the Ld. AO. AO is directed to recompute the addition and the income accordingly. Appeal filed by the assessee is partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

- Whether the Assessing Officer (AO) was justified in rejecting the books of account under Section 145(3) of the Income Tax Act, 1961 due to the alleged failure of the assessee to provide necessary documentation.

- Whether the AO's estimation of net profit at 2% of the gross turnover was reasonable and justified.

- Whether the disallowance of expenses and the additional income estimation of Rs. 1,65,09,996/- were justified without specific identification of disallowed expenses.

2. ISSUE-WISE DETAILED ANALYSIS

Rejection of Books of Account under Section 145(3)

- Relevant Legal Framework and Precedents: Section 145(3) of the Income Tax Act allows the AO to reject the books of account if they are not complete or correct. The Tribunal referred to several precedents, including Sanjay Kundu v. CIT and Sage Infrastructure (P.) Ltd v. ACIT, which support the rejection of books when the assessee fails to maintain proper records.

- Court's Interpretation and Reasoning: The Tribunal agreed with the AO's decision to reject the books of account due to the assessee's failure to provide supporting documentation such as bills, vouchers, and confirmations of creditors. The Tribunal noted that mere submission of audit reports and ledger accounts was insufficient to verify the genuineness of the entries.

- Key Evidence and Findings: The assessee did not furnish complete documentation, including cash books, ledgers, and vouchers, which led to the rejection of the books of account.

- Application of Law to Facts: The Tribunal found that the AO acted within the legal framework by rejecting the books based on incomplete documentation.

- Treatment of Competing Arguments: The assessee argued that the AO did not find any omission or commission in sales or purchases, but the Tribunal upheld the AO's decision, emphasizing the lack of supporting evidence.

- Conclusions: The rejection of the books of account was justified due to the absence of necessary documentation.

Estimation of Net Profit at 2%

- Relevant Legal Framework and Precedents: The Tribunal referred to precedents such as Kachwala Gems v. JCIT, which support the estimation of income when proper accounts are not maintained.

- Court's Interpretation and Reasoning: The Tribunal found the initial estimation of 2% net profit by the AO to be on the higher side, considering the nature of the assessee's business and the significant increase in turnover.

- Key Evidence and Findings: The Tribunal noted the substantial increase in turnover compared to the previous year and the lower net profit rate shown by the assessee.

- Application of Law to Facts: The Tribunal decided that a net profit rate of 0.75% was more appropriate given the circumstances and industry standards.

- Treatment of Competing Arguments: The assessee contended that the AO's estimation was arbitrary, while the Tribunal agreed to a reduced rate of 0.75% after considering both parties' arguments.

- Conclusions: The net profit estimation was adjusted to 0.75% of the gross turnover, resulting in a revised additional income calculation.

3. SIGNIFICANT HOLDINGS

- Preserve Verbatim Quotes of Crucial Legal Reasoning: "The AO had made a downward revision of profit from trading @2% of the gross profit instead of initially proposed rate of 8% by considering the nature of business of the assessee."

- Core Principles Established: The Tribunal emphasized the necessity of maintaining complete and accurate books of account and the authority of the AO to estimate income when documentation is lacking.

- Final Determinations on Each Issue: The Tribunal upheld the rejection of the books of account but modified the net profit estimation to 0.75%, leading to a reduced additional income of Rs. 43,29,907/-.

In conclusion, the appeal was partly allowed, with the Tribunal directing the AO to recompute the additional estimated income based on a net profit rate of 0.75% instead of 2%.