2014 (10) TMI 795 - AT - Income Tax

Rejection of books of accounts Counsel of the assessee contended that the books of accounts are not properly examined Reasons for rejection of books of accounts valid or not - Held that - The first reason for rejection of books is that the books of accounts are not contemporaneous - there is no denial that the books of accounts are not contemporaneous - the books of accounts have been prepared much after the close of the accounting year - rejecting the books of accounts on this ground is not justified because the books have actually been prepared much after the close of the accounting year - the books cannot be rejected merely because they are unaudited - All that has to be seen is that whether the books of accounts give a true and fair view or not. If the books of accounts have never been examined how can the revenue authorities say that the books are not complete - The revenue authorities should have specifically pointed out which part of the books is not complete - Without pointing out any specific/direct mistake, a general statement stating that the books are not complete would not do any justice - CIT(A) observed that most of the entries in the books of accounts are in the form of journal entries in the names of related person it could not be understood as to how can this be a reason for rejecting the books of accounts - When a person is maintaining books of accounts on mercantile system of accounting, obviously, most of the entries would be in the form of journal entries - the books of accounts have been prepared on the basis of the evidences which are seized by the authorities which mean that they are still in the possession of the department/custodian - There is no specific instance pointed out which is not backed by any primary documentary evidence - It is also not clear whether the assessee was ever called for to explain any of the transactions recorded in the books of accounts - In the absence of the verification of primary document vis- -vis entries in the books, assessee s accounts cannot be treated as unreliable. The auditors were appointed on 5.11.2003 about two years after the death of Shri Harshad S. Mehta who expired on 30.12.2001 - The widow Smt. Jyoti Mehta had already informed the custodian and the Special Court that she had no knowledge of the business of her deceased husband therefore will not be able to meet any queries - The auditor s commented that there was non-cooperation on the part of the assessee for the purpose of audit and that due to lack of verification, the reliabilities of these books could not be verified does not have any force for the simple reason that in a case of such huge magnitude expecting the widow to answer each and every query was not possible - the books of accounts have been rejected on flimsy grounds without thoroughly examining each and every entry and without confronting specific discrepancy, if any, to the assessee the matter is to be remitted back to the AO for verification and examination of each entry in the books of accounts without getting prejudice by the fact that books of accounts are not contemporaneous Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of books of accounts by Revenue authorities.
2. Contemporaneous nature of the books of accounts.
3. Auditing status of the books of accounts.
4. Completeness of the books of accounts.
5. Infirmities in the books of accounts of transacting parties.
6. Lack of primary documentary evidence backing the books of accounts.
7. Improbable entries in the books of accounts.
8. Rejection of books of accounts by Special Auditors.

Detailed Analysis:

1. Rejection of Books of Accounts by Revenue Authorities:
The primary issue revolves around the rejection of the books of accounts by the Revenue authorities. The assessee contended that a proper examination of the books would have presented a different financial picture. The Revenue, however, maintained that the books were thoroughly examined and subsequently rejected due to various deficiencies.

2. Contemporaneous Nature of the Books of Accounts:
The Tribunal noted that the books of accounts were not contemporaneous, prepared much after the close of the accounting year. However, it was emphasized that the rejection on this ground alone is not justified if the books are based on contemporaneous documents. The Tribunal highlighted that the books were prepared from documents in the possession of the custodian/Revenue authorities.

3. Auditing Status of the Books of Accounts:
The Tribunal clarified that books of accounts cannot be rejected merely because they are unaudited. The primary consideration should be whether the books provide a true and fair view of the financial state. The Tribunal noted that there are provisions in the Income Tax Act to penalize non-audited books, but this alone is not a ground for rejection.

4. Completeness of the Books of Accounts:
The Tribunal found the Revenue's claim that the books were incomplete to be unsubstantiated. The Revenue authorities failed to specify which parts of the books were incomplete. The Tribunal stressed that a general statement without specific instances does not justify rejection. The Tribunal also mentioned that the Ld. CIT(A) should have pointed out which bank accounts were not included in the books.

5. Infirmities in the Books of Accounts of Transacting Parties:
The Tribunal observed that the presence of journal entries in the books of accounts, which was cited as an infirmity, is a common practice in mercantile accounting. The Tribunal also noted that in similar cases involving the Harshad Mehta group, the Tribunal had restored matters for verification rather than outright rejection.

6. Lack of Primary Documentary Evidence:
The Tribunal found the Revenue's claim that the books were not backed by primary documentary evidence to be vague. The Tribunal pointed out that the books were prepared based on seized documents still in the possession of the authorities. The Tribunal emphasized the need for specific instances where primary evidence was lacking to be pointed out and verified.

7. Improbable Entries in the Books of Accounts:
The Tribunal dismissed the Revenue's claim that uniform monthly withdrawals were improbable, stating that this is a common practice. The Tribunal stressed that the Revenue should have been more specific in identifying which entries were deemed improbable.

8. Rejection of Books of Accounts by Special Auditors:
The Tribunal reviewed the Special Auditors' report, which cited non-cooperation from the assessee and discrepancies in data. The Tribunal noted that expecting the widow of the deceased to answer detailed queries was unreasonable. The Tribunal also mentioned that the auditors' inability to verify certain data due to lack of cooperation does not necessarily imply the books are unreliable.

Conclusion:
The Tribunal concluded that the rejection of the books of accounts was based on flimsy grounds without thorough examination. The matter was restored to the file of the AO for a detailed examination of each entry in the books of accounts. The AO was directed to confront the assessee with specific discrepancies and allow opportunities for reconciliation. The appeal was treated as allowed for statistical purposes, and the AO was instructed to decide the issue afresh after examining the books of accounts.