2018 (9) TMI 145 - AT - Income Tax

Rejection of books of accounts - Held that - We are in agreement with the arguments of Learned A.R. that once the addition has been made after rejection of books of account no further additions can be made relying on the same books of account. However, the Learned A.R. agreed that in respect of agreed addition of ₹ 3,00,000/- and ₹ 3,50,000/- he does not have anything to say GP estimation at higher rate - Held that - Neither the Assessing Officer nor the ld. CIT(A) has conducted any independent enquiry regarding the same and just on the basis of guess work has observed that assessee is not bringing out full particulars. Even the judicial pronouncements are clear on the facts that in the nature of trade as like assessee, cash memos for day-to-day sales are not required and that a consolidated entry in the cash book along with relevant documents of purchase of liquor are sufficient to prove the genuineness. In this view of the matter, we hold that the ld. CIT(A) was not justified in confirming the rejection of the books of account and adopting the G.P. rate on the higher side and, therefore, we set aside the order of the ld. CIT(A) on this issue and allow grounds No.1 & 2 of the appeal of the assessee.

Summary

Issues Involved:
1. Rejection of books of account and ad-hoc addition to gross profit.
2. Ad-hoc disallowance and other additions post rejection of books.
3. Addition on account of interest on income tax refund.
4. Ad-hoc disallowance of various expenses (shop, bardana, nikasi, printing & stationery).
5. Addition on account of purchases.

Detailed Analysis:

1. Rejection of Books of Account and Ad-hoc Addition to Gross Profit:
The primary issue revolves around the rejection of the books of account by the Assessing Officer (AO) under Section 145(3) of the Income Tax Act and the subsequent ad-hoc additions to gross profit. The AO made additions of ?3,00,000/- and ?3,50,000/- in ITA Nos. 703 and 704/Lkw/2016 respectively. The assessee contested that once the books of account are rejected, further reliance on the same for additional additions is not permissible. This argument was supported by the judgment in Indwell Constructions vs. CIT (232 ITR 776) and CIT vs. Banwari Lal Banshidhar (229 ITR 229). The tribunal agreed with the assessee, stating that further additions based on the rejected books are unsustainable in law. However, the agreed additions of ?3,00,000/- and ?3,50,000/- were upheld as the assessee had consented to these amounts during the assessment proceedings.

2. Ad-hoc Disallowance and Other Additions Post Rejection of Books:
The tribunal addressed the issue of further additions made by the AO after the initial ad-hoc addition to gross profit. It was noted that once the books are rejected and an ad-hoc addition is made, no further additions should be based on the same rejected books. This principle was upheld in the cited judgments. Consequently, the tribunal allowed the grounds related to these further additions in ITA Nos. 703 and 704/Lkw/2016.

3. Addition on Account of Interest on Income Tax Refund:
The assessee also contested the addition of ?1,23,854/- and ?2,20,800/- on account of interest on income tax refund in ITA Nos. 703 and 704/Lkw/2016 respectively. The tribunal, following the same reasoning regarding the rejection of books, allowed these grounds as well, indicating that such additions should not be made once the books are rejected and an ad-hoc addition is already applied.

4. Ad-hoc Disallowance of Various Expenses:
The tribunal examined the disallowances related to shop expenses (?48,000/-), bardana expenses (?5,252/-), nikasi expenses (?8,800/-), and printing & stationery expenses (?45,292/-). It was determined that these disallowances, made post rejection of books, should not stand as the books themselves were already deemed unreliable. Therefore, these grounds were allowed in favor of the assessee.

5. Addition on Account of Purchases:
In ITA No. 741/Lkw/2016, the AO made an ad-hoc addition of ?18,22,987/- to gross profit, citing a lower gross profit rate compared to the previous year. The tribunal noted that in a similar case for A.Y. 2012-13, the AO’s application of a higher gross profit rate was overturned by the tribunal. The tribunal found no significant defects in the books of account and noted that the sales and purchases in the liquor trade are regulated by the excise department, and prices are fixed by the government. Consequently, the tribunal allowed the ground related to the gross profit addition.

In summary, the tribunal partially allowed the appeals, emphasizing that once the books of account are rejected, further additions based on those books are not permissible. The tribunal upheld the agreed ad-hoc additions but allowed the grounds contesting further disallowances and additions.