2015 (9) TMI 809 - HC - Income Tax

Rejection of books of accounts - Whether the accounts maintained by the Assessee were incorrect and incomplete in terms of section 145(3) when it was not possible to verify from such accounts whether any unvouched expenses relating to one business, profits from which are declared on estimate basis, have actually been debited in the accounts of another business? - ITAT reversed AO order - whether while assessing the income of the assessee from running of the trucks on hire, the provisions of Section 44AE have been completely ignored? - Held that - Unable to agree with the contention of the assessee for the reason that not only were the accounts properly maintained, but even the freight and carriage expenses debited in the profit and loss account at ₹ 1,18,82,600/- are far too excessive, particularly keeping in view the fact that only six trucks were used for contract business. Further, the freight and carriage expenses that were debited were not segreable from unvouched expenses for plying of other nine trucks for which profit had been shown under Section 44AE of the Act. Admittedly, the assessee had failed to segregate expenses of the contract business from other nine trucks. Therefore, in such circumstances, no credence whatsoever could have been given to the books of accounts. We are not satisfied that the reasoning given by the ITAT to reverse such findings only on the ground that the A.O. ought to have satisfied that either the accounts maintained were incorrect or incomplete or the method of accounting followed was such as would not lead to correct estimation of income. We are further failed to understand how the burden to establish that the books of accounts maintained were incomplete or incorrect would rest upon the A.O. The CIT (A) could not have un-necessarily been influenced by the fact that the assessee had been filing his return regularly and was continuing the business of contract and truck hiring to conclude that the accounts were properly maintained. Merely because no one had earlier cared to scrutinize the accounts furnished by the assessee could not be a ground to dislodge the order passed by the A.O. Even otherwise, there is no presumption in law attaching presumption of correctness to the continuity of income tax returns. The assessments of each year have to be viewed and scrutinized independently as these are separate and distinct assessments. A.O. had every reason to invoke Section 145 of the Act in order to work out the real income and thereby deduce the profit and gain therefrom. As already observed earlier, the A.O. had given cogent reasons for not accepting the accounts. Though, these findings were set aside by the ITAT, but then even the ITAT did not conclude that the method of accountancy as employed by the assessee was in any manner correct. In absence of such findings, the order passed by the ITAT cannot be sustained. - Decided in favour of the revenue

Summary

Issues Involved:
1. Whether the accounts maintained by the assessee were incorrect and incomplete in terms of Section 145(3) of the Income Tax Act.
2. Whether the findings of the ITAT that the accounts are not incorrect or incomplete are perverse.
3. Whether the ITAT misinterpreted and misconstrued the material on record.

Issue-wise Detailed Analysis:

1. Whether the accounts maintained by the assessee were incorrect and incomplete in terms of Section 145(3) of the Income Tax Act:

The assessee, a Civil Contractor, declared income from government contracts and running trucks on hire. The Assessing Officer (A.O.) noted that the assessee did not show expenses on diesel and fuel for trucks run on hire, claiming net receipts on an estimated basis under Section 44AE. However, significant expenses were debited against contract income without providing a detailed break-up for each truck. The A.O. observed that the freight expenses debited were excessive and possibly included expenses for trucks run on hire. Consequently, the A.O. rejected the books of accounts under Section 145(3) and estimated net profit from the contract at 8% of gross receipts. The Commissioner of Income Tax (Appeals) [CIT (A)] upheld this decision, confirming that the freight expenses were excessive and the accounts were correctly rejected.

2. Whether the findings of the ITAT that the accounts are not incorrect or incomplete are perverse:

The Income Tax Appellate Tribunal (ITAT) reversed the decisions of the A.O. and CIT (A), stating that the books of account were properly maintained and no instance showed that expenses on trucks used in the hiring business were debited in the contract business accounts. The ITAT observed that the details of expenses included payment of hire charges with party-wise details and tax deductions at source, concluding that the freight expenses were not excessive or incorrect. Therefore, the ITAT held that the A.O. was not justified in rejecting the accounts and estimating higher contract profits.

3. Whether the ITAT misinterpreted and misconstrued the material on record:

The High Court found that the ITAT's decision was erroneous. The A.O. had validly expressed doubts about the correctness of the accounts due to the lack of segregation between expenses for contract business and truck hire business. The A.O. noted that the freight and carriage expenses debited were excessive, especially for only six trucks used in the contract business, and the assessee failed to provide a reasonable explanation. The High Court emphasized that the A.O. had given cogent reasons for not accepting the accounts, and the ITAT failed to appreciate the provisions of Section 145(3) read with Section 144 of the Act. The High Court underscored that it is the duty of the A.O. to ensure that the books disclose the true state of accounts and the correct income can be deduced.

Conclusion:

The High Court allowed the appeals, setting aside the ITAT's order and restoring the A.O.'s order. The court concluded that the accounts maintained by the assessee were indeed incorrect and incomplete, justifying the A.O.'s rejection of the books under Section 145(3) and the estimation of income. The findings of the ITAT were found to be perverse and misinterpreted the material on record. The appeals were allowed in favor of the revenue, and the parties were left to bear their own costs.