2013 (7) TMI 521 - HC - Income Tax

Rejection of books of accounts - Whether in the absence of any finding that the method of accounting adopted by the assessee is such that the income cannot be properly deduced, the AO erred in law in taking recourse to the first proviso to section 145(1) Held that - It appears that the AO, the CIT and ITAT have not considered the matter in a proper perspective for rejecting the books of account - the matter to be remitted back to the CIT (Appeals) for fresh decision after hearing the assessee in this regard - though certain reasons have been given by the AO but the entire basis of non-acceptance of the account books as recorded by the Assessing Officer was not correct - the factual position can be ascertained only from a perusal of the account books case remanded back - appeal decided in favour of assessee.

Issues Involved:
1. Whether the Assessing Officer erred in law by invoking the proviso to section 145(1) of the Income-tax Act without a finding that the method of accounting adopted by the assessee was such that the income could not be properly deduced.

Issue-wise Detailed Analysis:

1. Invocation of Section 145(1) of the Income-tax Act:
The primary issue revolves around whether the Assessing Officer (AO) was justified in invoking the proviso to section 145(1) of the Income-tax Act, 1961, without a clear finding that the method of accounting adopted by the assessee was inadequate for deducing the correct income. The appellant filed its return for the assessment year 1994-95 based on its account books. The AO, in the assessment order dated December 29, 1995, found that the method used by the appellant to calculate gross and net profit was incorrect. Without specific findings on the account books, the AO invoked section 145(1) and increased the profit ratio from 19.9% to 21.66%.

2. Appellant's Arguments:
The appellant argued that the AO invoked section 145(1) without assigning specific reasons. The figures considered by the AO were also contested as incorrect. The appellant presented correct figures before the Commissioner of Income-tax (Appeals) (CIT(A)), but these were not considered. The CIT(A) affirmed the AO's order without addressing the appellant's objections. The Income-tax Appellate Tribunal (ITAT) also did not consider the grounds for rejecting the account books.

3. Respondent's Arguments:
The respondents supported the AO's decision, stating that cogent reasons were provided in the assessment order. The reasons included discrepancies in the consumption of coal, repairs costs, valuation of closing stock, purchases from a sister concern, and contradictions in facts and figures provided by the assessee. The AO concluded that the correct gross profit was not disclosed and adopted a gross profit rate of 21%.

4. Analysis of the AO's Reasons:
The AO's reasons for rejecting the account books included:
- Discrepancies in the consumption of coal and repairs costs.
- Incorrect valuation of closing stock.
- Purchases from a sister concern affecting gross profit rate.
- Inherent contradictions in the facts and figures provided by the assessee.
- Failure to disclose the correct gross profit.

5. CIT(A) and ITAT's Consideration:
The CIT(A) and ITAT affirmed the AO's order without addressing the appellant's objections. The CIT(A) accepted the AO's addition without providing reasons. The ITAT also did not consider the reasons for rejecting the account books.

6. Legal Precedents:
The court referred to the case of R. J. Trivedi (HUF) v. CIT, where it was held that rejection of books under section 145(2) must consider all relevant facts and not be based on irrelevant or non-existent facts. Similar views were taken by the Patna High Court in MD. Umer v. CIT and the Gauhati High Court in Aluminium Industries (P.) Ltd. v. CIT, emphasizing that profit deduction from regularly employed accounting methods should be the end of the matter unless serious defects in maintenance of books are noted.

7. Court's Conclusion:
The court concluded that the AO, CIT(A), and ITAT did not properly consider the matter for rejecting the books of account. The court found that the reasons provided by the AO were primarily based on the lower profit ratio compared to the previous year, which required a thorough examination of the account books. The matter was remitted back to the CIT(A) for a fresh decision after hearing the appellant.

8. Directions:
The court directed the CIT(A) to restore the appeal and decide the matter afresh, considering the merits and all facts of the case. The parties were instructed to appear before the CIT(A) on May 6, 2013, with no fresh notice required. The CIT(A) was urged to expedite the hearing and decision within six months.

Conclusion:
The court remitted the matter to the CIT(A) for a fresh decision, emphasizing the need for a proper examination of the account books and consideration of all relevant facts and objections raised by the appellant. The court highlighted the importance of assigning cogent reasons for rejecting account books under section 145(1) of the Income-tax Act.

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