2021 (10) TMI 966 - AT - Income Tax

Rejection of books of accounts - Estimation of income - bogus purchases - addition by declaring purchases as bogus purchases and applying 25% profit thereon - HELD THAT - We find that the Assessing officer has rejected the books of accounts by invoking the provisions of section 145(3) and the same are not under dispute before us - where the books of accounts have been rejected, the appropriate course of action for the AO is to estimate the gross profit in the hands of the assessee on some reasonable basis and in this regard, the past history has been stated to provide reliable and reasonable basis for estimating gross profit in the hands of the assessee. In this regard, reference can be drawn to the decision of the Coordinate Bench in case of ACIT vs. M/s Allied Gems Corporation 2017 (12) TMI 1252 - ITAT JAIPUR wherein it was held that where the books of accounts have been rejected, the ld. CIT(A) was correct in restricting the addition to the average G.P rate based on the past history. In the instant case, the average gross profit for the past two assessment years as available on record comes to 25.18% as against 24.80% declared by the assessee. Therefore, the addition to the extent of differential of 0.38% is sustained and the remaining addition sustained by the ld CIT(A) is hereby directed to be deleted. In the result, the ground of appeal is partly allowed. Disallowance of certain expenses claimed in its profit/loss account - During the course of hearing, the ld. AR submitted that these expenses relates to telephone, mobile, vehicle running maintenance and depreciation on car - HELD THAT - AO has disallowed an amount of ₹ 20,000/- only out of total expenditure of ₹ 1,82,510/- on account of personal and non business used. It was accordingly submitted that considering the above facts and circumstances of the case, the nature and involvement of the assessee s business, the ld. CIT(A) has rightly upheld the disallowances of ₹ 20,000/- to cover possible leakage on account of personal expenses. It was accordingly submitted that there is no infirmity in the order so passed by the ld. CIT(A) and the same may be confirmed. We have heard the rival contentions and perused the material available on record. We find that the expenses have been disallowed purely on an adhoc basis and the same is directed to be deleted. In the result, the ground of appeal is allowed.

Summary

Issues:
1. Rejection of books of accounts under Section 145(3)
2. Addition of amount declared as bogus purchases
3. Lump sum disallowance of certain expenses

Issue 1: Rejection of books of accounts under Section 145(3):
The assessee challenged the rejection of books of accounts under Section 145(3). The Assessing Officer rejected the books, and the AR did not press this ground during the hearing. The Tribunal noted that once the books are rejected, the AO must estimate the gross profit reasonably. Referring to a previous case, the Tribunal emphasized that the AO should estimate income based on the best judgment. The Tribunal found the AO's addition of 25% of purchases unjustified and directed deletion of the excess addition, partly allowing the appeal.

Issue 2: Addition of amount declared as bogus purchases:
The assessee contested the addition of ?90,785 as bogus purchases. The assessee, engaged in gem and jewelry business, argued that all purchases were genuine, supported by bills with TIN and PAN numbers. Payments were made through cheques, and sales were undisputed. The DR claimed that despite payments through cheques, the genuineness of purchases was not proven. The Tribunal found the AO's 25% disallowance of purchases unjustified, considering the past profit history. The Tribunal directed deletion of part of the addition, partly allowing the appeal.

Issue 3: Lump sum disallowance of certain expenses:
The assessee challenged the lump sum disallowance of ?20,000 for various expenses. The AR argued that all expenses were business-related, with no specific non-business expenditure identified by the AO. The DR supported the disallowance based on the tax audit report's inability to separate personal elements in some expenses. The Tribunal found the disallowance ad hoc and directed its deletion, allowing this part of the appeal.

In conclusion, the Tribunal partly allowed the appeal, directing the deletion of excessive additions and ad hoc disallowances. The judgment highlighted the importance of estimating income reasonably when books are rejected and emphasized the need for proper justification for disallowances.