2019 (11) TMI 693 - AT - Income Tax

Rejection of books of account - Additions made on account of difference in the closing balance on account of purchases in comparison to the assessee s account in the books of supplier as well as adhoc disallowance made by the AO on account of Coal and Fuel expenses - HELD THAT - AO rejected the books of account of the assessee by invoking the provisions of section 145(3). Thus once the AO has invoked the provisions of section 145(3), the only course of action left with the AO to proceed with the assessment on best judgment basis and the income of the assessee ought to have been estimated on some reasonable and proper basis. It is also not in dispute that the past history i.e. the GP/NP declared by the assessee is the proper and reasonable basis and guidance for estimation of income of the assessee for the year under consideration. Instead of making the assessment by considering the provisions of section 145(3) read with section 144, the AO has proceeded to make specific disallowance after rejection of books of account. This action of the AO is not permitted under law as the book results were rejected by the AO then the items which are part of the trading account cannot be disallowed but the income of the assessee was required to be estimated. The assessee has pointed out that the AO has not pointed out any decline in the GP rate of the assessee for the year under consideration but the income declared by the assessee shows a better GP and NP rate in comparison to the preceding years. He has referred to the comparative chart of the preceding years as well as for the year under consideration showing the GP declared by the assessee. Thus having regard to the fact that the AO has rejected the books of account and the GP declared by the assessee for the year under consideration is 17.88% in comparison to the average of 3 years at 17.76%, the rejection of books of account under section 145(3) would not ipso facto lead to an addition if the assessee has declared the results either better or in line with the preceding years. Therefore, once the assessee s GP declared for the year under consideration is better than the average of the preceding year, then inspite of rejection of books of account, no addition is called for. Even otherwise, the AO has not attempted to make any trading addition but made specific disallowance after rejection of books of account which is not permissible. Accordingly, additions made by the AO on account of some discrepancies in the balance sheet on account of Coal and Fuel expenses are deleted. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of alleged difference in transactions
2. Disallowance of 25% of Purchases under "Coal and Fuel Expenses"
3. Charging of interest under sections 234B and 234C

Analysis:

Issue 1: Disallowance of alleged difference in transactions
The appellant contested the addition of ?42,584 as a difference in transactions, arguing that the Assessing Officer (AO) disregarded the detailed explanation and reconciliation provided by the assessee. The CIT (Appeals) also upheld this decision. However, the tribunal noted that once the AO invoked section 145(3) to reject the books of account, any discrepancies should have led to income estimation, not specific disallowances. The tribunal found that the AO's actions were not in accordance with the law, especially since the assessee's Gross Profit (GP) for the year was better than in previous years. Consequently, the tribunal ruled in favor of the assessee, deleting the additions made by the AO.

Issue 2: Disallowance of 25% of Purchases under "Coal and Fuel Expenses"
The AO disallowed 25% of Purchases debited under "Coal and Fuel Expenses" amounting to ?5,88,651, based on statements recorded from suppliers without providing the assessee an opportunity for cross-examination. The tribunal found this disallowance unjustified, as the AO should have estimated income under section 145(3) instead of making specific disallowances post-rejection of books of account. The tribunal emphasized that the AO's failure to show a decline in GP rate for the year under consideration, coupled with the better GP declared by the assessee, rendered the disallowance impermissible. Consequently, the tribunal ruled in favor of the assessee, deleting the disallowance.

Issue 3: Charging of interest under sections 234B and 234C
The AO charged interest under sections 234B and 234C, a decision upheld by the CIT (Appeals). However, the tribunal did not provide detailed analysis or reasons for the decision regarding the charging of interest.

In conclusion, the tribunal partially allowed the appeal of the assessee, ruling in their favor on the issues of disallowance of alleged differences in transactions and disallowance of purchases under "Coal and Fuel Expenses." The decision regarding the charging of interest under sections 234B and 234C was not elaborated upon in the judgment.