2020 (3) TMI 115 - AT - Income Tax

Rejection of books of accounts - applying the higher N.P. rate - HELD THAT - If on technical reasons books of account may be rejected because assessee surrendered additional income, but, there were no justification to apply higher N.P. rate for making further addition against the assessee. Whatever material was found during the course of search was considered in detail by the A.O. and assessee made surrender accordingly which is accepted by the A.O. Thus, there was no reason to make further addition against the assessee which was based on no material on record. A.O. in the remand report accepted that no direction was given to assessee to produce the books of account and no explanation of assessee was called, for any discrepancy in the books of account during the statement recorded of the Director. A.O, however, asked for production of the books of account by the assessee at the remand proceedings which have been verified and no defect whatsoever have been noted. It would clearly prove it is a case of violation of principles of natural justice because the A.O. without giving opportunity to the assessee and without any justification made the addition by enhancing the net profit rate. Therefore, on this reason alone the Departmental Appeal is liable to be dismissed. There is no requirement under the Law that the trading result should be constant or should keep going up always even if there justification for the same to vary. CIT(A) at the appellate stage forwarded all the documents to the A.O. for examining and filing remand report. The A.O. examined the same and found the contention of assessee to be correct. Thus, assessee produced the books of account when called for by the A.O. and explanation of assessee was found to be correct for fall in N.P. rate which was on account of increase in financial cost and increase in cost of raw material consumed. Since no discrepancy was found in the maintenance of the books of account, therefore, the CIT(A) correctly deleted the addition. The decisions noted above clearly apply to the facts and circumstances of the case. Additional income declared by the assessee, the A.O. has specifically noted in the assessment order that assessee made declaration of additional income which is based upon Annexure-A1 seized during the course of search. It is connected with the business activity of the assessee. Whatever discrepancy was explained by assessee have been accepted and whatever discrepancy assessee could not explain as per seized paper, assessee offered the same for taxation. Therefore, it is clearly business income in nature and assessee has rightly taken it into P L A/c. A.O. has not brought any material on record if assessee doing any other business so as to link the surrender to any other income earned by the assessee. Therefore, there is no infirmity in the Order of the Ld. CIT(A) in deciding this issue in favour of the assessee. We are of the view that there was no justification to make the addition by enhancing the N.P. rate. CIT(A) on correct reasoning has correctly deleted the addition. The Departmental Appeal fails and is accordingly dismissed.

Summary

Issues Involved:
1. Correctness of the CIT(A)'s order in law and on facts.
2. Deletion of addition of ?56,81,31,074 on account of increased profit after invoking Section 145(2) of the Income Tax Act, 1961.
3. Justification for rejecting the books of accounts due to lack of documentary evidence explaining the fall in net profit rate.
4. Deletion of the addition based on the principle of natural justice.
5. Inclusion of ?34,50,00,000 surrendered during the search in the regular Profit & Loss account.

Issue-wise Detailed Analysis:

1. Correctness of the CIT(A)'s Order in Law and on Facts:
The Revenue challenged the CIT(A)'s order, arguing that the CIT(A) erred in deleting the addition made by the Assessing Officer (A.O.) without properly appreciating the facts and law. The CIT(A) found that the A.O. did not provide a show-cause notice to the assessee before making the proposed addition and failed to establish a basis for rejecting the books of accounts. The CIT(A) concluded that the financial cost increase and lack of discrepancies in the books of accounts justified the deletion of the addition.

2. Deletion of Addition of ?56,81,31,074:
The A.O. made an addition of ?56,81,31,074 by estimating the net profit based on the average net profit rates of the previous three years, citing a significant fall in the net profit rate. The CIT(A) found that the A.O. did not give adequate opportunity to the assessee to explain the fall in net profit rate and failed to consider the explanations provided by the assessee regarding increased financial costs and raw material prices. The CIT(A) noted that the A.O. did not find any discrepancies in the books of accounts during the remand proceedings and thus, deleted the addition.

3. Justification for Rejecting the Books of Accounts:
The A.O. rejected the books of accounts on the grounds that the assessee did not furnish documentary evidence to explain the fall in net profit rate. The CIT(A) observed that the A.O. did not provide a show-cause notice about the proposed action of estimating the net profit rate and failed to consider the assessee's explanations regarding the fall in net profit rate due to increased financial costs and raw material prices. The CIT(A) concluded that the rejection of the books of accounts was unjustified.

4. Deletion of Addition Based on the Principle of Natural Justice:
The CIT(A) found that the A.O. violated the principles of natural justice by not providing a show-cause notice to the assessee before making the proposed addition and failing to consider the assessee's explanations. The CIT(A) noted that the A.O. did not find any discrepancies in the books of accounts during the remand proceedings and thus, deleted the addition based on the principle of natural justice.

5. Inclusion of ?34,50,00,000 Surrendered During the Search:
The A.O. added ?34,50,00,000 separately as additional income declared during the search, arguing that it could not be included in the regular Profit & Loss account. The CIT(A) found that the additional income was related to the business activities of the assessee and was rightly included in the Profit & Loss account. The CIT(A) noted that the A.O. did not provide any material to link the surrendered income to any other business activity and thus, upheld the inclusion of the additional income in the Profit & Loss account.

Conclusion:
The CIT(A) deleted the addition of ?56,81,31,074 and upheld the inclusion of ?34,50,00,000 in the Profit & Loss account, finding that the A.O. violated the principles of natural justice and failed to provide a basis for rejecting the books of accounts. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal.