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2018 (10) TMI 1447 - AT - Income TaxEstimation of net profit @ 5% - rejection of books of accounts - AO has rejected the books of accounts on the ground that he was not satisfied about the correctness or completeness of the accounts - Held that - In our opinion for rejection of the books of accounts on the ground of non-satisfaction of correctness or completeness it is essential for the Assessing Officer to point out the specific defects. Merely increase in expenses cannot be ground for rejection of books of accounts unless the assessee failed to explain or justify increase in expenses. CIT(A) has made detailed verification of invoices and vouchers in respect of the expenses claimed by the Assessing Officers as excessive. The Ld. DR could not controvert the finding of the CIT(A) on justification of increase in expenses in question. No error in the action of the Ld. CIT(A) in cancelling the rejection of books of accounts by the Assessing Officer and estimation of the profit. - Decided against revenue
Issues Involved:
1. Rejection of account books under section 145(3). 2. Estimation of net profit at 5%. 3. Deletion of the addition of ?1,31,96,254/-. 4. Justification of business expenses. Detailed Analysis: 1. Rejection of Account Books Under Section 145(3): The Assessing Officer (AO) rejected the account books of the assessee by invoking section 145(3) due to non-compliance in producing complete books of accounts, bills, and vouchers. The AO noted significant increases in expenses such as rent, administrative expenses, and directors' remuneration, and also observed a substantial addition to fixed assets. However, the Ld. CIT(A) found that the assessee had provided all necessary documents and explanations for these expenses during the assessment proceedings, which were ignored by the AO. The Ld. CIT(A) concluded that the AO's rejection of the books was unjustified as no specific defects were pointed out. 2. Estimation of Net Profit at 5%: The AO estimated the net profit at 5% of the gross receipts due to the fall in the net profit rate from 5.82% in the preceding year to 1.13% in the year under consideration. The Ld. CIT(A) examined the reasons for the increase in expenses and found them to be justified and supported by evidence. The Ld. CIT(A) also noted that the gross profit rate was higher than the previous year, indicating that the fall in net profit was due to increased expenses, not due to any defect in the trading/manufacturing account. The Tribunal upheld the Ld. CIT(A)'s decision, stating that merely low profits compared to previous years do not justify the rejection of books or estimation of profits without pointing out specific defects. 3. Deletion of the Addition of ?1,31,96,254/-: The AO made an addition of ?1,31,96,254/- by estimating the net profit. The Ld. CIT(A) deleted this addition after verifying the genuineness of the expenses claimed by the assessee. The Ld. CIT(A) found that the assessee had provided sufficient evidence for the expenses, including rent agreements, proof of TDS, and details of directors' remuneration approved by the Ministry of Corporate Affairs. The Tribunal agreed with the Ld. CIT(A)'s findings and dismissed the Revenue's appeal on this ground. 4. Justification of Business Expenses: The AO questioned the genuineness of the business expenses, particularly the significant increase in rent, directors' remuneration, and administrative expenses. The Ld. CIT(A) thoroughly examined these expenses and found them to be justified. The Ld. CIT(A) noted that the assessee had provided detailed explanations and supporting documents for these expenses, which were ignored by the AO. The Tribunal concurred with the Ld. CIT(A)'s findings, stating that the AO failed to provide specific instances of unverifiable expenses and that the increase in expenses was adequately explained by the assessee. Conclusion: The Tribunal upheld the Ld. CIT(A)'s decision to cancel the rejection of books of accounts and the estimation of profit by the AO. The Tribunal found that the AO's actions were not justified as the assessee had provided sufficient evidence for the expenses claimed, and no specific defects were pointed out in the books of accounts. The appeal of the Revenue was dismissed.
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