2018 (6) TMI 1103 - AT - Income Tax

Rejection of books of accounts - addition on estimated basis - Held that - Quantitative details as required by clause 28(b) of Form No. 3CD regarding raw material and finished products (i.e., opening stock of raw material, raw material issued to production department, raw material consumed and closing stock of raw material, opening stock of finished goods, finished goods produced during the year, finished goods sold and closing stock of finished goods) were prepared and audited by certified accountant and were enclosed with Form No. 3CD which had been placed on record, but the Assessing Officer had ignored the factual figures, both in qualitative and quantitative terms, enclosed with the return and filed during the course of assessment proceedings The accounts maintained by the assessee could not have been said to be incomplete or inaccurate. In fact, the Assessing Officer had no material before him to treat the accounts of the assessee as defective or incomplete. AO erred in rejecting the books of accounts under the provisions of Section 145(3) of the Act. Therefore there was no reason for the AO to estimate the profit after rejecting the books of accounts. AO has taken the guidance from the provisions of section 44AD in adopting the rate @ 8% for determining the profit of the assessee which is not correct as it applies to the small assessee having turnover up to ₹ 1 crore - Decided against revenue

Issues involved:
1. Whether the CIT(A) was justified in deleting the addition made by the AO on estimated basis after rejecting the books of account.

Analysis:
1. The Revenue appealed against the CIT(A)'s order concerning the addition made by the AO on an estimated basis after rejecting the books of account. The Revenue contended that the CIT(A) erred in deleting the addition. The AO had estimated the profit @8% of the total gross receipts after rejecting the books due to non-response from truck owners to whom notices were issued u/s 133(6). Additionally, the AO observed a lower profit declaration compared to market rates. The CIT(A) observed that the AO's grounds for rejecting the books were unjustifiable. The CIT(A) noted that the AO failed to identify any defects in the accounting method or the books themselves. The CIT(A) found the lack of cross-examination opportunity for the appellant with the truck owners as a violation of natural justice, leading to the deletion of the addition. The Tribunal upheld the CIT(A)'s decision, emphasizing that the books were duly audited and no significant defects were identified by the AO. The Tribunal referred to precedents highlighting that accounts maintained in the course of business, duly audited, and free from qualifications should be accepted unless proven unreliable. The Tribunal also noted the absence of comparable cases or consideration of the appellant's profit rates from previous years in the AO's estimation of profit at 8%. The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision.

2. The appellant, a partnership firm in the transportation business, provided services to Ultratech Cement Ltd. by hiring trucks from the local market without written agreements. The AO, during assessment, issued notices to truck drivers for verification of transportation expenses, with many drivers not responding or denying transactions. The AO also noted a low declared profit compared to market rates and subsequently rejected the books, estimating profit at 8% of gross receipts. The appellant contended before the CIT(A) that all accounts were produced, audited, and supported with evidence, challenging the rejection of books. The CIT(A) found the AO's grounds insufficient for rejection and deleted the addition. The Tribunal agreed with the CIT(A), emphasizing the lack of defects in the audited books and the absence of cross-examination opportunities, leading to the deletion of the addition. The Tribunal highlighted the need for specific defects before rejecting accounts and the importance of considering past profit rates in estimations. The Tribunal dismissed the Revenue's appeal, supporting the CIT(A)'s decision.

3. The AO's rejection of the appellant's books and estimation of profit at 8% without substantial grounds led to the Revenue's appeal against the CIT(A)'s deletion of the addition. The Tribunal upheld the CIT(A)'s decision, citing the lack of defects in the audited books and the absence of cross-examination opportunities as reasons for deletion. The Tribunal stressed the necessity of proving accounts unreliable before rejection and considering past profit rates in estimations. The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision.

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