2021 (8) TMI 458 - AT - Income Tax

Enlarging scope of limited scrutiny - rejecting the books of accounts of the assessee and estimating the income - CIT- A directed re-compute the net profit of the assessee at 8% in place of 6.54% as returned by the assessee - HELD THAT - We do not agree with the contention of the Ld. Sr. D.R. on this issue for the reasons that if there is deficiency in vouchers or bills supporting the inference of the expense, this in our view cannot make accounts maintained by the assessee to be incorrect or incomplete. At the most, the expenses to the extent they are not supported by the vouchers can be regarded to be non-genuine and can be disallowed by the AO while computing the income of the assessee, but it cannot give the power to the AO to hold that the accounts are not correct or incomplete i.e. for the said reason only the AO cannot resort to reject the books of accounts of the assessee. FAA Ld. CIT(A) has ventured to do so (rejection of books of account) by assuming incorrect facts and misdirected himself by stating that the assessee has not produced the books of accounts before the AO/himself, whereas the AO has categorically observed that the assessee has produced cash books, ledgers and other documents called for by him. And in this context, it is noted that the Ld. CIT(A) has deleted the addition of ₹ 1.48 crores by relying on the veracity of the cash book submitted by the assessee before him. As findings of the Ld. CIT(A) on this issue shows non-application of mind and exposes per-se contradiction of facts. Therefore, the assumption drawn by the Ld. CIT(A) to re-compute the net profit of the assessee at 8% in place of 6.54% as returned by the assessee needs to be interfered with because it has no sanction of law and we set aside the same. Therefore the assessee succeeds. So, the direction of Ld. CIT(A) to re-compute the income of the assessee at 8% of the net profit of the gross receipt is canceled. - Decided in favour of assessee.

Summary

Issues Involved:
Enlarging scope of limited scrutiny by rejecting books of accounts and estimating income.

Analysis:
The appeal was filed against the order of the Ld. CIT(A) for the assessment year 2015-16. The main grievance of the assessee was regarding the Ld. CIT(A) enlarging the scope of limited scrutiny and rejecting the books of accounts, leading to the estimation of income. The AO had initially raised four issues for limited scrutiny, and after examining the documents, made an adverse inference on one issue, resulting in an addition to the income. The Ld. CIT(A) deleted this addition but proceeded to estimate the income by directing the AO to consider a net profit of 8% on gross receipts, contrary to the 6.54% declared by the assessee. The appeal was made challenging these actions.

During the hearing, the Ld. A.R. of the assessee pointed out contradictions in the findings of the Ld. CIT(A) regarding the rejection of books of accounts. The Ld. CIT(A) had made observations suggesting dissatisfaction with the maintenance of accounts, despite the AO's acknowledgment of the documents provided by the assessee. The Ld. A.R. argued that the Ld. CIT(A) misdirected himself by assuming that the assessee did not produce necessary documents, leading to an incorrect estimation of income. The Ld. CIT(A) had ordered the re-computation of net profit at 8%, which was deemed unauthorized by the ITAT due to the lack of legal basis. The ITAT found the Ld. CIT(A)'s conclusions to be contradictory and lacking proper application of law, ultimately ruling in favor of the assessee by canceling the direction to re-compute income at 8%.

In conclusion, the ITAT allowed the appeal of the assessee, setting aside the Ld. CIT(A)'s decision to estimate income at 8% and emphasizing the incorrect assumptions made by the Ld. CIT(A) regarding the rejection of books of accounts. The judgment highlighted the importance of factual accuracy and legal basis in making such determinations, ultimately leading to a favorable outcome for the assessee.